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Pouring oil On OPEC's game plan
Energy officials want to use U.S. reserves to lower fuel prices
By ADAM ZAGORIN/WASHINGTON
January 31, 2000
Web posted at: 3:59 p.m. EST (2059 GMT)
Taxes, crime, education, the environment--these are all salient
issues worth airing in the political forum. But in the frigid,
snowbound Northeast, what better way to warm the hearts--and hands
and feet--of voters during primary season than devising a plan to
knock down the skyrocketing price of home-heating oil and
gasoline?
And guess what. The Clinton Administration has just such a scheme
brewing. Sources tell TIME that Energy Secretary Bill Richardson
is quietly but vigorously pushing a proposal that would pour
millions of barrels of oil from America's Strategic Petroleum
Reserve onto the market in coming weeks. The proposal, which has
circulated among a few top Administration officials and could
soon be approved by President Clinton, involves offering a "swap"
of crude oil from the 580 million-bbl. SPR to private oil
companies. They would bid to take the oil now, then make
repayment in kind, plus a premium, in 12 months or less. In other
words, for every barrel an Exxon-Mobil took out, it would return
that barrel and a little more--the more to be negotiated.
The scheme could offer some much desired relief to consumers
hammered by oil prices that have hit a nine-year high, courtesy
of the Organization of Petroleum Exporting Countries (OPEC),
whose members have by agreement kept supplies tight. As the cost
has surged, some industries have reacted. Airlines such as
American and United have slapped fuel surcharges on tickets. With
crude stocks dwindling, further price increases threaten to
ratchet up inflationary pressure.
Releasing crude from the SPR--the oil is stored in underground
caves in Texas and Louisiana--could be a dam breaker. Says
Daniel Yergin, chairman of Cambridge Energy Resources, a leading
consultant: "Any effort to tap the strategic reserve now will
add to pressure on oil producers to put more crude on the
market, which will start to bring prices down." The last time
the government announced it was unloading oil from the SPR, in
April 1996, petroleum-futures prices plummeted nearly 8% almost
immediately and the cost of gasoline soon dropped 10[cents] per
gal.
For more lasting impact, though, Richardson's formula will
require cooperation from none other than OPEC. Richardson will
try diplomatic jawboning to get some of its members to loosen
their restraints on supply. He's scheduled to meet this week with
Mexico's Oil Minister at the World Economic Forum in Davos,
Switzerland. He'll then travel to Oslo and, later in February, to
the Middle East for more arm-twisting. Perhaps he'll remind the
Kuwaitis and the Saudis that they owe the U.S. a favor. And he'll
warn the producers that there are real macroeconomic risks to
higher oil prices, such as choking off Asia's economic recovery.
In the U.S., it's not clear how many oil companies will
participate in a swap that would, in effect, sell the commodity
short, the bet being that the price of crude will be lower when
the time comes to return the borrowed oil several months down the
road. That deal could prove an attractive gamble, however, as oil
prices often slide with the advent of warmer weather.
Participants can also cover the risk that prices might
unpredictably rise by hedging in futures markets.
Richardson clearly hopes that his swap turns into a classic case
of doing well by doing good. The Energy Secretary is expected to
reiterate that he has the legal authority to carry out the
unusual maneuver, which has never before been tried on this scale
and could prove controversial. But the plan does uphold his
pledge not to sell oil from the SPR. That would be interfering in
the marketplace, wouldn't it? Instead, upon completion, a swap
would actually increase the amount of oil available in the SPR,
whose mission is to keep a safety stock in case of emergency.
The biggest immediate return of Richardson's hoped-for hat trick
could come on the campaign trail. The Secretary is under siege,
as everyone from truckers to homeowners complains about the high
price of gasoline, heating oil, etc. Bill Bradley and Al Gore
traded pot shots on oil prices in last week's presidential
debate, while George W. Bush called on the U.S. to persuade U.S.
allies like Saudi Arabia to turn up the motor on the oil pumps.
Despite the run-ups in prices, supplier groups such as the
American Petroleum Institute point out, there are no gas lines
and ample inventory. In other words, the market is doing what
it's supposed to do. But in an election year, that sentiment
appears to have a snowball's chance in hell--and even less in
primary states like New Hampshire and New York--of winning the
day.
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