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“THE HIGH PRICE OF OIL” mentioning the U.S. Dept. of Energy was published in the Senate section on pages S204-S207 on Feb. 1, 2000.
The publication is reproduced in full below:
THE HIGH PRICE OF OIL
Mr. MURKOWSKI. Mr. President, I would like to reflect a little bit on what is happening in our Nation. We got a little snow outside. Snow is not unknown to me or the State I represent. It is part of our livelihood. We live with the cold weather. We know how to handle it.
But there is suddenly a great concern among a number of my colleagues and their constituents about the high price of heating and transportation fuels in the country, particularly in the northeastern part of the Nation. This morning in New Hampshire they said it was cold and clear. People were out to vote, but they were worried about the price of heating oil. I would like to discuss for a moment why some of these price increases are occurring, as well as appropriate and perhaps inappropriate ways we could respond.
In mid-January, spot prices for heating oil spiked by about 50 cents. At one point, they closed at $1.36 per gallon. Gulf coast prices spiked, but they were pulled up, to a large degree, by the spike in New York State. One of the first places where consumers felt the impact was in home heating oil prices where, on January 21, they were up anywhere from 35 cents to 60 cents per gallon in the Northeast over the prior week. This was also felt in diesel prices, which have also risen dramatically. This is causing our trucking industry to seriously consider steep price increases, or even parking some of their trucks for a while.
If you have not bought an airplane ticket this month, you should try it because you will find there is a $20 surcharge added to your ticket. This is to offset the increased costs of fuel oil. You cannot run these aircraft on hot air. You run them on kerosene.
What is the cause of this price increase? For the most part, there are short-term causes that have so dramatically impacted the price in the Northeast, but there are also long-term issues that have impacted and will continue to impact the Nation.
If we are looking at a quick fix, we can do that or we can look at the long run and figure out how we are going to take care of this problem.
The short term problems include the combination of relatively low stocks of inventory, forecasts for colder than normal weather through early February, some barges being delayed because of storms, and some unexpected refinery problems.
Additionally, we have refineries that were in transition. We have not built any new refineries in this country for a couple of decades for a very good reason: Nobody wants to invest in them because of the concern over the environmental consequences, the Superfund exposure, and so forth.
Here we are, on the one hand, with an increasing demand for petroleum products, but because of the laws that were made by Congress which are so draconian, the investment community is reluctant to put in new, efficient refineries.
As a consequence of the low stocks, the existing refiners are scurrying to locate immediate supplies, a number of utilities are chasing the limited supply, and we have a peaking cold weather demand. As you walk home tonight you will feel it. In short, it was a basic problem of too much demand chasing too little supply.
There is some relief in that the New York spot distillate problem appears to be easing because the current refinery capacity currently is adequate to meet the needs, but there is going to be some delay in getting the supply delivered. Additionally, The good news about the high prices is that it usually speeds the arrival of product from someplace else. Indeed, it has been reported that at least a dozen tankers full of heating oil are on their way from Europe heading to the East Coast right now. There is an indication that as a result of this the price has dropped in the last few days.
Unfortunately, even when this immediate problem is resolved, it is possible recurrences will happen as stocks are likely to stay low for the remainder of the winter.
According to the Energy Information Agency, the EIA, ``the low-stock situation is worldwide and is not necessarily limited to distillate. It stems directly from what is happening in the crude oil markets.'' That is what we have to look toward. A continuing crude oil supply shortage is driving crude prices up, causing refiners worldwide to draw down stocks as the higher crude price squeeze margins.
What is happening in those crude markets? If one looks at the worldwide crude market, it is evident there has been more petroleum demand than supply, requiring the use of stocks to meet petroleum demands.
Following the extremely low prices at the beginning of 1999, OPEC, the Organization of Petroleum Exporting Countries, as well as Mexico, agreed to remove about 6 percent of the world's production from the market in order to work off excess inventories. And what else? To bring prices back. And they have been successful.
Remarkably, the producing countries have shown strong discipline in adhering to these quotas. This has caused worldwide stocks, including those in the U.S., to be drawn down at very low levels. In particular, refiners drew stocks down in the fall rather than build them up for the winter.
We are now in the middle of that winter, the usual high point of world demand, and we have low stocks. On top of this, OPEC members have been indicating that they will maintain their production cutbacks at least through March and possibly June, so there is no panacea here. The news, along with the cold weather, increased demand in Asia due to a faster than expected recovery of the Asian economy is behind the current crude surge which pushed west Texas intermediate crude past $30 a barrel briefly in January.
There is a response to this. One I think is inappropriate and the other is appropriate. Let's look at the first one: How should we react.
A number of my colleagues and some senior members of the administration have made suggestions about how we should react to this. The first suggestion made by some of my colleagues is let's release the oil from the Strategic Petroleum Reserve, or SPR, to combat the high price of crude. This is the reserve we have in the salt caverns in the southern part of Louisiana and other areas. That oil is there for the national and energy security of the country in case there is an emergency.
I believe such a decision to sell that oil would be disastrous from the standpoint of both national and security policy. Our Government has never tapped SPR to manipulate crude prices, and I do not think they should do so now. It is fair to say the administration tapped SPR to meet some of their budget requirements, but to manipulate crude prices is totally inappropriate.
SPR was set up as a way to protect us from a severe supply disruption. By tapping SPR to manipulate price, we make ourselves even more vulnerable to the supply disruption. We need to recognize that price volatility has been a fundamental feature of crude oil markets for three decades and is common in the commodity markets.
We also need to recognize we have made some classic policy blunders in attempting to reduce this volatility. Invariably, these measures, such as price controls in the seventies, clearly aggravated and perpetuated what would otherwise have been a much shorter lived problem.
The second problem with this approach is it would only represent a partial plan. We cannot move forward with an energy strategy of ``sell oil when prices are high'' and not have a companion strategy of ``buy oil when prices are low.'' We have to mix the price structure in SPR. At one time, the administration proposed to buy and was buying at $40. The next minute, they wanted to sell at $27. There is a mentality up there that we somehow can make up the difference in volume. That does not work. What would be the purpose of depleting a reserve if we do not have a concrete plan to fill it?
The second suggestion is to encourage other countries to ramp up their production levels so the United States can import more of their oil. Think about that. We are encouraging other nations to increase their production so we can get more of their oil so that we can be even more vulnerable to that particular supply. Even some of my friends on Pennsylvania Avenue have advocated this as a resolve.
The Secretary of Energy has been quoted as saying: I am going to meet with the oil ministries of Venezuela, of Norway, Saudi Arabia, and others. This is a strategy to encourage the Venezuelans and Saudis to produce more oil and for the United States to become more dependent on those sources.
Their strategy is to spend millions of dollars supporting development of oil fields in other nations. Here is the kicker: They have even supported policies that have allowed the Iraqis to produce more oil. That is our good friend, Saddam Hussein. Are the people of Iraq benefiting or are his Republican Guards? I do not have to tell you, Mr. President, because you know as well as I do.
Their answers lead to nothing more than the export of American jobs and increased imports of foreign oil. Their answers make us more susceptible to price volatility in the future, not less.
Finally, the third suggestion is that Congress appropriate more money next year to subsidize the Low-Income Housing Energy Assistance Program. I do not oppose this. However, throwing more money toward that program will not solve the underlying problem, and the underlying problem is very simple: We are not producing enough oil and gas in the United States. This is not to imply nothing can be done to protect ourselves from vulnerability to aggressive price policy by OPEC, there is a solution, and it begins at home.
The old adage, charity begins at home, is a far better approach to reducing our vulnerability to OPEC pricing, and that should begin by addressing the problems of our domestic U.S. oil and gas industry. We can do that very easily. We do not have the luxury in the United States of manipulating stocks and influencing price. The reason we do not is because we are 56-percent dependent on imported oil. We are currently not that big, in terms of oil production, to manipulate world prices. We have to make our strategic decisions through drilling strategies, and when we look at what has happened to drilling in the United States, we ought to be gravely concerned about the future volatility of heating and transportation fuel prices in the U.S.
In 1998, there was a decline of almost 60 percent in rigs drilling for oil in the United States. This was followed by a decline in the number of new and producing oil wells which was followed by a drop in our reserves. In 1998, only 24 percent of our domestic oil production was replaced by proven oil reserves.
The bare results of 1998 was that thousands of oil industry workers were laid off, drilling contractors were cut to the bone, our stripper wells went dry, and marginal wells were shut in.
This did not just happen. The administration knew what was going on. What did it do? It continued to thwart access by our domestic oil and gas industry to Federal lands where there was a promising likelihood of discovery.
It continues to try to force an unfair rule change for calculating oil royalties down the throats of our domestic producers. This is a not-so-subtle message to our domestic producers--you are not wanted here. The only effect these policies will have is to ensure that we continue to be susceptible to being taken hostage by aggressive OPEC pricing strategies and that we continue to encourage an outflow of U.S. capital, ingenuity, and investment to foreign shores to produce foreign oil so we can become more dependent on those sources.
Common sense tells us that if we are to become less dependent on OPEC pricing, if we want to be better able to respond to future price fluctuations, we must reinforce our domestic petroleum industry.
I understand my Northeast colleagues' concern about their constituents paying too high a price for heating and transportation oil. Frankly, we pay a higher price in Alaska. But I am not here to debate that issue at this time. I am also puzzled that many of those same Members of this body have continued to support efforts that would increase our susceptibility to this price volatility. You can't have it both ways. We are dependent on foreign stocks for 56 percent of our supplies. The only way we are ever going to break this cycle of dependence on foreign oil and our vulnerability to price is by boosting our own production here at home.
I can suggest that a good place to start is on the west coast. A good place to start is in my State of Alaska, where we have been supplying this Nation with 20 percent of its domestic oil for the last 20 years. Recently the U.S. Geologic Survey estimated that an area set aside by Congress for an evaluation of its oil and gas potential could have up to 16 billion barrels of recoverable oil. The 1998 estimate is the highest estimate ever published regarding the 1002 area. This body voted in 1995 to support environmentally sound exploration in this area. The Senate voted on this bill, but the Clinton administration vetoed the bill. They vetoed the ANWR bill. It has become a cry for environmentalism all over the country. If you initiate oil exploration in ANWR, you are going to violate this area, this pristine area.
How many people have taken the time to understand the significance of ANWR? There are 19 million acres in ANWR. It is an area about the size of the State of South Carolina. What have we done to try to maintain protection in these areas? We have taken 8 million acres of the 19 million acres and put it in wilderness in perpetuity. We have taken another 9.5 million acres and protected it as a refuge in perpetuity. But we set aside 1.5 million acres in the coastal plain, the so-called 1002 area, under the jurisdiction of the Congress to make a determination whether that portion and that portion only could be opened up for exploration.
Some of my colleagues talk about charity beginning at home, and suggest we ought to open up SPR. These are temporary measures that are basically impractical, that cut to the crux, if you will, of our national security interests, and don't resolve a long-term solution. What we should do is continue to advance science and technology, and develop domestic petroleum reserves.
The conclusion is obvious: If you don't support the industry's expertise and capability through advanced technology to continue to explore whether it be onshore or offshore, then you better be prepared for higher prices and the Northeast corridor better be prepared for price hikes as a consequence of cold weather, because we are looking right down the double barrels of the guns of control. Those guns of control come from the Mideast countries.
I think Secretary of Energy Bill Richardson has been quite correct in his response. He has agreed that the Strategic Petroleum Reserve is to be used only for emergencies associated with our national energy security interests and not for price manipulation. He has also postponed delivery on 5 million barrels of oil that the SPR would take at this time, an action which I think is responsible because it is intended to put more oil into the market and ease prices. It is going to help, but it is not going to help enough.
The President has released 44 million in emergency heating fuel funds. While I support these efforts, they alone are not enough. These are stopgap measures. They don't address the real problem of our continuing reliance on foreign oil and the resulting fact that we are going to be dancing to the tune of OPEC for the foreseeable future until we have the intestinal fortitude to recognize that we can develop domestic sources of oil and gas in the United States, and we can keep our jobs at home and lessen our dependence on imported oil.
Look at the facts. The fact is, during the tenure of this administration, U.S. demand for oil has increased 14 percent, and our domestic production, strangled by this administration's policies, has decreased 17 percent. You can't have it both ways. I am sympathetic to those Members who represent the Northeast corridor and are feeling the impact of a cold winter and high fuel prices. I would propose the following to address these concerns through the enhancement of a domestic industry policy.
First, give the industry greater access to Federal lands in the United States, both on and offshore, limiting to those States that want OCS activity. Louisiana is a good example; Texas is another. They recognize the contribution. They recognize the capability of the industry to do it safely. For the most part, the industry has done a pretty good job.
We should, second, develop incentive programs to make the U.S. oil and gas market more competitive in the world market. We should open up that tiny area of the Arctic oil reserve to environmentally sound exploration. Let's face it. Alaska produces 20 percent of the crude oil that this country enjoys today. That was authorized by the Senate on a tie vote where the Vice President had to break the tie to authorize the development of that.
There was great speculation that the 800-mile pipeline would somehow stop the caribou, would stop the moose. That has survived earthquakes, dynamite, shootings. It is one of the construction wonders of the world. Where would we have been without it? You would have had higher prices today, Mr. President.
Third, strengthen the Department of Energy's research and development program. We are going to be using petroleum products for a long, long time. You are not going to fly an airplane on solar or wind. You are going to fly it on fuel. Fourth, once and for all, throw out the MMS's attempts to change the rules on oil valuation.
Finally, let me refer to some who suggest that we don't need to look to the future of oil. We have a lot of gas in this country. It is just a matter of time. Gas is cheap. Let me refer you to a recent report by the National Petroleum and Gas Council. The demand for gas is going to be increasing about one-third in the next 10 years. There are going to be about 14 million new hookups for gas. The expenditure for that gas is going to be about $1.5 trillion. Hearings that we have had in the Energy and Natural Resources Committee show us that we do not have the infrastructure in place and we don't have access domestically to areas that have the potential for producing gas because the administration won't open them up for exploration.
I see my good friend from New York on the floor. I know of his interest in this crisis that is hitting the Northeast corridor. I encourage him and others to look toward a long-term solution. A long-
term solution speaks for itself. It suggests through technology, with proper environmental safeguards, we can encourage more oil and gas exploration and development right here in this country, as opposed to increasing our dependence on OPEC where we are going to continue to have this problem, not just this February, but we are going to have it this March. And we are going to have it next November and December and January, only by that time we might be 60 to 65 percent dependent on imported oil, as the Department of Energy suggests. Then you are going to have prices that are going to be coming down around our ears, and inflation will be attributed to a large degree to the price of oil and gas as a consequence to our increased dependence on imports.
Bottom line: Charity begins at home.
Mr. SCHUMER. Will the Senator from Alaska yield?
Mr. MURKOWSKI. I am happy to yield for a question.
Mr. SCHUMER. I thank the Senator.
First, I thank him not only for his leadership on this issue but for his very thoughtful remarks, which I will certainly chew over and look at. I saw them on the screen and wanted to do that. I certainly agree with the Senator from Alaska, that what he is talking about deals with the long-term problem which we have to deal with and what myself and the Senator from Maine, Ms. Collins, and some of us have been talking about as a short-term problem, which is the oil. For instance, home heating oil is higher in my State than it has ever, ever been, even though the price of oil itself is not higher than it has ever, ever been.
I would like to ask the Senator a question. On the short-term issue, which I understand the Senator's point, which is you are not going to solve the long-term issue. You will be back with short-term issues time and time again. But given the crisis that we have, the proposal that Senator Collins and I have made is to not deplete the oil reserve, the SPR, but rather to at this point sell a small amount of it, let's say 500,000 barrels a day, from now until March 31, that the experts we have talked to have told us that that is likely to crack OPEC's unity, and also not just OPEC, but Mexico and Norway, which in the past had not always marched in lockstep with OPEC. I would be against depleting the reserve. The first question I ask the Senator is: If he was assured that the oil would be bought back at either a higher or lower price--
and most experts think it would be considerably lower--would that assuage some of his concerns? I don't want to burden the Senator, but he is an expert, and I would like to get the benefit of his wisdom.
If a program were developed of swaps and were put in automatically so that oil was bought for the SPR when the price was rather low, oil was sold when the price was rather high, but there was a guaranteed commitment that if the oil was sold during a high price, that it would be bought back at a low price, and you could put a time limit on--one of the things mentioned was that you would have to do it in a year regardless--would that not deal with the long-term problem that the Senator is addressing in most of his remarks? But would that assuage some of his concerns about the short-term issue that many of us in the Northeast have such problems with?
I yield to the Senator to answer that question.
Mr. MURKOWSKI. I will respond to that. I recognize the sensitivity of my good friend, and the Senator from Maine, also. There are a couple of factors I think are very important to understand, and that is the ability of the strategic petroleum reserve to be moved out in a relatively short period of time the crude it has accumulated, or any portion of it, and transport it to refineries that aren't already up to the maximum capacity of their refining capability, and then move it to market because this winter isn't going to last forever. But right now, it is significant and very meaningful, as evidenced by the price associated with heating oil.
As I indicated in my floor statement, we have evidence by the Department of Energy that there are a number of ships in transit from Europe bringing heating oil. So there will be price relief soon. As you and I know, the price goes up a lot faster than it comes down. The idea of swaps certainly has merit and has been done before. But, traditionally, the manner in which the Federal Government in manipulating the sales of SPR has resulted in a situation where we have purchased high and sold low, and there is a mentality that suggests that we will make up the difference, with the taxpayers taking it in the shorts, so to speak--I am not suggesting we would not go back and replace SPR. Indeed, there are some logistic problems with the idea. One, you don't move it out of SPR very fast because it is in the salt caverns and there is only so much pumping capability and you have to move it to the refinery and then you have to refine it. The realization is that the refineries, as I understand it, in proximity to the SPR are pretty much up to their designed capacity. So what we need is an SPR of heating oil for you. That would be my best assessment of the current situation. But I am sensitive to the Senator's concern.
Mr. SCHUMER. I know the Senator is sensitive to that, and I very much appreciate that. The experts with whom I have checked at least have said it would take about 30 days from the time the President were to order selling of the SPR to the time it could be removed and refined appropriately. I think more to the point --or maybe not more to the point but also to the point, many people, certainly the majority I have talked to, believe that even if we were to announce we were going to sell some of the SPR on the open market, the odds are quite high that from that point, the OPEC nations, countries such as Mexico and Norway--that would crack their unity.
My main goal, at least, in offering this solution is not simply to temporarily reduce the price of oil but rather to sort of break OPEC. In the past, what our Government would do would be go to the governments of Mexico and Norway and say, hey, help us out. In the past, they would. When they pumped a little more oil, the unity of the 11 OPEC nations would crack. Well, Mexico and Norway are not fulfilling that role for a variety of reasons, some of which I am aware and some of which I am not. So we would be fulfilling the same role.
I guess my only question to the Senator from Alaska, chairman of the Energy and Natural Resources Committee, is--and maybe my information is wrong--if it would take 30 days, would that change his view? Secondly, does he think that it might have a good chance, if we did even announce this and began to do it, to crack OPEC's unity and that would solve our problem--short-term admittedly and not long-term--right away rather than pumping small amounts of oil ourselves?
Mr. MURKOWSKI. In response to my good friend from New York, I anticipate it would take at least 30-plus days to see any significant movement from the SPR, which is crude oil transported to a refinery in enough time to relieve the crisis of the high price in the Northeast. The problem is, the reserves of heating oil are down. I have discussed the rationale of why the reserves are low, but the fact is they are low. So as a consequence, we are left with a situation where price follows supply and demand, and we are certainly feeling the price. I think we should converse with our Secretary of Energy, who is attempting to interject with the Saudis, Venezuelans, Norwegians, and other oil-producing countries to try to encourage them to, if you will, increase their OPEC volume, which they have been remarkably solid in their ability to hold together and not do that.
They operate under two theories. One is they would like to have the highest possible price and produce the least amount of oil. But if that cartel cracks, then they still have to have the same volume of dollars to benefit their government, so they will produce more oil to get it. What we have seen as a consequence is the cartel coming together and holding tough. Subject to the ability of the Secretary of Energy to convince them to do otherwise, I would not look for immediate relief from that area. I think there is relief coming, but your constituents are going to be exposed to some high prices. As sympathetic as I am, I don't know the answer.
I just don't think SPR is going to be able to meet the demand in a timely enough manner by the time you get past another 30 days and some of this production in to your constituents. I don't think that is going to do what the market is doing now, which is bringing more heating oil that is already refined in Europe into the United States. I would much rather work ultimately for a long-term solution to our exposures because you have to look at the reality. We are going to be more and more exposed to the whims of OPEC. We have allowed Saddam Hussein and Iraq to come in with another 2 million barrels a day. That helps us and hurts us when you think about it. Who benefits from that? It is a complex problem. I have a hard time accepting that part of the role of SPR is to meet the domestic price manipulations as opposed to the philosophy that went into SPR, which was its design to be a strategic petroleum reserve in the sense of a time when our supplies may be cut off. There has been a great deal of criticism in my committee of the ability of SPR to be able to produce if a demand is there. There are a lot of shortcomings within SPR's makeup.
Mr. SCHUMER. I thank the Senator.
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