Bad Oil sale..

Congress: Printing money by the barrel

American oil isn't worth what Washington thinks. That could leave taxpayers on the hook for billions.

By DANNY VINIK

This summer, Congress's budget gimmick of choice appears to be selling oil from America’s Strategic Petroleum Reserve. Senators of both parties, including Majority Leader Mitch McConnell (R-Ky.) and Barbara Boxer (D-Calif.), want to sell oil from America’s Strategic Petroleum Reserve to pay for new roads and bridges. Meanwhile, the House passed a bill to fund $5.4 billion in medical research by selling 64 million barrels.

Sounds great, right? Oil America might not need, funding programs it does need—and Congress gets to stay within its own guidelines to cover any new spending with corresponding cuts or revenues.

But there are plenty of problems with the idea, including a big one that Capitol Hill  appears to be ignoring. As POLITICO's Elana Schor recently pointed out, the DRIVE Act assumes a price of $89 per barrel. The Cures act assumes a price of $84 per barrel.

The current world price: Less than $45 per barrel.

In other words, the government is paying for bills by wildly overestimating how much its oil is actually worth.

For these schemes to work, oil would have to nearly double in price by the time the U.S. sells it — something almost no economist expects. “I would definitely not count on being able to get in the mid-$80s per barrel for all these sales,” said energy analyst Chris Nelder. Barring an unexpected increase in oil prices, the mismatch would leave a huge hole in the federal budget, increasing the deficit by billions of dollars.

How is Congress doing this with a straight face? Their oil price estimate might sound made-up, like trying to get a loan by claiming your $300,000 house is worth half a million. But it comes from the Congressional Budget Office, the non-partisan outlet that comes up with a budgetary “score” for legislation. The budget office scores laws all year based on baseline numbers it publishes in January, using economic projections finalized in December. Last December, oil was worth around $65 a barrel, and using oil futures, the budget office forecast that it would be $91 per barrel this year and drop to $71 per barrel in 2016.

That’s not what happened. Weak global demand and excess supply have kept prices low; now oil is worth less than $45 and futures prices have oil barely topping $50 a barrel by the end of next year.

To be fair, the price of oil is inherently difficult to estimate, and right now “There’s more uncertainty now than I’ve ever seen,” said Nelder. But the result is extremely convenient for Congress — its new piggy bank of choice looks way, way more lucrative than it is really likely to be. The DRIVE Act and 21st Century Cures Act both call for the government to sell the oil over a 10-year period, much of in the 2020s, a time when nobody has much of an idea what the price of oil will be.

McConnell's spokesman defended its use of the CBO's score in funding the bill, arguing that it wouldn't make sense to constantly update the revenue totals whenever the price of oil changes. "A year ago you would have said they priced it too low," he wrote in an email. "A year from now, who knows?"

Neither bill is a done deal. The Senate will likely turn its attention to the Cures Act later this year while the House has already ruled out the DRIVE Act. If the debate drags into 2016, the budget committees will have the choice of switching to the new — and presumably more accurate — baseline oil price that the CBO will issue in January.

But for now, selling oil from America’s reserves appears to yield billions of dollars of imaginary money — and don’t expect anyone on Capitol Hill to complain about that.