Bush administration to cancel oil shipments into reserve

combined dispatches

WASHINGTON — The Bush administration, bowing to intense political pressure, said Friday that it would cancel oil shipments into the Strategic Petroleum Reserve starting in July.

The move comes two days after Congress voted overwhelmingly to suspend filling the reserve. The surprise announcement came not from the White House but from the Department of Energy, on the same day that President Bush, traveling in Saudi Arabia, was rebuffed in his call for the kingdom to pump more petroleum in hopes of lowering today’s high oil prices.

It was Bush’s second personal appeal this year to King Abdullah, head of the monarchy that rules the desert kingdom that is a longtime prime U.S. ally and home to the world’s largest oil reserves. But Saudi officials stuck to their position that they will pump more oil into the system only when asked to by buyers, something they say is not happening now, the president’s national security adviser told reporters.

“Saudi Arabia does not have customers that are making requests for oil that they are not able to satisfy,” Stephen Hadley said on a day when oil prices rose above $127 a barrel, a record high. “What the Saudis wanted to tell us was we’re doing everything we can do ... to meet this problem, but it’s a complicated problem.”

The Saudi oil minister, Ali al-Naimi, announced that the kingdom decided May 10 to raise production by 300,000 barrels at the request of customers, including the United States. He said that increase was sufficient.

“Supply and demand are in balance today,” he told a news conference. “How much does Saudi Arabia need to do to satisfy people who are questioning our oil practices and policies?”

Bernard Picchi, an energy analyst at Wall Street Access, an independent research firm, said the 300,000-barrel Saudi production increase was “a token amount” that is not expected to have much impact on prices.

It would be different, he said, if Saudi Arabia boosted production by 1 million or 1.5 million barrels a day. The announced increase will have Saudi Arabia pumping 9.45 million barrels a day by June, Saudi officials said. That’s about 2 million barrels below its capacity.

Oil prices advanced Friday as traders, unimpressed by efforts to boost supply, kept buying on the expectation that prices would keep setting new records.

Saudi Arabia often adjusts its output to meet demand, and the increase coincides with the start of the peak driving season in the U.S. “It’s a way to raise production without raising production,” said Phil Flynn, analyst at Alaron Trading Corp. “I think it was a way to save face.”

Hadley never mentioned the Saudi’s new production in his recap with reporters. He said the Saudis briefed Bush again on their plan to increase their production capacity over time. They also argued that even an increase would be unlikely to bring down the soaring prices, driven more by uncertainty in the market, lack of refining capacity for the type of oil readily available and other complicated dynamics, he said.

Economists say prices are being driven up by increased demand, not slowed production. Energy-guzzlers China and India are stretching supplies.

As a result, Hadley suggested the White House was satisfied with — or at least accepted — the Saudi response. He added, however, that the Bush administration will see if the explanation “conforms to what our experts say.”

Saudi Foreign Minister Saud al-Faisal said the discussion with Bush about oil was friendly. “He didn’t punch any tables or shout at anybody,” the minister said. “I think he was satisfied.”

High energy costs are a major drain on the U.S. economy, which is experiencing a slowdown that some think is already a recession. At the pump, gas prices rose to a national average of $3.78 per gallon on Friday, according to a survey of stations by AAA and the Oil Price Information Service.

When Bush first ran for president in 2000, he criticized the Clinton administration for high fuel prices and said the president must “jawbone” oil producing nations and persuade them to drop rates. At that time, oil was nearing $28 a barrel — less than a quarter what it is now.