Maureen Lorenzetti
Washington Editor
WASHINGTON, DC, Mar. 10 -- Responding to growing criticism from Congressional Democrats about higher fuel prices, the White House continued last week to defend its monitoring of volatile oil markets.
Democrats said President George W. Bush is mismanaging the 599 million bbl Strategic Petroleum Reserve and is maintaining heating oil and motor fuel prices higher than they need to be.
The White House said its SPR policy has nothing to do with higher prices and, as recently as Friday, reiterated it will only pull crude from SPR caverns in Louisiana and Texas if there is a supply crisis.
"The president continues to believe that tapping the SPR should be done in the event of an emergency," a spokesman said, supporting earlier comments by Sec. of Energy Spencer Abraham before Congress. The administration also indicated that US allies would be consulted before any draw-down is considered (OGJ Online, Feb. 26, 2002).
Capitol Hill Democrats charge the Department of Energy has been too vague about what constitutes a supply "emergency" and that a clearer policy statement on SPR is needed to calm oil markets.
But the White House counters that, instead of obsessing over the SPR, lawmakers should be coming together to pass a comprehensive energy bill that expands domestic production and reduces consumption.
"The most important thing to be done about the price of oil is to increase American conservation and production," a White House spokesman said Friday.
Report critical of SPR
Democrats said they also want to update the country's energy policy. But with possible war looming against Iraq, a more urgent problem is SPR policy because the stockpile is the first line of defense against supply disruptions.
Following a yearlong investigation, the Democratic staff of the US Senate Permanent Subcommittee on Investigations released a Mar. 5 report in which it sharply criticized DOE's SPR program. Ranking member Carl Levin (D-Mich.) said that DOE's recent efforts to fill the SPR with oil from federal leases increased crude oil prices and hurt US consumers and taxpayers.
The report said the energy department's program removed about 40 million bbl of crude from the marketplace in 2002. It charged that the loss of that crude was a "significant factor" in driving up US crude prices to a 12-year high of nearly $40/bbl, the report alleged.
With oil prices still near a 12-year high, and US commercial crude inventories at record lows, DOE should reconsider its plans to add another 40 million bbl to the SPR in 2003, the report said.
"I am a strong supporter of the SPR," said Levin, "but it has to be run so that it does not exaggerate oil price swings and supply problems. Otherwise, DOE ends up causing the very problems the SPR was created to cure, including boosting prices for gasoline, home heating oil, jet fuel, and diesel fuel."
DOE said the report misunderstands the facts and the purpose of the SPR. Deputy Secretary Kyle McSlarrow said the 40 million bbl in question did not impact the world oil market.
"To put this into context, the global market for crude oil in 2002 was approximately 28 billion bbl. The amount used to increase the size of the reserve in 2002 is (0.14%) of the global market," McSlarrow said.
"In response to the disruption of oil supplies from Venezuela, Sec. Abraham has deferred receipts of oil since December of 2002, totaling 18.5 million bbl, requiring that those who owe oil to the reserve will now have to supply an additional 2.8 million bbl at a future date," he said.
Report recommendations
Senate Democrats called on DOE to defer scheduled 2003 SPR deliveries until near-term oil prices fall and US commercial inventories increase. The agency last month moved in that direction when it deferred domestic oil deliveries into SPR because of curtailed Venezuelan imports. But DOE officials should go one step further and "publicly announce this policy change to calm markets by making it clear the SPR will not further reduce commercial oil supplies under current market conditions," the report said.
DOE also should analyze costs and benefits of the current policy, which calls on the agency to fill SPR without regard to oil prices and without deferrals, the report said. "When measuring benefits, DOE should analyze whether US energy security is better measured by considering only the amount of oil under government control or also the oil in US commercial inventories." Further, it said, DOE should restore procedures that allow for deferral of oil deliveries when crude prices are high or commercial oil supplies are tight, and the contractor agrees to deliver extra oil to the SPR at a later time.
More Hill response
As long as gasoline prices remain at uncomfortably high levels for consumers, the SPR is expected to be a continuing subject of debate among lawmakers this spring.
In a Mar. 3 Senate floor speech, Sen. Jeff Bingaman (D-NM), the Senate Energy Committee's ranking member, urged the Bush administration to better define its SPR policy. "I would call on the president to give us a clear and understandable signal as to what his policy is. Merely saying that 'we will wait for a severe supply disruption' does not cut it. . .it certainly is a severe issue weighing down our economy at this time."
Bingaman argued that the country is already facing an oil supply crisis. "Domestic crude and product stocks (outside of the SPR) are at all-time lows, and oil prices are now hovering at levels we have not seen since the Gulf War. High energy prices like this hurt consumers and hurt the economy."
Analysts' views vary
When and how DOE should trigger a SPR draw-down has been hotly debated by some oil analysts.
Bingaman noted that, in late fall after the election, crude supplies began to tighten because of the Venezuelan strike and other factors, causing prices to rise. Some analysts then called on DOE to perform a "test sale" of SPR crude to calm an increasingly jittery market.
But the administration chose not to act, Bingaman said, and "the situation we now face, in which curtailment of oil supplies is hurting our national economic security, is precisely what was foreseen when Congress created the SPR. The curtailment has been months in the making and the current crisis in Venezuela has pushed the supply situation to a level beyond 'severe.'"
According to Michael Lynch, president of petroleum services for the consulting group Energy Seer, policymakers will react slowly to price moves, focusing on the physical market balance. And that action will keep prices high briefly.
"Like his father before him, George W. Bush apparently intends to use the SPR to offset 'physical shortages' not to bring down prices. Thus, panic (or prudent) buying of oil by traders and users will not be the target of any release, but rather changes in the market balance, specifically the loss of Iraqi oil. But since hoarding withdraws of oil from markets as surely as bombs can (if more temporarily), this is a mistake and could result in a more-extended period of high prices. If the Saudis also raise production conservatively to avoid creating an inventory overhang later, they might keep the market tight—as they did in 1979," Lynch said.
Other analysts said the government should be judicious about when it decides to access the SPR.
"At some point, it is likely that our SPR will need to be drawn," said Matthew Simmons, president of the Houston-based investment bank Simmons & Co. International , speaking before a recent Senate Energy Committee hearing on oil prices. Simmons predicted that SPR will be used this year, but he warned a premature release could distort the market and waste reserves.
"It is critical that this is not done prematurely (i.e., merely to dampen high prices). The minute the US announces it is using the SPR, many planned imports of oil from other producers will likely turn away to other parts of the world. This could make a tight market even tighter. And we have never genuinely tested our SPR for any sustained period," Simmons said.
"Once winter is over, and if the SPR has been tapped, the US will still have to struggle to find a way to replenish the SPR and also rebuild our badly depleted oil stocks. There does not seem to be any simple way out of the box we find ourselves in. There is no reliable computer model to help the US rebuild the oil cushion it squandered over the past decade or two. In my opinion, there is no short-term remedy for the tight oil situation we presently face. The problem took too long to create for a quick fix to remedy the situation," he said.
Contact Maureen Lorenzetti at [email protected]
