DOE Not Backing Down On Strategic Reserve Fill

The Bush administration yesterday defended its policy to withdraw oil from a tight market to fill the Strategic Petroleum Reserve while at the same time asking other countries to boost oil production.

Katharine Fredriksen, principal deputy assistant secretary in the Energy Department's Office of Policy and International Affairs, said taking less than one-tenth of 1 percent of the 85 million barrels of crude consumed per day around the world for the SPR does not affect consumer prices.

"The modest fill rate does not put undue pressure on markets," Fredriksen told the Senate Energy and Natural Resources Committee. She repeated that DOE had a legal obligation from the 2005 energy bill to continue to fill the reserve.

But Sen. Byron Dorgan (D-N.D.) said filling the reserve at prices of $100 per barrel was "nuts." He has authored legislation to freeze DOE oil acquisitions for a year or until oil prices fall to $50 per barrel or less.

Dorgan said DOE's withdrawal of even a small amount of oil had an effect on the price in a market that is "a carnival of speculation." Dorgan, chairman of the Energy and Water Appropriations Subcommittee, said he would do everything possible to stop the current 70,000 barrels per day SPR fill.

The senator also said he was flexible on the bill's $50 per barrel threshold -- perhaps up to $70 -- and was looking at "all options" to get the legislation passed as soon as possible or to stop the fill.

As of yesterday the SPR had an inventory of 698.6 million barrels or about 58 days worth of oil supply, Fredriksen said. The administration's goal is to achieve 1 billion barrels by 2019 and 1.5 billion by 2029. DOE has announced it will take 125,000 barrels per day off the market later this year through the royalty-in-kind program and direct purchases.

Chairman Jeff Bingaman (D-N.M.), a cosponsor of the legislation, said he was worried about this mindset of filling the reserve regardless of market conditions, as if on "autopilot."

"As we face the threat that Venezuela might suspend oil shipments to the United States, it is more appropriate in my view to consider releasing the SPR rather than filling it," Bingaman said.

Republican Sens. Larry Craig of Idaho and Bob Corker of Tennessee said the focus on the SPR withdrawal was missing an even bigger discussion of the country's "greatest reserve," the oil and gas currently off-limits in the outer continental shelf, Alaska and the Gulf of Mexico.

Bingaman said beyond the $100 barrel oil purchases, there is a greater problem of SPR management and policy inconsistencies that must be examined.

"I am concerned that the current administration seems to have changed the long standing policy…in the case of a world oil supply disruption, the SPR would be drawn down early and in large volumes," Bingaman said. "The current administration has gone in a different direction."

Frank Verrastro, director and senior fellow of the Energy and National Security Program at the Center for Strategic and International Studies, testified that the new policy resisting the release had exacerbated speculation, as traders had no fear that higher prices would trigger drawing from the reserve.

Verrastro said along with the definition of an "emergency," the type of oil products used for the reserve should also be re-examined. DOE buys a majority of sweet crude, which may not be the best product option depending on the supply disruption and is also a very expensive form of crude oil, he said.

A witness from the Government Accountability Office, agreed that having heavy crude oil in the reserve would "make the SPR more compatible with many U.S. refineries, helping these refineries run more efficiently in the event that supply disruption triggers the use of the SPR."

Frank Rusco, acting director of GAO's Natural Resources and Environment program, said DOE also could save more than $1 billion if it bought 100 million barrels of heavy crude oil in the 1.5 billion barrel reserve expansion.

The GAO study also suggested DOE use a steady dollar amount -- known as "dollar cost averaging" -- as opposed to a steady volume amount, to fill the reserve.

Finally, GAO said it is more cost-effective to directly purchase the oil as opposed to using the royalty-in-kind program. Last month the DOE Inspector General found the program did not have proper oversight and DOE did not make purchases at the same price level as barrels traded in the royalty-in-kind program.