Oil strategies demonstrate the pressures

Friday, September 22nd 2000, 12:00 am
By: News On 6

WASHINGTON – The oil price surge that took center stage in the presidential election Thursday is seen by industry analysts as another example of how oil markets rarely get a chance to work freely without government intervention.

Oil demand is up, both in the United States and the rest of the world, as economies expand.

But analysts say prices have tripled in the last 18 months because producing nations have cut supplies deeper than necessary to recover from the 1997-98 price slump.

The price of a barrel of crude for November delivery closed Thursday at $34, down $1.24 on the New York Mercantile Exchange.

The presidential candidates were split Thursday over what should be done about it.

Vice President Al Gore urged releasing oil from the U.S. Strategic Petroleum Reserve to ward off a heating oil shortage this winter in the Northeast. Texas Gov. George W. Bush said the federal government should save the reserve for wars or other disruptions and instead put pressure on friendly producing countries to pump more oil.

Venezuela, one of those friendly producers, suggested both strategies would fail to fix the heating oil problem.

Bernardo Alvarez, Venezuela's vice minister for energy, said U.S. refiners couldn't handle any more crude oil.

"This situation cannot be solved simply by making more crude oil available to the U.S. refineries," he said at a Washington news conference.

On Wednesday, Venezuela offered to create a heating oil reserve for the U.S. market, he said, but the Department of Energy turned down the offer and urged Venezuela to put any heating oil it has into world oil markets.

"The U.S. government appreciates the spirit of cooperation with which the offer was made," Energy Department spokeswoman Jane Brady said.

U.S. analysts said two related problems are getting mixed together.

Market conditions are having an impact on the heating oil situation. Inventories are low. U.S. refineries are working near capacity, and can't easily make use of the high-sulfur, heavy crude oil produced by Venezuela. And transportation bottlenecks that caused price spikes last year haven't gone away. Heating oil production increases from Gulf Coast refineries will need to reach the Northeast by barge or tanker because of limited pipeline capacities.

Market research firm Raymond James & Associates has warned that oil tankers are in short supply, which has caused tanker freight rates to more than double in the last year.

"The bottleneck in the oil supply chain will first occur in the oil tanker market," the firm said in a recent report.

Last week, the federal government, acting on an executive order from President Clinton, bought 2 million barrels of home heating oil for this winter that contractors will store in Connecticut and New Jersey. The heating oil reserve is separate from the 571 million-barrel Strategic Petroleum Reserve, which stores unrefined crude oil in Texas and Louisiana.

The administration has urged Congress to enact legislation setting conditions for triggering use of the heating oil reserve. The American Petroleum Institute has expressed concern about the federal stockpile, saying federal reserves will keep private companies from building their own inventories.

Overall world oil demand is still running higher than world supply, even though the Organization of the Petroleum Exporting Countries (OPEC) recently voted to raise production to drop prices back to its target range of $22 to $28 a barrel. OPEC members agreed effective Oct. 1 to increase production by 800,000 barrels a day. Most of that oil is already in the market, however, and several analysts have estimated world demand is still at least 300,000 barrels a day more than OPEC's supply target.

"A crude oil output increase would improve the price situation," said John Lichtblau, chairman of the Petroleum Industry Research Foundation in New York. "If crude oil prices went down significantly, product prices would follow, and heating oil prices would be lower."

Mr. Lichtblau said Venezuela's offer of heating oil storage facilities and increased production from its U.S. and Caribbean refineries was "interesting, but nothing special."

Mr. Lichtblau said Mr. Alvarez made a more tantalizing statement when he said Venezuela, contrary to industry expectations, has plenty of spare crude oil production capacity.

Under OPEC's current rules, Venezuela's production quota is 2.96 million barrels a day, and most industry analysts have pegged its maximum production at 3 million barrels a day. Mr. Alvarez said Venezuela can pump 3.6 million barrels a day and will look at raising production if OPEC's latest supply hikes don't bring prices down to the target range.

"If they can do it, they should," Mr. Lichtblau said. "In this situation, it's a matter of great importance to try to help their major customers. I don't think anybody in OPEC would object."

Next week, Venezuela will host an OPEC summit meeting in Caracas to discuss strengthening the organization and its ties with nonmember oil producers such as Mexico, Norway and Russia. Prices and production are not on the agenda, Mr. Alvarez said.

"I don't see how any further increase by OPEC will solve the problem," he said.

Mr. Alvarez blamed speculators and rumors for driving prices higher, and said oil producers and consumers should "sit down and try to control" the oil futures markets.