Watching Government Robbing the piggybank

With Patrick Crow
from Washington, D.C.

New raids on the U.S. Strategic Petroleum Reserve have analysts debating whether the Clinton administration is robbing the piggybank or adjusting to changed oil markets.

This spring, the administration sold 5.1 million bbl of SPR crude oil to raise $96 million to close the Weeks Island site (OGJ, Apr. 1, p. 36).

Then Congress passed a budget bill that allowed the sale of about 12 million bbl to raise $227 million. Clinton accelerated that sale to help deflate gasoline prices (OGJ, May 6, p. 44). The Defense Fuel Supply Center will open initial offers for the oil May 13, followed by openings May 20, June 3, and later if necessary.

The 12 million bbl sale will reduce the SPR to about 575 million bbl.

Next, the administration has proposed to sell about 72 million bbl to raise $1.5 billion for federal coffers in 2002.

No defenders

Sales of SPR crude had no real defenders at a recent House commerce subcommittee hearing. Congressmen noted the U.S. has about $35/bbl invested in the oil but wants to sell it for $18-19.

Kyle Simpson, associate deputy secretary of energy, said DOE had advised the administration against the sales. He also noted it is clear the U.S. cannot depend heavily on private stocks. Industry has switched to "just in time" inventory practices that cut privately held stocks 100 million bbl in 1995-96.

Charles DiBona, American Petroleum Institute president, said the SPR holds 67 days of supply but should hold 90.

He said, "Using the SPR to attempt to mitigate short term price increases is inadvisable. It reduces incentives to hold private stocks and loses sight of the fundamental reason of the SPR, which is to combat serious threats from a significant supply interruption."

Vito Stagliano of Energy Security Analysis Inc. said using the SPR for short term revenue purposes and quick fixes of oil prices trivializes the nation's key defense against energy emergencies.

"The SPR cannot be drawn down each time crude oil prices reach $25/bbl, the apparent political trigger," Stagliano said. "Nor should the SPR be used to avoid or postpone the cost consequences of regulation, as appears to be the case in regard to retail prices experienced in California."

Annual question

John Lichtblau, Petroleum Industry Research Foundation Inc. chairman, warned, "The question of selling SPR oil can now be expected to come up at every annual budget debate, and the politics will usually be on the side of further reductions."

He said rising oil imports are eroding the SPR insurance policy. In 1986, SPR stocks equaled 95 days of imports, at the end of 1995 they were 75 days, and they are projected to be less than 60 days in 2000.

Philip Verleger of Charles Rivers Associates questioned whether the financial situation of the U.S. is so serious it cannot find a few hundred million dollars.

Only Jan Paul Acton, a Congressional Budget Office analyst, argued that the optimal size of the SPR has shrunk.

He said oil markets have become more efficient, the economy is less dependent on oil, and future oil disruptions are less likely because world economies are more interdependent.