NEW YORK -- Oil prices closed slightly lower Wednesday, as the strengthening dollar and signs of a slowing economy outweighed inventory drops and word that OPEC would cut production, reported the Associated Press. The average U.S. retail price for a gallon of gasoline was $3.668 on Wednesday, up from $3.652 on Tuesday, but well below the record $4.114 reached July 17, according to AAA, the Oil Price Information Service and Wright Express.
The U.S. Energy Information Administration (EIA) said crude inventories fell by 5.9 million barrels last week compared to the previous week, and that [image-nocss] gasoline inventories fell by 6.5 million barrels. EIA also reported, however, that inventories of distillates—which include heating oil and diesel fuel—fell by a lower-than-anticipated 1.2 million barrels. Refineries were running at a low 78.3% of their capacity last week, the report said.
The Organization of Petroleum Exporting Countries said it would reduce output by 520,000 barrels a day; however, it decided not to take the more dramatic step of slashing production targets. The decision was viewed as a compromise meant to avoid a backlash from the biggest petroleum consuming nations while halting the rapid decline in oil prices.
A number of analysts said they did not expect OPEC's output decision to spark a sustained rally in oil prices, as investors remain concerned over slowing economic growth in the United States, Europe and Japan.
Light, sweet crude for October delivery fell 68 cents to settle at $102.58 a barrel on the New York Mercantile Exchange, after initially jumping on the EIA's report. It was crude's lowest close since April 1. The contract fell by more than $3 a barrel in the previous session.
"You just can't fight the weight of the market right now," said Darin Newsom, senior analyst at DTN, Omaha, Neb. "I still think we're going to drop below $100."
Meanwhile, on Wednesday, Hurricane Ike was about 255 miles west of Key West, Fla., and was moving toward the northwest at about 13 mph with top sustained winds of around 100 mph. It was expected to cross the Gulf of Mexico, strengthening to a Category 3 with winds of up to 130 mph. Forecasters said that it could hit on Saturday morning anywhere along the Texas coast, most likely close to Corpus Christi, where there are number of refineries. The U.S. Department of the Interior's Minerals Management Service said that as of Wednesday, about 95.9% of oil production and about 73.1% of natural gas production in the Gulf remained shuttered as Ike approaches Texas. Operators have had the bulk of their production shut down since they began preparing for Hurricane Gustav nearly two weeks ago.
In Washington, with public opinion shifting toward offshore drilling, Democrats are looking to defuse the volatile election issue by allowing oil companies for the first time to explore off the Atlantic and Gulf coasts from Virginia to Florida, said the Associated Press, but only if they foot the bill for new alternative energy programs.
House Speaker Nancy Pelosi, who not long ago staunchly opposed lifting any of the offshore drilling bans, said Tuesday she now supports an energy package that would including drilling in federal waters off the southeastern coast. She is planning a vote that could come as early as Friday.
"If [oil companies] want to drill offshore, we'll say OK," Pelosi told reporters. But she said the bill also will require oil companies to give up $13 billion in tax breaks and agree to pay billions of dollars in back royalties that were avoided because of an Interior Department contracting error in deep-water drilling leases in the late 1990s. The money would be used to subsidize investments in solar, wind and other renewable energy.
Pelosi's proposal mirrors two in the Senate—one by the Democratic leadership and another by a bipartisan group known as the "Gang of Ten" that calls for limited offshore drilling from Virginia to Georgia and off Florida's Gulf coast, areas that have been off limits to energy companies for decades because of environmental concerns. The proposals would open federal waters beyond a 50-mile coastal buffer.
Senate Majority Leader Harry Reid reiterated Tuesday his intention to take up the drilling measures next week.
Republicans in both the Senate and House, meanwhile, are pushing for broader drilling. House Republican leader John Boehner of Ohio called Pelosi's proposal "just more of the same.... It leaves most American energy under lock and key when we should be doing everything possible to expand energy production."
Offshore drilling has gained political momentum since GOP presidential nominee John McCain made it a central part of his energy plan. Perhaps sensing a shift in public sentiment toward more domestic energy development, Democratic presidential nominee Barack Obama has also said he is open to limited expansion of offshore drilling.
Congressional Republicans want to lift all of the drilling bans that cover the Outer Continental Shelf waters 50 miles from shore from New England to Washington states. Oil and gas drilling has been allowed for decades in the western Gulf of Mexico where U.S. offshore energy production has concentrated. But Republican leaders are adamantly opposed to additional taxes on oil companies. They repeatedly have blocked proposals that would rescind oil industry tax breaks, arguing that would inhibit domestic oil production.
A possible compromise worked out in the Senate by a group headed by Democratic Sen. Kent Conrad of North Dakota and Republican Sen. Saxby Chambliss of Georgia—the Gang of Ten—calls for both limited offshore drilling and taxing Big Oil, while funneling billions of dollars into renewable energy.
Republican leaders have not embraced the compromise. "It's the only [approach] that has a realistic chance of getting 60 votes," said Sen. John Thune (R-S.D.), one of the "Ten," making clear that no matter that whatever the energy plan, it will need that much support to overcome a certain Senate filibuster.
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