[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]
HURRICANE KATRINA'S EFFECT ON GASOLINE SUPPLY AND PRICES
=======================================================================
HEARING
before the
COMMITTEE ON ENERGY AND COMMERCE
HOUSE OF REPRESENTATIVES
ONE HUNDRED NINTH CONGRESS
FIRST SESSION
__________
SEPTEMBER 7, 2005
__________
Serial No. 109-32
__________
Printed for the use of the Committee on Energy and Commerce
Available via the World Wide Web: http://www.access.gpo.gov/congress/
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__________
COMMITTEE ON ENERGY AND COMMERCE
JOE BARTON, Texas, Chairman
RALPH M. HALL, Texas JOHN D. DINGELL, Michigan
MICHAEL BILIRAKIS, Florida Ranking Member
Vice Chairman HENRY A. WAXMAN, California
FRED UPTON, Michigan EDWARD J. MARKEY, Massachusetts
CLIFF STEARNS, Florida RICK BOUCHER, Virginia
PAUL E. GILLMOR, Ohio EDOLPHUS TOWNS, New York
NATHAN DEAL, Georgia FRANK PALLONE, Jr., New Jersey
ED WHITFIELD, Kentucky SHERROD BROWN, Ohio
CHARLIE NORWOOD, Georgia BART GORDON, Tennessee
BARBARA CUBIN, Wyoming BOBBY L. RUSH, Illinois
JOHN SHIMKUS, Illinois ANNA G. ESHOO, California
HEATHER WILSON, New Mexico BART STUPAK, Michigan
JOHN B. SHADEGG, Arizona ELIOT L. ENGEL, New York
CHARLES W. ``CHIP'' PICKERING, ALBERT R. WYNN, Maryland
Mississippi, Vice Chairman GENE GREEN, Texas
VITO FOSSELLA, New York TED STRICKLAND, Ohio
ROY BLUNT, Missouri DIANA DeGETTE, Colorado
STEVE BUYER, Indiana LOIS CAPPS, California
GEORGE RADANOVICH, California MIKE DOYLE, Pennsylvania
CHARLES F. BASS, New Hampshire TOM ALLEN, Maine
JOSEPH R. PITTS, Pennsylvania JIM DAVIS, Florida
MARY BONO, California JAN SCHAKOWSKY, Illinois
GREG WALDEN, Oregon HILDA L. SOLIS, California
LEE TERRY, Nebraska CHARLES A. GONZALEZ, Texas
MIKE FERGUSON, New Jersey JAY INSLEE, Washington
MIKE ROGERS, Michigan TAMMY BALDWIN, Wisconsin
C.L. ``BUTCH'' OTTER, Idaho MIKE ROSS, Arkansas
SUE MYRICK, North Carolina
JOHN SULLIVAN, Oklahoma
TIM MURPHY, Pennsylvania
MICHAEL C. BURGESS, Texas
MARSHA BLACKBURN, Tennessee
Bud Albright, Staff Director
David Cavicke, Deputy Staff Director and General Counsel
Reid P.F. Stuntz, Minority Staff Director and Chief Counsel
(ii)
?
C O N T E N T S
__________
Page
Testimony of:
Angelle, Scott A., Secretary, Louisiana Department of Natural
Resources.................................................. 124
Barbour, Hon. Haley, Governor, State of Mississippi.......... 18
Caruso, Hon. Guy F., Administrator, Energy Information
Administration............................................. 48
Cavaney, Red, President, American Petroleum Institute........ 136
Cooper, Benjamin S., Executive Director, Association of Oil
Pipelines.................................................. 175
Cooper, Mark N., Research Director, Consumer Federation of
America.................................................... 206
Douglass, Bill, CEO, Douglass Distributing Company, on behalf
of the National Association of Convenience Stores and the
Society of Independent Gasoline Marketers of America....... 181
Garman, Hon. David K., Under Secretary for Energy, Science
and Environment, Department of Energy;..................... 44
Lashof, Daniel A., Science Director, Climate Center, National
Resources Defense Council.................................. 199
Moran, Kenneth P., Acting Director, Office of Homeland
Security, Enforcement Bureau, Federal Communications
Commission................................................. 68
Newsome, James, President, New York Mercantile Exchange,
World Financial Center..................................... 170
Seesel, John H., Associate General Counsel for Energy,
Federal Trade Commission................................... 56
Slaughter, Bob, President, National Petrochemical and
Refiners Association....................................... 146
Smith, William L., Chief Technology Officer, Bellsouth
Corporation................................................ 193
Additional material received for the record:
Dingell, Hon. John D., a Representative in Congress from the
State of Michigan, letter dated March 3, 2005, enclosing
questions for the record, and responses to same............ 248
Newsome, James, President, New York Mercantile Exchange,
World Financial Center, letter dated October 6, 2005,
enclosing response for the record.......................... 242
Slaughter, Bob, President, National Petrochemical and
Refiners Association, response for the record.............. 246
(iii)
HURRICANE KATRINA'S EFFECT ON GASOLINE SUPPLY AND PRICES
----------
WEDNESDAY, SEPTEMBER 7, 2005
House of Representatives,
Committee on Energy and Commerce,
Washington, DC.
The committee met, pursuant to notice, at 11:05 a.m., in
room 2123, Rayburn House Office Building, Hon. Joe Barton
(chairman) presiding.
Members present: Representatives Barton, Hall, Upton,
Stearns, Gillmor, Deal, Whitfield, Norwood, Shimkus, Wilson,
Shadegg, Fossella, Radanovich, Bass, Pitts, Bono, Walden,
Terry, Ferguson, Rogers, Otter, Myrick, Sullivan, Murphy,
Burgess, Blackburn, Dingell, Waxman, Markey, Pallone, Brown,
Rush, Eshoo, Stupak, Engel, Wynn, Green, Strickland, DeGette,
Capps, Doyle, Allen, Davis, Schakowsky, Solis, Gonzalez,
Inslee, Baldwin, and Ross.
Staff present: Bud Albright, staff director; Andy Black,
deputy staff director/policy coordinator; Mark Menezes, chief
counsel for energy and the environment; Margaret Caravelli,
majority counsel; Maryam Sabbaghian, majority counsel; Tom
Hassenboehler, majority counsel; Kelly Cole, majority counsel;
Peter Kielty, legislative clerk; David Schooler, minority
general counsel; Sue Sheridan, minority senior counsel; Michael
Goo, minority counsel; Bruce Harris, minority professional
staff; and Reed Stuntz, minority staff director.
Chairman Barton. The committee will come to order. We are
going to have a very important hearing this morning and this
afternoon but also a very long hearing.
The Chair should not have to announce this, but the Chair
is going to announce it: There will be regular order.
All members that wish to will be allowed to give their
opening statements. Those members that wish to defer the
opening statements will be given extra time in the Q and A
period.
At noon today, approximately, we are going to have a video
presentation by the Governor of Mississippi, Mr. Barbour.
We asked the Governor of Louisiana if she would also like
to participate by video conference. She is not able to do so,
but she is going to ask one of her assistants, who I believe is
in the room, to read her statement into the record.
So whenever Governor Barbour is able to teleconference with
us, we will suspend what we are doing at that moment for that
to happen. Then we will give the Governor of Louisiana's
representative an opportunity to read a statement into the
record, and then we will resume.
I also want to make a point of personal privilege before
beginning our opening statements to announce that Baby Barton
has not yet joined us in the world. He is due any day now. And
I know the airline schedule back to Texas. I have it memorized.
So if you see me hopping out and running out of here, it means
that I have received a phone call that I need to get home. But
we expect Baby Barton to be here any time between today and
next Friday.
Mr. Hall. Will the chairman yield?
Chairman Barton. Briefly.
Mr. Hall. Did you ever know where the term ``son of a gun''
came from?
Chairman Barton. I hesitate to ask.
Mr. Hall. Sailors used to take their wives to sea with
them. And when they were enceintes and they could not deliver,
they would walk them past the big guns, shoot the big guns off.
That is a son of a gun.
Chairman Barton. Okay. That is one theory.
Now we are going to resume regular order, and the Chair
recognizes himself for an opening statement.
I want to begin by expressing the deep sorrow that
everybody on this committee, on both sides of the aisle, has
for the families and friends who have lost loved ones and who
are experiencing, as we speak, the tragedy and loss as a result
of Hurricane Katrina.
This is one of the worst natural catastrophes to ever hit
our country, and I would remind us that we are the United
States of America, so our hearts reach out to those citizens in
Louisiana, Alabama, and Mississippi. Our thoughts and prayers
go out to them.
Many of the constituents hurt by Katrina are represented
directly on this committee. Vice-Chairman Chip Pickering of
Mississippi has had the benefits of representing his
constituents in Mississippi for a number of years.
Our former chairman, Billy Tauzin of Louisiana, represented
his constituents on this committee for years and years.
This storm is not a burden on any one State, it is a burden
for the entire Nation, and we will deal with it as a united
Nation.
Some States have come forward already to give aid and
comfort. To name a few: Texas, Arizona, Alabama, Tennessee,
Arkansas, Georgia, Florida, Kansas, Utah, and Ohio have all
opened their doors to Katrina refugees; we thank them for that.
In my congressional district in Texas, I know of at least
2,000 refugees in shelters as of the day before yesterday. The
Energy and Commerce Committee is going to do the very best it
can to help and alleviate pain and suffering and hopefully
prevent future events of this type from having the kind of
impact that it has had.
This hearing is the first of several hearings that we hope
to hold on the impact that Katrina has had on our energy
policy, our health care policy, and our telecommunications
policy.
Unlike hurricanes of the recent past, Katrina has been
destructive and disruptive. The disruptions have had an impact
on energy, telecommunications, health, interstate commerce, and
all sectors of our Nation's economy. These are all areas that
are within the purview of the Energy and Commerce Committee.
This is not a hearing today to engage in a blame game, or
to pose recriminations against anybody at any level. This is a
hearing to begin to understand the effect Katrina has had on
our committee's area of responsibility. There will be numerous
opportunities to determine where the blame should be placed. I
hope that we can spend time learning from our mistakes and
taking positive actions, if possible, to correct those
mistakes.
I want to thank the witnesses that are here today for their
time and their preparation to appear before the committee. Many
of you are here to discuss energy security. As we confront the
human tragedy from Katrina, the consequences force us to think
more expansively about energy security and to focus harder on
matters that the recently passed energy bill have already
emphasized.
If there is a silver lining, and I am not saying there is,
but if there is, it may be that our country is beginning to
realize how fragile our energy sector is and how easy it is to
disrupt it. It is my opinion that we have an energy
infrastructure based on a 1970's population and a 1970's
demand, and obviously we are in the 21st century and we have
not kept pace.
The U.S. oil infrastructure is operating at maximum
capacity. It has done so for the past 2 to 3 years. It was
stressed before Katrina. We have just signed the most
comprehensive energy bill I think that the Congress has ever
passed. We did that on a bipartisan basis. A majority of the
Democrats on this committee voted for that bill, and I wish to
thank them. I wish to thank the ranking member, Mr. Dingell,
for his support in that effort. So this committee should not
have to have a wake-up call, but Hurricane Katrina is
definitely a reminder that there is more to be done. It is
always easier to say after the fact what we should have done
before the fact.
Katrina reminds us of the need to protect and expand
resources and infrastructure not just in the Gulf-producing
States but in all areas of our Nation. I am pleased that our
recently passed energy bill did include a $500 million
provision directed at coastal restoration. So we have already
made a start in helping that region.
My time has expired, so I am going to put the rest of my
statement in the record.
[The prepared statement of Hon. Joe Barton follows:]
Prepared Statement of Hon. Joe Barton, Chairman, Committee on Energy
and Commerce
I want to begin by expressing my deep sorrow to the families and
friends who are experiencing such unimaginable loss from Hurricane
Katrina. I honestly can't imagine the terrible feeling of loss and
displacement that so many fellow Americans are being forced to face
right now. People have lost their loved ones, their friends, their
homes and their livelihoods. My thoughts and prayers and the thoughts
and prayers of America go out to the many.
Many of the constituents hurt by Katrina's wrath are represented
directly on this Committee by Vice Chairman Pickering, and the
Committee for years has had the benefit of representation from
Louisiana, including its former Chairman, Chairman Tauzin. But this
storm is not the burden of any one state, it has damaged a nation and
if the nation is going to survive, we must turn to one another for
support. To name a few, the States of Texas, Arizona, Alabama,
Tennessee, Arkansas, Georgia, Florida, Kansas, Utah and Ohio have all
opened their doors to Katrina refugees and we thank them for that.
The Committee too will do its part to help. This hearing will be
the first of several hearings that the Committee plans to hold on the
impact that Katrina had on energy, health and telecommunications.
Unlike hurricanes of the recent past, Katrina has been both destructive
and disruptive. The disruptions have had an impact on the energy,
telecommunications, health and commerce sectors of the nation's
economy--all areas within the purview of this Committee's broad
jurisdiction. Let me say at the very beginning today that this is not a
hearing to engage in a blame game or to pose recriminations against one
another. This is a hearing to begin to understand the effect Katrina
had on our committee's areas of responsibility. There will be plenty of
time to determine where blame should be placed. I hope we spend more
time learning from our mistakes, and taking positive action to correct
our mistakes, than we do in finger pointing. The American people
deserve no less.
I want to thank our witnesses for their time and preparation to
appear before the Committee today. Many of you are here today to
discuss energy security. As we confront the human tragedy from Katrina,
the consequences force us to think more expansively about energy
security, and to focus harder on matters that the recently passed
Energy Bill already emphasized.
If there is a silver lining in this tragic situation, it is that it
may finally bring home to the American people how fragile our energy
sector is and our energy infrastructure is.
The U.S. oil infrastructure is operating at maximum capacity and
has done so for the past 2-3 years. It's stressed. We just signed the
most comprehensive energy bill in the last 15 years. There are lots of
things in that bill to help and we're fortunate to have it. This
hurricane is a wake up call that we need to do things across-the-board
on infrastructure and to also expand the base.
It's always easier to say after the fact what should have been done
before the fact. Katrina reminds us of the need to protect and expand
resources and infrastructure in the Gulf producing states to encourage
continued operations. For example, the recently passed Energy Bill
included a $500 million provision directed at Coastal Restoration, but
we should and will need to do more.
Katrina also reminds of how centralized our nation's energy
infrastructure is and the need to encourage investment and
diversification. For a sense of the numbers, 29% of our oil production
and 20% of the natural gas is in the Gulf of Mexico. It doesn't have to
be that way. We could be drilling in Alaska right now; we could be
drilling off the coasts of several other states. It would make a
difference today if we were not as restrictive as we've been the last
20 years in where we drill. We can't just get our oil and gas from
Texas, Louisiana, Mississippi and the Gulf of Mexico. We need to
diversify our domestic oil resources.
We have not built a new refinery in the U.S.A. in over 30 years and
Katrina has shown us that our refinery capacity is inadequate. Last
week Katrina forced a shutdown of approximately 25% of our refining
capacity. Relief efforts have brought much of this capacity back on
line, but my understanding from recent Department of Energy reports is
that 10% of our gasoline refining capacity will nevertheless be out of
commission for some time. To encourage new refineries the Energy Bill
has a provision that allows a governor of a state to petition the
Environmental Protection Agency for technical and financial assistance
in the refinery permitting process.
We need to encourage states outside of the Gulf to take advantage
of Energy Bill provisions like this.
Also today I expect to hear more about gasoline pricing. I think a
good case can be made today that some retailers may have taken
advantage of the Katrina emergency. If that's true, that is something
that needs to be investigated and, in all probability, prosecuted.
Among other issues, we're going to investigate the price increase at
retail today. I believe in a market economy and there is no need for
price controls and price freezes at any level, but I think there may be
a need at the retail level to make sure we have adequate enforcement
tools to prevent pure price gouging
Also today we welcome witnesses that will help us begin developing
an understanding of Hurricane Katrina's effect on the communications
systems in the region and begin understanding the road to rebuilding
critical infrastructure that has been damaged or lost.
Again, this hearing will be the first of several hearings that the
Committee plans to hold on Katrina. We will have further hearings in
other areas of Committee jurisdiction. I thank you all for your time in
appearing today and look forward to hearing what you have to say. And
without objection, the Committee will proceed pursuant to Committee
Rule 4(e), allowing Members the opportunity to defer opening statements
for extra questioning time.
Chairman Barton. As I said at the beginning, we are
proceeding pursuant to Committee Rule 4(e), which will allow
members that wish to defer opening statements additional time
on their question-and-answer period.
I would now like to recognize the distinguished ranking
member of the committee, Mr. Dingell of Michigan.
Mr. Rush. Mr. Chairman, I have a unanimous consent request.
Chairman Barton. If it is in order. I am going to assume it
is. What is the gentleman's unanimous consent request?
Mr. Rush. Mr. Chairman, I would just ask for unanimous
consent that all members of this committee please join with the
President in refraining from calling American citizens who are
distressed refugees. They are not refugees. They are American
citizens. They pay taxes. They have been involved in helping to
build this country, and they are not refugees, and I think it
is a disservice to them.
Chairman Barton. I am not sure that is a unanimous consent.
The Chair would encourage members to use the appropriate
terminology.
Mr. Rush. I just ask, Mr. Chairman, if they would just join
the President and others in refraining from using the word
refugee.
Chairman Barton. I support the gentleman of Illinois'
intention.
Mr. Rush. Thank you.
Chairman Barton. I am going to recognize the distinguished
ranking member from Michigan for an opening statement. Mr.
Dingell.
Mr. Dingell. Mr. Chairman, thank you; and I commend you for
holding this hearing. It is very important that it should be
held at this time. The committee has many matters of interest
here related to the events that have followed Katrina; and
under your leadership, as under your leadership on the recent
energy bill, I am satisfied that we will address them well.
The hearing today takes place while vital rescue relief
efforts are still under way in New Orleans and our Gulf State
communities devastated by Hurricane Katrina. As we continue to
consider how this Nation will recover, we must also be mindful
of the scale and severity of the destruction in the Gulf and
the challenge of caring for those whose homes have been
destroyed and whose lives will not soon return to anything
resembling normal.
Our first efforts must be to take care of those who are
suffering, their families, and the families of those who have
been killed or seriously injured in these events. In the coming
months, the effects of this disaster will continue to ripple
through the economy. Several critical sectors are affected by
Katrina: health, energy and telecommunications. All of these
fall within this committee's responsibilities; and, again, Mr.
Chairman, I commend you for holding this hearing to help our
members focus on the work that lies ahead.
We know that the Federal response to Hurricane Katrina,
particularly that of the Federal Emergency Management Agency,
FEMA, has been just plainly disgraceful. But we must now focus
our attention on the tasks ahead. As a preliminary but very
important matter, I have introduced legislation to restore FEMA
to an independent agency with Cabinet-level status reporting
directly to the President.
With respect to gasoline, which was part of the original
focus of this hearing, it is important that the committee
provide strong oversight to ensure that consumers are not
subject to price gouging for gasoline and other energy supplies
and that recovering energy markets are not manipulated.
While local gas stations are usually the easiest target, we
learned in the 1970's--and again this is a little bit like deja
vu--that the major violators were elsewhere. They were the oil
price controls that were in effect then, and they were also the
persons who were compelled to disgorge billions of dollars in
overcharges. Those were people who--largely who were traders in
the industry, and people at the different major oil companies
and in major institutions inside that industry. Any examination
of price gouging must begin with a review of practices by
persons like this.
Already, a number of States have acted to stem gasoline
price increases, from suspension of State gas taxes to invoking
State emergency authorities limiting price increases; and it
appears that the announcements of release from the Strategic
Petroleum Reserve, the ``SPR,'' and from the International
Energy Agency Stockpile will temper escalating prices to some
degree.
But we cannot focus solely on gasoline. Natural gas and
heating oil prices could very well pose an even greater
challenge for our constituents as winter approaches. I applaud
Saturday's release of $27.25 million in LIHEAP funds to the
affected States, but we should recognize that we will need a
significant increase in LIHEAP funding in the coming months.
While the Nation's energy needs are critically important,
we cannot forget the real human need that exists in the Gulf
States right now.
First, how has our public health infrastructure met the
challenge? I hope that we can have hearings focusing on this
vital question.
Second, what do we do to provide for ongoing care of those
who were suffering in this area, for the industries and for the
institutions and for the States in the area and for hundreds of
thousands of displaced families? I note Medicaid is going to be
a lifeline in the coming months.
Earlier this year, Democrats strongly opposed the budget
plan that included $106 billion in new tax cuts benefiting
mostly wealthy people while requiring our committee to cut a
likely $10 billion in Medicaid. That budget must be scraped and
instead immediately replaced with a package of assistance to
assure that the health care needs of families and children do
not go unmet.
Hurricane Katrina has created an environmental catastrophe
for the Gulf region that will require significant Federal
assistance. This committee should monitor the environmental
issues that are arising, from Clean Air Act waivers to the
rebuilding of the safe water drinking water infrastructure, and
we must pay careful attention to the environmental consequences
as we consider best how to make the needed improvements in our
refining capacity.
Finally, the committee must also look closely at how the
communications and media sectors responded to Katrina and what
steps should be taken to better prepare for and to warn people
about and how to respond to emergencies. Functioning
communications networks are critical for first responders to do
their jobs efficiently and safely as possible and for victims
to call for help or communicate with loved ones.
I look forward to hearing from today's witnesses about the
response of the Federal Government and industry to the current
disruptions in these and all of the other vital sectors which
are affected and their plans for the coming months as we try to
help the Gulf region and its people to recover.
I thank you, Mr. Chairman.
Chairman Barton. I thank the gentleman for the opening
statement.
We want to recognize the distinguished chairman of the
Energy and Air Quality Subcommittee, Mr. Hall, for an opening
statement.
Mr. Hall. I thank you, Mr. Chairman, for holding this
hearing.
Just as a foreigner attacked New York on 9/11 and
devastated a great city and a great State, another foreigner
called Katrina hit New Orleans, Louisiana, and sister cities in
various States. I think we have a lot of work to do to meet the
challenges that are posed by the devastation that Katrina
inflicted on thousands of families and communities along the
Gulf; and we look for answers, not accusations. I think we must
also address the disruption to our Nation's infrastructure in
the wake of Katrina, particularly the impact on our energy
supply and delivery system.
Gasoline prices were already too high in August as a result
of increased worldwide demand and limited spare capacity. The
disruption of our energy infrastructure from Katrina compounded
the program. Actually, Americans are alarmed at the raising
cost of gasoline and the projected higher cost of natural gas,
and they are looking to Congress to address their concerns. The
Energy Policy Act of 2005 is certainly a step in the right
direction, and Katrina lends a sense of urgency to provisions
in that Act that need to be expedited.
A diversification of energy supplies is an important
component. Diversification could help ensure energy security
and thereby national security from disruption due to natural
disasters or terrorist acts.
Too much of our national gas supply comes from one region,
the Gulf of Mexico. By ultra deep provisions--the amendment
that we passed, we passed it two sessions ago, it got by, the
conference committee had accepted it, we passed it this time--
drilling deeper in the Gulf is going to make drilling
operations less susceptible to hurricane damage, for one thing.
Another thrust for diversification would be to streamline
the permit process for new refineries in each of the 50 States
as outlined in Section 392 of the Energy Act, and Governors
have been alerted and are alerted and are looking at that at
this time because that will allow them to seek at least a
refinery per State with a lot of encouragement from the Act
itself.
Drilling off the other coast is another option that would
us far less susceptible to disruption.
So these and other policies will help us achieve energy
security in the long term, but we also need to consider what
actions will give us immediate relief. Our citizens are paying
the price for our dependance on foreign sources for too many
years, and we need to stop that. The margins are just too thin
in our energy market to absorb the fluctuation in supplies and
prices due to catastrophic occurrences such as Hurricane
Katrina.
The hearing gives us opportunity to hear from experts in
the Government and industry about the magnitude of the problems
we face and suggestions for corrective action.
Mr. Chairman, thank you again for scheduling this hearing;
and I thank the panelists for giving us their time, their time
for preparation, their time for attending.
I thank you very much. I yield back my time.
Chairman Barton. We thank the gentleman.
The Chair recognizes the gentleman from California, Mr.
Waxman, for an opening statement.
Mr. Waxman. Thank you, Mr. Chairman.
The Federal response to Hurricane Katrina has been woefully
inadequate. Hurricane Katrina was an unstoppable force of
nature, but it is plain that the Federal Government could have
done much more far sooner to respond to the immediate survival
needs of the residents of Louisiana and Mississippi.
Congress has a responsibility to understand what went wrong
and why, and unless Congress conducts thorough oversight
investigations to examine the preparation for and response to
Hurricane Katrina, few lessons will be learned and the Nation
will remain vulnerable to future natural disasters.
The administration has told us that they were prepared for
this kind of disaster. Two years ago, FEMA Director Michael
Brown testified before Congress that FEMA would be able to
respond to disasters within 12 hours. Well, FEMA failed
miserably. Relief and supplies took days, not hours, to arrive;
and the toll on those affected was terrible.
Today's hearing focuses on the energy implications of
Katrina, but the pattern is the same. The administration
policies that we were told would protect Americans from
skyrocketing fuel prices and price gouging have failed. The
administration's energy policy is based on a trickle-down
theory: If we give the big energy companies enough subsidies,
tax cuts, and regulatory relief, then they will keep gasoline
prices low. This policy is great for the oil companies, but it
simply does not work. For the past few years, long before
Katrina, gasoline prices have been on a steady march upwards;
and the oil company profits tripled between 2002 and 2004 to
$87 billion.
Since last month, gasoline prices have shot up another 30
percent. Oil companies appear to have taken advantage of this
crisis to earn even higher profits, and now some Republicans
are saying that the answer is to give the industry even more
subsidies and breaks.
Our energy policy is fundamentally broken. As the hurricane
proved, we are exactly on the wrong track. To keep gas prices
down and to protect our energy security, we need conservation,
increased fuel efficiency, new technologies and not another
round of industry handouts.
Hurricane Katrina showed the bankruptcy of our policies. It
is not enough to look after the interests of the special
interests. We need to be focused on providing good government
and life-saving services to all Americans.
Thank you, Mr. Chairman.
Chairman Barton. We thank the gentleman.
The gentleman from Michigan, Mr. Upton.
Mr. Upton. I am going to take the extra time and defer.
Chairman Barton. The gentleman defers.
The gentleman from Florida, Mr. Stearns.
Mr. Stearns. Thank you, Mr. Chairman; and I want to thank
you for holding this hearing.
As chairman of Commerce, Consumer Protection and Trade, I
have jurisdiction over the Federal Trade Commission; and I want
to welcome their counsel this morning for coming here.
Maybe in the near future we can also have a hearing out of
my subcommittee where we talk about the study that you did
recently. I hope that Cecil will mention a little bit about the
study, and I compliment the Federal Trade Commission, because
that study was done well before Katrina.
I have to tell my colleagues that the Federal Trade
Commission looks at the price of gasoline in a continuous
operation mode with a modeling, a simulator; and I think a lot
of Americans do not realize that they have this jurisdiction in
which they can stop price gouging and can stop collusion
between oil companies. Some of the actions that they have done,
the American people should realize, have been beneficial in
stopping some of this monopoly practices. So I went to commend
them this morning.
But I think Katrina, the hurricane, has highlighted a very
serious problem that we have in this Nation with crude oil and
gasoline supply and demand that is out of balance. Before
Katrina, this balance was already very tight and prices were
already at record highs. Thus, by removing nearly a third of
the United States' crude oil production and 10 percent of the
Nation's refining capacity at a time of very high demand, we
caused gas prices to spike even further. This confluence of
events is precisely the situation the United States faced
during the Labor Day holiday.
The future is not bleak, though. We have new technologies
that are being developed in this country. As Chairman Barton
has mentioned, we tried to give incentives, we tried to give
alternative ways for Americans to view the problem.
For example, in Alberta, Canada, for example, a method of
producing oil out of deposits of Bitzium buried in the ground--
this is called oil shale--oil sands--is now finally becoming
very profitable and a viable alternative for crude oil
production. So I think the United States should realize right
there, close by in Canada, with oil sands we have a possibility
of a viable alternative for crude oil. Alberta's oil sands
deposits are second only to Saudi Arabia's reserves, and
estimates have shown it could satisfy the world's demand for
petroleum for the next hundred years. So there is some light at
the end of the tunnel.
In closing, Mr. Chairman, even under the best
circumstances, a storm like Hurricane Katrina would have had a
noticeable impact on gas prices no matter what we did. However,
at a time of extremely high demand and tight supplies
practically shutting down the United States largest oil
refining region, obviously gas prices are going to spike even
higher.
So I look forward to our witnesses today, and again I
commend the Federal Trade Commission for the study that they
did much before the hurricane.
Thank you, Mr. Chairman.
Chairman Barton. We thank the gentleman.
The gentleman from New Jersey.
Mr. Pallone. Thank you, Mr. Chairman.
Mr. Chairman, I have to say that I am kind of torn today.
Because, on the one hand, I admire the fact that this
committee, under your chairmanship, is holding this hearing
today and is trying to take quick action to address the crisis
from Hurricane Katrina. On the other hand, I feel that the Bush
administration has been totally incompetent in handling this
situation and the emergency response in particular; and I do--
I, amongst others, have called for the FEMA director to resign,
because I think that he has acted in a totally unconscionable
way.
I also agree with Mr. Dingell's comments about how we need
to change FEMA because of it. But, in addition to that, I must
say that my constituents are outraged and actually shameful
about the way our government reacted in terms of the emergency
response but also feel that the oil companies are taking
advantage of the situation to gouge and to increase prices in a
way that is also unconscionable.
So I appreciate the fact that you are having the hearing
today. I think it shows leadership on your part. But as far as
the Bush administration, they have acted in a shameful way, and
my constituents are absolutely outraged by what this
administration has done in response to the hurricane and by
what they think the oil companies are doing to gouge prices.
Now, in our committee, of course, we deal with the energy
issues; and I think that the devastation in the Gulf region and
the spike in prices is a wake-up call for our Nation, which is
accustomed to cheap oil, and raises several important
questions.
First, why were gas prices rising even before the hurricane
while oil companies were seeing record profits? Second, how can
a country that consumes 25 percent of the world's oil but
produces only 3 percent continue to use as much oil as we do
without being left vulnerable to severe price volatility? And,
third, how much price gouging occurred in the wake of the
hurricane? Do we need to consider implementing Federal anti-
gouging authority?
I introduced a bill on Friday which tries to deal with some
of these things because of the gouging and because of the high
prices. The bill would specifically limit the profits of big
oil companies that sell on the wholesale market to their
average over the past 5 years so profits do not continue to
skyrocket as consumers struggle in the wake of the hurricane.
The bill would also reduce gas price volatility by limiting
companies that sell on the wholesale gasoline market to only
one price increase per day. It also directs the FTC to
investigate whether there has been gas price gouging in the
wake of the hurricane. But, most important, the bill requires
the President to find ways to reduce our national oil
consumption.
The truth of the matter is that, over the long term, the
only way we will be able to keep gas prices down will be to
reduce our consumption of oil. That means increased fuel
efficiency of our cars and trucks. It does not mean the
administration's recently announced new rules concerning light
truck fuel efficiency, which will do little to solve the
problem. Indeed, it may encourage manufactures to make existing
models even bigger.
Again, I want to thank you, Mr. Chairman, for having this
hearing, but your response is so different from that of the
Bush administration.
Chairman Barton. Does Mr. Deal wish to make an opening
statement?
Mr. Deal. I would reserve my time for questions, Mr.
Chairman.
Chairman Barton. Does Mr. Whitfield wish to make an opening
statement?
Mr. Whitfield. I do, Mr. Chairman.
Chairman Barton. The gentleman from Kentucky is recognized
for 3 minutes.
Mr. Whitfield. Thank you, Mr. Chairman.
Today's hearing is vitally important. Despite the
widespread destruction and personal tragedy inflicted by
Katrina, it does raise an issue of utmost importance not only
for our country but I think for the world, and that relates to
this whole question of energy.
Gasoline prices are skyrocketing. There is no question
about it. There are examples of price gouging. We know that.
But I think that Katrina has demonstrated that we have a more
systemic problem relating to energy.
First, worldwide consumption of oil is presently at a
staggering 83 million barrels a day; and worldwide production
is around 84 to 85 million barrels a day. Worldwide demand has
been increasing at a faster rate than at any time in history.
As a matter of fact, in China alone last year demand increased
by 16 percent.
A new refinery has not been built in the United States
since 1976, but half of the refineries in the U.S. since that
time have been closed. In the U.S. alone, consumers are using
right around 21 million barrels of oil a day.
We use six times as much fuel per day as people in Europe.
Their gasoline taxes are much higher in Europe than they are in
the U.S., so we have become accustomed to low prices compared
to the rest of the world, and all of a sudden we find ourselves
in a situation that we do not particularly like.
I might also add that contributing to the situation today
we have speculators in oil futures more than at any other time.
That is putting a burden on higher prices.
We see other countries nationalizing oil reserves more than
at any other time in our Nation's history. Reserves available
to U.S. companies are not being produced the way and located
the way that they have in the past. We are, for the first time
in a long time, being forced to use reserves from our Strategic
Petroleum Reserve. Even the European reserve is going to be
providing the U.S. 2 million barrels a day for the next 30
days.
So we have some significant issues affecting this country
in the area of energy. It is going to require us as a Nation to
reexamine the way that we need to go. I think the energy bill
that we passed is going to help answer some of those questions.
But I want to commend the chairman for having this hearing
and allowing us to focus on an issue of utmost importance not
only for us but for the world. I think that is the only bright
spot that I have seen from Katrina, is it is going to require
us to focus on this issue.
Chairman Barton. We thank the gentleman.
Does the gentleman from Ohio wish to make an opening
statement?
Mr. Brown. Yes, I do.
Chairman Barton. The gentleman is recognized.
Mr. Brown. Thank you, Mr. Chairman.
As I wrote to you yesterday, I believe the committee staff
should be begin a jurisdiction-wide review to identify policy
areas where our committee can act; and particularly it is
important to examine the public health consequences of this
disaster, again with an eye toward identifying unmet needs. I
hope these questions will be the subject of another hearing in
the near future, especially Medicaid, hospital funding, long-
term health consequences to those victims of the hurricane, and
especially in New Orleans.
This hearing was originally focused on gas price
consequences of the disaster. I want to talk for a moment about
that.
One of our witnesses today, Dr. Mark Cooper of the Consumer
Federation of America,reminds us that Congress has missed
opportunities to provide a cushion to protect consumers when
supply disruptions cause price spikes. His testimony attaches a
2001 report calling for a regional reserve of gasoline similar
in concept to the Strategic Petroleum Reserve. Twice in our
committee, once on the House floor, we failed to take that
commonsense step.
It is also indefensible that, as gas prices break record
after record after record, that we continue to pump oil into
the ground without regard to price. Before 2002, the Energy
Department took price into account before deciding whether to
take oil off the market, but, since then, price has literally
been no object.
Congresswoman Baldwin and I offered an amendment during
this year's energy bill debate to correct that. Our amendment
would have required the Department to consider price before
making SPR acquisitions. It would have allowed the agency to
weigh the further energy security merits of acquiring oil at
times of high price against the cost to consumers. That
proposal was also rejected by this committee.
This committee and this Congress have not taken the lead
from States that have already acted to protect their consumers.
My State of Ohio and other States have enacted quote, unquote,
unconscionable sales practices laws that have been used to
enforce gasoline price gouging. But many States have no such
protections; and even for those States like mine that do, the
absence of a Federal standard contributes to a confusing and
chaotic environment that, frankly, provides ample cover for
those who would take advantage of national tragedy to abuse
consumers and pad their profit margins.
Our first priority should be to find unmet needs and act to
meet them, but we also must look at the lessons learned from
this tragedy. As we do so, we ought to begin by looking at the
opportunities that we ourselves have missed.
Thank you again, Mr. Chairman, for scheduling today's
hearing.
Chairman Barton. I thank the gentleman.
Does the gentleman from Georgia wish to make an opening
statement?
Mr. Norwood. I do, Mr. Chairman.
Thank you, Mr. Chairman, for having this hearing; and I do
want to thank all of our witnesses for their time and their
willingness to help analyze this dire situation. We know that
all of you are working overtime and your staffs have been
working overtime and probably will have to continue to do so
for days and weeks to come.
I would like to join all of my colleagues in expressing my
deepest and most heartfelt sorrow for those struggling along
the gulf coast. The devastation and the scope of the tragedy
there is beyond anything we have recently or ever seen in this
country. Our thoughts and our prayers have been with our fellow
Americans. Our assistance in just about anything that Congress
can do is coming and will continue. Hopefully, this panel can
help us identify exactly how to provide that assistance and the
best way to deliver it.
At some point in time, I hope that we have an opportunity
to examine how to better deal with situations like this
regarding energy and telecommunications, if and when there is
another time.
First, the short term. What is needed now and in the near
future to help deal with this tragedy, is dealing with the
human suffering. Of course, all of us recognize that dealing
with the human side of this will take longer than a few days.
Lives, not just homes, need to be rebuilt in so many cases.
The effects of this tragedy also reach beyond the Gulf. As
many of you know, the original scope of this hearing was high
gas prices, but, smartly, the chairman changed it and expanded
it to be much more than that.
I am very interested in this important issue because so
much of our Nation's infrastructure, energy infrastructure, is
in the Gulf.
Second, long term. We have had the reports of what went
wrong already. But I think many want to know what we can do to
prevent those same problems in the future. By the very nature
of a disaster like this, unexpected things happen. We need to
expect the unexpected and be prepared with a comprehensive plan
B, C and even D. A future tragedy maybe averted or at least our
response improved by learning lessons. I value your insight,
gentlemen, on this point.
Thank you, Mr. Chairman. I yield back.
Chairman Barton. Does Mr. Rush wish to make an opening
statement?
Mr. Rush. I would, Mr. Chairman.
Thank you, Mr. Chairman. I also want to join with my
colleagues in thanking you for holding this on-time hearing.
Mr. Chairman, when I think of the devastating effects of
Hurricane Katrina, I cannot help but wonder at the value of
some human life in this country, along with the rest of the
world, outraged by the slow response to take action and provide
aid to the thousands of individuals who were left to die and
fend for themselves in the aftermath of the worst national
disaster in American history.
Those who did not die were subject to the most dehumanizing
conditions imaginable. The demoralizing squalor in the
Superdome and other relief centers in New Orleans has been
compared to the conditions in the hulls of slave ships, and
this is not an exaggeration. This is an example of how
government failed, a complete breakdown when responding to the
needs of those who needed help in critical times. In times of
national crisis, the cries from Louisiana, Mississippi, and
Alabama went unheard.
Mr. Chairman, I am concerned about price gouging at
America's pumps, but at the same time I am more concerned about
the price of human suffering being paid by the most vulnerable
segment of our society. I fully realize this committee does not
have jurisdiction over FEMA or the National Guard, but this
committee has jurisdiction over multiple areas of immediate and
emergency concerns including water, the purification of
drinking water, the abatement of dreaded diseases, including e-
coli, Hepatitis A, cholera, salmonella, West Nile and other
mosquito and other waterborne diseases.
Clearly, the public health concerns of this Nation and
particularly the devastated Gulf region are of paramount
importance. That said, I want the record to reflect that we
will be quite intentional regarding conducting hearings to
determine what is the appropriate Federal response to this
acute and critical crisis.
Additionally, Mr. Chairman, I join with the ranking member,
Mr. Dingell, and I share the opinion that we as an authorizing
committee of jurisdiction has the authority to increase our
commitment to the LIHEAP program.
Mr. Chairman, with that, I yield back the balance of my
time.
Chairman Barton. The gentleman yields back.
Does Mr. Shimkus wish to make an opening statement?
Mr. Shimkus. Yes, sir, thank you. Just a couple comments.
I want to thank the panelists for being here.
When we passed the energy bill, we set out on a process so
that we could have a diversified energy portfolio; and I think
the Chairman was correct in that, in saying that what this
tragedy highlights is how fragile our infrastructure has been
for many, many years. Obviously, we hope that with a new look
at energy we can start reclaiming some independence and
diversifying our portfolio.
That is not just electricity generation but also in the
fuel arena. I, like everybody else, travel around our districts
numerous times, and there are parts of our policies on the
energy issues that there is some optimism out there.
I drive a Ford Explorer flexible-fuel vehicle. It runs on
85 permanent ethanol. Years ago, I had a flexible-fuel Ford
Taurus. Two years ago, I could not fill up this Taurus at a
single retail location in my district. Now I can fill it up all
throughout my district, probably 30 retail sites. In fact, I
have a picture of one.
Now the prices are still pretty scary: unleaded, $3.69;
E85, $3.09. That is a 60 cent price deferential for a vehicle
that runs on 85 permanent ethanol. Now this is an example of
public policy moving in the right direction.
I also have another article from a stop in Nashville,
Illinois, at a--this is a State and Federal addressing of our
reliance on imported crude oil; and the State has also pushed
and helped the rollout of biodiesel. Now most of--a lot of the
fleets in Illinois are moving to 11 percent bio, soy diesel, or
another formulation; and this article says trucking firm
embraces biodiesel. So this--over the long haul a truck company
of 150 tractor trailers runs his operations across the Nation
with 11 percent. Now you might say 11 percent is not much.
Well, just add that 11 percent back into the petroleum-based
diesel fuel and see what happens to prices.
So we have great challenges to deal with. The energy bill
talks about a hydrogen economy and moving to hydrogen fuels. So
we need to diversify our energy fuel.
The infrastructure is weak. The hurricane showed that.
Let's go about the job of diversifying our fuel portfolio.
Thank you, Mr. Chairman. I yield back.
Chairman Barton. The gentleman yields back.
The gentlewoman from California.
Ms. Eshoo. Thank you, Mr. Chairman, for your leadership in
calling this hearing. It is an important one and I think
underscores the very broad and powerful jurisdictions of the
House Energy and Commerce Committee. We are the oldest
committee in the Congress, and we are one of the most powerful.
Today and I think in subsequent hearings and the action that
this committee can take are going to flow from the power that
this committee has.
I want to express my sympathy and the sympathy of my
constituents very directly to members of this committee whose
congressional districts have been hardest hit.
Now, having said that, Mr. Chairman, there are two things
that I want to highlight today.
First of all, is there a commitment of the participants,
the leaders of the energy industry, most specifically the oil
industry, to go on record that they will not tolerate price
gouging? The answer has to come from them. If we try to do this
and address it legislatively through the various agencies of
the Federal Government, we are going to get hung up on the
ropes. I would like to hear very directly from the leadership
of the oil industry in our country that they will not engage or
tolerate price gouging. It is the simplest, most eloquent way
for this to be handled. So, No. 1, I think we need to have an
answer from them.
No. 2, Mr. Chairman, I think the next answer needs to come
from the leadership here, certainly yourself and the leadership
in the House, that the cuts to Medicaid will be suspended.
Front and center, we heard from more than one Secretary
last night as they came to the floor of the House to address
the Congress of what the safety net is in this country, how it
will be used and put out there effectively for tens of
thousands of our follow citizens, that they need this program,
wherever they are, whether they have been moved to different
cities in Texas, your home State, to California, to the
District of Columbia, to other places in our Nation.
This is not the time, this is not the time to be moving
forward with the cuts that the committee took up and that the
Congress is considering. This is wrong, it is hurtful, and it
is not the message to send to the victims. So when we speak
about compassion, when we speak about being effective, when we
speak about standing next to our colleagues whose districts
have been wiped out, whose constituents are seen floating in
contaminated waters, this committee has to respond and respond
effectively.
So those are the two things that I would highlight today.
We have our work cut out for us.
Now when the words ``blame game'' are used, I really resent
that; and I think that we all should. This is not a game. This
is not a game. People are dying, have died, people have been
displaced, taken away from their communities. We have long-term
and short-term work to do.
One of the great hallmarks of our Nation is that the
American Congress, that the Congress of the United States of
America, has been able to take up both a critical role of being
critical so that we learn from the mistakes that have been
made.
So this is not a game, Mr. Chairman. This is sobering work
as we try to adjust to the horrific catastrophe that has
happened to our country.
So, with that, I do not have time to yield back, but I
believe that these two issues need to be taken up front and
center. Thank you.
Chairman Barton. We thank the gentlelady.
We encourage members to try to stay within their 3-minute
limit, if possible.
The gentlewoman, Mrs. Wilson, is recognized for 3 minutes.
We are trying to get the Governor of Mississippi up on the live
video. So I think we can get you in before that happens.
Mrs. Wilson. Thank you, Mr. Chairman.
We have had a devastating storm, and it is not over. We are
still in the middle of the process of saving life and
sustaining life and recovering and rebuilding, and that will go
on for a long time. Nothing should distract us from those
priorities.
Sometimes, you know, my husband is kind of--he has got a
great sense of humor. And sometimes when he watches people
often criticizing with only partial information, he just kind
of laughs and says, you know, they should shut up and start
bailing. I think that is good advice, and a lot of ordinary
Americans have taken it.
I think we have seen across this country people opening
their homes and their wallets and their churches, our wonderful
National Guard and medical doctors embracing the displaced and
doing what they can from where they are with what they have
got. One of the great lessons of this disaster is that the real
strength of America is in the goodness of ordinary Americans,
and we have seen that again and again and again across this
country.
We also need here to continue to pursue policies that
create jobs and keep our economy on track. A disaster and a
tragedy should not be windfall, a windfall for opportunists.
All of us have seen prices go up at the gas pump and in some
communities exorbitantly. Most gouging laws are State laws, but
only 23 States have anti-gouging laws, and the standards and
definitions vary widely. I think we need to take a serious look
at how we dissuade and deter and punish those who would gouge
people in a time of tragedy.
We also have an opportunity here to put politics aside and
to look at our energy policy anew, with conservation,
exploration, production and refining, things that we look at
routinely here, but also to look at our own perhaps failures of
imagination. What are we going to do as a Nation to get beyond
the gasoline engine? We are here at a historic turning point to
make some serious decisions and have a serious debate about the
follow-on to the gasoline engine.
Because world oil supplies are not increasing, and we need
to make those decisions and investments now so that we change
the way in which we get things and people across the country
and back and forth to work.
Mr. Chairman, thank you for this hearing. I am sure it is
going to be the first of many. And God bless the people of the
gulf coast.
Chairman Barton. Does the gentleman from Michigan wish to
make an opening statement?
Mr. Stupak. No, Mr. Chairman, I will waive.
Chairman Barton. Does Mr. Green wish to make an opening
statement?
Mr. Green. Yes, sir, Mr. Chairman.
Chairman Barton. The gentleman is going to start,
understanding that we are trying to get this thing set up.
Mr. Green. I would like to have the full statement placed
in the record.
One, I want to thank you for having this timely hearing on
the second day we are actually back. I am glad we broadened the
scope to beyond just energy impacts, which is quite severe; and
I respectfully suggest a further hearing on the serious public
health impacts and our response in the near future.
Our pressing need in the Houston area, where we are home
now to about 140,000 plus residents from Louisiana, is health
care. With thousands in tight quarters, infectious disease a
real threat, we need to provide the necessary assurances to our
States who are the recipients that the health care providers,
that they will be reimbursed.
I asked Secretary Levitt last night at our briefing to
agree to provide a 100 percent Medicare/Medicaid reimbursement
rate when caring for out-of-State Medicaid beneficiaries. I
hope the administration will ease the Medicaid eligibility
requirements for Hurricane Katrina evacuees.
Again, the State of Texas is the biggest recipient; and our
Medicaid budgets are already stretched with our own
constituents, much less adding rolls from Louisiana and the
neighboring States. We want to be welcome neighbors, and we
are. In fact, I am so proud of what Houston has done and the
State of Texas.
The neighboring States of this disaster need massive
Federal assistance to care for these victims. When a neighbor
is in need, our neighboring States have opened--again, Texas
has 250,000 out-of-State evacuees. That is unprecedented.
I have been first hand every day we have been home by both
the Reliant Astrodome and the George R. Brown to see the
massive shelters. Again, we need to be able to eliminate red
tape now and get those folks out of those shelters into some
reasonable living conditions, both for health reasons but also
to try to return them to normalcy.
I am glad that, just today, we were notified that yesterday
at our dealing meeting that the Houston area leaders, the mayor
and the county judge and the business community, we found out
that people are having their cell phone service disconnected
from Louisiana. That is the only number most of the time their
relatives know how to reach them. The FCC this morning
announced, in working with CTIA, that those numbers and in
compelling businesses and companies, not to disconnect those
cell phones. One, that is a great declaration. The Federal
Government should interpret our ability broadly and flexibly to
make sure that we can handle the disaster and the relief that
we need.
Turning to energy, gasoline prices are already high due to
tight global supply and stretched energy infrastructure. Now
that has gotten pounded by a hurricane. Gas, oil and natural
gas will even be higher after most of the Gulf's production is
halted; and, thank goodness, a lot of those platforms are
trying to get back in use and even some of the refineries.
All of the pieces are connected when there is huge action
on the market like Hurricane Katrina and a huge reaction
throughout the system, and can we help without doing more harm
than good? I gather from the Senate hearing yesterday that the
FTC has no authority to investigate price gouging. We need to
know who does, if anyone; and if there is some stations taking
advantage, we need to stop them.
Even my Texas constituents want price caps, but if the
Government tries caps for any length of time, supply will
literally disappear. Let us not repeat the mistakes of
President Richard Nixon. Large companies typically don't set
the price at the pump, which is up to the individual station
owner.
Chairman Barton. Mr. Green, will you suspend so we can hear
from the Governor?
Mr. Green. Mr. Chairman, I would be glad to yield to the
Governor of Mississippi.
Chairman Barton. We are going to suspend our opening
statements. We do have video contact and, apparently, audio
contact with the Honorable Governor of the great State of
Mississippi, Governor Haley Barbour.
Governor, if you can hear me, you have got the full panoply
of the Energy and Commerce Committee waiting for your
statement; and then, once you have spoken, we are going to have
a written statement read in the record by a representative of
your companion Governor, Governor Blanco of Louisiana.
So, Governor Barbour, our hearts and our prayers are with
you; and you have our undivided attention.
STATEMENT OF HON. HALEY BARBOUR, GOVERNOR, STATE OF MISSISSIPPI
Governor Barbour. [Via teleconference.] Mr. Chairman, thank
you very much; and to all of the members of the committee, I
appreciate the chance to try to share with you what has been
going on in Mississippi for the last 9 days.
I do not have to tell you that this was the worst hurricane
to ever hit the United States, and it struck us a grievous blow
in Mississippi. The devastation is genuinely unimaginable and
indescribable. Total obliteration of many things, some of which
are the things that your committee is interested in.
I want to say to you that we appreciate you and the Federal
Government. Nothing is perfect when you have an epic disaster
like this. I told my wife as the week went on, every day we
made progress. But there was not any day that we made as much
progress as I wanted to.
Our Federal partners were great help, but there were days
when we wished they would have been faster. There were days
when we wished they would have done more. But when you consider
the way all of our systems were overwhelmed, we are very
grateful, and so thank you all.
Let me just say on the terms of energy, our energy
situation the first few days was cataclysmic. This disaster is
not just a coastal calamity. It goes 150 miles north. We had
130-mile gusts 90 miles inland. We had 90-mile an hour winds
150 miles inland. There is tremendous damage way, way north of
the coast. But the 80 miles across the Mississippi gulf coast
is largely destroyed. A town like Waveland, Mississippi has no
inhabitable structures. None. The fire, the 26 policemen on
Monday of last week went to the second floor, then got on the
roof of their headquarters, and then all 26 of them swam off.
Some of them hung in trees holding on until the storm was over.
The destruction is unbelievable, and it overwhelmed our
infrastructure.
Our utility that serves the coast in the southeastern part
of the State lost every transmission line, had two power plants
put out of commission, and virtually 100 percent of their
customers lost power. The company that serves the southwestern
part of the State, which is well inland, 75 percent of their
customers lost electricity. Our rural electric power
associations had similar percentages based on the geography.
Even the Tennessee Valley Authority, as far north as it is, had
tens of thousands of customers lose power.
When you lose power, the telecommunications systems falls
down because of the need for electricity, not to mention the
fact that virtually all the towers are blown down. We lost
water because the water systems run and the sewer systems run
on electricity. So we had a huge need, and one of our first
goals was to try to get fuel, particularly diesel fuel, to run
the generators that were powering our hospitals, our emergency
operations centers, the ones that weren't destroyed, our
sheriff departments, police departments, fire departments. So
from an energy standpoint, for about 5 days we were hustling to
keep people from running out.
Ultimately, the Federal Government started on Friday by the
activities of the U.S. Department of Transportation, the U.S.
Coast Guard, and FEMA was able to provide us with enough fuel
for all of our emergency vehicles, and since Friday we have had
an assured source of fuel for all our emergency vehicles,
whether it is fire trucks, police cars, National Guard trucks,
et cetera, and we are appreciative of that.
Today, we have about 288,000 customers who still don't have
power. The peak was about 1 million, on the report Tuesday was
about 1 million customers; we are down to 288,000. Mississippi
Power Company, which is the southeastern coastal industrial
utility, reports that they will have power to every customer
who can receive power by Saturday, which is incredibly
remarkable that in less than 2 weeks they can have restored
power, because every one of their customers had just about lost
power and their power plants are out.
They have about 7,000 people on the ground, pole climbers
and tree cutters, and Entergy Mississippi is making the same
kind of effort. And we are grateful. We have power, we have
linemen and tree people from all over the United States and
Canada who are down here helping our people getting electricity
back on.
As I say, we are about 75 percent recovered, and because of
their response. Except for the rural electric power
associations who don't have as much equipment, they are further
apart, you know, you may have to put back up 10 poles to serve
one customer. We are getting over the hump, and by the end of
the week should be over the hump on electrical power.
For telecom, the phone companies have really humped it to
get service back. The first few days, there was as close to
literally no communications, as you can believe. We couldn't in
Jackson get people on the phone, even the emergency operations
centers on the coast. And where there was particularly bad is
that people in the affected areas and near the affected areas,
they had no phone service, they didn't know what was going on,
they had no television so they didn't have that as a source of
information. A few of them had done like we asked people, and
that is to have battery powered radios, but most people had no
way to communicate and they were utterly isolated after living
a life with our information-rich environment. It was a huge
problem. It also led to some of the worst rumor mongering that
you ever can imagine. But the phone companies have restored at
least cellular telephone service to most of the populated
areas, and they are getting it better out into the countryside.
But Cellular South, which is our home-owned cellular
company, and BellSouth, which is our biggest provider and also
is a partner in Cingular, again, their people have worked
untold hours just like the electric utility people and made
huge sacrifices.
And, Mr. Chairman, we have got a lot of people here who are
first responders or utility people whose homes are blown down,
and they are out getting the other people's electricity back
on, or they are out digging through debris, firemen and search
and rescue, while their wives and children are having to stay
somewhere inland because their house isn't there anymore. The
stories of sacrifice and selflessness that come out of this are
pretty remarkable. In fact, they are not pretty remarkable,
they are mighty remarkable.
The U.S. Coast Guard helicopter team, starting Monday night
when the wind was still howling, have taken 1,700
Mississippians off of roofs or out of isolated places where
people couldn't get out because of the debris and wreckage,
1,700 by the Coast Guard alone. Over 5,000 when you include the
other first responders like firemen and policemen and National
Guardsmen. We appreciate all the States that have let us have
National Guard. We have more than 11,000 National Guard here.
And they were particularly critical last week when our law
enforcement people who had worked 18-hour and 20-hour days, 120
patrolmen, narcotics officers, and investigators from the State
law enforcement down on the coast who slept in cars for 5
nights but worked 18-hour days to help people. It has been an
incredible effort, and lots of people deserve credit.
I know that health is one of your issues. And I want to
report to you that we in the last 24 hours had four deaths in
Mississippi from a Vibrio type diarrheal disease, but the CDC
and the Health Department report to us that this is not
contagious, that this is the kind of disease that we common
folks think and get from eating bad oysters; and, that people
that have diminished immune capacity because of some other
disease like HIV or cirrhosis or something, that all four of
these people died of that disease. Because of HIPPA, we can't
tell, we are not allowed to know any more about who those
people were and what their conditions are. But the CDC tells us
it is not contagious, and the disease is normally gotten by
somebody that eats bad food, drinks bad water, or perhaps gets
an open wound. But, again, we have had that in the last 4 days,
which is I know a significant health thing that you would want
to know about.
The search and rescue wasn't as fast as we wanted, but if
you could come down here and see the devastation. We have
areas, tens of square blocks in a row, that have debris waist
high, head high, and search and rescue means people walking
through there and moving all that stuff out and looking to see
what is under it. As late as Friday we were finding people
alive buried in the debris, but unfortunately we are finding
people buried in the debris that are not alive. The official
fatality as reported is about 148--that is not right, 154. The
news reports, which we consider credible and relative and
reliable, are closer to 200, and the likelihood is that the
number will go up.
Let me just close by saying I am old enough to remember
Camille. As a college boy I drove a dump truck full of blankets
and pillows and baby clothes down to Gulfport in the wake of
Camille. Down here, we have always thought Camille was the
benchmark for what a hurricane could do. Katrina was worse than
Camille. The devastation is wider spread in terms of breadth.
Where Senator Lott's home was totally wiped off the beach in
Pascagoula that is about 75 miles east of the eye of the storm.
This storm's breadth was unbelievable, but its power was, too.
You know, I am not a meteorologist or a scientist. For some
reason, this storm's storm surge was much, much worse than
Camille. Places where people thought it was safe because
Camille didn't do any damage got 10 feet of water, and we had
some people that died because they thought it can't be worse
than Camille.
Again, in all of these things that we have talked about,
the Federal agencies have worked very hard to help us, and
their people have been down here busting it just like I talked
about, the Coast Guard and others, and we appreciate that. We
are going to need a lot more help. We are kind of turning the
corner to where we are starting recovery, we are starting
cleanup in most of our towns, we are going to start rebuilding.
Our attitude is on the future, and we are going to rebuild.
We are going to rebuild the gulf coast bigger and better than
ever it was, and all of the south part of Mississippi is going
to be improved when we get finished, but we are going to need a
lot of help and it is going to take a lot of time.
Thank you for letting me have a chance to tell you what is
going on, Mr. Chairman.
Chairman Barton. Well, Governor, we first of all want to
commend you for what you have done for the citizens of
Mississippi the last week or so. Your leadership has been
invaluable. We are not going to take questions because we still
have about 20 members that need to give an opening statement
and we have five witnesses that have waited patiently for the
last hour to give their statements. But we do want to commend
you for what you have done. You have got two United States
Senators and a United States Congressman who is a member of
this committee, plus several other Congressmen in the House.
Whatever you need from the Federal Government, if you will work
through them or directly with us if it is within this
committee's jurisdiction, we are going to do everything we can
to make it happen sooner rather than later and bigger rather
than smaller. And God bless you and God bless the great State
of Mississippi.
Governor Barbour. Thank you, Mr. Chairman.
Chairman Barton. We have as a representative of the
Governor of Louisiana, Governor Blanco, we have Mr. Scott
Angelle, who is the Secretary for the Louisiana Department of
Natural Resources. We would now recognize you, Mr. Angelle, to
read the Governor's statement. And Governor Barbour, you are
welcome to leave. Mr. Angelle.
Mr. Angelle. Thank you, Chairman Barton, and committee
members. Governor Blanco sends her greetings and her thanks for
all the prayers and support that are flowing into the gulf
coast and southeast Louisiana.
I am pleased to be here as a member of the second panel to
give you Louisiana's views on energy policies post Katrina, but
in her absence Governor Blanco has asked me to share this brief
statement with you.
Katrina dealt southeast Louisiana a devastating blow, but I
also know that this storm did not and will not destroy the
spirits or the hope of our citizens. I wish I could join you
today, but we, all of us here, are working hard and working
together to finish the rescues and begin the reconstruction.
The people of southeast Louisiana are already making plans
to rebuild their lives and their communities, and we will help
them do it. Our people, our most valuable asset, have been
forced to take shelter all across the country. We know
Louisiana will not fully recover until those displaced by this
storm rejoin their families and rebuild their communities. Part
of rebuilding Louisiana will be rebuilding our oil and gas
infrastructure. In the wake of all of this, we still understand
that America counts on Louisiana to produce the energy to fuel
this great Nation. We will focus on restoring and repairing the
offshore and onshore assets that are so vital to this region's
economy and so vital to America's economy. At this moment,
while we are focusing on the immediate needs of our people, we
also are looking forward to the rebuilding.
Thank you again for your prayers and your aid, and thank
you for also looking forward to the future of Louisiana and the
future of America's energy economy. Thank you, sir.
Chairman Barton. Mr. Angelle, I know you are going to be on
the second panel. But in response to the Governor's statement,
if you talk to her later today, you tell her that our prayers
are with the great State of Louisiana and with her, and that we
make the same offer to your Governor that I just made by
teleconference to the Governor of Mississippi: Whatever we can
do to help, if it is within our jurisdiction, we are going to
try to do it sooner rather than later and larger rather than
smaller.
Mr. Angelle. Thank you, sir.
Chairman Barton. We are now going to go back to our opening
statements. And I believe Mr. Green had finished his, so it
would be Mr. Shadegg's opportunity if he wishes to make his
opening statement.
Mr. Shadegg. Thank you, Mr. Chairman, for holding this
important hearing on the devastating impact of Hurricane
Katrina. My heart and my prayers go out to those whose lives
have been impacted and devastated by this disaster.
In 1969, I was stationed at Keesler Air Force Base in
Biloxi, Mississippi, and I arrived there literally days after
Hurricane Camille struck. It is tragic to see this kind of
devastation again to the gulf coast, and as the Governor
pointed out, to see that it is even worse.
I wholeheartedly agree with my colleague Mrs. Wilson
regarding the importance of moving beyond the gasoline engine
in the long run. But today, whether we like it or not, America
runs on refined oil products, and our transportation sector,
airlines, trucking industry, and railroads, require a steady
supply of fuel to keep our economy moving. In addition,
families across our Nation require that fuel to heat their
homes, and they will need it this winter and for winters to
come.
The damage that Hurricane Katrina has done to this energy
infrastructure, which has rippled from coast to coast, raises
many important policy questions for this Congress and this
committee to address, not the least of which are: Do we have
the facilities that we need to meet America's demands? And, is
our energy infrastructure too heavily concentrated along the
gulf coast?
Hurricane Katrina's impact on an already strained refining
industry has had a dramatic impact, most notably on the recent
stunning price spikes seen by Americans at their local gas
stations.
While I am encouraged that some refineries closed by
Katrina have already opened or are close to reopening, reports
indicate that several large refineries have experienced
significant flood damage and will not reopen for some time to
come. This is especially troubling because U.S. refineries were
already operating at over 97 percent capacity before Hurricane
Katrina hit.
As has already been noted here this morning, we have not
built a new refinery in the United States since 1976, a span of
29 years. Currently, we import roughly 12 percent of the
gasoline and diesel fuel we consume in this country from
foreign refineries. Yet, not long ago we refined all of the
gasoline and diesel fuel used in the U.S. from refineries here
in the U.S.
We should not be outsourcing the refining of the fuels we
need to run this country's economy. We must do more to bring
our refining capacity in line with all of our domestic demands.
Currently, this critical portion of our industry is
operating with no margin for error. Whenever a U.S. refinery
needs to interrupt production for any reason, including just
routine maintenance, Americans pay an unnecessary price because
we have insufficient domestic refining capacity. When a
disaster like Katrina strikes, we are in much worse shape. This
problem is exacerbated by the fact that there is a worldwide
shortage of refining capacity.
It is preposterous to argue that we do not need to fix this
system or that we can continue down a path of reliance on
foreign refining capacity. As America grows, total miles driven
each year go up. Demand for refined petroleum products also
goes up. The price of a barrel of oil is ever increasing, yet
just last year this committee heard testimony that investors
would frown on any decision by an energy firm to meet the
rising demand here in the U.S. for refined product by building
new refineries.
Let me illustrate how this point impacts us directly and
why it is more than a crude oil problem. Crude oil futures have
gone up over 60 percent over the last year, but refined
gasoline futures have more than doubled. We must address this
critical problem. Mr. Chairman, I thank you for holding this
hearing.
Mr. Whitfield [presiding]. Thank you. At this time I
recognize the gentleman from New York, Mr. Engel, for his
opening statement.
Mr. Engel. Thank you, Mr. Chairman. Let me first of all say
that my heart and prayers go to the brave people of Louisiana,
Mississippi, and Alabama, and anything that we can do to help
them, we should and we will.
Mr. Chairman, in the 1970's there was a movie where the
lead character gets up and he says: I am mad as hell, and I am
not going to take it anymore.
Well, I think the American people are rightfully mad as
hell, and we are not going to take it anymore. We are mad as
hell about rising gas prices, price gouging, and all things
that we have seen disgracefully over the past week. We have
seen on TV many pictures of people looting stores. Well, I
would say that the biggest looters have been the big oil
companies. They are looting the American public. There is no
way that increased gas prices at the pump could have been
reflected in 2 days after the hurricane with spikes of 30 to 50
cents per gallon. It is absolutely shameful and unconscionable
that big oil companies are making profits off people's misery
with this hurricane. There is no other way to say it. Because
when the cost of oil drops a barrel--a gallon drops, it takes
several weeks for it to be reflected at the pumps. So how could
this be reflected in a matter of 2 days? These increases in
gasoline prices are unconscionable and should not stand. The
oil companies own the means of cost and production. They have
long-term contracts on the oil fields. They own their drilling
equipment, they own their tankers. These haven't changed. Their
costs haven't changed. That is why their profits are soaring to
record levels. Why make profit off people's misery and cause
the entire American public to suffer? Gasoline over $3 a
gallon? Unconscionable. Now, they are saying that prices will
drop, and it will only be $2 and change a gallon what was
before. We are supposed to be grateful that it is going to drop
to $2 and some odd cents a gallon. There is no way that this
should continue.
Now, it is not a matter of the blame game. I ask unanimous
consent for an editorial of the New York Times today called
``It is not a blame game.'' I ask unanimous consent for it to
be inserted into the record.
Mr. Whitfield. Without objection, so ordered.
[The article follows:]
[Wednesday, September 7, 2005--The New York Times]
It's Not a ``Blame Game''
With the size and difficulty of the task of rescuing and rebuilding
New Orleans and other Gulf Coast areas still unfolding, it seemed early
to talk about investigating how this predicted cataclysm had been
allowed to occur and why the government's response was so slow and
inept. Until yesterday, that is, when President Bush blithely announced
at a photo-op cabinet meeting that he, personally, was going to ``find
out what went right and what went wrong.'' We can't imagine a worse
idea.
No administration could credibly investigate such an immense
failure on its own watch. And we have learned through bitter
experience--the Abu Ghraib nightmare is just one example--that when
this administration begins an internal investigation, it means a
whitewash in which no one important is held accountable and no real
change occurs.
Mr. Bush signaled yesterday that we are in for more of the same
when he sneered and said, ``One of the things that people want us to do
here is to play a blame game.'' This is not a game. It is critical to
know what ``things went wrong,'' as Mr. Bush put it. But we also need
to know which officials failed--not to humiliate them, but to replace
them with competent people.
It's obvious, for instance, that Michael Brown has met the
expectations of those who warned that he would be a terrible director
of the Federal Emergency Management Agency. This is no time to be
engaging in a wholesale change of leadership, but in Mr. Brown's case
there seems to be precious little leadership to lose. He should be
replaced with someone who can do the huge job that remains to be done.
But the questions go way beyond Mr. Brown--starting with why
federal officials ignored predictions of a disastrous flood in New
Orleans--and the answers can come only from an independent commission.
We agree with the Senate minority leader, Harry Reid, Senator Hillary
Clinton and others who say that such a panel should follow the
successful formula of the 9/11 commission: bipartisan leadership and
members chosen by the White House and both parties in Congress on the
basis of real expertise. It should have subpoena power and a staff
expert enough to find answers and offer remedies.
Mrs. Clinton has also proposed pulling FEMA out of the Homeland
Security Department and restoring its cabinet-level status. That is
premature. The current setup makes sense, at least in theory. The
nation should not have to support two different bureaucracies for
dealing with sudden disasters.
Before throwing the system into chaos again, an investigation
should determine whether the problem lies in the structure or in
execution. Yesterday, The Wall Street Journal showed how the Bush
administration had systematically stripped power and money from FEMA,
which had been painfully rebuilt under President Bill Clinton but had
long been a target of Republican ``small government'' ideologues. The
Journal said state officials had been warning Washington--as recently
as July 27--that the homeland secretary, Michael Chertoff, was planning
further disastrous cuts.
This page supported the creation of Mr. Chertoff's department. But
it was poorly run by the first secretary, Tom Ridge, with his maddening
color-wheel alerts.
It is clearly in need of a hard look and perhaps serious
reorganization. Senators Susan Collins, Republican of Maine, and Joseph
Lieberman, Democrat of Connecticut, have plans for hearings, which is
fine. But they created the department in the first place and may have
more of a stake in the outcome than a panel of impartial experts.
The panel should also look at the shortcomings of local officials
and governments. It was chilling, to put it mildly, to read Mayor Ray
Nagin's comment in The Journal that New Orleans's hurricane plan was
``get people to higher ground and have the feds and the state airlift
supplies to them.''
But disasters like this are not a city or a state issue. They
concern the entire nation and demand a national response--certainly a
better one than the White House comments that ``tremendous progress''
had been made in Louisiana. We're used to that dismissive formula when
questions are raised about Iraq. Americans deserve better about a
disaster of this magnitude in their own country.
Mr. Engel. Thank you. One of the things that we ought to
have is we ought to have an independent commission to
investigate what happened. The panel should follow the
successful formula, as the New York Times says today, of a
September 11 Commission, bipartisan leadership, members chosen
by the White House and both parties in Congress on the basis of
real expertise. It should have subpoena power and a staff
expert enough to find answers and offer remedies. We cannot
allow the administration to investigate itself to have a
whitewash and a coverup.
Now, as soon as the enormity of the approaching storm
became clear, obviously preparations should have been
immediately ramped up. It wasn't. FEMA failed miserably.
Provisions and assistance should have been ready so that, hours
after the storm moved on, food, water, medical supplies would
be on their way. We must not ignore the mistakes that have been
made. We must fix them immediately and learn from them for the
future. And I want to add my voice to the other members who
have said that it is now again unconscionable to have these
huge Medicaid cuts. As hundreds of thousands of people have
lost their jobs and net worth, it is more clear than ever how
much our citizens need Medicare and to be flexible and
responsive in times of crisis.
Now, we need to look to the future. For years I have been
talking about the need to wean ourselves off of oil because we
have to rely on sheikdoms that are either unstable, unfriendly
to the U.S., or even supporters of terrorism. We need to
improve the fuel economy of passenger cars and SUVs to a level
of our advanced technology that makes it possible, not issue
CAFE standards as the administration did last month, which do
nothing to improve fuel efficiency.
I hope that this committee will continue to hold hearings,
and I hope that we will get to the bottom, again, not because
of the blame game, but the people of the United States
particularly in those three States affected deserve nothing
less, and I thank you.
Mr. Whitfield. Thank you. And I would remind the members
that these opening statements are 3 minutes. And we do have a
number of witnesses today and we have a lot of other people. So
I would urge you to try to confine yourself to 3 minutes.
At this time I would recognize the gentleman from
Pennsylvania, Mr. Pitts.
Mr. Pitts. Thank you, Mr. Chairman. Thank you for holding
this hearing. I would like to thank the panelists for coming.
And first, again, our thoughts and prayers are with those
undergoing this disaster.
Mr. Chairman, we need to look at price gouging today, and
we need to encourage fuel efficiency and new technology and
conservation. But we also need to look at refining capacity in
our deliberations. And I would like to make a few comments on
that issue.
There are 149 oil refineries in the United States. And
before the disruption of Hurricane Katrina, the tragedy that
occurred in the gulf coast, they were all running at full
capacity. But we have yet to build any new refineries, despite
the fact that our aging system--none has been built in 30
years--cannot handle the increasing demand that we are placing
on them. ABC News reported last month that, ``analysts say just
a few new big refineries could produce enough extra gasoline to
make a dent in prices.''
The problem, according to ABC's report, is that building
even the smallest refinery is an uphill task. Faced with a
complicated morass of local and State and Federal regulations,
as well as residents who do not want a refinery in my back
yard, companies simply are not willing to shoulder the cost of
complying with regulations or fighting protracted legal battles
over land use, and so the problem remains.
Rising gas prices are the result of supply problems. And
supply problems are the result of refining capacity that cannot
keep pace with demand. And this is most apparent during times
of crisis, such as we face now. Hurricane Katrina knocked out a
significant portion of our refining capacity. Because we have
been unable to build refineries in other areas of the country,
our economy must wait until these refineries come back on line.
We need only to look as far as Arizona to see the obstacles
that the government has placed in front of those trying to
build new refineries. The Maricopa Refining Company received a
permit to build a 50,000 BPD refinery on January 16, 1992. MRC,
operating under the name of Arizona Clean Fuels, continued to
develop its refinery project through the 1990's, and because of
delays presented by the government, lost a significant
investor; in 1999 the project scope was changed, and ACF
applied for a new permit. That permit, however, was lost in red
tape as the EPA and other agencies squabbled about whether a
refinery could be built on the originally proposed site. The
permit application is still under review as ACF attempts to hit
the moving target presented by bureaucrats, EPA, and Federal
regulations.
This story is not unusual. It is not an anomaly. It is
common. And it is one reason we are facing these shortages. No
one is suggesting that we sacrifice environmental stewardship
to power SUVs. However, we must face the reality that our
economy, whether we have SUVs or not, needs oil to run. And
while there might come a day, and I hope this day comes, when
we find a suitable alternative to oil and gas, we are still far
away from discovering or developing a source of energy as
potent or reliable as oil. So we must find an environmentally
responsible way to increase our refining capacity. We simply
cannot go any longer without expanding our capacity to refine
oil.
Since my time is up, I will submit the rest of my statement
for the record. I look forward to the hearing today, and thank
the witnesses for sharing their expertise.
[The prepared statement of Hon. Joseph R. Pitts follows:]
Prepared Statement of Hon. Joe Pitts, a Representative in Congress from
the State of Pennsylvania
Mr. Chairman, thank you for holding this hearing and thank you to
the panelists for coming.
Our thoughts and prayers are will those enduring this disaster.
We need to look at price gouging today, and we need to encourage
fuel efficiency, new technology, and conservation.
But we also need to look at refining capacity in our deliberations.
I'd like to make a few comments on that issue.
Today, there are 149 oil refineries in the United States.
Before the disruption of Hurricane Katrina and the tragedy that
occurred on the Gulf Coast, they were running at full capacity.
But we have yet to build any new refineries despite the fact that
our aging fleet--none have been built in thirty years--cannot handle
the increasing demand we are placing on them.
ABC News reported that last month that ``analysts say just a few
new big refineries could produce enough extra gasoline to make a dent
in prices.''
The problem according to ABC's report is that building even the
smallest refinery is an uphill task.
Faced with a complicated morass of local, state, and federal
regulations as well as residents who do not want a refinery ``in my
back yard,'' companies simply are not willing to shoulder the costs of
complying with regulations or fighting protracted legal battles over
land use.
So, the problem remains.
Rising gas prices are the result of supply problems.
Supply problems are the result of refining capacity that cannot
keep pace with demand.
This is most apparent during times of crisis such as we face now.
Hurricane Katrina knocked out a significant portion of our refining
capacity.
Because we have been unable to build refineries in other areas of
the country, our economy must wait until these refineries come back on
line.
We need only look as far as Arizona to see the obstacles the
government has placed in front of those trying to build new refineries.
The Maricopa Refining Company received a permit to build a 50,000
BPD refinery on January 16, 1992.
MRC, operating under the name Arizona Clean Fuels continued to
develop its refinery project through the nineties.
However, because of delays presented by the government, it lost
nificant investor.
In 1999, the project's scope was changed and ACF applied for a new
permit.
That permit however was lost in red tape as the EPA and other
agencies squabbled about whether the refinery could be built on the
originally proposed site.
The permit application is still under review as ACF attempts to hit
the moving target presented by bureaucrats at the EPA and federal
regulations.
This story is not unusual.
It's not an anomaly.
It's quite common.
And it's one reason why we're facing these shortages.
No one is suggesting that we sacrifice environmental stewardship to
power SUVs.
However, we must face the reality that our economy, whether we have
SUVs or not, needs oil to run.
And while there might come a day--and I hope this day comes--when
we find a suitable alternative to oil and gas, we are still far away
from discovering or developing a source of energy as potent or reliable
as oil.
So, we must find an environmentally-responsible way to increase our
refining capacity.
We simply cannot go any longer without expanding our capacity to
refine oil.
Even if we wanted to import more oil or produce more, it wouldn't
matter.
This harms our ability to respond to increased demand or deal with
crises that disrupt oil refining.
Our economy depends on a reliable and affordable source of energy.
Frivolous and costly regulations make it impossible to build new
refineries.
Whatever their intent, these regulations harm the economy and drive
up the price of gas more than they protect the environment.
There must be a middle-ground between no regulation and so many
regulations that consumers suffer.
We can find that middle ground and build new refineries while still
protecting the environment.
I look to hearing today.
Thank you again to the witnesses for sharing their expertise.
Mr. Whitfield. I thank you very much, and at this time
recognize the gentlelady from Colorado, Ms. DeGette, for her
opening statement.
Ms. DeGette. I believe Mr. Strickland----
Mr. Whitfield. Well, I was told at the time the gavel went
down that Mr. Strickland was not here at that time, and that we
are going down the order of appearance.
Ms. DeGette. All right. Thank you, Mr. Chairman. Thank you,
Mr. Strickland.
I have been sitting here listening to everybody, and I
agree with a lot of what everyone has said. We are angry and
sickened by what happened on the gulf coast, and we all hope
that we can get as much help as we can. It looks like maybe a
million people have either lost their homes or their loved ones
or both, and their lives will be changed forever. But as we
assess the damage and we bury the dead and we begin to rebuild,
we also really do have to have a full accounting of the
actions. And it would frankly be political malfeasance of us
not to do that, which is why it is good we are having the
hearing today.
I think what we are seeing in Louisiana, Mississippi, and
Alabama is an echo of the Federal Government's failings on
September 11. We have seen an appalling lack of imagination,
planning, or preparation for a mass casualty disaster, and an
inept response to the disaster once it occurred that cost
people their lives. Now, all of this was supposed to be solved
when we created the Department of Homeland Security. And
instead, it seems to me like things just got worse. My
constituents are flooding my office with calls saying that the
Federal Government failed Americans in their time of need. And
I know that this is common to all of us in this room.
So what we need to talk about in this hearing is within
this committee's jurisdiction: What can we do to fix the
problems and make sure we can minimize disasters in the future.
And I don't mean the disaster of the hurricane. I mean the
disaster of the response.
Just talking about energy for a minute, because that is
what this hearing is about, the Nation faced a surge in gas
prices in the hours and days after Hurricane Katrina. In my
district of Denver, Colorado, far from the eye of the
hurricane, we saw gas prices going up almost hourly at some of
these pumps. And I know that there were some disruptions in
service in the Southeast and mid-Atlantic, expectedly so,
prices expected to jump everywhere in the country without
reason.
I went to the briefing, as many of us did last night. The
members of the cabinet briefed the Members of Congress about
what happened. And it was all very Pollyannish and everything
was going well. What really struck me about energy was when
Secretary Bodman said there were no real long-term disruptions
in supply. So what I want to know is why were prices of gas
skyrocketing in Colorado even though there was ample supply at
that time and frankly no connection to the distribution network
in the gulf? To us, this looks like price gouging, not disaster
impact, and it is frankly immoral and it is illegal in a lot of
places, too.
Now, we have been struggling for months with rising costs,
and it has been fueled by surging worldwide demand for oil,
infrastructure operating at near capacity, and also the
increasing profits of oil companies. So why did we have to add
to this price gouging as a result of a naturally occurring
disaster? I think it is wrong. I am glad we are having this
hearing. And I am very interested in hearing the testimony.
Mr. Whitfield. The gentleman Mr. Otter is recognized for an
opening statement.
Mr. Otter. I will pass.
Mr. Whitfield. Ms. Myrick.
Mrs. Myrick. Thank you, Mr. Chairman. And thank you for the
hearing today. All of us of course send all of our prayers and
lots of other things that we can send to help to the Katrina
victims. And we have been doing that, we will continue doing
so, and I want to thank all the volunteers as well who have
pitched in to help. Thank you to all the panelists who are
sitting here patiently waiting. I will be brief. I just have
two things I want to touch on today.
One of them is what I call price gouging, because in my own
area of Charlotte, North Carolina, it was mind boggling how
fast the prices rose at the pump. They no more than posted the
high premium price and they were right back upping the regular.
It was just a continual circle over and over again. And it is
not that I don't want people to make a fair profit. Of course,
that is what we are all about in America. That is not the
point. I just want to make sure that people aren't arbitrarily
raising their prices. And it is a serious issue that we need to
examine.
Second is the oil and gas futures market. I have been
concerned about this for some time because I think we can reel
this in in a way that is going to have an effect on prices in
the near future, not like the long-term remedies of building
refineries which we also need to look at. But I have had
concerns for many months that some speculators have been
driving prices of gas higher than the factors of supply and
demand really warrant. And I am particularly concerned about
the over-the-counter market for energy derivatives which is
subject to very limited oversight under the Commodities Future
Trading Commission, the way I understand it.
I know there are many factors involved in the final price
of gas in our neighborhood stations, such as the taxes and the
refinery costs and the distribution costs and the profits,
which I said before need to happen. But we need to examine what
is going on here, because it appears to me that it is abusive
and manipulative trading in some cases.
And so I thank you again, Mr. Chairman, for this hearing. I
truly believe this gives us an opportunity to look closely at
what we need to be doing for the future, because the global
situation is not going to change and, as was stated before, our
committee has jurisdiction over a lot of the health issues that
are going to be coming up and we need to be doing those, too.
And I yield my time.
Chairman Barton. The gentlelady yields back. The gentlelady
from California, Ms. Capps.
Mrs. Capps. Thank you, Mr. Chairman, and to our witnesses
for being here today. We have all been moved by the tragedy on
the gulf coast and our thoughts and prayers are with the
thousands of Americans, fellow citizens of ours so painfully
and personally affected. We also are thankful and need to keep
thanking folks for the countless acts of heroism and
selflessness, from both the area's residents and from people
across the country responding to this tragedy. And now Congress
has a critical role to play here in the aftermath of Katrina. I
believe there are two significant areas in which Congress has
major responsibility.
First, we have to provide the financial support for the
people affected by Katrina. I am glad we have moved the
emergency funding bill last week to start this process and
there will be more funding requests coming. We are going to
have to do a lot more to help these folks put their lives back
together, and I hope we will work in a bipartisan fashion to do
so.
And the second thing we must do is to figure out what went
wrong with the Federal response and why so that it never
happens in this way again. And I believe we need to do this in
a bipartisan way as well. The Federal response, as has been
said over and over again, was late and it was ineffective. This
administration utterly failed in its responsibility to help
prepare for the disaster ahead of time and to help in its
aftermath. There are disasters waiting to come, so we must do
this work. Hundreds of thousands of gulf coast residents have
paid a very high price for our failure. The administration's
actions or inactions were an insult to all Americans and simply
inexcusable. I believe that Congress has an important job in
investigating these shortcomings, and I hope this committee
will be vigilant in pursuing this inquiry, and I am thankful
that this hearing will start this process. The lives of
Americans will be affected by how well we do our job and by how
well the administration does its job and the private sector as
well, this time and the next time. There will be a next time.
So I hope, Mr. Chairman, that this hearing is only the
first of many that we can be holding, because studying the
lessons of Katrina should help us to avoid similar problems in
the future.
Finally, Mr. Chairman, I know there are many calls now for
congressional action to address the high gas prices. There are
things we should do and things we shouldn't do. For example,
resuscitating the ill-conceived refinery legislation is one we
shouldn't do. We do need more refineries. But as has been
noted, environmental regulations aren't the problem here. So
you don't need to waive them to get a refinery bill. The
problem is that the refining industry makes a lot more money
with a tight refining capacity. The industry doesn't want to
build more refineries because it makes too much money the way
things are. On the other hand, if we had cut down on some of
our demand over the last decade or so, we wouldn't be in such a
predicament right now. Demand reduction works, even as the
President now belatedly recognized, evidenced by his call last
week for conservation.
Mr. Chairman, you scheduled this hearing long before
Katrina, and I would remind committee members that record gas
prices were here long before Katrina hit and they will be here
long after the effects of Katrina are dealt with. If we don't
do something about our insatiable appetite for fossil fuel,
shoving more tax breaks to industries making record profits and
gutting the laws that protect our environment are simply
uncalled for. It should be rejected. And I do yield back.
Chairman Barton. The gentlelady yields back. Mr. Sullivan
to make an opening statement?
Mr. Sullivan. Saving my time.
Chairman Barton. The gentleman defers. Does Dr. Burgess
wish to make an opening statement?
Mr. Burgess. I will defer.
Chairman Barton. All right. Mr. Walden?
Mr. Walden. Mr. Chairman, I will defer as well and save my
time for the witnesses.
Chairman Barton. All right. Mr. Otter? He defers. I think
we have deferred on the Republican side, so we go to the
gentleman from Pennsylvania.
Mr. Doyle. And I will also defer.
Chairman Barton. We have got a string going here. Mr.
Allen.
Mr. Allen. I am afraid I am going to break the string, Mr.
Chairman.
Chairman Barton. The gentleman is recognized for 3 minutes.
Mr. Allen. Thank you, Mr. Chairman, for convening this
hearing. The victims of Hurricane Katrina remain in our
thoughts and prayers. When the 1998 ice storm crippled Maine,
the Nation rallied to our aid. Maine is prepared to do the same
for the people of the gulf coast in their hour of need. We are
a nation that draws strength from shared adversity, and I hope
that, working together, we will emerge from this terrible
tragedy a stronger and more united people.
The Federal Government's response to this crisis has been,
in a word, pathetic. But that response should be the subject of
another hearing. Today we will be focusing on Hurricane
Katrina's effect on energy prices, but let us not deceive
ourselves or our constituents: Gas prices, heating oil futures,
and oil company profits were at record highs before Katrina
struck. We cannot blame high gas prices on Katrina alone.
From 1977 through 2002, the number of refineries in the
U.S. decreased from 282 to 153. During this period of time,
gasoline demand rose 27 percent. Refiners in the last decade
have spent $47 billion to expand existing capacity by 13
percent, but demand has grown even faster.
Why not more refineries? The answer is profit margin. Fewer
refineries mean higher profits. The strategy has worked; oil
profits have soared into the billions. That may be all well and
good for ExxonMobil, and for others, but what about everyone
else? The increased profit margins for the oil companies are
driving my constituents out of business. Small businesses in
Maine are being crushed by increased gas prices, not to mention
the spike that is coming in their heating oil bills.
Maine's large fleet of independent truckers are suffering
and at grave risk of going out of business. Maine's fishing
fleet is suffering as well.
In 1962, facing a similar threat to the Nation's economy
due to the pricing practices of the Nation's steel
manufacturers, President Kennedy summoned steel barons to the
White House and demanded that they reduce prices. They backed
down. This President, President Bush, needs to call oil company
CEOs to the White House and demand sacrifice on their part.
That may seem like fantasy, but it is the kind of leadership
that we need today.
I would just add one other point. On Thursday, Valero's
chief executive Bill Greehey, commenting on the FTC's decision
last week to authorize Valero's $8 billion purchase of Premcor,
said that: We are in a new era for refining where I believe you
will continue to see higher highs and higher lows, among other
things, for product margins.
That is what has been going on in that industry, and Mr.
Chairman, that is what we need to investigate here. I yield
back.
Chairman Barton. The gentleman yields back. The gentlelady
Ms. Schakowsky wish to make an opening statement?
Ms. Schakowsky. Yes, Mr. Chairman. And thank you for
calling this timely hearing. Americans have been riveted to
their televisions watching with shock and shame, not shock and
awe, as the Federal Government failed in its primary mission,
providing for the safety and security of its citizens. As
reporters and camera crews brought images that look like they
came from another country instead of the superpower of the
world. As they were able to make it to the Superdome and
convention center, Americans watched and waited in disbelief
for help to arrive. For many, help came too late. This
predictable and predicted catastrophe, as the Sun Times
editorialized, exposed the plight of the Nation's have nots,
all those Americans, not refugees from another country, but the
millions of American citizens who are not part of the ownership
society. Now we know what that means. If you own a car, you can
escape disaster. If you own a tank of gasoline or enough money
to buy a hotel room, you might survive in this ownership
society.
Make no mistake, millions of Americans are angry, millions
of Americans are ashamed. And, yes, no matter how they and we
may be scolded for doing so, they blame the Federal Government,
they blame this administration for failing to do its job,
failing to prepare for this crisis, and failing promptly to
deal with it. Many Americans shook their heads and asked: Is
this my country? Newt Gingrich said, quote: As a test of
Homeland Security, this was a failure. He said this is not a
moment to defend inadequacy. End quote.
Other crises and potential crises are now looming, and we
in Congress have responsibility as well to face up to that fact
and deal with it. One of those is an energy crisis. The
question is, are we going to act now to prevent a catastrophic
energy crisis, or will we wait to scramble to pick up the
pieces in the aftermath? This time, the President and the
Congress have to anticipate a breach in the levees. In my view,
we already squandered an opportunity to look ahead and mitigate
an energy crisis that leaves our country at the mercy of
hurricanes and vulnerable oil rigs and oil refineries and
foreign countries when this committee and this Congress passed
an energy bill that the President's own experts said could
increase prices at the pump.
Days before Katrina struck, the price of a barrel of crude
was $66, double what it was in January 2004. In Chicago the
price was already nearly $3 a gallon, the highest in the
country. Katrina exacerbated a preexisting condition. Now we
must assure that immediate needs are met and that we look ahead
at the cost and availability not only of gasoline, but, as the
cold weather approaches, heating oil and natural gas. How are
the poor, several of whom because of Katrina now have to face,
going to stay warm. And what about middle-class families, small
businesses, and farmers? Our constituents can't afford $1,000
monthly heating bills.
Can we look that far ahead and plan? In the aftershocks of
Katrina, can we leave Americans out in the cold while energy
companies are left with money to burn?
I hope that no member has the audacity to suggest that
weakening environmental standards or drilling in the Arctic
wilderness or any other transparent political fix will
alleviate this energy crisis. The only way to mitigate this
pending catastrophe is for Congress, with this great committee
taking the lead, to be bold enough to enact laws that will hold
down costs, prevent profiteering off the backs of the American
people, and protect those who are hit hardest by increases in
energy costs.
Thank you, Mr. Chairman.
Chairman Barton. We thank the gentlelady. Mr. Radanovich,
would you like a statement?
Mr. Radanovich. Waive.
Chairman Barton. Okay. The gentlelady from California, Ms.
Solis.
Ms. Solis. Thank you, Mr. Chairman. Yes, I have a
statement.
As we sort through the issues surrounding recovering from
Katrina, it is important for us to remember many of the
communities that are still suffering right at this moment.
First responders and other emergency personnel volunteers and
even firemen from the local D.C. Area are training and working
to continue finding survivors and evacuating the rest.
I am glad that we are here today to begin to address this
issue. As we begin to learn, these evacuees and emergency
responders are at increased risk for disease and infection
caused by the mix of contaminants in the water they are wading
through, particularly to those engaging in rescue and recovery
missions, but also to those who lived in the Superdome and
struggled through the water to escape the city. All, regardless
of race, income, ethnicity, and country of origin, must receive
adequate health care and treatment and counseling, mental
counseling. I hope, Chairman Barton, that we will have a
hearing to better understand the health implications of this
hurricane. And I am also extremely concerned about the
environmental and drinking water infrastructure implications of
Hurricane Katrina.
On Sunday, on Meet the Press, Secretary Chertoff commented:
We are going to have to clean probably the greatest
environmental mess we have ever seen in this country.
Today's Washington Post identified just the beginning of
the environmental problems the gulf coast will be facing. These
include contaminated water which will likely be undrinkable for
many years to come, unknown damage to the drinking water
infrastructure, toxic fumes from fires which continue to burn.
State authorities announced a litany of contaminants which are
likely to be found in the flood waters, including tens of
millions of pounds of concrete, lumber, cars, and animal
carcasses. Sewage treatment plants were destroyed. Two major
spills sent 78,000 barrels of oil into a local lake there, and
fuel from 2,000 fuel tanks and leaking gasoline from flooded
cars and boats also coated the city.
As ranking Democrat on the subcommittee with jurisdiction
over these environmental hazards, I call on the Chair of the
subcommittee, Mr. Gillmor, and Chairman Barton to begin
hearings on the environmental implications of Hurricane
Katrina. It is critical that as we move forward to clean up we
rebuild New Orleans, that it be done in a manner which will
protect the health and safety of our communities. So I
encourage our colleagues not to disregard public health and
environmental regulations.
And, last, with respect to the gasoline prices, we do have
to have a thorough investigation here. In California for the
last 3 months we have experienced high rates of gasoline prices
far beyond the $3 mark. We need to do something now. We need to
call in all, all resources that we can to look at what kind of
price gouging has gone on.
I also would like to submit that there are several
refineries that are dormant right now in our country. We should
probably be going back and looking at those current refineries
and trying to provide assistance there so we can startup and
provide the kind of assistance that our consumers are waiting
for.
Thank you very much, Mr. Chairman.
Chairman Barton. We thank the gentlelady.
Does Mr. Fossella wish to make an opening statement? The
gentleman defers. Does Mr. Gonzalez wish to make an opening
statement?
Mr. Gonzalez. Yes, Mr. Chairman. And I will be quick. I
think what we see today as far as any shortages, price
increases, and such, and the crisis that we face truly are just
symptoms of underlying policies that have been inadequate and
unrealistic. I think we need to start off with a firm
understanding, if we are going to do something that is
realistic and substantive, that there are no quick fixes, first
of all; that there should not be any sacred cows. All of us
represent a sacred cow or two. And, of course, it is not going
to be pain-free. And that means for the industry and for the
consumer. And if we believe we can get away with any kind of
substantive policy changes that will address these problems
without what I have just said, and that is the sacred cows and
foregoing some of those interests, and that there is not going
to be some pain felt by every American, then we will not
accomplish what needs to be accomplished.
I think the American public will grasp certain concepts
that we will discuss here today and that witnesses will touch
on, such as production capacity on the domestic side. The
location of where we have our facilities, they will understand
that. And, again, just on the capacity side. But will they
really understand other things that really come into this mix
and I think have already been referred to by Congressman
Shadegg? And we are talking about the futures market. How many
Americans understand the futures market, the oil futures
market? Or hedging? What does all that mean to them? What it
means is exactly what is happening to them today when it comes
to the volatility of the marketplace.
And with that in, Mr. Chairman, I hope that we will
realistically promote policies that take all of this into
account. Thank you.
Chairman Barton. Does the gentlelady from Wisconsin wish to
make an opening statement? The gentlelady is recognized for 3
minutes.
Ms. Baldwin. Yes. Thank you, Mr. Chairman. My thoughts are
with all of those who are suffering the effects of Katrina and
also with those who are suffering the consequences of a
painfully slow and uncoordinated response to Katrina.
I keep asking myself how a country that has spent the last
4 years planning for catastrophe found itself so ill-prepared
for this catastrophe. There is a huge public call to assign
blame to the planners and to name the stunning vacuum of
leadership from this President and his FEMA Director
immediately following this disaster. I know there is also an
effort to subdue congressional critique and inquiry at least
while the rescue and relief operation is still ongoing.
We have been urged to focus on the present and the future.
But how can we do that properly without understanding the past?
Our history? And which decisions, both recent and in the more
distant past, have exacerbated and intensified last week's
natural disaster?
Last week showed us and all of America, and in fact the
world, many things, among them that our social safety net has
been badly neglected. It showed us that we have been inadequate
stewards of the environment, whether it is our failure to fight
poverty and provide health care to all in America or our
failure to protect the natural buffers, the coastal wetlands,
the barrier islands which serve as Mother Nature's shock
absorbers, the failure to make proper and adequate investments
in infrastructure, including our emergency communication
infrastructure, our failure to listen to scientists long
warning us of climate change, or our failure to embark upon a
path that decreases rather than increases our dependence on
finite resources so that future generations won't experience
the fear and anxiety that grips all of our constituents when
fuel becomes unaffordable. All of this was stunningly revealed
last week.
Let us not ignore what was exposed. I have talked about the
public calls for blaming the planners. In a real way, we on
this committee and in this Congress are planners, planners for
the future. This time, let us seize the opportunity to work for
the common good, to help those with the least, not just those
with the most, and to make good upon the social compact.
Mr. Chairman, I look forward to working with you on these
very big challenges.
Chairman Barton. I thank the gentlelady.
Does Mr. Ross wish to make an opening statement?
Mr. Ross. Yes, sir, Mr. Chairman. In fact, I just left a
conference call which I will soon be joining again with our
Governor of Arkansas, who is housing about 60,000 of our
neighbors from Mississippi and Louisiana. As you can imagine,
we have a lot of challenges that we want to meet, and we want
to be there for them and lend a helping hand.
I have grave concerns about the response time in the
aftermath of this hurricane and subsequent flooding and levee
failures as it relates to FEMA, and I believe that we need to
make FEMA a cabinet level position and remove it from Homeland
Security. We have some short- and long-term needs that are
going to have to be met for the people of Mississippi,
Louisiana, and Alabama. I believe that we must have a
bipartisan commission, much like the 9/11 Commission, to figure
out what went wrong and how to avoid this from happening in the
future. But there is time for those things. Right now is the
time I believe to try and restore order in New Orleans, to help
the people of these three States get their lives back together,
and obviously the challenge of recovering the bodies that
remain in the devastation of this hurricane.
But today, this hearing before the Energy and Commerce
Committee is, quite frankly, about dealing with the aftermath
of Katrina as it relates to energy, to gasoline supply and
prices, and so let me say this: That over the August district
work period I traveled the fourth district, in fact about 8,000
miles worth of traveling in my district, listening to the
concerns of constituents about rising gas and diesel prices. I
heard this before the hurricane. Obviously, it was compounded
by the hurricane. I witnessed firsthand already inflated gas
prices jump from $2.45 a gallon to $3.25 a gallon in
communities throughout Arkansas. These are the very towns and
communities our neighbors from Mississippi and Louisiana and
Alabama have traveled to seeking shelter. Many citizens in my
rural congressional district commute over 100 miles round trip
for work each day. Many farmers in my district face hardships
in operating the necessary equipment, especially in this
drought, to harvest their crops due to high diesel prices.
These citizens, as well as those impacted by the hurricane
in Mississippi and Louisiana and Alabama, simply cannot afford
these drastic increases in fuel prices.
We need to ensure the people of this country that oil
market manipulation and price gouging are not occurring; and,
if the Federal Trade Commission's ongoing investigations do
find manipulations, we need to move swiftly and effectively to
punish those taking advantage of this situation. Oil production
platforms, import terminals, pipelines, and refineries were all
affected as a result of Hurricane Katrina. The full impact that
Hurricane Katrina will have on oil markets will depend on how
quickly these facilities will be able to recover to pre-
hurricane status.
And, Mr. Chairman, finally let me just encourage this
committee to work to do all it can in a bipartisan way to bring
down the high cost of gasoline, to maintain an adequate supply
while also meeting the needs and challenges of the people that
have been directly impacted by this horrible natural disaster.
And, with that, I yield back the balance of my time.
Chairman Barton. We thank the gentleman.
Does the gentleman from Massachusetts, Mr. Markey, wish to
make an opening statement?
Mr. Markey. I do, Mr. Chairman.
Chairman Barton. The gentleman is recognized.
Mr. Markey. Thank you, Mr. Chairman. When the price of
gasoline is $2.50 at the pump and 3 days later $3.50 is what is
being charged to consumers as they are tipped upside down in
gas stations across America and having money shaken out of
their pockets, then there is profiteering, there is price
gouging which happens.
The President should have announced that he was deploying
the Strategic Petroleum Reserve on the first day of the crisis
last week, at the very beginning, not 5 days later after the
oil speculators were able to take advantage of consumers all
across our country. The President was at least 5 days late in
deploying the Strategic Petroleum Reserve and asking for help
from our allies around the world. We only have 3 percent of the
oil reserves in the world. God put most of the reserves under
certain Middle Eastern countries, but we put 70 percent of that
oil into our gasoline tanks.
The Republican energy bill which was passed and signed by a
Republican President was an historic failure. It did not deal
with the issue of fuel economy standards for SUVs and
automobiles, it did not have a renewable portfolio standard so
that all utilities in America increased dramatically their use
of renewables. I believe that what we should be doing right now
is suspending all royalty relief for oil and gas companies
across America, and giving that relief to the victims of
Hurricane Katrina.
Here is the oil company profits over the last 3 years. It
has just skyrocketed. And there are estimates that ExxonMobil
can make upwards of $40 billion this year. We just gave $10
billion for relief down in the gulf area. $40 billion for one
company. And the prices, the prices at the pump have just
skyrocketed over the last very brief period of time. And no
relief, no answer from this administration. In fact, they admit
that their bill does nothing.
So we continue to pollute our air, we continue to have
increases in climate change, we continue to see our wetlands
disappear, we continue to turn a blind eye to human rights
abuses by our OPEC suppliers, we continue to not really
complain about these incubators of terrorism over in the Middle
East, and we continue to argue--this administration continues
to argue that we need to give more royalty relief to oil and
gas companies.
This hearing is a very important first step. But what we
need is every CEO of every oil company, and I would also
recommend OPEC ministers, come in here and that they be
requested--we can't make them, but we request them to testify
as to what they are going to do in order to ensure that there
is an adequate supply of oil for our country.
Chairman Barton. The gentleman's time has expired. We thank
the gentleman. Does the gentleman from New Hampshire wish to
make an opening statement?
Mr. Bass. I will be brief.
I want to thank you for holding the hearing. I understand
that subject matter has been broadened from just talking about
gasoline and energy to talking about elements relating to the
latest catastrophe that has beset our Nation.
I just want to say that it is obvious that our Nation has
been lulled into complacency with respect to the availability
of cheap gasoline in the past; and we really haven't planned
for a perfect storm like that which we are experiencing today
with tight supplies, massive global demand and political unrest
and then, of course, Katrina. Maybe we could never have been
prepared for this kind of an event.
But I just want to say that last week I set up a special
Web site that would allow constituents in the Granite State to
fill out a form if they--which would be e-mailed to me directly
which would outline instances of--specifically about price
changes: the date, the reason, the period of time it occurred
between one price and another price. And I have notified these
citizens--I would say there have been well over 100 responses
in the last 7 days--that I will turn all of this information
over to the Department of Energy and the Federal Trade
Commission so that the appropriate action be taken, if it is
justified.
You know, I think it is appropriate to look into the
processes whereby oil is extracted from the ground,
transported, marketed, delivered and so forth and see if there
are areas that require policy attention. But I personally find
it difficult to define the term ``price gouging,'' and I will
be interested to hear what our witnesses have to say about
that.
Mr. Chairman, I will stop my statement here so that we can
get on with the important testimony that we are about to hear
from the people who are here today. Thank you.
Chairman Barton. Does the gentleman from Ohio wish to make
an opening statement?
Mr. Strickland. Yes, sir.
Mr. Chairman, I was reading in the New York Times comments
from an engineering professor at the State University of
Louisiana who had served as a consultant on the Louisiana State
evacuation plan. He said that little attention has been paid to
the evacuation of New Orleans's low mobility population: the
elderly, the infirm and the poor without cars or other means of
fleeing the city, about 100,000 people.
Mr. Chairman, we knew this disaster was upon us days before
it reached our shore. In fact, the President went on television
and urged people to evacuate the city. We saw the TV pictures
of cars lining the freeways as they were heading northward out
of harm's way. But apparently there were many in New Orleans
and elsewhere along the Hurricane's path that did not have
cars, that did not have credit cards. They had no means of
renting an automobile for transportation. They could not afford
a bus ticket. They simply were left behind. They were the
poorest among the region's population.
Then the flooding came; and these--the sickest, the
poorest, the oldest, along with children--have died. And the
sad truth is that many have died unnecessarily. Many have died
simply because they lacked for water, for food; they lacked for
timely medical attention.
Mr. Chairman, we are the greatest and most advanced Nation
on the face of the earth. We have at our disposal every
resource that is known to mankind. Yet when disaster hit our
own country, when our own citizens were without food, water and
medical care, we did not respond in a timely manner. So many
were lost. And those who lost their lives were primarily black,
and they were primarily poor, and that should strike at the
conscience of every one of us.
Mr. Chairman, one of the things that must be done is for us
to examine ourselves as a Federal Government and as a people
why is it, why is it that it is the poor, the minority, the
child, the elderly and the infirm who are most likely to suffer
in times of disaster?
But we are here today to talk about our Nation's energy. I
noticed that the President said a few days ago he had zero
tolerance for looters. This Nation is waiting for the President
to speak so strongly about gougers. Will he tell us and will he
tell the oil company executives that he has zero tolerance for
gouging at the gas pumps?
I yield back the remainder of my time.
Chairman Barton. The gentleman yields back 3 seconds. We
appreciate it.
Does Mr. Terry wish to make an opening statement?
Mr. Terry. No.
Chairman Barton. Does Mrs. Blackburn wish to make an
opening statement.
Mrs. Blackburn. Mr. Chairman, having been in Mississippi
with my family in the middle of this for the last few weeks I
will submit my statement and look forward to hearing from our
panel.
[The prepared statement of Hon. Marsha Blackburn follows:]
Prepared Statement of Hon. Marsha Blackburn, a Representative in
Congress from the State of Tennessee
Mr. Chairman, during the past decade Congress waged debate over
whether to increase domestic oil exploration and encourage construction
of new refineries.
Hurricane Katrina made it abundantly clear that this nation can no
longer engage in seemingly endless debate, but must actively work to
discover and harvest American oil. We must encourage construction of
new refineries. This is not to say that we should end our alternative
fuel research and development efforts, but that we must have a
realistic view of our current consumption needs.
Over the past few decades, environmental groups and some of my
colleagues across the aisle have been very successful in their efforts
to stymie domestic exploration. The National Energy Policy Act which we
passed this July after several years of effort took steps to ease the
regulatory red tape that has prevented us from accessing domestic oil
supplies and constructing refineries. In light of what we've learned
from Hurricane Katrina, I'd suggest we build on that legislation and
taking immediate steps to open ANWR.
Today we know that had we been able to pass that legislation years
ago we'd very likely be less reliant on the gulf region's oil
industries and the current price increases and periodic supply
shortages would not be nearly as painful.
This is not as complicated a problem as some would have us believe.
We need more domestic oil and we must increase our refining capacity.
Both of those needs are within our power to address. Our energy
security absolutely cannot remain so vulnerable to a single although
significant natural disaster like Hurricane Katrina.
Mr. Chairman, I thank you for holding this important hearing today
and I look forward to taking the steps necessary to strengthen our
energy infrastructure.
Chairman Barton. Seeing no other member present who wishes
to make an opening statement, the Chair asks unanimous consent
to put into the record at this point in time the statement from
the distinguished chairman of the Small Business Committee,
Congressman Manzullo.
Hearing no objection, so ordered.
[The prepared statement of Hon. Donald A. Manzullo
follows:]
Prepared Statement of Hon. Donald A. Manzullo, Chairman, House
Committee on Small Business
As the Chairman of the Small Business Committee, I hear everyday
how the price of energy affects entrepreneurs. It costs more everyday
to simply turn on the lights of a business when it opens its doors. It
costs more to ship merchandise, both raw material and finished
products. Every consumer sees prices rising on the most basic products.
Every time people add gasoline to their car, there is less money in
their pocket for other purchases.
In the northern Illinois Congressional district I am proud to
represent, many of my constituents have already been hurt by the
increase in energy prices. Richard Beuth is a farmer in Seward,
Illinois and he has told me how every facet of his operation rising
fuel prices has impacted. He explains that the cost of fertilizer has
doubled over the past year. A year ago at this time, fertilizer cost
$250 a ton and when it increased to $350 a ton he wondered how he would
absorb this increase. Now, in the span of a year, it has increased to
$500. Also, he tells me there is a scarcity of fertilizer on the market
for purchase.
Additionally shipping costs are hurting his farming operation. It
costs more to buy seeds, fertilizer and other products have increased
because of shipping costs. Farmers also get hit with shipping costs as
they send their crops to market. Richard explained to me that the cost
to farm an acre has increased between 15 and 20 percent. He explains
that because the price of corn is down, he is operating at a loss.
Richard Todd runs Todd Transfer Trucking of Rockford, Illinois.
Richard tells me that the cost of fuel is tipping the balance of the
scales to where he is operating without any profits. His company
normally runs on a margin of two to three percent and fuel increases
are eating into that margin. He says that his fuel prices are up
$90,000 in the last six months, with all other factors remaining the
same.
Additionally, his company is forced to absorb more of the costs
because their biggest customers will not accept a fuel surcharge. He is
only able to pass on his additional fuels costs or surcharges to his
smaller customers, who themselves are struggling.
Another example is Bob Trojan of Rockford Linear Actuation, a
hydraulic cylinder manufacturer. Bob explains that the cost to run his
plant has increased between 20 and 30 percent because of soaring fuel
prices. He says that he fully expects to the price of steel to rise,
because of production costs, which will again increases his input
costs.
Because he is a small manufacturer, trucking companies have passed
surcharges on to his shipments. He ships his products all over the
United States and Europe. Bob says that customers and vendors are more
cautious in taking trips to see products because travel costs are so
expensive.
Rising energy costs hurt every aspect of business. These costs are
spiraling out of control. It is imperative that we find ways to curtail
energy prices before businesses are forced to close their doors. The
economic aftershocks of Hurricane Katrina affected communities all
across this nation. Mr. Chairman, I trust that as oil refineries come
back on-line in Louisiana and production is restored to pre-storm
levels, we will see a decrease in energy costs so that our small
businesses and small manufacturers will remain open. Any change in U.S.
government policy to address the high cost of energy should keep in
mind the perspective of small business because this sector of our
economy generates most of the new jobs and economic growth in this
country. Thank you, Mr. Chairman, for allowing me this opportunity.
[Additional statements submitted for the record follow:]
Prepared Statement of Hon. Michael C. Burgess, a Representative in
Congress from the State of Texas
First, I want to thank Chairman Barton for convening this hearing
today. The Chairman has indicated that this will be the first of a
series of hearings to examine impact of Hurricane Katrina.
In the wake of Hurricane Katrina, many of my constituents have
contacted me with concerns about price gouging by gasoline retailers.
It is tempting to be led by emotion and make quick decisions in
order to show that we are ``doing something.'' But I believe that the
best thing to do in this situation is to study the issue as
deliberately as possible.
In the Dallas-Fort Worth area gasoline prices increased by anywhere
between 30-50 cents per gallon in the last week alone. I know Chairman
Upton indicated that he received reports that one point that gasoline
increased by a dollar per gallon overnight in Michigan.
At the same time, we know that Hurricane Katrina resulted in the
suspension of 25 percent of U.S. oil production and took 25 percent of
U.S. refining capacity offline. Since domestic oil and gas refineries
have operated at nearly 100 percent capacity over the last few years,
the loss of even one U.S. refinery would have reduced supply and
increased prices at the pump.
We need to determine if the problem is inappropriate pricing or a
problem with supply.
We need to make sure to fix the right problem. Trying to fix the
wrong problem can only make things worse--we all remember the long
lines at the gas pump in the 1970s.
If it is determined that illegal pricing has occurred, I will
support prosecution of wrongdoers to the utmost of my ability. I think
it is unconscionable that opportunists would take advantage of this
national tragedy for financial gain.
But, it is important that we, as policy makers, avoid single
synapse reactions which can translate into untenable public policy. We
should examine the strategy in place for dealing with this type of
emergency situation; and if no such strategy exists, we should work to
develop one. We need to learn from this experience and determine how we
can prevent this loss of supply in the future.
In conclusion, I'd like to again thank the Chairman for holding
this hearing. I look forward to hearing from the witnesses who are
appearing before us.
______
Prepared Statement of Hon. Bart Stupak, a Representative in Congress
from the State of Michigan
Thank you Chairman Barton and Ranking Member Dingell for calling
this hearing today and welcome to the witnesses. This hearing comes at
a time when our southern states are struggling with the ramifications
of a devastating natural disaster and the rest of our Nation is being
hit with gas and oil prices that are the highest this Country has ever
seen.
I hope that the witnesses here today will provide information that
will help this Committee understand why these high prices are occurring
and when the American people can expect a reprieve.
As every member of the Committee knows first hand, our constituents
are angry about high gas prices--and they have a right to be!
More than 5,000 complaints have been logged in at the Energy
Department's gas-price gouging hotline, and there have been reports of
pump prices hitting $6 per gallon in some parts of the country where
gas prices were in the range of $2.50 per gallon. Furthermore, oil
prices have reached as high as $70 per barrel.
My home state has been hit particularly hard by these prices,
especially in my Northern Michigan district. With tourism as the
largest industry in the region during the summer months, gas prices
have taken a toll on small businesses this year even before Katrina.
Many Northern Michigan residents who must commute to distant
communities for work find themselves putting in the first hour or two
just to pay for the gas to and from their job.
The fact is we rely on oil to fuel our cars, homes and economy, so
we're forced to pay the price. Like my constituents, I find myself at
the pump feeling completely helpless to stop the seemingly endless rise
in cost.
Many weeks prior to Hurricane Katrina's wrath, gas prices had been
increasing at an alarming rate. These prices have been pinching the
pockets of the middle class for well over a year.
During this time, the Administration did nothing to curb these
rising prices despite the urging of myself and other Members of
Congress to defer shipments of oil and tap into the Strategic Petroleum
Reserve.
Instead, the Administration chose to wait until Hurricane Katrina
put the country in dire straights before releasing this desperately
needed oil. Had they immediately released this oil, the situation after
Katrina might not have been so grim.
However, supply of oil is not the only factor that is affecting gas
prices. The United States refining capacity is concentrated in the
southern states and some of those states have unfortunately been
devastated by Katrina.
While many existing refineries have expanded operations, it has
barely kept pace with demand. Most U.S. refineries are operating at or
near 94 percent capacity, and the United States now has to import 10
percent of already refined gasoline.
For the current refiners, this limited capacity keeps gasoline
prices high and profits up. But for the consumer, and the overall
health of the American economy, it's a potential disaster.
Hurricane Katrina is not the only cause of these independent gas
prices. This Administration's foreign policy has also directly
influenced the price of gas we are paying today. Poorly planned foreign
policy and mismanaged international diplomacy have created major
instability in the oil rich regions of the world, including Venezuela
which has been one of our largest suppliers.
This pervasive instability in the Middle East and the Iraq war has
lead to a commodity futures market where an additional $10 to $15
``risk premium'' is added to each crude oil contract sold on the
market. This directly correlates to higher prices at the pump for
consumers and only increases with concerns over natural disasters such
as Hurricane Katrina.
I hope the witnesses here today will address these issues. Thank
you.
______
Prepared Statement of Hon. Albert R. Wynn, a Representative in Congress
from the State of Maryland
Chairman Barton and Ranking Member Dingell, thank you for holding
this hearing at such a critical point during this state of national
crisis. Hurricane Katrina has ravaged the Gulf Coast region, leaving
thousands without a place to call home, crippling and separating
families, and the death toll continues to rise as we press forward with
relief efforts.
The Administration, state, and local officials' sluggish response
and incompetence in addressing this catastrophic natural disaster are
unacceptable. The lack of coordination, limited military presence, and
insufficient supplies reveal a shocking ineptitude in planning for
emergency situations, such as witnessed along the Gulf Coast.
In addition to the human tragedy, in the context of this
committee's jurisdiction, Hurricane Katrina resulted in a significant
loss of refining capacity, intensifying already high gas prices. At
least 20 percent of the nation's refining capacity ceased operations or
reduced runs as a direct result of the disaster. No new refineries have
been built in this country since 1976, yet over the past 20 years U.S.
demand for gasoline has increased over 20 percent. Correspondingly,
refining capacity has decreased by ten percent over the same time
period. This is an unsustainable situation and we must work towards
increasing domestic refining capacity.
The current price of gasoline, when adjusted for inflation, is as
high as gas prices during the 1979 crisis! What makes matters worse is
that even before the hurricane, crude oil and gas prices were inching
towards unprecedented heights.
Unfortunately, in the aftermath of Hurricane Katrina, the issue of
price gouging has been illuminated. In the witnesses' testimony they do
not address the jurisdiction of the federal government over price
gouging; nor do they specify what specifically defines price gouging.
These are matters that must be addressed given the current crisis. We
need federal authority over price gouging; the American people should
not be subjected to artificially high prices without an effective means
of recourse.
We should also remember that the reduced refining capacity and
supply will impact the price of home heating oil this winter. While it
is currently a warm day in D.C., in a couple of months the weather will
cool significantly. For low-income residents, this could mean the
difference between putting food on the table and surviving the cold
winter. Given the high prices in energy, we should ensure that our low
income heating assistance is sufficient to support the inflated prices.
Adjustments in international supply and demand of oil, continually
increasing refining capacity, speeding up our energy independence from
foreign sources of oil, and ultimately shifting towards a hydrogen
economy are necessary to address America's energy crisis.
I look forward to hearing the testimony of those present today and
I thank you all for speaking with my colleagues and I about the
aftermath of Hurricane Katrina and her impact on oil and gas
production.
______
Prepared Statement of Hon. Jim Davis, a Representative in Congress from
the State of Florida
Mr. Chairman and Members of the Committee, thank you for holding
this hearing on the effect that Hurricane Katrina has had on the supply
and prices of gasoline in the United States. Last month, Congress
passed a massive energy bill that did nothing to address the price of
gas at the pump. It is unfortunate that it took this natural disaster
to finally get Congress to act on addressing the price consumers pay at
the pump.
Today, we are here to specifically look at the economy of
gasoline--a system that has proven to be fundamentally flawed, even
before Katrina devastated our coasts.
It is my hope that we will uncover long term solutions to address
the supply and pricing of gasoline in this process of Congressional
hearings and investigations that are sure to come.
We have all heard the stories of price gauging at the pump--I urge
the witnesses at this hearing today to heed the call of this Congress
and keep in mind that America is watching your actions closely to
ensure that suppliers of gasoline are not unfairly profiting in this
time of national crisis.
Gasoline is unlike any other US commodity. The fuel that every
American relies on in one way or another is impacted by a global market
of supply and demand which alters the prices of products from
Tupperware to jet fuel. The refining process is one of the steps in the
pricing of gasoline. Some Members of the House of Representatives argue
that relaxing the laws that protect consumers will assist in easing
this severely bottlenecked market. I don't believe that approach will
really address the problem or tell us why the years of bottlenecks and
tight supplies have allowed the refineries to maintain and increase
their profit margins. The Members of this Committee must be aware that
opportunistic exploitation of consumer protections will not be
tolerated by the American people.
Today, it is as clear as it has ever been that we are unable to
drill our way out of oil and gas dependence. While solutions to short
term disruption solutions are needed at this time to help address the
impact of Hurricane Katrina, we must look to solutions that will affect
the long term energy markets and keep in our minds the economic,
environmental and homeland security of our children's and
grandchildren's futures. I am eager to work with the Members of this
committee towards the goal of finding real solutions to obstacles that
will be outlined in the witness's testimonies.
I also look forward to hearing from the courageous Governors of
Louisiana and Mississippi. All of America appreciates their leadership
through these difficult and trying times for their state and our
nation. Floridians are said to have PhD's in hurricane preparedness,
and it is with this knowledge that we will help in the recovery process
for Hurricane Katrina in any way we can.
Mr. Chairman, I urge the Committee to put partisan politics aside;
we Floridians cannot wait through a year of hearings and investigations
to find out what failures occurred in the preparation and response to
Katrina as hurricane season is not yet over for us. We must get to the
bottom of this as no state stands to gain or loose from learning the
lessons of Katrina and the aftermath quickly.
Mr. Chairman, again, I thank you and the Members of this Committee
for the opportunity to discuss gas prices today and look forward to
working with you on this and many other issues in the future.
Chairman Barton. The Chair now is going to recognize its
first panel. We appreciate your patience, gentlemen.
I think it shows the importance of this hearing that, of
the 56 members of the Energy and Commerce Committee, 45 have
made an appearance and, of those 45, over 30 have made opening
statements. That shows the concern the country has about what
has happened and is worried and concerned about the response of
the Federal Government to the catastrophe. So I do thank you
again for your patience.
We are going to recognize David Garman, who is the Under
Secretary for Energy, Science and Environment at the Department
of Energy for 7 minutes; and then we will go to Mr. Caruso, Mr.
Seesel and Mr. Moran. Thank you, gentlemen, for waiting.
Secretary Garman, you are recognized for 7 minutes.
STATEMENTS OF HON. DAVID K. GARMAN, UNDER SECRETARY FOR ENERGY,
SCIENCE AND ENVIRONMENT, DEPARTMENT OF ENERGY; HON. GUY F.
CARUSO, ADMINISTRATOR, ENERGY INFORMATION ADMINISTRATION; JOHN
H. SEESEL, ASSOCIATE GENERAL COUNSEL FOR ENERGY, FEDERAL TRADE
COMMISSION; AND KENNETH P. MORAN, ACTING DIRECTOR, OFFICE OF
HOMELAND SECURITY, ENFORCEMENT BUREAU, FEDERAL COMMUNICATIONS
COMMISSION
Mr. Garman. Mr. Chairman and members of the committee,
apart from the human dimension, which weighs heavily on all of
our minds, Hurricane Katrina had a devastating impact on energy
infrastructure, prices and markets.
For example, Katrina shut in roughly 1.4 million barrels of
crude oil production, roughly 95 percent of all U.S. Gulf
production. Katrina halted 25 percent of all gulf coast
refining, or approximately 2 million barrels per day. Ten
refineries were totally shut down, and six were reduced in
their runs. Some undamaged refineries suffered from crude oil
supply shortfalls.
Approximately 2.7 million households were without
electricity at one point, in addition to the loss of
electricity to refineries and pipelines. Three major pipelines
carrying crude and petroleum products to large portions of the
Nation were out of service, with estimates of repairs ranging
from days to weeks.
Mindful of these impacts, we did the following:
First, the Department of Energy, within 48 hours of
receiving the first requests, approved loans of crude oil from
the Strategic Petroleum Reserve to refineries, 12.6 million
barrels as of yesterday afternoon. Some of that oil is being
delivered as we speak.
Second, the President has authorized the release and sale
of oil from the Strategic Petroleum Reserve. The Department has
issued the formal notice of sale of an initial 30 million
barrels of oil yesterday. Bids will be opened on Friday,
assessed over the weekend, and we should be in a position to
issue a notice of apparently successful offerers by Monday,
September 12. Oil will flow from that release and sale as soon
as the winning bidders provide for the oil's transportation.
Third, the Department has worked with the International
Energy Agency to coordinate the release of an additional 33
million barrels of crude oil and refined product from reserves
of our nations to provide additional supply to global markets.
Fourth, DOE's Office of Electricity Delivery and Energy
Reliability began working with other Federal, State and local
officials, utilities, municipalities, power marketing
administrations and cooperatives even before the storm struck
to accelerate the restoration of power. This was important not
only to the affected populations but the Nation as a whole
since the refineries and the product pipelines depend on this
power to deliver gasoline, diesel and other petroleum products
to demand.
Fifth, the Environmental Protection Agency issued a
nationwide waiver to allow the use of winter blend reformulated
gasoline in stock to increase the flow of refined products to
consumers. EPA is also allowing the use of diesel fuel with
sulfur content exceeding the 500 parts per million limitation.
Sixth, the Department of Homeland Security temporarily
waived Jones Act restrictions on transportation fuel supplies
by tanker.
Seventh, the Treasury Department announced that off-road
diesel would be permitted for road use to bring more diesel
into the market during this emergency.
Eighth, the Department of Transportation waived the
restriction on hours that can be driven by truckers to keep
goods and services and products, including energy, moving.
Ninth, the President and the Secretary have repeated their
calls for all Americans to use energy wisely. Energy efficient
practices, exercised by millions of American consumers, can
have a substantial impact.
Tenth, the Navy and Coast Guard are surveying and, as
necessary, clearing shipping channels of sunken obstructions
that would affect gasoline or crude shipments.
While we still face a difficult situation, there are
encouraging developments. Four hundred thousand barrels of the
lost production in the gulf have already been restored. The
latest assessments from the Department of the Interior suggest
that 99 percent of prior platform production will eventually be
restored.
Of the 10 refineries that were completely shut down, we
expect four to be operational within the next week or so. Of
the six that went to reduced runs, all are expected to be fully
operational by tomorrow. I am informed that five more that were
undamaged are now receiving supplies of oil from the Strategic
Petroleum Reserve. Of the 2 million barrel a day of refining
capacity lost, roughly half that capacity is now back on line.
Meanwhile, we understand that over 20 tankers carrying
gasoline are currently en route to the United States from
Europe. I am also informed that, as of this morning, power has
been restored to over 1.8 million households of the 2.7 million
households without power at peak impact. We are most grateful
for the work of thousands of utility crews working nearly
nonstop, many of whom who have been sleeping in their trucks
while they have not been working to restore power.
Also of good news for all consumers around the Nation is
the fact that all three of the major pipelines are back in
service at full or nearly full capacity far sooner than most
observers had predicted. In the near term, we need to get these
production and refining facilities back on line while
encouraging Americans to use energy wisely.
Again, millions of American consumers can have an impact by
doing simple things such as consolidating trips, keeping their
vehicles in tune, keeping tires at their proper inflation and
by driving more slowly and smoothly.
In the longer term, new supplies of petroleum and
alternatives to petroleum, including hydrogen fuel as the
President proposed back in January, 2003, along with provisions
of the just-passed energy bill can help us overcome these
challenges.
I would be pleased to answer any questions the committee
might have either today or in the future. Thank you, Mr.
Chairman.
[The prepared statement of Hon. David Garman follows:]
Prepared Statement of Hon. David Garman, Undersecretary, Department of
Energy
Mr. Chairman and Members of the Committee, thank you for the
invitation to appear this morning on the subject of Hurricane Katrina
and its effect on energy supply and prices.
Let me start by saying this is a tragedy of monumental proportions.
Hurricane Katrina is one of the worst national disasters in our
nation's history.
It has been responsible for an unknown number of deaths--possibly
in the many thousands.
And for those who survived, it has utterly destroyed homes,
schools, businesses and livelihoods. For them, it will be years before
life returns to normal--if it ever can.
It is also the largest single disaster impacting the energy
infrastructure of this country.
At the Department of Energy, our focus is on two aspects of the
events in the Gulf of Mexico.
First, obviously, we are concerned about the direct impact of the
storm on the residents of Louisiana, Mississippi, Alabama, Florida and
other affected states.
And because the Gulf Coast plays such a critical role in supplying
much of the nation's energy needs, we are also concerned about the
hurricane's broader effect on the country as a who le and on
international markets.
I want you to know at the outset that Secretary Bodman has
committed the Department of Energy to doing everything in its power to
meet the immediate needs of those affected by Hurricane Katrina--both
on the Gulf Coast and throughout the rest of the country--and we have
marshaled all of our resources to fulfill that commitment.
Within the last week, the Department of Energy dispatched employees
to emergency response centers throughout the southeastern United States
to coordinate power restoration efforts. DOE staff are working closely
with state and local officials, first responders, and power companies
to begin restoring power and fuel supplies as quickly as possible,
wherever possible.
In the immediate aftermath of Katrina, upwards of 2.7 million
customers were without electric power in Louisiana, Mississippi,
Alabama, Florida, Georgia, and Tennessee. One week ago, for instance,
more than 90 percent of the residents in the state of Mississippi had
no electricity--including those hundreds of miles from where the
hurricane made landfall.
Power has been restored in many of these areas. As of 11 a.m.
yesterday, fewer than a million customers remained without electric
power due to Hurricane Katrina. In Louisiana and Mississippi, 971,360
were without power. Alabama has essentially restored all customers
without electric power.
In some places--and not just New Orleans--it may be weeks, perhaps
months, before power can be restored. In Biloxi, Gulfport, and
elsewhere on the Coast, the electricity infrastructure of transmission,
substations, and distribution has been damaged or destroyed. Those
capabilities must be restored and rebuilt, and this cannot be done
overnight. The publicly owned municipal and cooperative utilities in
these states, with the help of other utilities and contractors from
many states, are undertaking the massive job of restoring the system.
But it will take time.
A number of challenges are hindering this effort. One is just the
massive scope of the destruction, as we have all seen on television.
Not to minimize the suffering caused by the hurricanes that battered
Florida last year, but Hurricane Katrina's devastation is in an
entirely different category. Upon seeing what Katrina had wrought on
the Mississippi coast, Governor Barbour remarked that it is what
Hiroshima must have looked like 60 years ago. I don't think anyone
could accuse the Governor of hyperbole.
On top of the sheer devastation caused by the storm as it passed
through, the subsequent flooding in New Orleans, Mobile, and elsewhere
adds further huge complications.
Well over 10,000 crews have arrived throughout the affected region
to work on electricity restoration. As they finish their work in
certain places, they move on to the next ones. As Florida utilities
have completed their work, crews from these companies and their
contractors have moved to the Gulf Coast to support restoration work.
Crews have come from many states and Canada to support utility
restoration.
But this is a massive area we are talking about, and a number of
factors are slowing progress. At this point inaccessibility and the
extensive damage from flooding and saltwater are the biggest
challenges. We have heard from Entergy that its single biggest problem
to restoring power in the greater New Orleans area is the lack of food
and water for its repair crews, who have literally been sleeping in
their trucks.
The affected states face a massive challenge, but we will work with
state and local leaders, with utilities and power companies, and with
anyone else to try to restore power wherever possible as quickly as
possible.
While the Department works with people on the ground to restore
power, we are also monitoring the effects of the storm on the nation's
energy markets.
Nine refineries that supply nearly 10 percent of the nation's
gasoline were shuttered by the storm.
Thousands of energy industry workers in the Gulf Coast had to be
evacuated.
Oil and Gas production rigs and other infrastructure were damaged.
The pipelines supplying Gulf Coast gasoline and natural gas to the
Midwest and Eastern part of the country were affected, as well.
However, damage was not as severe as we at first had feared.
One week after the storm, these are back at full or near full
capacity. Meanwhile, 95 percent of the nation's refining capacity
should be operating by mid-September.
Despite this news, it is not clear how long it will be before
energy production and distribution in the Gulf is back to normal.
The Department of Energy and the Bush Administration are very
concerned about the effects of this disaster on already tight markets.
And we are concerned about the impact of higher gasoline prices on
the average American.
Accordingly, we have taken a number of steps to try to alleviate
the situation. Last week, the Department of Energy entered into
separate agreements with several energy companies to loan more than 12
million barrels of oil from the Strategic Petroleum Reserve in order to
limit disruptions in crude supplies for refineries.
The crude oil will be loaned from the SPR under short-term
contractual agreements and returned to the Reserve once supply
conditions return to normal.
I want to point out we have taken very quick action in this regard.
Oil was on the way to refineries within 48 hours of loan requests being
made.
Further, in the aftermath of the storm, we outlined the impact on
our energy sector for the members of the International Energy Agency to
determine whether it was necessary to supply additional crude oil and
gasoline products to the market. On Friday, the members of the IEA made
a historic decision to provide crude oil from each member's strategic
reserves.
Under this agreement, IEA member countries have agreed to make
available 60 million barrels, or an average of 2 million barrels per
day, for 30 days beginning immediately. This will consist of both oil
and gasoline, with an emphasis on refined product.
The United States is a member of the International Energy Agency,
of course, so to meet our obligations as a member of the IEA, we will
be releasing 30 million barrels of crude oil from the United States
Strategic Petroleum Reserve.
In addition to these efforts, I want to add that the Environmental
Protection Agency has granted a nationwide waiver for fuel blends to
make more gasoline and diesel fuel available throughout the country.
The EPA action will permit the early use of wintertime gasoline blends
and, we expect, will take some pressure off the price of gas.
On top of this, I want to point out that the President has made an
appeal to the American people to conserve gasoline during this time of
tightened supply. There are a number of things that people can do to
reduce their use of gasoline, such as carpooling, driving slower,
bundling errands together to make fewer trips, and telecommuting.
One final point I want to make concerns the anecdotal reports all
of us have heard about price gouging in various parts of the country in
the days after Katrina hit. Our Department and our Administration take
the subject of excessive pricing very seriously. It is unconscionable
that Americans would seek to exploit a tragedy for profit.
DOE has established a web site where Americans can report gasoline
price gouging. All complaints registered with the Department of Energy
will be collected and transmitted to the Federal Trade Commission, U.S.
Department of Justice, and individual State Attorneys General for
investigation and prosecution where appropriate.
Chairman Barton--members of the Committee--I want to thank you for
the opportunity to come before you this morning to apprise you of our
Department's efforts in the wake of Hurricane Katrina.
I would be happy to respond to any questions you and the other
members may have.
Chairman Barton. We thank you, Mr. Secretary.
We now want to hear from the Honorable Guy Caruso, who is
the Administrator of the Energy Information Administration.
Welcome, Administrator Caruso. You are recognized for 7
minutes, also.
STATEMENT OF HON. GUY F. CARUSO
Mr. Caruso. Thank you very much, Mr. Chairman, for this
opportunity to present the Energy Information Administration's
views and analysis of energy markets in the aftermath of
Katrina.
As you know, EIA is the independent statistical and
analytical agency in the Department of Energy; and we do not
promote, formulate or take positions on policy issues.
As the Chairman has mentioned, even before the tragic
hurricane, crude oil and gasoline prices were already at high
levels. On August 29, average gasoline prices were $2.61 per
gallon, and diesel prices were $2.59 per gallon. Crude oil
prices on the futures market had increased by nearly 60 percent
over the same period compared with last year, due in large part
to substantial growth in world oil demand, which has used up
much of the world's productive capacity. Refineries have been
running at high levels of utilization in many parts of the
world, including the United States; and the high production of
distillate fuels and higher-than-average refinery outages this
summer added to the tight gasoline markets. Natural gas markets
were also tight on the eve of the hurricane and futures prices
were $10.85 per million Btus or more than double year earlier
levels.
Hurricane Katrina has had a significant impact,
particularly on gasoline, diesel fuel and natural gas prices.
For example, EIA's survey data released yesterday showed that
the national average price of regular gasoline prices rose 46
cents per gallon, to $3.07, between August 29 and Labor Day,
while diesel prices rose 31 cents, to $2.90 per gallon. While
prices rose throughout the country, the East Coast experienced
the largest price increase in both fuels.
The near-term outlook for the oil and gas markets will
depend on a number of factors, most importantly the timing and
pace of the recovery of the infrastructure and operations in
the Gulf.
Production of both oil and natural gas in the Gulf of
Mexico has already recovered substantially from the peak
impacts, as Mr. Garman has pointed out in his statement.
The infrastructure has been coming back more quickly than
many had expected, as Mr. Garman has mentioned, and,
fortunately for natural gas markets, we are in the shoulder
season, between the period of high demand for electricity
generation for air conditioning and the high demand for heating
fuel.
The level of natural gas in storage remains above the 5-
year average, but the disruption in operations due to Katrina
is likely to reduce the amount put in storage during the
remainder of the injection season.
Today, we released our September Short-Term Energy Outlook;
and, as you can imagine, the uncertainty in this outlook, which
goes out to the remainder of 2006, is greater than ever.
Nevertheless, we consider three cases in this current outlook
based on the speed of recovery from the effects of Hurricane
Katrina. We include in that report a slow, a medium, and a fast
recovery case. The fast recovery case assumes a very favorable
set of circumstances for returning operations to normal, while
the slow recovery case assumes that significant impacts on oil
and natural gas production and delivery continue at least into
November. In all cases, normal operations are achieved or
nearly achieved by December. We assume that the loans and
releases of crude oil and products from Government stocks will
help to offset the price increases due to Katrina.
The WTI crude oil price averaged $65 per barrel in August
and reached $70 in peak trading last week. Crude oil prices
have retreated from those heights in recent days, and we expect
they will trend downward in the fourth quarter of 2005,
although staying above $60 for the remainder of the year and
into 2006.
The national average price of unleaded gasoline was $2.49
per gallon in August, with prices generally rising throughout
the month. Projected gasoline prices in the near term are very
sensitive to the assumptions that I have mentioned in the three
cases. Gasoline prices, however, should ease in the coming
weeks as supply improves. We project $2.60 per gallon gasoline
in the fourth quarter and an average price for 2006 of $2.40.
The heating oil prices, however, will show a substantial
increase this winter compared with last year. Assuming normal
winter weather, heating oil prices are expected to be about 30
percent higher this winter compared with last winter in the
medium recovery case. Of course, this assumes a normal winter.
Natural gas prices probably will be impacted even more than
heating oil and are likely to stay tight over the next couple
of months as the heating season begins. We anticipate the
September spot price for natural gas to average about $13
dollars per million Btus and about $11.50 per million Btus in
the fourth quarter. Based on the present trends, natural gas
price this winter are expected to be significantly higher than
last winter.
In sum, Mr. Chairman, the impact of Katrina on energy
prices has been to make a tight market situation for oil and
natural gas even more challenging for the industry and for
consumers.
This concludes my statement. I would be happy to answer any
questions now or at any time that you deem appropriate, sir.
[The prepared statement of Hon. Guy Caruso follows:]
Prepared Statement of Hon. Guy Caruso, Administrator, Energy
Information Administration, U.S. Department of Energy
Mr. Chairman and Members of the Committee: I appreciate the
opportunity to appear before you today to discuss gasoline prices in
the United States and recent developments in world oil markets.
The Energy Information Administration (EIA) is the independent
statistical and analytical agency within the Department of Energy. We
are charged with providing objective, timely, and relevant data,
analysis, and projections for the Department of Energy, other
government agencies, the U.S. Congress, and the public. We do not take
positions on policy issues, but we do produce data and analysis reports
that are meant to assist policymakers determine energy policy. Because
the Department of Energy Organization Act gives EIA an element of
independence with respect to the analyses that we conduct and publish,
our views should not be construed as representing those of the
Department of Energy or the Administration.
The devastation of Hurricane Katrina included offshore production,
refineries, and loss of power to run pipelines and otherwise-working
refineries. Damage assessments are ongoing but still incomplete. With
the current tight global petroleum market, gasoline and distillate
prices have risen sharply. How far and how long they remain elevated
will depend on the severity of damage to petroleum facilities. Our
understanding of the situation is rapidly evolving, and I will discuss
this in my oral remarks. This written testimony focuses on events prior
to the hurricane and challenges to gasoline markets following the
recovery.
Even prior to Hurricane Katrina, petroleum prices, including
gasoline, were setting new records as crude oil prices climbed.
Gasoline prices as of August 29 were $2.61, which was 73 cents per
gallon higher than a year ago, and, on average for the month, were 58
cents per gallon higher. Yesterday's prices, which will be released
late this afternoon, will undoubtedly be--much higher given the
significant disruptions experienced due to Hurricane Katrina. A
consumer who drives about 1,000 miles per month in a car that gets
about 20 miles per gallon paid almost $30 more for that car's fuel
during August this year than last August. Businesses and government
budgets are also affected, as it costs more to fill their vehicle
fleets.
The remainder of this testimony describes the fundamentals
affecting petroleum prices, focusing on crude oil and gasoline. The
underlying market situation today, even before Katrina, is one in which
the spare crude oil production, refinery, and tanker capacities that
existed for more than a decade prior to 2003 were reduced more quickly
than EIA or other analysts anticipated. Little spare capacity, both
upstream and downstream, not only supports higher prices, but they also
add to price volatility, since any upset to supply/demand balances
regionally cannot be resolved quickly. Restoring spare capacity will
not be easy or rapid, because an increase in capacity takes time and
investment, and growing demand will require capacity increases just to
maintain current cushions, which suggests that high prices and
potential volatility will be with us for some time.
Changes in the gasoline price at the pump are driven mainly by
changes in crude oil prices and changes in wholesale gasoline prices.
Crude oil cost represented nearly 60 percent of the gasoline price this
summer and explains much of the variation in gasoline price. Crude oil
prices are driven and set by international markets. The wholesale price
of gasoline or its spot price is influenced first by crude oil but also
by seasonal demand variations and by regional refinery and distribution
supply and demand balances. Retail price changes generally lag behind
wholesale price changes.
INTERNATIONAL CRUDE OIL MARKETS
Turning to crude oil prices first, Figure 1 shows that the current
crude price increase began in 2004, when crude oil prices almost
doubled from 2003 levels, rising from about $30 per barrel at the end
of 2003 to peak at $56.37 on October 26, 2004. After falling back
briefly, prices then continued to rise in 2005.
This is a significant change from what we experienced during much
of the 1980s and 1990s. For most of the time since the early 1980s, we
have lived in a market in which spare crude oil production, refining,
and delivery system capacity existed. Crude oil suppliers outside of
the Organization of Petroleum Exporting Countries (OPEC) produce at
maximum rates (i.e., no surplus production capacity) for economic
reasons, thus, the world's surplus crude oil production capacity
resides in OPEC (mainly Saudi Arabia). The large growth in non-OPEC
capacity and production in areas like the North Sea and Alaskan North
Slope, along with softening demand from high prices, led to major cuts
in OPEC production in the 1980s, creating large capacity surpluses. As
demand grew through the 1990s, OPEC production increased, but new
productive capacity was not added. Short-term imbalances between supply
and demand occurred and we experienced some price swings, but those
imbalances did not last long, as capacity generally existed to remedy
the situation within a year.
During most of the 1990s, the West Texas Intermediate (WTI) crude
oil price averaged close to $20 per barrel, but plunged to almost $10
per barrel in late 1998 as a result of the Asian financial crisis
slowing demand growth, at the same time as extra supply from Iraq was
entering the market for the first time since the Gulf War. OPEC
producers reacted by reducing production, and crude oil prices not only
recovered, but increased to about $30 per barrel as demand grew in the
face of OPEC production discipline.
Beginning in 2004, world oil demand growth accelerated
significantly. For the 10 years prior to 2004, world oil demand growth
had averaged 1.2 million barrels per day. But in 2004, world demand
jumped by 2.6 million barrels per day, led by an unprecedented increase
in demand from China of about 1 million barrels per day, compared to
that country's increase of 0.4 million barrels from 2002 to 2003. This
unusually rapid demand growth along with growth in the United States
and the rest of the world, quickly used up much of OPEC's available
surplus crude oil production capacity (Figure 2). As the world balance
between supply and demand tightened considerably, ongoing supply
uncertainties associated with Russia, Iraq, and Nigeria added to market
concerns over the availability of crude oil, and prices rose. In 2005,
Iran, Ecuador, and Venezuela added new uncertainties.
Global oil demand is expected to grow more slowly during 2005 and
2006, increasing by about 1.7 to 1.8 million barrels per day. China's
demand is projected to increase by 0.5 million barrels per day and U.S.
demand by 0.4 million barrels per day in 2006. Together, these two
areas are projected to account for about 50 percent of the world's
petroleum demand growth next year.
Crude oil production capacity increases are expected to keep up
with these demand increases. Production increases from OPEC members are
projected to represent almost one-third of the world production growth
next year, and the former Soviet Union is expected to provide an
additional 40 percent of the increase. Other areas such as the United
States and other non-OPEC countries will provide additional production
volumes. However, EIA is not projecting much increase in the surplus
capacity cushion any time soon. Spare capacity is projected to remain
at or below 1.2 million barrels per day in 2005.
We are facing tight crude oil markets for a number of years. EIA's
Short-Term Energy Outlook is projecting WTI crude oil prices to remain
above $55 through 2006. Even if demand softens or capacity is developed
faster than anticipated, statements from OPEC members indicate an
intention to keep prices from falling below $50 per barrel. While high
relative to recent years, the price of crude oil, adjusted for
inflation, is still below the levels seen in the early 1980s.
This tight balance results in different behavior and price
implications than exhibited by the short-term market imbalances seen
for the past 20 years. Instead of high prices being accompanied by low
inventories and expectations for prices to be falling quickly in the
future, today, in both crude oil and product markets, we see high
prices with high inventories. Consumers exhibit similar behavior when
they expect to experience higher prices in the near future. For
example, consumers top off their gasoline tanks before a bad storm that
could limit supplies and drive prices up in their region.
Prior to Hurricane Katrina, crude oil prices increased about 39
cents per gallon in summer 2005 over summer 2004, while gasoline prices
only increased 34 cents per gallon (Figure 3). Although refinery and
distribution and marketing contributions to gasoline prices were on
average lower this summer on average than last summer, seasonal and
local supply conditions affected these refinery contributions to price
gasoline more strongly at the end of the summer, as described next.
U.S. PRODUCT MARKETS
Tightening in other parts of the supply chain beyond crude oil
exacerbated product price increases in the United States and in the
rest of the world. World refining capacity utilization increased from
85 percent to 87 percent from 2003 to 2004, driven in large part by
increases in demand and utilization in areas like China and India.
While adequate refining capacity is available to meet demand today, the
refining system cannot shift quickly to meet unexpected needs. With
refinery capacity running at high utilization levels in many parts of
the world, including the United States, product balancing is frequently
done through international trade, which means products must travel long
distances, stretching out the time it takes to resolve imbalances. This
sluggish response puts additional pressure on product prices beyond the
effect of high crude oil prices and can result in price spikes if a
regional shortage evolves.
Product markets in the United States provide an example of various
supply and demand balancing effects on price. In the United States, the
spread between wholesale product prices and crude oil prices is often
higher in spring and summer than during the rest of the year. Gasoline
is the highest volume product refineries produce, and spring and summer
are when gasoline demand is typically the highest. Gasoline spreads
typically increase at this time of year, lifting overall refinery
margins to their highest seasonal level. Distillate product (diesel and
heating oil) spreads are usually lower in spring and summer, but they
represent only about half as much volume as gasoline production.
U.S. petroleum product price spreads were very unusual in spring
and summer 2005. Wholesale gasoline price spreads through July were
slightly above the average for the past 5 years, but lower than spreads
seen in 2004. Heating oil and diesel spreads were unprecedented,
exceeding gasoline spreads from April through July. This unusual
distillate market was seen throughout the world as distillate demand
grew rapidly and ultra-low sulfur diesel demand in Europe pulled on
tight supplies. Distillate prices remained above gasoline prices in
Europe as well as Asia. This unusual distillate market ultimately
affected gasoline.
Gasoline and distillate products are produced together at the same
refineries. In the spring, the U.S. inventories for gasoline were high
and prices were lower than for distillates. Distillate inventories were
low, and the price incentives caused refiners to respond by producing
unusually high yields of distillate, which resulted in reduced gasoline
yields. The consequence was that U.S. distillate inventories rose from
below normal to above normal, and gasoline inventories fell from above
normal to normal into July.
In addition to the switch in yield patterns, unplanned refinery
outages in July and August added to the tightening gasoline market. The
high demand summer season is when U.S refiners run close to or at full
utilization rates, but outages always occur. The degree of outages
varies, and preliminary data indicate a higher level than average
occurred in July and August of this year. Had refineries been able to
run at the same utilizations as last year, they would have run about
200 thousand barrels per day more crude oil, and the gasoline
inventories in the July/August period would now be in the middle of
their seasonal range, even with the higher-than-usual distillate
yields.
The loss of supply and rapid decline in gasoline inventories
starting in July resulted in an increase in gasoline price spreads
(Figure 4). Higher gasoline spreads encourage more gasoline imports,
and some refiners may have shifted yields to produce more gasoline, but
with the peak summer driving season at an end, and winter heating needs
ahead, we would expect a continued focus on maximizing production of
distillates.
The high level of refinery outages in July and August increased
pressure on gasoline prices, adding possibly 8 to 15 cents per gallon.
Wholesale prices were poised to decline as some of the refinery
problems were being resolved, but then the Gulf Coast was hit by
Hurricane Katrina. Both spot market prices and near-month futures
prices for gasoline and distillate products have risen dramatically in
the days following the hurricane. Retail prices, which follow wholesale
prices with a lag, are also rising. We expect that prices will begin to
fall back as production and refining capacity are restored, although
the pace of restoration is at present highly uncertain. While the
gasoline price and supply situation will also be helped by the seasonal
decline in U.S. gasoline demand after Labor Day, seasonal trends in
crude oil markets will work in the opposite direction as world crude
oil demand begins to increase in the fall with the onset of the
Northern Hemisphere heating season.
Looking ahead to next summer, high crude oil prices are expected to
continue to support high prices for all petroleum products, including
gasoline. In addition, gasoline prices may see some additional pressure
since the industry is moving quickly to eliminate methyl tertiary butyl
ether (MTBE). While the removal of the oxygen content requirement in
the recently-enacted Energy Policy Act of 2005, without some
accompanying liability protection, may have hastened companies'
decisions to remove MTBE, companies were moving in that direction
anyway. Removing the oxygen content requirement will help consumers in
the long run by providing more supply options for refiners and
blenders. In the short run, however, the loss of gasoline production
capability and some potential sources of gasoline imports that will
occur when phasing out MTBE cannot be made up easily. The distribution
system will also have to adjust, depending on how the industry shifts.
The result is that we may see increased volatility during the
transition, as we have seen with other fuel specification transitions.
In addition to potential supply problems due to removal of MTBE,
the United States will begin the ultra-low sulfur diesel program. In
June 2006, suppliers will begin providing diesel fuel to the on-road
market that contains less than 15 parts per million sulfur. Following a
full recovery from Katrina, production capability to produce ultra-low
sulfur diesel is felt to be adequate, but the industry is still
struggling to determine how to deliver the product through its pipeline
and storage tank system without contamination. Many issues remain to be
resolved, implying this transition may also add pressure to the system,
and can be expected to affect gasoline as well as distillate prices.
Next year is also the first year of the renewable fuel standard
established under the new energy bill, and while meeting the total
volumes of ethanol required under this standard should not be
difficult, a credit trading program must be in place and operating
smoothly to enable each gasoline supplier to meet its obligation. It is
our understanding that Environmental Protection Agency (EPA) and the
industry are working towards this goal, but little time exists for EPA
and the industry to get everything prepared.
One more specification change slated for 2006 is the final phase of
the Tier 2 low-sulfur gasoline program for refiners and importers, who
will be providing gasoline with an average sulfur content of 30 parts
per million or less, which is less than one-tenth the average sulfur
content before the program began. With many refiners already producing
gasoline at 30 parts per million, this last phase may be less
challenging than the removal of MTBE and the start of ultra-low sulfur
diesel. It is one more additional strain on the supply system, however.
For example, if a refinery loses a desulfurization unit, the stricter
specifications may result in no production of gasoline, whereas, in the
past, the refinery might have been able to produce more volumes at
higher sulfur levels for a longer time.
CONCLUSION
In conclusion, the world is experiencing an underlying change in
petroleum markets with the development of tight supplies that will not
likely change quickly. Hurricane Katrina has significantly exacerbated
the near-term supply tightness, especially in the U.S. market for
gasoline and diesel fuel. Even after production and refinery operations
fully recover from the effects of Katrina, capacity increases will be
needed throughout the supply chain to keep up with demand. Until the
world returns to more spare capacity, particularly in crude oil supply,
crude oil and petroleum product prices will remain high. Even if the
balance should relax unexpectedly, OPEC members have expressed an
interest to maintain prices well above their prior target range. While
the system currently can meet demand, it cannot respond quickly to
unexpected changes. We will see shifts in imbalances from one region of
the world to another and from one product to another, as we saw with
gasoline and distillate in the United States. The gasoline market in
the United States is subject not only to the higher crude oil prices
and generally tight market conditions, but also to volatility from
continuing specification changes down the road, with next summer
presenting a number of such specification challenges.
This completes my testimony, Mr. Chairman. I would be glad to
respond to any questions you and the other Committee members may have.
[GRAPHIC] [TIFF OMITTED] T4246.001
[GRAPHIC] [TIFF OMITTED] T4246.002
Chairman Barton. Thank you, Mr. Director.
We now want to hear Mr. John Seesel, who is the Associate
General Counsel for Energy at the Federal Trade Commission.
Welcome, Mr. Seesel; and you are recognized for 7 minutes.
STATEMENT OF JOHN H. SEESEL
Mr. Seesel. Thank you, Mr. Chairman.
Good afternoon, Mr. Chairman and members of the committee.
I am John Seesel, the Associate General Counsel for Energy at
the Federal Trade Commission. I am pleased to have this
opportunity to discuss the FTC's actions to promote competition
in the petroleum industry and to protect consumers who use
gasoline, diesel fuel and the other petroleum products so vital
to our Nation's economy.
The Nation, indeed the world, continues to witness the
heart-rending destruction and misery that Hurricane Katrina
left in its wake. The Commission mourns the loss of life and
the many other tragedies that have unfolded in the past 10 days
in the States along the gulf coast.
Today's hearing focuses on one of Katrina's most important
economic consequences, the storm's impact on the Nation's
gasoline supply and on gasoline prices. I want to assure this
committee that the FTC is acutely aware of the pain that high
gasoline prices that we have experienced recently has caused
American families and businesses, and we are continuing our
intense scrutiny of conduct in the petroleum industry in the
aftermath of Katrina.
The FTC will proceed aggressively against any violations of
the antitrust and consumer protection laws that it enforces. We
are on high alert.
The Commission is committed to maintaining competitive
markets in refined petroleum products. We achieve this
objective through a three-pronged approach: vigorous law
enforcement against anti-competitive mergers and business
behavior, careful study of various developments with
competitive implications for the petroleum industry, and an
ongoing project to monitor gasoline and diesel prices in order
to detect unusual price movements.
A significant recent development in the FTC's law
enforcement program is the issuance of dual consent orders in
late July designed to remedy the anti-competitive effects of
Unocal's allegedly deceptive conduct in connection with the
development of reformulated gasoline in California, as well as
the alleged anti-competitive effects that were anticipated from
Chevron's acquisition of Unocal.
The Commission's first complaint alleged that Unocal had
deceived the California Air Resources Board, CARB for short, in
developing standards for reformulated gasoline. The Commission
challenged Unocal's misrepresentation that certain technology
was in the public domain while it pursued patents on that
technology to enable it to charge substantial royalties. The
proposed merger between Chevron and Unocal raised the concern
that if Chevron had acquired Unocal's patents, Chevron could
have obtained sensitive information and thus could have used
this information and power to facilitate coordination among
competitors to raise gasoline prices.
The two consent orders embodying Chevron's commitment not
to enforce the Unocal patents provided a significant victory
for consumers. The Commission has estimated that the main
relief provided by these orders could save California gasoline
consumers around $500 million dollars per year. The FTC will
continue its energetic enforcement of the antitrust laws
against collusive and monopolistic practices in this country.
In aid of its extensive law enforcement work, the FTC also
conducts careful research on key competitive issues in the
petroleum industry. I especially commend our recent report on
gasoline price changes to the committee's attention. The report
sets forth in detail the numerous supply, demand and
competitive factors that influence gasoline prices or cause
gasoline price spikes.
The report shows that the market for gasoline functions as
any other market is expected to when supply is significantly
constrained and demand keeps rising. As important, the report
also shows that market forces in the form of changes in how
much gasoline can producers supply and consumers demand can
ameliorate price increases.
A related FTC study issued last year was our staff report
on mergers, structural change and antitrust enforcement in the
petroleum industry over the last 20 years.
The third prong of our approach is a continuous effort by
our staff to identify unusual gasoline and diesel price
movements. Our economists monitor daily pricing data from 20
wholesale and approximately 360 retail areas across the Nation.
If the statistical model that they apply detects any unusual
price movement that cannot be explained by refinery outage, a
pipeline break or another business related cause, the FTC
staff, in consultation with other Federal and State officials,
will examine whether a law violation has occurred.
The Commission is acutely aware of the escalating prices
that consumers pay for gasoline, and we will examine any
information that we receive about pricing to determine whether
there is a basis for legal action under the anti-collusion and
anti-monopoly statutes that the FTC enforces. For those
complaints that are not a violation of Federal law, the State
attorneys general appear to have begun major multi-State
initiatives to pursue any such complaint under State statutes.
The energy industry, especially the petroleum sector, has
been a centerpiece of FTC antitrust enforcement for decades,
and the Commission expects to devote substantial resources to
policing the competitiveness of the industry in this time of
economic duress for many of our fellow citizens. Moreover, as
it always does, the Commission will give State and local
officials as much assistance as it can as those authorities
carry out their responsibilities.
Thank you again for the opportunity to present the FTC's
views, Mr. Chairman. I will be happy to answer any questions.
[The prepared statement of John H. Seesel follows:]
Prepared Statement of John H. Seesel, Associate General Counsel for
Energy, Federal Trade Commission
I. INTRODUCTION
Mr. Chairman and members of the Committee, I am John Seesel, the
Federal Trade Commission's Associate General Counsel for Energy. I am
pleased to appear before you to present the Commission's testimony on
FTC initiatives to protect competitive markets in the production,
distribution, and sale of gasoline, and to discuss an important recent
Commission study on the factors that affect gasoline prices.
1
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\1\ This written statement represents the views of the Federal
Trade Commission. My oral presentation and responses to questions are
my own and do not necessarily represent the views of the Commission or
any Commissioner.
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The petroleum industry plays a crucial role in our economy. Not
only do changes in gasoline prices affect consumers directly, but the
price and availability of gasoline also influence many other economic
sectors. No other industry's performance is more deeply felt or
carefully scrutinized.
Gasoline prices are among the most visible prices in our complex
economy. Consumers closely follow gasoline prices, and in recent months
these prices have experienced dramatic increases. In recent weeks,
prices of gasoline have exceeded $3.00 a gallon in some markets.
Despite higher prices, demand for gasoline continues to grow,
increasing at a 1.6 percent rate over the most recent four-week period
for which data are available (August 19), over that same period for
last year. Gasoline inventories remain at the lower end of the average
range. These rising prices command our attention.
On top of this tight market, Hurricane Katrina has temporarily
disrupted an important source of crude oil and gasoline supply. At one
point, over 95 percent of Gulf Coast crude oil production was shut in,
and numerous refineries and pipelines were either damaged or without
electricity.2 Because of this massive supply disruption,
price relief has been and will be delayed.
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\2\ See Minerals Mgmt. Serv., U.S. Dep't of the Interior, Release
No. 3328, Hurricane Katrina Evacuation and Production Shut-in
Statistics Report as of Tuesday, August 30, 2005 (2005), at http://
www.mms.gov/ooc/press/2005/press0830.htm.
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The FTC has been and remains vigilant regarding anticompetitive
conduct in this industry. Recent activity includes, on June 10, 2005,
the acceptance of two consent orders that resolved the competitive
concerns relating to Chevron's acquisition of Unocal and settled the
FTC's 2003 monopolization complaint against Unocal. The Unocal
settlement alone has the potential of saving billions of dollars for
consumers nationwide in future years. In addition, in early July 2005,
the Commission published its study of the factors that affect gasoline
prices.3 This study grew out of conferences of industry,
consumer, academic, and government participants held by the Commission
over the past four years, as well as years of research and experience,
and sheds light on how gasoline prices are set.
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\3\ Federal Trade Commission, Gasoline Price Changes: The Dynamic
of Supply, Demand, and Competition (2005) [hereinafter Gasoline Price
Changes], available at http://www.ftc.gov/reports/gasprices05/
050705gaspricesrpt.pdf.
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In 2004, the FTC staff published a study reviewing the petroleum
industry's mergers and structural changes as well as the antitrust
enforcement actions the FTC has taken.4 Commission
enforcement statistics show that the agency has taken action against
proposed mergers in this industry at concentration levels lower than in
other industries. Since 1981, the FTC has filed complaints against 19
large petroleum mergers. In 13 of these cases, the FTC obtained
significant divestitures. Of the six other matters, the parties in four
cases abandoned the transactions altogether after our respective
antitrust challenges; one case resulted in a remedy requiring the
acquiring firm to provide the Commission with advance notice of its
intent to acquire or merge with another entity; and the sixth case is
ongoing.
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\4\ Bureau of Economics, Federal Trade Commission, The Petroleum
Industry: Mergers, Structural Change, and Antitrust Enforcement (2004)
[hereinafter Petroleum Merger Report], available at http://www.ftc.gov/
os/2004/08/040813mergersinpetrolberpt.pdf.
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In addition to litigation and industry studies, the Commission also
protects consumers through other initiatives. The Commission actively
monitors wholesale and retail prices of gasoline.5 Three
years ago, the FTC launched an initiative to monitor gasoline prices to
identify ``unusual'' movements in prices 6 and then examine
whether any such movements might result from anticompetitive conduct
that violates Section 5 of the FTC Act. FTC economists developed a
statistical model for identifying such movements. The agency's
economists daily scrutinize price movements in 20 wholesale and
approximately 360 retail markets across the country. In no other
industry does the Commission so closely monitor prices.
---------------------------------------------------------------------------
\5\ See FTC, Oil and Gas Industry Initiatives, at http://
www.ftc.gov/ftc/oilgas/index.html.
\6\ An ``unusual'' price movement in a given area is a price that
is significantly out of line with the historical relationship between
the price of gasoline in that area and the gasoline prices prevailing
in other areas.
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This gasoline monitoring and investigation initiative focuses on
the timely identification of unusual movements in gasoline prices
(compared to historical trends) to determine if a law enforcement
investigation is warranted. If the FTC staff detects unusual price
movements in an area, it researches the possible causes, including
consultation, if appropriate, with the state Attorneys General, state
energy agencies, and the Department of Energy's (``DOE'') Energy
Information Administration. The FTC staff also monitors DOE's gasoline
price ``hotline'' complaints. If the staff concludes that the unusual
price movement likely results from a ``natural'' cause (i.e., a cause
unrelated to anticompetitive conduct), absent other evidence of
potential anticompetitive conduct, it does not investigate further
(although it continues to monitor).7 The Commission's
experience from its past investigations and the current monitoring
initiative indicate that unusual movements in gasoline prices typically
have a natural cause. FTC staff further investigates unusual price
movements that do not appear to be explained by ``natural'' causes to
determine whether anticompetitive conduct may be a cause. Cooperation
with state law enforcement officials is an important element of such
investigations.
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\7\ Natural causes include movements in crude oil prices, supply
outages (e.g., from refinery fires or pipeline disruptions), or changes
in and/or transitions to new fuel requirements imposed by air quality
standards.
---------------------------------------------------------------------------
The Commission's testimony today addresses the Committee's
inquiries in two parts. It first reviews the basic tools that the
Commission uses to promote competition in the petroleum industry:
challenging potentially anticompetitive mergers, prosecuting nonmerger
antitrust violations, monitoring industry behavior to detect possible
anticompetitive conduct, and researching petroleum sector developments.
This review of the Commission's petroleum industry agenda highlights
the FTC's contributions to promoting and maintaining competition in the
industry. The Commission places a premium on careful research, industry
monitoring, and investigations to understand current petroleum industry
developments and to identify accurately obstacles to competition,
whether arising from private behavior or from public policies. The
petroleum industry's performance is shaped by the interaction of
extraordinarily complex, fast-changing commercial arrangements and an
elaborate set of public regulatory commands. A well-informed
understanding of these factors is essential if FTC actions are to
benefit consumers.
The second part of this testimony reviews the learning the
Commission has derived from its conferences and research and its review
of recent gasoline price changes. Among other findings, this discussion
highlights the paramount role that crude oil prices play in determining
both the levels and the volatility of gasoline prices in the United
States. Changes in crude oil prices account for approximately 85
percent of the variability of gasoline prices.8 When crude
oil prices rise, so do gasoline prices. Crude oil prices are determined
by supply and demand conditions worldwide. The supply of crude is
strongly influenced by production levels set by members of the
Organization of Petroleum Exporting Countries (``OPEC''). Demand has
increased substantially over the past few years, both in the United
States and in the developing economies of China and India. When
worldwide supply and demand conditions result in crude oil prices in
the range of $70 per barrel, it is not surprising that we see higher
gasoline prices nationwide.
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\8\ See Gasoline Price Changes, supra note 3, at 13.
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II. FTC ACTIVITIES TO MAINTAIN AND PROMOTE COMPETITION IN THE PETROLEUM
INDUSTRY
A. Merger Enforcement in the Petroleum Industry
The Commission has gained much of its antitrust enforcement
experience in the petroleum industry by analyzing proposed mergers and
challenging transactions that likely would reduce competition, thus
resulting in higher prices.9 In 2004, the Commission
released data on all horizontal merger investigations and enforcement
actions from 1996 to 2003.10 These data show that the
Commission has brought more merger cases at lower levels of
concentration in the petroleum industry than in other industries.
Unlike in other industries, the Commission has obtained merger relief
in moderately concentrated petroleum markets.
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\9\ Section 7 of the Clayton Act prohibits acquisitions where the
anticompetitive effects may occur ``in any line of commerce or in any
activity affecting commerce in any section of the country.'' 15 U.S.C.
18.
\10\ Federal Trade Commission Horizontal Merger Investigation Data,
Fiscal Years 1996-2003 (Feb. 2, 2004), Table 3.1, et seq.; FTC
Horizontal Merger Investigations Post-Merger HHI and Change in HHI for
Oil Markets, FY 1996 through FY 2003 (May 27, 2004), available at
http://www.ftc.gov/opa/2004/05/040527petrolactionsHHIdeltachart.pdf.
---------------------------------------------------------------------------
Several recent merger investigations illustrate the FTC's approach
to merger analysis in the petroleum industry. The most recently
completed case involved Chevron's acquisition of the Union Oil Company
of California (``Unocal''). When the merger investigation began, the
Commission was in the middle of an ongoing monopolization case against
Unocal that would have been affected by the merger. Thus, the
Commission settled both the merger and the monopolization matters with
separate consent orders that preserved competition in all relevant
merger markets and obtained complete relief on the monopolization
claim.11 The nonmerger case is discussed below.
---------------------------------------------------------------------------
\11\ Chevron Corp., FTC Docket No. C-4144 (July 27, 2005) (consent
order), at http://www.ftc.gov/os/caselist/0510125/050802do0510125.pdf;
Union Oil Co. of California, FTC Docket No. 9305 (July 27, 2005)
(consent order), at http://www.ftc.gov/os/adjpro/d9305/050802do.pdf.
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Another recent merger case that resulted in a divestiture order
resolved a complaint concerning the acquisition of Kaneb Services and
Kaneb Pipe Line Partners, companies that engaged in petroleum
transportation and terminaling in a number of markets, by Valero L.P.,
the largest petroleum terminal operator and second largest operator of
liquid petroleum pipelines in the United States.12 The
complaint alleged that the acquisition had the potential to increase
prices in bulk gasoline and diesel markets.13
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\12\ Valero L.P., FTC Docket No. C-4141 (June 14, 2005)
(complaint), at http://www.ftc.gov/os/caselist/0510022/
050615comp0510022.pdf.
\13\ Id.
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The FTC's consent order requires the parties to divest assets
sufficient to maintain premerger competition, including certain Kaneb
Philadelphia-area terminals, Kaneb's West pipeline system in Colorado's
Front Range, and Kaneb's Martinez and Richmond terminals in Northern
California.14 In addition, the order forbids Valero L.P.
from discriminating in favor of or otherwise preferring its Valero
Energy affiliate in bulk ethanol terminaling services, and requires
Valero to maintain customer confidentiality at the Selby and Stockton
terminals in Northern California. The order succeeds in maintaining
import possibilities for wholesale customers in Northern California,
Denver, and greater Philadelphia and precludes the merging parties from
undertaking an anticompetitive price increase.
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\14\ Valero L. P., FTC Docket No. C-4141 (July 22, 2005) (consent
order), at http://www.ftc.gov/os/caselist/0510022/050726do0510022.pdf.
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Most recently, the Commission filed a complaint on July 27, 2005,
in federal district court in Hawaii, alleging that Aloha Petroleum's
proposed acquisition of Trustreet Properties' half interest in an
import-capable terminal and retail gasoline assets on the island of
Oahu would reduce the number of gasoline marketers and could lead to
higher gasoline prices for Hawaii consumers.15 Because this
matter is currently in litigation, this testimony will not discuss it
in any more detail.
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\15\ Aloha Petroleum Ltd., FTC File No. 051 0131 (July 27, 2005)
(complaint), at http://www.ftc.gov/os/caselist/1510131/
050728comp1510131.pdf .
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In the past few years, the Commission has brought a number of other
important merger cases. One of these involved the merger of Chevron and
Texaco, 16 which combined assets located throughout the
United States. Following an investigation in which 12 states
participated, the Commission issued a consent order against the merging
parties requiring numerous divestitures to maintain competition in
particular relevant markets, primarily in the western and southern
United States.17 Among other requirements, the consent order
compelled Texaco to (a) divest to Shell and/or Saudi Refining, Inc.,
all of its interests in two joint ventures--Equilon 18 and
Motiva 19--through which Texaco had been competing with
Chevron in gasoline marketing in the western and southern United
States; (b) divest all assets relating to the refining, bulk supply,
and marketing of gasoline satisfying California's environmental quality
standards; (c) divest assets relating to the refining and bulk supply
of gasoline and jet fuel in the Pacific Northwest; and (d) divest
various pipelines used to transport petroleum products.
---------------------------------------------------------------------------
\16\ Chevron Corp., FTC Docket No. C-4023 (Jan. 2, 2002) (consent
order), at http://www.ftc.gov/os/2002/01/chevronorder.pdf.
\17\ Id.
\18\ Shell and Texaco jointly controlled the Equilon venture, whose
major assets included full or partial ownership in four refineries,
about 65 terminals, and various pipelines. Equilon marketed gasoline
through approximately 9,700 branded gas stations nationwide.
\19\ Motiva, jointly controlled by Texaco, Shell, and Saudi
Refining, consisted of their eastern and Gulf Coast refining and
marketing businesses. Its major assets included full or partial
ownership in four refineries and about 50 terminals, with the
companies' products marketed through about 14,000 branded gas stations
nationwide.
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Another petroleum industry transaction that the Commission
challenged successfully was the $6 billion merger between Valero Energy
Corp. (``Valero'') and Ultramar Diamond Shamrock Corp.
(``Ultramar'').20 Both Valero and Ultramar were leading
refiners and marketers of gasoline that met the specifications of the
California Air Resources Board (``CARB'') and were the only significant
suppliers to independent stations in California. The Commission's
complaint alleged competitive concerns in both the refining and bulk
supply of CARB gasoline in two separate geographic markets, the state
of California and Northern California, and the Commission contended
that the merger could raise the cost to California consumers by at
least $150 million annually for every one-cent-per-gallon price
increase at retail.21 To remedy the alleged violations, the
consent order settling the case required Valero to divest: (a) an
Ultramar refinery in Avon, California; (b) all bulk gasoline supply
contracts associated with that refinery; and (c) 70 Ultramar retail
stations in Northern California.22
---------------------------------------------------------------------------
\20\ Valero Energy Corp., FTC Docket No. C-4031 (Feb. 19, 2002)
(consent order), at http://www.ftc.gov/os/2002/02/valerodo.pdf.
\21\ Valero Energy Corp, FTC. Docket No. C-4031 (Dec. 18, 2001), at
http://www.ftc.gov/os/2001/12/valerocmp.pdf.
\22\ Valero Energy Corp., supra note 20.
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A final example is the Commission's 2002 challenge to the merger of
Phillips Petroleum Company and Conoco Inc., alleging that the
transaction would harm competition in the Midwest and Rocky Mountain
regions of the United States. To resolve that challenge, the Commission
required the divestiture of: (a) the Phillips refinery in Woods Cross,
Utah, and all of the Phillips-related marketing assets served by that
refinery; (b) Conoco's refinery in Commerce City, Colorado (near
Denver), and all of the Phillips marketing assets in Eastern Colorado;
and (c) the Phillips light petroleum products terminal in Spokane,
Washington.23 The Commission's order ensured that
competition would not be lost and that gasoline prices would not
increase as a result of the merger.
---------------------------------------------------------------------------
\23\ Conoco Inc. and Phillips Petroleum Corp., FTC Docket No. C-
4058 (Aug. 30, 2002) (Analysis of Proposed Consent Order to Aid Public
Comment), at http://www.ftc.gov/os/2002/08/conocophillipsan.htm. Not
all oil industry merger activity raises competitive concerns. For
example, in 2003, the Commission closed its investigation of Sunoco's
acquisition of the Coastal Eagle Point refinery in the Philadelphia
area without requiring relief. The Commission noted that the
acquisition would have no anticompetitive effects and seemed likely to
yield substantial efficiencies that would benefit consumers. Sunoco
Inc./Coastal Eagle Point Oil Co., FTC File No. 031 0139 (Dec. 29, 2003)
(Statement of the Commission), at http://www.ftc.gov/os/caselist/
0310139/031229stmt0310139.pdf. The FTC also considered the likely
competitive effects of Phillips Petroleum's proposed acquisition of
Tosco. After careful scrutiny, the Commission declined to challenge the
acquisition. A statement issued in connection with the closing of the
investigation set forth the FTC's reasoning in detail. Phillips
Petroleum Corp., FTC File No. 011 0095 (Sept. 17, 2001) (Statement of
the Commission), at http://www.ftc.gov/os/2001/09/phillips
toscostmt.htm.
Acquisitions of firms operating mainly in oil or natural gas
exploration and production are unlikely to raise antitrust concerns,
because that segment of the industry is generally unconcentrated.
Acquisitions involving firms with de minimis market shares, or with
production capacity or operations that do not overlap geographically,
are also unlikely to raise antitrust concerns.
---------------------------------------------------------------------------
B. Nonmerger Investigations into Gasoline Pricing
In addition to scrutinizing mergers, the Commission aggressively
polices anticompetitive conduct. When it appears that higher prices
might result from collusive activity or from anticompetitive unilateral
activity by a firm with market power, the agency investigates to
determine whether unfair methods of competition have been used. If the
facts warrant, the Commission challenges the anticompetitive behavior,
usually by issuing an administrative complaint.
Several recent petroleum investigations are illustrative. On March
4, 2003, the Commission issued the administrative complaint referred to
above, stating that it had reason to believe that Unocal had violated
Section 5 of the FTC Act.24 The Commission alleged that
Unocal deceived the California Air Resources Board (``CARB'') in
connection with regulatory proceedings to develop the reformulated
gasoline (``RFG'') standards that CARB adopted. Unocal allegedly
misrepresented that certain technology was non-proprietary and in the
public domain, while at the same time it pursued patents that would
enable it to charge substantial royalties if CARB mandated the use of
Unocal's technology in the refining of CARB-compliant summertime RFG.
The Commission alleged that, as a result of these activities, Unocal
illegally acquired monopoly power in the technology market for
producing the new CARB-compliant summertime RFG, thus undermining
competition and harming consumers in the downstream product market for
CARB-compliant summertime RFG in California. The Commission estimated
that Unocal's enforcement of its patents could potentially result in
over $500 million of additional consumer costs each year.
---------------------------------------------------------------------------
\24\ Union Oil Co. of California, FTC Docket No. 9305 (Mar. 4,
2003) (complaint), at http://www.ftc.gov/os/2003/03/unocalcmp.htm.
---------------------------------------------------------------------------
The proposed merger between Chevron and Unocal raised additional
concerns. Although Unocal had no horizontal refining or retailing
overlaps with Chevron, it had claimed the right to collect patent
royalties from companies that had refining and retailing assets
(including Chevron). If Chevron had unconditionally inherited these
patents by acquisition, it would have been in a position to obtain
sensitive information and to claim royalties from its own horizontal
downstream competitors. Chevron, the Commission alleged, could have
used this information and this power to facilitate coordinated
interaction and detect any deviations.
The Commission resolved both the Chevron/Unocal merger
investigation and the monopolization case against Unocal with consent
orders. The key element in these settlements is Chevron's agreement not
to enforce the Unocal patents.25 The FTC's settlement of
these two matters is thus a double victory for California consumers.
The Commission's monopolization case against Unocal was complex and,
with possible appeals, could have taken years to resolve, with
substantial royalties to Unocal--and higher consumer prices--in the
interim. The settlement provides the full relief sought in the
monopolization case and also resolves the only competitive issue raised
by the proposed merger. With the settlement, consumers will benefit
immediately from the elimination of royalty payments on the Unocal
patents, and potential merger efficiencies could result in additional
savings at the pump.
---------------------------------------------------------------------------
\25\ Union Oil Co. of California, supra note 11.
---------------------------------------------------------------------------
The FTC undertook another major nonmerger investigation during
1998-2001, examining the major oil refiners' marketing and distribution
practices in Arizona, California, Nevada, Oregon, and Washington (the
``Western States'' investigation).26 The agency initiated
the Western States investigation out of concern that differences in
gasoline prices in Los Angeles, San Francisco, and San Diego might be
due partly to anticompetitive activities. The Commission's staff
examined over 300 boxes of documents, conducted 100 interviews, held
over 30 investigational hearings, and analyzed a substantial amount of
pricing data. The investigation uncovered no basis to allege an
antitrust violation. Specifically, the investigation detected no
evidence of a horizontal agreement on price or output or the adoption
of any illegal vertical distribution practice at any level of supply.
The investigation also found no evidence that any refiner had the
unilateral ability to raise prices profitably in any market or reduce
output at the wholesale level. Accordingly, the Commission closed the
investigation in May 2001.
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\26\ FTC Press Release, FTC Closes Western States Gasoline
Investigation (May 7, 2001), available at http://www.ftc.gov/opa/2001/
05/westerngas.htm. In part, this investigation focused on ``zone
pricing'' and ``redlining.'' See Statement of Commissioners Sheila F.
Anthony, Orson Swindle and Thomas B. Leary, available at http://
www.ftc.gov/os/2001/05/wsgpiswindle.htm, and Statement of Commissioner
Mozelle W. Thompson, available at http://www.ftc.gov/os/2001/05/
wsgpithompson.htm, for a more detailed discussion of these practices
and the Commission's findings. See also Cary A. Deck & Bart J. Wilson,
Experimental Gasoline Markets, Federal Trade Commission, Bureau of
Economics Working Paper (Aug. 2003), available at http://www.ftc.gov/
be/workpapers/wp263.pdf, and David W. Meyer & Jeffrey H. Fischer, The
Economics of Price Zones and Territorial Restrictions in Gasoline
Marketing, Federal Trade Commission, Bureau of Economics Working Paper
(Mar. 2004), available at http://www.ftc.gov/be/workpapers/wp271.pdf.
---------------------------------------------------------------------------
In conducting these and other inquiries, the Commission makes the
important distinction between short-term and long-term effects. While a
refinery outage on the West Coast could significantly affect short-term
prices, the FTC did not find that it would be profitable in the long
run for a refiner to restrict its output to raise the level of prices
in the market. For example, absent planned maintenance or unplanned
outages, refineries on the West Coast (and in the rest of the country)
generally run at full (or nearly full) capacity. If gasoline is in
short supply in a locality due to refinery or pipeline outages, and
there are no immediate alternatives, a market participant may find that
it can profitably increase prices by reducing its refinery output--
generally only for a short time, until the outage is fixed or
alternative supply becomes available. This transient power over price--
which occurs infrequently and lasts only as long as the shortage--
should not be confused with the durable power over price that is the
hallmark of market power in antitrust law.
In addition to the Unocal and West Coast pricing investigations,
the Commission conducted a nine-month investigation into the causes of
gasoline price spikes in local markets in the Midwest in the spring and
early summer of 2000.27 As explained in a 2001 report, the
Commission found that a variety of factors contributed in different
degrees to the price spikes. Primary factors included refinery
production problems (e.g., refinery breakdowns and unexpected
difficulties in producing the new summer-grade RFG gasoline required
for use in Chicago and Milwaukee), pipeline disruptions, and low
inventories. Secondary factors included high crude oil prices that
contributed to low inventory levels, the unavailability of substitutes
for certain environmentally required gasoline formulations, increased
demand for gasoline in the Midwest, and ad valorem taxes in certain
states. The industry responded quickly to the price spike. Within three
or four weeks, an increased supply of product had been delivered to the
Midwest areas suffering from the supply disruption. By mid-July 2000,
prices had receded to pre-spike or even lower levels.
---------------------------------------------------------------------------
\27\ Midwest Gasoline Price Investigation, Final Report of the
Federal Trade Commission (Mar. 29, 2001), available at http://
www.ftc.gov/os/2001/03/mwgasrpt.htm; see also Remarks of Jeremy Bulow,
Director, Bureau of Economics, The Midwest Gasoline Investigation,
available at http://www.ftc.gov/speeches/other/midwestgas.htm.
---------------------------------------------------------------------------
The Commission's merger investigations also are relevant to the
detection of nonmerger antitrust violations. FTC oil and gas merger
investigations during the past decade uniformly have been major
undertakings that have reviewed all pertinent facets of the relevant
petroleum markets. These investigations have involved the review of
thousands of boxes of documents in discovery, examination of witnesses
under oath, and exhaustive questioning of outside experts. The FTC
staff, therefore, have learned information that also could assist in
detecting and investigating potentially anticompetitive conduct.
III. COMMISSION REPORT ON FACTORS THAT AFFECT THE PRICE OF GASOLINE
What are the causes of high gasoline prices and gasoline price
spikes? These important questions require a thorough and accurate
analysis of the factors--supply, demand, and competition, as well as
federal, state, and local regulations--that drive gasoline prices, so
that policymakers can evaluate and choose strategies likely to succeed
in addressing high gasoline prices.
The Commission addressed these issues by conducting extensive
research concerning gasoline price fluctuations, analyzing specific
instances of apparent gasoline price anomalies, and holding a series of
conferences 28 on the factors that affect gasoline prices,
leading to the publication of a report 29 that draws on what
the Commission has learned about the factors that can influence
gasoline prices or cause gasoline price spikes. We discuss the findings
of our study, but first set out three basic lessons that emerge from
our collective work.
---------------------------------------------------------------------------
\28\ FTC Press Release, FTC to Hold Second Public Conference on the
U.S. Oil and Gasoline Industry in May 2002 (Dec. 21, 2001), available
at http://www.ftc.gov/opa/2001/12/gasconf.htm.
\29\ Gasoline Price Changes, supra note 3.
---------------------------------------------------------------------------
First, in general, the price of gasoline reflects producers' costs
and consumers' willingness to pay. Gasoline prices rise if it costs
more to produce and supply gasoline, or if people wish to buy more
gasoline at the current price--that is, when demand is greater than
supply. Gasoline prices fall if it costs less to produce and supply
gasoline, or if people wish to buy less gasoline at the current price--
that is, when supply is greater than demand. Gasoline prices will stop
rising or falling when they reach the level at which the quantity
consumers demand matches the quantity that producers will supply.
Second, how consumers respond to price changes will affect how high
prices rise and how low they fall. Limited substitutes for gasoline
restrict the options available to consumers to respond to price
increases in the short run. Because gasoline consumers typically do not
reduce their purchases substantially in response to price increases,
they are vulnerable to substantial price increases.
Third, producers' responses to price changes will affect how high
prices rise, and how low they fall. In general, when there is not
enough gasoline to meet consumers' demands at current prices, higher
prices will signal a potential profit opportunity and may bring
additional supply into the market. Additional supply will be available
to the extent that an increase in price exceeds the producers' cost of
expanding output.
The vast majority of the Commission's investigations and studies
have revealed market factors as the primary drivers of both price
increases and price spikes. There is a complex landscape of market
forces that affect gasoline prices in the United States.
A. Worldwide Supply, Demand, and Competition for Crude Oil Are the Most
Important Factors in the National Average Price of Gasoline in
the United States
Crude oil is a commodity that is traded on world markets, and the
world price of crude oil is the most important factor in the price of
gasoline in the United States and all other markets. Over the past 20
years, changes in crude oil prices have explained approximately 85
percent of the changes in the price of gasoline.30 United
States refiners compete with refiners all around the world to obtain
crude, and the United States now imports more than 60 percent of its
crude from foreign sources.
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\30\ A simple regression of the monthly average national price of
gasoline on the monthly average price of West Texas Intermediate crude
oil shows that the variation in the price of crude oil--based on data
for the period January 1984 to October 2003--explains approximately 85
percent of the variation in the price of gasoline. This is similar to
the range of effects given in United States Department of Energy/Energy
Information Administration, Price Changes in the Gasoline Market: Are
Midwestern Gasoline Prices Downward Sticky?, DOE/EIA-0626 (Feb. 1999).
More complex regression analysis and more disaggregated data may give
somewhat different estimates, but the latter estimates are likely to be
of the same general magnitude.
This percentage may vary across states or regions. See Prepared
Statement of Justine Hastings before the Committee on the Judiciary,
Subcommittee on Antitrust, Competition Policy and Consumer Rights,
United States Senate, Crude Oil: The Source of Higher Gas Prices (Apr.
7, 2004). Dr. Hastings found a range from approximately 70 percent for
California to 91 percent for South Carolina. South Carolina uses only
conventional gasoline and is supplied largely by major product
pipelines that pass through the state on their way north from the large
refinery centers on the Gulf Coast. California, with its unique fuel
specifications and its relative isolation from refinery centers in
other parts of the United States, historically has been more
susceptible to supply disruptions that can cause major gasoline price
changes, independent of crude oil price changes.
---------------------------------------------------------------------------
If world crude prices rise, then U.S. refiners must pay higher
prices for the crude they buy. Facing higher input costs from crude,
refiners charge more for the gasoline they sell at wholesale. This
requires retail stations to pay more for their gasoline. In turn,
retail stations, facing higher input costs, charge consumers more at
the pump. In short, when crude oil prices rise, gasoline prices rise
because gasoline becomes more costly to produce.
Crude oil prices are not wholly market-determined. Since 1973,
decisions by OPEC have been a significant factor in the prices that
refiners pay for crude oil. Over time, OPEC has met with varying
degrees of success in raising crude oil prices. (For example, OPEC
members can be tempted to ``cheat'' and sometimes sell more crude oil
than specified by OPEC limits.) Higher world crude prices due to OPEC's
actions, however, increased the incentives to search for oil in other
areas, and crude supplies from non-OPEC members such as Canada, the
United Kingdom, and Norway have increased significantly. Nonetheless,
OPEC still produces a large enough share of world crude oil to exert
market power and strongly influence the price of crude oil when its
members adhere to their assigned production quotas. Especially when
demand surges unexpectedly, as in 2004, OPEC decisions on whether to
increase supply to meet demand can have a significant impact on world
crude oil prices.
Crude oil consumption has fallen during some periods over the past
30 years, partially in reaction to higher prices and partially in
response to federal laws, such as requirements to increase the fuel
efficiency of cars. Gasoline consumption in the United States fell
significantly between 1978 and 1982, and remained lower during the
1980s than it had been at the beginning of 1978.31 Overall,
however, the long-run trend is toward significantly increased demand
for crude oil. Over the last 20 years, United States consumption of all
refined petroleum products increased on average by 1.4 percent per
year, leading to a total increase of nearly 30 percent.32
---------------------------------------------------------------------------
\31\ Gasoline Price Changes, supra note 3, at 43-45.
\32\ Id. at 19.
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Crude oil prices have been increasing rapidly in recent months.
Demand has remained high in the United States, and large demand
increases from rapidly industrializing countries, particularly China
and India, have made supplies much tighter than expected.33
---------------------------------------------------------------------------
\33\ This phenomenon was not limited to crude oil: other
commodities that form the basis for expanded growth in developing
economies, such as steel and lumber, also saw unexpectedly rapid growth
in demand, along with higher prices. Id. at 27.
---------------------------------------------------------------------------
B. Gasoline Supply, Demand, and Competition Produced Relatively Low and
Stable Prices From 1984 Until 2004, Despite Substantial
Increases in United States Gasoline Consumption
Consumer demand for gasoline in the United States has risen
substantially, especially since 1990.34 In 1978, U.S.
gasoline consumption was about 7.4 million barrels per day. By 1981, in
the face of sharply escalating crude oil and gasoline prices and a
recession, U.S. gasoline consumption had fallen to approximately 6.5
million barrels per day.35 As gasoline prices began to fall
in the 1980s, U.S. consumption of gasoline began to rise once again. By
1993, consumption rose above 1978 levels, and it has continued to
increase at a fairly steady rate since then. In 2004, U.S. gasoline
consumption averaged about 9 million barrels per day, and the EIA's
forecast is for 9.2 million barrels per day this year.36
---------------------------------------------------------------------------
\34\ Id. at 48.
\35\ Id.
\36\ See id. at 49; EIA, DOE/EIA-0202, Short-term Energy Outlook,
Apr. 2005, app. at 5 tbl.A5, at http://www.eia.doe.gov/pub/forecasting/
steo/oldsteos/apr05.pdf.
---------------------------------------------------------------------------
Despite high gasoline prices across the nation, demand has not
fallen off in 2005. Gasoline demand this summer driving season has been
above last year's record driving-season demand and well above the
average for the previous four years. Average daily demand of finished
gasoline for May was 9.3 millions barrels per day, an increase of 1.2
percent over May of 2004, and 5.5 percent higher than the average
demand for the previous four summers. Similarly, June's demand was up
2.8 percent over last June (up 5.4 percent from the average of the
previous four years) and July's demand increase was up 3.2 percent over
July of 2004 (up 4.6 percent from average of the last four years).
Gasoline demand for the last four weeks ending August 26 was level with
the demand for the same period last year, despite much higher
prices.37
---------------------------------------------------------------------------
\37\ EIA, DOE/EIA-0208(2005-34), Weekly Petroleum Status Report,
August 31, 2005, at 17, tbl.11, at http://www.eia.doe.gov/pub/oil_gas/
petroleum/data_publications/weekly_petroleum
_status_report/historical/2005/2005_08_31/pdf/wpsrall.pdf.
---------------------------------------------------------------------------
In spite of these substantial demand increases, increased supply
from U.S. refineries and imports have kept gasoline prices relatively
steady until 2004. A comparison of ``real'' average annual retail
gasoline prices and average annual retail gasoline consumption in the
United States from 1978 through 2004 shows that, in general, gasoline
prices remained relatively stable despite significantly increased
demand.38 Indeed, over the very long run in the 84-year
period between 1919 and 2003, real annual average retail gasoline
prices in the United States did not increase at all. The data show
that, from 1986 through 2003, real national average retail prices for
gasoline, including taxes, generally were below $2.00 per gallon (in
2004 dollars). By contrast, between 1919 and 1985, real national
average retail gasoline prices were above $2.00 per gallon (in 2004
dollars) more often than not.39
---------------------------------------------------------------------------
\38\ ``Real'' prices are adjusted for inflation and therefore
reflect the different values of a dollar at different times; they
provide more accurate comparisons of prices in different time periods.
``Nominal'' prices are the literal prices shown at the time of
purchase.
\39\ See Gasoline Price Changes, supra note 3, at 43-47.
---------------------------------------------------------------------------
Average U.S. retail prices have been increasing since 2003,
however, from an average of $1.56 in 2003 to an average of $2.04 in the
first five months of 2005.40 In the last two months, the
prices have moved even higher. It is difficult to predict whether these
increases represent the beginning of a longer-term trend or are merely
normal market fluctuations caused by unexpectedly strong short-term
worldwide demand for crude oil, as well as reflecting the effects of
instability in such producing areas as the Middle East and Venezuela.
---------------------------------------------------------------------------
\40\ The higher prices in 2005 appear to be the result of market
factors that have uniformly affected the entire country. At least for
the part of this year that preceded Hurricane Katrina, the FTC's
Gasoline Price Monitoring Project has detected no evidence of
significant unusual local or regional gasoline pricing anywhere in the
United States during this summer driving season. This contrasts with
the past two summers, during which various regional supply shocks, such
as the Arizona pipeline shutdown and Northeast blackouts of August
2003, and the several unanticipated regional refinery outages and late
summer hurricanes during the summer of 2004, significantly increased
prices in some areas above levels that might be expected based on
historical price patterns.
---------------------------------------------------------------------------
One of the reasons why long-term real prices have been relatively
contained is that United States refiners have taken advantage of
economies of scale and adopted more efficient technologies and business
strategies. Between 1985 and 2005, U.S. refineries increased their
total capacity to refine crude oil into various refined petroleum
products by 8.9 percent, moving from 15.7 million barrels per day in
1985 to 17.133 million barrels per day as of August 2005.41
This increase--approximately 1.4 million barrels per day--is roughly
equivalent to adding approximately 10 to 12 average-sized refineries to
industry supply. Yet U.S. refiners did not build any new refineries
during this time. Rather, they added this capacity through the
expansion of existing refineries. They also have adopted processing
methods that broaden the range of crude oils that they can process and
allow them to produce more refined product for each barrel of crude
processed. In addition, they have lowered inventory holdings, thereby
lowering inventory costs (although lower inventory holdings may also
make an area more susceptible to short-term price spikes when there is
a disruption in supply).
---------------------------------------------------------------------------
\41\ Petroleum Merger Report, supra note 4, at 196, tbl.7-1; EIA,
DOE/EIA-0340(04)/1, 1 Petroleum Supply Annual 2004, at 78, tbl.36
(2005), at http://www.eia.doe.gov/pub/oil_gas/petroleum/
data_publications/petroleum_supply_annual/psa_volume1/current/pdf/
volume1_all.pdf. EIA, DOE/EIA-0208(2005-33), Weekly Petroleum Status
Report, August 24, 2005, at http://www.eia.doe.gov/pub/oil_gas/
petroleum/data_publications/weekly_petrole
um_status_report/historical/2005/2005_08_24/pdf/wpsrall.pdf.
---------------------------------------------------------------------------
Offsetting some of the observed efficiency gains, increased
environmental requirements since 1992 have likely raised the retail
price of gasoline by a few cents per gallon in some areas. Because
gasoline use is a major factor in air pollution in the United States,
the U.S. Environmental Protection Agency--under the Clean Air Act
42--requires various gasoline blends for particular
geographic areas that have not met certain air quality standards. While
available information shows that the air quality in the United States
has improved due to the Clean Air Act, 43 as with any
regulatory program, costs come with the benefits. Environmental laws
and regulations have required substantial and expensive refinery
upgrades, particularly over the past 15 years. It costs more to produce
cleaner gasoline than to produce conventional gasoline. Estimates of
the increased costs of environmentally mandated gasoline range from
$0.03 to $0.11 per gallon.44
---------------------------------------------------------------------------
\42\ Beginning with the Clean Air Act Amendments of 1970 (Pub. L.
No. 91-604, 84 Stat. 1698) and continuing with further amendments in
1990 (Pub. L. No. 101-549, 104 Stat. 2468) and the Energy Policy Act of
1992 (Pub. L. No. 102-486, 106 Stat. 2776), Congress has mandated
substantial changes in the quality of gasoline, as well as diesel, that
can be sold in the United States.
\43\ Robert Larson, Acting Director of the Transportation and
Regional Programs, Environmental Protection Agency, Remarks at the FTC
Conference on Factors that Affect Prices of Refined Petroleum Products
79-80 (May 8, 2002).
\44\ See EIA, 1995 Reformulated Gasoline Market Affected Refiners
Differently, in DOE/EIA-0380(1996/01), Petroleum Marketing Monthly
(1996), and studies cited therein. Environmental mandates are not the
same in all areas of the country. The EPA requires particular gasoline
blends for certain geographic areas, but it sometimes allows variations
on those blends. Differing fuel specifications in different areas can
limit the ability of gasoline wholesalers to find adequate substitutes
in the event of a supply shortage. Thus, boutique fuels may exacerbate
price variability in areas, such as California, that are not
interconnected with large refining centers in other areas.
---------------------------------------------------------------------------
Our studies indicate that higher retail prices are not caused by
excess oil company profits. Although recent oil company profits may be
high in absolute terms, industry profits have varied widely over time,
as well as over industry segments and among firms.
EIA's Financial Reporting System (``FRS'') tracks the financial
performance of the 28 major energy producers currently operating in the
United States. In 2003, these firms did have a return on capital
employed of 12.8 percent, as compared to the 10 percent return on
capital employed for the overall Standard & Poors (``S&P'')
Industrials. Between 1973 and 2003, however, the annual average return
on equity for FRS companies was 12.6 percent, while it was 13.1 percent
for the S&P Industrials.45 High absolute profits do not
contradict numbers showing that oil companies may at times earn less
(as a percentage of capital or equity) than other industrial firms.
This simply reflects the large amount of capital necessary to find,
refine, and distribute petroleum products.
---------------------------------------------------------------------------
\45\ See Gasoline Price Changes, supra note 3, at 61.
---------------------------------------------------------------------------
The rates of return on equity for FRS companies have varied widely
over the years, ranging from as low as 1.1 percent to as high as 21.1
percent during the period from 1974 to 2003.46 Returns on
equity vary across firms as well. Crude oil exploration and production
operations typically generate much higher and more volatile returns
than refining and marketing. In essence, companies with exploration and
production operations now find themselves in a position analogous to
that of a homeowner who bought a house in a popular area just before
increased demand for housing caused real estate prices to escalate.
Like the homeowner, crude oil producers can charge higher prices due to
increased demand. If high prices and high profits are expected to
continue, they may draw greater investments over time into the oil
industry--in particular, to crude exploration and production. Over the
long run, these investments are likely to elicit more crude supply,
which would exert a downward pressure on prices.
---------------------------------------------------------------------------
\46\ Id.
---------------------------------------------------------------------------
C. Other Factors, Such as Retail Station Density, New Retail Formats,
and State and Local Regulations, Also Can Affect Retail
Gasoline Prices
The interaction of supply and demand and industry efficiency are
not the only factors that impact retail gasoline prices. State and
local taxes can be a significant component of the final price of
gasoline. In 2004, the average state sales tax was $0.225 per gallon,
with the highest state tax at $0.334 per gallon (New
York).47 Some local governments also impose gasoline
taxes.48
---------------------------------------------------------------------------
\47\ See Gasoline Price Changes, supra note 3, at 111--(noting that
the other four states with the highest average taxes on gasoline in
2004 were Wisconsin ($0.33 per gallon), Connecticut ($0.325 per
gallon), Rhode Island ($0.306 per gallon), and California ($0.301 per
gallon)).
\48\ Id. For example, all areas in Florida also have a local tax
between $0.099 and $0.178 per gallon. Similarly, Honolulu has a local
tax of $0.165 per gallon.
---------------------------------------------------------------------------
Local regulations may also have an impact on retail gasoline
prices. For example, bans on self-service sales or below-cost sales
appear to raise gasoline prices. New Jersey and Oregon ban self-service
sales, thus requiring consumers to buy gasoline bundled with services
that increase costs--that is, having staff available to pump the
gasoline.49 Some experts have estimated that self-service
bans cost consumers between $0.02 to $0.05 per gallon.50 In
addition, some 11 states have laws banning below-cost sales, so that a
gas station is required to charge a minimum amount above its wholesale
gasoline price.51 These laws harm consumers by depriving
them of the lower prices that more efficient (e.g., high-volume)
stations can charge.
---------------------------------------------------------------------------
\49\ See, e.g., Oregon Rev. Stat., ch. 480, 480.315.
\50\ See Michael G. Vita, Regulatory Restrictions on Vertical
Integration and Control: The Competitive Impact of Gasoline Divorcement
Policies, 18 J. Reg. Econ. 217 (2000); see also Ronald N. Johnson &
Charles J. Romeo, The Impact of Self-Service Bans in the Retail
Gasoline Market, 82 Rev. Econ. & Stat. 625 (2000); Donald Vandegrift &
Joseph A. Bisti, The Economic Effect of New Jersey's Self-Service
Operations Ban on Retail Gasoline Markets, 24 J. Consumer Pol'y 63
(2001).
\51\ See Gasoline Price Changes, supra note 3, at 113.
---------------------------------------------------------------------------
Not surprisingly, retail gasoline prices are likely to be lower
when consumers can choose--and can switch their purchases--among a
greater number of retail stations. A small number of empirical studies
have examined gasoline station density in relation to prices. One study
found that stations in Southern California that imposed a 1 percent
price increase lost different amounts of sales, depending on how many
competitors were close by.52 Those with a large number of
nearby competitors (27 or more within 2 miles) lost 4.4 percent of
sales in response to a 1 percent price increase; those with a smaller
number of nearby competitors (fewer than 19 within 2 miles) lost only
1.5 percent of sales.53 With all else equal, stations that
face greater lost sales from raising prices will likely have lower
retail prices than stations that lose fewer sales from raising prices.
---------------------------------------------------------------------------
\52\ John M. Barron et al., Consumer and Competitor Reactions:
Evidence from a Retail-Gasoline Field Experiment (Mar. 2004), at http:/
/ssrn.com/abstract'616761.
\53\ Id. at 13, 15, 30-31.
---------------------------------------------------------------------------
Station density depends on cost conditions in an area. For example,
the size and density of a market will influence how many stations can
operate and cover their fixed costs. Fixed costs will depend on the
costs of land and of building a station. Zoning regulations also may
limit the number of stations in an area below what market conditions
indicate the area could profitably sustain. Studies suggest that entry
by new gasoline competitors tends to be more difficult in areas with
high land prices and strict zoning regulations.54
---------------------------------------------------------------------------
\54\ See id. at 30-31; Gov't Accountability Office (GAO), GAO/RCED-
00-121, Motorfuels: California Gasoline Price Behavior 20 (2000),
available at http://www.gao.gov/new/items/rc00121.pdf.
---------------------------------------------------------------------------
One of the biggest changes in retail sales of gasoline in the past
three decades has been the development of such new formats as
convenience stores and high-volume operations. These new formats appear
to lower retail gasoline prices. The number of traditional gasoline-
pump-and-repair-bay outlets has dwindled for a number of years, as
brand-name gasoline retailers have moved toward a convenience store
format. Independent gasoline/convenience stores--such as RaceTrac,
Sheetz, QuikTrip, and Wawa--typically feature large convenience stores
with multiple fuel islands and multi-product dispensers. They are
sometimes called ``pumpers'' because of their large-volume fuel sales.
By 1999, the latest year for which data are available, brand-name and
independent convenience store and pumper stations accounted for almost
67 percent of the volume of U.S. retail gasoline sales.55
---------------------------------------------------------------------------
\55\ Petroleum Merger Report, supra note 4, at 246 tbl.9-5.
---------------------------------------------------------------------------
Another change to the retail gasoline market that appears to have
helped keep gasoline prices lower is the entry of hypermarkets.
Hypermarkets are large retailers of general merchandise and grocery
items, such as Wal-Mart and Safeway, that have begun to sell gasoline.
Hypermarket sites typically sell even larger volumes of gasoline than
pumper stations--sometimes 4 to 8 times larger.56
Hypermarkets' substantial economies of scale generally enable them to
sell significantly greater volumes of gasoline at lower prices.
---------------------------------------------------------------------------
\56\ Id. at 239.
---------------------------------------------------------------------------
The list of factors that have an impact on retail gasoline prices
is not exhaustive, but it shows that prices are set by a complex array
of market and regulatory forces working throughout the economy. In the
long run, these forces have combined to produce remarkably stable
prices in the face of consistently growing demand. Short-run
variations, while sometimes painful to consumers, are unavoidable in an
industry that depends on the demand and supply decisions of literally
billions of people.
IV. CONCLUSION
The Federal Trade Commission has an aggressive program to enforce
the antitrust laws in the petroleum industry. The Commission has taken
action whenever a merger or nonmerger conduct has violated the law and
threatened the welfare of consumers or competition in the industry. The
Commission continues to study this industry in detail, to monitor
wholesale and retail gasoline prices, and to search for instances of
illegal mergers or anticompetitive conduct.
Thank you for this opportunity to present the FTC's views on this
important topic. I would be glad to answer any questions that the
Committee may have.
Chairman Barton. Thank you, Mr. Seesel.
We now want to hear from Mr. Kenneth Moran, who is the
Acting Director of the Office of Homeland Security Enforcement
Bureau at the Federal Communications Commission.
Welcome, Mr. Moran, and you are recognized for 7 minutes.
STATEMENT OF KENNETH P. MORAN
Mr. Moran. Thank you, Mr. Chairman.
Good afternoon, Mr. Chairman and distinguished members of
the committee. My name is Ken Moran, and I serve as the
Director of the Federal Communication's Commissions Office of
Homeland Security. In that role, I am primarily responsible for
coordinating the Commission's support of the Hurricane Katrina
disaster relief efforts.
In my written testimony, I describe some of the damage to
the communications industry resulting from Hurricane Katrina
and the Commission's efforts to assist consumers, the
industries that the agency regulates, and other Federal
agencies during this difficult crisis. I ask that my written
testimony be submitted into the record, and I will summarize
those comments now.
Hurricane Katrina caused catastrophic damage and massive
flooding in areas of Louisiana, Mississippi and Alabama. The
loss of life and damage to property is astounding, and our
thoughts and prayers go out to those affected by the disaster.
Most of the communications industry sustained tremendous damage
to their facilitates in the affected area, hampering rescue
operations or emergency responders and affecting the
communications of those still struggling with the affects of
the hurricane.
Hurricane Katrina knocked out more than 3 million customer
phone lines. Wireline communications networks sustained
enormous damage both to the switching centers that route the
calls and the lines that connect the buildings and the
customers to the network.
Local wireless networks also sustained considerable damage.
More than 1,000 cell sites were knocked out of service by the
hurricane. During this disaster, millions of telephone calls
simply have not been able to get through.
Also, of the 41 broadcast radio stations located in New
Orleans and the surrounding area, only two AM and two FM
stations remained on the air in the wake of the hurricane.
We know that extraordinary efforts are being made to
maintain and restore service in the disaster zone. Broadcasters
are getting some stations on the air, albeit at significantly
reduced power, to provide survivors with important information.
Wireline and wireless carriers have crews working around the
clock to repair switching centers, customer lines and cell
towers. Satellite service providers have helped bridge some of
the gaps left by the outages by, for example, providing
satellite phones and video links to law enforcement officials
and medical personnel, emergency relief personnel and news
outlets. Even with these efforts, though, many of the
communications services in the affected areas remain down.
Today, we estimate that 1 million customer lines remain out
of service. Six 911 centers still remain out of service, and
approximately 30 percent of wireless telecom cell sites are not
operational. Also, more than 50 radio and TV stations remain
off the air. Many of these sites that are operational are
dependent on the back-up energy supplies.
On August 30, the Commission established an internal task
force consisting of senior executives and management from
within the Commission. Chairman Martin directed the task force
to coordinate the FCC's hurricane response activities which
fall into two categories: regulatory relief; and industry
outreach and coordination with other Federal agencies. The task
force has been working on these assignments continuously since
August 30, and the Commission was open throughout the Labor Day
weekend to continue the work. To date, nearly 200 FCC employees
have assisted in this effort.
The Commission has taken a number of steps to facilitate
resumption of communication services in the affected areas and
to authorize use of temporary communication services for use by
disaster relief personnel and evacuees in shelters.
At the start of this disaster, the Commission notified
communications providers that it would provide streamlined
treatment for requests for special temporary authority in order
to aid them in resuming and maintaining operations in the areas
impacted by Hurricane Katrina. The FCC has received 22 special
temporary authority requests and 77 requests for temporary
frequency assignments. The Commission has also received a
number of requests for temporary waiver of its rules. The
Commission has granted most of these requests within 4 hours of
their receipt and all requests within 24 hours. In addition,
the Commission has released several public notices and quickly
adopted orders to provide temporary relief.
My written testimony provides many examples of the
Commission action to date.
The Commission has been working closely with industry as
well as FEMA and the National Communications System consistent
with procedures established in the National Response Plan. The
Commission continues to reach out to the communications
companies serving the affected areas to assess their
operational status and determine the resources that they need
to resume full operations.
The FCC provides the critical information about resources
that communications providers need to restore and maintain
service in the area to both FEMA and the NCS, who are
responsible for ensuring that priority needs are met. The
agency updates FEMA and NCS daily on the evolving needs.
The Commission is also responsible for providing the
National Coordinating Center for Telecommunications with
information on communications companies' operational status for
incorporation into the governmentwide situation reports. Again,
the agency gathers and submits this data daily.
In addition, the Commission has worked closely with the
communications industry to help identify resources for use by
disaster response personnel. The agency both transmits this
information to the NCS and facilitates the industry's
communication with other Federal officials.
Finally, the Commission has been coordinating with the
Interagency Coordination Council on Individuals with
Disabilities to ensure that the needs of the disability
community are addressed in the coordinated Federal relief
efforts.
In conclusion, the Commission is continuing to work with
key Federal agencies and the communications industry to
determine what additional actions can be taken to assist in the
disaster relief and restoration effort. More information about
these efforts is available on our Web site.
The Commission stands ready to work with the Congress, our
colleagues at the State, Federal and local agencies and the
American public to do whatever we can to help with disaster
relief and restoration efforts. I would be pleased to respond
to your comments. Thank you.
[The prepared statement of Kenneth P. Moran follows:]
Prepared Statement of Kenneth P. Moran, Director, Office of Homeland
Security, Enforcement Bureau, Federal Communications Commission
Good morning, Mr. Chairman and distinguished members of the
Committee. My name is Ken Moran and I serve as the Director of the
Federal Communications Commission's Office of Homeland Security. In
that role, I am primarily responsible for coordinating the Commission's
support of the Hurricane Katrina disaster relief efforts.
In my testimony today, I will describe some of the damage wrought
by Hurricane Katrina to the communications industry and the
Commission's efforts to assist consumers, the industries the agency
regulates, and other Federal Agencies during this difficult crisis.
Hurricane Katrina caused catastrophic damage and massive flooding
in areas of Louisiana, Mississippi, and Alabama. The loss of life and
damage to property is astounding, and our thoughts and prayers go out
to those people affected by this disaster. As I am sure you are aware,
most of the communications industry sustained tremendous damage to
their facilities in the affected area, and the damage has had a
significant impact. The damage to the communications infrastructure
hampered the rescue operations of emergency responders. Relief efforts
and survivors are still struggling with the effects of the hurricane.
Survivors lack information about relief efforts. People displaced from
their homes do not have the means to contact their loved ones to let
them know they are safe. And of course, survivors remaining in the
affected area lack a reliable means of contacting the authorities and
getting help in life threatening situations.
STATUS OF COMMUNICATIONS NETWORKS
Hurricane Katrina knocked out more than 3 million customer phone
lines in the Louisiana, Mississippi, and Alabama area. The wireline
telecommunications network sustained enormous damage both to the
switching centers that route calls and to the lines used to connect
buildings and customers to the network. Local wireless networks also
sustained considerable damage--more than a thousand cell sites were
knocked out of service by the hurricane. During this disaster, millions
of telephone calls simply have not been able to get through. Of the 41
broadcast radio stations located in New Orleans and the surrounding
area, only two AM and two FM stations remained on the air in the wake
of the hurricane.
Through network outage reports filed in accordance with the
Commission's rules, and through data given to us voluntary by the
industry, we understand that an extreme effort is being made to
maintain and restore service in the disaster zone. Broadcasters are
making every effort to get stations on-the-air, even at significantly
reduced power, to provide survivors with important information.
Wireline and wireless carriers have crews working to repair switching
centers, customer lines, and cell towers. Satellite service providers
have helped bridge some of the gaps left by the outages by, for
instance, providing satellite phones and video links to law enforcement
officials, medical personnel, emergency relief personnel, and news
outlets.
Even with these efforts, given the enormity of the disaster, many
of the communications services in the affected areas remain down.
Today, we understand that more than one million customer lines and over
20 switching centers remain out of service. Approximately 1700 DS-3
interoffice facilities remain down. Six public safety answering points
remain out of service. Approximately thirty percent of cell sites are
not operational. Fifty to 100 radio and television stations remain off
the air. Many of the sites that are operational are dependent on back-
up energy supplies.
COMMISSION ACTIONS
On August 30th, Chairman Martin established an internal Task Force
consisting of senior executives and management from within the
Commission. Chairman Martin directed the Task Force to coordinate the
FCC's hurricane response efforts, which fall into two categories: (1)
regulatory relief; and (2) industry outreach and coordination with
other federal agencies. The Task Force has been working on these
assignments continuously since August 30th, and the Commission was open
throughout the Labor Day weekend to continue the work. To date, nearly
200 FCC employees have assisted in this effort.
Regulatory Relief
The Commission has taken a number of steps to facilitate the
resumption of communications services in the affected areas and to
authorize the use of temporary communications services for use by
disaster relief personnel and evacuees in shelters.
At the start of the disaster, the Commission notified
communications providers that it would provide streamlined treatment
for requests for special temporary authority (STA) in order to aid them
in resuming and maintaining operations in areas impacted by Hurricane
Katrina. The FCC has received at least 22 STA requests and 77 requests
for temporary frequency assignments. The Commission also has received a
number of requests for temporary waiver of its rules. The Commission
has granted each of these requests within 4 hours of receipt of all
necessary information from the requestor, except in instances requiring
coordination with other government agencies. Even in those cases,
requests have been granted within 24 hours. In addition, the Commission
has released several public notices and quickly adopted orders to
provide temporary relief.
Examples of the many steps the Commission has taken to assist
disaster relief efforts and affected providers are listed in the
attached appendix.
Industry Outreach and Coordination with Other Federal Agencies
The Commission has been working closely with industry as well as
the Federal Emergency Management Agency (FEMA) and the National
Communications System (NCS) pursuant to the procedures established in
the National Response Plan. The Commission is continuously reaching out
to communications companies serving the affected area--wireline and
wireless network providers, broadcasters, cable providers, satellite
providers--and to trade associations for these providers to assess the
companies' status and determine what they need to resume operations.
These efforts include Commission staff contacting each of the
approximately 160 broadcast stations in the affected region.
The FCC provides the critical information about resources that
communications providers need to restore and maintain service in the
affected area to FEMA and NCS, who are responsible for ensuring that
priority needs are met. For instance, the Commission identified
wireline central offices and radio and television broadcasters that
could be operational if provided fuel to power on-site generators. The
agency updates FEMA and NCS daily on evolving needs.
The Commission also is responsible for providing the National
Coordinating Center (NCC) with information on communications companies'
operational status for incorporation into the government-wide situation
reports. Again, the agency gathers and submits this data daily.
In addition, the FCC has worked closely with the communications
industry to help identify resources for use by disaster response
personnel. The agency both transmits this information to NCC and
facilitates industry's communication with other federal officials. For
example, Commission staff coordinated discussions between FEMA and a
major Direct Broadcast Satellite (DBS) provider to set up free
televisions at disaster relief facilities and to provide a nationwide
channel for disaster emergency services programming. Staff also worked
with a wide range of providers--including those offering competitive
facilities-based telecommunications, satellite, wireless, wireless
internet access and WI FI services--to identify those providers capable
of offering facilities and services that can assist those in the
affected area.
Finally, the Commission has been coordinating with the Interagency
Coordinating Council on Individuals with Disabilities, organized by the
Department of Homeland Security, to ensure that the needs of the
disability community are addressed in the coordinated federal relief
efforts.
CONCLUSION
FCC Chairman Kevin Martin, Commissioners Kathleen Abernathy,
Michael Copps and Jonathan Adelstein, along with the FCC staff, commend
the industry and the tremendous efforts it has made to begin to repair
the infrastructure and restore communications service to the Gulf
Coast. These extraordinary efforts to restore communications services
are being performed by employees of the communications industry--many
of whom may be personally impacted by this tragedy.
The Commission is continuing to work with other Federal agencies
and the communications industry to determine what additional actions
can be taken to assist in the disaster relief and restoration effort.
More information about these efforts is--and will continue to be--
available on the Commission's web site: http://www.fcc.gov/cgb/
katrina/.
The Commission also will continue its important work in reaching
out, and responding to, consumers affected by this tragedy. Since the
hurricane struck, including over the Labor Day weekend, the Commission
manned its toll-free consumer line to help individuals get access to
critical information about telecommunications and broadcast services in
the affected area. The agency will continue these and other efforts to
address consumer concerns, in coordination with other government
agencies, relief organizations, consumer groups and industry.
The damage wrought by Hurricane Katrina is tremendous and its
effects will be felt for months and possibly years to come. The
Commission stands ready to work with Congress, our colleagues at
federal, state, and local agencies, and the American public to do
whatever we can to help with the disaster relief and restoration
efforts. I would be pleased to respond to your questions.
Appendix
Since Hurricane Katrina struck the Gulf Coast, the Commission has
taken a number of steps to help the industry resume service and to
assist the communications needs of disaster relief personnel and
evacuees in shelters. Following are some examples of Commission
actions:
On September 2nd, the Commission granted STAs to operate ultra-wide
band services ``through-the-wall'' imaging systems to locate
survivors.
On September 5th, the Commission temporarily authorized the
Department of Defense to conduct ship-to-ship, ground, and air-
to-ground operations in the affected area.
Over the past week, the Commission granted STAs and temporary
frequency authorizations to parties working to support relief
efforts and to utilities working to restore phone and electric
service in the affected area.
Over the Labor Day weekend, the Commission granted a temporary waiver
of its ``slamming rules,'' which require carriers to ensure
subscribers are notified before their long distance service is
switched. This temporary waiver will permit carriers to
temporarily transfer customers to long distance carriers with
working facilities while restoration efforts are under way.
On September 2nd, the Commission acted upon the request of the
American Red Cross and temporarily reassigned the toll free 800
number ``1-800-RED-CROSS'' to the National Chapter of the
American Red Cross. This action will facilitate the disaster
relief operations and fundraising efforts of the American Red
Cross--the only non-governmental agency with a specified lead
role in the National Response Plan--by providing an easily-
recognizable centralized telephonic point of contact for this
important organization.
Also on September 2nd, the Commission suspended its rules in order to
permit noncommercial educational (NCE) radio and television
stations in New Orleans to rebroadcast programming, including
commercial matter, received from commercial broadcast stations.
This special relief is designed to bring immediate life saving
and other important program information to the residents of New
Orleans in the most expeditious manner possible.
Between September 2nd and September 4th, the Commission granted STAs
to provide Internet connectivity to more than 200 shelters
operated by the American Red Cross.
On September 1st and 2nd, the Commission temporarily waived certain
rules applicable to NCE television and radio stations, allowing
those stations to air fundraising programming to aid disaster
relief efforts.
On September 5th, the Commission granted experimental authorizations
to permit the use of 3 FM signals to broadcast emergency
information to the approximately 24,000 evacuees in the Houston
Astrodome.
Over the Labor Day weekend, the Commission granted a waiver of its
numbering rules that require carriers to return certain unused
telephone numbers. This action will permit carriers in the
affected area to retain telephone numbers that are not in use
for longer than 90 days in order to allow consumers returning
to the affected area continued use of their telephone numbers.
On September 1st, the Commission waived its rules in order to permit
wireline and wireless carriers to port telephone numbers
geographically outside of rate centers during this period of
service disruption. This action is intended to help consumers
keep using their telephone numbers during the crisis, to the
extent facilities are available.
Also on September 1st, the Commission granted an equipment
authorization for a new digital microwave radio system. One of
the major wireless carriers will use this equipment to replace
equipment in Baton Rouge and southern Louisiana that was
destroyed by the hurricane.
On September 2nd, the Commission granted a request from the 800 MHz
Transition Administrator to move Louisiana from Wave 2, which
begins relocation negotiations in October 2005, to Wave 3. This
action enables public safety entities in Louisiana to focus on
more immediate public safety needs.
On September 1st, the Commission issued informal guidance to amateur
radio operators that they have authority to make transmissions
necessary to meet essential communication needs and facilitate
relief actions, and that prior Commission approval is not
required for such transmissions.
FCC granted STA to the California Highway Patrol to operate
portable and mobile radios in support of other law enforcement and
relief agencies in Louisiana and Mississippi (9/6/05).
FCC granted STA to LifeCom/Air Methods to set up a control center
with mobile radio communications in the 460 MHz band in the New Orleans
area for disaster relief (9/6/05).
FCC granted an STA for stations licensed to American Family
Association in Mississippi and Louisiana that ceased operations on
August 28, 2005 to remain silent (9/6/05).
FCC granted an STA for WFMM(FM), Telesouth Communications, Inc.,
Sumrall, Mississippi, to remain silent after it went silent on 8/29/05
(9/6/05).
Chairman Barton. Thank you, Mr. Moran.
The Chair now recognizes himself for the first 5 minutes of
questions.
Secretary Garman, I want to commend you, the Deputy
Secretary, and the full Secretary for your expeditious work on
the SPR. I made a phone call to Secretary Bodman on Monday. I
sent him a letter Monday afternoon asking that the SPR be
utilized, and oil was released from the SPR on Thursday.
Crude prices on world markets have actually--they went up
to over $70 a barrel briefly, but as of late yesterday they
were down in the $65 to $66 range, and I do not know what the
market is today. But one thing that the President and the
Secretary of Energy have done right in the last week is use the
SPR, and I want to publicly commend the Secretary and you for
that decision.
I do have a question for you on refinery needs and this may
be Mr. Caruso, also. Do you, Mr. Garman, and you--especially
Mr. Garman as a policymaker--think that we should have 100
percent refining capacity for our demand in this country?
Mr. Garman. Clearly, the margins that we have suffered
under with inadequate refinery capacity in this country has had
consumer impacts; and if we want to address that consumer
impact, if we do not want to be dependent on foreign sources
for petroleum product as we are on foreign sources for crude,
then, yes, we ought to have sufficient refining capacity in
this country to serve our needs, in my view.
Chairman Barton. Okay. Mr. Caruso, as the director at EIA,
my information is that we are consuming around 21 million
barrels of refined products per day in this country, but our
refinery capacity before Katrina was less than 17 million
barrels per day. Do those numbers conform with your official
numbers?
Mr. Caruso. Yes, Mr. Chairman. The consumption for 2005, we
are estimating, is 20.8, so very close to 21; and primary
distillation capacity is 17.1 million barrels per day as we
speak, prior to Katrina.
Chairman Barton. Now the information that our staff has
prepared in the aftermath of Katrina, even given the amazing
efforts to bring refinery capacity back on line, showed about a
million barrels per day of refinery capacity is out
indefinitely because of water damage or power damage or
hurricane damage. That is primarily a big refinery in
Pascagoula and two refineries that are in or near New Orleans.
Does that million barrels per day again conform with what you
officially think is going to be long term out of order, either
Mr. Caruso or Mr. Garman?
Mr. Garman. Roughly, yes. Those refineries, with minor
damage, minor flooding or lack of power, have largely been
brought back on line.
Those refineries--by my count, there are currently six of
them that are off line--will probably take a bit longer to
bring on line. I do not have a good damage assessment to be
able to estimate. Perhaps some of the witnesses later in the
day do.
Chairman Barton. Mr. Caruso, do you want to do add anything
to that?
Mr. Caruso. The only thing that I would add is that those
four that appear to have suffered major damage will be off line
for a matter of months. So I probably would not use the word
``indefinitely,'' depending on what you----
Chairman Barton. I understand.
Now this is for Mr. Garman. We are seriously thinking about
preparing a refinery revitalization bill. In the current law
that the President just signed, we give Governors of the 50
States the authority to request the EPA to appoint a
facilitator to help facilitate and coordinate the various
permit applications for refineries in this country. The House
had passed a more comprehensive Refinery Revitalization Act,
but the Senate would not agree to that in conference. So, Mr.
Garman, if it is the will of this committee to expeditiously
move on a Refinery Revitalization Act, do you believe that the
Bush Administration, the Secretary would be supportive of that?
Mr. Garman. Without knowing the specific provisions, of
course, we could make no commitments. But, clearly, refinery
capacity is an issue. I am not certain why investment dollars
and capital flows are not going into this opportunity. I would
imagine, as is the case with many very large capital projects,
people do not want to put their money at risk for a long period
of time awaiting return in the face of regulatory uncertainty.
We have seen that in the nuclear plant business where utility
executives do not want to make that commitment and that large
capital up-front commitment. A refinery is very much the same
story, with a very uncertain regulatory path and very uncertain
timing associated with that permitting process.
We have watched with some amazement as a potential refinery
project in Arizona has been attempted to be built for the
better part of a decade, if I am not mistaken; and investors
have come and gone, somewhat frustrated by the inability to get
the project under way.
Clearly, something needs to be done; and we would take a
look at whatever the committee--and would be happy to work with
the committee in brainstorming some of the ideas that might be
employed.
Chairman Barton. Thank you.
My time has expired, but I want to ask Mr. Seesel one
question. It is my understanding that, under current law, there
is no specific Federal legislation directly on point against
price gouging. That is primarily a State issue, not a Federal
issue. My question to you, Mr. Seesel, is there a standard
definition of just exactly what price gouging is?
Mr. Seesel. Mr. Chairman, I think there probably is a wide
variety of definitions for that term. As far as I have been
able to determine, for example, the States that have various
laws against price gouging or similar terminology such as
unconscionably high prices apply a lot of different criteria
for measuring it either quantitatively in terms of a percentage
over the usual price level before a certain event occurred or
just more general language in terms of unconscionability or
shockingly high. There is a lot of variations just among the 23
or so States that have those statutes on the book; and I think
they are probably--it would be hard to find a consensus among
just people in their normal everyday parlance on what they mean
by gouging. I think there is a sort of ``I know it when I see
it'' sort of sense among a lot of people about very high
prices, but I think there is no real thing close to uniformity.
Chairman Barton. Well, is it your view or the Federal Trade
Commission's view that the State laws are adequate to handle
price gouging, however one defines it, or would it be the FTC's
view that we need specific Federal legislation on price gouging
preempting State law? Do you have a position one way or the
other on that?
Mr. Seesel. Mr. Chairman, I don't think I can give you what
the official FTC position on that would be. That would really
require a determination by the Commission. But I can tell you
that the issue of a Federal law about price gouging really
has--sort of, it raises several issues, and I will try to do
this quickly.
But one, obviously, is this difficulty of ascertaining how
to measure what price gouging is and the fact that a lot of
people have very different views on what that is.
In addition, I think any kind of effort to establish a
Federal prohibition of price gouging, given the sort of
uncertainty about what the term means, could also possibly
create a replication of the experience this country went
through in the 1970's. Essentially a well-intentioned effort to
sort of stop what many might consider unconscionable pricing
could essentially turn into an effort to control prices and
profits, which certainly in the 1970's' experience led to a lot
of unhappy experiences for this country in terms of gas lines
and rationing and stations running out of gasoline entirely.
I think there is generally a sense, though--and, again, I
am not speaking for the Commission officially--that the States
have adequate firepower in their statutes to deal with this
issue; and, as I said in my statement, I think a lot of
Governors and attorneys general around the country are
vigorously addressing that issue in the last few days.
Chairman Barton. Thank you. I apologize to the committee
for extending my time. I do not normally do that.
The Chair is trying to see who is the senior Democrat in
attendance at the gavel, and I think it is Mr. Green. Mr. Green
is the senior member. Mr. Gonzalez is closest to the Chair, but
he just kind of cheated and moved up. So we are going to go to
Mr. Green.
Mr. Green. Thank you, Mr. Chairman.
I know that we need to have a separate health hearing. I
would hope we would, because I have some concern, like I said
in my opening, about States' responsibility for their portion
of Medicaid for people who are guests and not necessarily
residents of that State. Ultimately, they may be, though.
Let me ask a question about high prices. It seems to me
that high prices were caused originally, before we even had
Katrina, by the global demand, the tight global supply, the
limited domestic production and infrastructure. If it were
possible in this--I guess the AEI. If it were possible to
produce off shore on the east and west coast and site more
energy infrastructure there, would a tricoastal energy
infrastructure mean strategic stability for our energy section
and wouldn't we also be more resistant to shocks like this one?
Because I have lived on the gulf coast my whole life in Houston
and, sure as you know, July comes around--to the end of
October, in some cases--we are going to have a hurricane or
tropical storm, and we will have a problem. But if we actually
had a tricoastal energy production, instead of just the Gulf of
Mexico and Alaska?
Mr. Caruso. Well, it certainly would be my opinion that
that would help the situation. Obviously, it is not a silver
bullet, but it definitely would be a movement in the right
direction.
Mr. Green. Any other response from anyone?
Mr. Garman. I would agree with that. Clearly, why is this
energy infrastructure located on the gulf coast? And the answer
is that is where it has been allowed to develop. That is where
refineries have been allowed to be built. It is a lesson for
all of us as we consider the location of new LNG terminals, as
we become more dependent on natural gas. If we once again
concentrate all of our LNG facilities on the gulf coast, as we
have concentrated--and thank goodness for Point Cove in
Maryland--but if we continue to do that, then we will be
vulnerable by putting all of our energy eggs in one basket, so
to speak.
Mr. Green. That leads to my next question. If your
strategic energy situation is vulnerable and energy shocks
travel so fast in our economy, I believe a national oversight
is proper to ensure a national policy is made. You mentioned
the example in the energy bill that just passed FERC will do
the siting now on LNG terminals, and that was in the energy
bill that the President signed over the break. Beyond the
limited steps we can take in these situations with current
authority, what else can be done to improve our ability to
generate the most robust energy sector in the medium term?
Should we have a Federal coordinating of these permits so we
have a really a tricoast strategy? Are there solutions on that?
Should we use the example of the energy bill on LNG for other
production?
Mr. Garman. My own view is that it is prudent for us to
allow the States to undertake their regulatory authority but to
have back-stop capability in those key areas where it is
needed, and that back-stop capability was provided in the
energy bill for both electricity transmission and LNG siting.
But I think it is probably prudent, and I think the States
would object, understandably, if we were to seize the powers
and authorities that have been vested in them from them
inordinately. But clearly it is something that, if the
infrastructure is not being built, we have to ask the tough
questions, why is that the case?
Mr. Green. So in the energy bill we did electricity and
LNG. Now because of the production predominately in the Gulf of
Mexico--and maybe instead of--you know, maybe we need to look
at it and our committee needs to look at, like you said, a
back-stop, some type of frame frames, maybe, that if you lease
off of California or Florida that, you know, the States would
have a certain period of time to approve, disapprove or
whatever.
But, again, because we are not just talking about States'
issues, we are talking about a national policy and actually
international, which is the reason the energy bill dealt with
the LNG terminal sitings.
So, Mr. Chairman, I guess I have only 30 seconds. But I
know the issue of price gouging--what have past price gouging
investigations found? Is it usually the large or small scale
and is it usually large or small operators? Is the problem with
oil companies or with retailers and distributors? And has that
been--what has the history been? Because this is something--we
have repeated this, I guess, for the last 30 years or more.
Mr. Seesel. Representative Green, I guess the Commission's
activity in the pricing area has largely involved receiving
complaints about pricing behavior that violates one of the
statutes that we enforce. So, generally, the investigations we
have undertaken have looked at pricing that might have been
collusive pricing and other activities.
For example, we had investigations in both the Midwest
after the price spike about 5 years ago and in the Western
States, an investigation that really lasted several years,
between 1998 and 2001. And those were both really designed to
look at whether pricing going on there was the result of
collusive and coordinated activity among--at firms at various
levels of the industry. There were long, arduous, detailed
investigations that resulted in public reports and so forth,
but they didn't turn up evidence of collusive behavior. There
hasn't really been an effort to look at individual firm pricing
behavior because of the problem that the Commission runs up
against, that essentially it is dealing with a statute that
primarily goes after collusive behavior, not individual firm
behavior.
Mr. Green. Thank you.
Mr. Hall [presiding]. Thank you, Mr. Green.
I will recognize myself for my time, and I will not use the
full amount, paying back some that the Chairman took on his own
to extract questions and answers from you.
Mr. Garman, you were asked about the provisions in the
Energy Policy Act. As we search for these policies that will
relieve some pressure on the energy sector, both short term and
then long term, I guess I want to focus on that Energy Policy
Act. You spoke of the reticence or the lack of any indication
of investors. It is a problem because, I guess, of the length
of the return of their capital; and there are some incentives,
though, that the EPA can make certain concessions or give
certain instructions.
I guess what I want to know is whether or not--I know the
Governors of the States have read the Energy Act, and I know
that you all have gone over it and back and forth and
everything. But everybody is aware of the provision in there
and the number of the provision. I do not have to list that
even for the policy. But have any of the States moved forward
on this? Have you had any correspondence with them or any
discussions with them for the use of this particular section of
this Act?
Mr. Garman. I have not personally, nor am I aware that any
States have focused on this provision yet. We are just at the
interagency level. In fact, there is another meeting tomorrow
at the White House, if I am not mistaken, where we are
gathering to ensure that we have all of the implementation
bases covered on the Act, that we are meeting, that assignments
are made, that timeframes are being laid out, that we are
making sure that the interagency cooperation that is needed to
implement this Act is indeed under way.
Mr. Hall. Mr. Caruso, do you have any suggestions or any--
have you had any contact or any inquiries from any of the
States?
Mr. Caruso. I have not, Mr. Chairman.
Mr. Hall. I am optimistic that one of the States other than
one of the producing States might move forward with this
policy. It is available to all of them.
What are the drawbacks, other than lack of expectation of
early return on investment?
Mr. Garman. I think history has shown us that anyone trying
to put a new energy facility of almost any kind--generation,
transmission, LNG facility--faces a lot of local opposition.
And NIMBYism rears its head, issues of environmental justice
are brought to bear, and so investors tread lightly into that
realm.
Mr. Hall. Well, I think one of the reasons that Joe Barton
was able to pass an energy act when no one has been able to in
the last 10 years is that he couched it with a lot of
research--R&D, really mostly an R&D act, rather than an energy
act.
But with the additional provisions and additional
incentives in there and the situation we find ourselves in,
there is increasing on an increasing ratio the difficulty of
dealing with the people who are selling us energy that we have
to rely on, that we do not really trust, and they do not really
trust us.
With that ability to fall back on that new technology, it
looks like we could shorten the time and make it a little more
appealing to the investing public. They want a return, but they
also want to see us solve a problem that might keep our kids
out of the war, and that is to solve the energy problems of
this country.
Mr. Garman. Yes, sir; and I think it is very important that
we score a quick success on this. I think if the first new
refinery gets built in 30 years, that will be a message to
investors that this is an area that is ripe for new investment
and new capital flow, and we can hopefully buildup the thin
margins of capacity that we have suffered under for some time
and have more cushion there to protect consumers.
Mr. Hall. All right. If I yield back 33 seconds, I have
kept the faith with the chairman. I yield back.
The Chair at this time recognizes Ms. DeGette from Colorado
for 5 minutes.
Ms. DeGette. Thank you, Mr. Chairman.
Mr. Garman, I wanted to ask you, as I mentioned in my
opening statement, last night at the members briefing,
Secretary Bodman told us that, aside from some short-term
disruptions in the natural gas and also gasoline supplies in
the southeastern United States, pretty much there were minimal
disruptions in fuel supply. So I guess I am wondering, if that
was the case, why did prices jump so significantly? For
example, in Denver, Colorado, where my district is, not even in
the supply chain of the gulf, the prices were going up as early
as Tuesday of last week. I am wondering if the Department has
some sense of why that happened?
Mr. Garman. I will provide an answer and then turn to my
colleague from the EIA who actually is closer to the price
situation.
But let me first make the comment that I believe Secretary
Bodman, in making the comment that he made last night, was
referring to permanent damage.
Ms. DeGette. Actually, I do not think that was true. I was
there. But if you want to clarify his remark that way.
Mr. Garman. Because--I do. As I point out, Katrina, had a
devastating impact on energy.
Ms. DeGette. But did it have a devastating impact as early
as Monday and Tuesday in areas of the country that aren't even
supplied by that region?
Mr. Garman. Yes. Refineries were shut down prior to the
storm striking on Monday, and petroleum product and crude oil
is a fungible material that affects prices outside a direct
supply chain. Guy might have more to say on that.
Mr. Caruso. Yes, there are two comments I could add. One,
the market impact started on the weekend, actually, because
some refineries were shut as early as Saturday.
And the second thing is that markets react to uncertainty.
When there was uncertainty as early as Monday as to how much
damage there would be, and how long it would last, the NYMEX
futures market already started to rise. In fact, European
markets rose, too so there are people in Paris and London today
paying more for gas.
Ms. DeGette. And I guess it is a fine line between market
uncertainty and price gouging, in many of our minds, because
people price gouge because consumers are uncertain, and they
know gas costs are rising, correct?
Mr. Caruso. Well, as Mr. Seesel pointed out, the definition
of price gouging is very nebulous. But, nevertheless, collusive
and anticompetitive behavior is certainly----
Ms. DeGette. Well, and I want to ask both of you gentlemen
just briefly, with respect to the Department's registration of
consumer complaints about gasoline price gouging through its
Web site and telephone hotline, how many complaints have been
registered with the DOE?
Mr. Garman. The last time that I had checked, as of
yesterday morning, I believe we had received on the order of
7,000 calls, which we were distributing to appropriate
authorities at the Federal Trade Commission and States'
attorneys generals.
Ms. DeGette. And what is the DOE going to do with this
information after they distribute it to those appropriate
agencies?
Mr. Garman. We do not have any regulatory or enforcement
authority. They are the parties that do. So we are a collector
of information, and we provide it----
Ms. DeGette. You are just going to pass that on.
Mr. Garman. We provide that information to the appropriate
parties with the enforcement authority.
Ms. DeGette. Are you going to provide it also to the
Department of Justice?
Mr. Garman. Yes, we are. And, yes, we have.
Ms. DeGette. Mr. Seesel, I would like to ask you, I was
intrigued by your testimony, and we all know about half of the
States currently have antigouging authority on their books,
correct?
Mr. Seesel. That is my understanding.
Ms. DeGette. And I think you were saying is that it is your
view of the Federal statutes that if there is no proof of
anticompetitive practices, then the Federal Government does not
have the authority to prevent and punish price gouging. Would
that be accurate?
Mr. Seesel. I believe that would be accurate.
Ms. DeGette. So if one oil company is not colluding with
another one, they just decide to price gouge on their own, it
is your agency's view that, really, the Federal Government
can't take any role in prosecuting that action, right?
Mr. Seesel. Well, Representative DeGette, the antitrust
laws that we enforce have historically consistently been
interpreted not to give us the power to second-guess or sit in
judgment on an individual firm's selection of a price.
Ms. DeGette. Exactly. So, really, State laws would be the
only recourse for that kind of anticompetitive behavior, right?
Mr. Seesel. That is correct.
Ms. DeGette. And for the half of the States that don't have
that law on their books, there wouldn't be any recourse at all.
Mr. Seesel. Well, I think there are a number of States have
actually said they have more general consumer protection
statutes that they are interpreting to deal with the gouging
issue. Not the States, the 23 or so States, that have explicit
gouging prohibitions, but there are some other States that are
starting to invoke their more general consumer protection laws.
Ms. DeGette. Just one last question. Do you think that it
would be useful to give additional Federal authority to an
agency like the FTC to be able to prosecute anticompetitive
behavior in gas pricing?
Mr. Seesel. Well, I certainly think that the FTC needs to
deal with anticompetitive conduct in the sense that I have been
talking about it, as the antitrust laws are historically
interpreted.
Ms. DeGette. Right. But there is anticompetitive behavior
that is not necessarily collusive behavior, Correct?
Mr. Seesel. That is correct.
Ms. DeGette. And would you require additional Federal
authority to do that?
Mr. Seesel. I think in order for the FTC to deal with a
unilateral price selection by a firm, we would need additional
authority.
Ms. DeGette. Thank you, Mr. Chairman.
Mr. Upton [presiding]. If I had known I was going to be
chairman when it was time for my question, I might not have
deferred on my opening statement but just stolen my 3 minutes.
But I will now recognize myself for 8 minutes.
My first question has to deal with interoperability and
public safety radio. As you know, this committee is poised to
process a transition to digital bill, which would set a hard
date for the broadcasters' return of their analog spectrum so
it could be used for, among other things, public safety radio
interoperability. And the tragic events of 9/11 underscored
that dire need for a hard date so that we can clear the
spectrum for public safety interoperability.
My understanding is that, in the wake of Katrina, public
safety entities at all levels were not able to effectively
communicate with each other, and I am hearing that there may
have been a host of reasons for that, including the fact that
police radio towers were knocked down, police radio batteries
could not be recharged, no electricity. But can you tell me,
Mr. Moran, about what, if anything, you have learned so far
about the situation on the ground with respect to the lack of
interoperability as a contributing factor to that situation?
Mr. Moran. Yes, certainly. In the wake of the events in the
gulf, the FCC works very closely with the National
Communications System and other Federal agencies, so we do a
lot of coordination, and we attempt to determine the status of
the communications networks, which ones are working, which ones
are not working. Also in those discussions there are--certain
aspects of them, industry is directly involved. And the
Commission, initially we went in there to see what we could do
to expedite matters. And we would talk to the industry to see
what their problems were, what systems were down, what could be
done about it to quickly effect a good result there.
And I will tell you, the primary things that we were
dealing with in the initial days were that the commercial power
was out. Once it is out for a long period of time, backup
batteries in the telecom and the communications systems will
run down. Of course, many of the big installations have
emergency generators; however, you have to get fuel to those
generators to keep them running. And so what we were seeing in
the first days after this was most of the infrastructure in the
worst-hit areas were--communication infrastructure was not
working because of power. But the biggest problems were as the
carriers, as the communications carriers, were getting assets
ready to get in there to see what they could fix, see what they
could keep up, and try to assess the situation, the biggest
problems we heard were they did not have security that would
enable them to get their assets into the areas, and also
transportation was really a serious problem trying to get fuel
into these areas.
So the initial thing was it was a commercial power--it was
a power issue, starting with commercial power and getting worse
because facilities could not get in there.
Now, we dealt extensively with industry, and those were big
issues that we were seeing and that we were dealing with FEMA
and the NCS. We, of course, have all--we were watching this
carefully, and we see the same videos that people around here
are seeing where an emergency responder is using a couple of
different communications devices because of an interoperability
issue. And, of course, the underlying issue is that if some of
the systems aren't even working, they might need more than one
piece of equipment.
Clearly that is not an acceptable situation. The
Commission--the effective communications for emergency
responders is a priority for the Commission. We are looking
into it; we will be working with the industry. And we have
actually done a number of things in recent years to try to
provide additional spectrum, for example, for the emergency
service providers.
And so the initial problems we saw, we did see
interoperability problems, but the biggest problems we saw
initially were things that were needed to do to get the
networks up. And that tended to be security issues, staging of
personnel, to get them in there and have them secure, and also
trying to get fuel into the areas until the power would come
up.
Mr. Upton. Mr. Caruso, in your statement you talked about
the future particularly with home heating oil as well as
natural gas. Now, you said that there were going to be
significant increases in natural gas beginning this winter. Did
Katrina seriously impact our natural gas supplies coming into
the United States?
Mr. Caruso. Yes.
Mr. Upton. Tell me precisely what it was.
Mr. Caruso. Yes. Initially--the Gulf of Mexico production
of natural gas is about 21 percent of our national total.
Mr. Upton. And where is that in terms of ramping back up to
where it was?
Mr. Caruso. It was 8.8 MMBtu per day shut in initially. As
of yesterday, it was down to about 5 million Btu still shut in.
Mr. Upton. And so it has come back to about 55 percent?
Mr. Caruso. It is about 50 percent. And in addition to
that, there are natural gas processing units onshore which were
damaged, and that will affect the ability to----
Mr. Upton. And do you think that will be a long-term
problem, then, to get that back up to 100 percent where it was
in natural gas?
Mr. Caruso. In our preliminary assessment, we have it all
back by end November. But certainly, until the investigators
are able to get on the platforms and to actually test some of
the pipeline infrastructure, we really don't know.
Mr. Upton. I want Mr. Garman and Mr. Caruso and Mr. Seesel
to respond to this question. Last week I drove probably every
day a couple hundred miles in my district. And on Tuesday the
gas price on average in our district in southwest Michigan went
from 2.61 a gallon to some stations that day to 3.58, almost $1
increase within a couple of hours. When you talked about the
price of oil per barrel going from $65 to $70, that is about a
7 percent increase. I think there are a lot of us that thought
maybe gasoline would go up 7 to 10 percent, not literally $1 a
gallon. Would you consider that type of an increase, knowing
that we did have the supply--none of my stations in my district
were out of gas. Would you consider that price gouging? Mr.
Garman.
Mr. Garman. With that information alone, I couldn't make a
judgment.
Mr. Upton. Yes. The answer is yes. Mr. Caruso. I know you
too well. Mr. Caruso.
Mr. Caruso. I would have to say the same, but make the
comment that the gasoline markets often times behave
differently than crude markets, and vice versa, and it very
much depends on the individual markets. For example, the NYMEX
gasoline market, as I mentioned, went up sharply between Monday
and Wednesday, much more sharply than crude, and many contracts
are indexed to the NYMEX futures market. So part of that is
explained by the wholesale and futures market rate.
Mr. Upton. I look forward and I know we are going to have
the witness from NYMEX in the second panel.
Mr. Seesel.
Mr. Seesel. Again, Mr. Chairman, with the understanding of
the sort of squishiness of the definition of the term
``gouging,'' I would say that, again, I can't answer that, as
Mr. Garman said, without information, but what you might be
observing is a couple of things going on. One is a gasoline
retailer hiking its price significantly because it expects to
be paying a whole lot more for supplies that will be coming in
the next day or the day after that, and generally an effort by
the retailer sometimes to stay in business, at least to stay
open and not put out a ``no gas'' sign, and essentially raising
the price significantly in order to ration demand to accomplish
that. It is--whether one calls it gouging, I don't know. It
could be very well just fairly reasonable and expectable
demand-and-supply responses to a situation of great shortage.
Mr. Upton. Even though I am chairman for the moment,
temporarily, my time has now expired. I yield to the gentleman
from the great State of Michigan Mr. Stupak for 8 minutes, who
also deferred.
Mr. Stupak. Thank you.
Mr. Caruso, you are familiar with the term called ``risk
premium''; are you not?
Mr. Caruso. Yes, Congressman.
Mr. Stupak. And in layman's terms, risk premium is
essentially the amount of money that is built into the future
price of a good, in this case oil, that is above and beyond the
amount of the normal price based on a number of factors that
may impact the price of a good, such as terrorism, natural
disasters, refinery problems, et cetera, right?
Mr. Caruso. That is correct.
Mr. Stupak. I have seen a number of articles that said that
prior to the war in Iraq and prior to Hurricane Katrina, the
risk premium on a barrel of oil, of crude, was in the
neighborhood of about $2 to $4. Is that about right?
Mr. Caruso. That is what a number of trade journals have
said. It is not the position of EIA.
Mr. Stupak. Right. Now, today, in the last couple of weeks
here, the last couple of months, that terrorist premium risk,
if you will, has gone up to $15 to $30 a barrel; is that
correct?
Mr. Caruso. I have not seen that large a number.
Mr. Stupak. What would you think it is at right now, then,
the risk premium on a barrel?
Mr. Caruso. I think our models for crude oil indicate that
you can explain most of the run-up in prices based on the lack
of spare productive capacity for crude oil.
Mr. Stupak. But to get back to the risk premium, though, As
Kiplinger forecasts here, they say 15 to $20 a barrel, right?
Would you disagree with that?
Mr. Caruso. Yes.
Mr. Stupak. What do you think it is then?
Mr. Caruso. I think the risk premium for crude oil is very
low. I think it----
Mr. Stupak. Give me a number. What do you think it is?
Mr. Caruso. I think it is probably only a few dollars.
Mr. Stupak. You think it is still $2 to $4?
Mr. Caruso. In that range. It hasn't changed that much for
crude oil as a result of the recent event.
Mr. Stupak. Here is another article that is within the last
year, MSNBC, and this actually shows it about 15 to $30. And
they talk about terrorism. Here is a--from Bloomberg.com which
shows that the risk premium has substantially gone up, and this
is actually from August 30, 2005, about $15 a barrel. So you
are not familiar with any of these articles?
Mr. Caruso. I am familiar with them. Yes. I disagree with
them.
Mr. Stupak. You disagree with them?
Mr. Caruso. Yes, sir.
Mr. Stupak. Well, let us assume that they are right and you
are wrong. Okay? Apparently these authors in these articles
disagree with you. So the price of oil right now per barrel is
probably about 25 percent more, if we believe this risk premium
is at $15, than what it should be, Right?
Mr. Caruso. If you believe that, yes, sir.
Mr. Stupak. How do you get your hands on this risk premium?
I know you don't agree with us that it is $15 a barrel. You
think it is much less than that. If it is not the risk premium,
then what is making these prices fluctuate so much? And,
really, the issue is $35, right? Now we are paying around $70,
roughly.
Mr. Caruso. That is right. It is 65 or----
Mr. Stupak. Okay. So it has almost doubled in a year. If it
is not a risk premium, then what is the factor that is causing
it?
Mr. Caruso. There are a number of factors. The first one is
that world oil demand has grown rapidly in the last several
years, putting upward pressure on price. There has not been
sufficient productive capacity to meet that demand in the short
term, there has been a lack of inventory to meet short-term
demand, all of which means that we are operating an industry of
83 million barrels a day, on a global basis, at about 98
percent of capacity. So any short-term perturbations in either
supply or demand, because of the low short-term elasticity of
price or income, mean volatility and sharp price rises. And
Katrina is a perfect example of that.
Mr. Stupak. But actually once the administration finally
heeded the advice of myself and others who have been for months
saying release the SPR, didn't the price of oil go down after
the barrels of oil were released from the SPR?
Mr. Caruso. Yes, it did. As the Chairman mentioned, it had
reached the peak of 70 in interday trading 1 day last week. It
is now between 65 and 66 as of this morning.
Mr. Stupak. So it has actually gone down. So isn't really
the price that keeps it up is like instability in the world,
such as like in Venezuela, one of our larger suppliers that we
had some disagreements with, Iran that we have disagreements
with over nuclear issues, Gulf, the war going on in Iraq,
things like that?
Mr. Caruso. Part of the reason that there is so much
uncertainty and that refiners are willing to pay those prices
is they don't know what is going to happen in places like those
you have just mentioned.
Mr. Stupak. Well, as these prices go up like this, whether
it is risk premium or not, it has gone from 35 earlier this
year to--peaked at 70. And who benefits? And take the case of
Saudi Arabia; Aramco, right?
Mr. Caruso. Yes, sir.
Mr. Stupak. The people who purchased the oil from Saudi or
Aramco, they would benefit, right? The refineries would
benefit, Correct?
Mr. Caruso. If they are able to sell it with enough of a
profit margin, they benefit, yes, sir.
Mr. Stupak. Sure. But the Saudis, if it takes $10 to get it
out of the ground, and they sell it at whatever they sell it
at, 40, there is a profit there. And they turn around and sell
it somewhere else. And these futures are up to, what, 65 right
now? So we have got some pretty good profits going right now,
Right?
Mr. Caruso. Absolutely. And----
Mr. Stupak. In fact, every article I have seen, we have got
record profits in parts of the industry, right?
Mr. Caruso. That is correct.
Mr. Stupak. Has the administration given any consideration
to a windfall profits tax then? Mr. Garman, do you want to
answer that?
Mr. Garman. I will, and say that, to my knowledge, no.
Mr. Stupak. Is there--there is actually more--less
refineries in the United States, but we are refining more oil
into gas than ever before in the Nation's history, correct?
Mr. Garman. That is correct.
Mr. Stupak. So everyone is making a pretty good profit
here, and yet we are not doing anything to try and get control
of the price of this oil other than release oil from this SPR,
correct, trying to get your hands on this price's volatility.
If it is not a risk premium, then, Mr. Caruso, if it is just
supply and demand, but we have more, we are refining more, how
do you account for those high prices then?
Mr. Caruso. We don't have enough refining capacity. We
are--as Mr. Garman mentioned, we are having to import more and
more refined products from abroad.
Mr. Stupak. We are importing about, what, 10 percent?
Mr. Caruso. In refined products, a little over 2 million
barrels a day on a net basis out of our 20-. So that is about
right.
Mr. Stupak. So what is the answer then to get control of
these prices? More refineries?
Mr. Garman. There is a multitude of answers, and I don't
think we should depend on any one answer. First, we should
encourage new supply. In fact, let me make that second.
First, we should encourage conservation and efficient use
of the supplies that we have. That is the quickest, cheapest,
most dramatic effect that one can have in the short term,
because it takes time to bring new production on line. New
production is very important.
And then I think these two thin-capacity margins that Mr.
Caruso have talked about are very, very important, both the
thin-capacity margin on the production side. You know, for many
years we had a production capacity margin of 3- to 5 million
barrels a day. Now we are down to 1 million barrels a day, and
most of that capacity margin exists in Saudi Arabia. It is in
our interest to see capacity margins increased on the supply
side upstream. It is also in our interest to see capacity
margins increase down, on the downstream side, at the refinery
side.
I think all of these are components, and I don't think we
should hitch our wagon to any single effort. I think we have to
take a comprehensive effort approach and urge Americans to
conserve, urge producers to produce, urge refiners to invest in
new refinery capability and capacity. We have to do all of
those things if we expect to have a long-term impact on price.
Mr. Stupak. So, in summation, when the President said in
2000 that he would just jawbone the Saudis into producing more
crude, that really wasn't an answer or a correct answer to a
complex problem.
Mr. Garman. The President, in my view, had a very
comprehensive answer in his May 2001 energy plan that depended
on both supply options and demand options. Roughly half, if I
recollect correctly, of the recommendations in the President's
original plan had to do with energy efficiency, renewable
energy, and other alternatives to the status quo.
Mr. Hall [presiding]. The gentleman's time has expired.
The Chair recognizes the gentleman from Florida Mr. Stearns
for 5 minutes.
Mr. Stearns. Yes. Thank you, Mr. Chairman.
My colleague from Michigan, Mr. Upton, asked each of you a
question about his experience driving around his district, and
it appeared to me that we couldn't have a definition among you
on what price gouging is. It seemed to me there is lots of
factors. So when he tried to present you a case example, you
really couldn't agree with him because you said there is other
factors.
Now, if I describe cheating to you, I think we can all
agree what cheating is. If I describe stealing, I think we
could all agree what stealing is. It seems to me we just have
to understand that gouging is something that we can discern and
involves several components. I looked up the definition of it,
and it comes from old Middle English which comes to sting. Now,
following that definition is to basically--to cut or force out
a rough cut of something.
I submit that gouging involves a couple things: It has a
moral component; that is, it is a necessity that we need to
have, so we are forced to buy it. Just before Valentine's Day,
I notice that roses go up. But I don't necessarily have to have
those roses, I can get carnations or something else. But if I
have to get to work, I am going to need gasoline. So I think
gouging involves a moral component.
Second, I think it involves a time factor, generally 1 or 2
days. If the price goes up, as Mr. Upton indicated, almost
doubled in a period of 1 day, that is obviously price gouging.
And, last, I submit that the buyer is coerced and
intimidated.
So I don't think--if you throw those three components in,
it is not hard to discern and to see what is gouging.
Now, as I understand it, on the Federal level we do not
directly have laws on gouging. Is that right, Mr. Seesel?
Mr. Seesel. That is my understanding, Congressman.
Mr. Stearns. But we do in the event of collusion. So, if
companies work together, then we can step in and say there is
collusion, but also price gouging; is that correct?
Mr. Seesel. Well, collusion may take a number of forms.
Traditionally, classically it would take the form of conspiracy
to raise prices or reduce output. And so it might not take the
form of gouging in the sense that you may be thinking of it
going from 2.50 to 3.50 a gallon.
Mr. Stearns. Do you think we should have Federal laws
dealing with price gouging separate from the idea that you have
to have collusion first?
Mr. Seesel. As I said before, I think the Congress needs to
tread quite carefully in this area because----
Mr. Stearns. What about the idea that, even in the States
where they have laws dealing with price gouging, it only
generally applies in state of emergencies? So in this case we
had four States declare a state of emergency. What about the
other 46 States? How do you handle price gouging in those
States?
Mr. Seesel. I have seen quite a few media reports in the
last few days, Congressman Stearns, of attorneys general and
Governors in States quite far away from the gulf region that
are applying either their specific price-gouging statutes or
their more general consumer-protection statutes to deal with
the gasoline pricing situation. And I think their sense is
there is an economic emergency going on in their States. I
think that is one of the rationales I have read. So that
irrespective of the physical emergency of the hurricane, a lot
of States have been able to proceed, begin investigations under
the rubric of their general statutes.
Mr. Stearns. In the State of Georgia, there was an example
where gasoline was selling for $6.38 a gallon, yet that was not
one of the States where there is an emergency. Texas, South
Carolina, there was huge increases. Surely I would think from
your standpoint that those would be areas you would
investigate, because they are not in a state of emergency, yet
it appears that the States are almost helpless to stop price
gouging.
Mr. Seesel. Well, Congressman, my understanding--and I may
be wrong about one or two of the States you mentioned, but I
think the attorneys general actually have announced they are
looking at pricing issues for gasoline in those States. Even
though--again, even though they are outside the Louisiana,
Mississippi, Alabama, Texas area, they are still invoking their
price-gouging or general consumer statutes to look at what has
been going on.
Mr. Stearns. Let me conclude before my time is out that you
had a report that you issued, and this report came out before
Katrina, before the hurricane, entitled: Commission Report on
Factors that Affect the Price of Gasoline.
How has this report affected your ability to scrutinize the
marketplace for collusion, for price gouging, for any things,
even such things as State and local regulations that affect it?
Maybe you can give me just a summary of what your report
provided so that you could help us in the future on this
matter.
Mr. Seesel. Well, the report really--we have a fairly broad
panoply of statutes that we enforce that we use in our law
enforcement program. The report was really an attempt to set
out in a very concise way all of the learning we have
accomplished over the last 20 or 25 years in the petroleum
industry on analyzing the various factors that will go into
driving the price of gasoline, whether you are talking about
supply factors, demand factors, competition for the various
resources that go into the product such as crude oil and
refining capacity and so forth. So what we attempted to set out
here was a--I am sorry.
Mr. Stearns. Mr. Chairman, could we allow him to finish his
answer?
Mr. Hall. The gentleman will be allowed to finish his
answer, if he wants.
Mr. Stearns. Thank you, Mr. Chairman.
Mr. Seesel. We essentially try to set out the entire
spectrum of supply, demand, regulatory, and other factors that
result in prices and volatility in gasoline.
Mr. Stearns. Thank you, Mr. Chairman.
Mr. Hall. I thank you.
The Chair recognizes the gentleman New York, Mr. Engel, for
5 minutes.
Mr. Engel. Thank you, Mr. Chairman.
Gentlemen, with all due respect, and I think you have heard
the frustrations of all of us, you know, if it looks like a rat
and smells like a rat, it is a rat. The American people aren't
stupid. And I remain totally unconvinced that 2 days after
Hurricane Katrina happened, gasoline prices went sky high as a
result of the catastrophe of that hurricane. It would certainly
take much longer to have the hurricane's catastrophe translated
into higher gas prices at the pump. There is no way other than
price gouging that it could happen within 2 days. And, again,
we all have seen that, when the price of oil drops, it takes
several weeks, if not months, for that to be reflected at the
pump with prices of gasoline dropping. So I just think that
there is no way we can excuse it.
The American people aren't stupid. The Representatives on
both sides of the aisle aren't stupid. We know that there was
price gouging. And I just think it is absolutely
unconscionable.
Last week I went to get gasoline right here on South
Capitol Street, and there were two gasoline stations within a
block from each other, and there was a 40-cent difference in
the price of gasoline between those two stations. I have spoken
with gasoline owners, owners of gas stations, who said that
they were told by the companies to increase the prices.
I don't think this is something we can kind of talk away or
just kind of have business as usual. The American people are
sick and tired of it and want an explanation and don't want it
to happen again. And, again, when prices sink next week or in a
month or whenever it is to below $3 a gallon, we are not going
to jump for joy, because as far as I am concerned, $2 and
change is too much to pay.
I want to ask Mr. Garman, yesterday Senator Domenici said:
We are too dependent on this part of the country. Congress must
do something on offshore drilling because we need more
diversity than what is out there.
I agree that we need to diversify our energy sources, but I
respectfully disagree with the Senate chairman about how. To
me, Hurricane Katrina has shown again that our Nation is overly
dependent on oil itself, not gulf coast oil. If we are going to
create a stable energy future for our country, we need to
diversify away from our oil. The answer, in my opinion, is not
opening drilling in Alaska or all along our Nation's coasts to
increase oil supplies on the mere margins, but to aggressively
promote technology such as advanced hybrid automobiles which
will substantially reduce our demand for oil. If we were
serious about energy policy in the wake of Katrina, we would
significantly increase CAFE standards for passenger vehicles,
not propose insignificant adjustments as the Bush
administration recently did.
Next week I and a bipartisan group of Members will announce
the founding of a new Oil and National Security Caucus. The
purpose of our group will be to highlight bipartisan, common-
sense ways to reduce our dangerous overreliance on oil. We will
work with members of the committee and the administration to
offer serious practical proposals to provide more balance in
our energy mix.
Now, Mr. Secretary, in the wake of Hurricane Katrina, what
policy adjustments are you and the administration proposing to
diversify our Nation away from oil?
Mr. Garman. As you know--and admittedly this is a long-term
approach--back in January 2003, the President in his State of
the Union Address announced his hydrogen fuel initiative, which
is a long-term effort to totally take our personal
transportation off of petroleum, completely, through the use of
hydrogen and fuel cell vehicles fueled by hydrogen fuel that
can be produced here domestically from a variety of different
energy, primary energy inputs. That is a long-term goal,
admittedly, and we do not expect to see affordable hydrogen
fuel cell vehicles that need no petroleum and emit no
pollutants in an affordable fashion available to consumers
prior to 2020. They are on the road today, but neither you nor
I can probably afford them. So we have to bring down the cost.
In the energy bill that was just passed, a proposal that
the President made back in January 2001, production tax--I am
sorry, a consumer tax credit for hybrid vehicles to get more of
these vehicles on the road is another very, very important
component. We want to encourage that.
There are a lot of things in the energy bill that have not
yet been implemented.
Mr. Engel. Let me just say, because I know my time is over,
I am told that the FTC maintains a gasoline price monitoring
project, and the DOE has a Web site for filing gasoline price-
gouging complaints. What do you do with the Web site which
permits the filing of complaints? Is it just for people to let
off steam and feel good? What practical substance can we tell
the American people that, if they feel they have been ripped
off at the pump, that they can effectively do something and
that government will move to make sure that it doesn't happen
again?
Mr. Seesel. Congressman, the Commission receives complaints
from all kinds of sources. If we get a complaint that deals
with gasoline pricing, to the extent the complaint spells out a
law violation of the kind that we can go after, we will proceed
vigorously against that. If it spells out an issue that the FTC
really does not have authority to go after, that is the kind of
thing we would refer to State attorneys general. It is not just
a mechanism for people to let off steam; it is a way for us to
learn information from consumers, some of which will be turned
into law enforcement investigations that we can pursue.
Mr. Whitfield [presiding]. The gentleman's time has
expired. It is my time to ask questions, so thank you.
You know, as elected representatives, and as people who
depend upon being reelected to their position, obviously all of
us are very much concerned and want to do everything we can to
defend against higher gas prices. And our ability to do that
will oftentimes depend upon whether or not we are reelected.
But I was reading an article recently, on August 26, that
indicated that in Amsterdam the price of gasoline was $7.13 per
gallon. The price in Great Britain was $6.43 per gallon. The
price in France was $6.90-some cents per gallon. The price in
Belgium was in the $6 range. And the price in Greece was about
$4.80 per gallon. And in the U.S., on August 26, it said the
price was about $2.61 per gallon.
So the question I would ask: Is it realistic for the
American people to expect low gas prices, maybe the lowest gas
price in the world, when we have--is that not? What is the
lowest gas price in the world?
Mr. Caruso. The lowest is in places like Saudi Arabia and
Iraq.
Mr. Whitfield. And how much are they paying per gallon?
Mr. Caruso. Saudi Arabia, when I was there in May, they
were paying about $1.50 a gallon. But they are much lower in
Iran.
Mr. Whitfield. And how much are they paying in Iran?
Mr. Caruso. Less than $1; 50 cents probably.
Mr. Whitfield. But is it realistic for a country like
America where we have such a small amount of reserve. We do
consume more than any other country in the world. Out of the 84
million barrels being consumed each day, we are consuming
around 21 million barrels a day. Is it unrealistic for the
American people to expect prices below $3 a gallon?
Mr. Caruso. I mentioned that in our short-term outlook,
prices are likely to come down below $3 in the coming days and
weeks and to be back to about $2.60 in the fourth quarter. In
the long run, the main difference between the European prices
and the U.S. is taxes. They are a large component of the high
price in the U.K.
Mr. Whitfield. It is my understanding that in Europe, I
mean, the taxes might reflect 60 percent of the overall price
of the gas, which might ask the question: Should we--I am not
advocating this, but should we increase price on the gas for
taxes?
There has been a lot of comments today about refineries and
the lack of investment in refineries. And I read an article
recently that said major oil companies are keeping a tight rein
on their capital expenditures, and that they typically for any
project will do a stress test for profitability at $20 a barrel
or below; that they are making their decisions based on a price
of $20 a barrel and below. Have you heard any comments about
that, or do you think that is true? Or does that explain why we
have not had a new refinery since 1976?
Mr. Garman. I am not familiar with the specific article
that you read, but I am surmising that that $20 figure may
relate to exploration and production investments by oil
companies. They have been burned before when they have made
their exploration and production investments in new finds
expecting to find 25 or $30 a barrel oil, and then it fell to
18 or 19, and have been--had an unprofitable investment. So I
have heard anecdotally that oil companies are now looking for
25 or even $30 investment, which is up from the past, in
analyzing whether a new exploration and production investment
is worthy of a payoff.
Mr. Whitfield. And I would be willing to stipulate that
there has probably been some price gouging going on. My
understanding, that at the retail level, that major oil
companies own, what, like 10 percent of the retail outlets? Or
is it more than that, or do you all have any idea?
Mr. Caruso. I don't have that number off the top of my
head, but I would certainly be able to provide it for the
record.
Mr. Whitfield. Mr. Seesel, when was the last time a major
oil company was successfully prosecuted for collusion or for
monopolistic pricing of gasoline in the U.S.?
Mr. Seesel. Mr. Chairman, I don't recall the last time. If
what you are talking about was a criminal prosecution, which,
of course, would be handled by the Justice Department, I don't
recall the last instance of that, I am afraid.
Mr. Whitfield. What about from a civil standpoint?
Mr. Seesel. From a civil standpoint? Could you hold on 1
second, sir? I am reminded, and I should have remembered, that
the Federal Trade Commission's own administrative complaint
against Unocal was essentially a monopolization complaint. So
the allegation that Unocal had deceived the California Air
Resources Board with regard to its patents on CARB gasoline was
a monopolization case. That is the one that I mentioned in my
opening statement.
Mr. Whitfield. What year was that?
Mr. Seesel. The complaint was issued in 2003; the case was
just settled about a month or so ago, about a month and a half
ago.
Mr. Whitfield. And wasn't there some $20 million fine
against some companies in Hawaii recently? Or was that a couple
years ago? Or are you familiar with that?
Mr. Seesel. I am not that familiar with that, Mr. Chairman.
Mr. Whitfield. Okay. Thank you.
My time has expired. I recognize the gentlelady from
California Mrs. Capps for 5 minutes.
Mrs. Capps. Thank you, Mr. Chairman.
And I want to turn again to Mr. Moran, the FCC's topic. It
is now 4 years after the tragic events of September 11 when
this country made many promises and pledges to look carefully
at what needed to be improved at that time. I want to ask you
if you consider today's emergency alert system to be the most
robust and effective mechanism for warning the American public
of an emergency? And, if not, what steps has the FCC taken in
the past 4 years to make the EAS more effective?
Mr. Moran. Well, the EAS system is designed really to
deliver the Presidential message to all Americans through the
broadcast process when the Nation's security is at risk. It is
available for use on a voluntary basis for State and local
emergencies, and it can be used for that purpose, too.
The Commission--it is an operational system. It is tested
all the time. We work with FEMA to ensure that this thing is
operational. There haven't really been any changes in the EAS
system over the last 4 years, if that is your question.
Mrs. Capps. Well, there have been no steps, no rulemaking?
Mr. Moran. Yes. The Commission has a rulemaking--the
Commission began a rulemaking a year ago. That rulemaking is in
process. We are looking at a number of things. Among the things
we are looking at, to see if we should make the use of the
system by State and locals mandatory. Right now broadcasters
have to agree to accept the State and local messages in order
for it to work. We also are looking to make sure--the current
system actually does not require digital broadcasters to be in
the system, and we are looking at that----
Mrs. Capps. But I want to ask, when does the FCC plan to
conclude this proceeding? And why is it taking so long?
Mr. Moran. Well, we have an open proceeding. I really
couldn't give you a timeframe as to exactly when it is going to
happen, but the record has closed, and we are looking at--we
are working on it actually right now. There is also, you may be
aware that there is an executive branch--the executive branch
began an overall review of all the emergency alert processes in
recent months.
Mrs. Capps. In addition? That is a separate action from the
FCC's action?
Mr. Moran. Yes. There is a committee that has been
established.
Mrs. Capps. So another committee. Another way of--- Mr.
Moran. By the executive branch. But it is actually much broader
than just EAS system. It is to look at such things as should we
involve cellular phone systems in the system.
Mrs. Capps. Yes, I want to get to that, too. Was the
emergency alert system activated with respect to Katrina and
the breach of the levees?
Mr. Moran. My understanding, it was not used in this
instance.
Mrs. Capps. It wasn't used at all. And it has been 4 years.
So nothing----
Mr. Moran. Well, but the issue of is it used, that is an
issue--the FCC, we have responsibilities to make sure we have
an operational system, and we do, and we have testing rules,
and we are involved in that.
Mrs. Capps. But you don't even know if it works because it
wasn't used for Katrina.
Mr. Moran. We do know that it works because there is a lot
of testing procedures that we do to make sure that----
Mrs. Capps. Why wasn't it used?
Mr. Moran. The decision as to if it is used or not even on
the national message, that is a decision by the executive
branch; but on the State and local side, it is the State and
local government's decision as to whether or not to use it.
Mrs. Capps. Okay. Can I ask you how many times the Federal
authorities have activated it since it has been put in place?
Mr. Moran. The current EAS, I believe, was put in place in
1994, and it has not been used for the Presidential message;
however, it has been used hundreds of times for State and local
messages, for hurricane and tornadoes----
Mrs. Capps. But in this case, when the President activated
the Federal Government's involvement after the hurricane, it
still wasn't----
Mr. Moran. It was not used by the Federal, and it is my
understanding that State and local authorities have not used it
either.
Mrs. Capps. They didn't use it either in this case?
Mr. Moran. In this instance. I think the warning that the
hurricanes were coming were so broadly known by everyone, it
didn't probably need to be activated at that point.
Mrs. Capps. Well, that is a different question, isn't it,
sir?
And then you started to--if I could just use the last few
seconds. And, by the way, many States now have Amber Alerts. My
State has one that works very well for child abductions all the
time. So this technology is there.
But let me ask you finally to talk about the digital
broadcasting. More and more people are watching digital
television. That is a subject of concern to this committee as
well. Does the FCC plan to institute that part of this? Will
digital requirement become part of whatever is done?
Mr. Moran. That is an issue in this proceeding, but I can't
speak to the proceeding until the Commission decides how it is
going to act in that. That is an issue before the Commission in
this proceeding that I told you about. That is before the
Commission, should we direct the digital broadcasters also to
participate. That is before the proceeding, but it is an open
proceeding.
Mrs. Capps. One final, because I have a lot more questions
to ask. Who in the executive branch triggers the alert, if I
could ask you that?
Mr. Moran. It is in the White House. I think it might be
the Office of Science and Technology Policy.
Mrs. Capps. But you don't know?
Mr. Moran. I don't know for a fact.
Mr. Shadegg [Presiding]. The gentlewoman's time has
expired.
The Chair recognizes the gentleman from Georgia for 5
minutes.
Mr. Norwood. Thank you very much, Mr. Chairman.
Mr. Garman, can you tell me once again how many refineries
in this country are in operation?
Mr. Garman. There are a total of 10 refineries that are out
of operation, that are shut down at this moment. However, we
expect four of those to come back up relatively quickly, maybe
one of them as soon as today.
Mr. Hall. But the total in the Nation?
Mr. Garman. We are hearing 136 from the folks behind us.
Mr. Norwood. And the percent of those in the gulf coast,
Whether they are working or not?
Mr. Garman. There was 8 million barrels a day of refining
capacity in the gulf coast; 2 million barrels a day were down
at the height of the storm, and we have got about 1- of those
back.
Mr. Norwood. But the percent at full production out of the
Gulf of Mexico is what for the Nation?
Mr. Garman. Roughly 50 percent.
Mr. Norwood. That is what I thought.
Now, why is it all there? Why did so much accumulate in the
gulf coast?
Mr. Garman. My theory is that, No. 1, that is where the
production, most of the offshore production, virtually all of
Nation's offshore production, is located there. That is where
investors have been successful in building refineries.
Mr. Norwood. Because of why? Why were they successful
there?
Mr. Garman. For a reason they found that closer to product,
and they possibly found a more willing and obliging State
regulatory regime.
Mr. Norwood. We haven't had a refinery in 30 years because
of State regulation?
Mr. Garman. It is not solely State regulation.
Mr. Norwood. Okay. A good bit of it?
Mr. Garman. It is the willingness of the community to host
a refinery.
Mr. Norwood. That is where I am sort of going. Are there
many refineries in California?
Mr. Garman. I am told there are 21 refineries in
California.
Mr. Norwood. And how about Massachusetts?
Mr. Garman. I am not aware of a refinery in Massachusetts.
Mr. Norwood. The problem is we don't have our refineries
distributed around the country appropriately, I guess, and I
think that is something that we significantly need to deal
with, and I hope the energy bill does. And Chairman Barton says
perhaps we go back and look at that again, but I view that as a
major part of the problem, not just because of the hurricane
which knocked out so much of our capacity but because it was in
one spot.
One of you have said that the price of crude oil is the
single largest factor in the price of gas. Am I correct in
thinking that?
Mr. Caruso. That is correct. It accounts for about 60
percent right now.
Mr. Norwood. And the price of crude oil then is determined
by supply and demand?
Mr. Seesel. Yes, sir.
Mr. Norwood. And a great deal of the supply today is from
India--I mean, the demand is from India and China?
Mr. Caruso. China is second largest.
Mr. Norwood. Are they making gasoline?
Mr. Caruso. Not enough.
Mr. Norwood. Do they demand that much gasoline in China
that the amount of crude that they are buying is going to
gasoline?
Mr. Caruso. In China there is a much smaller percentage of
the total barrel going into gasoline because of their small
passenger car fleet.
Mr. Norwood. So what do they do with that crude if they are
not making gasoline?
Mr. Caruso. Diesel fuel for generators and trucks and jet
fuel, of course, and also diesel for railroads. And they do
burn some for electric power, but not a lot.
Mr. Norwood. Well, the crude oil we purchase, what percent
of it goes toward fuels, gasoline, diesel?
Mr. Caruso. Approximately 70 percent of our oil.
Mr. Norwood. That is what I thought.
Is China anywhere near that?
Mr. Caruso. No, sir. They are much lower. I would say
probably about 25 percent.
Mr. Norwood. Let me just make one last comment, Mr.
Chairman, to these gentlemen. And we thank you so much for your
time. Mr. Upton made a point earlier asking, ``was an increase
of almost $1 or 75 cents over a period of 24 hours or 48 hours,
is that called gouging?'' And none of you could answer that or
would answer that. And I think you are doing a disservice to
your boss. The fact is it is gouging, and the reason it is
gouging is because the American public perceive it as gouging.
I know there are other factors out there, there are other
things, but the fact is most Americans don't understand and are
not willing to understand why gas could go up 75 cents in 2
days. And we need to deal with that as we speak, I think, in an
appropriate manner, and we, too, should agree that something is
bad, wrong for that to go up 75 percent. Many people think that
individual service stations are trying to make an extra buck--
maybe they are, maybe they aren't--but I don't want you to deal
with it, I don't want the Feds to deal with it. In my State of
Georgia, as was pointed out by Mr. Stearns, some of them went
up $6 a gallon. Our Governor took care of it: He sent the State
Patrol over and arrested them. Now, that is who I want to deal
with that. He called it gouging. Most of us thought it was
gouging. And he put a stop to it in Georgia very quickly.
And that is how I think we need to do it. We really don't
need the Feds to help us with that. But I wish you would be
careful of how you speak of the increased price of gasoline
that has sometimes gone up in a most unreasonable manner.
With that, Mr. Chairman, I am happy to yield back.
Mr. Hall [presiding]. I thank the gentleman. I thank him
for being so plainspoken. Did they torture that guy before they
put him in jail?
Mr. Norwood. No. They even fed him, too. It stopped it, Mr.
Chairman, I promise you.
Mr. Hall. I thank you.
The Chair recognizes the gentleman from Texas Mr. Gonzalez
for 5 minutes.
Mr. Gonzalez. Thank you very much, Mr. Chairman. I always
wanted to be on this committee, got my wish, and of course the
first thing we were dealing with was whether people's TVs would
go dark after we converted to a digital system. It appears now
we have to make a decision about gasoline, whether people are
going to be able to afford gas to leave their homes; and, if
they can't, they are going to stay home, and then when they
turn their TVs on, they won't be able to get a picture once we
convert over to digital.
But on the serious side, I had a question for Mr. Caruso. I
think you are going to be the most quoted guy on Capitol Hill
after today. What you are saying, in the fourth quarter
gasoline prices will recede somewhere around to $2.60; is that
correct?
Mr. Caruso. That is correct.
Mr. Gonzalez. And then next year, 2006, it will be around
$2.40 nationwide average?
Mr. Caruso. Yes, sir.
Mr. Gonzalez. Because, believe me, our constituents are
waiting for some sort of word about what they are going to be
paying, and the fact that it is going to be coming down. For
the first time, I think we have heard some discussion regarding
efficiency and conservation.
And I am going to ask Mr. Caruso, and, of course, Mr.
Garman, you can have your own opinion on this, this is from an
article that appeared in the Wall Street Journal, And it said:
Last month, the administration proposed a sweeping
restructuring of the light truck fuel economy rules, claiming
the new policy would save the country 10 billion gallons of
gasoline over the lives of vehicles bought from 2008 to 2011.
Critics say the administration's move wasn't enough. David
Friedman of the Union of Concerned Scientists, environmental
advocacy group, noted that 10 billion gallons of gasoline is
the amount that the United States uses approximately every 25
days. Quote: It is meaningless, he said, of the
administration's new fuel economy proposal. The administration
is bragging about saving less than a month's worth of oil over
two decades.
Would you agree with I guess it is Dr. Friedman's analysis
of the administration's proposal, Mr. Caruso, as its real
effectiveness?
Mr. Caruso. I would not agree. I think that any savings is
better than no savings. So the statistics that you have quoted
I believe are accurate, but I would disagree with the
characterization.
Mr. Gonzalez. Well, something is better than nothing. I
guess we can all agree on that. But sometimes something is not
meaningful, and that is what I am getting at is we could do
something that is more meaningful, or people will be staying
home a lot longer. And if we don't do the digital conversion,
right, then they won't even have a television either.
Mr. Garman, do you agree with David Friedman's analysis
that it really isn't meaningful or substantive?
Mr. Garman. I would make a couple of observations. First,
the administration previously raised CAFE standards on light-
duty trucks in the 2005 to 2007 frame. I mean, we have raised--
the administration has raised CAFE standards now twice,
standards that had not been raised at all prior to or since the
1996 model year.
And I think it is also important to point out that
consumers have the opportunity to choose high-mileage vehicles
today. They don't. It is not a requirement that the government
require manufacturers to make these vehicles. I drive a vehicle
today, and have since 2001, that gets more than 50 miles per
gallon, and that is a choice that I as a consumer can make and
have made that choice.
So I think the question is consumers can buy vehicles today
that deliver great efficiency, and we should encourage them to
do so. The question is do we force markets and mandate consumer
behavior and look to that as the answer? It is certainly an
approach, and it is a tool that we have used in the
administration, but we also want to encourage consumers to buy
fuel-efficient vehicles not because the government is telling
them they must, but because they realize that it is in their
own self-interests.
Mr. Gonzalez. And I understand the big argument about
choice; consumers should be given choice. But, you know, policy
and regulation and such is guidance so that you avoid a
situation where maybe our oil industries and others aren't
really prepared for suddenly a drastic shift in consumer
choice. And that is what I am talking about. When you are
talking about the price of gasoline reaching $3, $4, and $5, it
definitely will cause a tremendous shift in the way the
consumers will choose. And I do think we need responsible
policies that will point us in the right direction. You are
talking about hydrogen, we are talking about hybrids, we are
talking about greater efficiencies. Those are realistic goals
and policies that we should be instituting. And I think to
simply say, well, we are going to deprive people of choice if
we don't do these things, I don't think that that is really
what is going on.
I have a real quick question for Mr. Moran, and my time is
up, and I am hoping that they will allow you, and that is voice
over Internet protocol. We know that you have policies,
programs, regulations, and coordination of what is going on out
there. But what about this new method or manner of providing
phone service to households? That is not incorporated in any of
your plans, is it?
Mr. Moran. It is incorporated. We have done some things to
allow voice over Internet to work and also to allow 911--to
make it mandatory, actually, for voice over Internet providers
to provide 911 services. But do you mean in the emergency
alert?
Mr. Gonzalez. In the emergency alert system, sure, Because
I am just thinking that traditional providers come under the
scheme. But I don't think voice over Internet protocol would.
Mr. Moran. I think we may have had some questions in our
proceeding. I would have to check, though. We cast a pretty
wide net in our proceeding that is ongoing right now. I would
have to ask to see if we asked questions about voice over
Internet, and I don't recall if we did.
Mr. Gonzalez. If you could get back to me on that.
Mr. Moran. Sure.
Mr. Gonzalez. Thank you very much, Mr. Chairman.
Mr. Hall. The gentleman's time has expired. Don't worry
about us over in my area; we are still watching radio over
there.
Mr. Shimkus, the gentleman from Illinois, is recognized for
5 minutes.
Mr. Shimkus. Thank you, Mr. Chairman. We have already
mentioned about the inability to build a crude oil refinery,
but it is not true that we haven't built refineries in this
country; is that correct? I don't care who wants to jump up
there. How about Mr. Garman?
Mr. Garman. Are you speaking of ethanol production?
Mr. Shimkus. Any.
Mr. Garman. Yes, sir. We have built--there are in excess of
70 ethanol production facilities in operation today, and that
number is growing as the weeks go by.
Mr. Shimkus. And so I have always chided my friends that,
for us in the Midwest, they don't want to move and build
petroleum-based refineries; we will continue to build
renewable-fuel refineries. In fact, I have got 90 ethanol
plants that are on line today. There are 17 plants that are
under construction as we speak. There are seven in Illinois,
and 17 are planned for Illinois as we speak. That kind of talks
to some of the benefits of what we did in the energy bill. We
have to decrease our reliance on foreign oil, we did make great
progress on this issue, and I would encourage other feedstocks
to look at this as an alternative.
I also wanted to direct my colleagues, I do a lot of energy
debates and discussions back in my district because of the
expertise or lack thereof that you develop over the years. And
one of the slides I had was China crude imports. In 1996, China
demanded--and this is from the International Energy Agency, it
is out of the National Journal--22,828 million tons of crude
imports in 1996--that is a billion; 122--then there is 122,699
million tons in 2004, which is a sixfold increase in 6 years.
So for people to--so when I am asked by my public how--what
is going on, I have to talk about that fuel tanker that is
loaded with crude oil that is going to go to some port, it is
either going to go to India or it is going to go to the United
States, or it is going to go to China, what is going to
determine where that tanker of crude oil is going to go, to
what port? And, Mr. Garman, what would you say?
Mr. Garman. The willing buyer that will pay the highest
price.
Mr. Shimkus. And that is what the public has to understand.
Now, I would like--Mr. Caruso, how much crude oil reserves
do we have within the continental United States or off our
Outer Continental Shelf?
Mr. Caruso. We had proven reserves at the beginning of this
year of about 28 billion barrels total, and that is in those
areas that have been drilled.
Mr. Shimkus. How much do we not have access to?
Mr. Caruso. I don't have that precise number, but there is
a significant amount of resources that haven't been drilled and
proven, but that the USGS believes are available to be
discovered. And I could provide that number for you. But it is
a significant--it will be a significant increment to the proved
number I just gave you.
Mr. Shimkus. And so many of us are very frustrated by this
debate. It is incomprehensible that we in this country are
importing refined product. Just think of it from the job
creation aspect. We allow someone else to get the crude oil in
some other refinery, so they have got the tax base, they have
the jobs, and we get the refined product? My constituents don't
really understand that.
In 1998, my first term as a Member of Congress, myself and
a colleague of mine, Karen McCarthy from the great State of
Missouri, worked on changing Federal law under EPAct on which
we were able to give biodiesel credit, which changed the debate
from just vehicles purchased to fuel usage. And we have got a
50 percent credit now for fleets, and many fleets are moving to
biodiesel, decreasing reliance on foreign oil. In fact, it has
really hit now. Willie Nelson and all these stars are into soy
diesel, and we are glad to have them on board.
Has the administration thought about working with us to
move that credit to 100 percent?
Mr. Garman. We will certainly engage with the Treasury
Department and have those discussions. To my knowledge, I have
not been part of any such discussions.
Mr. Shimkus. If you can get back to me, I would appreciate
it. And if we can be helpful, I would like to be.
Mr. Chairman, thank you. I yield back my time.
Mr. Hall. I think the gentleman's time has expired.
The Chair recognizes Mr. Inslee from the State of
Washington for 5 minutes.
Mr. Inslee. Thank you.
Last weekend I went down to the Astrodome to work with the
evacuees, and I can tell you, I was so inspired talking to
these people. The resilience, the graciousness, the
appreciation of these people for what the country is doing for
them, it was really inspiring.
On our way back, we were flying back from Houston to D.C.,
halfway through the flight one of the evacuees who was heading
from Florida took out a razor blade and slashed his wrist to
cut it and take his life. He had just simply had it. And the
reason I mentioned, that we diverted our flight plan to
Nashville to rescue him, and he is okay; we had two EMTs on the
flight, and it was a happy ending of sorts. But we changed our
flight plan to accommodate that.
And it is clear to me that we need to have some major
flight plan changes in this country. We need a flight plan
change on our fiscal policy to pay for this what is going to be
close to a $100 billion disaster by the time we are done. We
need a flight plan change to deal with global warming, which
has the capacity to make these hurricanes more intense. And it
is clear to me listening to you today we need a flight plan
change on dealing with gouging and those who take advantage of
these poor, not just evacuees, but all of us.
Now, what I would like to make real clear on, we have heard
that the Federal Government does not have the ability to force
these antigouging laws in the absence of collusion. I would
like to know whether your administration is here asking the
U.S. Congress to take action to give the administration more
authority to prevent gouging from taking place. And the reason
I ask you that is that this administration sat on its hands and
let Enron abuse us to the tune of $1 billion and did nothing in
the State of Washington. We don't want that to reoccur. So the
question to you gentlemen: Are you asking us to do something to
prevent gouging?
Mr. Garman. No, sir, I am not here today for that purpose.
Mr. Inslee. Anyone else?
Mr. Seesel. Congressman, as I said to some of your
colleagues, I would need to check with the full Federal Trade
Commission on what it is asking for, but I don't believe the
Commission----
Mr. Inslee. Well, I have to tell you, that is extremely
disappointing. You know, when we heard the President say that
no one could have anticipated that these levees would have been
breached, and as a result we had a pathetically indifferent
Federal response to this terrible tragedy, and those people
ended up on the Astrodome floor, to see another pathetically
indifferent response to gouging is very, very disappointing. We
on this side will be introducing legislation which will call
for giving you authority to prevent gouging in the case of
natural disaster, taking into consideration the real prices,
taking into consideration the amount of ramp-up. And when that
happens, I hope you will come back to us and support that
legislation to show a little more aggression dealing with this
problem.
I want to go to the second issue. Mr. Garman, have you read
the National Oceanographic and Atmospheric Agency report on
global warming and its impact on hurricanes?
Mr. Garman. No, sir I have not.
Mr. Ross. Let me help you out. The National Geographic
Pollution Dynamics Agency of the administration--not a bunch of
granola eaters in Berkeley--the administration says, and I
quote, ``the strongest hurricane in the present climate may be
upstaged by even more intense hurricanes over the next century
as the earth's climate is warmed by increasing levels of
greenhouse gases in the atmosphere. Although we cannot say at
present whether more or fewer hurricanes will occur in the
future due to global warming, the hurricanes that do occur near
the end of the 21st century are expected to be stronger, more
intense, significantly more intense rainfall than the present
day climate.'' No one is saying this is caused by global
warming, but some have suggested before you spend $20 billion
in rebuilding New Orleans and Mississippi, we should do so with
a national policy that pays attention to science and that your
administration, says the hurricanes will become more intense in
the next several decades, and you are encouraging a policy
which occurs in the development to reduce the barrier island
protection, you cut the budget dealing with levees, we have now
had the most horrendous hurricane in American history. Do you
think the administration should rethink its refusal to consider
global warming?
Mr. Garman. I think the president has said in February
2003, with regards to global warming, it is a serious issue. I
think the President repeated that at the G-8 meetings in
Gleneagles most recently this year. We believe that we have a
response. And I think if you actually look at actual carbon
emissions performance of the U.S. Versus the EU and other
nations, you will see that we have a very, very good record.
Our rhetoric may not be as forward leading as some of our EU
partners, but the performance in actually avoiding greenhouse
gas emissions is actually among the very best among the
signatories to the framework convention on climate change.
Mr. Ross. Let me suggest a different viewpoint. If the
administration policy on global warming is similar to the
policy on levees in New Orleans, which is not listening to
science that specifically refused to adopt a elimination of
this issue which occurred, which many of us here want to
propose, you refuse to block efforts to increase and reduce oil
consumption in the energy bill just passed. You refused.
Mr. Chairman, I think I have 8 minutes. I waived my opening
statements. I probably have a couple more minutes. Am I right
on that?
Mr. Hall. I don't recollect that, but if that is your
recollection, I will honor it.
Mr. Ross. You refuse to embrace something meaningful and
that has to do with price with global warming. We have a CAFE
standards that are so abysmal. China has better corporate
standards than we. In the past years they had improved their
output. If you want to talk about the way to reduce prices, let
me ask you this, don't we have to find a way to reduce demand
in the most effective way? We have advanced in the last few
decades what we demonstrated in 1975 and 1973 when we almost
doubled a 60 percent increase at least in our fuel economy
standards which this administration refuses to take action.
Mr. Garman. Sir, again, this administration has raised or
proposed increases in corporate average fuel economy standards
twice--the first increases since the 1996 model year. I can
understand that we can have disagreements about the scope of
that increase and whether that increase should be more or less,
and that is what we propose.
Mr. Ross. Perhaps there will be a reconsideration, I don't
know, but we hope you will reconsider. And I will tell one
would think after the hurricane, after we have seen these
prices, outrageous prices at the pump, after we have seen the
destruction or diminishing of our refineries on the southern
coast, which has always been vulnerable to hurricanes, one
would think that we would have administration policy to
increase CAFE standards enough to at least reduce our
dependence on foreign oil.
Now, according to the energy information office, I am told
that the policy that the administration has proposed, what they
want to do with CAFE, which was almost nothing, would result in
our foreign fuel energy policy actually rising in next decade.
Is that true that under the policy that your administration
proposed, our dependence on SaudiArabian and Mid East oil--in
part because of your refusal to adopt fuel efficiency
standards--will actually go up?
Mr. Garman. Again, if one were to look at that single
policy in isolation, I wouldn't dispute the contention that
that single policy in isolation will not reverse our petroleum
dependence. But I would submit to you that were we to do that
and a good deal more, including opening the Arctic National
Wildlife refuge to production and increasing CAFE standards,
even beyond that, we would still looking at a situation of
increasing dependence on foreign petroleum.
Looking at these policies in isolation will not give us the
result that we need. There is no silver bullet. We need
comprehensive policies of a variety of different things.
Mr. Ross. We just feel that we are not doomed if we start
to embrace the new technologies. Thank you, Mr. Chairman.
Mr. Hall. Thank you, and the gentleman's time has expired.
Let's see. Chair recognizes Mr. Bass, gentleman from New
Hampshire, for 5 minutes.
Mr. Bass. Thank you, Mr. Chairman. Mr. Caruso, I was
wondering if you could help me understand why retail gasoline
prices moved up so rapidly in my neck of the woods in New
England, since New England sources a significant amount of its
gasoline, finished gasoline supplies from Canada, I believe
some of it from the Virgin Islands, but virtually none of it
from the gulf. Shouldn't there have been some more protection
in our region than there have been in others?
Mr. Caruso. Well, not all States' prices did rise. The main
reason prices rose is that the market's fungible, and,
therefore, when gasoline goes up at the NYMEX futures market,
often wholesale prices and contracts that retails are indexed
to that, so that is part of the reason. I can't really speak
specifically to New Hampshire.
Mr. Bass. I guess the fact is that prices for all fuel went
up because of the gulf crisis, even though the actual cost to
the manufacturer didn't go up, because there was no impact, the
refineries, all the fuel, most of the fuels in New England came
from--had nothing to do with the gulf.
Mr. Caruso. That is correct. As I mentioned earlier, it is
a global market and prices went up in Europe as well for
example.
Mr. Bass. Different subject. You testified earlier that
home heating oil would be 30 percent more expensive than last
year as a result of Katrina and the market disruptions caused
by it. So for low income Americans, do you believe the
government's low, major fuel assistance program, LIHEAP, would
be need to be funded at a level 30 percent or so higher than
last year's just to keep the purchasing power the same.
Forgetting the weather issues and how this winter may come, if
fuel prices are up 30 percent, should low income energy be up
30 percent?
Mr. Caruso. Just a clarification, the 30 percent increase
includes the fact that prices had already risen before Katrina,
so that they would have--it would have been up year on year
regardless----
Mr. Bass. So it might be more than 30 percent.
Mr. Caruso. No. 30 percent includes our latest assessment,
including the impact----
Mr. Bass. Fair enough. So you think it is going to take, is
it fair to say you think it will take 30 percent more money to
fund LIHEAP?
Mr. Caruso. I am not really familiar with the relationship
between the LIHEAP budget and the current price. I would have
to----
Mr. Bass. But if any panelist--it is intuitive if price of
heating oil goes from 150 to 250 a gallon, that is a third
increase, it will take more money to fund LIHEAP?
Mr. Caruso. Absolutely: whether it is 30 percent or not, I
have no idea.
Mr. Bass. I have one further question because I am running
out of time.
Mr. Garman, it would be fair to describe some elements of
the energy infrastructure as being a total loss. I am not
talking about production capacity, but on the consumption side.
And are going to go through a period spending a lot of money on
rebuilding that infrastructure.
Is there not an opportunity here to implement other kinds
of outer energy consumption patterns, distributed energy,
distributed--other ideas, if you will, that would lead to a
somewhat different infrastructure, a 21st century
infrastructure, rather than an early 20th century, or is it
going to be the Agency's position, if it has a position, that
we are just going to try to duplicate what was there before?
Mr. Garman. I would hope that any rebuilding effort that
results as a consequence of Katrina will encourage folks to
look at new technologies, distributed generation, micro grids,
solar, very highly energy efficient housing. I would like to
think that as houses are rebuilt, they are rebuilt at a much
higher level of energy efficiency. And I would hope that
consumers, who are in a position to make those choices, would
ask their builders for these new technologies and a higher
energy efficiency than the house that they lost.
Mr. Bass. One last question for Mr. Caruso.
Are you aware that there might have been any gasoline
stocks that were diverted from, originally designated for the
Port of Portsmouth, which is in New Hampshire, or elsewhere in
New England, were they diverted to any other region of the
country after Katrina?
Are you aware of any? And I don't have a follow-up. If you
don't know, would you be willing to look into the possibility
that one of the problems of fuel prices was that supplies were
diverted away from the northeast for one reason or another?
Mr. Caruso. I am not aware of any such diversions, but I
can certainly check our sources.
Mr. Bass. Thank you. I yield back, Mr. Chairman.
Mr. Hall. Thank the gentleman. The Chair recognizes the
gentlelady from Wisconsin, Ms. Baldwin, 5 minutes.
Ms. Baldwin. Thank you, Mr. Chairman. I wanted to follow a
little along the lines of earlier questions by Mr. Upton and
Ms. Capps. Mr. Moran, you are the director of the Federal
Communications Commission's Office of Homeland Security?
Mr. Moran. Yes I am.
Ms. Baldwin. And in addition to the disaster response that
you have been describing, what the commission has been up to
over the last week, does your office also engage in planning
ahead for threats and other disasters that could impact our
homeland security?
Mr. Moran. We--I have responsibilities in that area.
Ms. Baldwin. And does your office also work with other
agencies across the Federal Government in order to come up with
such plans and recommendations for----
Mr. Moran. Yes. We work very closely, especially with
national communication systems and the Department of Homeland
Security.
Ms. Baldwin. So, in that role of planning ahead and
interagency planning, have plans been developed for emergency
communications in the event of a hurricane or other disaster
that can be expected to topple power lines, phone lines and
wireless towers as we have seen in the past week?
Mr. Moran. Well, the Federal Government's role primarily in
the communication, emergency communications you are talking
about, are really to make sure that the carriers' processes and
systems can work. And the carriers themselves have--all the
major carriers have detailed emergency plans. There is a lot of
dialog between the carriers and the FCC and the NCS on these
plans, and many----
Ms. Baldwin. So is what you are saying is you try to prompt
the private sector and the regulated sector to do the right
thing, but the Government itself does not have its own set of
detailed plans on how to have communication occur in the event
of a catastrophe like this one?
Mr. Moran. I would say the biggest role we have is perhaps
as a catalyst. We have a number of advisory committees. We have
two major advisory committees that look at these things, and we
set the direction for the advisory committee. They run for 2
years. One of them is called the National Reliability and
Interoperability Council. It is all major carriers,
manufacturers participated in this advisory panel, committee.
And the Commission establishes the agenda basically for it.
Right now, it is primarily focused on actually public safety
communications.
Ms. Baldwin. I am pleased to hear that emphasis. It seems
in your testimony you point to, I guess, sort of four issues of
communication challenges, problems, things that were hampered
during this last week. One was the ability to communicate
between first responders within an entity or department. A
second was that communication between first responders in
various levels and jurisdictions. A third was problems with
communication between first responders, government officials
and hurricane survivors and telling them about the availability
of and where the relief effort was going. And then last, you
pointed out too the challenges in assisting survivors to figure
out how to communicate with and where are their loved ones, et
cetera.
Do Federal plans or recommendations to localities and
States exist with regard to all four of these critical areas so
that in the future, we have backups and redundancies, perhaps
not relying totally on the private and regulated sector, but
that we can step in and make sure that this type of lack of
communication never happens again to Americans.
Mr. Moran. Well, approximately 90 percent of all the
communications assets that we are talking about that are
relevant here, that infrastructure is really a privately owned
infrastructure. Our primary focus is to make sure that that is
as robust as it can be and that we know that the major--we know
that they all have emergency plans. We discussed their plans
with them.
I would say that the primary parties who are responsible
for the Federal Communications assets that we put to bear on
these functions are really not with the FCC.
Ms. Baldwin. But it does sound like you are saying that
this could happen again.
Mr. Hall. Gentlelady's time has expired.
Chair recognizes Mrs. Myrick, the gentlelady from North
Carolina, 5 minutes.
Mrs. Myrick. Thank you, Mr. Chairman. Thank you all for
your patience. Next time you need to bring your lunch.
I had a question for Mr. Caruso. Can you tell me if there
was any pressure taken off the gasoline prices by the easing of
the restrictions on the Clean Air Act probiotic fuels?
Mr. Caruso. We saw a fairly rapid response to the waiver by
the EPA and the other regulatory relief that was granted last
week. Within 24 hours of that, NYMEX gasoline prices started to
fall.
Mrs. Myrick. So it was helpful?
Mr. Caruso. Yes.
Mrs. Myrick. I appreciate that. We talked a lot about not
having a refining capacity cushion in this country. What would
you say does our country need? What type or what would you need
to do to create that? How much do we need? That kind of thing.
Mr. Caruso. I think the two most important things are
regulatory certainty,, which Mr. Garman mentioned in his
comments, and the other one is really not something that we
think can be legislated. The return on investment had been so
poor in the 1980's and 1990's that that inhibited investment
during those 2 decades. And now we have had 3 years or so of
pretty high refinery margins.
Whether that is sufficient to attract upstream investment
is unclear; so far we haven't seen much. There is one case in
Arizona, a project that has continued to languish, I think,
partly through regulatory problems, permitting, as well as
financing. So I think at least from a Government perspective,
the most important thing would be regulatory certainty.
Mrs. Myrick. I know in our area we have a couple of
companies that are looking at nuclear power again very
seriously because of what was done in the energy bill,
something I feel strongly about, too.
I appreciate your time. Again, I yield back, Mr. Chairman.
Mr. Hall. I thank you for yielding back, and the Chair at
this time recognizes a fine member of this committee, Mr.
Albert Wynn. Gentleman has 5 minutes.
Mr. Wynn. Thank you, Mr. Chairman. Thank you for your
flattery as well.
Mr. Garman and Mr. Seesel today cited the need for
increased refining capacity. There is a very significant
criticism being leveled at the FTC, Mr. Seesel, that the FTC is
not taking a hard enough look at this issue as it reviews
acquisitions, according to an article in the Washington Post
entitled Refiners Mergers Good For Business Not Consumers. It
indicates that the Commission last week approved a purchase of
Premcor by Valero making the latter the Nation's largest oil
refinery.
Are you familiar with the article?
Mr. Seesel. Yes, Congressman, I am.
Mr. Wynn. The article States that the FTC and its staff
never seem to make the link between industry consolidation,
rising energy prices and record profits and suggested there is
a gentlemen's agreement against investing too heavily in new
capacity that the FTC's analytical approach does not seem to
take into account. The article goes on to cite the fact that
the rate of return on shareholder equity is 23.9 percent last
year and 16 percent over the past decade. I think this is a
pretty serious criticism in light of what everyone seems to be
saying is the need for more refining capacity. It appears there
is no incentive for expanding refinery capacity because of
profits being made through mergers and basically maintaining
the status quo.
How do you respond to this criticism?
Mr. Seesel. As Mr. Caruso has pointed out, I think one of
the primary reasons refining capacity has really been sort of
stalled in recent years is that until the last couple of years,
it has fairly low return on investment. So the idea of
investing in new refining capacity has been quite unattractive.
Mr. Wynn. 16 percent over the last decade.
Mr. Seesel. Well, I think it probably reflects the uptick
of the last several years because over the last 10 years or so,
and Mr. Caruso probably has better figures on that, I think,
for example, several years ago I think the return on investment
was abysmal. And I don't know exactly what the number was----
Mr. Wynn. Can you get us that information about the return
of investment over the past few years because it seems to me
that the return actually has been pretty good.
Mr. Seesel. I will be glad to, Congressman.
Mr. Wynn. So your bottom line response is you don't accept
the criticism.
Mr. Seesel. Well, the author of that article is entitled to
have any thoughts he wants about gentlemen's agreements and so
forth. We have looked at many, many, many mergers and millions
of pages of documents in this industry over the 25 years we
have been looking at this and have come up with virtually no
evidence of anything like that.
Mr. Wynn. Did you find it interesting that the article says
that when President Bush sited the availability of inactive
military basis as possible locations for expanded refinery
capacity, that the spokesman for the Valero said they weren't
interested in that?
Mr. Seesel. I hadn't really focused that much on that part
of the article. I am aware, Congressman, that some refining
executives found the proposal about military bases to be
interesting, although some had some concerns about how close
they were or not to crude oil supplies. So that the idea of
siting a refinery on certain military bases didn't have much
appeal to them.
Mr. Wynn. Let me move on to another question that has been
talked about at some length today, and has to do with price
gouging. And I think you, in fact, testified it was very
complicated and depended upon circumstances, et cetera. Has FTC
ever studied this issue?
Mr. Seesel. The Commission has looked at pricing issues in
the context of claims and allegations that there is collusive
activity going on.
Mr. Wynn. Is there a report?
Mr. Seesel. The Commission did some investigations of
petroleum and gasoline prices.
Mr. Wynn. Is there a report on price gouging?
Mr. Seesel. On price gouging per se, no, sir.
Mr. Wynn. In view of the complaints that you received,
don't you think that is an appropriate role for the Agency?
Mr. Seesel. I certainly think, Congressman, that to the
extent we get complaints that are phrased in terms of price
gouging, it is appropriate for the FTC to look at whether or
not there is any violation of any law.
Mr. Wynn. So can we expect that you will, in fact, conduct
a study because you have already testified that you got the
complaints and that you forwarded to them to the States'
attorneys general. So presumably you think they have some
credibility.
Mr. Seesel. As you know, under the new Energy Act, we are
under section 1809, the Commission is going to conduct a study
starting right now of manipulation of gasoline prices in this
country.
Mr. Wynn. So you are telling us, the committee, that you
will be studying and reporting back on price gouging?
Mr. Seesel. Really, all aspects of possible manipulation of
gasoline supply and prices.
Mr. Wynn. I appreciate that. Mr. Garman, you talked about
hydrogen. You said 2020 would be the year we would have
hydrogen cars. What is the administration doing to speed that
up?
Mr. Garman. We think that the--frankly because we are
dependent on certain technological breakthroughs that aren't
necessarily mindful of a timeframe, we have to have some
success in the lab. As you and I have talked about before,
hydrogen storage is a technical barrier that we are
confronting.
We don't know what the answer is. So we are putting more
money into that effort to find, you know, to research different
and new compounds, halides and chemical and metal hydrides that
might be good storage media, but you know what we need in
addition to the funding is time--it is a learning process. So I
am not certain that there is a lot that can be done to speed
that up.
It has been suggested in the past we put more money in it
and that would be an approach because it might enable us to
study two pathways at once or three pathways or multiple
pathways. But what we really need is time.
Right now, we have several--we have a number of hydrogen
vehicles on the road. We are collecting data, performance data.
And what we need to do is take that data back to the laboratory
and then come up with the next iteration. So it is not--there
is not a whole lot that we can do to speed that up if the
ultimate goal is a product that consumers will choose and
consumers will buy.
We can produce a car tomorrow that has performance
characteristics that we want but not at a price that consumers
can afford. That is going to take some time.
Mr. Wynn. Thank you. I yield back the balance of my time.
Mr. Hall. Thank the gentleman. Chair recognizes Mr.
Sullivan, gentleman from Oklahoma, 5 minutes.
Mr. Sullivan. Thank you, Mr. Chairman. And you know, this
was a horrible tragedy, Katrina.
Mr. Hall. Sir, you get 8 minutes in all.
Mr. Sullivan. 8 minutes. It is horrific the things that
happened and it disrupted our energy sector, it has affected
this country in many ways. I was in the State legislature when
the Oklahoma city bombing occurred, too, and that was horrific
as well. And one thing that, you know, does come out of these
horrific tragedies is sometimes something good. And I think
that we do need to look at our--examine our energy
infrastructure, energy needs in general, even better than we
did on the last energy bill. I don't think that went far
enough. And we need to look at the long-term overall strategy
of energy looking at nuclear power, all the alternative energy
sources, because I do believe that some day, and it won't be in
our lifetimes or our kids' lifetimes or even our grandkids'
lifetimes, but we will run out of oil and gas or it will become
too expensive to produce. And one thing I do want to bring to
peoples' attention is, I guess, Mr. Garman, I will focus this
to you.
Right now in this country if we were to find, let's say you
and I found a billion barrel reserve today somewhere here in
this country, would we be able to refine it?
Mr. Garman. We would be competing with many other--with
others.
Mr. Sullivan. Outside the country?
Mr. Garman. Probably what would happen is we would displace
foreign oil into that--domestically produced crude would
displace foreign oil that was coming into those refineries is
what most likely would happen, is my estimation.
Mr. Sullivan. But we are at maximum capacity with our
existing refineries; now, would you agree?
Mr. Garman. That is correct. We actually do not have
refining capacity to refine all of our needs today.
Mr. Sullivan. And there is a place, I don't know if you are
familiar with Cushing, Oklahoma, it is just outside my
district, but there are 23-some odd pipelines go through that
area, and there have been refineries there in the 1920's and I
think up to the 1970's. Kerr-McGee had a refinery there. They
had like Citgo, Conoco Philips refinery, Embridge, Shell
Sunoco, Texas Eastern Pipeline Partners, Magellan, Plains All
American, just to name a few. Many pipelines intersect in that
area in Oklahoma. And also it is the delivery point for NYMEX
crude oil futures contracts.
Would this be a good idea? And I have always said since I
got elected, wouldn't it be a great idea to build a super mega
refinery in that area? We have the supply coming in. We are not
next to an ocean. We do have a great infrastructure of
pipelines there, as you know.
But could you see that becoming a reality if maybe we
lessened some of the burdensome government regulations and the
permitting, kind of like what we did in the House version of
the energy bill, maybe we can go back and revisit that and make
it even better, but to build a megs refinery there, maybe
making let's say 2 million barrels a day. I don't know. But
would that be a reality?
Mr. Garman. The Nation needs more refineries. And if
Oklahoma is willing to host a refinery, then I hope investors
are listening, and if there is anything we can do to help make
that come to pass, we would be happy to do that.
Mr. Sullivan. Well, if Oklahoma decides that is something
we want to do, I think that is something Oklahomans want to do,
would you be willing to help us along the EPA and all of that
as well?
Mr. Garman. Yes, sir.
Mr. Sullivan. Are you committed to doing that? Thank you
very much.
Mr. Hall. Gentleman yield back.
Mr. Sullivan. I will yield back, yes.
Mr. Hall. Chair recognizes Mr. Markey, 5 minutes.
Mr. Markey. Thank you, Mr. Chairman. Over the course of the
last few years, the oil companies have earned record profits as
this chart indicates. Exxon-Mobil's profits have risen from $11
billion to a projected $31 billion this year. Chevron-Texaco's
profits have risen from $1 billion to $13 billion; BP's from $8
billion to $21 billion; Shell's profits have risen from $10
billion to $20 billion.
These are huge numbers. And they are the direct result of
soaring oil and natural gas costs. Gasoline has risen from
$1.85 to $3.04 on the average.
In the last year, heating oil has risen from $1.36 a gallon
in 2003 to a projected $2.22 a gallon this winter. Natural gas
has risen from $9.85 per thousand cubic feet a few years ago to
a projected $12.81 this winter. We need to know why. This is
all before Katrina. This is just what has been going on in the
market.
Mr. Garman, in the last 10 years, at least 30 refineries
have closed.In the last 10 years, at least 30 refineries have
closed. These refineries were all fully permitted and were
producing gasoline for the American public.
Do you know of a single refinery the oil industry is
seeking to reopen to produce gasoline in the U.S. Market?
Mr. Garman. I am not aware of one, no, sir.
Mr. Markey. No. Mr. Caruso, last year, Business Week
reported that refineries are running near capacity because they
have little incentive to build more. For starters, they make
more money when supplies are tight, says Business Week.
Do you agree that reduced refining capacity means higher
profits for oil companies?
Mr. Caruso. Well, profitability really has more to do with
the demand, the competitiveness in the world market than that
single data point that you just mentioned. But that is one of
the components.
Mr. Markey. Haven't refinery margins increased, that is,
refinery profits increased?
Mr. Caruso. They have increased.
Mr. Markey. The less refining capacity, that is, the more
refining capacity that American oil companies have closed is
the more money refiners are making. Their profits are going up.
Is that correct?
Mr. Caruso. That is accurate and it is also accurate on a
global basis, not just in the United States.
Mr. Markey. You are saying the whole world is shutting down
refineries?
Mr. Caruso. The refining capacity on a global basis is
tight. Yes.
Mr. Markey. Is tight. So this is a global pattern where the
largest oil companies, not only here, but across the world,
have been shutting down refining capacity, without a government
mandate to do so over the last 10 years.
Now Mr. Garman, in the past, oil industry has suggested
that somehow environmental permitting requirements were to
blame for the industries failure to build new refineries.
However, let me read to you from an internal Chevron document
in 1995, ``If the U.S. Petroleum industry doesn't reduce its
refining capacity, it will never see any substantial increase
in refining margins.''
So Mr. Garman, by closing 30 refineries since 1995, not
building new ones, but closing 30 already existing operating
refineries, the oil industry seems to have achieved their goal
of 1995 of higher refining profits, have they not?
Mr. Garman. My understanding is that smaller, less
efficient refineries have shut while existing refineries have
expanded capacity. And the strategy--and I am not the right
person to ask. You should ask--you will have a witness in the
next panel to ask specifically what is their motivation, but my
observation has been there is a component of the environmental
standards to comply with environmental standards and maintain
an update refineries to----
Mr. Markey. But this was not building--these are not
building new ones. These were the old ones. And instead of
continuing to maintain them, they just decided to shut them
down. But they could have, with their profits, maintained them
and kept them going.
Mr. Garman. Actually many times--and Mr. Caruso has better
data--but many times, refinery margins have been quite small
and not been conducive to new invest and expansion.
Mr. Markey. Exactly. Chevron said that in its document in
1995, they said, we will never see any substantial increase in
refining margins if we don't reduce--if we don't reduce, that
is, Chevron doesn't reduce its refining capacity.
And Mr. Seesel, the FTC is supposed to be in charge of
monitoring the oil and gas industry for evidence of anti
competitive or manipulative activities.
Has the FTC examined whether current situations that now
have, with respect to refining capacity, may be the result of a
deliberate strategy by the oil industry to reduce capacity in
order to drive up the profit margins and prices to consumers?
Have you ever had an investigation?
Chairman Barton. If you can answer that please answer that
and that will be his last question.
Mr. Seesel. Congressman, I don't think the Commission is
aware there is any evidence, there is any collusive or anti
competitive scheme among oil companies to reduce refining
capacity.
Mr. Markey. Have you ever investigated it?
Mr. Seesel. The Commission looked at the Shell Bakersfield
refinery situation in California. The situations we are aware
of are individual unilateral decisions by refineries.
Mr. Markey. Did you ever look at what--30 refineries all
shut down?
Chairman Barton. Gentleman's time has expired. The
gentleman is obviously entitled to provide written questions to
this panel in addition to the questions he has already asked.
Mr. Murphy of Pennsylvania has 8 minutes, if you chose to
use them.
Mr. Murphy. Thank you, Mr. Chairman. I am trying to
summarize what I have learned so far in the last 5 hours.
It comes to this, that I think what you are saying is when
it comes to defining these price jumps, price gouging, it is
much like the Supreme Court's definition of obscenity. You
can't tell us what it is, but you know it when you see it.
Which doesn't leave us, our constituents, or Americans in
general, with a lot of comfort, although I say that tongue in
cheek.
I just want to review a few things, and whoever is best to
answer this, I appreciate that. We do not have enough oil to
meet the needs of our citizens. Therefore, we have to import.
When we do produce more oil to meet our needs, other areas like
OPEC reduce their production in order to keep prices high. When
we have catastrophes such as what we just experienced in the
Gulf Coast, we have to raise prices to pay for future costs,
increased costs of gasoline and also anticipated costs. If we
are importing more, other countries can also raise that price.
Am I correct so far, anybody, Mr. Caruso?
Mr. Caruso. I think that is generally accurate.
Mr. Murphy. Now on this, I have a question. I want to know
what the Department of Energy has done on this particular
issue. I want to read a couple of quotes from something, and I
would like to ask unanimous consent an article from the October
2004 National Geographic be entered into the record. This
article made a chilling prediction of this whole event. I will
read a couple quotes from this.
It says the ``Federal Emergency Management Agency lists a
hurricane strike on New Orleans as one of the most dire threats
to the Nation, up there with a large earthquake in California
or terrorist attack in New York City. Even the Red Cross no
longer opens hurricane shelters in the city claiming the risk
to its workers is too great.'' It goes on to say, ``the most
startling impact has only recently come to light. From concerns
about tidal surges, the effect of oil and gas and petroleum
subsidence rates--there is another aspect there. For decades
geologists believed that the petroleum deposits were too deep
and the geology of the coast too complex for drilling to have
any impact on the surface. But 2 years ago, petroleum geologist
Bob Morton, now with the U.S. Geological Survey, noticed the
highest rates of wetland loss occurred during or just after the
periods of peak oil and gas production in the 1970's and 1980's
and concluded that that had an impact on reducing some of the
areas of the wetlands.''
We knew before then that this area was prime for huge
devastation from tidal surges, and we knew we had huge loss of
wetlands, and some of this might have been gue to oil
exploration. Was there something the Department of Energy did
or should have done with regard to alerting the oil companies
and saying we can't have 25 percent of our oil production or
refinery production situated in an area which is considered by
FEMA to be at extremely high risk for devastation.
Did we know it was coming? And did we do anything about it?
Mr. Garman. No, sir. I cannot say that we made a connection
between oil production and subsidence. I would note that I
haven't seen the scientific literature behind that National
Geographic article. My observation would be the old warning of
every statistics professor that correlation does not
necessarily mean causation. But that is a very interesting
possibility----
Mr. Murphy. But still we knew there was a large loss of the
marshlands which were the natural buffer for storm surges, and
we did know that with all the oil refineries clustered around
there that there would be trouble for category 3, 4, especially
5 hurricanes. I am curious if anybody from the Department of
Energy began to raise questions and say we need to put some
pressure on oil companies to change this and not wait 30 years.
Mr. Garman. My understanding is that refinery siting--and
we had a discussion I think about some of this while you were
out of the room, but refineries are sited where they can be
based on market conditions and the willingness of local
population to accept them.
Yes. In a perfect world, it would be better to have
refineries distributed geographically around the country. And I
think that recognition is well understood. I am not sure that
we have the tools or the capability to force anyone to do that
distribution. I dare say that the market and the insurance
market and the reinsurance market might as a consequence of
these losses. It would probably be more difficult in the future
to site a refinery or some of this infrastructure that close to
the coast. And I think the market will respond, and folks
looking to site a new refinery will site their new refinery
elsewhere.
Mr. Murphy. So what you are saying is perhaps our minds
will change, at least the minds' of those who are otherwise
opposed to siting refineries and distributing them around the
country. Otherwise we could remain extremely vulnerable to a
natural disaster or terrorist attack.
Mr. Garman. I think it would be a mistake for us to ignore
a lesson that has been so devastatingly made clear to us in
this instance, yes.
Mr. Murphy. Does anybody else on the panel have a comment
on those issues? Mr. Chairman, it comes down to this: A lot of
our constituents are enraged about fuel prices. And seems
sometimes the best we can offer them is what people have said,
is either there is some intentional price gouging, or it is the
marketplace and a shortage and we don't have the refinery
capacity.
What the American people look upon in times like this is
that we have to show them that we are working together in a
bipartisan way to come up with some solid solutions on this.
And that is why I am really hoping we can move vigorously
forward in a couple of areas, and that is that we have to
explore for more oil in this country, we have to move more
vigorously toward clean coal technology and nuclear energy, and
we have to build more refineries because to wait longer is
going to have a more devastating and far-reaching effects on
our economy. And with that, I will yield back the balance of my
time.
Chairman Barton. Gentleman yields back. The gentlelady from
California, long, patient Mrs. Solis is recognized.
Ms. Solis. Thank you, Mr. Chairman. I appreciate that.
My question is for Mr. Caruso. I wanted to bring to your
attention report that I came across. The investment firm,
Friedman, Billings, Ramsey & Co. noted that in early August
2005, refinery margins rose 54 percent, and that these profit
margins were responsible for 60 percent of increased cost of
fuel at the pump. Other estimates say as much as two thirds of
the increased cost of gas at the pump is a direct result of
profit margins of refiners.
Murphy Oil, a company with refineries impacted by the gulf
coast, yesterday lamented the fact that it has refineries
offline and is missing out on record margins. It seems from
these reports that the refinery business is quite profitable,
more profitable than any other sectors of our economy.
Do you agree with this assessment of these reports which
identify a link between the increase of refinery profits and
the cost of gasoline at the pump?
Mr. Caruso. I haven't seen those specific reports, but
clearly, even before Katrina, particularly in July and August,
there was a significant run-up in refinery margins as a result
of the very tight gasoline supply situation during the time of
peak driving. So while I can't subscribe to those numbers
because I haven't seen them, they are consistent with the
general trend in prices and margins. But I would also caution
that this was a very short term situation. Over a long-term
period, the refinery sector has not had the kind of margins
that you have just referred to.
Ms. Solis. It is unusually high, though? Do you agree? And
just a comment, of the 95 percent of the Bush administration
energy plan which has been implemented, what specific parts, in
your opinion, would address the costs to consumers at the pump
from the high profit margin of refiners?
Mr. Garman. I would point out that, you know, this
legislation that has just passed, while we are proud of it, and
the President signed it, was a product of this Congress and
this committee and other committees of the Congress, developed
as a compromise. And I think the Secretary has said, clearly,
that the bill is not expected--we cannot reasonably expect the
bill in the short term to do much to deliver relief at the
pump. It is a long-term bill. It is primarily a research and
development bill focused on the opportunity to move us toward
new alternatives. But that will not happen overnight.
Ms. Solis. One of my other questions that I wanted to raise
was with respect to where some of these refineries are sited.
And this is for Mr. Garman.
It appears that the Chevron Texaco refinery in Pascagoula--
excuse my pronunciation--Mississippi and Conoco Phillips
refinery in Belle Chasse may have suffered the most significant
damage from Hurricane Katrina. No. 1, does the Department of
Energy or any other Federal agency have regulations which
require refineries, such as these, which are constructed in
areas of high risk, such as a ``hurricane,'' is there any
standards that would prevent a refinery from being placed in an
area that we know could possibly be affected by a disaster of
this magnitude?
Mr. Garman. The two refineries you mentioned are very
important refineries, with a combined capacity exceeding
500,000 barrels a day between those two. They represent a
substantial investment by the private sector investors.
It is also our understanding that both of those refineries
have suffered major damage, and that they will take some time
bringing back.
Ms. Solis. We currently know there are standards in place
to protect nuclear power plants. I am wondering is there any
discussion in the administration to look at potential safety
standards for refineries.
Mr. Garman. There are safety standards in place for
refineries, to be sure, to protect public health and safety
but----
Ms. Solis. But to anticipate a hurricane at the force of
category 4, is that something that the administration may look
at in the future if, given what you just said, that these are
two very important refineries?
Mr. Garman. We are willing to look at any variety of ideas
and to work with the Congress on any variety of ideas and
thoughts that you all may have. But my threshold observation
would be someone spent a tremendous amount of money building
this refinery.
It is a potential hundreds of millions or billion-dollar
investments. And I think that, you know, perhaps they bet
wrong, putting such a high investment, high value investment
right there at the coast. And they weighed that when they made
that investment. I am not sure this is something that is right
for some kind of Federal intrusion into the market. But as I
said, we are willing to take and consider any ideas and discuss
them with this Congress and this committee that you might deem
appropriate.
Chairman Barton. The gentlelady's time has expired. Dr.
Burgess has 8 minutes.
Mr. Burgess. Thank you, Mr. Chairman. Mr. Garman,
continuing on that same line, I can't help but observe, we are
just a day or two away from the 105th anniversary of the big
storm, the Galveston. Galveston, at the time, was the largest
city in Texas and after that storm, they never totally
recovered. In fact, it was 50 years before they got back to the
population they enjoyed in 1900. I don't think there is any
question that we will see the location of things change as a
result of this storm, regardless of our intention here in
Congress. I think insurance companies--just people's behavior
would have to question whether or not it is reasonable to live
or develop infrastructure in an area that has been proven to be
unsafe.
Let's talk--Mr. Seesel, let's talk about price caps because
it seems like that is what is on everyone' mind. Now, Hawaii
did price caps about a month ago. What has been the experience
with Hawaiian price cap? Do they work?
Mr. Seesel. Actually, Congressman, I believe the price caps
in Hawaii went in effect September 1. So it has been a little
bit early to tell. The Hawaii price caps, as you know, are
geared toward prices on the west coast, the east coast and the
gulf coast.
So probably contrary to the expectations in Hawaii, some of
the price there may have gone up, along with what has happened
to the prices on the gulf coast, which is obviously lower than
other parts of the country. But I think it is something that
time will tell what will happen with Hawaii's situation. It is
hard to tell. As you know, there is cap on the wholesale level
not retail level.
Mr. Burgess. Do you think it is good policy, one that
should be practiced in other areas of the country?
Mr. Seesel. I don't think--in fact, the FTC has testified
against price caps, including Hawaii price caps a couple of
years ago. And I think efforts to cap prices like that are
probably going to result in--a reasonable prediction is that
they could result in shortages and decisions by businesses in
the market to leave the market and other unintended
consequences of that.
Mr. Burgess. Is there any thought to perhaps allowing
States to have price caps if they have a refinery within their
borders? I will withdraw the question. I was just wondering
about Massachusetts not having any refineries? I am shocked
that they do not. Let's talk about the----
Chairman Barton. You are easily shocked.
Mr. Burgess. I understand. Round up the usual suspects. I
had my staff, a couple of weeks ago when I was getting
bombarded with questions by constituents about why not do
something about gas prices, and I asked them to just break down
for me, when gas was $2.29 a gallon for regular, give me a
breakdown on what the--what were the components, what made up
that $2.29.
And I was given these figures. Tell me if they are correct
or not: $1.25 for crude; 43.9 cents for taxes, State and
Federal, I am in Texas; 40 cents for refining; 18.3 cents for
distribution and marketing; and total profit of about 17 cents.
Is that--would you agree with that breakdown? Is that an
accurate representation?
Mr. Seesel. Congressman, those numbers are fairly
consistent with what I am familiar with, but I might defer to
my more expert colleagues on that, too, and see what they say.
Mr. Caruso. I believe those are accurate.
Mr. Burgess. So just going back to a couple of weeks ago,
in pre-hurricane terms, 17 cents a gallon profit, that is okay,
but that is not exorbitant. So the high profits that Mr. Markey
showed us on his graph, which was before the hurricane, it
seems to me those high profits would indicate that companies
are selling a lot of gas. Is that right? If they are only
making 17.4 cents a gallon, when it is selling for $2.29, the
profit is because there is a lot of those 17-cent gallons that
are sold. Is that correct?
Mr. Seesel. I presume the 17-cent profit is at the retail
level?
Mr. Burgess. Well, even if it was 19 or 22 cents, it is a
smidgen of what the total cost of a gallon of gasoline is. The
profits are not coming from the $2.29; they are coming from
that very narrow bit that is the gasoline or the oil company's
profit.
I guess I would be interested to know, and if I could ask
one of you to follow up with my office, what would that
breakdown be now with gas at $3.10 or whatever it is, again,
remembering that I am in Texas, and our State taxes are about a
quarter a gallon? I would be very interested to know what that
breakdown is now, and perhaps then we could make a judgment if
that 17 cents has jumped and is now 34 cents or 50 cents profit
per gallon, then perhaps people have a case to be made for
excess profits. Otherwise, it is an argument that we should
probably abandon.
I could not help but think the day--the Wednesday when you
realized that all of the water was in New Orleans--and with all
due respect to my colleague here, the wetlands would not have
stopped that, the hurricane remember, the puff of dry air that
somehow Bush managed to push the hurricane over a little bit so
he could do maximum damage to New Orleans, the hurricane did
not come across the wetlands, it went in in Biloxi.
But the day that all of the water came into New Orleans, I
found myself asking, where is the contingency plan that we have
for this type of disaster? Mr. Garman, is there a contingency
plan for an energy emergency that you can pull off the shelf in
the Department of Energy? And if so, what is the plan, and why
wasn't it enacted?
Mr. Garman. Well, we do have--our major contingency plan
and our major asset for a supply disruption is the Strategic
Petroleum Reserve. And as I indicated in the testimony, within
48 hours of the time that we had a request for a loan or a
diversion of oil from the Strategic Petroleum Reserve, we
approved that loan, and that oil was flowing very, very
quickly.
So I would submit that that is our primary method of
responding to a severe petroleum supply disruption. And in this
instance, it was used, and it was used quickly.
Mr. Burgess. Are there any other levers that we can pull to
manage an emergency? Is that the only tool in our tool box?
Mr. Garman. With respect to crude oil and product, the
Strategic Petroleum Reserve is the primary tool that we have
got. We do not have, as some our Nations have, for example, a
refined product or requiring refiners to keep a certain amount
of refined product in stock as a reserve. We do not do that.
Mr. Burgess. Do you think that is policy worth pursuing?
Mr. Garman. It is something that I think that--within a
full range of things that we ought to be thinking about it. It
is hard to dismiss anything out of hand.
Mr. Burgess. My time is drawing short. There are four
locations for the Strategic Petroleum Reserve, two in
Louisiana, two in my State of Texas. Do we need to think about
locating other areas in the country for the Strategic Petroleum
Reserve, since both of these States share the gulf coast and
the inherent vulnerability of this type of storm.
Mr. Garman. Well, I think it is again instructive, and we
will continue to learn from--but we are offering strategic--we
are offering oil from terminals that were hit directly by the
storm. So it shows that the reserve is quite robust, and the
infrastructure that we have around the reserve is robust, and
we have the capability to respond, even in this seemly worst-
case scenario. So I think that speaks well of the planning that
went into the reserve itself.
Mr. Burgess. Very well. I yield back.
Chairman Barton. I thank the gentleman. The gentlelady from
Tennessee, Mrs. Blackburn.
Mrs. Blackburn. Thank you, Mr. Chairman. Thank you all for
your patience. We appreciate that very much. It has been so
interesting sitting here listening to this today. I think this
is an industry when you talk about the petroleum industry, it
is an industry we have all got a love-hate relationship with.
And I think you all have shown that today, and you have
probably heard it from the questions. I also sit here, and I
realize that much of what we are asking and saying today
probably to many of our constituents appears to be Monday
morning quarter-backing.
And to our friends in Mississippi and Louisiana, we extend
our condolences and hopefully understanding hearts that this is
a really rough, rough time for you all. I have been in
Mississippi, as I said, when I waived my opening statement. And
I have been there where there was no cell service; nothing was
working. I have stood in gas lines with people that have driven
150 miles to get to an open tank so that they could fill up
their drums, 55-gallon drums to go run a generator.
I have been at a shelter trying to run down somebody from a
Federal agency who could help somebody with something else. And
there are plenty of lessons learned. And there is plenty of
education and character-building that has probably taken place
through this for everyone involved.
And I thank you all for taking the time to come here and
spend a good part of your day with us. And I hope that those
who have watched this hearing today understand that we do this
in the spirit of trying to be certain that everybody functions
well, and that we learn how we responded, we learn what
problems were with communication, that we learned a lot about
leadership and different leadership styles, and how we handled
a team effort from the local, State and Federal agencies that
are to be involved with this.
I hope also that we are going to see some changes come out
of this. I hope that we will see some changes when it comes to
looking at burdensome regulation that makes it very difficult
for the petroleum industry to operate in this country.
I have a father who is 80-years old who sells oil field
production equipment and goes to work every single day, every
single day, and has for many years. I hope that we will see the
need to address taxes. I hope that we will see the need to
address rules. And I hope we will apply some common sense to
this, that we do use it as an opportunity to learn and that we
as Members of Congress accept our part of the responsibility in
making the appropriate changes.
Transportation permitting, environment, how those
regulations affect every bit of this is going to be important.
But rather than spending a lot of time on questions, and I have
already used a good bit of my time, I want to pose some
questions for you all to answer, not now, but in the next 30
days.
And for those of you who are on the next panel, these
questions also go to you. I am not going to keep you here that
long. Let us look at this, looking at it long range. I want to
know what your people in the field say. I want to know what
your people that are out there are going to tell you that they
learned from this. I would like to know how many States removed
or reduced their tax on gas and diesel?
How many are going to move forward and do that? In
Tennessee, we have got 21.4 cents on a gallon of gas and 18.4
on diesel. How many are going to step up to the plate and work
with us on this? How many are going to report daily price
fluctuations in their district? You know, seeing a dollar
change, a 50-cent change in a day, that is something that
infuriates my constituents. We saw that in Tennessee. We saw
that in Tennessee. And it is something that people are not
happy about. Our Governor is working on that issue now, so are
some of our State legislators.
Mr. Moran, this one would really come through your plan,
and the folks in the telecommunication agencies that are going
to speak next. How many local governments have a communications
plan when everything fails? When you do not have cell phones,
when you do not have hardwired phone service, how many have a
back-up plan with satellite or with radios or some other
frequency?
How many companies have emergency disaster communications
plans? How many local governments have a plan for getting those
first-responder vehicles filled so that the tanks are full, so
that they are able to carry on with the work that they have to
do? How many of them were just planning on people having gas in
the pickup to get fuel out to the areas where it was needed? I
would also like to know how many of our State governments use
all of The Homeland Security funds that are allocated to them?
How much are they drawing down, and then how much are they
sending on to those local governments? And are those State
governments working with those local governments on these
energy distribution plans, on these communication plans?
Are they working with their major employers to be certain
that there is some kind of back-up system there? And also from
the communication and who is taking the responsibility? Is it
going to be Red Cross, is it someone else, to be certain that
there is a way for individuals to communicate?
It is so difficult standing in one of those shelters when
you have got people who desperately, desperately want to find
their relatives, and there is no gas within 150 miles, and they
drove out on Sunday to come to a shelter, and they ended up
there with about an eighth of a tank of gas left. That is a
pretty tough spot, pretty tough spot to be in.
In my minute that is left, Mr. Caruso, I did have some
questions, I think are most appropriately directed to you, in
having listened to your testimony. When we talk about refining
capacity here in the U.S., we know we have pretty much been at
capacity, we have been at about 94 percent of capacity for
refining, and people wonder why we do not have refineries all
over the country.
One reason is transporting the fuel. You know, we have got
a refinery in Memphis right at the edge of my district, and
sometimes you have to go dredge the river in order to get
enough depth to be able to unload those barges. So you get a
whole other set of problems when you move away from the coast.
But we talked about refinery capacity.
Are we higher or lower than the worldwide average on
refinery capacity when we talk about other nations and their
capacity? How are we measuring up there? And I am going to run
out of time, so I will just let you answer at a later time.
And then if we had opened ANWR in 2001, when there was a
debate about opening it in 2001, and oil was currently being
produced, what effect would that have on the cost of crude
today? I would like answers to those, too. And, Mr. Chairman, I
am over, so I will yield back.
Chairman Barton. We thank the gentlelady. The gentlelady
from Illinois, Ms. Schakowsky, is recognized for 5 minutes.
Ms. Schakowsky. Thank you, Mr. Chairman. I just wanted to
say that before we start seeing as the main solution to the
high gasoline cost the eliminating of gasoline taxes, money
that right now is desperately needed by States and communities,
not only those that are affected by Katrina but many others who
have been affected by budget cuts, health care needs,
education, environmental protection, housing, many of which are
also being called upon to address other problems, I think we
ought to look first at the record profits of the oil companies
and start asking our companies to share sacrifice.
You know, we have seen now a million people displaced, and
we have seen lots of families, now that we have sort of lifted
the veil on poverty in this country, who are barely making ends
meet and who are suffering in cities and rural areas all around
our country, that maybe those taxes, we have seen tax cuts at
the Federal level, for those who have the most, maybe we ought
to first look at some of the companies who are profiting most,
and maybe we ought to even consider rolling back some of the
tax cuts that have already been given.
But, what I am concerned about now and wanted to look ahead
a little, in addition to the cost of gasoline, in Chicago
before Katrina was paying the highest prices for gasoline, what
about the winter heating season? And what about natural gas,
and heating oil, and what can we expect in the way of price
increases? I just feel so strongly that we need to be planning
for that potential eventuality, and I would like to hear what
you think the odds are in order of magnitude if we are going to
see price increases? Anyone can answer for whom it is
appropriate.
Mr. Caruso. We released our latest short term energy
outlook this morning. It indicates that heating oil will be up
about 30 percent this winter compared with last winter. Unless
there is a significant improvement in the natural gas
situation, we think the natural gas prices for heating this
winter will have an even higher percentage increase than that.
The details are in our report released this morning. I would be
happy to make that available directly to you.
But, the bottom line is, heating oil, natural gas and
propane will all have significant year-on-year increases this
winter compared with last winter.
Ms. Schakowsky. Well, and I think that that ought to be,
sound the alarm for this committee and for this Congress to,
you know, we do not want anybody saying we did not expect the
levees to break. In many ways, for many families, these kinds
of increases in heating bills are--I do not want to say, get
equivalency, but is a serious crisis that could put poor
families particularly over the edge, but not just, you know, my
constituents really cannot afford to pay, middle-class
constituents, $1,000 a month to heat their homes in Chicago
where we rely mostly on natural gas and have already seen major
increases in the price of natural gas.
Small businesses that are, you know, struggling right now
and could potentially go under and farmers who rely on natural
gas, and you know, so we need to start planning now about what
we are going to do. And it is not just about LIHEAP, I want
that to go on the record as well. It is not just about LIHEAP.
That is needed to expand the funding for LIHEAP, but it goes
way beyond that, and we need to have better planning.
I want to--Mr. Caruso, your agency had predicted that as a
result of the energy bill that was passed, that at least
potentially, gas prices could go up. As I understood, not just
understood, we had quotes from the report that gas prices--this
is before Katrina--that you know there was a lot of talk about
how great the energy bill was, but when it comes to prices at
the pump, my understanding was that you thought that that bill
could actually raise prices?
Mr. Caruso. There was an analysis done of the House version
of the bill that indicated that there might be some--I think
there was a little bit of mischaracterization of that, in that
one component of the gasoline mix could actually increase in
order to meet the requirements in the bill. Overall, we did not
expect the bill to increase gasoline prices. But, I will
provide that specifically.
Chairman Barton. The gentlewoman's time has expired.
We are going to recognize Mr. Walden. I believe he is the
last questioner for this panel, and I will announce to the
audience our next panel at the conclusion of this panel. We are
going to take a very short 5-minute break, just to give people
a chance to do personal conveniences and things like that. But
we will reconvene very quickly.
So Mr. Walden is recognized for 8 minutes.
Mr. Walden. Thank you very much, Mr. Chairman.
First of all, along with my other colleagues on both sides
of the aisle, we express our deep sorrow for those who have
suffered so much in the South, and we will do everything we can
to help them.
In fact, my own State of Oregon is opening its door to
1,000 evacuees, coming all of the way up to Oregon. We are
sending about as many as 1,700 National Guard troops down to
the Gulf States to lend a hand and do what we can.
Mr. Caruso, I want to follow up real briefly on the tail
end of Ms. Schakowsky's question. So your analysis never showed
that the congressionally passed energy bill was going to drive
up the price of gasoline overall?
Mr. Caruso. As I understand it, there were certain types of
gasoline for which the price would go up; I believe the
reformulated component. But, as I mentioned to----
Mr. Walden. Is that like the ethanol version?
Mr. Caruso. I believe it was either the ethanol or the
MTBE, the combination of the MTBE ban being replaced by----
Mr. Walden. So the MTBE ban and replacement fuel might
drive up the cost of gasoline?
Mr. Caruso. Yes. But I would like to provide the actual----
Mr. Walden. That would be good. I want to move onto a
couple of other issues, because these are certainly ones that I
am concerned about. They relate to the markets, both CFTC and
NYMEX and I want to--I do not know who is best to address this,
maybe Mr. Seesel.
But in the September 2 issue of Dow Jones Newswire, a Mr.
Addison Armstrong, manager of the exchange traded markets TPS
Energy Futures LLC in Stanford, Connecticut, said, and I quote,
there are, and in parens, oil commodities, quote, traders who
made so much money this week following Hurricane Katrina, they
will not have to punch a ticket for the rest of the year.
Is anybody here concerned about this whole trading issue?
I, along with Ms. Baldwin and about 18 other Members of the
House have initiated a letter to the Government Accountability
Office asking for a full investigation. We did that back in May
of the trading market. Is this something you all have looked at
at FTC, the volatility? Does the hedging affect the volatility
of the spot market?
Mr. Seesel. Congressman, that is really not an area that
the Federal Trade Commission has looked at very much. I know,
obviously, that the CFTC has the great bulk of expertise on
that. And perhaps some of my colleagues here do, too. But we
have really not focused on the NYMEX markets.
Mr. Walden. Is that something that you have the authority
to focus on?
Mr. Seesel. I think the regulatory authority is in the CFTC
commission.
Mr. Walden. All right. Mr. Garman, Mr. Caruso. Mr. Moran.
Mr. Moran, I want to follow up on the question my colleague
from California asked about the emergency alert system and the
national notification system. By way of record, I am a
broadcaster, so I am intimately familiar, even wired them in
and run the test.
It would be highly unusual for the President to trigger a
national emergency alert notification on a regional problem,
wouldn't it?
Mr. Moran. Well, that is up to the President. That has not
happened. I guess that would be unusual. It has not happened.
Mr. Walden. It would be very unusual, wouldn't it,
announcing a hurricane off the gulf coast, in Oregon or in New
Hampshire, there wouldn't be much relevance to trigger a
national EAS, would there?
Mr. Moran. It would be totally up to the President.
However----
Mr. Walden. But no president has never done that on a
regional event, have they?
Mr. Moran. That is correct.
Mr. Walden. Isn't there a hierarchy of who does notify?
Aren't there emergency plans in every community, and generally,
they are triggered by whoever the emergency coordinator is in
that community?
Mr. Moran. There are State--local and State plans. The
State plans, most of them are filed with the FCC. We are aware
of the plans. There is a whole hierarchy of how the various
broadcast stations----
Mr. Walden. It is built from the grass roots up. I have to
have one in each of my studios. You all--you require that. So
you know that that has to be the case, that they are triggered
from bottom up, unless there is some national emergency.
Mr. Moran. But if there is a national emergency, the
President could--it is automatic.
Mr. Walden. What was the status of the broadcast facilities
at the time the levees broke? Were any of them on the air? If
power was out and towers were down, didn't you testify there
may be two AM stations?
Mr. Moran. There were two on the air. They had--they were
on emergency power. And we got word--the FCC mobilized. We had
people there 24/7. We had our watch center there. We were
working with the NCS and the FEMA. We were notified early on
that one of the AM stations, actually I believe several AM--
several stations got together and were operating off the same
tower.
And they said early on that they were nearly running out of
fuel. Getting fuel in there was very, very difficult. It wasn't
a matter of getting pickup trucks. It was a matter of getting
tankers in there. And it was extremely difficult. I believe
that--that that last station in downtown New Orleans, it stayed
up the whole time because within I believe hours of when it was
going to run out of fuel, it got a tanker in there.
Mr. Walden. They were broadcasting full time?
Mr. Moran. Yes, they were.
Mr. Walden. It was all focused on the hurricane? They
weren't playing music?
Mr. Moran. Absolutely. As I recall, ultimately, they had to
relocate their studio, I believe up to Baton Rouge, I believe.
And they actually were provided special housing in the dorm up
there, I believe.
Mr. Walden. Were they given notification that the levee
might fail, and did they broadcast that, do you know?
Mr. Moran. I really don't know the answer to that.
Mr. Walden. I assume if they would have been given
notification----
Mr. Moran. We have actually--one of the things we did when
this happened was, we didn't know who was up and who was down.
And we actually have some equipment at the FCC where we can
actually sort of scan the air to figure out what is up and what
is down.
And after that, by the way, we made calls to every single
station in the area. When I last checked here this morning, we
hadn't actually contacted all of them. We believe in some cases
the phone systems are out, so we could not get to them. But we
have contacted most of them, and we have a pretty good idea of
the status. And actually if you--we would perhaps be able to
ask what it was they knew.
Mr. Walden. My experience--and in Oregon, we do not have
many hurricanes thankfully, but we do get ice storms, and we
get some floods and things like that--is that most stations
just go immediately 24/7 doing whatever the emergency report
is.
And, I mean, we went through a flood, and we did, you know,
trigger an EAS occasionally. But that is generally triggered by
the local sheriff or the State police.
Mr. Moran. Right. So a lot of those sorts of things, the
message is getting--if the message is getting out, it does not
necessarily have to come from the EAS.
Mr. Walden. I remember in our post-9/11 hearing here that
the then-chairman of the Commission, Mr. Powell, suggested that
in New York, that they actually told the broadcasters to stop
using the EAS, because it was scaring people. They actually
shut down, asked broadcasters not to do that, not to use EAS,
because they were all reporting everything anyway.
So I just wanted to clarify, and you have helped me clarify
in terms of how the emergency alert system works. We have to do
tests every week. We have to record certain monthly tests. It
is--and you rigorously enforced all of that, don't you?
Mr. Moran. That is absolutely right. And we work with FEMA
on that.
Mr. Walden. Mr. Chairman, my time has expired. Thank you.
And thank you, Mr. Moran.
Chairman Barton. Thank you. I think that is all for the
first panel. I have to commend you, gentlemen. I did not see
any of you take a bathroom break in almost 6 hours. That has
got to be a record. So go to it.
We are going to take a recess until 5 p.m. So we are going
to reconvene with our second panel at 5 p.m.
[Brief recess.]
Chairman Barton. The committee will come to order. We are
now going to begin our second panel. I think we have nine
distinguished witnesses, which is not a record, we have had 10
distinguished witnesses on one panel. So you are one away from
the record, but you may be the record for distinguished-ness.
We are going to start with Mr. Angelle, who is representing
the Louisiana Department of Natural Resources. We will give
each of you 7 minutes. And we will just go right down the
aisle. There are going to be a series of votes beginning in the
next 10 to 20 minutes, but we will attempt to keep the hearing
going.
So we thank you folks for your patience and recognize Mr.
Angelle for 7 minutes.
STATEMENTS OF SCOTT A. ANGELLE, SECRETARY, LOUISIANA DEPARTMENT
OF NATURAL RESOURCES; RED CAVANEY, PRESIDENT, AMERICAN
PETROLEUM INSTITUTE; BOB SLAUGHTER, PRESIDENT, NATIONAL
PETROCHEMICAL AND REFINERS ASSOCIATION; JAMES NEWSOME,
PRESIDENT, NEW YORK MERCANTILE EXCHANGE, WORLD FINANCIAL
CENTER; BENJAMIN S. COOPER, EXECUTIVE DIRECTOR, ASSOCIATION OF
OIL PIPELINES; BILL DOUGLASS, CEO, DOUGLASS DISTRIBUTING
COMPANY, ON BEHALF OF THE NATIONAL ASSOCIATION OF CONVENIENCE
STORES AND THE SOCIETY OF INDEPENDENT GASOLINE MARKETERS OF
AMERICA; WILLIAM L. SMITH, CHIEF TECHNOLOGY OFFICER, BELLSOUTH
CORPORATION; DANIEL A. LASHOF, SCIENCE DIRECTOR, CLIMATE
CENTER, NATIONAL RESOURCES DEFENSE COUNCIL; AND MARK N. COOPER,
RESEARCH DIRECTOR, CONSUMER FEDERATION OF AMERICA
Mr. Angelle. Thank you, Mr. Chairman. It is with a heavy
heart that I come to our Nation's capital today. Although we
are here to discuss the effects of Hurricane Katrina on our
national energy supply, let us all be reminded of the human
tragedy on the gulf coast.
A special thanks to you, Mr. Chairman, and to the ranking
member for your fight to help coastal producing States in the
recent energy bill. Both of you were stand-up guys for
Louisiana. Over strong objections of the administration, you
gave us hope by providing resources for coastal restoration.
And it is only fitting that we return and thank you and now ask
your assistance for what is now our very survival.
The citizens of my State are still in the eye of Hurricane
Katrina's wake, and many are experiencing the tragedy that is
still unfolding; 899,000 people were without power and,
currently, 503,000 now. On behalf of our great people, I thank
you for your assistance in our rescue and recovery operations.
Together, we know we can rebuild a strong and great Louisiana.
So I come here today seeking help, bipartisan help, not
assessing blame.
It was a wise Thomas Jefferson some 200 years ago who
sought what would become the most valuable acquisition in the
history of this country, the Louisiana Purchase, including the
Orleans Territory. He understood the strategic importance of
New Orleans and the Mississippi River for navigation interests
and economic prosperity, but he had no way of knowing then the
additional resources this Nation would acquire from Louisiana's
rich delta land and the bounty off its shore. When it comes to
energy production, energy refining, energy distribution and,
indeed, America's energy security, this is the most important
piece of real estate from sea to shining sea, and every
American is connected to it through the gas pump and family
energy costs.
We must do everything we can to protect it because most of
America has resisted energy development. In fact, it has been
over 25 years since America has built a new refinery in the
continental United States. On the other hand, Louisiana has a
strong and distinguished history of oil and gas production.
Let me tell you a little bit about my Louisiana. We host
more than 80 percent of America's offshore oil and gas
production and distribution, 34 percent, of the Nation's
natural gas supply, and almost 30 percent of the Nation's crude
oil supply is either produced in Louisiana, produced offshore
Louisiana, or moves through the State and its coastal wetlands.
This production is connected to nearly 50 percent of the
country's refining capacity, and Louisiana alone hosts more
than 16 percent of the total U.S. refining capacity, second
only to the great State of Texas. We host the Strategic
Petroleum Reserve. Port Fourchon alone services 16 percent of
the Nation's oil supply.
The Louisiana offshore oil port is the only port in the
Nation that can handle the large super tankers from the Persian
Gulf. This port alone is responsible for some 13 percent of
America's foreign oil supply. We are home to America's most
recently permitted LNG facility, as well as America's largest
LNG facility, and we do all of this at the same time we produce
30 percent of our Nation's fisheries; catch and drain 41
percent of the Continental United States.
We have embraced the concept that we can improve the
quality of life for all Americans with the responsible
management of our natural resources, and we do all of this when
most coastal States continue to say no, and not in my back
yard.
We all know good relationships are like bank accounts, and
it takes a few deposits to make a few withdrawals. When it
comes to energy production, the 18th State of this Great Union
has made its share of deposits, and it is in desperate need of
a major withdrawal.
Louisiana Governors and Congressmen and DNR secretaries
before me, along with Federal agency heads, scientists,
economists, business and industry leaders, environmental
representatives, have together sounded the alarm for years and
respectfully, Mr. Chairman, neither Congress nor the White
House, past or present, have answered the call.
We have continuously asked for the Federal commitment to
restore our wetlands that protect this Nation's strategic
energy infrastructure off the coast of Louisiana, that protect
its No. 1 port system, the great city of New Orleans, and our
coastal residents from storm surge.
But we have been told that we should scale back our plans
and be satisfied with business as usual, that our Nation simply
cannot afford it right now. Yet Louisiana State University
research indicates that every 2.7 miles of healthy marsh can
reduce storm surge by a critical 12 inches.
We have the science and technology to make a difference. We
simply need the financial resources. We have asked for the
Federal commitment it would take to raise our levees and build
and upgrade flood and hurricane protection for our citizens and
for the most strategic of American real estate, but so far, we
have been shortchanged.
We have continuously asked, pleaded and begged for a true
sharing of OCS revenues for the coastal producing States. We
were on a course to adopt a constitutional amendment next fall
in Louisiana that would dedicate any future OCS funds the State
receives to rebuilding our wetlands.
Simply put, unless we invest in protecting the huge
concentration of energy assets in Louisiana by restoring our
wetlands and building levees, America's energy supply remains
exposed.
Gratefully, because of your help, Mr. Chairman, we received
the first step in that sharing through coastal impact
assistance for 4 years in the recently passed energy bill.
But even that is woefully inadequate for such a challenge.
We need true permanent revenue sharing like that with States
that produce oil and gas on Federal lands on shore so that we
may have the resources to protect our infrastructure.
You can imagine how amazed we were in July when our
Nation's Energy Secretary wrote a letter to the House and
Senate leaders opposing the sharing of OCS revenues through
direct spending and authorized appropriations for coastal
States.
What more must Louisiana do when it comes to energy
leadership and development to get a share of these resources so
that they can be used to help protect the energy infrastructure
of our Nation? I think every American would agree that it just
makes good common sense to take a portion of the OCS revenues
to protect the infrastructure that makes this production
possible.
In his letter dated July 15, 2005, the Energy Secretary
said, ``We can't afford to share revenues with the coastal
producing States that host our Nation's energy production.'' It
is right here in writing.
Well, let me share with you what we can't afford: A 50 cent
increase in the average cost per gallon of gasoline because
infrastructure was exposed. That equates to nearly $1.3 billion
a week in increased fuel costs based on the daily consumption
of America.
That says nothing of the increased cost of plastics,
building materials, home energy costs, and transportation of
products. When the Department of Energy doesn't think it is
important to share OCS revenues to allow Louisiana to protect a
high concentration of energy assets, Washington, we have a
problem.
I hear a lot about SPR. That will do nothing to reduce the
price of natural gas, and old man winter is just around the
corner. Concerted voices, both Republicans and Democrats, have
sounded the alarm: If the commitment wasn't made, the Nation
would pay a far greater price. But the Office of Management and
Budget continued to demand we justify the cost of our project
through years of feasibility studies. We have had studies to
study studies.
We do not have the luxury of time, especially now, and we
ask OMB: Is the cost now justified? We branded Louisiana's
coast America's wetland, and sounded the alarm that it is of
great significance to the world ecology and that it impacts the
Nation's economy and economic security. Restoration must be
treated as a special circumstance because there is no
comparison with how this coastline benefits the Nation or how
it impacts the Nation if it is lost.
We sounded the alarm that what would happen if the big one
ever hit New Orleans both in human cost and in energy
infrastructure cost. And we are seeing those results firsthand.
Our wounds are still gaping, and if these words sound strident,
I'm sure you agree that this is not rhetoric.
It is just amazing just how accurate the October 2004
edition of the National Geographic was in laying out the tragic
predictions that actually played out this week. Yet the
opposition for revenue sharing for coastal producing States
continues in Washington. It is no wonder many other States
won't allow drilling offshore.
The worst case scenario the experts have long predicted is
now reality. But yet in the midst of an ongoing crisis,
Louisiana remains committed to the fueling of this great Nation
as a world energy leader. Energy companies are working to
reestablish families, so that the work to rebuild may begin.
I hear a lot of things about ExxonMobil on the screen up
here, but keep in mind that 91 percent of the wells that were
drilled last year in Louisiana were by independents who, along
with the majors, will need Federal assistance to repair
infrastructure, low- or no-interest loans, permit streamlining
and immunity from outside litigation during this rebuilding
process.
What sits off Louisiana's coast cannot be compromised.
Estimated depreciated investment in offshore production
facilities is more than $85 billion; pipeline infrastructure,
more than $10 billion; and public coastal port facilities, $2
billion.
Production off Louisiana's shore alone contributes an
average of $5 billion a year to the Federal Treasury, and that
was when oil was less than the $68-a-barrel-plus today. A week
after Katrina's landfall, a whopping 58 percent of oil
production and 42 percent of natural gas from the OCSs remains
shut in.
As of yesterday, we still have six refineries in Louisiana
shut down from storm damage or lack of electric power. And a
huge unknown in all of this is the condition of the pipeline
infrastructure. When Hurricane Ivan made landfall two States
away last year, pipeline infrastructure took months and months
to rebuild.
As more of the protection from Louisiana's barrier islands
and coastal wetlands wash away, more onshore and offshore
production will be damaged or destroyed by storms. And
according to scientists, the increase in frequency and strength
of gulf hurricanes will be with us for years to come.
Louisiana needs America more than any State has ever needed
her mother country. And yet, America needs Louisiana more than
ever. It is vital to the Nation's security and economic future
that Louisiana is not only restored, both its infrastructure
and its wetlands, but that it is strengthened in the process.
Thank you for inviting me here to be with you. And to the
American people for the outpouring of your generosity, we say
thank you in this time of need.
May God continue to bless America and may God restore
Louisiana. Thank you.
[The prepared statement of Scott A. Angelle follows:]
Prepared Statement of Scott A. Angelle, Secretary, Louisiana Department
of Natural Resources
INTRODUCTION
Mr. Chairman, Mr. Ranking Member, and distinguished members of the
House Committee on Energy and Commerce, thank you for your gracious
invitation to address your Committee. Unfortunately, as you know, I
come to you today with a somber heart from the frontlines of the worst
natural disaster in our nation's history.
My home state will never be the same again, nor will America.
Almost no enemy of this nation, or terrorist of any kind, could have
wrought the terror and devastation to my state and to this nation as
the fury of nature with the name of Katrina did on August 29 and the
ensuing days. Overnight, upwards of a hundred thousand citizens of my
state and our neighbors in Mississippi and Alabama lost everything they
had--homes, jobs, businesses, cars, and for some, their very lives.
Hundreds of thousands of others were dramatically affected to a lesser,
but significant degree. Suddenly, we find ourselves in the midst of an
ongoing crisis, faced with restoring the basic elements of
civilization--food, safe drinking water, shelter, clothing, fuel, and
sanitation.
I want you to know that the people of Louisiana are deeply touched
by the outpouring of concern, prayers, help, and generosity from
Americans from every walk of life from all over the country. To all of
you, we give you our heartfelt thanks.
Now, I will focus on the subject of this hearing--the impact of
Hurricane Katrina on gasoline and petroleum supplies.
SUPPLYING THE NATION: LOUISIANA--AMERICA'S ENERGY CORRIDOR
Louisiana has a long and distinguished history of oil and gas
production, both onshore and offshore. Currently, approximately 34% of
the nation's natural gas supply and almost 30% of the nation's crude
oil supply is either produced in Louisiana, produced offshore
Louisiana, or moves through the state and its coastal wetlands.
Together with the infrastructure in the rest of the state, this
production is connected to nearly 50% of the total refining capacity in
the United States. Based on its energy producing value to the nation,
acre for acre, Louisiana is the most valuable real-estate in the
nation.
Louisiana has 17 petroleum refineries, most of them large, world
scale facilities, with a combined crude oil distillation capacity of
approximately 2.77 million barrels per calendar day, which is 16.2% of
total U.S. refinery capacity of 17.1 million barrels per day, the
second highest in the nation after our sister Gulf Coast state, Texas.
Louisiana produces approximately 42.1 million gallons of gasoline per
day and 29.9 million gallons of distillate fuel (that is, jet fuel and
diesel fuel) per day. Two of the four Strategic Petroleum Reserve
storage facilities are also in Louisiana. The other two are in Texas.
Louisiana is not some far off energy producing colony. Louisiana
and its citizens are fundamental elements from which this great nation
was forged. Dating back to Thomas Jefferson's signing of the Louisiana
Purchase in 1803, Louisiana has indelibly stamped its mark on this
country, becoming the 18th state in the Union in 1812. Even today,
Louisiana has provided more national guardsmen to the war against
terrorism in Afghanistan and Iraq than any other state, though we rank
only 22nd in population. Approximately 41% of the continental land mass
of the U.S. drains through Louisiana via the Mississippi River. The
Port of greater New Orleans is the largest port in total tonnage the
U.S., and the port of Baton Rouge is 10th.
When it comes to developing the nation's offshore petroleum
resources, there simply would not be much if it were not for
Louisiana's leadership and participation. The offshore territory off
Louisiana's coast is the most extensively developed offshore territory
in the entire world. As most of you know, the offshore area beyond 3
miles from Louisiana's coast is federal territory called the Outer
Continental Shelf, or OCS. Other than in a 3-mile transition zone, the
federal government receives ALL of the mineral revenue from production
in the OCS. Based on 2004 data, OCS production off Louisiana's coast
constitutes 91% of oil and 75% of natural gas production from all U.S.
OCS areas combined. Additionally, Louisiana OCS territory has produced
88.8% of the 14.9 billion barrels of crude oil and condensate and 82.3%
of the 150 trillion cubic feet of natural gas ever extracted from all
federal OCS territories since the beginning of time.
Offshore Energy Development and Economic Prosperity
This service that Louisiana provides to the nation is one of the
largest contributing factors to America's strategic security and
economic prosperity, which make possible the high standard of living
that we all enjoy in this country. Let's look at just one example of
how this translates to you. Prior to Hurricane Katrina, the pump price
of gasoline was already hitting the $2.50 per gallon range in many
parts of the country. If it were not for Louisiana's role in the
petroleum supply of the nation, you and your constituents would likely
have been paying in the range of $4.00 per gallon for gasoline pre-
Katrina, and more than that post-Katrina. And, that does not address
how sky-high prices would be for electricity, food, and all of the
other things fueled by, or made from, oil and natural gas.
Offshore petroleum production is not only good for the country, but
it is essential to the well-being of the USA. Offshore production is
also good for coastal producing states, and there are not many of us--
coastal states, that is, that allow new production off our coasts. The
list currently consists of only Alabama, Alaska, Mississippi,
Louisiana, and Texas. Even without being able to share in the mineral
revenue produced for the federal treasury off our coasts, offshore
production produces economic prosperity for coastal states in the form
of jobs for the service industries providing the logistics support for
the offshore industry. This includes, among others: equipment and
materials suppliers; food service; helicopter and boat transportation;
communications services; engineers, geologists, boat and rig crews;
other industry staff and employees; and many others. The offshore
industry also supports many jobs far removed from the coastal states,
including a multitude of employees who, because of the week on, week
off type of schedules, commute up to 500 miles or more from places like
Arkansas, Tennessee, and Georgia to work offshore in the Gulf.
Offshore Development Includes LNG
Stepping up to the plate to help the nation obtain new supplies of
energy including LNG (liquefied natural gas), Louisiana is the home of
the largest throughput facility (Southern Union in Lake Charles) of the
four existing LNG import terminals in the U.S., and it is undergoing
more than a doubling of capacity from 1 billion cubic feet per day to
2.5 billion cubic feet per day. While almost every state in the nation
is trying to prevent the siting of any new LNG facilities, Louisiana is
the site of the largest permitted LNG import terminal in the nation
(Cheniere Energy's 2.6 billion cubic feet per day facility in Sabine
Parish).
Offshore Development and Preserving the Environment Are Compatible
I am also here to tell you, that oil and gas production is
compatible with protecting and preserving the environment. Louisiana
can look at experience and footnote that offshore development and the
associated onshore infrastructure construction and operations are done
in an environmentally responsible way today and are done so under the
oversight of several state and federal regulatory agencies.
Louisiana has suffered some negative impacts in the past from
offshore production. And, yes, we still have to deal with some of those
legacies of the past, but that is because Louisiana pioneered offshore
production in the days before modern technology, before the awakening
of America's environmental consciousness, and before the advent of
environmental regulatory agencies and regulations.
Louisiana's first well (a dry hole) was drilled in 1868. Our first
oil well was drilled in 1901. The first oil well over water in the
world was in Louisiana in 1910 in Caddo Lake. The first well drilled
off the coast of Louisiana was in 1938 near Creole, Louisiana.
Louisiana was the site of the first well drilled out of sight of land
in 1947. Things have changed dramatically since 1910, 1938, 1947, or
even 1960, 1970, or 1980. Simply put, it was like the old Wild West out
there. Just as in other industries in other parts of the country in
other times, there was once a time, long ago, when almost anything in
the name of progress was accepted. Everything is different now. That
era and those practices have nothing more in common with modern
exploration, production, and environmental techniques than
transportation by horse and buggy in 1800's has in common with jet
airliners flying overhead today.
THE CONSEQUENCES OF CONCENTRATING OIL & GAS DEVELOPMENT IN ONE AREA
This country now faces an energy disaster of both short-term and
long-term causes, implications, and solutions. Our present energy
crisis is caused by the immediate effects of Hurricane Katrina,
compounded by the long term consequence of decades of having had no
meaningful energy policy, concentrating energy production and
processing in the Gulf Coast area, the aversion to energy development
in most other areas of the country, and this country's insatiable
appetite for energy. The Energy Policy Act of 2005 (EPAct 2005) that
was just enacted is a good step in the right direction, but it is not
soon enough and not enough. For the foreseeable future, EPAct 2005 will
not meaningfully reduce this country's increasing energy appetite. It
will not reduce this country's increasing dependence on unreliable
foreign sources of crude oil AND, NOW, liquefied natural gas. It will
not significantly increase domestic energy supply or diversity. And it
will not protect, much less rebuild, the Louisiana energy production
infrastructure and the eroding and decimated coastal wetlands that
protected and made the offshore production possible off Louisiana.
We are all familiar with the old adage, ``Don't put all of your
eggs in one basket.'' We all also know the reason for that: If you drop
that basket, what are you going to do? Well, ladies and gentlemen, this
nation's oil and gas offshore production, foreign import capability,
refining, and basic petrochemical eggs have been placed in one basket
called the Louisiana and the Gulf Coast, and that basket has not only
been dropped, it has been run over by Hurricane Katrina.
I am not here to chastise anyone from those states that will not
allow drilling off their coasts, or drilling rigs, petroleum
refineries, or petrochemical plants in their states. What I am here to
say is that since Louisiana has welcomed those facilities and
operations and has become America's Energy Corridor, help us. And, by
helping us, you are helping yourselves and all Americans.
Energy is the lifeblood of an industrialized nation and a
prosperous society, and none is more of both than this country. The
mainline artery supplying that sustaining life blood of oil, natural
gas, petroleum products such as gasoline, jet fuel, and diesel fuel, is
Louisiana. Louisiana has over 40,000 miles of pipelines just within our
state as part of the infrastructure that receives offshore and foreign
oil and gas, and feeds it through processing facilities, refineries,
and petrochemical plants that then distribute it to the rest of the
nation.
A PLAN NEEDED TO REBUILD LOUISIANA
Most of this offshore and onshore production is shutdown, and much
of the onshore infrastructure is either shutdown, damaged, destroyed,
or underwater. We will not know the full extent of either the short-
term or long-term damage for some time. Until that information is
available, a reasonable assessment of the cost and time to repair or
replace it and to restore energy flow to the pre-storm level will not
be known.
Here are just a few of the challenges we face in even determining
the damage:
The communications infrastructure is in ruins.
Telephone lines, cell phone towers, radio towers, repeaters and remote
data telemetry are either destroyed or have no power.
Advance rescue and assessment teams have to resort to carrying in
satellite phones just to communicate from sites they are able
to reach.
Accessibility to wells, pipeline pumping stations, and processing
facilities is limited by flood waters, downed trees, washed out
roads, lack of vehicle fuel and other impediments.
Complicating this even further, hundreds of thousands of people have
been dislocated to other cities throughout Louisiana and other
states.
The people who are most familiar with the damaged areas and who operate
the affected oil and gas facilities are among the hundreds of
thousands of displaced citizens.
Untold tens of thousands, or even hundreds of thousands of these
evacuees cannot return to homes for months, if they still have homes to
return to. Even the facilities that can be restarted and operated soon,
need the people who operate them, and those people need food, water,
and a place to live. The people and their needs cannot be separated
from the infrastructure.
Refineries are shut down, wells are shut in, and bodies are
floating in the streets. As the floodwaters recede, fires are burning
uncontrolled in New Orleans because there are no firefighters to put
them out. Businesses have been destroyed. Most of the oil and gas
exploration and development onshore in Louisiana, and a large portion
in the shallow waters offshore are done by independent companies. These
are small operations, many with only a half dozen to a couple of dozen
employees. These people would be your typical neighbors, not large
corporations with extensive resources. Without help, many of them will
never drill another well, because their employees are dislocated, their
equipment ruined, their offices and workshops destroyed, and their
financial resources gone.
It is expected that unemployment in Louisiana has almost overnight,
jumped to about 25%. Tens of thousands of people who once had jobs,
many in the oil and gas industry, have now lost homes, jobs, or both.
These are extraordinary times, and extraordinary times call for
extraordinary measures. Louisiana needs the rest of America more now
than ever before, and America needs Louisiana and its lifeblood energy
supply more now than ever before. The U.S. had a Marshall Plan to
rebuild Germany, the defeated enemy, after World War II; the U.S. now
needs to institute a massive rebuilding plan for its own people in
Louisiana, Mississippi, and Alabama.
A Rebuild Program from the Past to Inspire Us Today
In 1932, there was a cry for help from a desperate people near
panic. The nation turned to its leaders searching for an end to the
rampant unemployment and economic chaos that gripped the country. They
were not disappointed. A plan was needed to fight soil erosion and
declining timber resources, utilizing the unemployed of large urban
areas. Congress and the President initiated several actions, one of
which was the Emergency Conservation Work (ECW) Act, more commonly
known as the Civilian Conservation Corps. With this action, two wasted
resources were brought to bear, the young men and the land, in an
effort to save both.
President Roosevelt called the 73rd Congress into Emergency Session
on March 9, 1933, to hear and authorize the program. It included
recruiting thousands of unemployed young men, enrolling them in a
peacetime army, and sending them into battle against destruction and
erosion of the nation's natural resources. Before it was over, over
three million young men engaged in a massive salvage and public works
operation. We are all familiar with the public works facilities these
hard working men built throughout the country. These facilities--post
offices, other public buildings, roads, parks, fire towers, telephone
lines and many other facilities that Americans still use today.
A massive rebuilding program is needed to replace and restore all
that Katrina destroyed. This includes the whole infrastructure of a
modern civilization such as housing, public buildings, communications,
energy production facilities, offices, etc. As the infrastructure is
rebuilt and financial assistance is provided, more businesses can be
reopened, creating more jobs, reducing unemployment, and restarting the
decimated economy of the area. Today, skilled, hard-working men and
women of Louisiana, who until a few days ago, were going to their jobs
and returning home each day, need America's help, not charity, to
restore those jobs, homes, and lives.
Maybe the legacies of the Marshall Plan and the Civilian
Conservation Corps can serve as an inspiration for developing the
rebuild program direly needed today for Louisiana, Mississippi, and
Alabama.
LOUISIANA'S ROLE AS A PRODUCING AND CONSUMING STATE
A reliable and affordable supply of energy is necessary for
economic development, prosperity, and expansion. Although technological
improvements and investments in energy efficiency have reduced this
country's energy consumption per unit of Gross Domestic Product over
the past 20 years, increased economic prosperity is still dependent on
increased energy consumption. In the U.S., the availability of energy
has generally been taken for granted, but recent blackouts in
California and other parts of the country, the emergence of 70 plus
dollar per barrel oil and $11 to $12 per million BTU natural gas, and
the drive to build terminals to import foreign natural gas in the form
of a cryogenic liquid, have highlighted the need for addressing energy
supply.
I come to you representing a state to which energy is its middle
name. The words Louisiana and energy are almost synonymous. Among the
50 states, Louisiana ranks (2004 Energy Information Administration--EIA
data):
1st in crude oil production
2nd in natural gas production
2nd in total energy production from all sources
The importance of energy to Louisiana is further highlighted in the
following rankings in which Louisiana is (2003 EIA data latest
available):
2nd in petroleum refining capacity
2nd in primary petrochemical production
3rd in industrial energy consumption
3rd in natural gas consumption
5th in petroleum consumption
8th in total energy consumption
But, only 22nd in residential energy consumption
Usually, when national energy issues are discussed, Louisiana is
cast in the image of a rich producing state floating in a sea of oil
and gas that is being inequitably shared with the consuming states.
Often misunderstood or overlooked, is the fact that about two thirds of
the production from the state is in the Louisiana federal OCS territory
and, hence, produces no revenue for the state, while at the same time
incurring significant infrastructure support costs to the state, which
I will discuss in more detail later.
Also often overlooked or not explained, is the fact that, though
Louisiana is the 2nd highest energy producing state in the nation,
Louisiana is also 8th highest in total energy consumption. Therefore,
Louisiana is more of a consuming state than 42 other states! This story
is never told, nor are Louisiana's difficulties as a key consuming
state given much concern at the federal energy policy level. Thus, when
Louisiana, the energy producing state speaks, it is also Louisiana, the
energy consuming state speaking. Louisiana is inexorably tied into the
issues of all states in the nation, whether considered producing states
or consuming states. However goes the energy situation in Louisiana, so
goes the energy situation in the United States of America, and things
are not going well for Louisiana today.
Louisiana's Role as a Through-Processor of Hydrocarbons for the Nation
All of the preceding represents only the direct supply line of oil
and natural gas. Additionally, Louisiana's 8th highest ranking among
the states in energy consumption is attributable to the fact that
Louisiana is consuming most of this energy as a through-processor of
energy supplies for the rest of the nation, consuming colossal amounts
of energy for their benefit.
An example of how Louisiana is consuming energy resources for the
primary benefit of other states is petroleum refining. The energy
equivalent of 10% of Louisiana's entire petroleum product consumption
is required just to fuel the processes that refine crude oil into
gasoline, diesel fuel, jet fuel, heating oil and other products
consumed out of state. The oil refining industry employs only about
10,400 workers in the state; whereas tens of millions of jobs
throughout the country are dependent on the affordability and
availability of the products from the continued operation of these
refineries and associated petrochemical facilities in Louisiana.
Many other examples could be cited of the numerous energy intensive
natural gas and oil derived chemical products Louisiana (and also
Texas, Oklahoma, and California) through-processes for the rest of the
U.S. Per unit of output, these industrial processes in Louisiana are
characterized as capital (equipment), energy, raw material, and
pollution discharge intensive, and low in labor requirements and dollar
value added, essentially the opposite of the downstream industries in
other states that upgrade these chemicals into ultimate end products.
Much of the energy Louisiana technically consumes is really the
transformation of oil and gas into primary chemical building blocks
that are shipped to other states where the final products are made,
whether it be plastic toys, pharmaceuticals, automobile dash boards,
bumpers and upholstery, electronic components and cabinets, synthetic
fibers, or thousands of other products dependent on this flow of energy
and high energy content materials out of Louisiana.
OCS INFRASTRUCTURE AND ITS IMPACTS AND NEEDS
It is important to understand that there is no free lunch.
Louisiana, like other coastal producing states, sustains impacts on
coastal communities and bears the costs of onshore infrastructure
required to support this production activity.
Saving Louisiana's Wetlands that Protect Offshore and Onshore
Production Infrastructure
Louisiana's unique and fragile coastal wetlands introduce yet an
additional issue: land loss. Prior to Hurricane Katrina, Louisiana was
losing more than 24 square miles of our coastal land each year. In
fact, if what is happening today in coastal Louisiana were happening in
our nation's capital, the Potomac River would be washing away the steps
of the Capitol today, the White House next year, and the Pentagon soon
after that. In fact, during the course of this morning alone, Louisiana
will lose a football field wide area from the Capitol Building to the
Washington Monument. It is feared that the ferocity of Hurricane
Katrina may have accelerated the land loss by several years.
There are many causes of this coastal erosion in Louisiana,
including what may be the most significant factor: building levees and
channeling the Mississippi River. Whatever the cause of its demise, the
health and restoration of Louisiana's coastal wetlands are vital to
protecting the offshore and onshore infrastructure that is essential
for the continuation, as well as the expansion, of offshore energy
production in the Gulf of Mexico.
Once the State realized the magnitude of the coastal erosion
problem, we got serious about doing something about it. In 1980, the
coastal restoration permitting program was moved to the Department of
Natural Resources (DNR). In 1981, $40 million of state oil and gas
revenue was set aside in a legislative trust fund for coastal
restoration projects. The State has a dedicated revenue stream of up to
$25 million per year, depending on the level of revenue collections
from oil and gas production within the state, to replenish the fund. In
the past few years, that replenishment stream has been at the $25
million level. In 1989, the Office of Coastal Restoration and
Management was created in DNR, and the magnitude of the program was
greatly expanded.
The War against the Elements
Let me emphasize something extremely important to this nation's
energy supply. Here along the coast, WE ARE AT WAR. It is a war in
which the enemy is nature. It is an enemy with names like Andrew, Ivan,
Dennis, and Katrina--hurricanes. It is an enemy with names like wave
erosion, storm surges, sedimentary subsidence, soil consolidation, salt
water intrusion, and leveeing of the Mississippi River. As Hurricane
Katrina demonstrated last week, it is a war we are losing in Louisiana.
Prior to Hurricane Katrina, Louisiana needed a minimum of $14
billion (in today's dollars) over the next 20 to 30 years for coastal
restoration projects. Louisiana has quite a unique geology relative to
the rest of the country. The Louisiana coast is geologically the
youngest part of the U.S. and, prior to manmade interference from
leveeing and channeling the Mississippi River and other activities, was
still accreting land mass faster than it was losing it to subsidence,
erosion, salt water intrusion, sea level rise from global warming, and
other causes. The science of coastal geology and the expertise of
coastal engineering to counter these forces is in its infancy, as it
has never in the history of civilization, been attempted on the scale
it must be implemented in South Louisiana. Also, we are dealing with a
situation that is continuously subject to changing dynamics, such as
more frequent and more powerful hurricanes, the apparently increasing
effects of global warming, etc.
Extent of Louisiana Infrastructure Supporting OCS Production
The total value of the Louisiana OCS infrastructure and the onshore
infrastructure supporting it is difficult to ascertain. The estimated
depreciated investment in offshore production facilities is over $85
billion, depreciated offshore pipeline infrastructure is over $10
billion, and public coastal port facilities is $2 billion, for a total
of approximately $100 billion, depreciated, and not counting highways,
sewer, water, fire and police protection, schools, and other public
works structures that also have ongoing operation and maintenance
costs. The replacement of all of this would be several times the $100
billion depreciated figure. It also does not count the onshore coastal
infrastructure of pipelines, storage facilities, pumping stations,
processing facilities, etc.
This infrastructure is vulnerable if not protected by the State's
barrier islands and marshes. As these erode and disappear,
infrastructure is exposed to the open sea and all of its fury. As the
coast recedes, near shore facilities become further offshore and
subject to greater forces of nature, including subsidence, currents,
and mudslides. Erosion in the coastal zone is already beginning to
expose pipelines that were once buried.
A Wake-up Call from Hurricane Ivan
To bring home the point of infrastructure vulnerability, we need
only look back to this past Summer. Hurricane Ivan was not even a
direct hit on Louisiana's offshore and coastal oil and gas
infrastructure, striking two states away; yet, its effects on the
nation's supply of oil and gas were significant, even many months after
it hit. Most of the damage occurred along pipeline routes rather than
actual structural damage to the producing platforms. As of February 14,
2005, when the Minerals Management Service (MMS) released its final
impact report on Ivan, 7.42% of daily oil production and 1.19% of daily
gas production in the Gulf of Mexico was still shut-in. The cumulative
shut-in production through February 14 was 43.8 million barrels or
7.25% of annual Gulf of Mexico OCS production and 172.3 billion cubic
feet of natural gas or 3.9% of annual Gulf of Mexico OCS gas
production.
With Katrina, that infrastructure has sustained a direct hit. As of
Saturday, September 3, the Minerals Management Service (MMS) reported
that 70% of manned platforms and 71% of the drilling rigs in the Gulf
were not operating. Saturday's shut-in oil production was 1.2 million
barrels per day, or 79% of Gulf production. Shut-in gas production in
the Gulf was 5.8 billion cubic feet per day, or 58% of daily gas
production in the Gulf.
Also, as of noon Sunday, 7 refineries in Louisiana and 1 in
Mississippi were still shutdown from storm damage and/or lack of
electric power. An additional 4 refineries in Louisiana were operating
at reduced rates due to storm damage or lack of crude supply.
As more of the protection from Louisiana's barrier islands and
coastal wetlands wash away, increasingly more onshore and offshore
production will be damaged or destroyed by even less powerful storms
than Ivan and Katrina, and particularly by storms whose paths more
directly pass through the producing areas off of Louisiana's coast, as
did Katrina. Direct hits to the prime production area by hurricanes and
tropical storms will cause incalculable damage to this production
infrastructure, as well as to the onshore support infrastructure, as
Katrina is proving.
HOW TO INCREASE OFFSHORE ENERGY PRODUCTION
Share Offshore Revenue with the States that Allow Offshore Production
The most effective way to help is to assist those states that make
offshore energy production possible off their coasts. This can be
accomplished by sharing with those coastal producing states some of the
offshore revenues generated off their coasts. This would encourage
those states to pursue more development, and it would help offset
infrastructure costs those states incur that is associated with that
development. Louisiana, like other coastal producing states, sustains
impacts on coastal communities and bears the costs of onshore
infrastructure to support this production activity.
When states like Wyoming, New Mexico, Colorado, and others host
drilling on federal lands onshore, they receive 50% of those revenues
in direct payments, and consequently have the financial resources to
support that infrastructure. In Fiscal Year 2004, Wyoming and New
Mexico together received about $928 million from those revenues, which
IS an appropriate revenue sharing procedure.
In contrast, for example in 2001, of the $7.5 BILLION in revenues
produced in the federal OCS area, only a fraction of one percent came
back to those coastal states. The inequity is truly profound.
We are pleased this committee is investigating gasoline supply and
pricing. The need to sustain the existing supply that Louisiana
provides must simultaneously be addressed. The most effective answer to
both issues is to share offshore revenues with the coastal producing
states that make that production possible. It is critical that coastal
producing states receive a fair share of revenues to build and maintain
onshore infrastructure and, in Louisiana's case, to help stem our
dramatic land loss, which is occurring at a rate believed to be the
fastest on the planet.
Production off Louisiana shores alone contributes an average of $5
BILLION dollars a year to the federal treasury, its second largest
source of revenue. And, that was when oil was less than half of the $60
plus per barrel price it is selling for today.
Does it not make sense to encourage the coastal producing states
which provide that revenue for the benefit of the rest of the nation?
Does it not make sense, that when so many, like the U.S. Ocean
Commission, are targeting offshore OCS revenues to pay for worthwhile
preservation of natural resources, that this nation first protect those
who make these resources possible?
Prior to Katrina, in Louisiana's coastal zone, many of the
pipelines and other infrastructure that our wetlands have historically
protected had become exposed to open Gulf of Mexico conditions. I
shudder to think of the extent of production infrastructure damage that
we will learn that Katrina caused once we are able to get a full damage
assessment.
To maintain, much less increase, production from off our coasts, we
must reinvest in the infrastructure that makes all of the activity
possible, whether it be port facilities, roads to transport equipment
and supplies, erosion control, or barrier island and wetlands storm
protection.
Assistance from the Energy Policy Act of 2005
The Coastal Impact Assistance Money provided in the Energy Policy
Act of 2005 that you just helped pass is tremendously good news for the
state's coastal restoration efforts. Yet, the $540 million provided
over four years for coastal restoration is only a drop in the bucket
compared to the total of $14 billion needed, prior to Katrina, over 20
to 30 years for Louisiana's unique coastal restoration needs.
Enact Legislation to Extend Section 29 Tax Credits to Deep and Ultra-
Deep Production in States Allowing Offshore Production
Section 29 of the Internal Revenue Service (IRS) Code granted a tax
credit for the production of natural gas from unconventional resources
(coal bed methane and tight sands gas). The effect of the application
to coal bed methane gas production was astounding in those areas of the
country that have significant deposits of this kind, which is not along
the Gulf Coast. Natural gas reserves from coal bed methane rose from
6.3% of U. S. reserves at the end of 1993 to 9.9% at the end of 2003.
Annual natural gas production from coal bed methane rose from 4.2% of
U. S. dry gas production in 1993 to 8.2% by the end of 2003.
Deep natural gas reserves (15,000-24,999 feet sub-surface) and
ultra-deep gas reserves (greater than 25,000 feet sub-surface) are the
most immediately available resources capable of providing a substantial
increase in domestic production of natural gas. Substantial deep gas
reserves are known to exist, and a deep gas well can have the
productive capacity many fold over that of coal seam wells and as much
as five to ten times that of conventional shallower wells. For example,
a typical coal seam gas well may produce 100,000 cubic feet (CF) per
day, a good conventional 15,000 foot well could produce 1 to 2 million
CF per day, and a deep gas well could produce in excess of 50 million
CF per day. The richest deep gas domain known in the U.S. underlies the
onshore area and adjacent offshore shallow water shelf of the Gulf of
Mexico. A 1998 study of the Potential Gas Committee put estimates of
the U.S. deep gas resource base at possibly 170 Trillion Cubic Feet.
The deep gas domain along the Gulf Coast underlies the existing surface
infrastructure of pipelines, gas processing plants, and other drilling/
production support infrastructure to move this gas into the U.S. gas
supply immediately.
One problem is that, while productivity increases with depth in
elevated reservoir pressure wells, drilling costs rise exponentially
with well depth, and the drilling of one deep well takes a year or
more. For example, conventional wells less than 15,000 feet normally
cost between $100,000 and $2 million to drill. The deeper 15,000, plus
foot range wells average around $6 million, 20,000 foot wells about $16
million, and 25,000 to 30,000 foot wells are in the range of $25
million, plus. Hence, the capital at risk for a dry hole is
substantial, which makes the ability to fund such ventures difficult.
Additionally, deep wells require leading edge drilling technology. Due
to the limited amount of deep drilling done, few companies have the
experience, technological capabilities, and financial resources to
undertake this high return, but high risk activity. Of the few
companies that have the ability to drill in this domain, most are the
major oil companies, who have focused their financial resources on the
more lucrative oil reserves of the deep water Gulf and drilling in
foreign countries. Substantial new financial incentives could
significantly reduce the entry hurtle, increase the reward to risk
ratio, and reduce barriers to capital access, particularly for the
independent companies who now do most of the onshore drilling in this
country.
Immediately Share with the States A Percentage of Royalties from Deep
Drilling in the Shallow Waters of the Gulf:
Another thing that is needed immediately, is to share with coastal
producing states 50% of the royalties from new deep drilling in the
shallow federal waters on the shelf. The MMS royalty deep shelf
suspension program is a good program, but it is draining investment
from our parishes by shifting drilling across the boundary line into
federal waters, causing loss of investment and tax revenue from lost
drilling in state territory. Louisiana should receive a substantive
percentage of royalties from deep drilling on the shelf immediately.
Encourage New Energy Sources and Technology
Recent studies show that the Gulf of Mexico has a significant wind
energy potential. Although wind power does not have the energy density
of petroleum, it is an inexhaustible, renewable source of clean energy.
Again, much to my consternation, it appears that there are many parts
of the country that use a lot of energy and want it at low prices, but
do not want production of any kind, anywhere near them, including wind
energy. Again, Louisiana is stepping up to help encourage this clean
energy source. The State of Louisiana is currently working with private
sector investors who are interested in developing wind farms in state
and federal waters off Louisiana's coasts. My office submitted wind
power legislation which the Louisiana Legislature passed earlier this
year to facilitate offshore wind power development in Louisiana's State
offshore waters.
Natural gas hydrates probably offer the greatest untapped energy
resource the nation has. The Oil and Gas Journal recently reported that
the U.S. Geological Survey estimates that methane hydrate deposits are
greater than all other forms of fossil fuels combined. Large deposits
of gas hydrates are believed to lie below the offshore waters of the
U.S. Unfortunately, technology to tap these resources needs to be
developed. Once the technology is available, the first areas to be
developed will be the areas adjacent to the existing offshore producing
areas where the infrastructure is in place to get it to shore and into
the nation's pipeline distribution system. The federal government needs
to fund meaningful research into developing the technology to produce
gas hydrates, assessing the resource base, and delivering it.
IN CONCLUSION
It is vital to the nation's security and prosperity that new energy
sources be developed. The federal government has proven that it has the
ability to steer investment, as in the case of deep water drilling in
the Gulf and coal seam gas. In addition to its significance in
producing 30% of oil and 23% of natural gas produced domestically,
which is mostly off Louisiana, the OCS is probably the single most
promising area for the U.S. to obtain significant new energy supplies.
These supplies, whether conventional oil and gas, imported oil,
imported LNG, wind and ocean energy, or gas hydrates, need the support
of coastal states to cooperate and to supply and maintain critical
production and support infrastructure.
LNG facilities are being built where the existing U.S. pipeline
infrastructure exists (essentially Louisiana and Texas) in order to get
the gas from the coast into the delivery system to supply the nation.
The same will be true when the technology is developed to commercialize
methane hydrate production off the coasts. This Louisiana and Texas
infrastructure will also be used when deep and ultra-deep shelf
production comes on stream. This is another reason why offshore revenue
should be shared with the coastal producing states and why the
extension of Section 29 tax credits should be extended to deep gas
exploration at least in the states that are allowing onshore and
offshore drilling and allowing the siting of LNG facilities to make
energy available to the rest of the country.
With effective policies and incentives, the federal government can
steer investment into the offshore areas, and by receiving an equitable
share of revenue generated offshore, the coastal producing states can
be in a position to ensure that this production will be made available
to the rest of the nation. Louisiana desperately needs immediate
revenue sharing financial assistance from a source not subject to
annual appropriations, to continue to maintain existing, and to develop
future energy supplies for the nation.
Although the Congress enacted national energy legislation that
included direct payments to the coastal producing states for four years
for coastal impact assistance, it did not enact true sharing of OCS
revenues on a permanent basis that would be similar to the automatic
payments for drilling on federal lands onshore. This must be addressed.
Now that Hurricane Katrina has laid waste to Louisiana's largest
city, the entire southeastern portion of the state, the state's coastal
oil and gas infrastructure and its protective wetlands, a massive
national rescue and rebuilding program is imperative to bring the state
back from this crisis and to enable us to continue to supply a
critically needed portion of this nations energy needs.
Thank you for this opportunity to appear before you.
Mr. Hall [presiding]. We thank you, Mr. Angelle. And thank
you for your patience today, and thank you for the things you
have seen and witnessed and suffered through the last several
days.
All right. The Chair recognizes Mr. Red Cavaney. Thank you,
too. And thank you for the courtesy you extended to the
President of the United States out in New Mexico 2 weeks ago.
Appreciate that very much.
I recognize you for--we are not going to blow the whistle
on you. You have been so patient. You are really valuable
people. You have expended a lot of time and money to get here,
and you still got to go home sometime tonight, maybe. The Chair
is willing to recognize you for as long as it takes, but roll
around, if you can, pretty quick.
STATEMENT OF RED CAVANEY
Mr. Cavaney. Mr. Chairman, we will give you some time back.
The gulf coast is the very heartland of our industry, and
our prayers and support go out to each and everyone there. We
are not just responding to this disaster; we are living it.
Thousands of our husband and wives, sons and daughters and
friends and neighbors are suffering the hardships of others
living in this devastated region. They are the ones restoring
the production, bringing the refineries back on line and
restarting the pipelines. Facilities are coming back on line.
And we are grateful to the administration for access to the
Strategic Petroleum Reserve and for waivers to expedite the
flow of fuels, particularly to emergency responders.
The gulf coast region includes some 4,000 offshore
platforms in Federal waters, a dozen refineries, and hundreds
of production, transportation and marketing facilities. There
is a reason for this geographic concentration in the high-risk
hurricane area. Government policies have largely limited
offshore exploration and production to the central and western
gulf, and our on-shore facilities have been welcomed in the
communities in the region.
Unfortunately, offshore oil and natural gas development has
been barred elsewhere, including the eastern half of the gulf
and the entire Atlantic and Pacific coasts. On-shore
construction has been held back by Government restrictions,
permitting delays and the not-in-my-back-yard or NIMBY
sentiments.
It is ironic that we talk so much about diversifying the
sources of our energy supplies from abroad; yet we have done so
little to geographically diversify our oil and natural gas
presence here at home.
In an area of much recent concern has been the need to
bring additional clean-burning natural gas to industries and
consumers nationwide. Yet, efforts to increase domestic natural
gas production, both in the Rocky Mountain west and offshore,
have largely been stymied. And efforts to build more terminals
outside the gulf region to permit increased imports of
liquified natural gas or LNG have also been largely blocked.
Oil companies recognize the urgent need to expand refining
capacity. But they cannot do it alone. Chairman Barton, and the
rest of you, are particularly appreciated for your leadership
in this area. Government policies are needed to create a
climate conducive to investments to expand refining capacity.
For example, the Federal Government should take steps to
streamline the permitting process, to expand capacity at both
existing refineries and possibly even to build a new refinery
or two. We know that Hurricane Katrina's effects on our
industry are having a nationwide impact through skyrocketing
prices for gasoline and other fuels.
Our fuels are sold at more than 168,000 retail outlets
nationwide, and less than 10 percent of those outlets are
actually owned by the large oil companies. The remaining
150,000 outlets are owned by independent small businessmen and
women. They are making business judgments each and every day,
as is their right.
However, for any of us that break the law, prosecution must
follow. Let me be very clear. API and its member companies
condemn price gouging. History provides an important guide
here. Our industry has repeatedly been investigated over many
decades by the Federal Trade Commission, other Federal
enforcement agencies and States attorneys general, among a few.
In each and every instance, our companies have been
exonerated of price gouging or other anticompetitive behavior.
In conclusion, let us all not be diverted from the serious work
needed to ensure Americans continue to get the fuel they
deserve. We look forward to working with the committee in that
regard. Thank you, Mr. Chairman.
[The prepared statement of Red Cavaney follows:]
Prepared Statement of Red Cavaney, President and CEO, American
Petroleum Institute
I am Red Cavaney, President and CEO of the American Petroleum
Institute--the national trade association for the U.S. oil and natural
gas industry, representing all sectors of the industry, including
companies that make and market gasoline.
The Gulf Coast is the very heartland of our industry. We are not
just responding to this disaster. We are living it. Thousands of our
husbands and wives, sons and daughters, and friends and neighbors are
suffering the hardships of those living in this devastated region.
Fitch Ratings, a leading global ratings agency, reports that Hurricane
Katrina has caused the largest insured loss in U.S. history--more than
9/11 and more than any previous natural disaster.
Facilities are starting to come back online, and we are grateful to
the Administration for access to the Strategic Petroleum Reserve and
for waivers to expedite the flow of fuels, particularly to emergency
responders.
The Gulf Coast region includes some 4,000 offshore platforms in
federal waters, major refineries, and hundreds of production,
transportation and marketing facilities. There is a reason for this
geographic concentration in a high-risk weather area. Government
policies have largely limited offshore exploration and production to
the Central and Western Gulf--and our onshore facilities, including
refineries, have been welcomed in communities in the region.
Unfortunately, offshore oil and natural gas development has been barred
elsewhere--including the eastern half of the Gulf and the entire
Atlantic and Pacific Coasts. Onshore construction has been held back by
government restrictions, permitting delays, and not-in-my-backyard
NIMBY sentiments.
It is ironic that we talk so much about diversifying the sources of
our energy supplies from abroad, yet we have done so little to
geographically diversify our oil and natural gas industry here at home.
An area of much recent concern has been the need to bring
additional clean-burning natural gas to industries and consumers
nationwide. Yet, efforts to increase domestic natural gas production,
both in the Rocky Mountain West and offshore, have been stymied--and
efforts to build more terminals outside the Gulf region to permit
increased imports of LNG have also been largely blocked.
Impact of Hurricane Katrina
While it is still too soon to know the full effects of Hurricane
Katrina on production and refinery facilities in and along the Gulf of
Mexico, it is clear that the impact of this devastating storm on oil
and natural gas operations will be significant and protracted.
I know that I speak for every one of our member companies when I
say that our first concern--from the moment it becomes evident that a
hurricane is approaching the Gulf--is for the wellbeing and safety of
the thousands of men and women from across the country who work on
offshore facilities, on the vessels that serve them, in the refineries,
distribution networks, and retail outlets around the Gulf coast.
Equally as important is the welfare and recovery of the communities
in the Gulf region. Millions of people in the area are experiencing
firsthand the physical and emotional hardship of the death and
devastation caused by Katrina, and our hearts and our prayers are with
them.
API is working with the American Red Cross to facilitate U.S. oil
and natural gas industry efforts to help people throughout the Gulf
region. We have informed our companies that the Red Cross has described
how they can help relief efforts through corporate contributions and by
encouraging customer and employee contributions.
Effects of Hurricane Katrina on Industry Facilities
We are concerned, also, about our facilities in the area. While
they are designed to withstand the forces of the most severe storms,
extraordinary circumstances do occur. Therefore, one of our industry's
top goals is always to ensure minimal impact on the Gulf of Mexico and
coastal environments. The industry takes pride in its outstanding
record for safety and environmental protection in the Gulf region, and
we intend to live up to that record. Let me review the latest
information (as of September 4) we have from the Department of Energy
(DOE) and the Minerals Management Service (MMS) on the status of our
facilities:
Offshore Production Facilities. According to the latest MMS
reports, 30 percent of the 819 manned platforms and 29 percent of the
137 rigs are currently operating in the Gulf of Mexico. Shut-in oil
production is at 1,184,747 barrels of oil per day, which is equivalent
to 78.9 percent of the daily oil production in the Gulf. Shut-in gas
production is 5.779 billion cubic feet per day, which is equivalent to
57.8 percent of the daily gas production in the Gulf.
Refineries. A significant volume of refining capacity in the Gulf
Coast and Midwest remains impacted by Katrina. According to DOE, 11
percent of U.S. refinery capacity is shut-in, and refineries
representing another 14 percent of U.S. capacity are operating at
reduced levels because of a lack of crude supplies. Lack of electricity
has also been an issue in restarting refineries. Much progress has been
made and Entergy reports that it has restored electricity to all but
three refineries in the New Orleans area.
Pipelines. DOE reports that the Colonial and Plantation pipelines,
critical for distributing petroleum products from the Gulf Coast to the
Southeast and Mid-Atlantic regions, have resumed operations, albeit at
reduced rates. Colonial is operating at 66 percent of normal operating
capacity. Both gasoline and distillates are currently being transported
and delivered. Colonial's capacity is about 2.4 million barrels per
day. Plantation announced it would be 100 percent operational by late
on September 2. Plantation moves about 620,000 barrels of gasoline,
diesel, and jet fuel per day. The Capline pipeline is also now
operational at reduced rates, according to DOE. Capline will operate at
reduced rates until the Louisiana Offshore Oil Port (LOOP) is fully
operational. Capline runs roughly 1.2 million barrels a day of crude
oil to the Midwest.
LOOP. LOOP is operational at the Clovelly terminal. Entergy
energized a line to Clovelly and the terminal is now capable of
operating at approximately 75 percent of capacity. The Fourchon
terminal remains shut down.
Katrina Impact on Jet Fuel Supply
The Committee has expressed interest in the impact of Hurricane
Katrina on jet fuel supply. It is too soon to assess that impact, but
we are hopeful that restoration of refineries and pipelines to at least
partial operation will increasingly alleviate whatever supply
shortfalls are caused by the hurricane.
The Louisiana Gulf Coast District, the region hit by Katrina,
accounts for about 23 percent of U.S. jet fuel production. In 2004, the
region's refineries produced 355,000 barrels per day of the national
output of 1.547 million barrels per day. The Gulf Coast region as a
whole accounts for about half of U.S. jet fuel production, or 779,000
barrels per day in 2004.
The Gulf Coast region ships about two-thirds of what it produces to
the East Coast (about 500,000 barrels per day), and more than 80
percent of those shipments are by pipeline. Some jet fuel is also
shipped by tanker and barge to the East Coast, mainly to the South
Atlantic states. The Gulf Coast region ships approximately another
135,000 barrels per day to the Midwest, mostly by pipeline. The United
States also imports about 125,000 barrels per day of jet fuel.
Responding to Hurricane Katrina
In the coming days and weeks, we are committed doing our best to
minimize the impact of Hurricane Katrina on the flow of fuels to
consumers.
Even before the hurricane's devastating impact, American consumers
were concerned over the rising cost of gasoline, diesel and other
fuels. Katrina's aftermath, however, underscores the need for all
drivers to take seriously common-sense energy conservation
recommendations--found on API's website and elsewhere--for reducing the
amount of fuel they consume.
We also want to thank President Bush for making available crude oil
from the Strategic Petroleum Reserve to address circumstances for which
it was intended and appreciate the IEA member nations' contributions as
well. We are also grateful that EPA and the Department of
Transportation have granted waivers to expedite the flow of fuels,
particularly to emergency responders--an action that is very helpful at
a time when logistics and distribution of fuels are extremely difficult
and critical. The Departments of Energy and Homeland Security have also
been helpful in many ways.
We believe Congress can take action to help alleviate the hardships
Americans are suffering from Hurricane Katrina. One action involves
LNG. I earlier mentioned the importance of siting LNG receiving
terminals in areas beyond the Gulf region. This diversification is
helpful, and your support in facilitating it would be much appreciated.
These and other positive steps by government can be most helpful in
dealing with this catastrophe. We believe it is particularly important
for government officials at the federal, state and local levels to urge
citizens nationwide to use energy wisely, particularly in terms of not
hoarding gasoline and not ``topping off'' their vehicle tanks.
Effective conservation measures are vital in helping meet the fuel
needs of U.S. consumers in this difficult situation.
In attempting to meet the challenges we face, it is also most
important to do no harm. The worst thing Congress could do in these
challenging times would be to repeat the mistakes of some past energy
policies by trampling the structures of the free marketplace. Imposing
new controls, allocation schemes, or other obstacles will only serve to
make a bad situation much worse. (See the attachment, ``Hurricane
Katrina and U.S. Energy Policy: Do No Harm.'')
Why Have Gasoline Prices Risen?
We know that Hurricane Katrina's effects on our industry are having
a nationwide impact. We understand how Americans throughout the country
are facing skyrocketing prices for gasoline and other fuels. What
follows is background on two key components of the price of gasoline:
crude oil price and taxes.
Crude Oil Price. Before Hurricane Katrina struck, the price of
gasoline was rising primarily because U.S. refiners are paying more for
crude oil, the principal cost component of a gallon of gasoline. In
fact, the Federal Trade Commission noted this exact point in a report
this July: ``To understand U.S. gasoline prices over the past three
decades, including why gasoline prices rose so high and sharply in 2004
and 2005, we must begin with crude oil. The world price of crude oil is
the most important factor in the price of gasoline. Over the last 20
years, changes in crude oil prices have explained 85 percent of the
changes in the price of gasoline in the U.S.'' The crude oil price is
set in the international oil marketplace by the forces of supply and
demand for oil worldwide.
Tax Component. While more than half the cost of gasoline is for
crude oil, every time a motorist pulls up at the pump, he or she pays
46 cents in federal and state taxes per gallon of gasoline. The
remainder is the cost to refine and market the gasoline. The average
price of a gallon of regular gasoline reached $2.85 on September 2,
according to AAA. When the price of a barrel of crude oil is $67, as it
was at the end of last week, a refiner paid about $1.61 per gallon for
the crude oil in order to make a single gallon of gasoline. As noted
above, taxes average 46 cents per gallon nationwide. The remaining 78
cents per gallon includes the cost of running refineries, transporting
the finished gasoline to markets via pipelines and tank trucks, and
operating retail outlets. The cost to refine, market and distribute
gasoline has been trending downward for many years. The recent price
spikes are a direct consequence of disruptions in crude oil and
gasoline supplies. (Attached is a chart showing combined federal, state
and local gasoline taxes for each state.)
How Fuels Are Marketed. It is important to recognize that our fuels
are sold at more than 168,000 retail outlets nationwide--and less than
10 percent of those outlets are actually owned by refiners. The
remaining 150,000 outlets are owned by independent small businessmen
and women, who are your neighbors. They are making business judgments
every day, as is their right. However, if any of us breaks the law,
prosecution should follow.
History provides an important guide here. Our industry has been
repeatedly investigated over many decades by the Federal Trade
Commission, other federal agencies, and state attorneys-general. None
has ever found evidence that our companies have engaged in price
gouging or other anti-competitive behavior to drive up fuel prices.
The gasoline marketing system has the complexity and flexibility
required to meet the varying needs of both companies and consumers.
Companies have three basic types of outlet options and may employ any
and all in their marketing strategies to maximize efficiencies and
compete in the marketplace. First, they can own and operate the retail
outlets themselves (company owned and operated outlets). The second
option is to franchise the outlet to an independent dealer and directly
supply it with gasoline. This option may have three different forms of
property ownership: The operator can lease from the refiner, lease from
a third party, or own the outlet outright. The third option is to
utilize a ``jobber,'' who gains the right to franchise the brand in a
particular area. Jobbers can choose to operate some of their outlets
with their own employees and franchise other outlets to dealers. The
mix of distribution methods varies widely across firms. Different
refiners, depending on which type is perceived as most efficient, use
different types of outlets.
Supply and Demand in the World Market. Prices are rising because of
the forces of supply and demand in the global crude oil market. Supply
and demand is in a razor-thin balance in the global market. Small
changes in this market have a big impact.
World oil demand reached unprecedented levels in 2004 and continues
to grow. Strong economic growth, particularly in China and the United
States, is fueling a surge in oil demand. The U.S. Energy Information
Administration (EIA) reports that global oil demand in 2004 grew by 3.2
percent--the strongest growth since 1978--and projects growth to
increase by about 2.1 percent this year and next. By comparison, world
demand between 1993 and 2003 grew at an average rate of 1.6 percent.
At the same time, world oil spare production capacity--crude that
can be brought online quickly during a supply emergency or during
surges in demand--is at its lowest level in 30 years. Current spare
capacity is equal to about 1 percent of world demand. EIA projects
spare capacity for 2005 at just over 1.0 million barrels a day. Thus,
the world's oil production has lagged, forcing suppliers to struggle to
keep up with the strong growth in demand.
The delicate supply/demand balance in the global crude oil market
makes this market extremely sensitive to political and economic
uncertainty, unusual weather conditions, and other factors. Over the
past year, we have seen how the market has reacted to such diverse
developments as dollar depreciation, an unusually cold winter, the
post-war insurgency in Iraq, hurricanes in the Gulf of Mexico, the
continued impact on the Venezuelan sector from the oil workers' strike
in 2002-03, uncertainty in the Russian oil patch, ongoing ethnic and
civil strife in Nigeria's key oil producing region, recent mass
protests targeting Ecuador's oil infrastructure, and decisions by OPEC.
Gasoline Prices Mirror Crude Oil Prices
While consumer concern about high gasoline prices is very
understandable, we must recognize that gasoline prices mirror crude oil
prices. Crude oil costs make up more than 50 percent of the cost of
gasoline. Retail gasoline prices and crude oil prices have historically
tracked, rising and falling together. We import more than 60 percent of
the crude oil and petroleum products we consume. American refiners pay
the world price for crude and distributors pay the world price for
imported petroleum products. U.S. oil companies don't set crude oil
prices. The world market does. Whether a barrel is produced in Texas or
Saudi Arabia, it is sold on the world market, which is comprised of
hundreds of thousands of buyers and sellers of crude oil from around
the world.
Earnings
There is considerable misunderstanding about the oil and natural
gas industry's earnings and how they compare with other industries. The
oil and natural gas industry is among the world's largest industries.
Its revenues are large, but so are its costs of providing consumers
with the energy they need. Included are the costs of finding and
producing oil and natural gas and the costs of refining, distributing
and marketing it. The energy Americans consume today is brought to them
by investments made years or even decades ago. Today's oil and natural
gas industry earnings are invested in new technology, new production,
and environmental and product quality improvements to meet tomorrow's
energy needs.
The industry's earnings are very much in line with other industries
and often they are lower. This fact is not well understood, in part,
because the reports typically focus on only half the story--the total
earnings reported. Earnings reflect the size of an industry, but
they're not necessarily a good reflection of financial performance.
Earnings per dollar of sales (measured as net income divided by sales)
provide a more relevant and accurate measure of a company's or an
industry's health, and also provide a useful way of comparing financial
performance between industries, large and small.
For the second quarter of 2005, the oil and natural gas industry
earned 7.6 cents for every dollar of sales compared to an average of
7.9 cents for all U.S. industry.1 Many industries earned
better returns in the second quarter than the oil and natural gas
industry. For example, banks realized earnings of 19.6 cents on the
dollar. Pharmaceuticals reached 18.6 cents, software and services
averaged 17 cents, consumer services earned 10.9 cents and insurance
saw 10.7 cents for every dollar of sales. Last year, the oil and
natural gas industry realized earnings of 7 percent compared to an
average of 7.2 percent for all U.S. industry. Over the last five years,
the oil and natural gas industry's earnings averaged 5.7 cents compared
to an average for all U.S. industry of 5.5 cents for every dollar of
sales.
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\1\ Earnings equal profits divided by sales calculated from
``Corporate Scorecard,'' Business Week, August 22/29, 2005; and from
company financial reports for oil and natural gas figures.
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Some are calling for reinstatement of a windfall profits tax as a
response to the nation's energy challenges. As the figures I just cited
demonstrate, our industry's earnings are hardly a ``windfall.'' Strong
earnings enable our industry to remain competitive globally, benefit
millions of shareholders--your constituents--and enable the industry to
invest in innovative technologies that improve our environment and
increase energy production to provide for America's future energy
needs. Levying new taxes would likely end up harming consumers. As The
Wall Street Journal editorialized recently, (``China Does
Carternomics,'' August 19), ``A windfall profits tax only discourages
increases in supply by disincentivizing further production.'' According
to the Congressional Research Service, the windfall profits tax drained
$79 billion in industry revenues during the 1980s that could have been
used to invest in new oil and natural gas production. In fact, 1.6
billion fewer barrels of oil were produced domestically due to the
windfall profits tax--barrels that instead had to be secured from
foreign sources.
Perspective: The Role of Oil and Natural Gas
High gasoline prices have caused some to call for us to decrease,
if not eliminate, our nation's reliance on oil and natural gas.
However, if we are to understand and address the causes of the high
prices, we need to recognize the energy realities that our nation
faces.
These realities could not be clearer: We live in a global economy,
and there is a strong link between energy and economic growth. If we
are to continue to grow economically, we must be cost-competitive in
our use of energy. We need all sources of energy. We do not have the
luxury of limiting ourselves to one source to the exclusion of others.
Nor can we afford to write off our leading source of energy before we
have found a cost-competitive and readily available alternative.
Consider how oil and natural gas enhance our quality of life--
fueling growth and jobs in industry and commerce, cooling and warming
our homes, and getting us where we need to go. Oil provides about 97
percent of U.S. transportation fuels, which power nearly all of the
cars and trucks traveling on our nation's highways. More than 60
million American households are heated and/or cooled by natural gas.
And plastics, medicines, fertilizers, and countless other products that
extend and enhance our quality of life are derived from oil and natural
gas.
The U.S. Energy Information Administration has projected that
fossil fuels will continue to dominate U.S. energy consumption, with
oil and natural gas providing nearly two-thirds of that consumption in
the year 2025, even though energy efficiency and renewables will grow
faster than their historical rates. However, renewables, in particular,
start from a very small base; and the major shares provided by oil,
natural gas, and coal in 2025 are projected to be nearly identical to
those in 2003.
Our nation cannot afford to leave the Age of Oil before a realistic
substitute is fully in place. We will leave the Age of Oil, not because
we will run out of oil. Yes, someday oil will be replaced, but clearly
not until a substitute is found--a substitute that is proven more
reliable, more versatile, and more cost-competitive than oil.
There is a misperception by some about the time and costs involved
in any such transition. Consider what would be involved in replacing
the dominant role of oil with a substitute like ethanol, hydrogen, or
solar power. Most experts agree that finding and transitioning to a
substitute for oil will require dramatic advances in technology and
massive capital investments--and that such a displacement will take
many years to accomplish.
In the early 1970s, many energy policymakers were ``sure'' that oil
and natural gas would soon be exhausted, and government policy was
explicitly aimed at ``guiding'' the market in a smooth transition away
from these fuels to new, more sustainable alternatives. Price controls,
allocation schemes, limitations on natural gas, massive subsidies to
synthetic fuels, and other measures were funded heavily and
implemented.
Unfortunately, the key premises on which these programs were based,
namely that oil and gas were nearing exhaustion, and that government
``guidance'' was desirable to safely transition to new energy sources,
are now recognized as having been clearly wrong--and to have resulted
in enormously expensive mistakes.
The leading role that oil and natural gas will continue to play
makes it all the more important for our government to adopt policies
that do not prevent or delay oil and gas development before substitutes
are ready to satisfy consumer needs and to meet the economic investment
demands.
In considering future U.S. energy needs, we need also to understand
that gasoline-powered automobiles have been the dominant mode of
transport for the past century. Regardless of fuel, the automobile--
likely to be configured far differently from today--will remain the
consumer's choice for personal transport for decades to come. The
freedom of mobility and the independence it affords consumers are
highly valued.
Moreover, we expect that the dominant transport fuels will remain
gasoline and diesel for decades--the minimum amount of time required to
fully retire any existing and still growing fleet of automobiles and
trucks powered by these fuels and to deploy any replacement fuel source
throughout our nation. We cannot afford to prematurely retire a
century-old champion. And, sulfur-free diesel and sulfur-free gasoline
could well live on as the preferred sources for fuel cells well into
the future.
Gasoline Prices: What Can Be Done?
The solution to high gasoline prices is more supply of crude oil
and gasoline and less demand, but there is no simple strategy to make
that happen. Now that the long Congressional debate over energy
legislation has come to an end, the United States is at a critical
turning point in shaping its future energy policy. The legislation
signed by the President signals a first step in a much-needed effort to
enhance energy security and ensure the reliable delivery of affordable
energy to consumers. But much remains to be done.
The problems we face are very real: growing world demand for energy
at a time when many oil-producing countries around the world are
increasingly limiting or restricting our industry's access to new
resources; a lack of national commitment to develop our abundant
domestic energy resources and critical infrastructure; and scant
attention to energy efficiency. These factors have resulted in a tight
supply/demand balance for U.S. consumers, causing recurring price
spikes, greater market volatility, and overall strain on the nation's
energy production and delivery systems.
Energy demand continues to grow. The Energy Information
Administration (EIA) forecast that by 2025, U.S. energy consumption
will increase by 35 percent, with petroleum demand up by 39 percent and
natural gas up by 34 percent. These demand increases occur despite
expected energy efficiency improvements of 33 percent and renewable
energy supply increases of 41 percent.
Additional EIA forecasts point out our basic problem: Domestic
energy supplies are not keeping up with increased demand; and we are
relying more and more heavily on imports to meet our energy needs. EIA
projects that U.S. crude oil production will fall by 17 percent by 2025
(assuming no production from ANWR), while crude oil imports will
increase by 67 percent, and net petroleum product imports increase by
90 percent. Given these trends, it comes as no surprise that EIA
forecasts that our nation's dependency on foreign sources of petroleum
will rise from 59 percent today to 68 percent in 2025.
This increase, to the extent that it reflects import costs lower
than domestic supply costs, would represent a gain from trade which
should be encouraged. However, when we have resources that can be
developed at prices competitive to imports, and we choose not to do so,
we place a wasteful and unnecessary burden on our own consumers,
In fact, we do have an abundance of competitive domestic oil and
gas resources in the U.S. According to the latest published estimates,
there are more than 131 billion barrels of oil and more than 1000 TCF
of natural gas remaining to be discovered in the US.
However, 78 percent of this oil and 62 percent of this gas are
expected to be found beneath federal lands and coastal waters.
Federal restrictions on leasing put significant volumes of these
resources off limits, while post-lease restrictions on operations
effectively preclude development of both federal and non-federal
resources. The most comprehensive study of the effects of such
constraints was the 2003 National Petroleum Council study of natural
gas, which included an analysis of federal constraints on U.S. gas
supply in two key areas--the Outer Continental Shelf (OCS) and the
Rockies. The study found that in key areas of greatest supply
potential, federal policy precludes or seriously constrains
development. For instance, of the 209 TCF of estimated undiscovered gas
in the Rockies, 69 TCF is completely off limits, while another 56 TCF
is seriously constrained by federal policy. On the OCS, the entire
Atlantic, Pacific, and most of the Eastern Gulf of Mexico are off
limits to development. Furthermore, the study found that sustaining
these constraints over the next 20 years would cost U.S. consumers more
than $300 billion in increased energy costs.
We are aware that opponents of oil and natural gas development
still raise environmental concerns. However, we would point out that
history provides overwhelming evidence that our industry can find and
develop oil and natural gas resources safely and with full protection
of the environment, both on land and offshore. For example, according
to the U.S. Coast Guard, for the 1980-1999 period, 7.4 billion barrels
of oil were produced in federal offshore waters, with less than 0.001
percent spilled. That's a 99.999 percent record for clean operations--a
statistic few others can likely match or best, and far less than the
volumes of natural seeps that occur on ocean and gulf floors.
Using advanced technology and sound operational practices, our
industry has steadily reduced the impact of oil and gas development,
both onshore and offshore. The surface presence for exploration and
development wells has shrunk significantly. For example, a drilling pad
the size of Capitol Hill is all that is needed to access any oil
reserves that might exist in the entire 68.2 square mile District of
Columbia. Horizontal and directional drilling now enables our industry
to drill multiple underground wells from a single pad, sometimes
reaching sites as far away as 10 miles from the drilling pad.
Additionally, the U.S. oil and natural gas industry is among the
most heavily regulated industries in our country. Every lease contains
a standard stipulation to protect air, water, wildlife and historic and
cultural resources, but leases may also include any number of a
additional stipulations to further protect resources.
The recently enacted energy legislation takes a positive step by
requiring an inventory of OCS oil and natural gas resources. It will
not, by itself, result in new energy supplies.
We need to build on the energy legislation by encouraging the flow
of more natural gas and oil to the marketplace. And, while we must
focus on producing more energy here at home, we do not have the luxury
of ignoring the global energy situation. In the world of energy, the
U.S. operates in a global marketplace. What others do in that market
matters greatly.
For the U.S. to secure energy for our economy, government policies
must create a level playing field for U.S. companies to ensure
international supply competitiveness. With the net effect of current
U.S. policy serving to decrease U.S. oil and gas production and to
increase our reliance on imports, this international competitiveness
point is vital. In fact, it is a matter of national security.
We can no longer wait 15 years, as we have, to address our nation's
energy policy. The energy legislation is a foundation, but it must be
built upon. More needs to be done and more quickly, particularly
increasing access to offshore resources. We have the ingenuity, the
technology, and environmental protections. If enactment of the energy
legislation means we have a commitment to continued action, then it
will truly be a turning point in reshaping U.S. energy policy.
Refineries
We cannot understand or deal with high gasoline prices if we do not
consider the state of refineries in the United States. During the
1990s, the oil industry earned relatively poor rates of return on their
investments. This was especially true in the refining sector, which was
hard hit with the need for new investment in technology and equipment
to produce cleaner burning fuels to meet clean air standards set by the
Clean Air Act of 1990. The act had a major impact on the operation of
refineries in the U.S. and the return on investment realized at the
time.
From 1994 to 2003, the industry spent $47.4 billion to bring
refineries into compliance with environmental regulations. That
included $15.9 billion in capital costs and $31.4 billion in operations
and maintenance costs to comply with regulations covering air, water
and waste rules. Moreover, by 2010, the U.S. refining industry will
have invested upwards of $20 billion to comply with new clean fuel
regulations. This is in addition to the cost of compliance with many
dozens of other environmental, health, safety and security regulations.
All this investment severely reduces the funds available for
discretionary capacity expansion projects.
Technological advancements have helped refineries produce more from
existing facilities than they did in the past. In addition, the
elimination of subsidies under the government price and allocation
controls in 1981 led to the closure of many smaller, less-efficient
refineries throughout the 1980s and 1990s. Those refineries left
standing did a better job of bringing product to market for less.
This consolidation benefited consumers. We can see this in the
decline in the refiner/market margin (measured as the difference
between the retail price of gasoline minus taxes and minus the
refiner's composite crude oil price). Back in 1980, the cost to refine
and market and distribute gasoline averaged about 95 cents per gallon
(in inflation-adjusted terms). By 1990, it averaged more than 61 cents
per gallon, and, by 2000, it was 52 cents per gallon, which is about
where it has averaged over the last five years. Multiplying these
reductions by the 330 billion gallons of petroleum products consumed
translates into billions of dollars of savings for consumers. We all
benefit every day from these improvements and efficiency gains.
The Need to Expand Refinery Capacity
The expansion of refinery capacity must be a national priority. The
record-high gasoline prices, while primarily caused by increased crude
oil prices and exacerbated by Hurricane Katrina, have underscored the
fact that U.S. demand for petroleum products has been growing faster
than--and now exceeds--domestic refining capacity. While refiners have
increased the efficiency, utilization and capacity of existing
refineries, these efforts have not enabled the refining industry to
keep up with growing demand. Even with a projected expansion of product
imports of 90 percent, the Energy Information Administration (EIA)
forecasts a need for 5.5 million barrels a day of additional refining
capacity by 2025 beyond today's 16.9 million barrels a day of capacity,
even with higher utilization rates.
The fact is that--faced with increasingly more challenging fuels
regulations--only major refineries have the resources needed to expand
their capacity. Smaller refineries are increasingly unable to afford to
expand. Moreover, local opposition and not in my backyard (NIMBY)
attitudes persist and prevent new refineries from being constructed.
The steady growth in U.S. fuels demand must increasingly be met by
foreign product imports. Thus, in addition to blocking or delaying
refinery expansion, the extensive federal regulatory burden is
contributing to increased reliance on foreign product imports. This is
a result that neither serves the best interests of U.S. consumers nor
bolsters the U.S. economy and American jobs.
Oil companies recognize the urgent need to expand refining
capacity, but they cannot do it alone. Government policies are needed
to create a climate conducive to investments to expand refining
capacity. The President's innovative proposal earlier this year to
build new refineries on closed military bases deserves serious
consideration. In addition, many of the steps the federal government
could take to help the refinery capacity situation are covered in the
December 2004 National Petroleum Council (NPC) study, Observations on
Petroleum Product Supply--A Supplement to the NPC Reports ``U.S.
Petroleum Product Supply--Inventory Dynamics, 1998'' and ``U.S.
Petroleum Refining--Assuring the Adequacy and Affordability of Cleaner
Fuels, 2000.'' For example, that NPC study suggested that the federal
government should take steps to streamline the permitting process to
ensure the timely review of federal, state and local permits to expand
capacity at existing refineries and possibly even build a new refinery.
In addition to the myriad of permitting issues deterring new
refining capacity investments, there are financial constraints as well.
Attracting capital for new refinery capacity has been difficult with
refining rates of return historically averaging well below the average
for S&P Industrials. Over the 10-year 1994-2003 period, the return on
investment for the refining sector was 6.2 percent or less than half as
much as the 13.5 percent for S&P Industrials.
U.S. tax policy has also hindered the refining industry's ability
to attract new investment capital. New refinery investments are
depreciated over 10 years, while comparable assets in other industries
are recovered over five or seven years. The recently enacted energy
legislation takes a small, but positive, step in addressing this
inequity by allowing 50 percent of those investments to be currently
expensed through 2011. However, much more needs to be done to make U.S.
refinery investments more economically attractive, and, thus, better
able to compete for limited available capital.
Conclusion
The U.S. oil and natural gas industry recognizes the catastrophic
impact that Hurricane Katrina has had on millions of Americans and our
industry is working with government and others in the private sector to
do all we can to alleviate their suffering.
If we all do our part--industry providing supplies and repairs as
expeditiously as possible, government facilitating needed approvals,
and consumers adjusting their driving habits to consume less fuel--
Americans can overcome this challenge as we have others in our nation's
history.
Attachment: Hurricane Katrina and U.S. Energy Policy: Do No Harm
Hurricane Katrina has brought devastation to much of the Gulf
Coast, interrupting operation of significant parts of the nation's oil
and natural gas production facilities, refineries and pipelines. In
addressing this catastrophe, energy policymakers should do no harm.
They should avoid repeating past energy policy mistakes which could
make a bad situation much worse. The following are examples of actions
that should be avoided:
Windfall Profits Tax: This was tried before. Backers of the 1980 tax
claimed it would raise revenue and prevent oil companies from
benefiting from higher crude oil prices and the removal of
price controls. The tax drained $79 billion in industry
revenues that could have been used to invest in new oil
production--leading to 1.6 billion fewer barrels of oil being
produced domestically. The industry uses profits to invest in
new technology, new production, and environmental and product
quality improvements. The National Petroleum Council projects
that producers will have to invest a total of almost $1.2
trillion through 2025 to fund U.S. and Canadian natural gas
exploration and production activities. Investments of this
magnitude require long-term fiscal stability.
Price Controls: As seen the 1970s, price controls further reduce
product availability as suppliers are unable or unwilling to
bring product to market if they cannot recover the cost of
doing so. The result is less product available, potential
outages, and long lines at service stations.
Rationing/Product Allocation: Rationing results in too much product
being sent to some areas and too little product being sent to
other areas. The reason is that rationing ignores the market
price signal that producers use to decide which areas are in
greatest need of product. The result would be an inefficient
distribution of product with some areas of the country having
too much motor fuel while shortages develop in other areas.
Moratorium on Mergers: As noted by the Federal Trade Commission in
its August 2004 report, The Petroleum Industry: Mergers,
Structural Change, and Antitrust Enforcement, merger activity
in the U.S. refining sector over the last several years has not
adversely affected competition in the sector, and has resulted
in greater operational efficiencies in the refining sector and
lower costs to consumers. Government policy prohibiting mergers
would slow or reverse this positive trend and ultimately result
in higher fuel costs to the motoring public.
Regional Strategic Reserves of Refined Products: While the concept
behind the Strategic Petroleum Reserve (SPR) has merit, the
same cannot be said of regional strategic reserves of refined
products. Holding and managing refined products is much more
complex and impractical than holding and managing crude. The
large number of boutique fuels (17) would require a diverse
number of storage facilities for each chosen location.
Additionally, product degradation means that the product in the
reserves would have to be continuously rotated. Because of this
it is unlikely that there would be sufficient product of the
right specification in the right location to be helpful during
a supply disruption. 2
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\2\ National Petroleum Council, Observations on Petroleum Product
Supply, December, 2004 p. II-4
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Mandatory Minimum Inventory Levels: Since fuel producers have
considerable incentive to maintain sufficient inventories so as
to not forfeit sales, a minimum inventory mandate could result
in an inefficient level of inventory being held. Inventory is
considered working capital and as such is a cost of doing
business. Inefficient levels of inventory arising from
mandatory minimum inventory levels would unnecessarily raise
the cost of providing fuel to consumers.
Price Trigger for the SPR: Industry has long supported government
holdings of strategic stocks in the SPR, under one condition:
that it be used only to replace volumes of oil lost in an
emergency, not as an instrument for government price tinkering.
The current mechanism allows the President a wide range of
discretion to determine what constitutes an emergency. Some
argue that this essentially makes the SPR a political
instrument, subject to the President's whim. Setting a price
trigger, some argue, would leave the trigger decision to the
market. However, setting the price for the trigger is no less
arbitrary than the existing trigger, and puts the government
directly in the role of manipulating price.
Oil Import Tariff: Oil import tariffs have been proposed, and used,
in the past as an instrument of energy policy. The key motive
of such an approach stems from a belief that reducing imports
is unambiguously beneficial. However, when we look carefully at
each of the claimed benefits, we find them all to be dubious at
best, not to mention illegal under existing trade agreements
with many of our trading partners.
Chairman Barton. We thank you, Mr. Cavaney.
We now would like to hear from Mr. Bob Slaughter, who is
president, and is representing the National Petroleum and
Refiners Association.
Welcome, Mr. Slaughter. You are recognized for 7 minutes.
STATEMENT OF BOB SLAUGHTER
Ms. Slaughter. Thank you, Mr. Chairman. I wanted to
associate NPRA with the comments that API has just made,
particularly, especially mentioning no toleration of
profiteering or price gouging. And I think that is a very
important matter. Also, I think it is very important to take
note of the statement that the industry has been intensively
investigated many times, and a monitoring project is ongoing at
FTC for gasoline prices in 360 cities, and the industry has
never--there has never been any evidence of gouging or any kind
of price manipulative behavior on the part of our members.
I particularly want to focus, however, on the refining
questions that were raised earlier, and I want to actually show
a couple of charts. The first chart just shows the very strong
relationship between crude price and the price of gasoline. You
will see the curves are essentially the same. And the FTC, in
its publication a couple of months ago, it was a very large
study on gasoline, said that 85 percent of the price movements
in gasoline over the last 20 years were attributable to changes
in the price of crude.
The second chart, if we can show it, points out--and this
is an EIA chart--it shows the extent to which gasoline prices
are determined mostly by crude but, second, by taxes.
And if you put your crude price, which is the price of our
raw material, together with taxes on gasoline, when the
gasoline gets to the pump, 80 percent of it is out of our
control. The cost of actually refining and then the cost of
distributing and marketing is quite small. And those numbers
hold over considerable time.
The third chart, if I could. I would like to hold there for
a second. One thing I would like to say and I wouldn't like to
forget is, my first summer in Washington was 1971, and that was
the summer in which President Nixon imposed wage and price
controls. And it was 10 years before the wage and the price
controls on energy could be removed, 1981.
Gas price controls were put on in 1952, and they weren't
removed until 1983. So I just want to caution the committee in
everything that it does that we do not want to take a giant
step backward into the world of price control or other
government intervention in this market. It takes a great deal
to get rid of the shortages, lines and other negatives that
result from that policy.
This particular chart shows the many programs that refiners
have to comply with over this decade. The red ones are fuel
controls. The blue ones are stationary source controls. There
is well over $20 billion worth of investment on that chart. And
frankly, most of it did not get a very good review for impact
on supply.
One of our strong recommendations is supply, particularly
oil and gas supply, needs to be job No. 1. Those are the fuels
we depend on, and frankly, they always end up being the second
priority, behind whatever people wanted to really do at that
time.
Environmental regulations should go forward. We spend a
great deal of money on them. And the industry has contributed
greatly to environmental clean-up. But we should also look
seriously at the impact on supply of these regulations. And
these have not even been well sequenced, so we get many, many
expensive regulations, one on top of another.
I asked a gentleman who has been in the refining industry
for many years just a couple of years ago, why he found it
difficult. He has been involved in transactions involving
refineries. To get why it has been difficult to get new people
into the refining business, he said, Well, because--he said--
they know that it will take millions, maybe up to a billion
dollars to get in the industry. And then they have the fear
that Government at some level, whether it be legislative or
regulatory, will come along and suddenly impose additional
hundreds of millions of investment on them.
And if you will see that chart, that is pretty much what
happens. That is one of the deterrents to more investment in
the refining industry. A lot of people have jumped to the
conclusion that there hasn't been a lot of investment in the
industry. Mr. Chairman, there has been a great deal, billions
and billions of dollars.
Over the 1990's, the industry invested billions of dollars
to comply with the requirements of the Clean Air Act. You see
what it is going to have to comply with this decade. On top of
this, these are environmental programs, you have got to
basically spend billions of dollars to stay in business and
hopefully increase capacity. So there has been a lot of money
spent on the business.
Someone mentioned mergers earlier, and said that that might
be anticompetitive and lead to less capacity. But, I can just
mention one case, I know Valero, and this was quoted in the
Post this morning. That part of the article previously read
wasn't mentioned. Valero has added 380,000 barrels of oil a day
capacity to the refineries that it has purchased over the last
8 or 9 years. So often times mergers, you know, someone gets an
asset who sees new possibilities in it and will put additional
investment in it.
I would like to see that next chart if we could for just a
minute. That really shows what has to be done in 2006 and 2007.
It includes also the few programs that were imposed by the
Energy Act. And there are a couple of things there that the
industry has to do, but that is the agenda just for the next
couple of years. You can see that refineries have a lot on
their plate.
I know it is not in your jurisdiction, Mr. Chairman, but
the recent Energy Bill also included some tax treatment for
refinery investments. And it basically would allow expensing 50
percent of the cost of increasing refinery capacity by more
than 5 percent. It would be very useful also to have a look at
the depreciation rate for refining investments where 10-year
property now, and all of their businesses like ours are 5-year
property.
That would basically allow more investment in the industry.
And the other thing would be, you know, there is going to have
to be a lot of reconstruction done in these areas that have
been affected by the flood and the hurricane. It would
certainly be helpful to have assistance in getting the
necessary permits to rebuild, and perhaps harden those
facilities.
You know, we have heard several times today comments that
it is bad that the industry is centered in this area of the
country, as if we could pick it up and put it anywhere else in
the country. The fact of the matter is that we have got to keep
those assets there, hope they keep operating, which I believe
they will, and help them harden themselves against hurricanes,
because they are either there or they are nowhere is the
history that we have seen.
Although, we would hope that other areas of the U.S. would
take refineries, we have not found them willing to do that. So
thank you, Mr. Chairman.
[The prepared statement of Bob Slaughter follows:]
Prepared Statement of Bob Slaughter, President, National Petrochemical
& Refiners Association
Mr. Chairman and members of the Committee, thank you for the
opportunity to appear today to discuss the impact of the wide-spread
devastation caused by Hurricane Katrina on transportation fuels
markets. While I will focus on that urgent matter, I will also discuss
the many other factors impacting current transportation fuels markets.
My name is Bob Slaughter and I am President of NPRA, the National
Petrochemical & Refiners Association. NPRA is a national trade
association with 450 members, including those who own or operate
virtually all U.S. refining capacity, and most U.S. petrochemical
manufacturers.
PART I. RESPONDING TO HURRICANE KATRINA
In the aftermath of Hurricane Katrina our nation confronts death,
injuries and devastation of staggering proportions. The images of the
tragedy displayed in the last several days on television and other
media underscore the human toll and seeming hopelessness in ways more
eloquent and compelling than could ever be captured in testimony. We
share both the sense of dismay and increased humility felt by all
Americans before this latest reminder of nature's power to devastate
and confound the best efforts of human beings. NPRA offers our sympathy
and prayers to those who have suffered the loss of loved ones among
family members, or their neighbors and colleagues, as well as to those
who have lost much or all of their personal assets and livelihood in
this worst U.S. natural disaster.
Today's hearing has been called to inquire into the impact of
Hurricane Katrina on the nation's energy supply. It is appropriate that
Congress turn immediately to such questions because of the huge impact
of that storm on the Gulf Coast, the energy heartland of the United
States. This is a time when national attention is and should be focused
on human needs. Many industry employees and their families have been
victims as you will hear. Nevertheless, NPRA appreciates the
committee's immediate attention to the issue of energy supply, which
was the subject of considerable debate and attention even before the
hurricane disaster occurred. We also appreciate the opportunity to
respond to the committee's questions in person on this matter of
critical national importance. Because our expertise lies in the area of
refining and petrochemicals, we will focus on those areas, but will try
to provide other available information insofar as is possible.
Thus, on behalf of our refining and petrochemical industry members
we have attempted to respond to the questions most asked about
Hurricane Katrina's impact on the industry and energy supply, as
follows:
1. How much of the nation's oil and gas supplies come from this region?
According to the U.S. Energy Information Administration (EIA), the
Gulf of Mexico produces 1.582 million barrels per day (mmb/d) of
federal crude production, which is 28.5% of the U.S. total crude
production (5.488 million barrels per day).
Again according to EIA, the region contains 8.068 million barrels
per day of refining capacity, 47.4% of the nation's total refining
capacity (17 million barrels per day).
The Gulf Coast region receives 6.490 mmb/d of crude oil imports,
60.4% of the nation's total crude oil imports (10.753 mmb/d). (23.5% of
the nation's total comes into ports in Louisiana, Mississippi and
Alabama, and 8.5% of the nation's total crude imports come into the
LOOP.)
The Gulf Coast region produces 10.4 billion cubic feet (bcf/d) of
natural gas per day, 19.2% of the nation's total natural gas production
(54.1 bcf/d).
2. How extensive was the damage?
Crude Oil, Natural Gas Production
According to the U.S. Minerals Management Service (MMS), as of
September 2, 88.53% (1.328 mmb/d) of Gulf crude oil production was
shut-in, and 72.48% (7.248 bcf/d) of Gulf natural gas production was
shut-in. This amounts to 25% of total federal crude production and 14%
of the nation's natural gas production.
Crude Oil Import Facilities
The storm resulted in temporary closure of LOOP, the Louisiana
Offshore Oil Port. More than 10% (900,000 b/d) of the nation's crude
oil imports enter through LOOP. Roughly 500,000 b/d of crude produced
offshore is also unloaded at LOOP, which ceased operations on Sunday,
August 28 as the storm approached.
Refineries
The following refineries were directly affected by Hurricane
Katrina:
Belle Chasse, Louisiana (ConocoPhillips) 247,000 b/d; shut
Chalmette, Louisiana (ExxonMobil/PDVSA) 190,000 b/d; shut
Convent, Louisiana (Motiva) 235,000 b/d; shut
Garyville, Louisiana (Marathon) 245,000 b/d; shut
Meraux, Louisiana (Murphy) 125,000 b/d; shut
Norco, Louisiana (Motiva) 227,000 b/d; shut
Pascagoula, Mississippi (Chevron) 325,000 b/d; shut
Port Allen, Louisiana (Placid) 48,500 b/d; shut
St. Charles, Louisiana (Valero) 260,000 b/d; shut
Vicksburg, Mississippi (Ergon) 23000; shut
Together, these facilities constitute about 2 mm/b/d, 12% of the
nation's total refining capacity (17 mmb/d).
In addition, the following refineries were forced to reduce
operations because of the impact of Hurricane Kristina:
Baton Rouge, Louisiana (ExxonMobil) 488,000 b/d; reduced runs
Krotz Springs, Louisiana (Valero) 85,000 b/d; reduced runs
Memphis, Tennessee (Valero) 180,000; reduced runs
Port Arthur, Texas (Total) 285,000 b/d; reduced runs
Tuscaloosa, Alabama (Hunt Refining Co.), 35,000 b/d; reduced runs
In addition, several Midwestern refineries were affected by
shutdown of the Capline Pipeline, which supplies crude oil from the
Gulf region to refineries in the Midwest (16% of the nation's refining
capacity is in the Midwest). For example, Marathon's refineries at
Catlettsburg, West Virginia (222,000) and Robinson, Illinois (192,000)
were affected by Capline's closure, as were other Midwestern
facilities.
In total, we believe that at least 20% of the nation's refining
capacity (3.4 mmb/d) ceased operations or reduced runs at some time due
to the direct impact of Hurricane Katrina and the loss of crude
supplies from pipelines affected by the storm. This is probably a
conservative estimate.
Recent reports indicate that many of these refineries are either up
and running or anticipate start-up as early as this week. But,
unfortunately, there are some refineries representing a significant
amount of capacity that will remain shut for an undetermined period.
The Gulf refineries were first impacted by the need to protect the
personal and family safety of employees, as well as the high likelihood
of wind and flood damage as a result of the hurricane. After the
hurricane passed, many of these facilities remained totally off-line as
damages were assessed. In some instances companies could not physically
enter the facilities to conduct an assessment for several days, and had
to first depend on flyovers to study the plant. Damages included
flooding, wind damage, and lack of electricity.
Pipelines
In addition, the widespread damage caused by the storm disrupted
the electricity supply, which affected all industry operations. From a
refiner's point of view, among the most serious was closure of three
pipelines:
The Colonial Pipeline, 5,500 miles of pipeline originating in
Houston and ending in New York Harbor, carries a daily average of 100
million gallons of gasoline, diesel and other petroleum products from
refineries in the Gulf to customers in the South and Eastern United
States.
The Plantation Pipe Line, 3,100 miles of pipeline, performs a
similar function along a slightly different route, delivering a total
of 620,000 barrels (26 million gallons) of refined petroleum products
per day to Birmingham, Alabama; Atlanta, Georgia; Charlotte, North
Carolina; and Washington, D.C., among other cities.
The Capline Pipeline (previously mentioned), which carries 1.1
million b/d of crude oil to refineries in the Midwest where it is
refined to produce gasoline, diesel and other petroleum products for
distribution primarily in the Midwest.
All three of these pipelines were totally or partially out of
service due to disruption of electricity supplies as a result of
Hurricane Katrina. As a result, the major supply lines of refined
products to the Southern and Eastern states were unavailable for
shipment in whole or in part, during the initial period after the
storm. Midwestern gasoline and diesel production was affected by lack
of supply from the Capline Pipeline. This led to reduced supplies of
gasoline, diesel, and other products in parts of the country often far
removed from the Gulf area.
Petrochemical Facilities
The Gulf region is home to many of America's petrochemical plants,
which manufacture plastics and other products made from oil and natural
gas feedstocks, and which rely on these energy sources for fuel and
electricity for power. The impact of Hurricane Katrina on these
facilities is not currently known but is potentially quite serious,
both in terms of facility damage due to water or wind damage and
temporary closure or reduced operations due to feedstock shortages,
lack of fuel or electricity and transportation problems.
Petrochemical products serve as the building blocks for many
ultimate products such as computers, medicines and other medical
products, plastic packaging for food, and also automobile components,
to name just a few. Disruption of petrochemical production due to the
storm, if it continues, could affect the economy considerably due to
the economic importance of petrochemical-based products.
Other Facilities
In addition to the major impacts outlined above, company pipelines
and shore facilities and other operations were impacted by the
hurricane, but information on these matters is less readily available
to us. Company and government statements indicate that many of these
facilities were not operating due to lack of electricity or because
other related facilities (e.g. refineries) were down. Some natural gas
processing plants were affected but NPRA does not have more information
on this sector of the industry.
3. What is the current state of repairs?
The many different sectors of the energy industry, working around
the clock together with core service providers and with important help
from local, state and federal government agencies, have made
considerable progress in restoring some of the operations affected by
the storm.
The magnitude of the impact outlined above clearly dictates caution
in any assessment of when the energy production, refining, distribution
and related facilities will be back in service and industry conditions
will return to normal. Clearly, our national energy infrastructure has
suffered a setback from which it will take some time to emerge
completely.
Crude Oil, Natural Gas
According to the MMS as of Saturday, September 3, 78.98% of Gulf of
Mexico crude oil offshore production remained shut-in, an improvement
of 10% over Friday. Shut-in Gulf natural gas production stood at 57.80%
of total Gulf gas marketed production, an improvement of 21% over
Friday's figure. The number of manned offshore platforms that are
evacuated declined by 25% over the same period. Thus, important but
limited progress has been made both in restoring the flow of crude and
natural gas necessary for refiners to manufacture gasoline, diesel, jet
fuel and other petroleum products and to meet the needs of
petrochemical manufacturers. In addition, it is reported that LOOP is
operating at 75% of capacity.
These figures still leave significant amounts of offshore Gulf
crude oil and natural gas shut-in, and oil and gas volumes not produced
in the past several days are large. During the period 8/26-9/3 9.8
million barrels were shut-in, totaling 1.8% of yearly crude oil
production in the Gulf. During the same period 53.2 billion cubic feet
of natural gas were shut-in, roughly 1.45% of annual gas marketed
production from offshore.
There are indications of progress as well regarding refineries.
Marathon announced this weekend that, barring unforeseen problems, all
seven of its refineries would be operating at capacity on Monday. This
includes the Midwestern refineries impacted by the Capline Pipeline
closure as well as the Garyville, Louisiana refinery impacted directly
by the hurricane. Valero has announced that its St Charles refinery
will probably return to operation in the next two weeks. Shell has
stated that the Convent refinery may be restarted Sunday and the Norco
refinery midweek. Those refineries will be returned to full production
gradually and safely as soon as start-ups take place. Assessments of
physical damage to the Chalmette and Meraux refineries last week helped
ascertain the extent of damage was limited; no start-up date has been
set.
The Colonial Pipe Line expected to return to 86% capacity service
by the end of the Labor Day weekend. Plantation Pipe Line has returned
to 100% operation as has the Capline crude oil pipeline. This means
that major pipeline links to the Midwest, South and East have been
gradually restored. Serious problems remain, however, due to the
significant loss of product and crude volumes which would have been
shipped on these lines last week.
In addition, it remains unclear when many, if not most, of the
refineries impacted directly by Hurricane Katrina in the Gulf can
return to service. Problems with wind and water damage, electricity
supply and other infrastructure remain to be addressed despite the best
efforts of facility owners and operators. Thus, although some of the
affected refineries may restart and return to capacity or near-capacity
levels this week, there are indications that several facilities may be
out of service for a longer period.
The industry is committed to operation of these facilities as soon
as possible, but employee safety and overall safe start-up and
operation concerns are paramount. Significant flooding and damage still
affects some facilities. However, some refiners with operating
facilities have indicated that they will be able to ramp-up production
from currently reduced levels at refineries near the affected areas
which should have a positive impact on product supplies.
4. What else is industry doing to improve the situation?
As indicated above, the industry has moved with considerable speed
to restart the nation's energy infrastructure so severely damaged by
Hurricane Katrina. Even more important than assessing and repairing
physical damage however, was the need to locate and assist employees,
many of whom experienced significant personal losses of family or
friends in the tragedy as well as loss of or severe damage to their
homes. (All industry companies throughout this region have been deeply
involved in locating and providing for the needs of their employees at
the same time they were attempting to assess and respond to facility
damages and restore energy production).
Many companies are offering varying types of assistance to
personnel and their families who were impacted by the hurricane. These
include interest free loans; temporary living supplements for housing
and food; pay continuation while facilities are closed; transportation
assistance; paid time off; medical and prescription drug assistance;
temporary housing, including trailers, tents, and other available
housing.
The oil, gas and petrochemical industries have already contributed
millions of dollars to the American Red Cross and other relief agencies
involved in assisting all residents of the affected communities. They
are also matching employee contributions. Companies are also supplying
in-kind assistance, often including fuel, for relief efforts as well.
The industry will doubtless maintain its deep commitment to help end
the suffering in the affected communities and to begin planning for the
future.
5. What has the federal government done to address these emergency
conditions?
Federal authorities have taken several decisive actions to help
relieve the many energy-related problems left in the wake of Hurricane
Katrina.
SPR Release
The Administration has released 9 million barrels of crude oil from
the Strategic Petroleum Reserve (SPR) to assist refiners who are short
crude supplies as a result of hurricane damage. The recipients will use
this crude to manufacture more gasoline, diesel, jet fuel and home
heating oil to be supplied to consumers across the nation. This is a
dynamic process, and additional volumes may be needed as more
refineries restart.
The current situation is precisely the type of event meant to
trigger SPR release. It demonstrates the importance of careful SPR
management.
Waivers to Increase Fuel Flexibility
EPA has provided temporary fuel waivers that will make it easier to
provide fuels to affected areas. This action pertains to both gasoline
and diesel specifications, and will help alleviate some of the supply
problems in these areas by increasing the available supply of both
domestic production and imports. Affected states participated in the
EPA's decision process on this action.
Jones Act Waiver
DOT has temporarily lifted Jones Act requirements to allow non-U.S.
flag vessels to transport much needed refined products from one U.S
port to another.
IEA (International Energy Agency) Exchange
The Secretary of Energy has announced that the IEA will make
available 60 million barrels of petroleum. This will provide relief in
the form of refined products (gasoline, diesel, jet fuel, home heating
oil) which are much needed due to disrupted supplies from several
refineries. These products should begin to reach the U.S in one to two
weeks. The agreement with the IEA also requires the U.S. to release an
additional 30 million barrels of SPR crude.
Industry appreciates these actions, which were taken by the
Administration with bipartisan support from the Congress. They will be
very helpful in dealing with the serious supply problems that have
resulted from Hurricane Katrina.
6. What is the impact on fuel supply? When will the situation return to
normal?
As indicated above, Hurricane Katrina's direct hit on the energy
heartland of America resulted in significant damage to offshore energy
production in the Gulf, to facilities that are critically important to
imported oil supplies, to refineries in the affected states and beyond,
and to pipelines that serve as the major providers of refined products
and crude to large parts of the East, South and Midwest.
All segments of the industry are working together in an intensive
effort to repair as much of the damage as is possible at this time in
order to increase the flow of crude oil to refineries and refined
products to consumers throughout the country. Safety considerations and
the immediate needs of the industry's workforce are of course taken
into account at all times.
Industry and government are working together to provide available
supplies of product to areas that are experiencing supply concerns. The
fuel and Jones Act waivers mentioned above will be of immediate and
near-term assistance. Increased product imports through the IEA should
also help when they arrive. Refiners who have the ability to do so will
attempt to increase production to help meet the needs of the affected
areas. The release of oil from the SPR will be helpful in supplying
them with some of the crude needed to make these products.
Despite this hopeful news, our nation faces a disruption of the
fuel supply system that should not be understated. The hurricane
temporarily affected more than 90% of the Gulf's oil production and 80%
of its gas production. It effectively removed 10% of the nation's
gasoline supply by its impact on U.S. refining capacity located near
the Gulf. It also impacted refineries hundreds of miles away that lost
access to crude oil supplies. Although important progress has been made
through the efforts of government and industry, and with some help from
abroad, full recovery will take time. Hard work and cooperation
throughout this difficult period will certainly help speed the return
to normal conditions. The direct and indirect impact of the hurricane
on energy demand, which cannot yet be determined, will also be a major
factor during this period.
7. Should we continue to rely on free market forces during this period?
Absolutely. Continued reliance on market forces provides
appropriate market signals to help balance supply and demand even
during difficult times. President Reagan eliminated price controls on
oil products immediately upon taking office in 1981. He was outspoken
about the inefficiencies and added costs to consumers as a result of
America's ten-year experiment with energy price controls.
The energy price and allocation controls of the 1970s resulted in
supply shortages in the form of long gas lines. Studies have shown
that, although intended to reduce costs, they actually resulted in
increased costs and greater inconvenience for consumers. The benefits
of market pricing became clear soon after their elimination. The U.S.
Federal Trade Commission stated in an extensive study published this
June that ``Gasoline supply, demand and competition produced relatively
low and stable annual average real U.S gasoline prices from 1984 until
2004, despite substantial increases in U.S. gasoline consumption'' and
``. . . For most of the past 20 years, real annual average retail
gasoline process in the U.S., including taxes, have been lower than at
any time since 1919.'' Price caps and other forms of price regulation
are no more effective in the 21st century than they turned out to be in
the 1970s. Interference in market forces always creates inefficiencies
in the marketplace and extra costs for consumers.
The same holds true for ``windfall profit taxes.'' The U.S. had a
``windfall profit tax'' on crude oil from 1980 until 1988. That tax,
which was actually an ad valorem tax imposed on crude oil, discouraged
crude oil production in the United States and resulted in other market
distortions. It was repealed in 1988.
Calls for re-imposition of a windfall profits tax on refiners
reflect a misunderstanding of refining industry economics. In the ten-
year period 1993-2002, average return on investment in the refining
industry was only about 5.5%. This is less than half of the S&P
industrials average return of 12.7% for the same period. Refining
industry profits as a percentage of operating capital are not
excessive. In dollars, they seem large due to the massive scale needed
to compete in a large, capital-intensive industry. For example, a new
medium scale refinery (100,000 to 200,000 b/d) would cost $2 to $3
billion. In short, company revenues can be in the billions, but so, too
are the costs of operations.
The FTC June 2005 study cited above had the following comments on
industry profits: ``Profits play necessary and important roles in a
well-functioning market economy. Recent oil company profits are high
but have varied widely over time, over industry segments and among
firms . . . Profits also compensate firms for taking risks, such as the
risks in the oil industry that war or terrorism may destroy crude
production assets or, that new environmental requirements may require
substantial new refinery capital investments.''
Many other industries enjoy higher earnings than the oil industry.
Among these are telecommunication services, software, semiconductors,
banking, pharmaceuticals, coal and real estate, to name just a few.
Imposition of a windfall profits tax on the industry would discourage
investment at a time when significant capital commitments to all parts
of the industry, including refining, will be needed.
Tight gasoline market conditions have often led to calls for
industry investigations. More than two dozen federal and state
investigations over the last several decades have found no evidence of
wrongdoing or illegal activity on our industry's part. For example,
after a 9-month FTC investigation into the causes of price spikes in
local markets in the Midwest during the spring and summer of 2000,
former FTC Chairman Robert Pitofsky stated, ``There were many causes
for the extraordinary price spikes in Midwest markets. Importantly,
there is no evidence that the price increases were a result of
conspiracy or any other antitrust violation. Indeed, most of the causes
were beyond the immediate control of the oil companies.'' Similar
investigations before and since have reached the same conclusion.
There have been, however, reports of price gouging by unscrupulous
individuals who seek to profit during this time of national emergency
and crisis. Federal and state laws prohibit actions of this kind in
emergency situations like the present. Each alleged situation should be
thoroughly investigated by the appropriate state and federal
authorities and prosecuted when the law has been broken.
PART II. A SHORT DISCUSSION OF OIL AND OIL PRODUCT SUPPLY DRIVERS
1. INTRODUCTION
This hearing was originally intended to inquire into the factors
affecting the gasoline market. The natural disaster resulting from
Hurricane Katrina required an understandable shift in emphasis to the
human needs damages resulting from that storm and only then to supply
impacts. But it is important to remember that the effect of Hurricane
Katrina is an overlay on a pre-existing condition. That was and is a
situation characterized by high crude prices, strong demand for
gasoline, diesel and other petroleum products, and a challenged energy
infrastructure, especially in refining. In the interest of space and
time, NPRA has shortened the following discussion of these conditions
and policy recommendations for improving them. We urge members of the
committee to consider the need for policy changes to increase the
nation's supply of oil, oil products and natural gas as soon as
possible.
As the nation moves forward in its resolve to address and overcome
the effects of Katrina and the transportation fuels production and
distribution systems regain much-needed pre-storm productivity levels,
an underlying domestic fuel supply problem remains that requires
immediate, bold, and perhaps politically unpopular actions. NPRA
believes that policy changes must be put in place to enhance
domestically-produced supplies of oil, oil products and natural gas.
NPRA has consistently urged policy makers in Congress and the
Administration to support environmentally sound, economically
justifiable policies that encourage the production of an abundant
supply of petroleum and natural gas products for U.S. consumers.
NPRA supports requirements for the orderly production and use of
cleaner-burning fuels to address health and environmental concerns,
while at the same time maintaining the flow of adequate and affordable
gasoline and diesel supplies to the consuming public. Since 1970, clean
fuels and clean vehicles have accounted for about 70% of all U.S.
emission reductions from all sources, according to EPA. Over the past
10 years, U.S. refiners have invested about $47 billion in
environmental improvements, much of that to make cleaner fuels. For
example, according to EPA, the new Tier 2 low sulfur gasoline program,
initiated in January 2004, will have the same effect as removing 164
million cars from the road when fully implemented.
Unfortunately, however, federal environmental policies have often
neglected to consider fully the impact of environmental regulations on
fuel supply. Frankly, policy makers have often taken supply for
granted, except in times of obvious market instability. This attitude
must end. A healthy and growing U.S. economy requires a steady, secure,
and predictable supply of petroleum products.
Unfortunately, there are no silver bullet solutions for balancing
supply and demand. Indeed most of the problems in today's gasoline
market--without factoring the market disruptions caused by Katrina--
result from the high price of crude oil due to economic recovery abroad
together with strong U.S. demand for gasoline and diesel due to the
improving U.S. economy.
2. UNDERSTANDING GASOLINE MARKET FUNDAMENTALS: HIGH CRUDE PRICES;
STRONG GASOLINE DEMAND GROWTH
It is important to recognize the overwhelming factor affecting
gasoline prices: crude oil. In June of this year the U.S. Federal Trade
Commission released a landmark study titled: ``Gasoline Price Changes:
The Dynamic of Supply, Demand and Competition.'' To quote from the
FTC's findings: ``Worldwide supply, demand, and competition for crude
oil are the most important factors in the national average price of
gasoline in the U.S.'' and ``The world price of crude oil is the most
important factor in the price of gasoline. Over the last 20 years,
changes in crude oil prices have explained 85 percent of the changes in
the price of gasoline in the U.S.''
Crude prices have been steadily increasing since 2004, largely
because of surprising levels of growth in oil demand in countries such
as China and India, and in the United States as well. Actual demand
growth for oil and oil products in these countries in 2004 exceeded the
experts'' predictions and has remained strong this year. As a result,
world demand for crude is bumping up against the worldwide ability to
produce crude.
Strong demand for crude has dissipated the cushion of excess
available worldwide oil supply, just as strong U.S. demand for refined
products has eliminated excess refining capacity in the United States.
The good news is that producing countries will probably be able to add
crude production capacity in the years to come. The bad news is that
the United States has thus far shown only limited willingness to face
up to its own energy supply problems.
As shown in Attachment I, gasoline costs closely track the cost of
crude oil. Before hurricane Katrina, gasoline price increases lagged
crude oil price increases on a gallon for gallon basis. This means that
refiners did not pass through all of the increased costs in their raw
material, crude oil. Crude oil accounts for 55-60% of the price of
gasoline seen at the service station.
The cost of federal and state taxes adds another 19% to the cost of
a finished gallon of gasoline. Therefore under current conditions, 74-
79% of the total cost of a gallon of gasoline is pre-determined before
the crude is delivered to the refiner for manufacture into gasoline.
(See Attachment 2)
Another contributor to gasoline costs is tightness in our nation's
gasoline markets. While U.S. refiners are producing huge volumes of
products, strong demand has tightened supply. Gasoline demand currently
averages approximately 9 million barrels per day. Domestic refineries
produce about 90 percent of U.S. gasoline supply, while about 10
percent is imported.
Thus, strong and increasing demand can only be met by either adding
new domestic refinery capacity or by relying on more foreign gasoline
imports. Unfortunately, the desire for more domestic gasoline
production capacity is often thwarted by other public priorities.
3. U. S. POLICY SHOULD ENCOURAGE ADDITIONAL DOMESTIC REFINING CAPACITY.
Domestic refining capacity is a scarce asset. There are currently
148 U.S. refineries owned by 55 companies in 33 states, with total
crude oil processing capacity at roughly 17 million barrels per day. In
1981, there were 325 refineries in the U.S. with a capacity of 18.6
million barrels per day. Thus, while U.S. demand for gasoline has
increased over 20% in the last twenty years, U.S. refining capacity has
decreased by 10%. No new refinery has been built in the United States
since 1976, and it will be difficult to change this situation. This is
due to economic, public policy and political considerations, including
siting costs, environmental requirements, a history of low refining
industry profitability and, significantly, ``not in my backyard''
(NIMBY) public attitudes.
Nevertheless, existing refineries have been extensively updated to
incorporate the technology needed to produce a large and predictable
supply of clean fuels with significantly improved environmental
performance. Capacity additions have taken place at some facilities as
well; several of these projects implemented over several years can
actually increase product output as much as a new refinery. But this
increase in capacity at existing sites has not kept pace with the
growth in U.S. demand for products, meaning that the nation is
increasing its reliance on imports of gasoline and other petroleum
products each year.
Proposed capacity expansions can often become controversial and
contentious at the state and local level, even when necessary to
produce cleaner fuels pursuant to regulatory requirements. We hope that
policymakers will recognize the importance of domestic refining
capacity expansion to the successful implementation of the nation's
environmental policies, especially clean fuels programs. The
Administration's New Source Review reform program will also provide one
tool to help add and update capacity.
NPRA wants to recognize a provision in the recently enacted energy
legislation that will help encourage additional refining investment.
The provision allows 50% expensing of the costs associated with
expanding a refinery's output by more than 5%. The refiner must have a
signed contract for the work by 1/1/08, and the equipment must be put
in service by 1/1/12.
Common sense dictates that it is in our nation's best interest to
manufacture the lion's share of the petroleum products required for
U.S. consumption in domestic refineries and petrochemical plants.
Nevertheless, we currently import more than 62% of the crude oil and
oil products we consume. Reduced U.S. refining capacity clearly affects
our supply of refined petroleum products and the flexibility of the
supply system, particularly in times of unforeseen disruption or other
stress. Unfortunately, EIA currently predicts ``substantial growth'' in
refining capacity only in the Middle East, Central and South America,
and the Asia/Pacific region, not in the U.S.
4. THE U.S. REFINING INDUSTRY IS DIVERSE AND COMPETITIVE.
Today's U.S. refining industry is highly competitive. Some suggest
past mergers are responsible for higher prices. The data do not support
such claims. In fact, companies have become more efficient and continue
to compete fiercely. There are 55 refining companies in the U.S.,
hundreds of wholesale and marketing companies, and more than 165,000
retail outlets. The biggest refiner accounts for only about 13 % of the
nation's total refining capacity; and the large integrated companies
own and operate only about 10 % of the retail outlets. The Federal
Trade Commission (FTC) thoroughly evaluates every merger proposal,
holds industry mergers to the highest standards of review, and subjects
normal industry operations to a higher level of ongoing scrutiny.
Critics of mergers sometimes suggest that industry is able to
affect prices because it has become much more concentrated, with a
handful of companies controlling most of the market. This is untrue.
According to data compiled by the U.S. Department of Commerce and by
Public Citizen, in 2003 the four largest U.S. refining companies
controlled a little more than 40 % of the nation's refining capacity.
In contrast, the top four companies in the auto manufacturing, brewing,
tobacco, floor coverings and breakfast cereals industries controlled
between 80% and 90% of the market.
5. INDUSTRY IS WORKING HARD TO KEEP PACE WITH GROWING DEMAND FOR FUEL.
Despite the powerful factors that influence gasoline manufacturing,
cost and demand, refiners are addressing current supply challenges and
working hard to supply sufficient volumes of gasoline and other
petroleum products to the public. Refineries have been running at very
high levels, producing gasoline and distillate. Refiners operated at
high utilization rates--even before the start of the summer driving
season. To put this in perspective, peak utilization rates for other
manufacturers average about 82 %. At times during summer, refiners
often operate at rates close to 98 %. However, such high rates cannot
be sustained for long periods.
In addition to coping with higher fuel costs and growing demand,
refiners are implementing significant transitions in major gasoline
markets. Nationwide, the amount of sulfur in gasoline will be reduced
to an average of 30 parts per million (ppm) effective January 1, 2006,
giving refiners an additional challenge in both the manufacture and
distribution of fuel. Equally significant, California, New York and
Connecticut bans on use of MTBE are in effect. This is a major change
affecting one-sixth of the nation's gasoline market. MTBE use as an
oxygenate in reformulated gasoline accounted for as much as 11% of RFG
supply at its peak; substitution of ethanol for MTBE does not replace
all of the volume lost by removing MTBE. (Ethanol's properties
generally cause it to replace only about 50% of the volume lost when
MTBE is removed.) This lost volume must be supplied by additional
gasoline or gasoline blendstocks. Especially during a period of supply
concerns it is in the nation's interest to be prudent in taking any
action that affects MTBE use. That product still accounts for 1.6% of
the nation's gasoline supply on average, but it provides a larger
portion of gasoline supplies in areas with RFG requirements that are
not subject to an MTBE ban.
Obviously, refiners face a daunting task in completing many changes
to deliver the fuels that consumers and the nation's economy require.
But they are succeeding. And regardless of recent press stories, we
need to remember that American gasoline and other petroleum product
prices have long been low when compared to the price consumers in other
large industrialized nations pay for those products. The Federal Trade
Commission recently found that ``Gasoline supply, demand and
competition produced relatively low and stable annual average real U.S.
gasoline prices from 1984 until 2004, despite substantial increases in
U.S. gasoline consumption.''
6. REFINERS FACE A BLIZZARD OF REGULATORY REQUIREMENTS AFFECTING BOTH
FACILITIES AND PRODUCTS.
Refiners currently face the massive task of complying with fourteen
new environmental regulatory programs with significant investment
requirements, all in the same 2006-2012 timeframe. (See Attachment 3.)
In addition, many programs start soon. (See Attachment 4.) For the most
part, these regulations are required by the Clean Air Act. Some will
require additional emission reductions at facilities and plants, while
others will require further changes in clean fuel specifications. NPRA
estimates that refiners are in the process of investing about $20
billion to sharply reduce the sulfur content of gasoline and both
highway and off-road diesel. Refiners will face additional investment
requirements to deal with limitations on ether use, as well as
compliance costs for controls on Mobile Source Air Toxics and other
limitations. These costs do not include the significant additional
investments needed to comply with stationary source regulations that
affect refineries.
Other potential environmental regulations on the horizon could
force additional large investment requirements. They are: the
challenges posed by increased ethanol use, possible additional changes
in diesel fuel content involving cetane, and potential proliferation of
new fuel specifications driven by the need for states to comply with
the new eight-hour ozone NAAQS standard. The 8-hour standard could also
result in more regulations affecting facilities such as refiners and
petrochemical plants.
These are just some of the pending and potential air quality
challenges that the industry faces. Refineries are also subject to
extensive regulations under the Clean Water Act, Toxic Substances
Control Act, Safe Drinking Water Act, Oil Pollution Act of 1990,
Resource Conservation and Recovery Act, Emergency Planning and
Community Right-To-Know (EPCRA), Comprehensive Environmental Response,
Compensation, and Liability Act (CERCLA), and other federal statutes.
The industry also complies with OSHA standards and many state statutes.
A complete list of federal regulations impacting refineries is included
with this statement. (See Attachment 5.)
API estimates that, since 1993, about $89 billion (an average of $9
billion per year) has been spent by the oil and gas industry to protect
the environment. This amounts to $308 for each person in the United
States. More than half of the $89 billion was spent in the refining
sector.
Obviously, refiners face a daunting task in completing many changes
to deliver the fuels that consumers and the nation's economy require.
But they are succeeding. And regardless of recent press stories, we
need to remember that American gasoline and other petroleum products
have long been low when compared to the price consumers in other large
industrialized nations pay for those products. The Federal Trade
Commission recently found that ``Gasoline supply, demand and
competition produced relatively low and stable annual average real U.S.
gasoline prices from 1984 until 2004, despite substantial increases in
U.S. gasoline consumption.''
7. A KEY GOVERNMENT ADVISORY PANEL HAS URGED MORE SENSITIVITY TO SUPPLY
CONCERNS.
The National Petroleum Council (NPC) issued a landmark report on
the state of the refining industry in 2000. Given the limited return on
investment in the industry and the capital requirements of
environmental regulations, the NPC urged policymakers to pay special
attention to the timing and sequencing of any changes in product
specifications. Failing such action, the report cautioned that adverse
fuel supply ramifications may result. Unfortunately, this warning has
been widely disregarded. On June 22, 2004 Energy Secretary Abraham
asked NPC to update and expand its refining study and a report was
released last December. NPRA again urges policymakers to take action to
implement NPC's study recommendations in order to deal with U.S.
refining problems.
8. NPRA RECOMMENDATIONS TO ADD REFINING CAPACITY AND INCREASE FUTURE
PRODUCT SUPPLY
Make increasing the nation's supply of oil, oil products and
natural gas a number one public policy priority. Now, and for many
years in the past, increasing oil and gas supply has often been a
number 2 priority. Thus, oil and gas supply concerns have been
secondary and subjugated to whatever policy goal was more politically
popular at the time. Enactment of the recent Energy Bill is a first
step to making a first priority the supply of energy sources the nation
depends upon.
Remove barriers to increased supplies of domestic oil and gas
resources. Recent criticism about the concentration of America's energy
infrastructure in the western Gulf is misplaced. Refineries and other
important onshore facilities have been welcome in this area but not in
many other parts of the country. Policymakers have also restricted
access to much-needed offshore oil and natural gas supplies in the
eastern Gulf and off the shores of California and the East Coast. These
areas must follow the example of Louisiana and many other states in
sharing these energy resources with the rest of the nation because they
are sorely needed.
Resist tinkering with market forces when the supply/demand
balance is tight. Market interference that may initially be politically
popular leads to market inefficiencies and unnecessary costs.
Policymakers must resist turning the clock backwards to the failed
policies of the past. Experience with price constraints and allocation
controls in the 1970s demonstrates the failure of price regulation,
which adversely impacted both fuel supply and consumer cost.
Expand the refining tax incentive provision in the Energy Act.
Reduce the depreciation period for refining investments from 10 to
seven or five years in order to remove a current disincentive for
refining investment. Allow expensing under the current language to take
place as the investment is made rather than when the equipment is
actually placed in service. Or the percentage expensed could be
increased as per the original legislation introduced by Senator Hatch.
Review permitting procedures for new refinery construction and
refinery capacity additions. Seek ways to encourage state authorities
to recognize the national interest in more domestic capacity.
Keep a close eye on several upcoming regulatory programs that
could have significant impacts on gasoline and diesel supply. They are:
--Design and implementation of the credit trading program for the
ethanol mandate (RFS) contained in the recent Energy Act. This
mechanism is vital to increase the chance that this program can
be implemented next year without additional gasoline supply
disruption. Additional resources are needed within EPA to
accomplish this key task.
--Implementation of the ultra low sulfur diesel highway diesel
regulation. The refining industry has made large investments to
meet the severe reductions in diesel sulfur that take effect
next June. We remain concerned about the distribution system's
ability to deliver this material at the required 15 ppm level
at retail. If not resolved, these problems could affect
America's critical diesel supply. Industry is working with EPA
on this issue, but time left to solve this problem is growing
short.
--Phase II of the MSAT (mobile source air toxics) rule for gasoline.
Many refiners are concerned that this new regulation, which we
expect next year, will be overly stringent and impact gasoline
supply. We are working with EPA to help develop a rule that
protects the environment and avoids a reduction in gasoline
supply.
--Implementation of the new 8-hour ozone NAAQS standard. The current
implementation schedule determined by EPA has established ozone
attainment deadlines for parts of the country that will be
impossible to meet. EPA has to date not made changes that would
provide realistic attainment dates for the areas. The result is
that areas will be required to place sweeping new controls on
both stationary and mobile sources, in a vain effort to attain
the unattainable. The new lower-sulfur gasoline and ULSD diesel
programs will provide significant reductions to emissions
within these areas once implemented. But they will not come
soon enough to be considered unless the current unrealistic
schedule is revised. If not, the result will be additional fuel
and stationary source controls which will have an adverse
impact on fuel supply and could actually reduce U.S. refining
capacity. This issue needs immediate attention.
NPRA's members are dedicated to working cooperatively with
government at all levels to resolve the current emergency conditions
that result from Hurricane Kristina. But we feel obliged to remind
policymakers that action must also be taken to improve energy policy in
order to increase supply and strengthen the nation's refining
infrastructure. We look forward to answering the Committee's questions.
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Chairman Barton. We thank you. Your time has expired.
We now want to hear from Mr. James Newsome, who is the
President of the New York Mercantile Exchange.
You are recognized for 7 minutes, sir.
STATEMENT OF JAMES NEWSOME
Mr. Newsome. Thank you, Mr. Chairman. And as a native
Mississippian, I want to thank you for holding this committee
meeting, for having our Governor Haley Barbour on earlier, and
for the leadership that you are providing through what may come
from this hearing.
NYMEX is the world's largest forum for trading and clearing
physical commodity-based futures contracts, including energy
and metals. NYMEX provides an important economic benefit to the
public by facilitating competitive price discovery and hedging.
As the benchmark for energy prices around the world,
trading on NYMEX is transparent, open, competitive and heavily
regulated.
Contrary to some beliefs, NYMEX does not set prices for
commodities trading on the exchange. NYMEX does not trade in
the market, and, being price neutral, does not influence price
movement. NYMEX provides a forum for traders to come together
and execute trades at prices which best represent what market
participants think prices should be in the future, given
today's information.
Periods of market uncertainty and volatility often result
from extreme supply disruptions, as we saw with the numerous
refineries shut down due to Hurricane Katrina. Price volatility
following Hurricane Katrina drove many to the futures markets,
as is reflected by the record volumes traded on NYMEX since the
hurricane.
Futures markets fulfill two primary functions. They permit
hedging, giving market participants the ability to shift risk.
And, two, they facilitate price discovery and market
transparency.
Transparency involves many factors, including continuous
price reporting during the trading session, daily reporting of
trading volumes and open interest, and monthly reporting of
deliveries against the futures contracts.
NYMEX energy futures markets are highly liquid and
transparent, representing the views and expectations of a wide
variety of participants from every sector of the energy
marketplace. The price agreed upon for sale of any futures
contract trade is immediately transmitted to the exchange's
electronic price reporting system and to the news wires and
information vendors who inform the world of accurate futures
prices.
Gasoline is the largest single volume refined product sold
in the United States and accounts for almost one-half of
national oil consumption. It is a highly diverse market with
hundreds of wholesale distributors and thousands of retail
outlets, making it subject to intense competition and
occasionally price volatility. Average daily volume in these
contracts has hit record levels in recent months, and prices
have been volatile. These market conditions reflect the basic
market fundamentals where there is an imbalance of supply and
demand. Tight gasoline supplies due to the lack of refinery
capacity compounded by the impact of Hurricane Katrina drove
prices upward dramatically in the cash and in the futures
markets.
The importance of the gulf coast refineries as a key supply
source for the New York Harbor via Colonial Pipeline directly
impacts the physical and the futures gasoline markets. During
the 1-week period prior to Hurricane Katrina, the cash market
price for gulf coast gasoline averaged $1.82 per gallon, which
was 8 cents per gallon lower than the weekly average NYMEX
futures settlement price. After the supply disruption, the gulf
coast gasoline cash market rose more than $1, to $2.84 per
gallon for the daily average on August 30, 37 cents higher than
the NYMEX futures settlement price on August 30.
A number of refineries in the Gulf of Mexico were damaged
beyond immediate repair and critical petroleum supplies were
lost. Prior to Hurricane Katrina, the U.S. refineries had
already begun running at maximum capacities struggling to keep
up with gasoline demand. This disaster in a key refining region
only further exasperated an already growing problem.
It is widely theorized, Mr. Chairman, that speculators can
drive up prices. Placing blame on speculators may grab the
attention of the media but does not accurately reflect the
realities of how markets work. With hundreds of commercial
participants and instantaneous price dissemination, any
speculative price would be met with an equally strong
commercial reaction. If markets move in a direction
inconsistent with actual market factors, there are a vast
number of participants, including energy producers,
wholesalers, retailers, and government agencies, that have
comparable access to information.
During the August 30 trading session, NYMEX set daily
volume records for overall exchange volume and for gasoline and
crude oil futures. These volume numbers clearly reflect NYMEX's
importance as a transparent trading forum where customers can
effectively manage their price risk. It is precisely during
such times of market volatility uncertainty that the Exchange's
vital role in facilitating price discovery and risk management
is most crucial to our customers.
At all times during this period of extreme uncertainty in
the market, NYMEX has been the source for transparent prices in
the energy markets. Our trading systems and price reporting
systems to the world's vendors worked flawlessly and without
delay. Even though as consumers we may not necessarily like the
result, the NYMEX marketplace performed its responsibility to
create open, competitive, and transparent pricing. We can only
imagine the market uncertainty and further devastation to
consumers if NYMEX were unable to perform its duty and prices
were determined behind closed doors.
Thank you, Mr. Chairman, for the chance to be here.
[The prepared statement of James Newsome follows:]
Prepared Statement of James Newsome, President, New York Mercantile
Exchange, Inc.
Mr. Chairman and members of the Committee, my name is Jim Newsome
and I am the President of the New York Mercantile Exchange (NYMEX or
Exchange). NYMEX is the world's largest forum for trading and clearing
physical-commodity based futures contracts, including energy and metals
products. We have been in the business for 135 years and are a
federally chartered marketplace, fully regulated by the Commodity
Futures Trading Commission. On behalf of the Exchange, its Board of
Directors and shareholders, I thank you and the members of the
Committee for the opportunity to participate in today's hearing on
Hurricane Katrina's devastating effect on gasoline supply and prices.
First and foremost, we would like to acknowledge that not only has
the nation's energy supply been severely affected, but lives have been
lost, homes have been destroyed, and entire cities are in ruins. Our
thoughts and prayers are with all the families that have suffered from
the destruction of Katrina.
INTRODUCTION
NYMEX provides an important economic benefit to the public by
facilitating competitive price discovery and hedging. As the benchmark
for energy prices around the world, trading on NYMEX is transparent,
open and competitive and heavily regulated. Contrary to some beliefs,
NYMEX does not set prices for commodities trading on the exchange.
NYMEX does not trade in the market and, being price neutral, does not
influence price movement. NYMEX provides the forum for traders to come
together and execute trades at prices which best represent what market
participants think prices should be in the future, given today's
information.
Periods of market uncertainty and volatility often result from
extreme supply disruptions as we see with the numerous refineries shut
down due to Hurricane Katrina, which brings me to the reason I was
asked to testify today. There is a strong beneficial and interdependent
relationship between the futures and cash markets. The primary
motivation for using the futures market is to hedge against price risk
in the cash market. Prudent business managers rely on the futures
market to protect their business against price swings in the cash
market. Price volatility following Hurricane Katrina drove many into
the futures markets, as is reflected by the record volumes traded on
NYMEX since the hurricane.
Futures markets provide a reference point for use in arranging
trades at competitively determined prices. An understanding of the
NYMEX market, its pricing mechanism and the relationship between the
futures price and the cash price will provide useful instruction and
clarity to what is often perceived as an esoteric area of financial
dealings.
OVERVIEW
Futures markets fulfill two primary functions: (1) They permit
hedging, giving market participants the ability to shift price risk to
others who have inverse risk profiles or are willing to assume that
risk for profit; and (2) They facilitate price discovery and market
transparency. Transparency involves many factors, including: (1)
Continuous price reporting during the trading session; (2) Daily
reporting of trading volume and open interest; and (3) Monthly
reporting of deliveries against the futures contract.
NYMEX futures contracts trade by open outcry on the Exchange floor
during the day and during the evening on NYMEX ACCESS ', our
after-hours electronic trading platform. Transactions are executed in a
transparent and competitive environment between NYMEX members who are
registered futures industry professionals. The daily settlement price
for each contract is calculated pursuant to Exchange rules, which
generally is the average price for all outright transactions during the
closing range.
NYMEX energy futures markets are highly liquid and transparent,
representing the views and expectations of a wide variety of
participants from every sector of the energy marketplace. Customers
from around the globe can call into a broker on the NYMEX trading floor
to place buy and sell orders. On behalf of the customers, buyers
announce their bids and sellers announce offers. The price agreed upon
for sale of any futures contract trade is immediately transmitted to
the Exchange's electronic price reporting system and to the news wires
and information vendors who inform the world of accurate futures
prices.
Price signals are the most efficient transmitters of economic
information, telling us when supplies are short or in surplus, when
demand is robust or wanting, or when we should take notice of longer-
term trends. NYMEX futures markets are the messengers carrying this
information from the energy industry to the public. The wide
dissemination of futures prices generates competition in the
establishment of current cash values for commodities.
GASOLINE
Gasoline is the largest single volume refined product by volume
sold in the United States and accounts for almost half of national oil
consumption. It is a highly diverse market, with hundreds of wholesale
distributors and thousands of retail outlets, often making it subject
to intense competition and price volatility.
NYMEX trades, among other things, New York Harbor leaded and
unleaded regular gasoline futures contracts. The New York harbor
gasoline futures contract trades in units of 42,000 gallons (1,000
barrels). It is based on delivery of petroleum products to terminals in
the New York harbor, the major East Coast trading center for imports
and domestic shipments, from refineries in the New York harbor area or
from the Gulf Coast refining centers.
Average daily trading volume in these contracts has hit record
levels in recent months and prices have been volatile. These market
conditions reflect the basic market fundamentals where there is an
imbalance of supply and demand. Tight gasoline supplies due to lack of
refinery capacity, compounded by the impact of hurricane Katrina, which
resulted in the closing of 9 refineries, has driven prices upward
dramatically in the cash and futures market.
The importance of the Gulf Coast refineries as a key supply source
for the New York Harbor via Colonial Pipeline directly impacts the
physical gasoline market and the futures gasoline market. During the
one-week period prior to hurricane Katrina, the cash market price for
Gulf Coast gasoline averaged $1.82 per gallon (using the Platts
wholesale assessment at the Colonial Pipeline), which was $.08 per
gallon lower than the weekly average NYMEX futures settlement price.
After the supply disruption due to hurricane Katrina, the Gulf Coast
gasoline cash market rose more than one dollar to $2.84 per gallon for
the daily average on August 30 (one day after the storm), $.37 higher
than the NYMEX futures settlement price on August 30. This differential
between the cash and futures prices represents the free market price
that is derived in light of the extreme supply disruption and reflects
a new equilibrium in the marketplace in response to the shock to the
demand and supply balance.
NYMEX has closely monitored the gasoline futures market during this
recent period of price increases in the aftermath of hurricane Katrina
and has initially concluded that the market behaved rationally and the
market participants acted responsibly in their futures and options
trading.
SURVEILLANCE
Hurricane Katrina has had a devastating economic impact. Nine
refineries in the Gulf of Mexico have been damaged beyond immediate
repair and critical petroleum supplies have been lost. Prior to
Hurricane Katrina, the U.S refineries had already been running at
maximum capacity for years, struggling to keep up with rising gasoline
demand. This huge natural disaster in a key refining region only
further exacerbated an already growing problem.
The NYMEX Market Surveillance staff routinely follows trends in the
cash markets, focusing on whether the futures markets are converging
with the spot physical market as the NYMEX contract nears expiration.
In light of the market uncertainties that resulted from hurricane
Katrina, the NYMEX staff also monitored the supply and demand
fundamentals in the underlying cash market to ensure that NYMEX prices
reflect cash market price movements, that there are no price
distortions and no market manipulation.
After analyzing events and developments over the past week, NYMEX
staff believes that price increases experienced were due to fundamental
market factors tied to supply disruptions in the wake of hurricane
Katrina. The NYMEX system worked according to design, and added a level
of economic stability to the situation by providing a viable price
discovery and risk management forum.
SPECULATORS
It is widely, yet inaccurately, theorized that speculators can
drive prices up. Placing blame on speculators may grab the attention of
the media, but does not accurately reflect the realities of how markets
work. With hundreds of commercial participants and instantaneous price
dissemination, any "speculative" price would be met with an equally
strong "commercial" reaction. If markets move in a direction
inconsistent with actual market factors, there is a vast number of
participants including energy producers, wholesalers, retailers, and
government agencies that have comparable access to information. These
participants will respond to ensure that prices rapidly return to where
the industry consensus believes they should be.
Speculators do exist and they actually play a valuable, even
necessary role in the market. They add liquidity to the market and
enable commercial traders to get in and out of the market when
necessary. By the nature of their role, speculative traders seek to
take advantage of price trends, but because they lack the real product
to back up their investment, they cannot control the price. They create
virtually no impact on daily settlement prices, the primary benchmark
used by the marketplace.
The Exchange has been scrutinized in the past on the role of hedge
fund participation in causing market volatility. The effects of
hurricane Katrina further emphasize the minimal impact hedge funds and
speculators have on futures prices when compared to the real impacts of
true market factors. hurricane Katrina is a natural disaster that
severely disrupted the U.S. supply system and in effect drove prices
higher.
Hedge funds do not account for anywhere near enough volume to
affect prices.
According to a NYMEX study on the participation of hedge funds in
the energy markets over a one year period beginning in January 2004,
hedge funds only accounted for 4.6% of overall futures volume. Of this
total, the crude oil futures market had 3.07% hedge fund participation
and, its products, heating oil and unleaded gasoline, had 3.62% and
3.26% hedge fund participation, respectively.
MARKET IMPACT OF KATRINA
NYMEX directly felt the disruptive effects of Katrina in our energy
futures markets. The Exchange experienced several unprecedented market
events in the aftermath of Katrina. Significant price moves occurred in
the energy complex on Sunday evening during the NYMEX ACCESS
' trading session which commenced at 7:00 PM. During this
session (which is effectively the commencement of the Monday business
day) gasoline moved upward due to severe concerns around the immediate
and longer term effect to refineries in Louisiana, as well as pipeline
distribution systems in the region.
During regular trading hours on Tuesday, August 30, the September
2005 unleaded gasoline contract traded to its maximum upward price
limit, resulting in a temporary trading halt. Exchange rules impose a
price fluctuation limit of $0.25 per gallon of unleaded gasoline above
or below the previous day's settlement price. When that limit is hit, a
five minute temporary trading halt is triggered. This limit was reached
last Tuesday when the September 2005 contract traded at $2.31. In
accordance with NYMEX Rules, the market was halted at 11:15 AM and re-
opened after 5-minutes with an expanded limit of $0.50 cents above the
previous day's settlement.
In response to the price volatility, NYMEX increased margins on
several occasions for a variety of the energy futures contracts,
including gasoline and crude oil. Margin is the money or collateral
deposited with the clearinghouse to protect the clearinghouse against
loss on open futures or options positions. In all cases, NYMEX required
additional margin to maintain the integrity of the clearinghouse.
Margin is vital to ensuring the financial integrity of the Exchange and
provides the clearinghouse with the ability to protect customers
against counterparty credit risk. On August 30, 2005, NYMEX managed and
cleared the greatest single intra-day variation margin call scenario,
when it moved nearly $2 Billion.
During the August 30 trading session, NYMEX set daily volume
records for overall Exchange volume and for gasoline and crude oil
futures, as well as for the Exchanges electronic clearing platform
NYMEX Clearportsm. The following day, August 31, Exchange-wide options,
NYMEX Division options, and NYMEX ClearPortsm clearing once again
reached record volumes. These record volume numbers, clearly reflect
NYMEX's importance as a transparent trading forum where customers can
effectively manage their price risk. It is precisely during such times
of market volatility and uncertainty that the Exchange's vital role in
facilitating price discovery and risk management is most crucial to our
customers.
During the entire week following hurricane Katrina, NYMEX
Compliance and CFTC officials have had a heightened presence on the
trading floor overseeing all markets. All activity has been thoroughly
reviewed utilizing all available electronic tools to detect any abusive
activities.
CONCLUSION
At all times during this period of extreme uncertainty in the
market, NYMEX has been the source for transparent prices in the energy
markets. Our price reporting systems to the world's vendors have worked
flawlessly and without delay. Our trading systems during regular
trading hours and during after hours trading on our electronic
platforms have performed flawlessly.
Even though as consumers we may not like the result, the NYMEX
marketplace performed its responsibility to create open, competitive
and transparent energy pricing. We can only imagine the market
uncertainty and further devastation to consumers if NYMEX were unable
to perform its duty and prices were determined behind closed doors.
I thank you for the opportunity to share the viewpoint of the New
York Mercantile Exchange with you today.
Chairman Barton. Thank you, Mr. Newsome.
We now want to hear from Mr. Cooper. And Mr. Cooper is the
Executive Director of the Association of Oil Pipelines. You are
recognized for 7 minutes, sir.
STATEMENT OF BENJAMIN S. COOPER
Mr. Benjamin Cooper. Thank you, Mr. Chairman. I am Ben
Cooper with the Association of Oil Pipelines, a nonprofit trade
association of oil pipelines. We very much appreciate the
opportunity to be here today. I filed a full statement with the
committee and will summarize here, and I will give you the
short summary first.
Oil pipelines affected by Hurricane Katrina were rapidly
restored to service, are now in service, and are able to carry
oil from imports, offshore platforms, and refineries that
provide supply. Second, oil pipeline transportation rates are a
few cents per gallon and have not changed during the hurricane,
so oil pipeline rates have had no role in the recent petroleum
price increases.
Hurricane Katrina affected the operations of several major
oil pipelines and facilities in the gulf coast. Today, the
capacity of these pipelines has been substantially restored.
The good news is that all of these pipelines weathered the
hurricane with little damage and no spills. However, in the
aftermath of the hurricane they were taken out of service,
among other things, by the loss of grid electric power. Oil
pipelines operate using large electric pumps. The electricity
needed to run even one pump is enough to supply a small town.
After the hurricane, transmission and generation in south
Louisiana and Mississippi were shut down, yet 3 days later our
pipelines began to come back on line. Within 6 days, most were
at or could anticipate full operation. The extraordinary
efforts of pipeline employees, of the employees of the electric
utility companies that supply power to these pipelines, and of
some very dedicated public servants has restored the capacity
of these pipelines. One pipeline operator, for example, located
several large, many large portable generators all over the
country, and with the help of the Department of
Transportation's Pipeline and Hazardous Materials Safety
Administration, moved them to the affected areas to enable key
pumps to restart. Another operator actually rewelded bypass
lines to allow pumps on either side of a shut-in facility to
operate to restore partial service.
Pipelines are motivated to get their systems operating as
soon as possible. The interests of the public and the pipelines
are aligned in this. Of course, the shutoff of major offshore
platforms and refining capacity in the storm's wake means that
supply may still be affected even after the pipeline
transportation system is fully restored. But when the supply
does become available, oil pipelines will be ready to transport
it.
Let me talk about oil pipeline rates, because we have been
asked to address whether oil pipeline companies have
contributed to the sudden increase in gasoline prices by
raising the rates charged for transportation. The facts are
that pipeline rates did not change during the past week. The
Federal Government regulates the rates of interstate oil
pipelines. We are the only part of the petroleum supply system
that is under Federal regulation.
Our member companies deliver petroleum safely to nearly
every region in the United States for a few cents a gallon. A
typical rate for transport of petroleum product from the gulf
coast to the Southeast is about 2 cents a gallon, to the
Northeast about 3 cents a gallon, and to Chicago for about 2\1/
2\ cents a gallon. Oil pipelines provide transportation
services to customers. The customers are the ones who decide
what to ship, where to ship, and when to ship. The decision of
how much to ship of each commodity and to which destination is
made by our shipper customers, not by pipeline operators.
I would like to share a couple of lessons at least for our
industry from this experience. Federal policy should assign a
leadership role from within the Federal family to address oil
pipeline problems during these events. In the wake of Hurricane
Katrina, DOT's Pipeline and Hazardous Materials Safety
Administration performed highly useful services in coordinating
and addressing bottlenecks as oil pipeline operators sought to
locate and deliver emergency equipment and specialized
generators to particular pump stations.
The Pipeline and Hazardous Material Safety Administration
is the Federal agency most knowledgeable about oil pipelines
and is an excellent choice for the role of assisting oil
pipelines during emergencies. Legislation may be required to
authorize this.
Second, restoration of grid electric power is absolutely
critical to the resumption of pipeline service and needs to
receive the highest priority during these events. We have a new
appreciation of the interdependency of pipelines with electric
power. The Federal Government should be doing everything in its
power to assist the electric utility industry generally and
utilities individually to harden facilities to overcome threats
and to rapidly recover when power is lost despite all efforts.
A final note. Today oil pipeline capacity is near full
under normal conditions. Oil pipeline infrastructure will soon
require expansion to meet the needs of consumers, to
accommodate changing supply patterns, for example, such as the
growth of Canadian tar sands production, to meet stricter
requirements for product quality such as ultra load sulfur
diesel fuel, to meet stricter requirements for product
composition such as boutique fuels, and to provide
infrastructure security.
A support of public policy, including continuation of
flexible rate treatment, permitting assistance, and creative
approaches to acquiring pipeline rights-of-way will be required
to ensure that oil pipeline expansions are made when needed,
are there to meet expectations that the committee may have
about refinery capacity.
AOPL looks forward to working closely with the Department
of Transportation, the Federal Energy Regulatory Commission,
this committee, and the rest of Congress to ensure that the oil
pipeline industry is able to meet the challenges in the future,
and we thank you for our opportunity to appear today.
[The prepared statement of Benjamin S. Cooper follows:]
Prepared Statement of Benjamin S. Cooper, Executive Director,
Association of Oil Pipe Lines
INTRODUCTION
My name is Benjamin S. Cooper. I am the Executive Director of the
Association of Oil Pipe Lines. AOPL is a 501 (c) (6) non-profit trade
association of interstate oil pipelines, which includes pipeline
transporters of crude oil, refined petroleum products, liquefied gases
and anhydrous ammonia. Our Association's 53 members transport about 85
percent of the crude oil and refined petroleum products delivered by
pipelines. AOPL members include pipelines that transport crude oil from
production and import points to refineries and pipelines that transport
the refined products produced in those refineries to end users and
distributors (retailers, wholesalers, airports, railroads, etc.).
AOPL's membership is comprised of domestic U.S. oil pipeline companies
and two Canadian oil pipeline companies.
My testimony will first discuss the impact that hurricane Katrina
has had on oil pipeline operations and lessons learned during the past
week. I then will cover the role played by oil pipelines in petroleum
supply, describe government oversight of that role and sketch the
challenges faced by the industry in providing sufficient capacity to
meet our nation's current and future petroleum transportation needs.
Impact of Hurricane Katrina
As the Committee knows, the major impact of the hurricane was felt
in Louisiana and Mississippi. Four effects of the storm have been
important to oil pipelines with operations in these states:
The lives of local pipeline personnel have been severely disrupted;
Key pipeline facilities have been flooded;
Electric power has not been available; and
The supply of crude oil and products to ship in pipelines has been
disrupted
The major affected pipelines have been Colonial and Plantation,
which together account for a major share of the refined petroleum
products transported along the eastern seaboard, as much as 60% of the
supply in some areas of the southeast. Both pipelines were shut down in
an orderly way to maintain product quality and pipeline integrity in
anticipation of the storm. They then were prevented from restarting by
the severity of the storm's impact, in particular, by the loss of
electric power. Both companies were able to resume limited service on
Wednesday, August 31, when they were able to arrange for alternative
power sources. As of September 3, both were receiving some utility
electric power. Colonial was running at 80% of capacity, and Plantation
was running at 95% of capacity.
Capline, a crude oil pipeline that transports crude oil from the
Gulf of Mexico to refineries in the mid west, and one of the pipelines
that would carry oil from the Louisiana Strategic Petroleum Reserve
sites, was also shut down. As of September 3, service on Capline was
restored to 80% of capacity after the integrity of the pipeline was
established and utility electric supply to some pumps was re-
established.
Dixie, a propane pipeline serving markets in the Southeast could
not reopen after the storm due to loss of power. Dixie has also
partially resumed service with the restoration of some utility electric
power, and as of September 3 was operating at 50% of capacity.
Finally, Louisiana Offshore Oil Pipeline, which operates facilities
for receipt and transport of crude oil imported in large tankers was
also shut down, but as has since resumed operation at 75% of capacity.
The common denominator in these shut downs is the location of key
facilities in areas in the direct path of the storm where flooding was
extensive and electric power was out for considerable periods of time.
All have substantially recovered as facilities formerly isolated by
flooding are reactivated and electric power comes on line. The impact
of the shut down of Colonial and Plantation continues to be felt in
areas where alternative supply, for example, from imports or waterborne
carriers, is not feasible. Of course, the massive shut down of refining
capacity in the storm's wake meant and will mean for some time that
quantities of supply from these sources will be limited, even after the
transportation system is fully restored.
Some questions have arisen regarding whether these pipeline
companies were economically advantaged by the hurricane and contributed
to the sudden increase in gasoline prices by raising the rates charged
for transportation. The facts are that pipeline rates did not change
during the past week. For example, Colonial Pipeline's tariff from
Pasadena, Texas to Atlanta Georgia (82.82 cents/barrel--less than 2
cents/gallon) was set on July 1st and remains unchanged. In fact,
several pipeline companies were negatively impacted by the loss of
revenue and extraordinary costs incurred to bring their operations back
in service as soon as possible.
Lessons Learned from Hurricane Katrina
The decision by the EPA to act quickly to waive temporarily area
specific fuel requirements under the Clean Air Act in the
widest possible area allows the petroleum distribution system
to make the most effective use of existing supplies. Several
pipelines serving the Midwest immediately began receiving
nominations of alternative gasolines to move north and east.
This was an important action that was taken in a timely manner.
Federal policy should assign a leadership role from within the
federal family to address oil pipeline problems during these
events. In the wake of hurricane Katrina, DOT's Pipeline and
Hazardous Materials Safety Administration performed highly
useful services in coordinating with the Federal Emergency
Management Agency and addressing bottlenecks as oil pipeline
operators sought to locate and deliver emergency equipment and
specialized generators to particular pump stations. PHMSA is
the federal agency most knowledgeable about oil pipelines, and
is an excellent choice for the role of assisting oil pipelines
during emergencies.
Hoarding and panic buying exacerbate petroleum fuel shortages.
Officials need to be active early and continuously to
discourage, to the extent possible, these reactions. In
addition, dissemination of false information by the media can
make hoarding and panic buying worse and generally has a
negative impact on markets.
Restoration of grid electric power is critical to the resumption of
pipeline service and should receive the highest priority during
these events. The federal government should be doing everything
in its power to assist the electric utility industry generally
and utilities individually to enhance the ability of utilities
to overcome threats and recover rapidly where power is lost
despite all best efforts.
Finally, hurricane Katrina provides a sobering data point in the
nation's understanding of the interdependency of the energy
supply system and a highly painful real world experience with
the impact of a loss of key energy services and infrastructure
that approximates many homeland security emergency scenarios.
The Role of Oil Pipelines in the U.S.
Oil pipelines provide about \2/3\ of the petroleum transportation
in the U.S., measured in barrel miles. Unlike natural gas, which can
only be transported by pipeline, alternatives to petroleum pipeline
transportation exist and include tankers, barges, rail and trucks.
However, each of these alternatives has significant limitations, and,
as a result, pipelines are the primary method of bulk transportation of
petroleum over medium to long distances. It is difficult to imagine how
our transportation network, which is 95% powered by petroleum, could
operate without oil pipelines.
Pipeline transportation has dual advantages of efficiency and
safety. About 17% of the annual ton-miles of our nation's freight are
carried by petroleum pipelines, at a cost of about 2% of the total U.S.
freight bill. Pipelines share with tanker vessels the safest record in
petroleum transportation, safer than barge, rail or truck. Deaths and
injuries from petroleum pipeline transportation are rare and the
environmental impact of pipeline transportation is less than any of its
alternatives. Oil pipelines are able to deliver petroleum safely to
nearly every region of the U.S. for a few pennies per gallon. A typical
rate to transport petroleum product from the Gulf Coast to the
Southeast is about 2 cents per gallon, to the Northeast is about 3
cents per gallon and to Chicago is about 2.5 cents per gallon.
Economic Regulation of Oil Pipelines
The federal government regulates the economics of interstate oil
pipelines--in fact oil pipelines are the only part of the petroleum
supply system that is under federal economic regulation.
The Federal Energy Regulatory Commission administers the provisions
of the Interstate Commerce Act to ensure that interstate oil pipelines:
Function as common carrier providers of transportation to any
qualified shipper;
Charge no more than publicly available rates filed in advance with
the FERC, which are typically limited to a few cents per
gallon;
Assign space on the pipeline based on monthly nominations from all
interested shippers and prorate access to that space among all
applicants in a posted, non-discriminatory way when the line is
full;
Exercise no undue discrimination among shippers;
Maintain confidentiality of shipper records and not share information
of any shipper with any other shipper; and
File annual reports on pipeline company income and cost data with the
FERC that are available to the public.
Oil pipelines provide transportation services and charge fees that
do not fluctuate with the price of the products that are transported.
Because oil pipelines do not own the products that they transport, they
do not benefit from any product price increases. In fact, refined
products pipelines are generally adversely impacted by high commodity
prices, as higher prices increase power costs and marginally result in
lower consumption levels. Even when an oil pipeline is an affiliate of
a major integrated oil company, the Interstate Commerce Act and FERC
oversight establishes a wall between the pipeline portion of the firm
and the owners' transportation operations.
Oil Pipeline Transportation Rates
Typical oil pipeline rates range from 1 to 5 cents per gallon and
are independent of the value of the oil being transported. Thus the
revenue received by the oil pipeline is a few cents per gallon,
regardless of the sale price of that gallon, whether that sale price is
$1.00, $2.00, $3.00 or more.
Oil pipeline rates are posted in FERC-filed tariffs that normally
take effect after 30 days and are subject to protest during that
period. Oil pipeline rate changes must be justified using one of four
rate mechanisms: indexation, a settlement rate agreed to by all
affected shippers, market-basis or cost-of-service. In calendar years
2003 and 2004, there were 1096 oil pipeline tariff rate filings. Of
those, 937 (88%) were index-based, and 159 were justified on another
basis. Of the 159 others, roughly 49% were market-based, 30% were
settlement rates, 14% resulted from pervious settlements and 7% were
cost of service based.
Most oil pipeline tariffs cover a specific group of products. For
instance, a ``Products Tariff'' would apply the same tariff rate to
gasoline, diesel, jet fuel and kerosene product shipments between the
same points. For instance, Colonial's tariff defines ``Petroleum
Products'' to mean ``gasolines and petroleum oil distillates'', which
would include jet fuel, diesel fuel and heating oil. There are also
crude oil tariffs, propane tariffs, etc.
Pipeline tariffs do not tend to change frequently and, unlike
commodity prices, are not adjusted as a result of short-term market
circumstances. Since nearly 90% of tariffs are indexed, most
adjustments are done on an annual basis and occur on July 1 of each
year when the new FERC index takes effect. Even market based rate
changes occur infrequently, with some changes actually rate decreases
to meet competitive market conditions.
Pipelines also file rules and regulations tariffs that set forth
the pipeline's conditions of service. These filings explain such things
as the pipeline's tendering process, minimum batch size, allocation
policy and product specifications. Such rules and regulations are
required to be administered in a non-discriminatory manner. A system of
checks and balances on oil pipeline behavior operates through the
ability of any shipper to protest any alleged deviation from FERC
requirements.
Oil pipelines are providers of transportation services for
generally fixed fees for our customers, who determine what to ship,
where to ship or when to ship. The decision on how much to ship of each
commodity and to which destination is made by our shipper customers.
Pipelines then ship multiple products on a regular cycle of products.
On a normal basis, we provide transportation for all products to all
destinations on a regular cycle.
The oil pipeline business is volume driven, and the incentive for
pipelines from both a revenue and customer relations standpoint is to
transport as much product as possible. Any inference that oil pipeline
operators are purposely contributing to product shortages by reducing
or shutting down capacity to cause higher product prices is simply
false. In fact, the oil pipeline industry's drive to transport more
volumes contributes to market liquidity, which on the margin should
contribute to more competition and lower prices. The extraordinary
efforts of our member companies to return their systems to service as
fast as possible in the aftermath of hurricane Katrina provides ample
evidence of the pipeline industry's motivation and commitment to resume
business and recognition of the critically important role played by
pipelines in enabling adequate supplies of petroleum products to reach
destination markets..
The oil pipeline industry is not a large generator of revenue by
comparison with other sectors of U.S. industry, including other sectors
of the energy industry. For 2003 (the most recent data available) the
entire FERC-regulated oil pipeline industry received gross revenue of
$7.7 billion to deliver 13.2 billion barrels of crude oil and refined
petroleum products to its various customers. A single company's revenue
in many other sectors of the economy would far exceed the oil pipeline
industry's revenue as a whole
Pipeline ownership is diverse, with several forms of ownership as
detailed below:
Major integrated oil companies (for example: ExxonMobil Pipeline
Company, Marathon Pipe Line LLC, Chevron Pipeline Company,
Shell Pipeline Company);
Joint venture pipelines owned by shippers and other pipeline
companies (for example: Colonial, Explorer, Trans-Alaska
Pipeline, Capline); and
Independents engaged primarily in oil pipeline transportation
(Buckeye, TEPPCO, KinderMorgan, Enbridge, Plains All American).
A substantial percentage of the pipelines are independently owned
and operated, with the current trend towards increased independent
ownership of oil pipeline assets. Major integrated oil company
ownership of oil pipelines has been steadily decreasing in recent
years, with major oil companies now representing a minority of oil
pipeline asset ownership.
In sum, the amount charged to transport oil by pipeline is
controlled by either regulation or market forces and is quite small in
relation to the value of oil itself. The cost of transporting oil and
petroleum products by pipeline has a minimal, if any, impact on
consumer prices.
Oil Pipeline Capacity
While the cost of transporting oil by pipeline has a minimal impact
on consumer prices, access to adequate pipeline capacity can make a
substantial difference in consumer prices. As we have seen following
hurricane Katrina, when adequate pipeline capacity is not available,
shortages, price increases and price volatility for petroleum consumers
are the result. Even before hurricane Katrina, we saw this, for
example, in Arizona in 2004 and in the Midwest in 2003 when key
pipelines were out of service.
The U.S. oil pipeline infrastructure is a large system created over
many years. Volumes moving on those pipelines grow only in response to
increases in oil demand, that is, a few percent a year. Volumes can
sometimes also increase or decrease dramatically due to changes in
supply patterns such as refinery closures, new crude supplies and other
significant changes. Additions to capacity often present large hurdles
to individual companies in terms of capital requirements and perhaps
more importantly, acquisition of right of way and required permitting.
The current system, constructed principally in the 1950s and 1960s with
excess capacity for that time, is quite close to full capacity at
today's levels of domestic petroleum consumption, and pipelines have
had to adjust to a just-in-time inventory mentality and to seasonal
fuel switches that put additional strain on the system.
Oil pipelines are another component of the U.S. energy
infrastructure that will require expansion in coming years to meet the
needs of consumers. A supportive public policy, including continuation
of the recent trend to market based and indexed rate treatment,
permitting assistance and creative approaches to rights of way, will be
required to ensure that oil pipeline expansions are made when needed.
Key Aspects of Oil Pipeline Operations
Oil is moved through pipelines by large pumps powered by
electricity. Oil pipeline companies are large consumers of base-load
electricity. Pumps are located at the origin point of the pipeline and
at intervals typically 30 to 50 miles apart, depending on terrain and
the location of major facilities for pickup or delivery of oil. For a
pipeline of significant size, pumps at these stations of 3,000-5,000
horsepower are typically used, requiring megawatt quantities of
electric power. The only feasible method for delivery of electricity in
these quantities is through connection to the utility grid.
Oil pipelines maintain tanks at points along the line to facilitate
the scheduling of pipeline transportation. For refined product
pipelines, the need for tankage is a significant issue as the number of
distinct products shipped increases. Pipeline transportation tanks hold
oil that is owned and controlled by shippers. The volume in these tanks
typically only represents a limited supply in relation to overall
petroleum demand.
I will be glad to try to answer any of your questions, and our
Association would be pleased to work with the Committee on any follow
up from this hearing.
Chairman Barton. We thank you, sir. We now want to hear
from Mr. Bill Douglass, who is here representing the National
Association of Convenience Stores and the Society of
Independent Gasoline Marketers of America. You are recognized
for 7 minutes. Welcome.
STATEMENT OF BILL DOUGLASS
Mr. Douglass. Good evening, Mr. Chairman, and members of
the committee. As you said, my name is Bill Douglass. I am
Chief Executive Officer of Douglass Distributing Company
headquartered in Sherman, Texas. Thank you for inviting me to
testify before you today on behalf of NACS and SIGMA
On the impact of Hurricane Katrina on the Nation's
wholesale and retail fuel supply and prices. I will concentrate
my testimony on my personal experiences over the past 10 days
as a marketer in Texas and on the experiences of fellow
marketers and other areas during the past 10 days. In the
interest of time, I will have to move through the charts I
brought with me this afternoon fairly quickly.
The first chart depicts the daily movements of wholesale
prices in the Dallas-Fort Worth market last week. These
wholesale prices jumped an average of over 11 cents per day,
for a total increase between Monday August 29 and Friday
September 2 of 44 cents a gallon.
The second chart shows how my company reacted to these rack
price increases in terms of our retail outlet prices. As you
can see, our retail prices in general rose by a similar and in
some cases lower amount than our wholesale costs.
Chart 3 provides a broader look at wholesale prices in the
Dallas-Fort Worth market last week. My company's experience was
not unique. These prices happen to be on branded racks, and
they went all the way to $3.10 when you add the tax.
Chart 4 summarizes the changes in rack pricing in each
region of the country broken down by pad.
Chart 5 provides a look at wholesale prices, that is, rack
prices, last week in five randomly chosen cities: Atlanta,
Boston, Dallas-Fort Worth, Detroit, and Philadelphia. All of
these cities witnessed substantial increases in rack gasoline
prices last week, and these figures do not include the taxes or
fees or freight.
There has been widespread media reports and even some
comments by congressional leaders of gasoline price gouging by
gasoline marketers in the wake of Katrina. I cannot assure the
committee that isolated incidents of profiteering for personal
gain in the midst of this crisis did not occur last week. It is
important for this committee to understand, however, before you
rush to judgment on whether my or other retailers actions were
proper, how I and other retailers establish our retail prices
in a market with escalating wholesale prices.
Simply stated, I try to set my retail prices on the basis
of the replacement costs of the gallons I have at my outlets.
When the wholesale prices are rising, I know the next load of
gasoline I purchase from my supplier will cost me substantially
more than my last load. My sales must generate sufficient cash
for me to make the next purchase and pay my supplier.
If the only thing you knew about my company was that I
raised retail gasoline prices by over 40 cents per gallon last
week, would you suspect that I was attempting to profit from
this crisis? Maybe. But based on the information I have given
you today, I trust that you would reach a different conclusion
after you have investigated the facts. I urge this committee
and your colleagues to gather the facts on last week's gasoline
supply and retail pricing situation before reaching conclusions
about my actions or the actions of other motor fuel marketers.
The enactment of the Energy Policy Act of 2005 is a good
first step toward addressing the Nation's problems of shrinking
refining capacity and a trend toward higher gasoline prices. I
commend you, Mr. Chairman, and your colleagues for taking the
lead in making this important legislation a reality after 5
long years. Specifically, your provisions gave the
Environmental Protection Agency the statutory authority to
waive certain gasoline and diesel fuel controls last week,
providing the market with much needed flexibility to move
product between markets to mitigate the supply disruptions.
This is an immediate example of the positive impact this energy
bill has had on the market. There are other important
provisions in the 2005 energy bill that will assist in
expanding domestic refining capacity and in mitigating gasoline
supply dislocations and price spikes.
NACS and SIGMA urge this committee and this Congress to
build on the progress made through the Energy Act of 2005 in
the following ways: Assure prompt implementation of EPAC's 2005
provisions, including the joint Environmental Protection Agency
and Department of Energy study on increasing gasoline and
diesel fuel supplies while protecting the environment.
Streamline permitting and siting procedures for expanding
existing domestic refining capacity, and for the construction
of new grassroots refineries. Adopt additional incentives to
expand our domestic refining capacity. And, investigate the
pricing policies of credit card companies, whose charges make
up an ever increasing portion of the price of gasoline at
retail outlets, particularly when gasoline prices are high.
Thank you for inviting me to testify here today on this
important topic, and I would be pleased to answer any questions
my testimony may have introduced.
[The prepared statement of Bill Douglass follows:]
Prepared Statement of Bill Douglass, Chief Executive Officer, Douglass
Distributing Company Representing The National Association of
Convenience Stores and The Society of Independent Gasoline Marketers of
America
I. INTRODUCTION
Good afternoon, Mr. Chairman and members of the Committee. My name
is Bill Douglass. I am Chief Executive Officer of Douglass Distributing
Company, headquartered in Sherman, Texas. My company operates 14
convenience stores and supplies gasoline and diesel fuel to 165 retail
locations throughout the Dallas-Fort Worth area.
I appear before the Committee today representing the National
Association of Convenience Stores (``NACS'') and the Society of
Independent Gasoline Marketers of America (``SIGMA'').
II. THE ASSOCIATIONS
NACS is an international trade association comprised of more than
2,200 retail member companies operating more than 100,000 stores. The
convenience store industry as a whole sold 142.1 billion gallons of
motor fuel in 2004 and employs 1.4 million workers across the nation.
SIGMA is an association of more than 240 independent motor fuel
marketers operating in all 50 states. Last year, SIGMA members sold
more than 58 billion gallons of motor fuel, representing more than 30
percent of all motor fuels sold in the United States in 2004. SIGMA
members supply more than 35,000 retail outlets across the nation and
employ more than 350,000 workers nationwide.
Together, NACS and SIGMA members sell approximately 80 percent of
the motor fuel retailed in the United States each year.
III. SUMMARY OF TESTIMONY
Thank you for inviting me to testify before you today on the impact
of Hurricane Katrina on the nation's wholesale and retail motor fuel
supply and prices. The past ten days have been some of the most
challenging in my thirty years as a motor fuel marketer and I welcome
this opportunity to share my personal experiences, and the experiences
and impressions of other NACS and SIGMA members with whom I have
talked, with you.
As an initial matter, I would like to express my personal sympathy,
and the sympathy of our entire industry, for the victims of Hurricane
Katrina. Individually and collectively, our industry shares the
suffering of our fellow citizens and will do all in our power to
alleviate this suffering at the earliest possible date.
My testimony will touch on three broad topics today. First, I will
provide the committee with as much information as I have available on
the impact of Hurricane Katrina on gasoline supplies and prices.
Specifically, I will share with you my personal experiences over the
past ten days and summarize, to the extent possible, the information I
have received from my fellow retailers.
Second, I am here to respond to allegations that I, and my
industry, have taken advantage of this tragedy by ``gouging'' our
customers by raising retail motor fuel prices. Such allegations are
personally offensive to me, and in general reflect a lack of
understanding of the market events that have led to the gasoline and
diesel fuel price spikes of the last ten days. While it is certainly
possible that some ``bad actors'' have sought to exploit this crisis
for personal gain, I can assure you that their actions are not the
actions of the vast majority of our industry.
Third, my testimony contains recommendations to the committee on
steps that should be taken to lessen the likelihood that such supply
disruptions and wholesale and retail price spikes will occur in the
future. Unfortunately, these recommendations are remarkably similar to
the steps NACS and SIGMA have been urging public policymakers to take
for the last ten years. While the enactment of the ``Energy Policy Act
of 2005'' earlier this summer was a good first step towards
implementing some of these recommendations, much remains to be done.
IV. IMPACT OF HURRICANE KATRINA ON WHOLESALE AND RETAIL GASOLINE PRICES
For much of the eastern two-thirds of the nation, the impact of
Katrina on wholesale and retail gasoline prices could not have been
more immediate and profound. I will leave it to other witnesses here
today to discuss the impact Katrina had on crude oil production and
imports, crude oil movements from production to refineries, domestic
refining capacity, and the movement of finished gasoline and diesel
fuel throughout the country via pipeline, barge, and truck. That is not
my area of expertise. Instead, I will concentrate my testimony on my
personal experiences over the past ten days as a marketer in Texas, and
on the experiences of fellow marketers in other areas over the past ten
days.
It will be helpful for me to use several charts to graphically make
these points. This first chart (Chart 1) depicts the daily movements of
wholesale prices in the Dallas/Fort Worth market last week. This is the
``rack,'' or wholesale price--the price at which my suppliers are
willing to sell me, and other marketers, truckloads of 87 octane
conventional gasoline. As you can see, these wholesale prices increased
daily, and dramatically, last week. On August 28th, before Katrina
struck, my wholesale gasoline cost was $2.36 per gallon including
federal, state, and local taxes. Early last week, as Katrina struck the
Gulf Coast, these wholesale prices jumped an average of over eleven
cents per day, for a total increase between Monday, August 29th and
Friday, September 2nd of 44 cents per gallon.
I must point out that I am a branded marketer--the stations I own
and supply fly the flag of a major refiner. The wholesale prices in
this chart reflect branded rack prices, not unbranded, or independent,
rack prices. During this same five day period, wholesale prices for
these unbranded stores rose 73 cents per gallon, or over 18 cents per
day.
This second chart (Chart 2) shows how my company reacted to these
rack price increases in terms of our retail outlet prices. As you can
see, our retail prices in general rose by a similar, and in some cases,
lower amount than our wholesale costs. In short, my company reacted
primarily to changes in wholesale price increases when determining
where to set our retail prices. In some cases, because of competition
from other retailers in our market area, we did not pass the entire
increase in rack prices through to retail. On these days, virtually
every gallon we sold from our stations resulted in no or negative
profit margins for our company, once our operating costs are taken into
account.
My personal experience is similar to the experiences of other
retailers across the nation. NACS and SIGMA obtained rack pricing data
from the Lundberg Survey, an independent report on wholesale motor fuel
prices, for several major metropolitan areas for the past two weeks.
This chart (Chart 3) provides a broader look at wholesale gasoline
prices in the Dallas-Fort Worth market last week.
The next two charts (Charts 4 & 5) indicate that my experience in
Texas was not unique. Chart 4 summarizes the changes in rack pricing in
each region of the country, broken down by PADD. As you can see,
wholesale prices were up significantly last week in all areas of the
country. Chart 5 provides a look at wholesale rack prices last week in
five randomly chosen cities--Atlanta, Boston, Dallas/Fort Worth,
Detroit and Philadelphia. All of these cities witnessed substantial
increases in rack gasoline prices last week.
I have used these charts to provide you with detailed evidence that
Katrina had a widespread impact on gasoline prices in much of the
country over the past two weeks--not just in the areas devastated by
the storm itself. Because crude production was reduced, refineries
crippled, and gasoline pipelines were taken out of service, gasoline
supply shortages began to occur, first in areas close to the areas hit
by Katrina and rapidly moving outwards to areas of the country served
directly or indirectly by the production, refining and transportation
hub of the nation's Gulf Coast.
These statistics confirm that retail gasoline price increases last
week were justified by movements in the wholesale cost of gasoline.
While two months from now hindsight may provide us with additional
facts that will indicate that the markets could have responded to this
supply crisis differently, as we are going through this crisis, the
fundamental laws of economics tend to apply forcefully--if demand
remains the same or increases and supply is reduced, prices will rise.
This is the situation we have experienced for the last ten days.
V. ALLEGATIONS OF PRICE ``GOUGING''
Last week, there were widespread media reports, and even some
comments by congressional leaders, of gasoline price ``gouging'' by
gasoline marketers in the wake of Katrina. I can not assure the
committee that all of these reports are false or that isolated
instances of profiteering for personal gain in the midst of this crisis
did not occur last week. I wish I could.
However, I can tell you that such actions were not the norm in our
industry. The vast majority of gasoline marketers are fair and
scrupulous businesses. As my testimony has shown, I personally
responded to wholesale price hikes in my area in setting my retail
prices. I am not aware of any credible instance in which retail price
increases were not justified by the supply crisis faced by a retailer.
It is important for this committee to understand how I and other
gasoline retailers establish our retail prices in a market with
escalating wholesale prices. Simply stated, I try to set my prices on
the basis of the replacement cost of the gallons I have at my outlets.
This is an important concept which may not be readily grasped. When
wholesale prices are rising, and I know that the next load of gasoline
I purchase from my supplier will cost me substantially more than my
last load, my sales must generate sufficient cash for me to make that
next purchase and to pay my supplier.
For example, assume the gasoline at one of my retail stations cost
me $2.00 per gallon yesterday. I know that the next gasoline truckload
from my supplier, to be purchased tomorrow, will cost me $2.25 per
gallon. I will, if I can based on competition in my area, set a retail
price at my outlet today that will cover the higher price I will have
to pay tomorrow. If I don't, I will be forced to borrow money from my
company's banks to pay for tomorrow's gasoline. Such debt only
increases my cost of staying in business and adds to the upward
pressure on retail gasoline prices. It is a sound business practice for
a retailer to price today on the replacement cost of gasoline at the
outlet, not the cost of product actually at the outlet.
If instances of profiteering on this tragedy have occurred, federal
and state officials have ample legal recourse for dealing with those
bad actors, including Section 5 of the Federal Trade Commission Act.
Such behavior must not be tolerated now or in the future in our
industry or any industry.
However, just as such behavior must not be tolerated in our
industry, neither should the media or opinion leaders react to such
anecdotal reports by issuing blanket indictments of all motor fuel
marketers. Such generalizations may make for good ``sound bites,'' but
they do not reflect what is actually happening across the country and
unfairly damage the reputations of many companies that are struggling
to meet the challenges of the current crisis.
If the only thing you knew about my company was that I raised by
retail gasoline prices by over 50 cents per gallon last week, would you
suspect that I was attempting to profit from this crisis? Maybe. But
based on the information I have given you today, I trust that you would
reach a different conclusion after you had investigated the facts. I
urged this committee and your colleagues to gather the facts on last
week's gasoline supply and retail pricing situation before reaching
conclusions about my actions or the actions of other motor fuel
marketers.
As a final point with respect to retail pricing, I have one more
chart to share with you (Chart 6). This chart outlines the approximate
gross revenues that several different parties in the petroleum
exploration, refining, and distribution system realize from each barrel
of crude oil. Simply stated:
In August 2003, the royalty owner of the crude oil received
approximately $4 per barrel; in August 2005, the royalty owner
received about $8 per barrel;
In August 2003, the crude exploration and extraction company was
receiving approximately $28 per barrel of oil; in August 2005,
this company received about $67 per barrel;
In August 2003, a refiner was receiving around $11 per barrel; in
August 2005, this company received about $27 per barrel;
In August 2003, a gasoline retailer was receiving approximately $6
per barrel; in 2005, that retailer still received about $6 per
barrel; and,
In August 2003, a credit card company was receiving approximately
$1.50 per barrel; in 2005, that company is receiving
approximately $3 per barrel.1
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\1\ All information based on publicly available sources.
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Based on this information, I question whether it is appropriate to
single retailers out for pricing scrutiny.
VI. RECOMMENDATIONS FOR THE FUTURE
In 1996, Tom Robinson, a former president of SIGMA, offered the
following testimony before the Senate Energy Committee as part of a
hearing on ``Recent Increases in Gasoline Prices.'' ``The federal and
state governments regulate the gasoline refining and marketing industry
with little or no thought given to costs, distribution difficulties, or
market efficiencies. Congress must acknowledge that . . . the present
course will lead to further market disruptions and higher gasoline
prices at the pump.'' Mr. Robinson made that statement over nine years
ago.
Last year, I testified on behalf of NACS and SIGMA at a
subcommittee hearing of this committee and stated:
``Our nation's gasoline and diesel refining industry is
shrinking at a time when consumer demand continues to rise.
Unless we collectively change course, domestic refining
capacity will be unable to keep pace with demand, gasoline and
diesel fuel price spikes such as the one we have experienced
this year will become the norm rather than the exception, and
our nation will become more reliant on imports of gasoline and
diesel fuel to meet increased consumer demand in the coming
years. Congress has a choice, it can either pursue policies
that will encourage the expansion of domestic refining
capacity, or it can turn its gaze overseas for our nation's
future gasoline and diesel fuel needs.''
Unfortunately, both Mr. Robinson's and my predictions have come
true. Domestic refining capacity continues to shrink, wholesale and
retail motor fuel price spikes have become the norm rather than the
exception, and more of our nation's gasoline needs are being met by
foreign sources. NACS and SIGMA assert that it is time to stop talking
about these problems and do something about them.
In my opinion, the enactment of the ``Energy Policy Act of 2005''
(EPAct 2005) is a good first step towards addressing these problems. I
commend you, Mr. Chairman, and your colleagues for taking the lead in
making this important legislation a reality after five long years.
Specifically, your provisions gave the Environmental Protection Agency
the statutory authority to waive certain gasoline and diesel fuel
controls last week, providing the market with much needed flexibility
to move product between markets to mitigate supply disruptions. This is
an immediate example of the positive impact this energy bill had had on
the market.
There are other important provisions in the 2005 energy bill that
will assist in expanding domestic refining capacity and in mitigating
gasoline supply dislocations and price spikes, including:
Repeal of the reformulated gasoline program's oxygenate mandate;
Restrictions on creation of new ``boutique fuels'' which strain
refining capacity and the distribution system;
Authority for retailers to blend compliant RFGs for limited periods
each summer; and,
Federal tax incentives to encourage the expansion of domestic
refining capacity.
NACS and SIGMA urge this committee and this Congress to build on
the progress made through EPAct 2005 in the following ways:
Assure prompt implementation of the EPAct 2005 provisions outlined
above, including the joint Environmental Protection Agency and
Department of Energy Study on increasing gasoline and diesel
fuel supplies while protecting the environment;
Streamline permitting and siting procedures for expanding existing
domestic refining capacity and for the construction of new
grassroots refineries;
Adopt additional tax incentives to expand our domestic refining
capacity, or a federal government-led effort to site and build
three new 500,000 barrels per day refineries on federal lands
to augment domestic production;
Encourage increased price transparency and lower price volatility in
the nation's gasoline futures markets by increasing the number
of delivery points and product types under such contracts; and,
Investigate the pricing policies of credit card companies, whose
charges make up an ever-increasing portion of the price of
gasoline at retail outlets, particularly when gasoline prices
are high.
None of these recommendations will result in a substantial short-
term increase in gasoline supplies or retail price decreases. However,
if we do not undertake these initiatives now, we will be sure to repeat
the experiences of the past two weeks in the future.
vii. conclusion
Thank you for inviting me to testify today on this important topic.
I would be pleased to answer any questions my testimony may have
raised.
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Mrs. Myrick [presiding]. Thank you, Mr. Douglass. Thank you
very much. Mr. Smith. Welcome.
STATEMENT OF WILLIAM L. SMITH
Mr. Smith. Thank you. My name is Bill Smith, and I am the
Chief Technology Officer for BellSouth. The purpose of my
testimony today is to address the impact of Hurricane Katrina
on BellSouth's people and our network. I will describe the
damage that Hurricane Katrina has caused, which has been unlike
any other hurricane we have experienced, and I will give you a
status of the restoration efforts.
Given the area that we serve, BellSouth has dealt with
hurricanes for years; however, we rarely lost operational
status of an entire central office. Katrina has been very
different. We have lost service at some point during the storm
in 24 BellSouth central offices in the impacted area. The
majority of these central offices were in the New Orleans area
that was flooded. These central offices failed due to flooding
and logistical problems presented by the security in the area
and the ability to get fuel to the emergency generators.
Our operations in Florida, Alabama, Mississippi, and
Louisiana have all been impacted by Hurricane Katrina. In
places like Gulfport and Biloxi and New Orleans, the impact on
our customers, our employees, and our network have been
catastrophic, and restoration efforts are still encumbered by
flooding, debris, and security issues. In other areas of
Louisiana and coastal Mississippi and Alabama, we are well
under way in our restoration efforts and are progressing well.
In Florida, we are actually wrapping up our restoration efforts
and freeing up resources like generators and technicians to
move into the areas that are still impacted.
Let me move to the impact on our people. BellSouth has
approximately 13,000 employees in the States of Alabama,
Mississippi, and Louisiana, and approximately 6,500 of those
were in the impacted area. I am pleased to say that as of today
we have located all but 65 of those employees and we are
working very hard to find the others.
Immediately prior to Katrina, we took steps to ensure that
supplies and services would be on hand. We knew that employees
would be called upon to work around the clock, and, as Governor
Barbour said this morning, many of our employees actually lost
their own homes. So we established what we call BellSouth tent
cities that we can actually house, shelter, feed our employees
and their family, because we knew that we would be counting on
them to operate to help us restore our network. And, in fact,
we are currently operating six of these tent cities in the
impacted area and serving over 8,000 meals a day to provide
assistance for our employees and their families.
Let me move to the impact on our network. Our network
operations team actually started tracking Hurricane Katrina as
early as August 23. We began making preparations for landfall
in south Florida as a Category 1 hurricane. That actually
occurred on Thursday evening, August 25. Then we tracked
Katrina as she became a Category 4, 5, and then made landfall
as a Category 4 storm in New Orleans or just east of New
Orleans at approximately 2 p.m. on Monday, August 29. There
were reported wind speeds of over 145 miles an hour and the
storm surge was reported as high as 25 feet.
I have this chart you can see that we have used to assess
the impact on our network. We have categorized the damage in
geographic areas as catastrophic indicated by red, severe
indicated by yellow, or moderate indicated by green. We have
restoration efforts well under way in the green areas and are
moving into the yellow areas and the red areas as well. The
unique problem that we have experienced with Katrina has been
the severe flooding, particularly in New Orleans. It is not
unusual in these situations for a central office to lose its
commercial power and for BellSouth to continue to provide power
using generators. These generators, however, require fuel and
they require technician access to maintain them. With Katrina,
the continued flooding and security issues severely hampered
our ability to maintain our network as we would normally do.
Now, I will spare you a lot of the details, but suffice it
to say that our experience in New Orleans' main central office
at 840 Poydras Avenue was an example of what we saw. We
actually had 82 people in that office working to man our
equipment and our emergency operations center. And everything
was fine until the flooding started after the hurricane. At
that point and subsequently, we were advised that there was
gunfire in the area, it was not safe to keep our employees
there, so we actually made arrangements to evacuate those
employees with heavily armed State police. We later got FBI and
Federal Marshal protection back into the area to secure the
central office, and had heavily armed convoys taking fuel and
water back into the location. Obviously, that is not something
that we normally see in normal hurricane restoration
activities. I am happy to say, however, that office has
maintained operational status throughout this period.
Nevertheless, with all these difficulties, we have made
huge strides to restoring our network. As of yesterday morning
we actually had 506,000 lines remained out of service, and that
is less than one-fourth of the original number. We have
restored service to all but 18 of those central offices that
were impacted.
Now, let me move to what we can ask from the government for
help. Overall, the cooperation and assistance from state,
local, and Federal agencies has been very good. The FCC led by
Chairman Martin has been extraordinarily helpful. They have
reached out to offer assistance in many areas, in particular,
waiving rules that would have hampered our ability to restore
service in a quick manner. We will continue to need this kind
of assistance. The Louisiana and Mississippi Public Service
Commissions have also stepped up to provide assistance, as well
as the Department of Homeland Security, the White House, and
the Department of Defense, Northern Command. We have also had
great cooperation from the FAA, the Bureau of Alcohol, Tobacco,
and Firearms as well as the U.S. Marshal Service.
Right now we need three things. First, we need safe access
to our facilities and adequate security for our personnel.
Second, it will take many months for us to complete our repair
work even though we will be working around the clock. We have
engaged and restored 22 hurricanes since 1992, including storms
such as Hugo, Andrew, and now Katrina. Congress and the private
sector alike should be cautious about building unrealistic
expectations about how quickly we can fully recover from the
impact of this storm.
Third, the government needs to recognize that the cost to
BellSouth to restore these communications infrastructure items
will be significant. We have estimated those costs to be
between $400 and $600 million. Now, to put this in perspective,
the storms that we experienced last year, the four hurricanes,
cost $200 million, and we are still in the middle of the
hurricane season. So restoration of this infrastructure will
require that we deploy capital not as a cost plus utility but
in a very competitive industry. We will deploy this with other
companies, depending on our facilities, despite the fact that
we don't share the burden of this restoration between those
companies.
Thank you.
[The prepared statement of William L. Smith follows:]
Prepared Statement of William L. Smith, Chief Technology Officer,
BellSouth
I. INTRODUCTION
My name is Bill Smith, and I am the Chief Technology Officer for
BellSouth. BellSouth is a full-service communications company providing
service to customers in the nine southeastern states of Alabama,
Florida, Georgia, Kentucky, Louisiana, Mississippi, North Carolina,
South Carolina, and Tennessee. I have worked for BellSouth for 26
years, and in my current position I am responsible for overseeing the
planning of our overall network, integrating new technology into our
network, and ensuring the interoperability between our networks and
those of other carriers.
The purpose of my testimony is to address the impact of hurricane
Katrina on BellSouth's people and our network. I will describe for you
the damage that Katrina has caused, which is unlike any hurricane
BellSouth has experienced, and to give you the current status of our
restoration efforts. What I will give you today is a snapshot--the
situation changes literally every few minutes, as power is restored,
flood waters recede, field surveys occur, and repairs are made.
Furthermore, because we are still assessing the full impact of the
storm on our network and our customers, our damage estimates are
preliminary. It will take some time for us to know with certainty the
total magnitude of the destruction caused by hurricane Katrina.
Given where our network is located, BellSouth has dealt with
hurricanes for years. However, with most hurricanes, from Camille to
Andrew, we rarely lost operational status for an entire central office.
A central office is a building that houses the switching and
transmission equipment for a geographic area; it is usually the first
``building'' that all of the wires coming from houses and offices go in
connecting to BellSouth's regional network.
But Katrina was different. Based on what we know today, we lost
service in 24 of BellSouth's central offices in the impacted area. Some
of these offices were located in coastal Mississippi and were destroyed
by the storm surge when Katrina came ashore. The vast majority of
BellSouth's central offices that are currently out of service are
located in greater New Orleans. These central offices failed due to
flooding and logistical problems presented by security on the street.
The flooding and security issues that BellSouth has had to confront is
what makes Katrina different from other hurricanes--both in terms of
impact to the network and on our ability to restore service.
Operations in Florida, Alabama, Mississippi and Louisiana, all have
been impacted by hurricane Katrina. As I will describe in more detail
below, we have 3 different types of restoration efforts underway. In
places like Gulfport and Biloxi, Mississippi and New Orleans, the
impact on our customers, our employees and our network have been
catastrophic and basic restoration is still encumbered by flooding,
debris and security issues. In other parts of Louisiana, coastal
Mississippi and Alabama, we are well into our restoration efforts and
progressing well. In Florida, we are wrapping up our restoration
efforts, and freeing up resources like generators, and of course
technicians, to move to the other areas where they are needed.
As is standard operating procedure for us during hurricane season,
on August 23, BellSouth's network operations team began tracking
Tropical Depression 12, then located over the southeastern Bahamas with
35mph winds, moving northwest at 10 mph. This is business as usual for
us, but none could have imagined what was to follow. There are two
integral pieces to this story: the network, and the people. I plan to
first walk you through the people side of this story, because without
our people, we would have no company and no network. It is our
employees who make BellSouth what it is.
II. KATRINA'S IMPACT ON PEOPLE
BellSouth has about 13,000 employees in the states of Alabama,
Mississippi, and Louisiana, approximately 6500 of whom were in the
hardest hit areas affected by the storm. As of now, we have located or
made contact with all but about 110 of those employees, and we are
making every effort to locate these employees. Prior to Katrina,
BellSouth already had in place an 800 number for BellSouth employees to
call to report their status in the event of an emergency and a separate
number employees could call to get emergency information. Immediately
prior to Katrina, we also took steps to ensure adequate supplies and
services were on hand, sending non-perishable food to strategic areas
where employees could be stationed, setting up structural materials
including tents, showers, toilets, tables, and chairs, and engaging
janitorial and guard services. Our experience with prior hurricanes has
taught us that our employees will be called upon to work round the
clock, and they can best perform the extraordinary tasks expected of
them if their basic needs for food, shelter and the safety of their
family are addressed.
As Katrina hit the Gulf Coast on August 29th, we assessed potential
locations for what we call BellSouth tent cities--stations where
employees in affected areas could seek shelter, receive food, ice,
water, showers, laundry services, air mattresses, linens and clothing,
medical care and financial loans. In addition, we had on hand access to
our employee assistance program to provide counseling services as
needed. The first tent city was set up in Gulfport, Mississippi on
August 30th, a second opened in Baton Rouge on September 1st, and a
third on September 2nd in Covington, Louisiana. With the addition of
tent cities in Hattiesburg and Jackson, Mississippi, and Kenner,
Louisiana by the end of this week, BellSouth will be operating six tent
cities that will serve over eight thousand meals daily, and provide
assistance for our employees and their families, including medical
care.
III. KATRINA'S IMPACT ON BELLSOUTH'S NETWORK--RESTORATION EFFORTS
1
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\1\ Because restoration efforts in Florida are mostly complete, the
network impacts in section III will focus on operations in Alabama,
Mississippi, and Louisiana.
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BellSouth has 1591 central office buildings across its region. 578
of these central office buildings are located in Alabama, Louisiana and
Mississippi. As we do with every storm, our network operations team was
tracking Katrina as early as August 23, and began making preparations
for potential landfall in the Florida Gulf Coast area. Because our
network equipment requires power to operate, our standard hurricane
procedures include ensuring that generators are in working order and
fuel tanks filled for our central offices and our key administration
offices, closing shutters and sealing windows, sandbagging critical
facilities, and making arrangements for additional generators where
needed.
Despite these precautions, Katrina brought considerable damage to
BellSouth's network. Katrina first made landfall in South Florida as a
Category 1 hurricane on Thursday evening, August 25, and caused
considerable damage to the area. Katrina, a Category 5 hurricane that
dropped to a Category 4 just before landfall, made landfall in our
operating area for the second time at approximately 2 p.m. on Monday,
August 29, just east of New Orleans. In some areas, winds exceeded 145
miles per hour and the storm surge was reported as high as 25 feet. In
assessing the impact on our network, we have categorized damage to
geographic areas caused by Katrina as ``catastrophic'', ``severe'' or
``moderate''. The ``catastrophic'' areas are red on the map attached as
Appendix 1; severe areas are yellow; and moderate areas are green. Much
progress has already been made restoring service in the ``moderate''
areas of the region.
In the Gulf region of Mississippi, Alabama, and Louisiana, we had
4.9 million access lines prior to the storm. Of those 4.9 million
lines, 1.6 million were in the red zone, 782,000 were yellow and 2.6
million were green. A snapshot on August 30 after the storm estimated
that 2.475 million lines were actually affected. All 1.6 million lines
in red zones were affected; 500,000 of the 782,000 lines in yellow
zones were affected; and 440,000 of the 2.6 million lines in green
zones were affected. Details on a state by state basis are attached as
Appendix 2.
The unique problem that BellSouth has experienced with Katrina is
that the severe flooding, particularly in New Orleans, has made it
difficult to get a clear assessment of the extent of the damage. Normal
hurricanes have an initial surge, the water recedes, power begins
restoration, and we follow power with sweeping telecom restoration
resources. When the levees broke in New Orleans, the water did not
recede. The flooding has greatly complicated our restoration efforts.
In most hurricanes, it is not unusual for a central office to lose
commercial power and for BellSouth to continue providing service using
generators. Those generators require fuel, and we have to be able to
get our network technicians to those central offices in order to ensure
that the generators are fully fueled and operating correctly. With
Katrina, we have 24 central offices that are without commercial power
and are operating under generators. However, because of the continued
flooding we have not been able to access or support many of these
central offices in New Orleans as we would in normal hurricane
restorations.
Our experience in the New Orleans Main Central Office at 840
Poydras Street gives a sense of the situation on the ground. BellSouth
employees began staffing an Emergency Operations Center (EOC) on the
12th Floor of the building on Sunday, August 28. The office lost power
and engaged generators when the storm hit on Monday, but occupants
breathed a sigh of relief that there was no flooding. Then, the levy
broke and conditions rapidly deteriorated on Tuesday. Technicians and
engineers in the office were trying to re-establish service and
maintain power by keeping the generators fueled and running. As the
situation in New Orleans deteriorated with violence and looting, the
New Orleans police and the Louisiana State Police told us to evacuate
the building. There was gunfire in the area and it was therefore unsafe
for our employees to remain in the area. At 3:00 p.m. CST, the
Louisiana State Police arrived and provided us with an armed escort so
we could leave the building. We moved to Baton Rouge and, concerned for
the security of the building, we arranged for FBI agents to take
occupancy of the building at approximately 9:00 that evening. By Friday
morning, the Louisiana State Policy and the FBI occupied the building.
At that time, we began armed and escorted caravans to the building to
bring fuel for the generator, water for the coolers, and BellSouth
personnel to maintain the equipment. We are not yet back to full
support but have managed to keep this key switch operations despite the
flooding and security concerns.
And another example heroic story rises out of the coastal town of
Gulfport, MS. On September 3, a brick wall protecting the main
generator keeping the central office alive started to give way. Nine
workers from that central office ran from the basement, where they had
been working while riding out the storm, to the rooftop room and
fortified the walls with whatever they could find--plastic tarps,
plywood and even the cardboard from a science project of one worker's
son.
Nevertheless, we have made huge strides towards restoration of
communications capabilities. As of the morning of Tuesday, September 6,
506,000, less than one-fourth of the original 2.475 million lines,
remained impacted. Only 4,900 of the 440,000 lines remained impacted in
the green areas; 23,200 of the 500,000 lines in the yellow zone
remained impacted; and 478,500 of the 1.6 million lines in the red
zones remained impacted.
As of September 6, we have restored service to all but 20 central
offices. This restoration is due to the tireless efforts of our
employees on the ground who are working around the clock with a single
minded mission of restoring communications to these hard hit areas, and
to the efforts of our wireless and wireline industry colleagues who
have partnered with us with an unwavering commitment to enable
communications.
Of course, other carriers rely upon BellSouth's network in order to
provide service to their customers. We have an Emergency Control Center
in Atlanta, which is the control center from which we are coordinating
our hurricane response, overseeing network restoration efforts, and
working with other carriers to restore communications. We are
coordinating a contingent of impacted carriers with one mission--to
make communications work. We collaborated with other carriers, without
regard to ownership or jurisdiction, and brokered capacity and worked
through technical issues. We conduct two daily calls--one with wireless
carriers and one with wireline carriers. Using our network data and
resources we assisted in developing a joint wireless restoration plan,
now underway, bringing competitive service providers together to serve
a single goal of restoring communications. A joint industry team has
agreed on a list of prioritized sites and are working together to
restore wireless service to these sites in the New Orleans area. This
has included traveling by boat to several of the sites in order to
survey what equipment is needed to restore service. They traveled by
boat to survey sites on Sunday and Monday, and may have already enabled
communications from some of these towers while I am speaking with you.
This has been a remarkable collaborative effort.
In terms of restoration priority, we have been and continue to
focus our support on public safety concerns, including hospitals, E-911
centers and law enforcement. Following the storm, in Florida and
Alabama, there were no E-911 centers that incurred outages. For
Mississippi, service was impacted to 43 E-911 centers, and service to
all 43 centers has been restored on site or by re-routing the calls to
other centers. In Louisiana, 35 E-911 centers were impacted, and 28 of
these are back in service, either partially on site or through re-
routing of calls to other centers. Seven of the centers are out of
service. Of the 7 E 911 centers that remain out of service, all are
located in the New Orleans area and are served by the Franklin tandem,
which is flooded. Four of the centers are located in Plaquemine and St.
Bernard parishes, low lying parishes along the Mississippi River below
New Orleans which were in the eye of the storm as it came inland.
We are continuing to work around the clock to restore service. Our
restoration efforts involve surveying the damaged area. That activity
is approximately 80% complete. Next we concentrate on restoration of
highest priority circuits, specifically those which support public
safety including hospitals, E911 centers and law enforcement. Then we
focus on supporting other carriers, including the wireless industry.
IV. NEEDS FROM GOVERNMENT
What can the government do to help? The cooperation and assistance
from local, state and federal agencies overall has been good. The FCC,
led by Chairman Martin, has been extraordinarily helpful. The FCC has
reached out to offer assistance in many areas: waiving rules that will
help customers who are without service; taking actions that have and
will allow for the quick restoration of network facilities (including
the emergency routing of traffic over whatever facilities are available
for use); and helping with the publication of ``find me'' numbers to
help locate BellSouth employees. We will continue to need this type of
help, particularly related to the efforts to restore communications in
Louisiana and the Mississippi Gulf Coast areas. The magnitude of the
damage will present unique issues that will need to be resolved quickly
and efficiently in order to restore service.
The Louisiana and Mississippi Public Service Commissions have also
stepped up to provide assistance to the industry in efforts to assess
damage, maintain the operation of the remaining network, and restore
service to impacted areas.
BellSouth has been extremely engaged with the Department of
Homeland Security's Infrastructure Protection Directorate, headed by
Bob Stephan, and most specifically, DHS's National Coordinating Center
(NCC). The NCC, which is a division of the National Communications
System of DHS, provides a focal point for industry and the Federal
government to share operational information and coordinate needs to
respond to crises just like this. BellSouth maintains an office at the
NCC headquarters, along with many other major wireline, wireless, and
satellite providers.
Our representatives there work around the clock to facilitate
response efforts for FEMA, DHS, the National Guard, State Emergency
Management Agencies and Operations Centers, NORTHCOM, and many other
organizations. On industry's behalf, the NCC works through a myriad of
concerns, with security and fuel at the top of the list, along with
abatement of the flood waters. Industry has also worked together to
coordinate fuel convoys, search and rescue, network impacts, and
logistics. It's been an outstanding example of the public-private
partnership in action.
Through the NCC, and through direct sources, BellSouth has been in
communication with the Department of Energy and the Nuclear Energy
Regulatory Commission (NERC), which has provided status information on
power and electricity. The White House Executive Office of the
President has also been strongly supportive in responding to specific
issues that required support. We have had good coordination and
information from the FAA and DHS on aviation needs. The Department of
Defense's Northern Command has also been very helpful, providing
information, support, and logistics as well. BellSouth has also had
outstanding security support from the Bureau of Alcohol, Tobacco and
Firearms, as well as the US Marshal Service, which were coordinated
through FEMA. Keith Hennessey--Deputy Director of national Economic
Council at the White House Executive Office of the President, helped
BellSouth get the employee hotline number that I described earlier
publicized on Fox, CNN, and MSNBC Cable networks, as well as Direct TV
satellite network.
Right now, we need several things. First, we need safe access to
our network facilities. This will require the abatement of the flooding
in New Orleans, which I understand is underway. Once the flood waters
have receded, we need adequate security measures to ensure the safety
of our technicians trying to assess and conduct repairs.
Second, it will take many months for BellSouth to completely repair
the damage caused by Katrina. We will continue to work around the clock
to restore service to our customers as they have rebuilt and are ready
to be served. BellSouth has engaged and restored 22 hurricanes since
1992, storms such as Andrew, Hugo and now Katrina. Congress and the
private sector alike should be cautious about building unrealistic
expectations about how long it takes to fully recover from a storm
packing the furor of a Katrina.
Third, the government needs to recognize that the cost to BellSouth
to restore the communications infrastructure will be significant.
BellSouth has estimated that the cost to restore our network as a
result of hurricane Katrina will be between $400 and $600 million. By
comparison, the cost to BellSouth of the damage caused by the four
hurricanes that hit Florida last year was approximately $200 million.
And, of course, we're still in the middle of the hurricane season, and
the long term impacts of the flooding in New Orleans are hard to
estimate.
Restoration of our near ubiquitous infrastructure will demand that
we deploy capital, not as a cost plus utility, but as a company in a
very competitive industry. We will be expected to rebuild without
knowing what our ultimate demand will be. And, we will rebuild this
network in an environment where many companies depend on our network
for providing service to their customers, but policy doesn't equally
distribute the burden of restoration among all players. The FCC has
been very helpful in waiving rules that hamper restoration. We will
need continued focus from the policy community on rules and regulations
that hamper access to capital. Timely restoration requires that we
spend this money now, well in advance of knowing what people and
businesses will actually return to affected areas, and when.
Mrs. Myrick. Well, thank you for what you have done. And
also, please thank your employees for their commitment as well.
It is important to all of us, and I know it means a great deal.
Mr. Lashof.
STATEMENT OF DANIEL A. LASHOF
Mr. Lashof. Thank you very much, Madam Chairwoman, and
members of the committee, I appreciate the opportunity to
participate in today's hearing. And first let me add my voice
to those of the other witnesses and members of the committee in
expressing deep sympathy for the victims of Hurricane Katrina
and great appreciation for the emergency responders who are on
the ground struggling to restore service and provide emergency
services.
While Katrina has produced a horrendous catastrophe along
the gulf coast, its impact has also rippled across the country.
And, for many Americans, that has been most evident in the
price of gasoline. Both immediate and long-term responses are
needed to address the fundamental vulnerability that Hurricane
Katrina has revealed. But let me start with the Hippocratic
Oath: In searching for the right responses, let us first do no
harm. Let us be sure that we avoid counterproductive actions
that don't actually address the real problems, and would
needlessly expose people to higher pollution levels and harm to
the environment.
First let me address fuel standards which we have discussed
here. Certainly EPA's prompt action to temporarily waive
certain fuel requirements has ensured that these standards are
not responsible for the increases in gasoline prices that
consumers have seen during the last week. It also shows that
EPA has the statutory authority that it needs to respond to
supply disruptions and other emergencies. No permanent changes
in the Clean Air Act can be justified based on the aftermath of
Katrina, and responsible policy and law require the clean air
waivers should not be extended any longer than necessary to
respond to the immediate supply disruptions. If Congress does
wish to reduce the number of fuel specifications to provide
additional flexibility in the market, it should harmonize these
standards upwards by making it easier for States and regions to
opt in to Federal formulated gasoline programs and protect
their citizens with clean air.
Turning to refinery capacity, similarly, while it may be
desirable to increase refinery capacity, particularly outside
the gulf region, there is no justification for relaxing
environmental requirements in order to site new refineries.
There simply is no credible evidence that environmental
requirements have played a significant role in the economic
decisions that refiners have made to consolidate and to reduce
spare capacity. We have heard other testimony that it is
primarily an economic driver with respect to margins. In fact,
in response to an inquiry from the ranking member of this
committee, EPA has said that there are no pending applications
to restart any of the refineries that have closed since 1980.
And with respect to new refineries, the only application that I
am aware of, which is the Yuma facility which has been
mentioned here in Arizona, it has actually already received an
air permit which was granted less than 1 year after a complete
application was submitted.
Now, let me turn to the Arctic Refuge, where we have heard,
since Katrina, renewed cause to open the Arctic National
Wildlife Refuge to oil exploration and production. And these
are also impossible to justify based on the short-term supply
disruption caused by Katrina. Even if you take EIA's optimistic
estimates of potential annual production from the Arctic
Refuge, drilling would affect by their estimate gasoline prices
by less than 1.5 cents per gallon and then not until 2025. As
shown in my exhibit, oil from the Arctic Refuge would be a drop
in the bucket--it is the red curve there just hugging the
bottom--compared with the oil demand reduction we could achieve
with a national commitment to oil savings which I will address
in a minute.
We need a national commitment to reduce our dependence on
oil because currently our dependence is very dangerous to our
security and economy. With only 3 percent of the world's oil
reserves and 25 percent of the world's oil demand, there is no
way for the United States to drill its way into energy
security. The only effective way to reduce our vulnerability to
oil price shocks is to significantly reduce our dependence on
oil.
This is true for family budgets as well as for the national
energy security. For example, for an average family driving
2,500 miles a month, a $1 gallon run-up in gasoline prices as
we have seen in recent weeks takes $120 out of their monthly
budget if they are driving vehicles that average 21 miles per
gallon; but it would only take $60 out of their budget if those
vehicles average 42 miles per gallon, which is within our
technical capability.
Turning to short-term action, to respond to the short-term
disruption in oil, I believe the President should call on the
Nation to conserve gasoline. And I don't think it is enough for
him to simply say people shouldn't buy gasoline if they don't
need it. The President should specifically ask for consumers to
pitch in by taking five immediate and relatively simple steps
that would save 7 percent of our gasoline demand: First, by
keeping tires inflated; second, by sticking to the speed limit;
third, by reducing engine idling; fourth, by using car pools,
transit, and telecommuting; and, fifth, by keeping cars tuned
and using efficient engine oils. These are sensible steps that
all Americans can take that can help us all through this short-
term problem.
To reduce our vulnerability and increase our security in
the future, a broad coalition called Set America Free, which
involves national security organizations, religious leaders,
and energy experts, calls on Congress to establish a minimum
national commitment to reduce our oil commitments by saving 2.5
million barrels of oil a day within a decade and 10 million
barrels of oil a day by 2025. We can achieve that with a
combination of diversifying our supplies away from petroleum,
using biofuels that Mr. Shimkus has mentioned earlier in the
hearing, as well as American know-how and technology to make
sure that every gallon of fuel that we use is used with the
utmost efficiency. By doing that, we could save more than 15
times as much as the production from the Arctic Refuge could
potentially deliver cumulatively over the next 20 years.
Equally important, in contrast to oil savings, Arctic
Refuge drilling would do nothing to insulate our economy from
the effects of future oil supply disruptions, because those
would ripple through the economy and affect the price that
everyone pays regardless of how much crude oil we import or how
much comes from domestically because we have national and
global markets.
So, in conclusion, Mr. Chairman, I believe that there are
short-term measures that we should call on all Americans to
take to pitch in to help us through the immediate supply
disruption. In the longer term, we need a real commitment to
oil savings, and we should move forward with approaches that
really respond to the problems we have and not use the short-
term crisis to justify permanent changes that are
inappropriate.
Thank you.
[The prepared statement of Daniel A. Lashof follows:]
Prepared Statement of Daniel A. Lashof, Senior Scientist, Natural
Resources Defense Council
INTRODUCTION
Thank you Mr. Chairman. My name is Daniel Lashof and I am a senior
scientist at the Natural Resources Defense Council. I appreciate the
invitation to participate in today's hearing.
Mr. Chairman, it is now clear that hurricane Katrina is among the
worst natural disasters in American history. My deepest sympathy goes
to the victims and their families and my deepest respect goes to the
emergency workers who are struggling to provide relief in almost
unimaginable conditions.
While Katrina produced a horrendous catastrophe along the Gulf
Coast its impact has also rippled across the country. For many
Americans this is most evident in the price of gasoline. For some of us
this is an annoyance that means that our Labor Day trip to the beach
was a little more expensive than we had anticipated. But for millions
of low-income Americans higher energy costs have thrown carefully
balanced family budgets out of whack, creating real hardship.
With tempers running short as some motorists have watched the price
of gasoline increase as they were waiting in line to fill up, it is
natural to look for someone to blame. I urge that we resist the
temptation to offer simplistic explanations or simplistic solutions.
Where there is evidence of price gouging it should be investigated and
prosecuted to the full extent of the law. But we also need both
immediate and long-term responses that address the fundamental
vulnerability that hurricane Katrina revealed.
FIRST, DO NO HARM
Some argue that America should open its wild lands for oil
exploration and drilling or relax environmental safeguards to reduce
gasoline prices and U.S. dependence on imported oil. But these are
inappropriate, wasteful, and ineffective responses to the aftermath of
Katrina.
EPA's prompt action to temporarily waive certain clean fuels
requirements has ensured that these standards are playing no role in
the gasoline price increases that consumers have seen during the last
week. EPA's action also demonstrates that current law already provides
the necessary authority to respond to short-term supply disruptions. No
permanent changes to clean air laws can be justified based on the
aftermath of Katrina, and responsible policy and the law require that
clean air wavers should be extended no longer than necessary to respond
to the actual supply disruption. If Congress wants to reduce the number
of different fuel specifications it should make it easier for states
and regions to adopt the federal reformulated gasoline program, and not
lock in the use of dirtier conventional fuels.
Some have cited a decline in the number of refineries operating in
the United States as evidence that environmental regulations have
discouraged investment in new capacity, driving up gasoline prices. The
facts do not support this claim, however. While the total number of
refineries has declined, total capacity has increased as refiners have
found it to be more cost effective to expand capacity at existing
facilities than to operate small refineries or build new green field
plants. Refiners have also consciously sought to reduce excess capacity
to improve refinery margins. Environmental permitting has not played a
significant role in these decisions. In response to an inquiry from the
Ranking Member of the Committee, EPA has said that there are no pending
environmental permit applications from any of the U.S. refineries that
closed since 1980.1 With regard to new refiners, the record
shows that in the case of the proposed facility in Yuma, Arizona, an
air quality installation and operating permit was granted by the
Arizona Department of Environmental Quality less than a year after a
complete application was received.2
---------------------------------------------------------------------------
\1\ Letter from Charles Ingebretson, EPA Associate Administrator,
to Congressman Dingell, dated September 29, 2004.
\2\ The permit was granted on April 14, 2005. Letter from Nancy
Wrona, Director Air Quality Devision, Arizona Department of
Environmental Quality, to Jeff Donofrio, Committee on Energy and
Commerce Democratic Staff, dated July 29, 2004 shows that the complete
application was received on July 14, 2004.
---------------------------------------------------------------------------
Similarly, renewed calls to open the Arctic National Wildlife
Refuge to oil exploration and production are also impossible to justify
based on the short-term supply disruption caused by Katrina. Although
drilling advocates claim there is potentially 16 billion barrels of oil
in the Arctic National Wildlife Refuge, this figure is an upper bound
estimate (one-in-twenty chance) for the amount of oil that is
potentially recoverable, regardless of extraction costs. Using a price-
adjusted mean estimate (which better represents the basis for
production decisions regarding potential future discoveries), the
actual amount of oil that is economically extractable would be far
less. Investment decisions would be made based on expectations of long-
term average prices, which are far lower than current peaks. For
example, at $40 per barrel the economically recoverable total would be
about 6.7 billion barrels. Moreover, it would take 10 years for any oil
from the Arctic Refuge to reach the market. Even during the predicted
production peak in 2027, the coastal plain would produce about 3
percent of America's daily oil demand.3 Even with EIA's
optimistic estimate of potential annual production from the Arctic
Refuge, which is much higher than can be justified by actual experience
with North Slope fields, drilling would affect gasoline prices by less
than 1.5 cents per gallon in 2025.4
---------------------------------------------------------------------------
\3\ Arctic National Wildlife Refuge production analysis conducted
by Richard A. Fineberg (Principal Investigator, Research Associates),
January 2005.
\4\ U.S.DOE/EIA. Impacts of Modeled Provisions of H.R.6 EH. h. EIA
estimates that allowing drilling in the Arctic Refuge will reduce world
oil prices by $0.57 per barrel in 2025. Assuming a one-to-one impact on
gasoline prices, this translates into $0.57/42 = $0.014 per gallon.
---------------------------------------------------------------------------
A national commitment to oil savings could yield more than 15 times
as much as production from the Arctic Refuge cumulatively over the next
20 years (see exhibit). Equally important, in contrast to oil savings,
Arctic Refuge drilling would do nothing to insulate our economy from
the effects of future oil supply disruptions, which would ripple
through the oil market and affect the price of domestic and imported
crude equally.
DANGEROUS DEPENDENCE
Our fundamental vulnerability is rooted in America's dangerous
dependence on oil. Thirty years after the first Arab Oil Embargo our
transportation sector remains 97 percent dependent on oil; imports
account for over half of our supply; and our vehicle fleet remains
woefully inefficient. In fact, after increasing from 13.1 to 22.1 miles
per gallon between 1975 and 1987 the average fuel efficiency of new
personal vehicles has actually declined to 21 miles per gallon in 2005,
according to the latest government report.5
---------------------------------------------------------------------------
\5\ Light-Duty Automotive Technology and Fuel Economy Trends: 1975
Through 2005. EPA420-R-05-001. July 2005.
---------------------------------------------------------------------------
As a result of rising global demand, particularly in the United
States and China, and unrest in the Middle East and other major oil
producing areas, oil markets were already tight before Katrina struck.
Refinery acquisition costs for crude oil had more than doubled from $24
per barrel in 2002 to almost $53 per barrel in July 2005.6
China's 32 percent, or 1.6 million barrel per day, increase in oil
consumption between 2001 and 2004 was the largest single factor
increasing global demand, but the United States was not far behind.
Although U.S. consumption grew by only 5.5 percent over this period,
that represented more than a 1 million barrel per day increase due to
our much larger consumption base.7
---------------------------------------------------------------------------
\6\ U.S. Department of Energy, Energy Information Administration.
http://www.eia.doe/pub/oil_gas/petroleum/data_publications/
petroleum_marketing_monthly/current/txt/tables01.txt Accessed September
2, 2005.
\7\ U.S. Department of Energy, Energy Information Administration.
http://www.eia.doe.gov/emeu/ipsr/t24.xls Accessed September 2, 2005.
---------------------------------------------------------------------------
With only 3 percent of the world's oil reserves and 25 percent of
the world's oil demand, there is no way for the United States to drill
its way to energy security. The only effective way to reduce our
vulnerability to oil price shocks is to significantly reduce our
dependence on oil. For example, if the fuel efficiency of our personal
vehicle fleet was 42 miles per gallon today, rather than 21 miles per
gallon, U.S. oil demand would be lower by 4 million barrels per day,
oil markets would have spare capacity, and the impact of any gasoline
price spike would be far smaller. For an average family driving 2500
miles in a month, a $1/gallon run up in gasoline prices takes $120 out
of their monthly budget at 21 miles per gallon, but only $60 at 42
miles per gallon.
Unfortunately, neither the energy bill enacted last month nor the
fuel economy standards proposed on August 23rd will achieve substantial
oil savings.
The United States needs to make a national commitment to reduce our
oil dependence, through both immediate conservation measures and
through investments that increase our efficiency and diversify our
sources of fuel.
IMMEDIATE CONSERVATION MEASURES
During the Second World War, Americans met our nation's energy
challenges with an unprecedented spirit of conservation, using every
gallon of gasoline wisely. Californians showed again during the
electricity crisis in 2001 that the conservation spirit is alive and
well today, responding by cutting their power demand by 10 percent
without any draconian measures.
The President should announce a ``National Emergency Gasoline
Conservation Program'' to respond to the short-term supply disruption
caused by Katrina. There are five simple steps American consumers and
businesses could begin taking immediately to reduce gasoline
consumption. These steps could cut gasoline consumption by several
percent, helping to relieve gasoline shortages, save money, and cut
pollution at the same time.
In contrast to drilling in the Arctic National Wildlife Refuge,
which would not begin to produce oil for many years, these measures
would yield immediate benefits.
1. Check tire pressure.
More than a quarter of all cars and nearly one-third of all SUVs,
vans, and pickups are driven with tires at least 8 pounds below
their proper levels, according to a new survey by the
Department of Transportation.
If all Americans kept their tires properly inflated, our nation would
cut its gasoline use by 2 percent.
Maintaining the correct tire pressure also would save lives. Under-
inflated tires are more prone to tread separation and blowouts,
which can cause fatal accidents.
Congress should help by authorizing the president to require all
service stations to offer free air and to post prominent signs
and stickers that say, ``Check your tire pressure every time
you fill up--For your safety and America's energy security.''
2. Obey the speed limit.
Slowing down from 75 to 65 miles per hour would reduce highway
gasoline consumption by about 10 percent.
If Americans followed the speed limit on our nation's highways, we
would cut total national gasoline use by about 2 percent.
Slowing down also would save lives.
Congress should provide extra funding for states that strictly
enforce speed limits and post signs that encourage slower
driving: ``Drive 65--for your safety and America's energy
security''
3. Turn off the car engine while waiting in line.
Americans who run their engines while they are parked or waiting in
line waste as much as 4 million gallons of gasoline every day,
according to the U.S. Department of Energy.
Drivers cannot avoid idling in traffic jams, but they should turn off
their engines while parked or waiting at drive-in windows. If
the wait is longer than 30 seconds, starting up a car again
uses less gasoline than leaving it running.
If drivers turned off their engines while parked or waiting in line,
we would cut national gasoline use by about 1 percent.
Congress should help by authorizing the president to require parking
lots, banks, fast-food restaurants, and other drive-through
stores to post signs stating: ``Turn off your engine while you
wait--for cleaner air and America's energy security''
4. Use car pools and public transit, and telecommute.
If each commuter car carried just one more passenger once a week, we
would cut gasoline consumption by about 2 percent. That would
translate into big savings for the average American worker.
Someone with a daily commute of 10 miles each way and a 20- mpg
vehicle would save 236 gallons of fuel per year by opting to
carpool, telecommute or use transit, according to the American
Public Transportation Association.
A study in Minneapolis-St. Paul found that more than one in 10
employees shifted from driving to some other way of commuting
when offered tax-free commuter benefits equal to those provided
in the form of free parking.
Congress should promote commuter choice with a tax-free benefit for
employees who car-pool, use transit, bike to work, or
telecommute (currently limited to $100) equal to that provided
in the form of free parking (currently limited to $175). The
federal government also should support and promote Web sites
that help commuters find drivers traveling similar routes at
similar times. Posters at workplaces could say: ``Car pool or
ride the bus--for America's energy security'''
5. Keep cars tuned and use fuel-efficient engine oil.
A poorly tuned or poorly maintained engine can increase gasoline
consumption by as much as 10 to 20 percent.
Following the recommended maintenance schedule in your owner's manual
will save drivers fuel and cars will run better and last
longer.
Motor oils with additives that reduce friction may increase a
vehicle's fuel economy by 3 percent or more. Fuel-efficient
oils are marked with an ``Energy Conserving'' label by the
American Petroleum Institute (API).
Congress should authorize the president to require service stations
to post prominent signs trumpeting the benefits of keeping cars
tuned and using fuel-efficient oil. Signs could say: ``Keep
your car tuned to save gas for America's energy security'' and
``Use fuel-efficient motor oil to save gas for America's energy
security''
A NATIONAL COMMITMENT TO REDUCE OIL DEPENDENCE
To reduce America's vulnerability to future oil supply disruptions,
whether from natural disasters, war, or terrorist attacks, we need to
make a national commitment to invest in reducing our dependence on oil.
While there are many views of the energy bill enacted last month,
everyone agrees that it does not represent such a commitment. In fact,
the administration strongly opposed the Senate-passed measure that
would have required the president to develop and implement a plan save
at least 1 million barrels per day of oil and this critical proposal
was not included in the final bill. Yet the conference report retained
a provision that effectively lowers fuel economy standards by extending
a loophole that allows automakers to claim credit for producing ``dual
fuel'' vehicles, boosting their fuel economy numbers on paper by as
much as 1.2 miles per gallon, even though these vehicles use gasoline
more than 99% of the time.8 While biofuels have great
potential to reduce our oil dependence, rather than promote use of
alternative fuels this provision will increases gasoline consumption by
15 billion gallons over the life of its 10-year extension. Wasting 5
billion gallons of gasoline more than the estimated fuel savings from
the administration's proposed light truck fuel economy standards.
---------------------------------------------------------------------------
\8\ Department of Transportation. Effects of the Alternative Motor
Fuels Act CAFE Incentives Policy. Report to Congress. March 2002.
---------------------------------------------------------------------------
The fuel economy standards proposed by the administration on August
23rd miss a critical opportunity to seriously address America's oil
dependence. Despite record oil prices and mounting instability in oil
producing countries such as Iraq and Iran, the new administration plan
actually calls for a slower increase in light truck standards than the
modest 1.5 mpg increase adopted by the administration in 2003 when oil
was selling for less than $30 a barrel. The proposal also exempts the
heaviest SUVs and pickup trucks that weigh over 8500 pounds, such as
the Hummer H2 and Ford Excursion, and does not address the car
standard, which hasn't been updated in nearly 20 years. As an example
of how out of touch this proposal is, its benefits were calculated
assuming that the average price of gasoline over the next 25 years
would be less than $1.60 per gallon.
Technologies and fuels exist today that can reduce wasteful use of
oil in vehicles, industry, aviation, and buildings, delivering savings
of at least 3.2 million barrels of oil per day (mbd) by 2015. By 2025
we could save at least 11.2 mbd, cutting our demand in half. We can
reach these goals while enhancing the competitiveness of U.S.
automakers and farmers by combining efficiency standards with
incentives to retool factories, accelerate the production of gasoline-
efficient vehicles, and deliver alternative fuels to consumers. Because
our economy and national security are tied to America's dependence on
oil, smart energy policies that deliver near term results would reduce
America's vulnerability, stimulate our domestic economy, and help keep
our nation safe
The Set America Free coalition has brought together national
security and religious leaders, as well as energy experts, in calling
on Congress to take immediate action and establish a national
commitment to save 2.5 million barrels per day by 2015--as much as we
currently import from the Persian Gulf--and at least 10 million barrels
per day by 2025.
Saving oil requires mobilizing American ingenuity, factories, and
farms around a clear goal. The first, most critical, step is for
Congress to establish a national commitment to cut oil expenses and
reinvest the resources--otherwise sent to oil producing countries--in
American factories and farms. During World War II, American factories
converted in just months from building cars to building tankers and
bombers that became the arsenal of democracy. And after the first oil
crisis in the early 1970s, America cut its oil demand to keep our
economy strong. Although some may doubt the ability to turn this ship
around, history shows us that American efficiency and ingenuity can
meet the challenge. Given technologies and fuel available today we know
that saving 2.5 mbd by 2015 and at least 10 mbd by 2025 is an
achievable, practical goal that would deliver near term benefits in the
next 5 to 15 years, while also starting the United States on a new path
toward significantly greater energy independence and security
thereafter. An analysis of how these savings can be achieved is
attached to my testimony.9
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\9\ Bordetsky, A. et al., Securing America: Solving Our Oil
Dependence Through Innovation. NRDC and IAGS, 2005. http://
www.nrdc.org/air/transportation/oilsecurity/plan.pdf
---------------------------------------------------------------------------
Failure to take these steps would perpetuate unacceptable risks for
our economic and national security, American jobs, and consumers.
Rising oil prices have placed a devastating and disproportionate burden
on U.S. automakers, according to a report released last month by NRDC
and the University of Michigan. Without serious action to improve fuel
economy performance, Detroit automakers will continue to lose thousands
of jobs and millions in earnings, leaving them at a sharp disadvantage
to their Japanese competitors. This report is also attached to my
testimony.10 Rather than exporting billions of dollars more
to oil regimes with every rise in the prices of oil, the United Sates
should be investing those dollars at home to support domestic
industries and jobs, and leading the world in reducing global demand
for oil.
---------------------------------------------------------------------------
\10\ McManus, W. et al., In the Tank: How Oil Prices Threaten
Automakers' Profits and Job. NRDC and OSAT, July 2005. http://
www.nrdc.org/air/transportation/inthetank/contents.asp
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CONCLUSION
Katrina has highlighted the vulnerability of our energy system due
to our dangerous dependence on petroleum to fuel our transportation
system. The best way to reduce our vulnerability--both immediately and
in the longer term--is to reduce demand by becoming more efficient with
every barrel of oil we use and to diversify our supply by relying more
on homegrown biofuels. A national commitment to saving oil is long
overdue. If we make the commitment now America's oil dependence could
be reduced by 2.5 million barrels per day by 2015 and by at least 10
million barrels per day by 2025. Meeting such a commitment will reduce
our vulnerability to catastrophes like Katrina, protect the
environment, and make us more secure.
Chairman Barton. We thank you. Last but not least, a good
friend to the committee who has testified numerous times, Mr.
Mark Cooper, the Research Director for the Consumer Federation
of America. You are recognized for 7 minutes, sir.
STATEMENT OF MARK N. COOPER
Mr. Mark Cooper. Thank you, Mr. Chairman. There is a real
benefit to going last today, and you will see why.
Chairman Barton. You know what everyone said, for one
thing.
Mr. Mark Cooper. That is right, and I have gotten some
interesting numbers today. Again, let me stress as all of us
have, we have had a catastrophe of immense proportions, human
proportions, physical proportions, economic proportions. And it
is extremely important I think to act very, very quickly and
seize this moment to reorient the way we address these
fundamental problems. And as my testimony points out, we have
been saying the same thing for 4 years. Maybe folks will start
listening.
Public policy cannot prevent accidents or catastrophic acts
of nature, but it can build systems that are resilient, robust,
and flexible to minimize the impact of those inevitable
accidents on our society. We believe it is quite clear that the
business practices and public policy in the oil industry have
combined to create a gasoline sector that has difficulty coping
with even minor events, not to mention the disaster that struck
the gulf coast. If the measure of performance of an economic
sector is adequate supplies at stable prices, then this
industry and the public policy under which it operates has
failed, not just in the wake of Katrina, but also repeatedly
over the past 5 years.
The bulk of my testimony today presents word for word the
policy conclusions that we reached in a report over 4 years
ago. There is no Monday morning quarterbacking here. After
analyzing the industry structure conduct and performance, we
urged policymakers to move aggressively in five areas. And we
gave specifics. We said: Restore reserve margins by developing
efficiency. The first and most important thing is to get the
fuel efficiency of our fleet increased. The pitiful proposal of
increase that we got last month was based on a price of
gasoline of $1.80 a gallon, including taxes, in 2012. That
number is economically irresponsible and socially irrational.
They should have done the analysis with a much higher price,
with the social value of gasoline, and we would have asked for
much more efficiency.
Second, we ask for expansion of refinery capacity by
redeveloping the 50 sites that had been closed. And as you have
heard today, not one of them has applied for reopening. They
were closed for business reasons, not environmental reasons.
They should have been reopened. We wanted a list, we wanted a
study. Those are sites that you can't hide behind the
environmental laws for.
Second, we call for increasing flexibility in storage and
stock policy. We talked about strategic product reserves. Mr.
Chairman, our friends in the IEA who are giving us product are
drawing down their own strategic product reserves to help us.
We don't have a strategic product reserve. We should have one.
We should also have a policy requiring storage. This is not an
industry that can function without storage. In the electric
utility industry we have reserve margin requirements of 15 to
20 percent above peak precisely because they are high capital,
high intensity, inflexible industries. We need to think about
that here as well.
I said discourage private actions that make markets tight
or exploit markets. And you have the numbers before you today.
I have done this quickly, but here are the numbers you heard
today about gouging.
Mr. Caruso told us that the price of gasoline went up the
equivalent of $19 a barrel. Mr. Douglass told us that his rack
price went up $18 a barrel. That is the wholesale price he
pays. Mr. Cooper told us that there were no increases in
transportation costs because they are regulated. Mr. Caruso
also told us that the WTI price went up $5. The difference
between that WTI price and the rack price is $13. That is the
refiner margin. And if you look over at the charts that were
taken down, unbranded went up $26 equivalent per barrel. That
is the refiner margin against unbranded gasoline. If you want
to look for gouging, take a hard look at those numbers. Get the
record, find out what happened. There is a good case there that
it wasn't crude and it wasn't the retailer and it wasn't the
transport; it was the refining sector that sets the wholesale
price of gasoline.
Finally, we said promote a competitive industry. Almost
every wholesale market in this country is concentrated, every
regional retail market is concentrated, every regional refining
market is concentrated. They got that way over the past 15
years as a result of mergers. Now, the FTC says they are not
highly concentrated. In this industry, you get a lot of market
power with a little bit of market share, and these firms have a
sufficient market share to affect the price. The GAO discovered
that, found that, showed that, and the FTC attacked them for
showing us the facts.
I have attached to my testimony three graphs, one which
shows the growth of gasoline since I last testified or since we
did our report of 6 percent, one which shows an elimination of
oil spare capacity and refineries, and one which shows no
increase in our stocks.
Essentially, we were living on the razor's edge, and
Katrina pushed us off. But Katrina is only the last in a series
of accidents and interruptions that have hit this industry. It
was the worst possible single event that we could have
suffered, yet its impact is only an extrapolation of what has
been going on. Four times in the last 5 years we have had these
price spikes, and everyone said: Stocks were low, refinery
capacity was stretched to the limit, and we had an incident, a
pipeline broke, a refinery had a fire, a storm. Once is a
surprise, twice is bad luck, but three times is a systematic
pattern, and it is incumbent upon this Congress and our
government officials to take action to insulate us against
these kinds of events because they do happen and they will
happen.
So it is time for a dramatic change in our approach to
policies. I offer the same advice I gave 4 years ago but only
with greater urgency. We should pursue each of these options
twice as fast, aim twice as high, because we have wasted a
critical 4 years in providing the American consumer with the
gasoline sector that they need and deserve.
Thank you.
[The prepared statement of Mark N. Cooper follows:]
Prepared Statement of Mark N. Cooper, Director of Research, Consumer
Federation of America
Mr. Chairman and Members of the Committee, my name is Mark Cooper.
I am Director of Research at the Consumer Federation of America (CFA).
CFA is a non-partisan, non-profit association of 300 pro-consumer
groups, which was founded in 1968 to advance the consumer interest
through advocacy and education. We have been analyzing the petroleum
industry for decades and have issued numerous reports in the past five
years, as the seeds of the underlying conditions for the current crisis
became apparent.\1\ I greatly appreciate the opportunity to share our
views with the Committee today.
---------------------------------------------------------------------------
\1\ I have submitted for the record four reports on the oil and gas
industry that we have prepared over the past four yours. Our policy
discussion from the first of these in July 2001 are included as part of
this statement.
---------------------------------------------------------------------------
Public policy cannot prevent accidents or catastrophic acts of
nature, but it can build systems that are resilient, robust and
flexible to minimize the impact of the inevitable accidents on our
society. It is evident that the business practices of the oil industry
and public policy in this country have combined to allow a gasoline
industry that cannot respond to even minor incidents, not to mention
the disaster that struck the Gulf Coast last week. If the measure of
performance of an economic sector is adequate supplies at stable
prices, then this industry has failed the consumer, not just in the
wake o Katrina, but also repeatedly over the past five years.
The bulk of my testimony today presents word-for-word the policy
conclusions that we reached in a report released over four years ago.
After analyzing the structure, conduct and performance of the oil
industry, we urged policymakers to move aggressively in five areas.
Restore reserve margins by developing both efficiency (demand-side)
and production (supply-side).
Increase market flexibility through stock and storage policy.
Discourage private actions that make markets tight/or exploit market
disruptions by countering the tendency to profiteer by
withholding of supply.
Promote a more competitive industry.
Address the disproportionate burden that rising energy price place on
lower income households.
Unfortunately, these policy recommendations were not included in
any significant way in the recent energy legislation and actions by
Federal agencies. For example, the single most important mid- and long-
term policy we advocated, improving the fuel efficiency of the vehicle
fleet, could have taken significant pressure off of gasoline markets,
if it had been embraced four years ago. In the past four years,
gasoline consumption in America increased by about 6 percent.
Regrettably, just last month the Department of Transportation
proposed timid improvement in fuel efficiency standards, gerrymandered
the calculation to let more gas guzzlers escape scrutiny, and exempted
some of the worst gas guzzler from fuel consumption standards
altogether. Simultaneously, it threatened to preempt states like
California from imposing stricter standards. That proposal, which would
take ten years to lower consumption by the equivalent of less than what
we use in one month, does not address the problem in any meaningful
sense.
Similarly, the key short-term policy we recommended of increasing
reserve margins and stocks has been neglected. I have attached to my
testimony three updated graphs from our July 2001 analysis. The first
shows gasoline consumption. The second shows refinery capacity compared
to demand and the second shows gasoline stocks above minimum operating
levels. Together these show that we were living on the razor's edge,
with rising demand, little excess capacity and small stockpiles.
Katrina pushed us off the edge.
Hurricane Katrina is just the latest in a series of accidents and
interruptions that have hit the oil industry and consumers hard. It is
the worst possible single event one could imagine from the point of
view of the domestic gasoline sector. Yet, its impact reflects the same
underlying problems that have afflicted the industry for the past half-
decade. At the start of each price spike in the past few years we hear
the same refrain. ``Stocks were low, refinery capacity was stretched to
the limit.'' A refinery fire here, a pipeline breach there, or a storm
triggers a spike.
Once may be a surprise; twice may be bad luck; but by the third
time, it is a pattern that demands a systematic response, not hand
wringing. Moreover, if many different accidents keep happening, if many
different things can go wrong, and if running an overtaxed system makes
outages more likely, it is incumbent upon policy makers to do something
about it. The industry and public policy have failed to create a system
that can meet the needs of the American consumer and America as a
nation is paying the price for that inaction.
It is time for a dramatic change in the approach to policy. I offer
the same advice we gave four years ago. The only thing I would change
is the urgency in the recommendations. We should move twice as fast and
set our goals twice as high because past inaction has made the problem
we face even more critical.
Ending the Gasoline Price Spiral
MARKET FUNDAMENTALS FOR CONSUMER-FRIENDLY POLICIES TO STOP THE WILD
RIDE
July 2001
V. POLICY RESPONSES
A. ECONOMIC FUNDAMENTALS AND POLICY PRINCIPLES
Public policy responses must reflect physical and economic reality.
Since the laws of physics cannot be repealed, public policy must be
cognizant of the increased likelihood and severe impact of accidents in
energy industries, like refineries and pipelines. Physical and
institutional structures must be prepared to deal with accidents in
this industry.
The low short run elasticity plays a critical role in price
volatility and the exercise of market power. The extremely low
elasticity of demand is one of the key characteristics of the gasoline
market. Suppliers are well aware of the rigidities in the market and
can take advantage of them under the right circumstances. Because the
gasoline market is so large, even small and short term pricing abuse
imposes substantial costs on the public.
Under these circumstances, firms with relatively small market
shares can increase profits by withholding supplies, unless the
elasticity of supply is high. Unfortunately, petroleum product markets
do not exhibit very elastic supply. Reserve margins and stocks are
crucial.
1. Supply
Avenues for increasing supply are available, but they may not be
pursued, if left to industry business decisions. Since short-term
elasticities are quite low, a variety of resources that can be called
upon to meet demand quickly are necessary to prevent price volatility.
Having reserve margins of production and transport capacity would
dampen price volatility. Stockpiles and storage are the best option
when demand shifts or supply is interrupted. Import of product is an
important option when refinery capacity is not available or, depending
on geographic location, when pipeline capacity is not available.
The recent closure of refineries also suggests an avenue for
expanding capacity. The most readily available path to expanding
capacity may be to identify existing facilities that have been
shuttered, or sites that have been recently abandoned to expand
capacity while minimizing environmental impact should be explored. Each
of these options should be considered, particularly in markets where
capacity is tight and ownership is concentrated.
The behavior of small refiners in response to the elimination of
programs that supported their existence makes it clear that public
policy can affect the number and geographic distribution of refinery
capacity. If we want geographically dispersed refinery capacity to
promote local responses to supply problems, we just have to pay for it.
2. Demand
In the long run, reducing the size of the market, without imposing
deprivation on consumers, is the major policy challenge.
The consumption patterns deeply embedded in spatial relationships
lead us to conclude that increased fuel economy is the more readily
achievable approach to reducing gasoline consumption than changing
living patterns. Reducing fuel use per vehicle allows existing mobility
patterns to be preserved, while consumption is reduced.
Shifting preferences for vehicles (toward higher efficiency vehicle
types) requires greater change in social behaviors. It is also
vulnerable to changes in taste. Moreover, it requires a change in the
stock over a substantial period of time, perhaps a decade. While
policies to affect these behaviors should be pursued, their
complexities and difficulties should be recognized.
Attempting to overlay mass transit on existing living patterns may
be pursued as a long-term strategy. However, given consumer preferences
and the spatial distribution of activity, this is a substantial task.
The increasing suburbanization of living patterns frequently results in
relatively low densities and high costs for mass transit. Changing the
geographic distribution of work, home and play, requires the greatest
amount of social change.
3. Distributional Effects
Equity impacts of rising energy prices, particularly as they affect
low and lower middle income households, must be dealt with directly.
Neither general tax cuts nor existing energy assistance programs, such
as the Low Income Home Energy Assistance Program (LIHEAP), address the
problem of rising or volatile transportation energy costs. Even if it
could be argued that LIHEAP addresses the general energy needs of
groups, ad hoc efforts to increase programs like LIHEAP tend to fall
short and come long after the impacts of rising energy prices have been
felt.
B. POLICY TARGETS
It is time for public policy to seek permanent institutional
changes that both reduce the chances that markets will be tight and
reduce the exposure of consumers to the opportunistic exploitation of
markets when they become tight. To achieve this reduction of risk
public policy should be focused on achieving five primary goals.
Restore reserve margins by developing both efficiency (demand-side)
and production (supply-side).
Increase market flexibility through stock and storage policy.
Discourage private actions that make markets tight/or exploit market
disruptions by countering the tendency to profiteer by
withholding of supply.
Promote a more competitive industry.
Address the disproportionate burden that rising energy price place on
lower income households.
1. Expand Reserve Margins By Striking A Balance Between Demand
Reduction and Supply Increases
We have earlier identified the hierarchy of policies to reduce
demand. Increasing the fuel efficiency of the fleet through increased
standards for mileage and use of hybrid vehicles should be given top
priority. Shifting preferences for vehicle types and modes of
transportation through taxes and incentives are a second category to be
considered.
A goal of achieving an improvement of vehicle efficiency (reduction
in fleet average miles per gallon) equal to economy wide productivity
over the past decade (when the fleet failed to progress) would have a
major impact on demand. It would require the fleet average to improve
at the same rate it did in the 1980s. It would raise average fuel
efficiency by five miles per gallon, or 20 percent. This is a mid-term
target. This rate of improvement should be sustainable for several
decades. This would reduce demand by 1.5 million barrels per day. This
would return consumption to the level of the mid-1980s.
Expanding refinery capacity by 10 percent equals approximately 1.5
million barrels per day. This would require 15 refineries, if the
average size equals the refineries currently in use. This is less than
one-third the number shut down in the past ten years and less than one
quarter of the number shut down in the past fifteen years.
Alternatively, a ten percent increase in the size of existing
refineries, which is the rate at which they increased over the 1990s,
would do the trick, as long as no additional refineries were shut down.
Placed in the context of redevelopment of recently abandoned
facilities or expansion of existing facilities, the task of adding
refinery capacity does not appear to be daunting. Such an expansion of
capacity has not been in the interest of the businesses making the
capacity decisions. Therefore, public policies to identify sites, study
why so many facilities have been shut down, and establish programs to
expand capacity should be pursued.
Once the magnitude of the task on the supply-side is placed in
perspective, and given the objective analysis of the environmental
costs involved, the call to overturn environmental laws loses its
force. It seems that expansion of supply-side capacity can be
accomplished within the current confines of environmental laws. To the
extent that the costs of compliance can be demonstrated to be a
significant problem, then underwriting compliance (directly through
financial subsidies or indirectly through research) rather than
relaxing standards should be pursued.
This combination of demand-side and supply-side policies to improve
the long run market balance would restore the supply/demand balance to
levels that typified the mid-1980s.
2. Expanding Storage And Stocks
It has become more and more evident that private decisions on the
holding of stocks will maximize short term private profits to the
detriment of the public. Increasing concentration and inadequate
competition allows stocks to be drawn down to levels that send markets
into price spirals. While the strategic petroleum reserve has been
developed as a strategic stockpile and companies generally take care of
operating stocks, the marketplace is clearly not attending to economic
stockpiles. Companies will not willingly hold excess capacity for the
express purpose of preventing price increases. They will only do so if
they fear that a lack of supply or an increase in brand price would
cause them to lose business to competitors who have available stocks.
Regional gasoline markets appear to lack sufficient competition to
discipline anti-consumer private stock policies.
Public policy must expand stocks. Participants in the distribution
of gasoline can be required to hold stocks as a percentage of retail
sales. Public policy could also either directly support or give
incentives for private parties to keep storage. It could lower cost of
storage through tax incentives by draw down stocks during seasonal
peaks. Finally, public policy could directly underwrite stockpiles. We
now have a small Northeast heating oil reserve. It should be continued
and sized to discipline price shocks, not just prevent shortages.
Similarly, a Midwest gasoline stockpile should be considered.
3. Taking The Fun And Profit Out Of Market Manipulation
In the short term, government must turn the spotlight on business
decisions that make markets tight or exploit them.
Withholding of supply should draw immediate and intense public
scrutiny. It needs to be backed up with investigations. Since the
federal government is likely to be subject to political pressures not
to take action, state government should be authorized and supported in
market monitoring efforts. A joint task force of federal and state
attorney's general could be established on a continuing basis. The task
force should develop databases and information to analyze the
structure, conduct and performance of gasoline markets.
As long as huge windfall profits can be made, private sector market
participants will have a strong incentive to keep markets tight. The
pattern of repeated price spikes and volatility has now become an
enduring problem. Because the elasticity of demand is so low--because
gasoline is so important to economic and social life--this type of
profiteering should be discouraged. A windfall profits tax that kicks
in under specific circumstances will take the fun and profit out of
market manipulation.
Ultimately, market manipulation could be made illegal.
4. Promoting A Workably Competitive Market
Further concentration of these industries is quite problematic. The
Department of Justice Merger Guidelines should be rigorously enforced.
Moreover, the efficiency defense of consolidation should be looked on
skeptically, since inadequate capacity is a market problem.
Restrictive marketing practices, such as zonal pricing and
franchise restrictions on supply acquisition should be examined and
discouraged. These practices restrict flows of product into markets at
key moments.
Markets should be expanded by creating more uniform product
requirements. These should not result in a relaxation of clean air
requirements.
5. Low-income assistance
Rather than fight repeated battles over supplemental
appropriations, it would be more effective to index assistance payments
to energy prices. It may be time to consider new programs that deal
directly with transportation fuel costs. Transportation energy is a
necessity in the 21st century.
Chairman Barton. Well, thank you, Mr. Cooper.
The Chair is going to recognize himself for the first 5
minutes of questions. I want to ask Mr. Cavaney--and you may
have said this in your testimony; I was having to go to vote
and come back--is there evidence that any of the oil production
or distribution gathering or transportation pipelines or
production platforms in the Gulf of Mexico have not performed
as desired in terms of preventing spills during the hurricane?
In other words, I have not seen in the popular press any story
about a rupture or a spill, so I am assuming that part of the
system has performed as designed. Is that your understanding
also?
Mr. Cavaney. It is. Daily, Mr. Chairman, the MMS reports
all the activity that they have done through their overflights
and the searches in the area. There have been no spills related
to production.
Chairman Barton. So we have had a Category 5 hurricane take
a huge swath out of three of our coastal States, but in terms
of the offshore oil and gas production and delivery system,
while it has been shut down, it has not spewed any
environmental damage into the gulf coast?
Mr. Cavaney. No, Mr. Chairman. Another point, too, is these
platforms out there, particularly those in the deep water, are
designed to withstand the roughest of conditions, conditions
like what they experienced. There are over 4,000 total
operating platforms out in the Federal section of the OCS area,
and of those we have had reports of 41 of them which were all
very close inshore and basically first generation platforms
with very little production receive damage or were effectively
destroyed. But of all the rest in deep water, only four
platforms have experienced damage. We learn lessons when we go
through these things, and those will help us going forward. So
I think fairly much, if you look at 95 percent of the
production was shut in because we abandoned all those and shut
them down properly, now we are at a stage back where only 57
percent is shut in within a week after the storm went through
there. So I think the design parameters and the safeguards
performed as expected and as anticipated, but we do learn some
new things each time and we will from this one.
Chairman Barton. Now, we have before us on my far right two
of the watchdogs for the consumer, and to the left, with the
exception of the telephone gentleman and the Governor of
Louisiana's representative, I have got the full panoply of the
oil and gas industry from Mr. Cavaney of API who goes out and
finds and hopefully produces the oil, to the gentleman on the
New York Mercantile who helps create a market for the crude, to
Mr. Slaughter who helps purchase and refine the crude, and Mr.
Cooper who helps transmit both the crude and the refined
products, to Mr. Douglass who actually sells them at retail--
not you individually, but the groups that you represent.
My first question: Do any of you gentlemen have any
knowledge of any attempt to collude, to set a price because of
this shortage? Do you have any personal knowledge of attempting
to coordinate an orchestrated increase in the price that has
resulted in the gasoline prices being as high as they are right
now across the country?
Mr. Cavaney. Mr. Chairman, I can speak for API and its
members. We have no knowledge. We have cooperated, as I
mentioned in my testimony, for decades and decades on dozens of
investigations by the FTC, and we are daily monitored, as Bob
Slaughter had mentioned, by the FTC in 360 different cities.
This industry operates, because it is incredibly, incredibly
efficient and it is highly diverse particularly as you get
closer to the retailer. And I think that is our protection.
Chairman Barton. Now, Mr. Cooper has pointed out in his
testimony that if you have consolidation and if you have a
concentration, even at what would normally be considered a low
level, 10 to 15 percent of a given market, that in and of
itself can result in prices going up disproportionately. I am
going to ask the indulgence of the full committee. I want to
start with Mr. Cavaney and then work my way through the system
and have each of you try to explain how your segment sets the
price or how it is created. In other words, I want Mr. Cavaney
to explain to the best of his ability where this world price,
the raw material price comes from, and Mr. Newsome to explain
if there is any group of people like the Hunt brothers or
somebody who could create a position to move the market
artificially, and just work our way down. Because I am like
everybody else, I don't like going from 2.47 a gallon Tuesday
morning to 2.79 a gallon Tuesday night, which I had to do down
in Texas, and I just thought I was getting ripped off big time
until I heard from Mr. Upton in Michigan that the price went to
3.50, and then when I watched on TV and saw it Georgia it was
at $6. So I felt a little bit better about only having to pay
40 cents a gallon more when I found out about the rest of the
country. But I think it is a fair question that the American
people ask, is why, when we have such a little--and 2 million
barrels a day in terms of production and 4 million barrels a
day in terms of refinery capacity and two major pipelines being
shut down is not little, but in the overall scheme of things
why that would cause prices to go up everywhere in this
country.
So, Mr. Cavaney, can you briefly explain to the best of
your knowledge how the market price is set for crude that your
people produce?
Mr. Cavaney. Yes. Mr. Chairman, I might just comment, we
share the same concern; we don't like the prices, either. But
we just went through an experience down in the gulf that is a
once in a generation or once in every several generation
experience.
Directly to your point, the products that we produce,
natural gas and crude oil, those are set and traded in
worldwide markets. Crude oil is the world's largest commodity,
it is highly transparent, and the prices are established off of
what are called benchmarks, which are certain quality
parameters, certain viscosity, certain amounts of sulfur. And
then those that are considered to be more attractive have an
established differential that floats around. The more
attractive lighter grades, which are more efficient, you can
get higher yield, trade a little higher. The lower ones trade a
little lower.
Chairman Barton. But can any company----
Mr. Cavaney. Everyone pays the same price.
Chairman Barton. Can any producer, ExxonMobil, the biggest
in the world, can they or the Saudis last week, could they have
moved the market, the crude price higher by something that they
did or colluded with other producers?
Mr. Cavaney. Not in that short period of time. Nobody could
do any of that, because the market is so transparent and so
large.
Chairman Barton. Do you agree or disagree with that, Mr.
Cooper? I am going to use you as my referee here.
Mr. Mark Cooper. Well, collusion is not the issue. And
you----
Chairman Barton. Well, I am trying to get to----
Mr. Mark Cooper. But you posed the question properly. It is
that, it is not the crude market. I mean, the crude price is
set by a cartel primarily, and it is a political price, it is
not an economic price. The refinery market----
Chairman Barton. If you have a surplus, I agree with that.
But we don't have a surplus of production.
Mr. Mark Cooper. But the quantity of supply, the amount of
production capacity is a strategic variable. When you have a
small number of people who decide what to do, then supply is
not out. It doesn't happen in nature, it comes out of political
decisions.
Chairman Barton. I am just asking, do you have any--I am
going to give you a chance after each person speaks, because
you are a smart guy. Okay? But on the crude price, do you
stipulate that any producer in the world tried to raise the
price above a market level in the last 2 weeks?
Mr. Mark Cooper. Certainly not in the last 2 weeks. The
conditions were set over a period of time by political
decisions among the people.
Chairman Barton. Now, Mr. Newsome, is there anybody on the
New York Mercantile Exchange or any other commodity exchange
that, in a market this big, has the ability to move the price
higher on a purely speculative play?
Mr. Newsome. No, sir. As you know, I come from the
regulatory side of the equation, not as a trader or anything
else, and so monitoring markets, market surveillance is
something that is very near and dear to me. That is one of the
reasons that NYMEX is considered the benchmark in many energy
products is because you have hundreds of companies,
representatives that all come together to compete in a very
open, transparent environment to come up with a price.
Chairman Barton. So there is nobody out there that could
try to corner the oil market or the natural gas market and move
the price higher for purely speculative purposes in the last 2
weeks?
Mr. Newsome. No.
Chairman Barton. Do you agree or disagree with that, Mr.
Cooper?
Mr. Mark Cooper. I would like people to look at that one
very carefully. You would have gotten the same answers, and you
probably did, about the electricity market in California 4
years ago. There are a lot of people chasing a lot of oil out
there, a lot of financial transactions, but very little
physical product changing hands. That is a concern to me. He
has got the data, you can take a look at it.
Chairman Barton. In your opinion, how big of a position
would you want or a group colluding have to take to move the
market?
Mr. Mark Cooper. In a market that is this tight, you know,
the tighter the market, the smaller the position you need to
have that influence. But I am not asserting that. But that is a
good question and there is data that you can look at these
transactions, ask how many times this oil, this single barrel
of oil changed hands, just like we asked how many times the
electrons changed hands.
Chairman Barton. You believe, while on the crude--the
producers, while you think there are political considerations
over time that have tightened the market or prevented
production coming on line, on the commodity exchanges do you
think it is possible somebody could have moved the market
differently than pure market pressures moved it?
Mr. Mark Cooper. The amount of speculation going on is a
source of concern. We have seen it in the Wall Street Journal
and a number of other places. It is an objective study.
Absolutely.
Chairman Barton. We will put a question mark there. Now we
go to Mr. Slaughter, who takes the products that have been
produced and purchased, and it is your job now to refine those
products. You take the price coming in that is set on the
exchanges. The refined products that are coming out, your
refiners have the ability to set a price. How is that going out
price set?
Mr. Slaughter. It is basically set from market conditions.
There are two factors: One is the cost of production, and the
second is the market that it is being sold in.
Chairman Barton. Well, when Mr. Douglass, I think he had
the chart showing the rack price going up everywhere in the
country over a period of I think 3 days. It went up faster in
some regions than it did in others, but that is a refinery
setting that price. Why did it? Your crude input didn't really
go up that much. It went from about $65 a barrel to $70, and
then when the President announced the release of the SPR the
crude price went back down. Unless it went up big time today,
it is $65, $66, $67. But the price that Mr. Douglass is paying
went up and it stayed up. Now, what happened there?
Mr. Slaughter. First of all, there are 48 refining
companies and 149 refineries. Each sets prices, of course,
individually. But what happened was that with what happened in
the gulf last week, as Mr. Cavaney pointed out, was a once in a
lifetime event. It knocked out 20 percent plus of the Nation's
refining capacity, and it also knocked out the major supply
pipelines for about one-third of the country to a half of the
country, as well as the Midwest as well as the East and the
South. When that happens, basically prices go up. Prices went
up. If you look at what happened to gasoline on the exchanges,
gasoline prices went way up because people were anticipating
that there would be a supply shortage as a result of what had
happened with Hurricane Katrina.
Chairman Barton. I am not being argumentative, Mr.
Slaughter, but I am trying to understand. Your input price did
not go up. There is obviously some supply disruption to these
pipelines that got shut down, and we know that overall there is
going to be a shortage because we have less refined product
because the refineries themselves are down. But I am still
trying to understand why the refiners' posted prices went up
everywhere as quickly as they did. I understand raising a price
to alleviate a shortage. If I don't have any gasoline coming
into Atlanta, I know why that price is going up: Because you
are not getting any more gasoline. I don't quite understand why
it is going up in Texas and California where the refineries are
still operating, the distribution systems are still operating;
you just have to allocate across the 21 million barrel a day
market, you have got to allocate a shortage overall of
somewhere between 2 and 3 million barrels once you go through
your inventory.
Mr. Slaughter. What happens in the event of a supply
disruption is that basically, you know, prices throughout the
country will basically go up to try to allocate the product
through market forces. And----
Chairman Barton. So is there a marketing manager at each
refinery who takes it upon himself or herself to set the price?
Does it come down from the corporate office? I mean, how do you
get to that price?
Mr. Slaughter. Basically, the companies have their own
pricing strategies and they respond to market conditions and
what they also perceive as replacement cost and what the
marketplace is basically going through in terms of general
supply problems.
Chairman Barton. Mr. Cooper, do you want to comment on
that?
Mr. Mark Cooper. They have market power. There is a line in
the movie, A Beautiful Mind, about John Nash. And the key line
he says is: Adam Smith was wrong. When he realizes that nine
people can cooperate, a small group of people, maximize their
profits by observing each other's behavior. Right? It is called
the Nash equilibrium. He won the Nobel Prize for it and he
spent 25 years learning how noncollusive games, noncooperative
games--every refinery market in this country is concentrated.
Several of them are highly concentrated. So he told you the
right answer; he says: We will charge whatever the market will
bear. And in this particular market, there is only a small
number of other players out there to observe. So they all put
their prices up at the same time. And people call me all the
time and say they all did 15 cents overnight. How can that
happen? Because most experience is that someone in that market
would say, hey, I will eat a little bit of that to expand my
market share.
The refinery industry doesn't behave that way. The RAND
study showed that coming out of the mergers of the 1990's. You
put your finger on it. They have the market power to charge
whatever the market will bear.
Chairman Barton. I am not stipulating they have the market
power. I am trying to find out what they are really doing.
Mr. Mark Cooper. Well, his answer is that is where the
wholesale price is set. And the numbers you see today are
damning numbers, that $18 a barrel and $13 a barrel.
Chairman Barton. Well, it is not automatically a damning
number if it prevents a shortage. If you raise the price to
prevent a shortage so that willing buyers have an opportunity
to purchase, that is not damning. If it is artificially created
for whatever reason, that is damning.
Mr. Mark Cooper. It is damning if there are not enough
willing sellers to prevent excess profits.
Chairman Barton. Well, do you know of any refinery that
held refined product off of any given market?
Mr. Mark Cooper. Well, they created a market in which there
was no surplus. That is the long-term problem of letting those
50 refineries get closed.
Chairman Barton. We are going to encourage cooperation to
get some of them reopened and build some new ones.
Mr. Mark Cooper. But it would be real important to get some
other players, some independents in those markets. If those
same folks own those refineries, you are at the same point.
Chairman Barton. Let us go to Mr. Cooper. I am going to
stipulate, since you are regulated and you testified that the
pipelines didn't change their price.
Mr. Benjamin Cooper. That is described on page 4 and 5 of
my testimony.
Chairman Barton. So we are going to pass you over. Now we
go to Mr. Douglass. You are getting these higher prices from
Mr. Slaughter's group, but you didn't just pass those through.
The retail price went up too.
Mr. Douglass. Correct.
Chairman Barton. Okay. Do you want to explain how that
happened?
Mr. Douglass. Yes. May I be allowed to put up chart 2?
Chairman Barton. You may.
Mr. Douglass. If we can put up the second chart that we
have that was an attachment to our statement that was filed,
you will see that refiners--in this particular case I am a
branded marketer and this is a branded supplier, my biggest
supplier. They raised the price 13 cents the first day. By the
way, they lagged the market. I had other suppliers who raised
it 37 for their branded stores and 70 cents for the unbranded
business that I use commercially. So this is a very restrained
marketing company.
And for the benefit of those who have called them names
today, it is ExxonMobil. So they were dragging. They were
actually being very conservative in their price moves compared
to the others. However, they did raise my price 13 cents a
gallon. And the way it works in our business is you have to
pay--the next truckload, you have to pay that extra 13 cents.
So you immediately identify that as part of your inventory. So
we price on the basis that what is in the inventory at the time
of an escalating market, we better move consistent with that,
or if we sell that other inventory and don't get back the 13
cent increase, we will end up losing money.
Chairman Barton. You fast-forward to replace your
inventory.
Mr. Douglass. Correct. We are definitely trying to put a
replacement cost----
Chairman Barton. And you are stipulating that the retail
price just went up whatever the wholesale price you had to pay
went up.
Mr. Douglass. Actually, we lost 5 cents in the transaction
over time.
Mr. Mark Cooper. He lost because the credit card companies
charge him a percentage of the sale, and that went up as well
even though the cost of that transaction didn't go up at all,
and that is 3 percent. So if you went from $2 to $3, he lost 3
cents out of that. They took a bigger bite out of it.
So those are the numbers that suggest where the price
increase came from. That doesn't mean there weren't individual
stations who may have gone hog wild.
Chairman Barton. You think the retail guys are okay?
Mr. Mark Cooper. As far as I can tell, and these numbers
nailed it, and I have been talking with people, and the rack
price was just going up. And this gentleman had to come here
and put it on the screen.
Chairman Barton. If we had any black hats in the room--and
I am going to stipulate that everybody here has at least a gray
hat on, and I want to say everybody has a white hat on, but if
we had to go from white to shades of gray, you are going to say
the speculators on the commodity markets and the refiners are
the ones that are not lily white?
Mr. Mark Cooper. The latter I have seen some numbers; the
former I would like to see some analysis.
Chairman Barton. I am going to give those two guys a chance
to rebut, and then I am going to deal the next person.
Mr. Slaughter or Mr. Newsome.
Mr. Slaughter. Yes, Mr. Chairman. The point that Mr.
Douglass raised, the antitrust laws prevent collusion in our
industry, as you know.
Chairman Barton. I don't think anybody is alleging
collusion based on what I have heard today.
Mr. Slaughter. The spot price, because of the anticipation
of supply shortages for products, went up considerably during
this period of time when there was the greatest disruption. A
number of our companies froze prices or were selling prices
well below spot price during that period of time. So, I mean,
there is different behavior by each individual company.
The point I had before, the tremendous amount of our cost
of our product is involved with a cost accrued, plus the cost
of taxes. Different people behave differently, but everybody
could see that that situation that we had this week was a
cataclysmic event threatening so much of the market for our
products. The people responded accordingly. And, you know,
basically it is a market situation. It was a cataclysmic event.
It knocked out 20 percent of the refining supply, and everyone
responded accordingly. A number of them took the steps that Mr.
Douglass has suggested and froze prices or actually sold below
spot.
Chairman Barton. Mr. Newsome.
Mr. Newsome. Thank you, Mr. Chairman.
As I commented in my testimony, speculators have become
easy fodder to pick on by the media, but they play an important
role in the market.
Chairman Barton. I am not picking on them. I am trying to
give an explanation to the average citizen, if they are lucky
enough or bored enough to watch this entire hearing, about what
the best experts in the country explained is our pricing. We
will politicize it, but I at least want to try to get on the
record what it is.
Mr. Newsome. The reality of how the marketplace operates
keeps speculators from pushing the price. It is a very open,
competitive marketplace. And in one pit you have got
commercials, you have got the banks and brokers, you have got
the locals or the speculators that are all bidding and
competing one for another.
The markets move based upon fundamentals. If a speculator
tries to take the market in a direction that is not
fundamentally sound, there is someone always there ready to
make him pay, saying, yeah, do it, and we will turn around, and
it will cost you a lot of money. The reality of the market is
that everyone can't move in one direction whether that is high
or whether it is low. The futures markets are a zero sum game.
For every winner, there is a loser. So, that, just the way that
the markets operate don't allow it to get away from the
fundamentals.
Chairman Barton. I want to thank the committee for
indulging me. I don't normally take that much time, but this is
such an important issue that I wanted to try to get on the
record at least how the pricing system works or doesn't work
depending on your point of view. And I want to again thank the
committee for letting me do that.
Mr. Rush is recognized for 5 minutes.
Mr. Rush. Thank you, Mr. Chairman. Mr. Chairman, I don't
expect to take my 4 or 5 minutes. I just have a question that
is not in line with your line of questioning.
I want to ask Mr. Angelle, I had occasion this morning to
be at a meeting with the president of the American Red Cross as
it relates to the problem that we are experiencing in the gulf
coastal region, and I asked her a specific question. And I
asked her, why didn't the Red Cross go into New Orleans
earlier? And her response to me startled me really. And she
said that the Governor did not--ordered her not to go into New
Orleans to conduct rescue and recovery or relief work, for her
to conduct relief efforts in New Orleans. And that astounded
me. And I expected to--I wanted to ask the Governor. I thought
that maybe she would be here, but you are a representative. Are
you aware of that?
Mr. Angelle. No, sir. In my role as secretary of the
Department of Natural Resources, I obviously have primary
jurisdiction over managing our energy resources in Louisiana,
and I am not qualified to answer that question.
Mr. Rush. Thank you.
Mr. Chairman, I yield back.
Chairman Barton. Did you yield back? Wow, thank you.
Mr. Hall, 5 minutes.
Mr. Hall. Thank you, Mr. Chairman.
All of you probably sat through the first session and heard
our questions and answers, and I guess, Mr. Cavaney, I will
start with you. And I thank you for being here and sharing your
knowledge with us.
What is needed--what we need to do is to bring some
stability to the energy market, and that is easy to say and
hard to do. It is going to require long-term investments and
strategies.
What, in your opinion, will be the most effective strategy
for dealing with the spiraling cost in the short term first? We
got an idea on the long term, but what can we do tonight or
before milking time tomorrow, or within the reasonable
foreseeable future?
Mr. Cavaney. I think the steps that were undertaken by the
administration and by the IEA in terms of making available some
finished product, which is being brought over from their
reserves, did about as much as one could expect. We have seen
over the last several days both drops, pretty significant, in
the futures markets of both crude oil and finished product. I
am not forecasting here, but we may well look back and see that
the peak here occurred the last several days ago, because with
the passage of time, what we are finding is both the refineries
are, in fact, coming back; the pipelines are up, as we
mentioned; and the refined product that is coming over is
helping fill a void. So we are on the right track in the near
term.
What we ought to focus on is trying to help work together
instead of actually working against one another. And by that I
mean we in the industry as we are, we ought to be out there
getting supplies we need, getting the repairs, getting our
people down there and cooperating with the other entities which
are so important.
Utilities have done a terrific job of getting power down
there. Government ought to be in place to be able to provide
help when needed, and that is quick approval on permits,
helping to expedite things that need to go through the process
of getting approval, and in some cases possibly even helping
coordinate closely the various different entities within the
government itself.
And finally, consumers, and I think this is the part where
the biggest savings can be made. And I don't think we as a
country have done anywhere near the job we can, and that is in
energy conservation. We can give you on our Web site api.org a
whole litany of things that a driver can do in his or her
automobile that can actually improve the miles per gallon by as
much as 10 or 12. That is fairly significant if you are driving
a car that gets about 25 miles per gallon. And there is also,
very obviously, that if you have two cars, one gets good
mileage and other gets less so, try and plan your longer trips
for the other. That is the equivalent of actually adding
product instantaneously.
The problem is most people think, I am just an individual,
and my little contribution won't mean much. But if you do a few
simple things and multiply that by several million, you are
adding more production than we can ever find overnight.
So the answer to your question is individuals can look at
this and begin to create, I think, an approach that won't only
serve us well during this immediate postrestoration period, but
can serve us well going forward, and that is energy
conservation not only in transportation sector, but in all
sectors.
Mr. Hall. Would you repeat that?
Mr. Cavaney. I will do it a little more passionately next
time.
Mr. Hall. Seriously, I know you are a little disgusted that
you don't have a better audience. Everything is being taken
down by the reporter, every Member of Congress, and we will
read and reread it. That is the way we make decisions. I was
kidding you. I don't expect you to repeat it.
But Mr. Cooper made a great case for more refineries, and
the chairman, and the chairman's committee, those that work
with him and support him and advise him, worked with him, and
in his--I guess in his good judgment, he put subtitle H,
sections 391, 392, their aim toward the Governors of this State
to make it more possible and more likely that they could pursue
the construction of a refinery. And I am not sure, I don't
think we had any report language or anything telling him
exactly how to do it, because probably it will be done slowly
and by people that are more knowledgeable about the business
certainly than I am. But if we have the support of the EPA, and
we set that out in the bill itself, there is a lot of ``thou
shalts'' in there that ought to make the acquisition of a
refinery a little more attainable for the people, Governors of
the State, with a lot of their finances; that they have to
reduce the time that it takes to build one and might make it
more attractive for investors to shorten the time for them to
have some expectation of their payback.
But what are the--do you know--I asked someone who
represented the Federal Government if they had any anybody from
any of the 50 Governors tie into them on this, and I think
maybe, Mr. Chairman, our Governor has discussed it with you,
and you discussed it with several other Governors. Chairman
Barton. I asked the President to send a letter to all 50
Governors asking them if they want to consider using this
particular provision, and I talked directly with Governor Perry
of Texas, who is considering strongly doing just that.
Mr. Hall. Maybe I am talking to the wrong bunch, Mr.
Chairman. When did you send that letter?
Chairman Barton. I haven't sent the letter yet. I just made
a phone call. I asked the President of the United States----
Mr. Hall. I will follow up and I will send Red a copy so he
can help me answer that and help us work that out. But it is up
to--how much more time do I have?
Chairman Barton. You have been out about a minute and a
half.
Mr. Hall. Could I ask one real quick question of Mr.
Douglass? He is my constituent and my good friend. He has been
an effective witness before this committee before.
Bill, would you clarify how individual stations make
adjustments in pricing in times of market fluctuations; do
suppliers give you anticipated prices?
Mr. Douglass. When you say anticipated, we get our price
changes every day. But in a volatile market like we are
presently in, they may be twice a day, anticipated in the sense
that if they told us at noon, they would raise the price at 6;
if they told us at 6, they would raise it at 12.
Mr. Hall. Who is they?
Mr. Douglass. The oil companies.
Mr. Hall. Do you deal with the same one all the time?
Mr. Douglass. We have eight different suppliers, but we
have one principal supplier, a branded company. But what you
have to do is look at your replacement costs, because they
draft you as soon as they load the truck. They literally have
you on the computer, and when that truck is loaded, they draft
your account. So you have to pay when you buy, and if you don't
pay, obviously they don't let you buy.
Mr. Hall. What are the prices based on?
Mr. Douglass. The price that we pay?
Mr. Hall. Yes.
Mr. Douglass. Or the price that we charge?
Mr. Hall. The price that you set. You set a price to sell.
Mr. Douglass. Essentially we try to recover our costs,
because when I used my chart, one, I had a 14-cent margin at
that point, which is a gross margin before any expenses are
taken out. And when the truck picks up that fuel, and it is 10
cents, in this case, 13 cents higher on the next day, we have
to raise our price because our costs remain. And as they
pointed out, the credit card costs alone range from 5 to 7
cents a gallon of that 14 that I had. But if you will notice on
that chart, my margin went down to 10, so I had a net margin,
if you will, of 3 cents to pay all the expenses associated with
it.
So you must move forward. You must take your inventory.
Mr. Hall. My time is really up. I will write you a letter
and ask you to give some more answers, really to follow your
invoice right from the time you got it and the time you pay it,
and how much you raised your prices compared to how much the
people that sold to you raised theirs.
Did you ever raise yours in excess of what----
Mr. Douglass. No, sir. No, sir. In fact, we lost margin, if
you look on this transaction. We lost margin as it went up, and
our expenses went up, as I indicated, through credit card
expense and so on.
Mr. Hall. The only way you could have kept from losing that
was to arbitrarily raise yours above what you were paying
directly for it?
Mr. Douglass. That is correct.
Mr. Hall. You didn't do that?
Mr. Douglass. I did not do that.
Chairman Barton. Before I recognize Mr. Stupak, I want to
understand something. You just said if I come into one of your
stations, and I use my Visa credit card, and I buy 1 gallon of
gasoline, you are charged 7 cents?
Mr. Douglass. Yes, sir.
Chairman Barton. But if I buy two gallons, you are charged
14 cents? And----
Mr. Douglass. Yes, sir.
Chairman Barton. And if I charge 10 gallons, you are
charged 70 cents?
Mr. Douglass. Yes, sir.
Chairman Barton. So the more I buy, the more you are
charged?
Mr. Douglass. Absolutely.
Chairman Barton. Even though it doesn't cost any more for a
transaction if I buy 10 gallons than if I buy 1.
Mr. Douglass. That's correct.
Chairman Barton. That doesn't make a whole lot of sense.
Mr. Douglass. In my testimony I asked that we investigate
the pricing of the credit card companies.
Chairman Barton. Interesting.
Mr. Stupak.
Mr. Stupak. Thank you, Mr. Chairman.
Mr. Newman--I am sorry, Newsome--the risk premium, what is
it right now on a barrel of oil?
Mr. Newsome. I think it would vary depending upon what
analyst you talk to.
Mr. Stupak. All right. Most papers are saying 15 to 20
dollars; is that correct?
Mr. Newsome. I am not an oil analyst, so it would be
difficult for me to say, but my opinion would be that is very
high.
Mr. Stupak. What do you think it is?
Mr. Newsome. I would say it is much lower than that, below
$5.
Mr. Stupak. So Bloomberg, Kiplinger, all these people are
just wrong?
Mr. Newsome. Well, they all have their opinions.
Mr. Stupak. Okay. Thank you.
Mr. Douglass, certainly I enjoyed your testimony. I really
found your charts quite interesting. The chairman was just
asking you about if you take a look at your chart number 6
about the credit card companies, as you can see right there,
they went up twice, or 200 percent; average 2003 revenue was a
buck 50. They are up to $3 now, 200 percent increase, royalty
owners. They have doubled, if you will, their cost to a
retailer?
Mr. Douglass. Sure.
Mr. Stupak. Royalty owners, they doubled, crude exploration
and extraction, two and a half times, if my math is correct;
refiner, two and a half times; and retailer stayed the same.
Mr. Douglass. Correct.
Mr. Stupak. Is that a set margin you work off?
Mr. Douglass. Well, actually, I was reflecting incidentally
on this chart. It says average 2003 revenue. My staff didn't
understand my cursive. It was August 2003 revenue and August
2005. And, in fact, what I did, in the event I got challenged,
I brought invoices with me.
Mr. Stupak. So everybody in the industry has gone up at
least 200 percent in the last 2 years except the retailer?
Mr. Douglass. That is correct.
Mr. Stupak. If you look at your chart, go to chart number
4, if you will. You start on August 26 and go to close of
September 2. That is a week's time. Katrina hit land on August
29. Shortly thereafter the President released an SPR, or oil
out of SPR, as I and others have been advocating for some time
to try to bring some stability here. And Mr. Caruso testified
earlier that once the oil was reduced from the SPR, the cost of
a barrel of oil actually went down.
Mr. Douglass. Yes, sir.
Mr. Stupak. But the price keeps going up.
Mr. Douglass. Well, we have a chart, chart 3 here, which
does not reflect taxes or, if you will, freight, but it is the
price for unbranded fuel, and you will see that it did drop off
from its high of 831 for unbranded fuel. What happened with the
branded companies, they were lagging that particular pricing
strategy, so they were still catching up. They were still
passing through the----
Mr. Stupak. But then the next day on September 2, it is
going back up again.
Mr. Douglass. Yes, sir.
Mr. Stupak. Where would it be on the 3rd, 4th? Has it gone
up, stabilized? I am just asking you to guess. It is just on
your chart.
Mr. Douglass. It has actually dropped.
Mr. Stupak. Dropped again?
Mr. Douglass. Yes, sir.
Mr. Stupak. We appreciate your charts and appreciate the
suggestions you have.
Mr. Slaughter, I got a number of questions for you. And the
chairman is turning on the clock, so I am going to have to move
quickly, so my time is limited. If you answer yes or no, I
certainly would appreciate it.
Allow me to begin by quoting a 1995 industry document in
which the oil industry noted that--I am quoting now--that if
the U.S. Refining industry does not reduce its refining
capacity, it will never see any substantial increase in
refining margins.
And that is an internal Chevron document dated November 30,
1995. That suggests to me that the industry itself has played
an important role in the lack of refining capacity in the U.S.
So my question is in your testimony, you indicated that in 19--
you indicated that 177 refineries have shut down since 1977. Is
it true that there are no requests for environmental permits to
reopen any of these facilities, yes or no?
Mr. Slaughter. To my knowledge, there are not. Many of them
have been sold or moved, or many of them could not get another
permit.
Mr. Stupak. But there is no request to reopen these 177
refineries; the answer is no?
Mr. Slaughter. There may not even be a refinery on that
site any more, Congressman.
Mr. Stupak. Isn't italso true that since 1995--I should say
in 1995 alone, 30 refineries have shut down, right?
Mr. Slaughter. Many of them shut down because of the cost
of the Federal programs that I displayed on my third chart,
Congressman.
Mr. Stupak. Sure. So 30 of them shut down. So now we are up
to 207. Of the 30 that have shut down, are any of them seeking
permits to reopen?
Mr. Slaughter. It is funny you had mentioned that. There
was a refinery in California, the Powerine refinery, two
summers ago when there were supply problems in California
applied to reopen, and the application was denied.
Mr. Stupak. Denied by California?
Mr. Slaughter. Denied by the local authorities.
Mr. Stupak. Well, there have been no new refineries built
since 1976, and over the past 13 years only one refinery, the
Arizona clean fuels facility, has sought a permit to rebuild a
new refinery; isn't that correct?
Mr. Slaughter. That is correct.
Mr. Stupak. Isn't it also true that in 1992, the State of
Arizona granted a permit to the Arizona facility for
construction and operation, and the company sat on the permit
for nearly 8 years without actually building a refinery?
Mr. Slaughter. Not to my knowledge, no. They had to remove
the refining site----
Mr. Stupak. They didn't move the refinery site until 2003
from Maricopa County to Yuma, Arizona. So from 1992, after it
was approved, it sat 8 years without actually building a
refinery.
Mr. Slaughter. There was a lot of activity on that in the
meantime, Congressman.
Mr. Stupak. They got the permit, and they still to this day
have not built a refinery.
Mr. Slaughter. It is more than just one permit,
Congressman. They did just get an air permit, which is a good
sign, but you know there is a problem because it costs $3
billion to build a refinery of that size today. There is a lot
of upfront money you have to pay, and you may have to wait 15
years until you know whether you will ever get a drop out of
that refinery. There is a lot of uncertainty in making an
application to build a new refinery.
Mr. Stupak. They have all the permits they needed. What
permit did they not have after 1992?
Mr. Slaughter. They need air permits, and they need other
permits.
Mr. Stupak. Tell me the ones specifically they did not
receive for this one. I don't want general answers. I am
talking about a very specific refinery, because I found--and
today's Washington Post backs up the stories here. You claim
you can't get permits because of environmental reasons, yet
everything we have examined finds just the opposite. And when
you started off with the first quote I gave you, which was
1995, in which the refining industry says, if you don't reduce
your refining capacity, you will never see any substantial
increase in refining margins.
Mr. Douglass' chart here, which shows just in the last 2
years you were able to increase your revenue by decreasing
refining capacity by 2\1/2\ percent, from $11 in August 2003 to
$27 per barrel in 2005.
Mr. Douglass' charts sort of indicate what we are driving
at here. The issue isn't environmental laws. The issue is there
is no need to take refinery capacity because if you do, your
margins are going to go down.
Are you familiar with the Government Accounting Office
report of May of this year which says exactly the same thing?
Mr. Slaughter. I am aware of that GAO report. I am also
aware of a FTC report that rebuts it. You keep citing a 1995
document by one person in one company which I have not seen,
and there is no evidence at all that anyone ever acted on
whatever suggestion is there.
Mr. Stupak. Really, since that time you have closed 203
refineries. I think that is quite a bit of action; 177 and 30,
unless my math--you are right, it is 207.
Mr. Slaughter. That is right.
Mr. Stupak. One hundred seventy-seven----
Mr. Slaughter. Actually refining capacity has increased
over that period.
Mr. Stupak. In refineries that are left.
Mr. Slaughter. It is still capacity.
Mr. Stupak. Actually it is increased by 13 percent only
since change is made. I keep hearing this, and even the
questions of the chairman and Mr. Hall was if we would build
more refineries, and even in the energy bill, which I
supported, there was movement to waive environmental laws to
make the Department of Energy, the Secretary, the head person
who would decide the environmental laws of this Nation. I think
it is a lame excuse for putting forth when you see prices and
profits like this by the refineries.
Mr. Slaughter. Crude price remains the biggest determinant
of product prices, Congressman. The EIA testimony today
demonstrated that, what happens in the marketplace demonstrates
it. The industry has been adding capacity at existing sites
consistently over the time period that you have mentioned, and
we have increased the actual refining capacity in the United
States over the last 10 years. A number of the refineries that
are cited in the larger number were inefficient, small
refineries that were basically supported by the price control
system of the 1970's----
Mr. Stupak. Or, as Mr. Cooper says, the bigger ones bought
up these little refineries, put them out of business;
therefore, it is easier to control the price when very few are
controlling the process. That is what Valero and others have
done.
Mr. Slaughter. Valero has bought a number of refineries in
the last several years and they have added 400,000 barrels of
capacity to them, Congressman.
Mr. Hall [presiding]. Mr. Stupak, have you got the answers
you want?
Mr. Stupak. No. Mr. Chairman, can we be allowed to follow
those up, though, with more written questions?
Mr. Hall. I will allow you an additional 2 minutes. I will
allow you an additional 2 minutes if you are trying to close up
because we are not going to have a second round.
Our chairman took 20 minutes, and we will yield you 2 or 4
of those. I am not mad at him about it. Let the record show
that.
Mr. Stupak. Mr. Cooper, I brought up about the refineries
being closed, more people control it, and therefore they can
control also the price or the profit margin. Would you care to
comment on my question to Mr. Slaughter on that line?
Mr. Mark Cooper. It is a simple proposition that we have
understood for quite some time that when the number of actors
in the market gets small, they can exercise market power.
In this industry, because supply and demand are so weak,
market forces are weak, people can't come back, you can't
increase supply, you get more market power at a lower level of
concentration. And we submitted for the record a very detailed
analysis of this debate between the FTC and the GAO. The FTC
has a theory that mergers that don't increase the market
power--the concentration ratios above a certain level don't
hurt. The GAO analysis shows they do.
And let me be clear. The FTC and the GAO do not treat
capacity as a strategic variable. If you look at the GAO's
analysis, as capacity utilization goes up, price goes up. If
you cut back on capacity, you can expect the price increase. As
stocks go down, price goes up.
The GAO considers those to be exogenous; that is, they are
not part of the market power problem.
Your memo, the behavior over the past 4 years shows--or 10
years--shows quite clearly an industry that has got
concentrated, and as a result of concentration at the refinery
level, they have power over price. That is what we call market
power.
I think the numbers you have seen today suggest that they
set the price at what the market will bear--you can put it that
way--but there is not enough supply side competition, which is
what we like in our markets, to protect consumers from the
abuse of market power. I think that is a good case, and you
have good empirical evidence of that today during this crisis.
Mr. Stupak. Then what should the Congress do to take--if I
use the word we have heard a lot today--the U.S. Off the
razor's edge of tight refining capacity? What should we do?
Mr. Mark Cooper. Well, we tried to emphasize the demand
side. So Mr. Hall's question, what can I do before I have to
milk the cows tomorrow, I talk about three Ts. Two of them I
can do before tomorrow; that is, trips and tires.
You heard the suggestion. You inflate your tires, and you
think about your trips. And it is not deprivation. I think
about how many times I am going to the store and which car I am
going to drive to the store. I agree on something with Mr.
Cavaney--I hope this place doesn't get struck by lightning--and
then the third one is tune-ups. Those are near-term things. In
the long term, we have to get the efficiency of our fleet
increased.
Because reducing our consumption affects the world market--
Mr. Lashof showed you why it is a big impact on the world
market. It affects the domestic market. It alleviates the
refinery problem. Producing more domestic oil will not
alleviate the pressure on the refineries.
Those are the things to do. I think the Government agencies
that worry about gouging should stop saying there is no
collusion and start saying consumers aren't being treated
fairly. We should worry more about the unilateral exercise of
market power.
Mr. Hall. All right. Mr. Cooper took the 2 minutes. Now,
you want to----
Mr. Stupak. I thank you for the extra time.
Mr. Hall. You yield back?
Mr. Stupak. Yield back.
Mr. Hall. Thank you, Bart.
Chair recognizes Mr. Shimkus for 5 minutes, which will
probably be 7, 8 or 9 or 10 minutes.
Mr. Shimkus. Thank you, Mr. Chairman.
First of all, I want to thank Chairman Barton for actually
using a lot of time, because going through the chain process is
really helpful because the average consumer just gets lost, and
it is a great educational process.
We used to have on this committee jurisdiction over
financial services. We lost that with Gramm-Leach-Bliley, and I
think we have lost some of our financial service expertise on
markets and futures in the issue.
So, Mr. Newsome, could you briefly explain and answer this
question: If futures causes us to hedge risk, by looking at the
futures market, should we have been able to predict the high
prices we saw this summer? I am not talking about the
hurricane, but the escalation. By looking at the futures
market, should that have told us where we were headed?
Mr. Newsome. Well, certainly futures markets are no crystal
ball, but high energy prices are not new. I mean, the market
has been reacting to market fundamentals for over a year, and
if you start looking at those fundamentals of record high usage
from China, India and the U.S., China is still considered
potentially the 800-pound gorilla because most of their usage
is industrial. And as they move to normal usage as in the U.S.
Is the middle class, I think their demand for energy is going
to blow through the roof.
You combine that with a political unrest in the Middle
East, political unrest in Venezuela, and you get in the
situation that Mr. Cooper has talked about where you have got
such a tight margin that anything that happens around the
globe--because these market are global--anything that happens
has an impact. A refinery goes down in Venezuela, it has an
impact on our market. I mean, that is how thin the margin is.
So certainly the markets have been moving in that direction
over time.
Unfortunately, the hurricane became a market fundamental
very quickly, and the markets reacted to that fundamental.
Mr. Shimkus. Thank you.
Mr. Douglass, I really appreciate this chart because I have
gone to a lot of retailers, and they have talked to me about
price inversion in this issue, and I think it is really
helpful.
The other thing, based upon financial services aspects,
they also raised the credit card issue. And I have heard that
in my district, and that is part of the financial services
background that we have kind--of our expertise on this
committee we have kind of lost. But there are some savings. The
consumers choose to use credit cards; you choose to accept
credit cards instead of cash transactions. No one is being
forced to either use a credit card or pay for their gas by
credit card; is that correct?
Mr. Douglass. That's correct, Congressman.
Mr. Shimkus. There are benefits to that because you get
immediate payment versus if someone comes in to the quick mart
and wants to write a check that may clear or may not, and you
have to decide whether--at what level are you going to accept
the check, $20 or $50 or--use of the credit card hedges some of
your risk.
Mr. Douglass. The credit card does take some of the risk,
but the obvious costs of the credit card have accelerated.
Mr. Shimkus. And I think that--one of the issues here is
that we need more competition across the board in the markets.
We need more competition in the refinery industry. We need more
competition for you to have selected credit cards that would
have a different type of standard by which to, in essence, loan
money to individuals and then pay the retailers. But how do
you--government, how does government intervene to get involved
in the market? And that is a huge challenge.
I was asked by my friend Vito Fossella to ask this
question, and I looked at it, and I did think it is a pretty
good question. It is you, Mr. Douglass, from August 29 to
September 2, your testimony says that prices jumped 44 cents
for branded stations--those flying the flag of the major
refiners--but for unbranded, independent folks like the one I--
the picture I showed earlier, Rock stations in my district, it
went up 73 cents per gallon. Can you explain the difference?
Mr. Douglass. I think essentially the suppliers started to
be concerned that they couldn't meet their contractual
obligations. And the branded stores, we are contractually
obligated to our supplier, and they to us, to supply us at the
historical average, and they have us on allocation currently.
We are restricted in ourselves. We can't buy more each day than
we bought the same day last year. So they look at that and they
say, this is going out of control; I am going to be able to
supply the branded people. So then they take the unbranded, if
you will, or the surplus sale and take it off the market by
virtually pricing it so high, it squashes the transaction.
Mr. Shimkus. Thank you. And this has been a long day, and I
appreciate you all being here. I think we have learned a lot.
We have a lot of work to do. I am for more competition across
the board, and that is what makes America best. And we have to
move somehow incentively to get more refineries, more
independence. Of course, as I said earlier, and I was going to
try to go without saying anything, ethanol and biorefineries
are growing, and I encourage that also.
Thank you. I yield back, Mr. Chairman.
Mr. Hall. I thank you.
Chair recognizes the gentlelady from California Mrs. Capps
for what we hope will be 5 minutes.
Mrs. Capps. Thank you, Mr. Hall. And I was going to offer
my thanks to the person whose chair you succeeded here, Mr.
Barton, because I thought the exchange that he had early in the
hearing was very instructive, especially, from my point of
view, that Mr. Cooper, Dr. Cooper, was allowed to respond each
time, and that gave me the opportunity to learn.
Mr. Cavaney, I want to congratulate the people you
represent for the lack of any accidents in this massive assault
on the oil platforms. I come from California. We have a lot of
oil platforms on our coast. It is not hurricanes we are
terrified of, it is earthquakes. And I have several in my
district--off my district--that sit on earthquake faults. And I
want to say a word about taking advantage of technology that is
the very best there is, and this is an example. I hope you will
carry back to the industry that this happens.
Now, at the same time, I want to say, I believe--and I am
going to say it to you folks in the industry--that these high
gas prices and these disruptions in the oil market that we have
been talking about all afternoon--all day bring home the point
that we are too dependent on oil as a Nation. I believe that
America needs to diversify our energy portfolio. I have
actually heard more about conservation and diversification
today than I heard during our preparations for our energy
policy. I wish we had had more of this language that I have
heard today in this hearing in that markup.
I also want to say that I think it is really unfortunate
that some Members of--colleagues of mine, and some in the
industry, may use this tragedy to push unpopular plans for new
drilling in protected areas, and that they say we need to drill
in these areas in order to deal with the high gasoline prices.
And I understand there is a number of businesses and trade
groups that are planning to send a letter to the Republican
House leadership asking them to allow new drilling in protected
areas. Their letter specifically cites Lease 181 in the eastern
gulf as a priority area.
This is nothing new. Many of us have experienced this
before in this body. These businesses and groups have been
asking for this for years, and for years the House has rejected
these drilling plans, most recently during House consideration
of the Interior bill.
What is new, however, is the desire to use Hurricane
Katrina as a motivating factor. And I think this goes right to
the heart of profiteering motivation in the face of human
tragedy, and I hope we can avoid it.
We know MMS does an inventory every 5 years. We have within
our area, or confines, something like 3 percent of the known
oil and gas reserves, while we are responsible for 25 percent
of the world's demand.
So my question to you, Dr. Lashof, I want to ask from your
perspective and your studies, would drilling off the west
coast, off the east coast or in the eastern Gulf of Mexico,
where there are prohibitions currently, do anything for gas
prices now, or would it do also anything to lower oil prices in
the future?
Mr. Lashof. No, I don't believe it would.
Mrs. Capps. Maybe you could include ANWR in the same.
Mr. Lashof. The chart I had specifically related to the
Arctic National Wildlife Refuge, but it is much the same story
with regard to protected areas off the coast.
In fact, if you look at the areas that are already
available for oil and gas development, they contain 80 percent
of the estimated resources. So the areas that are protected are
a small fraction of the total resource base offshore, and, you
know, overall, as you mentioned, the United States only has 3
percent of the world's reserves. Two-thirds of the world's
reserves are in the Middle East. So any supply side strategy
that we might adopt that involves petroleum simply can't change
the balance in a significant way. And the EIA analysis
estimating the effects of the energy bill, for example, even
including the Arctic Refuge, which wasn't in the final bill,
suggested that its maximum impact would be less than 1.5 cents
in 2025. This is a trivial number compared with the kind of
price movements we have seen.
Another point, as we have heard, the price movements that
we have seen in the short term are mostly related to the price
coming from the refineries rather than crude oil. So any
drilling for crude oil has no impact on that. The price impacts
we are seeing are at the refinery gate rather than due to
increases in crude prices.
As Mr. Cooper said, and as I said in my testimony,
improvement in efficiency, both the short-term conservation
effort and the long-term commitment to real efficiency
improvement and diversifying supply away from petroleum itself,
can have a big impact, and it affects both the crude supply and
the refinery supply, whereas a drilling response will not do
that.
Mrs. Capps. And diversifying our energy portfolio is
something we could be emphasizing more in our energy policy?
Maybe I will use my last minute to ask Dr. Cooper, last
month the administration proposed a restructuring of light
truck fuel economy rules claiming the new policy would save the
country 10 billions of gallons of gasoline over the lives of
vehicles bought from 2008 to 2011. I know there is not much
time, but could you comment on this? Was this move enough?
Would you recommend we de lower? And this--I am talking about
regulations from the administration or from Congress.
Mr. Mark Cooper. Well, as I mentioned, you might not have
been in the room, the price of gasoline used in that cost-
benefit analysis was $1.80 a gallon in 2012, including taxes.
So they have undervalued gasoline dramatically.
Mrs. Capps. What should we do instead?
Mr. Mark Cooper. Well, the answer is you should adopt a
much higher standard. And we called for that last week at a
press conference, and, you know, the off-the-shelf technologies
can dramatically improve efficiency. People calculate to double
it in new cars, and then over the course of the life of the
cars, we will have a dramatic increase in efficiency.
And if we take a leadership position, the question comes
up, the automobile industry says, it will kill us. That is what
they told us about airbags, which is in the purview of this
committee. They said, airbags is the end of the industry, and
all these safety measures. And, of course, they adopted it.
They adjusted to it.
So from our point of view, the most important thing we can
do for our automobile industry is reorient their thinking.
Instead of giving people discounts to keep them hooked on fuel-
inefficient automobiles--I mean, they have lowered the private
cost of the automobile sufficiently to make it economic for
individuals to buy it on a private basis. There is no doubt
about that. I think that is clear.
But as a society, this is suicidal, because those vehicles
will be in this fleet guzzling gasoline for a decade. So there
is a big gap. And Mr. Garman really all day he does not
understand the gap between the private costs of gasoline and
the social costs of gasoline.
The price at the pump does not reflect the economic
slowdown, the trade deficit, the currency instability, the
political vulnerability, all of the environmental harm. There
is a social cost to gasoline. These guys couldn't even get the
economic cost right.
We have to start viewing gasoline as a critical public
problem. The example I use, the analogy I use, is cigarettes.
And maybe there are some people from tobacco-growing States.
Forty years ago this room would have been filled with people
who were smoking. Half the people in this room would have been
smoking. They all kind of knew it was bad for them, and they
couldn't kick the habit. We as a society, through a combination
of education and regulation, changed that behavior.
Gasoline is a bigger threat to our national health and
welfare, and we need that same sort of commitment to education
and regulation to change behaviors. And that is where I think
we have to go as a society. It can make a big difference for
our industry and our Nation.
Mr. Hall. A little relief now.
Mr. Cavaney. Mr. Chairman, I would like to just take
exception to that comment about comparing some of the dangerous
health effects that come from smoking with our products. Most
of the various pharmaceutical company inputs come from
hydrocarbons that we produce and make the various drugs that
save people's lives in an immense amount. So to equate one with
the other is really not a fair comparison in that same sense.
Our products save lives. The plastics that come from our
products that are found throughout hospitals, the drugs that we
use are incredibly valuable, and so it is just not a fair
comparison to equate us with some of the problems that were
associated with the other industry.
Mr. Hall. Gentlelady has the right to close. I will give
you a minute to close, Mrs. Capps. Is that enough?
Mrs. Capps. Less than that. And I want to wear another hat
now as someone who has worked in health care all my life and to
say I think the industry that you represent has enormous
products that benefit our health very much, and the use that
Mr. Cooper--I know I am putting words in his mouth when I say
this, but you gave the time to me, Mr. Hall--the uses that he
is talking about are very different uses of gasoline and oil.
I think actually you could make the case if we saved the
product--because it is fossil fuel, it is limited--over a
lifetime if we saved it for its more beneficial therapeutic
uses and life-enhancing uses and did that by--you know, we are
not going to stop using gasoline in our cars anytime soon, but
over the long haul, I have heard advertisements from the oil
industry on television talking about diversification as part of
their portfolio, and that is what we are talking about here.
Mr. Hall. All right. I thank you. Does gentlelady yield
back the balance of her time?
Mrs. Capps. I do yield back, finally.
Mr. Hall. I recognize the gentleman from Oregon.
Mr. Walden. Thank you very much, Mr. Chairman. I have got a
number of questions I would like to work through here, so I
appreciate your indulgence today and your testimony. It has
been most helpful.
Mr. Slaughter, you made a comment about the spot price and
how prices get adjusted because the spot price goes up. What
percent, though, of the market is traded in the spot market?
You know, we saw with energy pricing a spot market that went to
$1,900 a kilowatt hour at one point.
Mr. Slaughter. I can't give you a number on that. Mr.
Walden. It is essentially a wholesale price at the rack. It
generally is a higher price because it is something that
someone basically is going out in the marketplace and buying,
who doesn't have a contractual relationship.
Mr. Walden. Is there anyone on the panel that can tell me
how much is contracted out and how much is bought on the spot
market? Don't you maintain portfolios of different----
Mr. Newsome. If you look at, Congressman, the way the
market is set up, you have the futures, which is a slice, and
then you have got cash, which is the bulk of the marketplace.
In futures, it varies by contract. And natural gas, most of
our trading is in the back months; less of it is in the spot.
Gasoline and crude oil, it tends to be a little more even
between spot and back months, but it depends very much on which
markets you are talking about and whether it is futures or
cash.
Mr. Walden. So in gasoline, am I correct, then, hearing
what you have said, about half of it would be in the spot
market? Is that a daily or hourly----
Mr. Newsome. No. It is not going to be half of it. But
again, it depends if you are just talking spot market or cash
market.
Mr. Walden. One of the things we heard was that the price
went up at the rack--I don't know all your terminology--based
on the spot market going up, and you were somewhat under the
spot market. And I guess my question is if you have already got
a reserve of gas or crude oil or whatever part of the business
you are in already purchased and handled, then what percent,
how big an impact does the spot market really have on your
actual cost?
Mr. Cavaney. In our testimony that we submitted in a
written form, there is a little explanation. As the oil
companies utilize different arrangements with their
distribution chains--there are company-owned stores, and there
are stores that are leased, and there are three different ways
you can work under those, and then there is the independent.
Under each of those scenarios, there can be arrangements to
either go under a contract, which was mentioned here, or if
someone has a financial difficulty or somebody has a new rip-
roaring contract, you might say, let's work on the spot market.
Let's go for a while and see if we can develop a credible
history. It is changing all the time. There isn't one place you
can go to get a data point that would tell you that.
Mr. Walden. I am trying to get a handle on this. I sat
through here as my colleague from Washington--we heard
virtually the same sort of panels telling us why the energy
market and electricity was all fine, and there was no problem
out there. And then we hear the tapes of the traders. And I
will tell you what, I am not from Missouri, but a lot of
companies lost a lot of credibility with this Republican
business member because I had to sit here and listen to the
testimony, and I believed it. And then I found out the truth.
And I will tell you as vice chairman of the Oversight
Investigation Subcommittee, if we find that traders have been
manipulating the market, we are going to go after them, because
we found that to be the case long after the fact, and it cost
ratepayers in my State an enormous sum of money.
And I have already asked the Government Accountability
Office to look into the trading issues. I am sure you know, Mr.
Newsome, to make sure that isn't happening because consumers
deserve that right to know if these markets are being operated
in an honest, above-board, direct way. And I am not casting
aspersions, but, you know, it is like Mr. Cooper said, you
know, first time or second time, you learn from it. Third time,
I am not taking any prisoners.
Mr. Newsome. But only thing I would say when you talk about
traders, again, there are traders on future markets, traders on
over-the-counter market. I was chairman of the CFTC during the
whole Enron situation, brought multiple charges against energy
companies. Attempted manipulation did not take place in the
regulated futures market. It was an attempt through the false
reporting of prices to move those prices and then take
advantage through the positions they had in the over-the-
counter----
Mr. Walden. They did the round-tripping.
Mr. Newsome. Round-tripping, the false reporting of prices
to the indexes. But just to say traders are manipulating, I
want to clarify that it wasn't traders on the regulated
exchanges.
Mr. Walden. All right. But then I read this quote, as you
probably heard me read earlier today, on the Dow Jones news
wire from Mr. Addison Armstrong, manager of the exchange trade
markets, TFS Energy Futures, LLC, in Stamford, Connecticut, and
I quote the wire here: There are oil commodities traders who
made so much money this week following Hurricane Katrina, they
will not have to punch a ticket for the rest of the year.
What does that mean?
Mr. Newsome. Traders on the floor can make money from two
different methods; one through brokerage fees, they are trading
the accounts of customers. Obviously we had record volume last
week, so brokerage fees were the highest they have ever been.
The second component would be the position that the traders
had coming into the trading week. Typically on a Friday,
traders try to get flat their positions so they don't have to
take that risk over the weekend. But all traders cannot get
flat. Some are long. Some are short coming into Monday.
Obviously conditions changed drastically from the end of the
trading day Friday.
Mr. Walden. But they knew the hurricane was coming.
Mr. Newsome. Well, they knew it was coming, but they didn't
know the path it was going to take, they didn't know how hard
it would hit the oil refinery section, and certainly had no
idea it was going to be as strong as it ended up being. So
depending on what your positions were on Monday, some were big
winners, but some were big losers.
It is a net zero sum game. So for every guy that made it,
there was an equal and offsetting person who lost it.
Mr. Walden. So as the regulator--you do, NYMX, right?
Mr. Newsome. Yes.
Mr. Walden. And do you regulate that? What is your role?
Mr. Newsome. I am the president of NYMX.
Mr. Walden. Who is your regulator?
Mr. Newsome. The CFTC.
Mr. Walden. I will follow up with them.
Mr. Newsome. They have been on the floor every morning with
physical surveillance. They look at our large trader reports
every day. They also have analytical programs that look at how
traders trade, how they handle their customers' accounts,
whether they are trading their own accounts, et cetera, et
cetera.
Mr. Walden. I want to go to just a couple other quick
points here. One is we have talked about a lot of--about the
lack of supply because of the shutdown of the refineries and
the pipelines and everything else. I haven't heard anything
today about a drop in demand in that region.
I am curious about that, because if we had half a million
or a million people displaced that aren't driving, that aren't
moving--did anybody see a demand reduction?
Mr. Cavaney. Yes. There is demand reduction. We can't
really quantify because we collect data, and weekly data, and
put it out. Tomorrow morning we will be putting out a report,
and we will be glad to send you something on that.
But we have already seen in the previous month before the
hurricane was coming up that higher prices were having an
impact, and, typically, demand had flattened out year-over-year
basis. So trading nationally was already down, and when you see
something like this, you can fully expect that it is going to
be down pretty significantly.
Mr. Walden. One final question for Mr. B. Cooper--it says
B. Cooper and M. Cooper. This is a question I get a lot. I was
out 851 miles around part of my district. My district is bigger
than any State this side of the Mississippi. A question I would
ask is the gas station set this price in the afternoon, and
that price--I can find 2.79 gas today--when you talk about
forward pricing and how when they call and tell you at noon it
is going to go up 13 cents or whatever, and you immediately
then raise prices, right? No.
Mr. Benjamin Cooper. You got the wrong guy.
Mr. Walden. I am sorry. Mr. Douglass, I am sorry, because
you just do the pipelines, and you are not party to any side of
this because you didn't do anything.
Mr. Douglass, I apologize. The question that comes in is,
okay, you move your prices up immediately. Do they go down
immediately when they call and say tomorrow it is going to be
13 cents less? Does it take the same time to go down as it is
to go up?
Mr. Douglass. Actually it is driven by several factors.
First obviously is the cost. When the cost went up 13 cents, we
attempted to erase 10 cents; you know, the next day we
attempted to go up 10 cents. The market then determines whether
you get to keep that 10 cents or whether you have to roll it
back to zero. You may have no margin.
Mr. Walden. Market being competitors and the community?
Mr. Douglass. Correct.
Mr. Walden. So when the supplier comes to you and says, I
am going up 13 cents, you automatically go up. But it is the
community that decides how soon you go down?
Mr. Douglass. Absolutely. They will discipline you in a
hurry. If you are overpriced, your business will drop in half.
Mr. Walden. All right. Mr. Chairman, thanks for your
indulgence. Gentlemen, thank you for your testimony.
Mr. Hall. We recognize Mr. Inslee, the gentleman from
Washington, for 5 minutes.
Mr. Inslee. Thank you.
I am assuming, in talking to the gentlemen from the
petroleum industry, that anything that reduces demand or
reduces the rate of increase of demand has the capacity to
reduce the price. We have been talking to you about supply, but
it is a supply and demand they taught me in economics at UW.
I want to ask you about what the Federal Government has
done or not done to reduce demand, which could have the
capacity of reducing the price you charge; and I want to refer
you to a chart over here to your left. This chart shows what
has happened with average fuel economy since 1975 to 2005. You
will see the middle line there--the top line are cars, the
bottom line are trucks. The middle line is the average of both.
You will see that the average in 1975 was about 14 miles
per gallon. The Congress moved at that time to increase the
CAFE, the Corporate Average Fuel Economy standards, to
significantly increase it. As a result of that action by the
U.S. Congress, that went up in about 1986 to about 23 miles a
gallon, a very, very significant increase; and that had the
result of reducing demand or reducing the rate of increase in
demand, which had a capacity to reduce the price.
Since then, Congress fell off the wagon of fuel efficiency
in about 1985; and, in fact, the fuel efficiency of our cars
and trucks have gone done on average since 1985, have actually
been reduced in 2005 now to about 21 or 22.
So while we have created the Internet, we have mapped the
human genome, because the U.S. Congress has been asleep at the
switch, we have gone down on our efficiency of cars. As a
result, the demand has skyrocketed and one of the reasons our
price has skyrocketed.
If the U.S. Congress wants to be serious about reducing the
price of fuel, would you not suggest to us to get back on the
wagon of increasing the efficiency of the cars and trucks we
drive by increasing the CAFE standards? I ask Mr. Cavaney and
Mr. Slaughter that question.
Mr. Cavaney. I think your initial point is exactly correct,
and that is where I differ from my colleague from the NRDC, is
extra supply, whether it comes from drilling or from
conservation, is beneficial to the consumer. It is going to
help. And if you believe it in one area, then you have to
believe in another.
Now the answer to your question is we feel very strongly
that not only individuals but industries and companies ought to
practice conservation and energy efficiency, and our record as
an industry is very strong in that regard. We do not know--it
is not our business--how to make cars and how to make trucks.
But the idea that everybody ought to become more efficient, as
efficient as they can, consistent with safety and the like, is
something that we can support.
So I can speak to it on only the most general of terms. But
you are absolutely right on in terms of reduced conservation
helps people.
Mr. Slaughter. I would concur in that, Mr. Inslee. We are
definitely in favor of anything that creates additional supply.
The Association has always advocated trying to maximize supply
of fuels. We have always advocated that we do need additional
refineries in the United States; and conservation will
definitely help that, too.
Mr. Inslee. Now let me move to the supply side as far as
price for a minute. We went through the Enron and other energy
debacle. We saw an administration that was callously
indifferent, did nothing while Enron and other companies took
over a billion dollars out of the Pacific Northwest in their
rapacious behavior. So we are a little sensitive to supply
pricing issues up in the Northwest and on the West Coast.
We have heard discussions today that the Federal Government
really is very impotent in dealing with gouging issues in the
absence of collaborative behavior by various suppliers, that if
there is gouging done unilaterally or by one, we really do not
have a tool in our tool box federally to enforce this, and
there is 23 states that have anti-gouging laws specifically in
emergency context, but only 23 States.
Some of us think that we need a Federal tool to deal with
gouging, and we have proposed--today, I have introduced a bill
with a bunch of Members that would essentially give the Federal
Government an anti-gouging tool which--and it is just very
summary fashion--would amend the Clayton Act to bar charging
prices that are unconscionable in comparison to recent prices.
It would take into account the upstream components that you
all have to pay for the people ahead of you in the stream. It
would apply to necessary goods, which include gasoline, and
would apply during times of natural or man-made disasters,
pretty tightly woven bill, fairly consistent with some of the
State approaches.
Now assuming that you all want to demonstrate the effort to
show good corporate citizenship, which I believe--I hope that
you do, is this something that you think Congress ought to at
least consider, to have some type of anti-gouging regulation to
give us the authority to deal with this type of issue?
Mr. Cavaney. Well, first of all, we feel very strongly and
condemn any kind of gouging. I think just the discussion of it
and the fact that people are aware of it is going to have a
quiescent effect on it. Besides the 23 States that actually
have regulations that the Governor can enact, also any time a
Governor typically declares a state of emergency he can also
include gouging in there and do it. So the States do have some
authority if they choose to exercise it.
One of the challenges, I think, in approaching this from a
Federal level is going to be, like what we heard earlier today,
is really what is the definition of gouging? If it is a one-
person behavior? Does it mean, if you sell above a suggested
retail price, is that gouging one industry, or do you sell
within a range? And who determines it?
One of the things you need to sort of, I think, keep in
mind as you look at these things is the people who are closest
to where the occurrence may have happened are probably in the
best position to really get all of the facts and decide what is
there. So that would say at least there ought to be, in any
discussion, some consideration of making sure that you work
closely with the States and look at them as you go forward.
I cannot speak to whether Federal law is good or bad, but I
think the discussion certainly can inform people.
Mr. Hall. The gentlewoman from North Carolina, Mrs. Myrick.
Mrs. Myrick. Mr. Smith, you made comment that it was going
to cost between $400 and $600 million for getting service back
up again. But that is a cost that BellSouth absorbs as part of
what you do.
Mr. Slaughter, with the refineries--it is the same thing
with the refineries. You absorb the cost of whatever it costs
you to rebuild, et cetera? Am I correct? Because we have been
talking a lot today of what is the Federal responsibility and
all, but I am in my own mind clarifying that is your cost of
doing business, correct?
Mr. Slaughter. To rebuild the facilities that have been
damaged?
Mrs. Myrick. Yes.
Mr. Slaughter. That is what usually happens. Yes.
Mrs. Myrick. We appreciate that. Thank you.
And thank you all again for your patience in staying this
long and giving us a day of your time. We did not mean it to
end up this way. But I do have just two things.
Mr. Newsome, this is not at all--I wanted to ask you,
because this is not at all adversarial, so please help me.
Explain two things. First one was about the hedging and short-
selling that goes on and has gone on over the last, say, 4-year
period. Does that have anything to do with exacerbating the
price of oil by the barrel?
Mr. Newsome. No. Hedging is used by the market participants
who actually own the product that are trying to set a price or
a floor on what they think that product may be worth in the
future.
Mrs. Myrick. So that is produce moving? They would then be
moving product?
Mr. Newsome. Well, our contracts are deliverable. Most do
not go to delivery. They trade out of the contract at a moment
that is advantageous. But we maintain delivery of the contract,
so it gives the commercial participants an advantage over a
speculator or somebody who does not own the physical product
that they could be forced to make or take delivery. So unless
you have the ability to make or take delivery, you are not
going to go to expiration with a contract.
Mrs. Myrick. Then you said that there are a couple of ways
that traders get paid. One is a brokerage fee. Do they make
more money based on sales volume?
Mr. Newsome. Yes. Absolutely.
Mrs. Myrick. So if the market is volatile, then they
personally benefit from that?
Mr. Newsome. Well, it depends. You know, for every winner
there is going to be a loser. So, you know, some will benefit;
and there will be an equal and offsetting loser. Because, at
the end of the day, it is a zero sum game. But the speculators,
which I know you mentioned earlier in your opening----
Mrs. Myrick. That is my concern.
Mr. Newsome. It is an inaccurate theory that speculators
can move the market. Because if a speculator--if you look at
them, they try to operate off price trends and to profit off of
trends in the market, whether that price is up or whether it is
down. But if they try to move out of a fundamental range, you
have got hundreds of commercial participants who are in that
competitive environment with them that pull them right back
into the range or the speculator faces a severe financial
penalty.
Then, at the end of the day, the speculators do not own the
physical product, so they cannot move the price. They won't go
to the delivery of a product, and they create virtually no
impact on the settlement price, which is the price used by
commercial market participants.
Mrs. Myrick. You feel that there is sufficient oversight on
this trading?
Mr. Newsome. Yes. The Exchange itself, through its self-
regulatory function, serves the front line of enforcing the
rules. Our compliance staff is the second largest behind our
technology staff at the Exchange. We have many, many tools, and
we utilize all of those tools to oversee the market.
The CFTC serves as our oversight regulator. They have
physical bodies on the floor watching the trading. They do a
rule enforcement review of us every year to see what kind of
actions we have brought, what the penalties were, to make sure
they are in line with the crime, whether that is a fine or
suspension of trading. And they make sure that we are enforcing
all of our rules.
So we use a multitude of compliance and enforcement
activity to monitor our markets. The integrity of the
marketplace is critical to the reputation of the Exchange.
Mrs. Myrick. Sometime I would like to talk to you further
about that.
Mr. Newsome. I would love to.
Mrs. Myrick. I yield back my time, Mr. Chairman.
Mr. Hall. All right. Thank you.
The Chair recognizes the gentleman from Texas, Dr. Burgess.
Mr. Burgess. I thank the chairman.
Mr. Hall. You are going to close for us. Do a good job.
Mr. Burgess. All right.
Well, Mr. Chairman, we have quoted to us from the other
side several times today what has been characterized as an
internal Chevron document. Have you seen this?
Mr. Hall. Not tonight.
Mr. Burgess. Well, it is stamped ``Chevron pricing exhibit
156.'' the date underneath there, as best as I can make out
with my bifocals, is sometime in 1996.
Up at the top it says: Note. This product is gathered from
industry publications. And the rest of the line is unreadable.
But the paragraph that has been oft quoted today--and I wanted
to give Mr. Cavaney and Mr. Slaughter an opportunity to respond
to the second paragraph, if they would like to, talking about
Unocal: Unocal is exploring the sale of three refineries in
California due to high capital expenditures required to comply
with stringent environmental regularities.
I would just submit that for counterbalance to what you
were struck with earlier today.
Mr. Slaughter. Yes. Dr. Burgess, that is fairly typical.
Because the investments required to comply with the Clean Air
Act particularly--Unocal was operating in California, which has
the strictest environmental standards that require huge amounts
of investment. The gasoline sulfur, diesel sulfur regulation
the industry is complying with now each costs $8 billion across
the industry; and over the last several years, several refining
organizations or individual refineries were sold or shut down,
in rare instances. Many of them were sold because their owners
felt that they could not economically invest that much money in
that particular facility.
And you have to remember that before 2004 and 2005 return
on investment in our industry was only 5 percent. That is very
low, well below the median for all industries; and so it is
understandable that companies would respond that way.
Mr. Burgess. Mr. Cavaney, do you have any further that you
want to add?
Mr. Cavaney. No, that is fine.
Mr. Burgess. One of the questions that I posed to our
friend from the Department of Energy earlier today, as I was
driving around in my district last Wednesday, when it really
became apparent the extent of the trouble that was going on in
Louisiana, did the Department of Energy have a contingency plan
that they could pull off the shelf to deal with this type of
emergency? And the answer that I got was, basically, the
Strategic Petroleum Reserve, but there wasn't much of any kind
of lever that the Government could pull.
Does industry have a contingency plan, given the
concentration of the refining and drilling capacity that we saw
on the map? Does industry have a contingency plan? Because it
is not new information that hurricanes strike the gulf coast.
Mr. Cavaney. We do have elaborate contingency and security
plans. And when you go into these kind of circumstances, as you
point out, this is something that we have to deal with
regularly, not to the level of seriousness that this was, and
that is what differentiates it, I think, from previous
experiences.
Every single one of our companies at every single location
has an action plan that goes into effect. They are drilled on
it. They know what it is. We had abandoned all of those rigs
out in the gulf. We had abandoned and shut down properly all
the refineries along the coast well before the hurricane was on
top of us.
Part of these procedures are safety for the personnel. They
are to put the safes or the shut-downs on the various connect
points, which is why we did not have any spills, because they
worked. When you think of those refineries, the fact that there
are only three of them now that have power and are not in the
process of soon to be brought on board speaks well for the
systems and the safety that is done there.
One of the concerns we had--and we have worked with the
Department of Homeland Security who has looked at our various
plans and the like--is the physical security of these spaces in
that environment, which was something we had not too often had
to deal with. So those plans were not as far along as they
would otherwise be but will be.
So our industry, the ones that operate worldwide, these are
the kinds of environments, the kinds of conditions that we face
all of the time and have throughout the many, many decades that
we have been operating there. So it is not a totally new
experience, which is why I think you have been able to see the
return as fast as you have seen it, because there had been
plans in place.
I do want to say one thing about the Department of Energy
and about the administration and about the Governors, even up
here in some of the committees of jurisdiction. When this
started to happen, everybody called us. We called them, and we
have checklists about various things that could be done besides
the SPR, the idea of waivers for Clean Air Act to allow us to
have different fuels, the idea of letting the drivers stay in
the trucks a bit longer than the Department of Transportation
regs allow. So we all go down those, and to everyone's credit,
nobody was in opposition to these things, and I think there was
a lot of positive reinforcement which helped them go very fast.
So, in the aggregate, that was a pretty good plan, the way
it worked out, because everybody knew things need to be
addressed. So I think the response of the Government, while in
some areas may not have been that good, certainly in terms of
the oil and gas industry, I think it was quite responsive.
Mr. Hall. I am not going to cut you off. You go ahead.
Mr. Burgess. Mr. Inslee took his chart about the CAFE
standards. Let me stay with you, Mr. Cavaney, if I could, on
the CAFE standards.
I have only been here a term and a half, and I am just a
simple country doctor. But, as I recall, back in 1980 and 1981,
the days that we had gas lines, of course, then the price of
gas rose to over $1 a gallon, and the industry picked up its
production, and more gas became available. But what drove the
mileage, increased mileage in cars, my observation, back then
was not the U.S. Congress, but the simple country doctor back
in Texas who was trying to save a little cash.
Now I will just tell you, because I live in a district that
has severe problems with air quality, that I tried to do the
responsible thing a year and a half ago and ordered a car that
was a hybrid car, gets 50 miles to the gallon. So now I look
positively brilliant. It is a good feeling to drive along the
road with a feeling of moral superiority to everyone else, and
I do enjoy doing that.
But I guess what I am saying is, I will trust the American
consumer, I would trust American ingenuity before I would trust
the U.S. Congress with increasing CAFE standards. Do you have a
feel about that?
Mr. Cavaney. I am inclined to agree with you to that
extent. I mean--but what we do need is we can use leadership on
stressing the importance of energy efficiency and conservation.
Because I do think, all of us, we find it in our own facilities
constantly if you go in and relook at things with new
technology. Because it changes and thinks a different way, and
if you can create some lighter weight and gain some, so much
better.
But the idea of command and control in terms of how you
design cars, that is not our business. I can tell you that we
have worldwide companies that operate, and we were talking
earlier about greenhouse gas emissions reduction and the
various records.
We here in the United States, our company is using
voluntary systems that they are doing, because they own the
same kind of refineries and other places, actually can give you
better marks of reduction here by allowing the resourcefulness
to tackle the system than they can and this is how you do it
precisely.
So my comments before were because of the concept, and I
think we ought to do more. But the idea that you draw the
actual blueprints for people to do that I think is probably
overreaching, and the industry ought to be the ones that make
those decisions.
I worked in a gas station during that period of time. It
was consumers coming in, and they were the ones that stated the
preference for cars. They were not going to pay those terrible
prices.
Mr. Burgess. And, of course, you can go on the Internet
today onto Google and type in Prius plus under the search
engine; and eggheads across the country have figured out ways
of squeezing 100 miles to the gallon. I do not have enough
confidence in my own engineering ability to do that.
Mr. Chairman, I am going to wrap up. I just wanted to say
to Mr. Angelle, I did not ask you a question. I did read your
testimony. I apologize I wasn't here when you spoke. Many of
your constituents are in my district and Tarrant and Denton and
Cooke Counties, and I have heard their stories this past week.
And it a cliche to say it, but I truly do feel your pain. I
feel their pain. We have new mothers separated form new babies,
and a real big question mark as to how we are going ever going
to put all of these pieces back together again. You have got a
tremendous job ahead of you in Louisiana.
But, as your neighbor in Texas, we have been proud to help,
and certainly wish you all of the best as you go through those
next several weeks and months. I know it is going to be a
challenge to you.
Mr. Chairman, with that I will yield back.
Mr. Hall. I thank you. And you missed a good bit of
testimony from--Mr. Angelle's testimony. But we have a record,
and you will have copies of it.
Thank every one of you. You have been great. The chairman
chose well in getting both of these groups. Thank you for
leaving your homes. One of you missed your anniversary tonight.
You are in trouble tomorrow.
But God bless all of you, and thank you very much for what
you have done for this country.
[Whereupon, at 7:50 p.m., the committee was adjourned.]
[Additional material submitted for the record follows:]
New York Mercantile Exchange
October 6, 2005
The Honorable Joe Barton
Chairman
Committee on Energy and Commerce
U.S. House of Representatives
2125 Rayburn House Office Building
Washington, D.C. 20515-6115
Dear Mr. Chairman: Thank you again for the opportunity to testify
before the Committee on Energy and Commerce hearing entitled
``Recovering from Katrina'' on September 7, 2005. I am pleased to
submit the following responses to questions from Members of the
Committee for inclusion in the hearing record.
Please contact me if you should have any additional questions
regarding these responses, or any other matter.
Sincerely,
James E. Newsome
President
RESPONSES TO FOLLOW-UP QUESTIONS FOR THE RECORD SUBMITTED BY THE
HONORABLE PAUL E. GILLMOR
Question: What oversight body currently patrols your industry for
pricing abuses that directly affect the amount that gas stations pay
for their products?
Response: Gasoline futures market prices do not automatically or
directly reflect the amount that gas stations pay for their product. As
we understand it, gas stations receive fairly frequent deliveries of
their product and so the prices they pay to their suppliers are closely
tied to the near term market for delivery of the product in their
geographic area.
By contrast, NYMEX lists a series of separate calendar months in
its New York Harbor Unleaded Gasoline futures contract. Each of these
calendar months is separately traded. For market participants that stay
in the market through the termination of trading in a particular listed
calendar month, this gasoline contract provides physical delivery of
tankers of gasoline during a specified delivery period of several days
during the specified month between two commercial market participants
in the harbor area adjacent to New York City. NYMEX does not list any
gasoline contracts for next-day or day-ahead delivery of the physical
``cash'' commodity. On the other hand, it is our understanding that
there are frequent transactions in the off-exchange ``over-the-
counter'' (OTC) market for day-ahead or other near term delivery of the
cash commodity in various geographic regions.
Any regulatory body that polices abuses affecting the price of gas
at the pump, such as price gouging, has no connection to futures and
would exist outside of the framework of futures regulation. NYMEX is
under the full and direct regulatory authority of the Commodity Futures
Trading Commission, which has exclusive jurisdiction over futures
trading and has broad anti-fraud and anti-manipulation authority over
its regulated markets. In addition, manipulation of cash market prices
that impact prices on a futures market would be subject to the CFTC's
anti-manipulation authority.
Question: The public debate is focused on the revenues of petroleum
producers and retail gasoline outlets, however, little attention has
been paid to the increasing income of oil commodities traders. What
activities do you think can be meaningfully done to restrain the
consistent and upward movement of gasoline futures?
Response: This question seems to be based on two premises: (1) that
income for oil commodity traders is uniformly increasing; and (2) that
this rise in income is somehow responsible for ``consistent and upward
movement'' of gasoline futures prices. Both premises need to be re-
examined carefully.
In discussing futures trading, it is important to understand how
futures trading works and to understand the nature of futures markets.
Futures markets allow market participants either to buy a contract that
requires one to receive future delivery of the product (also referred
to as a ``long'' contract) or to sell a contract that requires the
company to make physical delivery of the product (also referred to as a
``short'' contract). The vast majority of open positions are not held
through to delivery of the product. Instead, market participants close
out or liquidate their open positions by buying a contract on the other
side of the market that offsets their existing position (e.g., a long
market participant buying a short contract to zero out its existing
market exposure). For such participants who close out their positions,
whether they make or lose money on the two transactions, i.e., the
initial transaction and the close-out transaction, depends on the
difference between the prices of their long and short contracts, which
depend on where the market was at the time of those transactions.
The critical point to note is that a futures market is a zero sum
type of market. In other words, for every winner there is also a loser.
We believe that this basic reality needs to be kept in mind before
placing too much faith in a wholly speculative statement made by
someone sitting in an office 75 or 100 miles away from our trading
floor. Clearly, there was a significant shift in energy prices,
including gasoline prices, in the wake of Hurricane Rita. The impact of
this shift in prices on the broad category of oil traders was related
to a considerable extent to which side of the market they were on when
the market moved. Some traders made money. On the other hand, as
gasoline futures trading is a zero sum market, other traders
necessarily lost substantial sums of money during the same period.
Turning specifically to NYMEX floor members, many floor members
focus upon trading for their own personal or proprietary trading
accounts. In general, these floor traders prefer to limit sharply their
market risk exposure to overnight changes in market prices. Simply put,
these traders prefer to go home at night being ``flat'' in the market
and having neither a long or a short position. To the extent that such
traders are successful in their trading activity, they do so by
providing short-term liquidity to the market during the trading day and
fluctuations in market price during a given trading session may
increase the value of that activity. On the other hand, these floor
traders have no incentive to gain from a consistent, upward movement in
price that occurs over an extended period of time because, as noted,
they close out their market positions at the end of each trading
session.
Even with respect to other non-floor market participants who do
maintain open positions over a period of time, NYMEX maintains strict
position limits on their market activity and engages in extensive
market surveillance to restrict sharply the ability of any market
participant to engage in prohibited manipulative activities. The CFTC
additionally has extensive resources devoted to market surveillance and
enforcement efforts.
As to the broader question of possibly trying to restrict price
movement in gasoline futures, a central role of futures markets is to
provide a price discovery service for future prices. In this way,
futures markets provide a neutral tool or a gauge as to these future
prices. Futures markets are simply auction markets where buyers and
sellers come together and as a result a market price is determined
through open and competitive execution. This market price is derived
through basic demand and supply fundamentals.
In particular, the gasoline futures price of an expiring contract
month is designed to converge with the cash market price at expiration
of that contract month. The futures market is a derivative of the cash
market. Futures prices, which reflect the underlying cash market, are
closely related to cash prices and are driven by the same economic
factors. At expiration of the contract during the spot (delivery)
month, the futures price converges to a single price with the cash
price, which provides transparency and an efficient hedging tool for
the market. Any thing that artificially restricts futures prices will
have no effect on the cash market. Instead, such artificial restraints
would remove liquidity and price transparency from the futures market
(and shift it to the less-regulated and less transparent OTC market),
and the futures market consequently would no longer be a reliable
hedging tool.
In our view, the real key to truly meaningful attempts to address
gasoline prices is to focus upon fundamental supply and demand issues.
A comprehensive energy policy that focuses on rebuilding the US
refining infrastructure is critically needed to address the supply
issues, which are causing gasoline prices to be high. No refineries
have been built in the US in 20 years and small ones keep going off-
line. Congress should review this trend and consider whether any
federal policies, including increasingly stricter EPA standards, play
any role in the shrinking supply of refineries.
Question: Do you think that the anti-competitiveness and pricing
protections in the petroleum marketing practices act should be extended
to transactions involving oil commodities traders?
Response: We understand this question as directed to NYMEX to be
referring to oil commodity traders in our futures markets. In response,
we do not believe that it should be extended because the goals of that
act do not apply to trading in our markets. The stated goals of this
act are as follows:
``[t]o provide for the protection of franchised distributors
and retailers of motor fuel and to encourage conservation of
automotive gasoline and competition to the marketing of such
gasoline by requiring that information regarding the octane
rating of automotive gasoline be disclosed to consumers.''
Our gasoline futures contract is a standardized contract with
established product specification terms that are consistent for all
contracts. Our market participants are focused on our markets and
generally have no awareness or interest or control over what may
eventually happen with respect to disclosure of octane ratings at
individual gas stations. This reflects a fairly basic instance of a
difference between apples and oranges, and thus the goals and scope of
that act are inapplicable to what happens on our markets.
RESPONSES TO FOLLOW-UP QUESTIONS FOR THE RECORD SUBMITTED BY THE
HONORABLE BART STUPAK
Question 1. Do you believe ``risk premium'' plays a role in high
oil and gas prices in our country?
Response. It may be useful to clarify NYMEX's role in connection
with market activity. NYMEX provides a neutral market forum for the
open and competitive execution of trades in our listed contracts. NYMEX
does not itself engage in any trading activity or establish any market
positions. Furthermore, NYMEX does not provide any services as a market
advisor or analyst, and so our comments below are necessarily somewhat
general in nature.
Academics have debated this issue for quite some time. The
existence of ``risk premium'' can be neither proved or disproved
because it is an abstract concept and cannot be observed directly and
may be interpreted differently by different analysts or scholars.
However, the implication is that ``risk premium'' would cause the
expected futures spot price to be either higher or lower than the cost
adjusted futures price. If a market participant is concerned about
future tight supplies or concerned about the possibility of supply
interruptions due to some type of extrinsic shock such as a political
event or terrorist activity at some point along the supply chain and
that participant is risk averse, then it is possible that the
participant may be willing to pay a higher market price, than a
participant that is risk neutral. These market decisions are based
strictly on personal judgments and there are individuals in the market
who are risk averse and willing to pay a premium. Alternatively, there
may be those who are risk neutral and are indifferent to risk and may
not be willing to pay a premium.
Although we cannot say a risk premium absolutely exists, NYMEX is a
liquid and transparent market and provides the most efficient and
reliable mechanism for price discovery as to future prices. By
providing a centralized auction market for discovery of future prices,
our markets allow market participants both to incorporate current known
information as to demand and supply as well as to reflect their various
views as to future demand and supply, including the views of the risk-
averse as well as the risk-neutral.
Question 2. I've seen several articles that have said that prior to
the Iraq war and prior to Hurricane Katrina, the risk premium on a
barrel of oil was in the neighborhood of $5 per barrel. Since the
beginning of the war and since Katrina, I have seen articles stating
that the risk premium is now anywhere from $15-$30/barrel. Is this your
understanding?
Response. Such an assertion (about a current risk premium of that
size) is questionable for the reasons discussed below. As background,
academics have argued that producers looking to hedge future production
tend to push down futures prices by the nature of their selling
activity. Buyers (speculators) of futures contracts incur the price
risk and theoretically would be willing only to buy the contracts at
below fair expected price due to the risk premium that would be
incurred by this price risk. The result would be what is referred to in
futures markets as a ``backwardation'' in the market where the futures
price would decline progressively out into the future for the distant
contact months in relation to the current or front calendar month of
that futures contract. However, a review of recent crude oil prices at
NYMEX reveals that this is not the case at present in the NYMEX market.
Since the passage of time that has now occurred following Hurricane
Katrina and Hurricane Rita, the market has had sufficient time to
absorb currently available information regarding the impact of the
hurricanes on possible future demand and supply of the commodity.
Prices traded in expectation of the hurricanes have adjusted since then
with increasingly better information about the market consequences of
those major events in the Gulf Coast region. As noted in our response
to the prior question, the existence of and extent of any risk premium
is open to discussion and is not susceptible to precise measurement.
Instead, these topics would seem to be a matter of fairly broad
estimates and conjecture. That stated, however, from our modest vantage
point as a neutral market forum and in light of the improving quality
of market information regarding the actual impact of the hurricanes, an
estimate of a $15-30 risk premium at this point in time strikes us as
questionable at best. Such an estimate suggests that the market is
substantially overpriced and inefficient.
Currently, there is little difference between crude oil prices for
2005 and prices for 2006 and 2007, i.e., futures prices are
approximately equal to futures spot (cash) prices. On October 3, 2005,
the November 2005 crude oil futures contract settled at $64.47/barrel.
The December 2006 contract was virtually the same at $65.49/barrel. The
inference to be drawn is that to any extent that risk is being shifted
in the market, it is being equally shifted between buyers and sellers.
If this were not the case, there would be either a backwardation or
contango (the opposite of backwardation where the prices for distant
contract months are progressively higher than the current contract
month) in the market. Current price trends indicate otherwise.
Question 3. Do you believe that the instability in the Middle East
and Venezuela and the War in Iraq have caused the price of crude oil
contracts on the NYMEX to increase?
Response. NYMEX provides a neutral market forum for open and
competitive execution of trading in our products. We do not provide
market analysis or market advice and our response should be considered
in this context accordingly.
That stated, the United States now obtains a substantial amount of
the crude oil needed for our economy from foreign imports, including
the areas noted in the question. Specifically, the United States--
averaged total net oil (crude and products)--imports of--an estimated
11.8 million bbl/d--during January-October 2004, representing around
58% of total U.S. oil demand. Crude oil imports from Persian Gulf
sources averaged 2.4 million bbl/d during that period. Overall, the top
suppliers of crude oil to the United States during January-October 2004
were Canada (1.6 million bbl/d), Mexico (1.6 million bbl/d), Saudi
Arabia (1.5 million bbl/d), Venezuela (1.3 million bbl/d), and Nigeria
(1.1 million bbl/d).
What seems clear is that the price of crude oil and other energy
products has risen due to both supply and demand factors. Instability
in the Middle East, Nigeria, and Venezuela, along with rapid demand
growth in emerging market countries such as China and India seemingly
have both contributed to the higher price levels. More temporary
setbacks from recent hurricanes also appear to have further exacerbated
the trend.
Question 4. If investors are concerned about possible terrorist
attacks and the risk premium per barrel goes up an additionally $15-$30
per barrel, who reaps these benefits?
Response. As noted previously, we cannot state definitively that
there is a risk premium and we do not have any conclusive views as to
the size of any such premium. Indeed, stating that a risk premium is
between $15-$30/barrel essentially translates to saying that oil is
overpriced by that amount. Anyone who believes this is true would
attempt to take advantage of the arbitrage opportunity available. A
market participant would be able to sell oil now and cover his position
later in the spot market for delivery. By the time of delivery, if the
market participant's belief that crude was overvalued was correct, the
price would be $15-$30 cheaper. For anyone who believes this scenario
it would be an unprecedented opportunity to profit, however, the
selling would in effect make the price go down more and more removing
the premium.
In response to the premise of the question, though, in general and
to the extent that oil prices rise, producers gain at the expense of
consumers. Since much of the production occurs outside of the US, the
benefits of higher prices generally would accrue to countries and
companies that produce oil for export.
Question 5. To what extent do you believe that the futures prices
for both crude and refined products supported or even advanced the
sharp increases in crude and product prices?
Response. This question suggests a possible connection between the
prices for crude oil and gasoline futures contracts for future periods
of time and the prices for current delivery of these products in the
cash market. Futures market prices do not automatically or directly
reflect the amounts that are paid in the cash market for near term
deliveries. Taking gasoline as an example, as we understand it, gas
stations receive fairly frequent deliveries of their product and the
prices they pay to their suppliers are closely tied to the near term
market for delivery of the product in their geographic area.
By contrast, NYMEX lists a series of separate calendar months in
its New York Harbor Unleaded Gasoline futures contract. Each of these
calendar months is separately traded. For market participants that stay
in the market through the termination of trading in a particular listed
calendar month, this gasoline contract provides physical delivery of
tankers of gasoline during a specified delivery period of several days
during the specified month between two commercial market participants
in the harbor area adjacent to New York City. NYMEX does not list any
gasoline contracts for next-day or day-ahead delivery of the physical
``cash'' commodity. On the other hand, it is our understanding that
there are frequent transactions in the off-exchange ``over-the-
counter'' (OTC) market for day-ahead or other near term delivery of the
cash commodity in various geographic regions.
However, while futures market prices do not automatically translate
into the price for next-day delivery in the cash market, futures
markets do provide one stream of information that may be considered by
market participants in the cash market. Indeed, the availability of
NYMEX's reliable and neutral market prices for future periods of time
may actually reduce the possibility of price shocks in the cash
markets.
In other words, the futures market can play an enormously
constructive role in keeping prices in the cash market from unnecessary
spikes. From time to time, cash markets may over react in the short
term to breaking news about demand and supply based on the predicted
severity of an event. As information becomes more and more available,
as was the case after Katrina and Rita, the extent of damage was better
understood and market prices came down very quickly. The futures
market's role as a price discovery vehicle for future prices arguably
prevented the prices in the cash market from going up as much as they
may have in the absence of NYMEX's stable and neutral market forum.
By contrast, a historical example may further illustrate how the
cash market operates less efficiently if an effective futures market
price discovery service is not available. During the historical
gasoline crisis that began in 1979, there was limited price
transparency in US energy cash markets. Between 1979 and 1981 (before
gasoline futures prices were fully embraced and accepted by the energy
industry as a benchmark for future prices), the Exchange was receiving
information from price reporters for cash markets that high prices
would be sustained for extended periods of time, months, possibly
years. During this period, US government price allocation controls were
in effect and prevented an easing of the imbalance between supply and
demand by restricting the market from reacting to weakening demand.
Market prices went up quickly and dramatically and stayed there beyond
what the current events would have been able to explain.
______
Questions for Bob Slaughter, President, NPRA, from Congressman Bart
Stupak
1. During your appearance before the Committee, I asked you the
following question:
``Isn't it true that in 1992, the State of Arizona granted a permit
to the Arizona facility for construction and operation, and the company
sat on the permit for nearly 8 years without actually building a
refinery?''
You responded by stating: ``Not to my knowledge, no'' and you went
on to state that ``they had to move the refining site.''
QUESTION: Isn't it true that in a response you provided this
committee earlier this year, answering follow-up questions from
congressman Dingell for the February 16, 2005 hearing entitled: ``The
Energy Policy Act of 2005, Ensuring Jobs For Our Future With secure and
Reliable Energy,'' you indicated that:
``Maricopa Refining Company (MRC) was issued an installation permit
for a 50,000 BPD refinery by the ADEQ on January 16, 1992,'' and you
later acknowledged in that same response to Congressman Dingell that
``the above permit was allowed to lapse and a new permit for a larger
facility was submitted to ADEQ on December 23, 1999''?
NPRA Response and Background
The following is a chronology from Arizona Clean Fuels in response
to the above questions:
1. Maricopa Refining Company (MRC) was issued an ``Installation
Permit'' for a 50,000 BPD refinery by the ADEQ on January 16,
1992.
2. MRC (under the name of Arizona Clean Fuels-ACF) continued
development of its refinery project in the early and mid-
nineties. A significant financial investor left the project.
The project was re-scoped as to refinery capacity and
feedstock. The above permit was allowed to lapse and a new
permit for a larger facility was submitted to ADEQ on December
23, 1999.
3. The ADEQ hired an outside contractor to prepare the permit. This
contractor worked with ACF, ACF's contractor and the ADEQ to
perform the BACT reviews, etc. required by the Clean Air Act.
In September 2002, the above parties agreed that the
information required to perform all of the permit reviews was
complete and the ADEQ confirmed this on September 4, 2002.
4. During the summer of 2003, the EPA and ADEQ declared an expansion of
the ozone non-attainment area in Maricopa County that included
the site of the proposed refinery. ACF advised the ADEQ that it
was considering alternate sites for the refinery outside
Maricopa County.
5. On October 30, 2003, the ADEQ issued a proposed Draft Air Permit to
the company only, for the refinery based on the December 1999
application and the Maricopa County site. This permit was not
formally issued pending decision by ACF on location.
6. In October 2003, ACF advised the ADEQ that the company was proposing
a new site for the refinery in Yuma County and the information
required to revise the permit for the new location was
submitted during the November 2003 to March 2004 period. This
information was consolidated into a ``new permit application''
document that was submitted to ADEQ on June 28, 2004. The
refinery facility was identical to that proposed in 1999 so the
BACT analysis remained valid. Revisions required for the new
site consisted primarily of new air emission impact modeling
7. The ADEQ issued the Draft Air Permit on September 14, 2004. Public
meetings and hearings were held during October and November
2004 with the public notice period closing on January 10, 2005.
8. The permit is currently in review by the EPA with a formal response
required by March 18, 2005
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