Sell-Low Trading Strategy Seen in Congress Oil Reserve Sale

Updated on

U.S. lawmakers may not have a future as oil traders.

The idea of selling off some crude in the U.S. emergency stockpile to raise money for programs is gaining currency in Congress even though per-barrel prices are half of what they were a year ago.

“It’s a bad idea regardless of price,” said Guy Caruso, a former administrator of the Energy Information Administration, which tracks and analyzes U.S. energy data. “It’s made even worse by the timing.”

The latest would-be raiders of the Strategic Petroleum Reserve are Senate Majority Leader Mitch McConnell, a Kentucky Republican, and Democrat Barbara Boxer, a California Democrat, who want to help pay for a $47.1 billion, multiyear highway bill.

Critics including oil analysts and other lawmakers say using the underground crude reserve as a piggy bank makes it less effective in meeting its intended purpose: to make up for a “severe energy disruption.” What’s more, the government would be selling at a time when oil is unlikely to have recovered from its precipitous fall from highs last year.

The proposal calls for selling 101 million barrels over an eight-year period ending in 2025 to raise $9 billion for highway spending. That works out to $89 a barrel, well below the $48.45 closing price on Thursday. A year ago, oil traded at $104 a barrel, but an oversupply has cut prices by half.

Selling Low

“Washington is selling on the low,” said Robert McNally, founder of the Rapidan Group, an energy consulting firm based in Bethesda, Maryland.

The Energy Department, which oversees the petroleum reserve, says on average the U.S. paid about $29.70 for the oil.

But after adjusting for inflation and the royalty payments the government gave up in exchange for contributions to the reserve, the average per-barrel cost rises to $74, according to ClearView Energy Partners, a Washington-based energy research firm.

The Energy Information Administration predicts the U.S. benchmark oil price will rise to around $70 a barrel by 2017, the first year a sale would take place. McNally said an oversupply in the market may leave price stagnant for awhile.

Kevin Book, a co-founder of ClearView Energy Partners, said it’s possible oil could reach $89 a barrel during the years the oil would be sold under the highway proposal.

“Is it likely? It doesn’t look that way right now,” he said in an e-mail.

Raising Money

Defenders say the rise in U.S. oil production to around 9.7 million barrels a day, the highest since 1971, gives the U.S. greater flexibility.

“There’s plenty out there and there’s plenty of production going on,” Carl Larry, a Houston-based consultant for oil and gas issues at Frost & Sullivan Inc., said in a phone interview, though he said the timing was “odd” given the fall in prices.

“It’s not about making money, it’s about raising money” to offset government spending, he said.

There is a precedent for raiding the reserve to get cash. The U.S. sold 28 million barrels from the reserve in 1996 and 1997 to reduce the federal deficit. It also has released oil three times to offset potential supply shortages, the latest in 2011 amid turmoil in the Middle East.

Expanding Stocks

Since then, the government has increased its stores of crude, to about 695 million barrels today from around 590 million barrels in the mid-1990s.

While U.S. production has expanded, McNally said drillers operating in shale fields driving the increase wouldn’t be able to boost production quickly enough to avoid the economic consequences of a severe oil price shock.

As a strategic asset, the petroleum reserve shouldn’t be viewed as a “piggy bank” to pay for other programs, no matter how worthy, Caruso, who is now a senior adviser at the Center for Strategic and International Studies in Washington.

The SPR sale envisioned in the Senate’s plan to shore up a depleted U.S. Highway Trust Fund is the second such grab at the reserve’s assets in Congress this year.

Earlier this month, the U.S. House backed sales of 80 billion barrels to offset the costs of a healthcare measure that speeds drug development and boosts funding for medical research. It cleared the chamber easily on a 344-77 vote.

Avoiding Cuts

Borrowing from the oil stockpile to pay for programs has appeal to members of Congress because it doesn’t anger constituents the way cutting a cherished benefit program might, said Stan Collender, a former congressional budget committee aide who now leads a Washington-based communications consultancy.

“Here you have the selling of an asset rather than eliminating a benefit, which makes it politically easier,” said Collender, executive vice president of Qorvis MSL Group.

Some lawmakers though are fighting the proposal.

“Why at this point in time, when oil is hovering just barely above $50 a barrel, why would we think that it’s a smart and sane idea to be selling off any” of the oil reserve, Senator Lisa Murkowski, the chairman of the Senate Energy and Natural Resources Committee, told reporters Thursday. “To me it makes no sense.”

After the House passed the health bill this month, the administration in a statement said that it opposes using the SPR to offset other programs and thinks it is of “critical importance” that the reserve get the funds for needed upgrades.

Secretary Moniz

Energy Secretary Ernest Moniz also has spoken against the idea. The reserve is “our most important federal energy security asset,” he said in a June speech before at a conference in Washington.

The Energy Department has estimated that the reserve needs as much as $2 billion in upgrades to ensure the reserve functions properly. Some nearby pipelines that would take the oil from the Gulf to markets elsewhere have been reversed to flow different ways, requiring new outlets, according to department.

But with Congress facing budget pressures and tax increases off the table, analysts said eventually the petroleum reserve would be tapped for some purpose other than an energy emergency.

“This is only the beginning,” said McNally, a former national security adviser to President George W. Bush. “It’s becoming a feeding frenzy. It’s likely to get bigger. Blood is in the water, and the sharks are swimming.”