Use the Oil Reserve as a Lever
Families planning their summer vacations would do well to start budgeting for some extra expenses. The Energy Department warns that retail gasoline prices are headed toward “unprecedented levels” and could reach a national average of $1.75 to $1.80 a gallon during summer’s peak driving months. In California, prices could spike well above that.
Even if the Organization of Petroleum Exporting Countries and non-OPEC producers were to immediately raise output by several million barrels a day, says the department, significantly higher fuel prices are unavoidable. U.S. oil inventories are at a 23-year low, which itself affects prices, while global oil consumption exceeds production by about 2 million barrels a day. It can take six weeks or more for oil newly pumped out of the ground to reach retail markets.
OPEC has scheduled a meeting March 27 to decide whether to ease up on the production cutbacks it put in place at the end of 1998. Right now Saudi Arabia, Venezuela, Kuwait and non-OPEC producer Mexico seem ready to boost output. By how much is unclear; most U.S. experts think it could be between 1 million and 3 million barrels a day. But Persian Gulf politics could thwart that expectation.
Iran, always one of OPEC’s most hawkish members on pricing policy, opposes expanding supplies. It argues that the second quarter of the year always brings a drop in oil demand and that to raise output would only work to depress prices when consumption declines. Like other major oil exporters, including Russia, Iran has done very well over the last 14 months of restrained production, seeing prices almost triple, to $32 a barrel. Iran has nothing to gain if OPEC raises its production quotas since it is already producing at maximum capacity. Iran and Saudi Arabia have recently reached a rapprochement after years of political hostility. Some think that pressure from Tehran could convince Saudi Arabia--the biggest foreign supplier of oil to the United States--to modify its plan to produce more.
President Clinton says every option for dealing with the shortfall remains open. That implicitly includes taking oil from the nearly 600-million-barrel Strategic Petroleum Reserve to sell on the domestic market. Energy Secretary Bill Richardson has said he doesn’t think much of that idea since it means “intervening and manipulating the market.” But deliberately limiting supplies in a period of rising demand to run up prices is classic market manipulation, with the added danger that it could lead to economic disruption and even global recession. A readiness to take 1 million or 2 million barrels a day out of the strategic reserve would quickly get the attention of the major oil exporters and encourage behavior that is more responsible. The sooner that decision is made the better.
