Unanswered questions about heating oil

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Editorial; Unanswered questions about heating oil Source: Boston Herald Publication date: 2000-07-16

Former congressman Joe Kennedy is right about President Clinton's proposal to establish a heating oil reserve for the Northeast: Two million barrels is too small. But leaving that aside, the proposal raises as many questions as it answers. Usage in the Northeast on an average winter day is just under 1 million barrels. A severe cold snap like that of last January would devour the reserve in no time at all.

The president has proposed to release crude oil from the Strategic Petroleum Reserve (570 million barrels held in Louisiana and Texas) to refiners in a few weeks, who would turn over heating oil of equivalent value to be set aside in the Northeast.

The first question: Since refineries will be running all-out to build up abnormally low heating oil inventories, can they produce an extra 2 million barrels? If that production capacity isn't there and the reserve comes out of normal production, the supply for sale will go down and the price will go up (unless the government arranges increased imports).

And where would the reserve oil go? To do any good it would have to be dispersed and stored in many places, close to users. But environmental regulations have reduced storage capacity by forcing many tanks out of service.

Just what would trigger use of the reserve - a crucial point - is unclear. The best way would be to sell options to buy the oil at various prices above current prices in the market for future delivery, which means politicians don't control use of the reserve. If the government said it would release the reserve at a price only modestly above the expected price (as the politicians would want), distributors and large users would have a disincentive to build up inventories.

It's also possible that factories, apartment and office buldings and other large users, if they knew the government was holding 2 million barrels, would try to operate on smaller inventories than usual and the net supply would change very little - and thus a really cold period would drive up prices sharply anyway.

Some of the president's proposals may require legislation, which would let Congress explore the many unanswered questions it raises.

Thanks to a booming economy and heavy demand for all petroleum products, refinery capacity is tight.

There is a tradeoff between gasoline and heating oil - the more production there is of one, the less there can be of the other. The best thing Congress could do for consumers would be to cancel the unneeded requirement for oxygen-containing compounds in gasoline, which would make gasoline easier to make and transport and thus indirectly make heating oil easier to produce.

http://cnniw.yellowbrix.com/pages/cnniw/Story.nsp?story_id=12063901&ID=cnniw&scategory=Energy%3AOil

-- Martin Thompson (mthom1927@aol.com), July 16, 2000


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