These Banks Hold Oil

www.ctnow.com February 20, 2003 By MICHAEL DOBBS, Washington Post Enough oil is stored in the deep, cone-shaped salt caverns along the Gulf of Mexico - most of them large enough to accommodate the towers of the World Trade Center - to replace a year of imports from Saudi Arabia. Originally conceived as a response to the oil crises of the 1970s, the Strategic Petroleum Reserve has become as much a part of the United States' strategic arsenal as the aircraft carriers, airborne divisions and spy planes converging on the Persian Gulf region. According to the Department of Energy, the 599-million barrel reserve constitutes the nation's "first line of defense" against disruptions in energy supplies. As President Bush prepares for war with Iraq, he has been pressured to use the reserve to calm an increasingly jittery market. In addition to the uncertainty caused by the Iraqi crisis, a general strike in Venezuela has helped push oil prices to new highs and slashed inventories in many parts of the world to critically low levels. Members of Congress from the Northeast - including Sen. Christopher Dodd of Connecticut - have urged Bush to release some of the reserves to ease heating oil prices, which have soared to an average $1.77 a gallon in Connecticut. If the past is a guide, and Bush follows the precedent set by his father in the Persian Gulf War in 1991, he probably will resist the temptation to tap the underground storage sites in Texas and Louisiana until the onset of any hostilities. If the attack on Iraq begins, he will order the release of some of the oil in the reserve, a move designed to signal the United States' ability to ride out any temporary panic over the oil market. If the war goes badly, and Iraqi President Saddam Hussein succeeds in torching Iraqi oil fields or hitting oil facilities in Kuwait or Saudi Arabia, the reserves would assume huge strategic importance. The 50 or so caverns in Louisiana and Texas contain enough oil to replace 53 days of lost imports. In practice, officials say, supplies should last considerably longer, as the United States buys much of its oil from such countries as Canada and Mexico, which would probably not be interrupted by a crisis in the Middle East. The Strategic Petroleum Reserve is "a powerful instrument," said John Shages, one of the Energy Department officials responsible for managing the network of storage sites, pipelines and loading facilities strung out along the Gulf of Mexico coast. "It gives the president a tremendous tool to use in the event of a severe disruption to the market, from an act of God to a political-military event." Because of the tightness of the international oil market, said Edward Porter, an economist at the American Petroleum Institute, the Strategic Petroleum Reserve could play "a much more central role" in a new Gulf war than it did in 1991. A decade ago, there was plenty of excess capacity in the oil market. After the war began in January 1991, prices dropped from more than $30 a barrel to about $20. Today, by contrast, it would be much more difficult to offset a likely loss of Middle Eastern oil, if the region became embroiled in war. Iraq alone sells 2 ½ million barrels a day to foreign countries, including the United States, through smuggling and "oil for food" arrangements approved by the United Nations. Although Venezuelan oil is slowly coming back on stream, as a general strike against populist President Hugo Chavez winds down, exports are no more than half those of pre-strike levels. According to oil analysts, the only country in the world that can significantly increase production levels practically overnight is Saudi Arabia, which has about 1 million barrels a day of excess capacity. In recent weeks, the Saudi government has boosted production to offset losses from Venezuela. But the Bush administration does not want to be held hostage to a potentially unstable Arab country rife with anti-Americanism that has previously used oil as a weapon against the United States. "We shouldn't allow U.S. national security to be dependent on decisions in Riyadh, when the president has the ability to take those decisions," said Edward L. Morse, who was responsible for international energy policy at the State Department during the Reagan administration. "The Strategic Petroleum Reserve allows the U.S. government to put much more oil onto the market (in the short term) than we can get from the Saudis." How much oil should be released from the reserve, and under what circumstances, is the subject of great debate among energy specialists. President George H.W. Bush was criticized for not acting after the Iraqi invasion of Kuwait in August 1990, when oil prices rose as high as $40 a barrel. He finally ordered a limited drawdown of 33.75 million barrels on Jan. 16, 1991, the same day he announced that U.S. warplanes had begun attacking Baghdad. By the time the oil reached the market, prices had fallen sharply, and the crisis was largely over. Last week, as the price of light sweet crude on the New York Mercantile Exchange rose to more than $36 - a 26-month high - calls for the release of oil from the reserves came from airlines hit by soaring fuel costs, refineries suffering from a lack of Venezuelan oil and senators worried about the rising price of both heating oil and gasoline for their constituents. Oil industry executives oppose the release of oil from the reserve, except in a national emergency. The Bush administration is keeping its options open. Energy Secretary Spencer Abraham said last week that the reserve should be used only in the event of severe supply disruptions, and not to bring down prices.