Over a barrel

The Crisis hit last week. You could tell it was a big deal by the way the New York Times ran 14 stories on the subject over three days.

After months of dickering -- but just a day after Vice President Al Gore asked him to -- President Clinton ordered the release of 30 million barrels of crude oil from the Strategic Petroleum Reserve, a 570-million-barrel stash held under salt domes on the Gulf Coast. It marked only the second time the reserve will be used in crisis since its 1975 creation.

The first -- and last -- time was during the Persian Gulf War.

All this oil is aimed at lowering prices at the gas pump, and at home, for the 27 million people who heat their houses with oil. Retail heating-oil prices now are hovering around $1.40 per gallon. Two years ago the stuff sold for 65 or 70 cents.

Clinton's intervention is sophisticated. Rather than selling the oil outright, the government intends to enter into deals with refiners under which the companies will agree to replace the oil, and then some, at a later date. In effect, Clinton is placing a large bet that oil prices will be lower next year. If he's correct, the program would add to the nation's oil reserves rather than deplete them.

Lost on nobody, least of all George W. Bush, was the importance of oil prices to the upcoming election -- especially in crucial swing states of the Midwest and Northeast. The reserve "was created for America's national security, not for the vice president's political security," Bush said last Saturday in Orlando. Two days earlier, Joseph Lieberman spoke in Central Florida about the same topic. "People are more and more angry about gas prices, but more and more anxious about heating oil," said Lieberman.

Suddenly the debate about oil and oil policy was out in the open, after months in which both presidential campaigns appeared to be selectively avoiding it.

Arguably it's because both sides have something to hide.

When Republican Bush chose as his running mate oil exec and former secretary of defense Dick Cheney, Democrats and Greens had a field day.

But while the Gore campaign has criticized Bush's ties to big oil, Gore's own ties to Occidental Petroleum -- and his family's long and close relationship with its late chairman, Armand Hammer -- have remained mostly in the background. The relationship, which spans generations, is particularly troublesome for a Democratic candidate who depicts himself as a friend of the environment and of the little man.

Clinton's opening of the reserve represents an escalation of a new and frantic policy begun this past summer -- a policy that oil experts and economists both in and out of the Clinton administration have criticized as short-sighted and potentially counter-productive.

Energy Secretary Bill Richardson admitted last winter that his department had been "caught napping" by a sudden spike in world oil prices. After months of dithering in Congress, Clinton last summer ordered an unprecedented 2 million barrel heating oil reserve for the Northeast.

In a meeting with Richardson on July 19, oil executives complained that such a reserve would create uncertainty in the market, possibly leading to the higher prices. After the meeting, Richardson underscored his agency's reluctance to administer such a reserve. "The government does not want to be in the heating oil business, but we must be ready to respond to a shortage or severe price spike," he told an Associated Press reporter.

When this modest, targeted effort bore no results, Richardson, with Gore, took the lead in demanding an even bigger oil splash. As with the original decree, Clinton's latest, 15-times-larger opening of the crude oil reserve seems geared toward augmenting the political prospects of Gore, and First Lady Hillary Clinton, running for U.S. Senate from New York.

In response, the Bush campaign so far has merely danced around the margins of Gore's Big Oil ties.

Last week, for example, Bush mocked Gore's claim that he had been involved in early discussions about the strategic oil reserve. "He claimed he was involved in the very invention of the Strategic Petroleum Reserve," Bush said. "The problem is the reserve was first established in 1975, two years before Al Gore even went to the United States Congress."

Bush might have instead noted that it was not Al Gore, but his father, the late Sen. Al Gore Sr. of Tennessee, who, in doing a small favor for Occidental chairman Hammer, played a crucial role in the events that triggered the 1973 Arab Oil Embargo -- the crisis that lead to the Strategic Petroleum Reserve's creation [see "Gore, Hammer, Gadhafi].

Or Bush might have siezed upon this irony: Just two years ago, Gore and Clinton sold America's largest national oil field, an underpinning of strategic reserve, to Occidental for less than half the value of the oil in the ground.

Although Bush so far has been publicly mute, the Bush campaign has picked up on these and other apparent contradictions in the Clinton/Gore energy policy, quietly alerting reporters to a central flaw in Al Gore's "clean-green" reputation.

"It's fair to say that when it comes to Al Gore and Occidental, Al Gore has been very slick," says Mike Collins, a spokesman for the Republican National Committee. "He should come clean."

Al Gore Sr., as chairman of the Senate Foreign Relations Commission, was a peripheral character in Armand Hammer's life -- one of a half-dozen or so politicians the oilman paid off at one time or another. But it's no stretch to say that Hammer was central to Gore's world. He paid Gore far better than his government did.

When Gore senior was defeated in his 1970 Senate re-election bid, Hammer awarded him the chairmanship of the Island Creek Coal Co., an Occidental subsidiary. The salary -- $500,000 per year -- was a tidy sum for a man who was a country teacher when first elected to Congress. In the 1980s Gore took a seat on the main board of Occidental. His annual earnings then exceeded $750,000.

"Hammer owned Al Gore," states Neil Lyndon, a former Hammer public-relations man. "Hammer kept Gore, as he liked to say, ‘in my back pocket.' When he said this, Hammer would touch his wallet and chuckle.

"Gore's father effectively delivered his son into Armand Hammer's back pocket."

Vice President Gore owns a brick home on 88 acres outside of Carthage, Tenn. He acquired that property after his father struck a cozy deal with Hammer. The deal has allowed Gore Jr. to earn a huge profit from his land, with no work required.

In 1972, Occidental Minerals bought the property for double the next-closest offer, according to a 1992 dissection of the deal in the Washington Post. A year later Hammer sold the land at cost to Gore Sr. He also offered Gore a $20,000 annual royalty for the right to mine zinc on the plot. A year after Gore Sr. closed the deal, he resold the land for $140,000 to his son.

The going rate for zinc rights at that place and time was $30 an acre, the Post reported. Occidental paid $227 per acre.

Then Hammer's Occidental left the zinc untouched. In 1985 it sold the mining rights to Union Zinc, which opened a mine on the property and continued to pay Gore. The rights have changed hands since then, but the $20,000 payments continue. Gore Jr.'s total take, so far, exceeds $450,000.

Lyndon says that until his death in 1990, Hammer "lavishly sponsored" Gore Jr.'s political career. "Hammer regularly met Al Gore Jr. for lunch or dinner on his visits to Washington," Lyndon wrote in a 1998 article for the London Sunday Telegraph. "They would often eat together in the company of Occidental's Washington lobbyists and fixers who, on Hammer's behest, hosed tens of millions of dollars in bribes and favors into the political world. Separately and together, the Gores sometimes used Hammer's luxurious private Boeing 727 for their own journeys and jaunts."

Like his father before him, Gore obtained for Hammer invitations and VIP tickets to the most rarefied Washington events, including the inaugurations of Ronald Reagan and George Bush. After Hammer's death, control of Occidental passed to Ray Irani, who has continued to support the campaigns of Gore and the Democratic Party.

Since Gore became vice president in 1992, Irani has donated more than $470,000 to the party and key members, including $100,000 after sleeping in the Lincoln bedroom.

Gore has not addressed questions about his and his family's ties to Hammer and Occidental. Last January, shortly after the Center for Public Integrity published a book, The Buying of the President 2000, which detailed the Gore-Hammer relationship, a Gore aide responded to a Knight Ridder reporter: "Decades ago, the vice president's father had a special relationship with Armand Hammer, and then he left his son some land," the anonymous aide said. "But that's the extent of it."

These days, Gore spokespersons are even more reticent. "There has been a lot of misinformation about this," says Jano Cabrera at the Gore campaign headquarters. "Gore does not own stock in Occidental Oil. ... He made a conscious decision to not invest in any stocks, to avoid the conflict of interest."

Gore's latest personal financial disclosure form, covering the year 1999, lists "Occidental Petroleum Stock (one certificate -- shares in process of transfer to trust)" with a value between $15,000 and $50,000. Another entry of Occidental Petroleum Stock is valued between $500,000 and $1 million, producing a yearly dividend of at least $15,000. (This is part of the estate of his father, who died in 1998, and is reportedly held in trust for his mother, Pauline. Gore is the executor, but his aides say he is not the trustee, although he is also his mother's sole heir.) This is not a blind trust -- its assets shielded from the beneficiary's knowledge -- which some politicians use to avoid conflicts of interest.

Cabrera, asked to elucidate the larger issues raised by Hammer's status as the fount of Gore's fortune, promised to e-mail the campaign's response but did not do so.

Perhaps Gore enjoys the spacious home, $20,000 annual stipend and tidy nest egg Hammer supplied him, and in return has merely comped Hammer and Irani the occasional party invitation. But amid the Clinton administration's policy of acquiring and setting aside millions of acres of land for parks and other public amenities, Gore's oversight of an astounding privatization scheme leaves him open to questions about his Occidental relationship.

On Feb. 5, 1998, Secretary of Energy Frederico Peña proudly announced the largest single transfer of public property into private hands in U.S. history. "This historic transaction is another example of the Clinton administration's commitment to common-sense government that works better and costs less," Peña said, parroting the mantra of the administration's "Reinventing Government" project, quarterbacked by Vice President Al Gore.

In a Washington, D.C., ceremony, Peña and Occidental Oil & Gas chief executive David Hentschel signed final papers for the sale of the United States' interest in the Elk Hills Naval Petroleum Reserve, located 35 miles west of Bakersfield, Calif., to Occidental for $3.65 billion. The property had been in government hands since President William Howard Taft created the reserve in 1912.

Elk Hills was used very sparingly for most of the century, pressed into service briefly in the 1920s and during World War II. The 1920s opening of the reserve was a scandal. The Pan-American Co. gave Interior Secretary Albert Fall $260,000 of Liberty Bonds for a lease at Elk Hills while Monmouth Oil "lent" Fall $100,000 in cash to get oil leases at a much smaller reserve in Wyoming, Teapot Dome.

Though it was argued that the leases -- awarded secretly -- were in the national interest, Fall eventually went to prison for his role in the corrupt deal.

Oil interests have coveted the fields ever since and attempted to secure leases or a sale during the Nixon, Reagan and Bush administrations. Congress each time rebuffed them.

George Horwich, a federal Energy Department official during the Carter and Reagan administrations who now teaches economics at Purdue University, says the Elk Hills sale is good policy. "Its drawdown capacity was too small to be of any real help in an emergency," he notes.

But even good policy can be administered badly. Questions linger about the unprecedented secret bidding and whether the Clinton-Gore administration sold a lucrative asset for less than it was worth.

Calculating Elk Hills' value is tricky, and estimates have varied widely.

While the government owned it, what Elk Hills did not put in the strategic reserve was sold on the open market. In March 1996, the Energy Department reported that, over the previous two decades, Elk Hills had generated nearly $10 billion in profit for the federal government.

The Clinton administration had estimated the asset's selling price at some $2.6 billion -- about four years' worth of Elk Hills' average revenues. But in 1987 -- when oil prices were low and the industry "depressed" -- Shearson Lehman Brothers estimated Elk Hills' value at $3.6 billion to $4.3 billion.

The Congressional Budget Office, or CBO, in 1995 estimated that selling the National Petroleum Reserve would cost the Treasury more than $1 billion in lost revenues by 2002. It further estimated the useful remaining life of the oil field was more than 40 years, raising the specter of billions more in forgone profits.

Putting a value on the asset was vexingly difficult because of the way the government managed it. By the mid-1990s, the government was cutting funds for the field's operation, thereby cutting production. By 1997 the reserve was pumping about 60,000 barrels per day -- a respectable number, but less than a third of its 1981 peak. During peak years the government profited by nearly $1 billion per year. By the 1990s, the typical annual profit from the operation was less than $250 million.

The Department of Energy resolved to allow five independent analysts to estimate Elk Hills' value. It took the average and set it as a floor for the bidding. It then refused to disclose analysts' documents, even after the bidding was over. DOE officials also declined to reveal the identities of the 21 other bidders for the property, or their bids, divulging only that Occidental's bid was highest "by a long shot" and "double" the minimum acceptable figure.

That puts the minimum bid at $1.8 billion -- $800 million less than the administration's 1996 estimate of the field's value.

The closed bidding was unprecedented.

Critics such as Charles Lewis, executive director of the Center for Public Integrity, admit there's no smoking gun here, just the sharp smell of burnt powder. Gore's fingerprints streak the administration's reinventing-government initiative, but the Elk Hills' deal contains mere hints of Gore direction.

One example: The DOE did not prepare the environmental-impact statement required for the sale, instead privatizing that function through ICF Kaiser, which loved the idea. One of Kaiser's directors is Tony Coelho, who served as Gore's campaign manager until July.

But if its value to taxpayers was dubious, the deal was a coup for Occidental. Elk Hills tripled Occidental's proven domestic oil reserves. On the date of sale it produced 55,000 barrels of oil and almost 400 million cubic feet of natural gas.

On news of the sale, Occidental Petroleum shares jumped 10 percent, coincidentally enriching the Gore estate by approximately $50,000.

On June 6, Irani spoke at an investment firm's "Strategic Decision Conference," bragging about the good deal he had gotten. "When we took over this operation we booked about 400 million equivalent barrels of proved reserves," Irani said, according to an account on an Occidental Internet page. "By year end 2000, we will have produced a total of 100 million equivalent barrels and proved reserves are expected to remain at 400 million equivalent barrels."

Put another way, Irani's company increased the field's production by 61 percent, to more than 90,000 barrels per day. And he said he expects that to increase another 20 percent.

By the time of Irani's speech, crude oil prices had risen to more than $30 per barrel. That increased Occidental's profits magnificently, but the same price increase led to higher prices at the pumps and higher fuel oil costs, creating difficulties for the Clinton/Gore administration -- and for Gore's presidential election bid.

"Our nation's energy resources should not be so overly reliant on others, so subject to shortages, or so vulnerable to big oil interests trampling on the public interest," Gore told a group of employees at Philadelphia's Trigen company on June 27. "We are Americans; we should plan ahead so that we can do what we have always taken as a right -- turn on our engines and get where we want to go, with nobody's permission. Our next-stage prosperity must be built on our ability to make sure Americans will be free forever from the dominance of big oil and foreign oil."

The speech came at a moment when gasoline prices in some areas of the Midwest touched $2.30 per gallon. The administration howled about oil company profiteering and ordered an investigation into price fixing, even as Energy Department administrators explained that a complex combination of factors -- including the administration's own decrees -- had led to the price spike.

Two weeks later, Clinton acted unilaterally to create the strategic heating oil reserve for the Northeast.

David Johnson directs the planning and engineering office at the Strategic Petroleum Reserve. As the person in charge of assembling the 2 million barrel heating oil reserve, he explains that the real problem facing New England today is not high oil prices, but prices that are too low. The futures market price for home heating oil delivered in December is not significantly higher than the futures market price of oil to be delivered in August, meaning the price paid to store oil until then will be hard to recoup.

"People who store, store to make money -- when the futures are down it's not worth it to them to store it," Johnson notes. "It's mostly due to OPEC's control of the market. Everyone agrees in the industry that the normal price for crude should be about $20 [a barrel]. ... When it goes to $30, production goes up."

And the futures market, anticipating a glut, goes down.

Oil distributors recognized that the government was likely going to do something to bring current prices down. Buying oil in early September seemed like a sucker's bet.

Last week national inventories of heating oil stood 48 million barrels, down from 72 million barrels a year ago, according to the Energy Department. The Energy Department says the United States uses about 19 million barrels of oil a day, 10 million of them imported.

The administration's latest effort put an immediate dent in world prices. The futures market for crude oil for November delivery fell by $1.32 cents a barrel on the New York Mercantile Exchange the day of the announcement, closing at $32.68.

The price of oil will continue to be an election issue, but Bush is in no position to criticize Gore. The oil industry mostly supports Republicans and is especially sweet on Bush. The Center for Responsive Politics' analysis of 95 political-action committees associated with oil and gas find they've given $3 million to candidates so far. Of that, just under $750,000 went to Democrats. The rest went to Republicans, a 3-to-1 split. Oil- and gas-related contributors put $1.5 million in Bush's campaign pocket as of his last filing.

So Gore has begun hammering at Bush's ties to the clubby world of "Big Oil" -- without explaining the complicated details surrounding his family's marriage to the Big Oil Maverick.

Former Orlando Weekly staff writer Edward Ericson Jr. now writes for the Hartford Advocate.

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