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37–352 PDF 2007

S. HRG. 110–210

THE IMPACT OF RISING GAS PRICES ON

AMERICA’S SMALL BUSINESSES

HEARING

BEFORE THE

COMMITTEE ON SMALL BUSINESS

AND ENTREPRENEURSHIP

UNITED STATES SENATE

ONE HUNDRED TENTH CONGRESS

FIRST SESSION

JUNE 14, 2007

Printed for the use of the Committee on Small Business and Entrepreneurship

(

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

(II)

COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP

ONE HUNDRED TENTH CONGRESS

FIRST SESSION

JOHN F. KERRY, Massachusetts, Chairman

CARL LEVIN, Michigan

TOM HARKIN, Iowa

JOSEPH I. LIEBERMAN, Connecticut

MARY LANDRIEU, Louisiana

MARIA CANTWELL, Washington

EVAN BAYH, Indiana

MARK PRYOR, Arkansas

BENJAMIN L. CARDIN, Maryland

JON TESTER, Montana

OLYMPIA J. SNOWE, Maine,

CHRISTOPHER S. BOND, Missouri

NORMAN COLEMAN, Minnesota

DAVID VITTER, Louisiana

ELIZABETH DOLE, North Carolina

JOHN THUNE, South Dakota

BOB CORKER, Tennessee

MICHAEL B. ENZI, Wyoming

JOHNNY ISAKSON, Georgia

NAOMI BAUM, Democratic Staff Director

WALLACE HSUEH, Republican Staff Director

(III)

CONTENTS

Page

OPENING STATEMENTS

Kerry, the Honorable John F., Chairman, Committee on Small Business

and Entrepreneurship, and a United States Senator from Massachucetts ..... 1

Corker, the Honorable Bob, a United States Senator from Tennessee ............... 5

Tester, the Honorable Jon, a United States Senator from Montana ................... 5

Thune, the Honorable John, a United States Senator from South Dakota,

prepared statement .............................................................................................. 59

TESTIMONY

Caruso, Guy F., Administrator, Energy Information Administration, U.S. Department of Energy, Washington, DC ................................................................ 7

Smith, Frederick W., chairman, president, and chief executive officer, FedEx

Corporation, Memphis, Tennessee ...................................................................... 16

Lupoli, Sal, president and chief executive officer, Sal’s Pizza, Lawerence,

Massachusetts ...................................................................................................... 24

Myhre, Janet, director, Government Services Group, Chuckals, Inc., Tacoma,

Washington ........................................................................................................... 28

Lynch, Timothy P. senior vice president, American Trucking Association,

Washington, DC ................................................................................................... 35

ALPHABETICAL LISTING AND APPENDIX MATERIAL SUBMITTED

Caruso, Guy F.

Testimony .......................................................................................................... 7

Prepared statement .......................................................................................... 9

Corker, the Honorable Bob

Opening statement ........................................................................................... 5

Kerry, the Honorable John F.

Opening statement ........................................................................................... 1

Prepared statement .......................................................................................... 3

Lupoli, Sal

Testimony .......................................................................................................... 24

Prepared statement .......................................................................................... 26

Lynch, Timothy P.

Testimony .......................................................................................................... 35

Prepared statement .......................................................................................... 37

Myhre, Janet

Testimony .......................................................................................................... 28

Prepared statement .......................................................................................... 31

Smith, Frederick W.

Testimony .......................................................................................................... 16

Prepared statement .......................................................................................... 18

Tester, the Honorable Jon

Opening statement ........................................................................................... 5

Thune, the Honorable John

Prepared statement .......................................................................................... 59

Page

IV

COMMENTS FOR THE RECORD

Buis, Tom, president, National Farmers Union .................................................... 68

National School Transportation Association (NSTA), Alexandria, Virginia ....... 79

Rell, M. Jodi, Governor, State of Connecticutt ...................................................... 85

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THE IMPACT OF RISING GAS PRICES ON

SMALL BUSINESS

THURSDAY, JUNE 14, 2007

UNITED STATES SENATE,

COMMITTEE ON SMALL BUSINESS AND

ENTREPRENEURSHIP,

Washington, DC.

The Committee met, pursuant to notice, at 9:41 a.m., in room

SR–428A, Russell Senate Office Building, the Honorable John F.

Kerry (Chairman of the Committee) presiding.

Present. Senators Kerry, Cantwell, Cardin, Tester, Snowe, Coleman, Thune, and Corker.

OPENING STATEMENT OF THE HONORABLE JOHN F. KERRY,

CHAIRMAN, COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP, AND A UNITED STATES SENATOR FROM MASSACHUSETTS

Chairman KERRY. Good morning. This hearing will come to

order, and I apologize to all our witnesses and my colleagues for

being a little late, but traffic today was more incomprehensible

than it normally is. I see some heads nodding. So we were a bit

delayed and I do apologize to everybody.

Thank you very, very much to this panel particularly for taking

time to come in here and discuss the important impact of rising gas

prices on America’s small businesses. Obviously, this is an important topic not just for our businesses, but with respect to American

security and energy policy as a whole.

I am grateful to all the members of this panel for coming in. I

particularly want to thank Fred Smith and I look forward to his

testimony. Federal Express got its start as a small business back

in 1971 and its success was built in large part by servicing America’s small businesses and facilitating the ability of a small business to be able to grow and do what it does. Because he has contact

with so many small businesses in so many parts of the country and

the world, I think he is particularly qualified to share with us his

view on how fuel prices are impacting those businesses and his

company.

In addition, he represents an important shift that is taking place

in the country with respect to energy policy, and that is the recognition among key business leaders, big business leaders, that our

Nation’s energy policy is directly linked to our overall economy, to

our security, as well as to a host of environmental issues. And

without a strong energy policy that invests in efficiency and renewVerDate 11-MAY-2000 09:03 Dec 12, 2007 Jkt 037352 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 C:\DOCS\37352.TXT DianeA PsN: DianeA
2

able energy sources, America is digging itself deeper and deeper

into a hole.

Last month, Americans emptied their wallets at the pump, paying record prices that reached, according to the Department of Energy Information Administration, $3.22 a gallon. This price represented a 28 percent increase over a period of just 2 months and

a 52 percent increase since the end of January. That is a big increase for small business folks who use vehicles in their business

on an everyday basis to swallow, and those rising prices underscore

the increased attention that small business owners are now paying

to this issue.

According to a survey conducted by the National Small Business

Administration, 62 percent of small businesses in our country use

vehicles for delivery or customer transportation, and a majority of

those who use vehicles travel more than 50 miles a day.

So we will hear from Administrator Caruso today that we are not

simply dealing with a temporary spike in prices. The Energy Information Administration projects that gas prices will remain above

$3 at least through the summer months. Meanwhile, small businesses like the ones we will hear from today, businesses that operate close to the margin and that rely on vehicles every day to maintain their competitiveness are struggling to keep up.

These are the same businesses that are coping with double-digit

increases in the cost of providing their employees health care, the

same burgeoning entrepreneurs that we count on to create nearly

three-quarters of the jobs of our country. These businesses can no

longer be expected to shoulder the burden that is created by this

rapid increase in oil prices coupled with serious questions about refinery rates and about input rates to those refineries, as well as

output rates.

The good news is that right now, even as we sit here, the Senate

is debating legislation that can put this country on a clear path toward energy independence. In a single month, we could rewrite the

story of procrastination, manipulation and to some degree failed

leadership, that has defined energy policy for 30 years. On a bipartisan basis in the Senate, Senators are working to develop a comprehensive energy policy that will make the country safer and stabilize and lower fuel costs for small businesses and all Americans.

I think it is clear that to do that effectively, the final legislation

has to particularly embrace three components. One, a major increase in the efficiency of all sources and uses of energy, from pickup trucks to fluorescent light bulbs.

Two, dramatic incentives for all renewable energy sources, including a requirement that at least 20 percent of our energy come

from renewable sources like wind and solar by 2020. That sounds

like a lot, but let me tell you, 24 States have already adopted a

standard. Minnesota recently set a 25 percent standard and California is already near reaching that level. If the sixth-largest economy in the world can do that on its own, surely we have the ability

to set a standard nationally that we can meet across the board.

And finally, we need a comprehensive plan to get clean coal technologies and carbon sequestration off the drawing board and under

construction. Improving fuel economy is also a cornerstone of this

strategy.

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I will just end quickly by saying I will put the rest of my comments in the record.

But after America’s second oil crisis in 1980, and many of us remember President Carter’s response to that and the initial unbelievable gains we made when we made a commitment to renewables and alternatives, opened the laboratory in Colorado and committed incentives to that sector, we became the world’s leader in

alternatives and renewables. But when ideology trumped common

sense and we pulled the guts out of those incentives, Germany and

Japan took over as the world’s leaders. When the Eastern Bloc

countries came into the marketplace in the 1990s and they realized

they needed to clean up the devastation that communism had left

them with, they turned to Germany and Japan for those technologies. It is estimated that we have lost upwards of 200,000 jobs

or more because of our myopia with respect to those incentives.

The same is true today with oil imports that have increased from

37 percent back then to 56 percent today, and our passenger fleet

averages only 25 miles per gallon, which is exactly the same that

it did in 1981. That is happening, despite the fact that small businesses are contributing to the technology that could change this.

There is a Massachusetts company in Watertown called A123

which will retrofit a current hybrid with a lithium battery that gets

40 miles to its one-time use. The average commute of Americans

is less than 40 miles a day. So if more cars were retrofitted with

this, most Americans could actually drive to and from work without

ever touching a drop of gasoline. The dramatic impact would be

that, per vehicle, you could go to 150 miles per gallon in a matter

of months.

All of this is achievable, but it is going to take some leadership

and that is what we are here today to talk about. So I welcome the

panel. We look forward to your testimony.

[The prepared statement of Chairman Kerry follows:]

PREPARED STATEMENT OF HON. JOHN F. KERRY, CHAIRMAN

Good morning. I want to thank our esteemed panel of witnesses for coming together today to discuss the impact of rising gas prices on America’s small businesses, a crucial topic not only for America’s small businesses, but for this nation’s

continued security and economic sustainability.

I am glad that Mr. Smith is able to join us today, and I’m looking forward to his

testimony. Mr. Smith’s company Federal Express got its start as a small business

back in 1971, and its success was built in large part by servicing America’s small

businesses, so he is in a unique position to speak on how fuel prices are impacting

both his company and his small business customers.

Mr. Smith also represents an important shift that is occurring in this country—

the recognition among key business leaders that that our nation’s energy policy is

linked directly to our economy, our security and our environment. Without a strong

energy policy that invests in efficiency and renewable energy sources, America is

digging itself deeper into a hole.

Last month, Americans emptied their wallets at the pump, paying record prices

that reached $3.22 a gallon according to the Department of Energy’s Energy Information Administration. This price represented a 28 percent increase over a period

of just 2 months, and a 52 percent increase since the end of January.

Rising prices underscore the increased attention that small business owners are

paying to this issue. According to a survey conducted by the National Small Business Association (NSBA), 62 percent of small businesses use vehicles for delivery or

customer transportation, and a majority of those who use vehicles travel more than

50 miles a day.

We’ll hear from Administrator Caruso today that we’re not simply dealing with

a temporary spike in prices. The Energy Information Administration projects that

4

gas prices will remain above $3.00 at least through the summer months. Meanwhile, small businesses like the ones we’ll hear from today—businesses that operate

close to the margin and that rely on vehicles every day to remain competitive—are

struggling to keep up.

These are the same businesses coping with double digit increases in the cost of

providing their employees health care—the same burgeoning entrepreneurs that we

count on to create nearly 3⁄4 of the jobs in this country. These businesses can no

longer be expected to shoulder a burden created by price gouging oil companies and

a government that has been reluctant to shift its priorities from serving the same

old special interests.

The good news is that right now, the Senate is debating legislation that would

put the country on a clear path toward energy independence. In a single month, we

could rewrite the shameful story of procrastination, manipulation and—most of all—

failed leadership that has defined our energy policy for thirty years.

On a bipartison basis in the Senate, Senators are working to develop a comprehensive energy policy that will make America safer and will stabilize and lower

fuel costs for small businesses and all Americans. But in order to effectively address

energy security, the final legislation must include three components: (1) a major increase in the efficiency of all sources and uses of energy, from pickup trucks to fluorescent light bulbs; (2) dramatic incentives for all renewable energy sources, including the requirement that at least 20 percent of our energy come from renewable

sources like wind and solar by 2020; and (3) a comprehensive plan to get clean coal

technologies and carbon sequestration off the drawing board and under construction.

Improving fuel economy is the cornerstone of the strategy to reduce our reliance

on imported oil and to stabilize the volatile market for gasoline. Since America’s second oil crisis in 1980, our oil imports have increased from 37 percent to 56 percent,

but our passenger fleet averages 25 miles per gallon (mpg), the same as in 1981.

Thankfully, small businesses are helping to contribute to a solution. Today there’s

a company in Massachusetts that has developed the technology for a plug-in hybrid

car that gets 150 miles per gallon. The average American’s commute is 40 miles—

and this car can travel that far on batteries alone. Just think of the fuel savings

if the average commute didn’t require any fuel.

Senator McCain and I first proposed a 35 mpg increase to fuel standards in 2002,

and I’ve supported efforts to move in this direction for my entire Senate career. The

Commerce Committee has reported a bill that would achieve 35 mpg by 2020. We

must work to guarantee those improvements and fend off any efforts to weaken the

Commerce bill on the floor.

Second, we need to establish a mandate for renewable energy production. Over

the last 5 years, 24 states and the District of Columbia have implemented local requirements that a certain percent of their energy comes from renewable sources by

the year 2020. And yet Republicans continue to stand in the way of a Federal Renewable Portfolio Standard. States are screaming for leadership on this issue, and

I will once again fight for an aggressive renewable portfolio standard in this bill.

Finally, this energy bill doesn’t adequately address our number one source of energy: coal. Coal is available, abundant and cheap, that’s true—but it’s also a huge

source of US greenhouse gas emissions—1.5 billion tons of carbon dioxide each year.

Any energy bill worth the paper it’s printed on should make dramatic investments

in developing technologies for clean coal.

These are the first steps Congress must take to address the long term security

and stability of this country’s fuel supply. But there are other steps we can take

in the short term to make sure our small businesses are protected against dramatic

interruptions in fuel.

Today, I’m introducing legislation that creates an emergency fuel assistance program for small businesses in the event of a severe fuel interruption. Under this program, small businesses and farms that rely on fuel as a key operating cost would

be eligible to receive grants to help them stay afloat during periods of extraordinarily high gas prices. This program could go a long way toward helping businesses operating close to the margin deal with costs that are beyond their control.

I’m also reintroducing legislation to provide low interest SBA loans to small business owners dependent on fuel. This legislation has passed the Senate in two previous Congresses and would provide the capital that small business owners need to

cope with extraordinarily high increases in fuel prices.

For too long, we’ve asked Americans to put up with an energy supply that is unstable and flat out dangerous. The path to energy security—a path that’s being cut

in the Senate as we speak—will lead to stability and lower prices at the pump. I

look forward to hearing your testimonies today, and to working together to secure

this nation’s energy future.

5

Chairman KERRY. Let me turn to my colleagues first. Senator

Corker.

OPENING STATEMENT OF THE HONORABLE BOB CORKER, A

UNITED STATES SENATOR FROM TENNESSEE

Senator CORKER. Mr. Chairman, thank you for convening the

meeting. I might have a few editorial comments regarding your

opening statement, but I will reserve that for the floor. I would

rather——

Chairman KERRY. You mean you don’t agree with me 100 percent?

[Laughter.]

Senator CORKER. But I do want to welcome this distinguished

panel and thank you all for coming. We all apologize for starting

late. You all are very distinguished and we want to hear from you.

I do want to make some comments about Fred Smith. He is an

icon in the State of Tennessee, wrote a paper in graduate school

that received an ‘‘F’’ and proceeded to build a global enterprise off

that failed paper. He is a civic leader. He is a great American, was

a veteran between 1966 and 1970. He is someone that the State

of Tennessee looks to for tremendous leadership, and Mr. Chairman, I am glad you have called upon him to help lead us here at

the Nation’s capital.

So I welcome him and all of the other panelists, some of which

I know personally, and thank you for your testimony.

Chairman KERRY. Thank you very much, Senator. I think, if I

can correct one piece of mythology here, because Mr. Smith was my

classmate and collegemate and I am not too sure that I didn’t see

that paper back then when he wrote it, but I know he didn’t fail

on it.

[Laughter.]

Chairman KERRY. Am I correct?

Mr. SMITH. Senator, the record would show, I think, that it was

a ‘‘C’’ grade, which, as you know, I was very gratified to receive.

[Laughter.]

Chairman KERRY. Well, we have seen what people with ‘‘C’’

grades accomplish.

Senator Tester.

OPENING STATEMENT OF THE HONORABLE JON TESTER, A

UNITED STATES SENATOR FROM MONTANA

Senator TESTER. Well, thank you, Mr. Chairman. I, too, want to

commend you on holding this hearing. I also want to commend you

on your energy vision for this country. I think it is on the right

track.

As many of you know and some of you may not, I happen to be

a farmer in production agriculture. We use a lot of energy. It is

part of the business. So when fuel prices go up approaching $3 a

gallon for untaxed fuel for my tractor, it cuts a pretty big hole in

my profit margin.

I look forward to hearing from Guy Caruso on the energy outlook. I certainly sympathize with Mr. Lynch’s situation that he is

in in the trucking business. I can’t imagine what the increase in

gas prices has done to your bottom line, as well as Janet Myhre

6

in the office supply business. Mr. Smith, you have already been

talked about. With Federal Express, it speaks for itself. And to a

guy who knows the way to get to my heart, and that is through

my mouth in the pizza business, the food delivery business, I can

imagine your challenges, each and every one of you. Making sure

your business remains profitable in this time when energy prices

have gone up like they have is truly a challenge, as it is for me.

I can also tell you that if we continue to do business from an energy standpoint, as we have done over the past 20 years, my future

doesn’t look very bright. So we need to make some changes. We

need to make some administrative changes at the Federal level if

we are going to empower small business to be all they can be and

to grow and flourish.

I certainly look forward to each and every one of you folks’ perspective as to how you deal with the current energy situation and,

by the way, I look forward to any ideas, any silver bullets you may

be able to pull out of your holster that could help us make our energy future bright.

Thank you, Mr. Chairman.

Chairman KERRY. Senator Tester, thank you. Thanks for your

comments. I think everybody on the Committee is thrilled with

your participation on this Committee because you bring very practical and real-time experience to the Committee. It is enormously

helpful to all of us.

Guy Caruso is the Administrator of the Energy Information Administration, nominated in February of 2002. He runs the statistical agency within the U.S. Department of Energy which provides

policy independent data, forecasts, and analyses regarding energy.

We welcome his testimony.

Fred Smith, I have already mentioned, the CEO of FedEx, a $32

billion global transportation and logistics company that, I think, if

memory serves me correctly, had the benefit in its early days of a

Federal guaranteed loan through SBA. Am I——

Mr. SMITH. SBA guaranteed small business investment companies’ investment——

Chairman KERRY. Right, SBIC.

Mr. SMITH. Very important.

Chairman KERRY. He has obviously served on the boards of a

number of large public companies. He is Chair of the Business

Roundtable’s Security Task Force and a member of the Business

Council and the CATO Institute.

Sal Lupoli, from my State, president and co-founder of Sal’s

Pizza from Lawrence, Massachusetts. I have been to his place. He

has hosted a small business consortium that we put together there.

At the age of 22, after graduating from Northeastern with a degree

in business management, he founded Sal’s Pizza with his brother,

Nick. Their first year annual sales were $200,000. Today, his pizza

company produces over 12,000 pizzas a week for schools throughout

New England and provides product to several supermarket chains,

convenience store distributors and various concession groups.

Tim Lynch, senior vice president of the American Trucking Associations. He is charged with developing and executing strategic

plans to ensure that ATA and its member motor carriers achieve

7

the necessary public policy goals to keep the U.S. trucking industry

safe, efficient and profitable.

And Janet Myhre, director, Government Services Group,

Chuckals Office Products. She joined Chuckals Office Products in

1999 as the administration operations director and holds a B.S. in

business administration from Park University.

So we are really delighted with the expertise the panel brings.

Mr. Caruso, why don’t you lead off.

STATEMENT OF GUY F. CARUSO, ADMINISTRATOR, ENERGY

INFORMATION ADMINISTRATION, U.S. DEPARTMENT OF ENERGY, WASHINGTON, DC

Mr. CARUSO. Chairman Kerry and Members of the Committee,

thank you very much for this opportunity. The Energy Information

Administration, as the Chairman mentioned, is an independent

statistical and analytical agency and 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.

Today, I will focus on our latest short-term outlook, which we released on Tuesday, looking at crude oil and gasoline markets and

discuss, some of the factors that have led to these high prices and

particularly, as the Chairman noted, the continued uncertainty

that we face in both the short and the longer term.

Global oil markets have tightened for crude oil and light petroleum products, especially gasoline. Commercial oil inventories have

dropped sharply since the end of September, reflecting strong oil

demand, production cuts by the Organization of Petroleum Exporting Countries (OPEC), and only modest increases in non-OPEC

production. Plus, increasing global demand for light products has

put pressure on refinery capacity worldwide. We project crude oil

prices will average in the mid-$60 per barrel this summer.

Against this background of already tight world markets, global

geopolitical uncertainties continue to threaten global oil supplies

and transport. 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 that country produces

light and sweet crude which is used by the world’s refineries to

maximize production of gasoline.

Turning to gasoline markets, we expect gasoline markets will remain fairly tight, although we anticipate some improvement over

the next several months. U.S. regular grade gasoline prices are projected to average $3.05 per gallon over the summer, and gasoline

inventories, which typically build slightly in April, sharply declined

instead because of refinery outages, both planned and unplanned,

and low imports.

Gasoline supply has been affected more than usual by refinery

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

during the first quarter, which reduces production of gasoline and

other products. But this year, outages extended into May and even

into June, which along with lower imports and seasonally rising

gasoline demand, all contributed to the steep inventory decline and

the upward price pressure that the Chairman mentioned in his

8

opening remarks. Refinery throughputs remain lower than typical

for this time of the year, although we expect them to increase over

the next several months. We do think that markets should be adequately supplied, assuming that there are no disruptions either

naturally-caused or manmade.

Gasoline imports are critical to meeting U.S. summer consumption needs, particularly in the Northeastern part of the United

States, and they have been lagging last year’s level through this

spring. Lower gasoline inventories in Europe resulted in limited

volumes available for export to the United States early this year.

Recently, total U.S. gasoline imports have returned to more normal

levels and we do think that these normal levels, or even above normal, will 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, leaves crude oil and gasoline markets poised for continued

volatility this summer. If gasoline production increases during the

rest of June and import volumes increase, gasoline markets should

ease somewhat, causing prices to recede from their current levels.

With the hurricane season already beginning, continued tight refinery conditions, low gasoline inventories, and increased demand for

summer travel, upward pressure on gasoline prices does remain a

concern.

In sum, Mr. Chairman, Members of the Committee, most of the

risks in the near term point to upward pressure on prices. And for

the medium to longer term, the fundamental problem, as noted in

the opening remarks, is the lack of infrastructure investment that

we have faced in this country for the last 20 years. We need to increase investment in the infrastructure not only of refineries, but

of the distribution system, as well as on the demand side, improving efficiency as noted by the Chairman.

Mr. Chairman, that concludes my remarks. I will be happy to answer questions at the appropriate time.

[The prepared statement of Mr. Caruso follows:]

9

10

11

12

13

14

15

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Chairman KERRY. Well, we look forward to the opportunity to

ask them. Thank you very much.

Mr. Smith.

STATEMENT OF FREDERICK W. SMITH, CHAIRMAN, PRESIDENT, AND CHIEF EXECUTIVE OFFICER, FEDEX CORPORATION, MEMPHIS, TENNESSEE

Mr. SMITH. Senator Kerry, it is always good to see you, and

thank you for clarifying that thing about my school grade. As you

noted and Senator Corker, who represents our hometown State,

FedEx is indeed a very big company, employing about 275,000 folks

around the world, 38,000 of them in Tennessee, Senator. But we

did start as a small company and we understand the issues of

small business very well, because our four operating companies

uniquely provide transportation services that allow small businesses everywhere to connect to an increasingly large global marketplace.

But I am not here today representing FedEx. I speak to you

today as the co-chairman of a group, the Energy Security Leadership Council, which is composed of 18 CEOs and retired four-star

admirals and generals who came together because we collectively

believe that the Nation’s increasing dependence on imported petroleum after nuclear proliferation and bioterrorism represents the

greatest economic and security threat to this Nation.

We base much of what we have recommended on a very in-depth

study conducted by an organization called SAFE, Securing America’s Future Energy, which conducted a simulation at Davos a year

ago in January which showed that very small perturbations in supply can result in very substantial increases in prices. A 3 to 4 percent reduction in supply could easily run the price of a barrel of

oil up to $120, $125 a barrel, which would have very significant

deleterious effects on the U.S. economy.

Much more importantly, I think, is the fact as you noted in your

opening comments, Senator, that we are now importing almost 60

percent of our petroleum. Transportation is 97 percent fuel petroleum. Ninety percent of the world’s oil reserves are now owned by

national oil companies, many of whom are controlled by countries

who, quite frankly, do not have the best interests of the United

States at heart.

If you look historically at the problem, one finds that the reason

that our economy has been able to absorb the tremendous run-up

in fuel prices over the last few years is that between 1975, after

the first Arab oil embargo, to the middle part of the 1990s, the U.S.

energy efficiency improved by 100 percent. And a large part of that

improvement was based on a system of fuel efficiency standards

which were enacted by the Congress in 1975 under a Republican

administration, which, I might add, were opposed by the auto manufacturers at the time. And those fuel efficiency standards, socalled CAFE ́ standards, were very, very important in the improvements that our economy has seen and given us the basis to absorb

the shock that we have already seen.

So with that background, we prepared a report to the Nation

which we published in December which recommended that the

Congress consider a balanced piece of legislation which had three

17

fundamental prongs on which it rested. The first was increased domestic production. The facts of the matter are that, worldwide, oil

markets are global in nature and a barrel of oil produced off the

coast of South Carolina does have an effect on the price of oil everywhere.

The second part of our recommendation was that the United

States should promote the production of alternative fuels to the

maximum extent possible. That obviously is something that has

been the source of much debate, but it is very important that these

goals be realistic and not pie-in-the-sky or the Congress will be sitting here 20 years hence dealing with an even bigger problem.

And third, and very importantly, is the recommendation that the

Congress enact a new system of fuel efficiency standards which are

quite different from the fleet averages that were used in the 1975

legislation. Instead, we recommended that NHTSA be empowered

to regulate a fuel efficiency improvement program by each category

of vehicle and by attribute, so that a Suburban car for a soccer

mom would not be in the same category as a pick-up truck used

for agriculture, and within each category, NHTSA would oversee a

program of 4 percent per annum fuel efficiency improvement, provided that there were appropriate off-ramps for safety or technological limitations.

With a balanced program like that, the math that we did in the

report to the Nation, which obviously has been made available to

all of you, the United States would see in the coming years a significant reduction in our dependence on this foreign imported petroleum.

And I would point out in conclusion, Senator, and I put all of this

in a written statement which I have given you for the record, many

of us on the Energy Security Leadership Council did not come to

this position lightly. I rarely come to Washington over these many

years I have been in business to argue for Government regulation.

Quite the contrary. But in this particular case, you are talking

about very serious economic and national security risk. You are not

talking about a free market. You are talking about a market which

is set by a cartel whose actions, were they conducted in the United

States, would simply be illegal.

And we think what we proposed to the Nation, and bear in mind

a company like FedEx, who spends over $3 billion a year in fuel,

the CEO of UPS, the CEO of Carnival Cruise Lines, the CEO of

Dow Chemical, the CEO of Southwest Airlines, the CEO of Auto

Nation, the largest seller of automobiles in the country, and distinguished four-star military officers, including our co-Chair, General

P.X. Kelley, the former Commandant of the Marine Corps, and

many of the admirals and generals who were responsible in their

careers for protecting these oil lanes, have come to the Congress

saying this is a problem that has to be addressed, and if the Nation

doesn’t address it, we do so at our peril.

Thank you very much for your kind attention, Senator.

[The prepared statement of Mr. Smith follows:]

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Chairman KERRY. Well, Mr. Smith, thank you very much. I think

your testimony is enormously important for a number of reasons,

not the least of which is that I think you bring a special kind of

validation to the table which is very important for everybody to

hear, not just our colleagues here, but for people in the country. So

we will, I know, follow up with some questions, but I think it is

important testimony and we really do appreciate your taking time

to be here.

Mr. Lupoli.

STATEMENT OF SAL LUPOLI, PRESIDENT AND CHIEF EXECUTIVE OFFICER, SAL’S PIZZA, LAWRENCE, MASSACHUSETTS

Mr. LUPOLI. Thank you, Chairman Kerry, Ranking Member

Snowe, and Members of the Committee. My name is Sal Lupoli and

I am the owner of Sal’s Pizza, a family owned business established

in 1990 located in Lawrence, Massachusetts. My company has over

30 retail stores, two upscale restaurants, and a central commissary

which sells to supermarket chains and school districts throughout

the New England area. I am also on the board of the Merrimack

Valley Chamber of Commerce, Workforce Investment Board, and

many community organizations throughout the Merrimack Valley

in Massachusetts.

I would like to thank you for inviting me to testify today regarding the impact of rising gasoline prices on small businesses, particularly mine. I am very grateful that you are cognizant of the

negative effect that the increasing gasoline prices are having on

small businesses across the country and that you are seeking to address it. Whatever the cause, the volatile and increasing price of

gasoline is wreaking havoc on American small business.

In the day-to-day operation of my small business, I have as many

as 30 delivery trucks and 5 management vehicles on the road at

any one point. Every day, my company makes deliveries of fresh ingredients, of product to various supermarkets throughout New

England, 30 franchise stores, retail stores, and school districts. Obviously, these trucks fall into the category of non-fuel-efficient vehicles. Unfortunately, there is no affordable alternative to me at this

choice.

Currently, the cost of gasoline in the Merrimack Valley varies

from $2.80 a gallon to as high as $3.09. This is from a low last year

of $1.98. This sudden and unpredictable 50 percent increase hits

directly to the bottom line of my business and countless others. Rising fuel costs have a direct impact on my means of delivery for my

product, but also other aspects of my business.

For instance, it has a direct impact on my employees. It has a

tremendous effect on them. Many of my employees have low to

modest means. Many of my employees live in low-income areas,

such as Lawrence, Massachusetts, and towns throughout the

Merrimack Valley. Many employees drive their cars to work. Often

I am faced with employees that are unable to afford the gasoline

for their cars. They face days out of work, which often results in

myself or my staff having to pick them up. This further disrupts

daily business operations. We encourage carpooling. We encourage

public transportation. But these options are always not available in

the towns of their residences.

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Another area in rising fuel costs have impacted my business is

to my customers and their expendable income. I have seen a decline in sales when gas prices increase, only to see business pick

up when prices go down. A family that I would generally see on

a weekly basis on a Friday night is now a twice-a-month customer.

Customers in my restaurant that I see two and three times a week

may only come to my restaurant once a week as a result of gas

price spikes. My business, as any retail, competes for the expendable dollar. I compete for the customer dollar when families make

a choice between fixing a leaking faucet or taking the family out

to a nice meal at my restaurant. When gas prices are high, the

American small business loses.

In addition to the direct impact that rising gas prices has on my

business, it is immeasurable. Although my company has moved its

corporate offices to Lawrence, Massachusetts and has renovated a

mill building along with other businesses, which are my tenants—

the mill building consists of 240,000 square feet—I have found it

extremely expensive to heat my building during the winter months

and pay for increasing electricity for cooling in the summer

months. I was forced to consider and chose to install solar panels

on the roof of my mill as an alternative to the traditional fossil fuel

energy. Solar energy helps defray some costs, but has yet to make

a significant impact on the overall operation.

In order to maintain a level of profit in my operation, I have no

alternative but to pass the costs of rising fuel on to my customers,

whenever possible trying to absorb the cost myself. On most deliveries, we have been forced to include a fuel surcharge on our delivery invoices. I am not alone in the rising prices whenever possible.

According to the 2006 NSBA Small Business Energy Survey of

the businesses that reported passing along their increased energy

cost to their customer, 65 percent have increased their prices. Of

that, 47 percent reduced the amount of business travel and 18 percent have reduced their workforce. The ramifications of rising gas

prices reverberate throughout the entire economy.

This concludes my testimony. Thank you again for inviting me

here today and recognizing the threat rising and volatile energy

prices pose to America’s small business. As you seek to address

America’s oil dependence, the shortcomings of the national energy

policy, and the global climate change, I hope you will continue to

keep America’s nearly 26 million small businesses in mind. I thank

you for your time and welcome any questions.

[The prepared statement of Mr. Lupoli follows:]

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Chairman KERRY. Thank you, Mr. Lupoli, for very graphic, important and powerful testimony. I don’t think a lot of us necessarily

thought that people weren’t able to get to work or that the CEO

is going to have to go out and actually pick them up to get them

there, and that is a pretty downstream real impact, so we appreciate your sharing it with us here.

Mr. LUPOLI. Thank you, sir.

Chairman KERRY. Ms. Myhre.

STATEMENT OF JANET MYHRE, DIRECTOR, GOVERNMENT

SERVICES GROUP, CHUCKALS, INC., TACOMA, WASHINGTON

Ms. MYHRE. Thank you, Chairman Kerry, Ranking Member

Snowe, and distinguished Members of the Committee for the opportunity to testify today. My name is Janet Myhre and I am the director of Government Services Group of Chuckals Office Products,

which is headquartered in Tacoma, Washington. I am here on behalf of the co-owners, Chuck Hellar and Al Lynden, and our great

team of employees who support the success of our small business.

I know that Chuck and Al would have liked to attend today’s hearing, but as you know, air fare from the West Coast on short notice

is quite high.

Fundamental to Chuckals’ growth over the last 13 years has

been a combination of innovative use of technology and powerful

strategic alliances that have enabled the company to offer big business prices while still preserving small business value and service.

Use of a stockless, just-in-time distribution model, partnering with

key suppliers like Federal Express, and a commitment to find new

and innovative ways to consistently streamline internal operations

has furnished a solid platform for sustained growth and enabled us

to provide a broad product offering and consistently high service.

Fuel costs impact each and every transaction that our organization manages and it is the third-largest expense item on our financial statement after cost of goods and employee wages. To keep it

simple, we have three categories of delivery expense. The first two

categories represent the costs and/or expense of getting our product

to our customers. Category one is the local and regional deliveries

that are handled through our company-owned vehicles and span a

large portion of middle and south Puget Sound region in Washington State. Currently, this sector makes up 7 percent of our delivery expense.

Category two is the servicing and delivery to both commercial

and Federal accounts under Federal contracts nationwide through

the use of third-party carriers such as Federal Express, UPS, and

LTL Truckload Relationship. This category represents 91 percent of

our delivery expense.

A final category is the cost of shipment from wholesalers and

manufacturers to our organizations and other internal fuel expense, such as employee auto reimbursement.

During the past 24 months, we have experienced a total increase

in delivery cost of over 35 percent in the combined categories. The

highest percentage was experienced in the category of national delivery, which has increased 36.4 percent. Just a quick look at the

increases. The local delivery has increased around 18; the national

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delivery, 36.4. The third category for internal kind of uses within

the business is 30 percent.

To break down the impact on a per delivery basis, in January

2005, the average delivery cost to deliver to a local customer was

56 cents per delivery. Today, our costs have almost doubled and

have peaked at $1.02 per delivery.

When we use other carriers such as UPS, FedEx, and DHL, our

per delivery costs are experiencing the same type of increase. For

example, the cost to ship an order to an Army customer in January

2006 was averaging $12.40 per order. As of April 2007, that cost

has risen by 34.2 percent to $18.86 per order.

From the early days of Chuckals’ organization, we have applied

a business model of continually improving our business practices to

embrace technology and efficiency. One of the first applications was

to be an early leader in transitioning an industry which heavily depended on a traveling outside sales team to a technology-driven inside team. Even with this transition, a limited outside sales team,

we incur another associated cost with fuel for employee auto reimbursement, indexing our expense reimbursement to the IRS guidelines, which we have watched jump by 38 percent.

Today, I presented a brief synopsis of the hard costs and direct

impact of double-digit delivery expense that we are incurring in the

delivery segment of our business. It is important to also discuss the

impact this fuel increase has had on the production and cost of

goods. It is quite amazing to discover how many products are petroleum-based, such as vinyl and polypropylene resins, which go into

binders and hard plastic office supplies.

We have seen the same percentage increase in our cost of goods.

Many times our suppliers do not charge for hard transportation

costs, but they increase the unit cost of the product. As an example,

we have seen our cost of goods price increase on a carton of paper

by 15 percent during the same 24-month period. This increase has

a direct relationship with the cost of fuel, both in manufacturing

and transportation.

We continue to look for alternative ways to save fuel and cut

costs through efficiencies of technology and management, such as

mapping of local delivery routes, consolidating customer deliveries,

routine maintenance of our fleet, and the continuous measurement

and feedback of productivities of our drivers. However, we have no

options when it comes to the raw cost of fuel. It is still X miles

from point A to point B and that will consume a defined amount

of fuel.

As we have discussed with Senator Cantwell and her staff, while

there are many new options for the consumer both in alternative

fuel and vehicles to combat this fuel emergency, there currently are

very few options for the small business owner who has commercial

fleets which run on gasoline. Couple the 40 percent increase in fuel

cost with the compounding increase in health care that we have

also incurred in the past 3 years, the small business professional

is finding it harder and harder to compete and stay in business.

As we continue to watch our operational margins shrink,

Chuckals will be faced with critical management decisions. What

programs and investment in capital and innovation must be foregone to absorb the increased cost of fuel and delivery? What appliVerDate 11-MAY-2000 09:03 Dec 12, 2007 Jkt 037352 PO 00000 Frm 00033 Fmt 6633 Sfmt 6601 C:\DOCS\37352.TXT DianeA PsN: DianeA
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cation and impact will this have on our competitive position in the

marketplace and our viability to win future awards? And finally,

what impact does this have on our finest assets, our employees? We

will have to change employee benefit plans, head count, and other

organization structures to react to the rising costs. Thank you.

[The prepared statement of Ms. Myhre follows:]

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Chairman KERRY. Very helpful. Thank you very, very much.

That is very helpful testimony.

Mr. Lynch. Let me just say for the record, everybody’s testimony

will be placed in the record in full as if read in full. Thank you.

STATEMENT OF TIMOTHY P. LYNCH, SENIOR VICE PRESIDENT,

AMERICAN TRUCKING ASSOCIATIONS, WASHINGTON, DC

Mr. LYNCH. My name is Tim Lynch. I am a senior vice president

with the American Trucking Associations, and on behalf of our

membership, we want to thank Chairman Kerry, Ranking Member

Snowe, and all the Members of the Committee for giving us an opportunity to testify on this very, very important subject.

The trucking industry is a vital component of our national economy. In 2005, trucks transported nearly 11 billion tons of freight

domestically, representing almost 70 percent of all freight transportation tonnage. The trucking industry accounts for 84 percent of

the nation’s freight bill and exclusively serves the freight needs of

over 80 percent of communities in the United States.

While the industry is very large, it includes hundreds of thousands of small businesses. As of November 2006, there were over

700,000 interstate motor carriers in the United States classified as

small businesses, 97 percent of which operated 20 or fewer trucks.

For most motor carriers, fuel is the second-largest operating expense after labor. Small carriers are particularly vulnerable to

large and swift increases in fuel prices. Typically, the smaller the

carrier, the larger percentage fuel represents of total operating expenses.

Over the past 4 years, the price of diesel fuel has steadily increased. According to the Energy Information Administration, the

national average price of diesel rose from $1.81 per gallon in 2004

to $2.41 in 2005, and then rose again to $2.71 in 2006. Unfortunately, there doesn’t seem to be any relief in sight. EIA analysts

now estimate that diesel will average $2.75 per gallon in 2007 and

$2.76 in 2008.

This year, in order to haul the Nation’s freight, the industry will

consume 51 billion gallons of fuel, including more than 38 billion

gallons of diesel fuel, at a record cost of $106 billion, $3 billion

more than in 2006 and more than double the industry’s fuel bill in

2003.

The sharp increase in the cost of diesel fuel is a hardship for

small trucking companies, but the full impact must be viewed in

the context of what also is occurring with fuel economy and environmental controls. This challenge is fully captured in the comments that were made by Barry Pottle of Pottle Transportation of

Bangor, Maine.

‘‘Twenty-five years ago, my trucks were getting a little over 4 miles to the

gallon. In the mid-1990s, my trucks were getting close to 7 miles to the gallon.

With the new engines and new requirements for the use of ultra low-sulfur diesel, my trucks are now getting about 5 miles to the gallon.’’

And let me just say, in making that comment, we were not opposed and do not oppose the new engine requirements and the use

of ultra low-sulfur diesel, but we do want to make the point that

those don’t come without some cost. And to put a fine point on that,

for a company like Mr. Pottle’s, whose individual trucks might

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travel 125,000 miles annually, at a 4-mile-per-gallon average, he

would use 31,250 gallons to travel those 125,000 miles. At 5 miles

per gallon, that would be 25,000 gallons, and at 7 miles per gallon,

that would be 17,857 gallons. If we were to apply today’s rate of $2.79 per gallon cost for diesel,

Mr. Pottle’s cost per truck would be as follows. Again, at the 4,

$87,000. At the 5, $69,000. And at the 7, $49,000. The approximately $20,000 difference between a 5 and a 7-mile-per gallon fuel

efficiency rate multiplied by the number of trucks operated by a

small business like Mr. Pottle can literally make the difference between business success and business failure.

I have a number of recommendations in our testimony, but I

would like to focus on one because given the current debate in both

the Senate and the House, is the APU weight exemption. The Energy Policy Act of 2005 included a 400-pound weight exemption for

alternative powering units that allow truck drivers to run fuel-efficient devices, such as generators, to operate heating and air conditioning units instead of using the main engine. The Federal Highway Administration has interpreted this language, incorrectly in

our opinion, as giving States the option of allowing this exemption

rather than establishing a nationwide standard as Congress intended. We need language clarifying Congress’ intent to ensure

that small trucking businesses don’t have to choose between advanced idle reduction strategies and lost productivity due to a

weight penalty.

Furthermore, we support legislation currently in the Senate, S.

894, that would provide a tax incentive to help offset the cost of

these devices, since many small businesses simply cannot afford to

buy them.

I have other suggestions here, including speed limits. Even within our own industry, the speed issue is somewhat controversial. I

notice that Senator Tester is smiling. I had the pleasure of presenting ATA’s position to the Montana Trucking Association to

have a national speed governed at 68 miles per hour, and Senator

Tester, I barely got out of the State. But we believe it is the right

thing to do and we would certainly urge whatever assistance we

might get from the Congress on that, as well.

I would be happy to answer any questions.

[The prepared statement of Mr. Lynch follows:]

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Chairman KERRY. Thank you very much, Mr. Lynch. I learned

first-hand out there how tough that issue can be for a lot of folks

on those wide-open roads for long distances. It is a pretty important issue.

Thank you, all of you, very, very much for the testimony here

today. We are going to do about 5-minute rounds, try to give everybody a chance to get in here. We can go for a second round afterwards if all of you can put up with that. I know there will be a

lot of questions and a lot of areas we want to try to cover.

Mr. Caruso, if I could just begin, you mentioned quickly that the

throughput is lower—the refinery throughput is lower. A lot of

Americans don’t understand that. They are having trouble seeing

the crude prices are low, but we still have this problem of supply.

Can you just help explain to people? A lot of small business people

keep saying, am I getting manipulated? Am I being jerked around

here? The oil companies walked away with, since 2005, $225 billion

of profit, record levels of profit, and a lot of people sit there and

say, well, what if they had only had $220 billion or $200 billion or

$180 billion? Is that really the difference in their success versus

the success of these folks over here? So can you help people understand why the throughput is so low given the crude situation and

where we are on the manipulation issue?

Mr. CARUSO. Sure. Why the throughput is low is that there have

been a number of refineries out for either planned or unplanned

maintenance this year. This is not particularly unusual for January and February, because normally refiners take down units that

need to be maintained for safety and efficiency reasons in order to

be ready for the peak driving season. So——

Chairman KERRY. Question—should that be, therefore, left up—

since it is having such a dislocative effect on the marketplace, and

as Mr. Smith and others have said, this is not a free market sort

of structure, should there be some better planning as to what the

rate of that offline maintenance, et cetera, is for the at least

planned downtime, because it is having a serious impact on small

business, as you can hear.

Mr. CARUSO. Yes.

Chairman KERRY. And a lot of people question whether that

planned maintenance truly couldn’t be done in a more effectively

planned manner.

Mr. CARUSO. Well, the companies, of course, try to plan it to

maximize their own individual sales opportunities. So no individual

company would take down a refinery because it would be to their

own detriment. They would lose sales. So the individual refiner’s

objective is to do this in the most efficient and planned way so as

to maximize their sales.

Now, what has gone wrong is there have been a number of unplanned outages. You know, of course, we are not an investigative

agency in any way, but we certainly have not seen any reason to

think that there was any attempt to manipulate the market——but

that is not our role. That would be the Federal Trade Commission,

of course.

Chairman KERRY. Can you comment on the likelihood of the sce- nario that Mr. Smith described, where you have oil prices at $120

a barrel?

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Mr. CARUSO. Well, that is certainly possible, but it would take

a huge disruption in either crude oil or refined products to get to

that kind of number. One could pose—and I know the group that

Mr. Smith is part of did that in the scenario planning that he mentioned—a severe disruption because we are so dependent on imports. It could certainly—in the short run, there is no real pressure

relief valve except price because there is very little cushion, as I

have mentioned, with such tightness in capacity. And, of course,

the Strategic Petroleum Reserve might get you through a shortterm situation, but in a long-term disruption, you could get very

high prices.

Chairman KERRY. Mr. Smith, to what degree has this increased

price changed or affected the way you do business with small businesses? I mean, has it had an impact? Have you changed actual

practices?

Mr. SMITH. Well, I think the testimony that you heard indicates

where it has had the most effect on small business. We decided a

long time ago that we should not be in the oil futures market, so

we have in our rates a baseline crude oil price, which we put on

the Internet. And then as the price of crude goes beyond that, we

have a surcharge. So many of the price increases that were mentioned are the run-up in fuel prices reflected in the surcharges.

For the air express business at FedEx Express, those surcharges

have gotten up at times during this run-up in fuel prices to almost

20 percent. For our ground parcel service, it has been somewhat

less, but still very significant. And in the aggregate, when you are

shipping many small shipments the way many of our small business customers do, this gets to be a very considerable expense to

either them or their customers.

Chairman KERRY. So yours is essentially a straight pass-through

based on a very transparent—it is very transparent——

Mr. SMITH. Yes, and we have over the last 3 years steadily increased the base barrel of crude price. We use the DOE numbers

to establish that.

Chairman KERRY. Also, share with us, if you would, speaking

from your experience as a business person, having come to the

judgments you have come to, why we still have resistance in some

quarters about the change in the CAFE ́ standards and in trying to

get better fuel efficiency on cars. I think one of the major auto

makers stood up the other day and suggested that this was going

to hurt their industry, et cetera. You are obviously of a different

opinion, both from a security point of view, as well as a business

point of view. Can you share with us quickly why you think it is

so compelling and important that we respond with that as one of

the components of our overall approach?

Mr. SMITH. Well, as I mentioned during the testimony, and in

the simulation that as done in Davos, it assumed a 4-percent reduction in worldwide supply. That is, as you well know with your

knowledge of geography and naval matters, very easy to accomplish. By simply shutting down the Straits of Hormuz, you would

have far more than 4 percent of worldwide supply taken off the

market. Many individual producers, which are subject to very volatile political situations, could take that amount off the market. So

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that is not far-fetched and it is about 3 million barrels of oil a day,

4 percent of 80 million barrels of need worldwide per day.

We were very mindful about the issue of the auto manufacturers

in coming up with our recommendation. Certainly, the last thing

in the world we would want to do is to harm our automotive manufacturers. They are wonderful customers and great business partners, and I think the facts of the matter are that our balanced approach, which provides funds from the government, largely through

royalties and all from increased production, and allows them to retool, would get them into a better market position, because I think

the record is pretty clear. The U.S. auto manufacturers with the

old fleet average CAFE ́ standards built a lot of small and profitable

cars and a lot of large profitable trucks, and it would have been

a lot better had they, like the foreign manufacturers, been producing a lot more fuel-efficient vehicles.

So we certainly believe that nothing we have suggested at the

end of the day is harmful. Now, the auto manufacturers, I certainly

can’t speak for them, but I do think that they have come around

to the point of view that fuel efficiency standards are probably in

the cards and now they are really just talking about what those

percentages should be.

I would point out one final thing to you, Senator. In 1975, when

the Ford administration and the Congress passed the original fuel

efficiency standards, as I said in my remarks, they were opposed

by the auto manufacturers. Subsequent to the fact, Henry Ford II,

who was the CEO of Ford Motor Company, to his credit, said, ‘‘I

was wrong,’’ that this country would not have achieved the improvements in energy efficiency that it has achieved absent those

fuel efficiency standards.

And I think we are simply in the same place we were before, except in a much more serious state of vulnerability because, as you

noted in your remarks, imports have gone up from 37 percent to

almost 60 percent. So we have an extreme exposure to a disruption

in supply in terms of our economy security and we are already in

the Middle East and involved in combat operations over there and

I don’t think these four-star admirals and generals came to this

conclusion lightly, either. They see a real prescription for a severe

national security challenge unless we do something.

Chairman KERRY. I appreciate that very much.

Senator Snowe.

Senator SNOWE. Thank you, Mr. Chairman for initiating this

hearing that rightfully focuses on the impact of rising gasoline

prices on small businesses. I also want to thank all our witnesses

here today for their very graphic and compelling testimony that

speaks to this issue, which affects small businesses and Americans

and particularly low-income Americans disproportionately. I know

I have seen that in my State.

We in America depend on jobs being created from the small business sector. Approximately two-thirds of all new jobs each year are

created from small businesses. So if they are affected disproportionately and they can’t survive, we can’t thrive in America. So this is

clearly an issue of major national priority.

We have abrogated our responsibilities over the years, frankly, in

developing a very bold and comprehensive National Energy Policy.

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We failed to execute the leadership, and as you mentioned, Mr.

Smith, in 1975, it was a generation ago that we enacted CAFE ́

standards for this country that yielded a 40-percent increase. I am

just relieved that we are finally considering in the base energy bill

that is pending before the Senate, a CAFE ́ standard increase of another 40 percent that Senator Feinstein and I have been working

on for the last 6 years. There will be efforts to undermine that and

I hope we can resist them. This is the minimum and the least that

we can be doing today in order to improve fuel economy standards.

Ater all, the transportation sector represents 40 percent of the

fossil fuel that is consumed in America. And we have seen significant job losses in the automobile industry, which needs to be on the

vanguard and the cutting edge to be able to offer choices to the consumers. They have lost jobs and yet we haven’t increased fuel efficiency standards. And we are losing jobs today, because every 10-

percent increase in oil prices results in 150,000 jobs being lost in

America.

And so I think that we have much more to do. Hopefully, we can

create an ambitious National Energy Policy. We are surrounded by

the consequences of a lack of a National Energy Policy and it has

repeatedly manifested itself, whether it is in our environment, our

economy, or as you say, Mr. Smith,and our national security. We

cannot be shifting billions of dollars from America to the most volatile, radical regions and leaders in the world, and that is essentially what we are doing. So it is in our national security interest

to reduce our reliance on imported oil.

We need to help small businesses, as well, in this process. People

say that we don’t have the ability to develop the technology to increase CAFE ́ standards by 10 miles per gallon over 10 years. I

mean, this country has been founded on innovation. But when you

think about it, 1985, was the last year in which passenger vehicles

went up as a result of the 1975 increase. Think of where we are

today. We have got hand-held computers from mainframes. We

have gone from landlines to cell phones, encyclopedias to the Internet. And we are saying in America we can’t do better?

Absolutely, we can, and that is what the bill on the floor hopefully can accomplish in challenging that innovation and the wherewithal, and also spearheading efforts here. And I know Senator

Kerry and I are going to be working on an initiative to see if we

can help small businesses play a leading role in promoting energy

efficiency and combating climate change. But in the meantime,

hopefully, we can do everything we can in the bill that is pending.

Mr. Smith, I just wanted to ask you, is there anything more we

should be doing in this bill? I thank you for co-Chairing the Energy

Security Leadership Council. Is there anything more we ought to

be doing in this bill that is before the Senate?

Mr. SMITH. Well, Senator, the council’s recommendation, I want

to urge people to look at again, is a comprehensive bill. It sits on

three fundamental pillars. It is the different, new, by category, by

attribute, fuel efficiency standards with the off-ramps, incentives

and help for the auto manufacturers to retool, alternative fuel production that is truly feasible. We all would love to think that we

could raise switchgrass in Montana and the Plains and fuel our vehicles, but we are a few years away from that and we don’t want

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to destroy the food markets by overshooting there. And the third

part about it, and I know this is controversial in certain areas, is

increased domestic production.

So it is all three of those which is the best way to deal with the

problem, and quite frankly, from our perspective—and here I am

preaching to the choir, you folks know a lot more about this than

I do—but it seems to be that you cover the political spectrum in

a grand compromise with legislation such as we recommended and

I think is reflected in the bill put forward by Senators Dorgan and

Craig.

So that is what we would recommend, a balanced approach with

all three of those things. And I think the military officers in our

council would also say there is a fourth element, and we have to

get folks around the world who benefit from the security that the

United States military and particularly our Navy provides to the

movement of this oil around the world, that they have to get in the

game and help pay for this.

Senator SNOWE. Good point. Mr. Lynch, you mentioned Pottle

Transportation, and I am very familiar with that company. In talking to them, it is amazing. Last year they made a significant profit.

That has now dropped even though they had an increase in business of more than a million dollars. Their lost profit is attributed

primarily to the rising price in gasoline.

One of the issues that has surfaced in Maine over the last few

years, and one we are trying to change here, is the whole issue of

truck weight limits, and you referred to that in your testimony. In

fact, I met with a group from Maine yesterday that suggested that

we could have a national standard in America on weight limits.

There are 29 States that have waivers from the weight limits on

the Interstate of 80,000 pounds. Data indicates that if we had a national standard of 97,000 pounds uniform across the country, that

we could promote highway safety. This is it a safety question for

us in Maine, because having these big trucks rumbling through

small towns can lead to accidents. In fact, we have had two serious

tragic accidents recently in Maine as a result of that.

But second, it would achieve an enormous savings in fuel cost,

not only to the truckers in Maine, the independent truckers, but

also to this country, not to mention the impact on the environment.

Can you speak to that question?

Mr. LYNCH. Certainly, and I would really give two comments on

that. First, that recommendation on the 97,000 pounds was also

part of the Energy Security Leadership Council’s overall recommendations. When we saw that, there are certainly portions of

the recommendations that are going to be a little harder to deal

with than others and to accept, but we saw that as a very, very

positive step.

It is important to keep in mind the whole issue of truck size and

weight, the debate previously has generally been along the lines

that we are going to run these bigger, heavier, longer trucks on

every road, every time, everywhere. The fact of the matter is that

right now today, there is something called the National Highway

System, the NHS system. That system represents about 7 percent

of the entire road network in the country. That system handles 75

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percent, though, of the freight traffic, the truck traffic that runs in

the country.

So what we would like to see is concentrate on those roads where

the freight is moving. Do what needs to be done. We understand

that there are bridge issues that have to be dealt with, off-ramp,

on-ramp issues, et cetera. But we think that these are, as you said,

these are not insurmountable problems. I mean, we can look at

these things, identify where the work needs to be done and what

has to happen to make this equipment the standard on the highway, because we can, in fact, reduce the number of trucks that operate on the system if we can look at this from a little more rational way.

Senator SNOWE. Thank you.

Chairman KERRY. Thank you, Senator Snowe.

Senator Corker.

Senator CORKER. Well, thank you, Mr. Chairman. I think this

testimony has been very enlightening and timely because of what

is on the floor right now and I want to thank the testimony that

has been received regarding businesses. I was on the board of one

of the companies that Mr. Lynch represents and find it hard for

them to figure out how to have a steady stream of profits based on

the various volatilities they face, and certainly have dealt with

some of the issues that you have focused on in your testimony and

want to thank you for that.

I think the reason, though, we are focused over here a little bit

today is we are dealing with some global issues, and I think the

testimony, Mr. Smith, that you gave could not be more dead on. I

was just in Brussels a few weeks ago meeting with European officials, talking about some of the energy policies that have been put

in place, and I think that sometimes we here in our country pick

winners and losers, or try to pick winners and losers instead of

having a balanced approach where we have an overall goal that absolutely focuses on energy security, and I think that is one of the

biggest mid- to long-term issues that we face in our country. I could

not agree more.

But combine that with raising the standard of living for future

generations, growing our GDP, but combines that with certainly

lessening the impact that we have on our world, the climate, environmental considerations. And I think if we can hit that sweet spot

with our energy policy, then we have done something that will be

great for generations to come.

I would like to just reiterate for my colleagues that I think what

Mr. Smith has said is that he embraces the CAFE ́ standards that

are in the base bill put forth by Commerce, and I find that fascinating and I appreciate that. We have had a number of Tennessee companies that do the same.

But I would like for you and Mr. Caruso to focus on an issue.

I am proud to be on the Energy Committee and we have a really

aggressive alternative fuels bill. I am setting out an amendment

that I hope will pass that just sets a standard and doesn’t pick alternative fuels specifically, but sets a standard for us to meet, because other technologies will come into play.

But one of the issues that you both have focused on is the refinery issue and domestic production, and that is something that we

48

seem not to want to embrace here in our country today, and there

is a lot of focus on price gouging. There is a lot of focus on refineries being down. I wonder if you all could talk a little bit about

what appropriate policies should be in place nationally to affect our

refining capacity and our own domestic growth.

Mr. CARUSO. Well, as you know, Senator Corker, EIA is not in

the policy business, but I can give you some of the fundamentals

that would lead to the investment needed in the downstream refinery sector. There hasn’t been a new grassroots refinery constructed

in this country since the late 1970s and that is part of the problem.

And one of the reasons that exists is that for most of that 25 to

27-year period the return on investment in that sector has been

poor. So therefore, the only additions to capacity have been made

at existing plants. That is partly a problem of getting permitting

and other issues, but it is mainly that the fundamental return on

investments was poor.

Now, as one looks forward, how do we change that? The way to

change it, of course, is to make it more attractive to invest and for

a typical refinery now in the size of, let us say, 300,000 to 400,000

barrels a day, companies are looking at $6 to $8 billion in investments that would require about a 20-year time of operation in

which they can get a return on that investment. Frankly, there is

a lot of uncertainty about what the investment climate will be for

refined products over the next 15 to 20 years.

I think some of the things that are being discussed in the current

energy bill and that were passed in the Energy Policy Act of 2005

are helping to clarify that outlook, but clearly companies in the petroleum downstream sector are looking at greater regulatory certainty and issues that you talk about in some of the other industries represented here today. But that is the fundamental issue—

getting the investment needed to meet the demand that we are

projecting.

Mr. SMITH. Well, Senator, one of the things I would just point

out to the Committee that always makes me stop and wonder, we

are heavily involved in China, as you know. We have been there

23 years. We have a very large business in China. The paper today

talks about four Senators who want to put sanctions on China because of their level of exports to the United States or the balance

of payments. But hardly anybody is talking about the balance of

payments issue in the petroleum sector. Five or 6 years ago, Saudi Arabia produced about $30 billion

from producing oil. I think the last year we have figures, it went

up to $200 billion. Forty percent of our balance of payments problem is from oil exporting countries that buy very little from us. The

exports to China are going up at a very rapid rate, not as fast as

their exports to us.

So as I said in my remarks, you have to recognize it is a worldwide market for oil, and a barrel of oil produced in the United

States, whether it is Alaska or off the Outer Continental Shelf, has

an effect on total worldwide prices and total supply.

And in the case of the refineries, when a business is looking at

whether it can get a return on that invested capital, there is always a band in there. On the one hand, when prices are too low,

they won’t invest. But on the other side of the coin, when supply

49

is constrained, they have a disincentive to invest because they can

maximize price on the existing investment. So the way to get refinery capacity, in my opinion, is to have a greater source of supply

and let the market work to a greater extent than was the case before.

But it has to be, in our opinion on the Energy Security Leadership Council, a comprehensive approach. We are exporting billions

of dollars, as Senator Snowe mentioned, to people who wish us ill.

In the debate about U.S. production, there is always this oil spill

off of Santa Barbara that is brought up that took place 30 years

ago. Well, all kinds of technology, again, as Senator Snowe mentioned, has taken place in 30 years and I would point out to the

Committee that during the disasters of Hurricane Katrina and the

other one, whose name escapes me—Hurricane Rita and Katrina,

there were 1,000 offshore rigs in the Gulf of Mexico. There wasn’t

one drop of oil spilled.

So not to be producing oil on our Outer Continental Shelf when

the Cubans are getting ready to do it and so forth, or Alaska, it

seems to me, is not in our strategic interest. So we would say that

fuel efficiency standards, alternative fuels, and production are the

answer.

Chairman KERRY. Thank you, Senator Corker.

Senator CORKER. Thank you.

Chairman KERRY. I appreciate it. I might just comment quickly,

because this is an issue I have been involved with a lot around

here for a long time. As we debate Alaska, 95 percent of the Alaska

oil shelf is open for leasing and the largest lease in history was

letted at the end of the Clinton administration and is still not fully

exploited, I might add. In addition to that, the largest explored but

unexploited oil field in the world is the offshore Gulf of Mexico,

which we have permitted, which is allowed. A lot of the oil companies have not done that, I am told, because they are waiting for the

price to be right on it.

So we have permitted significant additional production. I am all

for it. I think we ought to have additional domestic production. But

those are two places where you don’t run into a whole bunch of political and environmental clash. They are there. They are available.

They are subject to exploitation now and the oil companies are not

doing it.

Senator Tester.

Senator TESTER. Thank you, Mr. Chairman, and I, too, want to

express my appreciation to the members of the panel for their testimony today. I am not going to focus on Mr. Caruso or Mr. Smith

as much as the other three, but I do want, particularly you, Mr.

Smith, I want to thank you for your leadership in the area of production. I think the points you bring up are well founded and I certainly appreciate that perspective.

This can be for Janet or Sal, or both. You both run or are part

of successful small businesses, at least to this point they have been

successful for a number of reasons, and I am sure that when you

do your short-term and long-term planning for the future, energy

costs have to be something that you are very concerned about or

you wouldn’t be here today, as a matter of fact. What are you looking at as potential ways that you can save energy costs down the

50

line that you think are realistic, or are you just hoping the market

gets better as far as price at the pump? Either one or both.

Ms. MYHRE. Just real quickly, with the local delivery, what we

are finding is that we just don’t have any options associated with

the fleet or anything like that. We still only have gas-driven kind

of vehicles. So the only thing we have is to sell more to absorb, you

know, hopefully we get to that level where as our volume of sale

increases, obviously the operational cost for delivery goes down. So

that is what we focus on. We focus our energy into increase our volume to be able to absorb some of these without having to go to a

downsizing, if you will. We do plan for that, but not in the initial.

We plan for growth.

Senator TESTER. OK. Sal.

Mr. LUPOLI. Thank you, sir. Much like this answer that was just

given, we found ourselves consolidating a lot of routes. You know,

instead of making deliveries two to three times a week, we are trying to make that same delivery one or two times a week. We are

trying to carpool with our employees. We really feel—I feel as the

owner of the company that our biggest asset is our employees. That

is what we have to look at first.

So, as far as looking at that bottom line, it is important. We

want to continue to be profitable. But we will not be profitable if

we don’t take care of the kids that work in our company, and almost in excess of 300 kids that work in our company, or 300 adults,

I should say, that work in the company, I find myself speaking to

them and speaking to the managers how to help these guys consolidate the driving, public transportation and some of the things that

were mentioned at this table. But it certainly results back to focusing on that individual worker that needs the most help in my organization right now.

Senator TESTER. Thank you. Mr. Lynch, just as a sidebar, the

reason I was kind of chuckling is because once upon a time in Montana, we didn’t have a speed limit, and I happen to have been in

the legislature when we put one in and I remember the Trucking

Association coming in and saying they wanted, I believe it is 65,

and then I remember going back to my offices and getting calls

from the independent truckers that were not happy, to say the

least. So that is what brought a smile.

But at any rate, what I want to talk to you about real quickly

is the low-sulfur fuel and if, and I think it is going to happen, we

get standards for biodiesel so biodiesel becomes something that the

quality is dependable on, what kind of impact do you see that having on the low-sulfur fuel issue and the fuel economy issue?

Mr. LYNCH. On the ultra low-sulfur diesel, we are in the transitional stage now. I think we are probably almost up—well, frankly,

we might even be up close to 100 percent now. That transition

began in October. I will be very honest. Many of the problems that

had been anticipated did not materialize. There still are some questions about clogging of the filters, some other issues, particularly

in the colder weather States, there have been some issues there.

But again, we didn’t see nearly the number of problems that we

had anticipated, but they could be longer-term.

Senator TESTER. Right.

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Mr. LYNCH. Now, with respect to the biodiesel, we could not

agree with you more on the need for a standard. We think—we are

very supportive of biodiesel, very supportive of its use. We certainly

want to see, though, standards so that when every farmer decides

that they are going to start producing this stuff, that when it gets

into the stream, that it is of high quality, because frankly, we have

an issue also then with the engines and the warranties on the engines. We have had this sort of back and forth with the manufacturers.

But again, I think if we stick to a standard, a Federal standard,

and we would hope that the current pending energy bill would include something along those lines, labeling, and we are a little ambitious. We would like to see a little preemption so that we don’t

get a plethora of boutique fuels around the country, but we also

recognize the challenges with that. But that is certainly what we

would like to see.

Senator TESTER. Do you think that will help with the sulfur

issue?

Mr. LYNCH. My understanding is that it will not only help with

the sulfur issue, but with the emissions issue, as well.

Senator TESTER. OK. Just one other question. It deals with your

testimony that talked about the Federal Highway Administration

interpreting language on basically a generator that is allowed in

the truck for 400 pounds and they are not allowing for that weight

exemption. How long has this been going on, because to me, it

makes perfect sense from an energy standpoint and from a common

sense standpoint to have a generator instead of a big old hunk of

cast iron sitting there pumping heat or cooling to your cab. How

long has this been going on? When was the exemption given and

when did they take it away?

Mr. LYNCH. Language was included in the Energy Act of 2005.

Like most things in this town, the intent and then the interpretation when it gets to the agency, sometimes it drops a bit. In this

case, the Federal Highway Administration, and we are not critical

of them, but Federal Highway said the way the language was written, it is not mandatory. It is basically State by State. Well, for

trucks running interstate, they can’t purchase the equipment and

be able to run it in one State, but not run it in the other, so consequently, it is of little value. So we are still exploring with the Department as well as in Congress ways to get that done.

Senator TESTER. OK. I will rely on people who have more experience than I to figure out ways to influence the bureaucracy. Mr.

Chairman.

Chairman KERRY. Thank you, Senator Tester.

Senator Cantwell.

Senator CANTWELL. Thank you, Mr. Chairman, and thank you

for holding this important hearing. I think when we talk about all

the issues in regards to our energy supplies and the high cost, I

think many people often forget the impact on small businesses and

those that are particularly impacted because they are in the transportation sector, so thank you for having this hearing.

Mr. Smith, thank you for your leadership on trying to get a larger focus on this issue from an industry perspective and from a national security perspective. I noticed in your Q&A answer back and

52

forth that you said you no longer were participating in energy futures as part of your business. Why is that?

Mr. SMITH. Senator, it is probably because we are not smart

enough. But we simply decided that the markets were so volatile

that as a large publicly held company, we shouldn’t be speculating

on oil prices. We make it very transparent to our customers whether using express, ground, freight, or what have you, that this is the

baseline, the barrel price of fuel that is baked into the rate, and

then each month, we have a surcharge if the prices go beyond that.

And we just think it is a better way to do it. We lose as prices run

up because we are about a month behind on the posting, and then

we pick up it, hopefully, if it ever goes down, on the other side. It

is just a business decision that is fairly standard in our industry

as opposed to the passenger airline industry where there is a lot

of fuel hedging that goes on.

Senator CANTWELL. Well, it is a very interesting comment. I hope

that somebody doesn’t write a sequel to ‘‘The Smartest Guys in the

Room’’ that now is about how the lack of transparency in energy

futures market, which again, you can’t figure out. It is too volatile.

So a basic function that allowed businesses to do something to protect against future prices no longer works, and it doesn’t because

it is too volatile and I personally believe we don’t have enough

transparency there.

I hope you will consider the 787 coming out from Boeing that is

20 percent more fuel efficient. I think that they listened to customers. Given your CAFE ́ comments, I think the aerospace industry listened to customers and said, we need a more fuel-efficient

plane. Achieving 20 percent more fuel efficiency is going to be quite

a landmark, so we are excited for that.

Mr. SMITH. I might mention, Senator, that we have on order 15

of the new Boeing 777 freighters, which we start taking delivery

of in 2009, and that airplane in subsequent editions, based on what

the chairman of Boeing, Mr. McNerney, has told me, will incorporate many of these wonderful technology improvements embodied

in the 787. So we are looking forward to getting those airplanes.

They are about 25 percent more fuel efficient than the MD–11s

which we currently operate.

Senator CANTWELL. Thank you. Thank you for that.

Ms. Myhre, when a small business is caught between these high

expenses and delivering service, we just heard Mr. Smith say how

he had adjusted to large carriers and basically changing and creating a surcharge, what do you do when margins are obviously a

lot tighter at the retail end? I mean, what is the end result if prices

are going to keep going up? Are you just going to—I mean, is it

going to be a job impact? You are going to lose customers? How——

Ms. MYHRE. It can. Originally, we try not to increase our costs

to the end consumer. We are trying to absorb——

Senator CANTWELL. Why?

Ms. MYHRE. We are trying to watch the market. As you know,

prices went back down very close to the election last year, back

down to a manageable thing, and now again they have crept back

up, and we understand there is a seasonal fluctuation. So we have

tried to put that into our end prices to the customers for our delivery.

53

Right now, however, the trend has been continually to rise and

rise and rise with no slide-back. So what we are going to have to

do is start passing on the increase in our expense to the end product, to the end consumer. And we have quite large Federal contracts that that is a good portion of our business. It is destination.

So every time I charge for a pencil, my freight cost has to be included in that unit cost.

So you are going to watch—I cannot surcharge the government

for delivery. I have to deliver—you know, it is included in the cost

of the goods. So we are watching our industry starting to charge

more for a pencil and a pen, whereas before—it is starting to be

competitive. There are larger plays that can absorb a little bit faster than we can, so——

Senator CANTWELL. Thank you very much. Mr. Lupoli, did you

want to answer that, too?

Mr. LUPOLI. I think what is interesting in my business, we have

had growth every single year since the inception and our philosophy in our business is we take a portion of the profits every year

and reinvest them into the company for expansion. And I think

what is happening in the fuel, for example, last year, we spent

about $130,000 in fuel expense. This year, we are on budget to

probably spend over $200,000. Now, that is going to come directly

out of the bottom line. That is going to come directly out of profit.

We don’t have any intention or desire to cut back quality, cut back

certainly employees.

So what is going to happen to us? That means we are going to

have to cut back expanding our stores, and by cutting back expanding of the stores, we are not offering additional jobs out there. Although being a small business, every one of our stores typically employ anywhere between 10 and 15 people, and as we have a growth

plan of 3 to 4 stores a year, well, that is a big impact if we are

not able to expand our stores. That trickles all the way down to

somebody that needs a job, a local person, a local mom, dad, individual that is looking for that job that doesn’t have the ability or

possibly the education for a high-paying job to come over to our organization. It is not going to be there because of these rising fuel

costs. So in a——

Senator CANTWELL. Thank you, Mr. Lupoli, and thank you, Mr.

Chairman. I appreciate that very much.

Chairman KERRY. Thank you very much, Senator Cantwell. We

appreciate it. Thank you very much, and thank you for helping us

connect with Ms. Myhre. We appreciate that very much.

Senator Coleman.

Senator COLEMAN. Thanks, Mr. Chairman. This is a very important hearing, Mr. Chairman. I really appreciate it.

Mr. Caruso, has EIA, have they done a study? I mean, we have

some great testimony, but have you done a study on the impact of

energy prices on small business?

Mr. CARUSO. We have not, Senator. We don’t disaggregate our

data collection to that level of detail.

Senator COLEMAN. It would be worth having more extensive information, and this has been—I am sitting here listening about 35

percent increases. I am wondering, Ms. Myhre and Mr. Lupoli, is

there a point where we simply say—is there a tipping point that

54

says, we can’t handle this any more? Is there a price of gas or

something? I am amazed at this figure, 36 percent in a short period

of time. I mean, your margins can’t be that great. Is there some

point where you say, we can’t afford it. You are going to drive us

out of business, or the price of gas will drive us out of business?

Mr. LUPOLI. That is a very real statement, sir, and the answer

is yes. We are getting—my business, our business, we are getting

dangerously close to those levels. What we would like to do is continue to increase sales, increase expansion, but we are really finding it difficult to maintain the foundation we built of giving all our

employees insurance, offering them 401(k) plans, doing all those incentives to keep the people and create a lifestyle. We are finding

it very difficult, very close to the point right now where those options don’t exist anymore, or they have to be stopped and we are

waiting for this market or this release to take place. Something has

to happen in order to give us some kind of opportunity to expand,

and the rising gas prices are preventing us from doing that.

Senator COLEMAN. I appreciate that. Ms. Myhre.

Ms. MYHRE. We are in the same option right now, I mean, the

same level that you have to make that critical decision whether or

not you have to scale back your operations in order to absorb, and

what employees and what route. You know, a driver that drives a

route, maybe we will go down to two routes. Maybe we will get rid

of our local employees all the way around and they will be back

home. But maybe we will go to an outside deliver service and pass

it on that way. So yes, every day, there is a decision that has to

be made to absorb 35 percent—any line item of your financial

statement.

Senator COLEMAN. Is there anything, and Mr. Smith, you have

looked at the big picture, and maybe Mr. Caruso, is there anything

the Government can do in the short term? Is there anything that

we are not doing right now that we could be doing to lower the cost

of a gallon of gas?

Mr. SMITH. Well, I think, Senator, the situation we are in built

up over many, many years. We see this very clearly in our business

and I think you would find that the Federal Reserve looks at our

traffic and UPS’s traffic as an excellent surrogate as to what is

going on in the economy as a whole, and since the majority of all

business activity is small business, one of the things that we have

seen over the last year is the echo effect of this run-up, and there

is just no question that the current economic slowdown is directly

attributable to the run-up in fuel prices which has acted as a tax,

particularly on small businesses and lower-income people, where

those dollars have been shipped offshore and they are not recycling

in our economy.

I think Sal’s testimony was perfect about the people that used to

come into his restaurant several times a week have to scale down.

So that is what you are seeing. If the situation were to become

worse by the withholding of some supply, either because of a political act or the cartel determined to increase it more, I think you

would see significant economic travail in this country, particularly

in small business.

Senator COLEMAN. And yet we clearly have to take a long-term

view, and I——

55

Mr. SMITH. Well, that is the problem. You know, I don’t know

any short-term palliative. Obviously, you do something like have

the Government short the market or put petroleum out of the Strategic Oil Reserve, but it would just be a short-term effect. I mean,

these are long-term issues and they need to be dealt with in a comprehensive long-term fashion, in our opinion.

Senator COLEMAN. Just one question about CAFE ́ . Clearly, we

have to be more aggressive. With the underlying bill there is going

to be an alternative that is out there. The industry is, I think, finally getting it. They are a little slow to the dance, but they are

getting it. Do you have a position on a particular—I thought my

colleague from Tennessee asked a question about your position on

the underlying bill. Do you have a position on a particular proposal

or is it just the general concept that the industry has to be at the

table and they aren’t now?

Mr. SMITH. Our proposal was reflected in the bill that was put

in by Senators Dorgan and Craig, which call for a 4-percent by category, per year, administered by NHTSA, but very importantly,

with off-ramps if it were technologically infeasible or there were

safety considerations, you know, traffic fatalities went up or whatever the case may be. So you have that and then you have, I think

in the Commerce bill, Senator Feinstein’s bill, I believe it is 31⁄2

percent.

But the council believes that the underlying technology would

support what is in the Dorgan-Craig bill. Obviously, politics enters

into the equation. Maybe there is a compromise at some other level

or lower level, I don’t know. But we support the Dorgan-Craig bill

and certainly the Feinstein bill is in that direction, as opposed to

lower levels.

Senator COLEMAN. I appreciate your leadership in this area.

Thank you.

Chairman KERRY. I think, I may be wrong, but I think the Feinstein bill may ramp up after a number of years. It ramps up to the

4 percent. So we actually get much closer than people would think,

and there are some restraints on the off-ramps. I think people have

been nervous that the off-ramps could be deemed by some people

to be a non-compliance invitation. That is a balance that people are

trying to get at. But we hope we can hold it together on the floor.

Senator Cardin, welcome, sir. I think we are going to have a vote

around 11:30, so go right ahead.

Senator CARDIN. Mr. Chairman, I am going to be very brief. I

really apologize for not being here earlier to listen to the testimony

and hear my colleagues with the questions and your answers. The

Judiciary Committee, as you know, various committees including

the Judiciary Committee had markup today and they needed to

make a quorum, so I was over in the Judiciary Committee for this

morning.

But I really wanted just to come by to thank the Chairman and

the Ranking Member for holding this hearing. I think this is a

critically important issue to get your input. The energy policy in

this country is so important to this Nation for national security, becoming energy independent and less vulnerable to other countries’

whims. It is important for our environment. Global climate change

56

is a real issue that we need to deal with as a Nation and show

international leadership.

But it is also important for economic reasons. I can tell you, businesses in my community are hurting from the 40 percent increase

in gasoline prices over the last 5 months and energy costs generally. So I look to this Committee and I look to the leadership

within our business community to come forward with workable

ways that we can find the technology to advance energy independence and can deal with the economic realities of the energy pricing

as to economic growth in our community.

Mr. Chairman, I am not going to venture to ask a question that

may have already been asked, but I wanted to come by and tell you

that I think this hearing was extremely important. I will look forward to reviewing the testimony of the witnesses.

Chairman KERRY. Thanks a lot, Senator Cardin. We appreciate

it.

Senator Thune, I apologize. I didn’t realize you had come back

in. It was my fault. I am sorry about that.

Senator THUNE. Mr. Chairman, I, too, want to express my appreciation to you and Senator Snowe for holding what I think is a very

important hearing. The impact of fuel prices and energy prices on

small businesses is certainly something that is being felt all across

the country. And in my State of South Dakota, we travel long distances and we are very dependent upon the agricultural farm-tomarket economy. Obviously that is an input cost that our economy

is having to bear out and it is having a profound impact.

I guess I would just like to ask a question of some of the small

businesses on the panel about whether any of you have considered

switching to alternative fuel-type vehicles, hybrids or flex-fuel vehicles, and if not, why, and what are the barriers to greater use of

those types of automobiles.

Ms. MYHRE. The co-owners did do some research with our local

fleet management companies, a Ford dealership. We went out and

we did research to see if there was anything currently on the market to fit our delivery needs. We are a lot of stops, short route kind

of delivery, much like a pizza delivery, I guess. But there currently

is no alternative option for the type of vehicle we would use.

We only have one diesel truck, so obviously we could use the biodiesel, and Washington State is starting to have a better distribution system, I guess better than any other State, where you can get

access to the biodiesel. But for a gasoline small delivery, we just

don’t have any commercial options right now.

Senator THUNE. Mr. Smith.

Mr. SMITH. Senator, FedEx, along with the Environmental Defense Fund and Eton Corporation, pioneered the development of a

robust pick-up and delivery vehicle, 700-cubic foot delivery vehicle

like you see our express and ground units using. It gets about 100

percent more fuel efficiency than the conventional diesel-powered.

It emits about 10 percent of the emissions of a standard diesel-powered unit. The problem is, and these are rough order of magnitude

numbers, a conventionally powered vehicle will cost about $55,000

and the hybrid will cost about $90,000. So it is impossible with that

kind of disparity in capital cost, and if it were reflected in a smallVerDate 11-MAY-2000 09:03 Dec 12, 2007 Jkt 037352 PO 00000 Frm 00060 Fmt 6633 Sfmt 6601 C:\DOCS\37352.TXT DianeA PsN: DianeA
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er vehicle used by office supply or pizza delivery, you would have

the same relative, perhaps percentagewise even higher.

So as part of this fuel efficiency quest to reach this 4-percent

goal, clearly, the way to do it in the pick-up and delivery area, and

we did include in our recommendations that light trucks and heavy

trucks be included for the first time in fuel efficiency standards, a

big part of that would be to develop at scale hybrid pick-up and delivery vehicles, because it is a logical place to introduce those. But

you would have to have incentives to be able to afford them as a

small business unit or a company like FedEx, which employs

77,000 vehicles in our operation.

But clearly, as Senator Kerry mentioned, the technology is there.

It is just the will and the incentives and the retooling and the production to put these vehicles—battery-powered vehicles for the

smaller vehicles are certainly on the horizon. New battery technology can get us where we need to do. And all of those will be

driven by a program like we recommended, which come from the

fuel efficiency standards, because you have to use technologies like

that to get to where you need to get to.

Senator THUNE. Mr. Lynch.

Mr. LYNCH. Senator, the Class 8 engine tractor is truly a marvel.

This is an engine that typically for over-the-road truck operations

can run anywhere from 150,000 to 200,000 miles annually. In some

truck operations, the vehicle barely stops. There is a driver in it.

It stops. The next driver comes in after the 10 hours, 11 hours. It

is a workhorse vehicle. It is that efficiency and that dependability,

I think, that ultimately, not in the P&D operation, but in the overthe-road long-haul operation, that is where the biggest challenge is.

As we look at it, when you are operating at a 4- or 5-mile per

gallon standard now, you have a lot of room to grow and improve,

and we certainly would like to see that. But part of the challenge

there is that same tractor can pull 80,000 pounds or the same tractor can pull 30,000 pounds and that can make one whale of a difference as to how much of a CAFE ́ standard that particular equipment is going to be able to achieve.

But it is certainly something that—I think one of the Senators

said, what can we do? I think it is start now.

Senator THUNE. And it sounds like what I am hearing is that it

is going to take that kind of a requirement. It is not going to happen, the economics are not there currently for you to start using

those types of vehicles until they start producing them and have

some sort of a requirement that they achieve a certain level of fuel

efficiency and, therefore, get the technology into the assembly lines

and what not to be able to move in a direction that would make

those types of vehicles more cost effective. I mean, in your operation, that is significant, 55,000 versus 90,000, and I understand

you need a workhorse engine.

How much of it, too—it seems to me that is a bigger issue than

the question I am going to ask now, but how much of it, too, is having access to alternative fuels at the retail level? We have about

180,000 gas stations in America and of those, only about 1 percent

make, for example, the 85 available, and most of that you are probably going to find in the Midwestern region. So it seems like we

have also an infrastructure problem we have to solve, and these

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things may have to all be solved kind of at the same time. But that

is something I have been working on.

I think as we go toward hopefully cellulosic ethanol, we will see

more and more, and the research phase is, of course, underway.

Hopefully, commercialization is not very far away. But we have got

a limit, I think as you noted in your testimony, Mr. Smith, to what

we can do in terms of corn-based or kernel ethanol. We now have

to look at other biomass to be able to produce it.

I thought your testimony was especially good with regard to

what I think is a very precarious situation that we face in the

world relative to where we get our energy. I think that it would

not take much to disrupt or cause a significant increase in cost to

the American consumer, the American business, if there is just the

slightest hiccup in the Middle East or Venezuela or someplace like

that. I describe that as a terrorism tax. I think we are paying enormous amounts of money to countries around the world who have

hostile intentions toward the United States and that we need to diversify away from that.

The energy bills that we are debating this week and hopefully

will continue to move legislation through here that addresses this

issue, because I think that—I am a big advocate, as you might expect from my part of the country, for renewable energy. But we

have got to add supply. We have got to add supply. We have got

to figure out ways to get home-grown American energy so that we

do not get 60 percent of it from outside the United States. I think

that is a very perilous situation for our country.

So I am supportive of whatever steps we can take to move in

that direction, but I am appreciative of your testimony and comments in response to questions about the best way to go about that

and what makes the most sense in terms of your day-to-day operations. So thank you for being here and thank you for your testimony.

I have got a statement, Mr. Chairman, I would like to get included in the record.

[The prepared statement of Senator Thune follows:]

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Chairman KERRY. Without objection, it will be put in the record.

I really appreciate the Committee’s strong participation in this, obviously.

Just a couple of quick wrap-up questions and thoughts. First of

all, I am going to be introducing legislation, the Small Business

Emergency Fuel Assistance Act of 2007, which is based on a Presidential declaration of a fuel emergency. As we saw after Katrina

and other instances, there are moments where you may really come

into the kind of shortfall that Fred Smith has talked about. And

under those circumstances, we want to create a grant program to

help small businesses through a legitimate fuel emergency. This is

not for standard business operation, but rather a legitimate Presidentially declared emergency. Eligibility for these grants would be

restricted to businesses with fewer than 50 employees and less

than $5 million in gross receipts, eligibility being determined on

those businesses having a plan to, in fact, become more energy efficient. So hopefully we have a linkage there.

I might also comment that in the 23 years I have been here now,

on the Commerce Committee, when Senator McCain and I tried to

get CAFE ́ standards raised to 35 miles per gallon about 5 or 6

years ago, and the mood of the Senate just was not there. In fact,

one Senator actually brought a poster of a Volkswagen dragging a

plow through a field—a purple Volkswagen, I might add—and that

was the image and the sort of sloganeering used to try to deter people from moving in this direction, which has been obvious for a

long time.

I think when Harvard and Stanford and Tuck and Wharton and

places do their case studies in the future, one of the dramatic case

studies is going to be the big three out in Detroit, tragically, who

have again and again, from the 1960s on, missed market trends

and missed what consumer desire is or could be, or what it might

be marketed to. They have taken the simplest marketing route

rather than sometimes the most visionary or the best or the most

creative.

I know that in 1990, when we negotiated the Clean Air Act, I remember sitting there and listening to industry come into that room

where we sat with Senator Mitchell off of the Majority Leader’s office, with John Sununu and Bill Reilly and George Herbert Walker

Bush involved it, and the industry said, don’t do this to us. It is

going to cost $8 billion. It is going to take 10 years. You are going

to bankrupt us. We just can’t do it.

The environmental community and others came in and said, no,

it is not. It is going to cost about $4 billion. It can be done in about

half that time and it won’t bankrupt folks.

In the end, folks, it took half of that. It cost about $2 billion and

it was done in about 21⁄2 years. Why? Because no one was able to

predict what happens when American ingenuity is unleashed

around a national goal or standard.

We already have the National Academy of Sciences telling us we

have the technology to dramatically change fuel efficiency. So we

run into this simplistic resistance based on old visions of an old

market, when there is really an enormous opportunity here to grab

this and take the ball and run with it. We want cars made in Detroit. We want American workers making those cars. We want to

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beat Toyota and BMW and all the rest of these folks. But you have

sure got to market something, which is a product that makes

sense.

I wanted to buy an E–85 vehicle to drive around Massachusetts.

One gas station, in Chelsea, has the availability. For the price of

1 week of the war in Iraq, we could actually pay to put an alternative fuel pump in every single gas station in America. I mean,

these are the real choices that we face.

And I concur with what Fred Smith said. We have to be careful

not to go rushing off into the grain-based ethanol because of what

it will do to the food markets, as well as what it does to soil, water,

and a lot of other usages where you have these cellulosic opportunities.

And if you talk to the venture capitalists in California and Massachusetts and New York and elsewhere, they are already putting

billions of dollars into these other sectors, some of them promising.

They believe there will be an alternative to fossil fuel maybe 5 or

10 years from now.

So if we set this goal and we start to move our technology and

creativity in that direction, I am absolutely convinced, based on

past experience and current technology, that this is going to prove

so much easier than people think. And Mr. Lynch, you commented

on how many of the problems that had been predicted didn’t show

up in terms of the low-sulfur. I think the same thing will be true

here and we ought to have confidence in America’s ability to do

these things.

I might ask you just one more question, Sal, in terms of your

business. I wanted to provide a billion dollars of retooling to the

auto industry and I wanted to provide a $4,000 per vehicle credit

for hybrids, which I think would change a lot of attitudes. If you

had a better tax incentive available to you on solar or on other fuel

efficiencies, or you, Ms. Myhre, would that make a difference to

sort of the business plan you lay out, what you might be willing

to capitalize on, and ultimately, to your bottom line?

Mr. LUPOLI. Absolutely, yes, sir. What we would do is we would

look at the long-range vision, not trying to put a band-aid on today

but really look at this in 5 to 10 years from now. You know, oftentimes, people tell you, you know, buying electricity, trying to contract it right now, or trying to contract a fuel price right now. I

want to extend that. They are trying to hold you to a 16-month or

a 2-year program. I want to extend it to a 5- or 10-year program.

And if there were more exemptions and we took advantage of one

of them in our State of Massachusetts by putting the second-largest

solar panel system on a private business, we would do those things,

because in the long run, we will be better off. As opposed to just

looking at the short-term gain, I want to look at the long-term

gain, because as prices continue to increase, when people try to

talk about the amortization of that cost, we really look at it as the

gap is going to close even much faster because it is not going to

be a 10-year program. If prices continue to rise, it is really a 5-year

program we are talking about. So before you know, you will open

your eyes and that incentive and that opportunity will be there to

take advantage.

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Chairman KERRY. Obviously, your product is price-sensitive to

your consumer, so there is a limit to how much you can absorb

here?

Mr. LUPOLI. That is correct.

Chairman Kerry. Without starting to lose business, just based on

your own pricing, and the same for Ms. Myhre. Have you, however,

raised prices? Have you sort of reached that limit at all?

Mr. LUPOLI. We really have, Senator. You know, we really feel

the product to be competitive, and I think that is the most important thing we are talking about in my industry, there is only so far

you can go, sir, to be competitive. And unless you are willing to

sacrifice the quality or employees, which we are not, which will

never be an option, it really just comes right out of your pocket.

And we are at that point where we can’t really raise any prices

anymore. We can’t pass that price over to our customers on the

wholesale end of it. So it is just really becoming a financial burden

and it is becoming a great problem to the employee.

Chairman KERRY. Well, we really appreciate your business ethics, your values that guide your business, and are very sympathetic.

We are working on this right now, literally today, and the mark

should be out on the tax bill that we are doing to accompany what

is happening on the energy bill. We are going to put some serious

incentives in there for alternative renewable, hybrid electric, and

plug-in, and really try to stimulate this. As I said, I fought for a

billion dollars in 2004. I think I am going to be able to get about

a half-a-billion dollar tax benefit to businesses and to the auto industry here to be able to retool. Hopefully that can help to cushion

some of what we need to do to get these vehicles that Fred Smith

talked about.

It is crazy that you all don’t have better alternatives. It is crazy

that a whole bunch of folks can’t go out there and find a car or big

truck or big SUV, even, that a soccer mom can’t be confident that

she can get everybody in the team to the game with a fuel-efficient

vehicle. There is no reason not to in our country. So——

Senator CARDIN. Would the Senator yield just for one moment?

Chairman KERRY. Sure.

Senator CARDIN. I just want to concur in your comments and just

point out what I think is absolutely accurate. You have to make it

a little bit easier for individuals and businesses to make that initial

investment and I look forward to seeing the tax provisions from the

Finance Committee on the energy bill.

Mr. Lynch, we have the technology today to make engines with

alternative fuels as reliable and as efficient so that the business

concern of having the reliability of an engine that can go 100,000

or 150,000 miles a year, we have that. We just need to make sure

it is available.

I just really want to underscore one point you made, Mr. Chairman, and that is in my own State of Maryland, we have governmental fleets and business fleets that want to use biodiesel. The

problem is they can’t get biodiesel. Most of the diesel stations don’t

offer it. So we also need to make sure that there is the infrastructure network out there to supply those that are moving forward

with alternative fuels, so that they can get it conveniently, and

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that may require some action on our part to make sure that network is available.

I thank you for yielding, because I agree completely with your assessment. We have the technology. We have the ability to get this

done. We now need—I think we also have the national will, by the

way. So let us now enact the policy so that we can get it done.

Chairman KERRY. Well, I really want to thank everybody on the

panel. I know you have traveled some distance. You have all sat

here giving precious time to the Committee. I think it has been

very, very helpful, very important testimony, particularly at this

moment with a bill on the floor. I think some of the Senators here

will take some of this testimony to this debate, so I think it has

been really helpful in that regard.

I will leave the record open in case somebody does have a question they want to submit in writing to you, but we are very, very

appreciative and with that, we will stand adjourned. Thank you

very much.

[Whereupon, at 11:40 a.m., the Committee was adjourned.

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