<DOC> [106 Senate Hearings] [From the U.S. Government Printing Office via GPO Access] [DOCID: f:65746.wais] S. Hrg. 106-650 OVERSIGHT OF RISING OIL PRICES AND THE EFFICIENCY AND EFFECTIVENESS OF EXECUTIVE BRANCH RESPONSE--PART II ======================================================================= HEARING BEFORE THE COMMITTEE ON GOVERNMENTAL AFFAIRS UNITED STATES SENATE ONE HUNDRED SIXTH CONGRESS SECOND SESSION __________ JUNE 29, 2000 __________ Printed for the use of the Committee on Governmental Affairs _______________________________________________________________________ For sale by the Superintendent of Documents, Congressional Sales Office U.S. Government Printing Office, Washington, DC 20402 U.S. GOVERNMENT PRINTING OFFICE 65-746 cc WASHINGTON : 2000 COMMITTEE ON GOVERNMENTAL AFFAIRS FRED THOMPSON, Tennessee, Chairman WILLIAM V. ROTH, Jr., Delaware JOSEPH I. LIEBERMAN, Connecticut TED STEVENS, Alaska CARL LEVIN, Michigan SUSAN M. COLLINS, Maine DANIEL K. AKAKA, Hawaii GEORGE V. VOINOVICH, Ohio RICHARD J. DURBIN, Illinois PETE V. DOMENICI, New Mexico ROBERT G. TORRICELLI, New Jersey THAD COCHRAN, Mississippi MAX CLELAND, Georgia ARLEN SPECTER, Pennsylvania JOHN EDWARDS, North Carolina JUDD GREGG, New Hampshire Hannah S. Sistare, Staff Director and Counsel Paul R. Noe, Senior Counsel Catherine C. Walters, Legislative Assistant for Senator Voinovich Kristine I. Simmons, Staff Director, Oversight on Government Management, Restructuring and the District of Columbia Subcommittee Joyce A. Rechtschaffen, Minority Staff Director and Counsel Kenneth R. Boley, Minority Counsel Darla D. Cassell, Administrative Clerk C O N T E N T S ------ Opening statements: Page Senator Voinovich............................................ 1 Senator Lieberman............................................ 3 Senator Levin................................................ 6 Senator Akaka................................................ 15 Senator Durbin............................................... 36 Senator Domenici............................................. 42 Prepared statements: Senator Cleland.............................................. 59 WITNESSES Thursday, June 29, 2000 Hon. Robert Taft, Governor, State of Ohio........................ 8 Hon. Ernest J. Moniz, Under Secretary for Energy, Science and Environment, U.S. Department of Energy......................... 12 John Cook, Ph.D., Director, Petroleum Division, Energy Information Administration, U.S. Department of Energy.......... 16 Denise A. Bode, Vice Chairman, Oklahoma Corporation Commission... 18 Robert Perciasepe, Assistant Administrator, Office of Air and Radiation, U.S. Environmental Protection Agency................ 27 Phyllis Apelbaum, Owner, Arrow Messenger Service................. 34 Hon. Richard Blumenthal, Attorney General, State of Connecticut.. 37 J. Louis Frank, President, Marathon Ashland Petroleum, LLC....... 39 Red Cavaney, President and Chief Executive Officer, American Petroleum Institute............................................ 45 Alphabetical List of Witnesses Apelbaum, Phyllis: Testimony.................................................... 34 Prepared statement........................................... 110 Blumenthal, Hon. Richard: Testimony.................................................... 37 Prepared statement........................................... 113 Bode, Denise A.: Testimony.................................................... 18 Prepared statement........................................... 96 Cavaney, Red: Testimony.................................................... 45 Prepared statement........................................... 270 Cook, John: Testimony.................................................... 16 Prepared statement with attachments.......................... 89 Frank, J. Louis: Testimony.................................................... 39 Prepared statement with attachments.......................... 120 Moniz, Hon. Ernest J.: Testimony.................................................... 12 Prepared statement........................................... 67 Perciasepe, Robert: Testimony.................................................... 27 Prepared statement........................................... 101 Taft, Hon. Robert: Testimony.................................................... 8 Prepared statement........................................... 60 Appendix Prepared statements from: Hon. Evan Bayh, a U.S. Senator from the State of Indiana..... 283 Steven R. Smith, President, National Rural Letter Carriers' Association................................................ 286 Chart referred to by Senator Levin............................... 289 Copy of Corporate Scoreboard..................................... 290 OVERSIGHT OF RISING OIL PRICES AND THE EFFICIENCY AND EFFECTIVENESS OF EXECUTIVE BRANCH RESPONSE--PART II ---------- THURSDAY, JUNE 29, 2000 U.S. Senate, Committee on Governmental Affairs, Washington, DC. The Committee met, pursuant to notice, at 1 p.m., in room SD-342, Dirksen Senate Office Building, Hon. George Voinovich presiding. Present: Senators Voinovich, Domenici, Lieberman, Levin, Akaka, Durbin, and Cleland. OPENING STATEMENT OF SENATOR VOINOVICH Senator Voinovich. The Committee will please come to order. I want to welcome all of you this afternoon. Two weeks ago, I asked the Committee Chairman, Senator Thompson and Ranking Member Senator Lieberman, to conduct a hearing on the subject of the high price of gasoline. I am pleased that they responded positively, and I appreciate Senator Thompson's willingness to allow me to Chair this hearing of the Committee on Governmental Affairs. Today's hearing is the second that this Committee has held to look into the high cost of gasoline in our Nation. This Committee held its first gas price hearing on March 24, and we were assured that things would get better. Unfortunately, they have not. Ladies and gentlemen, today you cannot pick up a newspaper or turn on a television without reading or hearing about the high price of gasoline. People are mad, and I don't blame them. They are angry because the increase is affecting them where it hurts: Right in their pocketbook. Last year at this time, the prices we are experiencing today would have been considered inconceivable by most Americans. One year ago, the national average for a gallon of regular unleaded gas was about $1.15, according to the American Automobile Association. The last time I filled up in Ohio it was $1.94. Today the national average for gasoline in the country is $1.65, which is 50 cents more than a year ago. But nowhere has the price increase been so dramatic than in the Midwest where gas prices have skyrocketed in the last 4 weeks. Earlier this month, prices in Ohio and other parts of the Midwest increased by as much as 30 or 40 cents in a matter of hours. Prices in many cities and States went over the $2 mark for a gallon of gas, setting all-time high price records. In my county, Cuyahoga, just 10 days ago we were hovering at the $2 a gallon mark with prices averaging $1.98 a gallon. Although there are signs that prices are dropping, this is of little consolation to families, particularly in the Midwest, where the prices are so high. Prices in most major cities in the Midwest are well above the national average of $1.65, and $2 a gallon and higher are still prevalent in many areas. The kind of gas price increase we have seen lately does more than just raise eyebrows. Do you know what it does? It raises questions, significant questions. Politicians, analysts, business owners are busy pointing to a whole host of reasons for the recent hikes: Alleged collusion among oil companies who have sent crude oil prices through the roof, lack of domestic production, reformulated gasoline, alleged price gouging and collusion by the oil companies, economics and the law of supply and demand, pipeline and other transportation problems. You name it. Frankly, most people I talk to don't care what the reason is, and they are getting tired of the finger-pointing. What most people want to know, including this Senator, is: When are we going to see the prices go down? And what are we going to do as a Nation to make sure that we don't end up in the same predicament we find ourselves 5 years from now? Most people that have been around as long as I have remember the Arab oil embargo in 1973, and when costs went up, gas shortages were everywhere, and people sat in long lines. At that time the United States only relied on 35 percent foreign oil to meet our domestic needs. Today our reliance on foreign oil averages 56 percent, and in some months out of the year, it reaches 62 percent reliance. The American people want to know why hasn't something been done in the last 27 years to reduce our dependence on foreign oil. All too often in government when a problem comes up, we have a tendency to treat it like a barking dog. You know, give it a bone, a little attention to make it stop barking, and when it stops barking, ignore it until it starts barking again. And that is what we have done in terms of the price of gasoline in our energy policy in this Nation. Such neglectful treatment of such a vital component of our Nation's economy is unconscionable, and the major part of the problem that I see in this regard is the lack of an energy policy by this administration. And I am not even going to point the finger at this administration because that has been happening. It can be pointed at administrations since 1973 who have not developed an energy policy. And, quite frankly, and I don't want to make my colleagues feel uncomfortable, but I think the Congress has also not done the job that we are supposed to be doing in terms of developing an energy policy. One of the things that I am hopeful for is that on a bipartisan basis, we can develop some kind of an energy policy between now and the end of the year. There are a lot of good ideas. I have been on the Leader of the Senate, Senator Trent Lott, and Senator Frank Murkowski, to get a bill that they put together on the floor to be debated and discussed. And if we lose this opportunity and let it go and wait until next year, I think that we may find ourselves back in the same position we are in today, and that is, no energy policy. I recall at our hearing in March, we had David Goldwyn, who is the Assistant Secretary of Energy, and I asked him what this Nation's dependence on foreign oil should be. I asked him: Should it be 45 percent? Should it be 50 percent? He couldn't give me an answer. We need answers. I am an old governor, and I am glad that my successor, Governor Taft, is here today. But if we had a problem like this in Ohio, what we would do is sit down and say we have got to figure out how much we should be dependent on foreign oil, set a number. We would then develop a strategy identifying all the things that we would want to do in order to make sure that we reached the number, and then we would start the plan and monitor it and, of course, set a date when we expected to reach the goal. I mean, that is the logical thing to do, and I think that is what we need to do here in the Congress, and I think that we need to do that with the administration. I have a lot of other comments I would like to make, but we have a wonderful group of witnesses here today. I guess the last thing I will say is that I bet you that the witnesses here today that we have--if they got in a room and we locked them up for a couple of weeks, they could come back with a darn good energy policy for the United States of America. And so often we have witnesses that come before us, and they depend on us to do the job. And I have found that if you get the people who really know what it is about in a room and get them in the mood where they are willing to compromise with each other, they can do a whole lot better job of coming up with a solution than those of us sitting behind this table. So, without further words, I would like to hear from Senator Lieberman. OPENING STATEMENT OF SENATOR LIEBERMAN Senator Lieberman. Thanks, Mr. Chairman, and I would like to second your motion that we lock the witnesses up in a room. [Laughter.] I think that probably would have a good result on the problem. Senator Levin. Both parts of the motion or just the first part? Senator Lieberman. Both parts. Senator Levin. We can let them out afterwards. Senator Lieberman. We will let them out. Mr. Chairman, thanks so much for your initiative which has resulted in the convening of this very timely hearing. I am glad to join you today in trying to get to the bottom of this problem of skyrocketing oil prices that is so palpably frustrating and angering consumers in our country today as it has every now and then for years. As you said, every now and then the dog barks. I remember that oversight hearing in March that you talked about. At that time one of the witnesses told us that low inventories being kept by the oil companies might drive the cost of gasoline over $2 a gallon at the pump this summer, and I think we were incredulous about that prediction. But here we are 3 months later, and as you indicated, people in Chicago have been paying a whopping $2.13 a gallon to fill their tanks. In Milwaukee, the price has reached $2.02 a gallon. And even outside the particularly hard-hit areas, the price has reached $1.87 a gallon in my own State of Connecticut, and all these prices are for regular self-service unleaded. The American people clearly want to know why is this happening, who is to blame, and what can we do to make it better and have it not happen again? And we are holding this hearing because we on this Committee have exactly those same questions. I would like to just offer a few comments of my reaction to the problem, and then I look forward to hearing the witnesses. It seems to me to begin with that OPEC manipulates the price and production of oil with no consideration for the consumer. And then American oil companies and international oil companies keep their inventories low, apparently hoping that the price of crude oil will drop before they have to buy more to refine. As you know, there have been questions raised, Mr. Chairman, about price gouging along this line. And then, finally, as you said in your very strong and independent statement, as a Nation we are still too dependent on a source of energy--oil, fossil fuel--that we don't control. For me, the most infuriating factor is the behavior of OPEC. The member countries proudly call themselves a cartel. They collude and act anti-competitively. Their action in holding supply down has brought the price of crude oil per barrel up over $30 and kept it there, even though the consensus that I hear and read from experts is that that price should be fairly set, not only in the interest of the consumer but of the producer nations, in the vicinity of $20, perhaps $22 a barrel. The practices of OPEC should be illegal under the Sherman Antitrust Act. The fact is that if businesses in the United States acted in this way, it would be illegal. But because OPEC members have the protection of the Foreign Sovereign Immunity Act, they do not face a price-fixing case in the United States, although they are obviously very active here and are deriving billions of dollars of income from American consumers and businesses. I think it is worth reaching a bit here to try to test this proposition, and maybe this is one of the expressions of globalization. We are a global economy, and what happens elsewhere in the world affects us just as what we do here affects people elsewhere in the world. And I have been taken by the arguments of our colleagues Senators DeWine and Kohl who are sponsoring a bill that would subject OPEC to American antitrust laws and remove from them this shield of sovereign immunity when they are acting as they are with extraordinary impact on our economy as a business selling a precious commodity to the United States. It is called the ``No Oil- Producing and Exporting Cartels Act,''--NOPEC--and I have joined as a cosponsor on that bill. I also want to express my concern that there are some in the oil business who are taking advantage of the current situation to exact an even higher price at the pump than the increasing crude oil price that OPEC is charging and market forces support. Obviously we all want to know whether part of the reason the gas price increased results from the oil companies' padding their profits while hoping that inflated pump price will be blamed either on OPEC or on market conditions generally. As you know, Mr. Chairman, the Federal Trade Commission is investigating whether the oil companies have colluded to keep prices high in the Midwest. A group of us Senators from the Northeast have asked the commission now to extend its investigation to cover the rest of the country and to look at the reasons for the price increases, which might include price gouging. We have also called on the administration to better utilize the Strategic Petroleum Reserve in cases of what we consider to be unnatural, artificial reductions of supply and to put some of that almost 600 million barrels of crude that we own, that we have in our possession in the Strategic Petroleum Reserve, out into the market to begin to increase supply, reduce prices, and at least show OPEC that we are not helpless. Finally--and this goes to what you said, Mr. Chairman--I think we come back to part of this problem being us and our ever-increasing demand for energy without regard to the concerns that we have had at different times of our history since the early 1970's and the oil boycott for, one, more efficient use of fuel and energy and, two, a very aggressive partnership between the Federal Government, State governments, and the private sector to develop alternative sources of energy that are more within our control and that are renewable. At that hearing that I referred too, and that you did, too, in March, the Chairman of the President's Committee of Advisers on Science and Technology, Dr. John Holdren, gave what to me was some very impressive testimony about the promise of simple energy conservation, about doing what we used to do in this country, which is to conserve, to be a bit thrifty in the use of our resources. And he noted that if we in the United States increased our energy consumption efficiency by just 2.2 percent per year, it would reduce our dependence on oil by more than 50 percent, which is worth about 5.5 million barrels of oil a day. It seems to me that this is a goal that is within our reach. It is not unrealistic. The United States actually decreased our energy consumption by 1.7 percent between 1972 and 1979, which were the years surrounding the Arab oil boycott, and by 3.2 percent, believe it or not, between 1979 and 1982. So we can do it. I join you, Mr. Chairman, in seeing this moment of artificially reduced oil supply and outrageously but real rising prices as the time at which we should hear the bell tolling or, to use your reference, the dog barking, to think aggressively about the future health and security of our Nation and, as a result, to enact a progressive, new, comprehensive energy policy for our country. I think you have assembled a wonderful group of witnesses. I thank you for, on the second panel, calling the attorney general of my home State, Dick Blumenthal, who has been active in this area, and I look forward to the witnesses' testimony. Thank you very much. Senator Voinovich. Thank you. Senator Levin. OPENING STATEMENT OF SENATOR LEVIN Senator Levin. Mr. Chairman, thank you, and thank you for your initiative and your commitment to this issue. I have been trying to get answers to the cause or causes of skyrocketing prices in my home State of Michigan for many, many weeks. Many explanations have been offered for the incredible spike in gasoline prices, everything from the effect of reformulated gas to rising demand, to short supply, to the fact that the hurricane season makes the petroleum companies nervous because many of the refineries are located on the coast. But none of those explanations explain the 70- to 80-cents- per-gallon increase that we have experienced in Michigan over a 7-week period. Gas prices went to $2.07 statewide. On June 19, that was a statewide average increase of 70 cents per gallon. In Detroit, prices went up to $2.14 cents in the same 7-week period. That is an 80-cents-per-gallon increase in price. Those increases in prices are double the price hike experienced in other parts of the country, as can be seen on that chart.\1\ --------------------------------------------------------------------------- \1\ The chart referred to appears in the Appendix on page 289. --------------------------------------------------------------------------- The United States and Michigan prices generally stayed together until that point in May, and all of a sudden, Michigan, like other Midwestern States, was given that dose of price increase that is reflected on that chart. So we have got to fight back on behalf of our constituents to roll back these extreme gas price increases, and the fight has got to be waged both short term and long term. The Chairman has gone through some of the justifications which have been given which just don't hold water or don't hold gas. One excuse given for the gas price increase was reformulated gas, but Michigan doesn't have the reformulated gas requirement. We have heard about low inventories, but the Midwest's low inventories are not much different from low inventories elsewhere. High crude oil prices have been cited, but those increases have been nowhere near as steep as retail price increases in the Midwest. Two pipelines and their operational difficulties have been cited, but that doesn't wash either. The rupture of one had minimal effect on supply. The rupture of the other came after the big increase began, and in any event, the increase after the pipeline break in the second case remained about the same as in those Midwest States that were not dependent on that pipeline. So you have got to look at other factors, including price gouging and the possibility that oil companies are engaging in anticompetitive conduct, for instance, by refusing to deliver supply to certain independent gas dealers. The issue is the issue that our Chairman has indicated. What will it take to get these prices down? I think it would help to release more oil from the Strategic Petroleum Reserve, which the President has authority to use, to assist in relieving economic problems, and here I am quoting from the legislative history of the most recent reauthorization, where economic problems ``are directly related to a significant increase in the price of petroleum products.'' Well, we are seeing major economic impacts from these price hikes. The investigation of the Federal Trade Commission that is now underway has been helpful already. Just the announcement of the investigation was followed by a significant wholesale price drop. I don't think that is a coincidence. In the long term, we need to reduce our dependence on oil. We should enact greater tax incentives to encourage consumers to purchase cars, homes, and consumer products which run on alternative energies. We should increase Federal investments in renewable energy and natural gas programs. And, by the way, our Chairman is absolutely right. Congress here is also carrying some responsibility. This is not just something where we can point fingers to others. We have responsibility in this area. Over the past 7 years, Congress has supported only 12 percent of the administration's proposed increases for energy programs, such as Federal investment in efficient technologies for our factories and homes, weatherization of low-income households, technologies to produce biofuels and power from biomass, and in the case of the Partnership for a New Generation of Vehicles, which is a partnership between government and the automobile manufacturers, in order to produce energy-efficient automobiles, a new class of vehicles with up to 80 miles per gallon without sacrificing affordability or utility or safety or comfort. Just 2 weeks ago, the House cut the Department of Energy's budget for the PNGV so drastically that it would gut that partnership. So we do have responsibilities as a Congress, and we can't just point our fingers at others, although it is important that we hold others accountable as well. But the constituents are really being hit hard. Our citizens, our consumers, are going to have to pay $160 to $170 more for gas this season--the small gas station owner has to get family members to work because he can't afford to pay employees, the motel owner who has got to put the vacancy sign out because people don't want to travel and pay high gas prices, the trucking companies struggling to cover fuel costs, recreational vehicle dealers and users who are losing sales and unable to use their vehicles, farmers whose income may be reduced by a third because of high gas prices. So I want to commend our Chairman for his leadership in this area. It is a critically important area to find out not only why, but to force action to reduce these prices. Senator Voinovich. Thank you, Senator Levin. I also remind the Senator that one thing Congress did do is give the opportunity for more oil exploration to this administration, and that legislation was vetoed. And I think that is one of the things that needs to be talked about in terms of our overall energy policy. We are concentrating on some of these other things, but I think that to ignore that aspect of it that we should be more reliant on our own domestic supply is something that needs to be dealt with straightforward during this discussion of an energy policy. I am pleased to welcome my good friend, the distinguished Governor of Ohio Bob Taft, here today with us, who is going to give us the Midwest perspective on the very serious effects of rising gasoline prices. Governor Taft is a man of great courage. He was pushed by his legislature to eliminate the gas tax in the State of Ohio, and he did not do so, understanding that that money is necessary to maintain our roads in the State of Ohio and to do the new construction work that is necessary. I think that was a courageous action on your part, Governor. We also have with us the Hon. Ernest J. Moniz, Under Secretary of Energy, Science, and Environment in the U.S. Department of Energy; Dr. John Cook, Director of the Petroleum Division of the Energy Information Administration; and Denise A. Bode, Oklahoma Corporation Commissioner. We would like to welcome all of you here today, and, Governor Taft, we are going to call on you first. I understand that you have got to make a plane, and so we are going to let you go forward. And, Senator Levin, if you would like to ask Governor Taft a question or two after his testimony, you will be welcome to do that. Governor Taft. TESTIMONY OF HON. ROBERT TAFT,\1\ GOVERNOR, STATE OF OHIO Governor Taft. Thank you, Mr. Chairman, and good afternoon. I am very grateful for this chance to testify today on a subject that has the attention of motorists and consumers in Ohio and throughout the Nation. We are here today because gasoline prices affect everybody, not just the motorists at the pump, and I commend you for holding today's hearing. --------------------------------------------------------------------------- \1\ The prepared statement of Governor Taft appears in the Appendix on page 60. --------------------------------------------------------------------------- Recent severe increases in gasoline prices in my State are, to say the least, baffling. In Ohio, the price of regular gasoline is up approximately 16 percent, from $1.55 last month to $1.80 today, and, more troubling, up over 50 percent from a year ago, when a gallon of regular gasoline was selling at $1.15. The price of gasoline in Ohio is currently 5 percent above the national average. Our citizens are demanding, if not complete answers, at least some rational justification for this dramatic price increase. Every day I hear from people throughout Ohio about the burdens of this price increase. I hear from senior citizens on fixed incomes, like Robert York of Centerville, Ohio, who wrote to me that because gas is so expensive, he is forced to choose between going to the doctor, traveling to the grocery store, or attending church on Sunday. I have also heard from Cheryl Dolin in Carroll County, a single mom making $6.50 per hour. For Cheryl, a 50 percent increase in gasoline prices has placed a tremendous burden on an already stretched household budget. The impact of increased fuel prices on our transportation and business sector is equally dramatic. Just last week, I heard from Kevin Burch, the president of Jet Express Trucking in Dayton. His company uses about 4 million gallons of diesel fuel a year. If diesel prices stay at current levels, Jet Express Trucking will pay about $1.8 million in higher fuel costs this year. These are real dollars to a small business that already operates at close margins. Ohio roadways carry the fourth largest volume of freight traffic of any State in the Nation. We provide critical transportation links east to west, north to south. Interstate 75, which runs from Toledo to Cincinnati, carries $25 billion worth of goods each year by itself. So these unexplained price increases are not only penalizing Ohioans, they are also negatively affecting the Nation's ability to move goods from one destination to another. I recognize that motor fuel production and distribution are very complex processes influenced by a host of factors, and the most fundamental fact is that ours is a Nation increasingly dependent on petroleum-based energy. Crude oil prices have almost tripled since January 1999, and for a Nation that imports 55 to 60 percent of its crude oil and even imports some refined products, the impact of foreign price hikes has been significant. The Congressional Research Service reports a number of other factors affecting price increases to some extent, and I salute your efforts to examine the factors that have contributed to higher gasoline prices at the pump. I think it is equally important, however, to recognize that the underlying realities that affect our gas prices also pose a threat to our Nation's future prosperity. The most fundamental reality is this: For a Nation with an economy that is so heavily dependent on oil, we have no coherent energy policy to reduce our dependence on foreign oil or to lessen our vulnerability to rapidly escalating price spikes like this one. This fundamental failing exposes the fragility of our Nation's economic and national security, and it is compounded by the lack of a sensible, coordinated approach to environmental policy at the Federal level. I commend the Congress for rededicating itself to the task of devising a comprehensive energy policy for the United States, and I hope that the President and the administration will join you in that effort. I commend Majority Leader Lott, Chairman Murkowski, and others for introducing S. 2557, which provides a useful framework to begin work on a truly comprehensive national energy policy. We must also develop a sensible national environmental policy in a manner that complements our energy policy. You, Mr. Chairman, and also Senator Breaux and others deserve enormous credit for introducing the Air Quality Standard Improvement Act, which will provide a common-sense approach to new regulations under the Clean Air Act, while at the same time increasing public health, safety, and environmental protection. This bill comes in response to the current administration's disturbing history of issuing environmental regulations without adequately identifying risks to health and with no consideration of costs and benefits. Mr. Chairman, as I said earlier, governors across the Midwest are concerned about high gasoline prices. A number of citizens have suggested adjusting Federal and State fuel taxes to ease the pinch of rising pump prices. As you point out, I have opposed the suspension or elimination of the Federal gas tax because it is a dedicated user fee that generates needed revenues for highway safety, construction, and maintenance. Ohio maintains the fifth largest system of roadways, the fourth largest in freight volume, the fourth largest in traffic volume, and the second largest inventory of bridges in the Nation, and we need to maintain that system. Our strategy also relies on revenues from the dedicated fuel tax which Congress devoted solely to transportation purposes under TEA-21. I want to briefly, in conclusion, advise the Committee of our very serious concerns related to ethanol consumption that I have discussed on several occasions with the Chairman. We support the environmental contributions made by ethanol, and we support the continued use of this fuel. But we have become aware, as you have as well, that the funding formula adopted under TEA-21 is determined in large part by our contributions to the Highway Trust Fund. And because we utilize ethanol- blended gasoline, we suffer significantly because of the 5.4- cent-per-gallon Federal tax break on each gallon of ethanol- blended gasoline sold and the fact that 3.1 cents of the tax is credited to the general revenue funds and not the Highway Trust Fund. That means that we are losing 8.5 cents for each gallon of ethanol-blended fuel sold in Ohio, a total decrease to our State's trust fund contributions of $185 million annually. So this is a problem which we are very pleased that the Chairman is addressing, and we hope your colleagues will join you in that effort. Mr. Chairman, thank you for the opportunity to appear today, and I would be glad to answer any questions you or the Committee may have. Senator Voinovich. Thank you, Governor Taft. I am glad that you raised the issue of the loss of revenue to States like Ohio because of our significant consumption of ethanol. And one of the things that I think needs to be looked at when we are putting an energy policy together is a method to take care of that situation, perhaps taking the taxes that are generated, instead of them going into the general fund, have them go into the Highway Trust Fund. Governor Taft. That would be excellent. Senator Voinovich. I think the other thing that is important that you mentioned today, and so often people forget about it, is that Governor Taft just recently announced that our last area of the State of Ohio achieved the ambient air standards. Frankly, governor, they had achieved that status before I left the governor's office, but it has taken the EPA that long to give them the status. Governor Taft. Right. Senator Voinovich. And so the entire State today is reaching ambient air standards, and one of the reasons why is because we have emission testing in Ohio. We didn't go for reformulated gasoline. And most Ohioans are not aware that if the Supreme Court does not agree with the lower court's decision in the issue of new ambient air standards for ozone and particulate matter, then all of the major 26 areas in Ohio are going to go into nonattainment, which means that we may have to go to reformulated gasoline and many other things in terms of businesses adding great expense in order to meet those new standards. Again, it was recently announced that the oil companies are going to have to remove sulfur from gasoline, and everyone applauded that as a great environmental effort. But no one has paid attention to the fact--and we will have some witnesses later--that I think it is going to add 6 or 7 cents to the cost of gasoline. So, too often, what we do is we pass these things and don't really pay attention to the fact that ultimately somebody has to pay for it, and there is a balance between our environmental concerns and our costs and our economy. So I think those are things that too often get lost here in Washington. I would just be interested--I know you are concerned about the State, and you have heard it all, the pipelines and so forth. Governor, do you have any ideas on what you would do to take care of this problem immediately, to get the cost down? Governor Taft. I appreciate that question, Mr. Chairman. As you pointed out, we do not use reformulated gasoline in Ohio, which makes it even more difficult to understand the causes and the reasons. But certainly I would say we need to develop a policy that reduces our dependence on imported oil from the OPEC countries. We are concerned for our economy in the State of Ohio. We are very dependent on oil, obviously, our consumers as well as our business economy, and we believe that the Congress needs to take the lead with the administration in developing a comprehensive energy policy that is also consistent with the environmental policy that focuses on increasing our domestic energy supplies. And there are a number of opportunities to do so, and some of those are contained in S. 2557, which Senator Lott has introduced. But in addition to that, obviously greater energy efficiency--and we are working on that in Ohio. In fact, we are experimenting with soy diesel in our Ohio Department of Transportation vehicles to see if that is a good alternative to reducing our dependence on imported oil in the State of Ohio. We also need to seek, obviously, alternatives to petroleum as well. And I would support any efforts on the part of the administration to press the OPEC countries to put more oil on the market. That is certainly the most immediate solution that would help us in Ohio. But I believe we also need to address the long-term viewpoint as well. That is just as important. Senator Voinovich. I would like to make a suggestion to you. Governors of this country are very, very concerned about this issue. People forget about that the economic engines of America are in our States, and your policies have a lot to do with how competitive your State will be. It would be interesting if you might ask the National Governors' Association to put a little group together to look at this issue and come back to us with some of their recommendations on how they think that we can do a better job. Governor Taft. That is an excellent idea, and we will be meeting in a couple weeks at the National Governors' Association, and I will take that idea forward. Senator Voinovich. Perhaps maybe a special task force that might work with Congress on this issue, because we are going to need support for this. Too often, these things come to the floor of Congress, and we don't get the kind of support that we need from our brothers and sisters out in the State and local government. That might be a real positive thing that you can do for us. Governor Taft. That is an excellent idea, Mr. Chairman. Senator Voinovich. Thanks very much. I know you have to leave, and we really appreciate your coming from Ohio to be with us today. Governor Taft. Thank you very much. Thank you. Senator Voinovich. I would now like to call on the Hon. Ernest Moniz, Under Secretary, U.S. Department of Energy. Mr. Moniz, we are very happy for you to be here. I am sure that all of you at the Department of Energy are getting tired of going to all these hearings, and we are grateful for your input, and hopefully after this is all over with we will have enough information where we can start to do some things that are going to make a difference. TESTIMONY OF HON. ERNEST J. MONIZ,\1\ UNDER SECRETARY FOR ENERGY, SCIENCE AND ENVIRONMENT, U.S. DEPARTMENT OF ENERGY Mr. Moniz. Mr. Chairman, we certainly have had a number of hearings, but this is a very important issue and we certainly are willing and happy to support you and other Members as often as you need to help us solve this problem together. --------------------------------------------------------------------------- \1\ The prepared statement of Mr. Moniz appears in the Appendix on page 67. --------------------------------------------------------------------------- We do appreciate the opportunity, in fact, to come and discuss once again our energy policy and, of course, also to hear your suggestion for incarceration. I hope you have a nice location in mind for our being locked into a room for the policy development. The fundamental importance of energy to the Nation's economic and environmental health has warranted investments by the administration in a set of policies and a portfolio of technologies to produce more energy, to use energy more efficiently, to reduce impacts on the environment, to develop alternative sources of supplies, and to provide incentives for private sector advancement towards these goals. The administration's core principles in energy policy really are two: First, market forces are the best means of informing supply and demand and getting the most for the American consumer; and, second, environmental stewardship and abundant, affordable energy are quite compatible. Our commitment to these principles has contributed, in fact, to the longest period of sustained economic growth in modern times, while leading to significant progress in a number of environmental indicators. The reliance on free markets as the cornerstone of our energy and oil policy is a bipartisan view. It has been expressed over and over again in the last 20 years as the Congress and the Executive Branch have systematically removed the Federal Government's authorities to control oil prices or allocate supply. Generally with the exception of emergency authorities, the Congress has taken the government out of the equation and committed us to the free market principles of supply and demand. It is in this context that I would like to discuss briefly the current problems in the gasoline market and the major features of the Clinton-Gore energy policy. For the third quarter of this year, there will be 3.5 million more barrels of oil per day on the market than in March. Production, however, is still being outpaced by near historic demand levels and the need to rebuild stocks for the winter heating season. Oil prices remain high and refinery inventories are low. These are the fundamental reasons for high gasoline prices. It is in this context that we have been reviewing the gasoline supply situation, particularly in the Midwest, where you and other Members have clearly stated what is obviously a major problem. I would note that DOE performs gasoline supply assessments to inform the EPA's waiver process for cleaner gasoline as opposed to performing any specific price analysis. The situation, particularly in the Milwaukee-Chicago area, where gasoline prices are the highest in the Nation, is affected by the overall high price of crude, but also by other factors: Higher regional demand than the national average, low inventories in the region, distribution problems with pipelines and refineries, high regional refinery utilization rates, and an RFG formulation specific to the area that is more difficult to produce. These supply issues will affect the price of RFG Phase II and conventional gasoline, but the degree to which they contribute to price spikes is not yet known. Because the supplies in the area are tight but adequate, because the differential between RFG Phase II and conventional gasoline was so large--up to 48 cents at one point--and because DOE was not convinced that the factors I just listed were sufficient to explain this differential, DOE and EPA referred this matter to the FTC, the appropriate agency to review specific pricing issues. And it is my understanding that the FTC will issue an interim report on this matter in July. Let me now summarize some elements of the administration's energy policy. Through policy choices and investments, the administration seeks to address in particular four major challenges: Maintaining America's energy security in global markets, harnessing the forces of competition in restructured energy markets, mitigating the environmental impacts of energy use, and ensuring a diverse, reliable, and affordable set of energy sources for the future. While I discuss each of these challenges in detail in my written testimony, I will focus here only on the first: Maintaining our energy security. To address this challenge and reduce net imports, the administration has supported or proposed measures to spur domestic oil and gas production, address the generally high U.S. oil production costs relative to other regions of the world through advanced technologies, ensure that we are not overly reliant on imports from a single region of the world, encourage the world to develop its oil resources and increase world productive capacity, increase the size of the SPRO, provide tax incentives for the expensing of geological and geophysical costs and delay rental payments, provide deep-water royalty relief, simplify royalty collection on public lands, and promote the creation of a guaranteed loan program for small domestic oil and gas producers. Very importantly, we can also reduce net imports by focusing on the demand side of the oil equation. Two-thirds of our oil is used in transportation, so in the spirit of Willie Sutton's dictum, that is where we should look for demand-side relief. Increasing the average fuel efficiency of America's automobiles by just 3 miles per gallon would save us over 1 million barrels a day. This is why we have invested, for example, heavily in R&D on more fuel-efficient cars. Our PNGV program, Partnership for a New Generation of Vehicles, has a goal of developing an 80-mile-per-gallon prototype automobile by 2004. This focus is even sharper when we look ahead to world oil demand in this sector. For example, take China alone. Projected economic growth in China has led to the prediction that they will add about 150 to 180 million vehicles on the road in the next 20 years, an enormous, again, additional demand-side draw. In addition to technology development, therefore, the administration is also proposing tax credits to spur introduction of such advanced clean and efficient vehicles. These actions are good for the environment, good for energy security, and good for helping position American industry for a major export market. The administration is proud of its record on energy policy and the demonstrable results in contributing to economic growth and environmental stewardship. Nevertheless, the volatility in prices is clearly leading to significant problems for Americans, certainly in the Midwest, and we remain very concerned about high gas prices and are doing all that we can to address this issue within the authorities given to us by Congress. The Secretary has called on the Congress to work with us in a bipartisan fashion to pass legislation to enhance our national energy security, including extension of EPCA, which expired on March 31, establishment of a regional home heating oil reserve, additional tax incentives for domestic oil and gas production, renewable energy and increased efficiency, comprehensive electricity restructuring, replenishment of emergency LIHEAP funds, and funding of energy R&D to reduce demand, increase domestic supply, produce cleaner energy, and develop alternative sources. In fact, I would note, as Senator Levin did, that the House voted to cut $126 million from the PNGV and $45 million from the Department's Fossil Energy Program. As noted in my testimony, these programs support essential energy security goals on both the demand and supply sides. We appreciate the Senate's support of these R&D programs. They, together with our efficiency and renewable programs, have never been more important than they are today for meeting energy and environmental goals simultaneously. We urge the Congress to pass these proposals, and if we are going to meet the Nation's energy needs in the 21st Century, as you well know, we have neither the time nor the energy to waste. Thank you, Mr. Chairman. Senator Voinovich. Thank you. I am really glad to hear what you had to say today, but I can't help but thinking back to February 16, when gas prices were in the midst of their march upward, that the secretary of your agency said, ``The Federal Government was not prepared; we were caught napping; we got complacent.'' And in all due respect, I think some of the things you have talked about today are very, very worthwhile and we should study them and incorporate them into an energy policy for our Nation. The question you have to ask is: Why didn't we do this 6 or 7 years ago? And I think it just underscores the administration's responsibility to try and work with Congress between now and the end of the year to participate in a bipartisan way of putting some policy together that we can be supportive of. You mentioned the issue of exploration--there has been one initiative after another that has been shot down because of pressure on the administration not to do these things. And, again, ANWR, for example, we have been up in Prudhoe Bay, the technology has increased, but these become symbols of, well, we are not going to do that, this is going to hurt the environment. But we never talk about the other side of it, that right now it is hurting the people at the gas pump. It could have been done 5 years ago, 6 years ago, and that oil could be flowing today in this country. We never talk about the fact that when we talk about some of these environmental things about the defense of our Nation and the vulnerability that we are. The man that was here before you mentioned 65 percent reliance on foreign oil by the year 2020. We have a serious problem here, and I think we need to talk about it, and we need to balance out the environmental concerns that we have in this country with the economic and with the national security interests. Mr. Moniz. Shall I respond later on? Senator Voinovich. Pardon me. Senator Akaka is here. Senator, would you like to make a statement or would you rather hear the witnesses and then ask questions? Senator Akaka. Well, I would like to make a statement. OPENING STATEMENT OF SENATOR AKAKA Senator Akaka. Mr. Chairman, I want to thank you very much for holding this hearing. It is not only important to us but important to the Nation, and what we have been experiencing has been something that is extraordinary, I would say. I want you to know about how we feel in Hawaii. Let me tell you that for most of the 1990's, the average Honolulu price based on a weekly survey hovered roughly 25 cents to 50 cents above the national average. And in June 1999, only 1 year ago, Hawaii's $1.51 per gallon was ranked above Oregon's $1.44 and the national average of $1.14. As late as last month, according to Automobile Association of America, Hawaii topped the Nation with an average per gallon of $1.85 compared to the next highest State, Nevada, at $1.67 and the U.S. average of $1.51. Now, this month, according to AAA, Hawaii ranked fourth highest, with an average price for regular unleaded of $1.86. That fell below Illinois with an average of $1.98, Michigan at $1.96, and Wisconsin at $1.91. Still, Hawaii's average price is well above the U.S. average of $1.63, and it is no pleasure for me to say that Hawaii has lost its dubious distinction as the State with the Nation's highest gasoline prices. The pocketbooks of Americans are hurting all over the country, and that is what we are addressing at this time. Mr. Chairman, I am pleased that you called this hearing, as I said, and we must know why a region of the country was hit with such high price spikes in such a dramatic manner. We must not let this happen again to the Midwest or any other region of the country. The rise in gasoline prices hits Americans in an extremely uneven manner. Those who can afford it the least are affected the most. Our import dependence has been rising for the past two decades. The combination of lower domestic production and increased demand has led to imports making up a larger share of total oil consumed in the United States. We all understand that there is no overnight solution to America's energy problems. We can't turn this trend around overnight. Tax repeals and other such short-term actions may appear appealing given the political climate and may even help American pocketbooks in the short run. But they do not provide a solution for our energy problem. For me, the only way to reverse our energy problem is to have a multifaceted energy strategy and remain committed to that strategy. In my judgment, Mr. Chairman, you need both of these in equal portions, and this, I think, would send a clear message to OPEC and their partners about America's resolve. I am so happy you are having this hearing, Mr. Chairman, and I thank you for it, and I want to hear the witnesses. Thank you. Senator Voinovich. Thank you, Senator Akaka. Our next witness is Dr. John Cook, Director of the Petroleum Division of the Energy Information Administration. Dr. Cook, I want to say that the work that your organization has done has just been terrific, and it has been very helpful to me and, I know, other Members of the Congress. We thank you very much and thank you for being here today. TESTIMONY OF JOHN COOK,\1\ PH.D., DIRECTOR, PETROLEUM DIVISION, ENERGY INFORMATION ADMINISTRATION, U.S. DEPARTMENT OF ENERGY Dr. Cook. Thank you, Mr. Chairman. I have a lot of good staff to thank for that. --------------------------------------------------------------------------- \1\ The prepared statement of Mr. Cook with attachments appears in the Appendix on page 89. --------------------------------------------------------------------------- I would like to begin today by thanking the Committee for the opportunity to testify on behalf of Mark Mazur of the Energy Information Administration. With gasoline prices currently averaging about $1.66 nationwide, compared to just $1.11 last June, indeed, consumers do want an explanation. It is our view that this summer's run- up, like other recent oil price spikes, stems from a number of factors, including tight crude markets, resulting in low crude and product stocks and high crude prices, from pipeline and refinery problems, relatively strong demand, and a difficult transition to summer-grade Phase II reformulated gasoline, or RFG. Crude oil continues to be a significant factor in explaining these increases. As you know, crude oil prices have risen from about $10 a barrel in December 1998 to about $34 recently. While $34 is far from the inflation-adjusted $70 historical high seen in the early 1980's, for many the pace of these increases may be as disruptive as the higher absolute levels. Regardless, crude increases have contributed about 33 cents to the increase in gasoline. In turn, these crude oil prices are up as a result of the shift in the global balance between supply and demand. Crude markets tightened in 1999 as OPEC and several other exporting countries reduced supply, while at the same time economic recovery in Asia stimulated demand growth. As a result, crude oil and product inventories fell, and by the end of 1999, global inventories were at very low levels, especially here in the United States, as shown in Figure 1 on the right-hand side.\1\ --------------------------------------------------------------------------- \1\ Figures 1 and 2 appears in the Appendix on page 94. --------------------------------------------------------------------------- Last year, as markets tightened, crude oil prices rose faster than product prices, squeezing refinery margins, discouraging refinery production, and thereby adding to downward pressure on inventories. Figure 2 shows that in June of last year,\1\ the difference between wholesale gasoline prices and crude prices averaged less than 6 cents a gallon. This is compared to the more typical 10 to 12 cents a gallon seen typically in June. This year, however, by the spring, low crude and product stocks generated much higher product prices relative to crude oil. Where these margins were low last year, they are now high at about 20 cents a gallon, or 14 cents more than last year. To put it another way, low gasoline inventories are probably adding about 10 cents a gallon to the price of gasoline over what we would normally expect for this time of year. Yet some regions have experienced much higher prices than the 47-cent calculation I just implied. EIA has pointed out on numerous occasions that very low gasoline stocks combined with a market short on crude oil generates an environment ripe for price volatility, both during the spring and the peak summer periods. The West Coast experienced such volatility in February, and the Midwest erupted in May. Several pipeline and refinery problems caused already low stocks in the Midwest to fall 13 percent below their 5-year average, while at the same time U.S. gasoline inventories were only 5 percent below average in May. With inventories in the Midwest at extremely low levels, prices were bid up rapidly, as marketers scrambled for limited supplies of both conventional and reformulated gasoline. As we know, reformulated gasoline in the Chicago and Milwaukee areas drew most of the attention initially, as these prices increased more than 30 cents over conventional. As shown in our last figure, the jump in Midwest reformulated prices appeared similar to surges we saw earlier this year in California and have seen frequently since the start of that State's reformulated program. There are several reasons for this strong price response. First, the Midwest reformulated market is very small, only about 13 percent of all Midwest sales. This very limited size limits nearby supply options. Second, this was the first year of the Phase II of the reformulated program, and it is very clear from our research, our field work, that some refiners had added difficulty in making this transition to the summer grade. It is a more difficult product to make, and it does cost more to do that. In the Midwest, as you know, ethanol is used to make reformulated gasoline, which requires a unique blend of gasoline components with very low vapor pressure. Finally, as I said, with few alternative sources of readily available supply, it simply takes time for any added supply- demand imbalances to be resolved. The reformulated markets in the Midwest and California are alike in that they are isolated and use unique gasoline blends. As such, supply problems cannot be resolved quickly. Today the U.S. refinery system has little excess capacity, and the growth in the number of distinct gasoline types increases the potential for extended supply disruptions. Fortunately, wholesale prices in the Midwest began declining more than a week ago, reflecting increasing supplies. Midwest stocks have increased 13 percent over the last 4 weeks, and in response, reformulated retail prices have fallen over 12 cents a gallon while conventional is now down about 7 cents. Much lower wholesale prices indicate we could see further declines barring any more pipeline or refinery problems, and since retail prices normally lag wholesale prices, both when prices are rising and when they are declining, we can expect Midwest retail prices to fall further, barring any more supply problems. In closing, while the first hurdle of the transition to summer-grade gasoline is behind us, we may experience more volatility before the summer is over. As we enter the peak season, refiners will be pushing production to the limit to meet demand. With low stocks and refineries operating at high utilization rates, any more supply disruptions can trigger yet another price run-up. That concludes my testimony. I would be happy to answer any questions. Senator Voinovich. Thank you, Dr. Cook. Ms. Denise Bode, thank you for being here today. TESTIMONY OF DENISE A. BODE,\1\ VICE CHAIRMAN, OKLAHOMA CORPORATION COMMISSION Ms. Bode. Thank you. I appreciate the opportunity, Mr. Chairman. I am Denise Bode, and I am Vice Chairman of the Oklahoma Corporation Commission. --------------------------------------------------------------------------- \1\ The prepared statement of Ms. Bode appears in the Appendix on page 96. --------------------------------------------------------------------------- Mr. Chairman, having worked in energy policy my whole career, I am here to try to tell you as much of the facts as I know it, having worked through these processes and with these policymakers, many of whom I know back here in the audience, on energy policy to try to prevent us from being in the situation that we are right now. And so I am going to try to give you as clear a picture as I can as to how we got to where we got. And since you are focused on this administration, I will focus on this administration. But let me tell you, as you stated, the blame can go beyond this administration and the blame also lies with this Congress. And I think we have got to go through the historical perspective, and then I will give you some ideas as to what I think we can do short term and long term to try to solve the problems. Senator Voinovich. Great. Ms. Bode. OK. To understand how and why America is at risk, first understand that there is not a free market in the traditional sense when it comes to oil. There never has been. My friend Dan Yergin's book on oil, ``The Prize,'' articulates convincing rationale that all markets have always been manipulated, first by the Standard Oil Trust, then through our government through pro-rationing and price controls, and finally by OPEC through the producing-nation quotas. Oil- producing countries manipulate oil inventories for politics as well as for their own economic gain. Our reliance on foreign oil has gone from 34 percent during the 1974 Arab oil embargo to 44 percent at the beginning of this administration, to close to 60 percent today. In fact, the dependence on oil imports has grown twice as much in this administration than during the previous 20 years. The problem is that each time the OPEC cartel manipulates oil supply to create shortages or to flood the market, it causes price shocks, making the domestic oil industry a less stable business, driving away investment, terminating qualified employees, destroying valuable infrastructure, both exploration and refining. And it forces more of U.S. production, 40 percent of which is marginally economic to be plugged, to be lost forever. It is so serious now that even with the latest OPEC price increases, domestic producers are not drilling new wells. Of approximately 800 rigs drilling, less than a third of them are drilling for oil, and these price shocks, as you all well know, impact consumers as well, making it impossible for a family or a business to budget without knowing whether their gasoline is going to be 70 cents a gallon or $2 a gallon. Let me run through a chronology of events and responses by this Executive Branch since 1992 that have brought us to the dire straits we find ourselves in today. In 1993, at the beginning of this administration, the OPEC cartel had increased production. Oil prices in the United States fell below $13 a barrel and imports had risen to 44 percent. The IPAA, which I was president of at that time, petitioned in March 1994, under Section 232 of the Trade Expansion Act, for an investigation into increasing oil imports and asked for action by the President. Since the Eisenhower Administration, this Trade Expansion Act has been used to affect American energy policy relations with the world. A bipartisan group of members of Congress, Democrats and Republicans alike, met with the President personally in the White House and asked him to enact, to propose, to support an energy plan that would maintain a strong domestic production and refining option. In fact, that bill that they proposed looks very much like S. 2557. It said to the American industry, yes, we need your investment here in the United States so that we can have a domestic oil option. But no action was taken on their plan. A year later a Presidential finding of a national security threat was finally issued. No new action there. But the Presidential finding did warn us of what we would be facing without action. Specifically, it said, ``The United States and its allies may find themselves constrained from pursuing . . . foreign policy actions for fear of provoking producer countries into actions that could result in the manipulation of oil prices and increased prices for consumer countries.'' Even after that Presidential finding, no action was taken. During that time, domestic oil production dropped by over 500,000 barrels a day, imports accelerated, and 75,000 Americans lost their jobs. Congress did take the initiative to enact one item in their plan, a royalty holiday on Gulf of Mexico deep-water drilling. This new production, let me tell you, stopped the decline in domestic production by 1997, clearly demonstrating that we do have the ability to spur domestic production. But the most significant energy policy initiated by the administration during that time was initially a Btu tax, which ended up being a 4.3-cent increase in the gasoline tax. The OPEC cartel clearly understood that American energy policy in this administration was based on instant gratification, seeking low gasoline prices from foreign sources and ignoring future consequences with a foreign cartel in charge of our transportation fuel and our prices. In 1997, members of OPEC acted to consolidate their control of the American market by increasing production and reducing world oil prices to historic low prices. Of course, everybody liked the low prices. Of course, there are other economic factors they hadn't adequately predicted that drove the price down even beyond their control. But the United States took no action. Thirty thousand Americans lost their jobs. Domestic oil production went from holding steady to a 5 percent decline, an incredible drop of another 600,000 barrels today. Today we only have 153 refineries, down from 198 in 1990. Members of Congress clamored for another investigation of the threat to our national security of oil imports. The second Presidential finding in this administration was released at the end of March, again finding an increased national security threat. No action has been taken. There has been a recommendation now to take some action, but, again, no action has been taken. But 28 States have taken the initiative, including my State, with incentive programs for production. Ohio has taken action with encouragement for domestic producers. The Clinton Administration says they were ``caught napping'' when fuel prices jumped. I would suggest otherwise. With two Presidential findings of national security risk in hand--and let me tell you, DOE has been clamoring trying to get the attention of the administration. But they are not listening. They knowingly put American consumers at risk for these high prices with the foreign policy of looking to OPEC for more oil imports and gasoline instead of acting to stabilize domestic production and refining capacity. Senator Voinovich. Ms. Bode, would you please summerize---- Ms. Bode. Yes, absolutely. And I have a much longer statement that I would like to be included in the record. A lot of folks have talked here about what has been happening in the Midwest. Oklahoma is part of that PADD2 distribution region, so our prices were spiking, too. We looked into it. There is a tremendous amount of complicated infrastructure issues that are being resolved right now. Gasoline prices are continuing to fall. Hopefully we have learned lessons in regulatory policy from this government- caused disruption. But that is a smaller, more temporary matter. The much more important fundamental issue is whether we as a Nation have learned the importance to our national security and economy of maximizing domestic refining and production options. If we have not learned the fundamental lesson, this episode will be replayed in the future with even more costly effect. Senator Voinovich. Thank you very much. I think, Ms. Bode, one of the things that you mentioned that is interesting that is hard for Americans to understand because we are used to thinking of things one way, and when we are asked to think of them another way, it is sometimes hard for us to understand, particularly when it may cost us more money. When the oil prices went way down, they dramatically impacted upon many of the U.S. domestic producers of oil, and that if we are going to maintain our domestic producers, the marginal producers, ``the strippers'' that some people refer to out there, you need to maintain a certain level per barrel in order for them to stay in business. One of the things that we perhaps ought to look at is working it out so that when that price does fall way down there, that there is some kind of incentive for them to stay in the business and not just disappear. I would like you to comment on that so that people can maybe understand that concept, because I think what you said was that when the price goes so far down, hooray, but what you are doing is you are making yourself a lot more vulnerable so that later on somebody could take advantage of you because you, in effect, have eliminated part of the supply. Ms. Bode. Absolutely. And I think most Americans understand that, the concept. They are not saying that they have to have absolutely 25-cent gasoline. They are just saying don't whipsaw us like this so that we can't even plan--from 70 cents to $1.80 all in the period of a year. I think people understand you have to be able to at least break even or make a little profit on producing oil and gas, and that is all I think folks have been talking about. But one of the things that I think is fundamentally important that you mentioned is that there be some stability. And, in fact, one of the things we did and many other States did in putting incentive packages together was to drop the gross production tax, which is the State tax on oil and gas production, dropped it almost to zero whenever oil prices fall below $14 a barrel. And that provides a stabilizing effect so people know that there is going to be encouragement to continue to invest and stay in business. It is not the government saying, well, our policy is basically we are going to get all our oil from overseas, because that is a strong message to stop doing business here in this country, and, in fact, that has been the result. Senator Voinovich. Well, if you noticed, I suggested to Governor Taft that he might go back to the National Governors' Association. As a former Governor of Ohio, I don't know whether it happened during my administration. If it did, wonderful. If it happened under another, God bless. But the fact is that you are pointing out that even States can get into the act in terms of making more production available. Ms. Bode. And they have. Senator Voinovich. There is the issue of refineries, and I think you said that at one time we had 198 refineries, and now we have 153, and I understand there hasn't been a refinery built in this country in the last 25 years. I would like some comment from the witnesses on why that is, and do you believe that if we are going to have an energy policy that issue should be addressed? And should we build more refineries in the United States? You might even comment, if we haven't, why have they closed and why aren't people building more of them if they are needed? Ms. Bode. I would be glad to respond. I think obviously we have much stricter government regulation of refineries, environmental regulations and other things that--we have the most strict environmental regulations in the world on our domestic industry. And that is because we care about the environment, we care about health and safety, and that is good. But the problem is we need to evaluate how to balance that and the cost of those regulations with the needs of the country in building infrastructure, because, let me tell you, it is pseudo-environmentalism to say that it is better not to have domestic production and refining in this country than to ship it in on tankers. At 60 percent oil dependence, we are talking about 10,000 tankers coming into American ports, and anybody will tell you, particularly the Coast Guard, that that is a much greater threat to the environmental health of this country than drilling for oil and gas under our very strict environmental standards and refining oil under our standards. So those are some of the--and the loss of domestic production of oil, I think, has caused refineries to say, well, heck, we are not really needed to do business in here, and refined products coming in is another reason, I think, that fundamentally people have said, well, we will refine offshore because it is cheaper to refine offshore. Imported products coming in is another factor. But I think we should have an area at the Department of Energy, frankly, that focuses on refineries and that looks at our infrastructure on a regular basis and that we should focus on these issues and come up with a list of what we can do to encourage refinery upgrading and standards as opposed to putting new rules in place that basically run them offshore. Because if you have refineries close to your markets, you are going to be able to provide the product whenever you have these short-term problems. Otherwise, the problem in the upper Midwest and Chicago is that because they only can provide about 75 percent of the capacity for gasoline they need, it has to be piped up from the gulf. That product has to be piped up. If there is any disruption along the way and if anybody else needs all these different flavors of gasoline, then you are not going to be able to get it to the marketplace. So localized refineries are fundamentally important to the distribution system. Senator Voinovich. What is interesting is that I think, again, when we think about the environment and we are saying, gee, we don't want to have the oil exported--or we don't want to have the refineries here because we are concerned about the environment, I doubt seriously that anyone gives any consideration that it has got to be refined someplace, and if it is coming over here in large boats--there is a jeopardy to the environment in terms of spillage, what we have seen over the years. Ms. Bode. The greatest threat. Mr. Moniz. May I just add to the refinery question? Senator Voinovich. Yes. Mr. Moniz. Thank you, Mr. Chairman. First, of course, we certainly agree that we would like to see additional refining capacity in the United States, but I do want to note that although it is certainly true that the number of refineries has reduced, we should emphasize as well that there has been a significant increase in capacity of the remaining refineries, largely driven by new technology developments. There has been a consolidation in the industry. Clearly, there has been a problem in terms of the profit margin, which is one of the reasons we don't see more refinery development, and that, again, adds to something that Ms. Bode-- and I think you have also said--that one of the real problems right now, in addition to the too high level of cost in terms of oil, gasoline, etc., is the volatility. The volatility--the ups and downs, the rapid changes--makes life difficult for everyone from consumers to people in the refining business, etc. Finally, Ms. Bode suggested that the Department of Energy deal more with the refining industry, and I just would note that we do. We have several programs, for example, a couple of new programs. First, we have before the Congress this year a proposal called ultraclean fuels. It is precisely to work with the refining industry in developing the technologies to meet the increasing environmental needs and developing new petroleum- based fuels. The Congress I think is looking well on that proposal, and we appreciate it. Second, we have an important program in the Industries of the Future Program, working with refineries to reduce their internal energy costs, therefore improve their posture. Senator Voinovich. Can I ask, do we need more refineries? Mr. Moniz. Yes. Right now our refining capacity is really being pushed to the limit. We are about 96 percent utilization today across the country. Senator Voinovich. If you are not able to answer this, I would be interested in finding out the answer. If you looked at where we are today and you had to calculate based on the refinery technology that is available today and the average refinery, whatever it would be, is one, two, five, or ten refineries? Mr. Moniz. I am sorry? Senator Voinovich. In terms of the additional refineries, if we need more, approximately how many more would we need in order to be competitive? Mr. Moniz. Well, the issue is that--and maybe John Cook could actually expand on this--clearly we anticipate demand growing at somewhere between 1 and 2 percent per year in terms of domestic use. Senator Voinovich. It is interesting, I read that several years ago China was exporting oil. Today they have become a major importer of oil. Mr. Moniz. Yes. Senator Voinovich. In other words, we in the United States are kind of provincial in our thinking, and what is happening is that the market is growing by leaps and bounds around the world, and as a result of that, we may have to reevaluate the traditional way we have approached some of these things, for example, saying, we are going to have to do more of our refining here because of what is happening. Dr. Cook, would you like to comment on that? I am about out of time. Dr. Cook. Sure. I think they have covered it pretty well. When we hit peak demand in July or August, utilization rates may hit 98 percent. Some areas, the Chicago area is already at 99 percent, pretty close to flat out. The Gulf Coast and West Coast refineries often run at peak, at pretty much flat out. So, as was stated, if demand is going to rise 1 or 2 percent a year, just to maintain this volatile, very little excess capacity situation, it has to grow by that amount. And we need a cushion, another 4 or 5 percent or so. Senator Voinovich. What I would be interested in is if the experts looking at it say, objectively, this is what we ought to have in order to deal with it, because what I understand, in the Midwest we had this lack of refining capacity, then we had the reformulated gasoline, which, Mr. Perciasepe, I think it was mandated in those towns by the EPA. They had to have reformulated gasoline. Was it mandated---- Mr. Perciasepe. It was mandated by Congress in 1990 that the cities with those specific classifications are required---- Senator Voinovich. Had to have--OK. So, right, Congress, you are implementing it. Mr. Perciasepe. You had the option in Ohio when you were there to---- Senator Voinovich. We took the option. We did emission testing and didn't go for reformulated gasoline. But a lot of them were mandated. Ms. Bode. The date of implementation was set by EPA. Senator Voinovich. But the fact is that also was a problem, that this was coming on. You had the refinery capacity, and as a result of that, that interfered with the flow of oil coming into the area. Is that right? Dr. Cook. In my view, that is exactly right. Senator Voinovich. I have had a chance. Senator Lieberman. Senator Lieberman. Thanks, Mr. Chairman. I thank the witnesses. I apologize that I had to be out for a while to go back for a meeting in my office, but I followed your prepared testimony. I do have some questions. Dr. Cook, you put up a chart, which I have as Figure 2,\1\ components of gasoline prices. And I was interested in looking at it, and this is a comparison of June 1999 to June 2000-- $1.11 in June 1999, and $1.63 in June 2000. But what interested me is that the biggest percentage increase, almost quadrupling, was in the refiners' contribution to the cost per gallon of gasoline, the refiners' share of that, because most of the rest resulted from the jump in the price of crude oil. Distribution and marketing is a little bit larger but not that much; tax is about the same. --------------------------------------------------------------------------- \1\ Figure 2 appears in the Appendix on page 94. --------------------------------------------------------------------------- So why did the refiners' share of the cost of a gallon of gasoline quadruple in a year? Dr. Cook. Well, again, to keep it short, the very low gasoline stocks, strong gasoline demand, it is not unusual when these rare circumstances occur that this will put extra pressure at that refining level on wholesale prices. Typically in the spring, refiners are doing maintenance. Their gasoline production is not at maximum levels. Gasoline demand will start to rise as we move into the driving season. And that tighter balance will reduce stocks a little bit and raise gasoline prices relative to crude maybe a nickel or so. But with these extremely low stocks, especially in the Midwest, and with very strong demand, that tightening process was just much more severe and raised the margins more than they normally would go up. Senator Lieberman. Do you have a basis for making a judgment yourself--or I don't know whether you, Secretary Moniz, wanted to say anything--for whether this is fair? This looks like an awful large percentage increase for refiners compared to other contributions to the cost of a gallon of gasoline. Does it look fair to you? Dr. Cook. Well, it is extremely high, but it is important to remember that throughout the 1990's these refining margins were very poor, and especially in 1999. In 1999, with crude oil prices rising much faster than product prices, you had those almost nonexistent margins, and that is largely the reason that production failed to keep up with demand and we got these low stocks. They do have to make a healthy margin to encourage the extra production. I will let someone else comment on what is fair. They are very high. Senator Lieberman. They are high. I suppose it would be fair to say that the Federal Trade Commission may be commenting on whether these increases at the refiner level are fair or whether they do amount to price gouging or something else. I have been hearing about what was described as just-in- time inventory practices of the oil companies and the refineries, and I guess it is taking the concept that is quite fashionable and productive in industry where you have just-in- time inventory so that you are not carrying large inventories unnecessarily for long periods of time, but you use computers and sensible management to bring in the parts that you need as you need them. But when you apply this--and this has been a change, I gather--in the oil industry, it becomes a ``heads I win, tails you lose'' deal because if they are right in their projection of the inventory they are keeping, which presumably will be modest or more modest than it would otherwise be, then it is OK, they make what they would make. If for some reason there is an increase in demand, then, of course, they benefit again because supply is low as a result of that practice. That is my personal layperson's reaction to this. There is nothing illegal, as far as I can tell, about just-in-time inventory, but they are stacking the deck, to mix my metaphors here, against the consumer by this policy. And I just wonder from your review of the data whether there is any causal link between just-in-time inventory practices and increased price volatility of gasoline and, during the winter season, home heating oil. Dr. Cook. This concept was very popular in 1996. People attributed the low stocks, even within the industry, to this practice. I think we saw that debunked in 1997 and 1998 when we had very low crude stimulating a very favorable economic environment for refining, and cheap crude turned into cheap product. We had tons of stocks. Senator Lieberman. In other words, the refiners did buy more based on the lower world price. Dr. Cook. Yes. Senator Lieberman. And, therefore, the inventories were up. Dr. Cook. Yes. Senator Lieberman. OK. Dr. Cook. Cheap crude eventually filters down into cheap products. It is complicated, but, that is a fair statement. So now we have high crude and the reverse situation. It just basically discourages, with weak margins and what is called backwardation, excessive product production. The just-in-time inventory concept you might think of as just the normal business practice that anyone has of wanting to hold down their inventory costs or any other business costs as much as they can. Senator Lieberman. Yes. Dr. Cook. But I view it as an exacerbating factor. It is mainly the refinery economics. Senator Lieberman. Yes, I hear you. What I am concerned about is--and I understand that there would be a natural economic incentive as the world price of oil goes higher to buy less, hoping it will go down. But my question is--we have been following your numbers on home heating oil stocks now because we have an obvious concern that the crisis in the Northeast is going to be repeated again next winter. And your numbers show that the home heating oil stocks now are lower than they have been in the past than I would say they should be, so we are rapidly heading toward, are methodically, unfortunately, heading toward another winter in which if the weather is colder than we expect, the prices are going to shoot sky high. Of course, I wonder about the same thing as we approach the gasoline driving season. I understand that the price of world crude is up, but can't you really predict or can't they predict driving--gasoline demand is going to go up as we get to June, and that their stocks have been lower than predictable demand would be. This is probably even more predictable--it is more predictable than whether the winter is going to be cold or not. So my concern is here--and from your data, I wonder if you can either shed some light or tell me I am wrong or right--that they are keeping the inventory lower than in the best of circumstances we would want it to be. And I understand they are in a business, but you would hope for a certain amount of sensitivity to consumer cost along the way. Dr. Cook. Again, I think that limited excess refining capacity is part of the problem. When stocks fell over the winter for gasoline now to extremely low levels, even when the conditions improved, personally I believe refiners made every effort they could to crank up as high as they could and as quickly as they could, but they ran into a lot of refining problems, which occurs when you try to run at high rates. I don't think there is enough capacity to catch up. That is the problem here. When you get behind and you have to meet gasoline demand and you have to meet diesel and heating oil demand and restock from low levels, there is just not enough capacity to do that. I don't think they are holding back. I think the economics now are wildly favorable to maximum production, and anybody that can produce the product will do it. Senator Lieberman. Will do it; they are catching up. Thank you, Dr. Cook. I wonder, Mr. Chairman, if I could ask Mr. Perciasepe to come to the microphone. I just want to ask him in the time I have this one question, if he would come to the table. Senator Voinovich. I have no objection; it is on his time. Senator Lieberman. Yes, sir. Thank you. The question is the broad one, which is, there are clearly those who would place much of the blame for high gas prices on environmental regulation, specifically the reformulated gasoline requirement. In fact, I think the representative from the American Petroleum Institute, who is testifying on the next panel, is going to call--at least he called in his written testimony for the repeal of the RFG oxygenate requirement. I wonder, Mr. Perciasepe, if you think the reformulated gas requirement is responsible for some or most of the price increase. And given your review of the situation, has EPA been able to account for the entire increase in the Midwest, or is there some portion of it still that you can't attribute to the factors suggested by others, including the oil companies? Senator Voinovich. Would the witness state his name and the organization that he represents for the record? TESTIMONY OF ROBERT PERCIASEPE,\1\ ASSISTANT ADMINISTRATOR FOR AIR AND RADIATION, ENVIRONMENTAL PROTECTION AGENCY Mr. Perciasepe. Yes, sir, and I am sorry I didn't do that when you asked me when I was in the seat before. My name is Bob Perciasepe. I am the Assistant Administrator for Air and Radiation at the Environmental Protection Agency. Again, I appreciate the question. I will try to give a general answer. I am sure it will generate more questions. --------------------------------------------------------------------------- \1\ The prepared statement of Mr. Perciasepe appears in the Appendix on page 101. --------------------------------------------------------------------------- Our analysis continues to be that when you add up the additional cost of Phase II RFG on top of Phase I, which took effect in 1995--and which had a mere cost of around 3 to 4 cents per gallon. When you add both of them up together, it is about 4 to 8 cents impact on the cost of producing gasoline. And we have not seen any evidence that that cost should be any different. That cost range includes the cost of making the reformulated gasoline with ethanol, and so there has never been, back to 1993 when these regulations were enacted, a sense that it would be a free program. And I want to be clear about that, and I think everybody recognizes the balancing act that everyone has talked about here. Senator Voinovich. Mr. Perciasepe, I can tell you that we did in Ohio. It was a question of whether we were going one direction, emission testing, or in another direction, reformulated gas. I figured it was going to cost my people in Ohio more money and that the estimate of what it would be would be probably more. Mr. Perciasepe. Right. The actual cost of producing Phase I RFG turned out to be less than the estimates in the 5 years that it was implemented, and that is a tribute to the American refining industry who was able to do that. The current situation in the United States, looking at today's retail prices, if you take out Chicago and Milwaukee, the average cost of RFG in the United States is roughly equivalent to, on average, the cost of conventional gas in the United States. Remember, conventional gas is about 70 percent of the gas in the United States; RFG is about 30 percent. The Chicago and Milwaukee market is about 3.4 percent. Now, if you look at Chicago and Milwaukee, what has happened over the last 14 days is the wholesale price for RFG with ethanol in it has dropped 47 cents. That has not been reflected at the retail level. If half of that or a third of it or some of it is reflected at the retail level, the prices in these cities would be very similar to what it is in the rest of the country. And the differential between conventional gasoline and RFG at the wholesale level, off the rack where the trucks fill up, is less than a penny in Chicago and 7 cents in Milwaukee. And those are pretty much what we would expect-- those are within the range that I mentioned earlier. Obviously one is lower. Now, cost to produce is not price, and I want to be clear about that. My point is that there are other things going on that are affecting the price, not the cost of producing. And we see that stabilization in the entire country now that these wholesale prices are stabilized. We now need that pricing reality to move onto the retail level so the consumers can be relieved of whatever happened in early June to cause prices to reverse. Senator Voinovich. I think the time is up. Senator Lieberman. My time is up. I thank you, Mr. Chairman. Thanks, Mr. Perciasepe. Senator Voinovich. Thank you. We have some other Senators here. I am going to follow the early-bird rule, and I think, Senator Levin, you were here. Senator Levin. Mr. Chairman, thank you. While Mr. Perciasepe is there, if you could just stay there for a minute, you have analyzed some of the reasons--EPA has analyzed some of the reasons which have been given for the huge increases in prices in Michigan, Illinois, and Wisconsin, five factors: Higher crude oil prices, use of ethanol in reformulated gasoline, pipeline problems, low inventories, and the patented RFG process. Have you found that any of those factors or all of them put together can explain the 80-cent increase over 7 weeks in the price of gasoline in Michigan, Illinois, and Wisconsin? Mr. Perciasepe. We have been asked by many to grant a waiver for the reformulated gasoline program, particularly in the Chicago and Milwaukee area. So pursuant to our analysis to see whether there indeed is a supply problem, that there was not the clean-burning gasoline available to be sold, whether it be at the retail or at the wholesale level, we worked together with DOE to look to see what the supply situation was. And I think you have already heard reported here by Dr. Cook that the supply in the entire Midwest PADD was tight, and in particular, when we looked at the Milwaukee and Chicago area with field teams, we found that it was tight but adequate to meet the demand that was available. Nobody ran out of gasoline. And so when we looked back to see what the issues were, and we met with the oil industry, they brought up some of these issues. We have pursued every one of them vigorously. And, again, there are inadequate explanations in terms of equating that large of a price increase with whatever effect might result from savings, a 5-day outage of a pipeline or the cost of producing RFG. Senator Levin. Or all of them put together. Mr. Perciasepe. Or all of them put together. Senator Levin. Now, you have given us an analysis of---- Senator Voinovich. I think in fairness to the other witnesses that are here, Mr. Perciasepe was not on the witness list. He is now here and answering the questions. We have three people that have waited, and I think they ought to have an opportunity also to respond to the question. Senator Levin. Sure, I would be happy to. Mr. Moniz. I was going to add, Mr. Chairman, a footnote, a piece of good news. Today AAA announced that in Michigan there was almost a 10-cent price drop in the last week. It is only a datum. It isn't a trend yet, but hopefully it will become one. Senator Levin. That was announced some days ago, as a matter of fact. Mr. Moniz. I see. OK. Senator Levin. The EPA analysis is, relating to the wholesale price drop, a very significant price drop since June 15 when there was a Federal Trade Commission investigation that was announced. And as I understand it--either one of you from EPA can perhaps comment on this--while wholesale prices of gasoline have dropped significantly since June 15, none of the factors that I have just rattled off that have been given for the rise in prices have changed. Is that correct? I am reading an EPA memo here. I don't know which one of you gentlemen---- Mr. Perciasepe. Yes---- Senator Levin. So, in other words, of those five factors-- higher crude, use of ethanol in reformulated gas, pipeline problems, low inventories, and the RFG process--we have had a significant drop---- Mr. Perciasepe. None of those has changed in the last 2 weeks. Senator Levin. All right. So they don't explain the increase, and they haven't changed, as far as you know, to explain the drop. What, in your judgment--well, I will let it go at that. Now, on reformulated gasoline, Michigan does not use reformulated gasoline. Is that correct? I am just asking either of the EPA folks here. Is that correct? Mr. Perciasepe. Correct. Mr. Moniz. Correct, yes. Senator Levin. And yet the price in Michigan, is this not also correct, the retail price has been about equivalent, if not more, than the price in Chicago and Milwaukee? Do you know whether that is true or not? Mr. Moniz. That is approximately correct, yes. Senator Levin. As far as you know. Mr. Moniz. Yes. Senator Levin. There has been---- Senator Voinovich. I would just like to mention that we have got two back-to-back votes coming up. We have 10 minutes, and I think that what we probably should do is go for another 5 minutes and then go over and do our votes and recess this until we come back. Senator Levin. Do you want to recess now? Senator Voinovich. Well, we have 4 or 5 minutes. But the other thing I have to say is that these witnesses, are you able to stay until we come back? We are imposing on you and we have a bunch of other folks here that have been sitting around waiting to testify. So why don't we go on for another 5 minutes, and then we will recess and go down and vote and come back. Senator Levin. Let me ask the EPA folks this question. I believe that, according to one press report, New York Times, June 26, the American Petroleum Institute, ``pleaded with the EPA not to lift the rule'' relating to, I think, reformulated gas, if I am correct. Have they made that plea to the EPA? Mr. Perciasepe. Yes, they have. When we were asked to review a waiver request--we obviously take those very seriously--we instituted all the examinations that I just mentioned. We also asked the refiners who are supplying the area what their views were and how that would affect them, and all of them, I think, without exception, including their association, recommended no granting of a waiver. Senator Levin. Well, if I read the testimony today of the Petroleum Institute, however, they are urging that that requirement be lifted. Am I reading that correctly? Mr. Perciasepe. They haven't communicated to us. Senator Levin. One of you testified, I believe Dr. Cook, that the refining capacity is at 98 or 99 percent right now. Is that correct? Dr. Cook. In the Chicago area. Senator Levin. In the Chicago area. If this is generally true that we are refining at almost full capacity, what would be the benefit of greater oil supplies coming in from either OPEC or from the Strategic Petroleum Reserve? Could it be refined if we were able to get that release from the Strategic Petroleum Reserve or get OPEC to give us 2 million more barrels a day instead of 750,000 barrels? Dr. Cook. Well, that is a good point. It would have a limited effect. For one thing, a large release would reduce the crude price. It is a global market. That would undercut the crude component of the gasoline price. The expectation of that to happen, these markets are very important in pricing run forward, on expectations, so there could be some decrease from that. Not all regions are at 99 percent capacity. The Gulf Coast is not at capacity yet, and likewise, the East Coast. There could be some additional production there. More importantly, Europe and Asia are nowhere near capacity, so that to the extent that cheaper crude stimulates them to produce more, we could certainly see more conventional gasoline imported. And in your area, in your State, conventional is the problem. Senator Levin. Thank you. Thank you, Mr. Chairman. Senator Voinovich. I think we are going to recess the hearing, and we will try to be back as soon as possible. Thank you. [Recess.] Senator Voinovich. We will reconvene the meeting, while I wait until for my colleagues to return, I will ask a few questions before they get here. The issue of the refineries, I would like to go back to that again. There was a question asked about if we could get more supply in, could we handle it in terms of the refineries? And I think I heard you say, Dr. Cook, that we do have refinery capacity out in the West Coast. It is not at its capacity. Could you explain that? What I am trying to get at is do we need more refineries. And if we do, what have we got to do in order to get them? Dr. Cook. Well, we either need more refineries, or we need more refining capacity at the existing ones. They can upgrade, they can add units, and they have been doing that. So I think I would phrase it the latter. I would also like to say there isn't very much excess capacity left anywhere in this country. It is a very small amount, on the West Coast, Gulf Coast, East Coast, and virtually flat out in the Chicago area. Now, I think the potential for more product production of conventional and distillates, anyway, if not RFG, is globally, in Europe and Asia. To the extent that could be imported and help the distillate stocking for next winter, which is a concern of ours, that would be a plus. Senator Voinovich. So what you are saying is you either need more refineries or you need to have the ones that are there expand their capacity. And the reason why we have lost the refineries that we have is what? Why are they out of business? It is not economical or what is the reason? Dr. Cook. Well, most of the losses were very small refineries spawned from the regulation period that, once competition occurred, were inefficient and noneconomic to operate, so they dropped by the wayside. And some of that capacity was picked up by the remaining refineries. Senator Voinovich. Again, how do we get more refineries? Dr. Cook. Well, profit margins have to improve. No one is going to invest in it, especially with stringent environmental regulations, unless one can at least make the average of other large industrial rates of return. Senator Voinovich. Mr. Moniz. Mr. Moniz. The rates of return, as John just alluded to, in that business have been rather low compared to alternative ways of investing capital. I would just add one other thing, however, in terms of the refining equation, and that is also, again, the demand side. I think we need to keep working on the demand side, finding environmentally and economically attractive ways of reducing demand, like with the advanced automobiles. Senator Voinovich. It has to be more economical. How do you do that? Does that have to do with the price of oil has to stay up? What is it that is going to make it--what profit--is it more incentives from the Federal Government? What is it that is going to get them to get in there and build more refineries? Ms. Bode. Well, I will tell you what I think. Senator Voinovich. Fine. Ms. Bode. I think we need to have a comprehensive look at U.S. refinery policy in this country. As you suggested, what we need to make ourselves independent in terms of at least these short-term problems, which is probably close to 50 percent, we have, I think, an opportunity to get back to 50 percent domestic production, and refining capacity is very much a part of that. We need to have a look at comprehensive refinery policy. I would suggest incentives may be something to look at, but also we need to look at regulatory policy regarding refineries to make sure, to ensure that refinery policy and regulation is cost-effective. One of the newest things that is going to affect it coming up very shortly is new environmental standards for diesel fuel, and that is going to, again, cause some refineries that now may be in business to look seriously at whether the margins are sufficient for them to stay in business. So you may see a fall-off in new refineries or existing refineries as a result of new rules going into effect. So I just think we need to take a comprehensive look at our infrastructure, both refining, exploration, and production, and really see what we are doing right now to encourage having a strong domestic option so that consumers aren't hurt in these times of short supply, and particularly refining options, not just on the Gulf Coast, because refining capacity has increased, but it has all increased away from where we need the product. We need to be thoughtful about making sure the capacity is there close enough and supplied by pipelines, sufficient pipelines so that it can get the product to market in a timely fashion. Senator Voinovich. So what about if we opened up exploration and we had more oil produced here? Would that generate more refineries? Ms. Bode. Well, it is a two-part equation. Exploration, production, more domestic production obviously is something that you need in order to have domestic refineries. But you are not going to impact margin of domestic refineries by having more produced here at home. You are going to have to have policy that focuses on refineries and their margins as well in order to encourage more refining capacity and more refineries to be built in areas where you really need that capacity. Senator Voinovich. Well, I would be very interested in any suggestions from you or anybody in the audience about what is it that we would have to do in order to get our refining capacity increased. Mr. Moniz. Mr. Chairman, thank you. Ms. Bode addressed the issue of looking at the infrastructure requirements in the refining business and other parts of the business. I would just note that, in fact, we did ask the National Petroleum Council, and they just, in fact, produced a report looking forward on the refinery business, particularly as one looks at what she referred to as some of the coming requirements in terms of low- sulfur gasoline, diesel fuel issues, MTBE. We have a report. They basically emphasized very strongly the importance of sort of sequencing and phasing of these programs, and this is something that we intend to work closely with EPA and others in the administration to address. So that is very directly addressing this question of the refinery business in the next years. Senator Voinovich. Senator Lieberman, I just wonder, this panel has been here now for quite some time. I think that we ought to excuse them and let the other witnesses that have been waiting come forward. Senator Lieberman. Absolutely, Mr. Chairman. I agree. I thank the panel. Mr. Moniz. May I add one more comment, please, Mr. Chairman? I would appreciate it. I will be very brief, and I apologize. But I did want to go back to Mr. Lieberman's earlier question on heating oil and just add one fact. Dr. Cook emphasized how tight we are right now in the refining business and we are at capacity, and with regard to moving forward on a home heating oil reserve that we share with the Congress a desire to do so, we want to emphasize because of that fact, the urgency that we need to be moving forward very soon, because, frankly, in the situation he has described, the last thing we want to do is late in the fall begin to stock up a home heating oil---- Senator Lieberman. Start acquiring oil for the reserve, you mean. Mr. Moniz. Exactly. So we need to really be moving quickly and hope to work with the Congress in accomplishing that. Senator Lieberman. Thanks very much. We appreciate the department's support of the idea of a regional home heating oil reserve and look forward to working with you in the very near future to get this implemented. Thank you. Dr. Cook. Could I add one last comment also? As I testified, I would like to clarify that we do see the situation in the Midwest improving some. Inventories have been building, refinery production has been growing for the last 4 weeks out there, and that is behind the big wholesale price decrease. Senator Voinovich. OK. One other thing. I went to a meeting that Speaker Hastert had for the Midwest region. The EPA director had a chart that showed the prices going up, and then when it announced that we were going to have the FTC investigate, it looked like the prices went down. And the allegation is because of the threat of the FTC hearings, which everybody supports, including me, that all of a sudden the prices went down. Would either one of you want to comment on that? Dr. Cook. Well, I don't want to comment on that specifically. I just want to emphasize that supplies were increasing over this period of time. Ms. Bode. And I have talked to the refineries as well in our areas, because, obviously, that is something that we regulate, and we were also part of that PADD2 distribution reach, Oklahoma was, along with Ohio and Illinois and the upper Midwest. And what we found basically was that we had a tight, very tight situation coming in. We are part of the region, again, that only has 75 percent capacity in our region, and as they determined up the pipeline in Chicago that they were having difficulties blending the ethanol into the gasoline, and supplies became really tight and prices went up, the gasoline for Oklahoma--and we don't use reformulated gasoline--the gasoline in Oklahoma went up the pipeline to where the supplies were short. And so as soon as the batches of gasoline started getting to the marketplace up there and we started resupplying the marketplace, in Oklahoma our prices started coming down. And it was, steadying--long before any of the hearings or the investigation was announced--because I was talking to the marketers every single day. So I knew when the price fell and it was really before any investigations were announced. Senator Voinovich. So your feeling is that was more coincidence than it was any kind of---- Ms. Bode. That is my understanding as a regulator as to what---- Mr. Moniz. I personally believe we need to wait to see what the FTC says. Certainly the numbers don't all add up at the moment, but I would just add as well that the most recent data indicates a drop in demand, presumably as part of a price signal in the region. Senator Voinovich. It is so complicated. Thank you so much. Our next panel of witnesses, and, again, I apologize to you for the long delay: Hon. Richard Blumenthal, the Attorney General of the State of Connecticut; Phyllis Apelbaum, owner of Arrow Messenger Service; J.L. Frank, President of Marathon Ashland Petroleum Company; and Red Cavaney, President and Chief Executive Officer, American Petroleum Institute. I understand, Ms. Apelbaum, from your Senator that you have a plane to catch? Or have you missed it? Ms. Apelbaum. I have missed that one, but I am going to get the next one no matter what. Senator Voinovich. OK. Well, how would it be, then, if we would start with you, Ms. Apelbaum, and your Senator thinks the world of you, and he will be here to introduce you or say some nice things about you, as you have come all the way here. And we would start with you, and we will move then to Mr. Blumenthal, Mr. Frank, and then clean-up will be Mr. Cavaney. TESTIMONY OF PHYLLIS APELBAUM,\1\ OWNER, ARROW MESSENGER SERVICE Ms. Apelbaum. Thank you very much. Mr. Chairman, Members of the Committee, my home State of Illinois Senator, Senator Durbin, thank you for allowing me to testify here today. My name is Phyllis Apelbaum, and I am the owner of Arrow Messenger Service in Chicago, Illinois. I am a member of the Chicagoland Chamber of Commerce, and I am also the president of the Messenger Courier Association of the Americas. The MCAA represents approximately 500 courier companies in the United States and abroad. Most of these companies are small businesses and many are multigenerational family owned. In my brief remarks today, I hope to tell you a little about the effects of high gas prices on small business owners in the Chicago area and throughout the courier industry. --------------------------------------------------------------------------- \1\ The prepared statement of Ms. Apelbaum appears in the Appendix on page 110. --------------------------------------------------------------------------- Courier companies are not glamorous businesses, but we perform a vital role. As the agents for the same-day delivery business, we deliver the Nation's time critical shipments. We know full well that someone can pay 33 cents to mail a letter across town or pay FedEx or UPS to deliver it in 3 days or overnight. We deliver critical documents, medical supplies, blood, machine parts, and even organs for transplant. We even facilitate same-day cross-country shipping. The courier industry in Chicago and most major cities utilizes, contrary to the view you might get walking the streets of Washington, DC, mostly cars, vans, and light trucks to undertake deliveries. One of our major costs has always been fuel to keep our fleets in operation. We have always been conscious of gasoline prices and fuel efficiency. As the Committee knows, the rise in gas prices has been the highest and most destructive in the Chicago area. This rise in prices is not an abstract concern or a minor annoyance. We feel it every day as we refuel these fleets. This is a problem that not only inconveniences vacationers who have many travel options; it is affecting our businesses in a very real and negative manner. In mid-May, my drivers fueled the Arrow Messenger fleet of 110 vehicles for an average of $1.77 a gallon, up from $1.47 in January. Now we are paying $2.24 or more a gallon in the Chicago area for regular grade gasoline. This increase is costing my business thousands of dollars a month and over $35,000 since January. These figures are duplicated with other businesses throughout the greater Chicago area. We already employ complex dispatching software that allows us to do multiple pick-up and deliveries on all single runs. If there is a way to cut down on fuel costs and miles traveled, we are already using it. Short of refusing to make deliveries, there is little that we can do to mitigate the fuel usage. But it is not just couriers; the whole transportation sector in my area of the country has been especially hard hit, as we have heard today over and over. For example, in Chicago, we have 6,300 taxicabs and 15,000 drivers who are paying 30 percent more for fuel and working an additional 2 to 4 hours per day to cover these increases. Multiply what the courier industry is going through by the entire transportation industry, and you can see that millions, if not billions, of dollars is being drained out of the economy of the Midwest. Crain's Chicago Business estimates that the gasoline price shock will cost the local economy 36,000 jobs over this coming year. Gasoline is one of the largest costs for any courier business. As president of the Messenger Courier Association, I have spoken with members from throughout the greater Chicago area. They echo what I know to be a fact: That the increase in gasoline prices is hurting and even disrupting their businesses. Until the gas price shock, one of our toughest challenges was finding enough qualified drivers to make the deliveries that our fast-paced economy requires. After 40 years of working in this industry, I can tell you that there has never been a more difficult time to hire and retain drivers, and we are struggling to keep these vehicles on the road. On top of that, companies are having drivers quit on a daily basis rather than pay the exorbitant fuel costs. There has been a variety of responses to this crisis. Many of our companies have added fuel surcharges. This is done on either a percentage basis or a flat fee. Others are simply having to raise their basic rates. Most of the members report that the surcharges don't even begin to cover the lost revenue due to the gas price increases. So we have the dilemma of losing money to keep a client in the hopes that the gas prices will fall or letting the client go and jeopardizing future business. I have heard the theories put forth to us as to why this has happened: OPEN, environmental regulations, price gouging, SUVs. I will leave that up to the economists among us to decide. But I can tell you that the increases have hurt my family-owned business and many small and emerging companies in the Chicago area and throughout the country. I urge the Committee to continue its investigation into this matter, and I strongly support the FTC investigation into price gouging. The courier industry has faced many challenges over the past 20 years. First, the fax machine was going to wipe us out, but we survived in spite of it. Then came E-mail, and we just grew. Now, with the passage of the Electronic Signatures Act, once again we will have to adapt. The industry as a whole will survive this challenge over higher gas prices as well. What I fear is that many individual, good, hard-working family-run courier companies will be put out of business or greatly disrupted by the gasoline price shocks. And eventually higher costs get passed along to the customers. This is the strongest economy that I have witnessed in my lifetime. Anything that jeopardizes this should be of the very highest concern to the Members of Congress and this administration. I thank the Committee for the opportunity to testify before you today. I would be happy to answer your questions. Senator Voinovich. Thank you, Ms. Apelbaum. It is nice to have a witness like you to remind us again of what impact this is having on small business in our country. Senator Durbin is here. Would you like to say a few words? OPENING STATEMENT OF SENATOR DURBIN Senator Durbin. I will say very briefly, because I know Ms. Apelbaum has some time problems running out to the airport soon, but thank you for being here and thanks for making the sacrifice to come out and tell us your story. It makes a real difference. And to the Committee, let me tell you, Ms. Apelbaum is known as not only a great business leader but a great civic leader. Chicago and Illinois are very proud of her. I think you have made a very good statement to put in perspective the concern we have that this gas price problem is going to create a ripple effect across the economy--an economy that we are proud of, but one that is fragile when it faces this type of energy cost increase. I also want to add there is some frustration, I am sure, on your part and everyone who testifies that we have not been able to get our hands on this and turn it around more quickly. I am glad prices are coming down, and I hope they keep coming down more. Ms. Apelbaum, thank you for being here. Ms. Apelbaum. I hope so, too, Senator. One of the issues that people do ask me about all the time, in reference to the deliveries, is: When you are short of drivers and fuel is an issue and you have to choose between delivering blood or live organs and doing corporate work for people that really need to get that moving for the economy, there is no call. You have to make the call for life-saving measures. And so you turn business down every day in order to do that, and that has really become a major problem for all of us. Senator Durbin. Thank you. Senator Voinovich. Thank you very much. Senator Lieberman, would you like to introduce Attorney General Blumenthal? Senator Lieberman. Thanks, Mr. Chairman. It would be an honor to introduce the attorney general, who has a distinguished record in public service, served as a clerk to a Supreme Court Justice, as U.S. Attorney for Connecticut, a member of the State legislature, and now since 1990 is the attorney general. Am I right about that? Right, 1990, attorney general of the State of Connecticut. If I may impose on Richard for probably the 30th time in forcing him to hear this small story, when I was elected to the Senate, he succeeded me as State attorney general, and we have a mutual friend--or he is supposed to be a friend of mine in New Haven. I will now immortalize him by mentioning his name in the record here. He is our probate judge, Jack Keasan. In what I thought was a tribute to me after my election, commenting on the new offices, he said that now Connecticut not only has a better U.S. Senator, we have a better attorney general. [Laughter.] This is the tribute I pay. Attorney General Blumenthal has been a great attorney general, a great leader in a lot of the multistate attorney general actions, and very strong locally as a legal advisor to the governor in the State agencies, but also has an enforcer particularly of our environmental and consumer protection laws. So I am honored to welcome him, and thank you for calling him as a witness. Senator Voinovich. Mr. Blumenthal. TESTIMONY OF HON. RICHARD BLUMENTHAL,\1\ ATTORNEY GENERAL, STATE OF CONNECTICUT Mr. Blumenthal. Thank you. Senator Lieberman, I never tire of that story for some reason that probably most people can understand, and I want to thank the Chairman for having me today and the Members of the Committee for being here. --------------------------------------------------------------------------- \1\ The prepared statement of Mr. Blumenthal appears in the Appendix on page 113. --------------------------------------------------------------------------- I was listening earlier to the invitation--I think it was an invitation--to be locked in a room together, and I can safely say, one, I wouldn't volunteer; but, two, I probably would be the least expert and qualified of all the people locked in that room. But I would volunteer to help enforce the NOPEC prohibitions that Senator Lieberman and others have sponsored because I do think and agree wholeheartedly, Mr. Chairman, that a great share of the blame and responsibility for the skyrocketing prices that we have seen at the pump belongs to OPEC, and we need to take more effective action to assure that we are not at the mercy of that cartel or of foreign oil. I am going to briefly, very briefly, summarize my testimony in the interest of time rather than reading it and come first and most directly to the question that Senator Lieberman asked earlier, because I do think it is probably the central question that we confront today, looking at the margins at the refining level and seeing the increase from 6 cents to 20 cents in the contribution, if I may use that word, toward the increasing prices that we have seen made at the refining level. Is that increase fair? And my answer is unequivocally no, it is not fair. It is too high. It is excessive. And we have seen low inventories on the part of oil companies, and we have seen low inventories on the part of all of them together. We have seen increasing prices, again, together. We have seen profit margins increasing together. So it is not only skyrocketing prices that have precipitated an investigation focusing on potential collusion, price gouging, and antitrust violations; it is the fact of those trends happening together. And we have urged for some time that the FTC take the action that it has with respect to the Midwest price phenomenon, and I am delighted that Senator Lieberman and others have urged that the FTC investigation be extended to the Nation as a whole, which we hope it will be. A number of us as attorneys general have begun our own investigations, and we hope that the expertise and resources of the FTC and other Federal agencies will be focused on this trend because none of the excuses, none of the reasons given by the oil industry, even taken together, can explain the trends that we have seen. And that fact, I think, came across very clearly in the testimony yesterday before the House Judiciary Committee from the head of the Bureau of Competition for the FTC, Richard Parker, who cited, for example, the reformulated gasoline cost, the pipeline disruptions, the other kinds of temporary phenomena that the industry has blamed for these trends, and, again, they cannot account for the astonishing price spikes that we have seen. In any other industry, if there were product shortages, whether as a result of tremendous mistakes, unanticipated shortages of supply, or concerted activity, we would not see what we have witnessed in this industry, which are also record- high profits. And so what I have proposed in my testimony is that we take measures to increase the stocks and inventories by releasing product from our Strategic Reserve and creating regional reserves, such as Senator Lieberman and others have advocated, regional reserves for home heating oil and for gasoline, that we require perhaps minimum inventory levels, much as we do for banks and insurance companies with the same idea that we need to protect consumers against unanticipated shortages that threaten literally their lives if we lack the product that we need, that we adopt new merger standards to prevent the kind of consolidation that we have seen in the oil industry, a presumption against approval unless there are clear benefits for consumers, eliminating zone pricing and other abuses, and taking action now to deal with the crisis that we see on the horizon with home heating oil, because just as surely as we have a crisis now in gasoline, we face another crisis in home heating oil if we don't take action now to increase those stocks and inventories. Thank you very much, Mr. Chairman. Senator Voinovich. Thank you. Our next witness will be J.L. Frank, who is President of Marathon Ashland Petroleum. Mr. Frank, we are very happy to hear you have spent a lot of time here in Washington the last couple of weeks. I imagine you are getting a little tired of it, but we really appreciate the fact that you are here, and not only a spokesman for your company but for the industry. TESTIMONY OF J. LOUIS FRANK,\1\ PRESIDENT, MARATHON ASHLAND PETROLEUM, LLC Mr. Frank. Thank you. I should be wearing one of these buttons, but I am probably the least popular guy in town. I am J. Louis Frank, of Marathon Ashland Petroleum, and my company makes and markets most of our products in the Midwest. We are a buyer of crude oil and a seller of products. --------------------------------------------------------------------------- \1\ The prepared statement of Mr. Frank with attachments appears in the Appendix on page 120. --------------------------------------------------------------------------- I welcome this opportunity to discuss the gasoline market conditions we have experienced recently in our part of the country, and I look forward to answering your questions or those of other Members of the Committee. Let me start by saying that a very competitive gasoline market ultimately determines the price of gasoline. When there is a supply shortage in a competitive market, prices tend to rise to whatever level is necessary to balance demand with supply. And when supplies return to more normal levels, prices tend to return to lower levels. Adam Smith, in his writings, had portrayed these as the customary market. Just such an imbalance of supply and demand occurred in the Midwest over the past few weeks, and that is the reason that prices in the area surged. And I would like to explain that.\2\ --------------------------------------------------------------------------- \2\ The chart entitled ``Chicago Market Wholesale Gasoline Prices'' appears in the Appendix on page 129. --------------------------------------------------------------------------- First, worldwide crude oil prices have risen rapidly, as you heard, substantially going from $10 a barrel at a low to $35 a barrel at a high. Second, Midwest refineries can supply only about 75 percent of the region's demand. The balance is about 42 million gallons a day that must be transported to this region. That is a million barrels a day. The vast majority of this product comes in from the Gulf Coast by barge or two major pipeline systems. Recent events illustrate how fragile the Midwest refining and distribution system is and how any disruption can create a supply shortfall that will ripple through the system for weeks or maybe even months as refiners and pipeliners struggle to catch up. In March, one of these critical pipeline systems, the Explorer pipeline system--we have an exhibit that shows where the Explorer pipeline is \3\--experienced a line failure north of Dallas, followed by a 6-day outage, which resulted in a shortfall of about 336 million gallons of product deliveries to the Midwest--that is about 8 million barrels--markets from Tulsa to St. Louis and on to Chicago and Milwaukee. It quickly became apparent that there was no short-term make-up capacity to replace the 23 million gallons per day that Explorer was not moving out of the Gulf Coast market to PADD2. --------------------------------------------------------------------------- \3\ The chart entitled ``Regional Fuels Programs'' appears in the Appendix on page 130. --------------------------------------------------------------------------- More recently, the Wolverine pipeline, which carries almost 40 percent of Michigan's petroleum needs from Chicago, also experienced a release that resulted in a 9-day interruption of supply to that area. With only limited alternatives available, gasoline supplies in Michigan reached dangerously low levels, which are only beginning to recover now. Another factor that contributed to this supply and demand imbalance in the Midwest was the new Phase II reformulated gasoline requirements which became effective on June 1, and you can see on this map by the colored areas where different types of special gasolines, boutique gasolines, are required in the Midwest market. This gasoline is more difficult to blend to meet U.S. EPA regulations. We had to virtually drain our tanks of winter-grade gasoline at the same time as the supply disruptions with Explorer were unfolding. If these supply issues were not enough, EPA's decision to grant three waivers from the RFG requirements for the St. Louis area without any sort of penalty became the straw that broke the camel's back. Conventional gasoline that was originally destined for the upper Midwest conventional markets was immediately diverted to St. Louis. This contributed to the conventional gasoline shortages that in turn led to severe price increases for those products in the upper Midwest. And the price response that should have been seen in St. Louis was transferred up to Chicago because St. Louis went to consuming conventional gasoline while building their supplies of reformulated gasoline, so essentially in a supply-short market, they were taking two volumes of gasoline to St. Louis. The conventional they were burning and the replenishing of the reformulated stock. My company responded aggressively to the gasoline supply and demand imbalances in the Midwest. We took immediate and extraordinary steps to try to bring additional supplies into the Midwest. We have been running our refineries at capacity and pipelines are at full capacity, and we utilize trucks and barges to bring products in from nontraditional sources, as far away as Newfoundland, Canada, into the Michigan market. We brought truck drivers in from Texas, Florida, and Louisiana. Our comments to the EPA and DOE on what could be done to improve the Midwest supply situation in the short run were submitted in a letter dated June 13, 2000, and were discussed prior to that, and they have been attached to my testimony.\1\ --------------------------------------------------------------------------- \1\ The letter referred to appears in the Appendix on page 131. --------------------------------------------------------------------------- Our nine recommendations focused on relief from numerous regulatory restrictions that hampered our ability to move products into the areas that needed it most. My company is working on several long-term infrastructure problems that would help eliminate supply shortages like the one we just experienced. These include a new pipeline to serve the growing central Ohio market and a joint venture pipeline to convert an abandoned or low utilization natural gas pipeline into products, and that line is going through the approval process with FERC. And we are trying to expedite that to get it pulled forward. It won't be in operation even on the regular track until January 2002. In our view, these recent difficulties in the gasoline market are mere symptoms of the much deeper problem that the United States does not have a cohesive energy policy, a policy that would recognize the importance of ample, affordable, and clean energy for the Nation, a policy that would encourage a viable and vital domestic petroleum industry. Any national energy policy must recognize the need for strengthening the downstream infrastructure of the domestic petroleum industry, the sector that includes refining, pipelining, and terminaling. Investor confidence in this critical sector must be restored if we are to stem the decade- long retreat in refining capacity and maintain our self- sufficiency in motor fuels. In closing, I am very proud of the way that my company has responded to the petroleum shortfall situation. And as I said in my opening remarks, the gasoline market is highly competitive, and market forces ultimately determine the price of gasoline. However, the supply system remains fragile, and any disruption in a refinery or a pipeline distribution system could result in another supply-demand imbalance in the Midwest. And I have to say, Senator, that when I first heard of the calls of investigation on collusion and price fixing, I was sort of outraged and indignant about it. I was embarrassed for the 28,000 people that work at my company and come to work every day and wonder, ``is my company guilty of price gouging and collusion,'' and I say unequivocally ``no.'' And I now welcome this investigation to help clear the air for the accusations that have been validated by the President, the Vice President, and that inflames the consumer base, and everybody is concerned about price gouging and price fixing that the industry is being charged of. That concludes my remarks, and I will respond to any questions that anybody might have. Senator Voinovich. I appreciate that last comment because I know that there were those that said you were reluctant to answer questions, and I can understand your initial feelings about it. I am very pleased that you are here to say that you welcome questions, because I do think that in the next couple of months we should clear the air just about exactly what happened and we are starting to piece this together. But I will say this to you, that I think too much importance is placed on the cause of prices are high, and I would hope that in this further testimony through the questions that we get at the issue of what do we do now in order to systematically bring the price down and keep it down, and it is starting to fall. We know that. And, second, and more important, as I mentioned in my earlier remarks, we talk about what is it that we need to do to have a comprehensive energy policy to make sure that 5 years from now we are not in the same position that we are today. Mr. Frank. Senator, can I have one more minute to show you what I think is an explanation of the statement that is floating around that prices came down when the FTC said we are going to have an investigation? If you look at this chart, that shows what the inventory level in PADD2 did, where that inventory level actually fell to a minimum on June 2. And following June 2, the inventory started to build---- Senator Voinovich. I am sorry. Could somebody point that out? I am not following the chart. Mr. Frank. The minimum inventory level was on June 2. Since that date, inventories have risen in response to a decreased driving habit of the consumer, and the inventory levels have risen to a new level. And then on the next chart, John, if you would put that up, it shows that the prices were at their height on June 7 and were falling from that date. And then there was an announced fire at the Blue Island refinery in the Chicago area. The prices spiked overnight, 10 cents up on the spot market. The next day they were down 10 cents as the company said they were back in operation. And since that time, the prices have fallen. Now, we were facing charges or allegations of price fixing and colluding back in mid-May, but the market continued to work after that and the prices rose. And, finally, price stifled demand and the inventory started to build, and the price fell. And that is the normal response you would see in a supply- constrained market. Senator Voinovich. Thank you. Senator Domenici. Mr. Chairman. Senator Voinovich. Yes, Senator Domenici. Senator Domenici. I wonder if you would yield me 5 minutes. Or do you want a witness to go first? I have to go to the floor. Senator Voinovich. Senator Domenici, you were here before, and you mentioned that you did, and I apologize. I think that Senator Lieberman and I would more than honor your request to make a statement here today. Senator Lieberman. Absolutely. Besides, we note that you are still the Chairman of the Budget Committee. [Laughter.] OPENING STATEMENT OF SENATOR DOMENICI Senator Domenici. I might say to both of my friends, I am not at all proud of what we have done today with reference to the budget. Senator Lieberman. Understood. Senator Domenici. And I am about to form a pact with my own heart that I will never let anybody by unanimous consent waive the Budget Act. We, today, made some horrible mistakes in terms of taking things off budget that we just don't understand, and there was no way to get in front of the steamroller. But it will not happen without getting slowed down in the future. And I might find five other Senators to agree with me, and we will understand what we are doing rather than vote because we think people want us to vote in a certain way. Now, having said that, I want to thank you, Mr. Chairman, and this Committee. I have heard enough today to know that you are on track to getting the facts. And, frankly, I want to thank you, Mr. Frank, and I haven't read your testimony, Mr. Cavaney, but let me say we need to know what really happened. And my friend, Senator Lieberman, will not like me to focus this on the last 7\1/2\ years, but I will for a couple of minutes. Let me just ask a question that needs no answer. How could crude oil prices, since January 1999, go up 300 percent and there not be a dramatic increase in a derivative of crude oil called automobile gasoline? It is impossible to go from $11 a barrel to $33 a barrel and to blame you for the increase in gasoline prices when something is amiss in American policy, unless that is the way we want to do business. To have crude oil go to $10 and then go up to $30 and then come down to $20 and then go up to $40, I am just projecting, but that is the roller coaster we have been on. Now, I think the policies of our National Government are somewhat responsible, and I predict for you today the next crisis will be brownouts. And I am crossing my fingers while I predict there will be brownouts. And then there will be another series, Senator Lieberman, of ``we blame you.'' And the truth of the matter is we are not building enough power plant capacity to meet electrical generating needs, and we are going to get stuck with that just like we did by OPEC when they found we needed more crude oil and they weren't giving it to us. Instead, they decided we will not give it to you until the price gets up where we want it. And nobody really is going to be to blame for the brownouts, because it is the fault of an American policy of trying to get every ounce of energy out of the utility companies without producing any new sources. Because new sources create environmental hazards, we better squeeze every ounce out of the existing electric generating system and swapping around rather than just build new ones. And the only thing we are using to build new ones is very risky. The last five, Mr. Chairman, are all natural gas--natural gas which comes into your citizens' households, and they are delighted to be able to afford it. Build the next generation of plants that furnish us with electricity on natural gas, Senators, and the price in your households will begin to rise. Folks will begin to say, ``Who is responsible for that?''--for the enormous increase that is going to occur. And it is a lack of a policy, that forces us to recognize that we need power plant capacity. I am going to say from the standpoint of one Senator, and maybe Senator Lieberman has said a little bit that might permit me to say he concurs, but another problem is an American policy that says no activity in the nuclear power area, no nuclear waste disposal even on a temporary basis. Even though this is done by every European country like you get up in the morning. Eighty percent of France's electricity comes from nuclear power. They put it away temporarily, and they don't lose a wink of sleep. And we are fussing around trying to find a place to put the temporary storage of that which comes from nuclear power plants. Frankly, the President made a horrible mistake when he refused to let a facility be built. And if you had nothing else to blame on him, you can blame him for stifling the future because we are frightened to death of the cycle on nuclear power. Now, I want to talk one final moment on how you can send a message to the OPEC countries. How could we have less oil production in America and take more American land out of production, and send any signal to them other than we are more at your mercy every single day? And that is what happened. Sixty percent of the land that in 1983 was available for independents to try to produce oil is off limits now. The idea of a multiple use of the public domain is a concept that is fleeting away because it really isn't of concern to certain people who advise this administration that national lands be used for energy production. It is that they should be preserved, and the principal function of government is conservation and preservation, not utilization of what God put under the ground, which is energy sources. ANWR is off limits. Offshore drilling, which is an abundant source of natural gas, that moratorium is preserved as if we relaxed it a little, we would imbalance the environment of America. None of that is true. So I have been heard to say that the chickens are coming home to roost, and, frankly, they are going to come back in more numbers. The roost is going to get heavier, and there is going to be another roost for another source of energy, and that is going to be the one I just told you about. And then we are going to say, as we frequently do, it is your fault, Mr. Frank, it is your fault, and it is your fault, Exxon. In wrapping it up, let me say we now have--did anybody quote how few refineries we have now? Senator Voinovich. Yes. Senator Domenici. You already did that? Senator Voinovich. We have gone into that. Senator Domenici. Thank goodness that these refinery owners have put in new equipment and new technology, because fewer are producing more per unit, but you haven't built one since, what 1976, Mr. Chairman? Mr. Frank. Nineteen seventy-six. Senator Voinovich. Haven't built one for 25 years. Senator Domenici. Now, what does that say for a country? That means we must have some policy that says it is far more important not to build them, for some reason, than it is to build them and have capacity of our own. And I assume it is in some part because of the 23 environmental protection rules and regulations that apply to the oil and gas industry, or maybe it is even beyond those 23. But, essentially you just can't do all of these other things and expect to do anything but grow more dependent and grow more vulnerable. And I think you are proving that today, and thank you for the time. Senator Voinovich. Thank you, Senator Domenici. I will say this, that from everything I have heard, natural gas and home heating oil are going to skyrocket before this winter comes up, and I don't know what we can do about it, but that is what everyone is saying. And not only, Senator, I want to say, is it in terms of nuclear power and not having a policy in regard to that and the biggest stumbling block is not having a place to deal with nuclear waste, but this administration also wants to eliminate fossil fuel in this country, which is a very, very important source of fuel in my State. That is the way it is. Mr. Frank. That is one answer to Senator Domenici's question. Why hasn't there been a refinery built? It is because the administration and Vice President Gore in his book ``Earth in the Balance'' has said he wants to eliminate fossil fuels and doesn't want any more refineries. Who is going to build one under those circumstances? Senator Voinovich. We are getting into the finger pointing, which I didn't want--but it does get frustrating. I lived 8 years as Governor of Ohio, and we have 15,000 less miners in our State and costs are up. We will hear from you now, Mr. Cavaney. TESTIMONY OF RED CAVANEY,\1\ PRESIDENT AND CHIEF EXECUTIVE OFFICER, AMERICAN PETROLEUM INSTITUTE Mr. Cavaney. Thank you, Mr. Chairman and Members of the Committee. I appreciate the opportunity to present the views of API's members on rising oil prices and the efficiency and effectiveness of the Executive Branch's response. Our members understand their customers concerns over the recent higher gasoline prices. They work hard to ensure consumers have a readily available and affordable fuel supply, and the historical record attests to their success in that regard. --------------------------------------------------------------------------- \1\ The prepared statement of Mr. Cavaney appears in the Appendix on page 270. --------------------------------------------------------------------------- Over the past decade, gasoline has been more affordable than ever. Adjusted for inflation, 1998 prices were the lowest in history; in 1999, they were the second lowest. Prices have been low because companies have competed hard to reduce their costs and because supplies have been plentiful. Gasoline prices in 2000, however, have increased--not to record levels but far above where they were 12 to 18 months ago. And in the Midwest, they are above even the higher national average. There are four main reasons why. First, world crude oil prices have risen sharply, the result of decisions by OPEC and several other foreign producers. Since crude oil accounts for 60 percent of the cost of gasoline, excluding taxes, an increase in crude prices directly impacts the price at the pump. Over the past 2 months, the cost of crude oil has risen 35 percent. Second, inventories have been lower than usual, and prior to June 1, as Corky Frank testified, companies were clearing their storage tanks of the wintertime fuel in order to accommodate the new cleaner-burning gasoline when we experienced some shortfalls in the Midwest due to the pipeline and to several other problems that I will cite. Imports into the region are absolutely critical because the Midwest refineries only make a little less than 80 percent of the gasoline that is consumed in that region. Third, demand for gasoline has been increasing, as it usually does during the beginning of the driving season. According to the Department of Energy's Energy Information Administration, ``gasoline demand in the Midwest seems to be growing more strongly in 2000 than it has for the past couple of years in the region.'' Fourth, the new cleaner-burning gasoline which was introduced at retail on June 1 causes special problems in the Midwest, a fact EPA was aware of for over a year. Refiners weren't able to make quite as much of the special base fuel as quickly as needed, tightening supplies and ultimately pushing up prices. Other factors have also played a role, including the Unocal patent infringement case that has created uncertainty and risk for many companies making or importing cleaner-burning reformulated gasoline. As DOE Energy Information Administration says in its brochure entitled ``A Primer on Gasoline Prices,'' and I quote, ``Any event which slows or stops production of gasoline for a short time can prompt bidding for available supplies. If the transportation system cannot support the flow of surplus supplies from one region to another, prices will remain comparatively high.'' That is what happened in the Midwest. But, frankly, we are very pleased to see that the actions of the industry in bringing more supply to bear has made significant reductions in wholesale prices, and retail prices are moving accordingly. For all these reasons, today's gasoline supplies haven't been enough to meet the demand at the record low prices that consumers enjoyed not too long ago during this transition period involving RFG Phase II. This same conclusion was reached by two government reports issued just last week: The Congressional Research Service report and the DOE's EIA latest report of June 20. Price increases have surely been painful, and companies are rushing to get every gallon into the marketplace that they can. Refineries supplying the Midwest are running all out, and added supplies are exerting downward pressure on prices as we speak. In fact, spot prices for the Chicago market started falling, as Mr. Frank cited, back on June 7, less than a week after the new gasoline was introduced at the retail level, and they have fallen well over 30 percent since that time. Prices at the consumer level typically follow such reductions at varying intervals, depending on how much higher-priced products is still in the system and other factors. Already, as we have talked about, pump prices are falling. Gasoline is much like many other commodity products, although it differs in one important aspect. When a drought reduces the corn harvest or a freeze cuts citrus production, prices go up. When corn gets expensive, people can switch to potatoes or some other product where supplies are more plentiful and prices are lower. For gasoline, substitutes are not readily available, so consumers feel stressed. Yet the system ultimately works to their advantage because over the longer term gasoline prices for decades have been trending downward. The current situation underscores the need to revisit our national energy policy, and we would like to suggest at least four areas be considered in that regard. Greater access to government lands is needed to find and develop more domestic oil and natural gas resources and to cut our reliance on foreign oil, which now fulfills 55 percent of U.S. needs. We also need more access to foreign oil supplies, but government policies--specifically, unilateral sanctions--have placed some of these sources off limits. Coordinated implementation of the environmental rules impacting consumers and the industry are also needed. And, finally, expedited permitting for the building or modernization of facilities for the manufacture and delivery of gasoline, diesel oil, natural gas, and heating oil is also vital. U.S. oil and natural gas companies know how to make and deliver gasoline, and all strive to be an efficient provider. With a more effective national energy policy, still fully protective of the environment, our members could even better serve the consumer, and the risk of market volatility would be reduced as well. Thank you. Senator Voinovich. Thank you, Mr. Cavaney. What was the third reason that you had? You had access to government land-- -- Mr. Cavaney. Coordinated implementation of the environmental rules impacting both the consumer and the industry. Oftentimes, we and the Environmental Protection Agency get in disagreements over impacts, and there isn't enough time spent on looking at those things beyond just the environmental impacts, looking at the cost impacts, and, more importantly, in our case, the supply impacts. Is there going to be enough supply to go around? Because that is really what is at the heart of much of what has gone on these last 4 or 5 weeks. Senator Voinovich. As I said earlier in my opening statement, we have heard a lot about the high cost and everyone has got a different reason for it, and I am pleased to have heard the explanation here. Mr. Blumenthal, you have a theory, and we have heard these gentlemen. But the guy at the pump that I am going to run into this weekend--I am going to get over there--wants to know--prices are coming down: Senator, are they going to stay down? And, Senator, 5 years from now if I bump into you here at this Marathon station, are we going to have the same situation that we have today? I would like to know what things could we do--now, I heard from Mr. Frank, you testified before Speaker Hastert at a meeting we had last week or the week before, and you were talking about some things that you thought could help the situation. And I would like to hear about them, and I am sure my colleagues would today. What things do you think right now could help the situation so that we stabilize this price? And then what are your thoughts about the long run? Mr. Frank. Senator, our country has come to expect low energy prices, and yet we are becoming more and more dependent on imported crude oil, and that is because of the fact that we are locked out. The oil companies are locked out from exploring on whatever lands are available and what kind of crude oil reserves might be found there. Our infrastructure in this country, for all energy sources, is tired and worn-out, and it has low profitability. In the segment that I know about, for the last 20 years in the refining business, the rate of return on capital employed has been 5 percent. Senator Voinovich. Mr. Frank, we always use this word ``infrastructure.'' What do you mean by infrastructure? Mr. Frank. Pipelines, terminals, service stations, refineries and the pipelines that serve them. I am talking about the refining industry and transportation industry now. But the electrical industry--on the panel I was with yesterday were four people testifying on the electrical industry, and it amazed me that our problems are very similar, that low profitability is not encouraging investments. You are seeing major large, integrated oil companies walk away from the refining business because they are saying the returns aren't adequate for us to have an interest in that anymore. The refinery closures in the Midwest, 12 since 1990, they are just closing down. And there are several marginal refineries that remain through the rest of the United States, including the Midwest. And if they are uneconomic, something has got to happen to let that capacity be picked up because the refining system is running at 100 percent of capacity, the pipelines to the Midwest are at 100 percent of capacity. What do you do when you are up against those kind of constraints? You have got to have more capacity. Who is going to build it? How do you attract the capital to invest in building a refinery if you are uncertain what the economic return is going to be? That is what faces our country today. And then there is a concept that nobody believes that you could even build a refinery in the United States anymore, that the permitting process is so difficult, nobody wants a refinery in their area of the country. And the time to get a permit is exceptionally long, even for doing new capital projects. It is a very involved process. So I think that, in short, the situation has got to find some way to allow a return that attracts investment so that people find that an attractive place to be in business. Mr. Blumenthal. Mr. Chairman, if I may add a word, I certainly support the idea that infrastructure needs to be improved, that we should offer incentives for that kind of enhancement. At the same time, fundamentally, when you deal with customers at the pump or the man who is charging you who owns that gas station, what we are dealing with short term is a lack of inventory, a shortage in supply, insufficient stocks. And, in fact, in terms of infrastructure, I am told--and I believe reliably--that the industry has excess storage capacity. I believe it may be on the order of one-fifth overall nationally. We have storage capacity that is not being used now because inventories have been so low and that the shortage of stocks has made the system susceptible to the kind of short- run, short-term disruptions that you have heard mentioned today and have increased the margins that Senator Lieberman cited earlier and have been responsible for those historic price hikes that we have seen. And so I think the immediate question is: What do we do about inventory so as to avoid the looming crisis that you, I think, cite, quite rightly, that we face on heating oil this very winter? This week, in New York, the spot price for heating oil was 79 cents as compared to 46 cents per gallon last year. That gives you some idea of where we are heading on heating oil. And I think, quite rightly, you are focusing on long-term energy policy and so forth, but right away, for the sake of those people who are going to be without heating oil this winter or having to pay $2.25 per gallon, as we did in Connecticut last year, we need to increase the supply, and I think looking to the strategic reserves that this country has. Senator Voinovich. Well, I am very interested in the shorter term, and I may be from the Midwest, but I am concerned about the rest of the country also, and everything I have read says it is going to skyrocket and that we are going to be hearing people scream about this, as they are in the Midwest. In terms of heating oil, it is even more severe because this is how you heat your home. I am concerned about it, and I am interested. Are there short-term things that we can do to avoid the crisis? Mr. Blumenthal. And I might add, Senator, that in terms of short-term measures, the focus of this Committee--and I really commend and salute this Committee for focusing as it is in a very thoughtful and insightful way on this problem--does have a beneficial effect. Investigations do work. And whether it is the FTC or the antitrust department or this Committee--as Senator Levin remarked earlier--the light and heat of public scrutiny have a beneficial effect for consumers. And so I think the attention this Committee is giving to this problem so thoughtfully will have an effect in and of itself. Senator Voinovich. Mr. Caveney. Mr. Cavaney. Yes, Senator, I would like to comment on what we can do. I think the most important thing we can do right today is let the market work and not interfere. As the chart shows here, the industry's traditional response over decades is to rush supplies from wherever you can find them into areas that are getting tight. That is what you have seen in the Midwest. Our longer-term problem, though, which is part of this, is that when you have the capacity pretty well matched up with demand, when we are in the middle of a major effort to supply the needs of the consumer--think of earlier in the year when we were asked to go in to speak with Secretary Richardson, when we were talking to a lot of other people, they said maximize your production of distillates so we can get home heating oil and diesel fuel. We were told to go full up. Well, when you are going full up on that, you don't have the extra capacity to start to make a product to begin to full up inventory for the next change, which was the summertime fuel. And that is going to be the challenge we are going to face ahead of us: How do we keep producing at record levels the kind of production we need for summertime gasoline and at the same time make sure that there is enough extra capacity that can be worked into the system that you can get the build on home heating oil and the distillate fuel that we know we need for the other? So it goes to both the short term--don't confuse or discourage the kind of behavior that is producing good results, but long term focus on this idea that we are expected to change fuels by season and by regs. But when these two match up very, very closely, there is little give in the system. Senator Voinovich. Mr. Frank, when you testified before Speaker Hastert, you mentioned there were four or five things that you had given the administration, and one of them, I think, dealt with this Explorer pipeline and Wolverine that is going to take 8 months for you to test it so that it can be at full capacity. Right now it is at 80 percent of capacity, which means that you are only getting 90 percent of the gasoline throughput. Mr. Frank. Yes. Both Explorer and Wolverine are restricted to operating at 80 percent of the pressure at the point of the break, which translates to about 10 percent reduction in volume. And the Explorer pipeline has been down since early March, either completely out of production or at this restricted rate. The ongoing shortage in the PADD2 is 50,000 barrels a day of gasoline. That is significant. I have heard it described yesterday in the House hearing that the normal amount of gasoline was going to Chicago that normally goes there, but Chicago was almost in a critical state of supply, depleted inventories back in about the third week of May, and there is no make-up capacity. It is sending the normal volume in there, but that is all that can be sent by this pipeline with the restriction it is on. Wolverine is--and the company is trying to expedite, the Explorer pipeline company, the process of having run a smart pig, which is a flaw detector device, electronic flaw detector, and get the results analyzed. But they think that from the information I have heard that that takes about 3 or 4 more months. There have been some companies that have given up their space, other pipeline companies, to let Explorer company move to the front. The Wolverine situation is a little bit different in that the failure was related with a fitting, and from what I understand, they should be back to capacity in 3 or 4 more weeks. Senator Voinovich. I am very interested in any short-term things, an administrative agency or whatever it is, to try and jack them up and get them to do it, any way that we can tighten up a screw here and push this here to make it---- Mr. Frank. In the items that I listed to the Department of Energy and to the EPA, including expedite an increase in Explorer pipeline operating pressure, restoring it, grant a relief on DOT driver restrictions for transport, for drivers to be able to drive their transports longer hours. We got all the trucks we could, and we were moving gasoline from Illinois, Indiana, and Ohio into Michigan. First, it started off we were moving it into Chicago to help satisfy that problem, and then we moved it into Michigan, and longer hours would have helped. Approve the larger tank truck for use in other States, like is used in Michigan. It is about a 70 percent larger tank truck for transporting gasoline. Senator Voinovich. Mr. Frank, I am out of my time, and I am on my colleagues' time, but I would like to have you submit those letters for the record.\1\ I would certainly like to see them. And if there is something that I can do to help expedite it, I am sure some of my colleagues might be willing to do the same thing. We would be more than happy to do it. --------------------------------------------------------------------------- \1\ The information referred to in a letter dated June 13, 2000, sent to the EPA and the Department of Energy from Mr. Frank appears in the Appendix on page 131. --------------------------------------------------------------------------- Senator Voinovich. Senator Lieberman. Senator Lieberman. Thanks, Mr. Chairman. Attorney General Blumenthal, I know you have a plane to catch. Do you have a moment for some questions? Mr. Blumenthal. Sure. Senator Lieberman. Incidentally, Mr. Chairman, in my recitation of Mr. Blumenthal's background, I failed to mention one high point in his career. He was the administrative assistant to former Senator Abraham Ribicoff of Connecticut, who, in fact, was the Chairman of the Governmental Affairs Committee. So there is a nice piece of history. Mr. Blumenthal. The staff has improved considerably since then. [Laughter.] Senator Lieberman. We have been talking about the reserves here, and some of us have tried to convince the administration to open up the Strategic Petroleum Reserve, and we are talking about a regional home heating oil reserve. I was very interested that you have raised the question of the possibility of requiring the oil companies to maintain some minimum reserve of their own, and I wanted to know first--I don't know whether you have had a chance to go into that very much, but whether you feel we would be or the States would be on a strong legal foundation in considering such a requirement, and, second, whether you have thought at all about how we would try to determine what the minimum level of reserve required would be? Mr. Blumenthal. First, Senator, let me say that my preference would be to use the strategic reserve concept as you and others have suggested we do, and many of us as attorneys general have advocated as well, not to manipulate prices or have the government intervene in a heavy-handed way in the free market, but try to deal with extraordinary situations such as we now have confronting us in all parts of the country, and I agree with the Chairman that it is really all parts of the country that share in this problem. As an alternative, the idea that some kind of reserve or minimum balance be maintained I think in principle would operate much the same way as we now do with banks or insurance companies and other kinds of industries where the product is not a luxury or a common, everyday consumer product where there is competition and where there is an absence of government regulation, but in this industry where we are dealing with an essential commodity that people need at affordable prices and, at the very least, need to have at certain points of the year, for example, in the winter where consumers throughout the Northeast last year went without the product and suffered as a result. And so how to set what that reserve would be I can't state with precision at this point, but it would be based presumably on historical levels of supply and demand, and could well be enabled through tax credits and other kinds of incentives offered, as well as conceivably some kind of minimum requirements. Senator Lieberman. Well, I appreciate your venturing forth into this area, and I look forward to hearing, as you and your staff develop this thought, more about it. I don't know how-- maybe I should ask Mr. Cavaney or Mr. Frank how you respond to that proposal. Mr. Cavaney. Well, one of the things, when you look particularly at the Northeast where we had the heating oil experience, the problem in the Northeast was not one of inventories. The problem was one of transportation. There were inventories in PADD1, but if you will recall, the problem was that most of the harbors that we typically moved the product up the coast and into were iced over and we had trouble getting barges in to make deliveries. The roads, for a long period of time we couldn't move the trucks on them, and, finally, thanks to Secretary Richardson, he and the States up there mobilized and cleared the ice away, and we were able to move the inventory in. So just looking at inventories is not going to solve all of the problems that we happen to see. And then you also have to consider that the hand of government into the business of selecting inventories, because what you wouldn't want to do is create a law of unintended consequences that we haven't been able to think through. So a lot of consideration has to be given to the issue before people go jumping off in that direction given our experience. Senator Lieberman. OK. Did you want to add anything, Mr. Frank? Mr. Frank. I would say my company doesn't market heating oil, we are not a Northeast supplier. The things about strategic inventories, are they in the right place? How do you distribute them if they are needed? And then what is market interference or unreasonably prices, and when does it come in? How do you set those rules? One of the things that intrigues me--and this is sort of going to the SPR concept that we talked about, the last panel talked about--as a policy, why did the SPR not fill at a more rapid rate with these low prices last year, $10 a barrel, fill the Strategic Petroleum Reserve? It looked like an opportune time, and it could help stabilize the crude oil price from this volatility. But it wasn't done. In fact, I think we decreased what the fill rate was. Senator Lieberman. So you think that we made a mistake there in not purchasing while prices were low? Mr. Frank. Well, as a businessman, sir, I always like to buy low and sell high. Senator Lieberman. Sell high, exactly. I have heard that before. [Laughter.] I don't know what the explanation of that is. It is too bad the folks from the Energy Department left. Maybe we will have another chance to come back and ask them. General Blumenthal, I thought another--this is an area in which we tend to hear the same ideas and remedies mentions. I thought you had a couple of really fresh thoughts in your testimony, and another one was the question you raised, as I heard it, of the impact that mergers in the energy industry may be having on this problem that we are dealing with today. So I wanted to ask you to speak at a little more length about what your thoughts are on that one and about the extent--I think you suggested that we may want to have new standards for mergers to consider this impact. Mr. Blumenthal. Well, thank you, Senator. Again, I can't claim any overwhelming expertise or wisdom, but we have among us as attorneys general a lot of experience with antitrust law and its enforcement, and I opposed the most recent major merger in the country, Exxon-Mobil, and was disappointed to see it approved, even with some of the divestiture that was ordered by the FTC as a condition. I think that part of the reason for the diminished competition--indeed, for the absence of real competition in many parts of the country at the retail level and other levels in the industry is that we have seen a wave of mergers and consolidations. And I very simply propose that the presumption be against approval unless there is clear and convincing evidence that there will be a tangible benefit for consumers. A lot of times we hear the companies in this industry and in a great many others say rhetorically, somewhat vaguely, with uncertain data and predictions, that there will be benefits for consumers. But what I am suggesting is that we should put the burden of proof on the companies that are merging, that the presumption be against approval, and that there be clear and convincing evidence of real benefits, tangible ones, for consumers. Senator Lieberman. Let me ask one more question as my time is running out. You made mention of several State attorneys general being involved in review of this matter. Is that focused on the question of whether there is price gouging going on? And how broad is the multistate investigation in this case? Or is it individual States that are doing it individually? Mr. Blumenthal. There are individual States coordinating our efforts, some of them in the Midwest, obviously, that are working with the FTC, but others of us from other parts of the country, some of the major States that have a stake in this problem. And we have a real tradition, as you well know, of working together in these multistate task forces involving antitrust matters, and there is no economic problem that is of higher priority to us than this one. Senator Lieberman. Thank you very much for taking the time to come down and contributing to the discussion. I am proud to have you as my attorney general. Thanks, Mr. Chairman. Senator Voinovich. Thank you. Senator Durbin. Senator Durbin. Thank you very much, Mr. Chairman. Are we on a roll call vote? I don't know how much time is remaining. Well, if they could check, I may not be able to come back after the vote. I would like to make one comment for the record. If I am not mistaken, during Senator Domenici's testimony it was noted that it has been 25 years since we have built a refinery in this country, and someone--it may have been Senator Domenici, but someone said it is because of this war on fossil fuel, and someone said, yes--Vice President Gore. I had my staff check. He has only been Vice President for 7\1/2\ years, and if there hasn't been a refinery built in 25 years, I think perhaps that is overstating the politics of this issue. Now, there was, if I am not mistaken, a Republican President for 12 years in that period of time, and if there was a war on fossil fuels under Ronald Reagan and George Bush, I can't speak to it. But to assign political blame to Al Gore, the Democratic candidate for President, for the failure to build a refinery for 25 years is a leap that I hope we won't take in this Committee. Mr. Frank. Let me elaborate on that a little bit, Senator. For the period from 1976, which was when the last refinery was built in the United States--and my company built it--there hasn't been another one built. At that time there was an oversupply of refining capacity by about 25 percent, so there wasn't a need for a refinery to be built. In Al Gore's book, Vice President Gore's book, he says that he is opposed to this. Senator Durbin. Opposed to? Mr. Frank. Fossil fuel; the internal combustion engine he wants to obsolete. Senator Durbin. Well, we have had this debate on the Senate floor, and I think if you read the book more closely, you will see that he is suggesting--and a lot of people are joining him--that we should be looking at energy alternatives. I support that, and I don't believe it is going to happen overnight. Mr. Frank. I am not opposed to that, either. Senator Durbin. I hope your industry supports it. Mr. Frank. I am not---- Senator Durbin. Let me raise three questions because we have very limited time here. One is, if the price of wholesale gasoline has gone down 47 cents in 14 days, when will the price at the pump go down 47 cents? Mr. Frank. I think my partner, who has just left here from the table, would tell me that I can't predict that for you. But if you look historically, prices at the street lag going up---- Senator Durbin. Lag by how much? Mr. Cavaney. I can make a comment on the last increase that you see over there, we tracked it and it lagged by 2 weeks. Senator Durbin. So you would say in 2 weeks the full 47 cents ought to be felt in the upper Midwest? Mr. Frank. No, sir. It did not occur all in 1 day. Senator Durbin. Well, why not? Mr. Cavaney. Let me explain why. First of all, broadly, there are 180,000 retail outlets in the United States that sell gasoline. Ten percent of them are owned and operated by the oil companies; the other 90 percent are owned by independent businessmen and independent businesswomen who have their own marketing and sales strategies and determine the price of the product, how much inventory to hold, and the like. They all make these. Legally, we can't be privy to any information there, and even if you had the capability to do so, I don't think it would be easy to get your hands on it. But if you look at it historically, you can talk about trends, and the lag can't be as precise as by 1 day, but it is going to happen. Senator Durbin. I don't expect it to be precise, but you can understand the cynicism of the consumer when you see a 47- cent decrease in wholesale prices and you can't tell me when they are going to benefit from it. Let us hope that they do. Mr. Cavaney. They will. Senator Durbin. Let me ask you the second question. Some States like Indiana and Illinois are talking about reducing their gasoline taxes. What assurance can you give consumers, families, and businesses across America if we reduce any tax on a gallon of gasoline that they will be able to measure that impact in reduced cost at the pump? Mr. Frank. Let me respond to that, Mr. Cavaney. Governor O'Bannon in Indiana reduced the gasoline tax effective July 1, and there is a roll-in period because it is taxed as what goes into inventory. I can tell you what my company did. We made a press announcement on Tuesday of this week that we reduced the price of gasoline in the whole State of Indiana by the amount of the sales tax decrease before July 1. Senator Durbin. I am glad you did that. I wish we could have a similar impact in Illinois. It is going to be tough to measure how much of that is an impact of the wholesale price going down, which you are not sure when we are going to see the impact on. Mr. Frank. They are different situations, sir. Senator Durbin. I understand. For the consumer, it is the same situation. Mr. Cavaney, one of the things that you said here, I wrote down several of your comments, and sometimes it is hard for me as a liberal arts major to follow some of this deep, dark economics. But you said at one point, how can you invest if you are uncertain about economic return? I thought that was kind of what capitalism is all about. You deal with the market. Then you went on to say, let the market work. We have some numbers here that suggest that the members of the American Petroleum Institute have done very, very well in terms of the profitability of their operations. Let me give you a couple examples: First-quarter profits for the major private oil companies in the United States over the year 2000, up 500 percent; BP-Amoco, profits up 296 percent; Exxon-Mobil, 108 percent; Phillips, 257 percent; Texaco, 473 percent. That is the year 2000 first-quarter profits compared to the year 1999. Now, it is interesting to me that those first-quarter profits would be there, you would have such a good turnout for your members, and then the consumers get nailed in the upper Midwest with 40-, 50-, and 60-cent-a-gallon increases. Mr. Cavaney. Senator, that is very explainable. In 1999, the industry was in a depression. It was operating and selling gasoline as historically low prices, lower than they sold during the depression. What I have here that I would like to submit for the record, Business Week, May 15 edition, this is the Corporate Scoreboard \1\ that lists all corporations and their earnings over the first quarter, the exact period you cite. --------------------------------------------------------------------------- \1\ The Corporate Scoreboard appears in the Appendix on page 290. --------------------------------------------------------------------------- Let me just give you some examples of what we think is not any evidence at all of getting excessive profits. These are the returns, which is the net income as a function of sales on ongoing operations: The telecommunications industry, 10.3 percent; non-bank financial, 10.8; banks, 14.6; computer software, 17.4; electronics, 11.7; media, 11.9; all-industry, 7.3; and oil and gas industry, 5.9 percent. So the amounts that you cite are from a low historical base. If you compare them against all other corporations, you can certainly not argue that there had been any excessive profits in the industry. Senator Durbin. I will make a matter of record here of the increases between 1998 and 1999: ARCO, up 165 percent; BP- Amoco, 35 percent. The list goes on and on. It is certainly a lot more than 5 percent. Mr. Cavaney. It is not. Senator Durbin. The bottom line I want to get to is this: When it comes to the government's involvement here, there are environmental concerns which many of us in this country share. No, we don't want you to drill everywhere. We don't want you drilling offshore in vulnerable areas. Some of us were up in Prince William Sound and saw what happened with the Exxon Valdez. We don't want you--some of us don't want you to go in the Arctic National Wildlife Refuge when you are diverting oil that is being drilled out of Alaska to Japan instead of the United States. And some of us believe that, yes, we can produce energy and clean air for America. We don't think they are inconsistent. Mr. Cavaney. We believe the same thing, Senator, and we would look forward to sitting down and having a dialogue and trying to be constructive in that regard. We are not asking to be able to drill everywhere, but we certainly need more domestic energy sources if we are going to have any hope of---- Senator Voinovich. And the public ought to understand that because we haven't done the exploration and we haven't gone into the areas that that is part of the reason why they are paying increased taxes---- Senator Durbin. Well, let me say, Mr. Chairman---- Senator Voinovich [continuing]. Or increased costs for gasoline in this country, and the fact of the matter is it is time that the environmentalists and the oil industry sat down and started to look at balancing up the options, that there is a possibility that you can have more domestic supply and at the same time protect the environment, and they are not separated. But for the last several years, the attitude is that if you do any exploration, you are polluting the environment---- Senator Durbin. No, Mr. Chairman, on my time here--and I have a minute and 25 seconds, and I have waited patiently all afternoon for a chance to ask any questions. And let me just say on my time, I don't disagree with your premise here. There should be this conversation. But many of us are concerned when the major oil companies want to go on public lands and drill and not pay the taxpayers fair compensation for the oil that they are deriving from our land, America's land. And, second, it troubles me that during the course of this conversation this afternoon, there have been, I think, precious few opportunities for us to mention words like conservation and fuel efficiency. It is as if this isn't part of the equation. I think it is a big part. And when we talk about CAFE standards and talk about SUVs being held to standards so that they have some fuel economy--accountability, I don't think that is unreasonable. I would like to make that part of the same conversation. Mr. Cavaney. Senator, we support conservation efforts. We support efficiency efforts. And we also would like to, hopefully, through your good offices and some of the others, to begin the dialogue to talk about how can we have both, because most of the clean air gains have come from the mobile sources, which is the autos and ourselves. So we have the capacity to do it. We would like to. Senator Durbin. I yield back my time. Senator Voinovich. Thank you, Senator Durbin. I would like to just finish and adjourn this hearing with one last word, and that is, shame on all of us if we don't get together between now and the end of this year to come up with some kind of an energy policy, and I would be very interested in hearing the industry's point of view or anybody else that is viewing this hearing on S. 2557, that is, the Lott-Murkowski bill--I happen to be a cosponsor of that bill, but it would be wonderful if we would be able to perhaps refer that to a committee, get people, had testimony on it, and did it on a kind of bipartisan basis and work on that between now and the end of the year. There are some that want to bring it to the floor for a vote. I am not sure that would work out because I think it would get very partisan. But perhaps it should be referred to a committee and let's start the dialogue. I will talk to the Leader about it today, get it to a committee and start, get the administration in, get the EPA in, get the environmentalists in, get the oil companies in, and start to see if we can't hammer out something so that maybe before the end of the year we can pass a piece of legislation, or maybe at least do enough work to get it up the flagpole high enough that in the next administration we can tackle it immediately so that, again, we don't find ourselves where we are today with all of this going on and nothing to show for us. Thank you very much. Mr. Frank. Congratulations on taking the initiative to get that ball rolling, Senator, because it is something that the United States, our country, has been sorely lacking, and there needs to be a balancing of interests, and issues, to arrive at a workable plan that describes what our energy policy is. Senator Voinovich. Thanks very much for your patience. The record will remain open for 1 week for additional submissions.\1\ --------------------------------------------------------------------------- \1\ The prepared statement of Senator Bayh appears in the Appendix on page 283. --------------------------------------------------------------------------- [Whereupon, at 4:50 p.m., the Committee was adjourned.] A P P E N D I X ---------- PREPARED STATEMENT OF SENATOR CLELAND Mr. Chairman, thank you for the opportunity to come here again today to speak on the very important topic of rising oil prices. Since this Committee's last hearing on this issue on March 24, oil prices have steadily increased across the country resulting in sharply higher gasoline prices, including in my own State. Only in the last week or two have I heard reports that oil prices may have declined in certain parts of the country. However, prices have not declined enough to offer substantial relief to a vast majority of Americans. I am especially concerned about the devastating effect that the high gasoline prices may have on people with fixed incomes who lack the means to absorb the increase in the face of other essential household and personal expenses. Additionally, our farmers in the Southeast are currently facing one of the worst droughts in recent memory. The projections for this year's crops do not look good. We must realize that high fuel prices have a tremendous effect on the agriculture community. Those who are just getting by now have to contend with the exorbitant cost of diesel and gas. Though oil prices in Georgia are higher than they were last summer, gasoline prices have not yet reached the levels currently experienced in the Midwest. Since future increases remain a distinct possibility, I am closely following the situation in the Midwest. This hearing provides us with the opportunity to learn more about the impact that rising oil prices have had across the country and the various reasons for the higher fuel costs associated with the increase in oil prices. The exorbitant price of gasoline in the Midwest has reached approximately $2.30 per gallon in some cities and hopefully, today's experts and officials will provide solutions that will significantly reduce the cost of oil across the country. Over the last several weeks, I have been contacted by many of my constituents who have expressed their serious concerns about the impact of the recent dramatic increase in petroleum prices. I must note that I have heard a great deal of concern regarding the use of reformulated gasoline or RFGs. In the Commerce Committee, we recently reported a pipeline authorization and reform bill. It is the first time in many years that pipelines have been the focus of discussion. It is seldom noted that pipelines are an important form of transportation. In Georgia, we have an excellent network of pipelines which distributes fuel oil throughout the State. I recognize the importance of this system to supply our pumps, and I realize that our pipelines are one reason Georgians enjoy lower gas prices at the pump. Pipelines are an interstate mode of transportation. As such, it is a national concern that the challenges of transporting RFGs might increase the costs of fuel to consumers. Another aspect of this hearing is to examine the response from the Executive Branch to rising gasoline prices. Last January, I wrote to the President in order to express my concern over rising prices and to ask that the Administration consider any and all policy options in order to counteract this situation. The Administration has had some success in encouraging OPEC ministers to increase oil output. However, I feel that there is more that could be done. I look forward to hearing the Administration's summary of actions to date, and I would be pleased to know what we can expect in the near future. This is a desperate situation, and we must act immediately. And, of course, I hope we can get into the issue of the role of the pricing policies of the oil companies in contributing to the current program. As we all know, the Federal Trade Commission launched its investigation along these lines yesterday, but I think some of today's witnesses could shed light on this matter as well. Our constituents want to know what we're doing in Washington to address the high price of oil. As in most things, there is likely to be no single, simple explanation but we need to do what we can to get to the bottom of this serious situation. In an election year, there will be a great temptation for demagoguery and partisanship. I hope we can resist that temptation and develop a bipartisan consensus and course of action. I look forward to hearing from our distinguished witnesses. 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