House SPR oil purchase hearing splits along party lines

Nick Snow
Washington Editor

WASHINGTON, DC, Apr. 25 -- Democrats and Republicans at an Apr. 24 US House committee hearing on continuing oil purchases for the Strategic Petroleum Reserve when prices are breaking records disagreed on which government policies send the wrong signals to markets.

Democrats on the Select Committee on Energy Independence and Global Warming said suspending purchases for the SPR would effectively ease upward price pressure by sending more oil onto global markets instead of into storage. Republicans responded that authorizing leasing with appropriate environmental safeguards within the Arctic National Wildlife Refuge and on more of the Outer Continental Shelf would be even more effective.

Witnesses testifying before the committee offered recommendations ranging from generating more research and development funding by exchanging some light, sweet crude in the reserve for heavier grades to adjusting scheduled deliveries of royalty in-kind crude so that continuing to fill the SPR would cost less money.

Democrats on the committee said it made no sense to continue buying crude for the reserve when prices are so high. "When your house is on fire, it's insane to increase your insurance instead of grabbing a hose and turning on the water," said Rep. Jay Inslee (D-Wash.).

Committee chairman Edward J. Markey (D-Mass.) urged the administration of President George W. Bush not only to suspend SPR purchases, but to release crude from the reserve. "If President Bush were to announce his intention to release oil from the [SPR] today, it would put an immediate end to the speculative feeding frenzy that is driving up prices," he said in his opening statement.

'The biggest problem'
F. James Sensenbrenner (R-Wis.), the committee's ranking minority member, said, "I don't know whether tapping the SPR would have an effect on gasoline prices. I do know that the biggest problem is a lack of domestic supply. Congress has closed off ANWR, most of the OCS, and much of the Rocky Mountains. It has tried to take tax breaks away from domestic producers. In short, it has voted down every measure which would have increased US production."

John J. Hall (D-NY) said, "We are, in fact, working on increasing domestic production of other fuels to reduce our dependence on oil which has so many adverse consequences. There are a lot of new energy sources coming into play with the financial incentives we have enacted."

But John B. Shadegg (R-Ariz.) said upward pressure on gasoline prices would best be reduced by increasing domestic oil supplies. "I agree that we need to develop alternative forms of energy, but every expert who has appeared before this committee has said that the US economy will be oil-based for the next 30 years at least. We have already sent the wrong kind of signal to speculators by locking up so much of our domestic resources on the OCS and in the Intermountain West," he said.

Democrats said legislation is needed to limit financial speculators' impacts on oil markets. "We have heard from a number of oil and gas executives about the role of speculators and greed in driving the price at the pump up, especially for home heating oil," said John B. Larson (D-Conn.).

Inslee added that the US Commodity Futures Trading Commission's authority needs to be expanded so it can regulate over-the-counter energy commodity transactions. He said that HR 594, the Prevent Unfair Manipulation of Prices (PUMP) Act which Rep. Bart Stupak (D-Mich.) has introduced, should be seriously considered.

'Not the entire story'
One witness questioned committee members' focus on market speculators. "They're not the entire story," said Kevin Book, senior vice-president for energy policy, oil, and alternative energy at Friedman, Billings, Ramsey & Co. in Arlington, Va. "In tight markets, refiners have to bid up the price of crude to continue operating. The SPR's existence keeps them from hoarding by allowing them to maintain lower inventories," he said.

Growing global demand for oil, particularly in China, India, and other economically emerging nations, amid limited supplies is the main reason crude prices have climbed so dramatically, Book said, adding, "Simply put, these economies have entered into their energy adolescence."

But Mark Cooper, research director at the Consumer Federation of America in Washington, DC, contended that producing nations and integrated oil companies' refusals to invest in new production and refining capacity has been primarily responsible. "In a well-functioning market, growing demand does not produce the kinds of price increases that we have seen," he said. The SPR's size relative to the global oil market is so small that suspending purchases or releasing inventory would have little impact on prices, he added.

Dave Berry, vice-president of Swift Transportation in Phoenix, who testified on behalf of the American Trucking Association, said the trade association has previously recommended suspending SPR oil purchases and releasing inventory to ease the impact of high prices. But he also said that other measures are needed, including increased domestic oil and gas development, more refining capacity, sensible renewable fuels strategies, and a single national diesel fuel standard.

Congress also should consider instituting a nationwide 65 mph speed limit to reduce demand, Berry told the committee. It already has asked the administration to require that all new trucks be equipped with factory-installed devices which electronically limit the vehicle's speed to 65 mph, he said. "The users also need to be included in research and development discussions. Some of them are coming up with fabulous ideas already," he said.

SPR management measures
Two other witnesses said the Bush administration could take other steps to manage the SPR more effectively. Frank Rusco, acting natural resources and environment director at the Government Accountability Office, said the congressional watchdog agency has found that if DOE had used a steady dollar value instead of volume goals to fill the SPR from October 2001 through August 2005, it could have reduced fill costs by $590 million, or more than 10%.

"I think there has been opposition because DOE has used royalty in-kind oil to fill the SPR since 1999. There has been no coordination between DOE and the Department of Interior on this. There could be a cost benefit in DOI's deferring deliveries when prices are high and accelerating them when prices are low," he told the committee.

Melanie A. Kenderdine, associate director of the Massachusetts Institute of Technology Energy Initiative, said the RIK program was effective when low oil prices threatened to shut in domestic production in 1999. Energy secretaries Bill Richardson and Spencer Abraham each directed the SPR office to defer deliveries when prices started to climb, she said.

"We also need new ways to finance the research, development and demonstration of key technologies to enhance our energy security and sustainability and mitigate the impacts of climate change," Kenderdine said. She listed three specific steps: an outright sale of 40 million bbl from the SPR which would produce almost $4.5 billion in new revenues, suspending the RIK program in ways that reduce a positive budget score which could generate at least $1 billion of new funding for carbon sequestration and energy efficiency programs, and exchanging 50 million bbl of light, sweet crude in the reserve for heavy oil on the market which, if done correctly, could net $500 million without reducing the SPR's overall size.

Markey said that steps clearly need to be taken. "We have the worst of both worlds right now: wasting taxpayers' money buying oil at record-high prices and putting upward pressure on those prices with our purchases," he said. Following the hearing, he told OGJ that he had not invited anyone from the Bush administration to testify that day. "But I plan to in the very near future," he said.

Contact Nick Snow at nicks@pennwell.com.

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