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GASOLINE: WHAT’S CAUSING RECORD PRICES AT

THE PUMP?

HEARING

BEFORE THE

SUBCOMMITTEE ON ENERGY AND RESOURCES

OF THE

COMMITTEE ON

GOVERNMENT REFORM

HOUSE OF REPRESENTATIVES

ONE HUNDRED NINTH CONGRESS

FIRST SESSION

MAY 9, 2005

Serial No. 109–44

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

CHRISTOPHER SHAYS, Connecticut

DAN BURTON, Indiana

ILEANA ROS-LEHTINEN, Florida

JOHN M. MCHUGH, New York

JOHN L. MICA, Florida

GIL GUTKNECHT, Minnesota

MARK E. SOUDER, Indiana

STEVEN C. LATOURETTE, Ohio

TODD RUSSELL PLATTS, Pennsylvania

CHRIS CANNON, Utah

JOHN J. DUNCAN, JR., Tennessee

CANDICE S. MILLER, Michigan

MICHAEL R. TURNER, Ohio

DARRELL E. ISSA, California

GINNY BROWN-WAITE, Florida

JON C. PORTER, Nevada

KENNY MARCHANT, Texas

LYNN A. WESTMORELAND, Georgia

PATRICK T. MCHENRY, North Carolina

CHARLES W. DENT, Pennsylvania

VIRGINIA FOXX, North Carolina

——— ———

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

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

BRIAN HIGGINS, New York

ELEANOR HOLMES NORTON, District of

Columbia

———

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 AND RESOURCES

DARRELL E. ISSA, California, Chairman

LYNN A. WESTMORELAND, Georgia

ILEANA ROS-LEHTINEN, Florida

JOHN M. MCHUGH, New York

PATRICK T. MCHENRY, NORTH CAROLINA

KENNY MARCHANT, Texas

DIANE E. WATSON, California

BRIAN HIGGINS, New York

TOM LANTOS, California

DENNIS J. KUCINICH, Ohio

EX OFFICIO

TOM DAVIS, Virginia HENRY A. WAXMAN, California

LAWRENCE J. BRADY, Staff Director

STEVE CIMA, Professional Staff Member

LORI GAVAGHAN, Clerk

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C O N T E N T S

Page

Hearing held on May 9, 2005 ................................................................................. 1

Statement of:

Cook, John, Director of Petroleum Division, Office of Oil and Gas, Energy

Information Administration, U.S. Department of Energy; Jim Wells,

Director, National Resources and Environment, U.S. Government Accountability Office; Pat Perez, transportation energy division, California

Energy Commission; and Rayola Dougher, manager, energy market

issues, American Petroleum Institute ......................................................... 4

Cook, John ................................................................................................. 4

Dougher, Rayola ........................................................................................ 85

Perez, Pat ................................................................................................... 62

Wells, Jim .................................................................................................. 29

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

Cook, John, Director of Petroleum Division, Office of Oil and Gas, Energy

Information Administration, U.S. Department of Energy, prepared

statement of ................................................................................................... 8

Dougher, Rayola, manager, energy market issues, American Petroleum

Institute, prepared statement of .................................................................. 88

Perez, Pat, transportation energy division, California Energy Commission, prepared statement of .......................................................................... 67

Watson, Hon. Diane E., a Representative in Congress from the State

of California, minority report ....................................................................... 124

Wells, Jim, Director, National Resources and Environment, U.S. Government Accountability Office, prepared statement of .................................... 33

(1)

GASOLINE: WHAT’S CAUSING RECORD PRICES

AT THE PUMP?

MONDAY, MAY 9, 2005

HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON ENERGY AND RESOURCES, COMMITTEE ON GOVERNMENT REFORM, Long Beach, CA.

The subcommittee met, pursuant to notice, at 1:30 p.m., in City

Council Chambers City Hall, 333 West Ocean Boulevard, Long

Beach, CA, Hon. Darrell E. Issa (chairman of the subcommittee)

presiding.

Present: Representatives Issa and Watson.

Staff present: Larry Brady, staff director; Steve Cima, Dave

Solan, and Chase Huntley, professional staff members.

Mr. ISSA. Good afternoon. A quorum being present, the Government Reform Subcommittee on Energy and Resources will now

come to order.

Today our high energy prices are affecting everyone’s cost of living, America’s economy, from consumers and businesses to public

and private agencies. For Californians filling up the gas tank is not

a luxury; it’s a necessity. They have to fill up to get to work, take

the kids to school, and go to the grocery store.

In recent weeks President Bush has shown leadership by calling

for action on his energy development and conservation programs.

He pledged to address the root causes that are driving up gasoline

prices and encourage oil-producing nations to maximize their production, as well as vowing that consumers will not be gouged at the

pumps.

Since coming to Washington the President has stressed the need

for a comprehensive energy policy. Last month the House passed

an Energy Policy Act of 2005, and now it is time for the Senate to

enact this or similar legislation so that we could work out differences and more toward a national energy strategy to reduce consumer cost.

The President has also stressed the need to promote greater energy independence by harnessing the power of technology to create

new sources of energy and make more efficient use of existing

sources.

Since 2001 I have driven a Toyota Prius and it is here with me

today. New technologies like hybrid vehicles have played and will

play an absolutely essential role in lowering overall energy costs

for consumers, and it is important that Congress continue to reward the development and use of these energy savings innovations

and others to come.

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I understand that people are frustrated and outraged with the

soaring gasoline prices. As consumers struggle with increased

prices, we hear about oil companies with enormous profits increasing global oil demand and of limited plans for investing in refineries and petroleum infrastructure.

I believe it is important that this subcommittee hear from consumers and address your questions regarding gasoline prices. For

the past week I have allowed the public to submit questions, some

of which we will be asking the panel this afternoon in addition to—

if time allows—questions from the audience.

The issues we will address today are serious and go to the core

of our economic well-being and standard of living.

Hopefully the witnesses today can enlighten us on these issues

and possibly point out some solutions. I look forward to the testimony of the witnesses today. The witnesses include: Mr. John

Cook, Director of Petroleum Division, Office of Oil and Gas, Energy

Information Administration, U.S. Department of Energy; Mr. Jim

Wells, Director, National Resources and Environment, U.S. Government Accountability Office; Mr. Pat Perez, Transportation Energy Division, California Energy Commission; Ms. Rayola—how do

I pronounce it properly?

Ms. DOUGHER. Rayola Dougher.

Mr. ISSA. Rayola Dougher. Thank you. I’ll strive to get it right.

Ms. DOUGHER. Thanks.

Mr. ISSA. Ms. Dougher is manager, Energy Market Issues, American Petroleum Institute.

I want to thank the audience for attending this hearing. I will

now yield to the ranking member, the gentlewoman from California, Ms. Diane Watson, for her opening statement.

Ms. WATSON. Thank you so much, Mr. Chairman. I appreciate

you having this hearing in Long Beach, and I want to thank the

city council here in Long Beach for hosting this field hearing. It’s

close to my home and we came down through the rain in almost

20 minutes, so I appreciate that.

As you know, commuting is a necessity here in southern California and record gasoline prices are taking their toll on my constituents. My district starts, I would say, roughly at the 405 and goes

over to the University of Southern California, up to that Hollywood

sign, and down to South Los Angeles. It’s really in the heart of the

freeway area. It is from about 3 a.m., Monday to 3 o’clock Tuesday

the congestion starts and continues. It is in the congested area of

the city.

So gas prices on the average throughout the United States rose

above $2.20 a gallon in April of this year, creating record highs.

And unbelievably on March 5th of the year the average price of a

gallon of regular gas in California was $2.61.

Darrell, I’ve even seen signs around greater Los Angeles of $2.93.

Mr. ISSA. It was $2.79 at the closest gas station here today.

Ms. WATSON. So the cost of gas is rising at an astronomical rate

and the gasoline market’s uneven for different sections of the country. And, you know, they like to look at us out here on the West

Coast and say, ‘‘You’ve got those high gasoline prices and you’ve

got all those cars, what are you going to do?’’ But I see the signs

3

back in the Washington, DC, area, Virginia area also showing the

record rise in cost.

Mr. Chairman, the global thirst for oil has placed both foreign

and domestic oil companies in a very powerful position. American

consumers are caught in the squeeze of unregulated gas pricing.

The American dream is to create successful businesses and contribute to the free market system of this great nation, but there is

some concern that the recent mergers in the United States oil industry has made it easier for companies to control gas pricing. Indeed the gas and oil industry is recording the largest revenues in

history. ExxonMobil has disclosed the largest annual revenue in

the history of the business.

It is important for American Government to understand the dynamics of an industry in which the top 10 companies control 80

percent of the domestic oil refinery capacity. It’s important for us

in Congress to listen to the studies done by oversight agencies.

The U.S. General Accounting Office released a report in May

2004 on the effects of mergers and market concentration on the petroleum industry. And GAO found that the oil company mergers

and an increase in market concentration led to higher wholesale

gas prices. It is critical to note that the GAO reached their findings

in mergers that occurred between 1991 and 2000. Since 2001 the

largest five oil companies operating in the United States,

ExxonMobil, Chevron/Texaco, ConocoPhillips, BP, and Shell, have

enjoyed after-tax profits of $230 billion. Yes, even through an economic downturn and an unreasonably high jobless rate five companies have cleared an astronomical sum of money, $230 billion.

The Federal Trade Commission is the agency responsible for preserving competition in the market place in order to protect consumers. A number of experts have concluded that the increase in market concentration allows individual companies to engage in strategic decisions such as withholding supplies to increase prices and

thereby increase the bottom line, their profits.

In March 2001, FTC reports found that oil companies were making decisions to withhold formulated gas blends supply in order to

maximize profits.

Californians have suffered outrageous petroleum pricing through

no fault of their own, with dishonest market manipulation such as

the Enron scandal.

Mr. Chairman, I want to commend you, again, on this timely

field hearing. It’s important. And it’s critical that we investigate

the reasons for higher prices at the gas pumps and report back to

not only our constituents but those across this country.

Moreover, the President has indicated that the recently passed

majority energy bill will not provide any short-term relief on gas

prices. So Americans need to know whether they fill their tank or

whether they use the money to buy food and other things that they

need on a day-to-day basis.

So I look forward to this informational session with the GAO, the

EIA, and the California Energy Commission. And I understand

that we have a representative of the petroleum industry and I look

forward to listening. Thank you.

Mr. ISSA. Yes and, I apologize if I’m giving you my froggy throat.

Thank you.

4

According to the rules of the Government Reform Committee I

would request that each witness raise their right hand to take the

oath.

[Witnesses sworn.]

Mr. ISSA. And let the record show that each answered in the affirmative.

Thank you all for being here today—both the audience and our

distinguished panel. As Congresswoman Watson said and made

very clear, although we may differ in party, we don’t differ in a belief that gas prices have gotten too high and that they need to be

brought down. I think on a bipartisan basis we also agree that the

energy bill, if passed and signed into law, will not be an overnight

panacea for all of our problems. And certainly that’s one of the

questions we’re going to have for this panel today is long-term/

short-term.

The normal custom for any hearing is a 10-minute opening statement by each of the panelists. We have your written testimonies

in their entirety. They will be available both to this committee and

to the people here in the audience, and as well as on our Web site.

So if you’d like to abbreviate, add in material that’s not available

there, or summarize in any way, feel free to. We’ll not keep you to

an exactly 10-minute schedule, but Mr. Cima will be banging on

me to bang on you at some point.

And with that I would like to introduce—here we go—Mr. Cook,

Director of Petroleum Division, Energy Information Administration, the U.S. Department of Energy. And I’m looking for the gentleman’s biography. Well, I apologize, your title is more than

enough, and I will have the biography by the next introduction.

But, Mr. Cook, I appreciate your being here today. I would ask,

again, that your entire testimony be put in the record and to summarize it in about 10 minutes.

STATEMENTS OF JOHN COOK, DIRECTOR OF PETROLEUM DIVISION, OFFICE OF OIL AND GAS, ENERGY INFORMATION

ADMINISTRATION, U.S. DEPARTMENT OF ENERGY; JIM

WELLS, DIRECTOR, NATIONAL RESOURCES AND ENVIRONMENT, U.S. GOVERNMENT ACCOUNTABILITY OFFICE; PAT

PEREZ, TRANSPORTATION ENERGY DIVISION, CALIFORNIA

ENERGY COMMISSION; AND RAYOLA DOUGHER, MANAGER,

ENERGY MARKET ISSUES, AMERICAN PETROLEUM INSTITUTE

STATEMENT OF JOHN COOK

Mr. COOK. Thank you, Mr. Chairman and subcommittee members. On behalf of EIA I’d like to thank you for the opportunity to

testify today on the factors behind recent gasoline price movements. As the first speaker indicated and all U.S. drivers are all

too aware, gasoline prices have risen sharply since the beginning

of the year. As of last Monday the national average retail price

stood at $2.24, up 42 cents from a year ago and nearly 46 cents

from January. While relatively high in historical terms, retail

prices have been dropping recently. And barring unforeseen developments, we look for them to drop much further by Memorial Day.

In addition, adjusting for inflation, gasoline prices were much highVerDate 11-MAY-2000 11:40 Aug 12, 2005 Jkt 000000 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 D:\DOCS\22685.TXT HGOVREF1 PsN: HGOVREF1
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er in the early 1980’s at a little over $3 a gallon. Nonetheless, gasoline like oil prices in general are currently high throughout the

United States, and especially in southern California.

California prices typically run higher than the U.S. average and

often exhibit more volatility. This year’s no exception with the retail price running up about 58 cents since the beginning of year,

some 33 cents higher than the national average.

My statement today summarizes major changes seen in oil markets since 2000 impacting gasoline.

High prices, at least in our view, are primarily the result of an

unusual tightening and global crude markets. This tightness was

brought about primarily by an unexpected acceleration in demand

growth, stretching global crude production capacity nearly to its

limits. As a result crude prices almost doubled last year, and that

lack of spare capacity is expected to keep crude markets tight and

prices high for the foreseeable future. Other factors adding to this

pressure, of course, include tight refining capacity and tightening

product specifications worldwide.

To look more closely at the causes underlying recent gasoline

price pressure it may be helpful to take a look at the components

underlying retail costs. This figure shows that typically crude oil

accounts for the largest amount of retail cost and usually the lion’s

share of any increase.

Here we see that April-over-April comparison show about 32

cents of the overall 44-cent run-up accruing to the crude sector. Refining costs added about 7 cents and marketing costs about 5. Since

taxes vary little in the short-term, sufficient insight into the drivers here behind high retail prices may be obtained if we simply

focus on the crude and refining sector.

Figure 3 shows the crude prices have shifted upwards a couple of times in the last several years. After averaging around $20 for

most of the 1990’s, crude slumped almost to $10 as a result of the

Asian financial crisis and extra supply from Iraq re-entering the

market. OPEC responded to this by sharply cutting production,

driving prices not only back to the $20 level, but to what seemed

a new level of about $30 in the face of declining global inventories.

Then last year the crude oil prices shifted to a second higher

level, well over $40, almost doubling and rising from $30 early in

the year to a peak of over $56 by late October. Though prices fell

back toward $40 by the end of the year, they recently rebounded

over $57, and once again have fallen to about $50. We expect prices

for the remainder of this year to range between the low $50’s and

the mid-$50’s.

There are a number of factors that underlie this tightening in

the global crude balance pushing prices to $50. And probably the

biggest one is the huge increase in global demand. Probably the

biggest surprise was China with a demand increase of over a million barrels a day last year compared to growth rates of less than

half that amount in prior years. China and the United States alone

accounted for almost 60 percent of the increase last year, and we

expect that growth to remain strong this year.

On the supply side, growth in non-OPEC production fell well

short of meeting increasing world needs, and we expect that to remain short of those requirements.

6

We will continue to see growth in Russian and the Caspian regions, but there are no large new areas adding potentially a million

to $2 million per day as needed such as that seen from the North

Sea and the Alaskan North Slope regions in the 1970’s and 1980’s.

Therefore, if demand continues to grow strongly, OPEC must increase its capacity significantly.

The next figure shows that inventories in the developed nations

of the OECD moved to more comfortable levels at the mid point of

last year. On the other hand, if we take into account strong global

demand growth, if we put inventories in today’s supply terms or in

terms of expected consumption covered, the blue line at the top

shows that they were low most of last year and fell to 2000-like

lows of about 50 days by the end of the year. We expect supply to

remain low this year and again fall toward 50 days by the end of

the year, but perhaps the most important change last year was the

drop in the world’s ability to search crude production to offset unanticipated supply losses.

The next figure shows that global spare capacity which primarily

resides in OPEC, in fact, primarily in just one country, Saudi Arabia, has ranged—is currently ranging between a million to a million and a half barrels per day and stands at the lowest point since

the first Gulf war. As global oil demand rises seasonally to its peak

in the fourth quarter, we expect that spare capacity to drop even

further.

In our view it is this lack of supply cushions, low inventories on

a day supply basis, and very little, if any, usable spare capacity

that is responsible for the price pressure that we see in today’s

markets. The difference between what we see in today’s markets

and that from the last 20 years is that these drivers, low spare capacity and low day supply, are not short-term in their nature.

Turning to gasoline. We saw in figure 2 that crude oil explained

most, but not all of the rise in retail prices. While crude oil accounted for about 32 cents, relatively tight conditions in wholesale

markets added another 7. This chart if you look at it closely indicates that while crude oil and gasoline generally move together, at

times spot gasoline increases at a much faster pace than crude oil

widening the spread between them. The spread or the difference

between spot gasoline and spot crude oil depends upon the gasoline

supply/demand, balanced relative to that of crude oil. These

spreads tend to rise when gasoline market conditions tighten; that

is, factors in the gasoline market tighten the balance over and

above any tightness originating from crude markets. The figure

shows that tight crude oil and gasoline market conditions last year

lifted spreads throughout the Nation to very high levels. By the beginning of this year, though, some regions began to experience

some softening, especially in the Gulf Coast where spreads in February dropped almost to zero. Unfortunately in April they bounced

back to relatively high levels.

Turning to California. For the most part spreads this year have

run to—have been in at the relatively high end of California’s

range. Spreads in California generally are higher than other regions and more volatile. Hence, the retail prices are higher and

more volatile. In fact, it’s not unusual for California spreads to run

7

20 to 30 cents on average higher than the Gulf Coast, and at times

they can even range up to 50 or 60 cents higher.

The primary reasons for this are that the California system supplies most of the region’s needs, but the system runs near its capacity limits, meaning there’s little spare capacity to meet shortfalls. California’s also isolated, primarily from the Gulf Coast,

which prevents any rapid resolution to imbalances.

The region uses a unique gasoline that’s difficult and expensive

to make, which limits the number of suppliers that can provide

extra amounts. And finally, as California turned to ethanol banning MTBE, it lost production capability, which in the face of growing gasoline demand further tightened its balance, heightening its

already high spreads.

The last figure shows that following the ban California retail

prices rose relative to U.S. prices by another 10 cents or so. In

short, California’s unique fuel situation is likely to keep markets

tight on the West Coast for some time, meaning their prices are to

remain higher and more volatile.

As we look ahead, we don’t see much relief. Crude oil is likely

to remain 50 day supply and keeps pressure on OPEC spare capacity. Tight refining capacity is also likely to add to this pressure. At

this point little is certain. If crude oil remains around $50 and gasoline markets remain relatively soft, we may see some further decreases in the weeks ahead as we move toward Memorial Day. If

crude oil rises, which is possible as we move to the fourth quarter,

we have a strong surge and demand during the peak summer, or

if there is a rash of refinery outages, then of course that would put

gasoline prices back up.

That concludes my testimony. I would be happy to answer any

questions.

[The prepared statement of Mr. Cook follows:]

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Mr. ISSA. Thank you. We’ll hold our questions till the end.

Mr. Jim Wells is Director of the National Resources and Environment Team at the Government Accountability Office. Mr. Wells

joined the GAO in 1969, that is a long and distinguished career,

and has worked extensively in both energy and environmental

issues.

Again, Mr. Wells, thank you for being here. Your entire statement will be put in the record.

STATEMENT OF JIM WELLS

Mr. WELLS. I truly am pleased to participate in the subcommittee’s hearing today to discuss today’s gasoline prices.

Holding this hearing today in Long Beach, CA, is clearly very appropriate because just last week you set a record. You for the first

time had the highest gasoline prices in the Nation surpassing Hawaii. I don’t know whether that’s a good thing or a bad thing, but

there is a lot of pain.

Mr. ISSA. It’s a good thing if we pass them in tourism. It’s a bad

thing if we pass them in gas prices.

Mr. WELLS. Fair enough. There truly is a lot of pain as retail

gasoline prices are soaring. Each additional 10 cents per gallon of

gasoline adds about $14 billion to the American’s annual gasoline

bill. Consumers have a lot of questions as they fill up their tanks

with 380 million gallons a day, or they read in the newspapers, as

Congresswoman Watson talked about, high oil company profits.

Will prices get higher? Any chance they’ll go down? What can the

Federal Government do?

Mr. Chairman, you asked us to be here today based on our work

to talk about three questions. So let me just quickly summarize the

first question.

How are gasoline prices determined? First, you start with crude

oil prices. If gasoline were the meal that you went into a restaurant to buy, clearly the main entree would be crude oil, which

represents about 50 percent of the cost of that meal. If crude oil

goes up, gasoline prices will follow.

Another general fact is the price of crude is not a U.S. determined commodity price. Crude oil is a worldwide commodity and

its price at any single point in time has little to do with the cost

that it takes to get it out of the ground. The price is what the market will bear, and how much is demanded, and it depends on how

much oil is brought to the market.

When OPEC cuts back on production, prices rise. When demand

increases faster than supply, prices rise. That’s what we have

today. In a sense, the last tanker of oil that’s out there in the ocean

at the end of the day as its steering toward, it will steer and turn

toward that country, whether that might be the United States or

whether it might be China, that’s willing to pay the highest price

for that last barrel of oil. That’s how world crude oil price is determined.

In the last 15 months crude oil is up 60 percent to over $50 a

barrel. We’re going to hear a lot of explanations today about this

large increase, and clearly it is being attributed to surging world

demand, and particularly as it relates to China and the rest of

Asia, instability in the Persian Gulf region, and actions by OPEC

30

to restrict the production of oil and thereby increasing the price on

the world market.

I want to look a moment to—John Cook had a chart on the board

that talked about what is involved in the cost of a gallon of gasoline. On page 8 of my statement we have a chart there that talks

about the components, the crude oil, the taxes, the refining, and

the marketing and distribution.

These are the main prices and pieces of a gallon of gasoline.

You’re paying for these ingredients, the cost to make it, and then

you have to move it to your local filling stations, but clearly this

also includes the amount of the profit, and in the marketplace and

perhaps API will talk about that today—that will allow the industry to earn on delivering that gallon of gasoline as well as the Federal and State and local taxes that are imposed on a gallon of gasoline.

As John mentioned, a number of other factors also play a role.

Refining capacity, you’ll hear that today, in the United States is

very tight. Meaning that we’re already producing about as much as

our existing 149 refineries can. Our refinery numbers are down

over 300 refineries that were in existence in the 1980’s, and we’ve

now dropped to 149 refineries. We’re importing about 42 million

gallons of gasoline per day to help meet this demand.

The volume of inventories is another issue. What’s maintained by

refineries in today’s environment is typically low, 23 days’ worth of

supply as compared to 40 days of supply in the 1980’s.

The regulatory factors that are imposed on the industry are also

playing a fairly significant role. For example, in order to meet the

National Air Quality Standards under the Clean Air Act, many

States have adopted the use of special gasoline blends, so-called

‘‘Boutique Fuels,’’ which cost more to make, and they are clearly

putting stress on the gasoline supply system in existence today.

Finally, the structure of the gasoline market that we have in this

country has changed. It’s different than it used to be. For example,

a wave of mergers of the oil companies. We had a report last year

that Congressman Watson talked about, 2600 mergers occurred in

a 10-year period. We have a lot of loss of mom-and-pop dealers that

have changed the gasoline market. And many of this could possibly

lead to higher gasoline prices at the pump.

If I can, turning to question 2, why are prices so high in California? For example, at the end of April when the national average

price was $2.20, California’s price was $2.57. Explanation for why

California prices have been high include California’s unique gasoline blend, which I might add is the cleanest burning in the Nation,

and it is also the most expensive. Some studies have estimated it

as much as 5 to 15 cents more to contribute to that clean gasoline.

There’s a tight balance between supply and demand here on the

West Coast. There’s a long distance to replace any gasoline in the

event of supply disruptions. The term used many times is that

California is an island of itself in terms of the ability to bring in

supply.

California also has a high level of gasoline taxes. California currently taxes gasoline at—a gallon of gasoline at 57 cents, 30 cents

per gallon more than the State with the lowest, which is Alaska.

31

I don’t want to imply that anything is wrong with these factors.

They just represent choices, choices that are made and agreed to.

Internationally, taxes, the United Kingdom, Germany have im- posed $4 taxes on gasoline. Canada’s a dollar. Throughout the

world the U.S.’ taxing structure is the lowest for gasoline products.

The third question was: What does the future look like? In one

way it’s simple. Future gasoline prices will reflect the world’s supply and demand. Demand is expected to rise. For example, instead

of using 20 million barrels per day, EIA has estimated that we’ll

need approximately 28 million barrels in the future.

Demand in the rest of the world is also rising even faster than

what it is in the United States. A big question is: Do we have the

world capacity to expand to keep up? GAO really doesn’t know. A

lot of studies and a lot of people need to look at that. Are we, in

fact, running out of oil? We have been asked by the House to do

another investigation to look at where the status is on world oil reserves, and we will begin that shortly.

However, I don’t want to leave the impression that it’s all gloom

and doom for the future. In the past oil companies have always

managed to find enough oil to meet demand, and we clearly have

technology improvements. We’re getting smarter. We have better

equipment, and this may continue to be the case in the future.

Further, consumers can choose to be more energy efficient and

use different kinds of products, and otherwise they can make a

choice to conserve more energy. For example, in 1980 many consumers, when prices rose, chose to switch to smaller and more fuelefficient vehicles. That was in the 1980’s.

Mr. Chairman, if I could refer to a picture that appeared in the

USA Today newspaper today, you have a picture of the President

of the United States and the President of Russia, President Putin,

carpooling. They’re in their car carpooling. This is an example of

walking the talk, perhaps, in terms of things that can be done immediately in fixes.

Mr. ISSA. I wouldn’t do it with a 1950 Volvo. That was not a sterling example of a fuel efficient automobile, nor environmentally

sensitive.

Mr. WELLS. Would you agree with me it’s an example of carpooling, perhaps?

Mr. ISSA. I just wonder how many SUVs are following those two

heads of state.

Mr. WELLS. Today, Mr. Chairman, we have 200 million vehicles

in some mix of SUVs and newer hybrids. Maybe that mix will

change. I notice you’re driving a hybrid. Ford, Honda, Toyota sold

16,000 hybrids in March 2005, this year. 83,000 new hybrids were

registered in the year 2004. That is small, but it is making a dent.

Although not in the short-term, clearly there are some other

things that will impact the future—where will the price of gasoline

be in the future? The pace of the developing alternative energy

supplies such as the hydrogen fuel cell technology clearly does hold

promise.

There are additional unpredictable factors on the downside that

may include geopolitical issues such as the stability in the Middle

East, Venezuela, and the valuation of the U.S. dollar in world currencies. Because of the price paid for oil that we buy is denomiVerDate 11-MAY-2000 11:40 Aug 12, 2005 Jkt 000000 PO 00000 Frm 00035 Fmt 6633 Sfmt 6633 D:\DOCS\22685.TXT HGOVREF1 PsN: HGOVREF1
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nated in U.S. dollars, the U.S. buying power can be a major factor

for the future. If the dollar falls, the oil-producing countries that

are collecting these dollars will demand more dollars in return for

their oil, which will have some impact, potentially major impact, on

the price in the future.

Mr. Chairman, in closing, it is possible that low energy prices may be gone forever. Some think that the $50 barrel of oil may be

here to stay, which you heard from the EIA today that at least

through 2005. While there’s even some predictions in the financial

community that have predicted a $100 barrel of oil, but this is far

from a sure thing. Holding this hearing is a great first step in getting a better understanding of what paths may be available to help

steer the energy policy that you, Mr. Chairman, have talked about

in the Congress. Clearly striking that balance between efforts to

boost supplies on the one hand, to improve efficiencies and to conserve energy on the other hand are going to present challenges as

well as opportunities to make a difference on what prices we pay

for gasoline in the future. How we choose to meet those challenges

is an opportunity that perhaps we need to seize and to help determine the quality of life and the economic prosperity of the United

States in the future.

Finally, I think most of us here today would agree, and clearly

in the audience behind me that what is true for the Nation as a

whole is even more dramatically so here in California. California

needs a lot of gasoline to grow.

Mr. Chairman, this completes my prepared statement and I look

forward to responding to questions.

[The prepared statement of Mr. Wells follows:]

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Mr. ISSA. Thank you, Mr. Wells.

And next we go to Mr. Pat Perez, manager, Transportation Fuel

Office, California Energy Commission. Pat’s been involved in energy technology and transportation fuel issues for more than 24

years. As a technical and policy expert Pat has managed and directed numerous technical reports, helped developed policies for addressing fuel issues, and provided expertise to the Governor’s office

on California’s most pertinent and obviously difficult subjects as

they face us here today. We look forward to your testimony.

STATEMENT OF PAT PEREZ

Mr. PEREZ. Thank you, Congressman Issa and Congresswoman

Watson, for the invitation to be here this afternoon.

What I’d like to do is just briefly summarize what has taken

place in the California petroleum markets this past year, what factors have contributed to our fuel price increases, and what measures the California Energy Commission believes would help mitigate those impacts certainly over the long run.

First, talking a little bit about the fuel price trends and causes.

The price of crude oil, of course, on world markets to a very large

degree determines the price of transportation of fuels, even though

California receives 42 percent of its crude oil supply from in-state

oil fields. The price of the Kern River crude oil, a benchmark California heavy oil, has risen 49 percent since the beginning of the

year. And Alaskan North Slope which you see up on this screen,

a very important feedstock for making products in California, has

also increased roughly 36 percent since the beginning of the year.

Among the world oil market factors affecting crude oil prices are

the following: Certainly cautious investment strategies in petroleum exploration and production by oil companies and OPEC are

contributing to the higher prices. Second, the slow return of Iraqi

oil production to pre-war levels is also hindering oil output. And

high demand that we’ve heard from the two previous speakers relative to our world oil production capacity is leading to a very tight

market.

And I might also add that 20 to 30 percent reduction, or the devaluation of the dollar relative to other foreign currencies is also

adding upward pressure to oil because that’s when OPEC trades

barrels in.

The operations of California refineries and related infrastructure

also impact State fuel prices. In early 2005 California refineries underwent intensive planned maintenance as described in the graphic

behind you. In anticipation of this downtime, inventories of gasoline were built up to very high levels early in the year. However,

unplanned outages at two refineries in California and at facilities

elsewhere on the Pacific Coast caused the depletion of those inventories as reflected on the figure behind you.

As companies sought to cover their obligations and purchases onthe-spot market, wholesale prices increased and, as you can see, retail prices soon followed. The cost components of a gallon of gasoline at this price include $1.22 for crude oil, 52 cents for taxes; refining costs and profits add another 71 cents, and then finally 12

cents for distribution, marketing costs, and profits.

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As seen in this figure the cost of crude oil and refining costs as

well as profits have increased significantly since the beginning of

the year while distribution, marketing cost, and profits have actually declined since January.

California drivers consume about 43 million gallons of gasoline

per day. With prices increasing almost 60 cents per gallon since the

beginning of the year, the State’s consumers are paying over $25

million per day more for just gasoline. Or expressed in another

way, motorists are paying over $9 a day more each time they fill

their tanks at the service station.

California petroleum markets and neighboring States are very

much interconnected and interrelated. Although California’s considered to be somewhat of an island as far as its gasoline and diesel

markets, it’s still affected by conditions in other regions. In addition to imports of crude oil and other refinery feedstocks, California

also routinely imports finished fuels and essential blendstocks for

making our fuels. Since only a limited number of supply sources

can provide fuels meeting California’s clean burning fuel specifications, we must compete with other areas for these products. Our

distance from many of these supply sources further constrains our

ability to attract cargoes during unexpected refinery outages.

California’s petroleum trade relations with other States however

are much more complex than just simple import dependents. As described in figure 5 behind you, Nevada is an integral part of our

fuel markets since it relies almost entirely on California refineries

and pipelines for fuels. Arizona receives most of its fuels from California with the rest coming from Texas. And in Oregon, they also

receive significant amounts of fuel from California. As a consequence, situations that affect one Pacific region State typically affect neighboring States as well.

Now, I’d like to just turn my attention a little bit to ethanol and

the California gasoline production cost that we heard just a few

minutes ago.

Certainly the shift away from methyl tertiary butyl ether or

MTBE in gasoline has necessitated the use of ethanol here in California because the U.S. Environmental Protection Agency has not

granted California a waiver from the minimum oxygen requirement. Ethanol is the only type of oxygenate that can be used in

California; the Nation’s largest consumer of ethanol. In fact in 2004

California refiners blended about 900 million gallons of ethanol.

The cost of ethanol relative to other gasoline blendstocks has not

been a direct cause, however, of the higher gasoline prices seen in

the State. There have been—blending economics of higher ethanol

concentrations are much more favorable than they were last year

as seen in the figure. There have been no shortages of ethanol or

significant difficulties of blending the new gasoline.

The oxygenate requirement has, however, reduced refinery flexibility to produce and blend gasoline that meets California’s Air

Quality rules. This is particularly true during the low-volatility

summer gasoline season that we’re now in because the use of ethanol requires backing out some of the cheaper or less expensive gasoline components such as butanes and pentanes while replacing

those with higher cost blendstocks such as alkylate that you can

see on the figure behind you.

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Turning our attention a little bit, price gouging and anti-trust

issues, that certainly commands a lot of attention, not only in California, but throughout the country is that investigating price

gouging or anti-trust issues in California is really the responsibility

of the Federal Trade Commission and the California Attorney General’s Office.

Two types of investigations have been initiated by the Attorney

General’s Office. Those looking at gasoline prices and at oil company mergers, in the case of gasoline pricing, the Attorney General’s Office concluded that a lack of competition in gasoline markets in the State has played a significant role in past price spikes.

However, the ability of Government to quickly remedy high fuel

prices is somewhat limited.

Several measures are proposed about Attorney General’s Office

have been studied by the California Energy Commission, including

the creation of a State fuel reserve. And also a pipeline connecting

refineries in the U.S. Gulf Coast to California, that would increase

and provide us opportunities for getting more supplies, but we’ve

also undertaken very comprehensive studies on expanding the use

of alternative fuels and conservation.

What we found in those studies was one that the State fuel reserve was not found to be a viable measure because it could potentially displace private inventories of fuel, offer profitmaking opportunities that might reduce its effectiveness, and could actually reduce the total supply of gasoline in our State.

A pipeline to the Gulf Coast also does not look feasible at this

time because we do not believe there is sufficient product to move

in that pipeline to California to make it economically feasible.

Several oil company mergers have also been investigated by the

Attorney General’s Office since 1999. And in several cases these investigations have led to refinery asset divestments or other concessions aimed at preserving competition by reducing the concentration of important segments of California’s refining and marketing

industry in too few hands.

Now, I’d like to talk a little bit about the impact of the well-publicized Chevron/Texaco/Unocal merger. We see no impacts on refined product supplies for California from ChevronTexaco’s acquisition of Unocal, since Unocal does not possess any refineries or service stations in California, but there could be a major change to an

important gasoline blending constraint, which is the patenting by

Unocal of the phase 3 gasoline formulations that were negotiated

by both the oil industry and the California Air Resources Board.

If ChevronTexaco’s acquisition includes all five sets of these patents and ChevronTexaco decides to discontinue the enforcement of

said patents, this would remove a significant cost to producing gasoline in this State. Non-major refiners would benefit because their

license agreements could be eliminated, thus reducing a cost component for their own overall operations. Major refiners who are currently blending around some of the patents could eliminate this

practice, also reducing operating expenses.

The final benefit would be the removal of a constraint for importers, some of whom are unwilling to send cargos to California for

fear of infringing on Unocal’s patent rights. All of those benefits

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would probably amount to between 1 and 3 cents per gallon for the

cost of making California-compliant gasoline.

Now, talking a little bit about refinery expansions. Big West is

considering an expansion project at their Bakersfield refinery that

could increase gasoline and diesel production by another 10,000 to

12,000 barrels per day over the next 2 to 4 years. Likewise, here

in the South Basin, Paramount Petroleum should begin production

of California-compliant gasoline for the first time within the next

several days. And this will certainly add to the much-needed capacity to satisfy our growing appetite for not only gasoline but diesel.

No new refineries are planned for California; however, one

150,000-barrel-per-day refinery is planned for Arizona, which if

they obtain all their permits and secure some tenure supply contracts for crude oil, could be up and operating by 2010. Some of the

responses to high and rising fuel prices. The long-term demand for

gasoline in California is expected to continue growing. Refinery capacity is only expected in California to average less than a half a

percent per year growth creating a growing gap between supply

and demand in our State. I think this figure here kind of shows

the dilemma that we are faced here in California with slight expansion of refinery capacity and growing demand. And as you can see

from that figure, the gap is widening, not narrowing over time.

Two other general approaches can be applied to address this

growing shortfall between what we consume and what we produce.

That is, one, the increase in importation of products. And I’m not

just talking about gasoline, but also diesel and jet fuel. And, second, strategies to reduce demand.

The Energy Commission recently sponsored a study that has

identified current and future constraints with the system of

wharves, storage tanks, and pipelines that could impair our ability

of importers to deliver cargoes of petroleum products to this State,

especially during a disruption. The potential problems are most serious here in our backyard in southern California, and particularly

at the Port of Los Angeles and Long Beach where most of the growing quantities of imported crude oil and finished products would

have to be received.

Long lead-times and the complexity of acquiring permits to construct facilities were identified in our study as leading to a shortage of storage capacity and higher storage tank lease rates, which

you as a consumer, those higher costs ultimately get passed on to

the consumer as reflected in higher product prices.

Finally, on reducing demand for petroleum, the Energy Commission and the California Air Resources Board in a joint study found

that improving fuel efficiency using existing and emerging technologies would most dramatically reduce petroleum demand. And

specifically we recommend a doubling of fuel efficiency for cars,

pick-ups, sport utility vehicles to 40 miles per gallon.

The proposed energy bill Legislation that is emerging in Washington, DC, represents a significant opportunity to alter these vehicles fuel efficiency standards for the first time in many years.

The Energy Commission encourages the U.S. Senate to make revisions to their version of the energy bill that would advance this

strategy, particularly increases in Corporate Average Fuel Economy standards.

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The Energy Commission and ARB have also concluded that California must also increase the use of alternative fuels, including

natural gas, ethanol, liquid petroleum gas, gas-to-liquid, diesel, biodiesel, electricity, and hydrogen. We recommend that the State increase the use of alternative fuels to 20 percent of on-road fuel use

by 2020, and 30 percent by 2030.

The Energy Commission has also recommended several nearterm options certainly that is assisted by people moving to hybrid

vehicles. And I’m very pleased to see Congressman Issa driving one

of those vehicles, but there’s also other things that consumers can

do, such as greater use of public mass transit, carpooling, telecommuting, minimizing idling, and maintaining a vehicle property.

And certainly we have a host of other near-term means for reducing the impact of the high prices we have on the Energy Commission’s Web site.

And with that I’d like to conclude my testimony.

[The prepared statement of Mr. Perez follows:]

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Mr. ISSA. Thank you very much. Very helpful.

Rayola Dougher is manager of energy market issues, American

Petroleum Institute. She has more than 20 years’ experience in economic analysis of energy-related topics. Since 1985 her work has focused on public policy issues impacting the U.S. petroleum industry. And we look forward to your testimony. Thank you.

STATEMENT OF RAYOLA DOUGHER

Ms. DOUGHER. Thank you, Mr. Chairman, Congresswoman Watson. API welcomes this opportunity to discuss why gasoline prices

are so high and what can be done about it. Obviously your constituents, like Americans everywhere, are concerned about the continuing rise in prices and the impacts on their wallets and on the U.S.

economy.

I believe America’s oil and natural gas industry shares common

values and concerns with you. We share your commitment to finding workable solutions to our Nation’s energy problems. We are

committed to providing consumers with reliable energy supplies.

We work hard to support economic growth. We believe our domestic

oil and natural gas resources can be developed in a responsible

way.

Technological advances enable us to produce energy while protecting the land and the environment. And we want to work with

you in building support in Congress for urgently needed, comprehensive energy legislation.

Now, I’ll leave the rest of my testimony, which you have, and I

just thought I’d run through a few slides. Some of them might be

redundant, so I’ll be a little—I’ll gloss over those points that we’ve

already covered; OK? So here it goes.

Why we’re facing higher cost, and I’m going to discuss a little bit

about how we got here, supply and demand, and what we can do

about it.

As we heard earlier it’s really the forces of supply and demand

on the international marketplace for crude oil. Those prices are set

by the world’s demand and the world’s supply. And right now we

have very limited spare capacity, and under these circumstances

small changes have a big impact on prices. And what we’ve seen

over the past year, especially if you look at the highest bar, 2004,

you’ll see a big bump-up in the world’s demand. And the current

high prices we’re experiencing are in large measure due to this

surge in demand.

And if you look at 2005 and 2006, the forecasts by EIA are for

an additional 2 million barrels a day. This is twice as much as

what we had been growing in the 1990’s and early 2000’s. And

under these circumstances there’s a lot of factors then that will affect the price in addition to the fact that capacity is very limited

on the world’s market. We used to have 6 million barrels a day

extra capacity a few years ago, and now we’re down to about 1.

And this is in a world that’s consuming 841⁄2.

So under these circumstances any one or more of these factors—

and we saw all of these last year—will have an impact on prices

and continue to affect the marketplace as we move forward.

Well, if I can move the next slide forward, we’ll be OK.

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OK. This you’ve already seen, but I’ve put an extra line here

with crude oil prices. And it just shows fundamentally how the gasoline prices are mirroring what’s happening in the crude oil marketplace. And again, more volatility and higher prices in California

are for some of the reasons already discussed.

This is just a simple chart. It was a moment in time, I think it

was April 25th, and those prices do change somewhat, but I wanted

to show you between April of last year and April of this year the

price of crude oil is really what’s moving the price at the pump

more than anything else.

And I wanted to turn a little bit to earnings because there’s a

lot of frustration and misunderstanding about earnings in the oil

industry.

It’s a big industry, maybe the biggest in the world. This industry

earns billions of dollars, but they spend hundreds of billions, even

trillions bringing their product to market. So when you put it in

the context of how much money is the industry making on every

dollar of sales, last year they made 7 cents on every dollar of sales.

The rest of U.S. industry—and this is just from a survey that Business Week does—earned 7.2 cents. Over the past 5 years the industry earned 5.6 cents on the dollar and the rest of U.S. industry 5.4.

This quarter, we only have preliminary figures for this quarter,

but I think the oil and gas segment of what I’m showing above is

pretty good. It’s about 8.4 percent right now, 8.4 cents on every dollar of sales. And these others are just from a flash survey from

Business Week and it’s usually the early reporters with the higher

results will report first, so that the U.S. oil industry average is

high and ought to come down when Business Week publishes their

corporate scoreboard in a couple of weeks. And we keep this data

on our Internet and on our Web site.

Turning to the refining sector. The rate of return in the refining

and marketing industry has been disappointing for a long time

now. The bars show what the refining and marketing have earned

in relationship to that backdrop, which is the S&P industrials. And

they’ve been earning about, oh, half or less than half of what the

S&P has earned. And beginning in 1990 with the Clean Air Act

Amendment required massive investments in environmental expenditures to bring cleaner burning gasolines to market. Those investments were made, but smaller, less efficient refineries had a

tough time keeping up, and a lot of them closed down.

You do hear a lot about no new refinery in the United States

since 1976; that’s true. Back in 1980 we had over 300 refineries.

Today we have 148 operating refineries. But over this timeframe

we have continued to produce even greater amounts of gasoline. We

produce about 90 percent of what we use in the United States, and

this is—we’ve been able to do this because of efficiency improvements and also because we’re expanding the capacity and the utilization of that capacity. We’re at 93 to 95 percent right now.

And there’s a lot of misunderstanding, too, about the mergers

that took place in the late 1990’s. Part of the reason for these

mergers really was to realize efficiencies and economies of scale.

And this is just a simple figure that shows—that’s calculated by

subtracting taxes and refiner’s composite price for crude oil from

the retail price of gasoline. And it shows back in 1980 a cost of 95

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cents to refine and market and distribute gasoline. By 1990 on average it came down to 61 cents. By 2000 it was at 52 cents. And

it has varied quite a bit since then, in the 40’s, up to over 50, 60

right now, but on average for a 5-year period it’s been at 52 cents.

These are real savings.

So in the near term the market outlook is for continued strong

world oil demand. OPEC remains near capacity. There’s spare capacity in Saudi Arabia and limited ability for non-OPEC to bring

new product to market quickly. And geopolitical concerns remain,

a lot of political instability in oil-rich nations and that continues to

affect us. However, the market does work. It does respond to price.

It does stimulate demand and it does dampen supply.

What do we need? We need a lot. We need additional exploration

and development of production of fossil fuels. We need to increase

our energy efficiency. We need greater penetration of hybrid vehicles, for example. We need a lot of R&D and alternative fuels, including fuels like tar sands, and shale and renewables, hydrogen.

And I don’t need to tell you, the American Petroleum Institute

is very gratified by passage of H.R. 6, and we do look forward to

working with you to see comprehensive national energy legislation

passed this year.

Thank you very much.

[The prepared statement of Ms. Dougher follows:]

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Mr. ISSA. Thank you. And now the part you’ve all been waiting

for. And I’ll start the questioning, but because the two of us will

be the only panelists or only questioners of the panelists today, I

might ask my ranking member if we alternate questions rather

than worry about time. That will give you a variety of questions.

Mr. Cook, I’d like to start with you. You testified that there’s

been about a 12-cent per gallon increase between the cost of crude

oil and retail gasoline prices over the past year: 7 cents due to increased refinery costs and profits, 5 cents due to increased distribution costs and/or marketing costs and profits.

Are you saying that you can’t explain this by cost alone and that

at least a portion of this increase is greater than can be justified

by cost and commensurate percentage profits?

And I’ll make it simple for an old businessman, it looks like

gouging of some portion of that, doesn’t it?

Mr. COOK. With all due respect, I think what I was trying to illustrate—and I think it was figure 6 that did a little better job—

as the refining industry and the distribution, the retail segment,

operates at higher and higher levels on less and less spare capacity, that tends to raise the marginal costs in producing those last

barrels of gasoline, and that turns out to—in fact, is reflected in

higher retail prices.

So, no, I would not refer to it as gouging. It’s a symptom of an

industry that is seeing supplies tighten further and further with a

need to have clean fuels, but it does come with a price tag. It does

tend to raise marginal costs.

Mr. ISSA. I appreciate that, and on the same question with Ms.

Dougher. If I understand, you were showing us percentages, and if

I understood correctly, percentage return—and I’m very appreciative that percent of return has been low for this industry—but

percent of return over the last year has been significantly higher,

about 33 percent higher than they were running. In other words,

you go from 5 percent to 8 percent. That’s a 30 to 50 percent increase in your return.

Ms. DOUGHER. I’d like to clarify that. I think you were just talking about the profits themselves. And what my chart was showing

was profits divided by the revenue. So how much money are you

making on every dollar that you get? So that was showing—for example, the most recent quarter was 81⁄2 cents. Last year was 7

cents on the dollar. Now that’s a big improvement over a nickel or

nickel and a half. So that’s a big bump up. I think what happens

often is people just look at the profits, not as what’s being spent

to bring the product to market. You’re spending ever greater

amounts, and it takes a long lead time and huge investments that

this industry has to make to continue to produce more and to bring

more product to market.

Mr. ISSA. I wanted to respect that back-and-forth questioning,

but in my next round I’d like us to all think in terms of where I

came from, the electronics industry. If my costs were rising, everybody after that cost comes in generally found themselves squeezed

to try to get to the retail consumer. If you were bringing in something to market that Circuit City was going to sell and they’ve been

paying $2 but your costs went up from $1 to $1.50, you generally

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try to figure out how you could still deliver it at $2, which meant

you compressed your profit margins.

What I heard here today is that at a time which the raw product

price is rising, profit margins are expanding. And no matter how

you look at that, that’s the opposite of what one would expect. If

the beef in a restaurant is going up in price, the restaurant is generally trying to find ways to hold their top price as close as possible

to what it was, which means it’s compressing somewhere. But we’re

having just the opposite. We’re having an expansion of those margins after the cost of the product.

Ms. DOUGHER. Remember the one slide did show how the refining and marketing and distribution costs in America have been

coming down for quite a long time now as efficiency improvements

and economies of scale were realized. But on the other end of it the

cost that we can’t control that’s set on the world marketplace is the

cost of the crude oil. And that is determined upon hundreds upon—

well, millions of decisions each and every single day on that marketplace. So if you’re a producer right now in America and the

price of crude has gone from $35 a barrel to $50 or $55, than you’re

realizing good rate to return and searching for new places to explore and develop and bring ever more product to market. You

have every incentive to do that, especially at these prices. It’s happened quickly and these projects take long lead times to develop.

Mr. ISSA. Sure. And I’m going to respect our back-and-fourth

agreement. So, Ms. Watson?

Ms. WATSON. I want to thank you very much, Mr. Chairman.

When I look at the list of witnesses and I refer back to the question

for the hearing, what’s causing record prices at the pump, I hear

from our U.S. Department of Energy and I hear from the American

Petroleum Institute, and maybe only a couple of the witnesses that

really would be more leaning toward the consumer side.

So with that said, I had to—I requested a report, Mr. Chairman,

‘‘The Impact of Increased Oil Prices in the Los Angeles Area,’’ and

I seek permission to include this in the record.

Mr. ISSA. Without objection.

[The information referred to follows:]

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Ms. WATSON. All right. So let me address my question now to the

GAO, probably the only one on this panel that might see the problem differently from the consumer side.

Your May 2004 report found the link between the recent wave

of mergers and high gas prices. There is, I think, a relationship

there, regardless of what’s been said by this panel. But your price

analysis ended in the year 2000. Was there another one since then?

Mr. WELLS. There has not been.

Ms. WATSON. OK. So long before the approval at least of the last

two large mergers, which was ChevronTexaco and ConocoPhillips,

and would it be safe to say that your report understates the price

impact of mergers on gasoline?

Mr. WELLS. Congresswoman, we took extensive effort in designing a methodology that had never been used before. We tried to

consult with experts and got peer review expertise to look at the

type of design model that we were putting together. And I would

say that we erred on the side of conservative estimates wherever

possible. So I would not say underestimated.

Ms. WATSON. This is 2005. Your report was done in 2000.

Mr. WELLS. That’s correct. It looked at mergers that occurred

over a 10-year period from 1990 to 2000.

Ms. WATSON. OK. But look at the gasoline prices. And from what

I’ve seen on your charts the prices have gone up within the last 5

years. And we’ve had mergers since then. So I would say that your

data end results are stale. Would you agree?

Mr. WELLS. I’m sorry, our data was what?

Ms. WATSON. Stale.

Mr. WELLS. Stale?

Ms. WATSON. Yes.

Mr. WELLS. I would have to agree.

Ms. WATSON. OK.

Mr. ISSA. Time to ask for your new study.

Ms. WATSON. That’s where I’m going. Because I did ask my staff

to go out and do a little research. Because we get the complaints.

You’re getting the complaints. And what I’ve heard today does not

answer the question for me.

Now, capacity has been mentioned, but it seems to me, and this

one goes to Ms. Dougher, if you are merging, then you ought to

plan for a larger capacity. Why aren’t the—why aren’t there new

refineries being built? Why aren’t you anticipating the capacity?

California is a State where one person on the average has six automobiles. And people love their SUVs and all these—I mean, you

can do the math, and I don’t think we’re going to get Californians

out of their automobiles because we’re not building the metrorail

systems, and I’ve been trying in my district since the early 1980’s

to connect up the basin. And we’ve tried everything. And we can’t

get people out of their cars.

We have a Governor that has six—what do you call those things,

those armored-looking things?

Mr. ISSA. He’s called for hybrid Humvees.

Ms. WATSON. He’s got six of these he owns himself.

Mr. ISSA. Actually, he has a dozen.

Ms. WATSON. It’s more than I knew.

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So we’re not going to realistically get them out of those cars. You

can only drive one car at a time. So, Ms. Dougher, what is this institute recommending that we do for the future? Apparently, we’re

not having enough influence on OPEC and—because they keep

raising their prices. And, I mean, the fossil fuel is there and we

know it’s there. We just came back from Qatar a couple weeks ago,

and they told us we have enough natural gas and enough crude to

service, No. 1, with natural gas, any home for the next hundred

years, and to service your need for your automobiles ad infinitum.

So it’s there.

Now, why is it that we are not building for that capacity?

Ms. DOUGHER. We have been building for that. Capacity has increased and the utilization of that capacity has increased, but it’s

as an industry as I showed you that it’s realizing very poor rates

of return for a long time now. It’s producing 18 different formulations of gasoline, two different seasons, three different octane levels. It gets complicated fast.

Ms. WATSON. I know.

Ms. DOUGHER. So it’s economic and it’s also political. There’s a

lot of ‘‘not in my backyard’’ that goes on. And it’s been very, very

difficult to expand existing capacity. Never mind building a refinery. The one in Arizona, I think the permitting in there, has been

going on for 10 years now, and as we just heard it might get done

in another 5.

So it has been difficult economically. It’s been difficult politically.

And the remainder of what we need we’ve been importing because

it’s just been so difficult to get anything done here.

Ms. WATSON. I understand—and then I’m going to throw it back

to Mr. Chairman—that the United States is the third largest producer of oil in the world after Saudi Arabia No. 1, Russian No. 2.

We’re No. 3.

We’re producing that oil and you’re merging. The oil industry is

merging and we’re paying the price, these high prices. Something

is missing. Maybe we can get to it; maybe we can’t. Something is

missing in this equation. OK, Mr. Chairman.

Mr. ISSA. And perhaps I can get to it. Following up on my earlier

line of questioning, and this, by the way, is very consistent with

a lot of the questions that we got from our e-mails. ConocoPhillips

has increased profits this first quarter of 2004 versus the first

quarter of 2005, by 80 percent. Shell 42 percent. British Petroleum

36 percent. ExxonMobil 44 percent, and so on.

I hate to say this because it was my generation, but a generation

ago we had a sudden rise in profits of this sort and Congress

passed the Windfall Profits Tax. I looked through the record of how

that worked and there’s considerable debate, but it appears as

though the tax did not go toward new production, new capacity,

new—a new direction that prevented us from coming back right

where we are again, although the price of the oil went down, and

it was phased out and eventually eliminated.

If these kinds of increases—and to be honest, I have a hard time

believing that domestically they’re not even better than this. Because if I look at $15, $16 a barrel of actual cost to remove something from the ground and you went from getting—and it could be

lower in some cases—Bakersfield happens to be a high-cost area.

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So we in California know that we have oil wells that require steam.

They’re a little more expensive to get out, but even if you’re spending $17 or $18 a barrel to get it out, when the price gets to $20,

you’re just breaking even. When it gets to $40, you’re printing

money. And we’re well above printing money. We are now minting

gold coins.

This is somewhat of a panel question, but I think it’s essential

that we ask the question. How are we going to ensure that those

dollars, if allowed to be retained by the oil-producing and refining

facilities, or for that matter even by the final distributor, that if

those funds are allowed to be retained that they’re going to be invested and not simply windfalled to the stockholders because obviously the United States, at least in this Member’s opinions, has a

vested interest in seeing that if it costs $9 to $18 a barrel to take

even old oil out of the ground, that would not pay $50 a barrel, and

$2.79 a gallon for gasoline. That does not compute.

And, Ms. Dougher, I’ll start with you because I want to be very

supportive of your position, but all those efficiencies you put on the

board still don’t change the fact that an oil well sitting in Bakersfield that’s been producing for a very long time suddenly has a run

up and, if I remember right, Shell announced that they wanted to

close the refinery out there. You’re talking about an increased refinery, and I personally wrote a letter and weighed in that a profitable refinery was going to be closed in an oil-producing area of the

State, and anecdotally for Congresswoman Watson we were also

the third largest oil-producing State in the Union. Unfortunately

50 percent of what we consume, we import it.

But I’d like you to respond to that in light of these clear profits.

What should we be doing to ensure that those profits are invested

so that this long, short, medium term problem comes to an end?

Ms. DOUGHER. Well, if they’re not invested, then these companies

go out of business. They have to invest for the future or they won’t

have a product to sell. And they’re always looking for opportunities

to do just that, and this is a great opportunity for us with these

earnings over the past year or more. And what we need now is access to some of the more promising sites so that we can develop

them here in the United States, so to that we can keep the jobs

and keep the money here instead of flowing abroad.

But we’re in a good point in terms of an opportunity and in

terms of policy to match the two together.

Mr. ISSA. OK. And I appreciate your input on that and that new

site certainly is a point for, again, Congressman Watson, and I, and

perhaps certainly Pat, we’re a little tainted here in California by

the history of our deregulation of electricity.

We do know that is not always in a company’s best interest to

produce more of something. It may be in their best interest to

make more money on what they produce. And to a certain extent

that’s been the history, certainly, of electricity post deregulation in

California. It is also a clear sign of what we’re seeing over the last

20, 25 years. We are not producing more in the United States

and—nearly as we should. We are—were—not a gasoline importing

nation a generation ago. So we have slipped from being gasoline

self-reliant. We may not be oil self-reliant, but we were gasoline

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self-reliant until today. I think, what is it, Norway that we have

to get our gasoline from if we run short in California.

Ms. DOUGHER. We continue to produce about 90 percent of what

we use, but each year we use more and we are importing about 10

percent and we are getting to a point that these refineries really

are strained to keep up with the extra demand. And we need to

simplify some of the refinery fuel specifications which is addressed

in H.R. 6, as you know, and that could help add some flexibility

to the system, repeal the oxygenate mandate and have a national

phase-out of MTBE. All these things would help the refining segment of the industry to move forward in a better fashion.

Mr. ISSA. Excellent. Mr. Perez, you don’t have to weigh in, but

it’s your opportunity.

Mr. PEREZ. Certainly the investment in this State would be

something we would desire to see, but through all these consolidations, acquisitions, and mergers over the last 10 to 20 years you’re

dealing with essentially global giants where decisions are made on

a worldwide basis. And when it comes down to investing that

money from these profits, they look at the issue from a global perspective. If it’s less expensive to build a refinery, process crude oil,

and make a variety of products abroad, whether it be in India or

another Asian country, they’re going to pursue that option, and

that’s why at the Energy Commission, one of the things that we’re

most concerned about right now is our import infrastructure, our

ability to import, not only more crude oil, but petroleum products

as well as the blendstocks to make finished gasoline in this State,

and that is the reason we just issued a study, I guess it was about

10 days ago.

We’ll be holding hearings next Monday in Sacramento to highlight what some of the challenges are because as we see it, we don’t

see any significant investments being made in this State beyond

what we’ve seen Paramount is going to do, and certainly Big West

in Bakersfield is now pursuing plans to expand their capability, but

when you look at overall demand growth in this State, it’s only a

small portion of that demand growth.

Mr. ISSA. Mr. Wells.

Mr. WELLS. Yes, Mr. Chairman. Clearly the Government Accountability Office has legal access to Federal records and data.

When we deal with private sector industry, we rely on a lot of cooperation of the industry to discuss things with us. In the course

of doing our work related to gasoline and mergers, we did have the

opportunity to talk to some of the industry. Not all the industry

would agree to talk with us. But I can tell you sitting in those

meetings there’s a lot of issues with proprietary information. When

we sit in the meetings and any discussion of profit or prices comes

up, we have legal people in the room that basically shut the conversation down. But we hear a lot of explanation from the industry

as they explain what’s going on and we listen, but for me, a country boy, some of the things that I understood would be some issues

relating to a discussion that when times are good, you bank the

money and you use that money to help in lean times. I sort of understood that conversation.

Anecdotally we’re looking at data to look at whether or not the

industry is reinvesting right now. And we’re not necessarily seeing

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that, reinvestment dollars, but we are seeing a lot of dollars being

returned to the shareholders. And that’s not to say it’s anything

bad. The industry still has to stay in business and earn a living

and produce the product.

Mr. ISSA. So what you’re saying is the stockholder gets the

money so we can go buy Intel stock. I just want to make sure

that’s—you know, I would imagine if you’re returning dollars, it’s

not going to be likely to be going into new refineries with one of

the competitors.

Mr. WELLS. They’re buying back their stocks. There’s a lot of rebuying of some shares.

Mr. ISSA. Mr. Cook and then back to you.

Mr. COOK. I’d like to point out that the root of that problem to

me appears to be a lack of spare capacity both in crude production

and in refining. What that means is that demand growth has accelerated in the last year or two, surprising the industry. Capacity expansions haven’t kept up with that. So why haven’t they? No. 1,

they didn’t anticipate the spur in demand growth. And, No. 2, as

the API person tried to point out, returns on investment until the

last year or so have been half of the levels achieved in other industries.

So this is a situation where even today we think these forces to

high prices are permanent until that spare capacity problem is

solved, but there’s no consensus. You talk to a lot of experts,

they’re going to tell you it’s temporary. What does that mean to the

industry investor? This is an industry that’s been through cycles of

boom and bust time after time after time. So if there are a lot of

so-called experts telling these guys, ‘‘OK, times are good today, but

they won’t be 2 years from now,’’ what does that do to the investment signal? The root of the problem is to get more investment out

there. It seems to me that if, in fact, this continues over the next

few years and the market works, there won’t be any problem about

that investment flowing back into the industry.

Normal market forces are going to plow that back in. That’s what

we need now, a period of sustained, reasonable returns on investment. Certainly 8 cents on the dollar is not unreasonable and

that’s what we’re going to have to overcome—the various problems

the industry faces in permitting and environmental costs to have

that capacity.

Mr. ISSA. Ms. Watson.

Ms. WATSON. I’ve heard it said that the industry is saying that

the reason for rising costs is the demand in China and in India.

All of us have known and observed the growth in China. And you

can look at the population in India and, you know, I don’t understand how the industry has not projected for the future. I mean,

I’m baffled. I mean, you guys work with numbers all the time. And

OPEC does not set the price. They give you the price for their oil,

but they don’t set the prices at the pump. And we have plenty of

crude oil. Wait till we go into Africa. They’ve got enough natural

resources to serve this planet on into the future beyond our lifetimes.

Now, what I’m seeing and I’m listening very intently, that it’s

the energy traders in New York who are using their rising demand

as an excuse to drive the prices of crude up to return more to their

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investors. And we have been the victim of that here in California.

We’ve seen what the middle guy has done to us. They drive the

prices up and we don’t get our fair share here in California, so

we’re triply victimized.

Is there anyone at this table that’s brave enough to really kind

of look deep and give us an answer to these rising costs and the

fact that they’re going to continue to stay high? I feel they’re going

to continue to stay high. And somebody said we probably will be

around $3.15 a gallon in a couple of weeks. I feel that it is projecting for increased profits rather than the demand. It seems to me

that if more people are using crude, that means more money. And,

you know, with China and India now having more demands, I don’t

know why our price is going up when they are putting more money

into the oil companies who then can give large—and, we’re going

to always have that need for oil. We’re going to have that need for

oil.

And so will anyone want to respond to where you think the real

problems are? And don’t give me the answer that it’s the blends,

it’s the boutique fuels. I hope that we have greater usage, greater

development because we certainly need an alternative, but something is missing in all of your testimony.

Mr. COOK. Again, the bulk of the increase since 2000 is in crude oil. Prices on one of the charts that we showed you are $20 in 1999.

Now they’re $50. That’s $30 a barrel increase because of the lack

of spare capacity in global crude markets. $30 a barrel is 75 cents

a gallon. Right there is 75 cents off of $1.50. The prices used to run

just $2.25.

There’s been some additional elevation because of the tightness

in refining capacity. I think that would ease if these profits stayed

up, but nobody believes they’re going to stay up, and that tends to

dampen the investment that’s necessary.

Ms. WATSON. What do you mean by the prices are not going to

stay—the profits are not going to stay up. Can you explain that?

Mr. COOK. I’m saying that I think crude prices and retail prices

will stay up, but this lack of spare capacity, this key driver, is

going to sustain that. But there are a lot of experts out there that

refer to geopolitical risk, speculation on the NYMEX, things that

could be temporary that may ease and bring prices back down and

take away the extra profits necessary to do the investment that’s

needed here.

Ms. WATSON. Well, if you’re saying that it’s capacity, with these

mergers why aren’t we going after new refineries or increased capacity at the refineries we do have?

Mr. COOK. I think that will happen. It’s just all too new. It’s only

been in the last year or so, and it has been a surprise. Yes, I think

the industry forecasts——

Ms. WATSON. What is a surprise?

Mr. COOK. That one chart that showed you the big jump in demand in 2004, over doubled what had been going on the previous

year, in the last 15 years——

Ms. WATSON. Why is it a surprise?

Mr. COOK. Who knows exactly when demand is going to spurt because of Asia and China? It’s going to grow, but did we see—no one

saw that it was going to double overnight.

133

Ms. WATSON. It started in the 1980’s?

Mr. COOK. Pardon.

Ms. WATSON. It started in the 1980’s.

Mr. COOK. They started growing, yes, but the increase didn’t

double and triple until 2004.

Ms. WATSON. They put those bicycles aside and now they’re all

driving automobiles.

Mr. COOK. I think——

Ms. WATSON. 1.2 billion people in China and 1.3 billion in India.

OK.

Mr. ISSA. Thank you. I want to be consistent with the promise

to address constituent questions. I’ve been ticking off a lot of the

questions we got on the e-mail as they were answered here without

even being asked, but one of them that I don’t think has been fairly

addressed comes from Martin Reyes in Los Angeles.

It says, ‘‘I have noticed that gasoline prices vary from city to city

or even block to block. It sometimes varies as much as 10 to 20

cents a gallon at the same name brand stations. Why?’’

Ms. DOUGHER. Well, there’s lots of different reasons and it depends on where you are, and even myself traveling to work in the

morning I’ll see different prices on my way into town. Part of it’s

competition. Part of it’s supply. Who’s your supplier? Part of it’s the

contract that you have with that supplier. So it can vary for a

whole host of reasons. That’s the best I can give you on that.

And within a State, depending on which State you’re in, you can

have different taxes. For example, Florida has 60 different

counties——

Mr. ISSA. No, no. We’re only talking a Los Angeles person who drives and at the off ramp it’s $2.97, then you go a little further

in and it’s a dime cheaper. And you go around the corner—and it’s

all the same brand in some cases. I laughed at this one because

I understand somewhat how it happens, but it’s got to be the hardest thing for the consumer to believe that if there’s really competition, why is there—on four corners they’re always the same price,

but they’re not the same price two blocks away.

Ms. DOUGHER. It’s what the consumer’s willing to pay, and also

the competition, the cost of doing business in the area. It’s all those

things. If you have a better location, you can probably mark down

a little bit or maybe even mark up more. It depends on who your

competition is.

Mr. ISSA. Are there any other answers for Mr. Reyes because I’m

sure if he reads this one in the newspaper, he’s going to say, ‘‘And

what does that mean?’’ With all due respect, I don’t disagree with

your point, but I hope there’s another point.

Mr. WELLS. Mr. Chairman, we’re preparing a gasoline primer

study that we’re looking at trying to help explain to that consumer

the types of things that cause gasoline to be what it is. We too have

been asking the industry this question and the most frequently

mentioned answer we get is a corporate industry decision that allows them to do things like zone pricing. We’re still attempting to

understand zone pricing, but it involves the industry making conscious decisions about selling at the wholesale level to retailers at

different prices that will allow certain individual stations to charge

a lower price. And that is a market competition decision that the

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industry makes to remain competitive in the marketplace and what

the market will bear, but there is practices known as zone pricing.

Mr. ISSA. OK. So, I guess, the short answer for Mr. Reyes is zone

pricing, and since this is the wrong panel I won’t ask why is it that

I’m always paying $500 when the person next to me on the United

flight is paying $199? That also is a question I’d like to have answered.

Mr. Perez, real quickly, there were two things that you—quite a

few things you touched on that sparked my interest. One is you

talked about ethanol as a fuel. You may be aware that 53 members

out of 53 members of the California congressional delegation signed

on repeatedly to an ethanol waiver so that we wouldn’t have to put

that high cost oxygen into our fuel in hopes that it will lower our

cost of gasoline, which we’ve been assured that it would have an

impact, and you can respond to that.

So in that case why would we use ethanol as a fuel if it’s a more

expensive fuel?

Mr. PEREZ. Right now it’s not more expensive, but——

Mr. ISSA. Without subsidies. Yeah, let’s forget the fact that’s putting a lot of money into sugar.

Mr. PEREZ. One of the things that we feel consumers would benefit out here in California is if we had a waiver. Certainly right now

it’s very attractive to blend as much ethanol as possible. In fact,

the way the air quality requirements work is basically we’ve got to

use oxygenated gasoline with ethanol in about 80 percent of our

market, but right now we’re using it in roughly 97 percent of the

market because ethanol prices are significantly depressed right

now. And one of the reasons for that is there is tremendous production that has come on line here in the past year.

There’s also another major market in Atlanta that decided not to

go down that road right now, rather litigate it. So they’re not using

ethanol. That frees up about 250 million gallons of ethanol. You got

17 major ethanol production facilities under construction right now

that will be adding a lot more capacity.

So there’s a great deal of ethanol out there right now. And as a

result California refiners are blending a great deal of it. The concern we have is that is not likely to continue forever, that huge surplus that we have right now. Rather, we would like to have the

flexibility to let the refiners decide what’s the best blend of components to make gasoline. And if you did that—let’s say ethanol went

up significantly higher than where it is today, then they could decide to use other blending components that might be cheaper to

make gasoline. Furthermore, if we have that flexibility, essentially,

rather than having a Federal Government mandate, refiners would

be in a better position to bargain for those 6 to 9-month ethanol

contracts down the road. So it puts them in a stronger driver’s seat

to negotiate future contracts which we believe would contribute to

lower prices and not higher prices for the long-term.

Mr. ISSA. OK. And then just a followup on Unocal, and I didn’t

come here to pick on any one company. As I understand it you’re

talking about Unocal’s patents?

Mr. PEREZ. Yes.

Mr. ISSA. As I understand the history of the Unocal patents were

that the oil companies came together, they talked about the next

135

generation of gasoline, and then Unocal ran back and patented, basically, what the discussions told them we were going toward. Is

that correct?

Mr. PEREZ. Pretty much the way I understand—I wasn’t part of

those discussions, but they were able to reach agreement on these

unique patents for California base gasoline that would be blended

with ethanol.

Mr. ISSA. And those patents, if I heard you right, are 3 to 6 cents

of cost.

Mr. PEREZ. We believe 1 to 3 cents per gallon.

Mr. ISSA. OK. And, finally, why would this acquisition cause

somebody not to keep collecting royalties from their competitors?

Mr. PEREZ. That’s a good question. We hope as part of these investigations that question will be raised and discussed at the Federal level.

Mr. ISSA. OK. That’s—obviously a good Federal question for us

to take home because we’d all love to see opportunistic patents to

be kind, not continue to drive up the cost.

Anyone else want to answer on that?

Mr. DOUGHER. No. Mr. Perez did a good job.

Mr. ISSA. Thank you. Ms. Watson.

Ms. WATSON. Mr. Chairman, it appears that we’re winding down,

and I think this——

Mr. ISSA. I thought we were just warming up.

Ms. WATSON. I think this question from Stephanie Lawrence of

Laguna Hills sums up my questions and it may be a recommendation to our subcommittee. And Stephanie says, ‘‘What is and what

should be the Government’s role in gasoline pricing? Should it be

regulated?’’ You know, we do not regulate. And should it be regulated. And that’s something I think this committee has to grapple

with. ‘‘Information only?’’ She says. ‘‘Is that our role?’’ Or pressure

on oil producing countries and companies?

And these are the issues that I think we, as a subcommittee,

have to grapple with. I mean, next time we do one of these hearings, I’d like a group on the consumer research side that’s not connected to our Government agencies to be at the table so we don’t

have the pressure, our various departments saying to those that

represent them that let’s not deal with this. It’s political.

I would like to have another voice from the Institute to speak,

and I’d like to have another voice from the Commission, in addition, to speak—because Americans want to know what’s behind

this. Our constituents want to know. And I’m so glad you have

these questions here because I think the public sees that there’s an

issue out there and they want answers.

So with that—and I think we have asked the probing questions

already—I feel not completely satisfied that I’ve gotten the answers, but I think this is just the beginning. And with that I want

to say thank you so much more for having the subcommittee here

in Long Beach.

Mr. ISSA. Thank you. And the committee there take note and

plan on expanding even if it means a second panel for more consumer-oriented. I think it’s important that we look toward our Government and quasi-government agencies. But then as you pointed

out very rightfully, we have to spread out the witnesses we hear.

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I might note that—Congresswoman, I know, remembers—that

when we had the founder of Green Peace just a couple of weeks

ago, Mr. Moore made an interesting observation. One of them was

that if we had built all the nuclear power plants that were planned

in 1978 today, we would be Kyoto compliant, but he also noted that

we would not be using natural gas at a rate that would allow every

vehicle in America to run on natural gas, which was sort of an interesting theory of what fuel should be used where, although he

wasn’t recommending that. If you remember, he was recommending

that we go to electricity.

Ms. WATSON. Yes. Which, apparently, comes out to be 10 cents

a gallon of gasoline equivalent if you produce the electricity the

way he proposed.

Having said that, I think the committee has opened Pandora’s

Box, and I don’t expect we’ll be closing it any time soon. We only

touched on tar sands and other domestic production. We only

touched on ways in which we could conserve gasoline. We did certainly belabor the point of my hybrid vehicle and the Governor’s

proposal for a hybrid Humvee.

And with that I want to thank our panel and our audience that

came here to see this today. And I want to assure all of you that

the record will remain open for at least 5 days. If you look through

what you’ve said or have been asked here today and you want to

revise or extend, please feel free to. We can keep the record open

for up to 30 days.

And with that I thank you and this hearing is adjourned.

[Whereupon, at 3:16 p.m., the subcommittee was adjourned.]

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