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GASOLINE PRICES, OIL COMPANY PROFITS, AND

THE AMERICAN CONSUMER

HEARING

BEFORE THE

SUBCOMMITTEE ON OVERSIGHT AND

INVESTIGATIONS

OF THE

COMMITTEE ON ENERGY AND

COMMERCE

HOUSE OF REPRESENTATIVES

ONE HUNDRED TENTH CONGRESS

FIRST SESSION

MAY 22, 2007

Serial No. 110–51

(

Printed for the use of the Committee on Energy and Commerce

energycommerce.house.gov

COMMITTEE ON ENERGY AND COMMERCE

JOHN D. DINGELL, Michigan, Chairman

HENRY A. WAXMAN, California

EDWARD J. MARKEY, Massachusetts

RICK BOUCHER, Virginia

EDOLPHUS TOWNS, New York

FRANK PALLONE, JR., New Jersey

BART GORDON, Tennessee

BOBBY L. RUSH, Illinois

ANNA G. ESHOO, California

BART STUPAK, Michigan

ELIOT L. ENGEL, New York

ALBERT R. WYNN, Maryland

GENE GREEN, Texas

DIANA DEGETTE, Colorado

Vice Chairman

LOIS CAPPS, California

MICHAEL F. DOYLE, Pennsylvania

JANE HARMAN, California

TOM ALLEN, Maine

JAN SCHAKOWSKY, Illinois

HILDA L. SOLIS, California

CHARLES A. GONZALEZ, Texas

JAY INSLEE, Washington

TAMMY BALDWIN, Wisconsin

MIKE ROSS, Arkansas

DARLENE HOOLEY, Oregon

ANTHONY D. WEINER, New York

JIM MATHESON, Utah

G.K. BUTTERFIELD, North Carolina

CHARLIE MELANCON, Louisiana

JOHN BARROW, Georgia

BARON P. HILL, Indiana

JOE BARTON, Texas

Ranking Member

RALPH M. HALL, Texas

J. DENNIS HASTERT, Illinois

FRED UPTON, Michigan

CLIFF STEARNS, Florida

NATHAN DEAL, Georgia

ED WHITFIELD, Kentucky

BARBARA CUBIN, Wyoming

JOHN SHIMKUS, Illinois

HEATHER WILSON, New Mexico

JOHN B. SHADEGG, Arizona

CHARLES W. ‘‘CHIP’’ PICKERING,

Mississippi

VITO FOSSELLA, New York

STEVE BUYER, Indiana

GEORGE RADANOVICH, California

JOSEPH R. PITTS, Pennsylvania

MARY BONO, California

GREG WALDEN, Oregon

LEE TERRY, Nebraska

MIKE FERGUSON, New Jersey

MIKE ROGERS, Michigan

SUE WILKINS MYRICK, North Carolina

JOHN SULLIVAN, Oklahoma

TIM MURPHY, Pennsylvania

MICHAEL C. BURGESS, Texas

MARSHA BLACKBURN, Tennessee

PROFESSIONAL STAFF

DENNIS B. FITZGIBBONS, Chief of Staff

GREGG A. ROTHSCHILD, Chief Counsel

SHARON E. DAVIS, Chief Clerk

BUD ALBRIGHT, Minority Staff Director

SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS

BART STUPAK, Michigan, Chairman

DIANA DeGETTE, Colorado

CHARLIE MELANCON, Louisiana

Vice Chairman

HENRY A. WAXMAN, California

GENE GREEN, Texas

MIKE DOYLE, Pennsylvania

JAN SCHAKOWSKY, Illinois

JAY INSLEE, Washington

JOHN D. DINGELL, Michigan (ex officio)

ED WHITFIELD, Kentucky

Ranking Member

GREG WALDEN, Oregon

MIKE FERGUSON, New Jersey

TIM MURPHY, Pennsylvania

MICHAEL C. BURGESS, Texas

MARSHA BLACKBURN, Tennessee

JOE BARTON, Texas (ex officio)

(II)

(III)

C O N T E N T S

Page

Hon. Bart Stupak, a Representative in Congress from the State of Michigan,

opening statement ................................................................................................ 1

Hon. Ed Whitfield, a Representative in Congress from the Commonwealth

of Kentucky, opening statement ......................................................................... 4

Hon. Gene Green, a Representative in Congress from the State of Texas,

prepared statement .............................................................................................. 6

Hon. Jay Inslee, a Representative in Congress from the State of Washington,

opening statement ................................................................................................ 7

Hon. Joe Barton, a Representative in Congress from the State of Texas,

opening statement ................................................................................................ 8

Prepared statement .......................................................................................... 10

Hon. John D. Dingell, a Representative in Congress from the State of Michigan, opening statement ....................................................................................... 12

Hon. Charlie Melancon, a Representative in Congress from the State of Louisiana, opening statement ................................................................................... 14

Hon. Tim Murphy, a Representative in Congress from the Commonwealth

of Pennsylvania, opening statement ................................................................... 15

Hon. Marsha Blackburn, a Representative in Congress from the State of

Tennessee, opening statement ............................................................................ 17

WITNESSES

William E. Kovacic, Commissioner, Federal Trade Commission ......................... 19

Prepared statement .......................................................................................... 22

Answers to submitted questions ...................................................................... 46

Guy F. Caruso, Administrator, Energy Information Administration .................. 53

Prepared statement .......................................................................................... 56

Answers to submitted questions ...................................................................... 67

Stanley F. Pruss, deputy director, Michigan Department of Environmental

Quality .................................................................................................................. 70

Prepared statement .......................................................................................... 72

Thomas J. McCool, director, Center for Economics, Applied Research and

Methods, U.S. Government Accountability Office ............................................. 73

Prepared statement .......................................................................................... 75

Tyson Slocum, director, Public Citizen’s Energy Program ................................... 105

Prepared statement .......................................................................................... 108

Answers to submitted questions ...................................................................... 134

W. David Montgomery, vice president, CRA International .................................. 136

Prepared statement .......................................................................................... 139

Answers to submitted questions ...................................................................... 149

SUBMITTED MATERIAL

Geoff Sundstrom, director, public affairs, AAA, Heathrow, FL, submitted

statement .............................................................................................................. 102

Briefing memorandum to Subcommittee on Oversight and Investigations

members and staff ................................................................................................ 160

‘‘Oil Industry Profit Review 2005’’ CRS Report for Congress, updated January

12, 2007 ................................................................................................................. 172

‘‘Refiners Cash in on High Gasoline Prices’’, Ana Campoy, the Wall Street

Journal, May 18, 2007 ......................................................................................... 187

‘‘Gas Prices: How are they Really Set?’’Permanent Subcommittee on Investigations, Committee on Governmental Affairs, United States Senate ........... 190

Hon. Jennifer M. Granholm, Governor, State of Michigan, submitted testimony ...................................................................................................................... 207

Page

IV

‘‘Energy Markets: Effects of Mergers and Market Concentration in the U.S.

Petroleum Industry’’ May 2004, U.S. General Accounting Office, May 2004,

is on file in the subcommittee’s office.

‘‘Investigation of Gasoline Price Manipulation and Post-Katrina Gasoline

Price Increases’’ Federal Trade Commission, spring 2006, is on file in the

subcommittee’s office.

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GASOLINE PRICES, OIL COMPANY PROFITS,

AND THE AMERICAN CONSUMER

TUESDAY, MAY 22, 2007

HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON OVERSIGHT

AND INVESTIGATIONS, COMMITTEE ON ENERGY AND COMMERCE, Washington, DC.

The subcommittee met, pursuant to call, at 12:59 p.m., in room

2123, Rayburn House Office Building, Hon. Bart Stupak (chairman) presiding.

Present: Representatives Melancon, Green, Inslee, Dingell,

Whitfield, Walden, Murphy, Blackburn, and Barton.

Staff present: John Arlington, Kyle Chapman, Alan Slobodin,

Peter Spencer, Shannon Weinberg, Brian McCullough, Will Carty,

Matthew Johnson, and John Stone.

OPENING STATEMENT OF HON. BART STUPAK, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF MICHIGAN

Mr. STUPAK. This hearing will come to order. Today we have a

hearing on gasoline profits. Each Member will be recognized for 5

minutes

The American public is paying record high gas prices while Big

Oil companies are reaping record profits. Across our Nation, people

are struggling to pay to fill their gas tanks and their frustration

with gas prices is boiling over. In my vast rural district, my constituents have to travel the longest distances to and from work,

and there are little or no public transportation options. Many people can’t afford higher gas, so they are putting it on credit cards

and digging deeper and deeper into debt.

I was at a funeral last Saturday, and when the monsignor greeted me, he said, ‘‘My God, Bart, you have to do something about

these gas prices.’’ The monsignor explained how gas was $3.28 per

gallon when he drove to the rectory in the morning and it jumped

21 cents by the time he left that night. In 10 hours, a gas station

had raised its prices 21 cents to $3.49 per gallon. That was on Saturday. Our collective prayers must have worked, because on Sunday gas prices dropped 10 cents to $3.39 per gallon. In 4 days, gas

prices went up 21 cents, then dropped 10 cents, and remain at

$3.39 today in northern Michigan.

I received a call from a constituent who owns several gas stations

throughout northern Michigan and Wisconsin. The station owner

told me how he had to raise gas prices 15 cents overnight, and his

competitor in the same town raised his prices 16 cents. He added

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that there is no excuse for his supplier to raise prices other than

the fact that refineries continue to raise their prices dramatically.

Today’s hearing will explore why gas prices have continued to be

at record high levels, even as the price for a barrel of crude oil is

lower than last year. We will be investigating the factors that go

into the price of a gallon of gas and whether or not gouging is occurring in the oil and gas industry.

According to the Energy Information Administration, EIA, the

average price of gasoline from 2002 through 2007 has more than

doubled, while the consumer price index has risen only 13.6 percent. According to EIA’s Web site, the nationwide average for gasoline is now $3.22 per gallon. This is higher than any time in our

history, and we have yet to reach the peak driving season for 2007.

The Government Accounting Office has estimated that each addi- tional 10 cents per gallon of gas adds $14 billion to Americans’ annual gas bill. In effect, this is an enormous transfer of wealth, billions of dollars from consumers to the oil industry.

Many people wonder just what factors make up the price of a

gallon of gasoline and what is reasonable profit for each company

along the supply and distribution chain. Why do we have wild fluctuation in the price of gas from day to day, week to week?

In answer to some of these questions, we know that the price of

crude oil and refinement of oil into gasoline make up 75 percent

of the price of gasoline.

Big Oil is often quick to blame world crude prices, but that argument doesn’t appear to be the full story. In April 2007, a barrel of

oil cost $63. In April 2006, a barrel of oil was $70. Despite the fact that crude oil was $7 cheaper per barrel than

last year, gas prices are approximately 50 percent higher. Clearly,

this year’s run-up in gas prices has not been the result of crude oil

prices but some other factor or factors.

Many have pointed to the oil refineries as the most recent cause

for high gas prices. Since 1980, more than 200 U.S. refineries have

been closed, and a new refinery has not been built since 1976. In

1981, U.S. refineries were operated by 189 different companies.

Today, the remaining refineries are operated by about 60 companies. For the past 25 years, more than 50 percent of the refineries

have been closed, and the number of companies owning refineries

is less than one-third of what it was.

We will hear today from the GAO, Government Accounting Office, about their 2004 study, which confirmed that these mergers

have caused higher gas prices.

Historically, the average profit margin between a barrel of crude

oil and a barrel of refined gas, known as the crack spread, has been

around $8 to $9 per barrel, or 20 cents profit per gallon of refined

gasoline.

Today, the profit margin is $30 a barrel, as reported in a May

18, 2007 Wall Street Journal article.

Based on a $3 gallon of gas, that is roughly 70 cents in refinery

profits for every gallon of gas. In fact, according to the oil industry

publication Platts, the crack spread on the June futures market is

nearly $36 a barrel.

Unfortunately, $4 a gallon of gas is right around the corner for

America’s consumers.

3

As a result of these enormous profit margins, in the first 3

months of 2007, Valero, the Nation’s largest refinery company, announced profits of $1.1 billion, up 30 percent over last year. ExxonMobil refineries made $1.9 billion in the first quarter of 2007. Chevron reported over $1.6 billion in refining profits.

These high refining margins have led to record profits throughout the oil industry. During the first three months of 2007, Royal

Dutch Shell’s profits were $7.3 billion. Chevron made $4.7 billion.

ConocoPhillips reported more than $3.5 billion. And ExxonMobil’s

total profits for the first quarter were more than $9.2 billion.

In order to crack down on price gouging, the Federal Trade Commission needs to define when the oil industry is gouging the American consumers.

I have introduced legislation, the Federal Price Gouging Prevention Act, H.R. 1252, to protect American consumers from being

gouged at the pump.

Similar to my legislation last year, H.R. 1252 would give the

Federal Trade Commission the authority to investigate and punish

those who artificially inflate the price of energy.

The FTC would be empowered to exercise this authority at each

stage of the energy production and distribution supply chain.

Over 120 members have already co-sponsored this legislation,

and I look forward to moving it soon.

In its spring 2006 study on gas prices after Hurricane Katrina,

the FTC found that 23 percent of the refineries, 9 percent of the

wholesalers and 25 percent of the retailers studied had price increases that ‘‘were not substantially attributable to increased cost’’

and ‘‘could not attributed to national market trends.’’

In his concurring statement, FTC Commissioner Jon Leibowitz

admitted that, ‘‘The behavior of many market participants, on balance, leaves much to be desired.’’

According to the Washington Post, after Hurricane Katrina, refinery profits were 255 percent higher than they were the year before, as we show in our chart over there.

While 29 States and the District of Columbia currently have

State price gouging laws, these States typically do not have the resources to go after refineries and oil companies.

Last week, however, Kentucky Attorney General Greg Stumbo

announced that after an 18-month investigation, he has filed suit

against three oil companies he believes gouged Kentucky residents

after Hurricanes Katrina and Rita.

Citing the absence of a Federal price gouging statute, Stumbo is

the first attorney general to file suit against major oil refiners.

While consumers pay record prices, oil companies make record

profits. Unfortunately, the big oil companies are not reinvesting

these record profits into the safety and infrastructure of their refineries.

When I asked British Petroleum’s chairman in a hearing last

week whether cost-cutting pressures could have led to a culture

that discouraged preventative maintenance, his response was, ‘‘It

not only could have, we believe it did.’’

Even with record profits, BP cut preventative maintenance to

save money, which as of yesterday led to another oil pipeline shutdown in Alaska.

4

This reduced preventative maintenance to cut costs so they can

increase profits and corporate executive pay and bonuses jeopardizes the Nation’s most strategic oil supply and risks the health and

safety of workers.

This was most apparent in BP’s Texas City refinery disaster that

killed 15 workers and injured 180 others.

By investigating the factors that go into a gallon of gas, Congress

must work to protect consumers from price gouging and market

manipulation.

I wish to thank all the witnesses today, especially Mr. Pruss,

who will be testifying on behalf of Michigan’s governor, Jennifer

Granholm.

And I look to each and everyone’s testimony.

Last, I will note that we invited four of the major oil companies

to testify, but all of them declined our invitation.

In addition, the head of the President’s Council on Economic Advisors expressed interest in testifying. They were invited, too. But

later, they declined as well.

With that, I would yield to my friend, Mr. Whitfield of Kentucky,

for an opening statement.

We have 81⁄2minutes on votes, to let members know. Let’s get

through Mr. Whitfield’s opening statement. We will go vote. After

that, we have 2-minute votes, so I don’t think it will be that long.

We will probably need about a half hour.

Mr. Whitfield, please?

OPENING STATEMENT OF HON. ED WHITFIELD , A REPRESENTATIVE IN CONGRESS FROM THE COMMONWEALTH

OF KENTUCKY

Mr. WHITFIELD. Mr. Chairman, thank you very much, and we

certainly look forward to this hearing today on gasoline prices.

I must say that many of us on this side—and like all politicians,

there is not any issue of greater interest to us than gasoline prices

and the impact that it is having on the American public. But we

also are quite frustrated by the process involved in this particular

legislation.

I know that, Chairman Stupak, you have been a leader on this

issue for some time, but your bill has been introduced for some

time, and it is our understanding that your bill, with some changes

to it, will be coming to the floor this week for a vote before the Memorial Day recess, and that we have certainly not had any opportunity to see that legislation and do not really have any idea what

the final bill is going to look like.

And I think it is imperative that the American people also—

while they are focused on the profits of major oil companies, that

they also focus on the fact that in 2006, for example, 387 million

gallons of gasoline were consumed each day in America.

In 1970, that figure was 243 million gallons a day were consumed, so that is a 59 percent increase. So the demand for gasoline

continues to escalate in America, and we are consuming more gasoline than any other country in the world.

I would also note that in May 2006, the Federal Trade Commission completed an extensive congressionally mandated investigation to determine whether gasoline prices were being manipulated

5

and to determine whether price gouging actually followed the

events of Hurricane Katrina.

The investigation was extensive. It involved lawyers, economists,

pricing experts and many others, and it went on for many months.

The investigation did not uncover any evidence of manipulation

to increase prices or to manipulate prices but did find limited instances of price gouging by retailers, price gouging as defined by

the statute mandating the investigation. I might say that in that

statute, price gouging was basically looking at prices a month or

so after Katrina and compared it to a month or so before Katrina,

so it was a relatively simplified formula for determining price

gouging. Evidence did show that the price of crude oil is the largest

cost component of gasoline and that that certainly contributes to

gasoline price spikes.

Also, refinery production problems—and we have had four or five

refineries right now that are not at full capacity because of fires

and other production problems. And then we have some low inventories right now.

Now, in your opening statement, Mr. Stupak, you mentioned that

Attorney General Stumbo has filed complaints in Kentucky against

Marathon Oil Company and some others, which is true. Kentucky

does have a State price gouging statute.

But I would also note that these State laws prohibiting price

gouging—none of them have adopted a common definition or standard for price gouging. Every one of them is different. And of course,

we do not have a Federal price gouging statute, and that is, I

know, what your bill is about, and that is what is being considered.

But I would also point out that the Federal Trade Commission

in their report to the Congress advised Congress that if it enacts

a price gouging statute, it is essential that the language be clear

and easy to enforce and included mitigating factors such as market

factors for supply and demand.

And that is why I genuinely believe that the legislation we

passed last year on price gouging—I think Heather Wilson’s language—in which we allowed the Federal Trade Commission and its

experts to define the definition of price gouging and unconscionable

pricing, is actually better than the language of H.R. 1252, which

uses language like unconscionable pricing will include pricing that

is unconscionably excessive, which is pretty vague, pretty broad,

and I think it is going to invite a lot of legal lawsuits.

In addition to that, it indicates that the seller is taking unfair

advantage, unusual market condition. So at least those of us—and

I think every Member of Congress is concerned about price

gouging, but we want a bill that gives us the best opportunity to

address this problem.

And I think that is why many of us are quite concerned that

when this bill goes to the floor, it is going to be on the suspension

calendar, there will not be an opportunity to amend it on the floor,

and we actually are not going to have an opportunity at full committee to deal with it, either.

But I once again want to thank you for your leadership on this

issue, and we certainly look forward to the witnesses today as we

explore this important topic.

Mr. STUPAK. Well, I thank the gentleman from Kentucky.

6

We have up to 10 votes on the floor. The good news is some of

them are 2-minute votes. I would expect we would be back by 2

o’clock.

I hate to inconvenience our witnesses, but we are going to have

to recess until 2 o’clock. Thank you.

Yes, Mr. Green?

Mr. GREEN. Can I do my 5 minutes first?

Mr. STUPAK. You have 2 minutes and 14 seconds left.

OK. We will go do our votes, and we will come back. Thank you.

[The prepared statement of Mr. Green follows:]

PREPARED STATEMENT OF HON. GENE GREEN, A REPRESENTATIVE IN CONGRESS FROM

THE STATE OF TEXAS

Mr. Chairman, thank you for holding this hearing today on gasoline prices, oil

company profits, and the American consumer.

Few issues we debate here in Congress are as personally felt by every consumer

and business in the U.S. as energy prices. Over the past 2 weeks, the average price

of self-serve gasoline rose more than 11 cents for an all-time record of $3.18. Rising

as fast as gas prices is the anger and confusion of the American public who are asking themselves, why am I paying so much for a tank of gas?

I hope today’s panel will help shed some light on this very complex issue so Congress can address the root cause of high energy prices and not move in a direction

that, however well-intentioned, may hurt American consumers.

No one here in Congress likes to see American families struggle to pay higher

prices at the pumps. Families are digging deeper and deeper into their pocket books

for gas, and when prices increase, less money is available for other critical needs

like medicine, groceries, or savings. Unfortunately, driving less sometimes isn’t an

option when moms and dads must drive to work, take kids to school, or go buy groceries. These families must make tough choices, and so too must Congress when facing different policy proposals meant to address our energy security.

Fortunately, we can use history as a guide to tell us what worked and what didn’t

when the U.S. faced rising energy costs.

OPEC nations in the 1970’s placed an embargo on oil shipments to the U.S. which

caused the price of oil to skyrocket here at home. In response, President Nixon instituted a program to control prices and allocate supplies through Government intervention. This program was an abysmal failure. Long lines at the pump and an inefficient gas supply system proved Government interference in free-market processes

only compound—not help—the problem.

Most recently, after Hurricanes Katrina and Rita hit the Gulf Coast region in

2005, average gasoline prices rose close to 50 cents per gallon. Fearing potential

price gouging, Congress directed the Federal Trade Commission (FTC) to conduct

an investigation into nationwide gasoline prices and possible price gouging in the

aftermath of Hurricane Katrina. The FTC concluded that ‘‘the price increases were

predicted by the standard supply and demand paradigm of a competitive market.’’

In fact, the FTC found that wholesale prices ‘‘increased by less than what one would

expect given the losses in production capacity due to the hurricanes.’’ Time after

time, government investigations into price spikes by the FTC and the Department

of Energy have all come to the same conclusion: increases in gasoline prices were

generally explained by market forces of supply and demand, not by market manipulation.

Current petroleum and gasoline prices are set by a complex mix of factors, including global crude prices, increased world and U.S. demand, refinery capacity and

maintenance schedules, gasoline imports, prescriptive fuel mandates, and geopolitical events. Most of these factors are out of industry’s and retailer’s control. For

those that aren’t, I believe the FTC should continue to aggressively pursue anti-competitive conduct or evidence of market manipulation to the fullest extent of the law.

We here in Congress should do all we can to protect consumers, but we should

do so in a way that helps remedy the actual versus the perceived problem.

While there is no quick fix for gasoline prices, we need to evaluate proposals to

promote energy conservation, new alternative and renewable sources of energy, encourage increased refinery capacity, and increase domestic supplies of oil and natural gas resources.

Thank you Mr. Chairman, and I look forward to working with you and other

Members on improving the energy security of the U.S. I yield back.

7

[Recess.]

Mr. STUPAK. We are just waiting for a Member to come back who

has not given their opening statement. There is a couple of them

who will be coming.

When I said 2 o’clock, I should have told you I meant central

time. My district actually has two time zones.

The subcommittee will come to order. We will continue with

opening statements. We will start with Mr. Inslee from Washington

for an opening statement.

OPENING STATEMENT OF HON. JAY INSLEE, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF WASHINGTON

Mr. INSLEE. Thank you. I look forward to this testimony today.

Just a couple of things to say.

I just hope this week the U.S. Congress, while gas prices are

going up, will also rise the Federal Government’s ability to deal

with this issue and pass a bill to give the FTC authority to clearly

and concisively deal with predatory pricing.

If gas prices go up, so should the ability of the Federal Government to deal with predatory pricing to the extent that it exists.

And I am hopeful this week that will be added to the tool box of

our ability to deal with these issues.

But second, I hope that we will look ultimately at some of the

markets that could add to the volatility of gas prices. We have seen

a 60-cent increase just in the last year in the State of Washington.

We now average about $3.44 a gallon when you included taxes.

And when you have volatility, I believe that itself is a problem

for consumers. And I hope that we can take, at the appropriate moment, a look at the markets, the speculative markets, that may be

a cause for this volatility.

But third—and this is an important point that I hope we will

make at some point today—we are going to do some short-term

things to deal with potential predatory pricing issues.

But ultimately, we have got to add competitors to oil and gas in

our transportation sector in order to get a handle on prices.

Long term, we have to give consumers a choice in fuels, because

when we get a choice in fuels, the consumers will be the king, not

just the oil and gas industry, when they pull up to the pump.

Consumers in the next decade ought to have the ability to make

a choice whether they are going to have cellulosic ethanol, not just

corn ethanol, but the second-generation cellulosic ethanol, with flex

fuel vehicles, and a requirement, if necessary, to get the pumps put

in with E–85 pumps.

When that happens, Americans will be king of the pumps, not

just the oil and gas company, because you can pull up to the pump

and make people bid for your service just like people get that right

in Brazil.

And that is why I will be introducing my new Apollo energy

project later. I think it is a significant way to move forward to give

people a choice in fuels.

Second, we ought to have a right to use electricity to fuel our

cars. I drove a car that gets 150 miles a gallon when you use the

first 40 miles to use electricity.

8

When Americans have the ability to use electricity, or cellulosic

ethanol or biodiesel in their cars, they will finally be able to deal

with these increasing prices associated with oil and gas.

And we have to have a comprehensive, aggressive, visionary energy policy in this country to truly break the addiction to oil and

gas in this country. And so I am looking forward to a chance to do

that.

And I will rest at this point.

Mr. STUPAK. I thank the gentleman.

Mr. Barton of Texas for an opening statement, please?

OPENING STATEMENT OF HON. JOE BARTON, A

REPRESENTATIVE IN CONGRESS FROM THE STATE OF TEXAS

Mr. BARTON. Thank you, Mr. Chairman.

Let me say something positive before I say some things that are

not quite so positive. I think it is important that the Congress establish a record on why gasoline prices are where they are.

And I think it is important that the Energy and Commerce Committee and this subcommittee, the Oversight and Investigations

Subcommittee, lead that effort.

So as the ranking member on the minority side, I am not at all

opposed to this hearing. I am not opposed to this subject. I am opposed to what is going to happen tomorrow on the floor, however

and I am opposed to the way the witnesses for this hearing have

been obtained.

We are not going to hear anybody today who actually goes out

and tries to find oil in this country. We are not going to hear from

anybody who tries to refine oil into the various petroleum products,

including gasoline.

We are not going to hear from anybody who transports those

products to market either by pipeline or truck. We are not going

to hear from anybody who operates terminals at the wholesale

level.

And apparently, we are not going to hear from anybody who

owns a gasoline station. Now, I say apparently, because there may

be one witness that is involved in that.

So what we are going to do is have a hearing about gasoline

prices without actually hearing from any of the people who find the

oil, who make the products, who distribute the products, who

transport the products, and who sell it to us.

Now, I think that is wrong. In the last Congress, we had hearings similar to this, and we had all those people here. Plus, we had

all the people that then the minority, the Democrats, wanted on

some of the consumer side.

We had a fair and balanced hearing or set of hearings. That is

the way it should be.

We, the Republicans, asked the majority, the Democrats, on the

committee to invite some of the trade associations who represent

some of the folks that I have just talked about. We were turned

down.

And as I pointed out, when we held these same hearings in the

last Congress, we invited all those people plus more.

It would be nice to hear from the American Petroleum Institute,

the National Petrochemical and Refiners Association, the National

9

Association of Convenience Stores, maybe even the Society of Independent Gasoline Marketers of America.

Those folks were all available. They were willing to testify—at

least they told the minority staff that they were willing to testify.

And they are not here today. And I think that is a shame.

In addition to gasoline prices and oil company profits, at issue in

this hearing is anti-price gouging legislation. Nothing wrong with

that.

Again, in the last Congress, we passed anti-price gouging legislation twice on the floor of the House of Representatives. It did not

ever pass the Senate, but it passed the House on two different occasions.

Apparently, the Energy and Commerce Committee, which had a

legislative markup at least once in the last Congress, is not going

to be afforded an opportunity to hold a legislative hearing or to

mark up any of the legislation that, again, is supposedly going to

be on the floor tomorrow.

Now, I just got a bill somewhere that, I am told, is the bill that

is actually going to be on the floor tomorrow, H.R. 1252 as amended. I am going to study it very carefully this evening.

It would have been nice to have had a legislative hearing about

it. It would have been nice to have been invited by the majority to

participate in some negotiations, perhaps to offer some amendments, perhaps to have a markup. That is not going to happen.

Now, I understand that gasoline prices are higher than we wish

they were. Apparently, the Democratic staff has put out a handout

that shows that when President Bush became President, it was

$1.47, and today it is $3.22. I am not going to argue with that.

I will point out that when the Democrats took control of the House of Representatives on January of this year, it was $2.33.

And today, I filled up in Arlington, VA, it was $3.19. That is 86

cents in 4 months.

We keep up that rate, and it will be close to $5 by the end of

the year. So if I were a Democrat and talking about the price when

Bush took over, I wouldn’t crow too much, because on a percentage

basis, since they have taken over, it has gone up almost 33 percent,

and it is heading north a lot faster.

We feel the pain at the pump—we, the Republicans. And our constituents feel it. Our staffs feel it. As I said, I paid $3.19 a gallon

this morning, and I felt it then.

But I did get to fill up. I didn’t have to wait in line. I wasn’t limited to 10 gallons. And if I didn’t want to pay $3.19, I didn’t have

to pay it. I could have just not gotten gasoline.

I did notice on the way to work that there was one station selling

it for $3.17, and I could have saved 2 cents a gallon if I had gone

to a different gas station.

One thing that we don’t need is price controls. And I am afraid

that if we head down the road that this H.R. 1252 appears to be

heading down that that is what we are going to get.

Now, I have a number of other things I would like to say, Mr.

Chairman, but my time is already expired, and I do appreciate the

process of 5-minute opening statements, so I am going to limit that.

But I am very upset that we are not having a real legislative

hearing. I am very upset that we are not having a markup. I am

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very upset that we are putting a bill on the suspension calendar

that no Republican has been given any input into. And I just think

that is flat wrong.

With that, I yield back.

[The prepared statement of Mr. Barton follows:]

PREPARED STATEMENT OF HON. JOE BARTON, A REPRESENTATIVE IN CONGRESS FROM

THE STATE OF TEXAS

Our hearing opens this morning with some remarkable absences. We will not hear

from anyone who drills for oil. Nor will we hear from anyone who refines oil into

gasoline. And we won’t get to hear from anybody who transports oil or gasoline by

pipeline or by truck. How about a terminal operator? No. And what about a gasoline

station? No. So we’re going to have a hearing about gasoline prices without actually

hearing from the people who find the oil, who make the gasoline, who transport it,

and who sell it to us. This is unfortunate.

The Republican members of this committee requested that the Democrats invite

the industry associations representing everyone in the gasoline ‘‘food chain’’—from

oil well to gas pump—but our request was denied. The American Petroleum Institute, the National Petrochemical and Refiners Association, the National Association

of Convenience Stores, and the Society of Independent Gasoline Marketers of America were available to testify. It is a pity the record will not reflect their insights.

In addition to gas prices and oil company profits, at issue in this hearing is antiprice gouging legislation. It is unfortunate that the Energy and Commerce Committee will not be afforded an opportunity to hold a legislative hearing or a markup

on a piece of legislation that is so important to consumers and that could have a

broad and deep impact on our Nation’s economy. Mr. Stupak’s bill would benefit

from committee consideration. At the very least, it should have a trigger, which

comes into force after the Secretary of Energy has determined that there is a bona

fide problem with supply. There should be mitigation factors, especially a clear definition of what constitutes price gouging so that those subject to the Act will have

some idea of what they are being ordered not to do.

Everyone feels the pain at the pump—our constituents feel it, our staff feels it,

I feel it. We all want to do something about high gas prices, but effectively instituting price controls on gasoline—which is what H.R. 1252 as written would do—is the

worst possible solution. If you like spot shortages and lining up to buy your gasoline,

you’re going to love this bill.

Price controls didn’t work in the early 1970’s. They didn’t work in the late 1970’s.

And they won’t work now.

Instead, price controls will further constrict an already tight supply and result in

greater demand, which results in higher prices. This is not an emotional debate

where one’s personal beliefs and moral code dictate their stance on a solution. This

is economics. There is a finite and known result to price controls. Simple supplyand-demand economics explains the result—as supply tightens while demand grows,

there is less product available on the market, which drives price increases. Supply

will decrease if Congress institutes price controls. Oil companies and independent

gas stations alike will turn off their pumps rather than face 10 years in jail because

they had to raise their prices in order to cover the inevitable cost increase of obtaining gas after a natural or a man-made disaster. And for the record, let’s be clear

on one thing—the FTC has conducted numerous studies on this topic and has

never—I repeat, never—found a single instance of widespread, collusive price

gouging.

Anti-gouging legislation is based on the faulty assumption that price increases are

due to the greed of Big Oil and refineries (whose industry groups, again, were not

afforded an opportunity to speak today). In fact, what is driving up the price of gasoline is not these companies, but rather record high consumer demand, both domestic

and international. Compounding the problem is the anomaly that domestic demand

did not fall off this spring as it historically has during the period in which refineries

must go offline in order to perform the required annual maintenance and switch to

summer blends. Further driving up the cost of gasoline, we are importing historically low levels of refined product due to anomalies in the European market. When

we have a restricted supply with increased demand—or even static demand—prices

go up.

The only way to drive down the price of gas is to increase supply and decrease

demand: we must increase domestic crude inventory. We must increase refinery capacity. We must streamline refinery permitting. Oil companies are not sitting idly

by, merely reaping the benefits of high prices driven by the world crude market. InVerDate 11-SEP-98 12:22 Nov 09, 2007 Jkt 000000 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 Q:\DOCS\DOCUMENT SCOM1 PsN: SCOM1
11

dustry has added the equivalent of 10 new refineries over the last 10 years. Publicly

announced plans indicate the addition of the equivalent of eight more refineries over

the next 4 years. At the same time, we must decrease demand. We must continue

research into the use of alternative fuels. We must adopt higher efficiency standards

for vehicles. We must also educate consumers with proven fuel saving tips.

Mr. Chairman, I thank you for holding this hearing because it affords the public

an opportunity to see the difference between Republicans and Democrats. Fuel

prices are important to all of our constituents and if we follow your solution, our

people are going to pay more and get less—when they can find any gasoline at all.

I hope the next time we take up this matter, it will be for the purpose of increasing

the supply of gasoline and decreasing the price instead of grandstanding for the reporters in the audience.

Mr. STUPAK. Let me just respond briefly, if I may, to the gentleman’s request or statements there.

We have accepted on the hearing we have here today—there are

four witnesses invited by the majority, three that are invited by the

minority. We accepted your request to have EIA here. They are

here. We accepted your request to have Mr. Montgomery, an oil industry analyst on the second panel. He is here.

The National Petroleum Refiners Association have advised us

they did not wish to be part of any panel.

As far as American Petroleum Institute, instead of having a lobbying group, we would rather hear from Big Oil. We invited

ExxonMobil, Shell Oil, Chevron, Valero, the largest oil refiner in

the United States. They turned us down.

You know, we sought testimony from the Department of Energy’s

policy office but were told that no one was available on the date

of our hearing due to the Chinese trade conference.

On Monday, we were contacted by the White House. The chair

of the Council of Economic Advisors asked to testify. We graciously

extended that to him. It would have been four minority witnesses,

four majority witnesses.

A few hours later, they called us back, said because of scheduling

conflicts they could not testify.

So I think we have been more than generous with providing minority, the administration and industry with an opportunity to be

heard here today.

I hope that the minority would work with us to bring

ExxonMobil, Shell Oil, Chevron Oil, Valero and the rest of them to

come testify before the American people. They never testified when

you were in the majority, and we would like to hear from them.

We will be having other hearings. We have an unfair manipulation of prices that I would like to have hearings on. We have to do

something with natural gas and FERC regulation yet. So I look forward to it.

As far as the legislation coming to the floor, when you were in

the majority, Mr. Barton, I learned some things bad and some

things good.

One of the things I learned from you is take a piece of legislation

and bring it right to the floor, just like you did last year with the

Wilson legislation.

It was introduced on Tuesday, May 2. We never saw it. On

Wednesday, May 3, we had a vote on it—no hearing on it, no markups, no nothing. So I learned from you.

Mr. BARTON. Would the gentleman yield on that point?

Mr. STUPAK. Sure.

12

Mr. BARTON. What you just said, as you said it, is literally true.

The second time we brought the price gouging bill up, we did it just

like you said. And I wasn’t too happy about that, but I had to do

it.

But the first time we brought it up, we had a full committee

markup. You had an amendment in committee that failed. You

were given the right to offer that same amendment on the floor.

And then I think you offered a version of it as a motion to recommit.

Are we going to have a legislative hearing or a committee markup of this legislation any time in the near future?

Mr. STUPAK. As the chairman said, sometimes some of these

scheduling issues and how legislation comes to the floor—it is out

of our control.

And you are right, my legislation was a substitute to the Barton

amendment, which never came to the floor, but I did offer it as a

substitute.

So that means H.R. 1252, as you see it before you, has been

around for well over a year. It is not like it is a brand new piece

of legislation like the Wilson legislation was on the floor.

We all wish we would get things the way we want. Sometimes

the process moves a little quicker than what we would like. We actually had a hearing last week on parts of H.R. 1252 before the Judiciary Committee.

We are having this hearing today not on H.R. 1252 but on gas

prices and the impact on the American people. And I hope we can

have further hearings on that subject, as the ranking member suggested.

With that, I would turn to Mr. Dingell of Michigan for an opening statement.

OPENING STATEMENT OF HON. JOHN D. DINGELL , A REPRESENTATIVE IN CONGRESS FROM THE STATE OF MICHIGAN

Chairman DINGELL. Mr. Chairman, thank you. I commend you

for conducting this hearing into the pressing matter of gasoline

prices. American consumers today face the highest gasoline prices

in history, and apparently the worst is not yet over.

The American Automobile Association and others forecast that

prices are likely to go even higher. For many, high energy prices

are an economic crisis.

At today’s prices, the average American family will spend $2,413

more than they did in 2001, more than double what was spent

then. This is, no doubt, going to be very difficult for most, as family

incomes have not kept pace with the rapid rise in gasoline prices.

Similarly, those businesses, large and small, that do not enjoy

the comfort of high profit margins are experiencing severe pain.

Trucking companies, taxi drivers and other businesses that depend

on gasoline and petroleum products are feeling the pinch.

Rising gas prices, in turn, increase the price of goods and services throughout the economy. The results could be disastrous for

both individuals and for the economy as a whole.

13

At the same time this is taking place, the current administration

seems to be unable or perhaps unwilling to do anything about the

problem.

Today, we will hear testimony from the Government Accountability Office, which, after conducting an exhaustive study, concluded

that mergers and consolidations in the oil industry have contributed to an increase in the price of gasoline.

Yet the Federal Trade Commission will disagree and cite a list

of things that they have done to preserve competition amongst oil

companies and refineries.

Most of us would like to see the results of that competition, if

such there be.

There will no doubt be a debate over the fine points of the various economic models to explain each side’s conclusions.

But in the end, we are left with one irrefutable conclusion. Gas

prices have risen dramatically following 10 years of increasing concentration in the oil industry.

We also will hear testimony that the current rise in gasoline

prices is not due to skullduggery on the part of OPEC, but rather

to a lack of refining capacity.

Perhaps it is time for the FTC to investigate this matter more

closely and determine whether the lack of refining capacity is a coincidence of unplanned facility outages at multiple locations, or

whether, as some argue, it is a manufactured shortage.

Finally, I am concerned that some of the less scrupulous in our

society may seek to take advantage of those shortages by raising

prices to unconscionable levels unrelated to the cost of providing

the product.

It is essential that we have tools in place to address this kind

of behavior.

Mr. Chairman, I congratulate you for pursing this issue, and I

look forward to reviewing today’s testimony.

I particularly want to welcome Mr. Stanley Pruss, who appears

here today on behalf of Governor Granholm, who has successfully

dealt with gasoline price gouging in Michigan.

I would like to say just one thing, and I say this with affection

and the utmost respect for my dear friend Mr. Barton.

During the brief time that I have been chairman since the 1st

of January, I have sought with all diligence to approach the high

quality of leadership and the extraordinary capacity and ability

with which he ran this committee during the time when he was

chairman.

And I say this, again, with the utmost respect. We are here, I

note, to bring to the House floor a bill, and we are trying to do it

as well as he did. But as the record will show, last year, about this

time of year, we had the same bill. It was taken to the floor. It was

introduced 1 day on behalf of one member of this committee—a

very outstanding member, by the way—and was put on the floor

the next day, and it was proceeded on under suspension.

I could think of nothing better on my part than replicating the

extraordinary leadership which has been demonstrated by my dear

friend Mr. Barton, and I look forward to hearing further comments

about the way that we are following his extraordinary leadership

and competence in these matters.

14

I thank you.

Mr. STUPAK. I thank the chairman.

Next, we will hear from Mr. Walden of Oregon, please, for an

opening statement.

Mr. WALDEN. Well, thank you, Mr. Chairman. I am going to actually waive my opening statement in lieu of additional time for

our witnesses. I am very concerned about this issue and hope to

probe deeply.

Mr. STUPAK. Mr. Melancon, please, for an opening statement.

OPENING STATEMENT OF HON. CHARLIE MELANCON , A REPRESENTATIVE IN CONGRESS FROM THE STATE OF LOUISIANA

Mr. MELANCON. Thank you, Mr. Chairman.

First, I would like to thank you for holding this hearing today.

My constituents, as everyone else’s, have dealt with the rising price

at the pump for some time. With the change over to summer blends

of gasoline, the late spring tends to be when consumers experience

the first major price spikes of the year. And of course, hurricane

season presents its own unique set of problems, like the potential

for prolonged closure of refineries and shutting production.

Mr. Chairman, the farmers, fisherman and other businessmen

and women who depend on reasonable transportation costs to turn

a profit, along with the working people of my district and of this

country, long for affordable fuel.

The high cost of gasoline adds up for working people who are trying to make ends meet.

America has a crisis of supply and demand on its hands. The

good news is that this Congress has a lot of political will to help

solve this crisis.

I believe that we can help reduce prices at the pump, but our

ability to reduce those prices depends on responsible conservation,

increasing production, growing refining capacity and incubating

new energy technologies to help take demand pressure off our overburdened market.

I hope this committee and Congress will pursue a responsible

conservation agenda, and I look forward to working toward that

goal. It is only right that we should try to be good stewards of the

earth’s God-given resources. A responsible conservation policy will

help take pressures off of gasoline supplies.

I was happy to work with Senator Landrieu and other members

of the Congress in the last session to pass legislation that would

encourage an increase in oil and gas production in the Gulf of Mexico.

While fossil fuels present many problems in terms of their carbon

emissions and environmental impact, it is clear that they will be

the primary component of our Nation’s energy supply for the foreseeable future and possibly longer.

Given that reality, I strongly believe that now is not the time to

discourage exploration and production of oil and natural gas. Now

is not the time to place additional restrictions on companies that

produce and supply this country’s energy needs.

15

We are also committed to incubating new technologies like coal

gasification and carbon sequestration, and investing in the timetested non-carbon emitting energy sources like nuclear.

But those do not solve the immediate needs of consumers during

this summer’s driving season. My observation is that we have a

bottleneck in the supply chain.

We can’t pump oil out of the ground quick enough, and we can’t

seem to refine it fast enough to meet the demands of this Nation.

Oil is traded on the world market, and its price is set there, not

at the retail level. All prices can be volatile, and they often correlate with the retail gasoline prices.

However, retail gasoline prices are heavily dependent on refining

capacity and on inventories of gasoline. The refining bottleneck

causes American consumers to pay premium at the pump for policy

makers’ failures to plan for increased demand.

I hope this hearing helps us understand that we must work

through conservation, increasing production, investigating alternate sources of energy and increasing refining capacity in order to

reduce the pressure on this market.

Thank you, Mr. Chairman, and I thank you for the witnesses

today.

Mr. STUPAK. I thank the gentleman.

When does the hurricane season start? Right around now, I

know. June 1, OK. We had snow this weekend up in my district

in some parts, so you are a little ahead of us in the weather.

Mr. Murphy, for an opening statement, please?

OPENING STATEMENT OF HON. TIM MURPHY, A REPRESENTATIVE IN CONGRESS FROM THE COMMONWEALTH OF PENNSYLVANIA

Mr. MURPHY. Thank you, Mr. Chairman and Ranking Member

Whitfield, today.

We meet to discuss some of the issues involving rising gasoline

prices, or at least one part of the issue.

But I am concerned, and I hope we look at the real reasons why

prices are rising and some of the roles that Congress has played

in contributing to that so that we may make some changes.

And it has to do with the simple laws of supply and demand.

Until we find ways to increase supplies and reduce consumer demand for gasoline, we will continue to be susceptible to price spikes

such as those we are now experiencing. And that places a real burden on families.

Let’s keep in mind what contributes to the cost of gasoline at the

pump. Crude oil is about 56 percent of the cost. Taxes, about 18

percent of the cost. Refining, nearly 17 percent of the cost. Distribution and marketing, about 9 percent of the cost.

And overall, what we have seen is that oil costs have doubled

since 2004, tripled since 2001, and have gone up some 600 percent

since the 1980’s. Back then, it was $11, and it has gone up above

$70.

One thing we should not do about high gasoline prices is to adopt

legislation that would establish artificial controls over prices in the

name of protecting the consumer.

16

I believe we did that before in the Nixon administration. We also

did some things in the Carter administration. And I remember vividly long gas lines, frustrated motorists, and that did not solve our

problem.

Our gasoline imports have risen from 10 percent to 30 percent

at times after Hurricane Katrina because we did not have the oil

refining capacity. It costs much more to refine oil overseas and

bring it over here.

It is sort of like if you are in Pittsburgh and you decide to go out

and buy a pack of gum, and you drive to Chicago to do it instead

of finding a way you can buy at a local store.

The U.S. will grow in its demand over the next 20 years to use

oil. When demands increase and supplies do not, prices go up. And

Congress has added to this problem.

We have continued to grow in our dependence on other nations

and oil. Many countries like OPEC have manipulated production to

increase our costs dramatically, and they make massive profits.

They also use the money to purchase weapons and to fund terrorism directly. What a terrible, terrible thing it is, that we find that

whenever we put gasoline in the tanks of our cars, we are funding

both sides in the war on terror.

But when we refuse to allow drilling of our own oil on our Atlantic coast, on our Pacific coast, on our Gulf coast, in our western

States, on Federal lands in Alaska, despite abundant supplies of

oil, or when we look at ways that we are not increasing our supplies, et cetera, all of this has been some things that have contributed to cost, including what this Congress has done in the last couple months in increasing taxes on domestic oil explored in our own

Gulf of Mexico.

While Cuba and other nations are exploring within those boundaries, we still say no.

When we refuse to build support for building more refineries, we

contribute to shortages. And we end up increasing the price by importing the gasoline, as I said before.

When we do not develop new sources of energy, and we refuse

to look at such things as coal, and nuclear, and hydrogen fuel cell,

and fund the research on this, we are contributing to higher costs.

When we don’t emphasize conservation on every level, we are

contributing to increased costs.

When we hear people preach about global warming and conservation while they fly about the Nation in their private jets, we are

contributing to those costs.

When everything is as simple as leaving your cell phone plugged

in after it is charged, to leaving computers on, to leaving lights on,

and all the things that America does to waste energy, isn’t it time

that we began to look at the real sources of the cost of high gasoline, instead of just looking at price gouging concepts at the pump,

which we cannot even define?

Every time this Congress has had an opportunity to increase

supply, we have continued to say no. And yet we continue to import

more and more from other nations—as I said, nations who fund the

weapons used against our soldiers. And this is over half the cost

of oil.

17

When are we going to learn that we have supplies? And if we

want to reduce costs, we need to start looking for our oil. We need

to start using coal. We need to have clean coal technology. We need

to fund hydrogen fuel cell research.

We need to demand more conservation in our vehicles. We need

to look more at how our cars can be more efficient, how our highways can be more efficient, how our public transit systems can be

funded.

This is the cause of our problems of high gasoline prices. Isn’t it

time that Congress really looked at this? And instead, it is pointing

a finger here and there and said we ought to deal with this more

comprehensively.

Mr. Chairman, I know your commitment to work toward energy

independence and working these issues, and I hope that these are

some things we can all agree on to work on in the future to really

reduce gasoline costs. Thank you.

Mr. STUPAK. I thank the gentleman.

Mrs. Blackburn for an opening statement.

OPENING STATEMENT OF HON. MARSHA BLACKBURN, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF TENNESSEE

Mrs. BLACKBURN. Thank you, Mr. Chairman. I want to thank

you and Ranking Member Whitfield for holding the hearing today.

And to our witnesses, welcome. We appreciate that you are here.

And I think that as you have heard from the opening statements,

it is no secret that the increasing cost of gasoline is a pertinent

issue. It is on the mind of every single American.

And in west Tennessee in my district, it will cost the average

family nearly $60 to drive from one end to the other. It is a trip

of 428 miles.

And that is enough to give you heartburn as you are talking

about maybe going from Memphis to Nashville, or up to Clarksville, or out to the river for our Memorial Day holiday.

And yet the news reports announcing record profits for the large

integrated oil companies provide our constituents little pain relief.

I have said a couple of times over the weekend that it is more

like a three-alarm barbecue sauce at Memphis in May, which is

something that has been taking place in our district.

Our constituents, therefore, have a right to ask questions about

the rising cost of gasoline, and Congress has the responsibility to

provide them with some answers that are free of political talking

points and rhetoric.

They want to know why this is taking place, and they want to

know if there is anything that we can do about it, and what the

cause of it is.

However, it does concern me that some Members of Congress appear to be falling into the trap of political rhetoric.

It is too easy to simply try to do a connect-the-dots between, and

I will quote from today’s hearing, gas prices, oil company profits

and the American consumer, and immediately point toward alleged

marketplace manipulation and price gouging. It is a bit unfair to

travel that route.

18

Strong laws already exist to prevent this immoral and illicit corporate behavior, and I support rigorous enforcement of those laws

to protect the interest of our American consumers and of our constituents.

What I cannot support, on the other hand, is a politically motivated legislative approach that will demonize America’s small business owners who operate convenience stores, filling stations and

neighborhood truck stops.

And let’s make no mistake about this. Those are precisely the individuals who wear a target on the back, or they feel as if they

wear a target on their back, not the large, integrated oil companies.

And that is how they feel if we advance legislation to crack down

on price gouging that adopts vague language, employs heavy-handed criminal penalties and unenforceable civil penalties that no

small business owner can afford.

It would not only be legislative overkill, one might even call it

unconscionable excessiveness.

Mr. Chairman, here are a few inconvenient facts that are missing from this debate today, as I see it. Convenience stores and filling station owners supply gasoline to the American consumer in

every single congressional district, city and neighborhood across

this country.

Ninety-five percent of these are independent small business owners who operate between one and three stores. The average convenience store owner earns a $33,000 profit per year. Many of these

are the local community meeting place.

That is what we find in our district. They are the local gathering

spot. And they are not people who are going to go and gouge their

neighbors, their fellow church members and their friends.

And, Mr. Chairman, I have a statement from National Association of Convenience Stores, and I would ask unanimous consent to

enter that for the record.

Mr. STUPAK. It is not appropriate. We would object to it. We will

not have outside groups enter statements through Members. That

has always been the policy of this subcommittee. So we cannot accept it.

Mrs. BLACKBURN. OK. Thank you, Mr. Chairman.

Mr. STUPAK. I thank the gentlewoman. Do you have any further

on your——

Mrs. BLACKBURN. Yes, I do.

Mr. STUPAK. OK.

Mrs. BLACKBURN. Yes, I certainly do. And I thank the chairman

for yielding back and do reclaim my time.

And I would just mention these small stores are not the portrait

of a manipulating marketplace villain. They are small business

owners.

And I certainly hope that throughout the course of this debate

that my colleagues and I can move beyond a short-sighted temptation to engage in price gouging finger-pointing.

Instead, what we need to do is talk about what it really will take

to reduce the cost of gasoline. And that is a common-sense, balanced approach to address the dwindling energy production capacity and the future of renewable energy for this country.

19

Many on this side of the aisle are working on just that very

issue, and I invite my colleagues in the majority to join us, and

let’s address the real need for reform.

I thank the witnesses.

I yield the balance of my time.

Mr. STUPAK. I thank the gentlelady.

In this legislation, priority is given, if we are going to look for price gouging, at those who sell $500 million worth of sales. In my

neck of the woods, that is not mom-and-pop grocers or gas stations.

That is a pretty good size, just for the record on that.

If there are no other members seeking to be recognized for opening statements, I will now call our first panel of witnesses to come

forward.

On our first panel, we have the honorable William E. Kovacic,

Commissioner of the Federal Trade Commission. We have Mr. Guy

Caruso, Administrator, Energy Information Administration. Mr.

Stanley Pruss, deputy director, Michigan Department of Environmental Quality. And Mr. Thomas J. McCool, Director, Center of Economics, Applied Research and Methods, U.S. Government Accounting Office, GAO.

It is the policy of this subcommittee to take all testimony under

oath. Please be advised that witnesses have a right to have counsel

under the rules of the House to be present during their testimony.

Do any of you four witnesses wish to be represented by counsel?

Mr. Kovacic, Mr. Caruso, Mr. Pruss, Mr. McCool? OK.

Please rise, raise your right hand and take the oath.

[Witnesses sworn.]

You are now under oath.

Mr. Kovacic, we will start with you, sir. Opening statement.

TESTIMONY OF WILLIAM E. KOVACIC, COMMISSIONER,

FEDERAL TRADE COMMISSION

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

thank you for the opportunity to review the Federal Trade Commission’s competition policy program concerning the petroleum sector.

To provide a perspective on what we do, I would like to focus on

activities from the past few years. The foundation of our program

is law enforcement. In the past year alone, we have pursued several matters of note.

In April, the commission filed a lawsuit to block the proposed

purchase by Western Refining of Giant Industries. The FTC alleged

that the transaction would raise the price of gasoline in northern

New Mexico.

We are presently awaiting a decision from the Federal district

court on our motion for a preliminary injunction. In January, the commission opposed the $22 billion deal by

which Kinder Morgan would have been taken private by its management and a group of investment firms. The commission obtained adjustments to protect competition in the transportation and

temporary storage of gasoline and other petroleum products in the

southeastern United States.

Last November, Chevron and USA Petroleum abandoned a transaction by which Chevron would have bought most of USA Petroleum’s retail gasoline stations in California.

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The FTC had been conducting an investigation into that proposed deal, and USA Petroleum’s president said that resistance

from the commission induced the parties to abandon the deal. In

addition, in late 2005, the commission opposed the Aloha’s purchase of terminal facilities in the Hawaiian islands.

Earlier in the same year, the FTC settled a monopolization case

challenging Unical’s behavior in the process by which the California Air Resources Board set standards for gasoline sold in that

State. The settlement has generated savings of roughly $500 million per year to consumers of gasoline in California.

These and other FTC law enforcement initiatives draw heavily

upon the second element of our program: Namely, research and

studies involving the petroleum sector.

These investments guide our pursuit of cases and inform our use

of non-litigation policy tools.

In May 2006, as this committee’s members have discussed, the

commission presented to Congress its report on the investigation of

gasoline price manipulation and post-Katrina gasoline price increases.

The report examined whether energy firms had manipulated gasoline prices and described how energy markets responded to the destruction caused by Hurricanes Katrina and Rita.

In December 2006, the FTC also issued a report on the current

state of ethanol production in this country.

In May 2002, the FTC began a project to monitor wholesale and

retail gasoline prices and the prices of diesel fuel to identify possible anticompetitive practices.

That project continues today. We track prices in 360 cities across

the country and in 20 major wholesale markets.

The third element of our program is cooperation with other public bodies. The FTC is not the only public body with competition

policy duties in the energy sector.

Improved cooperation with other public authorities at the national, State and local levels can help each institution spend its

competition resources more effectively. I view more effective cooperation as vital to future policy success in this area.

To this end, last September, the FTC and representatives of various State attorneys general, including the State of Michigan, held

a day-long workshop to discuss competition and consumer protection issues involving gasoline pricing.

The participants regarded this event as a useful step toward improving Federal and State efforts to address developments of common concern.

The fourth element of our program is public consultation in the

form of public hearings, seminars and workshops.

Public consultations have enabled us to gain deeper insight into

developments, many of the type that this committee has discussed,

affecting industry and consumers, to identify major emerging

trends and to help build a consensus about appropriate policy responses.

One month ago, the commission convened 3 days of hearings on

Energy Markets in the 21st Century: Competition Policy and Perspective.

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The hearings studied old and new fuel cycles, demand side issues

involving transportation, lessons from past regulatory strategies,

and the vulnerability of the United States to supply and demand

shock.

The proceedings featured an extraordinary group of participants,

at least one additional person you will hear on the next panel of

this session. Energy companies, think tanks and universities participated, as well as government agencies and consumer groups.

This improved our understanding of how we can best use our policy tools and suggested paths that the Nation’s energy policy might

usefully take in the future.

I welcome your comments and questions.

[The prepared testimony of Mr. Kovacic follows:]

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Mr. STUPAK. Thank you, Commissioner.

Mr. Caruso, please, for an opening statement, sir? Five minutes.

If you want to submit a longer statement, it will be for the record.

TESTIMONY OF GUY CARUSO, ADMINISTRATOR, ENERGY

INFORMATION ADMINISTRATION

Mr. CARUSO. Thank you, Mr. Chairman. I appreciate the opportunity to represent the Energy Information Administration today.

EIA is an independent statistical and analytical agency within

the Department of Energy.

Because we have an element of statutory independence with respect to our activities, our views are strictly those of EIA and

should not be construed as representing those of the Department

of Energy or the administration.

And today, I will focus on EIA’s most recent short-term outlook

for crude oil and gasoline markets and discuss the factors contributing to high prices and continued uncertainty in these markets.

Global oil markets have tightened for crude oil and light petroleum products, especially gasoline, with commercial inventories

dropping sharply since the end of September, reflecting strong demand in the U.S. and globally, production cuts by the Organization

of Petroleum Exporting Countries, OPEC, and only moderate increases in non-OPEC production.

Increasing global demand for light products has put pressure on

refining capacity worldwide, and we project crude oil prices to average in the mid $60 per barrel this summer.

Retail prices for regular gasoline have increased from $2.17 per

gallon at the end of January to $3.22 per gallon as of yesterday.

This compares with a $2.84-per-gallon average last summer.

Against the background of already tight world oil markets, global

geopolitical uncertainties continue to affect global oil supply and

transportation.

Geopolitical uncertainty in a number of countries in the Middle

East and Africa will continue to keep markets on edge.

For example, Nigeria’s problems have aggravated the gasoline

situation both internally and globally because this country produces largely light and sweet crude oil, which is used by the

world’s refineries to maximize production of gasoline.

Turning to gasoline markets, we expect gasoline markets will

likely remain fairly tight, although we do anticipate some improvements over the next several months.

Gasoline inventories, which typically build slightly in April,

sharply declined last month because of refinery outages, both

planned and unplanned, and lower than normal imports.

Gasoline supply has been affected more than usual by refinery

outages this spring, as U.S. refineries typically have higher outages

during the first quarter as they reduce production of gasoline and

other products to prepare for the maximum production season of

the spring and summer.

This year, outages have extended into May and, along with lower

imports and seasonally rising gasoline demand, contributed to a

steep inventory decline and upward price pressures in April and

May.

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Refinery throughputs have just begun to show the seasonal increase typical at this time, and are expected to increase over the

next several months, which should ease pressure on gasoline

prices.

Gasoline imports, critical to meeting U.S. summer consumption

needs, are lagging last year’s levels and thus have been affecting

prices.

Low gasoline inventories in Europe have resulted in limited volumes available for export to the United States thus far in 2007.

Total U.S. gasoline imports have recently returned to about 1.2

million barrels per day, and imports at or above that level are likely to be needed to avoid persistent upward pressure on gasoline

prices.

In conclusion, Mr. Chairman, the combination of tight crude oil

and refined product markets, along with ongoing geopolitical concerns, leave crude oil and gasoline markets poised for continued

volatility this summer.

If gasoline production increases during the rest of May and imports increase, gasoline markets may ease somewhat, causing

prices to recede from their current high levels.

However, with the hurricane season approaching and continued

tight refinery conditions, low gasoline inventories and increased demand for summer travel, upward pressure for gasoline prices remains a concern.

In sum, Mr. Chairman, most of the risks point to upward pressure on prices because of limited refinery capacity, low inventories

and relatively low imports.

With that, Mr. Chairman, that concludes my oral remarks. I

would be happy to answer questions at the appropriate time.

[The prepared testimony of Mr. Caruso follows:]

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Mr. STUPAK. Thank you.

Mr. Pruss, for an opening statement, please.

TESTIMONY OF STANLEY PRUSS, DEPUTY DIRECTOR,

MICHIGAN DEPARTMENT OF ENVIRONMENTAL QUALITY

Mr. PRUSS. Thank you, Mr. Chairman, members of the committee.

My name is Stanley Pruss, and I appreciate the opportunity to

address the issues of high gasoline prices, oil company profits and

the effects on the American consumer.

I am appearing on behalf of Michigan Governor Jennifer

Granholm, and she has submitted written testimony to this committee which reflects her active engagement on issues relating to

the high price of fuel for more than eight years.

As Michigan’s attorney general, Governor Granholm was engaged

in a 3-year investigation in part with the Federal Trade Commission to examine and understand the price spikes that occurred in

the Midwest, particularly in the summer of 2000.

That FTC study, reported on March 29, 2001, indicated that at

least one petroleum company had deliberately withheld supplies

and inventories because they were concerned that the release of

those supplies would result in lower prices.

Governor Granholm testified May 2, 2002 before the Senate on

gas pricing issues, and she has continued to be, as I said, very actively involved in these issues.

Her testimony today is broader than mine. Mine is limited to the

events that occurred in association with September 11th, 2001.

At that time, I was the assistant attorney general in charge of

the Michigan Consumer Protection and Antitrust Division.

We had long been involved in the investigation of high gasoline

prices, but on that tragic day—shortly thereafter, we began to receive a number of calls at our complaint intake section of sharply

spiking prices.

This trickle of information soon became a deluge. And after a

short time, all of our intake lines were jammed with consumers

calling in reporting prices that were, on September 11, ranging

statewide between $1.60 and $1.80 a gallon, but in a very short period of time, hours, reached as high as $5 a gallon.

Attorney General Granholm came down to the division. We engaged our staff attorneys, our investigators and our complaint intake staff, and we mapped out a strategy to deal with this phenomenon.

We instantly entered this information that we received from consumers into our database in real time. We tried to be precise. We

tried to capture the price of petroleum. We asked the consumer

what they thought it was prior to the escalation in price. We recorded the location.

And our protocol was that if we received two or more consumer

complaints about a single gasoline retailer, we then routed an investigator to do a visual verification. With that confirming evidence, we felt we had sufficient information to move under Michigan’s consumer protection act.

Like many other States, Michigan has a price gouging statute

that is an analogue to H.R. 1252, at least as introduced.

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The Michigan consumer protection act prohibits charging a consumer a price that is grossly in excess of the price at which similar

property or services are sold.

Unlike most States, but like H.R. 1252, this standard is not tied

to a declaration of an emergency or a national emergency. The attorney general is free to use this any time the attorney general encounters unusual market conditions, as in H.R. 1252.

To address what was clearly price gouging activity, as I said, we

mobilized our staff. We collected this information. And ultimately,

we issued notices of intended action against 46 gasoline retailers

in the State of Michigan.

This notice of intended action required by statute recited the violation, the factual basis for the violation, the violation of the statute, demanded that the retailer cease and desist in the escalated

prices, demanded restitution, and outlined the consequences of noncompliance with the notice of intended action.

The statute allows the recipients of this notice to have an opportunity to confer, and the long and short of this enforcement initiative was that almost all of these stations entered into what is

called an assurance of discontinuance, or a settlement agreement,

whereby they promised, covenanted, to provide restitution to all

consumers who were overcharged on that day and the days following as well as pay civil penalties.

Two stations chose not to settle consensually, and we did file suit

against those gas stations. They interposed defenses that were both

factual and legal.

As you heard today, their factual defense suggested that there is

no such thing as price gouging in the marketplace, and that retailers have to purchase their next load of fuel based upon the sale of

their present inventory, and that they have to be anticipatory, and

when events like this occur, it was reasonable for them to escalate

prices in anticipation of price hikes at the wholesale level.

We asked for proof in that regard: Did you receive notices of imminent price hikes? To the best of my recollection, no such proofs

were forthcoming.

The legal defenses interposed were again, like what you have

heard today, particularly from Representative Whitfield, that the

term ‘‘grossly excessive’’ or ‘‘unconscionable’’ is inherently indefinite.

And this defense was interposed as being unconstitutionally

vague, so vague as not to allow a party to understand what kinds

of behavior are prohibited by law.

Although our initiative didn’t result in an appellate decision in

this regard, a judge did opine that the Michigan consumer protection act, which prohibits grossly excessive pricing, was not unconstitutionally vague.

And to the best of my understanding, although I have not been

engaged in this area for a while, no court has found standards of

unconscionability and standards that prohibit gross disparities in

pricing as being unconstitutionally vague.

[The testimony of Mr. Pruss follows:]

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TESTIMONY OF STANLEY F. PRUSS

Good afternoon. My name is Stanley Pruss and I appreciate the opportunity to

address the issues of high gasoline prices, oil company profits and impacts on the

American consumer.

I am appearing on behalf of Michigan Governor Jennifer Granholm. The Governor

has submitted written testimony to this committee which reflects her active engagement on the issue of high petroleum prices for more than 8 years. As the attorney

general of the State of Michigan, Governor Granholm investigated petroleum industry pricing and participated, with the Federal Trade Commission, in an investigation in Midwest price spikes that occurred in the summer of 2000. In her capacity

as Governor, she has continued to have a leadership role in urging Congress to

enact legislation in several key areas—all directed at alleviating the pain American

consumers experience at the pump.

Governor Granholm’s testimony goes beyond mine in that it constitutes a broader

assessment of the situation facing consumers. Governor Granholm’s testimony outlines the causes of high gasoline prices and price volatility and offers specific remedies, including support for H.R. 1252, as introduced.

My statement will be limited to price-gouging with respect to retail sale of gasoline and Michigan’s experience in that regard.

I served as the assistant attorney general in-charge of the Consumer Protection

and Antitrust Division under Michigan Attorney General Granholm. While we were

long focused on the causes of high gasoline prices and the effect on Michigan consumers, the tragic events of September 11, 2001 precipitated occurrences that profoundly affected consumers around the country with immediate and harsh consequences beyond their grief and sympathy. I speak, of course, of price-gouging.

Like many other States, the Consumer Protection and Antitrust Division of the

Michigan Department of Attorney General administers a Consumer Complaint Section that receives and records consumer complaints. Within minutes of the terrorist

attack on the Trade Center, we began to receive complaints from consumers around

the State of sharply elevated prices at the pump. This stream of complaints quickly

became a deluge, literally tying up all our intake lines.

The complaints had a common theme: Gasoline prices that were generally between $1.60–$1.80 per gallon prior to the attack were being increased precipitously

by some, but not all gasoline retailers, to as high as $5 per gallon. The complaints

were coming in from all over the State. Attorney General Granholm came down to

the Division to meet with staff attorneys, investigators and intake staff to assess

the situation and to identify and direct our course of action.

Price gouging falls under Michigan Consumer Protection Act (MCPA). The MCPA

prohibits unfair, deceptive or unconscionable methods, acts of practices in trade or

commerce, and these prohibited methods, acts or practices are specifically enumerated and defined.

They include ‘‘charging a consumer a price that is grossly in excess of the price

and which similar property or services are sold.’’

Unlike most State laws that address price gouging (and like H.R. 1252, as introduced), the Michigan price-gouging prohibition is not effectuated or triggered by a

declaration of emergency. Of the at least 28 States that have price-gouging provisions, I believe only the Michigan and Maine statutes are not dependent on emergency declarations.

To address what was clearly price-gouging activity, our Division established a protocol to identify, evaluate and confirm price-gouging occurrences. Attorney General

Granholm assigned additional support staff to the Division. Complaint information

and details were carefully recorded into a database as they were received. When we

received two or more complaints from consumers concerning a single gasoline retailer, an investigator was routed to location of the retailer to confirm the price.

From this universe of putative violators we selected the most egregious for legal action under the MCPA.

Under the MCPA, the enforcement process was initiated by the issuance of a ‘‘Notice of Intended Action’’ that recited the factual basis for the violation, the statutory

provisions that were violated, and the consequences that would ensue. The ‘‘Notice

of Intended Action’’ demanded that the unlawful activity cease and desist, indicated

that restitution to consumers would be required, and civil penalties would be exacted. It also explained that the recipient would have an ‘‘opportunity to confer’’ to

offer explanations or defenses to the action. Finally, it set forth a process through

which the recipient could consensually resolve the violations through execution of

an ‘‘Assurance of Discontinuance’’ that incorporated these elements.

Ultimately, we issued ‘‘Notices of Intended Action’’ to 46 gasoline retailers. The

vast majority of these retailers entered into Assurances of Discontinuances that reVerDate 11-SEP-98 12:22 Nov 09, 2007 Jkt 000000 PO 00000 Frm 00076 Fmt 6633 Sfmt 6633 Q:\DOCS\DOCUMENT SCOM1 PsN: SCOM1
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quired full restitution to any consumers who could prove through receipts or credit

card statements that they were over charged. Some retailers chose to make refunds

even to those consumers who did not have proof of purchases. In addition to restitution, approximately, $30,000 in civil penalties were collected. We filed lawsuits

against two gasoline retailers. These were ultimately resolved prior to trial.

The defenses interposed by the gasoline retailers were both factual and legal.

Some retailers maintained that their price escalations were justified under the circumstances. This explanation typically was based upon the assertion that the retailer must pay for the next load of petroleum from the wholesaler with the receipts

derived from the existing inventory. They asserted it was not unreasonable to anticipate immediate price increases at the wholesale level. Some indicated that they

were put on ‘‘notice’’ by wholesalers that sharp increases should be anticipated and

that they should raise prices. However, no one, to the best of my recollection, could

substantiate such claims.

Others asserted that there can be no such thing as a ‘‘grossly excessive’’ price or

‘‘price-gouging’’ in the marketplace and that such price spikes are not actionable. In

legal terms they assert that statutes like the MCPA and H.R. 1252 are unconstitutionally vague because terms like ‘‘unconscionable’’ and ‘‘grossly excessive’’ are too

indefinite to provide effective notice of behaviors that sanctionable. While the Michigan price-gouging effort did not result in any appellate decisions, a lower court

judge did opine that he did not find the ‘‘void for vagueness’’ defense compelling.

In conclusion, as someone who has supervised the enforcement of price-gouging

actions, I believe that a Federal statute like H.R.1252 can be an effective, indeed

essential, legal mechanism to not only combat price-gouging activity but to deter

such occurrences from happening. It is a certainty that there will be future public

emergencies and unusual market conditions that result in economic hardship, if not

actual harm, to American consumers. It is imperative that both Federal and State

law enforcement authorities be equipped with the appropriate means of protecting

consumers.

Thank you.

Mr. STUPAK. Thank you, Mr. Pruss.

Mr. McCool, opening statement, please, sir?

TESTIMONY OF THOMAS MCCOOL, DIRECTOR, CENTER FOR

ECONOMICS, APPLIED RESEARCH AND METHODS, U.S. GOVERNMENT ACCOUNTABILITY OFFICE

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

we are pleased to participate in today’s hearing to discuss the factors that influence the price of gasoline.

Few issues generate more attention and anxiety among American

consumers than the price of gasoline. Periods of price increases are

accompanied by high levels of media attention and consumers questioning the causes of higher prices.

The most current upsurge is no exception. For the average person, understanding the complex interactions of the oil industry,

consumers and the government can be daunting.

Given the importance of gasoline for our economy, it is essential

to understand the market for gasoline and what factors influence

the prices that consumers pay.

In this context, my testimony today addresses the following questions: What key factors affect the price of gasoline? And what effects have mergers had on market concentration and wholesale gasoline prices?

Let me sum up by making the following observations. Over the

long term, the price of crude oil is a major determinant of gasoline

prices.

Crude oil and gasoline prices have generally followed a similar

path over the past three decades and have risen considerably over

the past few years.

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A number of other factors also affect gasoline prices, including

increasing demand for gasoline. Now, while demand has fluctuated

over the long term, it has increased pretty steadily over that period

by about 1.6 percent a year over the past 35 years.

At the same time, refinery capacity in the United States has not

expanded at the same pace as demand for gasoline in recent years,

which, coupled with high refinery capacity utilization rates, reduces refiners’ ability to sufficiently respond to supply disruptions.

Gasoline inventories maintained by refiners or marketers of gasoline have also seen a downward trend in recent years.

Now, this follows similar trends in many other industries moving

to just-in-time delivery processes, but it is true that the average inventory held by U.S. oil companies went from about 40 days of consumption in the early 1980’s to about 23 days in 2006.

Also, regulatory factors such as national air quality standards

that have induced some States to switch to special gasoline blends

have also been linked to high gasoline prices.

Finally, consolidation of the industry can also play a role in determining gasoline prices. For example, mergers raise concerns

about potential anticompetitive effects because mergers could result in greater market power for the merged companies.

At the same time, these mergers could lead to efficiency gains,

enabling the merged companies to lower prices.

To that particular topic, the 1990’s saw a wave of merger activity

in which over 2,600 mergers occurred in all segments of the U.S.

petroleum industry.

This wave of mergers contributed to increases in market concentration in the refining and marketing segments of the U.S. petroleum industry.

Qualitative evidence suggests that mergers may also have affected other factors that can impact competition, such as vertical

integration and barriers to entry.

Econometric modeling that we performed of eight mergers involving major integrated oil companies that occurred in the 1990’s

showed that after controlling for other factors, including crude oil

prices and refinery capacity utilization, supply disruptions, and

also inventories, the majority of these mergers resulted in wholesale gasoline price increases, generally in the range of 1 cent to 2

cents a gallon, though one particular case went up 7 cents per gallon.

Additional mergers since 2000 are likely to increase the level of

industry concentration. However, because we have not performed

modeling on these mergers, we cannot comment on any potential

effect on gasoline prices at this time.

We are, however, in the process of updating our previous study

and plan to look at more recent mergers.

Mr. Chairman, this completes my prepared statement. I would be

happy to respond to any questions you or other members of the

subcommittee may have.

[The prepared testimony of Mr. McCool follows:]A

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Mr. STUPAK. Thank you, Mr. McCool.

And thank you, all witnesses.

Unfortunately, we have six votes on the floor—this one currently,

and then we have five that will take at least 5 minutes each, so

we are probably at least a good half hour. We are going to have

to recess.

And I hate to do this to you gentlemen, but it is one of these

days. The good news is that these will be the last votes of the day

and we can continue to go.

Commissioner Kovacic, you said we might be here till 8 o’clock

tonight. I guess you had better insight onto the House floor schedule than I did.

Mr. KOVACIC. That wasn’t a request, by the way, Mr. Chairman.

[Laughter.]

Feel free to depart from the request if you want.

Mr. STUPAK. Well, let’s get these votes out of the way, and we

will be back, and we will finish up. And we have another panel

after that.

OK, we are in recess until 45 minutes. Thank you.

[Recess.]

Mr. STUPAK. OK, the committee will be back in order. Unfortunately, Mr. Pruss had to grab an airplane and get back to Michigan, and I understand Mr. Sundstrom from AAA on our next panel

also had to do the same.

I just hope that during all these many delays we had today gas

prices haven’t gone up. But you never know.

We are going to start with the questioning.

Mr. Whitfield, if it is OK with you, we will go 10 minutes.

Mr. WHITFIELD. Sure.

Mr. STUPAK. And maybe we can get a little order going, except

Mr. Walden has 13 minutes since he waived his opening. OK.

Mr. Caruso, if I may start with you, please, sir. Remember, all

witnesses are still under oath.

Looking at this USA Today article that was in the paper, ‘‘Gas

Prices Approach 1981 Record’’, it quotes your organization, EIA,

that the nationwide average of gasoline is $3.218, up 11.5 cents in

the past week, and just a half penny shy of the inflation-adjusted

record.

When will we see the record, the next day or two?

Mr. CARUSO. What we do look at is wholesale prices, and that

normally is a precursor of what retail prices will do.

Mr. STUPAK. Sure.

Mr. CARUSO. And as of today, our models indicate there still is

some pass-through that has not reached the retail level.

It is always difficult to be precise about that, because——

Mr. STUPAK. But chances are we will probably break the record

tomorrow.

Mr. CARUSO. Well, in our case, we put them out every Monday.

Mr. STUPAK. Right. Well, let me ask you this. The record price

for gas, and even when adjusted for inflation—but there is not the

scope or magnitude of the reasons why we normally see for gas

prices to go up.

In March 1981, Iran-Contra war had started about that time, I

believe. Crude oil inventories are being maintained in this country.

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Refineries have some unplanned disruptions, but nothing like the

disruptions we saw after Hurricane Katrina.

Yet gas prices at the pump will set a new record, probably this

week, while big oil profits are the most ever of any company. Other

than profit-taking, is there any other event that would explain

what is driving these prices?

Mr. CARUSO. Well, as I mentioned, every component of the supply stream, which is the refinery outages that are keeping production up to now lower than we would have expected for this time

of the year, inventories are low, and imports up to now have been

lower than normal—so what that all means is that the system is

stretched very thin, and therefore there is no cushion to respond

to any unexpected either outages or——

Mr. STUPAK. But we haven’t seen those outages to drive the

prices we are paying now. I guess that is the point I am trying to

make. There is no major event to drive these kinds of prices other

than probably profit-taking.

Mr. CARUSO. It is the total system that is stretched thin, and

when there is no other cushion except price, it takes a large price

increase in a commodity that has very low responsiveness in the

short term, so it takes very high prices to rebalance the market

once it gets out of balance.

Mr. STUPAK. And you cited those things in your testimony. In

fact, on page 7 of your testimony I am looking—and the end of the

first paragraph says as a result, the average price of gasoline for

the summer driving season, April through September, is projected

to be $2.95 at the pump, up 11 cents from last summer.

Well, right now, today, we are off by about 27 cents. So all those

factors you just mentioned—you used that to make your prediction

that it would be 11 cents higher than last year, but we are already

27 cents—so we are about 38 cents higher than last year.

Do you wish to revise those numbers? Can we expect prices to

go down?

Mr. CARUSO. Well, we are still thinking that if imports do reach

the levels that we hope they will, which is 1.2 million barrels a day

or even higher, on average, this summer, and some of these refineries that are out come back on as planned, we can boost domestic

production.

The combination of those things should lead to some easing of

gasoline prices.

Now, as I pointed out in the testimony, this assumes a lot of

things going right, and that the risks that we still face out there,

both geopolitically and with industrial accidents, still indicate that

there is likely to be upward pressure on prices.

Mr. STUPAK. OK.

Mr. CARUSO. And the hurricanes that you mentioned in your——

Mr. STUPAK. Right, but they are not here yet.

Mr. CARUSO. Exactly. It is a risk.

Mr. STUPAK. And usually in April we would start restocking, and

we usually have excess gasoline. We don’t this year.

Mr. CARUSO. That is exactly right.

Mr. STUPAK. OK.

Commissioner Kovacic, if I may ask you a couple questions, in

GAO’s testimony they say that in the 1990’s the mergers resulted

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in a 1-cent to 7-cent increase, depending on how you are looking

at it, in the wholesale gasoline price, and a 1 percent increase FTC

considers significant.

Is that a true statement?

Mr. KOVACIC. We do, indeed, consider that percentage increase to

be significant.

Mr. STUPAK. And that is when you are looking at the mergers,

right?

Mr. KOVACIC. Exactly. And though we greatly admire and applaud the efforts that GAO did to do the study, as you are aware,

Mr. Chairman, we do have serious quarrels with the methodology

and the results, but we do, indeed, use exactly the threshold you

mentioned in looking at mergers.

Mr. STUPAK. OK. And when we are talking about mergers, you

indicated—and you testified to some of the mergers you were doing,

and I believe your testimony shows there were about 21 complaints

you filed on mergers in the 1990’s.

Mr. KOVACIC. That is correct, sir.

Mr. STUPAK. OK. But my concern was, in looking at the GAO report and some of the others that were documented, there were

2,600 mergers in the 1990’s. That is about less than 1 percent of

the total mergers.

Especially if you take a look at like when Exxon and Mobil—that

was the largest supplier with the second. You didn’t file any objections on that one.

Mr. KOVACIC. We actually did challenge that. It produced the

largest package of divestitures that the commission has ever obtained as a remedy to a merger.

Mr. STUPAK. OK. How come you didn’t mention that one in your

testimony, then?

Mr. KOVACIC. I believe it is. In my spoken remarks, I was covering more recent events, but I believe in the prepared statement it

is included.

And though I have never seen the entire data set of the 2,600

transactions—but my intuition, Mr. Chairman, is that the vast majority of those involved comparatively small transactions involving

production operations.

Mr. STUPAK. Would you look at page 12 of your testimony?

Mr. KOVACIC. Yes, sir.

Mr. STUPAK. And I am looking at footnote No. 24. And you are

talking about the Federal statute when we are trying to look at

price gouging after Katrina.

Mr. KOVACIC. Yes, indeed.

Mr. STUPAK. And the statute mandated how you do your investigation—effectively defined price gouging.

Now, so would you say that is the definition of price gouging, as

an average price of gasoline available for sale to the public following the hurricane that exceeded its average price in the area for

the month before the hurricane, unless the increase was substantially attributable to additional costs in connection with production,

transportation, delivery and sale of gasoline?

Mr. KOVACIC. I think if I were picking a composite of all of the

approaches that have been used in the State legislation and tested

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by Congress, that is the best approximation to a synthesis that I

would suggest.

Mr. STUPAK. OK. And then after Hurricane Katrina, I said in my

opening statement that we found 23 percent, you didn’t study all

of them, but 23 percent of the refineries that were studied, 9 percent of the wholesalers and 25 percent of the retailers had price increases that were not substantially attributable to increased costs

and ‘‘could not be attributable to national market trends.’’

In other words, there was some gouging going on, price gouging

going on.

Mr. KOVACIC. The one footnote I would add to that, Mr. Chairman, is that one of the screens we were asked to use was not simply to consider the effective national trends but also local and regional market trends.

And when we took those into account, most of the transactions—

the activity that was caught by our initial screen tended to fall by

the wayside, so that when we look at adjustments related to local

and regional circumstances, not simply national or international

conditions, those tended to fall by the wayside.

Mr. STUPAK. But those that fall at the wayside, you would agree

with me, 23 percent of refineries and 9 percent of wholesalers and

25 percent of the retailers studied had price increases that would

equate to price gouging using this definition found in footnote number 24.

Mr. KOVACIC. Except that when you take the clause, Mr. Chairman, that talks about the sale of gasoline in an area or to national

or international market trends, and if you took account of regional,

local trends, that percentage would drop considerably.

Mr. STUPAK. OK. So there was some, and we don’t know what

the amount is. Is that fair to say?

Mr. KOVACIC. Yes. I would be happy to provide a more specific

number to you for the record, sir.

Mr. STUPAK. OK. On page 2, you talk about the average refining

margin was about 10 cents to 15 cents per gallon in January and

February.

Mr. KOVACIC. Yes, sir.

Mr. STUPAK. And now we are up to 70 percent to 80 percent, you

say in your testimony.

Mr. KOVACIC. Yes, sir.

Mr. STUPAK. So that is a 55-cent to 65-cent increase in price per

gallon just for refinery, and that is all profit, right?

Mr. KOVACIC. I would suspect that a substantial amount of it is,

yes, sir.

Mr. STUPAK. OK. Where do you draw the line here? When do we

start hitting the excessive profit? We already have testimony that

the crack spread is going to be 36 cents. That is based on $30 a

barrel.

Now we are going to hit 36 cents here in June. That is what the

futures are already trading for. So that is probably going to get up

closer to about 80 cents per gallon of all profit.

Where are we hitting the excessive profit here, profit-taking?

Mr. KOVACIC. We don’t have a good functional definition for that.

In our experience, that is not an amount we have ever sought to

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calculate or have been pressed to calculate for both our consumer

protection and competition work.

What we have also noticed is an enormous degree of volatility

just in the past six months of what those margins have been.

Mr. STUPAK. OK, but if you look at it—and, Mr. Caruso, correct

me if I am wrong. But in September and October 2006, gas prices

actually dropped 60 cents.

Mr. KOVACIC. Indeed, they did.

Mr. STUPAK. And then now we are up, I think Mr. Barton said,

94 cents or 86 cents, since the first of the year. So that is about

$1.50, $1.54 spread there, in about 6 months.

You might call it volatility, but I think there is a lot of room for

profits in these where you can play with these margins all you

want. At what point do we pass where it is gouging?

I mean, if you are at $3, and you have got a $1.50 spread you

are playing within 6 months, where are you at this point where you

are taking excessive profit, especially when 10 cents increase is a

$14 billion transfer from the consumer to the Big Oil companies?

Mr. KOVACIC. In our experience, we have never had an occasion

in applying our authority to provide a definition for what the ceiling or the excessive amount is.

Mr. STUPAK. Well, that is because you have no law on price

gouging, right? You have always had to look at antitrust and competitive natures like that, not a price gouging——

Mr. KOVACIC. That is correct.

Mr. STUPAK. So would a price gouging law then help you answer

these questions?

Mr. KOVACIC. I think that were the Congress to adopt one—and

I do want to emphasize to you that were the Congress to adopt one,

we would faithfully execute it—that would press us to develop the

kind of functional definition that we have been talking about.

Mr. STUPAK. OK. Thank you. My time is up.

But, Mr. Caruso, one more, if I may. What percentage of the

price of a gallon of gas is risk premium associated based on fear

and speculation?

Mr. CARUSO. Well, there is no good agreement on what that is. You can hear analysts—anywhere from $5 to $20 per barrel, which

means 10 cents to 40 cents.

Our view is when there is fear of supply loss in the marketplace

for example, there could be a natural disaster, like hurricanes, or

you are worried about Nigeria or Iran, and you as a refiner were

to go out and add inventories to prepare yourself for those

eventualities, that adds to the price of, in this case, crude oil, in

our view, that is part of the market functioning.

If you are fearful of a supply loss, and you respond to that by

adding inventories, that certainly puts upward pressure on price.

That is one type of fear.

There is another part of it which you don’t—there has been financial speculation, and again, it is in some views that that adds

liquidity to the market, which is good. Others say that is pure risk

premium.

Mr. STUPAK. Well, that is another piece of legislation I have.

My time has expired. I turn to Mr. Whitfield of Kentucky for

questions, please.

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Mr. WHITFIELD. Thank you, Chairman Stupak.

And I also want to thank you all for your patience. I mean, how

frequent is it that you get to come to a hearing room and stay for

4 hours or 5 hours in the afternoon, and particularly with such personalities as us, right?

Mr. Caruso, let me ask you a question. We hear about these

record profits in the oil companies, and we have a lot of constituents who are paying these high prices.

But I will note that it doesn’t seem to be affecting many of them

in their willingness to stop driving. A lot of them have to drive for

work, and so they are still paying the prices.

But as administrator of the Energy Information Administration,

you certainly have reviewed and looked at a lot of statistics.

Now, how would you explain that the oil profits are so high at

this particular time of high prices in the oil and gas business, retail

gas particularly—if you are speaking to a Rotary Club, how would

you explain that to the Rotary Club members?

Mr. CARUSO. Well, I think perhaps to get to that level, I would

use an analogy of other markets, such as real estate, where we

have seen hot markets for real estate and prices of homes double

and triple. Therefore, individuals who own those homes don’t—take

their house off the market because they think that is a——

Mr. WHITFIELD. So the demand is so high that you can just make

more profit. You can just charge a little bit more and make more

profit.

Mr. CARUSO. I think that is the bottom line, and this particular

case—is that the demand is high and supply is limited.

But more important than a lot of products, there is this what

economists call very low price elasticity, so that you need a very

high price increase for small changes in supply or demand to rebalance the market.

And for example, we use about a 0.05 short-term elasticity,

which, to put that in, something that is maybe understandable, is

it would take a 100 percent increase in the price to change the demand by 5 percent.

Mr. WHITFIELD. I think for the average citizen, they understand

our free market system, the way it works, and that high demand,

prices go up, and so forth.

And so as long as they are convinced that there is not price

gouging going on, or advantage being taken of them, then they feel

pretty good about things.

Now, Mr. Pruss in his testimony talked about how the present

governor, when she was attorney general in Michigan, brought 46

claims against retail outlets and accused or charged all of them

with price gouging.

Now, I know enough about just the practical aspects of the legal

system that if you take a couple of retail outlets, and they may be

individually owned or a mom-and-pop operation, and the attorney

general comes in and says, ‘‘I am accusing you of price gouging,

and if you will sign this consent agreement and agree to do this

and this, then we will forget it and we will move on,’’ and I can

understand how a lot of people would just sign those and move on.

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But he also said, Mr. Kovacic, that they worked very closely with

the Federal Trade Commission on those cases. Now, were you there

at that time?

Mr. KOVACIC. I was, Congressman, but we did not work with

them in the formulation of their cases.

Mr. WHITFIELD. OK.

Mr. KOVACIC. We have had extensive discussions over time about

the types of cases they brought and how they have developed them,

but we were not their partner.

Mr. WHITFIELD. Well, was it your all’s impression that price

gouging was going on by those individual retailers, or do you have

an opinion of that?

Mr. KOVACIC. Well, I think, as suggested in Mr. Pruss’ comments, these matters don’t generate records.

Mr. WHITFIELD. OK. So there are no records.

Mr. KOVACIC. There is nothing really to take a look at.

Mr. WHITFIELD. So they simply signed these agreements to get

out of it.

Mr. KOVACIC. I believe in most instances—and you will recall his

closing comment that these tend not to generate published opinions

that are easily accessible to outsiders.

Mr. WHITFIELD. I would also note that, I guess, 29 States and the

District of Columbia do have price gouging statutes, and it is very

seldom, at least from my knowledge—and if I am incorrect, you all

can tell me. It is very seldom, from my knowledge, that charges are

brought against large oil companies, or refiners or anything else

under these price gouging statutes. It seems, generally speaking,

that the small independent retailer is the one that gets hit with it.

Would that be accurate or not accurate?

Mr. KOVACIC. I think that is an accurate characterization of experience with the States, yes.

Mr. WHITFIELD. OK. Now, we are going to have on the floor of

the House one day this week, as we did last year, a price gouging

bill, and one of the definitions is if the price is unconscionably excessive.

Now, Mr. Pruss indicated that the highest court in Michigan

ruled that phrase was not unduly vague, and so therefore was certainly legal.

But it is my understanding that the Federal Trade Commission

is on record in opposing a Federal price gouging law. Is that correct?

Mr. KOVACIC. That is correct, sir.

Mr. WHITFIELD. And you say because it would actually do more

harm to consumers than good. Now, could you explain that position?

Mr. KOVACIC. Again, addressing this in the capacity of someone

who is giving you my professional judgment about what would take

place, and not speaking to whether or not we would apply a law

that you would adopt, but as an adviser to you on this issue, one

of our concerns is that a measure of this type that is coupled with

powerful criminal penalties—and I know some of the proposals

have maximum sentences for individuals of up to 10 years.

You take the comparatively ambiguous definition, you couple it

with the possibility of a 10-year maximum prison sentence for the

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individual who transgresses—that is likely to induce a great deal

of caution, I believe, in how one behaves.

So to simply give one example of the concerns I have, that mixture of features, I think, could be very discouraging, certainly to

the small retailer, but to the larger refiners who would also be subject to the operation of the law itself.

That is, a definition that is comparatively ambiguous and has not

been well defined in the course of implementation in the States,

plus a 10-year sentence for individuals, I believe is going to induce

a great deal of caution in providing supply responses.

Mr. WHITFIELD. Right. Now, if the House passes this bill, and the

Senate passes this bill and the President happened to sign it, the

Federal Trade Commission would be vested with the authority to

prosecute under this price gouging bill.

Mr. KOVACIC. Exactly right, and in the case of the criminal matters, to refer them to the Department of Justice.

Mr. WHITFIELD. How difficult would it be to bring a case against

a Shell Oil Company or a ExxonMobil using this kind of language?

Mr. KOVACIC. I think these would be very demanding matters.

They are certainly not impossible. We are accustomed to dealing

with complex, difficult matters at our agency.

But being familiar with the very firms we would face, because we

do face them as opponents in other settings, these would be particularly challenging matters, because I think as the committee realizes, in order to come up with a sensible definition, it has to be

sensitive to cost justification arguments and to the national, regional and local market circumstances standard that we were talking about before. Yet it is the application of those very standards

that tends to involve, I would expect, a very elaborate and fact-intensive inquiry into the actual operations of the firm.

So impossible by no means. We do lots of difficult things, and we

do the difficult things very well. Yet these would be very demanding matters to pursue.

Mr. WHITFIELD. But even if the definition remains relatively

vague, and we do not give you the opportunity to define price

gouging, I am assuming that despite the complexity of it that the

American people would still be better off having a Federal price

gouging statute than not.

But is it the commission’s position that you are opposed to a Federal price gouging statute?

Mr. KOVACIC. As to your last question, yes. My concern is that

the uncertainty it would create would have a tendency—and I can’t

prove this to you by any rigorous calculus, but my intuition is that

it would create hesitation in the response to shortages, and that

might tend to exacerbate rather than to mitigate shortages.

Mr. WHITFIELD. Thank you, Mr. Chairman. My time has expired.

Mr. STUPAK. Mr. Inslee for questions.

Mr. INSLEE. Thank you.

I think I saw in Mr. McCool’s testimony discussions of geopolitical uncertainty in a number of different countries in the Middle East has kept and will continue to keep the market on edge.

Mr. McCool, is there any way to put any parameters at all what

those uncertainties translate to in the prices at the pump?

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Mr. MCCOOL. Congressman, I really don’t know that we would

be able to answer that. I mean, earlier, Mr. Caruso actually suggested that this idea of uncertainty certainly has an effect on supply, and inventories and things like that.

But it is, I think, very difficult to put any kind of meaningful

quantitative measure on that, except to know that geopolitical uncertainties clearly have some effect.

Mr. INSLEE. Has the Iraq war translated into increased prices

that consumers are now paying in America for gasoline to drive

their cars?

Mr. MCCOOL. I don’t know the answer to that, sir.

Mr. INSLEE. Is it uncertainty of the type that may have an impact on——

Mr. MCCOOL. It would increase the level of uncertainty, yes, sir.

Mr. INSLEE. Could you describe part of the amount that Americans are paying at the pump today as a tax associated with the

war started by this President?

Mr. MCCOOL. Again, I think the level of uncertainty in the

world—it may or may not be greater. I can’t quantify it.

Mr. INSLEE. Well, did the Iraq war make it drive prices down?

Mr. MCCOOL. I don’t know. We don’t know what the

counterfactual is, Congressman, so it is hard to really answer that

question.

Mr. INSLEE. Well, most of the people who have any understanding of the impact of war in my district believe that it had some impact on oil prices, and it is not been beneficial, and my constituents

are now paying at the pump for a misguided war. I will just tell

you that is their belief, for whatever that is worth.

I want to ask about the consolidation in the industry. I was looking at the GAO report of May 2004, and I assume this has been

discussed. I had been in another hearing about energy issues.

During the period of 1991 to 2000, there were over 2,600 merger

transactions within the various segments of the U.S. petroleum industry. That is what the GAO report found.

They found that concentration in the wholesale gasoline market

increased substantially from the mid 1990’s so that 46 States had

either moderately or highly concentrated wholesale gasoline markets.

They found that the availability of less expensive unbranded gasoline decreased substantially.

And even though this took place, there has not been, as far as

I know, an instance where the Federal agencies, at least during

this administration, have challenged any of the mergers that have

led to higher concentration.

Is that all of yours’ understanding?

Mr. KOVACIC. Congressman, all of the transactions you are talking about took place through the year 2000.

They were reviewed by our predecessors, and whatever relief was

achieved was achieved well before George Bush came to Washington in January 2001.

Mr. INSLEE. I appreciate that, and has this administration taken

any action involved in any of the mergers to prevent them and prevent further consolidation?

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Mr. KOVACIC. Indeed, we have, sir. As my spoken remarks and

my written text point out, I review a number of transactions where

we have challenged specific mergers.

And indeed, at this moment, we are before one of our Federal

courts awaiting a decision on the latest, a combination of the Western Refining Company and Giant Industries.

Mr. INSLEE. And what percentage of the mergers have you challenged?

Mr. KOVACIC. I don’t have a precise number, although the best

data I have seen—that is, when you take the rate of merger challenges by the Federal Trade Commission in this decade, I believe

it is almost identical to the rate of challenges during the previous

decade.

Mr. INSLEE. During your tenure, have you actually come out

against mergers, or you just have asked for some divestiture after

the merger?

Mr. KOVACIC. I believe in at least four of the transactions, we

have gone to court to block them outright. And in at least one of

those instances, the parties then proposed a settlement that we

found acceptable.

But I can give you the precise numbers on that as well, Congressman.

Mr. INSLEE. I would appreciate that. That would be helpful.

Mr. KOVACIC. Yes, sir.

Mr. INSLEE. While I have got you on the line here, do you believe

that consolidation has resulted as a partial reason for some of the

price hikes Americans have experienced?

Mr. KOVACIC. As I mentioned a moment ago, we deeply respect

the work of the GAO that you referred to before. That is, it is an

absolutely sensible and necessary element of good public policy that

agencies take steps to evaluate the effects of what they have done.

We do have a serious dispute with the GAO about the soundness

of the results that they have identified.

But notwithstanding that dispute—that is, we disagree fundamentally with their findings—we are devoting additional efforts

to do our own assessments of whether or not we have erred in

those earlier judgments, and to incorporate that into the formulation of policy looking ahead.

Mr. INSLEE. One of my concerns is that it is my belief that unless

we break this addiction to oil, we are all going to be exposed to increasing prices.

Even if we do some of the things we need to do, which is to pass

this antipredatory pricing bill, and even if we do slow down the

rate of consolidation and hopefully can then increase refinery capacity—even if we do do some of these common-sense things—that

unless we develop whole new revolutionary systems of fueling our

transportation system, we are still going to be behind the eight-ball

because of the huge increase in demand from China and other developing nations, because of the relative limited refining—or, excuse me, pumping capacity of the world, and that we really need

to develop whole new systems of powering our transportation system.

Mr. KOVACIC. Congressman, I think you would find many of your

concerns echoed in the 3 days of proceedings we had a month ago

97

at our agency on energy policy, where a recurring theme of many

speakers, I think, echoes your own remarks.

Namely, what we need is a far more fundamental reassessment

of energy supply and demand patterns, perhaps a more basic examination of how we live, where we get supplies, what supplies are

available to us, demand side considerations.

I think you would find that many of the themes you have identified were addressed again and again by our speakers who would

agree with you emphatically.

Mr. INSLEE. Well, there is a bill, and perhaps I can ask your comment, I will be introducing. It is called the New Apollo Energy Act.

And we call it the New Apollo Energy Act because many of us

believe that we need a revolution that is as ambitious and visionary in transportation fuels as Kennedy led the country to be in

1061 to go to the moon.

And in this bill, we will take measures such as assisting our domestic industry for retooling costs. We have a bill called the Health

Care for Hybrids bill that will help the development of hybrid technology distribution.

We will be proposing a bill for plug-in hybrids that can get 150

miles a gallon, that go 40 miles on your electricity.

You plug it in at night and you go 40 miles, and then if you want

to go more than 40 miles you use either ethanol or gasoline. You

get 150 miles per gallon of your fuel.

We have bills that will include efforts to increase efficiency of

battery technology to try to fulfill the remaining steps for battery

technology.

And we will have a bill to substantially increase cellulosic ethanol, the second generation of biofuels. Of course, everyone talks

about corn ethanol now, but we need a second generation.

So I would just ask for your comments from the panel as to

whether those steps make sense and whether or not, long term,

they might be beneficial to really break the back of this slippery

slope of eternally rising gas prices that we are having.

Mr. KOVACIC. I think that there are any number of ways that

this country can tap what is an unsurpassed degree of technical capacity, and that a variety of approaches along the lines you mention are quite worthwhile.

The one footnote I would add to it—and I think of my father’s

experience, who worked in the nuclear power sector, when we lived

in southeastern Michigan for 13 years, indeed, in Chairman Dingell’s district, where I first met him in 1959.

I think part of what we discovered with that experience with the

fission fuel cycle is that it invariably turns out to be somewhat

harder than we think it might be, that the mere fact of technical

feasibility does not always dictate successful implementation.

So I would endorse efforts to use the remarkable technical capacity we have to explore alternatives.

My only thought would be that given the humbling experience

we have had in closing the gap between the excellent concept and

the successful implementation that we realize that it turns out

often to be harder than we thought.

Mr. INSLEE. Right. Well, it is hard, and that is why we need to

get started, and that is why we need to be aggressive. And today,

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we are spending less than one-half on developing these technologies than we were in 1979.

We spend less on energy research in the entire United States

budget than we spend in three weeks in the Iraq war. And that is

a pathetic comment on our refusal to date to really try to break the

oil addiction habit.

And I hope that this hearing helps promote the New Apollo bill

so that we can move forward and really get a new revolutionary

transportation fueling system, which this country deserves. Thank

you.

Mr. STUPAK. I thank the gentleman.

A couple questions, if I may.

Mr. Kovacic, if I may, in the legislation that is being proposed

and we will take up later this week, it basically says it is unlawful

for a person to sell crude oil gasoline, natural gas or petroleum distillates at a price and we go unconscionable and things like that.

You would agree with me, the FTC has pretty much sort of identified price gouging. I mean, you have a working definition of it, do

you not?

Mr. KOVACIC. We have certainly developed proposals that we

think are the best things we have seen.

And as the committee goes forward in developing its work, as the

House works on this, notwithstanding any reservations I mentioned, we are at your disposal to work with you, your colleagues,

your staffs on suggesting specific adjustments that we think

are——

Mr. STUPAK. So those cases that the FTC saw after Hurricane

Katrina, where they say they were ‘‘not substantially attributable

to increased costs’’ and ‘‘could not be attributed to national market

trends,’’ that is a price gouging definition in a way.

Mr. KOVACIC. It is, and I would simply add the gloss that I mentioned before that also takes account of regional and local market

trends, too, sir.

Mr. STUPAK. And that is what the legislation says. And actually,

we give you 180 days to develop that definition, so it is not an impossible task.

And then you already have some guidelines that the FTC has relied upon in the past, as your footnote No. 24 in your testimony has

indicated.

Mr. KOVACIC. It is, and my request to the committee is that to

the extent that you can make the specific policy choices—because

in many ways, this is uncharted territory for us.

I don’t know outside the field of public utility regulation that we

have used approaches of this kind on a national scale.

It is enormously helpful to us that you and your colleagues, to

the extent you can, be as specific as you can about the appropriate

standard.

Mr. STUPAK. And you indicated that these dealings you have

with oil companies, especially on some of these mergers—they are

pretty complex litigation, correct?

Mr. KOVACIC. Some of the most complex that we have, yes, sir.

Mr. STUPAK. So if we are going to bring price gouging against

multinational corporations, we probably want the expertise of the

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FTC to do it, then, because you deal with these folks from time to

time.

Mr. KOVACIC. Without undue boastfulness, I would say that the

Federal Trade Commission has the best complement of competition

policy analysts in the field of petroleum in the world.

Mr. STUPAK. So you are willing to do your price gouging if the

legislation becomes law.

Mr. KOVACIC. I would say if the legislation becomes law, we have

the greatest expertise to apply it.

Mr. STUPAK. We mentioned—I did, at least, in my opening—Attorney General Stumbo from Kentucky, Mr. Whitfield’s home State,

bringing this case—I think he brought 70 cases of price gouging

after Hurricane Katrina.

Mr. KOVACIC. Yes.

Mr. STUPAK. Did the FTC work with him as you indicated you

worked with Governor Granholm in Michigan?

Mr. KOVACIC. We did not work with them on the formulation of

those cases, though when we did the Katrina report, we asked our

colleagues in the States to share with us as much as they could

their actual experience in bringing cases under their own laws.

And I do think, Mr. Chairman, that a fuller and deeper collaboration on our part with our State counterparts, even in the absence

of new legislation—a fuller discussion about how local markets

work would be an enormously valuable addition to the oversight of

the sector.

Mr. STUPAK. Well, let me ask you this. The chart we point out

earlier, from the ground to the pump, over there—it is the Washington Post looking at the price from September 2004 to September

2005.

And the cost of refinery went up 255 percent, as documented by

that article, and it is part of our reference we have used many

times on this committee.

Now, that is a national average. Now, wouldn’t that constitute

price gouging, 255 percent over a 12-month period?

Mr. KOVACIC. It would matter a lot to me how long it persisted,

and part of that is the concern that, as my colleagues have mentioned, our system is so fragile.

There is so little room for error that comparatively small disruptions tend to have an enormous effect.

Mr. STUPAK. But those small disruptions affect the folks, our constituents, in that area, right?

Mr. KOVACIC. Unmistakably.

Mr. STUPAK. So like in 2005 when gas prices shot up in the Saginaw area, right outside my district, 74 cents in 1 day, while that

is a small disruption to the FTC, that is real loss to consumers in

that area.

Mr. KOVACIC. It is a powerful impact on local consumers, and

there is no question that that causes enormous distress.

What we have seen in other industries is that it is the signal—

and it is a bitter signal, to be sure, but it is the signal that draws

more supplies into the area. So the reason concern of us is how

long does it persist.

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Mr. STUPAK. And the penalties here, in answer to Mr. Whitfield,

you indicated may produce a great deal of caution amongst oil companies to move around supplies.

But you would also have to agree with me that the caution could

be not to engage in these actions where you see 74 cents increase

in 24 hours, or 255 percent increase in refining, could it not?

Mr. KOVACIC. It certainly could in some instances discourage

what we might define as inappropriate behavior, and in particular

I am thinking of instances in which people are not engaged in a

repeated interaction with their customers.

That is, in most instances, and your constituents far better than

I do, of course. All of you do. But my intuition is that the local gasoline dealer—and this is perhaps what Congresswoman Blackburn

was mentioning. The local retailer encounters her customers again

and again and again and in many ways is making investments in

the community in goodwill. That person has no incentive to behave

badly for short-term gain.

They might panic. They might make bad judgments. But they

are not likely to be acting out of malice. It is the person who is engaged in one off transactions.

Mr. STUPAK. Now, I don’t disagree with you. That is why the legislation says you have got to have $500 million in sales before we

look twice at you. That is not mom and pop that Mrs. Blackburn

was talking about.

But they are sort of captive, are they not? If I am handling

ExxonMobil’s gasoline, and they decide to run up the price, as my

gas station owner told me over the weekend, 15 cents in one night,

I don’t have that much choice but to jack it up 15 cents or I eat

the cost, right?

Mr. KOVACIC. That is right.

Mr. STUPAK. So mom and pop and the gas station owners are

really at the mercy of the supplier or the refiner, are they not?

Mr. KOVACIC. The reason I mentioned mom and—they do depend

on their existing supplier base. The reason I mentioned mom and

pop is that—and perhaps I am misreading the text. The text that

I have is that mom and pop may not be the priority, but they are

covered.

Mr. STUPAK. Yes. Mom and pop are covered for those circumstances where you go—as Mr. Pruss indicated, when gas is

running about $1.60—you go to $5 because you are afraid you may

not have some supply tomorrow.

I think we would all agree that is price gouging, unless, in fact,

you run out of gas tomorrow and there is none for you.

But the concern we have, as I indicated in our opening—that you

know, we have seen, because of these mergers, over 200 refineries

closed in the 1980’s.

Today, the remaining refineries are operated by about 60 companies, where at one time it was 189 different companies running the

refineries.

And we have all indicated today the more you merge, the more

you merge, the greater chance there is not only to increase price

because of the merger but also to influence and manipulate the

price in the market, is there not?

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If less people control the market, the greater the ability to manipulate the price.

Mr. KOVACIC. In general terms, at a specific point, that is true.

Why I am hesitating a bit and stumbling a bit about is that that

level of concentration nationwide is so dramatically small compared

to so many of our other sectors that is a comparatively

unconcentrated market.

That is, to have the bulk of the Nation’s refinery capacity in the

hands of 60 companies compares very favorably, if we are just looking at concentration, to the vast swath of American commerce for

major goods and services.

Mr. STUPAK. So that is about 30 percent, what we had not even

20 years ago.

Mr. KOVACIC. Yes. Many of the disappearances were comparatively small companies that built artificially small refineries during

the 1970’s when we created a subsidy scheme that encouraged

them to do it.

But in many sectors—imagine airlines. Imagine semiconductors.

Imagine software. To think that there would be 60 companies instead of the number we have—that is, just looking at the numbers

and taking that on its own terms, that is a big number in our economy.

Mr. STUPAK. We did that. We had those kind of numbers before

we deregulated in the 1980’s, and we are sort of all paying for it

now.

Mr. KOVACIC. Not across the board. In many areas, that experience——

Mr. STUPAK. Take airlines. OK? I will tell you, come try to fly

to my district some time.

Mr. KOVACIC. I have had many experiences, I think, flying that

very same carrier to that very same airport in Romulus, and going

onward, as you have, in many instances.

Mr. STUPAK. No, no, Romulus is easy. That is Detroit. Try to

come to the Upper Peninsula of Michigan. Before deregulation, we

could do it. Now we cannot.

Mr. KOVACIC. I would say the studies I am familiar with that

look at the experience with the greater number of people who fly

now, compared to where we were in 1978 when the reforms took

place, airline deregulation, with lots of stickiness in places, has

been a great success.

Although a certain merger that I think generated many of the

circumstances we are talking about—Republic Northwest—the Department of Justice in the 1980’s tried to stop it, and the Department of Transportation said go ahead. That unmistakably was a

competition policy failure.

Mr. STUPAK. Well, the American people aren’t seeing it in the

studies. We are seeing it in our wallets in the lack of service.

Mr. Whitfield has a couple questions he would like to ask.

Mr. WHITFIELD. Yes, I would just make the comment that all of

us, obviously, are interested in protecting the American consumer,

and wrapping up this panel—the testimony that I have heard is

that widespread price gouging has not been detected by any formal

examination.

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There has been sporadic retail price gouging at the retail level

that may have occurred simply because small retailers did not have

enough money to defend themselves and entered into some consent

agreement.

The large oil companies, refiners—no one has gone after them,

even though 29 States and the District of Columbia have laws in

effect.

And I know that the attorney general of Kentucky has filed some

complaints, and we will see how that works out.

But the testimony I heard today talked about basically these

price increases that have hit recently have been the result of, one,

refinery outages, the capacity—some of them are down; two, inventory is low; three, imports are low; and four, the demand is up.

And all of those—and I do look forward to Mr. Slocum’s testimony, because he is with the Public Citizen’s Energy Program, and

I would be anxious to hear what he has to say as well.

But thank you all very much for your testimony, and this bill on

price gouging will be on the House floor this week. It will be on

suspension, so there won’t be an opportunity to amend it.

But hopefully we can move forward and continue to address this

issue. Thank you.

Mr. STUPAK. I want to thank this panel, and thanks for your patience. It has been a long day. And thanks for helping us with this

issue. Thank you. This panel is excused.

We will call up our second panel of witnesses.

Next we have Mr. Tyson Slocum. He is the director of Public

Citizen’s Energy Program. And also, Mr. David Montgomery, vice

president, CRA International here in Washington, DC.

And Mr. Sundstrom had to leave, but his written testimony will

be part of our record.

[The prepared statement of Mr. Sundstrom follows:]

TESTIMONY OF GEOFF SUNDSTROM, DIRECTOR, PUBLIC AFFAIRS, AAA, HEATHROW, FL

Chairman Stupak, Ranking Member Whitfield, and members of the subcommittee,

my name is Geoff Sundstrom, and I am AAA’s director of Public Affairs. I am the

association’s primary spokesperson on motor fuel issues and have oversight responsibility for AAA’s widely-sourced Fuel Gauge Report Web site which tracks national,

State and local fuel prices each day. I also work with local AAA clubs on fuel price

inquiries from members and the media in your home states.

AAA appreciates your invitation to appear before the Energy and Commerce Subcommittee on Oversight and Investigations to discuss the current escalation in gasoline prices. AAA’s concern revolves around the impact rising prices have on consumers.

As you may know, AAA is the largest paid-membership organization in North

America. Earlier this year we achieved the milestone of having 50 million members

in the United States and Canada. Our members drive approximately 25 percent of

all the motor vehicles in operation in the U.S. Using figures from the U.S. Department of Transportation, we estimate AAA members will purchase approximately 33

billion gallons of gasoline this year and at current prices will spend more than $100

billion on gasoline.

The important question is: With prices having risen more than 80 cents a gallon

this year, are Americans driving less? The fact is that consumers at different income

levels are affected differently by higher prices. There are affluent people in America

for whom spending an additional $100 per month on gas is not an issue. Some people have other transportation options and flexibility and can reduce their consumption of higher-priced fuel. But the vast majority of Americans have no choice but

to absorb the extra $50, $100, or $150 a month in gas prices. They have to go to

work, take children to daycare, and go to the grocery store. This is not discretionary

travel that can be limited.

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Like it or not, gasoline is a significant part of many Americans’ budgets. When

gas prices increase, there is less money to save, invest or spend on goods and services. The extra expense results in a sacrifice elsewhere in a family’s budget—groceries, healthcare, college savings, retirement planning.

Part of what we do at AAA is help motorists understand what they can do to reduce the burden of high gas prices, from vehicle maintenance to trip-chaining, to

purchasing more efficient vehicles, there are things that Americans can do to mitigate the impacts of high fuel prices. We also work to help motorists understand

what is going on in the fuel markets, and in times of crises, like after the hurricanes

of 2005, to help them understand how their decisions can impact what happens in

the market.

Unlike others that frequently comment on gasoline pricing, AAA has no involvement in the regulation, refining, shipping, blending or sale of gasoline. We do not

trade oil and gasoline futures, operate hedge funds, sell mutual funds, distribute investment newsletters or make commissions on the sale of energy stocks.

AAA has increasingly found itself involved in the great national debate on America’s energy future and has filled an important niche in objectively monitoring the

price of fuel, advising consumers about fuel conservation and, to a limited degree,

helping motorists anticipate what they might expect to pay to fuel their personal

vehicles in coming months and years.

The summer travel season—which is important to our quality of life and crucial

to the financial success of tens of thousands of tourism-related businesses across the

country—is around the corner. On Memorial Day weekend we forecast that 38.3 million Americans will travel 50 miles or more, an increase of 1.7 percent from last

year. Also, roughly 32.1 million travelers, or 84 percent of the total, will drive, up

1.8 percent from last year. During this time, American consumers will experience

the highest average prices they have ever paid for gasoline. On Sunday, May 13,

AAA’s daily, online Fuel Gauge Report Web site recorded a highest-ever nationwide

average price for self-serve regular gasoline of $3.073 per gallon. Since that time,

the average price of self-serve regular has increased an additional 13 cents per gallon.

We have crossed the $3 per gallon threshold twice before. Prices topped out at $3.036 per gallon on August 7 of last year, after Israel invaded Lebanon. That price

nearly reached the then-record average price of $3.057 per gallon paid by Americans

on Labor Day Monday of 2005, after Hurricane Katrina temporarily closed or damaged critical oil and gasoline infrastructure along much of the Gulf Coast. As frustrating and unpleasant as our two previous national experiences with $3 gasoline have been, both were accompanied by an oil price at or exceeding $75 per

barrel and a natural or man-made disaster with the real or perceived ability to

block the flow of petroleum for some period of time. This summer is clearly different, however. This year, $75 oil prices and dramatic

news about hurricane damage or a possible war throughout the Middle East are absent. Instead, we have high gasoline prices even though oil prices have rested comfortably near the $60 per barrel target set by OPEC for most of this year, amidst

crude inventories that are routinely described as plentiful. Without OPEC, Mother

Nature, or an imminent man-made catastrophe to blame for the high price of gasoline, it’s fair to wonder : why?

I am certainly not appearing before this committee today to say that AAA has the

answer. But as near as we can tell, there are strong indications the problem lies

at least in part with the fact that the domestic refineries that supply gasoline to

America’s network of filling stations, as well as the companies that import gasoline

from abroad for sale here, have been slow to supply the wholesale distribution network as consumer demand for their product has continued to rise.AAA leaves it to

the experts at the U.S. Department of Energy to cite the specific numbers behind

this situation. But we are concerned about the number and frequency of refinery

outages this year and the impact that it has had on the system. There is clearly

little margin for error. The fact that America is somehow losing ground in its ability

to supply enough gasoline to our economy—not oil, which this committee knows is

a different problem—is troubling. With the vast quantities of data generated and

analyzed by public and private institutions and industry economists and statisticians, Americans should be able to expect that those who refine oil into gasoline can

anticipate demand growth, plan to meet that growth, and then make the necessary

investments in plants, equipment and labor to provide the fuel at a cost that has

some semblance of stability.

AAA would like to say that no one can know with certainty the price of gasoline

this summer. For example, it was our belief the national average price of self-serve

regular would not exceed $3 per gallon this Spring, but this was before anyone knew

gasoline inventories would drop for 12 consecutive weeks as refiners continued to

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report equipment problems. Instead, what AAA tries to do is identify and describe

a trend that points to a top or bottom for fuel pricing. We do this to help consumers

anticipate what their monthly fuel expenses will be.

With that said, let’s look at what we know right now: We know that gasoline inventories are critically low especially on the west coast; our refining and distribution

infrastructure are stressed due to maintenance/investment issues, but also due to

the introduction of ethanol into the blending process and our boutique fuel requirements; increased imports of gasoline, which have been growing, are hoped for but

not assured; hurricane season is on the way; and much of the world’s oil production

shipping still takes place in a dangerous part of the world. We also know the stock

market has just had a record run, demand for gasoline remains strong, and the

summer travel season—which is important to our quality of life and crucial to the

financial success of tens of thousands of tourism-related business across this country—is around the corner.

Knowing these things, and using our experience watching gasoline prices, the

wholesale and retail gasoline prices generated for AAA by Oil Price Information

Service, and the production, inventory and import numbers produced by DOE, AAA

thinks prices are likely to move somewhat higher. But the much- predicted $4 per

gallon gasoline will not materialize as a national average price unless the oil price

marches into the $75 per barrel or higher range—a scenario that is only likely if

an unknowable event such as a hurricane or geo-political conflict were to seriously

threaten or disrupt energy flows. In making the projection to media that a $4 per

gallon average gasoline price was not probable, AAA has been described in the last

few weeks by some analysts as ‘‘conservative’’ and ‘‘not wanting to panic’’ consumers. In fact, our views simply reflect our interpretation of the best available data

and analysis.

In closing, AAA would like to address the notion that if the price of gasoline goes

high enough Americans will significantly reduce their gasoline consumption and

help solve our energy problem. Again, though we do advocate that motorists conserve fuel and choose fuel efficient vehicles, AAA does not believe that Americans

are frivolously driving around wasting either gasoline or money. According to AAA’s

most recent study of driving expenses, it costs 52.2 cents per mile to own and operate a typical new vehicle in the United States. That’s $52.20 to drive 100 miles—

and this number was calculated using an average fuel price from the fourth quarter

of last year of just $2.26 per gallon. What we have seen based on many years of

watching Americans’ driving habits is that motorists reduce their discretionary driving only based on a significant slowdown in the economy and the possibility of job

loss, or in response to gasoline shortages. While no one wants to pay high gasoline

prices—and those prices do not inflict pain equally since those at the lower end of

the economic scale are disproportionately burdened by rising prices - much of our

driving is essential and at this point is not easily traded for other modes of transportation. Whether the result of geopolitical, refining, or distribution factors, the

fluctuations in fuel prices underscore the Nation’s vulnerability and the need to take

a broad approach to securing a more diverse and sustainable supply of energy into

the future. AAA acknowledges that fossil fuels will play a critical role in our Nation’s economy for the foreseeable future, but we strongly believe steps must be

taken to decrease our reliance on oil and refined gasoline to ensure the strength of

our economy, the security of the Nation, and our way of life.Thank you again Mr.

Chairman for allowing me to testify here today, and I look forward to answering

any questions that you may have.

Mr. STUPAK. And as Members know, they can submit written

questions, and we will leave the record open for 30 days, as is customary, for written records for any member who would like to be

here.

Gentlemen, as you know, it is the policy of the subcommittee to

take all testimony under oath. Please be advised that witnesses

have a right under the rules of the House to be advised by counsel

during testimony.

Do any of you wish to be represented by counsel? Mr. Slocum?

Mr. SLOCUM. No.

Mr. STUPAK. Mr. Montgomery?

Mr. MONTGOMERY. No.

Mr. STUPAK. OK. Would you rise and raise your right hand and

take the oath?

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[Witnesses sworn.]

The record should reflect both witnesses have replied in the affirmative.

Let me again extend my thank you to you for staying around. I

know it has been a long afternoon. We have been in and out on the

floor.

But, Mr. Slocum, if you would, your opening statement, please.

TESTIMONY OF TYSON SLOCUM, DIRECTOR, PUBLIC CITIZEN’S

ENERGY PROGRAM

Mr. SLOCUM. Sure. Mr. Chairman and Mr. Whitfield, thank you

very much.

My name, again, is Tyson Slocum. I am director of the Energy

Program with Public Citizen. My organization represents over

100,000 consumers across the United States, and so I am testifying

on behalf of them, as our constituents.

So the hearing is on gasoline prices and oil company profits, and

what are some of the policy descriptions. And one thing that we

have focused on at Public Citizen is some of the dynamic changes

within the oil industry over just the last several years.

There is no doubt that there are several key variables that influence the price of oil and consequently the price of gasoline.

I think that one of the most important variables that often gets

overlooked is what has been happening in the dynamics of the oil

industry.

And one thing that is undeniable is that the number of mergers

that have been approved over the last several years has dramatically changed the industry.

The industry is sometimes explained as a cyclical industry. These

mergers, I would argue, are a direct response to that history of cycles of boom and bust. And these mergers were designed to put an

end or to significantly limit that cyclical nature of the industry.

And I think that the proof is in the numbers. Public Citizen,

compiling data obtained from the Energy Information Administration, shows that in 1993, for example, the largest five oil companies

controlled roughly one-third of the national refining market share.

By 2005, the largest five controlled over 55 percent of the market. And the largest 10 controlled over 80 percent. That is a huge

shift in the level of consolidation.

And that consolidation has resulted in higher prices at the pump.

The GAO showed that in their 2004 study. And it is important to

note that the GAO study stops in the year 2000.

Since 2000, of course, the mergers of Chevron Texaco,

ConocoPhillips—Valero has been allowed to acquire several of its

competitors. So since GAO’s report ended, there have been a number of additional mergers.

And so Public Citizen is eager in seeing what the GAO comes up

with as they are finishing the tabulations for that report.

So what is this consolidation translated into? The GAO concluded

that it did result in higher gasoline prices. And again, all you have

to do is look at the statistics.

The EIA, again, provides data on refining margins. And there, it

is very clear. In the year that Exxon and Mobil were allowed to

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merge, in 1999, the average refining margin in the United States

was 18.9 cents.

By 2005, it had jumped 158 percent to 48.8 cents. That is in

2005. 2006 was another record-breaking year for the industry, so

I think we can expect those refining margins to be far higher.

I took a look in BP’s financial statements, for example, and saw

that the refining margins at its U.S. operations—specifically, on

the west coast—were almost triple that of their refining margins

in their European operations.

And again, this is played out in ExxonMobil’s financial statements. In their 10(k) annual report filed with the Securities and

Exchange Commission, they reported a return on capital investment on their U.S. refining operations to be 66 percent. Compare

that with their non-U.S. refining margin of 24.5 percent.

So again, international global oil companies are reporting the

biggest profits, the biggest profit margins, on their American operations. And that, to me, is troubling.

A lot of the discussion has been on the merits of price gouging

legislation. I think that it is clear that oil companies have been engaging in price gouging.

No doubt, oil companies work very hard to produce a critical

commodity for the U.S. consumer and for the U.S. economy. And

the are entitled to a fair and reasonable return on their hard work

and ingenuity.

And the question is are these latest profit numbers—not just for

2006, not just for the first quarter of 2007, but over the last several

years, they have demonstrated a pattern, a pattern of substantially

high profits historically, and profits that will continue because of

the dynamic changes within the industry resulting from industry

consolidation.

Now, it would be one thing if the industry was using these record

profits to then reinvest back into their aging infrastructure to help,

long term, alleviate some of these pressures for consumers.

Again, the numbers tell a different story. For example, in

ExxonMobil’s 10(k) report, they show that they spent $824 million

in capital investment on their U.S. downstream sector.

Compare that with $37.2 billion that ExxonMobil spent buying

back its own stock and paying dividends to shareholders.

This shows that the high prices that consumers are paying at the

pump are not being adequately reinvested into the aging infrastructure, but are simply going into the pockets of oil company executives and shareholders.

Granted, there are many lucky motorists out there who also happen to be shareholders of these companies. But the vast majority

are not.

And so the issue here is why are consumers paying these record

high prices when the oil companies are not adequately reinvesting

their record earnings back into the aging infrastructure.

And Public Citizen would argue that this is a major contributing

factor to a lot of the outages that we are seeing. Some of the witnesses in the previous panel testified to the fact that a number of

the outages are unplanned.

And you have to wonder, would these have been avoided had the

oil industry been more responsible with its record earnings and reVerDate 11-SEP-98 12:22 Nov 09, 2007 Jkt 000000 PO 00000 Frm 00110 Fmt 6633 Sfmt 6633 Q:\DOCS\DOCUMENT SCOM1 PsN: SCOM1
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invested more of their record profits back into the type of investments that consumers need to have access to an adequately competitive market.

So one of the solutions that Public Citizen supports is, I think,

some sort of price gouging legislation. I think that right now, there

isn’t an adequate cop on the beat.

I think that the Federal Trade Commission hasn’t had enough

tools at their disposal to enforce the types of activities that we are

seeing, particularly unilateral withholding and other things that

fall between the cracks of our antitrust statutes.

And I think that a price gouging law would help fill in those

cracks and provide the kind of enforcement that consumers need.

Public Citizen also believes that it is time to stop subsidizing ma- ture, profitable oil companies. The taxpayer provides between $5

billion and $8 billion in subsidies a year.

That is between tax breaks, royalty relief and various Department of Energy spending programs to profitable oil companies. We

think that those days of providing subsidies to big oil is no longer

necessary.

And we would rather shift that money into the kind of investments that will help American families, things like expanding access to mass transit, giving bigger financial incentives for fuel-efficient and alternative fuel vehicles.

So I appreciate your time, and I look forward to any questions

you may have. Thank you very much.

[The prepared testimony of Mr. Slocum follows:]

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Mr. STUPAK. Thank you, Mr. Slocum.

Mr. Montgomery, please, your opening statement?

TESTIMONY OF DAVID MONTGOMERY, VICE PRESIDENT, CRA

INTERNATIONAL

Mr. MONTGOMERY. Thank you, Mr. Chairman, Mr. Whitfield. I

was pleased to accept your invitation to testify today. I realized, in

looking at some of my footnotes, that I have been working on this

subject for something like 30 years.

I am vice president of CRA International. I am co-head of our

global energy environment practice. And I am an economist by profession and by training. I mention this as background.

My statements today are my own conclusions and do not necessarily represent the positions of either CRA International or any

of our clients.

I have submitted a longer statement for the record, and I would

like to make just four points in my remarks now.

The first is that prices set by a competitive market serve a useful

purpose. They provide the incentives for new supplies to meet rising demand, and they allocate available supplies more efficiently

among competing uses than any alternative method of rationing

that we have devised.

When supply is limited, prices can be expected to rise high

enough to keep demand from exceeding available supply. This can

temporarily raise prices above cost, without any wrongdoing on

anyone’s part, as the normal result of competition for supplies.

Over time, high prices provide a signal for additional investment,

and that supply competes away any difference between price and

cost.But sometimes prices rise to extraordinary levels for the reasons that Mr. Caruso in particular mentioned, that when there is

a supply interruption, it takes a very high price in order to bring

demand down to those available supplies.

I think the experience of Hurricanes Rita and Katrina actually

teaches the beneficial effects of rising prices. Prices rose not only

in the region where the hurricanes made landfall, but throughout

the eastern United States.

Those price increases caused drivers in areas not affected by the

hurricanes to reduce their use of gasoline, which actually freed up

more supplies to flow south to serve those who were in need.

At the same time, suppliers who were able to work in the Gulf

region drew down their inventories. They purchased more costly

supplies from overseas markets to serve the needs of the Gulf.

Refiners actually rushed repairs on damaged facilities, increased

their utilization of operable refineries to what were extraordinarily

high levels. They incurred additional cost in doing all of this.

All of these actions were in response to the incentives created by

higher prices in the market.

Ironically, if you think about the flow of gasoline from north to

south, it was consumers in the north who would have benefited if

gasoline prices had not risen after Rita and Katrina, at the expense

of those who were hit by the storms, who would have remained

without fuel.

In all our experience with gasoline price increases, and I have

been studying this since the 1970’s, there has never been evidence

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that those increases were caused by anything but the normal operation of a competitive gasoline market.

The regional gasoline price spikes that occurred in the past decade were investigated extensively by EIA and the Federal Trade

Commission, and their conclusions in every case that I have found

have been that gasoline price increases were due to the operation

of supply and demand, in light of an interruption of supply, and

the magnitude of price increases was consistent with the magnitude of the loss of supply, not consistent with cost, but consistent

with what it took in a competitive market to bring demand down

to equal available supply.

I don’t have any finding in a competent analysis that widespread

gasoline prices were due to any other explanation.

My third point would be that price increases are far from the

worst thing that can happen to consumers when there is a shortage. Consumers don’t win when prices aren’t allowed to rise. Shortages are made worse, and those who need fuel most are often least

likely to get it.

It seems paradoxical, but consumers would not be better off

when prices are kept low by some form of government intervention.

But when supplies aren’t available, something has to bring demand down to equal available supply. If it is not prices, then something else has to raise the cost of obtaining a gallon of gasoline.

In previous shortage situations in which we did have price controls, waiting caused the higher cost. And we have actually had

sufficient experience with price controls to conclude with pretty

good confidence that the lost value of time spent in lines is comparable to the out-of-pocket savings from lower costs.

For example, California, as it frequently does, created an experiment in what will happen when prices are kept artificially low. The

State of California ordered Chevron to refund alleged overcharges

by reducing the price of gasoline at the pump.

Long lines developed at the Chevron stations during the period

of this refund program. There were lines at the Chevron station.

There were no lines at other Chevron stations.

Economists who studied this event found through a series of

interviews and statistical analyses that the value of time lost by

motorists who chose to sit in gasoline lines was larger than the

monetary saving provided by price control, which is pretty much

what we would expect.

But something has to ration that supply of gasoline whose price

is under controls.

My fourth point would be about the refining industry. The refining industry has swung from glut, to shortage, to glut over the past

30 years that I have been looking at it, certainly since the beginning of the 1980’s.

Overall, that industry has had pretty low returns until this decade. And it is not just the level of returns for the industry up

through the beginning of this decade. It is that in a volatile market

like gasoline, it is only during the peaks that returns are adequate

to motivate investment are earned.

It is a cyclical industry, and the incentive for expansion in a cyclical industry like refining comes from the profits earned during

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the periods of tight capacity which provide almost all of the return

on capital that justifies investment.

When we are in a period of excess capacity with depressed prices,

which has always followed surges of investment in the industry, refiners’ margins are only sufficient to cover their variable costs.

They contribute little or nothing to the investments they made earlier.

Overall investment in refining can only recover if margins during

the isolated periods of profitability rise above the level that would

be required on a sustained basis.

The best explanation I have seen for current tight capacity is the

fact that through the 1980’s and 1990’s, refiners were consistently

losing money. And even after margins recover, it takes some time

for expectations to adjust and for new capacity to be planned and

built.

I would add a couple of other factors that are out of the control

of refiners that haven’t been talked about yet that I think have also

served to tighten capacity.

One of them is regulations on fuel quality and sulfur content

that have been put in effect in the past couple of years that have

required additional processing and eat up capacity.

In the last couple of years, we have also eliminated, due to product liability and bans in some States, use of an additive, MTBE,

that helped to stretch capacity.

And right now, our restrictions on ethanol imports are preventing access to economic supplies that could alleviate some of the

tightness.

I also think that expectations of future developments may be diminishing the incentives for expansion of U.S. refineries.

We see in this Congress and from this administration proposed

policies that would reduce gasoline demand, including tighter

CAFE standards and a 20 percent goal for non-petroleum fuels.

That signals a lack of need for refining capacity in the long run.

That is a long-run investment that has to be made.

There are large capacity expansions now under way in the Middle East that will increase the supply of gasoline imports.

And finally, it strikes me that policies toward the refining industry that would eliminate the upside potential from refining margins

are themselves a disincentive for investment.

Nevertheless, I see that EIA still expects a net addition of about

a million barrels a day to capacity over the next 5 years.

To sum up, it is my opinion that since gasoline price controls

were eliminated in the early 1980’s, the market system has worked

extremely well to move gasoline supplies to where they were needed, to avoid gasoline lines and serious economic disruptions.

Thank you for your tolerance of my time, and I would be happy

to answer your questions.

[The prepared testimony of Mr. Montgomery follows:]

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Mr. STUPAK. Thank you.

We will start our questioning.

Mr. Slocum, you indicated that U.S. refineries versus non-U.S.

refineries for ExxonMobil—66 percent return on their investment

in the U.S. but 24.5 percent return outside the U.S.

Have you look at like Shell, which is Dutch-owned, and BP, British Petroleum? Is that a trend with them also?

Mr. SLOCUM. Sometimes the availability of data is inconsistent.

ExxonMobil, to is credit, is extraordinarily detailed in providing details of its financial operations by segment and by geographic area.

BP does have some information, and I had talked about it earlier, and it is in my written remarks that I submitted with you.

And BP gave specific operating margins for its west coast operations, for its U.S. Gulf Coast operations, and then Singapore and

Great Britain. And their refining margins were almost triple in the

west coast.

They were almost three times as high as what they were in the

United Kingdom, and a similar increase versus their operations in

Singapore.

BP and Exxon are two industry leaders, but I would imagine

that their experiences in terms of high refining profit margins in

the United States versus their overseas operations is probably consistent.

Mr. STUPAK. Well, we have talked a little bit today about the

crack spread, the difference between a barrel of crude oil and what

it costs to refine it into gasoline.

And the spread right now is estimated to be $30, where traditionally it is $8 to $9. And for June trading, it is at $36. What is

the crack spread, let’s say, in Europe, if they break it down that

detailed?

Mr. SLOCUM. That is a great question, and I do not know offhand.

Mr. STUPAK. OK. Do you think you can get back with us on that?

Mr. SLOCUM. Absolutely. I would be very happy to.

Mr. STUPAK. You also indicated, Mr. Slocum, that no one would

begrudge anyone making a profit, even though a lot of us think

some of these profits lately have been obscene.

But what is a reasonable return of investment? You said you

don’t begrudge them a reasonable return. What would a reasonable

return, let’s say, on a crack spread, let’s say——

Mr. SLOCUM. In a capital-intensive industry, I think that if you

are earning a 20 percent return on your capital investment, you

are doing very, very well.

And you know, Chevron Texaco, I think their total global operations was between 24 percent and 26 percent return on capital investment.

I break out Exxon’s total capital investment, return on their capital investment, on the very last page of my written testimony, and

their global operations in 2006 returned them over 32 percent.

And then when you break it down by segment and by geography,

they earned much bigger profit margins on their U.S. operations,

particularly downstream, at almost 66 percent.

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So I think when you are looking at around a 30 percent return,

a 60 percent return, I think that that is far beyond what would be

considered a fair and reasonable profit.

Mr. STUPAK. Thank you.

Mr. Montgomery, I take it CRA is opposed to H.R. 1252, the

price gouging legislation we have been mentioning a little bit

today.

Mr. MONTGOMERY. We take no position on legislation. First, I

should be clear. I am not speaking for CRA International, my employer, at all. I am discussing my own opinions.

And my intention in my work and in being here is to try to discuss, as an economist who is familiar with the field, what the potential consequences of legislation might be. It is not to say I am

for or against it.

Mr. STUPAK. Well, the reason why I asked the question—I am

looking at your January 10, 2007 testimony. I believe that was before the Senate. And in there, you mention H.R. 1252 and a couple

of Senate bills.

And my distinct impression, reading the testimony—you are not

in favor of H.R. 1252.

Mr. MONTGOMERY. I am sorry, January 10, 2007? My memory

may be failing me.

Mr. STUPAK. April 10, 2007. This was a report on the potential

effects of proposed price gouging legislation, cost and severity of

supply disruptions.

Mr. MONTGOMERY. Yes, I am looking at this report——

Mr. STUPAK. And on page seven, yes, you talked about S. 94, S.

1735 and H.R. 1252.

Mr. MONTGOMERY. I am sorry, this is a report. It is not testimony. I just wasn’t connecting with what you were discussing.

Yes, have listed in this report three examples of price gouging

legislation that were before the Congress at the time that I was

writing it.

I was trying to write the report, as I said, to try to elucidate

some of the economic consequences of this type of legislation.

Mr. STUPAK. OK. I noticed that the bill that was passed last year

by Ms. Wilson wasn’t mentioned in your remarks. Any reason for

that? Because you do mention—S. 1735 was in the 109th Congress,

same as the Wilson bill, which actually passed the House and went

on to the Senate.

Has CRA taken any position on the Wilson bill, whether that

was a good bill last year or a bad bill?

Mr. MONTGOMERY. No, and I think what happened was as I was

producing the final draft of this report, since they really were intended as examples, because I wanted to discuss concepts of price

gouging legislation, and kind of implications of price controls in

broader markets.

They were the three examples that I was aware of that were

under consideration. There was no intention to either exclude anything on purpose or include anything on purpose. They were the

three examples I was aware of.

Mr. STUPAK. OK. I am looking at your testimony here today. And

you mention the—let’s make sure I get the right one here. I have

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read quite a bit of your—yes, you mention on page three the FTC’s

Midwest gasoline price investigation.

And I think we had testimony earlier today that there actually

was some—a refinery was found to withhold their product to the

Midwest, and therefore that would constitute a price gouging by

withholding the product, is that correct?

Mr. MONTGOMERY. No, not necessarily. To explain my reference

to it here, what I have referred to in my testimony and what I discussed at more length in the report was my reading of that report—I am just simply telling you how I read it—was that it concluded that overall, the magnitude of the price increases investigated there were consistent with the operation of supply and demand.

They mentioned a few other factors such as some mistakes, some

lack of preparation, but did not mention price gouging or market

manipulation as responsible for the broad price increases observed

in that market.

Mr. STUPAK. Well, let me ask you this question. There is an internal BP memo from 1999 that confirms the interest at least one

oil company has had in limiting the supply of gasoline to the Midwest.

The memo identifies a number of options for consideration in

order to reduce supply of gas in the Midwest. Among the options

are shutting down capacity, exporting to Canada, lobbying for environmental regulations that would slow down the movement of gasoline in pipelines, shipping product other than gasoline in the pipelines, and providing incentives to others not to provide gasoline to

Chicago and the Midwest.

That was what they found happened in the Midwest in some of

these areas. Is that a legal practice underneath the oil and gas industry?

Mr. MONTGOMERY. I am not myself an antitrust lawyer, and I

hate to—and I hesitate to offer an opinion about whether any particular act is legal or not legal.

My understanding under the antitrust laws is that an action

which is taken unilaterally by a company purely for its own internal purposes without collusion or other cooperation is not contrary

to the antitrust laws.

That is as far as I could go. I certainly don’t know enough about

the circumstances of this particular one to offer an opinion.

Mr. STUPAK. Well, but that would be contrary to your free market approach that you have sort of advocated here today, right?

Mr. MONTGOMERY. It could be. And we certainly are concerned

about markets where there is one or such a small number of sellers

that they are able to not only influence the price by their actions

but they are able to do so profitably.

That is why the FTC and others apply their structural and other

tests to ask whether the oil market or the refined product market

is sufficiently competitive structurally that it would not be in the

interest of an individual company to withhold supplies in order to

raise prices, because the withholding would cost them more on the

lost sales than their gain on the price on the remaining.

So it is, again, a matter of market structure and how that market structure is managed.

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Mr. STUPAK. Well, you said you would like to make four points.

Your second point was in all our experience—and I am reading now

from your testimony on page one, your second point.

In all our experience with gasoline price increases, there has

never been evidence that those increases were caused by anything

but normal operations of a competitive market.

Now, we talked a lot about the crack spread used to be about 10

cents to 15 cents per gallon. Now we are up to 70 cents to 70 cents

price per gallon.

Now, do you think that is normal operating? And actually, that is based on $30 a barrel, but now we are going to go up to $36 a

barrel, so that crack spread is going to be even higher.

Now, why won’t you provide more? Do you think that is anything

but normal operations in a competitive market?

Mr. MONTGOMERY. I think it is the operation of a competitive

market. I think we are not seeing that market subject to normal

stresses at this point.

Mr. STUPAK. Well, if you are not seeing normal stresses, then

why do prices keep going up?

Mr. MONTGOMERY. Because we are seeing abnormal stresses.

Mr. STUPAK. What are the abnormal stresses that—I mean, there

is no Hurricane Katrina out there. There is no OPEC oil embargo.

Our oil, as the first panel said, has been maintained relatively stable in this country.

Mr. MONTGOMERY. You are right. It is a combination of events.

First, crude oil is high. Second, we are seeing extraordinary volatility in gasoline prices.

I was struck, and I mentioned it in my prepared statement because it was so remarkable, by an article in the Wall Street Journal a couple of days ago that was updating, if you like, data that

I had looked at only through 2005 that indicated, actually, in early

fall and late winter of this year, we were seeing essentially the refiners’ margins drop back down to zero again.

They are bouncing around in an extraordinary way, and I think

it is a combination of uncertainty in the market. There is no question about that.

It is very tight capacity, the tight capacity due to the reasons

that I mentioned and others have mentioned, that have kind of not

only prevented the expansion of capacity but have actually taken

capacity away compared to a couple of years ago, many of them

driven by policy events.

And we have had an extraordinary growth in demand for gasoline for driving which hasn’t been knocked down completely by

these price increases.

And we are having a very hard time getting gasoline supplies

from the rest of the world, which normally supplements our refineries.

Adding all these things together are a market-based explanation

of why we are seeing what we are seeing.

Mr. STUPAK. You certainly don’t disagree with what was testified

the last panel, and what I have alluded to and I have said before,

and that you mentioned last fall, basically, running gasoline at a

loss—that is because in September and October, they are trying to

influence the outcome of the November election.

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There was a 60-cent drop in gasoline in September and October,

run up to the election—60-cent drop in gasoline prices. They took

a loss.

Mr. MONTGOMERY. I find it extraordinary that an industry, with

the number of players that Mr. Kovacic was describing, with—as

I know from talking to the quite different political interests, were

actually able to collude on doing something like that to influence

an election.

Mr. STUPAK. Do you have any other explanation why it went

down 60 cents in September and October of 2006 before the runup of the election?

Mr. MONTGOMERY. Why it went down in September and October?

Yes. We came off the RFG season. It is usually the reason why we

see something there. Refining capacity is very tight.

Mr. STUPAK. So we can expect a 60-cent drop this year? That is

the first time it has ever happened in the Nation’s history in September and October, to have such a huge drop.

Mr. MONTGOMERY. Nothing is ever repeatable. And it was dropping from a very high level.

But the point is that when we come off the RFG season, the two

big constraints that I was talking about—the problem with MTBE

and the problem with fuel sulfur standards—become an awful lot

less.

The cost of producing the very expensive fuel we have to blend

with ethanol, because ethanol is not a particularly good blend

stock—all of those costs start to drop at that time of year.

And if that is combined with other events, which I have not

looked at, in terms of the amount of driving, coming down from a

big——

Mr. STUPAK. That is the first explanation—RFGs—because it is

usually, ‘‘Geez, we have got to raise gas prices, because we have

got to limit our gas manufacturing, because we have got to move

the home heating oil, because we are in the cold part of the season

coming on up,’’ so it is usually just the opposite.

Gas prices go up in the fall of the year, not down, because you

are switching over from making gasoline for summer driving to

home heating oil in the winter, for places like me that had snow

last weekend.

Mr. MONTGOMERY. Actually, it works the other way around. Gasoline prices go up during the summer in order to induce the stockpiling of gasoline during the winter.

They drop during the fall and winter in order to induce the shift

toward heating oil and away from gasoline.

Mr. STUPAK. Thank you.

Mr. Whitfield for questions, please.

Mr. WHITFIELD. Thank you, Mr. Chairman.

And thank you all for being with us today.

And, Mr. Slocum, you had mentioned that the large oil companies were not reinvesting in refineries, and I mean, that was what

I had always understood, too. We have a lot less refineries today

than we had a number of years ago.

But then I was reading this report by the Federal Trade Commission, and it says that while the number of refineries has fallen,

the average size of existing refineries has increased, so that overall

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industry distillation capacity increased from 15.3 million barrels

per day in 1996 to 17.1 million barrels per day in 2005, or about

11.7 percent, and that this increase is equivalent to the addition

of over 15 average-sized refineries at the average size of 115,700

barrels per day.

So it appears that we have actually more refinery capacity today

than we did in 1996. Would you agree with that?

Mr. SLOCUM. I actually would agree with that. And I did not

imply that oil companies are not reinvesting back in their infrastructure.

I did give a figure of $824 million that ExxonMobil alone spent

on capital investment in the domestic downstream sector, which for

them predominantly is refining. So they have been spending

money.

The question is has it been adequate for an aging infrastructure,

and has it been adequate in the growth of demand. Yes, indeed, refining capacity nationally has increased since 1996.

Mr. WHITFIELD. I am glad you pointed that out, because when we

talk about it up on the Hill, we are always saying, ‘‘Oh, well, we

haven’t had any new refineries built,’’ and yet we do have more capacity.

So I really appreciate your pointing that out.

Mr. SLOCUM. And I think the issue is has the capacity increase

in refineries kept up with demand.

Mr. WHITFIELD. It has not.

Mr. SLOCUM. And that, it has not.

Mr. WHITFIELD. Yes, because we are approaching 400 million gallons of gasoline every day that we are using in America alone.

Now, I want to just touch on briefly these refinery margins that

you referred to, and you were talking about a 64 percent or a 66

percent return in the U.S. operations and a 24.5 percent return in

Europe. I believe it was somewhere in that neighborhood.

Mr. SLOCUM. Yes, sir. That is exactly correct, for ExxonMobil

only.

Mr. WHITFIELD. Yes, and they say their refinery margins are calculated by taking the spot market price on gasoline and subtracting the spot market price on crude.

And so the spot market price on gasoline right now is going up

because of the demand, and you would think, with the demand

going up the way it is in the U.S., that actually our gasoline prices

would be higher than in Europe.

And I know that Europe has a much higher tax rate on gasoline

than we do, but if you remove their rate on the gasoline taxes and

remove our rates, the actual price per gallon is rather comparable,

if you remove the tax portion.

And so you would think that because the refinery margins here

are so much greater because of the gasoline—the spot market

prices being higher, that our prices would be higher here than in

Europe, and yet it appears to be the reverse.

And just from your understanding of the market, why would the

European prices be higher than in the United States?

Mr. SLOCUM. First, a clarification on those numbers for

ExxonMobil. Those are not referencing a crack spread or refining

margins from a crack spread.

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Those are return on capital investment for their different segments. So it is a slightly different number, but telling a similar

story.

And in terms of what is the comparable crack spread or gasoline

price in Europe, I am not an expert on European gasoline markets,

and so I actually do not know, and I cannot confirm whether or not,

if you removed the very high levels of taxation, I do outline in my

report what the exact levels of taxation are in various European

countries and Japan.

I actually don’t know whether or not—if you remove those high

taxes, whether or not European prices are higher or not.

The crack spreads that I saw for BP and the crack spreads or

the return on capital investment for ExxonMobil seemed to imply

that prices would be lower, but again, I would have to investigate

that. And I can get that data for you tomorrow, actually.

Mr. WHITFIELD. You would think that the European demand not

being as great as in the United States, and they certainly are more

accustomed to scooters and smaller cars and more public transportation than we are in America.

And the fact that they are closer to the Middle East and Russia

than we are, so transportation costs should be less. But yet their

prices are so much higher.

So in some ways, we are getting off easy in the U.S. even though

it is against our culture to be able to accept gasoline prices approaching $4 a gallon.

Mr. SLOCUM. And actually, I mean, transportation costs for crude

oil to this country aren’t that high. I mean, the largest suppliers

are the United States itself—I mean, we are the third-biggest producer of crude.

Canada is the single largest importer of crude, and Mexico isn’t

far behind, and so the United States also has fairly easy access to

pipeline shipments of crude oil that help keep costs down.

Mr. WHITFIELD. But I was reading an article the other day, and

it said that out of the 85 million barrels of oil being produced

worldwide, the largest company in the U.S., ExxonMobil, is only

producing 4.5 million.

So our largest oil company is only producing 4.5 million out of

85 million barrels being produced every day.

Mr. SLOCUM. And that number happens to be more than the

Kingdom of Kuwait produces.

Mr. WHITFIELD. What is Saudi Arabia producing per day now, do

you know?

Mr. SLOCUM. I think around 10 million barrels of oil a day. And

they remain, I believe, the largest exporter. It is close with Saudi

Arabia and Russia.

Mr. WHITFIELD. Right. One other point that I would just touch

on, because you had mentioned this GAO report about the mergers

and acquisitions contributing to increased prices, which may very

well be the case.

But the Federal Trade Commission, who has responsibility for

policing this—Mr. Kovacic testified that they disagreed with that

GAO report.

And have you had the opportunity to look at why they disagreed

with the GAO report in very much detail or not?

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Mr. SLOCUM. I believe that they disagreed with some of the econometric methodology that GAO employed.

And it is Public Citizen’s understanding that the econometric

methodology that GAO used is pretty standard. And we didn’t disagree with the methodology that the GAO employed.

And especially when you look at the other evidence, just the fact

that consolidation has occurred, that margins in the downstream

operations have mushroomed, we think it is a fair conclusion to

make that consolidation has directly led to higher prices at the

pump.

Mr. WHITFIELD. Mr. Chairman, I have no further questions.

Mr. STUPAK. Just one or two for me.

Mr. Montgomery, did you do a report for the American Council

for Capital Formation regarding price gouging legislation?

Mr. MONTGOMERY. Yes. That is the one we were just discussing.

Mr. STUPAK. OK. Did you assist the American Council for Capital

Formation, then, in writing its editorials to be placed in newspapers around the Nation?

Mr. MONTGOMERY. No. I haven’t even read them.

Mr. STUPAK. OK.

Mr. Whitfield, any further questions?

Mr. WHITFIELD. No, sir.

Mr. STUPAK. Well, that concludes our questioning.

I want to thank our witnesses for coming today and your patience. Your testimony is part of the record.

I ask for unanimous consent that the hearing remain open for 30

days for additional questions. And if those Members who could not

be here want additional time for questions, they will have 30 days.

And also, those witnesses who could not stay with us, we would

submit those to them.

So without objection, the record will remain open for 30 days.

I ask unanimous consent the contents of our document binder be

entered into the record.

Without objection, documents will be entered into the record.

This concludes our hearing. This meeting of the subcommittee is

adjourned.

[Whereupon, at 6:36 p.m., the subcommittee was adjourned.]

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