If you have been following the Strategic Petroleum Reserve oil swap you will recall that several of the original bidders for the 30 million barrels of crude were disqualified and the Department of Energy had to conduct a second round of bidding for 7 million barrels. The stated purpose of the swap was to reduce prices and to ensure adequate fuel oil supplies for the winter heating season. Oil companies were to receive the oil this November and in return they would replace it with a greater volume by next November. In this short article we analyze the benefit to the successful bidders of the oil swap. It should be noted that the benefit to the oil companies is a cost to the U.S. government.

The DOE has released numbers on the second round of the SPR swap. These numbers revise downward the percentage of additional oil to be received next year from the oil companies that borrowed 23 million barrels of oil in the first round. This is apparently because some of the original companies which were disqualified had bid a higher percentage than the ones which remained.

In our analysis the oil is valued in each case at the price for which it could be sold in the nearest month on the futures market on the day of the announcement. The companies receive two benefits from the oil received in the swap. The first is that they have the use of the dollar equivalent of the crude for 12 months in the first swap and 11 months in the second. This financial benefit is the equivalent of receiving a loan for the dollar value of the crude. The benefit is computed at the rate for T-bills ( 6.65625 percent ). Paul Horsnell of the Oxford Institute for Energy Studies suggested using T-bills over prime rate and a $0.74 discount of the value of the SPR crude from WTI. His reasoning for the $0.74 discount is based upon the quality of the crude and is explained in his article: The Strategic Petroleum Blunder?

The second benefit is the difference in the value of the crude received at the near month futures price and the value of the crude to be returned at the futures price for the month of return (November 2001)."

Our conclusion: The companies which were successful bidders have benefited $137 million from this transaction. We know at this point that the price impact of the transaction was short term and overshadowed by the uncertainty in the Middle East. We deal with impact on heating oil below.

There is a recap of this article and some interesting links to related articles and other energy policy issues at Policy Pete's web site.

Fuel Oil and Diesel from SPR release can't meet stated goal:

Increases in distillates ( gasoline and fuel oil ) as a result of the SPR swap are discussed in an AP news article: Impact of U.S. Oil Release is Limited.  The Winter fuels report referenced in the article is at Short-Term Energy Outlook October 2000 Winter Fuels Outlook.

The EIA comments that of the 30 million barrels there will only be a net increase of 10 million barrels as 20 million barrels will replace a similar quantity of imports. Acting Administrator Mark Mazur then goes on to say that this will achieve the policy goal of an additional 3 - 5 million barrels of distillate over the production in the absence of the SPR release.  If this is so, then there has been a radical change in the operating characteristics of U.S. refineries. In the last two decades, the highest production of distillates as a percent of refinery input was 25.6% in November of 1996. It seems hard to get 3 million out of a net increase of 10 million barrels and 5 million won't happen. Even at the highest percentage of distillate production, refineries can only produce 2.5 million barrels of crude from 10 million barrels.