Time to Tap the Oil Stash?

As prices climb, Bush is under pressure to release supplies

With war worries sending crude oil up 41% in three months, energy markets are on edge over whether President Bush will release oil from the Strategic Petroleum Reserve. Presidents have tapped the reserve just five times since it was established in 1975 to protect the nation from another extreme supply shock, such as the 1973 Arab oil embargo. Each time, the move was criticized.

But as crude sits above $36 a barrel for the first time since October, 2000, the current Administration faces a dilemma: Since the September 11 terror attacks, its policy has been to add to the reserves. Now, some question whether that policy is counterproductive. Is it time once again to consider releasing oil? Policymakers don't have all the answers. Sources say Energy Dept. officials in recent weeks have asked economists when to release oil and what the market response would likely be. Here's a guide to what the experts are saying.

Why are SPR supplies currently at a record high?

After the terror attacks, President Bush ordered the Energy Dept. to fill the SPR--which then stood at 544 million barrels--to the brim as a security precaution. The reserve now contains 599 million barrels and is well on the way to its maximum capacity of 700 million barrels--enough to quench America's thirst for Persian Gulf imports for 313 days.

When can the SPR be tapped?

By law, the President can use the reserve to counter a "severe energy supply interruption" of "significant scope and duration," at home or abroad, that harms national security or the economy. That vague wording gives the President plenty of leeway to decide what constitutes a severe emergency.

How have past Administrations used that leeway?

President Bush's father first used the SPR during the 1991 Gulf War. Critics complained that he waited too long--the day the U.S. began bombing Baghdad. By then, crude prices had already doubled, reaching as high as $41 a barrel. The release came too late to prevent damage to the economy and may have contributed to the recession that cost Bush Sr. his reelection.

President Clinton was less restrained, tapping the SPR three times in 1996 to raise government revenue and once in 2000 to dampen soaring home-heating oil prices. Critics said Clinton was too quick to use the reserve for political purposes--raising revenue to fill a fiscal hole and boosting Democratic candidates in the heating-oil-dependent Northeast.

So when should the SPR be tapped?

It's a question of timing. A consensus is emerging among economists that if the reserve is going to be tapped to prevent high oil prices from damaging the economy, it should be done early in any crisis. So if the Administration is considering releasing oil, it should do so well before the war erupts to brake anticipatory price lurches. Says James Schlesinger, President Carter's Energy Secretary: "You want to release the oil in advance of a constriction in supply. You don't wait for prices to run up."

Isn't the current runup in prices partly a result of the Administration's stockpiling?

Some critics, including Carl Levin, the Democratic Senator from Michigan, complain that socking away oil now means there's less available for consumers. It is true that prices at the pump have risen 13%, to $1.58 a gallon, in the past three months. That has led Levin to call for a suspension of SPR deposits until prices stabilize. While the President has postponed SPR purchases through March, Levin wants a longer delay. But most economists say that adding 100,000 barrels a day to the SPR is a drop in the bucket for a nation that consumes 20 million barrels a day. The strike in Venezuela and Iraq worries are the real force behind price increases.

Could the SPR be better managed?

Many economists now conclude that purchases and releases should respond to supply and demand signals: Buy oil when prices are low, and release it before skyrocketing prices threaten the economy. If President Bush wants to avoid the critics who hounded his predecessor and his father, he could follow a simple rule: Let the markets dictate.

By Laura Cohn with John Carey in Washington

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