Oil Prices and the SPR

September 23, 2004
02:47 PM
After three and a half years (and just weeks before an election), the Bush Administration is finally coming around to our view that it needs a more sophisticated approach to managing the Strategic Petroleum Reserve. Congressional Democrats have been saying all along that it just doesn’t make sense to keep filling the SPR when crude supplies are tight … stocks are low … and prices are sky-high. It’s a dreadful deal for American taxpayers and consumers, so we’re heartened that the Administration, at last, is starting to notice the damage that soaring oil prices are doing to our nation’s economy. Here is what Sen. Bingaman said this evening on the Senate Floor: "Mr. Chairman, I’ve come to the floor today to speak briefly again about the impact that high energy prices are having on consumers and the increasingly misguided filling of the Strategic Petroleum Reserve. This is not a new topic for discussion on the Senate floor; rather it’s one that we keep coming back to. Given the increase in oil prices that we’ve seen this year, many of us have been contemplating the Administration’s decision to continue to fill the Strategic Petroleum Reserve in this high-priced environment, and have been criticizing the Administration’s decisions in that regard. "Yesterday oil prices hit $48.35/bbl. Today, oil futures hit $49/bbl, just forty cents under the all-time high of $49.40/bbl that was reached August 20. "Market analysts attributed yesterday’s sharp increase in prices to trader reactions to EIA’s weekly inventory report. U.S. crude inventories dropped by 9.1 million barrels. More surprising was the decrease observed in petroleum product inventories, in particular heating oil. Distillate inventories plunged by 1.5 million barrels. This may not sound like a lot, but given that this is the season in which stocks are normally built in anticipation of the winter heating season, it is a significant decline. "In a season in which we should be building stocks, we see national commercial crude stocks at the lowest level since February, and we see draws on heating oil inventories. Heating oil prices have hit all-time highs on the NYMEX this past week and the crude price is once again near its all-time high. "Curiously, the Administration is seeking to remove some 5 million barrels of crude oil from the market in October to continue filling the Strategic Petroleum Reserve. This does not make economic sense. The direct effect -- to add more pressure to what we all know is a very tight market – is to create even higher energy prices for consumers, and these are the same consumers who have been faced with record energy prices for the past year. "According to a recent analysis by Energy Information Administration, the prices that consumers pay for heating oil and natural gas and propane has increased 46 percent since 2000 when the current Administration was took office. Gasoline prices increased more than 30 percent this year alone. When is this Administration going to do something to help consumers fight these high energy costs? How high do prices have to go before we see some action? "Yesterday rumors began to circulate that the Administration was contemplating a release of Strategic Petroleum Reserve oil in response to the disruptions by Hurricane Ivan to US offshore production and oil imports. Reports in this morning’s newspapers claim that two companies that have requested permission to defer their Strategic Petroleum Reserve deliveries. "This afternoon the Department of Energy announced that it intends to enter into negotiations with refiners for a loan of oil from the Strategic Petroleum Reserve. The press release notes that the Secretary has authorized these negotiations concerning that loan. "I hope that this announcement signals that the Administration will start taking a more realistic approach to the current situation in oil markets. "For several months I have advocated that we should suspend delivery of oil to the Strategic Petroleum Reserve until prices come down to a more reasonable level. Suspending the fill of the Strategic Petroleum Reserve during times of high oil prices makes economic sense. Diverting high-priced Federal oil into the Strategic Petroleum Reserve, does not make good economic sense. -- By filling the Strategic Petroleum Reserve in this high-priced environment that we find ourselves in, we are effectively paying more for oil now then we would if we waited until prices went down. -- Filling the Strategic Petroleum Reserve when oil prices are high costs American tax payers unnecessarily. Buy high/sell low is not a good strategy. -- AND, puts more pressure on already tight fuel markets and keeps oil prices higher for a longer period. "The royalty-in-kind oil program used to fill the Strategic Petroleum Reserve was first envisioned first in a low-priced environment. -- The government took oil from domestic producers on federal lands when prices were low to absorb some of the excess oil. -- The royalty-in-kind program was used to keep domestic oil prices from falling even further (below $14/bbl, NOT $50/bbl) -- The royalty-in-kind program was not established to help high oil prices stay high, but by taking oil off the market in a high-priced environment we essentially do that. "Suspending the fill of the Strategic Petroleum Reserve does not hurt our energy security. -- The reserve is already filled to 96 percent capacity. It has 670 million barrels that are now in storage, the highest level that it’s ever been. -- It currently covers 67 days of import capacity (at a level of 10 million bbls per day of imports). "I don’t know how the Administration will justify taking 5 million additional barrels oil off of the market in October, at the same time that it is granting loans, effectively releasing oil from the Strategic Petroleum Reserve to refiners. I hope the Administration will rationalize its position and stop filling the Strategic Petroleum Reserve for the time being."

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