U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

For sale by the Superintendent of Documents, U.S. Government Printing Office

Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800

Fax: (202) 512–2250 Mail: Stop SSOP, Washington, DC 20402–0001

97–399 PDF 2005

DRIVING DOWN THE COST OF FILLING UP

HEARING

BEFORE THE

SUBCOMMITTEE ON ENERGY POLICY, NATURAL

RESOURCES AND REGULATORY AFFAIRS

OF THE

COMMITTEE ON

GOVERNMENT REFORM

HOUSE OF REPRESENTATIVES

ONE HUNDRED EIGHTH CONGRESS

SECOND SESSION

JULY 7, 2004

Serial No. 108–241

Printed for the use of the Committee on Government Reform

(

Available via the World Wide Web: http://www.gpo.gov/congress/house

http://www.house.gov/reform
(II)

COMMITTEE ON GOVERNMENT REFORM

TOM DAVIS, Virginia, Chairman

DAN BURTON, Indiana

CHRISTOPHER SHAYS, Connecticut

ILEANA ROS-LEHTINEN, Florida

JOHN M. MCHUGH, New York

JOHN L. MICA, Florida

MARK E. SOUDER, Indiana

STEVEN C. LATOURETTE, Ohio

DOUG OSE, California

RON LEWIS, Kentucky

JO ANN DAVIS, Virginia

TODD RUSSELL PLATTS, Pennsylvania

CHRIS CANNON, Utah

ADAM H. PUTNAM, Florida

EDWARD L. SCHROCK, Virginia

JOHN J. DUNCAN, JR., Tennessee

NATHAN DEAL, Georgia

CANDICE S. MILLER, Michigan

TIM MURPHY, Pennsylvania

MICHAEL R. TURNER, Ohio

JOHN R. CARTER, Texas

MARSHA BLACKBURN, Tennessee

PATRICK J. TIBERI, Ohio

KATHERINE HARRIS, Florida

HENRY A. WAXMAN, California

TOM LANTOS, California

MAJOR R. OWENS, New York

EDOLPHUS TOWNS, New York

PAUL E. KANJORSKI, Pennsylvania

CAROLYN B. MALONEY, New York

ELIJAH E. CUMMINGS, Maryland

DENNIS J. KUCINICH, Ohio

DANNY K. DAVIS, Illinois

JOHN F. TIERNEY, Massachusetts

WM. LACY CLAY, Missouri

DIANE E. WATSON, California

STEPHEN F. LYNCH, Massachusetts

CHRIS VAN HOLLEN, Maryland

LINDA T. SANCHEZ, California

C.A. ‘‘DUTCH’’ RUPPERSBERGER, Maryland

ELEANOR HOLMES NORTON, District of

Columbia

JIM COOPER, Tennessee

BETTY MCCOLLUM, Minnesota

———

BERNARD SANDERS, Vermont

(Independent)

MELISSA WOJCIAK, Staff Director

DAVID MARIN, Deputy Staff Director/Communications Director

ROB BORDEN, Parliamentarian

TERESA AUSTIN, Chief Clerk

PHIL BARNETT, Minority Chief of Staff/Chief Counsel

SUBCOMMITTEE ON ENERGY POLICY, NATURAL RESOURCES AND REGULATORY

AFFAIRS

DOUG OSE, California, Chairman

EDWARD L. SCHROCK, Virginia

CHRISTOPHER SHAYS, Connecticut

JOHN M. MCHUGH, New York

CHRIS CANNON, Utah

NATHAN DEAL, Georgia

CANDICE S. MILLER, Michigan

PATRICK J. TIBERI, Ohio

JOHN F. TIERNEY, Massachusetts

TOM LANTOS, California

PAUL E. KANJORSKI, Pennsylvania

DENNIS J. KUCINICH, Ohio

CHRIS VAN HOLLEN, Maryland

JIM COOPER, Tennessee

EX OFFICIO

TOM DAVIS, Virginia HENRY A. WAXMAN, California

BARBARA F. KAHLOW, Staff Director

MELANIE TORY, Professional Staff Member

LAUREN JACOBS, Clerk

KRISTA BOYD, Minority Counsel
(III)

C O N T E N T S

Page

Hearing held on July 7, 2004 ................................................................................. 1

Statement of:

Caruso, Guy F., Administrator, EIA, DOE; Mark R. Maddox, Acting Assistant Secretary for Fossil Energy, DOE; Jeffrey R. Holmstead, Assistant Administrator for Air and Radiation, EPA; William E. Kovacic,

General Counsel, FTC; and Jim Wells, Director, Natural Resources

and Environment, GAO, accompanied by Scott Farrow, Chief Economist, GAO ...................................................................................................... 31

Slaughter, Robert, president, National Petrochemical and Refiners Association; Michael Ports, president, Ports Petroleum Co., Inc.; Ben

Lieberman, senior policy analyst, Competitive Enterprise Institute; and

A. Blakeman Early, environmental consultant, American Lung Association ................................................................................................................. 196

Letters, statements, etc., submitted for the record by:

Caruso, Guy F., Administrator, EIA, DOE, prepared statement of ............. 33

Early, A. Blakeman, environmental consultant, American Lung Association:

Letter dated July 6, 2004 ......................................................................... 252

Prepared statement of ............................................................................... 255

Holmstead, Jeffrey R., Assistant Administrator for Air and Radiation,

EPA, prepared statement of ......................................................................... 67

Kovacic, William E., General Counsel, FTC, prepared statement of ........... 96

Kucinich, Hon. Dennis J., a Representative in Congress from the State

of Ohio, letter dated May 25, 2004 .............................................................. 26

Lieberman, Ben, senior policy analyst, Competitive Enterprise Institute,

prepared statement of ................................................................................... 239

Maddox, Mark R., Acting Assistant Secretary for Fossil Energy, DOE,

prepared statement of ................................................................................... 55

Ose, Hon. Doug, a Representative in Congress from the State of California, prepared statement of ........................................................................... 4

Ports, Michael, president, Ports Petroleum Co., Inc., prepared statement

of ..................................................................................................................... 224

Slaughter, Robert, president, National Petrochemical and Refiners Association, prepared statement of ..................................................................... 199

Tierney, Hon. John F., a Representative in Congress from the State

of Massachusetts:

Charts ......................................................................................................... 16

Prepared statement of ............................................................................... 19

Wells, Jim, Director, Natural Resources and Environment, GAO, prepared statement of ........................................................................................ 79

(1)

DRIVING DOWN THE COST OF FILLING UP

WEDNESDAY, JULY 7, 2004

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON ENERGY POLICY, NATURAL

RESOURCES AND REGULATORY AFFAIRS,

COMMITTEE ON GOVERNMENT REFORM,

Washington, DC.

The subcommittee met, pursuant to notice, at 9:30 a.m., in room

2154, Rayburn House Office Building, Hon. Doug Ose (chairman of

the subcommittee) presiding.

Present: Representatives Ose, Schrock, Tiberi, Tierney, Kucinich,

and Cooper.

Staff present: Barbara F. Kahlow, staff director; Melanie Tory,

professional staff member; Lauren Jacobs, clerk; Megan Taormino,

press secretary; Krista Boyd, minority counsel; Earley Green, minority chief clerk; and Jean Gosa, minority assistant clerk.

Mr. OSE. Good morning. Recognizing a quorum we are going to

go ahead and convene this hearing of the Subcommittee on Energy

Policy, Natural Resources and Regulatory Affairs. This hearing is

entitled, ‘‘Driving Down the Cost of Filling Up.’’

I want to welcome my friend, Mr. Cooper. The way we handle

these hearings is, this is an investigative subcommittee. You’ll see

in the course of our proceedings that all the witnesses get sworn

in prior to that. All the Members who wish to participate are provided the opportunity to make an opening statement. Those statements are limited to 5 minutes. The statements that our witnesses

will make, while lengthy in written form, will be summarized within 5 minutes, which will be provided to each of them in order. In

front of you, see a little rectangular box that has three squares.

There are green, yellow and red lights in those squares. When the

red light shows, the gavel comes down. So I’m encouraging you to

keep your summaries to the 5 minutes.

One request I would make is that you turn your cell phones off

or turn it to just vibrate mode. That would be helpful.

During the first 5 months of 2004, the gasoline prices rose nearly

every week, peaking at a nationwide average of $2.05 per gallon.

Gasoline prices in my district in California climbed even higher,

hitting an astounding $2.30 per gallon on June 1st. Fortunately,

gasoline prices have begun to decline in recent weeks, bringing consumers and businesses much needed relief.

With this respite, however, comes a critical juncture for policymakers, and that is, do we allow the issue of high gasoline prices

to once again fade into the background, or do we actively seek to
2

implement solutions that address what seems to be a cyclical imbalance between gasoline supply and demand?

Over the last 4 years, I have presided over four hearings on gasoline markets. These hearings focused on a myriad of issues, including the structure of fuel markets nationwide, regional supply and

demand factors and the effect of the transition from MTBE to ethanol in California. We found that there are some very real problems

facing our fuel markets. As gasoline prices begin to retreat from

their current highs and headlines, it is important that these issues

do not fall by the wayside.

Since the cost of crude oil determines about 40 to 50 percent of

the cost of a gallon of gasoline, we must first consider what can be

done to reduce crude oil prices which reached a record setting $42

in June. And I think, this morning, we are popping up to $40 onthe-spot market. Some have advocated that we cease filling the

Strategic Petroleum Reserve. Others have gone a step further and

have called on the President to draw down on the SPR. These proposed quick fixes have serious repercussions and may do little to

help drive down prices at the pump.

To ensure that Americans have a secure and affordable crude oil

supply in the long term, we must either significantly reduce our

current demand or we must boost our domestic oil production. Regardless of where future crude originates, to process it in the

United States, we must expand and enhance the petroleum infrastructure which, at present, is stressed and at its operating limits.

Addressing the operating constraints and bottlenecks within the

entire infrastructure, including refineries, pipelines, storage tanks

and port facilities, is important because each component of the system must function properly to ensure that consumers receive an

adequate and affordable supply of gasoline.

We must look at ways to simplify the permitting process and to

reduce the burden of uncertainty of regulations so as to encourage

infrastructure upgrades and expansions. Failure to do so could result in additional market volatility and unnecessary price spikes.

Last, we must continue to consider the cumulative effect of Government regulation on gasoline supply and prices. Due to a dizzying array of Federal and State environmental regulations, there are

approximately 60 different types of fuel spread across the United

States. For the most part, these blends cannot be interchanged

from one market area to another. Therefore, certain regions are

susceptible to artificial shortages and price spikes.

In California, overlapping Federal and State regulations have

created a de facto ethanol mandate. This mandate results in a 10

percent reduction in gasoline supply for 8 months of the year and

does not necessarily improve either the quality of our air or the

quality of our water.

At present, the EPA is considering the oxygenate waiver request

from California. If approved, that waiver would exempt California

refineries from the Clean Air Act’s 2 percent oxygenate requirement, allowing them more flexibility to produce clean-burning gasoline. I continue to urge EPA to expeditiously grant this waiver, and

it will be the subject of some questions within this hearing.

Boutique fuels and mandates add complexity to the production,

distribution and storage of gasoline, further increasing volatility in
3

prices. Rather than continuing to dictate exactly what goes into a

gallon of gasoline, we should set high environmental and performance standards and allow the industry to meet them by their concoction of different recipes of fuels.

I look forward to the testimony of our witnesses today. They include: Mr. Guy Caruso, who is the Administrator for the Energy Information Department for the Department of Energy. Welcome. We

have Mr. Mark Maddox, who is the Acting Assistant Secretary for

Fossil Energy at the Department of Energy. We have Mr. Jeffrey

Holmstead, who is the Assistant Administrator for Air and Radiation at the Environmental Protection Agency. We have Mr. Jim

Wells, who is the Director of Natural Resources environment at the

Government Accountability Office.

We are also joined by again, after approximately a 2-year absence, by Mr. William Kovacic, who is the General Counsel for the

Federal Trade Commission. That comprises our first panel.

Our second panel of witnesses is comprised of Robert Slaughter,

who is the president of the Natural Petrochemical and Refiners Association and is also speaking on behalf of the American Petroleum

Institute; Mr. Michael Ports, who is the president of Ports Petroleum Co., Inc. and is speaking on behalf of the Society of Independent Gasoline Marketers, and also the National Association of Convenience Stores. Our third witness on the second panel is Mr. Ben

Lieberman, who is a senior policy analyst at the Competitive Enterprise Institute. And our fourth witness on the second panel is

Mr. Blake Early, an environmental consultant for the American

Lung Association.

In turn, we will welcome each of our witnesses.

At the present, I am pleased to recognize my good friend from

Massachusetts for the purpose of an opening statement.

[The prepared statement of Hon. Doug Ose follows:]
4
5
6
7
8
9
10
11
12
13
14
15

Mr. TIERNEY. Thank you, Mr. Chairman.

Thanks for holding this hearing on gasoline prices and continuing on this series of hearings. I think there are a couple of things

that we can agree on. The first is that gasoline prices are high, and

according to the Energy Information Administration, the average

price for gas nationwide is about $1.89. It’s decreased gradually

over the last 5 weeks, but it’s still about 40 cents more than at this

time last year. And the EIA is not projecting the downward trend

to last throughout the summer.

I think we can also agree, the demand for gasoline is increasing,

and gasoline supplies in the United States are tight. However,

rather than blaming environmental laws and promoting corporate

give-a-ways, I believe we should be taking action to address the underlying causes behind the current supply and demand situation.

I believe that we need to enact an effective national energy policy,

conduct an investigation into the business activities of oil companies and how those activities may be contributing to higher gas

prices and take actions that could bring immediate relief, like not

diverting supplies into the Strategic Petroleum Reserve.

We also should take any necessary actions to assist particular regions, such as granting California’s request for an oxygenate waiver. We need an effective national energy policy that promotes responsible energy consumption and reduces our dependence on foreign oil. We should be investing in renewable energy technologies

and strengthening our fuel economy standards. If we increase fuel

economy standards to 36 miles per gallons by 2015, we are told we

could save 2 million barrels of oil a day in just 5 years, and controlling demand would help control prices.

Under the administration’s energy plan, imports of foreign oil

would actually increase 70 percent from 2002 to 2025. The committee staff prepared charts as part of a report for Ranking Member

Waxman based on data from the EIA.

[The information referred to follows:]
16
17
18

Mr. TIERNEY. Those charts are over to my left and the audience’s

right. Those charts show that domestic oil production will decline,

even under the administration’s energy bill, and that, even if we

adopt the administration’s energy bill, the need for imported oil

continues to grow dramatically, and we will need to import a record

amount of oil in coming decades.

The administration’s bill does nothing to lower gasoline prices.

According to an analysis by the EIA, Energy Information Administration, the administration’s energy bill will have a negligible impact on gas prices, increasing the average gas prices by 3 cents per

gallon. The administration’s energy plan would not lower gas

prices, would not reduce our dependence on foreign oil, but would

give $20 billion of subsidies to the oil industry.

Instead of pushing give-a-ways to the oil industry, the administration’s efforts should be focused on investigating whether oil companies are engaging in anti-competitive practices and manipulating

gas prices. Oil companies engaged in a wave of mergers in the

1990’s, and the trend continues. There have been literally thousands of oil company mergers that have left 10 companies controlling close to 79 percent of the market. The General Accounting Office released a report in May finding that there were over 2,600

merger transactions between 1991 and 2000, leading to increased

concentration in the oil industry’s downstream market. I note that

study and that report ended in 2000 and does not even take into

account mergers since that date. Six of the eight specific mergers

evaluated by GAO resulted in higher wholesale gasoline prices.

Now, the Federal Trade Commission, who we’ll hear from today,

has severely criticized the GAO’s report. Rather than criticizing

GAO, the FTC should be focusing its energy on performing its own

analysis. It is the Federal Trade Commission’s responsibility to

protect consumers from anti-competitive behavior. And in light of

the mounting evidence that market concentration is creating an environment for anti-competitive behavior, the Federal Trade Commission and the Department of Justice should investigate the market structure and the business practices of the oil industry.

During a recent conversation with EPA—former EPA Administrator Carol Browner, it was pointed out that gasoline prices

dropped when the Clinton administration just announced the request for the FTC to investigate the possibility of anti-competitive

practices by oil companies. The administration should also send a

message to the market that it’s serious about lowering gas prices

by not filling the Strategic Petroleum Reserve until prices are

lower and more stable.

Americans deserve action by the administration and by this Congress to assure immediate relief at the pump and long-term energy

security.

Thank you, Mr. Chairman.

[The prepared statement of Hon. John F. Tierney follows:]
19
20
21
22

Mr. OSE. I thank the gentleman.

The gentleman from Ohio.

Mr. TIBERI. Thank you, Mr. Chairman, for scheduling this hearing this morning.

Over the past several months, you have taken this subcommittee

across the country. You’ve looked at why gas prices are so high.

You’ve probed into what can be done to bring prices down. Our

hearing today is a continuation of that effort, and on behalf of everyone who is filling up at the pump as we speak, I want to thank

you again for your leadership and working so diligently on this

issue.

I won’t recount the many reasons for today’s prices, high prices

at the pump. They’ve already been discussed this morning. They

have been discussed in the past. What I hope we can learn from

our witnesses today is how we can bring those prices down and

how we can do so in a manner that will prevent spiraling prices

at the gas pump in the future.

Specifically, there are two areas I hope we can examine in detail,

Mr. Chairman. First, can the Strategic Petroleum Reserve play a

role in reducing prices at the pump? There are those who say they

can, that the SPR should be tapped right now to help consumers.

But, there are others who say it shouldn’t be tapped, that the SPR

is not there for that purpose and, even if it were, the relief consumers would see would be so light that it wouldn’t be meaningful.

I certainly don’t know the answer to that question. I have heard

and seen mixed answers. Hopefully, we will have some enlightening answers today from our panelists.

The second area I want to hear more about is the confusing number of gasoline blends that are required across the country and

across certain regions of our country. The situation is so confusing,

Mr. Chairman, that I have had trouble finding out how many

blends there are required in America. I have heard estimates ranging from several dozen to over 100. Finding out exactly how many

is important, but more important than that and more crucial is

knowing just how many we really need in our country.

As has been noted many times, the number of blends we have

now, no matter what the number is, has already made a difficult

refining situation even worse. It stands to reason that fewer blends

would make refining operations simpler and more efficient and

thus lead to greater supplies that would bring prices down.

Last month, this House spent several days on a variety of energy-related legislation, and while we passed several important

measures, I was particularly pleased that one of them addressed

the need to add badly needed domestic refining capacity. We can

talk all we want about factors such as price of crude oil that we

cannot control ourselves in this country, but the fact is that there

is much that we could do right here, right now, to help our consumers and improve our energy security.

Mr. Chairman, I again want to thank you for your leadership on

energy-related issues. Your leadership will be missed as we continue our efforts in the years to come. Thank you for this hearing.

Mr. OSE. Thank the gentleman.

I am pleased to recognize the Representative from the country

music capital of the country, Mr. Cooper.
23

Mr. COOPER. Thank you, Mr. Chairman. I appreciate your calling

this hearing.

Certainly, gasoline prices are among the most visible and most

painful of the consumer price increases that we face. I think the

elephant in the room that has not been mentioned enough in regard to the many reasons that gas prices can go up or down, the

elephant in the room is the terrific uncertainty we face in the Middle East, the region of the world that’s blessed with the greatest

reserves of oil.

If you look at the country with the No. 1 amount of reserves, it

would be Saudi Arabia, which is one of the most dangerous countries in the world today for an American to live and work as a result of increased terrorism in the last months and years. If you look

at the country with the No. 2 amount of oil reserves, it would be

Iraq, where a war is currently being fought. So, there are a myriad

of factors that can increase or decrease gasoline prices, because if

you look at geopolitical uncertainty, certainly there is a period of

extreme concern in the region with the greatest number of oil reserves.

Mr. Chairman, I have come to this meeting greatly prejudiced because one of my friends and colleagues from the Vanderbilt Business School faculty happens to be chief economist of the FTC, and

while he and I don’t agree on many issues, we do agree on the need

for serious academic work done on issues of great national concern.

So, I come to this hearing with some worries that the GAO report

does not live up to those high standards. But, I’ll look forward to

hearing the testimony of the witness today and judging for myself,

for example, whether those results can in fact be duplicated.

But, if you take a great long list of reasons that gas prices can

go up or down, oil company mergers, to me, don’t seem to be at the

top of that list. Perhaps, they are, but when I worked as a businessman a little bit in the retail gasoline industry, I noticed that

convenience store sales of snacks have a lot more to do with retail

success in the marketplace than do gasoline prices. Because the

gasoline market seems to be a little bit more efficient than the

Snickers market or the other junk food items that we all love to

buy when we go to the store.

But, I appreciate your holding this hearing, Mr. Chairman, and

I will look forward to seeing if we can get some information that’s

useful for the American consumer.

Thank you.

Mr. OSE. I thank the gentleman.

I am pleased to recognize the vice chairman of the subcommittee,

from Virginia, Mr. Schrock.

Mr. SCHROCK. Thank you, Mr. Chairman. I have no opening

statement, which should make everybody happy.

Mr. OSE. We will move on.

Mr. SCHROCK. Oh, no, no, no. No, that doesn’t mean I’m finished.

The hearing we had last time was really amazing, and I think I

learned a lot, and I think a lot of other folks did, too. And if gas

prices are any indication, I can assure you that, in Virginia Beach

where I live, I got gas last week once for $1.69 and once for $1.65.

So it’s heading in the right direction. That doesn’t mean I want ev-
24

erybody moving down there, but I think it’s heading in the right

direction.

But, I am really anxious to hear what all the panels have to say

today and see if we can get our hands around this thing. Thank

you very much Mr. Chairman.

Mr. OSE. I thank the gentleman.

I am pleased to recognize the gentleman from Ohio, Mr.

Kucinich.

Mr. KUCINICH. Thank you very much, Mr. Chairman, for holding

this important hearing.

Our constituents are being gouged by high gasoline prices, and

the administration has provided no relief. Excessive gasoline prices

are stealing away the little discretionary income available to many

Americans in this troubled economy. We must demand relief now.

While the oil industry blames environmental regulations and

OPEC, there is substantial evidence that anti-competitive practices

by domestic corporations, made possible by recent mergers, are

partly to blame for high gasoline prices. I believe only an increase

in Government oversight can restore the transparency and accountability consumers need.

In the last 6 years, mergers between BP and Amoco, 1998; Exxon

and Mobil, 1999; BP Amoco and ARCO 2000; Chevron and Texaco,

2001; Valero and Ultramar Diamond Shamrock, 2001; Conoco and

Philips, 2002, all of these mergers in the last 6 years have created

huge new oil companies that have control over the most significant

factor impacting gasoline prices, control over domestic refineries.

Today, the largest five refiners operating in America, Conoco

Philips, Royal Dutch Shell, Exxon Mobil, BP and Valero, control

over 52 percent of domestic refining capacity. The top 10, which includes Chevron, Texaco, Citgo, Marathon, Sunoco and Tesoro, control 78.5 percent. This level of concentration is far greater than a

decade ago when the largest five refiners controlled 34.5 percent of

the market and the largest 10 owned 55.6 percent.

Armed with significant market share, these oil companies can

more easily pursue anti-competitive activities that result in price

gouging. The U.S. Federal Trade Commission, concluded in March

2001 that oil companies pursued profit-maximizing strategies to intentionally withhold gasoline supplies as a tactic to drive up prices.

In addition, deregulation of energy trading markets, like the ones

exploited by Enron, has removed transparency from oil and natural

gas futures markets, allowing oil companies and Wall Street investment banks to potentially manipulate prices on these markets.

While some claim the stalled energy bill will provide new supplies of the market and, therefore, force down prices, the Energy

Information Administration concludes that the billion dollar subsidies the energy bill would provide to energy corporations will neither significantly increase production nor lower prices for consumers.

I would like to enter into the record a letter signed by 75 Members of Congress, including Mr. Tierney and myself.

This letter was sent to the President asking him to take six actions to help reduce high gas prices. The letter was endorsed by the

leading consumer organizations, Consumer Federation of America,

Consumers Union and public citizen.
25

The six steps outlined for the President are: First, require oil

companies to expand gasoline storage capacities, require them to

hold significant amounts in that storage and reserve the right to

order those companies to release this stored gas to address supply

and-demand fluctuations.

Second, block mergers to make it easier for oil companies to manipulate gasoline supplies and take steps, such as forcing companies to sell assets, to remedy the current highly concentrated market.

Third, re-regulate energy trading exchanges that were exploited

by Enron and continue to be abused by other energy traders.

Fourth, discontinue filling the Strategic Petroleum Reserve while

prices are high and conduct the study of building crude and product reserves that can be used as economic stockpiles to dampen

price increases.

Fifth, reduce oil consumption by implementing strong fuel economy standards. Substantially improving CAFE standards over a

10-year period would reduce the oil used by one-third in 2020 and

save consumers $16 billion at the pump.

Sixth, request the Federal Trade Commission to conduct a study

of reasons why the market forced the closure of over 50 predominantly small and independent refiners in the past 10 years and assess how to bring fair competition back to the refinery market and

thus expand capacity.

Mr. Chairman, by employing all six of these strategies, substantial reductions in the price of gasoline are attainable. We are still

waiting for the administration’s response. I would like to enter this

letter in the record without objection.

[The information referred to follows:]
26
27
28
29
30
31

Mr. OSE. The gentleman’s request is granted.

All right. We have all completed our statements up here. We are

going to now go to the witnesses.

Before we go to the witnesses, we are going to swear you all in.

So if you’d all please rise.

[Witnesses sworn.]

Mr. OSE. Let the record show that all of the witnesses answered

in the affirmative.

Our first witness today is Mr. Guy Caruso. He is the administrator for the Energy Information Administration at the Department of Energy.

Mr. Caruso, we have received your written statement, and we

have read it. And, we have many questions. You’re recognized for

5 minutes for the purpose of summarizing.

STATEMENTS OF GUY F. CARUSO, ADMINISTRATOR, EIA, DOE;

MARK R. MADDOX, ACTING ASSISTANT SECRETARY FOR FOSSIL ENERGY, DOE; JEFFREY R. HOLMSTEAD, ASSISTANT ADMINISTRATOR FOR AIR AND RADIATION, EPA; WILLIAM E.

KOVACIC, GENERAL COUNSEL, FTC; AND JIM WELLS, DIRECTOR, NATURAL RESOURCES AND ENVIRONMENT, GAO, ACCOMPANIED BY SCOTT FARROW, CHIEF ECONOMIST, GAO

Mr. CARUSO. Thank you, Mr. Chairman, and I appreciate this opportunity to present to you and the Members of the subcommittee

the Energy Information Administration’s Short-Term Energy Outlook for crude oil and gasoline, which we released simultaneously

with the beginning of this hearing.

My main message is that, although we have seen some price relief in recent weeks, as has been mentioned, both crude oil and gasoline markets are very tightly balanced and subject to volatility.

Crude oil prices reached the high point of $42 in June, fell to $35

and now have risen again to $39 just this morning with the continued uncertainty in Iraq and in some cases other places, such as Nigeria and Venezuela.

Gasoline, having peaked at a national average for 1 week at $2.06 per gallon, yesterday was down to $1.89. The main reason for

these high prices compared with history are global world market

and supply and demand fundamentals which are tight. The world’s

economic growth in 2003 and 2004 has added 2.2 million barrels

a day of demand to the world market, led by China and the United

States. On the supply side, we are expecting non-OPEC production

to increase about 1 million barrels a day this year, which means

OPEC will need to increase production by 1.2 million barrels a day

just to keep up with that very strong growth. With inventories already low going into this year, that growth in both non-OPEC and

OPEC would just keep them at that low level, not building, which

we believe is necessary.

Another important factor in this tight and volatile market is the

very small amount of spare productive capacity. Currently, there’s

only about a million barrels a day of unused productive capacity in

the world, almost all of which is in Saudi Arabia, and that’s a

present world market of 82 million barrels a day, so we are operating the global crude market at between 98 and 99 percent of capacity. Clearly, that is little room for any surprises.
32

Inventories are and will continue to be a key indicator to prices.

U.S. crude inventories have been low most of this year and only recently have moved into the normal range, as published by the EIA.

Gasoline, however, remains quite low and at the lower end of the

normal range and, therefore, volatility and potential for price

spikes remains in the gasoline market because of the strong demand and the tight situation in domestic refining, which accounts

for about 90 percent of our domestic gasoline supplies, so that 10

percent from foreign refiners is critical, especially during the peak

driving season.

And this year, imports from Europe, the Caribbean and elsewhere are a bit lower than we anticipated, partly because of tightness around the world on refining capacity and partly because of

the more stringent U.S. specifications that have gone into effect

with regard to sulfur. And, therefore, we are watching the imports

very closely on a week-to-week basis to see where these supplies

will be headed, as well as the impact on inventories. So, to sum up,

EIA remains prudently cautious of where this market is going to

end up. Saudi Arabia and other producers have promised to increase their production, and so far, that seems to be holding up.

And while gasoline prices have declined in recent weeks, consumers should not expect retail prices to fall back to the prices we have

seen even last year. Our current short-term forecast projects that

west Texas Intermediate Crude prices will likely fluctuate around

$37 per barrel, reflecting this tightness, and that gasoline will average about $1.83 per gallon for the second half of the year.

So, in conclusion, the EIA anticipates a continued tight market

subject to volatility. Thank you very much, Mr. Chairman, for the

opportunity to be here today.

[The prepared statement of Mr. Caruso follows:]
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50
51
52
53

Mr. OSE. I thank the gentleman.

Our next witness is the Assistant Secretary for Fossil Energy,

the Acting Assistant Secretary for Fossil Energy at the Department

of Energy, Mr. Mark Maddox.

Sir, welcome to our witness table. You’re recognized for 5 minutes.

Mr. MADDOX. Thank you. Mr. Chairman, members of the subcommittee, thank you for giving me the opportunity to discuss the

volatility of U.S. gasoline markets.

Gasoline price volatility should come as no surprise to anyone.

President Bush foresaw the potential for gasoline price volatility

when he unveiled the National Energy Policy 3 years ago. That potential has become a reality.

The NEP noted energy demand was rising, and will continue to

rise, and recommended that we take steps to meet the growing demand most notably by increasing domestic production of energy

and by encouraging energy efficiency and conservation. In the

NEP, we said that energy supplies were being limited by restricted

access to Federal lands and that regulatory uncertainty and overlap, in combination with low historical profitability and low rates

of return, were contributing to a lack of investment in refineries.

The NEP also noted that our Nation’s energy infrastructure, our

network of pipelines, refineries, generators and transmission lines,

was antiquated and would need to be updated to deal with an everexpanding economy. Winston Churchill once spoke of finding security in diversity. Increased domestic production should be the cornerstone of diversity of oil supply for the United States.

The United States continues to be a major oil producer. According to the Energy Information Administration, the U.S. is currently

producing about 5.8 million barrels of crude oil per day, making us

the world’s third ranked producer, behind only Saudi Arabia and

Russia.

And, we still have considerable reserves to draw on. Today, 377

billion barrels of currently uneconomic and unrecoverable oil await

cost-effective technologies in addition to 22 billion barrels of proved

reserves. To help tap that immense resource, we are concentrating

the Office of Fossil Energy’s oil research and development efforts

on highly promising technologies with big potential payoffs. We’re

working toward prolonging the life of mature fields through greater

use of CO2 injection, by finding economic ways to bring CO2 produced at fossil fuel power plants to oil fields. We are working on

improved imaging and diagnostic tools, such as the recently announced new cross well electromagnetic imaging tool that can see

through the rock between widely separated oil wells, distinguish

the oil, water and gas reservoirs and measure changes over time.

And, we are developing microhole drilling technology that could reduce drilling costs by as much as two-thirds compared to a conventional well, reduce disposal costs for drilling fluids, cutting them by

20 percent, significantly lowering the environmental impacts of

drilling activities, and open access to 218 billion barrels of oil at

mature basins less than 5,000 feet deep. We are also working to

increase access to high priority areas for oil and gas in our western

mountain States, while protecting the environment.
54

We are making progress on boosting domestic production, but

more must be done. We need a comprehensive energy bill that will

open the Arctic National Wildlife Refuge, or ANWAR, to domestic

petroleum production. ANWAR offers us the prospect of secure, domestically produced oil. We have lost almost a decade to debating

the merits of developing ANWAR. Debate continues even as technological advances have made arguments over the environmental impact of development more tenuous. And, with each passing year,

our growing reliance on foreign sources of energy make it more urgent that we take advantage of these domestic oil resources.

Higher gasoline prices have prompted various proposals for action, among them that we use the Strategic Petroleum Reserve to

influence oil markets and reduce gasoline prices. We believe that

abandoning our stated goal of filling the Strategic Petroleum Reserve is wrong from a national security point of view. President

Bush has been very clear that the reserve is in place in case of

major disruptions of energy supplies to the United States that

could arise from a variety of events, such as natural disasters and

terrorist attacks.

We adopted a plan for filling the Reserve by a predictable

amount and over a certain length of time in order to affect markets

as little as possible. The current rate of fill is about 105,000 barrels

per day, which the EIA estimates has an impact of, at most, 1 or

2 cents per gallon of gasoline.

The world oil supply demand equation is largely responsible for

higher gasoline prices. But all of the factors also play a part. One

very important factor is our insufficient or outdated domestic pipeline and refinery capacity. The United States has not seen a new

refinery built since 1976, and the expansion of existing refineries

has slowed in recent years.

Mr. OSE. Mr. Maddox, how much time? I have a long series of

witnesses today and many statements to make. Can you—I’ll give

you 10 seconds to wrap up.

Mr. MADDOX. Our refineries are running at near total capacity

of about 96 percent while the EIA projects U.S. gasoline demand

will increase 47 percent and diesel used for transportation will increase 73 percent by 2025. Thank you. I look forward to taking

questions.

[The prepared statement of Mr. Maddox follows:]
55
56
57
58
59
60
61
62
63
64
65

Mr. OSE. Thank you.

Our third witness, Mr. Jeffrey Holmstead, who is the Assistant

Administrator for Air and Radiation at the Environmental Protection Agency.

Mr. Holmstead, we have received your written statement for the

record, and it’s been entered therein. You’re recognized for 5 minutes for the purpose of summarizing.

Mr. HOLMSTEAD. Thank you, Mr. Chairman and members of the

subcommittee. I appreciate the chance to be here today and talk a

little bit more about the clean fuels programs and their impact on

gasoline prices.

As most of you probably know, EPA began to require improvements in the quality of motor fuels back in the 1970’s when the

agency required that lead be phased out of gasoline, but the focus

of attention in recent years has been on two clean fuel programs

that are a result of the 1990 amendment to the Clean Air Act.

The first one is the Reformulated Gasoline Program [RFG], and

the other is the Tier 2 Low Sulfur Gasoline Program. By statute,

every gallon of RFG is required to obtain a minimum amount of an

oxygenate, such as ethanol or MTBE. EPA and the Department of

Energy have estimated that the cost of producing RFG is approximately 4 to 8 cents a gallon greater than the cost of producing conventional gasoline. About half of this cost increment is due to the

cost of the oxygenate requirement itself.

Now, I should note that the average retail price of RFG today,

what people pay at the pumps, is actually a little less than 4 cents

a gallon greater than the average retail price of conventional gasoline. That’s a pretty good indication of the cost to consumers of this

Federal mandate, about 4 cents a gallon.

The second clean fuel program I mentioned, the so-called Tier 2

Program began on January 1st of this year. By 2006, when this

program is fully phased in, it will reduce the sulfur content of most

gasoline sold in the United States by about 90 percent. This reduction in the sulfur content immediately reduces emissions from all

gasoline powered vehicles, and it also enables the use of more advanced pollution controls on these vehicles. Thus, the Tier 2 Program not only addresses fuels but also includes a phase which begins this year of more stringent tailpipe standards for all light-duty

vehicles, including cars, trucks, mini vans and SUVs.

We estimate that the cost of the Tier 2 Fuel Program is about

1 cent per gallon today, and will still be less than 2 pennies a gallon when the program is fully phased in in 2006. Now, the important thing of course is to compare the cost of the program to its

benefits.

On the benefit side, we estimate that the Tier 2 Program, including both the fuel and engine standards will prevent every year approximately 4,000 premature deaths, more than 10,000 cases of

chronic and acute bronchitis and tens of thousands of respiratory

problems. As far as I know, everyone agrees that the public health

benefits of this program far exceed the cost.

As you all know, the retail price of gasoline is affected by many

factors. We believe that the run-up in gasoline prices earlier this

year was primarily the result of a steep increase in crude oil prices.
66

But, what we can say with great certainty is that environmental

regulations have had a minimal effect on gasoline prices.

Let me turn now quickly to the issue of so-called boutique fuels.

The Clean Air Act specifically authorizes States to regulate fuels

as part of their State Air Quality Plans if they need this type of

regulation to achieve national air quality standards. This authorization in the Clean Air Act has resulted in a number of different

fuel formulations being required by different States. These formulations are often referred to as boutique fuels; 15 States have adopted their own Clean Fuel Programs for part or all of their State.

In October 2001, EPA released a comprehensive white paper discussing a range of issues associated with boutique fuels. The main

conclusions of this white paper were, one, that the current gasoline

refining and distribution systems work well except during times of

unexpected disruptions, a refinery fire, a pipeline outage, something like that. We also found, two, that fewer fuel types are likely

to improve fungibility and, three, options exist to reduce the number of fuel types and to improve fungibility while maintaining or

improving air quality. But, the fungibility benefit from taking these

actions are likely to be modest, and there may be significant cost

or supply implications associated with any of these options.

Now, we are committed to working with Congress to explore

ways to maintain or enhance the environmental benefits of these

programs while exploring ways to increase the fungibility of the infrastructure and increase flexibility and improve and provide added

gasoline market liquidity. The best way we have identified to accomplish these goals is to replace the current oxygen content requirements for RFG with the renewal fuel standard that includes

a flexible national credit trading system. But, we also note that

this can only be done through legislation such as the renewable

fuel provisions in the energy bill which the administration strongly

supports.

Mr. OSE. Mr. Holmstead——

Mr. HOLMSTEAD. Again, I thank you for the chance to be here

today and look forward to answering any questions you may have.

[The prepared statement of Mr. Holmstead follows:]
67
68
69
70
71
72
73
74
75
76
77

Mr. OSE. I thank the gentleman.

Our fourth witness on this panel is Mr. Jim Wells. He is Director

of the Natural Resources Environment Section at the Government

Accountability Office.

Sir, we have received your testimony. It’s been read. It’s part of

the record. You’re recognized for 5 minutes to summarize.

Mr. WELLS. Thank you, Mr. Chairman. We welcome the opportunity to contribute to the hearing.

Accompanying me today is Mr. Scott Farrow, GAO’s Chief Economist.

Our presence today relates to the GAO report that we published

in March looking at the effects of mergers in the U.S. petroleum

industry. In 2002, we agreed to study the effect of the wave of

mergers, that is acquisitions, joint ventures that were occurring

across the petroleum industry in the 1990’s.

More than 2,600 mergers have changed the landscape on how the

sale of petroleum products occur. Large oil companies combined

with other large oil companies who previously competed against

each other. For example, in 1998, BP and Amoco merged and later

acquired Arco, while Exxon acquired Mobil and thousands more

continued.

Can the wave of mergers reduce competition and generally lead

to higher gasoline prices? Our study says yes. We began our work

by talking with the FTC. We found no existing FTC study on a retrospective impact of oil mergers, at least none that was publicly

available. And, we met with skepticism from the FTC staff as to

whether this type of study was even impossible or possible to do.

What analysis was in the literature and publications was on a

smaller scale, and clearly, it was not nationwide or dealing with

multiple mergers. Therefore, we had to construct econometric models to estimate the effects of mergers and market concentration on

prices because we believe bottlenecks in the gasoline markets are

most common at the refining and distribution levels. Also, price

changes at wholesale generally get passed through to prices at the

pump.

What we found was a marketplace that has changed. There are

fewer oil companies and refiners. There is less non-branded gasoline that was traditionally offered in the marketplace at lower

prices. Distribution and availability of gasoline to the smaller dealers, the moms and the pops, is on the decrease. Market concentration, which relates to market shares and merger activities, increased at the refinery levels.

Clearly, mergers potentially enable companies to gain synergy.

No doubt about it. They can grow their assets. Stockholder value

is important. They can reduce cost by achieving efficiencies that

may be passed along to the consumers at the gas pump. We did

find mergers that caused prices to decrease.

However, if you do get bigger and you have fewer competitors,

you may also gain market power, the ability to raise prices above

competitive levels. Taken collectively, our models suggest that

wholesale prices increased anywhere from 1 to 7 cents for six out

of the eight specific mergers, the major mergers that we analyzed.

This specific finding is based on using hundreds of rack or terminal

city prices for each week from 1994 through the year 2000, data
78

at least 6 months before the merger and 6 months after the merger. And, we attempted to control for all other factors that varied

over time and the economic conditions.

Our findings would imply that overall, the effects of market

power which tend to increase prices won out over the efficiency

gains of mergers which would tend to decrease prices. We assume

that these price increases will carry forward after the mergers and

in a sense be embedded, if you will, in an unchanging way in today’s 2004 gasoline prices.

Clearly, in a study of this magnitude, you can expect to have differences of opinion. FTC, as you will hear this morning, weighs in

with their views. We can agree to disagree, I hope. Although no

econometric model can perfectly depict reality, we believe that our

models are sound, and produce reasonable estimates. We are, in

fact, very strongly supporting and welcoming public scrutiny and

discourse on issues like gasoline prices. We even welcome sorting

through this and these issues with the FTC.

Having Bill sit to my right, we agreed to be friends today, and

we agreed that our goal is to work together in the future to deal

with some of the estimates and issues with the GAO product.

Mr. Chairman, our hearings today will add to this debate as our

Nation struggles with high gasoline prices. Mr. Chairman, in summary, we believe that the retrospective look that GAO did, looking

back at what happened in the 1990’s, it can do two things. One,

it can help the Congress sort through today and other days some

of the background to what’s happening with 2004 price spikes.

Two, we would hope that our study could influence what the regulatory antitrust agencies like the FTC do in the future to protect

the competitive process and consumers.

I also want to thank Mr. Cooper for giving me a warning about

the potential challenging questions that I may face. I thank you.

[The prepared statement of Mr. Wells follows:]
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94

Mr. OSE. I thank the gentleman.

I am pleased to recognize the General Counsel for the Federal

Trade Commission, Mr. William Kovacic.

Sir, your statement, your written statement’s been entered into

the record. You’re recognized for 5 minutes for the purpose of summarizing. I just want to clarify the record. You’re on his left, not

on his right.

Mr. KOVACIC. Mr. Chairman and members of the subcommittee,

thank for the opportunity to present the FTC’s testimony on the

causes of and possible policy responses to gasoline price increases.

I will first describe FTC measures that insure that consumers

pay competitive prices for gasoline, then discuss the GAO report,

and then offer my views about the causes of gasoline prices. My

written statement gives the views of the commission, and my spoken comments offer my views and not necessarily those of the commission.

Competition policy plays a key role in protecting the consumers

of gasoline. FTC programs embrace this principle in four ways.

First, the FTC does oppose mergers that promise to curb competition. Since 1981, the commission has challenged 15 petroleum

mergers, causing four deals to be abandoned or blocked and requiring major divestitures in the other 11. Compared to other industries, FTC petroleum merger remedies have been uniquely stringent.

The FTC also prosecutes non-merger antitrust violations. For example, in March 2003, the FTC charged Unocal with violating the

FTC Act by deceiving California State regulators in connection

with proceedings to devise standards for reformulated gasoline.

Earlier today, the commission announced that it unanimously has

reversed the ruling of the administrative law judge who had dismissed the complaint at the end of last year.

A third FTC activity is to monitor industry conduct to spot possible antitrust violations. Since 2002, the FTC has used a statistical model to detect unusual gasoline price movements across the

country. The FTC examines apparent anomalies and works with

other Government agencies to pinpoint possible causes, including

antitrust misconduct.

The fourth FTC activity is to inform the public and policymakers

about petroleum competition issues. Later this year, the agency

will issue a report on the factors that affect fuel price increases and

will update FTC reports on petroleum mergers issued in the 1980’s.

The FTC’s petroleum experience builds heavily on merger review.

In May, the GAO report, as Jim Wells has just described, examined

mergers and concentration arising from transactions in 1990’s.

Among other tasks, the GAO studied eight mergers completed between 1997 and 2000 and found that six deals caused gasoline

wholesale prices to rise, while two caused prices to fall.

The GAO report contains fundamental methodological errors that

deny its results, in our view, reliability. Three crucial flaws stand

out. First, GAO’s econometric analyses did not properly account for

many factors that affect gasoline prices. Second, GAO’s study of

how concentration affects prices did not use properly defined relevant markets required for sound analysis. Third, the GAO failed
95

to consider critical factors about individual transactions that are

vital to assess price effects.

The FTC welcomes the rigorous analysis of past enforcement decisions. In the spirit of Jim Wells’ comments, we invite the GAO

to join the FTC in cohosting a conference to consider the GAO report’s findings. To inform these proceedings, we call upon GAO to

fully disclose its econometric methodology and all data used to run

its models. Participants at the conference would include GAO and

FTC experts, the agencies’ advisors and interested observers.

Let me turn to what the FTC has learned about factors that

cause gasoline prices to rise. The paramount factor, as we have

heard this morning, is the price of crude oil. Changes in crude oil

prices account for about 85 percent of the variability of U.S. gasoline prices. When crude oil prices rise, so do gasoline prices.

A second factor is the high level of utilization in the refining and

transportation sector. For example, pipeline capacity is stretched in

some regions, although expansion projects are underway to boost

capacity. The same could be said for inventory levels.

Another major factor, as we have heard this morning, is the design of environmental quality standards. Pollution control unmistakably yields great social benefits but also raises refining costs.

The multiplicity of environmentally mandated brands sometimes

can reduce the flexibility of the supply sector. ther Government

policies also raise gasoline prices at the State and Federal level.

To understand and publicize developments in the petroleum industry and to attack antitrust misconduct is a priority second to

none for the FTC. I welcome your questions.

[The prepared statement of Mr. Kovacic follows:]
96
97
98
99
100
101
102
103
104
105
106
107
108
109
110
111
112
113
114
115
116
117
118
119
120
121
122
123
124
125
126
127
128
129
130
131
132
133
134
135
136
137
138
139
140
141
142
143
144
145
146
147
148
149
150
151
152
153
154
155
156
157
158
159
160
161
162
163
164
165
166
167
168
169
170
171
172
173
174
175
176
177

Mr. OSE. I thank the gentleman.

All right. As I indicated earlier, what we’ll do is, each of the

Members up here has an opportunity to ask questions. We’ll move

in 5-minute increments. We are scheduled for six votes this morning on the floor some time—it actually might not be this morning.

Sometime between 12 and 12:30. We also have a second panel of

witnesses. We are required to be out of this room by 1:30.

Just for everybody’s edification, to the extent that we have questions that need to be asked that we don’t get to, we will leave the

record open and submit them to the witnesses in writing, leaving

the record open for 10 days.

Does anybody up here have any questions on that?

All right. I will go ahead and start.

Mr. Maddox, I want to ask you about this Strategic Petroleum

Reserve. I’ve spent a lot of time looking at the suggestion about

drawing down the 105-odd thousand barrels a day that is otherwise

going into the reserve. If that 105,000 barrels a day, as some have

suggested, were not going into the Strategic Petroleum Reserve,

where would it go? What would we be able to do with it? I mean,

how does it get to market?

Mr. MADDOX. Well, the process is pretty straight forward. If we

were not drawing it down, or filling a reserve, I guess is the question, the oil would be sold on the market.

What has traditionally happened, looking at some of the other

examples, is, we see most of that oil simply displace imports. Times

like right now, when you have a healthy storage or average storage

level of over 300 million barrels, there is not necessarily a crude

shortage at this point. So, any release would not necessarily impact, you know.

Mr. OSE. Before you leave that point, I think you—did you just

say there is not a shortage of crude?

Mr. MADDOX. Correct me if I’m wrong, but, our stocks are in the

average range right now, and we, in fact have, right now, a very

tight refining capacity at 96 percent, which is pretty close to flat

out. And to go much higher, I think you could argue whether it was

sustainable to go at a higher level.

Mr. OSE. Well, if I read—somebody’s statement here said that

the refining capacity in the United States is something like 8.78

million barrels—that’s the rated capacity for the refineries around

the SPR locations—and that they are running at 96 percent.

Mr. MADDOX. Correct.

Mr. OSE. Which means that 1 percent is 87,000 odd barrels.

Mr. MADDOX. Right.

Mr. OSE. Well, 87,000 and 105,000, that’s not, I mean, it seems

to me like that’s less than what would be necessary to take it to

100 percent. Why can’t we take it from 96 percent operating capacity to 100 percent?

Mr. MADDOX. You could, in theory, but the reality is, there are

breakdowns. There are, you know, these things, I don’t think

there’s any model that says you can run 100 percent forever.

I mean there’s just always the possibility, you know, things happen for lack of a better description. 96 percent, I think most manufacturing people would tell you, is a pretty extraordinary rate of capacity utilization.
178

So, you could nudge it up a little bit. But, the reality is, we have

been building our stocks the last 4 or 5 weeks, and we are filling

our stocks while we maintain a pretty steady level of product.

Mr. OSE. So, the storage above ground, if I’m correct, is about

300 million barrels today.

Mr. MADDOX. Right.

Mr. OSE. The Petroleum Reserve has about 660 million barrels

in place. Are you suggesting that, if the 105,000 barrels that’s currently going daily in to the SPR was not going into the SPR,

there’d be no place to put it?

Mr. MADDOX. Individual companies have to make economic decisions on how much stock they want to carry. Right now, the high

price environment, I don’t think they’d be too eager to build stocks

and create the carrying costs involved with the larger stocks.

Mr. OSE. Mr. Caruso, does the EIA concur with those conclusions?

Mr. CARUSO. Yes. I think Mark’s point about there not being a

shortage is different than not saying it’s a tight market. Clearly,

there are 305 million barrels of crude in stocks now.

Mr. OSE. Explain your nomenclature. Your vernacular is very

good. I think it’s very precise. Would you please explain the difference between not a shortage of crude and a tight market?

Mr. CARUSO. That’s crucial, actually, to the decision and the

memo that I wrote in February. And, that is that all refiners who

are seeking crude can buy it today at $39 WTI. So there is crude

available to refiners. If 100,000 barrels a day were made available,

would they add that to inventories? Our view is probably not.

Mr. OSE. Is it your view that the constraint is the refining capacity?

Mr. CARUSO. There’s two aspects of the refining capacity. One is

primary distillation, which is running at 96 percent of the 16.8 million barrels per day total capacity in this country. Second, there are

the conversion units that go beyond the primary distillation. We

believe that those are operating at close to 100 percent of capacity.

So there are two aspects. One is the primary distillation, and

then there’s the secondary conversion or treatment units transform

distillation unit outputs into gasoline and other products. And,

right now, they are operating these margins very close to full capacity.

Mr. OSE. Thank you.

The gentleman from Massachusetts.

Mr. TIERNEY. Thank you. Just to close out on that, the Valero

Energy Corp.’s chief executive officer, William Greehey, opined that

if the President stop purchasing for the oil reserve, it would signal

to the commodity traders that the White House is serious about oil

prices and the prices would fall fast.

Is there any merit to the concept that signal would be sent and

it would have an effect on prices, Mr. Maddox?

Mr. MADDOX. We don’t believe so. I mean, I think we have some

estimates that stopping may have an effect, I think, of a dollar a

barrel or so. But, I would note also that we saw the price swing

$1.26, I think, yesterday. At this stage it’s largely a supply uncertainty situation that is probably driving prices to a greater degree.

I think the Secretary stated yesterday that he thought there was
179

probably a risk premium of potentially as high as $10 right now

for the price of oil. And, I think events will probably drive that

issue.

Mr. TIERNEY. Mr. Kovacic, you know, rather than challenging

Mr. Wells’ organization to sort of a fact and figures dual of some

sort do you think it would be well spent time of the FTC to do an

actual report and study about the effects of mergers?

Mr. KOVACIC. We are in the process of completing a report that

does look at the consequences of mergers, that does update two

other studies we have done. And, we do think it’s useful to engage

in a continuing conversation with the GAO.

Mr. TIERNEY. Well, I’m sure it is. We had asked for any studies

that you had done on that, and I don’t recall getting them from

your office. So how long ago were those studies done?

Mr. KOVACIC. One in 1987 and one in 1989, and we are in the

process of doing a further document that updates the results of

those studies, sir.

Mr. TIERNEY. Are you familiar with the March 2001 Federal

Trade Commission report that was authored by Chairman Robert

Pitofsky? And he noted in that study, by withholding supply, the

industry was able to drive prices up and thereby maximize profits.

Mr. KOVACIC. That’s right. Are you referring to the Mid-western

States Study, Congressman?

Mr. TIERNEY. That’s correct.

Mr. KOVACIC. Yes. I believe that the FTC report also pointed out

that the capacity to act in that way was for a comparatively short

period of time as well. And I believe that the net assessment of the

Commission is that, though it takes temporary disruptions quite

seriously, that this was indeed a temporary and quite finite disruption.

Mr. TIERNEY. Are you familiar with the 2003 RAND study of the

refinery sector that reaffirmed the importance of the decisions to

restrict supply? And, it pointed out, in a change in attitude in the

industry, saying that increasing capacity and output to gain market share or to offset the cost of regulatory upgrades is now

frowned upon. In its place, we find a more discriminating approach

to investment and supplying the market that emphasized maximizing margins and returns on investment rather than on product output or market share. The central tactic is to allow markets to become tight by relying on existing plant and equipment to the greatest possible extent, even if that ultimately meant curtailing output

of certain refined products.

Mr. KOVACIC. Yes, indeed. I’m also struck, though, in the very

same study, toward the beginning of the study, you see the basic

conclusion by the RAND researchers that the supply system in the

United States operates comparatively well. Their net assessment

was relatively positive.

I guess another methodological point that interests me about the

RAND study is that they report in a very aggregate way the results

of all of their research. Something that would have been interesting

to us is to see precisely whose views factored into the observation

that you provided.

Mr. TIERNEY. Well, I guess that’s true in any study, where you

go back and forth. So, what you are saying is, you are going to
180

stick to your story no matter what it says so long as you can find

a methodology to support it?

Mr. KOVACIC. Well, I guess maybe it’s an academic’s obsession

with footnotes. But when you look at the RAND study, you simply

notice that they tell you who they spoke with at the back. But, as

they hit key conclusions along the way, there is no particular revelation of whose observations factored into the results.

Mr. TIERNEY. So, you are not troubled at all by the fact that

there have been a sizable number of mergers over recent years?

Mr. KOVACIC. We are extremely attentive to and extremely concerned about the impact of those mergers. I have to be clear, Congressman, that in addressing the GAO’s work and ours, the GAO’s

instinct here—and your observation as well—about the usefulness

of ex-post evaluations as a way of informing future policymaking

strikes me as being right on target. It’s a key element of responsible decisionmaking, before you take next steps, to go back and

look at what you have actually accomplished. And, the effects, good

or bad, ought to be well-known. So, I emphasize, that’s a crucial

ingredient of good policymaking, and I don’t want to diminish in

any way the value of that kind of assessment.

Mr. TIERNEY. I would hope not. And, I would hope that the FTC

starts looking at your merger guidelines a little more actively and

get on top of this, because I think it just stands to reason that the

GAO’s conclusions are right on the money in terms of the direction

of the things that are going on. I think it belies commonsense to

think that all these mergers haven’t had an effect. And, particularly—and I don’t have time to go into it now because we are going

to close out—but you look back at Senator Wyden’s committee

hearings of a while back, when you have industry people actually

quoted on there saying that keeping the supplies low is a good

strategy for them to keep their prices high. Those things, I hope,

ought to concern the FTC and ought to spark some sort of report

on that and some concern for the mergers and consolidations.

Thank you.

Mr. OSE. The gentleman from Ohio.

Mr. TIBERI. Thank you, Mr. Chairman.

Mr. Holmstead, can you give me the exact number of blends that

are required, fuel blends, in America?

Mr. HOLMSTEAD. I believe I can. And, I can understand your

question on this issue, because there are all kinds of numbers that

are thrown around.

When we talk about boutique fuels, what we talk about are specific State requirements that are different from those required

under Federal law. There is RFG that I mentioned. And, RFG actually is different in the North and in the South because of different

characteristics. The Federal requirements are major gasoline programs. But, if you look at boutique fuels, requirements by individual States, there are nine.

Now, while I say there are nine, other people are saying 100-

something. Well, the difference is, as we have delved into this, a

State sets a standard, but then different companies choose to sell

different grades of gasoline. So, you have standard, premium, and

ultra or whatever they are. In response to that State requirement,
181

an individual refinery may actually produce three different grades

of gasoline or more.

And then, some States have identical standards, but we count

those as just one. Some people may count three different States

with the same requirements; we are going to count those as three

or actually nine. But, we think the best way to look at it is there

are nine different State boutique fuels programs. In addition to

that, there are federally mandated programs that apply in the rest

of the country.

Mr. TIBERI. How many are those numbers?

Mr. HOLMSTEAD. Well, again, different requirements apply during the summer and during the winter. But, the biggest number of

gasoline blends is during the summertime season, and there are six

Federal requirements. So, there would be six Federal programs and

nine boutique State fuel programs.

Mr. TIBERI. Mr. Caruso, would you concur with that analysis?

Mr. CARUSO. Yes. That concurs with our information.

Mr. TIBERI. Thank you.

Mr. Holmstead, in layman’s terms, not in technical details, can

you explain why Washington, DC, has a different requirement than

Chicago, which has a different requirement than Atlanta?

Mr. HOLMSTEAD. In large part, that’s because of sort of our Federal system of Government, where the way Congress chose to enact

the Clean Air Act was to require in the most highly polluted cities

this reformulated gasoline or RFG. And I have to look at a map to

see exactly where that’s required, but that tends to be required in

the most highly polluted areas, New York, Los Angeles, Houston.

Mr. TIBERI. Excuse me, but are the pollution problems different

in Washington than Chicago?

Mr. HOLMSTEAD. Yes, they may be. The extent to which cars contribute to the problem is different in Atlanta compared to Baton

Rouge where it’s much more of a stationary source problem versus

a mobile source problem.

The other thing is different States, under the Clean Air Act, have

flexibility to decide how they want to achieve national standards.

Some States may decide that a fuels program is an effective way

of achieving these standards. Other States may believe that a more

effective way is to regulate factories and plants and things of that

sort.

Mr. TIBERI. Mr. Caruso, have the requirements from States and

the Federal Government caused foreign refineries to stop producing

refined or reduce the number of refined oil coming into the United

States?

Mr. CARUSO. The only instance I’m aware of is the gasoline components we get from Brazil. Most of their refineries cannot meet

the new Tier 2 RFG lower sulfur requirement—120 parts per million—starting this year. So perhaps—and this is quite a tentative

number—there may have been about 75,000 barrels a day from

Brazil that now has to be made up from other sources. And in fact,

there have been some increases in other refineries, other foreign refineries, such as Canadian and European.

Mr. TIBERI. OK. One final question, Mr. Holmstead. Has the EPA

done any research to see if, technologically, we can produce today

one type or maybe two or three types of fuels that can solve our
182

pollution problem in different cities at the same time of reducing

the number of fuels required by a refinery?

Mr. HOLMSTEAD. That is something that we have looked at quite

a bit. You won’t be surprised to hear that there are tradeoffs. For

instance, the cleanest gasoline from an environmental perspective

is California’s. California gasoline is a blend that exceeds the RFG

requirements. If we were to simply mandate that fuel throughout

the United States, we would solve our fungibility problem, so everybody would be using the same type of fuel. But that would dramatically increase costs.

And so, if you are trying to reduce the number of blends and improve fungibility, you may actually have an adverse impact, that is

on fuel supplies and cost to consumers. There is really no reason

for consumers in some States that don’t have a pollution problem

to pay those kind of high prices.

And so, it’s an issue that we are aware of and that we have paid

a lot of attention to. But, you know, common sense would dictate,

that we have fewer versions of gasoline. There may be some middle

ground that would love to explore with Congress. But, there is no

one obvious easy answer because there are tradeoffs.

Mr. TIBERI. Thank you.

Mr. OSE. We will go another round here.

Mr. Holmstead, I want to visit with you about California’s request for a waiver. If I understand correctly, EPA is concerned

about the impacts of air quality of granting such a waiver. And, I

impute from that you’re concerned about the deterioration in the

air quality that might occur. Am I correct in that?

Mr. HOLMSTEAD. That’s correct. Yes.

Mr. OSE. OK. The particulate matter. Are you worried about sulfur? What is it exactly that EPA’s concerns are based on?

Mr. HOLMSTEAD. This sounds self-aggrandizing, but all of these

air pollution problems are very complex, especially in California.

The air pollution problems that are of greatest concern are ozone,

which you are well aware of, and fine particles. But, these pollutants aren’t emitted directly into the air from automobiles. It’s not

as though you measure ozone or you measure fine particles. These

pollutants are made up of many different components.

So, for instance, if you care about ozone levels, you have to consider VOC emissions or hydrocarbon emissions which do come from

automobiles. You have to consider NOx. You also consider CO

emissions.

And so what we need to—what we have done in the case of ozone

is to look at what the air pollution situation would be in California

with a waiver and without a waiver. Actually determining what the

answer to that is somewhat uncertain because of a variety of factors. We know, for instance, that if you take out the oxygenate, you

will increase VOC emissions from the tailpipe. I think everyone

agrees with that. On the other hand, if you keep the oxygen in the

fuel you may increase what are called evaporative emissions because the oxygenate tends to have a higher Ried Vapor Pressure,

and so you get greater evaporative emissions. It’s enormously complex to try to understand that, and that’s just for the ozone, which

is something we have been looking at now for a couple of years.
183

On the fine particles side, again, there are some fine particles

that are emitted directly from cars, but also fine particles are

formed by the aromatics and NOx emissions in the fuel exhaust.

Trying to actually understand whether the waiver would hurt California’s air quality or help it is something that we are honestly

struggling with right now.

So, it’s a difficult issue and especially given that the statute says

that we can only grant the waiver if a State makes a showing that

the oxygen requirement is interfering with their ability to maintain

the standard. So, it’s something that we have taken seriously, and

we are really trying to get a handle on these issues.

Mr. OSE. Now, under the Tier 2 program, do you have—it’s being

phased in. Obviously, you have similar concerns, in particular, removing the sulfur from the fuel.

Mr. HOLMSTEAD. Right.

Mr. OSE. The question I have is that, while we haven’t been able

to get an affirmative or definitive response on California’s request

for waiver from EPA, EPA has in fact granted six hardship waivers

to refineries who otherwise can’t meet the Tier 2 phase-in requirements for sulfur. It’s on page 3 of your testimony here. You have

four bullet points, the last of which, ‘‘Hardship provision, which allows refineries to apply, on a case by case basis, for additional time

and flexibility to meet the low sulfur standards based on a showing

of unique circumstances. Under this program thus far, EPA has

granted hardship waivers to six refineries.’’

Where are those six refineries located?

Mr. HOLMSTEAD. Well, I’m not sure. I would be happy to provide

that for the record.

Mr. OSE. Are any of them located in California?

Mr. HOLMSTEAD. My expert tells me, probably not.

Mr. OSE. Are any of them located in Chicago or up in the New

York area?

Mr. HOLMSTEAD. I don’t know the answer to that.

Mr. OSE. I would be curious. I will submit that to you in writing.

Mr. HOLMSTEAD. I would be happy to provide that for the record.

[The information is provided in EPA’s answers to Chairman

Ose’s followup questions.]

Mr. OSE. Well, my basic question, and it may be rhetorical at

this point, is, how can you be so concerned about air quality in

California to the extent that we can’t get an answer from you one

way or another, and yet here are six refineries that can’t remove

the sulfur in a manner consistent with the Tier 2 phase in, and you

are granting them waivers? There is a certain inconsistency there.

Mr. HOLMSTEAD. Well, no. It’s a very different situation. The Tier

2 program is something that EPA created through regulation. The

oxygen mandate is a specific statutory mandate from Congress.

And, Congress said that we can only grant a waiver if a State

makes a showing that the oxygenate requirement interferes with

its ability to attain air quality.

So, you are right. Under our Tier 2 program, if there is a hardship at a refinery, we can grant that, even though it would have

a modest negative impact on air quality. We are not able to do that

in the case of the oxygenate waiver because that’s a statutory requirement.
184

Mr. OSE. Both of them have the force of law, do they not?

Mr. HOLMSTEAD. Well, they do. But, our regulations explicitly

allow us to grant this hardship waiver. If the statute had contained

a provision similar to our regulations that would allow us to grant

hardship waivers, then we would consider them both in the same

way. But, it’s just a very different legal regime in the case of oxygenate requirement versus the sulfur reduction requirement in the

Tier 2 program. And, I can understand your——

Mr. OSE. It seems to me you need to resolve the chemistry issue

here as to whether or not the evidence that California has put forward in fact is consistent with EPA’s desire for protection of these

different elements that you cited, whether it be ozone or a particulate matter or what have you. That’s the key element here.

Mr. HOLMSTEAD. What——

Mr. OSE. What I’m trying to get at, is, when are you going to finish that?

Mr. HOLMSTEAD. We have a group of people that are working on

that right now. The State provided us with significant additional

information in February. Just within the last month or so, we received a very detailed technical report from an outside stakeholder

group that was concerned about these issues. And that’s what we

are looking at right now. And we will resolve it as quickly as we

can.

Mr. OSE. If I am correct, you are under a court order to do so.

Is that not accurate?

Mr. HOLMSTEAD. I don’t believe we are under any specific court

order. What the court did was they remanded—initially, when we

had done this analysis——

Mr. OSE. They vacated the original.

Mr. HOLMSTEAD. They vacated the original, and they sent it back

to us. They said, ‘‘You have to look at this fine particles issue,’’

which we hadn’t looked at before. So, this is an issue that we had

never really looked at, and now we are looking at it.

But, the court didn’t give us a specific date. They just said that

it’s—that when we come back and make the decision, we have to

also look at fine particles as well as at ozone.

Mr. OSE. I’m here to ask you—I understand the time element,

and I appreciate the courtesy of my fellow Members here. I am asking you——

Mr. HOLMSTEAD. I keep hoping they are going to cut you off.

Mr. OSE. They are not going to cut me off. Trust me, they are

not going to cut me off. So, I am here to ask you again, do you have

a date by which this is going to be completed?

Mr. HOLMSTEAD. We don’t have a specific date. As I said, we received a significant new technical comment document just in the

last month or so, and that raises a number of issues that we are

still looking at. What my boss has said is, we are going to do this

as quickly as we can.

Mr. OSE. I can tell you why they are not going to cut me off, is

because the same issues on waivers in California are creeping up

to Massachusetts and over to Ohio.

So, this is not something that’s unique to California. This is

timely. It needs to be done. It sounds to me like you actually do
185

have a court order to at least review your decision, and yet we can’t

seem to get the thing done.

So, back to my original question. What kind of time line are we

working under?

Mr. HOLMSTEAD. I can understand your concerns, and we have

obviously heard from the Governor of your State and the members

of the delegation. We made this decision now over a year ago, and

the court overruled it, not because they said we were wrong on the

technical side but because they said we also have to look at fine

particles.

And, honestly, we want to just make sure that we do this right.

It’s an enormously complex undertaking that we are committed to

doing the right way, and that’s what my boss has said, and we will

do it as quickly as we can.

Mr. OSE. What does that mean, as quickly as you can?

Mr. HOLMSTEAD. That means as quickly as we can while ensuring that we actually get it right and do something that will be consistent with the statute that Congress has required and that will

stand up in court as well.

Mr. OSE. I’m just amazed to find that the courts are moving faster than the Federal Government. That just befuddles me. And, I

have to tell you, I’m highly critical of the inability to get to an end

on this.

The gentleman from Massachusetts.

Mr. TIERNEY. I feel your pain.

Mr. Wells, let me ask you a little bit about your study, if I could.

Why was your study focused on wholesale prices and not on retail

prices?

Mr. WELLS. First, let me say to, Mr. Chairman, you are 100 percent. That’s why I wasn’t a boxer; I didn’t know the difference between my right and left. And I will work on that.

Clearly, as I said earlier, we focused on the wholesale price because of two major factors: Wholesale prices tend to be passed on

through to the pump at the retail level. And, second, in terms of

our ability to look and assess what data is available in the Federal

Government to assess, there is less data that’s available in the retail sector. The retail sector is much more complex in terms of the

factors that can influence gasoline prices. So, we thought a good

proxy is to look at the wholesale level, which deals with the actual

prices paid as the gasoline is moved from the refinery into the retail market.

Mr. TIERNEY. Did your study differ from any previous studies?

Mr. WELLS. Absolutely. Clearly, we went to the FTC and asked:

Had you done a retrospect analysis? They said, no. We asked for

what public studies they had done. Essentially, we got nothing. The

only study we are aware of was released in March just before our

report came out. It was done in Louisville, KY. It was one city

analysis.

It’s interesting to note, their analysis showed that wholesale

prices also went up, and I believe the retail prices either stayed the

same or might have decreased a little bit. But, again, it was only

one study.

The GAO study, we believe, is much more comprehensive. We

looked at the cumulative effects of the many thousands of mergers.
186

We isolated the different types of gasoline, which, in many studies,

had not been done. We focused and isolated on cost margins. We

basically looked at and subtracted out, if you will, or accounted for

everything that could have affected a gallon of gasoline so that

what remained was some sense of what we attribute to market

power related to the actual cost of the factor of the merger itself.

So, we believe our study was—nationwide, we have not found

any study that had done what we had done.

Mr. TIERNEY. Now, I take it, Mr. Kovacic, just a little bit here

in indicating that you didn’t—the FTC didn’t do any studies or

whatever, but you are quick to criticize the GAO’s.

So, Mr. Wells, they say that your study is flawed. What have you

done to address the concerns, which I understand were extensive?

Mr. WELLS. They clearly gave us 30 pages of comments of why

they didn’t like our study. I think it is fair to say, they feel strongly.

We feel as strongly as well that we in fact did use sound economic principles; we did use factors. They, lately—I mean, just

today, we heard there is still an additional three criticisms of factors that we did not consider. In consulting with our Chief economist, we find that we did in fact use those variables. So, maybe it’s

a dialog issue that GAO would welcome.

I think, more disturbing to me is sort of the impression the FTC

has given us. It sounds as if they are spending a lot of time and

energy criticizing everyone else that has looked at this marketplace. We would hope, in the spirit that we would want to move

into, that maybe the FTC wants to move beyond our methodology

is wrong and their methodology is right —ours is different, it’s different than what they used. Hopefully, in there somewhere must

be lessons learned in terms of what the FTC may be able to do better.

And, again, I think the focus we have is, market power is extremely important and is something we as consumers want to ensure that someone is protecting us from market power. We clearly

don’t want another Enron situation. So, we are in favor of hoping

that the FTC will, in fact, look at a retrospect study, look at how

well their performance has been, could they do things better?

Mr. TIERNEY. Well, I would agree that seems to be their job, and

that it doesn’t seem to have been done yet on this. But did you

have a peer review done of your study? And who did you talk to

about your study within the industry?

Mr. WELLS. Absolutely. We had at least a dozen peer reviewers.

University of California, Yale, Texas, industry consultants. We

talked to law firms. Four major integrated oil companies. In fairness, some oil companies refused to talk with us. We did speak

with exploratory and production companies. We talked to four refiners, 24 independent distributors, three Federal agencies, two

State agencies. The list goes on and on, 16 associations. We talked

to the hypermarket people, the unbranded retailers.

We actually went out and bought data. There’s no data—we

didn’t find data at the FTC. They gave us no data. The data that

we bought is—some of it is data that’s collected by private sources.

We spent a lot of money buying this data. There is an issue about

whether we should share data. There are a couple issues. One,
187

there are some restrictions about these rack prices, wholesale

prices, their information that belongs to the people that we bought

it from. Some of the data we used, we only gain access to their data

so that we can actually turn a switch on, look at the data, and the

switch gets turned off. So that type of data is not releasable to us.

In terms of Bill’s suggestion that GAO and the FTC would be

willing to work together, I clearly would like to run this by for institutional approval. I think it’s a great idea. We would love to

have a conference. We would love to put the brains in the room and

have a conference and talk about methodology and talk about what

data may be available. We would welcome that.

Mr. TIERNEY. Look, if Mr. Kovacic wants to insist on you giving

information and you want to give it, I recommend you hire Dick

Cheney’s attorney, and then you can keep it from him, you won’t

have to worry about giving it to him.

Let me just wrap up here by asking Mr. Caruso a question. I am

going to put on the record here, the EIA did an analysis of the administration’s energy legislation. And am I correct in asserting that

the finding of that analysis was that the impact of the bill on gas

prices would be negligible?

Mr. CARUSO. The EIA analysis of the Conference Energy Bill

only looked at those components which we could quantify and analyze use in our National Energy Modeling System. The results that

you are referring to concerning negligible effects on prices—are

limited to those components. With that clarification, you are correct.

Mr. TIERNEY. Thank you.

Mr. Chairman, I yield back. Thank you.

Mr. OSE. The gentleman from Ohio.

Mr. TIBERI. Thank you, Mr. Chairman.

Mr. Holmstead, just a few more questions on the boutique

blends. I represent a district in Columbus, OH. And, my understanding is that there are different requirements, blend requirements in Detroit, Pittsburgh, Chicago, in our region. In your opinion, if Columbus is experiencing a shortage of gasoline supply over

the 4th of July weekend, what is the cost of providing—or is there

additional cost in providing gasoline to Columbus because of the

fact that Columbus has a different blend than Chicago, Detroit, or

Pittsburgh if they had an extra supply, additional supply? I guess

the question would be, is the price fungible or the gasoline fungible

with respect to those different markets?

Mr. HOLMSTEAD. I don’t know enough about the requirements. I

know specific markets. But, I can say that is an issue we are concerned about. Because of the different State requirements, if there

is a supply disruption, if a refinery goes down, if there is a problem

with a pipeline, then if all gasoline were the same, it would be relatively easier to shift from one market to the other.

The way it works now is, if the requirements in Columbus are

equal to or less stringent than the requirements in Chicago or Detroit, they can use that gasoline because that gasoline may well

meet the requirements in Columbus. There is a degree of

fungibility there, but it’s not completely fungible. And, I think that

is an issue that people are concerned about.
188

Our studies have shown that, again, as long as everything works

well, that the pipelines run the way they are supposed to and the

refinery is up and running—which is the case the vast majority of

the time—then we don’t see significant problems with these different fuel blends. And, in fact, when there is a disruption, we do

have the ability under our regulations to grant temporary waivers.

And, again, this is quite different from the California situation.

We have done that; where there has been a refinery fire, where

there has been a problem, we have granted temporary waivers.

Mr. TIBERI. You have granted waivers?

Mr. HOLMSTEAD. Yes, we have granted those waivers where

there are specific supply disruptions. So, I guess I agree that there

are legitimate concerns about the balkanization of the gasoline

market.

We believe that we have done what we can now to maximize the

flexibility we have under current law, but it is something that we

would continue to look at.

Mr. TIBERI. Don’t those requirements—you made a statement in

your written testimony that the—in fact, you even reiterated it in

your oral testimony, that environmental regulations have had minimal effect on gasoline prices. Wouldn’t it be true that prices have

had an impact or there have been impacts on prices in markets

where there is a different brand or different blend required that’s

not as open on the marketplace? Meaning, if a specific blend is required in Chicago, isn’t that going to increase the gas since the

supply is narrower for Chicago than the rest of the region?

Mr. HOLMSTEAD. Typically, what our studies have shown is that

when a State is going to adopt a requirement like that, we encourage them to have a collaborative process where they work with the

refiners and the environmental community, and to try to understand the kind of gasoline that refiner, given its equipment, given

its feedstock, can readily supply to that market. Is there a cost?

The answer is, yes, but it’s typically, you know, a pennies per gallon kind of cost.

The real problem comes when the refineries that typically supply

that market have a disruption, and whether, you can bring in fuel

from another refinery that doesn’t typically supply that market.

And that’s where the real concerns about price volatility have come

up. Again, we try to address those where we are aware of them.

I mean, I can tell you we go in sort of full red alert mode. We

have a group of people who, when there is an issue, which happens

a couple times a year, immediately assesses the situation. We talk

with our colleagues at DOE and EIA to determine whether, given

the circumstances, we ought to do some sort of a temporary waiver.

And, we have done that to try to address those concerns.

Mr. TIBERI. OK. Switch gears. Mr. Maddox, Secretary Maddox,

just trying to get some clarification on this issue. When President

Bush announced in November 2001 his goal of filling the SPR to

capacity, the Energy Department said that ‘‘the SPR is intended in

the short run to smooth out price hikes.’’

That was the quote from the Energy Department. When and why

did the policy change?

Mr. MADDOX. I think the fill policy was developed to have minimal impact in the markets, and that was how the schedule was de-
189

veloped. We’ve tried to maintain a level, with a few exceptions, between 100,000 and 150,000 barrels a day. And, so I think probably

the reference was to that. I don’t know the full quote and context.

But, that’s always been our goal, to fill it in such a manner that

it did not disrupt the market or did not create stress on markets.

As you said, I think it’s less than 0.2 percent of 1 percent, which

is real world, kind of rounding error on an 80 million barrel-a-day

global market. I think that’s generally been the strategy. I think

that’s probably what they are referring to, lacking other context.

Mr. TIBERI. Under statutory language, under current law, just to

followup, a drawdown of the SPR may occur—may not be made unless the President finds that a drawdown and a sale are required

to respond, prevent, or reduce a severe energy supply interruption.

And, I’m sure you are familiar with that.

Mr. MADDOX. Yes.

Mr. TIBERI. Given the criteria and the current situation, does the

President have the authority in your opinion to drawdown the SPR

at the current time?

Mr. MADDOX. No. Right now, as we talked earlier, there is oil on

the market out there at a price, and people are getting it. Our

stocks are close to the average level. There is no disruption.

There is a great deal of potential for disruption right now as

there are a number of hot spots in this world right now—that

produce oil that the United States uses and the world market uses.

But right now, there is no disruption, per se.

Mr. TIBERI. Do you think that when President Clinton released

oil from the reserve in September 2000 when prices were about $37

per barrel, that there were circumstances that allowed him to do

that?

Mr. MADDOX. To my knowledge—and, Guy, you can correct me—

I’m not aware of any disruptions at that time.

Mr. TIBERI. You would agree that, by Christmas of that year, oil

prices had dropped to about $22 per gallon?

Mr. MADDOX. I will take your word on that.

Mr. TIBERI. Mr. Caruso, are you familiar with that situation?

Mr. CARUSO. Yes. At the time, I wasn’t in Government, and I was

asked that same question. And my answer was, ‘‘no.’’ I didn’t think

there were the appropriate circumstances.

Mr. TIBERI. Why do you think—what circumstances led, in the

world or in America, prices of oil to go down to $22 per barrel by

Christmas of that same year?

Mr. CARUSO. I think it was largely the result of demand being

weaker and the additional supply put on the market by OPEC

countries. My recollection of the actual data is a little bit sketchy.

But, that’s my recollection of that.

Mr. TIBERI. Back to Mr. Maddox.

Assume we all agree that the strategic petroleum reserves should

not be tapped, was it prudent to say so publicly, in your opinion?

Mr. MADDOX. I believe so. I think one of the things we are trying

to do is to create certainty in the market’s decisionmaking, and I

think adding more variables to market decisionmaking with people

trying to make long-term plans on prices is kind of counterproductive to an efficient market.
190

There are enough variables right now in trying to decide at what

price and how much oil to buy. I don’t think trying to outguess the

Government or trying to predict what the Government is going to

do makes that job any simpler. And, in fact, it will create more risk

for people who are trying to build stocks and make prudent decisions.

Mr. TIBERI. Mr. Maddox, would you concur that the No. 1 issue

affecting gas prices today is the cost of crude oil?

Mr. MADDOX. Yes.

Mr. TIBERI. Mr. Caruso.

Mr. CARUSO. I would say that’s the No. 1 issue, yes.

Mr. TIBERI. Mr. Holmstead.

Mr. HOLMSTEAD. Yes. That’s our view as well..

Mr. TIBERI. Mr. Wells?

Mr. Wells. I agree.

Mr. TIBERI. Last but not least?

Mr. KOVACIC. Yes, it is.

Mr. TIBERI. Thank you. Mr. Chairman, I yield back.

Mr. TIERNEY. Would the gentleman yield for just a second.

Mr. TIBERI. I yield, Mr. Chairman.

Mr. TIERNEY. I want to clarify just one part of that. I understand

the gentleman’s point with regard to the statutory language, that

the President may not have the authority to take oil out of the

Strategic Petroleum Reserves.

Mr. Maddox, do you think there is any statutory prohibition

against the President not continuing to fill it at any time, not adding oil to it?

Mr. MADDOX. To my knowledge, there is not.

However, I think there are policy implications and negative impacts to not being consistent in your approach to filling the reserve.

Mr. TIERNEY. That’s consistent with what your comments were

about that earlier.

But there is no statutory prohibition about somebody making the

decision to not keep filling oil at a particular level?

Mr. MADDOX. I don’t believe so.

Mr. TIERNEY. Thank you.

Mr. OSE. I have here a copy of the GAO’s study.

Mr. Wells, I know that in these studies, at least in previous reports on different subjects, I have always found the assumptions

under which the study was done, and I have looked through the

table of contents, and I can’t find them. Do you offhand remember

where they are?

Mr. WELLS. I’m sorry, I didn’t hear the question, Mr. Chairman.

Mr. OSE. I’m looking through your study. And, I know, in previous GAO studies, there have always been sections that highlight

the assumptions under which GAO does their work. I can’t find

those here.

Mr. WELLS. We have a scope and methodology section that would

describe the process that we use to build the study, and the entire

number of appendix, I believe it is No. 4 that goes into quite a lot

of detail, the econometric assumptions that were used in how we

built the model, page 110.

Mr. OSE. Actually, 122, I believe.
191

While we are doing that, Mr. Kovacic, what mergers has FTC

looked at since 2000? I think Mr. Tierney asked a fair question earlier, that your studies or the analyses that are in front of us today

stop at the year 2000. Have we had mergers that have occurred

since then?

You can take us through the complexity of the HHI analysis, if

you wish. But my concern here is that, I know you guys are pretty

vigilant, I just want to get on the record that you have in fact

looked at such mergers as may have occurred. So if you would

share that with us, I would appreciate it.

Mr. KOVACIC. Yes. Since 2001, there have been several significant transactions that we have examined. And if you could bear

with me for a moment so that I have the count. A couple of those

we have mentioned this morning already. The commission did examine Chevron’s acquisition of Texaco in 2001 and demanded a significant number of divestitures associated with that transaction.

We did look at Valero/UDS which also was permitted to proceed on

the condition that a number of substantial divestitures be made.

Phillips/Conoco in 2002 also was the subject of close FTC review,

and that transaction was permitted to proceed with significant

divestitures, including refinery and terminal assets.

And, Shell/Pennzoil Quaker State in 2002 is the last of the transactions in which the Commission took action.

There have been other mergers in which the FTC did examine

the transaction in detail and did not act. If my random access

memory can summon them on the spot, I believe one was Phillips/

Tosco. If I could turn to my colleagues for a second. Sunoco/Coastal

is another transaction that we examined and did not intervene.

If I have missed any, Mr. Chairman, I will be sure to complete

the list for you in writing.

In each of these transactions—and this does relate to the point

of the Commission’s work in doing studies—we do exhaustive, caseby-case examinations of each of these transactions, and we look at

them in a considerable level of detail. Over the course of doing

those reviews, our basic aim in most instances is to avoid net increases in concentration. So we look very carefully for overlaps.

And, I would say that, even though we have not attempted the

sweeping kind of empirical assessment that Mr. Wells referred to,

it’s the process of doing the exacting assessment of competitive effects in each of those markets and looking at the institutional arrangements that govern the way in which refining and distribution

takes place that gives us the great concerns that I have expressed

about the GAO study.

Mr. OSE. I want to dwell on that particular aspect of this, Mr.

Wells. And I need to have you be willing to chime in here. If I understand, the study that GAO did, you focused the analysis on the

pads, the seven pads across the country.

Mr. WELLS. That is correct.

Mr. OSE. If I understand what FTC does, it’s not based on the

pads but perhaps the unique markets within the seven pads.

Mr. KOVACIC. Precisely. One of our fundamental concerns with

the GAO study is that, in many ways, they are using this measure

of concentration, refining concentration at the PADD level. Based

on our examination, transaction-by-transaction, over the past 20
192

years where we have been principally responsible for reviewing

mergers, that’s not an acceptable proxy.

Mr. OSE. It would be of immense help to those of us charged with

responsibility of making decisions on these issues to have you all

resolve the difference. I mean, it would be helpful to us for you

guys to get that methodology agreed upon.

Now, the other question I have is that Mr. Holmstead indicated

that the gasoline is fungible in certain directions but not in other

directions. In other words, if your gasoline, say, in Chicago, the

standards of that gasoline may well be higher than the gasoline

available—I think Mr. Tiberi’s example was Columbus, OH. So it’s

fungible from Chicago to Columbus, but it may not be fungible

from Columbus to Chicago.

And it strikes me that most of the boutique fuels we have in this

country were designed to fit highly urbanized areas, which happens

to be where most people live, which happens to be where the markets are the largest, which happens to be where the most fuel is

sold. So it seemed to me that we need to resolve this issue of the

impact of the fungibility of the fuel. I think you’d probably contend

that it affects things. I’m not sure that would be the same position

that you have at GAO.

Mr. WELLS. The position we found in our modeling clearly when

you—because we tried to delineate and separate conventional gasoline and reformulation gasolines and boutique gasolines. And, I believe, in almost all cases, the reformulation in boutique had greater

cost implication impacts. So, there is differences between the gasoline in terms of the impacts to the mergers, as the econometric

model pointed out.

Mr. OSE. I think there are differences. And, I’m trying to resolve

whether or not one of the assumptions in your study, if I read one

of the comments here correctly, may have been that the gasoline

is largely fungible. I’m not sure that’s the case. I will send you a

question in writing so you can clarify that.

I have no further questions for this panel.

Mr. Tierney.

Mr. TIERNEY. Thank you, Mr. Chairman.

Mr. Kovacic, I want to revisit an area. Are you familiar with Senator Ron Wyden’s report that was filed June 15, 2004?

Mr. KOVACIC. I am, sir.

Mr. TIERNEY. It’s entitled, ‘‘Campaign of Inaction: The Federal

Trade Commission’s Refusal to Protect Consumers From Consolidation, Cutbacks, and Manipulation in America’s Oil and Gasoline

Markets.’’

Mr. KOVACIC. I am familiar with it.

Mr. TIERNEY. One of the points made is that, of course, the FTC

is not taking action to stop Shell from shutting down its refinery

in Bakersfield even though the agency had previously required

Texaco to divest this refinery in order to remedy what it found to

be a likely anticompetitive impact of the Chevron Texaco merger.

The shutdown would eliminate the competitive benefit from the divestiture that the agency requires.

If I read this right, Texaco wanted to merge with Chevron. The

FTC then required that Texaco divest itself of the Bakersfield refinery, because if they didn’t do that, it would be a likely anti-
193

competitive impact. Yet, no sooner had Shell had that refinery in

place, it now looks as if Shell is intending to close a 70,000 barrelper-day refinery in Bakersfield even though the company records

show the refinery is currently profitable. The Shell documents

showing the refinery profits are attached to the report of Senator

Wyden.

Shell’s announcement of its decision to close the Bakersfield refinery claimed that

‘‘there is simply not enough crude supply to ensure continued operation would be

economically viable.’’ But recent news articles have reported that both Chevron and

Texaco and State of California officials estimated that the San Joaquin Valley,

where the Bakersfield refinery is located, has a 20 to 25-year supply of crude oil

remaining. In fact, the Bakersfield California reported that, on January 8, 2004,

that Chevron Texaco plans on drilling more than 800 new wells in that valley this

year, which is 300 more new wells than last year. The fact that Texaco, Shell’s

former partner in the Bakersfield refinery, is increasing its drilling in the area calls

into question Shell’s claim that a lack of available oil supply is the real reason for

closing the Bakersfield refinery.

Another reason to question Shell’s claim about the availability of crude oil is the

fact that Shell is currently the subject of an investigation for misstating its crude

oil reserves. Despite Shell’s claims that its decision to shut the refinery was not

made to drive up profits, the company has admitted that ‘‘there will be an impact

on the market.’’ That impact will be to drive prices even higher. Oil companies predicted that the shutdown of the Powerine refinery would boost gasoline prices by

2 to 3 cents. That refinery’s capacity was only 20,000 barrels per day. Because of

the much larger capacity of the 70,000 barrel-per-day Bakersfield refinery, Shell’s

shutdown of this refinery would have an even larger impact on prices at the pump.

Why did the FTC say that it had first required that Texaco divest itself of Bakersfield and then, according to Senator Wyden’s

study, do nothing as Shell announced plans to close down the

70,000 barrels-per-day facility?

Mr. KOVACIC. I can confirm to you, and the Commission has authorized me to inform the committee, that the FTC is conducting

a formal investigation of Shell’s announcement that it is going to

close the facility. I believe the scheduled closing date is tentatively

say for the fall of this year.

I can confirm to you that the Commission has opened and is conducting a formal investigation to examine possible antitrust violations associated with the closure of that facility. It recognizes the

urgency and time sensitivity of the matter. It is using its investigative resources at this moment to examine possible antitrust consequences of that event.

Mr. TIERNEY. I’m certainly glad to hear that.

But, are there other incidents like this that have occurred since

2000, where certain requirements of the FTC, in order to allow a

merger or consolidation go forward, have been put in place and

then the monitoring has not gone on from the FTC?

Mr. KOVACIC. For every transaction in which we have parties

under order, which is the typical approach for a consent order, we

monitor compliance with those requirements with the utmost urgency because it’s fundamental to the legitimacy and effectiveness

of any of our orders. We examine them carefully. I’m aware of no

instance in which we have permitted a deviation from the requirements of the order to pass without challenge.

Mr. TIERNEY. Given the plans of Shell to close this Bakersfield

refinery in the fall of this year, when do you think that your review

will be done?
194

Mr. KOVACIC. I can’t provide a specific date. But, I can only emphasize, as the Commission has instructed me to do today, that the

inquiry is proceeding with the greatest possible urgency in light of

the announced timetable for the closure of the facility. And we are

fully aware that completing that inquiry sooner is absolutely indispensable.

Mr. TIERNEY. How transparent will your review be?

Mr. KOVACIC. Typically, where the Commission uses a formal investigation, it requires a vote of the Commission, a formal vote, to

close the investigation. It has been the increasing custom of the

Commission and the Department of Justice over the past 3 years,

in closing an investigation that we regard as having significant policy import, to reveal the bases on which a decision to close the investigation was taken.

Mr. TIERNEY. And, will that be done before the vote is taken appreciably or only at the time of the vote?

Mr. KOVACIC. It is typically at the time that the investigation is

closed that the Commission chooses to issue a statement that explains the reasons for closing the investigation. It is at the Commission’s discretion to make announcements prior to the point at

which it takes action either to prosecute or not to prosecute.

But, typically, the disclosure of the bases for not taking action

takes place at the time the decision not to prosecute is made.

Mr. TIERNEY. Well, I would only suggest for whatever it’s worth

that given the questions that have been raised by RAND, by the

GAO, by others, Consumer Reports, whatever, about the FTC’s inaction or purported inaction, of some of these instances and the

conduct of the industry, that, hopefully, your commission might decide to be a little more transparent in advance of its decision so

that the public gets to see that it has done a thorough scrutiny of

this in a very open manner and thorough manner, and that we all

have a little heads-up to offer whatever input might be necessary

to make sure there is a full and complete record. We appreciate

that——

Mr. KOVACIC. I will certainly convey that to the commissioners

themselves. I will make sure that your observations on that point

are known to them as promptly as possible.

With the greatest respect, Congressman, I think that as our

statement tries to lay out, to speak of the Commission’s program

as inaction is mystifying. I think that is a contentless description

of the Commission’s program here. It is a fair point to debate the

level of activity, but is it really a fair approach to say that it’s been

one of inaction?

Mr. TIERNEY. Well, we will find out as we delve further into this.

It’s certainly not been as active as some of us would like to see,

and I think, as many of the reports indicate, there hasn’t been all

the action that would be necessary to protect the consumers. So

that would leave us with at least some inaction which I base my

statement upon and some great distress for consumers who are

paying the price at the pump. And, hopefully, we can put some policy around that to make sure that, as we move forward, we will all

be on the same page. Thank you.

Mr. OSE. I thank the gentleman. I want to echo his comments

regarding the Bakersfield refinery which, if I understand correctly,
195

is scheduled to close November 1. I know that the Attorney General in California is looking at this issue, and I know, pursuant to

Shell’s announcement, I have received anecdotal evidence that a

number of buyers or potential buyers have gone to look at the refinery. There is a confidentiality agreement required for them to

see the actual operating results of the refinery, so I can’t give you

anything more. But, I do appreciate the gentleman from

Massachusetts’s interest, because I share it, and I hope FTC does

follow through.

Mr. KOVACIC. I can assure you, Mr. Chairman, that we regard

this as a matter of particular urgency and importance. And we intend to cooperate, and we have been cooperating as fully as possible, with our colleagues in the State of California. And I can assure you that this is a matter of the greatest attention and urgency

for the Commission, sir.

Mr. OSE. Every time I fill my tank, I will be thinking of you.

The gentleman from Ohio.

Mr. TIBERI. Speaking of refineries, Mr. Chairman.

Mr. Caruso, we heard today that crude oil is not in short supply.

But, we also heard that refining capacity is nearly at capacity in

America. In your opinion, how much would we have to increase our

refining capacity in the United States to have a meaningful impact

on lowering pump costs, fuel costs at the pump?

Mr. CARUSO. Well, that’s, of course, a very complex issue, and we

haven’t studied it that directly. But, clearly, the lack of refining capacity, particularly in the conversion capacity, is an exacerbating

factor to the higher prices of gasoline. It’s not the No. 1 issue, as

we have all agreed here, but it’s a contributing factor.

An increase in refining capacity certainly would help with future

gasoline prices, but I couldn’t put a specific number on it at this

time.

Mr. TIBERI. Mr. Maddox, do you want a shot at that?

Mr. MADDOX. I wouldn’t venture a guess. I think we referred to

earlier comments about crude being the major driver right now.

Mr. TIBERI. But you would concur—and you don’t know what the

number is, but added refining capacity at some point would lower

fuel costs?

Mr. MADDOX. Well, I would say that, with the expected continued

growth in refined products with economic growth over the next 10,

15 years, as I mentioned in my opening statement, we are going

to need more refineries if we are going to have sufficient gasoline

available. And, you know, a scarce commodity demands a higher

price. I think that’s basic economics.

Mr. TIBERI. Thank you.

Thank you, Mr. Chairman. You want a shot at that? I don’t think

anyone’s willing to give me a number. Does the FTC have a number in terms of capacity, refining capacity that would have an impact?

Mr. KOVACIC. We don’t sir. No.

Mr. TIBERI. Would you concur with both Mr. Caruso’s statement

and Mr. Maddox’s statement?

Mr. KOVACIC. I would.

Mr. TIBERI. Thank you.
196

Mr. OSE. All right. I want to thank this panel for their participation.

As I said earlier, there are a number of questions that we have

not gotten to. Given time constraints, we will be forwarding those

to you in writing. We would appreciate timely responses. This

record will remain open for 10 days as it relates to this panel and

the next.

Gentlemen, I appreciate your appearance. I look forward to your

contributions for solutions on this. I thank you for your participation. We will take a 5-minute recess.

All right. I want to welcome the second panel to our witness

table. For today’s hearing we’re joined in this second panel by Mr.

Bob Slaughter, who is the president of the National Petrochemical

and Refiners Association and is also appearing on behalf of the

American Petroleum Institute.

He is joined by Mr. Michael Ports, who is the president of the

Ports Petroleum Co., Inc., and is here on behalf of the Society of

Independent Gasoline Marketers of America and the National Association of Convenience Stores; and, if I am correct, he is from Mr.

Tiberi’s district—State. Don’t you represent the whole State?

Mr. TIBERI. Not yet.

Mr. OSE. Well, you should.

We are also joined by Mr. Ben Lieberman, who is the director of

air quality policy at the Competitive Enterprise Institute; and Mr.

Blakeman Early, who is the environmental consultant for the

American Lung Association.

Gentlemen, welcome. As you saw in the first panel, we routinely

swear everybody in. So, if you’d all please rise.

[Witnesses sworn.]

Mr. OSE. Let the record show the witnesses all answered in the

affirmative.

Now, we have received each of your written statements. They

have been entered into the record. We have, in fact, read them, and

we are going to give you each 5 minutes to summarize.

As you saw in the first panel, my gavel is heavy at 5 minutes.

Please stay within that time requirement, given our time constraints.

Mr. Slaughter you’re recognized for 5 minutes.

STATEMENTS OF ROBERT SLAUGHTER, PRESIDENT, NATIONAL PETROCHEMICAL AND REFINERS ASSOCIATION; MICHAEL PORTS, PRESIDENT, PORTS PETROLEUM CO., INC.;

BEN LIEBERMAN, SENIOR POLICY ANALYST, COMPETITIVE

ENTERPRISE INSTITUTE; AND A. BLAKEMAN EARLY, ENVIRONMENTAL CONSULTANT, AMERICAN LUNG ASSOCIATION

Mr. SLAUGHTER. Thank you, Mr. Chairman. I’ll try to skip

through the things even in my oral statement that have already

been established.

One, we did establish earlier that roughly 60 percent of the current costs of gasoline basically are due to taxes, and particularly

to the cost of crude oil. So we have established the fact that the

recent run-up in demand for crude oil has had a significant impact.

The International Energy Agency has said that economic expansion is fueling the biggest increase in world oil demand in 16 years.
197

Chart No. 2 shows the strong correlation between crude costs, our

major feedstock and gasoline prices, again establishing that fact.

We also have established the fact that fortunately refineries have

been able to run at 95 to 96 percent of capacity for most of this

year, which is far in excess of what we see in other heavy manufacturing industries.

We also have established the fact that we no longer have sufficient domestic refining to match our U.S. demand, particularly for

gasoline. We are dependent on imports for 10 percent. There has

been no increase in U.S. refining capacity for the past 3 years and

no new refineries since 1976, although existing refineries have

been modernized since that time. U.S. refining capacity in 1981

was 18.6 million barrels a day with 325 refineries. Today, we have

149 refineries with a total capacity of 16.8 million barrels per day.

While U.S. demand for petroleum products has increased by over

21 percent since that time, domestic refining capacity has actually

decreased by 10 percent.

If I could see the next chart, one of the major factors, cost factors, for the industry is the cost of environmental requirements.

And this is the regulatory blizzard which shows all the different

regulatory programs the industry is subject to this decade. We’ll

spend roughly $20 billion across the industry to comply with these

programs, and most of them required by the Clean Air Act. Over

the last decade, 1990 to 2000, we spent another $20 billion to comply.

We cannot say that we agree with EPA’s characterization that

these expenditures result in minimal costs to refiners. There are

significant costs from these programs, which are nevertheless very

important programs, and we support programs like this very

strongly, both associations. But, we do believe that we have to take

into account their impact on supply and do a better job of that in

future than we have in the past.

In the meantime, it’s unclear whether new refineries will be

built. One company has been trying to build a new refinery in the

American Southwest, one of the fastest growing areas in the

United States. After 10 years, it has little to show for its efforts.

It’s hoping to get an air permit this year, but may or may not.

Certainly, New Source Review reform will be of help in this regard and also permit streamlining. ChevronTexaco, for instance,

had to wait over a year this year to get permits for an ethanol

tank, which the company had to have in California in order to comply with the ethanol mandate that’s in effect now for gasoline due

to the MTBE ban. Fourteen months is just too long to comply with

a mandatory requirement like that, but that’s the time they had to

wait.

Obviously, such a significant investment for these refining programs over the last 20 years has taken a lot of the available investment capital away from the industry to meet these environmental

requirements. Particularly with the reinterpretation of the newsource review program it became difficult even to add capacity to

existing sites. And, we do believe that we can do a better job in the

future of estimating the impact on supply of these regulatory requirements than we have been doing.
198

We need to be more careful also because, being dependent on imports for 10 percent of our supply, we have to make sure that our

traditional suppliers of imports are given enough time to comply

with the new regulatory requirements, as well, so they can continue to supply the increment that we’ve become dependent upon.

We believe that we need to coordinate State initiatives. The ban

on MTBE in California, New York and Connecticut were not well

coordinated, and we don’t think that enough attention was paid to

the impact on supply.

We do support elimination of the 2 percent requirement in reformulated gasoline for oxygenation. We believe that EPA should

grant the waivers that have been requested by both California and

New York until that repeal can be achieved.

We think you have heard enough in the background on the history of industry investigations. You will hear about refinery profitability and industry profitability. The numbers do appear large.

They are large numbers in isolation, but it takes a great deal of

money to remain in this business and to put back into this business to produce the products that consumers depend on.

So, we believe this has been a tough year. We think the industry

has done its very best to keep supplying adequate products to the

American people. We intend to continue doing that. And we look

forward to your questions.

Mr. OSE. I thank the gentleman.

[The prepared statement of Mr. Slaughter follows:]
199
200
201
202
203
204
205
206
207
208
209
210
211
212
213
214
215
216
217
218
219
220
221
222

Mr. OSE. Our next witness is Mr. Jeffrey Ports. Sir, you’re recognized for 5 minutes.

Mr. PORTS. Good morning, Mr. Chairman and members of the

subcommittee. My name is Mike Ports. I’m president of Ports Petroleum Co., an independent motor fuels marketer headquartered

in Wooster, OH. I appear before the subcommittee today representing the Society of Independent Gasoline Marketers of America

[SIGMA], and the National Association of Convenience Stores

[NACS]. Thank you for inviting me to testify today.

Collectively, the members of SIGMA and NACS sell approximately 80 percent of the gasoline consumed in the United States

every year. However, the vast majority of NACS members and all

SIGMA members do not make gasoline and diesel fuel. SIGMA and

NACS members are just as exposed as consumers to fluctuations

in the overall supply, to volatility in the price of crude oil, and to

the impact that volatility has on wholesale and retail motor fuel

prices.

In fact, independent motor fuel marketers represent the closest

proxy for gasoline and diesel fuel consumers that exists in the Nation’s motor fuel refining and distribution industry today. Shortages in gasoline and diesel fuel supplies impact independent marketers first, before your offices begin to hear complaints from consumers and businesses about the retail price of gasoline and diesel

fuel.

SIGMA’s and NACS’s message today to this subcommittee and to

your colleagues in the House and Senate is really very simple.

There are two main factors contributing to the high gasoline prices

that motorists are paying this spring and early summer: one, high

worldwide crude oil prices, and two, a very tight balance between

gasoline supplies and consumer demand. There is very little that

this subcommittee or this Congress can do legislatively in the short

term to address either of these factors. However, SIGMA and

NACS urge you and your colleagues to examine longer-term solutions to these problems so that the gasoline and diesel fuel price

spikes we witnessed this year do not become the norm.

World crude oil prices rose precipitously over the first 6 months

in the year. There are myriad reasons for these increases which

have been addressed by others and which I will not cover here. The

point I will make is that even if crude prices do fall significantly

in the coming months, the second factor leading to the 2004 price

spikes, tight gasoline supplies, will continue to exert significant upward pressure on gasoline prices in the future.

If Congress wants to prevent future gasoline price spikes,

SIGMA and NACS suggest that it focus its legislative attention on

three issues: the expansion of overall gasoline supplies, the restoration of gasoline fungibility, and the increase in domestic motor fuel

refining capacity.

Simply stated, the ability of our Nation’s motor fuel refining and

distribution industries to increase gasoline production or transfer

product from market to market in times of tight supplies and increasing wholesale and retail prices no longer exists. The environmental compliance burdens placed on the Nation’s refining industry over the past 20 years has effectively destroyed the world’s

most efficient commodity manufacturing and distribution system.
223

To enhance the quality of our air, an objective of which SIGMA and

NACS are completely supportive, the government has imposed on

domestic refiners tens of billions of dollars in costs, and has fragmented the motor fuels distribution system into islands of boutique

fuel. But, as for all other good things, there is a price for this cleaner air that ultimately must be paid by consumers of gasoline and

diesel fuel.

If we collectively want to prevent future national and regional

gasoline and diesel fuel price spikes, the current situation must be

addressed and changed. There are no short-term fixes to the interrelated issues of increasing overall gasoline and diesel fuel supplies

and preventing future price spikes. Therefore, SIGMA and NACS

urge Congress to examine a broad slate of legislative initiatives to

address these issues in the medium and long term.

No. 1, address boutique fuels by repealing the formulated gasoline oxygenate mandate, adopting a moratorium on new boutique

gasoline and diesel fuels and conducting a detailed study to determine if the number of boutique fuels across the country can be reduced without sacrificing environmental protections or significantly

reducing gasoline supplies.

Two, encourage expansion of existing domestic refining capacity

by adopting regulatory reforms that clarify new-source review applicability to refinery expansions and streamlining the Federal and

State permitting process for expanding existing refineries and

building new refineries.

And three, incentivize investment in new refining capacity by

adopting Federal tax incentives that encourage rather than discourage domestic refiners to expand capacity at existing facilities

and build new facilities.

SIGMA and NACS believe that we as a nation are at a crossroads with respect to motor fuels. If we continue along our present

path, balkanization will proliferate. Domestic refining capacity will

continue to stagnate or decrease and increased motor fuel prices

and periodic price spikes could become the norm rather than the

exception.

We can either chart a different course or continue with the status quo. For independent motor fuel marketers and for your constituents, SIGMA and NACS hope that Congress leads the way to

the new course.

Thank you again for inviting me to testify today. I would be

pleased to answer any questions my testimony may have raised.

Mr. OSE. I thank the gentleman for appearing. I apologize for

getting the name wrong. It’s Mike Ports, not Jeff Ports.

[The prepared statement of Mr. Ports follows:]
224
225
226
227
228
229
230
231
232
233
234
235
236
237

Mr. OSE. Our next witness, joining us in the second panel, is Mr.

Ben Lieberman, who’s the director of air quality policy at the Competitive Enterprise Institute.

Sir, you’re certainly—we’re pleased to have you with us and

you’re recognized for 5 minutes to summarize.

Mr. LIEBERMAN. Good morning, Mr. Chairman and members of

the subcommittee, and thank you for inviting me to testify. My

name is Ben Lieberman, and I’m the director of air quality policy

with the Competitive Enterprise Institute, a public policy organization committed to advancing the principles of free markets and limited government.

My comments today will focus on those measures I believe Congress should consider to reduce the likelihood and severity of future

gasoline price increases, such as the one we have experienced in recent months.

Of course, there are several factors that influence the price of

gasoline. Clearly, the rising price of oil is the single biggest reason

for the 50-cent-per-gallon jump during the first 5 months of the

year, but I am not going to say much about the price of oil because

that’s something largely outside of congressional control.

On the other hand, the complex Federal regulatory burden on

gasoline also adds to the price of gas, and it is something that is

very much within congressional control. So my comments will focus

on just a few ideas for streamlining these gasoline regulations.

The current confusing patchwork of motor fuels is a relatively

new phenomenon which got its start as the provisions in the 1990

Clean Air Act amendments took effect. Thanks to these new rules,

we have something called ‘‘reformulated gasoline,’’ which is supposed to help smog be reduced in nearly one-third of the Nation.

We also have something called oxygenated gasoline to reduce carbon monoxide. Even conventional gasoline is subject to several requirements.

In addition, some States have come up with their own blends, as

well, often in order to secure the needed EPA approval for their

smog fighting plans. Overall, there are more than a dozen blends

in use.

Not only do some of these blends cost more to make, but the

logistical burden of having to separately refine, store and ship all

of them adds at least a little to cost and also increases the incidence of localized shortages and price spikes.

RFG has cost 10 to 20 cents per gallon more than conventional

gas in recent months, although only part of that is due to the higher cost of actually producing RFG. And these higher prices existing

in some parts of the country, particularly California and the upper

Midwest, can be traced to the more stringent regulations there, as

well as some of the seasonal fluctuations. The tricky transition

from winter grade to summer grade gasoline has been a problem

in several springtimes in recent years.

Now, at the same time that we have these new rules, the environmental record is decidedly mixed. In fact, though air pollution

has been declining for decades, the trends were really just as

strong in the years before the experiment in boutique fuels was initiated in the 1990’s as they have been since that time.
238

While the whole system is far from perfect, there are certain regulatory provisions that stand out as being particularly problematic.

Most notably, the requirement that RFG contain 2 percent oxygen

content has added to the cost of this fuel, but has done little to

clean the air and has actually led to some water contamination

concerns. The National Research Council has concluded that this

requirement does little or no good, and an EPA expert panel has

called for its elimination.

We are long overdue to streamline the unnecessarily complicated

and costly maze of regulations that has been accumulating since

1990. The easiest place to start is with those provisions like the 2

percent oxygen content requirement that do far more economic

harm than environmental good. Other provisions could be retained

but modified to achieve the same effect in a more cost-effective

manner.

And, just as important as streamlining the existing requirements

is holding the line against expensive new regulatory or statutory

provisions. This includes a new bill soon to be voted on in the Senate that’s designed to fight global warming. According to analysis

from the Energy Information Administration, the Climate Stewardship Act is estimated to add 9 percent to the price of gasoline by

2010 and 19 percent by 2025. Given the experience in the past few

months, this is the last thing the driving public wants or needs.

Now, most of the opposition to gasoline regulatory reform comes

from those arguing that even modest changes will have an adverse

affect on air quality. These concerns are unfounded. Not only have

we seen decades of improvements in air quality for reasons mostly

unrelated to the use of boutique fuels, but we will continue to see

this kind of progress for decades to come. The new Tier 2 motor

vehicles, which will be phased in over the next few years, will be

70 to 90 percent cleaner burning than existing cars and trucks regardless of the fuel used to run them. In fact, studies have shown

that fleet turn over from older and dirtier vehicles to cleaner new

ones makes more of a difference than fuel changes.

So, as we move into the Tier 2 era in the years ahead, the justification for these alternatives to conventional gasoline will further

decline. In sum, I would say there’s plenty of room to make gasoline regulations more consumer friendly, and to do so within the

context of continuing improvements in air quality.

Thank you.

Mr. OSE. I thank the gentleman for his testimony.

[The prepared statement of Mr. Lieberman follows:]
239
240
241
242
243
244
245
246
247
248
249
250

Mr. OSE. Our fourth witness on the second panel is Mr. Blake

Early, who has been with us before.

Sir, it’s good to see you. I see your family has joined you today.

You’re recognized for 5 minutes to summarize.

Mr. EARLY. Thank you, Mr. Chairman. You can call me Blake.

Mr. OSE. Blake, you need to turn on your mic. There you go.

Mr. EARLY. Thank you, Mr. Chairman. It’s fine to call me Blake.

I’m pleased to be here today on behalf of the American Lung Association, celebrating its 100th anniversary this year. The American Lung Association has been working to promote lung health

through the reduction of air pollution for over 30 years, and I’m

happy to be here to discuss the elements of the Clean Air Act that

impact the oil refinery industry and gasoline prices.

I’m going to focus on the reformulated gasoline and low sulfur requirements for gasoline, on road diesel, and nonroad diesel fuel

which we believe to be—have the biggest impact on the oil refining

industry.

RFG has been shown by EPA in California to be a cost-effective

program to reduce vehicle emissions that contribute to ozone and

reduce toxic air pollution from vehicles by 30 percent. Low sulfur

gasoline, low sulfur on road diesel and nonroad diesel requirements, issued by both the Clinton and Bush administrations, are

key to enabling a new generation of emissions controls on everything from SUVs to diesel trucks, to earth movers. These requirements will reduce smog, reduce fine particulate and toxic air pollution and save tens of thousands of lives, heart attacks, respiratoryrelated hospitalizations and reduce thousands of asthma attacks

among children each and every year.

The monetized benefits from these sulfur fuel programs are enor- mous, calculated to approximate $24, $51 and $53 billion each year

for each of these three low sulfur programs when they are fully implemented. The sulfur limits for these gasoline and diesel fuel requirements do serve to make fuel more fungible because they will

apply to all gasoline and all diesel.

Any attempt to modify these rules at this juncture without thorough evaluation risks disrupting these programs in ways that could

reduce or delay the large public health benefits we need them to

deliver.

Those who propose to change these rules bear a heavy burden of

showing the need and demonstrating the benefit. This is because

air pollution still threatens millions of Americans. A recent American Lung Association study found 441 counties, home to 136 million people, have monitored unhealthy levels of ozone and fine particles.

We believe that should Congress choose to change the law or gasoline policy, it should do so in ways that make it easier for areas

with dirty air to adopt clean fuels programs and not lock into the

use of dirtier or conventional fuels.

There is no evidence that current clean fuel programs significantly influence current gasoline price increases. Prices for both

clean fuels and conventional gasoline have risen at the same rate

broadly across the Nation, and prices for clean fuels generally have

not risen faster for clean fuels than they have for conventional

fuels. In some cases, conventional gasoline is more expensive or the
251

same as RFG; and my testimony includes a chart which demonstrates this fact. It’s an informal chart and not intended to be

very precise. We think that perhaps the EIA should pursue this

more thoroughly.

The one clean fuel requirement that contributes to price volatility

is the Federal oxygen requirement. The one thing the Bush administration should do is grant California’s request for an oxygenate

waiver. Granting the waiver would improve the air quality and reduce gasoline prices in California and probably other parts of the

country. EPA has been avoiding a decision on this urgent matter

and treating it as a routine matter.

I introduce for the record, Mr. Chairman, a letter sent to Administrator Leavitt just yesterday, endorsing and asking him to grant

the California waiver request. It’s signed by nine health and environmental organizations.

[The information referred to follows:]
252
253
254

Mr. EARLY. This is a very urgent matter. We believe that the

agency is dragging its feet. It has had information available to it

on the California waiver since the year 2000, so when Mr.

Holmstead says, gee, this is really complicated and we have to look

at the information, he’s had about 4 years. And we fully support

it. And, of course, I would observe that every member of this panel

supports it.

We hope that maybe we can get this done and have a favorable

impact both on the environment and on gasoline prices in California.

Thank you, Mr. Chairman.

Mr. OSE. I thank the gentleman. The letter he referenced without objection will be made a part of the record.

[The prepared statement of Mr. Early follows:]
255
256
257
258
259
260
261
262
263
264
265
266
267

Mr. OSE. As you saw in the first panel, we will now go to questions of our witnesses.

Mr. Slaughter, you had a chart up—if you could put up the chart

that had the gasoline pump tanks. Now, in that chart you have

taxes at the top, distribution and marketing, refining and crude oil.

And I believe it’s your testimony that the crude oil is market dictated, the taxes are fixed by fiat, and the primary variables are the

two middle portions, refining in one case, and distribution and

marketing in the other. Is that correct?

Mr. SLAUGHTER. It is. There’s variation, of course, in crude oil

price.

Mr. OSE. But it’s beyond our control.

Mr. SLAUGHTER. Yes; 40 percent is traditionally a low point for

crude oil. It has been more, and the refining number at 31 is traditionally less than that. That 31 percent is a high point that’s been

reached only twice in the last 4 years.

Mr. OSE. OK. Within the refining portion and the distribution

and marketing portion, there is a cost element and then there is

a profit element. Can you break those out accordingly?

For instance, a refiner, of that 31 percent, how much would be

cost that’s inescapable, and how much would be profit to the bottom line of the refiner?

Mr. SLAUGHTER. It’s difficult to break it out exactly. There are

indications that the refining profit can be in the neighborhood of

2 cents per dollar of capital employed. Traditionally, the return on

investment in the refining industry is about 5 percent, so the piece

of that that is actual profitability is relatively small.

I’d be glad to get back to you with more definite information, but

it would be difficult to be definite beyond that.

Mr. OSE. Would the same factors dominate the distribution and

marketing side, too?

Mr. Ports, I mean, you’re more on that than Mr. Slaughter.

Mr. PORTS. Yeah, absolutely. I mean, that’s probably a pretty

historically—those are pretty historic levels. While the refining industry has certainly done well lately, the marketing side has basically been in its typical rut, so to speak. It’s a very difficult business.

Mr. OSE. Well, Mr. Slaughter just indicated that 2 cents of every

dollar represents profit to the refiner. Does 2 cents of every dollar

represent—I should say ‘‘margin to the refiner.’’ Does 2 cents of

every dollar represent the margin to the wholesalers and the like?

Mr. PORTS. No. It’s very hard to—again it’s hard to quantify that,

and I’m not evading the answer because there are different areas

of the country, different real estate costs in different areas of the

country, so some folks do require, you know, a higher margin than

other areas of the country. So, it is a big, big variable across the

United States.

Mr. OSE. Is it possible to break it out by geographic area or by

pad or by market?

Mr. PORTS. If we could get back to the committee with that information, that would be great.

Mr. OSE. All right. We’ll send you a question in writing. My objective is to break down within that framework how much profit,

how much cost is embedded in those percentages.
268

Now, Mr. Slaughter, you talked a little bit about the variability

in the price of the crude. It seems to me that almost every day we

get a new influence on that. We’ve dealt with Venezuela strife in

terms of productivity or politically. We’re dealing with the Iraq

question and the availability in production that gets to the ports.

This thing in Russia where YUKOS is now under severe strain for

whatever reason; apparently there’s an issue of liquidity in terms

of their ability to meet their contracts. Is there going to be a substantial impact on our availability of crude?

Mr. SLAUGHTER. Well, when it comes to YUKOS, I mean, there

has been a lot of discussion on that point since it was first raised

yesterday in some of the media. There is some feeling among analysts that even should YUKOS experience liquidity problems or go

into bankruptcy that their facilities would still operate. This is

typically what happens in the United States. So YUKOS could continue.

But, there is definitely an uncertainty premium in crude these

days because of the events in the Middle East, not just in the Middle East, but also concern about Venezuela, about Nigeria and

other areas. And, that, you know, it is one of the costs that are inherent in being 60 percent dependent on crude oil imports.

Mr. OSE. Mr. Maddox testified, if I recall, that premium, that risk premium, may be as high as $10 a barrel.

Mr. SLAUGHTER. I’ve seen analysts’ opinions that put it that high. Others put it in the neighborhood of $4 to $5.

Mr. OSE. Is that sort of like the minimum and maximum? Do

those numbers constitute the minimum and maximum risk premiums?

Mr. SLAUGHTER. Well, only in the sense that they are the minimum and maximum figures that I’ve seen from analysts. But I

have seen $10. There is no scientific determination.

Mr. OSE. There’s no scientific consensus as to what the risk premium is?

Mr. SLAUGHTER. There is not, but a number of analysts have said

it’s on the order of as much as $10. Others are about half that.

Mr. SHAYS. I noticed in Nigeria that, I think, Mobil declared

force majeure on their production facilities, and that the white collar workers for, I think, Shell, have notified Shell of a pending

strike in 3 weeks’ time.

Mr. SLAUGHTER. Well, I believe that’s true. But there have been

problems in Nigeria for some time. It was in the news about 3

weeks ago that things were cleared up there. They obviously have

broken out again. So, as you pointed out earlier in your questioning—I mean, these things tend to come and go, and you know, a

lot of areas that we are dependent on for crude supply have problems.

Mr. OSE. You also testified, if I recall correctly, that at some

point recently, in the recent past, we had about 300-plus refineries

producing or refining capacity of 18.5 million barrels a day.

Mr. SLAUGHTER. 1981.

Mr. OSE. OK. And then currently we have about 150 with refining capacity of 16.8 million barrels. So that’s a decline of 1.7 million barrels a day of refining capacity from 18.5 to 16.8.

Mr. SLAUGHTER. Yes. Right.
269

Mr. OSE. And, that’s since 1981.

Can you give us any indication of what demand has done since

1981 in terms of what was overall demand for refined product in

1918 versus overall demand for refined product in 2004?

Mr. SLAUGHTER. It has grown by 25 percent.

Mr. OSE. So, what was it in 1981?

Mr. SLAUGHTER. Well, it was on the order—it’s 16 million barrels

per day and change, and now it’s 19 to 20 million barrels per day.

Mr. OSE. Just a second. Let me write that down.

So, that leaves us short somewhere between 2—no, 3 and 4 million barrels, 2 to 4 million barrels a day in refining capacity.

Now, I understand we had been importing refined products somewhere on the order of 1,020,000 barrels a day, I think is the number. But, now it’s fallen to about 980,000.

Mr. SLAUGHTER. There’s been a decline of about 7 percent this

year, and there are various opinions as to why that has occurred.

Mr. OSE. Such as?

Mr. SLAUGHTER. Well, it could be that importers have been unwilling or unable to invest in some of the requirements necessary

to meet the new gasoline sulfur specs. In some instances, it could

be that foreign suppliers have been unable to deal with the situation on the East Coast, in New York and Connecticut, with the ethanol mandate that is now in place in RFG in those States because

of the decision to ban MTBE.

Mr. OSE. It’s the oxygenate mandate. You’re not required to use

ethanol. It’s a de facto mandate?

Mr. SLAUGHTER. It’s a de facto mandate. The only two really

available are MTBE and ethanol. If you ban MTBE and you have

to use RFG, you’ve got to go to ethanol; and that creates uncertainty for importers.

These are essentially opportunistic suppliers to the United

States. And, you know, they may decide they may be unable or just

unwilling to supply, they may have other markets where they won’t

have to make these investments, and that may be why the numbers are slightly down on imports this year.

Mr. OSE. All right.

The gentleman from Massachusetts.

Mr. TIERNEY. Thank you, Mr. Chairman. I want to read the

panel some quotes from industry individuals and documents, and

then I want to talk a little bit about some of the first quarter reports from some of the companies here.

Back in November 1995 there was an internal Chevron document

that revealed concerns of a senior energy analyst at the American

Petroleum Institute convention, it says, ‘‘If the U.S. petroleum industry does not reduce its refining capacity, it will never see any

substantial increase in refining margins. A few months later an internal Texaco document warned that ‘As observed over the last few

years and as projected into the future, the most critical factor facing the refining industry on the West Coast is the surplus refining

capacity and the surplus gasoline production capacity. The same

situation exists for the entire U.S. refining industry.’ ’’ That was a

document of March 7, 1996.

And, last, we have a Powerine Refinery document, the internal

Mobil Corp. e-mail of February 6, 1996, that ‘‘We would all like to
270

see Powerine stay down. Full court press is warranted in this

case.’’

I say that because it seems fairly obvious from the GAO’s report

and others that the business has made a decision to decrease the

amount of refining capacity, and as a result, their margins have

appreciably gone up. Refinery closure and tight supplies have increased refinery margins and padded the oil companies’ bottom

lines according to one investigative report done by Senator Wyden

that you heard me refer to earlier.

A prime example is ExxonMobil, which announced all-time

record earnings for 2003 of $21.5 billion. Those are not just the

highest earnings ever by an oil company; they are almost the highest ever by any company. ChevronTexaco, ExxonMobil, BP, Shell,

ConocoPhillips and Occidental Petroleum have now all reported

record first quarter results for 2004. ChevronTexaco shows a percentage increase in their first quarter 2004 results as compared to

last year’s first quarter of 33 percent. ExxonMobil is up 14 percent,

BP is up 17 percent, Shell is up 9 percent, ConocoPhillips up 27

percent, and Occidental is up 50 percent. Those are the overall corporate results. But, five of the six companies referred to increased

margins from their refinery operations as the significant factor in

their profit improvements.

ChevronTexaco in its quarterly report says U.S. refining marketing and transportation earnings of $276 million improved

$2,006,000 from last year, a 300 percent increase. The primary reasons for the improvement were an increase in average refined product margins, higher sales volumes and lower operating expenses. In

our downstream and chemical segments, increased demand for refined products strengthened industry margins and helped boost our

earnings.

From ExxonMobil, ‘‘U.S. gasoline prices helped give the world’s

largest publicly traded oil producer its biggest first quarter return

refining profit in 13 years.’’ ‘‘ExxonMobil’s refining profit rose 39

percent to $1 billion.’’ From Shell, ‘‘industry refining margins were

driven primarily by strength in gasoline, and European margins

found support from arbitrage opportunities to the U.S. In the first

quarter, refining margins averaged 19.5 percent for the U.S. Gulf

Coast region and 40 percent on the West Coast region.’’

‘‘Margins in the United States of America also may be impacted

by supply versus demand balances and low storage levels.’’ From

ConocoPhillips, ‘‘higher refining margins and running at 95 percent

of capacity were the primary reasons for the improvement in performance. The realized U.S. refining margin increased almost 31

percent from $5.58 a barrel to $7.30 a barrel. But if you look at

the first quarter performance in refining and marketing, all of our

earnings came essentially from the refining side of the business.

And when you look at the refining side of the business worldwide,

87 percent of that came from domestic refining and 13 percent from

international refining.’’

And, finally from BP, ‘‘the refining and marketing result increased 13 percent compared with a year ago, reflecting improved

refining margins particularly in the U.S.’’
271

Is this not pretty compelling evidence that the industry has been

making business decisions to reduce its refining capacity in order

to increase its margins?

Mr. Slaughter.

Mr. SLAUGHTER. No, Mr. Tierney, I don’t believe it is. As we

pointed out in our testimony, it requires a great deal of capital to

operate in our industry, and I would say that in the 20 years I’ve

been involved with the industry, we’ve seen many more bad refining quarters than good.

What you’re talking about in the first quarter of this year is the

rarest of instances in which refining profits were high. It’s a very

cyclical industry.

Mr. TIERNEY. Could I just interrupt you 1 second? And let’s go

back to last year when ExxonMobil announced all-time record earnings of $21.5 billion. So that’s at least a couple of years in a row

they’ve been doing pretty well, right?

Mr. SLAUGHTER. Well, again, I don’t know what refining is within that $21 billion, sir, but refining oscillates between the top and

the bottom of the scale and more times in the bottom than the top.

Mr. TIERNEY. Well, I think if we watch a trend—and you correct

me if I’m wrong, if you guys don’t have evidence of this—but since

the mid-90’s, probably since the 1990’s when these refineries were

being shut down, the margin has improved substantially; and that

lack of supply has had a lot to do with it.

Mr. SLAUGHTER. The supply/demand balance has been tighter

since about 2000. But there have been bad quarters since 2000 as

well. And, again, you are overlooking the cost of being in the business, and the amount of dollars that have to be put in the business

take up most of that income from the refining sector that you’re

talking about, even though the numbers——

Mr. TIERNEY. These are profits we’re talking about. These are

profits, not gross numbers or anything like that, but profits that

you’re talking about in their quarterly reports. You know, a 300

percent increase in one aspect of it.

Mr. SLAUGHTER. A lot depends, sir, on what it’s being compared

to. If it’s a low baseline it’s being compared to, you’ll come up with

a large percentage.

Mr. TIERNEY. I’m not going to go back and forth. I think the

numbers speak for themselves.

Let me just read into the record, if I can, the first quarter profit

figures, as reported by the Wall Street Journal, or by the companies themselves, for the first quarter 2004: ExxonMobil, $5.4 billion; BP, $4.8 billion; Shell, $4.4 billion; ChevronTexaco, $2.6 billion; ConocoPhillips, $1.6 billion; Amerada Hess, $281 million;

Unocal, $269 million; Marathon, $258 million; Valero, $48 million;

Murphy, $98 million; Sunoco, $89 million; Premcor, $50 million;

Citgo, $35 million. Overall, $20 billion in profits for the first quarter alone for the industry.

I think it’s a pretty compelling case, Mr. Slaughter and others,

and I also think it’s pretty damning that this industry fails to reinvest in its own operations in terms of maintaining its pipelines,

maintaining enough refineries to service consumers.

But, I note my time is up, and I’ll yield to the chairman.

Mr. OSE. The gentleman from Ohio.
272

Mr. TIBERI. Thank you. Staying on the same line of questioning,

Mr. Slaughter, you’ve heard it all. Some have argued that capacity

has been shut down to improve your bottom line or refineries’ bottom line. Others have argued that environmental regulations and

industry economics have contributed to the number of refineries or

the lack of reinvestment. Either way, I think everybody would

agree that we need to do something in America to improve refining

capacity.

In your opinion, what can we do, what can Congress do, to help

improve refining capacity in America?

Mr. SLAUGHTER. Well, we believe, first of all, that the United

States does need additional refining capacity; and we are very

strong proponents of the need for additional supply. We believe

that the New Source Review reforms are extremely important.

They need to be sustained. They are currently before the courts.

They will help the industry add additional capacity and install

modern technology when it—as soon as it becomes available.

We also believe that there can be improvements made in permitting requirements. We can have some streamlined permitting—

where you don’t have this situation where you’re required to make

a fuel, but you’ve got to wait a year or more for permits—so you

can go ahead and actually get the investment in the ground and

the product out.

You should be able to build refineries in this country, and frankly, it’s because of the NIMBY situation that you can’t. There is almost unlimited opportunity for public comment in any proceeding

or a series of proceedings that leads to a significant new refining

venture, and it shouldn’t be that way. People who are trying to

build a refinery in an area that’s growing very fast shouldn’t have

to wait 10 years and still have nothing to show for their efforts.

The other thing is, you can insist that people recognize the true

cost of environmental regulation and try to balance environmental

regulation and supply concerns so we come out with the right answer in both policy areas.

Mr. TIBERI. How much would we have to increase refining capacity to impact in a meaningful way—I asked the question earlier—

the cost of fuel at the pump?

Mr. SLAUGHTER. That’s a question I really can’t answer. It would

be inappropriate, frankly, for me to answer it. But let me tell that

any increase in refining capacity would be helpful in that direction.

We certainly need to maintain the refining capacity that we have

right now. And one of the ways we can do that is the suggestions

that I just made to you for policy changes. Certainly, passage of the

energy bill would be a good first step.

Mr. TIBERI. You made note in your comment, and I asked a question earlier about the cost of environmental regulations to the cost

of the pump; and it was answered two different ways: one in written testimony, environmental regulations have had a minimal effect on gasoline prices; and the other answer was a cent or two.

What would be your thought on that?

Mr. SLAUGHTER. EPA traditionally underestimates those costs.

They do them ex ante. They do them before the rulemaking takes

place. They have every reason to try to minimize the cost estimates.
273

I’ve often said I don’t understand—we believe these are very important programs. They have significant health benefits. Isn’t it

reasonable to believe that being so significant, they do also entail

significant costs? It has been pointed out earlier that although, the

cost of reformulated gasoline is only a few pennies, if you look at

the marketplace according to EIA, the market differential now is

20 cents between reformulated gasoline and conventional gasoline.

Part of that is the mandates now that we are seeing in some of

these States. There are significant costs.

We are not asking to do away with the programs. We’re not asking to change the programs. They are already on the books. But we

are asking for future programs to be done with a greater ear toward supply.

Mr. TIBERI. Mr. Ports, you’re on the front lines, you and your

members at the gas pump. And you mentioned in your testimony

about this proliferation of fuels and the impact it has. Can you give

us some examples of what you see?

Mr. PORTS. Well, I think you’re obviously very familiar with it.

You talked about the Chicago situation, Milwaukee, you know,

some of these—Atlanta.

You know, our real point is I think you need to move very, very

carefully on this situation. There are certainly compelling arguments on both sides that we could hurt refining capacity when we

are dealing with boutique fuels. But our point is, I think we can

help the distribution system by dealing with boutique fuels. And in

terms of how we refine it and what we make, I think that has to

be done very, very carefully.

Mr. TIBERI. How does that impact you as a marketer?

Mr. PORTS. It impacts us as a marketer very dramatically. We

market, as an example, in St. Louis, just outside of St. Louis also;

and the last few years, that’s been, you know, a hotbed of problems.

Now, it’s been very smooth this year, but we have had numerous

situations where product simply wasn’t available, spec product to

use in the St. Louis market. I mean, we had some times where

product might have had to have been trucked 500 or 600 miles to

bring it into that market.

Mr. TIBERI. What happens then?

Mr. PORTS. Obviously, the price goes up, I mean, dramatically.

Mr. TIBERI. Thank you.

Mr. OSE. I thank the gentleman.

All right. We have votes we estimate that are going to occur

around 12:45. I recommend we go over another round if you would

like, OK?

Mr. Lieberman—actually, I want to ask Mr. Early a question. It

seems to me, there is this underlying theme that is as yet

unstated—I’m going to take a stab at it—that there are significant

barriers to entry for new refining capacity in this country. I mean,

there is the capital necessary to produce the kind of income

streams that Mr. Tierney read into the record here that must be

significant; and we have had testimony today that the capital is

driven in part by putting in place the processes by which the oil

is refined from its crude state to its finished state.
274

To a certain degree, it would seem to me that we are making a

choice between significant increases in refinery capacity and strict

adherence to an environmental safeguard. And there are some who

advocate more so one way or the other. And, I am curious whether

or not you might recognize that same thing, that the—that there’s

a benefit to the industry in having high thresholds to entry, and

that it keeps competitors out.

And, then there’s a benefit to the environment in having high

thresholds to entry because it enforces the environmental safeguards.

Do you share that view?

Mr. EARLY. Mr. Chairman, we’re—we mostly focus on environmental requirements that protect people, and we’re not—you know,

we’re not knowledgeable enough as to whether those requirements

operate as an effective barrier to entry in the marketplace.

Personally, my instinct is, if you’ve got $40 million to invest, why

would you want to go into an industry where—that’s dominated by,

like, five major refiners? I mean, this wouldn’t seem to me to be

the best place you could put your money. So, I mean, that would

strike me as being a much more important factor as to whether you

want to get into the oil refining business.

When people start talking about streamlining requirements for

refiners, our concerns focus on, well, do those requirements, those

streamlined requirements, still continue to protect people from the

emissions from that refinery? That’s when we get nervous. The

Lung Association is strongly on record opposing the new-source review changes that this administration is seeking to do, because we

think the result will be more air pollution, and we think that will

harm the public health.

Mr. OSE. Mr. Lieberman, at the Institute, do you look at this barrier to entry question? And we had earlier testimony that there

were Brazilian refiners or Venezuelan refiners or Curacao refiners

or whoever, who had frankly had a product that was in the market

that they are no longer shipping to the market because they could

not comply with the sulfur issue. I think that was the testimony.

Is this an issue? Is there, in effect, an unstated benefit to the extent refiners, from an ever-rising environmental requirement?

Mr. LIEBERMAN. That could well be. Regulations do tend to create winners and losers among the affected industry groups. Some

refiners supported some of these State-level boutique fuels, maybe

in part because they thought it would stave off more difficult RFG

requirements, but maybe in part because they thought they would

have that market all to themselves; and so there were some incentives in creating some of these State-level boutique requirements.

So, yes, there’s refiners that don’t mind or maybe actually like

these requirements because they feel that it eliminates at least

some competition.

Now, with regard to foreign sources of oil, everybody knows that

we get more than half, 60 percent of our oil—it’s less known that

we get about 10 percent of our gasoline or refined gasoline components from overseas, as well. And there are some problems with

that, and we saw a little bit of that this year with the new lowsulfur rules. As we in the United States go further and further

down the road of these specialized blends that are only used in spe-
275

cific markets in the United States in some cases, although the sulfur rule is used everywhere—but as we go further and further

down the road of these specialized blends or tough requirements

that apply to all fuels, it’s unclear how many foreign refiners will

make the investment to provide that fuel. So there’s some question

where we are going to be getting our refined products in the years

ahead.

I believe EIA has estimated that we will be seeing 1.6 percent

or so increases in gasoline demand in the United States, and given

the constraints on domestic refiners and the constraints that I just

mentioned on foreign refiners, there are some serious questions,

looking ahead, whether we will have enough refinery capacity looking forward.

Mr. OSE. The gentleman from Massachusetts.

Mr. TIERNEY. Thank you, Mr. Chairman.

Mr. Blake, the letter that you referred to in your testimony that

was sent out yesterday, some people would find it interesting that

both the environmental and the health community were concerned

about gasoline prices.

Would you just expand a little bit upon your comments made in

the letter and your rationale behind it?

Mr. EARLY. The principal focus of the letter is the fact that all

the organizations that signed it, I think, believe that the State of

California is right in asserting that the oxygen requirements actually results in an increase in the amount of air pollution that is

generated by vehicles using the fuel, as distinct from using the fuel

without the oxygen requirement. And, that’s really what drove the

participation in signing the letter.

The fact that this is one of the few things that the Bush administration can do right now that would affect gasoline prices is something that obviously we wanted to point out as a way of trying to

leverage a decision on which, quite frankly, we think the Bush administration is dragging their feet.

And, I’ll go further and say, we believe they are doing so in order

to avoid offending the ethanol industry. I mean, this is all about

ethanol, and the reason——

Mr. TIERNEY. So, we can expect a decision sometime after November 2004?

Mr. EARLY. Exactly.

Mr. TIERNEY. OK.

According to the Environmental Protection Agency, oil refineries

are a significant source of air pollution, and in the year 2000, almost half of the refineries were within 3 miles of a population center of at least 25,000 people.

From your perspective, from a public health perspective, will you

tell us why it’s so important to implement and enforce the Clean

Air Act and other environmental protections on oil refineries?

Mr. EARLY. Well, the air pollution conditions around refineries

typically are among the worst in the country. As I discussed in my

response to the chairman’s question, we’re very concerned because

there is, all too often, this convergence between high populations

and oil refinery operations. So, it is very critical, particularly with

respect to toxic air pollutants that contribute to cancer and brain
276

damage and other very debilitating diseases—we think it is very

critical that the requirements be maintained or even strengthened.

Mr. TIERNEY. Now, if I’m not mistaken, the consumer protections

or the environmental regulations were in place before 1990. About

1990, with the Clean Air Act, the refineries started to shut down

before that act went into effect; and they continued to be shut

down after the act went into effect, so that there would be some

question about what the impact of the Clean Air Act itself was

upon the need to close down actually was.

Mr. EARLY. Absolutely. There has been a long history of concentration in the industry, and it’s very unclear as to the impact

of the environmental requirements with respect to that trend.

Mr. TIERNEY. OK. Thank you.

Mr. Slaughter, Mr. Ports, whose responsibility is it to improve refining capacity in this country? I notice that both of you indicated

that you think there’s a problem with the refining capacity. But in

that this is a private industry, don’t you think that the burden falls

on the industry itself to resolve that issue?

Mr. SLAUGHTER. Well, the burden, if I may—the burden, some of

the burden does fall on the industry itself. Also, it’s on policymakers to make sure that there are policies that encourage that investment capital be able to invest in this business to build new refineries and that there not be barriers to entry. It just seems

strange that people aren’t willing to admit that environmental requirements do cost money and can constitute a barrier to entry.

Mr. TIERNEY. Well, let’s assume that, as mentioned before, these

environmental regulations have been with us for some time now,

all right?

Mr. SLAUGHTER. But, they’ve been made increasingly stringent

all through the last decade, sir.

Mr. TIERNEY. All right. And, we have regulations that affect almost every industry. And, this is a public policy; people want to

breathe clean air, and they want to live healthily.

Mr. SLAUGHTER. But, most people believe the refining industry

to be one of the most heavily regulated industries in the United

States.

Mr. TIERNEY. Well, we may be disagreed on that. But let’s assume that it might, for a sense of that. It’s still the industry that

you’re in.

Mr. SLAUGHTER. Yes, sir.

Mr. TIERNEY. There are many people in this Congress that just

believe in this free market stuff, even though many of us who think

we’re in a mixed economy, that—there’s many that swear to this

free market stuff. So assuming that you’re in your free market, you

have a regulation that’s in place, you have to deal with it.

You know, what other policy—I mean, you certainly don’t advocate reducing the environmental protections. I think from our previous testimony from you that you did not advocate reducing environmental protections; am I right?

Mr. SLAUGHTER. That is correct. And then the industry, I would

point out, invests, as I’ve shown, billions of dollars over the last 2

decades, as many as $50 billion put back into this business just to

comply with environmental requirements, sir.
277

Mr. TIERNEY. So when will the industry start putting money

back in to increase its refining capacity and improve its pipeline

conditions and things of that nature?

Mr. SLAUGHTER. The industry makes huge investments every

year in those matters. Even when refining capacity has not been

increased, the facilities have been modernized. Many times investments, like the investments in lower-sulfur gasoline and diesel, result in modernization of facilities, but they may not result in more

capacity. One of the reasons is that because a lot of the processes

necessary to make these cleaner fuels actually reduce the yield. So

you, in essence, have reduced the capacity of the plants because

you’re increasing the severity of the refining process to make cleaner fuels.

Mr. TIERNEY. But you talked earlier of the huge gap between the

demand and the supply right now, the fact that you just don’t have

enough refining capacity to meet the demand for refined product,

right?

Mr. SLAUGHTER. When the demand, particularly for gasoline, is

high, as it has been this year and is particularly in the summer

driving season, there is a very tight supply/demand balance, yes.

Mr. TIERNEY. OK. So I guess my question comes back to, what

does the industry propose to do? Nothing? Until when?

Mr. SLAUGHTER. The industry—you know, given the regulatory

climate and the investment requirements in this industry, we are

very lucky we have many different kinds of companies that continue to be committed to and invest in the domestic refinery industry.

Mr. TIERNEY. That’s your interpretation. You’ve already accepted

the fact that you don’t want to make the air any dirtier, and that

you accept the Clean Air Act requirements and you’re content to

live within that.

So given your situation, what is the industry going to do about

increasing the refining capacity?

Mr. SLAUGHTER. Well, as individual players in the industry decide that is a good allocation of their capital and basically decide

that’s what they want to do, and if they’re able to do it with the

permitting authorities and through the long NIMBY process that

we have to go through to make changes in our facility, that will

happen. But those will be individual decisions.

We have some of our members who are increasing capacity at

their plants as we speak.

Mr. TIERNEY. The existing ones?

Mr. SLAUGHTER. At existing plants.

Mr. TIERNEY. Now, when’s the last time that anybody filed for

a permit to build a new refinery?

Mr. SLAUGHTER. Well, a group in Arizona has a permit, a live

permit, that has been pending for 10 years now, and there are people in our industry who are interested in that facility. But the big

question is whether or not they actually will be able to get through

the process and build it, even though the area needs more product.

Mr. TIERNEY. That’s one. How many others are out there?

Mr. SLAUGHTER. Well, there have been others over the years, but

actually most capacity has been added at existing sites and so——
278

Mr. TIERNEY. So I can count on one hand probably the number

of requests for permits for new refining facilities, right?

Mr. SLAUGHTER. Well, it doesn’t—well, yes, you can because it

doesn’t take long to learn what’s not doable under current statutes.

Mr. TIERNEY. Well, it doesn’t take long to make a decision—to

make a decision that you want to invest and move on either. You’ve

accepted your environmental constraints. Then it seems to me

you’re just going to make a decision: You either want to invest and

have more capacity or you don’t, or you’re going to find some excuse not to do it.

Mr. SLAUGHTER. Well, one of the things that’s not appreciated

about mergers and acquisitions, sir, is that many of the companies

that have bought these facilities from others in mergers or acquisitions have invested hundreds of millions of dollars in the plants

that perhaps the former owners would not have done. So there’s an

economic rationalization process through the industry that has let

people spend capital efficiently, even within the confines of not

being able to build new refineries.

A lot of people who are the new owners of some of these facilities

have invested significant sums of money in it because they saw a

different possibility there for business than the previous owner did.

It’s just part of the system.

Mr. TIERNEY. What do you say about the Shell Bakersfield situation? Do you think that fits your category?

Mr. SLAUGHTER. Well, you know, Shell probably is in the best position to know what the relative profitability of that facility has

been. Now we’ve heard today that the FTC is going to look into

that matter. It’s a relatively small refinery, as you know, 70,000

barrels a day.

Mr. TIERNEY. But a smaller one of 20,000 was found to be profitable. So doesn’t it make you just a little bit skeptical that all of a

sudden this is being shut down?

Mr. SLAUGHTER. Well, as I said, the owner is in the best position

to know. We have not evidently heard the last of what’s going to

happen with regard to that refinery.

I think this situation points out the intense scrutiny that everything this industry does is subject to. This hearing is part of it as

well. And I think you see today that, you know, things receive a

great deal of attention in our industry, and there are regulatory

authorities who even debate what the most effective way is to assess some of the finer points of our industrial operations.

Mr. TIERNEY. I’ll yield back. And we have some regulatory agencies that actually regulate, and we have some that stand by and

watch. Thank you.

Mr. OSE. Gentleman from Ohio.

Mr. TIBERI. Thank you, Mr. Chairman.

Mr. Slaughter, kind of continuing on the line of questioning on

the refinery business, if Mr. Tierney and I decide to become partners and start a refinery tomorrow or begin that process—and that

would be a joy——

Mr. TIERNEY. For you maybe.

Mr. TIBERI [continuing]. How much time and money would be required to construct, let’s say, an average-size refinery in America

today?
279

Mr. SLAUGHTER. Well, you know, if we go back to the Arizona

project, they’re talking about building 150,000-barrel-a-day refinery. That’s a little bigger than the average one in the United States

today, which is about 110,000 barrels per day. The estimated cost

of actually building that refinery, going through all the process and

building it for 150,000 barrels a day, is $3 billion.

Mr. TIBERI. $3 billion?

Mr. SLAUGHTER. $3 billion, so—you know, there are large expenditures; and again——

Mr. TIBERI. I guess we won’t be doing that.

Mr. SLAUGHTER. Again, looking at the relative economic——

Mr. TIERNEY. But you and I wouldn’t have shut down the 100 or

so that they’ve already shut down either, probably because we

would have thought about that.

Mr. SLAUGHTER. The economics of actually building one, of the

things you need to look at, is that it is so difficult to build refineries. Existing refineries—and the business is a tough business, a cyclical business. Refineries that have been sold have been sold

roughly for 25 to 33 percent of book value.

One of our members has gone from 1 refinery to 15 refineries by

acquisitions over the last several years. As stated, they never paid

more than $0.38 on the dollar for the facility.

Mr. TIBERI. If we decided instead to build a refinery abroad,

what would the cost be versus the cost here?

Mr. SLAUGHTER. It would depend on where you build it, Congressman.

Mr. TIBERI. The cheapest place to build one.

Mr. SLAUGHTER. Well, you could build one, you know, I guess, in

parts of Latin America or the Caribbean for a fraction of that price.

Of course, they have different air quality characteristics.

But, again, when you become dependent on foreign sources of

supply, even for the manufactured product, you’re exacerbating the

problems we’re seeing already in getting hold of crude supplies for

the country.

Mr. TIBERI. But if you are a refiner and you’re looking to expand,

are the incentives today there to expand abroad and to build

abroad, rather than here, because of the cost here?

Mr. SLAUGHTER. I think most refiners would prefer to build in

the United States if there is demand here, because you’re closer to

your markets. But, you know, there are significant costs that they

face if they try to build or even expand capacity in the United

States that they don’t face elsewhere. And as I pointed out before

in the case of ChevronTexaco and the ethanol tank, I mean, even

when you’re trying to do things that you’re mandated to do, it’s difficult to get them done here.

So, you know, again I say, looking at all these situations with the

difficulties in the investment requirements, we are fortunate that

we have the large number of refiners we have.

If you look at the top 12 refiners in the United States of America

today—also I would point out, 5 of them are independent refiners;

they are not integrated refiners. There’s a lot of diversity left in

this industry. There are regional refiners that are smaller. We’re

fortunate to have them, and we need to keep their capacity here.
280

Mr. TIBERI. Moving forward, if something is not done to increase

refining capacity in the United States, do you see an increase in

this foreign refining capacity, in that market increasing? I think

someone mentioned in the testimony, it’s 10 percent today. Do you

see that increasing?

Mr. SLAUGHTER. Well, practically, there’s almost no way around

it because, for instance, if you look at the EIA numbers, they believe that the lion’s share of the increase in demand for U.S. products will be met by imports. They believe we can see small increases in domestic refining capacity, but not significant enough

ones to actually meet most of the increasing requirements here.

They see about a 1.5 to 2 percent growth per year in U.S. demand

for petroleum products. But they see very small incremental increases in U.S. refining capacity. And they have said that they believe most new refinery construction will occur in the Middle East,

in Latin America and in the Caribbean.

Mr. TIBERI. So if your business is so attractive, why is that 10

percent there in the first place and why is it going to increase?

Mr. SLAUGHTER. Well, the business is a cyclical industry and, you

know, it is up and down. There are different kinds of players in the

industry. The relative profitability of the refining sector is not that

large.

We have a few times when the refining industry does relatively

well. The return reverts to about 5 percent on investment capital.

Business Week a month ago ran a chart of the profitability of various industries. Our industry was below the middle, so again, the

fact that existing plants are being sold for only a fraction of their

book value suggests that it’s a tougher business.

Now, some people have successful business plans and do better

than others in this business, but generally, it is a business with

very high fixed costs and, you know, the profitability is episodic.

Mr. TIBERI. Thank you, Mr. Chairman.

Mr. OSE. Mr. Slaughter, I don’t understand something. You comment about existing facilities being sold for 25 to 33 percent of book

value. There’s a certain disconnection in my mind, given the numbers that Mr. Tierney referred to relative to the profits. Why would

you sell something at 25 to 33 percent of book value if it’s profitmaking capability, at least in terms of the number of dollars—

maybe not in terms of percent of return on assets, but if its profitmaking ability is as indicated from those numbers?

Mr. SLAUGHTER. Well, first of all, I’m not sure that all those

numbers directly apply to refining profitability. And the fact of the

matter is that, you know, there are more down periods than up periods when it comes to refining profitability.

Analysts who know the industry well realize that there is a lot

more profit potential in the upstream portion of the industry, exploration and production, than there is in the heavy manufacturing

part, which is refining.

Mr. OSE. Well, at $40 a barrel, I would agree.

Mr. SLAUGHTER. And again, that represents an input cost to refining. And refining is also a heavily regulated business. So different people, you know, in a free market, view the value of facilities in different ways. Obviously, sellers, you know, felt that they
281

may not have been able to meet the investment requirements, for

instance.

Mr. OSE. Are you telling me and my colleagues up here that the

industry is making a—for lack of a better word, an economically

driven decision over time to keep refining capacity either static in

the United States or allow it to decline in favor of moving overseas?

Mr. SLAUGHTER. No.

Mr. OSE. Well, earlier you only were able to cite one location

where refining capacity—there’s an application to build new refining capacity. And you also indicated that such expansions as occur

are the little tweaking of refining capacity around the country at

existing facilities.

Mr. SLAUGHTER. The imported product is normally not supplied

by the same people that are the domestic refining companies. There

may—as Mr. Caruso indicated earlier, there may be suppliers from

Brazil, some of them can be European suppliers. In a situation like

we have now, some may be from the Caribbean. But they’re essentially different people.

I mean, we essentially have continued strong representation in

the United States by the same companies that have been the major

refiners in the United States for the last couple of decades. The

largest refiners in the United States, the top five, are still—you

know, they are ConocoPhillips, ExxonMobil, the Shell companies,

BP and Valero. Valero is a newcomer to that group. But there has

been a lot of stability with the exception of the fact of the mergers

and acquisitions, which have combined some companies. But these

companies have maintained very committed to U.S. refining capacity. ExxonMobil is the largest refiner in the world. But it is still

the second largest refiner in the United States.

Mr. OSE. But I also note in your earlier testimony that the refining capacity of domestic industry has dropped from 18.5 million

barrels a day to 16.8 million barrels a day. That’s over 25 years.

That’s a clear indication to me that there—for whatever reason,

whether it be regulatory or otherwise, that there is a consensus

among the industry that whatever investments we’re going to make

in refining capacity—and this is just a matter of—I mean, this is

just the way life is. Whatever this investment we are going to

make in refining capacity—and the EIA concurs in this, because

their projections are that the level of imported refined product is

going to continue to increase—whatever this investment we are

going to make in refining capacity, we are going to make offshore.

I mean, I look at this information, this testimony, and it seems to

me obvious that that’s the case, for whatever reason, that capital

is being moved offshore.

Mr. SLAUGHTER. Well, the companies that I have mentioned—I

mean, basically all 149 companies have made significant capital

commitments to the United States. And you know there may be

companies that were formerly in the refining business, smaller

ones that have gotten out of the refining business. There are a

number of them that have merged or been acquired. But the financial commitment of the companies that are in business in the refining business in the United States is substantial.
282

Some of them have foreign refining as well; some don’t. But as

you know, most of the product, 90 percent of the product that we

use in the United States is still produced here.

Mr. OSE. I’m not attacking. I’m just trying to look at the facts

as they are lying in front of me, and figure out what’s going on.

Mr. SLAUGHTER. Right. But I think you’ll find, sir, that the real

problem is what you mentioned earlier, which is the barriers that

people face to adding——

Mr. OSE. The barriers are lower elsewhere?

Mr. SLAUGHTER. Well, it’s true. I mean, that’s one of the reasons

why EIA says—for instance, says that you’ll see a very significant

increase in the percentage of imported products.

Mr. OSE. Because the barriers are lower elsewhere?

Mr. SLAUGHTER. Yes, but you know, again it was also said earlier

that one of the reasons we bring this to your attention is that it

is one of the—to the extent they are policy induced, it is something

that we can do something about here.

Mr. OSE. I agree. That’s my point, that we’re making some conscious decisions the net results of which are that this new, added,

incremental refining capacity is moving offshore.

Mr. SLAUGHTER. Yes, sir, that is true.

Mr. OSE. Now, I just have one other question I’d like to followup

on, and that is, in the Clean Air Act amendment in 1990, there

were a number of requirements that were laid into the statute that

you had to comply with. And if I understand correctly, you have

complied with them, that you support those and the like.

Mr. SLAUGHTER. Yes, a number of things like the sulfur reduction in gasoline and diesel. That’s where these billions of dollars of

investment have come from.

Mr. OSE. The oxygenate requirement?

Mr. SLAUGHTER. The oxygenation requirement.

Mr. OSE. OK.

Now, Mr. Ports, do you have any position or are you agnostic on

these?

Mr. PORTS. I wouldn’t say that we are agnostic on it. Rephrase

for me what your question is.

Mr. OSE. Do you or do you not support the improvements that

were embedded statutorily in the Clean Air Act of 1990?

Mr. PORTS. Yeah. I think all our organizations from any standpoint, both organizations, have long ago come to the conclusion

that, you know, you’ve got to move forward. Clean air’s going to

happen, and, you know, you move forward with those regs.

Mr. OSE. OK.

Mr. Lieberman.

Mr. LIEBERMAN. I think 14 years out we have learned what has

worked and what hasn’t worked and there is some room for some

streamlining. There is some room for jettisoning a few of the problematic provisions.

I think there’s some consensus here on the 2 percent oxygen content requirement, and there may be a few other things that have

out lived their usefulness. One thing might be the wintertime

oxygenated fuels, which isn’t that big a deal; but it is a fuel that

was designed to fight carbon monoxide, which has really essentially

disappeared as a problem.
283

So there are a few things that we could do to update those 1990

amendments. I’m not talking about a serious overhaul here, but

there is some room for some streamlining here within the context

of continuing cleaner air.

Mr. OSE. Mr. Early.

Mr. EARLY. Obviously, we support the amendments. If you’d permit me, Mr. Chairman, I wanted to address two points that Mr.

Lieberman has raised.

One is the wintertime oxy fuel program. The Clean Air Act actually has a mechanism for eliminating this program, and in fact,

many areas have abandoned the oxy fuel program so the Clean Air

Act isn’t really broken with respect to this program. In fact, I am

informed by California officials that they will meet the carbon monoxide standard, which is the reason they are using oxy fuels and

they will probably not be using oxy fuels next year after they get

clearance from EPA. So that piece isn’t really broken in the Clean

Air Act.

Mr. Lieberman also said that we don’t really need to adhere to

the sulfur and gasoline requirements because air pollution will still

go down as a result of the new emissions equipment in the Tier 2

program. I thought that’s what you were implying. I just wanted

to point out that if you talk to the automobile industry, they say

that the sulfur and gasoline requirements that are being phased in

beginning this year are absolutely critical for them meeting emission standards because the emissions control equipment on the new

vehicles that will start being sold have to operate at 99 percent of

efficiency; and if the sulfur levels are above an average of 30 parts

per million, that won’t happen, and if that doesn’t happen, you’ll

lose the investment in that equipment and you’ll also have dirtier

air.

Mr. OSE. I think Mr. Lieberman’s comment on page 10 and 11

was that whether or not the change from older fleets to newer

fleets has a far greater impact on the quality of the air, as opposed

to the reformulated gasoline formulas.

If you’d like to clarify, Mr. Lieberman.

Mr. LIEBERMAN. Yes, I would like to clarify. The low sulfur rules,

that wasn’t on my short list of things to change.

Mr. EARLY. Good.

Mr. LIEBERMAN. I never said it.

Mr. EARLY. I’m sorry.

Mr. LIEBERMAN. That’s one where changing it would do probably

more harm and good.

Even getting rid of rules involves transitional costs. And, here

the motor vehicle manufacturers, both cars and trucks, both gasoline and diesel fuel, are counting on sulfur reductions in order to

introduce new generations of emission controls technology. So,

that’s not one that ought to be on the chopping block.

Mr. OSE. I do want to followup though on one that I want to

make sure I get you all on record on, if I may interrupt; and that

is, do you support the rollback in California of the oxygenate mandate?

Mr. SLAUGHTER. Yes.

Mr. OSE. Do you, Mr. Ports?

Mr. PORTS. Yes, we have.
284

Mr. OSE. Mr. Lieberman, do you support the rollback of the oxygenate mandate in California?

Mr. LIEBERMAN. Yes. But I think, rather than a waiver, I’d like

to see a national law that makes it——

Mr. OSE. Mr. Early, if I understand correctly from your letter,

you and a number of organizations support the rollback of the oxygenate mandate in California.

Mr. EARLY. Yes, sir.

Mr. PORTS. Actually, Mr. Chairman, we would advocate the 2

percent oxygenate mandate nationwide on reformulated gasoline,

and I think everybody’s in agreement on that as certainly something that we could do away with.

Mr. LIEBERMAN. Better a law than just a mandate for a few

States.

Mr. SLAUGHTER. And we support the New York waiver as well.

Mr. OSE. OK.

Mr. Tierney.

Mr. TIERNEY. Thank you. And, I suspect that you’re in favor of

it, too.

Mr. OSE. Since 1999.

Mr. TIERNEY. We’re getting back on a little bit of the ground that

we covered out in Nevada on these related hearings. We talked

about the fact that in the early 1980’s there was a public policy

that provided support for small refineries, and those were terminated.

I would like each of you to give me as concise an answer as you

can about whether or not you’d like to see those public policies revisited. And which specifically do you think would be helpful?

Mr. Slaughter.

Mr. SLAUGHTER. We have been in favor of incentives and programs that affect everyone the same in the industry, because we

think it’s important to benefit—to give economic benefits that are

in the national interest to all refiners. So, you know, we believe the

thing that makes the most sense is to get the New Source Review

reform and take another look at and a better look at the energy

impact of regulatory actions across the board for all refiners.

Mr. TIERNEY. So, those are the two things that you think were

existing in the 1980’s that you’d like to see revisited?

Mr. SLAUGHTER. No. I thought that your question, sir, was

whether or not we would want a small refiner bias, and, you know,

we think it’s more effective to go with programs that the entire industry could use and improve.

Mr. TIERNEY. Given your clientele, I guess that would be a fair

assumption that’s where you would be. But, I was wondering if

there were any particular policies that existed in the 1980’s that

you’d like to see revisited and resurrected again now.

Mr. SLAUGHTER. No. I think that, you know, the stringency on

fuels and facilities really came in the 1990’s, 2000’s. And that’s

what’s really affecting the industry, sir.

Mr. TIERNEY. All right. Well, do you think that there were public

policies in the 1980’s that were later terminated that had an effect

on this? Or do you think the termination of those policies didn’t affect it at all?
285

Mr. SLAUGHTER. The termination of some policies that were of

particular benefit to smaller refiners did eliminate some of the refining population in the United States, yes.

Mr. TIERNEY. OK. But, that’s not something you’d like to address

because you want to give everybody a break somewhere?

Mr. SLAUGHTER. Well, if you’re talking about something that’s 20

years later and you can’t undo what was done in the 1980’s, at this

point, it makes sense to do things that would increase output

across the industry rather than just part of it. We obviously have

small refiner members who might feel differently about that, but

as an association——

Mr. PORTS. Yeah. I would say, generally speaking, our associations take the position that we would love to see incentives for

small refineries. You know, more supply is good for us. It really is.

It helps our business. It costs more in simple terms on a per-barrel

basis to upgrade a small refinery, there’s no question. I mean, I

don’t think anybody would dispute that.

Mr. TIERNEY. Mr. Lieberman.

Mr. LIEBERMAN. Well, one problem with the small refiners, particularly the older, smaller refineries, it’s just not economical to

make all the upgrades to meet the requirements. That’s probably

one of the reasons why you’ve seen some of the smaller refineries

close down over the years. So, that really ties in to the high regulatory costs in upgrading plants to meet all the refinery regulations

as well as the fuel regulations.

Mr. TIERNEY. Mr. Early, do you have an opinion? Do you want

to weigh in?

Mr. EARLY. I don’t think the Lung Association has a policy with

respect to—if you’re talking about economic incentives, obviously

there isn’t any question that some refiners chose not to make the

investment to meet environmental requirements and shut down.

And, we don’t regret that decision. You know, if they can’t meet the

requirements, then they shouldn’t operate.

Mr. TIERNEY. OK. Well, I guess, you know, just revisiting some

of the information regarding the last hearing is that in the 1990’s

alone approximately 50 refineries were closed. Twenty refineries

have been shut down since 1995. The number of operating refineries has been reduced by 13 percent since 1995. They’re getting larger, but smaller in number and owned by fewer and fewer entities.

Over the last 2 decades of the 20th century, the number of firms

engaged in refining in the United States has declined by twothirds.

The question we raised, and I think we might as well put on this

record as well, last time is, the industry prepared for some sort of

a tradeoff. If, in fact, you’re asking for a public policy that has the

taxpayers give some sort of incentive to increase capacity—and I’m

saying ‘‘taxpayers’’ because we, I think, all agreed that we want the

environmental regulations to stay in effect and to protect our

health. So, is the industry prepared for some sort of a tradeoff if

some incentive is given to increase the capacity?

What’s the give-back to the taxpayer? Are you going to share

profits or have an excess profit tax as a fall-back, or, you know,

what is the taxpayer going to get if there’s some sort of incentive

given to the industry to increase refinery capacity?
286

Mr. SLAUGHTER. You know, our association is not asking for any

incentives of those kinds. We are asking only for prudent policymaking in terms of being more sensitive to the impact on fuel supply of the environmental requirements.

Mr. TIERNEY. I’m sorry. You’re losing me here. A minute ago you

said that you were in favor of the environmental regulations, that

you didn’t want to have it adversely impact health. So, are you

looking for adjustments in it, changes?

Mr. SLAUGHTER. The fact of the matter is that there is a balancing process that is a part of all this. I mean, you look at things

like the New Source Review program; the actual truth is, there had

been some slight increases in domestic refining capacity that

stopped when the New Source Review program was reinterpreted

in the late 1990’s.

Mr. TIERNEY. But, it was interpreted.

Mr. SLAUGHTER. It was reinterpreted and it was used as an excuse to force additional investments on the industry.

Mr. TIERNEY. Sir, you are asking for a relaxation in environmental regulation?

Mr. SLAUGHTER. Not in the least. As a matter of fact, we are

making significant investments, and as has been pointed out here,

having made investments, it’s in our interest for those programs to

go forward. But, we can do a better job in the future.

Mr. TIERNEY. So, now we’re back to where I thought we were before. You have no change in the environmental landscape, and

you’re still not doing anything. So, what is it you want?

Mr. SLAUGHTER. But, Congressman Tierney, I just don’t realize

why you can’t understand that we want the policy to be implemented better with some more attention paid to the impact on the

supply. That’s all we’re asking.

Mr. TIERNEY. Which is semantics for saying that you want to reduce the environmental protections.

Let’s be serious with each other. That’s what I don’t understand.

I don’t understand why you won’t be succinct in saying what it is

you want. If you don’t want the environmental regulations enforced

to their fullest capacity to protect the health of people in this country and you want some sort of relaxation of that, then just say so,

and we’ll know where we are and we can move forward.

Mr. SLAUGHTER. There are few, if any, industries in the country,

Congressman, that have spent, invested more money in cleaner air

and other environmental improvements in the United States than

the refining industry and the automobile industries. They’re responsible for most of the improvements in air that have occurred

since 1970.

Mr. TIERNEY. Well, they’re also responsible for most of the damage in the air and most of the environmental pollution. So that’s

a good thing going.

We had a need to put environmental regulations on them. It was

a decision that the people of this country made. You, a minute ago,

told me that you were understanding of that and agreed with it.

But, what you are now telling me, although you won’t say it directly, is that what you want in order to build more refining capacity is a relaxation of those environmental regulations and nothing

else.
287

Mr. SLAUGHTER. No, that is not what we want. We are simply

asking for recognition that investment of those sums of money has

an impact on business and that there may be a way, going forward,

to balance our environmental requirements with a little more attention to the supply impact, often with no impact at all to the environment, Congressman. Some of these things improve the environment.

Mr. TIERNEY. Well, that would be certainly a matter of interpretation now, wouldn’t it?

Mr. SLAUGHTER. Well, the New Source Review program reforms

will improve the environment because they will allow the industry

to make quicker use of new technologies.

Mr. TIERNEY. Well, now we know exactly what you’re saying and

that is with as little foundation and scientific backup as any statement that’s been made today. But, that’s for another day.

But, now I know exactly what you’re after. You’re not after tax

breaks. You’re not after anything else. You’re after a relaxation of

the environmental regulations, although you say in another breath

that you’re not.

Mr. SLAUGHTER. I can’t agree with you, sir. I’m sorry.

Mr. TIERNEY. Well, it is what it is.

Mr. OSE. I want to thank this panel for their participation and

for both Mr. Tierney and Mr. Tiberi’s participation. I do appreciate

your coming down here.

I have to say, I am struck by two things. First, that the interests

of those who are in the business today, from an economic standpoint, are well served by higher barriers to entry, notwithstanding

anything else; but the ability to keep competitors out benefits those

who are able to deliver product today—that’s just an economic reality. And, the current regulatory regime, while Mr. Slaughter may

testify that his people are interested in increasing supply, which I

accept, the current regulatory regime and capital returns serve to

restrict the number of producers who give us product. That’s the

first thing.

And, the second is that everybody on this panel has now agreed

with me, which position I took in 1999, that the environmental regulation on oxygenate additives needs to be rolled back as it relates

to California.

And, I want to thank this panel for its testimony and participation. I certainly appreciate the company and input and the education I get from my friend from Massachusetts, and I look forward

to our next hearing.

We are adjourned.

[Whereupon, at 1 p.m., the subcommittee was adjourned.]

[Additional information submitted for the hearing record follows:]
288
289
290
291
292
293
294
295
296
297
298
299
300
301
302
303
304
305
306
307
308
309
310
311
312
313
314
315
316
317
318
319
320
321
322
323
324
325
326
327
328
329
330
331
332
333
334
335
336
337
338
339
340
341
342
343
344
345
346
347
348
349
350
351
352
353
354
355
356
357
358
359
360
361
362
363
364
365
366
367
368
369
370
371
372
373

Æ