By Brian Baskin
The U.S. government faces critical shortcomings in producing its influential weekly oil inventory report, according to documents obtained by Dow Jones Newswires, casting doubt on figures that affect the production and prices of the world’s most important industrial commodity.
The documents, obtained through a Freedom of Information Act request, exposed numerous reporting errors in the weekly oil report from the Energy Information Agency, including a record decline in inventories last September that baffled market participants and caused a big jump in oil prices. They also pointed to a litany of procedural problems, such as inadequate staffing levels and technology that make it difficult to detect misreported inventory data and maintain security.
Company e-mails and a report from a consulting group describe a process that served the oil world well in 1983, the first year that oil futures traded, but has not kept up as the report has become more influential and the nation’s oil infrastructure has become exponentially more complex. The EIA has been producing the data on oil and fuel inventories since the early 1980s, and the release of the report each Wednesday at 10:30 a.m. is a major event for oil markets.
The EIA “has clearly not devoted adequate resources to the ongoing evolution of the (weekly report) over the last decade,” the consultants, with SAIC Inc. (SAI), said in an EIA-commissioned report issued in September. While SAIC said that the weekly report “is not broken”, it added that “the current approach … may create an unacceptable risk of failure for this flagship EIA report.” SAIC noted, for instance, that key statistical methods used in the EIA report haven’t been evaluated or tested since their inception three decades ago. The consulting group directed questions to the EIA.
The EIA’s own administrators call into question the ability of the agency to continue to accurately collect, analyze and report the data. The statistical arm of the Department of Energy has long considered its data team stretched thin, and didn’t find most of SAIC’s findings a surprise, says Stephen Harvey, director of the EIA’s office of oil and gas, which puts out the weekly data.
“Should you be concerned? Yes. Is it as good as we’d like it to be? No. Is it better or worse than some other countries where we’d like to know this information? It’s probably a whole lot better,” Harvey said.
He said a number of measures are being implemented to cut down on the number of errors, even in the absence of new funding. After a series of budget cuts in the mid-1990s, calls in recent years from the agency for additional funding have largely fallen on deaf ears.
Market participants consider the EIA data to be the best window into U.S. supply and demand, with the American Petroleum Institute, an industry lobby group, the only other widely circulated weekly source.
No other major producing or consuming nation provides anywhere near the same level of transparency as the EIA report. The agency’s work is held up as a model internationally, and has factored heavily into attempts by U.S. officials to prod major oil producers such as Saudi Arabia and big consumers such as China into opening their own statistical books. Only with increased transparency can the market avoid a repeat of the 2008 oil price spike, officials have said.
“The EIA data is very important to us,” said Francisco Blanch, a prominent oil analyst with Bank of America Merrill Lynch in London. “If this data was called into question, it would obviously limit the validity of some of our analysis, particularly as it relates to the U.S. market.”
The internal company documents catalogued various instances in the past three years where companies misreported the amount of oil they had in storage, sometimes by over 2 million barrels in each weekly survey over the course of a year–a significant amount considering that can account for the entire change in inventories from week to week. Other errors were too small to significantly affect the market’s perception of nationwide commercial crude oil supplies, which the EIA currently totals at 344 million barrels.
The most-glaring example occurred in the Sept. 16 report, just a week after the SAIC study was released. The EIA showed almost 4 million barrels of oil had vanished from Cushing in a single week, a record drop. Some observers were initially skeptical of the size of the drop, but when the report showed oil inventories plunged at most important commercial oil hub in the world’s biggest oil consuming nation, the market listened. Oil futures jumped 2.2%.
Out of the sizeable drop at Cushing, 1.7 million barrels represented a “correction” made after the EIA discovered the error by comparing the tank owner’s weekly and monthly reports, said James Beck, who heads the team that conducts the weekly survey, in an interview. A second company’s Cushing inventories were also off by a wide margin earlier in 2009, the e-mails indicated.
None of the documents assert that the companies were deliberately reporting incorrect inventory data, and the agency was alerted to many of the errors by the firms themselves. The Federal Trade Commission last year implemented new regulations punishing companies that put out intentionally misleading inventory data, however.
The security of the weekly report has also become a bigger issue as the oil market has begun to treat the data’s release as a major event.
In one well-known example, heavy web traffic from “robots” used by traders to gain instant access to the weekly reports after their release online overwhelmed the agency’s computer systems one week in 2008, resulting in an accidental early release of the data.
The EIA recently moved the weekly inventory reports onto its own server to allow for closer monitoring, and now warns companies when their robots scan the website too often, Harvey said.
SAIC consultants made other recommendations, including putting EIA staff on “lockdown” prior to release, to prevent information from leaking. Other details were withheld by the EIA, which said making potential changes public would threaten the report’s security.
In a 2009 budget request, the EIA said the accuracy of the data has become “increasingly compromised” and that the problems will take “a significant investment over several years to resolve.” The request, for about $20 million, was mostly denied.
The current version of the 2011 fiscal year budget includes $18 million in additional funding requested by Energy Secretary Steven Chu for the EIA. Sen. Jeff Bingaman, D-N.M., chair of the Senate’s Energy Committee that oversees the department’s budget, in a February hearing called additional funds for the EIA “long overdue”.
The division responsible for the weekly oil inventory report has nearly 100 employees. However, many of the most crucial members of the team have been with the EIA since the early days of the survey, and replacing their expertise upon retirement will be difficult, according to the SAIC report.
These employees devote virtually all of their efforts to putting out the weekly and monthly reports, which are compiled from surveys sent in electronically from thousands of sources, with little time left over to hunt for mistakes or make improvements to the collection system.
Harvey said a planned revamp to the survey sent out to energy companies should help reduce the number of errors. Currently, companies are asked to list oil inventories by region; this year, the EIA will experiment with asking for supplies at the individual facility level. That way, EIA staff can more easily detect anomalies in the data.
Harvey said he expects to make these changes with existing funds and staff. “Just because we aren’t funded doesn’t mean we can ignore these things–it just takes a lot longer to get it done.”
Copyright (c) 2010 Dow Jones & Company, Inc.
