Decline in U.S. oil reserves raising fears of shortage

www.accessatlanta.com By MICHAEL E. KANELL The Atlanta Journal-Constitution

With war looming, oil prices have dropped but supplies are perilously tight -- raising chances of a shortage just as American drivers rev up for spring and summer.

Despite a slight increase last week, crude oil inventories are 18 percent below their levels of a year ago -- just barely above the amount needed for daily use, the Energy Information Administration said Wednesday.

Yet after President Bush on Monday announced plans to attack Iraq, oil prices fell -- a clear sign that traders expect no disruption in supplies, no spread of war to surrounding countries. Moreover, nearby Saudi Arabia has pledged to make up for any shortfalls.

But measly oil stocks in reserve mean that America is skirting close to a shortage, according to energy experts.

"These are the lowest stocks I've seen since 1993," said Jay Hakes, former Energy Information Administration chief. "I think there's more risk at this point that prices go back up. Besides, prices are still very high. The data suggests that we are not out of the woods yet."

The United States has been depleting its reserves by consuming 1 million barrels per day more than it produces and imports, said James Williams, president of WTRG Economics.

"We continue to run on empty," Williams said.

The Bush administration has promised to tap some of the Strategic Petroleum Reserve if there is a shortage, a move that can add several million barrels a day.

There is something of an energy window, since the winter need for heating oil has softened and the vacation season is still some time off. Energy prices have been adding a roughly $60 billion-a-year tax on consumers and companies. That load grew heavier in recent weeks as oil burgeoned to nearly $40 a barrel -- almost twice the price of a year ago.

The higher the price of oil, the greater the danger to the economy. Much of America's driving -- work, school, shopping -- will be done regardless of price, and money for gas is siphoned from other things.

In 1991, the start of the Gulf War took the air out of oil prices, proving the doomsayers wrong. But this time, more supplies are threatened -- not just in Iraq. Political turmoil has kept both Venezuela and Nigeria from full production.

"That would be a lot for the Saudis and the SPR to handle," said Hakes, now director of the Carter Presidential Library in Atlanta. "But it's doable."

The economy started a slide in 2000 that became a recession early in 2001. While growth began later that year, recovery has been sluggish at best. More than 300,000 jobs were shed last month, yet the economy still has pockets of strength.

Housing has provided unprecedented power to the limping economy for two years. And refinancing -- fueled by 40-year lows in interest rates -- again hit record highs last month, the Mortgage Bankers Association said Wednesday. But purchases have leveled off.

"Despite the heated pace of refinancing, housing's positive impact on the broader economy is waning," said economist Celia Chen of Economy.com

Construction of new homes last month took its sharpest tumble in almost a decade. After a buying binge for much of 2002, supplies of unsold homes have climbed back to year-ago levels.

"A year ago, it looked like every place was doing fine, but we are starting to see some soft spots," said economist Michael Carliner of the National Association of Homebuilders. "Atlanta is one of the markets where people have to be more cautious about speculative building."

With business investment still anemic, consumers have carried the economy, but they have become increasingly fretful. Last month consumer spending faltered also, and consumer comfort last week took yet another dip, to again reach a nine-year low, according to the ABC/Money Market survey.

About 52 percent of Americans say the economy is deteriorating -- 64 percent of women, but 39 percent of men.

Yet that cocktail of indicators is an undependable guide, said Rajeev Dhawan, director of the forecasting Center at Georgia State.

"Those trends cannot be projected until the future until we know how the war turns out," said Rajeev Dhawan, director of the Forecasting Center at Georgia State. "Everything depends on how the war turns out."

The stock market, considered a leading indicator, has embraced the arrival of war as the end to uncertainty.

But Wall Street in 1991 also boomed when the bombing started -- but the economic bounce was brief. For more than a year, economic growth was shaky and unemployment kept rising.

Now, the economy will come out of the war already damaged by months of high oil prices and unexpectedly cold weather, said John Silvia, chief U.S. economist for Wachovia Securities. Pessimists have said the war will send the economy dipping back into recession. Silvia is only a bit more hopeful.

"The economy still avoids a double dip but just barely," he said.

And that is assuming the battle goes according to administration plans.