The Strategic Petroleum Reserve

This amendment establishes a cost-effective program to fill the Strategic Petroleum Reserve. I understand it has been cleared by both of the managers.

Since late 2001 the Department of Energy--DOE--has been steadily adding oil to the U.S. Strategic Petroleum Reserve, SPR, in order to fill the reserve to its maximum capacity of 700 million barrels. In late 2001, the reserve held about 560 million barrels of oil; today holds nearly 620 million barrels. DOE anticipates that at the current fill rate it will reach its goal of 700 million barrels sometime in 2005.

Since early 2002, DOE has been acquiring oil for the SPR without regard to the price of oil. Prior to that time, DOE sought to acquire more oil when the price of oil was low, and less oil when the price of oil was high. In early 2002, however, DOE abandoned this cost-based approach and instead adopted the current approach, which does not consider cost when buying oil for the SPR. Since over this period the price of oil has been very high--often over $30 per barrel--and the oil markets have been tight, this cost-blind approach has increased the costs of the program to the taxpayer and, of great significance, put further pressure on tight oil markets, thereby helping boost oil and gasoline prices to American consumers and businesses.

The bipartisan amendment Senator COLLINS and I are offering today is simple. It would encourage DOE to consider the price and supply of oil when buying oil for the SPR. It would direct DOE to minimize the program's cost to the taxpayer while maximizing our energy security.
The Permanent Subcommittee on Investigations spend a year and a half looking at oil markets and the SPR. In March of this year my staff on the subcommittee published the repot of the investigation.

In summary our investigation found:

-In 2002, DOE began to fill the SPR without regard to the price of oil.
-Filling the SPR in tight market increased U.S. oil prices and hurt U.S. consumers.
-Filling the SPR regardless of oil prices increased taxpayer costs.
-Despite its high cost, filling the SPR [in 2002] did not increase overall U.S. oil supplies.

The March report also warned that the deliveries that were then scheduled for later in 2003 would drive oil prices higher because prices were high and inventories were low. Unfortunately, this prediction turned out to be accurate.

Our Report recommended:

-DOE should defer all SPR deliveries . . . until near-term crude oil prices fall and U.S. commercial inventories increase.
-DOE should conduct a cost-benefit analysis of the previous SPR fill policy compared to the current policy.
-DOE should restore its SPR business procedures allowing deferrals of oil deliveries to the SPR when crude oil prices are high or commercial crude oil supplies are tight.

Both Houses of Congress support the goal of filling the SPR to its capacity. I support this goal, too. This amendment seeks to further this goal and our national energy security at least cost to the taxpayers. For many years the SPR program followed the types of procedures that DOE has recently abandoned. The SPR program office itself has recommended the DOE return to using these market-based procedures. Under the amendment DOE would continue to have the discretion to determine when to buy oil for the SPR, and under which procedures, but DOE would be encouraged to use that discretion in a way to minimize costs while maximizing national energy security.

Any successful businessperson knows the saying, ``Buy low, sell high.'' This is as true for oil as it is for pork bellies and stocks. It is as true for the Strategic Petroleum Reserve as it is for any business involving a commodity. Indeed, in a recent presentation to other countries on how to create and manage a strategic reserve, DOE itself states: ``The Key To A Successful Strategic Reserve Is Cost Control.'' DOE identifies the major cost elements of a strategic reserve as capital costs, maintenance costs, and oil acquisition costs. Once constructed, the capital costs and the maintenance costs are largely fixed. The main variable cost, therefore, is the cost of acquiring oil for the SPR. DOE itself identifies for other countries the ``Lessons Learned to Control Oil Acquisition Costs'' as follows:

-Let the markets determine your buying pattern.
-Buy in weak markets.
-Delay deliveries during strong markets.
-Use your acquisition strategy to stabilize markets.

Prior to early 2002 DOE followed this sensible strategy when acquiring oil for the SPR.

Mr. President, I ask unanimous consent that excerpts from this DOE presentation to other countries be entered into the record.

The PRESIDING OFFICER. Without objection, it is so ordered.
(See exhibit 1.)

Part of this strategy--allowing deliveries to be deferred when prices were high and supplies tight--was spelled out in the ``Business Procedures'' for the SPR program issued by DOE in January 2002. The Business Procedures spell out how scheduled deliveries of oil to the SPR can be deferred. Generally, companies will ask for a deferral when the market is tight so they can meet their supply commitments to refiners who have an immediate need for the oil. DOE's procedures provided that a company could be granted a deferral in return for additional barrels of oil to be delivered at the later date. DOE calculated the amount of additional oil that would be delivered by comparing the market prices at the time of delivery was originally scheduled and at the time of the deferred delivery.

DOE's own documents state that deferrals of oil scheduled to be delivered in 2001 provided an additional 3 1/2 million barrels of oil for the SPR at no additional cost to the Government. Deferrals of deliveries scheduled for 1999 and 2000 had added another 3 1/2 million barrels. At an average cost of $25 per barrel, these deferrals added a total of 7 million barrels of oil to the Reserve, worth about $175 million, for no cost to the taxpayer. The SPR program projected:

The potential for savings to the Treasury if we continue to follow this business model until the Reserve is full is additional hundreds of millions of dollars.

But in April 2002, DOE stopped allowing deferrals of scheduled deliveries. Instead, DOE began to buy oil for the SPR without regard to the cost of oil or the supply of oil, and refused requests for deferrals. DOE has not explained the reason for abandoning its previous policy.

In addition to losing the benefits from deferrals, both in terms of oil gained and dollars saved, the abandonment of the previous policy is costing taxpayers because DOE has been paying top dollar for the oil placed into the SPR. Oil acquired for the SPR at $35 per barrel costs the taxpayers $10 more per barrel than oil acquired at $25 per barrel. Even more modest savings per barrel add up to large savings over the course of the program. In 2002, DOE's SPR program calculated:

If the SPR can average down the price of oil it injects in the Reserve by $1 per barrel between now and 2005, the U.S. Treasury will be better off by $125 million, a direct benefit.

But in these times of high gas prices, the DOE shift has another highly negative effect.
Filling up the SPR affects the price of oil and gasoline. In a tight market, filling the SPR reduces the amount of oil in private sector inventories, which, because it reduces available supply, will then lead to increases in the price of oil and petroleum products, such as gasoline, diesel fuel, jet fuel, and home heating oil. When prices are high and the market is tight, refiners will use up the oil in their inventories rather than purchase new oil in an expensive market, and wait for prices to fall before buying more oil. In a tight market, therefore, the additional demand for oil created by the SPR program will lead companies to take even more oil out of their own inventories to fill Government needs. In a tight market, the net result of the SPR program will not be any overall increase in domestic oil supplies, since the amounts of oil added to the SPR will come at the expense of oil in private sector inventories. These private commercial inventories are thereby reduced as a result of filling the SPR.

Oil prices are directly related to the supply of oil. When supplies are plentiful, prices fall. When supplies are scarce, prices rise. The supply of oil is determined by the amount of oil produced in oil wells around the world and the amount of oil in storage. As either the amount of oil produced or the amount of oil in storage decreases, prices will increase. In a tight market, therefore, when supplies are scarce, filling the SPR will lead both to a decrease in private sector inventories and a corresponding increase in the price of oil.

The Department of Energy's own documents explain this effect as follows:

If we look at the SPR from the perspective of daily supply and demand, the SPR fill rates are inconsequential. The fill rate is 100-170,000 barrels per day compared to world production and consumption of 75 million barrels per day. However, when OPEC countries are determined to maintain discipline in their export quotas, the cumulative impact of filling the SPR becomes more significant when compared to U.S. and Atlantic basin inventories. Essentially, if the SPR inventory grows, the OPEC does not accommodate that growth by exporting more oil, the increase comes at the expense of commercial inventories. Most analysts agree that oil prices are directly correlated with inventories, and a drop of 20 million barrels over a 6-month period can substantially increase prices.

Oil companies doing business with the SPR program supported DOE's business procedures in place prior to the spring of last year. These procedures afforded the contractors the flexibility to re-schedule deliveries to the SPR in accordance with market conditions. In exchange for providing the oil companies with this flexibility, the U.S. government was able to obtain additional barrels of oil for the SPR at no additional cost to the taxpayer. This enabled the Reserve to be filled faster and at less cost than if contractors were not allowed to reschedule their deliveries. These procedures were a win-win for taxpayers and the SPR.

And, of course, any increase in the price of oil will soon lead to an increase in the price of the various petroleum products, including gasoline, diesel fuel, home heating oil, and jet fuel. Hence, the SPR program affects price of basic oil products for a wide variety of American consumers and businesses.

The amendment I am offering today would encourage DOE to reinstate these ``win-win'' procedures for filling the SPR.

Mr. President, I ask unanimous consent to have printed in the Record a recent editorial critical of DOE's cost-blind approach to filling the SPR.

The PRESIDING OFFICER. Without objection, it is so ordered.
(See Exhibit 2.)

The editorial, in the Omaha World Herald, dated August 14, reads:

In general, we are strong supporters of keeping the nation's Strategic Petroleum Reserve at or near capacity in case of a national emergency. However, there is such a thing as bad timing. We believe the administration has been making a mistake by refilling the reserve to the tune of about 11 million barrels since the start of May. Commercial U.S. oil stocks have been low for months. Filling the reserve just now puts upward pressure on prices. ..... Washington should back off until oil prices fall somewhat. Doing otherwise is costing the Treasury unnecessarily and is punishing motorists during summer vacation driving time.

Under our amendment DOE would retain the complete discretion to determine the pace and schedule for filling the SPR. However, DOE would be required to issue procedures to guide this discretion, and would be required to consider how to maximize our national energy security and minimize costs to the taxpayers while filling the SPR. If implemented properly, such procedures can promote our national energy security, save taxpayers money, and lower oil and gasoline prices for consumers.

Exhibit 1

Proceedings of APEC Energy Security Initiative Workshop on Elements of Energy Security Policy in the Context of Petroleum, Amari Watergate Hotel, Bangkok, Thailand, September 14-15, 2001
ASIA-PACIFIC ECONOMIC COOPERATION, ENERGY WORKING GROUP, CLEAN FOSSIL ENERGY EXPERTS' GROUP

Jointly Organized by: Department of Industry, Science and Resource (ISR), Australia; The Institute of Energy Economics, Japan (IEEJ), Japan; Ministry of Commerce, Industry & Energy (MOCIE), Republic of Korea; Ministry of Energy, Mexico; National Energy Policy Office (NEPO), Thailand; and Department of Energy (DOE), United States.
Supported by: Asia Pacific Economic Cooperation (APEC) and Ministry of Economy, Trade and Industry (METI), Japan
STRATEGIC PETROLEUM RESERVE
APEC Workshop on Energy Security Policy: John Shages.
UNITED STATES POLICY ON RESPONDING TO OIL SUPPLY DISRUPTIONS
The policy of the United States regarding oil supply disruptions is to rely on market forces to allocate supply, and to ordinarily supplement supply by the early drawdown of the Strategic Petroleum Reserve in large volumes and in coordination with our allies and trading partners.
CRITICAL ELEMENTS TO JUSTIFY A DRAWDOWN
A Disruption Event.
Evidence of Supply Stress.
A Price Spike.
THE KEY TO A SUCCESSFUL STRATEGIC RESERVE IS COST CONTROL
The benefits come with a drawdown--but the number and extent of futures disruptions is unknown.
Measuring the degree of damage from a disruption, and the consequent benefits of a petroleum reserve, to an individual economy is an uncertain science.
Cost is the easiest aspect to control and has the highest probability of making the Reserve cost beneficial.
MAJOR COST ELEMENTS
Capital Costs--Including land, facilities, and logistics systems.
Maintenance Costs.
Oil Acquisition Costs.
CAPITAL COSTS
Dependent on location.
Technology and type of storage facilities.
Refer to the 1999 APERC Study supported by conceptual designs and cost estimates from PBKBB, Inc.
LESSONS LEARNED TO CONTROL OIL ACQUISITION COSTS
Let the markets determine your buying pattern.
Buy in weak markets.
Delay deliveries during strong markets.
Use your acquisition strategy to stabilize markets.

Exhibit 2

[From the Omaha World Herald, Aug. 14, 2003]
Oil's Not Well--Filling the Strategic Reserve Is a Good Idea--But Not Right Now.
In general, we are strong supporters of keeping the nation's Strategic Petroleum Reserve at or near capacity in case of a national emergency. However, there is such a thing as bad timing. We believe the administration has been making a mistake by refilling the reserve to the tune of about 11 million barrels since the start of May.
Commercial U.S. oil stocks have been low for months. Filling the reserve just now puts upwards pressure on prices. Every motorists sees this at the gasoline pump, where regular-grade gas is hovering around $1.60.
Oil has again begun to flow from Iraq's vast fields, which will help somewhat--weeks from now. Meanwhile, the strategic reserve is at 84 percent of capacity. This seems to us a comfortable level.
Washington should back off until oil prices fall somewhat. Doing otherwise is costing the Treasury unnecessarily and is punishing motorists during summer vacation driving time.