[Senate Hearing 106-650]
[From the U.S. Government Publishing Office]
S. Hrg. 106-650
OVERSIGHT OF RISING OIL PRICES AND THE EFFICIENCY AND EFFECTIVENESS OF
EXECUTIVE BRANCH RESPONSE--PART II
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON
GOVERNMENTAL AFFAIRS
UNITED STATES SENATE
ONE HUNDRED SIXTH CONGRESS
SECOND SESSION
__________
JUNE 29, 2000
__________
Printed for the use of the Committee on Governmental Affairs
_______________________________________________________________________
For sale by the Superintendent of Documents, Congressional Sales Office
U.S. Government Printing Office, Washington, DC 20402
U.S. GOVERNMENT PRINTING OFFICE
65-746 cc WASHINGTON : 2000
COMMITTEE ON GOVERNMENTAL AFFAIRS
FRED THOMPSON, Tennessee, Chairman
WILLIAM V. ROTH, Jr., Delaware JOSEPH I. LIEBERMAN, Connecticut
TED STEVENS, Alaska CARL LEVIN, Michigan
SUSAN M. COLLINS, Maine DANIEL K. AKAKA, Hawaii
GEORGE V. VOINOVICH, Ohio RICHARD J. DURBIN, Illinois
PETE V. DOMENICI, New Mexico ROBERT G. TORRICELLI, New Jersey
THAD COCHRAN, Mississippi MAX CLELAND, Georgia
ARLEN SPECTER, Pennsylvania JOHN EDWARDS, North Carolina
JUDD GREGG, New Hampshire
Hannah S. Sistare, Staff Director and Counsel
Paul R. Noe, Senior Counsel
Catherine C. Walters, Legislative Assistant for Senator Voinovich
Kristine I. Simmons, Staff Director, Oversight on Government
Management,
Restructuring and the District of Columbia Subcommittee
Joyce A. Rechtschaffen, Minority Staff Director and Counsel
Kenneth R. Boley, Minority Counsel
Darla D. Cassell, Administrative Clerk
C O N T E N T S
------
Opening statements:
Page
Senator Voinovich............................................ 1
Senator Lieberman............................................ 3
Senator Levin................................................ 6
Senator Akaka................................................ 15
Senator Durbin............................................... 36
Senator Domenici............................................. 42
Prepared statements:
Senator Cleland.............................................. 59
WITNESSES
Thursday, June 29, 2000
Hon. Robert Taft, Governor, State of Ohio........................ 8
Hon. Ernest J. Moniz, Under Secretary for Energy, Science and
Environment, U.S. Department of Energy......................... 12
John Cook, Ph.D., Director, Petroleum Division, Energy
Information Administration, U.S. Department of Energy.......... 16
Denise A. Bode, Vice Chairman, Oklahoma Corporation Commission... 18
Robert Perciasepe, Assistant Administrator, Office of Air and
Radiation, U.S. Environmental Protection Agency................ 27
Phyllis Apelbaum, Owner, Arrow Messenger Service................. 34
Hon. Richard Blumenthal, Attorney General, State of Connecticut.. 37
J. Louis Frank, President, Marathon Ashland Petroleum, LLC....... 39
Red Cavaney, President and Chief Executive Officer, American
Petroleum Institute............................................ 45
Alphabetical List of Witnesses
Apelbaum, Phyllis:
Testimony.................................................... 34
Prepared statement........................................... 110
Blumenthal, Hon. Richard:
Testimony.................................................... 37
Prepared statement........................................... 113
Bode, Denise A.:
Testimony.................................................... 18
Prepared statement........................................... 96
Cavaney, Red:
Testimony.................................................... 45
Prepared statement........................................... 270
Cook, John:
Testimony.................................................... 16
Prepared statement with attachments.......................... 89
Frank, J. Louis:
Testimony.................................................... 39
Prepared statement with attachments.......................... 120
Moniz, Hon. Ernest J.:
Testimony.................................................... 12
Prepared statement........................................... 67
Perciasepe, Robert:
Testimony.................................................... 27
Prepared statement........................................... 101
Taft, Hon. Robert:
Testimony.................................................... 8
Prepared statement........................................... 60
Appendix
Prepared statements from:
Hon. Evan Bayh, a U.S. Senator from the State of Indiana..... 283
Steven R. Smith, President, National Rural Letter Carriers'
Association................................................ 286
Chart referred to by Senator Levin............................... 289
Copy of Corporate Scoreboard..................................... 290
OVERSIGHT OF RISING OIL PRICES AND THE EFFICIENCY AND EFFECTIVENESS OF
EXECUTIVE BRANCH RESPONSE--PART II
----------
THURSDAY, JUNE 29, 2000
U.S. Senate,
Committee on Governmental Affairs,
Washington, DC.
The Committee met, pursuant to notice, at 1 p.m., in room
SD-342, Dirksen Senate Office Building, Hon. George Voinovich
presiding.
Present: Senators Voinovich, Domenici, Lieberman, Levin,
Akaka, Durbin, and Cleland.
OPENING STATEMENT OF SENATOR VOINOVICH
Senator Voinovich. The Committee will please come to order.
I want to welcome all of you this afternoon.
Two weeks ago, I asked the Committee Chairman, Senator
Thompson and Ranking Member Senator Lieberman, to conduct a
hearing on the subject of the high price of gasoline. I am
pleased that they responded positively, and I appreciate
Senator Thompson's willingness to allow me to Chair this
hearing of the Committee on Governmental Affairs.
Today's hearing is the second that this Committee has held
to look into the high cost of gasoline in our Nation. This
Committee held its first gas price hearing on March 24, and we
were assured that things would get better. Unfortunately, they
have not.
Ladies and gentlemen, today you cannot pick up a newspaper
or turn on a television without reading or hearing about the
high price of gasoline. People are mad, and I don't blame them.
They are angry because the increase is affecting them where it
hurts: Right in their pocketbook.
Last year at this time, the prices we are experiencing
today would have been considered inconceivable by most
Americans. One year ago, the national average for a gallon of
regular unleaded gas was about $1.15, according to the American
Automobile Association. The last time I filled up in Ohio it
was $1.94. Today the national average for gasoline in the
country is $1.65, which is 50 cents more than a year ago.
But nowhere has the price increase been so dramatic than in
the Midwest where gas prices have skyrocketed in the last 4
weeks. Earlier this month, prices in Ohio and other parts of
the Midwest increased by as much as 30 or 40 cents in a matter
of hours. Prices in many cities and States went over the $2
mark for a gallon of gas, setting all-time high price records.
In my county, Cuyahoga, just 10 days ago we were hovering at
the $2 a gallon mark with prices averaging $1.98 a gallon.
Although there are signs that prices are dropping, this is
of little consolation to families, particularly in the Midwest,
where the prices are so high. Prices in most major cities in
the Midwest are well above the national average of $1.65, and
$2 a gallon and higher are still prevalent in many areas.
The kind of gas price increase we have seen lately does
more than just raise eyebrows. Do you know what it does? It
raises questions, significant questions. Politicians, analysts,
business owners are busy pointing to a whole host of reasons
for the recent hikes: Alleged collusion among oil companies who
have sent crude oil prices through the roof, lack of domestic
production, reformulated gasoline, alleged price gouging and
collusion by the oil companies, economics and the law of supply
and demand, pipeline and other transportation problems. You
name it.
Frankly, most people I talk to don't care what the reason
is, and they are getting tired of the finger-pointing. What
most people want to know, including this Senator, is: When are
we going to see the prices go down? And what are we going to do
as a Nation to make sure that we don't end up in the same
predicament we find ourselves 5 years from now?
Most people that have been around as long as I have
remember the Arab oil embargo in 1973, and when costs went up,
gas shortages were everywhere, and people sat in long lines. At
that time the United States only relied on 35 percent foreign
oil to meet our domestic needs. Today our reliance on foreign
oil averages 56 percent, and in some months out of the year, it
reaches 62 percent reliance.
The American people want to know why hasn't something been
done in the last 27 years to reduce our dependence on foreign
oil.
All too often in government when a problem comes up, we
have a tendency to treat it like a barking dog. You know, give
it a bone, a little attention to make it stop barking, and when
it stops barking, ignore it until it starts barking again. And
that is what we have done in terms of the price of gasoline in
our energy policy in this Nation.
Such neglectful treatment of such a vital component of our
Nation's economy is unconscionable, and the major part of the
problem that I see in this regard is the lack of an energy
policy by this administration. And I am not even going to point
the finger at this administration because that has been
happening. It can be pointed at administrations since 1973 who
have not developed an energy policy. And, quite frankly, and I
don't want to make my colleagues feel uncomfortable, but I
think the Congress has also not done the job that we are
supposed to be doing in terms of developing an energy policy.
One of the things that I am hopeful for is that on a
bipartisan basis, we can develop some kind of an energy policy
between now and the end of the year. There are a lot of good
ideas. I have been on the Leader of the Senate, Senator Trent
Lott, and Senator Frank Murkowski, to get a bill that they put
together on the floor to be debated and discussed. And if we
lose this opportunity and let it go and wait until next year, I
think that we may find ourselves back in the same position we
are in today, and that is, no energy policy.
I recall at our hearing in March, we had David Goldwyn, who
is the Assistant Secretary of Energy, and I asked him what this
Nation's dependence on foreign oil should be. I asked him:
Should it be 45 percent? Should it be 50 percent? He couldn't
give me an answer.
We need answers. I am an old governor, and I am glad that
my successor, Governor Taft, is here today. But if we had a
problem like this in Ohio, what we would do is sit down and say
we have got to figure out how much we should be dependent on
foreign oil, set a number. We would then develop a strategy
identifying all the things that we would want to do in order to
make sure that we reached the number, and then we would start
the plan and monitor it and, of course, set a date when we
expected to reach the goal. I mean, that is the logical thing
to do, and I think that is what we need to do here in the
Congress, and I think that we need to do that with the
administration.
I have a lot of other comments I would like to make, but we
have a wonderful group of witnesses here today. I guess the
last thing I will say is that I bet you that the witnesses here
today that we have--if they got in a room and we locked them up
for a couple of weeks, they could come back with a darn good
energy policy for the United States of America. And so often we
have witnesses that come before us, and they depend on us to do
the job. And I have found that if you get the people who really
know what it is about in a room and get them in the mood where
they are willing to compromise with each other, they can do a
whole lot better job of coming up with a solution than those of
us sitting behind this table.
So, without further words, I would like to hear from
Senator Lieberman.
OPENING STATEMENT OF SENATOR LIEBERMAN
Senator Lieberman. Thanks, Mr. Chairman, and I would like
to second your motion that we lock the witnesses up in a room.
[Laughter.]
I think that probably would have a good result on the
problem.
Senator Levin. Both parts of the motion or just the first
part?
Senator Lieberman. Both parts.
Senator Levin. We can let them out afterwards.
Senator Lieberman. We will let them out.
Mr. Chairman, thanks so much for your initiative which has
resulted in the convening of this very timely hearing. I am
glad to join you today in trying to get to the bottom of this
problem of skyrocketing oil prices that is so palpably
frustrating and angering consumers in our country today as it
has every now and then for years. As you said, every now and
then the dog barks.
I remember that oversight hearing in March that you talked
about. At that time one of the witnesses told us that low
inventories being kept by the oil companies might drive the
cost of gasoline over $2 a gallon at the pump this summer, and
I think we were incredulous about that prediction. But here we
are 3 months later, and as you indicated, people in Chicago
have been paying a whopping $2.13 a gallon to fill their tanks.
In Milwaukee, the price has reached $2.02 a gallon. And even
outside the particularly hard-hit areas, the price has reached
$1.87 a gallon in my own State of Connecticut, and all these
prices are for regular self-service unleaded.
The American people clearly want to know why is this
happening, who is to blame, and what can we do to make it
better and have it not happen again? And we are holding this
hearing because we on this Committee have exactly those same
questions.
I would like to just offer a few comments of my reaction to
the problem, and then I look forward to hearing the witnesses.
It seems to me to begin with that OPEC manipulates the price
and production of oil with no consideration for the consumer.
And then American oil companies and international oil companies
keep their inventories low, apparently hoping that the price of
crude oil will drop before they have to buy more to refine. As
you know, there have been questions raised, Mr. Chairman, about
price gouging along this line.
And then, finally, as you said in your very strong and
independent statement, as a Nation we are still too dependent
on a source of energy--oil, fossil fuel--that we don't control.
For me, the most infuriating factor is the behavior of OPEC.
The member countries proudly call themselves a cartel. They
collude and act anti-competitively. Their action in holding
supply down has brought the price of crude oil per barrel up
over $30 and kept it there, even though the consensus that I
hear and read from experts is that that price should be fairly
set, not only in the interest of the consumer but of the
producer nations, in the vicinity of $20, perhaps $22 a barrel.
The practices of OPEC should be illegal under the Sherman
Antitrust Act. The fact is that if businesses in the United
States acted in this way, it would be illegal. But because OPEC
members have the protection of the Foreign Sovereign Immunity
Act, they do not face a price-fixing case in the United States,
although they are obviously very active here and are deriving
billions of dollars of income from American consumers and
businesses.
I think it is worth reaching a bit here to try to test this
proposition, and maybe this is one of the expressions of
globalization. We are a global economy, and what happens
elsewhere in the world affects us just as what we do here
affects people elsewhere in the world. And I have been taken by
the arguments of our colleagues Senators DeWine and Kohl who
are sponsoring a bill that would subject OPEC to American
antitrust laws and remove from them this shield of sovereign
immunity when they are acting as they are with extraordinary
impact on our economy as a business selling a precious
commodity to the United States. It is called the ``No Oil-
Producing and Exporting Cartels Act,''--NOPEC--and I have
joined as a cosponsor on that bill.
I also want to express my concern that there are some in
the oil business who are taking advantage of the current
situation to exact an even higher price at the pump than the
increasing crude oil price that OPEC is charging and market
forces support. Obviously we all want to know whether part of
the reason the gas price increased results from the oil
companies' padding their profits while hoping that inflated
pump price will be blamed either on OPEC or on market
conditions generally.
As you know, Mr. Chairman, the Federal Trade Commission is
investigating whether the oil companies have colluded to keep
prices high in the Midwest. A group of us Senators from the
Northeast have asked the commission now to extend its
investigation to cover the rest of the country and to look at
the reasons for the price increases, which might include price
gouging.
We have also called on the administration to better utilize
the Strategic Petroleum Reserve in cases of what we consider to
be unnatural, artificial reductions of supply and to put some
of that almost 600 million barrels of crude that we own, that
we have in our possession in the Strategic Petroleum Reserve,
out into the market to begin to increase supply, reduce prices,
and at least show OPEC that we are not helpless.
Finally--and this goes to what you said, Mr. Chairman--I
think we come back to part of this problem being us and our
ever-increasing demand for energy without regard to the
concerns that we have had at different times of our history
since the early 1970's and the oil boycott for, one, more
efficient use of fuel and energy and, two, a very aggressive
partnership between the Federal Government, State governments,
and the private sector to develop alternative sources of energy
that are more within our control and that are renewable.
At that hearing that I referred too, and that you did, too,
in March, the Chairman of the President's Committee of Advisers
on Science and Technology, Dr. John Holdren, gave what to me
was some very impressive testimony about the promise of simple
energy conservation, about doing what we used to do in this
country, which is to conserve, to be a bit thrifty in the use
of our resources. And he noted that if we in the United States
increased our energy consumption efficiency by just 2.2 percent
per year, it would reduce our dependence on oil by more than 50
percent, which is worth about 5.5 million barrels of oil a day.
It seems to me that this is a goal that is within our
reach. It is not unrealistic. The United States actually
decreased our energy consumption by 1.7 percent between 1972
and 1979, which were the years surrounding the Arab oil
boycott, and by 3.2 percent, believe it or not, between 1979
and 1982. So we can do it.
I join you, Mr. Chairman, in seeing this moment of
artificially reduced oil supply and outrageously but real
rising prices as the time at which we should hear the bell
tolling or, to use your reference, the dog barking, to think
aggressively about the future health and security of our Nation
and, as a result, to enact a progressive, new, comprehensive
energy policy for our country.
I think you have assembled a wonderful group of witnesses.
I thank you for, on the second panel, calling the attorney
general of my home State, Dick Blumenthal, who has been active
in this area, and I look forward to the witnesses' testimony.
Thank you very much.
Senator Voinovich. Thank you. Senator Levin.
OPENING STATEMENT OF SENATOR LEVIN
Senator Levin. Mr. Chairman, thank you, and thank you for
your initiative and your commitment to this issue. I have been
trying to get answers to the cause or causes of skyrocketing
prices in my home State of Michigan for many, many weeks.
Many explanations have been offered for the incredible
spike in gasoline prices, everything from the effect of
reformulated gas to rising demand, to short supply, to the fact
that the hurricane season makes the petroleum companies nervous
because many of the refineries are located on the coast.
But none of those explanations explain the 70- to 80-cents-
per-gallon increase that we have experienced in Michigan over a
7-week period. Gas prices went to $2.07 statewide. On June 19,
that was a statewide average increase of 70 cents per gallon.
In Detroit, prices went up to $2.14 cents in the same 7-week
period. That is an 80-cents-per-gallon increase in price. Those
increases in prices are double the price hike experienced in
other parts of the country, as can be seen on that chart.\1\
---------------------------------------------------------------------------
\1\ The chart referred to appears in the Appendix on page 289.
---------------------------------------------------------------------------
The United States and Michigan prices generally stayed
together until that point in May, and all of a sudden,
Michigan, like other Midwestern States, was given that dose of
price increase that is reflected on that chart. So we have got
to fight back on behalf of our constituents to roll back these
extreme gas price increases, and the fight has got to be waged
both short term and long term.
The Chairman has gone through some of the justifications
which have been given which just don't hold water or don't hold
gas. One excuse given for the gas price increase was
reformulated gas, but Michigan doesn't have the reformulated
gas requirement. We have heard about low inventories, but the
Midwest's low inventories are not much different from low
inventories elsewhere.
High crude oil prices have been cited, but those increases
have been nowhere near as steep as retail price increases in
the Midwest.
Two pipelines and their operational difficulties have been
cited, but that doesn't wash either. The rupture of one had
minimal effect on supply. The rupture of the other came after
the big increase began, and in any event, the increase after
the pipeline break in the second case remained about the same
as in those Midwest States that were not dependent on that
pipeline.
So you have got to look at other factors, including price
gouging and the possibility that oil companies are engaging in
anticompetitive conduct, for instance, by refusing to deliver
supply to certain independent gas dealers.
The issue is the issue that our Chairman has indicated.
What will it take to get these prices down? I think it would
help to release more oil from the Strategic Petroleum Reserve,
which the President has authority to use, to assist in
relieving economic problems, and here I am quoting from the
legislative history of the most recent reauthorization, where
economic problems ``are directly related to a significant
increase in the price of petroleum products.'' Well, we are
seeing major economic impacts from these price hikes.
The investigation of the Federal Trade Commission that is
now underway has been helpful already. Just the announcement of
the investigation was followed by a significant wholesale price
drop. I don't think that is a coincidence.
In the long term, we need to reduce our dependence on oil.
We should enact greater tax incentives to encourage consumers
to purchase cars, homes, and consumer products which run on
alternative energies. We should increase Federal investments in
renewable energy and natural gas programs. And, by the way, our
Chairman is absolutely right. Congress here is also carrying
some responsibility. This is not just something where we can
point fingers to others. We have responsibility in this area.
Over the past 7 years, Congress has supported only 12
percent of the administration's proposed increases for energy
programs, such as Federal investment in efficient technologies
for our factories and homes, weatherization of low-income
households, technologies to produce biofuels and power from
biomass, and in the case of the Partnership for a New
Generation of Vehicles, which is a partnership between
government and the automobile manufacturers, in order to
produce energy-efficient automobiles, a new class of vehicles
with up to 80 miles per gallon without sacrificing
affordability or utility or safety or comfort.
Just 2 weeks ago, the House cut the Department of Energy's
budget for the PNGV so drastically that it would gut that
partnership. So we do have responsibilities as a Congress, and
we can't just point our fingers at others, although it is
important that we hold others accountable as well.
But the constituents are really being hit hard. Our
citizens, our consumers, are going to have to pay $160 to $170
more for gas this season--the small gas station owner has to
get family members to work because he can't afford to pay
employees, the motel owner who has got to put the vacancy sign
out because people don't want to travel and pay high gas
prices, the trucking companies struggling to cover fuel costs,
recreational vehicle dealers and users who are losing sales and
unable to use their vehicles, farmers whose income may be
reduced by a third because of high gas prices.
So I want to commend our Chairman for his leadership in
this area. It is a critically important area to find out not
only why, but to force action to reduce these prices.
Senator Voinovich. Thank you, Senator Levin.
I also remind the Senator that one thing Congress did do is
give the opportunity for more oil exploration to this
administration, and that legislation was vetoed. And I think
that is one of the things that needs to be talked about in
terms of our overall energy policy. We are concentrating on
some of these other things, but I think that to ignore that
aspect of it that we should be more reliant on our own domestic
supply is something that needs to be dealt with straightforward
during this discussion of an energy policy.
I am pleased to welcome my good friend, the distinguished
Governor of Ohio Bob Taft, here today with us, who is going to
give us the Midwest perspective on the very serious effects of
rising gasoline prices. Governor Taft is a man of great
courage. He was pushed by his legislature to eliminate the gas
tax in the State of Ohio, and he did not do so, understanding
that that money is necessary to maintain our roads in the State
of Ohio and to do the new construction work that is necessary.
I think that was a courageous action on your part, Governor.
We also have with us the Hon. Ernest J. Moniz, Under
Secretary of Energy, Science, and Environment in the U.S.
Department of Energy; Dr. John Cook, Director of the Petroleum
Division of the Energy Information Administration; and Denise
A. Bode, Oklahoma Corporation Commissioner.
We would like to welcome all of you here today, and,
Governor Taft, we are going to call on you first. I understand
that you have got to make a plane, and so we are going to let
you go forward. And, Senator Levin, if you would like to ask
Governor Taft a question or two after his testimony, you will
be welcome to do that.
Governor Taft.
TESTIMONY OF HON. ROBERT TAFT,\1\ GOVERNOR, STATE OF OHIO
Governor Taft. Thank you, Mr. Chairman, and good afternoon.
I am very grateful for this chance to testify today on a
subject that has the attention of motorists and consumers in
Ohio and throughout the Nation. We are here today because
gasoline prices affect everybody, not just the motorists at the
pump, and I commend you for holding today's hearing.
---------------------------------------------------------------------------
\1\ The prepared statement of Governor Taft appears in the Appendix
on page 60.
---------------------------------------------------------------------------
Recent severe increases in gasoline prices in my State are,
to say the least, baffling. In Ohio, the price of regular
gasoline is up approximately 16 percent, from $1.55 last month
to $1.80 today, and, more troubling, up over 50 percent from a
year ago, when a gallon of regular gasoline was selling at
$1.15.
The price of gasoline in Ohio is currently 5 percent above
the national average. Our citizens are demanding, if not
complete answers, at least some rational justification for this
dramatic price increase. Every day I hear from people
throughout Ohio about the burdens of this price increase. I
hear from senior citizens on fixed incomes, like Robert York of
Centerville, Ohio, who wrote to me that because gas is so
expensive, he is forced to choose between going to the doctor,
traveling to the grocery store, or attending church on Sunday.
I have also heard from Cheryl Dolin in Carroll County, a single
mom making $6.50 per hour. For Cheryl, a 50 percent increase in
gasoline prices has placed a tremendous burden on an already
stretched household budget.
The impact of increased fuel prices on our transportation
and business sector is equally dramatic. Just last week, I
heard from Kevin Burch, the president of Jet Express Trucking
in Dayton. His company uses about 4 million gallons of diesel
fuel a year. If diesel prices stay at current levels, Jet
Express Trucking will pay about $1.8 million in higher fuel
costs this year. These are real dollars to a small business
that already operates at close margins.
Ohio roadways carry the fourth largest volume of freight
traffic of any State in the Nation. We provide critical
transportation links east to west, north to south. Interstate
75, which runs from Toledo to Cincinnati, carries $25 billion
worth of goods each year by itself. So these unexplained price
increases are not only penalizing Ohioans, they are also
negatively affecting the Nation's ability to move goods from
one destination to another.
I recognize that motor fuel production and distribution are
very complex processes influenced by a host of factors, and the
most fundamental fact is that ours is a Nation increasingly
dependent on petroleum-based energy. Crude oil prices have
almost tripled since January 1999, and for a Nation that
imports 55 to 60 percent of its crude oil and even imports some
refined products, the impact of foreign price hikes has been
significant.
The Congressional Research Service reports a number of
other factors affecting price increases to some extent, and I
salute your efforts to examine the factors that have
contributed to higher gasoline prices at the pump. I think it
is equally important, however, to recognize that the underlying
realities that affect our gas prices also pose a threat to our
Nation's future prosperity. The most fundamental reality is
this: For a Nation with an economy that is so heavily dependent
on oil, we have no coherent energy policy to reduce our
dependence on foreign oil or to lessen our vulnerability to
rapidly escalating price spikes like this one.
This fundamental failing exposes the fragility of our
Nation's economic and national security, and it is compounded
by the lack of a sensible, coordinated approach to
environmental policy at the Federal level.
I commend the Congress for rededicating itself to the task
of devising a comprehensive energy policy for the United
States, and I hope that the President and the administration
will join you in that effort. I commend Majority Leader Lott,
Chairman Murkowski, and others for introducing S. 2557, which
provides a useful framework to begin work on a truly
comprehensive national energy policy.
We must also develop a sensible national environmental
policy in a manner that complements our energy policy. You, Mr.
Chairman, and also Senator Breaux and others deserve enormous
credit for introducing the Air Quality Standard Improvement
Act, which will provide a common-sense approach to new
regulations under the Clean Air Act, while at the same time
increasing public health, safety, and environmental protection.
This bill comes in response to the current administration's
disturbing history of issuing environmental regulations without
adequately identifying risks to health and with no
consideration of costs and benefits.
Mr. Chairman, as I said earlier, governors across the
Midwest are concerned about high gasoline prices. A number of
citizens have suggested adjusting Federal and State fuel taxes
to ease the pinch of rising pump prices.
As you point out, I have opposed the suspension or
elimination of the Federal gas tax because it is a dedicated
user fee that generates needed revenues for highway safety,
construction, and maintenance. Ohio maintains the fifth largest
system of roadways, the fourth largest in freight volume, the
fourth largest in traffic volume, and the second largest
inventory of bridges in the Nation, and we need to maintain
that system.
Our strategy also relies on revenues from the dedicated
fuel tax which Congress devoted solely to transportation
purposes under TEA-21.
I want to briefly, in conclusion, advise the Committee of
our very serious concerns related to ethanol consumption that I
have discussed on several occasions with the Chairman. We
support the environmental contributions made by ethanol, and we
support the continued use of this fuel. But we have become
aware, as you have as well, that the funding formula adopted
under TEA-21 is determined in large part by our contributions
to the Highway Trust Fund. And because we utilize ethanol-
blended gasoline, we suffer significantly because of the 5.4-
cent-per-gallon Federal tax break on each gallon of ethanol-
blended gasoline sold and the fact that 3.1 cents of the tax is
credited to the general revenue funds and not the Highway Trust
Fund. That means that we are losing 8.5 cents for each gallon
of ethanol-blended fuel sold in Ohio, a total decrease to our
State's trust fund contributions of $185 million annually. So
this is a problem which we are very pleased that the Chairman
is addressing, and we hope your colleagues will join you in
that effort.
Mr. Chairman, thank you for the opportunity to appear
today, and I would be glad to answer any questions you or the
Committee may have.
Senator Voinovich. Thank you, Governor Taft. I am glad that
you raised the issue of the loss of revenue to States like Ohio
because of our significant consumption of ethanol. And one of
the things that I think needs to be looked at when we are
putting an energy policy together is a method to take care of
that situation, perhaps taking the taxes that are generated,
instead of them going into the general fund, have them go into
the Highway Trust Fund.
Governor Taft. That would be excellent.
Senator Voinovich. I think the other thing that is
important that you mentioned today, and so often people forget
about it, is that Governor Taft just recently announced that
our last area of the State of Ohio achieved the ambient air
standards. Frankly, governor, they had achieved that status
before I left the governor's office, but it has taken the EPA
that long to give them the status.
Governor Taft. Right.
Senator Voinovich. And so the entire State today is
reaching ambient air standards, and one of the reasons why is
because we have emission testing in Ohio. We didn't go for
reformulated gasoline. And most Ohioans are not aware that if
the Supreme Court does not agree with the lower court's
decision in the issue of new ambient air standards for ozone
and particulate matter, then all of the major 26 areas in Ohio
are going to go into nonattainment, which means that we may
have to go to reformulated gasoline and many other things in
terms of businesses adding great expense in order to meet those
new standards.
Again, it was recently announced that the oil companies are
going to have to remove sulfur from gasoline, and everyone
applauded that as a great environmental effort. But no one has
paid attention to the fact--and we will have some witnesses
later--that I think it is going to add 6 or 7 cents to the cost
of gasoline. So, too often, what we do is we pass these things
and don't really pay attention to the fact that ultimately
somebody has to pay for it, and there is a balance between our
environmental concerns and our costs and our economy. So I
think those are things that too often get lost here in
Washington.
I would just be interested--I know you are concerned about
the State, and you have heard it all, the pipelines and so
forth. Governor, do you have any ideas on what you would do to
take care of this problem immediately, to get the cost down?
Governor Taft. I appreciate that question, Mr. Chairman. As
you pointed out, we do not use reformulated gasoline in Ohio,
which makes it even more difficult to understand the causes and
the reasons. But certainly I would say we need to develop a
policy that reduces our dependence on imported oil from the
OPEC countries. We are concerned for our economy in the State
of Ohio. We are very dependent on oil, obviously, our consumers
as well as our business economy, and we believe that the
Congress needs to take the lead with the administration in
developing a comprehensive energy policy that is also
consistent with the environmental policy that focuses on
increasing our domestic energy supplies. And there are a number
of opportunities to do so, and some of those are contained in
S. 2557, which Senator Lott has introduced.
But in addition to that, obviously greater energy
efficiency--and we are working on that in Ohio. In fact, we are
experimenting with soy diesel in our Ohio Department of
Transportation vehicles to see if that is a good alternative to
reducing our dependence on imported oil in the State of Ohio.
We also need to seek, obviously, alternatives to petroleum
as well. And I would support any efforts on the part of the
administration to press the OPEC countries to put more oil on
the market. That is certainly the most immediate solution that
would help us in Ohio. But I believe we also need to address
the long-term viewpoint as well. That is just as important.
Senator Voinovich. I would like to make a suggestion to
you. Governors of this country are very, very concerned about
this issue. People forget about that the economic engines of
America are in our States, and your policies have a lot to do
with how competitive your State will be.
It would be interesting if you might ask the National
Governors' Association to put a little group together to look
at this issue and come back to us with some of their
recommendations on how they think that we can do a better job.
Governor Taft. That is an excellent idea, and we will be
meeting in a couple weeks at the National Governors'
Association, and I will take that idea forward.
Senator Voinovich. Perhaps maybe a special task force that
might work with Congress on this issue, because we are going to
need support for this. Too often, these things come to the
floor of Congress, and we don't get the kind of support that we
need from our brothers and sisters out in the State and local
government. That might be a real positive thing that you can do
for us.
Governor Taft. That is an excellent idea, Mr. Chairman.
Senator Voinovich. Thanks very much. I know you have to
leave, and we really appreciate your coming from Ohio to be
with us today.
Governor Taft. Thank you very much. Thank you.
Senator Voinovich. I would now like to call on the Hon.
Ernest Moniz, Under Secretary, U.S. Department of Energy. Mr.
Moniz, we are very happy for you to be here. I am sure that all
of you at the Department of Energy are getting tired of going
to all these hearings, and we are grateful for your input, and
hopefully after this is all over with we will have enough
information where we can start to do some things that are going
to make a difference.
TESTIMONY OF HON. ERNEST J. MONIZ,\1\ UNDER SECRETARY FOR
ENERGY, SCIENCE AND ENVIRONMENT, U.S. DEPARTMENT OF ENERGY
Mr. Moniz. Mr. Chairman, we certainly have had a number of
hearings, but this is a very important issue and we certainly
are willing and happy to support you and other Members as often
as you need to help us solve this problem together.
---------------------------------------------------------------------------
\1\ The prepared statement of Mr. Moniz appears in the Appendix on
page 67.
---------------------------------------------------------------------------
We do appreciate the opportunity, in fact, to come and
discuss once again our energy policy and, of course, also to
hear your suggestion for incarceration. I hope you have a nice
location in mind for our being locked into a room for the
policy development.
The fundamental importance of energy to the Nation's
economic and environmental health has warranted investments by
the administration in a set of policies and a portfolio of
technologies to produce more energy, to use energy more
efficiently, to reduce impacts on the environment, to develop
alternative sources of supplies, and to provide incentives for
private sector advancement towards these goals.
The administration's core principles in energy policy
really are two: First, market forces are the best means of
informing supply and demand and getting the most for the
American consumer; and, second, environmental stewardship and
abundant, affordable energy are quite compatible.
Our commitment to these principles has contributed, in
fact, to the longest period of sustained economic growth in
modern times, while leading to significant progress in a number
of environmental indicators. The reliance on free markets as
the cornerstone of our energy and oil policy is a bipartisan
view. It has been expressed over and over again in the last 20
years as the Congress and the Executive Branch have
systematically removed the Federal Government's authorities to
control oil prices or allocate supply.
Generally with the exception of emergency authorities, the
Congress has taken the government out of the equation and
committed us to the free market principles of supply and
demand. It is in this context that I would like to discuss
briefly the current problems in the gasoline market and the
major features of the Clinton-Gore energy policy.
For the third quarter of this year, there will be 3.5
million more barrels of oil per day on the market than in
March. Production, however, is still being outpaced by near
historic demand levels and the need to rebuild stocks for the
winter heating season. Oil prices remain high and refinery
inventories are low. These are the fundamental reasons for high
gasoline prices.
It is in this context that we have been reviewing the
gasoline supply situation, particularly in the Midwest, where
you and other Members have clearly stated what is obviously a
major problem. I would note that DOE performs gasoline supply
assessments to inform the EPA's waiver process for cleaner
gasoline as opposed to performing any specific price analysis.
The situation, particularly in the Milwaukee-Chicago area,
where gasoline prices are the highest in the Nation, is
affected by the overall high price of crude, but also by other
factors: Higher regional demand than the national average, low
inventories in the region, distribution problems with pipelines
and refineries, high regional refinery utilization rates, and
an RFG formulation specific to the area that is more difficult
to produce.
These supply issues will affect the price of RFG Phase II
and conventional gasoline, but the degree to which they
contribute to price spikes is not yet known.
Because the supplies in the area are tight but adequate,
because the differential between RFG Phase II and conventional
gasoline was so large--up to 48 cents at one point--and because
DOE was not convinced that the factors I just listed were
sufficient to explain this differential, DOE and EPA referred
this matter to the FTC, the appropriate agency to review
specific pricing issues. And it is my understanding that the
FTC will issue an interim report on this matter in July.
Let me now summarize some elements of the administration's
energy policy. Through policy choices and investments, the
administration seeks to address in particular four major
challenges: Maintaining America's energy security in global
markets, harnessing the forces of competition in restructured
energy markets, mitigating the environmental impacts of energy
use, and ensuring a diverse, reliable, and affordable set of
energy sources for the future.
While I discuss each of these challenges in detail in my
written testimony, I will focus here only on the first:
Maintaining our energy security. To address this challenge and
reduce net imports, the administration has supported or
proposed measures to spur domestic oil and gas production,
address the generally high U.S. oil production costs relative
to other regions of the world through advanced technologies,
ensure that we are not overly reliant on imports from a single
region of the world, encourage the world to develop its oil
resources and increase world productive capacity, increase the
size of the SPRO, provide tax incentives for the expensing of
geological and geophysical costs and delay rental payments,
provide deep-water royalty relief, simplify royalty collection
on public lands, and promote the creation of a guaranteed loan
program for small domestic oil and gas producers.
Very importantly, we can also reduce net imports by
focusing on the demand side of the oil equation. Two-thirds of
our oil is used in transportation, so in the spirit of Willie
Sutton's dictum, that is where we should look for demand-side
relief.
Increasing the average fuel efficiency of America's
automobiles by just 3 miles per gallon would save us over 1
million barrels a day. This is why we have invested, for
example, heavily in R&D on more fuel-efficient cars. Our PNGV
program, Partnership for a New Generation of Vehicles, has a
goal of developing an 80-mile-per-gallon prototype automobile
by 2004. This focus is even sharper when we look ahead to world
oil demand in this sector.
For example, take China alone. Projected economic growth in
China has led to the prediction that they will add about 150 to
180 million vehicles on the road in the next 20 years, an
enormous, again, additional demand-side draw.
In addition to technology development, therefore, the
administration is also proposing tax credits to spur
introduction of such advanced clean and efficient vehicles.
These actions are good for the environment, good for energy
security, and good for helping position American industry for a
major export market.
The administration is proud of its record on energy policy
and the demonstrable results in contributing to economic growth
and environmental stewardship. Nevertheless, the volatility in
prices is clearly leading to significant problems for
Americans, certainly in the Midwest, and we remain very
concerned about high gas prices and are doing all that we can
to address this issue within the authorities given to us by
Congress.
The Secretary has called on the Congress to work with us in
a bipartisan fashion to pass legislation to enhance our
national energy security, including extension of EPCA, which
expired on March 31, establishment of a regional home heating
oil reserve, additional tax incentives for domestic oil and gas
production, renewable energy and increased efficiency,
comprehensive electricity restructuring, replenishment of
emergency LIHEAP funds, and funding of energy R&D to reduce
demand, increase domestic supply, produce cleaner energy, and
develop alternative sources.
In fact, I would note, as Senator Levin did, that the House
voted to cut $126 million from the PNGV and $45 million from
the Department's Fossil Energy Program. As noted in my
testimony, these programs support essential energy security
goals on both the demand and supply sides. We appreciate the
Senate's support of these R&D programs. They, together with our
efficiency and renewable programs, have never been more
important than they are today for meeting energy and
environmental goals simultaneously.
We urge the Congress to pass these proposals, and if we are
going to meet the Nation's energy needs in the 21st Century, as
you well know, we have neither the time nor the energy to
waste.
Thank you, Mr. Chairman.
Senator Voinovich. Thank you.
I am really glad to hear what you had to say today, but I
can't help but thinking back to February 16, when gas prices
were in the midst of their march upward, that the secretary of
your agency said, ``The Federal Government was not prepared; we
were caught napping; we got complacent.'' And in all due
respect, I think some of the things you have talked about today
are very, very worthwhile and we should study them and
incorporate them into an energy policy for our Nation.
The question you have to ask is: Why didn't we do this 6 or
7 years ago? And I think it just underscores the
administration's responsibility to try and work with Congress
between now and the end of the year to participate in a
bipartisan way of putting some policy together that we can be
supportive of.
You mentioned the issue of exploration--there has been one
initiative after another that has been shot down because of
pressure on the administration not to do these things. And,
again, ANWR, for example, we have been up in Prudhoe Bay, the
technology has increased, but these become symbols of, well, we
are not going to do that, this is going to hurt the
environment. But we never talk about the other side of it, that
right now it is hurting the people at the gas pump. It could
have been done 5 years ago, 6 years ago, and that oil could be
flowing today in this country.
We never talk about the fact that when we talk about some
of these environmental things about the defense of our Nation
and the vulnerability that we are. The man that was here before
you mentioned 65 percent reliance on foreign oil by the year
2020.
We have a serious problem here, and I think we need to talk
about it, and we need to balance out the environmental concerns
that we have in this country with the economic and with the
national security interests.
Mr. Moniz. Shall I respond later on?
Senator Voinovich. Pardon me. Senator Akaka is here.
Senator, would you like to make a statement or would you rather
hear the witnesses and then ask questions?
Senator Akaka. Well, I would like to make a statement.
OPENING STATEMENT OF SENATOR AKAKA
Senator Akaka. Mr. Chairman, I want to thank you very much
for holding this hearing. It is not only important to us but
important to the Nation, and what we have been experiencing has
been something that is extraordinary, I would say.
I want you to know about how we feel in Hawaii. Let me tell
you that for most of the 1990's, the average Honolulu price
based on a weekly survey hovered roughly 25 cents to 50 cents
above the national average. And in June 1999, only 1 year ago,
Hawaii's $1.51 per gallon was ranked above Oregon's $1.44 and
the national average of $1.14.
As late as last month, according to Automobile Association
of America, Hawaii topped the Nation with an average per gallon
of $1.85 compared to the next highest State, Nevada, at $1.67
and the U.S. average of $1.51.
Now, this month, according to AAA, Hawaii ranked fourth
highest, with an average price for regular unleaded of $1.86.
That fell below Illinois with an average of $1.98, Michigan at
$1.96, and Wisconsin at $1.91.
Still, Hawaii's average price is well above the U.S.
average of $1.63, and it is no pleasure for me to say that
Hawaii has lost its dubious distinction as the State with the
Nation's highest gasoline prices. The pocketbooks of Americans
are hurting all over the country, and that is what we are
addressing at this time.
Mr. Chairman, I am pleased that you called this hearing, as
I said, and we must know why a region of the country was hit
with such high price spikes in such a dramatic manner. We must
not let this happen again to the Midwest or any other region of
the country. The rise in gasoline prices hits Americans in an
extremely uneven manner. Those who can afford it the least are
affected the most. Our import dependence has been rising for
the past two decades. The combination of lower domestic
production and increased demand has led to imports making up a
larger share of total oil consumed in the United States.
We all understand that there is no overnight solution to
America's energy problems. We can't turn this trend around
overnight. Tax repeals and other such short-term actions may
appear appealing given the political climate and may even help
American pocketbooks in the short run. But they do not provide
a solution for our energy problem.
For me, the only way to reverse our energy problem is to
have a multifaceted energy strategy and remain committed to
that strategy. In my judgment, Mr. Chairman, you need both of
these in equal portions, and this, I think, would send a clear
message to OPEC and their partners about America's resolve.
I am so happy you are having this hearing, Mr. Chairman,
and I thank you for it, and I want to hear the witnesses. Thank
you.
Senator Voinovich. Thank you, Senator Akaka.
Our next witness is Dr. John Cook, Director of the
Petroleum Division of the Energy Information Administration.
Dr. Cook, I want to say that the work that your organization
has done has just been terrific, and it has been very helpful
to me and, I know, other Members of the Congress. We thank you
very much and thank you for being here today.
TESTIMONY OF JOHN COOK,\1\ PH.D., DIRECTOR, PETROLEUM DIVISION,
ENERGY INFORMATION ADMINISTRATION, U.S. DEPARTMENT OF ENERGY
Dr. Cook. Thank you, Mr. Chairman. I have a lot of good
staff to thank for that.
---------------------------------------------------------------------------
\1\ The prepared statement of Mr. Cook with attachments appears in
the Appendix on page 89.
---------------------------------------------------------------------------
I would like to begin today by thanking the Committee for
the opportunity to testify on behalf of Mark Mazur of the
Energy Information Administration.
With gasoline prices currently averaging about $1.66
nationwide, compared to just $1.11 last June, indeed, consumers
do want an explanation. It is our view that this summer's run-
up, like other recent oil price spikes, stems from a number of
factors, including tight crude markets, resulting in low crude
and product stocks and high crude prices, from pipeline and
refinery problems, relatively strong demand, and a difficult
transition to summer-grade Phase II reformulated gasoline, or
RFG.
Crude oil continues to be a significant factor in
explaining these increases. As you know, crude oil prices have
risen from about $10 a barrel in December 1998 to about $34
recently. While $34 is far from the inflation-adjusted $70
historical high seen in the early 1980's, for many the pace of
these increases may be as disruptive as the higher absolute
levels. Regardless, crude increases have contributed about 33
cents to the increase in gasoline.
In turn, these crude oil prices are up as a result of the
shift in the global balance between supply and demand. Crude
markets tightened in 1999 as OPEC and several other exporting
countries reduced supply, while at the same time economic
recovery in Asia stimulated demand growth. As a result, crude
oil and product inventories fell, and by the end of 1999,
global inventories were at very low levels, especially here in
the United States, as shown in Figure 1 on the right-hand
side.\1\
---------------------------------------------------------------------------
\1\ Figures 1 and 2 appears in the Appendix on page 94.
---------------------------------------------------------------------------
Last year, as markets tightened, crude oil prices rose
faster than product prices, squeezing refinery margins,
discouraging refinery production, and thereby adding to
downward pressure on inventories. Figure 2 shows that in June
of last year,\1\ the difference between wholesale gasoline
prices and crude prices averaged less than 6 cents a gallon.
This is compared to the more typical 10 to 12 cents a gallon
seen typically in June. This year, however, by the spring, low
crude and product stocks generated much higher product prices
relative to crude oil. Where these margins were low last year,
they are now high at about 20 cents a gallon, or 14 cents more
than last year. To put it another way, low gasoline inventories
are probably adding about 10 cents a gallon to the price of
gasoline over what we would normally expect for this time of
year. Yet some regions have experienced much higher prices than
the 47-cent calculation I just implied.
EIA has pointed out on numerous occasions that very low
gasoline stocks combined with a market short on crude oil
generates an environment ripe for price volatility, both during
the spring and the peak summer periods. The West Coast
experienced such volatility in February, and the Midwest
erupted in May. Several pipeline and refinery problems caused
already low stocks in the Midwest to fall 13 percent below
their 5-year average, while at the same time U.S. gasoline
inventories were only 5 percent below average in May.
With inventories in the Midwest at extremely low levels,
prices were bid up rapidly, as marketers scrambled for limited
supplies of both conventional and reformulated gasoline. As we
know, reformulated gasoline in the Chicago and Milwaukee areas
drew most of the attention initially, as these prices increased
more than 30 cents over conventional.
As shown in our last figure, the jump in Midwest
reformulated prices appeared similar to surges we saw earlier
this year in California and have seen frequently since the
start of that State's reformulated program.
There are several reasons for this strong price response.
First, the Midwest reformulated market is very small, only
about 13 percent of all Midwest sales. This very limited size
limits nearby supply options.
Second, this was the first year of the Phase II of the
reformulated program, and it is very clear from our research,
our field work, that some refiners had added difficulty in
making this transition to the summer grade. It is a more
difficult product to make, and it does cost more to do that.
In the Midwest, as you know, ethanol is used to make
reformulated gasoline, which requires a unique blend of
gasoline components with very low vapor pressure.
Finally, as I said, with few alternative sources of readily
available supply, it simply takes time for any added supply-
demand imbalances to be resolved. The reformulated markets in
the Midwest and California are alike in that they are isolated
and use unique gasoline blends. As such, supply problems cannot
be resolved quickly.
Today the U.S. refinery system has little excess capacity,
and the growth in the number of distinct gasoline types
increases the potential for extended supply disruptions.
Fortunately, wholesale prices in the Midwest began
declining more than a week ago, reflecting increasing supplies.
Midwest stocks have increased 13 percent over the last 4 weeks,
and in response, reformulated retail prices have fallen over 12
cents a gallon while conventional is now down about 7 cents.
Much lower wholesale prices indicate we could see further
declines barring any more pipeline or refinery problems, and
since retail prices normally lag wholesale prices, both when
prices are rising and when they are declining, we can expect
Midwest retail prices to fall further, barring any more supply
problems.
In closing, while the first hurdle of the transition to
summer-grade gasoline is behind us, we may experience more
volatility before the summer is over. As we enter the peak
season, refiners will be pushing production to the limit to
meet demand. With low stocks and refineries operating at high
utilization rates, any more supply disruptions can trigger yet
another price run-up.
That concludes my testimony. I would be happy to answer any
questions.
Senator Voinovich. Thank you, Dr. Cook.
Ms. Denise Bode, thank you for being here today.
TESTIMONY OF DENISE A. BODE,\1\ VICE CHAIRMAN, OKLAHOMA
CORPORATION COMMISSION
Ms. Bode. Thank you. I appreciate the opportunity, Mr.
Chairman. I am Denise Bode, and I am Vice Chairman of the
Oklahoma Corporation Commission.
---------------------------------------------------------------------------
\1\ The prepared statement of Ms. Bode appears in the Appendix on
page 96.
---------------------------------------------------------------------------
Mr. Chairman, having worked in energy policy my whole
career, I am here to try to tell you as much of the facts as I
know it, having worked through these processes and with these
policymakers, many of whom I know back here in the audience, on
energy policy to try to prevent us from being in the situation
that we are right now. And so I am going to try to give you as
clear a picture as I can as to how we got to where we got. And
since you are focused on this administration, I will focus on
this administration. But let me tell you, as you stated, the
blame can go beyond this administration and the blame also lies
with this Congress. And I think we have got to go through the
historical perspective, and then I will give you some ideas as
to what I think we can do short term and long term to try to
solve the problems.
Senator Voinovich. Great.
Ms. Bode. OK. To understand how and why America is at risk,
first understand that there is not a free market in the
traditional sense when it comes to oil. There never has been.
My friend Dan Yergin's book on oil, ``The Prize,'' articulates
convincing rationale that all markets have always been
manipulated, first by the Standard Oil Trust, then through our
government through pro-rationing and price controls, and
finally by OPEC through the producing-nation quotas. Oil-
producing countries manipulate oil inventories for politics as
well as for their own economic gain. Our reliance on foreign
oil has gone from 34 percent during the 1974 Arab oil embargo
to 44 percent at the beginning of this administration, to close
to 60 percent today. In fact, the dependence on oil imports has
grown twice as much in this administration than during the
previous 20 years.
The problem is that each time the OPEC cartel manipulates
oil supply to create shortages or to flood the market, it
causes price shocks, making the domestic oil industry a less
stable business, driving away investment, terminating qualified
employees, destroying valuable infrastructure, both exploration
and refining. And it forces more of U.S. production, 40 percent
of which is marginally economic to be plugged, to be lost
forever. It is so serious now that even with the latest OPEC
price increases, domestic producers are not drilling new wells.
Of approximately 800 rigs drilling, less than a third of them
are drilling for oil, and these price shocks, as you all well
know, impact consumers as well, making it impossible for a
family or a business to budget without knowing whether their
gasoline is going to be 70 cents a gallon or $2 a gallon.
Let me run through a chronology of events and responses by
this Executive Branch since 1992 that have brought us to the
dire straits we find ourselves in today.
In 1993, at the beginning of this administration, the OPEC
cartel had increased production. Oil prices in the United
States fell below $13 a barrel and imports had risen to 44
percent. The IPAA, which I was president of at that time,
petitioned in March 1994, under Section 232 of the Trade
Expansion Act, for an investigation into increasing oil imports
and asked for action by the President. Since the Eisenhower
Administration, this Trade Expansion Act has been used to
affect American energy policy relations with the world. A
bipartisan group of members of Congress, Democrats and
Republicans alike, met with the President personally in the
White House and asked him to enact, to propose, to support an
energy plan that would maintain a strong domestic production
and refining option.
In fact, that bill that they proposed looks very much like
S. 2557. It said to the American industry, yes, we need your
investment here in the United States so that we can have a
domestic oil option.
But no action was taken on their plan. A year later a
Presidential finding of a national security threat was finally
issued. No new action there. But the Presidential finding did
warn us of what we would be facing without action.
Specifically, it said, ``The United States and its allies may
find themselves constrained from pursuing . . . foreign policy
actions for fear of provoking producer countries into actions
that could result in the manipulation of oil prices and
increased prices for consumer countries.''
Even after that Presidential finding, no action was taken.
During that time, domestic oil production dropped by over
500,000 barrels a day, imports accelerated, and 75,000
Americans lost their jobs.
Congress did take the initiative to enact one item in their
plan, a royalty holiday on Gulf of Mexico deep-water drilling.
This new production, let me tell you, stopped the decline in
domestic production by 1997, clearly demonstrating that we do
have the ability to spur domestic production.
But the most significant energy policy initiated by the
administration during that time was initially a Btu tax, which
ended up being a 4.3-cent increase in the gasoline tax.
The OPEC cartel clearly understood that American energy
policy in this administration was based on instant
gratification, seeking low gasoline prices from foreign sources
and ignoring future consequences with a foreign cartel in
charge of our transportation fuel and our prices. In 1997,
members of OPEC acted to consolidate their control of the
American market by increasing production and reducing world oil
prices to historic low prices. Of course, everybody liked the
low prices. Of course, there are other economic factors they
hadn't adequately predicted that drove the price down even
beyond their control. But the United States took no action.
Thirty thousand Americans lost their jobs. Domestic oil
production went from holding steady to a 5 percent decline, an
incredible drop of another 600,000 barrels today. Today we only
have 153 refineries, down from 198 in 1990. Members of Congress
clamored for another investigation of the threat to our
national security of oil imports. The second Presidential
finding in this administration was released at the end of
March, again finding an increased national security threat. No
action has been taken.
There has been a recommendation now to take some action,
but, again, no action has been taken. But 28 States have taken
the initiative, including my State, with incentive programs for
production. Ohio has taken action with encouragement for
domestic producers.
The Clinton Administration says they were ``caught
napping'' when fuel prices jumped. I would suggest otherwise.
With two Presidential findings of national security risk in
hand--and let me tell you, DOE has been clamoring trying to get
the attention of the administration. But they are not
listening. They knowingly put American consumers at risk for
these high prices with the foreign policy of looking to OPEC
for more oil imports and gasoline instead of acting to
stabilize domestic production and refining capacity.
Senator Voinovich. Ms. Bode, would you please summerize----
Ms. Bode. Yes, absolutely. And I have a much longer
statement that I would like to be included in the record.
A lot of folks have talked here about what has been
happening in the Midwest. Oklahoma is part of that PADD2
distribution region, so our prices were spiking, too. We looked
into it. There is a tremendous amount of complicated
infrastructure issues that are being resolved right now.
Gasoline prices are continuing to fall. Hopefully we have
learned lessons in regulatory policy from this government-
caused disruption.
But that is a smaller, more temporary matter. The much more
important fundamental issue is whether we as a Nation have
learned the importance to our national security and economy of
maximizing domestic refining and production options. If we have
not learned the fundamental lesson, this episode will be
replayed in the future with even more costly effect.
Senator Voinovich. Thank you very much.
I think, Ms. Bode, one of the things that you mentioned
that is interesting that is hard for Americans to understand
because we are used to thinking of things one way, and when we
are asked to think of them another way, it is sometimes hard
for us to understand, particularly when it may cost us more
money. When the oil prices went way down, they dramatically
impacted upon many of the U.S. domestic producers of oil, and
that if we are going to maintain our domestic producers, the
marginal producers, ``the strippers'' that some people refer to
out there, you need to maintain a certain level per barrel in
order for them to stay in business.
One of the things that we perhaps ought to look at is
working it out so that when that price does fall way down
there, that there is some kind of incentive for them to stay in
the business and not just disappear.
I would like you to comment on that so that people can
maybe understand that concept, because I think what you said
was that when the price goes so far down, hooray, but what you
are doing is you are making yourself a lot more vulnerable so
that later on somebody could take advantage of you because you,
in effect, have eliminated part of the supply.
Ms. Bode. Absolutely. And I think most Americans understand
that, the concept. They are not saying that they have to have
absolutely 25-cent gasoline. They are just saying don't whipsaw
us like this so that we can't even plan--from 70 cents to $1.80
all in the period of a year. I think people understand you have
to be able to at least break even or make a little profit on
producing oil and gas, and that is all I think folks have been
talking about.
But one of the things that I think is fundamentally
important that you mentioned is that there be some stability.
And, in fact, one of the things we did and many other States
did in putting incentive packages together was to drop the
gross production tax, which is the State tax on oil and gas
production, dropped it almost to zero whenever oil prices fall
below $14 a barrel. And that provides a stabilizing effect so
people know that there is going to be encouragement to continue
to invest and stay in business. It is not the government
saying, well, our policy is basically we are going to get all
our oil from overseas, because that is a strong message to stop
doing business here in this country, and, in fact, that has
been the result.
Senator Voinovich. Well, if you noticed, I suggested to
Governor Taft that he might go back to the National Governors'
Association. As a former Governor of Ohio, I don't know whether
it happened during my administration. If it did, wonderful. If
it happened under another, God bless. But the fact is that you
are pointing out that even States can get into the act in terms
of making more production available.
Ms. Bode. And they have.
Senator Voinovich. There is the issue of refineries, and I
think you said that at one time we had 198 refineries, and now
we have 153, and I understand there hasn't been a refinery
built in this country in the last 25 years.
I would like some comment from the witnesses on why that
is, and do you believe that if we are going to have an energy
policy that issue should be addressed? And should we build more
refineries in the United States? You might even comment, if we
haven't, why have they closed and why aren't people building
more of them if they are needed?
Ms. Bode. I would be glad to respond. I think obviously we
have much stricter government regulation of refineries,
environmental regulations and other things that--we have the
most strict environmental regulations in the world on our
domestic industry. And that is because we care about the
environment, we care about health and safety, and that is good.
But the problem is we need to evaluate how to balance that and
the cost of those regulations with the needs of the country in
building infrastructure, because, let me tell you, it is
pseudo-environmentalism to say that it is better not to have
domestic production and refining in this country than to ship
it in on tankers. At 60 percent oil dependence, we are talking
about 10,000 tankers coming into American ports, and anybody
will tell you, particularly the Coast Guard, that that is a
much greater threat to the environmental health of this country
than drilling for oil and gas under our very strict
environmental standards and refining oil under our standards.
So those are some of the--and the loss of domestic production
of oil, I think, has caused refineries to say, well, heck, we
are not really needed to do business in here, and refined
products coming in is another reason, I think, that
fundamentally people have said, well, we will refine offshore
because it is cheaper to refine offshore. Imported products
coming in is another factor.
But I think we should have an area at the Department of
Energy, frankly, that focuses on refineries and that looks at
our infrastructure on a regular basis and that we should focus
on these issues and come up with a list of what we can do to
encourage refinery upgrading and standards as opposed to
putting new rules in place that basically run them offshore.
Because if you have refineries close to your markets, you are
going to be able to provide the product whenever you have these
short-term problems. Otherwise, the problem in the upper
Midwest and Chicago is that because they only can provide about
75 percent of the capacity for gasoline they need, it has to be
piped up from the gulf. That product has to be piped up. If
there is any disruption along the way and if anybody else needs
all these different flavors of gasoline, then you are not going
to be able to get it to the marketplace. So localized
refineries are fundamentally important to the distribution
system.
Senator Voinovich. What is interesting is that I think,
again, when we think about the environment and we are saying,
gee, we don't want to have the oil exported--or we don't want
to have the refineries here because we are concerned about the
environment, I doubt seriously that anyone gives any
consideration that it has got to be refined someplace, and if
it is coming over here in large boats--there is a jeopardy to
the environment in terms of spillage, what we have seen over
the years.
Ms. Bode. The greatest threat.
Mr. Moniz. May I just add to the refinery question?
Senator Voinovich. Yes.
Mr. Moniz. Thank you, Mr. Chairman.
First, of course, we certainly agree that we would like to
see additional refining capacity in the United States, but I do
want to note that although it is certainly true that the number
of refineries has reduced, we should emphasize as well that
there has been a significant increase in capacity of the
remaining refineries, largely driven by new technology
developments. There has been a consolidation in the industry.
Clearly, there has been a problem in terms of the profit
margin, which is one of the reasons we don't see more refinery
development, and that, again, adds to something that Ms. Bode--
and I think you have also said--that one of the real problems
right now, in addition to the too high level of cost in terms
of oil, gasoline, etc., is the volatility. The volatility--the
ups and downs, the rapid changes--makes life difficult for
everyone from consumers to people in the refining business,
etc.
Finally, Ms. Bode suggested that the Department of Energy
deal more with the refining industry, and I just would note
that we do. We have several programs, for example, a couple of
new programs.
First, we have before the Congress this year a proposal
called ultraclean fuels. It is precisely to work with the
refining industry in developing the technologies to meet the
increasing environmental needs and developing new petroleum-
based fuels. The Congress I think is looking well on that
proposal, and we appreciate it.
Second, we have an important program in the Industries of
the Future Program, working with refineries to reduce their
internal energy costs, therefore improve their posture.
Senator Voinovich. Can I ask, do we need more refineries?
Mr. Moniz. Yes. Right now our refining capacity is really
being pushed to the limit. We are about 96 percent utilization
today across the country.
Senator Voinovich. If you are not able to answer this, I
would be interested in finding out the answer. If you looked at
where we are today and you had to calculate based on the
refinery technology that is available today and the average
refinery, whatever it would be, is one, two, five, or ten
refineries?
Mr. Moniz. I am sorry?
Senator Voinovich. In terms of the additional refineries,
if we need more, approximately how many more would we need in
order to be competitive?
Mr. Moniz. Well, the issue is that--and maybe John Cook
could actually expand on this--clearly we anticipate demand
growing at somewhere between 1 and 2 percent per year in terms
of domestic use.
Senator Voinovich. It is interesting, I read that several
years ago China was exporting oil. Today they have become a
major importer of oil.
Mr. Moniz. Yes.
Senator Voinovich. In other words, we in the United States
are kind of provincial in our thinking, and what is happening
is that the market is growing by leaps and bounds around the
world, and as a result of that, we may have to reevaluate the
traditional way we have approached some of these things, for
example, saying, we are going to have to do more of our
refining here because of what is happening.
Dr. Cook, would you like to comment on that? I am about out
of time.
Dr. Cook. Sure. I think they have covered it pretty well.
When we hit peak demand in July or August, utilization rates
may hit 98 percent. Some areas, the Chicago area is already at
99 percent, pretty close to flat out. The Gulf Coast and West
Coast refineries often run at peak, at pretty much flat out.
So, as was stated, if demand is going to rise 1 or 2 percent a
year, just to maintain this volatile, very little excess
capacity situation, it has to grow by that amount. And we need
a cushion, another 4 or 5 percent or so.
Senator Voinovich. What I would be interested in is if the
experts looking at it say, objectively, this is what we ought
to have in order to deal with it, because what I understand, in
the Midwest we had this lack of refining capacity, then we had
the reformulated gasoline, which, Mr. Perciasepe, I think it
was mandated in those towns by the EPA. They had to have
reformulated gasoline. Was it mandated----
Mr. Perciasepe. It was mandated by Congress in 1990 that
the cities with those specific classifications are required----
Senator Voinovich. Had to have--OK. So, right, Congress,
you are implementing it.
Mr. Perciasepe. You had the option in Ohio when you were
there to----
Senator Voinovich. We took the option. We did emission
testing and didn't go for reformulated gasoline. But a lot of
them were mandated.
Ms. Bode. The date of implementation was set by EPA.
Senator Voinovich. But the fact is that also was a problem,
that this was coming on. You had the refinery capacity, and as
a result of that, that interfered with the flow of oil coming
into the area. Is that right?
Dr. Cook. In my view, that is exactly right.
Senator Voinovich. I have had a chance. Senator Lieberman.
Senator Lieberman. Thanks, Mr. Chairman. I thank the
witnesses. I apologize that I had to be out for a while to go
back for a meeting in my office, but I followed your prepared
testimony. I do have some questions.
Dr. Cook, you put up a chart, which I have as Figure 2,\1\
components of gasoline prices. And I was interested in looking
at it, and this is a comparison of June 1999 to June 2000--
$1.11 in June 1999, and $1.63 in June 2000. But what interested
me is that the biggest percentage increase, almost quadrupling,
was in the refiners' contribution to the cost per gallon of
gasoline, the refiners' share of that, because most of the rest
resulted from the jump in the price of crude oil. Distribution
and marketing is a little bit larger but not that much; tax is
about the same.
---------------------------------------------------------------------------
\1\ Figure 2 appears in the Appendix on page 94.
---------------------------------------------------------------------------
So why did the refiners' share of the cost of a gallon of
gasoline quadruple in a year?
Dr. Cook. Well, again, to keep it short, the very low
gasoline stocks, strong gasoline demand, it is not unusual when
these rare circumstances occur that this will put extra
pressure at that refining level on wholesale prices. Typically
in the spring, refiners are doing maintenance. Their gasoline
production is not at maximum levels. Gasoline demand will start
to rise as we move into the driving season. And that tighter
balance will reduce stocks a little bit and raise gasoline
prices relative to crude maybe a nickel or so. But with these
extremely low stocks, especially in the Midwest, and with very
strong demand, that tightening process was just much more
severe and raised the margins more than they normally would go
up.
Senator Lieberman. Do you have a basis for making a
judgment yourself--or I don't know whether you, Secretary
Moniz, wanted to say anything--for whether this is fair? This
looks like an awful large percentage increase for refiners
compared to other contributions to the cost of a gallon of
gasoline. Does it look fair to you?
Dr. Cook. Well, it is extremely high, but it is important
to remember that throughout the 1990's these refining margins
were very poor, and especially in 1999. In 1999, with crude oil
prices rising much faster than product prices, you had those
almost nonexistent margins, and that is largely the reason that
production failed to keep up with demand and we got these low
stocks. They do have to make a healthy margin to encourage the
extra production.
I will let someone else comment on what is fair. They are
very high.
Senator Lieberman. They are high. I suppose it would be
fair to say that the Federal Trade Commission may be commenting
on whether these increases at the refiner level are fair or
whether they do amount to price gouging or something else.
I have been hearing about what was described as just-in-
time inventory practices of the oil companies and the
refineries, and I guess it is taking the concept that is quite
fashionable and productive in industry where you have just-in-
time inventory so that you are not carrying large inventories
unnecessarily for long periods of time, but you use computers
and sensible management to bring in the parts that you need as
you need them.
But when you apply this--and this has been a change, I
gather--in the oil industry, it becomes a ``heads I win, tails
you lose'' deal because if they are right in their projection
of the inventory they are keeping, which presumably will be
modest or more modest than it would otherwise be, then it is
OK, they make what they would make. If for some reason there is
an increase in demand, then, of course, they benefit again
because supply is low as a result of that practice.
That is my personal layperson's reaction to this. There is
nothing illegal, as far as I can tell, about just-in-time
inventory, but they are stacking the deck, to mix my metaphors
here, against the consumer by this policy. And I just wonder
from your review of the data whether there is any causal link
between just-in-time inventory practices and increased price
volatility of gasoline and, during the winter season, home
heating oil.
Dr. Cook. This concept was very popular in 1996. People
attributed the low stocks, even within the industry, to this
practice. I think we saw that debunked in 1997 and 1998 when we
had very low crude stimulating a very favorable economic
environment for refining, and cheap crude turned into cheap
product. We had tons of stocks.
Senator Lieberman. In other words, the refiners did buy
more based on the lower world price.
Dr. Cook. Yes.
Senator Lieberman. And, therefore, the inventories were up.
Dr. Cook. Yes.
Senator Lieberman. OK.
Dr. Cook. Cheap crude eventually filters down into cheap
products. It is complicated, but, that is a fair statement.
So now we have high crude and the reverse situation. It
just basically discourages, with weak margins and what is
called backwardation, excessive product production.
The just-in-time inventory concept you might think of as
just the normal business practice that anyone has of wanting to
hold down their inventory costs or any other business costs as
much as they can.
Senator Lieberman. Yes.
Dr. Cook. But I view it as an exacerbating factor. It is
mainly the refinery economics.
Senator Lieberman. Yes, I hear you. What I am concerned
about is--and I understand that there would be a natural
economic incentive as the world price of oil goes higher to buy
less, hoping it will go down. But my question is--we have been
following your numbers on home heating oil stocks now because
we have an obvious concern that the crisis in the Northeast is
going to be repeated again next winter. And your numbers show
that the home heating oil stocks now are lower than they have
been in the past than I would say they should be, so we are
rapidly heading toward, are methodically, unfortunately,
heading toward another winter in which if the weather is colder
than we expect, the prices are going to shoot sky high.
Of course, I wonder about the same thing as we approach the
gasoline driving season. I understand that the price of world
crude is up, but can't you really predict or can't they predict
driving--gasoline demand is going to go up as we get to June,
and that their stocks have been lower than predictable demand
would be. This is probably even more predictable--it is more
predictable than whether the winter is going to be cold or not.
So my concern is here--and from your data, I wonder if you
can either shed some light or tell me I am wrong or right--that
they are keeping the inventory lower than in the best of
circumstances we would want it to be. And I understand they are
in a business, but you would hope for a certain amount of
sensitivity to consumer cost along the way.
Dr. Cook. Again, I think that limited excess refining
capacity is part of the problem. When stocks fell over the
winter for gasoline now to extremely low levels, even when the
conditions improved, personally I believe refiners made every
effort they could to crank up as high as they could and as
quickly as they could, but they ran into a lot of refining
problems, which occurs when you try to run at high rates.
I don't think there is enough capacity to catch up. That is
the problem here. When you get behind and you have to meet
gasoline demand and you have to meet diesel and heating oil
demand and restock from low levels, there is just not enough
capacity to do that. I don't think they are holding back. I
think the economics now are wildly favorable to maximum
production, and anybody that can produce the product will do
it.
Senator Lieberman. Will do it; they are catching up. Thank
you, Dr. Cook.
I wonder, Mr. Chairman, if I could ask Mr. Perciasepe to
come to the microphone. I just want to ask him in the time I
have this one question, if he would come to the table.
Senator Voinovich. I have no objection; it is on his time.
Senator Lieberman. Yes, sir. Thank you. The question is the
broad one, which is, there are clearly those who would place
much of the blame for high gas prices on environmental
regulation, specifically the reformulated gasoline requirement.
In fact, I think the representative from the American Petroleum
Institute, who is testifying on the next panel, is going to
call--at least he called in his written testimony for the
repeal of the RFG oxygenate requirement.
I wonder, Mr. Perciasepe, if you think the reformulated gas
requirement is responsible for some or most of the price
increase. And given your review of the situation, has EPA been
able to account for the entire increase in the Midwest, or is
there some portion of it still that you can't attribute to the
factors suggested by others, including the oil companies?
Senator Voinovich. Would the witness state his name and the
organization that he represents for the record?
TESTIMONY OF ROBERT PERCIASEPE,\1\ ASSISTANT ADMINISTRATOR FOR
AIR AND RADIATION, ENVIRONMENTAL PROTECTION AGENCY
Mr. Perciasepe. Yes, sir, and I am sorry I didn't do that
when you asked me when I was in the seat before. My name is Bob
Perciasepe. I am the Assistant Administrator for Air and
Radiation at the Environmental Protection Agency. Again, I
appreciate the question. I will try to give a general answer. I
am sure it will generate more questions.
---------------------------------------------------------------------------
\1\ The prepared statement of Mr. Perciasepe appears in the
Appendix on page 101.
---------------------------------------------------------------------------
Our analysis continues to be that when you add up the
additional cost of Phase II RFG on top of Phase I, which took
effect in 1995--and which had a mere cost of around 3 to 4
cents per gallon. When you add both of them up together, it is
about 4 to 8 cents impact on the cost of producing gasoline.
And we have not seen any evidence that that cost should be any
different. That cost range includes the cost of making the
reformulated gasoline with ethanol, and so there has never
been, back to 1993 when these regulations were enacted, a sense
that it would be a free program. And I want to be clear about
that, and I think everybody recognizes the balancing act that
everyone has talked about here.
Senator Voinovich. Mr. Perciasepe, I can tell you that we
did in Ohio. It was a question of whether we were going one
direction, emission testing, or in another direction,
reformulated gas. I figured it was going to cost my people in
Ohio more money and that the estimate of what it would be would
be probably more.
Mr. Perciasepe. Right. The actual cost of producing Phase I
RFG turned out to be less than the estimates in the 5 years
that it was implemented, and that is a tribute to the American
refining industry who was able to do that.
The current situation in the United States, looking at
today's retail prices, if you take out Chicago and Milwaukee,
the average cost of RFG in the United States is roughly
equivalent to, on average, the cost of conventional gas in the
United States. Remember, conventional gas is about 70 percent
of the gas in the United States; RFG is about 30 percent. The
Chicago and Milwaukee market is about 3.4 percent.
Now, if you look at Chicago and Milwaukee, what has
happened over the last 14 days is the wholesale price for RFG
with ethanol in it has dropped 47 cents. That has not been
reflected at the retail level. If half of that or a third of it
or some of it is reflected at the retail level, the prices in
these cities would be very similar to what it is in the rest of
the country. And the differential between conventional gasoline
and RFG at the wholesale level, off the rack where the trucks
fill up, is less than a penny in Chicago and 7 cents in
Milwaukee. And those are pretty much what we would expect--
those are within the range that I mentioned earlier. Obviously
one is lower.
Now, cost to produce is not price, and I want to be clear
about that. My point is that there are other things going on
that are affecting the price, not the cost of producing. And we
see that stabilization in the entire country now that these
wholesale prices are stabilized. We now need that pricing
reality to move onto the retail level so the consumers can be
relieved of whatever happened in early June to cause prices to
reverse.
Senator Voinovich. I think the time is up.
Senator Lieberman. My time is up. I thank you, Mr.
Chairman. Thanks, Mr. Perciasepe.
Senator Voinovich. Thank you.
We have some other Senators here. I am going to follow the
early-bird rule, and I think, Senator Levin, you were here.
Senator Levin. Mr. Chairman, thank you.
While Mr. Perciasepe is there, if you could just stay there
for a minute, you have analyzed some of the reasons--EPA has
analyzed some of the reasons which have been given for the huge
increases in prices in Michigan, Illinois, and Wisconsin, five
factors: Higher crude oil prices, use of ethanol in
reformulated gasoline, pipeline problems, low inventories, and
the patented RFG process.
Have you found that any of those factors or all of them put
together can explain the 80-cent increase over 7 weeks in the
price of gasoline in Michigan, Illinois, and Wisconsin?
Mr. Perciasepe. We have been asked by many to grant a
waiver for the reformulated gasoline program, particularly in
the Chicago and Milwaukee area. So pursuant to our analysis to
see whether there indeed is a supply problem, that there was
not the clean-burning gasoline available to be sold, whether it
be at the retail or at the wholesale level, we worked together
with DOE to look to see what the supply situation was. And I
think you have already heard reported here by Dr. Cook that the
supply in the entire Midwest PADD was tight, and in particular,
when we looked at the Milwaukee and Chicago area with field
teams, we found that it was tight but adequate to meet the
demand that was available. Nobody ran out of gasoline.
And so when we looked back to see what the issues were, and
we met with the oil industry, they brought up some of these
issues. We have pursued every one of them vigorously. And,
again, there are inadequate explanations in terms of equating
that large of a price increase with whatever effect might
result from savings, a 5-day outage of a pipeline or the cost
of producing RFG.
Senator Levin. Or all of them put together.
Mr. Perciasepe. Or all of them put together.
Senator Levin. Now, you have given us an analysis of----
Senator Voinovich. I think in fairness to the other
witnesses that are here, Mr. Perciasepe was not on the witness
list. He is now here and answering the questions. We have three
people that have waited, and I think they ought to have an
opportunity also to respond to the question.
Senator Levin. Sure, I would be happy to.
Mr. Moniz. I was going to add, Mr. Chairman, a footnote, a
piece of good news. Today AAA announced that in Michigan there
was almost a 10-cent price drop in the last week. It is only a
datum. It isn't a trend yet, but hopefully it will become one.
Senator Levin. That was announced some days ago, as a
matter of fact.
Mr. Moniz. I see. OK.
Senator Levin. The EPA analysis is, relating to the
wholesale price drop, a very significant price drop since June
15 when there was a Federal Trade Commission investigation that
was announced. And as I understand it--either one of you from
EPA can perhaps comment on this--while wholesale prices of
gasoline have dropped significantly since June 15, none of the
factors that I have just rattled off that have been given for
the rise in prices have changed. Is that correct? I am reading
an EPA memo here. I don't know which one of you gentlemen----
Mr. Perciasepe. Yes----
Senator Levin. So, in other words, of those five factors--
higher crude, use of ethanol in reformulated gas, pipeline
problems, low inventories, and the RFG process--we have had a
significant drop----
Mr. Perciasepe. None of those has changed in the last 2
weeks.
Senator Levin. All right. So they don't explain the
increase, and they haven't changed, as far as you know, to
explain the drop. What, in your judgment--well, I will let it
go at that.
Now, on reformulated gasoline, Michigan does not use
reformulated gasoline. Is that correct? I am just asking either
of the EPA folks here. Is that correct?
Mr. Perciasepe. Correct.
Mr. Moniz. Correct, yes.
Senator Levin. And yet the price in Michigan, is this not
also correct, the retail price has been about equivalent, if
not more, than the price in Chicago and Milwaukee? Do you know
whether that is true or not?
Mr. Moniz. That is approximately correct, yes.
Senator Levin. As far as you know.
Mr. Moniz. Yes.
Senator Levin. There has been----
Senator Voinovich. I would just like to mention that we
have got two back-to-back votes coming up. We have 10 minutes,
and I think that what we probably should do is go for another 5
minutes and then go over and do our votes and recess this until
we come back.
Senator Levin. Do you want to recess now?
Senator Voinovich. Well, we have 4 or 5 minutes. But the
other thing I have to say is that these witnesses, are you able
to stay until we come back? We are imposing on you and we have
a bunch of other folks here that have been sitting around
waiting to testify.
So why don't we go on for another 5 minutes, and then we
will recess and go down and vote and come back.
Senator Levin. Let me ask the EPA folks this question. I
believe that, according to one press report, New York Times,
June 26, the American Petroleum Institute, ``pleaded with the
EPA not to lift the rule'' relating to, I think, reformulated
gas, if I am correct. Have they made that plea to the EPA?
Mr. Perciasepe. Yes, they have. When we were asked to
review a waiver request--we obviously take those very
seriously--we instituted all the examinations that I just
mentioned. We also asked the refiners who are supplying the
area what their views were and how that would affect them, and
all of them, I think, without exception, including their
association, recommended no granting of a waiver.
Senator Levin. Well, if I read the testimony today of the
Petroleum Institute, however, they are urging that that
requirement be lifted. Am I reading that correctly?
Mr. Perciasepe. They haven't communicated to us.
Senator Levin. One of you testified, I believe Dr. Cook,
that the refining capacity is at 98 or 99 percent right now. Is
that correct?
Dr. Cook. In the Chicago area.
Senator Levin. In the Chicago area. If this is generally
true that we are refining at almost full capacity, what would
be the benefit of greater oil supplies coming in from either
OPEC or from the Strategic Petroleum Reserve? Could it be
refined if we were able to get that release from the Strategic
Petroleum Reserve or get OPEC to give us 2 million more barrels
a day instead of 750,000 barrels?
Dr. Cook. Well, that is a good point. It would have a
limited effect. For one thing, a large release would reduce the
crude price. It is a global market. That would undercut the
crude component of the gasoline price.
The expectation of that to happen, these markets are very
important in pricing run forward, on expectations, so there
could be some decrease from that.
Not all regions are at 99 percent capacity. The Gulf Coast
is not at capacity yet, and likewise, the East Coast. There
could be some additional production there.
More importantly, Europe and Asia are nowhere near
capacity, so that to the extent that cheaper crude stimulates
them to produce more, we could certainly see more conventional
gasoline imported. And in your area, in your State,
conventional is the problem.
Senator Levin. Thank you. Thank you, Mr. Chairman.
Senator Voinovich. I think we are going to recess the
hearing, and we will try to be back as soon as possible. Thank
you.
[Recess.]
Senator Voinovich. We will reconvene the meeting, while I
wait until for my colleagues to return, I will ask a few
questions before they get here.
The issue of the refineries, I would like to go back to
that again. There was a question asked about if we could get
more supply in, could we handle it in terms of the refineries?
And I think I heard you say, Dr. Cook, that we do have refinery
capacity out in the West Coast. It is not at its capacity.
Could you explain that? What I am trying to get at is do we
need more refineries. And if we do, what have we got to do in
order to get them?
Dr. Cook. Well, we either need more refineries, or we need
more refining capacity at the existing ones. They can upgrade,
they can add units, and they have been doing that. So I think I
would phrase it the latter.
I would also like to say there isn't very much excess
capacity left anywhere in this country. It is a very small
amount, on the West Coast, Gulf Coast, East Coast, and
virtually flat out in the Chicago area.
Now, I think the potential for more product production of
conventional and distillates, anyway, if not RFG, is globally,
in Europe and Asia. To the extent that could be imported and
help the distillate stocking for next winter, which is a
concern of ours, that would be a plus.
Senator Voinovich. So what you are saying is you either
need more refineries or you need to have the ones that are
there expand their capacity. And the reason why we have lost
the refineries that we have is what? Why are they out of
business? It is not economical or what is the reason?
Dr. Cook. Well, most of the losses were very small
refineries spawned from the regulation period that, once
competition occurred, were inefficient and noneconomic to
operate, so they dropped by the wayside. And some of that
capacity was picked up by the remaining refineries.
Senator Voinovich. Again, how do we get more refineries?
Dr. Cook. Well, profit margins have to improve. No one is
going to invest in it, especially with stringent environmental
regulations, unless one can at least make the average of other
large industrial rates of return.
Senator Voinovich. Mr. Moniz.
Mr. Moniz. The rates of return, as John just alluded to, in
that business have been rather low compared to alternative ways
of investing capital.
I would just add one other thing, however, in terms of the
refining equation, and that is also, again, the demand side. I
think we need to keep working on the demand side, finding
environmentally and economically attractive ways of reducing
demand, like with the advanced automobiles.
Senator Voinovich. It has to be more economical. How do you
do that? Does that have to do with the price of oil has to stay
up? What is it that is going to make it--what profit--is it
more incentives from the Federal Government? What is it that is
going to get them to get in there and build more refineries?
Ms. Bode. Well, I will tell you what I think.
Senator Voinovich. Fine.
Ms. Bode. I think we need to have a comprehensive look at
U.S. refinery policy in this country. As you suggested, what we
need to make ourselves independent in terms of at least these
short-term problems, which is probably close to 50 percent, we
have, I think, an opportunity to get back to 50 percent
domestic production, and refining capacity is very much a part
of that. We need to have a look at comprehensive refinery
policy.
I would suggest incentives may be something to look at, but
also we need to look at regulatory policy regarding refineries
to make sure, to ensure that refinery policy and regulation is
cost-effective. One of the newest things that is going to
affect it coming up very shortly is new environmental standards
for diesel fuel, and that is going to, again, cause some
refineries that now may be in business to look seriously at
whether the margins are sufficient for them to stay in
business. So you may see a fall-off in new refineries or
existing refineries as a result of new rules going into effect.
So I just think we need to take a comprehensive look at our
infrastructure, both refining, exploration, and production, and
really see what we are doing right now to encourage having a
strong domestic option so that consumers aren't hurt in these
times of short supply, and particularly refining options, not
just on the Gulf Coast, because refining capacity has
increased, but it has all increased away from where we need the
product. We need to be thoughtful about making sure the
capacity is there close enough and supplied by pipelines,
sufficient pipelines so that it can get the product to market
in a timely fashion.
Senator Voinovich. So what about if we opened up
exploration and we had more oil produced here? Would that
generate more refineries?
Ms. Bode. Well, it is a two-part equation. Exploration,
production, more domestic production obviously is something
that you need in order to have domestic refineries. But you are
not going to impact margin of domestic refineries by having
more produced here at home. You are going to have to have
policy that focuses on refineries and their margins as well in
order to encourage more refining capacity and more refineries
to be built in areas where you really need that capacity.
Senator Voinovich. Well, I would be very interested in any
suggestions from you or anybody in the audience about what is
it that we would have to do in order to get our refining
capacity increased.
Mr. Moniz. Mr. Chairman, thank you. Ms. Bode addressed the
issue of looking at the infrastructure requirements in the
refining business and other parts of the business. I would just
note that, in fact, we did ask the National Petroleum Council,
and they just, in fact, produced a report looking forward on
the refinery business, particularly as one looks at what she
referred to as some of the coming requirements in terms of low-
sulfur gasoline, diesel fuel issues, MTBE. We have a report.
They basically emphasized very strongly the importance of sort
of sequencing and phasing of these programs, and this is
something that we intend to work closely with EPA and others in
the administration to address. So that is very directly
addressing this question of the refinery business in the next
years.
Senator Voinovich. Senator Lieberman, I just wonder, this
panel has been here now for quite some time. I think that we
ought to excuse them and let the other witnesses that have been
waiting come forward.
Senator Lieberman. Absolutely, Mr. Chairman. I agree. I
thank the panel.
Mr. Moniz. May I add one more comment, please, Mr.
Chairman? I would appreciate it. I will be very brief, and I
apologize. But I did want to go back to Mr. Lieberman's earlier
question on heating oil and just add one fact.
Dr. Cook emphasized how tight we are right now in the
refining business and we are at capacity, and with regard to
moving forward on a home heating oil reserve that we share with
the Congress a desire to do so, we want to emphasize because of
that fact, the urgency that we need to be moving forward very
soon, because, frankly, in the situation he has described, the
last thing we want to do is late in the fall begin to stock up
a home heating oil----
Senator Lieberman. Start acquiring oil for the reserve, you
mean.
Mr. Moniz. Exactly. So we need to really be moving quickly
and hope to work with the Congress in accomplishing that.
Senator Lieberman. Thanks very much. We appreciate the
department's support of the idea of a regional home heating oil
reserve and look forward to working with you in the very near
future to get this implemented. Thank you.
Dr. Cook. Could I add one last comment also? As I
testified, I would like to clarify that we do see the situation
in the Midwest improving some. Inventories have been building,
refinery production has been growing for the last 4 weeks out
there, and that is behind the big wholesale price decrease.
Senator Voinovich. OK. One other thing. I went to a meeting
that Speaker Hastert had for the Midwest region. The EPA
director had a chart that showed the prices going up, and then
when it announced that we were going to have the FTC
investigate, it looked like the prices went down. And the
allegation is because of the threat of the FTC hearings, which
everybody supports, including me, that all of a sudden the
prices went down.
Would either one of you want to comment on that?
Dr. Cook. Well, I don't want to comment on that
specifically. I just want to emphasize that supplies were
increasing over this period of time.
Ms. Bode. And I have talked to the refineries as well in
our areas, because, obviously, that is something that we
regulate, and we were also part of that PADD2 distribution
reach, Oklahoma was, along with Ohio and Illinois and the upper
Midwest. And what we found basically was that we had a tight,
very tight situation coming in. We are part of the region,
again, that only has 75 percent capacity in our region, and as
they determined up the pipeline in Chicago that they were
having difficulties blending the ethanol into the gasoline, and
supplies became really tight and prices went up, the gasoline
for Oklahoma--and we don't use reformulated gasoline--the
gasoline in Oklahoma went up the pipeline to where the supplies
were short. And so as soon as the batches of gasoline started
getting to the marketplace up there and we started resupplying
the marketplace, in Oklahoma our prices started coming down.
And it was, steadying--long before any of the hearings or the
investigation was announced--because I was talking to the
marketers every single day. So I knew when the price fell and
it was really before any investigations were announced.
Senator Voinovich. So your feeling is that was more
coincidence than it was any kind of----
Ms. Bode. That is my understanding as a regulator as to
what----
Mr. Moniz. I personally believe we need to wait to see what
the FTC says. Certainly the numbers don't all add up at the
moment, but I would just add as well that the most recent data
indicates a drop in demand, presumably as part of a price
signal in the region.
Senator Voinovich. It is so complicated. Thank you so much.
Our next panel of witnesses, and, again, I apologize to you
for the long delay: Hon. Richard Blumenthal, the Attorney
General of the State of Connecticut; Phyllis Apelbaum, owner of
Arrow Messenger Service; J.L. Frank, President of Marathon
Ashland Petroleum Company; and Red Cavaney, President and Chief
Executive Officer, American Petroleum Institute.
I understand, Ms. Apelbaum, from your Senator that you have
a plane to catch? Or have you missed it?
Ms. Apelbaum. I have missed that one, but I am going to get
the next one no matter what.
Senator Voinovich. OK. Well, how would it be, then, if we
would start with you, Ms. Apelbaum, and your Senator thinks the
world of you, and he will be here to introduce you or say some
nice things about you, as you have come all the way here. And
we would start with you, and we will move then to Mr.
Blumenthal, Mr. Frank, and then clean-up will be Mr. Cavaney.
TESTIMONY OF PHYLLIS APELBAUM,\1\ OWNER, ARROW MESSENGER
SERVICE
Ms. Apelbaum. Thank you very much. Mr. Chairman, Members of
the Committee, my home State of Illinois Senator, Senator
Durbin, thank you for allowing me to testify here today. My
name is Phyllis Apelbaum, and I am the owner of Arrow Messenger
Service in Chicago, Illinois. I am a member of the Chicagoland
Chamber of Commerce, and I am also the president of the
Messenger Courier Association of the Americas. The MCAA
represents approximately 500 courier companies in the United
States and abroad. Most of these companies are small businesses
and many are multigenerational family owned. In my brief
remarks today, I hope to tell you a little about the effects of
high gas prices on small business owners in the Chicago area
and throughout the courier industry.
---------------------------------------------------------------------------
\1\ The prepared statement of Ms. Apelbaum appears in the Appendix
on page 110.
---------------------------------------------------------------------------
Courier companies are not glamorous businesses, but we
perform a vital role. As the agents for the same-day delivery
business, we deliver the Nation's time critical shipments. We
know full well that someone can pay 33 cents to mail a letter
across town or pay FedEx or UPS to deliver it in 3 days or
overnight. We deliver critical documents, medical supplies,
blood, machine parts, and even organs for transplant. We even
facilitate same-day cross-country shipping.
The courier industry in Chicago and most major cities
utilizes, contrary to the view you might get walking the
streets of Washington, DC, mostly cars, vans, and light trucks
to undertake deliveries. One of our major costs has always been
fuel to keep our fleets in operation. We have always been
conscious of gasoline prices and fuel efficiency.
As the Committee knows, the rise in gas prices has been the
highest and most destructive in the Chicago area. This rise in
prices is not an abstract concern or a minor annoyance. We feel
it every day as we refuel these fleets. This is a problem that
not only inconveniences vacationers who have many travel
options; it is affecting our businesses in a very real and
negative manner.
In mid-May, my drivers fueled the Arrow Messenger fleet of
110 vehicles for an average of $1.77 a gallon, up from $1.47 in
January. Now we are paying $2.24 or more a gallon in the
Chicago area for regular grade gasoline. This increase is
costing my business thousands of dollars a month and over
$35,000 since January. These figures are duplicated with other
businesses throughout the greater Chicago area. We already
employ complex dispatching software that allows us to do
multiple pick-up and deliveries on all single runs. If there is
a way to cut down on fuel costs and miles traveled, we are
already using it. Short of refusing to make deliveries, there
is little that we can do to mitigate the fuel usage.
But it is not just couriers; the whole transportation
sector in my area of the country has been especially hard hit,
as we have heard today over and over. For example, in Chicago,
we have 6,300 taxicabs and 15,000 drivers who are paying 30
percent more for fuel and working an additional 2 to 4 hours
per day to cover these increases. Multiply what the courier
industry is going through by the entire transportation
industry, and you can see that millions, if not billions, of
dollars is being drained out of the economy of the Midwest.
Crain's Chicago Business estimates that the gasoline price
shock will cost the local economy 36,000 jobs over this coming
year.
Gasoline is one of the largest costs for any courier
business. As president of the Messenger Courier Association, I
have spoken with members from throughout the greater Chicago
area. They echo what I know to be a fact: That the increase in
gasoline prices is hurting and even disrupting their
businesses. Until the gas price shock, one of our toughest
challenges was finding enough qualified drivers to make the
deliveries that our fast-paced economy requires. After 40 years
of working in this industry, I can tell you that there has
never been a more difficult time to hire and retain drivers,
and we are struggling to keep these vehicles on the road. On
top of that, companies are having drivers quit on a daily basis
rather than pay the exorbitant fuel costs.
There has been a variety of responses to this crisis. Many
of our companies have added fuel surcharges. This is done on
either a percentage basis or a flat fee. Others are simply
having to raise their basic rates. Most of the members report
that the surcharges don't even begin to cover the lost revenue
due to the gas price increases. So we have the dilemma of
losing money to keep a client in the hopes that the gas prices
will fall or letting the client go and jeopardizing future
business.
I have heard the theories put forth to us as to why this
has happened: OPEN, environmental regulations, price gouging,
SUVs. I will leave that up to the economists among us to
decide. But I can tell you that the increases have hurt my
family-owned business and many small and emerging companies in
the Chicago area and throughout the country. I urge the
Committee to continue its investigation into this matter, and I
strongly support the FTC investigation into price gouging.
The courier industry has faced many challenges over the
past 20 years. First, the fax machine was going to wipe us out,
but we survived in spite of it. Then came E-mail, and we just
grew. Now, with the passage of the Electronic Signatures Act,
once again we will have to adapt. The industry as a whole will
survive this challenge over higher gas prices as well. What I
fear is that many individual, good, hard-working family-run
courier companies will be put out of business or greatly
disrupted by the gasoline price shocks. And eventually higher
costs get passed along to the customers. This is the strongest
economy that I have witnessed in my lifetime. Anything that
jeopardizes this should be of the very highest concern to the
Members of Congress and this administration.
I thank the Committee for the opportunity to testify before
you today. I would be happy to answer your questions.
Senator Voinovich. Thank you, Ms. Apelbaum. It is nice to
have a witness like you to remind us again of what impact this
is having on small business in our country.
Senator Durbin is here. Would you like to say a few words?
OPENING STATEMENT OF SENATOR DURBIN
Senator Durbin. I will say very briefly, because I know Ms.
Apelbaum has some time problems running out to the airport
soon, but thank you for being here and thanks for making the
sacrifice to come out and tell us your story. It makes a real
difference. And to the Committee, let me tell you, Ms. Apelbaum
is known as not only a great business leader but a great civic
leader. Chicago and Illinois are very proud of her.
I think you have made a very good statement to put in
perspective the concern we have that this gas price problem is
going to create a ripple effect across the economy--an economy
that we are proud of, but one that is fragile when it faces
this type of energy cost increase.
I also want to add there is some frustration, I am sure, on
your part and everyone who testifies that we have not been able
to get our hands on this and turn it around more quickly. I am
glad prices are coming down, and I hope they keep coming down
more.
Ms. Apelbaum, thank you for being here.
Ms. Apelbaum. I hope so, too, Senator. One of the issues
that people do ask me about all the time, in reference to the
deliveries, is: When you are short of drivers and fuel is an
issue and you have to choose between delivering blood or live
organs and doing corporate work for people that really need to
get that moving for the economy, there is no call. You have to
make the call for life-saving measures. And so you turn
business down every day in order to do that, and that has
really become a major problem for all of us.
Senator Durbin. Thank you.
Senator Voinovich. Thank you very much.
Senator Lieberman, would you like to introduce Attorney
General Blumenthal?
Senator Lieberman. Thanks, Mr. Chairman. It would be an
honor to introduce the attorney general, who has a
distinguished record in public service, served as a clerk to a
Supreme Court Justice, as U.S. Attorney for Connecticut, a
member of the State legislature, and now since 1990 is the
attorney general. Am I right about that? Right, 1990, attorney
general of the State of Connecticut.
If I may impose on Richard for probably the 30th time in
forcing him to hear this small story, when I was elected to the
Senate, he succeeded me as State attorney general, and we have
a mutual friend--or he is supposed to be a friend of mine in
New Haven. I will now immortalize him by mentioning his name in
the record here. He is our probate judge, Jack Keasan.
In what I thought was a tribute to me after my election,
commenting on the new offices, he said that now Connecticut not
only has a better U.S. Senator, we have a better attorney
general. [Laughter.]
This is the tribute I pay.
Attorney General Blumenthal has been a great attorney
general, a great leader in a lot of the multistate attorney
general actions, and very strong locally as a legal advisor to
the governor in the State agencies, but also has an enforcer
particularly of our environmental and consumer protection laws.
So I am honored to welcome him, and thank you for calling him
as a witness.
Senator Voinovich. Mr. Blumenthal.
TESTIMONY OF HON. RICHARD BLUMENTHAL,\1\ ATTORNEY GENERAL,
STATE OF CONNECTICUT
Mr. Blumenthal. Thank you. Senator Lieberman, I never tire
of that story for some reason that probably most people can
understand, and I want to thank the Chairman for having me
today and the Members of the Committee for being here.
---------------------------------------------------------------------------
\1\ The prepared statement of Mr. Blumenthal appears in the
Appendix on page 113.
---------------------------------------------------------------------------
I was listening earlier to the invitation--I think it was
an invitation--to be locked in a room together, and I can
safely say, one, I wouldn't volunteer; but, two, I probably
would be the least expert and qualified of all the people
locked in that room. But I would volunteer to help enforce the
NOPEC prohibitions that Senator Lieberman and others have
sponsored because I do think and agree wholeheartedly, Mr.
Chairman, that a great share of the blame and responsibility
for the skyrocketing prices that we have seen at the pump
belongs to OPEC, and we need to take more effective action to
assure that we are not at the mercy of that cartel or of
foreign oil.
I am going to briefly, very briefly, summarize my testimony
in the interest of time rather than reading it and come first
and most directly to the question that Senator Lieberman asked
earlier, because I do think it is probably the central question
that we confront today, looking at the margins at the refining
level and seeing the increase from 6 cents to 20 cents in the
contribution, if I may use that word, toward the increasing
prices that we have seen made at the refining level.
Is that increase fair? And my answer is unequivocally no,
it is not fair. It is too high. It is excessive. And we have
seen low inventories on the part of oil companies, and we have
seen low inventories on the part of all of them together. We
have seen increasing prices, again, together. We have seen
profit margins increasing together. So it is not only
skyrocketing prices that have precipitated an investigation
focusing on potential collusion, price gouging, and antitrust
violations; it is the fact of those trends happening together.
And we have urged for some time that the FTC take the
action that it has with respect to the Midwest price
phenomenon, and I am delighted that Senator Lieberman and
others have urged that the FTC investigation be extended to the
Nation as a whole, which we hope it will be. A number of us as
attorneys general have begun our own investigations, and we
hope that the expertise and resources of the FTC and other
Federal agencies will be focused on this trend because none of
the excuses, none of the reasons given by the oil industry,
even taken together, can explain the trends that we have seen.
And that fact, I think, came across very clearly in the
testimony yesterday before the House Judiciary Committee from
the head of the Bureau of Competition for the FTC, Richard
Parker, who cited, for example, the reformulated gasoline cost,
the pipeline disruptions, the other kinds of temporary
phenomena that the industry has blamed for these trends, and,
again, they cannot account for the astonishing price spikes
that we have seen.
In any other industry, if there were product shortages,
whether as a result of tremendous mistakes, unanticipated
shortages of supply, or concerted activity, we would not see
what we have witnessed in this industry, which are also record-
high profits. And so what I have proposed in my testimony is
that we take measures to increase the stocks and inventories by
releasing product from our Strategic Reserve and creating
regional reserves, such as Senator Lieberman and others have
advocated, regional reserves for home heating oil and for
gasoline, that we require perhaps minimum inventory levels,
much as we do for banks and insurance companies with the same
idea that we need to protect consumers against unanticipated
shortages that threaten literally their lives if we lack the
product that we need, that we adopt new merger standards to
prevent the kind of consolidation that we have seen in the oil
industry, a presumption against approval unless there are clear
benefits for consumers, eliminating zone pricing and other
abuses, and taking action now to deal with the crisis that we
see on the horizon with home heating oil, because just as
surely as we have a crisis now in gasoline, we face another
crisis in home heating oil if we don't take action now to
increase those stocks and inventories.
Thank you very much, Mr. Chairman.
Senator Voinovich. Thank you.
Our next witness will be J.L. Frank, who is President of
Marathon Ashland Petroleum. Mr. Frank, we are very happy to
hear you have spent a lot of time here in Washington the last
couple of weeks. I imagine you are getting a little tired of
it, but we really appreciate the fact that you are here, and
not only a spokesman for your company but for the industry.
TESTIMONY OF J. LOUIS FRANK,\1\ PRESIDENT, MARATHON ASHLAND
PETROLEUM, LLC
Mr. Frank. Thank you. I should be wearing one of these
buttons, but I am probably the least popular guy in town. I am
J. Louis Frank, of Marathon Ashland Petroleum, and my company
makes and markets most of our products in the Midwest. We are a
buyer of crude oil and a seller of products.
---------------------------------------------------------------------------
\1\ The prepared statement of Mr. Frank with attachments appears in
the Appendix on page 120.
---------------------------------------------------------------------------
I welcome this opportunity to discuss the gasoline market
conditions we have experienced recently in our part of the
country, and I look forward to answering your questions or
those of other Members of the Committee.
Let me start by saying that a very competitive gasoline
market ultimately determines the price of gasoline.
When there is a supply shortage in a competitive market,
prices tend to rise to whatever level is necessary to balance
demand with supply. And when supplies return to more normal
levels, prices tend to return to lower levels. Adam Smith, in
his writings, had portrayed these as the customary market. Just
such an imbalance of supply and demand occurred in the Midwest
over the past few weeks, and that is the reason that prices in
the area surged. And I would like to explain that.\2\
---------------------------------------------------------------------------
\2\ The chart entitled ``Chicago Market Wholesale Gasoline Prices''
appears in the Appendix on page 129.
---------------------------------------------------------------------------
First, worldwide crude oil prices have risen rapidly, as
you heard, substantially going from $10 a barrel at a low to
$35 a barrel at a high. Second, Midwest refineries can supply
only about 75 percent of the region's demand. The balance is
about 42 million gallons a day that must be transported to this
region. That is a million barrels a day.
The vast majority of this product comes in from the Gulf
Coast by barge or two major pipeline systems. Recent events
illustrate how fragile the Midwest refining and distribution
system is and how any disruption can create a supply shortfall
that will ripple through the system for weeks or maybe even
months as refiners and pipeliners struggle to catch up.
In March, one of these critical pipeline systems, the
Explorer pipeline system--we have an exhibit that shows where
the Explorer pipeline is \3\--experienced a line failure north
of Dallas, followed by a 6-day outage, which resulted in a
shortfall of about 336 million gallons of product deliveries to
the Midwest--that is about 8 million barrels--markets from
Tulsa to St. Louis and on to Chicago and Milwaukee. It quickly
became apparent that there was no short-term make-up capacity
to replace the 23 million gallons per day that Explorer was not
moving out of the Gulf Coast market to PADD2.
---------------------------------------------------------------------------
\3\ The chart entitled ``Regional Fuels Programs'' appears in the
Appendix on page 130.
---------------------------------------------------------------------------
More recently, the Wolverine pipeline, which carries almost
40 percent of Michigan's petroleum needs from Chicago, also
experienced a release that resulted in a 9-day interruption of
supply to that area. With only limited alternatives available,
gasoline supplies in Michigan reached dangerously low levels,
which are only beginning to recover now.
Another factor that contributed to this supply and demand
imbalance in the Midwest was the new Phase II reformulated
gasoline requirements which became effective on June 1, and you
can see on this map by the colored areas where different types
of special gasolines, boutique gasolines, are required in the
Midwest market. This gasoline is more difficult to blend to
meet U.S. EPA regulations. We had to virtually drain our tanks
of winter-grade gasoline at the same time as the supply
disruptions with Explorer were unfolding.
If these supply issues were not enough, EPA's decision to
grant three waivers from the RFG requirements for the St. Louis
area without any sort of penalty became the straw that broke
the camel's back.
Conventional gasoline that was originally destined for the
upper Midwest conventional markets was immediately diverted to
St. Louis. This contributed to the conventional gasoline
shortages that in turn led to severe price increases for those
products in the upper Midwest. And the price response that
should have been seen in St. Louis was transferred up to
Chicago because St. Louis went to consuming conventional
gasoline while building their supplies of reformulated
gasoline, so essentially in a supply-short market, they were
taking two volumes of gasoline to St. Louis. The conventional
they were burning and the replenishing of the reformulated
stock.
My company responded aggressively to the gasoline supply
and demand imbalances in the Midwest. We took immediate and
extraordinary steps to try to bring additional supplies into
the Midwest. We have been running our refineries at capacity
and pipelines are at full capacity, and we utilize trucks and
barges to bring products in from nontraditional sources, as far
away as Newfoundland, Canada, into the Michigan market. We
brought truck drivers in from Texas, Florida, and Louisiana.
Our comments to the EPA and DOE on what could be done to
improve the Midwest supply situation in the short run were
submitted in a letter dated June 13, 2000, and were discussed
prior to that, and they have been attached to my testimony.\1\
---------------------------------------------------------------------------
\1\ The letter referred to appears in the Appendix on page 131.
---------------------------------------------------------------------------
Our nine recommendations focused on relief from numerous
regulatory restrictions that hampered our ability to move
products into the areas that needed it most. My company is
working on several long-term infrastructure problems that would
help eliminate supply shortages like the one we just
experienced. These include a new pipeline to serve the growing
central Ohio market and a joint venture pipeline to convert an
abandoned or low utilization natural gas pipeline into
products, and that line is going through the approval process
with FERC. And we are trying to expedite that to get it pulled
forward. It won't be in operation even on the regular track
until January 2002.
In our view, these recent difficulties in the gasoline
market are mere symptoms of the much deeper problem that the
United States does not have a cohesive energy policy, a policy
that would recognize the importance of ample, affordable, and
clean energy for the Nation, a policy that would encourage a
viable and vital domestic petroleum industry.
Any national energy policy must recognize the need for
strengthening the downstream infrastructure of the domestic
petroleum industry, the sector that includes refining,
pipelining, and terminaling. Investor confidence in this
critical sector must be restored if we are to stem the decade-
long retreat in refining capacity and maintain our self-
sufficiency in motor fuels.
In closing, I am very proud of the way that my company has
responded to the petroleum shortfall situation. And as I said
in my opening remarks, the gasoline market is highly
competitive, and market forces ultimately determine the price
of gasoline. However, the supply system remains fragile, and
any disruption in a refinery or a pipeline distribution system
could result in another supply-demand imbalance in the Midwest.
And I have to say, Senator, that when I first heard of the
calls of investigation on collusion and price fixing, I was
sort of outraged and indignant about it. I was embarrassed for
the 28,000 people that work at my company and come to work
every day and wonder, ``is my company guilty of price gouging
and collusion,'' and I say unequivocally ``no.'' And I now
welcome this investigation to help clear the air for the
accusations that have been validated by the President, the Vice
President, and that inflames the consumer base, and everybody
is concerned about price gouging and price fixing that the
industry is being charged of.
That concludes my remarks, and I will respond to any
questions that anybody might have.
Senator Voinovich. I appreciate that last comment because I
know that there were those that said you were reluctant to
answer questions, and I can understand your initial feelings
about it. I am very pleased that you are here to say that you
welcome questions, because I do think that in the next couple
of months we should clear the air just about exactly what
happened and we are starting to piece this together.
But I will say this to you, that I think too much
importance is placed on the cause of prices are high, and I
would hope that in this further testimony through the questions
that we get at the issue of what do we do now in order to
systematically bring the price down and keep it down, and it is
starting to fall. We know that. And, second, and more
important, as I mentioned in my earlier remarks, we talk about
what is it that we need to do to have a comprehensive energy
policy to make sure that 5 years from now we are not in the
same position that we are today.
Mr. Frank. Senator, can I have one more minute to show you
what I think is an explanation of the statement that is
floating around that prices came down when the FTC said we are
going to have an investigation? If you look at this chart, that
shows what the inventory level in PADD2 did, where that
inventory level actually fell to a minimum on June 2. And
following June 2, the inventory started to build----
Senator Voinovich. I am sorry. Could somebody point that
out? I am not following the chart.
Mr. Frank. The minimum inventory level was on June 2. Since
that date, inventories have risen in response to a decreased
driving habit of the consumer, and the inventory levels have
risen to a new level. And then on the next chart, John, if you
would put that up, it shows that the prices were at their
height on June 7 and were falling from that date. And then
there was an announced fire at the Blue Island refinery in the
Chicago area. The prices spiked overnight, 10 cents up on the
spot market. The next day they were down 10 cents as the
company said they were back in operation. And since that time,
the prices have fallen.
Now, we were facing charges or allegations of price fixing
and colluding back in mid-May, but the market continued to work
after that and the prices rose. And, finally, price stifled
demand and the inventory started to build, and the price fell.
And that is the normal response you would see in a supply-
constrained market.
Senator Voinovich. Thank you.
Senator Domenici. Mr. Chairman.
Senator Voinovich. Yes, Senator Domenici.
Senator Domenici. I wonder if you would yield me 5 minutes.
Or do you want a witness to go first? I have to go to the
floor.
Senator Voinovich. Senator Domenici, you were here before,
and you mentioned that you did, and I apologize. I think that
Senator Lieberman and I would more than honor your request to
make a statement here today.
Senator Lieberman. Absolutely. Besides, we note that you
are still the Chairman of the Budget Committee. [Laughter.]
OPENING STATEMENT OF SENATOR DOMENICI
Senator Domenici. I might say to both of my friends, I am
not at all proud of what we have done today with reference to
the budget.
Senator Lieberman. Understood.
Senator Domenici. And I am about to form a pact with my own
heart that I will never let anybody by unanimous consent waive
the Budget Act. We, today, made some horrible mistakes in terms
of taking things off budget that we just don't understand, and
there was no way to get in front of the steamroller. But it
will not happen without getting slowed down in the future.
And I might find five other Senators to agree with me, and
we will understand what we are doing rather than vote because
we think people want us to vote in a certain way.
Now, having said that, I want to thank you, Mr. Chairman,
and this Committee. I have heard enough today to know that you
are on track to getting the facts. And, frankly, I want to
thank you, Mr. Frank, and I haven't read your testimony, Mr.
Cavaney, but let me say we need to know what really happened.
And my friend, Senator Lieberman, will not like me to focus
this on the last 7\1/2\ years, but I will for a couple of
minutes.
Let me just ask a question that needs no answer. How could
crude oil prices, since January 1999, go up 300 percent and
there not be a dramatic increase in a derivative of crude oil
called automobile gasoline? It is impossible to go from $11 a
barrel to $33 a barrel and to blame you for the increase in
gasoline prices when something is amiss in American policy,
unless that is the way we want to do business. To have crude
oil go to $10 and then go up to $30 and then come down to $20
and then go up to $40, I am just projecting, but that is the
roller coaster we have been on.
Now, I think the policies of our National Government are
somewhat responsible, and I predict for you today the next
crisis will be brownouts. And I am crossing my fingers while I
predict there will be brownouts. And then there will be another
series, Senator Lieberman, of ``we blame you.'' And the truth
of the matter is we are not building enough power plant
capacity to meet electrical generating needs, and we are going
to get stuck with that just like we did by OPEC when they found
we needed more crude oil and they weren't giving it to us.
Instead, they decided we will not give it to you until the
price gets up where we want it.
And nobody really is going to be to blame for the
brownouts, because it is the fault of an American policy of
trying to get every ounce of energy out of the utility
companies without producing any new sources. Because new
sources create environmental hazards, we better squeeze every
ounce out of the existing electric generating system and
swapping around rather than just build new ones. And the only
thing we are using to build new ones is very risky. The last
five, Mr. Chairman, are all natural gas--natural gas which
comes into your citizens' households, and they are delighted to
be able to afford it.
Build the next generation of plants that furnish us with
electricity on natural gas, Senators, and the price in your
households will begin to rise. Folks will begin to say, ``Who
is responsible for that?''--for the enormous increase that is
going to occur. And it is a lack of a policy, that forces us to
recognize that we need power plant capacity. I am going to say
from the standpoint of one Senator, and maybe Senator Lieberman
has said a little bit that might permit me to say he concurs,
but another problem is an American policy that says no activity
in the nuclear power area, no nuclear waste disposal even on a
temporary basis. Even though this is done by every European
country like you get up in the morning. Eighty percent of
France's electricity comes from nuclear power. They put it away
temporarily, and they don't lose a wink of sleep. And we are
fussing around trying to find a place to put the temporary
storage of that which comes from nuclear power plants.
Frankly, the President made a horrible mistake when he
refused to let a facility be built. And if you had nothing else
to blame on him, you can blame him for stifling the future
because we are frightened to death of the cycle on nuclear
power.
Now, I want to talk one final moment on how you can send a
message to the OPEC countries. How could we have less oil
production in America and take more American land out of
production, and send any signal to them other than we are more
at your mercy every single day? And that is what happened.
Sixty percent of the land that in 1983 was available for
independents to try to produce oil is off limits now. The idea
of a multiple use of the public domain is a concept that is
fleeting away because it really isn't of concern to certain
people who advise this administration that national lands be
used for energy production. It is that they should be
preserved, and the principal function of government is
conservation and preservation, not utilization of what God put
under the ground, which is energy sources.
ANWR is off limits. Offshore drilling, which is an abundant
source of natural gas, that moratorium is preserved as if we
relaxed it a little, we would imbalance the environment of
America. None of that is true.
So I have been heard to say that the chickens are coming
home to roost, and, frankly, they are going to come back in
more numbers. The roost is going to get heavier, and there is
going to be another roost for another source of energy, and
that is going to be the one I just told you about. And then we
are going to say, as we frequently do, it is your fault, Mr.
Frank, it is your fault, and it is your fault, Exxon.
In wrapping it up, let me say we now have--did anybody
quote how few refineries we have now?
Senator Voinovich. Yes.
Senator Domenici. You already did that?
Senator Voinovich. We have gone into that.
Senator Domenici. Thank goodness that these refinery owners
have put in new equipment and new technology, because fewer are
producing more per unit, but you haven't built one since, what
1976, Mr. Chairman?
Mr. Frank. Nineteen seventy-six.
Senator Voinovich. Haven't built one for 25 years.
Senator Domenici. Now, what does that say for a country?
That means we must have some policy that says it is far more
important not to build them, for some reason, than it is to
build them and have capacity of our own. And I assume it is in
some part because of the 23 environmental protection rules and
regulations that apply to the oil and gas industry, or maybe it
is even beyond those 23.
But, essentially you just can't do all of these other
things and expect to do anything but grow more dependent and
grow more vulnerable. And I think you are proving that today,
and thank you for the time.
Senator Voinovich. Thank you, Senator Domenici.
I will say this, that from everything I have heard, natural
gas and home heating oil are going to skyrocket before this
winter comes up, and I don't know what we can do about it, but
that is what everyone is saying. And not only, Senator, I want
to say, is it in terms of nuclear power and not having a policy
in regard to that and the biggest stumbling block is not having
a place to deal with nuclear waste, but this administration
also wants to eliminate fossil fuel in this country, which is a
very, very important source of fuel in my State. That is the
way it is.
Mr. Frank. That is one answer to Senator Domenici's
question. Why hasn't there been a refinery built? It is because
the administration and Vice President Gore in his book ``Earth
in the Balance'' has said he wants to eliminate fossil fuels
and doesn't want any more refineries. Who is going to build one
under those circumstances?
Senator Voinovich. We are getting into the finger pointing,
which I didn't want--but it does get frustrating. I lived 8
years as Governor of Ohio, and we have 15,000 less miners in
our State and costs are up.
We will hear from you now, Mr. Cavaney.
TESTIMONY OF RED CAVANEY,\1\ PRESIDENT AND CHIEF EXECUTIVE
OFFICER, AMERICAN PETROLEUM INSTITUTE
Mr. Cavaney. Thank you, Mr. Chairman and Members of the
Committee. I appreciate the opportunity to present the views of
API's members on rising oil prices and the efficiency and
effectiveness of the Executive Branch's response. Our members
understand their customers concerns over the recent higher
gasoline prices. They work hard to ensure consumers have a
readily available and affordable fuel supply, and the
historical record attests to their success in that regard.
---------------------------------------------------------------------------
\1\ The prepared statement of Mr. Cavaney appears in the Appendix
on page 270.
---------------------------------------------------------------------------
Over the past decade, gasoline has been more affordable
than ever. Adjusted for inflation, 1998 prices were the lowest
in history; in 1999, they were the second lowest. Prices have
been low because companies have competed hard to reduce their
costs and because supplies have been plentiful.
Gasoline prices in 2000, however, have increased--not to
record levels but far above where they were 12 to 18 months
ago. And in the Midwest, they are above even the higher
national average. There are four main reasons why.
First, world crude oil prices have risen sharply, the
result of decisions by OPEC and several other foreign
producers. Since crude oil accounts for 60 percent of the cost
of gasoline, excluding taxes, an increase in crude prices
directly impacts the price at the pump. Over the past 2 months,
the cost of crude oil has risen 35 percent.
Second, inventories have been lower than usual, and prior
to June 1, as Corky Frank testified, companies were clearing
their storage tanks of the wintertime fuel in order to
accommodate the new cleaner-burning gasoline when we
experienced some shortfalls in the Midwest due to the pipeline
and to several other problems that I will cite. Imports into
the region are absolutely critical because the Midwest
refineries only make a little less than 80 percent of the
gasoline that is consumed in that region.
Third, demand for gasoline has been increasing, as it
usually does during the beginning of the driving season.
According to the Department of Energy's Energy Information
Administration, ``gasoline demand in the Midwest seems to be
growing more strongly in 2000 than it has for the past couple
of years in the region.''
Fourth, the new cleaner-burning gasoline which was
introduced at retail on June 1 causes special problems in the
Midwest, a fact EPA was aware of for over a year. Refiners
weren't able to make quite as much of the special base fuel as
quickly as needed, tightening supplies and ultimately pushing
up prices.
Other factors have also played a role, including the Unocal
patent infringement case that has created uncertainty and risk
for many companies making or importing cleaner-burning
reformulated gasoline.
As DOE Energy Information Administration says in its
brochure entitled ``A Primer on Gasoline Prices,'' and I quote,
``Any event which slows or stops production of gasoline for a
short time can prompt bidding for available supplies. If the
transportation system cannot support the flow of surplus
supplies from one region to another, prices will remain
comparatively high.'' That is what happened in the Midwest.
But, frankly, we are very pleased to see that the actions of
the industry in bringing more supply to bear has made
significant reductions in wholesale prices, and retail prices
are moving accordingly.
For all these reasons, today's gasoline supplies haven't
been enough to meet the demand at the record low prices that
consumers enjoyed not too long ago during this transition
period involving RFG Phase II. This same conclusion was reached
by two government reports issued just last week: The
Congressional Research Service report and the DOE's EIA latest
report of June 20.
Price increases have surely been painful, and companies are
rushing to get every gallon into the marketplace that they can.
Refineries supplying the Midwest are running all out, and added
supplies are exerting downward pressure on prices as we speak.
In fact, spot prices for the Chicago market started
falling, as Mr. Frank cited, back on June 7, less than a week
after the new gasoline was introduced at the retail level, and
they have fallen well over 30 percent since that time. Prices
at the consumer level typically follow such reductions at
varying intervals, depending on how much higher-priced products
is still in the system and other factors. Already, as we have
talked about, pump prices are falling.
Gasoline is much like many other commodity products,
although it differs in one important aspect. When a drought
reduces the corn harvest or a freeze cuts citrus production,
prices go up. When corn gets expensive, people can switch to
potatoes or some other product where supplies are more
plentiful and prices are lower. For gasoline, substitutes are
not readily available, so consumers feel stressed.
Yet the system ultimately works to their advantage because
over the longer term gasoline prices for decades have been
trending downward.
The current situation underscores the need to revisit our
national energy policy, and we would like to suggest at least
four areas be considered in that regard. Greater access to
government lands is needed to find and develop more domestic
oil and natural gas resources and to cut our reliance on
foreign oil, which now fulfills 55 percent of U.S. needs. We
also need more access to foreign oil supplies, but government
policies--specifically, unilateral sanctions--have placed some
of these sources off limits. Coordinated implementation of the
environmental rules impacting consumers and the industry are
also needed. And, finally, expedited permitting for the
building or modernization of facilities for the manufacture and
delivery of gasoline, diesel oil, natural gas, and heating oil
is also vital.
U.S. oil and natural gas companies know how to make and
deliver gasoline, and all strive to be an efficient provider.
With a more effective national energy policy, still fully
protective of the environment, our members could even better
serve the consumer, and the risk of market volatility would be
reduced as well.
Thank you.
Senator Voinovich. Thank you, Mr. Cavaney. What was the
third reason that you had? You had access to government land--
--
Mr. Cavaney. Coordinated implementation of the
environmental rules impacting both the consumer and the
industry. Oftentimes, we and the Environmental Protection
Agency get in disagreements over impacts, and there isn't
enough time spent on looking at those things beyond just the
environmental impacts, looking at the cost impacts, and, more
importantly, in our case, the supply impacts. Is there going to
be enough supply to go around? Because that is really what is
at the heart of much of what has gone on these last 4 or 5
weeks.
Senator Voinovich. As I said earlier in my opening
statement, we have heard a lot about the high cost and everyone
has got a different reason for it, and I am pleased to have
heard the explanation here. Mr. Blumenthal, you have a theory,
and we have heard these gentlemen. But the guy at the pump that
I am going to run into this weekend--I am going to get over
there--wants to know--prices are coming down: Senator, are they
going to stay down? And, Senator, 5 years from now if I bump
into you here at this Marathon station, are we going to have
the same situation that we have today?
I would like to know what things could we do--now, I heard
from Mr. Frank, you testified before Speaker Hastert at a
meeting we had last week or the week before, and you were
talking about some things that you thought could help the
situation. And I would like to hear about them, and I am sure
my colleagues would today. What things do you think right now
could help the situation so that we stabilize this price? And
then what are your thoughts about the long run?
Mr. Frank. Senator, our country has come to expect low
energy prices, and yet we are becoming more and more dependent
on imported crude oil, and that is because of the fact that we
are locked out. The oil companies are locked out from exploring
on whatever lands are available and what kind of crude oil
reserves might be found there. Our infrastructure in this
country, for all energy sources, is tired and worn-out, and it
has low profitability.
In the segment that I know about, for the last 20 years in
the refining business, the rate of return on capital employed
has been 5 percent.
Senator Voinovich. Mr. Frank, we always use this word
``infrastructure.'' What do you mean by infrastructure?
Mr. Frank. Pipelines, terminals, service stations,
refineries and the pipelines that serve them. I am talking
about the refining industry and transportation industry now.
But the electrical industry--on the panel I was with yesterday
were four people testifying on the electrical industry, and it
amazed me that our problems are very similar, that low
profitability is not encouraging investments. You are seeing
major large, integrated oil companies walk away from the
refining business because they are saying the returns aren't
adequate for us to have an interest in that anymore.
The refinery closures in the Midwest, 12 since 1990, they
are just closing down. And there are several marginal
refineries that remain through the rest of the United States,
including the Midwest. And if they are uneconomic, something
has got to happen to let that capacity be picked up because the
refining system is running at 100 percent of capacity, the
pipelines to the Midwest are at 100 percent of capacity.
What do you do when you are up against those kind of
constraints? You have got to have more capacity. Who is going
to build it? How do you attract the capital to invest in
building a refinery if you are uncertain what the economic
return is going to be? That is what faces our country today.
And then there is a concept that nobody believes that you
could even build a refinery in the United States anymore, that
the permitting process is so difficult, nobody wants a refinery
in their area of the country. And the time to get a permit is
exceptionally long, even for doing new capital projects. It is
a very involved process.
So I think that, in short, the situation has got to find
some way to allow a return that attracts investment so that
people find that an attractive place to be in business.
Mr. Blumenthal. Mr. Chairman, if I may add a word, I
certainly support the idea that infrastructure needs to be
improved, that we should offer incentives for that kind of
enhancement. At the same time, fundamentally, when you deal
with customers at the pump or the man who is charging you who
owns that gas station, what we are dealing with short term is a
lack of inventory, a shortage in supply, insufficient stocks.
And, in fact, in terms of infrastructure, I am told--and I
believe reliably--that the industry has excess storage
capacity. I believe it may be on the order of one-fifth overall
nationally. We have storage capacity that is not being used now
because inventories have been so low and that the shortage of
stocks has made the system susceptible to the kind of short-
run, short-term disruptions that you have heard mentioned today
and have increased the margins that Senator Lieberman cited
earlier and have been responsible for those historic price
hikes that we have seen.
And so I think the immediate question is: What do we do
about inventory so as to avoid the looming crisis that you, I
think, cite, quite rightly, that we face on heating oil this
very winter?
This week, in New York, the spot price for heating oil was
79 cents as compared to 46 cents per gallon last year. That
gives you some idea of where we are heading on heating oil. And
I think, quite rightly, you are focusing on long-term energy
policy and so forth, but right away, for the sake of those
people who are going to be without heating oil this winter or
having to pay $2.25 per gallon, as we did in Connecticut last
year, we need to increase the supply, and I think looking to
the strategic reserves that this country has.
Senator Voinovich. Well, I am very interested in the
shorter term, and I may be from the Midwest, but I am concerned
about the rest of the country also, and everything I have read
says it is going to skyrocket and that we are going to be
hearing people scream about this, as they are in the Midwest.
In terms of heating oil, it is even more severe because this is
how you heat your home. I am concerned about it, and I am
interested. Are there short-term things that we can do to avoid
the crisis?
Mr. Blumenthal. And I might add, Senator, that in terms of
short-term measures, the focus of this Committee--and I really
commend and salute this Committee for focusing as it is in a
very thoughtful and insightful way on this problem--does have a
beneficial effect. Investigations do work. And whether it is
the FTC or the antitrust department or this Committee--as
Senator Levin remarked earlier--the light and heat of public
scrutiny have a beneficial effect for consumers. And so I think
the attention this Committee is giving to this problem so
thoughtfully will have an effect in and of itself.
Senator Voinovich. Mr. Caveney.
Mr. Cavaney. Yes, Senator, I would like to comment on what
we can do. I think the most important thing we can do right
today is let the market work and not interfere. As the chart
shows here, the industry's traditional response over decades is
to rush supplies from wherever you can find them into areas
that are getting tight. That is what you have seen in the
Midwest.
Our longer-term problem, though, which is part of this, is
that when you have the capacity pretty well matched up with
demand, when we are in the middle of a major effort to supply
the needs of the consumer--think of earlier in the year when we
were asked to go in to speak with Secretary Richardson, when we
were talking to a lot of other people, they said maximize your
production of distillates so we can get home heating oil and
diesel fuel. We were told to go full up. Well, when you are
going full up on that, you don't have the extra capacity to
start to make a product to begin to full up inventory for the
next change, which was the summertime fuel. And that is going
to be the challenge we are going to face ahead of us: How do we
keep producing at record levels the kind of production we need
for summertime gasoline and at the same time make sure that
there is enough extra capacity that can be worked into the
system that you can get the build on home heating oil and the
distillate fuel that we know we need for the other? So it goes
to both the short term--don't confuse or discourage the kind of
behavior that is producing good results, but long term focus on
this idea that we are expected to change fuels by season and by
regs. But when these two match up very, very closely, there is
little give in the system.
Senator Voinovich. Mr. Frank, when you testified before
Speaker Hastert, you mentioned there were four or five things
that you had given the administration, and one of them, I
think, dealt with this Explorer pipeline and Wolverine that is
going to take 8 months for you to test it so that it can be at
full capacity. Right now it is at 80 percent of capacity, which
means that you are only getting 90 percent of the gasoline
throughput.
Mr. Frank. Yes. Both Explorer and Wolverine are restricted
to operating at 80 percent of the pressure at the point of the
break, which translates to about 10 percent reduction in
volume. And the Explorer pipeline has been down since early
March, either completely out of production or at this
restricted rate. The ongoing shortage in the PADD2 is 50,000
barrels a day of gasoline. That is significant. I have heard it
described yesterday in the House hearing that the normal amount
of gasoline was going to Chicago that normally goes there, but
Chicago was almost in a critical state of supply, depleted
inventories back in about the third week of May, and there is
no make-up capacity. It is sending the normal volume in there,
but that is all that can be sent by this pipeline with the
restriction it is on.
Wolverine is--and the company is trying to expedite, the
Explorer pipeline company, the process of having run a smart
pig, which is a flaw detector device, electronic flaw detector,
and get the results analyzed. But they think that from the
information I have heard that that takes about 3 or 4 more
months. There have been some companies that have given up their
space, other pipeline companies, to let Explorer company move
to the front.
The Wolverine situation is a little bit different in that
the failure was related with a fitting, and from what I
understand, they should be back to capacity in 3 or 4 more
weeks.
Senator Voinovich. I am very interested in any short-term
things, an administrative agency or whatever it is, to try and
jack them up and get them to do it, any way that we can tighten
up a screw here and push this here to make it----
Mr. Frank. In the items that I listed to the Department of
Energy and to the EPA, including expedite an increase in
Explorer pipeline operating pressure, restoring it, grant a
relief on DOT driver restrictions for transport, for drivers to
be able to drive their transports longer hours. We got all the
trucks we could, and we were moving gasoline from Illinois,
Indiana, and Ohio into Michigan. First, it started off we were
moving it into Chicago to help satisfy that problem, and then
we moved it into Michigan, and longer hours would have helped.
Approve the larger tank truck for use in other States, like is
used in Michigan. It is about a 70 percent larger tank truck
for transporting gasoline.
Senator Voinovich. Mr. Frank, I am out of my time, and I am
on my colleagues' time, but I would like to have you submit
those letters for the record.\1\ I would certainly like to see
them. And if there is something that I can do to help expedite
it, I am sure some of my colleagues might be willing to do the
same thing. We would be more than happy to do it.
---------------------------------------------------------------------------
\1\ The information referred to in a letter dated June 13, 2000,
sent to the EPA and the Department of Energy from Mr. Frank appears in
the Appendix on page 131.
---------------------------------------------------------------------------
Senator Voinovich. Senator Lieberman.
Senator Lieberman. Thanks, Mr. Chairman.
Attorney General Blumenthal, I know you have a plane to
catch. Do you have a moment for some questions?
Mr. Blumenthal. Sure.
Senator Lieberman. Incidentally, Mr. Chairman, in my
recitation of Mr. Blumenthal's background, I failed to mention
one high point in his career. He was the administrative
assistant to former Senator Abraham Ribicoff of Connecticut,
who, in fact, was the Chairman of the Governmental Affairs
Committee. So there is a nice piece of history.
Mr. Blumenthal. The staff has improved considerably since
then. [Laughter.]
Senator Lieberman. We have been talking about the reserves
here, and some of us have tried to convince the administration
to open up the Strategic Petroleum Reserve, and we are talking
about a regional home heating oil reserve. I was very
interested that you have raised the question of the possibility
of requiring the oil companies to maintain some minimum reserve
of their own, and I wanted to know first--I don't know whether
you have had a chance to go into that very much, but whether
you feel we would be or the States would be on a strong legal
foundation in considering such a requirement, and, second,
whether you have thought at all about how we would try to
determine what the minimum level of reserve required would be?
Mr. Blumenthal. First, Senator, let me say that my
preference would be to use the strategic reserve concept as you
and others have suggested we do, and many of us as attorneys
general have advocated as well, not to manipulate prices or
have the government intervene in a heavy-handed way in the free
market, but try to deal with extraordinary situations such as
we now have confronting us in all parts of the country, and I
agree with the Chairman that it is really all parts of the
country that share in this problem.
As an alternative, the idea that some kind of reserve or
minimum balance be maintained I think in principle would
operate much the same way as we now do with banks or insurance
companies and other kinds of industries where the product is
not a luxury or a common, everyday consumer product where there
is competition and where there is an absence of government
regulation, but in this industry where we are dealing with an
essential commodity that people need at affordable prices and,
at the very least, need to have at certain points of the year,
for example, in the winter where consumers throughout the
Northeast last year went without the product and suffered as a
result.
And so how to set what that reserve would be I can't state
with precision at this point, but it would be based presumably
on historical levels of supply and demand, and could well be
enabled through tax credits and other kinds of incentives
offered, as well as conceivably some kind of minimum
requirements.
Senator Lieberman. Well, I appreciate your venturing forth
into this area, and I look forward to hearing, as you and your
staff develop this thought, more about it. I don't know how--
maybe I should ask Mr. Cavaney or Mr. Frank how you respond to
that proposal.
Mr. Cavaney. Well, one of the things, when you look
particularly at the Northeast where we had the heating oil
experience, the problem in the Northeast was not one of
inventories. The problem was one of transportation. There were
inventories in PADD1, but if you will recall, the problem was
that most of the harbors that we typically moved the product up
the coast and into were iced over and we had trouble getting
barges in to make deliveries. The roads, for a long period of
time we couldn't move the trucks on them, and, finally, thanks
to Secretary Richardson, he and the States up there mobilized
and cleared the ice away, and we were able to move the
inventory in.
So just looking at inventories is not going to solve all of
the problems that we happen to see. And then you also have to
consider that the hand of government into the business of
selecting inventories, because what you wouldn't want to do is
create a law of unintended consequences that we haven't been
able to think through. So a lot of consideration has to be
given to the issue before people go jumping off in that
direction given our experience.
Senator Lieberman. OK. Did you want to add anything, Mr.
Frank?
Mr. Frank. I would say my company doesn't market heating
oil, we are not a Northeast supplier. The things about
strategic inventories, are they in the right place? How do you
distribute them if they are needed? And then what is market
interference or unreasonably prices, and when does it come in?
How do you set those rules?
One of the things that intrigues me--and this is sort of
going to the SPR concept that we talked about, the last panel
talked about--as a policy, why did the SPR not fill at a more
rapid rate with these low prices last year, $10 a barrel, fill
the Strategic Petroleum Reserve? It looked like an opportune
time, and it could help stabilize the crude oil price from this
volatility. But it wasn't done. In fact, I think we decreased
what the fill rate was.
Senator Lieberman. So you think that we made a mistake
there in not purchasing while prices were low?
Mr. Frank. Well, as a businessman, sir, I always like to
buy low and sell high.
Senator Lieberman. Sell high, exactly. I have heard that
before. [Laughter.]
I don't know what the explanation of that is. It is too bad
the folks from the Energy Department left. Maybe we will have
another chance to come back and ask them.
General Blumenthal, I thought another--this is an area in
which we tend to hear the same ideas and remedies mentions. I
thought you had a couple of really fresh thoughts in your
testimony, and another one was the question you raised, as I
heard it, of the impact that mergers in the energy industry may
be having on this problem that we are dealing with today. So I
wanted to ask you to speak at a little more length about what
your thoughts are on that one and about the extent--I think you
suggested that we may want to have new standards for mergers to
consider this impact.
Mr. Blumenthal. Well, thank you, Senator. Again, I can't
claim any overwhelming expertise or wisdom, but we have among
us as attorneys general a lot of experience with antitrust law
and its enforcement, and I opposed the most recent major merger
in the country, Exxon-Mobil, and was disappointed to see it
approved, even with some of the divestiture that was ordered by
the FTC as a condition.
I think that part of the reason for the diminished
competition--indeed, for the absence of real competition in
many parts of the country at the retail level and other levels
in the industry is that we have seen a wave of mergers and
consolidations. And I very simply propose that the presumption
be against approval unless there is clear and convincing
evidence that there will be a tangible benefit for consumers.
A lot of times we hear the companies in this industry and
in a great many others say rhetorically, somewhat vaguely, with
uncertain data and predictions, that there will be benefits for
consumers. But what I am suggesting is that we should put the
burden of proof on the companies that are merging, that the
presumption be against approval, and that there be clear and
convincing evidence of real benefits, tangible ones, for
consumers.
Senator Lieberman. Let me ask one more question as my time
is running out. You made mention of several State attorneys
general being involved in review of this matter. Is that
focused on the question of whether there is price gouging going
on? And how broad is the multistate investigation in this case?
Or is it individual States that are doing it individually?
Mr. Blumenthal. There are individual States coordinating
our efforts, some of them in the Midwest, obviously, that are
working with the FTC, but others of us from other parts of the
country, some of the major States that have a stake in this
problem. And we have a real tradition, as you well know, of
working together in these multistate task forces involving
antitrust matters, and there is no economic problem that is of
higher priority to us than this one.
Senator Lieberman. Thank you very much for taking the time
to come down and contributing to the discussion. I am proud to
have you as my attorney general.
Thanks, Mr. Chairman.
Senator Voinovich. Thank you. Senator Durbin.
Senator Durbin. Thank you very much, Mr. Chairman. Are we
on a roll call vote? I don't know how much time is remaining.
Well, if they could check, I may not be able to come back after
the vote.
I would like to make one comment for the record. If I am
not mistaken, during Senator Domenici's testimony it was noted
that it has been 25 years since we have built a refinery in
this country, and someone--it may have been Senator Domenici,
but someone said it is because of this war on fossil fuel, and
someone said, yes--Vice President Gore.
I had my staff check. He has only been Vice President for
7\1/2\ years, and if there hasn't been a refinery built in 25
years, I think perhaps that is overstating the politics of this
issue.
Now, there was, if I am not mistaken, a Republican
President for 12 years in that period of time, and if there was
a war on fossil fuels under Ronald Reagan and George Bush, I
can't speak to it. But to assign political blame to Al Gore,
the Democratic candidate for President, for the failure to
build a refinery for 25 years is a leap that I hope we won't
take in this Committee.
Mr. Frank. Let me elaborate on that a little bit, Senator.
For the period from 1976, which was when the last refinery was
built in the United States--and my company built it--there
hasn't been another one built. At that time there was an
oversupply of refining capacity by about 25 percent, so there
wasn't a need for a refinery to be built.
In Al Gore's book, Vice President Gore's book, he says that
he is opposed to this.
Senator Durbin. Opposed to?
Mr. Frank. Fossil fuel; the internal combustion engine he
wants to obsolete.
Senator Durbin. Well, we have had this debate on the Senate
floor, and I think if you read the book more closely, you will
see that he is suggesting--and a lot of people are joining
him--that we should be looking at energy alternatives. I
support that, and I don't believe it is going to happen
overnight.
Mr. Frank. I am not opposed to that, either.
Senator Durbin. I hope your industry supports it.
Mr. Frank. I am not----
Senator Durbin. Let me raise three questions because we
have very limited time here. One is, if the price of wholesale
gasoline has gone down 47 cents in 14 days, when will the price
at the pump go down 47 cents?
Mr. Frank. I think my partner, who has just left here from
the table, would tell me that I can't predict that for you. But
if you look historically, prices at the street lag going up----
Senator Durbin. Lag by how much?
Mr. Cavaney. I can make a comment on the last increase that
you see over there, we tracked it and it lagged by 2 weeks.
Senator Durbin. So you would say in 2 weeks the full 47
cents ought to be felt in the upper Midwest?
Mr. Frank. No, sir. It did not occur all in 1 day.
Senator Durbin. Well, why not?
Mr. Cavaney. Let me explain why. First of all, broadly,
there are 180,000 retail outlets in the United States that sell
gasoline. Ten percent of them are owned and operated by the oil
companies; the other 90 percent are owned by independent
businessmen and independent businesswomen who have their own
marketing and sales strategies and determine the price of the
product, how much inventory to hold, and the like. They all
make these. Legally, we can't be privy to any information
there, and even if you had the capability to do so, I don't
think it would be easy to get your hands on it.
But if you look at it historically, you can talk about
trends, and the lag can't be as precise as by 1 day, but it is
going to happen.
Senator Durbin. I don't expect it to be precise, but you
can understand the cynicism of the consumer when you see a 47-
cent decrease in wholesale prices and you can't tell me when
they are going to benefit from it. Let us hope that they do.
Mr. Cavaney. They will.
Senator Durbin. Let me ask you the second question. Some
States like Indiana and Illinois are talking about reducing
their gasoline taxes. What assurance can you give consumers,
families, and businesses across America if we reduce any tax on
a gallon of gasoline that they will be able to measure that
impact in reduced cost at the pump?
Mr. Frank. Let me respond to that, Mr. Cavaney.
Governor O'Bannon in Indiana reduced the gasoline tax
effective July 1, and there is a roll-in period because it is
taxed as what goes into inventory. I can tell you what my
company did. We made a press announcement on Tuesday of this
week that we reduced the price of gasoline in the whole State
of Indiana by the amount of the sales tax decrease before July
1.
Senator Durbin. I am glad you did that. I wish we could
have a similar impact in Illinois. It is going to be tough to
measure how much of that is an impact of the wholesale price
going down, which you are not sure when we are going to see the
impact on.
Mr. Frank. They are different situations, sir.
Senator Durbin. I understand. For the consumer, it is the
same situation.
Mr. Cavaney, one of the things that you said here, I wrote
down several of your comments, and sometimes it is hard for me
as a liberal arts major to follow some of this deep, dark
economics. But you said at one point, how can you invest if you
are uncertain about economic return? I thought that was kind of
what capitalism is all about. You deal with the market.
Then you went on to say, let the market work. We have some
numbers here that suggest that the members of the American
Petroleum Institute have done very, very well in terms of the
profitability of their operations. Let me give you a couple
examples: First-quarter profits for the major private oil
companies in the United States over the year 2000, up 500
percent; BP-Amoco, profits up 296 percent; Exxon-Mobil, 108
percent; Phillips, 257 percent; Texaco, 473 percent. That is
the year 2000 first-quarter profits compared to the year 1999.
Now, it is interesting to me that those first-quarter
profits would be there, you would have such a good turnout for
your members, and then the consumers get nailed in the upper
Midwest with 40-, 50-, and 60-cent-a-gallon increases.
Mr. Cavaney. Senator, that is very explainable. In 1999,
the industry was in a depression. It was operating and selling
gasoline as historically low prices, lower than they sold
during the depression.
What I have here that I would like to submit for the
record, Business Week, May 15 edition, this is the Corporate
Scoreboard \1\ that lists all corporations and their earnings
over the first quarter, the exact period you cite.
---------------------------------------------------------------------------
\1\ The Corporate Scoreboard appears in the Appendix on page 290.
---------------------------------------------------------------------------
Let me just give you some examples of what we think is not
any evidence at all of getting excessive profits. These are the
returns, which is the net income as a function of sales on
ongoing operations: The telecommunications industry, 10.3
percent; non-bank financial, 10.8; banks, 14.6; computer
software, 17.4; electronics, 11.7; media, 11.9; all-industry,
7.3; and oil and gas industry, 5.9 percent.
So the amounts that you cite are from a low historical
base. If you compare them against all other corporations, you
can certainly not argue that there had been any excessive
profits in the industry.
Senator Durbin. I will make a matter of record here of the
increases between 1998 and 1999: ARCO, up 165 percent; BP-
Amoco, 35 percent. The list goes on and on. It is certainly a
lot more than 5 percent.
Mr. Cavaney. It is not.
Senator Durbin. The bottom line I want to get to is this:
When it comes to the government's involvement here, there are
environmental concerns which many of us in this country share.
No, we don't want you to drill everywhere. We don't want you
drilling offshore in vulnerable areas. Some of us were up in
Prince William Sound and saw what happened with the Exxon
Valdez. We don't want you--some of us don't want you to go in
the Arctic National Wildlife Refuge when you are diverting oil
that is being drilled out of Alaska to Japan instead of the
United States. And some of us believe that, yes, we can produce
energy and clean air for America. We don't think they are
inconsistent.
Mr. Cavaney. We believe the same thing, Senator, and we
would look forward to sitting down and having a dialogue and
trying to be constructive in that regard. We are not asking to
be able to drill everywhere, but we certainly need more
domestic energy sources if we are going to have any hope of----
Senator Voinovich. And the public ought to understand that
because we haven't done the exploration and we haven't gone
into the areas that that is part of the reason why they are
paying increased taxes----
Senator Durbin. Well, let me say, Mr. Chairman----
Senator Voinovich [continuing]. Or increased costs for
gasoline in this country, and the fact of the matter is it is
time that the environmentalists and the oil industry sat down
and started to look at balancing up the options, that there is
a possibility that you can have more domestic supply and at the
same time protect the environment, and they are not separated.
But for the last several years, the attitude is that if you do
any exploration, you are polluting the environment----
Senator Durbin. No, Mr. Chairman, on my time here--and I
have a minute and 25 seconds, and I have waited patiently all
afternoon for a chance to ask any questions. And let me just
say on my time, I don't disagree with your premise here. There
should be this conversation. But many of us are concerned when
the major oil companies want to go on public lands and drill
and not pay the taxpayers fair compensation for the oil that
they are deriving from our land, America's land.
And, second, it troubles me that during the course of this
conversation this afternoon, there have been, I think, precious
few opportunities for us to mention words like conservation and
fuel efficiency. It is as if this isn't part of the equation. I
think it is a big part. And when we talk about CAFE standards
and talk about SUVs being held to standards so that they have
some fuel economy--accountability, I don't think that is
unreasonable. I would like to make that part of the same
conversation.
Mr. Cavaney. Senator, we support conservation efforts. We
support efficiency efforts. And we also would like to,
hopefully, through your good offices and some of the others, to
begin the dialogue to talk about how can we have both, because
most of the clean air gains have come from the mobile sources,
which is the autos and ourselves. So we have the capacity to do
it. We would like to.
Senator Durbin. I yield back my time.
Senator Voinovich. Thank you, Senator Durbin.
I would like to just finish and adjourn this hearing with
one last word, and that is, shame on all of us if we don't get
together between now and the end of this year to come up with
some kind of an energy policy, and I would be very interested
in hearing the industry's point of view or anybody else that is
viewing this hearing on S. 2557, that is, the Lott-Murkowski
bill--I happen to be a cosponsor of that bill, but it would be
wonderful if we would be able to perhaps refer that to a
committee, get people, had testimony on it, and did it on a
kind of bipartisan basis and work on that between now and the
end of the year. There are some that want to bring it to the
floor for a vote. I am not sure that would work out because I
think it would get very partisan. But perhaps it should be
referred to a committee and let's start the dialogue. I will
talk to the Leader about it today, get it to a committee and
start, get the administration in, get the EPA in, get the
environmentalists in, get the oil companies in, and start to
see if we can't hammer out something so that maybe before the
end of the year we can pass a piece of legislation, or maybe at
least do enough work to get it up the flagpole high enough that
in the next administration we can tackle it immediately so
that, again, we don't find ourselves where we are today with
all of this going on and nothing to show for us.
Thank you very much.
Mr. Frank. Congratulations on taking the initiative to get
that ball rolling, Senator, because it is something that the
United States, our country, has been sorely lacking, and there
needs to be a balancing of interests, and issues, to arrive at
a workable plan that describes what our energy policy is.
Senator Voinovich. Thanks very much for your patience.
The record will remain open for 1 week for additional
submissions.\1\
---------------------------------------------------------------------------
\1\ The prepared statement of Senator Bayh appears in the Appendix
on page 283.
---------------------------------------------------------------------------
[Whereupon, at 4:50 p.m., the Committee was adjourned.]
A P P E N D I X
----------
PREPARED STATEMENT OF SENATOR CLELAND
Mr. Chairman, thank you for the opportunity to come here again
today to speak on the very important topic of rising oil prices. Since
this Committee's last hearing on this issue on March 24, oil prices
have steadily increased across the country resulting in sharply higher
gasoline prices, including in my own State. Only in the last week or
two have I heard reports that oil prices may have declined in certain
parts of the country. However, prices have not declined enough to offer
substantial relief to a vast majority of Americans.
I am especially concerned about the devastating effect that the
high gasoline prices may have on people with fixed incomes who lack the
means to absorb the increase in the face of other essential household
and personal expenses. Additionally, our farmers in the Southeast are
currently facing one of the worst droughts in recent memory. The
projections for this year's crops do not look good. We must realize
that high fuel prices have a tremendous effect on the agriculture
community. Those who are just getting by now have to contend with the
exorbitant cost of diesel and gas.
Though oil prices in Georgia are higher than they were last summer,
gasoline prices have not yet reached the levels currently experienced
in the Midwest. Since future increases remain a distinct possibility, I
am closely following the situation in the Midwest. This hearing
provides us with the opportunity to learn more about the impact that
rising oil prices have had across the country and the various reasons
for the higher fuel costs associated with the increase in oil prices.
The exorbitant price of gasoline in the Midwest has reached
approximately $2.30 per gallon in some cities and hopefully, today's
experts and officials will provide solutions that will significantly
reduce the cost of oil across the country.
Over the last several weeks, I have been contacted by many of my
constituents who have expressed their serious concerns about the impact
of the recent dramatic increase in petroleum prices. I must note that I
have heard a great deal of concern regarding the use of reformulated
gasoline or RFGs. In the Commerce Committee, we recently reported a
pipeline authorization and reform bill. It is the first time in many
years that pipelines have been the focus of discussion. It is seldom
noted that pipelines are an important form of transportation. In
Georgia, we have an excellent network of pipelines which distributes
fuel oil throughout the State. I recognize the importance of this
system to supply our pumps, and I realize that our pipelines are one
reason Georgians enjoy lower gas prices at the pump. Pipelines are an
interstate mode of transportation. As such, it is a national concern
that the challenges of transporting RFGs might increase the costs of
fuel to consumers.
Another aspect of this hearing is to examine the response from the
Executive Branch to rising gasoline prices. Last January, I wrote to
the President in order to express my concern over rising prices and to
ask that the Administration consider any and all policy options in
order to counteract this situation. The Administration has had some
success in encouraging OPEC ministers to increase oil output. However,
I feel that there is more that could be done. I look forward to hearing
the Administration's summary of actions to date, and I would be pleased
to know what we can expect in the near future. This is a desperate
situation, and we must act immediately.
And, of course, I hope we can get into the issue of the role of the
pricing policies of the oil companies in contributing to the current
program. As we all know, the Federal Trade Commission launched its
investigation along these lines yesterday, but I think some of today's
witnesses could shed light on this matter as well. Our constituents
want to know what we're doing in Washington to address the high price
of oil. As in most things, there is likely to be no single, simple
explanation but we need to do what we can to get to the bottom of this
serious situation. In an election year, there will be a great
temptation for demagoguery and partisanship. I hope we can resist that
temptation and develop a bipartisan consensus and course of action. I
look forward to hearing from our distinguished witnesses.
[GRAPHIC] [TIFF OMITTED] T5746.001
[GRAPHIC] [TIFF OMITTED] T5746.002
[GRAPHIC] [TIFF OMITTED] T5746.003
[GRAPHIC] [TIFF OMITTED] T5746.004
[GRAPHIC] [TIFF OMITTED] T5746.005
[GRAPHIC] [TIFF OMITTED] T5746.006
[GRAPHIC] [TIFF OMITTED] T5746.007
[GRAPHIC] [TIFF OMITTED] T5746.008
[GRAPHIC] [TIFF OMITTED] T5746.009
[GRAPHIC] [TIFF OMITTED] T5746.010
[GRAPHIC] [TIFF OMITTED] T5746.011
[GRAPHIC] [TIFF OMITTED] T5746.012
[GRAPHIC] [TIFF OMITTED] T5746.013
[GRAPHIC] [TIFF OMITTED] T5746.014
[GRAPHIC] [TIFF OMITTED] T5746.015
[GRAPHIC] [TIFF OMITTED] T5746.016
[GRAPHIC] [TIFF OMITTED] T5746.017
[GRAPHIC] [TIFF OMITTED] T5746.018
[GRAPHIC] [TIFF OMITTED] T5746.019
[GRAPHIC] [TIFF OMITTED] T5746.020
[GRAPHIC] [TIFF OMITTED] T5746.021
[GRAPHIC] [TIFF OMITTED] T5746.022
[GRAPHIC] [TIFF OMITTED] T5746.023
[GRAPHIC] [TIFF OMITTED] T5746.024
[GRAPHIC] [TIFF OMITTED] T5746.025
[GRAPHIC] [TIFF OMITTED] T5746.026
[GRAPHIC] [TIFF OMITTED] T5746.027
[GRAPHIC] [TIFF OMITTED] T5746.028
[GRAPHIC] [TIFF OMITTED] T5746.029
[GRAPHIC] [TIFF OMITTED] T5746.030
[GRAPHIC] [TIFF OMITTED] T5746.031
[GRAPHIC] [TIFF OMITTED] T5746.032
[GRAPHIC] [TIFF OMITTED] T5746.033
[GRAPHIC] [TIFF OMITTED] T5746.034
[GRAPHIC] [TIFF OMITTED] T5746.035
[GRAPHIC] [TIFF OMITTED] T5746.036
[GRAPHIC] [TIFF OMITTED] T5746.037
[GRAPHIC] [TIFF OMITTED] T5746.038
[GRAPHIC] [TIFF OMITTED] T5746.039
[GRAPHIC] [TIFF OMITTED] T5746.040
[GRAPHIC] [TIFF OMITTED] T5746.041
[GRAPHIC] [TIFF OMITTED] T5746.042
[GRAPHIC] [TIFF OMITTED] T5746.043
[GRAPHIC] [TIFF OMITTED] T5746.044
[GRAPHIC] [TIFF OMITTED] T5746.045
[GRAPHIC] [TIFF OMITTED] T5746.046
[GRAPHIC] [TIFF OMITTED] T5746.047
[GRAPHIC] [TIFF OMITTED] T5746.048
[GRAPHIC] [TIFF OMITTED] T5746.049
[GRAPHIC] [TIFF OMITTED] T5746.050
[GRAPHIC] [TIFF OMITTED] T5746.051
[GRAPHIC] [TIFF OMITTED] T5746.052
[GRAPHIC] [TIFF OMITTED] T5746.053
[GRAPHIC] [TIFF OMITTED] T5746.054
[GRAPHIC] [TIFF OMITTED] T5746.055
[GRAPHIC] [TIFF OMITTED] T5746.056
[GRAPHIC] [TIFF OMITTED] T5746.057
[GRAPHIC] [TIFF OMITTED] T5746.058
[GRAPHIC] [TIFF OMITTED] T5746.059
[GRAPHIC] [TIFF OMITTED] T5746.060
[GRAPHIC] [TIFF OMITTED] T5746.061
[GRAPHIC] [TIFF OMITTED] T5746.062
[GRAPHIC] [TIFF OMITTED] T5746.063
[GRAPHIC] [TIFF OMITTED] T5746.064
[GRAPHIC] [TIFF OMITTED] T5746.065
[GRAPHIC] [TIFF OMITTED] T5746.066
[GRAPHIC] [TIFF OMITTED] T5746.067
[GRAPHIC] [TIFF OMITTED] T5746.068
[GRAPHIC] [TIFF OMITTED] T5746.069
[GRAPHIC] [TIFF OMITTED] T5746.070
[GRAPHIC] [TIFF OMITTED] T5746.071
[GRAPHIC] [TIFF OMITTED] T5746.072
[GRAPHIC] [TIFF OMITTED] T5746.073
[GRAPHIC] [TIFF OMITTED] T5746.074
[GRAPHIC] [TIFF OMITTED] T5746.075
[GRAPHIC] [TIFF OMITTED] T5746.076
[GRAPHIC] [TIFF OMITTED] T5746.077
[GRAPHIC] [TIFF OMITTED] T5746.078
[GRAPHIC] [TIFF OMITTED] T5746.079
[GRAPHIC] [TIFF OMITTED] T5746.080
[GRAPHIC] [TIFF OMITTED] T5746.081
[GRAPHIC] [TIFF OMITTED] T5746.082
[GRAPHIC] [TIFF OMITTED] T5746.083
[GRAPHIC] [TIFF OMITTED] T5746.084
[GRAPHIC] [TIFF OMITTED] T5746.085
[GRAPHIC] [TIFF OMITTED] T5746.086
[GRAPHIC] [TIFF OMITTED] T5746.087
[GRAPHIC] [TIFF OMITTED] T5746.088
[GRAPHIC] [TIFF OMITTED] T5746.089
[GRAPHIC] [TIFF OMITTED] T5746.090
[GRAPHIC] [TIFF OMITTED] T5746.091
[GRAPHIC] [TIFF OMITTED] T5746.092
[GRAPHIC] [TIFF OMITTED] T5746.093
[GRAPHIC] [TIFF OMITTED] T5746.094
[GRAPHIC] [TIFF OMITTED] T5746.095
[GRAPHIC] [TIFF OMITTED] T5746.096
[GRAPHIC] [TIFF OMITTED] T5746.097
[GRAPHIC] [TIFF OMITTED] T5746.098
[GRAPHIC] [TIFF OMITTED] T5746.099
[GRAPHIC] [TIFF OMITTED] T5746.100
[GRAPHIC] [TIFF OMITTED] T5746.101
[GRAPHIC] [TIFF OMITTED] T5746.102
[GRAPHIC] [TIFF OMITTED] T5746.103
[GRAPHIC] [TIFF OMITTED] T5746.104
[GRAPHIC] [TIFF OMITTED] T5746.105
[GRAPHIC] [TIFF OMITTED] T5746.106
[GRAPHIC] [TIFF OMITTED] T5746.107
[GRAPHIC] [TIFF OMITTED] T5746.108
[GRAPHIC] [TIFF OMITTED] T5746.109
[GRAPHIC] [TIFF OMITTED] T5746.110
[GRAPHIC] [TIFF OMITTED] T5746.111
[GRAPHIC] [TIFF OMITTED] T5746.112
[GRAPHIC] [TIFF OMITTED] T5746.113
[GRAPHIC] [TIFF OMITTED] T5746.114
[GRAPHIC] [TIFF OMITTED] T5746.115
[GRAPHIC] [TIFF OMITTED] T5746.116
[GRAPHIC] [TIFF OMITTED] T5746.117
[GRAPHIC] [TIFF OMITTED] T5746.118
[GRAPHIC] [TIFF OMITTED] T5746.119
[GRAPHIC] [TIFF OMITTED] T5746.120
[GRAPHIC] [TIFF OMITTED] T5746.121
[GRAPHIC] [TIFF OMITTED] T5746.122
[GRAPHIC] [TIFF OMITTED] T5746.123
[GRAPHIC] [TIFF OMITTED] T5746.124
[GRAPHIC] [TIFF OMITTED] T5746.125
[GRAPHIC] [TIFF OMITTED] T5746.126
[GRAPHIC] [TIFF OMITTED] T5746.127
[GRAPHIC] [TIFF OMITTED] T5746.128
[GRAPHIC] [TIFF OMITTED] T5746.129
[GRAPHIC] [TIFF OMITTED] T5746.130
[GRAPHIC] [TIFF OMITTED] T5746.131
[GRAPHIC] [TIFF OMITTED] T5746.132
[GRAPHIC] [TIFF OMITTED] T5746.133
[GRAPHIC] [TIFF OMITTED] T5746.134
[GRAPHIC] [TIFF OMITTED] T5746.135
[GRAPHIC] [TIFF OMITTED] T5746.136
[GRAPHIC] [TIFF OMITTED] T5746.137
[GRAPHIC] [TIFF OMITTED] T5746.138
[GRAPHIC] [TIFF OMITTED] T5746.139
[GRAPHIC] [TIFF OMITTED] T5746.140
[GRAPHIC] [TIFF OMITTED] T5746.141
[GRAPHIC] [TIFF OMITTED] T5746.142
[GRAPHIC] [TIFF OMITTED] T5746.143
[GRAPHIC] [TIFF OMITTED] T5746.144
[GRAPHIC] [TIFF OMITTED] T5746.145
[GRAPHIC] [TIFF OMITTED] T5746.146
[GRAPHIC] [TIFF OMITTED] T5746.147
[GRAPHIC] [TIFF OMITTED] T5746.148
[GRAPHIC] [TIFF OMITTED] T5746.149
[GRAPHIC] [TIFF OMITTED] T5746.150
[GRAPHIC] [TIFF OMITTED] T5746.151
[GRAPHIC] [TIFF OMITTED] T5746.152
[GRAPHIC] [TIFF OMITTED] T5746.153
[GRAPHIC] [TIFF OMITTED] T5746.154
[GRAPHIC] [TIFF OMITTED] T5746.155
[GRAPHIC] [TIFF OMITTED] T5746.156
[GRAPHIC] [TIFF OMITTED] T5746.157
[GRAPHIC] [TIFF OMITTED] T5746.158
[GRAPHIC] [TIFF OMITTED] T5746.159
[GRAPHIC] [TIFF OMITTED] T5746.160
[GRAPHIC] [TIFF OMITTED] T5746.161
[GRAPHIC] [TIFF OMITTED] T5746.162
[GRAPHIC] [TIFF OMITTED] T5746.163
[GRAPHIC] [TIFF OMITTED] T5746.164
[GRAPHIC] [TIFF OMITTED] T5746.165
[GRAPHIC] [TIFF OMITTED] T5746.166
[GRAPHIC] [TIFF OMITTED] T5746.167
[GRAPHIC] [TIFF OMITTED] T5746.168
[GRAPHIC] [TIFF OMITTED] T5746.169
[GRAPHIC] [TIFF OMITTED] T5746.170
[GRAPHIC] [TIFF OMITTED] T5746.171
[GRAPHIC] [TIFF OMITTED] T5746.172
[GRAPHIC] [TIFF OMITTED] T5746.173
[GRAPHIC] [TIFF OMITTED] T5746.174
[GRAPHIC] [TIFF OMITTED] T5746.175
[GRAPHIC] [TIFF OMITTED] T5746.176
[GRAPHIC] [TIFF OMITTED] T5746.177
[GRAPHIC] [TIFF OMITTED] T5746.178
[GRAPHIC] [TIFF OMITTED] T5746.179
[GRAPHIC] [TIFF OMITTED] T5746.180
[GRAPHIC] [TIFF OMITTED] T5746.181
[GRAPHIC] [TIFF OMITTED] T5746.182
[GRAPHIC] [TIFF OMITTED] T5746.183
[GRAPHIC] [TIFF OMITTED] T5746.184
[GRAPHIC] [TIFF OMITTED] T5746.185
[GRAPHIC] [TIFF OMITTED] T5746.186
[GRAPHIC] [TIFF OMITTED] T5746.187
[GRAPHIC] [TIFF OMITTED] T5746.188
[GRAPHIC] [TIFF OMITTED] T5746.189
[GRAPHIC] [TIFF OMITTED] T5746.190
[GRAPHIC] [TIFF OMITTED] T5746.191
[GRAPHIC] [TIFF OMITTED] T5746.192
[GRAPHIC] [TIFF OMITTED] T5746.193
[GRAPHIC] [TIFF OMITTED] T5746.194
[GRAPHIC] [TIFF OMITTED] T5746.195
[GRAPHIC] [TIFF OMITTED] T5746.196
[GRAPHIC] [TIFF OMITTED] T5746.197
[GRAPHIC] [TIFF OMITTED] T5746.198
[GRAPHIC] [TIFF OMITTED] T5746.199
[GRAPHIC] [TIFF OMITTED] T5746.200
[GRAPHIC] [TIFF OMITTED] T5746.201
[GRAPHIC] [TIFF OMITTED] T5746.202
[GRAPHIC] [TIFF OMITTED] T5746.203
[GRAPHIC] [TIFF OMITTED] T5746.204
[GRAPHIC] [TIFF OMITTED] T5746.205
[GRAPHIC] [TIFF OMITTED] T5746.206
[GRAPHIC] [TIFF OMITTED] T5746.207
[GRAPHIC] [TIFF OMITTED] T5746.208
[GRAPHIC] [TIFF OMITTED] T5746.209
[GRAPHIC] [TIFF OMITTED] T5746.210
[GRAPHIC] [TIFF OMITTED] T5746.211
[GRAPHIC] [TIFF OMITTED] T5746.212
[GRAPHIC] [TIFF OMITTED] T5746.213
[GRAPHIC] [TIFF OMITTED] T5746.214
[GRAPHIC] [TIFF OMITTED] T5746.215
[GRAPHIC] [TIFF OMITTED] T5746.216
[GRAPHIC] [TIFF OMITTED] T5746.217
[GRAPHIC] [TIFF OMITTED] T5746.218
[GRAPHIC] [TIFF OMITTED] T5746.219
[GRAPHIC] [TIFF OMITTED] T5746.220
[GRAPHIC] [TIFF OMITTED] T5746.221
[GRAPHIC] [TIFF OMITTED] T5746.222
[GRAPHIC] [TIFF OMITTED] T5746.223
[GRAPHIC] [TIFF OMITTED] T5746.224
[GRAPHIC] [TIFF OMITTED] T5746.225
[GRAPHIC] [TIFF OMITTED] T5746.226
[GRAPHIC] [TIFF OMITTED] T5746.227
[GRAPHIC] [TIFF OMITTED] T5746.228
[GRAPHIC] [TIFF OMITTED] T5746.229
[GRAPHIC] [TIFF OMITTED] T5746.230
[GRAPHIC] [TIFF OMITTED] T5746.231
[GRAPHIC] [TIFF OMITTED] T5746.232
[GRAPHIC] [TIFF OMITTED] T5746.233
[GRAPHIC] [TIFF OMITTED] T5746.234
[GRAPHIC] [TIFF OMITTED] T5746.235
[GRAPHIC] [TIFF OMITTED] T5746.236
[GRAPHIC] [TIFF OMITTED] T5746.237
[GRAPHIC] [TIFF OMITTED] T5746.238
[GRAPHIC] [TIFF OMITTED] T5746.239
[GRAPHIC] [TIFF OMITTED] T5746.240
[GRAPHIC] [TIFF OMITTED] T5746.241
[GRAPHIC] [TIFF OMITTED] T5746.242
[GRAPHIC] [TIFF OMITTED] T5746.243
[GRAPHIC] [TIFF OMITTED] T5746.244
[GRAPHIC] [TIFF OMITTED] T5746.245
[GRAPHIC] [TIFF OMITTED] T5746.246
-