Oil markets yesterday brushed aside President Bush's decision to tap into the nation's Strategic Petroleum Reserve, sending the price of crude oil surging on commodity markets. At one point it topped $40 a barrel.
As the price rose, the Bush administration backpedaled from comments made by the president and White House Press Secretary Marlin Fitzwater Wednesday night that the proposed sale of 5 million barrels of oil from the 590 million-barrel strategic reserve was intended to send a "message" to speculators and bring down oil prices.
"I shouldn't have done that," Fitzwater told reporters yesterday. "We have no way of knowing what prices might do."
The abrupt reversal reflected the continuing debate within the administration over what do to about rapidly rising prices on world oil markets because of the Persian Gulf conflict.
Some officials had believed that simply signaling the administration's readiness to use its reserve stocks would help dampen price speculation.
With administration officials anticipating shortages during the peak-heating months this winter and oil markets reflecting nervousness about possible war in the Middle East, the continuation of rising prices threatens to throw the already sluggish economy into a recession. But some officials have opposed taking steps to tamper with the markets as an unwarranted intrusion by the government.
Amid continued concern about an imminent outbreak of warfare in the Middle East, the price of a barrel of high-quality crude oil for delivery in November closed the day on the New York Mercantile Exchange at the highest closing price in a decade, $39.54, up 87 cents, after trading as high as $40.10. These futures market prices strongly influence daily prices of oil that is actually delivered to refineries.
Energy Secretary James D. Watkins told members of two House Energy and Commerce subcommittees yesterday that the sale from the Strategic Petroleum Reserve was "not a drawdown" of the stockpile but a test of the department's ability to tap the reserve if required. Legislation signed by President Bush on Sept. 15 authorized the sale of up to 5 million barrels of the oil without the declaration of an energy emergency.
"We have no expectation of long-term market impact," Watkins said. "This is not an emergency drawdown, it's a test of the system under real-life conditions."
Still, the administration had originally billed the release of oil from the reserve as an effort to cap what Bush called "unwarranted speculation" in the oil markets. Most of the oil lost when shipments from Iraq and Kuwait were embargoed in August has been made up by other countries, putting the world oil market into a relatively even supply-demand balance, but prices have skyrocketed in anticipation of hostilities that could cause a catastrophic oil shortage.
Analysts and traders said the planned 5 million barrel release from the strategic reserve -- far less oil than the United States uses in a day -- was scarcely enough to put a dent in the supply-demand equation and deflate prices.
"It's a drop in the bucket," said John Lichtblau, executive director of the Petroleum Industry Research Foundation, a New York consulting group. If Bush was attempting to put a damper on the oil market, Lichtblau said, "he didn't try very hard. A 5 million-barrel drawdown wasn't intended to put a lid on things."
"If in fact the release of 5 million barrels was intended to take prices lower, the market interpreted it as too little," said Michael McDermott, an oil trader at PaineWebber Inc. in New York.
In his congressional testimony yesterday, Watkins said the test sale would have been bigger but for the 5 million-barrel limit on testing in the new law. Key members of the committee who want the oil released to ease the price burden on their constituents immediately promised to raise it.
"How much do you need?" asked Rep. Philip R. Sharp (D-Ind.), chairman of the energy and power Subcommittee.
Watkins said he wanted "three times that number," or 15 million barrels. Sharp and Energy Committee Chairman John D. Dingell (D-Mich.) drafted legislation on the spot that would authorize the new limit and said Congress would approve it within a few weeks.
A 15 million-barrel test would allow the Energy Department to sell 500,000 barrels a day for 30 days -- enough, analysts said, to make a serious dent in the anticipated worldwide shortfall of about 1 million barrels a day by November and probably affect prices.
Against the backdrop of the U.S. action, the governing board of the International Energy Agency is scheduled to meet in Paris today to decide whether the oil supply situation warrants a coordinated stock drawdown. Most analysts do not expect the IEA to decide to draw down world strategic reserves.
Staff writer Dan Balz contributed to this story from Cleveland.