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U.S. and allies to tap into oil reserves

The White House exercises one of its last remaining options to stimulate the struggling economy by adding to the supply of oil.

June 24, 2011|By Neela Banerjee and Walter Hamilton, Los Angeles Times
  • A Shell employee changes the price at a gas station in Menlo Park, Calif. The International Energy Agency announced Thursday that it will release emergency oil stockpiles to combat high prices around the world.
A Shell employee changes the price at a gas station in Menlo Park, Calif.… (Associated Press )

Reporting from Washington and Los Angeles — A surprise move to tap government oil reserves could slash painfully high gasoline prices this summer and give the U.S. economy a much-needed boost, but the rare action underscores the challenge posed by the weakening recovery.

The price of oil tumbled Thursday after the U.S. and other industrialized countries, citing the loss of oil from Libya, said they would release 60 million barrels of crude from emergency stockpiles and sell it on the energy markets over the next 30 days. Half of the oil is to come from the U.S. government's Strategic Petroleum Reserve on the Gulf Coast.

To some economists, the step is a Hail Mary pass showing that U.S. policymakers are just about out of moves to help the economy. On Wednesday the Federal Reserve cut its forecast of the country's 2011 economic output and confirmed the end of its controversial, 7-month-old program to boost growth with a $600-billion bond-buying spree.

With Congress unlikely to approve new government spending to stimulate the economy, the Obama administration is left with limited prescriptions, such as temporarily adding to the supply of oil.

"I view this as a kind of Band-Aid but the kind that's needed to avoid" another recession, said Frank Verrastro, director of the energy and national security program at the Center for Strategic and International Studies, a Washington think tank.

But Brian Wesbury, chief economist at First Trust Advisors in Wheaton, Ill., called tapping the reserve "an act of economic desperation."

"We've tried everything under the sun and yet unemployment is still high and the economy is in a soft patch," he said. "Now they're reaching for straws."

That soft patch has been blamed on a surge in oil prices early this year to as high as $113 a barrel, along with business disruptions created by the March earthquake and tsunami in Japan.

Thursday's news sent the price of crude sinking $4.39 to $91.02 a barrel in New York trading, its lowest closing price since Feb. 18.

On Wall Street, shares of airlines, retailers and other companies that would benefit from higher consumer spending finished the day higher on hopes that cheaper fuel will boost consumption by Americans who have been pinching pennies so they can afford to fill up their gas tanks.

But optimism for consumer spending was more than offset by another batch of weak economic reports, including a rise last week in unemployment claims. The Dow Jones industrial average finished at 12,050, down 59.67 points, after a wild trading session during which the index was down as much as 234 points.

Although the price of crude had already dropped in recent weeks, it remains well above its June 2010 level of about $75 a barrel, in part because the fighting in Libya has stripped about 1.5 million barrels of oil a day from global supplies.

The total amount of crude being released from reserves — 60 million barrels — amounts to less than a day's worth of worldwide oil production. Still it works out to 2 million barrels a day for the 30 days that the stockpiles are to be drained, more than making up for Libya's lost output.

As a result, some analysts said, crude could drop as low as $80 a barrel.

"The last thing propping up oil prices was the loss of … crude from Libya, and this release takes away that pressure too," said Phil Flynn, an analyst with PFGBest Research in Chicago.

It's unclear how long any decline would last. But even if oil merely stays below $95 a barrel, motorists could start seeing pump prices nationwide drop at least 50 cents a gallon from their current levels, said Jim Glassman, a senior economist at JPMorgan Chase & Co.

Nationwide, gasoline is selling at the pump for an average of $3.61 a gallon, down from $3.98 in early May, according to the AAA Fuel Gauge Report. A year ago, the average was $2.74 a gallon.

In California, the average price stands at $3.88 a gallon, down from $4.25 in May and $3.11 a year ago.

For gasoline prices to get back to where they were last summer, crude prices would need to drop to $70 to $80 a barrel, analysts say.

Any significant decline could juice economic growth in the second half of the year, adding to a rebound already predicted by many analysts who say the current slowdown is the result of temporary factors.

Until then, however, the Obama administration must fight the perception that the economy is swinging back and forth with no real gain, and that there's nothing on the horizon to improve the outlook.

"A slowdown can become self-reinforcing if business and consumer confidence falters, and that's what's happening right now," said Jane Caron, chief economic strategist at Dwight Asset Management in Burlington, Vt.

The U.S. last released oil from its strategic reserve in 2005 in the wake of Hurricane Katrina, which damaged much of the country's capacity to produce crude.

"We are taking this action in response to the ongoing loss of crude oil due to supply disruptions in Libya and other countries and their impact on the global economic recovery," U.S. Energy Secretary Steven Chu said. "As we move forward, we will continue to monitor the situation and stand ready to take additional steps if necessary."

In Washington, reaction to the decision to tap the oil reserve broke down along partisan lines. Democrats and their allies backed the decision. Republicans and their supporters uniformly decried it as a political gesture meant to shore up the president's flagging approval ratings.

Neela.banerjee@latimes.com

Walter.hamilton@latimes.com

Ronald D. White and Tom Petruno in Los Angeles contributed to this report.

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