Oil reserve may drive up costs - Senate study says Bush created a shortage on world markets that helped raise prices

www.detnews.com Thursday, March 6, 2003 By Mike Hudson / The Detroit News WASHINGTON -- The Federal government may have helped drive oil prices up $10 per barrel last year by hoarding millions of barrels for the Strategic Petroleum Reserve, said a Senate subcommittee report released Wednesday. Oil industry experts questioned those findings. President Bush ordered the U.S. Department of Energy to begin filling the nation's oil reserves in early 2002 to prepare for a possible war in Iraq and to deal with the general uncertainty in world oil markets after Sept. 11, 2001's terror attacks. The government created the reserve in the 1970s to stockpile oil in case of supply disruptions overseas. But in the process of stockpiling oil last year, Bush created a shortage on world markets that helped push prices up, said U.S. Sen. Carl Levin, D-Mich., who chairs the subcommittee that published the report. "The government established the (Strategic Petroleum Reserve) to protect U.S. consumers from a major oil shortage and the damage caused by high oil prices," Levin said. "But in the past year, the Department of Energy's management of (the reserve) has inflicted a lot of pain on U.S. consumers." Indeed, oil prices have soared during the past four months, jumping from $26 per barrel in November to more than $36 per barrel today. Levin's report said the Department of Energy's policy cost American consumers between $500 million to $1 billion in higher energy costs. But oil analysts say the Levin report vastly overstates the impact of the Strategic Petroleum Reserve and its effect on global prices. Fadel Gheit, oil analyst for Fahnestock & Co. in New York, said the labor strike among oil workers in Venezuela, cold weather in the Midwest and Northeast and tensions in the Middle East are the culprits in higher petroleum prices. The United States consumes 20 million barrels of oil per day out of the worldwide production of 70 million barrels per day, Gheit said. The Strategic Petroleum Reserve is limited to adding only 100,000 barrels per day making it insignificant to global oil prices, he said. "The (reserve) adds 100,000 barrels a day, which is a drop in the bucket," Gheit said. "A traffic jam for a few hours in New York can eat up almost as much as what they add to the reserve." Furthermore, the DOE decided to halt additions to the reserve when the Venezuelan oil strike began in early December. So any impact on prices is already being addressed, said Chip Hodge, oil analyst and managing director in the Bond and Corporate Finance Group of John Hancock Financial Services in Boston. You can reach Mike Hudson at (313) 222-2293 or mhudson@detnews.com.