Bush Halts Oil Reserve Purchases

Under Pressure, Policy Reversed

The Bush administration yesterday halted purchases of crude oil for the nation's Strategic Petroleum Reserve, reversing its policy on the emergency reserve three days after Congress voted overwhelmingly in favor of suspending the purchases to ease the upward pressure on oil prices.

The Energy Department announced that it would not sign contracts to buy up to 13 million barrels of crude that would have been delivered to the underground salt caverns on the Gulf of Mexico coast in Louisiana and Texas between July and December.

Just 17 days ago, President Bush had asserted the importance of continuing to pump oil into the reserve because of the risk of a terrorist attack on oil facilities. Regarding a halt in purchases, Bush said that "on a cost-benefit analysis, I don't think you get any benefits." He noted that the purchases for the emergency reserve represented less than 0.1 percent of world oil demand.

Oil experts, economists and lawmakers from both parties had argued that buying 76,000 barrels a day of crude oil for the reserve was needlessly adding to upward pressure on prices, especially for the high-quality, light crude used as a benchmark on the New York Mercantile Exchange. They also said that the reserve, which has 702.7 million barrels, or enough to replace U.S. oil imports for 52 days, was adequate for now.

The reserve's capacity is 727 million barrels, but the Energy Policy Act of 2005 authorized the president to expand it to 1 billion barrels.

"To continue with these contracts would have been recklessly irresponsible," said Rep. Edward J. Markey (D-Mass.), chairman of the House Select Committee on Energy Independence and Global Warming. "The Bush administration should be using our Strategic Petroleum Reserve as a weapon to help consumers, not continuing to waste hundreds of millions of taxpayer dollars and putting additional upward pressure on prices by acquiring oil at record prices."

Bush's reversal came on the day that Saudi Arabia announced that it was increasing its output by 300,000 barrels a day for the month of June. Though the announcement came after Bush met with Saudi King Abdullah, Saudi oil minister Ali al-Naimi said that the decision was made a week ago in response to requests for bigger volumes from 50 of its customers worldwide.

Oil markets treated both announcements skeptically. After climbing to a trading record of $127.82 a barrel, crude oil prices on the New York Mercantile Exchange closed at $126.29, up $2.17 for the day. The lowest price on the exchange for future delivery over the next 10 years was $123.63.

Oil traders said it remained unclear whether the Saudi production boost would be lasting. World demand for oil often increases in the summer, and Saudi production can fluctuate. Many contracts give buyers the option to take 5 percent more than the base amount, and oil trading sources in Europe said that customers in India and Japan had been asking for more crude.

"I think 300,000 barrels a day will have some influence in the market," said Abdulsamad al-Awadi, an adviser to oil trading firms and a former senior official of the Kuwait Petroleum Corp. But, he added, "if you really want to drive the market down, you need at least half a million barrels a day for some period of time."

Though the quantities of oil freed by the administration's halt of purchases for the reserve are smaller, they had become a symbol of the president's failure to take action against prices that have doubled over the past year.

"By itself it doesn't change the dynamic of the market, but at least you bring your policy on rational basis," said Roger Diwan, a partner at the consulting firm PFC Energy. "You stop digging the hole for yourself. That's good news."

Diwan said that during the first quarter, the amount of oil pumped into the emergency reserve was the same as the increase in crude oil produced in non-OPEC countries.

Bush had faced veto-proof, bipartisan majorities in the Senate and the House on the reserve issue. Worried about the rising ire among voters as gasoline prices march higher, lawmakers seized on the reserve purchases as a way to demonstrate concern and to take action. Even frequent Bush allies, such as Sen. Kay Bailey Hutchison (Tex.), chairman of the Republican Policy Committee, had pushed for the measure.

"This is a small step, but an important one," she said in a statement yesterday.