Politicians who monger bad ideas need to be reminded of their errors. Otherwise, what's to keep them from erring again?
Back in October, with cool autumn giving way to cold winter in the U.S. Northeast, worries arose over inventories of distillate heating oil. The oil market had tightened. Refineries were running crude at nearly capacity rates. Heating oil stocks nevertheless remained at very low levels by standards of recent history.
Unusual precaution
Alarmed, three Democratic lawmakers proposed an unusual precaution to former Energy Sec. Hazel O'Leary. The federal government, they said, should sell crude oil from the Strategic Petroleum Reserve and use proceeds to buy heating oil for storage in the Northeast. An aide to one of the lawmakers, Sen. Joe Lieberman of Connecticut, warned, "All of the stars are aligned for a heating oil crisis."
There was, of course, nothing inappropriate about concerns expressed by Lieberman, Sen. Chris Dodd of Connecticut, and Rep. Joe Kennedy of Massachusetts on behalf of constituents facing the imminent need of heat. What was wrong was their hasty recourse to government remedies, on which O'Leary properly declined to act.
Indeed, the winter just ending brought with it the tightest market in many years for heating fuels. The market had a number of reasons to be tight, including a previous heating season of unusual duration. At the beginning of the heating season just ending, distillate stocks were low not just in the U.S. but in Europe as well. Refiners and marketers had to strain to meet demand with their own plant capacity and with imports from suppliers outside the Atlantic basin.
All markets cycle though periods such as this, with supply the principal constraint. When they do, prices rise. Distillate prices thus rose last fall. But consumers had oil, and low-income consumers had access to price relief from federal assistance programs.
By last month, prices were in retreat, and inventories appeared to be recovering, although some of the early increases resulted from throughput cuts as companies turned refineries around to raise yields of gasoline. The market apparently had turned.
Once again, the oil industry should note this altogether constructive phenomenon to skeptical politicians: A tight market raised prices, which moderated demand and stimulated supply. Further to that latter development, an interesting highlight: U.S. production of crude oil climbed to an average of 6.46 million b/d in January from 6.449 million b/d in January 1996, according to American Petroleum Institute. And the increase came in the Lower 48, where a 70,000 b/d gain offset a decline in Alaska. Pleasant surprises remain possible.
But a "heating oil crisis" was never in prospect. Elevated prices, yes; crisis, no.
The government, however, might have created a crisis if it had taken seriously the proposal from Lieberman, Dodd, and Kennedy. It would have lost money on the spread between prices of crude and distillate. Its sales would have suppressed crude values; its purchases would have aggravated the distillate price rise. Uncertainty about its plans for hoarded product would have further discouraged stock-building by private interests. And every step that it took would have lagged behind market adjustments and thus been too late to have any but perverse results.
Confused market
The crisis created by government product hoarding would have been a confused and distorted market, a market unable to adjust appropriately to change. And the crisis would have been partly manifest now in either distillate still stored for no reason at taxpayer expense or massive losses resulting from late sales in a contracting market.
The next time product markets tighten, the industry should be prepared to remind politicians of the crisis that didn't happen in the winter of 1996-97-and the crisis that would have happened if bad ideas had prevailed.
Copyright 1997 Oil & Gas Journal. All Rights Reserved.
