Government's stockpiling of oil keeping gas prices high.

Byline: Melita Marie Garza

It's a crude oil conundrum: the price of light, sweet crude oil has fallen more than $4 a barrel in a little more than a month, yet tenaciously high gasoline prices at the pump are still the norm for most Americans.

And though Saudi Arabia and OPEC are furiously overproducing their self-imposed quotas by 2.78 million barrels a day, the gasoline market in the U.S. is tighter than ever.

The reason: Just as demand for gasoline is rising, fueled in part by sport utility vehicles and ever larger cars, the U.S. government has taken to stockpiling greater amounts of crude oil in the Strategic Petroleum Reserve.

The nation's emergency oil storehouse now holds more oil than ever in its quarter-century history _ 592 million barrels, according to the Department of Energy. The government is stockpiling the additional oil to offset possible supply shortages that might result from a conflict in the Middle East.

"The government is taking 100,000 to 150,000 barrels a day off the market," said Kyle Cooper, analyst for Salomon Smith Barney in Houston. "I actually don't think there's that much of a war premium, I think there is more of a Strategic Petroleum Reserve premium."

Crude oil prices on the New York Mercantile Exchange closed at a high of $30.83 a barrel on Oct. 1. Prices closed at $26.71 a barrel Monday, up $1.20 from the previous close. Phil Flynn, senior energy analyst with Alaron Trading in Chicago, said the arrival of arms inspectors in Baghdad Monday spurred the day's rally.

"Now the inspectors are there and dealing with realities, as well as the fear that Saddam might not cooperate," Flynn said. "There are threats against oil tankers, bin Laden is alive and there was a bombing of a TV station in Venezuela, raising fears of a Civil War (there)."

Still, crude oil is still more than $4 a barrel cheaper than the October high.

"The market is perceiving a tightness in the market that is not real _ that gives the government a great deal of flexibility," Cooper said.

However, squirreling the crude oil away might not be helping consumers at the moment. "There are 44.9 million more barrels in the Strategic Petroleum Reserve now than a year ago," Cooper said. "If those barrels were on the market we'd go from looking at what are now low stocks to high stocks."

In addition to the federal government's energy security measures, the recent hurricanes Isidore and Lili severely crimped oil production in the Gulf of Mexico for two weeks, adding to the tight supply.

"You'd be surprised at the amount of fallout from the two hurricanes," said John Kingston, the global expert for Platts, an energy news service. "Things got really tight in the New York market as a result, and that market tends to influence gasoline prices in the rest of the country."

While Cooper thinks gasoline prices are likely to stay at their current levels, some see it differently.

"There isn't any compelling reason for gasoline prices to remain high, with the single major caveat of war with Iraq, which is looking like a 2003 event," said Tom Kloza, with the Oil Price Information Service.

"Motorists can look forward to paying less as this month wears off and into December," he said.

"If you were to compare the wholesale prices for gasoline around Columbus Day, they were pushing close to a $1 a gallon in the Midwest, exclusive of taxes," Kloza said. "If you were to look at them today they were probably closer to about 75 cents a gallon.

"But it's kind of like getting a punch from a fighter and having a delayed reaction. What happens at the wholesale market comes down to the pump about two to three weeks later," Kloza said.

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(c) 2002, Chicago Tribune.

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