US officials fret emergency oil won’t ease fuel prices

WASHINGTON (Reuters): Obama administration officials told energy experts this week they worry a release of crude from U.S. emergency reserves would do little to temper global oil prices partly driven by tighter supplies of refined fuel like gasoline.

At an informal consultation on Thursday, mid-level officials from the National Security Council, the Department of Energy and other bureaus made clear a top concern was tight oil product markets caused by constraints in refining capacity, two outside energy experts who attended the meeting said on Friday.

The meeting coincides with rising speculation President Barack Obama may order a release of oil from the Strategic Petroleum Reserve (SPR) to control high gasoline prices and prevent high crude prices from undermining sanctions on Iran.

Reuters reported last month that the White House was dusting off plans from the spring for a potential release from the oil reserves, which currently hold a little under 700 million barrels of oil, all of it crude.

However the tone of Thursday’s meeting suggested some of Obama’s advisors question whether the United States has sufficient refining capacity to handle a release of crude from emergency reserves.

“None of them were thinking there’s any reason to be drawing down the SPR,” one expert said of the officials. “They are certainly worried about the prospects for prices to go higher in the near term because of a variety of factors.”

Officials ticked off supply disruptions or threats to oil output in Yemen, Sudan and Syria, as well as the added strain over the huge Amuay refinery in Venezuela, which has been partially shut since a deadly fire two weeks ago. And sanctions on Iran are steeply cutting exports from the OPEC member.

In addition, officials were concerned that gasoline prices, currently averaging more than $3.82 a gallon, or more than 17 cents higher than the same time last year, according to AAA, were still rising after the Labor Day holiday.

As the November 6 election nears, high gasoline prices are a growing headache for President Barack Obama.

A White House official confirmed the meeting with the oil market experts occurred on Thursday and that such talks happen periodically. The official would not comment on what happened at the talks, attended by mid-level officials who advise decision makers on use of the SPR.

A top concern was not about global crude supply, but that refining capacity was low, diminishing the ability for plants to turn SPR crude quickly into gasoline, diesel and heating oil, the energy expert said.

“We don’t have refinery capacity to really have much impact on gasoline prices,” the source said.

Worries over capacity are an abrupt turn-around from just six months ago, when an industry in the midst of a deep cyclical downturn was shutting down plants or seeking buyers.

Even after several East Coast plants marked for closure were spared, U.S. refining capacity has dropped to the lowest since 2005, government data showed. Gasoline inventories are at their lowest since 2008, while supplies of distillates like diesel fuel are about a fifth below the five-year average.

Most of the concern now is about the logistics of getting fuel to the right markets, low supplies of refined products after the hurricane, and the threat of more storms that could slow refineries and oil output in the Gulf of Mexico, another of the outside experts who attended the meeting said.

Last year, as civil war in Libya slashed oil exports, the Obama administration coordinated with the International Energy Agency to sell 60 million barrels of oil, a move that lowered oil prices for only a few weeks.

But the participation of European members offered an advantage: Unlike the U.S. reserve which is entirely crude oil, more than half of Europe’s reserves are refined products.

This year IEA members Germany and Italy have opposed a coordinated reserve release, but Washington has secured support from the UK and France.

One recently proposed idea to engage in a much larger, more prolonged release from reserves, perhaps over 100 million barrels, was not discussed at Thursday’s meeting, three sources who attended it said.