Democrats Assail Bush Oil Policy - Adding to Reserve in 2002 Raised Prices, Senate Staffers Say

www.washingtonpost.com By Peter Behr Washington Post Staff Writer Thursday, March 6, 2003; Page E02

The Bush administration's decision to buy oil for the nation's strategic petroleum reserve last year, as oil prices were climbing, raised U.S. energy costs without significantly improving the nation's energy security, a report by Senate Democrats said yesterday.

Although the administration last year added 41 million barrels of oil to the reserve, kept in salt domes along the Gulf of Mexico, U.S. energy companies cut back comparably on their own oil inventories, resulting in no net increase in nationwide oil supplies, said the report by the Democratic staff of the Senate Permanent Subcommittee on Investigations.

The strategy "appears to have backfired," said Sen. Carl M. Levin (D-Mich.), the subcommittee's top-ranking Democrat. His staff's 268-page report on the strategic oil reserve follows a year-long inquiry, most of it done while Levin was the subcommittee's chairman.

Energy Secretary Spencer Abraham rejected the report's conclusions, saying he did not believe the U.S. strategy affected prices.

Some industry analysts challenged the report's conclusion, saying the escalating tensions over Iraq created a strong reason for increasing the oil stockpile.

"If things go horribly wrong in the [Persian] Gulf, it means they have a bit more of an insurance policy," said George Beranek, manager of market analysis with PFC Energy in the District.

"With the current Iraqi situation, the value of the strategic petroleum reserve is priceless," said Adam Sieminski, an energy analyst with Deutsche Bank in London.

Once a decision has been made to buy oil for the reserve, it's hard to know what is the "right" price, Sieminski said. The administration's error is in failing to use the oil stockpiles now, he said, to increase supplies and lower current oil prices, which have risen by more than 60 percent over the past year. "They keep waiting for some sign from heaven," he said.

In November 2001, President Bush set a goal of increasing the reserve from about 550 million barrels to its full capacity of 700 million barrels, about a 45-day supply. Before that, the Energy Department had deferred purchases for the reserve when prices were moving higher.

Abraham said yesterday the administration is monitoring the oil supply situation "very closely" but does not intend to use the reserve to restrain price increases. It would be used if a war with Iraq cut seriously into oil supplies.

The administration has been postponing purchases for the reserve since mid-December, a move that Levin's staff said supports its claim that the old Energy Department policy was correct.

Beranek said the subcommittee was wrong in concluding that oil companies refrained from increasing their crude oil inventories because the Bush administration was filling the petroleum reserve.

As oil prices rose in 2002, energy company executives were feeling pressure to cut operating costs, and that led to their shrinking inventories, he said. The committee's analysis also underestimates the impact on inventories of production cutbacks early in 2002 by the Organization of Petroleum Exporting Countries, and the sharp drop in oil imports late last year when Venezuela's oil fields were closed by a national strike, he added.

"I don't think somebody at Exxon is saying, 'DOE has more oil, so we need less,' " Beranek said.

Levin's report also said it looked into the possibility that prices of North Sea oil purchased for the reserve were manipulated, but could not prove it, because of the large volumes of oil traded on unregulated over-the-counter energy markets.

The risk was disputed by Neal L. Wolkoff, executive vice president of the New York Mercantile Exchange, the primary regulated market for energy trades.

"I'm not saying that a market absolutely can't be manipulated," Wolkoff said. "But if anyone does try to manipulate the [oil] market, we have the power to investigate and punish it." The exchange "takes that responsibility seriously."

Wolkoff said that despite the oil market's volatility there are many competing traders. "I don't see anything unusual. I don't see any dominant positions."