What the options are for lowering oil prices

With oil and gasoline prices moving to uncharted levels, a lot of people are looking for a way to make filling up the gas tank less painful.

Some US senators want to tap the Strategic Petroleum Reserve as a way to lower the price of crude oil. OPEC is talking about increasing production. A consumer group wants the Bush administration to open up an investigation into the competitive practices of the oil companies. At least one book predicts current prices "may be the preamble to a major crisis."

"Such suggestions are not unusual," says economist Mark Zandi of Economy.com. "This is what happens when there is an unfortunate confluence of strong demand and constrained supply."

Last week, that confluence pushed oil prices to their highest noninflation-adjusted price ever: $41.38 a barrel. On the futures markets, gasoline prices also hit all time noninflation-adjusted highs. The stock market was pummeled as traders worried about the economic effect.

"We're just seeing continued worries about gasoline production," says John Kilduff, an oil trader at Fimat USA. Last week, for example, a power outage hit a Louisiana refinery, cutting production for only a short time. As soon as the news hit the market, however, the price of gasoline leaped 5 cents a gallon. "The market is on tenterhooks," says Mr. Kilduff.

Some executives in the oil industry think such speculation is driving the oil markets. Bill Greehey, the CEO of Valero Energy, a large refiner, says there is no good market reason for the high prices. If the hype were removed from the markets, he says oil prices would fall $5 a barrel overnight. And since crude oil represents half the cost of gasoline, he says that would quickly reduce pump prices.

Oil traders have been particularly alarmed by the relatively low level of gasoline inventories despite the fact refineries are operating at 96 percent of capacity. However, the industry says it expects to get by. "We will be light on inventory this summer but if things go OK we should be OK," says Bob Slaughter, president of the National Petrochemical & Refiners Association in Washington. "We've been able to meet demand so far."

Oil experts have been surprised that imports of gasoline have not filled the gap in the US. John Felmy, chief economist at the American Petroleum Institute, wonders if some of the offshore refiners have been slow to meet new US standards on the amount of sulfur allowed in gasoline.

"We have heard the importers were petitioning the EPA to change its stance and the agency decided not to," he says.

In fact, Mr. Slaughter says the domestic industry won't be able to produce much more. "There's been no new capacity in the last three years," he says.

Higher demand, up 3 percent so far this year, is one of the factors behind the tighter gasoline supplies. "The higher demand this winter meant we didn't have an opportunity to build a cushion for gasoline," says Dave Costello, an analyst at the Energy Information Agency (EIA) in Washington.

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