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Administration Optimistic On Oil

Energy Secretary Bill Richardson said Wednesday high oil prices and low supplies threaten the world economy but he is optimistic that producers will agree later this month to increase production.

Richardson, appearing before a congressional committee, gave no indication the administration has imminent plans to draw down emergency oil reserves to force down prices. The administration is believed to be edging closer to such a drawdown amid complaints about high heating-oil and gasoline costs.

"We cannot sustain this imbalance between supply and demand without risking serious repercussions for the world economy," Richardson said in testimony prepared for the House International Relations Committee.

At the same time, he said, the United States "cannot force nations to increase production." Richardson just returned from a week-long trip that included meetings with Saudi Arabian, Venezuelan and Kuwaiti oil ministers. He urged them to increase production, he said.

But Republican and Democratic lawmakers questioned the administration's response to the soaring oil prices that have led to a doubling of heating-oil bills this winter and some of the highest gasoline prices ever, averaging nearly $1.50 a gallon nationwide.

"Why has the administration sat idly by?" the committee chairman, Rep. Benjamin Gilman, R-N.Y., demanded in opening remarks.

Rep. Sam Gejdenson of Connecticut, the committee's ranking Democrat, noted that President Clinton is considering releasing oil from the government reserve, but said, "We should have done that a long time ago.

"We're being held hostage," declared Gejdenson, referring to decision by the Organization of Petroleum Exporting Countries to hold back production by some 4.3 million barrels a day.

While no decision has been made on drawing down the federal petroleum reserve, President Clinton made clear Tuesday that he has not ruled out using some of the nearly 600 million gallons of oil stored in salt caverns on the Gulf Coast to try to ease tight supplies and drop prices that are hovering around $30 a barrel.

"I have not taken the petroleum reserve issue off the table," said Mr. Clinton, calling such a release of oil a possibility "in the event that we don't seem to have any other options" to force down gasoline prices.

Richardson returned Tuesday from a weeklong trip that took him to Mexico, the Persian Gulf and Europe, where, he said, he sought to convince officials of "the folly of artificial production quotas" that threaten the world economy.

Some oil producers, including Saudi Arabia and Kuwait, indicated they were ready to boost production, but the timing and the amounts have yet to be determined. The OPEC countries, which curtailed production a year ago to boost prices, are to meet later this month to decide production strategies.

But administration officials are concerned that additional oil will come too late to head off continuing ncreases in gasoline prices as the heavy-demand summer driving season approaches. Some within the administration have argued that the government's Strategic Petroleum Reserve could be used to ease the supply crunch and force down prices in the short term.

Richardson has maintained the emergency reserve should be drawn down only to counter supply disruptions and not to manipulate prices. But in recent weeks the administration has considered an oil "swap" that essentially would allow oil companies to borrow from the government stockpile.

It would work this way:

The government could put oil - perhaps 500,000 barrels a day - out for bid. Companies would take the oil, promising to return it in perhaps a year or two, and agree to put an additional amount into the reserve as well. No money would be exchanged.

The oil companies could profit because the current price of oil is much higher than what oil costs on the futures market for delivery next year or the year after. The companies could buy the cheaper oil, which eventually will be returned to the government, on the futures market, and sell the oil taken from the reserve at current prices.

The additional oil would help ease petroleum inventories which are much lower right now than normal for this time of year, and ease prices, economists said.

The oil industry is not keen on using the strategic reserve "because they know it's going to lower prices," said Adam Sieminski, an energy economist for Deutsche Banc Alex. Brown. Still, he added, a swap should attract plenty of buyers.

While current oil prices are about $30 a barrel, the cost of oil on the futures market for delivery 13 months from now was $22 a barrel and two years from now $19.40 a barrel on Tuesday, he said.

But the administration has been reluctant to use the strategic reserve despite repeated calls from Northeast lawmakers to do so. One concern was that such a move might hamper efforts to get friendly producers such as Saudi Arabia and Mexico to boost production, which most economists agree is the long-term answer to the current price crunch.

Oil prices have soared from $10.72 on Dec. 10, 1998, to a nine-year high of around $30 a barrel. While heating oil prices, which doubled in some areas of the Northeast this winter, have begun to decline, gasoline prices have been increasing to a national average of $1.47 a gallon, according to the Lundberg Survey, up 6 cents a gallon from only two weeks ago.

By H. Josef Hebert
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