More important than establishing a home heating oil reserve in the Northeast is setting the criteria for its use.
Last month, US Pres. Bill Clinton ordered the Department of Energy to establish a temporary, 2 million bbl reserve for possible use this winter.
Because it is being created under the government's powers to operate the crude oil Strategic Petroleum Reserve, the interim distillate stockpile can be tapped if the president declares a "national supply disruption" exists.
That assumes that Congress will reauthorize the expired Energy Policy and Conservation Act, the bill governing the SPR's operation.
Clinton also has asked Congress to pass legislation for a permanent distillate reserve and set criteria to "trigger" its use (because the latter is a political question rather than an economic one).
The definition
Energy Sec. Bill Richardson recently agreed to a restrictive trigger that Sen. Frank Murkowski (R-Alas.), the energy committee chairman, has proposed.
It would sell federal distillate only if the price differential between crude and No. 2 heating oil in the Northeast increases by more than 60% over its 5-year rolling average from mid-October through March and continues for 10 consecutive days.
Apparently Murkowski's goal was to design a trigger that would be tripped only by the direst circumstances. One observer calculated those market criteria have only occurred once before.
A Senate energy committee aide defended a conservative approach. "Should this be any different than the SPR, which has never been touched, except during the Persian Gulf War?" she asked.
It remains to be seen if the full Senate and the House of Representatives will agree to Murkowski's definition when they consider the EPCA reauthorization bill next month.
Bad idea
Larry Goldstein, president of the Petroleum Industry Research Foundation Inc., New York City, argues that no matter how high the trigger, the federal stockpile will skew the market.
He said the distillate price spike in New England lasted only 3 weeks last winter because "industry did what you hope they would do in response to high prices and a selfish motivation to make money: Domestic refiners increased production of heating oil, and foreign refiners flooded the Northeast. Imports went from 150,000 to 714,000 b/d, bringing in an extra 10 million bbl.
"Now, with government reserves sitting over the market, they don't have that magnet. If they go out and arrange for those foreign barrels, and the government releases the reserve, they'd get killed.
"It doesn't matter that the reserve is only 2 million bbl, because each company is going to make an individual decision to wait on the government. Meanwhile, the government is going to wait for the market to work. Precious time will be wasted.
"As counter-intuitive as it sounds, and as well-intentioned as the government may be, the reserve has actually improved the odds of a problem occurring.
"And that's how, in the next crisis, the government is going to turn 10 million bbl of extra supply into 2 million."