<DOC>
[107th Congress House Hearings]
[From the U.S. Government Printing Office via GPO Access]
[DOCID: f:71483.wais]
NATIONAL ENERGY POLICY: CRUDE OIL AND REFINED PETROLEUM PRODUCTS
=======================================================================
HEARING
before the
SUBCOMMITTEE ON ENERGY AND AIR QUALITY
of the
COMMITTEE ON ENERGY AND COMMERCE
HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTH CONGRESS
FIRST SESSION
__________
MARCH 30, 2001
__________
Serial No. 107-12
__________
Printed for the use of the Committee on Energy and Commerce
Available via the World Wide Web: http://www.access.gpo.gov/congress/
house
__________
U.S. GOVERNMENT PRINTING OFFICE
71-483 WASHINGTON : 2001
----------------------------------------------------------------------------
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpr.gov Phone: toll free (866) 512-1800; (202) 512ÿ091800
Fax: (202) 512ÿ092250 Mail: Stop SSOP, Washington, DC 20402ÿ090001
COMMITTEE ON ENERGY AND COMMERCE
W.J. ``BILLY'' TAUZIN, Louisiana, Chairman
MICHAEL BILIRAKIS, Florida JOHN D. DINGELL, Michigan
JOE BARTON, Texas HENRY A. WAXMAN, California
FRED UPTON, Michigan EDWARD J. MARKEY, Massachusetts
CLIFF STEARNS, Florida RALPH M. HALL, Texas
PAUL E. GILLMOR, Ohio RICK BOUCHER, Virginia
JAMES C. GREENWOOD, Pennsylvania EDOLPHUS TOWNS, New York
CHRISTOPHER COX, California FRANK PALLONE, Jr., New Jersey
NATHAN DEAL, Georgia SHERROD BROWN, Ohio
STEVE LARGENT, Oklahoma BART GORDON, Tennessee
RICHARD BURR, North Carolina PETER DEUTSCH, Florida
ED WHITFIELD, Kentucky BOBBY L. RUSH, Illinois
GREG GANSKE, Iowa ANNA G. ESHOO, California
CHARLIE NORWOOD, Georgia BART STUPAK, Michigan
BARBARA CUBIN, Wyoming ELIOT L. ENGEL, New York
JOHN SHIMKUS, Illinois TOM SAWYER, Ohio
HEATHER WILSON, New Mexico ALBERT R. WYNN, Maryland
JOHN B. SHADEGG, Arizona GENE GREEN, Texas
CHARLES ``CHIP'' PICKERING, KAREN McCARTHY, Missouri
Mississippi TED STRICKLAND, Ohio
VITO FOSSELLA, New York DIANA DeGETTE, Colorado
ROY BLUNT, Missouri THOMAS M. BARRETT, Wisconsin
TOM DAVIS, Virginia BILL LUTHER, Minnesota
ED BRYANT, Tennessee LOIS CAPPS, California
ROBERT L. EHRLICH, Jr., Maryland MICHAEL F. DOYLE, Pennsylvania
STEVE BUYER, Indiana CHRISTOPHER JOHN, Louisiana
GEORGE RADANOVICH, California JANE HARMAN, California
CHARLES F. BASS, New Hampshire
JOSEPH R. PITTS, Pennsylvania
MARY BONO, California
GREG WALDEN, Oregon
LEE TERRY, Nebraska
David V. Marventano, Staff Director
James D. Barnette, General Counsel
Reid P.F. Stuntz, Minority Staff Director and Chief Counsel
______
Subcommittee on Energy and Air Quality
JOE BARTON, Texas, Chairman
CHRISTOPHER COX, California RICK BOUCHER, Virginia
STEVE LARGENT, Oklahoma RALPH M. HALL, Texas
Vice Chairman TOM SAWYER, Ohio
RICHARD BURR, North Carolina ALBERT R. WYNN, Maryland
ED WHITFIELD, Kentucky MICHAEL F. DOYLE, Pennsylvania
GREG GANSKE, Iowa CHRISTOPHER JOHN, Louisiana
CHARLIE NORWOOD, Georgia HENRY A. WAXMAN, California
JOHN SHIMKUS, Illinois EDWARD J. MARKEY, Massachusetts
HEATHER WILSON, New Mexico BART GORDON, Tennessee
JOHN SHADEGG, Arizona BOBBY L. RUSH, Illinois
CHARLES ``CHIP'' PICKERING, KAREN McCARTHY, Missouri
Mississippi TED STRICKLAND, Ohio
VITO FOSSELLA, New York THOMAS M. BARRETT, Wisconsin
ROY BLUNT, Missouri BILL LUTHER, Minnesota
ED BRYANT, Tennessee JOHN D. DINGELL, Michigan
GEORGE RADANOVICH, California (Ex Officio)
MARY BONO, California
GREG WALDEN, Oregon
W.J. ``BILLY'' TAUZIN, Louisiana
(Ex Officio)
(ii)
C O N T E N T S
__________
Page
Testimony of:
Cook, John, Director, Petroleum Division, Energy Information
Administration............................................. 3
D'Arco, Peter, President, SJ Fuels........................... 25
Kassel, Richard, Senior Attorney, Natural Resources Defense
Council.................................................... 33
King, Gregory C., Vice President and General Counsel, Valero
Energy Corporation......................................... 18
Layton, Stephen D., President and CEO, Equinox Oil Company... 9
Pitts, John Paul, Oil Editor, Midland Reporter Telegram...... 57
Robinson, Thomas L., Chief Executive Officer, Robinson Oil
Corporation................................................ 29
(iii)
NATIONAL ENERGY POLICY: CRUDE OIL AND REFINED PETROLEUM PRODUCTS
----------
FRIDAY, MARCH 30, 2001
House of Representatives,
Committee on Energy and Commerce,
Subcommittee on Energy and Air Quality,
Washington, DC.
The subcommittee met, pursuant to notice, at 10 a.m., in
room 2123, Rayburn House Office Building, Hon. Joe Barton
(chairman) presiding.
Members present: Representatives Barton, Bono, Walden,
Boucher, and Markey.
Staff present: Jason Bentley, majority cunsel; Karine
Alemian, majority professional staff; Andy Black, policy
coordinator; Anthony Habib, legislative clerk; Rick Kessler,
minority professional staff; Sue Sheridan, minority counsel;
and Alison Taylor, minority counsel.
Mr. Barton. The subcommittee will come to order.
The Subcommittee of Energy and Air Quality of the Energy
and Commerce Committee is today continuing a series of hearings
on national energy policy. Today's hearing is on crude oil and
refined products. I want to thank our witnesses that are here
this morning, and I want to thank our members that are here on
a Friday when there are no votes scheduled.
I drove here today in a car that uses gasoline. I think
most of us probably arrived here by transportation that uses
gasoline, also. The demand for petroleum is not going down.
Even though our motor engines continue to become more energy
efficient and even though alternative fuel vehicles and public
transit are making great technological advances, we have not
yet left the age of the gasoline internal combustion engine.
Last night spot crude oil prices closed at $26.32 a barrel.
Had that figure been over $30 per barrel, as was the average
for November of 2000, more members would have been here today.
Had that figure been $10.76, as it was 2 years ago this month,
national attention would have been less than it is today.
We suffer the problems of an up-and-down market. Between
600,000 and 1 million barrels per day of domestic crude oil
production was lost in the late 1990's, when oil prices were at
all time lows adjusted for inflation. Many marginal wells were
shut in and those wells, once shut in, are very difficult, if
not impossible, to reopen. That supply has been recovered
obviously with foreign imports, including more than half a
million barrels per day from Iraq, of which we have economic
sanctions in force.
Our dependence upon foreign crude oil imports for more than
half of our needs, perhaps 56 or 57 percent, means that
consumers must bear the brunt of mood swings in world markets.
A small amount of crude oil being produced or withheld by the
OPEC trading cartel can change the spot price dramatically,
which brings us to prices for petroleum products like gasoline,
heating oil, fuel oil, propane and others, which have all seen
price spikes in the last year.
The Energy Information Administration warns that gasoline
inventories are even lower this year than they were last year
and that this summer's prices are expected to be relatively
high. Of course, part of the reason for high petroleum product
prices is the base price of crude oil. But many other factors
affect these prices, refinery capacity, refiner cost, business
decisions based upon economic forecasts, inventory stocks and
distribution constraints.
We are here today to talk about the upstream issues, such
as increasing supply of crude oil generally, and the downstream
issues dealing with refining, distribution and sales to
consumers. We hope to hear from the witnesses what impacts the
ability to improve supply, if any, would be on the cost of the
product. If there are laws and regulations that Congress should
review, we would like to know which ones those are. We need to
learn more about the refinery business and the downstream
markets for petroleum and products like heating oil. Do we have
markets that encourage investment in refinery capacity? If not,
why not?
The lessons of California's electricity problem should not
be forgotten here. American consumers need sufficient supply to
meet demand at an acceptable price. When energy supply is not
adequate, we as a Congress and as a Nation have a duty to help
the supply demand imbalance.
This subcommittee hopes to soon begin crafting
comprehensive energy legislation dealing with all fuel sources
as well as conservation and environmental issues. I look
forward to working with members on both sides of the aisle,
especially my distinguished ranking member, the gentleman from
Virginia, Mr. Boucher, and I know that we are all concerned
about our Nation's energy future. Your testimony today will
help us in these efforts.
With that, I would like to recognize the distinguished
gentleman from Virginia, Mr. Boucher, for an opening statement.
Mr. Boucher. Thank you very much, Mr. Chairman. Oil is the
fuel for 40 percent of our Nation's energy consumption, and
assuring an adequate supply of petroleum and refined petroleum
products is essential to our Nation's energy security and to
the affordability of gasoline and home heating oil for American
consumers. I look forward to advice from today's witnesses
about measures that we can take at the Federal level to reduce
our dependence on foreign sources of crude oil, to reduce the
volatility of prices for oil-derived products and to ensure
that we can satisfy our Nation's oil needs in an
environmentally acceptable manner.
A key question for our consideration this morning is why
United States refinery capacity has not expanded to meet the
demand for refined products. Ten years ago, domestic refineries
were able to meet 94 percent of our domestic consumption needs.
Today, that figure stands at 85 percent. What are the
constraints inhibiting the needed investment in new refinery
capacity? And what can we do about those constraints?
I would also welcome the views of our witnesses concerning
the recent reports that gasoline inventories are below the
level of 1 year ago. Last year's inadequate inventories
contributed to price spikes that occurred as the spring-summer
driving season matured, and we were certainly hoping for a
better report and projection for the year 2001. What are the
problems that have caused these reduced inventories of
gasoline? And what actions do our witnesses suggest that we as
a committee take in order to address those problems?
I want to thank our witnesses for being here today. With
those brief thoughts, Mr. Chairman, I look forward to their
testimony.
Mr. Barton. I thank the gentleman. We would welcome the
gentlewoman from California for an opening statement.
Mrs. Bono. Thank you, Mr. Chairman. I have a written
statement I will just submit for the record.
Mr. Barton. Without objection, so ordered.
I would also encourage you to move closer to the center. I
don't think we are going to be overwhelmed with members today.
We want to welcome our panel. Your statements are in the
record in their entirety. We are going to start with Mr. Cook,
who is the Director of the Petroleum Division of the Energy
Information Administration, and we will go right down the line.
I can't say we will save the best for last, but certainly for
the last testifier we have one of the most noted experts in the
State of Texas here from the Permian Basin, Mr. Pitts, who is
going to give us kind of a cleanup testimony today.
Mr. Cook, we welcome you to the subcommittee. We recognize
you for 6 minutes to elaborate on your testimony.
STATEMENTS OF JOHN COOK, DIRECTOR, PETROLEUM DIVISION, ENERGY
INFORMATION ADMINISTRATION; STEPHEN D. LAYTON, PRESIDENT AND
CEO, EQUINOX OIL COMPANY; GREGORY C. KING, VICE PRESIDENT AND
GENERAL COUNSEL, VALERO ENERGY CORPORATION; PETER D'ARCO,
PRESIDENT, SJ FUELS; THOMAS L. ROBINSON, CHIEF EXECUTIVE
OFFICER, ROBINSON OIL CORPORATION; RICHARD KASSEL, SENIOR
ATTORNEY, NATURAL RESOURCES DEFENSE COUNCIL; AND JOHN PAUL
PITTS, OIL EDITOR, MIDLAND REPORTER TELEGRAM
Mr. Cook. Thank you, Mr. Chairman and members of the
committee, for the opportunity to testify today on behalf of
the Energy Information Administration. I will begin with an
overview of recent oil market trends and the key underlying
factors. I will then talk a little about our near-term
forecasts.
A combination of factors contributed to the sharp increases
in both crude oil and refined product prices experienced over
the last year or so. On the demand side, strong economic growth
through the first half of last year stimulated increased oil
consumption. Additionally, this winter started out very cold,
unlike the previous four winters. November and December were
very cold in certain parts of the country, requiring
significantly more energy for home heating. On the other hand,
while oil supplies outpaced demand growth last year, resulting
in a slight gain in inventory levels, that excess supply proved
to be too little to significantly boost global stocks from
already low levels.
Arguably, tightness in crude markets has been the key
factor driving high oil prices recently. Although the cold
winter, robust economy and some fuel switching from natural gas
has had an impact on product demand, it has been recent actions
taken by OPEC that are largely responsible for the sharp
increases in oil prices from the $10 lows we saw in December
1998. OPEC dramatically reduced crude production in 1998 and
early 1999, so much so that even after four increases last
year, inventories remained at extremely low levels.
Furthermore, scarce crude supplies encourages high near-
term prices relative to those for future delivery. This
situation, known as backwardation, discourages inventory growth
and maximum refinery production. Thus, with low crude stocks
and low product stocks, there is little flexibility to adjust
to changing conditions setting the stage for volatility.
I will turn next to our short-term forecasts, beginning
with crude oil. At their March 17 meeting, OPEC members agreed
to reduce production quotas by a million barrels a day
effective next month. This is in addition to the 1.5 million
barrel a day reduction taken in January. The combined 2.5
million barrel a day quota reduction puts actual likely OPEC
production significantly below last summer's levels. This is
expected to continue the tight balance between global supply
and demand, resulting in continued low inventories worldwide,
especially in the developed countries of the OECD. Given these
low stocks, we expect prices for OPEC's basket of crude oils to
remain toward the high end of its $22 to $28 range.
Since WTI, West Texas Intermediate, the key U.S. bench mark
crude oil, tends to run about $3 or $4 higher than the OPEC
basket, this puts our forecast at $29 to $30 later this year.
Turning to distillate markets, in spite of strong demand
this winter, heating oil stocks have not dropped the way they
normally do the first quarter of the year. Warm weather in
Europe, high margins for heating oil encouraging record levels
of imports and refinery production have offset strong demand.
Thus, at this point distillate stocks are now back in the
normal range, which bodes somewhat better for next year.
I say this because refiners may not have to produce or
import as much distillate product this summer in order to
rebuild inventories ahead of next winter. Nevertheless, I
should caution that the improved outlook does not take into
account the potential for continued unusually high demand from
large end-users. Should we have hot weather this summer, this
could result in higher diesel demand as more peaking units and
backup generators are used. Regardless, with the heating season
ending and more comfortable inventory levels, we should see
retail prices begin to decline from current levels as seasonal
demand diminishes.
Unfortunately, even with this decline, on average retail
prices have been relatively high, resulting in higher bills for
consumers. For example, due to higher prices and colder
weather, the average bill for oil heat in the Northeast was
nearly $1,000 this year compared to under $600 two winters ago.
Turning to gasoline, with crude prices expected to rebound
from the recent lows and continued low stocks, EIA projects
that prices at the pump will rise modestly as the year's
driving season begins. While EIA expects little difference from
last summer's average price of $1.50 a gallon, stocks are
projected to be about the same or less. This could set the
stage for regional supply problems and significant price
volatility. With little stock cushion to absorb unexpected
changes in supply and demand, regional problems can arise even
from temporary losses in refining capacity or pipeline
disruptions, particularly since there is little excess refining
capacity available during the summer.
This lack of excess capacity leaves the domestic system
dependent on high imports and smooth operations from the
infrastructure, both pipelines and refineries, if we are to
avoid significant price fluctuations. However, imports cannot
function as a relief valve to the same degree as we see in
distillate markets, since few overseas refiners make the summer
grades of gasoline used in many parts of this country.
The prospect of regional supply problems is also increased
by the differing regional gasoline product requirements arising
from Federal and State air quality programs, which limit the
distribution system's flexibility to respond.
I will close with a positive note. It is expected that a
year's experience behind them should make the refining industry
more able to produce the summer grades of gasoline first
introduced last year. This concludes my testimony. I would be
happy to answer any questions.
[The prepared statement of John Cook follows:]
Prepared Statement of John Cook, Director, Petroleum Division, Energy
Information Administration, Department of Energy
Thank you, Mr. Chairman. I would like to thank the Committee for
the opportunity to testify on behalf of the Energy Information
Administration (EIA).
I will begin with an overview of recent crude oil and petroleum
product trends and the underlying factors behind them. I will then
address our near-term forecast.
A combination of factors contributed to the sharp increases in both
oil and refined petroleum product prices experienced over the past year
or so. On the demand side, strong economic growth through the first
half of 2000 led to increased oil consumption. Additionally, this
winter started out very cold, unlike the previous 4 winters, which were
much warmer than normal. November and December were very cold in
certain parts of the country, requiring significantly more energy for
home heating than in recent winters.
On the other hand, supplies of crude oil and petroleum products in
2000 just kept pace with demand growth, resulting in continued low
inventory levels, and leaving high prices.
Crude oil prices have been a key factor driving refined product
prices in recent years. Although the cold winter, robust economy, and
some fuel switching from natural gas to oil had an impact on petroleum
product demand, it was action taken by OPEC and a rebounding Asian
economy that sharply increased oil prices from the $10 per barrel low
levels seen in December 1998. OPEC dramatically reduced its crude oil
production in 1998 and early 1999, so that even after four separate
production increase agreements in 2000, inventories remained at
extremely low levels. Scarce crude supplies encourage high near-term
prices relative to those several months out. This situation, referred
to as backwardation, discourages robust growth in inventories, and
discourages maximum refinery production. With low crude oil and product
inventories, there is little flexibility to adjust to changing
conditions, and the stage is set for volatility.
I would now like to focus next on our short-term forecast,
beginning with Crude Oil. At their March meeting, OPEC members agreed
to reduce production quotas by 1 million barrels per day effective
April 1. This production quota reduction is in addition to a 1.5-
million-barrel-per-day cut agreed upon in January. Combined, the 2.5-
million-barrel-per-day quota reduction is expected to continue the very
tight balance between global crude oil supply and demand, resulting in
continued low inventories worldwide, and especially in the developed
countries of the OECD (Figure 1). Given low stocks, EIA expects prices
for OPEC's basket of crude oils to remain toward the high end of its
target range of $22 to $28 per barrel, at least for the balance of
2001. However, West Texas Intermediate (WTI), the U.S. benchmark crude
oil, tends to run about $3-$4 per barrel higher than the OPEC basket
price, given its higher quality. Our forecast then, projects WTI to
average about $29 to $30 per barrel (Figure 2) again this year and
next. This forecast assumes that Iraqi oil exports bounce back to
levels easily achieved beginning in the second quarter of 2001. But
Iraq is probably the biggest wild card that could generate higher
prices in the short term.
Now, Distillate Fuel. In spite of strong demand this past winter,
heating oil stock levels have not weakened over the past month or two
as would normally occur. Warm weather in Europe, in combination with
high heating oil margins, encouraged record levels of imports and
refinery production of heating oil, countering strong demand. Thus, for
the country as a whole, distillate stocks are now back within the
normal range after being well below normal for most of the winter. This
indicates refiners may not have to produce and import as much product
to build inventories prior to next winter to maintain them in the
normal range. However, this does not take into account the potential
for continued unusually high demand from the industrial and electricity
sectors. Hot weather this summer could result in higher diesel demand
as more peaking units and backup generators are used.
With the heating season ending, retail heating oil prices are
expected to remain at or possibly decline some from current levels as
seasonal demand diminishes. Nevertheless, retail prices remain
relatively high on an historical basis, resulting in higher bills for
consumers.
This past winter, the average bill for heating with oil in the
Northeast was nearly $1,000, compared to $760 last winter and under
$600 the previous two winters. Although consumers did not face the
price spike they saw last winter, preliminary data indicate consumption
was about 11 percent higher than last year, because of colder weather
and high natural gas prices encouraging some fuel switching. Higher
consumption levels, lower initial stock levels, and higher crude oil
prices relative to last winter have combined to push up the average
cost of a gallon of heating oil by 18 percent this winter. Together,
the increases in consumption and price raised winter oil heating bills
by about 31 percent.
Turning to Gasoline. With crude oil prices rebounding from their
recent lows, and continued lower-than-normal gasoline stock levels, EIA
projects that prices at the pump will rise modestly as this year's
driving season begins. While EIA expects little difference from last
summer's average price of $1.50 per gallon, gasoline inventories going
into the driving season are projected to be about the same or even less
than last year (Figure 3), which could set the stage for regional
supply problems that once again could bring about significant price
volatility, especially in the Midwest and on both coasts.
With little stock cushion to absorb unexpected changes in supply or
demand, regional problems can arise from temporary or permanent losses
of refining capacity, or pipeline disruptions, particularly since there
is little or no excess U.S. refining capacity available in the summer.
This lack of excess capacity leaves the domestic gasoline system
dependent on high imports and smooth operations from the
infrastructure, both pipelines and refineries, if it is to avoid a
substantial near-term price run-up. However, imports cannot function as
a relief valve for tight gasoline markets as effectively as in the case
of distillate, since few overseas refiners make the summer grade Phase
II gasoline that is required in many parts of the United States. The
prospect of regional supply problems is also increased by the differing
regional gasoline product requirements, arising from Federal and State
air quality programs, which limit the distribution system's flexibility
to respond. On the positive side, though, it is expected that with a
year's experience behind them, the refining industry's ability to make
the Phase II reformulated gasoline first required last year should be
improved.
Finally, I would like to expand briefly on U.S. refining capacity.
Capacity constraints are more of an issue with gasoline during the
summer than with heating oil during the winter (Figure 4). Refineries
usually run at their peak capacities when gasoline demand is highest
during the summer. In 1997 we saw for the first time, a situation where
a temporary shortage at the end of the summer could not be resolved
with an increase in domestic production because operating refineries
were running at very near full capacity. Last summer, while individual
refiners ran at full capacity, the industry as a whole did not run as
high as we have seen historically. This was generally due to a 550,000
barrel per day increase in operating capacity since 1998. While this
suggests some potential for higher domestic gasoline production this
summer, any incremental production will necessarily be quite small,
given that further capacity growth in 2001 and 2002 is not expected to
be significant. For almost 20 years, we have had an excess of refining
capacity in this country, but that is no longer the case.
This concludes my testimony, and I would be pleased to answer any
questions the Committee may have.
[GRAPHIC] [TIFF OMITTED] T1483.001
[GRAPHIC] [TIFF OMITTED] T1483.002
[GRAPHIC] [TIFF OMITTED] T1483.003
Mr. Barton. Thank you, Mr. Cook. We do appreciate you being
here.
We now want to hear from Mr. Stephen Layton, who is the
President and Chief Executive Office of Equinox Oil Company in
The Woodlands, Texas. He is representing the Independent
Producers Association of America, IPAA. Welcome. Your testimony
is in the record. We would let you summarize it for 6 minutes.
STATEMENT OF STEPHEN D. LAYTON
Mr. Layton. Thank you, Mr. Chairman, members of the
committee. I am Steve Layton, Chairman of the Crude Oil
Committee of the Independent Petroleum Association of America.
Today I am testifying on behalf of the IPAA, the National
Stripper Well Association, and 32 cooperating State and
regional oil and gas associations. These organizations
represent the thousands of independent petroleum and natural
gas producers that drill 85 percent of the wells in the United
States. This segment of the industry has been damaged most by
the lack of an energy policy that recognizes the importance of
our domestic natural resources. Independent producers are
indeed the linchpins to the continued development of the
country's petroleum and natural gas resources.
Today's hearing addresses issues associated with crude oil
and its domestic use. Mr. Chairman, my written testimony
details the events that have placed us in the current situation
and presents our recommendations. I will highlight several of
the key points in my oral testimony.
First, our national policies must be based on a realistic
view of the marketplace. While the natural gas market is
largely North American and is basically free, the supply of
crude oil and its price are largely determined by geopolitical
considerations, by actions of producer nations, actions taken
both for economic and for political reasons. Domestic producers
must live with the consequences of these decisions. When oil
prices collapsed in 1998 and 1999, domestic producers lost $19
billion of revenue. Crude oil prices are also affected by
actions or, more accurately, the reactions of the commodity
markets. These markets can particularly influence prices at the
extremes with overreactions to what is in many cases imprecise
supply and demand data.
Second, national policies need to recognize the nature of
domestic production. Approximately 20 percent of domestic crude
oil comes from Alaska. But this is a resource that due to
depletion is providing almost 1 million barrels a day less of
oil production than in 1990. The Alaskan National Wildlife
Refuge presents the opportunity to sustain and grow this
Alaskan supply level for years to come. Another 20 percent of
the domestic production comes from the offshore, but only the
western and the central Gulf of Mexico are being aggressively
developed. In the offshore, future development of the resource
base will be defined first by what areas are accessible and
second by the Federal royalty policies that apply. The majority
of domestic production, about 60 percent, comes from the lower
48 States onshore. Of this, roughly one-third comes from
marginal wells, wells that average about 2.2 barrels of oil per
day but still are competitive in the global marketplace, and
collectively these marginal wells equal the amount of oil
imported from Saudi Arabia. A great deal of effort will be
required to maintain or hopefully to expand this onshore
production. This is a challenge that must be met.
Third, domestic policy needs to recognize that independent
producers are rapidly becoming the backbone of the industry.
They are responsible for the majority of the production,
operations and drilling activity in the lower 48 States.
Independents require different policies than large integrated
companies. Their revenues come solely from the sale of their
oil and their natural gas production. They are therefore much
more susceptible to price swings and market instability.
Fourth, domestic production needs a stable climate to
maintain the production levels essential to meet future demand.
National crude oil policy must be committed to stability. The
1998 and 1999 price crisis has demonstrated that consequences
adverse to domestic production affect both oil and natural gas.
The two are inherently intertwined. Moreover, a significant
factor in today's high oil and natural gas prices is the
reduced capital reinvestment which resulted from that same
price crisis, so the consequences apply not only to oil and gas
producers but to consumers as well.
Crafting Federal policy is difficult, but some elements
should be obvious to everyone. First, there is a compelling
need to understand the supply and demand of crude oil on a
worldwide scale. The Department of Energy Oil Data Transparency
Project should be supported. This effort would improve the
quality of information available to understand what is
happening in the worldwide petroleum market. This could reduce
the volatility of the market and provide an early warning
mechanism for potential supply and demand imbalances. This
information should be used to develop policies that focus on
improving domestic production rather than relying on
criticizing OPEC and expecting foreign nations to bail the
United States out during periods of tight supply. We must
always strive to control our own destiny.
Second, policies need to recognize how vulnerable the
domestic industry is to instability. The National Petroleum
Council estimates that we need to increase investment in
domestic exploration and production by $10 billion annually
over the next 15 years to meet future demand. For producers,
most of this will have to come from retained revenues and this
is largely an issue of tax reform. Congress should enact
legislation to maintain and enhance investments, such as a
marginal well tax credit and other tax provisions designed to
encourage exploration and production, including incentives to
plow back or reinvest revenues during periods of higher prices.
We need to avoid policies that result in closures of small
refineries that purchase and process domestic crude oil. This
limits the markets available to independent producers for the
sale of their production. We must acknowledge the importance of
a strong and stable labor pool for the industry through
assistance to educational institutions that are developing and
rebuilding training programs. This industry lost 65,000 jobs
during the most recent price crisis. About 40 percent have been
recovered, but they are not the same highly skilled employees
that left. Training new workers is critical to the long-term
health of the industry. We also should recognize the importance
of the Department of Energy's fossil energy programs designed
to improve drilling, production and environmental technologies
available to independent producers.
Finally, policies must address the importance of access,
particularly with regard to regulatory constraints. The impact
on our energy supply should be considered when new regulations,
resource management plans and interagency agreements are
created. Domestic oil production can be an integral part of the
Nation's future energy supply. The 1998 and 1999 price crisis
proved that a healthy oil industry is essential to the
development of the country's natural gas resources, but because
the industry competes in a world marketplace that is defined
largely by the political decisions of producer nations, it is
critical that our national energy policy recognizes the
vulnerability of the industry and of the Nation.
With that, I will conclude my testimony, Mr. Chairman.
[The prepared statement of Stephen D. Layton follows:]
Prepared Statement of Steve Layton on Behalf of The Independent
Petroleum Association of America and The National Stripper Well
Association
Mr. Chairman, members of the committee, I am Steve Layton,
Executive Vice President of Elysium Energy, LLC. of Houston, Texas, and
Chairman of the Crude Oil Committee of the Independent Petroleum
Association of America (IPAA). Today, I am testifying on behalf of the
IPAA, the National Stripper Well Association (NSWA), and 32 cooperating
state and regional oil and gas associations. These organizations
represent the thousands of independent petroleum and natural gas
producers that drill 85 percent of the wells drilled in the United
States. This is the segment of the industry that is damaged the most by
the lack of a domestic energy policy that recognizes the importance of
our own national resources. NSWA represents the small business
operators in the petroleum and natural gas industry, producers with
``stripper'' or marginal wells. These producers are the linchpins to
continued development of domestic petroleum and natural gas resources.
Today's hearing addresses issues associated with crude oil and its
domestic use. To fully address the role and policy issues associated
with petroleum, it is important to understand how the nation's current
petroleum situation occurred.
THE PETROLEUM CENTURY
Petroleum--the energy source that dominated the 20th Century--will
continue to be pivotal for the foreseeable part of the 21st Century. It
is the most versatile energy source available today. It is the most
political of energy sources--the substance that makes countries go to
war, the substance that countries must have to wage war. And yet, it is
also a commodity--like sugar or pork bellies. As a commodity, it has
been one of the most volatile the world has seen.
As the 20th Century began, petroleum was being found, produced, and
wasted. In the US, states had to step into the production of petroleum
to protect their resources. They created commissions to determine where
wells could be developed and how much they could produce--forcing
conservation and stabilizing the supply and price. After World War II
petroleum's global nature changed the supply structure. As US demand
increased and foreign supplies of petroleum became available, prices
were largely defined by what refineries were willing to pay. This
system worked fine for refineries but not for producers, particularly
foreign producer nations that relied on petroleum sales to fund their
national budgets. It led in part to the creation of the Organization of
Petroleum Exporting Countries (OPEC).
By 1973 OPEC controlled enough petroleum production that if it
acted collectively, it could determine whether the world had enough
supply or too little; it could determine the market price. Driven by
political events of the time, a band of OPEC countries found the will
to restrain exports and OPEC control of prices began. Like all cartels,
OPEC's strength is in solidarity and trust. By 1986 this trust was lost
and OPEC members began competing for market share, driving prices to
their lowest levels since the early 1970's.
Ultimately, the OPEC infighting ended and new production quotas
were devised. But, at the same time, a profound change in petroleum
pricing was beginning. In 1983, the New York Mercantile Exchange began
to trade oil futures on its commodity market. Over time, commodity
market trading would become the price maker. Petroleum prices would not
be set by regulators controlling supply, by refiners stating what they
would pay, or by OPEC oil ministers setting production quotas. It would
be defined on the tumultuous and volatile trading floors of the NYMEX.
We are seeing the consequences of this change.
1998-99: LOW OIL PRICES AND THE CRISIS THEY CREATED
In late 1997 several events combined to initiate a precipitous drop
in world oil prices--events that are now defining current energy
issues. First, Asian economies, which had been generating the greatest
increases in petroleum demand, suffered substantial contractions--
lowering their growth in petroleum use. Second, OPEC--not perceiving
this situation--agreed to increase production quotas. Third, the
Northern Hemisphere benefited from a mild winter--reducing its
petroleum demand. Fourth, weakness in the Russian economy resulted in
higher exports of Russian petroleum. Fifth, Venezuela and Saudi Arabia
engaged in a market share battle that led to higher volumes of
petroleum exports.
Taken together, these events triggered price drops on the commodity
markets. OPEC then recognized the nature of the events and initiated
production reductions, but a new factor was surreptitiously entering
the arena. Iraq's petroleum production is defined by the UN sanctions
program. With little notice, the UN allowed Iraq to increase the amount
of production it could sell. At the beginning of 1998, Iraq exported
roughly 500,000 barrels/day. By the beginning of 1999, Iraq was
exporting 2.5 million barrels/day. This dramatic increase occurred
while other OPEC countries were reducing production. Virtually every
action to bring supply and demand back into balance was offset by Iraq
increases. The commodity markets continued to drive prices down.
The consequences to petroleum production were devastating. Capital
investment to develop new production and to maintain existing
production was slashed throughout the world. Even the OPEC countries
curtailed development projects to divert diminishing petroleum revenues
to maintain their national budgetary commitments to their citizens. The
effects of lost capital are twofold. First, all oil wells deplete over
time. While new technology has made the discovery of oil more
effective, it has also allowed oil reserves to be depleted more
quickly. Some recent studies suggest that the current oil depletion
rate in the Gulf of Mexico is now averaging 26 percent per year. This
is dramatically higher than historic rates of 3 or 4 or 5 percent per
year. Without adequate investment to maintain existing production,
critical resources were lost--many of which will never be recovered.
Second, the loss of an investment year in the petroleum production
business creates a critical time lag. The new production that was
needed first to replace depleted resources and second to meet expanding
demand was not there. IPAA warned in early 1999 that this loss of
capital could produce serious production capacity limitations as early
as 2000.
1999-2000: OPEC REBOUNDS, BUT THE DAMAGE IS DONE
In March 1999, OPEC countries agreed to substantial reductions in
exports; Mexico, Norway and other producer countries joined in. Prices
began to rebound, but so did demand. The US economy remained robust and
Asian economies recovered. By year's end, prices had returned to 1997
levels, but by then the consequences of a year's lost investment began
to tell. In the US, where 65,000 jobs had been lost, only 7,000 had
been recovered; where the oil rig count had fallen by 331, it had
increased by only 67. Internationally, the results were similar.
Strapped for revenues to meet national budgets, new production was not
being developed and existing production was not maintained.
Continued demand growth and reducing inventories of petroleum were
leading NYMEX commodity prices still higher. In March 2000, OPEC acted
again--this time to increase production. It was not an easy task. When
OPEC agreed to cut production, Saudi Arabia agreed to the biggest
reduction--in part to offset the increased share that Iraq had
acquired. Yet, when increases were at issue, no other OPEC country
wanted to give market share to the Saudis, but many countries had now
lost their previous production capacity--the consequence of lost
investment.
While Americans demanded that OPEC ``open the spigots'' and let the
oil flow, the reality was that the capacity was not there except for
Saudi Arabia, Kuwait, and the United Arab Emirates. In its effort to
raise production in September 2000, the fundamental issue had not
changed. Even after a year of high petroleum prices, new capacity is
lagging because of the low prices in 1998-99. While OPEC countries,
particularly Saudi Arabia talked about increasing production again if
petroleum prices did not fall, Kuwait announced that it could not meet
its current quota. In reality the world's excess oil production
capacity was whatever production the Saudis could muster. Even then,
questions remained regarding worldwide tanker capacity, the quality of
the remaining oil that can be produced, and the accuracy of estimates
of remaining spare capacity such as those of the International Energy
Agency.
Since the end of 2000, OPEC has chosen to reduce its production
targets. Publicly, these actions are based on its assessment of whether
world oil demand will diminish either because of slower economic
activity or because of historic seasonal demand fluctuations as spring
approaches. However, it is also possible that the intense production
efforts of 2000 may have stressed the facilities in these countries as
it has in the United States and they require the flexibility to
rehabilitate their operations. While the United States has criticized
OPEC's actions, the situation reflects the tenuous nature of world oil
supply following the 1998-99 oil price crisis.
And then there's Iraq. Since early 1999, IPAA has warned that UN
policies were placing Iraq in a position where it could ultimately
control the world price of oil and demand the end to UN sanctions. On
September 19, 2000, the Wall Street Journal article, ``Iraq Pumps
Critical Oil, and Knows It'' crystalized this risk.
Every six months, the UN revisits Iraqi sanctions and each time
there is a tension over what Iraq will do. For all the talk of using
the Strategic Petroleum Reserve to mitigate price concerns about
heating oil or gasoline, perhaps the real issue will be whether the
world can physically meet its petroleum needs if Saddam ``closes the
spigot.'' Then, the SPR will be needed for its true purpose--meeting a
supply crisis. Clearly, the decision on releasing SPR oil in late 2000
was based on the politics of the Northeastern and Midwestern states.
Its purpose was to manipulate the commodity markets that had little
response to the OPEC increases. It would be far more beneficial to
assure that adequate low income assistance is provided to purchase
heating oil or to address better ways to shift supplies of gasoline
than to risk placing our economic future in Saddam's hands in an
attempt to change the commodity price of oil on the NYMEX.
A NATION DEPENDENT ON FOSSIL FUELS
National energy policy must reflect an accurate understanding of
the nature and politics of world oil supply and demand. The US is the
second largest petroleum producer in the world; yet, domestic
production has dropped by over 10 percent--to 5.8 million barrels/day--
since the 1998-99 low price crisis. To meet future natural gas demand
and provide the nation with its true strategic petroleum reserve of
oil--domestic production--national policies must recognize the
importance of a healthy domestic exploration and production industry.
During the past three decades the United States has become more
dependent on energy and more dependent on foreign energy. While there
have been numerous efforts to define a national energy policy, none
have been successful. Today, the world is operating with its tightest
supply of petroleum and the United States is facing tight natural gas
supplies. Now is the time to clearly address national energy policy and
build the program that is needed to meet future demand.
Like it or not, the nation will be dependent on fossil fuels for
the foreseeable future. In particular, petroleum and natural gas
currently account for approximately 65 percent of the nation's energy
supply--and will continue to be the significant energy source. Natural
gas demand, for example, is expected to increase by more than 30
percent over the next decade.
INDEPENDENT PRODUCERS--THE LINCHPIN TO FUTURE DOMESTIC PETROLEUM AND
NATURAL GAS
It is important to recognize that the domestic oil and natural gas
industry has changed significantly over the last fifteen years. The oil
price crisis of the mid-1980's and policy choices made then triggered
an irreversible shift in the nature of the domestic industry.
Independent producers of both oil and natural gas have grown in their
importance, and that trend will continue. Independent producers produce
40 percent of the oil--60 percent in the lower 48 states onshore--and
produce 65 percent of the natural gas. They are becoming more active in
the offshore, including the deep water areas that have previously been
the province of the large integrated companies. At the same time those
large companies are now mainly focusing their efforts overseas, in
addition to Alaska and the offshore, because they are aiming their
investments to seek new and very large fields. Domestic energy policy
must recognize this reality.
RECOGNIZING THE ROLE OF THE MARKET
Future energy policy should rely on market forces to the greatest
degree possible. For natural gas the market is strong and active.
Natural gas supply is essentially North American and overwhelmingly
from two countries that rely on private ownership and the free market--
the United States and Canada. Currently, exploration and development of
natural gas in both countries is being aggressively pursued when the
opportunities are there, and can be accessed. In the United States
drilling rig counts for natural gas are running at rates that are as
high as they have ever been since natural gas drilling was
distinguished from petroleum. The principal constraints are finding the
capital to invest, getting access to the resource base, finding
competent personnel, and obtaining rigs. If the market is allowed to
work, it will continue to draw effort to produce this critical resource
for domestic consumption.
Oil, however, is a different situation. In making decisions
regarding developing domestic petroleum resources, the nature of the
world petroleum market must be recognized. Although the United States
remains the second or third largest producer of petroleum, it is
operating from a mature resource base that makes the cost of production
higher than in competitor nations. More importantly, most other
significant petroleum producing countries rely on their petroleum sales
for their national incomes. For them, petroleum production is not
driven by market decisions. Instead, their policies and their
production is determined by government decisions. Most are members of
OPEC, the Organization of Petroleum Exporting Countries. Several are
countries hostile to the United States like Iraq, Libya, and Iran. Even
those that are generally supportive of the United States, like Saudi
Arabia and Kuwait, are susceptible to unrest from both internal and
external forces.
Thus, the market price for petroleum will be largely framed by
production decisions driven not by the market, but by the politics of
these countries--both by internal issues and global objectives. United
States domestic policy decisions must reflect this reality--looking to
this factor in taking actions that can affect domestic production and
producers. But, more importantly, it must recognize that a healthy
domestic oil production industry is also essential for a healthy
domestic natural gas industry, because they are inherently intertwined.
For example, the failure of the United States to recognize the need
to respond to the low oil prices of 1998-99 resulted in adverse
consequences for both oil and natural gas production. The nation has
lost about 10 percent of its domestic oil production--most of which has
been made up by imports from Iraq. And, in addition, the tight natural
gas supplies this year are partially attributable to the drop in
natural gas drilling in 1998-99 when oil prices were low and capital
budgets for exploration and production of both oil and natural gas were
slashed by producers because drilling under those conditions made no
economic sense.
It is equally important to recognize that while all of these
factors influence the ultimate prices of oil and natural gas, it is the
commodity markets that have the final say. The role of these markets
has emerged from a minor factor in the mid-1980s, when oil and natural
gas trading began, to the dominant force today. While many people want
to point toward OPEC or big oil, the ultimate price maker is the
trading floor of the commodity markets. This has added a new volatility
to oil and natural gas prices. Its impact is still poorly understood
but must be considered.
However, it is clear that the market reacts to whatever information
it can obtain. During the low oil prices of 1998-99 and even during the
high prices of 2000, the impreciseness of this information likely
created incorrect perceptions of the fundamental situation in the
market. The widely held belief that there were large volumes of crude
oil available that helped suppress prices in the 1998-99 time period
proved incorrect. But, it also worsened the state of the industry such
that productive capacity was lost. One action that has been developed
to respond to this problem is the creation of an Oil Data Transparency
initiative by the Department of Energy to create better information
worldwide on supply and demand.
PROVIDING ACCESS TO ESSENTIAL CAPITAL
The nation must avoid making bad policy choices like it has in the
past. For example, because oil and natural gas exploration and
production are capital intensive and high-risk operations that must
compete for capital against more lucrative investment choices, much of
its capital comes from its cash flow. The federal tax code is a key
factor in defining how much capital will be retained. In the late
1970's and early 1980's when oil prices were high and drilling activity
was soaring, the industry was hit by the Windfall Profits Tax that
pulled a net $44 billion from the industry at a time when it could have
been invested in new exploration and production. In addition, in 1986,
when the industry was recovering from the low oil prices of that year,
the Alternative Minimum Tax (AMT) was created. The AMT sapped capital
from the industry when it was desperately needed. From 1986 to 1997
(before the latest price crisis) domestic oil production dropped by 2
million barrels per day--roughly 25 percent of 1986 capacity. Thus,
those tax policies stifled the industry at a time when U.S. energy
demand was increasing significantly.
Instead of such counterproductive tax actions, the Administration
and Congress need to enact provisions designed to (1) encourage new
production, (2) maintain existing production, and (3) put a ``safety
net'' under the most vulnerable domestic production--marginal wells.
Congress has considered a mix of tax reforms that have widespread
support. They include provisions to allow expensing of geological and
geophysical costs and of delay rental payments that encourage new
production, extending the net operating loss timeframe and revising
percentage depletion that assist both new and existing production, and
a countercyclical marginal well tax credit when prices fall to low
levels. All of these are programs that independent producers need
because their revenues are limited to their production.
Beyond these immediately needed policy changes, new tax policies
must be developed to meet future demand. In 1999 the National Petroleum
Council released its Natural Gas study projecting future demand growth
for natural gas and identifying the challenges facing the development
of adequate supply. For example, the study concludes that the wells
drilled in the United States must effectively double in the next
fifteen years to meet the demand increase. Capital expenditures for
domestic exploration and production must increase by approximately $10
billion/year--roughly a third more than today. While these estimates
are cast in the context of natural gas, the task to maintain or even
enhance domestic crude oil production could be similarly stated.
Generating this additional capital will be a compelling task for the
industry. As the National Petroleum Council study states:
While much of the required capital will come from reinvested
cash flow, capital from outside the industry is essential to
continued growth. To achieve this level of capital investment,
industry must be able to compete with other investment
opportunities. This poses a challenge to all sectors of the
industry, many of which have historically delivered returns
lower than the average reported for Standard and Poors 500
companies.
For the industry to meet future capital demands--and meet the
challenges of supplying the nation's energy--it will need to increase
both its reinvestment of cash flow and the use of outside capital. The
role of the tax code will be significant in determining whether
additional capital will be available to invest in new exploration and
production in order to meet the $10 billion annual target.
There are a number of different approaches that should be
considered. The AMT remains a constriction. While the AMT was modified
to exclude percentage depletion from the calculation of the alternative
minimum taxable income (AMTI), independent producers remain subject to
the AMT with regard to intangible drilling costs (IDCs). Specifically,
if ``excess intangible drilling costs'' exceed 65 percent of net income
from all oil and gas production, these costs are ``potential preference
items''. AMTI cannot be reduced by more than 40 percent of the AMTI
that would otherwise be determined if the producer was subject to the
IDC preference. This 40 percent rule forces many independent
producers--particularly smaller ones--to curtail drilling once the
expenditures become subject to the AMT. Now is a time when drilling
needs to increase significantly. It makes no sense for the federal tax
code to be a barrier to this effort.
Some of the future focus also needs to be directed to getting more
out of existing resources. For example, while the Enhanced Oil Recovery
tax credit exists, it is based on technologies that are twenty or more
years old. This provision should be restructured and updated.
Equally significant, policies need to address encouraging more new
development. Proposals to encourage domestic exploration and production
should be created. A number of concepts are already in play and need to
be more fully evaluated.
For example, the Section 29 tax credit for unconventional fuels
proved to be a strong inducement to developing those resources. It
applies to wells drilled prior to 1993 and uphole completions
thereafter. Just last July, the Federal Energy Regulatory Commission
acted to reinstate its certification process to address many wells that
would otherwise qualify for the Section 29 tax credit. But, the
existing credit expires in 2003 and provides no incentive for current
development since the qualifying wells had to have been drilled before
1993. S. 389 extends the existing credit and creates a second drilling
window that also applies to heavy oil.
Fundamentally, the question facing the nation is how to marshal the
capital to develop its domestic resources. To date the $10 billion
annual spending increase target has not been met. At issue is how to
obtain capital for domestic development. One source is the capital
markets and some of this amount will come from there, but it has
significant drawbacks. First, the capital markets have yet to show a
strong interest in the oil and gas exploration and production industry
despite the recent high prices of both commodities. Second, where the
capital markets are likely to focus their attention will be on large
companies. So, while some large independents may derive some of their
capital from these markets, it will only be a portion and smaller
independents will need to look elsewhere. Third, there is no guarantee
that such capital will go into domestic production because even with
regard to investment in exploration and production activities, capital
must compete against other projects including international ones.
The next source of capital will be from the revenues generated by
higher production and higher prices. First, the magnitude of this
capital may be overstated because just as prices for oil and natural
gas have increased, prices for drilling rigs and other costs are also
increasing which will squeeze the capital that is available. Second,
this capital will also be directed to the most promising projects, so
there is no guarantee that it will be invested domestically. Third,
this revenue will be significantly reduced by taxes.
The challenge, then, is to create a mechanism to direct the capital
to domestic production. One such approach would be to create a
``plowback'' incentive that would apply to expenditures for domestic
oil and natural gas exploration and production. This type of proposal
would encourage capital formation and development of domestic wells
provided it was immediately beneficial. Therefore, it would have to be
creditable against both regular and AMT taxes and any excess available
for carryback and carryforward. It would address the compelling need to
improve natural gas supply as well as reduce the growing dependency on
foreign oil. It must, in fact, apply to both oil and natural gas
because they are inherently intertwined--often found together.
Moreover, because of their inherent link, a healthy domestic natural
gas exploration and production industry cannot exist without a healthy
comparable oil industry.
PROVIDING ACCESS TO THE NATURAL RESOURCE BASE
National energy policy must also recognize the importance accessing
the natural resource base. While this issue has been addressed
extensively for natural gas in other hearings, its importance should
not be underestimated. Crude oil production is also significant on
government controlled lands and has to confront the same permitting
problems and access constraints. The Arctic National Wildlife Refuge
(ANWR) has been the focal of access discussions and its reserves are
largely oil. The Department of Energy recently released a comprehensive
report, Environmental Benefits of Advanced Oil and Gas Exploration and
Production Technology, demonstrating that the technology for
development of resources in sensitive environments is available. And,
it is being employed, when exploration is allowed.
Without policy changes, the nation may not be able to meet its
needs. Currently, much of the offshore is off limits to development
because of moratoria that are based on technologies that have been
replaced decades ago. The rationale for these moratoria is outdated and
inaccurate; there must be a reassessment of these decisions in the
context of today's technology and tomorrow's needs.
Even in those offshore areas of the Gulf of Mexico that are open
for development, the federal policies that determine royalties will
also significantly define the extent to which development will occur.
For example, over the past half-decade, Gulf of Mexico development has
soared, partly because of the Deep Water Royalty Relief Act that
specified how royalties would be determined for a set time period. This
allowed producers to plan their investments better. However, the Deep
Water Royalty Relief Act was largely used by large integrated companies
and its specific provisions expired in 2000. Now, as independent
producers are also seeking deep water opportunities, the planning
window is narrow and the policies are less certain. On the Outer
Continental Shelf, marginal properties remain that could be developed
if the royalty policies were right. All of these issues need to be
addressed with the full understanding that independent producers will
be increasingly willing to develop these areas as large integrated
companies look toward the Ultra-deep Water and overseas for the large
fields that they need to find.
Onshore, an inventory of resources is underway. It is an important
first step. But, it is equally important to understand that access to
these resources is limited by more than just moratoria. The constraints
differ. Monument and wilderness designations prohibit access to some
areas. Regulations like the Forest Service roadless policy and
prohibitions in the Lewis and Clark National Forest are equally
absolute.
At the same time the permitting process to explore and develop
resources often works to effectively prohibit access. These constraints
range from federal agencies delaying permits while revising
environmental impact statements to habitat management plans overlaying
one another thereby prohibiting activity to unreasonable permit
requirements that prevent production. There is no single solution to
these constraints. What is required is a commitment to assure that
government actions are developed with a full recognition of the
consequences to natural gas and other energy supplies. IPAA believes
that all federal decisions--new regulations, regulatory guidance,
Environmental Impact Statements, federal land management plans--should
identify, at the outset, the implications of the action on energy
supply and these implications should be clear to the decision maker.
Such an approach does not alter the mandates of the underlying law that
is compelling the federal action, but it would likely result in
developing options that would minimize the adverse energy consequences.
THE OTHER CHALLENGES TO DOMESTIC CRUDE OIL PRODUCTION
Any realistic future energy policy will take time. There is no
simple solution. The popular call for OPEC to ``open the spigots''
failed to recognize how serious crude oil production has been
constrained by the low oil prices of 1998-99. While the producing
industry lost 65,000 jobs in 1998-99, only about 40 percent of those
losses have been recovered and they are not the same skilled workers.
If measured by experience level, the employment recovery is far below
the numbers. Less obvious, but equally significant, during the low
price crisis equipment was cannibalized to keep operating and support
industries were devastated. Even now, while natural gas drilling rig
use has reached record levels, oil rig counts are only about 60 percent
of their 1997 level. It will take time to develop the infrastructure
again to build new drilling rigs and provide the skilled services that
are necessary to rejuvenate the industry. For example, a number of
Texas and New Mexico community/junior colleges are recreating programs
to train rig workers--programs that were shut down during the price
crisis. This is an area where federal assistance could improve the
success of the programs and speed their efforts.
There are longer term issues that must be fully understood as they
affect domestic crude oil production. Some of these have been
suppressed as the industry has had to respond first to the low oil
prices and then to rebuild itself as prices increased and supply
tightened. For example, domestic refining capacity has shifted during
the past decade or so. Many of the smaller refineries scattered
throughout the middle part of the country have shut down due to
increased capital requirements--in part compelled by the requirements
of the Clean Air Act. These refineries were purchasers of domestic
crude and as they close down, this affects where domestic crude can be
sent and its economics. Similarly, pipelines that once took crude oil
to refineries are being reconfigured to take product from these
refineries. This both eliminates a domestic crude oil market and may
affect the regional market of another refinery that is purchasing local
crude. The consequence may be to create a preference for foreign crude
over domestic. Similarly, crude oil pipelines connecting to Canada can
adversely affect domestic production in northern states and those
supplying midwest refineries.
The interrelationships between energy sources can also have adverse
effects. For example, California heavy crude oil production is
confronted with its own problems resulting from high natural gas
prices. Because this production requires special treatment to heat it,
natural gas is used to generate steam for injection. However, with
natural gas prices at current high levels operating costs are so high
that production is being shut in and may be lost. High electricity
costs can have the same effect. Electricity is one of key operating
costs for crude oil production. Particularly for marginal wells, high
electricity costs can take away the profitability of a well and force
it to shut down.
CONCLUSION
The challenges facing domestic crude oil are diverse and
complicated. Because crude oil is a world market, supply is not
determined by pure market forces--it can be defined by political
decisions. Moreover, the commodity markets then add greater
uncertainty. These dynamics taken together with the high marginal costs
associated with domestic crude oil production create an uncertain
investment atmosphere.
Overall, attracting capital to fund domestic production under these
circumstances will be a continuing challenge. This industry will be
competing against other industries offering higher returns for lower
risks or even against lower cost foreign energy investment options. The
slower the flow of capital, the longer it will take to rebuild and
expand the domestic industry. Providing access to the resource base
will be critical and requires making some new policy choices with
regard to federal land use. Rebuilding the domestic infrastructure is
essential but difficult in the near term. Longer term a stable policy
structure is critical.
Domestic crude oil production remains an important national
security issue. Maintaining or enhancing domestic production is an
important national objective. The failure to have clear policies has
resulted in two significant adverse events--the 1986 low price crisis
that ultimately led to the loss of 2 million barrels per day of
domestic production and the 1998-99 low price crisis where the
consequences are still being determined.
It is time for this country to take its energy supply issues
seriously and develop a sound future policy. Certainly, there is room
in such a policy for sound energy conservation measures and protection
of the environment. But, energy production--particularly petroleum and
natural gas--is an essential component that must be included and
addressed at once. Independent producers will be a key factor, and the
industry stands ready to accomplish this component, if policy reflects
that reality.
Mr. Barton. Thank you, Mr. Layton, we appreciate your
testimony.
We now want to hear from Mr. Gregory King, who is Vice
President and Chief Operating Officer of Valero Energy
Corporation in San Antonio, Texas. We welcome you, sir. Your
statement is in the record in its entirety. We would ask you to
summarize it in 6 minutes.
STATEMENT OF GREGORY C. KING
Mr. King. Chairman Barton, Congressman Boucher and members
of the subcommittee, thank you for this opportunity to testify
regarding the national energy policy and its relationship to
the U.S. refining industry.
My name is Greg King, and I am Executive Vice President and
Chief Operating Officer of Valero Energy Corporation. Valero is
now the largest independent refiner in the United States, with
refineries on the East Coast, West Coast and the Gulf Coast. We
now have a combined throughput capacity of 1 million barrels a
day.
I am also here on behalf of the Natural Petrochemical and
Refiners Association, which represents 98 percent of the
refining capacity in the United States. President Bush recently
remarked that tightness in gasoline supplies and volatility in
price are directly related to the fact that we don't have
enough refining capacity. He further observed that we haven't
built a refinery in America in 25 years. We couldn't agree
more. Over the past two decades, domestic refining capacity has
fallen from 17.9 to 16.5 million barrels a day, or a 9 percent
decline, while gasoline demand has increased 20 percent since
1984. We have gone from 315 refineries to 152 refineries in the
last 20 years. The U.S. is more dependent on imported products
than any time in our history.
Now, it is not easy to isolate a single cause for the
shortage we face in domestic refining capacity. We do know that
the regulatory burdens faced by the industry certainly don't
help. Refiners face near simultaneous implementation of
significant reductions in sulfur for both gasoline and diesel
fuel and perhaps limitations on the use of clean fuel additives
such as MTBE. At the same time, the U.S. EPA has made it
increasingly difficult for refiners to expand capacity based
upon novel and restrictive interpretations of the New Source
Review Program. The first challenge for policymakers is to
avoid making the situation worse. Precipitous action to ban
MTBE would be problematic from an environmental and a supply
perspective.
This January, DOE's Office of Policy noted that eliminating
MTBE would effectively reduce the domestic supply of gasoline
by 550,000 barrels a day, or about 6.8 percent of our current
capacity. Now, in our view MTBE concerns should be directly
addressed through programs to detect and fix leaking
underground storage tanks and through effective remediation
programs. As I know the chairman would not follow California's
path on electricity deregulation, I urge the committee and
Congress not to follow California's lead to ban MTBE.
Some have further suggested that mandating a certain amount
of ethanol could boost supply. Actions like this tend only to
compound problems, not alleviate them. Based on our review at
our refinery out in Benicia, California, an MTBE ban coupled
with an ethanol blending would reduce the production volume of
gasoline at our facility alone by 8 percent. We think that is
indicative of what would happen in the rest of the State. Even
some proponents of the MTBE ban in California now admit that
California cannot turn to ethanol without substantial price
increases and supply disruptions.
Another challenge that we face as an industry is the
continuing difficulties with the so-called Unocal patent. As
many of you know, Unocal participated in regulatory
deregulation proceedings in California and then successfully
patented the results of this joint exercise. Unless some
legislative relief is found from this situation, supplies of
clean gasoline will be made more costly. Suffice it to say, the
imbalance between refining capacity, supply and demand did not
emerge overnight and it won't be solved overnight, either.
However, concrete steps to address refining issues should
include the following: First, address the cumulative effects of
regulations. When the EPA, DOE and the Office of Management and
Budget conduct their reviews of each regulation, the cumulative
impact of regulations on supply, distribution and costs should
be fully considered before taking action.
Second, do not change the rules of the game in the middle
of the game. Retroactive reinterpretation of regulatory
programs wastes scarce capital resources. Congress should
consider enacting measures that compensate impacted parties
when the reversal of Federal regulations strand business with
useless equipment that was built specifically to comply with
Federal law.
Third, reform the permitting process in order to facilitate
capacity expansion and maintenance. By questioning State
permitting decisions and policy over the past 20 years, EPA
will only further slow down the permitting process and divert
State resources toward reviewing past decisions. This is
inappropriate at a time when it is critical that State
permitting authorities and refiners work together.
Finally, consider tax incentives to encourage environmental
improvements. Valero alone spends over $100 million a year in
environmental compliance expenditures. But the real cost of
environmental standards is lost international competitiveness
for U.S. refiners. Although by no means a complete solution,
the Congress should consider some combination of tax credits
for environmental compliance or at least enhanced depreciation
for such investments.
President Bush recently remarked that the solution for our
energy shortage requires long-term thinking and a plan that
will take time to bring to fruition. We agree. Any successful
plan must take into account the current state of the U.S.
refining industry.
Thank you very much for this opportunity to testify.
[The prepared statement of Gregory C. King follows:]
Prepared Statement of Gregory C. King, Executive Vice President and
Chief Operating Officer, Valero Energy Corporation
Chairman Barton, Congressman Boucher, and Members of the
Subcommittee, thank you for this opportunity to testify regarding the
implications of a National Energy Policy on Crude Oil and Refined
Petroleum Products. My name is Greg King, and I am Executive Vice
President and Chief Operating Officer of Valero Energy Corporation.
Valero is a Fortune 500 company based in San Antonio, with over
3,000 employees. The company currently owns and operates six refineries
in Texas, California, Louisiana and New Jersey with a combined
throughput capacity of approximately one million barrels per day,
making it the nation's largest independent refining company. Valero is
recognized throughout the industry as a leader in the production of
premium, environmentally clean products such as reformulated gasoline,
CARB Phase II gasoline, low-sulfur diesel and oxygenates. The company
markets its products in 34 states through an extensive wholesale bulk
and rack marketing network, and in California through approximately 85
Valero branded retail and 270 other retail distributor locations.
Valero is a member of the National Petrochemical and Refiners
Association, and is pleased to appear on NPRA's behalf today. NPRA's
membership includes virtually all U.S. refiners, as well as
petrochemical manufacturers using processes similar to refineries. Its
members own and/or operate almost 98 percent of U.S. refining capacity.
NPRA includes not only the larger companies, but also many small and
independent companies.
Valero is proud of its record of environmental achievement, which
goes beyond its commitment to produce cleaner-burning fuels and
additives. Investing millions of dollars in pollution prevention and
waste minimization, Valero was the first petroleum refiner ever to
receive the prestigious Texas Governor's Award for Environmental
Excellence and was recognized during the Clean Air Celebration for its
``outstanding environmental stewardship and leadership.''
CURRENT STATE OF THE REFINING INDUSTRY
The United States has long recognized the importance of domestic
refining to its economy. Many people in various states across the
country have found high-paying jobs in the refining sector, and the
energy sector plays a vital role in the gross domestic product of the
U.S.
Unfortunately, the refining capacity of the United States has been
in a continual decline for a number of years. In the past twenty years,
the number of domestic refineries dropped from a high of 315 to only
152, a 48% decrease. During the same period, domestic refining capacity
fell from 17.9 to 16.5 million barrels per day, a 9% decline, while
gasoline demand increased 20% since 1984.
While refiners have historically been able to meet consumer demand
by simply expanding capacity, U.S. utilization is currently at virtual
capacity so there's not much room to increase production. Utilization
rates hit a high of 97% last summer and were as high as 94% in
December. Expansion of existing capacity has been constrained by
permitting challenges, raising questions about our industry's ability
to meet future demand domestically.
To compound the problem, the one thing that all of the new
environmental regulations have in common is that they reduce supply.
And, to make matters worse, refiners must direct much of their capital
investments to meet environmental regulations so there is less capital
available for much-needed expansion projects. In fact, increasingly
stringent environmental regulations, often adopted in piecemeal
fashion, have created operational constraints and have sharply
curtailed the flexibility of refiners to expand. Over the course of the
last decade, the National Petroleum Council estimated that total
investments to comply with the Clean Air Act Amendments in the refining
sector exceeded the total book value of the refineries brought into
compliance by $6 billion dollars. Things are even worse today. Refiners
face near simultaneous implementation of reductions in gasoline sulfur
and air toxic constituents, changes to diesel fuel to reduce sulfur to
ultra-low levels, and, perhaps, limitations on the use of clean-fuel
additives like MTBE. At the same time, the U.S. Environmental
Protection Agency has made it increasingly difficult for refiners to
expand capacity based upon novel and restrictive interpretations of the
New Source Review (NSR) program.
Of course, the Clean Air Act is just one piece of the puzzle. A
regulatory blizzard swirls around the U.S. refining industry. We have
included a more comprehensive list of the real and potential federal
regulatory burdens that can interfere with an adequate supply of
refined product. See Appendix I. In addition, individual state actions
(e.g., NAAQS implementation, California, New York and Connecticut bans
on MTBE) will further jeopardize fuel supplies.
Unfortunately, the conditions that have caused our current
stretched capacity in refining are not likely to resolve themselves in
the near future without careful planning and a balanced energy policy
that takes refining issues into account. Indeed, as we enter the summer
driving season, refiners will struggle to make up inventory deficits
created by the need to produce more home heating oil this past winter.
Also, unusually high natural gas prices last winter directed natural
gas into direct usage and away from feedstock usage. As a result, less
MTBE and alkylate were made, thus further depriving the summer driving
season of some of its usual cushion in gasoline inventories. The tight
market for MTBE is already fueling predictions of another summer of
high gasoline prices. According to the Energy Information
Administration, MTBE inventories in February were down 22.4% from a
year ago and MTBE production declined by 9.2% from the year-ago level.
This decline has contributed to lower production of RFG at a time when
demand for RFG continues to grow. This problem could be exacerbated by
the unreliability of electricity supply in California, which could
result in power outages that force refiners and pipelines to shut down.
Therefore, American consumers may see an increase in prices at the
pump this summer. As USA Today reported earlier this month, gasoline
prices might exceed $2.50 per gallon in some areas. Tightness in
capacity is much of the problem: even as EPA eased the clean air
restrictions on ethanol use for Milwaukee and Chicago, one Midwest
refinery announced that it would be unable to meet regulatory
constraints and therefore will close down. Loss of one refinery may
reduce Midwest supply by as much as 9%--eliminating the potential gains
that might have resulted from EPA's actions. See USA Today, March 9,
2001, at 3B.
After his first briefing with the National Energy Policy Task
Force, President Bush recognized the dire situation with refining
capacity and its direct relationship to high prices at the pump. The
President stated on March 19 that: ``it's important for American
consumers to understand that if we have a price spike in refined
product, it's not going to be because of the price of crude oil being
$25 or $26 a barrel; it's going to be because we don't have enough
refining capacity.'' He concluded: ``We think that the major impact on
gasoline prices, if they go up, is a result of not generating . . .
enough refined product to meet the demand of U.S. drivers. And we
haven't built a refinery in 25 years in America.'' We concur with the
President's assessment and believe that a key component of any National
Energy Policy must create an environment that enables domestic refiners
to invest in and increase our nation's refining capacity. Such an
environment can only be created if an appropriate amount of
consideration is given to the supply/demand impact of future
regulations.
MTBE
One challenge for policy makers is to avoid making the situation
worse. Precipitous action to eliminate the fuel additive MTBE that has
been detected in ground and surface water would be problematic from an
environmental, energy price and supply perspective.
In a January 2001 presentation, authors from DOE's Office of Policy
and the Oak Ridge National Laboratory reminded us that an MTBE ban is
equivalent to a loss of 300,000 barrels per day of premium blendstock.
Since MTBE is an exceptionally clean burning, high-octane gasoline
additive, it allows refiners to extend the gasoline pool by bringing in
lower octane components. Eliminating MTBE would effectively reduce the
domestic gasoline supply by 550,000 barrels a day or roughly 6.8% of
the total daily consumption of gasoline. The severe energy and
environmental consequences of proceeding in this fashion will further
increase our dependency on imports.
Banning MTBE does not address the potential problem of MTBE in
groundwater. The fact remains that MTBE is most often detected in
groundwater as a result of gasoline leaking from underground storage
tanks. Assessments of MTBE were made prior to implementation of the
current Underground Storage Tank regulations. As more data is
developed--including data from California--the percentage rate of MTBE
detections seems to be declining. With regard to surface water
concerns, a recent report confirmed that a water-quality sampling
project completed in 46 Texas Lakes on behalf of the U.S. Geological
Survey concluded that, ``health concerns about MTBE in water is not a
factor.''
MTBE concerns can be directly addressed through programs to detect
and fix leaking underground storage tanks and through effective
remediation programs. As I know the Chairman would not follow
California's path on electricity deregulation, I urge the Committee and
Congress not to follow California's lead with a ban on MTBE.
Ethanol Mandate
Some in Congress and elsewhere have further suggested that
mandating a certain amount of ethanol usage could boost supply. Actions
like this tend only to compound problems, not alleviate them. While the
current fuel market includes a healthy share for ethanol, further
mandates are likely to be counterproductive. An ethanol mandate will
make it harder for refiners to provide cleaner fuels to consumers at
acceptable prices. Due to ethanol's high blending vapor pressure,
pentanes are backed out of the gasoline pool, further decreasing
supply. An ethanol mandate will hinder refiners' ability to optimize
the quality and volume of cleaner-burning gasoline. This will increase
refining costs, and negatively impact both gasoline supplies and price.
According to the California Energy Commission, the costs of
substituting ethanol-blended gasoline in that state could increase
refining costs by up to 7 cents per gallon. Based on our review at the
Valero Benicia Refinery, an MTBE ban, coupled with ethanol blending
reduces production volume by 8%.
UNOCAL
Another challenge that could complicate the picture is the
continuing difficulties with the so-called Unocal patent. As many of
you know, Unocal participated in regulatory negotiation proceedings in
California and then successfully patented the results of this joint
exercise. Recently, the U.S. Supreme Court decided not to hear an
appeal of the patent, thus leaving refiners the choice of paying a
large licensing fee to Unocal (on the order of 5.75 cents per gallon),
or ``blending around'' the patent (also a very costly alternative). In
addition, refiners face four more patents that further severely limit
our flexibility. Unless some relief is found from this situation,
supplies of clean, reformulated gasoline will be made more costly in
the near term. And, we should recall that last summer the Congressional
Research Service listed the on-going controversy regarding the Unocal
patent as a contributing factor in last summer's high fuel prices.
how do we fix the problem with refining?
Suffice it to say, the imbalance between refining capacity, supply
and demand did not emerge overnight, and it won't be solved overnight.
The domestic refining industry finds itself in the same position as the
domestic oil and gas producers of twenty years ago. Without proper
attention to the role of the domestic refiner in shaping energy policy,
you will see the nation's dependence on imported petroleum products
increase. The current Administration and the Congress are off on the
right foot: they are cooperatively working toward a national energy
policy that will include some consideration of refining issues and
appropriate legislative and executive action.
We strongly recommend you keep refining issues in mind as you
fashion legislative responses to our current energy situation. In
particular, remember that a diversity of refining capacity that
includes robust participation by domestic independent refiners is
critical to produce a system capable of meeting the economic,
environmental and security demands of the United States.
Additional concrete steps to address refining issues should include
the following:
<bullet> Address the cumulative impact of regulations. There is a
tendency to view each regulation imposed upon refining in a
vacuum, particularly when measuring primary and secondary
economic impacts. However, as we observed above, the plain fact
is that the refining sector has numerous, overlapping
regulations. Most recently, compliance deadlines have come one
on top of another. When EPA, DOE and the Office of Management
and Budget conducts their reviews of each regulation, the
cumulative impact of regulations on the supply, distribution,
and cost on transportation fuels should be fully considered
before taking action.
<bullet> Ensure thorough review of regulations. Preparation of an
Energy Impact Statement for major rules could help ensure that
energy supply impacts are fully understood and balanced with
environmental goals. Proper use of cost-benefit analysis to
ensure cost-effectiveness of regulations is another essential
tool.
<bullet> Do not change the rules in the middle of the game. Retroactive
reinterpretation of regulatory programs such as EPA's NSR
enforcement activities constitute rulemaking without due
process and opportunity for comment. Also, changes in
requirements that negate good faith compliance investments
waste scarce capital resources that are much needed for other
projects such as refining capacity expansions. To deter unwise
government intervention, Congress should also consider enacting
measures which compensate impacted parties when the reversal of
federal rule or regulations strand business with useless
equipment which was built specifically to comply with federal
law.
<bullet> Reform the permitting and New Source Review processes in order
to facilitate capacity expansion and maintenance. By
questioning state permitting decisions and policy over the past
20 years, EPA will only further slow down the permitting
process and divert state resources towards reviewing past
decisions. This is inappropriate at a time when it is critical
that state permitting authorities and refiners work together to
expedite the permitting processes for important upcoming
environmental regulations, such as the Tier II gasoline sulfur
reduction requirements. We believe that any real reform must
address both substantive and procedural issues. Real reform
should ensure that NSR applies only if emissions actually
increase significantly. The current system of perpetual
exposure to NSR cannot be defended; and
<bullet> Consider tax incentives to encourage environmental
improvements. The costs associated with environmental
compliance often make the difference between a competitive
refinery operating in the U.S., and one that closes. Valero
alone spends on the order of $100 million per year in
environmental compliance expenditures. The real cost of these
environmental standards is lost international competitiveness
for U.S. refiners. The Office of Technology Assessment has
found that the cost to the domestic refining industry for
pollution abatement is substantial and is higher than for most
other industries. API has calculated that petroleum refining
could account for a disproportionate 17% of the national
environmental expenditure in the year 2000. Although by no
means a complete solution, the Congress could consider some
combination of tax credits for environmental compliance or
enhanced depreciation for such investments.
CONCLUSION
While these responses to current refining difficulties are by no
means comprehensive, they represent a start. President Bush recently
remarked that, ``the solution for our energy shortage requires long-
term thinking and a plan that we'll implement that will take time to
bring to fruition.'' At Valero, we couldn't agree more. However, any
plan, in order to succeed in providing the American consumer with
reliable and affordable motor fuel supplies, must take into account the
current state of the US refining industry and of our product
distribution infrastructure.
Thank you very much for this opportunity to testify.
Appendix One: Overlapping Federal Regulatory Requirements
Tier II Gasoline Sulfur--In December 1999, EPA announced a final
rule to provide new Tier II motor vehicle emission and gasoline sulfur
standards. The Tier II standards adopt stricter tailpipe emission
standards for motor vehicles beginning in model year 2004 and phase in
over a ten-year period for larger models, such as sports utility
vehicles. The gasoline sulfur standard is a national annual average
standard set at 30 parts per million, a 90 percent reduction over
current national levels. The new sulfur standard would be phased in
beginning in 2004 and must be met by 2006.
California MTBE Phase-out--In March 1999, Governor Davis of
California issued an Executive Order to phase out the use of MTBE in
California no later than December 31, 2002. In December 1999, CARB
adopted gasoline standards without using MTBE. The Governor also
petitioned EPA to waive the 2% oxygen content mandate for federal RFG
in the state.
Regional Haze--In July 1999, EPA promulgated a final rule requiring
states to establish goals for improving visibility in 156 national
parks and wilderness areas. States will develop strategies and plans
for reducing emissions of air pollutants that contribute to poor
visibility in these areas. These plans will likely include controls to
reduce emissions of fine particulates, PM<INF>2.5</INF>. Fine
particulates are emitted by mobile and stationary sources. The schedule
for states submitting SIPs is uncertain because the regional haze
program is linked with the new NAAQS PM<INF>2.5</INF> SIP process,
which was invalidated by the courts.
Off-Road and On-Road Diesel Fuel--In December 2000, EPA released a
final rule for highway diesel fuel that includes a 15 ppm sulfur cap
effective in 2006. EPA is expected to issue a proposal controlling the
sulfur content of off-road diesel fuel.
Gasoline Air Toxics--In December 2000, the Agency promulgated a
restrictive mobile source air toxics standard for gasoline effective in
2002.
Refinery MACT II--In September 1998, EPA proposed National Emission
Standards for Hazardous Air Pollutants from Petroleum Refinery Vents.
This rulemaking, refinery MACT II, covers emissions from the catalytic
cracker, catalytic reformer, and sulfur plants.
Section 126 Petitions--In August 1997, eight northeastern states
filed Section 126 petitions. The Clean Air Act gives a state the
authority to petition EPA to set emission limits for specific sources
of pollution in other states that contribute to its ozone nonattainment
problems. In December 1999, EPA granted four of the petitions filed by
the states of Connecticut, Massachusetts, New York, and Pennsylvania.
The granting of these petitions would require 392 facilities to reduce
NO<INF>X</INF> emissions. Refineries and petrochemical plants are on
the list of affected facilities. There is litigation challenging these
petitions pending action in the US Court of Appeals for the D.C.
Circuit. These petitions were originally conceived as a ``backstop''
for EPA's NO<INF>X</INF> SIP call which also was the subject of legal
challenge. The US Supreme Court recently upheld EPA's authority
regarding the NO<INF>X</INF> SIP call which will likely make that the
main approach for further controls in this area.
New Source Review Enforcement Initiative--EPA's Office of
Enforcement has said it will target enforcement actions against
refineries for alleged noncompliance with the New Source Review
program, based for the most part on a new interpretation of what
constitutes a modification triggering NSR permitting requirements. EPA
has filed actions against the paper and utility industries seeking the
highest penalties under the Clean Air Act. The NSR regulations were
issued in 1980 and supplemented by seven volumes of guidance documents
and altered over the years by informal policy in letters, memoranda,
and other documents outside of the public notice and comment process.
Climate Change--The U.S. signed the Kyoto Protocol on November 12,
1998. in this as yet unratified treaty, the U.S. agreed to a 7 percent
reduction in greenhouse gas emissions from 1990 levels between 2008--
2012. According to some analysts, this 7 percent reduction could
translate into a 40 percent reduction in fossil fuel use. Fossil fuel
production, including gasoline manufacture would be affected.
Residual Risk--Under Section 112 of the Clean Air Act, EPA is
required to assess the residual risk posed to public health and
environment after implementing technology-based MACT (maximum
achievable control technology) standards for major industrial sources
emitting toxic air pollutants. Refineries and petrochemical plants are
currently subject to several MACT standards. After this assessment, EPA
may promulgate additional regulations and require additional emission
reductions for these sources.
Urban Air Toxics Strategy--In July 1999, EPA released its
Integrated Urban Air Toxics Strategy to provide a framework for
reducing air emissions and health risks from toxic air pollution in
urban areas. EPA identified 33 toxic air pollutants as posing the
highest risks and targeted 13 new area sources (smaller industrial and
commercial facilities) for new national standards. Gasoline
distribution and oil and natural gas production facilities are on the
list. The Agency released a Report to Congress, dated July 2000, that
summarized actions to reduce public health risks and listed research
needs.
Mr. Barton. Thank you, sir. We do appreciate you flying up
from San Antonio.
We now want to hear from Mr. Peter D'Arco, the President of
SJ fuel in Brooklyn, New York. You have testified before this
subcommittee before and done an excellent job. I am sure you
are going to do the same today. Your testimony is in the
record. We would ask you to summarize it in 6 minutes.
Welcome back to the subcommittee.
STATEMENT OF PETER D'ARCO
Mr. D'Arco. Good morning, Mr. Chairman and committee
members. I am Pete D'Arco, Vice President of SJ fuel. I
appreciate the opportunity to discuss the petroleum industry
today. I would like to review the state of the oil heat
industry and the progress that has been made since last year. I
would also like to discuss the motor fuels industry and the
recently finalized rules affecting diesel. In particular, I
would like to encourage you and the committee to closely
examine the rule recently issued by the Environmental
Protection Agency to lower the sulfur in diesel fuel.
Prior to the start of the winter, many said that distillate
prices would spike or we would run out of product because
inventories of distillate were below normal. However, the free
market that I represent did many things to avoid a problem.
First, many interruptible consumers of natural gas entered into
supply contracts. Additionally, many residential consumers
entered into contracts for supply while others merely
transferred their business to dependable vendors. What we have
seen is an industry that has responded to a winter that is
colder than normal since the winter of 1993-1994. Last year the
winter was 10 percent warmer than normal and this year the
winter in many areas is 5 percent colder than normal for a
swing of 15 percent.
Additionally, record prices for gas led many interruptible
consumers to switch to heating oil for generating electricity
and heat. Thus, the demand for heating oil is much higher this
winter than last but the market has worked to avert problems.
In fact, the Department of Energy has seen prices in New York
fall nearly 15 cents a gallon since the beginning of this year.
There has been no concern about supply, and our customers are
pleased that they are not tied to utility pricing and product
is being delivered consistently.
This success story is in sharp contrast to the continuing
and persistent problems now confronting the natural gas and
electricity industries. While I am not an expert in either
area, it is apparent that at the residential level in
California, there are only one or two suppliers and that the
grid is controlled by a single entity. This limited and
controlled competition has been proven to be incapable of
matching a competitive field.
In focusing on our success compared to the utility problems
in California, we believe the Congress must recognize some of
the unique attributes of oil markets that can give it a
competitive edge. Since oil is easy to transport, it is an
international product. Instead of perceiving this to be a
problem, we should recognize it as a competitive advantage. Can
you imagine where natural gas prices would be today if everyone
in the Northeast relied on natural gas for heating?
With respect to the motor fuel industries, for nearly a
year the United States had significant problems with
distribution and supply of refined products. Unfortunately, the
Environmental Protection Agency has issued a rule that will
impact distribution at every level. In 1990, the country used
essentially two distillates. No. 2 distillate was used for home
heating oil, truck diesel and off-road equipment diesel.
Kerosene, our No. 1 distillate, was used as a jet fuel, for
inner city buses and a blend stock for diesel and heating oil
in the winter months. Today, due to congressional and
environmental initiatives, there are six fuels. The
Environmental Protection Agency rule further divides the on-
the-road fuel into a 500 parts per million fuel and a 15 parts
per million fuel. However, we are not merely adding one fuel.
It is conceivable that we are adding two new products for a
grand total of eight when the tax status is considered.
PMAA is concerned with adding new fuels and thus supports a
more rational approach to the rulemaking now being considered.
The new rule will require the new 15 parts per million fuel for
new trucks and older trucks can continue to use the older
diesel at 500 parts per million. There is no harm in an old
truck using a new fuel and there are some environmental
advantages. However, the rule that EPA has issued will create
confusion in the marketplace, lead to difficult enforcement
issues and stress our distribution system.
We would note that the transitional program proposed by EPA
is similar to that of the leaded-unleaded transition that
occurred in the seventies. EPA found a 17 to 20 percent
noncompliance with the rule. The leaded-unleaded program was
the last transitional program. Apparently for 20 years we
remembered this problem and avoided it. Unfortunately, diesel
phase-in is likely to repeat that same problem, disrupting the
distribution system and at the same time hampering the smooth
implementation of this important environmental program. PMAA is
thus encouraging Congress to override EPA and transition the
fuel at a single point in time.
Thank you, Mr. Chairman, for the opportunity to testify.
[The prepared statement of Peter D'Arco follows:]
Prepared Statement of Peter D'Arco, SJ Fuel, on Behalf of The Petroleum
Marketers Association of America
Good Morning Mr. Chairman, and committee members. I am Peter D'Arco
and I am the President of SJ Fuels. We are a third generation company
located in Brooklyn, New York and deliver fuel to nearly 5000
locations. I am here on behalf of the Petroleum Marketers Association
of America. PMAA represents 7,800 petroleum marketers. These marketers
ell 40 percent of the gasoline, 50 percent of the diesel and nearly 75
percent of the heating oil distributed in the United States.
As the country reflects on the last year's energy issues, I welcome
the opportunity to discuss the status of the refined petroleum products
industry with you. It has been six months since I testified before this
Committee and I applaud you for holding another hearing. As you know,
Mr. Chairman developing natural resources is a long term proposition
and what we do today will have an impact on America's energy future ten
and twenty years from now. However, the core of any energy strategy
must continue to be the free market`
Today, I would like to review the state of the oilheat industry,
and the progress that has been made since last year. I would also like
to discuss the future of the motor fuels industry, and the recently
finalized rules affecting both gasoline and diesel. In particular, I
would like to encourage you and the committee to closely examine the
rule recently issued by the Environmental Protection Agency (EPA) to
lower the sulfur in diesel fuel.
First, I would like to update the committee on the heating oil
industry. Last year, its ability to respond and its resilience was
questioned as prices rose sharply when the weather became extremely
cold in the winter. The problems related to unusual weather patterns
that caused transportation problems, and refinery problems. However, as
you know our company as well as thousands of other businesses both
large and small responded. Refineries increased production, wholesalers
searched the globe for product, and marketers like myself staggered
deliveries to ensure all customers had product at all times. I would
like to contrast that behavior with what has occurred in California
where monopolies or semi-monopolistic utilities unilaterally decided to
cease distribution of electricity to selected communities. Now, the
state of California is subsidizing electricity purchases on a daily
basis, and has just imposed a massive rate increase
That stands in sharp contrast to the industry I represent. Last
winter forced many firms from the business, others sold out at the end
of the year. However, at no time did the federal or state government
begin to pay their bills. In fact many of the energy experts predicted
a similar debacle this year. There was an obsessive focus on
inventories, and the fact that they were below normal.
Many said that prices would spike or we would run out of product
because these inventories of distillate were below normal. However, the
free market that I represent did many things to avoid a problem. First,
many interruptible consumers of natural gas entered into contracts for
supply. Additionally, many residential consumers entered into contracts
for supply, while others merely transferred their business to
dependable vendors. And what we have seen is an industry that has
responded to a winter that is colder than normal for the first time
since 1993 and 1994. Last year, the winter was 10 percent warmer than
normal, and this year the winter in many areas is 5 percent colder than
normal, for a total swing of 15 percent. Additionally, record prices
for gas led many interruptible consumers to switch to heating oil for
generating electricity and heat. The market responded by searching
internationally for product, and in January, imports of distillate into
the northeast were 2.5 times higher than normal.
As a result we have seen level and declining prices in many
markets. According to the Department of Energy prices in New York have
fallen nearly 15 cents since the beginning of the year. There has been
no concern about supply and our customers are pleased that they are not
tied to utility pricing, and product is being delivered consistently.
For my industry, failing to deliver product to a customer is the same
as losing the customer. As I said last spring we will do anything
necessary to get supply to customers, and since I am a customer to my
supplier, he will do the same.
The one lesson that we must take from this is that the free market
works. Particularly when there are competitors to force competition.
PMAA believes that as the Congress considers establishing a new
energy strategy, how to ensure that markets have multiple competitors
must be the guiding principle. Congress must work to have competitors
in the various energy fields, in oil at every level, in natural gas at
every level, and in electricity at every level. Further, attempting to
encourage one of these sectors to be dominant will necessarily be
harmful. We are dismayed by many proposals now circulating which could
encourage consumption of natural gas or electricity. We believe
consumer choice will lead to people selecting the best fuel for their
use, and the best fuel for the future, tilting the playing field will
always decrease competition, and thus should be avoided.
Flexibility comes from competition, as competitors adapt to changed
circumstance. And as you know each winter is different, each year
competition is more intense. As the heating oil industry demonstrated
this year, many wholesalers searched worldwide for product. Brokers
distributed the product between markets. Refiners worked round the
clock to increase production. Finally the ability of oil to be stored
at every level, from homeowner to refiner allowed the industry to
distribute the product efficiently. Similarly, the final customer was
able to time his or her purchases, how much they should store who
should they buy from and what type of contract they should enter into
with their supplier. And as every business knows, the best discipline
for a market is a customer, and the competitors I described are each
customers of each other, and they are always trying to get the best
value and deliver the best product to the ultimate consumer.
This is in sharp contrast to the continuing and persistent problems
now confronting the natural gas and electricity industry. While I am
not an expert in either area, it is apparent that at the residential
level in California there are only one or two suppliers, and that the
grid is controlled by a single entity. This limited and controlled
competition has been proven to be incapable of matching a competitive
field.
As we debate energy policy, many raise the issue of imports of
crude oil into the country. As you know, the heating oil industry
relies on domestic crude for approximately 50 percent of the fuel oil
produced, and uses domestic refineries plus Canadian refineries for
nearly all the refined product consumed. Similarly, the vast majority
of gasoline and diesel consumed in the United States is refined in the
United States. However, as we have seen in California, their isolation
from the country for fuel and electricity makes their problems worse,
perhaps we should recognize that an international market is preferred
to a domestic market.
We would again contrast the oil industry with the natural gas
industry. While gas is generally domestic sourced and distributed, it
cannot utilize worldwide energy resources in a problem time. As we
know, natural gas prices have risen sharply and likely will not drop
substantially until more production goes on line in the United States.
Again, the oil industry because of the easy transportability of oil can
search internationally for product. We must acknowledge that oil will
always be an international product, as transportation is a small
fraction of the cost, and thus, the domestic oil industry will always
be tied to the international economy. Dissimilarly, both coal and gas
are more difficult to transport and thus will tend to be domestic
industries.
We do not believe that our energy policy should in any way be
altered to give these two domestic products advantages in our market.
Consider the situation we would be in today, if somehow the United
States was independent of international energy markets. Oil would not
be available to take some of the pressure off of natural gas demand,
and the utility industry would not only be coping with making more
electricity for California, they would have had to supply the 5 percent
increase in demand for oil in the northeast. Where would prices be
today if that were our energy policy of five years ago?
PMAA does of course agree that steps must be taken to increase
domestic production. Having crude developed both domestically and
internationally increases competition, and thus benefits consumers.
PMAA would also urge the Congress to liberalize the waiver
provisions within the Jones Act. During heavy weather, barges cannot
transit from New York to Boston, or from the gulf coast to New York.
However, many foreign flag tankers could be diverted into this trade if
the government would allow waivers of the Jones act. Such a course
would allow wholesalers to buy product in the gulf coast and bring it
up to the northeast if the pipeline systems are at capacity.
Additionally many of these tankers can be used in heavier weather that
would allow product to move between Boston and New York.
PMAA would now like to turn its attention to the motor fuels
industry. As you know, PMAA represents the marketers who sell over 40
percent of the gasoline and 50 percent of the diesel sold in the United
States.
For nearly a year, the United States had significant problems with
distribution and supply of refined products. The Environmental
Protection Agency had to delay implementation of reformulated gasoline
in St. Louis because of supply and pipeline problems, and prices for
reformulated gasoline spiked in Milwaukee and Chicago, and then
gasoline prices spiked throughout the Midwest. While some of the
problems related to lack of refined product, much of the problem
related to distribution problems. Pipeline problems outside St. Louis
initiated the Midwest problem. This proceeded to Chicago where the new
reformulated gasoline was more difficult to manufacture than was
anticipated. A pipeline problem in Michigan exacerbated the problem.
Thus, much of the problems were sourced to a distribution system that
is at capacity, and thus has limited ability to recover from problems.
Unfortunately, the Environmental Protection Agency has issued a
rule that will impact distribution at every level. In 1990, the country
used essentially two distillates for all uses. Number 2 distillate was
used for home heating oil, trucks, and off-road equipment. Kerosene or
Number 1 distillate was used as a jet fuel, for inner-city buses, and a
blendstock for diesel and heating oil in the winter months. In the last
ten years we have subdivided each of these fuels by four. We have a
high and low sulfur fuel for both diesel and kerosene, and we have a
dye system, which is used for the tax status of the product. Thus, each
of two products described above has been divided and are now six
distinct products.
The Environmental Protection Agency will further divide those pools
into a 500-ppm fuel and a 15-ppm fuel. However, we are not merely
adding one new fuel we are adding two new fuels, one taxed, and one not
taxed. Thus, there will be eight distinct distillates.
How does this affect distribution? The petroleum industry has
always been a high volume industry relying on fungible products. A
barge would carry a large load of a single product, a pipeline would
carry millions of gallons of a single product that would supply every
terminal in its area before transitioning to a new product, and a truck
would distribute the multiple grades of gasoline and diesel. Now each
of these transportation systems must lose its economies of scale as
smaller and smaller volumes of product are transported. Staging in the
pipeline becomes more difficult. Terminals may choose to handle only a
selection of the products, or put one of these products into smaller
tanks, or perhaps not sell a particular product. Marketers may have to
drive farther to find the product they are searching for, and make more
stops to distribute the same volume of product. Thus, each change
increases distribution costs.
PMAA has thus supported a more rational approach to the rulemaking
now being considered. As the Committee understands, the new rule will
require the new 15 PPM fuel for new trucks, and older trucks an
continue to use the older diesel at 500 PPM. There is no harm in an old
truck using the new fuel, and there are some environmental advantages.
However, the rule that EPA has issued will create confusion in the
marketplace, lead to difficult enforcement issues and stress our
distribution system.
PMAA would note that the transitional program proposed by EPA is
similar to that of the leaded unleaded transition that occurred in the
70's. EPA stated at that time there was 17-20 percent non-compliance
with the rule as consumers used funnels to overcome the nozzle
restrictors or simply removed the restrictor in their tanks. This
behavior destroyed the emissions devices, and thus much of the
environmental gains were lost. To counter this, EPA began an
enforcement program targeted at marketers. Unbelievable as this may
seem, marketers were directed to memorize vehicle designs and
descriptions to prevent misfueling. PMAA distributed vehicle profiles
to marketers to assist in this process. EPA also considered price
controls to ensure that the leaded gasoline was sold at the same or
higher prices than the unleaded program to counter this problem.
The leaded unleaded program was the last transitional program with
both gasoline and diesel being implemented at once. Apparently for
twenty years we remembered this problem, and avoided it. Unfortunately,
the diesel phase in is likely to repeat that problem, disrupting the
distribution system and at the same time hampering the smooth
implementation of this important environmental program.
PMAA is thus encouraging Congress to override EPA and transition
the fuel at a single point. We are of course concerned with supply, and
whether the refiners will be able to make the fuel. While their
concerns are real, we recognize that nearly all of the problems of the
last year are distributional and we do not want them to occur for four
straight years
Additionally, I would like to offer one final comment on the number
of rules that have come out affecting the domestic refining and
distribution industry. Each new rule affecting refining requires
substantial capital investment. Similarly, the splitting of the fuels
pools also requires substantial investment. Each time that happens,
there is a bias in favor of large plants that can more readily absorb
the investment and spread it over more gallons. This bias leads to an
industry of fewer competitors. Additionally, each of the competitors
must try to always be at 100 percent capacity. However, when demand
increases or there are problems with supply, big problems await
everyone.
We believe that the Congress must recognize this and try to ensure
that our country's energy policy is as flexible and multi-source
reliant. Competition will benefit the American consumer, the economy
and the environment.
Mr. Barton. Thank you, sir.
We would now like to hear from Mr. Thomas Robinson, who is
the Chief Executive Officer of the Robinson Oil Corporation in
San Jose, California. We have heard a lot about California over
the last month or so in this subcommittee. Welcome. Your
testimony is in the record. We would ask you to summarize it in
6 minutes.
STATEMENT OF THOMAS L. ROBINSON
Mr. Robinson. Good morning. Yes, California is an
interesting place. Good morning, Mr. Chairman and members of
the subcommittee. My name is Tom Robinson. I am CEO of Robinson
Oil, San Jose, California. Our company owns and operates 28
Rotten Robbie retail gasoline outlets located in the San
Francisco Bay Area of California.
I appear before this subcommittee today as a representative
of the National Association of Convenience Stores, NACS, and
the Society of Independent Gasoline Marketers of America,
SIGMA. Collectively, NACS and SIGMA members sell more than 75
percent of the gasoline and diesel fuel purchased by American
consumers each year. I appreciate this invitation to appear at
this hearing to present testimony on the Nation's energy policy
as it relates to crude oil and refined petroleum products.
The companies I represent today are different from the
other witnesses at today's hearing. For all practical purposes,
we are a surrogate for the Nation's gasoline and diesel fuel
consumers. Our primary mission is to secure adequate supplies
of gasoline to sell consumers at a competitive price. My
company is not involved in the exploration or production of
crude oil, nor is it a refiner. If companies like mine,
independent marketers of motor fuels, are unable to secure this
adequate supply, then we cease to be a competitive force in the
marketplace, and if independent marketers cease to be an
effective competitive force in the marketplace, then consumers
lose as retail gasoline and diesel fuel prices rise in response
to the supply shortage.
NACS and SIGMA have two primary messages for the
subcommittee today. First, we must collectively and
aggressively address the motor fuel supply problems that are
facing this Nation. Otherwise, the fuel price spikes we have
witnessed for the past decade in California and for the past 2
years in other parts of the Nation will become worse and more
frequent. Our failure to act has, is and increasingly will cost
consumers more at the pump.
Second, the debate over the future of our Nation's energy
policy need not be confrontational. Our Nation can have both a
clean environment and affordable, plentiful supplies of
gasoline and diesel fuel. However, in order to achieve these
twin goals, all sides of the current debate, industry,
government, consumers and environmentalists, must approach this
debate in the spirit of cooperation, not confrontation. This
includes a reasonable attitude and an understanding of the
tradeoffs.
The challenge facing the Congress today is straightforward.
We must preserve current and future improvements in air quality
while at the same time maintaining and expanding supplies of
motor fuels. Otherwise, our Nation's consumers will continue to
pay the price when supply shortages occur and retail prices at
the pump spike as they have done repeatedly over the past few
years.
As a Californian, I have become only too familiar with this
routine. NACS and SIGMA do not have a specific legislative
proposal to put forward at this time. Instead, we offer the
following principles which we are convinced must be part of any
legislative initiative: One, greater fungibility in motor fuels
and a stop to the balkanization of our Nation's gasoline and
diesel fuel markets. I cannot overemphasize the importance of
this particular point. The second point is fuel requirements
that recognize the limitations and strengths in the motor fuel
distribution system in the United States. Three, reasonable
implementation plans for new environmental initiatives. Four,
fuels programs that set performance goals rather than specific
formulas or mandates. And, five, it must be economically
feasible to upgrade the Nation's refining capacity to make
these clean fuels.
We look forward to working with this subcommittee and
others in Congress to explore legislative options in the months
ahead. We certainly offer our assistance to the subcommittee in
this exploration. The debate over our Nation's energy policy is
just starting, but the crisis has been occurring for some time.
We can either discuss potential solutions collectively now or
we can point fingers, cast blame and collectively suffer the
consequences as we have seen occur in the California
electricity crisis.
We encourage all parties to this debate to adopt fresh and
reasonable approaches. Both the environment and our Nation's
motor fuel consumers can be winners in this debate, but only if
all sides agree with the premise that environmental protection
and affordable energy are not inherently contradictory goals.
NACS and SIGMA assert that these goals need not be
irreconcilable.
Thank you for the opportunity to testify today.
[The prepared statement of Thomas L. Robinson follows:]
Prepared Statement of Thomas L. Robinson, Chief Executive Officer,
Robinson Oil Corporation Representing the National Association of
Convenience Stores and the Society of Independent Gasoline Marketers of
America
Good morning, Mr. Chairman and Members of the Subcommittee. My name
is Tom Robinson. I am Chief Executive Officer of Robinson Oil
Corporation of San Jose, California. Our company owns and operates 28
``Rotten Robbie'' retail gasoline outlets located in the San Francisco
Bay Area of California.
I appear before this Committee today as a representative of the
National Association of Convenience Stores (``NACS'') and the Society
of Independent Gasoline Marketers of America (``SIGMA''). NACS
represents an industry of more than 120,000 retail outlets, 75 percent
of which sell motor fuels. In 1999, convenience stores sold more than
117 billion gallons of motor fuels which accounts for more than 60
percent of American consumption.
SIGMA is an association of approximately 260 motor fuels marketers
operating in all 50 states. Together, SIGMA members supply over 28,000
motor fuel outlets and sell over 48 billion gallons of gasoline and
diesel fuel annuallyor approximately 30 percent of all motor fuels sold
in the nation last year.
Collectively, NACS and SIGMA members sell more than 75 percent of
the gasoline and diesel fuel purchased by American consumers each year.
I appreciate the invitation to appear at this hearing to present
testimony on our nation's energy policy as it relates to crude oil and
refined petroleum products. The companies I represent today are
different from all of the other witnesses at today's hearing. For all
practical purposes, we are a surrogate for the nation's gasoline and
diesel fuel consumers. Our primary mission is to secure adequate
supplies of gasoline to sell to consumers at a competitive price. My
company is not involved in the exploration or production of oil, nor
does it refine oil. If companies like mine, independent marketers of
motor fuels, are unable to secure this adequate supply, then we cease
to be a competitive force in the marketplace. And if independent
marketers cease to be an effective competitive force in the
marketplace, then consumers lose as retail gasoline and diesel fuel
prices rise in response to the supply shortage.
NACS and SIGMA have two primary messages for this Subcommittee
today. First, if we, collectively, do not address aggressively the
motor fuels supply crisis that is facing this nation in the near
future, then the price spikes we have witnessed, for the past decade in
California and for the past two years in other portions of the nation,
in gasoline, diesel fuel, and other petroleum products will become the
norm rather than the exception. Ultimately, if we fail to act, it will
be consumers who will pay for this inaction--through higher retail
motor fuels prices at the pump.
Second, the debate over the future of our nation's energy policy
need not be confrontational. Our nation can have both a clean
environment and affordable, plentiful supplies of gasoline and diesel
fuel. However, in order to achieve these twin goals, all sides to the
current debate--industry, government, consumers, and
environmentalists--must approach this debate in a spirit of
cooperation, not confrontation.
These are not new points for either the associations I represent or
for me. As a California marketer I have personally witnessed these
events happening over and over again. I personally have had the
opportunity to present these points to Congress in the past.
Unfortunately, our warnings have been ignored. However, it is my
personal hope that the renewed attention to the need for a national
energy policy will produce the results NACS and SIGMA have been calling
for over the years.
The challenge facing this Subcommittee and your colleagues in
Congress today is straightforward. We must preserve current and future
improvements in air quality while at the same time maintaining and
expanding supplies of motor fuels. Otherwise, our nation's consumers
will pay the price when supply shortages occur and retail prices at the
pump spike, as they have done repeatedly over the past three years in
several areas of the nation and over the past decade in California. And
these price spikes will not be limited to the additional expense of
producing the new cleaner fuels. Rather, they will be multiples of this
amount as the market drives prices far above the additional cost of
manufacture in times of short supply.
I firmly believe that our nation is facing a serious energy crisis
in the motor fuels refining and marketing industry. Dozens of petroleum
refineries have closed over the past two decades and new environmental
protection mandates, such as low sulfur gasoline and diesel fuel, are
likely to exacerbate this trend. Operating inventories of diesel fuel
and gasoline are at historically low levels and the nation's refineries
are operating at or near maximum capacity. Gasoline and diesel fuel
demand is increasing by between one and two percent each year, and yet
the number of refineries operating to meet this ever increasing demand
is decreasing. In 1990, there were essentially six different types of
gasoline being sold nationwide. Now, there are over 25 different
gasoline formulations, all being transported and distributed through
the nation's motor fuel infrastructure. The pressure of overlapping
federal, state and local regulations has crippled what was previously
one of the most efficient commodity distribution systems in the world--
the United States' fungible grade motor fuels distribution system.
As the saying goes, there is no free lunch. It should not surprise
policy makers that after tens of billions of dollars in environmental
compliance costs borne by refiners and marketers, the complete
fragmentation of the motor fuels distribution system, and the
politically-motivated diverse gasoline formulations adopted by various
states, there is a price to pay--a price that ultimately must be paid
by consumers of gasoline and diesel fuel. As long as the motor fuels
refining and distribution system works perfectly, supply and demand
stay roughly in balance and retail prices remain relatively stable.
However, if a pipeline or refinery goes down, overseas crude oil
production is reduced, the weather disrupts smooth product deliveries,
or a new regulatory curve ball is thrown at the motor fuels refining
and marketing industries, we do not have the flexibility to react and
counterbalance these forces.
If there is one point that I really want to emphasize it is the
point of ``no free lunch''. Our country can have clean and
environmentally friendly fuels and it can have plentiful supplies--
there will be a cost and it will be borne by the consumer (that is a
given)--our job is to make the lunch, if not free, at least a fair
bargain.
Californians have become somewhat accustomed to motor fuels price
volatility over the past five years because California is in fact the
laboratory for the fuels programs that EPA currently is forcing on the
rest of the country. When a refinery in California goes down, or a
pipeline breaks, the impact on prices is almost immediate. In
California, gasoline prices can increase by 40 cents per gallon within
two or three days. When prices get high enough to attract supply from
other markets, then eventually the supply shortage is alleviated and
prices start to fall.
This is the reason I am appearing before you today. The motor fuels
supply problems we have witnessed in California over the past decade
are now being visited on the rest of the nation. If we do not act,
independent motor fuels marketers (who I am very concerned about), and
gasoline consumers (who we all should be very concerned about), will
suffer in the near future.
The public policy solution to the current motor fuels supply crisis
will not be simple, but it must be addressed. NACS and SIGMA posit that
the solution is not the rollback of environmental protections. This
solution is a non-starter and should be discarded. Alternatively, NACS
and SIGMA encourage Congress to consider an effective plan to assist
our nation's domestic refining industry to meet the challenges posed by
ever more stringent environmental mandates and restore fungibility to
the nation's distribution system. This will increase gasoline and
diesel fuel supplies and keep retail prices down.
We must collectively arrive at a public policy that assures that
our nation's refineries, both large and small, stay in business, expand
to meet increases in demand, and produce clean, affordable motor fuels.
But this policy cannot be achieved without enlightened government
policies and programs. The capital expenditures that refineries must
make over the next six years in order to meet new environmental
mandates are huge. And many refineries, particularly small, regional
refineries, will be unable to justify those expenditures and will cease
operation--further straining motor fuels supplies. Already, this year,
Premcor announced that it would close its Blue Island refinery rather
than undertake the upgrades necessary to make low sulfur gasoline and
diesel fuel. Other refineries, owned by both large and small companies,
will follow suit in the next few years.
NACS and SIGMA urge Congress to assist these refineries in making
these upgrades. This assistance will be particularly important to
small- and medium-size ``regional'' refineries because the
environmental upgrade costs fall more heavily on these smaller
refineries because they do not enjoy the economies of scale that some
larger refineries possess to make these upgrades. And, in many cases,
these smaller refineries represent the ``marginal'' gallon of gasoline
and diesel fuel in many marketplaces--the gallon that is the difference
between adequate supplies and supply shortages.
Motor fuels marketers and refiners are not always on good terms. We
compete daily in the marketplace for customers and market share. So it
may seem odd to have motor fuels marketers recommend to Congress that
assistance must be given to our nation's domestic refining industry.
However, without adequate and diverse sources of gasoline and diesel
fuel supply, independent marketers cannot exist. Thus, the solution we
are proposing to Congress is the only way our segment of the marketing
industry can survive and can continue to provide consumers--your
constituents--with the most affordable, clean gasoline and diesel fuel
in the world.
NACS and SIGMA do not have a specific legislative proposal to put
forward at this time to put our joint recommendation into operation.
Instead, we offer the following principles which we are convinced must
be a part of any legislative initiative: (1) greater fungibility in
motor fuels and a stop to the balkanization of our nation's gasoline
and diesel fuel markets; (2) fuel requirements that recognize the
limitations and strengths of the motor fuel distribution system in the
United States; (3) reasonable implementation plans for new
environmental initiatives; (4) fuels programs that set performance
goals, rather than specific formulas or mandates; and (5) it must be
economically feasible to upgrade the nation's refining capacity to make
these clean fuels.
We look forward to working with this Subcommittee and others in
Congress to explore legislative options in the months ahead. We offer
our assistance to this Subcommittee in this exploration.
The debate over our nation's energy policy is just starting. But
the crisis has been occurring for some time. We can either discuss
potential solutions collectively now, or we can point fingers, cast
blame, and collectively suffer the consequences--as we have seen in the
California electricity crisis.
We encourage all parties to this debate to adopt fresh approaches
to the problems our nation is facing. Both the environment and our
nation's motor fuel consumers can be the winners in this debate, but
only if all sides agree with the premise that environmental protection
and affordable energy are not inherently contradictory goals. NACS and
SIGMA assert that these goals need not be irreconcilable.
Thank you for inviting me to present this testimony. I would be
pleased to answer any questions my testimony may have raised.
Mr. Barton. Thank you, Mr. Robinson. We do appreciate you
coming all the way from California to testify.
We would now like to hear from Mr. Richard Kassel, who is
the Senior Attorney for the Natural Resources Defense Council.
He comes from the East Coast in New York City. We welcome you,
sir. Your testimony is in the record and we ask that you
summarize it in 6 minutes.
STATEMENT OF RICHARD KASSEL
Mr. Kassel. Thank you, Mr. Chairman, members of the
committee. Thank you for the opportunity to testify today. At
NRDC we believe strongly that the Nation needs a balanced
energy policy that meets a series of equally important energy,
public health and environmental goals. At NRDC I run our Dump
Dirty Diesels campaign, so I will spend some time on EPA's
recent diesel rule. Other specific energy issues are addressed
by my colleagues in attachments 1 and 2. But as background,
here is where we are.
Once again America faces a national debate about its energy
future. Two distinct visions of this energy policy and energy
future are emerging. One vision focuses chiefly on extracting
as much energy as possible, mostly in fossil fuel form, in
hopes that supply can somehow catch up with demand. That vision
in the past has delayed capital investments in more efficient
power generation, hoping to maximize short-term profits by
squeezing extra years out of old, dirty plants. That vision
also minimizes the environmental impacts of a supply side
approach, including global climate change.
Users often count environmental regulation as an issue to
obscure its call for more drilling and more production. The
California situation and some of the responses are instructive
here. Contrary to suggestions from the White House and some
today, the California crisis and our national energy problems
are not caused primarily by pollution regulation and will not
be solved by drilling in the Arctic National Wildlife Refuge or
other sensitive areas. The real reasons for the California
crisis include a market structure that failed to ensure long-
term supplies as a hedge against volatile spot market prices,
rapid consumption growth in neighboring States that is
overloading the interstate power grid, cutbacks in electricity
infrastructure investments throughout the West due to
unfavorable expectations of return on those investments, and
reduced hydropower generation due to low rainfall.
As if that was not enough, investigations continue of
alleged anticompetitive practices by power generators. Rigorous
permit procedures have not been the reason for the lack of
growth in the California energy supply side.
There is an alternative vision that is also emerging. That
vision calls for encouraging innovation, investment and new
technology to meet our energy needs in an environmentally
responsible manner. This vision invests in the efficient use of
energy, renewable energy sources, places priority on using
energy resources in a way that is least damaging to our
environment and strives to minimize the public health harms of
the extracted resources that we continue to consume. It
promotes economic growth, industrial competitiveness and does
not force consumers to make sacrifices. It accepts the reality
of global climate change and invests accordingly.
NRDC believes that U.S. energy policy should follow this
alternative path which is described more fully in attachment 3.
We believe we can meet our energy needs through innovative
investments and policies, like investing in efficiency and
renewables, like providing tax credits for hybrid vehicles,
home insulation and smart growth, like improving the fuel
efficiency of tires and vehicles, and like strengthening
efficiency standards for appliances, buildings and so on.
I will spend my remaining time talking a bit about the
diesel rule and its role in ensuring clean, reliable goods
movement in America in the 21st century. Of course diesel
trucks provide the backbone of America's goods movement, yet
diesel pollution is one of our most enduring pollution
problems. Diesel trucks comprise roughly 7 percent of the
Nation's vehicles, but they consume more than 40 percent of the
Nation's transportation energy use and they emit more than half
of the asthma attack inducing and cancer causing particulates
in many urban areas and roughly one-third of the
transportation-related smog and acid-rain-causing nitrogen
oxides.
Recently EPA Administrator Whitman reaffirmed the agency's
commitment to cleaning up this pollution source, thereby
helping to assure them a responsible place in America's energy
future. Nearly eliminating the sulfur in diesel fuel will be
the key to this step just as removing lead from gasoline was
the key to cleaning up cars 20 years ago.
The diesel rule's substantial flexibility and lead time
will be critical to ensuring the widespread national
availability of the new low sulfur diesel as it comes to market
in the coming decade. This flexibility includes allowing a
percentage of the higher sulfur fuel to be sold in each
regional petroleum district from 2006 to 2009, allowing intra-
district trading among refiners to assure an efficient and
smooth transition, and providing extra provisions to help small
refiners, extra time and extra flexibility. It includes interim
dates for diesel at the refinery, at the terminal and at the
retail levels to keep the fuel flowing smoothly in a way that
providing a retail compliance date only has not done in the
past.
In sum, these options reflect past experiences with other
fuel shifts, and it is the right way to do it.
As we have heard, some individual firms will bear
significant costs to upgrade old refinery infrastructure but to
society the costs are reasonable. EPA estimates that diesel
fuel costs might increase by about 5 cents a gallon over the
course of the decade. Indeed, two of the largest diesel
sellers, BP and Tosco, have each announced that they will be
selling the 15 part per million diesel fuel in the West in the
next year at a comparable incremental cost without the benefits
of a national program's economy of scale.
We believe that this undercuts the statements of the
American Petroleum Institute and others in the oil industry who
have suggested that the costs will be much, much higher. We
also believe that it is worth noting that in the past,
environmental regulation history has been filled with examples
of regulations that did not cost nearly as much to implement as
industry advocates had previously estimated before they became
law.
In conclusion, our Nation stands at a historic moment and
we face a historic opportunity to develop an energy policy that
can meet many critical energy, economic and environmental
needs. Also, we finally have the technology to clean up many of
our most enduring and polluting energy sources. The diesel rule
is just one example of such a case. At NRDC we look forward to
working with the subcommittee and all interested parties toward
such a successful energy policy for the Nation. Thank you again
for the opportunity to testify.
[The prepared statement of Richard Kassel follows:]
Prepared Statement of Richard Kassel, Senior Attorney, Natural
Resources Defense Council
I. INTRODUCTION
Mr. Chairman and members of the Committee, thank you for the
opportunity to testify today. At NRDC,<SUP>1</SUP> we believe strongly
that the nation needs a balanced energy policy that meets a series of
equally important energy, public health protection and environmental
quality goals.
---------------------------------------------------------------------------
\1\ The Natural Resources Defense Council (NRDC) is a national,
non-profit environmental advocacy organization. Founded in 1970, NRDC
has over 400,000 members nationwide, and offices in Washington, DC, New
York City, Los Angeles and San Francisco.
---------------------------------------------------------------------------
Towards that end, I will limit my oral comments to a discussion of
the Environmental Protection Agency's recent step to insure that
America's future freight needs are met in a way that minimizes
environmental and public health impacts, and that ensures that diesel
fuel supplies remain adequate and protected from price and/or supply
spikes.<SUP>2</SUP> Other issues--including power plant emissions, new
source review, and our response to President Bush's reversal on carbon
dioxide--are summarized in NRDC's March 21, 2001 testimony before the
Senate Subcommittee on Clean Air, Wetlands, Private Property and
Nuclear Safety, attached hereto and incorporated herein as Attachment
1; environmental issues related to natural gas exploration, development
and production from submerged federal lands on the Outer Continental
Shelf (OCS) are summarized in NRDC's March 15, 2001 testimony before
the House Subcommittee on Energy and Mineral Resources, attached hereto
and incorporated herein as Attachment 2.
---------------------------------------------------------------------------
\2\ Control of Air Pollution from New Motor Vehicles: Heavy-Duty
Engine and Vehicle Standards and Highway Diesel Fuel Sulfur
Requirements, 66 Federal Register 5002 et seq. (January 18, 2001)
(hereafter, the ``Diesel Rule'').
---------------------------------------------------------------------------
II. BACKGROUND: ENERGY POLICY IN THE 21ST CENTURY
At the dawn of a new century, America finds itself once again
grappling with a chronic problem--how to provide enough energy for its
growing population and its growing economy. The United States has 5
percent of the world's population, but consumes nearly a quarter of the
world's energy supply. We use energy to heat our homes and our
businesses, power our computers and telephone systems, run our
automobiles and aircraft, drive our manufacturing plants and hospitals,
and deliver every good we use. In short, we have constructed an economy
and a way of life that depends on the ready availability of energy.
Two distinct visions of an energy policy for the United States have
emerged to meet these demands. One vision focuses chiefly on extracting
as much energy as possible, mostly in fossil fuel form (oil, coal and
natural gas), in hopes that supply can catch up with demand. The
alternative vision, however, calls for encouraging innovation and new
technology to meet our energy needs in an environmentally responsible
manner. This vision emphasizes efficient use of energy, places priority
on using energy resources that are least damaging to our environment,
and strives to minimize the environmental and public health harms of
the extractive resources we consume. It promotes economic growth and
American industrial competitiveness. This energy path would not force
consumers to make sacrifices. Instead it relies on improved
technologies that will eliminate waste while increasing productivity
and comfort.
NRDC believes that U.S. energy policy must follow this alternative
path. America can and must rely on the application of technological
advances already in place and readily available as a way to reduce
consumption and/or minimize environmental and public health impacts.
Such an approach will decrease America's reliance on foreign sources of
energy in the near- and long-term, protect the environment and the
public's health, provide for America's energy needs, and buffer the
economy against short-term swings in the market. NRDC's recently
published report, A Responsible Energy Policy for the 21st Century
examines these issues in detail. The executive summary is attached
hereto and incorporated herein as Attachment 3.
III. CLEANER TRUCKS ARE CRITICAL TO ENSURING CLEAN, RELIABLE GOODS
MOVEMENT IN THE 21ST CENTURY
Diesel trucks provide the backbone of America's freight movement,
yet diesel pollution has been one of America's enduring pollution
problems--with impacts that are far greater than the size of the
vehicle population would suggest. Diesel trucks comprise roughly 7
percent of the nation's vehicles, but their impact is far greater. More
than 40 percent of the nation's transportation energy use comes from
the nation's diesel trucks and buses, equivalent to more than 5,000,000
barrels of crude oil per day.<SUP>3</SUP> More than half of the
particulate matter found in some urban areas come from diesel
tailpipes--soot particles that have been linked to increased asthma
attacks, cancer and even premature death. Roughly one-third of the
transportation-related smog- and acid rain-causing nitrogen oxides come
from diesel tailpipes.
---------------------------------------------------------------------------
\3\ Oak Ridge National Laboratory, U.S. Department of Energy,
Transportation Energy Data Book, October 2000, p. 2-7.
---------------------------------------------------------------------------
Recently, EPA Administrator Christine T. Whitman reaffirmed the
agency's commitment to cleaning up these trucks--thereby helping to
assure them a responsible place in America's energy future. This
commitment came in the form of a complex, thorough rule making that
will bring about the most significant improvement in the environmental
performance of the nation's vehicles since the removal of lead from
gasoline two decades ago.
EPA's Diesel Rule was supported by more than 75,000 Americans who
provided written comments to EPA, and by an extremely diverse coalition
of supporters that included the Alliance of Automobile Manufacturers,
the California Trucking Association, International (formerly Navistar),
Tosco, BP, the Manufacturers of Emission Controls Association, the
American Lung Association, the U.S. Public Interest Research Group
(USPIRG), the Union of Concerned Scientists, the Clean Air Network, the
Clean Air Trust and others.
Briefly, EPA's Diesel Rule will do the following: Starting in mid-
2006, 97 percent of the sulfur in diesel fuel would be eliminated, in a
four-year phase-in that provides substantial flexibility for refiners,
special allowances to help small refiners, and significant flexibility
for vehicle and engine manufacturers. With sulfur largely eliminated,
drastic emissions reductions will be possible, using advanced emission
controls that cannot be used with today's high-sulfur diesel fuel.
Starting with the 2007 model year, soot particles from new diesel
engines will be slashed by 90 percent. By the end of the decade,
tailpipe emissions of smog-forming nitrogen oxides (NO<INF>X</INF>)
would be cut by 95 percent. As a result, diesel vehicles will achieve
gasoline-like emissions levels.
These emission reductions will be huge--equivalent to removing the
pollution from 13 million of today's 14 million trucks from the roads.
When fully implemented, the Diesel Rule will result in the elimination
of 2.6 million tons/year of NO<INF>X</INF>, 115,000 tons/year of non-
methane hydrocarbons, and 109,000 tons/year of particulates. This will
avoid 8,300 premature deaths, more than 23,000 cases of acute or
chronic bronchitis, 360,000 asthma attacks and other avoidable health
impacts annually.<SUP>4</SUP>
---------------------------------------------------------------------------
\4\ Statement of EPA Administrator Christine T. Whitman, February
28, 2001. See also 66 Federal Register 5002 (January 18, 2001).
---------------------------------------------------------------------------
There are three keys to the successful implementation of EPA's
Diesel Rule. First, the desulfurization of today's high-sulfur diesel
fuel is necessary to achieve the predicted health and emissions
benefits. Just as a small amount of lead in gasoline disables
automobile catalytic converters, even a small amount of diesel sulfur
will disable the most promising emission controls for nitrogen oxides
and will make the soot controls less effective. In other words, a
smaller, compromised sulfur cut (as has been suggested by the oil
industry) would render the EPA's proposed PM and NO<INF>X</INF> targets
unachievable.
Second, the Diesel Rule's substantial flexibility and lead-time
will be critical to the success of the Diesel Rule. Various
implementation options are available on a region-by-region basis to
ensure that there is widespread, national availability and supply of
the low-sulfur diesel fuel from the beginning of the program. However,
these options are designed (e.g., a percentage of higher-sulfur fuel
will be allowed from 2006-2009 in each regional petroleum district,
intra-district trading will be allowed, etc.) to provide important
implementation flexibility to small and other refiners who need it
during the first four years of the program. This will provide the
widespread fuel availability that is critical to every truck operator.
Also, this approach (including a four-year phase-in of the
NO<INF>X</INF> standard) will provide engine and vehicle manufacturers
with adequate lead time to efficiently phase-in the exhaust emission
control technology that will be used to achieve the health benefits of
the new standards.<SUP>5</SUP>
---------------------------------------------------------------------------
\5\ One other point is worth noting. By requiring that all highway
diesel fuel produced by refiners or imported to begin meeting the new
sulfur standard by April 1, 2006, and all highway diesel fuel at the
terminal level begin meeting the new sulfur standard by May 1, 2006,
EPA is providing adequate lead time to ensure that all highway diesel
fuel users can buy the low-sulfur diesel fuel by June 1, 2006 and is
providing a clear and useful road map to implementing the sulfur limits
in a manner that avoids market disruptions that could occur if only a
retail compliance date were provided.
---------------------------------------------------------------------------
Third, although some individual firms will bear significant costs
to upgrade old refining infrastructure, the costs are extremely
reasonable to society as a whole. EPA estimates that the Diesel Rule
will increase the cost of a new truck or bus by about one percent or
less, and that diesel fuel costs might increase by five cents per
gallon. Indeed, BP and Tosco have each announced that they will be
selling 15 ppm diesel fuel next year at comparable cost, completely
undercutting the excessive claims of other oil industry commenters. In
sum, EPA estimates that the benefits outweigh the costs by sixteen to
one.<SUP>6</SUP> It is worth noting that even these cost estimates are
likely to be high--the past three decades of environmental regulations
are filled with examples of air pollution regulations that did not cost
nearly as much as industry advocates had previously estimated.
---------------------------------------------------------------------------
\6\ See footnote 4.
---------------------------------------------------------------------------
IV. FURTHER DETAILS ON THE HEALTH THREAT OF DIESEL EMISSIONS
More than fifty studies show links between particulate matter
generally and a wide range of health impacts, including increased
asthma attacks and emergencies, endocrine disruption,<SUP>7</SUP>
numerous cardiopulmonary ailments, cancer and premature
death.<SUP>8</SUP> Nitrogen oxides contribute to ground-level ozone
formation, acid deposition, nutrient pollution of waterways, and
secondary (i.e., atmospheric) formation of particulate matter.
---------------------------------------------------------------------------
\7\ Endocrine/Estrogen Letter, June 2, 2000, p. 6. Researchers at
the Science University of Tokyo found testicular abnormalities in male
mice that inhaled diesel exhaust.
\8\ NRDC, Exhausted by Diesel, Third edition, May 1999, pp. 5, 8.
---------------------------------------------------------------------------
While numerous studies have concluded that the particulate matter
and nitrogen oxide emissions in diesel exhaust are harmful to human
health, NRDC is increasingly concerned about the growing evidence that
diesel particulates are associated with increased cancer risk. Diesel
exhaust has long been considered to be at least a probable human
carcinogen by the National Institute of Occupational Safety and Health
(NIOSH) and the World Health Organization's International Agency for
Research on Cancer (IARC).
In the past two years, three actions by various government bodies
moved the nation further along this path: In July, EPA staff reiterated
its prior conclusion that diesel exhaust is a likely human carcinogen,
based on compelling epidemiological studies.<SUP>9</SUP> We expect the
Clean Air Scientific Advisory Committee to finalize its work on this
document at its October meeting. In August 1998, the California Air
Resources Board (CARB) formally declared diesel particulate exhaust to
be a toxic air contaminant.<SUP>10</SUP> And in December 1998, the
National Toxicology Program advisory board recommended that diesel
exhaust particulates be listed as ``reasonably anticipated to be a
human carcinogen'' in the ninth edition of the Congressionally-mandated
Report on Carcinogens.<SUP>11</SUP>
---------------------------------------------------------------------------
\9\ U.S. EPA, Office of Research and Development, Health Assessment
Document for Diesel Emissions, EPA/600/8-90/057E, July 2000, SAB Review
Draft.
\10\ California Air Resources Board, Resolution 98-35 (listing of
diesel particulate as a toxic air contaminant), adopted August 27,
1998.
\11\ See <http://www. dieselnet.com/news/9812ntp.html>
---------------------------------------------------------------------------
Diesel's link to cancer results in thousands of avoidable cancers
nationwide. The association of the nation's state, territorial and
local air pollution officials estimates that current levels of diesel
pollution result in over 125,000 potential lifetime cancers nationwide,
based on their extrapolation of the MATES-II study.<SUP>12</SUP>
---------------------------------------------------------------------------
\12\ State and Territorial Air Pollution Program Administrators/
Association of Local Air Pollution Control Officials (STAPPA/ALAPCO),
Cancer Risk from Diesel Particulate: National and Metropolitan Area
Estimates for the United States, March 2000. This report was based on
calculations of cancer risk first published in South Coast Air Quality
Management District, Multiple Air Toxics Exposure Study (MATES-II),
Draft Final Report, November 1999.
---------------------------------------------------------------------------
NRDC is also especially concerned about the growing incidence of
asthma in our nation, as well as the association between diesel
particulate matter and asthma attacks. A recent study estimated that
asthma cases would double by 2020, hitting one out of every five
American families. <SUP>13</SUP> Nobody knows what causes asthma, but
numerous studies have found associations between pollution (i.e., both
ozone and particulate levels) and acute respiratory symptoms, including
asthma attacks and hospitalizations.<SUP>14</SUP>
---------------------------------------------------------------------------
\13\ Pew Environmental Health Commission, Attack Asthma: Why
America Needs a Public Health Defense System to Battle Environmental
Threats, May 2000.
\14\ Regarding ozone associations, see, e.g., Gilmour MI,
``Interaction of air pollutants and pulmonary allergic responses in
experimental animals,'' Toxicology 1995 Dec 28; 105(2-3): 335-42;
regarding PM associations, see, e.g., Nel AE, Diaz-Sanchez D, Ng D,
Hiura T, Saxon A, ``Enhancement of allergic inflammation by the
interaction of diesel exhaust particles and the immune system,'' J
Allergy Clin Immunol 1998 Oct; 102 (4 Pt 1): 539-54.
---------------------------------------------------------------------------
V. WHY THE OIL INDUSTRY COUNTER-PROPOSAL DIDN'T WORK
Throughout the comment period, various oil industry representatives
suggested a counter-proposal of 50 ppm. NRDC continues to view this
approach as completely unworkable.
At a sulfur level of 50 ppm, PM traps are likely to suffer high
failure rates, leaving oxidation catalysts that yield only a 20 percent
PM reduction <SUP>15</SUP> as the most likely PM after-treatment
technology. While some PM traps (including the most promising
continuously regenerating traps) can operate at 50 ppm, trap clogging
and failure is a serious problem at this level, due to the formation of
sulfate PM. Fuel economy also suffers, as a result of increased
regeneration needs. As a result, it would be difficult--if not
impossible--for engine, aftertreatment and/or vehicle manufacturers
and/or sellers to warrant such a trap for the full useful life of the
vehicle, and fuel economy-sensitive vehicle users might not welcome the
technology. Consequently, if EPA had adopted a 50 ppm sulfur cap,
manufacturers and sellers would be likely to opt for the less effective
oxidation catalyst, rendering the proposed 0.01 g/bhp-hr PM standard
unachievable.
---------------------------------------------------------------------------
\15\ Statement by EPA Office of Transportation and Air Quality
(OTAQ) Director Margo T. Oge, June 19, 2000, at EPA's hearing on the
Diesel Rule, pp. 53, 55.
---------------------------------------------------------------------------
Likewise, under a higher-sulfur approach, engine manufacturers and
vehicle sellers would likely opt for selective catalytic reduction
(SCR) as their preferred NO<INF>X</INF> after-treatment because it is
less sulfur-sensitive than NO<INF>X</INF> adsorbers and other
NO<INF>X</INF> after-treatment technologies that are in development.
NO<INF>X</INF> adsorber efficiencies are dramatically reduced when
sulfur contacts the NO<INF>X</INF> storage bed. Perhaps for this
reason, the Manufacturers of Emission Controls Association has
testified that industry efforts to develop an effective NO<INF>X</INF>
adsorber would cease if EPA had chosen a 50 ppm cap.<SUP>16</SUP> While
SCR seems capable of significant emission reductions, it also requires
the development of a nationwide urea infrastructure that would cost
billions of dollars to install, operate and maintain. As with oxidation
catalysts, it seems unlikely that the NO<INF>X</INF> standard would be
achievable with an SCR-only strategy.<SUP>17</SUP>
---------------------------------------------------------------------------
\16\ Testimony of Bruce Bertelson, Manufacturers of Emissions
Control Association, June 19, 2000, as reported in the transcript of
EPA's New York hearing on the Diesel Rule, June 2000, p. 56.
\17\ EPA OTAQ Director Oge noted that EPA estimated that a 50 ppm
sulfur limit would yield NO<INF>X</INF> reductions of 20 percent,
presumably because of the perceived limits of SCR technology. See
footnote 15 above.
---------------------------------------------------------------------------
It is worth reiterating that the oil industry's preferred 50 ppm
sulfur limit would have had a negative effect on the fuel economy of
the nation's trucks and buses--hardly an issue for the industry that
sells the fuel. For example, NO<INF>X</INF> adsorbers are expected to
consume diesel fuel as they cleanse themselves of stored sulfates. As
noted above, PM trap regeneration is inhibited by diesel fuel's
sulfur--leading to increased PM loading, increased exhaust
backpressure, and decreased fuel economy.<SUP>18</SUP> In other words,
the higher the sulfur cap, the lower the fuel economy.
---------------------------------------------------------------------------
\18\ Memorandum from former EPA Official Michael P. Walsh to
Interested Parties, May 17, 2000, p. 10.
---------------------------------------------------------------------------
CONCLUSION
With a new century, a new President and a new Congress, our nation
stands at a historic moment, and we face a historic opportunity to
develop an energy policy that can meet many critical needs. Innovative
technologies and policies allow us to finally move away from an energy
policy that is focused primarily on increasing supply, and towards an
energy policy that meets our energy needs while simultaneously meeting
our environmental and public health needs. Further, we finally have the
technology to clean up many of our most polluting energy sources. The
Diesel Rule is just one example of such a case.
At NRDC, we are excited about the possibilities for the alternative
path discussed at the outset of this testimony. We look forward to
working with the Committee and all interested parties towards such a
successful energy policy for the nation.
Thank you again for the opportunity to testify today. For further
information, please do not hesitate to contact Richard Kassel at (212)
727-4454 or at <rkassel@nrdc.org>.
Attachment 1
Prepared Statement of David G. Hawkins, Director, Air & Energy
Programs, Natural Resources Defense Council Before the Subcommittee on
Clean Air, Wetlands, Private Property, and Nuclear Safety, Committee on
Environment and Public Works, U.S. Senate, March 21, 2001
Mr. Chairman, members of the Subcommittee, thank you for your
invitation to testify on behalf of NRDC, the Natural Resources Defense
Council, regarding the Clean Air Act and national energy policy. NRDC
is a nonprofit citizen organization dedicated to environmental
protection, with more than 400,000 members nationwide. Since 1970, NRDC
has followed closely the implementation of the Clean Air Act and has
sought to promote actions under the law that carry out Congress' policy
decisions to protect public health and the environment from harm caused
by air pollution.
With all respect to the Subcommittee, my first point today is to
suggest that the title of this hearing does not capture the issue
before us. Rather than discussing ways to change the Clean Air Act to
harmonize with an independently determined national energy policy, we
need to define our tasks as identifying the goals that are important to
Americans in the areas of energy, public health protection, and
environmental quality and then designing energy and clean air policies
that support these goals. I think any objective view of the historical
record would demonstrate that the way we have pursued our energy goals
in the past has interfered with Americans' desire for clean air, rather
than the other way around. Today's hearing appears to be prompted by
concerns that the Clean Air Act is interfering with meeting the
nation's energy needs. While I welcome the opportunity to speak to
these claims, I think it would be healthy for your sister committee,
the Senate Committee on Energy and Natural Resources, to hold a hearing
to review widespread concerns regarding the impact of our energy
policies on public health and the environment. NRDC certainly would
appreciate any encouragement you can give your colleagues on that
Committee. Perhaps Senators Campbell, Graham, and Wyden, who serve on
both Committees, could form an Health, Energy, Environment Harmony
Caucus!
In this testimony I would like to touch on three topics: the need
to clean up electric power plants, the flaws in President Bush's change
of position on including carbon dioxide in that program, and the role
of new source pollution control requirements in the nation's air
quality management program and useful improvements to that program.
I. THE NEED FOR A COMPREHENSIVE PROGRAM TO CLEAN UP POLLUTING POWER
PLANTS.
Today, electricity generation imposes an enormous burden of air
pollution on the American public and the great bulk of that pollution
comes from plants that are not meeting technically feasible, affordable
modern environmental performance standards. This fact is the product of
actions, both lawful and unlawful, that have resulted in an electric
generating fleet that is older, dirtier, and less efficient than is
needed to protect health and the environment.
As I explain in greater detail in Part III of my testimony,
Congress in 1970 drew a distinction between existing pollution sources
and sources that are new or modified: new and modified power plants
were required to minimize air pollution through performance standards
based on state-of-the-art clean power techniques, while existing,
unmodified plants were required to clean up only to the degree needed
to address local air quality problems.
There were several reasons for this approach. First, most air
quality problems were perceived as local. Second, at the time, the
electric power industry was mostly a local one. Third, the exemption
was assumed to be temporary--Congress believed existing plants would
retire and be replaced by new ones meeting modern performance
standards.
Now, nearly 30 years later, the facts on the ground have changed.
We know now that many of our most threatening air pollution problems
are not local--they are regional, national, and even global. Our
electric generating industry is rapidly becoming a national industry
with all parts of the country connected by wires over which the product
can move anywhere in three large regions of the lower 48 states. And
those powerplants that were supposed to retire have, by lawful and
unlawful means, kept on running like the Energizer Bunny. As a result,
pollution from electric power generation is a dominant cause of nearly
all our most pressing air quality related problems.
Four pollutants cause a host of public health and environmental
damage: sulfur dioxide, nitrogen oxides, mercury, and the pollutant no
one can get away from, carbon dioxide, the dominant greenhouse gas.
Electric generation in the U.S. is the largest single source of these
four horsemen of air pollution. Electric powerplants release over two-
thirds of total U.S. emissions of sulfur dioxide; they release forty
per cent of U.S. carbon dioxide; and they release about one-third of
the nation's nitrogen oxide and mercury pollution.
These pollutants are responsible for a Pandora's box of health and
environmental harm:
<bullet> fine particles, formed from sulfur and nitrogen emissions,
that contribute to tens of thousands of premature deaths in the
U.S. each year;
<bullet> smog, that plagues our major cities, and causes respiratory
attacks in kids and seniors;
<bullet> acid rain, that still damages lakes, streams, forests, and
monuments;
<bullet> regional haze, that spoils trips to national parks for
millions of visitors annually;
<bullet> nitrogen emissions, that help over-fertilize estuaries,
including the Chesapeake Bay, Long Island Sound, Pamlico Sound,
and the Gulf of Mexico, leading to dead zones where aquatic
life perishes;
<bullet> mercury contamination of lakes and streams, that has lead 40
states to issue continuing advisories of the fish that store
this toxin; and,
<bullet> carbon dioxide driven climate change, that threatens ``
<bullet> to kill millions of people through more destructive floods,
droughts, heat waves, intense storms, and climate-related
infectious disease;
<bullet> to produce sea-level rise that would inundate the homes of
tens of millions of people and cost hundreds of billions of
dollars in damages and for countermeasures in those countries
with the resources to respond; and
<bullet> to destroy complex ecosystems that have evolved over thousands
of years under the influence of climate cycles that were not
destabilized by fossil fuel combustion.
Consider also the energy we waste with current generating
technology. Today's fossil generating plants are about 34% efficient in
converting the chemical energy found in fossil fuels into electricity.
What that means in real terms is that we must mine three tons of coal
and pollute the air with the emissions caused by burning three tons of
coal just to get electricity with the energy equivalent of one ton of
coal. In fact, the energy we waste each year in making electricity is
greater than the total energy in all the coal we burn each year in the
United States. Stated another way, if we could increase the efficiency
of our power plant fleet from about 34% to around 68%, we would cut
sulfur, nitrogen, mercury, and carbon pollution from electricity
generation in half, even with no change in the fuel mix.
Our plague of pollution problems and wasted energy is the result of
policies and practices that still allow 30, 40 and 50-year old plants
to keep operating without meeting modern performance standards for
pollution or efficiency. In addition to harming health and the
environment, the de facto grandfather status of most of today's power
plants creates unfair competition in the electricity market. In effect,
the patchwork of lenient or nonexistent rules at the state and local
level, combined with evasion of federal requirements, has created
pollution havens where grandfathered plants can engage in domestic
environmental dumping, distorting fair energy markets.
As we move to modernize the electricity market economically, we
must accompany it with modern environmental performance measures. A
central purpose of electric industry restructuring legislation is to
create a free and fair, competitive market for energy services. But
fair competition is impossible in an environment where air pollution
performance requirements are balkanized. Because electricity markets
are connected by wires, different pollution standards promote a
``survival of the filthiest'' market, where the power plants that are
the dirtiest, run harder because they can slightly underbid cleaner
generators.
These market distortions do not deliver consumer benefits. The
price differences caused by different pollution requirements are quite
small--usually 2-3 mills per kilowatt-hour or less--but these small
differences are enough to give dirtier producers a decisive market
advantage in many areas. The market distortions also discourage
investment in new, cleaner, more efficient generation and in renewable
resources.
Under the current rules, an entrepreneur who seeks financing for,
say, a clean, high-efficiency natural gas plant can point out that it
emits no sulfur, no mercury, and much less nitrogen oxides
(NO<INF>X</INF> ) and carbon dioxide (CO<INF>2</INF>) than the
competition. But, with the partial exception of sulfur (for which
allowance programs exist under the acid rain law), this superior
environmental performance has no economic value in the market place.
The financier wants to know whether the plant will be able to run more
cheaply than the competition. If the competition is a group of
grandfathered coal-fired power plants, the answer often will be no, and
financing may go to a higher-polluting new plant rather than a clean
one.
To address the egregious health, environmental, and economic flaws
in the current air pollution control programs, a number of bills were
introduced in the last Congress and last week the bipartisan ``Clean
Power Act of 2001,'' S. 556, was introduced in the Senate. Among its
lead sponsors are three members of this Committee, Senators Lieberman,
Clinton, and Corzine. The Clean Power Act establishes industry-wide
caps on tons of each of the ``four-horsemen'' pollutants: sulfur
dioxide (SO<INF>X</INF>), NO<INF>X</INF>, CO<INF>2</INF>, and mercury.
The caps on SO<INF>X</INF> and NO<INF>X</INF> would provide building
blocks for meeting health-based smog and fine particle standards
(challenged unsuccessfully by industry in the Supreme Court) and would
reduce acid rain further. The mercury cap would attack the largest
single remaining U.S. source of this pollutant. And the CO<INF>2</INF>
cap would return the industry's emissions to 1990 levels--the target
set in the 1992 Rio Climate Treaty that the first President Bush signed
and that the Senate has ratified.
With the exception of mercury, for which there are both local and
regional concerns, the bill would implement the cap through market-
based approaches where power generators could trade their clean-up
obligations to meet the caps in the most efficient manner. One possible
market mechanism, a ``generation performance standard,'' would define
the amount of pollution that could be legally emitted for a kilowatt-
hour of electricity from fossil generation, thus creating a level
playing field for those generators. This system will directly reward
cleaner, more efficient generators.
In contrast to the current situation, if the Clean Power Act were
now law, a developer of a new clean power plant would be able to show
direct tangible economic benefits from its reduced environmental
impact. Because the new plant would be able to generate electricity
below the average pollution performance required under the law, every
kilowatt-hour generated would also generate another source of revenue:
emission allowances that can be banked or sold on the market. This
additional revenue stream would make financing such projects that much
more attractive.
A final benefit of these integrated pollution cleanup bills is that
they provide a clear roadmap for business in planning long-term
investments. The history of clean air progress has developed as a
series of unconnected initiatives, typically focused on a single
pollutant. Today, we can survey the next 10-15 years and be confident
that additional measures will be pursued to reduce the four horsemen
pollutants. But if we pursue the traditional approach, no one can say
now with confidence, when, how deep, and in what order these important
steps will occur.
As a result, business planners must approach today's investments by
making educated guesses about environmental requirements. Billions of
dollars are changing hands as generation plants are sold under state
restructuring programs. One thing we can say for sure is that someone
is guessing wrong. By enacting integrated cleanup programs, Congress
could both provide certainty and reduce the tendency to prolong
dependence on existing outmoded plants through the traditional process
of applying end-of-pipe cleanup devices normally aimed at controlling
only one pollutant.
In short, we know we need to reduce a range of damaging pollutants
from the electric generating sector; we know how to do it; and we know
that failure to take these steps now will increase damage, prolong
uncertainty, and encourage unfair competition. Mr. Chairman and members
of the Subcommittee, we hope you will seize the opportunity presented
by the Clean Power Act to harmonize clean air and energy goals. By
doing so you can address the key issues that face the industry and the
public in a manner that produces a cleaner, more efficient, more
sustainable, and more competitive electricity market that delivers
energy services for lower costs.
II. PRESIDENT BUSH'S POSITION ON CARBON DIOXIDE
As you know, on March 13, 2001, President Bush announced that,
despite his campaign promise to support emission reductions for all
four major pollutants from power plants, including carbon dioxide, he
now opposes inclusion of CO<INF>2</INF> in a power plant control bill.
You may also know that NRDC and virtually every other environmental
organization strongly objected to the President's change of position,
the reasons he gave for his decision, and the way in which he made his
decision.
From what I have said in Part I of my testimony you can understand
that NRDC believes that control of carbon dioxide from power plants is
as critical to health and the environment as control of the other three
pollutants. Requiring the electricity industry to return its carbon
emissions to 1990 levels is a practical and necessary first step in
demonstrating that the U.S. intends to honor its commitment under the
1992 Rio Climate Treaty, which, as I said, has been ratified by the
Senate. Failure to include carbon dioxide in a clean-up bill would mean
the legislation would not be comprehensive. By decoupling carbon
emissions from control strategies on the other three pollutants, a
limited bill would increase the tendency for plant owners to make
short-sighted investments in control methods that might reduce sulfur,
nitrogen, and mercury but would perpetuate high levels of carbon
emissions. Indeed, a narrow-focus strategy that slaps controls on
inefficient, outmoded generators could well extend the life of such
facilities further, wasting energy and making it more difficult and
costly to reduce carbon when Congress decides (as I believe will
happen) to take on that threat to planet. A narrow bill would send a
confusing signal to investors: is carbon really off the table or will
it be put back on in a couple of years just after we have selected a
strategy that ignores that pollutant? A two-step program to control the
four major pollutants from electric generators will cost consumers more
in the end than enacting a comprehensive bill now.
Let me turn to the reasons President Bush gave in his March letter
for his about-face. The first reason cited by the President is his
claim that carbon dioxide is ``not a ``pollutant' under the Clean Air
Act.'' To start, the claim that carbon dioxide is not a Clean Air Act
pollutant is irrelevant as a justification for abandoning his pledge to
support a new law (imagine President Lincoln announcing he would oppose
adoption of the 14th Amendment because he had learned that the original
Constitution did not prohibit discrimination). However, President Bush
is wrong on the law as well as on his logic.
To my knowledge, the only official interpretation of the status of
carbon dioxide under the Act was issued in a legal memorandum prepared
in April 1998, by the chief agency officer authorized to interpret the
Act, EPA General Counsel Jonathan Z. Cannon (copy attached). In his
memorandum, Mr. Cannon concluded that while not yet covered by
regulations issued under the Act, carbon dioxide met the statutory
criteria for a ``pollutant'' as the term is defined in the law. Indeed,
as pointed out by Mr. Cannon, carbon dioxide is mentioned by name in a
list of multiple pollutants from fossil fuel power plants for which
Congress directed EPA to develop pollution prevention programs. Sec.
103(g). To be sure, this section of the law does not by itself confer
authority on EPA to regulate carbon dioxide, just as it does not
provide regulatory authority for any of the other pollutants listed in
section 103(g) that EPA has regulated under other provisions of the
Act. While lawyers will argue about the scope of EPA's current
authority to regulate carbon dioxide, the Act is clear that carbon
dioxide is a pollutant. (See attached NRDC Fact Sheet.)
Perhaps some will argue, Mr. Cannon was general counsel in the last
administration and we now have a new president. It is true that
President Bush is the Chief Executive of the United States but his oath
under the Constitution is to faithfully execute its laws, not to make
them up. If President Bush did not rely on Mr. Cannon's existing
interpretation of the Act, on what official's legal interpretation did
he rely? Was a memorandum of law prepared for the president's
consideration? If so, by whom? We don't know the answers to these
questions and we should know, to promote confidence in the way the
president reaches his decisions.
President Bush's second reason for changing his position was an
assertion that including carbon dioxide in new legislation would lead
to significantly higher electricity prices. Was this conclusion based
on any analysis performed by his administration? Apparently not. His
letter cites one report for the high cost conclusion: ``Analysis of
Strategies for Reducing Multiple Emissions from Power Plants.'' I will
say more about this report in a moment. First, let me point out that
while the president apparently did not ask his own appointees to
prepare an analysis for him, there were four other reports done in the
last six months regarding the costs of programs to reduce power plant
emissions of carbon dioxide. The other four studies, including a
November, 2000, Department of Energy report, Scenarios for a Clean
Energy Future, concluded that substantial carbon dioxide reductions
from the electric sector could be achieved at very low costs. For
example, the DOE ``Clean Energy Future'' study found that electric
sector carbon dioxide emissions could be reduced to 1990 levels with a
net increase in Americans' energy bills of less than 1% in the year
2010 and with large energy bill savings in later years due to more
efficient use of energy. Citations to this and the other studies are
attached.
Thus, there were five studies the president could have consulted
regarding the costs of carbon controls--four that found low to modest
costs and one outlier that forecast high costs. Unfortunately, his
letter leaves the impression that his staff seized on the EIA analysis,
not based on any broad review of the issue but because it contained the
conclusion that could be used to rationalize the president's change of
position. If this is correct, it is quite striking. The president made
an explicit and clear policy commitment during the campaign. His
surrogates repeated his pledge in additional public appearances during
the campaign. One would think that before abandoning such an explicit
promise, the president would have directed a thorough review by his own
administration team of policy options and the costs of those options to
determine whether there was a real conflict between his promise and
Americans' energy goals. At the very least, one would have hoped that
the president's staff would have recommended a process that included an
examination of all relevant recent analyses and, when presented with a
conflict in those analyses, that more time would have been taken to
determine which cost analyses were more reliable. While the president's
letter states the information he received ``warrants a reevaluation,''
he didn't announce he was undertaking a reevaluation. He just made a
decision that flatly contradicted his campaign pledge. All of these
facts suggest that careful policy analysis had very little to do with
the president's decision.
What should we make of the report cited by the president? While he
called it a ``Department of Energy Report,'' the analysis is, in fact,
a ``Service Report'' prepared by the Energy Information Administration
(EIA) for submission to former Congressman David McIntosh in response
to his request for an analysis of emission reduction scenarios
specified by the congressman. Now EIA is respected for its analytical
capabilities but it is also clear that when Congressmen McIntosh
requested the analysis, his staff knew before the EIA computers were
turned on that the result would forecast high costs for carbon
controls. Given Mr. McIntosh'' vehement opposition to any form of
carbon emission reductions, this prospect probably did not make him
unhappy.
Is EIA's predictable result due to deliberate deception by EIA?
Certainly not. It is an artifact of the approach EIA used to evaluate
the policies specified by Mr. McIntosh. The analytic approach and
assumptions that EIA adopts in modeling electric services options
guarantee that any policy aimed at significantly reducing carbon from
electricity generators will be calculated as having a high cost. One
would have more confidence in the reality of this prediction if there
were no credible conflicting conclusions. But, in fact, the Department
of Energy Clean Energy Future study I mentioned above, uses the same
model run by EIA and reaches dramatically different conclusions. A
principle reason for this is that in DOE's runs, analysts incorporate a
number of sensible policies designed to help Americans use electricity
and natural gas more efficiently. These policies lower consumer energy
bills and make it possible to clean up power plants at much lower
costs. For example, the DOE analysis ignored by the president includes
policies found in Chairman Smith's recently reintroduced Energy
Efficient Buildings Incentives Act, S. 207, also sponsored by Senators
Reid, Lieberman, and Chafee of this Committee. By examining a
harmonized set of energy and clean air policies such as those
championed by Chairman Smith, the DOE Clean Energy Future report comes
much closer to the truth about the costs of smart carbon reduction
programs than the EIA service report done at Mr. McIntosh'' request.
President Bush also refers to concerns about current high energy
prices in California and other states as supporting his new position on
carbon dioxide. This point really does not withstand analysis. Prices
are high today and generation capacity in California and the West is
constrained. But any legislation enacted by Congress for power plants
will not affect energy supplies today. Instead, a reduction timetable
will be some years in the future, allowing time to install pollution
controls and for repowering or replacement of the very plants whose
breakdowns contributed to California's problems in the last year. As
explained in attached NRDC fact sheets, environmental requirements have
not caused today's electricity price and supply problems and no amount
of scapegoating will change the facts or improve our chance of
designing effective remedies.
Finally, I must comment on the president's statements regarding the
Kyoto Protocol in his letter. Just last month the president's foreign
policy officials requested and received a delay in the resumed meeting
of the parties to the Rio Climate Treaty, previously scheduled for May
2001. The State Department requested this delay because, it told other
countries, the administration was conducting a comprehensive review of
climate change policy that could not be completed by the May meeting.
How is that need for a thorough review to be squared with the
president's apparently definitive denunciation of the Kyoto agreement
in his letter? Granted, in this case, his statements are consistent
with views he expressed on the campaign trail. But why not await the
review he has promised before reaffirming views he formed without
benefit of such an analysis? The president says the Kyoto agreement
would ``cause serious harm to the U.S. economy.'' What analyses did he
review in reaching this conclusion? The previous administration
published analyses concluding that compliance with the agreement would
have less than a 1% impact on forecasted GDP, equivalent to adding no
more than a month or two to a ten-year forecast for achieving a vastly
increased level of wealth in this country. The president may well
disagree with the previous administration's analysis but on what basis?
Wouldn't he and the American public be benefited by preparation of the
best objective analysis that the new administration is capable of
producing? Why the hurry to issue the verdict before hearing the
evidence?
The other thing the president had to say about the Kyoto agreement
was that it was unfair because it does not establish the same reduction
targets for China and India as for the United States. In my opinion,
this is a shameful statement. Consider that the U.S. and other
developed countries are among the wealthiest nations on earth and that
they have put into the atmosphere about 75% of the carbon dioxide that
has accumulated since the start of the industrial revolution 150 years
ago. Consider also the relative economic ability of the U.S., India,
and China to take the first steps in demonstrating that we can fight
global warming. The mortality rate for children under 5 years old in
India is thirteen times higher than in the U.S.; China's mortality rate
for these children is 6 times higher than ours. In India, close to half
the population attempts to survive on less than $1 per day; in China,
one in five people lives on this level. Consider electricity
consumption: the average American uses more electricity in a day than
the average person in India uses in a month; compared to China the
average American uses more electricity in a month than a Chinese person
uses in fifteen months.
For the president to demand that India and China make equal
commitments to control carbon dioxide as a condition for the U.S. to
take a first step along with other wealthy nations, flies in the face
of Americans' vision of our country as a compassionate and responsible
world citizen. America's heart is bigger than this. The president spoke
of compassion during the campaign and I have to believe his heart is
bigger than this too.
There is a practical point to be made here as well. China and India
are important nations to engage in global strategies to fight climate
change. The U.S. certainly needs a strategy to break down barriers with
these countries and produce a more cooperative basis for discussion of
all countries' global warming responsibilities over time. But what
possible strategy could underlie the President's decision to single out
China and India for criticism in his letter? Did Secretary of State
Powell advise that this would be helpful in moving those two countries
to a position that is less contentious on this issue? That seems
unlikely.
NRDC hopes the president actually will evaluate and reevaluate his
positions on carbon dioxide from power plants and the Kyoto agreement,
rather than flatly reversing one position and restating the other with
no current analysis to inform his decisions. If he does so, he could
rebuild some badly needed bridges that are now in flames.
III. THE CLEAN AIR ACT'S DUAL-TRACK AIR QUALITY STRATEGY
Now I want to turn to the role of new source review under the Clean
Air Act. Members who read my testimony before this Subcommittee in
February, 2000, will find this material familiar, since I repeat in
this section, what I said at that time.
In 1970 Congress adopted a dual-track program to protect and
enhance our nation's air quality. The first program calls on states to
adopt comprehensive pollution control programs under state law to
achieve air quality objectives set forth in National Ambient Air
Quality Standards (NAAQS) adopted by EPA. This ambient program is an
example of the ``assimilative capacity'' approach to environmental
management--based on the belief that the environment can assimilate a
certain amount of dirt or toxins released from human activities without
causing identifiable harm. This approach starts by identifying exposure
levels of pollution that current research indicates may be tolerable
for humans and ecosystems and then seeks to reduce emissions from
pollution sources enough to meet the maximum tolerable exposure
targets.
The 1970 Act's ambient management program strengthened previous
efforts enacted by Congress in the 1960s and relied on states to set
control rules for pollution sources at levels just tough enough to
bring total pollution down to the level of the national ambient
standards. Implicit in this approach is that an area's air quality
determines the amount of clean-up required of sources. Even if there
are readily available means of reducing a source's pollution, a state
is not required to adopt such measures if not needed to meet the NAAQS.
But Congress did not rely exclusively on the assimilative approach
to air quality protection in the 1970 Act. Congress adopted another
strategy designed to minimize air pollution by requiring sources to
meet emission performance standards based on modern ``best practices''
in pollution abatement. The performance standard approach does not set
required levels of control based on the air quality conditions of
particular areas. Rather, the required emission reductions are
determined by assessing how much polluting processes can be cleaned up,
taking account of technical and economic constraints.
Congress expected that future ambient goals would likely be more
ambitious than 1970's defined goals and wanted an independent program
that would be effective in reducing total emissions over time.
Congress' intent in the performance standard program was to use the
force of new purchases and investments to incorporate advances in
pollution prevention and control as a complementary strategy to the
ambient management program.
Congress applied the performance standard approach to both
stationary and mobile sources but with some important distinctions. In
the mobile source area (cars, trucks, buses), only entirely new
vehicles were subject to federally-established modern performance
standards. Congress was presented with analyses demonstrating that with
traditional rates of ``fleet turnover,'' most of the benefits of
tighter new car standards would be experienced in less than 10 years.
In requiring performance standards for stationary sources, Congress
adopted more sweeping provisions. The Act requires that both new and
modified stationary sources must meet modern performance standards.
Congress in 1970 also adopted a very expansive definition of
``modification,'' to assure that environmental performance would
improve as investments were made.
The 1970 Act's principal tool for improved pollution control for
new and modified sources was the New Source Performance Standard
(NSPS), a national, categorical requirement based on very good, but not
the best, pollution minimizing practices. In 1977, when the Act was
amended, Congress adopted the new source review (NSR) and prevention of
significant deterioration (PSD) programs to strengthen efforts to
minimize emissions and air quality impacts from new and modified
sources.<SUP>1</SUP> In the 1977 Amendments Congress expanded both the
scope of the rigor of the requirements for improved performance from
new and modified sources. Coverage would no longer be limited to the
categories for which EPA had adopted NSPS requirements; rather all new
and modified sources above certain pollution tonnage thresholds would
be required to minimize their emissions. Second, the level of the
performance requirement would not be tied to often out-of-date NSPS;
rather case-by-case determinations of current best performance would be
required. Third, covered sources locating in clean areas as well as
dirty areas would have to pass ambient impact tests to prevent a
worsening of air quality. In 1990, Congress again increased its
emphasis on pollution prevention from new and modified sources,
reducing the size thresholds for coverage in badly polluted areas.
---------------------------------------------------------------------------
\1\ For simplicity, for this testimony I will refer to these
programs generally as NSR.
---------------------------------------------------------------------------
In sum, Congress has repeatedly endorsed the concept of modern
performance standards for new and modified pollution sources, adopting,
in successive amendments, strengthened requirements intended to make
the NSR programs more effective in reducing pollution.
However, these programs have for twenty years been the subject of
criticism from industry representatives and from many academic
economists. The economists' argument runs, ``why should new sources be
regulated more strictly than existing sources? After all, air quality
is determined by how much pollution is released and where it is
released. The air certainly cannot tell the difference between a pound
of pollution from a plant built in 1965 and that from a plant built in
1995.''
Critics of the Act's new source requirements argue that instead of
regulating new and old sources differently, we should simply establish
our desired air quality objectives and allow them to be met by the most
efficient means. Under this approach, agencies first would do research
to identify the adverse effects of air pollution on health and welfare;
next, agencies would convert this research into environmental
standards; then, the agencies would design pollution control programs
to achieve the environmental standards; finally, agencies and pollution
sources would implement the pollution control programs and the air
would become cleaner.
This critique and prescription has a certain superficial appeal. As
I have mentioned, the ambient management program has been a central
program of the Clean Air Act since 1970 and it should continue. The
question is whether it is prudent to rely on the ambient standards
approach as the only strategy for improving and protecting air quality.
In my view that would be a mistake.
The 1970 and later Clean Air Acts reflect a judgment by Congress
that the ambient standards approach should be the major pollution
control strategy but that it should be complemented by other
independently functioning programs such as the NSR and Mobile Source
Emission Standards programs. I think that this judgment was a wise one.
The history of air pollution control efforts both before and after the
1970 Act reveals that the ambient standards approach, while
conceptually sound, has its weak spots, which when exploited by well-
organized opposition, can prevent the program from solving air quality
problems in a timely fashion.
First, the Government's capacity to acquire unambiguous information
about natural processes is very limited. The research is complex,
expensive, and time consuming. Due to perennial shortages of money,
talent, and time, most of the studies undertaken in the past and those
being conducted now are less than perfect. As a result, their
conclusions are easy to pick apart and dismiss as not dispositive.
Moreover, the health effects we are concerned about are increasingly
related to chronic exposures to low levels of combinations of
pollutants. We have never conducted an adequate study to characterize
the effects from these kinds of exposures and none is even planned.
The uncertainties in what we know about air pollution effects in
turn lead to controversy and delay in establishing environmental
standards. All of us, including this Committee, have experienced this
controversy in the continuing disputes about EPA's revised ozone and
particulate standards.
The next step in the process--control program design--can also be
affected. Different interests argue at length about how emissions in a
particular location relate to air quality in that location or
elsewhere. This can and has led to uncertainty, controversy and delay
in designing pollution reduction programs to meet environmental
standards. The continuing fights over efforts to address transported
air pollution are an example of this problem.
Another weak spot in the ambient standards abatement program is
that it often requires large changes in established patterns of
behavior. When an air pollution control agency adopts a regulation that
applies to an existing source it is trying to get firms to spend their
money, time, and thought in ways they have not planned. Not
surprisingly, these firms often resist, which leads to uncertainty,
controversy and delay in the final step of the ambient standards
approach, the actual implementation of pollution reduction measures in
the real world.
This resistance to change often feeds back to the first step in the
ambient standards process, setting the standards themselves. Pressure
is mounted to weaken existing standards and to oppose the setting of
new ones. Again, the unified fight of industrial polluters against the
revision of the ozone and particulate standards highlights this
problem.
These weaknesses do not call for abandoning the ambient standards
approach. But they do suggest the wisdom of complementing that approach
with programs that are strong where the ambient approach is weak. The
Act's NSR programs meet that need. Implemented properly, these programs
can assure that as new well-controlled sources replace old ones, we
will make progress in reducing emissions as our economy grows. By
controlling the major pollutants, the new source programs also serve as
a hedge against unidentified risks associated with those pollutants. By
dealing with engineering facts rather than biological facts, the new
source programs usually involve more manageable factual controversies.
We are relatively good at measuring the dollar costs of meeting
performance standards and calculating the emission reductions such
standards can provide. Finally, by focusing on new and modified
sources, the new source programs can lessen the social and political
costs of reducing pollution. Because they operate at the time firms are
making new investments, these programs allow firms to plan pollution
prevention and control into their plant operations.
All of this does not argue that the new source programs should
replace the ambient program, only that they should complement that
program. For the new source programs have weaknesses in areas where the
ambient program performs better. The new source programs focus on the
highly technical details of engineering and thus are too insulated from
effective public participation. Controlling pollution only from new
sources often is not the cheapest way to achieve a unit of emissions
reduction. In my view, the premium we pay to accomplish reductions
where the ambient program has failed to deliver them is a prudent
investment, but controls on new and modified sources should not be our
only program. Finally, new source programs, because they are technology
based, do not guarantee a desirable level of environmental quality. We
will degrade our air quality unless we improve pollution reducing
methods and processes at least as fast as we grow. The new source
programs do not create adequate incentives for such improvements and
thus must be complemented by the ambient standards and PSD programs
which do recognize that clean air is a scarce resource.
In sum, the Clean Air Act's dual track approach to air quality
management employs the principle of diversification to reduce risks. In
an uncertain world, a prudent investor will forego putting all her
money into the one stock with the apparent highest yield. Instead she
will spread her risk by selecting a range of investments--some which
offer high risk and high yield and others which offer less risk and
less yield. Similarly, the Act resembles a stable ecosystem which has a
diversity of species. Such systems are much less likely to fail in the
face of adversity than systems that have no diversity.
IV. HOW SHOULD EPA'S NSR PROGRAMS BE ``REFORMED''?
NRDC has participated over the last decade in stakeholder
discussions convened by EPA to consider ways to improve the Act's NSR
programs. A major reason these talks have made little progress is the
lack of agreement on the purposes of these programs. There are two
major purposes: to assure that new investments do not degrade air
quality and to assure that when new investments are made, emissions are
minimized by requiring sources to meet performance standards that
reflect modern emission prevention capabilities.
While a great deal of attention has been paid to the complexity of
the NSR permitting process, the larger environmental failure of the NSR
program is that the program has not brought down emissions as Congress
intended. Citizens, pollution control agencies, and members of Congress
are increasingly aware of the fact that grandfathered air pollution
sources are more and more the central impediment to clean air progress.
Contrary to the intent of Congress, investments in new production have
not resulted in existing grandfathered sources being replaced by
facilities that must meet modern performance standards. As a result,
grandfathered sources dominate the pollution inventory throughout the
United States.
The degree to which old stationary sources determine our nation's
burden of air pollution is striking, especially when compared to the
impact of old cars on pollution loads. For example, fossil electric
powerplants built more than 20 years ago are responsible for 84% of
total US nitrogen oxides (NO<INF>X</INF>) pollution from that sector
and 88% of sulfur dioxide ( SO<INF>X</INF>). In contrast, 20-year-old
cars contribute less than 7% of US car NO<INF>X</INF> pollution and 3%
of that sector's VOC (volatile organic compounds) pollution.
It is obvious that the Title II new mobile source program has done
quite a good job of preventing old cars from dominating today's
pollution problems but the Title I new stationary source program has
performed miserably on this score.
There are some obvious reasons for the NSR program's poor pollution
reduction performance. First, the rules themselves contain too many
loopholes that allow sources to avoid NSR even though they continue to
make significant investments year after year. Second, as recent
enforcement actions have alleged, there are many instances of firms
escaping the requirements of the rules by misclassifying projects in an
unlawful manner.
Reform of the NSR program should address its failure to produce
pollution reduction from old grandfathered sources as a priority issue
as well as explore ways to simplify the NSR process. A genuine reform
of the program should aim to make two basic changes: the program should
apply to more industrial projects than it now does and the review
process should be streamlined to enable decisions to be made quickly
while protecting the public's right to participate. Instead, the
``reform'' proposals EPA has published over the last decade have
concentrated almost entirely on changes that would expand the loopholes
of the current rules so that even fewer grandfathered sources would be
required to clean up as they upgraded their capital equipment.
The combination of categorical exemptions and exclusions, weak
rules for calculating emission increases, and broad provisions for
``netting out'' of review allow far too many sources to avoid the NSR
program indefinitely. When illegal evasions of the rules are added to
the many exemption opportunities in the rules, we get the results we
see--most sources never encounter the federal NSR program and their
pollution remains with us.
NRDC has filed lengthy comments with EPA on these issues over the
years and I will not burden the Subcommittee with a recitation of the
details here. I would like to mention one area--that of ``netting.''
Netting is the jargon for a transaction that allows new projects at
existing sources to escape NSR. In essence it allows the source
operator to count ``reductions'' from grandfathered pieces of polluting
equipment at the site in calculating whether a new project will result
in an emission increase that would require new source review. By
allowing sources to avoid the modern performance requirements of NSR,
netting preserves the status quo, perpetuating excessively high levels
of pollution originally emitted by poorly-controlled, grandfathered
pollution sources.
Netting rewards sources that have managed to manipulate the current
system to preserve high levels of emissions. Current netting policy
allows those high emission levels to function as an asset that can be
deployed to avoid NSR/PSD review. Thus, netting operates at cross
purposes with sound air quality objectives. It creates incentives to
keep emissions at unnecessarily high levels and perpetuates an
inefficient allocation of emission ``shares'' by providing the greatest
rewards to the most polluting sources. Netting frustrates one of the
primary objectives of the NSR/PSD program, which is to link
requirements for modern emission performance standards to investments,
so that emissions are reduced as the economy expands. Instead, netting
allows existing emission levels to be perpetuated indefinitely.
While the netting rules are complex, the fundamental problem with
the approach is easy to understand. Netting allows a grandfathered
pollution source to ``bequeath'' its excessive pollution privileges to
its descendant, the new piece of equipment. Under netting, the new
piece of equipment is not required to meet modern performance
standards; it can emit at much higher levels by relying on the
pollution entitlements transferred from old, grandfathered pieces of
equipment. In this way, excessive amounts of pollution can live on long
after the original sources have disappeared. Netting resembles the
former hereditary peerage system in England, where membership in the
House of Lords and other privileges were handed down from generation to
generation. England recently acknowledged this system has no proper
place in a modern democracy. We too need to eliminate the pollution
peerage that is imbedded in EPA's netting rules.
For nonattainment NSR, the Supreme Court in Chevron made it clear
that EPA has the authority to eliminate the availability of netting
altogether.<SUP>2</SUP> One perverse effect of netting in nonattainment
NSR is that new equipment is installed without meeting ``lowest
achievable emission rate'' (LAER) performance standards. This in turn
means that a greater level of emission reduction is required to offset
the new equipment's emissions than if the new equipment had met LAER
standards. These additional emission reductions must come from a finite
pool of existing emission sources whose total pollution load must be
further reduced for the area to attain the ambient standards. Thus, the
effect of NSR netting is to allow existing source owners to
unilaterally dedicate the cheapest and easiest emission reductions in a
nonattainment area to compensate for poorly-controlled new units,
leaving state and local control agencies with the more difficult task
of developing an attainment plan from the more expensive, politically
controversial remaining emission reduction opportunities.
---------------------------------------------------------------------------
\2\ Chevron, U.S.A., Inc. v. NRDC, 467 U.S. 837 (1984).
---------------------------------------------------------------------------
EPA's original defense of its 1981 change to allow netting under
the nonattainment NSR program was that areas choosing such an approach
would be required to develop timely attainment plans in any event so
that there would be no environmental harm. It is now the year 2000 and
EPA can no longer deny that the theory it presented to the Supreme
Court in the early 1980s has no basis in reality. In fact, areas have
not succeeded in developing timely and adequate attainment plans. State
and local agencies have protested repeatedly to EPA that they cannot
identify sufficient, politically feasible emission reductions to
demonstrate timely attainment. EPA has responded with policies that
have permitted lengthy delays in the submission of adequate plans.
Given that the premise for EPA's initial adoption of NSR netting in
1981 has not been achieved, it is time for nonattainment netting to be
abolished.
To restrict netting in the PSD NSR program, EPA should reform its
definition of contemporaneous so that only activities which are part of
the project for which the netting claim is made can qualify. Second,
EPA should reduce the netting credits available for shutting down or
limiting operations at existing units to reflect the obvious fact that
the new emission-increasing projects will have greater longevity than
the older existing units that are generating the netting credits. For
example, consider a source that proposes to build a 100-ton-per-year
new unit with a 35-year useful life and to net out the increase with
the shutdown of a 100-ton source that has only 5 years of life
remaining. The stream of emission reductions from the shutdown source
ends after 5 years but the emission increases from the new source
continue for an additional 30 years. There clearly is an enormous
increase in the cumulative emissions from the facility over the life of
the new project that is not captured if netting credits are given for
the shutdown unit based only on a comparison one year's emissions.
V. NEW SOURCE REVIEW AND ENERGY FACILITIES
Over the last year, as we have experienced high prices and
shortages in some energy markets, the cry has been raised that
permitting requirements, including the Act's NSR requirements, are
preventing construction of needed facilities. These are not new claims.
They are raised whenever the basic fact that energy is a scarce
resource makes its way on to the evening news. So we see repeated
references to the fact that California ``has not built a major power
plant in a decade'' and the claim that permitting requirements are the
reason. As NRDC's attached fact sheet points out, the claim is wrong.
Power plant construction slowed to a trickle in California in the 1990s
not because of permitting requirements but because private investors
first did not forecast enough demand to be assured of returns that
would beat other uses for their money; then uncertainties created by
the development of a deregulated electricity market caused further
hesitation. A review of California's permitting files demonstrates that
nearly all power plant projects were approved and without significant
delays. The fact is, had there been no permitting requirements at all
in California during the 1990s, private investors still did not have
adequate market incentives to spend money building new plants.
However, in this Congress bills have been introduced that would
carve gaping exemptions for from NSR requirements for new and modified
power plants. For example, S. 60 and similar provisions in S.389,
Senator Murkowski's energy bill, would exempt from NSR and from any
additional emission regulation, projects at new or existing coal-fired
power plants. While these exemptions are labeled ``credit for emission
reduction'' or ``clean-coal'' projects, in fact the legislation does
not require emissions to be reduced as a condition for eligibility. The
eligibility criteria are so broadly drafted that virtually any
expansion project at an existing plant or any new coal plant could be
built with an exemption from NSR and a prohibition of coverage by new
pollution control requirements, such as future rules for mercury
controls or rules to reduce nitrogen oxides to address regional smog
problems. A detailed analysis of S. 60's exemptions, which applies as
well to similar provisions in S. 389, is attached.
In truth, these efforts to repeal Clean Air Act safeguards are
short-sighted and counterproductive to the goal of increasing public
acceptance of new energy projects.
While the nation's energy concerns continue to be a convenient
excuse for attacking environmental permitting requirements, with the
``NIMBY syndrome'' derided as a telltale symptom of our ills, the fact
is, people want nearby plants to be as clean as possible and want the
chance to participate in location decisions. Weakening the Clean Air
Act would increase anxiety and opposition to new projects, not lessen
it.
As you consider this issue I would encourage each member of the
Subcommittee to ask, ``how close is the nearest large fossil fuel
generating station to my home--1 mile away, 2, 5, 10?'' Suppose a new
station was proposed less than a mile from your home; how would you
talk about it in your own kitchen or living room? Would you like the
opportunity to ask questions about the design, performance, scale, and
perhaps even the location of the project? Would you like a public
process that your neighbors could join in? Would you like the right to
get answers from the approval authorities? Would you like some recourse
if officials ignored your questions and suggestions for improvement of
the project? Other Americans want these same safeguards and they
deserve better than to be labeled ``NIMBY.''
The path to harmonizing clean air and energy goals is not down the
road of exemptions from safeguards. The right path involves adopting
comprehensive integrated programs to clean up existing polluting power
plants and improving current new source programs so that they more
reliably and efficiently assure citizens that expanded energy supplies
can be achieved without degrading environmental quality. Mr. Chairman
and members of the Subcommittee, NRDC would be happy to work with you
to move down this path. Thank you for the opportunity to present these
views and I am happy to answer any questions you may have.
Attachment 2
Prepared Statement of Lisa Speer, Senior Policy Analyst, Natural
Resources Defense Council, Before the Subcommittee on Energy and
Mineral Resources, House Committee on Resources, March 15, 2001
My name is Lisa Speer. I am Senior Policy Analyst with the Natural
Resources Defense Council (NRDC) in New York. NRDC is a national
nonprofit organization of scientists, lawyers, and environmental
specialists, dedicated to protecting public health and the environment.
Founded in 1970, NRDC serves more than 400,000 members from offices in
New York, Washington, Los Angeles, and San Francisco. My testimony
today addresses environmental issues surrounding natural gas
exploration, development and production from submerged federal lands on
the Outer Continental Shelf (OCS).
1. BACKGROUND: ENERGY POLICY IN THE 21ST CENTURY
At the dawn of a new century, America finds itself once again
wrestling with a problem that has, off and on, been at the forefront of
U.S. politics for several decades: energy. The United States has 5
percent of the world's population, but consumes nearly a quarter of the
world's energy supply. We use energy to heat our homes and our
businesses, power our computers and telephone systems, run our
automobiles and aircraft, and drive our manufacturing plants and
hospitals. In short, we have constructed an economy and a way of life
that depends on the ready availability of energy.
Two distinct visions of an energy policy for the United States have
emerged to meet these demands. One vision focuses chiefly on extracting
as much energy as possible, mostly in fossil fuel form (oil, coal and
natural gas), in hopes that supply can catch up with demand. The
alternative vision, however, calls for encouraging innovation and new
technology to meet our energy needs in an environmentally responsible
manner. This vision emphasizes efficient use of energy, and places
priority on using energy resources that are least damaging to our
environment. It promotes economic growth and American industrial
competitiveness. This energy path would not force consumers to make
sacrifices. Instead it relies on improved technologies that will
eliminate waste while increasing productivity and comfort.
Therefore, NRDC believes that U.S. energy policy must rely on the
application of technological advances already in place and readily
available as a way to reduce consumption. Such an approach will
decrease America's reliance on foreign sources of energy in the near-
and long-term, protect the environment, provide for America's energy
needs, and buffer the economy against short-term swings in the market.
NRDC's recently published report, A Responsible Energy Policy for the
21st Century examines these issues in detail. I ask that the report be
included in the record.
2. NATURAL GAS RESOURCES OF THE OUTER CONTINENTAL SHELF
As the cleanest burning fuel, natural gas makes an important
contribution to the nation's energy supply. Some argue that natural gas
development on the Outer Continental Shelf should be promoted. They
argue that the risk of oil spills is negligible, and that
environmentally sound development can take place. This argument ignores
the reality that oil spills are not the only environmental concern
related to OCS development. Offshore gas development, like oil
development, causes substantial environmental impacts, including the
following.
Onshore damage: The onshore infrastructure associated with offshore
oil or gas cause significant harm to the coastal zone. For example, OCS
pipelines crossing coastal wetlands in the Gulf of Mexico are estimated
to have destroyed more coastal salt marsh than can be found in the
stretch of land running from New Jersey through Maine.<SUP>1</SUP>
Moreover, the industrial character of offshore oil and gas development
is often at odds with the existing economic base of the affected
coastal communities, many of which rely on tourism, coastal recreation
and fishing.
---------------------------------------------------------------------------
\1\ Boesch and Rabalais, eds., ``The Long-term Effects of Offshore
Oil and Gas Development: An Assessment and a Research Strategy.'' A
Report to NOAA, National Marine Pollution Program Office at 13-11.
---------------------------------------------------------------------------
Water pollution: Drilling muds are used to lubricate drill bits,
maintain downhole pressure, and serve other functions. Drill cuttings
are pieces of rock ground by the bit and brought up from the well along
with used mud. Massive amounts of waste muds and cuttings are generated
by drilling operations--an average of 180,000 gallons per
well.<SUP>2</SUP> Most of this waste is dumped untreated into
surrounding waters. Drilling muds contain toxic metals, including
mercury, lead and cadmium. Significant concentrations of these metals
have been observed around drilling sites.<SUP>3</SUP>
---------------------------------------------------------------------------
\2\ MMS, 2000. Gulf of Mexico OCS Oil and Gas Lease Sale 181, Draft
Environmental Impact Statement (DEIS), p. IV-50.
\3\ Id.
---------------------------------------------------------------------------
A second major polluting discharge is ``produced water,'' the water
brought up from a well along with oil and gas. Offshore operations
generate large amounts of produced water. The Minerals Management
Service estimates that each platform discharges hundreds of thousands
of gallons of produced water every day.<SUP>4</SUP> Produced water
typically contains a variety of toxic pollutants, including benzene,
arsenic, lead, naphthalene, zinc and toluene, and can contain varying
amounts of radioactive pollutants. All major field research programs
investigating the fate and effects of produced water discharges have
detected petroleum hydrocarbons, toxic metals and radium in the water
column down-current from the discharge.<SUP>5</SUP>
---------------------------------------------------------------------------
\4\ Id., p. IV-32.
\5\ Id., p. IV-32-33.
---------------------------------------------------------------------------
Air pollution: Drilling an average exploration well generates some
50 tons of nitrogen oxides (NO<INF>X</INF>), 13 tons of carbon
monoxide, 6 tons of sulfur dioxide, and 5 tons of volatile organic
hydrocarbons. Each OCS platform generates more than 50 tons per year of
NO<INF>X</INF>, 11 tons of carbon monoxide, 8 tons of sulfur dioxide
and 38 tons of volatile organic hydrocarbons every year.<SUP>6</SUP>
---------------------------------------------------------------------------
\6\ Id., p. IV-40.
---------------------------------------------------------------------------
Oil spills: If offshore areas are leased for gas exploration there
is always the possibility that oil also will be found. We no of no
instance where a lease prohibits an oil company from developing oil if
oil is found in a ``gas prone'' region. We are not aware of any company
ever agreeing to such a condition in the history of the OCS program.
Without such a restriction included in a lease there would be no
assurances that oil in fact would not be developed, raising the
possibility of an oil spill. According to statistics compiled by the
Department of the Interior, some 3 million gallons of oil spilled from
OCS oil and gas operations in 73 incidents between 1980 and
1999.<SUP>7</SUP> Oil is extremely toxic to a wide variety of marine
species, including marine birds, mammals and commercially important
species of fish.
---------------------------------------------------------------------------
\7\ MMS, 2000. Gulf of Mexico OCS Oil and Gas Lease Sale 181, Draft
Environmental Impact Statement (DEIS), pp. IV-50.
---------------------------------------------------------------------------
3. THE OCS MORATORIA
Beginning in 1981 and every year since then, Congress has imposed
restrictions on OCS leasing in sensitive areas off the nation's coasts.
These moratoria now protect the east and west coasts of the U.S. and
most of the Eastern Gulf of Mexico. The moratoria reflect a clearly
established consensus on the appropriateness of OCS activities in most
areas of the country, and have been endorsed by an array of elected
officials from all levels of government and diverse political
persuasions, from former President George H.W. Bush to Governor Jeb
Bush of Florida, and from Governor Tony Knowles of Alaska to Governor
Gray Davis of California.
We strongly oppose any attempt to lift the moratorium, or to
promote gas development in other sensitive OCS areas, including the
Sale 181 area off the west coast of Florida and areas off Alaska. We
have called on the Interior Department to remove these areas from the
new Five Year OCS Program currently under development.
4. DRILLING IN THE MORATORIA AREAS, THE SALE 181 AREA AND THE ALASKAN
OCS IS NOT NECESSARY.
Despite assertions from industry and their supporters on Capitol
Hill, it is not necessary to drill in sensitive areas to meet America's
energy needs. For example, industry is pressing to drill in the
moratorium areas, the Eastern Gulf of Mexico, and off Alaska. But such
drilling is unnecessary because seventy per cent of the nation's
undiscovered, economically recoverable OCS oil and gas, and 80% of the
nation's undiscovered, economically recoverable OCS gas, is located in
the Central and Western Gulf of Mexico. <SUP>8</SUP> Thus, removing the
moratorium areas, the OCS off Alaska, and the Eastern Gulf of Mexico
from the 5 Year Program will leave the vast majority of the nation's
OCS oil and gas available to the industry.
---------------------------------------------------------------------------
\8\ U.S. Department of the Interior, Minerals Management Service
(MMS), 2000. Outer Continental Shelf Petroleum Assessment, 2000, page 5
and Gulf of Mexico Assessment Update.
---------------------------------------------------------------------------
Large untapped energy efficiency resources provide a much better
choice. Congress can help by providing tax incentives for the
construction of energy efficient buildings, manufacturing energy-
efficient heating and water heating equipment. These measures could
save 300 Tcf of natural gas over 50 years.<SUP>9</SUP> This is more
than twelve times the Interior Department's mean estimates of
economically recoverable gas located outside the Central and Western
Gulf of Mexico.<SUP>10</SUP> These strategies will do far more to
increase our nation's energy security than a ``drain America first''
policy of exploiting sensitive offshore and onshore federal lands.
---------------------------------------------------------------------------
\9\ NRDC, 2001. A Responsible Energy Policy for the 21st Century,
p. 32.
\10\ U.S. Department of the Interior, Minerals Management Service
(MMS), 2000. OCS Petroleum Assessment, 2000, p. 5 and Gulf of Mexico
Assessment Update.
---------------------------------------------------------------------------
Thank you for the opportunity to testify.
Attachment 3
A Responsible Energy Policy for the 21st Century
Principal Authors: Daniel Lashof and Patricio Silva. Contributing
Authors: Alyssondra Campaigne; Sheryl Carter; Ralph Cavanagh; Sarah
Chasis; Charles Clusen; Karen Garrison; David Goldstein; Nathanael
Greene; David Hawkins; Roland Hwang; Kit Kennedy; Lisa Speer; Johanna
Wald; Faith Weiss; and Gregory Wetstone, Natural Resources Defense
Council, March 2001.
Executive Summary
This report offers a responsible approach to meeting America's
energy requirements. And it is balanced, recognizing the need to
extract resources, while proposing a range of environmentally preferred
ways to increase supply and energy efficiency improvements that could
substantially reduce the demand for energy without forcing Americans or
American industry to make sacrifices.
The cornerstone of NRDC's (Natural Resources Defense Council) plan
is increased energy efficiency, relying not on pie-in-the-sky,
undeveloped technologies, but on readily available and cost-effective
processes and technologies. In the short-term, the plan calls for
increased reliance on natural gas as a bridge to renewable and
environmentally sound energy sources in the future. Correspondingly,
the plan calls for reducing U.S. reliance on dirtier fossil fuels--oil
and coal. And the plan addresses the urgent needs of low-income
households for affordable energy services.
In sharp contrast to NRDC's common sense approach is the Bush
administration's controversial energy initiative. Among other things,
it calls for opening the Arctic National Wildlife Refuge coastal plain
to oil drilling and development, and for rolling back environmental
safeguards to pave the way for more fossil fuel development. Already
the plan has come under severe criticism for the irreparable harm it
would cause pristine areas of the wildlife refuge. That criticism is
entirely accurate. But there is another fundamental reason to reject
the proposal: it is completely unresponsive to the problems it purports
to address. It would make virtually no difference to America's energy
supply in the short- or long-term, it would have no impact on energy
prices, and it would have no practical effect on America's dependence
on foreign sources of oil.
RESPONSIBLE OIL POLICY: FUEL EFFICIENCY, NOT FOOLISH DEVELOPMENT OF THE
ARCTIC NATIONAL WILDLIFE REFUGE
Key Recommendations:
<bullet> Provide tax credits to individuals who buy clean and efficient
advanced-technology vehicles employing hybrid gasoline-electric
drive.
<bullet> Raise fuel economy standards for new cars, sport utility
vehicles (SUVs), and other light trucks to an average of 39
miles per gallon over the next decade.
<bullet> Require replacement tires to be as fuel efficient as the
original tires on new vehicles.
<bullet> Expand programs to weatherize low-income Americans' housing
and help pay their energy bills.
<bullet> Provide incentives for smart growth development patterns that
reduce sprawl.
<bullet> Do not drill in the Arctic National Wildlife Refuge.
<bullet> Do not drill in sensitive offshore areas, including moratorium
areas, Alaska, and the eastern Gulf of Mexico.
<bullet> Maintain existing protections for sensitive onshore public
lands and extend protection to other special places.
The reality that proponents of drilling in the Arctic National
Wildlife Refuge refuse to acknowledge is that the United States cannot
drill its way out of its energy problem. America has 5 percent of the
world's population, but consumes nearly a quarter of the world's oil
supply. It already has extracted the majority of its available oil. The
obvious conclusion is that the United States can have a much greater
impact on oil prices worldwide and can do more to help ensure its own
economic security by cutting its demand.
For example, simply upgrading the quality of replacement tires to
match that of tires that come as standard equipment on new cars would
save 5.4 billion barrels of oil over the next 50 years--70 percent more
than the total amount of oil that would likely be pumped from the
Arctic Refuge over the same time period. Updating fuel efficiency
standards to reflect the capabilities of modern technology would
produce even greater savings. Increasing fuel efficiency standards for
new vehicles to an average of 39 miles per gallon over the next decade
would save 51 billion barrels of oil over the next 50 years--more than
15 times the likely yield from the Arctic Refuge.
DRILLING THE ARCTIC REFUGE IS UNRESPONSIVE TO AMERICA'S ENERGY NEEDS
The case for drilling the Arctic National Wildlife Refuge made by
the Bush administration and its supporters on Capitol Hill makes no
sense. Proponents wrongly present drilling as a solution to the current
California energy crisis. They overstate how much oil could be pumped.
They understate the environmental consequences. In fact, drilling in
the Arctic Refuge coastal plain would have no bearing on California's
current crisis, would cause huge and unnecessary environmental damage,
would do nothing to address America's long-term need for greater energy
efficiency, would not affect the price of gasoline at the pump, and
would not significantly reduce U.S. dependence on foreign oil.
The available oil from the Arctic National Wildlife Refuge is a
drop in the bucket of America's energy needs. The best U.S. Geological
Survey estimate is that less than a six-month supply of oil could be
economically recovered from the Arctic Refuge (about 3.2 billion
barrels, spread out over a 50-year period), and that it would take at
least 10 years of exploration, drilling, and pipeline construction
before the oil would reach refineries. In its peak year of production--
2027--the Arctic Refuge would yield less than 2 percent of projected
U.S. consumption in that year.
Proponents overstate how much oil would be extracted from the
refuge. Proponents of drilling maintain that as much as 16 billion
barrels of oil would be pumped from the Arctic Refuge. The claim is a
gross exaggeration that ignores the U.S. Geological Survey's conclusion
that about 60 percent of the oil in the Arctic Refuge would not be
economically feasible to produce. Even if there were 16 billion barrels
of oil available in the refuge, more than three times as much could be
saved by raising vehicle fuel economy standards to an average of 39
miles per gallon.
Drilling in the coastal plain would have no impact on California's
electricity problems or any other state's electricity problems. Most
U.S. electric power plants do not use oil. Less than 1 percent of
California's electricity is generated by burning oil. The average for
the United States as a whole is only 3 percent. And as noted above, oil
from the refuge would not flow to refineries for at least a decade.
Drilling in the Arctic National Wildlife Refuge would have no
impact on the price of energy. The oil market is global, and refuge oil
would expand global oil reserves by just 0.3 percent--a quantity far
too inconsequential to affect prices at the pump or elsewhere.
Drilling in the coastal plain would spoil an irreplaceable natural
treasure. The Arctic National Wildlife Refuge is a fragile wilderness
that would be ruined by oil drilling.
RESPONSIBLE ELECTRICITY POLICY: CLEAN AIR, ENERGY EFFICIENCY,
CONVERSION TO RENEWABLES
Key Recommendations:
<bullet> Establish a national ``system benefits'' fund to promote
energy efficiency, support research and development, and
maintain universal service.
<bullet> Establish a federal ``portfolio standard'' to ensure that
renewable energy steadily increases its market share at minimum
cost.
<bullet> Extend the renewable energy production tax credit, which
encourages greater reliance on emerging renewable energy
sources.
<bullet> Provide tax incentives for advanced energy-efficient buildings
and appliances.
<bullet> Strengthen energy-efficiency standards for appliances and
buildings.
<bullet> Establish comprehensive limits on air pollution from power
plants covering emissions of carbon, nitrogen, sulfur, and
mercury.
<bullet> Require full disclosure to customers about the sources and
environmental impact of their electricity.
<bullet> Reject new subsidies for so-called ``clean coal'' technology
and nuclear power, and eliminate existing subsidies.
Another form of energy in the news today is electricity. As
Californians suffer through an unprecedented electricity crunch,
politicians a continent away are beginning to debate the causes of--and
solutions to--the shortfall.
Contrary to suggestions from the White House, the California crisis
is not a function of pollution regulation, and it will not be solved by
drilling in the Arctic National Wildlife Refuge. The real reasons for
the crisis include a market structure that failed to ensure long-term
supplies as a hedge against volatile spot market prices, rapid
consumption growth in neighboring states that is overloading the
interstate power grid, cutbacks in electricity infrastructure
investment throughout the West, and reduced hydropower generation due
to low rainfall. As if all of that were not enough, investigations
continue of alleged anti-competitive practices by power generators.
Also contributing to the crisis is a contraction in available
natural gas supplies, leading to higher costs (almost one-third of
California's electricity is generated with natural gas). Again, the
upswing in natural gas prices is partly the result of industry
decisions to forego exploration and cut storage levels after years of
low commodity prices. Another contributor to natural gas price
increases is a short-term reduction in pipeline capacity in the
Southwest due to an explosion last summer.
California already has acted to reduce its exposure to volatile
short-term electricity markets by providing for a more balanced
portfolio of longer-term purchase contracts. Looking ahead, the
fastest, cheapest, and cleanest response to the electricity crisis is
to take advantage of the state's many immediate opportunities to ramp
up its investments in energy efficiency and renewable energy. These
measures already contribute more than 15,000 megawatts to the Western
power grid, which never needed them more. And the California Energy
Commission recently issued emergency upgrades for efficiency standards
governing all new buildings, which will yield the equivalent of two
giant coal-fired power plants (1,000 megawatts) in the next five years.
Also, last September, the Legislature and Gov. Gray Davis created a 10-
year, $5.5 billion investment fund for energy efficiency and other
sustainable energy technologies. California legislators could do more,
starting with making a large additional investment from California's
budget surplus in energy efficiency and renewable energy.
California also needs more highly efficient natural-gas-fired power
plants. NRDC and other environmental groups support the ongoing
additions of such plants, which have had no difficulty meeting
California's siting requirements. Since April 1999, nine plants
totaling nearly 6,300 megawatts have received siting approval. Six are
under construction, and at least three are expected to be on-line by
the end of this year (2,368 megawatts). At least 14 more plants capable
of generating about 7,000 megawatts are poised to follow, rebutting
claims that environmental safeguards somehow prevent additions of
generation capacity. The new plants (both renewable and fossil) are
dramatically cleaner than their aging gas- and coal-fired competitors
across the Western power grid. Indeed, the capacity additions
anticipated over the next several years are both clean and large enough
to begin improving air quality by displacing those dirtier competitors
during at least some hours of the year.
Nonetheless, President Bush said recently, ``If there's any
environmental regulations . . . preventing California from having a 100
percent max output at their plants--as I understand there may be--then
we need to relax those standards.'' But as reported by the Los Angeles
Times on January 25, Richard Wheatley, spokesman for Houston-based
Reliant Energy Co., which operates four Southern California power
plants, said that the assertion that environmental regulations are
holding back output ``is absolutely false. We're making every megawatt
available on request. We factor the air quality regulations into our
daily operating basis, and they are not causing us to withhold power.''
The Times could find only one small, obsolete plant that had to suspend
operations temporarily to comply with air quality standards, and it
accounted for less than 0.2 percent of California's peak power needs.
In the long-term, the best path for California is the best path for
America: strong clean air standards; increased reliance on energy-
efficiency measures; a shift away from obsolete, inefficient fossil-
fueled plants as a source for electricity; and, eventually, full
conversion to renewable and environmentally sound forms of energy.
Taken together, these measures will reduce power plant pollution.
The electricity-generating sector today is the single largest source of
the four pollutants responsible for the most serious local, regional,
national, and global air pollution problems we face. These four
horsemen of power plant pollution are: sulfur dioxide (causing acid
rain and producing fine particles), nitrogen oxides (causing ozone
smog), mercury (causing neurological damage), and carbon dioxide
(causing global warming).
Policies to limit air pollution are fragmented and based on
outdated assumptions, resulting in excessive emissions and distorted
electricity markets. As a result, support continues to grow for
integrated requirements to reduce the four horsemen. A major benefit of
an integrated pollution cleanup approach is that it would provide a
clear road map for business in planning long-term investments.
Large pollution reductions can be achieved at reasonable cost while
meeting America's electricity needs by maximizing energy efficiency and
reliance on renewable energy technologies. Market barriers, however,
have inhibited the widespread deployment of environmentally preferred
electricity demand and supply options. Two of the most effective and
market-compatible public policies to address this problem are public
goods or system benefits funds, and renewables portfolio standards.
A public goods or system benefits charge--a small surcharge on
customers' electricity bills--can help fund cost-effective, long-term
investments in energy efficiency, low-income services, and renewable
energy resources. At least 20 states have some form of system benefits
charge.
Renewables portfolio standards, meanwhile, encourage greater
diversity of energy resources, which enhances reliability by requiring
electricity providers to include a minimum percentage of renewable
energy resources in the electricity mix they deliver to their
customers.
RESPONSIBLE NATURAL GAS POLICY: SENSIBLE EXTRACTION, SENSIBLE PIPELINE
SITING
Key Recommendations:
<bullet> Provide tax incentives for the construction of energy-
efficient buildings and for manufacturing energy-efficient
heating and water-heating equipment.
<bullet> Adopt a comprehensive pipeline approach ensuring that
pipelines are constructed and operated in an environmentally
sensitive manner, with strong safety oversight, and, whenever
possible, along existing routes.
<bullet> Reject plans to construct an offshore pipeline off the Arctic
National Wildlife Refuge coastal plain.
<bullet> Plan an Alaska gas pipeline if needed to deliver Prudhoe Bay
gas to the lower 48 states that follows the Trans-Alaska
Pipeline System and the Alaska-Canadian Highway right-of-ways;
complies with all U.S. and Canadian environmental laws; has a
thorough, new environmental impact statement; and incorporates
the best pipeline safety and environmental measures.
<bullet> Do not drill in sensitive offshore areas, including the
moratorium areas, Alaska, and the eastern Gulf of Mexico.
Maintain existing protections for sensitive onshore public
lands and extend protection to other special places.
Of the three fossil fuels that dominate the U.S. energy market,
natural gas is by far the cleanest burning fuel. It is, therefore, a
key part of NRDC's energy policy--the bridge to greater reliance on
cleaner and renewable forms of energy. Increased energy efficiency in
homes and factories not only would lower consumers' energy bills; it
would also free up large amounts of natural gas to help meet the needs
of new, highly efficient, combined-cycle (combustion and steam turbine)
power plants. Stronger and better-enforced building codes augmented by
tax incentives for constructing buildings that exceed code requirements
would pay a double dividend: lower heating and electric bills, and less
pollution.
But natural gas is not sufficiently clean to be considered the
long-term answer to America's energy needs. Extracting gas,
transporting it to market, and burning it all cause pollution in
various forms.
NRDC recognizes the need for continued exploitation of America's
natural gas resources, but believes that certain federal lands should
be afforded special protection. This applies to existing protected
areas, including roadless national forest areas and the Rocky Mountain
Front. Additional areas that should be protected include Wyoming's Red
Desert, Utah's fabled red rock country, and the area in and around
Vermillion Basin in northwest Colorado.
The energy production industry and its champions in Washington
sometimes assert that America's public lands natural gas resources have
been put off limits, but in fact, 95 percent of onshore federal public
lands in the Rocky Mountain region managed by the Bureau of Land
Management (including split estate lands) remain open to exploration
and production leasing. Similarly, nearly 70 percent of the nation's
untapped economically recoverable offshore oil and gas resources are
open for these purposes. Oil and gas development should be excluded
from sensitive offshore areas, including existing moratorium areas,
Alaska, and the eastern Gulf of Mexico.
Another important natural gas issue involves siting pipelines to
carry gas from drilling sites to market. NRDC believes that pipelines
should be constructed and operated in an environmentally sensitive
manner, with strong safety measures and oversight, and, whenever
possible, along existing routes. For example, plans to construct an
offshore pipeline off the Arctic National Wildlife Refuge coastal plain
should be rejected. Instead, if Prudhoe Bay gas supplies are needed to
serve markets in the lower 48 states, any Prudhoe Bay natural gas
pipeline should follow the Trans-Alaska Pipeline System and the Alaska-
Canadian Highway right-of-ways; undergo a thorough, new environmental
impact statement; comply with all U.S. and Canadian environmental laws;
and incorporate the best pipeline safety and environmental measures.
CONCLUSION
Eventually the United States will have no choice but to turn to
greater energy efficiency and renewable sources of power. Demand for
fossil fuels surely will overrun supply sooner or later, as indeed it
already has in the case of U.S. domestic oil drilling. The capacity of
our air and land to absorb unlimited quantities of waste from fossil
fuel extraction and combustion is also limited. As that day draws
nearer, policymakers will have no realistic alternative but to turn to
power sources that today make up a viable but small part of America's
energy picture. They also will be forced to embrace energy
efficiencies--those that are within our reach today, and those that
will be developed tomorrow. Precisely when they come to grips with that
reality--this year, 10 years from now, or 20 years from now--will
determine how smoothly the transition will go for consumers and
industry alike.
Mr. Barton. Thank you, Mr. Kassel. We appreciate that.
Last but not least, we want to hear from John Paul Pitts,
who is the Oil Editor for the Midland Reporter Telegram in the
Permian Basin in west Texas. As a personal note, I have been
involved in energy issues in some shape, form or fashion for
almost 20 years, and of all the people I have met with, talked
to, listened to, read, researched, and I think I am pretty
comprehensive in at least having contact with most people that
are supposed to know something about oil and gas issues, I
would put Mr. Pitts at the very top of the list in terms of
personal knowledge and integrity on these issues. So it is
truly an honor to have you before the subcommittee that I
chair.
We have got your testimony in the record and look forward
to having you summarize it in 6 minutes.
STATEMENT OF JOHN PAUL PITTS
Mr. Pitts. Thank you for those kind comments, Chairman
Barton. Distinguished members of the committee, my name is John
Paul Pitts. I am the Oil Editor of the Midland Reporter
Telegram, a Hearst newspaper serving the Permian Basin of west
Texas and southeast New Mexico. I am honored to be here today
to provide this committee what insight or information I can as
you take on the urgent task of developing a comprehensive
national energy policy that will provide America with abundant,
sustainable, secure, and affordable energy for the short term
and the long term.
The Permian Basin, comprised of 52 counties in west Texas
and New Mexico, is larger than Norway, Italy or Ireland. It is
a prolific oil and gas producing area, accounting for 75
percent of all the oil in Texas and 18 percent of the Nation's
5.8 million barrels of daily oil production. The oil and gas
capital of the Permian Basin is Midland, Texas, a world class
oil town that is both highly dependent and highly focused on
oil and gas.
This oil centered intensity has given us a community of oil
and gas producers highly attuned to energy issues with views
tending to be reflective of the entire industry.
Mr. Barton. Mr. Pitts, would you suspend a minute. Do you
know of anybody who just recently moved to Washington that was
from Midland, Texas?
Mr. Pitts. My friend George Bush.
Mr. Barton. That is right. I think you should put that in
your testimony if you are talking about Midland, Texas.
Mr. Pitts. I didn't want to drop names.
Mr. Barton. Continue.
Mr. Pitts. I will have to find my place here.
This oil centered intensity has given us a community of oil
and gas producers highly attuned to energy issues and with
views tending to be reflective of the entire industry. In other
words, if you could take the entire domestic oil industry and
somehow distill it and condense it into one city of 106,000
people, you would have essence of oil, or Midland, Texas.
In February, the Reporter Telegram interviewed a large
cross-section of these producers and asked key energy policy
questions on energy policy issues. I would like to share some
of those findings with you. First, most producers in the
Permian Basin think it is a now or never situation for our oil
and gas policy. Ninety-seven percent feel that this is the
President and this is the administration and this is the
Congress and this is the year. If it doesn't happen this year,
it will never happen.
By the same token, less than half think it can happen. They
don't think it is politically possible. They just don't think
the Nation is ready yet to make the hard choices for a viable
energy policy.
Second, there is great concern among Permian Basin
producers about national security. Eighty percent are very
concerned about it. They feel that we must begin now to back
away from the treachery in the Middle East before it is too
late. Yet three quarters do not believe that we can become
energy independent if you were to conceive the best energy
policy you could.
Third, while producers feel a national energy policy should
deal with oil price volatility, 68 percent would not support a
floor price on crude oil. They say floor prices don't work, you
have a ceiling that will be artificial, a floor that will be
artificial and it will be subject to government manipulation.
A resounding 86 percent do favor the OPEC trading band of
22 to $27 as the best means of controlling price volatility for
U.S. producers and consumers. The main fear there is that OPEC
cannot maintain the discipline to hold that together. I
interviewed at one time the Oil Minister of Saudi Arabia. He
told me that trying to keep OPEC together was like trying to
herd chickens. Over half of the Permian Basin does believe that
NYMEX, and not OPEC, is the real villain behind oil price
volatility and some would welcome a legislative remedy for
that.
Fourth, while basin producers feel that America has gone
too far down the road of dependence to achieve total energy
independence, we do feel that the U.S. oil decline curve of 2
percent to 3 percent per year can be flattened, not turned up
but flattened. That will be with a pricing scenario of $20 for
a sustained period and an energy policy that encouraged
domestic production, access to domestic reserves, new
technology and intense drilling. By the same token, applying
those same policy factors to natural gas, producers feel that
30 Tcf annual gas production can be achieved and sustained
within 10 years, but only in the context of a North American
gas market and only at a price of $5 per Mcf. That means no
more cheap gas.
Last, Permian Basin oil producers also noted that in
addition to price instability, excessive environmental
regulation is a concern, regulations like the one that recently
shut down rigs in New Mexico and sent fathers home without a
paycheck because the noisy rigs were interfering with the
mating habits of the prairie chickens.
In conclusion, as an oil and gas journalist, I feel that it
is absolutely critical that our Nation develop an energy policy
that relies on homegrown energy and decreases our dependency on
foreign sources. We have managed without an energy policy for
two decades, but it would really, really be pressing the odds
to think that we could go one more decade without a major
crisis. I am talking about a major confrontation in the Middle
East. The blackouts in California have been a wake-up call for
America. If we don't heed them, the next wake-up call may be
body bags stacked on the deck of an aircraft carrier in the
Persian Gulf.
I thank you for your attention. I will answer any questions
I can.
[The prepared statement of John Paul Pitts follows:]
Prepared Statement of John Paul Pitts, Oil Editor, Midland Reporter
Telegram
Good Morning, Chairman Barton, distinguished members of the
committee. As this committee goes forward in its quest for a national
energy policy, I am honored to be allowed to provide what insight I
can, as an oil and gas journalist for the past 25 years, and the oil
and gas editor of the Midland Reporter Telegram for the past 18.
I am not here today with another bag of statistics, a legislative
wish list or well-worn argument, but simply the results of a survey of
a small segment of America's oil and gas producers. Hopefully, as you
go forward with the urgent task of creating policy to fix America's
energy problems for the short term and the long term, this survey
information will provide you more insight into the challenge.
This survey of Permian Basin oil and gas producers addresses many
of those challenges.
THE PROLIFIC PERMIAN BASIN
Larger than Norway, Italy or Ireland, the Permian Basin is a
prolific, geological province, comprised of 52 counties in West Texas
and Southeast New Mexico, accounting for 75 percent of all the oil in
Texas, and 18 percent of the nation's 5.8 million barrels of daily oil
production. The capitol of the Permian Basin is Midland Texas--a world
class oil town, and a microcosm of the domestic oil industry. If
somehow, you could take the entire domestic oil industry--from
Louisiana to California and Texas to Canada and distill it down into a
single city of 106,000 you would have essence of oil or Midland, Texas.
Because Midland lives and dies by the price of oil and gas, and the
issues that impact those prices, producers, there, are perhaps more
keenly attuned to oil and gas issues than any other oil town in
America--including Houston.
Chairman Barton was in Midland recently on a fact-finding mission
for this committee, and I am sure he will agree with me that when it
comes to getting a feel for America's energy destiny, Midland is a go-
to-place.
THE PRODUCER SURVEY
Each year the Reporter-Telegram interviews a cross-section of
Permian Basin oil and gas producers--majors and independents--from
Midland to Hobbs, New Mexico, conducts a survey, in which it attempts
to interview each oil and gas producer--major and independent--in order
not only to determine spending and activity levels for the year, but
producer opinions on key issues. We do not ask for a simple yes or no,
but sought to engage them in discussion to validate a bigger picture.
While it is neither highly scientific, or large in sample, over the
years the Reporter-Telegram Producer Survey has proven nevertheless to
be a highly accurate barometer of mood and money in the oilpatch.
That's because there are a large number of producers, intensely focused
on oil and gas, in a region with one of the oldest and largest
concentrations of oil and gas in the world.
Today, we offer the results of our survey questions on energy
policy, in hopes that it will , perhaps, give the committee a broader
understanding of America's oil and gas producers, a better feel for
what needs to be done and what is politically possible, and physically
``doable.'' Over decades of trying to make a living in the risky and
politically charged oil business, Midland oil and gas producers have
developed a strong sense for the possible and impossible. Here are some
of the responses.
ENERGY POLICY
On the issue of energy policy we asked: Is the time right for an
energy policy?--And how high should it rank on President Bush's policy
agenda.
To no one's surprise 97 percent, said ``yes'' this is the time.
Only three percent said no.
On its ranking as a priority, 91 percent said it should be ``high
or very high'' on President Bush's agenda. But 9 percent said it should
rank less than that.
From the responses we detected not only a great deal of enthusiasm,
that a national energy policy is finally on the table, but a strong
sense of finality--we heard many times that it was now or never if
America is to finally have an energy policy.
Next we asked: Do you think it is politically possible to achieve a
national energy policy?
Only 44 percent said ``yes,'' 25 percent said ``no,'' and 30
percent said ``maybe.'' If producers were all over the board on this
response, one must remember that the oil industry has had along history
of disappointment in matters energy policy issues. While they want it
to be true, it is very apparent that they are not long history of
disappointment in matters of energy policy. While they want it to be
true, (that an energy policy is coming) it is very apparent that they
are not confident that Congress can bridge the political differences or
that the public will be able to overcome their NIMBY ways or their bias
against the oil and gas industry. Also for decades, producers have been
told repeatedly, that it is politically impossible to achieve an energy
policy.
The traditional argument is that there are more energy consumers
than producers and the only thing consumers care about is cheap
energy--and the cheaper the better. One producer noted: ``We will never
get the consuming public's attention on energy until they begin to
stack American body bags on the deck of air craft carriers in the
Middle East.''
ENERGY SECURITY
Next we asked: How concerned are you or your company about energy
security?
Over 80 percent said they were very concerned, while 19 percent
said they were not. Why only 80 percent and not 100 percent?
I sensed that some thought oil and gas had become too global for
anything drastic to happen. Also there is the lull factor created by
the fact that we have gone decades without an energy policy and have
had to fight only one war--which we easily won. Most, however,
acknowledged that it was sheer folly and highly dangerous to be 57
percent dependent on foreign oil producers. Especially when America has
so many energy resources and some of our foreign oil suppliers are
openly hostile to America--its culture and religious heritage. And then
there is Iraq. We are their biggest oil customer, but they are so bad
we have to bomb them from time to time--taking care not to hit any oil
facilities.
ENERGY INDEPENDENCE
Energy independence will become one of the most critical aspects of
a national energy policy. Is it a realistic goal--or not? If it is not,
should we just forget about an energy policy, and focus on our
military? We phrased this question very carefully.
We asked--is energy independence a realistic goal to pursue, in the
context of a comprehensive energy policy that includes conservation,
access to reserves, coupled with the use of broad-based energy
resources including: coal, nuclear, oil, natural gas and alternatives?
The majority, 68 percent, said that even with the best energy
policy, energy independence is impossible, that we have gone too far
down the road of dependence to become totally free of foreign oil
producers. Only 31 percent thought it was possible.
Many of those negative responses, however, were qualified by noting
that energy independence should be pursued, even it may not be
achieved. ``You can't hit the bulls eye unless you aim for it,'' said
one operator.
There was also the sense, that even though total energy
independence is unattainable, we must begin to back away from the
Middle East--even if it is only a little space, we must begin to put
space between America and the treachery of the Middle East.
OIL PRICE STABILITY
Oil price volatility has proven to be highly corrosive to the
welfare and security of America. During the downturn of 1997-1999, $11
oil nearly destroyed the oil and gas infrastructure. Then, in 2000-2001
high oil prices, above $35, produced a near train wreck in the economy.
We asked Basin producers if they would support a floor price on
crude oil as a means of controlling oil price volatility.
Over 60 percent, said they would not support a floor price. The
reasons: Price controls don't work. Every floor has a ceiling. Both
floor and ceiling would be artificial and mismanaged by government. But
37 percent said they would support a floor price.
Next we asked: Do you approve of NYMEX as a pricing mechanism for
crude oil?
Of those responding, 54 percent said they did not approve of NYMEX
as a pricing mechanism for world crude oil. Another 11 percent said
they did not think it was the right pricing mechanism, but accepted it
because, ``it was the only thing we have.'' Another 11 percent had no
opinion, and only 23 percent thought NYMEX was a legitimate and useful
pricing mechanism for world crude oil.
Most of the comments reflect the opinion that: NYMEX does not truly
reflect free market principles; that it is a price-maker and not a
price-taker; that there are too many more paper barrels trading; that
it was volatility by design for the benefit of commodity traders. There
is a strong feeling, even among those who favor NYMEX, that it must be
changed to prevent extreme price volatility.
Then we asked about the OPEC trading band of $22-$27. Is it a good
pricing mechanism for world crude? Is it working?
About 86 percent said ``yes'' it was a good pricing mechanism. It
is working and it is good for OPEC, U.S. consumers and domestic
producers. Most of the 14 percent who responded negatively to the idea
of the trading band qualified their answers by noting that they feared
OPEC did not have the discipline to make it work.
OIL AND GAS PRODUCTION
As the number one energy consumer in the world, America is faced
with two major challenges:
1. flattening an oil production decline curve of 2-3 percent per year,
2. trying to discover, develop and sustain 30 Tcf per year of gas
production within the next 10 years.
We asked: With the right oil price scenario, intense drilling, and
access to domestic reserves, do you think the domestic oil industry can
flatten the oil decline curve?
Approximately three-quarters said they were confident the steep oil
decline curve could be flattened--26 percent did not. While most said
the maturity of U.S. reservoirs, would be the biggest hurdle to
flattening the decline curve, they also thought new technology could
help compensate for maturity, and thought that opening access to
domestic reserves would be a bigger factor in flattening the decline
than increased drilling.
We also asked about natural gas: With the right gas price scenario,
intense drilling and an energy policy that encourages exploration and
production, do you think a North American gas market can reach and
sustain the target of 30 Tcf natural gas production per year? There is
more optimism here.
A solid 89 percent thought a North American gas market could
sustain that level, only 11 percent did not. Again access to reserves,
was given as the key to achieving the 30 Tcf goal. Also, that it is
developed within the context of a North American natural Gas Market
that includes Alaska, the Lower 48, Canada, and Mexico. Few feel the
U.S. can do it alone.
ENVIRONMENTAL CONCERNS
Asked to rank their top concern as producers--lack of rigs and
crews, oil price volatility or unreasonable environmental regulation,
we found few who would rank them and choose all three as top concerns.
Environmental Extremism is 11the bee in the bonnet'' for basin
producers. For example, during the California crisis, when natural gas
was in short supply and gas prices soared above $10, rigs in New
Mexico, drilling for natural gas were shut down, and men with families
to feed were put out of work--so as not to disturb the prairie chicken
during its mating season.
THE BOTTOM LINE
I think the bottom line of our survey is this: There are many
things to be addressed and fixed to have a viable national energy
policy. Permian basin producers strongly support a national policy, and
when called upon to step forward help solve America's energy dilemma
will do so, even though they have doubts that conditions in America
have changed enough for an energy policy to happen.
As unfortunate as it is, we can only hope that the California
situation will suffice as America's wake up call on energy--that it is
only black outs that are needed to get America's attention and not body
bags.
I applaud the Committee for the very serious work it is doing in
moving forward to formulate a long term energy policy, that will
provide the nation with secure, abundant, sustainable and affordable
energy sources for decades to come--an energy policy that will
hopefully decrease the danger we face from over dependence on Middle
East oil.
As you seek to build consensus around energy policy issues, I hope
this information can be of some use. Thank you very much.
Mr. Barton. We thank you, Mr. Pitts. We do appreciate you
flying up from Texas.
We are going to have 10-minute question rounds and if we
need more than one round, we will certainly do that. The Chair
would recognize himself for the first 10-minute round.
Mr. Cook, in your testimony, you didn't really give us an
overview of the world situation in terms of production and
consumption, or the U.S. production and consumption. Do you
know approximately how many barrels per day is produced of oil
in the world market?
Mr. Cook. We expect global oil supply, global oil
production to run 76 million barrels a day or so.
Mr. Barton. Is that about where it has been the last 3 or 4
years, or is that up a little bit?
Mr. Cook. It has grown significantly since the early
1990's.
Mr. Barton. What was it--could you get that information,
the trend line where the world production curve is going?
Mr. Cook. Sure.
[The following was received for the record:]
From 1990 to 2000, world oil production has risen by approximately
10 million barrels per day (mmbd) from 66.7 mmbd to 76.6 mmbd. This was
an average 1.4 percent annual increase, although the increase was not
steady. World oil production remained relatively flat through the early
1990s. The year 1994 marked the beginning of larger annual increases in
production. From 1994 to 1998, world oil production rose 11.9 mmbd,
increasing from 63.2 mmbd in 1994 to 75.1 mmbd in 1998. This created an
average surplus of about 1.5 mmbd for 1998.
OPEC drastically cut production in 1998 and early 1999, resulting
in reduced world crude oil production of 74.2 mmbd for 1999. Crude
inventories have remained extremely low despite four production
increases in 2000 to attain a production level of 76.6 mmbd.
In 2001, OPEC reduced its quota 1.0 mmbd in January and then
another 1.5 mmbd when they met on March 17. While OPEC members have
tended to produce more than their quotas, EIA estimates that this
combined cut of 2.5 mmbd per day would put OPEC production below last
summer's levels.
Mr. Barton. Is world consumption in that same range, about
76 million barrels a day right now?
Mr. Cook. It averaged about 76 last year.
Mr. Barton. Now, in the United States do you know what our
domestic production is averaging per day?
Mr. Cook. Crude oil is about 5.8 million barrels a day.
Mr. Barton. 5.8. About how many million barrels of
equivalent do we get in terms of natural gas liquids per day in
the United States?
Mr. Cook. That one I would have to get back to you on.
[The following was received for the record:]
Natural Gas Liquid (NGL) production comes from both natural
gas processing plants and refineries. Natural gas processing
plants account for about 73 percent of total production. There
is some seasonality to natural gas liquids (NGL) production
levels, with production being higher in the summer months as
refiners produce butane that cannot be used in gasoline during
the summer (the butane is used in the winter).
NGL production levels tend to fluctuate anywhere from 2.0
to 2.6 million barrels per day (mmbd), depending on the time of
year. However, January 2001 production was only 1.8 mmbd, the
lowest level for any month in at least ten years. This is due
in part to the high price of natural gas, which encourages
refiners to simply sell the gas for a higher profit than they
could make by removing the wet NGL streams.
Mr. Barton. The number I have is about 2 million barrels.
Mr. Cook. 2 million, right. Correct.
Mr. Barton. What is the United States consumption per day
in millions of barrels?
Mr. Cook. We are running between 19 and 20 million barrels
a day, depending on the season.
Mr. Barton. So that is up then significantly from where it
has been?
Mr. Cook. Absolutely. Demand growth has been very strong.
That is one of the main reasons why excess refining capacity
has dropped.
Mr. Barton. If you could provide the committee with the
historical data say for the last 10 to 15 years in world
production, world consumption, United States production, United
States consumption, but in general the consumption of petroleum
in the United States for the last 5 or 6 years is on an upwards
curve.
Mr. Cook. Absolutely. A strong economy.
[The following was received for the record:]
From 1990 to 2000, world oil production and consumption
have risen steadily, increasing by approximately 10 million
barrels per day (mmbd) or an average 1.4 percent annual
increase. However, production and consumption did not always
change together, and price variations reflect these imbalances
in cycles of demand and production.
World oil production reached 75.1 mmbd in 1998, creating an
average surplus of about 1.5 mmbd. Resulting low prices in 1997
and 1998 led OPEC member countries to drastically cut
production in 1998 and early 1999. World oil production for
1999 was about 74.2 mmbd, which was about 0.72 mmbd below
consumption.
Despite four increases in 2000, crude inventories remain
extremely low. World oil production for 2000 was about 76.6
mmbd, which was approximately 0.8 mmbd in excess of
consumption.
OPEC cut 1.5 mmbd in January 2001 and then cut another 1.0
mmbd when they met on March 17. This combined cut of 2.5 mmbd
per day would put OPEC production below last summer's levels.
U.S. oil consumption has increased steadily since 1990.
Consumption has risen from 17.0 mmbd in 1990 to 19.5 mmbd in
2000. However, U.S. oil production has actually declined during
this period, falling from 9.7 mmbd in 1990 to 9.1 mmbd in 2000,
including crude oil and natural gas liquids production.
Mr. Barton. Has that continued in spite of the price spike
that we saw about 1\1/2\ years? Did that have any impact on
consumption?
Mr. Cook. Well, last year the consensus is that U.S. oil
demand did flatten out. In fact, gasoline dropped some because
of the significant price jump from 1999 to 2000.
Mr. Barton. Okay.
Mr. Cook. It is still relatively high.
Mr. Barton. Mr. Layton, you are the closest thing we have
here to a spokesman for the producing sector, because you were
representing the independent producers.
The American Petroleum Institute, which would represent the
major oil producers, chose not to participate. They were
willing to send their executive director who is headquartered
here in Washington. And he is a very able gentleman. But we
wanted what I call a real-world witness, somebody who is
actually out in the market; and for whatever reason, that was
not possible.
So if people in the audience are scratching your heads
about how we managed to have an oil hearing without Exxon,
Mobile, Texaco, Chevron, some of those folks participating,
they chose not to be here, except for the executive director,
who again is a very abled person, if he had been here.
So I am going to ask you some questions, knowing that you
don't represent the major producers.
What is your best guess about how much oil production we
can get in the United States if we really made a major emphasis
on supply, as if we were willing to look at the OCS, willing to
look at ANWR, willing to look at Federal lands in the United
States that are currently off limits, put some production
incentives back into the Tax Code? If we did all of the things
that people talk about doing, do you know how much we could
increase the approximately 8 million barrels a day that we have
right now, if you include natural gas liquids?
Mr. Layton. I think that is a two-step process. The first
step is to flatten the decline curve, and that is a challenge
that I think can be met with--I do not want to make it sound
like it is easy, but it certainly is well within reach, if we
can bring stability and, more importantly, the perception of
stability to the marketplace.
That can be done with providing tax incentives, with
removing some of the perception that you have inability to
access lands to drill. And with those steps in place, I think
we can flatten production. We are not going to increase
production until we come to the point where we can stop the
decline.
The next step--I think probably that the best thing for me
to point to is what happened roughly 20 years ago when the
Alaskan Pipeline came online, and all of a sudden we saw an
extra 2 million barrels a day of oil production coming down
from Alaska. I do not know that there is a better example for
me to point at, other than that. And that was not that long
ago. Maybe there is not another 2 million barrels a day of
production that could come out of ANWR or come from more
drilling in the deep-water Gulf of Mexico, but we do not have
to look back too far to see a huge jump in the domestic crude
oil supply.
Mr. Barton. Prudoe Bay is currently producing at
approximately 1 billion barrels a day. Is that not correct? Mr.
Cook may know the answer to that, but it is on the decline.
Mr. Layton. Yes, it is. I think last year is the first year
that Alaskan production had dropped blow a million barrels a
day. It is just barely below a million.
Mr. Barton. If we do not do something somewhere in the
North Slope, that production decline is going to accelerate.
Mr. Layton. It certainly will; and more importantly--and
maybe your witnesses from the API could address this more
accurately than I can--but the production in Alaska, as you
know, comes to the pipeline, and there is a critical mass that
is required to keep that pipeline going. And I have heard that
that number is several hundred thousand barrels a day of
production.
So you are not going to ride that million barrels a day of
production down to zero before there is not any Alaskan crude
coming. It will shut off long before it hits zero.
Mr. Barton. Mr. Robinson, you represent the marketers. Of
course, your actual chain of convenience stores and gasoline
service stations is in California; is that not correct?
Mr. Robinson. Correct.
Mr. Barton. Are California gasoline prices lower or higher
than the national average?
Mr. Robinson. Higher.
Mr. Barton. Quite a bit higher, aren't they?
Mr. Robinson. Typically.
Mr. Barton. And where does most of the crude oil come from
that is refined in the products? Doesn't most of it come from
Alaska?
Mr. Robinson. California has a fair amount of crude, but an
awful lot of it comes from North Slope.
Mr. Barton. All right. So if we were not to drill in ANWR
and the production decline continues on the North Slope, would
you think gasoline prices on the West Coast would go up or go
down?
Mr. Robinson. They would likely go up.
Mr. Barton. Would likely go up. That is what I think, too.
Mr. Pitts, can you tell me how many wells have been drilled
approximately in the Permian Basin?
Mr. Pitts. I would estimate 6 to 700,000.
Mr. Barton. 6 to 700,000. Where does West Texas get its
water supply?
Mr. Pitts. Groundwater.
Mr. Barton. You need to turn your microphone on.
Mr. Pitts. I am sorry.
Mr. Barton. You said groundwater.
Mr. Pitts. Yes, groundwater.
Mr. Barton. How many of those 6 or 7,000 wells have
contaminated water supply in West Texas.
Mr. Pitts. In all of Texas last year, there were 52.
Mr. Barton. Fifty-two.
Mr. Pitts. Of 600--that is just wells in the Permian Basin.
There are probably several million wells in all of Texas.
Mr. Barton. Has there been any permanent contamination from
all of those wells drilled in West Texas?
Mr. Pitts. No, sir, it has all been taken care of.
Mr. Barton. All of you rowdy wild rambunctious wild catters
out West for all of the wild talk about raping and pillaging
the environment, they have drilled almost three quarters of a
million oil wells and gas wells, and they managed to do that
without damaging the environment in any kind of a permanent
situation?
Mr. Pitts. Would you believe that?
Mr. Barton. I believe it. I am asking you. You are the
expert.
Mr. Pitts. Yes, sir, it happened.
Mr. Barton. Okay. Mr. Kassel, you are obviously a little
outmanned here, but certainly if we had a little broader
perspective, it would be a pretty equal fight.
I am almost tempted to say--we used to say one ranger, one
riot. We can say in your case, you know: one energy hearing,
one environmentalist is all we need. You know, it is a pretty
fair fight. I thought your testimony was well spoken.
Mr. Kassel. Thank you.
Mr. Barton. But I do not think this subcommittee has any
serious objection to focusing on conservation and trying to
improve the environmental protection in existing laws. We are
certainly in favor of that.
But would you agree from your side of the equation it is
also appropriate that we do what we can to increase the
domestic supply, if that is possible?
Mr. Kassel. I think the real issue isn't one of supply or
demand. It is meeting our energy needs. Most of the folks on
the panel today are talking about meeting our energy needs with
a basket of new sources of supply. We have a different view.
Our view is that the combination of supply side and demand-side
management, with more focus on demand-side than we have seen in
the past, can really bring us much closer toward meeting our
environmental need--our energy needs over the long haul.
There are some--again, the California situation provides
some instruction. You know, drilling in the Arctic Refuge or
offshore is not going to solve or even help at all the short-
term electricity crisis in California.
Mr. Barton. I agree with that.
Mr. Kassel. And we all agree--I think everybody agrees with
that. And yet that is a piece, a large piece of the debate.
But if you look at what they are doing in California, they
have taken some very important steps that will increase
efficiency of energy use over the next few years in a very
clean way to offset the need for more production.
It does not mean there will not be more production, and I
think we all know that there will be some more production as
well.
But take one example, the California Energy Commission
issued an, under an emergency basis, efficiency standards for
new buildings. Those standards will roll out over 5 years. It
will take the place of 2,000 megawatt coal-fired power plants.
That is a way to meet the energy need in California without
adding to the pollution.
Mr. Barton. Of course, there is a cost to that. I am not
opposed to what they did, but you do not increase efficiency
and installation capability at zero costs. I mean, it costs
money to do that. You recognize that.
My last question--then I want to go to Mr. Boucher--you do
live in New York City, so I do not know the answer to this
question. Do you own an automobile?
Mr. Kassel. I have owned an automobile----
Mr. Barton. You have owned an automobile.
Mr. Kassel. [continuing] in my life. My first car was a
1972 Thunderbird, which probably----
Mr. Barton. So you at least----
Mr. Kassel. [continuing] was 8 miles a gallon.
Mr. Barton. You at least have been in an automobile?
Mr. Kassel. I was in an automobile. I was in a taxi today.
I live in Manhattan, so I do not need one.
Mr. Barton. I think that is a wise decision.
I recognize the gentleman from Virginia for 10 minutes for
questions.
Mr. Boucher. Thank you very much, Mr. Chairman.
For a couple of years, I also lived in Manhattan; and I
found out having a car was more of a burden than an
opportunity, so I gave it up very quickly.
I want to say thank you to our witnesses for their
outstanding testimony this morning.
Just a brief follow-up with regard to the Alaskan
production of oil, a concern has been expressed about the fact
that production from the Prudoe Bay is beginning to decline
below 1 million barrels per day; and the suggestion that some
have made is that the next obvious step might be to explore and
develop in the Arctic National Wildlife Refuge.
What has not been mentioned is that there is another
possible source of production in Alaska, and that is the
National Petroleum Reserve, which is 23 million acres
altogether, lying just to the west of Prudoe Bay.
And I am wondering if any of our witnesses this morning,
perhaps Mr. Kassel, Mr. Layton or Mr. Robinson, all of whom
have made comments with respect to the potential for developing
the ANWR, can give us any information about what might be
expected were development to proceed with regard to the
National Petroleum Reserve.
During the course of the last year, Secretary Babbitt made
exploration in that area possible leading toward the potential
for development, and I wondered if perhaps that is a way that
we might continue to provide supply for the Alaska oil pipeline
and to keep production in Alaska going so as to benefit the
United States economy, while at the same time maintaining the
Arctic Natural Wildlife Refuge in its current condition.
Mr. Kassel, do you have any information?
Mr. Kassel. I think I would like to defer to some of my
colleagues who focus on that part of our energy policy. As I
said at the outset, my focus has been on the diesel rule, and
my real focus is on air pollution and vehicle policy.
But I will provide you a written answer if you would like.
Mr. Boucher. That would be helpful. Do other witnesses care
to comment on the question? Mr. Layton?
Mr. Layton. Well, I confessed not having a great deal of
knowledge about the potential of the reserve. My comment would
be that exploration anywhere in an environmentally sound
fashion is a good thing, but if you are trading off exploring
in an area that may have less promise than the one that perhaps
you want to, if that is the tradeoff that you make, then you
are certainly not gaining as much ground as you could.
And if this industry, and I firmly believe it can, can
effectively explore in either of those areas in an
environmentally sound manner, I do not know that the two really
should be mutually exclusive.
Mr. Boucher. But you have not actually focused on the
potential of the National Petroleum Reserve to provide a
substantial supply of oil to the United States.
Mr. Robinson, do you have any comments you would like to
make?
Mr. Robinson. Yes, I am certainly not an expert on the
reserve; but as I mentioned--and I talked about performance
standards for fuels--I think that you look at that exploration,
if you set your performance standards which you expect those
folks that are attempting to drill oil to meet whatever
environmental standards that are necessary, I believe, No. 1,
they can. And you should--at that point you should attempt to
take advantage of those resources in a responsible manner. I
mean, to me----
Mr. Boucher. Thank you. It is an interesting response, but
hardly directed to the question. It would appear to me that
before we plunge headlong into developing a pristine wilderness
area that the better course might be to examine in detail what
potential there might be for the Arctic National Petroleum
Reserve to provide substantial supply to the United States.
That is a comment.
I do have some other questions.
Mr. Cook, I would like to ask you a little bit about
refinery capacity in the United States. About a decade ago, we
had sufficient refinery capacity to meet approximately 94
percent of the needs that we had for refined product in this
Nation. Ten years later, that number has declined to 85
percent, and it is generally thought that the absence of
sufficient domestic refinery capacity is a contributing factor
to the high price of gasoline and to the gasoline price spikes
that we experienced last year and some anticipate that we may
experience again as the spring and the summer driving season
comes upon us.
Some of the witnesses this morning have suggested that one
of the reasons that we do not have adequate refinery capacity
is because of the operation of various environmental
requirements, the clean air laws, perhaps the sulfur rule, and
other Clean Air Act requirements.
I would like to just review with you a little bit of the
history of refinery capacity in the United States and get your
comments on that assertion as to whether or not it is accurate.
Let me just cite a few numbers. It appears that in the
United States, refinery capacity grew steadily in the 1970's
and reached a peak in 1980. By 1985, 5 years later, the number
of operating refineries had dropped dramatically to 223, and
that was substantially below even the 1970 level of 276.
So in 1970, we had 276 refineries; and by 1985, that number
had dropped to 223. By the time that President Bush signed the
Clean Air Act in 1990, the number of operating refineries had
already dropped to 205. And so it would appear that there was a
very substantial decline in the number of refineries in the
United States by the time those major amendments to the Clean
Air Act of 1990 were adopted.So the trend had already begun and
was quite dramatic.
Now, in view of that history, would it be reasonable for us
to conclude that the problem with regard to inadequate refinery
capacity in the Nation really is not the Clean Air Act, but was
other factors, and that those other factors might be things
like the end of price controls in 1981 and the determination
that approximately that time of the small refinery crude oil
entitlement program?
Your views with regard to those matters would be very
welcome, Mr. Cook.
Mr. Cook. Well, first of all, there at the very end, I
think you touched on why we saw the big drop in the number of
refineries. In the early and middle 1980's, we had that shake-
out period where the small, inefficient refineries would never
have existed in the first place were it not for the regulatory
program. So in some sense, taking those out is probably
analytically the right thing to do.
Now, there was--even after the shake-out--I would term
adequate refining capacity in the late 1980's, even up until
the early 1990's, recognizing that it is a global market now
and that at the same time Europe enjoyed, or the opposite, if
you are a refiner, a significant amount of excess capacity as
well.
So any temporary tightness through this period was quickly
responded to by both domestic and foreign refineries with a
large influx of product, gasoline in particular.
So this tended to keep margins relatively low throughout
this period along with some warm weather. You move into the
middle 1990's and that is when this excess capacity begins to
get fairly small.
We had a very strong U.S. economy, very strong demand for
petroleum that outstripped a significant uptick in refinery
capacity from the mid-1990's up through this point up 1.5
million to 2 million barrels a day. So while the number of
refineries had dropped over this period, there was still
ongoing upgrading going on; but it just occurred at a somewhat
slower pace than the strong demand growth over the second half
of the 1990's.
The real question here was why wasn't it stronger, and I
would say that the margins are key here. With that excess
gasoline capacity in Europe, which still exists, this, along
with again some high stocks and cheap crude oil and some warm
weather in the middle to late 1990's, kept those margins less
than what would be necessary to stimulate significant increases
in refining capacity.
This is not to say that the environmental regulations do
not contribute to it; of course they do, because they add to
costs of compliance. You have to invest for that, plus you have
to invest for the economic factors.
Mr. Boucher. Would your conclusion be that the primary
motivation for the existing level of capacity, the primary
problem that there not being enough capacity to meet a larger
amount of our domestic needs is economic as compared to
problems that arise from environmental requirements?
Mr. Cook. I would say both, but the bottom line is the
margins have not been sufficient to stimulate capacity growth.
Mr. Boucher. Why aren't the margins sufficient enough? What
is the major problem there?
Mr. Cook. Again, there is a lot of capacity in Europe. So
we get a little temporary tightness in gasoline like we had
last year, you know, off and on, 1996, late 1997; and within 3
to 4 weeks a flood of gasoline will arrive on the East Coast
undercutting prices and margins and quickly restoring the
market balance.
So while there may be a month period where refiners enjoy
relatively healthy margins--you average it out for the year--
when you look at the history over the last 15 years and compare
it with other industries where the capital could go, it is just
not an attractive environment.
Mr. Boucher. Mr. Chairman, with your indulgence, I would
like to pose one other question to one of the witnesses.
Mr. Barton. Sure.
Mr. Boucher. This will be fairly brief.
Mr. D'Arco, I would like to ask you about the operation of
the Jones Act and the potential that we could either make more
readily available Jones Act waivers or perhaps consider repeal
of the Jones Act altogether.
The Jones Act requires that for domestic shipments within
the territorial waters of the United States that we use
American-flag carriers; and foreign-flag carriers oftentimes
could provide that service at a much lower price, which in turn
might make the availability of fuels cheaper to the end user.
I can say that I personally have long felt that major
modifications or repeal of the Jones Act altogether would be
appropriate. I think you have some information about the recent
operation of that act.
What I would like for you to do, if you can, is give us a
sense of how many waivers under the Jones Act have been applied
for within the last year or, perhaps, 2 years; how many have
been granted; and if none have been applied for, why not.
Is it the waiver provision that is not sufficiently
generous to make the waiver process worthwhile and what change,
if any, do you think would be necessary in order to assure that
we can use more cheaper foreign-flag carriers for this
transport than can occur today?
Mr. D'Arco. Sir, I do not know actually--I do not know how
many waivers have been applied for and issued over the last few
years. I can certainly get that information for you from my
trade association, but it is an important issue.
And I know a lot of the product that is needed in winter
season that cannot be provided by local refineries must come
from the Gulf Coast, and the pipelines do not have the
capability at all times to deliver that fuel. So it would be a
wonderful thing if we can use foreign-flag ships to bring it
into New York Harbor and ameliorate the price situation.
Mr. Boucher. Okay. Thank you, Mr. D'Arco. Thank you, Mr.
Chairman.
Mr. Barton. Thank you for that last question. Let the
record reflect that was on my list of questions for the next
round.
The gentlewoman from California, Congresswoman Bono, is
recognized for 10 minutes.
Mrs. Bono. Thank you, Mr. Chairman. I would like to thank
the panelists for your time today. I am very new on this
committee; I think I have been here for 3 weeks. I just want to
say that I am enjoying learning about these issues a great
deal. I have a brother who is in this business as an
independent producer, and I should have listened to him as I
was growing up. And he reminds me of that daily now.
My first question is to Mr. Layton. In your testimony, you
referred to the critical time lag for production capacity to
meet demand because of the lack of investment in new
development. How long is this time lag?
Mr. Layton. It certainly is something that could easily
exceed a year, and the reason I say that is because if we go
back to 1998 and 1999 and see what happened primarily to
independent producers, capital sources dried up, debt problems
were there; and so once the prices recovered, you are not
immediately in a position to go out and spend money on drilling
new wells.
You have got to heal the company, if you will; and that
takes time. I mean, that process to a certain extent is still
going on. The rig count has grown substantially, particularly
if you look at natural gas. But if you look at the number of
rigs that are out drilling for oil right now, we have not
approached the level that we were in 1997. So, you know, we are
a couple years beyond that price crisis of 1998 and 1999. And I
would still say we are not in the period of time in terms of
drilling where we have fully recovered.
Mrs. Bono. Is the California crisis helping with that
recovery?
Mr. Layton. The California crisis is, I think, very ironic
to me. You have a situation in California now where oil
producers are seeing higher prices than have been seen in many,
many years. Yet, because so much of the production in
California is incorporated in enhanced-recovery operations that
use steam, and to generate steam, you have to buy natural gas.
And so many producers have had to shut in their steam
generation operations and, therefore, are actually going to
experience a decline in production unless they are able to
start steaming their properties again.
And so even though the price of oil is high, margins out
there are really tough because of the costs to generate steam,
which is tied directly to the price of natural gas.
Mrs. Bono. Thank you. To just change subjects, but still
with you, Mr. Layton. I am hoping to take a trip myself
actually up to Alaska this summer to see ANWR before I have to
take a position on it either way. I think it is a novel
approach sometimes for a politician to actually to see what you
are voting on, and I hope to do it.
But in your testimony, you mentioned the technology
currently available for the development of resources in areas
like ANWR. Can you describe some of these technologies and
explain how they are environmentally friendly?
Mr. Layton. Probably the--I think the technology that
reduces the footprint required to develop is the one specific
one I would point to, and that is where you have wells that can
be drilled directionally from a very compact location, so
rather than scattering wells all over a large area, you are
able to drill many, many wells from a very small area that
extend out and are able to tap reserves that are a long, long
ways away from where the actual drilling operations are. So
that is the one technology that I would certainly say would
minimize the environmental impact.
Mrs. Bono. Thank you. Mr. King, some in Congress want to
eliminate the additive MTBE from the national fuel supply. They
say that MTBE has been detected in water. Can you update us on
the science?
Mr. King. As you know, MTBE has been detected--as you know
it began in Santa Monica and that was a very sensationalized
case, and what we have found is that the number of detections
has actually flattened out and actually been in decline.
We have to remember that in California, it is only like 1
percent, I believe, of the total water systems that have been
tested have we found any traces of MTBE. And then only .2 of 1
percent of those wells have we found levels of MTBE in excess
of the maximum containment level.
So we think it is an issue that is overblown, and it has
unfortunately tarnished the reputation for this product that is
extremely effective at reducing air pollution. And it is
something that I think we need to deal with through the--as I
mentioned in my comments--through the leaking underground
storage tanks and fixing those tanks, which is the source of
not only MTBE leaks but also other components of gasoline like
benzene and things that are known carcinogens. We have to
remember also MTBE is not a known carcinogen, and I think it is
very important to recognize that issue.
Mrs. Bono. Thank you. You answered my next question, too.
Some of my colleagues also labor under the impression that
any volume lost in banning MTBE would quickly be made up by
using ethanol. What are your views on that?
Mr. King. Ethanol is a product that simply will--if you
replace ethanol with MTBE, it would not keep the same level of
gasoline. You cannot blend as much ethanol as you can MTBE.
There are limits with the amount that you can blend--it is 10
percent--for two reasons:
First of all, any level above 10 percent affects the
engine's performance, and the car will not work as well; and
then second, the subsidy, the Federal subsidy for ethanol stops
at 10 percent.
And the only reason why you would ever blend ethanol is if
you were able to take advantage of the Federal subsidy; and so,
therefore, we actually, as I said in my comments, at our
refinery in California alone, if we switch MTBE with ethanol,
we lose 8 percent of our gasoline production.
And I think that number that we have studied in California
is just replacing ethanol with MTBE, we would see a reduction
of supply of around 100,000 barrels a day; and that is already
in a very, very tightly balanced supply and-demand situation in
California.
So we do not believe that ethanol is the answer, not only
from a supply perspective, but it is simply not available in
the quantities that are needed. It is hard to transport. It is
very difficult to transport. It is more water soluble than
MTBE.
There is just simply not the capacity of ethanol to do the
replacement with MTBE. So there are several issues with ethanol
that we find problematic as a potential solution to our
gasoline shortage issue.
Mrs. Bono. Thank you. My next question is for Mr. Robinson.
One of the biggest questions facing consumers and many
legislators is our price is going to spike again this year.
Mr. Robinson, you have daily, direct contact with
consumers; you hear from them more than we do, and prices are
going up. So do you believe we are going to have price spikes
this summer, and why is that?
Mr. Robinson. We have had numerous price spikes. Nothing is
changed to stop that. At this point, there is no good reason to
expect that the past will not occur in the future. Our
situation is that we have basically sort of a stressed system,
refining and distribution system. It is a very tight system,
caused partly because we have a number of different
specifications for fuels.
It takes a very small problem to make a very large price
increase. We have got the oxygenate mandate which makes the
problem even more difficult; and then if you add in a few other
problems, for example, you know, natural gas is going up.
Natural gas impacts MTBE; that impacts the overall supply. It
also in particular impacts the higher octane products; and so,
you know, you couple all of these things, there is no good
reason not to expect that we will continue to have any price
spikes.
Mrs. Bono. Do you have any idea what Congress can do to
provide relief for our constituents this summer?
Mr. Robinson. I think a really good place to look at is the
oxygenate mandate. You know, I think Mr. King mentioned about
four things, and I would like to add a couple of things to
those. He mentioned that you really need to look at the
cumulative regulatory effects. You just need to consider it as
you are going forward. That is not necessarily a quick fix, but
you need to look at that as you go forward. I think that is an
important thing.
You need to have clear rules. They need to be reasonable,
and you need to have an implementation time that the job can
get done. You need to look at the permit process. I think the
permit process, a lot of times that stresses the system too,
and that is somewhat of an artificial requirement.
He mentioned tax incentives for environmental costs. That
is something that you can look at that will help on the supply
side.
I think, in particular, you need to look at the number of
fuel specifications. We have continued to add more and more
fuel specifications. What you end up with--I mean, we have
RVPs. We have reformulated gasoline, nonreformulated gasoline,
reformulate gasoline with ethanol, reformulated gasoline
without ethanol. You have different kinds of diesels. You
really have stressed the system.
What happens is a lot of times you have products, but you
have artificial shortages because you have the wrong product in
the wrong place or the right product in the wrong place,
however you want to say it. So I think you need to look at the
performance standards instead of mandates and then in
particular--and this is, you know, something that I think is
very, very important for California--is you need to look at
that oxygenate mandate, and you need to get rid of it.
Mrs. Bono. Thank you. My time has expired. Thank you, Mr.
Chairman.
Mr. Barton. Thank you, Congresswoman.
The gentleman from Massachusetts, Mr. Markey, is recognized
for 10 minutes for questioning.
Mr. Markey. Thank you, Mr. Chairman, very much.
Mr. Cook, let me ask you, based upon EIA's present-day
analysis of the current market conditions, do you believe that
America is in an energy crisis?
Mr. Cook. That terminology would be something that a
statistical organization would probably choose to avoid. There
is no question that supplies are extremely tight right now, and
the risk of price spikes for summer gasoline is high.
Mr. Markey. Would you agree with the statement in the
Republican staff memo that they gave us today that ``while
crude oil prices have gone up in nominal terms, when adjusted
for inflation, they are still lower than historical prices''?
And the statement again in their memo to us and to the world
``in today's dollar prices for crude oil peaked in 1981 at
about $70 per barrel using 2001 dollars, and today it's about
$26 to $27 a barrel''?
Would you agree with that analysis?
Mr. Cook. It sounds like my testimony last summer.
Mr. Markey. As we know, imitation is the sincerest form of
flattery; and if it could get the staffers on the Republican
side home earlier at night, they probably did so in complete
concurrence with your findings. Would you agree with that, Mr.
Cook?
Mr. Barton. Will the gentleman yield?
Mr. Markey. I would be glad to.
Mr. Barton. I come from an oil-producing State; I will put
on the record I think oil prices are too high.
Mr. Markey. Too high?
Mr. Barton. Too high, if that helps the gentleman's point.
Mr. Markey. It is just the opposite.
Mr. Barton. It is just the opposite.
Mr. Markey. I am making the opposite.
Mr. Barton. You want to say they are too low?
Mr. Markey. No, I am saying it is just like Goldie Locks,
they are just right. I mean, they could be a little lower,
okay? A little lower. But, you know, $22 to $28 a barrel at
least is the stated goal of OPEC; and they are at the upper end
of that range right now, but it is also within a range that is
not overly detrimental to the American economy, compared to
$70-a-barrel prices in 1981, which were having a devastating
impact on our economy.
Is that a correct summary of your point, Mr. Cook?
Mr. Cook. There are a couple of things here. First of all
the $70 high is correct; $30 today puts you in the--at the
upper end of the lower third on the historical real-price
range.
Mr. Markey. The upper end of the lower third?
Mr. Cook. The lower third.
Mr. Markey. Your mother would not be proud if you came home
with that as your report card; but for oil prices, that is a
good grade, isn't it?
Mr. Cook. Let us just say it is in the lower--it is below
the median price since----
Mr. Markey. Below the median price.
Mr. Cook. [continuing] since 1981. However, that is not the
end of the story. That suggests that from an economic impact
point of view, whether it is the household or whatever, it is
not an extremely high price. However, it is the volatility that
I think concerns all decisionmakers and households. When
nominal prices swing out of the historical range--nominal
prices now have historically ranged between $17 and $21--and
when they swing out of this range, even with a dip to $10 in
less than a year to $30, that causes a lot of investment
confusion and causes a lot of consumption confusion.
So I do think--we have to take that volatility very
seriously.
Mr. Markey. Well, let me say this: the President is dead
wrong. We are not in an energy crisis. I think all the evidence
makes it clear that in the same way that he is talking down the
economy so that he can justify his huge tax cuts, he is talking
up an energy crisis that does not exist so that he can drill in
the Arctic Wilderness and other environmentally sensitive parts
of the United States. In both instances, he is dead wrong.
His analysis of the energy situation is completely
inaccurate, looking at all of the historical numbers of where
we are. And if we are in a crisis, he has the wrong solution,
because we cannot extract oil from the Arctic Wilderness for at
least 8 to 10 years. Meanwhile, he has yet to mention the words
suburban utility vehicle, air conditioners, and every other
appliance or device which has been manufactured by man that is
now consuming all of this energy, which gives us a much higher
probability of getting a near-term solution.
One word, yes or no, we will go down the line. Are we in an
energy crisis, Mr. Layton? Crisis, yes or no?
Mr. Layton. Yes.
Mr. Markey. Mr. King.
Mr. King. California certainly is.
Mr. Markey. I am not talking about an electricity crisis in
California. I am talking about a national energy crisis. Yes or
no?
Mr. King. I think we are, yes.
Mr. Markey. Yes, fine. Mr. D'Arco.
Mr. D'Arco. No.
Mr. Markey. No. Mr. Robinson.
Mr. Robinson. I am a Californian, realize.
Mr. Markey. I am not talking about an electricity crisis,
Mr. Robinson. I am talking about a national energy crisis.
Mr. Robinson. You can't ignore----
Mr. Markey. Yes or no, are we in a national energy crisis,
Mr. Robinson?
Mr. Robinson. Yes.
Mr. Markey. Yes, thank you. Mr. Kassel.
Mr. Kassel. No.
Mr. Markey. No. Mr. Pitts.
Mr. Pitts. Yes.
Mr. Markey. Yes. Thank you.
Now, I would like to ask each of you, do you support in a
crisis, as we did in 1975 in this country when we increased the
efficiency standards for automobiles from 13 miles a gallon to
27 miles a gallon, moving to increase, mandate the fuel economy
standards once again for automobiles and especially for SUVs,
which have never had any standards imposed?
Under your own definitions that that we are in a crisis,
should we impose standards on those vehicles that consume \2/3\
of all of the oil that we consume in our country?
Mr. Layton?
Mr. Layton. No.
Mr. Markey. No, thank you. Mr. King.
Mr. King. No.
Mr. Markey. No. Fine. Mr. D'Arco.
Mr. D'Arco. No.
Mr. Markey. No, fine. Mr. Robinson.
Mr. Robinson. It is going to take more than one word. But I
think I will agree with you.
Mr. Markey. I will take that. Mr. Kassel.
Mr. Robinson. My point is that SUVs will----
Mr. Markey. We will come back to you. I will come back to
you, Mr. Robinson. Mr. Kassel.
Mr. Kassel. I said we were not in a energy crisis, but we
should close the SUV loophole and fuel economy and bring us up
to 39 to 40 miles a gallon by the end of the decade.
Mr. Barton. Mr. Pitts.
Mr. Pitts. I agree with you.
Mr. Markey. You agree with me.
Mr. Barton. If the gentleman will suspend.
Mr. Markey. I would be glad to.
Mr. Barton. We encourage the gentleman to show the
enthusiasm he normally does, but this is not an oversight
hearing. We do not need to be on the verge of brow beating the
witnesses.
Mr. Markey. I am not brow beating the witnesses. I am
trying to extract answers in the very wise time constraints
that the chairman is imposing upon the members of the
committee.
Mr. Barton. You are one of the wisest, most valuable
members of the subcommittee.
Mr. Markey. I think you. That is a tribute from Caesar.
Mr. Barton. That is actually seriously meant. But you know,
there will be times that we need to be in the witness' face,
but I do not believe this is one of those times.
Mr. Markey. I am not in the witness' face. I'm trying to
actually get helpful information from them. See, sometimes what
you have to do in order to get answers from people is to
paradox them so that they can understand the inherent
contradictions in their testimony, only by making them really
simplify down the essential contradictions in their positions
can you get them to confront that and ultimately to reconcile
so that we can get a real answer that is helpful to the
American people; otherwise their testimony appears to be self-
serving from an industry perspective, but is it really helpful
from a national perspective.
Mr. Barton. I understand. This is just not a grand jury.
Mr. Markey. We obviously do not have them under oath.
Mr. Barton. We will give the gentleman more time, because I
took--that took 2 or 3 minutes, so please continue.
Mr. Markey. So that is my--that is the essential points
that I am trying to make, Mr. Chairman, that the President--
once again I am saying this clearly--is trying to create an
atmosphere of artificial energy crisis in order to drill in
environmentally sensitive areas in our country while ignoring
the fact that we put 2/3 of all the oil that we consume in the
United States in gasoline tanks.
Yet we have now rolled back the efficiency of automobiles
and SUVs and light trucks back to the same standards that they
were in the early 1980's. If there is a crisis, we must deal
with it as a crisis. If it is not, we should not take the most
environmentally sensitive parts of our country.
I think, Mr. Chairman, that we should drill in all parts of
the United States that are not environmentally sensitive. But
second, we have to realize that we only have in the United
States 3 percent of all of the oil reserves in the world. That
is our disadvantage when we compete against OPEC.
Our advantage is that we are the most technologically
sophisticated Nation in the world. That is how we are going to
bring OPEC to its knees, only by looking at automobiles and
SUVs and light trucks and air conditioners and all the other
devices that consume energy and making them much more efficient
can we ultimately take OPEC and regain the national and global
agenda.
We are playing into their hands, and so here we are on the
committee that prides itself as being the technological
committee of Congress, and instead of talking about the devices
which we have control over, all of those automobiles, all of
those SUVs, all of those air conditioners and saying how do we
make them more efficient, the President says to us, that we are
in a crisis, let us go to the Arctic, the most environmentally
sensitive part of the United States, and drill to produce oil
that will not come down to the United States for another 10
years; and when it finally arrives in California, since they do
not burn oil in order to generate electricity, that oil will go
into the gasoline tanks of SUVs.
Now what kind of crisis is that that we will drill in the
most environmentally sensitive part of the United States to
build a pipeline to put into tankers to bring it to California
to put it in SUVs?
Can we be smarter than that? Can we not find some better
and more decent way of dealing with the legacy that we should
be leaving to every subsequent generation of Americans?
I would ask, Mr. Chairman, that the next hearing be on
energy efficiency. I think that that would be--having a hearing
on all of the issues that deal with how much we consume in this
country, how much higher percentage of all the energy per
capita that we consume, and I think that that would help to
flesh out this whole debate. But right now, we have not talked
about alternative energy resources. We have not talked about
energy efficiency.
We have witnesses down here that think we are in an energy
crisis, but we should not look at where we put all of our
energy. As far as oil is concerned, we put it in gasoline
tanks.
So I do not think we are really hearing, in other words,
the kind of balanced presentation of the problems and the
solutions. I agree with Mr. Cook, and he did a very good job
with the certain amount of terminological inexactitude to deal
with his governmental job to tell us where we were in the
upper--the upper part of the lower third of energy prices
historically.
That is not a crisis. What we have is, in fact, an
unwillingness on the part of our country to deal with the fact
that we are consuming all of this energy.
I am just going to yield a final second here to Mr.
Robinson so he can elaborate, if you would like to, on your
answer on SUVs.
Mr. Robinson. I can tell you a few more things, but my
point is, I just do not think SUVs should necessarily be
treated any differently than anything else. That is my point.
Mr. Markey. You mean separate from automobiles?
Mr. Robinson. Yes.
Mr. Markey. I agree with you 100 percent.
Mr. Kassel, we have basically 20 percent of the vehicles
out there on the street now are SUVs and people--Chrysler has
announced a Unimark, it is 10 feet high and 7\1/2\ feet wide
and it gets 10 miles to the gallon. There is the kind of
announcement that the United States is looking for in terms of
energy efficiency, huh? And that is heading in the wrong
direction; we are going backwards. The big announcement should
be that SUVs are going to get 25 miles a gallon, not 10 miles a
gallon.
Mr. Kassel.
Mr. Kassel. I just wanted to agree with what you have been
saying----
Mr. Barton. Agree with him quickly, because the Chair gave
him an extra 5 minutes which he already exceeded.
Mr. Kassel. One quick sentence, increasing fuel economy
across the board to 39 miles per gallon would yield the
equivalent energy consumption to 15 Arctic Refuges.
Mr. Markey. Thank you, Mr. Chairman. Thank you for your
generosity.
Mr. Barton. Let is put a few things on the record here. The
gentleman from Massachusetts has asked that we do a hearing on,
I think, liquefied natural gas. That we are trying to work in
the schedule.
Great minds do think alike sometimes, even from opposite
political spectrums, because one of the next hearings we are
going to do is on conservation efficiency renewables, and I
know that has been briefed at the staff level. It may not have
yet reached the exulted levels of senior members like yourself,
but it is in the works.
Mr. Markey. I am in the top part of the lower third of the
information chain.
Mr. Barton. And we are working together toward a
comprehensive strategy in which all things are on the table,
including some of the things that are nearest and dearest to
your heart. Democracy is a wonderful thing.
Mr. Markey. Thank you.
Mr. Barton. The gentleman from Oregon, Mr. Walden, is
recognized for 10 minutes.
Mr. Walden. Thank you, Mr. Chairman.
I appreciate the opportunity to follow my distinguished
colleague from Massachussetts. It is a long way from
Massachusetts to Oregon, but we may actually share some common
goals, including energy efficiency and conservation; and I look
forward to that hearing.
I happen to be among those, even though I was not polled,
who agree there is an energy crisis. I also do not believe that
the only part of the energy crisis or the way you solve it is
ANWR. I think that is a very small issue in terms of the
overall problem that we face in terms of energy.
I think it is wrong to suggest that it is the answer or the
only reason the President says we have a problem. I have an
energy crisis in my district and in my region.
When 1,285 steel workers are laid off and may never get
their jobs back because the electrical power is too expensive
and their power is being bought out and sold on the market, and
the plants shut down, that is a crisis.
When we are paying $2 a gallon for gas as we did last year
in Oregon--and I some day would love to get to the bottom of
why that is--that is a crisis. That is a crisis for the men and
women who are trying to figure out how to pay for the gas to go
in their tank--and it is more than just SUVs in my district--
because I got tractors and other farm machinery they are trying
to put gas into and diesel into--it's very expensive. So mark
me down as a person who believes there is a crisis.
I was kind of taken by your comment about how you would
support drilling in parts of the United States that are not
environmentally sensitive, because I would love to have a
definition or have you point out on a map where those places
are. Because I tend to think every place has a little
environmental sensitivity to it.
Mr. Markey. Prudoe Bay, the National Petroleum Reserve, all
of that is still is yet to be developed.
Mr. Walden. And should be developed. I think there is an
issue too that should be looked at: If we add to the supply out
of our own reserves, does that just get exported and is there
market manipulation going on? I know the FTC has looked at that
a bit on the West Coast. Whether there is or not, I do not
know. I would love to hear from our witnesses about that.
Because what good does it do to go through the fight opening up
new areas to drill if what happens to the amount that we drill
gets shipped overseas in part of a global trading environment?
Do you all have a comment on that particular side of
things, the export of domestic oil as it relates to trying to
move the market one way or another? All right.
Mr. King. I will comment.
Mr. Walden. Talk to me about it.
Mr. King. I will comment on it from the refiners
perspective. Last year about this time, we bought a refinery
from Exxon in California, and that refinery ran primarily crude
oil from the Alaskan North Slope, and also some California
crude called SJC, San Joaquin Valley, exclusively from those
two places.
It is difficult to get incremental supplies of ANS. First
of all it is declining in production. Second, it has a very
tight market out there in terms of who is buying and who is
offering for sale that crude. One of the things that we are
doing is actually trying to bring crude in from the AG and from
other sources to compete with that crude and to bring more
supply in so that we can ultimately drop the costs of gasoline
for the consumer.
So I do not know if I specifically answered your question,
but we are doing what we can as a refiner to force competition
in that market; and, you know, we do not support exporting that
crude away from our American needs.
Mr. Walden. How much impact do all of these different
boutique fuels, as they are labeled, have in terms of the costs
of gasoline in the market? And I apologize for being here late,
maybe you covered this.
Mr. King. I did not cover that, but that is a good
question. I think it does have an impact on the price of
gasoline. Because, for example, in California, California has
the strictest standards for gasoline in the country. It is very
difficult to make that gasoline, and you do not make it outside
of California other than a few selected areas maybe in Asia,
but it takes a lot of money to get that over here.
We do make it in one refinery in Corpus Christi, but that
is very unusual; and it takes certain market dynamics and
transportation costs to get it there.
So the same thing in the Midwest, they use ethanol. It is
difficult to blend ethanol and to provide components to make
ethanol; and, therefore, they hit a very tight supply demand
situation, and we saw what happened there last summer.
Different standards in the South, different standards in
the Northeast, and different times that certain things happen
with respect to vapor pressure and things that affect gasoline
production. So it does have impact on prices.
Mr. Walden. Because that is where we get a lot of our gas
in Oregon is imported in from California.
Mr. King. Either that or you get a lot from Washington
State.
Mr. Walden. I think it is both 70 and 30 percent, one from
the other. And it strikes me that we end up in the price vise
pretty quickly out there; we certainly have over the last
couple of years. And then you get into all of these zoning
issues, the zones that get set by the oil companies as well. I
think it is something that this committee frankly ought to be
looking at as well.
Mr. King. Mr. Robinson might be able to talk about the
zoning situation in terms of pricing. I am more focused for
your attention on the refining capacity. I do not think you
have a refiner in Oregon.
Mr. Walden. We do not.
Mr. King. So you are dependent upon the sources, as we
said, from Washington and California.
Mr. Walden. Before we go to Mr. Robinson, can you tell me
from your perspective what are the impediments to a new
refinery in, say, a State like Oregon? Is there just not enough
volume there? Is it a permitting process? Is it we are not the
right end into some pipeline? What is it?
Mr. King. Primarily, I think--and this speaks of the whole
country--I mean, the question should be why do we not build
refineries in our country including Oregon, and it is
permitting. Permitting has a lot to do with it.
It is difficult to get permits. Most people do not want a
refinery in their backyard.
The other thing is you've got overlapping regulations. We
talked about this. You have got regulations on the fuels that
we produce, and then there are also significant regulations on
the refining--it is the refinery itself. Then you compound that
with the rules changing in the middle of the game.
You get halfway through a particular mandate or a situation
that is dictated by the government, and then the rules change
and you have a stranded investment. That is not necessarily an
environment that attracts capital.
As Mr. Cook accurately pointed out, our business has
basically historically been about the same rate of return as a
mutual fund, with a whole lot more risk.
Mr. Walden. See, my concern is that we are sitting here
today with gas prices at $1.49 to $1.69 or higher in my
hometown--frankly, it is always higher--and I am afraid we are
going to wake up this summer and the same situation we found
ourselves when it comes to electricity this winter when it
comes to gas prices. I will have to go home and explain why gas
prices are back up over $2 a gallon in northeast Oregon.
Mr. King. I think it is two things. First of all, it is
crude oil prices. They are higher than they were last year, but
if you really look at the issue; there is plenty of crude oil
on the market. In fact, OPEC is cutting crude because there is
too much. So what does that tell you?
It tells you that there is a problem with converting that
crude oil into product, which is the lack of refining capacity
in our country. That is the issue. That is why we are where we
are on gasoline prices.
Mr. Walden. So to take this back to the electricity
example, the problem we have is a lack of supply. And there are
a lot of people in my region where we are now having blackouts
in California, we are not going to spill water for fish. We are
having all of these problems. They are saying, How did we get
here? Why did someone not see this coming? What are we going to
do about this supply? And everybody is rushing in to fill in
the gap. How do we have a more reasonable approach when it
comes to adding a refinery?
Mr. King. I think we need to have a more receptive process
by which a refinery is permitted and allowed to be in someone's
backyard. On the electricity situation in California, I don't
think a new power plant has been built in California in 10
years. Whereas demand has grown significantly, there are 4
million extra people in California. So it is the same concept.
How do we make it easier? You make the permitting process
easier. We don't change the rules in the middle of the game. We
do the things that I have talked about.
Mr. Walden. Are the environmental laws that are in place,
are you talking about relaxing those or just making the process
itself easier?
Mr. King. We are not--and this is something that I think is
important for everyone to know--we are not in favor of relaxing
the laws. I think that should come as a nice surprise to Mr.
Kassel. But we are not in favor. We just want----
Mr. Walden. Tell us what they are and stick to them.
Mr. King. Here is a good example. We are talking about
lowering the sulfur in diesel fuel. We make several different
types of diesel fuel. There are many categories: on-road
diesel, off-road diesel, heating oil, jet fuel. But we are only
talking about right now changing the specifications for on-road
diesel. Then the next thing you know, in a year there will be a
change in spec for off-road; then in a couple of years it will
be jet fuel, then heating oil. So we are constantly compounding
this issue, and we have got to spend capital retrofitting
refineries over and over again; and we would just like one
comprehensive plan to say, this is what we are going to do from
a regulatory standpoint.
Mr. Walden. Those regulations, are they coming from the
Congress, the EPA?
Mr. King. They are coming from Congress, they are coming
from the EPA, they are coming from the States, at the State
level. We have incremental pressures. We have two refineries in
the Houston area. They are being asked to reduce air emissions
in Houston more so than other parts of the country. So we have
got to even do more work there, and that capital has no return
whatsoever. So your return on capital on that is zero. Whatever
you couple that with, it is difficult.
Mr. Walden. That is my concern, we are going to wake up, no
new refineries, heck of a gas price spike this summer, not that
you would have a refinery in place by then, anyway; and it
strikes me that you could live with these environmental laws if
you had certainty long term so that you could plan for it and
invest your capital wisely.
Mr. King. That is right. The other thing that would help,
sir, I think is at least an investigation into possible tax
incentives for environmental equipment and maybe accelerated
depreciation or giving us some advantage, some incentive to
make those investments. Because the major, major oil companies,
are diverting their capital away from the refining sector and
going through the E and P sector, toward the exploration and
production section of their company versus their refining
system.
Mr. Walden. I have overrun my time. Thank you, Mr.
Chairman.
Mr. Barton. The gentleman's time has expired. The second
round of questions is going to be for 5 minutes so we are going
to try to wrap this up in the next 30 minutes or so. Before I
start asking questions, just a kind of general overview. Mr.
Cook pointed out in response to my questions in the first round
that world production and consumption is somewhere in the 75-
to 76 million-barrel-per-day range. OPEC is producing between
25 and 30 million barrels per day depending on their quotas
that they set and how much cheating there is--OPEC is a swing
producer. They can raise production, lower production.
Saudi Arabia is about 7 to 8 million barrels a day, so
Saudi Arabia by itself with a list cost of $1 to $2 a barrel
can kind of target the range; and if they get the price
elasticity demand correct--they have this target price that Mr.
Cook put on the table--they try to manage the world oil market.
I happen to think that their target price is too high. I
disagree some with Mr. Markey when he says the prices are
acceptable. I think they need to be lower. We need lower oil
prices; we need lower natural gas prices. That would help
tremendously in our electricity markets if natural gas prices
were lower than they are.
I would agree with Mr. Markey on the definition of a crisis
versus a problem. We do have an energy problem in this country,
and it is both a consumption problem and a supply problem. We
need to address it. Conservation is part of it that Mr. Kassel
is supportive of as, I think, are most of the other panel
members; but I think supply increases are also a part of it.
Now, I want to ask Mr. King, who is representing the refiners,
my understanding is that your specific company does use MTBE in
its reformulated gasoline; is that correct?
Mr. King. That is correct.
Mr. Barton. In response to questions from Congresswoman
Bono, I think you indicated that MTBE is not a carcinogen; is
that correct?
Mr. King. That is correct.
Mr. Barton. Isn't the worst thing you can really say about
MTBE is that if it gets into the water table, it stinks?
Mr. King. It smells bad.
Mr. Barton. It is not a nice smell. It smells like rotten
eggs.
Mr. King. Right. At large levels. But the levels we are
talking about, I don't think that is the issue. But you are
right, that is the concern, is the smell.
Mr. Barton. If we were to ban MTBE as the Governor of the
State of California has done by executive order, what would
that do to the ability to actually meet the clean air standards
that are in place? There are two ways to do it. One is--I guess
three. MTBE is an additive at the refinery; ethanol is an
additive at the terminal; and Chevron, I think Chevron, has a
patented reformulated gasoline that can meet the standards in
some areas of the country. Which of those is the least cost
option?
Mr. King. Keeping MTBE in the gasoline pool is the least
cost option.
Mr. Barton. If we were to take the MTBE out of the
equation, do you have any data on what the overall cost
increase would be in areas that are currently using MTBE?
Mr. King. I don't know if I have--I think I have heard
numbers. It is a range, as usual. Anywhere from 7 to 14 cents
are numbers that I have heard. So I think it would have a
definite impact on the price.
Mr. Barton. It would add 7 to 14 cents a gallon?
Mr. King. Those are the numbers that we have heard, the
ranges, yes. It will certainly be more costly to produce the
gasoline. Now, whether you can pass every penny of that on, I
don't know.
Mr. Barton. Are refineries in the United States set up that
they can blend MTBE or not blend MTBE and there is no
difference to them, there is no cost difference, there is no
output difference; or are refineries actually set up more
specifically for particular feed stock and a specific type of
crude oil with the addition of MTBE?
Mr. King. Most refiners are set up to allow them the
flexibility. But of the oxygenates that have been utilized,
MTBE and ethanol, 85 percent of refiners that blend an
oxygenate choose MTBE. So most of them are set up to handle
MTBE.
Mr. Barton. Under the current Tax Code, does MTBE get any
special tax considerations?
Mr. King. No.
Mr. Barton. Do any of the other oxygenate substitutes,
additives, get tax considerations?
Mr. King. Yes, they do. Ethanol does.
Mr. Barton. Ethanol does. Do you know approximately what
the tax consideration is in cents per gallon or dollars per
gallon or dollars per barrel or whatever the standard of
measure is?
Mr. King. It is 54.5 cents a gallon of ethanol.
Mr. Barton. 54.5 cents per gallon.
Mr. King. Of ethanol.
Mr. Barton. Of ethanol. Per gallon. Not per barrel. Per
gallon. That is a pretty good deal.
Mr. King. It isn't, if you are the American consumer.
Mr. Barton. But it is if you are getting it.
Mr. King. It is if you are getting it, no doubt about it.
But if you are a taxpayer in this country, I think people would
like to know that. And to the extent that we would consider
expanding the pool for ethanol, that is a real problem.
Mr. Barton. What would happen if that tax benefit were
taken away?
Mr. King. No one would blend ethanol.
Mr. Barton. Ethanol would not be cost competitive without
that. In any region of the country, even in the Midwest?
Mr. King. I don't believe that it would be competitive.
Mr. Barton. My time is about to expire, so I would
recognize the gentleman from Virginia for 5 minutes, Mr.
Boucher.
Mr. Boucher. Thank you very much, Mr. Chairman. Mr. D'Arco,
I would like to propound a couple of additional questions to
you.
In your testimony, you have talked at some length about the
new rule with regard to sulfur content in the diesel stream.
Under that rule, older trucks can continue to use diesel fuel
at the level of 500 parts per million of sulfur in the diesel
stream, while for newer trucks a different standard is imposed;
and that standard is 15 parts per million in the stream.
You suggest that this new rule, because it has two
differentiations, of the amount of sulfur in the stream that is
allowable is causing some dislocation and confusion in the
market, because producers will presumably in some cases at
least continue to produce diesel fuel at both levels of sulfur
content. Why would that problem not be effectively addressed if
all of the producers do what some of them have done and simply
decide to move immediately to the lower content and only
produce one fuel and that fuel would have 15 parts per million?
Why not do it that way?
Mr. D'Arco. That is actually our position. We are looking
for that to happen.
Mr. Boucher. So you think that will happen?
Mr. D'Arco. I honestly don't know. I do know that if we
have these two separate fuels, certainly it is going to create
supply problems because terminal facilities as they exist in
the Northeast cannot handle the abundance of products.
Mr. Boucher. Your suggestion is that in fact the best way
to address that particular problem is for the producers to make
one fuel, and that would be at the lower level of 15 parts per
million?
Mr. D'Arco. That is correct.
Mr. Boucher. I have a question that is primarily for the
purposes of clarification. You have a reference in your
testimony to a dye system that is used for tax purposes. Is
that a dye system that is required in the diesel sulfur rule,
or is it required in some other EPA rule? Why is this dye
system used and what is it?
Mr. D'Arco. That system exists to identify which fuels are
subject to motor fuel taxes and which are not.
Mr. Boucher. And what is the source of that requirement?
Mr. D'Arco. I am sorry, I don't understand.
Mr. Boucher. Where does that requirement derive?
Mr. D'Arco. Congressional mandate.
Mr. Boucher. It is a congressional mandate. It is contained
in the statute?
Mr. D'Arco. Yes.
Mr. Boucher. The chairman was saying that we prefer the
nicer term, Federal law, to congressional mandate.
Mr. Layton, let me turn to you, if I may. In your
testimony, you have raised some concerns about the impediments
to drilling on the outer coastal shelf. I want to ask you a
little bit about your expression of those concerns. There was
recently a disaster off the coast of Brazil in which a large
drilling rig sank. In view of that experience, I wonder what
kind of assurance you could offer to someone like the current
head of the EPA, the former Governor of New Jersey, Ms.
Whitman, who opposed drilling offshore or perhaps to Florida
Governor Jeb Bush, who has also opposed drilling offshore, that
a similar kind of disaster would not happen in the United
States if we were to make it easier for production to take
place on rigs that are located on the outer continental shelf.
What assurance could you offer?
Mr. Layton. An honest assurance that there are no hundred
percent guarantees that something bad would not happen. But I
would ask that they go back and look at the record of the
industry, particularly over the last 20 years. Not only in the
incidents that did happen but how the industry and the
technology that is available allowed the industry to cope and
to take care of problems if they did come up. I think they will
find that there are very, very few problems that have arisen
and certainly not of the magnitude of the one you just
mentioned. But those that have, I think the industry is in a
position that it can be very responsive and has been very
responsive to take care of the obligation to clean up if there
is an incident that has happened.
Mr. Boucher. Was there any particular lack of safeguard in
the case of the Brazilian incident that we could reliably
assume would not be repeated with regard to offshore drilling
in the United States? Was there any particular facet of that
Brazilian experience that was unique, and do we have any
confidence that whatever affected that drilling rig would not
affect a rig in the United States?
Mr. Layton. I apologize to the Congressman. I really am not
in a position to address that.
Mr. Boucher. Thank you very much, Mr. Layton. Thank you,
Mr. Chairman.
Mr. Barton. Before we get off the subject, could we--would
EIA have data on the amount of oil spilled from drilling
platforms versus oil spilled from tankers bringing imported
oil? Is such data available? Or is that such an esoteric
statistic that it is not obtainable?
Mr. Cook. Given our budget, I am not aware of any such data
collection.
Mr. Barton. Mr. Layton?
Mr. Layton. Congressman, I believe there is some data
available. I will take it upon myself to find that.
Mr. Barton. I wouldn't put my hand on a Bible, but my
recollection is that we have had more spills from tankers in
the last 20 years than we have from drilling rigs. I know that
is the case in the Gulf of Mexico off the coast of Texas.
Mr. Layton. My recollection is the same as yours. But I
will collect that and submit it to the Congress.
Mr. Barton. The gentleman from Oregon is recognized for 5
minutes.
Mr. Walden. Thank you, Mr. Chairman.
Mr. Pitts, you noted that the results of your survey
indicated a majority of those interviewed did not approve of
NYMEX as a pricing mechanism for crude oil and believe it
causes unnecessary price volatility. Do you or any of the
producers have suggestions on how to create more price
stability?
Mr. Pitts. The OPEC pricing ban is working very well.
Everybody I have talked to agrees with it and thinks it is
working and it should stay in place.
Mr. Walden. Do others want to comment on that?
Mr. Layton. I would add a comment and, that is, one
mechanism that I believe would help would be the Department of
Energy's oil data transparency project. That project has the
goal of making sure that the information that is out there that
drives the markets is in fact as accurate, as accessible as
possible. If the markets do overreact--and I think there is
some evidence that momentum carries them too far one way or
another--it certainly adds insult to injury if they are
overreacting to the wrong data, and that is what I believe the
Department of Energy effort is designed to try and combat. And
so I certainly think that is one thing that should be supported
and worked on very much.
Mr. Walden. Let me follow up on some of the information
issues and the way prices are set and all. It used to be that
there were 10 to 13 players in the market; no one company could
set the market price. But now with all the information
available on the Internet, quick access to information, what
effect does that quick access to information have on the
consumer?
Mr. Layton. Is your question addressed to me?
Mr. Walden. Whoever wants to take it. You seem brave enough
to answer.
Mr. Layton. Brave or foolish, I am not sure which.
It certainly, over the years as information has become more
available, has changed the price of our commodities, crude oil
and natural gas. You can look back historically--and you have
to go back a number of years to see that--but the price of oil
might change a few times during the year. Now we have it
changing daily and not by 25 cents a barrel, but maybe a dollar
a barrel and maybe $5 a barrel over a week's period of time. I
think the additional volatility probably is the biggest impact
on the consumers, and I guess that can be good for them in the
short term. I don't agree it is good for them in the long term
if volatility is downward because it is downward as it was in
1998 and 1999; it is going to bounce back like it has.
Mr. Walden. I guess it is somewhat like their siting of
refineries. I think what people want most is some level of
predictability as they do their own budgeting, whether you are
in a small business or just a household budget. If you are
commuting and gas is 98 cents 1 year as it was and close to $2
the next, how do you budget for that? I just wondered how
that--everybody gets information right away. Does that really
end up having a positive effect on the pricing structure? Does
it create more volatility? Does it do damage to the marketplace
in terms of competitiveness? Mr. Robinson? Or is it not an
effect at all?
Mr. Robinson. I think it has a degree of an effect. When
things are tight and information is flowing, you are going to
see rapid run-ups. You will also see--when it gets loose, you
will also see the prices going down. The villain really isn't,
though, the information. It might make it a little bit quicker,
but it doesn't materially impact it overall. Just like all the
technology, it makes things a little quicker, but you would
have gotten there anyway.
Mr. Walden. Anybody else? Mr. Kassel?
Mr. Kassel. I think one impact that we might see with the
incredibly fast flow of information is a quickening of when
problems become crises. We have been talking--before we were
talking about is it a crisis or is it a problem, and we had a
variety of different answers to the question. The reality is
that the country needs a balanced energy policy that meets a
whole array of energy, economic, and environmental and health
goals. We don't have that now.
But what we do have is a near-hysteria pitch growing over
what are we going to do, what are we going to do, which is in
part increased by the incredible flow of information that we
all have. But our response should be to the problem that we
have, to the lack of the policy. So yes, we have to be talking
about the supply side as we have done in many cases, for most
of today, but we also have to talk about how do we free our
fuel economy so that we can meet the energy needs, the
consumption needs of America's driving without having to go
offshore, without having to go into sensitive areas like the
Arctic Refuge. I think that is a debate that will take time to
unroll. And it flows at a different pace than the kind of
information flow you are talking about.
Mr. Walden. I am out of time. Thank you, Mr. Chairman.
Mr. Barton. The gentleman's time has expired. For the last
5 minutes of questioning, the mild-mannered man from
Massachusetts, the mellifluous Mr. Markey.
Mr. Markey. Thank you, Mr. Chairman, very much. I will try
to merit the confidence that you have in me to maintain that
demeanor.
First of all, let me say that we don't have as many oil
wells in Massachusetts as we would like to; and so even when
prices are in the upper part of the lower third, prices, we
still believe that prices are too high, so I just want to make
that clear. The point I was trying to make is we don't have an
energy crisis, we have an energy problem; and a problem as a
result lends itself to more judicious consideration. We can
exclude the more extreme resolutions of that crisis, if we want
to work together. On the other hand, if we want to take the
most extreme solutions, then it can only be justified by
calling something a crisis. So let me ask this, Mr. King. I
thought I heard you say--maybe I was wrong--but I thought I
heard you say that there is plenty of crude oil in the world.
Did I misunderstand that?
Mr. King. I think at this--it is all seasonal. It is all
dependent upon supply and-demand fundamentals, but I think--at
this time, I think there is a general feeling at least among
OPEC that there is too much oil.
Mr. Markey. But I thought you said there is plenty of crude
oil, but because there is plenty of crude oil that OPEC has
decided to cut back because it affects their ability to have
the price that they want; is that correct? Would that be an
accurate summary?
Mr. King. I think that is accurate for today. It wasn't
true last year when they were increasing production. But their
feeling is that with the slowdown in the economy, they are
trying to figure out how do we regulate the oil. So therefore
they are having to cut back their production.
Mr. Markey. Exactly. So the point again, to put a point on
it, is that there is plenty of crude.
Mr. King. That is right. But I think what we are talking
about here is a domestic energy policy. There is not plenty of
crude oil in the United States. That is the real issue. It is
the same thing with refining capacity.
Mr. Markey. We only have 3 percent of the oil reserves in
the world, so we are never going to be able to drill our way
out of the crisis. There is no way--you do agree that there is
no way that we could ever reach a point where we have 100
percent of our oil production in the United States produced
domestically?
Mr. King. I do agree with that, but I also believe that we
have become over time now, the last 10 years, 20 years, we are
more and more dependent on OPEC than we ever have been. So,
therefore, I think we have lost some of that power that we want
to have back, as you have mentioned.
Mr. Markey. Let me show you a chart here that BP Amoco has
provided to the committee in terms of the share of global oil
production from 1965 to the year 2005. According to this chart,
this is BM Amoco, that OPEC today is producing just about the
same level of total production in a global marketplace as it
was 15 years ago. In fact, it is lower today than it was back
in the late sixties and early seventies. Meanwhile, the non-
OPEC production has remained stable over the last generation.
In fact, it is higher than it was back in the 1960's and right
up to the mid-1970's.
Mr. Barton. We will need that chart, to put it in the
record. I have seen the same chart, but we need to make sure we
get it into the record.
Mr. Markey. I place a great deal of weight on BP Amoco's
analysis. I don't know about you, Mr. Chairman.
Mr. Layton. I would be happy to comment on that chart.
Mr. Markey. Please do so, Mr. Layton.
Mr. Layton. There is one difference that doesn't show up on
the chart and, that is, excess production capacity with the
OPEC countries. In the earlier years where that production hit
that level you pointed to, there was an enormous amount of
capacity beyond what OPEC was actually producing. The issue
that we are dealing now with in the global marketplace is that
the only excess production capacity prior to the recent cuts
that were made really resided with Saudi Arabia, and it was
maybe 2 million barrels a day. So if there was a cushion, not
if, there was a cushion there in years past, that cushion has
almost disappeared. And I think that is something that
certainly--I don't disagree with what the chart shows, but it
is information that is not available on that chart.
Mr. Markey. Again, I am just trying to make the point
that--I guess you are trying to make the point that we are too
dependent on OPEC on the one hand, but that they should produce
more on the other. I understand that. That is again another one
of these contradictions that we have. But ultimately, no matter
what we do in our own country in terms of additional
production, our better way of putting pressure on OPEC so that
they are at the lower end of what their production needs are to
satisfy all their members in terms of the revenues they need to
satisfy the citizens of their countries in terms of their needs
is to continue to lower the amount of oil that we consume, in
automobiles and SUVs.
Then there is pressure on their membership to raise the oil
production because you kind of hit a bottom level, below which
they can't go back to their own citizens and say that we are
going to lower the production of oil again. Because, obviously,
Saddam Hussein is going to be arguing that he has a right to
produce more oil because he has been off the market for so
long, and Mexico and others are also going to be saying we need
to produce more.
I just think that we are not using our primary tool, which
is our technological superiority, in order to leverage this
relationship with OPEC. That is our single most underutilized
tool. It just seems to me that if we can boast about putting a
man on the Moon or having invented the Internet and made all
the information in the world available at the fingertips of
every citizen of our country and every citizen of the world, it
seems to me that it is kind of a sad commentary on us as a
Nation that we are now using 1982-level automotive efficiency
tools.
It seems to me that on the central relationship to our
economy, our dependence upon imported oil, that we are looking
at this technology and basically ignoring the potential
benefits that we could extract from it in terms of our
relationship with this unstable source of energy for our
economy.
I would just make one final point, Mr. Chairman. The BP
Amoco charts also include a very interesting point, which is
that U.S. oil products, imports into the United States, have
stayed within the same band, that is, 1.5 to 2.5 million
barrels of oil a day of refined product for the last 10 years.
It stays right inside of that band. There is no real spike that
is evident right now or last year or the year before, and that
in terms of again these historical trends, that there is no
justification for drilling in the Arctic Wildlife Reserve or
moving to those more vulnerable areas before we have looked at
the National Petroleum Reserve, Prudhoe Bay, looked at other
potential--I will tell you the truth.
I look at natural gas in Prudhoe Bay, and I am astounded
that we haven't brought that down yet. There is only about 7
trillion cubic feet of natural gas that people estimate is over
in the Arctic Wildlife Reserve, but there is 25 to 30 trillion
cubic feet in the Prudhoe Bay area. Yet the pipeline hasn't
been built; it hasn't been brought down. So I think if we are
going to be looking, in other words, at where the energy is
that we can all agree, Democrat, Republican, liberal,
conservative, environmentalist, producer, that we really
haven't even begun to tap those resources yet before we have to
reach the more vulnerable parts of our country. I thank you,
Mr. Chairman.
Mr. Barton. Thank you. We will try to get those charts you
referred to into the record. The Chair would also ask unanimous
consent that the February DOE monthly highlight fact sheet be
put into the record from the energy information agency unless
you have got a later one out. The latest we have is February.
When would the March highlight data sheet be out, Mr. Cook?
Mr. Cook. Could you clarify which data sheet you are
talking about?
Mr. Barton. EIA DOE Government February 2001 Energy
Highlight. It is petroleum supply summary table H1. I know you
know every one of the things you do. Generally when do they
come out? I want to put this one in because I am told at the
staff level it is the latest one we have, but if there is a
March one we will certainly put--we will show you----
Mr. Cook. We don't have final March monthly data yet.
Without taking a look at what you are looking at there, I
suspect maybe that is using December data.
Mr. Barton. Actually, it has estimates for February and
January. I guess the actual would be December. It does say--it
says total petroleum demand averaged 20 million barrels per
day. This was the highest daily average for February since
1979. Crude oil production was 5.9 million barrels per day, the
lowest since February 1950. We have got the highest demand we
have had in 21 years and the lowest production we have had in
51 years according to the--that would tend to be a problem.
Mr. Cook. Do you have an estimate for February on that
table?
Mr. Barton. Yes, sir.
Mr. Cook. Okay. Approximately the end of the first week of
April.
Mr. Barton. That is next week.
Mr. Cook. Yes. We will have all of the data from March in a
preliminary form, and we can give you an estimate then for the
March figure.
Mr. Barton. Thank you. I wasn't trying to create an
argument right at the end. I was just asking unanimous consent
to put the latest data into the record. Hearing no objection,
so ordered. If we can update the data, we will put that into
the record, too.
[The following was received for the record:]
Data will be available on the EIA website (www.eia.doe.gov)
on Wednesday, April 18 in the Weekly Petroleum Status Report.
Mr. Barton. I want to thank our panels. I want to thank the
Members for being here on a day that we don't have votes. There
may be written questions from the staff for the record. If so,
we would ask that you reply expeditiously. We have probably
three to a half a dozen more hearings before we begin to try to
put together a package, a legislative package. We appreciate
your attendance. Again, I want to give special thanks to Mr.
Pitts for coming. We do appreciate your attendance. This
hearing is adjourned.
[Whereupon, at 12:30 p.m., the subcommittee was adjourned.]