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95–551 PDF 2004

S. HRG. 108–604

CRUDE OIL: THE SOURCE OF HIGHER GAS

PRICES?

HEARING

BEFORE THE

SUBCOMMITTEE ON ANTITRUST, 

COMPETITION POLICY AND CONSUMER RIGHTS

OF THE

COMMITTEE ON THE JUDICIARY 

UNITED STATES SENATE

ONE HUNDRED EIGHTH CONGRESS

SECOND SESSION

APRIL 7, 2004

Serial No. J–108–65

Printed for the use of the Committee on the Judiciary

(

(II)

COMMITTEE ON THE JUDICIARY 

ORRIN G. HATCH, Utah, Chairman 

CHARLES E. GRASSLEY, Iowa 

ARLEN SPECTER, Pennsylvania 

JON KYL, Arizona 

MIKE DEWINE, Ohio 

JEFF SESSIONS, Alabama 

LINDSEY O. GRAHAM, South Carolina 

LARRY E. CRAIG, Idaho 

SAXBY CHAMBLISS, Georgia 

JOHN CORNYN, Texas 

PATRICK J. LEAHY, Vermont 

EDWARD M. KENNEDY, Massachusetts 

JOSEPH R. BIDEN, JR., Delaware 

HERBERT KOHL, Wisconsin 

DIANNE FEINSTEIN, California 

RUSSELL D. FEINGOLD, Wisconsin 

CHARLES E. SCHUMER, New York 

RICHARD J. DURBIN, Illinois 

JOHN EDWARDS, North Carolina 

BRUCE ARTIM, Chief Counsel and Staff Director 

BRUCE A. COHEN, Democratic Chief Counsel and Staff Director 

SUBCOMMITTEE ON ANTITRUST, COMPETITION POLICY AND CONSUMER RIGHTS

MIKE DEWINE, Ohio, Chairman 

ORRIN G. HATCH, Utah 

ARLEN SPECTER, Pennsylvania 

LINDSEY O. GRAHAM, South Carolina 

SAXBY CHAMBLISS, Georgia 

HERBERT KOHL, Wisconsin 

PATRICK J. LEAHY, Vermont 

RUSSELL D. FEINGOLD, Wisconsin 

JOHN EDWARDS, North Carolina 

PETER LEVITAS, Majority Chief Counsel and Staff Director 

JEFFREY MILLER, Democratic Chief Counsel 

(III)

C O N T E N T S

STATEMENTS OF COMMITTEE MEMBERS

Page 

Craig, Hon. Larry E., a U.S. Senator from the State of Idaho ............................ 9

DeWine, Hon. Mike, a U.S. Senator from the State of Ohio ................................ 1

prepared statement .......................................................................................... 118

Feingold, Hon. Russell D., a U.S. Senator from the State of Wisconsin, prepared statement ................................................................................................... 121

Kohl, Hon. Herbert, a U.S. Senator from the State of Wisconsin ....................... 3

prepared statement .......................................................................................... 138

Leahy, Hon. Patrick J., a U.S. Senator from the State of Vermont .................... 6

prepared statement .......................................................................................... 169

Schumer, Hon. Charles E., a U.S. Senator from the State of New York ............ 7

Specter, Hon. Arlen, a U.S. Senator from the State of Pennsylvania ................. 5

WITNESSES 

Bermann, George A., Walter Gelhorn Professor of Law and Jean Monnet 

Professor of European Union Law, Columbia University School of Law, 

New York, New York ........................................................................................... 20

Cooper, Mark, Director of Research, Consumer Federation of America on 

behalf of Consumer Federation of America and Consumers Union, Washington, D.C. ........................................................................................................... 21

Felmy, John, Chief Economist and Director of Policy Analysis and Statistics, 

American Petroleum Institute, Washington, D.C. ............................................. 16

Hastings, Justine S., Assistant Professor of Economics, Yale University, prepared statement ................................................................................................... 18

Kovacic, William E., General Counsel, Federal Trade Commission, Washington, D.C., prepared statement ....................................................................... 14

Wyden, Hon. Ron, a U.S. Senator from the State of Oregon ............................... 10

QUESTIONS AND ANSWERS 

Responses of George Bermann to questions submitted by Senators DeWine, 

Kohl, and Craig .................................................................................................... 40

Responses of Mark Cooper to questions submitted by Senators Craig and 

Leahy ..................................................................................................................... 43

Responses of John Felmy to questions submitted by Senators DeWine, Leahy, 

Kohl, and Craig .................................................................................................... 45

Responses of Justine Hastings to questions submitted by Senators DeWine, 

Kohl, Leahy, and Craig ........................................................................................ 50

Responses of William Kovacic to questions submitted by Senators Kohl, 

Leahy, DeWine, and Craig .................................................................................. 58

SUBMISSIONS FOR THE RECORD 

Bermann, George A., Walter Gelhorn Professor of Law and Jean Monnet 

Professor of European Union Law, Columbia University School of Law, 

New York, New York ........................................................................................... 84

Bingaman, Jeff, Ranking Member, letter to President, March 24, 2004 ............ 87

Cicio, Paul N., Executive Director, Industrial Energy Consumers of America, 

Washington, D.C., prepared statement .............................................................. 95

Cooper, Mark, Director of Research, Consumer Federation of America on 

behalf of Consumer Federation of America and Consumers Union, Washington, D.C., prepared statement ....................................................................... 101

Felmy, John, Chief Economist and Director of Policy Analysis and Statistics, 

American Petroleum Institute, Washington, D.C., prepared statement ......... 123

Page

IV

Hastings, Justine S., Assistant Professor of Economics, Yale University, prepared statement ................................................................................................... 129

Kovacic, William E., General Counsel, Federal Trade Commission, Washington, D.C., prepared statement ....................................................................... 140

Sloan, James B., Antitrust Attorney, Chicago, Illinois, statement ..................... 172

(1)

CRUDE OIL: THE SOURCE OF HIGHER GAS 

PRICES? 

WEDNESDAY, APRIL 7, 2004 

UNITED STATES SENATE, SUBCOMMITTEE ON ANTITRUST, COMPETITION POLICY AND

CONSUMER RIGHTS, COMMITTEE ON THE JUDICIARY, Washington, DC. 

The Subcommittee met, pursuant to notice, at 2:53 p.m., in room 

SD–226, Dirksen Senate Office Building, Hon. Mike DeWine, 

Chairman of the Subcommittee, presiding. 

Present: Senators DeWine, Specter, Craig, Kohl, Leahy, and 

Schumer. 

OPENING STATEMENT OF HON. MIKE DEWINE, A U.S. SENATOR 

FROM THE STATE OF OHIO 

Chairman DEWINE. Good afternoon. Let me welcome all of you 

to the Antitrust Subcommittee hearing on the causes of higher gas 

prices in the United States. 

As most Americans know, we are in the middle of another round 

of painful increases in gasoline prices. The national average has 

reached a new record high for self-serve unleaded gas, and that is 

about $1.80 per gallon. Recently, in my home State of Ohio, gas 

prices have been even higher. In Marietta, Ohio, for example, gas 

was $1.84 per gallon recently. In Cleveland, it was $1.86, and in 

Columbus it topped out at $1.88 at some stations. Many analysts 

predict that prices could break the important psychological barrier 

of $2.00 per gallon this summer. 

Although the prices this time around seem particularly high, the 

American consumer has unfortunately been here before. Since the 

1970’s, when we first experienced the so-called oil shocks, periodic 

price spikes seem to have become as predictable as the seasons 

changing. Though these spikes no longer surprise us, they continue 

to harm consumers, weaken the economy and leave us with an important question: What, if anything, should lawmakers be doing to 

address this recurring problem? 

Today, we hope to address that question in a setting where we 

can explore the reasons for high-price gasoline and consider possible policy steps. We do have excellent panelists and we will hear 

from a number of experts who will offer their perspectives on the 

root causes for higher gasoline prices. 

But I want to stress one thing upon which I think there will be 

universal agreement. The single most important factor affecting 

gas prices in the United States is the price of crude oil. We have 

a chart over there which indicates that. 

2

As we can see from our chart, as of March 2004, crude oil is the 

largest single component of the gasoline price, making up nearly 

half of the overall price that consumers pay at the pump. Beyond 

that, the Federal Trade Commission has said that changes in crude 

oil prices account for approximately 85 percent of the variability of 

gasoline prices. In other words, the changes in crude oil prices lead 

directly to the gasoline price spikes that cause so much economic 

distress. 

Of U.S. imported crude oil, more than 40 percent comes from 

OPEC member nations. Last week, OPEC met in Austria and decided to cut production by 4 percent, down about 1 million barrels 

to 23.5 million barrels per day. The price of a barrel of oil is already very high, between $35 to $38 per barrel. And according to 

some analysts, the price is likely to break the $40-per-barrel ceiling. 

Of course, OPEC’s decision to decrease supply likely will increase 

U.S. gasoline prices further, causing American consumers to suffer 

more. That is why last week Senator Kohl and I reintroduced our 

No Oil Producing and Exporting Cartels Act of 2004, or our 

NOPEC bill. 

The purpose of the bill is to end OPEC’s flagrant violation of our 

antitrust laws. This is hard-core cartel behavior and should not be 

tolerated. If OPEC were a group of international oil companies getting together to set prices and cut output, it could be prosecuted 

under U.S. antitrust laws. But to this day, OPEC continues to receive special treatment under U.S. antitrust law. Our bill would remove the legal obstacles that have protected OPEC until now and 

gives our antitrust enforcement agencies the tools they need to 

prosecute OPEC. 

First, NOPEC, this bill, responds to a 1979 Federal district court 

opinion that found that OPEC’s activities were, and I quote, ‘‘governmental,’’ not ‘‘commercial,’’ and therefore protected from prosecution under the Foreign Sovereign Immunities Act. 

Second, our bill responds to a 1981 Federal court of appeals decision where the court refused to hear that same case against OPEC 

based on the so-called ‘‘act of state doctrine,’’ which states that a 

court will not judge the legality of the sovereign acts of a foreign 

country. 

Finally, our bill gives the Department of Justice and the Federal 

Trade Commission explicit authority to prosecute OPEC. In short, 

our bill says to OPEC, no more special treatment under U.S. antitrust law. One of our expert witnesses today will offer his legal 

analysis of our proposed law and we look forward to his testimony. 

We are going to try to move the NOPEC bill and are hopeful that 

if it becomes law, it will help restore market discipline to crude oil 

prices. But even if we do manage to get crude oil prices back in line 

with the laws of supply and demand, there is a range of other factors that affect gasoline prices, and we will consider those today as 

well. 

For example, the proliferation of specialty gases creates a particularly complex part of the supply problem, as our chart over 

there indicates, as well. In the United States, as we can see from 

this chart, a number of State and local governments have different 

gasoline grades that they use to achieve EPA mandates for cleaner 

3

air. There are currently 18 different grades sold in the United 

States. This creates two supply problems. First, it reduces the 

availability of substitutes to cushion supply and price shocks. Second, it makes importing gas harder because many foreign refiners 

do not provide non-conventional gas grades. 

Refining capacity is another part of the gasoline supply problem 

and a number of people believe it is the key problem we are facing 

today. There are about 145 refineries currently operating in the 

United States. In the last 15 to 20 years, no new refineries have 

been built and about 75 have been closed. 

Although the efficiency of the remaining refineries has been improved, refinery capacity is still strained. In fact, refinery capacity 

utilization rates are running at about 90 to 95 percent today. This 

leaves the system with very little margin for error, because a fire 

or other accident that temporarily shuts down a refinery cannot be 

easily accommodated by increased output from another refinery. 

Even worse, there is no solution on the horizon. Despite the high 

demand for gasoline, refiners are unwilling to build new refineries 

because of cost, environmental issues and expected local opposition. 

Another controversial aspect of the gasoline pricing problem is 

the issue of concentration within the refining industry. Those who 

have followed the work of this Subcommittee are well aware of the 

merger wave that rolled through the U.S. economy in the 1990’s. 

That wave engulfed the petroleum industry as well. 

Mergers such as Exxon–Mobil, BP–Amoco and Conoco–Phillips 

clearly increased concentration levels both upstream, in exploration 

and production, and downstream, in refining and retailing. Now, 

whether or not this concentration has reached a level high enough 

to raise competition concerns is a matter of some dispute. 

For example, in 1983 the top five refiners controlled approximately 35 percent of the U.S. domestic refining market. In 2003, 

that number increased to over 50 percent. From a pure antitrust 

merger analysis point of view, I question whether these concentration levels are high enough to merit serious concern, but we will 

consider this issue during the course of today’s hearing. 

In addition, we will examine a number of other secondary factors 

contributing to the recent increase in gas prices, such as strong 

growth in the U.S. and China’s demand for oil. Finally, we will 

touch today on the state of competition in the market for natural 

gas, which is also selling at prices approaching historic highs. 

Let me now turn to my friend and colleague, the Ranking Member of the Subcommittee, Senator Kohl. 

STATEMENT OF HON. HERB KOHL, A U.S. SENATOR FROM THE 

STATE OF WISCONSIN 

Senator KOHL. Thank you, Mr. Chairman. 

Mr. Chairman, we are reminded everyday when we drive by a 

gas station that Americans are paying record levels for a gallon of 

gas. Gas prices now average $1.78 a gallon nationally and $1.80 in 

my State of Wisconsin. Prices over $2.00 a gallon are now common 

throughout our country. 

These rising gas prices are felt throughout the economy. They 

are a silent tax that takes hard-earned money away from Americans every time they visit the gas pump. Higher gas prices drive 

4

up the cost of transportation, harming every sector of the economy 

from aviation to trucking. Those costs are passed on to consumers 

in the form of higher prices for manufactured goods. Higher oil 

prices also mean higher heating and electricity costs. 

So let’s examine the cause of these rising prices. First, we need 

to look at the price of crude oil. Indeed, the FTC states that 85 percent of the variability in the cost of gasoline can be accounted for 

by the price of crude oil. Simply put, the cost of crude oil moves 

the price of a gallon of gas. And as we all know, OPEC sets the 

price of oil. 

OPEC’s actions to manipulate the oil market cost Americans billions of dollars every year. If the members of OPEC were private 

companies and not nations, they long ago would have been prosecuted for engaging in illegal price-fixing. 

The bill that Senator DeWine and I introduced last week, and 

which passed the Judiciary Committee unanimously in 2000, would 

end this injustice by subjecting OPEC to antitrust suits in U.S. 

courts. While NOPEC is not a panacea, a lawsuit or threat of a 

lawsuit will give our Government the first real weapon it has ever 

had to deter OPEC from its seemingly endless cycle of price increases. 

But restraining OPEC is not the entire answer. There are other 

factors that lead to higher gas prices. In the face of ever-increasing 

demand and higher prices, the domestic oil industry has not responded as we would have expected by increasing refinery capacity. 

Instead, numerous refineries have been closed—about 75 over the 

past 15 years—and none have been opened for many years, but it 

must also be said that existing refineries have also increased their 

capacity. 

Refinery capacity, now operating at 95 percent, has become a 

bottleneck, limiting supply and causing price spikes whenever an 

accident occurs. Indeed, critics argue that oil companies have chosen not to expand refining capacity in order to gain market power 

in order to keep prices high. While there are clearly barriers to expanding refinery capacity, at the same time the antitrust authorities must not permit oil companies with market power to deliberately withhold supply to raise prices. 

In addition, mergers in the oil industry have left a dangerous 

level of consolidation in their wake. The oil companies not only drill 

the oil, but they also refine it and they also own the gas pumps 

as well. The five largest oil companies now control more than half 

of our domestic refining capacity and more than 60 percent of the 

national retail gasoline market. This level of concentration, magnified in some areas, permits just a few competitors to control 

prices. Just as importantly, this consolidation has virtually eliminated independent retailers and refiners and the competition that 

they provide. Where there has been a high degree of integration between refiners and retailers, consumers pay higher prices. 

For the last 4 years, Senator DeWine and I have repeatedly 

called upon the FTC to study the cause for high prices. The FTC 

should remain vigilant in monitoring gas price increases, but it 

must do more. Antitrust authorities must scrutinize future oil industry mergers with a keen eye toward preserving the competitive 

benefits of independent retailers and refiners. 

5

So, Mr. Chairman, it is time for action to end the ever-escalating 

pattern of gas price increases that are regularly inflicted on our 

Nation’s consumers. Our NOPEC bill is one place to start, but we 

must also do more to ensure that the conditions exist to lower gas 

prices for all Americans. 

Thank you, Mr. Chairman. 

Chairman DEWINE. Senator Kohl, thank you very much. 

Senator Specter.

STATEMENT OF HON. ARLEN SPECTER, A U.S. SENATOR FROM 

THE STATE OF PENNSYLVANIA 

Senator SPECTER. Thank you, Mr. Chairman. At the outset, Mr. 

Chairman, I thank you for convening this very timely hearing. 

There is no doubt that the actions by OPEC are drastically increasing the cost of gasoline and oil in the United States. 

On February 10, OPEC curtailed oil production by 1.5 million 

barrels a day, and then on March 31 an additional 1 million barrels 

a day. Oil has now reached the staggering price of $38 a barrel, 

which is the highest it has been since the Gulf War, in 1991. 

I believe that our Department of Justice and our Federal Trade 

Commission have been lax in not acting against the clear-cut violation of U.S. law, conspiracy and restraint of trade, which is clearcut on what OPEC has been doing for years. I have studied this 

issue in some detail, and on April 11, 1998, I wrote to President 

Clinton outlining a course of action for lawsuits to hold OPEC responsible. I wrote the same letter to President Bush on April 25, 

2001. 

Mr. Chairman, I would ask unanimous consent that both of those 

letters be made a part of the record. 

Chairman DEWINE. Without objection, they will be made part of 

the record. 

Senator SPECTER. The essential points which I made in these letters—they really are, in effect, a legal brief—are that a suit in Federal court would be appropriate under U.S. antitrust laws, and 

there is not immunity under act of state or sovereign immunity. 

When they are engaged in a commercial transaction, there is no 

doubt they are subject to the antitrust laws. There has been an 

evolving recognition of international law that they are bound by 

the antitrust laws, which was a possible defense early in the interpretation of the antitrust laws. 

The letter which I sent to President Clinton was cosigned by you, 

Mr. Chairman; the ranking member, Senator Kohl; Senator Thurmond; Senator Schumer; and Senator Biden. It is high time that 

that action was taken. I believe the action can be taken under existing law, but I do believe, Mr. Chairman, that the legislation 

which you have reintroduced, Senate bill 2270, is a very good bill. 

It removes it from a common law interpretation so that there is 

specific legislation which provides that sovereign immunity does 

not bar an action or that the act of state does not bar an action. 

So it is really time to get on with it, and the American people 

are clamoring for relief. It is just really outrageous that we are 

being gouged by OPEC at the gas pump. We have had a very heavy 

winter. We are now about to provide for LIHEAP, low-income energy assistance, $2 billion-plus. 

6

It is high time we focused on the fact that the Saudis are not our 

friends on so many lines. On terrorism, which they are sponsoring 

under the guise of helping charitable organizations, 15 of the hijackers on 9/11 were from Saudi Arabia. And they are continuing 

to gouge the American consumers and it is time we acted to stop 

them. So I hope this hearing will provide an impetus to do just 

that. 

Thank you, Mr. Chairman. 

Chairman DEWINE. Senator Leahy. 

STATEMENT OF HON. PATRICK J. LEAHY, A U.S. SENATOR 

FROM THE STATE OF VERMONT 

Senator LEAHY. Thank you, Mr. Chairman. 

I am going to be home this weekend and when I go to the gasoline pump and I am pumping gasoline in my car, my neighbors in 

Middlesex, Vermont, are going to say, Pat, what is going on? Why 

are we paying so much? If we have a Vermont farm, why are our 

profit margins, which are historically thin anyway, being cut out 

entirely by this? 

Frankly, I have to say that not enough is being done by our Government or by others to cut down the price of fuel. I hope that today’s hearing tells both the administration and foreign governments that the American people and the Congress demand that we 

use the tools we have available to keep gasoline prices affordable. 

I feel as one Vermonter that if we don’t have enough legal tools, 

then let’s find some more and pass those. 

We know, and most Americans do, why high prices are at the 

pump. The OPEC cartel sets production quotas for member countries and prevents the free market from setting crude oil prices. I 

agree very much with the Senator from Pennsylvania when he says 

we ought to realize that the Saudis are not the great friends that 

they say they are. I think they have demonstrated that in one 

thing after another. 

As of April 5, the U.S. Department of Energy reports the nationwide average price of a gallon of gasoline is $1.78. Now, on this 

chart, just to give you an idea, that is an increase of $.60 since the 

year 2001. Some are saying it may go up to $3.00 this summer. 

That is going to be like what we saw in real dollars during the 

shortages of the early 1980’s. And that seems likely, since OPEC 

met on March 31 and they decided to cut the output of oil even further, not only cutting it by a million barrels a day, but they wanted 

to increase that. 

A Nigerian petroleum advisory says that they are considering 

raising prices $3.00 a barrel. That is going to increase costs to consumers, small businesses and, in my State, the dairy industry, 

among others. Vermont dairies are experiencing 40-percent higher 

fuel prices. 

In a normal time, we ask the famous question ‘‘Got milk?’’ Today, 

we ask ‘‘Got enough money for gas?’’ To give you an idea, in a typical dairy operation in the Northeast it adds $5,000 to their costs. 

This shouldn’t be falling on all of us. 

I think Senator DeWine and Senator Kohl deserve thanks for 

their leadership on the NOPEC bill. It is obvious that we are not 

going to get help otherwise to deal with the gas crisis that is a 

7

threat to our families, our farmers, our truck drivers. If the administration can’t say no OPEC, then we ought to try to do it. 

OPEC has tried to dismiss criticism about the high price of gasoline through disingenuous arguments. Actually, the consumption of 

oil has remained relatively level over the past few years, and nobody could say with a straight face that a 60-percent increase per 

gallon in price is because of tough environmental rules by the Bush 

administration. Give me a break. This is not right. In fact, there 

is a letter by Senator Bingaman to the President, and I would ask 

that that be made part of the record. 

I am glad to see this hearing. I wrote to Senator Hatch urging 

such a hearing a couple of weeks ago. I have praised both Senator 

DeWine and Senator Kohl so many times in these hearings that I 

am afraid it may hurt them back home, but I just want to praise 

you two one more time. This is an important hearing. 

I will put the rest of the statement in the record. 

[The prepared statement of Senator Leahy appears as a submission for the record.] 

Chairman DEWINE. Thank you very much. 

Senator Schumer.

STATEMENT OF HON. CHARLES E. SCHUMER, A U.S. SENATOR 

FROM THE STATE OF NEW YORK 

Senator SCHUMER. I want to thank you, Mr. Chairman, for holding this hearing. I want to thank you and Senator Kohl for being 

leaders on this issue, as you are on so many other antitrust issues. 

I want to thank our witnesses today, as well, and appreciate the 

opportunity to talk about natural gas as well as oil, although obviously I want to talk about both. 

Let me say, Mr. Chairman, that I believe that the Federal Government has an obligation to take decisive, aggressive and immediate action to curtail energy price spikes and make sure that energy costs stop creating hardships for working families throughout 

the United States. 

I am sure everyone here is familiar with the legend of the Bermuda Triangle, where planes and ships mysteriously disappear and 

are never heard from again. Well, over the past few months, American consumers feel like the same thing has happened to their energy dollar. But this triangle is the Saudi triangle, composed of 

OPEC, big oil companies and a lack of action by the administration 

to stem the tide of increasing prices. 

At one point in this triangle we have OPEC, which just last week 

announced its continued commitment to reducing production by a 

million barrels a day, despite the fact that crude oil was already 

approaching record prices. The decision is motivated purely by 

greed and a desire to bolster budgets and increase profits for 

OPEC’s largest producers, like Saudi Arabia, by taking money out 

of the wallets of average American families. 

There are also indications that more OPEC action to pinch us at 

the pump may be on the way. They have sort out thrown out the 

window the $28 ceiling and they are now maximizing their profitability because basically no one is stopping them and they have 

been getting a green light. 

8

At the second point in the triangle is the trend of consolidation 

in the oil industry. Over the past 5 years, mergers between the biggest players in the market and increasing vertical integration have 

made consumers more vulnerable to exploitation at the pump. Currently, the top five oil companies in the U.S. control 14 percent of 

global production—almost as much as the Middle Eastern members 

of OPEC—over half of domestic refiner capacity and 60 percent of 

the retail gasoline market. 

This lack of competition has made the oil and gasoline markets 

vulnerable to market manipulation through the withholding of supply and other means, leading to longer, increasingly frequent price 

spikes and weakening any downward pressure on prices that exists 

in healthy and competitive markets. 

To make matters worse, these highly concentrated companies are 

sometimes directly tied to OPEC producers, as in the case of 

Motiva, a 50–50 venture between Shell and Saudi Aramco. The 

companies do nothing but benefit from high prices by reaping windfall profits and creating a win-win scenario for big oil at the expense of the American consumer. As prices go up and as OPEC 

raises prices, oil company profitability goes up. So they are on 

board for the ride. 

At the third point of the triangle, I regret to say, Mr. Chairman, 

lies the administration, which has a ‘‘hear no evil, see no evil, do 

no evil’’ attitude. They have not taken any aggressive action to provide needed relief to the American driver. It is bad enough that it 

hasn’t happened so far, but if they don’t do anything soon, gas 

prices are going to be sky-high as we go into the summer months. 

OPEC’s ability to brazenly raise prices and fill its coffers is in 

part as a result of the administration’s inability to engage and influence oil-producing nations to cooperate with U.S. needs and as 

a consequence of hostility that the administration’s foreign policy 

has engendered toward America throughout the world. 

The President says he is close to the Saudi royal family, but time 

and time again when dealing with the Saudis, it is America that 

gets the short end of the stick. They tolerate Wahabbi extremists 

who preach hate and terror against the U.S., they refuse to allow 

our law enforcement the access it needs to investigate crimes, and 

now they are holding us hostage to high gas prices. 

What Uncle Sam gave us with the tax cuts, the $400 rebate 

every family got, he is now allowing the Saudis to take away with 

exorbitant prices at the pump. The President has the power to 

weigh in against the Saudis, but he is not using it. It is time he 

did. So we have this new Bermuda triangle—OPEC, consolidated 

big oil and a do-nothing policy from the administration. 

Let me say we have some weapons. First, we should stop adding 

100,000 barrels of oil a day to the SPR. A majority of Senators 

voted for that amendment. The administration has also missed an 

opportunity to prevent gasoline price spikes by failing to approve 

oxygenate waiver requests from States like New York and California, which are being forced to use ethanol this summer, raising 

prices. Most importantly, they refuse to use the SPR as our ace in 

the hole against the Saudis and against big oil and bring prices 

down. 

9

As you know, Mr. Chairman, I have been advocating this for a 

long time. It took me about a year to get the Clinton administration to use it. When they did, prices went down; they stayed down. 

And the amount of oil in the SPR went up because the swap enabled us to get more oil for what we put into the market several 

months later. 

So we need a long-term solution—that is not what we are here 

to talk about today—that involves both new exploration and conservation. But we need a short-term solution, lest our economy go 

down the drain. I hope that we can break the influence of this triangle, get to work and do something good to reduce prices. 

Thank you, Mr. Chairman. 

Chairman DEWINE. Senator Craig. 

STATEMENT OF HON. LARRY CRAIG, A U.S. SENATOR FROM 

THE STATE OF IDAHO 

Senator CRAIG. Well, Mr. Chairman, I largely came to listen 

today to our colleagues, and certainly to those who are experts in 

this field. 

All of us are concerned about high prices at the pump, but why 

should we be surprised? This Congress has refused to act in any 

progressive manner to increase production in this country for the 

last decade. So the blame game is now underway and we will hold 

hearings, as we should. 

At the same time, a decade and 39 States’ investigations have 

not yet pointed to effective wrongdoing on the part of any producer 

in large part. What we have is a dysfunctional market today because we no longer control our destiny. We can bite around the 

edges, if we wish to, and we will, and we will try to find someone 

else to accuse. 

I have given in the last two weeks three speeches on the floor 

of the U.S. Senate on this issue. I am certainly no expert in it, but 

I have studied it closely as a member of the Energy Committee for 

the last 7 years. The problem is the U.S. Congress today, and the 

consumers of America ought to know it. 

We are no longer allowing this Nation to produce in any and 

every way we should. We should be encouraging the production of 

domestic oil, we should be encouraging the development of natural 

gas, we should be encouraging the building of necessary infrastructure like the Alaska natural gas pipeline, we should be encouraging 

the use of renewable fuels like ethanol, we should be encouraging 

more renewable energy. We should be encouraging the construction 

of new nuclear plants, clean coal technology, new hydrogen production, promoting energy efficiency and increasing the R and D on a 

variety of technologies. 

The Senator from New York and I differ a little, but at the same 

time there are many things on this issue we tend to agree on. The 

manipulation of SPR during the Clinton years effectively changed 

the price at the pump by one cent. Those are the facts on the 

books. 

So I am here to listen. It is obvious I have strong opinions on 

this issue. I think the consumers are gaining strong opinions on 

this issue, as they should. I hope they reflect on Congress’ unwillVerDate 0ct 09 2002 10:57 Sep 16, 2004 Jkt 095551 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 S:\GPO\HEARINGS\95551.TXT SJUD4 PsN: CMORC
10

ingness or inability to act on this issue in any progressive and comprehensive form for well over a decade. 

Thank you, Mr. Chairman. 

Chairman DEWINE. We will turn now to our colleague and 

friend, Senator Ron Wyden. 

STATEMENT OF HON. RON WYDEN, A U.S. SENATOR FROM THE 

STATE OF OREGON 

Senator WYDEN. Thank you very much, Mr. Chairman. I very 

much appreciate your giving me the chance to come. I would ask, 

with your indulgence, if my full remarks could be made part of the 

record. 

Chairman DEWINE. They will certainly be made part of the 

record. 

Senator WYDEN. I thank you. 

First, it is obvious if you want to get anything important done 

in this town, it has got to be bipartisan, and I congratulate you and 

Senator Kohl for doing that. That is what it is going to take to really make some changes in this area. And that is what the public is 

asking. The public is saying, are you all in Washington going to do 

anything or are you just going to talk about it? 

What I would like to do is just outline briefly what I think would 

be an effective bipartisan package in this area. Let me start by saying that I think the gasoline consumer is about to be hit by a perfect storm, and there are really three factors behind this storm that 

is coming. 

The first is what we have all talked about today, the OPEC shenanigans. The second involves refinery cutbacks, and the third involves the Federal Trade Commission sitting on its hands in the 

face of documented anticompetitive practices. 

I would just say, Mr. Chairman, that I think if we took your bill 

which deals with OPEC and my legislation, which is S. 1737, the 

Gasoline Free Market Competition Act, we could systemically tackle those three factors that come together to create what I call the 

perfect storm. 

First, with respect to OPEC, put me down as a cosponsor of your 

legislation. 

Chairman DEWINE. We will add your name. We appreciate it. 

Thank you. 

Senator WYDEN. Look, I have been saying all week OPEC stands 

up for OPEC. Anybody who thinks OPEC stands up for the American consumer thinks Colonel Sanders stands up for the chickens. 

I mean, it is just a preposterous idea that OPEC is going to do anything for the consumer. So I am very glad that you and Senator 

Kohl have teamed up in that area, and I want to be a cosponsor 

of your legislation. 

But I think we ought to be clear, and the Consumer Federation 

has offered an interesting report in this area that, for example, oil 

company refinery margins are taking an even bigger bite out of the 

consumer’s pocket, as is the OPEC cartel. That is why I would very 

much like to merge my bill with the fine bill that you and Senator 

Kohl have because while taking action against OPEC will be very 

constructive, it won’t provide full relief if Congress looks the other 

11

way when it comes to anticompetitive practices right here in our 

markets here at home. 

So just as you, Chairman DeWine and Senator Kohl, seek to provide new tools with respect to dealing with OPEC, that is what I 

am seeking to do with respect to making sure we have competition 

in our markets in this country. And to illustrate the need for my 

bill, I would like to talk about what is going on in Bakersfield, 

California, right now with the refinery cutbacks because I think it 

provides a textbook case of how these anticompetitive practices are 

perpetrated in our country. 

Obviously, when you ask about what is going on on the West 

Coast, they are saying what does that mean for us in Ohio and 

Wisconsin and other parts of the country? But what I offer up is 

inaction by the Federal Trade Commission on the growing problem 

of refinery shutdowns, which is clobbering my constituents now 

and is going to hurt people all over this country. 

What has happened in Bakersfield exemplifies how these refinery shutdowns are going to hurt people across the Nation. Suffice 

it to say there were 24 refineries that closed between 1995 and 

2001. So you are talking about a combined capacity of more than 

800,000 barrels per day, including many on the West Coast of the 

United States. 

I got involved in this issue with respect to refinery cutbacks, Mr. 

Chairman and colleagues, in 2001 when we came upon some internal oil company memos involving the closed Powerine refinery in 

southern California. One of the company documents then revealed 

that if the Powerine refinery was restarted, the additional gasoline 

supply on the market could bring down gas prices by two to three 

cents a gallon. And it called for, and I quote, ‘‘a full-court press to 

keep the refinery down.’’ So you have oil company documents that 

called for keeping a refinery down while they are saying that it 

could increase profit margins. 

That refinery was about 20,000 barrels per day. The one we are 

talking about in Bakersfield, which services the whole West Coast, 

about a third of my constituents, involves 70,000 barrels per day. 

So if Bakersfield goes down, this is going to be very, very harmful 

to the entire West Coast of the United States. 

I will tell you, Mr. Chairman and colleagues, this Bakersfield 

deal smells. First, we know that Shell has made no significant effort to try to find a buyer in that area. Second, a number of independent experts have documented that there is a substantial 

amount of oil in that area in the San Joaquin Valley. Recent news 

articles have reported both Chevron–Texaco and the State of California estimate that the San Joaquin Valley, where the Bakersfield 

refinery is located, has a 20- to 25-year supply of crude oil remaining. 

The Bakersfield paper indicated that there are 300 more new 

wells now being pursued this year than last year. And Texaco, 

Shell’s former partner in the Bakersfield area, is actually increasing its drilling. So this certainly calls into question Shell’s claim 

that a lack of available oil supply is the real reason for closing the 

refinery. Another reason to question Shell’s claim about the availability of crude oil is the fact that Shell is currently the subject of 

an inquiry that we know about for misstating its crude oil reserves. 

12

So I have repeatedly asked the Federal Trade Commission to 

look into this and other anticompetitive practices, and they have 

just been AWOL. I know you are going to have them testify today. 

They have talked in the past about being concerned. They have 

talked in the past about doing sort of informal surveys, when our 

constituents are getting mugged at the pump. They have abdicated 

their responsibilities. 

By the way, Mr. Chairman, just so it is clear that my concern 

here is bipartisan, I don’t think the Clinton administration covered 

itself with glory over at the Federal Trade Commission either. I 

think this is a systemic problem and it needs to be dealt with in 

a bipartisan fashion. 

So let me wrap up, if I might, by saying exactly the three areas 

that my legislation would change that I think would give us some 

tools to deal with the refinery cutbacks, the anticompetitive practices, and I think could complement the kind of work that you and 

Senator Kohl are trying to do with respect to OPEC. 

First, under my legislation the Federal Trade Commission would 

be empowered to issue cease and desist orders to prevent individual companies from gouging consumers. This is not allowed 

under current law, so we would give them cease and desist powers 

to prevent gouging of consumers when it is perpetrated by an individual company. 

Second, we would stipulate that the Federal Trade Commission 

would have the authority to put the burden on the oil companies 

to show that certain practices, such as the Bakersfield refinery 

shutdown or red-lining and zone pricing which has been found in 

the past—that the company has got to show that this doesn’t reduce supply or drive up prices when we are talking about concentrated markets. 

This would apply, Mr. Chairman and colleagues, in the just over 

25 States where there are concentrated markets. Senator Craig 

and I represent such an area. I hardly ever disagree with my friend 

from Idaho on these kinds of things. I would just say in response 

to my colleague’s comments that the Federal Trade Commission 

has said in the past that there has been zone pricing and red-lining. They said they can’t do anything about it and that is why I 

think this legislation is needed, Mr. Chairman. 

What we have seen in the past is the Federal Trade Commission 

sets out a bar that is absolutely unachievable with respect to showing that there are anticompetitive practices in the marketplace. 

The Federal Trade Commission has been arguing that they can 

only prosecute if they find out and out, blatant collusion, which 

savvy oil companies are not going to be involved in. They don’t 

have to do that. They are not going to go to a smoke-filled room; 

they are not going to show up at a steakhouse and decide, well, 

let’s set gasoline prices tonight. They are way too savvy for something like that. 

So that is why I would like to give the Federal Trade Commission these additional tools in S. 1737—the question of cease and desist powers, and the authority in markets where there is concentration to shift the burden of proof, such as we find with the Bakersfield refinery or red-lining and zone pricing. 

13

In a case like Shell’s Bakersfield refinery, the Federal Trade 

Commission could issue under my legislation, Mr. Chairman, a 

cease and desist order to halt shutdown of the refinery. Because 

California is a highly concentrated market, Shell would be required 

to show that closure of the refinery would not have an anticompetitive impact by reducing supply or increasing the price of gas. 

If Shell can show that it would be increasing its production at 

the company’s other West Coast refineries to make up for lost production at Bakersfield, the closure under my legislation could still 

be allowed to go forward. But my legislation would protect the consumer where an oil company was closing its refinery as part of a 

deliberate effort to reduce supply and to drive up prices. 

Suffice it to say, Mr. Chairman and colleagues, the problems that 

we are seeing we are going to have for some time to come. The Energy Information Administration came to the Committee that Senator Craig and I serve on saying that there will be continued vulnerability of future gasoline price spikes. 

Mr. Chairman, I would wrap up by way of saying I don’t think 

there is a silver bullet here. I am supporting your bill because I 

think it is a significant step forward for the reasons that you have 

outlined, and particularly important today because the Saudi foreign minister said last week he wasn’t even contacted with respect 

to this most recent production cut. 

But I would only say that I think we need to complement your 

fine legislation with the kind of measure that I am advocating that 

will get the Federal Trade Commission off its hands. You ask this 

commission what single thing have they done to help the gasoline 

consumer. I can’t find one step that they have taken. By the way, 

it goes back a few years and we haven’t seen any action that they 

have taken to help the gasoline consumer. 

I don’t think that is acceptable. I want it understood, as you and 

I have in so many other instances, and I want to work with you 

in a bipartisan way. Senator Craig and I have talked about these 

issues a number of times over the years on the Senate Energy 

Committee, and I will look forward to working with you, colleagues, 

to try to deal with making sure the consumer gets a fair shake in 

the gas market. 

Chairman DEWINE. Senator Wyden, thank you very much for a 

very provocative statement. It certainly gives the Subcommittee a 

lot of things to think about, and we will use some of your statements as questions when the next panel comes up. 

Thank you very much. 

Senator KOHL. Mr. Chairman? 

Chairman DEWINE. Senator Kohl. 

Senator KOHL. I would like to ask consent that Senator 

Feingold’s statement be placed in the record. 

Chairman DEWINE. Without objection. 

Let me invite our next panel to come up right now and I will 

begin to introduce the panel as they come up. 

Mr. William Kovacic is a recognized expert in both antitrust law 

and government contracts law, and has published extensively in 

both fields, most notably as coauthor of Antitrust Law and Economics in a Nutshell. He presently serves as general counsel at the 

Federal Trade Commission. 

14

Mr. John Felmy is the chief economist at the American Petroleum Institute. He also serves as the Chairman of the Policy Committee of the Alliance for Energy and Economic Growth. 

Dr. Justine Hastings is an assistant professor in the Yale Department of Economics. Her current research interests lie in 

vertical integration, competition and product differentiation, and 

she has written extensively on the petroleum industry. 

Professor George Bermann is professor of law at Columbia University, where he has taught since 1975. He is recognized as an expert on European Union law and has written many articles and 

several books. 

Dr. Mark Cooper is the Director of Research at the Consumer 

Federation of America, where he works on economic policy, among 

other issues. Dr. Cooper has testified before the Subcommittee in 

the past and we welcome him back. 

Let me just say to all of our witnesses we are going to have 5 

minutes. We have your written testimony and it will be made a 

part of the record. But we are going to limit you to 5 minutes, if 

you could just summarize, please, and then we will have the opportunity for questions. 

Mr. Kovacic, you can start, please. 

STATEMENT OF WILLIAM E. KOVACIC, GENERAL COUNSEL, 

FEDERAL TRADE COMMISSION 

Mr. KOVACIC. Thank you, Mr. Chairman and members of the 

Subcommittee. I am pleased to appear before you today to discuss 

the FTC’s initiatives to promote competition in the supply of gasoline. My written statement presents the views of the Federal Trade 

Commission, and my spoken comments today are my views and not 

necessarily those of the commission or its members. 

The FTC’s energy program reflects the agency’s acute awareness 

of the vital role that competition policy in the petroleum industry 

plays in safeguarding consumer interests. Today, I will first describe the FTC’s competition program in petroleum, and then I will 

identify lessons that the agency’s work concerning gasoline prices 

has yielded. 

The FTC’s competition program in petroleum has four elements. 

The first is to challenge mergers that are likely to reduce competition and injure consumers. Since 1981, the commission has taken 

enforcement action against 15 major petroleum mergers. Four 

transactions were either abandoned or blocked as a result of commission or court action. In the other 11 cases, the FTC required the 

parties to divest substantial assets in markets where competitive 

harm was likely to occur. 

From data the FTC recently released concerning enforcement 

programs from 1996 through 2003, it is evident that the FTC’s remedial requirements have been more demanding in petroleum markets than for any other area of commerce in which the commission 

is active. 

The second activity at the FTC is to detect and prosecute antitrust violations that do not involve mergers. For example, in March 

of 2003 the FTC issued an administrative complaint alleging that 

Unocal violated the FTC Act by deceiving the California Air ReVerDate 0ct 09 2002 10:57 Sep 16, 2004 Jkt 095551 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 S:\GPO\HEARINGS\95551.TXT SJUD4 PsN: CMORC
15

sources Board in connection with regulatory proceedings to develop 

standards for reformulated gasoline. 

Unocal, the commission alleges, misrepresented that certain 

technology was non-proprietary and in the public domain at the 

same time that Unocal was seeking patents that would enable it 

to charge substantial royalties if CARB mandated Unocal’s technology in the refining of summer reformulated gasoline. The commission has charged here that Unocal’s conduct, unless enjoined, 

could cost California consumers hundreds of millions of dollars per 

year. 

The third activity is to monitor petroleum industry behavior to 

detect possible instances of anticompetitive conduct. Nearly 2 

years, the FTC launched an initiative to monitor gasoline prices to 

identify unusual movements in prices and examine whether apparent anomalies might result from anticompetitive conduct. 

The FTC’s economists have developed a statistical model for 

identifying such price movements. They look at price movements in 

over 20 wholesale and over 350 retail markets across the country. 

If our staff detects unusual price movements in an area, it studies 

the possible causes, and follow-up efforts typically have involved 

extensive cooperation with State attorneys general, State energy officials, and the Department of Energy. 

If our staff concludes that the unusual price movement likely results from a natural cause—that is, a cause unrelated to anticompetitive conduct—it investigates no further. Our experience to 

date indicates that unusual movements in gasoline prices typically 

have what we consider to be a natural cause. If there are competitive problems, the monitoring project and our expanded cooperation 

with Federal and State agencies have put us in a better position 

to identify and address these problems than at any time in recent 

memory. 

In recent years, the commission has also conducted intensive 

non-merger investigations involving refining and distribution practices in the western and midwestern United States. I would like to 

acknowledge the role that Chairman DeWine and Senator Kohl 

have played in inspiring the agency to undertake the midwest gasoline pricing investigation, even though the two investigations I 

have mentioned uncovered no basis to find an antitrust violation. 

The last activity of the FTC is to collect data and perform research to develop a better understanding of what affects gasoline 

prices and to improve our knowledge base about the consequences 

of our enforcement decisions. In 2001 and 2002, the commission 

held conferences on these topics and is currently updating a comprehensive report on merger enforcement in the petroleum sector 

since 1989. 

Let me finish by turning to the lessons that we derived from our 

program so far. First, the paramount factor affecting both the level 

and movement of gasoline prices in the United States indeed is the 

price of crude oil. Changes in crude oil prices account, as Senator 

Kohl’s introductory remarks and yours, Mr. Chairman, mentioned, 

for approximately 85 percent of the variability of gasoline prices. 

Second, crude oil and refined products inventories significantly 

affect gasoline prices at retail. At one of our conferences, the Energy Information Administration reported that high crude oil prices 

16

indeed not only affect gasoline prices directly, but indirectly as 

well, by reducing inventories. 

There are indeed tighter inventory situations, but what we 

found, in general, is that by adopting just-in-time techniques, on 

average, there is the possibility that gasoline prices over time are 

lower than they would be if just-in-time techniques were not used 

widely. 

Third, our conferences and investigations have highlighted the 

generally high levels of utilization in the refining and transportation segments of the industry—conditions that do make interruptions attributable to fires and other breakdowns a possible cause 

of price spikes. 

Last, the interaction of environmental quality requirements and 

gasoline does supply a fourth important factor. There is no question in this country that pollution control has yielded massive benefits. At the same time, we have identified in our hearings and proceedings that such controls have added at times to the cost of refining crude oil, and thus to the price of gasoline. Finally, our research and conferences indicate that other Federal and State laws 

sometimes tend to increase gasoline prices. 

Let me finish by saying that competition policy unquestionably 

helps assure that the petroleum industry is and remains competitive. The commission has devoted substantial effort and resources 

to enforce the antitrust laws and to scrutinize behavior in this sector. We will continue to do so in the future. Higher prices for petroleum products deeply affect the quality of life in this country, and 

we are keenly aware of that. We will also seek to attack conduct 

that disturbs the proper functioning of the market where antitrust 

violations can be shown. 

I look forward to the opportunity to address your questions. 

[The prepared statement of Mr. Kovacic appears as a submission 

for the record.] 

Chairman DEWINE. Thank you very much. 

Dr. Felmy. 

STATEMENT OF JOHN FELMY, CHIEF ECONOMIST AND DIRECTOR OF POLICY ANALYSIS AND STATISTICS, AMERICAN PETROLEUM INSTITUTE 

Mr. FELMY. Thank you, Mr. Chairman and members of the Subcommittee. I am John Felmy, Chief Economist and Director of Policy Analysis and Statistics of the American Petroleum Institute. 

API is a national trade association representing more than 400 

companies engaged in all sectors of the U.S. oil and natural gas industry. API is pleased to have the opportunity to present a statement on gasoline and natural gas, and urge Congress to enact national energy policy legislation. 

The recent spikes in gasoline prices are primarily due to fundamentals in the supply and demand for crude oil. Demand for 

crude oil has risen due to a cold winter and strengthening economies. Unrest in key supplying countries such as Venezuela and Nigeria, and lower Iraqi production have kept world supplies tight. 

OPEC continues to operate under production quotas and has recently confirmed its intent to cut production by a million barrels 

per day, to 23.5 million barrels a day, potentially worsening the 

17

current situation. However, there is no guarantee member nations 

will reduce output sufficient to comply. 

The United States continues to import more than 60 percent of 

the crude oil and petroleum products used each day to provide 

Americans the products they need. While 20 percent of current imports are from the Middle East, the U.S. Energy Information Administration, EIA, expects that figure to climb substantially as the 

gap between U.S. oil production and consumption widens. 

In addition to higher crude prices, several other factors have affected gasoline prices. We have experienced refinery problems; a 

Mississippi River accident that shut down traffic for several days; 

the difficulty of switching from winter to summer fuel in California; 

the introduction of new low-sulfur gasoline, Tier II; the bans of 

MTB in gasoline in New York, Connecticut and California; and 

sharply higher demand. 

I have attached two papers that elaborate on these points, and 

I have a chart here that shows the complex nature of the crude oil 

and gasoline markets. I don’t have time in my verbal statement to 

elaborate, but I will be happy to answer questions later. 

As a consequence of all these factors, gasoline prices have reached a record level, unadjusted for inflation, of over $1.76 per 

gallon, while, adjusted for inflation, the real price of gasoline has 

fallen over 40 percent from a peak of $2.77 in 1981. The real cost 

of crude oil and manufacturing, delivering and marketing gasoline 

has fallen over the past 20 years, while the real cost of Federal and 

State taxes has risen. 

Demand for gasoline continues to be strong as our economy 

grows. Gasoline production is running at record levels this year to 

date. However, inventories are low because of strong demand and 

lower imports. Imports play an important role even though 90 percent of the gasoline we use is refined in this country. High tanker 

freight rates, low European inventories and increasingly more restrictive U.S. fuel specifications have contributed to the curtailing 

of gasoline imports. 

What then can be done about the situation? Some want to suspend filling the Strategic Petroleum Reserve and releasing the 

150,000 barrels a day currently going into the reserve onto the 

marketplace. That would have negligible effect on supply because 

the amount made available is equivalent to only about two-tenths 

of 1 percent of world supply. 

The SPR was established as a back-up in the event of a real supply emergency shortfall, not a non-market mechanism aimed at influencing prices. Turning to the reserve when prices go up sends 

precisely the wrong message to the marketplace at exactly the 

wrong time. Unintended consequences may include foreign nations 

curtailing production. 

Let me also briefly discuss the situation in natural gas markets. 

Like gasoline, natural gas has increased substantially in price over 

the past 2 years. We have seen three price spikes in 3 years, and 

prices remain high due to high demand and low supply growth. 

Weather, economic growth and continued increases in demand for 

gas by electricity generators have kept prices over $5 per million 

Btus. The industry has responded to the higher prices by operating 

more drilling rigs searching for natural gas. We have also continVerDate 0ct 09 2002 10:57 Sep 16, 2004 Jkt 095551 PO 00000 Frm 00021 Fmt 6633 Sfmt 6633 S:\GPO\HEARINGS\95551.TXT SJUD4 PsN: CMORC
18

ued our efforts to obtain access to lands that are currently off limits to exploration for natural gas. 

API has argued for several years that we need a national energy 

policy that increases supplies, streamlines regulation, fosters energy efficiency and growth in renewables, and allows for increased 

infrastructure to get supplies to consumers. The Senate was only 

two votes short of passing an energy bill that contains provisions 

that would have helped consumers. A comprehensive energy bill 

needs to be passed and sent to the President for his signature. Failure to pass meaningful energy legislation will increase the risk 

that we will stay on the energy price treadmill. 

Thank you, Mr. Chairman. I am prepared to answer some questions. 

[The prepared statement of Mr. Felmy appears as a submission 

for the record.] 

Chairman DEWINE. Dr. Felmy, thank you very much. 

Dr. Hastings. 

STATEMENT OF JUSTINE S. HASTINGS, ASSISTANT 

PROFESSOR OF ECONOMICS, YALE UNIVERSITY 

Ms. HASTINGS. Mr. Chairman, members of the Subcommittee, my 

name is Justine Hastings. I am an Assistant Professor of Economics at Yale University and a faculty research fellow at the National 

Bureau of Economic Research Program on Industrial Organization. 

I hold a Ph.D. in economics from the University of California at 

Berkeley and I have previously testified at the United States Senate Governmental Affairs Committee, Permanent Subcommittee on 

Investigations, hearings into Gasoline Prices: How Are They Set? 

The focus of my research over the past few years has been primarily on firm conduct, competition and consumer behavior, and 

much of my work has been applied to the gasoline industry. 

Through my research projects, I have analyzed extensive data on 

retail market structure, wholesale market structure and retail and 

wholesale gasoline prices for a diverse group of metropolitan areas 

for a time covering about the past decade. 

I have used this data to examine, among other things, vertical 

and horizontal market structure, vertical meaning relationships between upstream firms or producing firms, such as refiners, and retail firms, such as gasoline stations, and horizontal market structure, meaning kind of the structure of the market within either retail or at the refinery level, and the effects of these types of market 

structures on prices and competition through firm incentives. 

I have also examined the effects of consumer demand and consumer behavior and preferences on gasoline competition, and I am 

currently completing a study funded through the National Science 

Foundation on the determinants of wholesale price discrimination, 

which you may have heard referred to as zone pricing, and what 

are the effects of this pricing policy on gasoline retail prices and 

wholesale prices. 

I am also currently working on a project with colleagues at Yale 

and at the University of California at Berkeley examining the effects of environmental regulations that we are discussing today on 

market structure, arbitrage rates between markets, and gasoline 

price levels and volatility. 

19

Through my research, I have gained substantial knowledge about 

the gasoline industry, and my independent academic research and 

acquired knowledge will form the basis of my comments and answers before this Subcommittee today. I would like to make a few 

quick points or broad points and then I would be happy to answer 

questions related to them during the questioning session. 

First, crude oil prices explain a substantial amount of retail gasoline prices in most parts of the country. We have heard a figure 

of .85, 85 percent, a couple times so far today, and I put a quick 

table in my written statement that shows that if you went even 

State by State, with very limited data that I just had someone pull 

off the Web for me, that varies actually by State from 69 percent 

to 91 percent. So the question is, yes, it is a big fraction, but what 

is making the difference between 69 percent in some States and 91 

percent in other States? Market structure, both vertical and horizontal, and environmental regulations are also going to be contributing to gasoline price levels, that 69-percent to 81-percent difference. 

My second point is that in markets where supply is very tight, 

inelastic demand for gasoline is going to lead to large price changes 

in response to small supply disruptions. In very tight markets, 

every firm actually may have market power to unilaterally increase 

market price. It is not anticompetitive. It is a factor of inelastic demand and a tight supply. 

Increasing the number of refineries in key markets may ease this 

tightness. And it is something we may not want to discuss, given 

environmental regulations and concerns, but it is something we are 

going to have to bring to the table. If new refineries are also new 

competitors in the market and, in addition, if they are relatively 

unintegrated, have a smaller downstream component, they may act 

to increase competition even further after entry. 

My third point touches on environmental policy. Environmental 

policy needs to be designed to incorporate the secondary effects of 

market structure, not just the effects on pollution. Smart environmental policy looks at market structure when looking at how to 

achieve an ultimate goal of pollution standards. 

Fourth, governmental regulations such as minimum mark-up 

laws, divorcement legislation, fair wholesale pricing or, as you have 

heard it referred to today, zone price elimination, and governmentowned refineries or strategic gasoline reserves in most cases will 

actually make consumers worse off. I will be happy to address each 

of these issues during the questioning session. 

Finally, any policy that comes out of this or any other legislation 

session must really be founded in credible and sound statistical 

analysis, guided by economic principles, in order to ensure that the 

welfare of American consumers and taxpayers is maximized 

through efficient and competitive markets. 

Thank you. 

[The prepared statement of Ms. Hastings appears as a submission for the record.] 

Chairman DEWINE. Mr. Bermann. 

20

STATEMENT OF GEORGE A. BERMANN, WALTER GELHORN 

PROFESSOR OF LAW AND JEAN MONNET PROFESSOR OF EUROPEAN UNION LAW, COLUMBIA UNIVERSITY SCHOOL OF 

LAW 

Mr. BERMANN. Thank you, Mr. Chairman and the other members 

of the Subcommittee. In the few minutes that I do have, I would 

like to address three questions very briefly and they have to do 

with the three dimensions that I see in the bill that is before me 

and before yourselves, and those three dimensions are the substance of the Sherman Act, the Foreign Sovereign Immunities Act 

as the source of sovereign immunity defense that OPEC countries 

might assert, and last, and most complicated, the act of state doctrine, to which reference has been made. Because I want to discuss 

three subjects and I have 5 minutes, the math suggests that I need 

to move quickly. 

With respect to the Sherman Act, the bill before me and before 

yourselves seem to me to make it very plain, and perhaps desirably 

so, that foreign states are indeed subject to the Sherman Act. I say 

that because at least one district court has expressed the view that 

foreign states are not subjects of the Sherman Act. The bill makes 

that clear. 

Secondly, the court of appeals in that same case expressed doubt 

that international cartels constituted violations of the Sherman 

Act, saying that there was an insufficient consensus to that effect, 

and I think the bill would address that problem, as well, arising 

under the Sherman Act. 

With respect to the Sherman Act, I have simply one question 

that I would raise and one doubt I entertain, and that is why the 

absence of the Clayton Act from the legislation. In the two pieces 

of litigation that have been brought, both the Sherman Act and the 

Clayton Act have been evoked, the latter primarily because it gives 

rise to claims for injunctive relief. 

Turning to the Foreign Sovereign Immunities Act, there was, and 

there is to this day debate over whether the activity of the OPEC 

countries and OPEC itself, were it a proper defendant, constituted 

a commercial activity. As you well know, the Federal courts are divided as to whether they do or do not constitute commercial rather 

than governmental activity. 

The creation of a new, independent exception to the principle of 

sovereign immunity in the FSIA which this bill would also do 

would obviate the necessity of characterizing price collusion, output 

collusion, as commercial or governmental by creating an independent, self-standing statutory exception. 

A final word of cautionary note with respect to the Foreign Sovereign Immunities Act, and indeed with respect to the Sherman 

Act, is the bill requires direct, substantial and reasonably foreseeable effect on U.S. markets. And there is at least one Federal court 

that has found that the OPEC activity was not proximately causally related to the price effects reported in the U.S. market. I think 

that difficulty that one might encounter is endemic to any statute 

that contains the formula of direct, substantial and reasonably 

foreseeable effect on U.S. markets. 

The act of state doctrine is my last subject. On this, I need to 

be a little more complex, but there are some clear lines to be 

21

drawn. The act of state doctrine was the reason why in the one suit 

that has been brought to the level of the court of appeals that that 

suit could not proceed. The act of state doctrine was characterized 

as preventing that cause of action from being pursued. 

There is no question in my mind, as my written testimony indicates, that Congress has the authority to override the act of state 

doctrine to whatever extent it wishes to do so. Congress has done 

so in the past in a small number of very isolated instances, but 

there is no doubt in my mind, under international and constitutional law alike, that Congress has the authority to do so, even 

though you will hear and you will read that the act of state doctrine has constitutional underpinnings, and I quote the United 

States Supreme Court. 

Those constitutional underpinnings are separation of powers 

scruples, and it seems to me quite clear that Congress has the 

right to tell the courts that the courts do not need to defer to Congress. That does not strike me as a disturbance of the separation 

of powers. 

Finally, mention should be made of the possibility that other doctrines besides the act of state doctrine might get in the way of successful prosecution of a claim under the amended legislation. The 

political question doctrine, general principles of international comity, the forum non conveniens doctrine and foreign government 

compulsion strike me as the four most likely candidates, for reasons I don’t have time to go into because I see a red light. I would 

simply say that I think none of those is a serious problem, and I 

would be glad to answer questions to that effect. 

I would simply add that I believe, however, that we should pay 

some attention to the fact that the Supreme Court, to the extent 

that it has spoken, has suggested that the Sherman Act itself in 

its own content incorporates considerations of international comity, 

and that those considerations might lead a court to decline to enforce the Sherman Act in certain international scenarios. 

Thank you. 

[The prepared statement of Mr. Bermann appears as a submission for the record.] 

Chairman DEWINE. Dr. Cooper. 

STATEMENT OF MARK COOPER, DIRECTOR OF RESEARCH, 

CONSUMER FEDERATION OF AMERICA, ON BEHALF OF CONSUMER FEDERATION OF AMERICA AND CONSUMERS UNION 

Mr. COOPER. Mr. Chairman, members of the Subcommittee, the 

headlines in the energy news that are never written are about the 

domestic petroleum industry. They include the fact that domestic 

gasoline refining and marketing operations have increased pump 

prices by about $50 billion in the past 4 years, and domestic natural gas well head prices have increased by over $80 billion, separate and apart from anything that OPEC has done. 

The bottom line that is overlooked is an increase in the after-tax 

profits of domestic petroleum companies of well over $50 billion in 

the same 4 years. The story behind those headlines that doesn’t get 

coverage is how a merger wave in the mid–1990’s dramatically increased the concentration of the petroleum industry and enabled it 

to make business decisions that restricted capacity, eliminated 

22

competition from independents and rendered many markets uncompetitive and vulnerable to manipulation. 

When markets are tight, there are not a lot of suppliers around 

and prices get sticky. Individual companies can put them up quickly and don’t feel pressures to lower them. This is especially true 

for energy products because large investments in physical facilities 

are necessary to deliver product, and that means that the flow 

can’t be increased in the short term. 

On the demand side, these are necessities consumers can’t cut 

back. So market power is augmented when supply and demand 

elasticities are low. It takes less of a market share to gain power 

over price, but the antitrust authorities don’t adjust their thinking. 

Storage and economic stockpiles are critical here, but the industry has done a miserable job of ensuring that enough product is 

available to meet demand without dramatic increases in price. 

Just-in-time in the oil industry means never there when you really 

need it. Every accident or blip in the market becomes an excuse to 

trigger a price increase, and people wring their hands, oh, we 

didn’t have supplies, we didn’t have storage. Who chose not to have 

storage? Business decisions. 

Moreover, by failing to expand capacity, they are operating their 

facilities at very high rates of utilization, which makes accidents 

more likely to happen. If there were more competition, if there 

were the threat of losing your customers when the shelves go bear, 

they would have more facilities and they would keep more in storage and we would not have these wild price swings. 

Three years ago, we outlined a comprehensive policy to implement permanent institutional changes that would reduce the 

chances that markets will be tight and reduce the exposure of consumers to the opportunistic exploitation of markets when they do 

become tight. Those recommendations made sense then; they make 

even more sense today. 

We would all want a quick fix, immediate relaxation of prices, 

but what consumers need is the end of the roller coaster and the 

ratchet of constant volatility with ever-mounting prices. We would 

love to break the pricing power of OPEC, which would relieve a 

great deal of the pricing problem, but the short-term prospects are 

not promising there either. 

There, too, we need long-term solutions that address fundamentals. We must restore reserve margins by increasing energy efficiency that takes demand out of the world market, but also reduces 

demand in tight domestic markets, which also suffer from the 

abuse of market power. 

In the 1990’s, we built two fleets of gas-guzzlers—SUVs on the 

roads and natural gas-fired power plants, particularly that fire up 

in the summer to run our air conditioners. They have kept domestic markets tight. Efficiency can produce a tremendous saving that 

has the double impact of relaxing the tightness of both international and domestic markets. 

We must increase the flexibility of downstream capacity in the 

gasoline industry. We closed those refineries—that is, the oil industry closed those refineries after mergers as a function of their business decisions to consciously tighten markets and increase profits. 

We are suffering from that today. We have to have policies that 

23

promote economically-and socially-responsible storage. There is no 

excuse for repeatedly being short. Those are business decisions. 

Public policy can influence those business decisions. 

The pending energy legislation does not substantially advance 

the four key elements of a national energy policy. We must expand 

domestic refining capacity by studying who closed what, why, and 

where are the sites that we could redevelop, instead of simply complaining about unidentified environmental obstacles. Those refineries were there; they can be reopened. We need a more competitive domestic sector. We need rules that dictate when you have to 

have storage and how you should use it. We have to take the fun 

and profit out of market manipulation. 

It may very well be that none of the behaviors I have mentioned 

violate the antitrust laws. That doesn’t make them right. It simply 

tells us that we need a new set of laws that get at this behavior 

which is actually imposing immense pain on the American consumer and our economy. 

Thank you, Mr. Chairman. 

[The prepared statement of Mr. Cooper appears as a submission 

for the record.] 

Chairman DEWINE. Senator Specter. 

Senator SPECTER. Mr. Kovacic, has the FTC ever considered antitrust action against OPEC? 

Mr. KOVACIC. I don’t know, Senator. I know the commission has 

certainly for a period going back over decades had an active hand 

in studying crude oil markets. Indeed, in the— 

Senator SPECTER. I am interested in OPEC. If you don’t know, 

you don’t know. I would suggest the FTC ought to consider that, 

and I would also suggest that the FTC ought to send somebody 

today who could give us an FTC policy about OPEC. That is the 

central thrust of the hearing and that is the statute which we are 

looking at. 

Professor Bermann, isn’t there at least a prime facie case to get 

to a jury on OPEC being in violation of the antitrust laws on conspiring to restrain trade when they are working with other countries to limit production and in a context where there is a rising 

cost of gasoline? 

Where you have a couple of doctrines on sovereign immunity and 

that turns on whether it is a commercial activity or a governmental 

activity, it seems to me that it is clearly a commercial activity 

when they are selling oil to us. And you have the act of state doctrine where the courts have said there is flexibility and it depends 

upon the evolution of international legal principles. A great deal 

has happened in the intervening time since the International Association of Machinists case was decided. 

Just to cut through it, without taking them up one by one, 

couldn’t an aggressive prosecutor make a case that would get to the 

jury or the fact-finder if it is a bench trial? 

Mr. BERMANN. Well, certainly, as to the merits—that is to say 

you asked whether the activity in question would represent anticompetitive behavior within the meaning of the Sherman Act. I 

think the answer is most certainly yes, and one court has so held 

in an action brought in the year 2001 that hasn’t yet been mentioned against OPEC. 

24

Senator SPECTER. The one in Alabama? 

Mr. BERMANN. Yes, the suit in Alabama that actually rendered 

a judgment adverse to OPEC and issued an injunction to OPEC, 

but which was vacated, and which vacatur was sustained on appeal 

on the ground of inadequate service of OPEC in Vienna, Austria, 

on technical grounds. 

Senator SPECTER. Well, I am glad you brought that case up because at least there is a Federal court determination that there 

was a violation of the U.S. antitrust laws. The judgment was vacated because OPEC didn’t defend. They were disdainful of coming 

into the Federal court, and they later raised technical objections 

and came in after a judgment had been entered against them. But 

at least that is authority for the proposition that U.S. antitrust 

laws were violated by OPEC. 

Mr. BERMANN. Well, the district court actually found that the 

violation was per se. The district court actually found it was a per 

se violation of the antitrust laws. 

Senator SPECTER. I know what per se means, but somebody who 

may be watching on C–SPAN may not. 

Mr. BERMANN. A per se violation is an act that in itself, without 

more, constitutes a violation. 

Senator SPECTER. That means it is a pretty clear-cut situation? 

Mr. BERMANN. A clear-cut case of a violation. It was vacated only 

on grounds that service was technically inadequate, and it was 

technically inadequate because OPEC refused to accept service of 

process in Vienna, Austria, where it was located. 

Senator SPECTER. Certainly, they had notice. They knew they 

were being sued. That wasn’t any surprise to them, but we all understand that service and jurisdiction are matters to be decided 

under technical rules. 

Mr. BERMANN. They conceded notice. 

Senator SPECTER. They conceded notice? 

Mr. BERMANN. OPEC conceded notice, yes. 

Senator SPECTER. Well, we have got too much to discuss to get 

into the issue as to whether the court inappropriately dismissed 

the case on technical grounds. 

When you talk about causation, that is a fact question. Where 

you have OPEC limiting production by 2.5 million barrels, and 

doing so at a time when gasoline prices are rising, that would depend upon the skill of the prosecutor in putting on the evidence as 

to whether the evidence was sufficient to establish a causal connection. 

Mr. BERMANN. You are entirely right about that. It is a matter 

of a combination of basic factual showing and a skillful and convincing characterization of the facts. 

Senator SPECTER. Well, I am a little at a loss to know why our 

law enforcement agencies have not pursued the matter. It is a matter of great concern to the American people. It is a matter of enormous financial cost on gasoline going up—we have already seen all 

the fancy charts and heard the statistics—and heating oil going up. 

In your judgment, an action could be maintained under existing 

law which would get to the fact-finder or get to a jury? 

Mr. BERMANN. It could be maintained under existing law. My remarks about the bill were oriented toward the fact that the bill reVerDate 0ct 09 2002 10:57 Sep 16, 2004 Jkt 095551 PO 00000 Frm 00028 Fmt 6633 Sfmt 6633 S:\GPO\HEARINGS\95551.TXT SJUD4 PsN: CMORC
25

moved doubts. Any doubts about the principal matters are subject 

to one or two lingering doubts that I alluded to. 

Senator SPECTER. Well, I am glad you took up the bill because 

I think it is a good bill. I have already complimented Senator 

DeWine on it for initiating it. The legislation is good, so that we 

don’t have to get into the intricacies as to whether you have a commercial activity or a governmental activity, or the flexibility of the 

act of state doctrine. So I think we ought to pass it. 

Mr. BERMANN. You are right in those respects. 

Senator SPECTER. It is pretty hard to pass something in Congress 

these days. So my hope would be that the FTC would take a look 

at this matter, or that the Justice Department would take a look 

at it. 

Mr. Kovacic, the FTC ordinarily exercises jurisdiction on gasoline 

matters, but there is nothing to stop the Department of Justice 

from initiating an antitrust violation, is there? 

Mr. KOVACIC. There would not be. Any matter involving a criminal allegation would be handled by the Department of Justice, and 

we do have a process between us by which, if the Justice Department said they had better capability to pursue a matter, they 

could. 

Senator SPECTER. Professor Bermann, there could also be a private action under the antitrust laws for treble damages, could 

there not? 

Mr. BERMANN. That is correct, and both lawsuits to which reference has been made—the one from 1979, on appeal in 1981, and 

2001, on appeal in 2003—were private lawsuits seeking damages 

and/or injunctive relief. 

Senator SPECTER. Do you have any idea why some aggressive private lawyer—there are lots of antitrust suits brought as private 

prosecutors—why such an action has not been initiated? 

Mr. BERMANN. Well, those two were initiated. 

Senator SPECTER. Beyond that, something more recently. 

Mr. BERMANN. Why there haven’t been more? Well, I think the 

act of state doctrine and the Foreign Sovereign Immunities Act 

have operated as some sort of brakes on that process. I didn’t mention this in my oral testimony, nor, in fact, in my written testimony, but I think that, as I read the bill—and I sought clarification 

on this question—the Federal Trade Commission and the Attorney 

General would have exclusive authority to enforce these provisions. 

Now, I stand to be corrected in my understanding of the bill, but 

I understand the bill to so state. That would seem to me, while it 

would prevent any future private parties from bringing antitrust 

suits against the OPEC countries, it would go a very long way to 

defeating any arguments that might be based on the act of state 

doctrine, because after all the act of state doctrine is intended to 

protect the political prerogatives of the legislative and executive 

branches. And if those actions are authorized by Congress and decided upon to be brought by the Federal Trade Commission or the 

Department of Justice, then there is no reason left for anybody to 

even think about the act of state doctrine. 

Senator SPECTER. Professor Bermann, do you think that the provision as to enforcement being with the Attorney General or the 

Federal Trade Commission would raise any question as to the right 

26

of a private litigant under the treble damage provisions to initiate 

a private lawsuit? 

Mr. BERMANN. Well, I think it would raise that question because 

I believe that the bill is ambiguous on that point and it is more 

than arguable that a recital that enforcement shall be—the exact 

language is ‘‘The Attorney General of the United States and the 

Federal Trade Commission may bring an action to enforce this section.’’ 

That is ambiguous as to whether that is exclusive or not exclusive of the existing rights of private parties to do so, and I would 

recommend that any such legislation clarify that point. The consequences of clarifying that one way or another are quite significant. 

Senator SPECTER. Well, I think we ought to make that modification. My judgment would be that there could be private enforcement. When you say ‘‘may,’’ I think that leaves the leeway, but 

there is no reason to have any doubt about it. 

Taking up the issue of a legal action under existing law, is there 

any real basis, where you have the sovereign immunity question 

which turns on whether it is commercial activity or governmental 

activity, to conclude that this is a clear-cut commercial activity? 

Mr. BERMANN. Well, courts have differed over that, and one reason they differ over that is because sometimes the judgment as to 

whether an activity is commercial is based upon the nature of the 

activity and sometimes it is based upon the purposes or policies underlying the activity. 

Senator SPECTER. Where it is to make money, is there any 

doubt? 

Mr. BERMANN. No doubt, no doubt. But where natural resources 

are involved, a good many courts, including in cases outside this 

sector altogether, have held that the management of a country’s 

natural resources—even if dealt with in ways that are commercially familiar to us, the very fact that they are natural resources 

renders it governmental. 

The courts have a bit of a problem with characterizing foreign 

countries’ control of their natural resources as purely commercial. 

Some have and some have not. The virtue of this bill is that it 

would make it no longer necessary for the exception to sovereign 

immunity to depend upon whether we accentuate or don’t accentuate the natural resources character of oil and petroleum. 

Senator SPECTER. Okay, that is fine. I think we ought to get the 

bill, but in the interim I would like to see the Justice Department 

do something about it. I think your opinion is a solid that there is 

a basis to pursue, notwithstanding the sovereign immunity doctrine, on the ground that this is really a commercial activity. 

May the record show that there was a nod in the affirmative. 

Mr. BERMANN. Yes, sir. 

Senator SPECTER. On the act of state doctrine, the International 

Association of Machinists case talked about the flexibility of it and 

on the availability of internationally-accepted legal principles. 

Since the Ninth Circuit opinion in 1981, there has been in the 

1990’s a significant increase in efforts to seek compliance with 

basic international norms through international courts and tribuVerDate 0ct 09 2002 10:57 Sep 16, 2004 Jkt 095551 PO 00000 Frm 00030 Fmt 6633 Sfmt 6633 S:\GPO\HEARINGS\95551.TXT SJUD4 PsN: CMORC
27

nals, and an emerging consensus in international law that pricefixing by cartels violates such international norms. 

Would you agree with that? 

Mr. BERMANN. Yes, I would. 

Senator SPECTER. Well, then I think the stage has been set for 

an aggressive prosecution here, Professor Bermann. I appreciate 

your background and your insights and your research. I think an 

aggressive prosecution would be well received. 

The worst that could happen, Mr. Kovacic, would be to lose, and 

that is not such a dire consequence when the stakes are as important as they are. 

Mr. BERMANN. Mr. Senator, if I may, in the case that began in 

Alabama and went up to the Eleventh Circuit, the act of state doctrine was found to be inapplicable to the action against OPEC. It 

was found to be inapplicable because OPEC’s activity was commercial, and, secondly, because OPEC’s activity was taking place in Vienna, Austria, which is not on the territory of the states in question. 

So the most recent decision that we have been referring to is a 

decision that addressed the act of state doctrine and found it to be 

inapplicable to these circumstances. That is a decision of 2001 and 

not in any respect weakened in the appellate ruling of 2003. 

Senator SPECTER. Well, that is an important observation to show 

that some of these legal hurdles have already been overcome and 

that there is precedent. 

Senator DeWine and I used to be prosecuting attorneys, and a 

prosecuting attorney ought not to take a case that doesn’t have a 

sound policy and that he doesn’t have sufficient evidence to get to 

a jury. But when you weigh the importance of the matter, as I 

would weigh the importance of going after OPEC in their collusive 

practices and the consequences at least sequentially of rising gasoline and rising oil prices in the United States, we are dealing with 

very substantial financial matters for the American consumer. 

Dr. Cooper, would you like to see a test case brought representing consumers? 

Mr. COOPER. We are big fans of test cases. Frankly, clearly, one 

of our problems is that, in my opinion, OPEC has fought an economic war against the American consumer and we have not responded at that level. 

Senator SPECTER. That is not the only war they have fought 

against us. 

Mr. COOPER. I understand, but the point is that we definitely 

think that we support this legislation to remove any doubts. There 

is absolutely no reason why we can’t defend ourselves from this 

sort of attack. 

Senator SPECTER. Mr. Kovacic, would you think it appropriate for 

the FTC to consider an enforcement action against OPEC under 

the antitrust laws? 

Mr. KOVACIC. Senator, I don’t have instructions from the commission to address this, so I answer in my own capacity. 

Senator SPECTER. Sure. 

Mr. KOVACIC. I see this as involving a number of extremely complicated issues. I agree completely with the suggestion that the behavior would be unmistakably illegal. By any of our standards, if 

28

these were private enterprises, our Department of Justice would 

highly likely prosecute them criminally and seek to imprison the 

individuals involved. So the culpability of the behavior under our 

legal standards is unmistakable. 

If I could mention for a moment the things that might make us 

hesitate, one is that obtaining discovery in such a matter might be 

relatively difficult. Enforcing a judgment might be relatively difficult. 

Senator SPECTER. Offending the sovereign, you say? 

Mr. KOVACIC. Obtaining discovery and enforcing a judgment 

would be complex. If I think of the practical steps that would be 

taken, these would likely be fairly elaborate and long-running as 

we dealt with those issues. 

Senator SPECTER. If you can’t get discovery, if they don’t submit 

to discovery, you get a default judgment. If you go after assets, 

OPEC has plenty of assets within the long arm of U.S. law. 

Mr. KOVACIC. If I could offer another possibility, in the international work we do a number of countries raise objections to policies that the United States follows which they allege to be matters 

of cartelization. I wonder if they would pass their own accord collateral legislation to bring their laws to bear upon our own policies, 

and I think of the matter of agricultural commodities as being one. 

Senator SPECTER. Supply for the record—I don’t want to go on 

too much longer—where the United States might be exposed. 

Dr. Felmy, do you think an aggressive prosecution here might be 

warranted? 

Mr. FELMY. Senator, I am not an attorney. I am not qualified to 

make a statement on that particular issue. 

Senator SPECTER. Well, because you are not an attorney may 

make you well qualified, Dr. Felmy. 

Senator SPECTER. Dr. Hastings, you are a Ph.D. That certainly 

gives you qualifications. 

Ms. HASTINGS. Yes, but in economics, unfortunately, not in law. 

So I joint have a joint J.D.–Ph.D. I am an economist and I examine 

industrial organization, so market structure and firm behavior. So 

I am really not able to speak to the extent to which we could successfully litigate antitrust laws against OPEC. 

Senator SPECTER. Okay, thank you. This transcript ought to be 

sent over to both the commission and the Attorney General, at 

least with my thinking, and I will discuss it with my colleagues beyond. Both Senator DeWine and I, as a I said before, were prosecutors, and I initiated many actions which were original actions, sued 

under the nuisance laws people who were spraying asbestos and 

closed down commercial buildings; prosecuted for first-degree murder a defendant who did not touch the victim, made new law on 

first-degree murder without contact. The law is an evolving body 

which responds to aggressive prosecutions when you have a good 

factual basis and you have a policy to be enforced. 

Senator DeWine, thank you very much for convening the hearing 

and thank you very much for the latitude on my questioning. 

Chairman DEWINE. Well, Senator Specter, thank you very much. 

I think you all can see why we brought my senior partner here to 

prosecute the case for the DeWine–Kohl bill here today. 

Thank you, Senator, very much. 

29

Senator SPECTER. Thank you. 

Chairman DEWINE. I will reserve my questions. 

Senator Schumer. 

Senator SCHUMER. Thank you, Mr. Chairman. I want to thank 

the witnesses. I apologize for missing a few of you. We had a Banking hearing at the same time. 

First, I want to ask a little bit about natural gas to Kovacic and 

the others. We had a dramatic price spike in natural gas last year. 

This last winter, it was much higher than it had been before. Yet, 

if you looked at supply and demand, it wasn’t terribly different. In 

fact, it was a little less stringent this past winter than it was in 

the previous winter. 

Has the FTC investigated last winter’s price spikes? If so, what 

is the status of the investigation? If not, since you can’t speak for 

the commission, what are your thoughts? Gas just went through 

the roof. Obviously, it is a different type of market than oil, with 

pipelines and everything else. Tell me what you think. 

Mr. KOVACIC. Senator, our work to date has basically been focused on looking at mergers involving natural gas companies, 

seven in the past two-and-a-half years. In the course of those investigations, we have had some occasion to look at behavioral issues 

in the industry. But to my knowledge, we don’t have a current investigation simply looking at conduct, but I would be happy to 

check that and to report to you. 

Senator SCHUMER. Would it be within the purview of the FTC? 

Mr. KOVACIC. Yes, it would, sir. 

Senator SCHUMER. And would it be in the purview to see if the 

mergers that have occurred have helped contribute—one of my 

premises is we have had less and less competition in the energy industry, and that has in part increased the price, whether it be 

overseas with Senator DeWine’s bill, with OPEC, or domestically 

with the mergers that we have seen throughout the 1990’s, by the 

way many of them under Democratic administrations. This is hardly a partisan-type issue. 

Mr. KOVACIC. We have several projects underway to look at the 

consequences of past petroleum mergers. Again, speaking for myself, I think it is a wise policy for the commission to expand its efforts to assess the effects both of past decisions to prosecute and 

not to prosecute. In one area not involving petroleum or natural 

gas, the commission has begun to do this in health care. 

Without being able to predict how the agency will act in the future, I see a growing interest in looking in the rear view mirror to 

see the actual consequences of what we have done. So my view is 

that is wise policy. 

Senator SCHUMER. Good. That would be very helpful. I hope you 

will do it. Tell the commissioners about that. 

Mr. KOVACIC. I will, sir. 

Senator SCHUMER. Dr. Hastings, as the economist with only a 

Ph.D. and not a J.D. who has maybe studied these markets a little 

bit— 

Ms. HASTINGS. I am not an expert in natural gas markets. I am 

an expert in gasoline markets, and they are very different. 

Senator SCHUMER. But just using your knowledge as an economist, given the fact that we have pipelines from gas fields conVerDate 0ct 09 2002 10:57 Sep 16, 2004 Jkt 095551 PO 00000 Frm 00033 Fmt 6633 Sfmt 6633 S:\GPO\HEARINGS\95551.TXT SJUD4 PsN: CMORC
30

nected and they are generally monopolies—that is, you can’t go to 

two different natural gas producers and the natural gas companies 

have a limit in terms of who they can get the gas from. I have 

asked lots of people and no one has come up with a good explanation as to why natural gas spiked so in price last year, this past 

winter. 

Ms. HASTINGS. I am not an expert to speak to that. 

Senator SCHUMER. Do you, Dr. Cooper, have anything to say 

about it? 

Mr. COOPER. Well, in my testimony we look at natural gas and 

we observe that over the past four or 5 years, natural gas has risen 

much more rapidly than crude oil. 

Senator SCHUMER. Correct. 

Mr. COOPER. The domestic market has changed in the last 5 

years to close that gap. What changed was the majors, the same 

folks who are concentrating the refinery industry, moved into the 

natural gas market in a big way. They invest differently, they behave differently, they manage their assets differently. So the same 

attitudinal factors that look at the way they maximize their profit 

as opposed to compete for market share afflict the natural gas market, in my opinion, as they do the domestic gasoline market. 

The other point is that the natural gas price is now set in the 

spot markets, the hubs. Well, it turns out that most of those hubs 

didn’t even exist 10 years ago and we are now discovering that all 

of them have been afflicted by manipulation. Almost daily, you 

read press accounts from the Federal Energy Regulatory Commission discovering that people were mis-reporting gas, et cetera. So 

these are very thin markets. 

There is a court case going forward. Just a couple of weeks ago, 

I believe a Federal district court judge allowed the case to go forward and he pointed out that on any given day in 2001, Enron accounted for 40 percent of the gas being transacted at the Henry 

hub. Now, the Henry hub is the key referent price. The Department of Energy has discovered that that is setting the price of natural gas, and it is tracking crude much more closely than it used 

to do. 

Enron controlled 40 percent of the transactions in that market. 

When Enron went away, for clearly very, very nasty reasons, these 

markets got to be very thin and they have been laboring along. 

They are not transparent, and the Federal Energy Regulatory Commission is struggling to figure out how to get real clear price signals out of the gas market and still doesn’t have a program. 

Again, the fundamentals in this industry are exactly like the gasoline industry—inelasticity of supply in the short term, inelasticity 

of demand in the short term. So last spring, with a natural gas crisis, the prices popped up and everyone was wringing their hands 

about how storage wasn’t adequate again. How did that happen? 

It is a business decision. 

When the stocks finally moved up over the course of the summer, 

by the end of the winter people pointed out there was more in storage than there was in the previous 2 years and the price is still 

too high. So this is market that is not setting prices in a competitive, pro-consumer manner. 

31

Senator SCHUMER. So you would recommend the FTC do what 

Mr. Kovacic said maybe they should do? 

Mr. COOPER. But they have to begin to look at these markets 

given what we know about the inelasticity of supply and demand. 

If we just do routine antitrust analysis, as Senator DeWine, if you 

look at their market shares, they don’t look very concentrated, although certainly some of the gasoline markets have gotten very 

concentrated. 

But knowing the economic fundamentals, knowing about how inelastic are supply and demand, that magnifies market power. And 

maybe we can’t do that under the antitrust laws. Maybe we need 

different laws that are on different premises, but that is a fundamental problem. 

Senator SCHUMER. Like I mentioned before, my great concern is 

this sort of triangle I mentioned—OPEC, a small number of large 

oil companies and administration friendliness to that. 

In your testimony, Dr. Cooper—and I am going to ask Mr. 

Kovacic and Dr. Felmy this—you made a point that when OPEC 

raises its international price, American oil companies greatly profit 

even more from their domestic production, where their cost of production stays the same or is on the same curve as it was before. 

But because the international price has gone way up, they make 

much more in profit. Certainly, the profits of the oil companies 

seem to be quite in sync with the increase in price, not exactly, but 

pretty close. 

Just give me a yes or no on that. Is that true, Dr. Cooper? 

Mr. COOPER. There is price-following behavior in both the domestic oil market and the natural gas market. The interesting thing 

is that one of the reasons the large industrial gas users in this 

country are screaming is because in the rest of the world gas is not 

exhibiting that price-following behavior. They are losing their jobs 

to other markets where the price of natural gas doesn’t run up 

every time the price of crude runs up. Now, we can have a debate 

about why those foreign markets behave differently. 

Senator SCHUMER. It means it is not inexorable. That is what it 

means. 

Mr. COOPER. That is right. It is not inexorable. 

Senator SCHUMER. The big oil companies sort of like it when 

OPEC raises prices because then the world price goes up and their 

domestic production is more profitable. 

Do you agree with that, Mr. Kovacic? Again, you can speak for 

yourself, not for the commission. 

Mr. KOVACIC. Yes, sir. I know that we have done work looking 

at trends in profitability and attempting to explain them. I don’t 

have a good sense of exactly what our research has shown on the 

point you ask, but I would be happy to check that and submit that 

in writing to you. 

Senator SCHUMER. You could submit that in writing. 

Do you have any thoughts on that, Dr. Hastings? 

Ms. HASTINGS. On the profitability of oil companies coinciding 

with the profitability— 

Senator SCHUMER. The price that OPEC sets, yes. 

Ms. HASTINGS. No, I have not looked into that issue. 

32

Senator SCHUMER. Okay, and I will bet Dr. Felmy doesn’t quite 

agree with what I said, so let’s give him a chance. 

Mr. FELMY. Well, actually, Senator, because domestic prices 

move with world prices, because oil is an international commodity, 

you will see for that roughly, I guess, 35 percent of the crude oil 

that we actually produce here to use, higher margins for that crude 

as world prices go up. 

Senator SCHUMER. So if an oil company were interested, at least 

in the short term, in maximizing their profits, they would be 

happy, at least—let’s not get into collusion, but they would be 

happy to see OPEC raise its price? 

Mr. FELMY. Well, it depends on whether or not you are a refiner 

or a producer. If you are refiner, the answer is a decided no. If you 

are a producer, it tends to benefit you. 

Senator SCHUMER. Overall, let’s take Exxon Mobil—something 

that never should have existed, in my opinion; it should be Exxon 

and it should be Mobil. Those were the two biggest in my area and 

they were allowed to merge. 

Doesn’t Exxon Mobil do better profitability-wise when OPEC 

raises its price, because at least the domestic share— 

Mr. FELMY. I am not an expert, sir, on the split between the refining, production, chemicals and all the other businesses that 

large corporations such as Exxon Mobil have ongoing. So I can’t 

speak to that, sir. 

Senator SCHUMER. Do you want to say something, Dr. Hastings? 

Ms. HASTINGS. Well, I don’t know Exxon Mobil’s exact ratio of 

production to consumption of crude oil. If they are a net producer 

of crude oil, then they benefit from it. If they are a net consumer 

of crude oil, they don’t benefit from it. It depends on the balance 

of their— 

Senator SCHUMER. Assuming that there is pure competition at 

the selling end, which there isn’t. 

Ms. HASTINGS. I am sorry. I didn’t quite understand. 

Senator SCHUMER. Even if they are a consumer, if they can pass 

all of that along in an inelastic way to the person who buys gasoline, home heating oil or whatever else, it is not going to hurt them 

even on their consuming side. They gain on the production side. 

Because of these mergers, they have an inelastic demand curve on 

the consumption side and it is a win-win. 

Ms. HASTINGS. Not necessarily. 

Senator SCHUMER. Go ahead and explain to me why. 

Ms. HASTINGS. Well, it depends. Imagine the opposite happening, 

the opposite being, as Mr. Felmy pointed out, suppose that Exxon 

was actually not a producer, but only a refiner. Before Tosco 

merged with Conoco Phillips, Tosco would have been in this category. So they are only going to be purchasing crude oil. Then your 

assumption is actually that they are going to pass a hundred percent of that crude oil price on to retail. 

Senator SCHUMER. But Tosco is not a fair example because they 

didn’t own gasoline stations. 

Ms. HASTINGS. They did own gasoline stations before they 

merged with Conoco Phillips. They owned the West Coast refining 

and marketing assets of Unocal Corporation. They owned the Circle 

K chain since 1996. 

33

Senator SCHUMER. Did they have the same kind of market dominance that, say, Exxon Mobil has at the pump in my area or any 

part of the country? 

Ms. HASTINGS. Most definitely, in Arizona. 

Senator SCHUMER. In Arizona? 

Ms. HASTINGS. Most definitely, in Arizona. 

Senator SCHUMER. So Tosco would have made money in Arizona. 

Ms. HASTINGS. And they most definitely had a large market 

share. And I am not agreeing that they would have made money 

in Arizona. They also had a large market share in California. 

Senator SCHUMER. Do you know what percent? 

Ms. HASTINGS. It depends on the metropolitan area. So I am 

thinking somewhere between 12—no, probably about 10 percent, 12 

percent. I could be off on that. 

Senator SCHUMER. I think that is a lot less than Exxon Mobil has 

in my area. True? 

Ms. HASTINGS. Perhaps. 

Senator SCHUMER. Oh, yes, more than perhaps. 

Ms. HASTINGS. I actually just looked at the percent that Exxon 

Mobil has in the New York metropolitan area. 

Senator SCHUMER. Good. What is it? 

Ms. HASTINGS. I am just not remembering off the top of my head, 

but I think it is probably closer to 20 percent. So, yes, they have 

a large market share in your area. 

Senator SCHUMER. What do you say to this, Dr. Cooper? 

Mr. COOPER. Well, the point is that they are integrated, and that 

has been one of the trends is that you have got more integrated refiners. So it is more and more difficult to talk about the refining 

sector because this is an integrated operation. 

Senator SCHUMER. Right. That is what I was trying to say. 

Mr. COOPER. So the point is that if you look at the bottom line 

of Exxon Mobil this year, folks, it is through the roof, and it is driven significantly by crude oil prices, but also by the ability to keep—

if there were price resistance at the point of sale, the rise in crude 

prices would have squeezed down the domestic spread, and it did 

not. 

If you look at our testimony, the reason we are having so much 

shouting today is that both domestic spread and crude oil prices, 

the input prices, are at historic highs for an April, and it is the 

combination of that. I understand you could hypothesize other reasons, but the simple fact of the matter is that there is no elasticity 

of demand at the point of sale. 

Senator SCHUMER. Right, and Dr. Hastings made the point because she had to go to something that doesn’t exist now, a large 

refiner that didn’t have production. That was Tosco, and who 

bought Tosco? I don’t even know. Who bought them? 

Ms. HASTINGS. Conoco Phillips. 

Senator SCHUMER. Conoco Phillips, a seller and a producer. 

Ms. HASTINGS. By the way, Tosco was just the first thing that 

came to my head. 

Senator SCHUMER. I understand, I understand, but I don’t think 

Tosco was the biggest sort of refiner qua refiner. 

Ms. HASTINGS. It might have actually been the largest independent refiner at the time of the purchase. 

34

Senator SCHUMER. That is what I am saying. The point I am 

making is the greater consolidation, vertical and horizontal, in this 

industry over the last several years has created less competition 

and has created not only higher prices, but a greater incentive, either implicitly or even explicitly, for OPEC and the oil companies, 

the big ones, not everybody, to cooperate. 

I just have one more question here, and the Chairman has been 

very generous. This is about ethanol. Last week, there were rumors 

that the administration might have granted both New York and 

California a waiver from the ethanol mandate, and prices dropped 

for energy futures on the NYMEX. I think they went down 5.2 percent for gasoline and 4.2 percent for crude oil. 

Anyone can answer this. Isn’t this empirical evidence that the 

waivers, if we were to allow New York, California and whatever 

other States wanted to that are far away from the corn-growing 

ethanol-producing centers—if we were to allow those States to meet 

the clean air standards by cracking gasoline somewhat differently, 

prices would come down some. 

Does anyone want to agree or disagree? Yes, Mr. Kovacic. 

Mr. KOVACIC. We haven’t tried to measure the exact effects of the 

substitution you mention, Senator, but an unmistakable finding 

that we have made is that measures that can be taken to preserve 

general levels of air quality while introducing more flexibility into 

the supply system, have possibilities in many areas to put greater 

downward pressure on prices. A more flexible supply and distribution system consistent with broad air quality goals is better for the 

competitive process. 

Senator SCHUMER. Dr. Felmy. 

Mr. FELMY. I would agree, Senator, that any measure that allows 

you to be able to increase the flexibility so that refiners can meet 

clean air without prescriptive solutions for that introduces flexibility. It also introduces the possibility of additional imports. So we 

would agree with that position and we support waivers for everyone. 

Senator SCHUMER. Does anyone disagree with that? 

Mr. COOPER. I agree with it, with a caveat. Bigger markets are 

better for consumers as long as the players in the markets are 

more. If it is the same players in the same big markets, I am not 

sure you diminish their market power. So when we look at making 

these bigger markets, we have to also make sure we increase the 

competitiveness of those markets or we may end up on a treadmill. 

Senator SCHUMER. One final question. This is for Mr. Bermann. 

We left the legal questions to the former prosecutors, Senator 

DeWine and Senator Specter. But as a cosponsor of Senator 

DeWine’s legislation, given that OPEC is a cartel specifically designed to manipulate price, does the involvement of U.S. companies 

with OPEC raise any domestic antitrust issues? 

In other words, does the fact that some of the oil companies also 

own some of the production in the OPEC nations, such as whatever 

the name of that company is that I mentioned in my opening—

Motiva, the old Aramco—does that raise any antitrust issues independent of the good legislation that Senator DeWine has offered? 

Mr. BERMANN. Well, the fact that those companies might be dealing with foreign governments would not immunize them in any reVerDate 0ct 09 2002 10:57 Sep 16, 2004 Jkt 095551 PO 00000 Frm 00038 Fmt 6633 Sfmt 6633 S:\GPO\HEARINGS\95551.TXT SJUD4 PsN: CMORC
35

spect. The law has never gone any further than to say only the 

compulsion of a foreign government would operate as a defense. 

So if you had the kinds of predicate acts that you are thinking 

of, there is no question that I think the Sherman Act could apply 

to them. And the fact that they are dealing with or consorting with 

foreign governments will not immunize them. 

Indeed, if I can revert to the act of state doctrine, the courts have 

held routinely that the act of state doctrine only applies when the 

legality of what a foreign government does is in question and not 

when, if you will, the good faith or bad motivation of the foreign 

government is indirectly implicated. 

Senator SCHUMER. Do you agree with that, Mr. Kovacic, and does 

the FTC agree with that? 

Mr. KOVACIC. Again, speaking in my own capacity, I think Professor Bermann has accurately described the requirement that 

there be compulsion. So the issue of fact would be, in the concession arrangements that govern their activities in these countries, 

are there measures in those arrangements that provide the requisite compulsion. I think his technical assessment is correct. 

Senator SCHUMER. So would that mean that, say, Shell, which 

has ownership in Saudi Arabia and is part of this Aramco, which 

is part of OPEC, is susceptible to FTC action for what they do here 

because of their big network and operations here? 

Mr. KOVACIC. In any instance in which we would look at foreign 

behavior in these circumstances, we would generally take the view 

that without compulsion, for example, the behavior in question is 

fair game. So that would be the crucial factual issue. 

Senator SCHUMER. Thank you, Mr. Chairman. I appreciate your 

having this hearing. 

Chairman DEWINE. Senator, thank you very much. 

Mr. Bermann, you have made some good suggestions on how we 

can improve this bill and we are certainly going to take a look at 

that. I want to thank you for that. That is one of the reasons we 

have these hearings. 

You made the point about the state of the law and told us a little 

bit about that, and we appreciate that. 

I might say there has been some editorial comment about this 

proposed bill that we couldn’t do this because there are legal impediments. And I would just say your testimony has pointed out, 

I think, the fact that this bill would remove any legal impediments. 

Whatever legal impediments are out there—and that is an open 

question—but whatever legal impediments are out there, this bill 

eliminates them. That is why we introduced the bill. 

It is problematic whether or not suits could be brought now or 

not. I think they could be, but the whole purpose today of this bill 

is to make it so that prosecution can move forward, and make it 

clear that the antitrust laws of this country do, in fact, apply. 

The idea of the Department of Justice enforcing the antitrust 

laws against cartels is something that happens all the time, and 

they do it against not just domestic companies; they do it against 

foreign companies. It wasn’t too many years ago there was a lawsuit brought by the Department of Justice. It was an international 

cartel case against, I believe, German and Swiss firms for a vitaVerDate 0ct 09 2002 10:57 Sep 16, 2004 Jkt 095551 PO 00000 Frm 00039 Fmt 6633 Sfmt 6633 S:\GPO\HEARINGS\95551.TXT SJUD4 PsN: CMORC
36

mins cartel. That case was successful. Foreign executives, I believe, 

were sent to jail. Two firms paid a fine of over $700 million. 

So the United States can reach the assets; the Justice Department can reach those assets. We can attach those assets. We can 

bring those people into court. I have faith in the ability of the lawyers at the Justice Department to get the job done, and that is why 

we have this bill to remove the impediments and let them go about 

their business and do their job and enforce our antitrust laws. This 

is the only major area that I know of where we say they can’t do 

it, and we think they should be able to do it. 

Mr. Kovacic, we have heard testimony today complaining about 

the FTC’s efforts to investigate the petroleum industry. In your testimony, you talked about a number of actions and investigations 

that the FTC has conducted in this area, but it seems clear to me 

that consumers still believe that they are looking at a very dysfunctional market. 

What else can the FTC do? 

Mr. KOVACIC. I think one of the most important things, Mr. 

Chairman, is to bring to a complete conclusion a great deal of the 

research that we have been doing that comes both from the active, 

almost real-time monitoring of price changes, the consequences of 

our retrospective assessments of completed transactions, the continued work that we are doing to enlist expert outsiders to tell us 

more about the industry—to bring that to a successful conclusion 

so that our understanding of the precise phenomena in question is 

more complete, to have a better sense, for example, of precisely 

how specific transactions or activities have affected market outcomes. 

I have heard on a number of occasions Senator Wyden express 

his frustration, his disappointment with the inquiries. But our view 

has been in this and other areas that are terribly complex that the 

sound empirical foundation is the indispensable basis for making 

good policy. One of the first and most important things we can do 

is to bring those efforts to a close as a foundation for doing more 

work. 

Second, I think bringing to a successful close cases such as the 

Unocal case that I mentioned before, which we allege—our opponents in this case would strongly dispute my characterization—literally involves hundreds of millions of dollars for California consumers, direct pass-through effects, to establish the principle that 

the regulatory process which is so important to the operation of 

this industry—clean air and clean water controls, other controls 

that govern the behavior of the industry—cannot be gamed, that 

firms subject to them cannot lie or misrepresent their behavior. 

And again I must emphasize I am offering the allegations in the 

commission’s complaint. These aren’t proven facts. To demonstrate 

that principle successfully would be, I think, a critical addition to 

our competition policy about what it says in petroleum and elsewhere about the manipulation of regulatory schemes that do affect 

competitive outcomes. 

I think we have the humility, Senator, in listening to all of the 

representations here about additional avenues for research and 

analysis, to continue to pursue those paths. I am quite at peace 

with the process that continues to bring upon us possibilities for 

37

additional analysis, new research, new areas for examination. Our 

process of policymaking takes those into account, so most certainly 

we would carefully consider and reflect upon the results of this proceeding as well. 

Chairman DEWINE. Let me ask you, do you agree with Dr. Cooper’s assessment that refining is excessively concentrated, and if 

so, does that mean that the FTC got it wrong when it reviewed the 

big mergers of the 1990’s in the petroleum industry? 

Mr. KOVACIC. When we look carefully at the contributions that 

the mergers in question made to concentration in refining, we find 

that those adjustments were modest, at most. Indeed, it is very difficult to detect, I believe, direct, convincing links between the mergers we permitted, with conditions, with large divestitures, and notable increases in concentration in these markets. So I think that 

we and Dr. Cooper would have quite a debate about exactly how 

those mergers influenced refining concentration in those markets. 

Chairman DEWINE. Well, let me move to another area. There 

seems to be widespread agreement that petroleum companies run 

their refineries at a very high capacity, yet don’t build up new capacity to meet potential demand increases. 

We know that there are some difficulties in increasing refining 

capacity. We have talked about this a little bit today; environmental permitting, for example. But on balance, it seems as though 

there ought to be some way the industry could boost refining capacity. 

Why don’t we see more refining capacity come on line? Is there 

any other industry that comes to mind where producers run at this 

very high capacity year after year and don’t take any steps to increase capacity? What is the difficulty here? 

Mr. KOVACIC. I think part of what we have observed, Mr. Chairman, is that utilization rates, at least in the past couple of years, 

to some extent have been falling a bit, so that we don’t have the 

level of tightness that prevailed before. 

I would have to check, Mr. Chairman, to look at exactly what our 

experience base tells us about actual improvements in the capacity 

of specific facilities that do remain on line. And if you will permit 

me to do so, I would like to supplement my answer with a fuller 

response. 

Chairman DEWINE. That would be fine. You can submit that. 

Mr. KOVACIC. But our impression is that certainly in some areas 

with respect to some facilities, we are seeing enhancements that do 

increase the capacity of existing facilities. 

Chairman DEWINE. Dr. Felmy, have you ever done a study estimating what price we would pay for crude oil if it were subject to 

the free market instead of being fixed by OPEC? 

Mr. FELMY. I have really not, Mr. Chairman. An economist looks 

at cartels and has an academic view of how things go, but then 

when you transfer that analysis to the real world, there are many 

other things that happen. Cartel behavior is very complex. Behavior of non-cartel members is also very complex. You also have dramatic changes in demand over time which can also affect the 

prices. So I don’t have an analysis of that. 

Chairman DEWINE. Dr. Hastings, do you? 

Ms. HASTINGS. I do not have an analysis of that. 

38

Chairman DEWINE. Dr. Hastings, your testimony mentions that 

the Energy Information Administration of the Department of Energy collects data, but does not let academics have access to detailed data for research purposes. You also note that the Department of Energy does not have grant programs for economists to do 

research on energy policy, and as a result the economic research 

into energy policy suffers. 

Can you explain your thoughts about these two points maybe in 

more detail to us? 

Ms. HASTINGS. Sure. In order to examine many of the questions 

that we have been discussing here, an applied economist needs to 

be able to get access to detailed data that would allow them to understand better issues. For example, suppose I wanted to look at 

the following question: Was there strategic capacity entry into markets that were regulated by reformulated gasoline requirements? 

How did firm choose capacities to enter into these markets? Are we 

going to be ready to supply Milwaukee’s market when they introduced a specific type of gasoline only for that market? 

Price volatility went up substantially there, so did mark-ups, and 

the number of firms supplying unbranded gasoline decreased substantially after that introduction. So suppose you might want to 

ask the question, how tight are markets? Did firms anticipate this 

tightness when setting capacities when they went into the market? 

In order to look at something like that, you would actually need 

to look at refinery-level production decisions, and there is no way 

to actually get that information even though the Energy Information Administration has such information. Typically, the only thing 

that one can get access to is very average data across the whole 

country or perhaps across a large part of the country on an aggregated basis, kind of monthly or yearly information. 

One of the things that maybe Mr. Kovacic might agree with me 

on is that there is a real need for sound empirical work in industrial organization to look at a lot of these questions. What is going 

on in natural gas? What is the effect of having these micro markets 

for different reformulated gasoline on prices, on competition, on 

who decides to enter and who doesn’t? Those questions could be answered with good data. 

Currently, for the projects that I have done, it is incredibly difficult to get such detailed data and it takes a long time for an academic to get a hold of this data. Labor economists were in a similar 

position before the Census Bureau introduced a program that allowed labor economists to look at detailed data at the Census Bureau, confidential data on firm production decisions, for example, 

in manufacturing, on consumer behavior at the consumer level. 

What they did is introduce a program by which academic could 

apply to get access to the confidential data. It is a very stringent 

application process. Once they are granted this application, they 

actually have to go to the Census Bureau to use the data. They 

can’t take confidential data off-site. But having this access, this 

program set-up, led to a huge boom in the sound empirical knowledge base of labor-related policies such as minimum wage laws, et 

cetera. 

Before that time, labor economists and labor issue policymakers 

were in the same position that many regulatory policymakers find 

39

themselves in today. Having a program modeled after what the 

Census Bureau did perhaps at the Energy Information Administration may lead to the same boom in knowledge and understanding 

of what is affecting these energy markets. Chairman DEWINE. Dr. Cooper, we have heard testimony that it 

is too hard to open a new refinery due to such reasons as huge 

costs, environmental issues and local opposition. Do you disagree with these reasons? I mean, is that what the 

problem is? Mr. COOPER. It is not that I disagree with the reasons. It is that 

we have observed the closure of refineries, which were clearly industrial sites that supported those refineries. They were permitted 

to exist in those locations. They were closed, we know, as part of 

a business strategy to diminish capacity. So what we asked for several years ago was a study of those sites, a detailed analysis of why 

were they closed, what would it take to get them open, would there 

be people who are interested in reopening them. I think Dr. Hastings has sort of raised the interesting question, 

because the really interesting thing is that the Federal Trade Commission which studied the first price spike in 2000 actually asked 

exactly that question, the question she asked about: How do strategic decisions in the reconfiguration of refineries to meet the reformulation requirements affect supply in that market. The FTC asked that question not with the detailed data that she 

would like to have, but by interviewing all of the behaviors and the 

actors in those markets. And they concluded that, based on those 

interviews, strategic decisions had been made about how much capacity to have in a market that tightened them and cut off independents. Two years ago, the RAND Corporation did another study, based 

again not on the detailed data that she would like, but on the same 

sets of interviews, and they concluded exactly the same thing. So 

now we have the qualitative evidence on business decisions. Senator Wyden repeats his internal memos almost on a daily basis 

that those decisions were made.

So the answer is you hear the excuse that it is too hard to locate, 

it is too expensive, but you look at the people who have studied it 

and you discover that this was intended to increase the profitability of refineries, that it was intended to accomplish certain sets 

of things. The definitive answer comes in a backward look around 

each of those price spikes with the data that Dr. Hastings has mentioned.

But I submit that there is another explanation. Now, we are 

through 4 years of unhinging in the gasoline market and nobody 

has looked at this issue in detail repeatedly, aggressively. What we 

get is excuses rather than explanations and analysis. Chairman DEWINE. Well, I want to thank you all very much for 

your testimony. It has been very, very helpful and it has been a 

very instructive hearing. We have had a lot of interest in this hearing and we do appreciate your testimony. This Subcommittee will 

continue to monitor this issue and we are going to continue to push 

forward and move forward on our bill.

Thank you very much.

[Whereupon, at 5:08 p.m., the Subcommittee was adjourned.]

[Questions and answers and submissions for the record follow.]

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