President Clinton has ordered the near term sale of about 12 million bbl of crude from the Strategic Petroleum Reserve in a move designed to deflate rising U.S. gasoline prices.
Clinton also ordered the Department of Energy to examine the gasoline market and tell him within 45 days why prices have increased so sharply and what to expect for the rest of the summer.
Meanwhile, Republican leaders said Congress should repeal a 4.3/gal gasoline tax Democrats pushed through in 1993 as part of Clinton's deficit reduction package. It brought the federal gasoline tax to 18.3/gal.
The American Petroleum Institute disagreed with the SPR oil sale, saying, "The SPR never was intended to be used to control prices or dampen normal price fluctuations. The SPR was designed as a strategic stockpile to provide Americans with a buffer in case of a major oil supply disruption or shortage."
It pointed out that 12 million bbl is one sixth of the world's daily oil consumption. The U.S. uses about 18 million b/d, half of it imported.
The White House reacted after the average price of all grades of gasoline rose 5 in 1 week to $1.36/gal, making gasoline prices a potential election year issue.
Prices were even higher in California, a key state in the presidential election, due to introduction of the state's version of reformulated gasoline.
Clinton reacts
Clinton's action came just 3 days after he signed a fiscal 1996 budget bill for the federal government. That legislation calls for the government to sell $227 million worth of oil from the SPR before the fiscal year ends Sept. 30, earmarking the income for education programs.
DOE estimated such a sale would involve about 11-13 million bbl of crude if the oil could be sold for about $19/bbl.
A DOE spokesman said while the SPR oil would have been sold anyway, Clinton told DOE to sell it "expeditiously." The sour crude will come from the Weeks Island, La., SPR site, which DOE will close because of a geologic fracture.
This spring, under another budget directive, DOE sold 5.1 million bbl from Weeks Island for an average price of $18.92/bbl to raise $96 million to help pay for closing the site and transferring the crude (OGJ, Apr. 1, p. 36).
Clinton discussed his order while speaking at a fund-raising dinner in Florida.
He said, "I've been very concerned about this dramatic-although apparently temporary-rise in the price of gasoline at the pumps. We're about to get into the high driving season, and if gasoline is 20% higher, there's not going to be as many people driving as far to do whatever it is they're going to do this summer."
The White House said some of the price increase stemmed from inventories held to a minimum by refiners who were uncertain whether the United Nations will allow Iraq to sell a limited volume of oil to buy food and medicine.
Justice Department probe
Asst. Atty. Gen. Anne Bingaman, head of the Justice Department's antitrust division, named a five person task force of lawyers and economists to investigate the rise in gasoline prices.
Justice said the action is in response to congressional requests. Atty. Gen. Janet Reno said the White House did not request the probe.
A spokesman said the task force will first study whether market forces account for the increase in prices. "If not, they will determine whether there is evidence of collusion."
An API official said every investigation into higher product prices the past 20 years has found market forces, not price fixers, were responsible.
API said, "The petroleum industry is one of the world's most competitive. We are confident this investigation will conclude, as have other previous such inquires at the federal and state level, that gasoline and other petroleum product prices are set by the marketplace and respond to basic laws of supply and demand."
The White House said the Council of Economic Advisers also is watching the price increases.
Congressional voices
Sen. Robert Dole (R-Kan.), Senate majority leader and apparent Republican presidential nominee, and House Speaker Newt Gingrich (R-Ga.) urged repeal of the additional 4.3/gal gasoline tax.
Dole said, "We believe with the skyrocketing prices of gasoline, jet fuel, and other fuels that the most certain way to give consumers relief is to repeal the gasoline tax and do it as quickly as we can before the summer driving season starts in earnest."
Gingrich predicted the House will vote on a repeal bill this month. Sen. Phil Gram (R-Tex.) was preparing to introduce such a bill in the Senate.
Leon Panetta, Clinton's chief of staff, said the White House would consider a reduction if it were in the context of budget negotiations.
Dole discounted the price effect of selling SPR oil. He said when the U.S. sold 18 million bbl of SPR crude during the Persian Gulf war there was "a marginal impact on prices."
Referring to Clinton, Dole said, "I'm glad he's finally concerned about gas prices. I'm glad we finally got his attention."
Rep. Ed Markey (D-Mass.) said DOE should investigate to determine if oil companies have engaged in "collusion, price fixing, or deliberate efforts to limit supply." He said if the excise tax is reduced, Congress should consider placing a "windfall profits" tax on oil companies.
Tom Daschle (D-S.D.), Senate minority leader, said, "Just before the tourist season begins, it's interesting that these prices would go as high as they are. I have a feeling it has a lot more to do with profits than it does with taxes."
Daschle did not oppose repealing the 4.3 tax but said it would be hard for Congress to replace the $4.8 billion the tax will generate this year.
The Senate energy committee planned to conduct a hearing on gasoline price increases this week.
API's explanation
Edward Murphy, director of API finance, accounting, and statistics, explained the price increases were due to market forces that led to an increase in crude prices beginning in early February that, after a lag of several weeks, began to show up in gasoline prices.
Murphy said world products consumption increased a modest 1.5% in 1994 and most of 1995, but rose more than 2% in fourth quarter 1995 due to strong economic growth in Asia and an extremely cold winter in North America and Europe.
The International Energy Agency estimated fourth quarter 1995 world oil production would be 43.7 million b/d outside the Organization of Petroleum Exporting Countries sphere. But for several reasons, the most significant of which was the effect of hurricanes on Mexico's production, only 42.5 million b/d was produced.
Those factors caused a 1.8 million b/d increase in demand for OPEC crude, but OPEC kept production constant at 25.6 million b/d, up about 400,000 b/d from the year before.
So oil firms drew down world oil stocks 1.4 million b/d, leaving on-land OECD petroleum stocks at only 3.6 billion bbl at the end of December, more than 100 million less than a year earlier and, at 86 days of supply, the lowest level since 1979.
Murphy said, "The first quarter of this year surprised most petroleum industry analysts with further unexpected changes in the world market."
Estimates of OECD consumption in the first quarter turned out to be about 300,000 b/d too low, largely as a result of cold weather in North America and northern Europe.
"Largely as a result of temporary, one time events such as delays in start-up of North Sea fields and weather related production problems, production from OECD countries in the first quarter of this year was 700,000 b/d less than had been expected," Murphy said.
"The result of extraordinary events in the first quarter was that the call on OPEC oil-the difference between world consumption and non-OPEC production-was 900,000 b/d more than had been expected. The result of this shortfall was further pressure on inventories."
Inventories depleted
Murphy pointed out that U.S. inventories of crude and products were driven down at a rate of more than 800,000 in first quarter 1996. Many reached low levels and may have been at the point that they could not be further depleted.
Crude buyers were thus forced to bid on the spot market for crude and products. At the same time, expectations of an early return of partial Iraqi production to the market began to be questioned."
Spot prices for West Texas intermediate crude were a little less than $18/bbl in early February but rose to more than $25 in mid-April before dropping to $22.
"Historically," Murphy said, "there has been a fairly predictable relationship between crude prices and gasoline prices. Given the importance of crude oil as a cost element in the production of gasoline, this should not be surprising.
"When crude oil prices increase, as they did in 1992 and 1994, as well as when they fall, as they did in late 1993 and early 1995, there is, with some lag, a corresponding change in gasoline prices."
DOE data show conventional gasoline prices averaged $1.06/gal in early February and did not start to increase until late in the month. By early March they had reached almost $1.11 and as of Apr. 22 were $1.23, an increase of 17/gal and almost exactly the same as the increase per gallon in crude costs.
Murphy said spot crude prices have fallen $2/bbl recently, which would indicate a drop in gasoline prices is on the way.
Murphy also said consumers should remember that short term crude and gasoline prices are volatile, and recent gasoline price increases do not infer the U.S. has entered a long period of tightened petroleum supplies.
He noted that gasoline prices in the 1990s were lower than past prices, when adjusted for inflation, and current prices are still lower than gasoline was in the 1960s before the Arab oil embargo and later energy crises. Copyright 1996 Oil & Gas Journal. All Rights Reserved.
