U.S. keeps oil reserves options open as gasoline surges

WASHINGTON/NEW YORK Sun Mar 6, 2011 6:58pm EST

A woman stands in front of gas prices at a petrol kiosk in Dal Mar, California March 1, 2011. REUTERS/Mike Blake

A woman stands in front of gas prices at a petrol kiosk in Dal Mar, California March 1, 2011.

Credit: Reuters/Mike Blake

WASHINGTON/NEW YORK (Reuters) - The government reiterated on Sunday that it could tap its strategic oil reserves in order to safeguard economic growth as surging gasoline prices threaten to amp up pressure for action.

While longstanding U.S. policy is to release reserves only in the event of a significant and immediate supply shortage, some analysts say the Obama administration may feel compelled to try to tamp down prices that are being fueled both by outages in Libya as well as concerns over Middle East unrest.

Echoing comments made by a number of Obama officials over the past week, White House Chief of Staff William Daley told NBC television's "Meet the Press" on Sunday: "We are looking at the options. The issue of the reserves is one we are considering."

"It is something that only is done -- has been done -- in very rare occasions. There's a bunch of factors that have to be looked at and it is just not the price," he added. "All matters have to be on the table when you go through -- when you see the difficulty coming out of this economic crisis we're in and the fragility of it."

He spoke just before a survey showed the second-largest two-week rise in gasoline pump prices ever. The national average for a gallon of self-serve, regular gas was $3.50 on March 4, according to the influential Lundberg Survey of about 2,500 gas stations, up 32.7 cents from the February 18.

Congress has pressured the Obama administration to look to the emergency oil supplies as an option to ease consumers' fears over rising U.S. gasoline prices, which are nearing the all-time high of $4.1124 per gallon hit on July 11, 2008, according to the Lundberg Survey.

Higher oil prices could undermine the fragile U.S. economic recovery and damage President Barack Obama politically as he moves toward a 2012 re-election bid.

2011 NOT 2008

The United States has tapped the Strategic Petroleum Reserve, which now holds 727 million barrels, only a handful of times since it was created in the mid-1970s after the Arab oil embargo. It was last used in 2005 following Hurricane Katrina.

Thus far the International Energy Agency (IEA) -- which coordinates reserves policy among the world's major energy consuming countries -- has made clear it will rely first on OPEC to fill the void left by the violence in Libya, which has cut off an estimated 1 million barrels per day (bpd) of output.

Saudi Arabia has stepped up production significantly, but oil prices remain high, partly due to intensifying fears that the wave of North African and Middle East protests could yet seep into major Gulf oil producers, cutting off supplies that would be impossible to make up from other producers.

Despite longstanding U.S. policy on the SPR, there are reasons to believe the reserves could be used more liberally now.

Unlike in 2008, when oil prices shot to nearly $150 a barrel in a demand-led rally, the current spike is driven by the real loss of supply -- a distinction which could give President Barack Obama more latitude to tap into the SPR, even though Libya ships only a fraction of its oil to U.S. shores.

In addition, the global economy is in a more precarious state than was generally believed at the start of 2008, prior to the financial crisis.

"Sovereign debt issues need time and growth to resolve. High oil prices threaten that outcome. No leader will want to preside over a recession that they had the tools to avert," said Lawrence Eagles, head of oil research at JP Morgan.

His outlook calls for a possible SPR release if Brent crude pushes materially above $120 a barrel. It settled on Friday at near $116, having jumped about 13 percent in two weeks.

U.S. federal law allows the government to tap the reserve during a national energy supply shortage that raises petroleum prices and could damage the economy. The president has the authority to determine such an emergency.

While the reserves could help make up for lost supplies, it is unclear how effective they would be in tempering fears that unrest could spread to other, bigger producers including Saudi Arabia, where security forces have detained at least 22 minority Shi'ites following protests last week.

OFFICIALS KEEP DOOR OPEN, DEMOCRATS PUSH

On Thursday, U.S. Treasury Secretary Timothy Geithner played down the risks to the oil supply, but also reminded lawmakers of the emergency stockpile.

"If necessary, those reserves could be mobilized to help mitigate the effect of a severe, sustained supply disruption," Geithner told the U.S. Senate Foreign Relations Committee.

But there has been growing support among Senate Democrats for tapping America's emergency oil supply.

Senator Jay Rockefeller last week urged Obama to allow a "limited drawdown" from the oil reserves to "protect our national security by preventing or reducing the adverse impact of an oil shortage.

But Republican Senator Lamar Alexander, speaking on CNN's "State of the Union" program on Sunday, said he would not support the oil reserve drawdown.

On Wednesday, U.S. Energy Secretary Steven Chu had ruled out releasing oil from the reserve, saying ramped-up oil production in Saudi Arabia should lower the crude price.

"We're hoping market forces will take care of this," he added.

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