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[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]

 
                   PRICE FLUCTUATIONS IN OIL MARKETS

=======================================================================

                                HEARING

                               before the

                    SUBCOMMITTEE ON ENERGY AND POWER

                                 of the

                         COMMITTEE ON COMMERCE
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED SIXTH CONGRESS

                             SECOND SESSION

                               __________

                             MARCH 9, 2000

                               __________

                           Serial No. 106-149

                               __________

            Printed for the use of the Committee on Commerce

                                

                      U.S. GOVERNMENT PRINTING OFFICE
 62-977CC                     WASHINGTON : 2000
------------------------------------------------------------------------------
                   For sale by the U.S. Government Printing Office
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                         COMMITTEE ON COMMERCE

                     TOM BLILEY, Virginia, Chairman

W.J. ``BILLY'' TAUZIN, Louisiana     JOHN D. DINGELL, Michigan
MICHAEL G. OXLEY, Ohio               HENRY A. WAXMAN, California
MICHAEL BILIRAKIS, Florida           EDWARD J. MARKEY, Massachusetts
JOE BARTON, Texas                    RALPH M. HALL, Texas
FRED UPTON, Michigan                 RICK BOUCHER, Virginia
CLIFF STEARNS, Florida               EDOLPHUS TOWNS, New York
PAUL E. GILLMOR, Ohio                FRANK PALLONE, Jr., New Jersey
  Vice Chairman                      SHERROD BROWN, Ohio
JAMES C. GREENWOOD, Pennsylvania     BART GORDON, Tennessee
CHRISTOPHER COX, California          PETER DEUTSCH, Florida
NATHAN DEAL, Georgia                 BOBBY L. RUSH, Illinois
STEVE LARGENT, Oklahoma              ANNA G. ESHOO, California
RICHARD BURR, North Carolina         RON KLINK, Pennsylvania
BRIAN P. BILBRAY, California         BART STUPAK, Michigan
ED WHITFIELD, Kentucky               ELIOT L. ENGEL, New York
GREG GANSKE, Iowa                    TOM SAWYER, Ohio
CHARLIE NORWOOD, Georgia             ALBERT R. WYNN, Maryland
TOM A. COBURN, Oklahoma              GENE GREEN, Texas
RICK LAZIO, New York                 KAREN McCARTHY, Missouri
BARBARA CUBIN, Wyoming               TED STRICKLAND, Ohio
JAMES E. ROGAN, California           DIANA DeGETTE, Colorado
JOHN SHIMKUS, Illinois               THOMAS M. BARRETT, Wisconsin
                                     BILL LUTHER, Minnesota
                                     LOIS CAPPS, California

                   James E. Derderian, Chief of Staff
                   James D. Barnette, General Counsel
      Reid P.F. Stuntz, Minority Staff Director and Chief Counsel

                                 ______

                    Subcommittee on Energy and Power

                      JOE BARTON, Texas, Chairman

MICHAEL BILIRAKIS, Florida           RICK BOUCHER, Virginia
CLIFF STEARNS, Florida               KAREN McCARTHY, Missouri
  Vice Chairman                      TOM SAWYER, Ohio
STEVE LARGENT, Oklahoma              EDWARD J. MARKEY, Massachusetts
RICHARD BURR, North Carolina         RALPH M. HALL, Texas
ED WHITFIELD, Kentucky               FRANK PALLONE, Jr., New Jersey
CHARLIE NORWOOD, Georgia             SHERROD BROWN, Ohio
TOM A. COBURN, Oklahoma              BART GORDON, Tennessee
JAMES E. ROGAN, California           BOBBY L. RUSH, Illinois
JOHN SHIMKUS, Illinois               ALBERT R. WYNN, Maryland
HEATHER WILSON, New Mexico           TED STRICKLAND, Ohio
JOHN B. SHADEGG, Arizona             PETER DEUTSCH, Florida
CHARLES W. ``CHIP'' PICKERING,       RON KLINK, Pennsylvania
Mississippi                          JOHN D. DINGELL, Michigan,
VITO FOSSELLA, New York                (Ex Officio)
ED BRYANT, Tennessee
ROBERT L. EHRLICH, Jr., Maryland
TOM BLILEY, Virginia,
  (Ex Officio)

                                  (ii)

                            C O N T E N T S

                               __________
                                                                   Page

Testimony of:
    Cavaney, Red, President and CEO, American Petroleum Institute    75
    Cook, John, Director of Petroleum Division, Energy 
      Information Administration.................................    30
    Crowley, Hon. Joseph, a Representative in Congress from the 
      State of New York..........................................    37
    D'Arco, Peter, Vice President, S.J. Fuel Company.............   119
    Farruggio, Samuel, President, Farruggio Express..............   116
    Mazur, Mark, Director, Office of Policy, Department of Energy    41
    Moran, Hon. Jerry, a Representative in Congress from the 
      State of Kansas............................................    26
    Murphy, Mark B., Strata Production Company...................    81
    Parker, Richard G., Director, Bureau of Competition, Federal 
      Trade Commission...........................................    46
    Sherwood, Hon. Don, a Representative in Congress from the 
      State of Pennsylvania......................................    28
    Slaughter, Bob, General Counsel and Director of Public 
      Policy, National Petrochemical and Refiners Association....   109
    Sweeney, Hon. John E., a Representative in Congress from the 
      State of New York..........................................    22
    Wolkoff, Neal, Executive Vice President, New York Mercantile 
      Exchange...................................................    88
Material submitted for the record by:
    Air Transport Association of America, prepared statement of..   123
    Gekas, Hon. George W., a Representative in Congress from the 
      State of Pennsylvania, prepared statement of...............   125
    Smith, Hon. Lamar S., a Representative in Congress from the 
      State of Texas, prepared statement of......................   125

                                 (iii)

                   PRICE FLUCTUATIONS IN OIL MARKETS

                              ----------                              

                        THURSDAY, MARCH 9, 2000

                  House of Representatives,
                             Committee on Commerce,
                          Subcommittee on Energy and Power,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 10:05 a.m., in 
room 2123, Rayburn House Office Building, Hon. Joe Barton 
(chairman) presiding.
    Members present: Representatives Barton, Bilirakis, 
Largent, Burr, Norwood, Shimkus, Wilson, Shadegg, Fossella, 
Bryant, Boucher, Hall, McCarthy, Sawyer, Markey, Rush, Wynn, 
and Strickland.
    Also present: Representative Greenwood.
    Staff present: Cathy Van Way, majority counsel; Miriam 
Erickson, majority counsel; Elizabeth Brennan, legislative 
clerk; Sue Sheridan, minority counsel; and Rick Kessler, 
minority professional staff member.
    Mr. Barton. The Subcommittee on Energy and Power of the 
Energy and Commerce Committee hearing on Oil Price Fluctuations 
will please come to order.
    I would like to welcome everybody to today's hearing. I 
believe it's going to be educational, and I hope that we will 
learn quite a bit about how oil markets work and their impact 
on the U.S. economy.
    Before we begin, I would like to personally welcome our new 
ranking member, Congressman Rick Boucher of the great State of 
Virginia.
    I have enjoyed working with Congressman Boucher on a number 
of other issues, and I look forward to working with you on the 
issues before this subcommittee for the remainder of this 
Congress.
    I think everyone that knows Congressman Boucher knows that 
he's a very thoughtful legislator, and he pays close attention 
to the issues that he has responsibility for.
    He does have some big shoes to fill. The great Congressman, 
Ralph Hall of Rockwall is a tough act to follow, but I'm sure 
that he'll be up to the task.
    Congressman Hall is now the ranking member on the Science 
Committee, but he will remain a member of this subcommittee.
    I'd like to take note of what a difference a year makes. 
Last Spring I was hearing daily from my independent producers 
down in Texas that the price of oil was too low.
    The independent producers were shutting in wells, companies 
were going bankrupt, people were being laid off. Out in West 
Texas, when they deducted for the cost of transportation, there 
were stripper well producers that were getting less than eight 
dollars a barrel for oil.
    What a difference a year makes. Prices are now above $30 a 
barrel. Instead of hearing from oil producers, all of our 
colleagues that are before me are hearing from their oil 
consumers.
    That's democracy, and there is absolutely nothing wrong 
with the communication channel in a democracy.
    So the question arises, what, if anything, should we do, 
we, being the U.S. Congress and the Federal Government, about 
oil prices?
    Since 1981 the price of oil has been deregulated, and has 
been set exclusively in the marketplace. Admittedly, the 
marketplace is not an open marketplace because as we all know, 
the OPEC cartel, most of which members have nationalized their 
oil production, does, for all intents and purposes, set the 
price.
    The United States, however, has eliminated price and 
allocations controls for oil, recognizing that those policies 
had been failures and had resulted in shortages and gasoline 
lines.
    Anybody in this room who is over 40 years old certainly 
remembers the gasoline lines of the late 1970's and early 
1980's. Allowing the marketplace to set oil prices has resulted 
in more than adequate supply, and has resulted in lower prices.
    However, unfortunately, one result of the price being set 
by the marketplace is that it does fluctuate. Just yesterday, 
for example, the price of oil dropped $2.85 a barrel, closing 
at $31.28 a barrel on the New York spot market.
    In recent years, these price fluctuations have been in 
favor of consumers. I did not have one person call me last 
year, asking if the Government could do something about low oil 
prices, not one.
    By and large, allowing oil markets to operate free of 
government intervention has worked, and even at today's prices, 
oil and the byproducts that are refined from it is a bargain.
    According to the Energy Information Administration, which 
we will hear from later today, in 1991, the price of oil, when 
adjusted for inflation to 2000 dollars, was over $70 a barrel, 
which is more than double today's price.
    Considering the poor track record of the U.S. Government in 
trying to regulate oil prices, I, for one, do not believe that 
we should get back in the business of setting oil prices, even 
in a back-door fashion by drawing down the Strategic Petroleum 
Reserve as some have requested.
    In addition to being against the Congressional intent and 
spirit of the law, it is just quite simply bad public policy.
    I agree with former Secretary of Energy, James Schlesinger 
who said earlier this week, ``. . . the Reserve was adopted for 
an entirely different reason--to help tide this country over in 
a supply cutoff--and to deter political blackmail. It was not 
intended as a short-term economic instrument to modify price 
swings. To use it would make the U.S. Government just another 
player in the oil market, adding another unpredictable element 
that would likely deter new company investment in exploration 
and production.''
    That's from Jim Schlesinger, the former Secretary of Energy 
in the Carter Administration.
    I am also not a fan of investing money in a heating oil 
reserve in the Northeast as some have advocated, for basically 
the same reasons.
    I do, however, believe that there are some things that we 
can do to address this problem. No one in this room wants 
higher and higher energy prices. If we're going to try to 
stabilize our energy infrastructure and our energy markets, we 
should be looking for ways to improve many areas.
    For one, we could begin to add to and improve the natural 
gas infrastructure in this country, especially in the 
Northeast. Natural gas is a clean fuel; it's environmentally 
safe. We have adequate supplies in the United States. We could 
do much to improve and increase our production of clean-burning 
natural gas.
    Second, we could at least consider to reduce, on a 
temporary basis, some of the Federal Excise taxes that we now 
have on energy products, such as fuel oil, diesel fuel, and jet 
fuel, perhaps even gasoline.
    The gasoline Federal Gas Tax is 18.4 cents a gallon. Each 
penny of the gas tax is a billion dollars a year in revenue to 
the Federal Government.
    Third, and most importantly, we need to focus on improving 
our energy base in this country by improving and increasing 
domestic production. If we really want to decrease our 
dependence upon foreign oil imports, and decrease our 
dependence on the quotas that OPEC sets, we need to offer 
whatever support we can to our independent oil and gas sector.
    Our marginal-well producers should be kept operating as 
long as is possible. When oil prices hit their low last year, 
for example, many independents were forced to cease production 
from their marginal wells.
    These are wells that produce less than 10 barrels as day. 
We lost, according to the Independent Petroleum Association of 
America, approximately 600,000 barrels of oil production per 
day in this country last year--600,000 barrels a day.
    It's estimated right now on the world market that there is 
a shortage of somewhere between 1 million and 1.5 million 
barrels a day. Think what prices would be if we hadn't shut in 
those wells last year. This lost production would have 
certainly minimized the price spike that we've had this year.
    We should also discuss environmentally safe ways to harness 
our Nation's natural resources in the outer continental shelf 
and in the Alaska National Wildlife Reserve. Producers have 
been unable to employ modern drilling technologies which are 
more efficient, less costly, and much more safe than such 
techniques were when those moratoria were put in place.
    For example, we could have one drilling platform located 
right here at the Capitol, and it could drill all the wells 
that would be needed for the entire District of Columbia, going 
out into Maryland and also out into Virginia, one platform. 
That's how efficient and how effective our drilling technology 
is today.
    So, if we really want to do something to stabilize prices, 
we should revisit the issue of exploration and production in 
areas that are currently off limits. I will be holding hearings 
later this year on just issues of that nature.
    I am not a supporter of regulating the price of energy, but 
I am a supporter of developing a coherent national energy 
policy that minimizes dependence and maximizes the independence 
of the United States economy.
    I look forward to hearing the testimony of the witnesses 
before us. I would now recognize my ranking member, Mr. Boucher 
of Virginia for an opening statement.
    Mr. Boucher. Mr. Chairman, thank you very much for your 
kind words of welcome and your kind comments. I very much look 
forward to our work together, and in the pursuit of sound 
energy policy.
    I want to commend you, Mr. Chairman, for scheduling the 
hearing this morning on a very timely subject. Our colleagues 
who represent the Northeast have large numbers of constituents 
who rely on oil for home heating.
    They have experienced tremendous financial pressures as the 
price of heating oil has increased this year by approximately 
80 cents per gallon, a 66 percent increase from previous 
levels.
    In rural America, our concerns are also large. I represent 
a rural Congressional District. It has 23 counties and cities.
    It's not uncommon for many of my constituents to drive as 
much as 50 miles in each direction to go to work. I have a lot 
of those constituents who are saying that they can no longer 
afford those long drives, given the rapid increase in gasoline 
prices.
    And some people in rural America are now even looking for 
other work so that they can be closer to home. And while they 
will earn less, at least at the end of the week, they take home 
more.
    We're all concerned about the effect on our national 
economy of the dramatic increase in the price of crude oil from 
approximately $12 per barrel this time last year, to more than 
$30 per barrel at times this year.
    Mr. Chairman, I am also very concerned about our Nation's 
unhealthy reliance on oil imports. We currently rely on foreign 
oil producers for approximately 50 percent of the oil that we 
consume in this Nation.
    The Department of Energy has predicted that current trends 
suggest that in the absence of some rather significant policy 
changes, over the course of the next two decades, our reliance 
on foreign oil imports will rise, and that in the year 2020, 
we'll be importing approximately 65 percent of all of the oil 
that we consume, from foreign nations.
    The best way to guard against the fluctuations of future 
world oil prices, the best way to prevent in future years, the 
kind of financial pain that many of our constituents are 
feeling today, the best way to assure future oil price 
stability is to enhance American energy self reliance.
    We're a Nation rich in resources and rich in technical 
expertise. We can become more energy self-sufficient. But to do 
so is going to require a national commitment to that cause.
    Given the problems that we face today, I think the time for 
that commitment is at hand.
    Finally this morning, I want to say a word of thanks and a 
word of congratulations to the Administration for the steps 
that it has taken to address the current financial pain felt by 
millions of Americans.
    Secretary Richardson has personally urged the leaders of 
oil-producing nations to increase production levels, and a 
number of nations have indicated their intention to seek higher 
oil production quotas later this month. The results of his 
diplomacy are self evident.
    The President has released all of the funds available in 
the Low-Income Home Energy Assistance Program in order to 
assist in relieving the financial pressures people are feeling 
for home heating.
    The Federal Trade Commission is working actively with the 
Attorneys General of the States to investigate whether 
increases in oil prices arise, at least in part, from 
anticompetitive conduct anywhere in the supply chain.
    And the Administration is working with the States to obtain 
waivers under the Clean Air Act, where appropriate, to ensure 
adequate energy production levels.
    These are commendable steps. This morning, I'm sure our 
subcommittee will hear recommendations for other steps that 
should be considered, and I join with you, Mr. Chairman, in 
looking forward to the testimony of these witnesses.
    Mr. Barton. Thank you, Congressman Boucher. We'd now like 
to recognize Congressman Bryant for an opening statement.
    Mr. Bryant. Thank you, Mr. Chairman. I appreciate very 
much, you holding this very timely hearing, and I want to thank 
our distinguished witnesses for appearing today, especially our 
colleagues in Congress.
    I'm eager to hear the thoughts and recommendations on this 
issue that they have, and I would simply concur with what both 
of you have already said today in terms of concerns that I 
have.
    But in addition to that, I want to say that a few weeks 
ago, over 400 heavy trucks and tractor trailers came to the 
Capitol to try to raise the Nation's awareness of the 
escalating price of fuel.
    For these drivers, many of whom are independent businessmen 
and women, this was about more than simply paying a few more 
dollars at the pump; their trip here was about sending a 
message to Washington's policymakers that the future of their 
business was at stake.
    Fuel is often the second highest expense for truckers, and 
that dramatic price increase has forced many to simply park 
their trucks or even surrender their trucks, rather than lose 
money on each haul because of the high price of fuel.
    We certainly have this occurring back in Tennessee, and I 
know it's occurring across the country. The average American 
driver is like the rest of us, though; we're also feeling the 
effects of the steep prices.
    But these implications of high fuel prices for us go far 
beyond the increased cost of filling our gasoline tanks. The 
vast bulk of our Nation's goods are being transported by the 
trucking industry, and as the transportation costs rise, 
obviously, businesses are going to be forced to raise the price 
of their goods and pass those on to us as consumers.
    So, in practical terms, this means that not only will a 
mother have to pay more to drive to the local grocery store and 
to take the kids to school, but she will also have to confront 
an increase in the price of milk and eggs and vegetables at the 
grocery store.
    Fuel prices have recently shot up, I believe, because 
member countries of OPEC have agreed to artificially raise the 
price of oil by limiting production. Due to OPEC's actions, 
prices have gone from $11 to $12 a barrel in December 1998, to 
a high of $30 a barrel in mid-February of this year, levels not 
seen since the Persian Gulf conflict.
    A columnist in yesterday's Washington Post argued that 
Washington should not overreact to high fuel prices and should 
allow the free market to set the fuel prices. I believe in a 
free market, and I agree that Americans do not have a right to 
cheap gasoline, but the free market is being manipulated, and 
Congress should not have to apologize for considering policies 
to counter the foreign collusion.
    Short of legislative solutions, President Clinton can, and 
I think should, use better diplomatic resources that are 
available to him to put pressure on OPEC member nations to 
increase their production.
    In fact, many of the Americans currently suffering from 
OPEC's manipulation of global supplies are veterans of the Gulf 
War who risked their lives to liberate and defend the oil-
producing states, states which are now conspiring to keep 
prices artificially high.
    I think the President has an obligation to use the power 
associated with his office to convey the U.S. disapproval of 
OPEC's supply strategy.
    And I think this should have been not as a reaction that 
we're looking at right now where all of a sudden we're doing 
it, this should have been a long time ago. This didn't happen 
just simply overnight. And that's my concern, that we're going 
to have to go through this crisis when we could have had better 
diplomatic relations in anticipation in a preventative measure, 
rather than reacting and running over there and asking them, 
oh, please, lower your prices. I just disagree with this 
policy.
    As a footnote, I want to also, since we have some 
distinguished panelists, I want to know more about how prices 
are set in this country. It concerns me when I'm back home 
buying gas, and I see the price go up or down, and it seems to 
be tied together. I know it's against the law to conspire, and 
I know people aren't conspiring, but every price goes up about 
the same when they go up, and it goes down about the same.
    And I understand that competition drives it down sometimes, 
but I'm concerned about the prices going up together at the 
same time, as well as the other one. I haven't figured out 
yet--I know gasoline is delivered to the retailers' service 
stations, not every day. But yet every day, the prices seem to 
be going up and down.
    And this argument that, well, you know, I have to raise my 
price because when they bring gasoline in, it's gone up. But I 
see them going up and down--mainly up now--every day, and I 
know they're not getting resupplied every day.
    And I just wonder how they can justify that type of price 
increase on that argument, well, my prices are going up.
    Maybe somebody can educate me on that today. I look forward 
to that, and I thank, again, the chairman for holding this 
hearing, and look forward to learning a lot about what's going 
on today. Thank you.
    Mr. Barton. I thank the gentleman from Tennessee. We now 
recognize the distinguished gentleman from Massachusetts, Mr. 
Markey, for an opening statement.
    Mr. Markey. Thank you, Mr. Chairman, very much. You know, I 
know that many like me are inspired by the eloquent odes to the 
free market and the dire warnings about the catastrophic 
consequences of any governmental intervention into the 
operation of the marketplace.
    And I wonder just where all of those spokespeople were last 
March when the subcommittee held a hearing just upstairs to 
pressure the Administration to block additional sales of Iraqi 
oil under the Oil for Food Program because many members from 
oil-producing regions felt that oil prices were too low, and 
they wanted to drive these prices back up.
    Where were all these opponents of governmental intervention 
into the markets last October when this committee approved H.R. 
2884, the Energy Policy and Conservation Act Reauthorization 
Bill, which included a provision directing the Department of 
Energy to purchase oil from marginal stripper wells in the 
United States whenever the price dropped below $15 a barrel? 
That's not the free market; that's the government intervening.
    Now, for most of my constituents up in Massachusetts, the 
stripper well sounds like something you used find down in a 
section of Boston we referred to as the Combat Zone, but this 
committee decided last Fall that it was so important to protect 
stripper wells from threat of low oil prices that we had to set 
up a special little welfare program for them.
    But now that oil prices are too high, and consumers in the 
Northeast and across the country are suffering from gasoline 
prices, now what are we going to do? Are we going to actually 
get the Administration to use its existing legal authority to 
deploy the Strategic Petroleum Reserve? Are we going to get 
around to creating a regional refined product reserve that 
could quickly be deployed in the Northeast when we face energy 
emergencies?
    No. We're told that would be wrong. That would be 
interfering in the operation of a free market, and we just 
couldn't do that, because that would only be protecting 
consumers, not the oil industry.
    Well, the fundamental fact of the world oil market is that 
it is not a free market. Much of the supply is controlled by 
the OPEC oil cartel. OPEC governments meet to set production 
quotas and establish target prices, not the hidden hand of the 
free market.
    Now, OPEC and the Cato Institute might believe that that's 
a free market, but they're the only people who believe that 
that is a free market.
    So, if it is acceptable to the U.S. Government to intervene 
when prices are too low for the producer states, which is what 
this subcommittee apparently thinks, because that is just what 
H.R. 2884 does, why is not also acceptable for the government 
to intervene when oil prices are too high and consumers are 
being harmed?
    Ten years ago, I joined with Representatives Moorehead and 
Lent, Republicans, to offer an amendment to the Energy Policy 
and Conservation Act which would create, on an interim basis, a 
federally sponsored regional storage facility for petroleum 
products.
    Our amendment, which was signed into law in September 1990 
as Section 160(g) of the Act, would have mandated that DOE set 
up a regional refined products reserve on a test basis. The 
Bush Administration's Department of Energy then completely 
disregarded the direction of Congress that the regional reserve 
be located in those areas of the country such as the Northeast 
that were most dependent upon imported petroleum products or 
likely to experience shortages of refined petroleum products.
    Instead, they proposed to set up the regional refined 
reserve using existing facilities on the Gulf Coast. And then 
to add insult to injury, the Bush Department of Energy then 
refused to spend any money on the program.
    I wish I could say that the Clinton Administration 
Department of Energy had corrected the problem, but it didn't. 
It failed to insist that Congress appropriate funding for the 
program between 1994 and 1995 and then it walked away from the 
program.
    In 1996 when we were experiencing an earlier round of high 
oil prices, the Department actually undertook a paper study of 
the desirability, feasibility and cost of creating a regional 
refined product reserve, and even this study, which I think 
understates the matter, was forced to conclude that the 
benefits of a 2 million barrel refined product petroleum 
reserve located in leased terminals in the Northeast would 
approximate or exceed its costs, provided that the costs would 
be reduced by trading Strategic Petroleum Reserve crude oil for 
distillate fuel.
    Despite this favorable conclusion, the Department 
subsequently took the official position that a government-owned 
and controlled crude oil reserve located in the Gulf Coast 
region is the most cost-effective way to ensure continued oil 
products to the Nation during a severe oil supply interruption.
    In other words, no regional refined product reserve in the 
northeastern part of our country. Indeed, last September 23, 
the Department's Assistant Secretary for Fossil Energy actually 
testified before this subcommittee that the Administration 
wished to delete unused provisions of the law that provide for 
the establishment of regional and industrial petroleum 
reserves.
    Unused? I'll say they're unused. These provisions are 
unused because neither this Administration nor the Bush 
Administration ever bothered to make use of them.
    Indeed, DOE has chosen to disregard and ignore the problem. 
And so I look forward to hearing from the Department this 
morning about the lessons of this Winter's home heating oil 
crisis. Perhaps now we will take action.
    And I look forward to hearing from the other witnesses, and 
I thank you, Mr. Chairman, for holding this hearing.
    Mr. Barton. Thank you, Mr. Markey. I'm sure that you'll 
invite me up to Boston and I can ask your constituents if they 
want gasoline refined from $15 a barrel Texas crude oil or $30 
a barrel Saudi Arabia crude oil and most of them will vote for 
$15 a barrel Texas crude oil. I just have a suspicion of that, 
but I could be wrong.
    Mr. Markey. I think that when people go up to their gas 
station they don't ask where it is coming from, they just ask 
how much does it cost, and when it's heading toward two bucks a 
gallon they are not going to be too choosy and say I would 
rather pay a higher price if it came from America. They just 
want to make sure it is there.
    Mr. Barton. Well, democracy is a wonderful thing and you 
and I together will solve this problem, I'm sure.
    Mr. Markey. This committee wouldn't be interesting if Texas 
and Massachusetts wasn't as fully represented as they are.
    Mr. Barton. That's true. Now let's hear from Congressman 
Largent of the great State of Oklahoma for an opening 
statement.
    Mr. Largent. Mr. Chairman, I commend you for holding this 
hearing this morning to examine a cause and effect of recent 
price fluctuations in the world's oil markets. Unfortunately it 
is not until we experience sticker shock at the gas pump where 
American families have to pay significantly higher prices to 
heat their homes that oil and gas enter the national 
consciousness.
    Now that the matter has raised national interest I hope 
that the Administration and Congress will genuinely focus on 
developing a long-term energy policy based on self-reliance, 
one that promotes domestic oil and gas exploration and 
production, rather than directing our efforts on some short-
term band-aid fix that may help in the short-term but 
ultimately does little to prevent future price fluctuations.
    In short, we need to stop treating the symptoms and find a 
cure.
    As one who represents an oil-producing State I know all too 
well the economic havoc as well as the national security threat 
that stems from our reliance on foreign oil imports. Since 1985 
domestic crude oil production has declined while our oil 
consumption has increased. Today the U.S. imports over 55 
percent of our crude to meet domestic demand. Common sense 
would dictate that as demand grows so should our production. 
Unfortunately, this is not the case.
    In fact, during the last 2 years our domestic oil industry 
has lost 65,000 jobs. These jobs have been lost for a variety 
of reasons--a tax policy that favors investment overseas rather 
than here at home, a growing regulatory burden which has 
significantly increased industry's compliance cost to the tune 
of $90 billion over the past decade, offshore drilling 
moratoriums that prevent environmentally safe development of 
domestic resources off our coasts, and the refusal to even 
consider whether to open the Arctic National Wildlife Refuge 
Coastal Plane for oil and natural gas development.
    Mr. Chairman, we can talk about whether or not we should 
release the Strategic Petroleum Reserve, why OPEC and non-OPEC 
producing companies decided to cut back on their production, 
whether or not there has been anticompetitive behavior, or 
whether or not we should create a strategic reserve for heating 
oil, but in my opinion the focus of this hearing as well as the 
focus of policymakers needs to be on what we must do to 
stimulate domestic exploration and production. Otherwise I 
predict we will continue to have these large price spikes which 
will result with future Secretaries of Energy traveling the 
globe on bended knee asking foreign countries to please meet 
our energy needs.
    I look forward to hearing our witnesses' comments. Thank 
you, Mr. Chairman.
    Mr. Barton. Thank you, Mr. Largent. We would now like to 
hear from the former ranking member and a member whose district 
includes the East Texas oil patch, Congressman Ralph Hall of 
Texas.
    Mr. Hall. Mr. Chairman, thank you very much and I join the 
accolades for holding this hearing. It is very timely. A lot of 
attention has been focused on the rapid rise in heating oil 
prices and I am sympathetic to that, particularly for the 
people in the Northeast. Higher product prices for heating oil, 
diesel fuel and gasoline have been felt in other parts of the 
country as well.
    You know, before Mr. Boucher moved closer to the chairman's 
desk up there, I always got to talk before Markey talked and 
that was both good and bad but I think I just have to answer my 
friend from Massachusetts in that it is not that prices are too 
low for energy, because all of us want reasonable prices, but 
they are too unreliable and if we could get a steady price--
something acceptable that was steady where little guys could go 
borrow it to drill a hole and then sell it to the big guys, and 
that's the way it works, I think we could help you solve the 
problem of heating oil in the North and East.
    We're not unsympathetic to that. I certainly am not, but I 
don't hear my friend from Boston complaining about Amtrak--the 
dang thing goes I think 38 times from here to New York, 36 
times to Philadelphia, I don't know how many times to Boston 
subsidized. The thing doesn't even whistle west of the 
Mississippi or slow down going through my little hometown, but 
still I support railroads because in a national emergency we 
operate on railroads and we have to travel by rail and it is 
important for those people in the Northeast Corridor with the 
population, heavy population, and in New York and those areas 
that they have transportation.
    We are one Nation and we have different needs. We have 
different needs today to where there might be an answer that 
would help both of us very much. The problem of the oil market 
is that OPEC can get more oil out of one hole than we can get 
out of a hundred here. We have had no government protection and 
yet we are too proud to ask for a lot of Government protection, 
but the Government could be a little kinder to the energy 
operation. We don't need any energy policy other than a simple 
energy policy that says that there's some reward for getting it 
and then send you to look for it. That is what we really need 
and that is what we really want and that is what we have not 
really had in years and years.
    I think in my district farmers and truckers have been 
squeezed dramatically and I realize that this gentleman from 
Massachusetts does an excellent job for the people he 
represents, and that we have different constituencies and we 
must make different speeches up here, but really and truly I 
think both of us want the same thing. That is an answer to what 
Jeremy Bentham called the greatest good for the greatest 
number. Energy is so important so why can't it like railroads 
and be a national asset and be considered as a national asset.
    In my district we have been squeezed. Independent truckers 
do not operate a high profit business. Theirs is a low profit 
business and for independent truckers, the effects of increases 
on fuel is disastrous to them. Farmers in my area, already hit 
hard by a draught, are attempting to cope with higher fuel 
prices while their incomes have fallen dramatically. The Right 
to Farm Act that we passed some time ago that affects my 
district a little more than the Boston area. Any of you that 
have agriculture, any of us here who represent people that have 
agriculture the Right to Farm Act is going to wind up in about 
2 years. The 7 year period is going to be over--and if the 
subsidies get pulled back and they don't have that thing called 
parity, which is not in that act anywhere, right, side, nor 
forehand, they are going to have a Right to Starve Act if this 
Government does not move in and do something to change that----
    Mr. Barton. Would the gentleman from Texas yield? I hate to 
interrupt his----
    Mr. Hall. I am going so good----
    Mr. Barton. I know you are.
    Mr. Hall. You never did stop me when I was sitting that 
close to you.
    Mr. Barton. Well, I am sorry. I will make it up to you, I 
promise.
    Mr. Hall. All right.
    Mr. Barton. I just want our witnesses and the members of 
the panel that have not yet given their opening statements to 
know. We have two votes pending on the floor. We have a vote on 
a resolution. There is late-arriving news here.
    We have a 15-minute vote, a 5-minute vote, and then a 
general vote to follow, so unfortunately I am going to have to 
suspend the hearing.
    I would like to get Mr. Hall's opening statement and 
perhaps Mr. Shimkus's opening statement and then we will 
suspend to go vote, so I will now again recognize Mr. Hall.
    Mr. Hall. Well, I just think amid all the allegations of 
one thing I believe consumers and producers can agree on is a 
goal that we ought to find a way to achieve some stable oil 
prices. All of us crave some certainty in the price of basic 
goods and services and no one is well served over the long term 
by huge fluctuations in the market. That is what the major 
problem is.
    We are embarking on answers. I don't have one today, but I 
am interested in hearing what our witnesses have to say and 
maybe some ideas will come out of this and a way to work 
things. I yield back my time----
    Mr. Markey. Mr. Chairman----
    Mr. Hall. Yes, I do yield.
    Mr. Markey. I would just like to say that I agree with you. 
I think the Northeast should work with the Southwest when the 
prices are too low, right?--and I would hope that the Southwest 
could work with the Northeast when the prices are too high, so 
that we can find some equilibrium.
    Mr. Barton. Isn't brotherly love great? I just love this. 
We are in the opening statements and already we are bonding 
here.
    But unfortunately we have two pending votes. The Chair is 
going to recognize Mr. Shimkus for his opening statement, then 
we will suspend, but we are going to have three votes on the 
floor and as soon as the last vote is, the chairman intends to 
come back. We will recognize members that are present for 
opening statements, but if a member is not present for an 
opening statement we will then get to our first panel.
    The gentleman from Illinois.
    Mr. Shimkus. Thank you, Mr. Chairman. I will be brief and 
cut through a lot of the gobbledegook and just talk about in 
the national energy portfolio one thing that you left out and I 
will list it in No. 4 on your list is a credible, reliable 
biofuels program, one that the Administration talked about.
    I have a bill, H.R. 2788, which would expand the CMAC. We 
had a hearing last week on the auctioner program. It was stated 
by the DOE, who is testifying today, that if we eliminated the 
auctioner program, gas prices would increase 3 to 5 cents a 
gallon. A credible biofuels program is critical to our national 
security. It decreases our reliance on foreign oil. It is 
cleaner burning and it is renewable. Any discussion on energy 
policy without considering the biofuels program is a mistake 
and obviously I will be in this process fighting for cleaner 
air, renewable source of fuel, and for our farmers, and I yield 
back my time.
    Mr. Barton. We are going to suspend the hearing. We have 
three votes on the floor. My guess is we will restart between 
11:20 and 11:30, so the subcommittee is in recess until 
approximately that time.
    [Brief recess.]
    Mr. Barton. The subcommittee will come to order. We are 
still in opening statements. We have members present.
    The Chair would recognize Mr. Norwood for an opening 
statement and then he'll recognize Congresswoman McCarthy for 
an opening statement. Mr. Norwood.
    Mr. Norwood. Thank you very much, Mr. Chairman. I do 
appreciate you having this hearing today. It is very timely and 
I thank our colleagues for taking the time and coming to 
testify.
    I think it is fair to say that all areas of this country 
are feeling the effects of the recent near-historically oil and 
gas price increases. It is not just Boston. The unusually 
harsh, cold spell in January and early February over much of 
the East Coast, combined with OPEC's shenanigans, have made it 
extremely hard on many citizens, especially older Americans.
    Mr. Chairman, I firmly believe that this crisis could and 
should have been avoided, and I lay the blame for allowing 
prices to get out of control squarely at the feet of the 
current Administration. This oil shortage is completely and 
wholly artificial. There is plenty of oil to go around if the 
oil-producing countries simply choose to pump it. If we had a 
President with enough intestinal fortitude to face down that 
same OPEC group that we baled out earlier last decade I do not 
think we would be in this mess.
    Furthermore, I am deeply disturbed by remarks made by 
President Clinton on Tuesday that suggest he may be complicit 
in the artificial price hike. The President said that the 
prices need to be high in order to, and I quote, ladies and 
gentleman, ``encourage the use of alternative fuels and to 
prevent global warming.''
    Now Mr. Chairman, I find that a little offensive. We do not 
need to be furthering the Clinton-Gore Administration's liberal 
global environmental wacko agenda on the backs of the American 
working poor and elderly. Our gas and oil prices do not hurt 
the new wealthy elite who have profited so well from the stock 
market, international trade and the boom in technology. If you 
are riding in a $60,000 Mercedes you probably do not give a rip 
whether gas is 89 cents or $1.89, but Mr. Chairman, my people 
are riding in used Fords and Chevrolets working two jobs to 
make up for the manufacturing jobs lost by NAFTA and the Red 
Chinese Army and I'll be durned if we ought to let the oil 
producing countries take their lunch money to boot.
    Mr. Chairman, we need to send a strong message today gas 
prices last year in this country were not too cheap. We need 
this Administration to use every possible economic weapon at 
our disposal to bring these prices down before cumulative 
inflationary effect pulls our overall economy into recession.
    If this Administration wants to pass new environmental 
legislation to stop people from using their cars to get to work 
or take their children to school, then bring the bill forward 
and let us have a debate on it today, but do not try to 
circumvent the will of the people by encouraging foreign 
nations to raise prices on our poor, then declare it is for 
their own good.
    Mr. Chairman, I am anxious about this hearing. I look 
forward to it, and again I thank you for calling it.
    Mr. Barton. Thank you, Congress. We will put you down as 
undecided on what to do about the problem.
    We would now like to hear from the gentlelady from 
Missouri, Congresswoman McCarthy, for an opening statement.
    Ms. McCarthy. Thank you very much, Mr. Chairman.
    I was not present when Mr. Shimkus gave his remarks with 
regard to biodiesel fuel, something that this committee helped 
to put into law and is hopefully creating relief in our 
transportation sector, but as I read the briefing that the 
staff provided about today's oil prices, they note that while 
crude oil prices have risen in nominal terms when adjusted for 
inflation they are still lower than historical prices. In 
today's dollars prices for crude oil peaked in 1981 at about 
$70 per barrel or $39 per barrel in nominal terms. Heating oil 
prices are also still lower than previous years, and yet we are 
experiencing in our country some distress in certain sectors 
and regions and certainly at certain economic levels, so I 
would hope, Mr. Chairman, that we would go forward on two 
fronts.
    First of all, take a look at what other things we can be 
doing, such as this committee has done, to encourage uses of 
alternative fuels such as biodiesel and other fuel combinations 
that use our natural resources. Since the transportation sector 
is the largest petroleum end user, I think we might also 
explore whether or not what OPEC is doing is actually legal 
within the WTO and if not take steps to address that as well.
    I do thank you, Mr. Chairman, for holding this hearing and 
for allowing us this opportunity to hear from members and also 
experts in the field and to have a full and fair discussion of 
what we as a Congress might do. Thank you very much.
    Mr. Barton. Thank you, Congresswoman. We appreciate that.
    I would now like to hear from the distinguished chairman of 
the Health and Environment Subcommittee who shares some 
jurisdiction on this issue, Congressman Bilirakis of the great 
State of Florida.
    Mr. Bilirakis. Thank you very much, Mr. Chairman, and I, 
too, commend you for holding this hearing.
    Mr. Chairman, in yesterday's St. Petersburg Times there is 
an article entitled ``Survey Confirms Gas Pump Shock.'' There 
is a paragraph in here: ``The AAA usually conducts its price 
survey on a monthly basis but prices have been rising so fast 
lately that the organization will begin conducting weekly 
surveys March 14. The weekly schedule will continue at least 
through March 27, the next time members of the Organization of 
Petroleum Exporting Countries meet to discuss whether they will 
pump out more oil.''
    I think that basically says it all so very well, Mr. 
Chairman. We know about the gas prices having gone up and in 
Florida prices have gone up 15 cents a gallon in just 3 weeks. 
The average price for a self-service gallon of regular unleaded 
fuel reached $1.54 on Tuesday, up from $1.39 on February 15. A 
year ago a gallon of gas cost just 98.2 cents in Florida and 
earlier this week the Energy Information Agency predicted that 
even barring major refinery disruptions this summer average 
retail gasoline prices could reach a monthly average of $1.75 
to $1.80 per gallon, and in high cost areas such as California 
prices could be as high as $2 per gallon.
    Mr. Chairman, you and others have all said it. Finding the 
cure is really what we should be doing hopefully in this 
committee, and not just short-term fixes that we read about 
what the Administration is doing when their Department of 
Energy News announces ``Administration's Actions to Ease Home 
Heating Oil Crisis.'' I would like to say that there are an 
awful lot of things they could be doing on a regular basis to 
keep the problem from taking place rather than after something 
like this comes up. Mr. Chairman, it is critical I think to go 
into the real reasons why the prices have gone up.
    We can blame OPEC and OPEC to a large degree probably is 
responsible. I don't know how much of the responsibility lies 
really domestically, but knowing you and knowing your 
persistence and perseverance I think you are going to come up 
with the answers ultimately. Thank you, sir.
    Mr. Barton. Thank you, Congressman Bilirakis. We appreciate 
that.
    The gentleman from Ohio, Mr. Strickland, is recognize for a 
brief opening statement.
    Mr. Strickland. Thank you, Mr. Chairman. I am pleased that 
we are holding this hearing today because the high price of 
gasoline and fuel oil deserves our full attention.
    I represent a very rural part of Ohio, and just recently in 
recent days I have met with independent truckers, I have met 
with members of the Farm Bureau, and other constituents across 
Southern Ohio to hear the concerns that these hard-working 
individuals have.
    Many of these people maintain business or farm operations 
which simply cannot withstand the recent volatility in the 
prices of diesel fuel, gasoline, and home heating oil. In rural 
Southern Ohio the considerable increase in fuel prices has 
alarmed many and they are looking to us to provide some 
stability during this emergency.
    I think we must take our responsibility very seriously and 
explore thoughtfully and thoroughly our options for addressing 
this alarming situation, including the release of oil from the 
Strategic Petroleum Reserve.
    I understand that the Administration has made no decision 
as to whether or not to pursue this particular option, but I 
emphasize that for many people in my district the high fuel 
costs have already created an economic crisis for them, and 
while we are sharing the blame for this current crisis, I think 
we should remind our so-called international friends that 
friendship is a two-way street.
    We went to Mexico and helped them when they were 
experiencing economic difficulty and yet they have colluded, in 
my judgment, with OPEC including Venezuela and Saudi Arabia and 
Kuwait, a country where we put our national resources and the 
lives of our young people on the line, and now they collude to 
raise prices, and I think we should take the firmest stand with 
the OPEC nations.
    I understand that we don't give them a lot in terms of 
direct economic aid, but we give them security, and Saudi 
Arabia is awfully glad that we exist, otherwise they may not 
exist and I think we should remind them of these circumstances 
and demand that they be sensitive to the needs of our economy 
as we face this very difficult set of circumstances.
    Thank you, Mr. Chairman. I yield back my time.
    Mr. Barton. Thank you, Congressman, and your point about 
Mexico I think is very well taken.
    I am glad that you brought that up, because that is worthy 
of future discussion.
    The gentleman from the Tarheel State, the Honorable Mr. 
Burr of North Carolina.
    Mr. Burr. Thank you, Mr. Chairman, thank you for this 
hearing. I welcome my colleagues. I had the opportunity to have 
Secretary Richardson in International Relations last week. Wish 
I could tell you that I was enlightened and knew that there was 
an end to the current process from his statement and answers 
but in fact I got the distinct impression that we still have no 
policy. For an issue that most Americans have seen coming for 
some time, the question is who was asleep at the helm.
    Let me take this opportunity, Mr. Chairman, as you know I 
exercise frequently when individuals don't share with us the 
opportunity to read their testimony well in advance, that for 
an issue of this magnitude that affects so many Americans--
seniors, truckers, the average person every time they stop at 
the pump--EIA and the Department of Energy was nice enough to 
share their testimony for this hearing with us at 8:30 p.m. 
last night. Under the rules of this committee we could deny 
them the opportunity to testify and I question today after 
reading the testimony last night whether it is even worth 
hearing, but this committee has never denied a branch of the 
Government the opportunity to come before us and educate us, 
enlighten us, and share with America what their plans were to 
solve the problem.
    Clearly there was an opportunity for both to share their 
testimony with each other to make sure that there were no 
discrepancies between how they would testify.
    I just had the opportunity to refresh myself with a letter 
or the response to a letter that I wrote to the EIA earlier 
with a number of other members, Republican and Democrat. Let me 
read one sentence in that letter: ``EIA's latest projections 
show regular gas prices peaking near $1.40 per gallon this 
summer.'' That was in the last several weeks. Think of the gas 
pump price the last time you filled up. Clearly we have missed 
it again.
    We have no better determination of where gas prices are 
going to go because we have no policy to stabilize it. I think 
my chairman of the Health Committee was right. It is time we 
find a solution. It is time that the Congress and the 
Administration work together. If using SPR to stabilize the 
price is an option, we have used it before. We should put it on 
the table now. How difficult a decision does the Administration 
have to make a determination as to what is an effective way to 
stabilize price?
    I am reminded of the remarks that Senator Murkowski said 
this week or last week in his hearings. It is odd at a time 
where we are faced with this crisis that we have an 
Administration who is aggressively causes the price of 
electricity to go up through the regulations on the industry, 
has cutoff new exploration in the areas of the public Federal 
lands for exploration, and an Administration that blocks the 
Nuclear Waste Policy Act which affects the long-term cost and 
unpredictability of energy as well as our inability to 
relicense hydro facilities.
    Mr. Chairman, this is an important hearing I thank you for 
holding and I yield back.
    Mr. Barton. I thank the gentleman from North Carolina. I 
would agree with the gentleman on the tardiness of some of the 
testimony. I was tempted to not let DOE testify today, but this 
is such an important hearing that I think we have to have their 
testimony in the record but it is ironic to me that they 
testified at a similar hearing in the Senate 2 weeks ago, so 
that I doubt that they had to reinvent every paragraph.
    I just have a feeling that some of what their testimony 
today is is similar to what it was 2 weeks ago, so I share your 
concerns and I will be addressing them with the Secretary or 
his deputy later today, I hope.
    We do have several more opening statements, but Mr. Sweeney 
has a pending engagement at 11:30, so we are going to attempt 
to expedite these opening statements.
    The distinguished gentleman from Illinois, Mr. Rush, who I 
am sure his constituency has experienced more than most of our 
constituencies the pain of some of these higher energy prices 
recently, will be recognized for an opening statement.
    Mr. Rush. Thank you, Mr. Chairman, and you are absolutely 
correct. My constituency has faced many, many problems as it 
relates to the escalating prices, oil prices, and I want to 
thank you for calling today's hearing on the issue of oil price 
fluctuations.
    I especially think it is important that our subject for 
hearing this morning is just not the high price of gasoline at 
the pumps or the price of heating oil this winter. Really our 
hearing must focus on the volatility of our markets. Just a 
year ago crude oil was selling for approximately $11 a barrel. 
Today it is selling for $30 a barrel. Now we certainly all 
understand how the free market economy works. When supply is 
high and demand is low, prices will fall. When supply is low 
and demand is high, as we know, prices will rise.
    That said, my issue is not with the free market economy. My 
issue is with how we have allowed ourselves and our Nation to 
be manipulated by it.
    During the first session of this Congress, this 
subcommittee held hearings on what could be done to assist 
domestic oil producers to keep their wells open. Situations 
like the one we face today was used as an argument for giving 
assistance to domestic producers. In response to today's high 
prices, the Administration appropriately took action by 
releasing LIHEAP funding for the lower income. Additionally, 
the Administration waived on a case by case basis certain 
environmental standards and currently on the Hill there is 
discussion of dropping the Federal gasoline tax.
    That said, Mr. Chairman, these proposed remedies are not 
remedies to solve the issue of price fluctuation and our 
Nation's vulnerability to such fluctuations. Really what we 
must be about today and what we must be about when prices come 
back down is figuring out a way to decrease our Nation's 
vulnerability to fluctuating prices. We are present here at the 
dawn of the 21st Century. We are seeing technology that our 
parents and grandparents never dreamed of, and, Mr. Chairman, I 
find it hard to believe that in this day and age American 
cannot find a workable solution to oil price fluctuation.
    What is the solution? Well, we are not sure at this point, 
but maybe perhaps there must be a greater focus on the use of 
renewable energies. Maybe we should be looking at natural gas 
more closely. Perhaps we should increase our reliance on 
domestic production and maybe we need to rethink our heavy 
reliance on foreign oil. Quite frankly, I am not sure of the 
solution.
    However, I am certain that a quick fix today does not solve 
the problem tomorrow. Therefore, I am calling on the Congress 
and this subcommittee to work to solve this problem 
permanently--no quick fixes.
    Let us set up commissions, conduct studies, do whatever 
that we must do to prevent our Nation's vulnerability to 
fluctuating oil prices. This must be done to protect our 
Nation's economy and to protect our Nation's security.
    So Mr. Chairman, I fully appreciate the subject of today's 
hearing, but we must be about finding a permanent solution and 
not quick fixes, and with that, Mr. Chairman, I yield back the 
balance of my time.
    Mr. Barton. We thank the gentleman from Illinois for his 
thoughtful statement. We would like to now recognize the 
gentleman from Staten Island and part of Brooklyn, the baseball 
standout from the 13th District who is celebrating I am told 
today his 35th birthday, which means he is now eligible to run 
for President of the United States of America if he so wishes--
Mr. Vito Fossella.
    Mr. Fossella. Well, thank you very much, Mr. Chairman.
    Mr. Barton. Is it not true it is your birthday?
    Mr. Fossella. This is true.
    Mr. Barton. It is true?
    Mr. Fossella. As to the second, I decline.
    Thank you very much and thank you as always for holding the 
hearing.
    I think the last thing we need today, Mr. Chairman, the 
American people need today is another analysis as to why prices 
have run up. I think what the American people need are answers 
as to what this Administration and Members of Congress who have 
been resistent to allow greater emphasis on domestic oil 
producers and create of a dependency on a foreign cartel.
    I think if anything has come out of this hearing in the 
opening statements so far is that both sides of the aisle agree 
that the United States is too dependent on foreign cartels and 
there are things that this Administration can be doing to ease 
the regulatory burden on domestic oil producers to ease the tax 
burden and to create incentives so that we are less reliant 
upon this cartel.
    We have seen in the last several months those constituents 
of mine in Staten Island, Brooklyn, what the consequence of 
lack of action are. Yesterday on Staten Island at the pump, 
$1.99 for gasoline. We have a gentleman with us today, Mr. 
Peter D'Arco, who supplies home heating oil to a lot of people 
in my district, and he will tell you first-hand what happened 
when we saw that spike in home heating oil just a couple of 
months ago. A lot of citizens on fixed income are not going to 
be able to pay their bill.
    That is the consequence of lack of action, and I know a lot 
of people call for long-term solutions. Some people have called 
for commissions and studies. I don't think we need a 
commission. I think what we need is an articulate policy that 
says these tax burdens are too high, these regulatory burdens 
are too great, and then ultimately the constituents on Staten 
Island, my constituents in Staten Island, Brooklyn, will 
benefit and we will have a rational policy for the domestic oil 
producers around the country, particularly in the West and the 
South.
    I think if anything else, if I might add, it has been 
repeated a couple of times, but let us not just take a snapshot 
here and forget about it. Let us not just tell the American 
people that we are doing something when in reality nothing may 
come out of it. I think what you need and what this country and 
what the people of this country need is less rhetoric and more 
action.
    I know our colleagues here have also felt the brunt. I know 
Congressman Sweeney in upstate New York and Congressman 
Sherwood in Pennsylvania get hit even harder, and you have been 
vocal advocates in trying to bring about relief and trying to 
help your constituents and I appreciate your coming here today. 
You have done a great job as well.
    Mr. Chairman, I think what--if I could underscore one more 
time--that life is a two-way street, and this issue of OPEC's 
decrease in production, I agree with my good friend from Ohio, 
that several years ago we lost American lives because we were 
there for Saudi Arabia and Kuwait and now, all of a sudden, it 
seems that they forgot those lives that were lost.
    Right now there are being in Staten Island, Brooklyn, 
across the Northeast who are paying a lot for gas at the pump 
and home heating oil. If anything comes out of this, and I am 
as big a believer in the free market as anybody here, but 
technically we do not have one because as long as we are 
dependent on places like Saudi Arabia, Kuwait and Mexico and 
Venezuela for our oil, we do not live in a free market. If 
anything comes out of this, I would hope it is a united 
Congress and an Administration that sends a signal around the 
globe that when the chips are down for us we expect help, just 
as we are there for them when they need help. With that, I 
yield back the balance of my time, Mr. Chairman.
    Mr. Barton. Thank you, Congressman, and I want to commend 
you on the effort that you put in on this issue. You were one 
of the first Congressmen to ask me to conduct this type of a 
hearing and you have been very aggressive in seeing to the 
needs of your constituents and you are to be commended on that.
    Our last opening statement is going to be from the 
gentlelady from New Mexico, Congresswoman Heather Wilson, who 
has helped this subcommittee in obtaining a witness for later 
in today's hearing. Congresswoman Wilson.
    Mrs. Wilson. Thank you, Mr. Chairman, and I wanted to thank 
you for holding this hearing.
    I have a slightly different situation than the folks in the 
Northeast in that New Mexico doesn't rely as much on home 
heating oil, but on Sunday the price of a gallon of gas at the 
Chevron station at I-25 in Lomas was $1.49.9 and it is probably 
2 or 3 cents higher than that by today. The New Mexico Hotel 
and Motel Association says that they have historic low advance 
bookings for June, July and August and the No. 1 reason they 
believe--that we have got a great economy otherwise--but people 
are not planning to drive this summer and it is going to affect 
tourism across America.
    Eighteen months ago, or for the 18-month period between 
1997 and mid-'99, we had historic low prices for oil that cost 
$3.7 billion to the New Mexico economy, 1500 jobs and $25 
billion to the Nation as a whole. Where was this Administration 
on energy policy then? Frankly, it is pretty much where we are 
now. I don't think they have a policy and we are all suffering 
the fluctuations because of it.
    The reality is that the problem is the fluctuations and it 
is the dependence on foreign oil that is driving many of those 
fluctuations. It is not a free market. It is a cartel. You are 
exactly right--and those countries will do what it is in their 
national interest to do.
    In 1998 52 percent of the oil consumed in the United States 
was from foreign sources. That is the highest level in history, 
the highest percentage in history, and at the same time we have 
a tax structure and a regulatory structure that cuts off 
responsible exploration, that encourages foreign exploration, 
and that limits offshore drilling. We have taxes on gasoline, 
and most folks don't know that of that $1.49 they paid last 
weekend at the pump per gallon 18.3 cents is in Federal taxes. 
It used to be 14 cents before the tax hike of 1993. The same 
with diesel--24.3 cents is taxes.
    I think the question today that I am going to have for some 
of the folks particularly from the Department of Energy is what 
is the plan? For 12 months--it was 12 months ago that OPEC said 
we are going to cut production and started to hold together. As 
long as a cartel holds together America has a problem. They 
were inactive for 12 months and then we see a flurry of 
airplanes going around the world asking people on bended knee 
with hat in hand to increase production. That is not a policy. 
That is a plea, and we need to come up with a policy.
    I am glad they released the LIHEAP funds for folks in the 
Northeast and I hope that that helped some, and likewise 
looking at weatherization assistance, but that doesn't solve 
the problem. These are little band-aids and we need to get a 
serious policy to reduce reliance on foreign production.
    Thank you, Mr. Chairman.
    Mr. Barton. Thank you to the gentlelady from New Mexico. We 
are now going to welcome our first panel. All other members are 
not present who have yet to make an opening statement who wish 
to make an opening statement, the Chair would ask unanimous 
consent that their statement be included in the record at the 
appropriate point.
    Is there objection? Hearing none, so ordered.
    [Additional statements submitted for the record follow:]
Prepared Statement of Hon. Cliff Stearns, a Representative in Congress 
                       from the State of Florida
    Thank you Mr. Chairman for holding this hearing.
    One dollar and eighty cents. That's what average Americans can 
expect to pay for a gallon of gasoline this summer. Home heating oil 
will cost even more. So, I need not emphasize the importance for this 
Subcommittee to examine the recent spike in oil prices and how this 
Administration deals with such changes in the market.
    In February of last year, crude oil was $12 per barrel. 12 months 
later--the cost rose to over $30 per barrel. Though these prices, when 
adjusted for inflation, are below historical oil prices, there is cause 
for concern.
    Some have called for the President to drawdown the Strategic 
Petroleum Reserve. At this time, I would caution against such action. 
This reserve was created to sustain the US in the event of a major 
disruption in its energy supply.
    However, we must examine all aspects of this issue including 
allegations of ``price gouging'' by oil companies and most importantly 
our dependence on foreign oil. Our dependence on foreign oil has 
increased since the oil crisis in the 70's. Over 50% of our oil is 
imported leaving our economy at the whim of a handful of nations. This 
is a national security concern. And one not to be taken lightly.
    Regardless of where each of us stands on addressing the oil price 
issue, I am most concerned with the Administration's handling of this 
recent price spike.
    In March of 1999, OPEC met and agreed to reduce oil production. 
That was nearly a year ago. The federal government had more than enough 
time to prepare for what inevitably would result from a decrease in 
supply--an increase in price.
    In fact, the Department of Energy did not announce any major action 
until just last month per its news release dated February 10. Even more 
amazing is that Secretary Richardson in a Boston meeting was quoted as 
saying ``the federal government was caught napping.''
    Heaven forbid if any of our military leaders were to use such an 
explanation.
    And speaking of unprepared, for the record Mr. Chairman, I would 
like to note that DOE did not get its testimony to the subcommittee 
until 8:30 last night. However, I guess we should be used to this by 
now.
    I do question some of the actions proposed or taken by the 
Administration. For instance, the President released nearly $300 
million in Low-Income Home Energy Assistance Funding in response to the 
home heating oil crisis.
    While, this undoubtedly provided needed relief, I wonder if the 
Administration considered that much of the emergency LIHEAP funding 
will also be needed for air conditioning in the summer. We can expect 
another summer of extreme heat and many Americans will need such 
assistance.
    In addition, waiving ``hours of service'' regulations for 
commercial trucking and deferring routine maintenance at refineries may 
cause more additional problems.
    Mr. Chairman, we have a lot to learn today, and I look forward to 
the testimony of our distinguished Member panel, as well as the 
Administration and Industry witnesses. Thank you.
                                 ______
                                 
 Prepared Statement of Hon. Tom Bliley, Chairman, Committee on Commerce
    Mr. Chairman, before I give my statement I would like to welcome 
Congressman Boucher from my home State of Virginia as the new ranking 
member on this Subcommittee. I think the gentleman will make an 
excellent ranking member and I am happy to see we have finally broken 
the lock the State of Texas has had on this Subcommittee.
    Thank you, Mr. Chairman. I'd like to commend you for holding this 
hearing on oil prices and I welcome the Members that have come to 
testify before the Subcommittee today.
    As everyone is well aware, recently there has been a dramatic 
increase in the price of crude oil and oil products, including home 
heating oil, gasoline, and diesel fuel. Although heating oil prices 
have declined as the temperature has risen, I am told gasoline prices 
for this summer will reach heights we haven't seen for years. Like many 
members, I am concerned about the impact these high oil prices are 
currently having on consumers and on our economy.
    There are always events out of our control that impact the price we 
pay for oil: the decision of OPEC to decrease production; a sudden, an 
unexpected cold snap; an increase in the demand for oil in Asia; and 
the unexpected shutdown of refineries. Given all that, this hearing 
will look at whether government intervention is necessary or 
appropriate on this matter.
    This hearing will provide an opportunity to explore this country's 
policy on oil markets and our energy security. We need to assure that 
the U.S., not officials in countries thousands of miles away, is in 
charge of its energy policy.
    I welcome today's witnesses, and I am especially looking forward to 
hearing the testimony of our colleagues. Thank you.
                                 ______
                                 
Prepared Statement of Hon. Ron Klink, a Representative in Congress from 
                       the State of Pennsylvania
    I want to thank Chairman Barton and Ranking Member Boucher for 
holding this hearing today to talk about high fuel prices and what we 
can do to bring relief. I want to welcome all of our witnesses today, 
especially Mr. Sam Farruggio, who is from Bristol, Pennsylvania, and 
who runs a trucking business of over 100 trucks in the northeast. Mr. 
Chairman, I will also submit for the record a statement from Mr. Jim 
Luchini of Kirk Trucking in Delmont, Pennsylvania, who sent me figures, 
back in January, showing that prices at the diesel fuel pumps increased 
in some places by 10 cents in 24 hours. Also, on January 26th, the 
Pittsburgh Post Gazette reported that diesel prices shot up about 40 
cents in the previous week.
    We need to get the price of crude oil down to normal levels so our 
folks can afford to live. The problem began in March of last year, when 
OPEC decided to cut oil production by 7.5% because they wanted bigger 
profits. As a result, home heating oil prices skyrocketed, and diesel 
fuel prices haven't been under $1.00 a gallon since. Diesel fuel prices 
in Pennsylvania were up to $1.96 a gallon at the beginning of February 
and, as of March 6th, are now $1.60 a gallon.
    I am here today to tell you that I understand and appreciate what a 
dramatic impact these increases are having on truckers and their 
families, and on people trying to pay their home heating bills.
    Here is a case study. In February, when the Independent Truckers 
drove their trucks in to Washington to protest skyrocketing diesel 
prices, the Washington Post wrote a story about the Ericksons from 
Meyerstown, PA who own their own rig. Mrs. Erickson is now helping her 
husband to drive the truck, to make ends meet and to cover operating 
costs, and they had to pull their 14-year-old daughter out of school 
and are now home-schooling her in the cab of their truck. No family 
should have to disrupt their lives so drastically, because of high 
prices at the gas pumps.
    Congress, and the Administration, have discussed every option 
imaginable. Congress has met with President Clinton, and Energy 
Secretary Richardson has been all over the Mideast urging OPEC 
countries to increase production. After our citizens fought the Persian 
Gulf War, risked their lives, and some lost their lives, to keep our 
allies free (Kuwait) the least they can do for us is to increase oil 
production. After meeting with Secretary Richardson, OPEC nations have 
agreed to meet on March 27th to decide whether they will increase 
production.
    This week, I have introduced a resolution in the House saying that, 
if OPEC leaders fail us, and don't increase production, the President 
should draw down the Strategic Petroleum Reserve (SPR) to give us 
relief The SPR contains 586 million barrels of oil, and if OPEC fails 
us, then we must tap in to our own reserves. I would appreciate the 
support of my colleagues on the Committee for this resolution.
    I am also a co-sponsor of a bill, introduced by Congressman Sanders 
of Vermont, to create a special 6 million barrel oil reserve for the 
northeastern states. This will help diesel truck drivers, farmers, who 
must operate tractors, drivers of regular cars, and persons paying home 
heating oil bills. Here is how it will help: if we have an emergency or 
severe winter weather, the 2 million barrels of oil will be used for 
home heating oil purposes. If the severe winter continues, then we will 
draw on an additional 4.7 million barrels of oil kept in reserve to 
heat homes. That way, diesel fuel will not be confiscated to use as 
home heating oil, because the reserves were there. This will keep 
prices down for truckers, car drivers, and farmers driving tractors.
    In addition, as quickly as possible, Congress needs to pass the 
Supplemental Appropriations bill in which the President asked for an 
additional $600 million for LIHEAP funds, $19 million for the Home 
Weatherization Program run by the Department of Energy and another $1 
million for the Small Business Administration to provide low-interest 
loans for small businesses to get through the crisis.
    If more Pennsylvanians can weatherize their homes, their heating 
bills will go down. The extra funds for LIHEAP will give SBA a total of 
$86 million to give loans to home heating oil dealers so they can 
extend flexible payment terms to their customers. Loans will also be 
available to loggers and truckers who were affected by the price 
spikes.
    I look forward to working with my colleagues in Congress and the 
Administration to determine whether we need to re-examine our policy 
regarding the Strategic Petroleum Reserve and United States energy 
policy in general.
    Again, I want to thank our witnesses, especially Mr. Farruggio who 
came from Pennsylvania and gave us the message we all must remember--
``we have seen the fuel prices move as much as 15 cents a in one day 
and changes at the pump two to three times in one day.'' We must 
resolve this, so working men and women of America can afford to live 
and work without passing costs on to consumers due to high oil prices. 
Thank You, Mr. Chairman.

    Mr. Barton. Due to a pending engagement, we are going to 
recognize the gentleman from New York, the Honorable John 
Sweeney. We will go with you first, then we will start with Mr. 
Moran, Mr. Sherwood, and hopefully by that time Congressman 
Crowley of Pennsylvania will be joining us, so Mr. Sweeney, 
your statement is in the record in its entirety and we 
recognize you for 5 minute to summarize and appreciate your 
appearance before the committee.

    STATEMENTS OF HON. JOHN E. SWEENEY, A REPRESENTATIVE IN 
   CONGRESS FROM THE STATE OF NEW YORK; HON. JERRY MORAN, A 
 REPRESENTATIVE IN CONGRESS FROM THE STATE OF KANSAS; HON. DON 
   SHERWOOD, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF 
  PENNSYLVANIA; AND HON. JOSEPH CROWLEY, A REPRESENTATIVE IN 
              CONGRESS FROM THE STATE OF NEW YORK

    Mr. Sweeney. Thank you, Mr. Chairman. I want to thank you 
and the ranking member, Mr. Boucher, for conducting this 
hearing. I am extremely thankful. As you know, I have had a 
number of conversations with you in the halls of Congress about 
this particular issue.
    And while we may not agree on all or share the same views 
on all of the issues attendant here, I think we do agree on the 
need to begin to develop the process for finding a long-term 
solution based on self-reliance.
    This hearing is an important event for those of us in the 
Northeast, because, frankly, the Administration has viewed this 
with benign neglect. They have ignored our pleas and they have 
shown no leadership.
    They have detached; they don't feel our pain. And I think 
if I can do something important here, it will be to put a human 
face on what's happening in my region of the United States in 
upstate New York.
    Many of my constituents have been shocked at what has 
happened with fuel and oil prices as they have risen, but I'd 
like to start by saying that as New Yorkers, we prepare and 
plan for all sorts of weather conditions in the Winter, and we 
have a lot of experience.
    Whether it's families putting plastic over their windows 
for extra insulation, or pulling sweaters out for warmth, or 
adjusting the thermostat down to preserve fuel, New Yorkers, we 
know how to prepare for cold winters.
    But this is one that we were really caught by surprise on, 
and I think it will give you a real sense of the kind of issues 
that exist out there, as you begin the journey to find 
solutions.
    In January, one constituent called and told me that he was 
using his overtime wages to pay the heating bill, rather than 
saving for his children's education.
    A senior citizen called and explained that she didn't act 
quickly enough to stop the oil distributor from delivering the 
recap on her oil tank, and filling her oil tank, as is usually 
done in my neck of the woods, was faced with a $450 oil bill.
    This woman is collecting a Social Security check each month 
for just under $400, and this current situation is real to her. 
It leaves her finances decimated.
    These are just two of the many examples of this horrendous 
situation, and how people are dealing with this extreme 
hardship. With the high cost of home heating fuel ruining many 
family budgets, people have had to cut expenses elsewhere.
    Often, too many people are literally having to choose 
between putting food on the table for their families and having 
a warm home.
    The crisis has been so severe that an oil distributor in my 
District recently told me that he was hoping for warmer weather 
quickly. That's like hearing that Frosty the Snowman wants to 
sing about how he is looking forward to Spring.
    This gentleman told me that they were only delivering in 
quantities of 100 gallons, because most folks could not afford 
more, and he could not get enough fuel from producers to 
satisfy the demand, because there was not enough heating oil in 
the region.
    For further reference, he usually will not deliver less 
than 150 gallons, because he can't justify the cost.
    Truckers, as many of your committee have pointed out, are 
feeling the pinch in high diesel prices. Mr. Bryant mentioned 
the rally that was held earlier this month in Washington.
    I live in an area where mass transit is not readily 
available. The trucking industry is a major, major component of 
our economy, and the area is very dependent on moving goods and 
supplies by using truckers.
    Many truckers in my District are finding it too expensive 
to start their engines, and are simply quitting the business. 
An industry that already has a shortage of drivers doesn't need 
this additional burden.
    The stories continue: Whether it's the small manufacturing 
plant pouring its profits into fuel tanks, the grocers who must 
pay more for food to be shipped, the local government that 
finds its heating bills doubled, forcing them to cut back on 
services; this crisis has affected everyone in the region.
    In response to this emergency situation, I have sent, as 
have other Members of Congress, sent letters to the President 
and to the Secretary of Energy, asking them to release 
emergency LIHEAP dollars and to consider opening the Strategic 
Petroleum Reserves to get more oil into the region.
    Many of our colleagues have joined us, as I said, in this 
call, asking that we reduce the burden in the Northeast, in 
particular, but with all due respect to those who feel 
otherwise about the Administration's response to this, it has 
been grossly inadequate.
    They have been, as I said earlier, treating this with 
benign neglect. The entire State of the New York, in the first 
release of funds, received $2.6 million in emergency 
assistance, while our friends in Maine and in surrounding 
States received five times that emergency aid.
    We quickly called for assistance to help New Yorkers, but 
were rebuffed by the Administration, which still refused to 
acknowledge there was an emergency situation in the first 
instance.
    Only after LIHEAP funds became an issue in the current New 
York Senatorial race, did the White House release more funds. 
Too little, too late, is what we heard from most of the 
constituents and most of the people in upstate New York.
    The White House had an opportunity to release from the SPR 
in January, yet they have steadfastly denied there was any 
problem in the first instance. Now, after belatedly 
acknowledging that there is not enough oil in the market, the 
Secretary of Energy has traveled the world with hat in hand, 
asking OPEC to increase oil production to help get us out of 
this situation.
    In 1984, President Reagan announced that the SPR would be 
drawn down in early in disruption such as what the Northeast is 
experiencing now. If this Administration had acted when they 
were first asked to, and acted in accordance with President 
Reagan's policy regarding the SPR, this crisis may have been 
shortened.
    By strategically releasing oil from the reserves into the 
Northeast in January when there was a definite disruption in 
the oil supply, oil would have made it through the process to 
the consumer at a much cheaper price by mid-February.
    I see that my time has expired, Mr. Chairman. I want to say 
that I have a couple of bills in committee that I'd like you to 
consider:
    One that would require the Department of Energy to study 
and report back to you, the causes, and to make definitive, 
tangible recommendations; and the second is to create a 
Northeastern Reserve so that we in the Northeast may find an 
ability to be independent in and of ourselves.
    But I can't overstate how critical this issue is in my neck 
of the woods, how people are really suffering from this issue. 
I thank you very, very much, for conducting this hearing, and 
hopefully beginning a real discussion and national debate on 
how we make sure that this never happens again.
    [The prepared statement of Hon. John E. Sweeney follows:]
    Prepared Statement of Hon. John E. Sweeney, a Representative in 
                  Congress from the State of New York
    Good morning Chairman Barton and Ranking Member Hall. Thank you for 
allowing me the opportunity to testify before the committee. I 
congratulate you for holding a hearing on this important topic and am 
pleased to be able to help shed some light on this terrible situation. 
My comments will be directed at the recent home heating fuel price 
surge in the Northeast and its effect on my constituents.
    As you know, the recent heating fuel price spike sent home heating 
oil, kerosene, and diesel prices through the roof. Many of my 
constituents were shocked when home heating oil prices rose from just 
over a dollar per gallon last fall to more than two dollars per gallon. 
No one can accuse New Yorkers of not expecting temperatures to drop 
during the winter months--everyone knows and prepares one way or 
another. Whether families are putting plastic over their windows for 
extra insulation, pulling out sweaters for warmth, or waxing their skis 
in preparation for the coming snow, residents of New York know cold 
weather.
    However, the sudden cold snap, which kept the region in icebox 
temperatures for weeks, sent heating fuel prices skyrocketing. In 
January, one gentleman called and told me his story--how he is using 
his overtime wages to pay the heating bill rather than saving for his 
child's education. A senior citizen called and explained that she was 
not quick enough to stop the oil distributor from filling her heating 
oil tank like ususal, and was faced with a $450+ oil bill. Her Social 
Security check for the month was for just over $400--leaving her 
finances decimated. These are just two of the many people who contacted 
me about this horrendous situation. With the high cost of home heating 
fuel ruining many family budgets, people have to cut expense elsewhere. 
Too many people are having to choose between food on the table and a 
warm home.
    Another perspective of the problem came from an oil distributor in 
my district who told me he was hoping for warmer weather. That's like 
hearing Frosty the Snowman sing about how he's looking forward to 
Spring! This gentleman told me they were only delivering in quantities 
of 100 gallons--because most folks could not afford more and he could 
not get enough fuel from producers to satisfy demand because there was 
not enough heating oil in the region. For reference, he usually will 
not deliver less that 150 gallons--because he cannot justify the cost.
    Truckers are feeling the pinch of high diesel prices too. To drive 
their point home, they staged a mass protest of high diesel fuel prices 
by driving in convoy down to the heart of Washington. Many truckers in 
my district are finding it too expensive to start their engines and are 
quitting the business. An industry that already has a shortage of 
drivers does not need this additional burden.
    The stories continue. Whether it is the small manufacturing plant 
pouring its profits into fuel tanks, the grocers who must pay more for 
food to be shipped, the local government that finds its heating bills 
doubled forcing them to cut back on services, this crisis affects 
everyone in the region.
    In response to this emergency situation, I sent letters to the 
President and Secretary of Energy asking them to release emergency 
LIHEAP (Low Income Heating Energy Assistance Program) funds and to 
consider opening the Strategic Petroleum Reserve to get more oil into 
the region. While many of my colleagues joined me in saying there was 
an emergency situation in the Northeast, the Administration was 
hesitant to act.
    The Administration's initial response, in my view, was inadequate 
at best. The whole state of New York received a whopping $2.6 million 
in emergency assistance, while our friends in Maine received five times 
as much emergency aid. I quickly called for more assistance to help New 
Yorkers but was rebuffed by the Administration, which to my dismay, 
still refused to acknowledge there was an emergency situation. Only 
after the LIHEAP funds became an issue in the New York Senatorial race 
did the White House release more emergency LIHEAP funds.
    ``Too little too late'' is what I heard from many people. The White 
House had the opportunity to release oil from the SPR in January, yet 
they steadfastly denied there was a problem. Now, after belatedly 
acknowledging there is not enough oil in the market, the Secretary of 
Energy has traveled the world--hat in hand--asking OPEC to increase oil 
production to help get us out of this situation.
    In 1984, President Reagan revised its earlier position by 
announcing that the SPR would be drawn down early in a disruption--such 
as the Northeast experienced. If the Administration acted when I asked 
them to, and in accordance with President Reagan's policy regarding the 
SPR, this crisis may have been shortened. By strategically releasing 
oil from the reserves into the Northeast in January, when there was a 
definite disruption in the oil supply, oil would have made it through 
the process to the consumer at a much cheaper price by mid-February.
    Regardless of Administration actions, all the LIHEAP money in the 
world wasn't going to help folks who didn't qualify. Even people who 
did qualify for LIHEAP funds were going forced to wait for their 
checks, because bureaucracy cannot work that fast.
    To prevent this appalling situation from happening again I 
introduced the Home Heating Fuel Price Spike Act (H.R.3641). My 
legislation takes two simple steps in this effort. First, H.R. 3641 
requires the Department of Energy to fully examine the oil crisis and 
report back to Congress exactly what happened so we can effectively 
work together to prevent future problems. The Study also requires the 
Secretary of Energy to propose alternatives to alleviate future home 
heating fuel shortages and make recommendations with respect to the 
suitability and feasibility of each alternative.
    Some factors that caused the shortage of heating oil in the 
Northeast region are:

 Sudden cold snap.
 Poor judgements of how much supply to keep on hand--because 
        the last three winters were warmer than usual.
 Weather related delivery problems--ice on the river, etc.
 Interaction with the natural gas supply.
 Volatile commodity market.
 OPEC policies.
    The question is--how do these factors interrelate. My legislation 
will help us get the answers we need.
    H.R. 3641 creates a 10 million barrel heating oil reserve in the 
Northeast region that can be tapped in times of trouble. The reason for 
creating a reserve in the region, rather than capitalizing on the 
existing SPR, is the amount of time it takes to get oil from the SPR to 
the Northeast. There is a definite possibility that in the future, a 
severe cold spell will shut down river traffic for an extended period 
of time, leaving thousands of residents without access to heating oil. 
In an emergency like this, it will take too long to find enough trucks 
to haul a million barrels of oil, then load up the trucks and drive 
them halfway across the country. The only reasonable solution to this 
problem is to establish a heating oil reserve in the region.
    Whether we establish one, two or three different sites across the 
Northeast--in times of emergency, oil distributors would not have to 
wait for oil to be trucked across the country. Since the problem is 
getting heating fuel into the region, having a reserve located there 
solves half the problem.
    H.R. 3641 will help us get the facts on what thrust us into this 
situation, so that we can work together to prevent such an emergency 
from happening again. Creating a heating oil reserve in the region to 
guard against future shortages is a good and necessary first step.
    We have lived through a terrible crisis that never had to happen. 
Too many families have had their savings depleted and budgets racked. 
Too many have had to choose between food on the table or a warm home. I 
am grateful that nobody has died because of this needless tragedy. By 
considering H.R. 3641, we will get the answers we need. I look forward 
to working with you on this extremely important issue.
    Thank you again for allowing me the opportunity to testify before 
the committee. This concludes my testimony.

    Mr. Barton. Thank you, Congressman. I can assure you that 
this is not the only hearing we're going to have this Spring or 
Summer on this issue. This is not an ending; this is a 
beginning.
    I now recognize the gentleman from the great State of 
Kansas. Again, your statement is in the record in its entirety, 
and we would recognize you for 5 minutes to summarize, Mr. 
Moran.

                 STATEMENT OF HON. JERRY MORAN

    Mr. Moran. Mr. Chairman and Mr. Boucher, thank you for the 
opportunity to appear once again before this subcommittee.
    Three years ago this month, I made my first speech on the 
House floor, highlighting the importance of domestic oil 
production, and our dangerous reliance upon imported oil, and 
calling for the development of a national policy on our 
dependence.
    At that time, oil prices were sliding, were under $15 a 
barrel; gasoline was around 80 cents a gallon. Within the next 
12 months, the price of crude would reach $7.75 per barrel for 
Western Kansas Crude, and would remain under $10 a barrel for 
most of the next year.
    As a result of this dramatic price decline, more than 
136,000 wells were shut down, and more than 41,000 jobs were 
lost in the oil and gas industry.
    This amounts to 136,000 wells and 41,000 people not today 
producing oil to meet the country's energy needs.
    It was during that time that I introduced legislation aimed 
at reducing the cost of production for independent oil and gas 
producers. The bill I introduced seeks to boost domestic 
production by lowering the tax burden on independent producers, 
increasing the credits for advanced oil recovery, and calling 
for a strategic plan, including additional research and 
development to address our national security needs when oil 
imports reach 60 percent.
    While the focus of today's subcommittee hearing is on the 
cost of energy paid by the American consumer, the solution for 
today's consumer is the same as the solution for the 
independent oil producer. We must encourage production in our 
domestic industry, and limit our dependence upon foreign 
supplies of petroleum.
    High oil prices are a burden that we all bear. Kansas is a 
transportation-dependent State with long distances between our 
communities and many commodities to haul, and we normally have 
an extremely cold Winter.
    Whether it's the Kansas farmer preparing now his fields for 
Spring planting, the trucker hauling wheat to the elevator, or 
the Kansas City commuter on her way to work, we all pay when 
our dependence on foreign oil becomes too great.
    While we may be upset about the current situation, we 
certainly can't say it comes as a surprise. In the last 7 
years, U.S. oil production has fallen by nearly 20 percent, 
while oil consumption continues to increase.
    During the 25 years since the last oil crisis when we lined 
up at the pumps, our reliance on foreign oil has increased from 
37 percent to nearly 57 percent today. Today's higher crude 
prices alone are insufficient to increase domestic production, 
particularly in the short run.
    Kansas producers who have lost much of their equity in the 
years of 1997, 1998, and 1999, find it very difficult to 
convince lenders to take a risk in exploring and developing new 
leases now in the year 2000.
    When prices are dependent upon the actions of OPEC rather 
than on free market forces, the ability to take risks necessary 
to find and produce new sources of oil and gas are limited.
    Does the Kansas small, independent producer invest 
necessary money today, not knowing what the world price will be 
tomorrow? In Kansas, the average daily production is 2.2 
barrels per day.
    The cost per barrel is very high, and the price received 
for that barrel determined by foreign suppliers. The stability 
which comes from greater control of our own destiny through 
increased domestic production is what is required.
    Today's situation is a clear signal for Congressional 
action. It's our obligation to develop tax policies, regulatory 
policies, and research funding that will allow us to raise 
domestic production to meet the demands of the U.S. economy.
    Mr. Chairman, I do not come here today to indicate that the 
legislation that I introduced last year is the be-all and end-
all or the solution to the current situation. There are many 
other options that you will hear about, and they should be 
considered.
    However, I do come here today to say that our strategy for 
dealing with our energy needs must be something more than 
simply begging at OPEC's door. Thank you.
    Mr. Barton. Thank you, Congressman. We appreciate your 
leadership on that legislation, and it will be at the top of 
legislation that this subcommittee will be looking at. I can't 
guarantee you that we're going to come down exactly where you 
are, but it's certainly a good place to start looking.
    Mr. Moran. Thank you, Mr. Chairman.
    Mr. Barton. We'd now want to recognize a very patient 
Congressman from the great State of Pennsylvania, Mr. Sherwood, 
who has been a strong advocate for action in this area. He also 
has been very aggressive in working with me to try to help us 
put this hearing together.
    Your statement is in the record in its entirety, 
Congressman, and we'll recognize you for 5 minutes to 
summarize.

                 STATEMENT OF HON. DON SHERWOOD

    Mr. Sherwood. Thank you very much, Mr. Chairman. I 
appreciate your consideration, and I think this is a very 
important issue today.
    And if you'll look at the Northeast, it will give you a 
road map of where we might be going in our current oil crisis. 
This Winter in the Northeast, we had an extreme shortage and an 
extreme price spike.
    Diesel fuel went from $1.30 to $2.60. Home heating oil went 
from 90 cents to $1.80, so we had elderly people trying to 
decide whether to buy food or buy fuel. You've heard all those 
stories.
    The people who are making out great in the Northeast are 
the people who repossess trucks. Their lots are full. All the 
repossession guys are going out to pick up the trucks of the 
independent truckers who have had their costs go up so 
strongly, so quickly, that it has disrupted their lives and 
ruined their livelihoods.
    And I know that you folks from the oil patch have seen that 
in the past. When the price of oil gets ridiculously low, there 
is crisis in the oil patch.
    When it gets short or ridiculously high, there is crisis in 
the Northeast and across the rest of the country.
    And, you know, we talked very strongly to Secretary 
Richardson this Winter that we needed some action. We didn't 
get it.
    When the Northeast got short on oil, then the speculators 
took over on the New York Merc, and there were fortunes made 
because of the shortage of oil. That fortune didn't go to the 
independent producers in the oil patch; it went to the people 
who were able to speculate on the New York Merc.
    So, I'd like to think of the Strategic Petroleum Reserve as 
flood control dam. And I think that when your prices are low, 
we ought to buy in that Reserve very heavily; when there is a 
shortage or there is not enough oil and the prices are very 
high in the rest of the country, that's a good time to let a 
little of the flood control waters out of that dam.
    We have to have an energy policy, and it doesn't seem to me 
that we have an energy policy. We need to find both short-term 
and long-term solutions by which the United States can reduce 
its dependence on foreign oil.
    As a member of the Armed Services Committee, I'm 
particularly concerned about our reliance on foreign oil which 
may be cutoff during times of crisis. After the fall of the 
Warsaw Pact forces, we have dramatically reduced the size of 
our Armed Forces.
    If we're confronted with responding to a multi-front 
crisis, we would have the ability to prevail only on our 
national security objectives if they diverged from those of 
OPEC nations. If our oil supply is at any time shut off, we're 
in very grave danger.
    I think that if we could develop a policy where if oil is 
cheap and the oil patch is in crisis, that's a great time for 
the Strategic Oil Reserve to buy. If we're short, that's a good 
time to use that as a lever.
    If we had released the Strategic Petroleum Reserve in 
January as President Bush did 10 years ago, it would have 
discouraged the speculators on the New York Merc, and it would 
have saved a great deal of pain and suffering, ruination of 
lives, crisis situations, and failed businesses in the 
Northeast.
    Mr. Chairman, thank you for giving me the opportunity to 
testify on this most important matter. The time for action is 
now.
    We need to create an effective national policy which is 
prudent, responsive to demand, and sound. Thank you for your 
consideration.
    Mr. Barton. We want to thank you, Congressman Sherwood, for 
your attention to this matter. Your expertise is going to be of 
benefit to the subcommittee as we continue on these hearings, 
and then decide what legislative action, if any, to take.
    We are not going to ask the Congressional panel questions. 
We can meet with you individually and collectively, if 
necessary. Our other panel members, we don't have that option, 
so we're going to excuse you.
    The Chair will announce that if Congressman Crowley does 
show up, we'll put him on the panel that's currently before the 
subcommittee. But this panel is excused.
    We'd now like to call forward our panel from the executive 
branch. We should have in the audience, Mr. Mark Mazur, who is 
the Director of the Office of Policy for the United States 
Department of Energy; we should also have Dr. John Cook, who is 
the Director of the Petroleum Division of the Energy 
Information Administration; and we should have Mr. Richard G. 
Parker, Director of the Bureau of Competition for the United 
States Federal Trade Commission.
    Mr. Barton. Gentlemen, welcome to the subcommittee. Your 
testimony is in the record in its entirety, although two of you 
were somewhat tardy in getting it to the subcommittee; but, 
that will be addressed at a later time. We're going to start 
with you, Dr. Cook. We'll put your statement in the record. 
We're going to recognize you for 7 minutes. Then, we'll go to 
Mr. Mazur; then, we'll go to Mr. Parker. So, Dr. Cook, welcome 
to the subcommittee and you're recognized for 7 minutes.

STATEMENTS OF JOHN COOK, DIRECTOR OF PETROLEUM DIVISION, ENERGY 
  INFORMATION ADMINISTRATION; MARK MAZUR, DIRECTOR, OFFICE OF 
POLICY, DEPARTMENT OF ENERGY; AND RICHARD G. PARKER, DIRECTOR, 
        BUREAU OF COMPETITION, FEDERAL TRADE COMMISSION

    Mr. Cook. Thank you, Mr. Chairman. I wish to begin by 
thanking the committee for the opportunity to testify on behalf 
of Jay Hakes, the administrator of the Energy Information 
Administration. Regrettably, he was unable to be here today.
    As has become increasingly apparent to consumers, world 
crude oil and refined product prices have risen rapidly over 
the last 12 months, from about $12 a barrel in February 1999 
for crude oil, to as high as $34 this week. While the change is 
dramatic, I would be remissed in not noting that in inflation 
adjusted terms, such prices are still less than the $70 levels 
seen in 1981.
    The recent price rise is, of course, the result of a 
notable shift in the global balance between demand and crude 
production. Crude oil markets tightened in 1999, as OPEC and 
several other key exporting countries significantly reduced 
supply, while, at the same time, economic recovery in Asia 
restimulated demand growth. In 1999, global demand out paced 
production by over a million barrels a day, reducing surplus 
world inventories by almost 400 million barrels. If OPEC were 
to restrain production in this year to the levels seen 
recently, we estimate that the shortfall in 2000 would be as 
much as 2 million barrels a day.
    Further complicating the supply picture, crude oil prices 
have risen faster than product prices this year, reducing 
refining margins. This squeeze on margins, on top of already 
high crude oil prices, encouraged refiners to restrain crude 
purchases, restrict product output, and draw down crude and 
product inventory. By the end of last year, world stocks had 
dropped to very low levels, especially in the U.S.
    If I may call your attention to the first chart, on the 
east coast, distillate stocks began the winter season just 
past--almost past.
    Mr. Barton. Dr. Cook, is distillate, would we call that 
fuel oil?
    Mr. Cook. Yes, sir, that's--distillate, which is comprised 
of both heating oil and diesel fuel. And what we're seeing here 
is that we began the winter in October with more than ample 
supplies; but, by the end of December, stocks had dropped 
significantly below normal levels, which, of course, set the 
stage for the recent spike in heating oil prices.
    Low inventories leave little cushion to meet unexpected 
shifts in supply and demand and increase the risk of price 
fluctuations. In the northeast, heating oil prices and diesel 
prices surged in January, when a combination of cold weather 
and supply problems occurred in that region in the face of low 
stocks. With little cushion, local supplies were drained and 
prices spiked. In the 3-week period ending February 7, retail 
heating oil prices and diesel prices in New England rose 78 and 
68 cents, respectively. In contrast, prices for these fuels 
elsewhere in the country hardly budged.
    Fortunately, a flood of distillate imports arrived 
throughout the month of February, in response to these high 
prices. That, in combination with warm weather, eased these 
market pressures and by the end of last month, heating oil and 
diesel prices had fallen about 60 cents a gallon, offsetting 
much of the earlier rise.
    With the apparent end of winter in sight, I'd like to 
conclude my testimony by focusing some comments on the gasoline 
outlook. Tight crude oil markets are now impacting gasoline in 
much the same manner as earlier heating oil markets were 
impacted. The same crude-oil-induced squeeze on margins that 
drove down distillate stocks has now reduced gasoline 
inventories. With both crude oil and gasoline stocks at levels 
not seen for decades, gasoline prices are now climbing sharply, 
averaging $1.50 this week.
    Mr. Barton. When you say that, Dr. Cook, you're saying it 
is that they're at all time lows; that the stocks, the amount 
in inventories is at an all time low?
    Mr. Cook. Twenty year low.
    Mr. Barton. Twenty year low.
    Mr. Cook. Unfortunately, as high as these prices are, 
gasoline prices are likely to continue rising, given that both 
the spring transition period and the peak summer demand period 
are now looking increasingly vulnerable. During March and 
April, U.S. refineries typically increase crude throughputs by 
about a million barrels a day. This year, with low stocks and a 
market short on crude oil, that situation implies a volatile 
spring.
    But even after this transition, we expect volatility to 
continue this summer. We expect strong demand, uncertain and 
possibly limited imports to push utilization rates to very high 
levels. Given precariously low stocks, this combination leaves 
little room for the unexpected. Unplanned refinery outages, 
import delays, sudden surges in demand can push prices well 
above those forecast in EIA's base case, now at $1.56. 
Potential volatility could add as much as another 25 cents a 
gallon to the price, pushing actual prices to be seen this 
summer possibly as high as $1.80. Although such prices are far 
from record highs in real terms, this rapid rise over such a 
short period of time will no doubt continue to attract consumer 
intention.
    That concludes my testimony. I'd be happy to answer 
questions.
    [The prepared statement John Cook follows:]
 Prepared Statement of John Cook, Director, Petroleum Division, Energy 
                       Information Administration
                                summary
    World crude oil and petroleum product prices have risen rapidly 
over the past twelve months, from about $12 per barrel in February to 
touch $34 this week. While $34 adjusted for inflation is still less 
than the $70 per barrel seen in 1981, the extreme price volatility over 
the last year has created market dislocations. The recent price rise is 
the result of a shift in the world balance between production and 
demand. Over the last year, as OPEC and several other exporting 
countries cut output, world oil demand exceeded production, and 
inventories were used to meet demand growth. World inventories of crude 
oil and products are now at low levels, and continue to fall.
    Low inventories leave little cushion to meet sudden increases in 
demand or decreases in supply, increasing the possibility of price 
runups. In particular, U.S. Northeast heating oil and diesel prices 
surged in January 2000, when cold weather and supply problems occurred 
in the region on top of low stocks. With little distillate stock 
cushion, local supplies were diminished, and prices spiked. Large 
volumes of distillate imports, warm weather, and increases in 
production have since resolved this supply shortage in the Northeast.
    We are now facing a very tight gasoline market. U.S. crude oil and 
gasoline inventories are at alarmingly low levels not seen for decades. 
On top of low stocks, refineries need to increase crude inputs over 1 
million barrels per day during March and April, within a market short 
on crude oil--creating an environment ripe for gasoline price 
volatility this spring. But even after we get through the spring, 
expected high refinery utilization rates on top of precariously low 
gasoline stocks set the stage for volatility during the summer as well.
      increases in crude oil, distillate fuels and gasoline prices
    I wish to thank the Committee for the opportunity to testify on 
behalf of Jay Hakes, Administrator of the Energy Information 
Administration, who regrets that he was unable to be here. I will focus 
on the status of the global crude oil market and its effects on the 
heating oil, diesel fuel, and gasoline markets and prices. As I will 
illustrate, world demand exceeded crude oil production in 1999, largely 
as a result of the decline in production by the Organization of 
Petroleum Exporting Countries (OPEC) and several other exporting 
countries. Inventories were used to meet the excess demand, and prices 
rose in response. Today, world inventory levels are very low, leaving 
markets vulnerable to price spikes, such as that just experienced for 
heating oil and diesel fuel in the Northeast.
U.S. Dependence on Petroleum
    Today, the United States is still heavily dependent on crude oil, 
in spite of the growth in use of other fuels like natural gas and coal. 
In 1998, petroleum supplied 39% of our energy needs. Since 1985, 
domestic crude oil production has been declining while oil product 
consumption has been increasing, resulting in a growing reliance on 
imports. In 1974, net imports of crude oil and products supplied about 
35 percent of U.S. consumption. In 1998, net imports supplied about 52% 
of U.S. petroleum consumption, the highest percentage ever. However, 
this dependence is offset, to some extent, by an ongoing decline in 
petroleum's role in the economy. Over the last 20 years, spending on 
petroleum has dropped from about 8 percent of all spending on U.S. 
goods and services to about 3 percent.
Crude Oil Market and Recent Price Increases
    Crude prices have changed significantly over the past year. Prices 
have risen more than $20 per barrel (48 cents per gallon) from under 
$12 per barrel in mid February 1999--the lowest prices in nominal terms 
since 1986--to $34 per barrel recently. To put this in perspective, 
while this represents the highest price since the Persian Gulf War, 
crude oil prices peaked in 1981 at $70 per barrel in today's dollars 
($39 per barrel in nominal terms). Recent EIA forecasts show that these 
high prices have resulted in a decline in OPEC's market share of over 
1% from fourth quarter 1999. Non-OPEC production in the fourth quarter 
was higher than expected, indicating higher oil prices may be 
stimulating more non-OPEC production than many analysts predicted.
    Nevertheless, crude oil markets tightened in 1999 as OPEC and 
several other exporting countries reduced supply, and, at the same 
time, recovery of Asian economies increased demand growth. In 1999, 
world oil demand exceeded production by over 1 million barrels per day 
for the year, reducing world inventories by nearly 400 million barrels. 
If OPEC were to keep production in the year 2000 at the levels seen in 
the first quarter, EIA estimates the shortfall in 2000 could be up to 2 
million barrels per day. Should such production levels be sustained, 
the resulting higher prices would have adverse impacts on inflation and 
economic growth.
    During 1999, crude oil prices rose faster than product prices, 
reducing refining margins. The squeeze on margins, on top of high crude 
oil prices, encouraged refiners to constrain crude oil purchases, 
restrict product output, and draw down inventory. By the end of 1999, 
world crude oil and product stocks sank to very low levels, and U.S. 
inventories were no exception. For example, as shown in Figure 1, East 
Coast distillate inventories, which were ample at the start of the 
winter season, fell well below normal levels by year end, setting the 
stage for the heating oil price spike experienced in recent weeks.
Heating Oil Price Spike
    Retail heating oil and diesel fuel prices (distillate prices) 
climbed steadily from early 1999 through the middle of January 2000, 
largely as a result of increases in crude oil prices. But distillate 
prices in the Northeast 1 turned sharply upward in the third 
week of January. In a three-week period, New England residential 
heating oil prices, as shown in Figure 2, rose 78 cents (66 percent) to 
$1.96 per gallon. During the same three-week period, New England retail 
diesel fuel prices (Figure 3) rose 68 cents per gallon (47 percent), to 
peak at $2.12 per gallon. While Northeast prices surged further at the 
end of January, heating oil and distillate product prices in other 
parts of the country rose relatively little.
---------------------------------------------------------------------------
    \1\ The Northeast includes New England (Connecticut, Maine, 
Massachusetts, New Hampshire, Rhode Island, Vermont) and the Mid-
Atlantic region (Delaware, District of Columbia, Maryland, New Jersey, 
New York, Pennsylvania).
---------------------------------------------------------------------------
    Fortunately, prices peaked in early February, and are now dropping. 
By February 28, New England residential heating oil prices had fallen 
60 cents and retail diesel fuel 48 cents per gallon from their peaks.
    Retail heating oil and diesel fuel prices follow the spot 
distillate markets, which had been driven by crude oil prices until 
recently. Figure 4 shows that spot crude oil prices for West Texas 
Intermediate (WTI) changed relatively little, even as No. 2 heating oil 
spot prices in the Northeast spiked dramatically. New York Harbor spot 
heating oil prices rose from about 76 cents per gallon on January 14 to 
peak at $1.77 February 4 before falling back. Gulf Coast prices did not 
spike, but were probably pulled slightly higher as the New York Harbor 
market began to draw on product from other areas, again indicating the 
Northeast focus of this problem.
    The late-January heating oil and diesel fuel price surges in the 
Northeast resulted from a unique combination of low inventories, 
weather, and supply problems. Low stocks leave little cushion to absorb 
sudden changes in supply or demand. Distillate stocks fell rapidly in 
late November through December as high crude oil prices and margin 
pressure discouraged production. By the beginning of January, East 
Coast inventories were running almost 4 million barrels, or 8 percent, 
below the low end of the normal range.
    During the last half of January, cold weather in the Northeast not 
only increased demand, but also caused supply problems, with frozen 
rivers and high winds hindering the arrival of new supply. It was 
reported that utilities were buying distillate both for peaking power 
and, along with industrial and commercial users, to substitute for 
interruptible natural gas supplies, further adding to the market 
pressure.
    Thus, with new supply being delayed and little inventory to cover 
the increased demand, prices spiked. Within weeks, a flood of imports 
attracted by the higher prices, along with domestic resupply, stopped 
the inventory decline, and prices dropped substantially. Although 
stocks remain low, with currently mild weather and only a few weeks of 
the traditional heating season remaining, a surge like that seen in 
late January is unlikely.
Upcoming Gasoline Season
    I would like to conclude my testimony by focusing on the outlook 
for gasoline. The tight crude oil market is also affecting the gasoline 
market. U.S. gasoline prices averaged $1.50 this past Monday, an 
increase of 23 cents per gallon since the beginning of this year. 
Today, both U.S. crude oil and gasoline stocks are at alarmingly low 
levels (Figure 5)--levels not seen for decades. The same squeeze on 
margins that brought distillate stocks down to low levels also reduced 
gasoline stocks.
    I would like you to focus on two time periods--spring and summer. 
During March and April, refineries need to increase crude oil inputs by 
over 1 million barrels per day (Figure 6). With low stocks and a market 
short on crude oil, the situation is ripe for gasoline price 
volatility. Spot gasoline prices are already reflecting the tight 
gasoline supply-demand balance. Last week, spot gasoline prices on the 
Gulf Coast averaged almost 20 cents per gallon higher than crude oil 
prices--a spread that is about 2 times the average spread this time of 
year.
    But even after we get through the spring, we may see price 
volatility this summer as well. EIA expects to see high refinery 
utilization rates on top of precariously low gasoline stocks. This 
combination leaves little room for the unexpected. Unplanned refinery 
outages, import delays or demand increases can create price surges 
above levels shown in the EIA forecast. EIA is currently projecting 
regular gasoline prices to peak at $1.56 per gallon this summer. Price 
volatility can result in a 20-25 cent per gallon price surge such as 
those seen in California historically, which brings the price to $1.80 
for a time. Although these prices are far from record highs in real 
terms, they have risen rapidly over a short period of time, attracting 
a great deal of consumer attention.
    This concludes my testimony. I would be glad to answer any 
questions that you might have.

[GRAPHIC] [TIFF OMITTED] T2977.001

[GRAPHIC] [TIFF OMITTED] T2977.002

Source: Reuters Daily Spot Prices.
Note: WTI--West Texas Intermediate crude oil price; GC No. 2--
Gulf Coast No. 2 heating oil; NYN No. 2--New York Harbor No. 2 
heating oil prices.

[GRAPHIC] [TIFF OMITTED] T2977.003

    Mr. Barton. Thank you, Dr. Cook.
    We have Congressman Crowley from Pennsylvania, who has 
arrived. We have two 15-minute votes pending. We're going to 
recognize Congressman Crowley for 5 minutes; then, we're going 
to take a recess to go do the two votes; and we'll reconvene 
between 12:45 and 1 p.m., to hear our other two Executive 
Branch witnesses.
    Congressman, we welcome you. Your statement is in the 
record in its entirety and ask you to summarize it in 5 
minutes.

                STATEMENT OF HON. JOSEPH CROWLEY

    Mr. Crowley. Thank you. Chairman Barton, and I appreciate 
your extending the courtesy to allow me to appear before the 
second panel today.
    Mr. Barton. You've been very patient. And this is an issue 
that's very important to your constituents and you've been a 
leader on it and we want to hear what you have to say about it.
    Mr. Crowley. Thank you, Mr. Chairman. I, also, want to 
thank Ranking Member Boucher, as well, for his patience, and 
the other members of the committee.
    The massive fluctuations of the price of oil is of extreme 
concern to my congressional district in New York, in Queens and 
the Bronx, particularly with respect to the high cost of home 
heating oil. This winter, an extremely cold one in New York, my 
constituents and many other citizens of the northeast--
including one of the members here on the committee, Vito 
Fossella, from Staten Island--suffered not only frigid 
temperatures, but, also, extreme increases in the price of oil.
    While oil is used to heat approximately 12 percent of all 
homes in the United States, in New York State, that number is 
almost 40 percent. In my congressional district, that number if 
46 percent of my constituents, who use oil to heat their home, 
on over 108,000 households. Many of my constituents have told 
me that they are paying double for their energy this winter, as 
opposed to previous years.
    I represent a working class district, where most of the 
home owners are seniors or working families. These are people 
that are hurting. The skyrocketing costs are hitting these 
people the hardest. The average income of my district is 
approximately $30,100 per year. They make too much to qualify 
for LIHEAP and, at the same time, they make too little to 
afford an increase of almost $1,000 a year in home heating oil 
costs.
    In my invitation to testify, it was requested that I 
comment on the likely cause or causes of the massive price 
swings in the cost of oil. The first and largest cost of the 
massive price volatility in the market deals with international 
supply; in this case, the reduction of output by OPEC members 
and their non-member allies. Since OPEC began their reduction 
in output in March 1999, the price of a barrel of crude oil 
rose over $14 a barrel, to over $30 a barrel.
    The second reason deals with oil speculators or domestic 
price gougers, who are using higher prices caused by the 
decrease in supply to their advantage in gouging the American 
consumers. Let me point out that this is not a universal 
stance. There are some oil distributors that I have met with, 
who are concerned not only about their image, but, also, their 
customers. They're not looking to have their customers convert 
to gas heat.
    In response to the allegations domestic price gouging have 
joined, a number of my colleagues in both political parties 
demand action by our attorney general to investigate the 
situation. Besides launching a Federal investigation into 
alleged domestic price gouging, I believe the best short term 
solution would be to open the strategic petroleum reserve. I 
understand that you are opposed to that action.
    The law creating an authorizing SPR, the Energy Policy 
Conservation Act allows draw down of the Nation's oil reserves 
under several conditions, including when a sharp increase of 
petroleum process would likely have a major adverse impact on 
the economy of the United States. Economists at the Department 
of Energy expect the average price of gasoline to hit $1.50 
soon. That will be certainly much higher in New York and other 
major metropolitan areas, where a gallon of gas goes for over 
$1.80. In fact, other independent economists expect gas prices 
to hit $2 a gallon, maybe hitting $2.50 a gallon during the 
peak summer travel season. This is not good for our economy.
    I believe the president has the grounds to open the SPRO 
for these economic reasons, but has continually refused to do 
so. Therefore, I am supportive of an amendment to the Energy 
Policy and Conservation Act Reauthorization, H.R. 2884, which 
recently passed both this subcommittee and the full Committee 
on Commerce by voice vote--albeit with dissenting views from 
the minority--to allow for the draw down of the in times of 
reduction and supply caused by anticompetitive activity.
    In the long term, I believe that Congress, working with the 
oil producing allies, such as Mexico, Norway, Russia, and with 
OPEC member states, must work together to establish and set 
stable oil prices. As a member of the committee in 
international relations, I was pleased that Chairman Gilman and 
ranking member Gejdenson conducted a hearing on March 1, 
regarding the issue of OPEC and their price fixing. At the 
time, I heard the viewpoint of Wes Watkins of Oklahoma, a 
representative of an oil producing state, who informed the 
committee on international relations that from a producer's 
standpoint, the best solution would be to have a stable price 
for oil. a stable price would rid the people of Oklahoma, 
Louisiana, and Texas, and other petroleum producing states of 
the economic insecurities brought on when the prices are too 
low, just as they would help protect my constituents in Queens 
and the Bronx and all the people of cold climate States in 
years like this, when prices skyrocket out of control. This 
should be a long-term goal to Congress, so we can eliminate 
these massive price fluctuations.
    I, also, believe it's important for us to create a 
strategic reserve for home heating oil in the northeast, as Mr. 
Markey mentioned earlier, and I would be supportive of that 
legislation, as well. And I thank the chairman for this time 
and yield back the balance of my time.
    [The prepared statement of Hon. Joseph Crowley follows:]
Prepared Statement of Hon. Joseph Crowley, a Representative in Congress 
                       from the State of New York
                            i. introduction
    I would like to thank both Chairman Barton and Ranking Member 
Boucher for holding this important hearing today and for inviting me to 
speak before the Committee.
                        ii. importance of issue
    The issue of the massive fluctuations in the price of oil is of 
extreme concern to my Congressional District particularly with respect 
to the high costs of home heating oil.
    This winter, an extremely cold one in New York, my constituents and 
many other citizens of the Northeast, including the residents of Vito 
Fossella's Staten Island district, suffered not only frigid 
temperatures but also extreme increases in the price of oil.
    While oil is used to heat approximately 12% of all American homes, 
in New York State that number rises to almost 40%.
    In my Congressional district, 46% of my constituents use oil to 
heat their homes--over 108,000 households.
    My constituents have told me that they are paying double for their 
energy this winter as opposed to previous years.
    I represent a working class district, where most of the homeowners 
are senior citizens or working families.
    These are the people who are hurting--these skyrocketing costs are 
hitting these people the hardest.
                   iii. reasons for price volatility
    In my invitation to testify, it was requested that I comment on the 
likely cause or causes of the massive price swings in the cost of oil.
A. OPEC
    The first and largest cause of the massive price volatility in the 
market deals with international supply--in this case the reduction of 
output by OPEC member states and their non-member allies.
    Since OPEC began their reductions in output in March 1999, the 
price of a barrel of crude oil rise over $14 a barrel to over $30.00 a 
barrel.
B. Domestic Price Gougers
    The second reason deals with oil speculators, who are using the 
higher prices caused by the decrease in supply to their advantage and 
gouging the American consumer.
    Prices for both home heating oil and diesel fuel are far higher in 
the Northeast then elsewhere, and in New York City they are higher then 
in other neighboring Northeastern states.
                       iv. short term solutions:
A. Investigation by Department of Justice
    In response to the allegations of domestic price gouging, I joined 
with a number of my colleagues in both political parties to demand 
action by the Attorney General to investigate this situation.
B. Open the Strategic Petroleum Reserve
    Besides the launching of a Federal investigation into alleged price 
gouging, I believe that the best short-term solution would be to open 
the Strategic Petroleum Reserve.
    The law creating and authorizing the SPR, the Energy Policy and 
Conservation Act, allows draw down of the nation's oil reserves under 
several conditions, including when a sharp increase in petroleum 
process would likely have ``a major adverse impact'' on the economy of 
the United States.
    Economists at the Department of Energy expect the average price for 
a gallon of gas to hit $1.50 soon--though it is currently much higher 
in New York and other major metropolitan areas.
    Other independent economists expect gas prices to hit $2 a gallon--
maybe hitting $2.50 during the peak summer travel season.
    This is not good for our economy.
    I believe that the President has the grounds to open the SPR for 
these economic reasons. But he has continually refused.
    Therefore, I am supportive of amending the Energy Policy and 
Conservation Act Reauthorization (H.R. 2884) which recently passed both 
this Subcommittee and the full Committee on Commerce by voice vote--
albeit with dissenting views from the Minority--to allow for the 
drawdown of the SPR in times of reduction in supply caused by anti-
competitive activity.
    President Bush authorized the tapping of the SPR during the Gulf 
War--and world oil prices dropped by $10 a barrel overnight.
                        v. long-term solutions:
A. Attain A Stable Price
    In the long-term, I believe that the Congress, working with our 
oil-producing allies such as Mexico, Norway and Russia and with the 
OPEC Member states must work together to establish a set, stable price 
for oil.
    As a member of the Committee on International Relations, I was 
pleased that Chairman Gilman and Ranking Member Gejdenson conducted a 
hearing on March 1 regarding the issue of OPEC and their price fixing. 
At that time, I heard the viewpoint of Rep. Wes Watkins of Oklahoma, a 
representative of an oil producing state, who informed the Committee on 
International Relations that from a producers standpoint the best 
solution would be to have a stable price for oil.
    A stable price would rid the people of Oklahoma, Louisiana and 
Texas and other petroleum producing states of the economic insecurities 
brought on when prices are too low just as they would help protect my 
constituents in Queens and the Bronx, and all of the people of cold 
climate states in years like this when prices skyrocket out of control.
    This should be a long-term goal of the Congress so that we can 
eliminate these massive price fluctuations.
B. Use Diplomacy to Attain the Objective
    I believe that international mutual understanding and cooperation 
achieved through diplomacy will be our nation's best bet to accomplish 
the goal of a stable price for oil.
    On this score, I believe that Secretary of Energy Bill Richardson 
deserves the praise of the Congress for his work in communicating the 
American position on the oil reductions to our OPEC allies over the 
past few weeks.
    Although I believe the Administration could have done and still can 
do more to help the American people, and diplomacy is no short term 
answer for my constituents who are suffering, I applaud the Secretary's 
efforts to meet the long term goals of satisfying both the supply end 
and demand end of America's oil consumption needs.
    I hope that the Secretary's talks will lead to an increase in oil 
output sufficient to meet world demand in the short term and the 
establishment of a stable price for oil for the long term.
C. Wean the U.S. off of Imported Oil
    I also believe that the United States should look into alternative 
energy sources to wean our nation off of imported oil.
                             vi. conclusion
    That concludes my remarks, and I again would like to thank the 
Chairman and the entire Committee for inviting me before you this 
morning.
    I am prepared to answer questions that the Committee my have.

    Mr. Barton. Well, I thank you, Congressman, and I think I 
mistakenly in my introduction said you were from the great 
State of Pennsylvania. I want to correct the record and let 
everybody know you're from the great State of New York----
    Mr. Crowley. That's quite all right.
    Mr. Barton. [continuing] the Empire State.
    I don't want your constituents to think that I'm a dizzy 
Texan who doesn't know the difference between Pennsylvania and 
New York, because they're both great States and both well 
represented in this committee and this Congress.
    We're going to recess until approximately 12:45. We have 
two pending votes on the floor. So, I would surely hope that 
Dr. Cook and Mr. Mazur and Mr. Parker can be back by 12:45. And 
that clock is going crazy. I have no idea; but time flies in 
Congress, but it doesn't fly that rapidly. We're in recess 
until approximately 12:45.
    [Brief recess.]
    Mr. Barton. The subcommittee will come to order. When we 
recessed, we had heard from Congressman Crowley of New York and 
we have, also, heard from Dr. Cook. We now would like to hear 
from Mr. Martin Mazur, who is the director of the Office of 
Policy at the U.S. Department of Energy. We'll give you 7 
minutes to summarize your statement that will be in the record 
in its entirely. Mr. Mazur?

                    STATEMENT OF MARK MAZUR

    Mr. Mazur. Thank you, Mr. Chairman. First, I want to start 
off by apologizing for our testimony being late yesterday. As 
you know, there's a lot of interest in this hearing and it took 
a long time for the people within the Department of Energy, 
within the rest of the administration, to clear off on it. And 
I understand----
    Mr. Barton. On that--we won't take this out of your time--
--
    Mr. Mazur. Okay.
    Mr. Barton. [continuing] but Mr. Parker had his testimony 
here on time and it had to be cleared through all kinds of 
people. I'm not going to say you, personally, because you 
haven't testified often, but it seems a chronic problem of DOE, 
whatever the deadline is, they miss it.
    Mr. Mazur. Okay.
    Mr. Barton. And I am going to talk to Secretary Richardson, 
the earliest possible convenience and when I do, you know, 
politely, but firmly say the next time DOE doesn't get its 
testimony in on time, they won't be a part of the hearing. Now, 
he may say is that a promise, I don't know; but it's not fair 
to our members on both sides of the aisle, even when we think 
we know what you're going to tell us, to not have it so we can 
verify what you're going to tell us. So, anyway, we set the 
clock at 7 minutes and we do welcome you to the hearing today.
    Mr. Mazur. Thank you, Mr. Chairman. I want to thank you for 
inviting the Department here today to testify in recent 
movements in crude oil and petroleum product prices. One point 
that I do want to make clear is that the United States does 
have a longstanding energy policy followed for about 20 years 
by both Democrat and Republican administrations. This energy 
policy is grounded in general reliance on markets and prices to 
allocate energy resources. Usually, these energy markets work 
well. However, when there are market imperfections or unwelcome 
distributional consequences, government has a role in 
addressing these concerns.
    As my EIA colleague pointed out, the expanded oil producing 
cartel, including Mexico, restricted production, to address 
concerns of oversupply and large inventories. When combined 
with increased demand from Asian economies coming out of 
recession, there was a dramatic increase in oil prices and 
large increases in domestic prices for a number of refined 
products, notably home heating oil.
    This administration has moved forcefully to deal with 
current price movements. Secretary Richardson has coordinated 
the administration's efforts in this regard. Actions included 
the following: releasing additional LIHEAP money--$295 million 
in emergency funds that will help low-income Americans pay 
their heating bills this winter. The administration also 
submitted to Congress a supplemental request for additional 
funds--emergency funds for LIHEAP, to get through the end of 
the fiscal year. The administration assured availability of SBA 
loans for heating oil distributors, to help with their cash-
flow. The administration worked with States on a case-by-case 
basis on possible Clear Air Act waivers, in order to ensure 
that fuel oil supplies were available. The administration 
obtained hours of service waivers, to enable truckers to work 
extended hours to deliver products safely. The administration 
urged refiners to defer routine maintenance turnarounds, so 
that heating oil production will be adequate to meet demand 
during the heating season; also, the administration urged 
electricity generators to switch from heating oil to natural 
gas where possible.
    The Department began a process to reestablish an Energy 
Emergency Office, to enable the Federal Government to work more 
closely with States, and to anticipate, plan, and respond to 
energy problems. The administration created a DOE-U.S. Coast 
Guard task force for product movement, to make sure there were 
no shipping delays for heating oil. And the Department directed 
the strategic petroleum reserve office to renegotiate oil 
delivery contracts for the reserves royalty in kind program, to 
ensure that more oil stayed on domestic markets in the near 
term. We also sought additional weatherization funds for fiscal 
year 2001 and, also, a supplemental request for fiscal year 
2000.
    Secretary Richardson hosted a home heating oil summit in 
Boston on February 16, to bring together congressional members, 
State officials, industry leaders, to discuss methods to 
address the price run up.
    In addition, Secretary Richardson personally coordinated a 
strong diplomatic effort, to show oil producers that supply 
restrictions are harmful not only to oil consuming countries, 
but, also, to the oil exporting countries, themselves.
    The culmination of these discussions with energy 
administers from Saudi Arabia, Kuwait, Mexico, Norway, and 
Venezuela was the release of a number of communiques that 
shared a common theme: volatility in oil markets is not 
desirable; it is damaging to both consuming and producing 
nations. Moreover, these countries agreed that upcoming 
production decisions by OPEC and its oil producing colleagues 
will take into account the implications of current production 
levels on the world economy. We are guardedly optimistic that 
when the OPEC ministers meet at the end of March, that there 
would be substantial and timely increases in production.
    We should not focus solely on production decisions by oil 
producing nations. Also, keep in mind that the Department has a 
long-term R&D effort aimed at cutting oil consumption without 
cutting the services that we get from petroleum products. These 
programs can help reduce dependence on foreign oil, by 
encouraging energy efficiency, developing alternative fuels, 
and supporting domestic oil production.
    Total petroleum consumption in the United States is 
approximately the same as it was 20 years earlier. But, our per 
capita consumption has dropped by about a fifth and our energy 
consumption per dollar GDP has dropped by about a third. This 
has been achieved through a number of efficiency and 
alternative fuel efforts, which we plan to continue for the 
future. For example, the Department's transportation program is 
working with its partners in the Partnership for a New 
Generation Vehicles Program, to develop an 80-mile per gallon 
prototype mid-size sedan by 2004; to improve light truck 
efficiency by 35 percent, also by 2004; and to develop 
technologies to increase the economy of the largest heavy 
trucks from seven to 10 miles per gallon, almost a 50 percent 
increase. The Department has also worked to increase domestic 
ethanol production to 2.2 billion gallons per year by 2010.
    On the domestic oil and gas side of things, the Department 
is working with industry to make efficient use of the resources 
we have in an environmentally responsible manner. The emphasis 
is on recovery technology, helping the private sector extract 
more usable oil and gas from existing reserves than we did in 
the past, and extending the life times of those reserves.
    While some have argued for release or sale of oil from the 
strategic petroleum reserve as a way to bring down world oil 
prices, we do not believe that a release at this time would be 
desirable. The SPR's is intended for release only in the event 
of a major oil supply disruption, not for trying to manage the 
world market of nearly 74 million barrels per day. If you keep 
in mind that the strategic petroleum reserve is 570 million 
barrels, you can see it's far too small for the task of 
managing world oil prices.
    In summary, we think the outlook is for lower world oil 
prices later this year. We're aware that high crude prices and 
low inventory levels can lead to higher gasoline prices this 
summer; however, we need--we think that we need to let the 
energy diplomacy efforts led by Secretary Richardson to work in 
the short term and then look to address our other concerns 
through long-term efforts that make the best use of markets to 
allocate energy resources.
    Thanks for your attention. I appreciate your questions.
    [The prepared statement of Mark Mazur follows:]
  Prepared Statement of Mark Mazur, Director, Office of Policy, U.S. 
                          Department of Energy
    Mr. Chairman and members of the subcommittee: I would like to thank 
Chairman Barton for inviting the Department of Energy here today to 
testify on the recent movements in crude oil and petroleum product 
prices. At the Department of Energy, the Policy Office is responsible 
for providing objective analysis and policy advice to the Department's 
senior management. I am happy to be here today to speak on behalf of 
the Department.
    One point I want to make clear is that the United States has a 
long-standing energy policy, followed for about 20 years by both 
Democratic and Republican Administration's. This energy policy is 
grounded in a general reliance on markets and prices to allocate energy 
resources. Usually, energy markets work well. However, when there are 
market imperfections or unwelcome distributional consequences of market 
operations, government has a role in addressing these concerns. That is 
why the government policy toolbox in the energy area includes items 
such as LIHEAP, weatherization, and the Strategic Petroleum Reserve.
                        the situation this year
    Cold weather, limited heating oil availability and rapidly climbing 
heating oil prices in the Northeast in late January and February 
alarmed consumers, distributors, and governments at all levels. And an 
expanded oil-producing cartel (OPEC plus Mexico and Norway) restricted 
oil production to address concerns with oversupply and exceptionally 
large inventories. As my EIA colleague has pointed out, these actions, 
combined with increased demand from Asian economies coming out of 
recession, led to a dramatic rise in world oil prices.
    This Administration has moved forcefully at home and abroad to deal 
with both short-run and long-run causes of our current environment of 
``extreme'' price movements. Following this winter's runup in price for 
distillate fuels in the Northeast, Secretary Richardson coordinated the 
Administration's efforts. The Administration moved to implement 
traditional programs and went beyond these initiatives to creatively 
help those in need. The Administration:

 Released additional Low Income Home Energy Assistance Program 
        (LIHEAP) funds. The U.S. Department of Health and Human 
        Services (HHS) released a total of $295 million in emergency 
        funds to help low-income Americans pay their energy bills this 
        winter. The bulk of these funds were targeted at Northeast 
        states that had substantial fuel price increases.
 Submitted to Congress a supplemental request for $600 million 
        to provide additional contingent emergency funds for LIHEAP 
        through the end of the fiscal year.
 Ensured availability of Small Business Administration loans 
        for heating oil distributors who needed improved cash flow in 
        order to meet contractual obligations and make deliveries;
 Worked with states on a case-by-case basis on possible Clean 
        Air Act waivers to help add to the quantity of available fuels 
        ensuring that people had adequate fuel oil supplies;
 Obtained ``Hours of Service'' waivers that enabled truckers to 
        work extended hours to deliver the product safely;
 Urged refiners to defer routine maintenance turnarounds. 
        Recognizing individual refinery needs and safety requirements, 
        the Administration urged trade associations and companies to 
        delay routine maintenance so that heating oil production would 
        be adequate to meet demand this heating season;
 Urged electricity generators to switch from heating oil to 
        natural gas where possible;
 Began the process to reestablish an Energy Emergency Office at 
        the Energy Department to enable the federal government to work 
        more closely with the states to anticipate, plan and respond in 
        a more immediate and coordinated way when energy crises occur, 
        including heating oil/gasoline shortages, power outages, or 
        pipeline emergencies;
 Created a DOE/U.S. Coast Guard Task Force for Product 
        Movement, to prioritize heating oil shipments at terminals when 
        necessary, clear rivers as needed, deploy Coast Guard vessels 
        and other resources to make certain there are no shipping or 
        loading delays;
 Directed the Energy Department's Strategic Petroleum Reserve 
        Office (SPRO) to renegotiate oil delivery contracts for the 
        Reserve's royalty-in-kind program to ensure that more oil 
        remained on domestic markets;
 Directed the Energy Information Administration to increase its 
        monitoring of home heating oil prices;
 Sought $154 million for low-income weatherization assistance 
        in the FY 2001 budget and requested an additional $19 million 
        in a supplemental request for FY2000;
 Announced regulatory changes to give nonprofit organizations 
        more flexibility in providing weatherization assistance;
 Held a series of meetings with refiners, industry, consumers, 
        and Northeast lawmakers; and
 Hosted a home heating oil summit in Boston on February 16 that 
        brought industry leaders, congressional members and state 
        officials together to address methods to address the price run-
        up.
    To look at long-term solutions, the President has directed the 
Department to study the longer-term issue of heating oil supply 
shortages and price spikes by examining possible ways to reduce 
regional reliance on heating oil, mainly through the increased use of 
natural gas. Moreover, the Secretary has directed the Department to 
study the impacts of interruptible contracts on home heating oil 
supply.
    John Cook provided you with an excellent overview of current supply 
restrictions by OPEC and its allies. Secretary Richardson has 
personally coordinated a strong diplomatic effort to show oil producers 
that supply restrictions, past some point, are harmful not only to oil 
consuming countries but also to the oil exporting countries themselves. 
In general, because OPEC does not control all the world's oil, the more 
successful OPEC is in restricting supply, and hence the higher oil 
prices, the more incentive is provided for non-cooperating producers to 
increase their output. As non-cooperating oil suppliers increase 
production to take advantage of higher prices, and consumers move away 
from high-priced oil, OPEC must either make further supply cuts to 
maintain price--thus losing market share--or maintain market share but 
give on price.
    The culmination of this round of discussions with energy ministers 
and key leaders from Saudi Arabia, Kuwait, Mexico, Norway and Venezuela 
was the release of four joint communiques that shared a common theme: 
excessive volatility in oil markets is not desirable--it is damaging to 
both consuming and producing nations. And, while the communiques varied 
in substance from country to country, the single point on which all 
producing countries--Kuwait, Saudi Arabia, Norway, and Venezuela--
agreed, was to reevaluate data on current oil market conditions to help 
avoid excess market volatility and preserve world economic growth. In 
other words, upcoming production decisions by OPEC and its oil 
producing colleagues will not be arbitrary--they will take into account 
the implications of current production levels on the world economy. We 
believe the likely outcome of this analysis will be shown when the OPEC 
ministers meet on March 27th--that there should be substantial and 
timely increases in production.
                           the larger picture
    I think we should not focus solely on production decisions by oil-
producing nations in the short term, but also keep in mind that the 
Department has a long-term, well-crafted research and development 
effort aimed at cutting our oil consumption without cutting the 
services we get from petroleum products. These programs can help 
mitigate energy price spikes and slow our rising dependence on foreign 
oil by encouraging energy efficiency, developing alternative fuels, and 
supporting domestic oil production. Although total petroleum 
consumption was approximately the same, in million barrels per day, in 
1999 as 1979, our per capita consumption has dropped about one fifth 
and our energy consumption per dollar of gross domestic product has 
dropped about a third. This has been achieved through a number of 
efficiency and alternative fuel efforts which we plan to continue for 
the future. For example, the Department's transportation program is 
working with its partners to develop an 80 mile per gallon(mpg) 
prototype sedan by 2004; to improve light truck fuel efficiency by 35 
percent while meeting newly issued EPA Tier 2 emission standards by 
2004; to develop technologies to increase fuel economy of the largest 
heavy trucks from 7 to 10 mpg (nearly 50 percent) by 2004, and to 
increase domestic ethanol production to 2.2 billion gallons per year by 
2010. The Administration is also supporting market incentives like the 
tax credit proposal for hybrid vehicles. These efforts will result in 
vehicles with higher fuel economy and increase the production and use 
of alternative fuels, both important avenues to reducing the potential 
for future oil price fluctuations.
    The Department also is encouraging the domestic oil and gas 
industry to make efficient use of the resources we have in an 
environmentally responsible manner. The emphasis is on recovery 
technology--helping the private sector to extract more usable oil and 
gas from existing reserves than we did in the past. The Energy 
Department restarted its program to share the costs of field tests of 
new or improved technologies that keep endangered resources in 
production. This program has subsequently provided nearly $23 million 
in cost-sharing assistance to producers. Some elements of the 
Department's wide-ranging research program cover: improved drilling and 
completion techniques; use of new diagnostic and imaging tools; and 
improved techniques to improve the efficiency with which reserves are 
recovered and to increase useful reservoir life.
    Clearly, we need to recognize that petroleum product price 
volatility is a periodic policy issue--particularly during times of New 
England cold snaps or supply cutbacks by overseas oil producers. With 
cost-driven lower inventory levels and electronic markets, petroleum 
product prices are responding immediately to market developments. While 
prices are excellent sources of information for all sorts of business 
and personal decisions, rapidly changing prices introduce uncertainty 
that has its own costs for consumers and producers.
    While some have argued for release of oil from the SPR as a way to 
bring down world oil prices, we do not believe that a release at this 
time would be desirable. The SPR is intended for release only in the 
event of a major oil supply disruption, not for trying to manage the 
world market of nearly 74 million barrels per day. At 570 million 
barrels, it is far too small for that task. Releasing crude oil from 
the Strategic Petroleum Reserve now for future repayment in delivered 
oil--including a premium--could add crude oil to the current market and 
could be appealing to crude purchasers because of expectations that 
future oil prices will be lower than today's. We are evaluating this 
strategy as a possibly cost-effective way to increase the size of the 
SPR to address potential future supply imbalances. However, no decision 
on whether to undertake this policy option has been made.
                                summary
    In summary, we think the outlook is for lower world oil prices 
later this year, as forecast by participants in the futures markets. We 
are aware that high crude prices and low inventory levels can lead to 
higher prices for gasoline this summer. However, we think that we need 
to let the energy diplomacy efforts undertaken by Secretary Richardson 
work in the short term and then look to address these concerns through 
long-term efforts that make best use of markets to allocate energy 
resources.
    Thanks for your attention. I would be happy to answer any questions 
you may have.

    Mr. Barton. Thank you, sir. We now like to hear from the 
Federal Trade Commission. We have Mr. Richard Parker, who is 
the director of the Bureau of Competition. Your statement is in 
the record in its entirety. We want to thank for getting it in 
on time and would ask you to summarize it in 7 minutes or less.

                 STATEMENT OF RICHARD G. PARKER

    Mr. Parker. Thank you, very much, Mr. Chairman and members 
of the committee for asking us to participate. What I'd like to 
do is make basically three points that I hope will be helpful 
to the committee about the FTC and what we--what our 
capabilities are in this area.
    The FTC enforces the antitrust laws. We share that 
responsibility with the Department of Justice. The Commission 
has been very active in enforcing those laws over a lot of 
years, in a lot of industries, including most prominently the 
petroleum industry and the energy industry, generally. We have 
a long history of enforcement actions. We are ready, willing, 
and capable to take on the industry, in the event they cross 
the antitrust lines that I'm going to describe in a moment.
    Our most recent action would have been--is a challenge to 
the BP-ARCO merger, which is pending in Federal court in San 
Francisco and now scheduled for trial on March 20. I would add 
that in the EXXON-Mobil matter, we achieved divestitures of 
over 2,000 gas stations, refineries, and EXXON's marketing 
system in California, in order to ensure that that merger did 
not increase concentration in any American market.
    The second point I want to make is about the antitrust 
laws, generally, that we're trying to enforce. The antitrust 
laws are about competition. They're the laws of competition and 
they're premised on the notion that's been part of American law 
for 110 years now, that consumers are best protected when 
companies are slugging out, to use the colloquial; fighting it 
out in the marketplace. And it's that interaction of force, 
that interaction of competitive forces that produce low prices, 
innovation, and increasingly good service.
    What the antitrust laws do is intervene and what an 
enforcement agency does is intervene when companies or 
individuals attempt to opt out of the competitive system, which 
largely, and I'm speaking broadly, occur in three general kinds 
of instances. First is when they quit competing and start 
cooperating; collusion: agreeing on price, agreeing on output, 
and the like. That violates the antitrust laws and where that 
occurs and where we have a case to prove it, we have and will 
take action.
    Point two would be monopolization, where one company grows 
to a level where it, alone, is so dominant, that it can raise 
price or reduce output and reduce service and get away from it, 
in attempts to preserve or extend that monopoly power with 
anti-competitive practices. And where that happens, the 
antitrust laws take hold and we have the ability and certainly 
the willingness to go after that, as well.
    The third area is one that's been particularly active, 
because this country is in the throes of a merger wave that is 
of historic proportions, and that is the antitrust laws do not 
allow companies to merge their way to market dominance. And 
when that occurs, as we've seen in the EXXON-Mobil matter and 
in the BP-ARCO matter and a lot of other matters, the 
Commission has the resources and the willingness and the 
ability and the trial and other skills it takes, to take that 
on.
    My final point is this, and it is somewhat frustrating, 
because I cannot talk, for a good reason, about ongoing 
investigations and so I can't get into detail about that, but 
the oil price increases are a serious matter, a very serious 
matter. We recognize that. Particularly compelling is the human 
side that has been presented by so many of the members this 
morning. We have good people, expert people looking at, for 
example, the oil price issues in California, and we're 
assisting, working with the States in the northeast, and we 
continue our vigil on the merger front. We have the people and 
we are paying attention.
    I appreciate, again, the opportunity to participate in the 
hearing and I'd be please to respond to any questions you might 
have.
    [The prepared statement of Richard G. Parker follows:]
 Prepared Statement of Richard G. Parker,1 Director, Bureau 
                of Competition, Federal Trade Commission
---------------------------------------------------------------------------
    \1\ This written statement represents the views of the Federal 
Trade Commission. My oral presentation and response to questions are my 
own, and do not necessarily represent the views of the Commission or 
any individual Commissioner.
---------------------------------------------------------------------------
                            i. introduction
    Mr. Chairman and members of the Committee, I am Richard G. Parker, 
Director of the Federal Trade Commission's Bureau of Competition. I am 
pleased to appear before you today to present the Commission's 
testimony concerning the important topic of recent large increases in 
the prices of oil products, and what the various agencies of the 
federal and state governments can, and should, do in response. This is 
a national issue that calls for a coordinated response from all 
parties.
    The FTC is a law enforcement agency whose statutory authority 
covers a broad spectrum of the American economy, including the 
companies and economic sectors that make up the energy industry and its 
various components. The Commission enforces, among other statutes, the 
FTC Act 2 and the Clayton Act,3 sharing with the 
Department of Justice authority under section 7 of the Clayton Act to 
prohibit mergers or acquisitions that may ``substantially lessen 
competition or tend to create a monopoly.'' 4 In addition, 
section 5 of the FTC Act prohibits ``unfair methods of competition'' 
and ``unfair or deceptive acts or practices,'' thus giving the 
Commission responsibilities in both the antitrust and consumer 
protection areas. In antitrust cases not involving mergers, the laws 
enforced by the Commission generally prohibit two categories of 
anticompetitive activities--conspiracies in restraint of trade and 
exclusionary monopoly tactics. The Commission also provides advice and 
guidance to states and other federal regulatory agencies on competition 
issues.5 Moreover, the Commission has experience in applying 
antitrust principles across many different industries.
---------------------------------------------------------------------------
    \2\ 15 U.S.C. Sec. Sec. 41-58.
    \3\ 15 U.S.C. Sec. Sec. 12-27.
    \4\ 15 U.S.C. Sec. 18.
    \5\ In recent years, the Commission has been active in supporting 
the deregulation of the electric power industry. See Commission Letter 
to the Honorable Thomas E. Bliley, Chairman, Committee on Commerce, 
United States House of Representatives, Concerning H.R. 2944, The 
Electric Competition and Reliability Act (Jan. 14, 2000); Comment of 
the Staff of the Bureau of Economics, Federal Trade Commission, 
``Inquiry Concerning Commission's Merger Policy Under the Federal Power 
Act,'' Dkt. Nos. RM95-8-000 and RM94-7-001 (May 7, 1996); ``Revised 
Filing Requirements,'' Dkt. No. RM98-4-000 (Sept. 11, 1998); Comment of 
the Staff of the Bureau of Economics of the Federal Trade Commission 
Before the Alabama Public Service Commission, Dkt. No. 26427, 
Restructuring in the Electricity Utility Industry (Jan. 8, 1999).
---------------------------------------------------------------------------
    Experience demonstrates that competition among market participants 
ordinarily will provide consumers with the benefits of low prices, 
desirable products, good service, and innovation. Certainly that is the 
case for energy products, including oil, natural gas, and electric 
power.
    The Commission has had experience in enforcing the antitrust laws 
in each of these industries. The Commission has expended a substantial 
part of its resources in recent years on energy matters. In fiscal 
years 1999 and 2000 to date, the Bureau of Competition spent 115 work 
years on investigations in energy industries, almost one-third of its 
total enforcement budget. So far in fiscal 2000, the Bureau has spent 
over 35 work years on energy related matters.
 ii. the commission's experience with antitrust enforcement in energy 
                               industries
    Much of the Commission's experience with enforcing the antitrust 
laws in energy industries has been in analyzing mergers. Merger 
enforcement is the first line of defense in protecting a competitive 
marketplace, because it preserves rivalry that brings lower prices and 
better services to consumers. The Commission blocks those mergers that 
increase the likelihood that the merged firm can unilaterally, or in 
concert with others, increase prices or reduce output or innovation. 
The Commission has an extensive history of carefully investigating 
mergers in the energy industries, particularly petroleum, and the FTC 
has challenged mergers in those industries that would be likely to 
reduce competition, result in higher prices, and injure the economy of 
the nation or any of its regions.6
---------------------------------------------------------------------------
    \6\ Section 7 of the Clayton Act specifically prohibits 
acquisitions where the anticompetitive acts affect ``commerce in any 
section of the country.'' 15 U.S.C. Sec. 18.
---------------------------------------------------------------------------
    The Commission has been particularly active in investigating 
petroleum mergers due to the ongoing trend of consolidation and 
concentration in this industry. On February 2, 2000 the Commission 
voted to challenge the proposed merger of BP/Amoco and 
ARCO.7 In recent years, the Commission has investigated the 
mergers of Exxon and Mobil 8 and BP and Amoco 9--
the two largest oil mergers in history--and the combination of the 
refining and marketing businesses of Shell, Texaco and Star Enterprises 
to create the largest refining and marketing company in the United 
States.10 Other recent mergers regarding petroleum industry 
assets include Tosco's acquisition of Unocal's California refineries 
and marketing business, the acquisition by Ultramar Diamond Shamrock of 
Total's North American refining and marketing operations, and the 
combination of the refining and marketing businesses of Marathon and 
Ashland.
---------------------------------------------------------------------------
    \7\ Federal Trade Commission v. BP Amoco, p.l.c., Civ. No. C 000416 
(SI) (N.D. Cal. Feb. 4, 2000) (complaint).
    \8\ Exxon Corp., FTC File No. 991 0077 (Nov. 30, 1999) (proposed 
consent order).
    \9\ British Petroleum Company p.l.c., C-3868 (April 19, 1999) 
(consent order).
    \10\ Shell Oil Co., C-3803 (April 21, 1998) (consent order).
---------------------------------------------------------------------------
    Our investigations revealed that several of these transactions 
threatened competition in local or regional markets. In each instance, 
relief was obtained to restore the competition lost as a result of the 
merger in a wide range of markets from refineries to distribution to 
retailing. In retail markets in Exxon, the Commission ordered 
divestiture of all Mobil stations from Virginia to New Jersey, and all 
Exxon stations from New York to Maine, the largest retail divestiture 
in history. In addition, the Commission ordered additional retail 
divestiture in Texas and Arizona, the divestiture of Exxon's Benecia 
refinery and California marketing assets, the divestiture of Mobil's 
Boston and Manassas, Virginia terminals, the sale of the Exxon 
Plantation or Mobil Colonial pipeline interest, and the divestiture of 
Mobil's interest in the Alaska pipeline. In BP/Amoco, the Commission 
ordered divestiture to preserve retail competition in 30 local gasoline 
markets mostly in the Midwest, and in Shell-Texaco, the Commission 
preserved competition through divestiture in local gasoline markets in 
San Diego and Hawaii, and broader refining and pipeline markets in the 
Pacific Northwest, California, and the Southeast.
    The Commission has also challenged anticompetitive mergers in other 
energy industries, including electric power, coal, and gas pipelines. 
The Commission recently investigated three ``convergence mergers''--
where an electric power company proposed to merge with a fuel supplier. 
The first case concerned PacifiCorp's proposed acquisition of The 
Energy Group PLC and its subsidiary, Peabody Coal.11 In a 
second case, the Commission filed a complaint against CMS Energy 
Corporation's proposed acquisition of two natural gas pipelines from 
subsidiaries of Duke Energy.12 In Dominion Resources, the 
electric utility that accounted for more than 70 percent of the 
electric power generation capacity in the Commonwealth of Virginia 
proposed to acquire Consolidated Natural Gas (``CNG''), the primary 
distributor of natural gas in southeastern Virginia. Working closely 
with Commonwealth officials, the Commission required the divestiture of 
Virginia Natural Gas, a subsidiary of CNG.13
---------------------------------------------------------------------------
    \11\ PacifiCorp, FTC File No. 971 0091 (consent order accepted for 
public comment Feb. 17, 1998). This order was withdrawn when the 
parties abandoned the transaction.
    \12\ CMS Energy Corp., C-3877 (June 2, 1997) (consent order).
    \13\ Dominion Resources, Inc., C-3901 (Dec. 9, 1999).
---------------------------------------------------------------------------
    In each energy investigation, the Commission has carefully reviewed 
the proposed merger, and has intervened where appropriate to prevent 
those mergers from significantly reducing competition in any sector of 
this industry that affects the United States or its citizens. The 
Commission's inquiry has been, and continues to be, to determine 
whether a merger would make it substantially likely that the remaining 
firms in the industry could reduce output and raise prices to the 
detriment of consumers anywhere in the United States. Consumer 
protection is the goal of antitrust enforcement across all industries; 
its importance is particularly clear in the energy industry, where even 
small price increases can have a direct and lasting impact on the 
entire economy.
    As an analytical matter, the Commission approaches its antitrust 
mission by examining the areas in which merging companies compete, 
looking at the existing state of competition in that marketplace and 
the likely changes in that marketplace in the future, both from new 
competition entering and from existing competition exiting. We also 
look at the effect of recent mergers on competition in the particular 
marketplaces at issue, and whether the merger is a part of a trend 
towards concentration. The Commission has recognized the existence of 
such a trend toward consolidation in the petroleum 
industry.14
---------------------------------------------------------------------------
    \14\ British Petroleum Company p.l.c., C-3868 (April 19, 1999) 
(consent order), Analysis to Aid Public Comment.
---------------------------------------------------------------------------
    We also consider whether a merger will yield efficiencies that 
might counteract the merger's threatened anticompetitive effects. 
However, efficiencies must be proven--merely claiming cost savings is 
not enough to allow an anticompetitive merger. The cost savings must be 
real, they must be substantial, they cannot result from reductions in 
output, they cannot be practicably achievable by the companies 
independently of the merger, and they must counteract the merger's 
anticompetitive effect, not merely flow to the shareholders' bottom 
line.15
---------------------------------------------------------------------------
    \15\ See United States Department of Justice and Federal Trade 
Commission, Horizontal Merger Guidelines Sec. 4 (1992), reprinted in 
Trade Reg. Rep. (CCH) para. 13,104 (1992).
---------------------------------------------------------------------------
    The Commission has several active investigations of matters 
involving energy industries, both merger and nonmerger. Commission 
rules prevent comment on current investigations, but it is public 
knowledge that the Commission has filed a complaint against the 
proposed merger of BP/Amoco and ARCO and is also looking at the issue 
of gasoline pricing in California and other Western states.
  iii. the current economic environment and possible government action
    The last year has been a volatile one for energy prices in the 
United States, and that volatility has only increased in the first few 
months of this year. Based on publicly available information, we know 
that crude oil prices rose from $12 per barrel in February 1999 to over 
$31.00 per barrel by March 1, 2000.16 On top of the crude 
oil price increases, the prices for heating oil and diesel fuel jumped 
sharply in the Northeast in January 2000. Between January 17 and 
February 7, prices of New England residential heating oil prices rose 
from $1.18 to $1.96 per gallon, while New England retail diesel prices 
rose from $1.44 to $2.12. Just as quickly, however, prices have begun 
to come down. By February 21, the price for retail diesel fuel fell to 
$1.74 per gallon and the heating oil price also dropped.17 
What are the causes of high prices and substantial price volatility, 
and what can competition enforcement agencies do to ameliorate them?
---------------------------------------------------------------------------
    \16\ Energy Information Administration, Heating Fuels and Diesel 
Update, March 2, 2000, at www.eia.doe.gov. See also Martha M. Hamilton, 
``Three Major Oil Producers Consider Increasing Output,'' Wash
    \17\ Statement of John Cook, Petroleum Division Director, Energy 
Information Administration, Department of Energy, before the Committee 
on Energy and Natural Resources, United States Senate (Feb. 24, 2000).
---------------------------------------------------------------------------
    It is no secret that the United States is dependent on foreign 
sources for a major portion of our petroleum consumption. That reliance 
is growing. In 1998, net imports of crude oil supplied approximately 52 
percent of U. S. demand--the highest percentage ever. Despite the 
rising use of alternate fuels such as coal and natural gas, petroleum 
still provides 39 percent of the country's energy needs.18
---------------------------------------------------------------------------
    \18\ Id.
---------------------------------------------------------------------------
    Higher petroleum prices in 1999 can be traced to several factors. 
OPEC countries and several other non-OPEC exporting countries curtailed 
supply. Simultaneously, a number of Asian economies began to recover 
from a regional recession, causing increased demand for petroleum 
products. The result was that worldwide consumption exceeded production 
and inventories were drawn down. The price increase caused by the 
excess of demand over supply also reduced refinery margins, causing 
refiners to cut production and use inventories to meet demand.
    The short term price volatility in the Northeast was probably 
caused by several different, or at least additional, factors, including 
weather and supply problems. Low inventories set the stage for price 
volatility as changes in demand had to be met from imports. At the 
beginning of January, East Coast inventories for distillates were about 
8 percent below the low end of the normal range.19
---------------------------------------------------------------------------
    \19\ The low inventories were likely a response to both high crude 
prices and an expectation that those prices would come down. If 
refineries had expected crude prices to continue to rise, it would have 
made sense to continue buying instead of reducing inventories.
---------------------------------------------------------------------------
    The weather on the East Coast was also unusually severe in January. 
During the week of January 16, a cold spell hit the Northeast, dropping 
temperatures to nearly 20 percent lower than normal for that time of 
the year. The weather had a two-fold effect: at the same time that it 
caused the demand for heating oil to increase, the cold weather 
decreased supply because frozen rivers and high winds delayed product 
movement. Demand for electric power also increased, causing utilities 
to turn to distillates as a substitute for interruptible natural gas 
supplies. Additionally, several refinery outages in January exacerbated 
the supply/demand imbalances.
    While cold weather and refinery malfunctions raise no obvious 
antitrust issues, continued antitrust oversight of these markets is 
important to insure that market participants do not exacerbate those 
conditions through anticompetitive conduct. There are a number of 
potential activities that would violate the laws enforced by the 
Commission. Price fixing, tying, or agreements on supply reductions 
could all be antitrust violations. For example, if producers take 
advantage of market-determined events to overtly or tacitly collude on 
price increases or output reductions, the enforcement agencies should 
aggressively intervene. The potential is always present for producers, 
refiners, or distributors to take advantage of sudden market imbalances 
to engage in anticompetitive conduct in the hope that their illegal 
activities will be lost in all the noise.
    There are certain markers or evidentiary patterns that the 
Commission staff looks for when deciding whether or not to open an 
investigation. Evidence of overt collusion may point to anticompetitive 
activity, but it is rarely observed. Where there is evidence of overt 
collusion, criminal enforcement may be appropriate.20 Where 
there is evidence of tacit collusion, a closer look also is warranted. 
Many factors may show tacit collusion, but generally we look for 
evidence that firms are acting contrary to what would seem to be their 
independent economic interests. For instance, if some or all firms in 
an industry are shipping from high margin markets to low margin 
markets, that may be some evidence of an agreement. If price and cost 
movement are divorced from each other, that may also be evidence that 
competitive forces are muted.
---------------------------------------------------------------------------
    \20\ The Department of Justice has brought a number of criminal 
enforcement proceedings against international price fixing cartels in 
industries such as food additives and vitamins.
---------------------------------------------------------------------------
    It is crucial to separate anticompetitive conduct from market-
driven outcomes so as not to chill competitive conduct. Large price 
increases are not themselves inconsistent with competitive behavior. 
They may merely be a competitive reaction to large cost increases. 
Without evidence of concerted activity or exclusionary monopoly 
conduct, there can be no antitrust violation.
    The January price spikes were principally a Northeastern 
phenomenon. Crude oil prices for Gulf Coast and West Texas Intermediate 
crude did not increase materially; Midwest heating oil prices increased 
only 10 cents per gallon. A number of State Attorneys General in the 
Northeast have opened an investigation of the increase in prices for 
heating oil and diesel fuel in their jurisdictions and have requested 
that the Federal Trade Commission assist them. Beyond stating that we 
are providing such assistance, I cannot comment further on this law 
enforcement investigation.
                             iv. conclusion
    The Commission thanks the Committee for holding this important 
hearing. The American public needs to know what forces are at work in 
this vital sector of the economy. Higher prices for products that are 
critical to our citizens' quality of life and for the efficient 
functioning of the national economy are a matter of serious concern. 
Where conduct that violates the antitrust laws is implicated in the 
higher prices, enforcement action must be taken.
    The Northeastern Attorneys General's investigation, assisted by the 
Federal Trade Commission, should enable us to determine if the reasons 
for recent increases in the price of heating oil warrant enforcement 
action.

    Mr. Barton. We thank you, Mr. Parker. The Chair is going to 
recognize himself for the first round of questions. They will 
be 5-minute rounds, but we'll have as many 5-minute rounds as 
members want. And with only three members here, I think we all 
have our chance to get the questions in.
    My first question is to Dr. Cook and to Mr. Mazur of the 
Department of Energy and EEI. When did the Department sense 
that there might be a tightening of crude oil supplies coming 
into the United States? You showed us some pretty fancy charts, 
where you're predicting continued tightness in supply and, 
therefore, projecting increased gasoline prices at retail, 
which leads me to believe you do have a model that makes 
predictions or projections in advance. So, my question is: when 
did the Department sense that we were going to have this 
tightness in December and January, which did, in fact, result 
in a run up in fuel oil prices and gasoline prices?
    Mr. Cook. As you may know, the Department has a monthly 
short-term forecast that comes out the first week or so of the 
month. The apparent impact on crude oil inventories from the 
imbalance and global supply and demand began to show up as 
significant by June--June and July.
    Mr. Barton. Last June and July.
    Mr. Cook. Last June and July, in the data. The forecast 
began to reflect that, which go out on the Web. The published 
version is twice a year, April and October, I believe. I'd 
actually like to read you a quote, if I might, from the 
November forecast, which indicates some concern about price 
volatility.
    ``Price volatility in the spot and futures markets for both 
crude oil and natural gas has been the norm since the end of 
the summer, as the market has tried to anticipate the fuel 
requirements for the upcoming heating season. Changes in both 
the current weather and in short-term forecasts of the weather, 
particularly for the northeast and Midwest regions of the 
country, have caused heavy price fluctuation in these heating 
fuels markets. These weather factors are likely to continue to 
cause wide price swings in the spot and near-term futures 
markets for oil and gas through this end of the month, even 
before the heating system begins.''
    Mr. Barton. That wasn't until November.
    Mr. Cook. That was in the November forecast.
    Mr. Barton. Well, my point is: EIA has got some fairly 
sophisticated models. It would seem to me that if back in June, 
July, your models began to project the shortage in the fall and 
winter, it would have been prudent to schedule meetings with 
the Secretary of Energy and the President, and then, in turn, 
have them get with the State Department and work with the non-
OPEC member states, like Mexico and others, that perhaps could 
increase production, so that you can have an increase in crude 
oil supply. Because, if you wait until November, December, even 
with the best of intentions, it takes a while from the time a 
decision is made to increase production, actually get the crude 
oil to the refinery and get the refinery to process it and send 
it through the distribution channel. So, why didn't the 
administration began to act a little bit more rapidly, if, in 
fact, you had indications last spring and summer, that the 
problem that has occurred might occur?
    Mr. Cook. If you recall that stock chart that I had up 
there, you may remember that even as late as November--the end 
of November, distillate inventories and inventories were still 
in the normal range. So, while we put out that warning in the 
forecast, we still had adequate inventories, by any measure. 
The problem in the northeast happened very rapidly and you 
really didn't have cause to go out and say the sky is falling, 
so to speak, until, essentially, right when the impact hit, 
with the cold weather in late January.
    With those normal stocks in November, there were signs that 
if these trends were to continue, and that's why the language 
that I read to you, if, in fact, the stocks were to get low by 
January, the implication here, and you combine that with cold 
weather, you could have some volatility for the second half of 
the winter. But no one, not us or anyone else, can forecast 
cold weather and some of the other complications that occurred 
there.
    Mr. Barton. But, you can predict that it's probably going 
to be colder in December or January----
    Mr. Cook. We were trying to predict that the stage----
    Mr. Barton. [continuing] than it is in June or July.
    Mr. Cook. [continuing] was being set, but we couldn't take 
it any farther than that.
    Mr. Barton. Well, I----
    Mr. Cook. Now, that said, I agree, you know, the process of 
communicating these concerns certainly can be and should be 
improved and we would like to work on you on that.
    Mr. Barton. Okay.
    Mr. Mazur. Mr. Chairman, I just want to interject one 
point, is that the data that we rely on for worldwide supply 
and demand measures comes with quite a lag, a several month 
lag. The data that John showed you for the United States comes 
very quickly. Basically, we have the best data system at the 
Energy Information Administration in the world. Everybody else 
is not so good. And so a lot of the work that John's folks are 
doing on forecasts is based on older data from other parts 
around the world and then their best judgment of what that is 
likely to show. And so when we get concerns, as John read, they 
tend to be tempered, because we don't have a very precise feel 
for what the worldwide stocks of crude oil are.
    Mr. Barton. Well, my prediction is, based on the hearing 
today, since it's being televised, DOE projecting higher 
gasoline prices in the summer, that impact is going to be felt 
on the spot market this afternoon. It was probably felt in 
minutes after that went out. So, you know, we really need to do 
a better job. Because, if you try to increase supply, the only 
way we have to increase supply in the short run in the United 
States is greater imports. And given that OPEC has a cartel 
that is trying to restrict production right now, we have to 
work with our non-OPEC allies that are just observers: Mexico 
and Russia, some of those nations. So, we really need to 
develop a better mechanism, when your model show a projected 
tightness, to do something other than economists sit around 
conference tables and cluck about it. I mean, I would hope you 
would agree with that.
    Mr. Cook. I agree. I said that we should improve this 
process and we'd like to work with you.
    Mr. Barton. My last question, because my time has expired: 
what are fuel oil prices today in the northeast? We've heard 
the testimony from our congressional panel of $1.80 a gallon 
and there's anecdotal evidence that it is $2 a gallon. I'm told 
that that price has already come back down and the numbers that 
we have on the staff, they were about $1.17 a gallon for fuel 
oil. Does that track with what you have?
    Mr. Cook. No. I think I testified that in New England, 
heating oil prices rose about 75 cents a gallon and over the 
balance of February, they had dropped about 60 cents, as of our 
last survey at the end of February.
    Mr. Barton. So, they are 15 cents a gallon higher?
    Mr. Cook. So, they're still elevated, about 15 cents.
    Mr. Barton. And where was your base? Was it 90 cents a 
gallon?
    Mr. Cook. That would put them in the $1.35 to $1.60 range, 
depending on the State.
    Mr. Barton. Today?
    Mr. Cook. As of the end of February.
    Mr. Barton. Okay. What about as of today.
    Mr. Cook. Well, we did a survey on Monday and the data will 
be available and published tomorrow. I just don't have it.
    Mr. Barton. But, is it a fair assessment that, as of 
today's hearing, the prices have declined from the highs that 
caused the greatest concern to some of the congressmen from the 
northeast?
    Mr. Cook. Most of that increase has been offset.
    Mr. Barton. My time has expired. I'll get into the 
distribution channel in the next round of questioning. Mr. 
Boucher of Virginia.
    Mr. Boucher. Thank you, very much, Mr. Chairman. I agree 
with the statements that have been made by a number of members 
of this panel this afternoon, that it's important that 
witnesses present their testimony in a timely fashion. However, 
let me say in defense of DOE on this particular occasion, that 
the Department is testifying today before four committees of 
this Congress, and I would, also, point out that at least three 
members of the panel to follow did not present their testimony 
in a timely fashion either. I think we all can improve our 
practice, in this regard, and I would hope we would do that.
    Mr. Mazur, let me ask you a couple of questions about the 
strategic petroleum reserve. There is a statutory mandate that 
the reserve have 1 billion barrels of petroleum. The actual 
capacity of the reserve today is about 700 million barrels, as 
a consequence of one of the facilities some time ago having 
leaked and that facility is today closed; so the real capacity 
is about 700 million barrels. At the present time, the 
inventory in the reserve is about 570 million barrels. Do you 
believe that it's in the public interest to utilize the full 
capacity of 700 million barrels that we have available and find 
the means to acquire the additional 130 million barrels 
necessary to fill it?
    Mr. Mazur. One of the steps that Secretary Richardson 
directed the Department to take last year, when prices were 
low, was to find innovative ways to add to the strategic 
petroleum reserve. And the one chosen was to use a royalty in-
kind program: while prices were low, to add some oil to the 
strategic petroleum reserve, thinking that was a good deal for 
the taxpayer; when prices are high, it's probably not such a 
good time to be adding oil to the reserve. So, these are the 
steps that we're taking now. The strategic petroleum reserve 
competes with every other priority that Congress funds and 
there have not been a lot of appropriated moneys forthcoming to 
add oil to the SPR.
    Mr. Boucher. Well, I'm going to get to a potential way that 
we might add to the reserve without having to have appropriated 
moneys; but, let me just get you to say whether you think it's 
a good idea for us to add to it, at this time. Assuming that 
the funding environment permitted that, do you think it's a 
good idea?
    Mr. Mazur. The administration is engaged in an SPRO sizing 
study, at that moment. I think it would be premature to come 
out one way or the other on that, until the actual analysis is 
completed.
    Mr. Boucher. Well, I notice from your testimony a 
suggestion that DOE is presently considering, something that 
you call a lending plan, under the basic structure of which 
petroleum would be loaned from the reserve, at the present 
time, to petroleum companies. Those companies, presumably, 
then, would sell that petroleum into the market, with the 
beneficial effect that that would add to the supply and, 
presumably, affect price in a favorable manner. And, then, that 
petroleum would be returned to the reserve with interest, if 
you will, with a premium, meaning that more gallons would be 
put into the reserve than were withdrawn. And the return of the 
petroleum would, presumably, occur at a time when prices are 
lower and when the petroleum, therefore, can be purchased by 
the companies for less than they would be selling it for today. 
Now, this strikes me as a very innovative proposal. Among its 
benefits would be that the premium paid by the petroleum 
companies would actually serve to increase the size of the 
inventory.
    Now, your testimony suggest that that is being considered 
by the DOE. So, let me just get you to elaborate on that a bit 
and why don't you start by telling us whether you think it's 
legally authorized, this proposal.
    Mr. Mazur. I think first, we do believe it is legally 
authorized. There have been other types of arrangements where 
oil has been traded, exchanged, in the past, and we think it's 
well within the authorization of the SPR. I think it's included 
in EPCA.
    Second, whether it's a good idea or bad idea is being 
discussed right now. It's, again, under active consideration. 
It's an innovative program, as you say, and it's something 
where the details need to be worked out. And the details are 
quite important, in part, determining whether or not you're 
getting a good deal, in terms of the amount that is getting put 
back in the SPR, in the future. It's something that's not 
obvious to a casual observer.
    Mr. Boucher. Well, let me simply encourage you to continue 
to refine this concept. It strikes me as creative thinking. I 
think it's entitled to more careful consideration. I would like 
to have the benefit of your thinking about the basis on which 
it is legally authorized. And I will conclude my questions with 
this, my time has expired, and that is following the OPEC 
meeting to take place later this month, during which it is 
hoped that the OPEC member nations will decide to increase 
petroleum production levels. If they do, by the way, I think 
that will be a direct consequence of the very favorable steps 
taken by our Secretary of Energy, to discuss that very process 
with the leadership in the petroleum exporting countries.
    But following that meeting later this month, is it the 
intention of DOE to reevaluate your strategy, with regard to 
oil prices, and do you think you might be forthcoming with some 
additional recommendations to the Congress or a decision to 
take some additional steps, yourself, following that meeting, 
given the virtual certainty that gasoline prices will increase 
no matter what happens at OPEC at the end of this month?
    Mr. Mazur. I think the President said that all options are 
on the table and I think the he's encouraging a lot of creative 
thinking within the administration, as to what steps can be 
taken. I don't want to go too far out on this, though, when you 
talk about our policy toward energy prices. Really, the policy 
is to let prices and markets be set by supply and demand, and 
not have the government intervene and say price should be x. 
That's not part of the----
    Mr. Boucher. Well, that, in and of itself, is a strategy 
with regard to energy crisis.
    Mr. Mazur. Probably a failed one.
    Mr. Boucher. Well, that's fine. Thank you, very much, Mr. 
Mazur. Thank you, Mr. Chairman.
    Mr. Barton. Thank you, Congressman Boucher. We recognize 
Congressmen Burr for 5 minutes.
    Mr. Burr. Thank you, Mr. Chairman. I want to say--it is 
Mazur?
    Mr. Mazur. Mazur, yes.
    Mr. Burr. Mazur. Mr. Mazur, hopefully, you can give that 
same speech about our policy not being one to influence prices 
the next time we talk about some of the onerous regulations 
that we place on individuals in the energy field, because I 
think we do have a great effect on where the pricing is.
    Let me turn to Mr. Cook, first. EIA missed their 
projections in a February letter on where gas prices were going 
to go. Would you care to give a new estimate today on what the 
peak is?
    Mr. Cook. No. The one I just gave is our current 
projection.
    Mr. Burr. And that is what?
    Mr. Cook. $1.56 peak in May, up to $1.80, with the 
volatility that's out there.
    Mr. Burr. And the basis for your peak number is on what 
OPEC has or has not done, or what DOE is going to or is not 
going to do? Is it on policy or is it on the OPEC decision?
    Mr. Cook. Like all forecasts, it makes some assumptions.
    Mr. Burr. What are those assumptions?
    Mr. Cook. We assume that OPEC, one way or another, will 
increase production beginning April 1, by a million barrels a 
day. That may not be enough to fully balance crude markets and, 
therefore, that's one of the reasons why the forecast calls for 
continued high crude prices. That influences the gasoline 
price. The tightness in the gasoline market, itself, 
independent of the increase we might see in crude, is due to 
low stocks, high requirements for feed stocks----
    Mr. Burr. But, you're presuming in this calculation that 
there's no policy or move that we make in this country that 
would stabilize the price?
    Mr. Cook. No, we don't do that.
    Mr. Burr. So, do you consult with DOE when you do your 
assumptions?
    Mr. Cook. No.
    Mr. Burr. Okay. Let me go back to you, if I could. We've 
had this discussion about SPR. It's on the table; it's off the 
table; it's on the table; it's off the table. Tell me what is 
different now than in 1995 or 1996, when we sold SPRO to raise 
revenues for budget purposes?
    Mr. Mazur. In those years, Congress directed the Department 
to sell a limited amount of oil from the strategic petroleum 
reserve. I think it was on the order of----
    Mr. Burr. Congress approved the ability to sell oil at the 
request of the administration.
    Mr. Mazur. The administration requested it one time in the 
fiscal year and Congress----
    Mr. Burr. And the administration requested it to raise 
revenues, so the budget would balance; yet, we're hesitant to 
sell any SPR to stabilize the price of oil prices.
    Mr. Mazur. My recollection is that the administration 
requested funds, so that the Weeks Island facility could be 
decommissioned and that Congress approved those funds. And then 
in subsequent years, Congress directed the Department to sell 
oil----
    Mr. Burr. When we sell off SPR, do we affect the price of 
oil in the marketplace?
    Mr. Mazur. Actually, we did a quick little analysis, 
looking at the timing of the strategic petroleum reserve sales 
and what the effects of prices are and except for the Gulf War 
sale, it's difficult to see a dramatic drop in price coincident 
with the sales from the SPR.
    Mr. Burr. So, we could estimate the effect that SPR sales 
were going to have on the world supply and, consequently, the 
cost in the United States of oil; but, we couldn't anticipate 
what would happen if OPEC cut their production, that we would 
be at $1.60 a gallon on gas?
    Mr. Mazur. I think part of what the forecast from the 
Energy Information Administration does is assume some 
production paths for various countries in the world: OPEC, non-
OPEC producers, United States, and others. Sometimes, they are 
right; sometimes, they are a little short; sometimes, they are 
a little over. The EIA forecasts have consistently called for 
higher crude oil prices then in the month those forecasts are 
made. They may have undershot the extent to which prices were 
going to rise; but, they're pretty much on the mark, saying 
that fuel prices were going up.
    Mr. Burr. You don't anticipate DOE to make any moves prior 
to the OPEC meeting the end of March?
    Mr. Mazur. Moves in which direction, sir?
    Mr. Burr. Any direction.
    Mr. Mazur. You mean like selling SPR oil?
    Mr. Burr. Making a decision to sell SPR or not sell SPR, or 
anything that would affect the stabilization of the price?
    Mr. Mazur. I think at this point, we think it's--the best 
course of strategy, to let Secretary Richardson's energy 
diplomacy work its way and see what----
    Mr. Burr. Which is to wait for OPEC to have their meeting.
    Mr. Mazur. At the end of the month, yes.
    Mr. Burr. So, we will continue Federal subsidies to those 
individuals, who are having a tough time affording fuel oil, 
and we'll extend SBA loans to truckers, who can't pay for the 
price of diesel. Now, how do we expect them to pay back those 
loans?
    Mr. Mazur. I think in the forecast that both EIA made and a 
number of private sector folks have made, oil prices are 
expected to come down probably by the end of the year or later.
    Mr. Burr. And somehow they're going to recover enough money 
in additional profits to pay off loans that they've now 
incurred, because we've extended SBA loans to them?
    Mr. Mazur. That would be the expectation, yes, sir.
    Mr. Burr. I will conclude, Mr. Chairman, because I have to 
go to another hearing. I would, also, tell you that with the 
accuracy of EIA's projections, I'll let you tell that to 
truckers across America, because I'm not going to be the one to 
give them that assurance that it's coming down. I thank you, 
Mr. Chairman.
    Mr. Barton. Thank you, Congressman Burr. We'll now 
recognize Mr. Wynn of Maryland for 5 minutes.
    Mr. Wynn. Thank you, Mr. Chairman. I recognize that we 
don't have a representative from the State Department here, but 
I would like for you to share any information you may have on 
the subject of Russia's role in the OPEC decisionmaking, with 
regard to increase in production. The information that seems to 
be floating around suggests that Russia is one of the major 
obstacles to getting an OPEC agreement. Is that accurate?
    Mr. Mazur. This is not an area that I'm an expert on. I do 
know Russia is not a member of OPEC, so I would be surprised if 
they were a major obstacle to OPEC coming with an agreement.
    Mr. Wynn. What about Russia, in general, are they--what 
role are they playing, in general?
    Mr. Mazur. Again, that's something that is outside of my 
area.
    Mr. Barton. Would the gentleman yield?
    Mr. Wynn. Certainly, Mr. Chairman.
    Mr. Barton. I mean, it's true, they're not a member of 
OPEC; but, isn't it, also, true that they are regular observers 
at OPEC meetings and that there are meetings at the staff level 
between the oil ministry in Russia and the oil ministries in 
the OPEC countries?
    Mr. Mazur. They are a major oil supplier, so, yes, you 
would expect them to be sitting in----
    Mr. Barton. So, the Congressman's question, you know, does 
have merit, since Russia is one of the few non-OPEC members 
that could increase production, if they were so inclined?
    Mr. Mazur. Perhaps, yes.
    Mr. Wynn. Thank you, Mr. Chairman. In your strategy 
discussions, have there been any consideration of negotiating 
with Russia? Are you aware of any negotiations with Russia, to 
increase their production?
    Mr. Mazur. I am not, no, sir.
    Mr. Wynn. Early on, many of us expressed concern about the 
problems in the northeast with heating oil and there's a bill 
around, in which many of us believe that we ought to have a 
northeast or a regional reserve for domestic consumption of 
heating oil. What is your position on that?
    Mr. Mazur. The Department has looked over the past decade a 
number of proposals for regional refined product reserves and 
generally found that the expected cost of those reserves 
exceeded the benefits that would come from it. Secretary 
Richardson wants us to think creatively about alternatives, and 
so we are going to be spending a little bit of time to see if 
we can find a better approach. But, frankly, the analysis that 
has been done over the past decade has not been very supportive 
of the idea of having a regional petroleum----
    Mr. Barton. Would the gentleman yield on that point?
    Mr. Wynn. Certainly, Mr. Chairman.
    Mr. Barton. Is it not true that the Department submitted to 
the chairman of this subcommittee a proposal that would 
eliminate the current authority to put funds into the regional 
reserve that was authorized in 1992?
    Mr. Mazur. Yes, I understand that.
    Mr. Barton. So, your official position is that you want to 
eliminate the existing authority?
    Mr. Mazur. And that would have been based on the most 
recent analysis that had been done of a regional product 
reserve.
    Mr. Barton. Thank you.
    Mr. Wynn. You said the costs outweigh the benefits. How was 
that analysis done? I mean, as somewhat laypersons, we're 
assuming that the benefit would be that families would get 
heating oil, particularly low income persons, who would be 
impacted. That's the benefit. What are the costs considerations 
that were used to say that this was not a good idea?
    Mr. Mazur. There are a number of costs that are involved in 
creating and operating a regional product reserve. First, you 
need to acquire the facilities where the product is going to be 
stored.
    Mr. Wynn. If you assume these are leased facilities.
    Mr. Mazur. You still have to pay the lease payments for 
that. Then, you need to acquire the product, and with refined 
product, one of the things you need to do is be in the market 
fairly regularly, to maintain a product that is of sufficient 
quality to be sold in the marketplace. So, the operating costs 
could be quite substantial. In addition, the analysis showed 
that it's not every year in which you would choose to use this 
facility. It would be on the order of one out of three winters, 
perhaps, that were cold enough and where the prices had spiked 
enough that you would want to make use of these reserves.
    Mr. Wynn. It would appear that that would be a good thing; 
that that would kind of stabilize or help maintain the reserve, 
so that you wouldn't have to constantly make maximum purchases.
    Mr. Mazur. Not maximum purchases, but you need to keep the 
supply of the refined product relatively fresh, and so you 
would have to be in the market pretty regularly. So, you would 
be incurring operating costs on a regular basis.
    Mr. Wynn. Let me ask two final questions: one, and this may 
be the same question in another guise, if this is not a good 
idea, what are your proposals to address the concerns of the 
northeast; and second, what are you long-term plans to make us 
more self-reliant, in view of these kind of periodic problems 
that we're encountering now and that we may well encounter in 
the future?
    Mr. Mazur. On the first question, what are we doing about 
the situation in the northeast, Secretary Richardson has 
directed the Department to look at a couple of issues. One is 
decreasing the reliance on fuel oil in the northeast, perhaps 
by increasing the use of natural gas there and try to 
understand what sort of obstacles there are to that switch in 
fuels. In addition, in the longer term, as I mentioned in the 
testimony, the Department has a fairly robust R&D program in 
energy efficiency, alternative fuels, and so on, which are 
designed to reduce our reliance on imported oil. On the 
domestic supply side, we have a fairly robust R&D program to 
help improve the amount of resource that can be extracted from 
existing reservoirs.
    Mr. Wynn. What specific alternatives are you talking about?
    Mr. Mazur. On alternative fuels?
    Mr. Wynn. Yes.
    Mr. Mazur. It would include things like--well, in 
transportation fuels, ethanol would be a top candidate. 
Biodiesel, as Ms. McCarthy mentioned earlier, is another one. 
And there are natural gas, methanol, and other types of fuels 
that can be used for transportation vehicles.
    Mr. Wynn. All right, thank you.
    Mr. Barton. Thank you, Congressman, those were excellent 
questions. We would now welcome 5 minutes of questions from the 
gentleman from Georgia, Mr. Norwood.
    Mr. Norwood. Thank you, Mr. Chairman, I appreciate that. 
Mr. Mazur, I'm, basically, going to confine my first full 
minute to you. Two days ago in the White House briefing room, 
the President, in his remarks, said he prefers high oil prices, 
because they're useful in supporting his social and 
environmental agenda. And just so I can get this exactly right, 
I'd like to quote the President, so we won't be off base here. 
He said, ``Americans should not want oil prices to drop to $10 
to $12 a barrel, the levels that they were last year, because 
that would take our minds off of our business, which should be 
alternative fuels, energy conservation, and reducing the impact 
of all of this global warming.'' Do you support that?
    Mr. Mazur. What the President, I think, was saying is 
that----
    Mr. Norwood. I understand what he is saying.
    Mr. Mazur. Okay.
    Mr. Norwood. Everybody in this room understood it. Now, do 
you support that?
    Mr. Mazur. I support the position that when prices last 
year at historic lows, that they took away the incentive for 
folks to give consideration to things, like energy efficiency 
and use of alternative fuels.
    Mr. Norwood. Does the Department of Energy, then, and the 
Secretary support this statement that the President made, that 
anybody I know can understand?
    Mr. Mazur. Secretary Richardson has said, and he said many 
times last year, I think even in front of this committee, that 
prices--oil prices of $10 a barrel were too low. He's, also, 
said prices----
    Mr. Norwood. Does that mean he, then, supports that price 
of gasoline at $1.80 a gallon?
    Mr. Mazur. That--that--no, I don't think that's what it 
means. It means that at $10 a barrel, the incentives for 
domestic production were sufficiently low, that not a whole lot 
of it was occurring.
    Mr. Norwood. It's a little hard to have it both ways. The 
administration, in particular the Vice President, called for a 
50 cents a gallon Federal tax hike, as part of the Clinton-Gore 
1993 tax increase. Now, the administration, at that time, 
justified the request on grounds that higher prices would force 
the public, especially low income families, to use less energy. 
Public outcry, as you remembered, I certainly do, and I wasn't 
up here, forced the administration to drop this idea.
    Now, the administration publicly supports allowing at least 
part of this OPEC price gouging to become permanent for the 
very same reason, forcing the public to use less gas by simply 
pricing low income working families out of the gas lines, which 
is what it does. Has anyone in the administration discussed any 
portion of this policy with you or other personnel at the 
Department of Energy?
    Mr. Mazur. I don't think anyone has discussed the idea of 
supporting OPEC to raise prices on American consumers, as part 
of a U.S. strategy, no.
    Mr. Norwood. Were you in the Department of Energy in 1992-
93, when----
    Mr. Mazur. In 1993, I was working for Joint Tax Committee, 
and I was working on the----
    Mr. Norwood. Ah-hah, then you recall them wanting to 
increase prices 50 cents a gallon, so people would use less 
gas; in other words, pay more.
    Mr. Mazur. My recollection was that it was a broad-based 
energy tax, not just a gasoline tax.
    Mr. Norwood. Well, that was certainly the part out of the 
broad-based tax that got dropped out, because the American 
people said, in a fairly loud voice in 1993, no, you don't; 
you're not going to do that.
    Does the Department of Energy believe that higher oil 
prices, either through direct taxes or by default through 
international trade agreements, should be used as a tool to 
force the public to drive less? If so, does this amount to the 
same thing, enacting of 50 cents a gallon tax hike without 
having to seek congressional approval? Does it mean the same 
thing?
    Mr. Mazur. Again, I don't----
    Mr. Norwood. If you're supporting higher prices, which 
means it's going to be higher at the gas tank, doesn't that, in 
effect, mean the same thing as raising the Federal excise tax 
by 50 cents?
    Mr. Mazur. No, I don't think so. I think one thing you need 
to keep in mind is that last year, when prices were $10, $11, 
$12 a barrel, those were historic lows, not seen since the days 
of the depression in the United States, in real terms. And I 
think it was commonly agreed that prices at that level were too 
low.
    Mr. Norwood. So, you're, basically, saying that it's all 
right for the price to go up; it just may be a little high now?
    Mr. Mazur. I'm saying prices now are, I think--quite 
clearly, prices now are too high, yes.
    Mr. Norwood. In your statement, you said, and I quote, 
``Oil prices will come down by the end of the year.''
    Mr. Mazur. I think that's my expectation, yes.
    Mr. Norwood. Do you mean by late October?
    Mr. Mazur. I think the price forecast that I've seen have 
shown them coming down throughout the course of the year; yes, 
sir.
    Mr. Norwood. Well, explain to the public why you think 
they're going to come down?
    Mr. Mazur. I think the way I looked at this is the market 
participants, who purchase oil in the futures markets, for 
delivery in months of July, August, September, October, are 
willing to pay much less, $2, $3, $4 a barrel less for that oil 
than for today's oil. That's indication to me that the market 
believes prices will be coming down in the future.
    Mr. Norwood. Did you predict the prices would go up as high 
as they're going?
    Mr. Mazur. As I said earlier, the EIA projections were 
fairly consistent that prices would be going up. I don't think 
they projected $32 a barrel oil.
    Mr. Norwood. Dr. Cook, you said that----
    Mr. Barton. This will have to be your last question----
    Mr. Norwood. It's very brief.
    Mr. Barton. [continuing] of this round.
    Mr. Norwood. Very brief. Dr. Cook, you said that OPEC will 
increase production a million gallons a day and then you went 
on to say by one way or the other.
    Mr. Cook. Barrels not gallons.
    Mr. Norwood. I'm sorry, barrels. Explain to me what one way 
or the other would mean, so we can have some confidence this 
may be true. It doesn't appear there's going to be help from 
the Department of Energy, so what other ways are we going to 
hope to increase this production?
    Mr. Cook. First of all, that was an assumption. The model 
works that way. We assumed a million barrel a day increase 
beginning in the second quarter. It doesn't mean that we have 
inside knowledge of anything like that. When I said one way or 
another, what I meant is that OPEC, after the meeting on March 
27, may announce that. On the other hand, who knows what 
they're going to announce. It seems to change from day to day.
    The other way that it can come out is just high prices tend 
to reduce their compliance with their own agreement. They tend 
to cheat more. And, in fact, that's why we underestimated all 
along the oil price, because we assumed that they would cheat 
more than they actually did. This is maybe a historic period 
for their unity, possibly dating all the way back to the early 
1970's.
    Mr. Barton. That's true.
    Mr. Norwood. Next round we'll finish.
    Mr. Barton. Thank the gentleman from Georgia. The gentleman 
from Massachusetts is recognized for 5 minutes.
    Mr. Markey. Thank you, Mr. Chairman, very much. Mr. Mazur, 
in response to the gentleman from Maryland earlier, you said 
that DOE had done a recent study of the matter and you 
concluded that establishing a regional reserve was not cost 
effective. Now, if you're referring to your June 1998 study, 
then that just flat out contradicts what the conclusion was in 
your report, where it says that the expected benefits of a 
smaller 2 million barrel regional product reserve located in 
lease terminals in the northeast would approximate or exceed 
its costs. Is there some other study that you're referring to?
    Mr. Mazur. Yes, sir. I guess what I was saying was that 
there are a number of studies that have been done over the last 
decade and that the general conclusion----
    Mr. Markey. No, I'm talking about is there some study more 
recent than your own study in June 1998?
    Mr. Mazur. That is the most recent study and under one 
scenario, it does conclude that the costs approximate the 
benefits. Under the other scenarios, I believe it concludes 
that the costs exceed the benefits.
    Mr. Markey. So, when you said to Mr. Wynn that a regional 
petroleum reserve was not cost effective, were you referring to 
your own study, which says that it is----
    Mr. Mazur. I was referring----
    Mr. Markey. [continuing] cost effective or are you 
referring to other people's studies that said that it may not 
be, Mr. Mazur?
    Mr. Mazur. Mr. Markey, I was referring to the bulk of the 
studies and I was referring to the general conclusion that 
comes from----
    Mr. Markey. No, I'm talking about--you're not sticking by 
your own conclusions and in your own report, with regard to the 
economic feasibility of planting a petroleum reserve right in 
the northeast.
    Mr. Mazur. My understanding of that study is that you have 
one scenario in there, a 2 million barrel leased facility with 
oil swapped from the SPR, and that the conclusion and a 
particular strategy for using oil from that reserve. Under 
those sets of assumptions, their costs approximately equal the 
benefits. Under every other set of assumptions--under other----
    Mr. Markey. Why don't you go forward with it, then, if it 
says that you can do it under this--under these conditions, 
using this scenario, it would be cost effective? Why isn't the 
administration moving forward on a program that you have 
concluded would be cost effective for the northeast?
    Mr. Mazur. I guess the point is that it would be 
approximately cost effective under the circumstances that are 
designed in there, including the assumed draw down plan, and 
it's not obvious to me that the assumed draw down plan would be 
one that the Federal Government would be utilizing.
    Mr. Markey. Well, of course, they wouldn't be utilizing it, 
if they never wanted to deploy it in the case of a huge spike 
in the rates that the elderly and the poor in the northeast 
would have to suffer, because of the rise in home heating oil. 
If your whole belief is that you're never going to deploy it, 
in the event that consumers are getting hurt, then, of course, 
it wouldn't be effective. But, if you had it there and then 
there was without question a gouging of consumers, where they 
were being tipped upside down and had money being shaken out of 
their pockets by OPEC, by oil companies, and you deployed it, I 
don't think there's any question, based upon your own 
conclusions, that it would be an effectual use of taxpayer's 
money, in order to make sure that there was a rectification of 
a distortion of market forces.
    Mr. Mazur. I guess, sir, we disagree on the interpretation 
of that study.
    Mr. Markey. Okay. Now, does the Department still want to 
repeal the provisions of the--of EPCA, that authorized DOE to 
create a regional refined product reserve, or have you changed 
your policy on that?
    Mr. Mazur. I understand that Assistant Secretary for Fossil 
Energy testified to that effect last year. I don't think that 
issue has been revisited.
    Mr. Markey. So, now you're saying that you want to--you 
don't even want to build it at all, is that right? Is that the 
policy now with this administration, cancel it out?
    Mr. Mazur. I think that's what the Assistant Secretary 
testified to, but I don't know for----
    Mr. Markey. Okay. Well, that's unacceptable. I mean, right 
now, I'm--what I'm--you know, the Christians had a better 
chance against the lions, than the consumers in the northeast 
are going to have against the OPEC and oil companies under this 
administration's oil policy. Now, we need a regional petroleum 
reserve to protect us against market distortions and you're 
telling us right now you have no intention of even revisiting 
this issue. And I think that maybe you are waiting it out, 
hoping spring hits early up in the northeast. But, it wasn't--
it wasn't 85 degrees up there yesterday; it was 44 when I left. 
And you might get a little bit of a break, but you're only 
buying time before this issue comes back to haunt you again.
    Now, instead of repealing this law, why don't we just 
reauthorize the test fill; that is, just do a little experiment 
up there. Norman Lent, the Republican from New York, and I 
passed that amendment back in 1990. Two years of the Bush 
Administration, no experiments; 2 years of the Clinton 
Administration, no experiments, and that legislation just 
lapsed. Why don't we reauthorize it, so you can have a chance 
to test? Would you support passage of legislation that 
reinstituted the Markey-Lent language, which gave you the 
ability to test?
    Mr. Barton. And this will have to be the last question of 
this round; but, if you want a second round, we'll certainly 
have a second round.
    Mr. Markey. Thank you.
    Mr. Mazur. At this point, that's something that we would 
have to take under serious consideration. I couldn't commit one 
way or the other.
    Mr. Markey. It's just unacceptable. Thank you, Mr. 
Chairman.
    Mr. Barton. The gentleman from New York, Mr. Fossella, is 
recognized for 5 minutes for questions.
    Mr. Fossella. Thank you, Mr. Chairman. Mr. Mazur, there is 
a direct correlation between the price of a barrel and the 
price of home heating oil and/or gasoline at the pump; 
correct--or Dr. Cook. In other words, the higher the price of a 
barrel, the higher the home heating oil----
    Mr. Cook. Sure; sure----
    Mr. Fossella. It's just that----
    Mr. Cook. [continuing] all other things equal.
    Mr. Fossella. I beg your pardon?
    Mr. Cook. All other things equal.
    Mr. Fossella. Or, all other things equal. Now, this issue 
of the concern for the spike in prices, not on home heating oil 
in the northeast, but gasoline at the pump, has been on the 
table for several months now; correct? It goes back to November 
1999?
    Mr. Cook. I wouldn't phrase it quite that way, no.
    Mr. Fossella. December 1999? There were people raising the 
issue of releasing the strategic petroleum reserve back in 
November and December 1999, correct?
    Mr. Mazur. I think the chart that John Cook showed a little 
earlier had the distillate inventories still in the normal 
range in November 1999. So, I----
    Mr. Fossella. There were people advocating the release of 
the strategic petroleum reserves back in November and December 
1999, correct?
    Mr. Mazur. I don't know.
    Mr. Fossella. You don't know?
    Mr. Mazur. Don't know.
    Mr. Fossella. Senator Shumer and others----
    Mr. Mazur. I'm sorry.
    Mr. Fossella. [continuing] who indicated----
    Mr. Mazur. Okay, I understand Mr. Shumer did, yes; so, at 
least--at least several people, yes.
    Mr. Fossella. I'm just--well, that is sort of 
disconcerting, because if there were--and he was just one them. 
There were others, who were raising this issue. I guess what 
I'm getting at is if we knew about in November of--December and 
you didn't, which is disturbing, but if you didn't and we had 
done something about it at that time, this quiet diplomacy that 
is now being discussed, if something was done then, wouldn't we 
be experiencing some relief in prices today?
    Mr. Cook. As I indicated earlier, global inventories and 
U.S. inventories in November were still in the normal range. a 
lot of people were saying they were high then. What I tried to 
convey, maybe not as clearly as I should have earlier, is that 
the cuts in OPEC were beginning to cut into those surplus 
inventories and beginning to show a trend from high end to 
normal. Our models, everyone else's that I'm familiar with, 
assumed that OPEC would cheat more, supply more over the winter 
period, and that this trend would not necessarily bring 
inventories down to below normal. So, although Mr. Shumer did 
advocate use of the SPR at that point, the stock globally and 
in the United States were not even below normal.
    And just the fact that they got below normal by mid-January 
did not produce the spiked price either. It was the combination 
of that, with cold weather, with some factors in the market 
that were pretty unusual that did that. We couldn't predict 
that in November. For all we knew, the stocks would start 
rising like they normally do in November.
    Mr. Fossella. But with all due respect, your analysis, it 
was wrong.
    Mr. Cook. Absolutely. The actual----
    Mr. Fossella. And the fact of the matter, there were people 
advocating that somebody should step up on OPEC's toes, to 
increase production, because of a simple correlation between a 
price of a gallon--a barrel of crude oil and the price of home 
heating oil and the price at the gasoline pump. Nothing was 
done. Now, we're here today, that we should just wait until the 
Secretary's diplomacy takes hold. And isn't it a legitimate 
question that this should have been done 2, 3, 4 months ago, so 
that rather than wait until late October, November, December, 
the guy, who is filling up now, is paying $1.99 on Staten 
Island?
    Mr. Cook. I can't speak to what should have been done. I 
can only point out, again, there's a lot of uncertainty in 
these areas and no one could know how much oil OPEC was going 
to actually supply over the winter. For all anyone knew, at 
higher prices, they could have supplied enough, that we would 
not have seen a continuation in that decline. Mr. Shumer's 
scenario, one of many out there, turned out to be the one that 
actually unfolded.
    Mr. Fossella. Well, I guess we're not going to make 
progress on that. But, let me just step aside, because I see my 
time is running now, and that is what is the position of the 
Department of Energy, other than waiting for these alternative 
fuel sources to come to fruition, what are your official 
positions, regarding the taxation on domestic oil producers, 
incentives, to encourage more production in the United States, 
as opposed to being dependent upon the foreign cartel and, 
also, the regulatory burdens that place disincentives on 
American oil producers, to--again, to bring that product to the 
table?
    Mr. Mazur. As part of Secretary Richardson's response to 
the low oil prices of last year--as you recall, about a year 
ago, the prices were $10, $11, $12 a barrel--he worked with the 
domestic producers, to try and find ways to reduce their costs 
of finding and producing oil. There were a number of technology 
programs to transfer technology to smaller independent 
producers, so they can get more out of the reservoirs that they 
have available. We've, also, worked for royalty relief on 
Federal lands. We have deep water royalty relief for some 
projects deep in the Gulf. And the Department is working on on-
line oil and gas projects, to help get rid of some of the red 
tape, at least, in that area. So, we're doing what we think are 
measured responses to help domestic producers with their 
regulatory burdens.
    Mr. Barton. Unfortunately, the gentleman's time has expired 
and I've been reasonably strict with the other members. But, we 
are going to have, after Mrs. Wilson, kind of an open question 
period, so that all members, who are present, if you have one 
or two wrap-up questions for this panel. Congresswoman Wilson 
is recognized for 5 minutes.
    Mrs. Wilson. Thank you, Mr. Chairman. I was interested in 
some of your testimony about allowing Secretary Richardson's 
energy diplomacy to work, and interested in it for a couple of 
reasons. This is--it's interesting to me that we're now 
pursuing this concept of diplomacy, which some commentaries 
within the last month have acknowledge that the administration 
was caught napping on energy policy. And I understand that now, 
as you've just testified, that the Secretary and the President 
have asked you to think creatively about alternatives and that 
everything is on the table, which raises a question of was 
everything on the table a year ago, when OPEC announced 
publicly that it was reducing its supply?
    Mr. Mazur. As you recall, OPEC announced several times they 
were reducing supply. There were a series of supply cuts. And 
as John pointed out a little bit earlier, that the effect of 
the cuts didn't really show up until, basically, the fall, in 
good measure. And so, we were monitoring the situation and 
looking at oil prices; but, frankly, a year ago, this committee 
was concerned about prices being too low and that was one of 
the areas that the Department was being tugged in.
    Mrs. Wilson. When Secretary Richardson went to the oil--to 
the OPEC countries, diplomacy is usually a give and take game. 
What demands were made by OPEC on the United States?
    Mr. Mazur. I wasn't part of that trip, so I really can't--
and I wasn't in the room with the Secretary, I really can't 
answer that.
    Mrs. Wilson. So, we don't know what the price is?
    Mr. Mazur. Again, I wasn't there. Secretary Richardson 
would have to answer himself.
    Mrs. Wilson. Who--you're the head of policy, right----
    Mr. Mazur. Yes, ma'am.
    Mrs. Wilson. [continuing] in Department of Energy? Who is 
setting up what the policy is? Who is writing the talking 
points for the Secretary of Energy?
    Mr. Mazur. On international issues, we have the Office of 
International Affairs, that works on those, and the Secretary's 
office. There are a number of people, who have worked with him 
on this OPEC issue, and others, the energy diplomacy portion of 
things.
    Mrs. Wilson. Mr. Chairman, I would very much like to ask 
that those folks come up here to testify, if we can't get 
answers about what America is giving up, in return for 
increased oil production. I think that really highlights the 
problem of foreign dependence pretty clearly.
    Mr. Barton. We're going to send written questions to the 
Secretary and this certainly will be one of the questions that 
we send.
    Mrs. Wilson. A year ago, a section 232 investigation was 
initiated, with respect to oil imports and whether they are a 
threat to national security. Is that the most recent study 
done?
    Mr. Mazur. My understanding is that study is at the White 
House for review of the recommendations of the study.
    Mrs. Wilson. What were its conclusions?
    Mr. Mazur. I don't know, ma'am.
    Mr. Barton. Excuse me, you don't know or you can't say, 
because it's still being cleared by the political officers at 
the White House?
    Mr. Mazur. It's being reviewed at the White House. The 
conclusions of the study, I did not work on that study, so I 
really don't know what the conclusions were.
    Mr. Barton. Well, I want to reenforce what the gentlelady 
from New Mexico is saying. I was a White House fellow at the 
Department of Energy in the early years of the Reagan 
administration and I worked in the Office of Policy, Planning, 
and Analysis. I mean, I was low man on the totem pole. I was 
way down there. But, the head of the Office of Policy, 
Planning, and Analysis knew what the policies were. How can you 
be a head of the policy office and with an apparently sincere 
and straight face claim you don't know? I mean, that--if you're 
honest--well, you're not under oath----
    Mr. Mazur. Yeah, I understand that.
    Mr. Barton. [continuing] but if you're being truthful, they 
must not include you in too many of the policy discussions.
    Mr. Mazur. I don't know how large the Office of Policy was 
when you were there. It is probably well below the size, at 
that point; much smaller operation, focused mostly on domestic 
issues, not international issues.
    Mr. Barton. All the more reason for you to know. If there 
are fewer bodies----
    Mr. Mazur. The section 232----
    Mr. Barton. [continuing] the body at the top would tend to 
be more informed on what the other bodies are doing.
    Mr. Mazur. The section 232 studies, there have been about a 
dozen--about 10 of them done in the past. Every single one has 
concluded that the level of oil imports has threatened national 
security. That sort of a finding in this study would not be 
surprising. The study then goes on to have a number of--studies 
tend to go on having a number of recommendations for what the 
Federal Government should be doing. That's the part that I just 
don't know what those recommendations are.
    Mr. Barton. We're going to give the gentlelady a little 
more time, because I've taken up some of your time. Would it be 
safe to say that you have been briefed, in your preparation for 
testimony, to tell us as little as possible?
    Mr. Mazur. No, that would be incorrect, sir.
    Mr. Barton. Okay.
    Mrs. Wilson. Thank you, Mr. Chairman. How many barrels of 
oil per day does Iraq produce?
    Mr. Cook. It's been fluctuating. Lately, we have estimated, 
February anyway, that it was around 2.3 million barrels a day.
    Mrs. Wilson. And you expect, you hope, you, well, pray, I 
suppose, that OPEC will increase its production by a million 
barrels per day at the end of this month; is that right?
    Mr. Cook. No, we assume that.
    Mrs. Wilson. Even worse.
    Mr. Cook. Well----
    Mrs. Wilson. In May, the United Nations is, again, going to 
consider whether it will lift sanctions on Iraq. And every time 
that we come up to that decision point in the past, Iraq has 
sent a little shock into the oil market. Do you anticipate 
that, again?
    Mr. Cook. I think based on their track record, you'd have 
to assume that there is always that potential for Iraq to 
disconnect, to disrupt, or suspend its shipments, when the 
various phases of the program roll over.
    Mrs. Wilson. Mr. Mazur, what does this do our oil 
diplomacy?
    Mr. Mazur. Oh, as you can imagine, it complicates it quite 
a bit. When you have countries that we don't have very good 
relations with, Iran, Libya, Iraq, as part of the discussion, 
it's very much a complicating factor.
    Mrs. Wilson. In fact, what it really means is that Saddam 
Hussein now holds the cards, doesn't it?
    Mr. Mazur. I don't think I'd go that far, no, ma'am.
    Mrs. Wilson. He produces 2.2 billion barrels per day and 
OPEC may, if we're lucky, increase production a million barrels 
a day. And you don't think he's holding the cards?
    Mr. Cook. It's 2.3 million.
    Mr. Mazur. Out of a world production of about 75 million, 
where other countries could, if they desired to, make up some 
of that excess. For instance, Saudi Arabia has excess capacity 
to more or less offset, if that were desirable.
    Mrs. Wilson. I think what this gets to, Mr. Chairman, is 
just how vulnerably we are to dependence on foreign supply and 
just how weak how diplomatic approach is. Thank you, Mr. 
Chairman.
    Mr. Barton. I thank the gentlelady. We're going to set the 
clock at 10 minutes. This is going to be an open question 
period, so any congressman can ask a question. So, we got to 
this up in the next 10 minutes and then go to our second panel.
    Mr. Markey. This is the fastest finger round, then, okay.
    Mr. Barton. This is do you want to be a millionaire, if you 
push the right button.
    I'm going to start it and I want to ask our two witnesses 
from DOE and EIA, this model that you put on the board showed a 
projected retail gasoline price increase. My question: in the 
next coming months, we can't do a lot about what wasn't done 3 
or 4 months ago, but we can do something about what we do the 
next month or 2. How much available refined product supply is 
there in the world and how rapidly do your models project it? 
If wholesale gasoline prices on U.S. markets stay where they 
are or go higher, then how much of that would be redirected 
from Europe or Asia, come into the United States, and how 
quickly would it get here? Do you understand the question?
    Mr. Cook. Sort of. If the market gets very tight in the 
spring and summer and needs more imports, historically, there 
has been 400,000-500,000 barrel a day excess gasoline capacity 
in Europe and, typically, it would take 5 to 10 cents a gallon, 
in terms of higher New York Harbor prices, to attract that 
extra supply.
    Mr. Barton. Today on the New York market, unleaded gasoline 
wholesale dropped from 96 cents a gallon to 94.9 cents a 
gallon, so it's down about 2 cents a gallon. I don't have any 
clue where 94 cents a gallon relates to the European market. 
Where would the price have to be, at the wholesale level, 
landed in New York, for the available surplus capacity of 
unleaded gasoline to be redirected to the U.S. market?
    Mr. Cook. Well, first of all, we get a base--a baseline 
line of imports from Latin America, the Caribbean, Canada, 
anyway, again, 5 to 10 cents higher in New York--New York 
Harbor, 5 to 10 cents higher than, say, Rotterdam is normally 
enough to at least redirect flows from those regions, 
incremental flows, and attract excess European gasoline. So, 
if, you know, New York Harbor is at 95 and Rotterdam is at 85, 
I would anticipate some beginnings of movement.
    Mr. Barton. Okay. I've got other questions, but, Mr. Wynn?
    Mr. Wynn. Thank you, Mr. Chairman. Mr. Mazur, you were 
saying, when we were talking about an eastern reserve, that you 
did not like that approach and the administration was pursuing 
other approaches involving alternative fuels: methane, ethanol, 
natural gas, in substitute. The question I have is: given that 
the consumers homes are basically set up to operate on home 
heating oil fuel, if you will, how are you going to substitute 
these other fuels that use a different mechanism, if you will, 
to operate? I mean, are you going to retrofit homes? I mean, 
how are we going to actually make this substitution work?
    Mr. Mazur. Let's think about natural gas in the New England 
area. We're seeing a number of pipe--a couple of pipelines 
being built into New England, to power electric generating 
facilities. You could imagine that large industrial facilities 
could make use of that natural gas and get off of fuel oil, if 
that is economical for them to do so.
    Mr. Wynn. What about the residential consumers?
    Mr. Mazur. New residential markets are--or new residential 
developments will be more likely to be gas than oil. It's much 
more difficult to convert existing residential developments.
    Mr. Wynn. I'm going to--okay, that's where I wanted to go, 
because my time is short. Senior citizens, low income citizens 
in these areas that have severe weather are not likely to have 
newer homes that are suitable for these alternatives. So, what 
are they going to do?
    Mr. Mazur. To the extent you can take pressure off of fuel 
oil use by converting other sources, there should be greater 
amounts of fuel oil available for them, putting some downward 
pressure on prices.
    Mr. Wynn. When--and this is my last question, Mr. 
Chairman--when is this conversion going to take place?
    Mr. Mazur. This is a long-term process. You can ask Mr. 
Markey how long it takes to put pipelines in New England. It 
takes a long time. It's a period of years.
    Mr. Wynn. So, we're talking about a solution that is not 
going to be viable within, say, the next 5 to 7 years?
    Mr. Mazur. Certainly not next winter; maybe the 5 to 7 
years----
    Mr. Barton. The last two pipelines built in New England for 
natural gas have come on line in the last year and they took 5 
to 7 years to site and build, I'm told.
    Mr. Mazur. Okay.
    Mr. Barton. Let's go to Mr. Fossella and then we'll come 
back to Mr. Markey.
    Mr. Fossella. Again, Mr. Mazur, we talked before about what 
we can do to--or what the Federal Government and what this 
administration can do, to establish a long-term plan to 
decrease our reliance upon the cartel. Several years ago, the 
House and the Senate passed legislation that would have opened 
a tiny portion, \1/100\ of 1 percent, the Arctic National 
Wildlife Refuge to oil exploration, and the administration 
vetoed it. And some of the members here today have raised it as 
a possibility, as a way to decrease our reliance. Do you 
believe that we should seek that as an alternative, as an 
option?
    Mr. Mazur. I think the administration's position is pretty 
clear on ANWR. I think that the opening of that would incur 
significant environment costs and that, at this point, the 
administration doesn't support that at all, no.
    Mr. Fossella. And that is your position, as well?
    Mr. Mazur. That's my position, as well, yes, sir.
    Mr. Fossella. Dr. Cook, you mentioned the OPEC, you're 
anticipating a million dollar--a million barrel increase at 
March 27 meeting--assuming a million. Isn't there indications 
that there's about a 3 million barrel per day demand right now? 
So, in light of that, will there still be a 2 million barrel 
per day demand, in addition to the 1 million barrel per day 
increase in production?
    Mr. Cook. I'm not sure I followed you. What I think you're 
saying is that our assumed million barrel a day increase is 
maybe half as much as necessary to balance markets, according 
to other groups that do these forecasts. Our own estimate is 
that it would take 2 to 2.5 million barrels a day, as I 
testified earlier----
    Mr. Fossella. Right.
    Mr. Cook. [continuing] to balance the market. So, that's on 
the low side. Bear in mind, that's our base case, which tends 
to be conservative, and it shows high prices. If OPEC actually 
does increase the 2 million, then that should go a long way to 
begin restoration of low inventories. Again, it's just, you 
know, a starting point.
    Mr. Fossella. I'm just curious, we've been there for these 
countries in the past and they risk losing their sovereignty. 
Doesn't it disturb anybody that we're just sort of hoping on a 
wing and a prayer that these countries may come forward and 
increase production? We don't look to destabilize their economy 
by any stretch, but there's a legitimate demand, whether you're 
in Maryland, in Massachusetts, or anywhere across the country. 
Doesn't anybody in this administration have a problem with 
that?
    Mr. Mazur. Part of what Secretary Richardson is doing, when 
he goes to meet with these leaders, is to remind them that we 
have a strong partnership with them and it covers a number of 
different dimensions, one of which is oil, but there are other 
dimensions, as well, and that he does make clear partnerships 
go both ways.
    Mr. Barton. Mr. Markey, you had another question?
    Mr. Markey. Yes, I do, Mr. Chairman, thank you. I just 
wanted to say to the Department of Energy, you guys aren't 
giving yourself enough credit in anticipating this energy 
crisis. In fact, on October 6, 1999, the Department of 
Energy's, Energy Information Agency forecast for this coming 
winter fuel costs increases rising as much as 44 percent for 
household heating expenditures. The increases were attributed 
to the likelihood of a colder winter this year and dramatic 
increases in crude oil prices.
    How do I know that? Because, you put out that report on 
October 6 and I wrote you a letter on October 7 and I got the 
entire Massachusetts delegation to sign on with me, saying, in 
light of what you've just said on October 6, we would suggest 
exploring the use of the strategic petroleum reserve, to 
ameliorate the sharp increases in home heating oil prices, 
should your forecast prove accurate. And, in addition, we 
requested that you ask the Department of Energy to examine the 
adequacy of current home heating oil inventories at refineries 
and storage tanks in the northeast, as well as other measures 
undertaken by the industry. So, I sent you this letter on 
October 7, based upon your public statements about what you 
were anticipating this winter.
    So, you're down there saying how difficult it might have 
been to predict, I guess forgetting your own report and 
forgetting the letter I then sent you from the northeastern 
delegation asking for anticipatory action, based upon your own 
report. So, I'm just, again, continually dismayed by your 
attempts to, you know, leave us with the impression that you 
didn't know what was going to happen.
    As I see it, we have a decision made by OPEC last year, to 
reduce the production by about 6 percent. That decision comes 
on the heels of a year, in which prices have been at historic 
lows and demand was depressed by the recession in Asia. So, oil 
companies are in a mind set all through last year, where they 
aren't inclined to add to their refined product inventories. 
You identify that in your report. So, I don't think it takes a 
Nobel prize in economics to recognize that prices were headed 
up by the fall and that these price spikes would be most 
sharply felt in the northeast, where families are most 
dependent on home heating oil. And now, we're facing the 
prospect that the same reduced supply in crude oil is likely to 
result in increased gas prices at the pump by the summer peak 
driving season. And what this reminds me of is that old verse, 
``for want of a nail, the shoe was lost; for want of a shoe, 
the horse was lost; for want of a horse, the battle was lost; 
for losing the battle, the kingdom was lost.''
    We now put our economy increasingly in jeopardy. The longer 
we ignore the ascertainable facts, which were there on October 
6, that we had to take swifter, more forceful action with the 
oil companies domestically, to buildup their inventory; but, 
also, with these other countries, to let them know how 
seriously we were going to react to whatever action they took; 
and at the end of the day, not having taken those actions, to 
then take the deployment of the strategic petroleum reserve off 
the table is the ultimate cruel cut to those consumers in the 
northeast, because, at the least, they were left with a 
misimpression that that could be used as something that could 
deal with the unjustifiable non-market-based prices that were 
going to be inflicted upon them.
    So, again, I think that you're sitting down here with a--
you know, with this see nothing, know nothing attitude here 
today; but, it was clear to me in October, just last year, that 
you knew what was coming. You predicted what was coming. And my 
response to you was please do something in anticipation of 
those events unfolding. Thank you, Mr. Chairman, unless Mr. 
Cook wants to respond.
    Mr. Barton. If you want a quick response, because we've got 
our second panel and I want to get to that, but give you a 
chance to respond to Congressman Markey's, I thought, very well 
put comments. I have to say that the constituents of 
Massachusetts ought to be well served that he could reply that 
quickly on a report and be as on the mark as history has turned 
out that he was. I'm very impressed with that fact.
    Mr. Markey. Thank you.
    Mr. Cook. Mixed feelings about it. I think what I'm hearing 
is that EIA did signal enough for Mr. Markey, as early as 
October. On the other hand, the signal that we sent out in 
October was based on two things. When you said the weather 
would be colder, that assumed normal weather. We had the 
previous year in 1998 warm weather. So, that was what that 
reference was, that we would just have normal weather.
    Mr. Markey. Was normal weather warm weather or cold 
weather, as you were predicting?
    Mr. Cook. The previous year, the 1998-99 winter was much 
warmer than normal, so we were assuming a return to normal 
weather, which would add to heating demand. The second 
assumption there--nothing like what we saw in late January, 
mind you; just normal weather. The second assumption was that 
crude oil prices, underestimated, would rise as high as $24 to 
$25 a barrel. Based on those relatively low projections, we 
said the home heating oil costs would be up 44 percent.
    The issue that I think we've been talking about today goes 
far beyond that. We did not project $1.96 for home heating 
oil--$2.12 for home heating oil. That's the part that we could 
not predict, because of the cold weather and the other factors 
that were in the Harbor. But the higher crude price, the normal 
weather, we did.
    Mr. Markey. Mr. Cook--Dr. Cook, I don't think you 
understand. What you predicted was enough for me and our 
delegation to write to you, to say please now take action, 
because a 44 percent spike in the price of home heating oil is 
unacceptable, and you did nothing in anticipation----
    Mr. Cook. No.
    Mr. Markey. [continuing] of that.
    Mr. Cook. What you have done is take EIA out of the debate 
and you have said that from your standpoint, that's a high 
enough price for the issue of the SPR to be on the table. I 
have no comment on that. It's not my role.
    Mr. Markey. Yeah, my--I don't have a problem with you, Dr. 
Cook, by the way. My problem is with Mr. Mazur, okay. No 
response.
    Mr. Barton. We're going to have to----
    Mr. Markey. You are Paul Revere, saying, you know, OPEC is 
coming, okay. Now, over here, Mr. Mazur, then, did nothing to 
ensure that the United States had some kind of response that 
was put in place. That's my problem.
    Mr. Barton. We need to continue this dialog at a later 
point. But, I do want to reinforce one thing that Congressman 
Markey said, I disagree with his solution, which is using the 
SPR, but I don't disagree with the fact that given all the 
indicators that were at the disposal of the policymakers at DOE 
and the White House, literally nothing was done. Now, that, to 
me, does merit some attention, because the Clinton 
Administration does have the responsibility for implementing 
policy decisions and there was adequate information to predict 
that a shortage was coming, that it was going to impact the 
northeast unduly. And I don't see that there was any action 
taken until December or January, and I think that's 
inexcusable.
    I do want to thank this panel. We didn't ask Mr. Parker any 
questions, because we were told at the staff level that you 
couldn't answer too many questions, based on pending 
investigations. So don't feel like you're unloved; we just 
ceded to the staff request that you be able to talk in general 
terms. We will have written questions for this panel. We do 
excuse you. We thank you for your personal attendance today.
    We now want to call our second panel forward and we have a 
number of members here that want to introduce personally some 
of the witnesses. I'll call the panel generally and then I'll 
yield to each member to introduce your specific witness.
    We have Mr. Red Cavaney, who is the President and CEO of 
the American Petroleum Institute. We have Mr. Neal Wolkoff, who 
is the Executive Vice President, New York Mercantile Exchange. 
We have Mr. Samuel Farruggio, who is the President of Farruggio 
Express in Bristol, Pennsylvania, and he is representing the 
American Trucking Association. Mr. Mark Murphy, who is an 
independent producer from Roswell, New Mexico, he is here on 
behalf of the Independent Petroleum Association of America. Mr. 
Bob Slaughter, former staff member for this committee, who is 
here as general counsel and Director of Public Policy for the 
National Petrochemical and Refiners Association. And Mr. Peter 
D'Arco, who is the Vice President of S.J. Fuel Company, from 
Brooklyn, New York, and he's representing the Petroleum 
Marketers Association of America.
    I'm going to yield to Mr. Greenwood to introduce more 
formerly Mr. Farruggio; then, Mrs. Wilson to introduce more 
formerly Mr. Murphy; and then Mr. Fossella to introduce more 
formerly Mr. D'Arco.
    Mr. Greenwood. Thank you, Mr. Chairman. I want to thank you 
for holding this hearing. I want to, also, particularly thank 
you for responding to my request that Mr. Farruggio be able to 
come--my constituent be able to come here and testify.
    Sam Farruggio is the President of Farruggio Express. His 
company operates out of Bristol, Pennsylvania, in my district. 
It's a family owned and operated business that was opened over 
80 years ago by Mr. Farruggio's grandfather. Mr. Farruggio, who 
has worked in the trucking industry for 30 years, will be able 
to shed some light on how the diesel fuel price crisis has not 
only affected his business, but, also, that of other 
independent truckers--truck owners and small trucking companies 
and large fleet owners. I called Mr. Farruggio and asked him if 
he would be so kind as to come to Washington and testify. I did 
not warn him that he'd have to spend 4\1/2\ hours sitting, 
listening to others testify. But, I hope he found it edifying. 
I'm glad you're here.
    I am in the midst of another hearing, another subcommittee, 
so I apologize that I can't stay. But, I did want to introduce 
my constituent and thank you for that indulgence, Mr. Chairman.
    Mr. Barton. Mrs. Wilson, and welcome, Mr. Farruggio, to the 
committee.
    Mrs. Wilson. Thank you, Mr. Chairman. I'm real pleased to 
have Mark Murphy here from Roswell, New Mexico, which is 
outside my district, so I have no aliens in my district.
    We are very pleased that Mark is with us here today. He's 
the President of Strata Production Company, an independent oil 
and gas exploration and production company. And as most folks 
in this room know, the independent producers in the continental 
United States are the ones, who are producing most of the oil. 
They are kind of the wild catters and I'm real pleased. I can't 
see real clearly, but Mark is usually in cowboy boots and we 
love him for it.
    Mr. Murphy has served as the Chairman of the United States 
Department of Interior Public Lands Advisory Council, as 
President of the Independent Petroleum Association in New 
Mexico, and a member of the U.S. Department of Energy, 
Secretary of the Energy Advisory Board. He has served on the 
task force on alternative futures for the Department of Energy, 
National Laboratories, which was known more widely as the 
Galvin Commission, and on the task force on Strategic Energy, 
Research, and Development. He is a member of the National 
Petroleum Council and currently serves as the Chairman of the 
Lands and Royalty Committee of the Independent Petroleum 
Association of America. And we're real glad to have him here.
    Mr. Barton. Welcome. And let the record show he does not 
have cowboy boots on.
    Mrs. Wilson. I'm really disappointed in you, Mark.
    Mr. Barton. It looked to me like they're loafers.
    Mr. Murphy. My wife wouldn't let me bring them.
    Mr. Barton. Mr. Fossella, would you like to introduce your 
witness to the committee?
    Mr. Fossella. Thank you, Mr. Chairman, and welcome the 
panel. I'd like to introduce Mr. Peter D'Arco from Brooklyn, 
New York. He's Vice President and Chief Operating Officer of 
S.J. Fuels, a third generation company that has about 5,000 
clients in the New York City area. And we met several weeks ago 
on Staten Island, to discuss the impact. Again, this lack of 
action, as we've highlighted here today, the impact on men and 
women across Staten Island and Brooklyn, the high home heating 
costs, and we prayed for warm weather and it seems we got it. 
So, that solves one problem, but we have others that come down 
the road. So, I want to thank you for your patience today and 
thank you for coming down.
    Mr. Barton. Thank you, Congressman Fossella, and welcome, 
Mr. D'Arco. And for you other gentlemen, who didn't have 
members to personally introduce you, we love you, too, and 
suffice it to say that the minority and the majority staff work 
together in a bipartisan basis, to make sure that this panel 
was a very balanced panel.
    We're going to start with Mr. Cavaney, who is representing 
the American Petroleum Institute. We will give each of you 5 
minutes to summarize your written testimony, which is in the 
record in its entirety, then there will be a question period. 
So, Mr. Cavaney, welcome to the committee.

    STATEMENTS OF RED CAVANEY, PRESIDENT AND CEO, AMERICAN 
PETROLEUM INSTITUTE; MARK B. MURPHY, STRATA PRODUCTION COMPANY; 
  NEAL WOLKOFF, EXECUTIVE VICE PRESIDENT, NEW YORK MERCANTILE 
EXCHANGE; BOB SLAUGHTER, GENERAL COUNSEL AND DIRECTOR OF PUBLIC 
POLICY, NATIONAL PETROCHEMICAL AND REFINERS ASSOCIATION; SAMUEL 
FARRUGGIO, PRESIDENT, FARRUGGIO EXPRESS; AND PETER D'ARCO, VICE 
                  PRESIDENT, S.J. FUEL COMPANY

    Mr. Cavaney. Thank you, Mr. Chairman and members of the 
subcommittee. My name is Red Cavaney. I am President and CEO of 
the American Petroleum Institute. I appreciate the opportunity 
to offer our assessment on the recent oil supply situation and 
on the impact of rising petroleum product prices on consumers.
    America's oil and natural gas companies have a proud 
history of providing this country's consumers with a reliable 
and affordable supply of energy, that gives Americans the 
mobility they need and the products that make their homes 
comfortable and their lives more enjoyable. It is because of 
this history of service that we understand the impact of rising 
prices on the Nation's consumers. We find no comfort in knowing 
that a number of them might be facing hardships or 
inconveniences. We share your concerns for the health and 
welfare of your constituents. They are, also, our customers and 
our neighbors.
    Research has shown that Americans know how the markets 
work. They understand that with America importing some 55 
percent of its crude oil, we are significantly impacted by 
outside forces, whether it is OPEC or other producing nations. 
We, also, know that Americans believe our member companies are 
doing a good job, given this country's heavy dependence on 
foreign oil, the unwillingness of our government to allow these 
companies to more fully explore for oil and natural gas on 
Federal lands and the non-coordinated layers of regulation that 
limit refiners ability to keep the fuel flowing into America's 
cars, homes, and manufacturing plants. Over regulation reduces 
the flexibility refiners need to respond to this fast pace 
changed world.
    America's consumers are frustrated over their sense that 
control of something very crucial to their lives has moved to 
forces over which they have very little influence. We 
understand that frustration. A stronger, more vibrant domestic 
oil and natural gas industry can provide Americans a better 
sense of security about their energy needs.
    Price increases arising from international market 
conditions have imposed hardships on consumers, particularly 
those on fixed incomes, farmers, and truckers. But the American 
people understand that these increases were brought about by 
short-term shocks that resulted from sudden changes in supply 
and demand. Prices are up now, but they will go down when 
factors change. In a free market economy, we've seen time and 
again that price movements ultimately create balance between 
supply and demand. If allowed to work, the marketplace delivers 
lower average prices over time to consumers.
    Government industry can work closer together, to ease some 
of the hardships and concerns faced by American consumers. We 
are urging the Energy Information Administration to convene a 
summer fuels conference, to evaluate the status of gasoline, 
diesel, and jet fuel production and inventories. We are, also, 
asking EIA to expand the scope of their winter fuels 
conference, to give the agency the opportunity to share 
information on winter fuel production inventories and imports 
with all of the stakeholders.
    The government can, also, take steps to further inform 
consumers on energy market conditions. API has participated in 
the Department of Energy's meetings on heating oil conditions 
and stands ready to provide information on market conditions. 
We will seek to develop a joint effort with DOE, to provide 
consumers the best and most updated information available and 
to help them find ways to better cope with the fluctuation in 
prices.
    The government should, also, take steps to help further 
prevent the reoccurrence of the home heating oil situation. It 
can increase funding for the low income housing energy 
assistance program and move quickly and equitably to release 
funds, and they can consider expanding SBA emergency loans to 
home heating oil dealers and to truckers. Secretary 
Richardson's leadership here, as this unfolded, has been very 
helpful.
    Government, however, should, also, take long-term steps, to 
strengthen our domestic oil and natural gas industry. We can 
reduce our reliance on foreign supplies and, also, exert 
downward pressure on international crude oil prices, by opening 
our best oil and natural gas prospects to responsible 
exploration and development, many of these areas which have 
been placed off limits by the Federal Government. Since 1983, 
access to Federal lands in the western United States, where 
nearly 67 percent of our on-shore oil reserves and 40 percent 
of our natural gas reserves are located, have declined by 60 
percent.
    Mr. Chairman, we know that Americans have learned to rely 
on America's oil and natural gas companies. We, also, know that 
they want the facts about the current situation and what it can 
mean for the future, especially as they face the upcoming 
vacation season. That trust calls for honest answers and the 
only honest answer we can offer today is that things may get a 
bit tougher before they get better, but they definitely will 
get better.
    Because of the international market supply and demand 
situation, we cannot always guarantee gasoline, diesel, and 
home heating oil at prices Americans would prefer to pay. But, 
we can guarantee that our companies will do all they can to 
keep fuel available and to keep this country going strong. 
Thank you, Mr. Chairman.
    [The prepared statement of Red Cavaney follows:]
    Prepared Statement of Red Cavaney, President and CEO, American 
                          Petroleum Institute
    The American Petroleum Institute (API) is pleased to have the 
opportunity to present a statement on the recent oil supply situation 
in the United States, and on the impact of rising prices on consumers 
of petroleum products. API represents almost 500 companies engaged in 
all aspects of the U.S. oil and natural gas industry, including 
exploration, production, refining, distribution and marketing.
    Our industry works very hard to provide consumers with the energy 
they need for their daily lives. Therefore, we can appreciate your 
concern about the current oil supply situation, and your desire to 
lessen its impact on your constituents. I want to assure you that we in 
the industry are likewise concerned. We appreciate this forum to share 
with you our views about the causes of the current situation. We are 
taking what actions we can to improve conditions, and also have 
suggestions to offer for actions that can be taken by government and 
even by consumers, themselves, to help through these difficult times.
    First, let me take a moment to frame the situation. While research 
and development continue on alternative sources of energy, gasoline and 
diesel fuel remain the most cost-effective and prevalent fuels for our 
transportation needs. To be specific, 97 percent of all transportation 
is fueled by petroleum products. These fuels, and the infrastructure 
built to fuel a nation of cars and trucks, allow us to get us where we 
need to go. Whether we need to go to work, take a school bus, get 
produce to market, or fly for business or pleasure, oil plays a crucial 
role in our daily lives.
    But for decades, as a matter of government policy this nation has 
reduced the industry's access to some of the most promising domestic 
resource areas for oil and gas exploration and development. As a 
result, despite significant energy efficiency gains since the 1970s, we 
have become increasingly reliant on foreign supplies of crude oil.
    As the markets rise and dip, American consumers sometimes benefit, 
as was the case last year when prices were at historic lows, and 
sometimes suffer when prices are high, as they are now. The industry is 
keenly aware of the fact that rapidly rising prices cause consumers to 
pay more for their needs than they had budgeted. This means less is 
available in the family budget for other equally pressing needs. People 
aren't as able to take care of their families as comfortably. This is a 
concern to us, as well, and we understand that consumers expect us to 
do everything in our power to help alleviate these conditions. We want 
to help.
    I would now like to explain our perspective on the current 
situation.
    Just last year at this time, we were experiencing some of the 
lowest prices--adjusted for inflation--for petroleum products in this 
century. Crude oil was selling for less than $13 per barrel and 
gasoline prices were less than $1 a gallon. Things have certainly 
changed. Today, crude oil is in the $34 range--a 160 percent increase.
    What caused these changes?
    The simple answer is supply and demand. Worldwide crude oil 
supplies have declined, as major, foreign crude oil exporters have 
reduced production. These declines, in combination with increased 
worldwide demand for crude oil from growing economies, have driven 
world oil prices sharply higher.
    Because crude oil is the largest cost component of gasoline, 
heating oil and diesel fuel, prices of these fuels have also increased. 
Gasoline, heating oil and diesel prices have increased by about 60 
percent.
    It is during times of uncertainty, such as concerns over fuel 
prices, that we hear the louder voices of those who demand that 
government step in to offer immediate relief. Such actions always 
involve consequences, and it is important that all concerned understand 
the full range of the potential consequences from any such government 
involvement. All voices should be heard, of course, but these voices 
should be listened to in context. In this case, for instance, we should 
not lose sight of the fact that this situation is not new: prices have 
risen before. Such increases are the result of complicated market 
forces that operate globally as well as locally.
    In addition, we should remember that the overall economic 
prosperity we are now experiencing is partly due to the efforts of 
moving government out of is direct involvement in major sectors of the 
economy--deregulation. The United States is the envy of the world 
because of its productivity and efficiency.
    This is not, however, to say that the particular confluence of 
events that occurred in recent weeks was not extraordinary. What it 
does mean is that the world market, as well as local supply-and-demand 
conditions, will occasionally create price spikes. However, as history 
has shown, these variations are soon returned to a ``norm'' by the 
market, when it balances supply and demand. We cannot, however, lose 
sight of the fact that these price shocks have potentially dire 
consequences for low- and fixed-income consumers, and action must be 
taken to help these consumers.
Supply, demand and price
    The price of crude oil, obviously, is the dominant influence on the 
price of all petroleum products. For example, crude oil currently 
accounts for approximately 50 percent of the cost of gasoline. The 
current price of crude is about $34 per barrel. A year ago, the price 
was about $13. That's a jump of about 160 percent.
    OPEC has been a critical factor. While many market watchers may 
have believed OPEC's ability to move world markets was diminished, what 
we have witnessed since March of last year would belie that notion. 
OPEC and several non-OPEC producers such as Mexico and Norway have 
removed significant amounts of crude oil from production. Coupled with 
the new increasing world demand for petroleum, especially in the Far 
East, this production rollback is having a significant impact on 
supply, pushing prices higher.
    In the case of heating oil, the increase in demand was local. 
Extremely cold weather in the Northeast increased demand for home 
heating oil and forced natural gas suppliers to curtail or eliminate 
deliveries of natural gas to ``interruptible'' customers. 
``Interruptible'' natural gas customers usually pay lower prices for 
gas on the condition that they can be interrupted, if their suppliers 
need their gas for other customers such as residential users. When the 
interruptibles' natural gas was re-directed to other customers, these 
interruptibles switched to other petroleum products to meet their 
needs, further squeezing an already demand-heavy market.
    It's important to remember, too, that extreme temperatures had a 
temporary impact on supply and price by increasing transportation and 
delivery disruptions. For example, because there are no pipelines for 
petroleum products into New England, products must be barged from New 
Jersey. However, frozen rivers slowed or stopped barge traffic in many 
locations in the Northeast. As a result, supplies at some northern 
terminals were severely reduced. At times, roads were not much better. 
In our nation as a whole, almost 75 percent of petroleum products 
travel by pipeline. Consequently, the New England region is much more 
vulnerable to weather impacts and fuel disruptions than elsewhere.
    U.S. refiners are now implementing their driving season plans. 
Refineries are turning to increases in production for gasoline to meet 
the summer driving demands, since inventory must be built in advance of 
use. We have reviewed production, imports, inventory and refinery 
utilization statistics and believe we will be able to meet the needs of 
our customers this summer.
    However, the entire petroleum-products distribution system is 
stretched to its limits and its flexibility has been significantly 
reduced. We are wrestling with significant hurdles in the form of 
increasing non-coordinated government regulatory constraints on 
refinery operations. These regulations deal with gasoline sulfur, 
reformulated gasoline, new-source review, MTBE and diesel sulfur, to 
list a few.
    The price of gasoline is, of course, influenced by world crude oil 
prices--and today this country imports about 55 percent of its crude 
oil. If recent reports of increased supplies by foreign national 
producers turn out to be true, the increased supply will be a welcome 
addition.
Inventories
    Some media reports have created the impression that U.S. suppliers 
have pinched supply in order to drive up price. Statistics do not 
support such claims. For example, inventories for heating oil were low 
earlier as a result of two and a half years of moderate weather, 
coupled with the high cost of maintaining excess stocks. In fact, in 
response to the 1999-2000 cold snap in the Northeast, the industry was 
able to supply 17 million barrels of distillate (home heating oil) from 
inventory over a three-week period--the largest amount of distribution 
for a three-week period in five years. In total, nationwide inventories 
were adequate. Because of the weather-related conditions and uniqueness 
of the New England fuel logistics, getting inventory into that market 
took time. As mentioned earlier, the cold weather slowed or stopped the 
delivery of supplies in New England. Prices then rose dramatically 
because of local bidding for scarce supplies. However, to the best of 
our knowledge, no one went without heating oil.
    Occasionally, consumers suggest that refiners should increase 
inventories to better protect them against possible price spikes. While 
refiners make their own decisions about inventory levels, and other 
business matters, if they had increased inventories to last year's 
levels, it would likely have been at greater cost to the consumer than 
any savings relief they might have realized during the cold snap. 
Increased purchases of crude oil would have no doubt driven world crude 
oil prices even higher. Thus, increased inventories would not have 
protected consumers from higher fuel prices. Increased production, 
increased inventory and additional storage are all increased cost 
factors.
    Inventories kept available by primary suppliers and retail 
marketers are not regulated. However, suppliers who fail to estimate 
correctly the inventories they will need to satisfy their customers pay 
a stiff penalty in a competitive market. If inventories are too low, 
the suppliers lose customers to their competitors. And some of those 
customers may well never return. If inventories are too high, the 
suppliers bear higher costs and necessarily charge higher prices than 
their competitors, eventually losing customers and risking their entire 
business.
    Similarly, there have been some recent predictions about gasoline 
prices based on low inventories of gasoline. Inventories for gasoline 
are currently lower than normal, but they are not currently at a 
problematical level, based on estimates from the National Petroleum 
Council. The NPC estimated in 1998 that about 185 million barrels of 
gasoline inventories were needed to keep the nationwide distribution 
system running smoothly. Current inventories are about 200 million 
barrels.
Production
    Some have alleged that refineries have restricted output. The facts 
are at odds with this contention. Production of distillate fuel oil 
this heating season has been higher than average and may actually set a 
seasonal record. While refinery utilization is lower than last year and 
lower than normal, the most relevant and important measure is actual 
production--and gasoline production has also been high. Gasoline output 
for 1999 was 8 percent higher than average. Gasoline production has 
averaged the highest ever over the past six months. February's gasoline 
production figure of 7.76 million barrels per day was the most ever 
produced in a February.
    Refinery management cannot and should not automatically increase 
production in response to calls for increased output. Each refiner's 
situation is unique and must be looked at by those in positions of 
responsibility in those organizations. Refineries are complex 
structures operating under high temperatures and pressures. To push 
production beyond design limits may endanger the health and safety of 
our employees and the communities in which they operate. Already, there 
are ample incentives to increase output within safety tolerances.
Prices
    Despite some recent upswings in price, today's retail heating oil 
and gasoline prices have increased by less than the jump in worldwide 
crude prices. According to the U.S. Energy Information Administration, 
heating oil retail prices peaked at a national average of $1.86 per 
gallon. They have fallen by about 40 cents per gallon since then. At 
this time last year, the average retail price was 86 cents per gallon, 
with crude prices about $13 per barrel. Gasoline prices have increased 
from about 92 cents per gallon a year ago to about $1.50 today. That's 
an increase of 63 percent compared to crude price increases of 140 
percent. It would appear that retail prices not only have a direct 
relationship to the spiraling worldwide price of crude, but have been 
more restrained in their upward momentum.
What government can do
    We are urging the Energy Information Administration to convene a 
``Summer Fuels Conference'' to evaluate the status of gasoline, diesel 
and jet fuel production and inventories. We are also asking that the 
EIA expand the scope of the ``Winter Fuels Conference'' next fall to 
give the agency the opportunity to share information on winter fuel 
production, inventories and imports with all stakeholders.
    The government can also take steps to further inform consumers on 
energy market conditions. API has participated in the Department of 
Energy's meetings on heating oil conditions and stands ready to provide 
information on market conditions. Educated consumers are our best 
assets. We will seek to develop a joint effort with DOE to provide 
consumers the best and most up-to-date information available, and to 
help them find ways to better cope with the fluctuation in prices.
    In the short term, the government can also consider a number of 
actions to help prevent another recurrence of the home-heating oil 
situation. It can increase funding for the Low-Income Home Energy 
Assistance Program and more quickly and equitably release funds; and 
consider expanding Small Business Administration emergency loans to 
home heating oil dealers and truckers.
    We think it's imperative that Congress quickly reauthorize the 
Energy Policy and Conservation Act that provides authorization for the 
Strategic Petroleum Reserve and U.S. participation in the International 
Energy Agency.
    In the long run, government can and should also take steps to 
strengthen our domestic oil and natural gas industry. Popular belief to 
the contrary, the age of the American oil and natural gas producing 
industry is not over. It is very much alive, and can be an even more 
important asset if government were to take immediate steps to improve 
access to domestic oil and natural gas resources.
    We can reduce our reliance on foreign supplies and also potentially 
exert downward pressure on international crude oil prices by opening 
our best oil and natural gas prospects to responsible exploration and 
development. Currently, many of these areas have been placed off-limits 
by the federal government. Since 1983, access to federal lands in the 
western United States--where nearly 67 percent of our onshore oil 
reserves and 40 percent of our natural gas reserves are located--has 
declined by 60 percent. Our industry works hard to supply the energy to 
keep America going strong, but to continue to produce domestic oil and 
natural gas, we must have access to federal and state lands.
    The federal government has imposed layer upon layer of regulations 
on U.S. refineries without sufficient regard as to how these 
regulations impact refiners' ability to meet the full range of needs of 
the American consumers. Refineries need flexibility to respond to the 
fast-paced change in today's world. Overregulation reduces flexibility. 
A soon-to-be proposed regulation to drastically lower the sulfur 
content of diesel fuel is an example of a government action that could 
have negative consequences on our ability to supply heating oil and 
diesel fuel. We share the government's interest in cleaning the air. 
But reductions beyond the 90-percent level we proposed stand a good 
chance of further driving up fuel manufacturing costs unnecessarily, 
imposing yet additional burdens on our nation's truckers and farmers.
    Even with greater access and flexibility, the United States will 
continue to need to rely on foreign oil supplies. Thus, it is important 
that we maximize the diversity of those supplies to help ensure the 
reliability of a continuous flow of oil imports. Unfortunately, U.S. 
unilateral trade sanctions narrow our sources of supply, frustrating 
achievement of this important objective.
    In recent years, unilateral economic sanctions have increasingly 
become the policy tool of choice in the conduct of U.S. foreign policy. 
One of the favorite targets of these recent sanctions has been major 
oil-producing countries. The U.S. currently has sanctions in place 
against countries comprising over 10 percent of world oil production 
and 16 percent of estimated remaining oil resources. With little 
evidence that unilateral sanctions produce desired outcomes, is there 
not a better way?
    In short, U.S. policymakers face a dilemma. Growing supplies of 
crude oil will be required to sustain world economic prosperity, and 
diverse, ample foreign supplies are needed to help ensure our own 
country's economic growth. The drive to impose unilateral sanctions is 
an obstacle to both of these objectives.
What Consumers Can Do
    While it may be easier to see what government policymakers and the 
industry can do to improve the current situation, many consumers can 
help lessen the impact on their budgets by embracing ways to use less 
fuel. The industry will be doing its part to share advice for 
conserving fuel use in the hope that some families can benefit.
    Examples of the types of changes drivers can make include: 
maintaining their vehicles properly, combining trips to reduce fuel 
consumption from cold starts of automobiles; accelerating slowly and 
decelerating rather than multiple braking to stop; and, in a two-car 
family, having the family member who does the most driving use the most 
fuel-efficient car. Many families will be surprised at the fuel economy 
benefits they can achieve from these simple changes. While they 
certainly won't offset the higher cost of gasoline, they should help 
families get where they need to go at less cost until purchasing 
conditions improve.
Conclusion
    In closing, we share your concerns for the health and welfare of 
your constituents. They are our customers. They are our neighbors. We 
are as frustrated as they are by the sense that too many outside 
factors control our destiny. We believe that a stronger, more vibrant 
domestic oil and natural gas industry can provide Americans a better 
sense of security about their energy needs.
    Price increases--brought about for whatever reason--have imposed 
hardships on consumers, particularly those with lower or fixed incomes. 
But these increases were brought on by short-term shocks that resulted 
from sudden changes in supply and demand. Just as prices are up now, 
they will turn down when factors change. In a free-market economy, we 
have seen time and again that price movements ultimately create balance 
between supply and demand. We are confident that if we continue to 
allow the marketplace to work, this balance will be maintained. And, 
history would show us that the longer-term cost of the product is less 
than would otherwise be the case.
    America's oil and natural gas companies have a long and proud 
history of providing this country's consumers with a reliable and 
affordable supply of energy to make their homes comfortable and take 
them where they need to go, when they want to go. Through good and lean 
years, U.S. suppliers of petroleum products have kept America's 
factories running and provided the fuel to move goods from 
manufacturers to retailer and, ultimately, into America's homes and 
offices.
    It is because of this history of service that we understand the 
impact of rising prices on this nation's consumers--our customers. We 
find no comfort in knowing that a number of them might be facing 
hardships or inconveniences. We are cognizant, too, of the concerns of 
our nation's truckers and farmers, who also have been adversely 
affected by these increases in fuel prices.
    Finally, we recognize that you are faced with increasing demands to 
address this situation. To the extent to which we can help in your 
efforts to better understand the possible effects of the many various 
proposed actions under consideration, we are here to assist you.

    Mr. Barton. Thank you, Mr. Cavaney. We now would like to 
hear from Mr. Murphy for 5 minutes, please.

                   STATEMENT OF MARK B. MURPHY

    Mr. Murphy. Thank you, Mr. Chairman. My name is Mark 
Murphy. I'm President of Strata Production Company, an 
independent oil and gas exploration and production company, 
based in Roswell, New Mexico. Today, I'm representing the 
Independent Petroleum Association of America and the National 
Stripper Well Association. These organizations represent the 
backbone of the United States domestic oil and gas industry.
    Mr. Barton. Would you put on the record the definition of a 
stripper well, so that people don't think this is some sort of 
adult-oriented hearing.
    Mr. Murphy. Yes, sir. I believe that the current definition 
is 15 barrels per day or less. The independent producer is the 
true strategic petroleum reserve, in my opinion. We've got a 
350 billion barrel reserve base in this country. And if you 
look to the independents to develop it, we need four things, 
and they all come under the heading of access, and its access 
to land, access to capital, access to technology, and access to 
skilled workers.
    Now, thinking about that as a chair, a platform, you've got 
four important legs to it and there's probably a couple of 
cross beams there, one is regulatory reform and incentive 
programs. It's always difficult to follow someone as well 
prepared as Red; so, I'm not going to repeat all that he has 
said, but I'm going to try and hit a few highlights.
    We understand and sympathize with the pain that people are 
going through due to high energy prices. Within the last 2 
years, I've laid off half of my workforce and so I understand 
what that means, putting people out of work. It's difficult 
when you see companies and people that you've known for 
decades, companies that have gone from grandparents, to 
parents, to sons and daughters, close their doors.
    There was an interesting question earlier in the hearing 
and it had to do with why prices are so high. And one thing 
that has struck me is, is that crude oil is 50 cents per gallon 
when oil is $21 a barrel. At $30 a barrel, it is 71 cents, so 
there's about 21 cents there. And, yet, we have seen prices 
rise by as much as 80 cents to $1.
    If I recall the gentleman's testimony from the Department 
of Energy, he said that those things were related, as long as 
all things are equal. I think that was the testimony. So, there 
must be other factors, factors such as storage and 
transportation and those sorts of things. And I think it's 
important for people to keep that in mind, that it's not just 
the price, it's getting the product to where it needs to be.
    Mr. Barton. It's not the raw material price, that's what 
you mean?
    Mr. Murphy. Yes, sir, that's correct.
    Mr. Barton. It's not the crude oil price?
    Mr. Murphy. That's right. There were some other discussion, 
and this is something that has troubled many of us, and this is 
regards to section 232 analysis. Many in our industry called 
for that about a year ago; many in this Congress supported it. 
The administration has started it. We don't have an answer.
    There was a similar analysis in 1993 and it concluded that 
imports at this level, 55 percent or so, are a threat to 
national security; yet, nothing has happened. There has been no 
major policy changes by this administration in that period of 
time, almost 7 years. We have heard about the 10,000 
steelworkers that were put out of work. We haven't heard about 
the 65,000 oil and gas producers put out of work in the last 18 
months. Since the 1980's, that number is about 500,000. That's 
a lot of jobs to lose and not have apparently anyone too 
concerned about it, certainly anyone in the administration. 
Prior to the 1986 crash, there were over 10,000 companies just 
like mine. There's about 6,000 now.
    This consistent lack of interest hurts our industry and our 
Nation and it's got to be reversed. Now, this year, prices have 
returned to about the 1997 level. Had they stayed at the 1998-
99 level for another year or 2, I would submit to you that we 
would have no industry left. So when people look at prices now 
and say, well, gee, they're a whole lot higher than they were 
last year and the year before, they're right; but if they had 
stayed at the 1998 and 1999 levels in a year or 2, there 
wouldn't be companies like mine.
    We import over 55 percent of our crude oil.
    Mr. Barton. I hate to hurry you along, but we've got four 
more witnesses. So--and if you could kind----
    Mr. Murphy. Let me----
    Mr. Barton. [continuing] of summarize the next minute or 
so.
    Mr. Murphy. You bet, I sure can.
    Mr. Barton. And God knows, I would love to let you talk all 
afternoon, but we need to get the other testimony on the 
record. I think New Mexico is a lot like Texas, it's hard to 
say hello and my name in 5 minutes.
    Mr. Murphy. The National Petroleum Council has put out a 
report called the National Gas Report and it goes into many of 
the issues that I've talked about and I would encourage you to 
become familiar with that report. It talks about the access 
issues that I mentioned in the very beginning of my testimony, 
and access to land is absolutely critical; access to capital is 
absolutely critical; and much of that can be achieved through 
simple tax reform.
    We would encourage this committee and those that are 
interested to spur the administration along, in concluding the 
section 232 analysis. And I guess the real disconnect that I 
see in the policy and one of the things that troubles me the 
most is, is that we have continued to hear about how the 
country must rely in the future on natural gas, and we agree 
with that and I think we can get out there and find it and 
develop it for this Nation. But the problem is, is we continue 
to see policies that discourage that very thing, access to less 
land and access to the other things that I mentioned. Thank 
you, very much.
    [The prepared statement of Mark Murphy follows:]
    Prepared Statement of Mark Murphy on Behalf of The Independent 
                    Petroleum Association of America
    Mr. Chairman, members of the committee, I am Mark Murphy, President 
of Strata Production Company, representing the Independent Petroleum 
Association of America and the National Stripper Well Association. IPAA 
represents the 7,000 independent oil and natural gas producers that 
drill 85 percent of domestic oil and natural gas wells and produce 
approximately 40 percent of domestic oil and 66 percent of domestic 
natural gas. We are the segment of the industry that is damaged the 
most by the lack of a domestic energy policy that recognizes the 
importance of our own national resources.
    Let me say at the outset that we understand the pain that high 
energy prices can cause, and we sympathize with those who have been 
shocked by sudden price increases in heating oil and diesel fuel. But 
it is equally important to understand that a year ago we were watching 
friends in the oil patch we had known for decades being driven out of 
business, companies that had been handed down from grandfather to 
father to son closing their doors forever. Neither situation is 
acceptable. Dramatic price shifts harm everyone. We need to look for 
routes to stability for both producers and consumers.
    There is another fact that is frequently lost in the debate over 
high heating oil or diesel prices. Crude oil costs 50 cents per gallon 
when it is $21 per barrel. At $30 per barrel, it costs about 71 cents 
per gallon. So, when heating oil or diesel prices soar by $1.00 per 
gallon in a week, the source of the problem is not the crude oil.
    Last month, it was reported that Energy Secretary Bill Richardson 
said that the Administration was caught napping at the start of the 
current heating oil crunch in the Northeast. Well if that's true, the 
Administration must have been hibernating during the 18 months that oil 
prices dropped to historic lows in 1998 and 1999.
    Almost a year ago, the Administration started an analysis under 
Section 232 of the U.S. Trade Expansion Act to determine whether oil 
imports pose a national security threat. It has yet to be completed.
    For the past two years we have heard President Clinton speak 
repeatedly about his concern for the jobs of 10,000 American 
steelworkers that were lost due to foreign competition. We have heard 
nothing about the 65,000 American jobs lost due to low oil prices.
    We met with representatives of the president when oil prices were 
at their depth. We asked that the president state clearly that he 
understands the value of domestic oil and natural gas production and 
the importance of maintaining and enhancing it. They are words he has 
never spoken. This year, as 1997 prices have returned, we now hear 
voices of complaint. Recently, President Clinton was quoted as saying 
that he believed oil prices were too high and that it would be in the 
best interests of OPEC countries to lower prices. It is position echoed 
by many in Congress.
    It is this consistent lack of interest in domestic oil and natural 
gas production that hurts the nation the most. Few in Washington seem 
to understand that today's problems result from prior decisions by our 
Government.
    Let's review the critical facts facing us today.
    One. it is wrong to compare today's crude prices to 1998 and 1999. 
Those prices were at historic low levels. 1997 is a more appropriate 
comparison.
    Over the past two years the United States lived with unusually low 
crude oil prices. At the depth of the crude oil price crisis, crude oil 
was selling at prices--on an adjusted basis--not seen since the Great 
Depression. These prices were crippling the domestic oil and natural 
gas exploration and production industry. Over the eighteen-month time 
frame of low prices, the industry lost 65,000 American jobs. Even after 
months of higher prices, only about 7,000 of these have been recovered. 
Eighteen months of low oil prices resulted in devastating reductions in 
capital investment in the industry both domestically and worldwide. The 
consequences of this lost investment will take years to measure as 
existing wells were shut down prematurely and delays in bringing new 
wells into operation will no doubt limit the potential ability to meet 
expanding demand. The implications of those Depression-era prices are 
not just domestic. The lost investment extended to all producer 
countries.
    Thus, if we are to realistically compare today's prices against a 
past price, we should look to 1997 before the oil price crisis began. 
Then, the economy was booming as it is now--oil prices were not a 
constraint.
    Two, we now import over 55 percent of our crude oil demand. Like it 
or not, this is a national security issue. Our economy could well be 
defined by the decisions of Saddam Hussein in the near future.
    There is pending an analysis under Section 232 of the U.S. Trade 
Expansion Act to determine whether the current level of oil imports 
presents a threat to national security. This assessment has been made 
five times before. In each instance the analysis concluded that a 
threat exists. However, perhaps now more than ever, the threat is as 
imposing as it was in 1973 when the Arab Oil Embargo crippled the 
American and European economies. While that crippling effect required 
the concerted effort of many Arab countries, today, it could 
accomplished by just one country--Iraq. Why?
    Clearly, Iraq's actions are driven by its own political agenda. As 
it was prior to the Persian Gulf War, Saddam Hussein's objective is to 
dominate the Middle East. What he could not achieve militarily in 1990, 
he now seeks to achieve through the manipulation of other countries. 
Today, he seeks to rid himself of the UN sanctions, to gain the ability 
to control his nation's oil resources and spend that wealth how he 
chooses. He uses the failed UN humanitarian aid process to gain 
worldwide sympathy for the Iraqi children he prevents from receiving 
food and medicine that has been purchased for them. He uses the greed 
of France and Russia and China to restore and improve Iraq's oil fields 
to weaken UN Security Council resolve. He uses radical Moslems to try 
to destabilize his Arab neighbors' governments. He will use an oil 
weapon as soon as it becomes available.
    When will that be? How about two months from now.
    Today, the world uses about 77 million barrels per day of oil. The 
oil price crisis of 1998-99 essentially resulted in a lost year of 
capital investment in maintaining existing oil production and 
developing new production. As a result the world's excess oil 
production capacity has diminished. Most of it is controlled by Saudi 
Arabia, which has long been considered the world's swing producer of 
crude oil. Estimates of this capacity vary.
    Now, OPEC is grappling with increasing its production to 
accommodate world demand and reaction to higher prices. But, it is 
walking a dangerous path. OPEC speaks of raising production by 1 
million barrels per day beginning in April. Most oil industry analysts 
argue that the increase needs to be about 2.5 million barrels per day. 
Some OPEC members argue that no Increase is needed now because of 
traditional demand drops in the second quarter of the year. In reality, 
many experts question whether all OPEC countries could increase their 
production consistent with their current quotas. On March 6, both the 
Financial Times and the Wall Street Journal ran articles about OPEC 
capacity. The Financial Times questioned Venezuela's production 
capacity. The Wall Street Journal analyzed both Iran and Iraq. The 
conclusions were similar--the capacity is not there.
    So, while it may be possible to increase production by 1 million 
barrels per day, a 2.5 million barrels per day increase may exceed 
current capacity--or can only be provided by Saudi Arabia. No one knows 
for certain. Either case plays into the hands of Saddam Hussein. Iraq 
currently exports about 2 million barrels per day, sometimes more. In 
May, the UN again reviews its sanctions policy on Iraq. In the past, 
Saddam has temporarily withdrawn production to tweak the world markets. 
But this time he will be in a unique position. This time, if he pulls 
his oil off the market, the market will be short. This time, it will 
cause substantial price spikes, perhaps to $50 per barrel. This time, 
other production cannot be instantly increased and the world will have 
to grapple with Saddam's demands to remove UN sanctions and then--
maybe--he will return to the oil market.
    We hear many argue that we should release oil now from our 
Strategic Petroleum Reserve. We should not. It is there to respond to 
supply shortages, particularly politically created supply shortages. If 
we act now to use the SPR when the issue is price, it won't be 
available when the true crisis comes.
    Three, in 1986 we produced 8.5 million barrels/day of domestic oil; 
now, production has dropped to below 6 million barrels/day.
    Prior to the last oil price crisis in 1986, domestic oil production 
was about 8.5 million barrels per day. By 1997, domestic production had 
dropped to about 6.5 million barrels per day--a 2 million barrel per 
day loss. In 1998, the Clinton Administration's energy strategy called 
for a 500,000 barrel per day increase in domestic oil production by 
2005--moving to a 7 million barrel per day target. Now, as a result of 
the 1998-99 price crisis, domestic production has dropped below 6 
million barrels per day.
    Four, this drop in oil production reflects changes in investment in 
the United States--a change largely due to the 1986 price crisis as 
major oil companies shifted their investments out of the U.S. lower 48 
states onshore.
    The 1986 oil price crisis demonstrated that the United States was 
the world's highest cost production area. In particular, the lower 48 
states onshore is the highest cost area because it is such a mature 
area compared to the rest of the world. Combined with domestic policy 
changes, like the 1986 tax reform law that created the Alternative 
Minimum Tax, the desirability of domestic oil development in the lower 
48 states onshore dropped dramatically. As a result, the major 
integrated oil companies revised their investment strategies. They 
shifted their investment plans to develop large ``elephant'' prospects. 
In the United States these are located offshore or in Alaska--
frequently in areas where development has been prohibited. Thus, our 
own policies led to a shift in capital deployment that encouraged 
foreign oil development over domestic.
    Five, the role of independent producers has steadily increased 
since the mid-1980s. In the lower 48 states onshore which accounts for 
60 percent of domestic oil production, the independent share has 
increased from about 45 percent to over 6O percent. This shift is 
irreversible and represents a profound change in the character of the 
domestic industry. Independent producers are primarily involved only in 
the upstream part of the industry and do not have the diverse resources 
of major integrated oil companies. They need different governmental 
policies.
    For independent producers this shift in strategy by major oil 
companies has opened opportunities throughout the United States. While 
most of this effort has been in the lower 48 states onshore, 
independents are also moving aggressively into the offshore. At the 
same time, for independents to meet the challenge, they must have 
capital. Independents do not have the diverse resources of majors; they 
draw their income from the upstream part of the industry: producing oil 
and natural gas. Many are small business entities that draw their 
capital from their current production.
    For these companies domestic tax policies--the AMT, limitations on 
the use of percentage depletion, constraints on intangible drilling 
costs, and efforts to limit the expensing of delay rental payments and 
geological and geophysical costs--constrain their capital retention and 
their ability to increase production. Price stability becomes a more 
critical concern to generate the ability to attract capital compared to 
other investments. They differ from major integrated companies and need 
policy structures that reflect these differences.
    Six, independent producers account for 85 percent of wells drilled 
in the United States and produce 66 percent of the nation's natural 
gas.
    In the United States, independent producers--with the capital to do 
it and access to the resources--are the aggressive explorationists. 
Their ``wildcatter'' image is not without merit. While they use far 
more sophisticated tools today, independents are still willing to 
develop new frontiers and rework old ones. They drill the most wells. 
And, they produce most of the nation's natural gas. So, as natural gas' 
role increases in the domestic energy supply mix, it is independents 
who will be the mainstay.
    Seven, natural gas cannot economically be supplied to the U.S. 
market from outside the continental area. If it doesn't come from the 
U.S., it must come from either Canada or Mexico. Currently, Mexico does 
not export natural gas.
    Natural gas differs from oil in one key respect--transportability. 
As a liquid, oil can be loaded on ships and sent around the world. Gas 
isn't as easy to move across oceans. Economically, natural gas must be 
supplied in large volume in the continental area where it is found. In 
North America, that means that the supply sources for the United States 
are domestic production, Canada, and Mexico. Today, U.S. supplies come 
from domestic production and Canada.
    Eight, the National Petroleum Council's Natural Gas study estimates 
that domestic natural gas supply must reach 29 trillion cubic feet per 
year by 2010. Natural gas and crude oil are intrinsically related--they 
are found together, they are produced together, and they require the 
same industry. Without a healthy domestic oil industry, we cannot have 
a healthy domestic natural gas industry, and we cannot meet future 
needs.
    Natural gas is a key fuel to America's future. All credible energy 
studies predict the need for increased domestic natural gas use. It is 
a significant task. Building to a supply level of 29 or 30 trillion 
cubic feet per year by 2010 requires not just the development of new 
reserves but the replacement of existing ones. It will require capital, 
access to resources, technology, and a trained workforce. It will also 
require a clear understanding that crude oil production and natural gas 
production are intrinsically related. Physically, they exist together. 
Physically, they are produced together. Economically, they require the 
same industry skills, the same capital, the same workforce. We cannot 
achieve the national goals for natural gas use without a healthy 
domestic oil industry.
    For all these reasons we should be developing national policies to 
maintain and enhance domestic oil and natural gas production--but we 
have not. Over the past 15 years this nation has made policy choices 
that strip capital from domestic oil and natural gas production, limit 
access to essential resources, aid foreign producers, and under the 
guise of environmental righteousness limit logical options.
    Let me address some of these.
     The 1986 tax reform act stripped away critical capital 
after the 1986 oil price crisis through elements like the creation of 
the Alternative Minimum Tax. Some of this effect was corrected in 1992 
amendments. Now Congress has embraced a series of sound modifications 
to the tax code affecting independent producers. These were included in 
tax bill passed by Congress last year, but President Clinton vetoed the 
bill Congress and the Administration need to act jointly on these 
issues.
    Domestic tax policy remains an important component to the 
maintenance and enhancement of domestic oil and natural gas production. 
Because domestic production must compete in a world market where 
foreign producer nations determine the price of oil, domestic producers 
cannot define the price framework and must operate within the price 
that exists. At the same time, domestic oil projects must compete for 
investors against foreign projects and against other investment 
opportunities. In the 1990's, their rate of return was 6 to 8 percent--
paltry given the risk and capital intensive nature of the industry and 
certainly compared to the returns from many new high technology and 
Internet companies. Even government-regulated sectors, like pipelines 
and utilities, have typical returns between 12 and 14 percent.
    It is in this context that one must look at the role of the federal 
tax code. The tax code determines how much income oil and gas producers 
will retain and how much capital will be available for reinvestment in 
maintaining production or developing new production. It influences the 
rate of return on projects and therefore the appeal of a project to 
investors. Independent producers typically drill off their cash flow. 
That is, they must have producing operations generating revenue to 
maintain and develop properties. Historically, independents have 
``plowed back'' 100% of their after tax revenues into their operations. 
Thus, when their tax burden is reduced, it means more funding for 
domestic production of vitally needed oil and natural gas.
    Clearly, at a time when we are trying to improve national security 
and when our imports of foreign oil already exceed our domestic 
production, it is counterproductive to tilt the incentives for 
investment to ``push'' more investment overseas, or limit its 
availability in the U.S. Many other countries allow full cost recovery 
before applying any income tax. The U.S. rules are already more complex 
and produce an overall higher tax rate on oil and gas development than 
many if not most foreign countries. Several industry analytic companies 
have evaluated the investment climate in the U.S. versus foreign 
countries. On the basis of business and political risk for oil and gas 
production investment, the U.S. ranked 31st out of 111 countries. On 
the basis of leasing and fiscal tax policies, in a ranking system where 
individual states were compared to countries, the state of Texas ranked 
180th. These analyses point to the problems facing investment in 
domestic oil and natural gas production.
    Domestic tax policy needs to be crafted to encourage the 
maintenance and enhancement of domestic oil and natural gas production. 
The tax bill passed by Congress last year included five key provisions 
that would help retain capital for domestic production. These need to 
be included in the tax code.
    Similarly, the National Petroleum Council's Marginal Wells study 
concluded that a marginal wells tax credit would provide 
countercyclical protection to the vulnerable marginal wells that 
produce about 20 percent of domestic crude oil and represent this 
nation's true strategic petroleum reserve. Last year, Congress at least 
appeared to be moving toward tax policies that would help the 
investment climate for domestic oil and natural gas production.
    But, we must be watchful. Two of the current presidential 
candidates have proposed tax plans that would attack key elements of 
the current tax code that provide capital to the independent producer.
     A linchpin to develop gas supplies consistent with the 
determinations of the NPC Natural Gas study is access to resources. 
Yet, successive administrations have created offshore moratoriums to 
prevent environmentally safe development of domestic resources off 
California, in the Gulf of Mexico and in the Atlantic. The most 
egregious of these actions was in 1998. After going through the charade 
of commissioning a study of the risk to the oceans from offshore 
development--a study that stated unequivocally that offshore 
development was environmentally sound--President Clinton extended the 
California offshore moratorium another decade.
    For decades the nation has deliberated the use of its offshore 
resources with mixed results. In the Gulf of Mexico where drilling and 
production has been allowed, offshore development has provided 
substantial oil and natural gas resources to the nation. Offshore 
production now accounts for roughly 20 percent of domestic oil 
production and over 25 percent of natural gas production. This 
production has been both a technological and environmental success 
story. On the other side of the coin, unreasonable opposition to the 
offshore development of California and other areas has limited use of 
these potential resources. Under the guise of environmental 
righteousness, the nation is denied resources that can be produced in a 
clearly environmentally sound manner.
    During the 1998 Year of the Ocean activities, the Heinz Center for 
Science, Economics and the Environment analyzed the history and 
potential of offshore production for the National Oceanic and 
Atmospheric Administration. It was unequivocal in its conclusions that 
offshore production can be done and done well. Yet, the Clinton 
Administration ignored this assessment as it imposed another ten year 
extension to the California offshore moratorium.
     For well over two decades we have debated whether to open 
the Arctic National Wildlife Refuge (ANWR) Coastal Plain to oil and 
natural gas development. It could yield a field on a par with Prudhoe 
Bay. Development has never occurred under the guise of environmental 
righteousness. Now, the latest question is whether the Clinton 
Administration will use the Antiquities Act again to wall off any 
development.
    Debate over the use of ANWR parallels the offshore debate. The 
nation is losing access to valuable potential resources that can be 
produced in an environmentally sound manner. The latest question will 
be whether the Clinton Administration will use the Antiquities Act to 
designate the area as a National Monument to prevent its development.
     On a broader scale the Clinton Administration has 
consistently closed off access to national resources. In addition to 
offshore moratoriums and opposition to ANWR development, it has 
initiated policies to prevent access to forestland by preventing road 
construction. It has denied permits on federal land. It is an attitude 
that also pervades Congress. For example, the House has passed 
legislation to prohibit the development of natural gas resources under 
Mosquito Creek Lake in my home state of Ohio.
     IPAA initiated a Section 232 request regarding the level 
of crude oil imports in 1993. Despite a clear determination that the 
level posed a threat to national security, the Clinton Administration 
proposed no concrete policies to enhance or maintain domestic oil 
production. As mentioned earlier, another Section 232 assessment is 
pending. It needs to include provisions that are designed to maintain 
and enhance domestic oil and natural gas production.
    No Section 232 analysis has concluded that oil import levels do not 
pose a threat to national security. Now is the time to recognize that 
while the steps to improve energy efficiency, develop alternate fuels, 
diversify import sources, and other steps are useful, they are 
worthless without a strong domestic oil and natural gas production 
industry. Without sound policies that support domestic marginal well 
production, the nation loses its true strategic petroleum reserve. 
Without sound policies that support domestic natural gas production, 
the nation's most plentiful ``alternate'' fuel will never meet its 
potential.
     The Environmental Protection Agency develops policies that 
undermine the domestic resources. For example, after initially opposing 
an erroneous court interpretation of the scope of underground injection 
control under the Safe Drinking Water Act, the EPA now opposes 
legislation to structure the law as it was originally intended, EPA's 
original position before the court.
    The 11th Circuit Court of Appeals in the LEAF v EPA case 
erroneously interpreted the scope of the Safe Drinking Water Act's 
Underground Injection Control (UIC) program. It ruled that the UIC 
program applied to the injection of fluids for the purpose of 
hydraulically fracturing geological formations to stimulate reservoirs 
for oil and natural gas production. EPA argued against this 
interpretation of the law in the case, a case where no environmental 
damage was shown. It lost. Subsequently, the State of Alabama was 
threatened with the loss of its primacy to run the UIC program for coal 
bed methane operations. EPA compelled Alabama to require the use of 
federally certified drinking water in hydraulic fracturing operations 
at substantial cost with no environmental benefit. However, EPA now 
opposes legislation that would correct the erroneous court decision.
    If this Court interpretation is allowed to stand, it could threaten 
normal safe hydraulic fracturing operations at all oil and gas 
operations in all states. Congress must act. LEAF has filed another 
action in the Circuit Court seeking a review of the EPA action in 
Alabama.
     Implementation of the limited emergency oil and gas loan 
guarantee program has been so constrained that no loan guarantees have 
yet to be provided. Yet, in 1998 when oil prices were at their lows, 
the United States was sending funding to Russia and Mexico to develop 
their oil industries. We have shown more interest in a pipeline across 
Turkey than preserving domestic resources.
    Last year after considerable delay, Congress passed the Emergency 
Oil and Gas Loan Guarantee Program. While the congressionally imposed 
restraints on the program make it complicated to implement, the 
interpretation of the law by the Loan Guarantee Board has so limited 
the program that it has scared off many potential banks and producers 
from seeking the financial assistance. To date the first guarantee has 
yet to be granted and less than 25 applications have been received.
    At the same time many independent producers are frustrated that 
while Congress was delaying action on this program and making it too 
constrained, while the Administration was further limiting its 
application, the United States was sending funding to Mexico and Russia 
to enhance their oil production operations during the depths of the oil 
price crisis.
     The Strategic Petroleum Reserve has been manipulated for 
budget tricks. Now, there are persistent efforts to use it to influence 
prices rather than when supplies are in jeopardy.
    IPAA has consistently sought two objectives with regard to 
strategic reserves of petroleum. First, the nation needs to recognize 
the role of its marginal wells as a true strategic petroleum reserve 
that produces crude volumes approximately equal to imports from Saudi 
Arabia.
    Second, the Strategic Petroleum Reserve was created to deal with 
supply disruptions of crude oil; it should not be used to influence the 
market. IPAA objects to selling oil for budget purposes or releasing 
oil to affect prices.
    As a nation we must define policies that recognize the ongoing 
importance of domestic oil and natural gas supplies. We cannot continue 
the current path of trashing crude oil as environmentally evil and 
banking on natural gas to meet future fuel needs.
    We cannot continue a policy of reliance on foreign oil at prices 
that destroy the domestic producer. It will place our energy and 
economic future in the hands of foreign governments--first because we 
will lose our domestic oil resources, second because we will not be 
able to develop our domestic natural gas.
    Instead, we must work together--both here in the United States and 
with foreign producer nations--to develop a stable oil and natural gas 
development framework. The next several months will test our resolve. 
Price pressures will continue. The Section 232 action will be 
completed. Policymakers can establish a sound framework for the future 
of domestic energy, or they can continue the failed policies of the 
past. Let's hope for the right choice.

    Mr. Barton. Thank you, sir. We now want to hear from Mr. 
Neal Wolkoff, who is the Executive Vice President for the New 
York Mercantile Exchange, for 5 minutes, please, sir.

                    STATEMENT OF NEAL WOLKOFF

    Mr. Wolkoff. Thank you, Mr. Chairman, for the invitation to 
appear. I'd like to take a moment of my time to describe NYMEX, 
the New York Mercantile Exchange. It was described in a rather 
colorful way a bit earlier, but I'd like to expand on some of 
the things said about us today.
    We occupy a fairly unique position, vis-a-vis the witnesses 
that have testified today before this committee. We are a 
federally chartered and regulated commodity future exchange. We 
are a market place. We are completely price neutral and have no 
vested interest either in higher or lower energy prices. Our 
markets in energy include crude oil, heating oil, unleaded 
gasoline, and natural gas, and the prices determined at NYMEX 
are arrived at in a completely open and competitive auction 
market. Important to note, it's a zero sum market. So for every 
dollar that someone earns at NYMEX, another participant loses 
that dollar, as well.
    Our prices are accepted worldwide as benchmarks for the 
various commodities that are represented. As part of our 
responsibilities in operating a public marketplace for 
strategically important commodities, we are required by the 
Federal Government to be self regulating. NYMEX oversees its 
markets, to ensure that NYMEX's prices represent supply and 
demand fundamentals; in other words, we monitor our markets, to 
assure price integrity and to protect against manipulation, and 
the exchange provides a structure of rules and policies that 
put teeth into the surveillance efforts.
    What we have seen in energy prices since the beginning of 
last year is a tripling of crude oil prices. As the feed stock 
for refined products, including gasoline, heating oil, and 
diesel fuel, sharp increases in crude have resulted in similar 
and very noticeable price increases in those fundamentally 
important products.
    I'd like to summarize, very briefly, what our findings are 
about the fundamental of these and to conclude in sum that the 
increases in price that we have seen are due to fundamentals of 
supply and demand and not due to price manipulation or any 
other artificial pricing. As has been said before, there has 
been a reduction in OPEC production. It's a 12 percent cut in 
production. But what hasn't been said, and I think it's 
important to offer some perspective just on how sensitive the 
oil pricing mechanism is and what an inexact science it is to 
predict oil pricing. We've seen as a result, a 4 million barrel 
a day reduction in crude production by OPEC, out of total world 
production of nearly 80 million barrels, a tripling of energy 
prices over the last year. It is a very price sensitive market, 
extremely sensitive to the slightest provocations of changes in 
supply or sudden changes of demand.
    Earlier this year, we had a 13 percent increase in heating 
oil demand, in the first 6 weeks of January and February, 
mainly due to cold weather. That, on top of a 12 percent cut in 
production, was, in many respects, behind the spike that we saw 
in the northeast. Gasoline demand nationwide is matching last 
year's demand, which was at a record, and last year's supply 
was plentiful and prices were low. We've seen that price has 
not yet been a catalyst for any meaningful conservation, a 
word, by the way, that I think I've just mentioned for the 
first time today.
    Inventories of crude and products reached at least 10 year 
lows a few weeks ago. Refinery utilization, which means how 
much available refinery capacity is being used, is well below 
the average over the last 5 years. A significant cause in 
something that hasn't been mentioned today has been unexpected 
maintenance in many important refineries during the month of 
January. But, certainly, the suddenness in the rise of crude 
and the expectation that those high prices are temporary have 
not encouraged high inventories or maximum refinery 
utilization.
    What is not a factor, I would like to add, is market 
speculation. There is overwhelming commercial use of the 
marketplace. I would like to ask what the market would be like 
without price transparency in times of shortage of supply. As 
I've said, it's a very fragile market and without transparency, 
prices would be determined in a non-public way. I think we 
would have seen even higher prices than we did.
    In addition to high prices, we have, also, been dealing 
with price spikes, that is one actual and one, I think, to 
which a great deal of fear has been instilled in the public 
mind about coming times. I think it's important just to 
understand what a price spike is and why it happens, and I 
would briefly like to touch on that. It starts with low 
inventories and added to that, a sudden change in demand. 
Inventories normally cushion price impacts from demand and when 
the inventories are low, we can sometimes see price spikes, an 
inventory shortage causing State price volatility.
    Typically, these spikes are painful, but short lived, and 
the marketplaces tended to quickly normalize the situation, as 
the earlier chart shown by the EIA demonstrated. In answer to 
the chairman's question, typical fuel oil prices today are 
between $1.10 and $1.20, at the retail level.
    And my final comment, on the SPR, the issue of release and 
the issue of SPR swaps--I almost said swipes and perhaps that 
would have been more appropriate. We are fundamentally opposed 
to that and see it as an opening of a door to market 
intervention that, in the past, is shown to be completely 
unsuccessful. Thank you.
    [The prepared statement of Neal Wolkoff follows:]

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    Mr. Barton. Thank you, Mr. Wolkoff and we'll have questions 
for you in the question period. Now, I would like to hear from 
Mr. Bob Slaughter, who is representing the National 
Petrochemical and Refiners Association. Mr. Slaughter?

                   STATEMENT OF BOB SLAUGHTER

    Mr. Slaughter. Thank you, Mr. Chairman. I'm Bob Slaughter, 
General Counsel for NPRA. We represent refiners, who own about 
98 percent of the U.S. refining capacity.
    NPRA shares your concern about the supply and price of 
petroleum products. We and our members have been working with 
the Secretary of Energy and other officials to mitigate the 
adverse effects of recent supply problems in the northeast. The 
Secretary has asked for our members' help in maximizing the 
output of home heating oil and diesel and in rescheduling 
discretionary maintenance and repair, which could interfere 
with refinery output. Of course, that can be delayed only when 
safety considerations are not compromised. Refiners are 
responding to this and other requests and our cooperation has 
been acknowledge. We will continue to do so.
    We agree with the general consensus that the northeast 
supply problems resulted from a sudden cold snap, the weather, 
and, also, from OPEC's reduction of supply. Another factor was 
the triggering of natural gas interruptible contracts. Frankly, 
the OPEC problem is beyond NPRA's control, but we support 
efforts to convince OPEC and non-OPEC participants that an 
increase in crude supply is necessary and warranted. Refiners 
and consumers will benefit from additional crude supplies.
    Crude and product inventories seem to be on the increase 
and that's a good sign. Stable supplies of crude and 
predictable prices are important to us, too. Refiners are, 
also, aware of concerns that gasoline supplies for this year 
may be under pressure, as a result of the reduction in crude. 
We would have to say that these concerns are speculative at 
this point. Refiners excel at meeting consumers demand for 
petroleum products and are focused on the need to provide 
gasoline to consumers. We are confident that continued reliance 
on market forces will best help them to accomplish this task.
    We are looking at all the policy options that have been 
discussed here and elsewhere, but we want to mention that the 
U.S., not long ago, experimented with an energy policy 
characterized by widespread government intervention in energy 
markets. This was found to be inefficient and costly. After 
several years of experience with that model, it was traded for 
a policy that relies on market forces to balance supply and 
demand. Reliance on the market has its rough spots and we are 
experiencing one at present, but history suggest the 
alternatives are worst. Also, Mr. Chairman, we support your 
reluctance and DOE's reluctance to tap the SPR for a temporary 
supply problem. The SPR is a strategic asset and is meant to 
address more critical situations than this.
    It does seem the post examination of some policy options 
may help to avoid future supply problems. During the decade 
just past, refiners faced an unprecedented level of 
environmentally related investments in their facilities. The 
industry spent $50 billion to comply with stationary source 
controls alone in this timeframe. Perhaps, as a result, the 
average return on capital for the industry, for 1990 to 1997, 
was 3 percent. This does not compare favorably with the 
passbook savings rate at the local bank.
    We now face another round of large environmentally related 
spending in this decade. The chart before us shows the 
environmental programs for which investment will soon be 
required. Those that can be estimated, at this point, add up to 
more than $15 billion in new investment, and this does not 
include needed investment to maintain and expand current 
operating capacity to meet demand.
    We're not here to seek any moratorium or a roll back of 
environmental progress. On the contrary, our industry has an 
excellent record of environmental achievement. Between 1980 and 
1996, air emissions from refineries declined by 73 percent and 
there is more to be done. But, these programs do come at a cost 
and we urge the subcommittee to review the impact of 
perspective environmental proposals on a supply of petroleum 
products. We can go too far, too fast. This is especially true, 
if we lose refineries and capacity.
    And we especially want to urge the subcommittee to examine 
the upcoming diesel sulpher rulemaking, which will impact both 
diesel and home heating oil supply. EPA seems ready to support 
an unreasonable level of sulfur reduction, which could endanger 
future diesel and home heating oil supplies, as well as 
refinery viability. We believe that the industry has proposed a 
more reasonable and equally effective approach.
    I want to thank you for the interest of the subcommittee 
and I look forward to responding to your questions.
    [The prepared statement of Bob Slaughter follows:]
 Prepared Statement of Bob Slaughter, General Counsel and Director of 
   Public Policy, on behalf of the National Petrochemical & Refiners 
                              Association
    Good morning. My name is Bob Slaughter. I am General Counsel and 
Director of Public Policy for the National Petrochemical & Refiners 
Association (NPRA). I am very pleased to be here this morning to 
address the refining industry's perspective on the fluctuations in 
crude oil prices and supplies over the past 12 months.
    NPRA's membership includes virtually all U.S. refiners, as well as 
petrochemical manufacturers using processes similar to refineries. Our 
members own and/or operate almost 98 percent of U.S. refining capacity. 
NPRA includes not only the larger companies, but also many small and 
independent companies.
                                overview
    Today Americans have the benefit of a highly competitive refining 
industry that welcomes challenges and which produces quality supplies 
at market prices. Price fluctuations are driven by many factors that 
influence supply and demand in a competitive oil marketplace. The 
fluctuations which we have seen lately are the result of many events, 
some of which have occurred far from our shores.
    In addition, our industry is currently confronted by many 
environmental challenges from state and federal regulators, which we 
plan to meet. However, contrary to popular belief, the refining 
industry's resources are limited and the costs of these upcoming 
regulatory initiatives are high.
    I would like to review for you (1) what we see as some of the 
causes of these recent fluctuations, (2) NPRA activities with Secretary 
Richardson and the Department of Energy, (3) supply and distribution 
challenges which we see ahead for the refining industry, and (4) some 
future steps which we believe may be appropriate.
  causes of price fluctuations and status of current crude oil markets
    Early in 1999, a ``glut'' of oil on the world oil market drove the 
price of a barrel of oil down sharply. In February 1999, a barrel of 
crude oil was being sold for an astonishing $11. This was the result of 
two major factors, 1) reduced demand in Asia and to a lesser extent 
Europe, and 2) increased production in the Western Hemisphere. However, 
beginning in April, 1999 the price for crude oil began a consistent and 
steady increase, with a barrel of oil today (March, 2000) selling for 
around $30. A few events can be identified as contributing factors to 
the current price scenario. First, OPEC and several other exporting 
nations, in response to the devastatingly low price of crude oil during 
the 1998-1999 time frame, began to reduce the supply of oil to the 
world market by cutting production. This decrease in production 
coincided with a rejuvenation of the sagging Asian and European 
economies which increased the demand for crude oil on the world 
markets. In addition, the U.S. experienced a colder than normal late 
winter in 2000, especially in the Northeast, adding a greater than 
expected demand for heating oil. The reality of all of these factors is 
that the world is now consuming around 2 million barrels more than it 
is currently producing.
          refineries are working with the department of energy
February 9, 2000 Meeting with Secretary Richardson
    On February 9, 2000, NPRA member company representatives and staff 
met with Secretary Richardson regarding the current problems with 
heating oil supplies in New England. Refiners were encouraged to take 
all steps possible to increase the supply of heating oil and diesel 
fuel to the affected region. It was also suggested that routine 
maintenance and turnarounds at refineries be delayed where feasible and 
safe, in order to maintain distillate output. Insofar as these 
activities are consistent with safety and sound operating practices, 
some refiners have agreed to consider rescheduling minor repairs in 
order to maximize distillate supplies to this region. However, it must 
be stressed that these activities will only take place provided all 
necessary safety concerns are met.
February 16, 2000 Department of Energy Home Heating Oil Summit
    On February 16, 2000, NPRA attended the Department of Energy's Home 
Heating Oil Summit in Boston, Massachusetts. Both Secretary Richardson 
and NPRA told the Boston meeting that the refining industry is working 
with DOE and others to respond to the current situation. In addition to 
the meeting with the Secretary, several NPRA member company 
representatives have provided the DOE with private information in an 
effort to help the Secretary and the Department of Energy assess the 
current situation and the near-term supply situation as he evaluates 
various possible responses. Refiners have also confirmed to the 
Secretary that efforts to ensure adequate production of heating oil and 
diesel fuel have been underway for weeks and are continuing. Because of 
competitive considerations we asked our members to deal privately and 
directly with the Secretary's office and his distillate supply task 
force, and we know that many of our members have done so. We anticipate 
continued contact between our members and the Secretary's office on 
this subject.
   supply and distribution challenges ahead for the refining industry
    The current predicament again reminds us that the U.S. either 
deliberately or inadvertently has followed a national policy which, at 
times, doesn't pay sufficient attention to the question of supply. This 
is most often true in the area of environmental policy. The U.S. 
frequently pursues overly expensive environmental restrictions without 
looking for equally effective but less costly alternatives. The 
inevitable result is situations such as that which we are confronted 
with in the Northeast. The refining industry now faces extensive new 
Clean Air Act regulations that will take effect in the near future. 
These include requirements both for control of refinery emissions, New 
Source Review (NSR), and for the reformulation of gasoline to remove 
sulfur and selected "air toxics". Refiners are also currently making 
the transition into RFG II as required by the 1990 Clean Air Act 
Amendments. It seems certain that in addition that EPA will require the 
reformulation of diesel fuel, and it is likely that Congress or EPA 
will consider proposals which require the phase-down or even 
elimination of MTBE from gasoline. Attached is a chart titled, 
``Cumulative Regulatory Impacts on Refineries: 2000-2010,'' reflecting 
these requirements in more detail. This chart reflects the importance 
of the need for policymakers to begin working together with industry to 
balance the environmental concerns of the country with consumers' need 
for an adequate supply of petroleum products. I would like to briefly 
cite some of the environmental rulemakings the refining industry faces.
New Source Review (NSR)
    Under the Clean Air Act Section 111(a)(4) and EPA's regulations, 
NSR is triggered by any ``physical change or change in the method of 
operation'' of a source that increases its emissions by a significant 
amount. If a physical/operational change does not itself significantly 
increase source emissions, or if the source ``nets out'' the change by 
offsetting emissions reductions in other places, then, under the law, 
NSR does not apply.
    NSR is one of the most complicated regulatory programs ever 
created. EPA has recognized this and initiated the reform process to 
simplify and rectify the program. EPA's current approach to NSR 
applicability makes it extremely difficult for refiners to determine 
when NSR permitting and controls are required and leaves refineries in 
enforcement jeopardy unless they consider NSR for any and all 
operational changes. As a result, the program is an untenable burden on 
state permitting authorities and refineries and threatens their ability 
to implement Congress' future environmental goals in a timely manner.
    The end point of EPA's current position is universal NSR. However, 
no industrial economy could function if every change to a factory 
required a permit before construction could begin. This will be 
particularly burdensome for refineries given the operational changes 
necessary to comply with the blizzard of new fuel reformulation and 
stationary source regulations. EPA recognized that Congress did not 
intend universal NSR in its 1996 proposal for NSR reform, however EPA's 
new approach is achieving just that.
Tier II Regulations
    EPA's recently concluded rulemaking on the Tier II gasoline program 
is an extremely ambitious, high-stakes approach to reducing sulfur in 
gasoline. It requires that refining industry to make unprecedented 
investments in improving technology to meet the rule's timing 
requirements. The final Tier II rule will require the refining industry 
to invest as much as $8 billion in order to comply with a new 30 ppm 
gasoline sulfur standard effective 2004-6. Conservative estimates have 
stated that the cost of gasoline will rise 5 cents per gallon in 
response to these costs. This doubles the refining industry's recent 
annual environmental expenditures. Expected requirements to reformulate 
diesel fuel could increase these costs by as much as $4 billion, or 
more, depending on the extent and timing of sulfur reduction.
Diesel Fuel
    Another prime example is an upcoming EPA regulation affecting 
diesel fuel. Truckers and others who are reliant on diesel supplies 
have recently protested about disruptions in the supply and price of 
the product. At the same time, EPA is preparing to propose a regulation 
drastically reducing sulfur levels in diesel fuel. NPRA is committed to 
improving the environmental performance of fuels, and we have endorsed 
a reasonable reduction in diesel sulfur. However, all indications are 
that the EPA proposal goes far beyond anything that could be called 
``reasonable.''
    EPA is set to propose a severe reduction in the on-highway diesel 
fuel sulfur standard from a cap of 500 parts per million to 15 parts 
per million. The agency has conducted no analysis of the impact of this 
reduction on diesel supply or price or on the viability of the U.S. 
refining industry. NPRA has told the agency that a sulfur cap of 15 ppm 
will severely impact refiners, resulting in the reduction of U.S. 
refining capacity. We think that it will severely reduce the available 
supply of diesel, and that heating oil and gasoline supply will also be 
affected if marginal refineries close, or elect not to produce on road 
disels. Please note that the diesel requirement would take effect at 
the same time as a 90% reduction in gasoline sulfur. Together these 
initiatives could cost the refining industry roughly $12 billion. And, 
the process and operating changes are not the same for gasoline and 
diesel--synergies do not exist between the two.
    Reducing diesel fuel sulfur content to the level under 
consideration by EPA poses difficult technical and engineering 
challenges for the refining industry and imposes significant capital 
requirements and operating costs. There are no obvious solutions or 
inexpensive means to accomplish this level of reduction, and the 
technical capability to achieve very low sulfur levels is in question 
for many refineries. Very low diesel sulfur levels may also lead to 
other unexpected problems or unintended consequences, such as 
reductions in energy content, lubricity degradation, and susceptibility 
to contamination problems at the refinery and terminals.
    As this rulemaking goes forward, policymakers must be sensitive to 
diesel supply implications, and the availability of technologies 
capable of meeting regulators' objectives. We must guard against 
unreasonable requirements which would threaten the viability of 
refineries, and cause market disruptions in the flow of critical energy 
products to consumers.
Urban Air Toxics
    Yet another example of challenges facing the refining industry can 
be found in EPA's plans to regulate air toxics. Section 202 (1) of the 
Clean Air Act directed EPA to complete a study of toxic air pollution 
from mobile sources, including both vehicles and fuels by May 15, 1992 
and issue final air toxics regulations by May 1995. The study was to 
focus on air toxic emissions that posed the most significant risk to 
human health. EPA was delayed in completing the study and issuing air 
toxics standards. It is now under court order to propose regulations by 
April 2000, with a final rule by December 2000. It is likely EPA will 
propose stringent new air toxic standards for both conventional 
gasoline and reformulated gasoline (RFG) and EPA will issue these new 
toxics standards as part of its Integrated Urban Air Toxics Strategy. 
It is expected that EPA will focus on benzene in gasoline and is 
currently seeking information and data from industry in order to make a 
cost effectiveness determination of possible benzene control options.
  secretary richardson is correct not to tap the strategic petroleum 
                                reserve
    NPRA commends the Secretary of Energy and the Administration for 
their continued disinclination to tap the Strategic Petroleum Reserve 
(SPR). The SPR is a designed to be available in major supply 
emergencies when our national security and economic prosperity are at 
stake. It is a strategic asset intended to counteract severe crude oil 
supply disruptions such as occurred during the 1970s.
    Use of the reserve should be based only on a Presidential finding 
that implementation of a drawdown plan is required by a disruption, 
originally stipulated by the Energy Policy and Conservation Act of 
1975. The concept of using the reserve to influence prices should be 
rejected as impractical. Using the SPR to manipulate prices would both 
politicize this asset and render it less useful for the purpose for 
which it was originally designed. In addition, logistically, by the 
time the SPR crude oil was released, transported, refined and delivered 
to customers, the current situation and certainly the winter season 
would be over.
                              future steps
    NPRA and its members urge federal and state policymakers to review 
the current situation and events leading up to it for ways to avoid or 
at least minimize the possibility of future price and supply upsets. 
Unless there is rational, coordination of pending and future 
regulations there is a serious threat of supply disruption and price 
swings. As was mentioned earlier, this can in part be accomplished by 
rethinking the current U.S. policy regarding production of crucial 
energy products such as heating oil, diesel and gasoline. We also 
support the Administration's attempts to urge OPEC and other suppliers 
of crude oil to consider providing additional allocations of oil to 
U.S. markets. Renewed international economic growth coupled with 
continuing strength of the U.S. economy may warrant increased crude oil 
supplies. Consequently, refiners may need access to more crude oil in 
order to meet projected strong demand for gasoline during the upcoming 
driving season. We also need to guard against a repeat problem with 
heating oil supplies if untimely ``cold snaps'' occur during the next 
and subsequent winters. Finally, as a nation, we must work to promote 
and develop policies that focus on continued environmental progress 
without reducing the supply of petroleum products needed for a healthy 
economy.
                               conclusion
    In the past decade the refining industry invested more money in 
environmental improvements than the total book value of refining 
assets. We have been asked to continue significant environmental 
investments, and we will do so. We ask, however, that policymakers pay 
close attention to the scope and pace of environmental regulations. 
Trying to go too far too fast will result in market disruptions which 
are not in the best interests of consumers or refiners. We hope that 
the Congress will assist us in addressing these concerns. NPRA believes 
that even with its occasional (but temporary) shortcomings, market 
forces remain the best foundation for U.S. energy policy.

[GRAPHIC] [TIFF OMITTED] T2977.023

[GRAPHIC] [TIFF OMITTED] T2977.024

    Mr. Barton. Thank you, Mr. Slaughter. We have a pending 
series of votes on the floor, we have two votes. So, what I am 
going to try to do is let Mr. Farruggio and Mr. D'Arco give 
your testimony. Unfortunately, I don't think we're going to be 
able to give you oral questions, unless you want to wait around 
until 4 or something, and I doubt that you're going to want to 
do that. So, we'll hear from Mr. Farruggio, Mr. D'Arco, and 
then we'll release the panel and send you written questions.
    We'll, also, try to do an informal brown bag seminar, like 
we've done in the past. So maybe if you, personally, can't 
come, somebody from your associations can come and members can 
come in and we can have an off-the-record discussion, because I 
would really like to spend some time. Unfortunately, these 
votes are going to make that impossible. So, Mr. Farruggio, and 
then we'll hear from Mr. D'Arco.

                  STATEMENT OF SAMUEL FARRUGGIO

    Mr. Farruggio. Thank you, Mr. Chairman. I am Sam Farruggio, 
President of Farruggio Express. I want to thank you for 
allowing me to testify before this subcommittee on diesel fuel 
crisis that is devastating my industry. I would, also, like to 
express a special thanks to Representative Greenwood for 
allowing me to share my thoughts.
    Farruggio Express runs over 100 trucks in the northeast, 
operating out of five terminals located in Baltimore; 
Harrisburg; Allentown; Bristol, Pennsylvania; and Cliftwood, 
New Jersey. We, together with our independent contracts, total 
over 175 people counting on Farruggio to provide a living for 
our families.
    My purpose today is to express my concerns for the industry 
I've worked in for 30 years. I am here to represent everyone 
from the independent truck owner, to the largest fleet owner, 
in what has become a battle to survive. Before I go into 
specifics on how the diesel fuel crisis has severely impacted 
by company, let me give you a little background on the trucking 
industry.
    Trucks haul nearly every commodity in the United States. 
Essentially, if you bought it, a truck delivered it. There are 
over 9.6 million people employed in the industry today. Trucks 
haul 60 percent of the annual freights or tonnage. Eight-one 
cents out of every dollar spent on transportation goes to 
trucking. An astonishing 70 percent of the communities in the 
United States get their goods solely from trucks. The truck 
industry--the trucking industry is primarily composed of small 
businesses. Out of the hundreds of thousands of trucking 
companies running in the country today, 80 percent of them 
operate 20 or fewer trucks. These are companies that can be 
wiped out from this unbelievable surge in fuel costs.
    According to the American Trucking Association, on average, 
trucking companies have profit margins of only two to 4 
percent. So as diesel fuel prices jumped over 50 cents a gallon 
in the last year, most small trucking companies have seen their 
profit margins go from the average of two to four, to nothing. 
In fact, many small carriers are losing money on each and every 
load they deliver.
    Behind labor, fuel is typically the second most important 
input for the trucking operation. As diesel fuel prices rose 
from an average of 96 cents a gallon a year ago, an average of 
$1.49 today, many of my colleagues and competitors have had 
to--had difficult times in keeping their trucks on the road. I 
know many are now at the breaking point. If the industry does 
not see some relief now, there will be significant numbers of 
carriers going out of business. This will be detrimental to our 
economy.
    To put some perspective on just how serious the situation 
is, let me tell you what my company has gone through recently, 
by comparing February 1999 fuel costs, to those of February 
2000. In February 1999, we consumed 50,000 gallons of diesel 
fuel, with an average cost of $1.04 a gallon, totaling for 
$52,000. In February of 2000, we purchased the same number of 
gallons, 50,000 gallons, but with an average price of $1.82 per 
gallon. It's a monthly cost of $91,000. The increase was 
$39,000 in 1 month. We traveled the same mileage, delivered the 
same product, costs us $39,000 more to do it.
    Farruggio is a family owned and operated business that was 
opened over 80 years ago by my grandfather. We have survived 
many a crisis in the past and I feel confident we will see our 
way through this current situation. But, as in the past, I can 
guarantee that many other companies, some small and some 
larger, will not make it. Over the past 2 months, we have seen 
many independent contractors go out of the business. We're 
already in a period of a driver shortage, but after years 
within the industry, these drivers are forced to look for other 
types of work.
    A good friend of mine in Allentown operates nine trucks. He 
is $15,000 behind in his payment to his fuel supplier. He will 
be forced out of business, unless we can make something happen 
to correct this injustice.
    The independent contractors have shown their frustration. 
Recently, they have shut down the ports of New York, New 
Jersey, Philadelphia, Baltimore, and Miami, at various times. 
We have seen the fuel price increase as much as 15 cents in 1 
day. Some days, the pump prices change three times. What will 
you do to correct this? You cannot act fast enough.
    The current Department of Energy's statistics for the 
central Atlantic region shows the average fuel price at $1.60. 
Yet, in Philadelphia, the pump price is $1.79 to $1.89. Why is 
there such a large difference?
    The diesel fuel crisis is a disaster to the trucking 
industry. The government reacts over night to most natural 
disasters; yes, we are in the third month of this crisis. The 
news media says the U.S. economy is controlled by the Federal 
Reserve. I beg to differ, at this point. I fear that it will 
take the country coming to a complete stop before we see some 
relief.
    Most food stores hold three to 4 days supply. When there is 
not a loaf of bread in the store, not a gallon of milk for 
miles, and not nearly enough truck drivers to----
    Mr. Barton. I hate to interrupt you, Mr. Farruggio, but 
I've got 6 minutes to vote----
    Mr. Farruggio. Okay.
    Mr. Barton. [continuing] and I still need to let Mr. 
D'Arco----
    Mr. Farruggio. We thank you for this opportunity.
    [The prepared statement of Samuel Farruggio follows:]
  Prepared Statement of Sam Farruggio, President, Farruggio's Express
    Mr. Chairman and Members of the Subcommittee, I am Sam Farruggio, 
President of Farruggio's Express in Bristol, PA. I sincerely appreciate 
the opportunity to testify before this subcommittee on the diesel fuel 
crisis that is devastating my industry. I would also like to to express 
a special thank you to Representative Greenwood for allowing me to 
share my thoughts. Farruggio's Express runs over 100 trucks in the 
Northeast operating out of 5 terminals located in Baltimore, MD, 
Harrisburg, PA, Allentown, PA, Bristol, PA and Cliffwood, NJ. We, 
together with our independent contractors, total over 175 people 
counting on Farruggio's to provide a living for our families. My 
purpose today is to express my concerns for the industry I have worked 
in for 30 years. I am here to represent everyone from the independent 
truck owner to the largest fleet owner in what has become a battle to 
survive.
    Before I go into the specifics of how this diesel fuel crisis has 
severely impacted my own company, let me give you a little background 
on the trucking industry. Trucks haul nearly every commodity in the US. 
Essentially, if you bought it, a truck delivered it. There are over 9.6 
million people employed in trucking related jobs in every sector of the 
economy. Trucks haul 60% of the freight tonnage annually. Eighty-one 
cents out every dollar spent on freight transportation goes to 
trucking. An astounding 70% of the communities in the US get the goods 
they consume solely from trucks.
    The trucking industry is primarily composed of small businesses. 
Out of the hundreds of thousands of trucking companies running in this 
country, 80% of them operate only 20 or fewer trucks. These are the 
companies that can be wiped out from this unbelievable surge in fuel 
costs. According to the American Trucking Associations, on average, 
trucking companies have profit margins of only 2% to 4%. So, as diesel 
fuel prices jumped over 50 cents per gallon in the last year, most 
small trucking companies have seen their profit margins go from the 
average 2% to 4% to nothing. In fact, many small carriers are losing 
money on each and every load they deliver.
    Behind labor, fuel is typically the second most important input for 
a trucking operation. As diesel fuel prices rose from an average of 96 
cents per gallon a year ago to an average of $1.49 per gallon today, 
many of my colleagues and competitors have had a difficult time keeping 
their trucks on the road. I know many are now at the breaking point. If 
this industry does not see some relief now, there will be a significant 
number of carriers going out of business. This would be detrimental to 
our economy.
    To put some perspective on just how serious this situation is, let 
me tell you what my company has gone through recently by comparing our 
February 1999 fuel costs to that of February 2000. In February of 1999, 
we consumed 50,000 gallons of diesel fuel with an average cost of $1.04 
per gallon totaling $52,000.00. In February 2000, we purchased the same 
number of gallons, 50,000, but the average price was $1.82 per gallon 
for a monthly total cost of $91,000.00. This means that there was a 
$39,000.00 increase or 57%.
    Farruggio's Express is family owned and operated business that was 
opened over 80 years ago by my grandfather. We have survived many a 
crisis in the past and I feel confident that we will see our way 
through this current situation. But, as in the past, I can guarantee 
that many other companies, some smaller and some larger, will not make 
it. Over the past two months, we have seen many independent contractors 
go out of business. We are already in a period of driver shortage, but 
after years within the industry, these drivers are forced to look for 
other types of work. A friend of mine in Allentown operates 9 trucks. 
He is $15,000.00 behind in payments to his fuel suppliers. He will be 
forced out of business, unless we can make something happen to correct 
this injustice. The independent contractors have shown their 
frustration by refusing to handle cargo, literally shutting down the 
ports of NY, NJ, Philadelphia, Baltimore and Miami at various times 
over the past few weeks
    We have seen the fuel prices move as much as 15 cents in one day. 
We have seen changes at the pump two to three times in one day. What 
will you do to correct this? You can not act fast enough. The Current 
Department of Energy weekly statistics for the Central Atlantic region 
showed an average fuel price $1.601, Yet, in Philadelphia, PA, the 
price at the pump was from $1.799 to $1.899. Why is there such a large 
difference?
    This diesel fuel crisis is a disaster to the trucking industry. The 
government reacts overnight to most natural disasters, yet we are in 
the third month of this crisis. The news media says that the US economy 
is controlled by the Federal Reserve. I beg to differ at this point. I 
fear that it will take the country coming to a complete stop before we 
see some relief. Most food stores hold a three to four day supply. When 
there is not a loaf of bread in the store, not a gallon of milk for 
miles and not nearly enough trucks nor drivers to catch up, then will 
we receive some assistance? When the movement of goods has ceased, our 
economy will come to a halt. We need your help now. What can you do to 
help these people who have or may lose everything? What can you do to 
save 9.6 million jobs?
    There is no guarantee that my industry will see relief anytime 
soon. Diesel stocks are extremely low. In fact, they are 30% lower than 
one year ago. Even the Department of Energy has stated that we are not 
out of the woods. I am not an expert on how to achieve the relief that 
this industry needs, whether it be by releasing oil from the Strategic 
Petroleum Reserve or by some other means. All I know is that we 
desperately need your help. I am saying this not only as a very 
concerned trucking company, but as a consumer of the thousands of goods 
that these trucks deliver every second of the day across this entire 
nation. Again, we need your help and we need it now. I thank you Mr. 
Chairman and would be happy to entertain any questions.

    Mr. Barton. Thank you, sir. Mr. D'Arco, on behalf of the 
distributors.

                    STATEMENT OF PETER D'ARCO

    Mr. D'Arco. Thank you, Mr. Chairman and committee members. 
I am Peter D'Arco. I am the Vice President and Chief Operating 
Officer of S.J. Fuel Company. We're a third generation company, 
located in Brooklyn, New York, and deliver fuel to nearly 5,000 
locations. Earlier this year, dealers from Staten Island and 
Brooklyn visited Congressman Fossella, to discuss the heating 
oil situation. Today, I'll try to describe the retailer 
perspective on the price increases and offer some suggestions.
    I would like to join the chairman and other members in 
expressing concern for consumers. The high prices and cold 
weather that occurred earlier this year are troubling. 
Fortunately, prices are returning to more normal levels 
throughout the northeast and these price increases should have 
a limited impact on my customers.
    Late January and early February were very trying times for 
my company and myself. As the temperature dropped, we had to 
pick up the pace of the company and nearly all of my employees 
began working extended hours, many had to work 7 days a week to 
keep up with increased demand. a price run up like this is a 
disaster for my company. Over time, expenses skyrocketed, 
credit lines have been stretched, and many consumers have 
delayed payments. Consumers of heating oil are upset by the 
increased prices, but the committee should know that throughout 
the 1990's, we have provided superior services and low prices. 
I hope that my customers will bear with me, as we move forward, 
and not forget the very low competitive prices that they have 
been getting for years.
    In my discussions with other dealers and suppliers, it 
became apparent that there are two main reasons for this 
problem: low inventories and a backwardized market. 
Backwardization is illustrated by this example. If you buy a 
gallon of oil for a dollar today, the market is saying that if 
you sell it in the future, you will receive less than a dollar. 
Taking on inventory in a backwardized market means that you 
have high priced inventory and most certainly will sell it at a 
loss. The market did not provide incentives to keep inventory.
    Several other important events happened. The weather became 
extremely cold and stayed extremely cold for several weeks. 
This led to a rapid increase in demand. Further, in the 
northeast, there are many interruptible consumers of natural 
gas. When the weather gets cold, many of these large gas 
consumers are switched to oil, thus the demand not only 
increased among our normal customer group, we added many new, 
but temporary customers. For my company, our volume in the 
Bronx increased over 400,000 gallons, as we began supplies city 
schools, hospitals, and colleges. This is an increase of 30 
percent.
    I would like to describe some of the bright spots. First, 
we took care of our customers and made sure they stayed warm, 
despite tight conditions. Second, our government agencies 
responded effectively. LIHEAP funding was released, so that low 
income families would not go without heat. The Department of 
Transportation issued emergency waivers to the hours of service 
regulations. The Coast Guard acted quickly to keep the water 
ways free of ice. The Department of Energy worked with the 
Small Business Administration, to develop and publicize bridge 
loans for heating oil retailers.
    As we move away from the crisis, we would encourage this 
committee to carefully consider ways of minimizing this type of 
problem. I would like to offer a number of suggestions. The 
Petroleum Marketer's Association of America would recommend 
that legislation be enacted, ensuring that the depreciation 
period for tanks is 5 years. Representative Crane has 
introduced a bipartisan bill to accomplish this, H.R. 2429, and 
we would encourage the House to enact this measure.
    The best way to have markets work is to have informed 
consumers, making intelligence choices on how to heat their 
water and their homes. Consumers, who use energy efficient 
equipment, will help reduce the cost of their energy bills 
every year. The Senate has enacted legislation----
    Mr. Barton. If you could summarize in the next 1 minute, 
I'd really appreciate it. I know you've got a lot and you 
waited a long time.
    Mr. D'Arco. That's quite all right. I just thank you for 
the opportunity----
    Mr. Barton. You've still got a minute, so----
    Mr. D'Arco. Well, okay. The Senate has enacted legislation, 
S. 348, which would provide consumers with this information and 
would, also, authorize funding to develop new technologies. The 
heating oil industry has vigorously supported S. 348 and H.R. 
380 for several years, and would encourage all members of the 
subcommittee to support this bill. PMAA, also, believes that 
more and better information regarding oil markets can be 
provided by the Department of Energy. We believe that H.R. 3662 
may be meritorious and should be considered by the committee. 
PMAA would, also, encourage the Congress to provide funding for 
oil heat research and development. The PMAA would recommend 
that funding of $1.2 million be provided for this program in 
fiscal year 2001.
    PMAA, also, believes that the markets and the control that 
OPEC has over consumers in America results from a lack of 
domestic production and increase refining course in the United 
States. Congress should encourage domestic production of new 
crude oil reserves. Additionally, Congress should closely 
examine the efforts of the Environmental Protection Agency, to 
alter the sulphur levels in diesel fuel. These changes may 
result in additional supply and price problems.
    Thank you for the opportunity to testify.
    [The prepared statement of Peter D'Arco follows:]
Prepared Statement of Peter D'Arco, Vice President, S.J. Fuel Company, 
      on Behalf of The Petroleum Marketers Association of America
    Thank you Mr. Chairman and committee members. I am Peter D'Arco and 
I am the Vice President and Chief Operating Officer of SJ Fuels. We are 
a third generation company located in Brooklyn New York and deliver 
fuel to nearly 5000 locations. Earlier this year, dealers from Staten 
Island and Brooklyn visited Mr. Fossella to discuss with him what was 
going on in the industry. I am pleased that the Chairman felt that the 
entire subcommittee should be similarly briefed. PMAA represents 
heating oil retailers throughout the country, as well as distributors 
of gasoline and heating oil. Today, I will describe the retailer 
perspective on the price increases and offer some suggestions on what 
can be done to avoid a repetition of the extreme price increase of 
January and February.
    Before beginning I would like to join the Chairman and other 
members in expressing concern for consumers. The high prices and cold 
weather that occurred earlier this year will affect many of the working 
poor and middle class who lack excess disposable income. Fortunately, 
prices have returned to more normal levels throughout the northeast and 
the last couple of warm weeks have allowed the industry to recover. 
Thus, the price increases should have a limited long term impact on 
heating oil consumers.
    As you can imagine, late January and early February were very 
trying times for my company and me. I know my experience was not 
unique. First, as the temperature dropped, we had to pick up the pace 
at the company, and nearly all of my employees began working round the 
clock, and many had to work seven days a week to keep up with the 
increased demand. This was coupled with rapidly increasing costs which 
significantly stretched the credit lines of my business and many 
similarly situated businesses. Finally, there were many unhappy 
customers, and we had to spend a lot of time explaining the situation 
to them.
    As you can imagine, a price run up like this is a disaster for my 
company. Expenses associated with overtime skyrocketed, my lines of 
credit have been stretched, and many consumers have delayed payments. 
Additionally, because of lack of product in the market, we occasionally 
had to deliver fewer gallons to individual homes so that we could 
provide product to all our customers. These "short deliveries" 
significantly reduced delivery efficiencies.
    Consumers of heating oil are upset by the increased prices. 
However, throughout the 90's we have provided superior services and 
prices. The lower cost of heating oil in New York has been shown by the 
statistics developed by Energy Information Administration and the New 
York State Energy Research and Development Administration. I hope that 
consumers do not change supplier or to another fuel based on a 
temporary price increase last month, but rather look at the last 
decade.
    In my discussions with other dealers and suppliers, it became 
apparent that there are two main reasons that this crisis occurred. Low 
inventories and a backwardated market. Backwardization is a term used 
to describe what happens when the market perceives product prices will 
be lower in the future. For example, if you buy a gallon of oil for a 
dollar today, the market is saying that if you sell it in the future 
you will receive less than a dollar. In December and January the market 
was backwardated at the crude level as well as the product level. 
Taking on inventory in a backwardated market means that you have high 
price inventory, and will almost inevitably lead to losses.
    The result of this behavior is lean inventories. And unfortunately, 
as inventories become lean, there is a greater chance of price 
volatility as there is a limited amount of supply in storage to meet 
demand.
    As the inventories became lean, a confluence of events occurred. 
First, the weather became extremely cold and stayed extremely cold for 
several weeks. While this winter has not even been as cold as normal, 
the latter half of January and the first weeks of February were far 
colder than normal. This led to a rapid increase in demand. Further, in 
the northeast, there are many interruptible consumers of natural gas. 
When the weather gets cold, many of these large commercial and 
industrial gas consumers were switched to oil. Thus, the demand not 
only increased among our normal customer group, we added many new, but 
temporary, customers. The Department of Energy is now studying this 
issue, and we are looking forward to their analysis as to how we can 
work with these industrial users to minimize their impact on our 
traditional customers.
    What happened on the supply side has also now been described to the 
industry by the press and our suppliers. Apparently, there were a 
number of refinery problems that prevented normal production in the 
critical winter months reduced supply.
    There are a few bright spots that did come out of this crisis. 
First, we took care of our customers and ensured that they received 
product, despite tight conditions. Second, it is our opinion that our 
government agencies responded effectively. LIHEAP funding was released 
so that low-income families would not go without heat. The Department 
of Transportation issued emergency waivers to the hours of service 
regulations. The Coast Guard acted quickly to keep the waterways free 
of ice for the heating oil barges on the Hudson River and other 
waterways in the northeast. The Department of Energy worked with the 
Small Business Administration to develop and publicize bridge loans for 
heating oil retailers.
    As we move away from the crisis, we would encourage this committee 
to carefully consider legislation which might lessen the impact of the 
volatile oil markets on consumers in the northeast. I would like to 
offer a number of suggestions that have been discussed in our industry. 
We believe that we should take steps to improve the tax structure for 
those of us in the industry that store product. As you know, the 
regulations issued by the Environmental Protection Agency and state and 
local agencies discourage storing product. As a result, there have been 
sharp reductions in storage capacity in the northeast and throughout 
the country. Thus, when the weather turns colder there is less 
available oil in the market for distribution. As a result, spot prices 
drive the market, rather than the prices of stored product. To 
encourage the construction of storage, PMAA would recommend that the 
tax code be amended to provide economic incentives for storing 
petroleum products.
    Currently there is discussion regarding the appropriate 
depreciation schedule for aboveground storage tanks. If they are 
classified as personal property, the depreciation period is five years, 
if real property, the depreciation schedule is 15 years. PMAA would 
recommend that legislation be enacted ensuring that the depreciation 
period is five years. Representative Crane has introduced a bipartisan 
bill to accomplish this, H.R. 2429, and we would encourage the House to 
enact this measure.
    PMAA would also recommend considering the use of the investment tax 
credit as a method to encourage construction of new tanks.
    PMAA also believes that the best way to have markets work is to 
have informed consumers that make informed and intelligent choices on 
how to heat their water and their homes. Consumers by making wise 
purchasing decisions and utilizing energy efficient equipment will help 
reduce the cost of their energy bills and reduce our reliance on 
imported energy. The Senate has enacted legislation, S. 348, which 
would provide consumers with this information and would also authorize 
funding to develop new technologies. A similar bill passed the House in 
1998, and we would encourage this committee to consider S. 348 
expeditiously. We believe this bill will provide the industry with 
tools to ensure consumers are using modern and efficient equipment and 
taking steps to maintain their equipment at the highest efficiency 
levels. Further, this bill provides the funds necessary to validate the 
energy efficiency of products and maintenance techniques, which should 
aid consumers. I have vigorously supported both S. 348 and its 
companion bill, H.R. 380, for several years and would encourage all 
members of the subcommittee to support this bill.
    PMAA also believes that more and better information regarding oil 
markets can be provided by the Department of Energy. Each year PMAA 
hosts a conference where international oil markets are discussed, 
additionally PMAA participates in the Department of Energy's Winter 
Fuels Conference. However, we believe that improved information 
dissemination would have lessened the impact of the crisis. We believe 
that H.R. 3662 may be meritorious and should be considered by the 
Committee.
    Maintaining waterways has been a traditional function of the Coast 
Guard. Prior to the crisis, there was concern that the Coast Guard 
would not have adequate resources to ensure waterways in the northeast 
were open. The Coast Guard responded admirably as the weather became 
severe and they should be commended. We would encourage the Congress to 
review the Coast Guard's equipment and operating abilities for future 
crisis.
    PMAA would also encourage the Congress to provide funding for 
oilheat research and development. For many years, the Department of 
Energy has provided $1 million for energy research and development for 
oilheat consumers. This research has been the foundation for the 
development of new equipment and better service. Over time, this 
research has improved the efficiency of oilheat equipment. 
Additionally, a curriculum has been developed to educate service 
personnel on how to reduce oil consumption. In recent years, the 
funding has been reduced, and in the 2001 budget request no funding has 
been requested for this program. Thus, the 14 million households that 
use oilheat in the northeast do not benefit from the nearly $100 
million that the Department of Energy invests in research. PMAA would 
recommend that funding of $1.2 million be provided for this program in 
FY 2001.
    In addition to these ideas, there are several initiatives being 
considered to increase the amount of stored oil in the northeast. PMAA 
believes that objective is worthwhile, but is concerned that these 
measures may not achieve their objectives of increasing supply and 
minimizing price volatility. Therefore, we encourage the Congress to 
defer a decision on those matters until the Department of Energy 
completes a full analysis of this winter's problems and the possible 
impacts of the proposed initiatives on improving the supply situation. 
We must ensure that the remedy we select directly benefits the oilheat 
consumer.
    PMAA also believes that the tight oil markets and the control that 
OPEC has over consumers in America results from a lack of domestic 
production and increased refining costs in the United States. We 
believe that the Congress should carefully consider legislation that 
would encourage domestic production of new crude oil reserves. 
Additionally, we would encourage the Congress to more closely examine 
the efforts of the Environmental Protection Agency to alter the sulfur 
levels in diesel fuel. PMAA is very supportive of the Agency's efforts 
to improve the fuel by reducing sulfur. However, the contemplated 
levels are likely to reduce refinery capacity below acceptable levels. 
Additionally, there is now consideration of adding a third diesel fuel 
which would reduce transportation efficiencies and likely reduce the 
amount of diesel and heating oil in the market.
    I thank you for this opportunity to testify.

    Mr. Barton. Thank you, Mr. D'Arco. I really do apologize to 
this panel, that we can't really ask you a lot of questions, 
because I think you would be very illuminating. We will provide 
those questions for the record. This is not the only thing this 
subcommittee is going to do. We're going to be working with the 
Senate. We work with the administration. And we may do another 
hearing on this. We may move to do some sort of a working group 
that we put together on a bipartisan basis.
    I do want to thank you for your testimony. Before I close 
the hearing, I want to, also, put on the record that the Air 
Transport Association, the Interstate Natural Gas Association, 
the Natural Gas Supply Association, and the Owner/Operator 
Independent Service Associations asked to testify. As you can 
tell, we ran out of room at the table, but their statements, if 
they give them to the committee in the requisite amount of 
time, will be included in the formal hearing record.
    Thank you. You are released and the hearing is adjourned.
    [Whereupon, at 3:10 p.m., the subcommittee was adjourned.]
    [Additional material submitted for the record follows:]
     Prepared Statement of the Air Transport Association of America
    Mr. Chairman, the Air Transport Association of America appreciates 
the opportunity to submit this statement on the price fluctuations in 
oil markets.
    ATA's member airlines collectively account for approximately 95 
percent of the revenue passenger miles and freight ton-miles flown in 
the United States. With fuel representing our second largest item of 
operating expense, the recent fuel price run up is particular cause for 
concern in the airline industry.
Scope of the problem
    Like home heating oil customers, motorists, and truckers, the 
airline industry is suffering from spiraling fuel price increases. The 
March 1, 2000 vs. March 1, 1999 spot market jet fuel price increase is 
169%, from 31 to 83.25 cents per gallon. On an annualized basis this 
amounts to a $10 billion fuel cost increase, more than doubling the 
cost of fuel purchased by the airlines in 1999.
    But far greater impact from the fuel cost increase falls on our 
customers and employees. For example, even if the average fuel price 
for all of 2000 were 75 cents per gallon, air carriers would need to 
increase fares by $32.50 just to cover these fuel cost increases. For 
many passengers, particularly leisure travelers, a $32.50 fare increase 
for each ticket is the difference between making a trip and staying 
home. Based on traditional elasticity measures in the industry, a 
$32.50 fare increase, would result in about 50,000,000 fewer 
enplanements, or 18,000,000 passengers foregoing trips. With 18,000,000 
fewer passengers, airlines would be significantly overstaffed, and 
roughly 30,000 jobs would be expendable. Such a scenario also would 
result in service on marginally profitable routes--often to smaller 
communities--being dropped, further exacerbating adverse economic 
conditions in these communities.
    The airlines, their customers, and their employees cannot afford 
the effects of these fuel price increases. The US economy cannot afford 
these types of increases either. The last time we faced this kind of 
devastating energy price increase, in 1990 and 1991, almost half the 
airline industry filed for protection under chapter 11 of the 
bankruptcy code, long standing airlines went out of business, more than 
100,000 employees lost their jobs, and the industry went into a 
financial tailspin from which it took years to recover.
    Congress needs to take action now to alleviate the crushing burden.
Energy Policy
    The source of our problem is a national energy policy rooted in 
reliance on OPEC controlled crude oil. As long as oil supply, and 
therefore oil pricing, is dictated by OPEC, we remain at its mercy. 
International jawboning is not a substitute for energy policy. 
Cajoling, begging, and threatening foreign governments to produce more 
oil is not an energy policy worthy of the United States. And while 
targeted assistance to low income individuals who cannot cope with the 
price shocks is clearly understandable, it represents a failure to 
establish an enduring energy policy framework. Moreover, tax policies 
that burden oil consumers and disincentives to domestic oil production, 
are not the hallmarks of a sound energy policy.
    ATA recommends both a short term and lone term course to alleviate 
the cost burden that falls so heavily on the US airline industry, and 
other oil dependent consumers.
    Short term--As a modest demonstration of a national commitment to 
bringing oil prices down, the 4.3 cents per gallon ``deficit 
reduction'' tax adopted in 1993 must be repealed. This tax, which 
currently adds $620 million annually to the airlines' fuel cost burden 
made little sense when it was adopted and makes even less today in an 
era where there is no ``deficit''. Its immediate repeal will have both 
substantive and symbolic value. Averaged over the number of customers 
who fly, it amounts to an about $1 per passenger. But more importantly, 
it sends an important signal that discriminatory taxation is not the 
United States' tool of choice in dealing with energy.
    Long term--The US must foster environmental and financial 
incentives for domestic oil exploration, production and refining. If 
even a small portion of our untapped reserves were made available for 
consumption, OPEC's stranglehold on the US economy would be lessened. 
Additionally, it makes little sense to beseech foreign governments to 
produce more oil while domestic reserves are so substantial.
Conservation Measures
    Throughout the course of civil aviation, airlines have introduced 
fuel saving measures. We have done so well; in fact, there isn't much 
room for improvement in the current crisis. Changes in cruise speed, 
use of flight simulators, sophisticated flight planning systems, 
increasing load factors and the introduction of newer, more fuel 
efficient aircraft has resulted in improved fuel efficiency in excess 
of 130% since the first OPEC instigated fuel crises some 26 years ago. 
We currently obtain the equivalent of 38 miles per passenger gallon, a 
figure that compares favorably with even the most fuel-efficient 
automobile.
    But there are only so many efficiencies that can be squeezed out.
    It's time for the Government to develop a sound energy policy that 
serves the American people. It's time for the Government to develop an 
energy policy that shields the US from the overwhelming economic power 
of OPEC. And it's time that the government to develop an energy policy 
that looks to domestic solutions to our reliance on foreign sources of 
oil. Regrettably, we may be a generation late in doing so.
    In the meantime, the Air Transport Association urges the Congress 
to repeal the 4.3 cents per gallon ``deficit reduction'' fuel tax now! 
Punishing consumption of energy has no role in the a national energy 
policy.
                                 ______
                                 
    Prepared Statement of Hon. George W. Gekas, a Representative in 
                Congress from the State of Pennsylvania
    Mr. Chairman, thank you very much for permitting me to submit this 
statement for this important hearing. I regret that I am unable to 
appear in person. I want to express my sincere thanks for holding this 
hearing on price fluctuations in oil markets.
    As you know, the price of oil in the United States, particularly 
the Northeast, has increased at an astounding rate over the last few 
months. Unfortunately, numerous predictions indicate that gasoline 
prices could climb to over $2.00 a gallon. This steep rise in oil 
prices may lead to inflation, and the accompanying severe consequences 
for our current robust economic growth.
    The people of Pennsylvania have suffered because of the recent 
increase in heating oil and diesel fuel prices. As a member of Congress 
representing Central Pennsylvania, I am particularly concerned about 
this issue. Specifically, my district sits at a unique ``crossroads'' 
position in the eastern seaboard and is home to a significant 
warehousing/distribution and transportation companies.
    Pennsylvania, like so many other states in the Northeast, also has 
a large population that is dependent on heating oil, this price 
increase has hit pensioned seniors on fixed incomes and families on 
tight budgets particularly hard.
    As everyone on the committee knows, the reason for the recent 
increase in the price of heating oil and diesel fuel is that demand is 
high and supply is low. Unusually cold January weather increased demand 
significantly above that experienced in recent years.
    On the supply side, a significant portion of the increase in the 
price of oil is the result of international events that are beyond the 
control of the Congress or the people of the United States. For 
example, OPEC has pursued a production quota among its member states 
that has had a dramatic effect on the price of oil. In order to raise 
global oil prices, OPEC has advised its member countries to cut 
production to a level that would sufficiently limit supplies in order 
to raise petroleum profits for member countries. Simply put, the OPEC 
cartel dictates world oil prices. Since January, OPEC has decreased its 
oil production by 4.2 million barrels a day from this time last year--
about 13% lower than January 1998. As a result, a barrel of oil 
increased in price from $12.33 a barrel last year to nearly $31.00 a 
barrel at the close of trading yesterday. This price increase at the 
industry level has been passed directly on to consumers at gas 
stations, trucking companies, utilities and other fuel consumers, and 
has been felt throughout the economy.
    OPEC's behavior illustrated by the recent rise in oil prices 
demonstrates the dangers of shutting down America's domestic oil 
production. However, this Administration has pursued policies that have 
increased our country's dependency on foreign oil, especially OPEC. For 
example, this Administration has continued to put unnecessary 
restrictions on oil exploration and extraction. While there are many 
untapped reserves in the U.S., restrictions that prevent companies from 
extracting this oil.
    Mr. Chairman, today I would like to thank you for having the 
courage to investigate the dramatic increase in oil prices. I would 
also like to welcome to this hearing Samuel Farruggio, President of 
Farruggio Express Trucking, Inc., of Bristol, Pennsylvania. Although he 
is not a constituent of mine, his concerns about the effects of high 
oil prices are shared by people throughout Pennsylvania. Hard working 
entrepreneurs like Mr. Farruggio are among the hardest hit by these 
drastic price increases.
    Thank you again Mr. Chairman for allowing me to submit this 
statement.
                                 ______
                                 
Prepared Statement of Hon. Lamar S. Smith, a Representative in Congress 
                        from the State of Texas
    Mr. Chairman, thank you for holding this important hearing on Price 
Fluctuations in Oil Markets. I appreciate the opportunity to submit 
testimony and regret that I cannot be present because of a Judiciary 
Committee meeting.
    Our best defense against instability and volatility in the world 
oil market is an energy policy that produces a healthy domestic oil and 
gas industry. For too long, the Administration has pursued a policy of 
cheap foreign oil.
    Domestic producers continue to recover from one of the worst price 
crashes in history. This has been followed by some of the highest oil 
prices in recent years. These wild fluctuations are not good for 
anyone.
    The United States now imports 55 percent of our petroleum products, 
up from 45 percent in 1991, and just 35 percent in 1973. We are 
becoming increasingly dependent on foreign oil even though the 
Administration found, in 1995 and in a number of other years, that 
increasing oil imports is a threat to national security.
    Rather than develop and implement a national energy policy, the 
Administration continues to rely on foreign oil. Most recently it sent 
Secretary of Energy Richardson to other oil producing nations to ask 
them to increase their output.
    In particular, Iraq has benefited from the United States' 
dependence on foreign oil. The United Nations ``Oil for Food Program'' 
has enabled Iraq to rebuild its facilities and become the swing 
producer on the world market. Iraq's new market power leaves the United 
States even more vulnerable to the whims of Saddam Hussein.
    Just over 1 year ago, when producers in the United States faced 
some of the lowest prices in history, the Administration did nothing. 
This industry lost over 65,000 jobs during the most recent downturn. 
The steel industry, which also faced tough times, lost about 10,000 
jobs. In order to help the steel industry, the Administration proposed 
$300 million in tax incentives. Unfortunately the President vetoed the 
tax reform bill that included similar tax relief for the domestic 
petroleum industry.
    Independent producers are the backbone of the industry. These 
wildcatters drill 85 percent of the wells and produce about 40 percent 
of the domestic oil. These risk takers typically plow most of their 
income back into the business, always looking for the next producing 
well. They are hardest hit by the boom and bust cycle since typically 
they do not have other operations on which to rely for cash flow.
    The industry's infrastructure must be protected. When wells are 
shut in, that production is lost forever. Marginal wells, wells that 
produce less than 15 barrels a day, are particularly vulnerable to low 
oil prices. Individually these wells produce very little, however their 
aggregate oil production is 20 percent of our nation's total.
    Oil production today is less than it was in 1986. In 1986 the 
United States produced about 8.5 million barrels a day and in 1997 that 
number dropped to below 6 million barrels a day. We need to enact 
policies that will increase our domestic production.
    Many in Congress and the Administration continue to oppose opening 
some of our resources to oil and gas drilling. The Arctic National 
Wildlife Reserve (ANWR) holds the potential to lessen our reliance on 
imported oil. It is estimated that a small portion of the reserve could 
hold 16 billion barrels of oil.
    Drilling is also banned off much of America's coasts, further 
limiting access to potentially large reserves. Without allowing, much 
less encouraging, domestic exploration and production we cannot hope to 
lessen our dependence on foreign oil.
    Some in Congress want to tap into the Strategic Petroleum Reserve 
(SPR) to combat higher home heating oil and gasoline prices. I strongly 
oppose this action. The SPR has statutorily defined uses and 
manipulating markets is not one of them. The SPR was created for use 
during crude oil supply emergencies.
    Congress should pass and the President should sign a number of oil 
and gas incentives to support the domestic industry. I support enacting 
a marginal well tax credit that will help keep these wells on line when 
prices drop. I support other tax relief provisions such as a percentage 
depletion expansion; clarification that delay rental payments are 
deductible as ordinary and necessary business expenses; and the 
expensing of geological and geophysical expenses among other things. 
Many of these provisions were included in last year's tax reform 
legislation that was vetoed by the President.
    As we enter the next century we must develop a national energy 
policy that will reduce dependence on foreign oil and stabilize prices.

                              
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