<DOC>
[108th Congress House Hearings]
[From the U.S. Government Printing Office via GPO Access]
[DOCID: f:97399.wais]
DRIVING DOWN THE COST OF FILLING UP
=======================================================================
HEARING
before the
SUBCOMMITTEE ON ENERGY POLICY, NATURAL
RESOURCES AND REGULATORY AFFAIRS
of the
COMMITTEE ON
GOVERNMENT REFORM
HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTH CONGRESS
SECOND SESSION
__________
JULY 7, 2004
__________
Serial No. 108-241
__________
Printed for the use of the Committee on Government Reform
Available via the World Wide Web: http://www.gpo.gov/congress/house
http://www.house.gov/reform
______
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COMMITTEE ON GOVERNMENT REFORM
TOM DAVIS, Virginia, Chairman
DAN BURTON, Indiana HENRY A. WAXMAN, California
CHRISTOPHER SHAYS, Connecticut TOM LANTOS, California
ILEANA ROS-LEHTINEN, Florida MAJOR R. OWENS, New York
JOHN M. McHUGH, New York EDOLPHUS TOWNS, New York
JOHN L. MICA, Florida PAUL E. KANJORSKI, Pennsylvania
MARK E. SOUDER, Indiana CAROLYN B. MALONEY, New York
STEVEN C. LaTOURETTE, Ohio ELIJAH E. CUMMINGS, Maryland
DOUG OSE, California DENNIS J. KUCINICH, Ohio
RON LEWIS, Kentucky DANNY K. DAVIS, Illinois
JO ANN DAVIS, Virginia JOHN F. TIERNEY, Massachusetts
TODD RUSSELL PLATTS, Pennsylvania WM. LACY CLAY, Missouri
CHRIS CANNON, Utah DIANE E. WATSON, California
ADAM H. PUTNAM, Florida STEPHEN F. LYNCH, Massachusetts
EDWARD L. SCHROCK, Virginia CHRIS VAN HOLLEN, Maryland
JOHN J. DUNCAN, Jr., Tennessee LINDA T. SANCHEZ, California
NATHAN DEAL, Georgia C.A. ``DUTCH'' RUPPERSBERGER,
CANDICE S. MILLER, Michigan Maryland
TIM MURPHY, Pennsylvania ELEANOR HOLMES NORTON, District of
MICHAEL R. TURNER, Ohio Columbia
JOHN R. CARTER, Texas JIM COOPER, Tennessee
MARSHA BLACKBURN, Tennessee BETTY McCOLLUM, Minnesota
PATRICK J. TIBERI, Ohio ------
KATHERINE HARRIS, Florida BERNARD SANDERS, Vermont
(Independent)
Melissa Wojciak, Staff Director
David Marin, Deputy Staff Director/Communications Director
Rob Borden, Parliamentarian
Teresa Austin, Chief Clerk
Phil Barnett, Minority Chief of Staff/Chief Counsel
Subcommittee on Energy Policy, Natural Resources and Regulatory Affairs
DOUG OSE, California, Chairman
EDWARD L. SCHROCK, Virginia JOHN F. TIERNEY, Massachusetts
CHRISTOPHER SHAYS, Connecticut TOM LANTOS, California
JOHN M. McHUGH, New York PAUL E. KANJORSKI, Pennsylvania
CHRIS CANNON, Utah DENNIS J. KUCINICH, Ohio
NATHAN DEAL, Georgia CHRIS VAN HOLLEN, Maryland
CANDICE S. MILLER, Michigan JIM COOPER, Tennessee
PATRICK J. TIBERI, Ohio
Ex Officio
TOM DAVIS, Virginia HENRY A. WAXMAN, California
Barbara F. Kahlow, Staff Director
Melanie Tory, Professional Staff Member
Lauren Jacobs, Clerk
Krista Boyd, Minority Counsel
C O N T E N T S
----------
Page
Hearing held on July 7, 2004..................................... 1
Statement of:
Caruso, Guy F., Administrator, EIA, DOE; Mark R. Maddox,
Acting Assistant Secretary for Fossil Energy, DOE; Jeffrey
R. Holmstead, Assistant Administrator for Air and
Radiation, EPA; William E. Kovacic, General Counsel, FTC;
and Jim Wells, Director, Natural Resources and Environment,
GAO, accompanied by Scott Farrow, Chief Economist, GAO..... 31
Slaughter, Robert, president, National Petrochemical and
Refiners Association; Michael Ports, president, Ports
Petroleum Co., Inc.; Ben Lieberman, senior policy analyst,
Competitive Enterprise Institute; and A. Blakeman Early,
environmental consultant, American Lung Association........ 196
Letters, statements, etc., submitted for the record by:
Caruso, Guy F., Administrator, EIA, DOE, prepared statement
of......................................................... 33
Early, A. Blakeman, environmental consultant, American Lung
Association:
Letter dated July 6, 2004................................ 252
Prepared statement of.................................... 255
Holmstead, Jeffrey R., Assistant Administrator for Air and
Radiation, EPA, prepared statement of...................... 67
Kovacic, William E., General Counsel, FTC, prepared statement
of......................................................... 96
Kucinich, Hon. Dennis J., a Representative in Congress from
the State of Ohio, letter dated May 25, 2004............... 26
Lieberman, Ben, senior policy analyst, Competitive Enterprise
Institute, prepared statement of........................... 239
Maddox, Mark R., Acting Assistant Secretary for Fossil
Energy, DOE, prepared statement of......................... 55
Ose, Hon. Doug, a Representative in Congress from the State
of California, prepared statement of....................... 4
Ports, Michael, president, Ports Petroleum Co., Inc.,
prepared statement of...................................... 224
Slaughter, Robert, president, National Petrochemical and
Refiners Association, prepared statement of................ 199
Tierney, Hon. John F., a Representative in Congress from the
State of Massachusetts:
Charts................................................... 16
Prepared statement of.................................... 19
Wells, Jim, Director, Natural Resources and Environment, GAO,
prepared statement of...................................... 79
DRIVING DOWN THE COST OF FILLING UP
----------
WEDNESDAY, JULY 7, 2004
House of Representatives,
Subcommittee on Energy Policy, Natural Resources
and Regulatory Affairs,
Committee on Government Reform,
Washington, DC.
The subcommittee met, pursuant to notice, at 9:30 a.m., in
room 2154, Rayburn House Office Building, Hon. Doug Ose
(chairman of the subcommittee) presiding.
Present: Representatives Ose, Schrock, Tiberi, Tierney,
Kucinich, and Cooper.
Staff present: Barbara F. Kahlow, staff director; Melanie
Tory, professional staff member; Lauren Jacobs, clerk; Megan
Taormino, press secretary; Krista Boyd, minority counsel;
Earley Green, minority chief clerk; and Jean Gosa, minority
assistant clerk.
Mr. Ose. Good morning. Recognizing a quorum we are going to
go ahead and convene this hearing of the Subcommittee on Energy
Policy, Natural Resources and Regulatory Affairs. This hearing
is entitled, ``Driving Down the Cost of Filling Up.''
I want to welcome my friend, Mr. Cooper. The way we handle
these hearings is, this is an investigative subcommittee.
You'll see in the course of our proceedings that all the
witnesses get sworn in prior to that. All the Members who wish
to participate are provided the opportunity to make an opening
statement. Those statements are limited to 5 minutes. The
statements that our witnesses will make, while lengthy in
written form, will be summarized within 5 minutes, which will
be provided to each of them in order. In front of you, see a
little rectangular box that has three squares. There are green,
yellow and red lights in those squares. When the red light
shows, the gavel comes down. So I'm encouraging you to keep
your summaries to the 5 minutes.
One request I would make is that you turn your cell phones
off or turn it to just vibrate mode. That would be helpful.
During the first 5 months of 2004, the gasoline prices rose
nearly every week, peaking at a nationwide average of $2.05 per
gallon. Gasoline prices in my district in California climbed
even higher, hitting an astounding $2.30 per gallon on June
1st. Fortunately, gasoline prices have begun to decline in
recent weeks, bringing consumers and businesses much needed
relief.
With this respite, however, comes a critical juncture for
policymakers, and that is, do we allow the issue of high
gasoline prices to once again fade into the background, or do
we actively seek to implement solutions that address what seems
to be a cyclical imbalance between gasoline supply and demand?
Over the last 4 years, I have presided over four hearings
on gasoline markets. These hearings focused on a myriad of
issues, including the structure of fuel markets nationwide,
regional supply and demand factors and the effect of the
transition from MTBE to ethanol in California. We found that
there are some very real problems facing our fuel markets. As
gasoline prices begin to retreat from their current highs and
headlines, it is important that these issues do not fall by the
wayside.
Since the cost of crude oil determines about 40 to 50
percent of the cost of a gallon of gasoline, we must first
consider what can be done to reduce crude oil prices which
reached a record setting $42 in June. And I think, this
morning, we are popping up to $40 on-the-spot market. Some have
advocated that we cease filling the Strategic Petroleum
Reserve. Others have gone a step further and have called on the
President to draw down on the SPR. These proposed quick fixes
have serious repercussions and may do little to help drive down
prices at the pump.
To ensure that Americans have a secure and affordable crude
oil supply in the long term, we must either significantly
reduce our current demand or we must boost our domestic oil
production. Regardless of where future crude originates, to
process it in the United States, we must expand and enhance the
petroleum infrastructure which, at present, is stressed and at
its operating limits. Addressing the operating constraints and
bottlenecks within the entire infrastructure, including
refineries, pipelines, storage tanks and port facilities, is
important because each component of the system must function
properly to ensure that consumers receive an adequate and
affordable supply of gasoline.
We must look at ways to simplify the permitting process and
to reduce the burden of uncertainty of regulations so as to
encourage infrastructure upgrades and expansions. Failure to do
so could result in additional market volatility and unnecessary
price spikes.
Last, we must continue to consider the cumulative effect of
Government regulation on gasoline supply and prices. Due to a
dizzying array of Federal and State environmental regulations,
there are approximately 60 different types of fuel spread
across the United States. For the most part, these blends
cannot be interchanged from one market area to another.
Therefore, certain regions are susceptible to artificial
shortages and price spikes.
In California, overlapping Federal and State regulations
have created a de facto ethanol mandate. This mandate results
in a 10 percent reduction in gasoline supply for 8 months of
the year and does not necessarily improve either the quality of
our air or the quality of our water.
At present, the EPA is considering the oxygenate waiver
request from California. If approved, that waiver would exempt
California refineries from the Clean Air Act's 2 percent
oxygenate requirement, allowing them more flexibility to
produce clean-burning gasoline. I continue to urge EPA to
expeditiously grant this waiver, and it will be the subject of
some questions within this hearing.
Boutique fuels and mandates add complexity to the
production, distribution and storage of gasoline, further
increasing volatility in prices. Rather than continuing to
dictate exactly what goes into a gallon of gasoline, we should
set high environmental and performance standards and allow the
industry to meet them by their concoction of different recipes
of fuels.
I look forward to the testimony of our witnesses today.
They include: Mr. Guy Caruso, who is the Administrator for the
Energy Information Department for the Department of Energy.
Welcome. We have Mr. Mark Maddox, who is the Acting Assistant
Secretary for Fossil Energy at the Department of Energy. We
have Mr. Jeffrey Holmstead, who is the Assistant Administrator
for Air and Radiation at the Environmental Protection Agency.
We have Mr. Jim Wells, who is the Director of Natural Resources
environment at the Government Accountability Office.
We are also joined by again, after approximately a 2-year
absence, by Mr. William Kovacic, who is the General Counsel for
the Federal Trade Commission. That comprises our first panel.
Our second panel of witnesses is comprised of Robert
Slaughter, who is the president of the Natural Petrochemical
and Refiners Association and is also speaking on behalf of the
American Petroleum Institute; Mr. Michael Ports, who is the
president of Ports Petroleum Co., Inc. and is speaking on
behalf of the Society of Independent Gasoline Marketers, and
also the National Association of Convenience Stores. Our third
witness on the second panel is Mr. Ben Lieberman, who is a
senior policy analyst at the Competitive Enterprise Institute.
And our fourth witness on the second panel is Mr. Blake Early,
an environmental consultant for the American Lung Association.
In turn, we will welcome each of our witnesses.
At the present, I am pleased to recognize my good friend
from Massachusetts for the purpose of an opening statement.
[The prepared statement of Hon. Doug Ose follows:]
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Mr. Tierney. Thank you, Mr. Chairman.
Thanks for holding this hearing on gasoline prices and
continuing on this series of hearings. I think there are a
couple of things that we can agree on. The first is that
gasoline prices are high, and according to the Energy
Information Administration, the average price for gas
nationwide is about $1.89. It's decreased gradually over the
last 5 weeks, but it's still about 40 cents more than at this
time last year. And the EIA is not projecting the downward
trend to last throughout the summer.
I think we can also agree, the demand for gasoline is
increasing, and gasoline supplies in the United States are
tight. However, rather than blaming environmental laws and
promoting corporate give-a-ways, I believe we should be taking
action to address the underlying causes behind the current
supply and demand situation. I believe that we need to enact an
effective national energy policy, conduct an investigation into
the business activities of oil companies and how those
activities may be contributing to higher gas prices and take
actions that could bring immediate relief, like not diverting
supplies into the Strategic Petroleum Reserve.
We also should take any necessary actions to assist
particular regions, such as granting California's request for
an oxygenate waiver. We need an effective national energy
policy that promotes responsible energy consumption and reduces
our dependence on foreign oil. We should be investing in
renewable energy technologies and strengthening our fuel
economy standards. If we increase fuel economy standards to 36
miles per gallons by 2015, we are told we could save 2 million
barrels of oil a day in just 5 years, and controlling demand
would help control prices.
Under the administration's energy plan, imports of foreign
oil would actually increase 70 percent from 2002 to 2025. The
committee staff prepared charts as part of a report for Ranking
Member Waxman based on data from the EIA.
[The information referred to follows:]
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Mr. Tierney. Those charts are over to my left and the
audience's right. Those charts show that domestic oil
production will decline, even under the administration's energy
bill, and that, even if we adopt the administration's energy
bill, the need for imported oil continues to grow dramatically,
and we will need to import a record amount of oil in coming
decades.
The administration's bill does nothing to lower gasoline
prices. According to an analysis by the EIA, Energy Information
Administration, the administration's energy bill will have a
negligible impact on gas prices, increasing the average gas
prices by 3 cents per gallon. The administration's energy plan
would not lower gas prices, would not reduce our dependence on
foreign oil, but would give $20 billion of subsidies to the oil
industry.
Instead of pushing give-a-ways to the oil industry, the
administration's efforts should be focused on investigating
whether oil companies are engaging in anti-competitive
practices and manipulating gas prices. Oil companies engaged in
a wave of mergers in the 1990's, and the trend continues. There
have been literally thousands of oil company mergers that have
left 10 companies controlling close to 79 percent of the
market. The General Accounting Office released a report in May
finding that there were over 2,600 merger transactions between
1991 and 2000, leading to increased concentration in the oil
industry's downstream market. I note that study and that report
ended in 2000 and does not even take into account mergers since
that date. Six of the eight specific mergers evaluated by GAO
resulted in higher wholesale gasoline prices.
Now, the Federal Trade Commission, who we'll hear from
today, has severely criticized the GAO's report. Rather than
criticizing GAO, the FTC should be focusing its energy on
performing its own analysis. It is the Federal Trade
Commission's responsibility to protect consumers from anti-
competitive behavior. And in light of the mounting evidence
that market concentration is creating an environment for anti-
competitive behavior, the Federal Trade Commission and the
Department of Justice should investigate the market structure
and the business practices of the oil industry.
During a recent conversation with EPA--former EPA
Administrator Carol Browner, it was pointed out that gasoline
prices dropped when the Clinton administration just announced
the request for the FTC to investigate the possibility of anti-
competitive practices by oil companies. The administration
should also send a message to the market that it's serious
about lowering gas prices by not filling the Strategic
Petroleum Reserve until prices are lower and more stable.
Americans deserve action by the administration and by this
Congress to assure immediate relief at the pump and long-term
energy security.
Thank you, Mr. Chairman.
[The prepared statement of Hon. John F. Tierney follows:]
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Mr. Ose. I thank the gentleman.
The gentleman from Ohio.
Mr. Tiberi. Thank you, Mr. Chairman, for scheduling this
hearing this morning.
Over the past several months, you have taken this
subcommittee across the country. You've looked at why gas
prices are so high. You've probed into what can be done to
bring prices down. Our hearing today is a continuation of that
effort, and on behalf of everyone who is filling up at the pump
as we speak, I want to thank you again for your leadership and
working so diligently on this issue.
I won't recount the many reasons for today's prices, high
prices at the pump. They've already been discussed this
morning. They have been discussed in the past. What I hope we
can learn from our witnesses today is how we can bring those
prices down and how we can do so in a manner that will prevent
spiraling prices at the gas pump in the future.
Specifically, there are two areas I hope we can examine in
detail, Mr. Chairman. First, can the Strategic Petroleum
Reserve play a role in reducing prices at the pump? There are
those who say they can, that the SPR should be tapped right now
to help consumers. But, there are others who say it shouldn't
be tapped, that the SPR is not there for that purpose and, even
if it were, the relief consumers would see would be so light
that it wouldn't be meaningful.
I certainly don't know the answer to that question. I have
heard and seen mixed answers. Hopefully, we will have some
enlightening answers today from our panelists.
The second area I want to hear more about is the confusing
number of gasoline blends that are required across the country
and across certain regions of our country. The situation is so
confusing, Mr. Chairman, that I have had trouble finding out
how many blends there are required in America. I have heard
estimates ranging from several dozen to over 100. Finding out
exactly how many is important, but more important than that and
more crucial is knowing just how many we really need in our
country.
As has been noted many times, the number of blends we have
now, no matter what the number is, has already made a difficult
refining situation even worse. It stands to reason that fewer
blends would make refining operations simpler and more
efficient and thus lead to greater supplies that would bring
prices down.
Last month, this House spent several days on a variety of
energy-related legislation, and while we passed several
important measures, I was particularly pleased that one of them
addressed the need to add badly needed domestic refining
capacity. We can talk all we want about factors such as price
of crude oil that we cannot control ourselves in this country,
but the fact is that there is much that we could do right here,
right now, to help our consumers and improve our energy
security.
Mr. Chairman, I again want to thank you for your leadership
on energy-related issues. Your leadership will be missed as we
continue our efforts in the years to come. Thank you for this
hearing.
Mr. Ose. Thank the gentleman.
I am pleased to recognize the Representative from the
country music capital of the country, Mr. Cooper.
Mr. Cooper. Thank you, Mr. Chairman. I appreciate your
calling this hearing.
Certainly, gasoline prices are among the most visible and
most painful of the consumer price increases that we face. I
think the elephant in the room that has not been mentioned
enough in regard to the many reasons that gas prices can go up
or down, the elephant in the room is the terrific uncertainty
we face in the Middle East, the region of the world that's
blessed with the greatest reserves of oil.
If you look at the country with the No. 1 amount of
reserves, it would be Saudi Arabia, which is one of the most
dangerous countries in the world today for an American to live
and work as a result of increased terrorism in the last months
and years. If you look at the country with the No. 2 amount of
oil reserves, it would be Iraq, where a war is currently being
fought. So, there are a myriad of factors that can increase or
decrease gasoline prices, because if you look at geopolitical
uncertainty, certainly there is a period of extreme concern in
the region with the greatest number of oil reserves.
Mr. Chairman, I have come to this meeting greatly
prejudiced because one of my friends and colleagues from the
Vanderbilt Business School faculty happens to be chief
economist of the FTC, and while he and I don't agree on many
issues, we do agree on the need for serious academic work done
on issues of great national concern. So, I come to this hearing
with some worries that the GAO report does not live up to those
high standards. But, I'll look forward to hearing the testimony
of the witness today and judging for myself, for example,
whether those results can in fact be duplicated.
But, if you take a great long list of reasons that gas
prices can go up or down, oil company mergers, to me, don't
seem to be at the top of that list. Perhaps, they are, but when
I worked as a businessman a little bit in the retail gasoline
industry, I noticed that convenience store sales of snacks have
a lot more to do with retail success in the marketplace than do
gasoline prices. Because the gasoline market seems to be a
little bit more efficient than the Snickers market or the other
junk food items that we all love to buy when we go to the
store.
But, I appreciate your holding this hearing, Mr. Chairman,
and I will look forward to seeing if we can get some
information that's useful for the American consumer.
Thank you.
Mr. Ose. I thank the gentleman.
I am pleased to recognize the vice chairman of the
subcommittee, from Virginia, Mr. Schrock.
Mr. Schrock. Thank you, Mr. Chairman. I have no opening
statement, which should make everybody happy.
Mr. Ose. We will move on.
Mr. Schrock. Oh, no, no, no. No, that doesn't mean I'm
finished. The hearing we had last time was really amazing, and
I think I learned a lot, and I think a lot of other folks did,
too. And if gas prices are any indication, I can assure you
that, in Virginia Beach where I live, I got gas last week once
for $1.69 and once for $1.65. So it's heading in the right
direction. That doesn't mean I want everybody moving down
there, but I think it's heading in the right direction.
But, I am really anxious to hear what all the panels have
to say today and see if we can get our hands around this thing.
Thank you very much Mr. Chairman.
Mr. Ose. I thank the gentleman.
I am pleased to recognize the gentleman from Ohio, Mr.
Kucinich.
Mr. Kucinich. Thank you very much, Mr. Chairman, for
holding this important hearing.
Our constituents are being gouged by high gasoline prices,
and the administration has provided no relief. Excessive
gasoline prices are stealing away the little discretionary
income available to many Americans in this troubled economy. We
must demand relief now.
While the oil industry blames environmental regulations and
OPEC, there is substantial evidence that anti-competitive
practices by domestic corporations, made possible by recent
mergers, are partly to blame for high gasoline prices. I
believe only an increase in Government oversight can restore
the transparency and accountability consumers need.
In the last 6 years, mergers between BP and Amoco, 1998;
Exxon and Mobil, 1999; BP Amoco and ARCO 2000; Chevron and
Texaco, 2001; Valero and Ultramar Diamond Shamrock, 2001;
Conoco and Philips, 2002, all of these mergers in the last 6
years have created huge new oil companies that have control
over the most significant factor impacting gasoline prices,
control over domestic refineries.
Today, the largest five refiners operating in America,
Conoco Philips, Royal Dutch Shell, Exxon Mobil, BP and Valero,
control over 52 percent of domestic refining capacity. The top
10, which includes Chevron, Texaco, Citgo, Marathon, Sunoco and
Tesoro, control 78.5 percent. This level of concentration is
far greater than a decade ago when the largest five refiners
controlled 34.5 percent of the market and the largest 10 owned
55.6 percent.
Armed with significant market share, these oil companies
can more easily pursue anti-competitive activities that result
in price gouging. The U.S. Federal Trade Commission, concluded
in March 2001 that oil companies pursued profit-maximizing
strategies to intentionally withhold gasoline supplies as a
tactic to drive up prices. In addition, deregulation of energy
trading markets, like the ones exploited by Enron, has removed
transparency from oil and natural gas futures markets, allowing
oil companies and Wall Street investment banks to potentially
manipulate prices on these markets.
While some claim the stalled energy bill will provide new
supplies of the market and, therefore, force down prices, the
Energy Information Administration concludes that the billion
dollar subsidies the energy bill would provide to energy
corporations will neither significantly increase production nor
lower prices for consumers.
I would like to enter into the record a letter signed by 75
Members of Congress, including Mr. Tierney and myself.
This letter was sent to the President asking him to take
six actions to help reduce high gas prices. The letter was
endorsed by the leading consumer organizations, Consumer
Federation of America, Consumers Union and public citizen.
The six steps outlined for the President are: First,
require oil companies to expand gasoline storage capacities,
require them to hold significant amounts in that storage and
reserve the right to order those companies to release this
stored gas to address supply and-demand fluctuations.
Second, block mergers to make it easier for oil companies
to manipulate gasoline supplies and take steps, such as forcing
companies to sell assets, to remedy the current highly
concentrated market.
Third, re-regulate energy trading exchanges that were
exploited by Enron and continue to be abused by other energy
traders.
Fourth, discontinue filling the Strategic Petroleum Reserve
while prices are high and conduct the study of building crude
and product reserves that can be used as economic stockpiles to
dampen price increases.
Fifth, reduce oil consumption by implementing strong fuel
economy standards. Substantially improving CAFE standards over
a 10-year period would reduce the oil used by one-third in 2020
and save consumers $16 billion at the pump.
Sixth, request the Federal Trade Commission to conduct a
study of reasons why the market forced the closure of over 50
predominantly small and independent refiners in the past 10
years and assess how to bring fair competition back to the
refinery market and thus expand capacity.
Mr. Chairman, by employing all six of these strategies,
substantial reductions in the price of gasoline are attainable.
We are still waiting for the administration's response. I would
like to enter this letter in the record without objection.
[The information referred to follows:]
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Mr. Ose. The gentleman's request is granted.
All right. We have all completed our statements up here. We
are going to now go to the witnesses.
Before we go to the witnesses, we are going to swear you
all in. So if you'd all please rise.
[Witnesses sworn.]
Mr. Ose. Let the record show that all of the witnesses
answered in the affirmative.
Our first witness today is Mr. Guy Caruso. He is the
administrator for the Energy Information Administration at the
Department of Energy.
Mr. Caruso, we have received your written statement, and we
have read it. And, we have many questions. You're recognized
for 5 minutes for the purpose of summarizing.
STATEMENTS OF GUY F. CARUSO, ADMINISTRATOR, EIA, DOE; MARK R.
MADDOX, ACTING ASSISTANT SECRETARY FOR FOSSIL ENERGY, DOE;
JEFFREY R. HOLMSTEAD, ASSISTANT ADMINISTRATOR FOR AIR AND
RADIATION, EPA; WILLIAM E. KOVACIC, GENERAL COUNSEL, FTC; AND
JIM WELLS, DIRECTOR, NATURAL RESOURCES AND ENVIRONMENT, GAO,
ACCOMPANIED BY SCOTT FARROW, CHIEF ECONOMIST, GAO
Mr. Caruso. Thank you, Mr. Chairman, and I appreciate this
opportunity to present to you and the Members of the
subcommittee the Energy Information Administration's Short-Term
Energy Outlook for crude oil and gasoline, which we released
simultaneously with the beginning of this hearing.
My main message is that, although we have seen some price
relief in recent weeks, as has been mentioned, both crude oil
and gasoline markets are very tightly balanced and subject to
volatility. Crude oil prices reached the high point of $42 in
June, fell to $35 and now have risen again to $39 just this
morning with the continued uncertainty in Iraq and in some
cases other places, such as Nigeria and Venezuela.
Gasoline, having peaked at a national average for 1 week at
$2.06 per gallon, yesterday was down to $1.89. The main reason
for these high prices compared with history are global world
market and supply and demand fundamentals which are tight. The
world's economic growth in 2003 and 2004 has added 2.2 million
barrels a day of demand to the world market, led by China and
the United States. On the supply side, we are expecting non-
OPEC production to increase about 1 million barrels a day this
year, which means OPEC will need to increase production by 1.2
million barrels a day just to keep up with that very strong
growth. With inventories already low going into this year, that
growth in both non-OPEC and OPEC would just keep them at that
low level, not building, which we believe is necessary.
Another important factor in this tight and volatile market
is the very small amount of spare productive capacity.
Currently, there's only about a million barrels a day of unused
productive capacity in the world, almost all of which is in
Saudi Arabia, and that's a present world market of 82 million
barrels a day, so we are operating the global crude market at
between 98 and 99 percent of capacity. Clearly, that is little
room for any surprises.
Inventories are and will continue to be a key indicator to
prices. U.S. crude inventories have been low most of this year
and only recently have moved into the normal range, as
published by the EIA. Gasoline, however, remains quite low and
at the lower end of the normal range and, therefore, volatility
and potential for price spikes remains in the gasoline market
because of the strong demand and the tight situation in
domestic refining, which accounts for about 90 percent of our
domestic gasoline supplies, so that 10 percent from foreign
refiners is critical, especially during the peak driving
season.
And this year, imports from Europe, the Caribbean and
elsewhere are a bit lower than we anticipated, partly because
of tightness around the world on refining capacity and partly
because of the more stringent U.S. specifications that have
gone into effect with regard to sulfur. And, therefore, we are
watching the imports very closely on a week-to-week basis to
see where these supplies will be headed, as well as the impact
on inventories. So, to sum up, EIA remains prudently cautious
of where this market is going to end up. Saudi Arabia and other
producers have promised to increase their production, and so
far, that seems to be holding up. And while gasoline prices
have declined in recent weeks, consumers should not expect
retail prices to fall back to the prices we have seen even last
year. Our current short-term forecast projects that west Texas
Intermediate Crude prices will likely fluctuate around $37 per
barrel, reflecting this tightness, and that gasoline will
average about $1.83 per gallon for the second half of the year.
So, in conclusion, the EIA anticipates a continued tight
market subject to volatility. Thank you very much, Mr.
Chairman, for the opportunity to be here today.
[The prepared statement of Mr. Caruso follows:]
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Mr. Ose. I thank the gentleman.
Our next witness is the Assistant Secretary for Fossil
Energy, the Acting Assistant Secretary for Fossil Energy at the
Department of Energy, Mr. Mark Maddox.
Sir, welcome to our witness table. You're recognized for 5
minutes.
Mr. Maddox. Thank you. Mr. Chairman, members of the
subcommittee, thank you for giving me the opportunity to
discuss the volatility of U.S. gasoline markets.
Gasoline price volatility should come as no surprise to
anyone. President Bush foresaw the potential for gasoline price
volatility when he unveiled the National Energy Policy 3 years
ago. That potential has become a reality.
The NEP noted energy demand was rising, and will continue
to rise, and recommended that we take steps to meet the growing
demand most notably by increasing domestic production of energy
and by encouraging energy efficiency and conservation. In the
NEP, we said that energy supplies were being limited by
restricted access to Federal lands and that regulatory
uncertainty and overlap, in combination with low historical
profitability and low rates of return, were contributing to a
lack of investment in refineries.
The NEP also noted that our Nation's energy infrastructure,
our network of pipelines, refineries, generators and
transmission lines, was antiquated and would need to be updated
to deal with an ever-expanding economy. Winston Churchill once
spoke of finding security in diversity. Increased domestic
production should be the cornerstone of diversity of oil supply
for the United States.
The United States continues to be a major oil producer.
According to the Energy Information Administration, the U.S. is
currently producing about 5.8 million barrels of crude oil per
day, making us the world's third ranked producer, behind only
Saudi Arabia and Russia.
And, we still have considerable reserves to draw on. Today,
377 billion barrels of currently uneconomic and unrecoverable
oil await cost-effective technologies in addition to 22 billion
barrels of proved reserves. To help tap that immense resource,
we are concentrating the Office of Fossil Energy's oil research
and development efforts on highly promising technologies with
big potential payoffs. We're working toward prolonging the life
of mature fields through greater use of CO2 injection, by
finding economic ways to bring CO2 produced at fossil fuel
power plants to oil fields. We are working on improved imaging
and diagnostic tools, such as the recently announced new cross
well electromagnetic imaging tool that can see through the rock
between widely separated oil wells, distinguish the oil, water
and gas reservoirs and measure changes over time. And, we are
developing microhole drilling technology that could reduce
drilling costs by as much as two-thirds compared to a
conventional well, reduce disposal costs for drilling fluids,
cutting them by 20 percent, significantly lowering the
environmental impacts of drilling activities, and open access
to 218 billion barrels of oil at mature basins less than 5,000
feet deep. We are also working to increase access to high
priority areas for oil and gas in our western mountain States,
while protecting the environment.
We are making progress on boosting domestic production, but
more must be done. We need a comprehensive energy bill that
will open the Arctic National Wildlife Refuge, or ANWAR, to
domestic petroleum production. ANWAR offers us the prospect of
secure, domestically produced oil. We have lost almost a decade
to debating the merits of developing ANWAR. Debate continues
even as technological advances have made arguments over the
environmental impact of development more tenuous. And, with
each passing year, our growing reliance on foreign sources of
energy make it more urgent that we take advantage of these
domestic oil resources.
Higher gasoline prices have prompted various proposals for
action, among them that we use the Strategic Petroleum Reserve
to influence oil markets and reduce gasoline prices. We believe
that abandoning our stated goal of filling the Strategic
Petroleum Reserve is wrong from a national security point of
view. President Bush has been very clear that the reserve is in
place in case of major disruptions of energy supplies to the
United States that could arise from a variety of events, such
as natural disasters and terrorist attacks.
We adopted a plan for filling the Reserve by a predictable
amount and over a certain length of time in order to affect
markets as little as possible. The current rate of fill is
about 105,000 barrels per day, which the EIA estimates has an
impact of, at most, 1 or 2 cents per gallon of gasoline.
The world oil supply demand equation is largely responsible
for higher gasoline prices. But all of the factors also play a
part. One very important factor is our insufficient or outdated
domestic pipeline and refinery capacity. The United States has
not seen a new refinery built since 1976, and the expansion of
existing refineries has slowed in recent years.
Mr. Ose. Mr. Maddox, how much time? I have a long series of
witnesses today and many statements to make. Can you--I'll give
you 10 seconds to wrap up.
Mr. Maddox. Our refineries are running at near total
capacity of about 96 percent while the EIA projects U.S.
gasoline demand will increase 47 percent and diesel used for
transportation will increase 73 percent by 2025. Thank you. I
look forward to taking questions.
[The prepared statement of Mr. Maddox follows:]
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Mr. Ose. Thank you.
Our third witness, Mr. Jeffrey Holmstead, who is the
Assistant Administrator for Air and Radiation at the
Environmental Protection Agency.
Mr. Holmstead, we have received your written statement for
the record, and it's been entered therein. You're recognized
for 5 minutes for the purpose of summarizing.
Mr. Holmstead. Thank you, Mr. Chairman and members of the
subcommittee. I appreciate the chance to be here today and talk
a little bit more about the clean fuels programs and their
impact on gasoline prices.
As most of you probably know, EPA began to require
improvements in the quality of motor fuels back in the 1970's
when the agency required that lead be phased out of gasoline,
but the focus of attention in recent years has been on two
clean fuel programs that are a result of the 1990 amendment to
the Clean Air Act.
The first one is the Reformulated Gasoline Program [RFG],
and the other is the Tier 2 Low Sulfur Gasoline Program. By
statute, every gallon of RFG is required to obtain a minimum
amount of an oxygenate, such as ethanol or MTBE. EPA and the
Department of Energy have estimated that the cost of producing
RFG is approximately 4 to 8 cents a gallon greater than the
cost of producing conventional gasoline. About half of this
cost increment is due to the cost of the oxygenate requirement
itself.
Now, I should note that the average retail price of RFG
today, what people pay at the pumps, is actually a little less
than 4 cents a gallon greater than the average retail price of
conventional gasoline. That's a pretty good indication of the
cost to consumers of this Federal mandate, about 4 cents a
gallon.
The second clean fuel program I mentioned, the so-called
Tier 2 Program began on January 1st of this year. By 2006, when
this program is fully phased in, it will reduce the sulfur
content of most gasoline sold in the United States by about 90
percent. This reduction in the sulfur content immediately
reduces emissions from all gasoline powered vehicles, and it
also enables the use of more advanced pollution controls on
these vehicles. Thus, the Tier 2 Program not only addresses
fuels but also includes a phase which begins this year of more
stringent tailpipe standards for all light-duty vehicles,
including cars, trucks, mini vans and SUVs.
We estimate that the cost of the Tier 2 Fuel Program is
about 1 cent per gallon today, and will still be less than 2
pennies a gallon when the program is fully phased in in 2006.
Now, the important thing of course is to compare the cost of
the program to its benefits.
On the benefit side, we estimate that the Tier 2 Program,
including both the fuel and engine standards will prevent every
year approximately 4,000 premature deaths, more than 10,000
cases of chronic and acute bronchitis and tens of thousands of
respiratory problems. As far as I know, everyone agrees that
the public health benefits of this program far exceed the cost.
As you all know, the retail price of gasoline is affected
by many factors. We believe that the run-up in gasoline prices
earlier this year was primarily the result of a steep increase
in crude oil prices. But, what we can say with great certainty
is that environmental regulations have had a minimal effect on
gasoline prices.
Let me turn now quickly to the issue of so-called boutique
fuels. The Clean Air Act specifically authorizes States to
regulate fuels as part of their State Air Quality Plans if they
need this type of regulation to achieve national air quality
standards. This authorization in the Clean Air Act has resulted
in a number of different fuel formulations being required by
different States. These formulations are often referred to as
boutique fuels; 15 States have adopted their own Clean Fuel
Programs for part or all of their State.
In October 2001, EPA released a comprehensive white paper
discussing a range of issues associated with boutique fuels.
The main conclusions of this white paper were, one, that the
current gasoline refining and distribution systems work well
except during times of unexpected disruptions, a refinery fire,
a pipeline outage, something like that. We also found, two,
that fewer fuel types are likely to improve fungibility and,
three, options exist to reduce the number of fuel types and to
improve fungibility while maintaining or improving air quality.
But, the fungibility benefit from taking these actions are
likely to be modest, and there may be significant cost or
supply implications associated with any of these options.
Now, we are committed to working with Congress to explore
ways to maintain or enhance the environmental benefits of these
programs while exploring ways to increase the fungibility of
the infrastructure and increase flexibility and improve and
provide added gasoline market liquidity. The best way we have
identified to accomplish these goals is to replace the current
oxygen content requirements for RFG with the renewal fuel
standard that includes a flexible national credit trading
system. But, we also note that this can only be done through
legislation such as the renewable fuel provisions in the energy
bill which the administration strongly supports.
Mr. Ose. Mr. Holmstead----
Mr. Holmstead. Again, I thank you for the chance to be here
today and look forward to answering any questions you may have.
[The prepared statement of Mr. Holmstead follows:]
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Mr. Ose. I thank the gentleman.
Our fourth witness on this panel is Mr. Jim Wells. He is
Director of the Natural Resources Environment Section at the
Government Accountability Office.
Sir, we have received your testimony. It's been read. It's
part of the record. You're recognized for 5 minutes to
summarize.
Mr. Wells. Thank you, Mr. Chairman. We welcome the
opportunity to contribute to the hearing.
Accompanying me today is Mr. Scott Farrow, GAO's Chief
Economist.
Our presence today relates to the GAO report that we
published in March looking at the effects of mergers in the
U.S. petroleum industry. In 2002, we agreed to study the effect
of the wave of mergers, that is acquisitions, joint ventures
that were occurring across the petroleum industry in the
1990's.
More than 2,600 mergers have changed the landscape on how
the sale of petroleum products occur. Large oil companies
combined with other large oil companies who previously competed
against each other. For example, in 1998, BP and Amoco merged
and later acquired Arco, while Exxon acquired Mobil and
thousands more continued.
Can the wave of mergers reduce competition and generally
lead to higher gasoline prices? Our study says yes. We began
our work by talking with the FTC. We found no existing FTC
study on a retrospective impact of oil mergers, at least none
that was publicly available. And, we met with skepticism from
the FTC staff as to whether this type of study was even
impossible or possible to do. What analysis was in the
literature and publications was on a smaller scale, and
clearly, it was not nationwide or dealing with multiple
mergers. Therefore, we had to construct econometric models to
estimate the effects of mergers and market concentration on
prices because we believe bottlenecks in the gasoline markets
are most common at the refining and distribution levels. Also,
price changes at wholesale generally get passed through to
prices at the pump.
What we found was a marketplace that has changed. There are
fewer oil companies and refiners. There is less non-branded
gasoline that was traditionally offered in the marketplace at
lower prices. Distribution and availability of gasoline to the
smaller dealers, the moms and the pops, is on the decrease.
Market concentration, which relates to market shares and merger
activities, increased at the refinery levels.
Clearly, mergers potentially enable companies to gain
synergy. No doubt about it. They can grow their assets.
Stockholder value is important. They can reduce cost by
achieving efficiencies that may be passed along to the
consumers at the gas pump. We did find mergers that caused
prices to decrease.
However, if you do get bigger and you have fewer
competitors, you may also gain market power, the ability to
raise prices above competitive levels. Taken collectively, our
models suggest that wholesale prices increased anywhere from 1
to 7 cents for six out of the eight specific mergers, the major
mergers that we analyzed. This specific finding is based on
using hundreds of rack or terminal city prices for each week
from 1994 through the year 2000, data at least 6 months before
the merger and 6 months after the merger. And, we attempted to
control for all other factors that varied over time and the
economic conditions.
Our findings would imply that overall, the effects of
market power which tend to increase prices won out over the
efficiency gains of mergers which would tend to decrease
prices. We assume that these price increases will carry forward
after the mergers and in a sense be embedded, if you will, in
an unchanging way in today's 2004 gasoline prices.
Clearly, in a study of this magnitude, you can expect to
have differences of opinion. FTC, as you will hear this
morning, weighs in with their views. We can agree to disagree,
I hope. Although no econometric model can perfectly depict
reality, we believe that our models are sound, and produce
reasonable estimates. We are, in fact, very strongly supporting
and welcoming public scrutiny and discourse on issues like
gasoline prices. We even welcome sorting through this and these
issues with the FTC.
Having Bill sit to my right, we agreed to be friends today,
and we agreed that our goal is to work together in the future
to deal with some of the estimates and issues with the GAO
product.
Mr. Chairman, our hearings today will add to this debate as
our Nation struggles with high gasoline prices. Mr. Chairman,
in summary, we believe that the retrospective look that GAO
did, looking back at what happened in the 1990's, it can do two
things. One, it can help the Congress sort through today and
other days some of the background to what's happening with 2004
price spikes. Two, we would hope that our study could influence
what the regulatory antitrust agencies like the FTC do in the
future to protect the competitive process and consumers.
I also want to thank Mr. Cooper for giving me a warning
about the potential challenging questions that I may face. I
thank you.
[The prepared statement of Mr. Wells follows:]
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Mr. Ose. I thank the gentleman.
I am pleased to recognize the General Counsel for the
Federal Trade Commission, Mr. William Kovacic.
Sir, your statement, your written statement's been entered
into the record. You're recognized for 5 minutes for the
purpose of summarizing. I just want to clarify the record.
You're on his left, not on his right.
Mr. Kovacic. Mr. Chairman and members of the subcommittee,
thank for the opportunity to present the FTC's testimony on the
causes of and possible policy responses to gasoline price
increases.
I will first describe FTC measures that insure that
consumers pay competitive prices for gasoline, then discuss the
GAO report, and then offer my views about the causes of
gasoline prices. My written statement gives the views of the
commission, and my spoken comments offer my views and not
necessarily those of the commission.
Competition policy plays a key role in protecting the
consumers of gasoline. FTC programs embrace this principle in
four ways. First, the FTC does oppose mergers that promise to
curb competition. Since 1981, the commission has challenged 15
petroleum mergers, causing four deals to be abandoned or
blocked and requiring major divestitures in the other 11.
Compared to other industries, FTC petroleum merger remedies
have been uniquely stringent.
The FTC also prosecutes non-merger antitrust violations.
For example, in March 2003, the FTC charged Unocal with
violating the FTC Act by deceiving California State regulators
in connection with proceedings to devise standards for
reformulated gasoline. Earlier today, the commission announced
that it unanimously has reversed the ruling of the
administrative law judge who had dismissed the complaint at the
end of last year.
A third FTC activity is to monitor industry conduct to spot
possible antitrust violations. Since 2002, the FTC has used a
statistical model to detect unusual gasoline price movements
across the country. The FTC examines apparent anomalies and
works with other Government agencies to pinpoint possible
causes, including antitrust misconduct.
The fourth FTC activity is to inform the public and
policymakers about petroleum competition issues. Later this
year, the agency will issue a report on the factors that affect
fuel price increases and will update FTC reports on petroleum
mergers issued in the 1980's.
The FTC's petroleum experience builds heavily on merger
review. In May, the GAO report, as Jim Wells has just
described, examined mergers and concentration arising from
transactions in 1990's. Among other tasks, the GAO studied
eight mergers completed between 1997 and 2000 and found that
six deals caused gasoline wholesale prices to rise, while two
caused prices to fall.
The GAO report contains fundamental methodological errors
that deny its results, in our view, reliability. Three crucial
flaws stand out. First, GAO's econometric analyses did not
properly account for many factors that affect gasoline prices.
Second, GAO's study of how concentration affects prices did not
use properly defined relevant markets required for sound
analysis. Third, the GAO failed to consider critical factors
about individual transactions that are vital to assess price
effects.
The FTC welcomes the rigorous analysis of past enforcement
decisions. In the spirit of Jim Wells' comments, we invite the
GAO to join the FTC in cohosting a conference to consider the
GAO report's findings. To inform these proceedings, we call
upon GAO to fully disclose its econometric methodology and all
data used to run its models. Participants at the conference
would include GAO and FTC experts, the agencies' advisors and
interested observers.
Let me turn to what the FTC has learned about factors that
cause gasoline prices to rise. The paramount factor, as we have
heard this morning, is the price of crude oil. Changes in crude
oil prices account for about 85 percent of the variability of
U.S. gasoline prices. When crude oil prices rise, so do
gasoline prices.
A second factor is the high level of utilization in the
refining and transportation sector. For example, pipeline
capacity is stretched in some regions, although expansion
projects are underway to boost capacity. The same could be said
for inventory levels.
Another major factor, as we have heard this morning, is the
design of environmental quality standards. Pollution control
unmistakably yields great social benefits but also raises
refining costs. The multiplicity of environmentally mandated
brands sometimes can reduce the flexibility of the supply
sector. ther Government policies also raise gasoline prices at
the State and Federal level.
To understand and publicize developments in the petroleum
industry and to attack antitrust misconduct is a priority
second to none for the FTC. I welcome your questions.
[The prepared statement of Mr. Kovacic follows:]
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Mr. Ose. I thank the gentleman.
All right. As I indicated earlier, what we'll do is, each
of the Members up here has an opportunity to ask questions.
We'll move in 5-minute increments. We are scheduled for six
votes this morning on the floor some time--it actually might
not be this morning. Sometime between 12 and 12:30. We also
have a second panel of witnesses. We are required to be out of
this room by 1:30.
Just for everybody's edification, to the extent that we
have questions that need to be asked that we don't get to, we
will leave the record open and submit them to the witnesses in
writing, leaving the record open for 10 days.
Does anybody up here have any questions on that?
All right. I will go ahead and start.
Mr. Maddox, I want to ask you about this Strategic
Petroleum Reserve. I've spent a lot of time looking at the
suggestion about drawing down the 105-odd thousand barrels a
day that is otherwise going into the reserve. If that 105,000
barrels a day, as some have suggested, were not going into the
Strategic Petroleum Reserve, where would it go? What would we
be able to do with it? I mean, how does it get to market?
Mr. Maddox. Well, the process is pretty straight forward.
If we were not drawing it down, or filling a reserve, I guess
is the question, the oil would be sold on the market.
What has traditionally happened, looking at some of the
other examples, is, we see most of that oil simply displace
imports. Times like right now, when you have a healthy storage
or average storage level of over 300 million barrels, there is
not necessarily a crude shortage at this point. So, any release
would not necessarily impact, you know.
Mr. Ose. Before you leave that point, I think you--did you
just say there is not a shortage of crude?
Mr. Maddox. Correct me if I'm wrong, but, our stocks are in
the average range right now, and we, in fact have, right now, a
very tight refining capacity at 96 percent, which is pretty
close to flat out. And to go much higher, I think you could
argue whether it was sustainable to go at a higher level.
Mr. Ose. Well, if I read--somebody's statement here said
that the refining capacity in the United States is something
like 8.78 million barrels--that's the rated capacity for the
refineries around the SPR locations--and that they are running
at 96 percent.
Mr. Maddox. Correct.
Mr. Ose. Which means that 1 percent is 87,000 odd barrels.
Mr. Maddox. Right.
Mr. Ose. Well, 87,000 and 105,000, that's not, I mean, it
seems to me like that's less than what would be necessary to
take it to 100 percent. Why can't we take it from 96 percent
operating capacity to 100 percent?
Mr. Maddox. You could, in theory, but the reality is, there
are breakdowns. There are, you know, these things, I don't
think there's any model that says you can run 100 percent
forever.
I mean there's just always the possibility, you know,
things happen for lack of a better description. 96 percent, I
think most manufacturing people would tell you, is a pretty
extraordinary rate of capacity utilization.
So, you could nudge it up a little bit. But, the reality
is, we have been building our stocks the last 4 or 5 weeks, and
we are filling our stocks while we maintain a pretty steady
level of product.
Mr. Ose. So, the storage above ground, if I'm correct, is
about 300 million barrels today.
Mr. Maddox. Right.
Mr. Ose. The Petroleum Reserve has about 660 million
barrels in place. Are you suggesting that, if the 105,000
barrels that's currently going daily in to the SPR was not
going into the SPR, there'd be no place to put it?
Mr. Maddox. Individual companies have to make economic
decisions on how much stock they want to carry. Right now, the
high price environment, I don't think they'd be too eager to
build stocks and create the carrying costs involved with the
larger stocks.
Mr. Ose. Mr. Caruso, does the EIA concur with those
conclusions?
Mr. Caruso. Yes. I think Mark's point about there not being
a shortage is different than not saying it's a tight market.
Clearly, there are 305 million barrels of crude in stocks now.
Mr. Ose. Explain your nomenclature. Your vernacular is very
good. I think it's very precise. Would you please explain the
difference between not a shortage of crude and a tight market?
Mr. Caruso. That's crucial, actually, to the decision and
the memo that I wrote in February. And, that is that all
refiners who are seeking crude can buy it today at $39 WTI. So
there is crude available to refiners. If 100,000 barrels a day
were made available, would they add that to inventories? Our
view is probably not.
Mr. Ose. Is it your view that the constraint is the
refining capacity?
Mr. Caruso. There's two aspects of the refining capacity.
One is primary distillation, which is running at 96 percent of
the 16.8 million barrels per day total capacity in this
country. Second, there are the conversion units that go beyond
the primary distillation. We believe that those are operating
at close to 100 percent of capacity.
So there are two aspects. One is the primary distillation,
and then there's the secondary conversion or treatment units
transform distillation unit outputs into gasoline and other
products. And, right now, they are operating these margins very
close to full capacity.
Mr. Ose. Thank you.
The gentleman from Massachusetts.
Mr. Tierney. Thank you. Just to close out on that, the
Valero Energy Corp.'s chief executive officer, William Greehey,
opined that if the President stop purchasing for the oil
reserve, it would signal to the commodity traders that the
White House is serious about oil prices and the prices would
fall fast.
Is there any merit to the concept that signal would be sent
and it would have an effect on prices, Mr. Maddox?
Mr. Maddox. We don't believe so. I mean, I think we have
some estimates that stopping may have an effect, I think, of a
dollar a barrel or so. But, I would note also that we saw the
price swing $1.26, I think, yesterday. At this stage it's
largely a supply uncertainty situation that is probably driving
prices to a greater degree. I think the Secretary stated
yesterday that he thought there was probably a risk premium of
potentially as high as $10 right now for the price of oil. And,
I think events will probably drive that issue.
Mr. Tierney. Mr. Kovacic, you know, rather than challenging
Mr. Wells' organization to sort of a fact and figures dual of
some sort do you think it would be well spent time of the FTC
to do an actual report and study about the effects of mergers?
Mr. Kovacic. We are in the process of completing a report
that does look at the consequences of mergers, that does update
two other studies we have done. And, we do think it's useful to
engage in a continuing conversation with the GAO.
Mr. Tierney. Well, I'm sure it is. We had asked for any
studies that you had done on that, and I don't recall getting
them from your office. So how long ago were those studies done?
Mr. Kovacic. One in 1987 and one in 1989, and we are in the
process of doing a further document that updates the results of
those studies, sir.
Mr. Tierney. Are you familiar with the March 2001 Federal
Trade Commission report that was authored by Chairman Robert
Pitofsky? And he noted in that study, by withholding supply,
the industry was able to drive prices up and thereby maximize
profits.
Mr. Kovacic. That's right. Are you referring to the Mid-
western States Study, Congressman?
Mr. Tierney. That's correct.
Mr. Kovacic. Yes. I believe that the FTC report also
pointed out that the capacity to act in that way was for a
comparatively short period of time as well. And I believe that
the net assessment of the Commission is that, though it takes
temporary disruptions quite seriously, that this was indeed a
temporary and quite finite disruption.
Mr. Tierney. Are you familiar with the 2003 RAND study of
the refinery sector that reaffirmed the importance of the
decisions to restrict supply? And, it pointed out, in a change
in attitude in the industry, saying that increasing capacity
and output to gain market share or to offset the cost of
regulatory upgrades is now frowned upon. In its place, we find
a more discriminating approach to investment and supplying the
market that emphasized maximizing margins and returns on
investment rather than on product output or market share. The
central tactic is to allow markets to become tight by relying
on existing plant and equipment to the greatest possible
extent, even if that ultimately meant curtailing output of
certain refined products.
Mr. Kovacic. Yes, indeed. I'm also struck, though, in the
very same study, toward the beginning of the study, you see the
basic conclusion by the RAND researchers that the supply system
in the United States operates comparatively well. Their net
assessment was relatively positive.
I guess another methodological point that interests me
about the RAND study is that they report in a very aggregate
way the results of all of their research. Something that would
have been interesting to us is to see precisely whose views
factored into the observation that you provided.
Mr. Tierney. Well, I guess that's true in any study, where
you go back and forth. So, what you are saying is, you are
going to stick to your story no matter what it says so long as
you can find a methodology to support it?
Mr. Kovacic. Well, I guess maybe it's an academic's
obsession with footnotes. But when you look at the RAND study,
you simply notice that they tell you who they spoke with at the
back. But, as they hit key conclusions along the way, there is
no particular revelation of whose observations factored into
the results.
Mr. Tierney. So, you are not troubled at all by the fact
that there have been a sizable number of mergers over recent
years?
Mr. Kovacic. We are extremely attentive to and extremely
concerned about the impact of those mergers. I have to be
clear, Congressman, that in addressing the GAO's work and ours,
the GAO's instinct here--and your observation as well--about
the usefulness of ex-post evaluations as a way of informing
future policymaking strikes me as being right on target. It's a
key element of responsible decisionmaking, before you take next
steps, to go back and look at what you have actually
accomplished. And, the effects, good or bad, ought to be well-
known. So, I emphasize, that's a crucial ingredient of good
policymaking, and I don't want to diminish in any way the value
of that kind of assessment.
Mr. Tierney. I would hope not. And, I would hope that the
FTC starts looking at your merger guidelines a little more
actively and get on top of this, because I think it just stands
to reason that the GAO's conclusions are right on the money in
terms of the direction of the things that are going on. I think
it belies commonsense to think that all these mergers haven't
had an effect. And, particularly--and I don't have time to go
into it now because we are going to close out--but you look
back at Senator Wyden's committee hearings of a while back,
when you have industry people actually quoted on there saying
that keeping the supplies low is a good strategy for them to
keep their prices high. Those things, I hope, ought to concern
the FTC and ought to spark some sort of report on that and some
concern for the mergers and consolidations. Thank you.
Mr. Ose. The gentleman from Ohio.
Mr. Tiberi. Thank you, Mr. Chairman.
Mr. Holmstead, can you give me the exact number of blends
that are required, fuel blends, in America?
Mr. Holmstead. I believe I can. And, I can understand your
question on this issue, because there are all kinds of numbers
that are thrown around.
When we talk about boutique fuels, what we talk about are
specific State requirements that are different from those
required under Federal law. There is RFG that I mentioned. And,
RFG actually is different in the North and in the South because
of different characteristics. The Federal requirements are
major gasoline programs. But, if you look at boutique fuels,
requirements by individual States, there are nine.
Now, while I say there are nine, other people are saying
100-something. Well, the difference is, as we have delved into
this, a State sets a standard, but then different companies
choose to sell different grades of gasoline. So, you have
standard, premium, and ultra or whatever they are. In response
to that State requirement, an individual refinery may actually
produce three different grades of gasoline or more.
And then, some States have identical standards, but we
count those as just one. Some people may count three different
States with the same requirements; we are going to count those
as three or actually nine. But, we think the best way to look
at it is there are nine different State boutique fuels
programs. In addition to that, there are federally mandated
programs that apply in the rest of the country.
Mr. Tiberi. How many are those numbers?
Mr. Holmstead. Well, again, different requirements apply
during the summer and during the winter. But, the biggest
number of gasoline blends is during the summertime season, and
there are six Federal requirements. So, there would be six
Federal programs and nine boutique State fuel programs.
Mr. Tiberi. Mr. Caruso, would you concur with that
analysis?
Mr. Caruso. Yes. That concurs with our information.
Mr. Tiberi. Thank you.
Mr. Holmstead, in layman's terms, not in technical details,
can you explain why Washington, DC, has a different requirement
than Chicago, which has a different requirement than Atlanta?
Mr. Holmstead. In large part, that's because of sort of our
Federal system of Government, where the way Congress chose to
enact the Clean Air Act was to require in the most highly
polluted cities this reformulated gasoline or RFG. And I have
to look at a map to see exactly where that's required, but that
tends to be required in the most highly polluted areas, New
York, Los Angeles, Houston.
Mr. Tiberi. Excuse me, but are the pollution problems
different in Washington than Chicago?
Mr. Holmstead. Yes, they may be. The extent to which cars
contribute to the problem is different in Atlanta compared to
Baton Rouge where it's much more of a stationary source problem
versus a mobile source problem.
The other thing is different States, under the Clean Air
Act, have flexibility to decide how they want to achieve
national standards. Some States may decide that a fuels program
is an effective way of achieving these standards. Other States
may believe that a more effective way is to regulate factories
and plants and things of that sort.
Mr. Tiberi. Mr. Caruso, have the requirements from States
and the Federal Government caused foreign refineries to stop
producing refined or reduce the number of refined oil coming
into the United States?
Mr. Caruso. The only instance I'm aware of is the gasoline
components we get from Brazil. Most of their refineries cannot
meet the new Tier 2 RFG lower sulfur requirement--120 parts per
million--starting this year. So perhaps--and this is quite a
tentative number--there may have been about 75,000 barrels a
day from Brazil that now has to be made up from other sources.
And in fact, there have been some increases in other
refineries, other foreign refineries, such as Canadian and
European.
Mr. Tiberi. OK. One final question, Mr. Holmstead. Has the
EPA done any research to see if, technologically, we can
produce today one type or maybe two or three types of fuels
that can solve our pollution problem in different cities at the
same time of reducing the number of fuels required by a
refinery?
Mr. Holmstead. That is something that we have looked at
quite a bit. You won't be surprised to hear that there are
tradeoffs. For instance, the cleanest gasoline from an
environmental perspective is California's. California gasoline
is a blend that exceeds the RFG requirements. If we were to
simply mandate that fuel throughout the United States, we would
solve our fungibility problem, so everybody would be using the
same type of fuel. But that would dramatically increase costs.
And so, if you are trying to reduce the number of blends
and improve fungibility, you may actually have an adverse
impact, that is on fuel supplies and cost to consumers. There
is really no reason for consumers in some States that don't
have a pollution problem to pay those kind of high prices.
And so, it's an issue that we are aware of and that we have
paid a lot of attention to. But, you know, common sense would
dictate, that we have fewer versions of gasoline. There may be
some middle ground that would love to explore with Congress.
But, there is no one obvious easy answer because there are
tradeoffs.
Mr. Tiberi. Thank you.
Mr. Ose. We will go another round here.
Mr. Holmstead, I want to visit with you about California's
request for a waiver. If I understand correctly, EPA is
concerned about the impacts of air quality of granting such a
waiver. And, I impute from that you're concerned about the
deterioration in the air quality that might occur. Am I correct
in that?
Mr. Holmstead. That's correct. Yes.
Mr. Ose. OK. The particulate matter. Are you worried about
sulfur? What is it exactly that EPA's concerns are based on?
Mr. Holmstead. This sounds self-aggrandizing, but all of
these air pollution problems are very complex, especially in
California. The air pollution problems that are of greatest
concern are ozone, which you are well aware of, and fine
particles. But, these pollutants aren't emitted directly into
the air from automobiles. It's not as though you measure ozone
or you measure fine particles. These pollutants are made up of
many different components.
So, for instance, if you care about ozone levels, you have
to consider VOC emissions or hydrocarbon emissions which do
come from automobiles. You have to consider NOx. You also
consider CO emissions.
And so what we need to--what we have done in the case of
ozone is to look at what the air pollution situation would be
in California with a waiver and without a waiver. Actually
determining what the answer to that is somewhat uncertain
because of a variety of factors. We know, for instance, that if
you take out the oxygenate, you will increase VOC emissions
from the tailpipe. I think everyone agrees with that. On the
other hand, if you keep the oxygen in the fuel you may increase
what are called evaporative emissions because the oxygenate
tends to have a higher Ried Vapor Pressure, and so you get
greater evaporative emissions. It's enormously complex to try
to understand that, and that's just for the ozone, which is
something we have been looking at now for a couple of years.
On the fine particles side, again, there are some fine
particles that are emitted directly from cars, but also fine
particles are formed by the aromatics and NOx emissions in the
fuel exhaust. Trying to actually understand whether the waiver
would hurt California's air quality or help it is something
that we are honestly struggling with right now.
So, it's a difficult issue and especially given that the
statute says that we can only grant the waiver if a State makes
a showing that the oxygen requirement is interfering with their
ability to maintain the standard. So, it's something that we
have taken seriously, and we are really trying to get a handle
on these issues.
Mr. Ose. Now, under the Tier 2 program, do you have--it's
being phased in. Obviously, you have similar concerns, in
particular, removing the sulfur from the fuel.
Mr. Holmstead. Right.
Mr. Ose. The question I have is that, while we haven't been
able to get an affirmative or definitive response on
California's request for waiver from EPA, EPA has in fact
granted six hardship waivers to refineries who otherwise can't
meet the Tier 2 phase-in requirements for sulfur. It's on page
3 of your testimony here. You have four bullet points, the last
of which, ``Hardship provision, which allows refineries to
apply, on a case by case basis, for additional time and
flexibility to meet the low sulfur standards based on a showing
of unique circumstances. Under this program thus far, EPA has
granted hardship waivers to six refineries.''
Where are those six refineries located?
Mr. Holmstead. Well, I'm not sure. I would be happy to
provide that for the record.
Mr. Ose. Are any of them located in California?
Mr. Holmstead. My expert tells me, probably not.
Mr. Ose. Are any of them located in Chicago or up in the
New York area?
Mr. Holmstead. I don't know the answer to that.
Mr. Ose. I would be curious. I will submit that to you in
writing.
Mr. Holmstead. I would be happy to provide that for the
record.
[The information is provided in EPA's answers to Chairman
Ose's followup questions.]
Mr. Ose. Well, my basic question, and it may be rhetorical
at this point, is, how can you be so concerned about air
quality in California to the extent that we can't get an answer
from you one way or another, and yet here are six refineries
that can't remove the sulfur in a manner consistent with the
Tier 2 phase in, and you are granting them waivers? There is a
certain inconsistency there.
Mr. Holmstead. Well, no. It's a very different situation.
The Tier 2 program is something that EPA created through
regulation. The oxygen mandate is a specific statutory mandate
from Congress. And, Congress said that we can only grant a
waiver if a State makes a showing that the oxygenate
requirement interferes with its ability to attain air quality.
So, you are right. Under our Tier 2 program, if there is a
hardship at a refinery, we can grant that, even though it would
have a modest negative impact on air quality. We are not able
to do that in the case of the oxygenate waiver because that's a
statutory requirement.
Mr. Ose. Both of them have the force of law, do they not?
Mr. Holmstead. Well, they do. But, our regulations
explicitly allow us to grant this hardship waiver. If the
statute had contained a provision similar to our regulations
that would allow us to grant hardship waivers, then we would
consider them both in the same way. But, it's just a very
different legal regime in the case of oxygenate requirement
versus the sulfur reduction requirement in the Tier 2 program.
And, I can understand your----
Mr. Ose. It seems to me you need to resolve the chemistry
issue here as to whether or not the evidence that California
has put forward in fact is consistent with EPA's desire for
protection of these different elements that you cited, whether
it be ozone or a particulate matter or what have you. That's
the key element here.
Mr. Holmstead. What----
Mr. Ose. What I'm trying to get at, is, when are you going
to finish that?
Mr. Holmstead. We have a group of people that are working
on that right now. The State provided us with significant
additional information in February. Just within the last month
or so, we received a very detailed technical report from an
outside stakeholder group that was concerned about these
issues. And that's what we are looking at right now. And we
will resolve it as quickly as we can.
Mr. Ose. If I am correct, you are under a court order to do
so. Is that not accurate?
Mr. Holmstead. I don't believe we are under any specific
court order. What the court did was they remanded--initially,
when we had done this analysis----
Mr. Ose. They vacated the original.
Mr. Holmstead. They vacated the original, and they sent it
back to us. They said, ``You have to look at this fine
particles issue,'' which we hadn't looked at before. So, this
is an issue that we had never really looked at, and now we are
looking at it.
But, the court didn't give us a specific date. They just
said that it's--that when we come back and make the decision,
we have to also look at fine particles as well as at ozone.
Mr. Ose. I'm here to ask you--I understand the time
element, and I appreciate the courtesy of my fellow Members
here. I am asking you----
Mr. Holmstead. I keep hoping they are going to cut you off.
Mr. Ose. They are not going to cut me off. Trust me, they
are not going to cut me off. So, I am here to ask you again, do
you have a date by which this is going to be completed?
Mr. Holmstead. We don't have a specific date. As I said, we
received a significant new technical comment document just in
the last month or so, and that raises a number of issues that
we are still looking at. What my boss has said is, we are going
to do this as quickly as we can.
Mr. Ose. I can tell you why they are not going to cut me
off, is because the same issues on waivers in California are
creeping up to Massachusetts and over to Ohio.
So, this is not something that's unique to California. This
is timely. It needs to be done. It sounds to me like you
actually do have a court order to at least review your
decision, and yet we can't seem to get the thing done.
So, back to my original question. What kind of time line
are we working under?
Mr. Holmstead. I can understand your concerns, and we have
obviously heard from the Governor of your State and the members
of the delegation. We made this decision now over a year ago,
and the court overruled it, not because they said we were wrong
on the technical side but because they said we also have to
look at fine particles.
And, honestly, we want to just make sure that we do this
right. It's an enormously complex undertaking that we are
committed to doing the right way, and that's what my boss has
said, and we will do it as quickly as we can.
Mr. Ose. What does that mean, as quickly as you can?
Mr. Holmstead. That means as quickly as we can while
ensuring that we actually get it right and do something that
will be consistent with the statute that Congress has required
and that will stand up in court as well.
Mr. Ose. I'm just amazed to find that the courts are moving
faster than the Federal Government. That just befuddles me.
And, I have to tell you, I'm highly critical of the inability
to get to an end on this.
The gentleman from Massachusetts.
Mr. Tierney. I feel your pain.
Mr. Wells, let me ask you a little bit about your study, if
I could. Why was your study focused on wholesale prices and not
on retail prices?
Mr. Wells. First, let me say to, Mr. Chairman, you are 100
percent. That's why I wasn't a boxer; I didn't know the
difference between my right and left. And I will work on that.
Clearly, as I said earlier, we focused on the wholesale
price because of two major factors: Wholesale prices tend to be
passed on through to the pump at the retail level. And, second,
in terms of our ability to look and assess what data is
available in the Federal Government to assess, there is less
data that's available in the retail sector. The retail sector
is much more complex in terms of the factors that can influence
gasoline prices. So, we thought a good proxy is to look at the
wholesale level, which deals with the actual prices paid as the
gasoline is moved from the refinery into the retail market.
Mr. Tierney. Did your study differ from any previous
studies?
Mr. Wells. Absolutely. Clearly, we went to the FTC and
asked: Had you done a retrospect analysis? They said, no. We
asked for what public studies they had done. Essentially, we
got nothing. The only study we are aware of was released in
March just before our report came out. It was done in
Louisville, KY. It was one city analysis.
It's interesting to note, their analysis showed that
wholesale prices also went up, and I believe the retail prices
either stayed the same or might have decreased a little bit.
But, again, it was only one study.
The GAO study, we believe, is much more comprehensive. We
looked at the cumulative effects of the many thousands of
mergers. We isolated the different types of gasoline, which, in
many studies, had not been done. We focused and isolated on
cost margins. We basically looked at and subtracted out, if you
will, or accounted for everything that could have affected a
gallon of gasoline so that what remained was some sense of what
we attribute to market power related to the actual cost of the
factor of the merger itself.
So, we believe our study was--nationwide, we have not found
any study that had done what we had done.
Mr. Tierney. Now, I take it, Mr. Kovacic, just a little bit
here in indicating that you didn't--the FTC didn't do any
studies or whatever, but you are quick to criticize the GAO's.
So, Mr. Wells, they say that your study is flawed. What
have you done to address the concerns, which I understand were
extensive?
Mr. Wells. They clearly gave us 30 pages of comments of why
they didn't like our study. I think it is fair to say, they
feel strongly.
We feel as strongly as well that we in fact did use sound
economic principles; we did use factors. They, lately--I mean,
just today, we heard there is still an additional three
criticisms of factors that we did not consider. In consulting
with our Chief economist, we find that we did in fact use those
variables. So, maybe it's a dialog issue that GAO would
welcome.
I think, more disturbing to me is sort of the impression
the FTC has given us. It sounds as if they are spending a lot
of time and energy criticizing everyone else that has looked at
this marketplace. We would hope, in the spirit that we would
want to move into, that maybe the FTC wants to move beyond our
methodology is wrong and their methodology is right --ours is
different, it's different than what they used. Hopefully, in
there somewhere must be lessons learned in terms of what the
FTC may be able to do better.
And, again, I think the focus we have is, market power is
extremely important and is something we as consumers want to
ensure that someone is protecting us from market power. We
clearly don't want another Enron situation. So, we are in favor
of hoping that the FTC will, in fact, look at a retrospect
study, look at how well their performance has been, could they
do things better?
Mr. Tierney. Well, I would agree that seems to be their
job, and that it doesn't seem to have been done yet on this.
But did you have a peer review done of your study? And who did
you talk to about your study within the industry?
Mr. Wells. Absolutely. We had at least a dozen peer
reviewers. University of California, Yale, Texas, industry
consultants. We talked to law firms. Four major integrated oil
companies. In fairness, some oil companies refused to talk with
us. We did speak with exploratory and production companies. We
talked to four refiners, 24 independent distributors, three
Federal agencies, two State agencies. The list goes on and on,
16 associations. We talked to the hypermarket people, the
unbranded retailers.
We actually went out and bought data. There's no data--we
didn't find data at the FTC. They gave us no data. The data
that we bought is--some of it is data that's collected by
private sources. We spent a lot of money buying this data.
There is an issue about whether we should share data. There are
a couple issues. One, there are some restrictions about these
rack prices, wholesale prices, their information that belongs
to the people that we bought it from. Some of the data we used,
we only gain access to their data so that we can actually turn
a switch on, look at the data, and the switch gets turned off.
So that type of data is not releasable to us.
In terms of Bill's suggestion that GAO and the FTC would be
willing to work together, I clearly would like to run this by
for institutional approval. I think it's a great idea. We would
love to have a conference. We would love to put the brains in
the room and have a conference and talk about methodology and
talk about what data may be available. We would welcome that.
Mr. Tierney. Look, if Mr. Kovacic wants to insist on you
giving information and you want to give it, I recommend you
hire Dick Cheney's attorney, and then you can keep it from him,
you won't have to worry about giving it to him.
Let me just wrap up here by asking Mr. Caruso a question. I
am going to put on the record here, the EIA did an analysis of
the administration's energy legislation. And am I correct in
asserting that the finding of that analysis was that the impact
of the bill on gas prices would be negligible?
Mr. Caruso. The EIA analysis of the Conference Energy Bill
only looked at those components which we could quantify and
analyze use in our National Energy Modeling System. The results
that you are referring to concerning negligible effects on
prices--are limited to those components. With that
clarification, you are correct.
Mr. Tierney. Thank you.
Mr. Chairman, I yield back. Thank you.
Mr. Ose. The gentleman from Ohio.
Mr. Tiberi. Thank you, Mr. Chairman.
Mr. Holmstead, just a few more questions on the boutique
blends. I represent a district in Columbus, OH. And, my
understanding is that there are different requirements, blend
requirements in Detroit, Pittsburgh, Chicago, in our region. In
your opinion, if Columbus is experiencing a shortage of
gasoline supply over the 4th of July weekend, what is the cost
of providing--or is there additional cost in providing gasoline
to Columbus because of the fact that Columbus has a different
blend than Chicago, Detroit, or Pittsburgh if they had an extra
supply, additional supply? I guess the question would be, is
the price fungible or the gasoline fungible with respect to
those different markets?
Mr. Holmstead. I don't know enough about the requirements.
I know specific markets. But, I can say that is an issue we are
concerned about. Because of the different State requirements,
if there is a supply disruption, if a refinery goes down, if
there is a problem with a pipeline, then if all gasoline were
the same, it would be relatively easier to shift from one
market to the other.
The way it works now is, if the requirements in Columbus
are equal to or less stringent than the requirements in Chicago
or Detroit, they can use that gasoline because that gasoline
may well meet the requirements in Columbus. There is a degree
of fungibility there, but it's not completely fungible. And, I
think that is an issue that people are concerned about.
Our studies have shown that, again, as long as everything
works well, that the pipelines run the way they are supposed to
and the refinery is up and running--which is the case the vast
majority of the time--then we don't see significant problems
with these different fuel blends. And, in fact, when there is a
disruption, we do have the ability under our regulations to
grant temporary waivers. And, again, this is quite different
from the California situation.
We have done that; where there has been a refinery fire,
where there has been a problem, we have granted temporary
waivers.
Mr. Tiberi. You have granted waivers?
Mr. Holmstead. Yes, we have granted those waivers where
there are specific supply disruptions. So, I guess I agree that
there are legitimate concerns about the balkanization of the
gasoline market.
We believe that we have done what we can now to maximize
the flexibility we have under current law, but it is something
that we would continue to look at.
Mr. Tiberi. Don't those requirements--you made a statement
in your written testimony that the--in fact, you even
reiterated it in your oral testimony, that environmental
regulations have had minimal effect on gasoline prices.
Wouldn't it be true that prices have had an impact or there
have been impacts on prices in markets where there is a
different brand or different blend required that's not as open
on the marketplace? Meaning, if a specific blend is required in
Chicago, isn't that going to increase the gas since the supply
is narrower for Chicago than the rest of the region?
Mr. Holmstead. Typically, what our studies have shown is
that when a State is going to adopt a requirement like that, we
encourage them to have a collaborative process where they work
with the refiners and the environmental community, and to try
to understand the kind of gasoline that refiner, given its
equipment, given its feedstock, can readily supply to that
market. Is there a cost? The answer is, yes, but it's
typically, you know, a pennies per gallon kind of cost.
The real problem comes when the refineries that typically
supply that market have a disruption, and whether, you can
bring in fuel from another refinery that doesn't typically
supply that market. And that's where the real concerns about
price volatility have come up. Again, we try to address those
where we are aware of them.
I mean, I can tell you we go in sort of full red alert
mode. We have a group of people who, when there is an issue,
which happens a couple times a year, immediately assesses the
situation. We talk with our colleagues at DOE and EIA to
determine whether, given the circumstances, we ought to do some
sort of a temporary waiver. And, we have done that to try to
address those concerns.
Mr. Tiberi. OK. Switch gears. Mr. Maddox, Secretary Maddox,
just trying to get some clarification on this issue. When
President Bush announced in November 2001 his goal of filling
the SPR to capacity, the Energy Department said that ``the SPR
is intended in the short run to smooth out price hikes.''
That was the quote from the Energy Department. When and why
did the policy change?
Mr. Maddox. I think the fill policy was developed to have
minimal impact in the markets, and that was how the schedule
was developed. We've tried to maintain a level, with a few
exceptions, between 100,000 and 150,000 barrels a day. And, so
I think probably the reference was to that. I don't know the
full quote and context. But, that's always been our goal, to
fill it in such a manner that it did not disrupt the market or
did not create stress on markets.
As you said, I think it's less than 0.2 percent of 1
percent, which is real world, kind of rounding error on an 80
million barrel-a-day global market. I think that's generally
been the strategy. I think that's probably what they are
referring to, lacking other context.
Mr. Tiberi. Under statutory language, under current law,
just to followup, a drawdown of the SPR may occur--may not be
made unless the President finds that a drawdown and a sale are
required to respond, prevent, or reduce a severe energy supply
interruption. And, I'm sure you are familiar with that.
Mr. Maddox. Yes.
Mr. Tiberi. Given the criteria and the current situation,
does the President have the authority in your opinion to
drawdown the SPR at the current time?
Mr. Maddox. No. Right now, as we talked earlier, there is
oil on the market out there at a price, and people are getting
it. Our stocks are close to the average level. There is no
disruption.
There is a great deal of potential for disruption right now
as there are a number of hot spots in this world right now--
that produce oil that the United States uses and the world
market uses. But right now, there is no disruption, per se.
Mr. Tiberi. Do you think that when President Clinton
released oil from the reserve in September 2000 when prices
were about $37 per barrel, that there were circumstances that
allowed him to do that?
Mr. Maddox. To my knowledge--and, Guy, you can correct me--
I'm not aware of any disruptions at that time.
Mr. Tiberi. You would agree that, by Christmas of that
year, oil prices had dropped to about $22 per gallon?
Mr. Maddox. I will take your word on that.
Mr. Tiberi. Mr. Caruso, are you familiar with that
situation?
Mr. Caruso. Yes. At the time, I wasn't in Government, and I
was asked that same question. And my answer was, ``no.'' I
didn't think there were the appropriate circumstances.
Mr. Tiberi. Why do you think--what circumstances led, in
the world or in America, prices of oil to go down to $22 per
barrel by Christmas of that same year?
Mr. Caruso. I think it was largely the result of demand
being weaker and the additional supply put on the market by
OPEC countries. My recollection of the actual data is a little
bit sketchy. But, that's my recollection of that.
Mr. Tiberi. Back to Mr. Maddox.
Assume we all agree that the strategic petroleum reserves
should not be tapped, was it prudent to say so publicly, in
your opinion?
Mr. Maddox. I believe so. I think one of the things we are
trying to do is to create certainty in the market's
decisionmaking, and I think adding more variables to market
decisionmaking with people trying to make long-term plans on
prices is kind of counterproductive to an efficient market.
There are enough variables right now in trying to decide at
what price and how much oil to buy. I don't think trying to
outguess the Government or trying to predict what the
Government is going to do makes that job any simpler. And, in
fact, it will create more risk for people who are trying to
build stocks and make prudent decisions.
Mr. Tiberi. Mr. Maddox, would you concur that the No. 1
issue affecting gas prices today is the cost of crude oil?
Mr. Maddox. Yes.
Mr. Tiberi. Mr. Caruso.
Mr. Caruso. I would say that's the No. 1 issue, yes.
Mr. Tiberi. Mr. Holmstead.
Mr. Holmstead. Yes. That's our view as well..
Mr. Tiberi. Mr. Wells?
Mr. Wells. I agree.
Mr. Tiberi. Last but not least?
Mr. Kovacic. Yes, it is.
Mr. Tiberi. Thank you. Mr. Chairman, I yield back.
Mr. Tierney. Would the gentleman yield for just a second.
Mr. Tiberi. I yield, Mr. Chairman.
Mr. Tierney. I want to clarify just one part of that. I
understand the gentleman's point with regard to the statutory
language, that the President may not have the authority to take
oil out of the Strategic Petroleum Reserves.
Mr. Maddox, do you think there is any statutory prohibition
against the President not continuing to fill it at any time,
not adding oil to it?
Mr. Maddox. To my knowledge, there is not.
However, I think there are policy implications and negative
impacts to not being consistent in your approach to filling the
reserve.
Mr. Tierney. That's consistent with what your comments were
about that earlier.
But there is no statutory prohibition about somebody making
the decision to not keep filling oil at a particular level?
Mr. Maddox. I don't believe so.
Mr. Tierney. Thank you.
Mr. Ose. I have here a copy of the GAO's study.
Mr. Wells, I know that in these studies, at least in
previous reports on different subjects, I have always found the
assumptions under which the study was done, and I have looked
through the table of contents, and I can't find them. Do you
offhand remember where they are?
Mr. Wells. I'm sorry, I didn't hear the question, Mr.
Chairman.
Mr. Ose. I'm looking through your study. And, I know, in
previous GAO studies, there have always been sections that
highlight the assumptions under which GAO does their work. I
can't find those here.
Mr. Wells. We have a scope and methodology section that
would describe the process that we use to build the study, and
the entire number of appendix, I believe it is No. 4 that goes
into quite a lot of detail, the econometric assumptions that
were used in how we built the model, page 110.
Mr. Ose. Actually, 122, I believe.
While we are doing that, Mr. Kovacic, what mergers has FTC
looked at since 2000? I think Mr. Tierney asked a fair question
earlier, that your studies or the analyses that are in front of
us today stop at the year 2000. Have we had mergers that have
occurred since then?
You can take us through the complexity of the HHI analysis,
if you wish. But my concern here is that, I know you guys are
pretty vigilant, I just want to get on the record that you have
in fact looked at such mergers as may have occurred. So if you
would share that with us, I would appreciate it.
Mr. Kovacic. Yes. Since 2001, there have been several
significant transactions that we have examined. And if you
could bear with me for a moment so that I have the count. A
couple of those we have mentioned this morning already. The
commission did examine Chevron's acquisition of Texaco in 2001
and demanded a significant number of divestitures associated
with that transaction. We did look at Valero/UDS which also was
permitted to proceed on the condition that a number of
substantial divestitures be made.
Phillips/Conoco in 2002 also was the subject of close FTC
review, and that transaction was permitted to proceed with
significant divestitures, including refinery and terminal
assets.
And, Shell/Pennzoil Quaker State in 2002 is the last of the
transactions in which the Commission took action.
There have been other mergers in which the FTC did examine
the transaction in detail and did not act. If my random access
memory can summon them on the spot, I believe one was Phillips/
Tosco. If I could turn to my colleagues for a second. Sunoco/
Coastal is another transaction that we examined and did not
intervene.
If I have missed any, Mr. Chairman, I will be sure to
complete the list for you in writing.
In each of these transactions--and this does relate to the
point of the Commission's work in doing studies--we do
exhaustive, case-by-case examinations of each of these
transactions, and we look at them in a considerable level of
detail. Over the course of doing those reviews, our basic aim
in most instances is to avoid net increases in concentration.
So we look very carefully for overlaps.
And, I would say that, even though we have not attempted
the sweeping kind of empirical assessment that Mr. Wells
referred to, it's the process of doing the exacting assessment
of competitive effects in each of those markets and looking at
the institutional arrangements that govern the way in which
refining and distribution takes place that gives us the great
concerns that I have expressed about the GAO study.
Mr. Ose. I want to dwell on that particular aspect of this,
Mr. Wells. And I need to have you be willing to chime in here.
If I understand, the study that GAO did, you focused the
analysis on the pads, the seven pads across the country.
Mr. Wells. That is correct.
Mr. Ose. If I understand what FTC does, it's not based on
the pads but perhaps the unique markets within the seven pads.
Mr. Kovacic. Precisely. One of our fundamental concerns
with the GAO study is that, in many ways, they are using this
measure of concentration, refining concentration at the PADD
level. Based on our examination, transaction-by-transaction,
over the past 20 years where we have been principally
responsible for reviewing mergers, that's not an acceptable
proxy.
Mr. Ose. It would be of immense help to those of us charged
with responsibility of making decisions on these issues to have
you all resolve the difference. I mean, it would be helpful to
us for you guys to get that methodology agreed upon.
Now, the other question I have is that Mr. Holmstead
indicated that the gasoline is fungible in certain directions
but not in other directions. In other words, if your gasoline,
say, in Chicago, the standards of that gasoline may well be
higher than the gasoline available--I think Mr. Tiberi's
example was Columbus, OH. So it's fungible from Chicago to
Columbus, but it may not be fungible from Columbus to Chicago.
And it strikes me that most of the boutique fuels we have
in this country were designed to fit highly urbanized areas,
which happens to be where most people live, which happens to be
where the markets are the largest, which happens to be where
the most fuel is sold. So it seemed to me that we need to
resolve this issue of the impact of the fungibility of the
fuel. I think you'd probably contend that it affects things.
I'm not sure that would be the same position that you have at
GAO.
Mr. Wells. The position we found in our modeling clearly
when you--because we tried to delineate and separate
conventional gasoline and reformulation gasolines and boutique
gasolines. And, I believe, in almost all cases, the
reformulation in boutique had greater cost implication impacts.
So, there is differences between the gasoline in terms of the
impacts to the mergers, as the econometric model pointed out.
Mr. Ose. I think there are differences. And, I'm trying to
resolve whether or not one of the assumptions in your study, if
I read one of the comments here correctly, may have been that
the gasoline is largely fungible. I'm not sure that's the case.
I will send you a question in writing so you can clarify that.
I have no further questions for this panel.
Mr. Tierney.
Mr. Tierney. Thank you, Mr. Chairman.
Mr. Kovacic, I want to revisit an area. Are you familiar
with Senator Ron Wyden's report that was filed June 15, 2004?
Mr. Kovacic. I am, sir.
Mr. Tierney. It's entitled, ``Campaign of Inaction: The
Federal Trade Commission's Refusal to Protect Consumers From
Consolidation, Cutbacks, and Manipulation in America's Oil and
Gasoline Markets.''
Mr. Kovacic. I am familiar with it.
Mr. Tierney. One of the points made is that, of course, the
FTC is not taking action to stop Shell from shutting down its
refinery in Bakersfield even though the agency had previously
required Texaco to divest this refinery in order to remedy what
it found to be a likely anticompetitive impact of the Chevron
Texaco merger. The shutdown would eliminate the competitive
benefit from the divestiture that the agency requires.
If I read this right, Texaco wanted to merge with Chevron.
The FTC then required that Texaco divest itself of the
Bakersfield refinery, because if they didn't do that, it would
be a likely anticompetitive impact. Yet, no sooner had Shell
had that refinery in place, it now looks as if Shell is
intending to close a 70,000 barrel-per-day refinery in
Bakersfield even though the company records show the refinery
is currently profitable. The Shell documents showing the
refinery profits are attached to the report of Senator Wyden.
Shell's announcement of its decision to close the
Bakersfield refinery claimed that ``there is simply not enough
crude supply to ensure continued operation would be
economically viable.'' But recent news articles have reported
that both Chevron and Texaco and State of California officials
estimated that the San Joaquin Valley, where the Bakersfield
refinery is located, has a 20 to 25-year supply of crude oil
remaining. In fact, the Bakersfield California reported that,
on January 8, 2004, that Chevron Texaco plans on drilling more
than 800 new wells in that valley this year, which is 300 more
new wells than last year. The fact that Texaco, Shell's former
partner in the Bakersfield refinery, is increasing its drilling
in the area calls into question Shell's claim that a lack of
available oil supply is the real reason for closing the
Bakersfield refinery.
Another reason to question Shell's claim about the
availability of crude oil is the fact that Shell is currently
the subject of an investigation for misstating its crude oil
reserves. Despite Shell's claims that its decision to shut the
refinery was not made to drive up profits, the company has
admitted that ``there will be an impact on the market.'' That
impact will be to drive prices even higher. Oil companies
predicted that the shutdown of the Powerine refinery would
boost gasoline prices by 2 to 3 cents. That refinery's capacity
was only 20,000 barrels per day. Because of the much larger
capacity of the 70,000 barrel-per-day Bakersfield refinery,
Shell's shutdown of this refinery would have an even larger
impact on prices at the pump.
Why did the FTC say that it had first required that Texaco
divest itself of Bakersfield and then, according to Senator
Wyden's study, do nothing as Shell announced plans to close
down the 70,000 barrels-per-day facility?
Mr. Kovacic. I can confirm to you, and the Commission has
authorized me to inform the committee, that the FTC is
conducting a formal investigation of Shell's announcement that
it is going to close the facility. I believe the scheduled
closing date is tentatively say for the fall of this year.
I can confirm to you that the Commission has opened and is
conducting a formal investigation to examine possible antitrust
violations associated with the closure of that facility. It
recognizes the urgency and time sensitivity of the matter. It
is using its investigative resources at this moment to examine
possible antitrust consequences of that event.
Mr. Tierney. I'm certainly glad to hear that.
But, are there other incidents like this that have occurred
since 2000, where certain requirements of the FTC, in order to
allow a merger or consolidation go forward, have been put in
place and then the monitoring has not gone on from the FTC?
Mr. Kovacic. For every transaction in which we have parties
under order, which is the typical approach for a consent order,
we monitor compliance with those requirements with the utmost
urgency because it's fundamental to the legitimacy and
effectiveness of any of our orders. We examine them carefully.
I'm aware of no instance in which we have permitted a deviation
from the requirements of the order to pass without challenge.
Mr. Tierney. Given the plans of Shell to close this
Bakersfield refinery in the fall of this year, when do you
think that your review will be done?
Mr. Kovacic. I can't provide a specific date. But, I can
only emphasize, as the Commission has instructed me to do
today, that the inquiry is proceeding with the greatest
possible urgency in light of the announced timetable for the
closure of the facility. And we are fully aware that completing
that inquiry sooner is absolutely indispensable.
Mr. Tierney. How transparent will your review be?
Mr. Kovacic. Typically, where the Commission uses a formal
investigation, it requires a vote of the Commission, a formal
vote, to close the investigation. It has been the increasing
custom of the Commission and the Department of Justice over the
past 3 years, in closing an investigation that we regard as
having significant policy import, to reveal the bases on which
a decision to close the investigation was taken.
Mr. Tierney. And, will that be done before the vote is
taken appreciably or only at the time of the vote?
Mr. Kovacic. It is typically at the time that the
investigation is closed that the Commission chooses to issue a
statement that explains the reasons for closing the
investigation. It is at the Commission's discretion to make
announcements prior to the point at which it takes action
either to prosecute or not to prosecute.
But, typically, the disclosure of the bases for not taking
action takes place at the time the decision not to prosecute is
made.
Mr. Tierney. Well, I would only suggest for whatever it's
worth that given the questions that have been raised by RAND,
by the GAO, by others, Consumer Reports, whatever, about the
FTC's inaction or purported inaction, of some of these
instances and the conduct of the industry, that, hopefully,
your commission might decide to be a little more transparent in
advance of its decision so that the public gets to see that it
has done a thorough scrutiny of this in a very open manner and
thorough manner, and that we all have a little heads-up to
offer whatever input might be necessary to make sure there is a
full and complete record. We appreciate that----
Mr. Kovacic. I will certainly convey that to the
commissioners themselves. I will make sure that your
observations on that point are known to them as promptly as
possible.
With the greatest respect, Congressman, I think that as our
statement tries to lay out, to speak of the Commission's
program as inaction is mystifying. I think that is a
contentless description of the Commission's program here. It is
a fair point to debate the level of activity, but is it really
a fair approach to say that it's been one of inaction?
Mr. Tierney. Well, we will find out as we delve further
into this. It's certainly not been as active as some of us
would like to see, and I think, as many of the reports
indicate, there hasn't been all the action that would be
necessary to protect the consumers. So that would leave us with
at least some inaction which I base my statement upon and some
great distress for consumers who are paying the price at the
pump. And, hopefully, we can put some policy around that to
make sure that, as we move forward, we will all be on the same
page. Thank you.
Mr. Ose. I thank the gentleman. I want to echo his comments
regarding the Bakersfield refinery which, if I understand
correctly, is scheduled to close November 1. I know that the
Attorney General in California is looking at this issue, and I
know, pursuant to Shell's announcement, I have received
anecdotal evidence that a number of buyers or potential buyers
have gone to look at the refinery. There is a confidentiality
agreement required for them to see the actual operating results
of the refinery, so I can't give you anything more. But, I do
appreciate the gentleman from Massachusetts's interest, because
I share it, and I hope FTC does follow through.
Mr. Kovacic. I can assure you, Mr. Chairman, that we regard
this as a matter of particular urgency and importance. And we
intend to cooperate, and we have been cooperating as fully as
possible, with our colleagues in the State of California. And I
can assure you that this is a matter of the greatest attention
and urgency for the Commission, sir.
Mr. Ose. Every time I fill my tank, I will be thinking of
you.
The gentleman from Ohio.
Mr. Tiberi. Speaking of refineries, Mr. Chairman.
Mr. Caruso, we heard today that crude oil is not in short
supply. But, we also heard that refining capacity is nearly at
capacity in America. In your opinion, how much would we have to
increase our refining capacity in the United States to have a
meaningful impact on lowering pump costs, fuel costs at the
pump?
Mr. Caruso. Well, that's, of course, a very complex issue,
and we haven't studied it that directly. But, clearly, the lack
of refining capacity, particularly in the conversion capacity,
is an exacerbating factor to the higher prices of gasoline.
It's not the No. 1 issue, as we have all agreed here, but it's
a contributing factor.
An increase in refining capacity certainly would help with
future gasoline prices, but I couldn't put a specific number on
it at this time.
Mr. Tiberi. Mr. Maddox, do you want a shot at that?
Mr. Maddox. I wouldn't venture a guess. I think we referred
to earlier comments about crude being the major driver right
now.
Mr. Tiberi. But you would concur--and you don't know what
the number is, but added refining capacity at some point would
lower fuel costs?
Mr. Maddox. Well, I would say that, with the expected
continued growth in refined products with economic growth over
the next 10, 15 years, as I mentioned in my opening statement,
we are going to need more refineries if we are going to have
sufficient gasoline available. And, you know, a scarce
commodity demands a higher price. I think that's basic
economics.
Mr. Tiberi. Thank you.
Thank you, Mr. Chairman. You want a shot at that? I don't
think anyone's willing to give me a number. Does the FTC have a
number in terms of capacity, refining capacity that would have
an impact?
Mr. Kovacic. We don't sir. No.
Mr. Tiberi. Would you concur with both Mr. Caruso's
statement and Mr. Maddox's statement?
Mr. Kovacic. I would.
Mr. Tiberi. Thank you.
Mr. Ose. All right. I want to thank this panel for their
participation.
As I said earlier, there are a number of questions that we
have not gotten to. Given time constraints, we will be
forwarding those to you in writing. We would appreciate timely
responses. This record will remain open for 10 days as it
relates to this panel and the next.
Gentlemen, I appreciate your appearance. I look forward to
your contributions for solutions on this. I thank you for your
participation. We will take a 5-minute recess.
All right. I want to welcome the second panel to our
witness table. For today's hearing we're joined in this second
panel by Mr. Bob Slaughter, who is the president of the
National Petrochemical and Refiners Association and is also
appearing on behalf of the American Petroleum Institute.
He is joined by Mr. Michael Ports, who is the president of
the Ports Petroleum Co., Inc., and is here on behalf of the
Society of Independent Gasoline Marketers of America and the
National Association of Convenience Stores; and, if I am
correct, he is from Mr. Tiberi's district--State. Don't you
represent the whole State?
Mr. Tiberi. Not yet.
Mr. Ose. Well, you should.
We are also joined by Mr. Ben Lieberman, who is the
director of air quality policy at the Competitive Enterprise
Institute; and Mr. Blakeman Early, who is the environmental
consultant for the American Lung Association.
Gentlemen, welcome. As you saw in the first panel, we
routinely swear everybody in. So, if you'd all please rise.
[Witnesses sworn.]
Mr. Ose. Let the record show the witnesses all answered in
the affirmative.
Now, we have received each of your written statements. They
have been entered into the record. We have, in fact, read them,
and we are going to give you each 5 minutes to summarize.
As you saw in the first panel, my gavel is heavy at 5
minutes. Please stay within that time requirement, given our
time constraints.
Mr. Slaughter you're recognized for 5 minutes.
STATEMENTS OF ROBERT SLAUGHTER, PRESIDENT, NATIONAL
PETROCHEMICAL AND REFINERS ASSOCIATION; MICHAEL PORTS,
PRESIDENT, PORTS PETROLEUM CO., INC.; BEN LIEBERMAN, SENIOR
POLICY ANALYST, COMPETITIVE ENTERPRISE INSTITUTE; AND A.
BLAKEMAN EARLY, ENVIRONMENTAL CONSULTANT, AMERICAN LUNG
ASSOCIATION
Mr. Slaughter. Thank you, Mr. Chairman. I'll try to skip
through the things even in my oral statement that have already
been established.
One, we did establish earlier that roughly 60 percent of
the current costs of gasoline basically are due to taxes, and
particularly to the cost of crude oil. So we have established
the fact that the recent run-up in demand for crude oil has had
a significant impact.
The International Energy Agency has said that economic
expansion is fueling the biggest increase in world oil demand
in 16 years. Chart No. 2 shows the strong correlation between
crude costs, our major feedstock and gasoline prices, again
establishing that fact.
We also have established the fact that fortunately
refineries have been able to run at 95 to 96 percent of
capacity for most of this year, which is far in excess of what
we see in other heavy manufacturing industries.
We also have established the fact that we no longer have
sufficient domestic refining to match our U.S. demand,
particularly for gasoline. We are dependent on imports for 10
percent. There has been no increase in U.S. refining capacity
for the past 3 years and no new refineries since 1976, although
existing refineries have been modernized since that time. U.S.
refining capacity in 1981 was 18.6 million barrels a day with
325 refineries. Today, we have 149 refineries with a total
capacity of 16.8 million barrels per day. While U.S. demand for
petroleum products has increased by over 21 percent since that
time, domestic refining capacity has actually decreased by 10
percent.
If I could see the next chart, one of the major factors,
cost factors, for the industry is the cost of environmental
requirements. And this is the regulatory blizzard which shows
all the different regulatory programs the industry is subject
to this decade. We'll spend roughly $20 billion across the
industry to comply with these programs, and most of them
required by the Clean Air Act. Over the last decade, 1990 to
2000, we spent another $20 billion to comply.
We cannot say that we agree with EPA's characterization
that these expenditures result in minimal costs to refiners.
There are significant costs from these programs, which are
nevertheless very important programs, and we support programs
like this very strongly, both associations. But, we do believe
that we have to take into account their impact on supply and do
a better job of that in future than we have in the past.
In the meantime, it's unclear whether new refineries will
be built. One company has been trying to build a new refinery
in the American Southwest, one of the fastest growing areas in
the United States. After 10 years, it has little to show for
its efforts. It's hoping to get an air permit this year, but
may or may not.
Certainly, New Source Review reform will be of help in this
regard and also permit streamlining. ChevronTexaco, for
instance, had to wait over a year this year to get permits for
an ethanol tank, which the company had to have in California in
order to comply with the ethanol mandate that's in effect now
for gasoline due to the MTBE ban. Fourteen months is just too
long to comply with a mandatory requirement like that, but
that's the time they had to wait.
Obviously, such a significant investment for these refining
programs over the last 20 years has taken a lot of the
available investment capital away from the industry to meet
these environmental requirements. Particularly with the
reinterpretation of the new-source review program it became
difficult even to add capacity to existing sites. And, we do
believe that we can do a better job in the future of estimating
the impact on supply of these regulatory requirements than we
have been doing.
We need to be more careful also because, being dependent on
imports for 10 percent of our supply, we have to make sure that
our traditional suppliers of imports are given enough time to
comply with the new regulatory requirements, as well, so they
can continue to supply the increment that we've become
dependent upon.
We believe that we need to coordinate State initiatives.
The ban on MTBE in California, New York and Connecticut were
not well coordinated, and we don't think that enough attention
was paid to the impact on supply.
We do support elimination of the 2 percent requirement in
reformulated gasoline for oxygenation. We believe that EPA
should grant the waivers that have been requested by both
California and New York until that repeal can be achieved.
We think you have heard enough in the background on the
history of industry investigations. You will hear about
refinery profitability and industry profitability. The numbers
do appear large. They are large numbers in isolation, but it
takes a great deal of money to remain in this business and to
put back into this business to produce the products that
consumers depend on.
So, we believe this has been a tough year. We think the
industry has done its very best to keep supplying adequate
products to the American people. We intend to continue doing
that. And we look forward to your questions.
Mr. Ose. I thank the gentleman.
[The prepared statement of Mr. Slaughter follows:]
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Mr. Ose. Our next witness is Mr. Jeffrey Ports. Sir, you're
recognized for 5 minutes.
Mr. Ports. Good morning, Mr. Chairman and members of the
subcommittee. My name is Mike Ports. I'm president of Ports
Petroleum Co., an independent motor fuels marketer
headquartered in Wooster, OH. I appear before the subcommittee
today representing the Society of Independent Gasoline
Marketers of America [SIGMA], and the National Association of
Convenience Stores [NACS]. Thank you for inviting me to testify
today.
Collectively, the members of SIGMA and NACS sell
approximately 80 percent of the gasoline consumed in the United
States every year. However, the vast majority of NACS members
and all SIGMA members do not make gasoline and diesel fuel.
SIGMA and NACS members are just as exposed as consumers to
fluctuations in the overall supply, to volatility in the price
of crude oil, and to the impact that volatility has on
wholesale and retail motor fuel prices.
In fact, independent motor fuel marketers represent the
closest proxy for gasoline and diesel fuel consumers that
exists in the Nation's motor fuel refining and distribution
industry today. Shortages in gasoline and diesel fuel supplies
impact independent marketers first, before your offices begin
to hear complaints from consumers and businesses about the
retail price of gasoline and diesel fuel.
SIGMA's and NACS's message today to this subcommittee and
to your colleagues in the House and Senate is really very
simple. There are two main factors contributing to the high
gasoline prices that motorists are paying this spring and early
summer: one, high worldwide crude oil prices, and two, a very
tight balance between gasoline supplies and consumer demand.
There is very little that this subcommittee or this Congress
can do legislatively in the short term to address either of
these factors. However, SIGMA and NACS urge you and your
colleagues to examine longer-term solutions to these problems
so that the gasoline and diesel fuel price spikes we witnessed
this year do not become the norm.
World crude oil prices rose precipitously over the first 6
months in the year. There are myriad reasons for these
increases which have been addressed by others and which I will
not cover here. The point I will make is that even if crude
prices do fall significantly in the coming months, the second
factor leading to the 2004 price spikes, tight gasoline
supplies, will continue to exert significant upward pressure on
gasoline prices in the future.
If Congress wants to prevent future gasoline price spikes,
SIGMA and NACS suggest that it focus its legislative attention
on three issues: the expansion of overall gasoline supplies,
the restoration of gasoline fungibility, and the increase in
domestic motor fuel refining capacity.
Simply stated, the ability of our Nation's motor fuel
refining and distribution industries to increase gasoline
production or transfer product from market to market in times
of tight supplies and increasing wholesale and retail prices no
longer exists. The environmental compliance burdens placed on
the Nation's refining industry over the past 20 years has
effectively destroyed the world's most efficient commodity
manufacturing and distribution system. To enhance the quality
of our air, an objective of which SIGMA and NACS are completely
supportive, the government has imposed on domestic refiners
tens of billions of dollars in costs, and has fragmented the
motor fuels distribution system into islands of boutique fuel.
But, as for all other good things, there is a price for this
cleaner air that ultimately must be paid by consumers of
gasoline and diesel fuel.
If we collectively want to prevent future national and
regional gasoline and diesel fuel price spikes, the current
situation must be addressed and changed. There are no short-
term fixes to the interrelated issues of increasing overall
gasoline and diesel fuel supplies and preventing future price
spikes. Therefore, SIGMA and NACS urge Congress to examine a
broad slate of legislative initiatives to address these issues
in the medium and long term.
No. 1, address boutique fuels by repealing the formulated
gasoline oxygenate mandate, adopting a moratorium on new
boutique gasoline and diesel fuels and conducting a detailed
study to determine if the number of boutique fuels across the
country can be reduced without sacrificing environmental
protections or significantly reducing gasoline supplies.
Two, encourage expansion of existing domestic refining
capacity by adopting regulatory reforms that clarify new-source
review applicability to refinery expansions and streamlining
the Federal and State permitting process for expanding existing
refineries and building new refineries.
And three, incentivize investment in new refining capacity
by adopting Federal tax incentives that encourage rather than
discourage domestic refiners to expand capacity at existing
facilities and build new facilities.
SIGMA and NACS believe that we as a nation are at a
crossroads with respect to motor fuels. If we continue along
our present path, balkanization will proliferate. Domestic
refining capacity will continue to stagnate or decrease and
increased motor fuel prices and periodic price spikes could
become the norm rather than the exception.
We can either chart a different course or continue with the
status quo. For independent motor fuel marketers and for your
constituents, SIGMA and NACS hope that Congress leads the way
to the new course.
Thank you again for inviting me to testify today. I would
be pleased to answer any questions my testimony may have
raised.
Mr. Ose. I thank the gentleman for appearing. I apologize
for getting the name wrong. It's Mike Ports, not Jeff Ports.
[The prepared statement of Mr. Ports follows:]
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Mr. Ose. Our next witness, joining us in the second panel,
is Mr. Ben Lieberman, who's the director of air quality policy
at the Competitive Enterprise Institute.
Sir, you're certainly--we're pleased to have you with us
and you're recognized for 5 minutes to summarize.
Mr. Lieberman. Good morning, Mr. Chairman and members of
the subcommittee, and thank you for inviting me to testify. My
name is Ben Lieberman, and I'm the director of air quality
policy with the Competitive Enterprise Institute, a public
policy organization committed to advancing the principles of
free markets and limited government.
My comments today will focus on those measures I believe
Congress should consider to reduce the likelihood and severity
of future gasoline price increases, such as the one we have
experienced in recent months.
Of course, there are several factors that influence the
price of gasoline. Clearly, the rising price of oil is the
single biggest reason for the 50-cent-per-gallon jump during
the first 5 months of the year, but I am not going to say much
about the price of oil because that's something largely outside
of congressional control.
On the other hand, the complex Federal regulatory burden on
gasoline also adds to the price of gas, and it is something
that is very much within congressional control. So my comments
will focus on just a few ideas for streamlining these gasoline
regulations.
The current confusing patchwork of motor fuels is a
relatively new phenomenon which got its start as the provisions
in the 1990 Clean Air Act amendments took effect. Thanks to
these new rules, we have something called ``reformulated
gasoline,'' which is supposed to help smog be reduced in nearly
one-third of the Nation. We also have something called
oxygenated gasoline to reduce carbon monoxide. Even
conventional gasoline is subject to several requirements.
In addition, some States have come up with their own
blends, as well, often in order to secure the needed EPA
approval for their smog fighting plans. Overall, there are more
than a dozen blends in use.
Not only do some of these blends cost more to make, but the
logistical burden of having to separately refine, store and
ship all of them adds at least a little to cost and also
increases the incidence of localized shortages and price
spikes.
RFG has cost 10 to 20 cents per gallon more than
conventional gas in recent months, although only part of that
is due to the higher cost of actually producing RFG. And these
higher prices existing in some parts of the country,
particularly California and the upper Midwest, can be traced to
the more stringent regulations there, as well as some of the
seasonal fluctuations. The tricky transition from winter grade
to summer grade gasoline has been a problem in several
springtimes in recent years.
Now, at the same time that we have these new rules, the
environmental record is decidedly mixed. In fact, though air
pollution has been declining for decades, the trends were
really just as strong in the years before the experiment in
boutique fuels was initiated in the 1990's as they have been
since that time.
While the whole system is far from perfect, there are
certain regulatory provisions that stand out as being
particularly problematic. Most notably, the requirement that
RFG contain 2 percent oxygen content has added to the cost of
this fuel, but has done little to clean the air and has
actually led to some water contamination concerns. The National
Research Council has concluded that this requirement does
little or no good, and an EPA expert panel has called for its
elimination.
We are long overdue to streamline the unnecessarily
complicated and costly maze of regulations that has been
accumulating since 1990. The easiest place to start is with
those provisions like the 2 percent oxygen content requirement
that do far more economic harm than environmental good. Other
provisions could be retained but modified to achieve the same
effect in a more cost-effective manner.
And, just as important as streamlining the existing
requirements is holding the line against expensive new
regulatory or statutory provisions. This includes a new bill
soon to be voted on in the Senate that's designed to fight
global warming. According to analysis from the Energy
Information Administration, the Climate Stewardship Act is
estimated to add 9 percent to the price of gasoline by 2010 and
19 percent by 2025. Given the experience in the past few
months, this is the last thing the driving public wants or
needs.
Now, most of the opposition to gasoline regulatory reform
comes from those arguing that even modest changes will have an
adverse affect on air quality. These concerns are unfounded.
Not only have we seen decades of improvements in air quality
for reasons mostly unrelated to the use of boutique fuels, but
we will continue to see this kind of progress for decades to
come. The new Tier 2 motor vehicles, which will be phased in
over the next few years, will be 70 to 90 percent cleaner
burning than existing cars and trucks regardless of the fuel
used to run them. In fact, studies have shown that fleet turn
over from older and dirtier vehicles to cleaner new ones makes
more of a difference than fuel changes.
So, as we move into the Tier 2 era in the years ahead, the
justification for these alternatives to conventional gasoline
will further decline. In sum, I would say there's plenty of
room to make gasoline regulations more consumer friendly, and
to do so within the context of continuing improvements in air
quality.
Thank you.
Mr. Ose. I thank the gentleman for his testimony.
[The prepared statement of Mr. Lieberman follows:]
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Mr. Ose. Our fourth witness on the second panel is Mr.
Blake Early, who has been with us before.
Sir, it's good to see you. I see your family has joined you
today. You're recognized for 5 minutes to summarize.
Mr. Early. Thank you, Mr. Chairman. You can call me Blake.
Mr. Ose. Blake, you need to turn on your mic. There you go.
Mr. Early. Thank you, Mr. Chairman. It's fine to call me
Blake.
I'm pleased to be here today on behalf of the American Lung
Association, celebrating its 100th anniversary this year. The
American Lung Association has been working to promote lung
health through the reduction of air pollution for over 30
years, and I'm happy to be here to discuss the elements of the
Clean Air Act that impact the oil refinery industry and
gasoline prices.
I'm going to focus on the reformulated gasoline and low
sulfur requirements for gasoline, on road diesel, and nonroad
diesel fuel which we believe to be--have the biggest impact on
the oil refining industry.
RFG has been shown by EPA in California to be a cost-
effective program to reduce vehicle emissions that contribute
to ozone and reduce toxic air pollution from vehicles by 30
percent. Low sulfur gasoline, low sulfur on road diesel and
nonroad diesel requirements, issued by both the Clinton and
Bush administrations, are key to enabling a new generation of
emissions controls on everything from SUVs to diesel trucks, to
earth movers. These requirements will reduce smog, reduce fine
particulate and toxic air pollution and save tens of thousands
of lives, heart attacks, respiratory-related hospitalizations
and reduce thousands of asthma attacks among children each and
every year.
The monetized benefits from these sulfur fuel programs are
enormous, calculated to approximate $24, $51 and $53 billion
each year for each of these three low sulfur programs when they
are fully implemented. The sulfur limits for these gasoline and
diesel fuel requirements do serve to make fuel more fungible
because they will apply to all gasoline and all diesel.
Any attempt to modify these rules at this juncture without
thorough evaluation risks disrupting these programs in ways
that could reduce or delay the large public health benefits we
need them to deliver.
Those who propose to change these rules bear a heavy burden
of showing the need and demonstrating the benefit. This is
because air pollution still threatens millions of Americans. A
recent American Lung Association study found 441 counties, home
to 136 million people, have monitored unhealthy levels of ozone
and fine particles.
We believe that should Congress choose to change the law or
gasoline policy, it should do so in ways that make it easier
for areas with dirty air to adopt clean fuels programs and not
lock into the use of dirtier or conventional fuels.
There is no evidence that current clean fuel programs
significantly influence current gasoline price increases.
Prices for both clean fuels and conventional gasoline have
risen at the same rate broadly across the Nation, and prices
for clean fuels generally have not risen faster for clean fuels
than they have for conventional fuels. In some cases,
conventional gasoline is more expensive or the same as RFG; and
my testimony includes a chart which demonstrates this fact.
It's an informal chart and not intended to be very precise. We
think that perhaps the EIA should pursue this more thoroughly.
The one clean fuel requirement that contributes to price
volatility is the Federal oxygen requirement. The one thing the
Bush administration should do is grant California's request for
an oxygenate waiver. Granting the waiver would improve the air
quality and reduce gasoline prices in California and probably
other parts of the country. EPA has been avoiding a decision on
this urgent matter and treating it as a routine matter.
I introduce for the record, Mr. Chairman, a letter sent to
Administrator Leavitt just yesterday, endorsing and asking him
to grant the California waiver request. It's signed by nine
health and environmental organizations.
[The information referred to follows:]
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Mr. Early. This is a very urgent matter. We believe that
the agency is dragging its feet. It has had information
available to it on the California waiver since the year 2000,
so when Mr. Holmstead says, gee, this is really complicated and
we have to look at the information, he's had about 4 years. And
we fully support it. And, of course, I would observe that every
member of this panel supports it.
We hope that maybe we can get this done and have a
favorable impact both on the environment and on gasoline prices
in California.
Thank you, Mr. Chairman.
Mr. Ose. I thank the gentleman. The letter he referenced
without objection will be made a part of the record.
[The prepared statement of Mr. Early follows:]
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Mr. Ose. As you saw in the first panel, we will now go to
questions of our witnesses.
Mr. Slaughter, you had a chart up--if you could put up the
chart that had the gasoline pump tanks. Now, in that chart you
have taxes at the top, distribution and marketing, refining and
crude oil. And I believe it's your testimony that the crude oil
is market dictated, the taxes are fixed by fiat, and the
primary variables are the two middle portions, refining in one
case, and distribution and marketing in the other. Is that
correct?
Mr. Slaughter. It is. There's variation, of course, in
crude oil price.
Mr. Ose. But it's beyond our control.
Mr. Slaughter. Yes; 40 percent is traditionally a low point
for crude oil. It has been more, and the refining number at 31
is traditionally less than that. That 31 percent is a high
point that's been reached only twice in the last 4 years.
Mr. Ose. OK. Within the refining portion and the
distribution and marketing portion, there is a cost element and
then there is a profit element. Can you break those out
accordingly?
For instance, a refiner, of that 31 percent, how much would
be cost that's inescapable, and how much would be profit to the
bottom line of the refiner?
Mr. Slaughter. It's difficult to break it out exactly.
There are indications that the refining profit can be in the
neighborhood of 2 cents per dollar of capital employed.
Traditionally, the return on investment in the refining
industry is about 5 percent, so the piece of that that is
actual profitability is relatively small.
I'd be glad to get back to you with more definite
information, but it would be difficult to be definite beyond
that.
Mr. Ose. Would the same factors dominate the distribution
and marketing side, too?
Mr. Ports, I mean, you're more on that than Mr. Slaughter.
Mr. Ports. Yeah, absolutely. I mean, that's probably a
pretty historically--those are pretty historic levels. While
the refining industry has certainly done well lately, the
marketing side has basically been in its typical rut, so to
speak. It's a very difficult business.
Mr. Ose. Well, Mr. Slaughter just indicated that 2 cents of
every dollar represents profit to the refiner. Does 2 cents of
every dollar represent--I should say ``margin to the refiner.''
Does 2 cents of every dollar represent the margin to the
wholesalers and the like?
Mr. Ports. No. It's very hard to--again it's hard to
quantify that, and I'm not evading the answer because there are
different areas of the country, different real estate costs in
different areas of the country, so some folks do require, you
know, a higher margin than other areas of the country. So, it
is a big, big variable across the United States.
Mr. Ose. Is it possible to break it out by geographic area
or by pad or by market?
Mr. Ports. If we could get back to the committee with that
information, that would be great.
Mr. Ose. All right. We'll send you a question in writing.
My objective is to break down within that framework how much
profit, how much cost is embedded in those percentages.
Now, Mr. Slaughter, you talked a little bit about the
variability in the price of the crude. It seems to me that
almost every day we get a new influence on that. We've dealt
with Venezuela strife in terms of productivity or politically.
We're dealing with the Iraq question and the availability in
production that gets to the ports. This thing in Russia where
YUKOS is now under severe strain for whatever reason;
apparently there's an issue of liquidity in terms of their
ability to meet their contracts. Is there going to be a
substantial impact on our availability of crude?
Mr. Slaughter. Well, when it comes to YUKOS, I mean, there
has been a lot of discussion on that point since it was first
raised yesterday in some of the media. There is some feeling
among analysts that even should YUKOS experience liquidity
problems or go into bankruptcy that their facilities would
still operate. This is typically what happens in the United
States. So YUKOS could continue.
But, there is definitely an uncertainty premium in crude
these days because of the events in the Middle East, not just
in the Middle East, but also concern about Venezuela, about
Nigeria and other areas. And, that, you know, it is one of the
costs that are inherent in being 60 percent dependent on crude
oil imports.
Mr. Ose. Mr. Maddox testified, if I recall, that premium,
that risk premium, may be as high as $10 a barrel.
Mr. Slaughter. I've seen analysts' opinions that put it
that high. Others put it in the neighborhood of $4 to $5.
Mr. Ose. Is that sort of like the minimum and maximum? Do
those numbers constitute the minimum and maximum risk premiums?
Mr. Slaughter. Well, only in the sense that they are the
minimum and maximum figures that I've seen from analysts. But I
have seen $10. There is no scientific determination.
Mr. Ose. There's no scientific consensus as to what the
risk premium is?
Mr. Slaughter. There is not, but a number of analysts have
said it's on the order of as much as $10. Others are about half
that.
Mr. Shays. I noticed in Nigeria that, I think, Mobil
declared force majeure on their production facilities, and that
the white collar workers for, I think, Shell, have notified
Shell of a pending strike in 3 weeks' time.
Mr. Slaughter. Well, I believe that's true. But there have
been problems in Nigeria for some time. It was in the news
about 3 weeks ago that things were cleared up there. They
obviously have broken out again. So, as you pointed out earlier
in your questioning--I mean, these things tend to come and go,
and you know, a lot of areas that we are dependent on for crude
supply have problems.
Mr. Ose. You also testified, if I recall correctly, that at
some point recently, in the recent past, we had about 300-plus
refineries producing or refining capacity of 18.5 million
barrels a day.
Mr. Slaughter. 1981.
Mr. Ose. OK. And then currently we have about 150 with
refining capacity of 16.8 million barrels. So that's a decline
of 1.7 million barrels a day of refining capacity from 18.5 to
16.8.
Mr. Slaughter. Yes. Right.
Mr. Ose. And, that's since 1981.
Can you give us any indication of what demand has done
since 1981 in terms of what was overall demand for refined
product in 1918 versus overall demand for refined product in
2004?
Mr. Slaughter. It has grown by 25 percent.
Mr. Ose. So, what was it in 1981?
Mr. Slaughter. Well, it was on the order--it's 16 million
barrels per day and change, and now it's 19 to 20 million
barrels per day.
Mr. Ose. Just a second. Let me write that down.
So, that leaves us short somewhere between 2--no, 3 and 4
million barrels, 2 to 4 million barrels a day in refining
capacity.
Now, I understand we had been importing refined products
somewhere on the order of 1,020,000 barrels a day, I think is
the number. But, now it's fallen to about 980,000.
Mr. Slaughter. There's been a decline of about 7 percent
this year, and there are various opinions as to why that has
occurred.
Mr. Ose. Such as?
Mr. Slaughter. Well, it could be that importers have been
unwilling or unable to invest in some of the requirements
necessary to meet the new gasoline sulfur specs. In some
instances, it could be that foreign suppliers have been unable
to deal with the situation on the East Coast, in New York and
Connecticut, with the ethanol mandate that is now in place in
RFG in those States because of the decision to ban MTBE.
Mr. Ose. It's the oxygenate mandate. You're not required to
use ethanol. It's a de facto mandate?
Mr. Slaughter. It's a de facto mandate. The only two really
available are MTBE and ethanol. If you ban MTBE and you have to
use RFG, you've got to go to ethanol; and that creates
uncertainty for importers.
These are essentially opportunistic suppliers to the United
States. And, you know, they may decide they may be unable or
just unwilling to supply, they may have other markets where
they won't have to make these investments, and that may be why
the numbers are slightly down on imports this year.
Mr. Ose. All right.
The gentleman from Massachusetts.
Mr. Tierney. Thank you, Mr. Chairman. I want to read the
panel some quotes from industry individuals and documents, and
then I want to talk a little bit about some of the first
quarter reports from some of the companies here.
Back in November 1995 there was an internal Chevron
document that revealed concerns of a senior energy analyst at
the American Petroleum Institute convention, it says, ``If the
U.S. petroleum industry does not reduce its refining capacity,
it will never see any substantial increase in refining margins.
A few months later an internal Texaco document warned that `As
observed over the last few years and as projected into the
future, the most critical factor facing the refining industry
on the West Coast is the surplus refining capacity and the
surplus gasoline production capacity. The same situation exists
for the entire U.S. refining industry.' '' That was a document
of March 7, 1996.
And, last, we have a Powerine Refinery document, the
internal Mobil Corp. e-mail of February 6, 1996, that ``We
would all like to see Powerine stay down. Full court press is
warranted in this case.''
I say that because it seems fairly obvious from the GAO's
report and others that the business has made a decision to
decrease the amount of refining capacity, and as a result,
their margins have appreciably gone up. Refinery closure and
tight supplies have increased refinery margins and padded the
oil companies' bottom lines according to one investigative
report done by Senator Wyden that you heard me refer to
earlier.
A prime example is ExxonMobil, which announced all-time
record earnings for 2003 of $21.5 billion. Those are not just
the highest earnings ever by an oil company; they are almost
the highest ever by any company. ChevronTexaco, ExxonMobil, BP,
Shell, ConocoPhillips and Occidental Petroleum have now all
reported record first quarter results for 2004. ChevronTexaco
shows a percentage increase in their first quarter 2004 results
as compared to last year's first quarter of 33 percent.
ExxonMobil is up 14 percent, BP is up 17 percent, Shell is up 9
percent, ConocoPhillips up 27 percent, and Occidental is up 50
percent. Those are the overall corporate results. But, five of
the six companies referred to increased margins from their
refinery operations as the significant factor in their profit
improvements.
ChevronTexaco in its quarterly report says U.S. refining
marketing and transportation earnings of $276 million improved
$2,006,000 from last year, a 300 percent increase. The primary
reasons for the improvement were an increase in average refined
product margins, higher sales volumes and lower operating
expenses. In our downstream and chemical segments, increased
demand for refined products strengthened industry margins and
helped boost our earnings.
From ExxonMobil, ``U.S. gasoline prices helped give the
world's largest publicly traded oil producer its biggest first
quarter return refining profit in 13 years.'' ``ExxonMobil's
refining profit rose 39 percent to $1 billion.'' From Shell,
``industry refining margins were driven primarily by strength
in gasoline, and European margins found support from arbitrage
opportunities to the U.S. In the first quarter, refining
margins averaged 19.5 percent for the U.S. Gulf Coast region
and 40 percent on the West Coast region.''
``Margins in the United States of America also may be
impacted by supply versus demand balances and low storage
levels.'' From ConocoPhillips, ``higher refining margins and
running at 95 percent of capacity were the primary reasons for
the improvement in performance. The realized U.S. refining
margin increased almost 31 percent from $5.58 a barrel to $7.30
a barrel. But if you look at the first quarter performance in
refining and marketing, all of our earnings came essentially
from the refining side of the business. And when you look at
the refining side of the business worldwide, 87 percent of that
came from domestic refining and 13 percent from international
refining.''
And, finally from BP, ``the refining and marketing result
increased 13 percent compared with a year ago, reflecting
improved refining margins particularly in the U.S.''
Is this not pretty compelling evidence that the industry
has been making business decisions to reduce its refining
capacity in order to increase its margins?
Mr. Slaughter.
Mr. Slaughter. No, Mr. Tierney, I don't believe it is. As
we pointed out in our testimony, it requires a great deal of
capital to operate in our industry, and I would say that in the
20 years I've been involved with the industry, we've seen many
more bad refining quarters than good.
What you're talking about in the first quarter of this year
is the rarest of instances in which refining profits were high.
It's a very cyclical industry.
Mr. Tierney. Could I just interrupt you 1 second? And let's
go back to last year when ExxonMobil announced all-time record
earnings of $21.5 billion. So that's at least a couple of years
in a row they've been doing pretty well, right?
Mr. Slaughter. Well, again, I don't know what refining is
within that $21 billion, sir, but refining oscillates between
the top and the bottom of the scale and more times in the
bottom than the top.
Mr. Tierney. Well, I think if we watch a trend--and you
correct me if I'm wrong, if you guys don't have evidence of
this--but since the mid-90's, probably since the 1990's when
these refineries were being shut down, the margin has improved
substantially; and that lack of supply has had a lot to do with
it.
Mr. Slaughter. The supply/demand balance has been tighter
since about 2000. But there have been bad quarters since 2000
as well. And, again, you are overlooking the cost of being in
the business, and the amount of dollars that have to be put in
the business take up most of that income from the refining
sector that you're talking about, even though the numbers----
Mr. Tierney. These are profits we're talking about. These
are profits, not gross numbers or anything like that, but
profits that you're talking about in their quarterly reports.
You know, a 300 percent increase in one aspect of it.
Mr. Slaughter. A lot depends, sir, on what it's being
compared to. If it's a low baseline it's being compared to,
you'll come up with a large percentage.
Mr. Tierney. I'm not going to go back and forth. I think
the numbers speak for themselves.
Let me just read into the record, if I can, the first
quarter profit figures, as reported by the Wall Street Journal,
or by the companies themselves, for the first quarter 2004:
ExxonMobil, $5.4 billion; BP, $4.8 billion; Shell, $4.4
billion; ChevronTexaco, $2.6 billion; ConocoPhillips, $1.6
billion; Amerada Hess, $281 million; Unocal, $269 million;
Marathon, $258 million; Valero, $48 million; Murphy, $98
million; Sunoco, $89 million; Premcor, $50 million; Citgo, $35
million. Overall, $20 billion in profits for the first quarter
alone for the industry.
I think it's a pretty compelling case, Mr. Slaughter and
others, and I also think it's pretty damning that this industry
fails to reinvest in its own operations in terms of maintaining
its pipelines, maintaining enough refineries to service
consumers.
But, I note my time is up, and I'll yield to the chairman.
Mr. Ose. The gentleman from Ohio.
Mr. Tiberi. Thank you. Staying on the same line of
questioning, Mr. Slaughter, you've heard it all. Some have
argued that capacity has been shut down to improve your bottom
line or refineries' bottom line. Others have argued that
environmental regulations and industry economics have
contributed to the number of refineries or the lack of
reinvestment. Either way, I think everybody would agree that we
need to do something in America to improve refining capacity.
In your opinion, what can we do, what can Congress do, to
help improve refining capacity in America?
Mr. Slaughter. Well, we believe, first of all, that the
United States does need additional refining capacity; and we
are very strong proponents of the need for additional supply.
We believe that the New Source Review reforms are extremely
important. They need to be sustained. They are currently before
the courts. They will help the industry add additional capacity
and install modern technology when it--as soon as it becomes
available.
We also believe that there can be improvements made in
permitting requirements. We can have some streamlined
permitting--where you don't have this situation where you're
required to make a fuel, but you've got to wait a year or more
for permits--so you can go ahead and actually get the
investment in the ground and the product out.
You should be able to build refineries in this country, and
frankly, it's because of the NIMBY situation that you can't.
There is almost unlimited opportunity for public comment in any
proceeding or a series of proceedings that leads to a
significant new refining venture, and it shouldn't be that way.
People who are trying to build a refinery in an area that's
growing very fast shouldn't have to wait 10 years and still
have nothing to show for their efforts.
The other thing is, you can insist that people recognize
the true cost of environmental regulation and try to balance
environmental regulation and supply concerns so we come out
with the right answer in both policy areas.
Mr. Tiberi. How much would we have to increase refining
capacity to impact in a meaningful way--I asked the question
earlier--the cost of fuel at the pump?
Mr. Slaughter. That's a question I really can't answer. It
would be inappropriate, frankly, for me to answer it. But let
me tell that any increase in refining capacity would be helpful
in that direction.
We certainly need to maintain the refining capacity that we
have right now. And one of the ways we can do that is the
suggestions that I just made to you for policy changes.
Certainly, passage of the energy bill would be a good first
step.
Mr. Tiberi. You made note in your comment, and I asked a
question earlier about the cost of environmental regulations to
the cost of the pump; and it was answered two different ways:
one in written testimony, environmental regulations have had a
minimal effect on gasoline prices; and the other answer was a
cent or two.
What would be your thought on that?
Mr. Slaughter. EPA traditionally underestimates those
costs. They do them ex ante. They do them before the rulemaking
takes place. They have every reason to try to minimize the cost
estimates.
I've often said I don't understand--we believe these are
very important programs. They have significant health benefits.
Isn't it reasonable to believe that being so significant, they
do also entail significant costs? It has been pointed out
earlier that although, the cost of reformulated gasoline is
only a few pennies, if you look at the marketplace according to
EIA, the market differential now is 20 cents between
reformulated gasoline and conventional gasoline. Part of that
is the mandates now that we are seeing in some of these States.
There are significant costs.
We are not asking to do away with the programs. We're not
asking to change the programs. They are already on the books.
But we are asking for future programs to be done with a greater
ear toward supply.
Mr. Tiberi. Mr. Ports, you're on the front lines, you and
your members at the gas pump. And you mentioned in your
testimony about this proliferation of fuels and the impact it
has. Can you give us some examples of what you see?
Mr. Ports. Well, I think you're obviously very familiar
with it. You talked about the Chicago situation, Milwaukee, you
know, some of these--Atlanta.
You know, our real point is I think you need to move very,
very carefully on this situation. There are certainly
compelling arguments on both sides that we could hurt refining
capacity when we are dealing with boutique fuels. But our point
is, I think we can help the distribution system by dealing with
boutique fuels. And in terms of how we refine it and what we
make, I think that has to be done very, very carefully.
Mr. Tiberi. How does that impact you as a marketer?
Mr. Ports. It impacts us as a marketer very dramatically.
We market, as an example, in St. Louis, just outside of St.
Louis also; and the last few years, that's been, you know, a
hotbed of problems.
Now, it's been very smooth this year, but we have had
numerous situations where product simply wasn't available, spec
product to use in the St. Louis market. I mean, we had some
times where product might have had to have been trucked 500 or
600 miles to bring it into that market.
Mr. Tiberi. What happens then?
Mr. Ports. Obviously, the price goes up, I mean,
dramatically.
Mr. Tiberi. Thank you.
Mr. Ose. I thank the gentleman.
All right. We have votes we estimate that are going to
occur around 12:45. I recommend we go over another round if you
would like, OK?
Mr. Lieberman--actually, I want to ask Mr. Early a
question. It seems to me, there is this underlying theme that
is as yet unstated--I'm going to take a stab at it--that there
are significant barriers to entry for new refining capacity in
this country. I mean, there is the capital necessary to produce
the kind of income streams that Mr. Tierney read into the
record here that must be significant; and we have had testimony
today that the capital is driven in part by putting in place
the processes by which the oil is refined from its crude state
to its finished state.
To a certain degree, it would seem to me that we are making
a choice between significant increases in refinery capacity and
strict adherence to an environmental safeguard. And there are
some who advocate more so one way or the other. And, I am
curious whether or not you might recognize that same thing,
that the--that there's a benefit to the industry in having high
thresholds to entry, and that it keeps competitors out.
And, then there's a benefit to the environment in having
high thresholds to entry because it enforces the environmental
safeguards.
Do you share that view?
Mr. Early. Mr. Chairman, we're--we mostly focus on
environmental requirements that protect people, and we're not--
you know, we're not knowledgeable enough as to whether those
requirements operate as an effective barrier to entry in the
marketplace.
Personally, my instinct is, if you've got $40 million to
invest, why would you want to go into an industry where--that's
dominated by, like, five major refiners? I mean, this wouldn't
seem to me to be the best place you could put your money. So, I
mean, that would strike me as being a much more important
factor as to whether you want to get into the oil refining
business.
When people start talking about streamlining requirements
for refiners, our concerns focus on, well, do those
requirements, those streamlined requirements, still continue to
protect people from the emissions from that refinery? That's
when we get nervous. The Lung Association is strongly on record
opposing the new-source review changes that this administration
is seeking to do, because we think the result will be more air
pollution, and we think that will harm the public health.
Mr. Ose. Mr. Lieberman, at the Institute, do you look at
this barrier to entry question? And we had earlier testimony
that there were Brazilian refiners or Venezuelan refiners or
Curacao refiners or whoever, who had frankly had a product that
was in the market that they are no longer shipping to the
market because they could not comply with the sulfur issue. I
think that was the testimony.
Is this an issue? Is there, in effect, an unstated benefit
to the extent refiners, from an ever-rising environmental
requirement?
Mr. Lieberman. That could well be. Regulations do tend to
create winners and losers among the affected industry groups.
Some refiners supported some of these State-level boutique
fuels, maybe in part because they thought it would stave off
more difficult RFG requirements, but maybe in part because they
thought they would have that market all to themselves; and so
there were some incentives in creating some of these State-
level boutique requirements.
So, yes, there's refiners that don't mind or maybe actually
like these requirements because they feel that it eliminates at
least some competition.
Now, with regard to foreign sources of oil, everybody knows
that we get more than half, 60 percent of our oil--it's less
known that we get about 10 percent of our gasoline or refined
gasoline components from overseas, as well. And there are some
problems with that, and we saw a little bit of that this year
with the new low-sulfur rules. As we in the United States go
further and further down the road of these specialized blends
that are only used in specific markets in the United States in
some cases, although the sulfur rule is used everywhere--but as
we go further and further down the road of these specialized
blends or tough requirements that apply to all fuels, it's
unclear how many foreign refiners will make the investment to
provide that fuel. So there's some question where we are going
to be getting our refined products in the years ahead.
I believe EIA has estimated that we will be seeing 1.6
percent or so increases in gasoline demand in the United
States, and given the constraints on domestic refiners and the
constraints that I just mentioned on foreign refiners, there
are some serious questions, looking ahead, whether we will have
enough refinery capacity looking forward.
Mr. Ose. The gentleman from Massachusetts.
Mr. Tierney. Thank you, Mr. Chairman.
Mr. Blake, the letter that you referred to in your
testimony that was sent out yesterday, some people would find
it interesting that both the environmental and the health
community were concerned about gasoline prices.
Would you just expand a little bit upon your comments made
in the letter and your rationale behind it?
Mr. Early. The principal focus of the letter is the fact
that all the organizations that signed it, I think, believe
that the State of California is right in asserting that the
oxygen requirements actually results in an increase in the
amount of air pollution that is generated by vehicles using the
fuel, as distinct from using the fuel without the oxygen
requirement. And, that's really what drove the participation in
signing the letter.
The fact that this is one of the few things that the Bush
administration can do right now that would affect gasoline
prices is something that obviously we wanted to point out as a
way of trying to leverage a decision on which, quite frankly,
we think the Bush administration is dragging their feet.
And, I'll go further and say, we believe they are doing so
in order to avoid offending the ethanol industry. I mean, this
is all about ethanol, and the reason----
Mr. Tierney. So, we can expect a decision sometime after
November 2004?
Mr. Early. Exactly.
Mr. Tierney. OK.
According to the Environmental Protection Agency, oil
refineries are a significant source of air pollution, and in
the year 2000, almost half of the refineries were within 3
miles of a population center of at least 25,000 people.
From your perspective, from a public health perspective,
will you tell us why it's so important to implement and enforce
the Clean Air Act and other environmental protections on oil
refineries?
Mr. Early. Well, the air pollution conditions around
refineries typically are among the worst in the country. As I
discussed in my response to the chairman's question, we're very
concerned because there is, all too often, this convergence
between high populations and oil refinery operations. So, it is
very critical, particularly with respect to toxic air
pollutants that contribute to cancer and brain damage and other
very debilitating diseases--we think it is very critical that
the requirements be maintained or even strengthened.
Mr. Tierney. Now, if I'm not mistaken, the consumer
protections or the environmental regulations were in place
before 1990. About 1990, with the Clean Air Act, the refineries
started to shut down before that act went into effect; and they
continued to be shut down after the act went into effect, so
that there would be some question about what the impact of the
Clean Air Act itself was upon the need to close down actually
was.
Mr. Early. Absolutely. There has been a long history of
concentration in the industry, and it's very unclear as to the
impact of the environmental requirements with respect to that
trend.
Mr. Tierney. OK. Thank you.
Mr. Slaughter, Mr. Ports, whose responsibility is it to
improve refining capacity in this country? I notice that both
of you indicated that you think there's a problem with the
refining capacity. But in that this is a private industry,
don't you think that the burden falls on the industry itself to
resolve that issue?
Mr. Slaughter. Well, the burden, if I may--the burden, some
of the burden does fall on the industry itself. Also, it's on
policymakers to make sure that there are policies that
encourage that investment capital be able to invest in this
business to build new refineries and that there not be barriers
to entry. It just seems strange that people aren't willing to
admit that environmental requirements do cost money and can
constitute a barrier to entry.
Mr. Tierney. Well, let's assume that, as mentioned before,
these environmental regulations have been with us for some time
now, all right?
Mr. Slaughter. But, they've been made increasingly
stringent all through the last decade, sir.
Mr. Tierney. All right. And, we have regulations that
affect almost every industry. And, this is a public policy;
people want to breathe clean air, and they want to live
healthily.
Mr. Slaughter. But, most people believe the refining
industry to be one of the most heavily regulated industries in
the United States.
Mr. Tierney. Well, we may be disagreed on that. But let's
assume that it might, for a sense of that. It's still the
industry that you're in.
Mr. Slaughter. Yes, sir.
Mr. Tierney. There are many people in this Congress that
just believe in this free market stuff, even though many of us
who think we're in a mixed economy, that--there's many that
swear to this free market stuff. So assuming that you're in
your free market, you have a regulation that's in place, you
have to deal with it.
You know, what other policy--I mean, you certainly don't
advocate reducing the environmental protections. I think from
our previous testimony from you that you did not advocate
reducing environmental protections; am I right?
Mr. Slaughter. That is correct. And then the industry, I
would point out, invests, as I've shown, billions of dollars
over the last 2 decades, as many as $50 billion put back into
this business just to comply with environmental requirements,
sir.
Mr. Tierney. So when will the industry start putting money
back in to increase its refining capacity and improve its
pipeline conditions and things of that nature?
Mr. Slaughter. The industry makes huge investments every
year in those matters. Even when refining capacity has not been
increased, the facilities have been modernized. Many times
investments, like the investments in lower-sulfur gasoline and
diesel, result in modernization of facilities, but they may not
result in more capacity. One of the reasons is that because a
lot of the processes necessary to make these cleaner fuels
actually reduce the yield. So you, in essence, have reduced the
capacity of the plants because you're increasing the severity
of the refining process to make cleaner fuels.
Mr. Tierney. But you talked earlier of the huge gap between
the demand and the supply right now, the fact that you just
don't have enough refining capacity to meet the demand for
refined product, right?
Mr. Slaughter. When the demand, particularly for gasoline,
is high, as it has been this year and is particularly in the
summer driving season, there is a very tight supply/demand
balance, yes.
Mr. Tierney. OK. So I guess my question comes back to, what
does the industry propose to do? Nothing? Until when?
Mr. Slaughter. The industry--you know, given the regulatory
climate and the investment requirements in this industry, we
are very lucky we have many different kinds of companies that
continue to be committed to and invest in the domestic refinery
industry.
Mr. Tierney. That's your interpretation. You've already
accepted the fact that you don't want to make the air any
dirtier, and that you accept the Clean Air Act requirements and
you're content to live within that.
So given your situation, what is the industry going to do
about increasing the refining capacity?
Mr. Slaughter. Well, as individual players in the industry
decide that is a good allocation of their capital and basically
decide that's what they want to do, and if they're able to do
it with the permitting authorities and through the long NIMBY
process that we have to go through to make changes in our
facility, that will happen. But those will be individual
decisions.
We have some of our members who are increasing capacity at
their plants as we speak.
Mr. Tierney. The existing ones?
Mr. Slaughter. At existing plants.
Mr. Tierney. Now, when's the last time that anybody filed
for a permit to build a new refinery?
Mr. Slaughter. Well, a group in Arizona has a permit, a
live permit, that has been pending for 10 years now, and there
are people in our industry who are interested in that facility.
But the big question is whether or not they actually will be
able to get through the process and build it, even though the
area needs more product.
Mr. Tierney. That's one. How many others are out there?
Mr. Slaughter. Well, there have been others over the years,
but actually most capacity has been added at existing sites and
so----
Mr. Tierney. So I can count on one hand probably the number
of requests for permits for new refining facilities, right?
Mr. Slaughter. Well, it doesn't--well, yes, you can because
it doesn't take long to learn what's not doable under current
statutes.
Mr. Tierney. Well, it doesn't take long to make a
decision--to make a decision that you want to invest and move
on either. You've accepted your environmental constraints. Then
it seems to me you're just going to make a decision: You either
want to invest and have more capacity or you don't, or you're
going to find some excuse not to do it.
Mr. Slaughter. Well, one of the things that's not
appreciated about mergers and acquisitions, sir, is that many
of the companies that have bought these facilities from others
in mergers or acquisitions have invested hundreds of millions
of dollars in the plants that perhaps the former owners would
not have done. So there's an economic rationalization process
through the industry that has let people spend capital
efficiently, even within the confines of not being able to
build new refineries.
A lot of people who are the new owners of some of these
facilities have invested significant sums of money in it
because they saw a different possibility there for business
than the previous owner did. It's just part of the system.
Mr. Tierney. What do you say about the Shell Bakersfield
situation? Do you think that fits your category?
Mr. Slaughter. Well, you know, Shell probably is in the
best position to know what the relative profitability of that
facility has been. Now we've heard today that the FTC is going
to look into that matter. It's a relatively small refinery, as
you know, 70,000 barrels a day.
Mr. Tierney. But a smaller one of 20,000 was found to be
profitable. So doesn't it make you just a little bit skeptical
that all of a sudden this is being shut down?
Mr. Slaughter. Well, as I said, the owner is in the best
position to know. We have not evidently heard the last of
what's going to happen with regard to that refinery.
I think this situation points out the intense scrutiny that
everything this industry does is subject to. This hearing is
part of it as well. And I think you see today that, you know,
things receive a great deal of attention in our industry, and
there are regulatory authorities who even debate what the most
effective way is to assess some of the finer points of our
industrial operations.
Mr. Tierney. I'll yield back. And we have some regulatory
agencies that actually regulate, and we have some that stand by
and watch. Thank you.
Mr. Ose. Gentleman from Ohio.
Mr. Tiberi. Thank you, Mr. Chairman.
Mr. Slaughter, kind of continuing on the line of
questioning on the refinery business, if Mr. Tierney and I
decide to become partners and start a refinery tomorrow or
begin that process--and that would be a joy----
Mr. Tierney. For you maybe.
Mr. Tiberi [continuing]. How much time and money would be
required to construct, let's say, an average-size refinery in
America today?
Mr. Slaughter. Well, you know, if we go back to the Arizona
project, they're talking about building 150,000-barrel-a-day
refinery. That's a little bigger than the average one in the
United States today, which is about 110,000 barrels per day.
The estimated cost of actually building that refinery, going
through all the process and building it for 150,000 barrels a
day, is $3 billion.
Mr. Tiberi. $3 billion?
Mr. Slaughter. $3 billion, so--you know, there are large
expenditures; and again----
Mr. Tiberi. I guess we won't be doing that.
Mr. Slaughter. Again, looking at the relative economic----
Mr. Tierney. But you and I wouldn't have shut down the 100
or so that they've already shut down either, probably because
we would have thought about that.
Mr. Slaughter. The economics of actually building one, of
the things you need to look at, is that it is so difficult to
build refineries. Existing refineries--and the business is a
tough business, a cyclical business. Refineries that have been
sold have been sold roughly for 25 to 33 percent of book value.
One of our members has gone from 1 refinery to 15
refineries by acquisitions over the last several years. As
stated, they never paid more than $0.38 on the dollar for the
facility.
Mr. Tiberi. If we decided instead to build a refinery
abroad, what would the cost be versus the cost here?
Mr. Slaughter. It would depend on where you build it,
Congressman.
Mr. Tiberi. The cheapest place to build one.
Mr. Slaughter. Well, you could build one, you know, I
guess, in parts of Latin America or the Caribbean for a
fraction of that price. Of course, they have different air
quality characteristics.
But, again, when you become dependent on foreign sources of
supply, even for the manufactured product, you're exacerbating
the problems we're seeing already in getting hold of crude
supplies for the country.
Mr. Tiberi. But if you are a refiner and you're looking to
expand, are the incentives today there to expand abroad and to
build abroad, rather than here, because of the cost here?
Mr. Slaughter. I think most refiners would prefer to build
in the United States if there is demand here, because you're
closer to your markets. But, you know, there are significant
costs that they face if they try to build or even expand
capacity in the United States that they don't face elsewhere.
And as I pointed out before in the case of ChevronTexaco and
the ethanol tank, I mean, even when you're trying to do things
that you're mandated to do, it's difficult to get them done
here.
So, you know, again I say, looking at all these situations
with the difficulties in the investment requirements, we are
fortunate that we have the large number of refiners we have.
If you look at the top 12 refiners in the United States of
America today--also I would point out, 5 of them are
independent refiners; they are not integrated refiners. There's
a lot of diversity left in this industry. There are regional
refiners that are smaller. We're fortunate to have them, and we
need to keep their capacity here.
Mr. Tiberi. Moving forward, if something is not done to
increase refining capacity in the United States, do you see an
increase in this foreign refining capacity, in that market
increasing? I think someone mentioned in the testimony, it's 10
percent today. Do you see that increasing?
Mr. Slaughter. Well, practically, there's almost no way
around it because, for instance, if you look at the EIA
numbers, they believe that the lion's share of the increase in
demand for U.S. products will be met by imports. They believe
we can see small increases in domestic refining capacity, but
not significant enough ones to actually meet most of the
increasing requirements here. They see about a 1.5 to 2 percent
growth per year in U.S. demand for petroleum products. But they
see very small incremental increases in U.S. refining capacity.
And they have said that they believe most new refinery
construction will occur in the Middle East, in Latin America
and in the Caribbean.
Mr. Tiberi. So if your business is so attractive, why is
that 10 percent there in the first place and why is it going to
increase?
Mr. Slaughter. Well, the business is a cyclical industry
and, you know, it is up and down. There are different kinds of
players in the industry. The relative profitability of the
refining sector is not that large.
We have a few times when the refining industry does
relatively well. The return reverts to about 5 percent on
investment capital. Business Week a month ago ran a chart of
the profitability of various industries. Our industry was below
the middle, so again, the fact that existing plants are being
sold for only a fraction of their book value suggests that it's
a tougher business.
Now, some people have successful business plans and do
better than others in this business, but generally, it is a
business with very high fixed costs and, you know, the
profitability is episodic.
Mr. Tiberi. Thank you, Mr. Chairman.
Mr. Ose. Mr. Slaughter, I don't understand something. You
comment about existing facilities being sold for 25 to 33
percent of book value. There's a certain disconnection in my
mind, given the numbers that Mr. Tierney referred to relative
to the profits. Why would you sell something at 25 to 33
percent of book value if it's profitmaking capability, at least
in terms of the number of dollars--maybe not in terms of
percent of return on assets, but if its profitmaking ability is
as indicated from those numbers?
Mr. Slaughter. Well, first of all, I'm not sure that all
those numbers directly apply to refining profitability. And the
fact of the matter is that, you know, there are more down
periods than up periods when it comes to refining
profitability.
Analysts who know the industry well realize that there is a
lot more profit potential in the upstream portion of the
industry, exploration and production, than there is in the
heavy manufacturing part, which is refining.
Mr. Ose. Well, at $40 a barrel, I would agree.
Mr. Slaughter. And again, that represents an input cost to
refining. And refining is also a heavily regulated business. So
different people, you know, in a free market, view the value of
facilities in different ways. Obviously, sellers, you know,
felt that they may not have been able to meet the investment
requirements, for instance.
Mr. Ose. Are you telling me and my colleagues up here that
the industry is making a--for lack of a better word, an
economically driven decision over time to keep refining
capacity either static in the United States or allow it to
decline in favor of moving overseas?
Mr. Slaughter. No.
Mr. Ose. Well, earlier you only were able to cite one
location where refining capacity--there's an application to
build new refining capacity. And you also indicated that such
expansions as occur are the little tweaking of refining
capacity around the country at existing facilities.
Mr. Slaughter. The imported product is normally not
supplied by the same people that are the domestic refining
companies. There may--as Mr. Caruso indicated earlier, there
may be suppliers from Brazil, some of them can be European
suppliers. In a situation like we have now, some may be from
the Caribbean. But they're essentially different people.
I mean, we essentially have continued strong representation
in the United States by the same companies that have been the
major refiners in the United States for the last couple of
decades. The largest refiners in the United States, the top
five, are still--you know, they are ConocoPhillips, ExxonMobil,
the Shell companies, BP and Valero. Valero is a newcomer to
that group. But there has been a lot of stability with the
exception of the fact of the mergers and acquisitions, which
have combined some companies. But these companies have
maintained very committed to U.S. refining capacity. ExxonMobil
is the largest refiner in the world. But it is still the second
largest refiner in the United States.
Mr. Ose. But I also note in your earlier testimony that the
refining capacity of domestic industry has dropped from 18.5
million barrels a day to 16.8 million barrels a day. That's
over 25 years. That's a clear indication to me that there--for
whatever reason, whether it be regulatory or otherwise, that
there is a consensus among the industry that whatever
investments we're going to make in refining capacity--and this
is just a matter of--I mean, this is just the way life is.
Whatever this investment we are going to make in refining
capacity--and the EIA concurs in this, because their
projections are that the level of imported refined product is
going to continue to increase--whatever this investment we are
going to make in refining capacity, we are going to make
offshore. I mean, I look at this information, this testimony,
and it seems to me obvious that that's the case, for whatever
reason, that capital is being moved offshore.
Mr. Slaughter. Well, the companies that I have mentioned--I
mean, basically all 149 companies have made significant capital
commitments to the United States. And you know there may be
companies that were formerly in the refining business, smaller
ones that have gotten out of the refining business. There are a
number of them that have merged or been acquired. But the
financial commitment of the companies that are in business in
the refining business in the United States is substantial.
Some of them have foreign refining as well; some don't. But
as you know, most of the product, 90 percent of the product
that we use in the United States is still produced here.
Mr. Ose. I'm not attacking. I'm just trying to look at the
facts as they are lying in front of me, and figure out what's
going on.
Mr. Slaughter. Right. But I think you'll find, sir, that
the real problem is what you mentioned earlier, which is the
barriers that people face to adding----
Mr. Ose. The barriers are lower elsewhere?
Mr. Slaughter. Well, it's true. I mean, that's one of the
reasons why EIA says--for instance, says that you'll see a very
significant increase in the percentage of imported products.
Mr. Ose. Because the barriers are lower elsewhere?
Mr. Slaughter. Yes, but you know, again it was also said
earlier that one of the reasons we bring this to your attention
is that it is one of the--to the extent they are policy
induced, it is something that we can do something about here.
Mr. Ose. I agree. That's my point, that we're making some
conscious decisions the net results of which are that this new,
added, incremental refining capacity is moving offshore.
Mr. Slaughter. Yes, sir, that is true.
Mr. Ose. Now, I just have one other question I'd like to
followup on, and that is, in the Clean Air Act amendment in
1990, there were a number of requirements that were laid into
the statute that you had to comply with. And if I understand
correctly, you have complied with them, that you support those
and the like.
Mr. Slaughter. Yes, a number of things like the sulfur
reduction in gasoline and diesel. That's where these billions
of dollars of investment have come from.
Mr. Ose. The oxygenate requirement?
Mr. Slaughter. The oxygenation requirement.
Mr. Ose. OK.
Now, Mr. Ports, do you have any position or are you
agnostic on these?
Mr. Ports. I wouldn't say that we are agnostic on it.
Rephrase for me what your question is.
Mr. Ose. Do you or do you not support the improvements that
were embedded statutorily in the Clean Air Act of 1990?
Mr. Ports. Yeah. I think all our organizations from any
standpoint, both organizations, have long ago come to the
conclusion that, you know, you've got to move forward. Clean
air's going to happen, and, you know, you move forward with
those regs.
Mr. Ose. OK.
Mr. Lieberman.
Mr. Lieberman. I think 14 years out we have learned what
has worked and what hasn't worked and there is some room for
some streamlining. There is some room for jettisoning a few of
the problematic provisions.
I think there's some consensus here on the 2 percent oxygen
content requirement, and there may be a few other things that
have out lived their usefulness. One thing might be the
wintertime oxygenated fuels, which isn't that big a deal; but
it is a fuel that was designed to fight carbon monoxide, which
has really essentially disappeared as a problem.
So there are a few things that we could do to update those
1990 amendments. I'm not talking about a serious overhaul here,
but there is some room for some streamlining here within the
context of continuing cleaner air.
Mr. Ose. Mr. Early.
Mr. Early. Obviously, we support the amendments. If you'd
permit me, Mr. Chairman, I wanted to address two points that
Mr. Lieberman has raised.
One is the wintertime oxy fuel program. The Clean Air Act
actually has a mechanism for eliminating this program, and in
fact, many areas have abandoned the oxy fuel program so the
Clean Air Act isn't really broken with respect to this program.
In fact, I am informed by California officials that they will
meet the carbon monoxide standard, which is the reason they are
using oxy fuels and they will probably not be using oxy fuels
next year after they get clearance from EPA. So that piece
isn't really broken in the Clean Air Act.
Mr. Lieberman also said that we don't really need to adhere
to the sulfur and gasoline requirements because air pollution
will still go down as a result of the new emissions equipment
in the Tier 2 program. I thought that's what you were implying.
I just wanted to point out that if you talk to the automobile
industry, they say that the sulfur and gasoline requirements
that are being phased in beginning this year are absolutely
critical for them meeting emission standards because the
emissions control equipment on the new vehicles that will start
being sold have to operate at 99 percent of efficiency; and if
the sulfur levels are above an average of 30 parts per million,
that won't happen, and if that doesn't happen, you'll lose the
investment in that equipment and you'll also have dirtier air.
Mr. Ose. I think Mr. Lieberman's comment on page 10 and 11
was that whether or not the change from older fleets to newer
fleets has a far greater impact on the quality of the air, as
opposed to the reformulated gasoline formulas.
If you'd like to clarify, Mr. Lieberman.
Mr. Lieberman. Yes, I would like to clarify. The low sulfur
rules, that wasn't on my short list of things to change.
Mr. Early. Good.
Mr. Lieberman. I never said it.
Mr. Early. I'm sorry.
Mr. Lieberman. That's one where changing it would do
probably more harm and good.
Even getting rid of rules involves transitional costs. And,
here the motor vehicle manufacturers, both cars and trucks,
both gasoline and diesel fuel, are counting on sulfur
reductions in order to introduce new generations of emission
controls technology. So, that's not one that ought to be on the
chopping block.
Mr. Ose. I do want to followup though on one that I want to
make sure I get you all on record on, if I may interrupt; and
that is, do you support the rollback in California of the
oxygenate mandate?
Mr. Slaughter. Yes.
Mr. Ose. Do you, Mr. Ports?
Mr. Ports. Yes, we have.
Mr. Ose. Mr. Lieberman, do you support the rollback of the
oxygenate mandate in California?
Mr. Lieberman. Yes. But I think, rather than a waiver, I'd
like to see a national law that makes it----
Mr. Ose. Mr. Early, if I understand correctly from your
letter, you and a number of organizations support the rollback
of the oxygenate mandate in California.
Mr. Early. Yes, sir.
Mr. Ports. Actually, Mr. Chairman, we would advocate the 2
percent oxygenate mandate nationwide on reformulated gasoline,
and I think everybody's in agreement on that as certainly
something that we could do away with.
Mr. Lieberman. Better a law than just a mandate for a few
States.
Mr. Slaughter. And we support the New York waiver as well.
Mr. Ose. OK.
Mr. Tierney.
Mr. Tierney. Thank you. And, I suspect that you're in favor
of it, too.
Mr. Ose. Since 1999.
Mr. Tierney. We're getting back on a little bit of the
ground that we covered out in Nevada on these related hearings.
We talked about the fact that in the early 1980's there was a
public policy that provided support for small refineries, and
those were terminated.
I would like each of you to give me as concise an answer as
you can about whether or not you'd like to see those public
policies revisited. And which specifically do you think would
be helpful?
Mr. Slaughter.
Mr. Slaughter. We have been in favor of incentives and
programs that affect everyone the same in the industry, because
we think it's important to benefit--to give economic benefits
that are in the national interest to all refiners. So, you
know, we believe the thing that makes the most sense is to get
the New Source Review reform and take another look at and a
better look at the energy impact of regulatory actions across
the board for all refiners.
Mr. Tierney. So, those are the two things that you think
were existing in the 1980's that you'd like to see revisited?
Mr. Slaughter. No. I thought that your question, sir, was
whether or not we would want a small refiner bias, and, you
know, we think it's more effective to go with programs that the
entire industry could use and improve.
Mr. Tierney. Given your clientele, I guess that would be a
fair assumption that's where you would be. But, I was wondering
if there were any particular policies that existed in the
1980's that you'd like to see revisited and resurrected again
now.
Mr. Slaughter. No. I think that, you know, the stringency
on fuels and facilities really came in the 1990's, 2000's. And
that's what's really affecting the industry, sir.
Mr. Tierney. All right. Well, do you think that there were
public policies in the 1980's that were later terminated that
had an effect on this? Or do you think the termination of those
policies didn't affect it at all?
Mr. Slaughter. The termination of some policies that were
of particular benefit to smaller refiners did eliminate some of
the refining population in the United States, yes.
Mr. Tierney. OK. But, that's not something you'd like to
address because you want to give everybody a break somewhere?
Mr. Slaughter. Well, if you're talking about something
that's 20 years later and you can't undo what was done in the
1980's, at this point, it makes sense to do things that would
increase output across the industry rather than just part of
it. We obviously have small refiner members who might feel
differently about that, but as an association----
Mr. Ports. Yeah. I would say, generally speaking, our
associations take the position that we would love to see
incentives for small refineries. You know, more supply is good
for us. It really is. It helps our business. It costs more in
simple terms on a per-barrel basis to upgrade a small refinery,
there's no question. I mean, I don't think anybody would
dispute that.
Mr. Tierney. Mr. Lieberman.
Mr. Lieberman. Well, one problem with the small refiners,
particularly the older, smaller refineries, it's just not
economical to make all the upgrades to meet the requirements.
That's probably one of the reasons why you've seen some of the
smaller refineries close down over the years. So, that really
ties in to the high regulatory costs in upgrading plants to
meet all the refinery regulations as well as the fuel
regulations.
Mr. Tierney. Mr. Early, do you have an opinion? Do you want
to weigh in?
Mr. Early. I don't think the Lung Association has a policy
with respect to--if you're talking about economic incentives,
obviously there isn't any question that some refiners chose not
to make the investment to meet environmental requirements and
shut down. And, we don't regret that decision. You know, if
they can't meet the requirements, then they shouldn't operate.
Mr. Tierney. OK. Well, I guess, you know, just revisiting
some of the information regarding the last hearing is that in
the 1990's alone approximately 50 refineries were closed.
Twenty refineries have been shut down since 1995. The number of
operating refineries has been reduced by 13 percent since 1995.
They're getting larger, but smaller in number and owned by
fewer and fewer entities. Over the last 2 decades of the 20th
century, the number of firms engaged in refining in the United
States has declined by two-thirds.
The question we raised, and I think we might as well put on
this record as well, last time is, the industry prepared for
some sort of a tradeoff. If, in fact, you're asking for a
public policy that has the taxpayers give some sort of
incentive to increase capacity--and I'm saying ``taxpayers''
because we, I think, all agreed that we want the environmental
regulations to stay in effect and to protect our health. So, is
the industry prepared for some sort of a tradeoff if some
incentive is given to increase the capacity?
What's the give-back to the taxpayer? Are you going to
share profits or have an excess profit tax as a fall-back, or,
you know, what is the taxpayer going to get if there's some
sort of incentive given to the industry to increase refinery
capacity?
Mr. Slaughter. You know, our association is not asking for
any incentives of those kinds. We are asking only for prudent
policymaking in terms of being more sensitive to the impact on
fuel supply of the environmental requirements.
Mr. Tierney. I'm sorry. You're losing me here. A minute ago
you said that you were in favor of the environmental
regulations, that you didn't want to have it adversely impact
health. So, are you looking for adjustments in it, changes?
Mr. Slaughter. The fact of the matter is that there is a
balancing process that is a part of all this. I mean, you look
at things like the New Source Review program; the actual truth
is, there had been some slight increases in domestic refining
capacity that stopped when the New Source Review program was
reinterpreted in the late 1990's.
Mr. Tierney. But, it was interpreted.
Mr. Slaughter. It was reinterpreted and it was used as an
excuse to force additional investments on the industry.
Mr. Tierney. Sir, you are asking for a relaxation in
environmental regulation?
Mr. Slaughter. Not in the least. As a matter of fact, we
are making significant investments, and as has been pointed out
here, having made investments, it's in our interest for those
programs to go forward. But, we can do a better job in the
future.
Mr. Tierney. So, now we're back to where I thought we were
before. You have no change in the environmental landscape, and
you're still not doing anything. So, what is it you want?
Mr. Slaughter. But, Congressman Tierney, I just don't
realize why you can't understand that we want the policy to be
implemented better with some more attention paid to the impact
on the supply. That's all we're asking.
Mr. Tierney. Which is semantics for saying that you want to
reduce the environmental protections.
Let's be serious with each other. That's what I don't
understand. I don't understand why you won't be succinct in
saying what it is you want. If you don't want the environmental
regulations enforced to their fullest capacity to protect the
health of people in this country and you want some sort of
relaxation of that, then just say so, and we'll know where we
are and we can move forward.
Mr. Slaughter. There are few, if any, industries in the
country, Congressman, that have spent, invested more money in
cleaner air and other environmental improvements in the United
States than the refining industry and the automobile
industries. They're responsible for most of the improvements in
air that have occurred since 1970.
Mr. Tierney. Well, they're also responsible for most of the
damage in the air and most of the environmental pollution. So
that's a good thing going.
We had a need to put environmental regulations on them. It
was a decision that the people of this country made. You, a
minute ago, told me that you were understanding of that and
agreed with it. But, what you are now telling me, although you
won't say it directly, is that what you want in order to build
more refining capacity is a relaxation of those environmental
regulations and nothing else.
Mr. Slaughter. No, that is not what we want. We are simply
asking for recognition that investment of those sums of money
has an impact on business and that there may be a way, going
forward, to balance our environmental requirements with a
little more attention to the supply impact, often with no
impact at all to the environment, Congressman. Some of these
things improve the environment.
Mr. Tierney. Well, that would be certainly a matter of
interpretation now, wouldn't it?
Mr. Slaughter. Well, the New Source Review program reforms
will improve the environment because they will allow the
industry to make quicker use of new technologies.
Mr. Tierney. Well, now we know exactly what you're saying
and that is with as little foundation and scientific backup as
any statement that's been made today. But, that's for another
day.
But, now I know exactly what you're after. You're not after
tax breaks. You're not after anything else. You're after a
relaxation of the environmental regulations, although you say
in another breath that you're not.
Mr. Slaughter. I can't agree with you, sir. I'm sorry.
Mr. Tierney. Well, it is what it is.
Mr. Ose. I want to thank this panel for their participation
and for both Mr. Tierney and Mr. Tiberi's participation. I do
appreciate your coming down here.
I have to say, I am struck by two things. First, that the
interests of those who are in the business today, from an
economic standpoint, are well served by higher barriers to
entry, notwithstanding anything else; but the ability to keep
competitors out benefits those who are able to deliver product
today--that's just an economic reality. And, the current
regulatory regime, while Mr. Slaughter may testify that his
people are interested in increasing supply, which I accept, the
current regulatory regime and capital returns serve to restrict
the number of producers who give us product. That's the first
thing.
And, the second is that everybody on this panel has now
agreed with me, which position I took in 1999, that the
environmental regulation on oxygenate additives needs to be
rolled back as it relates to California.
And, I want to thank this panel for its testimony and
participation. I certainly appreciate the company and input and
the education I get from my friend from Massachusetts, and I
look forward to our next hearing.
We are adjourned.
[Whereupon, at 1 p.m., the subcommittee was adjourned.]
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