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Sitting on black gold
Tapping vast U.S. oil reserve could cut gas prices, but it won't happen until war begins -- if then.
February 28, 2003: 11:17 AM EST
By Mark Gongloff, CNN/Money Staff Writer

NEW YORK (CNN/Money) - As U.S. gasoline prices climb to near record highs, some say relief is sitting in vast salt caverns near the Gulf of Mexico -- about 600 million barrels of oil, that is. Black gold. Texas tea.

But while tapping this reservoir could cut oil and gas prices, President Bush probably won't turn the spigot, at least not until war breaks out in Iraq. And that's probably a good thing, according to some economists and energy experts.

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Driven by worries about a possible U.S.-led war in Iraq and an oil workers' strike in Venezuela, the world's No. 5 oil exporter, crude oil prices have nearly doubled in the past year, surging to two-year highs. Iraq sits on the world's second-biggest untapped oil reserve and is in the middle of the world's biggest oil-producing region, the Persian Gulf.

Meanwhile, gasoline prices have jumped about 20 percent in the past six months and about 50 percent in the past year.

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Motorists in some cities around the country are paying $2 for a gallon of gas, and a recent survey by the American Automobile Association (AAA) found U.S. gas prices averaging about $1.66 a gallon, not far from the survey's record high of nearly $1.72, reached in June 2001.

All of this is bad news for a U.S. economy still struggling to recover fully from the recession it suffered in 2001.

Higher oil and gas prices act as a sort of tax on consumers and businesses, according to many economists. If consumers are spending more at the gas pump, they've got less to spend on other things, and businesses have a harder time making a profit when they have to pay more for energy.

As a result, some politicians have begun calling for President Bush to release oil from the Strategic Petroleum Reserve (SPR), those vast pools of oil sunk deep beneath Texas and Louisiana, to boost the supply of oil and drive prices down.

"Having but not using the SPR is like having an ace in the hole and saying you're not going to play the card," Sen. Charles Schumer, D-N.Y., said last week.

But most oil analysts say it's impossible to tell how much good releasing oil from the SPR would actually do to cut prices, with so many factors -- including the possibility of an oil-worker strike in Nigeria, a key exporter, and an exceptionally cold winter in the Northeast -- pulling oil prices in different directions.

"There are so many factors going on right now; it's a perfect storm," said Genevieve Murphy, a spokeswoman for the American Petroleum Institute, an industry lobbying group.

What's more, if the United States makes a habit of toying with its SPR simply to manipulate prices, it could find itself in the position of competing with the Organization of the Petroleum Exporting Countries (OPEC), the cartel that exports about 38 percent of the world's oil and has a big influence on oil prices.

"We could say we were releasing oil to drive prices down until they get to $25 a barrel," said Fadel Gheit, oil analyst with Fahnestock & Co. "Then OPEC could say it'll cut production to keep prices up. It's a very delicate subject to tinker with."

The SPR was established after the Arab oil embargo of 1973-74, which caused oil and gasoline prices to nearly quadruple, leading to a long and nasty U.S. recession.

The SPR's 600 million barrels of oil could allow the United States to survive for up to 60 days without any oil imports and for up to 300 days without imports from the Persian Gulf.

Its oil is meant for use only in the event of oil supply shortages "of significant scope or duration" that hurt the economy. Though it's been used in other ways -- including a sale made to help balance the federal budget in 1996 -- President Bush has long held that he won't touch the SPR except in extreme cases.

"The SPR is, by design, to be used for severe disruptions of the market. That is a type that has not occurred," White House spokesman Ari Fleischer said last December, a stand the administration has maintained ever since.

War might lead to tapping the SPR

Some analysts think the eruption of hostilities in Iraq -- which could happen in the next few weeks -- will be the right moment to tap the SPR.

Bush's father did the same thing at the start of the Gulf War in 1991, authorizing the sale of 14 million barrels from the SPR at the same time he announced that the military effort to drive Iraqi forces from Kuwait had begun. The average price of a barrel of crude oil plummeted from $32.25 on Jan. 16, 1991, the day of the announcement, to $21.48 the following day.

The idea that the United States was willing to keep oil flowing through the market provided a big psychological boost, analysts said -- a boost that might soon be necessary again.

"The market is so fragile that there needs to be an announcement [of SPR tapping] simultaneously with the announcement of war," said Larry Goldstein, President of PIRA Energy Group, who along with PIRA Chairman John Lichtblau, authored the SPR concept in 1971. "Barrels and bombs must be released simultaneously."

Though Goldstein and Lichtblau criticized the first President Bush for not tapping the SPR sooner, Goldstein said the current President Bush should wait in this instance because it's possible the SPR release might not be necessary -- there might not be a war at all.

And other analysts note that simply going to war might not be enough to constitute a supply emergency; Bush might not tap the SPR until he sees actual disruption in supply.

After all, oil prices will probably fall a bit once war begins simply because traders will be relieved that the build-up to war is over; and prices would be falling in the spring anyway, when demand for heating oil drops.

"We could suddenly have oversupply and weaker demand, and that will probably bring oil prices down on their own," said Gheit of Fahnestock & Co.  Top of page

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