The Clinton administration's political decision to release oil from the Strategic Petroleum Reserve has become a political embarrassment.
In an effort to boost production of home heating oil production, the administration is releasing 30 million bbl. The original winning bidders pledged to return 31.56 million bbl by Nov. 1, 2001.
But the US Department of Energy awarded a third of the crude to three small companies not known for oil trading. Euell Energy Resources and Lance Stroud Enterprises could not provide the necessary letters of credit. Burhany Energy Enterprises transferred title to its 3 million bbl to Hess Energy Trading.
Last week, DOE reoffered the remaining 7 million bbl, for delivery by Jan. 1.
Energy Sec. Bill Richardson tried to put a good face on the situation, announcing that the administration's temporary 2 million bbl home heating oil reserve in the Northeast has been filled ahead of plan. The distillate is stockpiled at a Woodbridge, NJ, site and two New Haven, Conn., locations.
Republicans in Congress were planning oversight hearings to compound the administration's embarrassment.
Sen. Frank Murkowski (R-Alas.), the energy committee chairman, consistently has criticized the SPR swap.
He said that because US refineries are running at 95% of capacity, they cannot make more home heating oil, no matter how much SPR oil is released.
He also complained that the SPR was established to offset a severe supply disruption, "not to lower market prices when politics demand."
Murkowski claimed that two thirds of the SPR oil will not be refined in the US.
"If the stated purpose for the swap was to supply the Northeast with home heating oil, why wasn't there a contractual obligation that made sure it will get there?"
Later, Richardson announced that four large distillate producers had agreed to suspend heating oil exports.
Also, DOE required a 5% bid bond in its latest SPR solicitation. If a company could not produce a letter of credit, it would forfeit the 5% or $3 million, whichever is less. The letter of credit was set at 110% of the value of the SPR oil, rather than the previous 100%.
Meanwhile, a paper by the Oxford Institute for Energy Studies, Oxford, England, called the crude swap an economic blunder.
"The real surprise of the SPR auction," says the study, "is that the DOE was prepared to give so much money away in order to move the oil into the marketplace.
"The release of SPR oil provided the chance of a risk-free cash windfall for the winners. We would estimate this handout to be, at the very least, $93 million, had all the initially accepted bids actually stood."
Bidders had to take the oil by Dec. 1 and replace it within a year.
"They would be exposed to the risk of a price fall before they took the oil and a price rise before they replaced it. However, both risks can be hedged, and a guaranteed riskless profit locked in."
The study says that if DOE had simply sold the SPR oil, invested the money, and repurchased oil in a year, it could have added 5 million bbl to the SPR instead of 1.5 million.