U.S. Says Oil Is Plentiful, Rejects Panic : Economics: Companies are warned about gouging. The Fed decides against any immediate action to lower interest rates.
Faced with soaring energy prices and plummeting financial markets, the Bush Administration sought Monday to head off an economic panic, assuring Americans that world oil supplies are plentiful and warning oil companies to exercise restraint in raising prices.
“It is not clear that all the price increases that have been reported at the consumer level are necessary,” White House spokesman Marlin Fitzwater cautioned. “It would be most unfortunate if there was any gouging or anyone was trying to take advantage of the situation.”
Meanwhile, the Federal Reserve Board, caught between fears of a recession and the threat of new inflation, decided Monday against taking any immediate action to lower interest rates, government sources said.
But sources said the policy-makers left open the possibility that the central bank may cut short-term rates later if it seems possible to do so without raising fears among Wall Street bond traders that the Fed is abandoning its effort to keep inflation under control.
The combination of actions reflects the increasingly tough economic realities that the United States finds itself confronting as it responds to last week’s Iraqi invasion of Kuwait.
In financial markets Monday, the stock market took its steepest fall since last October, as the Dow Jones Industrial Average plunged 93.31 points in the face of investor worry about the impact on the economy of rising oil prices.
At the same time, oil prices continued to skyrocket. The prices of West Texas intermediate, a key grade of crude oil, soared $3.56 a barrel Monday to $28.05 a barrel--almost $7 a barrel higher than it was a week ago.
One reason the markets were worried is that the Administration’s push to organize a worldwide economic embargo of the oil produced by Iraq and Kuwait adds to inflation pressures and threatens ultimately to tip the economy into a recession.
“It’s like the patient was dying of cancer, and suddenly he has a heart attack,” said Kenneth Gerbino, a New York investment manager.
Despite the risk of higher prices, the White House is still urging the Fed to ease its grip on credit quickly to help keep the economy out of a recession, Administration officials indicated Monday.
“There’s no question that the sluggish state of the economy and the risk of recession call for some gradual Fed easing,” one senior official said. “Even when you superimpose the Iraqi oil situation, it looks like the one-time impact on inflation should be relatively modest.”
But the official added that “we understand why they (top Fed policy-makers) have to be cautious, because there are a lot of uncertain possibilities out there right now.”
In their move to quell panic buying of oil, officials pointed out that the world was already awash with surplus crude before the Iraqi invasion. And they suggested that the current supply-and-demand situation does not justify sharp price boosts.
“With the current excess world supply of oil, there is no economic reason why prices should be going up so much,” a top Energy Department official said.
Lawmakers appeared even more skeptical of the recent price boosts, with several of them demanding a rollback and an investigation of oil company actions.
Senate Minority Leader Bob Dole (R-Kan.) formally asked Atty. Gen. Dick Thornburgh to launch an antitrust investigation.
“ ‘Price-gouging’ is a harsh term, but it is a term that seems to most aptly describe the situation we are now witnessing,” Dole said in a letter to Thornburgh.
Sen. Donald W. Riegle Jr. (D-Mich.) took a similar tack. “We deserve a price rollback,” he told a news conference.
By contrast to the rhetoric coming from Capitol Hill, White House officials emphasized that they want to avoid any hint that might encourage reimposing price controls on the oil industry.
“It’s absolutely critical that we not repeat some of the stupid mistakes of the 1970s,” one senior Administration official said. “If we got price controls, then we would have to worry about artificial shortages and gas lines. Nobody should want that again.”
His reference was to the situation in the 1970s, when price controls imposed after the 1973 Arab oil embargo prevented U.S. oil companies from moving gasoline to high-demand areas and exacerbated regional shortages, forcing motorists to wait in line for hours to buy gasoline.
Because prices now are free-floating, energy experts say that the price increases can be used to help ration supplies more sensibly and that the nation should be able to avoid the kinds of artificial shortages that plagued the United States in the 1970s.
“The lesson of the 1970s is that it’s better to let markets do the work, even if they sometimes overreact, rather than trusting in some bureaucrat sitting in his office,” said John Sawhill, a former top energy official in both the Carter and Reagan administrations.
Federal Reserve officials said they, too, are trying to avoid some of the economic policy mistakes of the past. Where the Fed eased monetary policy in the 1970s, in hopes of cushioning the depressing effects of higher oil prices, today it is seeking to keep inflation in check.
“This is going to be a force for higher inflation and a force for lower growth,” said Robert Parry, president of the San Francisco Federal Reserve Bank and a member of the Fed’s policy-setting Open Market Committee.
“But there is a real danger if people thought Fed policy could be used in any dramatic way to deal with these kinds of events,” Parry said. In the past, he added, “insufficient attention was paid to the inflationary consequences of policy in the 1970s.”
As the Administration worked to put the global economic embargo of Iraq in place, the Treasury Department clarified its decision last Friday to allow U.S. firms to accept shiploads of previously purchased oil from Iraq.
Officials said the oil may be used as long as it was purchased before the ban went into effect last Thursday and the tankers in which it is carried arrive at the United States by Oct. 1.
