Energy Department to stop adding oil to reserve

By Tom Doggett

WASHINGTON (Reuters) - The U.S. Energy Department said on Friday it will not add millions of barrels of oil to the Strategic Petroleum Reserve, a move sought by Congress to battle record fuel costs that in the end will likely have little impact on lowering prices.

The department's decision comes after Congress this week approved legislation ordering the Bush administration to stop putting oil into the emergency stockpile until crude prices fall below $75 per barrel, far lower than current levels.

On the New York Mercantile Exchange, crude oil for delivery in June hit a record high of near $128 on Friday.

Many energy analysts believe stopping the reserve's oil shipments will have little, if any, effect on lowering fuel costs.

Michael Greenberger, director of the Center for Health and Homeland Security at the University of Maryland, said the extra supplies may provide some short-term relief at the pump.

"In the long term, gasoline prices will soon continue their rapid rise because those prices have little relationship to supply/demand factors (and) are being manipulated upward by energy traders," he said.

Republican Sen. Kay Bailey Hutchison of Texas said the department's decision was encouraging. "This is a small step, but an important one," she said.

The oil stockpile is already 97 percent full, holding almost 703 million barrels of crude at four underground storage sites in Texas and Louisiana. The reserve was created by Congress after the 1973-74 Arab oil embargo to ensure the United States has a cushion of crude to handle major supply disruptions.

The department said it would not sign contracts with energy companies to deliver up to 13 million barrels of crude oil to the reserve.

It had received bids this week to exchange millions of barrels of oil that was turned over to the government as royalties for drilling on federal leases for better qualities of crude from firms that would have gone into the reserve.

Those contracts would have delivered oil to the reserve at a rate of 76,000 barrels a day from August through December.

Separately, the department said it would not go into the market this year and buy $584 million worth of oil for the stockpile if the legislation becomes law, as is expected.

Those oil purchases would have helped to replace some of the crude the government sold from the reserve to refineries after Hurricane Katrina disrupted supplies along the Gulf Coast and flooded New Orleans in late August 2005.

The department also said it will defer some 4.2 million barrels of oil scheduled to be delivered to the stockpile from late May through July, if the legislation becomes law. About 3.7 million barrels of oil is already in route this month to the stockpile and won't be stopped.

The White House has said it will not veto the legislation, though the Bush administration had fought against halting oil shipments to the stockpile.