US scrimps on oil reserve: want a piece of the wells?
New York — The nation's strategic petroleum reserve (SPR) has fallen victim to budget cuts. The reserve was established by Congress to deal with a cutoff in Middle East oil imports, such as the one in 1973-74 that produced long lines of autos at the gas pumps.
Following the President's directive to pare federal spending by 12 percent, the SPR office has curtailed plans to spend some $3.88 billion for oil to be delivered in 1983. Instead, some $466 million has been lopped off the fiscal year 1982 budget, cutting SPR spending 12 percent.
A shortfall in oil deliveries for the reserve will begin to be noticed in 1983. The cost, figured at $42 a barrel (the government's estimate for oil bought for delivery in 1983), means the US now will not buy some 11 million barrels.
According to a high official with the SPR's strategic planning and analysis division, it's possible the office can make up some of this cutback in fiscal 1983. This of course, depends on that year's budget. It is also possible that if the price of oil doesn't increase to $42 a barrel, the $3.22 billion budgeted for buying oil in fiscal 1983 will buy more oil -- making for less effect on deliveries.
The decision to cut back on the purchases has already raised some eyebrows in the oil world. John Lichtblau, chairman of the Petroleum Industry Research Foundation, branded cuts in buying as a bad move now. "This is an absolutely vital program," Mr. Lichtblau said, "and it should be completed as fast as possible, since we may not have this kind of worldwide oil surplus for long."
In fact, he says, the current feeling of instability in the Middle East should point out to the administration the need for a reserve. "The oil is a lot more important than the gadgets [defense items] they are trying to buy," he concludes.
Partly because the government recognizes the value of the oil, it decided this year to make it an off-budget item. According to the SPR official, the government decided to fund the reserve on an offbudget basis, since the oil was an asset.
he government figures that of the $64 billion it will spend on purchasing the 1 billion-barrel target, it will have an asset worth $62 billion.
So far, according to the SPR, some 205 million barrels of oil have been purchased. Storage facilities, utilizing salt domes in Louisiana and Texas, have been readied and oil is pouring into them at a rate of about 325,000 barrels a day. According to the American Petroleum Institute, the oil has come from the North Sea (31 percent), Mexico (20 percent), Libya (13.5 percent), and Iran (10.5 percent). The Iranian oil was bought before the embassy hostages were seized.
"Wanna buy some oil wells?"
For years, well-heeled investors have heeded this call and often filled their ten-gallon hats with cash afterward. Specifically, the big spenders have bought mutual funds that go for oil and gas income (as apposed to "growth" funds).
Such funds, run by companies like Petro-Lewis Corporation in Denver and Damson Oil in New York, have traditionally invested in producing oil and gas wells and then paid out the income from those wells as dividends to investors. The income has averaged from 12 to 15 percent.
The "kicker" for the investors has been the sharply rising price of oil and gas. Since 1973, for example, the average price of US crude at the wellhead has gone up 800 percent. Thus, investors in producing wells have received a lot more income than they originally bargained for. In fact, some of the early 1970 funds have returned over 40 percent annually. Even later funds have tended to return 15 to 25 percent. Thus, it's not surprising that these funds are expected to mushroom dramatically. Industry sources estimate that such funds will raise $1.1 billion this year, compared with $43 million in 1975 and $250 million in '79.
And these funds are being sold at a time when most investors won't touch anything that smells of fixed income. Of that $1.1 billion, Petro-Lewis and Damson Oil will underwrite about $1 billion worth of the funds.
Now ENI, a group based in Seattle, has entered Petro-Lewis and Damson's oil patch with a different way to market the funds. ENI, which has traditionally sold oil and gas drilling programs, has decided to sell teh oil and gas "income" funds on a noload (no sales charge) mutual fund basis. Both Petto-Lewis and Damson have traditionally sold their funds with a heavy load (sales charge) through the brokerage community. This load factor has been high, running as much as 8 percent.
Will this no-load approach work? Victor Alhadeff, chairman of ENI, points out that his fund will invest about 97 percent of its funds to buy properties directly. Thus, he says, the yield should be 13 to 20 percent better than the load funds'. The group hopes to entice investors with a national advertising campaign it has just started.
The possible kicker for investors in these funds is the instability in the Middle East, which might prompt another round of oil price increases, and the possibility of accelerated decontrol of natural gas, which might push up the price of the fund. Thus the return to investors would be greater. If stability in the area returned and the surpluses in oil persisted, the return might be less than that offered by a money market mutual fund. The minimum investment in the ENI funds is $2,500.