<DOC>
[109 Senate Hearings]
[From the U.S. Government Printing Office via GPO Access]
[DOCID: f:42273.wais]
S. Hrg. 109-1026
THE IMPACT OF THE ELIMINATION OF MTBE
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON
ENVIRONMENT AND PUBLIC WORKS
UNITED STATES SENATE
ONE HUNDRED NINTH CONGRESS
SECOND SESSION
__________
MARCH 29, 2006
__________
Printed for the use of the Committee on Environment and Public Works
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congress.senate
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COMMITTEE ON ENVIRONMENT AND PUBLIC WORKS
ONE HUNDRED NINTH CONGRESS
SECOND SESSION
JAMES M. INHOFE, Oklahoma, Chairman
JOHN W. WARNER, Virginia JAMES M. JEFFORDS, Vermont
CHRISTOPHER S. BOND, Missouri MAX BAUCUS, Montana
GEORGE V. VOINOVICH, Ohio JOSEPH I. LIEBERMAN, Connecticut
LINCOLN CHAFEE, Rhode Island BARBARA BOXER, California
LISA MURKOWSKI, Alaska THOMAS R. CARPER, Delaware
JOHN THUNE, South Dakota HILLARY RODHAM CLINTON, New York
JIM DeMINT, South Carolina FRANK R. LAUTENBERG, New Jersey
JOHNNY ISAKSON, Georgia BARACK OBAMA, Illinois
DAVID VITTER, Louisiana
Andrew Wheeler, Majority Staff Director
Ken Connolly, Minority Staff Director
(ii)
C O N T E N T S
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Page
MARCH 29, 2006
OPENING STATEMENTS
Boxer, Hon. Barbara, U.S. Senator from the State of California... 4
Inhofe, Hon. James M., U.S. Senator from the State of Oklahoma... 1
Jeffords, Hon. James M., U.S. Senator from the State of Vermont,
prepared statement............................................. 36
Lautenberg, Hon. Frank R., U.S. Senator from the State of New
Jersey......................................................... 6
Lieberman, Hon. Joseph I., U.S. Senator from the State of
Connecticut, prepared statement................................ 38
Murkowski, Hon. Lisa, U.S. Senator from the State of Alaska,
prepared statement............................................. 37
Obama, Hon. Barack, U.S. Senator from the State of Illinois,
prepared statement............................................. 37
Warner, Hon. John W., U.S. Senator from the Commonwealth of
Virginia....................................................... 5
WITNESSES
Caruso, Guy, Administrator, Energy Information Administration,
U.S. Department of Energy, Accompanied by: Joanne Shore, Lead
Analyst, Energy Information Administration..................... 8
Prepared statement........................................... 39
Response to an additional question from Senator Thune........ 49
Dinneen, Bob, president and chief executive officer, Renewable
Fuels Association.............................................. 26
Prepared statement........................................... 75
Responses to additional questions from Senator Inhofe........ 78
Douglass, Bill, chief executive officer, Douglass Distributing
Company........................................................ 23
Prepared statement........................................... 70
Responses to additional questions from Senator Inhofe........ 74
Early, A. Blakeman, American Lung Association.................... 25
Prepared statement........................................... 58
Meyers, Robert, Associate Assistant Administrator, Office of Air
and Radiation, U.S. Environmental Protection Agency............ 10
Prepared statement........................................... 52
Responses to additional questions from Senator Inhofe........ 54
ADDITIONAL MATERIAL
Analysis, Energy Information Administration, Eliminating MTBE in
Gasoline in 2006............................................... 40
Article, Hidden Poison, MTBE Tainting Water Across State, by Matt
Pacenza, staff writer, April 9, 2006........................... 66
Chart, Estimated Increase in Ethanol Demand, Relative to Recent
Ethanol Use.................................................... 91
Study, A Review of Cost Estimates of MTBE Contamination of Public
Wells, American Water Works Association........................ 60
Court Case, South Tahoe Public Utility District vs., Atlantic
Richfield Company.............................................119-126
Letters from:
American Lung Association, April 20, 2006.................... 65
U.S. House of Representatives, Committee on Commerce, Bob
Meyers, counsel; Stephen Sayle, counsel, June 5, 1995......92-118
Statements:
American Petroleum Institute................................. 80
National Petrochemical and Refiners Association.............. 82-90
THE IMPACT OF THE ELIMINATION OF MTBE
----------
WEDNESDAY, MARCH 29, 2006
U.S. Senate,
Committee on Environment and Public Works,
Washington, DC.
The committee met, pursuant to notice, at 9:30 a.m. in room
628, Senate Dirksen Building, Hon. James M. Inhofe (chairman of
the committee) presiding.
Present: Senators Inhofe, Warner, Murkowski, Thune,
Jeffords, Boxer, Carper, Lautenberg, and Obama.
Senator Inhofe. Our meeting will come to order. I
understand Senator Boxer is almost here, and some others, here
she is. We went ahead and decided to start without you, but I
was going to talk until you got here. How is that?
Senator Boxer. All right.
Senator Inhofe. We will have others that will be joining
us.
We have two panels today, and I want to welcome the first
panel. Guy Caruso, it is nice to have you here, and Robert
Meyers. You have an extensive background over in the House. You
have all the answers and it's always refreshing to know that
there is someone on a panel that has all the answers.
[Laughter.]
OPENING STATEMENT OF HON. JAMES M. INHOFE, U.S. SENATOR FROM
THE STATE OF OKLAHOMA
Senator Inhofe. We appreciate your being here.
We will have other members here on both sides of the aisle
and their staffs are here. There will be questions submitted
for the record.
MTBE may be the most carefully scrutinized and debated
substance since the 1990 Clean Air Act amendments required its
use. Today's oversight hearing on the impacts if the
elimination of MTBE is the latest in a long history before this
committee. I am going to summarize that history.
The 1990 Clean Air Act Amendments established the
reformulated gas program, that's the RFG program, which most
regard as an environmental success story. Yet, the inclusion of
the oxygenate requirement as a component of RFG resulted in a
few unintended consequences. I would like to remind my
colleagues that the 2 percent oxygen requirement was not
included in the bill passed by this committee which laid on the
foundation for the amended Clean Air Act.
Rather, the oxygenate requirement was added after vigorous
debate and was the only successful amendment on the Senate
floor. Senators from both sides of the aisle hope that the
requirement would lay the groundwork for greater ethanol use,
but acknowledged that MTBE would likely be preferred as it is
more affordable to the consumers.
Yet, although MTBE exceeded air-related goals, it tainted
the taste and the smell of the water in some instances.
Further, the 2 percent oxygenate requirement and the air
quality concerns of the certain areas created boutique fuel
regions, leading to higher prices during supply problems.
Last year, this committee passed S. 606, the Reliable Fuels
Act, which called for the elimination of the 2 percent
requirement and the phase-out of MTBE within 4 years, but still
preserving the MTBE authority for States. As was the case with
the bill that passed this committee in 1989, S. 606 was changed
in material ways after we reported the bill. Today the Nation
faces--although temporary--some potential unintended
consequences.
Pursuant to the Energy bill, the 2 percent oxygenate
requirement will be repealed this May. A majority of members
recommended that oxygenate producers and marketers be afforded
liability protection against defective product lawsuits for
their mere compliance with the law. Unfortunately, that
provision was not included in the Energy bill. To me, that is
just remarkable, that we as Government can mandate things to
take place and then not offer the protection for those who are
simply following the law.
Therefore, refiners have been forced to stop using MTBE
more suddenly than stakeholders, industry or the committee have
ever considered. They had to stop, because after this is no
longer a requirement, then that could be used against them in
lawsuits, as we all know.
One of the facts is that MTBE has been the preferred
oxygenate used in reformulated gas, and its elimination means a
corresponding loss of fuel supply that must be made up. Ethanol
is needed to replace MTBE, but the ethanol industry, refiners
and marketers, infrastructure operators, are working hard to
make sure that the transition is as painless as possible.
We have a chart up here and you can see, in terms of the
supply, the green bar on this chart from the EIA illustrates
just how much ethanol is currently being produced, a
significant amount in a relatively short period of time.
However, the sudden elimination of MTBE and the current state
of the ethanol industry means that significant volumes of
ethanol must be imported.
The orange bar shows that about 130,000 barrels per day of
additional ethanol is needed to replace MTBE. In other words,
the United States needs to come up with close to half of the
ethanol currently being produced domestically.
Actually, the transition means even greater supply loss
than this chart illustrates, because the production of ethanol-
blended RFG, yields 5 to 6 percent less fuel per barrel. It is
critical for the Nation to increase its petroleum and
biorefinery capacity. My legislation, the Gas PRICE Act, and
then the amendment that we tried to put on LIHEAP, the Energy
Price Reduction Act, would have assisted in this transition.
I really believe that the Gas PRICE Act was one of the
biggest surprises I had here, to see it defeated right down
party lines, when it was a very moderate bill that would have
had a dramatic effect, a positive effect on the refining
capacity of this country. We would expedite the permitting
process for traditional as well as renewable fuels
infrastructure, so that regions of the country would not have
to face the temporary supply shortfalls and corresponding price
increases likely this summer.
Congress must be mindful of the unintended consequences
before considering any future action. I urge my colleagues,
stakeholders and the public to allow the recently enacted fuels
title of the Energy bill to be fully implemented.
The EIA and our other witnesses will testify that the
Nation's fuel system requires infrastructure investment and
most importantly, time to develop. The refining industry's
position dealing with fuels policy, warning against sudden
transition, the need for liability protection and so forth,
that is very understandable. This hearing is squarely centered
on the imminent future, not the past. I look forward to hearing
from our witnesses if they have any policy recommendations for
Congress, including the likelihood of importing more ethanol.
[The referenced chart referred to may be found on page 91.]
[The prepared statement of Senator Inhofe follows:]
Statement of Hon. James M. Inhofe, U.S. Senator from the
State of Oklahoma
MTBE may be the most carefully scrutinized and debated substance
since the 1990 Clean Air Act amendments required its use. Today's
oversight hearing on the impacts on the elimination of MTBE is the
latest in a long history before this committee. I am going to summarize
that history.
The 1990 Clean Air Act amendments established the reformulated
gasoline or RFG program, which most regard as an environmental success
story. Yet, the inclusion of the oxygenate requirement as a component
of the RFG program resulted in a few unintended consequences.
I would like to remind my colleagues that the 2 percent oxygen
requirement was not included in the bill passed by this committee,
which laid the foundation for the amended Clean Air Act. Rather, the
oxygenate requirement was added after vigorous debate and was the only
successful amendment on the Senate floor.
Senators from both sides of the aisle hoped that the requirement
would lay the groundwork for greater ethanol use, but acknowledged that
MTBE would likely be preferred as it is more affordable for consumers.
Yet, although MTBE exceeded air-related goals, it tainted the taste
and smell of water in some instances. Further, the 2 percent oxygenate
requirement and air quality concerns of certain areas created boutique
fuel regions, leading to higher prices during supply problems.
Last year, this committee passed S. 606, the Reliable Fuels Act
which called for the elimination of the 2 percent requirement and a
phase-out of MTBE within 4 years, while preserving the authority of
States to continue its use.
As was the case with the bill that passed this committee in 1989,
S. 606 was changed in material ways after we reported the bill and
today the Nation faces, although temporary, some potential unintended
consequences.
Pursuant to the Energy bill, the 2 percent oxygenate requirement
will be repealed this May.
A majority of members recommended that oxygenate producers and
marketers be afforded liability protection against defective product
lawsuits for their mere compliance with the law. Unfortunately, that
provision was not included in the Energy bill either.
Therefore, refiners have been forced to stop using MTBE more
suddenly than stakeholders, industry, or this committee had ever
considered.
Fact: MTBE has been the preferred oxygenate used in reformulated
gasoline, and its elimination means a corresponding loss of fuel supply
that must be made up.
Fact: Ethanol is needed to replace MTBE.
Fact: The ethanol industry, refiners, marketers, and infrastructure
operators are working hard to make sure that the transition is as
painless as possible.
The green bar on this chart from EIA illustrates just how much
ethanol is currently being produced--a significant amount in a
relatively short period of time.
However, the sudden elimination of MTBE and the current state of
the ethanol industry means that significant volumes of ethanol must be
imported.
The orange bar shows about 130,000 barrels per day of additional
ethanol is needed to replace MTBE. In other words, the United States
needs to come up with close to half of the ethanol currently being
produced domestically.
Actually, the transition means even greater supply loss than this
chart illustrates because the production of ethanol-blended RFG yields
5 to 6 percent less fuel per barrel.
It is critical for the Nation to increase its petroleum and bio-
refinery capacity. My legislation--the Gas PRICE Act and Energy Price
Reduction Act amendment to the LIHEAP bill--would assist with the
transition away from MTBE.
We would expedite the permitting process for traditional as well as
renewable fuel infrastructure so that regions of the country will not
have to face the temporary supply shortfalls and corresponding price
increases likely this summer.
Congress must be mindful of the unintended consequences before
considering any future action. I urge my colleagues, stakeholders, and
the public to allow the recently enacted fuels title of the Energy bill
to be fully implemented.
As EIA and our other witnesses will testify, the Nation's fuel
system requires infrastructure, investment, and most importantly, time
to develop.
The refining industry's positions dealing with fuels policy--
warning against sudden transitions, the need for liability protection,
etc.--are well understood.
This hearing is squarely centered on the imminent future not the
past. I look forward to hearing from our witnesses and if they have any
policy recommendations for Congress, including the likelihood of
importing more ethanol.
Thank you.
Senator Inhofe. Senator Boxer, would you like to be
recognized for an opening statement?
OPENING STATEMENT OF HON. BARBARA BOXER, U.S. SENATOR FROM THE
STATE OF CALIFORNIA
Senator Boxer. I would. I thank you very much, Mr.
Chairman. Thank you for holding this hearing and I am pleased
to say that we have a ban on MTBE in California already in
place, which will without a doubt aid in the prevention of
additional damage to our drinking water supply, damage already
estimated to reach $7 billion.
Seeing an end in sight to MTBE use nationwide is good. I
want to add that MTBE is gone from the gas in California, and
the removal of it was never, to my knowledge, and we have
researched all the records on this, cited as a reason for high
gas prices. Oil companies have been long on notice that MTBE
must be phased out of the gas supply. Its use was never
mandated by the Clean Air Act. In fact, oil companies have even
been found to have acted ``with malice'' by a California jury
in the South Lake Tahoe case. They settled for nearly $70
million.
It has long been obvious that MTBE was the wrong oxygenate
to use in gasoline. The oil companies have known for years that
MTBE is extremely soluble in water, persistent and smells and
tastes foul. Even if it was safe to drink, no one would drink
it because of the odor and the appearance. It renders water
containing fairly low levels, 20 to 40 parts per billion,
unusable for drinking.
There are also potential health concerns with MTBE,
including possible carcinogenicity and other toxicity. The oil
companies were also put on notice of the serious problems with
MTBE when 25 States, including California, enacted some sort of
MTBE ban. The question I would have liked to have posed to the
oil companies in today's hearing, although they were not
invited, is what has taken them so long to deal with this
threat to our drinking water. Why haven't they addressed the
MTBE problems years ago?
Unfortunately, again, they were not invited here to explain
why they have let this mess go on all these years. We have
asked to have them here. The claim that the Government made
them use MTBE is patently false. In the Lake Tahoe case, for
example, the court found that use of MTBE was permissible, but
not required, underscore, not required. We now hear the oil
companies intend to phaseout MTBE immediately and may
potentially disrupt gas supplies. It's sort of like, let's
punish the public again, for something they had nothing to do
with. It's the oil companies who chose MTBE.
Interestingly, the oil companies themselves testified in
hearings almost 5 years ago on this issue. Mr. Edward Murphy
stated in a House hearing on behalf of the American Petroleum
Institute that phasing out MTBE would be, and here it is, a
walk in the park. He said, making up roughly 300,000 barrels a
day of MTBE volumes when we are producing gas at 8 million
barrels a day over a 4-year-period is a virtual walk in the
park.
So lots of crocodile tears and worries about nothing. That
was almost 5 years ago. The oil companies were ready then for a
walk in the park, now it would be a stroll in the park all
these years later.
That gentleman who testified for the oil companies never
said disruption was inevitable, gas price hikes were
inevitable, or that consumers would have to pay through the
nose. The oil companies failed to remove MTBE for years, even
though they knew and they admitted that a reasonable phase-out
would smooth the way. The oil companies now claim legal
liability due to the elimination of the oxygenate requirement
which forces them to act immediately. It is not true. Nothing
in the law forces them to act immediately. Period. These
liability defenses have not been accepted by the courts.
What are the oil companies taken for now? We've heard
waivers from environmental laws are on their wish list, they
also again may want waivers of liability for MTBE. That's a get
out of jail free card. Tom DeLay led that fight in the House
and lost.
There are new initiatives underway in my own State to get
big oil off the hook, a proposed ballot initiative in
California that would eliminate punitive damages for MTBE. No
surprise, the L.A. Times reports this proposal is backed by
Chevron.
Mr. Chairman, I see my time is running low. I would ask
that the rest of my statement be placed into the record. But
the bottom line here is that all the crocodile tears about how
they always wanted these liability waivers, the fact is, oil
profits have never been as good and they have always been
liable for MTBE as they should be, as the courts have so
stated. Thank you.
Senator Inhofe. Without objection, all the entire
statements will be a part of the record.
Senator Warner.
OPENING STATEMENT OF HON. JOHN W. WARNER, U.S. SENATOR FROM THE
COMMONWEALTH OF VIRGINIA
Senator Warner. Thank you, Mr. Chairman.
First, I supported you on the amendment that this committee
very wisely and properly put into the Energy bill, the 4-year
phase-out program. I am not a fan of MTBE. All of us who have
been around here for a while recognize this is one of the
political footballs that is being kicked back and forth. But it
really has a serious impact on the health of the Nation and
other things. I am fully supportive of whatever initiatives
this committee wishes to take regarding this problem.
I think this hearing is timely to try and elevate from
politics some of the real serious ramifications in the
marketplace of this conference revision of your amendment. So I
would simply ask to have my full statement placed in the record
and once again commend the Chair for its leadership on this
issue.
[The prepared statement of Senator Warner follows:]
Statement of Hon. John W. Warner, U.S. Senator from the
Commonwealth of Virginia
Mr. Chairman. Thank you for calling this hearing today on the
impact of the elimination of MTBE from the Nation's fuel supply. Like
you, I share significant concerns about our fuel supply system and our
ability to meet market demands as well as minimize price volatility.
That is why I have long advocated an expansion in the sources of our
domestic supply of oil and natural gas and supported efforts to expand
the capacity of our refineries.
The supply of transportation fuels in our Nation are subject to
myriad influences including national and global politics, increasing
worldwide demand, Federal and State policy, and the ever unpredictable
Mother Nature. As a result of last year's Hurricanes we saw supply
disruptions that this committee attempted to address through a refining
capacity bill and we now see the potential for a similar situation with
regard to supply as a result of the virtual wholesale replacement of
MTBE with ethanol.
With the removal of the oxygenate requirement and industry's
decision to effectively eliminate MTBE from our fuel mix, octane boost
and emission requirements must be met with some sort of additive.
Ethanol is the obvious answer for to near term because of relatively
widespread infrastructure, the ability for 99.9 percent of vehicles to
accept the fuel, and a generous Federal tax code.
However, as the Energy Information Administration (EIA) has
provided in its report, there are regions of the country that will
likely see short-term disruptions in supply due to a number of factors.
In the mid-Atlantic for example, we currently rely on MTBE and don't
have the infrastructure set up for the transportation and distribution
of ethanol. Other areas of the country with established distribution
systems, an educated marketing and customer base, and boutique fuels
requiring ethanol will continue to be a draw on this supply. All the
while we are expecting a net increase in ethanol consumption of more
than 200,000 barrels a day of ethanol nationwide in a very short period
of time. The competition for this demand surely will place pressure on
prices.
I have been critical of our Federal policy toward ethanol,
especially in the current climate, because I feel that market forces
are already strong enough to support the ethanol industry and meet
demand. And while I don't agree with all of our current Federal policy
in this arena, our mission today is not necessarily to debate those
points. We have a responsibility to explore the potential effects
during this transition phase to ethanol during the upcoming peak
driving season and discuss possible solutions. One thing is clear, the
removal of the oxygenate requirement is going to have a significant
effect on the market this season and I look forward to hearing from our
witnesses about this issue and how Congress may address it.
Senator Inhofe. Thank you, Senator Warner.
Senator Lautenberg.
OPENING STATEMENT OF HON. FRANK R. LAUTENBERG, U.S. SENATOR
FROM THE STATE OF NEW JERSEY
Senator Lautenberg. Mr. Chairman, thank you for calling
this hearing.
I sit here as a grandfather of a child who has asthma and
that, for those who witness the condition, know that it a
blight and often with serious overtones. His life depends on
the quality of air and his functioning, as a child, and my
daughter's functioning as a mother of four, in many areas
during the summertime there are days when parents are advised
not to let their children play outdoors if they have asthma.
What my daughter does is when he plays sports and when they
go away from the home area, she checks to see where an
emergency facility is, just to be prepared. It is painful to
hear him wheeze and lose his energy. So in many areas during
the summertime, there are days when parents are advised not to
let their children play outdoors if they have asthma, because
the air is unhealthy and could trigger an attack.
But air pollution is not only a threat to children with
asthma. According to a study from the Harvard School of Public
Health, as many as 4 percent of premature deaths in the United
States can be attributed to air pollution. When we look at the
costs for shifting away from MTBE, I don't think we dare ignore
the other side of the seesaw which says all kinds of expenses
are incurred as a result of the cost of health and family
dislocation and other problems. As many as 30,000 Americans die
prematurely every year because of problems related to air
pollution.
So I support the Clean Air Act and I support the
requirement for the past decade for cleaner gasoline in cities
with the worst air pollution, something I supported. It is up
to the oil companies to decide how they met the requirements
for cleaner fuel. Some used ethanol, others chose to use MTBE.
The problem with MTBE, we know now, it is polluting
groundwater, that's been known for several years. It's
considered to be a likely human carcinogen. Many States are
banning this chemical, including New Jersey. Now New Jersey is
going to take some time for it to be fully in effect, 4 years
to be specific. I wish that we could accelerate that pace.
Apparently California has done much better in clearing up that
problem.
So this issue doesn't come up overnight. The oil companies
have plenty of time to consider other options. They certainly
have been making enough money to invest in developing for
alternative additives. I hope these companies will not use this
phase-out of MTBE as an excuse to manipulate a shortage in the
market, drive up prices further.
Mr. Chairman, Exxon reported the largest profit ever, not
just for an oil company, but for any company, $36 billion in a
single year. That was in the year when Hurricane Katrina struck
and Americans were being hit hard at the pump. It was a bad
year for everybody, everyday Americans, but a great year for
big oil.
We need to put the oil companies on notice that they can't
use MTBE as another excuse to boost up oil prices. Mr.
Chairman, I appreciate the fact that you've called this hearing
and I look forward to the testimony from our witnesses and the
opportunity to talk to them.
Senator Inhofe. Thank you, Senator Lautenberg.
We will now proceed to our witnesses. We would like to ask
you to try to confine your statements to 5 minutes. Your entire
statement will be a part of the record. We will start with you,
Mr. Caruso.
STATEMENT OF GUY CARUSO, ADMINISTRATOR, ENERGY INFORMATION
ADMINISTRATION, U.S. DEPARTMENT OF ENERGY, ACCOMPANIED BY:
JOANNE SHORE, LEAD ANALYST, ENERGY INFORMATION ADMINISTRATION
Mr. Caruso. Thank you, Mr. Chairman, members of the
committee. I appreciate the opportunity to appear before you
today to discuss possible consequences of eliminating MTBE in
U.S. gasoline supplies this summer.
I am accompanied by Joanne Shore, the EIA's lead analyst on
this issue.
EIA is the independent statistical and analytical agency in
the Department of Energy. We do not promote or formulate policy
positions. We do conduct analyses. Last month we completed an
analysis of the effects of the elimination of MTBE on gasoline
in 2006, which I will be summarizing and updating.
In 2005, a number of petroleum companies announced that
they would remove MTBE from their gasoline in 2006, due to a
number of State bans and liability concerns. EIA's discussions
indicate that the industry is trying to eliminate virtually all
MTBE prior to the driving season this summer.
Currently the largest use of MTBE is in reformulated
gasoline, or RFG, in Texas and in parts of the East Coast.
Other areas are using reformulated gasoline--in the Midwest,
California, New York and Connecticut. They have already removed
MTBE and moved to ethanol as the oxygenate replacement.
Due to a provision in last year's Energy Policy Act, as the
Chairman has mentioned, as of May 2006 the previous oxygen
content requirement for reformulated gasoline will no longer be
in effect. In theory, this means that suppliers could sell
reformulated gasoline made without either MTBE or ethanol.
However, given the need to replace the octane and clean-burning
properties of MTBE, nearly all companies have been planning to
blend ethanol into gasoline as they eliminate MTBE.
This shift from MTBE to ethanol involves major changes in
operations and supply sources to the East Coast and Texas,
particularly for those reformulated gasoline markets. While
refiners, marketers, pipelines, terminal operators and ethanol
suppliers have been preparing for the transition, this change
is taking place on a tighter time schedule than previous MTBE
to ethanol transitions in California, for example, which was
noted by Senator Boxer. A shift in this magnitude in this short
of time could cause temporary local supply dislocations and
price volatility.
To make reformulated gasoline using ethanol, refiners must
change their operations to produce a base reformulated gasoline
blend stock, so-called RBOB. This change results in some loss
of RFG production capability and product volume. Other
petroleum blending components can be used to replace the lost
volume and meet emissions limitations. But finding supply of
suitable blending components may pose a problem for some
gasoline producers, limiting their production and requiring
other refiners to find or produce more.
The Northeastern gasoline markets receive about 90 percent
of their RFG supplies from East Coast refineries and imports
into the New York harbor area, with the remainder coming from
Gulf Coast refineries. As the shift to ethanol reduces RFG
production capability at East Coast refineries, supplies from
the Gulf Coast and imports are expected to increase. However,
some foreign refiners are currently unable to produce RBOB
components, and hence there will be fewer potential foreign
suppliers for ethanol blended reformulated gasoline. Shifts in
past supply patterns for RFG will add to supply uncertainty
during this transition.
Changes are also required to the distribution system.
Ethanol-blended gasoline cannot be mixed with other gasolines
and cannot be moved through pipelines. RBOB is moved through
the petroleum distribution system, but unlike MTBE, ethanol
must be transported and sold separately, then blended with RBOB
at the end of the distribution chain. This requires time and
investment to add blending facilities, to add or convert
storage facilities and to convert retail outlets.
Pipelines and terminals are limited in the number of
products they can carry efficiently. In many cases, the system
would be strained to handle MTBE-blended RFG, ethanol and RBOB.
As a result, even if some suppliers had wanted to continue to
use MTBE-blended RFG, the distribution system could become a
barrier in many areas. The recent FERC decision regarding the
Colonial Pipeline announcement raised the question of whether
or not suppliers were planning on using MTBE into this summer
season. The FERC decision was only directed at how Colonial
Pipeline should respond if a supplier wished to continue
shipping MTBE RFG. Colonial is still bound by its usual
shipping requirements and physical constraints and EIA is not
aware of suppliers wanting to provide MTBE-blended RFG this
summer.
This large increase in ethanol demand and associated
transportation needs implies a tight ethanol market at least
the first half of 2006. As noted, January 2006 production of
ethanol was 288,000 barrels a day and about 130,000 barrels a
day may be needed to replace MTBE.
Moving additional ethanol from the Midwest to the East
Coast----
Senator Inhofe. Mr. Caruso, try to wind up, would you,
please?
Mr. Caruso. Yes, sir. Moving additional ethanol from the
Midwest to the East Coast also poses a transportation
challenge. East Coast ethanol use is expected to increase
90,000 barrels a day, which, if it all came from the Midwest,
would result in 3\1/2\ times the volume in 2006 compared with
2005.
In conclusion, Mr. Chairman and members of the committee,
petroleum and ethanol companies are working diligently to make
this transition away from MTBE to ethanol. This transition does
pose some of the challenges that I have mentioned for both
supply and logistics. As a result, ethanol supplies are
expected to remain tight through the summer, and increased
potential exists for short-term supply disruptions and
associated price volatility.
Mr. Chairman, I would be pleased to answer questions at the
appropriate time.
Senator Inhofe. Thank you, Mr. Caruso.
Mr. Meyers.
STATEMENT OF ROBERT MEYERS, ASSOCIATE ASSISTANT ADMINISTRATOR,
OFFICE OF AIR AND RADIATION, U.S. ENVIRONMENTAL PROTECTION
AGENCY
Mr. Meyers. Yes, Mr. Chairman, members of the committee, I
appreciate the opportunity to come before you today to testify
regarding the impact of eliminating MTBE.
My testimony will address how recent amendments to fuel
quality regulations and ongoing implementation of the Energy
Policy Act of 2005 affect U.S. fuel programs, in particular,
the Reformulated Gasoline Program, or RFG. Following passage of
the 1990 Amendments to the Clean Air Act, EPA was tasked with
developing and implementing several new motor vehicle emission
and motor vehicle fuel quality programs to reduce harmful
evaporative and exhaust emissions that negatively impact our
Nation's environment and the public health. Among many other
new provisions, the Clean Air Act required implementation of
new fuel quality programs with prescribed fuel parameters.
In 1992, the Wintertime Oxygenate Fuels Program was
implemented, and that program was required in more than 30
areas exceeding air quality standards for carbon monoxide.
Senator Boxer. Would you speak up a little, Mr. Meyers? I'm
having a hard time hearing you.
Senator Inhofe. Move your microphone a little closer to
you, Mr. Meyers.
Mr. Meyers. I apologize. I was just referencing the
implementation in the 1990 Amendments, and in 1992, we began
that implementation in our fuel quality programs by
implementing the Oxygenated Fuels Program at that point in
time. This program required gasoline to contain 2.7 weight
oxygen and it was instrumental, actually, in bringing many of
the areas that had been in carbon monoxide non-attainment into
attainment.
Subsequently, in 1995 after a period of regulatory
negotiations, we began implementation of the RFG program. The
1990 amendments, I think as people are well aware, required RFG
to contain 2.0 weight percent oxygen and established
essentially a two-phase program in 1995 and 2000. Historically,
the RFG program has used large quantities of MTBE. In 1995, I
think our figures showed about 2.5 billion gallons of MTBE was
used in RFG compared with about 300 million gallons of ethanol.
Today, after roughly 10 years of the program, 35 percent or
thereabouts of our gasoline is RFG. Both ethanol and MTBE have
been used in the program, but until recently, the MTBE
percentage was approximately 85 percent or so.
Over the last 6 to 7 years, concerns have arisen with
respect to groundwater contamination from leaking underground
storage tanks having gasoline containing MTBE. As the Senator
from California referenced, these concerns have prompted some
States to ban MTBE, including such large markets as California,
New York and Connecticut. That has had an impact on MTBE usage
over the last 2 or 3 years.
Altogether, EPA estimates that about 3.2 billion gallons of
MTBE were used in the RFG program in 1997. This level increased
about 3.4 billion gallons in 2000. In 2004, following
California's ban, the use of MTBE declined to around 2.1
billion gallons. Correspondingly, ethanol usage in the RFG
program has grown from 420 million gallons since 1997 to 1.7
billion gallons in 2004.
I mentioned before at the beginning of the testimony the
Energy Policy Act, which Congress passed in August of last
year. So far, in response to the law's enactment, EPA has
promulgated a direct final rule of the RFG regulations in order
to eliminate regulatory standards requiring the use of
oxygenates in RFG. This rule, when it becomes effective, will
remove the current regulatory standards nationwide. The rule
will also serve to implement provisions regarding commingling
of ethanol and non-ethanol blended reformulated gasoline.
In terms of other energy-packed provisions, we have
published a direct final rule regarding the default rule for
RFS compliance in 2006. We are continuing to work on the
renewable fuels standard regulation, which will be necessary
for 2007 and beyond.
I don't have much time left, so I would just sum up to say
that the Agency understands as a result of the changes made by
the Energy Policy Act of 2005, in particular the removal of the
RFG oxygen requirement, MTBE use in the RFG program will
decline significantly. As noted by EIA, some providers are
already transitioning away. The Northeast market may undergo
substantial conversion to ethanol RFG. Southern RFG markets,
too, such as Houston and Dallas, are likely experiencing a
changeover to ethanol RFG as well.
While we defer to EIA on the broad economic analysis, as an
Agency we remain committed to successful implementation of the
Energy Policy Act. I want to thank the Chairman of the
committee and members of the committee for your attention. This
concludes my prepared statement and I am willing to answer
whatever questions you might have.
Senator Inhofe. Thank you, Mr. Meyers, for that excellent
statement.
Mr. Caruso, I am going to pick up on his last statement
concerning what will result from the oxygenate elimination. For
years, refining and related industries urged Congress to
protect them from product liability lawsuits for following the
law and using MTBE under the oxygenate requirement. The Energy
bill repealed that requirement but did not include the product
liability protection. We spent a long time on the floor looking
at this, because this is one of the things that seemed to be so
logical.
Yesterday, the Wall Street Journal, I suspect everyone in
here has read that article, it is an excellent article, they
published a piece about the elimination of MTBE from gasoline
without liability protection, noting that Congress was well
aware that high prices would result. I imagine that you are
familiar with that article.
Would you agree that much of the industry made the public
aware that it would stop using MTBE without the liability
protection? To me, it's a no-brainer. In a court of law, I
would assume if they had the oxygenate requirement, that would
offer some defense. But you take that away, then they would be
without defense. Would you agree with that, and what's your
assessment of the conclusions of the article that I referred
to?
Mr. Caruso. Well, the specific issue of how well informed
the public was, that's very difficult to know. But certainly
it's clear that the refining interests sought the MTBE
liability protection, based on testimony before this committee
and the Energy and Natural Resources Committee during the
debate on EPACT last year. So I don't think there's any doubt
about that part of it.
It's also my impression that they generally favored the
repeal of the oxygenate requirement and/or were actually
opposed to an explicit near-term Federal ban on MTBE during
those hearings.
Senator Inhofe. All right, thank you. Mr. Meyers, you
testified that MTBE was among, I'm quoting now, ``the primary
product used to implement both the winter oxy and RFG
programs.'' According to the information we have seen,
implementing these Federal mandates would have been practically
impossible without MTBE. Would you agree with that?
Mr. Meyers. Well, as I noted in my testimony, the RFG
program heavily utilized MTBE from the initial start of the
program in 1995. I cited 2.5 billion gallons.
If you look at the regulatory history of the program, I
think it is also instructive to look at what the EPA did in
1999. At that point in time, there was concern about the
utilization of ethanol and the Agency promulgated what was
known as the renewable oxygenate requirement, which would have
established a 30 percent renewable standard for the RFG
program. That requirement was later overturned in the courts,
but is instructive in terms of the views at that point in time
concerning renewables and the RFG program.
If you step it up a little bit further after that, in 1999,
there was a blue ribbon panel commission on this issue on the
use of oxygenates in RFG. In that report, it seems to indicate
from the 1999 perspective that moving away from MTBE would be
very difficult in the short term, because of the heavy reliance
of MTBE in the program. Although it urged that in terms of
recommendations it noted the difficulties, since MTBE at that
point was so integral to the program.
I think going further, until very recently, MTBE has
certainly been the most predominant oxygenate utilized in the
program. In 2000, it was about 87 percent of the entire RFG
program.
Senator Inhofe. Well, I think that it's been stated by a
lot of the strongest supporters of ethanol. I remember Senator
Daschle made the statement that MTBE would still be necessary.
Of course, what all this translates in, back in supply and
demand, is increased costs.
Mr. Caruso, your report notes that ethanol production is at
capacity, and tight capacity leads to higher prices, a
situation facing the refinery industry for years. I have tried
twice now to introduce legislation that would increase capacity
at the traditional and biorefineries. The Gas PRICE Act was one
that I thought was a very moderate and modest proposal that
would encourage additional refineries, really at virtually no
cost.
Now, I would ask you the question, is it true that
consumers want reasonably or lower priced fuels? Since tight
capacity leads to higher prices, wouldn't it make sense that
greater capacity leads to lower prices? In other words, do you
believe in supply and demand?
Mr. Caruso. Most definitely. As an economist and the head
of a statistical, analytical agency, all of our studies
indicate that one of the reasons prices are so volatile and the
market inflexible now is lack of spare capacity from the
upstream all the way through the downstream.
Senator Inhofe. Yes, it's obvious.
Senator Jeffords, let's go ahead and have 6-minute rounds,
because we're going to have to confine this to one round. I
will recognize Senator Jeffords.
Senator Jeffords. Mr. Caruso, in gathering information for
its report in February, did EIA learn whether the oil companies
had an extensive planning effort in place to minimize price
impact of removal of MTBE from gasoline, and ease any supply
disruptions?
Mr. Caruso. I'm not aware of any information that we may
have gotten on the price aspect of it. Most of our focus was on
asking the industry how they were going to deal with the
requirement in EPACT 2005 to eliminate or remove the oxygenate
requirement in 270 days, which comes up in early May of this
year.
So we are focused on how are they going to meet this and
how are they going to deal with their statements that they felt
that without the oxygenate requirement they no longer had
product liability coverage. Most of them said to us that they
were going to move out of MTBE into ethanol as quickly as
possible. So that's the information we gathered from not only
those companies, but the distribution companies, to see if it
could be done--are the rail cars there, the whole logistical
chain of this moving out of MTBE within 270 days from the
passage of EPACT 2005.
Senator Jeffords. Do you believe your report spurred the
market to begin grappling with possible supply issues this
spring?
Mr. Caruso. Well, we'd like to think that one of the roles
we play is to inform the market participants when we think an
issue such as this is impending. Because oftentimes, for either
legal or competitive reasons, some of the market participants
aren't talking with each other, and especially an issue where
there are so many moving parts from the production of ethanol
to the transportation to the distribution. We'd like to play
that role as an information agency.
Hopefully it did perhaps stimulate some movement. We know
that the economic incentives were there, ethanol prices were
rising. So clearly the incentive for the refiners is to have
adequate supplies for their customers. So it was a question of,
is there going to be enough time to overcome some of these
logistical challenges.
Senator Jeffords. Since the release of your report,
Colonial Pipelines' plans to phaseout MTBE from gasoline
shipments have changed. On St. Patrick's Day, the Federal
Energy Regulatory Commission denied their request to stop
shipping these products. Have you examined this issue, and do
you know its potential to alleviate supply problems?
Mr. Caruso. Well, we have talked to the Colonial Pipeline
people, and they will honor their regular contractual
agreements to move the product as specified in the arrangements
with the company. So we have looked at it. But it doesn't
really alleviate the problems mentioned because, if the
companies are essentially all moving out of MTBE, the only
issue that was on the table for FERC was whether companies who
wanted to continue shipping reformulated gasoline containing
MTBE would still be able to do it. Colonial Pipeline officials
have told us the answer is yes, in response to the FERC
decision.
Senator Jeffords. Will you commit to updating your report
before early May, and including an actual price prediction?
Mr. Caruso. Well, we certainly are following this very
closely. I would be happy to make sure that we do have an
updated report by May.
The second thing is, on price, we do on a monthly basis
make gasoline and other product price projections and the next
one will be presented on April 11 at our Summer Fuels Outlook
Conference in conjunction with the National Association of
State Energy Officials, NASEO, here in Washington. So we will
have a summer outlook projection which includes our latest
expectations for meeting the MTBE phaseout on April 11.
Senator Jeffords. Mr. Meyers, in your testimony you stated
the EPA is now working on an implementation plan for future
years of the renewable fuels standard. When do you expect to
issue that plan?
Mr. Meyers. It's our current intention, we have to go
through normal process of a proposed rule, at the end of this
summer or early fall, it would be our projection when we will
have a proposed rule out.
Senator Jeffords. Mr. Meyers, the new energy law allows
unformulated gasoline in tanks that contain MTBE to be mixed
with reformulated gas that does not, a practice known as
commingling. EPA has yet to issue rules to implement this
section of the law. Would this practice help supply situations
this summer?
Mr. Meyers. In actuality, that was contained in our direct
final rule that we placed for removal of the oxygen standards.
So we actually have, we included it in our direct final rule
which removed the oxygen requirement and we specified, as the
Act specified, the circumstances under which commingling could
occur.
Senator Jeffords. Thank you, Mr. Chairman.
Senator Inhofe. Thank you, Senator Jeffords.
Senator Warner.
Senator Warner. Thank you, Mr. Chairman.
Mr. Meyers, on the subject of the environment, can you
speak to the expected effects on the environment and health of
ethanol replacing the MTBE?
Mr. Meyers. I can speak in terms of the air program.
Senator Warner. Yes.
Mr. Meyers. As you know, the effects of MTBE are multi-
media and they have water quality effects. In moving from MTBE
to ethanol, the way our RFG program works is a series of
performance specifications, plus some actual formulated
requirements for the gasoline. So both MTBE based RFG and
ethanol based RFG have to meet the same requirements. They will
have to meet the benzene cap, they will have to----
Senator Warner. I'm not getting what you're saying. Once
again, more slowly. Both have? Go ahead, once again.
Mr. Meyers. Both have to meet the same requirements.
Senator Warner. Correct. But have you done an evaluation of
which is least detrimental to the health?
Mr. Meyers. From an air emissions standpoint, I don't
believe we have any analysis. Again, we are dealing with a
program that utilizes, it is a little bit complicated, but uses
refiner baselines as a measurement for the gains of the
program. So we'd measure the performance requirements against
the gas that refiners actually use to produce, and it's a
percentage. So both MTBE and ethanol will meet the same
percentage air quality gains under the requirements that we
have.
Senator Warner. Is there any basis for assuming that
ethanol would be better for the future in terms of the
environment?
Mr. Meyers. There are different emission profiles in terms
of what would come out the tailpipe. But I don't believe from
an air quality standpoint, if we are talking about non-
attainment, that we would have substantial differences between
the performance.
On that point, though, I would be happy to provide for the
record anything that we do have. My knowledge may not be
comprehensive of the analysis that we have. I would be happy to
provide that.
Senator Warner. Well, I thank you for your candor. I do
believe, Mr. Chairman, it would be important for the record if
you would canvass the Federal Government----
Mr. Meyers. Of course, sir, I will.
Senator Warner [continuing]. To determine what is out
there. Because I have to assume that someone has run some
fairly significant tests and evaluations on this subject.
Mr. Meyers. Well, we have evaluated the impact of the RFG
program and certainly think it's produced large environmental
gains. After 1995, we studied its impact and previously we have
testified as to the reductions in VOx, NOx and the air toxics
that occur from the program.
Your specific question as to the emission performance
between ethanol and MTBE, that I'm not aware of a specific
study, but I will check that and get back to the committee as
soon as possible.
Senator Warner. What about the water quality? Is someone at
the EPA looking at that?
Mr. Meyers. That falls under the Office of Water. Right
now, there's an action level for MTBE between 20 and 40. The
Office of Water has been looking at it in terms of the Safe
Drinking Water Act and establishment of regulatory standards
under the Safe Drinking Water Act.
Senator Warner. Presumably they would be in favor of
shifting to the ethanol? It seems to me somebody, we have to
begin to reach some conclusions down here.
Mr. Meyers. I need to stay within my office.
Senator Warner. All right, you're being very careful and
very accurate and very candid. Do what you can to bring that
information before the committee.
Mr. Meyers. Thank you.
Senator Warner. Mr. Caruso, on the supply and demand thing,
it's a complicated responsibility you have. Do you think that
the EIA had any thoughts about the ability of imports to meet
the demand?
Mr. Caruso. Yes.
Senator Warner. Nobody has a free lunch. What about the
tariffs that are likely to be put on these imports and the
effect of the tariffs?
Mr. Caruso. One of the reasons ethanol imports have been
down is that there is a high tariff--it's 54 cents a gallon
plus the 2\1/2\ percent ad valorem. So that ethanol imports
have been very low, as recently as even 2005. They are ramping
up now in 2006. We already saw that at the end of 2005, imports
of ethanol from Brazil were up over December 2004. We would
expect that that would be part of the answer, because the price
of ethanol has gone up as demand has increased. Therefore, even
with a 54-cent-a-gallon tariff, it's economic to bring in
ethanol.
However, there is a limit as to how much ethanol is
available on the foreign market.
Senator Warner. Right. Maybe we ought to address the issue
of tariffs. Clearly there's tremendous demand for the domestic
supply, and maybe it doesn't need such protection as a tariff
may afford. You're nodding your head.
Mr. Caruso. Well, as an economist I would agree with you.
Senator Warner. Beg your pardon?
Mr. Caruso. As an economist, I certainly would agree with
you. But obviously as the head of EIA, I can't take a position
on the policy issues.
Senator Warner. I appreciate that nod. Will the record
indicate, Mr. Chairman, that he is in assent?
[Laughter.]
Senator Inhofe. The record will so indicate.
[Laughter.]
Senator Inhofe. Thank you, Senator Warner.
Senator Boxer.
Senator Boxer. Thank you very much, Mr. Chairman.
Mr. Caruso, you make it sound very difficult for the oil
companies to make this transition away from MTBE. So on that,
you disagree with the sentence, again, I am going to read to
you, Edward Murphy, American Petroleum Institute, said,
``making up roughly 300,000 barrels a day of MTBE volumes will
be producing gas at 8 million barrels a day over a 4-year-
period is a virtual walk in the park.''
So I just wanted to note that the oil institute, the
Petroleum Institute itself in testimony said it was no big deal
to do this. Then you said in answer to Senator Jeffords'
question, something I found very interesting, I wanted to probe
you a little bit on it. You said that you learned from the oil
companies, and this is true, because this is what they're
saying, but I just wanted to ask you about it. That with no
more oxygenate requirement, oil companies no longer have
product liability coverage. Those were your words.
Now, they never have had waiver of product liability. So
what are you talking about? Are you talking about the fact that
when they go to court to fight these cases, they say, ``Well,
Your Honor, don't hold us liable, Congress made me do it?''
Isn't that what you mean?
Mr. Caruso. That's what the companies have been saying.
Senator Boxer. That's what they're saying.
Mr. Caruso. Yes.
Senator Boxer. But isn't it a fact that Congress has never
given them a waiver of liability?
Mr. Caruso. That's correct.
Senator Boxer. Isn't it a fact that although they've had
this liability on their shoulders, and believe me, I know about
it, because they polluted Lake Tahoe, they destroyed 75 percent
of the water supply in Santa Monica, CA, they went to court, we
have discovery, we saw what they were writing to one another
almost as jokes. The fact is during that whole time that they
had liability, between now and that time, haven't they had
record profits? So clearly this burden hasn't been such a
burden, is that right?
Mr. Caruso. Well, they see the burden being in the future--
without the oxygenate mandate, they wouldn't have a product, a
legal argument, that is what they are telling me.
Senator Boxer. But they've lost in court. They haven't ever
won in court. So the fact of the matter is, I would like you to
give them a little bit of a reality check. They have never had
a liability waiver. They don't deserve it. The courts have
found they have no excuse. All of a sudden now they're coming
and crying again. I just love it. It's just extraordinary.
Now, Mr. Meyers, did the Clean Air Act legally mandate the
use of MTBE in gasoline?
Mr. Meyers. The Clean Air Act contained the 2 percent
oxygenate requirement.
Senator Boxer. Did the Clean Air Act legally mandate the
use of MTBE in gasoline, yes or no?
Mr. Meyers. The Clean Air Act did not specifically
reference MTBE. It required a 2 percent oxygenate requirement.
Senator Boxer. Right. So there is, no mandate for MTBE ever
was in the law?
Mr. Meyers. The language of the Clean Air Act does not
contain a reference to MTBE.
Senator Boxer. Correct. So, yes or no, did the Clean Air
Act legally mandate the use of MTBE in gasoline, yes or no?
Mr. Meyers. The issue in your question is with respect to
legally mandating----
Senator Boxer. Can you answer yes or no? You've said it
didn't, why can't you just say no?
Mr. Meyers. I thought I had said that the Clean Air Act did
not require the specific use of MTBE in the statutory terms.
Senator Boxer. So there is no mandate for MTBE, is that
correct?
Mr. Meyers. It's not in the statute in terms of a specific
legislative reference to MTBE.
Senator Boxer. Thank you. Because you've just supported my
argument and the argument that the court has found in favor of,
and the fact that Mr. Caruso, the next time you see the oil
companies, you might mention that Mr. Meyers, who certainly
knows about this, says there has never been a mandate for MTBE
from this Congress.
I would ask to place into the record a document that dates
back to 1995, Special Counsel Robert Meyers, who was the
counsel to the House Energy and Commerce Committee, in which he
said, ``In essence, since various fuels and fuel constituents
compete for the RFG and alternative fuels market, an effort was
made by Congress to avoid dictating any particular fuel
choice.'' Now, that could be used in court.
Senator Inhofe. Without objection, that will be included.
[The referenced information follows on page 92.]
Senator Boxer. Thank you.
So let's get off this business of the poor oil companies
were forced into MTBE when they clearly were not. It's
important for us, if this issue of a liability waiver comes up
again, let me just say now, that it isn't going to go anywhere
on the Senate floor. It's going to go down.
Mr. Meyers, the Houston Chronicle reported on March 24,
2006 that Lyondell Chemical Company, a major MTBE producer,
sent EPA a letter urging the Agency to extend a rule that
Lyondell believes will help them avoid paying MTBE cleanup
costs. Do you know about this letter?
Mr. Meyers. I don't have personal knowledge of the letter.
I would be happy to provide a response for the record.
Senator Boxer. I would be delighted if you would please
send me a copy of the letter and any response that you plan to
make.
I think, Mr. Chairman, that I will stop here. I just feel
very, very strongly, that if this new bill that we passed is
another excuse for the oil companies to try to get off the hook
for poisoning so much of our Nation's water supply, it would be
a travesty if this Congress went along with it. Thank you.
Senator Inhofe. Thank you, Senator Boxer.
Before you start, Senator Lautenberg, I will ask unanimous
consent to submit for the record statements from the National
Petrochemical and Refiners Association and the American
Petroleum Institute. Without objection, those will be entered.
[The referenced information follows on pages 80-91.]
Senator Boxer. Mr. Chairman, I'm not going to object, but I
want to clarify a matter with respect to putting these letters
here. As you know, we wanted to have the oil companies and they
were not invited here. I just want to make sure, on behalf of
Senator Jeffords and myself----
Senator Lautenberg. And me.
Senator Boxer [continuing]. Senator Lautenberg, I want to
make sure that these documents you are putting in the record
are not regarded as testimony, but rather as additional written
material offered to you, the chairman, in the form of a letter,
and accepted into the record to inform members of the NPRA's
point of view.
Senator Jeffords and I want to make this clear, because we
have some questions about the content of these letters. We
would have liked to have asked the oil companies about them and
we were not able to do so. But I will not object.
Senator Inhofe. I would respond, that's always the case.
They will be in as submitted letters.
Senator Boxer. Thank you.
Senator Inhofe. Senator Lautenberg.
Senator Lautenberg. Thank you. Is it possible, if these
letters are not particularly lengthy, to have the general
context of these explained here or read here?
Senator Inhofe. Well, why don't you go ahead with your
time, and I will look at these and see if that would fit into
this.
Senator Lautenberg. I think it would be very helpful.
Senator Inhofe. Thank you.
Senator Lautenberg. Mr. Chairman, I'd like to ask Mr.
Caruso a question about something that is in his testimony that
I'd like to be more certain about. That is, it's page 6, he'll
know as soon as I identify it. Where you talk about the cost
for ethanol imports generally less attractive than domestic
production, because imports are subjected to an ad valorem
tariff of 2.5 percent, second duty of 54 cents a gallon, which
offsets the 51-cent-per-gallon tax credit for blending 10
percent ethanol into gasoline.
Could you in quick form tell me exactly what the 51-cent-
per-gallon credit is for, why that derives in here? It's
obviously an offset to the tariff. What happens with the 51-
cent-a-gallon credit? Who does that go to? What's the mission,
what's the purpose of that offset?
Mr. Caruso. With the permission of the Chairman, if I could
ask the author of the report, Joanne Shore, to answer that
question?
Senator Inhofe. Without objection.
Ms. Shore. Actually where it goes I'm not sure.
Senator Inhofe. State your name and your title, please.
Ms. Shore. Joanne Shore, Senior Analyst with the Energy
Information Administration.
Where it goes at this point I don't know, but there is a
credit that's allowed, that the blenders are allowed to take. I
believe it's 51 cents a gallon right now. The import tariff is
roughly the same amount, so when that ethanol gets blended----
Senator Lautenberg. It creates sort of a trust fund from
which to take----
Ms. Shore. Exactly.
Senator Lautenberg. So is that designed to relieve the
gasoline companies of some part of the cost for having to make
this transfer to ethanol?
Ms. Shore. No, I believe the 51 cents has always been there
as a credit. The ethanol producers will be able to realize a
higher price. Then the blender is able to take that credit down
the road at that point where it is blended to be able to make
it more competitive with alternative materials as it is
blended.
Senator Lautenberg. So it saves the companies some part of
the cost of producing the product?
Ms. Shore. Yes, it saves the blenders.
Senator Lautenberg. Are the blenders separate and apart
from the gasoline companies?
Ms. Shore. They can be. Some companies do their own
blending and there are many independent blenders out there as
well.
Senator Lautenberg. I see. So that if they didn't have this
waiver, then they would have to pick up the costs? I just want
to be sure, tax credit, sorry, they would have to pick up the
cost out of their revenues, perhaps pass it on to the public or
otherwise?
Ms. Shore. Yes, or the ultimate price, then, of ethanol
would drift accordingly to settle at a new price, whatever the
market balance would bear at that point.
Senator Lautenberg. Yes. I guess what I see is that we want
to help the companies make a reasonable profit on their
activities, like $36 billion. Anybody know whether Exxon has
its own blending structure?
Ms. Shore. Yes, they have both, in the sense that they sell
product to others who do blending. They also would have some of
their own blending. But the price that they pay at that point
for the ethanol that comes in would effectively be, for
example, 50 cents higher than the price of gasoline. Frequently
ethanol prices, when the market is relatively well balanced,
will be at the price of gasoline after the credit.
Senator Lautenberg. There are offsetting amounts?
Ms. Shore. Right.
Senator Lautenberg. OK. I just wonder at what point they
pitch in and say, OK, it costs us more to do a little more
business. But we've got a pretty good business without that. So
the profits are enormous and it's just amazing when we look at
this how the gasoline companies perform. There was a $5 billion
punitive award for the spill in Prince William Sound. It's
never been paid, it's gone to court and they keep on, it's
about 15 years now I guess, since that judgment was made. But
they manage to stave off paying their share of responsibility.
It's very interesting.
Mr. Caruso, you said that you would be creating, or
releasing a projection for the cost in the coming months, on
April 11, was it?
Mr. Caruso. Yes, Senator.
Senator Lautenberg. Do you have any idea of the range of
what the increased costs might be? Is it a nickel, is it a
dollar?
Mr. Caruso. Our current outlook is for about $2.50 average
price of gasoline for the summer. I think that's about 12 cents
higher than last summer per gallon.
Senator Lautenberg. I thank you.
Senator Inhofe. Thank you, Senator Lautenberg. We want to
hear from Senator Thune, but before we do let me just, Senator
Boxer, since you had mentioned several times that you wanted
the oil companies to be present at this hearing, I've been
advised that your staff made that clear and we said that we'd
be happy to have them as your witnesses if you wanted to name
them as witnesses. You declined to do so.
Senator Boxer. Well, that's because you said we couldn't
have any of our other witnesses.
Senator Inhofe. Well, we have a limited number that is very
consistent with the way we've done it in the past. If you
wanted them here, you had the opportunity.
Senator Thune.
Senator Boxer. Mr. Chairman, I guess since you brought it
up, I don't understand why you wouldn't have wanted them here.
Senator Inhofe. I didn't say I didn't want them.
Senator Boxer. I mean, this is about them. If you read
their letter, by the way, they claim that we mandated MTBE and
other falsity, right in there. By the way, they put out a press
release about their letter to you.
Senator Inhofe. Thank you, Senator Boxer.
Senator Thune.
Senator Thune. Thank you, Mr. Chairman. I will reserve most
of questioning for the next panel. I thank you, by the way, for
holding this hearing.
I think this is a critical issue obviously to our economy.
As we head into the summer season, dealing with gasoline costs
in a State like South Dakota, where we are very agricultural
intensive and tourism intensive, that has a profound impact on
the economy. I think we need to be examining all the policies
that we have in place that will impact adversely the cost of
fuel oil in this country. I think that--I'm hoping we will get
a chance to move another Energy bill this year that will help
address some of those concerns as well.
But this hearing is obviously very important in terms of
what we are doing to take a very close look at this.
I will reserve most of my questions for the next panel, but
I do want to ask Mr. Caruso a question, if I might. That has to
do with the supply and stock data that EIA publishes and the
timing of that publication tends to track about 2 months
behind. How do you determine the availability of ethanol in the
marketplace with numbers that are so outdated once they're
published?
Mr. Caruso. You're correct, the actual final data on a
monthly basis has about a 60-day lag, on the monthly data. We
do collect on a weekly basis some blendstock information. So it
gives us some idea of what the blending components that go into
the reformulated gasoline are doing. So we have incomplete
information on a weekly basis, but we do have to wait for that
60 days.
So one of the things we try to do--people like Joanne Shore
and other experts in EIA--is to communicate with companies that
are producing ethanol, with refiners and blenders to get the
sense on a real-time basis of how things are going when we are
in a situation that requires more close monitoring. We couldn't
afford the resources to have this done on a regular basis, but
now that we know there's an issue, for example, this 270-day
phase-out of oxygenate, in this case MTBE, Joanne immediately
started communicating with the participants in the marketplace.
Are you going to be able to do this, what problems do you
anticipate? That's what led to the analysis that I presented
this morning.
Senator Thune. It seems at least that not having real time
data available would make it awfully difficult to track with
any specificity what's happening right now. If you're getting
information that is dated, it seems to me at least that closer
coordination with the industry and to understand exactly, and I
know you're doing that, sounds like you're doing that,
communicating with the industry to figure out what their
capacity is going forward, but if you have a 2-month lag in
this day and age, I think it's going to be awfully difficult to
predict with any reliability what prices or supplies or
anything else are going to be.
So I guess my follow-up question would be, what would it
take to close that 2-month gap? What do we have to do to get to
where this is, we're getting more of a real time assessment of
where things are?
Mr. Caruso. There was a provision within the Energy Policy
Act of 2005 that we do a survey on a weekly basis of ethanol
production in more detail. However, there was no budgetary--
excuse me, on a monthly basis. However, there was no budgetary
authority that went along with that request.
So we looked at what it would take, and we initially made
an estimate that there would be about a $2 million cost of
starting up a survey to allow us to collect that data on a
monthly basis, and about $800,000 a year thereafter. But as of
yet, this budgetary authority has not been made available.
Senator Thune. Well, I guess in light of the fact that now
with the phase-out of MTBE and that ethanol is becoming the
additive of choice or perhaps necessity, and the importance of
knowing on an I think more day-to-day basis rather than month-
to-month or 60-day- to 60-day-basis what the real situation is
in the marketplace would suggest that the steps be taken. You
do, my understanding is you do real time tracking of petroleum.
Now the blends that are going to be required to be used in the
future, it seems to me that you would want to use a similar
type process, a more timely type process of keeping
availability, supply, capacity of ethanol at your disposal as
well. Because otherwise, I just think that the reliability of
the data is really questionable, if you're talking about data
that's 60 days old, and trying to make any predictions about
capacity or supply, demand, price, anything going forward.
Thank you, Mr. Chairman.
Senator Inhofe. Thank you, Senator Thune.
Senator Murkowski.
Senator Murkowski. Thank you, Mr. Chairman.
I apologize to the committee and to the witnesses that I
haven't been able to be here to hear your testimony. This is an
issue that I think people in the country are looking at. They
want to know what's going to happen to the price of gas. We can
talk about the specifics of MTBE and the liability issue, but
at the end of the day, what Americans want to know is, so what
am I going to be paying at the pump?
I understand that a couple of the questions that I had
prepared for you gentlemen have already been asked and
answered. But do you have a simple answer for me in terms of
what we can expect to be paying this summer?
Mr. Caruso. Our latest outlook, which is our best judgment
and assumes no disruptions, is about a $2.50 a gallon average
price for gasoline.
Senator Murkowski. So about 20 cents over what we're seeing
here in this region right now? Is that about right?
Mr. Caruso. Actually this week I think our numbers are just
about $2.50, maybe slightly under that, on a national average
basis. I mentioned in the testimony that the issue that we
think is before us is the possibility that there could be some
logistical dislocations in this transition and therefore on a
regional basis you could have price volatility. We don't see
that as likely to be a national issue. But clearly in places
like Houston, Dallas, Fort Worth, and the East Coast, where
they have not already phased out MTBE, you could get price
volatility, which could go certainly above the national
average.
Senator Murkowski. If that assumption holds true, then, how
long do you anticipate that these prices stay at these levels?
When will it settle?
Mr. Caruso. We think it's a short-term problem. That's the
other point I mentioned. It's a temporary issue. We do think
the ethanol producers are ramping up and will meet the demand
increase. However, it takes time and we're very tight for the
first half of 2006. But it's a summer driving season problem
that we think we face, and we'll be presenting that in more
detail at an April 11th Summer Fuels Outlook Conference.
Senator Murkowski. We'll look forward to that.
Let me ask you just in terms of the liability aspect of
MTBE, do either one of you want to venture an opinion on
whether the MTBE processing industry has any greater legal
exposure now than it's faced since the 1990's for the water
quality impact of the MTBE if it leaks into the groundwater? Is
there any greater exposure now than we saw before?
Mr. Meyers. I think the question is a good one, but would
require a very studied legal analysis that I would not be
prepared to offer.
Senator Murkowski. Mr. Caruso, any comments on that?
Mr. Caruso. I think that's a legal question I really have
no competence to answer.
Senator Murkowski. If we had a legal expert here, he would
probably say, it's a legal complex question. Thank you, Mr.
Chairman.
Senator Inhofe. Thank you, Senator Murkowski.
We thank the panel very much for their indulgence. I would
ask the next panel to come forward, which would be Bill
Douglass, CEO of the Douglass Distributing Company, on behalf
of the National Association of Convenience Stores; Blakeman
Early, American Lung Association; Bob Dinneen, president and
CEO for the Renewable Fuels Association.
Please take your seats. Gentlemen, thank you for your
presence here. We are going to kind of watch the clock a little
closer this time, because we are running out of time. We would
like to have you confine your statements to 5 minutes, but your
entire statement will be made a part of the record. I will
definitely let you know when your time is up. The same will go
for the timing of the questions that will be asked.
We will start with you, Mr. Douglass.
STATEMENT OF BILL DOUGLASS, CHIEF EXECUTIVE OFFICER, DOUGLASS
DISTRIBUTING COMPANY
Mr. Douglass. Good morning. My name is Bill Douglass, and I
serve as the chief executive officer of Douglass Distributing
in Sherman, TX. My company owns and operates 14 fuel outlets in
the Dallas-Fort Worth area and supplies gasoline and diesel
fuel to 165 additional retail outlets in the area under long-
term supply contracts.
I appear before the committee representing the National
Association of Convenience Stores, which we call NACS, and the
Society of Independent Gasoline Marketers of America, which we
call SIGMA. Together NACS and SIGMA members sell approximately
80 percent of the gasoline and diesel fuel purchased by
motorists in the United States each year.
Over the past 3 months, I've witnessed such a blizzard of
announcements in developments regarding gasoline production and
distribution that even I, who study and participate in gasoline
marketing every day, am uncertain as to what to expect over the
next 6 months. This hearing is an attempt to sort through these
announcements, rumors and questions.
You've heard testimony this morning from Government experts
regarding the facts and statistics associated with the
transition from MTBE to ethanol. I will not duplicate their
testimony. Instead, I will move beyond the statistics and
examine my real world situation.
First, the use of MTBE as a gasoline additive will decline
in the future, whether rapidly as some have predicted this
spring and summer, or more gradually. This decline is a direct
result of Congress' failure to adopt liability reform
provisions for MTBE as part of last year's Energy bill.
I'm not seeking to get into the debate as to whether
Congress should have adopted the MTBE Safe Harbor last year,
but this committee and the Congress as a whole must understand
the decisions made last year are having repercussions in the
gasoline market this year.
Second, ethanol is the most likely and immediate substitute
for MTBE in RFG. EIA has estimated on average refiners lose
approximately 5 percent of their production capacity when
making RFG with ethanol, when compared to RFG with MTBE. This
is a significant reduction in domestic gasoline production
capacity that should be of a concern to policymakers, marketers
and consumers.
Third, in general the Nation's refiners are not positioned
to produce substantial quantities of clear RFG, which is not
blended with either ethanol or MTBE, which will be authorized
for the first time in May. Fourth, it's clear that the domestic
ethanol industry is doing its utmost to maximize of ethanol it
will produce and sell this year. But it's uncertain whether
these best efforts will be sufficient to meet the demand for
ethanol in the next 6 months, as the Nation transitions away
from MTBE.
Fifth, boutique fuels continue to complicate the supply and
distribution of gasoline. As noted in the EIA study, the Energy
bill's cap on the number of boutique fuels does not cover State
boutique renewable fuels mandates. Such mandates constrain the
availability of ethanol in other areas of the Nation and limit
the supply flexibility in the marketplace.
Sixth, the bulk gasoline storage and terminal
infrastructure in many parts of the Nation is not prepared for
a transition from MTBE to ethanol. Finally, the transition from
MTBE additized gasoline to ethanol additized gasoline will be
problematic for motor fuel retailers like me. Retailers will be
undertaking preparations to market gasoline blended with
ethanol, at the same time they are preparing to switch from
winter to summer gasoline blends.
While many retailers have been selling ethanol blended
fuels for years, there are others like myself that will be
making the transition for the first time. I recently received a
20-page document from one of my gasoline suppliers, explaining
the steps I must take to prepare to sell ethanol-blended
gasoline. Increasing my challenge is the fact that I do not
have the lead time many of my colleagues in other parts of the
Nation had to prepare for this conversion. This could be
problematic, as there are many others in my situation.
Unfortunately, there are few public policy options open to
Congress to mitigate potential gasoline or ethanol supply
shortages and price volatility in the short run. NACS and SIGMA
propose that the action that would have the greatest
significant positive effect on supply and the consumer prices
in the next 6 months would be a temporary suspension of the
tariff on imported ethanol. Such a move would help supplement
the efforts of the domestic ethanol industry to satisfy the
rapidly escalating demand without penalizing the consumers with
a 54-cent-per-gallon tariff. This would be meaningful, sound
public policy enacted for the good of the consumer.
In the medium term----
Senator Inhofe. Thank you, Mr. Douglass, your time has
expired. Thank you very much.
Mr. Early.
STATEMENT OF A. BLAKEMAN EARLY, AMERICAN LUNG ASSOCIATION
Mr. Early. Mr. Chairman and members of the committee, I
appreciate the opportunity to appear today on behalf of the
American Lung Association.
The American Lung Association supports the removal of MTBE
from gasoline. As you know, MTBE has been found to contaminate
ground or surface water in nearly every State, and has rendered
thousands of public and private drinking water sources
unusable. Addressing the cleanup or replacement of these
sources has been estimated to cost upwards of $25 billion.
These statistics provide reason enough to eliminate MTBE from
the Nation's fuel supply.
But the American Lung Association is particularly
interested in eliminating MTBE from reformulated gasoline
because many areas with unhealthy levels of ozone have avoided
adopting RFG for fear of contaminating local water supplies.
Therefore, we see the recent trend of refiners choosing to
eliminate MTBE from RFG as a welcome development, which may
facilitate the option of RFG in more areas that need it. If so,
the public will benefit from the reduced exposure to ozone and
toxic air pollution.
The elimination of the oxygen requirement in RFG in
combination with the sulfur limit in all gasoline implemented
as part of Tier II rules, and the limitation on boutique fuels
adopted in EPACT should eliminate the proliferation of boutique
fuels, while providing clean fuel choices to areas that need
them. We believe that any additional limitations on States'
ability to select clean fuels would have an adverse air quality
impact and are unnecessary, given all the changes I just
described.
Refiners are eliminating MTBE from RFG this spring entirely
voluntarily. The American Lung Association endorsed a ban on
MTBE phased in over 4 years, a timeframe that was originally
identified by the industry itself in testimony before this
committee. The Congress chose not to adopt such a measure
during its consideration of EPACT, but did remove the oxygen
requirement. This enables each refiner to use as much or as
little MTBE as it chooses.
Now this spring, refiners are attempting to remove MTBE
from RFG all at once, rather than pursuing a phased
elimination. The current action to remove MTBE from the
remaining RFG supply is voluntary and is not required to meet
any law. We see no credible basis for finding that the use of
MTBE in RFG in 2006 gives rise to special liability, given the
nature of MTBE groundwater contamination and the difficulty of
distinguishing when contamination occurred. Whatever liability
refiners may be subject to will be based largely on past
actions, not future actions.
It has long been predicted that the removal of MTBE from
RFG would spike a demand for ethanol. I provided testimony to
this effect before this committee in June 2000. The fact that
refiners are voluntarily and precipitously withdrawing MTBE
from use, knowing that such action would cause a spike in RFG
prices, provides testament to the indifference the refining
industry has to the calls of consumers to restrain fuel prices.
As you know, in EPACT the Congress provided EPA with the
authority to temporarily waive a fuel additive or additive
requirement under the Clean Air Act, in cases of an extreme or
unusual fuel or fuel additive supply circumstance. The statute
explicitly states that shortages that reasonably could have
been foreseen or derive from a lack of prudent planning do not
qualify. We believe the ethanol and fuel shortage we are
discussing today was foreseeable and in fact, is exactly the
result of a failure of prudent planning. The American Lung
Association hopes no one will suggest the need for invoking the
need for the EPACT waiver authority.
Under EPACT, 9 months after the enactment, EPA is required
to establish standards for each refiner and importer designed
to maintain the level of toxic air pollutant reduction achieved
on average during 2001 and 2002. This so-called anti-
backsliding provision was enacted to ensure that as refiners
reduce the amount of MTBE they use in RFG, the level of toxic
air pollution from the use of such fuel did not increase.
The dramatic shift away from MTBE use occurring this spring
well illustrates why this provision is needed. EPA recently
announced it will not implement these provisions, but will
defer these protections until the mobile source air toxics rule
is implemented in 2011. This allows at least 5 years for
refiners to increase toxic air pollution in RFG from past
levels, the very backsliding the law requires EPA to prevent.
We call on the EPA to issue backsliding rules as
expeditiously as possible to prevent toxic air pollution
increases in RFG over the next half decade.
This concludes my remarks. Thank you.
Senator Inhofe. Thank you.
Mr. Dinneen.
STATEMENT OF BOB DINNEEN, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, RENEWABLE FUELS ASSOCIATION
Mr. Dinneen. Good morning, Mr. Chairman, and thank you.
This is an important and timely hearing and I am certainly
pleased to be able to be here today to discuss with you all
that the industry is doing in coordination with refiners,
gasoline marketers and the fuel distribution network to make
sure that the transition from MTBE to ethanol is indeed a
success.
As you know, Mr. Chairman, the ethanol industry is growing
rapidly. In addition to the 97 ethanol biorefineries that
produce more than 4.5 billion gallons of ethanol today from a
billion and a half bushels of grain, there are 33 plants and
several major expansions that will add another 2 billion
gallons of ethanol production capacity very shortly.
This remarkable growth can most certainly be attributed in
no small part to passage of the Energy Policy Act of 2005,
which included a renewable fuels standard that provided a
clarion call to our industry and the financial community to
grow with confidence. Mr. Chairman, I hope that you and the
members of this committee are very proud of the role that you
had in getting a renewable fuels standard passed as part of the
Energy Policy Act. It has done exactly what it had been
intended to do in terms of stimulating the production of
ethanol and biodiesel. We certainly are very appreciative of
the role that you had and others on the committee, like Senator
Thune and Senator Obama and others, that worked so hard to get
that passed.
One of the consequences of the Energy bill, though, is that
refiners have begun to hemorrhage MTBE from the marketplace.
It's important to note, though, that no provision of EPACT or
the Clean Air Act or any other congressional action has
compelled such a rapid transition away from MTBE. This decision
is the refiners' alone. I can assure you, though, that there
will be sufficient ethanol supplies to meet this new demand.
First, as noted, domestic ethanol supply is growing
rapidly. We anticipate more than 500 million gallons of new
capacity coming online before the end of the summer. Another
900 million gallons will be completed by the end of the year.
That reflects a 37 percent growth rate this year alone. That's
a phenomenal pace, particularly given the rate of growth we
have already seen over the past several years. Moreover,
several ethanol producers and refiners have been building
ethanol stocks in anticipation of this increased demand.
Second, several refiners have contracted with Brazilian
and/or Caribbean ethanol suppliers for product. Approximately
130 million gallons were imported last year. We anticipate even
higher imports this year. I would note parenthetically that as
Senator Lautenberg was sort of getting to, the secondary tariff
that is imposed on imported ethanol is repaid essentially as
soon as the refiners get the tax incentive that's available. To
remove the secondary tariff, all you're doing is then
subsidizing already subsidized Brazilian ethanol to come into
the marketplace.
The marketplace is doing it fine already today. There will
be increased imports. There is really no need for the U.S.
taxpayer to pay Brazilian sugar growers and Brazilian ethanol
producers, it is already subsidized to come into the
marketplace.
The other important point I would like to make is that
there will be migration from existing conventional gasoline
markets to areas of the country where ethanol will be needed to
replace MTBE. Already many gasoline marketers and ethanol
producers are arranging exchange agreements to make sure that
that happens.
Finally, it's important to note that the ethanol industry
is indeed working very closely with our refiner customers,
gasoline marketers, terminal operators and the fuel
distribution network, to secure a successful transition. Over
the past several years, the ethanol industry has worked hard to
expand a virtual pipeline using rail, barge and truck traffic.
As a result, we can now move product quickly to any area where
it is needed. Many plants today have the ability to load unit
trains of ethanol to ship to terminals in key markets.
I give great credit to the refiners and gasoline marketers
that are working with us to build that infrastructure. Working
together, we can make the transition from MTBE to ethanol in
these areas as successful as it was in California, New York and
Connecticut.
Mr. Chairman, you were wise to hold this hearing and hold
everyone's feet to the fire. Clearly this transition presents
challenges. But the refiners have chosen to remove MTBE from
gasoline. They would not have done so if they didn't think they
could successfully switch to ethanol. We are ready to work with
them and this committee to ensure the continued supply of high
quality clean burning gasoline to the motoring public.
Thank you.
Senator Inhofe. Thank you very much.
We will confine our questions to 5 minutes and be rather
rigid. First of all, your last statement there I thought was
very good. There is a lot of discussion about whether or not an
MTBE is actually mandated. In reality it is. I think that we,
well, I have asked you this question, to Mr. Douglass and Mr.
Dinneen, if you do away with the 2 percent oxygenate
requirement, doesn't that expose them, if they continue to use
MTBE, in terms of a court of law?
Mr. Douglass. Mr. Chairman, my supplier has so indicated
that that's their reason for withdrawing, the use of MTBE.
Senator Inhofe. Do you agree with that, Mr. Dinneen?
Mr. Dinneen. I'm not hampered by a law degree, so I
wouldn't want to state with any degree of confidence, but I
will tell you that the refiners themselves have stated for a
long time that they could produce reformulated gasoline in the
absence of oxygen and as was made pretty clear by the last
panel, there is nothing in the Act that requires the addition
of MTBE.
Senator Inhofe. Thank you very much.
Mr. Douglass, Mr. Dinneen, you both testified that a tight
capacity of fuel production side, both in traditional refining
and biorefineries, are a problem because they raise prices for
you and for your consumers. That's the consumer that we're
concerned about out there. I'm encouraged that both industries
are increasing capacity as fast as possible, and that
challenges do remain.
I had two pieces of legislation, one is the Gas PRICE Act
and the other was an amendment that we referred to as the
Energy Price Reduction Act. I would ask the two of you if you
are familiar with those two pieces of legislation that failed,
and if that would have helped, would you have been supportive
of those bills, to increase capacity?
Mr. Douglass. Mr. Chairman yes, we are familiar with that.
NACS and SIGMA both wrote and supported this committee last
year when you proposed that Act, that those measures be
incorporated in the bill.
Senator Inhofe. I appreciate that. It is a supply and
demand thing.
Mr. Early, I would like to ask you about----
Mr. Dinneen. Mr. Chairman, I'm sorry, did you want an
answer from me?
Senator Inhofe. I thought you were nodding in agreement.
Mr. Dinneen. Staff really wanted to get me on the record.
Senator Inhofe. Yes, please do. Real quick.
Mr. Dinneen. As amended by Senator Thune, certainly we have
also supported that bill. Clearly we believe getting additional
refinery capacity online is extraordinarily important, and that
includes biorefinery capacity.
Senator Inhofe. I thought it was done very well. I'm still
just pretty dismayed as to why it was defeated on a partisan
vote. It just is--here's a way you could utilize some of the
closed bases from the BRAC process. You could have allowed
cities and communities to apply for EDA grants to help them
attract refineries. So I regretted it did not pass.
Mr. Early, I would like to ask you about a document you
submitted for the record and your reasons for doing so. I
understand the company which drafted the document, KOMEX, is a
litigation support company hired by the trial lawyers. In
addition, their work was thrown out of court by a California
court as being too speculative and for double accounting of
damages and other cases, and that their cost estimates for MTBE
are reportedly 25 times the actual cost.
I'd like to first of all ask you the question, what is your
purpose for submitting this report on the record? You're the
American Lung Association. Do they endorse this report? Is this
something that they are requesting you to have as a part of the
record? Are you working in conjunction with the trial lawyers
on this?
Mr. Early. The report, Mr. Chairman, was prepared by the
American Water Works Association. I submitted it simply to
support the----
Senator Inhofe. Where's KOMEX come in, then?
Mr. Early. I guess KOMEX was hired by the American Water
Works Association. American Water Works Association needs to
stand behind its report. I submitted the report in order to
support the contention that there's upwards of a $25 billion
potential cost. This is in the public domain, obviously, and
can be examined.
Senator Inhofe. The specific question is, KOMEX was used as
the foundation of this report, isn't that correct?
Mr. Early. Yes.
Senator Inhofe. If you say no for the record, then I will
submit something to show that it was.
Mr. Early. No, I agree that Komex is cited.
Senator Inhofe. The question I had asked you also was, is
the American Lung Association supportive of the product of this
case of Komex?
Mr. Early. The American Lung Association takes the report
on its face value. I'm not aware of the information that you
just mentioned, that it's been challenged. We would certainly
look at that.
Senator Inhofe. On their own Web site, ``KOMEX is one of
the leading environmental consulting companies in California.
Since 1992, we have been assisting California attorneys in
environmental related litigation by providing unparalleled
technical, regulatory and data management expertise.'' That's
what they say about themselves, and that's what you're using as
a foundation for your report.
My time has expired. Thank you very much.
Senator Jeffords.
Senator Jeffords. Mr. Early, who were the principal
advocates for the removal of the 2 percent oxygenate standard?
Is it fair to say that the repeal of the oxygenate mandate or
the need to remove MTBE from gasoline due to either groundwater
protection or liability concerns comes as a surprise to the oil
industry? How long has the oil industry known it had a problem
with MTBE?
Mr. Early. Well, of course the oil industry has known it
had a problem with MTBE from literally decades ago, they knew
and did not disclose some of the properties of MTBE that caused
it to contaminate groundwater. But really going back to the
blue ribbon committee that Mr. Meyers mentioned, and on which
the American Lung Association served the blue ribbon committee
looking at oxygenates and gasoline, which recommended phasing
out of the use of MTBE, the signal was very clear that that was
going to happen.
The industry has known obviously since EPACT was enacted
last August that the oxygen requirement was going to be
eliminated this May. They could have been planning to remove
MTBE since last August, but all of a sudden, they rushed to do
it just this spring. We think this is precipitous and
unnecessary and simply punishes the consumer for a decision
that they are making voluntarily.
Senator Jeffords. As you stated in your written testimony,
the new energy law does provide EPA the authority to
temporarily waive a fuel or additive requirement under CAA in
an extreme and unusual supply circumstance. Do you foresee any
legitimate claim for a waiver under the current circumstances?
Mr. Early. I do not. As my testimony indicated, any
shortages that occur are a result really of bad planning that
could have been avoided. They certainly don't qualify as any
kind of extreme circumstance as occurred, for instance, with
Hurricane Katrina, where the Agency legitimately waived
requirements, in the case of a national need.
Senator Jeffords. Mr. Dinneen, several representatives of
the oil industry have recently stated that there will be enough
ethanol to meet increased demands during the transition away
from MTBE. This seems to be at odds with the findings of the
EIA report.
What do you think is the cause of this discrepancy?
Mr. Dinneen. I think what the EIA did was take a snapshot
in time a couple of months ago. I think at that time they were
hearing some things that gave them cause for concern. I think
your question earlier to Mr. Caruso about whether or not his
report had any impact, I think his report may have had some
impact. I think people may have taken a much more careful look
at supply and demand balances. Clearly, as that occurred,
people have understood that there is going to be enough ethanol
supply and people have gotten busy and the marketplace is
responding.
I think if EIA were to redo their analysis today, they'd be
a little bit more hopeful about what the situation is actually
going to be. I think there is an increasing recognition that
the marketers, the refiners, the ethanol industry are working
awfully hard to make sure that there aren't any consumer
impacts.
Senator Jeffords. Some in the oil industry seem to be
suggesting that EPA should issue a waiver of reformulated
gasoline requirements in light of EIA's February report. I am
concerned that though we have, say we want cleaner gasoline, if
we keep waiving the requirements to make it, at some point we
affect the market's decisions about completing a transition
getting MTBE out of gas and finding substitutes, like ethanol.
Have the waivers issued after Hurricane Katrina or the
prospects of future waivers affected plans for ethanol plant
construction?
Mr. Dinneen. Senator, we are moving forward in anticipation
of the demand that we know is going to be there. I do not
believe that any waivers will be necessary or will be granted.
I'm confident the marketplace is going to respond and have the
product where it needs to be.
Senator Jeffords. Thank you. Thank you, Mr. Chairman.
Senator Inhofe. Senator Warner.
Senator Warner. Thank you, Mr. Chairman.
To you, Mr. Douglass, all these things you know, but I'd
like to recite them for the record and others who might be
following it. You can't transplant or transport the ethanol in
a pipeline, correct?
Mr. Douglass. That's correct.
Senator Warner. You have to ship it in a truck?
Mr. Douglass. Yes, sir, or a tank car or barge.
Senator Warner. Train or likewise?
Mr. Douglass. Yes, sir.
Senator Warner. Furthermore, it has to be blended with the
gas at the wholesale terminals, correct?
Mr. Douglass. Correct.
Senator Warner. In your written testimony, you note storage
capacity at the terminals is already stretched to the limit, so
this is another choke point?
Mr. Douglass. Yes, sir.
Senator Warner. Especially in Texas and the Mid-Atlantic
regions. In your home State and my home State, there seems to
be, that's Virginia, there seems to be a significant problem on
the horizon because of this lack of our own infrastructure.
What are you and other distributors and marketers doing to
overcome these hurdles?
Mr. Douglass. You understand our interest in supply, and in
supply at a price the consumer will pay. We have moved in our
particular case to start cleaning our tanks and preparing very
rapidly for the introduction of ethanol. But in the process of
doing that, we find that there are not enough contractors,
because your requirements are to flush out your tanks. The
second thing is that our suppliers are forcing us to different
terminals, because they don't have enough storage in their base
units in the Dallas-Fort Worth area. So we're having to hire
people and get additional trucks in order to make those longer
runs.
Senator Warner. Well, that's the best you can do. But I
just think it's important for the American public to be aware
of this thing and the difficulty of this proposed transition.
Thank you, Mr. Chairman.
Senator Inhofe. Thank you, Senator Warner.
Senator Boxer.
Senator Boxer. Thank you, Mr. Chairman.
Just for the record, I want it to be clear that this
committee voted in a bipartisan way against that special deal
for the refineries. It was a bipartisan vote that brought it
down. It was about grants to refineries, it was about giving
refineries access to Federal lands and at a time when they're
making record profits. I feel like sometimes----
Senator Inhofe. For clarification of the record, without
taking your time, it was, all the Democrats plus Senator
Chafee.
Senator Boxer. Yes, I would call that bipartisan.
Senator Inhofe. That's fine.
Senator Boxer. That's all we need, is one of you----
[Laughter.]
Senator Boxer. We have it. OK, glad for that clarification.
Mr. Douglass, you are the second witness to make the case
that there should be a liability waiver for the oil companies
for MTBE and therefore, I think it's very important for me to
put a few things on the record, because I think that's what is
coming at us maybe, unless we can deter it. So in this whole
issue I always ask myself, why should the taxpayers have to
step up to the plate and pay for the mistakes of the oil
companies? They didn't have to choose MTBE. We've had a Bush
administration witness say clearly today there was no mandate
from the Congress.
So since there was no mandate and since this was a free
choice, as a matter of fact, I would ask unanimous consent to
place into the record a document from discovery on a court case
in South Lake Tahoe, in which the executives were bandying
about with a sense of humor what MTBE stands for. One of the
things they suggested in this kind of joke-filled presentation
was Menace Threatening our Bountiful Environment, MTBE. That's
what it could stand for. Or Most Things Biodegrade Easier. Or
Money To Be Extracted.
This is the truth, folks, about what was going on. So there
was a settlement in this case, because the drinking water,
South Lake Tahoe, was so tainted that they had to sue, as did
the city of Santa Monica. Now, the jury in that case found
clear and convincing evidence that defendant Shell Oil acted
with malice in selling gasoline containing MTBE. So you bet
your bottom dollar I am going to fight against giving folks who
knew better protection in court, when they destroyed drinking
water supplies, when there was never any mandate. That was
clearly stated here today.
Now, Mr. Douglass, in your testimony, you said that you
were very worried about price increases because of the
transition.
Mr. Douglass. Yes.
Senator Boxer. But I want to ask you this. You have here
put out an eight point card that you said could be factors that
could affect the petroleum markets. This is your tool kit from
your organization. You list eight reasons. You do not list the
transition to MTBE. And I wondered, if it's such an important
part of your testimony, why it's not even listed in a group of
eight reasons?
Mr. Douglass. The transition to MTBE, as you probably know,
our concern is primarily supply. We are not particularly
concerned about the legalities of the issues in this thing, but
its supply at retail. We are focused primarily on getting
sufficient supplies. I hope Mr. Dinneen is correct that there
will be sufficient supplies.
Senator Boxer. Well, yes, I think he had some good news for
you, very good news for you.
Mr. Douglass. Excuse me, Senator, but the only difference
we have here is the price of ethanol has doubled in the past
year and we have not yet had the ethanol put into the fuel. We
will as of April 1. But suffice to say when it doubles, we have
a concern, and our price at Dallas-Fort Worth is already in
excess of what----
Senator Boxer. Well, sir, if I might, I asked you a very
simple question. Here you put out a tool kit. Here's a look at
some of the factors that will affect what consumers pay at the
pump in 2006: elevated price of crude, impact of speculation,
spring transition to summer blends, and it goes on. No mention
of MTBE.
My point is, it seems to me that this hearing, which my
good Chairman called and he has deep feelings on this, and I
respect his feelings on this, we just disagree on this, you
seem to be creating kind of what could be a false crisis here.
You know, I know what suffering from high gas prices means,
because believe me, California has been the leader. I have done
many things in an attempt to shed light on that.
But MTBE transition wasn't listed on your list as one of
those causes. I wanted to make that point, as well as how much
I would fight a waiver on liability for MTBE. Thank you.
Senator Inhofe. Thank you, Senator Boxer.
Senator Thune.
Senator Thune. Thank you, Mr. Chairman. I do think that gas
prices where they are today, and if they do end up at the range
that some suspect they will before we get through the summer
season is, creates an economic crisis, I think in a State like
South Dakota, where we rely heavily, we have a lot of very
fuel-intensive industries.
I want to follow up if I might with Mr. Dinneen. There's
been a lot of discussion today about what is driving up the
price of a gallon of gasoline. It seems to me at least that
there are a lot of factors associated with that, and I would
come back to a point that was made earlier and that is that the
bill that was reported out of this committee did allow for a 4-
year phase-out of MTBE that would have smoothed the transition
as ethanol production was ramping up. I think that was the
expectation that we would have a bill that would accomplish
that and enable us to get to a point in terms of the capacity
that this would be a very, hopefully much smoother transition.
As it is, we're being asked to fill the demand much more
quickly I think than had been anticipated.
But just a very simple question, Mr. Dinneen, do you
believe that ethanol is driving up the price of gasoline today?
Mr. Dinneen. No, Senator, I don't. There are lots of
reasons why gasoline prices are going up. It has to do with
crude oil prices, it has to do with the transition to summer
grade gasoline, it has to do with the rising demand as we move
toward the summer season. Ethanol is a very small component of
the motor fuel market. Ethanol prices are indeed going up, they
are. It's still cheaper than MTBE was a year ago, however.
Those prices are going to come down.
More importantly, what's being looked at is the spot market
prices for ethanol. Eighty-five percent of the ethanol that's
sold is sold under long-term contracts. Contract prices
typically are much, much lower. What's happening is, those
companies that planned for the transition to MTBE and
contracted their ethanol are set. They're looking at a pretty
decent price. Ethanol, as it has in the past, is likely to
lower their gasoline costs.
For those companies that didn't anticipate such a rapid
transition to ethanol away from MTBE, and they're having to
scramble to find product on the spot market or have to go to
the import market or have to look to migrate product from the
existing conventional gasoline market, those prices are going
to be higher. That's just a fact of life. It's going to be a
short-term situation even for them, however. I think overall,
ethanol is going to continue to help to lower consumer gasoline
prices as it has throughout its history.
Senator Thune. Well, I would make an observation about
that, because I think we use about 140 billion gallons of
gasoline fuel in the country today. We are right now producing
about 4\1/2\, slightly higher than that, billions, billion
gallons of ethanol. It seems to me at least that given that
proportion that the price of crude obviously is driving a lot
more than then price of ethanol the cost of gasoline in this
country.
But that being said, some in the past have suggested, in
fact it has been intimated today that the ethanol industry is
highly concentrated, that a very few companies are in a
position to manipulate prices. Testimony today has suggested
that the ethanol industry ought to be investigated because of
rising ethanol prices.
How do you respond to that?
Mr. Dinneen. Senator, this committee last year had included
a provision in the Energy bill that required the FTC to look at
that very issue. The FTC released its report in December and
found that the ethanol industry is not at all concentrated.
Indeed, that reflects what we have known all along with as many
ethanol companies that are coming into the business today and
our industry is highly competitive and will remain so.
Senator Thune. I appreciate it. I know my experience with
the industry too is, you have a number of companies that are
involved in production, obviously a lot of investment by
individuals like farmers, many of them cooperatively owned. It
seems to me at least an industry that has tremendous up side
potential in terms of addressing the energy needs we have in
this country. We are in the short term because of the phase-
out, because of the oxygenate standard, in a position where we
need to have more ethanol sooner. I know that folks are working
very hard to meet the demand out there, and I fully expect that
they will be able to do that.
So I thank you, Mr. Chairman and yield back the balance of
my time.
Senator Inhofe. Thank you, Senator Thune.
Senator Obama.
Senator Obama. Thank you very much, Mr. Chairman.
I apologize, I missed the first panel, so some of this may
be going over new ground. I just want to make clear that I
understand the nature of the debate that's taking place.
As I understand it, essentially, as a consequence of
suppliers eliminating MTBE quicker than I think many
anticipated, there's now going to be an uptake in demand for
ethanol as an additive. Your argument, Mr. Douglass, as I best
understand it, is that because of some of the distribution
issues involved with ethanol that that may contribute to a
modest boost in gas prices this summer. Is that basically the
argument?
Mr. Douglass. Yes, sir.
Senator Obama. OK. The assumption that I'm hearing from Mr.
Dinneen is that although you may see a little, a few bumps in
the road, that overall this is a process that ethanol producers
will be able to deal with adequately, that there may be a few
difficulties in terms of making sure supplies are sufficient,
but that over the course of 2, 3, 4, 5 years, this is not going
to be a significant problem. Am I correct about that?
Mr. Dinneen. Senator, I would say 2, 3, 4, 5 months.
Senator Obama. OK.
Mr. Douglass. The marketplace is responding pretty
effectively.
Senator Obama. So as far as you can tell, you would expect
that to the best of your knowledge, this is not going to be a
major contributor to a spike in oil, gasoline prices at the
pump this summer? That's your assessment?
Mr. Douglass. Absolutely not, sir.
Senator Obama. OK. I guess I don't have a lot of questions,
I would just make a simple point. MTBE appears to have the
potential of causing health problems. Congress did not ban the
use of MTBE, it simply refused to protect MTBE suppliers from
potential liability. They made a decision that they did not
want to expose themselves to that liability and hence
eliminated the use of this additive. It was a market decision.
I don't see any reason why we would reverse our refusal to
protect them from liability if in fact MTBE causes a serious
health concern. Now, if it doesn't, presumably they will win in
court. If it does, then it's something that we should not want
out there affecting our kids.
Ethanol seems entirely extraneous to that debate. I think
that there is a legitimate concern as to whether we have the
distribution mechanisms in place to get ethanol to market and
people like myself and Senator Thune have been working
diligently to make sure that happens. My expectation and my
hope is that in the coming months and the coming years, you're
going to see the ethanol market become extraordinarily robust.
I think that's a good thing. I think we all should want to
be encouraging biofuels as a means of weaning ourselves off
dependence on Middle Eastern oil. I think there are national
security, economic as well as environmental reasons for us
hoping for that future.
So I would just end by saying that although none of us want
to see additional costs at the pump, and I recognize, Mr.
Douglass, from your perspective, you don't want a bunch of
irate customers who are complaining and thinking that you're
the cause of it. I will tell you that this is not, from my
perspective, at least, based on testimony here, there is not
much of a relation between the decline in MTBE use and prices
at the pump, at least not compared to potential disruptions in
supply in Nigeria or Venezuela or Iran and the world spot
market.
So that's my assessment, Mr. Chairman. I would yield back
the remainder of my time.
Senator Inhofe. Thank you, Senator Obama. My staff advises
me, Mr. Early, that I didn't give you a chance to answer the
question. Since I think you would like to think it over a
little bit first, you can do it for the record in writing. The
question was, does the American Lung Association embrace the
methodologies of the trial lawyers support group, KOMEX, which
was part of the foundation of your report. You can just submit
that in writing.
I thank all the witnesses for coming, and we're adjourned.
[Whereupon, at 11:32 a.m., the committee was adjourned.]
[Additional statements submitted for the record follow:]
Statement of Hon. James M. Jeffords, U.S. Senator from the
State of Vermont
Mr. Chairman, thank you for holding this hearing. We will hear
testimony today on the effects of eliminating MTBE as a gasoline
additive. I hope we will look carefully at this issue.
I do not believe that the elimination of MTBE will have a
significant impact on the gasoline market. I do believe it is the right
thing to do for the environment.
MTBE is an additive that helps gasoline burn more cleanly. It has
been used since 1979. But we now know that MTBE is also a groundwater
contaminant. Low levels make water undrinkable due to offensive taste
and odor. High levels are potentially cancer-causing in humans.
Although the Clean Air Act does require the use of re-formulated
gasoline in areas with unhealthy levels of air pollution, it does not
specify that MTBE must be used. Refiners have the ability to use other
additives to clean up their gasoline, and many are using ethanol and
other petroleum-derived compounds.
The Energy Information Administration issued a report in February
about the effect of our new energy law and market forces on the use of
MTBE. Our hearing is in response to this report. But the report is only
one piece of information. It is not really a price prediction. It is a
snapshot of market conditions, and it is now more than a month old.
My real concern is that we get a better understanding of how
markets have responded to this report. Actions to eliminate MTBE from
the marketplace are certainly not new. Twenty-five States now have full
or partial bans on MTBE. The Environmental Protection Agency
recommended that MTBE be banned in the late 1990s.
It is my view that we should have acted long ago to swiftly remove
MTBE from gasoline. Instead, this committee responded with legislation
to phase out MTBE over 4 years. Unfortunately, this phase-out was not
included in the Energy bill that became law last August. That was one
of the reasons I voted against it.
I say this to highlight the fact that we routinely try to implement
our environmental laws in a deliberate and measured way. The Clean Air
Act's compliant motor fuels have been phased in over long time frames
in consultation with industry. We have done this specifically to try to
avoid market shocks and price spikes. These are not new requirements,
they are not a surprise, and the costs associated with meeting them are
known. The oil industry has had plenty of time to phase out MTBE and
has resisted doing so. But suddenly, after years of foot-dragging, it
has decided to stop using MTBE in gasoline in early May, in an abrupt
and potentially disruptive manner. The industry is now faced with a
crisis of its own making, and I fear it will use this as an excuse to
hike prices at the pump.
I am sorry that there are no witnesses at this hearing today to
represent the oil industry so that we could better understand why they
are responding to the new energy law in this way. In the future,
particularly as we examine issues related to the new energy law's fuels
provisions, we should have them here.
Over the past year, we have seen record-breaking gas prices, the
national average exceeding $3 a gallon after Hurricane Katrina. This
comes, perhaps not surprisingly, as oil companies continue to enjoy
record profits. Exxon-Mobil announced a record quarterly profit of
$10.7 billion in the fourth quarter of 2005. Its annual profits
increased to $36 billion, up 43 percent from 2004. Now, we are being
told that the elimination of MTBE will mean even higher prices and
undoubtedly more profits. I believe what we should really be examining
today is why these oil companies are amassing record profits while
Americans pay record prices for gas. It is time for answers.
During this hearing, I will be listening closely for any
documented, real evidence to show that switching away from MTBE is
contributing to increases in gasoline prices in a significant way. What
we do know is that our country still has much to do to improve air and
water quality, and it is this committee's first and foremost
responsibility to assure that the Nation's laws are protective of
public health and the environment.
Thank you again, Mr. Chairman for holding this hearing. I look
forward to hearing from the witnesses.
__________
Statement of Hon. Lisa Murkowski, U.S. Senator from the State of Alaska
Thank you Mr. Chairman for holding this hearing on the problems we
may well be facing on the East Coast and in parts of the South later
this spring and summer because of the rapid discontinuation of use of
the additive MTBE in gasoline.
Coming from a cold-weather state like Alaska, MTBE was certainly
never popular. While it is easier to transport and cheaper to blend in
gasoline than ethanol; in the extreme cold, MTBE fumes caused skin
rashes. To say my Fairbanks constituents do not miss MTBE is an
understatement.
But reading the testimony before us this morning, East Coast,
Northeast and Texas motorists may well miss MTBE greatly since the
phase out of MTBE appears to be coming before the Ethanol industry, and
the refinery industry, can be prepared to fully utilize ethanol in
reformulated gasoline.
The predictions of ethanol shortages to put into gasoline and
regional fuel shortages resulting from the blending characteristics of
ethanol itself paint a pretty unpleasant forecast. A cloudy forecast of
rising prices in the Northeast, almost guarantees that Congress is
going to be hearing thunderous complaints from motorists before
summer's end. Given what may be happening to fuel prices already
because of the costs of producing ultra-clean diesel, the pressures of
global demand increases and any supply disruptions that result, mean it
is going to be raining down complaints on Congress for the price of
gasoline and diesel this summer.
I hope to hear more suggestions to mitigate fuel price problems
during this hearing. The suggestion that we ask the Finance Committee
to temporarily waive the import tariff on ethanol to allow foreign
imports probably from Brazil to lessen the supply shortage was
something. I hope the hearing will produce even more ideas from the
witnesses.
Greater reliance on ethanol will be good for our farmers and our
energy security in the future, but it may raise a bumper crop of
complaints this summer if we can't relieve the additive shortages that
the rapid phase out of MTBE is about to cause. I await the testimony,
thank you.
__________
Statement of Hon. Barack Obama, U.S. Senator from the State of Illinois
Mr. Chairman, thank you for holding this timely hearing today.
We're here to examine the costs of eliminating MTBE as a fuel
additive. But in examining these costs, we need to look at more than
just the price that consumers pay at the pump. We need to look at the
health impact of MTBE as a carcinogen and its effect on drinking water.
And we need to look at the costs of the alternative additive, namely,
ethanol.
Certainly, the production of ethanol isn't where it should be. But
lawmakers on both sides of the aisle are working to change that. Last
year, I was pleased to work with a number of colleagues on this
committee to create a renewable fuel standard. And this year, I have
introduced comprehensive legislation with Senator Lugar to further
stimulate the production of biofuels.
The challenge we face with ethanol--and biofuels in general--is
getting them out of the labs, out of the farms, and onto the wider
commercial market. This is an issue that politicians from both parties
clamor about when gas prices are the headline of the month, only to
fall back into inaction once things calm down.
So, for me, the answer to insufficient ethanol supplies isn't to
delay the switchover from MTBE; the answer is to pursue policies for
greater expansion of ethanol, and to strengthen the infrastructure to
transport it.
In his State of the Union address, President Bush told us that it
was time for America to get serious about its addiction to foreign oil.
A day or so later, Energy Secretary Bodman assured the world that the
President didn't mean it literally. Why? Well, apparently, the Saudi
government wasn't too happy with the President's statement. To me, that
level of foreign influence over our domestic affairs is the exact
reason why we need to do more to increase our production of renewable
fuels.
And, even if there would be some minimal price increases from
replacing MTBE with ethanol--and I know this assumption is disputed by
the witnesses--we shouldn't lose sight of the larger reason for high
gasoline prices--the tightfisted control that a handful of foreign
governments have over the world's oil supply.
Every single hour of every single day, we spend $18 million on
foreign oil. It doesn't matter if these countries are budding
democracies, despotic regimes, or havens for the madrassas that plant
the seeds of terror in young minds--they get our money because we need
their oil. We have to start changing this now, and the way to do to
that is to encourage greater development of home-grown fuels.
I look forward to hearing today's witnesses, and I thank the Chair.
__________
Statement of Hon. Joseph I. Lieberman, U.S. Senator from the
State of Connecticut
Thank you Mr. Chairman for calling this hearing to review
Department of Energy warnings that the oil industry's abrupt decision
to switch from MTBE to ethanol as an oxygenate or octane enhancer could
lead another summer of gasoline shortages and high prices.
I support the goal of phasing out MTBE--or methyl tertiary butyl
ether--in favor of ethanol. In fact, the bipartisan Vehicle and Fuel
Choices for American Security Act I have sponsored, along with Sen.
Brownback and 10 other Senators, encourages the development ethanol and
other renewable fuels as a way of lowering our dependence on foreign
oil.
My home state of Connecticut is one of seven states that have
already banned the use of MTBE as a gasoline additive because of the
dangers it poses to public health and environment as a possible
carcinogen leaking into the ground water.
But I fear that the oil industry--already drowning in record
profits--will use the sudden switch from MTBE to ethanol as a backdoor
means of raising prices if the ethanol industry cannot deliver the
quantities needed, as the Energy Information Administration thinks
likely, according to its recent report.
The oil industry says it was forced to switch from MTBE to ethanol
because Congress did not provide a waiver of liability from damage
caused by MTBE when it dropped the oxygenate requirement in the 2005
Energy Policy Act. Unfortunately, we do not have a representative of
the oil industry at this hearing today, so we can not explore more
fully how they would defend their decisions.
As we consider the actions of the oil industry, we should remember
several points. First, the industry chose to use MTBE as an oxygenate
to make gasoline burn cleaner in heavily polluted areas. MTBE was the
industry's choice, not a Congressional mandate, and there is no reason
to release the industry from liability for a choice it made.
As stated succinctly by the representative of the Renewable Fuels
Association today, ``Refiners are not compelled to use MTBE in
[Reformulated Gasoline], nor are they compelled to use ethanol once the
oxygenate requirement is eliminated. The decision to stop using MTBE is
the refiners' alone.''
The industry knew the day would come that it would have to phase
out MTBE and has had plenty of time to plan for the transition and make
sure there were adequate supplies of the ethanol or another
alternative.
There is no excuse for unnecessary shortages and discretionary
price increases. That, if anything, should be the focus of
Congressional investigation. Any resulting price spikes and higher
profits should be taxed as an undeserved windfall.
Legislation I introduced in December year would impose an excise
tax on oil companies for 50 percent of their windfall profits. This
one-time tax would provide a one-time payment to partially offset
increased home heating and energy costs, as well as a portion of
gasoline cost increases.
Thank you Mr. Chairman.
__________
Statement of Guy Caruso, Administrator, Energy Information
Administration, U.S. Department of Energy
Mr. Chairman, and members of the committee, I am pleased to be with
you today to testify on the effects of the removal of methyl tertiary-
butyl ether (MTBE) from gasoline.
The Energy Information Administration (EIA) is an independent
statistical and analytical agency within the Department of Energy. We
are charged with providing objective, timely, and relevant data,
analysis, and projections for the use of the Congress, the
Administration, and the public. We do not take positions on policy
issues, but we do produce data, analysis, and forecasts that are meant
to assist policymakers in their energy policy deliberations. Because we
have an element of statutory independence with respect to our analyses,
our views are strictly those of EIA and should not be construed as
representing those of the Department of Energy or the Administration.
I have been asked to focus my testimony on a recent analysis
entitled, ``Eliminating MTBE in Gasoline in 2006,'' which EIA issued on
February 22, 2006. A copy of that analysis is attached and provides the
substance of my written testimony.
Although EIA's analysis is now approximately a month old, we feel
that it still provides a timely and pertinent description of our
perspective on the market situation with regard to the widespread
removal of MTBE from reformulated gasoline and the significantly
increased use of ethanol that is likely to occur as a result. I will be
providing an update of market conditions, based on information
available in the past few days, in my oral remarks.
Thank you for your consideration of the following analysis. I look
forward to answering any questions you may have.
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Response by Guy Caruso to an Additional Question from Senator Thune
Question. I want to thank you for participating in our recent
hearing regarding the impact refiners' decision to eliminate methyl
tertiary butyl ether (MTBE) will have on U.S. gas markets and prices.
As refiners switch to ethanol from MTBE, I wanted to follow up with you
concerning a question I asked during our hearing with regard to the
Energy Information Agency's policy regarding the reporting of oxygenate
data.
Given the growing importance ethanol is playing in America's motor
fuels market, I am concerned by the fact EIA's monthly oxygenate
reports represent data that is at least 60 days old. In this day and
age, EIA should be able to compile and report the data with the same
frequency with which petroleum data is reported. Given how closely both
markets are tied to each other, a more recent and accurate accounting
of what is taking place in the ethanol industry would be of tremendous
benefit to both petroleum companies and ethanol producers.
During your testimony you cited budgetary restraints as the main
reason for the lack of real time reporting of oxygenate data. In
particular, you estimated it would take $2 million to get such a
reporting system up and running and $800,000 a year thereafter to
maintain it.
Given that EIA already has staff committed to publishing oxygenate
data and much of the data is reported electronically, it would seem
that more timely reporting could be done in coordination with EIA's
Weekly Petroleum Status Report within existing budget authority. If
that is not the case, I am requesting a detailed accounting on what the
additional $2 million and $800,000 annually thereafter would be spent.
It would seem to me that such an adjustment would not be a monumental
task for EIA to overcome.
I firmly believe that the petroleum industry and the ethanol
industry should be kept current on production and supply data
concerning their products. Such timely information would go a long way
in reducing price volatility and provide the government and private
companies more accurate information on which to base their short and
long term forecasts.
I want to formally express my appreciation for the work EIA does
and assure that I am committed to working with you and providing the
resources required to provide more current and relevant data concerning
the oxygenate market.
Response. EIA works within a limited budget, prioritizing needed
investments. While EIA has undertaken activities to improve efficiency
(e.g., increased collection of information using the Internet), the
efficiency savings have not completely offset additional resources
required to satisfy the increasing information demands on EIA. As a
result EIA identified selected surveys and programs that must be
eliminated. For example, after collection of data for July 2006, EIA
will discontinue two petroleum surveys, Forms EIA-182 and EIA-856
(Federal Register/Vol. 71, No. 56/Thursday, March 23, 2006/Notices).
We agree that collecting weekly ethanol data would be beneficial,
however there are higher priority activities that we are funding. As
indicated above and in our FY 2006 budget documents, we are not able to
maintain our full petroleum data collection program, much less add to
our forms and systems at this time.
Regarding your specific question on monthly ethanol data collection
costs, we need to clarify a misunderstanding. During the hearing, the
$2 million one-time cost estimate and associated ongoing costs
mentioned were budgetary requirements to comply with Section 1508 of
the Energy Policy Act of 2005. This section directs EIA to collect
various renewable fuel data on a monthly basis. Data for a given month
are published about 2 months after the month ends to allow time for
companies to assemble the data and submit it to EIA and for EIA to
process the data. Attached is a brief explanation of that requirement,
and a breakdown of resources.
This attachment and its accompanying table illustrate the cost
issues associated with our data collection efforts. Data survey work
goes beyond simply gathering some forms and adding up the data. It must
comply with the Information Quality Guidelines of the Office of
Management and Budget, the Department of Energy, and the Energy
Information Administration. These Guidelines are designed to ensure the
quality (i.e., objectivity, utility, and integrity) of information. The
validation, statistical analysis, system design/changes, integration
into existing production systems and so forth are where much of the
cost lies.
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Statement of Robert Meyers, Associate Assistant Administrator, Office
of Air and Radiation, U.S. Environmental Protection Agency
Mr. Chairman, and members of the committee, I appreciate the
opportunity to come before you today to testify regarding ``The Impact
of Elimination of MTBE.'' My testimony will address how recent
amendments to fuel quality regulations and ongoing implementation of
the Energy Policy Act of 2005 affect existing U.S. fuel programs, in
particular the Reformulated Gasoline Program (RFG), which has
historically utilized large quantities of methyl tertiary butyl ether
(MTBE) in order to meet requirements imposed by the 1990 Clean Air Act
Amendments.
As the Associate Assistant Administrator for the Agency's Office of
Air and Radiation, my responsibilities include supporting the Assistant
Administrator on all air-related activities of the Environmental
Protection Agency (EPA or Agency), including programs addressing
industrial and vehicle pollution, acid rain, stratospheric ozone
depletion, radiation protection, indoor air quality and global climate
change. I am pleased to be here representing my colleagues at EPA who
are responsible for implementing the various laws and provisions that
protect our Nation's air quality. An important element of this task is
the successful development and implementation of programs affecting our
Nation's fuel supply.
Following passage of the Clean Air Act Amendments of 1990, EPA was
tasked with developing and implementing new motor vehicle emissions and
motor vehicle fuel quality programs to reduce harmful evaporative and
exhaust emissions that negatively impact our Nation's environment and
public health. Among many other new provisions, the Clean Air Act
required the implementation of several new fuel quality programs with
prescribed fuel parameters that supported attaining our Nation's clean
air standards. The Agency developed specific controls on fuel component
parameters, such as seasonal controls on Reid vapor pressure and the
RFG oxygenate requirements. Where available under applicable
legislative provisions, the Agency also utilized a performance based
approach to afford fuel producers greater flexibility in bringing these
new cleaner fuels to market.
In 1992, the Wintertime Oxygenated Fuels Program was implemented,
requiring more than thirty areas exceeding air quality standards for
carbon monoxide to use oxygenated fuels. This program, as specified in
the 1990 Clean Air Act Amendments, required gasoline to contain 2.7
weight percent oxygen and the program has been instrumental in bringing
many of these areas into attainment of the national standard for this
pollutant. Both MTBE and ethanol were the primary products used to meet
these new quality standards.
Subsequently, following successful regulatory negotiations with the
oil industry stakeholders, oxygenate producers, states, and other
interested parties, another landmark fuel quality program was
implemented the RFG program. The 1990 Clean Air Act Amendments
specifically required RFG to contain on average 2.0 weight percent
oxygen and established a two phase program designed to reduce vehicle
emissions that cause or contribute to ozone (smog) and toxic pollution
in our cities. The first phase of the RFG program introduced cleaner
gasoline in January 1995, followed by the more protective Phase 2 in
January 2000. This program was required in the ten metropolitan areas
with the most serious air pollution levels. Although not required to
participate, some areas in the Northeast, Kentucky, Texas, and Missouri
elected to join, or ``opt-in'' to the RFG program as a cost-effective
measure to help combat air pollution problems. Today, roughly 35
percent of this country's gasoline consumption is cleaner-burning
reformulated gasoline. The RFG program has also often been referred to
as one of the most successful air quality programs implemented. As in
the Wintertime Oxygenated Fuels Program, MTBE and ethanol were again
the primary products used to meet these new quality standards.
For more than a decade prior to the implementation of these fuel
quality programs, refiners worldwide had been using MTBE, an oxygenated
hydrocarbon derived from methanol and petroleum, to augment gasoline
supplies and provide a source of octane. Ethanol was also used in the
Nation's fuel supply for several decades. With the implementation of
the RFG and the Wintertime Oxygenated Fuels Program, however, the use
of fuel oxygenates, almost exclusively MTBE and ethanol, increased
dramatically. In meeting RFG requirements and other state-specific
requirements, ethanol was primarily utilized in the Midwest. MTBE is
primarily used elsewhere, including large areas of the Northeast, the
State of California, and metropolitan Philadelphia, Baltimore and
Washington.
Over the last 6 to 7 years, however, concerns have arisen with
respect to groundwater contamination from leaking underground storage
tanks having gasoline containing MTBE. These concerns prompted some
states to ban the use of MTBE in gasoline, including large gasoline
markets such as California, New York, and Connecticut. This resulted in
a significant reduction in the use of MTBE and a corresponding increase
in the use of ethanol in these areas.
the energy policy act of 2005
The Energy Policy Act of 2005 (Act) made several alterations to the
RFG program, including removal of the 2 percent oxygenate mandate for
RFG. In response to the law's enactment in August of last year, EPA
promulgated a direct final rule to amend the RFG regulations in order
to eliminate regulatory standards requiring the use of oxygenates in
RFG. The direct final rule provides that these regulatory standards
will no longer apply nationwide, outside of California, as of May of
this year. Within California, the RFG oxygenate regulatory standards
will no longer apply as of April of this year. The rule also serves to
implement provisions of the Energy Policy Act respecting the
commingling of ethanol-blended and non-ethanol blended reformulated
gasoline.
The Energy Policy Act of 2005 also set forth a new national
renewable fuels program that established renewable fuel volume
standards beginning in 2006. The renewable fuel standard, or RFS,
requires an increasing volume of renewable fuel to be utilized in the
continental United States starting in 2006. In order to implement this
requirement, EPA published a direct final rule in December 2005. This
``default'' rule for RFS compliance applies only in 2006.
Under the RFS default rule, refiners, importers, and gasoline
blenders will collectively be held responsible to meet a 2.78 percent
nationwide renewable volume standard. This equates to approximately 4.0
billion gallons toward which both ethanol and biodiesel can count. The
Energy Policy Act specified 4.0 billion gallons as the RFS level for
2006. This level increases year by year through 2012 under a specific
statutory schedule and increases afterwards according other statutory
provisions. If the 2.78 percent volume standard is not met, the default
rule specifies that this deficit would carry over to the RFS
requirement for 2007. However, based on data demonstrating ethanol use
in 2005, and stakeholder projections for 2006, it is expected that far
greater than 4.0 billion gallons of renewable fuels will be used in
2006 in the United States.
As the Agency continues to address other provisions of the Energy
Policy Act which have the potential to impact the US gasoline market,
we are paying close attention to the specific directions set forth in
the Act in designing future programs and making required revisions to
existing ones. Recognizing that fuel oxygenates, such as MTBE and
ethanol, have played a significant role in these programs and are a
significant volume portion of the overall US gasoline market, the
Agency will continue to strive to maintain and advance the air quality
protection gains through these programs, while minimizing potential
market impacts when possible.
Looking forward, it is the Agency's understanding that as a result
of changes made by the Energy Policy Act of 2005, in particular the
removal of the RFG oxygenate requirement, MTBE use in the RFG program
will decline significantly. Some fuel providers are already
transitioning away from using MTBE with most moving to blend ethanol in
their RFG products. It is not anticipated that large volumes of non-
oxygenated RFG will be in the RFG market areas.
In order to accomplish this change in the RFG market, fuel
producers will produce reformulated gasoline blendstock for oxygenate
blending (RBOB) that, compared with MTBE RFG, may require adjustments
to lower the Reid vapor pressure of the RBOB in order to accommodate
ethanol blending. In addition, some stakeholders have indicated that
the removal of MTBE from the RFG pool may also result in some refiners
using ethanol in order to meet the RFG toxics requirements.
Altogether then, RFG is likely to absorb a significant percentage
of ethanol utilization in this country. The Northeast market alone,
with areas in New Jersey, Pennsylvania, Delaware, Maryland, the
District of Columbia, Northern Virginia, Richmond and Norfolk, may
undergo a substantial conversion to ethanol RFG. The Houston and Dallas
markets are already experiencing a change over to ethanol RFG.
While EPA would defer to the Energy Information Administration to
make assessments concerning overall impact of this conversion on fuel
price and supply, it is likely that without a minimum oxygenate
standard in place, traditional market supply, demand and economic
behavior will have a greater role in determining the production and
blending of compliant RFG. With the removal of the RFG oxygenate
standard, refiners will have greater flexibility as to when and where
to blend ethanol or other oxygenates. As a result, refinery volumes may
be affected since using ethanol to support volume replacement is not a
one to one equivalent with MTBE blended RFG.
Depending on decisions made in the private marketplace, there are
also potential upstream distribution impacts that may occur as a result
of conversion from MTBE to ethanol-based RFG. Responses may involve
designated tanks, tank management practices and terminal blending
equipment. Retail facilities may also need to prepare for any switch to
ethanol blended fuels, by emptying and cleaning their storage tanks and
removing any water.
There are also several other provisions of the Energy Policy Act
which will affect the fuel supply and potentially affect or mitigate
supply issues. For example, unification of RFG northern and southern
volatile organic compound (VOC) controls, as required by section
1504(c) of the Act, will allow RFG product to move to markets more
freely. Further, the development of a boutique fuels limitation
required under section 1541 of the Act will affect EPA's future
consideration of state requests for fuel controls or prohibitions.
EPA also recently proposed the Mobile Source Air Toxics (MSAT)
rule. Pursuant to section 1504(b) of the Energy Policy Act of 2005, EPA
must adjust the toxics emissions baselines for reformulated gasoline to
reflect 2001-2002 fuel qualities. However, this section also provides
that this action becomes unnecessary if EPA takes action which results
in greater overall reductions of toxics emissions from vehicles in
areas with reformulated gasoline. As proposed, EPA believes that the
MSAT rule would result in greater reductions than would be achieved
through adjusting the baselines under section 1504(b). Accordingly, if
the EPA were to finalize an MSAT rule meeting the directives of this
section, the need for readjusting baselines for reformulated gasolines
would be obviated.
EPA will also be taking action this year to propose a rulemaking to
implement the RFS for 2007 and subsequent years. While this proposal is
still under development, EPA is cognizant of the need to propose an RFS
implementation plan that maximizes existing fuel production and
distribution market dynamics and minimizes impacts on production,
supply, distribution and price. In general, the proposed rulemaking
will define who the liable parties are for the RFS, establish a credit
trading program, assign appropriate credits for additional renewable
fuel products and establish compliance assurance provisions.
Altogether, through a combination of removal of the RFG oxygenate
standard and implementation of the new renewable fuels requirement,
ethanol use in the U.S. will undoubtedly increase and MTBE use will
likely decrease by a substantial margin. The precise impact of these
events will depend on many different factors, including the reaction of
the private marketplace to the elimination of previous regulatory
requirements. As indicated above, EPA is committed to helping ensure a
successful transition to greater use of renewable fuels and will work
with other federal agencies and departments on issues affecting fuel
supply and distribution.
Again, I want to thank you, Mr. Chairman and the members of the
committee for your attention to this important issue. This concludes my
prepared statement. I would be happy to answer any questions that you
may have.
______
Responses by Robert Meyers to Additional Questions from
Senator Inhofe
Question 1. Mr. Meyers, when you were before the committee, you
were asked if MTBE had not been available as an option at the outset,
would that fact have made the Federal fuel oxygen standard practically
impossible to implement. In part, you responded by directing the
committee to the findings of the September 16, 1999 report of the EPA
MTBE Blue Ribbon Panel created under a Charter from the EPA Clean Air
Act Advisory Committee. Upon review of that report, the committee finds
that the report states that the ``infrastructure to support such
[ethanol] blending on a wide scale does not currently exist'' (p. 65)
and that, ``The likely oxygenate replacement for MTBE is ethanol.
Current and near future ethanol production (i.e., on-line in less than
2 years), however, is not adequate to meet the volume of oxygenate
required nationally.'' (p.72).
Based upon this analysis, is it reasonable to conclude that
implementation of the Federal mandate would not have been possible if
MTBE had been unavailable at the time the program was required to go
into effect?
Response. My testimony before the committee included reference to
both the Blue Ribbon Commission Report as well as efforts by EPA in
1994 to promulgate a Renewable Oxygenate Requirement (ROR) for the
Reformulated Gasoline (RFG) program. Regarding the latter, this
reference was made since the effort to promulgate a ROR predated the
first phase of the RFG program, which began in January 1995. Therefore,
the EPA rulemaking record for the ROR reflected conditions that existed
after congressional enactment of the RFG program, but before its
initial implementation.
In the development of the ROR, EPA conducted extensive analysis of
the then-current ethanol supply and demand. Table 1-3 of the Regulatory
Impact Statement for the ROR summarized the ethanol supply/demand
situation and indicated that there was a potential shortfall (or
displacement from existing markets already using ethanol) of 320
million gallons just to satisfy a requirement that 30 percent of RFG
contain renewable oxygenates in 1995. The RIA further indicated that,
even if implementation of the 30 percent ROR was delayed until 1996,
there would be a potential shortfall (or displacement) of 160 million
gallons of ethanol.
The RIA for the ROR additionally indicated that ``in the early
years of the program the renewable oxygenate requirement is expected to
be met primarily with ethanol blended into winter RFG.'' This analysis
flowed from assessments that renewable oxygenates, like ETBE, would not
be expected to provide a significant contribution to the renewable
requirement in 1995, although more capacity for ETBE could come on line
in 1996. Table 11-2, contained in page 59 of the RIA, addressed total
fossil energy consumption under a 30 percent renewable oxygenate
requirement. The table addressed both a situation where the entire 30
percent ROR was satisfied by utilization of ethanol in the wintertime
and a situation where the requirement was satisfied by ethanol in the
winter and ETBE in the summer. With respect to the portion of RFG not
affected by the ROR--the other 70 percent of the oxygenate
requirement--DOE's analysis assumed that this RFG would contain MTBE.
While this RIA did not directly address the implementation of the RFG
program that ultimately unfolded (i.e., since the ROR was later
overturned in the courts) it does represent a contemporaneous
assessment of conditions in the renewable oxygenate market. Based on
this analysis, it is logical to conclude that MTBE was expected to be
used in the RFG program in substantial quantities.
As your question also indicates, several years after the initial
implementation of the RFG program, the Blue Ribbon Panel Report
indicated that ethanol alone could not fully satisfy meeting the
oxygenate requirements for the Federal Reformulated Gasoline Program.
As your citations to the report indicate, the Blue Ribbon Panel report
concluded that a lack of infrastructure existed, as of 1999, to support
full replacement of MTBE with ethanol blending in the short term.
As you know, other oxygenate additives apart from MTBE and
ethanol--such as tertiary amyl methyl ether (TAME), diisopropyl ether
(DIPE), and ethyl tertiary butyl ether (ETBE)--have been developed for
many years and have been available during the entire course of the RFG
program. EPA's Final Regulatory Impact Analysis for Reformulated
Gasoline (December 1993), however, indicated that, at that time,
technological and economic uncertainties existed regarding ETBE and
that ETBE was not cost-competitive with MTBE and ethanol (page 295 of
RIA--EPA420-R-93-017). The analysis indicated that ETBE had not been
widely used in the market to date (page 28 of RIA). EPA's analysis in
this regard is consistent with other market data concerning oxygenate
production. Information produced by the Energy Information
Administration in 1995 (Short-Term Energy Outlook Annual Supplement
1995) indicated a sizable growth in MTBE production capacity between
1991 and 1995 and a more modest increase ethanol production capacity.
Corresponding figures for TAME and ETBE production capacity indicated
that such capacity combined constituted less than 10 percent of MTBE
capacity. I have attached a table containing this information that was
published as part of another EIA publication (Oxygenate Supply/Demand
Balances in the Short-Term Integrated Forecasting Model, March 6,
1998). Overall, MTBE was the primary oxygenate utilized to blend into
RFG to meet the 2 weight percent oxygenate requirement mandated by the
RFG program. MTBE is high in octane, has favorable distillation
properties, and can be blended and shipped through pipelines. These
attributes, along with economic valuations of the product, were highly
favorable in meeting the RFG oxygenate requirement.
Question 2. Mr. Meyers, in implementing the RFS, how will EPA guard
against supply disruptions and price impacts?
Response. As you know, EPA is in the process of developing a
proposal to implement the Renewable Fuel Standard (RFS) which was
established by the Energy Policy Act of 2005. While EPA is still in the
pre-proposal stage for this rulemaking, it would be the Agency's
general intent to design a program that allows renewable fuel blending
when, where and how it makes the most sense.
The RFS Program as prescribed by the Energy Policy Act of 2005
(EPAct) allows industry flexibility in meeting the new standards. EPA
considers that the legislative flexibility is intended to mitigate, to
the extent possible, adding any additional market constraints that
could cause or contribute to supply or price volatility. That is, the
RFS program does not require every gallon of gasoline to contain a
renewable fuel component. Therefore, industry can choose how best to
comply based on a number of factors affecting supply, demand and
blending economics including: seasonal (with some limitations) and
geographic system optimization, and the purchasing and trading of
excess blending credits. This flexibility supports greater market
fluidity thus enabling a more expeditious response to unusual supply,
demand and other unique situations that could adversely impact product
availability and price.
Additionally, in accordance with other provisions contained in the
EPAct, EPA has proposed removal of the oxygenate standard in the RFG
program areas. Removal of this standard allows stakeholders greater
flexibility in when, where and how they blend renewable fuel
components. EPAct additionally granted EPA authority to waive fuel
quality program requirements. EPA exercised such authority in 2005,
when it became aware of potential fuel supply issues resulting from the
fallout of the Hurricanes in the gulf region. In this effort, EPA
worked closely with other private and government stakeholders and
responded quickly providing necessary short term relief, allowing the
markets to adjust rapidly. This provision provides EPA with continuing
legal authority to address fuel supply disruptions which occur as a
result of conditions specified in the waiver authority.
Finally, it is notable that over the last several years EPA has
implemented a number of actions and programs that significantly ease
potential supply constraints that may have occurred as a result of
clean fuel requirements such as the on-road and off-road diesel sulfur
requirements. Programs such as market-based trading systems, geographic
phase in allowances, baseline adjustments, short term testing tolerance
modifications, as well as others, have provided the fuel supply and
distribution industry increased flexibility to comply with the rules
more cost-effectively, and in some cases, to increase production, thus
providing for a more reliable supply of fuel. These have all
contributed to ensuring smooth distribution and thus price stability
while maintaining the significant environmental benefits these programs
were designed to achieve.
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Statement of A. Blakeman Early, American Lung Association
Mr. Chairman and members of the committee, I appreciate the
opportunity to appear today on behalf of the American Lung Association
to discuss the impact of eliminating MTBE from gasoline.
THE AMERICAN LUNG ASSOCIATION SUPPORTS THE REMOVAL OF MTBE FROM
GASOLINE
As you know MTBE has been found to contaminate ground or surface
water in nearly every state. MTBE has rendered thousands of public and
private drinking water sources unusable. Addressing the clean up or
replacement of these sources has been estimated in a study by the
American Water Works Association to cost upwards of $25 billion
dollars. These statistics, which may not include all MTBE contamination
costs, provide reason enough to eliminate MTBE from the Nation's fuel
supply. I have attached a summary of the AWWA report to my testimony.
The American Lung Association is particularly interested in
eliminating MTBE from reformulated gasoline (RFG) because the fear of
MTBE contamination has reduced the public acceptance of RFG as a tool
in fighting air pollution. Many areas with unhealthy levels of ozone
have avoided adopting RFG for fear of contaminating local water
supplies. Therefore, we see the recent trend of refiners choosing to
eliminate MTBE from RFG as a welcome development which may facilitate
the adoption of RFG in more areas that need it. If so, the public will
benefit from reduced exposure to ozone and toxic air pollutants. The
elimination of the oxygen requirement in RFG, in combination with the
sulfur limit in all gasoline implemented as part of the Tier II rules,
and the limitations on boutique fuels adopted in the Environmental
Policy Act of 2005 (EPACT) should eliminate the proliferation of
boutique fuels while providing clean fuels choices to areas that need
them. We believe that any additional limitations on states' ability to
select clean fuels would have adverse air quality impacts and are
unnecessary given all the changes I just described.
refiners are eliminating mtbe from rfg this spring entirely voluntarily
The American Lung Association endorsed a ban of MTBE in fuel phased
in over 4 years. This time frame was originally identified by the
refining industry as the necessary phase out period in testimony before
this committee. The Congress chose not to adopt such a measure during
its consideration of EPACT. Congress did remove the oxygen requirement
from RFG, enabling each refiner to use as much or as little MTBE as it
chose.
Now this spring, refiners are attempting to remove MTBE from RFG
all at once rather than pursuing a phased elimination. Although MTBE is
already banned for use in fuel in over 20 States, the current action to
remove MTBE from the remaining RFG supply is voluntary, is not required
to meet any law. We see no credible basis for finding that the use of
MTBE in RFG in 2006 gives rise to special liability given the nature of
MTBE groundwater contamination and the difficulty of distinguishing
when contamination occurred. Whatever liability refiners may be subject
to will be based largely on past actions. The nature of that liability
is well described in testimony by Erik D. Olson of the Natural
Resources Defense Council before the House Energy and Commerce
Committee (see http://energycommerce.house.gov/108/Hearings/
03132003hearing818/Olson1367.htm).
It has long been predicted that removal of MTBE from RFG would
spike a demand for ethanol. I provided testimony before this committee
in June 2000 that the removal of MTBE would create a demand of 3.8
billion gallons a year just to provide octane in RFG. My testimony was
based on information obtained from the refining industry itself. In
fact ethanol is apparently being used today in amounts greater than
needed to provide octane in order to help refiners meet air toxics
reduction requirements.
The fact that refiners are voluntarily and precipitously
withdrawing MTBE from use knowing that such action would cause a spike
in RFG prices provides testament to the indifference the industry has
to the calls of consumers to restrain fuel prices.
SHORTAGES CREATED THROUGH VOLUNTARY OIL INDUSTRY DECISIONS ARE NOT A
BASIS FOR WAIVING FUEL REQUIREMENTS
As you know, in the Energy Policy Act of 2005 (EPACT) the Congress
provided EPA with the authority to temporarily waive a fuel or additive
requirement under the Clean Air Act in cases of an ``extreme and
unusual fuel or fuel additive supply circumstance'' (Section 1541(a)).
The statute explicitly states that shortages that reasonably could have
been foreseen or derive from a lack of prudent planning do not qualify
for such waiver.
We believe the ethanol and fuel shortage we are discussing today
was foreseeable and in fact is exactly the result of a failure of
prudent planning. The American Lung Association hopes no one will
suggest the need for invoking the EPACT waiver authority.
SHORTAGES IN ETHANOL CAUSE THE SAME PRICE VOLATILITY AS GASOLINE
SHORTAGES
The wholesale or ``rack'' price of ethanol is well over a dollar
more than it was a year ago. It should come as no surprise that ethanol
producers will charge as much as they can get on the market. However,
it is worth noting that when ethanol demand has surged in the past as
with the phase out of MTBE in California and in the New York/
Connecticut RFG markets, the ethanol industry has responded to such
demand and provided the needed ethanol with modest impact on overall
RFG price. We operate on the assumption that the ethanol industry will
respond similarly in the case of the current shortage over the longer
term. However, we believe the Department of Energy should be more
proactive in alleviating ethanol shortages by encouraging alternative
sources of ethanol supply from off-shore sources such as the Caribbean
Basin and Brazil. Given that the expected shortage in ethanol supply
this spring is occurring in the Mid-Atlantic and Texas, it should not
be difficult to facilitate the location and shipment of foreign sources
of ethanol to Hampton, Virginia and Houston, Texas to help meet
unexpected demand.
EPA MUST ACT NOW TO MEET ANTI-BACKSLIDING REQUIREMENTS TO CURB
TOXIC AIR POLLUTANTS
Under EPACT, 9 months after enactment EPA is required to establish
standard for each refiner and importer designed to maintain the level
of toxic air pollutant reduction achieved on average during 2001 and
2002. (Section 1506(b)). This so-called ``anti-backsliding'' provision
was enacted to ensure that as refiners reduced the amount of MTBE they
used in RFG, the level of toxic air pollution from the use of such fuel
did not increase. The dramatic shift away from MTBE use occurring this
spring well illustrates why this provision is needed. Yet to my
knowledge EPA has not instituted any effort to assemble the regulatory
information or propose the anti-backsliding requirements required by
the law. We call on EPA to move expeditiously in light of the current
circumstances.
Again, I appreciate the opportunity to appear before the committee
on behalf of the American Lung Association.
______
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Statement of Bill Douglass, Chief Executive Officer, Douglass
Distributing Company, Representing the National Association of
Convenience Stores and the Society of Independent Gasoline Marketers of
America
Good morning, Mr. Chairman, Ranking Minority Member Jeffords, and
members of the committee. My name is Bill Douglass. I serve as the
chief executive officer of Douglass Distributing Company in Sherman,
TX. My company owns and operates 14 motor fuel outlets in the Dallas-
Fort Worth area and supplies gasoline and diesel fuel to 165 additional
retail outlets in that area under long-term supply contracts.
Thank you, Mr. Chairman, for calling this important hearing this
morning. I appear before the committee representing the National
Association of Convenience Stores (NACS) and the Society of Independent
Gasoline Marketers of America (SIGMA). I am the former chairman of
NACS' Board of Directors and my company also is an active member of
SIGMA. Together, NACS and SIGMA members sell approximately 80 percent
of the gasoline and diesel fuel purchased by motorists in the United
States each year. NACS and SIGMA appreciate the opportunity to present
testimony this morning on an issue of great importance to our industry
and to the entire Nation--the current turmoil and uncertainty in the
nation's gasoline markets and the opportunity this uncertainty has to
translate into supply shortages and price volatility during the spring
and summer of 2006.
NACS is an international trade association comprised of more than
2,200 retail member companies operating more than 100,000 stores. The
convenience store industry as a whole sold 143.5 billion gallons of
motor fuel in 2005 and employs 1.5 million workers across the Nation.
SIGMA is an association of more than 240 independent motor fuel
marketers operating in all 50 States. Last year, SIGMA members sold
more than 58 billion gallons of motor fuel, representing more than 30
percent of all motor fuels sold in the United States in 2005. SIGMA
members supply more than 35,000 retail outlets across the Nation and
employ more than 350,000 workers nationwide.
Over the past 3 months, I have witnessed such a blizzard of
announcements and developments regarding gasoline production and
distribution this Spring and Summer that even I, who study and
participate in gasoline marketing every day, am uncertain what to
expect over the next 6 months. It would not surprise me if the members
of this committee, who wrestle daily with many issues of national
importance far removed from motor fuel issues, are not sure what to
make of these developments either. This hearing represents an attempt
to sort through these announcements, rumors, and questions.
NACS and SIGMA believe it is a timely examination and we welcome
this committee's interest.
As an initial matter, I would like to review briefly what we know,
rather than what we don't know:
<bullet> Methyl tertiary butyl ether (MTBE) has been used as an
octane enhancer in gasoline since the 1970's when lead was removed from
gasoline. Only in the 1990's did its use as an oxygenate in gasoline
become common. As a result, when MTBE is removed from gasoline, not
only does the Nation's gasoline pool lose substantial volume which must
be replaced by other products, but the octane MTBE adds to gasoline
must be replaced by other products to assure that fuel performance is
not degraded.
<bullet> In late 2005 and early 2006, several of the nation's
pipeline systems, which transport gasoline from the major Gulf Coast
refining complexes up the East Coast and through the Mid-West,
announced that they would stop accepting shipments of reformulated
gasoline (RFG) containing the oxygenate and octane additive methyl
tertiary butyl ether (MTBE).
<bullet> During the same time period, several major integrated oil
refiners announced that they would transition away from blending MTBE
into RFG and conventional gasoline early in 2006 due to the pipeline
actions and ongoing concerns regarding potential liability resulting
from contamination of groundwater by MTBE.
<bullet> In late February, the Environmental Protection Agency
(EPA) issued a final rule, required by the Energy Policy Act of 2005
(EPAct 2005), to remove the RFG oxygen mandate as of May 8, 2006,
thereby permitting non-oxygenated RFG, or clear RFG, to be sold as RFG
as long as it met EPA clean fuel standards.
<bullet> Also in late February, the Department of Energy's Energy
Information Administration (EIA) released a report entitled
``Eliminating MTBE in Gasoline in 2006'' which raised concerns about
shortages in both domestic gasoline and ethanol production capacity in
the coming months if such a transition away from MTBE RFG is pursued
and concluded that ``the complexity of the transition away from MTBE-
blended RFG may give rise to local imbalances between supply and demand
and associated price surges during the change.''
<bullet> Earlier this month, the Renewable Fuels Association, the
trade association representing domestic ethanol producers, responded to
what it perceived to be inaccuracies in the EIA report, stating ``. . .
we have worked diligently with our customers--the Nation's gasoline
refiners--to ensure that any consumer impact . . . will be temporary.''
<bullet> Most recently, the Federal Energy Regulatory Commission
(FERC) denied a
request from Colonial Pipeline Company, which operates one of two
major petroleum pipelines serving the East Coast, to amend immediately
its tariff schedule to delete MTBE RFG from the list of products it
will accept on its pipeline after objections from several MTBE
manufacturers.
As you may note, none of these announcements and developments
involved gasoline retailers directly. There is a simple reason for this
fact. Independent gasoline marketers do not make gasoline or ethanol,
we do not own pipelines, and we do not have access to the type of data
necessary to produce a report as authoritative as that released by EIA.
Instead, we purchase gasoline at wholesale and sell it to motorists at
retail. All of these activities have. been taking place, so to speak,
``far above our pay grade'' and their exact effect on independent
gasoline marketers and consumers will be known only as events develop
over the next 6 months.
From all of these recent developments, gasoline marketers, and the
members of this committee, can glean several important facts (rather
than arguments).
First, use of MTBE as a gasoline additive will decline in the
future, whether precipitously as some have predicted this Spring and
Summer, or more gradually. This decline is a direct result of Congress'
failure to adopt liability reform provisions for MTBE as part of the
Energy Policy Act of 2005. Without such liability reform, refiners,
pipelines, and marketers are disinclined to extend their potential
liability for use of this product in the future. I am not seeking to
get into a debate as to whether Congress should have adopted the so-
called MTBE safe harbor last year. That debate is over.
must understand that the decisions you Rather, this committee, and
Congress as a whole, made, or chose not to make, last year, are having
repercussions in the gasoline markets this year. Those repercussions
were entirely predictable. Many in Congress wanted to ban MTBE outright
and immediately. NACS and SIGMA supported a gradual phase down of MTBE
use over a number of years. Reality will fall somewhere between these
two positions. MTBE use will be reduced in the future. The focus of
this hearing, however, should be on the effect this reduction will have
on domestic gasoline supplies and prices.
Second, ethanol blended with gasoline is the most likely and
immediate substitute for MTBE in RFG. Ethanol contains some of the same
characteristics that have made MTBE an attractive blending component in
the past--high octane content and a blend rate that dilutes other
gasoline properties. However, the use of ethanol in RFG also increases
volatility (thereby increasing VOC emissions, which lead to ozone
formation) and ethanol contains higher levels of toxics than MTBE--
substances controlled under EPA's mobile source air toxics program. To
prepare for blending ethanol with RFG and the resulting volatility
surge, refiners must take certain components out of gasoline intended
for ethanol blending, reducing the gasoline yield from a barrel of
crude oil. EIA has estimated that on average refiners lose
approximately 5 percent of their production capacity when making RFG
for ethanol blending when compared to RFG for MTBE blending. This is a
significant reduction in domestic gasoline production capacity that
should be of concern to policymakers, marketers, and consumers.
Third, in general the Nation's refiners are not positioned to
produce substantial quantities of clear RFG--RFG that is not blended
with either ethanol or MTBE. Since the RFG program started in 1995, it
has been unlawful for a refiner to produce such clear RFG. In fact, it
will not be lawful to produce clear RFG until May 8, 2006--nine months
after the President signed EPAct 2005 into law. It should not be
surprising that the nation's refiners have not been able, during the
short period between EPAct's enactment and now, to dramatically alter
their production capabilities to produce clear RFG. While undoubtedly
many refinery modifications projects are in the works to produce clear
RFG from many domestic refineries, the timetable simply has been too
short to expect these modifications to be completed before this Spring.
Fourth, it is clear that the domestic ethanol production industry
is doing its utmost to maximize the amount of ethanol it will produce
and sell this year. Given that prices for ethanol scheduled to be
delivered in May and June in recent weeks have fluctuated between $2.40
and $3 per gallon, they have every incentive to make every gallon of
ethanol they can. Depending on the producer, ethanol costs between $1
and $1.50 per gallon to make, not taking into account the production
tax credits that these producers laws. That means their margins are
somewhere over $1. per gallon--a margin that I as a gasoline marketer
could never hope to achieve and one that makes the ``crack spreads'' of
the Nation's integrated refiners look like an amateurish attempt to
turn a profit.
The question is not whether the domestic ethanol industry is doing
its best to maximize production, but whether these best efforts will be
sufficient to meet the demand for ethanol in the next 6 months as the
Nation transitions away from MTBE as a fuel additive. Depending on the
assumptions one makes as to the pace and extent of MTBE de-selection as
a blending component, as EIA's report accurately points out, the
domestic ethanol industry's best efforts may fall far short of
supplying the amount of ethanol required to meet the demand of refiners
and marketers. If this is the case, the primary source of additional
ethanol supply will be from foreign countries, including enjoy under
many State and Federal Jamaica, Mexico, and Brazil. As EIA's report
also notes, however, much of this foreign ethanol is subject to a $0.53
per gallon duty unless it has been processed in certain Caribbean Basin
Initiative (CBI) countries. Thus, the option to look toward foreign
ethanol to fill the shortfall in domestic production is limited by this
tariff--unless domestic ethanol prices rise to such high levels that
importers are able to pay the huge per gallon duty and still offer
competitively priced ethanol to refiners and marketers. If such ethanol
price spikes occur over the next 6 months, it will be interesting to
see if the producers of ethanol will be called before congressional
committees or placed under Federal investigation for collusion and
price gouging and for visiting on motorists hundreds of millions of
dollars of increased prices at the gasoline pump.
Fifth, the continuing role of boutique fuels in complicating the
supply and distribution of gasoline in 2006 must not be ignored. While
it is true that Congress took effective steps in EPAct to cap the
number of boutique fuels across the Nation, to date this cap has not
had the desired effect of reducing the number of unique gasoline and
diesel fuel blends across the Nation and restoring fungibility to the
motor fuel supply and distribution industries. Thus, the problem of
boutique fuels and the price volatility they cause during short supply
situations remains.
Of greater immediate importance relative to this issue, as noted in
the EIA study, is the lack of Federal legislative action to limit State
boutique renewable fuel mandates. EIA noted that State ethanol
mandates, such as the one currently in place in Minnesota and those
under consideration or being implemented for ethanol in other States,
constrain the ability of ethanol producers to respond to ethanol demand
in other areas of the Nation. Congress enacted the Renewable Fuel
Standard (RFS) as part of EPAct last year to assure a minimum demand
for ethanol and bio-diesel in the coming years. At the same time,
however, Congress built into the RFS certain flexibilities to assure
that renewable fuels would be used efficiently and economically under
the RFS and would not be concentrated in any particular area of the
Nation. These State boutique renewable fuel mandates directly undercut
the EPAct RFS flexibility by preventing renewable fuels, including
ethanol, from moving to the areas of highest demand. NACS and SIGMA
believe that this committee and others must look into the role these
boutique renewable fuel mandates play in decreasing the fungibility of
product and increasing wholesale and retail price volatility for
consumers--much the way Congress looked into the negative effect of
State boutique gasoline and diesel fuel blends on these factors under
EPAct. If State boutique renewable fuels mandates are allowed to
proliferate unchecked, then all of the work Congress put into restoring
fungibility in the gasoline and diesel fuel markets will ultimately go
for naught.
Sixth, the bulk gasoline storage and terminaling infrastructure in
many parts of the Nation is not prepared for a transition from MTBE to
ethanol. Because ethanol generally cannot be transported via pipelines,
it must be trucked, barged, or shipped via rail to wholesale gasoline
terminals for blending into gasoline. These terminals' storage capacity
for different gasoline and diesel fuels already is stretched to the
limit. Many terminals in the mid-Atlantic States and Texas, where the
potential effect of the transition from MTBE to ethanol will be the
greatest, simply do not have an ``extra'' storage tank in which to
store ethanol. And it is not likely that they will be able to obtain
the permits and build additional storage capacity in a two or 3 month
timeframe. As a result, gasoline suppliers and marketers seeking to
blend ethanol into gasoline this Spring--assuming they can locate the
ethanol at a reasonable price--will be forced to scramble to find
storage for this ethanol at bulk terminals or will locate separate and
at times distant ethanol storage facilities at which they will blend
ethanol with gasoline. These bulk storage infrastructure constraints
will result in an added level of complexity in an already stressed
gasoline supply distribution system.
Seventh, this transition away from MTBE comes during the yearly
transition from winter to summer gasoline--a transition that has in
past years repeatedly resulted in supply shortages and wholesale and
retail price spikes. In 2006, not only must terminals and retailers
complete the switch from winter to summer gasoline, but they must also
switch from MTBE RFG to ethanol RFG. This transition to ethanol will
require terminals and retailers to draw down their gasoline inventories
aggressively to complete the transition as quickly as possible and to
avoid offering gasoline that does not comply with EPA's clean gasoline
programs. And as with any commodity, when inventories are low, the
opportunities for supply shortages and price volatility increases.
Finally, the transition from MTBE additized gasoline to ethanol
additized gasoline will be problematic for motor fuel retailers like
me. Due to ethanol's characteristics, many marketers will be forced to
pump out their retail underground storage tans to convert to RFG with
ethanol to prevent clogged fuel dispenser filters or clogged motor
vehicle fuel filters. Retailers will be undertaking these preparations
at the same time that they are preparing to switch from winter to
summer gasoline blends.
Most marketers, myself included, are confused by the various
announcements and predictions being made about the transition from MTBE
to ethanol in RFG and have not been able to make concrete operational
plans to carry one product or another.
NACS and SIGMA members have been selling gasoline blended with
ethanol for decades. The challenges of selling gasohol at retail are
well-known: securing appropriate gasoline blendstock and ethanol
supplies and the facilities to blend these products; phase separation
if any water makes its way into the blend; cleaning storage tanks
before adding ethanol to prevent clogged fuel filters; and, educating
consumers about gasohol in areas where it may never have been sold
previously. As a result, given sufficient time to effect this
transition from MTBE to ethanol, such a transition would be transparent
to our customers. However, many retailers like myself are making this
transition for the first time and I can tell you that the conversion is
rather daunting. For example, one of my gasoline suppliers provided me
a document to walk me through the conversion process--it is a 20-page
document! That is a lot of information for retailers to absorb and
implement.
Unfortunately, this transition is happening on a much tighter
timetable than any previous transition from MTBE to ethanol. In
California and New York, where MTBE was banned several years ago,
retailers in those States had 2 to 3 years to plan for an orderly
transition to ethanol. This is not the case with this transition. In
most cases, retailers began hearing about the planned transition in
January and only recently have received confirmation from their
suppliers regarding the details and timing of the transition.
In short, such transitions have been accomplished before with
little disruption to gasoline supplies or significant price volatility.
But this transition is being undertaken much more quickly and in larger
geographic areas.
This committee's inquiry on this issue could not be more timely.
The gasoline refining and distribution industry is in turmoil in many
areas of the Nation as each participant makes decisions concerning
which products to offer, carry and sell. Suffice it to say that this
turmoil will resolve itself in the near future. However, the question
for policymakers must be how high gasoline prices will have to rise
before sufficient quantities of gasoline blendstocks are attracted from
foreign sources to make up for shortfalls in domestic production? And
what role will ethanol supply and prices play in influencing retail
gasoline prices in the next 6 months? Neither of these questions can be
answered authoritatively at this time. However, to quote again from
EIA's recent report: ``(T)he complexity of the transition away from
MTBE-blended RFG may give rise to local imbalances between supply and
demand and associated price surges during the change. As the summer
progresses and demand grows, the right supply situation is not likely
to ease significantly, leaving the market exposed to the increased
potential for price volatility in the East Coast and Texas RFG
regions.''
Unfortunately, there are few public policy options open to Congress
to mitigate these potential supply shortages and price volatility in
the short-term. NACS and SIGMA propose the action that would have the
most significant positive effect on supply and dampening effect on
price increases in the next 6 months would be the temporary suspension
of the tariff on imported ethanol. This suspension would be adopted to
ease the transition of the domestic ethanol industry through the period
of increased ethanol demand caused by decreased MTBE use and its
inability, despite its best efforts, to totally fill the supply gap
left by MTBE.
In the medium term, NACS and SIGMA suggest that Congress consider
two additional actions. The first would be to extend the boutique fuels
cap under EPAct to limit State boutique renewable fuel mandates. Such
an extension would prevent such State mandates from undermining the
policy goals and the flexibility of the RFS in EPAct and would halt the
renewed proliferation of unique fuel blends across the Nation.
Second, NACS and SIGMA again urge Congress to pass legislation to
encourage the expansion of domestic refining capacity. Mr. Chairman,
the legislation you introduced last year to encourage such expansions
was a very good effort to achieve this goal. Unfortunately, it was not
approved by this committee. NACS and SIGMA urge you and your colleagues
to redouble your efforts to pass such legislation. Without it, American
motorists will continue to face the supply and price uncertainties that
are so widespread this spring and summer.
Last year, the subject of numerous congressional hearings was the
destruction of Hurricanes Katrina and Rita and their effect on gasoline
and diesel fuel supplies and prices. This year, the subject is the
transition away from MTBE and the effect this transition will have on
gasoline supplies and prices. Next year, it may be a different set of
developments, but the underlying issue will be the same. Until domestic
refining capacity is increased in this Nation, gasoline and diesel fuel
supply shortages and price volatility will be the norm rather than the
exception. I appreciate the opportunity to present NACS' and SIGMA's
views at this hearing. I would be pleased to answer any questions that
my testimony may have raised.
______
Responses by Bill Douglass to Additional Questions from Senator Inhofe
Question 1. In your testimony, you urge Congress to suspend
temporarily the duty on imported ethanol. In your opinion, if Congress
were to act on this recommendation, what would the short-term impact be
on the prices you are paying for ethanol and that American motorists
are paying for gasoline?
Response. There is no question in my mind that suspending
temporarily the duty on imported ethanol would almost immediately
reduce the price of ethanol, perhaps significantly, because of the
increased competition domestic ethanol manufacturers would face from
foreign ethanol producers. While there are many factors that are
contributing to the upward price pressures on gasoline, the increased
price of ethanol is a significant one. By opening the U.S. market to
foreign ethanol producers, Congress will encourage the importation of
substantial additional quantities of ethanol. This increase in overall
ethanol supplies and increased competition among ethanol producers,
will help satisfy the market demands for the product and place downward
pressure on ethanol and gasoline prices.
Supporters of domestic ethanol producers oppose the suspension of
the ethanol tariff because they believe that domestic producers must be
protected from foreign competition. Given the fact that ethanol prices
have more than doubled over the past year and domestic ethanol
producers enjoy a 100 percent profit margin on every gallon of ethanol
they produce, NACS and SIGMA suggest that suspending the tariff on
imported ethanol is in the best interests of American consumers.
Question 2. EIA's testimony highlighted how complex the fuels
system really is. Would you agree that increasing the complexity of the
fuels system, such as requiring new fuels mandates, would increase
prices for consumers?
Response. I would agree. The Energy Policy Act of 2005 sought to
restore some fungibility to the motor fuels supply and distribution
system by stopping the spread of additional boutique fuels and
embarking on a process by which to responsibly reduce the number of
fuels to a more manageable number. State fuels mandates serve to
further isolate markets and create distribution challenges within a
system that is already operating under a considerable strain.
In addition, the Energy Policy Act of 2005 included a ``Renewable
Fuels Standard'' (RFS) designed to increase the use of alternative
renewable fuels, such as ethanol and biodiesel, as motor fuels.
Incorporated into the RFS was substantial flexibility to insure that
the motor fuels markets could meet this mandate in the most cost-
effective and efficient manner possible. State ethanol or biodiesel
mandates--in effect, State ``boutique'' renewable fuels--undermine the
flexibility built into the RFS by requiring minimum quantities of
renewable fuels to be used in every gallon of gasoline or diesel fuel
sold in a State. These State renewable fuel mandates also circumvent
the Energy Policy Act's boutique fuels cap and, if left unchecked, will
give rise to additional boutique fuels, further balkanization of the
Nation's motor fuels markets, and more frequent supply disruptions and
price volatility.
Question 3. What would you say to policymakers who would recommend
such new mandates?
Response. The RFS will increase, by mandate, the use of renewable
fuels to a minimum of 7.5 billion gallons by 2012. This was an historic
provision designed to move the Nation toward a greater reliance on
renewable resources. However, the regulations implementing this program
have not yet been drafted by the Environmental Protection Agency due to
their complexity. NACS and SIGMA believe it would be premature and
inappropriate for Congress to consider yet another fuels mandate before
the Renewable Fuels Standard signed into law in August 2005 has been
fully implemented and its market affects have been appropriately
analyzed and understood. Since the RFS was enacted, domestic ethanol
prices have doubled and there have been widespread media reports that
domestic ethanol supply will fall short of demand in the coming years.
Before increasing the RFS, NACS and SIGMA urge Federal policymakers to
permit the existing mandate to be implemented fully, study its impact
on gasoline prices, and only then consider an expansion once this
evidence has been gathered.
__________
Statement of Bob Dinneen, President, Renewable Fuels Association
Good morning, Mr. Chairman and members of the committee. My name is
Bob Dinneen and I am president of the Renewable Fuels Association, the
national trade association representing the U.S. ethanol industry.
This is an important and timely oversight hearing, and I am pleased
to be here to discuss everything the ethanol industry is doing to
mitigate any potential consumer impact resulting from refiner decisions
to eliminate the use of MTBE. In short, I can assure you the Nation's
ethanol producers are working closely with their refiner customers to
make the transition from MTBE to ethanol in those areas not yet having
made the switch as seamless as possible. I am confident the transition
can, and will, go smoothly.
BACKGROUND
Today's ethanol industry consists of 97 biorefineries located in 19
different States with the capacity to process more than 1.7 billion
bushels of grain into nearly 4.5 billion gallons of high octane, clean
burning motor fuel and 9 million metric tons of livestock and poultry
feed. It is a dynamic and growing industry that is revitalizing rural
America, reducing emissions in our Nation's cities, and lowering our
dependence on imported petroleum. Ethanol has become a ubiquitous
component of the U.S. motor fuel market today. Ethanol is blended in
more than 30 percent of the Nation's fuel, and is sold virtually from
coast to coast and border to border.
<GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT>
The 4 billion gallons of ethanol produced and sold in the U.S. last
year contributed significantly to the Nation's economic, environmental
and energy security. According to an analysis completed for the RFA\1\,
the 4 billion gallons of ethanol produced in 2005 resulted in the
following impacts:
---------------------------------------------------------------------------
\1\ Contribution of the Ethanol Industry to the Economy of the
United States, Dr. John Urbanchuk, Director, LECG, LLC, February 2006.
---------------------------------------------------------------------------
<bullet> Added $32 Billion to gross output;
<bullet> Created 153,725 jobs in all sectors of the economy;
<bullet> Increased economic activity and new jobs from ethanol
increased household income by $5.7 Billion, money that flows directly
into consumers' pockets;
<bullet> Contributed $1.9 Billion of tax revenue for the Federal
Government and $1.6 Billion for State and Local governments; and,
<bullet> Reduced oil imports by 170 million barrels of oil, valued
at $8.7 Billion.
In addition, because the crops used in the production of ethanol
absorb carbon dioxide, the 4 billion gallons of ethanol produced in
2005 reduced greenhouse gas emissions by nearly 8 million tons.\2\
That's the equivalent of taking well over a million vehicles off the
road.
---------------------------------------------------------------------------
\2\ Argonne National Laboratory, U.S. Department of Energy, GREET
Model, February 2006.
---------------------------------------------------------------------------
ENERGY POLICY ACT HAS STIMULATED SIGNIFICANT NEW ETHANOL PRODUCTION
Mr. Chairman, in large part because of the Energy Policy Act of
2005 (EPAct), the U.S. ethanol industry is today the fastest growing
energy resource in the world. This committee should be proud of its
role in getting the congressional debate regarding a robust Renewable
Fuels Standard (RFS) started. With your leadership, and the tremendous
support of members of the committee, such as Senators John Thune (R-SD)
and Barack Obama (D-IL), the Congress last year enacted an RFS
requiring the use of at least 7.5 billion gallons of renewable fuels by
2012. That provision signaled a clarion call to the ethanol industry
and the financial community that demand for ethanol and biodiesel was
no longer uncertain, allowing the renewable fuels industry to grow with
confidence.
Indeed, there are currently 33 plants under construction. Eighteen
of those have broken ground just since last August when President Bush
signed EPAct into law. With existing biorefineries that are expanding,
the industry expects more than 2 billion gallons of new production
capacity to be in operation within the next 12 to 18 months. The
following is our best estimate of when this new production will come on
stream.
<GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT>
This preceding chart reflects eight plants and three expansions we
believe will be complete before July, representing more than 500
million gallons of production capacity; and another 16 plants and 2
expansion that will be complete before the end of the year, adding
about 900 million gallons more. This new 1.4 billion gallons of new
capacity represents a 32 percent increase in production, a phenomenal
rate of growth, particularly when viewed in light of the 20-plus
percent growth the industry has already achieved in each of the past
several years.
MTBE IS HEMORRHAGING THE MARKETPLACE
Another consequence of the Energy Policy Act appears to be a much
more rapid elimination of MTBE than analysts anticipated. Because
Congress chose not to provide liability protection for refiners and
producers of MTBE, virtually every major refiner has decided to
eliminate the use of MTBE by the time the Federal RFG oxygenate
requirement is officially repealed (May 5, 2006). While State
legislative actions to prohibit the sale of MTBE had already greatly
reduced the volume of MTBE used in reformulated gasoline (RFG),\3\
there is still approximately 2 billion gallons of MTBE sold in the Mid-
Atlantic, Northeast and Texas. This volume will likely be replaced by
ethanol.
---------------------------------------------------------------------------
\3\ Twenty-six States have enacted legislation to prohibit the use
of MTBE because of increasing concerns related to MTBE water
contamination. These States include the RFG areas of California,
Illinois, New York and Connecticut. Ethanol has already successfully
replaced MTBE in RFG sold in these areas.
---------------------------------------------------------------------------
It is important to note, however, that no provision of the Energy
Policy Act or the Clean Air Act requires refiners to eliminate MTBE by
this date. Refiners are not compelled to use MTBE in RFG, nor are they
compelled to use ethanol once the oxygenate requirement is
eliminated.\4\ The decision to stop using MTBE is the refiners' alone.
---------------------------------------------------------------------------
\4\ Based on indications from the refining industry, the Colonial
Pipeline had announced that MTBE shipments would not be allowed after
March. That decision has been re-evaluated, however, and the pipeline
system will allow MTBE RFG to be shipped upon request.
---------------------------------------------------------------------------
THERE WILL BE ADEQUATE SUPPLIES OF ETHANOL TO MEET THE DEMAND CREATED
BY THE REMOVAL OF MTBE
U.S. ethanol supplies will be available to meet this new demand.
First, as noted, dramatically increased ethanol production capacity
will satisfy much of the new demand. In addition to the new capacity
previously discussed, several ethanol and gasoline marketers have been
storing ethanol supplies at terminals in these new markets in
anticipation of the transition from MTBE.
Second, several refiners have contracted with Brazilian and/or
Caribbean ethanol suppliers for product. Approximately 130 million
gallons of ethanol were imported last year. That figure is expected to
increase in 2006.\5\
---------------------------------------------------------------------------
\5\ It is important to note that lifting the secondary tariff on
ethanol is not necessary to encourage additional imports. Under the
Caribbean Basin Initiative, 270 million gallons can be imported duty-
free. Moreover, the secondary tariff only exists to offset the tax
benefit refiners receive for blending ethanol, regardless of its
source. Eliminating the tariff, then, would result in U.S. taxpayers
subsidizing already highly subsidized Brazilian ethanol. That is
particularly unnecessary as the marketplace is seeing ethanol imports
increase under the existing tariff regime.
---------------------------------------------------------------------------
Third, the marketplace will migrate ethanol from existing
conventional gasoline areas where it is added for octane or as a
gasoline extender to MTBE replacement markets where it will be needed
more. Indeed, many refiners and marketers are today renegotiating
existing contracts to effect a temporary re-allocation of product and
assure a smooth transition in new market areas.
As a result, virtually every refiner and gasoline analyst now
acknowledges there will be sufficient ethanol supplies to meet the
demand created by MTBE replacement. Consider the following statements:
<bullet> ``The United States will have enough ethanol to blend into
gasoline during the current spike in demand as companies transition
away from the oxygenate MTBE.'' Valero Energy CEO William Klesse.
<bullet> ``We have enough ethanol to replace MTBE when the new
ethanol mandate takes effect in May.'' ExxonMobil CEO Rex Tillerson.
THE TRANSPORTATION, DISTRIBUTION AND BLENDING INFRASTRUCTURE WILL BE
READY
The ethanol industry is working diligently with our refiner
customers, gasoline marketers, terminal operators and the fuel
distribution network to assure a successful transition from MTBE to
ethanol in these areas. Over the past several years, the ethanol
industry has worked to expand a ``Virtual Pipeline'' through aggressive
use of the rail system, barge and truck traffic. As a result, we can
move product quickly to those areas where it is needed. Many ethanol
plants have the capability to load unit trains of ethanol for shipment
to ethanol terminals in key markets. We are also working closely with
terminal operators and refiners to build ethanol storage facilities and
blending equipment.
Great credit must be given to the petroleum industry for the effort
that is being made to assure success. Examples of some of the
investments being made to accommodate the switch from MTBE to ethanol
in key markets include the following:
<bullet> Sewaren, NJ is expected to be the primary gathering point
for ethanol for East Coast markets in 2006 because it has both unit
rail car capacity and marine access. Ethanol will be trucked to serve
New York and New Jersey, and product will flow out by barge to
Providence, Boston and Baltimore.
<bullet> Unit Train unloading facilities are either being built or
planned for Providence, RI, Linden, NJ, Baltimore, MD, and Dallas, TX.
Already, a unit train breakout facility is in operation in Albany, NY.
<bullet> Barge receiving capability is either in place or being
built in Philadelphia, Baltimore and Houston.
<bullet> Transloading (rail to truck) capability is being developed
as a transitional step for Richmond, Washington and Dallas. More
permanent rail terminals are being developed for these areas.
There is no question that the dramatically accelerated removal of
MTBE has challenged the marketplace. But the ethanol and petroleum
industries have done this successfully before in New York, California
and Connecticut. We know we can do it again. As one industry analyst
observed recently, ``The very fact that these companies are on the
record as discontinuing MTBE and replacing it with ethanol tells us one
very important fact--they are prepared.''\6\
---------------------------------------------------------------------------
\6\ The Ethanol Monitor, published by Oil Intelligence Inc.,
Oceanport, NJ, Volume 2, No. 11, March 27, 2006.
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CONCLUSION
In his State of the Union Address, President Bush acknowledged the
Nation ``is addicted to oil'' and pledged to greatly reduce our oil
imports by increasing the production and use of domestic renewable
fuels such as ethanol and biodiesel. The Energy Policy Act of 2005
clearly put this Nation on a new path toward greater energy diversity
and national security through the RFS. The unprecedented transition
from MTBE to ethanol may present short-term challenges that industry is
working cooperatively and diligently to overcome, but it also presents
a long-term benefit for the Nation, by moving us one step closer to
President Bush's vision of a more energy secure America. Thank you.
__________
Responses by Bob Dinneen to Additional Questions from Senator Inhofe
Question 1. Mr. Dinneen the primary way to reduce ethanol prices
would be to increase supply, and one suggestion has been made that
ethanol prices will fall if the import duty on ethanol is suspended
temporarily. I am not talking about repealing it entirely--your members
clearly plan to have additional plants on line by next year, according
to the facts, domestic supplies of ethanol will be short. Do you agree
that suspending the duty will cause ethanol prices to drop?
Response. Mr. Chairman. The recent voluntary shift away from methyl
tertiary butyl ether (MTBE) to ethanol undertaken by U.S. gasoline
refiners has put increased focus on America's ethanol and gasoline
supplies. Some have suggested that the secondary tariff on imported
ethanol should be removed, as least temporarily, to augment domestic
supplies. It is claimed this would lower prices at the pump. This claim
is flawed on a number of counts.
First, Ethanol supplies are sufficient. The Energy Information
Administration (EIA) estimates that 130,000 barrels per day (b/d) of
ethanol will be needed to replace the volume of MTBE refiners have
chosen to remove from the gasoline pool. The most recent EIA report
shows that U.S. ethanol production has soared to 302,000 b/d in
February, clearly enough ethanol to meet the new MTBE replacement
demand while continuing to supply existing markets. With 32 new ethanol
biorefineries under construction, ethanol production capacity will only
continue to increase.
In addition, EIA data shows a large increase in ethanol stocks.
Because gasoline marketers and ethanol producers have been building
stocks over the past several months in anticipation of the transition
from MTBE, there is now nearly 29 days of supply in working inventory.
Additional data has shown that imports are rising also, demonstrating
the existing tariff structure is not a barrier to entry. Indeed, more
than 50 million gallons of ethanol have been imported this year.
Moreover, some 40 million gallons of the total has been imported duty
free through the Caribbean Basin Initiative (CBI) as of May 1, 2006,
with much of that being Brazilian in origin. All of these numbers
indicate that ethanol supplies are sufficient to meet the new demand.
Second, repealing the tariff won't lower gasoline prices. Gasoline
prices will not be affected by removing the secondary tariff on
imported ethanol. Imported ethanol represents just a fraction of the
ethanol used to replace MTBE, and ethanol itself represents just 3
percent of U.S. motor fuel supplies. The factors truly driving the
price of gasoline higher have nothing to do with ethanol supplies.
Record crude oil prices, tight refining capacity, lower gasoline
production, lower gasoline imports and limited expansion of domestic
refining expansion all play a much greater role than the supply of
ethanol in today's higher gasoline prices.
Furthermore, imported ethanol arrives in the United States at the
same market price as domestic ethanol. Ethanol from Brazil is in short
supply and ethanol marketers from Brazil do not discount the price of
ethanol that is shipped to the United States.
Third, removing the tariff means American taxpayers would be
subsidizing Brazilian ethanol production. Removing the 54 cent
secondary tariff would in essence be asking American taxpayers to
further subsidize already heavily subsidized ethanol and sugarcane
production in countries like Brazil. U.S. gasoline refiners receive a
51 cent tax incentive for every gallon of ethanol they blend into
gasoline, regardless of the ethanol's origin. So, imported ethanol from
Brazil, for instance, qualifies for the tax incentive. Brazil has built
its ethanol industry through 35 years of tax incentives, production
subsidies, mandates, export enhancement, infrastructure development,
debt forgiveness and currency devaluation. Brazil does not need U.S.
tax dollars to compete effectively, as evidenced by the fact 135
million gallons were imported last year and those volumes are
increasing.
Question 2. Mr. Dinneen, the ethanol industry existed along with
MTBE. In order to help renewable fuels develop, ethanol benefited from
State subsidies, Federal tax credits, State mandates, and protectionist
Federal tariffs. As you pointed out in the RFA's conference, ``ethanol
has arrived'' with the passage of the 7.5 billion gallon mandate. Since
ethanol has arrived, isn't it time to repeal government sanctioned
market interference and really let ethanol grow in a transparent and
free marketplace?
Response. Ethanol has arrived, because under the Renewable Fuels
Standard (RFS), ethanol and biodiesel are now an official component of
the transportation fuels market program, albeit only 3 percent. Today,
only 4.8 billion gallons of ethanol and biodiesel are blended into a
140 billion gallon gasoline market and a 45 billion gallon diesel
market.
The energy sector worldwide is heavily subsidized, including oil,
natural gas, coal, wind, nuclear, hydrogen and biofuels. The current
incentives for biofuels are necessary to continue to grow the industry.
According to The National Defense Council Foundation, which
completed a comprehensive analysis of the external costs of imported
oil in a report issued in 2003 entitled, ``America's Achilles Heel: The
Hidden Costs of Imported Oil.'' The study analyzed three basic
categories: Direct and Indirect economic costs, Oil Supply Disruption
Impacts and Military Expenditures. Taken together, these costs totaled
$304.9 billion annually, the equivalent of adding $3.68 to the price of
a gallon of gasoline imported from the Persian Gulf. In 2006 numbers
the annual cost is $825.1 billion.
In 2000, the Government Accounting Office analyzed specific
incentives for the petroleum sector and concluded that in the last 25
years, well over $150 billion of annual revenue to the United States
Treasury had been lost due to Federal tax incentives. Finally,
according the Joint Committee on Taxation, the petroleum sector also
received well over $12 billion of additional tax benefits, under the
Energy Policy Act of 2005 (EPAct).
By comparison, the ethanol industry has gradually built a program
that has benefited from government programs while at the same time
providing a great deal of benefit to the both the Government and
Nation. As I stated in my testimony, in 2005, the 4 billion gallons of
ethanol produced and sold last year, contributed significantly to the
Nation's economic, environmental and energy security. According to an
analysis completed for the RFA, the 4 billion gallons of ethanol
produced in 2005 resulted in the following impacts:
<bullet> Reduced oil imports by 170 million barrels of oil, valued
at $8.7 Billion.
<bullet> Added $32 Billion to gross output;
<bullet> Created 153,725 jobs in all sectors of the economy;
<bullet> Increased economic activity and new jobs from ethanol
increased household income by $5.7 Billion, money that flows directly
into consumers' pockets; and,
<bullet> Contributed $1.9 Billion of tax revenue for the Federal
Government and $1.6 Billion for State and Local governments.
Furthermore, according the U.S. Department of Agriculture in 2005,
the ethanol program reduced Federal farm program payments by nearly $5
billion.
Indeed, the targeted investment by the Federal Government in
ethanol, has increased tax revenue and decreased Federal spending,
while at the same time creating billions of dollars of private
investment for new infrastructure across the United States, adding jobs
to the economy and decreasing the trade imbalance.
At this point, it is necessary to continue the ethanol program to
grow the marketplace to its full potential which includes the
realization of cellulosic ethanol. Through the new research and
development programs created in EPAct, the industry is on track to
begin construction of new ethanol plants using feedstocks from
cellulosic sources by 2013. Changes to the current program will hinder
that process significantly.
Question 3. Mr. Dinneen in light of your support for the RFS, would
you agree that the recent flurry of activity to adopt State ethanol and
bio-diesel mandates actually undermines the RFS and its flexibility
provisions? As EIA noted in its report, Minnesota's ethanol mandate
actually harms the ability of ethanol to replace MTBE in many markets
by inflexibly requiring minimum ethanol content in every gallon of
gasoline sold in the State. If these State mandates expand, will they
not continue to act as obstacles to the national renewable fuels market
envisioned in EPAct?
Response. I understand that some are concerned about the
proliferation of State biofuels programs because they believe these
programs may undermine the flexibility intrinsic to the national
renewable fuels standard (RFS) adopted as part of last year's Energy
Policy Act (EPAct). I am sympathetic to that concern. The Renewable
Fuels Association worked in good faith with the American Petroleum
Institute and others to pass a national RFS that gave refiners maximum
flexibility to blend ethanol and other biofuels wherever the market
place determined. To an extent, State biofuels mandates do chip away at
that flexibility, which States should appropriately weigh when
contemplating such programs.
Even from an RFS implementation standpoint, however, the concerns
about State biofuels programs might be overstated. First, only two
State programs are currently in place (Minnesota and Hawaii); and those
areas where such programs have been adopted or are proposed are largely
in areas where refiners would be likely to utilize biofuels to meet RFS
requirements in any case, i.e., in States with significant existing or
potential ethanol production capacity. Indeed, several of the proposed
State programs would not become effective until there is meaningful
biofuels production in the State.
Second, not all of the biofuels programs rely upon mandates. Iowa
just enacted a very aggressive 25 percent oil displacement program by
2019 that relies entirely upon tax incentives to motivate gasoline
marketers to install biofuels infrastructure allowing for much greater
ethanol, E-85 and biodiesel use. The Iowa legislation had support from
the local petroleum industry and it is likely to become a model for
other States to follow.
Mr. Chairman. I appreciated the opportunity of testifying before
your committee and to provide you with additional feedback on the
additional questions. I look forward to working with you and your staff
on the ongoing development of renewable fuels, if you have additional
comments or questions, please contact me.
__________
Statement of American Petroleum Institute
API is a national trade association representing more than 400
companies involved in all aspects of the oil and natural gas industry,
including exploration and production, refining, marketing and
transportation, as well as the service companies that support our
industry. As a trade association, representing all members, API does
not collect information about company-specific plans.
We welcome this opportunity to provide our views on the fuels
transitions and related issues involving the fuel needs of U.S.
consumers.
The Energy Policy Act of 2005 eliminates the reformulated gasoline
(RFG) oxygen requirement in May, and also sets a new renewable fuel
standard, requiring that the industry use 4 billion gallons of
renewable fuel in 2006--increasing to 7.5 billion gallons in 2012 and
increased amounts thereafter. In addition, ultra-low sulfur diesel will
be introduced starting June 1. Eliminating the RFG oxygen requirement
is a change in the law that the industry has long supported as one that
will add to refiners' flexibility to produce gasoline and allow those
who so choose to eliminate the use of MTBE in gasoline. Similarly, the
introduction of ultra-low sulfur diesel, despite the large costs
incurred by the nation's refiners, will have major benefits and is
strongly supported by the U.S. oil and natural gas industry. However,
both of these are major fuels changes and present significant
challenges to fuel providers. Despite this, we know that oil companies
are dedicated to ensuring that these transitions go smoothly as
possible.
API believes that, to be successful, fuel transitions should be
based on the free and unfettered functioning of fuel markets. Market
mechanisms are most effective in providing companies with appropriate
indicators and in ensuring a rapid response to changes in market
conditions or transitional problems that may occur. Changes to these
market indicators by government--such as calling for waivers from clean
fuel regulations in light of concerns about possible volatility in fuel
prices--will only cause market uncertainty and send confusing
information to markets in transition. There are already mechanisms in
place to deal with true market supply disruptions, and we urge the
Government to use appropriate caution in exercising this existing
authority.
There is very little literature available about a number of the
impacts. The Blue Ribbon Panel on Oxygenates in Gasoline noted in its
report dated September 15, 1999, that it is important to explore ``the
potential for adverse effects . . . before widespread introduction of
any new, broadly-used product.'' Further, the panel recommended that a
full assessment be conducted ``of any major new additive to gasoline
prior to its introduction.''
Operating in a free marketplace, the U.S. oil and natural gas
industry has the technical expertise and decades of experience in
successfully handling fuel specification transitions. Our companies
have repeatedly demonstrated their capability for making these
transitions on the national level in dealing with RFG, low-sulfur
gasoline and diesel fuel and in meeting so-called ``boutique fuels''
requirements at the State level. It has also successfully managed
earlier phase-outs of MTBE from the gasoline supply, including those in
California, New York, and Connecticut where, despite initial concerns,
transitions to ethanol fuels went smoothly. Our companies have not only
committed their expertise, they are also making the substantial
investments required to complete these transitions. And we note the
ethanol industry's statements that it is making a major effort to
supply ethanol, as it did during the smooth transitions in California,
New York and Connecticut.
Since the Energy Policy Act of 2005 did not provide for a national,
ordered phase-out of MTBE, individual companies are making individual
decisions on how best to deal with the end of the RFG oxygen mandate
and the use of oxygenates. The elimination of the RFG oxygen mandate,
the State MTBE bans (26 so far), and announcements by refiners,
pipelines and marketers indicate a likely rapid reduction in the use of
MTBE. Companies are taking into account various factors such as
customer preference, State laws, pipeline decisions, distribution
system capabilities, and information from government agencies such as
the Energy Information Administration (EIA).
Recent data indicate that there is about 158,000 b/d of MTBE being
used today. If ethanol were substituted for this amount, we would need
roughly 225,000 b/d of additional ethanol. However, some of the MTBE
loss could and likely will be made up through the use of different
compounds and increased gasoline production. Moreover, the fuels market
is worldwide, so we assume that increased reliance on imports is an
option that some suppliers are also considering. We should keep in mind
that, while there is a substantial volume of MTBE, it is a small
component of the total reformulated gasoline market and an even smaller
portion of the world fuels market.
U.S. oil and natural gas companies have the expertise, experience,
and resources required to make the fuel transitions that are required--
provided fuel markets are allowed to function freely. We think a
valuable role for the Government is to help create as clear and
transparent a picture as possible of what is occurring in the
marketplace during this summer's upcoming transitions. In this vein, we
strongly support continued efforts by EIA to monitor the supply and
demand dynamics of the market, and provide timely updates to their
initial study. API and its members are happy to cooperate in any such
effort. Clearly, the Nation needs to work together--industrial and
retail consumers, energy companies and government--to address the
energy challenges we all face.
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