Common Tragedies

Thoughts on Environmental Economics

GAO blasts DOE on SPR*

Posted by Evan Herrnstadt on February 28, 2008

As the fill of the SPR is debated by Congress and the DOE, the GAO threw its hat in the ring. The Office’s report is critical of the cost-effectiveness of fill protocol. It makes three very reasonable suggestions:

1. Include some heavy crude in the SPR.

This is a complete no-brainer as far as I’m concerned. According to the report, around half of disruption-vulnerable U.S. refineries are incompatible with the light and medium crude currently held in the SPR. Running the wrong type of crude would result in about a 5% reduction in U.S. refining throughput, a significant loss during a supply disruption. Five percent is pretty bad, and certainly blunts the impact of any SPR release, but that’s for total refinery throughput. One refiner cited in the study claims that using exclusively SPR oil in its heavy crude unit would result in 11 percent less gasoline and 35 percent less diesel. To be fair, refineries are probably not going to be relying entirely on SPR crude, but you get the point.

There’s also the little matter that heavy crude costs about 10% less than light. So current policy has us buying more expensive crude oil that is only efficiently compatible with about 55% of likely affected U.S. refineries. Gold star for the GAO.

2. Use dollar-cost averaging to determine a purchase path instead of a constant quantity path.

The government has basically set a quantity and, as Sen. Dorgan is learning, is largely intractable regardless of market conditions. This means that even as prices soar above that magical $100 mark, the DOE is stubbornly purchasing the same monthly quantity as before. By using dollar-cost averaging, DOE basically gives itself a monthly SPR allowance. Thus, like a normal consumer, the DOE buys more oil when it’s cheap, and less when it’s expensive. This sounds good, but markets are tricky, and the oil market is quite volatile. So I quote the GAO:

We also ran simulations to estimate potential future cost savings from using a dollar-cost-averaging approach over 5 years and found that DOE could save money regardless of the price of oil as long as there is price volatility, and that the savings would be generally greater if oil prices were more volatile.

100 points to the GAO.

3. Purchase oil on the market instead of through royalty-in-kind arrangements.

    First, this adds an unnecessary level of red tape to the SPR fill process. Since not all oil from RIK arrangements goes to the SPR, there is clearly already bureaucracy in place to sell RIK crude. But maybe selling off RIK crude and using the revenues to purchase the same amount of oil on the world market sounds inefficient and circuitous.

    Well, unfortunately, the way the bid evaluation process works is not equivalent for market purchases versus RIK exchanges. Straight market purchases are considered conditional on general market trends, as well as the prices of SPR-suitable crude grades relative to other grades. In contrast, the RIK oil is exchanged for other oil for the SPR. The evaluation process focuses on whether DOE will receive oil of at least the same value as the RIK oil it is giving up. Thus, it ignores market trends and is vulnerable to exchanging at questionable times. The GAO report gives an example in which simultaneous bidding processes resulted in opposite outcomes: the cash process rejected Light Louisiana Sweet (LLS) at $67/bbl, whereas the exchange process bought LLS at a similar price. As you might have just concluded yourself, the cash process is also considerably more transparent. A for the GAO.

    This report is quite readable, and well worth a look. But at first glance, it certainly seems that if the SPR fill process is to go on, the DOE and Interior would do well to implement the GAO’s suggestions. They would save money, improve the SPR’s effectiveness in the event of a disruption, and increase transparency.

    Note: for great analysis of the fill/no fill debate, check out this post at Energy Outlook. Also read the post’s comments for some discussion of dollar-cost averaging by people who actually seem to know something about investment.

    * I kind of wanted to see if I could write a title in which over 50% of the letters are in acronyms. Yes I could.

    12 Responses to “GAO blasts DOE on SPR*”

    1. Daniel Hall said

      I kind of wanted to see if I could write a title in which over 50% of the letters are in acronyms. Yes I could.

      I had a friend inform me the other day that “acronyms” are technically words which are pronounced abbreviations. When each letter is pronounced individually it is only an abbreviation (or, I think technically, an “initialism”). Both and — more significantly — Language Log seem to back this up.

    2. Evan Herrnstadt said

      Thanks William Safire.

    3. Daniel Hall said

      Four minutes is a really impressive response time there, Evan. It’s pretty cool that you have an entire library of humorous Onion articles around to offer as witty rejoinders. Do you read up on weekends, or actually carry a rolodex of clippings around with you everywhere?

    4. Evan Herrnstadt said

      Need I remind you of the end of this post:

      ’nuff said.

    5. […] wants the government to spend money more wisely when replenishing the Strategic Petroleum Reserve, explains Common Tragedies. In Iran, what happens to a small oil company blacklisted by mistake by U.S. sanctions?, in the […]

    6. Susie said

      Evan, Wikipedia supports your classification as acronyms.

      Daniel, that same entry also gives the Jesus fish story you mentioned at HH!

    7. Daniel Hall said

      Wikipedia supports your classification as acronyms.

      Um, not really. Wikipedia says:

      Initialism originally described abbreviations formed from initials, without reference to pronunciation. The word acronym was coined during the mid-20th century for abbreviations pronounced as words, such as NATO and AIDS. Of the names, acronym is the most frequently used and known; many use it to describe any abbreviation formed from initial letters. Others differentiate between the two terms, restricting acronym to pronounceable words formed from components (letters, usually initial, or syllables) of the constituent words, and using initialism or alphabetism for abbreviations pronounced as the names of the individual letters.

      If you check the references carefully you’ll indeed see that some dictionaries say both uses are fine, while “others differentiate”. I’ll note that “others” includes the Oxford English Dictionary. (Also, as an aside about Wikipedia’s quality, some of these references — including OED — are miscategorized.) I’m pretty happy to have the OED and a professor of linguistics on my side, particularly given that Evan currently can boast a webpage that was likely written by a prepubescent male.

      I recognize that this is part of a larger debate about ‘prescriptive’ versus ‘descriptive’ approaches to language use. Although I mocked Evan’s use of William Safire as a slur, he is undoubtedly right that I was being a bit of a nit. This is somewhat unusual for me, as I frequently take the laissez-faire view that “language is use”. I actually pointed it out only because I was surprised to learn that I had been using “acronym” incorrectly — at least in normative terms — for my entire life.

      On the other hand, some modern conflations DO bother me. Have you noticed the increasing trend to use “disinterested” when the speaker means “uninterested”? I hate this, both because the language is getting poorer and because 90% of the time the idiot is doing it to make themselves sound sophisticated and urbane. (I’d say that “Using “disinterested” incorrectly” would be a good entry for Stuff White People Like.) So maybe I AM a nit after all.

    8. Evan Herrnstadt said

      Irregardless, while we’re on the topic of prescriptive linguistic pet peeves, one of mine is people using irregardless. It ain’t a word.

    9. Daniel Hall said

      Oh, I had a prof in grad school — grad school! — repeatedly use the term “irregardlessly” to open sentences. This was the source of much humor at late-night (and ethanol-enhanced) student bitch sessions.

    10. Susie said

      Um OK you win. I just skimmed the Wikipedia article because it’s actually very long and mostly disinteresting… i mean, uninteresting.

      In response to your last paragraph…
      I’m helping Juha write a choice experiment survey (it’s like contingent valuation) and the other day, I came across a website about how to write survey questions. It basically advocated incorrect grammar (“relax your grammatical standards”) in the interest of making sure “people from a variety of backgrounds” would understand it. In the interest of getting the best survey results, this is probably a good idea, but it did make me cringe to think a survey writer may be advocating language degradation.

    11. Susie said

      Another is nauseous instead of nauseated

    12. Daniel Hall said

      I thought this was interesting:

      Usage Note: Traditional critics have insisted that nauseous is properly used only to mean “causing nausea” and that it is incorrect to use it to mean “affected with nausea,” as in Roller coasters make me nauseous. In this example, nauseated is preferred by 72 percent of the Usage Panel. Curiously, though, 88 percent of the Panelists prefer using nauseating in the sentence The children looked a little green from too many candy apples and nauseating (not nauseous) rides. Since there is a lot of evidence to show that nauseous is widely used to mean “feeling sick,” it appears that people use nauseous mainly in the sense in which it is considered incorrect. In its “correct” sense it is being supplanted by nauseating.

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