CRISIS IN THE PERSIAN GULF : Consider Using Oil Stores, Bush Urges Nations : Energy: The U.S. could tap its strategic reserve, the President says. He also urges conservation.

President Bush, moving to minimize the oil embargo’s effect on the U.S. economy, on Wednesday urged other industrial nations to join the United States in considering tapping their pools of stored oil to help offset the loss of Iraqi and Kuwaiti supplies.

Meanwhile, prices retreated in hectic trading Wednesday on world oil markets, no doubt partly because Saudi Arabia, Venezuela and several other members of the Organization of Petroleum Exporting Countries appeared ready to boost oil production to replace some of the 4.5 million barrels a day that once flowed from Iraq and Kuwait.

Bush told reporters that he expects some oil producers to raise output levels “very, very soon.”

The President, in a televised speech Wednesday morning, also called on the American public to reduce its energy demand.

“I will explore whether we and our allies should draw down our strategic petroleum reserves,” Bush said. “Conservation measures can also help. Americans everywhere must do their part.”

Bush signaled a possible reversal of the Administration’s opposition to tapping the nation’s 590-million-barrel reserve by suggesting that the United States will go along if other nations agree to dip into their own storage facilities.

Oil analysts have been almost unanimous in urging the White House to dip into the nation’s strategic petroleum reserve--established in the mid-1970s to offset any sudden supply crunch--to help dampen the recent surge in oil prices that threatens to topple the struggling U.S. economy into a full-fledged recession.

U.S. energy aides had argued that the government’s hoards of stored oil should be used only to offset a severe shortage rather than just to hold down escalating prices. But they hinted Wednesday at a change in policy.

“A multilateral drawdown is much better than a unilateral drawdown,” one Energy Department official said.

The government-owned reserve, stored in underground Texas and Louisiana salt domes, is enough to cover total U.S. imports for 80 days and could offset lost Kuwaiti and Iraqi supplies for almost two years.

Japanese government stocks include about 200 million barrels, while Western European nations hold about 80 million barrels--also equal to roughly three months of oil imports.

On Thursday, representatives of 21 major industrial nations, including U.S. energy official John Easton, will meet in Paris at the International Energy Agency, the West’s energy security operation created after the 1973 Arab oil embargo.

The IEA can ask its member nations to curb demand or draw on stocks. Although the group can also impose compulsory oil sharing when any nation suffers a 7% oil supply shortage, spokesman Joyce Heard said it is “not expected that the IEA will decide to use its emergency oil sharing system at this time.”

One proposal that is likely to emerge from the meeting, an IEA official said, is to call on countries to encourage industrial and electric power facilities to switch from oil to natural gas where possible.

In public, Administration officials continued to play down the chances of recession this year.

“The events of the last week, where the price of oil has gone up, is going to impose additional hardship on the economy,” admitted Treasury Secretary Nicholas F. Brady. But he added: “We are not contemplating a recession.”

With the economy likely to be suffering from higher oil prices, White House officials have begun to echo those in Congress who are talking about scaling back plans to cut the federal deficit by $50 billion in the fiscal year that begins Oct. 1. They are worried that large spending cuts and tax increases could exacerbate economic hardship.

“I’m not sure that the first-year figure will come out to be exactly $50 billion,” Brady said, but “. . . we cannot be strong, as strong as we should be, if we continue with the deficits that the President has spoken so forcefully about.”

While the White House still will press for an ambitious five-year deficit deal with Congress when lawmakers return in September, Administration aides are worried that taking a big bite out of the budget next year could be too much for the economy to absorb when it is likely to be suffering already from spurting oil prices.

“If the economy begins to look really bad,” said Rep. Bill Frenzel (R-Minn.), “every element of the deficit-reduction package will be threatened.”

The conflict in the Persian Gulf also limits White House credibility as it has threatened to impose $100 billion in automatic spending cuts on Oct. 1 called for under the Gramm-Rudman deficit-reduction law.

Times staff writer Maura Reynolds contributed to this story.

THE U.S. STRATEGIC PETROLEUM RESERVE

BACKGROUND: In 1976, concerned that a cutoff in Middle east oil supplies might threaten U.S. national security, Congress created the Strategic Petroleum Reserve, designed to store excess crude oil for use by the armed forces and vital industries in case of a shortage. Filling began in 1977 but was halted in 1979 in exchange for Saudi Arabia’s promise to increase production. “Deposits” of crude resumed in 1980.

PROCEDURES: Before the reserve can actually be tapped, the President must declare a “severe” energy emergency. The oil is sold at auction in a process that takes three weeks. Would-be buyers must offer separate bids for each type of oil-light, or heavy-crude - and for one of three or four separate delivery cycles. The oil than is delivered by one of several pipelines.

CAPACITY: The reserve currently contains 590 million barrels of oil. Its daily pumping capacity of 3.5 million barrels is considered adequate to make up the most likely shortfall of 1 million to 4 million barrels per day. The United States imports a total of 8 million barrels a day, but not all of this would be at risk if the Iraqi and Kuwaiti supplies were unavailable.

OTHER COUNTRIES: Three other countries maintain similar strategic reserves. Japan, with the largest, has available 170 million barrels of crude. West Germany has 54 million and Sweden 25 million. Many other countries require their oil companies to maintain excess inventories.

HOW IT WORKS: The reserve is a complex of six huge, water-filled salt domes on the Texas-Louisiana Gulf Coast. The crude oil to be stored is pumped into a dome, displacing the water. The salt provides an impermeable layer,. virtually like plastic, that can preserve the oil indefinitely. To tap the stored crude, the process is reversed: Seawater is pumped in, displacing the oil.

Source: Institute for International Economics