Purchase Price of Strategic Petroleum Reserve Oil Fair but Payment Timing Is Costly
PSAD-80-30: Published: Apr 3, 1980. Publicly Released: Apr 3, 1980.
- Full Report:
The Defense Fuel Supply Center (DFSC) is responsible for buying oil for the Strategic Petroleum Reserve. According to Department of Energy expectations, the reserve will ultimately contain 1 billion barrels of oil at a cost of $22.6 billion for the first 750 million barrels. A review was made of the cost of the 113 million barrels of oil purchased through June 30, 1979.
The prices paid were competitive with prices in commercial markets during the period reviewed. However, the Defense Logistics Agency (DLA), which pays the DFSC bills, had not complied with Department of the Treasury regulations which require federal agencies to refuse prompt payment discounts offering a rate of return below 9 percent per annum and to pay no bills sooner than due. This policy was designed to prevent agencies from accepting discounts whenever the discount offered is less than the government's cost of financing the payments. DLA continued to take the uneconomical discounts and to pay invoices before they were due because DLA officials improperly calculated the rate of return offered, erroneously believed they were required to take uneconomical discounts in certain circumstances, and did not have established procedures to deliberately forgo uneconomical discounts. Following current Treasury policies could save the government as much as $17.7 million over the remaining life of the Strategic Petroleum Reserve Program. An additional $18.5 million could be saved in crude oil costs if policies were instituted to require all agencies to consider the government's cost of money while evaluating bids and if the Treasury were to develop and periodically revise an estimate of the cost of money to be used during offer and payment evaluations.
Recommendation for Executive Action
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Recommendation: The Director of the Office of Management and Budget, in connection with the Secretaries of Defense and the Treasury and the Administrator of the General Services Administration, should (1) establish, as a matter of policy, that agencies must consider the time value of money as part of their bid evaluation procedures, and (2) establish and periodically update an index reflecting the Government's current cost of money to be used when evaluating prompt payment discounts and contract offers. The Secretary of Defense should direct the Director of DLA to establish regulations and procedures which assure that bills are not paid until due and uneconomical discounts are not taken.