Report says increasing oil stockpile triggered higher prices

WASHINGTON -- President Bush's decision after the Sept. 11 terrorist attacks to aggressively boost the federal emergency oil stockpile contributed to a dramatic decline in commercial oil stocks and caused energy prices to soar, says a study by Senate Democrats.

The report released Wednesday said that the diversion during 2002 of 40 million barrels of crude into the Strategic Petroleum Reserve required refiners to dip into their commercial inventories at a time when markets already were tight and production by the Organization of the Petroleum Exporting Countries was being reduced.

"We're confident this had a significant impact on the price of oil in 2002," said Sen. Carl Levin, D-Mich., who released the report prepared by the Democratic staff of the Senate Government Affairs investigations subcommittee he chaired last year.

But Energy Secretary Spencer Abraham rejected the notion that the government's decision to continue filling the reserve during most of 2002 significantly affected energy prices. He said the amount was too small to have an impact.

"The principal issue here is national security and we believe and continue to believe that enlarging the amount of emergency reserves we have in the strategic reserve is very important to America's energy and national security," said Abraham when asked about the report.

Four months' worth of oil

The reserve has about 600 million barrels -- equivalent to four months of oil imports from the Middle East -- stored in salt caverns on the Gulf Coast with a goal of increasing that to 700 million by 2005. Abraham has said the administration is ready to move quickly to draw on the reserves if there are severe supply disruptions.

The Levin report cited internal Energy Department documents showing that the Bush administration in early 2002 decided against deferring the deliveries despite warnings from career officials that syphoning oil away from the market could have adverse impact on commercial inventories and prices.

"Commercial petroleum inventories are low, retail product prices are high and economic growth is slow," wrote John Shages, a senior official at the Strategic Petroleum Reserve office in Louisiana, in a memorandum. "The government should avoid acquiring oil for the reserve under these circumstances."

Shages said the government purchases during a tight market "would be difficult to defend" and could be criticized as mismanagement.

Top priority since Sept. 11

While the government was buying the oil last year, commercial crude inventories declined by 10 percent from 310 million barrels to 280 million barrels. Energy economists have cited the tight inventories as a key reason for the sharp price increases of crude as well as gasoline and heating oil.

Increasing emergency stocks has been a top priority since the Sept. 11, 2001 terrorist attacks. Two months after the attack, President Bush directed that purchases be accelerated to fill the reserve to 700 million barrels by 2005.

As oil prices flirted with $30 a barrel in late 2002 and Venezuelan imports disappeared, the Energy Department decided to shift policy and begin postponing deliveries to its emergency stockpile. On Tuesday, the department announced it also would postpone April deliveries because of current tight market conditions.

Levin welcomed the latest decisions, but argued Wednesday that they should have been made a year ago. He maintained the government's aggressive oil purchases did nothing for national security.

"The overall inventory of oil in this country was no better in the end of 2002 than it was at the beginning of 2002. We had 40 million more barrels in the petroleum reserve, but we had 40 million fewer in commercial oil inventories," he said.