[House Hearing, 107 Congress] [From the U.S. Government Publishing Office] GASOLINE SUPPLY--ANOTHER ENERGY CRISIS? ======================================================================= HEARING before the SUBCOMMITTEE ON ENERGY POLICY, NATURAL RESOURCES AND REGULATORY AFFAIRS of the COMMITTEE ON GOVERNMENT REFORM HOUSE OF REPRESENTATIVES ONE HUNDRED SEVENTH CONGRESS FIRST SESSION __________ JUNE 14, 2001 __________ Serial No. 107-55 __________ Printed for the use of the Committee on Government Reform Available via the World Wide Web: http://www.gpo.gov/congress/house http://www.house.gov/reform U.S. GOVERNMENT PRINTING OFFICE 77-984 WASHINGTON : 2002 ____________________________________________________________________________ For Sale by the Superintendent of Documents, U.S. Government Printing Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; (202) 512-1800 Fax: (202) 512-2250 Mail: Stop SSOP, Washington, DC 20402-0001 COMMITTEE ON GOVERNMENT REFORM DAN BURTON, Indiana, Chairman BENJAMIN A. GILMAN, New York HENRY A. WAXMAN, California CONSTANCE A. MORELLA, Maryland TOM LANTOS, California CHRISTOPHER SHAYS, Connecticut MAJOR R. OWENS, New York ILEANA ROS-LEHTINEN, Florida EDOLPHUS TOWNS, New York JOHN M. McHUGH, New York PAUL E. KANJORSKI, Pennsylvania STEPHEN HORN, California PATSY T. MINK, Hawaii JOHN L. MICA, Florida CAROLYN B. MALONEY, New York THOMAS M. DAVIS, Virginia ELEANOR HOLMES NORTON, Washington, MARK E. SOUDER, Indiana DC JOE SCARBOROUGH, Florida ELIJAH E. CUMMINGS, Maryland STEVEN C. LaTOURETTE, Ohio DENNIS J. KUCINICH, Ohio BOB BARR, Georgia ROD R. BLAGOJEVICH, Illinois DAN MILLER, Florida DANNY K. DAVIS, Illinois DOUG OSE, California JOHN F. TIERNEY, Massachusetts RON LEWIS, Kentucky JIM TURNER, Texas JO ANN DAVIS, Virginia THOMAS H. ALLEN, Maine TODD RUSSELL PLATTS, Pennsylvania JANICE D. SCHAKOWSKY, Illinois DAVE WELDON, Florida WM. LACY CLAY, Missouri CHRIS CANNON, Utah ------ ------ ADAM H. PUTNAM, Florida ------ ------ C.L. ``BUTCH'' OTTER, Idaho ------ EDWARD L. SCHROCK, Virginia BERNARD SANDERS, Vermont JOHN J. DUNCAN, Tennessee (Independent) Kevin Binger, Staff Director Daniel R. Moll, Deputy Staff Director James C. Wilson, Chief Counsel Robert A. Briggs, Chief Clerk Phil Schiliro, Minority Staff Director Subcommittee on Energy Policy, Natural Resources and Regulatory Affairs DOUG OSE, California, Chairman C.L. ``BUTCH'' OTTER, Idaho JOHN F. TIERNEY, Massachusetts CHRISTOPHER SHAYS, Connecticut TOM LANTOS, California JOHN M. McHUGH, New York EDOLPHUS TOWNS, New York STEVEN C. LaTOURETTE, Ohio PATSY T. MINK, Hawaii CHRIS CANNON, Utah DENNIS J. KUCINICH, Ohio ------ ------ ROD R. BLAGOJEVICH, Illinois ------ ------ Ex Officio DAN BURTON, Indiana HENRY A. WAXMAN, California Dan Skopec, Staff Director Jonathan Tolman, Professional Staff Member Regina McAllister, Clerk Michelle Ash, Minority Counsel C O N T E N T S ---------- Page Hearing held on June 14, 2001.................................... 1 Statement of: Cook, John, Director, Petroleum Division, Energy Information Administration, U.S. Department of Energy; and Rob Brenner, Acting Assistant Administrator, Office of Air and Radiation, U.S. Environmental Protection Agency............ 15 Coursey, Don L., Ameritech professor of public policy, University of Chicago, and Policy Solutions, LTD.; Robert Slaughter, general counsel, National Petrochemical and Refiners Association; Ben Lieberman, senior policy analyst, the Competitive Enterprise Institute; and A. Blakeman Early, environmental consultant, American Lung Association. 110 Letters, statements, etc., submitted for the record by: Brenner, Rob, Acting Assistant Administrator, Office of Air and Radiation, U.S. Environmental Protection Agency, Letter dated June 27, 2001............................... 108 Prepared statement of.................................... 34 Cook, John, Director, Petroleum Division, Energy Information Administration, U.S. Department of Energy: E-mail dated June 28, 2001............................... 101 Prepared statement of.................................... 19 Coursey, Don L., Ameritech professor of public policy, University of Chicago, and Policy Solutions, LTD., prepared statement of............................................... 113 Early, A. Blakeman, environmental consultant, American Lung Association, prepared statement of......................... 156 Lieberman, Ben, senior policy analyst, the Competitive Enterprise Institute: Names of energy companies that fund the organization..... 184 Prepared statement of.................................... 141 Mink, Hon. Patsy T., a Representative in Congress from the State of Hawaii, information concerning Alcohol fuels tax incentives................................................. 89 Ose, Hon. Doug, a Representative in Congress from the State of California: Letters dated May 3 and June 11, 2001.................... 186 Prepared statement of.................................... 4 Slaughter, Robert, general counsel, National Petrochemical and Refiners Association: Letter dated February 14, 2000........................... 179 Prepared statement of.................................... 121 Tierney, Hon. John F., a Representative in Congress from the State of Massachusetts, prepared statement of.............. 11 Towns, Hon. Edolphus, a Representative in Congress from the State of New York, prepared statement of................... 192 Waxman, Hon. Henry A., a Representative in Congress from the State of California, letter dated June 14, 2001............ 46 GASOLINE SUPPLY--ANOTHER ENERGY CRISIS? ---------- THURSDAY, JUNE 14, 2001 House of Representatives, Subcommittee on Energy Policy, Natural Resources and Regulatory Affairs, Committee on Government Reform, Washington, DC. The subcommittee met, pursuant to notice, at 10 a.m., in room 2154, Rayburn House Office Building, Hon. Doug Ose (chairman of the subcommittee) presiding. Members present: Representatives Ose, Waxman, Otter, LaTourette, Cannon, Tierney, Mink, and Kucinich. Staff present: Dan Skopec, staff director; Barbara Kahlow, deputy staff director; Jonathan Tolman, professional staff member; Regina McAllister, clerk; Michelle Ash, Greg Dotson, Elizabeth Mundinger, and Alexandra Teitz, minority counsels; Andrei Greenawalt, minority special assistant; and Kate Harrington, minority staff assistant. Mr. Ose. Good morning. We welcome everybody to the committee hearing. Today we are going to take a look at gasoline prices. Joining us is Mr. Cannon of Utah. I presume Mr. Tierney will be here soon. We will start with opening statements, then proceed to the witnesses for theirs. But, first of all, let me welcome everyone. We appreciate your taking the time to come and visit, particularly our witnesses. I'm sure the information you provide will be very helpful. The best known price in America is of gasoline, there isn't any doubt. Americans see it posted along the road dozens of times every day, they pull in to fill up at least once a week, if not two or three times. Filling up with gas today is an expensive proposition. Last Monday, the average price for regular gasoline nationwide was $1.65 a gallon. In California, it was even higher, $1.95, with some cities seeing prices over $2. For working Americans filling up their gas tank is not a luxury, it is a necessity. They have to go to work, they have to take the kids to school, they have to go to the grocery store, they have to go to the doctor or they have to go to the emergency room. Like it or not, gasoline is the energy that literally fuels our everyday life. When prices skyrocket, as they have in the past few weeks, it has a dramatic effect not only on the economy but also on the pocketbooks of everyday families, particularly those on low or fixed incomes. Unfortunately, this is not the first year that gasoline prices have suddenly escalated in the spring. Two years ago, the price of gas jumped dramatically on the West Coast. Last spring, the price of gasoline skyrocketed in the Midwest, and this year, prices have done the same. This sequence of events, the repetitive pattern, begs the question, if nothing changes, what is going to happen next year? It seems that the events of the last 2 years have been a series of warnings that there is something wrong with the gasoline market. But it is not just the recent price increases that suggest there is a problem. Even though demand for gasoline has risen nearly every year since 1982, refining capacity has actually declined more than 10 percent since that time. Today, refineries nationwide are operating at over 97 percent of capacity, essentially full tilt. Even when operating at such a high rate, refineries are barely keeping up with demand. At such a high utilization rate, there is virtually no room for error. Any accident or error can cause a supply disruption, with dramatic consequences for the price of gasoline. This is a problem of particular concern for California. The prospect of rolling blackouts across the State creates the specter of another energy crisis, this time in gasoline. If the lack of power to refineries significantly disrupts supply, some analysts have predicted the price of gasoline could go to $3 a gallon. That benefits no one. With eminent blackouts and high natural gas prices, the California economy can ill afford a third crisis in gasoline prices. The effect would be devastating, not only in generic economic terms of a recession, but also in personal terms, affecting Mr. Waxman's district, my district, every single district of every single member from California, with job loss and financial hardship. A gasoline crisis due to refinery blackouts is avoidable. On May 3rd of this year, Chairman Dan Burton, Mr. Steve Horn and I sent a letter to California Governor Gray Davis, urging him to place refineries on the list of facilities exempt from having their power cutoff. Blackouts at refineries can and should be avoided. There is no reason to substitute a shortage of gasoline for a shortage of electricity. One reason that California is so sensitive to supply disruptions is a function of its special requirements for clean burning gasoline. California's own special blend of gasoline, although good for the environment, means that California must produce virtually all of its gasoline inside the State. When there's a supply shortage, refiners in the rest of the country can't simply ship more gasoline to California. And although California may be the largest example of this problem, it is by no means alone. Twenty years ago, the Nation was essentially one single market for gasoline. It was a commodity, if you will. Today, the Nation has been balkanized into dozens of tiny boutique markets with their own specialized blends of gasoline. In Chicago, there's a unique blend of gasoline. In Mr. Cannon's home State of Utah, there are two special blends in addition to the conventional blend of gasoline. The principal question that concerns me about these boutique islands is not whether these special blends are more or less expensive to produce than conventional gasoline, but do they make the entire market less stable. Does this overlay of regulatory barriers on top of the current supply problems make the market susceptible to recurrent spikes? Beyond this balkanization of the gasoline market is the overarching regulation of gasoline under the Clean Air Act, particularly the oxygenate mandate added by Congress in 1990. On Tuesday, the EPA declined to grant California a waiver from the oxygenate requirement. This waiver is critical to California's continued commitment to protect water quality and reduce skyrocketing gasoline prices. This ruling is a setback to our continued efforts to help Californians acquire clean, affordable gasoline. I will continue to work with the administration and our State government to seek alternative ways to implement this waiver. I think the fact that California cannot get a waiver from the EPA administrator to protect its water shows a fundamental problem with the way our Nation's environmental laws are structured. Fundamentally, I'm disturbed that the Federal Government seems to be in the business of micromanaging what goes into California's gasoline and everyone else's, for that matter, too. Hopefully the witnesses today can enlighten us on these issues facing the gasoline market and possibly point toward some productive solutions. I do look forward to your testimony. Now I want to recognize Mr. Tierney for 5 minutes for an opening statement. [The prepared statement of Hon. Doug Ose follows:] [GRAPHIC] [TIFF OMITTED] T7984.001 [GRAPHIC] [TIFF OMITTED] T7984.002 Mr. Tierney. Thank you, Mr. Chairman. I'm going to yield to Mr. Waxman, who has another committee meeting to go to, if that's all right. Mr. Waxman. Thank you very much, Mr. Chairman, for holding this hearing, Mr. Tierney for yielding to me. I'll try to be at this hearing as much as possible, because I think it's a very important one. Just since March, gasoline prices rose an average 31 cents per gallon nationwide. The national average for self-service regular is $1.65, which is 30 cents lower than the price of regular in California. Gasoline prices often rise for reasons outside of the control of U.S. policymakers. In the 1970's, the cost of gasoline soared when OPEC cut oil production and there was little we could do about this. Similarly, a series of OPEC production cuts that began in December 1998 caused gasoline prices to rise again. In these circumstances, U.S. policymakers have limited options. When President Clinton faced this challenge in 2000, he successfully urged OPEC and non-OPEC countries to increase oil production, and I hope that President Bush will make similar efforts. What is unforgivable, however, is for U.S. policymakers to create a gas crisis through their own blunders. But unfortunately, this is exactly what the Bush administration is doing. Mr. Chairman, you and I join the entire California delegation, both Republicans and Democrats, in supporting California's request for a waiver of the Federal oxygenate requirements in gasoline. The science justified this waiver, and EPA wanted to grant it. But just 2 days ago, President Bush denied it. This decision, which makes absolutely no sense, has the potential to cause a gasoline crisis in California. The decision benefits political supporters of President Bush like Archer Daniels Midland, the largest manufacturer of ethanol. But for California, it means more air pollution and higher fuel costs. Starting in 2003, California has banned the use of methyl tertiary butyl ether [MTBE], in gasoline, because MTBE contaminates drinking water wells. Because California's waiver request was denied, California will be forced to use the only practical alternative, ethanol. In California, ethanol will not reduce air pollution, yet it is more expensive than MTBE, and it's in short supply. In fact, industry officials estimate that it will take about one third of current U.S. production of ethanol for California to meet the Federal oxygenate requirements. Shortage of ethanol could cause gas prices to rise by 50 cents a gallon, according to California Governor Gray Davis. What's more, President Bush's decision will cause balkanization of the fuel supply in California. This is completely contradictory to ``reducing the number of boutique fuels,'' a goal of his National energy policy. Because California will not receive a wavier, oil refiners will have to supply California with at least two different fuels in areas that are classified as severe or extreme, non- attainment areas under the Clean Air Act, like Los Angeles, oil refineries will have to add ethanol to meet the oxygenate requirements of the Clean Air Act. But in other parts of the State, oil refineries only have to meet California's clean fuel standards, which do not require the addition of ethanol. Moreover, gasoline with ethanol must be segregated from non-oxygenated throughout the distribution process and large quantities of ethanol will have to be imported from halfway across the country. President Bush's decision is so mind- boggling that I awarded him a golden jackpot for failing to grant the California waiver. The golden jackpot is an award that recognizes indefensible government decisions that benefit special interests at the expense of the public interest. Besides avoiding blunders like the California decision, there are essential affirmative steps that we should implement to reduce gasoline prices. President Bush should put pressure on OPEC to increase supply. We should also increase the fuel economy standards required in motor vehicles, which would significantly reduce our demand for gasoline. Mr. Chairman, we worked together on a bipartisan basis to urge President Bush to grant California's waiver. We were unsuccessful in that effort, but I hope we can work together on other policies to alleviate gasoline price hikes and any other potential fuel shortages. I thank you very much for allowing me to make this opening statement. Mr. Ose. Thank you, Mr. Waxman. Mr. Cannon. Mr. Cannon. Thank you, Mr. Chairman. I have an opening statement that I'd just like to submit for the record. Mr. Ose. Without objection. Mr. Tierney. Mr. Tierney. Thank you, Mr. Chairman. I want to thank you for holding this hearing. As Mr. Waxman already stated, the price of gasoline has increased significantly between May and March of this year, and the American public does deserve to know what's happening and what we're going to do about it. Clearly, one factor that is contributing to the rise in high prices is the high cost of crude oil. In December 1998, the cost of crude oil was 23.4 cents a gallon. Today that cost is two to three times more expensive at around 66 cents a gallon, and it reflects the fact that OPEC countries have significantly limited supplies. Other foreign oil producers, including Mexico, are joining in and significantly reducing their production. If we're going to see relief at the pump any time soon, we're going to have to address that problem. Mr. Waxman alluded to the fact that in the previous administration, President Clinton lobbied foreign producers, and as a result they increased their production quotas by more than 3\1/2\ million barrels per day. It's interesting to note that during that period of time, as a candidate, the current President was pretty harsh in his criticism of President Clinton, pretty insistent, in fact, that President Clinton do that lobbying, which he then in turn did and met with some success. I urge the Bush administration now to heed its own words and do the same. We've had a decrease in the months that this administration has been in office. Mexico alone, with which this particular administration is supposed to have a special relationship, could increase its production capacity by 500,000 barrels per day over the next 2 years, even more than that, going further out. They have in fact reduced their production by some 40,000 per day. So, we also have to look at the issue of market manipulation. We should be looking at it seriously as it pertains to the oil industry. I notice that in some of the written testimony, and I suspect that we'll hear in some of the testimony today, claims that the Federal Trade Commission found no illegality with respect to what went on in the Midwest last year. But that begs the question, in fact, that what they found was that gasoline price spikes last spring in the Midwest were caused in part by refineries curtailing production and withholding supply. That may not be illegal, but it certainly was a cause, part of the cause of the rise in prices. Three companies produced 23 percent less reformulated gasoline in 2000 than they did in 1999, thus substantially limiting supply. One company that was later identified by the Wall Street Journal as Marathon Ashland substantially increased its production of reformulated gasoline, and then, despite its increased production that increased excess supplies, it withheld supplies in order to sustain high retail prices. So, maybe there was nothing illegal about it, and maybe the industry wants to keep going around banging on that drum. But, the fact of the matter is, they took actions, and by those actions, we had a price hike. The Wall Street Journal reported that ``the steep prices substantially boosted prices for Marathon Ashland,'' and refining and marketing profits were more than double from the year before. Marathon Ashland represents more than 5 percent of the total refining capacity in the United States. Clearly, if this type of behavior is continuing at Marathon Ashland or other refineries, and this should be explained, it could explain part of the steep rise in prices. The refining industry is making huge profits and consumers are paying for it at the pump. Oil Daily, which is an industry newsletter, reported, ``U.S. independent refiners say that they are on pace to exceed last year's record profits, due to robust refining margins--Valero and Sunoco both announced that second- quarter profits would exceed Wall Street forecasts by a hefty margin, owing largely to the strength of the U.S. gasoline market, where profit margins soared in April and May--a combination of low product inventories, tightening environmental specifications on fuels, and strong demand has led to higher-than-normal refining margins in the United States over the past year, lining the pockets of refiners.'' Between 1999 and 2000, profits for the top 10 petroleum refining companies on average have doubled. The profits of Valero Energy Services increased by 437 percent in this same time period: profits for Phillips Petroleum increased by 127 percent; and profits for Chevron increased by a mere 110 percent. In addition, profits in the first quarter of 2001 are on average 81 percent higher than they were in the first quarter of 2000. This is the same industry that received tens of billions of tax credits, and is expected to benefit from another $15 billion in tax breaks and incentives over the next 5 years. I hope, Mr. Chairman, that this hearing will help us determine whether a portion of these enormous profits came from price gouging or from market manipulation. At this hearing, we can also anticipate hearing a great deal of discussion regarding environmental protections. I would like to take a moment to urge the President to improve the corporate average fuel economy standards. We have the technology to implement increases, we can conserve 3 million barrels per day and we can pay less at the pump. Regardless of the Vice President's claim that real men don't conserve, in fact, conservation can have a serious, positive impact, and we would reduce our contribution to global warming at the same time. I expect that some may claim that other environmental protections contribute to higher gasoline prices, so I want to take a moment and review some of these claims. Last spring, when there were gasoline price hikes in the Midwest, especially in the price for reformulated gasoline [RFG], many claimed that the price increase was due to the RFG program. However, we investigated this issue extensively and learned that environmental regulations were not to blame. In fact, the average retail price for RFG everywhere except in Chicago and Milwaukee was 1 percent lower than the average retail cost of conventional gasoline, indicating that RFG can be produced inexpensively. Furthermore, the Federal Trade Commission, as I mentioned earlier, found that the refineries in the Chicago and Milwaukee area were curtailing production and withholding supplies of RFG to the region, and these activities contributed to the price hikes. Others may charge that environmental protection has discouraged expansion of our domestic refining capacity. President Bush, in fact, recommends one, that the EPA provide more regulatory certainty to refinery owners and streamline the permitting process, two, that the EPA review new source review, including administrative interpretation and implementation and its impact on investment in new utility and refinery generation capacity, and three, the Attorney General review existing enforcement actions regarding new source review to assure that the enforcement actions are consistent with the Clean Air Act and its regulations. Now, anybody reading the testimony of some of our witnesses today would wonder whether the administration was looking over the shoulder of the people writing that testimony or vice versa, but it's remarkably close. New source review requires new refineries, and existing refineries that undergo a significant expansion that substatially increases emissions of pollution to install up-to- date pollution controls. There is little, if any, evidence that they have discouraged the building of new refineries or the expansion of existing refineries. Industry has not applied for a permit to build a new refinery for over 25 years. In fact, industry closed down 50 refineries over the last 10 years, presumably 50 of the dirtiest refineries, thus giving us cleaner air. During the same period, refinery capacity at existing facilities has expanded and the EPA has not denied a single permit to expand. The evidence indicates that the choice not to build new refineries was primarily the result of business decisions, market forces, not environmental regulations. For example, the New York Times reported on May 13, 2001, ``such regulations are viewed by many executives as nuisances rather than as barriers to meeting demand--but, the bigger headache for industry is the fierce competition that keeps profit margins thin. Our margins are not wide enough to justify building new refineries. Where we need to expand, we do it at the existing sites''--from Gene Edwards, senior vice president of Valero Energy of San Antonio, one of the Nation's largest independent refiners. Moreover, given the industry's record profits, it appears that refineries can afford the cost of installing modern pollution controls. And last, let me indicate that with respect to boutique fuels, the President also recommended review of the use of boutique fuels. It's important to note that boutique fuels have arisen primarily as a function of States' rights, with the encouragement and support of oil companies. In the words of the National Petrochemicals and Refiners Association, ``because local air quality conditions vary, NPRA does not support the establishment of a single performance standard for gasoline or diesel throughout the U.S.'' However, there is a concern that the number of fuels may be increasing gasoline prices, and if that's the case, why not require cleaner burning fuel nationwide? I understand that there are concerns about the oxygenate requirement in RFG. However, we could require a fuel that is at least as clean as RFG. We learned that RFG could be produced inexpensively, and in fact, during the price spikes of the spring of 2000 the cost of RFG was generally 1 cent lower than conventional gasoline. Mr. Chairman, I know my time has run and you've been kind to listen to that. I just want to say that I will ask for unanimous consent to include copies of articles and testimony that I referred to, as well as miscellaneous materials in the record. Mr. Ose. Without objection. [The prepared statement of Hon. John F. Tierney follows:] [GRAPHIC] [TIFF OMITTED] T7984.003 [GRAPHIC] [TIFF OMITTED] T7984.004 [GRAPHIC] [TIFF OMITTED] T7984.005 Mr. Tierney. The balance of my remarks I'll put on the record, and I look forward to hearing from these witnesses and getting more evidence. Thank you. Mr. Ose. Thank you, Mr. Tierney. Mr. Otter for 5 minutes. Will the counsel please start the clock? Mr. Otter. I have no opening statement, thank you, Mr. Chairman. Mr. Ose. Do you have anything you wish to submit for the record? Mr. Otter. No, I do not. Mr. Ose. All right. Mr. Kucinich for 5 minutes. Mr. Kucinich. I thank the gentleman. Oil companies posting record profits are blaming everyone but themselves for the excessive gas price increases. The consumer is being gouged and the oil companies continue to avoid their responsibilities. Their record profits are massive. Consider the 251 percent increase in profits Occidental reaped last year, or the $17.7 billion profit posted by Exxon-Mobil last year. If environmental regulations are to blame for excessive gasoline prices, oil companies should be supporting them, because they're making a killing. But they don't. Because they know that environmental regulations have little to no impact on gasoline prices. If you want to know why gasoline prices are high, all you have to do is follow the money. Oil companies have it, and I don't think it got there accidentally. I've introduced H.R. 1967, the Gas Price Spike Act of 2001, which will authorize a windfall profits tax on gasoline and other related fuels, create tax credits for ultra-efficient vehicles, lower fares for mass transit and grant the Attorney General the authority to order the licensing of reformulated gasoline patents at a fair and competitive price. This legislation will institute a windfall profit tax on gasoline, diesel and crude oil. Such as tax is to be imposed on all industry profits that are above a reasonable profit level, which should be based on the history of oil company profits. This proposal would not increase the cost of gasoline or any other fuel, because this proposal does not tax the price of any of these fuels. It only taxes excessive profits at each transaction in the production of these fuels. Some of the revenue from the windfall profits tax will be used to offer tax credits of up to $6,000 to Americans who buy ultra-efficient cars that are union made in America. These will be directly available to the purchaser of a car that traveled at least 45 miles on a single gallon of gas or driven with an electric motor. In an effort to provide relief, the bill makes funding available to regional transit authorities to offset significantly reduced mass transit fares during times of gas price spikes. The gas industry has also blamed high prices of reformulated gasoline on a patent dispute with Unocal that is deterring the industry from making cleaner burning reformulated gasoline [RFG], and making RFG more expensive for consumers. By amending the Clean Air Act, the monopoly control of RFG is eliminated. This will lead to lower gasoline prices because it will make the process for manufacturing RFG available to all oil companies. The owners of the patents will be fairly compensated, more RFG will be produced, lowering the price of RFG. I think it's particularly vexing to have a condition where consumers are being socked with these high prices, being gouged at the pump and simultaneously told that they should expect to have the quality of their air diminished. There's one transfer of wealth going on, from the consumer to the oil companies, because of the way the market is rigged. And there's another transfer of wealth going on, the wealth of the natural treasure of our resource of clean air transferred to these companies that do not want to abide by environmental regulations that are ensuring the quality of life for all Americans. So I think this is a particularly interesting hearing to have, and I appreciate a chance to be present at it. Thank you, Mr. Chairman. Mr. Ose. The gentleman's time has expired. The Chair recognizes the gentlelady from Hawaii, Mrs. Mink, for 5 minutes. Mrs. Mink. Thank you, Mr. Chairman. I reserve my right to include my remarks at the end of the hearing. Thank you. Mr. Ose. Just a moment. Mrs. Mink, would you clarify? You're going to make your remarks during the course of the hearing? Mrs. Mink. I reserve my time for the end, where I could make my remarks at that time. Mr. Ose. We'll be happy to give you time at the end, regardless. Mrs. Mink. Thank you. Mr. Ose. OK. At this committee, we swear in our witnesses, so if you would please rise. [Witnesses sworn.] Mr. Ose. Let the record show that the witnesses answered in the affirmative. Joining us on the first panel today is Mr. John Cook, who is the Director of the Petroleum Division for the Energy Information Administration at the Department of Energy, and also Mr. Robert D. Brenner, who is the Acting Assistant Administrator for the Office of Air and Radiation at the U.S. Environmental Protection Agency. Gentlemen, thank you for coming. Mr. Cook, you're recognized for 5 minutes. STATEMENTS OF JOHN COOK, DIRECTOR, PETROLEUM DIVISION, ENERGY INFORMATION ADMINISTRATION, U.S. DEPARTMENT OF ENERGY; AND ROB BRENNER, ACTING ASSISTANT ADMINISTRATOR, OFFICE OF AIR AND RADIATION, U.S. ENVIRONMENTAL PROTECTION AGENCY Mr. Cook. Thank you, Mr. Chairman and members of the committee, for the opportunity to testify today. Gasoline prices have begun declining, as we expected, from this spring's apparent peak of $1.71 on May 14, with the national average now standing at $1.65. Between late March and mid-May, retail prices rose 31 cents a gallon, some regions experiencing even greater increases. Like last year, Midwest consumers saw some of the largest increases and along with California, some of the highest prices. Prices in the Midwest increased 43 cents a gallon over this 7 week period, peaking at $1.81 on May 14. However, since then, Midwest gasoline prices have fallen faster than the national average, now down 16 cents from the peak, according to EIA's latest survey. Most of the factors that affected prices last year were again at work this year. The relatively tight crude oil market, resulting in low petroleum inventories, relatively tight spring gasoline supply demand balance, compounded by extensive refinery maintenance, unique regional and seasonal products, high refinery capacity utilization and dependence on distant supplies. When these factors come together, just as they did last year, rapid price run-ups can occur. The principal difference from last year's pattern has been timing. This year's increases occurred a month earlier. Barring any major infrastructure problems over the remainder of the summer, we expect the current decline to continue just as we saw last summer. I'd like to turn next to a brief summary of these factors, beginning with inventories. Low stocks set the stage for gasoline price increases this spring, just as they did last year for heating oil and gasoline. Low inventories originate in the tight global crude oil supply demand balance that evolved in early 1999. This ongoing tightness has been a key factor in maintaining both low crude and product inventory since then. Actions taken by OPEC are largely responsible for the sharp increase in oil prices from the $10 levels seen in December 1998. OPEC dramatically reduced crude oil production in 1998 and again in 1999, so much so that even after four increases last year, inventories remained at relatively low levels this spring, especially for the developed countries of the OECD. Furthermore, scarce crude supplies encourage high near term prices relative to those for future delivery. This situation, referred to as backwardation, discourages discretionary inventory growth and maximum refinery production. Thus with crude oil and product inventories relatively low, again entering this spring, little cushion existed to absorb unexpected imbalances in supply and demand, thereby setting the stage for volatility. Although world demand is again projected to grow this year, OPEC's current plans imply even less production than last year. This is expected to limit global inventory growth and maintain crude prices close to $30 for the balance of the year. The recent OPEC meeting and Iraqi exports cutoff could result in oil production levels low enough to again cause us to enter the fourth quarter with both low crude and product inventories, especially heating oil. Last year, in a similar situation, OPEC did not increase its quotas significantly until fall. Thus, there was insufficient time to buildup heating oil inventories by the time winter started. Even if Iraqi imports are suspended for just a brief time, petroleum markets are likely to be tight. But if Iraqi imports are cutoff for a month or more and not fully offset by other producers, market conditions will definitely be tighter. Returning to U.S. markets, and gasoline in particular, stocks were even lower this spring than last year. In recent weeks, there's been significant improvement, though, and as of Friday June 8th, stocks were about 2 percent above their seasonal 5 year average. Nevertheless, both conventional and RFG gasoline markets exhibited low stocks and tight conditions over this mid-March to mid-May period. Low inventories were partially a consequence of refineries focusing strongly on distillate production last winter, given that the United States entered the season with low stocks. They're also a consequence of high natural gas prices which encouraged fuel switching to distillate, heightening the focus on distillate production at the expense of gasoline. Furthermore, high natural gas prices undercut the production of clean gasoline components, including MTBE. In addition, relatively strong late winter gasoline demand combined with extensive refinery maintenance to sustain downward pressure on inventories. Gasoline prices were in steep backwardation until recently, thereby discouraging inventory growth at the margin. Several other factors are also at work that add to the potential for volatility when stocks are low. Today's market is comprised of many different types of gasoline serving different regional markets to meet varying environmental requirements. While producing these specialized products can be an efficient approach for individual refineries to meet regional air quality needs, it's not necessarily efficient for the overall marketplace. Mr. Ose. Mr. Cook, you need to wrap up here. Mr. Cook. OK, sorry. This large number of product types adds a level of complexity to the distribution system. This targeted approach has been, in particular, one to create gasoline islands. The primary examples are well known, California and the Chicago area, which require unique blends. Only a limited number of refineries make these products, thus when stocks are drawn down, prices surge, given that these specialized fuels cannot be quickly resupplied. Another factor is limitations on refinery capacity. The summer of 1997 was the first time the system was pushed to its limits and unable to respond adequately when gasoline demand surged. As a result, seasonally low stocks were drawn further, and prices surged. This summer, we again saw what can happen when low inventories combine with regional capacity limitations and unique gasoline requirements. For example, in the Midwest, the closure of the Blue Island refinery created a concern about the level of RFG supplies in the Chicago area. The closure also created the need for greater volumes to move from the Gulf Coast. Economic incentives to build inventories were further eroded as Gulf Coast prices surged in response to the strong demand not only from the Midwest, but also from the West Coast, the East Coast where refineries were undergoing extensive maintenance. Thus, in April, with little inventory cushion in place, and a transition from winter to summer grade gasolines requiring the running down of tanks, further undercutting stocks and Tosco's Wood River refinery having a fire, reducing its ability to produce conventional and reformulated gasoline, we saw this surge. In closing, I would like to note that almost exactly 1 month ago, EIA in testimony before another House committee stated that we thought gasoline prices were nearing the peak for the summer. At that time, we noted the United States was nearing the end of what is usually one of its tightest times in the market, when gasoline demand begins to rise seasonally and refineries are winding up maintenance. Since the end of March, production has jumped significantly. Refineries have ramped to full capacity, Wood River is now fully operational, boosting Midwest supplies, and imports are streaming into the East Coast. As a result, stocks have returned to the normal range. Barring further refinery or other major problems, we do expect prices to drop significantly over the balance of the summer. Finally, I should caution, that gasoline markets remain exposed to volatility, particularly toward the end of the summer when demand peaks. Some factors suggesting the potential return of late summer volatility include likely low global inventories, as I noted earlier, even with the early return of Iraqi exports and gasoline markets here and in Europe already signaling a potential reduction in crude runs and gasoline production. That concludes my testimony. [The prepared statement of Mr. Cook follows:] [GRAPHIC] [TIFF OMITTED] T7984.006 [GRAPHIC] [TIFF OMITTED] T7984.007 [GRAPHIC] [TIFF OMITTED] T7984.008 [GRAPHIC] [TIFF OMITTED] T7984.009 [GRAPHIC] [TIFF OMITTED] T7984.010 [GRAPHIC] [TIFF OMITTED] T7984.011 [GRAPHIC] [TIFF OMITTED] T7984.012 [GRAPHIC] [TIFF OMITTED] T7984.013 [GRAPHIC] [TIFF OMITTED] T7984.014 [GRAPHIC] [TIFF OMITTED] T7984.015 [GRAPHIC] [TIFF OMITTED] T7984.016 [GRAPHIC] [TIFF OMITTED] T7984.017 [GRAPHIC] [TIFF OMITTED] T7984.018 Mr. Ose. Thank you, Mr. Cook. Mr. Brenner, we're going to go ahead and take your testimony. I want to remind you, we have received your written testimony. I know I've read it, I know staff's read it, I'm sure my colleagues on both sides of me have read it. If you could be brief, I would appreciate it. Mr. Otter went to vote, he's going to come back so we can keep the hearing going, then I'm going to go vote, as well as my colleagues. We're going to try to keep this thing rolling. Mr. Brenner, for 5 minutes. Mr. Brenner. Thank you, Mr. Chairman and members of the subcommittee. Thanks for inviting me here today to outline EPA's gasoline initiatives related to President Bush's National Energy Policy, and to discuss the vital role that cleaner burning gasoline plays in improving America's air quality. I will offer a brief opening statement and submit my longer statement for the record, as you requested. Mr. Chairman, let me assure you first and foremost that this administration is determined to see that consumers continue to receive the benefits of cleaner burning gasoline at a reasonable price. When Congress passed the Clean Air Act amendments of 1990, it established a number of programs to achieve cleaner motor vehicles and cleaner fuels. These programs have been highly successful in protecting public health by reducing harmful vehicle exhausts. One of these programs, the Reformulated Gasoline Program, was designed to serve multiple national goals, one of which was improving air quality. Today, roughly 35 percent of the gasoline used in this country is reformulated gasoline. RFG is used in 10 metropolitan areas required by Congress, and in areas that have chosen to opt-in to this cost effective pollution reduction program. Those include areas in Kentucky, Texas, Missouri, and the Northeast. The program is working. RFG has significantly reduced vehicle tailpipe emissions, including emissions of smog forming pollution and air toxics, such as benzene, which is known to cause cancer in humans. Benzene emissions have dropped a dramatic 38 percent in RFG areas, and smog forming emissions have dropped by more than 27 percent. Results like these mean cleaner air for early 75 million Americans at a cost of just 4 to 8 cents per gallon. The cost is small compared to what we saw this spring. Across the country, gas prices climbed in areas that use cleaner burning gasoline and in those that do not. Similarly, the price drops we have seen since mid-May have occurred across the board. Those spring price increases were influenced by a number of major factors, including the continued high cost of crude oil, a decrease in the amount of oil available on world markets, record low gasoline inventories, following a longer than normal winter heating season, continued increases in vehicle miles traveled and in fuel demand, and decreases in vehicle fuel efficiency. Finally, American refiners are producing gasoline at nearly full capacity. Any disruption, no matter what the cause, affects the entire U.S. gasoline market. To help reduce disruptions like these in the future, this administration is committed to exploring whether there are ways to increase flexibility for refiners. Already, the administration has provided a VOC adjustment for ethanol blended RFG in the upper Midwest. We are looking for ways to minimize disruption when the gasoline distribution system switches from winter to summer fuel. And as part of our efforts to carry out the President's National Energy Policy, we have begun meeting with the oil industry, States and other stakeholders to examine opportunities to reduce the number of State and local boutique fuels while maintaining or even improving the environmental benefits these fuels produce. We see this study as an opportunity to provide greater flexibility for the fuel production and distribution system. This concludes my statement, and I'd be happy to answer any questions. [The prepared statement of Mr. Brenner follows:] [GRAPHIC] [TIFF OMITTED] T7984.019 [GRAPHIC] [TIFF OMITTED] T7984.020 [GRAPHIC] [TIFF OMITTED] T7984.021 [GRAPHIC] [TIFF OMITTED] T7984.022 [GRAPHIC] [TIFF OMITTED] T7984.023 Mr. Ose. Thank you, Mr. Brenner. I think we have somewhere around 8 minutes before the vote comes. Mr. Otter should be back within 5. We will proceed to questions. Mr. Cook, does the Energy Information Agency anticipate that refinery capacity in the United States will increase in the next few years? I think the question we are all interested in knowing is whether we're going to be back here next year, hearing different testimony. Mr. Cook. Well, the latter part is difficult to say. If Iraq stays out of the market for a significant period of time, we'll probably be back before then. As far as capacity is concerned, actually over most of the 1990's it's been growing at something like an average rate of about 1.4 percent per year, roughly keeping pace with gasoline, total product demand. We expect that to continue. But we don't expect to see any growth in excess capacity. We expect it to stay tight. Mr. Ose. So, the 97 odd percent utilization, you don't expect that to change very much? Mr. Cook. Not very much. Now, that's a summertime peak number. There are lots of times during the year, during the winter in particular, the fall, the spring periods, where that utilization rate is much lower. Mr. Ose. Does the EIA foresee the construction of new refineries or an increase in the capacity of existing refineries, beyond the 1.4 percent? Mr. Cook. No, we're anticipating no new refineries, but continuing creep at existing refineries, roughly at that pace. Mr. Ose. So, we're destined to have a very tight alignment between supply and demand? Mr. Cook. It would appear, yes. Mr. Ose. If refinery capacity does not keep pace with demand or it aligns very closely with the growth, to the extent that we have excess demand, where does that product have to come from? Mr. Cook. Well, the seasonal surge typically comes from Europe. Europe has excess capacity for gasoline for a variety of reasons. We tap into that, and have been at near record levels ever since January of this year. Mr. Ose. So, we end up importing refined or finished product from Europe on a seasonal basis? Mr. Cook. Well, we do it year-round. Our average imports for last year and recent years has been about 500,000 barrels a day. Canada, the Caribbean, Venezuela, Europe, are baseline exporters. Then the seasonal surge typically comes from Europe. Mr. Ose. I want to digress for a minute. One of the things I was curious about, reading everybody's testimony last night was, who is a chemist and who is a petroleum engineer and who is not. Are you a chemist? Mr. Cook. No, I'm an economist. Mr. Ose. You're an economist. Mr. Brenner, are you a chemist? Mr. Brenner. I am also an economist. Mr. Ose. OK. I like economists. [Laughter.] Mr. Cook, do you have any thoughts as to why our refinery capacity has essentially, I mean, you've got a report here from 1999 showing capacity has declined from the early 1980's. In other words, in 1981, there were 324 refineries operating, in 1999, there were 159. In 1981, capacity was 18.62 million barrels per day, 1999 capacity is 16.26 barrels per day. Interestingly, the utilization in 1981 was a little bit over 68 percent versus in 1999, 92.7 percent. Do you have any thoughts as to why the capacity has declined in the last couple of decades? Mr. Cook. There are a couple of factors. The big drop in the early 1980's was a shakeout of the movement to deregulation. A number of smaller, less efficient plants dropped by the wayside rapidly. Over the rest of the 1980's, I would argue that competition and relatively low margins or spreads seen in the industry over that decade, and since then as well, have discouraged all but the most efficient refineries from remaining in operation. So you basically have the shakeout of the deregulation period and then a period of low margin increasingly forcing consolidation in the industry. Mr. Otter [assuming Chair]. Thank you, Mr. Cook. The chairman's time is up, so I'm going to take over now. Mr. Cook, your organization has stated in the past that California is different than the rest of the country, and that the prices need to spike fairly high before refineries are actually induced to bring in more supply. Would you explain that? Mr. Cook. Well, that's not exactly the way we put it. But first of all, California's gasoline is unique, as you know. Mr. Otter. Well, I don't want to put words in your mouth, nor in the record. How did you put it? Mr. Cook. Where did you get that statement? Mr. Otter. Gasoline primer. Mr. Cook. I don't recall the need to spike before product will come in or refiners will crank up. But in many cases that is in fact what happens. Mr. Otter. Why does that happen? Mr. Cook. First of all, you have a unique fuel that's produced only by a handful of refiners on the West Coast. You have a typically tight balance out there, very little difference between capacity at the dozen or so large plants that are out there on the West Coast and summer demand. So again, if anything goes wrong there, given the geographic isolation that California has, and given the unique nature of that fuel, it takes a significant amount of time to provide the market signals and incentives to Gulf Coast producers who don't normally produce that type of gasoline to make a batch, ship it around to the West Coast. And in the meantime, the price spikes, as folks bid up what is available on the West Coast to meet the near term needs they absolutely have to meet. Mr. Otter. It was a gasoline primer update, June 13, 2001, I've got it right here. That was yesterday. Your statement in that then said, the farther away the necessary relief supplies are, the higher and longer the price spike will be. I think you've answered that. Can we conclude, then, that the same thing is going to happen for offshore refineries? How high is the spike going to have to go before we induce foreigners to then start making these same blends for California, for Minnesota, other areas that have a unique blend of gasoline? Can we conclude, then, I guess my question goes back to Mr. Cook, can we conclude then that foreign refineries are going to have to see a higher spike before they will be induced to make these specialized kinds of fuels? Mr. Cook. Well, it's relative. Certainly we've seen the same kind of a spike in the Chicago, Milwaukee area, where the singular conditions, extreme conditions, if you will, exist when stocks get low. Now, of course in California and in the Chicago market, stocks are not always low, in which case, when you have a refinery problem you don't get the big spike and you don't have these pressures at work. Outside of those two areas, the East Coast, for example, has more sources of supply and those relief valves, if you will, Europe, the Caribbean, Venezuela, are closer. Therefore, you won't have to see the same kind of a price signal to get extra supply. Mr. Otter. Mr. Cook, you were heard during some of the opening statements by several of the folks that said that perhaps the confusion on the boutique fuels and the whole reason for the boutique fuels was that there was too much freedom for the States to kind of do their own thing. I think the word used was States rights. I suspect that was a referral to the 10th amendment. Do you agree with that? Does your agency agree with that? Is there too much freedom for the States to pick and choose themselves? Should we have a national gasoline policy? Mr. Cook. As you may be aware, we're a statistical organization, and I am not authorized to make policy statements. So, I respectfully decline on that one. Mr. Otter. Do you analyze your statistics? Mr. Cook. Sure. Mr. Otter. Would an analysis of your statistics, if we have uniform fuel across the United States, in your analysis of your own statistics, would then the price be moderately low, medium, moderately high? And if we then superseded the States' choices and made a national gasoline, would then that stabilize not only supply but also price? Mr. Cook. Well, let me put it this way, and you might not like the answer, but the way I see it personally is that this market fragmentation, even the capacity issue, become important in the recovery period of gasoline. If you have a capacity limitation and you have a spike, that clearly limits the ability to quickly produce a lot more gasoline and get it into the area. So you could argue that the duration of the spike is affected by the fragmentation and by the capacity. But the primal causal factors may still be there, and that's low stocks and tight balances at certain points in the year, especially in the spring when you have refinery maintenance. So you're still going to be subject to volatility if, for whatever reason, stocks are low and you go into this period, whether it's one fuel or a bunch of fuels. Mr. Otter. I don't necessarily dislike that answer, but, I was hoping for something better. Mr. Brenner, a new refinery hasn't been built in the United States since 1976, I think that's right, and in fact, since 1981, the number of refineries has been substantially reduced in number, not necessarily in ability to produce. Last January, the Blue Island refinery in Illinois shut down, citing insufficient returns to justify the cost of upgrading to meet new EPA standards. Do you think that the constant cycle of product upgrades has had an effect on the ability of the refining industry and its ability to increase capacity by attracting capitalization funds? Mr. Brenner. What we've seen, Representative Otter, is that they have in fact been increasing capacity in the industry, as you heard from the earlier testimony. It's gone up by 1 to 2 percent a year. In addition, they've further increased their ability to produce fuel by adding oxygenates to the fuel, which has also enabled them to produce additional gasoline without having to add a lot of additional capacity at the refinery. Those two factors have enabled them to keep up, although barely keep up, with the increasing demand for gasoline. So our experience has been that refineries are expanding and in terms of profitability, of course what we've seen over the last few years is that profitability has increased markedly. At this point, the situation that existed in the, say, mid-1990's, where there were concerns about profitability, has changed very dramatically and profit margins are considerably better than they were. Mr. Otter. We heard comments during the opening statements, Mr. Brenner, about the unfortunate resolve of the Bush administration to refuse to waive the standard for California. In your estimation, over the last 8 years, is that a unique situation where the administration vis-a-vis the EPA, Army Corps of Engineers, let's name all of the regulators, refuses to grant a waiver to a State or municipality or to a locale? Mr. Brenner. No, that's not a unique situation. When we get a request for a waiver such as that, we need to apply the statutory requirement to that request and make a determination. In this case, the Clean Air Act has a fairly narrow framework that we are supposed to use for examining the request, it's to look at whether, by granting the waiver, if we did not grant the waiver, would it interfere with or prevent attainment of the ambient air quality standards. So we had to look at the proposal from California, look at whether by, whether the oxygenate requirement that they asked a waiver from was interfering with their ability to meet the air quality standard. When we looked at their analysis, what we found was that we could not make that showing that the Clean Air Act requires us to make. Because we could not make that showing, we ended up having to deny the waiver request. Mr. Otter. Could you take a guess or be willing to take a guess on how many waivers were denied in the last 8 years? Mr. Brenner. We've had very few waiver requests from the oxygenate requirement. Mr. Otter. What happened to the one from Boise, ID? Mr. Brenner. The Boise, ID one? Mr. Otter. I'm being facetious. There was a request, it was denied and then we were threatened with the loss of about $30 million if we continued the course that we were going to go on in Idaho. I just wanted to make the point that it has not been a unique thing, even in emergency situations, for the administration to adhere itself strongly, root itself in the law of the land, and then use that as guidelines, rather than personalities and whims, isn't that right? Mr. Brenner. That's true, Congressman Otter. Mr. Otter. OK, thank you very much. Lacking anybody else being here, I guess I will then excuse this panel and thank you very much for being here. Perhaps the vice chair, in his position, was a little hasty. I have been called by those who have been here longer than 155 days and we would like to retain this panel. So without objection, there being nobody here to object, I'm in charge here. [Laughter.] Somebody else said that once. Mr. Cook, on behalf of Chairman Ose, I would like to ask you this question, as a matter for the record. Your organization has released a report today on the possible impacts of blackouts on California refineries. Does the EIA have an estimate of the kind of price hike that could occur in California if there is a major refinery outage? Mr. Cook. Strictly speaking, we do not have a precise or reliable estimate of that. Not for lack of modeling tools, but for lack of a data base. We don't specifically have a time series relating electrical outages to volume losses and price responses. That said, we do have a lot of data for California and elsewhere on production, stocks, prices, and what have you. We've identified maybe 20 spikes or fluctuations in the last umpty-up years where the trade press reported them due at least in part to outages of whatever type. When we look at that, we see a spread of from 7 to 52 cents a gallon as the historical response, depending on the condition of the market at the time. By that I mean whether stocks are low, whether it's early in the gasoline season, whether it's an isolated outage or a series of outages with some catalytic event at the end, when stocks have been eroded. That's basically all we can really say and said in the report at this point. We've done some preliminary regression analysis to try to support that's not in the report. The early results are very consistent with that. We have basically shown that if stocks are low and you have, let's say, a 10 percent gasoline volume loss as a result of maybe a couple hours of outages that brings refineries down and the accumulated gasoline volume loss to that level would be within that range. The results show anywhere from 30 to 60 cents a gallon, depending on whether it's a 10 or 20 percent volume loss. Mr. Otter. What would the volume loss be if you had a major blackout, let's say, every 24 hours? Mr. Cook. That we can't estimate. We really haven't been able to do that. Mr. Otter. The committee will go at ease subject to the call of the Chair. [Recess.] Mr. Ose [resuming Chair]. Excuse me for a minute. Mr. Cook, in your written testimony you stated that today's gasoline market comprises many types of gasoline, and that the result has been the creation of gasoline islands. Given not only the production and distribution constraints, but regulatory barriers that you've mentioned, how many of these islands are there? Mr. Cook. That might have been poor wording. What we intended to imply in term of islands is the California, Chicago and Milwaukee area, that those are the true islands where these markets are tight in the summer time and sit at the end of the pipeline, so to speak, and use a unique product. Which means that if they get tight, they see a price response, then it's going to take a significant period of time and a significant increase to induce additional resupply into that area. There are something like 14 different types of summer gasolines and what-not. I wouldn't call them all islands. It's a matter of degree. But you don't see the barrier to the flow of products in these other market areas that you see for Chicago and California. Mr. Ose. When did these unique, since we're not going to call them boutique or islands, when did these unique fuel requirements--how do I phrase this? I'm going to use my language. When did these boutique islands emerge? Mr. Cook. Well, we would loosely trace that to the Clean Air Act, even more loosely to first, the oxygenated program that began in 1992, and then the reformulated gasoline program in 1995. These were the major drivers of the 14. Mr. Ose. You say 14, and that's just in those two markets? Mr. Cook. No, that's nationwide. Mr. Ose. OK, because we've had different numbers put forth in the different testimony, some as high as 38. But you're referencing 14? Mr. Cook. Yes, I don't know how they get those. We're not counting grades and this, that and the other. Mr. Ose. Mr. Brenner, in your testimony you state that actions taken by a growing number of States to ban the use of MTBE as a gasoline additive is the single biggest factor that threatens to proliferate boutique fuel requirements around the country. Why is that? Mr. Brenner. Mr. Chairman, the reason is that as the individual States, because of their concerns over water pollution from MTBE, make that decision to move away from continuing to use MTBE in their gasoline, that means they need to work with their fuel suppliers to provide gasoline that does not have MTBE in it. So that gasoline is somewhat different from what may be provided to neighboring States where MTBE may still be a component. So that's really the classic definition of boutique fuels, where it's for a limited area and it's not a fuel that's necessarily widely used around the country. Mr. Ose. In the Clean Air Act, or the amendments, more accurately, of 1990, or 1992, I think you just referenced, is MTBE called out specifically, or is a 2 percent oxygenate requirement called out specifically? Mr. Brenner. The Clean Air Act amendments of 1990, they do not call out for a specific oxygenate. What they call for is a 2 percent oxygenate requirement, and the suppliers of gasoline have several options in terms of what oxygenate they would choose to use. Mr. Ose. So, there is some flexibility in the law in terms of unique markets, how they meet their air quality requirements. As long as they meet that 2 percent oxygenate requirement. Mr. Brenner. That's right, the 2 percent requirement is in essence a performance standard for the amount of oxygenate to be included. Then, they have a choice of those two how to meet it. Mr. Ose. Given that, is it more accurate to say that the oxygenate mandate is the biggest factor in creating or proliferating boutique fuels, as opposed to saying it's MTBE? Mr. Brenner. No, I would not say that, because the oxygenate requirement, for example, has resulted in reformulated gasoline being used around the country in many different areas, as I mentioned. Thirty-five percent of the fuel supply now is reformulated gasoline. I would not think of something that's 35 percent of the gasoline supply as being a boutique fuel. But what I was referring to in my testimony is the fact that in a number of areas, States are removing one of the oxygenate choices and removing MTBE as one of the oxygenate's choices. That is what is beginning to create a proliferation of gasoline. But it's for understandable reasons, they're concerned about their water supplies. Mr. Ose. I'd like to followup, but my time has expired. Mr. Waxman for 5 minutes. Mr. Waxman. Thank you very much, Mr. Chairman. Mr. Brenner, yesterday the administration rejected California's request to waive the Federal oxygenate requirement for gasoline. This decision was so incomprehensible on the merits that I awarded President Bush a golden jackpot for that decision, as I mentioned in my opening statement. In effect, the President had a simple choice. He could grant California's request, which was what every member of the delegation urged. This would result in cleaner gasoline and lower prices for California consumers, or he could deny the waiver, which would mean more pollution and higher cost for California consumers but would provide an enormous windfall for ethanol companies like Archer Daniels Midland that gave hundreds of thousands of dollars in campaign contributions. The President chose more pollution at higher cost for California. Earlier this year, EPA was prepared to grant the California waiver. EPA even prepared a proposal to do so. And I've obtained a copy of this proposal, and I'm sending Administrator Whitman a letter today asking her to explain this last minute reversal in their decision. I'm releasing both the letter and the proposal to the press. I'd also like to submit them, Mr. Chairman, for the record. Mr. Ose. Without objection. 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In denying the request, Administrator Whitman said, ``We cannot grant a waiver for California, since there's no clear evidence that a waiver will help California reduce harmful levels of air pollutants.'' This is a remarkable statement, given that EPA's technical staff found just the opposite. Let me read from EPA's proposal to grant a waiver. EPA concludes, I'm reading from the EPA technical document, ``that compliance with the oxygen content requirement for reformulated gasoline would interfere with attainment of the national ambient air quality standards for ozone and particulate matter in the reformulated gasoline areas in California.'' The oxygenate decision seems directly contrary to the goals of the administration's National Energy Policy. One of the goals of the National Energy Policy is to reduce the number of boutique fuels. Yet I understand that as a result of the administration's decision, oil refiners will have to supply California with at least two different fuels in areas that are classified as severe or extreme non-attainment areas under the Clean Air Act like Los Angeles. Oil refiners will have to add ethanol to meet the oxygenate requirement of the Clean Air Act. But in other parts of the State, oil refiners only have to meet California's clean fuel requirements, which do not require the addition of ethanol. Mr. Brenner, do you agree that the decision to deny California's waiver will increase the balkanization of the fuel supply? Mr. Brenner. Congressman Waxman, based on the evidence we have right now, it's difficult to say whether it would or would not increase the balkanization of the fuel supply. It will depend, of course, on how the fuel suppliers respond to the requirement. But I would like to take a minute to explain why Governor Whitman made the decision that she made, and why there seem to be differences of views as to whether it would be adverse or not to air quality in California. The requirement in the 1990 amendments is that we examine whether the oxygenate requirement would have, would prevent or interfere with the ability of the State to meet the air quality standards, in this case, ozone. That is a fairly narrow task that was put into the Clean Air Act amendments. It does not enable us to consider the factors, many of the factors that you raised. California sent us a proposal indicating that they felt they met that test, because with a wavier they could reduce the nitrogen oxide emissions from gasoline. When we examined the proposal, we found that although that was the case, we agreed. We found that carbon monoxide emissions would go up and they contribute somewhat to ozone formation. And hydrocarbons could go in either direction, depending on the---- Mr. Waxman. And that means if California didn't have an oxygenate requirement that they couldn't develop reformulated gasoline that would meet the Clean Air standards both in all the criteria? Is that your testimony? Mr. Brenner. The test is not in whether it would meet Clean Air Act standards or not. We need to do a comparison of what the fuel would achieve with or without the oxygenate requirement. So we need to compare it to the fuel they would be producing with the oxygenate requirement continuing, compared to the fuel they would be producing without the oxygenate requirement. Mr. Waxman. I ask unanimous consent for an additional minute. Mr. Ose. We'll have another round. Mr. Waxman. Well, Mr. Chairman, on this point, you took a little bit more than 5 minutes, I wonder if I could ask some further questions. Mr. Ose. I thought I was right on 5 minutes. I tell you what, we'll give you a minute, Henry. Go ahead. Mr. Waxman. Thank you very much. Now, wouldn't that depend on the reformulated gasoline requirements? Do you agree that if they didn't have an oxygenate requirement to do reformulated gasoline in a specified formula, a certain recipe, that they could develop a reformulated gasoline that would meet all the requirements of the Clean Air Act? Mr. Brenner. The reformulated gasoline could meet the basic requirements of the Clean Air Act. But the test in the statute is not whether it meets the basic performance standards of the Clean Air Act that we do a comparison of, it's the gasoline that they would be likely to produce with oxygenates compared to the gasoline they would produce if they received a waiver. We found that differential in terms of carbon monoxide---- Mr. Waxman. EPA wrote in its document, ``We conclude that compliance with the 2.0 weight percent oxygen content requirement for RFG would interfere with the attainment of the NAAQS for ozone and PM in the RFG areas in the State. EPA has considered the data and other analyses submitted by CARB in support of its request for a waiver. We have also considered information submitted by other interested parties.'' And so EPA said that it thought that if California had the oxygenate requirements, California could achieve what it is required to do under the law. Mr. Ose. Mr. Brenner, we're going to come back---- Mr. Waxman. Yes or no, do you agree with that statement? Mr. Brenner. I need to explain that that was in a draft. Mr. Ose. We'll come back to Mr. Waxman on a second round. Mr. Waxman. Thank you, Mr. Chairman, for that additional minute. Mr. Ose. Mr. LaTourette, for 5 minutes. Mr. LaTourette. Thank you, Mr. Chairman. Mr. Cook, last week I had all of the mayors, city managers, township trustees from my district in town. We met with the American Petroleum Institute, which has some opinions about this as well. One of the mayors raised his hand and raised the question, at least in northeastern Ohio, I don't know if it's this way in California or other parts of the country, but when you drive by a gasoline station on Thursday morning, gas is like $1.50, when you come back home and if you'd made the mistake of not filling up on your way to work, it's $1.70 or $1.75. The mayor's question and I guess my question to you is from the hearings that this committee had last summer, I understand what happened with pipelines and I understand what happens with boutique fuels, and I understand RFG II dilemmas in Chicago or Wisconsin. But folks in my part of the country don't understand why the same gas in the same ground in the same station goes up 20, 30 cents on a Thursday afternoon. Do you have any insight on that, based on your research? Mr. Cook. We've looked into that claim some, given the limited amount of retail data that we have. And we've generally found it to be not a true statement as far as statewide averages are concerned, as far as Ohio or Michigan or what have you are concerned. There does appear to be some isolated stations that did raise prices significantly, although we didn't find any at 25 cents. But I'm not saying, since we don't survey every single, etc. On the other hand, those that did raise prices significantly seemed to be those who had suppressed prior wholesale cost increases to them substantially up to that point, and facing the likely prospect of a sharp jump in their resupply costs, they chose to pass those prior cost increases through plus stay up with the market. So you do get a pretty good jump when someone's been below market and all of a sudden they correct to market. Mr. LaTourette. The biggest one we had last summer was 42 cents. That's what the fellow from API said, that basically statewide averages don't jump. But I can tell you, it's not only that mayor's observation, everybody in the room started shaking their heads. In the summer time, maybe it's not always 25 cents, but it's 10 cents and people don't understand that. Mr. Cook. Right. Mr. LaTourette. Because if it is truly a supply and demand difficulty, people don't understand what's happened, other than we know that people are going to hop into their car and take their kids to the beach on Saturday, and so let's get 10 cents a gallon extra from them. I think that leads to some of the conspiracy theories that we hear around here. Mr. Brenner, let me ask you, following up on where Mr. Waxman was, the President's National Energy Policy does call for a reduction of boutique fuels, and I think when I started driving, there were maybe three blends of gasoline. Now if I read the literature correctly, there are 27 or 28. You have these islands that the chairman talked about in his questioning. Don't you think that we have the ability to put our heads together and come up with two, three or four that will satisfy the requirements of the Clean Air Act and their amendments and also be specific to certain areas of the country? Isn't it time to do that? In helping, I mean, we're going to have to build more pipelines and more refineries and so on. But it seems to me that some of these spikes, like the ones you got in Chicago and Wisconsin last summer, are caused by inventory shortfalls, together with other problems. But, it's a fact that we have all these blends of gasoline all over the country. Can't we do that? Don't we have the science to do that? Mr. Brenner. We believe there probably are opportunities to reduce the number of fuels out there. Whether there are 27 or how many there are depends on how you count them. But as I noted in my testimony, there is a potential for more. We have already begun a process of sitting down with the oil companies and with the States and with other stockholders to talk about the reasons for the proliferation of number of fuels, and opportunities to reduce that number and perhaps do something. As you suggested, creating a smaller number of different formulations that States might choose from. That's one of the options that one of the stakeholders has put on the table. So, the energy policy report asks that we do that in working with the Department of Agriculture and Department of Energy. We've already begun that process and hope to find some opportunities to do exactly what you're suggesting. Mr. LaTourette. Is there a bad guy in the scenario? For instance, a big deal in last year's hearing was the patent that Unocal had, and basically some refiners are saying that Unocal has patented the Clean Air Act. Are the refiners objecting? Are they saying, no, we want to make our stuff and because we have a patent on the blending or the formula, and so are they being the bad guys? Mr. Brenner. What we find is differing views within the industry. Some of the companies have found it advantageous to produce fuels for smaller markets. Some of them have found that they would prefer to have the flexibility of being able to provide fuel to many different areas, to have broader markets for their fuels. So as you would expect to see in a big country with lots of different companies, there are different views. But, we think that we can sit down with the companies and with the States and develop options which would reduce the number of fuels, while maintaining the environmental benefits. The States are of course very anxious, and we're anxious to see them preserve the environmental benefits of cleaner fuels. So that would be an important part of that discussion. Mr. LaTourette. Thank you. Thank you, Mr. Chairman. Mr. Ose. The gentleman yields back. The gentlelady from Hawaii for 5 minutes. Mrs. Mink. Thank you very much, Mr. Chairman. Mr. Brenner, in your testimony, with reference to the reformulated gasoline, you indicated that the Federal program requires 10 metropolitan areas to participate in this program, but that others have joined voluntarily. Is there any impetus for the Congress at this point to increase the numbers of areas that are required to participate? Mr. Brenner. The reason some additional areas have chosen to participate is because it provides them with, of course, additional air quality benefits. It reduces pollution in their area. Then some other areas have chosen to, instead of participating in the full reformulated gasoline, to select somewhat cleaner gasoline than conventional fuels, but not go all the way to the reformulated gasoline. Mrs. Mink. Well, my question is, we limited it to 10 metropolitan ares in the legislation. Isn't there some justification for now considering extending that requirement to other areas? Mr. Brenner. I'd say what the Congress would want to consider is, what would the additional cost be. As I said, it is 4 to 8 cents a gallon. But also how many additional areas could take advantage of the additional environmental benefits, how many of them have continuing air quality problems, and this could contribute to reducing those problems. Mrs. Mink. Your testimony said that ethanol is used in 100 percent of the reformulated gasoline in Chicago and Milwaukee. What has been the experience of these two cities with the use of ethanol and the price for gasoline in these areas, and the premier consequences? Mr. Brenner. What they found is, of course, the reformulated gasoline does meet Clean Air Act requirements, which means it provides them with significant environmental benefits. In the case of Chicago, their emissions of pollution are down something like 8,000 tons a year as a result of using reformulated gasoline with ethanol in it. Mrs. Mink. Has the price of gasoline increased as a consequence of the use of ethanol? Mr. Brenner. The price of gasoline has increased, as it does with all reformulated gasoline. As I said, it is about 4 to 8 cents per gallon. Mrs. Mink. But how about Chicago? Mr. Brenner. I don't have numbers that show the price differential in Chicago compared to conventional gasoline that is nearby, the exact numbers. However, if you do the comparison of gasoline in nearby areas to reformulated gasoline in Chicago with ethanol in it, it's a relatively small differential. We're still talking on the order of 10 cents or less, I believe. Mrs. Mink. Given a situation where regular gasoline prices are skyrocketing in so many areas, it would seem to me that the price increase for reformulated gasoline would be minimal by comparison. Mr. Brenner. That's right. As I said, the price increase for reformulated gasoline has only been 4 to 8 cents a gallon, and you can do those comparisons of conventional gasoline nearby to these areas. Mrs. Mink. So wouldn't you be prepared to recommend that the Congress consider moving in the direction of extending the requirement to other areas for reformulation, because it does increase the supply, does it not? If the rationale for the crisis is the lack of supply, doesn't the extension into ethanol increase the supply as well, as well as take care of the pollution problem? Mr. Brenner. The supply problem is for gasoline overall, not reformulated gasoline alone. So you'd be shifting from conventional to reformulated---- Mrs. Mink. Doesn't the use of ethanol increase the supply? Mr. Brenner. The use of ethanol or other oxygenates does increase the supply by about, I believe it's about 5 or, well, actually, the way it's blended, it can increase the supply as much as 9 or 10 percent of gasoline. That's part of why this requirement for reformulated gasoline is in the Clean Air Act, and it's one of the benefits of reformulated gasoline, it helps increase supply. Mrs. Mink. What incentives are there now for the production of ethanol and its use as a gasoline additive? Mr. Brenner. There are a set of tax incentives to encourage the use of ethanol. Mrs. Mink. What are the incentives? Mr. Brenner. I'd have to provide you the specific incentives. I could followup and provide you with a list of those incentives. Mrs. Mink. Mr. Chairman, I would ask that be inserted in the record. Mr. Ose. Without objection. [The information referred to follows:] [GRAPHIC] [TIFF OMITTED] T7984.061 [GRAPHIC] [TIFF OMITTED] T7984.062 [GRAPHIC] [TIFF OMITTED] T7984.063 [GRAPHIC] [TIFF OMITTED] T7984.064 [GRAPHIC] [TIFF OMITTED] T7984.065 [GRAPHIC] [TIFF OMITTED] T7984.066 Mr. Ose. I'd also remind the gentlelady that--she yields back. Mr. Otter from Idaho for 5 minutes. Mr. Otter. Mr. Brenner, so that I don't misunderstand, and I don't want to rush to an idea here where we end up dividing up the scarcity, which it sounds like where we're going. We have a law in Idaho, it's called Finagle's law. It says, once something is sufficiently screwed up, almost anything the Government does to improve it will make it worse. Having said that, in these new bunch of fuels, these exotic efforts that we've got that we now want to apply uniformly, it appears, across the United States, tell me, in the refining process, with the new standards, how many gallons of gasoline do you get out of a barrel of oil? Mr. Brenner. How many gallons? Mr. Otter. How many gallons. It used to be, if we had a viscosity of 19 from, say, Saudi light crude, we'd get 19 gallons of gasoline. How much do you get today? Mr. Brenner. It really varies depending on what mix of products the refinery is choosing to produce from each barrel. But the point is correct that with reformulated gasoline, it extends the amount of gasoline supplied, because the oxygenates that you add to it displace the need for additional petroleum from that barrel of oil. Mr. Otter. But isn't it true that there's a reduction in the raw base material, the crude oil, in the amount of gasoline that you get out of a barrel of crude? Is there a reduction or not? Do you still get the same amount of gasoline as you did 20 years ago? Mr. Brenner. Actually, with reformulated gasoline, you end up getting somewhat more, because of the addition of the oxygen. Mr. Otter. No, forget the oxygen. Forget adding ethanol. Before you blend, how much gasoline did you get out of a barrel of oil? Mr. Brenner. I can't tell you what the numbers were from previously to now, but we could certainly provide you that. Mr. Otter. What does a gallon of ethanol cost? Mr. Brenner. About--I understand that it's pretty close to the price of gasoline, it's about $1.40, $1.50 a gallon, is our understanding. Mr. Otter. My company made 6 million gallons on an average, ethanol out of potato waste in Idaho. Our average price was $2.30 a gallon. That's what we had to get out of it, after we poisoned it with gasoline to make sure that we didn't drink it. So I don't know where you're getting this extra ethanol much cheaper than the price of gasoline. But it seems to me, we're going to go out of business out there if you can buy it cheaper, made out of corn, I guess, so long as the price of corn is reduced. Mrs. Mink. If the gentleman would yield---- Mr. Otter. My point is this, Mr. Brenner. Isn't it a fact that not only just in the production of the product itself, but in the handling of the product, the storage of the product, the transportation of the product, the delivery of the product, the execution of delivery from the pump itself into the gas tank, all have changed substantially? You cannot put the same gas in the pipeline if you've got one fuel going into another. So you've got to purge the pipeline, you can't put the same one in the pipeline. So you've got to purge the transport. You can't put the same in the tank, so if you're going to have two or three of these fuels, you've got to have two or three tanks. All of this adds to the overall capitalization cost of the whole idea of 27 different kinds of fuels, isn't this right? Mr. Brenner. It's true that when you use ethanol as part of the fuel supply then you have a set of additional requirements, as you mentioned, with respect to storage and distribution to minimize the amount of what we call commingling of the ethanol based fuel with other fuels. In part, those additional costs have been offset by a tax benefit that ethanol receives and that helps. I think that's part of why you're seeing a difference in price that you've described compared to what I described. There is a tax benefit that is somewhat over 50 cents a gallon for the use of ethanol. Mr. Otter. Thank you. Mr. Ose. The gentleman yields back? Mr. Otter. I yield back. Mr. Ose. The gentleman from Massachusetts. Mr. Tierney. Mr. Brenner, just following up on that a bit, in your testimony I believe you said that some in the industry thought it was advantageous to produce fuels for smaller markets. So, I'm assuming that the EPA is going to explore the fact that industry has been very complicit in fostering this boutique sort of situation that we have. And you're going to deal with them and talk to them about that? Mr. Brenner. Well, Congressman Tierney, our focus is going to be on trying to look for solutions to---- Mr. Tierney. Well, one solution I would hope would be to get them to cooperate as opposed to trying to drive the market into boutique so they can make more money. Mr. Brenner. Sure, we would certainly want to work with companies---- Mr. Tierney. Let me ask you, do some refineries encourage States to adopt boutique fuel requirements instead of opting into the RFG program? Mr. Brenner. My understanding is that in some instances, companies did suggest that. Mr. Tierney. And when the Federal Government permitted a State to require the use of a boutique fuel, EPA publishes that notice in the Federal Register, right? Mr. Brenner. That's correct. Mr. Tierney. Has the refining industry ever submitted comments opposing any State boutique fuel requirement, to your knowledge? Mr. Brenner. I don't know if I can say that's true for any instance---- Mr. Tierney. To your knowledge. Mr. Brenner [continuing]. But typically, we have, I know there are very few instances, if any, where we have received comments from refiners. Mr. Tierney. You're not aware of any, are you? Mr. Brenner. I'm not personally aware of any, that's right. Mr. Tierney. Thank you. Mr. Cook, let me just ask you a question. You mentioned the concept of backwardation in your testimony. Would you explain to us again what that is? Mr. Cook. For crude oil, it would simply mean that future deliveries, say deliveries in August, of crude oil, would be somewhat lower priced than deliveries in July. Mr. Tierney. And as a result of that, people in the refinery industry are less inclined---- Mr. Cook. Right. Mr. Tierney [continuing]. To put on production capacity now at a higher price than they would at an anticipated lower price? Mr. Cook. Sure. Mr. Tierney. Now, we're all enthralled with the free market, which I used to assume meant that this industry and others would not want the Government to get involved in their business, but I notice that we already have an estimated $15.6 billion over the next 5 years of incentives for oil and gas production that are in existing law. So, assuming for a second that we don't do any more of that, and we grant them their wish to be a free market, what policies are out there for us that encourage something against that trend, that encourage people to actually produce more now than be afraid that the price is going to drop later and quit that production? Mr. Cook. Well, again, I don't think that EIA as a statistical organization can comment on policy, other than to make the comment consistent with my testimony that more crude supply certainly improves refining economics and tends to encourage, rather than discourage, extra production and extra storage. Mr. Tierney. So, if we convince OPEC to produce more and if we convince some of the non-OPEC countries to produce more, that would be an assistance on that? Mr. Cook. Certainly more supply is going to reduce crude costs and encourage refiners to buy and store and refine more products. Mr. Tierney. Mr. Brenner, what are the air pollution concerns that are associated with refineries? Mr. Brenner. Well, refineries, as major industrial sources, do produce significant amounts of pollution. They have reduced their emissions over the years, but nonetheless, they in recent years have produced over 30,000 tons per year of toxic emissions and over 800,000 tons per year of what we call criteria pollutant emissions--nitrogen oxides, hydrocarbons, carbon monoxide and sulfur dioxide. So they are significant sources of air pollution. Mr. Tierney. Under the new source review requirements, what are the refineries required to do when they increase production? Mr. Brenner. A refinery can increase its utilization, in other words, its production, without any additional controls if it does not require making a change to the refinery. But if they need to make a change to the refinery in order to increase production, then they can still do that without any new requirements, as long as the pollution does not go up by more than 10 tons a year in California or 40 tons a year in many other parts of the country. So the first 10 to 40 tons of emission increases do not carry with them additional control requirements. But if they do make a change and the pollution goes up by more than that 10 to 40 tons, then they need to either find offsetting reductions within their facility or they need to put on modern pollution control equipment. The goal, of course, is to minimize the increase in pollution that occurs as a result of the increased production. And it's important to the communities near the refinery that those pollution increases, of course, be minimized. Mr. Tierney. Thank you. Mr. Ose. Thank you, Mr. Tierney. Mr. LaTourette, for 5 minutes. Mr. LaTourette. Thank you, Mr. Chairman. Mr. Brenner, I apologize for not being here at the beginning of the hearing. Do you have the job Mr. Perciasepe used to have in the old administration? Mr. Brenner. I'm the Acting Assistant Administrator until the political appointee can be confirmed, that's correct. Mr. LaTourette. I wanted to followup on where Mrs. Mink was a little earlier, and also Mr. Otter's observation about how when the Government gets involved, things can get screwed up. It seems, as my grandfather used to say, we have things ``bassackwards'' with our tax code on some of these. Let me just tell you, on ethanol, in the State of Ohio, about 4 out of every 10 gallons of fuel that's sold in Ohio is ethanol based, which is good for the air, it's helped us get our non- attainment areas into attainment. But, I think as you know, when it comes to the Highway Trust Fund, it's taxed at about 10 cents a gallon as opposed to 18 cents a gallon for regular gasoline. So while Ohioans are driving around doing nice things for the environment, they're getting whacked, and when it comes to distributing shares, to fix the roads, bridges and highways, which also increase fuel efficiency, make the air cleaner and everything else. It seems to me, on the Transportation Committee, on which I also have the pleasure of serving, we will be attempting shortly to legislatively fix that inequity. It seems to me that a State that wants to do good by its air and use reformulated gasoline should be rewarded, not penalized. I know that there's a big ethanol lobby that plays into that, and it's a big issue that's not as simple as I just made it. But I would hope that the EPA will take a look at it, as you move forward in seeking cooperation with all the various stakeholders, that perhaps States that want to do well by the environment should also have the opportunity to participate fully in the Highway Federal Trust Fund to make their roads better. If you have any comment about that, I'd be glad to hear it. Mr. Brenner. That's a good example of why the decisions on fuels, and why, in the President's energy report, a directive is that work be done not just by EPA, but working with the Department of Energy, the Department of Agriculture, we'll certainly be talking to the Department of Treasury regarding some of the issues you raised. We will then need to consult closely with Members of Congress. Because as you're noting, all of these decisions have ramifications that go well beyond environmental protection. Mr. LaTourette. Let me just ask you now, in response to that question, I understand the meetings with the stakeholders. But, I also think Mr. Tierney hit the nail on the head, too, if I'm the CEO of a corporation that has a patent on a certain blend of fuel that I want you to buy, I think it would be a good idea for the State or locality to say that you've got to have my fuel running in the cars to meet the Clean Air Act requirements. And this may be a non-Republican position, but I'll tell you, if you came to the conclusion that there was a blend of gasoline that would take care of our air and it would help ease some of the things Mr. Otter was talking about, that's OK with me. I think that's something that would generate a lot of support in the Congress. Did you have at EPA a timeframe when you think you're going to get this thing squared away, these meetings that you're having? Mr. Brenner. The meetings have already begun, and our schedule for producing a report on boutique fuels is to issue a draft of it in the fall for comment, and then toward the end of the fall or beginning of the coming winter have a final report which hopefully will include some suggestions or options for all of us, the administration and the Congress, to pursue in addressing these concerns. Mr. LaTourette. Thank you very much. I don't have any more questions. I yield back. Mr. Ose. The gentleman yields back. Mrs. Mink for 5 minutes. Mrs. Mink. I have one question of Mr. Cook. As I read your testimony, the major emphasis that you made was that the primary reason our gasoline prices have escalated and fluctuated is because of the oil supply. And where the supply has been inadequate, it has increased the prices for gasoline. My question is, with the new administration taking office in January, what efforts have you and the administration made to try to work with OPEC to increase the supply so that this basic problem could be solved at least on one end without all the other discussions that we've had? Mr. Cook. Well, first of all, I'm in EIA, and I don't have a lot of contact with the Secretary of Energy. So I can't tell you what he's been doing with OPEC. Also, that might be a slight misunderstanding of my testimony. We didn't try to pick one factor out and emphasize it any more than another. We did talk a little more about crude oil in the testimony because it's very topical right now, with the Iraqi outage. But now, we list that factor, and then the other four or five factors, not the least of which was the weather back in December. Those high natural gas prices deeply cut into the methane and the butane streams that are key compounds to making MTBE, which helped to keep stocks low going into the spring. The focus on distillate production, which was extra strong because of fuel switching from natural gas to heating oil, diesel fuel, can take some of the responsibility for less gasoline this spring. A number of factors there that gave us low stocks that combined with the tight balance to give us the spike. Mrs. Mink. Well, with respect to most complicated issues, there are always many avenues that you approach in order to solve it. One would think that the administration would put high on its agenda efforts that need to be made to increase the supply and the one source is OPEC. So, I'm surprised not to see anywhere in the policy statements that are being made that effort is underway. Thank you, Mr. Chairman. Mr. Cook. Well, can I comment on that? I can't speak for the Secretary, but I've seen in the press that he is in a continuous dialog with OPEC, it's just one that is not public. Mr. Ose. Mr. Tierney for 5 minutes. Mr. Tierney. Thank you. Mr. Cook, can you share with us what the profits of the refining industry were in 1999 and 2000? Mr. Cook. No, I don't have those figures handy. I could get them for you. But generally speaking, they were relatively low in 1999 and relatively high in 2000. Mr. Tierney. Well, if you could get those, I would appreciate it, and if they could be made part of the record. Mr. Ose. Without objection. [The information referred to follows:] [GRAPHIC] [TIFF OMITTED] T7984.067 Mr. Tierney. Mr. Brenner, would you comment on the reaction that we've been seeing from different types, particularly the industry, with regard to the diesel sulfur rule? Mr. Brenner. Sure. The diesel sulfur rule is part of a regulation that is intended to clean up diesel emissions and it is an effort to combine both new technologies on vehicles with cleaner diesel fuel so that the emissions can be significantly reduced, because the new technologies on vehicles require cleaner diesel fuel in order to work effectively. This is a rule that is phased in beginning in the year 2006. The administration decided recently, as you are probably aware, to go ahead with this rule. One of the things, though, that we will be doing is trying to ensure that it's implemented in a way to minimize any possible fuel impacts, the adverse impacts on fuel supply. That's part of the reason why it's designed with a phase-in and why there's a several year lead time for producing the new gasoline. We are hopeful that we will be able to work closely with the petroleum industry to ensure that there is a smooth phase- in of the lower sulfur diesel fuel, just as there is currently a smooth phase-in of the lower sulfur gasoline for cars that's going on now. Mr. Tierney. In Europe, are they using cleaner diesel fuels now? Mr. Brenner. In Europe, they have also made a decision to move toward cleaner diesel. They are in the process of cleaning up diesel fuel and they have a proposal before them that would result in even slightly cleaner standards than what we have proposed for 2006. Mr. Tierney. So that will increase the market and presumably help on the price issue. Mr. Brenner. What we seem to be moving toward is decisions, both in Europe and Canada, to move toward a lower sulfur diesel fuel for use, that's right. Mr. Tierney. I think, Mr. Cook, in fact, I'm sure that Mr. Cook's figures are going to show us that the refineries are earning record profits. How would you compare the recent profits of the refining industry to the cost that might be incurred in complying with the diesel sulfur rule? Mr. Brenner. The diesel sulfur rule, our estimate was that for the refiners, not for the auto and truck manufacturers, but for the refiners, the cost is on the order of somewhat less than $2 billion a year. When you take the capital costs and annualized them, and you take the operating costs, it's a little bit less than $2 billion a year. Because we need to do an economic impact analysis whenever we do a new regulation, we did look at how did, one of the factors we looked at is how does that compare to profits. What we found was that profitability over the last few years has been, or we had numbers that were close to $20 billion in 1998 and over $70 billion in 2000. And so you could compare, one measure would be to compare that profitability with the annualized cost, which as I said is a little bit less than $2 billion a year. Mr. Tierney. Now, refineries, they say they're going to need enough lead time to prepare for the new fuel requirements, and they're going to be required to produce tier two low sulfur gasoline starting in 2004. Do you think that's enough time for them to comply? Mr. Brenner. That program seems to be working very well. They have been making investments to enable them to produce the lower sulfur fuel in some areas, it's already being produced. And so we've been very pleased with the progress. Mr. Tierney. Is BP-Amoco producing? Mr. Brenner. Yes, in many areas, BP-Amoco is already producing lower sulfur gasoline. And in some instances, we're seeing commitments already to produce lower sulfur diesel fuel. That's only a year after the regulation was issued. Mr. Tierney. And finally, you testified that prices this spring rose both for conventional and RFG fuels. What does that tell us about the effect of the RFG program is having on the rise in gasoline prices? Mr. Brenner. We believe that the primary factors causing increases in gasoline prices are some of the other ones that were mentioned here, the tight situation in terms of refinery capacity, the increased costs of crude, some of those other factors, and that they seem to be affecting both conventional and reformulated gasoline. So, we continue to believe that the effect of reformulated gasoline is the 4 to 8 cents a gallon I mentioned, but that's only a small part of the overall increase, of course, that we're seeing in gasoline. Mr. Tierney. Thank you very much. Thank you, Mr. Cook. Mr. Ose. The gentleman from California for 5 minutes. Mr. Waxman. Mr. Brenner, I want to go back to this issue, and ask you to take a step back to look at it. Under the Clean Air law, California has a requirement that 2 percent of its reformulated gasoline has to have an oxygenate in it. If California is kept to that requirement, it could well mean that there will be a supply disruption, there will definitely be a price increase, and EPA at one point thought it could lead to less cleanup of the air quality. So, let's just say a possible environmental consequence, adverse environmental consequence. So, it seems to me that California wanted a waiver of this oxygenate requirement so they'd only have one fuel instead of two fuels. It's cheaper to have one fuel. The administration says we ought to have one and not a bunch of different fuels. It would be more available, and with the California standard, they'll get all the environmental benefits. Am I right in what I'm saying so far? You don't have to agree with every analysis, but generally, isn't that really what we're facing? Mr. Brenner. Well, of course, it would depend on what fuel is produced. But, what our analysis showed was that you may or may not have an increase in pollution. The problem was that the statutory requirement we were working under required us to be able to clearly state that you would have an air quality benefit by dropping the oxygenate waiver. Mr. Waxman. Now, I have it clear in my mind. What you're saying, in effect, is that it is a legalistical argument, not whether it makes sense to have one fuel as opposed to two. Whether we're going to get the environmental benefit by the California gasoline standard, and whether we're going to have less of a threat of supply and price increases because of the two fuel standard, you're saying that the law says that for California to get a waiver that we've got to show that the 2 percent oxygenate requirement is going to lead to an adverse environmental impact. Now, EPA at one time said it would lead to an adverse environmental impact. On that basis, EPA recommended to the administration that they grant the waiver. Well, this went to the White House and the President turned it down. The only one who wants this oxygenate requirement is Archer Daniels Midland. And now EPA's coming back and saying, well, wait a minute, we don't know for sure that there's going to be an adverse environmental consequence, and on that basis, that waiver should be denied. Well, that doesn't make any sense to me. EPA is changing its position from that which it had before. The Bush administration is saying it makes more sense to have gasoline in California that is specialized for one part of the State as opposed to another, that could lead to less of an environmental benefit, and is going to cost more because they'd have to meet this oxygenate requirement. It's going to cost more. And because it's going to cost more to get this replacement for MTBE, it could be that there's going to be a supply disruption. That to me doesn't make any sense. That's why I find it so incomprehensible that the Bush administration made the decision it did. Mr. Brenner. Let me try to help explain that, which is that there's a technical basis, there's an analytic basis for that decision. You quoted from an earlier draft that we had done last year. Since then, we have done additional analyses of the hydrocarbon related issues, and as we did the additional analysis of the hydrocarbon related issues, what we found is that we could not clearly say that hydrocarbon emissions would remain the same. In fact, they could go up if the oxygenate waiver was granted. Mr. Waxman. It seems to me you're arguing a technical point. We can sit here all day and argue that technical point. But if in another month from now people are looking at higher prices of maybe 20, 30 or 60 cents a gallon for gasoline, and they're buying a gasoline that may even pollute more than what they could do otherwise. No one's going to accept this very technical, legalistic analysis to deny us what makes just good common sense. And States' rights seems to be a proposal, not a proposal, but a philosophy of Republicans, here the States want to do what's right and they're being denied the opportunity to do it for its own citizens. Mr. Brenner. The waiver, Congressman Waxman, was to take effect at the end of next year, at the end of 2002. So, we're not looking at an immediate impact on the fuel supply. That does provide an opportunity to work through ways to best provide gasoline for California without disruption. Mr. Waxman. Refineries have to make investments today to meet any changes a year or two from now. If we don't make the issue clear, they're not going to know how to make their investment, and we're not going to have the gasoline that we need for our citizens at the prices they ought to be paying down a year or two from now. Thank you, Mr. Chairman. Mr. Ose. Thank you. We're going to wrap this panel, I have a couple of followup questions. I want to followup on Mr. Waxman's comment, or observation, about the technical issues. Are we talking about technical in the sense that it's chemistry or are we talking about technical in the sense that it's statutory? Obviously, there's something there that exists in statute or in physics or something. Is it statutory or is it chemistry? Mr. Brenner. There is a statutory requirement that we examine the air quality impact of the waiver. Then when we did that examination, we used air quality models and engineering and gasoline supply models to make that defemination. Mr. Ose. Congressman Waxman refers to a report, and I'm sorry I don't have it, and you had indicated there was a subsequent report. Can we enter the report in the record? Without objection. [Note.--The report may be found at http://www.epa.gov/oms/ regs/fuels/rfg/ro1016.pdf.] Mr. Brenner. I can help you with that---- Mr. Ose. I just want to get the chronology here, to make sure we have the most current data we're receiving testimony on. Mr. Brenner. I believe what Congressman Waxman has is a draft that we had produced earlier as we went through this process of evaluating California's waiver. We have since developed additional analyses and the final decision was issued earlier this week and was sent to the State of California. The State of California received our decision and a copy of the analysis that backed up the decision. Mr. Ose. So, we had an early report or a draft or whatever, and then we had a final, is what you're telling me. I'm trying to figure out which is it that we're basing policy on. Are we basing it on the draft or the final report? Mr. Brenner. We based our decision on the final version, of course. Mr. Ose. Was it, the final said that the statutory requirements were X, whereas the draft said there were things that could be done to address X? Mr. Brenner. They both of course had the same statutory requirement in them, but in the first version, we had thought based on the information we had at the time that the statutory requirement could perhaps be met. Then based on additional information, we found that we were not able to say it could be met. Mr. Ose. All right, I want to make sure that we get both the draft and the final in the record. I'm going to yield to my friend, but I'm going to maintain my time as chairman. Mr. Waxman. I thank you for yielding. I was one of the authors of the Clean Air Act in 1990. We provided a reformulated gasoline requirement, with an oxygenate formula minimum. And we said, you can get a waiver. But we didn't want States to get waivers where they're going to do environmental damage. So we said, in order to get a waiver, you've got to show that keeping to the requirement of the law is going to hurt the environment. EPA did an analysis. And they said they thought it could hurt the environment, and therefore, they were recommending the waiver. The administration denied the waiver, and then EPA sent us a subsequent report saying, well, they're not sure that it would be harmful to the environment if California keeps to its requirement in the law. But if you step back from that, for California to meet the requirement of the law, parts of the State have to use a fuel that's different than what the rest of the State uses. California could use the same fuel for everyone in the State at a lower price, because in order to meet the oxygenate requirement, it costs more money. In order to meet this oxygenate requirement, because we're no longer using MTBE, we have to get the ethanol and there could be a disruption of that supply. So, we're looking at a ridiculous situation in California by not having this waiver. That's why you and I and all the members of our delegation wanted this waiver. The only explanation that anyone could come up with why the administration would turn this request down, which EPA supported originally, is Archer Daniels Midland. They're the ones who make the ethanol requirement for reformulated gasoline. There's no environmental reason to do it. It's a higher price that we're asking people to pay, with a possible disruption in supplies. And if we're looking at the next crisis in gasoline, well, we're going to have a crisis in California, because this waiver has been denied. To me it doesn't make sense. Mr. Ose. I appreciate my friend offering those remarks, and I want to--this is the part that I'm trying to get clear, and you might know the answer to this. As I understand it, the waiver denial was issued on Tuesday of this week, and the draft report, I don't recall the date on that, but the draft report was issued some months ago or some weeks ago? Mr. Brenner. It was not issued. But somehow it was obtained by both the State of California and by the Energy and Commerce Committe. This was last year that they asked for it. And, I can explain the difference. Mr. Ose. I'm just trying to get the chronology right. If I remember correctly, I heard that there was the draft, then the waiver, denial, and then the final report was issued. Was the draft prepared and then the final was prepared and the waiver was denied, or was the draft prepared, the waiver was denied and the final report was written? Mr. Brenner. No, there was a draft prepared, it was not publicly released. However, copies of it were obtained by outside sources. Since then, we did additional analyses, found additional environmental concerns, prepared our final report and based on that final report, made the decision to deny the waiver request. Mr. Ose. OK. I'd be happy to yield. Mr. Waxman. I would submit the following chronology. EPA was working over a 9-month period on this staff report. Their staff report recommended that the waiver should be granted. I believe that the head of EPA concurred in that decision. Then it went to the administration and the administration decided not to grant the waiver, and therefore, another further report was prepared to show on a technical basis that EPA was not sure that there would be an adverse environmental result if the waiver were granted. First they were, and now they're saying they're not sure. That's why they're turning us down on the waiver. But the fact of the matter is, the waiver should be granted for all these other reasons, and it was denied for no reason except, seems to me, the obvious special interest conclusion of the people who wanted to make gasoline with this ethanol in it. Mr. LaTourette. Mr. Chairman, may I make some observations about that, if we're going to make observations? Mr. Ose. Yes, you may. Mr. LaTourette. That's a pretty serious allegation I think you're making, Mr. Waxman. Mr. Brenner, you're not a political appointee, as I understand, you're the acting Mr. Perciasepe, I think we talked about before, right? Mr. Brenner. That's right. Mr. LaTourette. Is there anything--and how long have you been with the EPA? Mr. Brenner. I've been with the EPA for over 20 years now. Mr. LaTourette. And the Republican and Democratic administrations have put you at the EPA, if I have my history correct? Mr. Brenner. That's correct. Mr. LaTourette. Are you aware of anything to validate or buttress what Mr. Waxman has just said? Do you concur with the final report? Mr. Brenner. Yes, I did sign off on the final report. As I indicated, there is a technical report that buttresses the decision that was made, that explains the decision that was made. We've provided that report to California and we'll provide it to the committee. Mr. LaTourette. Were you directed by Governor Whitman or the President or Vice President or anyone in the administration to reach that conclusion, that even though it conflicted with what you knew as a career member of the U.S. EPA? Mr. Brenner. No, we were not directed to reach that decision. [The information referred to follows:] [GRAPHIC] [TIFF OMITTED] T7984.068 Mr. LaTourette. Do you own any Archer Daniels Midland stock that would put you in conflict? Mr. Brenner. No, sir. Mr. LaTourette. Thank you very much, Mr. Chairman. Mr. Ose. Thank you, Mr. LaTourette. We're going to wrap this up. I do want to ask a couple of questions. You've indicated there's a statutory constraint to granting the waiver that California has requested. What I'm trying to find out is, can Congress provide statutory flexibility whereby California can be granted the waiver that it requested, and how would we go about doing that? Mr. Brenner. Currently in the act, and I want to just say, as an aside, probably a highlight of my career definitely has been working with Members of Congress on the Clean Air Act amendments of 1990, however, that provision in there that deals with waivers from the oxygenate requirement is a fairly narrow one that deals just with the air quality effects. So, we would need to take into account more than just the air quality effects in order to be able to grant that sort of waiver. And as I've indicated, that's something that, whenever you change the fuel supply, it has a fairly broad set of implications across the economy. Undoubtedly, there would be a number of other stakeholders that would want to comment on any change such as that. Mr. Ose. Are you familiar with former Congressman Bilbray's legislation in 1999 to provide California the flexibility for such reformulated gasoline? Mr. Brenner. I'm sorry, I'm not. Mr. Ose. OK. I'm referring to H.R. 11 from the last Congress, that had significant support, 51 of 52 Members of Congress from California supported it. I'm curious whether this might offer, this particular legislation, if updated, might offer a vehicle whereby we could provide some resolution in a timely manner, so that statutorily, EPA could come forward to grant the wavier. Mr. Brenner. We could certainly look at it and report back to you on what we think the implications of legislation like that might be. Mr. Ose. I just want to emphasize, we're all up here trying to find solutions to this. Because all of our people are paying, whether it be in Mr. Tierney's district in Massachusetts or Mr. LaTourette's or mine or Mr. Otter's, Mr. Waxman's, all our people are paying extra and we don't like it. If there's something we can do to alleviate that, we want to do it. So, you may well get a written question. We're going to leave the record open. I want to make sure everybody's aware of that. We're going to leave the record open for some written questions. I want to thank both of you for coming. It's been a long hour and a half, you've been very gracious. We'll take a 5-minute break. [Recess.] Mr. Ose. The subcommittee will come to order. We'll swear in our witnesses, so if you'd all rise and raise your right hands. [Witnesses sworn.] Mr. Ose. Let the record show that the witnesses all answered in the affirmative. Joining us on our second panel is Dr. Don Coursey, who is professor at the Harris School of Public Policy, University of Chicago; Mr. Robert Slaughter, the general counsel for the National Petrochemical and Refiners Association; Mr. Ben Lieberman, who's a senior policy analyst for Competitive Enterprise Institute; and Mr. A. Blakeman Early, who's an environmental consultant for the American Lung Association. Gentleman, I welcome you. We appreciate your taking the time from your day to come. Dr. Coursey, you're recognized for 5 minutes. We all have your written testimony. I know we've all read it. So if you could summarize, that would be great. STATEMENTS OF DON L. COURSEY, AMERITECH PROFESSOR OF PUBLIC POLICY, UNIVERSITY OF CHICAGO, AND POLICY SOLUTIONS, LTD.; ROBERT SLAUGHTER, GENERAL COUNSEL, NATIONAL PETROCHEMICAL AND REFINERS ASSOCIATION; BEN LIEBERMAN, SENIOR POLICY ANALYST, THE COMPETITIVE ENTERPRISE INSTITUTE; AND A. BLAKEMAN EARLY, ENVIRONMENTAL CONSULTANT, AMERICAN LUNG ASSOCIATION Dr. Coursey. Thank you for inviting me today. I am an economist from the University of Chicago, and my interest in looking at this is from a market viewpoint. That's what I do for a living, study markets. People like to look at Chicago historically and think that we invented markets and invented transactions. Markets have been around for a long time. People traded corn, wood, and wheat. What the great invention of the Chicago markets were over 100 years ago was the commodification of these things, the corn, the wheat and the wood. And the definition of a commodity, instead of bringing corn or wheat to the docks and have people individually go through it, the commodification of these things allowed people to just trade them freely. There were difficulties at that time as well in defining different types of corn, but we managed to work our way through that. Now we can trade corn fit for human consumption, corn fit for animal consumption. That was the invention of Chicago, the commodity. And that's what led to the emergence of modern markets. It may come as a shock to you today, but I strongly feel that there is no such thing as a gasoline market in the United States today. Rather, I think the situation is much better described as a set of regional oligopolies. Why? The invention of commodities in Chicago meant that everything was a perfect substitute for everything else. If corn was needed in Iowa, it would move there. And what would attract it would be prices. The corn could come from Wisconsin, it could come from North Dakota, whatever. So, one of the conditions for forming a market is the commodification of whatever you're trying to trade. The second reason why I think we have regional oligopolies as opposed to a marketplace is because there are few sellers. There are great returns of scale in the refining and distribution business. You're going to end up, given current technologies, with at most a handful of people serving in an individual region in a country. The third reason has to do with entry restraints and the difficulty of setting the refining capacity. I'll return to that. All these have led to higher prices for gasoline, and everybody here has commented on that, I don't need to repeat that. But, I want to emphasize something about volatility of prices in a moment. Oil bashing seems to be quite a great spectator sport right now. Someone earlier in the morning commented on the Wall Street Journal article regarding my area of the country, Chicago, and the problems having to do with Marathon and BP- Amoco, or now just BP, serving the Chicagoland area. But, I would urge the committee to consider the challenges of being a refiner these days. I think a lot of people have the opinion that refiners take crude oil, smash it up, turn it into other products, and distribute it around the country. That is, as I argue in my testimony, the easy part. Marathon and BP in my area will have raw product. The price of that raw product is often dictated many thousands of miles away. And they've got it, what are they going to do with it? They have to decide, what flavor do they want to produce? Do they want to produce for the Milwaukee-Chicagoland region? Do they want to produce for Ohio? Do they want to produce for somewhere else, do they want to produce for North Dakota? When are they going to produce it? You can only make one of these at a given period of time, you can't stop and 5 minutes later start making another one. There are turnaround times. Where are you going to send it? Additionally, the product doesn't go directly out the front door into people's cars. It has to go through pipelines. Indeed, many of the in the additives in the Chicagoland area have to come through their own pipeline, of which BP or Amoco have no control over. There are refining constraints in place. These refineries require maintenance periods, shutdown periods, and how do you plan them into the schedule? And last and not least important, it's all subject to fixed general stocks, such as changes in the weather patterns, changes in consumer behavior, and changes in the behavior of OPEC, of which the Chicagoland area has very little control over, of course. So, I would argue that running a modern refinery, given the current regulations, is very similar to running an airline, which as we know has not been an easy thing to do over the last 4 or 5 years as well. Both airlines and refiners are subject to heavy capacity constraints, the airlines, in terms of airplanes and increasingly runway space. The changes in consumer demand patterns that can occur, and again shocks such as weather or other external factors. It's very, very difficult to begin with, to run a refinery, and you're adding a degree of complexity that's mind boggling on top of that. A lot of people here have focused on the higher average prices. And when OPEC moves the prices up and down, it's inevitable that regular gasoline, reformulated gasoline, everything's going to move up and down with them. That's just the law of supply and demand. What I think has not been focused on as much is the volatility produced when all these additional regulatory constraints are imposed upon refiners. It's the volatility in places such as Chicago that really attracts people's attention. Earlier you asked about the Ohio consumers, driving to work 1 day at $1.50, coming home in the evening at $1.75. That's not at all unusual in my part of the country as well. I think one of the things that's left unnoticed is that oftentimes prices will fall equally as much. I don't think we see 25 cents over the course of an 8 hour working day, but they can come down as much as they can go up. It's the volatility that drives people quite crazy in my region, as well as the average prices. I argue strongly in my---- Mr. Ose. Dr. Coursey, you need to wrap up here. Dr. Coursey. OK. So, to put this all together, perhaps what the perspective of the committee might be is to consider a return back to the future. Figure out ways to get the interested parties together and recreate a commodity of gasoline. We had gasoline as a commodity for a long time in this country. The United States doesn't need 50 blends of gasoline, it doesn't need 30, 20, 18, 20, there's all kinds of numbers floating around. Perhaps we need as few as four. But once that is accomplished, then the problems that you see out in places like California or in my area will tend to take care of themselves naturally. The easiest way to attract resources to your area is to provide people incentives to send them there. [The prepared statement of Dr. Coursey follows:] [GRAPHIC] [TIFF OMITTED] T7984.069 [GRAPHIC] [TIFF OMITTED] T7984.070 [GRAPHIC] [TIFF OMITTED] T7984.071 [GRAPHIC] [TIFF OMITTED] T7984.072 [GRAPHIC] [TIFF OMITTED] T7984.073 [GRAPHIC] [TIFF OMITTED] T7984.074 Mr. Ose. Thank you, Dr. Coursey. Mr. Slaughter, for 5 minutes. Mr. Slaughter. Thank you, Mr. Chairman. I'm here today on behalf of NPRA. The Association's members and owners operate 98 percent of U.S. refining capacity. We also have as our members most petrochemical manufacturers. A lot of the current information about the market has been given out today by EIA. Obviously we're in a situation in which we've had record production of gasoline by refiners over the last 2 months, some addition even to inventories. Prices over the last couple of weeks have generally been declining. There is reason to believe that we may get through this summer all right, the heavy driving season, provided there are no unforeseeable problems, such as there were and which triggered events in the Midwest last summer. And frankly, I think that some considerable credit should go to the men and women in the refining industry for all they've done over the last few months to turn this product out in very severe situations. But of course, we have underlying problems, which we've talked about today. My first chart over here shows that we have no longer really any excess capacity in the United States, excess refining capacity. The top line, the light green line, represents demand, the dark green line, capacity. We obviously over the last several years no longer have that cushion. That means a tight supply demand balance. We're dependent on imports. Projections are that gasoline demand will grow by 1 to 2 percent over the next several years. There really are no projections that refining capacity will grow to meet that. With no new refineries since 1976, and it's becoming increasingly difficult to add capacity at existing sites, which is the major way that we add capacity in this country, because of reinterpreted rules and restrictions that EPA is in charge of. So, you can't count on the refining industry being able to add the capacity we need unless we make some policy changes. We currently important 700,000 barrels of refined product to help us meet demand, and we're not always going to be able to depend on that increment of supply. Other societies are growing, economies are growing and they want some of that gasoline as well. Now, basically, I think we ought to move to a few of the issues just very quickly that have come up several times, so we can talk about these issues. We are concerned about the Unocal patent. We do think that's having an impact on gasoline supplies. We have asked the FTC to look at Unocal's conduct in participating in Federal and State regulatory activity, and then patenting these particular blends. We hope that the FTC will look at it. We think it does have an impact on gasoline supply. The next chart is a bar chart that shows you all the different regulations that face the refining industry over the next 10 years. There's roughly $20 billion of investment required. It's going to be very difficult to do it all, particularly the diesel sulfur rule. Some people want to take great umbrage that we suggest that this is not a perfect rule. It's not a perfect rule. It requires that 80 percent of diesel be reduced from essentially 500 parts per million now to 15 parts per million in 2006, that 80 percent of diesel be reduced, at a cost of $8 billion, to that level, to meet only 5 percent of demand in 2006 and 2007. That overlaps almost exactly the period for the reduction of gasoline sulfur from the current 500 parts per million to 30 parts per million average. Double programs, EPA refused to sequence them. There's not really any demand for 15 parts per million diesel in 2006, but the industry is under the gun to have to make it. We want to thank Chairman Ose, Mr. Burton and Mr. Horn for their efforts to encourage California officials to exempt refineries from rolling electricity blackouts. We need that exemption in order to keep products flowing in California, and we thank you for that. On the California oxygenate waiver, I would just like to point out one---- Mr. Ose. Mr. Slaughter, I appreciate your thanks, as does Mr. Burton and Mr. Horn, our concern was the consumers and the impact of shutting you guys down. Mr. Slaughter. We understand. On the California waiver, I would like to point out one fact that was not mentioned earlier, which is that the waiver was pending at EPA for 23 months, and the previous administration didn't grant it either. They didn't explicitly turn it down, but they didn't grant it, either. Our members are of two minds on the waiver. Our refiner members would support the waiver, and want relief from the 27% requirement. We also do have some MTBE manufacturers who wouldn't agree with that position. But again, I wanted to clear the record and say that it had been pending there under two administrations. The new source review program we think needs a second look. It's going to get one under the President's recommendations. It is a road block to improving and expanding capacity, installing new technologies, even undertaking basic maintenance procedures now at refineries. We think it deserves a look. There's room for improvement. People who say that it's the best that can be invented have got a hard case to make, if you look at its history. The boutique fuel chart; it's up on the other screen as well. People want to argue about how many fuels there are. There are 14 to 16 on this map. There are different grades of those: there are geographic grades, there are seasonal grades, there are a lot of gasolines out there. These maps were generated last summer when people in the Midwest wanted to understand what the gasoline distribution system really looks like. The 1990 Clean Air Act set out essentially a three gasoline system but local choice, economics and politics have made it look like it does. The energy industry has to optimize this map to deliver gasolines, and this situation as well looks like something that could deserve a second look. The administration is going to take another look at it and everyone can participate in that review. Mr. Ose, and members of the committee, I think I'll leave it there, and look forward to your questions. [The prepared statement of Mr. Slaughter follows:] [GRAPHIC] [TIFF OMITTED] T7984.075 [GRAPHIC] [TIFF OMITTED] T7984.076 [GRAPHIC] [TIFF OMITTED] T7984.077 [GRAPHIC] [TIFF OMITTED] T7984.078 [GRAPHIC] [TIFF OMITTED] T7984.079 [GRAPHIC] [TIFF OMITTED] T7984.080 [GRAPHIC] [TIFF OMITTED] T7984.081 [GRAPHIC] [TIFF OMITTED] T7984.082 [GRAPHIC] [TIFF OMITTED] T7984.083 [GRAPHIC] [TIFF OMITTED] T7984.084 [GRAPHIC] [TIFF OMITTED] T7984.085 [GRAPHIC] [TIFF OMITTED] T7984.086 [GRAPHIC] [TIFF OMITTED] T7984.087 [GRAPHIC] [TIFF OMITTED] T7984.088 [GRAPHIC] [TIFF OMITTED] T7984.089 [GRAPHIC] [TIFF OMITTED] T7984.090 [GRAPHIC] [TIFF OMITTED] T7984.091 Mr. Ose. Thank you, Mr. Slaughter. Mr. Lieberman, for 5 minutes. Mr. Lieberman. Good morning. My name is Ben Lieberman, and I'm a senior policy analyst with the Competitive Enterprise Institute, a public policy organization committed to advancing the principles of free enterprise and limited government. Gasoline prices have risen more than 20 cents per gallon on average over the past 10 weeks, with consumers in some parts of California and the upper Midwest recently paying more than $2 per gallon. As with previous price spikes, Congress has sought to learn why these increases occurred and what can be done about it. Thus far, most of the attention has focused on allegations of illegal conduct on the part of the oil industry. Consequently, there have been many Federal investigations of alleged collusion of price gouging, and in fact, two Federal Trade Commission reports on previous price spikes have recently been released. However, these investigations have pointed away from industry conduct as the cause of the gasoline price increase. At the same time, evidence is emerging that the growing Federal regulatory burden is having an effect on gasoline prices, and is a factor in the volatility seen in recent years. In particular, the regulations promulgated under the Clean Air Act, which both dictate the composition of gasoline and place limits on refining infrastructure, are a major contributor to the price of gasoline today. The 1990 amendments to the Clean Air Act contained a number of motor fuel regulations. For example, we now have specialized blends such as reformulated gasoline and oxygenated gasoline mandated for particular areas. There are also varying requirements applicable to conventional gasoline. The amendments also gave broad discretion to EPA to set additional fuel requirements. As a result, we now have a number of distinct fuel types in use. Perhaps the most problematic of these provisions is the requirement for reformulated gasoline in the smoggiest parts of the country. Reformulated gasoline must meet several compositional requirements and emissions performance standards. Today, nearly one-third of the Nation's fuel supply is reformulated gasoline, and it currently averages 21 cents per gallon more than conventional gasoline. There are distinct requirements for reformulated gasoline in northern States and southern States and specific summer requirements applicable from June to September. Despite the higher costs, the National Research Council and others have raised some questions about the extent of the environmental benefits of reformulated gasoline. Some benefits, but not as great as originally anticipated. And in fact, California, as we've discussed, and other States, are trying to get out of certain specific requirements under the reformulated gasoline program. As I mentioned, reformulated gasoline costs more than conventional gasoline, but the emerging problem is not so much the higher price of individual blends, but the balkanizing effect of so many distinct gasoline types simultaneously in use. In 1999, the Department of Energy's Energy Information Administration stated that ``The proliferation of clean fuel requirements over the last decade has complicated petroleum logistics,'' and predicted that ``Additional clean fuels programs could make the system more vulnerable to local outages and price spikes.'' In fact, one pipeline operator reports having to handle 38 different grades of gasoline, several due to environmental requirements and some due to other requirements. But many of these blends have to be separately refined, shipped and stored. For those who question whether Federal regulations really are major contributors to the high price of gas, I would suggest taking a close look at the where and when of the highest gas prices, because it matches reasonably well with the where and when of the most burdensome regulations. For example, the prices tend to be highest in the late spring, early summer timeframe. This is the second year in a row that Chicago has been hit with $2 gas at this time of the year. This is due in part to the additional complication of transitioning away from winter fuel specifications to the summer specifications. The location of the highest prices, California and the upper Midwest, is not coincidentally the location of the most unique and challenging fuel standards, as well as the most vulnerable refining infrastructures. In contrast, I've heard a lot of people claim that high gas prices are due to industry manipulation. But I've never heard a logical explanation why big oil gets so greedy in April and May and not the rest of the year, or why they keep picking on Chicago and California and leave other parts of the country alone, or for that matter why they endured long stretches in the 1990's when gasoline prices were at record lows. Unfortunately, there are a number of new fuel regulations scheduled to take effect in the years ahead, such as the new ultra low sulfur standards for gasoline and diesel fuel. These rules could increase costs further in the years ahead. Now, the FTC report as to last summer's Midwest gas price spikes further confirms the role of regulation. While the report found no evidence of illegal conduct by industry participants, it went on to list the primary and secondary factors behind the price increases. Many of these factors are related to the regulatory burden, particularly the stringent new requirements for reformulated gasoline that took effect in 2000. In fact, the FTC report could be used as a good starting point for regulatory reform. In closing, I'd like to offer a few general thoughts on what needs to be done to ensure that gasoline is as affordable as the market will allow. I think there are some good elements in the administration's recently released energy plan, particularly the plan to direct EPA to study ways to reduce the proliferation of different fuel requirements and to streamline the regulations that are stopping refiners from expanding to meet demand. This can be done without sacrificing environmental quality. One specific recommendation is that Congress amend the Clean Air Act to eliminate the 2 percent oxygenate requirement from the reformulated gasoline program, or at least allow States to opt out of this requirement, as California has attempted to do. The role of Government should be to set environmental end goals for gasoline, not to dictate the specific ingredients and recipes by which those goals are met. And given the magnitude of recent gasoline price increases, I would urge EPA and Congress to take a look at some of the new fuel regulations scheduled to take effect in the years ahead, and amend them if they threaten future price increases disproportionate to the expected environmental benefit. Thank you. [The prepared statement of Mr. Lieberman follows:] [GRAPHIC] [TIFF OMITTED] T7984.092 [GRAPHIC] [TIFF OMITTED] T7984.093 [GRAPHIC] [TIFF OMITTED] T7984.094 [GRAPHIC] [TIFF OMITTED] T7984.095 [GRAPHIC] [TIFF OMITTED] T7984.096 [GRAPHIC] [TIFF OMITTED] T7984.097 [GRAPHIC] [TIFF OMITTED] T7984.098 [GRAPHIC] [TIFF OMITTED] T7984.099 [GRAPHIC] [TIFF OMITTED] T7984.100 [GRAPHIC] [TIFF OMITTED] T7984.101 [GRAPHIC] [TIFF OMITTED] T7984.102 [GRAPHIC] [TIFF OMITTED] T7984.103 [GRAPHIC] [TIFF OMITTED] T7984.104 Mr. Ose. Thank you, Mr. Lieberman. Mr. Early, for 5 minutes. Mr. Early. Good afternoon. I'm very happy to be here on behalf of the American Lung Association, and I'm going to basically chuck my testimony and try to hit on some key issues that I urge the committee to consider. Talking about this in the same way that Dr. Coursey does, I think it's important to recognize that the American public wants the refining industry to deliver both affordable gasoline and clean air. The American public expects and the Congress has dictated through the Clean Air Act that they deliver on clean air as well as gasoline. Weakening either the clean fuel requirements or the new source review requirements that will apply to expansions of refineries is going to ensure that the refining industry does not deliver on clean air as much as they are right now. So the American Lung Association very much opposes proposals in that regard. We also have sponsored public opinion surveys which show the American public is willing to pay more for their gasoline for the delivery of clean air. All the price spikes we've seen have exceeded by a considerable margin the amount of the incremental costs of delivering clean air. It's obviously these other factors, as the previous witness, Mr. Cook, pointed out, such as consolidation of the oil refining industry. Essentially, when you put more of the power of gasoline production and supply in fewer hands, you can't guarantee that weakening clean air requirements is going to result in lower fuel prices, because they just have too much power to manipulate the market. Briefly, my testimony shows that we believe the refining industry is exaggerating the problems of boutique fuels. I have in my testimony a map, this one, and I apologize that it's difficult to understand. But basically, a lot of the fuel requirements, particularly in the Southeast, the RVP requirements, are essentially the same requirements and don't represent a major impediment to the industry. The RVP requirements for Texas, Louisiana, North Carolina, Tennessee and Florida are essentially identical on that map. If you take California out of the equation, you take Chicago out of the equation, the number of separate gasolines on that map really goes down to seven gasolines. You multiply that by low test or regular and premium, and there's a total of 14 summertime fuels, not 48 fuels. Let me also just briefly touch on the Bush administration's oxygenate waiver denial. The American Lung Association is very disappointed in this decision. But, I urge you to consider another factor which hasn't gotten any discussion. There's another special interest that doesn't want this waiver. It's the MTBE industry. And one of the things that we're very concerned about is, the previous administration basically was in favor of a policy that would promote removing MTBE from the entire national fuel supply. The denial of this waiver, from our perspective, would indicate that this administration has abandoned that policy. We think this is very unfortunate, because there's a very strong consensus that removing MTBE from the fuel supply is a good idea for the protection of our water resources, and that we can achieve air quality goals without MTBE in the fuel supply. The administration had the opportunity, because of the nature of the evidence, to hang their hook on evidence that would support the waiver or hang their hook on evidence to deny the waiver. Unfortunately, they took the latter course. We're very concerned and disappointed. There's a real opportunity to help California deal with its water quality problems and ensure air quality, and the administration basically did not do anything to help them do that. Finally, what I'd like to do with respect to new source review is, which has not been discussed too much by the committee today, but we think it's a very important issue, is to submit a letter to the record from the Natural Resources Defense Council to President Bush which discusses the fact that the Environmental Protection Agency has not changed the rules with respect to new source review applications for expansions at refineries or any other industrial expansions. They're the same rules and the same interpretation of the rules that we've seen for many, many years, going back to the first Bush administration. They ensure that as modernization occurs at industrial facilities, we get a delivery on clean air benefits as well. And we urge you not to consider making changes to the new source review program. With that, I will conclude, Mr. Chairman. Again, I hope you will be able to include that letter for the record. [The prepared statement of Mr. Early follows:] [GRAPHIC] [TIFF OMITTED] T7984.105 [GRAPHIC] [TIFF OMITTED] T7984.107 [GRAPHIC] [TIFF OMITTED] T7984.109 [GRAPHIC] [TIFF OMITTED] T7984.111 [GRAPHIC] [TIFF OMITTED] T7984.113 [GRAPHIC] [TIFF OMITTED] T7984.115 [GRAPHIC] [TIFF OMITTED] T7984.117 [GRAPHIC] [TIFF OMITTED] T7984.119 [GRAPHIC] [TIFF OMITTED] T7984.121 [GRAPHIC] [TIFF OMITTED] T7984.123 [GRAPHIC] [TIFF OMITTED] T7984.125 [GRAPHIC] [TIFF OMITTED] T7984.127 [GRAPHIC] [TIFF OMITTED] T7984.129 [GRAPHIC] [TIFF OMITTED] T7984.131 [GRAPHIC] [TIFF OMITTED] T7984.132 [GRAPHIC] [TIFF OMITTED] T7984.133 Mr. Ose. Without objection, it will be included. Thank you, Mr. Early. Mr. Otter, for 5 minutes. Mr. Otter. Thank you very much, Mr. Chairman. Members of the panel, welcome, and I apologize for having to run in and out. But in the normal course of business, I find that's the way it is. You sort of do these things on the installment plan, and today is no exception. Interesting, your comments, Mr. Early, that the EPA hasn't changed the rules. I would take exception to the idea that not having changed the rules doesn't change the environment for competition. Because as we know the rules that were established had a progressive effort to clean things up, had a progressive effort to make things better. As we reached some of those plateaus of making things better, even though we didn't change the rules, substantial costs and investment in meeting some of the new standards that were established, that we didn't change the rules since 1990 have taken effect. And, the result of that obviously is that we've got less production. Less production means there is an increasing demand and it's going to create scarcity. So, hasn't in fact the increasing standard that we put in place, starting in 1990, and we didn't want to create too much hardship, so we didn't want to do it overnight, and so it's actually taken about 11 years for our chickens to come home to roost here. Even though your statement, we didn't change the rules, in fact may be correct, but from where we started in 1990 to where we are in the year 2001, haven't the standard considerably changed? Mr. Early. Well, let me respond in this way. First of all, the new source review program, if you're talking about the standards that apply to refinery expansions, for instance, first took place in 1977, and it was a pretty long time ago. All the changes that have been discussed in the industry, as was testified to by Mr. Cook, appear to be as a result of larger forces within the industry, and not environmental requirements that will apply. Obviously, some refineries have a harder time meeting environmental requirements than others. But in terms of the consolidation of the industry, that has been a process that's affected by far larger forces. I think I'm getting at what you're asking, but I'm not certain. Mr. Otter. That sort of is where I'm going to. But I was involved in an industry, and I saw a lot of industry change between 1964 and 1993, or 1994, when I retired from the company. Quite frankly, the thing that would happen in the french fry business was for the EPA or OSHA or some other Government regulatory agency to come into our industry and say, you can't do this any more and you can't do that any more and you must change this and you must change that. Because we were large enough, and we had a large enough critical mass at the time that we could go ahead and make the changes. We could retrofit our plants. The little guy couldn't. So, when we retrofitted, we were then obeying the law and they weren't obeying the law so, they had to go out of business. Somebody got their customers, and it was generally one of us. When I started in that business, there was, I'm guessing now, but well over 20. I know it was over 20, could have been 40. Today there's about six. And most of the reason for that, make no mistake, it has nothing to do with the marketplace, other than the marketplace continued to grow. But what continued to grow even more dramatically was the Government constantly mucking about in that industry. Rather than just setting the standard and holding people responsible, they continued to try to control the industry to their own peril. French fries then were selling for 8 cents a pound, today they're about 58 cents a pound, a la gasoline. So, I guess maybe they're catching up, but I don't see the pickets outside McDonald's and Jack in the Box yet. But maybe we will, I'm not exactly sure. I think it's terribly naive to suggest that the constant drum beat of Government regulation and whether it started in 1990, certainly this drum beat started maybe even before that, but I think it's terribly naive to suggest that the constant infusion of Government regulation in the marketplace hasn't caused a constant increase. And I'd be willing to listen to your response to that. Mr. Early. Well, I'm not really qualified to talk about all Government regulation. But again, going back to my initial remarks, Congress, at the urging of the American public, has been basically sending a message to the oil refining industry, we want you to deliver not only on gasoline and other fuels, but clean air as well. And there isn't any question that refiners who refuse to deliver on the clean air part of the requirement are going to be at a disadvantage and might have to go out of business. But as a general matter, all the data would indicate that the forces that have really caused this consolidation of the industry don't have to do with the air quality regulations and have everything to do with natural economic forces that benefit large gasoline producers over small gasoline producers, as a result of a wide variety of factors. Dr. Coursey talked about that. Mr. Otter. But you don't think that it is a factor that one person can afford to comply relatively easily and the other can't? Mr. Ose. If I may interject here, we're going to have a second round. Can you hold this line of thought? Mr. Otter. Yes, I will. But I would just conclude, Mr. Chairman, and say that whenever you're going to steal from Peter to pay Paul, you're always going to have Peter to support. Mr. Ose. Mr. Tierney, for 5 minutes. Mr. Tierney. Thank you. I think we can show a pretty good record for the drum beat of Federal regulation for clean air standards, and that's a drum beat that most people like to hear. Contrast that with the constant whining of the industry for wanting Government to get out of their affairs, yet they've got their hand out for some $15.6 billion of subsidies and tax credits and other things, and I think we'd take the drum beat any day over the whining. With respect to the settlements on those cases, you've got 9 to 10 settlements, and you may want to comment on this, Mr. Early, but I think that from 22 years in litigation, if you're settling cases of that magnitude, you're pretty much admitting that you should have complied, and now you're bellying up to the table and paying with respect to the new source. Mr. Early. That's correct, and in the letter that I submitted for the record, it quotes from a portion of the brief submitted by the Bush administration Justice Department in litigation over the Tennessee Valley Authority, which acknowledges that the rules and the interpretation of the rules are the same today as they've been over more than 15 years. And these cases are meritorious cases, basically they're requiring those members of the industry to play by the rules and help deliver on clean air as well as product. And we think that we shouldn't be messing around with a program which actually has a record of success. Mr. Tierney. My latest recollection of that is there have been 10 settlements. Is that accurate in terms of your recollection? Mr. Early. I think that's my understanding, yes. Mr. Tierney. I don't have a question for you, Mr. Slaughter, but I do have some information for you, just to correct. I know you don't want to leave the misimpression that the last administration had a fully completed application for waiver in 1999. In fact, that California application for waiver was finalized in February 2000. So after about 9 months of review, it then was recommended for approval, and now this administration has turned that around. Apparently there's going to be an effort to try and win it through some sort of political manipulation. But I did, again, ask you, Mr. Early, this oil industry has experienced record profits and consumers are paying high prices. Between 1999 and 2000, profits from the top 10 petroleum refining companies on average doubled. Profits from Valero Energy Services increased by 437 percent in the same period, profits from Phillips Petroleum increased by 127 percent, and profits from Chevron increased by 110 percent. In addition, profits in the first quarter of 2001 averaged 81 percent higher than they were in the first quarter of 2000. This is the same industry, as I mentioned earlier, that's going to get $15.6 billion in corporate welfare in the form of special tax breaks over the next 5 years. You think that perhaps we ought to watch this industry, make sure they're doing their fair amount of protecting the public health? And I would suspect to make sure that they understand that if they had to incur some cost of the new source review or whatever, it is a fair price for doing business, and for making the enormous profits that they're making and for the subsidies that they're getting? Mr. Early. The evidence would indicate that the new requirements that the industry is going to have to meet, and you saw Mr. Slaughter's chart, are affordable to the industry. They do make life a little more complicated for them, but you know, Exxon-Mobil made $5 billion in the first quarter of 2001, I think they can get over it. They clearly can afford it. The important thing is that we need the oil industry, as we need other stationary sources, to contribute to the effort to get us to healthy air, just as they contribute to the economy through providing the American public valuable products. And we think that the mix is not out of balance at this point, and would argue that weakening requirements for the industry are by no means in order. Mr. Tierney. Mr. Chairman, I would just end my comments here by saying, these are business decisions on the part of these refineries, and not any sort of problems with regulations. In fact, I quoted in my opening remarks one of the vice president of Valero Energy in San Antonio making that point. Regulations are merely a nuisance rather than a barrier to meeting the demand. A bigger headache for the industry is the fierce competition that keeps the profit margins thin. So I think the real issue here is, some of them decided to do boutiques because that narrows down their market, gives them a sort of a small monopoly and they can certainly capitalize on that, others, as we've seen in the Midwest, have curtailed production and withheld supply. The real issue here is, what do we do, other than give out more corporate welfare, what do we do with the policy issue to try to ensure that there's more refining capacity? That industry has made a decision on business premises that they don't want to increase refining capacity because they wouldn't make enough money for them. Not that they wouldn't make a profit, but they apparently wouldn't make enough of a profit. So I would hope that the real question in this hearing is, what do we do to get industry, not only to comply with the reasonable environmental standards, that certainly wouldn't cut into their profits in any appreciable sense, but how do we get them to build more refining capacity when they tell us, we're making a profit, but it just isn't enough, so we're not going to. Thank you. Mr. Ose. As always, the gentleman is right on the button with his time, and I appreciate it. Dr. Coursey, if I read your written testimony correctly, your essential point is that we need to move from a situation where we are today with a variety of different fuels to something more similar to a commodity market. I'm synthesizing or basically summarizing your point, but I believe it was that the simpler we make our fuel mix requirements, the more likely we are to have acceptable supply levels and price levels. Is that accurate? Dr. Coursey. Yes. I would agree with the remark earlier that consumers, based upon my 20 years of looking at them, are willing to pay 5 to 10 cents more per gallon, on average, to have these environmental benefits. There's a lot of evidence that I can prepare and submit if you'd like to see that. But what that ignores is what I was referring to in my opening remarks. The other part that consumers are playing is less well noted, and that is that the spikes are part of the regulatory type of problem. When you put this very, very confused situation up here, that's going to cause small shocks to the system to be amplified, particularly in places like we've talked about, the upper Midwest and California. Mr. Ose. I meant your points about the fungibility of production, that is, when a refinery goes off line in California, the consequence in, say, southeast Louisiana or whatever, for demand for substitute fuel and how it ripples through the entire economy were very well made. I was most appreciative of that. Dr. Coursey. I think what's interesting about this map, and we've all seen these maps that exaggerate the size of States depending upon a particular variable---- Mr. Ose. But California remains the biggest and only State we're concerned about here, of course. [Laughter.] Dr. Coursey. I think another way of looking at this map up here would be to look at how far away from other competitive sources are these regions. If you do that, you're going to pull California way up the coast and make it an island with some home production capacity. We're going to pull Milwaukee, Chicago, northeast Indiana area off, put it up in Canada somewhere, and then ask, how can new sources get there under the current constraints of the system. Mr. Ose. Mr. Slaughter, in your testimony, you talk about the denial of California's oxygenate waiver. We've heard a lot of discussion up here today about how legally narrow the waiver ability is, and whether or not California qualifies. I find it interesting sitting here thinking about it, you've probably got members in your association on both sides of that issue, so I think you're probably pretty well suited to answer this question. Is the waiver narrow or does California qualify for a wavier? Mr. Slaughter. Well, let me answer the first question first. The waiver is narrow. It was designed to be narrow. When the Clean Air Act amendments of 1990 was passed, there was great concern about that 2 percent oxygenate requirement, because it was an intense political issue. There was great interest in designing that portion of the act very narrowly. But as Mr. Waxman has stated, there are grounds for waiving it. I don't know what more I can say about that. The grounds are narrow. It looked to me, I looked at EPA's decision, it looked to me to be a close decision. They said that some pollutants went up, some pollutants went down, they couldn't be quite sure about the overall effect, and so they decided not to grant the waiver. One of the difficulties, I will say, that they raised, one of the reasons they gave for not waiving was, that there's a question of what the VOC impact of ethanol will be. If the waiver isn't granted and the MTBE phase-out stands, there will be considerable use of ethanol in California, with a lot of potential for increased VOCs. It seems to me that this is kind of a circular matter, because there is evidence that if the current state of affairs in California stands, and ethanol is used, it basically will take a quarter of all the ethanol produced in the country to satisfy California's demand. I don't know how it's all going to get there. But there will be VOC impact from it. But that fact was not discussed. But again, this is a matter that's been pending before EPA for a long time. The Administrator had authority to grant it now, or before the beginning of this year, and it was not done. Mr. Ose. Let me just follow up on that. I'm a little bit confused on that. Apparently the application from California was received in the spring of 2000 for a wavier. I don't know how you act on something that is not complete. Was it complete? Was it incomplete? I don't quite understand. Mr. Slaughter, we're going to come back to my question, but my time's expired. Mr. Otter, for 5 minutes. Mr. Otter. Thank you very much, Mr. Chairman. I have just a couple that I'd like to follow up on. One of them is the waiver, because much has been made about it, because some people feel like we're just picking on them, we're just picking on California. And I say that with all due respect to my good friend, the chairman. Has anybody else, in your recollection, I couldn't get it out of the last panel, did Chicago ever ask for a waiver and they not get it? Mr. Slaughter. Well, there are different kinds of waivers, Mr. Otter. In the Midwestern situation last year, for instance, several people asked for waivers of the RFG program, because of the supply problems in the Midwest. They were not granted in the case, for instance, of Chicago and Milwaukee, but they were granted in the case of St. Louis. Mr. Otter. Mr. Gephardt's territory. I'm not suggesting anything. Mr. Slaughter. It was granted in the case of St. Louis. It was not exactly the same type of waiver, but it was a waiver that required serious consideration. Some were granted, some were not. Mr. Ose. Would the gentleman yield? Mr. Otter. Yes, I'll yield. Mr. Ose. You're saying there was a waiver granted in St. Louis on reformulated gasoline type II by the Clinton administration? Mr. Slaughter. That's correct. Mr. Early. If I might shed some light on that---- Mr. Ose. Mr. Slaughter is speaking, Mr. Early. I appreciate the variance in the waivers. I'm just kind of curious, we had some rather serious allegations earlier for which there was no evidence, I don't think you're making any---- Mr. Otter. No. Mr. Lieberman. It might be worth adding that on a related matter, some of the States and counties that have opted into the RFG program are now attempting to opt out. So they would like to accomplish what California is also trying to accomplish, and perhaps that's the reason to maybe amend the Clean Air Act, to allow that opt-out of the 2 percent oxygenate requirement for any State or locality that wants to continue with the RFG program, but not with that RFG 2 percent requirement. Mr. Early. Amazingly enough, the American Lung Association agrees with Mr. Lieberman on this question. But just to correct the record, or to clarify the record, St. Louis is a non-mandatory RFG area. They opted into the program. There is a provision in the Clean Air Act which specifically allows opt-in areas as opposed to mandatory areas, to ask for a waiver. It was on that basis that St. Louis obtained a waiver last summer. California is a mandatory area, and the statutory provisions are different for mandatory areas. Mr. Otter. Mr. Slaughter. Mr. Slaughter. Mr. Otter, I understand that EPA wrote the California Environmental Protection Agency in February 2000, that its application was complete. And that letter said that EPA would issue a decision on the waiver request in summer 2000. Mr. Otter. Could I get a copy of that letter? Do you have a copy of that letter? Mr. Slaughter. I will see if we can supply one to you, sir. Mr. Otter. Mr. Chairman, I would like to make sure that the committee gets a copy of that letter forwarded to it, and also that it become part of this committee process. Mr. Ose. Without objection. [The information referred to follows:] [GRAPHIC] [TIFF OMITTED] T7984.134 [GRAPHIC] [TIFF OMITTED] T7984.135 Mr. Otter. Mr. Slaughter, I would be interested in the industry's response to the earlier testimony, and I think you were here during the earlier testimony, about the EPA's estimate of what it would cost in order to retrofit the petroleum, or the refining industry, it was like $2 billion is what it would cost. I'm always a little nervous when I have a Government agency that estimates the cost for an industry. Would you agree to that $2 billion? Mr. Slaughter. Mr. Otter, I believe the figure was $2 billion per year. We believe the cost of the diesel fuel regulation to be $8 billion over a 4-year period, so it seems relatively close. That's on top of the $8 billion that the gasoline sulfur reduction will cost the industry in the same period of time. I think one of the factors is that the refinery industry earnings are cyclical. Over the long period of time, the earnings on investment and refining, as opposed to the rest of the business, have averaged 4 to 5 percent. You can make 4 to 5 percent by putting your money in a Treasury note with no risk. Obviously, refining is a difficult investment. Right now, refining is doing better than that. We may well be at the top of the cycle. There has been reference today to a number of incentives and tax breaks that the industry receives. I'm not aware of any of them that the refining industry receives. There may be other portions of the energy industry that do receive them. But essentially, refiners operate in a free market environment. One of the problems, sir, is that people want to basically maintain that these environmental initiatives have no cost, that they're free. When regulations are finalized, EPA press releases are coming out basically saying that it's the most significant event since the stone tablets came down from Sinai. But if you suggest that they have any impact on operating costs, or on the concentration within the industry, it's as if that's something that can't even be considered. I don't know what their impact is. But obviously something that significant that reduces pollution as much as they say is going to have an impact on cost. For some reason, people want to ignore that fact. And I really don't understand why. Mr. Otter. Thank you. Thank you, Mr. Chairman. Mr. Ose. Mr. Tierney, for 5 minutes. Mr. Tierney. Mr. Slaughter, some of those companies that are into refining, are they also into other products or aspects of the energy business? Mr. Slaughter. There are integrated companies, Mr. Tierney, then there are independent ones, smaller regional ones. It's a diverse industry, but there are fewer participants than there used to be. Mr. Tierney. How about Valero? Is that somebody that has refining as well as other aspects? Mr. Slaughter. No, Valero is an independent refiner with no production. Mr. Tierney. Sunoco? Mr. Slaughter. Sunoco has no production. Mr. Tierney. Can you give me the names of some, Chevron? Mr. Slaughter. Chevron has production, Exxon-Mobil has production, BP, Citgo. Mr. Tierney. Phillips Petroleum? Mr. Slaughter. Phillips, yes, has production. It's integrated. Mr. Tierney. So they're making 120 percent profits, and 5 percent profits at the refining end, probably appreciably more profits in other aspects of their business. Mr. Slaughter. But they may not channel those profits back into the refining business, Mr. Tierney. They may put it in other pursuits, and---- Mr. Tierney. No. But that's their decision, right? Mr. Slaughter. That's their decision. But we ought to try to make the refining industry attractive to investment, because it's important to the country. Mr. Tierney. Who's we on that? Mr. Slaughter. All of us. I think that should be public policy, to encourage investment in a key industry. Mr. Tierney. Why won't the market do that? You guys are big market fans. Why won't the market take care of that? Mr. Slaughter. Well, part of ``the market'' is basically the investment requirement on the industry, which is a function of what you're asking it to do environmentally. And the industry is never saying that we shouldn't make environmental improvements, we're saying that some of them can be done more efficiently. We're suggesting that people look at that. Do you think the current situation can't be improved? Mr. Tierney. Well, Mr. Early, let me get back to you, because I want to knock this out once and for all. Let's make it clear here, have you ever seen any evidence at all, any evidence at all, that the decisions of whether or not to increase refining capacity were based on environmental regulations as opposed to business decisions? Mr. Early. To my knowledge, I've seen no evidence of that nature. Mr. Tierney. Have you got any, Mr. Slaughter, that you want to put on the record here? Hard evidence, not conjecture or broad conclusionary statements, but just hard evidence to that effect? Mr. Slaughter. Well, there's plenty of evidence, I'd be glad to supply it for the record. Refining investment has not gone forward in many instances because of the return on the investment. Mr. Tierney. What's the nature of the evidence that you-- return on the investment or the regulations? Mr. Slaughter. What was the nature of Mr. Early's evidence that there wasn't any impact? Mr. Tierney. He either has some or he doesn't. I'm asking you, do you have some hard evidence? Are you going to produce for us hard evidence of the places that decided they weren't going to build refining capacity because of environmental regulations, as opposed to because they just didn't think they were getting enough of a profit margin generally? Mr. Slaughter. First of all, the investment requirement for environmental expenditures is part of the investment climate, and the return on investment, refiners will tell you that has been a factor in their decision to build or not build refining capacity, particularly in the United States. I'd be glad to supply some of that information for you. Mr. Tierney. Let me just say what was mentioned again in one of the earlier statements, there was a person who said it wasn't a factor. They said it was a minor nuisance, and that's what they say. Mr. Slaughter. He was speaking for one---- Mr. Tierney. U.S. independent refiners say they are on pace to exceed last year's record profits, robust margins, and they go on to say that basically it's a nuisance, not a reason for why they're going to build or not build. The fact of the matter is, you've got part of the industry, it's not the refining part of the industry, it's other parts of it, that get $15.6 billion. I guess you're saying that you hand it out again, and you're saying, well, in order to get more refineries, you've got to ante up on that, too. Is that how we make it attractive? Mr. Slaughter. We're simply suggesting that environmental requirements can be done more cost effectively than they have been, and that some of them are impediments going back over more than a decade and ought to be reconsidered. Mr. Lieberman. One thing that I might add to the record, the National Petroleum Council and Advisory Committee---- Mr. Ose. Mr. Lieberman, I'm sorry, it's Mr. Tierney's time. Mr. Tierney. I wasn't asking you a question, sir, but I do have a question for you. Can you tell me which energy companies contribute to your organization? Mr. Lieberman. We get funding from, I believe, the American Petroleum Institute and some---- Mr. Tierney. Mr. Slaughter's group? Mr. Lieberman. No. Mr. Tierney. Oh, he doesn't give you any. American Petroleum Institute and what? Mr. Lieberman. And some large companies. I don't know the exact ones. I believe we get money from Texaco. Mr. Tierney. Will you submit that for the record, the names of the energy companies that fund your organization and the extent to which they do that? Mr. Lieberman. OK. [The information referred to follows:] [GRAPHIC] [TIFF OMITTED] T7984.136 Mr. Tierney. I yield back. Mr. Ose. Thank you, Mr. Tierney. We've just been called for votes, we've got a 15 minute vote and a 5 minute vote. We're going to go ahead and wrap. I have a couple of questions, if I might, I'll use my time accordingly. First of all, I want to thank Mr. Tierney for being here, Mr. Waxman and the others, as well as the members on my side. I want to go to the electricity issue in California. Mr. Slaughter, this is probably going to be a discussion you and I are going to have. It seems to me that if we, or if the State sets up a regulatory scheme for allocation of electricity that puts refineries at the back of the line, we're in effect substituting or actually manufacturing a gasoline shortage. Because, if I understand the industry practices, it takes from a week to 2 weeks once a line loses power to bring it back up. The consequence of that would be lost supply, resulting in significantly higher prices. Is that an accurate analysis? Mr. Slaughter. Yes, it is, Mr. Chairman. It's just not as simple as turning a switch on or off to start a refinery back. For instance, Mr. Cook mentioned the maintenance and repair cycle, and the problem that some refineries have in coming back from that in the spring season. You basically have to shut parts of your units or all of your units and then restart them again. It's not as easy as flicking a switch. So, there would be lost production and increased costs to your constituents. Mr. Ose. I continue to be focused on that, I have since early spring. You referenced this letter we sent, that Mr. Burton and Mr. Horn and I sent to the PUC, which by the way, we followed up with a letter on June 11th, excuse me, we sent a May 3rd letter to Governor Davis regarding this particular concern of ours, and we followed up with a June 11th letter to the person who runs the PUC in California. We're going to enter these into the record. [The information referred to follows:] [GRAPHIC] [TIFF OMITTED] T7984.137 [GRAPHIC] [TIFF OMITTED] T7984.138 [GRAPHIC] [TIFF OMITTED] T7984.139 Mr. Ose. The consequence of shutting electricity off at the refineries in effect means that people aren't going to be able to fill their tanks in their cars. Since they can't put fuel in their cars, they won't be able to get to work or to school or the grocery store. The price of fuel is likely to rise, did Mr. Cook estimate 30 to 60 cents per gallon. And the net result of which is a terrible disruption to the sixth largest economy in the world. This isn't about Mr. Slaughter and his clients. This isn't about air quality. This is about making California work and giving us the tools to do so. I would just hate to see the California PUC compound its problems by frankly, making a foolish decision that takes away the ability of our people to utilize natural resources to facilitate their work. That doesn't call for a comment from you. Refineries may benefit, the fact of the matter is, I'm trying to get consumers gasoline at the lowest possible price and an adequate supply. I want to summarize a couple of thoughts here, then I want to ask each of you to be brief, give you each a minute. One of the things I always try and focus on is, what have we learned today. What we have leaned today is that the in next few years, we're going to spend $10 billion a year to keep refineries in compliance or in anticipation of new air quality requirements. We've learned that rolling blackouts in California, if refineries are not protected from denial of power, may cause an increase in the cost per gallon of fuel of 30 to 60 cents. We've learned that the Bush administration has followed the law written by Mr. Waxman in making the unfortunate decision to deny California's longstanding request for a waiver from the oxygenate requirement. We've learned that for the Bush administration to grant the waiver will require statutory changes that can only be put forward by Congress. And we've learned that--this is Dr. Coursey's comment--we've learned that to the extent we can narrow the numbers or types of fuels that we have in the marketplace, we can give refiners the opportunity to better align production with demand, and likely to end up with lower prices to the consumers. The essential question I have is, is there a process impediment that prevents us from saying, you have a safe harbor here on all of your air quality requirements, as long as you use one of these two or three fuels across the country? Is there a process impediment to us saying that from an outcome based procedure, not a process procedure, but from an outcome based procedure? If you produce fuel that meets this requirement, you are in compliance with the Clean Air Act? That's my basic question. Frankly, we've focused on the process in writing the law. I want to focus on the outcome. Can we give industry the freedom to help us get adequate supplies of fuel at affordable prices for our consumers? Dr. Coursey. Dr. Coursey. I'd like to make my summary remarks around the notion of profit, which has also taken a beating a lot today. Clearly, you want to identify the choke points, and clearly one of them, I elaborated on others in my written testimony, but one of them is the refining process. As an economist, I know that if this situation keeps up in the long run, somewhere or another, the forces of competition are going to move in to solve it. I think two basic scenarios you have right now to choose over are A, let's revisit the way we're regulating American refineries, see if there's a compromise that can be made, and see if the things that were done 10 years ago still hold water today. Let them expand, especially as everybody's talked about, when they're in a rare period where profits are high. And, I emphasize the fact that this is a rare event. The other option, I think, is that other people will take care of it for us, Europeans, South Americans, particularly the Venezuelans and Mexicans. And that's, I think, one of the broad brush things that you're going to have to confront. Which of those two scenarios do you want to see occur in the long run? Mr. Ose. Thank you, Dr. Coursey. Mr. Slaughter, briefly. Mr. Slaughter. Conceivably no, there's no impediment. But, probably you would have difficulties with the NSR, new source review, program. People who have come up with suggestions for streamlining, bubble concepts, things that you're suggesting, we think that people who are making cleaner fuel ought to at least be given expedited permitting, and shouldn't be subject to the labyrinth of the new source review system in every instance. But that's not today's case. So changes would have to be made, at least in the new source review program. One of the things I have to tell you is that the refining industry is concerned about convergence on one or two very expensive, difficult to make fuels. For instance, we can't afford to make CARB 3 throughout the country as the national fuel, you will decimate the American refining industry if you do it. It's expensive to make. So please keep that in mind. Mr. Ose. Thank you. Mr. Lieberman, we're going to save you for last. Mr. Early. Mr. Early. It's certainly possible to come up with a consensus on reducing the number of fuels. But the main message that the American Lung Association is trying to send today is that those fuels have to contribute to clean air rather than being neutral or detracting from clean air. In my testimony, I have a map showing all the areas that have high levels of air pollution that could benefit from a uniform clean fuel, and would obviously be adversely impacted from a uniform, dirty fuel. Our concern is that as we have these discussions, we end up with the wrong fuel. Mr. Ose. Mr. Lieberman. Mr. Lieberman. Just one obvious thing, just because gasoline gets more expensive, because of regulations, that doesn't automatically make it better for the environment. We see a number of these fuel specifications, and a large number of fuel specifications adding to the cost burden in a way that really doesn't provide additional environmental improvements. There are some things that can be done at the Federal level, just within the reformulated gasoline program alone. Right now RFG costs 21 cents a gallon more than conventional, the 4 to 8 cents that the EPA representative mentioned, that's just the estimated cost. But people pay at the pumps right now 21 cents a gallon more. A lot of the problems that have been associated with reformulated gasoline, especially the new tougher reformulated gasoline standards that took effect starting last year, things like maybe easing the transition from the winter to the summer blend, which is I think a factor in why we see price spikes this time of year. There is some tinkering at the administrative level that can be done, and I would also urge the Congress to take a look at the Clean Air Act. If even Henry Waxman can say that there are problems with the 1990 amendments, the Clean Air Act, then there may be some problems worth looking at and some revisions to be made. Mr. Ose. I want to thank the witnesses for their participation today. I do want to just reiterate that I am terribly concerned about the denial of electricity to refineries in California and the consequences that clearly leads to in terms of consumers paying exorbitantly high prices. I think the State government needs to move expeditiously to grant their request that puts these refineries in a position where they can produce. Gentlemen, I do appreciate your joining us today, as well as the previous panel. We will take your comments and advice into consideration. We're going to leave the record open for 10 days for additional questions. If we send them to you, we hope you will be able to respond. Again, thank you. We're adjourned. [Whereupon, at 1:22 p.m., the subcommittee was adjourned, to reconvene at the call of the Chair.] [The prepared statement of Hon. 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