Pouring Oil On OPEC's Game Plan

By Adam Zagorin/Washington

Taxes, crime, education, the environment--these are all salient issues worth airing in the political forum. But in the frigid, snowbound Northeast, what better way to warm the hearts--and hands and feet--of voters during primary season than devising a plan to knock down the skyrocketing price of home-heating oil and gasoline?

And guess what. The Clinton Administration has just such a scheme brewing. Sources tell TIME that Energy Secretary Bill Richardson is quietly but vigorously pushing a proposal that would pour millions of barrels of oil from America's Strategic Petroleum Reserve onto the market in coming weeks. The proposal, which has circulated among a few top Administration officials and could soon be approved by President Clinton, involves offering a "swap" of crude oil from the 580 million-bbl. SPR to private oil companies. They would bid to take the oil now, then make repayment in kind, plus a premium, in 12 months or less. In other words, for every barrel an Exxon-Mobil took out, it would return that barrel and a little more--the more to be negotiated.

The scheme could offer some much desired relief to consumers hammered by oil prices that have hit a nine-year high, courtesy of the Organization of Petroleum Exporting Countries (OPEC), whose members have by agreement kept supplies tight. As the cost has surged, some industries have reacted. Airlines such as American and United have slapped fuel surcharges on tickets. With crude stocks dwindling, further price increases threaten to ratchet up inflationary pressure.

Releasing crude from the SPR--the oil is stored in underground caves in Texas and Louisiana--could be a dam breaker. Says Daniel Yergin, chairman of Cambridge Energy Resources, a leading consultant: "Any effort to tap the strategic reserve now will add to pressure on oil producers to put more crude on the market, which will start to bring prices down." The last time the government announced it was unloading oil from the SPR, in April 1996, petroleum-futures prices plummeted nearly 8% almost immediately and the cost of gasoline soon dropped 10[cents] per gal.

For more lasting impact, though, Richardson's formula will require cooperation from none other than OPEC. Richardson will try diplomatic jawboning to get some of its members to loosen their restraints on supply. He's scheduled to meet this week with Mexico's Oil Minister at the World Economic Forum in Davos, Switzerland. He'll then travel to Oslo and, later in February, to the Middle East for more arm-twisting. Perhaps he'll remind the Kuwaitis and the Saudis that they owe the U.S. a favor. And he'll warn the producers that there are real macroeconomic risks to higher oil prices, such as choking off Asia's economic recovery.

In the U.S., it's not clear how many oil companies will participate in a swap that would, in effect, sell the commodity short, the bet being that the price of crude will be lower when the time comes to return the borrowed oil several months down the road. That deal could prove an attractive gamble, however, as oil prices often slide with the advent of warmer weather. Participants can also cover the risk that prices might unpredictably rise by hedging in futures markets.

Richardson clearly hopes that his swap turns into a classic case of doing well by doing good. The Energy Secretary is expected to reiterate that he has the legal authority to carry out the unusual maneuver, which has never before been tried on this scale and could prove controversial. But the plan does uphold his pledge not to sell oil from the SPR. That would be interfering in the marketplace, wouldn't it? Instead, upon completion, a swap would actually increase the amount of oil available in the SPR, whose mission is to keep a safety stock in case of emergency.

The biggest immediate return of Richardson's hoped-for hat trick could come on the campaign trail. The Secretary is under siege, as everyone from truckers to homeowners complains about the high price of gasoline, heating oil, etc. Bill Bradley and Al Gore traded pot shots on oil prices in last week's presidential debate, while George W. Bush called on the U.S. to persuade U.S. allies like Saudi Arabia to turn up the motor on the oil pumps.

Despite the run-ups in prices, supplier groups such as the American Petroleum Institute point out, there are no gas lines and ample inventory. In other words, the market is doing what it's supposed to do. But in an election year, that sentiment appears to have a snowball's chance in hell--and even less in primary states like New Hampshire and New York--of winning the day.