Overcast78° WeatherOvercast78° Weather

Oil prices hint at relief

WASHINGTON — A surprise move to tap government oil reserves could cut gasoline prices this summer and boost the U.S. economy, but the rare action underscores the challenge posed by the weakening recovery.

The price of oil fell sharply Thursday after the U.S. and other industrialized countries, citing the loss of oil from Libya, said they would release 60 million barrels of crude from emergency stockpiles and sell it on the energy markets over the next 30 days. Half of the oil is to come from the U.S. government's Strategic Petroleum Reserve on the Gulf Coast.

To some economists, the step is a hail Mary pass showing that U.S. policymakers are just about out of moves to help the economy. On Wednesday the Federal Reserve cut its forecast of the country's 2011 economic output and confirmed the end of its controversial, 7-month-old program to boost growth with a $600-billion bond-buying spree.

With Congress unlikely to approve new government spending to stimulate the economy, the Obama administration is left with limited options, such as temporarily adding to the supply of oil.

"I view this as a kind of Band-Aid but the kind that's needed to avoid" another recession, said Frank Verrastro, director of the energy and national security program at the Center for Strategic and International Studies in Washington.

But Brian Wesbury, chief economist at First Trust Advisors in Wheaton, Ill., called tapping the reserve "an act of economic desperation."

"We've tried everything under the sun and yet unemployment is still high and the economy is in a soft patch," he said. "Now they're reaching for straws."

That soft patch has been blamed on a surge in oil prices this year to as high as $113 a barrel, along with business disruptions created by the March earthquake and tsunami in Japan.

Crude oil fell $4.39 to $91.02 a barrel in New York trading, its lowest closing price since Feb. 18.

Shares of airlines, retailers and other companies that would benefit from higher consumer spending finished the day higher.

Although the price of crude had already dropped in recent weeks, it remains well above its June 2010 price of about $75 a barrel, in part because the fighting in Libya has stripped about 1.5 million barrels of oil a day from global supplies.

The total amount of crude being released from reserves — 60 million barrels — amounts to less than a day's worth of worldwide oil production. Still, it works out to 2 million barrels a day for the 30 days that the stockpiles are to be drained, more than making up for Libya's lost output.

As a result, some analysts said, crude could drop as low as $80 a barrel.

"The last thing propping up oil prices was the loss of crude from Libya, and this release takes away that pressure too," said Phil Flynn, an analyst with PFGBest Research in Chicago.

It's unclear how long any decline would last. But even if oil merely stays below $95 a barrel, motorists could start seeing pump prices nationwide drop at least 50 cents a gallon from their current levels, said Jim Glassman, a senior economist at JPMorgan Chase & Co.

Nationwide, gasoline is selling for an average of $3.61 a gallon, down from $3.98 in early May, according to the AAA Fuel Gauge Report.

A year ago, the average was $2.74 a gallon.

Oil prices hint at relief 06/24/11 [Last modified: Friday, June 24, 2011 12:31am]

    

Join the discussion: Click to view comments, add yours

Loading...