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Bush Takes Steps to Expand Oil Supplies

Deposits to Strategic Reserve Are Suspended,
Rules on Ethanol Changeover Relaxed
April 26, 2006; Page A4

WASHINGTON — Under pressure to curb soaring gasoline prices, President Bush announced he would suspend deposits to the U.S. Strategic Petroleum Reserve to boost consumer supplies and also seek to relax some antipollution rules.

[George Bush]

The moves, combined with calls by Mr. Bush for an end to certain tax breaks for oil companies, reflect something of an about-face by the president and show the political risks for Republicans in the latest increases in gas prices. Those increases, which have pushed pump prices to more than $3 a gallon in some areas, come as voters' attitudes about the economy and pocketbook issues are beginning to take shape before the fall elections.

During the 2000 presidential campaign, then-Gov. George W. Bush said the reserve “should not be used for short-term political gain at the cost of long-term national security,” as the Clinton administration engineered a release from the reserve to boost Vice President Al Gore's chances in the election that year.

Yesterday, Mr. Bush, facing an outcry from his own party leaders, called high gas prices “a hidden tax on the working people” and said he would stop purchases and deposits to the reserve in order to increase supplies for consumer use. “By deferring deposits until the fall, we'll leave a little more oil on the market,” Mr. Bush said. “Every little bit helps.”

The president said his administration would seek to get tougher on enforcing antigouging rules on suppliers. He also announced moves to ease fuel-formulation requirements at the state and federal levels, saying the government must “ensure that there are not needless restrictions on our ability to get gasoline to the pump.”


What should Bush's top policy priority be? Cast your vote in the Question of the Day.

Mr. Bush said he was directing the Environmental Protection Agency to grant waivers from air-quality requirements that now call for switching a main ingredient in so-called reformulated gasoline to ethanol from methyl tertiary butyl ether this year. Both additives are used to make cleaner-burning gasoline in smog-prone urban areas. State and local officials have said they are worried about supply disruptions during the transition.




President Bush speaks to the Renewable Fuels Association in Washington, D.C., about strategies to reduce U.S. dependence on foreign oil, including using more ethanol. Part 1, Part 2.

Mr. Bush, speaking here at a conference of ethanol producers, said he would try to find ways to harmonize states' “boutique” requirements for fuel formulations, which now vary widely, adding to regulatory complexity and prices.

He also called on Congress to encourage sales of fuel-efficient hybrid and clean-diesel cars by expanding a tax break for buyers.

In seeking a relaxation of the boutique fuel standards, Mr. Bush was endorsing a step long advocated by the oil industry. More politically surprising were two other points he made yesterday — points traditionally offered by Big Oil's critics.

He suggested that oil companies aren't investing enough of their profits in activities that will boost the energy supply for consumers. “Listen, at record prices, these energy companies have got large cash flows, and they need to reinvest those cash flows into expanding refining capacity or researching alternative energy sources or developing new technologies or expanding production in environmentally friendly ways,” he said.

He also called for a reduction in deepwater-drilling subsidies for energy firms.

The administration tried a few of the measures outlined yesterday after Hurricane Katrina disrupted gasoline supplies last summer, but they had little discernible impact on prices.

Still, Mr. Bush's speech — and the gathering political storm over the issue — had some effect on the oil industry yesterday. The nearby contract for June delivery of light, sweet crude settled 45 cents lower at $72.88 a barrel on the New York Mercantile Exchange. Another effect was to push down the share prices of some oil and refining companies. That is further evidence that a sizable chunk of current oil prices is the result of investor speculation, rather than the fundamentals of supply and demand, said Fadel Gheit, an oil analyst at Oppenheimer & Co. Mr. Gheit said that about $10 of the per-barrel oil price now results from speculation; he added that “this $10 could go to $20 in no time.”

[Focus on Energy]

The American Petroleum Institute, which represents most of the oil industry, said it welcomed the president's move to keep oil lent from the Strategic Petroleum Reserves in the market this summer. However, it balked at Mr. Bush's call for more investigations into alleged price gouging. “Our industry has been investigated more than 30 times by federal authorities, and there has been no evidence of collusion or market manipulation,” the organization said.

Despite critics' dismissal of the White House moves, the actions — particularly relaxing clean-fuel standards — could affect prices, oil analysts said. Doug Leggate, an oil analyst at Citigroup Inc., said in a research note following Mr. Bush's speech that the “upside volatility associated with the transition towards clean fuels” has been a big factor in the recent rise in refiners' stocks. “Should the EPA take swift action, the margin outlook could ease significantly,” he added.

Congressional Democrats, eager to maintain the offensive on gas prices, responded at a news conference, where House Minority Leader Nancy Pelosi said Republicans “are so tied to Big Oil, they can't even grasp what energy independence means.” Among other things, Democrats promised to introduce a measure that would tighten regulation of oil-futures speculators.

Oil executives, who typically have a friendly ear in the administration, appeared worried by the escalating political rhetoric. The National Petrochemical and Refiners Association, an industry trade group, issued a statement to “remind policy makers” that the best way to boost the supply of gasoline in the U.S. “is continued reliance on market mechanisms, not price regulation or other actions that interfere with and distort … market realities.”

In his remarks, the president also called for longer-term solutions, such as congressional action to accelerate approvals for new refining capacity and to authorize drilling in the Arctic National Wildlife Refuge.

Administration officials sought to distinguish their plans from proposals in Congress for energy-related taxes, such as a windfall-profits tax on oil companies, or for new regulation of pricing and futures trading. But some administration proposals represent a departure for the conservative, free-market-oriented Mr. Bush and reflect the extent to which his political position has eroded since his re-election.

Despite the hit from gasoline increases, Mr. Bush depicted the U.S. economy as vibrant. He said increasing global demand for oil from developing powers such as India and China is the root cause of the problems and also called again for long-term technological gains to help wean the U.S. from its dependency on foreign oil.

Aides explained later that the Strategic Petroleum Reserve initiative involves giving oil companies that have borrowed 12 million barrels of crude oil from the reserve until this fall to return the oil, plus the required interest. That would make the 12 million barrels available over the summer, but since the U.S. consumes more than 20 million barrels a day, the impact on supplies and prices will be small.

The nation's 687.5 million-barrel Strategic Petroleum Reserve has released oil twice to prevent major disruptions in the nation's oil supplies, once in 1991 at the outset of the first Gulf War and again in September 2005, after Hurricane Katrina.

Write to John D. McKinnon at [email protected], John Fialka at [email protected] and Jeffrey Ball at [email protected]

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