- The Washington Times - Wednesday, December 28, 2005

The United States, Europe and Japan recently stopped releasing oil and gasoline from their strategic reserves as fuel prices retreated from record post-hurricane highs.

The release of reserve oil in September helped to stamp out speculation that was driving up prices, analysts say, but an energy-saving trend spawned by high prices and lower oil demand in China also helped to stabilize energy markets.

“The impact of hurricanes Katrina and Rita has been successfully addressed,” said Claude Mandil, executive director of the International Energy Agency, in announcing the end of the reserve program Monday.

He credited the “collective action” by the United States and 25 other countries that had agreed to release reserves, as well as “lower-than-expected demand, worldwide refinery flexibility” and efforts by oil-producing countries to make up the shortfall.

The United States was charged with providing half of a planned 60 million barrel-per-day release from the reserves, but neither the U.S. Energy Department nor its counterparts in Europe and Asia ended up releasing that much oil. In all, about 50 million extra barrels of oil and gasoline were released on world markets each day during the duration of the reserve program.

The program, which was announced with a rash of publicity Sept. 2, ended quietly Thursday. It was the second coordinated release in history. The first release occurred during the oil crisis precipitated by the 1990 Persian Gulf War.

Energy analysts say the government’s threat to flood the market with crude oil reserves proved to be a potent weapon against speculators who have been a force behind soaring oil prices for several years.

The price of premium crude topped a record $70 a barrel immediately after Katrina hit Aug. 29, but quickly fell back into the $60 range when the coordinated release was announced. It has stayed there ever since. The price of sweet crude for February delivery declined 28 cents in New York trading yesterday to $58.15 per barrel.

The release “certainly had an impact on speculative activity,” said Antoine Halff, an energy analyst with the Eurasia Group. “It had a big headline impact because what it signaled was a turn in U.S. policy.”

Before the release, the Bush administration was adamantly opposed to using the reserves to manipulate oil prices, maintaining that they should be tapped only in case of a national emergency.

The devastation hurricanes wreaked on Gulf of Mexico oil production and refining facilities last summer proved to be just such an emergency. Initially, 90 percent of Gulf facilities were shut down. About 30 percent of Gulf oil production and 3 percent of U.S. refining capacity remains offline today.

Oil prices turned down after the coordinated release in September because “the administration made it clear early on that crude would be made available” from the reserves, said Ron Gold, analyst at Petroleum Industry Research Foundation Inc.

As it turned out, the administration ended up having to release only about two-thirds of its commitment, or 20 million barrels, from the reserves through auctions and loan agreements with refineries, to satisfy the thirst for oil.

It took longer for gasoline prices to fall back because of the big loss of Gulf Coast refining capacity the storms caused during the peak summer driving season, Mr. Gold said.

After surging to highs over $3 a gallon, the average price of a gallon of gas did not retreat to pre-hurricane levels until mid-October.

The sky-high pump prices had a “profound” impact on American consumers, according to cars.com, an automobile search service that noted a big drop in searches for large sport utility vehicles when gas prices hit records in September. There has been only a slight rebound in SUV interest since gas prices retreated, it said.

By November, gas prices had fallen by nearly a third — a record $1 drop from September’s record high.

Mr. Gold credited moves by the administration to waive low-sulfur rules for diesel fuels for a near-doubling of gasoline imports that remedied shortages of fuel on the East Coast and dramatically helped to lower fuel prices.

The waiver authority was included in energy legislation enacted in July. Other provisions of the law had little effect on the markets. Provisions that would have increased supplies in future years by allowing drilling for oil and gas offshore and in the Arctic National Wildlife Refuge were dropped from the legislation.



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