Senate Report Explains Oil Price Spike
www.guardian.co.uk Thursday March 6, 2003 12:20 AM
WASHINGTON (AP) - President Bush ordered a rush of oil into the government's Strategic Petroleum Reserve after the Sept. 11 attacks, and the Energy Department stopped its practice of holding off shipments to the reserve when prices got high or supplies got tight.
A report by Senate Democrats Wednesday maintained the decision, which diverted 40 million barrels of crude from the markets into the government-owned reserve last year, helped drive up gasoline and other energy prices.
With markets tight and oil prices high, refiners dipped into their inventories to replace the oil going into the government reserve, said the report produced by the Democratic staff of the Senate Governmental Affairs investigations subcommittee.
``We're confident this had a significant impact on the price of oil in 2002,'' Sen. Carl Levin of Michigan, the ranking Democrat on the subcommittee and its chairman last year.
Energy Secretary Spencer Abraham rejected the notion that the government's decision significantly affected energy prices. He said the amount was too small to have an impact.
``The principal issue here is national security and we believe and continue to believe that enlarging the amount of emergency reserves we have in the strategic reserve is very important to America's energy and national security,'' said Abraham.
A department spokesman, Joe Davis, added that the reason inventories dropped was OPEC's decision to cut production in early 2002, a decline in Iraqi oil exports and losses of oil from Venezuela last December. As for oil that went to the SPR, ``we're talking about a drop in the bucket,'' said Davis.
Some critics also have said taxpayers have lost million of dollars because of oil acquisitions for the reserve during periods of high prices. While the government does not technically buy oil, it accepts oil in lieu of royalty payments on oil pumped from federal land.
At 100,000 barrels a day, filling the reserve when crude was selling at $30 a barrel rather than $20 a barrel cost taxpayers $1 million a day in lost royalties, the Levin report said.
During 2002, when oil was diverted steadily into the strategic reserve, oil prices climbed steadily from the low $20s early in the year to over $30 a barrel by September. After easing a bit, prices soared again toward the end of 2002, remaining largely above $30 a barrel as crude inventories tightened. War jitters have caused prices to continue their climb this year, recently passing $37 a barrel before retreating modestly.
The department reversed course on filling the reserve last December, with Venezuelan oil production halted and commercial inventories extremely low, and suspended delivery of oil to the SPR from December through March. On Tuesday, it said April deliveries also would be deferred.
Levin said such a decision should have been made a year ago, arguing that the reserve already has plenty of oil to meet emergency needs. Currently there are 600 million barrels of crude - equivalent to four months of oil imports from the Middle East - stored in salt caverns on the Gulf Coast.
Before December, oil company requests for deferrals of deliveries to SPR were routinely denied, the report said.
Internal DOE documents indicated that career officials involved in the SPR program cautioned that private oil inventories could suffer, leading to higher prices.
Commercial petroleum inventories are low, retail product prices are high and economic growth is slow,'' said one memo from a senior SPR official in late May of 2002. The government should avoid acquiring oil for the reserve under these circumstance.'' Such purchases ``would be difficult to defend,'' he continued.
A reduction in private oil inventories equal to amounts put into the SPR ``could have a substantial price impact,'' said another memo, obtained by Levin's subcommittee.
John Shages, a director of policy for the SPR program, expressed his concern last June that filling the reserve could significancy impact private crude stocks and force up prices.
He characterized the SPR diversions as potentially a powerful 30 million barrel reduction of private inventory over 10 months'' if the oil is not replaced by OPEC or other producers. Come December ... we will have higher prices, nervous traders, a more confident OPEC...''
Commercial crude inventories declined from 310 million barrels to 280 million barrels during 2002 and another 10 million barrels early this year. Energy economists have cited the low inventories as a key reason for the sharp price increases of crude as well as gasoline and heating oil.
In April 2002, a BP executive repeatedly sought to have a scheduled delivery to the SPR postponed, according to e-mails obtained by the Senate investigators.
Oil prices keep rising,'' wrote James Dyer to Michael Waggoner at the SPR office. As of this morning we calculate a year's deferral would be worth an extra 750,000 to you,'' Dyer wrote, referring to the premium in barrels that BP would agree to pay for later delivery.
But the department said no.
In October, Marathon Ashland Petroleum asked to defer its scheduled shipment to the SPR because a hurricane had kept oil from getting to its Louisiana refinery and it needed all the crude it could get. The refinery had ``nearly depleted all its crude oil working inventory,'' wrote Marathon Ashland's Daniel Pears to Waggoner.
His request was also denied. ^--- On the Net: Strategic Petroleum Reserve: www.fe.doe.gov Senate Governmental Affairs investigations subcommittee: www.senate.gov