Elk Hills and the budget

An isolated, relatively low-dollar oil and gas issue lurks in the U.S. governments budget dispute, which late last week remained at stalemate. A deadlocked reconciliation bill contains a provision for sale of the 78% federal interest in Californias Elk Hills oil field. Separately, the House at yearend passed a Defense Department spending authorization bill with a similar provision. The Senate was expected to do the same.

It is fitting that broader questions about the federal budgetMedicare, Medicaid, the pace of progress toward balanceobscure the Elk Hills sale. Against a trillion dollar budget with a deficit approaching $200 billion, the $2 billion and change that Elk Hills would net for the government and the nearly $80 million/year in operating outlays that it would save dont look like much.

But a simple question links the broad and narrow issues in its ability to clarify things: Why should the government perform this activity?

Simple answer

Why should federal contractors operate the nations seventh-ranking oil producing field? The question had a simple answer in 1912, when the naval petroleum reserves (NPRs) were created. The Navy was switching from coal to oil as a fuel for its ships, and the NPRs helped allay fears about wartime shortages.

Even now, the idea of federally owned oil production holds intuitive appeal. Warships still need fuel. What the government produces on its own account it need not buy from others in a war.

The trouble is, what the government produces on its own account turns out to be hugely expensive in war or peace. Last September, the Elk Hills program director for Chevron Corp., which owns the fields nongovernment interest, told a House subcommittee that taxpayers had paid more than $50 million too much for Elk Hills production in the preceding 2 years due to overstaffing, inefficiencies, and the failure to pursue competitive practices. The program director, Michael Stay, pointed out that in California private companies employ an average of 17 workers for every 100 wells. The governments contractor at Elk Hills employs 50 workers per 100 wells.

The Department of Energy wants to rationalize its expenditures for NPRs, last year proposing for fiscal 1996 to cut the budget for Elk Hills by 50% to $78.8 million. Of course that precludes work needed to maintain productionwork the government cant perform nearly as efficiently as a private operator couldso revenues will drop, producing a loss to the government that will exceed the budget cut. Its a classic government paradox: fiscally prudent and commercially untenable.

For this bottomless economic drain, however small it may be in the larger scheme of things, the taxpayers receive the comfort of knowing their navy, should it go to war, wont have to go to the market for 65,000 b/d of crude oil. Yet the volume is pittance. And having to resort to the modern market in an emergency just isnt as dour a security prospect as it was in 1912.

Is the supposed comfort of federalized oil production worth all the peacetime expense, however small the dollar amounts may be in relation to the entire budget? Absolutely not. So why is the government still blundering around in the oil business? DOE itself wants out of the operators role at Elk Hills. The only thing wrong with its proposal is that it doesnt move fast enough.

Asking why

Alas, an eminently sensible plan to sell the federal interest in Elk Hills field may die of neglect this year as lawmakers and the White House fight over grander designs. Officials will ask why they should bother with such small sums. They should be asking why the government performs this activity at all. Absent a defensible answer, they should quit performing the activity, whatever its share of total government outlays. And they shouldnt quit asking the question, and cutting where answers compel them to, until theyve worked through the entire budget.