In the hunt for new sources of cash, U.S. lawmakers may have set themselves up to get fleeced by savvy oil traders.
In an era where tax increases are non-starters, lawmakers and their aides are constantly looking to identify new—and often creative—ways to raise money. One idea increasingly considered as a pay-for? Selling barrels of oil from the Strategic Oil Reserve, the U.S. oil stockpile designated for drawdown only in case of emergency, whether national security- or national disaster-related.
In times of major U.S. reliance on foreign sources of oil, the reserve's use for anything other than emergency would be unthinkable. But the U.S. oil boom, combined with the more than 695 million barrels currently held in reserve, has led lawmakers to not only entertain sales, but vote them into law. The idea has no high-profile champion, yet even as a bipartisan group of lawmakers voice concerns about its use (most notably the top Republican and Democrat on the Senate Energy and Natural Resources Committee), millions of barrels will soon be sold off. The bipartisan budget agreement signed by President Barack Obama on Nov. 2 directed the Energy Department to sell 58 million barrels of oil over the course of six years, starting in 2018.
The first potential problem lies in the accounting. The Congressional Budget Office scored the sales as raising more than $5 billion—a significant chunk of the money needed to finance the budget deal. But that forecast relied on oil, which is currently sitting at around $40 a barrel, to jump to more than $70 by 2018, $80 by 2019, and more than $95 by 2024. In all but the first year of sales, the estimates fall short of the forecasts of the U.S. Energy Information Administration. The futures market is even less forgiving.
“If you look at the way the money is right now, it is a money-losing trade in real dollar terms,” says Kevin Book, managing director at ClearView Energy Partners LLC.
Now, markets shift, and there are any number of reasons that an increase to that level could occur. But that doesn't mean potential problems are resolved. The budget deal explicitly lays out the sales schedule—and gives the Energy Department limited flexibility in the process.
Book recounted a conversation with a hedge fund client, who was, safe to say, completely befuddled by the process. As Book tried to explain, he said, the client interrupted and said it obviously has to be a sale into the futures market.
“The answer was, 'No, they're going to do a solicitation and they are going to schedule when they are going to sell. They are going to announce it and then they are going to sell on that date in the future after it has been announced,'” Book said, recounting the conversation. Or, to put it another way: “This is the least stealthy, least defensible way to sell oil into the market. If you are doing this for money, you are going to lose every time. Every scheduled sale is a sitting duck. All traders have to do is get on the other side of it.”
Energy Secretary Ernest Moniz, even in acknowledging the shift in U.S. energy security, called sales as a money-raising mechanism “a very slippery slope.” Senate Energy and Natural Resources Committee Chair Lisa Murkowski, an Alaska Republican, was more pointed during an Oct. 6 hearing on modernizing the SPR.
“We are looking at this as nothing more than a cash machine at a time when we're looking for more money, and I think that this is wrong, and I think that this is irresponsible,” Murkowski said.
The budget agreement does include up to $2 billion to upgrade and modernize the current SPR facilities—a tradeoff that Jason Bordoff, a former top energy official on the staff of Obama's National Security Council, said is worth it. Even staunch defenders of the reserve note that changes in U.S. production and infrastructure have left the facilities out of date. “If selling a fraction of the SPR’s 694 million barrels is the only way to make sure the SPR can be accessed, it’s better than doing nothing,” Bordoff wrote in an Oct. 29 opinion piece in the Hill.