Oil for food - Release of oil reserves has little effect

FT.com / International economy / Oil for food - Release of oil reserves has little effect

By Carola Hoyos in London
Published: August 31 2005 20:43 | Last updated: August 31 2005 20:43

The US government on Wednesday agreed to lend refiners small quantities of oil from its strategic emergency stockpile to help ease the shortage of petrol caused by Hurricane Katrina.


But the relief it caused in the overheated oil market was cut short when it became clear that the move would have little impact on the problem and was as much a political gesture as an economic one.

In fact, helping the US deal with the loss of 20 per cent of its oil production and 10 per cent of its refining capacity has become a global tug of war between three powerful players.

The first is US President George W. Bush, who is facing some of his lowest approval ratings of his career courtesy of Iraq and oil. But he still has his most potent weapon to use: a broad release of oil from the same stockpiles that are now lending refiners small packets of oil.

This time the reason for tapping the reserves appears almost exactly what Mr Bush says the 700m barrels are meant for – a genuine shortage in the market.

But what the US now needs is petrol rather than crude oil.

The US has no emergency reserves of petrol while commercial reserves are near a two-year low and dwindling by the day as refiners are unable to replenish their storage tanks.

This is where Europe, the second player in this tug of war, comes into the fray. The EU stipulates that countries must also hold reserves, not only of oil but also of petrol. There are 52m barrels of reserves of petrol worldwide. Most of them are in Germany, France, Italy and Spain.

But whether it is politically feasible for Europe to send the US petrol while Europe’s own prices are at record highs is unclear.

The first signs are not promising. Wolfgang Clement, Germany’s economy minister, on Wednesday implied the petrol shortages in the US were at least in part its own fault. “I must say the United States has had insufficient refining capacity for a long time, and this is presumably now impaired, so the situation is coming to a head,” he said

Whether the US would want to accept such aid is also far from certain. What is sure is that Saudi Arabia, the third player in this geopolitical tussle, will be far from pleased.

Saudi Arabia, through the Organisation of the Petroleum Exporting Countries, enjoys international clout as the world’s central banker of oil by keeping some of its production capacity shut for times of emergencies like Hurricane Katrina.

Ali Naimi, Saudi Arabia’s oil minister, said shortly after the hurricane that he would be willing to increase the kingdom’s output to 11m barrels a day to cover the shortfall in the US. Opec is said to be considering raising output even before it meets in two weeks in the hope of not being trumped by a release of oil from the emergency stockpiles in Europe and the US.

All three players yesterday were discussing how to respond.

What they will decide is likely to become clear in the next few days, when more is known about how long it will take the US refineries in Mississippi, Tennessee and Louisiana to get on their feet.