Pledge to release oil reserves if war starts

news.ft.com By Rebecca Bream in London and Carola Hoyos in New York Published: February 25 2003 19:26 | Last Updated: February 25 2003 19:26

Spencer Abraham, the US energy secretary, attempted to calm oil market nerves on Tuesday, saying that the US would release some of the country's strategic oil reserves in the event of war with Iraq.

The world's oil stocks have fallen to historically low levels and commercial oil producers are facing supply problems. Those arguing for the release of strategic oil reserves - held in countries such as the US and Japan - fear that these factors could further inflate the price of oil.

"We will and can act quickly to use the Strategic Petroleum Reserve to fortify efforts by producers to offset any severe disruption if needed," said Mr Abraham, speaking at a senate energy committee hearing in Washington.

Crude oil prices fell by more than 30 cents immediately after Mr Abraham's comments, but US prices soon shot back up.

In midday trade, April crude oil futures on NYMEX rose 27 cents to $36.75 a barrel. In London the April Brent future price stayed lower, down 22 cents at $32.93 per barrel.

Oil prices recently hit their highest level in more than two years, boosted by a so-called war premium under which the market has priced in potential risks to the oil supply posed by a second Gulf war. The price has also been kept high by a surge in demand for heating oil caused by a cold winter in the US.

Analysts were sceptical about whether releasing strategic stocks would make any difference to the oil price. Steve Turner, oil analyst at Commerzbank in London, said: "Only the removal of uncertainty about whether there will be a war is going to calm this market."

The oil market is not only facing possible supply problems in the Gulf region but analysts are also worried about the political situation in oil-rich Nigeria. They says that, if strike action disrupts output in other countries, as it has done in Venezuela, there is no safety net for oil supplies.

Mr Abraham's move towards releasing US oil reserves followed a speech by Claude Mandil, the director of the International Energy Agency, warning against using reserves too soon.

Mr Mandil told a conference at the Royal Institute for International Affairs in London that Opec had assured the agency, which controls the west's oil reserves, that it would raise oil output to offset any disruption in production caused by war.

"I believe that the producers should act first. Reliance on strategic reserves should be a last resort," said Mr Mandil. But he acknowledged that Opec had already raised its production to mitigate the effects of the general strike in Venezuela and that it could not be relied on to fill all possible gaps in world supply.

During the first Gulf war in 1991, the agency was criticised for releasing strategic oil reserves too late in the conflict which, some said, led to an overinflated oil price.