http://www.chron.com/cs/CDA/story.hts/special/terror/front/1110523

Oct. 29, 2001, 6:06PM

Bush expected to order 70 million barrels into government's emergency reserves

Associated Press

WASHINGTON -- President Bush is expected, perhaps within days, to direct that an additional 70 million barrels of oil be put into the government's emergency reserve over the next several years, according to administration and private sources.

The additional oil would be acquired at a rate of about 100,000 barrels a day and for the first time would bring the government's Strategic Petroleum Reserve to its full capacity, said the sources, who spoke on condition of anonymity.

Private economists viewed the move as additional insurance against future supply disruptions. At the same time, they said, it will help to contain the recent downward spiral in world oil prices by taking 100,000 barrels a day off the market.

Energy analyst Adam Sieminski, of Deutsche Banc Alex. Brown, said the overall impact probably would be modest, but "anything that takes oil off the market and puts it into storage adds to demand and is going to have some effect on price."

"It's the U.S. contribution to stabilizing prices," Sieminski said. He said OPEC oil producers, who are worried about an oil glut, undoubtedly will be pleased.

While some details remained to be worked out, an Energy Department proposal sent to the White House was said to await final approval from the president. An executive order could allow purchases immediately.

The proposal recommends that most if not all of the oil be acquired as "royalty in kind," the procedure through which oil companies holding leases to drill in the Gulf of Mexico and on federal lands put oil into government storage instead of paying cash royalties to the government.

The strategic reserve, a string of salt caverns along the Gulf coast in Texas and Louisiana, currently has 543 million barrels of oil with a capacity to hold 700 million barrels.

Another 48 million barrels is expected to be put into the reserve by the end of next year under existing royalty-in-kind contracts and from oil returned to the reserve as part of an oil "swap" arrangement last year.

Only recently, the administration responded with little enthusiasm to a House-passed resolution that urged stepped-up oil purchases for the reserve. The resolution wanted to expand the reserve and eventually fill it to the authorized 1 billion barrels.

The House passed the resolution Oct. 9 by a 409-3 vote, and the measure awaits consideration by the Senate. To fill the reserve beyond 700 million barrels would require expansion and cash purchases. Congress has given no indication it is ready to appropriate additional money to buy large amounts of oil.

The oil companies favor royalty-in-kind payments into the reserve as an alternative to making cash royalty payments on oil they take under federal leases. Royalty payments have been a focus of controversy for years because of disputes over how the oil is valued, with critics charging the companies frequently have shortchanged the national Treasury.

Amid anxiety over tensions in the Middle East and the U.S. war against terrorism, there has been renewed focus on U.S. preparedness for potential future disruptions in oil supply.

The United States uses 19 million barrels of oil a day, about half of it imported. The U.S. reserve currently holds 54 days' worth of imports.

Congress created the Strategic Petroleum Reserve in 1975 as a response to the 1973 Arab oil embargo that caused severe supply shortages. Today's oil markets are much more flexible, and the Organization of the Petroleum Exporting Countries has indicated its producers do not want to use oil as a political weapon.

OPEC producers have said they are most interested in price stability and want to get the price of oil in the $22 to $28 a barrel range. Light sweet crude sold for $22.34 a barrel on Monday, with Saudi crude at $19.79 a barrel.

-- slza (slzattas@tidalwave.net), October 29, 2001