[Senate Hearing 108-604]
[From the U.S. Government Publishing Office]
S. Hrg. 108-604
CRUDE OIL: THE SOURCE OF HIGHER GAS PRICES?
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HEARING
before the
SUBCOMMITTEE ON ANTITRUST,
COMPETITION POLICY AND CONSUMER RIGHTS
of the
COMMITTEE ON THE JUDICIARY
UNITED STATES SENATE
ONE HUNDRED EIGHTH CONGRESS
SECOND SESSION
__________
APRIL 7, 2004
__________
Serial No. J-108-65
__________
Printed for the use of the Committee on the Judiciary
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COMMITTEE ON THE JUDICIARY
ORRIN G. HATCH, Utah, Chairman
CHARLES E. GRASSLEY, Iowa PATRICK J. LEAHY, Vermont
ARLEN SPECTER, Pennsylvania EDWARD M. KENNEDY, Massachusetts
JON KYL, Arizona JOSEPH R. BIDEN, Jr., Delaware
MIKE DeWINE, Ohio HERBERT KOHL, Wisconsin
JEFF SESSIONS, Alabama DIANNE FEINSTEIN, California
LINDSEY O. GRAHAM, South Carolina RUSSELL D. FEINGOLD, Wisconsin
LARRY E. CRAIG, Idaho CHARLES E. SCHUMER, New York
SAXBY CHAMBLISS, Georgia RICHARD J. DURBIN, Illinois
JOHN CORNYN, Texas JOHN EDWARDS, North Carolina
Bruce Artim, Chief Counsel and Staff Director
Bruce A. Cohen, Democratic Chief Counsel and Staff Director
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Subcommittee on Antitrust, Competition Policy and Consumer Rights
MIKE DeWINE, Ohio, Chairman
ORRIN G. HATCH, Utah HERBERT KOHL, Wisconsin
ARLEN SPECTER, Pennsylvania PATRICK J. LEAHY, Vermont
LINDSEY O. GRAHAM, South Carolina RUSSELL D. FEINGOLD, Wisconsin
SAXBY CHAMBLISS, Georgia JOHN EDWARDS, North Carolina
Peter Levitas, Majority Chief Counsel and Staff Director
Jeffrey Miller, Democratic Chief Counsel
C O N T E N T S
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STATEMENTS OF COMMITTEE MEMBERS
Page
Craig, Hon. Larry E., a U.S. Senator from the State of Idaho..... 9
DeWine, Hon. Mike, a U.S. Senator from the State of Ohio......... 1
prepared statement........................................... 118
Feingold, Hon. Russell D., a U.S. Senator from the State of
Wisconsin, prepared statement.................................. 121
Kohl, Hon. Herbert, a U.S. Senator from the State of Wisconsin... 3
prepared statement........................................... 138
Leahy, Hon. Patrick J., a U.S. Senator from the State of Vermont. 6
prepared statement........................................... 169
Schumer, Hon. Charles E., a U.S. Senator from the State of New
York........................................................... 7
Specter, Hon. Arlen, a U.S. Senator from the State of
Pennsylvania................................................... 5
WITNESSES
Bermann, George A., Walter Gelhorn Professor of Law and Jean
Monnet Professor of European Union Law, Columbia University
School of Law, New York, New York.............................. 20
Cooper, Mark, Director of Research, Consumer Federation of
America on behalf of Consumer Federation of America and
Consumers Union, Washington, D.C............................... 21
Felmy, John, Chief Economist and Director of Policy Analysis and
Statistics, American Petroleum Institute, Washington, D.C...... 16
Hastings, Justine S., Assistant Professor of Economics, Yale
University, prepared statement................................. 18
Kovacic, William E., General Counsel, Federal Trade Commission,
Washington, D.C., prepared statement........................... 14
Wyden, Hon. Ron, a U.S. Senator from the State of Oregon......... 10
QUESTIONS AND ANSWERS
Responses of George Bermann to questions submitted by Senators
DeWine, Kohl, and Craig........................................ 40
Responses of Mark Cooper to questions submitted by Senators Craig
and Leahy...................................................... 43
Responses of John Felmy to questions submitted by Senators
DeWine, Leahy, Kohl, and Craig................................. 45
Responses of Justine Hastings to questions submitted by Senators
DeWine, Kohl, Leahy, and Craig................................. 50
Responses of William Kovacic to questions submitted by Senators
Kohl, Leahy, DeWine, and Craig................................. 58
SUBMISSIONS FOR THE RECORD
Bermann, George A., Walter Gelhorn Professor of Law and Jean
Monnet Professor of European Union Law, Columbia University
School of Law, New York, New York.............................. 84
Bingaman, Jeff, Ranking Member, letter to President, March 24,
2004........................................................... 87
Cicio, Paul N., Executive Director, Industrial Energy Consumers
of America, Washington, D.C., prepared statement............... 95
Cooper, Mark, Director of Research, Consumer Federation of
America on behalf of Consumer Federation of America and
Consumers Union, Washington, D.C., prepared statement.......... 101
Felmy, John, Chief Economist and Director of Policy Analysis and
Statistics, American Petroleum Institute, Washington, D.C.,
prepared statement............................................. 123
Hastings, Justine S., Assistant Professor of Economics, Yale
University, prepared statement................................. 129
Kovacic, William E., General Counsel, Federal Trade Commission,
Washington, D.C., prepared statement........................... 140
Sloan, James B., Antitrust Attorney, Chicago, Illinois, statement 172
CRUDE OIL: THE SOURCE OF HIGHER GAS PRICES?
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WEDNESDAY, APRIL 7, 2004
United States Senate,
Subcommittee on Antitrust, Competition Policy and Consumer
Rights, Committee on the Judiciary,
Washington, DC.
The Subcommittee met, pursuant to notice, at 2:53 p.m., in
room SD-226, Dirksen Senate Office Building, Hon. Mike DeWine,
Chairman of the Subcommittee, presiding.
Present: Senators DeWine, Specter, Craig, Kohl, Leahy, and
Schumer.
OPENING STATEMENT OF HON. MIKE DEWINE, A U.S. SENATOR FROM THE
STATE OF OHIO
Chairman DeWine. Good afternoon. Let me welcome all of you
to the Antitrust Subcommittee hearing on the causes of higher
gas prices in the United States.
As most Americans know, we are in the middle of another
round of painful increases in gasoline prices. The national
average has reached a new record high for self-serve unleaded
gas, and that is about $1.80 per gallon. Recently, in my home
State of Ohio, gas prices have been even higher. In Marietta,
Ohio, for example, gas was $1.84 per gallon recently. In
Cleveland, it was $1.86, and in Columbus it topped out at $1.88
at some stations. Many analysts predict that prices could break
the important psychological barrier of $2.00 per gallon this
summer.
Although the prices this time around seem particularly
high, the American consumer has unfortunately been here before.
Since the 1970's, when we first experienced the so-called oil
shocks, periodic price spikes seem to have become as
predictable as the seasons changing. Though these spikes no
longer surprise us, they continue to harm consumers, weaken the
economy and leave us with an important question: What, if
anything, should lawmakers be doing to address this recurring
problem?
Today, we hope to address that question in a setting where
we can explore the reasons for high-price gasoline and consider
possible policy steps. We do have excellent panelists and we
will hear from a number of experts who will offer their
perspectives on the root causes for higher gasoline prices.
But I want to stress one thing upon which I think there
will be universal agreement. The single most important factor
affecting gas prices in the United States is the price of crude
oil. We have a chart over there which indicates that.
As we can see from our chart, as of March 2004, crude oil
is the largest single component of the gasoline price, making
up nearly half of the overall price that consumers pay at the
pump. Beyond that, the Federal Trade Commission has said that
changes in crude oil prices account for approximately 85
percent of the variability of gasoline prices. In other words,
the changes in crude oil prices lead directly to the gasoline
price spikes that cause so much economic distress.
Of U.S. imported crude oil, more than 40 percent comes from
OPEC member nations. Last week, OPEC met in Austria and decided
to cut production by 4 percent, down about 1 million barrels to
23.5 million barrels per day. The price of a barrel of oil is
already very high, between $35 to $38 per barrel. And according
to some analysts, the price is likely to break the $40-per-
barrel ceiling.
Of course, OPEC's decision to decrease supply likely will
increase U.S. gasoline prices further, causing American
consumers to suffer more. That is why last week Senator Kohl
and I reintroduced our No Oil Producing and Exporting Cartels
Act of 2004, or our NOPEC bill.
The purpose of the bill is to end OPEC's flagrant violation
of our antitrust laws. This is hard-core cartel behavior and
should not be tolerated. If OPEC were a group of international
oil companies getting together to set prices and cut output, it
could be prosecuted under U.S. antitrust laws. But to this day,
OPEC continues to receive special treatment under U.S.
antitrust law. Our bill would remove the legal obstacles that
have protected OPEC until now and gives our antitrust
enforcement agencies the tools they need to prosecute OPEC.
First, NOPEC, this bill, responds to a 1979 Federal
district court opinion that found that OPEC's activities were,
and I quote, ``governmental,'' not ``commercial,'' and
therefore protected from prosecution under the Foreign
Sovereign Immunities Act.
Second, our bill responds to a 1981 Federal court of
appeals decision where the court refused to hear that same case
against OPEC based on the so-called ``act of state doctrine,''
which states that a court will not judge the legality of the
sovereign acts of a foreign country.
Finally, our bill gives the Department of Justice and the
Federal Trade Commission explicit authority to prosecute OPEC.
In short, our bill says to OPEC, no more special treatment
under U.S. antitrust law. One of our expert witnesses today
will offer his legal analysis of our proposed law and we look
forward to his testimony.
We are going to try to move the NOPEC bill and are hopeful
that if it becomes law, it will help restore market discipline
to crude oil prices. But even if we do manage to get crude oil
prices back in line with the laws of supply and demand, there
is a range of other factors that affect gasoline prices, and we
will consider those today as well.
For example, the proliferation of specialty gases creates a
particularly complex part of the supply problem, as our chart
over there indicates, as well. In the United States, as we can
see from this chart, a number of State and local governments
have different gasoline grades that they use to achieve EPA
mandates for cleaner air. There are currently 18 different
grades sold in the United States. This creates two supply
problems. First, it reduces the availability of substitutes to
cushion supply and price shocks. Second, it makes importing gas
harder because many foreign refiners do not provide non-
conventional gas grades.
Refining capacity is another part of the gasoline supply
problem and a number of people believe it is the key problem we
are facing today. There are about 145 refineries currently
operating in the United States. In the last 15 to 20 years, no
new refineries have been built and about 75 have been closed.
Although the efficiency of the remaining refineries has
been improved, refinery capacity is still strained. In fact,
refinery capacity utilization rates are running at about 90 to
95 percent today. This leaves the system with very little
margin for error, because a fire or other accident that
temporarily shuts down a refinery cannot be easily accommodated
by increased output from another refinery. Even worse, there is
no solution on the horizon. Despite the high demand for
gasoline, refiners are unwilling to build new refineries
because of cost, environmental issues and expected local
opposition.
Another controversial aspect of the gasoline pricing
problem is the issue of concentration within the refining
industry. Those who have followed the work of this Subcommittee
are well aware of the merger wave that rolled through the U.S.
economy in the 1990's. That wave engulfed the petroleum
industry as well.
Mergers such as Exxon-Mobil, BP-Amoco and Conoco-Phillips
clearly increased concentration levels both upstream, in
exploration and production, and downstream, in refining and
retailing. Now, whether or not this concentration has reached a
level high enough to raise competition concerns is a matter of
some dispute.
For example, in 1983 the top five refiners controlled
approximately 35 percent of the U.S. domestic refining market.
In 2003, that number increased to over 50 percent. From a pure
antitrust merger analysis point of view, I question whether
these concentration levels are high enough to merit serious
concern, but we will consider this issue during the course of
today's hearing.
In addition, we will examine a number of other secondary
factors contributing to the recent increase in gas prices, such
as strong growth in the U.S. and China's demand for oil.
Finally, we will touch today on the state of competition in the
market for natural gas, which is also selling at prices
approaching historic highs.
Let me now turn to my friend and colleague, the Ranking
Member of the Subcommittee, Senator Kohl.
STATEMENT OF HON. HERB KOHL, A U.S. SENATOR FROM THE STATE OF
WISCONSIN
Senator Kohl. Thank you, Mr. Chairman.
Mr. Chairman, we are reminded everyday when we drive by a
gas station that Americans are paying record levels for a
gallon of gas. Gas prices now average $1.78 a gallon nationally
and $1.80 in my State of Wisconsin. Prices over $2.00 a gallon
are now common throughout our country.
These rising gas prices are felt throughout the economy.
They are a silent tax that takes hard-earned money away from
Americans every time they visit the gas pump. Higher gas prices
drive up the cost of transportation, harming every sector of
the economy from aviation to trucking. Those costs are passed
on to consumers in the form of higher prices for manufactured
goods. Higher oil prices also mean higher heating and
electricity costs.
So let's examine the cause of these rising prices. First,
we need to look at the price of crude oil. Indeed, the FTC
states that 85 percent of the variability in the cost of
gasoline can be accounted for by the price of crude oil. Simply
put, the cost of crude oil moves the price of a gallon of gas.
And as we all know, OPEC sets the price of oil.
OPEC's actions to manipulate the oil market cost Americans
billions of dollars every year. If the members of OPEC were
private companies and not nations, they long ago would have
been prosecuted for engaging in illegal price-fixing.
The bill that Senator DeWine and I introduced last week,
and which passed the Judiciary Committee unanimously in 2000,
would end this injustice by subjecting OPEC to antitrust suits
in U.S. courts. While NOPEC is not a panacea, a lawsuit or
threat of a lawsuit will give our Government the first real
weapon it has ever had to deter OPEC from its seemingly endless
cycle of price increases.
But restraining OPEC is not the entire answer. There are
other factors that lead to higher gas prices. In the face of
ever-increasing demand and higher prices, the domestic oil
industry has not responded as we would have expected by
increasing refinery capacity. Instead, numerous refineries have
been closed--about 75 over the past 15 years--and none have
been opened for many years, but it must also be said that
existing refineries have also increased their capacity.
Refinery capacity, now operating at 95 percent, has become
a bottleneck, limiting supply and causing price spikes whenever
an accident occurs. Indeed, critics argue that oil companies
have chosen not to expand refining capacity in order to gain
market power in order to keep prices high. While there are
clearly barriers to expanding refinery capacity, at the same
time the antitrust authorities must not permit oil companies
with market power to deliberately withhold supply to raise
prices.
In addition, mergers in the oil industry have left a
dangerous level of consolidation in their wake. The oil
companies not only drill the oil, but they also refine it and
they also own the gas pumps as well. The five largest oil
companies now control more than half of our domestic refining
capacity and more than 60 percent of the national retail
gasoline market. This level of concentration, magnified in some
areas, permits just a few competitors to control prices. Just
as importantly, this consolidation has virtually eliminated
independent retailers and refiners and the competition that
they provide. Where there has been a high degree of integration
between refiners and retailers, consumers pay higher prices.
For the last 4 years, Senator DeWine and I have repeatedly
called upon the FTC to study the cause for high prices. The FTC
should remain vigilant in monitoring gas price increases, but
it must do more. Antitrust authorities must scrutinize future
oil industry mergers with a keen eye toward preserving the
competitive benefits of independent retailers and refiners.
So, Mr. Chairman, it is time for action to end the ever-
escalating pattern of gas price increases that are regularly
inflicted on our Nation's consumers. Our NOPEC bill is one
place to start, but we must also do more to ensure that the
conditions exist to lower gas prices for all Americans.
Thank you, Mr. Chairman.
Chairman DeWine. Senator Kohl, thank you very much.
Senator Specter.
STATEMENT OF HON. ARLEN SPECTER, A U.S. SENATOR FROM THE STATE
OF PENNSYLVANIA
Senator Specter. Thank you, Mr. Chairman. At the outset,
Mr. Chairman, I thank you for convening this very timely
hearing. There is no doubt that the actions by OPEC are
drastically increasing the cost of gasoline and oil in the
United States.
On February 10, OPEC curtailed oil production by 1.5
million barrels a day, and then on March 31 an additional 1
million barrels a day. Oil has now reached the staggering price
of $38 a barrel, which is the highest it has been since the
Gulf War, in 1991.
I believe that our Department of Justice and our Federal
Trade Commission have been lax in not acting against the clear-
cut violation of U.S. law, conspiracy and restraint of trade,
which is clear-cut on what OPEC has been doing for years. I
have studied this issue in some detail, and on April 11, 1998,
I wrote to President Clinton outlining a course of action for
lawsuits to hold OPEC responsible. I wrote the same letter to
President Bush on April 25, 2001.
Mr. Chairman, I would ask unanimous consent that both of
those letters be made a part of the record.
Chairman DeWine. Without objection, they will be made part
of the record.
Senator Specter. The essential points which I made in these
letters--they really are, in effect, a legal brief--are that a
suit in Federal court would be appropriate under U.S. antitrust
laws, and there is not immunity under act of state or sovereign
immunity. When they are engaged in a commercial transaction,
there is no doubt they are subject to the antitrust laws. There
has been an evolving recognition of international law that they
are bound by the antitrust laws, which was a possible defense
early in the interpretation of the antitrust laws.
The letter which I sent to President Clinton was cosigned
by you, Mr. Chairman; the ranking member, Senator Kohl; Senator
Thurmond; Senator Schumer; and Senator Biden. It is high time
that that action was taken. I believe the action can be taken
under existing law, but I do believe, Mr. Chairman, that the
legislation which you have reintroduced, Senate bill 2270, is a
very good bill. It removes it from a common law interpretation
so that there is specific legislation which provides that
sovereign immunity does not bar an action or that the act of
state does not bar an action.
So it is really time to get on with it, and the American
people are clamoring for relief. It is just really outrageous
that we are being gouged by OPEC at the gas pump. We have had a
very heavy winter. We are now about to provide for LIHEAP, low-
income energy assistance, $2 billion-plus.
It is high time we focused on the fact that the Saudis are
not our friends on so many lines. On terrorism, which they are
sponsoring under the guise of helping charitable organizations,
15 of the hijackers on 9/11 were from Saudi Arabia. And they
are continuing to gouge the American consumers and it is time
we acted to stop them. So I hope this hearing will provide an
impetus to do just that.
Thank you, Mr. Chairman.
Chairman DeWine. Senator Leahy.
STATEMENT OF HON. PATRICK J. LEAHY, A U.S. SENATOR FROM THE
STATE OF VERMONT
Senator Leahy. Thank you, Mr. Chairman.
I am going to be home this weekend and when I go to the
gasoline pump and I am pumping gasoline in my car, my neighbors
in Middlesex, Vermont, are going to say, Pat, what is going on?
Why are we paying so much? If we have a Vermont farm, why are
our profit margins, which are historically thin anyway, being
cut out entirely by this?
Frankly, I have to say that not enough is being done by our
Government or by others to cut down the price of fuel. I hope
that today's hearing tells both the administration and foreign
governments that the American people and the Congress demand
that we use the tools we have available to keep gasoline prices
affordable. I feel as one Vermonter that if we don't have
enough legal tools, then let's find some more and pass those.
We know, and most Americans do, why high prices are at the
pump. The OPEC cartel sets production quotas for member
countries and prevents the free market from setting crude oil
prices. I agree very much with the Senator from Pennsylvania
when he says we ought to realize that the Saudis are not the
great friends that they say they are. I think they have
demonstrated that in one thing after another.
As of April 5, the U.S. Department of Energy reports the
nationwide average price of a gallon of gasoline is $1.78. Now,
on this chart, just to give you an idea, that is an increase of
$.60 since the year 2001. Some are saying it may go up to $3.00
this summer. That is going to be like what we saw in real
dollars during the shortages of the early 1980's. And that
seems likely, since OPEC met on March 31 and they decided to
cut the output of oil even further, not only cutting it by a
million barrels a day, but they wanted to increase that.
A Nigerian petroleum advisory says that they are
considering raising prices $3.00 a barrel. That is going to
increase costs to consumers, small businesses and, in my State,
the dairy industry, among others. Vermont dairies are
experiencing 40-percent higher fuel prices.
In a normal time, we ask the famous question ``Got milk?''
Today, we ask ``Got enough money for gas?'' To give you an
idea, in a typical dairy operation in the Northeast it adds
$5,000 to their costs. This shouldn't be falling on all of us.
I think Senator DeWine and Senator Kohl deserve thanks for
their leadership on the NOPEC bill. It is obvious that we are
not going to get help otherwise to deal with the gas crisis
that is a threat to our families, our farmers, our truck
drivers. If the administration can't say no OPEC, then we ought
to try to do it.
OPEC has tried to dismiss criticism about the high price of
gasoline through disingenuous arguments. Actually, the
consumption of oil has remained relatively level over the past
few years, and nobody could say with a straight face that a 60-
percent increase per gallon in price is because of tough
environmental rules by the Bush administration. Give me a
break. This is not right. In fact, there is a letter by Senator
Bingaman to the President, and I would ask that that be made
part of the record.
I am glad to see this hearing. I wrote to Senator Hatch
urging such a hearing a couple of weeks ago. I have praised
both Senator DeWine and Senator Kohl so many times in these
hearings that I am afraid it may hurt them back home, but I
just want to praise you two one more time. This is an important
hearing.
I will put the rest of the statement in the record.
[The prepared statement of Senator Leahy appears as a
submission for the record.]
Chairman DeWine. Thank you very much.
Senator Schumer.
STATEMENT OF HON. CHARLES E. SCHUMER, A U.S. SENATOR FROM THE
STATE OF NEW YORK
Senator Schumer. I want to thank you, Mr. Chairman, for
holding this hearing. I want to thank you and Senator Kohl for
being leaders on this issue, as you are on so many other
antitrust issues. I want to thank our witnesses today, as well,
and appreciate the opportunity to talk about natural gas as
well as oil, although obviously I want to talk about both.
Let me say, Mr. Chairman, that I believe that the Federal
Government has an obligation to take decisive, aggressive and
immediate action to curtail energy price spikes and make sure
that energy costs stop creating hardships for working families
throughout the United States.
I am sure everyone here is familiar with the legend of the
Bermuda Triangle, where planes and ships mysteriously disappear
and are never heard from again. Well, over the past few months,
American consumers feel like the same thing has happened to
their energy dollar. But this triangle is the Saudi triangle,
composed of OPEC, big oil companies and a lack of action by the
administration to stem the tide of increasing prices.
At one point in this triangle we have OPEC, which just last
week announced its continued commitment to reducing production
by a million barrels a day, despite the fact that crude oil was
already approaching record prices. The decision is motivated
purely by greed and a desire to bolster budgets and increase
profits for OPEC's largest producers, like Saudi Arabia, by
taking money out of the wallets of average American families.
There are also indications that more OPEC action to pinch
us at the pump may be on the way. They have sort out thrown out
the window the $28 ceiling and they are now maximizing their
profitability because basically no one is stopping them and
they have been getting a green light.
At the second point in the triangle is the trend of
consolidation in the oil industry. Over the past 5 years,
mergers between the biggest players in the market and
increasing vertical integration have made consumers more
vulnerable to exploitation at the pump. Currently, the top five
oil companies in the U.S. control 14 percent of global
production--almost as much as the Middle Eastern members of
OPEC--over half of domestic refiner capacity and 60 percent of
the retail gasoline market.
This lack of competition has made the oil and gasoline
markets vulnerable to market manipulation through the
withholding of supply and other means, leading to longer,
increasingly frequent price spikes and weakening any downward
pressure on prices that exists in healthy and competitive
markets.
To make matters worse, these highly concentrated companies
are sometimes directly tied to OPEC producers, as in the case
of Motiva, a 50-50 venture between Shell and Saudi Aramco. The
companies do nothing but benefit from high prices by reaping
windfall profits and creating a win-win scenario for big oil at
the expense of the American consumer. As prices go up and as
OPEC raises prices, oil company profitability goes up. So they
are on board for the ride.
At the third point of the triangle, I regret to say, Mr.
Chairman, lies the administration, which has a ``hear no evil,
see no evil, do no evil'' attitude. They have not taken any
aggressive action to provide needed relief to the American
driver. It is bad enough that it hasn't happened so far, but if
they don't do anything soon, gas prices are going to be sky-
high as we go into the summer months.
OPEC's ability to brazenly raise prices and fill its
coffers is in part as a result of the administration's
inability to engage and influence oil-producing nations to
cooperate with U.S. needs and as a consequence of hostility
that the administration's foreign policy has engendered toward
America throughout the world.
The President says he is close to the Saudi royal family,
but time and time again when dealing with the Saudis, it is
America that gets the short end of the stick. They tolerate
Wahabbi extremists who preach hate and terror against the U.S.,
they refuse to allow our law enforcement the access it needs to
investigate crimes, and now they are holding us hostage to high
gas prices.
What Uncle Sam gave us with the tax cuts, the $400 rebate
every family got, he is now allowing the Saudis to take away
with exorbitant prices at the pump. The President has the power
to weigh in against the Saudis, but he is not using it. It is
time he did. So we have this new Bermuda triangle--OPEC,
consolidated big oil and a do-nothing policy from the
administration.
Let me say we have some weapons. First, we should stop
adding 100,000 barrels of oil a day to the SPR. A majority of
Senators voted for that amendment. The administration has also
missed an opportunity to prevent gasoline price spikes by
failing to approve oxygenate waiver requests from States like
New York and California, which are being forced to use ethanol
this summer, raising prices. Most importantly, they refuse to
use the SPR as our ace in the hole against the Saudis and
against big oil and bring prices down.
As you know, Mr. Chairman, I have been advocating this for
a long time. It took me about a year to get the Clinton
administration to use it. When they did, prices went down; they
stayed down. And the amount of oil in the SPR went up because
the swap enabled us to get more oil for what we put into the
market several months later.
So we need a long-term solution--that is not what we are
here to talk about today--that involves both new exploration
and conservation. But we need a short-term solution, lest our
economy go down the drain. I hope that we can break the
influence of this triangle, get to work and do something good
to reduce prices.
Thank you, Mr. Chairman.
Chairman DeWine. Senator Craig.
STATEMENT OF HON. LARRY CRAIG, A U.S. SENATOR FROM THE STATE OF
IDAHO
Senator Craig. Well, Mr. Chairman, I largely came to listen
today to our colleagues, and certainly to those who are experts
in this field.
All of us are concerned about high prices at the pump, but
why should we be surprised? This Congress has refused to act in
any progressive manner to increase production in this country
for the last decade. So the blame game is now underway and we
will hold hearings, as we should.
At the same time, a decade and 39 States' investigations
have not yet pointed to effective wrongdoing on the part of any
producer in large part. What we have is a dysfunctional market
today because we no longer control our destiny. We can bite
around the edges, if we wish to, and we will, and we will try
to find someone else to accuse.
I have given in the last two weeks three speeches on the
floor of the U.S. Senate on this issue. I am certainly no
expert in it, but I have studied it closely as a member of the
Energy Committee for the last 7 years. The problem is the U.S.
Congress today, and the consumers of America ought to know it.
We are no longer allowing this Nation to produce in any and
every way we should. We should be encouraging the production of
domestic oil, we should be encouraging the development of
natural gas, we should be encouraging the building of necessary
infrastructure like the Alaska natural gas pipeline, we should
be encouraging the use of renewable fuels like ethanol, we
should be encouraging more renewable energy. We should be
encouraging the construction of new nuclear plants, clean coal
technology, new hydrogen production, promoting energy
efficiency and increasing the R and D on a variety of
technologies.
The Senator from New York and I differ a little, but at the
same time there are many things on this issue we tend to agree
on. The manipulation of SPR during the Clinton years
effectively changed the price at the pump by one cent. Those
are the facts on the books.
So I am here to listen. It is obvious I have strong
opinions on this issue. I think the consumers are gaining
strong opinions on this issue, as they should. I hope they
reflect on Congress' unwillingness or inability to act on this
issue in any progressive and comprehensive form for well over a
decade.
Thank you, Mr. Chairman.
Chairman DeWine. We will turn now to our colleague and
friend, Senator Ron Wyden.
STATEMENT OF HON. RON WYDEN, A U.S. SENATOR FROM THE STATE OF
OREGON
Senator Wyden. Thank you very much, Mr. Chairman. I very
much appreciate your giving me the chance to come. I would ask,
with your indulgence, if my full remarks could be made part of
the record.
Chairman DeWine. They will certainly be made part of the
record.
Senator Wyden. I thank you.
First, it is obvious if you want to get anything important
done in this town, it has got to be bipartisan, and I
congratulate you and Senator Kohl for doing that. That is what
it is going to take to really make some changes in this area.
And that is what the public is asking. The public is saying,
are you all in Washington going to do anything or are you just
going to talk about it?
What I would like to do is just outline briefly what I
think would be an effective bipartisan package in this area.
Let me start by saying that I think the gasoline consumer is
about to be hit by a perfect storm, and there are really three
factors behind this storm that is coming.
The first is what we have all talked about today, the OPEC
shenanigans. The second involves refinery cutbacks, and the
third involves the Federal Trade Commission sitting on its
hands in the face of documented anticompetitive practices.
I would just say, Mr. Chairman, that I think if we took
your bill which deals with OPEC and my legislation, which is S.
1737, the Gasoline Free Market Competition Act, we could
systemically tackle those three factors that come together to
create what I call the perfect storm.
First, with respect to OPEC, put me down as a cosponsor of
your legislation.
Chairman DeWine. We will add your name. We appreciate it.
Thank you.
Senator Wyden. Look, I have been saying all week OPEC
stands up for OPEC. Anybody who thinks OPEC stands up for the
American consumer thinks Colonel Sanders stands up for the
chickens. I mean, it is just a preposterous idea that OPEC is
going to do anything for the consumer. So I am very glad that
you and Senator Kohl have teamed up in that area, and I want to
be a cosponsor of your legislation.
But I think we ought to be clear, and the Consumer
Federation has offered an interesting report in this area that,
for example, oil company refinery margins are taking an even
bigger bite out of the consumer's pocket, as is the OPEC
cartel. That is why I would very much like to merge my bill
with the fine bill that you and Senator Kohl have because while
taking action against OPEC will be very constructive, it won't
provide full relief if Congress looks the other way when it
comes to anticompetitive practices right here in our markets
here at home.
So just as you, Chairman DeWine and Senator Kohl, seek to
provide new tools with respect to dealing with OPEC, that is
what I am seeking to do with respect to making sure we have
competition in our markets in this country. And to illustrate
the need for my bill, I would like to talk about what is going
on in Bakersfield, California, right now with the refinery
cutbacks because I think it provides a textbook case of how
these anticompetitive practices are perpetrated in our country.
Obviously, when you ask about what is going on on the West
Coast, they are saying what does that mean for us in Ohio and
Wisconsin and other parts of the country? But what I offer up
is inaction by the Federal Trade Commission on the growing
problem of refinery shutdowns, which is clobbering my
constituents now and is going to hurt people all over this
country.
What has happened in Bakersfield exemplifies how these
refinery shutdowns are going to hurt people across the Nation.
Suffice it to say there were 24 refineries that closed between
1995 and 2001. So you are talking about a combined capacity of
more than 800,000 barrels per day, including many on the West
Coast of the United States.
I got involved in this issue with respect to refinery
cutbacks, Mr. Chairman and colleagues, in 2001 when we came
upon some internal oil company memos involving the closed
Powerine refinery in southern California. One of the company
documents then revealed that if the Powerine refinery was
restarted, the additional gasoline supply on the market could
bring down gas prices by two to three cents a gallon. And it
called for, and I quote, ``a full-court press to keep the
refinery down.'' So you have oil company documents that called
for keeping a refinery down while they are saying that it could
increase profit margins.
That refinery was about 20,000 barrels per day. The one we
are talking about in Bakersfield, which services the whole West
Coast, about a third of my constituents, involves 70,000
barrels per day. So if Bakersfield goes down, this is going to
be very, very harmful to the entire West Coast of the United
States.
I will tell you, Mr. Chairman and colleagues, this
Bakersfield deal smells. First, we know that Shell has made no
significant effort to try to find a buyer in that area. Second,
a number of independent experts have documented that there is a
substantial amount of oil in that area in the San Joaquin
Valley. Recent news articles have reported both Chevron-Texaco
and the State of California estimate that the San Joaquin
Valley, where the Bakersfield refinery is located, has a 20- to
25-year supply of crude oil remaining.
The Bakersfield paper indicated that there are 300 more new
wells now being pursued this year than last year. And Texaco,
Shell's former partner in the Bakersfield area, is actually
increasing its drilling. So this certainly calls into question
Shell's claim that a lack of available oil supply is the real
reason for closing the refinery. Another reason to question
Shell's claim about the availability of crude oil is the fact
that Shell is currently the subject of an inquiry that we know
about for misstating its crude oil reserves.
So I have repeatedly asked the Federal Trade Commission to
look into this and other anticompetitive practices, and they
have just been AWOL. I know you are going to have them testify
today. They have talked in the past about being concerned. They
have talked in the past about doing sort of informal surveys,
when our constituents are getting mugged at the pump. They have
abdicated their responsibilities.
By the way, Mr. Chairman, just so it is clear that my
concern here is bipartisan, I don't think the Clinton
administration covered itself with glory over at the Federal
Trade Commission either. I think this is a systemic problem and
it needs to be dealt with in a bipartisan fashion.
So let me wrap up, if I might, by saying exactly the three
areas that my legislation would change that I think would give
us some tools to deal with the refinery cutbacks, the
anticompetitive practices, and I think could complement the
kind of work that you and Senator Kohl are trying to do with
respect to OPEC.
First, under my legislation the Federal Trade Commission
would be empowered to issue cease and desist orders to prevent
individual companies from gouging consumers. This is not
allowed under current law, so we would give them cease and
desist powers to prevent gouging of consumers when it is
perpetrated by an individual company.
Second, we would stipulate that the Federal Trade
Commission would have the authority to put the burden on the
oil companies to show that certain practices, such as the
Bakersfield refinery shutdown or red-lining and zone pricing
which has been found in the past--that the company has got to
show that this doesn't reduce supply or drive up prices when we
are talking about concentrated markets.
This would apply, Mr. Chairman and colleagues, in the just
over 25 States where there are concentrated markets. Senator
Craig and I represent such an area. I hardly ever disagree with
my friend from Idaho on these kinds of things. I would just say
in response to my colleague's comments that the Federal Trade
Commission has said in the past that there has been zone
pricing and red-lining. They said they can't do anything about
it and that is why I think this legislation is needed, Mr.
Chairman.
What we have seen in the past is the Federal Trade
Commission sets out a bar that is absolutely unachievable with
respect to showing that there are anticompetitive practices in
the marketplace. The Federal Trade Commission has been arguing
that they can only prosecute if they find out and out, blatant
collusion, which savvy oil companies are not going to be
involved in. They don't have to do that. They are not going to
go to a smoke-filled room; they are not going to show up at a
steakhouse and decide, well, let's set gasoline prices tonight.
They are way too savvy for something like that.
So that is why I would like to give the Federal Trade
Commission these additional tools in S. 1737--the question of
cease and desist powers, and the authority in markets where
there is concentration to shift the burden of proof, such as we
find with the Bakersfield refinery or red-lining and zone
pricing.
In a case like Shell's Bakersfield refinery, the Federal
Trade Commission could issue under my legislation, Mr.
Chairman, a cease and desist order to halt shutdown of the
refinery. Because California is a highly concentrated market,
Shell would be required to show that closure of the refinery
would not have an anticompetitive impact by reducing supply or
increasing the price of gas.
If Shell can show that it would be increasing its
production at the company's other West Coast refineries to make
up for lost production at Bakersfield, the closure under my
legislation could still be allowed to go forward. But my
legislation would protect the consumer where an oil company was
closing its refinery as part of a deliberate effort to reduce
supply and to drive up prices.
Suffice it to say, Mr. Chairman and colleagues, the
problems that we are seeing we are going to have for some time
to come. The Energy Information Administration came to the
Committee that Senator Craig and I serve on saying that there
will be continued vulnerability of future gasoline price
spikes.
Mr. Chairman, I would wrap up by way of saying I don't
think there is a silver bullet here. I am supporting your bill
because I think it is a significant step forward for the
reasons that you have outlined, and particularly important
today because the Saudi foreign minister said last week he
wasn't even contacted with respect to this most recent
production cut.
But I would only say that I think we need to complement
your fine legislation with the kind of measure that I am
advocating that will get the Federal Trade Commission off its
hands. You ask this commission what single thing have they done
to help the gasoline consumer. I can't find one step that they
have taken. By the way, it goes back a few years and we haven't
seen any action that they have taken to help the gasoline
consumer.
I don't think that is acceptable. I want it understood, as
you and I have in so many other instances, and I want to work
with you in a bipartisan way. Senator Craig and I have talked
about these issues a number of times over the years on the
Senate Energy Committee, and I will look forward to working
with you, colleagues, to try to deal with making sure the
consumer gets a fair shake in the gas market.
Chairman DeWine. Senator Wyden, thank you very much for a
very provocative statement. It certainly gives the Subcommittee
a lot of things to think about, and we will use some of your
statements as questions when the next panel comes up.
Thank you very much.
Senator Kohl. Mr. Chairman?
Chairman DeWine. Senator Kohl.
Senator Kohl. I would like to ask consent that Senator
Feingold's statement be placed in the record.
Chairman DeWine. Without objection.
Let me invite our next panel to come up right now and I
will begin to introduce the panel as they come up.
Mr. William Kovacic is a recognized expert in both
antitrust law and government contracts law, and has published
extensively in both fields, most notably as coauthor of
Antitrust Law and Economics in a Nutshell. He presently serves
as general counsel at the Federal Trade Commission.
Mr. John Felmy is the chief economist at the American
Petroleum Institute. He also serves as the Chairman of the
Policy Committee of the Alliance for Energy and Economic
Growth.
Dr. Justine Hastings is an assistant professor in the Yale
Department of Economics. Her current research interests lie in
vertical integration, competition and product differentiation,
and she has written extensively on the petroleum industry.
Professor George Bermann is professor of law at Columbia
University, where he has taught since 1975. He is recognized as
an expert on European Union law and has written many articles
and several books.
Dr. Mark Cooper is the Director of Research at the Consumer
Federation of America, where he works on economic policy, among
other issues. Dr. Cooper has testified before the Subcommittee
in the past and we welcome him back.
Let me just say to all of our witnesses we are going to
have 5 minutes. We have your written testimony and it will be
made a part of the record. But we are going to limit you to 5
minutes, if you could just summarize, please, and then we will
have the opportunity for questions.
Mr. Kovacic, you can start, please.
STATEMENT OF WILLIAM E. KOVACIC, GENERAL COUNSEL, FEDERAL TRADE
COMMISSION
Mr. Kovacic. Thank you, Mr. Chairman and members of the
Subcommittee. I am pleased to appear before you today to
discuss the FTC's initiatives to promote competition in the
supply of gasoline. My written statement presents the views of
the Federal Trade Commission, and my spoken comments today are
my views and not necessarily those of the commission or its
members.
The FTC's energy program reflects the agency's acute
awareness of the vital role that competition policy in the
petroleum industry plays in safeguarding consumer interests.
Today, I will first describe the FTC's competition program in
petroleum, and then I will identify lessons that the agency's
work concerning gasoline prices has yielded.
The FTC's competition program in petroleum has four
elements. The first is to challenge mergers that are likely to
reduce competition and injure consumers. Since 1981, the
commission has taken enforcement action against 15 major
petroleum mergers. Four transactions were either abandoned or
blocked as a result of commission or court action. In the other
11 cases, the FTC required the parties to divest substantial
assets in markets where competitive harm was likely to occur.
From data the FTC recently released concerning enforcement
programs from 1996 through 2003, it is evident that the FTC's
remedial requirements have been more demanding in petroleum
markets than for any other area of commerce in which the
commission is active.
The second activity at the FTC is to detect and prosecute
antitrust violations that do not involve mergers. For example,
in March of 2003 the FTC issued an administrative complaint
alleging that Unocal violated the FTC Act by deceiving the
California Air Resources Board in connection with regulatory
proceedings to develop standards for reformulated gasoline.
Unocal, the commission alleges, misrepresented that certain
technology was non-proprietary and in the public domain at the
same time that Unocal was seeking patents that would enable it
to charge substantial royalties if CARB mandated Unocal's
technology in the refining of summer reformulated gasoline. The
commission has charged here that Unocal's conduct, unless
enjoined, could cost California consumers hundreds of millions
of dollars per year.
The third activity is to monitor petroleum industry
behavior to detect possible instances of anticompetitive
conduct. Nearly 2 years, the FTC launched an initiative to
monitor gasoline prices to identify unusual movements in prices
and examine whether apparent anomalies might result from
anticompetitive conduct.
The FTC's economists have developed a statistical model for
identifying such price movements. They look at price movements
in over 20 wholesale and over 350 retail markets across the
country. If our staff detects unusual price movements in an
area, it studies the possible causes, and follow-up efforts
typically have involved extensive cooperation with State
attorneys general, State energy officials, and the Department
of Energy.
If our staff concludes that the unusual price movement
likely results from a natural cause--that is, a cause unrelated
to anticompetitive conduct--it investigates no further. Our
experience to date indicates that unusual movements in gasoline
prices typically have what we consider to be a natural cause.
If there are competitive problems, the monitoring project and
our expanded cooperation with Federal and State agencies have
put us in a better position to identify and address these
problems than at any time in recent memory.
In recent years, the commission has also conducted
intensive non-merger investigations involving refining and
distribution practices in the western and midwestern United
States. I would like to acknowledge the role that Chairman
DeWine and Senator Kohl have played in inspiring the agency to
undertake the midwest gasoline pricing investigation, even
though the two investigations I have mentioned uncovered no
basis to find an antitrust violation.
The last activity of the FTC is to collect data and perform
research to develop a better understanding of what affects
gasoline prices and to improve our knowledge base about the
consequences of our enforcement decisions. In 2001 and 2002,
the commission held conferences on these topics and is
currently updating a comprehensive report on merger enforcement
in the petroleum sector since 1989.
Let me finish by turning to the lessons that we derived
from our program so far. First, the paramount factor affecting
both the level and movement of gasoline prices in the United
States indeed is the price of crude oil. Changes in crude oil
prices account, as Senator Kohl's introductory remarks and
yours, Mr. Chairman, mentioned, for approximately 85 percent of
the variability of gasoline prices.
Second, crude oil and refined products inventories
significantly affect gasoline prices at retail. At one of our
conferences, the Energy Information Administration reported
that high crude oil prices indeed not only affect gasoline
prices directly, but indirectly as well, by reducing
inventories.
There are indeed tighter inventory situations, but what we
found, in general, is that by adopting just-in-time techniques,
on average, there is the possibility that gasoline prices over
time are lower than they would be if just-in-time techniques
were not used widely.
Third, our conferences and investigations have highlighted
the generally high levels of utilization in the refining and
transportation segments of the industry--conditions that do
make interruptions attributable to fires and other breakdowns a
possible cause of price spikes.
Last, the interaction of environmental quality requirements
and gasoline does supply a fourth important factor. There is no
question in this country that pollution control has yielded
massive benefits. At the same time, we have identified in our
hearings and proceedings that such controls have added at times
to the cost of refining crude oil, and thus to the price of
gasoline. Finally, our research and conferences indicate that
other Federal and State laws sometimes tend to increase
gasoline prices.
Let me finish by saying that competition policy
unquestionably helps assure that the petroleum industry is and
remains competitive. The commission has devoted substantial
effort and resources to enforce the antitrust laws and to
scrutinize behavior in this sector. We will continue to do so
in the future. Higher prices for petroleum products deeply
affect the quality of life in this country, and we are keenly
aware of that. We will also seek to attack conduct that
disturbs the proper functioning of the market where antitrust
violations can be shown.
I look forward to the opportunity to address your
questions.
[The prepared statement of Mr. Kovacic appears as a
submission for the record.]
Chairman DeWine. Thank you very much.
Dr. Felmy.
STATEMENT OF JOHN FELMY, CHIEF ECONOMIST AND DIRECTOR OF POLICY
ANALYSIS AND STATISTICS, AMERICAN PETROLEUM INSTITUTE
Mr. Felmy. Thank you, Mr. Chairman and members of the
Subcommittee. I am John Felmy, Chief Economist and Director of
Policy Analysis and Statistics of the American Petroleum
Institute. API is a national trade association representing
more than 400 companies engaged in all sectors of the U.S. oil
and natural gas industry. API is pleased to have the
opportunity to present a statement on gasoline and natural gas,
and urge Congress to enact national energy policy legislation.
The recent spikes in gasoline prices are primarily due to
fundamentals in the supply and demand for crude oil. Demand for
crude oil has risen due to a cold winter and strengthening
economies. Unrest in key supplying countries such as Venezuela
and Nigeria, and lower Iraqi production have kept world
supplies tight.
OPEC continues to operate under production quotas and has
recently confirmed its intent to cut production by a million
barrels per day, to 23.5 million barrels a day, potentially
worsening the current situation. However, there is no guarantee
member nations will reduce output sufficient to comply.
The United States continues to import more than 60 percent
of the crude oil and petroleum products used each day to
provide Americans the products they need. While 20 percent of
current imports are from the Middle East, the U.S. Energy
Information Administration, EIA, expects that figure to climb
substantially as the gap between U.S. oil production and
consumption widens.
In addition to higher crude prices, several other factors
have affected gasoline prices. We have experienced refinery
problems; a Mississippi River accident that shut down traffic
for several days; the difficulty of switching from winter to
summer fuel in California; the introduction of new low-sulfur
gasoline, Tier II; the bans of MTB in gasoline in New York,
Connecticut and California; and sharply higher demand.
I have attached two papers that elaborate on these points,
and I have a chart here that shows the complex nature of the
crude oil and gasoline markets. I don't have time in my verbal
statement to elaborate, but I will be happy to answer questions
later.
As a consequence of all these factors, gasoline prices have
reached a record level, unadjusted for inflation, of over $1.76
per gallon, while, adjusted for inflation, the real price of
gasoline has fallen over 40 percent from a peak of $2.77 in
1981. The real cost of crude oil and manufacturing, delivering
and marketing gasoline has fallen over the past 20 years, while
the real cost of Federal and State taxes has risen.
Demand for gasoline continues to be strong as our economy
grows. Gasoline production is running at record levels this
year to date. However, inventories are low because of strong
demand and lower imports. Imports play an important role even
though 90 percent of the gasoline we use is refined in this
country. High tanker freight rates, low European inventories
and increasingly more restrictive U.S. fuel specifications have
contributed to the curtailing of gasoline imports.
What then can be done about the situation? Some want to
suspend filling the Strategic Petroleum Reserve and releasing
the 150,000 barrels a day currently going into the reserve onto
the marketplace. That would have negligible effect on supply
because the amount made available is equivalent to only about
two-tenths of 1 percent of world supply.
The SPR was established as a back-up in the event of a real
supply emergency shortfall, not a non-market mechanism aimed at
influencing prices. Turning to the reserve when prices go up
sends precisely the wrong message to the marketplace at exactly
the wrong time. Unintended consequences may include foreign
nations curtailing production.
Let me also briefly discuss the situation in natural gas
markets. Like gasoline, natural gas has increased substantially
in price over the past 2 years. We have seen three price spikes
in 3 years, and prices remain high due to high demand and low
supply growth. Weather, economic growth and continued increases
in demand for gas by electricity generators have kept prices
over $5 per million Btus. The industry has responded to the
higher prices by operating more drilling rigs searching for
natural gas. We have also continued our efforts to obtain
access to lands that are currently off limits to exploration
for natural gas.
API has argued for several years that we need a national
energy policy that increases supplies, streamlines regulation,
fosters energy efficiency and growth in renewables, and allows
for increased infrastructure to get supplies to consumers. The
Senate was only two votes short of passing an energy bill that
contains provisions that would have helped consumers. A
comprehensive energy bill needs to be passed and sent to the
President for his signature. Failure to pass meaningful energy
legislation will increase the risk that we will stay on the
energy price treadmill.
Thank you, Mr. Chairman. I am prepared to answer some
questions.
[The prepared statement of Mr. Felmy appears as a
submission for the record.]
Chairman DeWine. Dr. Felmy, thank you very much.
Dr. Hastings.
STATEMENT OF JUSTINE S. HASTINGS, ASSISTANT PROFESSOR OF
ECONOMICS, YALE UNIVERSITY
Ms. Hastings. Mr. Chairman, members of the Subcommittee, my
name is Justine Hastings. I am an Assistant Professor of
Economics at Yale University and a faculty research fellow at
the National Bureau of Economic Research Program on Industrial
Organization. I hold a Ph.D. in economics from the University
of California at Berkeley and I have previously testified at
the United States Senate Governmental Affairs Committee,
Permanent Subcommittee on Investigations, hearings into
Gasoline Prices: How Are They Set?
The focus of my research over the past few years has been
primarily on firm conduct, competition and consumer behavior,
and much of my work has been applied to the gasoline industry.
Through my research projects, I have analyzed extensive data on
retail market structure, wholesale market structure and retail
and wholesale gasoline prices for a diverse group of
metropolitan areas for a time covering about the past decade.
I have used this data to examine, among other things,
vertical and horizontal market structure, vertical meaning
relationships between upstream firms or producing firms, such
as refiners, and retail firms, such as gasoline stations, and
horizontal market structure, meaning kind of the structure of
the market within either retail or at the refinery level, and
the effects of these types of market structures on prices and
competition through firm incentives.
I have also examined the effects of consumer demand and
consumer behavior and preferences on gasoline competition, and
I am currently completing a study funded through the National
Science Foundation on the determinants of wholesale price
discrimination, which you may have heard referred to as zone
pricing, and what are the effects of this pricing policy on
gasoline retail prices and wholesale prices.
I am also currently working on a project with colleagues at
Yale and at the University of California at Berkeley examining
the effects of environmental regulations that we are discussing
today on market structure, arbitrage rates between markets, and
gasoline price levels and volatility.
Through my research, I have gained substantial knowledge
about the gasoline industry, and my independent academic
research and acquired knowledge will form the basis of my
comments and answers before this Subcommittee today. I would
like to make a few quick points or broad points and then I
would be happy to answer questions related to them during the
questioning session.
First, crude oil prices explain a substantial amount of
retail gasoline prices in most parts of the country. We have
heard a figure of .85, 85 percent, a couple times so far today,
and I put a quick table in my written statement that shows that
if you went even State by State, with very limited data that I
just had someone pull off the Web for me, that varies actually
by State from 69 percent to 91 percent. So the question is,
yes, it is a big fraction, but what is making the difference
between 69 percent in some States and 91 percent in other
States? Market structure, both vertical and horizontal, and
environmental regulations are also going to be contributing to
gasoline price levels, that 69-percent to 81-percent
difference.
My second point is that in markets where supply is very
tight, inelastic demand for gasoline is going to lead to large
price changes in response to small supply disruptions. In very
tight markets, every firm actually may have market power to
unilaterally increase market price. It is not anticompetitive.
It is a factor of inelastic demand and a tight supply.
Increasing the number of refineries in key markets may ease
this tightness. And it is something we may not want to discuss,
given environmental regulations and concerns, but it is
something we are going to have to bring to the table. If new
refineries are also new competitors in the market and, in
addition, if they are relatively unintegrated, have a smaller
downstream component, they may act to increase competition even
further after entry.
My third point touches on environmental policy.
Environmental policy needs to be designed to incorporate the
secondary effects of market structure, not just the effects on
pollution. Smart environmental policy looks at market structure
when looking at how to achieve an ultimate goal of pollution
standards.
Fourth, governmental regulations such as minimum mark-up
laws, divorcement legislation, fair wholesale pricing or, as
you have heard it referred to today, zone price elimination,
and government-owned refineries or strategic gasoline reserves
in most cases will actually make consumers worse off. I will be
happy to address each of these issues during the questioning
session.
Finally, any policy that comes out of this or any other
legislation session must really be founded in credible and
sound statistical analysis, guided by economic principles, in
order to ensure that the welfare of American consumers and
taxpayers is maximized through efficient and competitive
markets.
Thank you.
[The prepared statement of Ms. Hastings appears as a
submission for the record.]
Chairman DeWine. Mr. Bermann.
STATEMENT OF GEORGE A. BERMANN, WALTER GELHORN PROFESSOR OF LAW
AND JEAN MONNET PROFESSOR OF EUROPEAN UNION LAW, COLUMBIA
UNIVERSITY SCHOOL OF LAW
Mr. Bermann. Thank you, Mr. Chairman and the other members
of the Subcommittee. In the few minutes that I do have, I would
like to address three questions very briefly and they have to
do with the three dimensions that I see in the bill that is
before me and before yourselves, and those three dimensions are
the substance of the Sherman Act, the Foreign Sovereign
Immunities Act as the source of sovereign immunity defense that
OPEC countries might assert, and last, and most complicated,
the act of state doctrine, to which reference has been made.
Because I want to discuss three subjects and I have 5 minutes,
the math suggests that I need to move quickly.
With respect to the Sherman Act, the bill before me and
before yourselves seem to me to make it very plain, and perhaps
desirably so, that foreign states are indeed subject to the
Sherman Act. I say that because at least one district court has
expressed the view that foreign states are not subjects of the
Sherman Act. The bill makes that clear.
Secondly, the court of appeals in that same case expressed
doubt that international cartels constituted violations of the
Sherman Act, saying that there was an insufficient consensus to
that effect, and I think the bill would address that problem,
as well, arising under the Sherman Act.
With respect to the Sherman Act, I have simply one question
that I would raise and one doubt I entertain, and that is why
the absence of the Clayton Act from the legislation. In the two
pieces of litigation that have been brought, both the Sherman
Act and the Clayton Act have been evoked, the latter primarily
because it gives rise to claims for injunctive relief.
Turning to the Foreign Sovereign Immunities Act, there was,
and there is to this day debate over whether the activity of
the OPEC countries and OPEC itself, were it a proper defendant,
constituted a commercial activity. As you well know, the
Federal courts are divided as to whether they do or do not
constitute commercial rather than governmental activity.
The creation of a new, independent exception to the
principle of sovereign immunity in the FSIA which this bill
would also do would obviate the necessity of characterizing
price collusion, output collusion, as commercial or
governmental by creating an independent, self-standing
statutory exception.
A final word of cautionary note with respect to the Foreign
Sovereign Immunities Act, and indeed with respect to the
Sherman Act, is the bill requires direct, substantial and
reasonably foreseeable effect on U.S. markets. And there is at
least one Federal court that has found that the OPEC activity
was not proximately causally related to the price effects
reported in the U.S. market. I think that difficulty that one
might encounter is endemic to any statute that contains the
formula of direct, substantial and reasonably foreseeable
effect on U.S. markets.
The act of state doctrine is my last subject. On this, I
need to be a little more complex, but there are some clear
lines to be drawn. The act of state doctrine was the reason why
in the one suit that has been brought to the level of the court
of appeals that that suit could not proceed. The act of state
doctrine was characterized as preventing that cause of action
from being pursued.
There is no question in my mind, as my written testimony
indicates, that Congress has the authority to override the act
of state doctrine to whatever extent it wishes to do so.
Congress has done so in the past in a small number of very
isolated instances, but there is no doubt in my mind, under
international and constitutional law alike, that Congress has
the authority to do so, even though you will hear and you will
read that the act of state doctrine has constitutional
underpinnings, and I quote the United States Supreme Court.
Those constitutional underpinnings are separation of powers
scruples, and it seems to me quite clear that Congress has the
right to tell the courts that the courts do not need to defer
to Congress. That does not strike me as a disturbance of the
separation of powers.
Finally, mention should be made of the possibility that
other doctrines besides the act of state doctrine might get in
the way of successful prosecution of a claim under the amended
legislation. The political question doctrine, general
principles of international comity, the forum non conveniens
doctrine and foreign government compulsion strike me as the
four most likely candidates, for reasons I don't have time to
go into because I see a red light. I would simply say that I
think none of those is a serious problem, and I would be glad
to answer questions to that effect.
I would simply add that I believe, however, that we should
pay some attention to the fact that the Supreme Court, to the
extent that it has spoken, has suggested that the Sherman Act
itself in its own content incorporates considerations of
international comity, and that those considerations might lead
a court to decline to enforce the Sherman Act in certain
international scenarios.
Thank you.
[The prepared statement of Mr. Bermann appears as a
submission for the record.]
Chairman DeWine. Dr. Cooper.
STATEMENT OF MARK COOPER, DIRECTOR OF RESEARCH, CONSUMER
FEDERATION OF AMERICA, ON BEHALF OF CONSUMER FEDERATION OF
AMERICA AND CONSUMERS UNION
Mr. Cooper. Mr. Chairman, members of the Subcommittee, the
headlines in the energy news that are never written are about
the domestic petroleum industry. They include the fact that
domestic gasoline refining and marketing operations have
increased pump prices by about $50 billion in the past 4 years,
and domestic natural gas well head prices have increased by
over $80 billion, separate and apart from anything that OPEC
has done.
The bottom line that is overlooked is an increase in the
after-tax profits of domestic petroleum companies of well over
$50 billion in the same 4 years. The story behind those
headlines that doesn't get coverage is how a merger wave in the
mid-1990's dramatically increased the concentration of the
petroleum industry and enabled it to make business decisions
that restricted capacity, eliminated competition from
independents and rendered many markets uncompetitive and
vulnerable to manipulation.
When markets are tight, there are not a lot of suppliers
around and prices get sticky. Individual companies can put them
up quickly and don't feel pressures to lower them. This is
especially true for energy products because large investments
in physical facilities are necessary to deliver product, and
that means that the flow can't be increased in the short term.
On the demand side, these are necessities consumers can't
cut back. So market power is augmented when supply and demand
elasticities are low. It takes less of a market share to gain
power over price, but the antitrust authorities don't adjust
their thinking.
Storage and economic stockpiles are critical here, but the
industry has done a miserable job of ensuring that enough
product is available to meet demand without dramatic increases
in price. Just-in-time in the oil industry means never there
when you really need it. Every accident or blip in the market
becomes an excuse to trigger a price increase, and people wring
their hands, oh, we didn't have supplies, we didn't have
storage. Who chose not to have storage? Business decisions.
Moreover, by failing to expand capacity, they are operating
their facilities at very high rates of utilization, which makes
accidents more likely to happen. If there were more
competition, if there were the threat of losing your customers
when the shelves go bear, they would have more facilities and
they would keep more in storage and we would not have these
wild price swings.
Three years ago, we outlined a comprehensive policy to
implement permanent institutional changes that would reduce the
chances that markets will be tight and reduce the exposure of
consumers to the opportunistic exploitation of markets when
they do become tight. Those recommendations made sense then;
they make even more sense today.
We would all want a quick fix, immediate relaxation of
prices, but what consumers need is the end of the roller
coaster and the ratchet of constant volatility with ever-
mounting prices. We would love to break the pricing power of
OPEC, which would relieve a great deal of the pricing problem,
but the short-term prospects are not promising there either.
There, too, we need long-term solutions that address
fundamentals. We must restore reserve margins by increasing
energy efficiency that takes demand out of the world market,
but also reduces demand in tight domestic markets, which also
suffer from the abuse of market power.
In the 1990's, we built two fleets of gas-guzzlers--SUVs on
the roads and natural gas-fired power plants, particularly that
fire up in the summer to run our air conditioners. They have
kept domestic markets tight. Efficiency can produce a
tremendous saving that has the double impact of relaxing the
tightness of both international and domestic markets.
We must increase the flexibility of downstream capacity in
the gasoline industry. We closed those refineries--that is, the
oil industry closed those refineries after mergers as a
function of their business decisions to consciously tighten
markets and increase profits. We are suffering from that today.
We have to have policies that promote economically-and
socially-responsible storage. There is no excuse for repeatedly
being short. Those are business decisions. Public policy can
influence those business decisions.
The pending energy legislation does not substantially
advance the four key elements of a national energy policy. We
must expand domestic refining capacity by studying who closed
what, why, and where are the sites that we could redevelop,
instead of simply complaining about unidentified environmental
obstacles. Those refineries were there; they can be reopened.
We need a more competitive domestic sector. We need rules that
dictate when you have to have storage and how you should use
it. We have to take the fun and profit out of market
manipulation.
It may very well be that none of the behaviors I have
mentioned violate the antitrust laws. That doesn't make them
right. It simply tells us that we need a new set of laws that
get at this behavior which is actually imposing immense pain on
the American consumer and our economy.
Thank you, Mr. Chairman.
[The prepared statement of Mr. Cooper appears as a
submission for the record.]
Chairman DeWine. Senator Specter.
Senator Specter. Mr. Kovacic, has the FTC ever considered
antitrust action against OPEC?
Mr. Kovacic. I don't know, Senator. I know the commission
has certainly for a period going back over decades had an
active hand in studying crude oil markets. Indeed, in the--
Senator Specter. I am interested in OPEC. If you don't
know, you don't know. I would suggest the FTC ought to consider
that, and I would also suggest that the FTC ought to send
somebody today who could give us an FTC policy about OPEC. That
is the central thrust of the hearing and that is the statute
which we are looking at.
Professor Bermann, isn't there at least a prime facie case
to get to a jury on OPEC being in violation of the antitrust
laws on conspiring to restrain trade when they are working with
other countries to limit production and in a context where
there is a rising cost of gasoline?
Where you have a couple of doctrines on sovereign immunity
and that turns on whether it is a commercial activity or a
governmental activity, it seems to me that it is clearly a
commercial activity when they are selling oil to us. And you
have the act of state doctrine where the courts have said there
is flexibility and it depends upon the evolution of
international legal principles. A great deal has happened in
the intervening time since the International Association of
Machinists case was decided.
Just to cut through it, without taking them up one by one,
couldn't an aggressive prosecutor make a case that would get to
the jury or the fact-finder if it is a bench trial?
Mr. Bermann. Well, certainly, as to the merits--that is to
say you asked whether the activity in question would represent
anticompetitive behavior within the meaning of the Sherman Act.
I think the answer is most certainly yes, and one court has so
held in an action brought in the year 2001 that hasn't yet been
mentioned against OPEC.
Senator Specter. The one in Alabama?
Mr. Bermann. Yes, the suit in Alabama that actually
rendered a judgment adverse to OPEC and issued an injunction to
OPEC, but which was vacated, and which vacatur was sustained on
appeal on the ground of inadequate service of OPEC in Vienna,
Austria, on technical grounds.
Senator Specter. Well, I am glad you brought that case up
because at least there is a Federal court determination that
there was a violation of the U.S. antitrust laws. The judgment
was vacated because OPEC didn't defend. They were disdainful of
coming into the Federal court, and they later raised technical
objections and came in after a judgment had been entered
against them. But at least that is authority for the
proposition that U.S. antitrust laws were violated by OPEC.
Mr. Bermann. Well, the district court actually found that
the violation was per se. The district court actually found it
was a per se violation of the antitrust laws.
Senator Specter. I know what per se means, but somebody who
may be watching on C-SPAN may not.
Mr. Bermann. A per se violation is an act that in itself,
without more, constitutes a violation.
Senator Specter. That means it is a pretty clear-cut
situation?
Mr. Bermann. A clear-cut case of a violation. It was
vacated only on grounds that service was technically
inadequate, and it was technically inadequate because OPEC
refused to accept service of process in Vienna, Austria, where
it was located.
Senator Specter. Certainly, they had notice. They knew they
were being sued. That wasn't any surprise to them, but we all
understand that service and jurisdiction are matters to be
decided under technical rules.
Mr. Bermann. They conceded notice.
Senator Specter. They conceded notice?
Mr. Bermann. OPEC conceded notice, yes.
Senator Specter. Well, we have got too much to discuss to
get into the issue as to whether the court inappropriately
dismissed the case on technical grounds.
When you talk about causation, that is a fact question.
Where you have OPEC limiting production by 2.5 million barrels,
and doing so at a time when gasoline prices are rising, that
would depend upon the skill of the prosecutor in putting on the
evidence as to whether the evidence was sufficient to establish
a causal connection.
Mr. Bermann. You are entirely right about that. It is a
matter of a combination of basic factual showing and a skillful
and convincing characterization of the facts.
Senator Specter. Well, I am a little at a loss to know why
our law enforcement agencies have not pursued the matter. It is
a matter of great concern to the American people. It is a
matter of enormous financial cost on gasoline going up--we have
already seen all the fancy charts and heard the statistics--and
heating oil going up.
In your judgment, an action could be maintained under
existing law which would get to the fact-finder or get to a
jury?
Mr. Bermann. It could be maintained under existing law. My
remarks about the bill were oriented toward the fact that the
bill removed doubts. Any doubts about the principal matters are
subject to one or two lingering doubts that I alluded to.
Senator Specter. Well, I am glad you took up the bill
because I think it is a good bill. I have already complimented
Senator DeWine on it for initiating it. The legislation is
good, so that we don't have to get into the intricacies as to
whether you have a commercial activity or a governmental
activity, or the flexibility of the act of state doctrine. So I
think we ought to pass it.
Mr. Bermann. You are right in those respects.
Senator Specter. It is pretty hard to pass something in
Congress these days. So my hope would be that the FTC would
take a look at this matter, or that the Justice Department
would take a look at it.
Mr. Kovacic, the FTC ordinarily exercises jurisdiction on
gasoline matters, but there is nothing to stop the Department
of Justice from initiating an antitrust violation, is there?
Mr. Kovacic. There would not be. Any matter involving a
criminal allegation would be handled by the Department of
Justice, and we do have a process between us by which, if the
Justice Department said they had better capability to pursue a
matter, they could.
Senator Specter. Professor Bermann, there could also be a
private action under the antitrust laws for treble damages,
could there not?
Mr. Bermann. That is correct, and both lawsuits to which
reference has been made--the one from 1979, on appeal in 1981,
and 2001, on appeal in 2003--were private lawsuits seeking
damages and/or injunctive relief.
Senator Specter. Do you have any idea why some aggressive
private lawyer--there are lots of antitrust suits brought as
private prosecutors--why such an action has not been initiated?
Mr. Bermann. Well, those two were initiated.
Senator Specter. Beyond that, something more recently.
Mr. Bermann. Why there haven't been more? Well, I think the
act of state doctrine and the Foreign Sovereign Immunities Act
have operated as some sort of brakes on that process. I didn't
mention this in my oral testimony, nor, in fact, in my written
testimony, but I think that, as I read the bill--and I sought
clarification on this question--the Federal Trade Commission
and the Attorney General would have exclusive authority to
enforce these provisions.
Now, I stand to be corrected in my understanding of the
bill, but I understand the bill to so state. That would seem to
me, while it would prevent any future private parties from
bringing antitrust suits against the OPEC countries, it would
go a very long way to defeating any arguments that might be
based on the act of state doctrine, because after all the act
of state doctrine is intended to protect the political
prerogatives of the legislative and executive branches. And if
those actions are authorized by Congress and decided upon to be
brought by the Federal Trade Commission or the Department of
Justice, then there is no reason left for anybody to even think
about the act of state doctrine.
Senator Specter. Professor Bermann, do you think that the
provision as to enforcement being with the Attorney General or
the Federal Trade Commission would raise any question as to the
right of a private litigant under the treble damage provisions
to initiate a private lawsuit?
Mr. Bermann. Well, I think it would raise that question
because I believe that the bill is ambiguous on that point and
it is more than arguable that a recital that enforcement shall
be--the exact language is ``The Attorney General of the United
States and the Federal Trade Commission may bring an action to
enforce this section.''
That is ambiguous as to whether that is exclusive or not
exclusive of the existing rights of private parties to do so,
and I would recommend that any such legislation clarify that
point. The consequences of clarifying that one way or another
are quite significant.
Senator Specter. Well, I think we ought to make that
modification. My judgment would be that there could be private
enforcement. When you say ``may,'' I think that leaves the
leeway, but there is no reason to have any doubt about it.
Taking up the issue of a legal action under existing law,
is there any real basis, where you have the sovereign immunity
question which turns on whether it is commercial activity or
governmental activity, to conclude that this is a clear-cut
commercial activity?
Mr. Bermann. Well, courts have differed over that, and one
reason they differ over that is because sometimes the judgment
as to whether an activity is commercial is based upon the
nature of the activity and sometimes it is based upon the
purposes or policies underlying the activity.
Senator Specter. Where it is to make money, is there any
doubt?
Mr. Bermann. No doubt, no doubt. But where natural
resources are involved, a good many courts, including in cases
outside this sector altogether, have held that the management
of a country's natural resources--even if dealt with in ways
that are commercially familiar to us, the very fact that they
are natural resources renders it governmental.
The courts have a bit of a problem with characterizing
foreign countries' control of their natural resources as purely
commercial. Some have and some have not. The virtue of this
bill is that it would make it no longer necessary for the
exception to sovereign immunity to depend upon whether we
accentuate or don't accentuate the natural resources character
of oil and petroleum.
Senator Specter. Okay, that is fine. I think we ought to
get the bill, but in the interim I would like to see the
Justice Department do something about it. I think your opinion
is a solid that there is a basis to pursue, notwithstanding the
sovereign immunity doctrine, on the ground that this is really
a commercial activity.
May the record show that there was a nod in the
affirmative.
Mr. Bermann. Yes, sir.
Senator Specter. On the act of state doctrine, the
International Association of Machinists case talked about the
flexibility of it and on the availability of internationally-
accepted legal principles. Since the Ninth Circuit opinion in
1981, there has been in the 1990's a significant increase in
efforts to seek compliance with basic international norms
through international courts and tribunals, and an emerging
consensus in international law that price-fixing by cartels
violates such international norms.
Would you agree with that?
Mr. Bermann. Yes, I would.
Senator Specter. Well, then I think the stage has been set
for an aggressive prosecution here, Professor Bermann. I
appreciate your background and your insights and your research.
I think an aggressive prosecution would be well received.
The worst that could happen, Mr. Kovacic, would be to lose,
and that is not such a dire consequence when the stakes are as
important as they are.
Mr. Bermann. Mr. Senator, if I may, in the case that began
in Alabama and went up to the Eleventh Circuit, the act of
state doctrine was found to be inapplicable to the action
against OPEC. It was found to be inapplicable because OPEC's
activity was commercial, and, secondly, because OPEC's activity
was taking place in Vienna, Austria, which is not on the
territory of the states in question.
So the most recent decision that we have been referring to
is a decision that addressed the act of state doctrine and
found it to be inapplicable to these circumstances. That is a
decision of 2001 and not in any respect weakened in the
appellate ruling of 2003.
Senator Specter. Well, that is an important observation to
show that some of these legal hurdles have already been
overcome and that there is precedent.
Senator DeWine and I used to be prosecuting attorneys, and
a prosecuting attorney ought not to take a case that doesn't
have a sound policy and that he doesn't have sufficient
evidence to get to a jury. But when you weigh the importance of
the matter, as I would weigh the importance of going after OPEC
in their collusive practices and the consequences at least
sequentially of rising gasoline and rising oil prices in the
United States, we are dealing with very substantial financial
matters for the American consumer.
Dr. Cooper, would you like to see a test case brought
representing consumers?
Mr. Cooper. We are big fans of test cases. Frankly,
clearly, one of our problems is that, in my opinion, OPEC has
fought an economic war against the American consumer and we
have not responded at that level.
Senator Specter. That is not the only war they have fought
against us.
Mr. Cooper. I understand, but the point is that we
definitely think that we support this legislation to remove any
doubts. There is absolutely no reason why we can't defend
ourselves from this sort of attack.
Senator Specter. Mr. Kovacic, would you think it
appropriate for the FTC to consider an enforcement action
against OPEC under the antitrust laws?
Mr. Kovacic. Senator, I don't have instructions from the
commission to address this, so I answer in my own capacity.
Senator Specter. Sure.
Mr. Kovacic. I see this as involving a number of extremely
complicated issues. I agree completely with the suggestion that
the behavior would be unmistakably illegal. By any of our
standards, if these were private enterprises, our Department of
Justice would highly likely prosecute them criminally and seek
to imprison the individuals involved. So the culpability of the
behavior under our legal standards is unmistakable.
If I could mention for a moment the things that might make
us hesitate, one is that obtaining discovery in such a matter
might be relatively difficult. Enforcing a judgment might be
relatively difficult.
Senator Specter. Offending the sovereign, you say?
Mr. Kovacic. Obtaining discovery and enforcing a judgment
would be complex. If I think of the practical steps that would
be taken, these would likely be fairly elaborate and long-
running as we dealt with those issues.
Senator Specter. If you can't get discovery, if they don't
submit to discovery, you get a default judgment. If you go
after assets, OPEC has plenty of assets within the long arm of
U.S. law.
Mr. Kovacic. If I could offer another possibility, in the
international work we do a number of countries raise objections
to policies that the United States follows which they allege to
be matters of cartelization. I wonder if they would pass their
own accord collateral legislation to bring their laws to bear
upon our own policies, and I think of the matter of
agricultural commodities as being one.
Senator Specter. Supply for the record--I don't want to go
on too much longer--where the United States might be exposed.
Dr. Felmy, do you think an aggressive prosecution here
might be warranted?
Mr. Felmy. Senator, I am not an attorney. I am not
qualified to make a statement on that particular issue.
Senator Specter. Well, because you are not an attorney may
make you well qualified, Dr. Felmy.
Senator Specter. Dr. Hastings, you are a Ph.D. That
certainly gives you qualifications.
Ms. Hastings. Yes, but in economics, unfortunately, not in
law. So I joint have a joint J.D.-Ph.D. I am an economist and I
examine industrial organization, so market structure and firm
behavior. So I am really not able to speak to the extent to
which we could successfully litigate antitrust laws against
OPEC.
Senator Specter. Okay, thank you. This transcript ought to
be sent over to both the commission and the Attorney General,
at least with my thinking, and I will discuss it with my
colleagues beyond. Both Senator DeWine and I, as a I said
before, were prosecutors, and I initiated many actions which
were original actions, sued under the nuisance laws people who
were spraying asbestos and closed down commercial buildings;
prosecuted for first-degree murder a defendant who did not
touch the victim, made new law on first-degree murder without
contact. The law is an evolving body which responds to
aggressive prosecutions when you have a good factual basis and
you have a policy to be enforced.
Senator DeWine, thank you very much for convening the
hearing and thank you very much for the latitude on my
questioning.
Chairman DeWine. Well, Senator Specter, thank you very
much. I think you all can see why we brought my senior partner
here to prosecute the case for the DeWine-Kohl bill here today.
Thank you, Senator, very much.
Senator Specter. Thank you.
Chairman DeWine. I will reserve my questions.
Senator Schumer.
Senator Schumer. Thank you, Mr. Chairman. I want to thank
the witnesses. I apologize for missing a few of you. We had a
Banking hearing at the same time.
First, I want to ask a little bit about natural gas to
Kovacic and the others. We had a dramatic price spike in
natural gas last year. This last winter, it was much higher
than it had been before. Yet, if you looked at supply and
demand, it wasn't terribly different. In fact, it was a little
less stringent this past winter than it was in the previous
winter.
Has the FTC investigated last winter's price spikes? If so,
what is the status of the investigation? If not, since you
can't speak for the commission, what are your thoughts? Gas
just went through the roof. Obviously, it is a different type
of market than oil, with pipelines and everything else. Tell me
what you think.
Mr. Kovacic. Senator, our work to date has basically been
focused on looking at mergers involving natural gas companies,
seven in the past two-and-a-half years. In the course of those
investigations, we have had some occasion to look at behavioral
issues in the industry. But to my knowledge, we don't have a
current investigation simply looking at conduct, but I would be
happy to check that and to report to you.
Senator Schumer. Would it be within the purview of the FTC?
Mr. Kovacic. Yes, it would, sir.
Senator Schumer. And would it be in the purview to see if
the mergers that have occurred have helped contribute--one of
my premises is we have had less and less competition in the
energy industry, and that has in part increased the price,
whether it be overseas with Senator DeWine's bill, with OPEC,
or domestically with the mergers that we have seen throughout
the 1990's, by the way many of them under Democratic
administrations. This is hardly a partisan-type issue.
Mr. Kovacic. We have several projects underway to look at
the consequences of past petroleum mergers. Again, speaking for
myself, I think it is a wise policy for the commission to
expand its efforts to assess the effects both of past decisions
to prosecute and not to prosecute. In one area not involving
petroleum or natural gas, the commission has begun to do this
in health care.
Without being able to predict how the agency will act in
the future, I see a growing interest in looking in the rear
view mirror to see the actual consequences of what we have
done. So my view is that is wise policy.
Senator Schumer. Good. That would be very helpful. I hope
you will do it. Tell the commissioners about that.
Mr. Kovacic. I will, sir.
Senator Schumer. Dr. Hastings, as the economist with only a
Ph.D. and not a J.D. who has maybe studied these markets a
little bit--
Ms. Hastings. I am not an expert in natural gas markets. I
am an expert in gasoline markets, and they are very different.
Senator Schumer. But just using your knowledge as an
economist, given the fact that we have pipelines from gas
fields connected and they are generally monopolies--that is,
you can't go to two different natural gas producers and the
natural gas companies have a limit in terms of who they can get
the gas from. I have asked lots of people and no one has come
up with a good explanation as to why natural gas spiked so in
price last year, this past winter.
Ms. Hastings. I am not an expert to speak to that.
Senator Schumer. Do you, Dr. Cooper, have anything to say
about it?
Mr. Cooper. Well, in my testimony we look at natural gas
and we observe that over the past four or 5 years, natural gas
has risen much more rapidly than crude oil.
Senator Schumer. Correct.
Mr. Cooper. The domestic market has changed in the last 5
years to close that gap. What changed was the majors, the same
folks who are concentrating the refinery industry, moved into
the natural gas market in a big way. They invest differently,
they behave differently, they manage their assets differently.
So the same attitudinal factors that look at the way they
maximize their profit as opposed to compete for market share
afflict the natural gas market, in my opinion, as they do the
domestic gasoline market.
The other point is that the natural gas price is now set in
the spot markets, the hubs. Well, it turns out that most of
those hubs didn't even exist 10 years ago and we are now
discovering that all of them have been afflicted by
manipulation. Almost daily, you read press accounts from the
Federal Energy Regulatory Commission discovering that people
were mis-reporting gas, et cetera. So these are very thin
markets.
There is a court case going forward. Just a couple of weeks
ago, I believe a Federal district court judge allowed the case
to go forward and he pointed out that on any given day in 2001,
Enron accounted for 40 percent of the gas being transacted at
the Henry hub. Now, the Henry hub is the key referent price.
The Department of Energy has discovered that that is setting
the price of natural gas, and it is tracking crude much more
closely than it used to do.
Enron controlled 40 percent of the transactions in that
market. When Enron went away, for clearly very, very nasty
reasons, these markets got to be very thin and they have been
laboring along. They are not transparent, and the Federal
Energy Regulatory Commission is struggling to figure out how to
get real clear price signals out of the gas market and still
doesn't have a program.
Again, the fundamentals in this industry are exactly like
the gasoline industry--inelasticity of supply in the short
term, inelasticity of demand in the short term. So last spring,
with a natural gas crisis, the prices popped up and everyone
was wringing their hands about how storage wasn't adequate
again. How did that happen? It is a business decision.
When the stocks finally moved up over the course of the
summer, by the end of the winter people pointed out there was
more in storage than there was in the previous 2 years and the
price is still too high. So this is market that is not setting
prices in a competitive, pro-consumer manner.
Senator Schumer. So you would recommend the FTC do what Mr.
Kovacic said maybe they should do?
Mr. Cooper. But they have to begin to look at these markets
given what we know about the inelasticity of supply and demand.
If we just do routine antitrust analysis, as Senator DeWine, if
you look at their market shares, they don't look very
concentrated, although certainly some of the gasoline markets
have gotten very concentrated.
But knowing the economic fundamentals, knowing about how
inelastic are supply and demand, that magnifies market power.
And maybe we can't do that under the antitrust laws. Maybe we
need different laws that are on different premises, but that is
a fundamental problem.
Senator Schumer. Like I mentioned before, my great concern
is this sort of triangle I mentioned--OPEC, a small number of
large oil companies and administration friendliness to that.
In your testimony, Dr. Cooper--and I am going to ask Mr.
Kovacic and Dr. Felmy this--you made a point that when OPEC
raises its international price, American oil companies greatly
profit even more from their domestic production, where their
cost of production stays the same or is on the same curve as it
was before. But because the international price has gone way
up, they make much more in profit. Certainly, the profits of
the oil companies seem to be quite in sync with the increase in
price, not exactly, but pretty close.
Just give me a yes or no on that. Is that true, Dr. Cooper?
Mr. Cooper. There is price-following behavior in both the
domestic oil market and the natural gas market. The interesting
thing is that one of the reasons the large industrial gas users
in this country are screaming is because in the rest of the
world gas is not exhibiting that price-following behavior. They
are losing their jobs to other markets where the price of
natural gas doesn't run up every time the price of crude runs
up. Now, we can have a debate about why those foreign markets
behave differently.
Senator Schumer. It means it is not inexorable. That is
what it means.
Mr. Cooper. That is right. It is not inexorable.
Senator Schumer. The big oil companies sort of like it when
OPEC raises prices because then the world price goes up and
their domestic production is more profitable.
Do you agree with that, Mr. Kovacic? Again, you can speak
for yourself, not for the commission.
Mr. Kovacic. Yes, sir. I know that we have done work
looking at trends in profitability and attempting to explain
them. I don't have a good sense of exactly what our research
has shown on the point you ask, but I would be happy to check
that and submit that in writing to you.
Senator Schumer. You could submit that in writing.
Do you have any thoughts on that, Dr. Hastings?
Ms. Hastings. On the profitability of oil companies
coinciding with the profitability--
Senator Schumer. The price that OPEC sets, yes.
Ms. Hastings. No, I have not looked into that issue.
Senator Schumer. Okay, and I will bet Dr. Felmy doesn't
quite agree with what I said, so let's give him a chance.
Mr. Felmy. Well, actually, Senator, because domestic prices
move with world prices, because oil is an international
commodity, you will see for that roughly, I guess, 35 percent
of the crude oil that we actually produce here to use, higher
margins for that crude as world prices go up.
Senator Schumer. So if an oil company were interested, at
least in the short term, in maximizing their profits, they
would be happy, at least--let's not get into collusion, but
they would be happy to see OPEC raise its price?
Mr. Felmy. Well, it depends on whether or not you are a
refiner or a producer. If you are refiner, the answer is a
decided no. If you are a producer, it tends to benefit you.
Senator Schumer. Overall, let's take Exxon Mobil--something
that never should have existed, in my opinion; it should be
Exxon and it should be Mobil. Those were the two biggest in my
area and they were allowed to merge.
Doesn't Exxon Mobil do better profitability-wise when OPEC
raises its price, because at least the domestic share--
Mr. Felmy. I am not an expert, sir, on the split between
the refining, production, chemicals and all the other
businesses that large corporations such as Exxon Mobil have
ongoing. So I can't speak to that, sir.
Senator Schumer. Do you want to say something, Dr.
Hastings?
Ms. Hastings. Well, I don't know Exxon Mobil's exact ratio
of production to consumption of crude oil. If they are a net
producer of crude oil, then they benefit from it. If they are a
net consumer of crude oil, they don't benefit from it. It
depends on the balance of their--
Senator Schumer. Assuming that there is pure competition at
the selling end, which there isn't.
Ms. Hastings. I am sorry. I didn't quite understand.
Senator Schumer. Even if they are a consumer, if they can
pass all of that along in an inelastic way to the person who
buys gasoline, home heating oil or whatever else, it is not
going to hurt them even on their consuming side. They gain on
the production side. Because of these mergers, they have an
inelastic demand curve on the consumption side and it is a win-
win.
Ms. Hastings. Not necessarily.
Senator Schumer. Go ahead and explain to me why.
Ms. Hastings. Well, it depends. Imagine the opposite
happening, the opposite being, as Mr. Felmy pointed out,
suppose that Exxon was actually not a producer, but only a
refiner. Before Tosco merged with Conoco Phillips, Tosco would
have been in this category. So they are only going to be
purchasing crude oil. Then your assumption is actually that
they are going to pass a hundred percent of that crude oil
price on to retail.
Senator Schumer. But Tosco is not a fair example because
they didn't own gasoline stations.
Ms. Hastings. They did own gasoline stations before they
merged with Conoco Phillips. They owned the West Coast refining
and marketing assets of Unocal Corporation. They owned the
Circle K chain since 1996.
Senator Schumer. Did they have the same kind of market
dominance that, say, Exxon Mobil has at the pump in my area or
any part of the country?
Ms. Hastings. Most definitely, in Arizona.
Senator Schumer. In Arizona?
Ms. Hastings. Most definitely, in Arizona.
Senator Schumer. So Tosco would have made money in Arizona.
Ms. Hastings. And they most definitely had a large market
share. And I am not agreeing that they would have made money in
Arizona. They also had a large market share in California.
Senator Schumer. Do you know what percent?
Ms. Hastings. It depends on the metropolitan area. So I am
thinking somewhere between 12--no, probably about 10 percent,
12 percent. I could be off on that.
Senator Schumer. I think that is a lot less than Exxon
Mobil has in my area. True?
Ms. Hastings. Perhaps.
Senator Schumer. Oh, yes, more than perhaps.
Ms. Hastings. I actually just looked at the percent that
Exxon Mobil has in the New York metropolitan area.
Senator Schumer. Good. What is it?
Ms. Hastings. I am just not remembering off the top of my
head, but I think it is probably closer to 20 percent. So, yes,
they have a large market share in your area.
Senator Schumer. What do you say to this, Dr. Cooper?
Mr. Cooper. Well, the point is that they are integrated,
and that has been one of the trends is that you have got more
integrated refiners. So it is more and more difficult to talk
about the refining sector because this is an integrated
operation.
Senator Schumer. Right. That is what I was trying to say.
Mr. Cooper. So the point is that if you look at the bottom
line of Exxon Mobil this year, folks, it is through the roof,
and it is driven significantly by crude oil prices, but also by
the ability to keep--if there were price resistance at the
point of sale, the rise in crude prices would have squeezed
down the domestic spread, and it did not.
If you look at our testimony, the reason we are having so
much shouting today is that both domestic spread and crude oil
prices, the input prices, are at historic highs for an April,
and it is the combination of that. I understand you could
hypothesize other reasons, but the simple fact of the matter is
that there is no elasticity of demand at the point of sale.
Senator Schumer. Right, and Dr. Hastings made the point
because she had to go to something that doesn't exist now, a
large refiner that didn't have production. That was Tosco, and
who bought Tosco? I don't even know. Who bought them?
Ms. Hastings. Conoco Phillips.
Senator Schumer. Conoco Phillips, a seller and a producer.
Ms. Hastings. By the way, Tosco was just the first thing
that came to my head.
Senator Schumer. I understand, I understand, but I don't
think Tosco was the biggest sort of refiner qua refiner.
Ms. Hastings. It might have actually been the largest
independent refiner at the time of the purchase.
Senator Schumer. That is what I am saying. The point I am
making is the greater consolidation, vertical and horizontal,
in this industry over the last several years has created less
competition and has created not only higher prices, but a
greater incentive, either implicitly or even explicitly, for
OPEC and the oil companies, the big ones, not everybody, to
cooperate.
I just have one more question here, and the Chairman has
been very generous. This is about ethanol. Last week, there
were rumors that the administration might have granted both New
York and California a waiver from the ethanol mandate, and
prices dropped for energy futures on the NYMEX. I think they
went down 5.2 percent for gasoline and 4.2 percent for crude
oil.
Anyone can answer this. Isn't this empirical evidence that
the waivers, if we were to allow New York, California and
whatever other States wanted to that are far away from the
corn-growing ethanol-producing centers--if we were to allow
those States to meet the clean air standards by cracking
gasoline somewhat differently, prices would come down some.
Does anyone want to agree or disagree? Yes, Mr. Kovacic.
Mr. Kovacic. We haven't tried to measure the exact effects
of the substitution you mention, Senator, but an unmistakable
finding that we have made is that measures that can be taken to
preserve general levels of air quality while introducing more
flexibility into the supply system, have possibilities in many
areas to put greater downward pressure on prices. A more
flexible supply and distribution system consistent with broad
air quality goals is better for the competitive process.
Senator Schumer. Dr. Felmy.
Mr. Felmy. I would agree, Senator, that any measure that
allows you to be able to increase the flexibility so that
refiners can meet clean air without prescriptive solutions for
that introduces flexibility. It also introduces the possibility
of additional imports. So we would agree with that position and
we support waivers for everyone.
Senator Schumer. Does anyone disagree with that?
Mr. Cooper. I agree with it, with a caveat. Bigger markets
are better for consumers as long as the players in the markets
are more. If it is the same players in the same big markets, I
am not sure you diminish their market power. So when we look at
making these bigger markets, we have to also make sure we
increase the competitiveness of those markets or we may end up
on a treadmill.
Senator Schumer. One final question. This is for Mr.
Bermann. We left the legal questions to the former prosecutors,
Senator DeWine and Senator Specter. But as a cosponsor of
Senator DeWine's legislation, given that OPEC is a cartel
specifically designed to manipulate price, does the involvement
of U.S. companies with OPEC raise any domestic antitrust
issues?
In other words, does the fact that some of the oil
companies also own some of the production in the OPEC nations,
such as whatever the name of that company is that I mentioned
in my opening--Motiva, the old Aramco--does that raise any
antitrust issues independent of the good legislation that
Senator DeWine has offered?
Mr. Bermann. Well, the fact that those companies might be
dealing with foreign governments would not immunize them in any
respect. The law has never gone any further than to say only
the compulsion of a foreign government would operate as a
defense.
So if you had the kinds of predicate acts that you are
thinking of, there is no question that I think the Sherman Act
could apply to them. And the fact that they are dealing with or
consorting with foreign governments will not immunize them.
Indeed, if I can revert to the act of state doctrine, the
courts have held routinely that the act of state doctrine only
applies when the legality of what a foreign government does is
in question and not when, if you will, the good faith or bad
motivation of the foreign government is indirectly implicated.
Senator Schumer. Do you agree with that, Mr. Kovacic, and
does the FTC agree with that?
Mr. Kovacic. Again, speaking in my own capacity, I think
Professor Bermann has accurately described the requirement that
there be compulsion. So the issue of fact would be, in the
concession arrangements that govern their activities in these
countries, are there measures in those arrangements that
provide the requisite compulsion. I think his technical
assessment is correct.
Senator Schumer. So would that mean that, say, Shell, which
has ownership in Saudi Arabia and is part of this Aramco, which
is part of OPEC, is susceptible to FTC action for what they do
here because of their big network and operations here?
Mr. Kovacic. In any instance in which we would look at
foreign behavior in these circumstances, we would generally
take the view that without compulsion, for example, the
behavior in question is fair game. So that would be the crucial
factual issue.
Senator Schumer. Thank you, Mr. Chairman. I appreciate your
having this hearing.
Chairman DeWine. Senator, thank you very much.
Mr. Bermann, you have made some good suggestions on how we
can improve this bill and we are certainly going to take a look
at that. I want to thank you for that. That is one of the
reasons we have these hearings.
You made the point about the state of the law and told us a
little bit about that, and we appreciate that.
I might say there has been some editorial comment about
this proposed bill that we couldn't do this because there are
legal impediments. And I would just say your testimony has
pointed out, I think, the fact that this bill would remove any
legal impediments. Whatever legal impediments are out there--
and that is an open question--but whatever legal impediments
are out there, this bill eliminates them. That is why we
introduced the bill.
It is problematic whether or not suits could be brought now
or not. I think they could be, but the whole purpose today of
this bill is to make it so that prosecution can move forward,
and make it clear that the antitrust laws of this country do,
in fact, apply.
The idea of the Department of Justice enforcing the
antitrust laws against cartels is something that happens all
the time, and they do it against not just domestic companies;
they do it against foreign companies. It wasn't too many years
ago there was a lawsuit brought by the Department of Justice.
It was an international cartel case against, I believe, German
and Swiss firms for a vitamins cartel. That case was
successful. Foreign executives, I believe, were sent to jail.
Two firms paid a fine of over $700 million.
So the United States can reach the assets; the Justice
Department can reach those assets. We can attach those assets.
We can bring those people into court. I have faith in the
ability of the lawyers at the Justice Department to get the job
done, and that is why we have this bill to remove the
impediments and let them go about their business and do their
job and enforce our antitrust laws. This is the only major area
that I know of where we say they can't do it, and we think they
should be able to do it.
Mr. Kovacic, we have heard testimony today complaining
about the FTC's efforts to investigate the petroleum industry.
In your testimony, you talked about a number of actions and
investigations that the FTC has conducted in this area, but it
seems clear to me that consumers still believe that they are
looking at a very dysfunctional market.
What else can the FTC do?
Mr. Kovacic. I think one of the most important things, Mr.
Chairman, is to bring to a complete conclusion a great deal of
the research that we have been doing that comes both from the
active, almost real-time monitoring of price changes, the
consequences of our retrospective assessments of completed
transactions, the continued work that we are doing to enlist
expert outsiders to tell us more about the industry--to bring
that to a successful conclusion so that our understanding of
the precise phenomena in question is more complete, to have a
better sense, for example, of precisely how specific
transactions or activities have affected market outcomes.
I have heard on a number of occasions Senator Wyden express
his frustration, his disappointment with the inquiries. But our
view has been in this and other areas that are terribly complex
that the sound empirical foundation is the indispensable basis
for making good policy. One of the first and most important
things we can do is to bring those efforts to a close as a
foundation for doing more work.
Second, I think bringing to a successful close cases such
as the Unocal case that I mentioned before, which we allege--
our opponents in this case would strongly dispute my
characterization--literally involves hundreds of millions of
dollars for California consumers, direct pass-through effects,
to establish the principle that the regulatory process which is
so important to the operation of this industry--clean air and
clean water controls, other controls that govern the behavior
of the industry--cannot be gamed, that firms subject to them
cannot lie or misrepresent their behavior.
And again I must emphasize I am offering the allegations in
the commission's complaint. These aren't proven facts. To
demonstrate that principle successfully would be, I think, a
critical addition to our competition policy about what it says
in petroleum and elsewhere about the manipulation of regulatory
schemes that do affect competitive outcomes.
I think we have the humility, Senator, in listening to all
of the representations here about additional avenues for
research and analysis, to continue to pursue those paths. I am
quite at peace with the process that continues to bring upon us
possibilities for additional analysis, new research, new areas
for examination. Our process of policymaking takes those into
account, so most certainly we would carefully consider and
reflect upon the results of this proceeding as well.
Chairman DeWine. Let me ask you, do you agree with Dr.
Cooper's assessment that refining is excessively concentrated,
and if so, does that mean that the FTC got it wrong when it
reviewed the big mergers of the 1990's in the petroleum
industry?
Mr. Kovacic. When we look carefully at the contributions
that the mergers in question made to concentration in refining,
we find that those adjustments were modest, at most. Indeed, it
is very difficult to detect, I believe, direct, convincing
links between the mergers we permitted, with conditions, with
large divestitures, and notable increases in concentration in
these markets. So I think that we and Dr. Cooper would have
quite a debate about exactly how those mergers influenced
refining concentration in those markets.
Chairman DeWine. Well, let me move to another area. There
seems to be widespread agreement that petroleum companies run
their refineries at a very high capacity, yet don't build up
new capacity to meet potential demand increases.
We know that there are some difficulties in increasing
refining capacity. We have talked about this a little bit
today; environmental permitting, for example. But on balance,
it seems as though there ought to be some way the industry
could boost refining capacity.
Why don't we see more refining capacity come on line? Is
there any other industry that comes to mind where producers run
at this very high capacity year after year and don't take any
steps to increase capacity? What is the difficulty here?
Mr. Kovacic. I think part of what we have observed, Mr.
Chairman, is that utilization rates, at least in the past
couple of years, to some extent have been falling a bit, so
that we don't have the level of tightness that prevailed
before.
I would have to check, Mr. Chairman, to look at exactly
what our experience base tells us about actual improvements in
the capacity of specific facilities that do remain on line. And
if you will permit me to do so, I would like to supplement my
answer with a fuller response.
Chairman DeWine. That would be fine. You can submit that.
Mr. Kovacic. But our impression is that certainly in some
areas with respect to some facilities, we are seeing
enhancements that do increase the capacity of existing
facilities.
Chairman DeWine. Dr. Felmy, have you ever done a study
estimating what price we would pay for crude oil if it were
subject to the free market instead of being fixed by OPEC?
Mr. Felmy. I have really not, Mr. Chairman. An economist
looks at cartels and has an academic view of how things go, but
then when you transfer that analysis to the real world, there
are many other things that happen. Cartel behavior is very
complex. Behavior of non-cartel members is also very complex.
You also have dramatic changes in demand over time which can
also affect the prices. So I don't have an analysis of that.
Chairman DeWine. Dr. Hastings, do you?
Ms. Hastings. I do not have an analysis of that.
Chairman DeWine. Dr. Hastings, your testimony mentions that
the Energy Information Administration of the Department of
Energy collects data, but does not let academics have access to
detailed data for research purposes. You also note that the
Department of Energy does not have grant programs for
economists to do research on energy policy, and as a result the
economic research into energy policy suffers.
Can you explain your thoughts about these two points maybe
in more detail to us?
Ms. Hastings. Sure. In order to examine many of the
questions that we have been discussing here, an applied
economist needs to be able to get access to detailed data that
would allow them to understand better issues. For example,
suppose I wanted to look at the following question: Was there
strategic capacity entry into markets that were regulated by
reformulated gasoline requirements? How did firm choose
capacities to enter into these markets? Are we going to be
ready to supply Milwaukee's market when they introduced a
specific type of gasoline only for that market?
Price volatility went up substantially there, so did mark-
ups, and the number of firms supplying unbranded gasoline
decreased substantially after that introduction. So suppose you
might want to ask the question, how tight are markets? Did
firms anticipate this tightness when setting capacities when
they went into the market?
In order to look at something like that, you would actually
need to look at refinery-level production decisions, and there
is no way to actually get that information even though the
Energy Information Administration has such information.
Typically, the only thing that one can get access to is very
average data across the whole country or perhaps across a large
part of the country on an aggregated basis, kind of monthly or
yearly information.
One of the things that maybe Mr. Kovacic might agree with
me on is that there is a real need for sound empirical work in
industrial organization to look at a lot of these questions.
What is going on in natural gas? What is the effect of having
these micro markets for different reformulated gasoline on
prices, on competition, on who decides to enter and who
doesn't? Those questions could be answered with good data.
Currently, for the projects that I have done, it is
incredibly difficult to get such detailed data and it takes a
long time for an academic to get a hold of this data. Labor
economists were in a similar position before the Census Bureau
introduced a program that allowed labor economists to look at
detailed data at the Census Bureau, confidential data on firm
production decisions, for example, in manufacturing, on
consumer behavior at the consumer level.
What they did is introduce a program by which academic
could apply to get access to the confidential data. It is a
very stringent application process. Once they are granted this
application, they actually have to go to the Census Bureau to
use the data. They can't take confidential data off-site. But
having this access, this program set-up, led to a huge boom in
the sound empirical knowledge base of labor-related policies
such as minimum wage laws, et cetera.
Before that time, labor economists and labor issue
policymakers were in the same position that many regulatory
policymakers find themselves in today. Having a program modeled
after what the Census Bureau did perhaps at the Energy
Information Administration may lead to the same boom in
knowledge and understanding of what is affecting these energy
markets.
Chairman DeWine. Dr. Cooper, we have heard testimony that
it is too hard to open a new refinery due to such reasons as
huge costs, environmental issues and local opposition.
Do you disagree with these reasons? I mean, is that what
the problem is?
Mr. Cooper. It is not that I disagree with the reasons. It
is that we have observed the closure of refineries, which were
clearly industrial sites that supported those refineries. They
were permitted to exist in those locations. They were closed,
we know, as part of a business strategy to diminish capacity.
So what we asked for several years ago was a study of those
sites, a detailed analysis of why were they closed, what would
it take to get them open, would there be people who are
interested in reopening them.
I think Dr. Hastings has sort of raised the interesting
question, because the really interesting thing is that the
Federal Trade Commission which studied the first price spike in
2000 actually asked exactly that question, the question she
asked about: How do strategic decisions in the reconfiguration
of refineries to meet the reformulation requirements affect
supply in that market.
The FTC asked that question not with the detailed data that
she would like to have, but by interviewing all of the
behaviors and the actors in those markets. And they concluded
that, based on those interviews, strategic decisions had been
made about how much capacity to have in a market that tightened
them and cut off independents.
Two years ago, the RAND Corporation did another study,
based again not on the detailed data that she would like, but
on the same sets of interviews, and they concluded exactly the
same thing. So now we have the qualitative evidence on business
decisions. Senator Wyden repeats his internal memos almost on a
daily basis that those decisions were made.
So the answer is you hear the excuse that it is too hard to
locate, it is too expensive, but you look at the people who
have studied it and you discover that this was intended to
increase the profitability of refineries, that it was intended
to accomplish certain sets of things. The definitive answer
comes in a backward look around each of those price spikes with
the data that Dr. Hastings has mentioned.
But I submit that there is another explanation. Now, we are
through 4 years of unhinging in the gasoline market and nobody
has looked at this issue in detail repeatedly, aggressively.
What we get is excuses rather than explanations and analysis.
Chairman DeWine. Well, I want to thank you all very much
for your testimony. It has been very, very helpful and it has
been a very instructive hearing. We have had a lot of interest
in this hearing and we do appreciate your testimony. This
Subcommittee will continue to monitor this issue and we are
going to continue to push forward and move forward on our bill.
Thank you very much.
[Whereupon, at 5:08 p.m., the Subcommittee was adjourned.]
[Questions and answers and submissions for the record
follow.]
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