Financing of oil reserve debated

By , Business and financial correspondent of The Christian Science Monitor

The US government hopes to fill its energy cupboard by pumping $4 million worth of oil a day into the Strategic Petroleum Reserve. Financing the stockpile through private investors might cut the cost to zero -- or it could be just governmnet sleight of hand, a way of hiding expenditures by whisking them off- budget.

At issue is a novel idea, being considered by the Reagan administration, that proposes paying for the oil by issuing oil-backed securities.

The government would peddle shares in the stockpile to private investors.The money raised would pay for more oil; the securities issued would entitle each owner to their own bit of the projected billion-gallon reserve.

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When the securities mature, the owner would receive whatever his bit of oil is worth. If the cost of oil doubles between purchase and maturation dates, the investor will have doubled his money.

There are three ways the government could pay back the investors:

* Pay them in cash out of the general budget.

* Sell the oil and hand the proceeds over directly to the investors.

* "Roll over" the debt or issue new securities to cover the cost of paying back the old ones.

This proposal was first floated at a Senate hearing last April by Dr. Alice Rivlin, head of the Congressional Budget Office. It was later included in a list of 105 proposed cuts in the federal budget that CBO prepared for the House of Budget Committee. CBO estimates that the move would save $3.7 billion in fiscal year 1982.

David Stockman, the enfant terrible head of the Office of Management and Budget, has included the "oil bond" idea in his list of proposed cuts for the Department of Energy budget.

Government documents obtained by the Monitor refer to the Strategic Petroleum Reserve as "our most important short-term insurance against further Persian Gulf supply interruptions," and claim that the Carter administration dropped 40 percent behind schedule in filling the reserve.

Oil bonds, say the documents, are a good idea because they "could be marketed to the public, and the proceeds used to both redeem the current government investment in the reserve (roughly valued at $4.2 billion by the end of 1981) and probably provide sufficient funds to maintain -- or even increase -- the present fill rate."

Backers of the bond issue say it makes storing petroleum as easy as stockpiling stewed tomatoes. They list several specific advantages:

1. No money would be scooped out of the Treasury to pay for the reserve. Private investors, powered by the speculative urge, would shoulder all the risk; the government would get all the credit.

2. It would reduce the government's role in financial markets, transferring more action back to the private sector, where it belongs.

3. It would help crowd some capital out of the speculative commodities market , driving money into more productive investments like plant and new equipment.

It is government in its most enterprising state. A good idea. Right?

Wrong, says Irving Auerbach. Auerbach, an economist and government bond specialist for Aubrey Lanston, claims "oil bonds" are nothing but a government magic trick -- now you see the oil, but now you don't see the spending.

"It is a devious device to produce budget savings by gimmickry," he says.

Basically, Auerbach believes that the "oil bonds" simply put off the day of reckoning. "All you're doing is borrowing the money in the marketplace to finance the purchase," he says. "If the oil is not sold, the securities will be redeemed with federal funds."

Understandably, he says, the Reagan administration doesn't want to take the rap for doing something that actually increases budget expenditures. So the "oil bonds" will let them buy now and make some future administration pay.

It would make more sense, says Auerbach, to finance the purchases through the Federal Financing Bank -- an institution that has come in for much criticism from the Reagan administration.

Other financial experts caution it must be kept in mind that the "oil bonds," unlike other government securities, would be backed by a real, tangible asset. By selling the oil, future administrations would be able to pay off the securities without touching government funds, as backers of the proposal claim -- but then the country would be deprived of the full cupboard of a Strategic Petroleum Reserve.

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