US Pres. Bill Clinton's heating oil reserve for northeastern states addresses a genuine problem in an altogether improper way. It puts government in the middle of the oil market, where it always does more harm than good. And it reveals a breathtaking misunderstanding of the problem.
The problem is, of course, that supply of oil products can barely keep pace with demand. Its scope is worldwide. This month's issue of International Energy Agency's Oil Market Report makes the point in an analysis with this headline: "What the world needs now: more product."
Saudi Arabia's unilateral decision to raise production by 500,000 b/d will help. The increase will ease the price of crude oil and encourage refiners with idle capacity to increase throughput.
Focus on gasoline
Few such refiners exist in the US, however. The US refining industry is operating at an estimated 95% of capacity. It can't push facilities much harder.
Meanwhile, inventories of gasoline and distillate oil, including heating oil, remain very low. Heating-oil stocks aren't growing as they should at this time of year because refiners must make all the gasoline they can just to satisfy immediate demand. And with product supply tight worldwide, imports aren't available in volumes sufficient to make up the difference.
As the Saudi lift to crude supply takes effect and refiners outside the US raise runs, the import problem should ease. But it will take a while. And until inventories reach more comfortable levels around the world, any interruption will do more than usual damage to supply.
In response to this unusual and ultimately self-correcting market strain, the Clinton administration will exchange crude oil from the Strategic Petroleum Reserve for as much as 2 million bbl of heating oil for storage in facilities leased from private companies. If the president determines that some future emergency warrants tapping the reserve, the government will either sell its heating oil to the highest bidders or direct distribution of as much as 10% of the reserve volume at the average price of competitive sales.
The program involves neither great volumes of oil nor significant costs, which are estimated at $8 million/year. But it will accomplish absolutely nothing that the market would not do on its own and more efficiently. And to the extent that it discourages private storage of heating oil, it will only get in the way.
Worse than the future market intrusion that the program promises are the effects it will have now-commercial and political.
Under current market conditions, the oil can come from only two sources: refinery operations adjusted to boost distillate output at the expense of gasoline, and diversion of product to program storage at the expense of commercial stock levels. So the commercial effect will be to prolong this period of elevated gasoline price and add uncertainty to the already worrisome outlook for the next heating season.
Politically, the program further disparages an industry under siege on the gasoline-price front. It implies that companies would be storing heating oil if they only chose to do so and that the government must nudge them into prudent inventory behavior.
Wrong. It is painfully clear that the market is short product. Refiners operating at capacity rates simply cannot, at this moment, both meet immediate demand for gasoline and replenish heating oil stocks at seasonally normal rates. The market will correct the imbalance if government will just leave it alone.
Regulatory burden
What the Clinton administration should instead be addressing is the mess it has made of the refining industry's future with aggressive and unnecessary environmental regulation. Last month, the National Petroleum Council called the coming regulatory burden "unprecedented" and noted that the government has mandated too many fuel changes too quickly for refiners to make them efficiently.
If the administration wanted to do something for oil consumers, in the Northeast and everywhere in the nation, it would give that warning the attention it deserves. Alas, petroleum chemistry isn't fertile ground for votes. And the Clinton team and its would-be successor have given the nation no reason to believe it cares about anything else.
