U.S. Energy Dept. Proposes Swapping Oil to Curb Prices

The U.S. Energy Department has proposed putting millions of barrels of crude oil from the national Strategic Petroleum Reserve on the market through oil swaps with energy companies, a government official said Sunday.

While the long-term goal of the plan is to put more oil back into the reserve, a short-term side effect of the additional supplies from the proposed swap could be to lower crude oil prices, which have recently hit nine-year highs, said the official, who asked not to be named.

Under the department’s plan, oil companies would submit bids to take oil from the reserve and then sell it in the market. Instead of paying the government cash for the reserve oil, the companies would replace the crude at a future date with more product.

The plan is being reviewed by the White House, and a decision on the proposal may come as soon as two weeks, the official said.

The official said the department didn’t spell out in its proposal how much oil it expects would be swapped because it would depend on the bids that were received. However, the official said that oil could be withdrawn from the reserve at a maximum rate of 4 million barrels per day.

Last month the U.S. consumed an average of 19.8 million barrels a day of crude oil and refined petroleum products, such as gasoline and heating oil, according to department data.

Despite pressure from some members of Congress and state governors, Energy Secretary Bill Richardson has insisted that he would not sell oil from the reserve to lower crude prices.

The department’s plan would allow him to continue following that policy because he would eventually fill the reserve with more oil to handle any future supply disruptions, the official said.

Northeast lawmakers, whose constituents use most of the nation’s home heating oil, have urged that reserve oil be sold to push down prices that have skyrocketed due mostly to production cuts made by the Organization of Petroleum Exporting Countries.

Richardson has begun talking with OPEC members and other major U.S. oil suppliers about current production levels. He will travel next month to Saudi Arabia, the biggest U.S. oil supplier and most influential OPEC member.

Under the Energy Department’s plan, a company could “pay” for one barrel of high-priced swapped oil by replacing it with two or three barrels in the future when oil might cost less, explained the official.

“In order for us to exchange oil and get more in return, we need to take advantage of current market conditions,” said the official, referring to high energy prices that would make selling swapped reserve oil so profitable for firms. “We have to be able to respond quickly.”

The winning bids would be from those firms that could quickly replace swapped oil with the most new oil. The department would want any swapped oil replaced within 12 months, the official said.

The emergency reserve was created by Congress in the mid-1970s after the Arab oil embargo. The stockpile holds 567 million barrels of oil in underground salt caverns in Texas and Louisiana.

Details of the department’s proposal were first reported in the latest issue of Time magazine, which hits newsstands today.

Richardson wouldn’t need congressional approval to swap the oil because he already has the authority to manage the reserve and fill it with oil “through either exchanges or purchases,” the official said.