Obama's oil reserves plan took shape in May: official

WASHINGTON Tue Jun 28, 2011 7:01pm EDT

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WASHINGTON (Reuters) - It was on May 2, the day U.S. oil prices peaked at nearly $115 a barrel, that President Barack Obama put into a motion a controversial plan that would lead to the biggest-ever sale of U.S. emergency oil stocks.

Even as oil prices fell from that high, a core team of Obama officials pressed ahead with diplomatic efforts to rally other consuming nations behind a plan they felt would aid to the faltering global economy, while ensuring key OPEC allies were consulted, an administration official told Reuters.

"This was done very carefully and quietly with very significant pros and cons presented," the official said, describing the behind-the-scenes talks that led up to the third-ever release of global stockpiles.

The picture that emerges is of a lengthy but determined march toward a measure that many analysts say marks a turning point in energy policy favoring more active use of reserves to combat high prices.

The United States and other oil-consuming nations agreed on Thursday to release a total of 60 million barrels of oil from reserves -- half of that from the United States -- sending crude prices tumbling.

The decision has been panned by U.S. oil companies, OPEC members, and Obama's Republican opponents, and the timing questioned given that oil prices have fallen from their May peak.

GEITHNER, OTHERS ADVISORS INVOLVED

Releasing oil from U.S. caverns holding 727 million barrels was first mentioned to Obama as an option early in 2011, the official said.

Oil prices were rising with political upheavals in the Middle East and Northern Africa, prompting warnings about harm to the U.S. economy, and calls from some Democrat lawmakers to dip into the reserves.

Even when war first broke out in Libya, cutting its oil output, Obama's advisors didn't believe the situation justified releasing reserves, traditionally used for severe supply emergencies such as 2005's Hurricane Katrina.

But the option was more compelling by the time of an April 26 briefing that included Treasury Secretary Timothy Geithner, White House deputy national security adviser Michael Froman, and Deputy Energy Secretary Daniel Poneman -- a core group that would meet with Obama a half-dozen more times on the issue in following weeks, the official said.

Libya's exports of light, sweet crude -- the kind held in the U.S. Strategic Petroleum Reserve (SPR) -- had been off the market for a month, speculators were aggressively selling the market, and the global economy was feeling the pinch.

"That was the first time that he heard from his economic and energy team that the case had dramatically strengthened for a potential SPR action," the official said.

Obama told advisors to give him more details, and after a May 2 memo laying out options, the president gave his staff the go-ahead to pursue the plan after talking with allies.

QUIET DIPLOMACY

Obama phoned Saudi King Abdullah and Kuwaiti Emir Sheikh Sabah al-Ahmad al-Sabah the week of May 5 to discuss the situation, and directly afterwards sent Froman, Poneman and Deputy Treasury Secretary Neal Wolin to Saudi Arabia for private talks.

The administration also reached out to other members of the International Energy Agency, which speaks for 28 industrialized countries.

But by late May, officials worried opening reserves ahead of a June 8 meeting of the OPEC cartel of producers would be viewed as confrontational.

At that meeting Saudi-led efforts to agree an increase in production were thwarted by non-Gulf members, who complained about interference from the West.

After OPEC, members of the International Energy Agency were confident that the disruption to world supplies of light, sweet crude oil -- the type produced by Libya and held in the U.S. reserves -- justified the release of stockpiles.

The timing of the move was good for the United States as it comes ahead of the summer driving season, the official said.

But advisors have warned Obama that the impact of the oil release on prices would not be predictable.

"Oil markets are completely uncertain. You can't do things like this with the assumption of a particular price impact. It just was a sound thing to do," the official said.

(This story corrects a June 23 story to show in 14th paragraph that Obama placed calls the week of May 5, not on May 5 as previously reported)

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