Watching Government: SPR refill

Patrick Crow
Washington, D.C.
[email protected]

The Petroleum Industry Research Foundation Inc. (Pirinc), New York, says the U.S. is missing a golden opportunity to replenish the Strategic Petroleum Reserve, which now holds 563 million bbl.

It said, "Over the past 3 years, Congress and the administration have seen fit to raid the SPR for budgetary purposes by selling off 29 million bbl. The time is uniquely right to at least buy these barrels back."

Pirinc noted world oil prices are hovering around $11/bbl, about $9 below the 1997 average price.

It said lower prices are benefiting consumers but hurting U.S. producers.

"Indeed, with the Organization of Petroleum Exporting Countries production cuts in place, the U.S. is currently the world's largest single source of petroleum supply.

"Depressed oil prices adversely impact the finances of all oil producers, as well as drilling and service companies, and reduce their ability, as well as the incentive, to continue to find and produce oil."

Logic

Pirinc said warning signs are flashing for U.S. oil output. "The number of rotary rigs in use for U.S. oil and gas exploration was down about 6% in the first 9 months of 1998 vs. the comparable period in 1997. The decline is accelerating, with no bottom in sight.

"The rig count for the third quarter of 1998 was 20% below the year earlier, and for the most recent period, 32% below year-ago levels."

Pirinc said the U.S. government has found intervention methods to stabilize other markets in the past when national interests required it, such as buying grain.

"The oil industry is being impacted by some of the same exogenous factors that caused such distress for American agriculture, notably global weakness in demand and therefore prices, primarily as a result of the collapse of economic growth in Asia."

Pirinc said buying oil for the SPR would offer the industry temporary relief at little cost, considering the long-term benefit of buying oil at rock-bottom prices.

Buyback

Pirinc said Congress should approve a $375 million "emergency" appropriation (which would not need offsetting spending reductions) early next year to rebuy the 29 million bbl.

The Clinton administration recently refused the Department of Energy's request for $160 million in the fiscal 2000 budget for SPR oil purchases. Now DOE is seeking $100 million.

Pirinc said the U.S. would be "buying low after selling high" and making about 40% on the transaction.

"Such a purchase, spread over 3 months, would have only marginal effects on the global oil balance since it would total less than 0.5% of world oil supply."

Pirinc said, "It should be kept in mind that today's conditions are unique and unlikely to last. The very high global oil inventories that helped depress prices are beginning to fall, aided by the reductions in production by oil exporting countries.

"There is no guarantee that we will have yet another unusually warm winter to reduce demand, or that the Asian economies will continue indefinitely in their depressed state. In this light, failure to buy now means passing up a time-limited opportunity for bargain-priced oil."