U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

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

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

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

96–506 PDF 2005

IMPACT OF HIGH NATURAL GAS PRICES ON

SMALL FARMERS AND MANUFACTURERS

HEARING

BEFORE THE

SUBCOMMITTEE ON RURAL ENTERPRISES, 

AGRICULTURE, & TECHNOLOGY

OF THE

COMMITTEE ON SMALL BUSINESS 

HOUSE OF REPRESENTATIVES

ONE HUNDRED EIGHTH CONGRESS

SECOND SESSION

WASHINGTON, DC, SEPTEMBER 22, 2004

Serial No. 108–77

Printed for the use of the Committee on Small Business

(

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

COMMITTEE ON SMALL BUSINESS 

DONALD A. MANZULLO, Illinois, Chairman 

ROSCOE BARTLETT, Maryland, Vice 

Chairman 

SUE KELLY, New York 

STEVE CHABOT, Ohio 

PATRICK J. TOOMEY, Pennsylvania 

JIM DEMINT, South Carolina 

SAM GRAVES, Missouri 

EDWARD SCHROCK, Virginia 

TODD AKIN, Missouri 

SHELLEY MOORE CAPITO, West Virginia 

BILL SHUSTER, Pennsylvania 

MARILYN MUSGRAVE, Colorado 

TRENT FRANKS, Arizona 

JIM GERLACH, Pennsylvania 

JEB BRADLEY, New Hampshire 

BOB BEAUPREZ, Colorado 

CHRIS CHOCOLA, Indiana 

STEVE KING, Iowa 

THADDEUS MCCOTTER, Michigan 

NYDIA VELA ́ ZQUEZ, New York 

JUANITA MILLENDER-MCDONALD, 

California 

TOM UDALL, New Mexico 

G. K. BUTTERFIELD, North Carolina 

ENI FALEOMAVAEGA, American Samoa 

DONNA CHRISTENSEN, Virgin Islands 

DANNY DAVIS, Illinois 

GRACE NAPOLITANO, California 

ANI ́BAL ACEVEDO-VILA ́ , Puerto Rico 

ED CASE, Hawaii 

MADELEINE BORDALLO, Guam 

DENISE MAJETTE, Georgia 

JIM MARSHALL, Georgia 

MICHAEL MICHAUD, Maine 

LINDA SA ́ NCHEZ, California 

BRAD MILLER, North Carolina 

[VACANCY]

J. MATTHEW SZYMANSKI, Chief of Staff 

PHIL ESKELAND, Policy Director/Deputy Chief of Staff 

MICHAEL DAY, Minority Staff Director

SUBCOMMITTEE ON RURAL ENTERPRISES, AGRICULTURE AND 

TECHNOLOGY 

SAM GRAVES, Missouri, Chairman 

BILL SHUSTER, Pennsylvania 

SUE KELLY, New York 

SHELLEY MOORE CAPITO, West Virginia 

MARILYN MUSGRAVE, Colorado 

PATRICK TOOMEY, Pennsylvania 

G. K. BUTTERFIELD, North Carolina 

DONNA CHRISTENSEN, Virgin Islands 

ED CASE, Hawaii 

MICHAEL MICHAUD, Maine 

BRAD MILLER, North Carolina

PIPER LARGENT, Professional Staff

(II) 

C O N T E N T S 

WITNESSES

Page 

King, Hon. Steve, U.S. House of Representatives (IA-5), Co-Founder, House 

Agriculture Energy Users Caucus ...................................................................... 5

Peterson, Hon. John, U.S. House of Representatives (PA-5), Co-Chairman, 

House Rural Caucus ............................................................................................ 7

Swaney, Mr. Hal, Missouri Farm Bureau ............................................................. 9

Rockhold, Mr. Brent, National Association of Corn Growers ............................... 11

Smoak, Mr. J. Fletcher, Chairman & CEO, Old Virginia Brick, Inc. ................. 13

Willard, Mr. Billy, President, Willard Agri-Service of Frederick, Inc. ................ 16

Huntsman, Mr. Peter, Huntsman, LLC ................................................................. 18

Prindle, Mr. Bill, Deputy Director, American Council for an Energy Efficient 

Economy ................................................................................................................ 20

APPENDIX

Opening statements: 

Graves, Hon. Sam ............................................................................................. 34

Butterfield, Hon. G.K. ...................................................................................... 36

Prepared statements: 

King, Hon. Steve, U.S. House of Representatives (IA-5), Co-Founder, 

House Agriculture Energy Users Caucus ................................................... 38

Peterson, Hon. John, U.S. House of Representatives (PA-5), Co-Chairman, 

House Rural Caucus ..................................................................................... 40

Swaney, Mr. Hal, Missouri Farm Bureau ...................................................... 45

Rockhold, Mr. Brent, National Association of Corn Growers ....................... 47

Smoak, Mr. J. Fletcher, Chairman & CEO, Old Virginia Brick, Inc. .......... 50

Willard, Mr. Billy, President, Willard Agri-Service of Frederick, Inc. ......... 53

Huntsman, Mr. Peter, Huntsman, LLC ......................................................... 58

Prindle, Mr. Bill, Deputy Director, American Council for an Energy Efficient Economy ............................................................................................... 61

For the record: 

American Chemical Council ............................................................................. 79

(III) 

(1)

HEARING ON IMPACT OF HIGH NATURAL GAS 

PRICES ON SMALL FARMERS AND MANUFACTURERS 

WEDNESDAY, SEPTEMBER 22, 2004

HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON RURAL ENTERPRISES, AGRICULTURE & 

TECHNOLOGY

COMMITTEE ON SMALL BUSINESS

Washington, D.C. 

The Subcommittee met, pursuant to call, at 10:06 a.m. in Room 

311, Cannon Building, Hon. Sam Graves, [chairman of the Subcommittee] presiding. 

Present: Representatives Graves, Butterfield, Shuster and 

Capito.

Chairman GRAVES. At this hearing we are going to explore the 

outrageously high natural gas prices and its impact and how that 

is having an effect on small businesses, specifically farmers and 

manufacturers. I do appreciate everyone being here today. 

Currently over 60 million homes, farms, businesses and industries are dependent on natural gas. With the spike in the price of 

natural gas, one would think there is a shortage out there. Nothing 

could be farther from the truth. The United States has an abundance of natural gas, and yet prices are two or three times higher 

today than historic averages. 

Beginning in the mid 1980s gas prices dropped, and for nearly 

a decade the price stabilized. It was an inexpensive energy source, 

and supply was extremely plentiful. For years natural gas was promoted, and public policy encouraged Americans to utilize the clean, 

cheap and efficient energy. The abundance of the gas supply would 

keep prices low, and that was the answer to all our energy needs. 

When additional clean air regulation was added to the books, converting to natural gas seemed to be the most efficient solution. 

Prices have been skyrocketing in the past three years, and demand is expected to increase 30 to 40 percent by the year 2025, 

nearly 20 years from now, yet recent studies show that our recoverable natural gas reserves are sufficient to meet our demand for 

years to come, and it is believed that we have more natural gas resources than we thought nearly 20 years ago. 

So what is the problem? Many say our supply chain is the problem, and I am sure many of our witnesses today are going to shed 

some light on that particular problem. In the meantime, we have 

2

to deal with these high prices and what those prices are doing. 

They are driving manufacturing and driving our manufacturing 

base right out of this country and hurting our farmers. 

Energy costs are frequently cited as one of the biggest costs to 

businesses, second only to labor. Many sectors rely significantly on 

natural gas. Natural gas accounts for more than 40 percent of commercial energy consumption. 

Our manufacturing sector has been hard hit by the recession. 

While it is slowly turning around, soaring energy prices threaten 

this recovery. High natural gas prices have increased the cost of 

producing important fertilizers that farmers rely on for their crops. 

Natural gas is a primary component in nitrogen fertilizers and 

accounts for 90 percent of the production cost. Fertilizer producers 

have had to turn to foreign imports, causing an upsurge in cost. As 

I think everyone knows, fertilizers plays an important role in the 

development of crops. As a farmer, I know how tough it is to meet 

the bottom line. When you have to take on additional costs profits 

become more difficult to realize. 

We rely on our farmers three times a day. Farmers have been 

forced to decrease production by 25 percent in some cases, causing 

adverse financial damage to the agriculture industry, which has 

been hard hit over the years, and causing additional challenges to 

our slowly recovering economy, particularly in the rural areas. 

There are answers to this problem. One, pass an energy bill that 

will allow us to explore for more natural gas, repeal the red tape 

surrounding further exploration and build a pipeline to increase 

gas supplies are all solutions that will help to stabilize the price 

volatility of natural gas. 

Liquified natural gas is another solution to supply stability. We 

already know that there are abundant supplies under our lands 

and seas, and we need to tap these natural resources. However, 

many say the short-term recovery that we have is nearly three 

years away, and the pipeline that many talk about is at least a decade before it will impact supply and prices. 

The fact is, high natural gas prices are driving jobs out of this 

country and hurting our farmers and manufacturing segment. I 

want to hear from our witnesses on how these prices affect them 

and any solutions they have to remedy the situation. In my eyes, 

we need to stabilize the price of natural gas and increase domestic 

exploration in an environmentally safe manner, and in turn help 

our economy. 

[Chairman Graves’ statement may be found in the appendix.] 

Again, I want to thank all of our witnesses for being here today, 

and I look forward to hearing their testimony. 

I want to welcome Judge Butterfield, Congressman Butterfield, 

to the Committee today. He is the new Ranking Member from 

North Carolina. I am very pleased to have you on board and look 

forward to hearing your opening statement.

Mr. BUTTERFIELD. Thank you so much, Mr. Chairman, for holding this hearing to review the impact of high natural gas prices on 

rural enterprises and manufacturers. I also want to thank you for 

your work on this Committee. 

3

I am pleased that we will have the opportunity to examine the 

far reaching impacts of high energy prices. In particular, I am concerned about the impact that energy prices, specifically natural 

gas, are having on our farming operations. 

I am deeply concerned about the consistent high cost of fuel. Experts do not see these costs coming down in the foreseeable future. 

It will cost Americans more to heat their homes and drive their 

cars, while costing businesses more to operate. Hardest hit will be 

the manufacturers that use energy intensive processes to produce. 

I am most concerned about the state of the fertilizer industry. I 

am sure we will hear a lot about that today. Mr. Chairman, fertilizer is a necessary input in all crops. Eighty percent of the cost 

of fertilizer manufacturing comes from the cost of natural gas used 

to heat massive ovens that create the finished product. These ovens 

are not easily turned off and on again and are often kept heated 

throughout the night and weekends when the plant is closed. The 

result is that fertilizer manufacturers live and die by the prices of 

natural gas. 

Natural gas is now three times as expensive today as it was two 

years ago, which means that the cost of fertilizer is also three time 

as expensive as it was two years ago. When the cost of fertilizer 

goes up, so does the cost of our food. Some farmers, as a result of 

these increasing costs, have been forced to the auction block. 

Those of us from agricultural districts make the connection between the farm and the dinner table, although I realize that not 

everyone else does. American agriculture feeds 283 million Americans and consistently generates a surplus in foreign trade. A surplus. USDA instruments will reach $62 billion during 2004. 

American agriculture also accounts for more than 60 percent of 

all food aid distributed throughout the world. Americans spend less 

than 13 percent of their total income on food, a lower percentage 

than any other nation in the world. 

The rising cost of inputs into our food supply should be a reason 

for alarm. In addition, the fertilizer industry is feeling a severe 

pinch. Production plans are built to take advantage of economies 

of scale, so when capacity falls below 90 percent the facility ceases 

to be profitable. 

Over the last three years, a number of plant closings throughout 

the south has put an increasing number of Americans out of work 

as farmers are forced to use cheaper foreign products. That, Mr. 

Chairman, is not good. 

[Ranking Member Butterfield’s statement may be found in the 

appendix.] 

I may address some more of these points with the witnesses 

when they begin to testify in just a few minutes, but I thank you, 

Mr. Chairman, and I look forward to this process.

Chairman GRAVES. Mr. Shuster?

Mr. SHUSTER. Thank you, Mr. Chairman. I want to thank you 

and commend you for holding a hearing on this today. It is extremely important that we figure out a way here in Congress how 

to have a reliable, stable supply of natural gas. 

4

As I travel around and talk to my manufacturers, where two and 

three and four years ago they were talking about the low cost of 

labor in the global market that they were competing in that has 

really taken a back seat now to the high cost of natural gas and 

energy in this country, so we need to move forward. 

It is a shame—it is tragic—that we have not been able to pass 

an energy bill to be able to go out and explore new areas, find new 

sources of natural gas. I am hopeful that in the coming months we 

will finally be able to pass an energy bill here and do the things 

we need to do to, as I said, have a stable, reliable source of natural 

gas in this country. 

Again, Mr. Chairman, thanks for holding this hearing today.

Chairman GRAVES. Thank you, Mr. Shuster. 

Ms. Capito?

Ms. CAPITO. Yes. Thank you, Mr. Chairman. Again, thank you 

for holding this hearing and bringing attention to the problem of 

rising energy costs. It is an issue that Congress must address. 

We are getting ready to head into the winter season, and our 

seniors are going to bear the cost of the high heating prices. Rising 

energy makes it harder for small businesses to make ends meet. I 

live in West Virginia where we have quite a large chemical industry, and they are feeling the effects daily of the rising energy costs 

of the price of natural gas. 

I would like to use this hearing to call to attention something 

that has been brought to my attention, which is that the burden 

of the higher energy cost prices could be because of a manipulation 

of the trading markets. Unlike other commodity and trading markets, the market for natural gas does not have effective trading 

stops that limits sudden and massive price increases that can hurt 

folks in their pocketbooks. 

In 2003, in spite of record natural gas inventories, and a record 

amount of gas production, the U.S. experienced more price volatility, including a price spike of more than $11. Unlike what exists 

with the trading of other commodities, there are no meaningful 

stops in place to prevent rumor or speculation from causing massive market disruptions. Gas prices may rise $3 per million BTU before trading is stopped 

for five minutes. Then trading may resume. In theory, natural gas 

prices could climb $162 per MMBTU in one trading session. If you 

contrast that with beef prices, for instance, it may change 1.5 cents 

per pound before trading is suspended for 24 hours. 

While consumers can choose to eat chicken if the price of beef 

jumps, seniors and small business people unfortunately cannot 

change on a dime how they want to heat their homes or heat their 

small businesses. 

We cannot sweep this issue under the table. I look forward to 

hearing the testimony that is being brought forth today. Thank you 

for giving us this opportunity.

Chairman GRAVES. Thank you. 

All statements of the Members and witnesses are going to be 

placed in the record in their entirety. We will get started right 

5

away. I know that Representative King and Representative Peterson have other commitments, so we will jump right in. 

We will start off with Representative Steve King from Iowa. Representative King is the co-founder of the House Agriculture Energy 

Users Caucus. Steve, I appreciate you being here today. 

STATEMENT OF HON. STEVE KING, U.S. HOUSE OF REPRESENTATIVES (IA-5), HOUSE AGRICULTURE ENERGY USERS 

CAUCUS

Mr. KING. Thank you, Mr. Chairman. I appreciate you holding 

this hearing and having an opportunity to testify before this Committee. It is a perspective I do not often get to enjoy. 

The Subcommittee knows that high energy costs are affecting 

farmers and small business owners in the Fifth District of Iowa 

and across this nation, and I do appreciate this hearing. In June 

I brought together a bipartisan coalition of Members to form a new 

caucus, the Ag Energy Users Caucus. I serve as the co-chair of this 

caucus, along with the Chairman of this Subcommittee, you, Mr. 

Chairman, and the Ranking Member of the House Ag Committee, 

Charlie Stenholm, Representative Earl Pomeroy, all as members of 

that caucus. 

The mission of the caucus is to provide Members and staff with 

access to a forum where they can be educated and activated on 

issues affecting agricultural use of energy. Agriculture is an energy 

dependent industry that is affected by energy prices both directly 

and indirectly. 

Let me give you some examples. Fertilizer, almost all of the nitrogen fertilizer, is made from natural gas. Of course, that is the 

foundation for most of our crops. Natural gas also runs irrigation 

pumps in many parts of the country. Propane gas is used to heat 

hog confinements, poultry houses and nearly all of our animal livestock enclosed facilities. Propane is used to dry our grain. Of 

course, we use gasoline and diesel for all of our crop production, 

from planting to harvest, and on the roads when we deliver our 

crops. 

While all energy costs have become high input costs to farming 

and ranching, natural gas prices are of significant concern. I listened to the opening remarks by Mr. Butterfield, and 80 percent 

of the cost of the production of nitrogen fertilizer comes directly 

from the cost of natural gas. 

That percentage has gone from around 60 percent in past years 

to 70 to 80. My producers in Iowa informed me a couple of months 

ago that now it is up to 90 percent of the cost of the nitrogen fertilizer. As a result, over the last four years nitrogen fertilizer costs 

to the farmer have skyrocketed by nearly 50 percent. 

Another result is the decreased capacity of fertilizer production. 

Nearly 20 percent of our capacity that existed in this country prior 

to the year 2000 has been permanently closed with more at risk of 

closing. This has caused the agricultural industry to import over 

half of the total U.S. nitrogen supply compared to only 30 percent 

just four years ago. 

If you remember, we had an oil crisis a couple of decades ago or 

25 years ago when we were looking at about 30 percent imported 

6

oil. Now we are up to 60 percent imported oil. Our fertilizer has 

gone from 30 percent to 50 percent. We are headed in a direction 

where we are so dependent on foreign suppliers that we may not 

be in control of our own food supply if this continues. 

The outlook for the winter ahead does not look good either because natural gas prices have decreased over the summer due to 

the relatively mild temperatures. Storage levels are above average 

for this time of year, which could be seen as good news, but some 

of this gas was purchased into storage at fairly high prices, and 

really cold weather can lead to unexpected demand spikes. It is 

also important to note that 60 percent of our stored natural gas is 

for residential needs. That leaves only 40 percent then for industrial and agricultural needs. 

U.S. fertilizer producers just cannot compete because natural gas 

supplies are simply too expensive. Supply is not keeping up with 

demand when it comes to natural gas, and it will not for many 

years unless we, the elected officials, act. 

Switching gears, gasoline and diesel fuel used for planting, harvest and transportation have continued to experience prices that 

are higher than the average in the past several years. Diesel fuel 

has been especially high, and that is because of strong demand 

and, of course, low domestic production. 

According to the American Petroleum Institute, U.S. imports 60 

percent of the crude oil in petroleum products we consume. Our refineries are operating at record levels and are producing record 

amounts of gas and diesel. Moreover, as our economy grows, the 

demand for gas and diesel fuel strengthens. 

In conclusion, Mr. Chairman, something must be done unless we 

want to see our domestic fertilizer industry go overseas and our agricultural producers go out of business due to expensive input costs. 

In the area of natural gas, let us see the Senate pass the energy 

bill conference report that this House has passed twice. A pipeline 

from Alaska would do wonders for natural gas prices in this country. Let us allow the United States geological survey to explore 

other domestic sources of natural gas in the Rocky Mountains, off 

the coast of Florida and other areas around and especially on public lands in the United States. 

Let us encourage the Administration to work through the WTO 

to persuade Russia to stop negative pricing effects of massive nitrogen exports produced with natural gas supplied at government set 

rates that do not even cover the full cost of gas. 

In the area of petroleum, let us see the Senate pass the energy 

bill conference report. Our own homegrown sources of energy, such 

as ethanol and biodiesel, will help if we produce more of that. Let 

us also drill in ANWR, the Arctic National Wildlife Refuge. I have 

been up there. I have inspected the place. I do not know if there 

is a better place and a safer place environmentally in the world to 

drill for gas and oil than up in ANWR. 

The facts are clear. Safe production on just 2,000 acres, which is 

actually really less than .01 percent of ANWR, will yield more than 

one million barrels of oil a day, and that will go on for at least 30 

years. Whenever we have opened an oil field, we have always found 

more oil there than was predicted. 

7

The current use is about nine million barrels a day. We could 

have one-ninth of that oil coming out of the Arctic National Wildlife Refuge at no environmental disadvantage. If the pattern at the 

North Slope is consistent from 30 years ago to today, 7,000 caribou 

in 1970, 28,000 caribou today, then the environment has actually 

been enhanced, if there is any argument it has been affected at all. 

I would also emphasize that I represent western Iowa. We are 

in the heart of the corn belt. The corn belt runs across the country 

at least as far as Pennsylvania in an effective way, and corn is very 

sensitive to the nitrogen price. It takes a lot of nitrogen to raise 

corn. We get ethanol out of that. We get food products. We get 300 

other products out of corn. 

If we cannot purchase our nitrogen fertilizer at a competitive 

rate then the entire corn production is held, as I will say, hostage 

to those prices of imported fertilizer from foreign countries, that 

being Venezuela and Russia. 

I think we need to be talking with the environmentalists. I do 

not think we have a very good dialogue there. When we cannot get 

down to sound science and have a dialogue, that barrier is keeping 

us from passing an energy bill. 

Again, Mr. Chairman, I want to thank you for allowing me to 

testify today. Energy costs to ag producers are clearly a challenge 

of our time. I hope we can work together for some solutions. 

Thank you very much.[Congressman King’s statement may be 

found in the appendix.]

Chairman GRAVES. Thank you, Representative King. 

We will now hear from Representative John Peterson, who is the 

co-chairman of the House Rural Caucus. 

Thank you very much, John, for coming in. I appreciate it. I 

know you are busy, but it is a pleasure to have you. 

STATEMENT OF HON. JOHN PETERSON, U.S. HOUSE OF 

REPRESENTATIVES (PA-5), HOUSE RURAL CAUCUS

Mr. PETERSON. Thank you very much, Chairman Graves, Ranking Member Butterfield and Members of the Subcommittee. Thank 

you for allowing me to testify today on an issue critical to the future of rural America. 

I represent the second largest congressional district east of the 

Mississippi. Along with Congressman Alan Boyd of Florida, I am 

the co-chair of the congressional Rural Caucus. The Rural Caucus 

is a bipartisan group of 145 Members advocating for strong rural 

health care for rural veterans, all rural citizens, broadband access 

for all our rural communities, maintaining rural jobs, particularly 

our ailing manufacturing and natural resource base industries. 

Taken together, all of these issues have one goal in mind: To preserve our rural way of life by having quality health care, education 

and jobs close to home. I have worked closely with the full Committee chairman, Mr. Manzullo, in support of our domestic manufacturers and am pleased to be here today to add my voice to those 

of my colleagues from Pennsylvania—Congressman Shuster, 

Toomey and Capito, my neighbor to the south in West Virginia—

8

on the impact of high natural gas prices on the small farmer and 

manufacturers in America. 

I am going to turn the rest of my prepared statement in to the 

record—it gives a lot of details—and share with you how I think 

we got here, which I do not hear much discussion. 

About 10 years ago, shortly before I came to Congress, there was 

a change in law that removed the prohibition of using natural gas 

to generate electricity in mass amounts. Prior to that, you only 

used natural gas to make electricity for peak power in the morning 

and the evening. That was the limit. That limitation was removed. 

About five or six years ago I attended breakfasts put on by the 

Edison Energy Institute that talked about a 12 year bubble where 

we were going to generate a lot of our electricity in this country 

with natural gas. Now, I was not opposed to that, but I also attended a hearing in the Senate that talked about with some experts saying this was all being done without proven reserves available. In other words, the supply was not there. 

Twenty-five percent of our natural gas today is used to generate 

electricity. It used to be a single digit. That amount of natural gas 

has not been replaced. Eighty-two to 83 percent of our gas is derived from our own country. Twelve to 13 percent we import from 

Canada. One to two percent is liquified natural gas. We actually 

export a little bit to Mexico because they do not have the system 

to get it to us. They have lots of gas, but they do not have the system to produce it. 

So what do we do to fix this? I believe personally that the continuing skyrocketing prices of natural gas are going to impact home 

ownership in America and the ability of people to stay in their 

homes because the cost of heat is going up dramatically every year. 

It is going to put certain businesses offshore. 

I think natural gas prices are offshoring more jobs than any 

other issue, maybe even more than China. The fertilizer business 

is leaving, as we heard, quickly, because you just cannot afford to 

make it here. The petrochemical businesses are moving. Dow 

Chemical recently moved 2,000 jobs not to a cheap labor market, 

but to Germany because our gas price has been averaging $6 per 

1,000. Europe’s has been under $4. North Africa is $1.20. Russia 

is 70 cents. We are not competitive for any industry that uses natural gas. 

Now, we do not want to go back to $2 gas. There was no real 

way to drill. The gas price increases, in my view, are going to continue to escalate just as fast as they have in the past because we 

do not have the will to open up and drill. 

A gas well is a six inch hole in the ground with a steel casing 

put in as it is drilled. It is not an environmental threat. It is not 

an oil well. It is not like an oil well, and it should be separated. 

We should not treat them the same. You drill a well. You put the 

casing in as you drill. You cement the bottom. You cement the top. 

You let gas out. 

Most nations in the world drill offshore everywhere. Canada 

drills in our Great Lakes and sells us the gas. My staff have gone 

there and observed it. We have most of the Rocky Mountains 

locked up legislatively or by Presidential decree. We have 60 percent of the Gulf locked up legislatively. We have the Florida coastVerDate 0ct 09 2002 15:50 Jun 24, 2005 Jkt 000000 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 G:\HEARINGS\96506.TXT MIKE
9

line locked up legislatively. We have the east and west coast locked 

up legislatively. 

Folks, until we change, this country is going to have skyrocketing 

natural gas prices that make any industry that depends on them 

uncompetitive. I have businesses in my district that have gone out 

of business because of natural gas prices, others who are limping 

along and if they had not had a little cash reserve would not have 

made it. 

Natural gas prices, in my view, are the greatest threat to the 

American economy if we do not stabilize them. All we have to do 

to stabilize them is to drill for natural gas. It is not an environmental hazard. We have lots of it. We do not have to import any. 

Greenspan says LNG is the answer. It is a small piece. To bring 

liquified natural gas to this country we have to build the most expensive ships in the world. We have to build very controversial 

ports. Then we have to build pipelines hooking into our natural gas 

system. It will take a decade to have a dent in the natural gas supply. 

In my view, this Congress is the problem because we have locked 

up all the natural gas reserves in this country that hold promise. 

We are drilling more natural gas wells today than we have ever 

drilled, but with less production because we are in the old fields. 

We need to be in some new fields, and Congress needs to bite the 

bullet.

Chairman GRAVES. Thank you very much, Representative Peterson. I appreciate it. Thanks, Jon. 

Both of you, I know you have other commitments. I appreciate 

you being here. Thank you so much for your testimony. 

[Pause.]

Chairman GRAVES. I appreciate all of you coming in today. You 

have come quite a distance, and we are just now in some parts of 

the country, at least my part of the country, starting into the harvest season, so I know it is a sacrifice to come in, but I do appreciate it. This is a very important issue and important to all of us, 

so we do appreciate your testimony. 

We will start right out with Hal Swaney, who is a farmer from 

Platte City, Missouri, and representing the Missouri Farm Bureau. 

Hal, I appreciate you being here. 

STATEMENT OF HAL SWANEY, MISSOURI FARM BUREAU

Mr. SWANEY. Thank you, Mr. Chairman, and good morning, everyone. My name is Hal Swaney, and I am a farmer. 

I suppose it would have been nice if I had been turned in, would 

it not? Are we all right to continue, Mr. Chairman?

Chairman GRAVES. Absolutely. It happens to the best of us.

Mr. SWANEY. Okay. I am sorry. I will start with our industry is 

more efficient than ever before. I use 30 percent less gasoline and 

diesel than I did 15 years ago, but my total expenditures for energy 

keep going up. It remains essential that we have access to reliable, 

10

affordable energy inputs, including gasoline, diesel, electricity and 

natural gas. 

Natural gas is particularly important to agriculture because it is 

used to produce a host of farm inputs, one of which is nitrogen fertilizer. That is one of the more important ones. Natural gas by our 

standards accounts for about 90 percent of the cost of nitrogen fertilizer. 

During the past four years, the cost of natural gas has risen dramatically. This has caused the price of nitrogen fertilizer between 

the year 2000 and 2003, the national average retail cost of nitrogen 

fertilizer has skyrocketed from $100 a ton to more than $350 a ton. On my farm, in 2002 I paid $270 a ton for anhydrous ammonia. This spring, anhydrous ammonia was $400 a ton. That is a 48 percent increase. Due to these drastic price increases, I have reduced 

the amount of fertilizer I am applying to my corn and bean acreage. I am drawing down my soils’ own reserves. 

Another example. LP gas has gone from 86 cents a gallon to the price of $1.19 a gallon. That is a 34 percent increase. To offset this, 

I am allowing my corn to stand in the field and dry down on its 

own. Of course, what that does is increase my chances for losses 

in the field. 

These two practices that I am doing right now are what I consider to be very short-term solutions to what appears to be a very 

long-term problem. Why do we feel this is a long-term problem? 

Eleven fertilizer plants closed due to high natural gas prices. That 

is 21 percent of our capacity in this nation. 

As we have heard, another 15 to 20 percent are temporarily shut 

down due to high prices of natural gas. The loss of supplies has 

forced U.S. farmers to import nearly 60 percent of the area to grow 

this year’s crop. Losing the domestic fertilizer industry negatively 

impacts America’s food security. The issue of affordable natural gas 

is critical to the fertilizer industry. 

Now, there are numerous research projects underway to help alleviate the problem. One of those is to produce from our abundant 

coal supply and use it to produce nitrogen fertilizer. This technology does show some early signs of being a good thing, but it is 

years away. 

Farm Bureau has long been calling for a comprehensive energy 

bill that would increase domestic gas production. Missouri Farm 

Bureau policy specifically calls for an inventory of the natural gas 

potential in the United States and the development of the domestic 

natural gas reserves. 

The Department of Interior announced plans that would provide 

for more natural gas drilling in the shallow waters off the Gulf of 

Mexico. That is a good start, but it is only a start. More action is 

needed. Energy rich deposits of natural gas that are now off limits 

must be considered for gas exploration and production immediately. 

The demand for natural gas is increasing at an increasing rate. 

Congress should review the current policies that restrict the use of 

coal generation for electricity and provide incentives for clean coal 

technology as a way to alleviate some of the demand for natural 

gas. 

Mr. Chairman, thank you for the opportunity to be here today. 

11

[Mr. Swaney’s statement may be found in the appendix.]

Chairman GRAVES. Thank you, Hal. 

I think it is important to note, too, that we talk a lot about natural gas and the importance it has on the fertilizer industry. A lot 

of people think that is just because of using natural gas to generate 

that fertilizer, but it is actually an ingredient. That is what a lot 

of people do not realize. It is an ingredient in fertilizer. It is not 

just used to generate it. It is a beginning ingredient, so it is important to note that. 

Next on our panel is Brent Rockhold from Missouri with the National Corn Growers Association. Brent, you might also point out, 

and I do not know if it is in your testimony or not, but we have 

had hearings in this Committee on ethanol as an alternative fuel, 

and you guys have your NASCAR that is powered by ethanol or 

race car that is powered by ethanol. I think it is on display out 

here right now, is it not?

Mr. ROCKHOLD. It will be at 1:00, from 1:00 until 4:00 today in 

the Garfield Circle.

Chairman GRAVES. Okay. I think it is important. That is obviously another area that when it comes to the energy bill and trying 

to reduce our reliance on foreign oil and increase our production, 

which has an impact on natural gas, we certainly want to highlight 

any ethanol use that we can. 

I would appreciate you mentioning that, but go ahead with your 

testimony.

Mr. ROCKHOLD. We certainly appreciate you and your staff and 

the Members to come over and view the car while it is on display 

over there.

Chairman GRAVES. Absolutely. 

STATEMENT OF BRENT ROCKHOLD, NATIONAL ASSOCIATION 

OF CORN GROWERS

Mr. ROCKHOLD. Good morning, Chairman Graves, Ranking Member Butterfield and the rest of the Committee Members. Thank you 

for the opportunity to testify on the impact of high natural gas 

prices on farmers. 

My name is Brent Rockhold. I am the immediate past president 

of the Missouri Corn Growers, president of Missouri MOSA, a new 

generation cooperative trying to build a value added producer 

owned processing plan in northeast Missouri. I am also a producer 

member of the Nemo grain ethanol plant in Macon, Missouri, but 

first and foremost a farmer from Arbela. 

I am also a member of the National Corn Growers Association 

Ethanol Committee. NCGA was founded in 1957 and represents 

more than 33,000 dues-paying members from 48 states. NCGA also 

represents the interests of more than 300,000 farmers who contribute to corn checkoff programs in 19 states. NCGA’s mission is 

12

to create and increase opportunities for corn growers and to enhance corn’s profitability and use. 

My purpose today is to provide insight to the Subcommittee on 

how high natural gas prices affect the cost of producing important 

fertilizers that farmers rely on for their crops. Increased natural 

gas prices have already had an adverse effect on farmers due to 

higher production costs and will continue to do so in the future. 

Growers rely on affordable natural gas as feedstock for fertilizer, 

but also energy for irrigation, powering farm equipment, drying 

grain, cooking corn and producing ethanol. Whether used directly 

as a feedstock or for heat and power generation, reasonably priced 

natural gas is essential to grower profitability. 

Fertilizers account for more than 40 percent of the total energy 

input per acre of corn harvested. Most of that energy is consumed 

in the production of nitrogen fertilizer. Retail prices for fertilizer—

the prices paid by farmers —rise sharply when natural gas prices 

increase. According to the USDA, farm gate prices for fertilizer 

have jumped to near record highs. The largest cost component of 

making all basic fertilizer cost is natural gas, accounting for more 

than 90 percent of the cost of production. 

Nitrogen fertilizer is a key input for the bountiful yields achieved 

by U.S. corn farmers. Nitrogen fertilizer in northeast Missouri has 

increased nearly $25 an acre since the year 2000. For my typical 

600 acres of corn, that means an increase of $15,000 since 2000 to 

2004. My total fertilizer costs have increased $24,000 in those four 

years. 

Committee people, when it gets to my end there is nobody to 

pass that extra cost to. I just have to absorb it. I think it is the 

same for those senior citizens trying to buy natural gas for heating. 

There is no place else to pass that on. 

Rising natural gas prices in the U.S. have caused domestic nitrogen fertilizer producers to greatly curtail production, but production curtailments and higher nitrogen prices are largely the cause 

of the current surge in nitrogen imports. Lower natural gas prices 

in Europe, Asia and South America make it difficult for U.S. nitrogen producers to compete with foreign nitrogen fertilizer producers 

who can buy natural gas at lower prices and export their products 

to the U.S. 

Natural gas accounts for up to 90 percent of the cost of producing 

anhydrous ammonia, a key source of nitrogen fertilizer. In the midwest, in the beginning of 2000 anhydrous was selling for $160 per 

ton. By the end of that year, the price had climbed to $210 per ton. 

This spring, prices in northeast Missouri were close to $400 per 

ton. 

Unfortunately, these high and volatile prices are expected to continue into the foreseeable future. Tight supplies and increasing demand will continue to pressure producers’ margins and profitability. 

Higher natural gas prices will also negatively impact this country’s growing ethanol industry. According to USDA’s latest crop 

production report, this year’s corn crop will be the largest ever, and 

yields will be increased by nearly seven bushels per acre compared 

to last year. When harvested, more than 10 percent of that crop 

will be converted into ethanol. 

13

Natural gas costs account for more than half of the energy costs 

for ethanol production. The corn industry becomes more energy efficient every year, but we still must have adequate, reliable and affordable natural gas to fuel the industry. 

Government policy is creating a supply squeeze for natural gas. 

On one hand, electric utilities and other industries are moving 

from using our plentiful supplies of coal towards use of natural gas. 

Natural gas has been the choice for most of the new electric generation to come on line in the last decade. In addition, as that happens our access to natural gas is limited due to environmental policy. Clearly, we cannot have it both ways. 

Our ability to be efficient and environmentally friendly corn producers will face huge obstacles if our nation cannot come to grips 

with its desire to have limitless resources like natural gas for production and not realize these resources have to come from somewhere. 

I am sure the Members of the Subcommittee and individuals as 

well know this. However, Congress seems unaware of this fact. We 

can produce corn, but we need you to produce the kind of policy 

that enables us to use the needed resources to do so. 

A renewable fuels standard as part of a comprehensive energy 

policy would result in the expansion of ethanol production, directly 

contributing to domestic fuel supply and reduction in our dependence on imported oil. Our ability to produce food and fuel our nation, and the world, depends on a sound energy policy. 

We urge Congress to pass a comprehensive energy policy now 

that provides an enhanced role for renewable energy sources, further development of all energy resources for a more diverse portfolio and environmentally sensitive production of adequate domestic supplies of natural gas. 

I encourage this Subcommittee to continue to address the energy 

and natural gas issues. Your decision directly impacts my farming 

operation. Simply, farmers need access to reliable sources of energy 

and raw materials so they can use the fertilizers necessary to 

produce an abundant, affordable and healthy food supply. 

Thank you, Mr. Chairman. 

[Mr. Rockhold’s statement may be found in the appendix.]

Chairman GRAVES. Thank you, Mr. Rockhold. 

Next we will hear from Mr. J. Fletcher Smoak, who is chairman 

and CEO of the Old Virginia Brick, Inc. He is also here representing the National Association of Manufacturers. 

I appreciate you being here, Mr. Smoak, and I look forward to 

your testimony. 

STATEMENT OF J. FLETCHER SMOAK, OLD VIRGINIA BRICK, 

INC.

Mr. SMOAK. Thank you, Chairman Graves. Good morning, Chairman Graves and Members of the Committee. I am Fletcher Smoak, 

chairman and CEO of Old Virginia Brick. 

It is a great honor, as a member of the National Association of 

Manufacturers, to have the opportunity to address you regarding 

14

our concerns about the huge impact of energy costs, especially natural gas costs, on our company and the manufacturing industry. 

The National Association of Manufacturers is the largest industrial trade association, representing small and large manufacturers 

in every industrial sector in all 50 states. 

Old Virginia Brick has been manufacturing brick for 125 years, 

and our products grace some of the most beautiful buildings on university and college campuses in the eastern United States. We operate three plants in Virginia, and our 185 employees take great 

pride in the brick we produce. 

They are very patriotic. In fact, we erected a very moving 9-11 

memorial by using two 36 foot beams weighing 14,000 pounds from 

the World Trade Center Tower One at our corporate headquarters 

in Salem, Virginia. It is open from dusk to dawn, lit all night for 

the public. We invite anyone who is down our way to get off on Exit 

137 and come by and see this memorial. It will really touch you. 

As is the case with all energy intensive manufacturers, Old Virginia Brick faces major cost increases that threaten the survival of 

our company. Fortunately, the construction economy has remained 

very strong in large part due to the strong productivity growth that 

has offset or moderated inflation. 

High energy cost increases have historically driven the economy 

into a recession, and the construction industry is usually the first 

to feel the effects. I must give the Federal Reserve Board and the 

President’s three tax relief bills over the past three years credit for 

keeping the economy afloat in the face of unprecedented natural 

gas and oil costs. 

In addition, credit must be given to the continuous improvements 

in energy efficiency in the manufacturing sector, particularly which 

has led the company to be 46 percent more energy efficient per unit 

of gross domestic product versus 30 years ago. 

Despite these general improvements, high energy prices are still 

devastating to energy intensive industries like mine. We have 

struggled, as has everyone, with increases in group insurance and 

workmen’s comp insurance, but these increases pale by comparison 

to our cost increases from 2002 to 2004 of 60 percent or $1,160,000 

from natural gas. We experienced a similar natural gas run up 

from 1999 to 2000, but not of this magnitude. Prices did moderate 

in 2002, but they were still 19 percent above 1999. 

We are currently producing and shipping at record levels. However, our pretax profit will be only very modest, at approximately 

three percent of sales, compared with the 11 percent we should 

achieve at these shipment levels. If it was not for the high volume 

of shipments, we could not operate our plants with these natural 

gas costs. We have increased our selling price, but it is difficult to 

increase prices to cover such high cost run ups in a year to 18 

months. We have contracts with our customers, and they must 

have some price protection. 

Just one quick aside. I think this past weekend in the Washington Post there was an article about the high cost of building materials in the Washington area/Northern Virginia area. If you look 

at that, next to the bottom thing was 22 percent, and I think it was 

plywood or something. Unfortunately, brick is down there at a 3.2 

percent increase. Our industry is very conservative, and we keep 

15

getting squeezed and squeezed. The natural gas cost is just killing 

us. 

During the winter months, November to March, the price of natural gas delivered to our distribution company increased from 

$5.22 per decatherm in 2002 to $6.58 in 2004, or 26 percent. The 

greatest impact was the summer cost, which increased from $3.09 

in 2002 to $6.21 per decatherm in 2004, an increase of over 100 

percent. For the first time in our history, we are paying more for 

summer gas at the Henry hub than the preceding winter’s prices. 

It is absolutely upside down. 

The persistent high prices in the summertime underscore a number of changes that have occurred in the natural gas supply/demand balance. First, during the 1990s natural gas became the 

overwhelming choice for new electric generation. Second, the natural gas domestic supply bubble shrank and disappeared during 

the 1990s, and Canadian imports grew every year to pick up the 

gap between domestic demand and supply. 

Starting in 2003, Canadian gas imports began to drop. Meanwhile, despite active drilling in some areas of the U.S., domestic 

production dropped while the industrial economy began to revive. 

In other words, there is not enough gas to meet demand. Thus, the 

summer, despite a relatively cool summer, less natural gas was 

used in the utility section, but demand pressures on tight supplies 

have kept the market clearing price far above affordable levels. 

In my view, these summer prices may have been driven by large 

investors such as hedge funds and commodity trading advisors, as 

referenced in an article on oil trading in the Wall Street Journal 

on September 2. 

I suggest for the immediate term a study, perhaps by this Committee, be undertaken to determine if pure speculation and market 

manipulation created the summer price run up. However, the core 

issue remains the same. The nation needs adequate supplies to reduce both price spikes and volatility. 

Old Virginia Brick has started an investigation into using landfill 

gas for part of our natural gas needs. Unfortunately, the landfill 

is over 20 miles from our plants, and the only economical means 

of transportation is through the local distribution company’s pipeline. 

This is possible except the BTU content has to be increased from 

490 to 950 BTUs per MCF. This can be accomplished but at substantial cost. The ultimate risk to us are whether the fowler gas 

quality is satisfactory and what will be the useful life of the landfill 

output. Funding to help develop this type of resource could greatly 

reduce the natural gas demand by allowing brick companies in 

many locations to convert. This would also reduce pollution since 

the landfills would no longer need to flare the gas that is being 

generated. 

For the short term, two to four years, we must increase drilling 

in new fields and offshore, and we must expedite the permitting of 

LNG facilities. Long term, we need to start pipeline development 

from Alaska and, as needed, pipelines for LNG terminals. This 

should have been accomplished several years ago. 

It is the responsibility of Congress to protect our jobs, our economy and our nation by ensuring that these efforts be put on a fast 

16

track without fear of litigation. We applaud the House for passing 

a comprehensive energy legislative package the last two congressional sessions, including provisions to facilitate the Alaskan gas 

pipeline project. 

The House had it right. We need improvements in every energy 

area. Congress needs to facilitate improvements for natural gas 

and the electricity infrastructure and put in place incentives for additional energy efficient investments. Most of all, Congress must 

recognize we need more of every type of energy supply; not just oil 

and natural gas, but also coal, nuclear and affordable renewables. 

Congress must put statesmanship ahead of politics and develop 

a workable short term, mid term and long term energy plan because energy is the life blood of our economy. 

Thank you. 

[Mr. Smoak’s statement may be found in the appendix.]

Chairman GRAVES. Thank you, Mr. Smoak. 

We are now going to hear from Billy Willard, who is president 

of Willard Agri-Service of Frederick, Inc., and he is also representing The Fertilizer Institute. 

I thank you, Mr. Willard, for being here. I look forward to your 

testimony. 

STATEMENT OF WILLIAM F. WILLARD, WILLARD AGRISERVICE OF FREDERICK, INC.

Mr. WILLARD. Thanks for having me. Good morning, Mr. Chairman and Members of the Subcommittee. My name is Billy Willard. 

I am president of Willard Agri-Service of Frederick, Maryland. 

Our company is a family owned business operating out of five locations—Marion, Pennsylvania; Frederick, Maryland; Mt. Airy, 

Maryland; Lynch, Maryland; and Greenwood, Delaware. Our primary customer is the farmer, accounting for approximately 95 percent of our total gross sales. The remaining sales are attributed to 

our specialty division, which serves turf grass, golf course and the 

nursery industry. 

Our products and services include crop protectants, application, 

agronomic consulting and fluid fertilizers. We employ about 60 fulltime employees and hire about another 50 part-timers during the 

busy season. 

My family has a longstanding history with involvement in agriculture, being in the farm supply business since 1970 and also operating a 2,200 acre grain farm in Poolesville, Maryland, just about 

25 miles up the river from here, which was started by my greatgreat-grandfather in 1871. 

T.F.I. is the leading voice of the nation’s fertilizer industry, representing public policy, communication and statistical needs of 

manufacturers, producers, retailers and transporters of fertilizer. 

Other issues of interest to TFI members include the environment, 

international trade, security, transportation and worker health and 

safety issues. Willard Agri-Service has been a member of the TFI 

for the past 25 years. 

On behalf of these two groups, I appreciate the opportunity to 

testify before this Subcommittee regarding the impact of high natVerDate 0ct 09 2002 15:50 Jun 24, 2005 Jkt 000000 PO 00000 Frm 00020 Fmt 6633 Sfmt 6633 G:\HEARINGS\96506.TXT MIKE
17

ural gas prices on farmers and manufacturers. Furthermore, I 

would like to thank you, Mr. Chairman, for scheduling this very 

important hearing and for your leadership in this critical issue impacting my family farm, my family business and the farmers that 

are our customers who depend on us for their fertilizer needs. 

I am present here today to speak to you concerning our inability 

to purchase for our farm and our farmer customers nitrogen products that are essential to produce corn, small grains and the very 

important grass hay crops, which, by the way, are critical components of dairy production in Representative Shuster’s region of 

Pennsylvania. Ninety percent of our customers we serve up in that 

Pennsylvania area are dairy farmers, and they use a lot of hay. 

The aforementioned crops simply will not grow and achieve economical yields without the addition of nitrogen fertilizers. The nitrogen product that is most commonly used by our companies is 

called liquid urea ammonium nitrate. It is the most accepted product for a nitrogen source in our region and a good part of the country at that. I will refer to that as UAN or UAN solution. 

It is important to note that there really is not any substitute 

product for UAN solution fertilizer because of how we use it in production agriculture in our region. It is the most cost effective product to use, and our 1,800 farmer customers depend on us to supply 

them with that product to feed their crops. 

As a side note, UAN is a relatively inert product. It is non-flammable, and its chemical characteristics are not in any way usable 

in the manufacturing of explosives or illegal substances. Natural 

gas was alluded to this morning as a fundamental feedstock ingredient for the production of nitrogen fertilizers and represents 70 to 

90 percent of the production cost of one ton of anhydrous ammonia. 

UAN solutions, which we use, and other forms of nitrogen such as 

urea are all derived from anhydrous. 

To get right to the important part of this matter, the issue of 

why farmers are paying very high prices for their nitrogen products 

and the reason we as manufacturers are having a difficult time 

procuring product comes down to the basic principle of supply and 

demand. There just is not enough nitrogen product being produced 

in the U.S. to meet our needs for agriculture. 

Since mid 2000, as was mentioned here earlier, when the natural 

gas price crises began, 15 nitrogen production facilities in the U.S. 

representing more than 22 percent of U.S. capacity have permanently closed. They will not be back. During this period, many 

other production facilities have been idled due to the volatility of 

U.S. natural gas prices, all of this jeopardizing the farm profitability. 

The shortage/high price issue is more severe on the east coast, 

we feel, because of our inability to access the river system as the 

midwest can. We in the east are very dependent on imports and 

are getting most of our product now from the Ukraine, Russia and 

Bulgaria. 

A quick overview of where our business has been over the past 

few years concerning UAN solutions is as follows: For the crop year 

2003, UAN solution, which is 32 percent of solution, cost us on the 

average $110 a ton delivered by rail, and this was all U.S. product, 

most of it coming out of Augusta, Georgia. 

18

We prefer and aggressively try to purchase U.S. product, and in 

the past this product was very cost competitive. One reason for this 

was that it could be railed directly to our facilities from the factory 

where it is produced. Imported product that arrives at Baltimore 

or Norfolk or Philadelphia has to be offloaded from the ship, put 

into a tank, for which there is a charge, and then reloaded and 

trucked to our locations. 

For the crop year 2004, we were unable to purchase any domestically produced UAN. We paid the average cost for 32 percent nitrogen of $135 per ton. 

For the upcoming season, 2005, we are now trying to make purchases and have only been able to secure about 50 percent of our 

needs for our customers. Usually by this time of year we have 

about 75 percent of our needs covered. The product that we have 

committed to is all imported material, averaging a cost of about 

$180 a ton for 32 percent again. 

At present, there is no producer in the market, import or domestic, in our area with product to sell us except for one recent quote 

we just got last week from Terra out of Canada for $204 a ton for 

32 percent nitrogen. They could ship it in February of 2005. As was mentioned also earlier, these increases of $70 a ton is 

really going to hit farmers hard. Farmers cannot pass that on when 

they are selling corn, wheat, milk, et cetera. That just cannot be 

passed on to the consumer. The farmer has to eat that. 

Again, I thank you for allowing me to testify today on this very 

important subject. The TFI will issue you an in-depth analysis of 

possible solutions to our problem, two of which include supporting 

comprehensive federal energy policies that allow for increased exploration, drilling and supplies of natural gas and supporting research into clean coal and coal gasification technologies. 

I would like to invite any of the Members of this Committee to 

visit any of our outlets, which are pretty close to D.C., or our farming operation if they wish to learn more about our industry. 

Thanks for much for having me. 

[Mr. Willard’s statement may be found in the appendix.]

Chairman GRAVES. Thank you, Mr. Willard. 

We will now hear from Mr. Peter Huntsman with Huntsman, 

LLC, in Houston, Texas. Did I get that right?

Mr. HUNTSMAN. That is right.

Chairman GRAVES. I appreciate you being here and look forward 

to your testimony. 

STATEMENT OF PETER HUNTSMAN, HUNTSMAN LLC

Mr. HUNTSMAN. Mr. Chairman, thank you very much. I would 

like to express my appreciation to this Committee as well for taking a keen interest in this. 

I am president and chief executive officer of the Huntsman group 

of companies. We are the largest privately held chemical company 

in the world. We employ roughly 15,000 people around the world. 

We have annual sales of just over $10 billion. 

19

I will not reiterate much of what has been said. We fully agree 

that a long-term solution is more exploration and more production, 

better conservation of natural gas prices. I want to address something that literally hits these companies and our company and the 

American economy on a day-to-day basis. 

Our company was struck very hard in 2000-2001 with price volatility of natural gas. Over a six month period, we absorbed over 

$250 million and pushed our group of companies to the brink of 

bankruptcy. Over that six month period, we laid off over 1,000 positions in North America alone and 600 contractors during that same 

time period. Like the nitrogen and like the fertilizer industry, these 

are jobs that are going, and they are gone for good. 

Our largest concern rotates around the issue of price volatility. 

I understand the laws of supply and demand. We trade products 

all over the world on a global basis and manufacture products. The 

United States has not only the highest natural gas prices, but also 

the most volatile natural gas prices. 

As we have had an opportunity to go back and examine what 

happened between 2000 and 2001, it is now very apparent that the 

market was under huge manipulation of companies like Enron, El 

Paso and other companies that had been fined billions of dollars 

and caused billions of dollars of damage to the western United 

States, to the American Gulf coast and the agricultural industry. 

We saw the same sort of pricing manipulation take place in 

2002-2003 as Reuter’s reported an epidemic of false prices, sham 

trades, round trip trades and so forth that continue. 

As we look at where natural gas prices are set in the United 

States economy, you must focus on the New York Mercantile Exchange or the NYMEX. This is a group that is largely self-regulated. This is a group that from a manufacturer’s perspective I 

have great concern that three weeks ago they reported that the 

CFTC who oversees the NYMEX had studied the gas trading markets and could find no signs of price manipulation, though they 

themselves have fined companies, many of which are members of 

the NYMEX, $230 million over the course of the last 24 months. 

At the very time that the CFTC was reporting these findings, the 

chairman of the CFTC took a job as chairman of the NYMEX. The 

chief of staff for the CFTC, while this investigation was taking 

place, took a job with one of the largest hedge fund traders that 

trades on the NYMEX and moves the price of natural gas. 

I want to just give you one example as to how the volatility is 

devastating the industry. Look at the events of the trading prices 

over the course of the last three trade sessions. The price of natural 

gas has moved nearly 25 percent up over the course of the last 

three trading sessions—Friday, Monday and Tuesday of this past 

week. 

This morning, the headline article in Platt’s Daily, which reports 

the movement of price and movement of traders, attributed this to 

aggressive short covering and fresh buying. They quoted one trader 

as saying that the frenzy on the floor was to buy first and ask 

questions later. 

I am not proposing government control of natural gas prices. 

Government control is precisely what I just mentioned here. It is 

when a group of traders can put billions of dollars behind certain 

20

investments and push the price up and down. We read these quotes 

almost on a daily basis as to what is happening. 

Simply put, let me offer two solutions that would cost taxpayers 

no money, that do not require any further jobs in the federal government or anything else. Let us look at two simple solutions here. 

First, the price of natural gas on the NYMEX, again which largely influences and sets the price of natural gas on a nationwide 

basis, is largely unregulated. Look at what is going on with beef. 

Look at what is going on with agricultural products and so forth. 

One and a half cent movement per trade session. The stops that are put in for natural gas is $162 per day per 

MMBTU. Now, what does that mean? That is the equivalency of 

a movement in crude oil of $1,000 per barrel per day. The NYMEX 

says that these stops have worked well and have served them well 

in the past. There is no point in having stops when you have an 

equivalency of $1,000 per barrel movement per day. 

We would propose that this Committee would seriously propose 

legislation that would put similar sorts of stops in with natural gas 

that are in agricultural products. We are doing a better job in this 

economy of protecting the price of a Big Mac and the price of a hot 

dog than we are the price of natural gas. 

Secondly, as we get into looking at who is trading and any sort 

of market manipulation, there is no public accountability here. As 

you see in the New York Stock Exchange, as you see in most other 

exchanges, we have no idea which companies are moving what sort 

of volumes, what sort of terms and so forth. 

One single gas company in the United States is capable of trading up to 42 percent. That is more than the entire OPEC, any legal 

cartel, is capable of controlling on crude oil, one company controlling 42 percent of the trading volume that is consumed on a daily 

basis in the United States. 

We would propose just two simple solutions. Let us look at putting in some sort of daily meaningful stops in the price of natural 

gas. I have said nothing about high natural gas prices. Meaningful 

stops. 

Secondly, we believe that transparency and openness with some 

sort of an idea of who is trading and what volumes are trading 

would be of great help to industry today, not three to five years out 

when ANWR can be developed and pipelines put in. This can be 

enacted today, and it could help industry today. 

Thank you very much. 

[Mr. Huntsman’s statement may be found in the appendix.]

Chairman GRAVES. Thank you, Mr. Huntsman. 

We will now hear from Bill Prindle, who is the Deputy Director 

of the American Council for an Energy Efficient Economy. I appreciate you being here today. 

STATEMENT OF WILLIAM R. PRINDLE, AMERICAN COUNCIL 

FOR AN ENERGY EFFICIENT ECONOMY

Mr. PRINDLE. Thank you, Mr. Chairman and Members of the 

Committee. My name is Bill Prindle. I am with the American 

Council for an Energy Efficient Economy. We are a national nonVerDate 0ct 09 2002 15:50 Jun 24, 2005 Jkt 000000 PO 00000 Frm 00024 Fmt 6633 Sfmt 6633 G:\HEARINGS\96506.TXT MIKE
21

profit organization that specializes in technology research and policy analysis. 

Today I want to talk to you about how energy efficiency can help 

on the demand side to bring balance into the natural gas markets. 

There is a supply and a demand challenge that we face in these 

markets. We have done some research that shows that energy efficiency can not only help individual farmers and businessmen and 

homeowners save energy. If done in a concerted way, we can actually help bring prices down on the margin as much as 20 percent. 

While I think we all understand intuitively that if we invest in 

efficiency we can make our businesses and our homes less costly 

to run, in a tight market like we have today we can actually affect 

prices. That is really the bottom line of my message. I want to say 

a little more about how we got to that. 

Just to say a little bit about how we got into this situation with 

these tight gas markets, we have an increasingly challenging supply picture in the lower 48 of the United States for both oil and 

gas. Oil production peaked in this country in 1970. Gas production 

peaked in 1973. 

We have average depletion rates in U.S. gas fields of 29 percent 

a year. That means that regardless of how much we open up lands 

and new areas to production, the drillers have to work that much 

harder every year just to account for depletion. The supply side is 

continually challenging. That is why we are looking at LNG and 

the Alaska pipeline and the other sources. 

The other problem that we face with the supply options is that 

they are typically six, eight, 10 or even 12 years out. We can get 

relief from those sources. We need new sources clearly, but what 

do we do for the next five years? That was the focus of our research 

last year. What can we do in the next five years to bring some relief to gas markets to help all consumers, farmers and small businesses and homeowners? 

Energy efficiency has proven itself as a resource in this country. 

As my colleague down the panel here said, we have become 46 percent more energy efficient as a nation. What that means is that we 

are using about 25 quads of energy, if you will. We use about 100 

quads overall today. 

What that means is if we had not saved that much energy we 

would have to be using more than double the amount of coal we 

now produce, more than double the amount of petroleum or more 

than double the amount of gas. That would be a huge penalty to 

our economy. We would be spending an additional $400 plus billion 

in the economy today if we had not made those improvements. 

Some may get the impression that because we have saved a lot 

of energy there is no more to be saved. Well, that is actually not 

correct. We and others, the national laboratories, do a lot of research on this. The good news is that technology continues to improve, so even as we have made investments in efficiency in the 

past, there is a large resource potential that remains. We are estimating 20 to 25 percent of our gas consumption can be saved looking forward through energy efficiency. 

I want to say a little bit about the study we did last year. Last 

year, some of you may be aware, the National Petroleum Council 

issued a major study called for by the Department of Energy on the 

22

natural gas industry future for the United States. They did some 

very detailed modeling of natural gas markets using a very sophisticated computer model run by a consulting firm named EEA. 

Well, we decided to work in parallel with the NPC study, and we 

used the EEA model to look at what would happen if we were able 

to ramp up the efficiency resource a little bit on the demand side. 

The bottom line is that by achieving relatively modest gains in efficiency—we are talking about maybe a four percent gain in energy 

efficiency across the board—we could bring gas prices down about 

20 percent over the next five years. That is about $1 an MCF. 

It is not where we want to be totally, but it is a contribution that 

would bring significant relief to everyone who is represented on 

this panel—the fertilizer industry, small manufacturers and farmers—so we think it is important that Congress and the Administration really focus on this over the next five years and try to do what 

we can from the demand side to bring energy markets, especially 

the gas markets, back into balance before these new supply options 

can be brought on line. 

There is one interesting fact. You know, when you think about 

saving gas you think about well, maybe I will put in a new furnace, 

or maybe I will make my industrial boiler a little more efficient, 

or I will do this or that. There are direct savings in natural gas 

end uses, but what we found in our study is that the majority of 

the natural gas savings actually come from saving electricity. 

How is that? The fastest growing end use for natural gas in the 

last 15 years has been electric generation, so in many markets 

today the marginal unit that is on line at a given hour is a gas 

fired unit. That means if you achieve an energy efficiency gain, you 

back out a little bit of natural gas as the power plant. 

Of course, not all of the gas that goes into the power plant turns 

into electricity. There is some thermal waste. You actually save two 

to five times the amount of gas for every unit of electricity you 

save, so there is a very broad spectrum of efficiency opportunity out 

there that we can use to affect the natural gas markets. 

You might ask well, will the market not just correct itself? Will 

people not just invest in efficiency because prices are high? The answer is yes, markets do work. However, what we are finding is they 

are not working fast enough. What we need is a little bit of a policy 

boost to get the kind of efficiency resources that we need to bring 

markets back into balance, especially in the small business world. 

A lot of small businesses do not have engineers who understand 

energy or whose job it is to walk around and worry about energy 

all day. They have too many other things to do. A lot of small businesses do not have the capital to go out and invest in new technology. 

We need to get technology to market. You know, it is a big country out there. There are millions of farmers, millions of homeowners, thousands of businesses. Just getting that technology out 

to market is a challenge. It needs help from the government side. 

What can Congress and the Administration do in the next five 

years to use the resources we have on the demand side to help balance the gas market situation? Well, the good news is that there 

are some programs already in place. 

23

For the farm sector, the good news is that in the 2002 farm bill 

there was a new provision created for energy efficiency/renewable 

energy grants, Section 9006. It is funded currently at about $20 

million. We would like to see that go up, given the need that is out 

there. The Ag Department just announced their new round of 

grants last week. They gave about 175 grants. Clearly not enough. 

We would like to see that program do better. 

At the Department of Energy there is an industrial assessment 

center where schools of engineering around the country take skilled 

graduate students, and they go out to small manufacturers and 

they show them practical, low-cost, fast payback ways to save energy. It is a very successful program. It has been recommended for 

a small cut in the 2005 appropriations. I would like to see that 

come back. 

There is a whole range of other energy efficiency programs in the 

appropriations process that I will not go into, but we would like to 

see Congress boost those energy efficiency R&D programs. There is 

an energy bill, as many of my colleagues on the panel have referred 

to. There are many worthwhile energy efficiency provisions in that 

bill and so we support those. 

However, there is also the tax incentive portion of the energy 

bill, which includes a range of homeowner and business tax credits 

for energy efficiency and renewable energy and also from the farm 

point of view includes the production tax credit for wind energy. A 

lot of farmers, as many of you know, are beginning to see the profit 

potential and becoming hosts for wind machines. 

The FSC/ETI bill, which is trying to work its way through conference, has some of those tax credits embodied in it. We would like 

to see the full set of efficiency and renewable credits included in 

the FSC/ETI bill. That is something that Congress could pass this 

month, could start getting tax incentives out to businesses, farmers 

and homeowners starting next year and really start to make a dent 

in this problem. 

There are several other policy options out there. Appliance efficiency standards have been a very successful program. It works 

across the board. We have refrigerators that are three times more 

efficient than they were 20 years ago, even though they are bigger 

and have more ice coming through the door. There are technology 

success stories out there that need to be continued. 

Many states run public benefits energy efficiency programs, 

about 20 states currently. We would like to see more states get into 

that role because that provides a small funding source to help 

farmers, small businesses and homeowners invest in energy efficiency. 

Combined heat and power. We currently waste about two-thirds 

of the energy that goes into a power plant out the stack. Through 

combined heat and power technologies, we can cut those losses in 

half. That is a huge opportunity. Those opportunities are available 

even down at the small manufacturer and the commercial building 

level with today’s technology. 

Last, but not least, we need to keep the technology pipeline flowing. We need strong R&D programs because ultimately this is a 

technology challenge. We need the new technologies for new drilling and exploration. We also need the new technologies for more 

24

and more efficient end use. Again, that is an appropriations question. We would like to see the Administration up its request and 

like to see the Congress support that. 

I will stop now, and thank you again for the invitation to speak. 

[Mr. Prindle’s statement may be found in the appendix.]

Chairman GRAVES. Thank you, Mr. Prindle. 

We will now open it up for questions. I do have one for you real 

quick, too. 

You did not mention increasing production in your options. Do 

you think that is just as much a part of this process as getting better as far as efficiency goes?

Mr. PRINDLE. Yes, certainly. We are going to need more supplies. 

We do not believe that we can totally save our way to economic 

prosperity. However, we do believe that in the near term, before 

some of the bigger supply projects come on line, we have a lot of 

opportunity on the margin to use the demand side resources that 

we know about to bring some balance to the markets. Then, you 

know, as new pipelines, LNG or whatever come on line the markets 

will begin to correct themselves.

Chairman GRAVES. Thank you. 

I do have a question for Mr. Rockhold and Mr. Swaney because 

both of you have farming operations, and it has often been said 

that agriculture farmers are the only industry out there that buy 

everything—all their inputs —at retail and sell all their outputs at 

wholesale, which is completely backwards to the way it is when fertilizer prices continue to go up the way they have, but yet your output price continues to stay relatively the same. In fact, it has been 

approximately the same for the last several decades. 

What does that do to your bottom line? How do you recover from 

that? How do you react to that when you are continuing to get 

squeezed, and there is not a thing you can do? You cannot pass 

that on to the consumer.

Mr. SWANEY. I think if you look at our industry, Mr. Chairman, 

as being a farmer you well know there are certain things we can 

do. As I said, we have cut the amount of diesel and gas we are 

using. We have become more efficient to try and offset those higher 

costs of inputs. 

The other thing that we can do, that we are doing, is we expand 

our operations. We try to absorb those that are less efficient. That 

is why the number of farmers are dropping rapidly in this country. 

I will give you an example of one of the things, a group that really cannot pass their costs on. I was in southwest Missouri just a 

few days ago and had dinner with some chicken producers. Their 

natural gas price was 35 cents a gallon, now $1. 

That is a pretty good increase, and you know chicken prices have 

not changed at all. These gentlemen use 50,000 to 60,000 gallons 

or units of that every year, so that is a huge addition to their bottom line. 

You know, two years ago we had so much chicken in this country 

that if you bought one at the store they almost gave you another 

25

one just to get them out of there, so there is no way that these 

prices can be passed on to the consumer.

Mr. ROCKHOLD. Mr. Chairman, I would pretty much echo what 

he just said. I think it is in the numbers. You have seen the 

amount of producers dwindle significantly in the last decade, and 

that is going to continue to happen. These margins have been tight 

even without the higher natural gas price. 

I know in my area, as well as in your area, there has been a severe crop production loss in the last couple years as well, and we 

have just seen several people just have to sell and move on to other 

things. 

I think if it gets into more bigger corporate farms it is going to 

be a higher cost to everybody in the food chain, so we have to look 

for ways to continue to help the small farmer stay on the farms. 

Another number that I think reflects very highly is the average 

age of farmers is nearly 60 years old, so I think it shows that it 

is very hard for a new guy to break in or a young person to stay 

on the farm. 

Our value added opportunities like the ethanol plants are one 

way of giving those people a chance to come back to the farm, but 

with natural gas highs like we mentioned in our testimony even it 

affects those ventures too. 

I just think we have to figure out some way to keep our young 

people coming back. The numbers are going the other way against 

us right now.

Mr. SWANEY. One additional point, Mr. Chairman, would be that 

the GMOs—everybody talks about the GMO crops that we now 

produce, but if it was not for the technology and the advancements 

in quality of seed and what they can produce with the limits that 

we can place on ourselves with how much fertilizer we can put on 

and chemicals. If it probably was not for those we would be a lot 

worse off than we are now, sir.

Chairman GRAVES. We are going to have some votes here coming 

up at any time. I have a lot more questions, but I want to move 

right on down so we can allow Mr. Shuster and Ms. Capito to ask 

some too. 

Mr. Shuster?

Mr. SHUSTER. Thank you, Mr. Chairman. 

I first want to welcome Mr. Willard. Thanks for coming here 

today. I would extend an invitation to all Members of Congress if 

they want to see not only a fertilizer facility or the business that 

you are in. It is only about an hour and 20 minutes up the road. 

It is an award winning facility. It won the EPA award for being 

environmentally friendly. Thank you for all the good work you do 

up there. 

My question is to Mr. Huntsman, and then I would like maybe 

all the panel members to comment on it. The two ideas that you 

put forward, the transparency I think makes perfectly good sense 

and finding out who is out there so it is easier for us to determine 

26

if there is manipulation going on in the markets. I do not doubt 

that there was some of that going on. 

The first one, though, the stops. I have some concern, and maybe 

you can talk about it a little more in depth. It is not price controls, 

but price influencing that always concerns me when we put stops 

on. The difference, too. We talk about beef and other commodities. 

I think Ms. Capito pointed out, you know, that you do not have 

to buy beef. You can buy chicken if something is going on in the 

market. With natural gas, if you are using natural gas and producing fertilizer in your business then you pretty much have to use 

natural gas. 

Do you believe that those stops are going to be effective, or is it 

just going to be a one day deal where we stop trading natural gas, 

and then the next day the prices spike up anyway?

Mr. HUNTSMAN. I think again if you look at the realities of the 

marketplace I would just ask my colleagues here to the right, who 

are all considered manufacturers, can you absorb a 25 percent increase in your raw materials in three days, and can you pass that 

along? I do not have to wait for their response. It is impossible. 

You know, the reason, if you go back three days ago and you 

read why the price of gas went up, it was because Hurricane 

Jeanne was heading into the U.S. Gulf coast. That was the reason 

that was given three days ago. Jeanne is now heading to the 

Azores Islands the last I looked this morning, yet the prices never 

went back down. 

All I am saying is people can have some sort of rational sentiment. I think that we all would be very familiar in this room with 

what happened with the cattle prices and cattle futures during the 

mad cow scare. There was a legitimate concern that could have 

driven the price of cattle to near zero. 

If my memory serves me, over a four day period the cattle futures stopped out four days in a row. Finally after a week, the 

news reports came out that there had been a single cow that had 

been affected, that the herd had been isolated, and cattle future 

prices were able to recover quite rapidly after that. 

I am for free trade. We have as much manufacturing outside the 

U.S. as inside the U.S., but if you want to talk about price controls 

the price is being controlled today. It is not being controlled by people who manufacture, people who transport or people who consume 

natural gas. It is being controlled by people who trade paper and 

profit on the volatility of it. 

Now, if a product can move in price one, two percent a day, think 

of what would happen to your stock portfolio. One or two percent 

a day? That is a 700 percent increase a year. Nobody sees a return 

like that. 

You know, I am not proposing that we should not be trading gas. 

I am not proposing it should not be a commodity that is traded. I 

am merely saying that we ought to treat it like we do other commodities that are, in my opinion at least, less important to the welfare and the future viability of our overall manufacturing economy. 

Efficiency is fine. Our industry became 15 percent more efficient 

in four months. In four months in the winter of 2000-2001, we went 

27

from battling the agricultural industry as being the nation’s largest 

exporter of goods. In six months we were importing. 

The chemical industry, for the first time in its history, became 

a net importer. We lost the ability to compete overseas. It was not 

just our company that lost 1,000 jobs, you know. We became very 

efficient overnight. I do not think that that is a very decent model 

to follow here.

Mr. SHUSTER. Again, we talked about beef. They put a stop because the beef prices were falling. Natural gas has not fallen for 

many, many months, as far as I can see, or just a little bit of a 

dip up and down. 

What you are talking about is stopping the increase, for instance, 

on the storm when it went up, and it has not come down. Does that 

not indicate that that is what the market will bear? Whether it is 

good or bad for the market, the market says prices go up and stay 

up.

Mr. HUNTSMAN. My question I guess to that would be who is the 

market? I am a consumer. For every dollar that gas moves, it costs 

my company between $80 and $85 million per year. 

I do not ever have anybody come and sit down with me and negotiate gas prices. It is set because of what is done on the NYMEX. 

When we talk about what the market can bear, the people trading 

paper can bear all sorts of outrageous price because they do not 

have to live with the consequences of it.

Mr. SHUSTER. Right.

Mr. HUNTSMAN. We do in manufacturing. We do in the agricultural industry. That is of grave concern to us. 

I would propose that prices ought to be capped going both up and 

down. I believe when I talk to my friends who are in the gas exploration business, when they see the price of gas fall by 50 cents or 

$1 per MMBTU they say, because of this extreme volatility, we do 

not want to go out and risk money and be punching new holes in 

the ground because we are afraid that it could fall as fast as it has 

gone up.

Mr. SHUSTER. All right.

Mr. HUNTSMAN. On the manufacturing side, we do not want to 

invest in any more capital projects in the United States because we 

do not know where our raw materials are going to be priced.

Mr. SHUSTER. Sure. Would anybody else like to comment on that 

about the stops?

Mr. SMOAK. Yes. How about instead of stops if they put trading 

caps at so much percent and let the trading—and they can still 

trade. Not stop trading, but say all right, you have reached the cap. 

This is all you can do for a certain period of time. Either daily caps 

or monthly caps. 

28

There is one more thing, and I had not looked at this, but electric 

generation is a very, very inefficient use of any fuel and especially 

premium fuel like natural gas. Now, a lot of my associates say well, 

it does not matter. The electric companies can just pass it on. They 

can only pass on so much. 

If my memory serves me correctly, many years ago at EE they 

told us that only about 25 percent of the energy out for the energy 

in. You put 100 percent energy in. You get 25 percent out with 

electric generation. Line losses, power losses also. It is a very, very 

inefficient way. We have to have it, but it is a very inefficient way 

to use fuel. 

Therefore, the need for nuclear, the need for coal firing, and 

short-term maybe if some of the power companies can be given 

some waivers so they could go back to firing coal with existing 

technology, with existing scrubbers, that would take a tremendous 

amount of load off of the natural gas markets because these utilities really suck up the gas, even just the peak units. 

In my view, if we could do something with that short term and 

then go back when we get the pipelines in and, you know, we all 

keep talking seven to 10 years out, but we need to do something 

for the next two or three years to keep our economy healthy.

Mr. SHUSTER. I think what you say there is true, and I have seen 

that the utility companies now are moving towards building coal 

fired plants, which is good for West Virginia and Pennsylvania. We 

are happy to see that and try to encourage that. 

You mentioned caps. Now, are you talking about caps, or are you 

talking about what Mr. Huntsman mentioned about stops?

Mr. SMOAK. Well, stops and caps are a little different I think. 

Caps, you can continue to trade, but you have just reached the 

maximum you can trade for that day. Maybe it is a one or two percent margin, not ten and twenty percent per day. Maybe monthly 

caps of ten percent. That equates to 120 percent a year so there 

is still a lot of upside, and it can be on the downside to keep the 

same thing so that companies can at least— 

For instance, two years ago as we tried to budget for the coming 

year we have to start the process in June and July for the following 

year. We start either locking in gas or attempting to lock in gas 

unless it is so obscenely high that we cannot lock it in, as has been 

the case for the last 22 months. 

You know, I put down 20 to 25 percent increases. I had $4 well 

head gas for the summer. I said gosh, it has never been that bad. 

Well, it is $6. I mean, you cannot budget. You cannot project what 

you need to do when it is that volatile. As the gentleman over there 

says, you cannot pass that much on.

Mr. SHUSTER. Right.

Mr. SMOAK. We have tried to, and you would have thought we 

were asking some of our distributors to give us the second and 

third generation of their children when we try to go up four or five 

percent in price, you know.

29

Mr. SHUSTER. I see that my time has expired. I want to make 

certain that Ms. Capito—

Mr. HUNTSMAN. Mr. Shuster?

Mr. SHUSTER. Yes?

Mr. HUNTSMAN. I think we are both in violent agreement, whether it is caps or stops.

Mr. SHUSTER. Right. It sounds that way.

Mr. HUNTSMAN. I would just note, too, we are sitting today on 

the highest inventories, near record high inventories and production today. 

I mean, if you want to say why do you not just hedge for the winter, all supply and demand market indicators would tell me the 

prices ought to be going down under that sort of scenario.

Mr. SHUSTER. Right. Again, it is your belief that the manipulation is what is causing much of this?

Mr. HUNTSMAN. I frankly do not know what it is, but when the 

price goes up 25 percent in three trade sessions it is not because 

we have all of a sudden increased capacity by that amount.

Mr. SHUSTER. Okay. Again, my time has expired. Just a final 

comment. I think that in the long term, the answer has to be more 

supply. We have to find it out there. We have to be able to go into 

these various other places of the country and bring the gas out so 

that we do not have to depend on other nations and we do not have 

to limit the supply that we have now. 

Thank you all very much for being here today. I appreciate it. 

Thank you, Mr. Chairman.

Chairman GRAVES. Ms. Capito?

Ms. CAPITO. Thank you. Yes. I have a couple comments to make 

and then a couple questions. 

I am pleased, coming from one of the largest coal producing with 

one of the largest coal reserves, the State of West Virginia, pleased 

to see that there is an overwhelming belief across your businesses 

and across your experiences that coal has a place in the future of 

the energy production here in America, and there are ways to clean 

it up and burn it safely, more efficiently. Efficient is really going 

to be the key as we move towards the future. 

I would like to go back to this question of stops and caps, Mr. 

Huntsman, and I am going to pull a little naivete here. In terms 

of stocks and other commodity trading, I mentioned beef prices do 

have this. Are there other stocks and commodity trading markets 

that do have the cap and stop or range of trading?

Mr. HUNTSMAN. Every commodity that is traded on the Chicago 

or the New York Mercantile Exchange has caps. They are all much 

30

less, everything from diesel fuel to crude oil. They are all much less 

than natural gas. 

There is a direct corresponding effect to caps and price volatility. 

That is just not my opinion. Natural gas, of all the commodities, 

is the most volatile of all of these, and it is also the most widely 

consumed. As was said earlier, if you are living on a fixed income 

in January, you cannot go out and boycott your utility. 

Utilities, by the way, they do not have to put up with the pricing 

pressure that we do. They just put it on through to the consumer, 

so naturally they do not take an interest in this.

Ms. CAPITO. Yes. Let me ask a follow-up question to that. When 

you see the volatility, for instance, in the last three days the rise 

in price of 25 percent, let us take it down to the general consumer, 

the elderly couple heating their home through this winter. 

I know you all see it probably much more immediately than an 

individual consumer might because in my state, for instance, they 

have to go to the Public Service Commission to raise the rates and 

all this. Where does that individual consumer see it? Do they see 

it this winter? Do they see it in three days? Do they see it two 

years down the road?

Mr. HUNTSMAN. We obviously are not a utility, but my understanding is that most utilities buy their natural gas in strips. They 

will go out for multiple months. 

A three day increase like this, if it stays at the present price, will 

obviously affect the value of those long-term strips, and they will 

most likely see it during the winter months. Those strips are usually three to six months out, and the highest consumption will take 

place either in the heat of the summer or in the cold of the winter. 

They will also see it—the minority of the amount of gas consumed in this country is for utility purposes. The rest of it is used 

in manufacturing, agriculture and so forth. They will see it in inflationary indexes with higher prices and so forth as we attempt to 

try to put our prices up to try to reconcile this.

Ms. CAPITO. Let me ask another question in final. Anybody can 

answer this if they have an opinion. I have heard you all talk, several folks talk, about LNG, you know, bringing it in from Africa 

and all these other places where you can liquify the natural gas 

and then bring it in across the ocean. 

You know, in this day and world that we are living in right now, 

that raises a bit of a red flag for me, even though I am sure we 

can assure some of the safety issues. But it has to be an enormous 

safety consideration that is going to be built into the price of LNG 

as it is imported into this country. 

Does anybody have an opinion on that?

Mr. HUNTSMAN. Ms. Capito, I do not think that the price of oil 

today is $47 a barrel. I think it is about $80 a barrel when you 

take into account the costs that we spend in our foreign policy. 

I am not trying to point fingers at what is going on in Iraq or 

anything, but just our macro foreign policy to try to preserve the 

31

sea lanes and try to preserve the ability to import in the energy 

and these hydrocarbons. 

If the average American understood the price of crude oil is more 

like $80 to $100 a barrel and the price of gasoline ought to be 

about $4 to $5 a gallon when you take into account those subsidies, 

I think your point is exactly well taken. 

We are now consuming 60 percent of our crude oil in this country. That is increasing. That does not worry me nearly as much as 

when our agricultural industry or the chemical industry, when we 

have to start importing in all of our basic raw materials for food 

production. 

Again, we are going to be dependent on—no offense to our allies 

overseas and neighbors in the U.N. and so forth, but we are going 

to be dependent on countries that I do not know if they have our 

best interests at heart when it comes to pricing, when it comes to 

price stability. That I think is a very real issue.

Ms. CAPITO. Anybody else? 

[No response.]

Ms. CAPITO. I thank the Chairman. This has been an interesting 

discussion. Obviously if we would all burn more coal we would be 

in great shape. That is my parting comment. Thank you.

Chairman GRAVES. Mr. Willard, I wanted to ask you and also 

Mr. Swaney mentioned too that a number of fertilizer plants have 

closed. Can you expand on that just a little bit the reasons for that 

and what is happening there, who is picking up that production? 

Is that just lost production?

Mr. WILLARD. It is indeed just lost production. The importers 

have tried to scramble, and I will speak about our little area of the 

world in the mid-Atlantic. In the last couple years they have been 

scrambling and buying materials for us. 

This year almost mirrors maybe what had happened in 1973. If 

you recall, we did have a shortage in the U.S. of product. It is my 

understanding that some of the suppliers have sold off or the manufacturers will sell off their natural gas contracts if in fact the natural gas becomes so high. They figure they can make more money 

selling off those contracts rather than converting it into agricultural nitrogen. 

I understand also that there is probably some industrial capacity 

at these plants, that they will turn their production towards industrial capacities and generate greater profits than agricultural.

Mr. SWANEY. Actually, those that did not sell off their natural 

gas and made fertilizer were probably foolish because farmers can 

only pay so much for nitrogen fertilizer. 

They probably would have done better to have sold their natural 

gas and had their money as compared to taking the risk of producing something like anhydrous ammonia, the exposure you have 

in transporting that, collecting from farmers as you sell it to them 

at an extremely high price. 

32

That production is gone, and in my opinion and American Farm 

Bureau and Missouri Farm Bureau is that it will probably not 

come back for several reasons. What has happened, and I served 

on the board of a local cooperative for nine years. We kept inventory, you know, just so that when a farmer called in and said I 

need some nitrogen fertilizer, you know, whether it was early in 

the season or late in the season we had some. 

Today that is not the case. Anhydrous delivery is coming in almost as fast as it is going out. I say almost as fast because there 

is always people waiting for that next transport to show up, waiting for that next load of dry fertilizer to come in to the elevator to 

be redistributed out to the farms. 

There is just very little inventory. They cannot afford to keep inventory. When prices go up this high and you try to keep margin, 

when you are selling anhydrous at $100 a ton or even $200 a ton 

and then it goes to $400 a ton and you try to make margin on that, 

it becomes very difficult. 

I have a concern because that supplier— you have to be there for 

me to do business. If the supplier goes broke, where am I going to 

get my anhydrous? Who is going to handle that dry fertilizer? You 

know, for us on our individual farm we cannot bring in and stockpile those commodities or inputs.

Mr. WILLARD. May I make one other comment, please?

Chairman GRAVES. Yes.

Mr. WILLARD. You know what else is happening also that I think 

further complicates the issues is the development of other agricultural regions in the world. There has actually been a tremendous 

additional demand for some of these products, nitrogen products especially, that we are trying to get shipped into the mid-Atlantic are 

coming. They are going somewhere else. 

Not only nitrogen products. If you have not shopped potash for 

your fall needs yet, the potash market is just absolutely crazy right 

now. World demand is also impacting what is happening.

Chairman GRAVES. Any more questions?

Mr. SHUSTER. No, sir.

Ms. CAPITO. No.

Chairman GRAVES. I appreciate all the witnesses coming down. 

Again, all the statements of the witnesses and Members will be 

placed in the record in their entirety. 

Obviously we have a huge problem out there. There are no good 

short-term solutions obviously, but certainly we need to start down 

this road in figuring out what we are going to do in the future. 

I think efficiency is obviously important, but as much as anything else we have got to increase supply in this country. Getting 

an energy bill passed through the Senate would be a huge step in 

that direction. 

33

I appreciate everybody coming out today, and I appreciate your 

testimony. Again, I know it is a very busy time right now, but 

thank you all so much. 

The hearing is adjourned. 

[Whereupon, at 11:43 a.m. the Subcommittee was adjourned.]

34


96506.001
35


96506.002
36


96506.003
37


96506.004
38


96506.005
39


96506.006
40


96506.007
41


96506.008
42


96506.009
43


96506.010
44


96506.011
45


96506.012
46


96506.013
47


96506.014
48


96506.015
49


96506.016
50


96506.017
51


96506.018
52


96506.019
53


96506.020
54


96506.021
55


96506.022
56


96506.023
57


96506.024
58


96506.025
59


96506.026
60


96506.027
61


96506.028
62


96506.029
63


96506.030
64


96506.031
65


96506.032
66


96506.033
67


96506.034
68


96506.035
69


96506.036
70


96506.037
71


96506.038
72


96506.039
73


96506.040
74


96506.041
75


96506.042
76


96506.043
77


96506.044
78


96506.045
79


96506.046
80


96506.047
81


96506.048
82


96506.049
83

Æ


96506.050