SPR build's cost proving heavy on US taxpayers

SPR build's cost proving heavy on US taxpayers

New York (Platts)--19Oct2004


October has marked the end of 15 consecutive months of additions to the US
Strategic Petroleum Reserve, and it could be as good a time as any to tabulate
the cost of the Bush administration's persistent stock building effort on the
US taxpayer. This year's contributions to the 670-mil bbl SPR totaled
32.21-mil bbl as of the end of September, prior to the Hurricane Ivan-related
crude loans. The build progressed unabated even as crude futures prices on
NYMEX continued to probe price levels that, when adjusted for changes in the
purchasing power of the dollar, were last seen in 1981. The 32.21-mil bbl of
crude deposited into the SPR throughout 2004 has cost $1.235-bil, calculating
monthly contributions multiplied by the average monthly price of a barrel of
WTI. The US trade deficit in August, which widened by $3.5-bil to $54-bil, was
in no small measure caused by a $3.11/bbl jump in imported crude prices, and
,including energy-related petroleum product imports, accounted for $1.9-bil of
the $3.5-bil increase.

Add the $120-mil/year of SPR maintenance costs the US pays to DynMcDermott,
and the bill to US taxpayers edges up. A spokesman for the Department of
Energy said the average price per barrel for storing the 638-mil bbl of SPR
crude was unknown. "I don't have that figure," the spokesman said, adding,
"It's probably included in the $120-mil maintenance costs." Yet it is far from
certain that the $120-mil accounts for the cost of carry--the price of storing
any commodity, security or equity if not lent back into the market on an
overnight basis. If the crude market was in contango--which it is not--and one
were to account for the carrying costs of the 638-mil bbl, the amount in the
SPR at the beginning of 2004, and factor in the cost of inancing storage at
1.5% for a spread above average Fed Funds rate, an additional $315.8-mil would
be tacked on to the cost of the SPR. But the crude market is in backwardation,
and the cost of storage is twice as high as the $0.4950/bbl the above
calculation implies, suggesting an additional carrying cost of $631.6-mil.

Therefore, the total cost to the US taxpayer, including the oil purchase price
and storage, would be closer to $1.987-mil for the year, depending upon
interest rates and the annual average price per barrel of crude oil. Besides
the costs associated with maintaining this secure supply of oil, the loss of
additional barrels from the commercial crude market has helped to boost
prices. If one were to add the 32.21-mil bbl to present US commercial crude
inventories of 278.236-mil bbl, stocks would be 310.446-mil, a level last seen
in July 2002 when the active front-month contract on NYMEX was trading at
about $27/bbl. While this does not mean the crude that went into the SPR was
solely responsible for frothy petroleum prices, it does point to its
contribution to the bull-run in 2004.

If the crude barrel is that expensive, then the price of the refined product
becomes just as taxing to the average US consumer. Residential heating oil
prices, at $1.899/gal for the week ending Oct 11, were 52 cts above year-ago
levels while average retail gasoline prices at $1.993/gal were 42.5 cts above
year-ago levels, according to the Energy Information Administration. Low
sulfur diesel prices were 60.9 cts/gal above year-ago levels. Through the end
of September, refined product prices cost the US consumer an estimated
$67.45-bil, based on implied demand. That is a situation which eventually
causes a decline in personal consumption expenditures as financial resources
are diverted from certain purchases to pay for higher energy bills. The median
tax cut for all Americans was $407/yr, according to data from the Urban
Institute and Brookings Institution. On balance, the high energy costs appear
to be a taxing situation for the average American.

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