So-called ‘dumb’ oil deal ready to flow through Washington, D.C.

[November 02, 2015]  By Rob Nikolewski
 
 As Raye Miller plainly sees it, a move by the federal government to sell 8 percent of the Strategic Petroleum Reserve to raise $3 billion to $5 billion is “a dumb idea.”

Miller is president of Regeneration Energy Corp. in Artesia, New Mexico and a veteran oil man, whose business has a “whopping number of four employees.”

Miller has seen his share of twists and turns in the Permian Basin, as well as the ups and the downs that characterize this tumultuous industry.

“If they were going to take it out, they should have at least considered doing it at high prices instead of selling it out at $40 a barrel,” Miller told Watchdog.org.

One provision in a proposed deal reached by the White House and congressional leaders Monday night includes tapping the strategic reserve to help shore up the budget.

“I am pretty happy about that because it reflects our values, growing the economy and the middle class by investing in things like education and job training that are needed, and it keeps us safe by investing in our national security,” President Obama said Tuesday.

The budget deal, which passed the House on Wednesday, is ready for a vote in the Senate. Update 10/30: The Senate passed the budget deal on a 65-34 vote. It now heads to the president’s desk.

For Miller, the deal doesn’t make any sense for a number of reasons, the biggest being the current price of oil.

A little more than a year ago, the global price was at $100 a barrel, but it has since fallen to its lowest point in six years.

“If nothing else, they should hold out until the price goes up where they can actually make more money on it,” Miller said.

But budget negotiators need to make a deal now.

Jason Furman, chairman of President Obama’s Council of Economic Advisers, tweeted out his approval for the deal on Tuesday:

jason furman tweet

Proponents of the plan to remove 8 percent from the SPR point out the oil won’t be taken until between 2018 and 2025. By then, they hope, oil prices will have rebounded.

The U.S. Energy Department, which oversees the reserve, said the oil cost an average of $29.70 a barrel. That sounds like a pretty good bargain, but ClearView Energy Partners, a research firm based in Washington D.C., reported that, after adjusting for inflation and other costs, the average cost goes up to $74 a barrel.

The Congressional Budget Office predicted Tuesday oil will rise to $70 a barrel by 2018 and increase to $95 in 2025, when 10 million barrels would be sold.

But predicting the price of oil has proven to be, well, unpredictable.

“I guess it’s a new government initiative — buy high and sell low,” Steve Ellis, vice president of Taxpayers for Common Sense, told NPR. “With oil prices as low as they are, they’re not going to generate a lot of revenue. Clearly, this is a one-time insurgence of cash and doesn’t make a lot of sense.”

Dipping into the strategic reserve will add more oil onto an already glutted international market, which will almost certainly put more downward pressure on prices.

Despite the low-price environment, U.S. producers are still churning out millions of barrels a day. Saudi Arabia, the 800-pound gorilla of the Organization of Petroleum Exporting Countries, has set records in recent months for production.

What’s more, thanks to the Iranian nuclear agreement signed off by the Obama administration and six other countries, Iran is expected to soon put an estimated one million barrels of crude on the international market each day.

RELATED: Ripple effects: What the Iran nuclear deal means for oil

“The industry’s already in a world of hurt,” Bernard “Bud” Weinstein, associate director of the Maguire Energy Institute at Southern Methodist University, told Watchdog.org. “Why would anyone want to do that? It’s beyond me.”

From the perspective of people in Washington anxious to come up with a few billion to complete a budget deal, selling off 8 percent of the Strategic Petroleum Reserve contains some crude — pardon the pun — logic.

Analysts say the oil boom in the U.S. makes it a safe time to draw down the reserve, which now holds 695 million barrels.

But critics say the SPR was never intended to be used as a short-term budget fix.

“It’s bad, it’s short-sighted,” Sen. Lisa Murkowski, R-Alaska, and chairman of the Energy and Natural Resources Committee, told Bloomberg BNA. “For all the reasons that I opposed it last time about eroding the safety net and using it as an ATM, I still worry about that.”

Reeling from the Middle East oil embargo in the 1970s — which resulted in lines for gas across the nation — lawmakers created the strategic reserve as an insurance policy of sorts — millions of barrels left at the ready in case of any international disruption of oil.

This won’t be the first time the SPR has been tapped.

Oil was released three times due to emergencies — in 1991 during the first Gulf War, in 2011 during a crisis in Libya and in 2005 after Hurricane Katrina. Between 1996 and 1997, 28 million barrels were sold to reduce the federal deficit.

In the end, Miller doesn’t think the 8 percent dip into the SPR would significantly hurt small oil companies like his.

“The consequences over a few weeks would probably be very minor,” Miller said.

It’s been estimated that the world consumes 94 million barrels a day.

Still, in Miller’s mind the move is about short-term economic fixes, not long-term energy issues.

“The strategic reserve is not going to be any type of significant solution,” Miller said. “They do something like this, it sounds like they’re trying to help the budget, but, in reality, it’s a nothing in the way of a fix. They have bigger issues they should spending their time on instead of playing tiddly-winks, like on this deal.”