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DOE Plans Heating Oil Reserve; Legislators See Energy Crisis Ahead

DOE Plans Heating Oil Reserve; Legislators See Energy Crisis Ahead

President Clinton last week ordered the Department of Energy to trade crude oil from the Strategic Petroleum Reserve for two million barrels of heating oil to be stored temporarily in the Northeast as protection against fuel shortages this winter.

While the decision may provide some degree of energy security in the Northeast, where fuel oil was in short supply last winter, it probably is not enough to calm the storm that's brewing on Capitol Hill.

Sens. Frank Murkowski (R-AK), Charles E. Schumer (D-NY) and Susan Collins (R-ME) all expressed concerns publicly last week about low energy inventories, tight supply and high prices. A potential energy crisis in the works, they said, including shortages and extreme prices this winter.

"All it will take is a run of bad weather to spring the trap on the American people," said Schumer.

"There is a coming price shock for consumers this winter when they start using natural gas," said Murkowski in a statement. "Even though demand has skyrocketed for this fuel, supply has remained constant. Prices for natural gas are reaching historic highs and storage, which is usually high during the summer months is extremely low this summer," he noted. "Since 50% of Americans heat their homes with natural gas, the Northeast's heating oil problems last year may look like a picnic compared to the howling we will hear this winter. If we do not move to address this situation quickly, we will soon face the consequences of an energy policy that is adrift."

Schumer, who claims his state will be the "epicenter" of the natural gas, fuel oil and electricity "shortfalls and price spikes," went into panic mode, calling on the president to set up a Presidential Energy Commission made up of representatives from energy producing and consuming states to explore short-term and long-term responses to the "potential energy crisis." Schumer and Collins plan to introduce legislation requesting the formation of the new commission.

Using data that was a couple months old, Schumer referred to "record low" U.S. inventories of natural gas, crude oil and heating oil coupled with increasing demand for electricity. He warned the situation could lead to "the most serious domestic energy crisis since the 1970s."

"Never in our history have we seen U.S. stocks of natural gas, crude oil and heating oil shrink so low at the same time. And in New York City, our electricity usage has already surpassed our generating capacity," said Schumer. "A confluence of shortages in all the major energy components are coming together at once to form what could be the 'perfect' energy crisis. All it would take is an unseasonably hot summer, or a cool winter to push us over the line."

Schumer said a new commission could "focus on both the supply and demand side of the energy equation... We need to get ahead of the curve."

He said Energy Information Administration data shows that inventories of crude oil, natural gas, home heating oil and diesel fuel are all at 24-year lows. He cites EIA data showing that gas inventories have been lower than 1,450 Bcf at the end of May only twice in the past besides this year: in 1996 at 1,161 Bcf and in 1997 at 1,365. Meanwhile, he noted gas prices on June 30 at $4.43/Mcf were at record levels of more than twice the 24-year national average or $1.80 and more than twice prices in January 2000 of $2.12/Mcf. Storage injections this summer have been about half the average rate, he said, because of high demand and flat supplies. His announcement, however, came out prior to the American Gas Association's report last week of the highest weekly storage injection (97 Bcf for the week ending July 7) in more than two years. AGA's Chris McGill, director of gas supply and storage, said last week Schumer's concern about the natural gas situation is misplaced. McGill said the storage inventory situation is not that far from normal and there is absolutely no reason to panic. "I know that the local distribution companies and other companies that put gas in storage for firm customers are going to have it there," he said (see related story this issue). Working gas levels in storage currently are 8.5% below the five-year average.

The situation is slightly different for crude oil inventories, which are 11% below the 24-year average. Schumer noted oil prices on July 7 were 50% more than the 24-year average. In June, heating oil and diesel fuel inventories of about 103.7 million barrels were about 26% below the 24-year historic average of 140.2 million barrels. Since 1976, distillate stocks have been this low only twice: 1989 and 1996. In addition, he noted, heating oil prices at 84.6 cents on June 30 were twice the average June price and 23 cents greater than the next highest June price of 61.7 cents in 1992.

Schumer also highlighted the power situation in his home state where demand behind Consolidated Edison's citygate grew by 700 MW between 1989 and 1996 to 10,950 MW and soared by another 700 MW between 1996 and 1999 to 11,650 MW.

Schumer blames OPEC first. The origin of the energy shortage, he said, began with OPEC's supply cuts in March of last year. Those cuts began to dry up crude and distillate inventories, which led to record heating oil prices last winter and record gasoline prices this summer. The strong economy is to blame for the power and natural gas situations, he said.

The Clinton Administration, meanwhile, believes its decision to add a heating oil element to the Strategic Petroleum Reserve will provide adequate insurance "so that consumers won't be left literally out in the cold this winter," said DOE Secretary Bill Richardson. "While it might be difficult to focus the nation's attention on sub-freezing temperatures during the middle of July, it is important we set up this reserve now so that there will be adequate supplies of heating oil come this winter."

Under current law, the administration lacks the power to release the oil, and the president is appealing to Congress to approve a mechanism for its release. "Time is running out," he said last week before departing for State College, PA, to address the National Governors' Association. "Winter may seem far off on this hot day, but if we don't do something now, reserve stocks of heating oil may not be in place before the cold weather comes."

Last month, the House approved an amendment to a $21.7 billion spending bill for energy and water programs that would set up a two million bbl reserve that the energy secretary could tap into when price spikes cause financial hardships in the Northeast. The amendment, sponsored by Rep. Don Sherwood (R-PA), also reauthorizes the president's power to withdraw oil from the Strategic Petroleum Reserve. The Senate has not acted on it.

Clinton urged lawmakers to approve his overall energy proposal, which includes a series of tax incentives, comprehensive electricity restructuring and a reauthorization of the Strategic Petroleum Reserve.

"The action I take today will leave us far better prepared to face the winter months, but it does not relieve Congress of the responsibility to act," he said.

The strategic reserve has been used only once, by President Bush during the 1991 Persian Gulf War. The DOE plans to offer an exchange of crude oil from the SPR to companies willing and able to provide up to two million barrels of emergency heating oil and the necessary Northeast storage facilities in time for the heating season. If authorized, the crude oil would come from the Reserve's West Hackberry site in Louisiana and will be offered through the Defense Energy Supply Center, an arm of the Department of Defense that routinely procures petroleum for the military. The Center will issue a solicitation within the next two weeks that will specify the terms and deadlines for the program. DOE wants the heating oil in storage by October.

The distillate reserve would be located at no more than four sites in the Northeast. The two million bbl reserve should provide relief from weather-related shortages for about 10 days, DOE said. The reserve should cost the American taxpayer about $8 million/year.

The American Petroleum Institute came out against the reserve plan last week, however. API is concerned about the effects on the market of building heating oil reserve. By creating the reserve, the government may be diverting heating oil away from private inventories and exacerbating the problem, API said. It also may be diverting oil away from refiners who desperately need to rebuild gasoline stocks.

Rocco Canonica

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