Washington, 13 June 2011

Neither the Organization of Petroleum Exporting Countries’ (OPEC) internal rift over production targets, nor high U.S. gasoline prices should signal the release of oil from the U.S.’ Strategic Petroleum Reserve (SPR), two industry experts agreed Sunday on the Platts Energy Week, the U.S. independent, all-energy television news and talk program.

After OPEC failed last week to agree to a hike in oil output targets, U.S. Massachusetts Democratic Representative Edward Markey renewed his call for the federal government to release 30 million barrels of SPR crude into the market, as outlined in legislation he introduced earlier this year. He said the refusal by some organization members to agree to a production hike supported by Saudi Arabia was a "clear sign" the U.S. should "engage in a long-term plan to break our ties to this OPEC-controlled market and prepare to deploy America's oil reserves now, to head off an economic collapse from continued high gas prices."

But Randa Fahmy Hudome, international energy consultant, and Guy Caruso, senior adviser with the Center for Strategic and International Studies and former head of the U.S. Energy Information Administration ( EIA), did not agree that current pump prices should be driving decisions to release SPR crude oil.

Hudome acknowledged that the "high price of gasoline is a huge political issue, especially going into the summer driving months," but she did not think this should translate into tapping the SPR.

"It is our strategic petroleum reserve and it is used in emergency situations," Hudome said. "This is not an emergency situation. This is a classic case of economics, and supply and demand driving the markets."

Caruso said the market "is adequately supplied, so I don't think it would be necessary to use [the SPR] now." Both said the SPR should be saved for times when there has been a serious supply disruption.

"I'd rather see SPR considered under a real emergency – and I would hope that we would not be confronted with that emergency," Fahmy Hudome said. "But, should there be a fatal disruption abroad in the oil market, that's when [SPR] should kick in."

Caruso agreed, adding that since political unrest in North Africa and elsewhere "could threaten even further disruptions [to oil supply] on top of Libya," the SPR was something the U.S. "should be prepared to use on very short notice."

The two offered different takes, however, on what was driving the rift within OPEC. Noting that Saudi Arabia and its supporters had sought a production hike due to forecast higher global oil demand for the second half of 2011, Caruso said the OPEC members that disagreed "are countries that can't produce any more oil anyway, so they are mainly interested in maximizing their revenue through higher prices."

He said a key long-term issue was which countries would put in the investment needed to meet future oil demand. He suggested that since countries with larger reserves were more likely to be able to meet that demand in the years ahead, it gave them a different perspective.

"What the Saudis and other high-reserve countries are worried about is [that] high prices will reduce future demand, and bring on alternative supplies of other fuels that will compete with oil," he said.

Hudome, however, focused on political motives for the split within OPEC. She said that after the Arab embargo that led to the oil crisis of the 1970s, OPEC had said it would never again use oil as a political weapon.

But at this latest meeting, she argued, "those that were on the opposing side of Saudi Arabia indeed were using oil as a political weapon, primarily against the West."

As for the significance of OPEC's internal impasse, Hudome said, “It's the first sort of crack, if you will, in the coalition," agreeing the outcome was more indicative of the state of OPEC, rather than of oil markets.

“So you had Saudi Arabia, you had UAE, Qatar, Kuwait, voting to increase production, and you had the others – [including] Libya, Iraq, Iran, Venezuela – voting 'No, no go,'" she said. "I think for the first time you saw this division where they're openly battling it out and proclaiming publicly that they had a very bad meeting."

As for the impact on oil markets, the promise by Saudi Arabia to boost its output anyway takes the sting out of the organization’s lack of consensus on a production hike – at least for now, Caruso said.

“The net result of this is the Saudis are going to go ahead and put more oil on the market, just as they would have done had they gotten an agreement on their proposal, so on the net supply effect, I don't think this meeting is going to have that much of an impact in the very near term," he said.

Ends --

Platts Energy Week also featured an interviewed with Byron Dorgan, former Democratic Senator from North Dakota and now co-chairman of the Bipartisan Policy Center’s Energy Project, who discussed a different royalty plan for oil drilling with big incentives for renewable energy.

www.platts.com