What the options are for lowering oil prices

US mulls how to ease pump prices - tapping strategic reserve, encouraging more production.

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.

Energy prices are continuing to rise despite the fact OPEC is planning to meet next week in Amsterdam to discuss increasing production. "It looks like they are trying to come to a consensus to increase their quota level by 1.5 million barrels per day," says Kilduff.

However, analysts believe OPEC members are already cheating on their quotas and are producing an extra 2 million barrels of oil per day. "So that means if they increase their official quotas there is no new net oil on the market," says Mr. Felmy.

Only a month ago, Saudi Arabia lowered quotas. Now, the Oil Kingdom, with almost the only spare capacity around, is one of the leading proponents to increase output. "They see the $40 price as hurting the global economy," says Kilduff.

To get more oil on the markets, some in Congress are looking at the nation's Strategic Petroleum Reserve (SPR). During the budget debate last month, Sen. Carl Levin (D) of Michigan and Sen. Susan Collins (R) of Maine included language that asked the administration to stop filling the SPR. It passed but had no affect of law. This week, Sen. Charles Schumer (D) of New York is expected to ask for the release some of the crude from the SPR as President Clinton did during an oil spike.

One consumer group, Public Citizen, is asking the administration to investigate what it terms the "uncompetitive practices by large companies operating in the US."

In a recent study, the watch-dog group examined the impact of recent mergers on oil industry market share. "We found in the last 10 years there is a huge concentration in refining capacity ownership," says Tyson Slocum, the research director. "That increased market share has made it easier to do anticompetitive practices."

Spiking oil prices have become part of campaign rhetoric. Last week, the Kerry campaign accused the White House of having no plans. Scott McClellan, White House spokesman, says the president "remains concerned about rising gas prices."

Some energy experts believe the price of oil may be close to peaking. The EIA is projecting the national average for gasoline will hit $2.03 a gallon in June. Mr. Costello doesn't see the price falling below $1.90 a gallon for the rest of the summer. The highest price for gasoline was in 1981 when it hit $2.99 in today's dollars.

Other analysts, however, see higher prices. Kilduff expects prices to peak near Memorial Day at around $2.15 a gallon.

Market forces are already working to reduce prices, says Mr. Zandi. He points to an increased number of oil rigs in the Gulf of Mexico and increasing supplies from the Caspian Sea region. "The energy industry has been distracted by the mergers and acquisitions and accounting scandals," he says, "but all that is changing."

At the same time, he says the strong demand for oil in China should slow as that country's economy loses steam. He expects the US as well should slow from its 5 percent growth pace. "I think next year crude oil prices will be closer to $30 a barrel than $40," he says.

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