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Price of Oil Rises Despite Loans From U.S. Reserve
By Justin Blum - Washington Post Staff Writer

The price of crude oil rose to a record high yesterday even as the Bush administration agreed to tap the nation's emergency oil stockpile because of supply problems caused by Hurricane Ivan.

Prices rose because of concern about damage to oil operations in the Gulf of Mexico by last week's hurricane, analysts said. Imports were delayed and production has not returned to normal, causing some refineries to run low on supplies.

The Energy Department announced yesterday that it would lend 1.4 million barrels of oil from the Strategic Petroleum Reserve to a unit of the Royal Dutch/Shell Group and 300,000 barrels to Placid Refining Co. of Port Allen, La.

Officials said the oil would be returned with supplemental supplies that would be provided as interest. Jeanne Lopatto, an Energy Department spokeswoman, declined to say how much additional oil the companies would have to provide, describing the information as proprietary.

The Energy Department is continuing to accept requests for oil. Officials said a request from ConocoPhillips is pending.

Yesterday's announcement did little to allay the concerns of oil traders. Markets have been jittery because of concerns that world oil production is close to capacity at a time of instability in Iraq and attacks on oil operations elsewhere.

U.S. benchmark crude oil for November delivery closed at $48.88 a barrel yesterday, up 42 cents from the day before. The previous closing record was $48.70, set on Aug. 19. Adjusted for inflation, prices remain below their 1981 peak.

Marshall Steeves, an analyst for Refco LLC in New York, said he was surprised that the announcement about the loan from the petroleum reserve did not bring down prices. The administration first said on Thursday that it was considering lending oil.

He said the market reacted to a report from the Minerals Management Service showing that oil production in the gulf remained nearly 28 percent below normal, at about 1.2 million barrels per day. "People were thinking that it would come back a lot more quickly than it has," Steeves said.

Reports last week also showed a significant decline in U.S. crude oil reserves as a result of the storm.

Daniel Robinson, president of Placid, said the storm damage meant that suppliers had not been able to deliver enough oil to his refinery to allow it to run at capacity. As a result, he said, his refinery has been running about 25 percent below normal production.

That prompted Placid to request oil from the Energy Department's reserve.

"This could have been a nightmare," Robinson said. "We just couldn't be more pleased with how they addressed the situation."

Placid began receiving oil from the reserve yesterday, Robinson said. Without it, his refinery would not have been able to produce as much automobile fuel and home heating oil as normal, or meet contractual requirements to provide military jet fuel to the Defense Department, he said.

Robinson said he intended to replace the oil by the end of the year along with a "small negotiated premium." He would not disclose the amount of the premium.

The other company to receive oil, Shell Trading (U.S.) Co., based in Houston, also would not disclose terms of the loan.

A spokesman for the company, Mark Singer, would only say that the oil was needed to "help insure the continued and adequate production of gasoline and oil products for the Gulf Coast region."

The petroleum reserves have become an issue in the presidential campaign. On Thursday, a spokesman for Sen. John F. Kerry (Mass.), the Democratic presidential nominee, criticized the Bush administration for not dealing sooner with rising energy prices. The Bush campaign said the reserves should be used only in the event of an emergency supply disruption and not to manipulate prices.

Before the loans, the petroleum reserve contained about 670 million barrels of oil -- enough to supply 33 days of domestic consumption, according to the American Petroleum Institute.
 

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