Obama Reported To Consider Tapping Oil Reserve

  on August 16 2012 7:47 PM

(Reuters) - The White House is "dusting off old plans" for a potential release of oil reserves to dampen rising gasoline prices and prevent high energy costs from undermining the success of Iran sanctions, a source with knowledge of the situation said on Thursday.

U.S. officials will monitor market conditions over the coming weeks, watching whether gasoline prices fall after Labor Day, as they historically do, the source said.

It was too early to say how big a drawdown would be from the U.S. Strategic Petroleum Reserve and, potentially, other international reserves if a decision to proceed was taken, the source said.

Oil prices have surged in recent weeks, with Brent crude prices closing in on $120 a barrel, up sharply from around $90 a barrel in July. The United States and other Group of Eight countries studied a potential oil release in the spring but shelved the plans when prices dropped.

With prices high again, U.S. officials were now collecting information from the market about potential needs and studying futures, production numbers and data on Iranian oil exports.

"The driving force in this is both impact on the economy and impact on the Iran sanctions policy," the source said, noting that Washington did not want rising oil prices to create a windfall for Iran while oil embargo and international sanctions were having an effective impact.

The United States has not yet held talks with international partners about a coordinated move. The source noted that Britain, France, Germany and other partner nations in the Paris-based International Energy Agency were receptive to a potential release a few months ago when conditions were similar.

Those countries were concerned about the impact of high oil prices on the global economy and Iran then, and those concerns remain equally relevant now.

"The logic behind a potential release in the spring is at least if not ... more true today," the source said.

Domestically, tapping reserves could spark criticism from Republicans, who would cast it as a political move to boost President Barack Obama's chances in the election.

The source said the White House had not discussed political ramifications because a decision on a release had not been made.

A White House spokesman declined to comment.

Gathering support from partner nations is likely to be the next step as Washington studies its options.

In May the G8 put the IEA -- the West's energy adviser responsible for coordinating reserves -- on standby for action, a sign at the time that Obama was winning support for tapping government-held oil stocks for the second time in two years.

Some IEA nations could object to a release now because market conditions are less tight than they were in the spring, the source said. Saudi Arabia and Iraq were producing more and the supply disruption related to Libya was resolved.

Germany and some other European nations have generally resisted using government-held oil inventories in the absence of a sharp and deep disruption in supplies.

Although the loss of over half Iran's oil exports is about equivalent to the drop in Libyan shipments that prompted IEA action last year, the decline has been relatively gradual and global commercial oil inventories remain relatively well-supplied for this time of year.

Last year on the day, the United States and the IEA announced a coordinated drawdown of 60 million barrels in response to outages in Libya and other places, Brent oil prices fell 6 percent, or nearly $7 a barrel, to about $107 a barrel.

A week later the prices were back to about where they had been, though analysts say the drawdown could have stopped prices from going even higher.

"As long as the Brent price stays up, and there are still problems with the North Sea (oil production) and there is still geopolitical risk, I think this creates a buying opportunity for every speculator in the world," said Richard Ilczyszyn, chief market strategist and founder of iitrader.com LLC.

"The market will drop initially, people will then buy that dip, as they did last year."

(Additional reporting by Timothy Gardner and Matthew Robinson; Editing by Russ Blinch and Sandra Maler)

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