The administration of President George W. Bush sends conflicting signals when it wants to expand purchases for the Strategic Petroleum Reserve despite unusually high prices while vigorously promoting alternatives to end the nation’s “oil addiction,” Democrats on the Senate Energy and Natural Resources Committee charged.
“There’s a carnival of speculation in the markets. Prices for both crude oil and gasoline are bouncing around at high levels, yet we’re taking oil off the market and into the ground,” said Sen. Byron L. Dorgan (D-ND) during the committee’s Feb. 26 hearing on US oil inventory policies and the SPR.
A US Department of Energy official testified that expanding the reserve is required under the 2005 Energy Policy Act, that it’s part of a comprehensive national energy policy, and that the purchases are so small relative to the total global oil market that they don’t have a noteworthy impact. Some Republicans on the committee suggested that continued fill is prudent given many overseas suppliers’ uncertain political situations.
Katharine Fredriksen, principal deputy assistant secretary in DOE’s policy and international affairs office, said the Bush administration’s objectives for the SPR are to achieve 727 million bbl in storage in 2009, 1 billion bbl in 2019 and 1.5 billion bbl in 2029. “Expansion of the SPR is essential to meeting the nation’s future energy needs,” she said.
Currently, SPR supplies roughly equal 58 days of domestic demand. Higher SPR inventories are necessary because domestic demand and imports have increased, Fredriksen said. The reserve achieved its originally mandated goal of 90 days of import protection in 1983 and reached 118 days’ supply in 1985 before Congress discontinued funding to buy oil and purchases were suspended in 1994, she said.
“The amount currently being placed in the SPR of 70,000 b/d of royalty-in-kind oil is less than one tenth of one percent of the daily global demand of 85 million b/d and is well within producers’ existing excess production capacity. The modest fill rate does not put undue pressure on markets,” Fredriksen said.
Strategy questioned
Frank A. Verrastro, director and senior fellow of the Energy and National Security Program at the Center for Strategic and International Studies, said, “I understand [that] arithmetic. The question is the philosophy of taking oil off the market at all when prices are so high and both President Bush and Energy Secretary [Samuel W.] Bodman have asked Middle East members of the Organization of Petroleum Exporting Countries to produce more so prices will come down,” he said.
Sen. John Barrasso (R-Wyo.) also questioned the strategy. “The main question is whether taxpayers are getting the most for their money. It seems to me that continuing to buy oil at these high prices means that we either expect prices to go up more or we perceive a threat,” he said.
Melanie A. Kenderline, a former DOE policy office director and current associate director of the MIT Energy Initiative, said the money could be better spent on energy efficiency programs, where spending has plummeted in recent years.
Other alternatives
Frank Rusco, acting director for natural resources and environment at the Government Accountability Office, told the committee GAO recommends purchasing more heavy crude, which would both save money and provide standby supplies for refineries configured to run more sour grades.
DOE should also consider using dollar values instead of barrels in filling the reserve because it would let it buy more oil when prices are low, he indicated. “GAO found that if DOE had used this purchasing approach from October 2001 through August 2005, it would have saved approximately $590 million, or over 10%, in fill costs. GAO’s simulations indicate that DOE could save money using this approach for future SPR fills, regardless of whether oil prices are trending up or down as long as there is price volatility,” Rusco said.
Fredriksen countered that DOE plans to buy some heavier grades as it expands the reserve. It currently buys light and medium crude because they reflected the US refinery configuration when the program began. The 11 US refineries that are configured to process sour crude would still be able to refine a limited amount of SPR crude and maintain their full gasoline production, she added.
Committee chairman Jeff Bingaman (D-NM) said he convened the hearing because SPR policies had been inconsistent not only across administrations, but also sometimes during a single administration. “We also need to discuss whether we should be adding more crude oil inventories or storing refined products instead, and whether we should have the government own all of the oil or whether there are other, more market-friendly approaches to increasing our supply cushion,” he said.
Democrats on the committee suggested that SPR fill money could instead be added to alternative fuels research and development, while Republicans said it should be used to determine how much crude oil actually is on the US Outer Continental Shelf and in the Arctic National Wildlife Refuge.
In a bill he introduced on Feb. 6, Dorgan calls for suspension of SPR purchases for a year, restoring them only if oil prices fall below (a negotiable) $50/bbl. Money now being spent on SPR fill could be better used, he said, for domestic ultradeep and unconventional drilling research, which the administration repeatedly “zeros out” and which he keeps having to put back into DOE’s budget.
“We can expect some push-back from the administration,” he told reporters. “I understand that a substantial portion of this is coming from the vice-president’s office.” Following the hearing, Dorgan said there are several bills to which his measure could be attached as an amendment.