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Government Duplicity in Big Oil

May 19, 2008

Check the U.S. Strategic Petroleum Reserve for today by clicking on the image link.

Lawmakers have cranked up pressure on the Bush administration to stop filling the nation’s Strategic Petroleum Reserve during growing election-year anxiety on Capitol Hill about high gasoline prices.

What is the Strategic Petroleum Reserve? The SPR is the largest emergency petroleum supply in the world. The reserve stores more than 700 million barrels of crude oil in underground salt caverns at four sites along the Gulf of Mexico. The storage is in original form as sweet crude, sour crude and recently as heavy crude to save money and for compatibility with some refineries. The Energy Department states that the temperature difference in the caverns, 2,000 feet below the surface of the earth, keeps the oil circulating so that the petroleum maintains its quality. Any leaking petroleum is safely contained within the salt. The depth of the petroleum also provides security and protection for the petroleum reserve. While most domestic oil is sent directly to refineries and then to the consumer market, some of oil from federal landholdings is held back and sent directly to the SPR in natural form in 42 gallon oil drums.

Department of Energy officials have repeatedly said they would continue to fill the emergency reserve under the royalty-in-kind program, which accepts oil from companies in lieu of cash, at a rate of 76,000 barrels a day.

What is the royalty-in-kind program? The royalty-in-kind program allows the Interior Department to collect a share of the oil and gas that companies produce on federal property for storage in the SPR and then to resell the same amount of oil from the existing stock of the SPR on the open market to generate cash. This direct tax of national petroleum reserves accounts for about 13% of oil produced.

Bush administration officials have called the royalty-in-kind program a simpler and more efficient way for the government to collect royalties on the vast amounts of oil and gas produced on public lands.

The Interior Department currently collects about $4 billion in royalties yearly in the form of oil and gas, mostly from the Gulf of Mexico. Administration officials want to double that volume and collect about 80 percent of all offshore royalties “in kind” by 2009 as a money-making vehicle. The Department of Interior’s Minerals Management Service (MMS) collects the royalty oil and transfers it to DOE, which then trades it for oil suitable for the SPR. Nearly one-quarter of the oil and gas produced in the United States comes from federal land or federal coastal waters. Under the law, companies that drill on federal leases must pay the government a royalty, normally 12 to 16 percent of sales. Last year, those royalties totaled about $10 billion.

The Energy Policy Act of 2005 directed the Department of Energy (DOE) to increase the SPR storage capacity from 727 million barrels to 1 billion barrels, which it plans to accomplish by 2018. Since 1999, oil for the SPR has generally been obtained through the royalty-in-kind program, whereby the government receives oil instead of cash for payment of royalties on leases of federal property. The behind-the-scenes transactions have effectively allowed the U.S. government to get into the big business of oil, tapping approximately 13% of all oil produced from federal lands.

The Department of Energy officials said they would still consider soliciting bids for a further addition to replace oil sold during the 2005 hurricane season, which has not been replaced due to budget constraints. Speaker of the House Nancy Pelosi called on President Bush to suspend filling the reserve. She claims this move would directly lower the price of gasoline at the pump by 5 cents to 24 cents a gallon.

In the Senate, Charles Schumer wants to attach to an appropriations bill a requirement that the government pause in filling the reserve if oil prices go above $75 a barrel. This action could freeze and jeopardize the continued supplementation of the SPR since oil speculation prices have been higher than $75 a barrel for quite some time.

Trade groups representing truckers and airlines — for whom rising fuel costs are the greatest operating expense — have lobbied for a release of oil from the strategic reserve as a way to bring down prices.

The White House has rejected the lawmakers’ calls. “The purpose of the Strategic Petroleum Reserve is to provide the U.S. with oil in the event of a severe disruption of supply,” spokeswoman Dana Perino said. “It has been ineffective when it has been used to manipulate the price in the past, and the administration continues to fill the reserve at a very modest rate and we don’t believe the fill rate has a meaningful impact on oil supplies.” So much for the law of supply and demand.

The Department of Energy said it is studying the market impact of potential purchases of oil for the strategic reserve. It has long downplayed the impact that the royalty-in-kind program has on prices or supplies, saying volume typically amounts to 70,000 barrels a day, out of global demand of more than 85 million barrels a day.

The DOE said it will decide in coming weeks whether to go ahead with a controversial plan to buy crude oil in the open market to increase the pace of further increases in the reserve.

Mrs. Pelosi said that the reserve is around 97% full and that the U.S. cannot afford to keep filling it while gasoline prices remain so high. The fact the U.S. government is already in the oil business means that it can cover some of its own expenses even though that money is supposedly used as taxation for the benefit of taxpayers. In the mind of the government, its’ actions are for the good of the nation and the benefit of taxpayers.

Mrs. Pelosi said this effort would be more successful in lowering gasoline prices immediately than would a plan by likely Republican presidential candidate Sen. John McCain to remove federal gasoline taxes during the summer driving season. Sen. McCain has also called for a halt to oil diversions to the strategic reserve. Based on what the Bush Administration claims, the posturing of the lawmakers is unsubstantiated and is for appearances only.

A group of senators led by Sen. Charles Schumer sent a letter to President Bush demanding that he urge Saudi Arabia, the United Arab Emirates and Kuwait to increase oil supplies. The senators are threatening to block “their lucrative arms deals while they stick it to American consumers at the pump.” Clearly, the Senators threatening stance is political posturing. Any bill blocking the sale of arms that has already been authorized would face a veto from the White House.

The United States has had a Strategic Petroleum Reserve since the oil shocks of the 1970s to protect the U.S. economy against disruptions in the market. Those stores of crude oil, deep in salt caverns near the Gulf of Mexico are of limited value when the U.S. doesn’t have enough refineries to churn the black gold into usable gasoline and jet fuel. President Bush released some of the federal petroleum reserve to calm the jittery market after Katrina, but that didn’t keep a lid on the price of gas at the pump. Gas prices rose steadily and the distribution network profited from the measures instead of consumers.

The U.S. government is playing both sides, all the while, profiting from big oil.

— This is reprise of a very relevant article written recently this year. Dr. Manning is dealing with family business this week. —

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