U.S. Will Sell Oil From Reserves to Hold Down Price : Gulf crisis: 5 million barrels will go on the block. Further steps may be necessary, the President says.


With spot-market oil prices topping $40 a barrel for the first time in a decade, President Bush on Wednesday announced plans to sell 5 million barrels of oil from the U.S. Strategic Petroleum Reserve to curb "intensive and unwarranted speculation in oil futures."

The sale, which White House Press Secretary Marlin Fitzwater described as a "demonstration test" of the 590-million-barrel reserve, is aimed directly at "those speculators who might try to drive up the price of oil," Bush said in a speech to a Republican fund-raising dinner in Chicago.

Should the current sale prove insufficient to calm frenzied oil markets, "I am prepared to take additional steps, if necessary, to ensure that America stays strong right here at home," Bush said.

Although "the oil market is very tight, with little spare capacity, there is sufficient oil to meet current needs," Bush said. "There is no justification for the intensive and unwarranted speculation in oil futures."

The unprecedented release of oil from the 15-year-old reserve comes eight weeks after the Iraqi invasion of Kuwait sent oil prices soaring and led to widespread demands that Bush open the reserve to moderate price boosts.

The 5 million barrels the Administration is now releasing is less than the amount the United States imports in a single day. But Bush and his aides hope that the small test release will calm markets by demonstrating the Administration's resolve. The full reserve could replace all U.S. imports for about three months.

Oil prices, which more than doubled in the days immediately after Iraq's Aug. 2 invasion of Kuwait, have jumped again in recent days, fueled by rumors of war and speculation about possible Iraqi attacks on Saudi Arabia's massive oil fields.

The current price increases "could not be entirely based on legitimate market factors," Fitzwater said, although he added that the Energy Department has found no evidence of price gouging.

"We're acting against what we believe is speculation in terms of unwarranted price increases," Fitzwater said, adding that Bush is concerned that the price situation could grow worse with the onset of the fall and winter heating season. "We need to make it clear that we do have oil available to put on the market."

Oil industry experts generally agree that recent price increases indicate that fear has overwhelmed the hard facts of the world oil supply.

"There's no doubt that the price increases we've seen over the last week or so, taken into the mid and high $30s, were not a product of the pure supply-demand fundamentals as we see them today, but rather a reflection of the market's anxieties about the risks of (military) escalation," said John Treat, an oil analyst with Booz, Allen & Hamilton in San Francisco and former energy adviser to President Jimmy Carter.

Based on the supply and demand, oil prices should be in the mid to high $20 range, Treat said.

Instead, the spot-market price for Britain's North Sea Brent oil, a widely traded oil future, peaked at more than $40 a barrel Wednesday before falling off slightly late in the day. Futures contracts for West Texas Intermediate, the benchmark U.S. oil, rose to $39.20 during the day.

Prices that high have not been reached since 1980, in the early days of the Iran-Iraq War.

Although the amount of oil being released is negligible in a world market that produces roughly 60 million barrels of oil every day, economists said the effect on oil prices should be immediate and dramatic.

"It could (drop) $3 a barrel. It could be $5," depending on the timing of the release, said Philip K. Verleger Jr., a leading oil industry economist with the Institute for International Economics in Washington.

"The psychological impact could be quite significant," said Thomas G. Burns, manager of economics at Chevron Corp. in San Francisco. "The message that's sent is that, No. 1, the strategic reserve is there, it is available, it does work, and the President is willing to use it for these purposes.

"And once you have it open, it's much easier to open it all the way," he added.

That last factor may have been part of Bush's decision to tap the reserve now after resisting doing so for nearly two months. According to Administration officials, the President initially feared that any quick move to tap the reserve would backfire by convincing consumers that a true shortage existed, setting off panic buying.

Members of Congress have been urging Bush to tap the reserve. "Clearly this is the kind of economic hardship the SPR was designed to reduce," a group of House Democrats declared earlier this week in a letter to Bush.

In recent days, as the cost of oil has soared, Bush has publicly softened his position, with Energy Department officials warning that shortages could become severe as demand increases to meet the beginning of the fall and winter heating season. Waiting until that point to release the first oil from the reserve could have set off a major price panic, officials feared.

Nonetheless, Fitzwater said, Bush--who spent nearly 20 years as an oilman in Texas before becoming a politician--made his decision "reluctantly."

World oil markets lost 4.8 million barrels of daily oil production when the United Nations imposed an embargo on Iraq and occupied Kuwait. Since then, increased production by Venezuela, Saudi Arabia and other oil exporters has replaced about two-thirds of that crude oil. A daily shortage of between 1.5 million and 1.7 million barrels each day remains, U.S. officials say.

The United States uses about 17 million barrels of oil each day, importing somewhat less than half of that total. Imports from the Middle East account for roughly 30% of U.S. supplies. Iraq and Kuwait together accounted for only a small percentage of oil used in the United States, about 730,000 barrels per day.

The strategic reserve--a massive lake of oil stored in underground salt domes along the coast of the Gulf of Mexico--was created by Congress in 1975 to assure the country an adequate supply of oil in the event of an international crisis. Until now, it had been never been tapped to ease market shortages.

A 1-million-barrel test was conducted in 1985 to try out the government's ability to retrieve oil from the reserve when needed.

The actual delivery of oil from the reserve will take 30 to 60 days, Fitzwater said. The government will publish a formal notice of sale, then take bids from buyers. Profits from the sale will go into the general treasury.

"This is obviously a critical insurance policy for the United States, and it's tremendously important that we know the oil can be recovered and put into the system in a timely and effective fashion," said Arthur Wiese, a spokesman for the American Petroleum Institute, the industry's main trade group in Washington.

Under the Energy Policy and Conservation Act of 1975, which established the reserve, the stockpiles can be drawn on when the President determines that such action is "required by a severe energy supply interruption."

The government has elaborate plans to consult with other major nations with oil stockpiles before tapping the petroleum reserve. Western Europe and Japan together have similar reserves totaling about 400 million barrels.

Fitzwater said other nations are not planning to tap their stockpiles at this point, however. "They don't feel it is necessary at this time," Fitzwater said, "and we don't see the need."

In a speech in Washington on Wednesday, Iran's minister of economic affairs and finance urged Western nations to "use their current reserves to relieve the current pressure on the international oil market and to restore stability."

"As far as we're concerned, a stable international oil market will be beneficial for both the oil producers and the consumers," Mohsen Nourbakhsh told the annual meeting of the International Monetary Fund and the World Bank.

Although oil-exporting countries have gotten more revenue from increasing oil prices, the cost of their imports has also gone up, Nourbakhsh said.

Shogan reported from Chicago and Lauter from Washington. Staff writers Patrick Lee, in Los Angeles, and Oswald Johnston, in Washington, contributed to this report.

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