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News Intelligence Analysis
[Editor's Note: In his State of the Union Address in January 2007, President Bush revealed a new and startling plan to double the Strategic Petroleum Reserve: Read the ramifications of this unwise move from the New York Times editorial here.]
How Bush Pushed Gasoline Prices Sky High
By Katherine Yurica
On March 5, 2003, Senator Carl Levin, the Ranking Minority Member of the Senate’s Permanent Subcommittee on Investigations, released a report prepared by the minority staff that reveals why gasoline prices soared under the Bush administration. It has to do with the nation’s Strategic Petroleum Reserves (SPR) and some odd decisions by the Department of Energy (DOE) after consulting with White House officials.
According to the Senate Report, the Bush administration added forty million barrels of oil to the nation’s reserves in 2002. That wouldn’t be a problem in and of it self. But the purchases represented an extreme change in energy policy; they were made in a strong market, with a tight supply of oil, which increased demand, which in turn pushed up the gasoline prices to their highest levels in twelve years.
The Senate report said in a one-month period in mid 2002 the Bush administration purchases caused crude oil prices to soar, raising the cost of heating oil by 13%, jet fuel by 10% and diesel fuel by 8%. The bottom line was the Bush policy change cost citizens between $500 million and $1 billion.
When crude oil jumps from $20 a barrel to $30, the Senate report says, the costs to U.S. taxpayers are an additional $1 million per day. “Over three months, the additional cost of filling the SPR approached $100 million,” which will ultimately be borne by U.S. taxpayers.
Why did Bush do it? For one thing, he was advised to do it. It has to do with the secret National Energy Policy advisory group headed by Vice President Dick Cheney. Cheney has steadfastly refused to release the names of those who advised the administration on energy matters. However, according to an article published in the Sunday Herald in Scotland (October 6, 2002), by Neil Mackay, it was former Secretary of State, James Baker who personally carried an advisory report to Cheney in April of 2001. Assembled at the James A. Baker Institute for Public Policy of Rice University, the task force consisted of oil and energy executives. The report, Strategic Energy Policy Challenges for the 21st Century is referred to simply as the “Baker Report” or “report” below.
The report advised the new president, “At a minimum the government should aim to fill all of the nearly 700 million barrels of [reserve] capacity it currently has available.” Later, the National Energy Policy report recommended that the President wait until exchanged SPR barrels were returned and then he should determine whether offshore Gulf of Mexico royalty oil deposits to the SPR should be resumed. So after September 11, 2001, George W. Bush vowed to fill the Strategic Petroleum Reserves (SPR) to capacity.
The Baker report was not irresponsible, it also warned the president, “One problem with trying to refill the reserve at this time when markets are strong is that any purchases made by the U.S. government would add to the current tight supply.” In other words, prices would go up!
At one point, the Baker report recommended that purchases of reserve additions be accomplished through direct “budgetary allocations.”
Trying to teach a new president the facts on SPR oil rights and wrongs must have been a heady proposition. There were many object lessons in which to point. The Baker report singled President Bill Clinton’s use of his “discretionary authority to lease oil to the market on a time-swap or exchange basis” as an example of a no-no. First, according to the Baker experts, Clinton’s exchanges reduced the size of the SPR at a time when more oil might have been needed. Next, the report chided, a president must not earn “far less in interest” than he could have, by using better methods. Perhaps Clinton’s biggest faux pas according to the Baker experts is that he used the drain-down of the reserves “to address winter heating-oil inventory concerns,” which indeed reduced heating oil from $37 to $31 per barrel. That was a big no-no. The Baker report advises a president must not use the SPR as “a market buffer stock to damp prices and price volatility.” (Translation: A president must not help the poor to heat their homes at a reasonable price at the expense of oil company profit taking.)
Hence in the National Energy Policy report, the NEPD Group “recommends that the President reaffirm that the SPR is designed for addressing an imminent or actual disruption in oil supplies, and not for managing prices.” (At page 8-17.)
That recommendation signaled a significant policy change: it denied the president the right to withdraw oil at times when prices are unusually high due to manipulation of the market.
What were the superior choices left for the President? The report advises taking advantage of “the market’s forward price structure…if the market structure were backwardated, with future prices lower than current prices, the government would be able to replenish the reserve with more oil than it had leased on an auction basis. If the market structure were in contango, with future prices higher than prompt prices, the government could lease its cheaper spare storage capacity to industry, thereby also providing revenue to build government-owned reserves at a later time.”
But the method the Bush administration chose was to fill the SPR without regard to crude oil prices at all but simply at a constant rate of speed. The result was extremely high prices for gasoline and increased charges to be born by the taxpayers. The Bush administration denies this. But the method they chose did not add any additional reserve oil to the nation’s strategic supply. So why do it? Oil companies were happy, after all oilmen contributed $26.7 million to Bush’s campaign in 2000 and another $18 million for the 2002 election.
Another possible reason is this: The only way to get oil companies willing to make investments in drilling new sources of oil is to keep oil prices high. The nice thing about this methodology is that criticism can be so easily deflected as a White House spokesman did in a recent interview, by claiming the “purchases were for national security reasons.”
Whatever the motivation, this much is clear: American citizens had to pay and are still paying a hefty price for gasoline and home heating oil. In the end, regardless of the lip service Mr. Bush may offer to the American people on how he is benefiting all citizens, the facts show he benefits those corporations who made large contributions to his campaigns.
Documentation & Links
1. Neil Mackay’s article in the
Sunday Herald, October 6, 2002,
http://www.sundayherald.com/print28285
2. U.S. Strategic Petroleum Reserve: Recent Policy Has Increased Costs to Consumers But Not Overall U.S. Energy Security by Minority Staff of the Permanent Subcommittee on Investigations. This is a 294 page report in a PDF file. See Senator Levin's summary at:
http://levin.senate.gov/issues/index4.cfm?MainIssue=Energy&SubIssue=CrudeOilInvestigation
And see Sen. Levin's Press Release: http://www.senate.gov/~levin/newsroom/release.cfm?id=209139
Or click here for another source of the complete report: http://a257.g.akamaitech.net/7/257/2422/05jun20031230/www.access.gpo.gov/congress/senate/pdf/108hrg/85551.pdf
3. The Baker Report, Strategic Energy Policy Challenges for the 21st Century. In a PDF file.
The report is no longer available at: http://www.rice.edu/projects/baker/Pubs/workingpapers/cfrbipp_energy/energytf.htm
4. National Energy Policy report: In a PDF file.
Or click here: http://www.whitehouse.gov/energy/