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96–370 PDF 2004

S. HRG. 108–644

CRUDE OIL SUPPLY, GASOLINE DEMAND AND

THE EFFECTS ON PRICES

HEARING

BEFORE THE

COMMITTEE ON 

ENERGY AND NATURAL RESOURCES 

UNITED STATES SENATE

ONE HUNDRED EIGHTH CONGRESS

SECOND SESSION

TO

RECEIVE TESTIMONY REGARDING CRUDE OIL SUPPLY, GASOLINE DEMAND AND

THE EFFECTS ON PRICES

JUNE 15, 2004

(

Printed for the use of the 

Committee on Energy and Natural Resources 

(II)

COMMITTEE ON ENERGY AND NATURAL RESOURCES 

PETE V. DOMENICI, New Mexico, Chairman 

DON NICKLES, Oklahoma 

LARRY E. CRAIG, Idaho 

BEN NIGHTHORSE CAMPBELL, Colorado 

CRAIG THOMAS, Wyoming 

LAMAR ALEXANDER, Tennessee 

LISA MURKOWSKI, Alaska 

JAMES M. TALENT, Missouri 

CONRAD BURNS, Montana 

GORDON SMITH, Oregon 

JIM BUNNING, Kentucky 

JON KYL, Arizona 

JEFF BINGAMAN, New Mexico 

DANIEL K. AKAKA, Hawaii 

BYRON L. DORGAN, North Dakota 

BOB GRAHAM, Florida 

RON WYDEN, Oregon 

TIM JOHNSON, South Dakota 

MARY L. LANDRIEU, Louisiana 

EVAN BAYH, Indiana 

DIANNE FEINSTEIN, California 

CHARLES E. SCHUMER, New York 

MARIA CANTWELL, Washington

ALEX FLINT, Staff Director 

JUDITH K. PENSABENE, Chief Counsel 

ROBERT M. SIMON, Democratic Staff Director 

SAM E. FOWLER, Democratic Chief Counsel 

LISA EPIFANI, Counsel 

JENNIFER MICHAEL, Democratic Professional Staff Member 

(III)

C O N T E N T S 

STATEMENTS 

Page

Berry, David, Vice President, Swift Transportation Company, on behalf of 

the American Trucking Associations, Inc. .......................................................... 20

Bunning, Hon. Jim, U.S. Senator from Kentucky ................................................. 1

Burns, Hon. Conrad R., U.S. Senator from Montana ........................................... 2

Caruso, Guy F., Administrator, Energy Information Administration, Department of Energy ..................................................................................................... 5

Cavaney, Red, President, American Petroleum Institute ..................................... 11

Domenici, Hon. Pete V., U.S. Senator from New Mexico ..................................... 1

Feinstein, Hon. Dianne, U.S. Senator from California ......................................... 3

Kilduff, John, Senior Vice President, Energy Risk Management Group, Fimat 

USA, Inc. ............................................................................................................... 15

Smith, Hon. Gordon, U.S. Senator from Oregon ................................................... 4

Tobin, John C., Executive Director, Energy LITERACY Project ......................... 47

APPENDIX 

Responses to additional questions .......................................................................... 51

(1)

CRUDE OIL SUPPLY, GASOLINE DEMAND AND 

THE EFFECTS ON PRICES 

TUESDAY, JUNE 15, 2004

U.S. SENATE, COMMITTEE ON ENERGY AND NATURAL RESOURCES, Washington, DC. 

The committee met, pursuant to notice, at 10:45 a.m., in room 

SD–366, Dirksen Senate Office Building, Hon. Pete V. Domenici, 

chairman, presiding. 

OPENING STATEMENT OF HON. PETE V. DOMENICI, U.S. 

SENATOR FROM NEW MEXICO 

The CHAIRMAN. The committee will come to order. 

First, when I saw all of you and saw everybody down the line, 

Senator Bingaman, I thought maybe we were having a movie here 

today. 

[Laughter.] 

The CHAIRMAN. But we will try our best to give you something 

interesting at least. 

Senators, it looks to me like everything is behind schedule and 

we have got witnesses that are ready. So what I propose—and I 

have checked it with Senator Bingaman—is that we move to the 

witnesses now and then, when they are finished, when we start, we 

will be able to use parts of our statement, put our statements in 

the record, and proceed in that manner. Otherwise, it would seem 

to me they are not going to testify and we brought them here for 

that. So I think we ought to proceed. 

Let us go with Guy F. Caruso, Administrator of the Energy Information Administration, Department of Energy. We will then take 

Red Cavaney, president of the American Petroleum Institute, and 

then John Kilduff, senior vice president of the Energy Risk Management Group of Fimat USA. 

Now, is David Berry coming? 

He’s making his way in. Okay. 

Now, you heard me. So you’re going to follow those instructions 

and proceed. 

Mr. Caruso. 

[The prepared statements of Senators Bunning, Burns, Feinstein 

and Smith follow:]

PREPARED STATEMENT OF HON. JIM BUNNING, U.S. SENATOR

FROM KENTUCKY

The price of energy has risen sharply during the last two years. The average price 

of gasoline has broken $2.00 per gallon. Natural gas prices and coal prices are also 

2

up significantly. These high prices are hitting working Americans’ pocketbooks hard 

just as our economic recovery is picking up steam. 

It is time Congress acts to help Americans face these rising costs. We have been 

fortunate to see prices slip from their highs in recent weeks. But if Congress does 

nothing to encourage more production, Americans will continue to struggle financially and our economic recovery could evaporate. 

The most important action we can take is to increase domestic energy production. 

As demand for energy increases in the summer months, we cannot afford to see energy prices skyrocket even more. Having a cheap, ready supply of energy is more 

crucial than ever to our economy. 

Energy production is also a national security issue. Iraq and problems in the Middle East are on all of our minds. We have to recognize that continuing to rely on 

energy supplies from that part of the world is a threat to our national and economic 

security. We can’t change that overnight, but we can start taking the first steps 

today. 

Opening the Strategic Petroleum Reserve has become an issue lately. The Strategic Petroleum Reserve is an emergency reserve. I understand that to working 

Americans hit hard by the economic downturn of 2000, facing high energy prices 

is an emergency. and I will work hard to bring prices down, but not at the expense 

our nation’s security. I am sure that all Americans would agree that saving a nickel 

on a gallon of gas is not worth the risk to our country and our men and women 

in uniform. 

I thank the witnesses for appearing before the committee and testifying on this 

important topic. 

Thank you, Mr. Chairman. 

PREPARED STATEMENT OF HON. CONRAD R. BURNS, U.S. SENATOR

FROM MONTANA

Thank you Mr. Chairman, for holding this important hearing, and thank you to 

our witnesses for testifying today. Gasoline and oil prices affect every one of us 

every day and in a time like this when fuel prices are climbing, we need to understand why it is happening and what we can do about it. 

In Montana, we are affected by high fuel prices more than most. There-is a lot 

of ground to cover in Montana—we live in a big state with long distances between 

home and school or town to town. Additionally, Montana’s economy is driven by agriculture. Farmers and ranchers are price-takers on both the input side and the production side. If the price of fuel or fertilizer goes up, it just cuts right into the bottom line. 

When we look at the price at the pump, it is easy to understand the effect it has 

on each of us individually. It’s also important to understand the costs high fuel 

prices have on this entire country. We are a nation built on our ability to move 

things and people and ideas. Fuel prices affect everything from the cost of airline 

tickets to the price of shipping merchandise by truck, just to name a few. In a time 

when we are welcoming steady economic expansion, these high fuel prices threaten 

to stop this growth in its tracks. 

The first question is ‘‘why?’’ The second is ‘‘what can we do about it?’’

We all know OPEC has a major role in determining the world price of oil. Because 

middle eastern oil is plentiful and relatively easy to reach, the OPEC nations will 

always be big players on the world oil market. However, competition from other 

sources can distribute the price influence to new regions, new players, and new markets. Russia, Central Asia and Western Africa all have large reserves of oil and natural gas. I just returned from a Kazakhstan where I learned a great deal about the 

resources they are discovering in the Caspian Basin and throughout Central Asia. 

We need to encourage these countries to treat the companies who work their fairly 

and the resource production will then encourage greater stability and even the 

spread of democracy. Most importantly, the more players there are in the world 

market for oil, the less a supply disturbance in one region will determine the world 

price. 

We also have a responsibility to do what we can domestically to increase production and streamline those processes that increase the price of both oil and gasoline. 

We need to access our own reserves, and be wary of shutting off access to known 

reserves on public land. 

When it comes to refining, we need to understand that our refineries are at 96% 

capacity and we are not building any new ones. ‘‘Boutique’’ fuels to comply with different local or regional requirements make markets even tighter. We need to be very 

3

careful about regulations discourage the construction of new refineries and fuel 

mandates that will make prices climb for everyone. 

PREPARED STATEMENT OF HON. DIANNE FEINSTEIN,

U.S SENATOR FROM CALIFORNIA

Mr. Chairman, thank you for holding this hearing. Gas prices in California are 

almost 30 cents above the national average. They have climbed from $1.71 in January to $2.29 as of yesterday. If we have any hope to forestall even greater hikes, 

we must move rapidly to develop alternatives to the internal combustion engine. 

For California and several other states that can produce gasoline that meets the 

requirements of the Clean Air Act without the use of oxygenates, we need to eliminate the 2% oxygenate requirement which forces refiners to use either MTBE or 

ethanol. In effect, this requirement is an unnecessary ethanol mandate for refiners 

in California that tightens gasoline supplies and causes upward pressure at the 

pump. 

California, unlike other states, is a gasoline island—we use gasoline that is cleaner burning than any other gasoline in the nation and no refiner outside of California 

produces the gasoline the State needs. 

Plus, the State’s refining capacity has shrunk over the past 30 years from over 

30 refineries to 13 during a time when our population has more than doubled. And 

with the closure of the Shell Bakersfield refinery in October, the number will drop 

to 12. 

Refiners in California produce about 46 million gallons of gasoline per day, while 

Californians use up to 42 million gallons per day. And refineries are already running at maximum capacity. 

The most important factor in determining the price at the pump is crude oil 

prices. While OPEC plays a large role in determining the price, the other issue is 

the global demand for oil, which we have seen increase considerably over the last 

few years. World demand for oil will continue to increase as countries like the China 

and India continue to grow. 

In California alone, gasoline demand is expected to increase by 2.5 percent per 

year compounded according to the California Energy Commission. Globally, according to the latest Oil Market Report issued by the International Energy Agency, the 

average demand for oil will total 81.1 million barrels per day this year. That represents an increase of 2.3 million barrels per day over 2003. 

At the same time that demand is increasing, the amount of oil the world is producing is estimated to peak within the next few decades. As a result, we need to 

start focusing on how we can use our oil supplies more efficiently. 

One way is to close the SUV loophole. This small step will force SUVs to meet 

the same fuel efficiency standards as passenger cars. Currently, Model Year 2005 

SUVs and light duty pickup trucks have a fuel economy standard of 21 miles per 

gallon. By Model Year 2007, that will increase to 22.2 miles per gallon. 

I have proposed picking up where the Bush Administration’s increase left off so 

that by 2011, SUVs would have to average 27.5 miles per gallon. 

Closing the SUV loophole will:

• Save the U.S. 1 million barrels of oil a day; 

• Reduce our dependence on foreign oil imports by 10 percent; 

• Save SUV and light duty truck owners hundreds of dollars each year in gasoline 

costs; and 

• Prevent about 240 million tons of carbon dioxide, a greenhouse gas, from entering the atmosphere each year.

We also need more hybrids on the road. Already, we have seen foreign auto makers like Toyota and Honda make huge strides regarding the implementation of hybrid technology in their vehicles. Auto-manufacturers need to add more hybrids to 

their vehicle mix. 

The investment in fuel efficient technology is paying off for Toyota as the Prius 

was named the 2004 Motor Trend Car of the Year. Toyota has also announced it 

will soon be releasing the first luxury hybrid SUV this fall. I look forward to the 

introduction of the hybrid Ford Explorer, and hope that American auto makers will 

fully embrace the use of more fuel efficient technology rather than continue to let 

themselves fall behind in the development of fuel efficient vehicles. 

I look forward to working with my colleagues to craft legislation that will impact 

the United States’ demand for oil. 

Thank you Mr. Chairman. 

4

PREPARED STATEMENT OF HON. GORDON SMITH, U.S. SENATOR

FROM OREGON

Mr. Chairman, I appreciate your willingness to convene this timely hearing to examine what drives fuel prices. As American consumers continue to empty their wallets to fill their tanks, we need a thorough vetting of the issues related to crude 

oil supplies, gasoline demand, and the impact on prices. 

This is an issue that I have been following for some time in my role as Chairman 

of the Commerce Subcommittee on Competition, Foreign Commerce, and Infrastructure. On April 5, 2004, I wrote to the FTC asking that it provide that Subcommittee 

with information relating to any FTC investigations of the gasoline market since 

1973. I would like to submit a copy of that letter for the record, and reiterate my 

hope that a response will be forthcoming. 

I would also like to suggest that the FTC change the manner in which it handles 

such investigations. For some time, individual Members of Congress have requested 

that the FTC investigate increases in gasoline prices to determine if there has been 

any price or market manipulation. It is my understanding that the FTC has, in fact, 

investigated these issues several times. However, its findings are often not reported, 

which does little to improve consumer confidence in the face of historically high gasoline prices. 

In addition, in 2000, I asked the General Accounting Office (GAO) to investigate 

issues affecting gasoline prices in Oregon, which are almost always higher than the 

national average. The GAO report outlined several factors contributing to high gas 

prices in Oregon. For example, Oregon state excise taxes on gasoline are among the 

highest in the nation. Oregon also prohibits self-service at gas stations, which may 

add as much as 5 cents to the cost of a gallon of gas. 

Oregon has no refineries in the state. It also has the highest proportion of miles 

driven in rural areas of the three West Coast states. Both of these factors add to 

the transportation costs of getting gasoline to retail outlets throughout Oregon, and 

make the state vulnerable to any West Coast supply disruption. 

We will hear from the witnesses today about global production, and global demand, which continues to increase. The United States is now more than 50 percent 

reliant on oil imports to meet its needs, and this dependency is projected to increase 

to almost 70 percent by 2025. 

One thing is clear. While we can increase domestic production in less environmentally sensitive areas, the United States does not have the reserves to drill its 

way to energy independence. 

That is one of the reasons why, in the 107th Congress, I joined with several of 

my colleagues on the Commerce Committee to cosponsor a bipartisan amendment 

to the national energy bill that would have increased the CAFE standard to 36 

miles per gallon by 2015, without sacrificing passenger safety. 

While the amendment was withdrawn, it was projected to save as much oil per 

day by 2025 as we currently import from the Persian Gulf. 

There are still opportunities this Congress to enact measures that will, over time, 

reduce our dependence on imported oil. The stalled energy legislation contains provisions relating to hybrid and advanced technology vehicles, and the development 

of fuel cell technology. 

In addition, the tax provisions currently included in the Senate-passed FSC/ETI 

bill provide tax incentives for alternative and electric vehicles, and for the installation of alternative fueling stations. 

Some in this body have effectively blocked further consideration of even a scaledback version of the energy bill. I would urge my colleagues not to make the perfect 

the enemy of the good. We need to move forward today to secure tomorrow’s energy 

future for our nation. 

I look forward to hearing from the witnesses today. 

U.S. SENATE, 

SUBCOMMITTEE ON COMPETITION, FOREIGN COMMERCE, AND INFRASTRUCTURE, 

Washington, DC, April 5, 2004. 

Hon. TIMOTHY J. MURIS, 

Chairman, Federal Trade Commission, Washington, DC. 

DEAR CHAIRMAN MURIS: In representing my constituents, and in my role as chairman of the Competition, Foreign Commerce, and Infrastructure Subcommittee of the 

Senate Committee on Commerce, Science, and Transportation, I am very concerned 

about the rapid increase in the cost of gasoline. Therefore, I am writing to request 

that the Federal Trade Commission (FTC), over which the Competition SubVerDate 0ct 09 2002 09:38 Oct 20, 2004 Jkt 000000 PO 00000 Frm 00008 Fmt 6633 Sfmt 6621 P:\DOCS\96370.TXT SENE3 PsN: SCAN
5

committee has jurisdiction, provide the Subcommittee with information relating to 

any FTC investigations of the gasoline market since 1973. 

As you are aware, for some time, individual Members of Congress have requested 

that the FTC investigate increases in gasoline prices to determine if there has been 

any price or market manipulation. It is my understanding that the FTC has, in fact, 

investigated the gasoline pricing issue numerous times in the past and has not 

found any evidence of wrongdoing. However, the FTC’s findings are often not reported, which does little to improve consumer confidence in the face of rising gasoline prices. 

Specifically, I request that you provide the Competition Subcommittee with a list 

of the gasoline pricing investigations that have been performed by the FTC during 

the past 30 years and a summary of the conclusions of each of these investigations. 

Please include those instances when the FTC made a preliminary investigation of 

allegations but eventually determined that the situation did not warrant a full-scale 

investigation. 

If you have any questions concerning this request, please do not hesitate to contact me. 

Sincerely, 

GORDON H. SMITH, 

Chairman.

STATEMENT OF GUY F. CARUSO, ADMINISTRATOR, ENERGY 

INFORMATION ADMINISTRATION, DEPARTMENT OF ENERGY 

Mr. CARUSO. Thank you, Mr. Chairman, for this opportunity to 

present the Energy Information Administration’s crude oil and gasoline outlook. 

We have seen very strong price increases in both crude oil and gasoline this year with spikes as high as $42 for crude and a $2.06 

a gallon national average on gasoline. But I am happy to say that 

the very latest data show that there is the beginning of a market 

turnaround. Retail gasoline prices have fallen by 8 cents a gallon 

during the last 3 weeks. Yesterday’s number was $1.985 for average retail. More importantly, wholesale prices are down about 23 

cents over the past several weeks, and if all goes well, we see the 

trend for retail prices to follow the wholesale prices down over the 

coming weeks. 

Of course, much can happen that can change that, but we anticipate the second half average retail price of gasoline to be about 

$1.82 compared to the $1.98 where we are now. So there are hopeful signs and the market appears to be reacting to both forces of 

supply and demand and prices. 

The CHAIRMAN. Mr. Caruso, we know that the price per gallon 

is very important to the American consumer, but most of us have 

been talking about price per barrel. Can you convert those? I assume the prices come down relatively speaking in that regard also, 

and could you convert that so we will understand it? 

Mr. CARUSO. Sure. We now have crude oil prices at about $37.50 

per barrel which is the price that NYMEX opened at, approximately, this morning. We see that trending downwards by the end 

of the year to about $35. So we also see crude oil prices trending 

down, which also passes through to the gasoline price that I mentioned. 

Senator DORGAN. Mr. Chairman, on that point, could he tell us 

whether there is a direct relationship? I think that was the implication of your question. 

The CHAIRMAN. Yes. 

Mr. CARUSO. There is definitely a direct relationship between the 

crude oil going up, of course, early in the year, leading to gasoline 

6

* Figures 1-5 have been retained in the committee files. 

prices going up, among other things, and we see that trend now 

turning around and moving downward over the coming months. 

Senator DORGAN. The same percentages, barrel versus gallon? 

Mr. CARUSO. The crude oil price has probably contributed about 

30 cents per gallon to the increase in gasoline prices. So the increased margins have also gone up and contributed to about another 30 cents. So the combination of crude oil prices and the tightness in the refinery situation in this country have each contributed 

to the run-up that got us to $2.06, and we see them both contributing to the decline as we move over the coming weeks and 

months. 

The CHAIRMAN. Please proceed. 

Mr. CARUSO. A key factor has been inventories. They have been 

low during 2003, continuing into 2004. The hopeful signs from 

OPEC over recent weeks, that they will increase production in 

Saudi Arabia in particular, do lead us to believe that crude oil imports will remain strong and that crude imports will lead to higher 

inventories and higher runs of gasoline. Gasoline inventories have 

also been low, and we do see some improvement in the gasoline inventory situation as well. So these are the main factors that contribute to this decline in the price that EIA sees coming over the 

coming weeks. 

In conclusion, barring unexpected supply disruptions, EIA is cautiously optimistic that petroleum markets have turned the corner 

and that gasoline prices should continue to ease over the next 

weeks and months. Sustained levels of production of OPEC are 

making an important contribution to our strong imports and high 

refinery runs, allowing us to produce high levels of gasoline, as well 

as importing blending components for gasoline, as well as finished 

gasoline. So we are again optimistic that this decline will continue, 

and perhaps as important, that this high level of crude oil imports 

will allow our refiners to produce enough heating oil as we come 

out of the summer to prepare for the winter heating oil season. 

So with that, Mr. Chairman, I will conclude and be happy to answer questions at the appropriate time. 

[The prepared statement of Mr. Caruso follows:]

PREPARED STATEMENT OF GUY F. CARUSO, ADMINISTRATOR, ENERGY INFORMATION

ADMINISTRATION, DEPARTMENT OF ENERGY

Mr. Chairman and Members of the Committee, I appreciate the opportunity to appear before you today to discuss what drives crude oil supply, gasoline demand and 

the effects on prices. The Energy Information Administration (EIA) is the independent statistical and analytical agency within the Department of Energy. We are 

charged with providing objective, timely, and relevant data, analysis, and projections for the Department of Energy, other government agencies, the U.S. Congress, 

and the public. We do not take positions on policy issues, but we do produce data 

and analysis reports that are meant to help policymakers determine energy policy. 

Because the Department of Energy Organization Act gives EIA an element of independence with respect to the analyses that we publish, our views are strictly those 

of EIA. They should not be construed as representing those of the Department of 

Energy or the Administration. 

Prices for both crude oil and gasoline have risen steadily throughout 2004. At the 

end of May, the price of West Texas Intermediate (WTI) crude oil prices reached 

$42 per barrel, and national average retail price of regular gasoline was nearly 

$2.05 per gallon, more than 50-cents-per-gallon higher than prices at the beginning 

of this year or in May 2003 (Figure 1*). While gasoline prices in real, inflation-adVerDate 0ct 09 2002 09:38 Oct 20, 2004 Jkt 000000 PO 00000 Frm 00010 Fmt 6633 Sfmt 6621 P:\DOCS\96370.TXT SENE3 PsN: SCAN
7

justed terms remain well below their historical peak level (gasoline prices in 1981 

were closer to $3.00 per gallon in today’s dollars), there is little doubt that the recent rapid run-up in prices constitutes a drain on disposable income and a challenge 

to planning for many businesses and consumers. 

The very latest data show the beginnings of a price adjustment. Retail gasoline 

prices fell by three cents per gallon from May 24 through June 7. More significantly, 

wholesale gasoline prices fell by 23 cents per gallon from their peak on May 19 

through June 7, which should result in further reductions in retail prices in coming 

weeks. Crude oil prices were also down significantly ($2.89) over the same time period. 

So, what next? Let me begin by stating the obvious—any projection of oil markets 

is highly uncertain given the present situation of tight crude oil and product inventories at a time when recent attacks in Saudi Arabia and Iraq have heightened concerns regarding the potential for unexpected disruptions. That said, however, EIA 

believes that, absent major disruptions, oil and gasoline markets may be turning a 

corner. The June 2004 Short-term Energy Outlook (STEO), released last week, lowers last month’s projection for the average retail gasoline price in June by 3 cents 

per gallon, to just under 2.00 per gallon. Gasoline prices are expected to continue 

falling beyond June. 

The revised gasoline price outlook reflects our view of an improved balance between supply and demand in gasoline markets as well as a lowering of our expectations for crude oil prices. Our STEO scenario projects that WTI prices will ease to 

the vicinity of $35 by year-end—a level significantly higher than the $30 at the start 

of the year, but significantly below recent peak prices. We expect that the additional 

crude oil production, which producers with excess capacity have recently committed 

to provide, would allow for building of oil and product inventories towards normal 

levels. Higher inventories can play an important role in reducing future volatility 

by providing a necessary cushion that can be drawn upon in response to unexpected 

supply or demand developments. 

With that overview of the bottom line, the remainder of my testimony addresses 

the issues raised in your invitation—the driving forces behind crude oil supply and 

gasoline prices. 

CRUDE OIL MARKETS

Crude oil markets are where today’s situation began, and are a critical key to generating and sustaining price relief through the rest of this year and beyond. 

A combination of rising world oil demand growth and oil supply restraint by the 

Organization of Petroleum Exporting Countries (OPEC) has kept oil supplies tight, 

as reflected in low petroleum inventories worldwide since early last year. The price 

of West Texas Intermediate (WTI) crude oil rose by more than $12 per barrel from 

early December 2003 to reach over $42 at the beginning of June. Since then, the 

WTI price has dropped to $38.50 per barrel as of June 4 as signs of increasing crude 

and gasoline supplies are emerging. 

How did we get here? On the supply side, the Venezuelan strike at the end of 

2002 removed about 3 million barrels per day of supply from world markets for a 

short time, and production still remains less than pre-strike levels. Other OPEC 

countries were slow to respond to the loss of supply, and world inventories were 

drawn down precipitously during this time. We had further losses from strife in Nigeria and the Iraq War as well. While OPEC increased production in 2003 and Venezuela and Iraq slowly recovered, the supply increases were not enough to allow 

world inventories to return to normal levels, given strong demand. 

As world economies began recovering from the earlier downturn, world demand 

in 2003 grew about 1.3 million barrels per day, compared to the depressed 0.2 million barrel per day growth seen in 2002. This year, world demand is expected to 

increase 2.1 million barrels per day, with the U.S. and China making up half of that 

increase. Non-OPEC supply is expected to increase only about 1.2 million barrels 

per day, indicating OPEC must increase production at least 0.9 million barrels per 

day to just stay even and not allow for any inventory recovery. 

World petroleum commercial inventories, which reflect the balance between production and demand and thus act as a good barometer of price pressure, have been 

at or below the bottom end of the normal range for most of 2003 and 2004 to date. 

The United States has followed world markets in this regard. For most of 2004, U.S. 

total petroleum inventories have been at the bottom of the normal range, at or 

below 2000 levels (Figure 2). With WTI prices significantly above those experienced 

during the 1998-2002 period, and above OPEC’s stated target price band for half 

of 2003 and all of 2004 to date, the prevailing view has been that prices were bound 

to fall. This view that future prices will be lower (referred to as backwardation in 

8

the futures market) has provided a disincentive for refiners to hold any more crude 

oil in storage than was absolutely necessary. 

Fundamentals may not explain all of the current oil price. This year, concerns 

such as limited excess crude oil production capability, instability in the Middle East, 

and less available excess refining capacity than in the past may be contributing to 

higher prices. For example, if an abundance of excess crude oil production capacity 

were available, the level of inventories would be less critical, as new supply could 

be brought online quickly as needed. And with nearly all available excess capacity 

located in Saudi Arabia, markets are especially sensitive to unrest in that country. 

Still, fundamentals imply that extra crude oil production would both reduce price 

and help to replenish inventories, thereby creating a cushion to help withstand unexpected supply problems and thus reduce risk premiums that may be in the market. 

GASOLINE MARKETS

When global crude markets tighten, product markets also tighten and prices increase. Between the most recent low point on December 1, 2003 and the peak spot 

gasoline price on May 19, 2004, the average spot gasoline price rose by 68 cents per 

gallon. Over the same time period, crude oil prices increased about 28 cents per gallon. .This implies that 40 cents per gallon of the increase in spot prices was related 

to developments in gasoline markets. Some of the increase reflects seasonal influences. Over 2000 through 2003, spot margins increased by an average of 15 cents 

per gallon between December and May, which leaves another 25 cents per gallon 

of the increase attributed to the especially tight gasoline market experienced this 

year. 

As with crude oil inventories, gasoline inventories have been low this year (Figures 3 & 4), both due to strong demand and tight supply relative to demand. Gasoline demand January through May has grown about 2.8 % over the same period last 

year. Some of that strength reflects relatively low first half demand in 2003 due 

both to weak economic growth and bad weather that likely interfered with driving. 

Despite high prices, growth in vehicle miles traveled continued to push gasoline demand higher. 

While over 90 percent of U.S. gasoline is produced domestically, gasoline imports 

play an important role in meeting demand. Although demand is higher this year, 

imports are lower so far, with total gasoline imports averaging 830 thousand barrels 

per day compared to 874 thousand barrels per day last year. Although U.S. gasoline 

sulfur content was reduced this year under the Tier 2/Gasoline Sulfur regulations, 

the reduction in imports are likely due more to world market conditions than U.S. 

requirements for higher-valued cleaner products. With high world demand and competition for gasoline driving up both prices and freight rates, imports would be less 

economic even if our sulfur requirements had remained unchanged. We are seeing 

less imports from regions like Latin America where many refineries cannot produce 

our low sulfur gasoline, while imports increased from regions like Western Europe, 

which have similar sulfur specifications to those in the U.S. This has occurred even 

though European inventories are also low, and implies extra premiums must be 

paid to attract those extra volumes. 

Through May 28, U.S. gasoline production has averaged 8.53 million barrels per 

day in 2004, an increase of 3.4 percent over the same period last year. As we move 

into the summer driving season, refineries have emerged from their spring maintenance programs and are increasing gasoline production towards maximum levels, 

averaging about 8.9 million barrels per day in May. 

With strong demand relative to supply keeping inventories low, the. gasoline 

crack spread (the difference between wholesale spot gasoline and crude oil prices) 

has increased, as has been the case in previous tight spring gasoline markets such 

as occurred in 2000, 2001, and 2003. But this year, the tight balance and high margin situation has been sustained rather than occurring in a shorter price spike, and 

the increase is nationwide, with regional supply problems playing less of a role than 

they have in recent years. Spring maintenance, which prevents refiners from running at maximum utilization, and higher than expected demand worked to keep gasoline markets tight. Gasoline inventories have been low and showed no signs of recovery to more normal levels. 

Crude oil market conditions and strong demand have both played key roles in 

keeping gasoline inventories low. The tightening crude oil market created incentives 

for refiners everywhere to buy only crude that is needed immediately and to draw 

down their product inventories. When markets tighten, the current prices and current crack spread widens, but expectations for prices in future months are typically 

lower. While a large current crack spread works to encourage refiners to produce 

9

as much product as possible for immediate sale, the expectation for future declining 

prices discourages inventory accumulation. Strong worldwide demand also has made 

it difficult for refiners to generate extra gasoline inventory that could enter the 

international market. 

With U.S. gasoline demand increasing for the summer, domestic market tightness 

will only ease with a supply surge to both add to inventories and relieve near-term 

prices. Even with domestic refining already operating at high capacity utilization 

(95 per cent in May), refiners may ultimately be able to produce more gasoline, assuming minimal refinery problems. Imports under any scenario are also an important source of extra volume. 

Crude oil markets are a critical key to turning this cycle back down. With extra 

crude oil, recently occurring underlying backwardation eases, and refiners have incentives to produce more product than that needed for the near term, which could 

result in inventories moving closer to normal levels. With world demand being lower 

during the summer than the winter, refiners outside the U.S. can produce such 

product. Until recently, signs of any increases in supply (crude oil or gasoline) had 

not occurred. 

LOOKING AHEAD

As noted at the start of my testimony, recent events show some promise of lower 

prices ahead. Saudi Arabia and several other suppliers have pledged significant increases in crude oil production, which is critical to breaking the upward price pressure. Increases in crude oil production would help put downward pressure on crude 

oil prices, which would help lower gasoline prices. Crude oil imports reported two 

weeks ago averaged 10.7 million barrels per day, the second largest weekly amount 

ever, with most of the increase in short-haul crude oil, notably from Mexico and Nigeria (the latter a provider of high quality crude oil). Last week, import volumes 

remained strong at 10.5 million barrels per day. These imports have helped to increase commercial crude oil inventories, even above the usual increase seen at this 

time of year. As of June 7, commercial crude oil inventories stood at 302.1 million 

barrels, just above the lower end of the normal range. While inventories are still 

relatively low, having them within the normal range, even if just barely, is an improvement over recent experience. Increases in imports from longer-haul crude oil 

import sources, such as Saudi Arabia, are more likely to appear next month, which 

would help offset seasonal downward pressure on commercial crude oil inventories, 

thus relieving some of the upward price pressure experienced over the last several 

months. 

The U.S. gasoline market may also be beginning to reflect a shift from this high 

price cycle. Beyond the 3 cent fall in retail prices over the last two weeks, average 

spot gasoline prices have been falling for a couple of weeks now, dropping a total 

of 23 cents per gallon from May 19 through June 7. Since it takes about 1 to 2 

weeks for changes in spot prices to begin being reflected in retail prices, last week’s 

drop in retail prices may indicate the start of a decline in retail prices over the next 

couple of weeks. 

Finally, U.S. gasoline inventories have risen, increasing by another 3.4 million 

barrels between May 21 and June 4. With imports averaging about 1 million barrels 

per day and production, including at gasoline blenders, averaging 8.9 million barrels 

per day in May, there continues to be enough supply to not only meet demand, but 

add to inventories as well. It should be noted that gasoline inventories typically increase in May, and that they still are significantly below the 5-year average. Again, 

the higher inventories are, the more flexibility is inherent in the system, thus relieving some price pressure. 

Consumers should not expect retail prices to fall back to prices seen before the 

recent increases. While prices could drop below $2 per gallon over the next couple 

of weeks, and may continue to fall thereafter, present market conditions do not provide a reason to expect prices to return to their level at the start of this year anytime soon. Furthermore, with low inventories, regions in the United States are still 

subject to potential price spikes this summer. 

EIA’s latest Short Term Energy Outlook (STEO) is projecting crude oil prices to 

decline from the $40.30 average in May, perhaps dropping as much as $4.50 per 

barrel by the end of the summer (Figure 5). For the second half of 2004, gasoline 

demand growth is expected to slow from 2.8 percent growth in the first half to about 

1.2 percent over last year. With improvement in underlying fundamentals for both 

crude oil and gasoline, retail gasoline prices should decline. While we expect the 

June average price to stay near $2.00, average prices could drop as much as 5-10 

cents per gallon as early as July. These projections assume no further supply disruptions either in crude oil or gasoline markets. 

10

CONCERNS OVER ABILITY OF PETROLEUM MARKETS TO REBALANCE

Several concerns about the world’s ability to rebalance petroleum markets have 

been raised in the media and elsewhere related to the quality of incremental OPEC 

crude, refinery constraints, timing of supply, and the availability of spare crude oil 

production capacity. The remaining discussion describes why EIA believes these concerns will not stand in the way of market rebalancing and easing of prices. 

Regarding OPEC production, additional crude oil would contribute to lower prices, 

particularly if the OPEC members maximize the incremental supply of light crude 

and provide terms that will enable potential buyers to commit to the purchase of 

more oil without undue risk. 

On the issue of crude quality, concerns have been raised that additional supply 

of heavier, more sour crude oil (meaning crude oil with a higher sulfur content) may 

be more than the market needs right now in the heart of the U.S. gasoline season. 

The reasoning is that since this is not the ideal crude sought by the market, it is 

of little use. Not all refiners need high-quality crude oil, and while heavy, high sulfur crude oil is less desirable, added supplies can free up available high-quality 

crude oil for those who need it the most. In short, extra crude oil of any grade that 

is priced to sell will find buyers and help to alleviate current market tightness. 

On the issue of refining capacity, concerns were mentioned that with U.S. refinery 

capacity utilization at 95-96 percent in recent weeks, there is little room for significant increases in gasoline production. This is inaccurate. There have been times in 

the past when weekly refinery utilization has even exceeded nameplate capacity. An 

increase in the utilization rate of 2 percent, which is possible when refineries are 

not experiencing unusual unplanned outages, equates to an increase in refinery production of about 340,000 barrels per day, and if half of that were gasoline, 170,000 

barrels per day of additional gasoline would be available. This represents more than 

5 million barrels in a month, a sizable increase in such a tight market. While such 

an increase might not remedy a particular regional problem that may occur, a boost 

of this size could offset the normal stock draw in July and August. Such a scenario 

is possible depending on how key OPEC producers implement their announcements 

to add more oil to the market and on whether other unexpected refining problems 

or supply disruptions can be avoided. 

On the issue of rebalancing the U.S. petroleum market, extra crude oil should 

help even if inventories do not build substantially. At a time of year when crude 

oil inventories typically fall, if imports increase enough to keep inventories above 

290 million barrels, they would be near the middle of the average range by as early 

as September. If crude oil imports average 10.3-10.5 million barrels per day during 

July and August, it would minimize the usual crude draw during these months 

while helping to rebuild all refined product inventories. While today’s markets and 

news stories are focusing on gasoline, inventories across all petroleum products, as 

well as crude oil need to improve to insure more flexibility in the system, thus reducing price pressures. Higher production now would also help to reduce the prospects for volatility in heating fuel markets this winter. 

Concerns have also been raised on the ability of Middle East crude oil, which is 

40 days away, to help ease U.S. markets. Oil produced in early June can begin to 

start reaching U.S. refineries by mid to late July, provided refiners find the terms 

attractive. Furthermore, Middle Eastern oil could be used in refineries closer to the 

Middle East, such as those in Europe, freeing up Atlantic Basin crude oil for U.S. 

refineries. And, of course, knowing that more crude oil was on the way, refiners 

would be more willing to draw from their limited crude oil and gasoline inventories 

in the interim, thus improving the supply situation even before the crude oil arrives. 

Finally, it has been suggested that any increase in global crude oil production 

would reduce the limited global spare production capacity that already exists. Using 

capacity that would otherwise be idle over the next several months provides the 

market with additional supply now, and does not lessen the future capacity. Also, 

Saudi Arabia will still have considerable additional capacity. If the Persian Gulf 

War from 1990-91 is any indication, Saudi Arabia may actually be able to produce 

more than what common wisdom suggests, at least on a surge capacity basis. Regardless, even if spare production capacity were reduced, strategic inventories in 

consuming countries would still be available should a real supply emergency occur. 

CONCLUSION

In conclusion, subject to the important caveat that no significant unanticipated 

disruptions occur, EIA is cautiously optimistic that petroleum markets may be beginning to turn the corner and that gasoline prices should continue to ease. Since 

the industry will likely focus on gasoline at the expense of distillate this summer, 

we may enter the winter season this year with low heating oil inventories, increasVerDate 0ct 09 2002 09:38 Oct 20, 2004 Jkt 000000 PO 00000 Frm 00014 Fmt 6633 Sfmt 6621 P:\DOCS\96370.TXT SENE3 PsN: SCAN
11

ing the potential for high heating fuel bills for consumers this winter. Sustained 

high levels of OPEC crude oil production, making continued high U.S. imports of 

both crude oil and products possible, would be helpful both in addressing the current situation in gasoline markets and ameliorating prospects for tight heating oil 

supplies during the upcoming winter. 

Thank you for the opportunity to testify before the committee today.

The CHAIRMAN. Could I clarify? This is not a substantive question. When you say that you are the Energy Information Administration, and you are the Administrator of that, you work for the 

Federal Government. You fill a niche that was created by Congress. 

Is that correct? 

Mr. CARUSO. That is correct, Senator. 

The CHAIRMAN. Now let us go to you, please. 

STATEMENT OF RED CAVANEY, PRESIDENT AND CEO, 

AMERICAN PETROLEUM INSTITUTE 

Mr. CAVANEY. Thank you, Mr. Chairman, members of the committee. I am pleased to present the U.S. oil and natural gas industry’s views on gasoline prices. We welcome your interest and hope 

that it encourages policies that address the root causes behind 

these recent price spikes. 

Higher crude oil prices, as you have just heard, set on international markets, reflect rapidly growing world demand and have 

driven most of the recent increases. The EIA says economic expansion is fueling the biggest increase in world oil demand in 16 years. 

Supplies have been insufficient to keep prices moderated due to 

several factors, including earlier OPEC production cuts, as well as 

domestic policies that prevent development of promising U.S. oil 

fields. 

For years, government and private energy analysts have predicted substantial increases in the demand for crude oil. EIA estimated that in 2020, it would take new oil production capacity equal 

to eight times Saudi Arabia’s current output to replace lost supply 

from declining fields and to satisfy new growth in world demand. 

The other principal contributor to the rise in gasoline prices is 

the tightness in our Nation’s gasoline markets. With our economy 

improving, Americans are consuming markedly more gasoline. 

While U.S. refiners are producing record amounts, strong demand 

and a reduction in gasoline imports have tightened supply, putting 

upward pressure on prices. Less gasoline has been imported due, 

at least in part, to the roll out of low sulfur gasoline and much 

broader use of ethanol. With refineries running flat out, gasoline 

inventories have remained below average. 

Higher gasoline prices have improved profits, but average profit 

margins were below those of other industries in the first quarter, 

as reported last month in Business Week magazine. The U.S. oil 

and gas industry earned 6.9 cents on the dollar. The all-industry 

average was 7.5 cents. In percentage terms, our profits are small. 

In dollars, they are large due to the massive scale needed to compete in the world’s largest industry. A new competitive scale refinery will cost between $2 billion and $3 billion, and over the last 

decade, companies have spent almost $5 billion per year on environmental compliance on refinery and fuels regulations alone. 

While significantly improving air quality, these investments help 

explain the low percentage return on refinery investment, 5.5 perVerDate 0ct 09 2002 09:38 Oct 20, 2004 Jkt 000000 PO 00000 Frm 00015 Fmt 6633 Sfmt 6602 P:\DOCS\96370.TXT SENE3 PsN: SCAN
12

cent over the same period, an amount that is less than half the 

12.7 percent average return for the Standard & Poor’s industrials. 

Today’s oil and gas industry is highly competitive. Some suggest 

past mergers are responsible for higher prices. The data do not 

support such claims. There are almost 60 refining companies in the 

United States, hundreds of wholesale and marketing companies, 

and more than 165,000 retail outlets. The biggest refiner accounts 

for only about 13 percent of the Nation’s refining capacity and the 

large integrated companies own only about 10 percent of all the retail outlets. 

The Federal Trade Commission thoroughly evaluates every one 

of our industry’s merger proposals, holds those mergers to the highest standards, and subjects the industry to a higher level of ongoing scrutiny. For decades, investigations by a number of sources at 

the Federal and State level of price spikes have consistently exonerated the industry of any wrongdoing. 

We do not know what prices will be in the future. We do know 

that we as an industry will continue working hard to increase supplies of crude oil and gasoline and that better energy policy is essential in order for us to meet that goal. We need action on many 

fronts: more conventional energy and supplies, expanded alternatives, and greater energy efficiency. To have a positive impact, 

energy legislation needs to be comprehensive, not piecemeal, and it 

needs to be enacted in this Congress given the long-term nature of 

investment in the industry. 

Companies and virtually all energy analysts realize that oil and 

natural gas will continue to provide the world with most of its energy for many more decades. EIA projects that the United States 

still expects to consume 44 percent more oil and 38 percent more 

natural gas in 2025 than in the year 2002. 

Consumers are frustrated by today’s higher prices. They rely on 

gasoline to go to work, to school, for errands, and vacations, and 

to realize an improved quality of life. Taking into account inflation, 

prices are not the highest they have ever been, but they are far 

higher than the nonsustainable lows of 1998 and 1999. 

Oil and gas is a long-term, massive scale, large investment business. Few tools are available for providing substantial short-term 

relief for gasoline consumers. The best way to help is to subscribe 

to the ‘‘do no harm’’ rule and work together, government and industry. For the longer term, we do have workable options and we look 

forward to working with Congress and all interested stakeholders 

in moving to implement these ideas. 

Thank you, Mr. Chairman. 

[The prepared statement of Mr. Cavaney follows:]

PREPARED STATEMENT OF RED CAVANEY, PRESIDENT AND CEO,

AMERICAN PETROLEUM INSTITUTE

I’m pleased to present the U.S. oil and natural gas industry’s views on gasoline 

prices. We welcome your interest and hope it encourages policies that address the 

root causes behind these most recent spikes. 

Higher crude oil prices, set on international markets, have driven most of the increases. When prices crested above $42 a barrel not too long ago, refiners were paying more than $1.00 for each gallon of crude oil used to make a gallon of gasoline. 

Higher crude oil prices reflect rapidly growing world demand relative to slower 

growing supply. 

13

The International Energy Agency (EIA) says economic expansion is fueling the 

biggest increase in world oil demand in 16 years. In the U.S., oil demand is up 2.8 

percent over a year ago. International demand is projected to be up 2.9 percent this 

year, with a 23-percent year-on year increase in China during the second quarter. 

China’s crude oil imports grew 36 percent last year, making China the second largest importer of crude oil in the world. There has also been strong demand growth 

in India and other Asian countries. 

World supplies have been insufficient to keep prices moderate because of several 

factors, including OPEC production cuts, the aftermath of strikes and political turmoil in Venezuela, troubles in Nigeria, and domestic policies that prevent development of promising U.S. oil fields. 

Based on last week’s gasoline prices, the cost of crude oil to refiners accounted 

for about 43 percent of the price at the pump. Taxes accounted for 21 percent. The 

remaining 36 percent represented the cost of refining, marketing and distribution 

as well as profits. 

Today’s tight crude market—and the resulting higher crude costs—couldn’t be 

predicted although we’ve known that demand was rising. For years, government and 

private energy analysts have talked about this. A few years ago, the U.S. Energy 

Information Administration (EIA) estimated that in 2020 it would take new oil production capacity equal to eight times Saudi Arabia’s current output to replace lost 

supply from declining fields and to satisfy new growth in world demand. We’ve 

known we would need to bring substantial new production on line, but until the last 

six months, weaker economic conditions, which restrained growth in demand for 

crude oil, has masked the problem we’ve been facing. 

The other principal contributor to the rise in gasoline prices is tightness in our 

nation’s gasoline markets. With our economy improving, Americans are consuming 

markedly more gasoline, up three percent compared with last year. While U.S. refiners are producing record amounts, strong demand and a reduction in gasoline imports have tightened supply, putting upward pressure on prices. Less gasoline has 

been imported, due—at least in part—to new low sulfur gasoline requirements and 

much broader use of ethanol. Even with refineries running flat out, strong demand 

has kept inventories below average. Refiners have been operating at an average utilization rate of about 95 percent over the past few months. To put this in perspective, peak utilization rates for other manufacturers average about 82 percent. 

Regulations targeting industry have made it hard for refiners to expand capacity 

and for distributors to move supplies around when localized refinery and distribution problems occur. Both have contributed to tighter markets and higher gasoline 

prices. Four years ago, the National Petroleum Council (NPC), an industry advisory 

group to the U.S. Department of Energy, noted that the industry would be ‘‘significantly challenged to meet the increasing domestic light petroleum product demand 

with the substantial changes in fuel quality specifications recently promulgated and 

currently being considered.’’ Some of these changes are now being implemented including gasoline sulfur reductions and the removal of MTBE from part of the gasoline pool. 

Nationwide, the amount of sulfur in gasoline was reduced from 300 parts per million (ppm) to a corporate average of 120 ppm effective January 1, 2004, giving refiners an additional challenge in both the manufacture and distribution of fuel. Equally 

significant, California, New York and Connecticut bans on use of MTBE went into 

effect January 1. This is a major change affecting one-sixth of the nation’s gasoline 

market. Where MTBE was used as an oxygenate in reformulated gasoline (RFG), 

it accounted for as much as 11 percent of RFG supply at its peak, and substitution 

of ethanol for MTBE does not replace all of the volume lost by removing MTBE. 

(Ethanol’s properties generally cause it to replace only about 50 percent of the volume lost when MTBE is removed.) The missing volume must be supplied by additional gasoline or gasoline blendstocks. 

Many of the policy adjustments recommended by the NPC to mitigate the impacts 

on markets of these and other fuel changes have not been not adopted by our government. 

Higher gasoline prices have improved profits, but average profit margins were 

below those of other industries in the first quarter, as reported last month in Business Week magazine. The U.S. oil-and gas industry earned 6.9 cents on the dollar. 

The all-industry average was 7.5 cents. Our profits in percentages are small. In dollars, they are large due to the massive scale needed to compete in the world’s largest industry. A new competitive-scale refinery will cost $2 to $3 billion. And, over 

the last decade, companies spent about $5 billion per year on environmental compliance with refinery and fuels regulations. While significantly improving air quality, 

these investments also help explain the low percentage return on refinery investment—5.5 percent—over that same period: an amount less than half the average 

14

return—12.7 percent—for the S&P industrials. Yes, our revenues can be in the billions, but so, too, are our costs. 

Today’s oil and gas industry is highly competitive. Some suggest past mergers are 

responsible for higher prices. The data do not support such claims. In fact, companies have become more efficient and continue to fiercely compete. There are almost 

60 refining companies in the U.S., hundreds of wholesale and marketing companies, 

and more than 165,000 retail outlets. The biggest refiner accounts for only about 

13 percent of the nation’s total refining capacity; and the large, integrated companies own and operate only about 10 percent of the retail outlets. The Federal Trade 

Commission (FTC) thoroughly evaluates every one of our merger proposals, holds 

those mergers to the highest standards, and subjects the industry to a higher level 

of ongoing scrutiny. For decades, investigations of price spikes have consistently exonerated the industry of any wrongdoing. 

A recent U.S. General Accounting Office (GAO) report raised the issue of the impact of mergers. It concluded that they raised average wholesale gasoline prices by 

one-half cent per gallon. However, even this modest increase deserves serious questioning. FTC chairman Timothy J. Muris has strongly criticized the reliability of the 

GAO report: ‘‘In 30 years as an antitrust enforcer, academic, and consultant on antitrust issues, I have rarely seen a report so fundamentally flawed as the GAO study 

of several oil mergers that the Federal Trade Commission investigated under my 

predecessor, Robert Pitofsky. As the Commission unanimously said in its August 

2003 letter to the GAO, this report has major methodological mistakes that make 

its quantitative analyses wholly unreliable; relies on critical factual assumptions 

that are both unstated and unjustified; and presents conclusions that lack any 

quantitative foundation. As a result, the report does not meet GAO’s own high 

standards of ,accountability, integrity, and reliability’ that one expects from its reports and publications.’’

Other evidence further undermines the GAO’s conclusions. For example, a comparison of U.S. Energy Information Administration price data for the six years before the mergers, 1990-1996, and a similar period after, 1997-2003, shows that retail 

prices were on average five cents per gallon less in the latter period. A price breakdown shows that four cents of the decline resulted from lower costs to manufacture, 

market and distribute gasoline. 

Critics of the mergers sometimes suggest that the industry is able to manipulate 

prices because it has become much more concentrated, with a handful of companies 

controlling most of the market. This is untrue. According to data compiled by the 

U.S. Department of Commerce and by Public Citizen, in 2003 the four largest U.S. 

refining companies controlled a little more than 40 percent of the nation’s refining 

capacity. In contrast, the top four companies in the auto manufacturing, brewing, 

tobacco, floor coverings and breakfast cereals industries controlled between 80 percent and 90 percent of the market. 

We don’t know what prices will do in the future. We do know we will continue 

working hard to increase supplies of crude oil and gasoline. High prices are strong 

incentive, and companies value their reputations as reliable providers of petroleum 

products. Today, we have fewer than half the refineries and 90 percent of the capacity of the early 1980s—the last period of extended price spikes. As for building new 

refineries—the last was in 1976—investors will need to believe the return on investment will be adequate and that refiners will be able to obtain the necessary permits. 

For years, getting permission to build a new refinery in the United States has been 

extremely difficult, if not impossible. 

Over the long run, better energy policy is essential. Enacting the comprehensive 

energy bill conference report to H.R. 6 is an important first step to addressing obstacles contributing to today’s higher gasoline prices. Improved land access policies, adjustments in refinery tax rules, and reform of new source review regulations are examples of other important changes needed to help ease constraints on crude oil and 

gasoline supplies. Such changes could also benefit other energy markets. When 

crude oil prices are high, some fuel switching occurs, increasing demand—and 

prices—for natural gas and coal. 

We need action on many fronts: more conventional energy supplies, expanded alternatives and greater energy efficiency. To have an impact, energy legislation needs 

to be fully comprehensive—not piecemeal. In addition to oil and gas, our companies 

already have a large presence in alternatives—hydrogen, fuel cell technology and 

solar, to name a few. And, we take a back seat to no one in increasing energy efficiency. 

However, companies, and virtually all energy analysts, realize that oil and natural gas will continue to provide the world with most of its energy for many more 

decades. EIA projects that consumption of renewables in the U.S. will rise at a far 

faster rate than consumption of oil and gas. Nevertheless, the U.S. still expects to 

15

consume 44 percent more oil and 38 percent more natural gas in 2025 than in 2002. 

That’s about 3.2 billion barrels more oil on top of the 7.3 billion we’ll consume this 

year. 

People are frustrated by today’s higher prices. They rely on gasoline to go to work, 

to school, for errands and vacations, and to realize an improved quality of life. Taking into account inflation, prices aren’t the highest they’ve ever been, but they are 

far higher than the nonsustainable lows of 1998 and 1999. 

Oil and gas is a long-term, massive scale, large investment business. Few tools 

are available for providing substantial short-term relief for gasoline consumers. The 

best way to help is to subscribe to the ‘‘do no harm’’ rule and work together—government and industry. For the long-term, we have workable options, and we look 

forward to working with Congress and all interested stakeholders in moving to implementation.

The CHAIRMAN. Thank you very much. 

I received a note here. I thought my opening remarks were quite 

clear, but maybe they were not, that we were going to take the witnesses and then ask questions. I did not think it was take a witness and then proceed. I thought it was all of them. 

Let us proceed with you, Mr. Kilduff. 

STATEMENT OF JOHN P. KILDUFF, SENIOR VICE PRESIDENT, 

ENERGY RISK MANAGEMENT GROUP, FIMAT USA, INC. 

Mr. KILDUFF. Thank you, Mr. Chairman, as well and members 

of the committee. It is a privilege to be here. 

The recent record high prices for crude oil have captured the attention of consuming and producing countries around the world, 

and both constituencies are justly concerned about this fact. Consuming countries face a considerable drag on economic growth, and 

producing countries face the potential for reduced demand for their 

product and increased competition in the world market as new production is brought on line and then stays on line to compete for 

market share. 

There has been some debate over the economic impact of high 

crude oil prices, but as a senior Chinese government official whose 

country is terribly reliant on imported crude oil said, security of energy supply is a dilemma that must be addressed or we risk jeopardizing economic growth. If there is an energy crisis in the future, 

it will be an oil crisis. 

The vulnerability of crude oil supplies to the United States and 

the world is the central theme of my testimony. Based on recent 

data, nearly 50 percent of the crude oil imported into the United 

States is sourced from countries that have experienced civil or 

labor strife, acts of terrorism or war in the past year and a half. 

These countries include Saudi Arabia, Venezuela, Nigeria, and 

Iraq. Globally 20 percent of all crude supplies are sourced from 

these and other trouble spots. This adds up to a tremendous vulnerability for the United States and its economy. 

Prices right now are very much reflecting these future 

vulnerabilities rather than actual supply shortages. The continued 

attacks on Iraq’s oil infrastructure and, more importantly, terrorist 

attacks in Saudi Arabia have put the market on notice that crude 

oil is squarely in the cross hairs, adding as much as $12 to the 

benchmark price of crude oil in the United States. 

The high crude oil prices have, however, evoked a response from 

OPEC and Saudi Arabia in particular. Saudi Arabia rose to meet 

the challenge of an oil price it saw as deleterious to its own interVerDate 0ct 09 2002 09:38 Oct 20, 2004 Jkt 000000 PO 00000 Frm 00019 Fmt 6633 Sfmt 6602 P:\DOCS\96370.TXT SENE3 PsN: SCAN
16

ests. It has raised production by nearly 1 million barrels a day recently from 8 million to 9 million barrels. Some have doubted the 

ability of Saudi Arabia to continue to produce at this higher level. 

They should not. Saudi production approached 9 million barrels 

just last year during the first 3 months of the war in Iraq. 

Crude oil prices have risen steadily actually since November 

2001, as the country and global economies recovered from the attacks of September 11. During this period, China has experienced 

double-digit demand growth, along with strong demand from other 

emerging economies such as India and Brazil. 

The steady price rise was helped along by a litany of supply concerns within producing countries. In addition, OPEC sought to cut 

production several times in an effort to avoid what it viewed as a 

potential over-supply of crude oil. 

Of all the factors that determine crude oil prices, none is more 

inversely correlative than the prices and the level of U.S. crude oil 

inventories. Back in January of this year, these inventories hit a 

30-year low and record prices ensued. While inventories have since 

rebounded to levels consistent with historical norms, the previously 

mentioned security concerns and the failure of producing countries 

to strongly commit to ensuring adequate supplies have, until just 

recently, trumped this fundamental factor. 

The energy markets have also attracted the attention of the investment community overall. It appears that oil is increasingly 

serving as a proxy for inflation, terrorism, and other concerns in 

a role traditionally filled by gold or other investments. 

As consumers at the pump are very much aware, very expensive 

crude oil is being refined into very expensive gasoline, and gasoline 

prices have been affected to an even greater degree by two other 

factors: first, demand that has not only increased over the years, 

but is now sustained throughout the year. The so-called driving 

season is really almost no more. 

The decision by two of the largest States, in addition to mandated change in their gasoline formulation, resulted in an isolation 

of supplies on the east and west coasts from neighboring States 

and really the rest of the country. Specifically, New York, along 

with Connecticut and California, mandated that the additive 

MTBE no longer be used as the oxygenation component in their 

gasoline. In the case of California, there it has for some time been 

an isolated State from neighboring States due to its more rigorous 

pollution control regimen, but the decision by New York and Connecticut especially roiled the gasoline market because it had the effect of cutting available supplies in New York Harbor in half, as 

New Jersey continued to allow MTBE. 

The situation is magnified and resonated across the country because New York Harbor is the delivery point for the NYMEX unleaded gasoline futures contract and is the seminal pricing point 

for gasoline nationally. This resulted in a concern for the potential 

of outright shortages of gasoline in the market, which manifested 

itself in record prices on the futures exchange and at the pump. 

Looking ahead overall, the best case scenario for consumers envisions demand growth that proves to be manageable, coupled with 

growing supplies from OPEC and promising increases in production from eastern Europe and western Africa. 

17

The worst case scenario, though, is not necessarily the flip of 

that scenario. We are only a supply disruption event away from 

even higher prices that we have just experienced, as capacity on all 

fronts is strained. 

And the worst, if you will allow me, of the worst case scenarios 

involves potential for regime change in Saudi Arabia or merely a 

successful attack on that country’s oil infrastructure. The power to 

control oil prices has never been so concentrated nor dependent on 

a single country. 

Thank you. 

[The prepared statement of Mr. Kilduff follows:]

PREPARED STATEMENT OF JOHN P. KILDUFF, SENIOR VICE PRESIDENT, ENERGY RISK

MANAGEMENT GROUP, FIMAT USA, INC. 

WHAT DRIVES CRUDE OIL AND GASOLINE PRICES?

John P. Kilduff is Senior Vice President of the Energy Risk Management Group 

of Fimat USA, Inc. The opinions expressed in this testimony are those of the author 

and do not necessarily reflect the views of Fimat USA, Inc. 

The recent record high prices for crude oil and gasoline have captured the attention of consumers and producers. Both constituencies are justly concerned: consumers face significantly increased expenditures on virtually all aspects of their 

lives and businesses at a time when the global economy seems to be experiencing 

a renewed robustness. Producers are also concerned that prices have risen too high 

as well, threatening their future prospects. A reduction in economic activity will reduce demand for their product. In addition, high prices attract further exploration 

and production, while increasing competition and reducing their ability to maintain 

a level of control over crude oil production and prices. 

There are several key factors driving crude oil and gasoline prices:

1. The basic relationship between supply and demand is the principal determinant 

of the price of these globally traded commodities. While that premise is most basic, 

the factors that determine the sufficiency and perception of both are more complex. 

2. Currently, the greatest factor determining prices is the perceived uncertainty 

or vulnerability of future crude oil and gasoline supplies. 

3. This sentiment is driven by the fact that approximately 50 percent of the crude 

oil imported into the United States and one-fifth of the global supply comes from 

countries that have experienced instability, civil strife, terrorist attacks, or war. 

4. Demand for crude oil has grown consistently over the past decade. Global consumption is currently running in excess of 80 million barrels per day, up approximately seven percent from 2000 and roughly 17 percent since 1995. The greatest 

rate of increase of late has come mainly from emerging economies in Asia, especially 

China and India. 

5. The recent high prices have evoked a response from the Organization of Petroleum Exporting Countries (‘‘OPEC’’), with Saudi Arabia taking the lead by providing 

the market with upwards of one million barrels per day of additional crude oil. 

6. Historically, there has been a highly inverse correlation between the level of 

crude oil held in commercial inventories in the United States and price. The United 

States has experienced historically low crude oil prices when inventories have been 

above average (and high prices when inventories have been lower). Domestic crude 

oil inventories hit a 28-year low in January and record crude oil prices ensued. 

7. The transparency provided by the energy markets has attracted the attention 

of speculative interests, who appear to view oil as a safe haven or proxy for terrorism concerns in the way gold used to be a haven in prior eras of uncertainty or 

rising inflation. 

8. Crude oil is the principal manufacturing component in gasoline production. 

Every dollar in the price of crude oil translates directly into 2.4 cents per gallon 

of gasoline on the breakdown of the barrel. 

9. The decision by New York and Connecticut to proscribe the use of the gasoline 

additive methyl tertiary butyl ether (‘‘MTBE’’), as part of their clean-air rule attainment regimen, and the decision by New Jersey and other east coast states to continue its use, roiled the gasoline market, as supplies became bifurcated in New York 

Harbor, which is the principal trading point for gasoline nationally. California’s decision to eliminate MTBE also served to further isolate its supply from neighboring 

18

* NOTE: All charts have been retained in the committee files. 

states which has resulted in extreme price spikes on even the slightest reported refining problems, due to the feared impact on available supplies. 

10. Gasoline demand has grown steadily, straining refiners’ abilities to manufacture sufficient supplies. 

11. The refining industry has contracted over the past 15 years because of a consistently poor operating environment. Besides the challenging economics, permitting 

issues appear to be formidable and make it unlikely any new refineries will be built 

in the United States in the future. 

The chart, above (and below)*, shows the relationship between commercial crude 

oil inventory levels and the weekly closing price of West Texas Intermediate crude 

oil as reported by the New York Mercantile Exchange (‘‘NYMEX’’). Low crude oil 

inventories in 1996-1997, which occurred because of the advent of more efficient inventory management processes by major oil companies, coincided with a significant 

rise in crude oil prices. Prices fell considerably during 1998 as inventories built up, 

due, in part, to a lack of production discipline with OPEC that led to an over supply 

of crude oil globally. 

In 2000, prices rose throughout the year as inventories fell. Renewed compliance 

by OPEC with production restraints, as well as fears within the market that producers lacked the capacity to meet demand, fostered the rally. Producers, however, 

met the challenge and prices responded. The terrorist attacks of September 11, 2001 

furthered the price decline, initially, as concerns for the global economy predominated market sentiment. The build up to war in Iraq and falling crude oil inventories set the foundation for the current rally, which dates back to November of 

2001. Commercial inventories fell to their lowest level in 28 years in January 2004, 

as crude oil rose to its highest price level ever on the NYMEX. Since then, inventories have rebounded and we are now beginning to see prices ease, as this fundamental factor begins to overwhelm supply fears. 

SUPPLY VULNERABILITIES

Recently, many market observers, including myself, have characterized current 

crude oil prices as being comprised of a security premium, constituting as much as 

$15 per barrel. This is a function of various problems within a near plenary of oil 

producing countries. Based upon crude oil import data for December 2003, 52 percent of imports were sourced from countries that experienced either civil unrest, 

labor unrest, terrorism, or war within the past year. Of the five largest suppliers 

of crude oil to the United States: Canada, Saudi Arabia, Nigeria, Venezuela, and 

Iraq; only Canada is currently seen as a secure source of supply. 

Nigerian oil workers and the indigenous population engage in labor stoppages and 

other forms of protest against Western oil companies that operate in the country 

with some regularity. In effect halting, to varying degrees, the supply of oil. Nigerian oil, due to its chemical composition, is particularly well suited to the manufacturing of gasoline. As a result, these disruptions have an exaggerated effect on gasoline prices when they occur. 

In Venezuela, the ascendancy of Hugo Chavez as President has had one of the 

largest impacts of all on the global crude oil marketplace. At his direction, Venezuela renewed its commitment to OPEC production quotas. Mr. Chavez, however, 

faces considerable opposition within Venezuela—he was briefly ousted in a coup 

d’etat, but returned to office within three days. Venezuela’s state-owned oil company 

fired many of its workers after a strike in early 2003, which was undertaken to protest government policies. Venezuela’s output still has not returned to pre-strike levels. 

The war in Iraq was an extremely significant event in the oil market, due to its 

obvious importance as a major source of oil. Not very well known, however, was that 

Iraq was an important source of crude oil for the United States prior to the war. 

During the years before United States and British troops went into the country, 

Iraq, under the oil-for-food program, exported between 500,000 and one million barrels per day of oil to the United States, according to API import statistics. The recovery in Iraqi oil exports has been impressive, with almost two million barrels a 

day of production being generated by Iraq’s southern oil fields. Operations in the 

northern oil fields have been beset by attacks on the miles of exposed, highly vulnerable, pipelines. The northern oil assets represent upwards of 700,000 barrels per 

day of additional production that, if added to the current output, would rival prewar levels. 

The recent terrorist attacks in Saudi Arabia and the continuing attacks on oil infrastructure in Iraq are largely responsible for the extant security premium in crude 

19

oil prices. Historically, Saudi Arabia has been the stalwart in terms of being able 

to fill production gaps when they have occurred. The mere idea that the Kingdom 

may be the source of a supply disruption has caused available crude oil to become 

even more valuable in the face of such an uncertainty. 

DEMAND FACTOR

Increased energy consumption by China has been a leading factor in driving crude 

oil prices higher. China’s voracious appetite for raw materials has engendered a 

macro commodity price rally that has been well chronicled, during the past year. 

Recently, China surpassed Japan to become the second largest consumer of crude 

oil, behind the United States, and the country continues to set new records for consumption month after month. China’s reported GDP growth is approaching 10% per 

annum and is forecasted by some to reach 11%, validating its projected demand 

growth for crude oil, which has risen at an astounding year-on-year pace of 30%. 

Despite high crude oil and refined product prices, demand remains strong in the 

United States and is expected to continue to grow at approximately 2.0% per year 

for the foreseeable future, consistent with the overall growth rate of 1.5% to 2.5% 

per year for industrialized countries. As referenced above, Asian demand, including 

China, is expected to grow by double the rate for industrialized countries. 

OPEC RESPONSE

Officials within OPEC have publicly questioned whether or not a true supply 

shortage actually exists; and they have blamed high crude oil prices on speculators 

and the gasoline supply situation in the United States. However, Saudi Arabia has 

clearly identified $40 per barrel as a line in the sand. In mid-May, Saudi Arabia 

undertook steps to increase exports in June. In order to maintain unity among fellow producers within OPEC, the idea of a formal increase in the group’s quotas was 

discussed and finally agreed to on June 3rd. 

In my view, the final pronouncement, which disappointed the market to a small 

degree, was not important. Saudi Arabia and the United Arab Emirates stepped forward to quell an oil price that was viewed as too high and have put upwards of 

one million additional barrels of crude oil on the market. During the past several 

weeks, United States crude oil imports have exceeded 10 million barrels per day, 

well above the five-year average of just over nine million barrels per day. Increased 

Saudi production appears to account for some of the increase. 

Institutions that may have traditionally focused on equity and fixed income markets appear to have gained a growing sophistication, regarding the energy markets. 

The last leg of the rally in crude oil prices, which dates from September 2003, has 

been accompanied by a significant participation by non-commercial market participants. This moniker is typically associated with hedge funds or companies that are 

not in the oil business. Commodity Futures Trading Commission (‘‘CFTC’’) reporting 

requirements makes their position well known to the market; and the crude oil market’s depth and liquidity appear to have attracted these investors. As a result, it 

appears crude oil is increasingly serving as a proxy for inflation, terrorism, or other 

concerns in a role traditionally filled by gold or other precious metals. 

Gasoline implied demand has increased virtually every year for each of the past 

six years. In 1998, implied demand averaged 8.5 million barrels per day. During the 

first five months of 2004, implied demand has risen to over nine million barrels per 

day. With five-year average production at 8.3 million barrels per day and five-year 

imports averaging 695,000 barrels per day, it is relatively easy to see how even 

slight refinery problems, shipping disruptions, and demand spikes combine to cause 

a volatile gasoline price environment. 

As stated previously, crude oil is the principal component from which gasoline is 

manufactured. One barrel of crude oil produces 42 gallons of gasoline. And every 

one-dollar rise in the price of a barrel of oil translates into a 2.4 cent per gallon 

increase in the cost of gasoline. The approximate $26 rise in crude oil prices, since 

their low in November 2001 to the highs reached in May, translates into a 60 cent 

per gallon price rise in gasoline. Gasoline prices can rise in greater amounts, independent of the price of crude oil, due to other factors unique to it. The availability 

of blending components, refinery operations, barge and pipeline shipping constraints 

are among the determining factors. 

The decision this past year by California, New York, and Connecticut to proscribe 

the use of the additive MTBE in favor of ethanol for the oxygenation component for 

gasoline, while neighboring states maintained its use, has roiled the gasoline market. These three states represent one-sixth of total gasoline sales in the United 

States and 45% of all nationwide reformulated gasoline sales. California had previously isolated itself, in terms of supply, due to its enhanced pollution requirements 

20

for gasoline. The decision by New York and Connecticut has had a pronounced effect 

on prices because a major consumption area was basically bifurcated as New Jersey 

and surrounding states could not readily share supplies with New York and Connecticut, straining the entire system. 

The effect on prices was particularly transparent as New York Harbor, situated 

between New York and New Jersey, is the delivery point for the gasoline futures 

contract traded on the NYMEX and acts as the seminal gasoline pricing point for 

most of the country. 

Now that the summer driving season is upon us, gasoline supplies appear adequate. Refiners raised operating rates to near record levels during the second quarter of this year; and total motor gasoline imports also rose during this time period. 

Of particular note, Venezuela’s state oil company, Petroleos de Venezuela S.A., initiated the export of gasoline suitable for blending with ethanol for the New York and 

Connecticut market. 

The chart above is representation of the operating environment for refiners, dating back nearly ten years. The relationship between crude oil futures and oil product futures (gasoline and heating oil) is referred to as the ‘‘crack spread.’’ This term 

has its origin in the refining process, in which a barrel of crude oil is refined or 

cracked into its component parts. While there are several ratios available to measure the relationship, the referenced spread measures the relationship of the sum of 

two parts gasoline and one part heating oil against three parts crude, reflective of 

the breakdown of the barrel. 

The chart shows that, with the exception of three brief periods during the past 

several years, the profitability of refining a barrel of crude has remained stagnant 

and the overall operating environment has not been very profitable. During the illustrated time period, the spread or profit averaged slightly less than five dollars 

per barrel with considerable operating periods of less than four dollars per barrel 

profitability. The economics of the industry have not rationalized the necessity of 

building a new refinery for quite some time. 

During the second quarter, refiner profitability, as measured by the crack spread, 

has increased markedly and refiners increased their operating rates in order to capitalize on the profitable environment. The effect of this has been increased supplies 

rapidly coming to market and total motor gasoline inventories exceeding their fiveyear average, recovering from near-record low levels experienced as recently as last 

November.

Senator CAMPBELL [presiding]. Mr. Berry. 

STATEMENT OF DAVID BERRY, VICE PRESIDENT, SWIFT 

TRANSPORTATION COMPANY, ON BEHALF OF THE AMERICAN TRUCKING ASSOCIATIONS, INC. 

Mr. BERRY. Thank you, Mr. Chairman. Mr. Chairman and members of the committee, thank you for the opportunity to appear 

today to discuss the issue of what drives fuel prices. I am with 

Swift Transportation, vice president of that company. Swift has 

over 18,000 trucks. We employ 21,000 good, safe working people 

and have over 3,000 owner-operators. 

Fuel is very important to Swift. We use 900,000 gallons of diesel 

fuel every single day. 900,000 gallons every single day. Needless to 

say, we pay very close attention to the price, the supply, and the 

demand for diesel fuel. 

I am here today also representing the American Trucking Association, ATA, and speak on behalf of our industry as well. 

Our industry uses over 32 billion gallons of diesel fuel every 

year. 32 billion gallons. 

To maintain the health of the trucking industry, we need one national diesel fuel. One. Today we have two diesel fuels. In California, we have a special formula put together by the California Air 

Resources Board and affectionately referred to as ‘‘CARB’’ diesel. 

And then we have our national standard. We are headed down the 

slippery slope of four diesel fuels in use to fuel the movement of 

goods across the United States. We have, as I mentioned, the naVerDate 0ct 09 2002 09:38 Oct 20, 2004 Jkt 000000 PO 00000 Frm 00024 Fmt 6633 Sfmt 6602 P:\DOCS\96370.TXT SENE3 PsN: SCAN
21

tional and California standards, and next year in 2005, Texas has 

come up with their own unique blend for diesel fuel, as has the 

State of Minnesota. 

Why the exceptions to the one national standard? Section 211 of 

the Clean Air Act mandated that there be one national diesel fuel 

standard. However, it provided exceptions that the States could ask 

for in order to reach attainment of the clean air standards. So 

States and cities and counties with the worst problems, faced with 

very difficult choices, have searched out a silver bullet, and over 

the years that silver bullet has come in the form of boutique fuels, 

or their own special formulation for clean air in their own particular city or county. 

I know what these States and counties and cities are up against 

because in Phoenix, Arizona in Maricopa County, I serve on the 

technical advisory committee that is faced with making many of 

these difficult and tough choices in terms of what control measures 

to use. 

Now for my experience with boutique fuels as a trucker and as 

a user. Last week the average price of CARB diesel, which again 

is the California diesel, was $2.12 a gallon. That compared to the 

national average of diesel fuel of $1.73. That is a 39 cent difference, 

or California diesel was 39 cents more expensive than the national 

average. 

Why? What kind of impact does that have on the user of the 

fuels and the movements of our Nation’s goods? The experts tell me 

that 4 to 5 cents of that 39 cent difference comes from the cost of 

production of the fuel, the special formulation. In California, the 

fuel tax is 12 cents a gallon higher than the national average for 

the fuel tax. So you add the 12 and the 4 to 5 cents in manufacturing, and that leaves a 22 cent per gallon difference. 

Why? Why is it 22 cents more in California for making that special fuel? I have explained the cost of production and the tax component. Well, that just leads me to conclude that when you have 

a boutique fuel, that you have less competition. There are only a 

few people, a few refiners that end up making that fuel. And that 

less competition sets up the potential for severe impacts due to 

supply disruptions and it creates an uneven playing field for the 

trucking industry and the truckers. 

Now, you may ask why is Swift concerned about an uneven playing field. As I mentioned, I am here representing the trucking industry today as well. So with my trucking industry hat on, it is 

simply very, very difficult for the small carriers and the small 

truckers to have the knowledge and the information to show them 

where the lowest and highest fuel prices are. They get stuck fueling in California, paying those very high prices. 

Mr. Chairman, in summary, one national fuel is the answer, and 

I would urge this committee and this Congress to seriously consider eliminating the exemptions that allow the EPA to create and 

to approve these boutique fuels. 

Thank you, Mr. Chairman. 

[The prepared statement of Mr. Berry follows:]

22

PREPARED STATEMENT OF DAVE BERRY, VICE PRESIDENT, SWIFT TRANSPORTATION

COMPANY, ON BEHALF OF THE AMERICAN TRUCKING ASSOCIATIONS, INC. (ATA) 

Mr. Chairman and members of the Committee, thank you for the opportunity to 

appear today to discuss the issue of diesel supply and the impact of recent price 

spikes upon the nation’s trucking industry. My name is Dave Berry, and I am the 

Vice President of Swift Transportation Company. Swift is on of the largest truckload 

carriers in the nation and is headquartered in Phoenix, Arizona. We employee over 

21,000 individuals and utilize the services of an additional 3,700 owner/operators. 

In providing these transportation services, Swift consumes more than 900,000 gallons of diesel fuel each day. 

I am also appearing today on behalf of the American Trucking Associations. ATA 

is the national trade association of the trucking industry. Through its affiliated 

state trucking associations, affiliated conferences and other organizations, ATA represents more than 30,000 trucking companies throughout these United States. 

The trucking industry is the backbone of this nation’s economy accounting for 68% 

of the total freight tonnage transported and employing more than 10 million hardworking Americans. Over 80% of all communities in the United States are serviced 

exclusively by trucks. We are an extremely competitive industry comprised largely 

of small businesses. Roughly 87% of all interstate motor carriers operate 6 or fewer 

trucks and 96% operate 20 or fewer trucks. 

Diesel fuel is the lifeblood of the trucking industry. For many companies diesel 

fuel the second highest operating expense after labor, equaling between 10 and 20 

percent of total operating expenses. Each year, the trucking industry consumes over 

32 billion gallons of diesel fuel. This means that a one-cent increase in the price 

of diesel costs the trucking industry an additional $320 million in fuel expenses. 

Today the national average price of diesel fuel is $1.73, nearly 31 cents higher compared to the same period in 2003. So far this year, the national average price of 

diesel is 11 cents more than last year. If that spread remains at 11 cents, then the 

trucking industry will pay about $3.5 billion more for diesel fuel this year compared 

to last year. 

Against this background, we greatly appreciate the opportunity to discuss the factors that impact diesel fuel prices. Our remarks highlight the need for a national 

diesel fuel standard. 

A. BOUTIQUE DIESEL FUELS

We believe that Congress should amend section 211 of the Clean Air Act to restore a single national diesel fuel standard and remove EPA’s discretion to approve 

boutique fuel formulations. A single national diesel fuel standard is critical to limiting the duration and magnitude of fuel price spikes, which are devastating to the 

economic health of the trucking industry. Varying state fuel requirements (‘‘boutique 

fuels’’) typically result in fuel price differentials and prevent diesel fuel from simply 

being transported from one jurisdiction to another in times of shortage. Boutique 

fuels, due to their limited markets, are produced by only a handful of refineries, 

which results in less competition and higher fuel prices. California, which requires 

a boutique diesel fuel, provides a perfect example of this principle. The state’s 

CARB-diesel is a specially formulated diesel fuel with a higher octane index and 

lower aromatic content than the diesel fuel sold in the rest of the country. Last 

week, the average retail price of CARB diesel was $2.12 per gallon, which is 39 

cents higher than the $1.73 national average for diesel fuel. The cost of manufacturing CARB-diesel adds 4—5 cents extra per gallon. The difference in state fuel 

taxes adds another 12 cents per gallon. This leaves a 22 cent difference that can 

only be explained by higher distribution costs and the oligopolistic pricing associated 

with boutique fuels. 

The price disparity that results from state-mandated boutique fuel blends and potential fuel shortages hurts the trucking industry by creating an uneven playing 

field and causing damaging fuel price spikes. Due to the competitive nature of the 

trucking industry with operating margins of only two to four percent, a sudden increase in the price of diesel fuel turns a marginally profitable truck route into an 

unprofitable obligation. Moreover, the companies located within the boutique fuel jurisdiction have an economic incentive to refuel their trucks outside the jurisdiction, 

resulting in additional vehicle miles traveled, additional fuel consumed, and additional air emissions. 

The Clean Air Act provides for a national diesel fuel standard and prohibits states 

(except California) from requiring fuel formulations that differ from the standard established by the EPA. EPA, however, may grant states a waiver to adopt a unique 

fuel formulation where the state demonstrates that the boutique fuel is necessary 

23

to achieve compliance with the National Ambient Air Quality Standards and that 

other pollution control measures are either unreasonable or impracticable. 

In addition to California’s boutique diesel fuel (i.e., CARB diesel), EPA has granted a diesel fuel waiver to the state of Texas. Beginning in 2005, Texas will require 

the sale of a boutique fuel that is similar to CARB diesel. Minnesota also will adopt 

a boutique biodiesel fuel in 2005; however, the state has not applied to EPA for a 

waiver under the Clean Air Act. 

ATA strongly supports a single national diesel fuel standard. We have seen how 

a myriad of reformulated gasoline blends result in localized fuel shortages and are 

apprehensive that EPA will allow a proliferation of boutique diesel fuels. If EPA believes there is an alternate diesel fuel formulation that will reduce emissions and 

not create operational problems for the existing fleet, then that fuel formulation 

should be mandated nationally. 

We believe that the restoration of a single national diesel fuel standard will prevent localized supply shortages and price spikes and request that this Committee 

consider amending section 211 of the Clean Air Act to achieve this goal. 

B. PROPOSED RENEWABLE FUEL MANDATE

The renewable fuel mandate contained in both the Senate and House energy bills 

has the potential to increase the price of diesel fuel. The reason for this is that biodiesel is significantly more expensive to produce than petroleum-based diesel. In addition, because biodiesel is unlikely to move by pipeline, its distribution costs will 

be higher than ordinary diesel fuel. 

Putting the drastic price differential aside for the moment, the trucking industry 

also has operational concerns with the use of biodiesel. These concerns include poor 

cold weather performance at higher blend rates, reduced fuel economy, engine warranty issues, and storage difficulties.

• Biodiesel tends to gel in cold weather, whereas No. 2 diesel typically gels at 

¥9° C, soy-based biodiesel gels at 0° C, and biodiesel derived from animal fat 

gels at 20° C. Anti-gelling products, heating systems for fuel tanks and blending 

with No. 1 diesel fuel have been used to prevent gelling, but each of these options adds to operating costs. 

• Biodiesel fuels contain residual alcohol, which can remove deposits from fuel 

tanks and cause filter plugging. As a result, more frequent fuel filter changes 

are anticipated, which will increase maintenance costs. In addition, biodiesel is 

an excellent medium for microbial growth, which could increase fuel system corrosion and premature filter plugging. 

• In comparison to No. 2 diesel, biodiesel has a lower energy value. One gallon 

of No. 2 diesel has 129,000 BTUs, while one gallon of biodiesel has only 118,000 

BTUs. This lower energy value may result in less power produced by the engine 

and a corresponding need to burn additional fuel to produce an equivalent 

amount of work.

Proponents of biodiesel cite its environmental benefits. These benefits, however, 

have been drastically overstated. Unless added at high levels, biodiesel has minimal 

impact on emissions reductions. While evidence exists that certain blends of biodiesel can lower particulate matter emissions, studies show that biodiesel also increases nitrogen oxide emissions, which are a significant problem for most major 

metropolitan regions and could frustrate compliance with the Clean Air Act’s ozone 

standards 

We also must point out the fallacy surrounding the energy security argument. We 

share policymakers’ concerns over our nation’s energy security and our dependence 

upon oil imports; however, biodiesel is not the answer. In fact, if you consider the 

entire lifecycle analysis of biodiesel production, including the fuel necessary to grow 

and transport the raw materials, it takes more energy to produce a gallon of biodiesel than the energy released from a gallon of biodiesel. 

A biodiesel mandate is merely a transfer of wealth from the trucking industry to 

the farmers that grow the raw materials. Moreover, the mandate will only serve to 

increase the demand for these raw materials, which will in turn increase their price, 

making biodiesel even more expensive to produce in the future. This is a vicious circle that will harm the trucking industry and American consumers. If farm subsidies 

are necessary, then provide money to the farmers, but please do not force our industry to use a fuel that is dramatically more expensive and will cause unnecessary 

operational challenges. 

24

C. THE RELATIONSHIP BETWEEN DIESEL ENGINE EMISSION REDUCTIONS

AND DIESEL FUEL CONSUMPTION

The U.S. Environmental Protection Agency (EPA) rulemakings have consistently 

required new on-road heavy-duty diesel engines to emit fewer and fewer pollutants. 

The most recent revisions to the emissions standards have resulted in significant 

fuel economy penalties. In fact, the technologies used to comply with EPA’s 2004 

heavy-duty diesel engine emission standards have resulted in an average fuel economy penalty of between 2% and 5%, depending upon application. EPA’s 2007 heavyduty diesel emission standards will require engine manufacturers to further reduce 

nitrogen oxide and particulate matter emissions. To comply with these 2007 standards, engine manufacturers have indicated that they will need to use after-treatment devices, such as particulate matter traps. These devices will consume additional fuel during their regeneration cycles. Thus, we are anticipating an additional 

fuel economy penalty to be associated with EPA’s 2007 emissions standards. These 

fuel economy penalties result in increased demand for diesel fuel, which places additional pressure on diesel fuel prices. 

D. REFINERY CAPACITY

While I am confident that other panelists will address the issue of refinery capacity in greater detail, one of the largest culprits of price spikes for refined petroleum 

products is the lack of capacity. The fact that no new U.S. refineries have been built 

in over 25 years has resulted in a precarious situation where an upset condition at 

even one refinery will cause a significant supply disruption that will result in a dramatic price spike. We feel strongly that the construction of additional refining capacity in the United States is long overdue and we support boosting refining capacity 

in the U.S. in an environmentally safe fashion. 

CONCLUSION

The trucking industry thanks the Chairman for holding this hearing and looks 

forward to continuing to work with this Committee to address these important 

issues. I would be pleased to answer any questions raised by our testimony.

The CHAIRMAN [presiding]. Thank you very much. 

Senators, because I have not been here for a while and you all 

have, I think I will move to one Democrat and one Republican. Is 

that satisfactory? 

Senator Bingaman. 

Senator BINGAMAN. Thank you very much, Mr. Chairman. As I 

understand it, we have 7 minutes. 

Let me just start right into questions. I think we all understand 

the seriousness of this, particularly the high price of gasoline that 

consumers are facing. 

I wanted to ask Mr. Caruso, first of all, do you have a calculation 

as to the impacts that these higher fuel prices are having on the 

average consumer? 

Mr. CARUSO. On average, we are expecting an increase in the average cost of gasoline, of about $300 per family. 

Senator BINGAMAN. $300 per year? 

Mr. CARUSO. Yes, sir. 

Senator BINGAMAN. So that would be during this calendar year, 

you would expect there would be a $300 additional cost to the average family. Is this just gasoline or does this also include higher 

natural gas prices? 

Mr. CARUSO. That is based on the average consumption of gasoline and the average miles driven per car. 

Senator BINGAMAN. So it is just gasoline prices. Okay. 

The CHAIRMAN. Could you ask at what price? 

Senator BINGAMAN. The price is the one that you mentioned. It 

has been at $2.06 per gallon. 

25

Mr. CARUSO. Yes. The annual average, in our latest estimates, 

will be about $1.90. 

Senator BINGAMAN. Let me ask about boutique fuels. This is an 

issue that was raised when Vice President Cheney issued the Energy Policy Report back in 2001, and that report, among its recommendations, called upon the Environmental Protection Agency 

to ‘‘study opportunities to maintain or improve the environmental 

benefits of State and local boutique fuel clean fuel programs while 

exploring ways to increase the flexibility of the fuels distribution 

infrastructure, improve fungibility and provide added gasoline markets liquidity.’’

As far as I know, we have not seen any action out of EPA on any 

of that. Are you aware of anything, Mr. Caruso? 

Mr. CARUSO. I am not aware of any, Senator. 

Senator BINGAMAN. I have written to the President and also to 

the head of EPA and the Secretary of Energy urging that the President direct the Administrator of EPA, with technical assistance as 

needed from the Secretary of Energy, to require revisions of State 

implementation plans—these are the implementation plans for the 

Clean Air Act—to reduce the overall number of fuel specifications 

by at least a factor of 5 and preferably a factor of 10. We have 

about 110 different specifications for fuels nationwide now, which 

seems excessive I think to anybody. 

I would ask, Mr. Cavaney, do you think that kind of an action 

by EPA would be helpful in dealing with this boutique fuel situation? 

Mr. CAVANEY. Yes, sir. Senator, I have two points. No. 1, as long 

as we understand it is not a silver bullet for the current situation, 

I do think it is part of a solution over the longer term to try and 

get more efficiency, more flexibility into the system. 

One of the things we need to be cautioned about is in this year 

we are going through very dramatic changes in the fuel slate that 

we provide. No. 1, we rolled in the new low sulfur gasoline, and No. 

2, a significant increase in the amount of ethanol that is being used 

in place of MTBE. Both of those will change the emission characteristics and properties to a significant amount. 

And we would agree with you. What would make sense would be 

to do a study and look at what could be done, but we need to stabilize generally this massive change that is going on right now and 

then understand what we have. Then that would be the appropriate time to look at suggestions such as you have outlined. 

Senator BINGAMAN. The letter I did to the head of EPA and to 

Secretary Abraham urged that they come up with what we called 

a fuels harmonization options paper, which would try to eliminate 

some of these differences and tell us how we could get there. 

Mr. Berry, you made a big point about the increased price that 

truckers are having to pay as a result of boutique fuels in the diesel area. Are you aware of any action that is going on to bring some 

harmony or resolution of this issue, or do you think this proposal 

makes sense? 

Mr. BERRY. Senator, yes, I think the proposal makes sense. No, 

I’m not aware of any action, and the situation is getting worse and 

not better. 

26

Senator BINGAMAN. Let me ask about another issue that I also 

wrote the President on, and that is on the issue of additional refining capacity. I think, Mr. Caruso, you said that part of the increase 

in the price of gas at the pump that people are seeing is a result 

of tightness of refining capacity. Is that a correct interpretation of 

what you said or not? 

Mr. CARUSO. I think it is a combination of capacity and the whole 

distribution system, which includes, of course, imports and transportation. We are operating at about 96 percent of operable capacity right now at the refineries. It is a contributing factor. I would 

not put it at the top of the list. 

Senator BINGAMAN. Well, let me just indicate another recommendation that I made to the President in this same earlier letter, and that was that we develop a national fuel strategy which 

would look at this issue of refining capacity and try to bring together industry representatives, along with regulators, consumer 

representatives, and others, to find out what the obstacles or barriers are to building additional refining capacity that could actually 

be dealt with. Is this something you think makes sense, Mr. 

Cavaney? 

Mr. CAVANEY. Senator, we definitely need additional capacity. 

The last time we built a grassroots refinery in this country was 

1976, and the reason is twofold. No. 1, the returns, as I have mentioned to you in my statement—and I have more data, if you would 

like, for the record—are just terrible on the refinery sector and 

have been historically going back decades. So No. 1, in this market 

where you compete for capital, that has to be dealt with. 

The second is the permitting process, particularly at the local 

level, which is an open-ended process, and the NIMBY phenomenon 

and other things are a huge discouragement to put a grassroots. So 

if the focus were on trying to increase the capacity within existing 

refineries, I think there is a quicker payoff. I think it has an opportunity to make more sense and we would like to recommend that 

we concentrate on doing that. 

The new source review, when those were being discussed in the 

late 1990’s, we saw basically it froze the industry in its tracks because we were uncertain of the outcome. And if you will look at capacity additions, they have stopped for the last 4 or 5 years because there has not been a full resolution of that issue. 

So there are things that we can deal with and they should be 

dealt with because the demand is certainly there and we in the industry want to be able to provide the product to our customers. 

Senator BINGAMAN. My time is up, Mr. Chairman. 

The CHAIRMAN. Thank you very much, Senator. 

Let us stay on that subject for a minute. How long would it take, 

based on current law and construction time, in your opinion and 

anybody else’s opinion, to construct a refinery in the United States 

today? A major refinery, not a little, tiny one. 

Mr. CAVANEY. A major refinery, as I said, is probably going to 

run between $2 billion and $3 billion. Probably from the time you 

actually were able to start the construction until you could actually 

deliver product, it is about 4 years. But the big uncertainty is the 

permitting process, the part that is up front and tying up all that 

27

capital and distraction if in fact it does not go through. So that is 

really where the attention needs to be, as well as the return. 

The CHAIRMAN. I want to ask you one additional question. Do 

you have any reason to believe that those who objected in the past 

because we have a major problem would stop objecting now? 

Mr. CAVANEY. We have no feeling that that is the case. We might 

do a parallel. Our industry also produces natural gas, and there 

has been a great effort to try and increase the amount of LNG, 

liquified natural gas, which is also a permitting problem. We find, 

as much as people prefer environmentally natural gas, at the local 

community, a great deal of objection to the siting, the same problem we encounter with the refineries. 

The CHAIRMAN. I walked out for a minute and it was not for 

pleasure. The Minister of Oil from Qatar was out there, and obviously they are pretty important to us. In talking with him, as in 

talking with most ministers, they all say they want to be friends 

of the United States and keep the price of oil down, but that has 

not happened other than in the last month or so. 

What is your opinion, any of you, as to the risk factor that is 

built into oil today? And let me explain what I think is a risk factor. I think risk factor is what happens in the marketplace when 

those who sell and buy oil are frightened or are scared of the fact 

that there may be a major interruption as they look at the world. 

Is that correct? Is that what it means? 

Mr. CARUSO. Yes. 

Mr. CAVANEY. Yes. 

The CHAIRMAN. What is the risk factor now? 

Mr. CARUSO. Well, there is a definite difference of opinion among 

analysts on this particular issue. EIA happens to be of the view 

that the fundamentals are the main driving force that got us to 

$30-plus crude oil. Now, right now we are at, as I mentioned, 

$37.50. Our models would indicate that just supply and demand 

factors alone probably would get us to between $32 and $35. So you 

could say that there are several dollars of a ‘‘risk premium,’’ but 

I would say that our main view is that the very strong demand, 

tightness in crude oil supply, and the refining situation are far 

more important, but the long positions of the commodity index 

funds that Mr. Kilduff mentioned in his testimony are certainly 

putting some upward pressure on price. 

The CHAIRMAN. Does anybody else have an opinion? 

Mr. KILDUFF. Yes, Mr. Chairman. In my statement actually I referenced this——

The CHAIRMAN. I am sorry. I did not hear it. 

Mr. CAVANEY. That is quite all right. 

But no, basically depending what side of the fence you are sitting 

on, what has happened in the global supply picture has really been 

a parade of horribles over the past 2 years. Most of the major producing countries have had some problem of some sort whether it 

is the war in Iraq, the terrorism in Saudi Arabia, the Venezuelan 

situation with the new president there and a major oil worker 

strike. This has affected supply and has really made the oil markets quite nervous. I think there is a lot of air in the price right 

now as a result of these troubles around the world. 

28

When I look at U.S. inventories, they are within their 5 and 10-

year averages. Granted, demand has gotten a lot stronger and they 

could be under pressure, but we are seeing real strong imports that 

tell me that it is going to take some time for that supply fundamental to overwhelm the security fears. 

The CHAIRMAN. Well, I wonder as we saw the Saudi Arabian helicopter come down, it looked just like an American helicopter, built 

by us or by somebody that builds like it, and out the back end came 

all the paratroopers just like we have. They stormed the building 

which had all the people in it. That incident caused the price of oil 

to go up, did it not? 

Mr. KILDUFF. Yes, it did, Mr. Chairman. We are reacting to almost daily reports, even the most recent kidnapping certainly, 

when we hear statements, just advisories from the State Department, for the oil workers to exit the country. What will happen if 

there is an attack on the infrastructure? We wonder who is there 

to fix it. 

The CHAIRMAN. It seems to me for those sitting at the table to 

say there is no risk factor when that kind of an incident causes oil 

prices to go up, what is that? It seems to me that all the countries 

that are not even involved in that problem all get involved in raising prices. Is that not true, Mr. Cavaney? 

Mr. CAVANEY. Mr. Chairman, I think there is no question there 

is a risk factor involved, but everybody defines risk to themselves 

in a slightly different manner. The one phenomenon to watch very 

closely—I want to assign myself with Guy Caruso’s remarks earlier. The closer supply and demand are, the more volatility you get 

because calculating risk then becomes much more volatile and can 

move literally on one dynamic. When there is a spread that there 

is ample supply to serve demand, the volatility of the risk gets reduced significantly and it does not go so much. Basically right now 

our situation is I think most people were surprised by the growth 

in worldwide demand, and that put the floor under the kind of risk 

assignment that you have cited. 

The CHAIRMAN. Well, there is nothing we can do about the enormous market involvement by China. China is out there buying everything. If they cannot get oil, they buy oil fields. If they cannot 

get steel, I think they are buying steel mills. And the price of steel 

in America is going up. So we cannot do anything about that. 

Let me close by saying that I think we need an energy bill. I do 

not think we can necessarily do anything about oil directly, but I 

think it is important that we do something about a wide array of 

energy issues. There are some who say the bill is dead. I say they 

are dead wrong. I think we still have a chance. I hope we can work 

something out. 

I want to close by saying the United States of America can be 

brought to its knees by terrorists without them ever setting a foot 

in the United States. If we are waiting around for terrorists who 

are going to do something here, they do not have to do that. If they 

are halfway smart—and we seem to think they are—all they have 

to do is cause an oil disruption of significance and you will see 

what will happen. How much was the Iranian—when they held up 

on supply? Do you any of you remember what it was, Mr. Caruso? 

29

Mr. CARUSO. Yes. The Iranian production went from 6 million 

barrels a day down to 1.5 million barrels a day within 3 months. 

The CHAIRMAN. And that was for the whole world market. 

Mr. CARUSO. Yes, sir. 

The CHAIRMAN. And what happened to America? 

Mr. CARUSO. Well, we were fortunate in that we were getting 

most of our oil from the western hemisphere at that time and others stepped up. So the price doubled. That is basically what happened. 

The CHAIRMAN. And there were short supplies. 

Mr. CARUSO. There were short supplies. 

The CHAIRMAN. Do you remember in Brooklyn somebody shot a 

driver who drove around to get an advantage and somebody pulled 

a pistol and shot him at 5 o’clock in the morning? Think what 

would happen if we had a supply disruption three or four times 

that because of terrorists. 

Thank you very much to all of you. I am probably going to have 

to leave, but I am going to move in order. Senator Wyden, you are 

next. 

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

Mr. Caruso, the west coast gasoline market is not seeing the relief that you described. Today my constituents are paying $2.23 a 

gallon. Over the weekend, Californians were paying more than 

$2.30 a gallon. It is clear to me there are a lot of reasons why gasoline prices are going up: worldwide demand, the shenanigans of 

OPEC. 

But you repeatedly come here and advocate policies that hammer 

my constituents. I am going to take another crack at seeing if I can 

understand why. 

The administration has created a strategic reserve of petroleum 

products in Iraq for the purpose of keeping the price of gasoline low 

for Iraqis at a cost of $150 million to the U.S. taxpayer. Iraqis now 

pay 5 cents per gallon for their gas, while on the west coast people 

are getting clobbered, as I have described. 

How is it that you can advocate not taking even modest steps 

with respect to the Strategic Petroleum Reserve? Let us just say 

holding off on some deliveries. It is 94 percent full. How is it that 

you can advocate not even taking modest steps that can provide 

some pricing relief for people on the west coast when they are getting hit this way? 

Mr. CARUSO. Well, just for the record, the Energy Information 

Administration does not advocate any policy. We are a policy-neutral organization. 

You may be referring to the analysis that I mentioned previously, 

that we thought that deferring deliveries into the SPR would have 

a minimal impact on the oil market. We still believe that the 

amount of oil going in there is so small that it would have little 

or no effect if it were stopped. 

Senator WYDEN. Let me give you a memo to make clear what you 

are advocating. I am going to have the staff put it in your hands 

while we talk. 

On February 6 of this year, you wrote a memo to the Secretary 

of Energy, Secretary Abraham, saying that the impact of taking 

200,000 barrels per day of oil from the private market would be to 

30

increase oil prices by up to $1 per barrel. Using your own calculations, did the administration’s decision to increase the SPR fill rate 

from the average rate of 120,000 barrels per day to 300,000 barrels 

per day not increase prices by nearly $1 per barrel? 

Mr. CARUSO. The decision to increase the fill rate I think had 

nothing to do with this analysis. That was already in the cards. 

This analysis is based on the assumption that for every 100,000 

barrels a day on the market, it could lead to as much as, I think 

it says, 60 cents to $1, if everything else were unchanged. It also 

says in the memo that we do not necessarily agree with the assumption that other things would be unchanged. For example, if 

OPEC saw the U.S. deferring fill or using its SPR, it certainly 

could take actions to counter that very quickly. 

Senator WYDEN. Mr. Kilduff, I gather you feel that SPR deliveries are contributing to some of the pricing problems people are 

seeing, but I would like to get you to state your position on the 

record. 

Mr. KILDUFF. Yes, I do, Senator. A fill rate of 100,000 represents, 

obviously, 700,000 barrels for a week. At 300,000 it is 2.1 million 

barrels. A 2.1 million barrel increase in U.S. commercial crude oil 

inventory in a particular weekly report would be a big build for the 

particular week and would help with downward pressure on crude 

oil prices. 

I disagreed with, I guess, Secretary Abraham that this is an insignificant amount of oil. I do not think it is. I think it has been 

a contributing factor and I think in some weeks, when the market 

has been disappointed with the commercial inventory rises—or 

sometimes they have even been negative in spite of our forecasting 

of them rising—the numbers have jibed with what has gone on to 

the SPR. And if that oil had been on the open market, it might 

have been a different story. 

Senator WYDEN. I am going to leave this subject, but it is clear 

to me we have got a Strategic Petroleum Reserve for the Iraqis. 

They are paying 5 cents a gallon for their gas while people on the 

west coast are being hammered. Using your own math, Mr. Caruso, 

it contributed to a huge increase of the per-barrel cost, and that 

has just been confirmed by Mr. Kilduff. So I hope on one of your 

upcoming visits here, the administration will support policies that 

at least do not inflict the level of pain that those policies are inflicting on my constituents. 

The second area I want to ask about involves you, Mr. Cavaney. 

Here is what the two largest refiners said in their first quarter 

2004 reports. These come from the companies. 

ExxonMobil reported—and I quote—‘‘U.S. gasoline prices help 

give the world’s largest publicly traded oil producer its biggest first 

quarter refining profit in 13 years.’’

Now, Chevron Texaco said—and I quote here—‘‘U.S. refining, marketing, and transportation earnings of $276 million improved 

$206 million from last year, a 300 percent increase. The primary 

reasons for the improvement were an increase in average refined 

product margins, higher sales volumes, and lower operating expenses.’’

Isn’t the industry using these current high oil prices as another 

vehicle to hit the consumers when you are adding on huge refining 

31

profits? Those come from industry publications. They are not made 

up. Those are the industry’s figures. I would like to hear your reaction to the industry reports about these huge refinery profits. 

Mr. CAVANEY. I can speak, Senator, for the industry, not for individual companies, which you have cited. 

The data from multiple sources is really quite clear on what the 

profit margins are. I will be glad to enter it for the record. Here 

is data from the Department of Energy that goes back over 25 

years and will show that consistently over the cycles the refining 

part of the business earned significantly less than the industry in 

total and significantly less than the Standard & Poor’s industrials. 

We are a highly cyclical industry and companies make individual 

investment decisions when to bring on extra capacity and when not 

to. So you will get large swings in an individual company, but it 

is important to stay focused on the overall industry. 

As I mentioned in my statement, the first quarter of this year, 

the overall industry’s profit margin was 6.9 percent. The all-industry average—that is all industries together—was 7.5. There were 

a number like pharmaceuticals, biotech, financials that were at 19, 

18 percent. So we do not earn a profit margin that is even up to 

the all-industry average, let alone to be at the higher levels. And 

Wall Street reflects that in their investment in it. 

Senator WYDEN. The two largest refineries in the quarter had 

huge profits. They come from SEC figures, Exxon and Chevron. 

The record is different than what you have described. 

Let me ask you about one other area because my light is on. Refinery capacity is so critical. Why is it that Shell is shutting down 

its Bakersfield refinery? The west coast market again is very, very 

tight, as we talked about. It has been documented that there is a 

lot of oil in the San Joaquin Valley. There is, for example, significant evidence that the refinery there has been very profitable. It 

just seems to me that it is bizarre that not a single oil company 

has come forward to buy the Bakersfield refinery. Given how important refinery capacity is to the west coast, given the huge profit 

margins of refineries that I have just documented, how is it that 

nobody is interested? 

Mr. CAVANEY. I cannot comment specifically on all of the details, 

but some public information that Shell did make available to everyone—basically the documents that they prepared, in order to be 

able to invite buyers to come and look at the potential for investment here, were released by someone into the public. What those 

documents clearly show is that refinery lost money in 2001, lost 

money in 2002, and it is projected to lose money in 2004. 

Shell also, in that same public release, indicated that there were 

sufficient declines in their source of crude oil and that they are a 

landlocked refinery. Therefore, they wanted to sell the refinery. 

They are open to all credible buyers to come and see them, sit 

down and visit, and try and see if an opportunity can be arranged. 

So it is a decision. A final chapter has not be written on it yet. 

They said that they announced well in advance to provide an opportunity for people to come and look at the opportunity and decide 

for themselves whether they wanted to make the investment. 

Senator WYDEN. My time is up, but the valley produces 650,000 

barrels per day. Only half of it is being used at refineries in the 

32

* The report has been retained in the committee files. 

area. Again, the public record does not reflect what you are telling 

us, Mr. Cavaney, and it starts with those profits that I have cited, 

that are documented in SEC filings. 

I gather we have temporarily lost our chairman, with Senator 

Campbell acting. Mr. Chairman, I would ask unanimous consent to 

enter into the record a report that I am releasing today that we 

have spent a number of months working on that documents the 

campaign of inaction that is being waged by people like Mr. Caruso 

that I think contributes mightily to the problems we are seeing on 

the west coast of the United States.* 

Senator CAMPBELL [presiding]. Without objection, that will be included in the record. 

Senator WYDEN. Thank you. 

Senator CAMPBELL. Now I would like to ask a couple of questions 

too. Also, I do not know if everybody can see this light or not from 

where you sit, but I would ask you to observe that light, if you can. 

We have been talking in broader terms. I would like to focus a 

little more about what I call where the rubber hits the ground, 

what the increased costs are doing in terms of jobs. So I would like 

to ask most of my questions to Mr. Berry who represents ATA and 

Swift. 

First of all, the trucking industry probably carries 98 percent or 

more of just everything we use in daily life. What is the profit per 

mile of a trucking company on average? I understand it is like 2 

cents a mile or something, very, very small. Is that correct? 

Mr. BERRY. Mr. Chairman, that is correct and that is the average 

for all companies. It is a very slim margin. 

Senator CAMPBELL. The industry is somewhat divided. The 

OOIDA, which represents a lot of independent drivers, has been 

pushing Congress through a bill that was introduced in the House 

side by Chairman Rahall to have a surcharge on shippers for trucking to offset these spikes that we are facing in the cost of diesel. 

What is ATA’s position or Swift’s? 

Mr. BERRY. Mr. Chairman, I believe that ATA’s position on that 

is—well, let me just check here. It is neutral, just like in the truck, 

you know, neutral. 

Senator CAMPBELL. I know where that is. 

[Laughter.] 

Mr. BERRY. Mr. Chairman, I think the issue on the fuel surcharge—and that, so the committee knows, is a formula based on 

prices published by the U.S. Government, Department of Energy, 

that would automatically trigger price increases to the customers. 

I think the industry is split as to whether or not they want to start 

down that path toward economic regulation. 

Senator CAMPBELL. You may not know the answer to this, but 

maybe Mr. Caruso does. Do you know what percent of our trade 

deficit is imported oil? 

Mr. CARUSO. I do not have that offhand, but I could certainly 

supply it for the record. 

[The information follows:]

In 2003, 22.8 percent of the total merchandise trade deficit was from net imports 

of crude oil and petroleum products. For the year 2003, the U.S. merchandise trade 

33

deficit was $535.5 billion. Of that amount, net imports of crude oil and petroleum 

products amounted to $122.3 billion.

Senator CAMPBELL. Could you get that for the committee? I have 

heard numbers going from 20 percent up to a third of our trade 

deficit has something to do with imported oil. I think most of the 

committee members would like to know that. 

Back to Mr. Berry. Did I understand you to say that your company Swift pays 22 percent more per gallon in California than Arizona for fuel? 

Mr. BERRY. Mr. Chairman, the example that I used was 39 cents 

per gallon more, and when you took out the cost of taxes because 

California’s tax rate on fuel is higher than most States, so that accounted for 12 cents. And then the cost of production for the special 

formula, the CARB diesel fuel, was about 4 to 5 cents. And that 

left 22 cents that was unexplained. 

Senator CAMPBELL. You are Phoenix based. Can a California 

trucking company that may be in Barstow, right across the border 

from Arizona—they are paying more per gallon in California than 

Arizona. If they had a yard or a tank or something in Arizona, can 

they come over and get fuel and fill up in Arizona and avoid that 

extra charge in California without any penalty? 

Mr. BERRY. Mr. Chairman, that is correct. They can and they do 

do that. Swift has extensive operations in California all up and 

down the coast, and we purchase—I am estimating now—about 

100,000 gallons of diesel fuel per day in California. 

Senator CAMPBELL. I mention that because years ago when I was 

in the State legislature Colorado passed an increased cost to diesel 

fuel and we found truckers fueling up in Senator Thomas’ State 

and Senator Bingaman’s State and just going right through Colorado not buying any fuel at all because ours was more. And we defeated the purpose of trying to raise more revenue for the State by 

taxing ourselves right out of business. 

Mr. BERRY. Mr. Chairman, the market sometimes can be a very 

cruel judge. In truck stops, you will see the fuel vendors popping 

up on the State lines to take advantage of those situations. 

Senator CAMPBELL. Thank you. Well, my time is up but maybe 

just a personal note, if I might have my colleagues’ indulgence. I 

have a CDL. I got through college by driving years ago and still 

drive. A couple of years ago I wanted to know more about what are 

called Rocky Mountain doubles and triples, which are combinations 

of trailers that we use in some interstates. So I went to a refresher 

school, and right after I got out of the refresher school, I got a call 

from Swift wanting to know if I wanted a job. I did not know that 

the big companies now recruit out of trucking schools. I wanted to 

thank you, but I respectfully declined that offer then. I declined it 

then. I am retiring now. I may be interested now. 

[Laughter.] 

Senator CAMPBELL. On the list here, I believe it is Senator Dorgan. 

Senator DORGAN. Mr. Chairman, thank you very much. Mr. 

Chairman, you know and others know that in rural States we have 

almost twice the burden of these increased prices as they do in 

urban States. I mean, in Wyoming and Montana and Colorado and 

North Dakota, Alaska, it is not a big deal to drive 100 miles or 200 

34

miles to pick up parts, to go to a social event, do things like that. 

On the east coast, they will pack an emergency kit to go 40 miles 

to see a long lost aunt or uncle. For example, North Dakotans use 

almost twice as much gasoline per capita as do New Yorkers. So 

when you see these price spikes in gasoline, it has a much higher 

burden on consumers in rural States. 

I used to teach some economics in college. I understand when the 

price of a barrel of oil rises, spikes up, it is going to have an impact 

on the price at the pumps. I understand that. I understand, given 

the circumstances and what has happened in the world price, it is 

expected that you would see a higher price at the pump. 

But I want the witnesses to understand and others to understand that there is a healthy skepticism here on Capitol Hill for a 

couple of reasons about what happens when you see price spikes. 

I chaired some hearings with respect to the price spikes in electricity in California, and we were told by Enron executives and others, well, this was the market system. The market caused these 

prices to increase. We now know from criminal indictments that it 

was, in fact, not the market at all. Big enterprises took advantage 

of consumers, perhaps to the tune of $10 billion. They stole from 

them. So there is a healthy skepticism here on Capitol Hill about 

some who would use price spikes to their own purpose and actually 

cause price spikes to increase margins. 

I think we are choked by excessive reliance on production outside 

of our country, particularly from troubled parts of the world, particularly from the OPEC region. We are choked by increased concentration from the oil industry, which I think is unhealthy for this 

country. It has been relentless in the last several decades. I think 

that there is a healthy skepticism about what has happened here 

on the part of consumers, but not just consumers, on the part of 

those of us in Congress as well, and we want answers. 

Let me go back to this question of the fill rate to SPR. Again, 

it just seems logical to me that if you reduce the supply of oil at 

a time when we are in short supply and therefore prices are rising, 

it is just illogical. Why would you do that if you had the opportunity not to do it? 

Mr. Caruso, you and Mr. Kilduff seem to be at odds on that, and 

yet your February 6 memorandum, Mr. Caruso, says in the second 

bullet point, that you have a rule of thumb for assessing the effect 

of unexpected disruptions to commercial oil supply. Applying this 

rule at 200,000 barrels per day, it would have a price impact of 60 

cents to $1 per barrel. It seems to me that Mr. Kilduff is right and 

your previous memo is right and your testimony today seems at 

odds with it all. 

If you simply short the supply by putting oil in the ground at a 

time when your supplies are short anyway, you are going to exacerbate the problem. Is that not the case? 

Mr. CARUSO. Let me clarify. The memo said that if you had an 

unexpected either increase or decrease in the supply of oil and 

there were no offsetting factors, that the rule of thumb indicates 

that 200,000 barrels a day would lead to between 60 cents and $1 

a barrel, which is about 2 to 2.5 cents a gallon. Now, further on 

in the memo, it explains that our assumption would be that if, inVerDate 0ct 09 2002 09:38 Oct 20, 2004 Jkt 000000 PO 00000 Frm 00038 Fmt 6633 Sfmt 6602 P:\DOCS\96370.TXT SENE3 PsN: SCAN
35

deed, the fill rate were stopped, that OPEC production would just 

be reduced. 

Senator DORGAN. I understand all that. 

Mr. CARUSO. So that is the rationale behind the memo. 

Senator DORGAN. Anytime someone is asked for advice and you 

give advice, it is other things being equal. Perhaps any number of 

cataclysmic events occur. But the point is you indicate that another 

200,000 barrels per day of supply on the market would have a price 

impact that would be beneficial. 

I make the point that I think Mr. Kilduff made. At a time of 

short supply, it just seems illogical to me to be exacerbating that 

short supply by putting oil in the ground. I understand this is not 

the major part of the price spike, but nonetheless, it is part of that 

decision making that we have some control of, and I do not think 

it makes sense to continue putting this in the ground, especially 

given the percentage of SPR that is involved. You said 94. I think 

it is 96 or somewhere in that neighborhood. 

I think we have a lot to learn about what has contributed to all 

of these price variations. I am particularly interested in the increased margins that exist, Mr. Cavaney. We just have to track 

this down. It took us months and months and months of hearings 

in the Commerce Committee to finally understand that behind it 

all there was something more than just the market. There was not 

much of a market in electricity in California or on the west coast. 

That turned out not to be a free market at all. 

Frankly, there is not much of a free market for oil. I know there 

are spot trading and there is a lot of shallow breathing and that 

sort of thing that goes on with traders, but there is really not much 

of a free market regrettably in my judgment because we are held 

hostage, on the one hand, by the OPEC supply and, on the other 

hand, by increased concentration in the oil industry. 

We will learn as much as we can. I think this hearing is productive. 

Senator CAMPBELL. Senator Burns. 

Senator BURNS. Mr. Chairman, I will relinquish my time to the 

Senator from Wyoming because he has other activities that he 

must attend. 

Senator CAMPBELL. We were going back and forth here. I believe 

Senator Cantwell is next. 

Senator BURNS. No. He can have my turn. 

Senator CAMPBELL. Yes, that is fine. 

Senator BURNS. Or I was going to reclaim my time. 

[Laughter.] 

Senator THOMAS. Thank you very much. I do have to run. 

Obviously, something we can do immediately is on everybody’s 

mind and we need to talk about that. We need to try and do something. Obviously, it seems to me that the real challenge is clearly 

consumption is moving ahead much faster than is production, and 

we have got a very difficult long-term problem that we have failed 

to move on over the last 2 or 3 years that we could have done 

something here. 

But specifically, Mr. Caruso, we had SPR release before several 

years ago. What kind of an impact did that release have? 

36

Mr. CARUSO. Well, there is a disagreement among analysts on 

that as well, but it did have a short-term decrease in the price, but 

prices then rose again within a number of weeks. So there was a 

short-term reduction in the price but then it increased. 

Senator THOMAS. A fairly insignificant impact, however, it is fair 

to say. 

Mr. Berry, you advocated a single diesel fuel standard. I presume 

under the circumstances we operate under that would be a pretty 

high standard. Would that increase over the country or have an decrease, as you suggest? 

Mr. BERRY. Senator, I think that working with the States and 

EPA we could come up with the right formula. I do not think it 

would be a minor tweak to the national formula that exists today, 

but I think that standard would be one that would allow us to 

achieve all of our clean air goals and objectives and not burden the 

rural States with excessive costs. 

Senator THOMAS. Come up and help us a little bit with some of 

the environmental issues on clean air, will you? 

Mr. Cavaney, what do you think it would take to have significant 

incentives for increased refining capacity? 

Mr. CAVANEY. I think No. 1, really the heart of this goes to the 

permitting issues, as I mentioned. The New Source Review project 

which has transcended two administrations now—it started in the 

mid-1990’s—has yet to be fully clear about what the consequences 

are of increasing capacity on your refinery while you are doing 

these other environmental improvements. Therefore, it has had a 

very chilling effect, which is why capacity has not been done. 

So the extent to which the administration has put on the table 

a series of things that they feel should be considered, I would like 

to encourage people to take a look at those because the sooner we 

can resolve that, you are going to bring certainty to the investment 

climate and people are going to know if they put money in for capacity, they will, in fact, get product out. So there is that. 

Plus, working more closely on making sure that there is a timely 

response to the permitting and that they do not get tied up in an 

endless circle within the local community or in jurisdictional battles between different parts within the executive branch and the 

like. So permitting is probably the best answer. 

The biggest problem besides permitting is the return. Despite 

what some people have said here, the return by any standard over 

time has not been attractive enough to bring in surplus capital. 

There are other places people can put their money. 

So we need to get efficient, be able to provide more product, more 

certainty. That, in turn, I think will help attract some of the capital and improve the situation there as well. 

Senator THOMAS. It is my understanding over time we have had 

not had any new facilities, but we have had increased capacity in 

some of the older facilities. But the requirements have been less severe to do upgrading than to build new plants. Is that correct? 

Mr. CAVANEY. It is easier in the permitting process. There are 

many less jurisdictions that need to be involved and there is less 

of a sensitivity because the facility already exists. As I mentioned, 

by and large, while reduced by over 50 percent the number of refineries from the high point in 1981, we still produce about 90 percent 

37

of the volumes that we did then. So we have had some creep up, 

and we were doing just fine until about the last 3 years of the 

1990’s and here where we hit this New Source Review confusion, 

which basically sort of stopped capacity expansion in its tracks. 

Senator THOMAS. I thank you and thank all of you. But I sure 

hope we can continue to focus on conservation, on alternatives, on 

efficiency because clearly if we continue to go as we are in terms 

of our usage, we are going to far beyond our capacity to produce. 

Thank you very much. 

Senator CAMPBELL. Senator Cantwell. 

Senator CANTWELL. Thank you, Mr. Chairman. 

Mr. Cavaney, thank you for being here. I would be glad to hear 

from the other panelists, but my questions are specific to you and 

the American Petroleum Institute. 

The west coast, California, Washington, and Oregon, have traditionally had higher gasoline prices than the rest of the country and 

some people say that this is because of the unique fuel blends and 

the lack of refinery capacity. For us in Washington State, since we 

have five refineries, that is a little hard to understand. 

But my question today is more specific. The West has been 

gouged by market manipulation on electricity. How do we convince 

the public that the same market manipulation is not happening 

with gasoline prices? I guess my question is in regard to this article 

that was recently in the oil price information services that speculates on the number of exports of U.S. distillate product abroad, 

that basically says, ‘‘Even as the U.S. markets have advanced to 

some of their highest wholesale and retail levels on record, the 

trading departments of multinational companies have been actively 

sending cargos of low and high sulfur fuel abroad.’’

In fact, it mentions one company, BPA, which has popped up on 

ships and charter lists shipping out a lot of cargo and basically that 

there is nothing illegal about this. It is usually counterbalanced by 

the number of imports that we have, but marketers are bristling 

over having watched the spot prices and the refining margins move 

to record levels because of these exports. 

So I want to ask you specifically about that. I do not know if you 

want to comment on that, but I have some specific questions. I 

know we are limited in time. 

But my first question is, is there currently a system in place to 

track the disbursing of refined petroleum products from a particular refinery? 

Mr. CAVANEY. One of the categories that people become concerned about is the subcategory of distillate, which is diesel fuel. 

We do not collect data in sufficient amount of detail to be able to 

track diesel fuel per se. We track the category ‘‘distillate,’’ which 

you referred to. We are a very minor exporter of distillate compared to the amount that we import. It would be literally a drop 

in the bucket there. 

So distillate data is tracked. We collect it on a weekly basis. EIA 

does. It is reported. It is readily available to everyone. 

The principal cost pressures there are many of the same things 

we have with gasoline. It is made from crude oil, which on the 

world markets tracks up highly, and it also is in great demand. 

38

The capacity of the refineries essentially is so tight that it succumbs to some of the same kind of concerns. 

One of the points you mentioned in the beginning was the confidence that people should have about what we have to say in fighting the problem that occurred with the electric situation in California. I would like to ask and would be glad to provide you and 

enter for the record, if you would like—ours is the other way. I 

have here a record of over 30 years of major investigations by the 

Department of Justice for many, many different kinds of administrations, by States Attorneys Generals, by local areas and all, looking into the subject of gouging, collusion, price spikes and everything like that. Every single one of these studies has publicly exonerated the industry from any wrongdoing. We do not have the huge 

market shares or the controls that other industry has. We are not 

concentrated to the extent that they are and, therefore, do not have 

the sort of market power that people oftentimes talk about that is 

not substantiable from the data. 

Senator CANTWELL. So is there a current system on the books to 

track the disbursement of refined petroleum? Do most refineries 

have that? They have books that show that? 

Mr. CAVANEY. And they report data on a weekly basis to our association, and they also report it to EIA. 

Senator CANTWELL. So the American Petroleum Institute would 

open their books, either to the public or to Federal investigators, 

to look at those books. 

Mr. CAVANEY. That data is not available to the public. Obviously, 

if there is an investigation of some kind, it is available under those 

kind of circumstances. But it is proprietary information for the 

companies. 

Senator CANTWELL. Well, given this crisis and the perception of 

price gouging that is going on, would you not want to have some 

Federal oversight come in and say we have looked at the books and 

we know that there is not an export problem causing this issue or 

moving around to increase shortages or increase demand in certain 

areas? 

Mr. CAVANEY. They have been looked at, and the Attorney General from Florida is also looking at our companies. So this process 

of investigation goes on frequently whenever you have a situation 

where price spikes go up. It is one of the responses public officials 

can do, and so it is occurring and that look is being done by people 

in responsible elected positions. 

Senator CANTWELL. So, the American Petroleum Institute members are currently being investigated by Department of Justice? 

Mr. CAVANEY. No. I said the Attorney General in the State of 

Florida has contacted our companies. This is an occurrence, as I 

said, that oftentimes happens whenever you have price spikes. 

Public officials would like to have a chance to look into these matters, and it does occur. As I said, I have here, going back, dozens 

and dozens of investigations over 30 years, all of which have exonerated the industry. 

Senator CANTWELL. But right now we have price spikes in the 

West, and so is there a Federal investigation going on now? 

Mr. CAVANEY. Not that I am aware of. 

Senator CAMPBELL. The Senator’s time is expired. 

39

Senator CANTWELL. Okay, thank you, Mr. Chairman. 

If I could just follow up with you later, Mr. Cavaney, about 

whether the West and those refineries—I do not know if you are 

inviting a Washington State investigation of that to get the information. But maybe we can follow up with you on that. 

Senator WYDEN. Just a procedural question, Mr. Chairman. After 

our colleagues have finished their first round, would it be possible 

for those of us to ask some additional questions on a second round? 

Senator CAMPBELL. Yes. I understand we have a vote at 12:15. 

So if you want to stick around, that would be fine. 

Senator WYDEN. I very much would like to, including coming 

back after the vote. This is the most important pocketbook issue to 

my constituents, and I would very much like to come back, Mr. 

Chairman. 

Senator CAMPBELL. A 12:15 vote and the conference is at 12:30. 

Senator WYDEN. I appreciate your thoughtfulness. 

Senator CAMPBELL. Senator Murkowski. 

Senator MURKOWSKI. Senator Burns was first. 

Senator BURNS. May I have my turn now? 

Senator CAMPBELL. Senator Burns. 

Senator BURNS. And it will not take very long. 

Senator CAMPBELL. I was going to skip you, but I guess I will 

not. 

Senator BURNS. I am getting misused and abused. 

[Laughter.] 

Senator CAMPBELL. Senator Burns. 

Senator BURNS. Thank you very much, Mr. Chairman. 

I just want to go back on this SPR thing because I do not think 

a lot of Americans understand what the SPR is and how it affects 

our market. Could you just answer real quickly? What is the capacity of SPR? How much oil can we hold? 

Mr. CARUSO. 700 million barrels, Senator. 

Senator BURNS. How much do we have now? 

Mr. CARUSO. The last number I saw was 661 million barrels. 

Senator BURNS. What kind of a daily fill rate are we in right 

now? 

Mr. CARUSO. In June, I believe the fill rate was about 30,000 barrels a day. It is much reduced from what it had been. 

Senator BURNS. From what source? 

Mr. CARUSO. Mostly from royalty-in-kind oil that is produced in 

the United States. 

Senator BURNS. I looked at this thing too because I have got Interior Appropriations. What if we just did not fill during these high 

times? Maybe we just didn’t fill. We didn’t release any oil. We held 

what we had and we put our in-kind oil on the market and took 

the money for the Government. 

Mr. CARUSO. That is correct, Senator. The memorandum that 

Senator Wyden referred to earlier was produced when the EIA was 

asked by the Secretary of Energy to answer the question, what 

would happen. As was pointed out, it said that if you applied the 

rule of thumb and all other things were equal, it could add about 

60 cents to $1 per barrel to the price of crude oil. 

Senator BURNS. Well, I wanted to clear that up on SPR. 

40

As far as Montana is concerned, I am kind of like Senator Dorgan. Sure, we drive long distances, but we also have a double-bedded edge too. We have had estimates right now on high energy 

costs for this crop year. It is going to cost us about 25 to 30 percent 

of our farm income. That is a big hit. That is really a big hit, getting the crop in and getting it out. 

We are not in a position to put anything on the price of our product because our products travel on the open market and I bet you 

will not see they will pay any more for wheat this year at the elevator or the five companies that buy grain this year will not give 

you any more just because your energy costs were higher. So we 

are following this very closely. 

I am interested in the situation at Bakersfield. I am familiar 

with Kern County and its production down there. So we should 

take a look at that. 

But I just think if we want to beat up on the refineries and we 

want to beat up on people who are trying to find bigger reserves, 

then let us really beat up on them and put them out of business. 

Then we will see how high this gasoline can go. We should be 

working together on this thing. 

I am not so much concerned about crude oil as I am about natural gas. Has anybody looked at the gas prices? You are going to 

look at your electrical rates. Are all of our utilities going to be in 

front of their public utilities commissions this fall and say, my 

gosh, we cannot produce this electricity at this rate and hold the 

rates to the consumer? 

And when you apply transportation costs, electricity costs, we are 

in for a big bounce here. What we ought to be doing, we ought to 

be working together, rather than trying to find somebody who is 

gouging the market, and finding larger supplies and taking a look 

at some of the rules and regulations that we put on production. We 

should be really looking at that seriously instead of giving it lip 

service because I am concerned about my farmers. But putting a 

refinery out of business is not the way to get it done. We have got 

to start looking for supply, especially local supply. 

Senator CAMPBELL. The Senator’s time is up. 

Senator BURNS. We cleared up SPR, and thank you very much 

for those answers. I appreciate it because I chair that Interior Appropriations, and do not think we have not been looking at that situation. Thank you for your answers. 

Senator CAMPBELL. Senator Murkowski. 

Senator MURKOWSKI. Thank you, Mr. Chairman. 

Senator Burns, I appreciate your talking about looking to the 

local supply and looking to the domestic sources. Of course, you all 

know what I am going to talk about. 

Alaska is in no different position than any of the other States in 

terms of what we are paying at the pump. Our urban communities 

are paying what you are seeing on the west coast, but I have some 

outlying areas, most of the State, where we are pushing 5 bucks 

a gallon for gasoline. I have some 40 villages that are faced with 

the real possibility of not being able to afford fuel for the winter 

season. They have to commit to it this summer at this summer’s 

prices so they can get it on the barge before the rivers freeze up. 

We have a real situation in my State. 

41

And it is ironic that we have more oil, we have more natural gas 

sitting up there than anywhere else in the country, and yet we cannot get to it. If we had ANWR on line, when President Clinton 

chose to veto this in 1995, we would have a million more barrels 

a day coming into this country. It is not the silver bullet. It does 

not make us energy independent, but it sure helps at a time like 

this. I know that that is long-term. 

But to hear you say that in looking at the supply, we look to 

OPEC, we look to eastern Europe, we look to west Africa, but we 

really do not look domestically. It is important that we continue to 

encourage that domestic reserve. 

Talking about the risk factors, this is an area that I have been 

very keenly focused on, the fact that the more we are reliant on 

outside sources, foreign sources of oil, the more risk there is. I appreciated your statement, I think it was Mr. Cavaney, when you 

said that the closer that the supply and demand is, the greater volatility in terms of this risk factor. 

Mr. Kilduff, when you were talking about SPR and whether or 

not it was a good idea, bad idea, whether it really did help the 

price factor, you have indicated that you feel it might, but what 

does that do insofar as the balance to the risk? We have not really 

talked about the increased risk to this country if we do for shortterm gain—because we are admitting that it is short-term gain 

here—if we draw down from that reserve. This is a concern that 

I have and I have not really heard much discussion about the balancing of the risk against the short-term price gain. 

Just very quickly, in terms of the conversation that I believe Senator Cantwell brought up about what the API has in terms of its 

information, does the EIA get the same reported information as the 

API? 

Mr. CARUSO. That is correct, Senator. 

Mr. CAVANEY. They actually get more. 

Mr. CARUSO. Actually in a little more detail. 

Senator MURKOWSKI. So that information is available. It is out 

there. 

Mr. CARUSO. Yes. 

Senator MURKOWSKI. Mr. Caruso, on April 8, the EIA had issued 

a forecast that the national average price for a gallon of gas would 

be $1.76. On May 26, the national average peaked at $2.05. You 

were correct, of course, in noting that it was going to go up, but 

you were obviously off the mark in terms of how much it was going 

to go up. 

Can you speak to whether or not there could be anything else out 

there that could make it worse than you have already predicted, 

than we are already seeing? What else can happen out there? I 

guess if we have got to prepare for the worst, what should we do? 

Mr. CARUSO. That is correct. Our current estimate is that the national average for 2004 will be $1.91, which, as you pointed out, is 

about 15 cents more than it was in April. But the risk on the upside certainly remains, and I think Mr. Kilduff in his statement 

enumerated a number of those. So clearly ours is based on the expectation that the production that has been announced by OPEC 

and others would continue, there would be no further disruptions, 

42

and that there are no industrial accidents, some of which have contributed to the spikes in gasoline in particular. 

Senator MURKOWSKI. So your numbers are assuming basically 

best case, given what we have right now. 

Mr. CARUSO. I would say prudently optimistic, yes. 

Senator CAMPBELL. The Senator’s time is expired. 

Senator Talent. 

Senator TALENT. Thank you, Mr. Chairman. 

Mr. Caruso, let me ask you this. I have heard some people here 

arguing that if we just released some supplies from the Strategic 

Petroleum Reserve, why that would drive down the price of oil. And 

yet, many of the same folks are saying that the price of oil is high 

because of gouging in the industry or suggesting that that may be 

the case. That is kind of an inconsistent argument, is it not? 

Mr. CARUSO. Yes, sir. 

Senator TALENT. Because if the gouging is what is causing it, 

why, then increasing supply should not make any difference, 

should it? 

How many barrels a day, roughly, do the Saudis put on the world 

market? 

Mr. CARUSO. Their current production is about 9 million barrels 

per day and they are consuming domestically a little over 1 million. 

So roughly 8 million of crude oil is exported from Saudi Arabia per 

day. 

Senator TALENT. Does anybody on the panel believe that if the 

Saudis announced credibly that they were going to increase the 

amount they were putting on the world market by, let us say, 2 

million a day for the foreseeable future, that that would not have 

a downward influence on gasoline prices? I mean, we all believe 

that if 2 million more barrels a day, let us say, were to appear on 

the world market, that would tend to decrease prices, would it not? 

Mr. KILDUFF. In fact, Senator, we have already seen that. A July 

futures contract has fallen some 30 cents already from its high 

back in March. 

Senator TALENT. And largely because OPEC has stepped forward. 

Mr. KILDUFF. I would argue it is almost a direct result from the 

Saudis stepping up to the plate and putting a million barrels on 

now, and we have already been informed and we know that they 

have increased supply to the United States in June and they are 

going to increase it further in July. 

Senator TALENT. Not necessarily the pinch hitter we would all 

like to rely on, but they have stepped up to the plate and increased. 

Conversely, if they were to retreat from the on-deck circle and 

say we are going to reduce the amount of oil we are putting on the 

market by 2 million barrels a day, why, that would certainly have 

an upward influence, would it not? We all agree on that. Right? 

Mr. KILDUFF. Yes. 

Senator TALENT. So basically we are all in agreement here that 

supply and demand, along with factors like refinery capability, 

which is just another way of stating supply and demand, is what 

is determining the price of gasoline because this really is a market. 

Right? 

Mr. KILDUFF. Yes. 

43

Senator TALENT. So would it not follow that anything we could 

do here to increase the market’s confidence that we were going to 

increase supply in the future would tend to have a downward impact on gasoline prices? Does anybody disagree with that? 

Mr. CARUSO. No. 

Senator TALENT. So things like making it easier to explore in 

marginal wells or to explore for oil in Alaska, which my friend from 

Alaska just talked about, or building pipelines to make it easier to 

get from one place to another, or increasing regulatory certainty so 

we could build more refineries, that would all tend to have a downward increase on gasoline prices. We are all pretty much in agreement. 

Mr. Chairman, it sounds to me like the energy bill which we 

have been trying to pass here for about a year and which the chairman talked about because that is what we were trying to do in that 

bill. It just amazes me that we tried to pass this bill just in my 

time in the Congress, since I came in in the Senate, for the last 

year and a half, those of us who have been for this bill have argued 

against left and right that opposed it, that all the objections raised 

to that bill were nothing as compared to what was going to happen 

to this economy and our security when the market doubted the 

supply of different kinds of energy, and now it is coming true and 

we cannot seem to turn around and pass this energy bill or some 

energy bill like it. 

That is all I have to say, Mr. Chairman. Thank you, Mr. Chairman. 

Senator CAMPBELL. That was the first call to vote. We have a few 

more minutes. Senator Domenici does not want to come back after 

the lunch break. Senator Wyden had another couple questions. Did 

you, Senator Bingaman? 

Senator BINGAMAN. I did have a couple of questions. 

Senator CAMPBELL. Senator Bingaman. 

Senator BINGAMAN. Thank you very much. 

Let me ask Mr. Berry a couple of questions. We have all agreed, 

and I think everyone here, all witnesses and all Senators, has 

made the statement that there is no silver bullet, but there is a 

whole range of specific incremental actions that might help. 

One of the issues that would be involved with trying to conserve 

a little fuel, diesel fuel in particular, would be to reduce the idling 

of heavy-duty vehicles. This is information I have and you can contradict this if I am wrong, but my information is that an average 

heavy-duty vehicle, a large truck consumes more than 1,200 gallons of fuel per truck per year just idling at truck stops or whatever. Usually that is done, as I understand it, to keep the refrigeration unit going on the truck so that whatever is being transported 

will not be damaged. 

We have put a provision in this tax package that has now passed 

the Senate a couple of times and is in this fisc bill to provide a 

small credit to encourage more use of these auxiliary power units 

so that a truck could turn off the engine, save the fuel there, and 

turn on an auxiliary power unit to keep the refrigeration unit 

going. Do you support that? Is that something that you think would 

be helpful? Does the ATA support that? 

44

Mr. BERRY. Senator, I do not think I can speak for the ATA on 

this issue. I am not sure what the policy is, but I will get maybe—

Senator, yes, ATA supports it. 

At Swift Transportation, to be more specific, we have for 10 years 

been using the computer that controls the engine to automatically 

shut off our truck after a specified period of time to fight and to 

reduce idling. Furthermore, the manufacturers have a rheostat you 

can now put in the cab of your truck much like a rheostat in your 

home that turns your heat or air conditioner on and off as the temperature dictates, and it does that with the truck engine. 

There are many ways to combat idling. The one that you mentioned is a good one, and there is a good company in New Mexico 

that manufactures them, as I recall. 

Senator BINGAMAN. Yes. We want to encourage everyone to buy 

one of their units. 

[Laughter.] 

Senator BINGAMAN. Mr. Kilduff, let me ask you. This is a fairly 

abstruse issue but an important one I believe. The International 

Energy Agency has a methodology that they use for calculating certain figures they put in their oil market report each month. It is 

my belief that that methodology is flawed, and accordingly, the report that they issue causes producing countries to undershoot what 

they ought to be producing on a fairly systematic basis. 

As I understand it, IEA uses a method to calculate monthly demand that essentially assumes that there is always going to be the 

same amount in inventory. They do not take into account differences in inventory levels. Accordingly, when inventories are low, 

there is a bias against OPEC nations in particular producing as 

much as they should. 

Is this an issue that you have focused on and is it one that you 

have an opinion on? 

Mr. KILDUFF. Well, I know that the OPEC producers themselves 

formulate their own report for their own call, and we do find that 

the IEA numbers tend to lag the real picture. There are constant 

revisions upward and downward based upon what is going on 

there, but it is an all-important report for the market. 

So I guess we take it, to a relative degree, for what it is worth. 

It is certainly a sound indicator. It is certainly something we look 

to, but it is one of a myriad of factors that we sort of put into the 

mix to figure out what real demand is going to be, including our 

own U.S. demand in particular, because we are obviously the No. 

1 consumer. What has really snuck up on the market is the demand in China which I think has been somewhat under-reported. 

So with that, the inventory numbers for the OECD countries in 

that report seem to be fairly represented and they do seem to fluctuate up and down. From there the call on OPEC is something of—

I guess they do the best they can. 

Senator BINGAMAN. Mr. Chairman, I know Senator Schumer has 

arrived. He might want to ask a question before the vote. So I will 

stop with that. Thank you. 

Senator CAMPBELL. Senator Schumer, you will have the last 4 

minutes. Senator Wyden, I apologize. You are going to have to submit your questions I suppose in writing because the chairman does 

not want to reconvene. 

45

Senator WYDEN. Mr. Chairman, if my colleague takes his full 

time, I can still have a couple of minutes, which is what I thought 

we were going to do. 

Senator CAMPBELL. Senator Schumer. 

Senator SCHUMER. Yes, I need about 4 or 5 minutes and that is 

it. 

Senator WYDEN. I would be grateful if I could have a few more. 

We could still be able to make the vote and wrap up at 12:30. 

Senator CAMPBELL. We will try it. We will play it by ear. 

Senator SCHUMER. Thank you, Mr. Chairman. 

As everyone on this panel knows, I have been advocating use of 

SPR since 2000. So I have a question on that and then I have a 

question on the ethanol and the specialty fuels. 

On the SPR, everyone looks at a basic supply and demand analysis, another million barrels out on the market. I think they are 

missing a second point, and I would ask each of you to comment 

on that. And that is, we are in a psychological warfare game with 

OPEC and when our Secretary of Energy said that they are not 

going to use the SPR, they basically told OPEC you can do whatever you want. We are not going to counter you. Whereas, if first 

we said we might use it and then, second, we actually used it, I 

think what would happen—and I think history shows this to some 

extent—is that OPEC would be chastened over the next year or 2 

far beyond a million barrels of oil a day for 30 days or 60 days, 

which my resolution, which I know many of my colleagues, Senator 

Wyden and many others on the committee, have cosponsored. 

So my first question to you all—and certainly I would like Mr. 

Kilduff’s and Mr. Caruso’s opinion on this—is are we not beyond 

just simple supply and demand numbers? Because OPEC, being a 

cartel and trying to figure out how they can control the market, if 

there was another intangible out there that they could not figure 

out what we are going to do, would have an effect on prices beyond 

supply and demand. 

Second on ethanol. Some of you have said that the requirement 

that we use ethanol has raised prices of gasoline. No question 

about it, particularly on the east and west coasts. So my question 

is a very simple one. What is your opinion of granting States that 

are far away from the middle western cornfields—that is what 

makes ethanol expensive. It is not the production of it, but the 

transportation. It is an extremely volatile substance and there is no 

pipeline, so you have got to send it by barge and truck and everything else. What about a waiver for States like New York, like 

California, perhaps Oregon—I do not know the details there—

where the costs are unduly large? 

Those are my two questions and maybe I will begin with Mr. 

Kilduff, then Mr. Caruso, and then everybody else. 

Mr. KILDUFF. Thank you, Senator. I have believed for a long time 

that certainly the SPR is a lever for the United States, that it certainly can be used. I think in 2000, when there was a release, as 

somebody from the markets now, it had the effect of being a momentum killer for the price rally. Even just the talk of it can certainly send the crude oil prices down on the futures market and 

kill the momentum of the rally. 

46

I have disagreed that it is an insignificant amount of oil going 

into the SPR right now as well. I did not say it earlier and I am 

sorry Senator Murkowski is not here now. I do, however, respect 

wholly the national security issue that surrounds filling it. There 

is no question about that. 

But, yes, I think it is a lever for the United States to use against 

the sources of foreign crude oil that are out there. 

Senator SCHUMER. Mr. Caruso. 

Mr. CARUSO. As an analyst, one thing that I would be concerned 

about would be if the Government gets into using a commodity surplus to try to manipulate the market; it would be a game. It would 

be market manipulation. 

Senator SCHUMER. Is OPEC not doing that right now? 

Mr. CARUSO. Yes. 

Senator SCHUMER. You are saying we should not do it even 

though OPEC is doing it? I would agree in a free market you do 

not want to do that. My argument is when you have one manipulator, somebody else who says I have an ace in the hole, I may play 

it, I may not, but you better be careful with your manipulation, it 

is the very point that OPEC is manipulating the market that leads 

you to the conclusion that using the SPR will have an effect beyond 

supply and demand. 

Mr. CARUSO. Clearly it is a game. You would have to make sure 

you would win before you get into it. That is my caution. 

Senator SCHUMER. Well, I understand but we have some pretty 

smart people. We can figure out game theory and all of that. 

Let me ask if any others want to comment on the SPR issue beyond what you have said already. 

Mr. Cavaney. 

Mr. CAVANEY. Senator, I would just make a point. Back in the 

year 2000, we had an instance where we did release some gasoline——

Senator SCHUMER. Yes, I was very involved. 

Mr. CAVANEY. But what happened, referring to Mr. Caruso’s report earlier about his memo, is there were consequences because 

what OPEC did is OPEC cut production by 44 million barrels and 

prices returned back to where they were. So there was a temporary 

relief during the time when we took the initial action, but then 

eventually it reverted back. 

Senator SCHUMER. Let me tell you, sir, my view is OPEC was 

chastened. I understand they did that immediately, but I think it 

had an effect on them over the next several years, and it really was 

not until about 8 months ago, a year ago—when the Saudis cut 

back a million in the spring, that is what sent the thing way up. 

That alone would not have done it, but that with the increased demand with China and India, sent things skyrocketing. 

Senator CAMPBELL. Senator, we are going to really run out of 

time. 

Senator SCHUMER. Can I just ask people to answer my second 

question just if they think that a waiver from ethanol would make 

sense for the States far away from ethanol? I apologize. 

Mr. CAVANEY. Senator, one of the big problems that is included 

in the bill that the Senate had an opportunity to vote on last 

Thanksgiving and then here again not too long ago was the reVerDate 0ct 09 2002 09:38 Oct 20, 2004 Jkt 000000 PO 00000 Frm 00050 Fmt 6633 Sfmt 6602 P:\DOCS\96370.TXT SENE3 PsN: SCAN
47

moval of the oxygenate requirement, and were that eliminated—we 

have proven that we can make gasoline to meet any spec without 

having to have that in. There is an EPA process where States can 

go and request the waiver, and API and its member companies 

support the States having the right. 

Senator SCHUMER. You do. Okay, good. I am glad to hear that. 

Anyone else on that issue? Then I will defer to my colleague. 

Senator CAMPBELL. Go ahead and finish up within a couple minutes, if we can. 

Senator WYDEN. Thanks very much. 

Mr. Caruso, you always say you never advocate anything in spite 

of the fact that you nod every time you agree with something. My 

last question almost sums up the hearing. When you and others 

disagree with us about the Strategic Petroleum Reserve or the 

record refinery profits that I have been pointing out, you always 

say pass the administration’s energy bill. Let me just read you 

what you said in February 2004. 

‘‘On a fuel-specific basis, changes to production, consumption, import and prices are negligible.’’ Is it not correct that you are formally on record—I would like to enter this document in the record, 

Mr. Chairman—as saying that that energy bill will not do anything 

about gasoline prices that we have been concerned about? 

Mr. CARUSO. We did not analyze the full energy bill. We analyzed those components of the energy bill that we could address in 

our National Energy Modeling System. Your quote is accurate. 

Senator WYDEN. Mr. Chairman, I think that sums it up. You 

have been exceptionally kind. He has said the administration’s position is on a fuel-specific basis, the energy bill would have essentially no impact on prices or production or consumption. 

Senator CAMPBELL. With that, we appreciate the panel appearing 

today. The record will remain open for any additional comments, 

and the committee is adjourned. 

[Whereupon, at 12:28 p.m., the hearing was adjourned.] 

[The following statement was received for the record:]

STATEMENT OF JOHN C. TOBIN, EXECUTIVE DIRECTOR, ENERGY LITERACY PROJECT

INTRODUCTION

Mr. Chairman and Members of the Committee, on behalf of the Energy LITERACY Project, I want to thank you for accepting this testimony and respectfully 

request that this statement be part of the hearing record. 

My name is John Tobin. I am the Executive Director of the Energy LITERACY 

Project (ELP), a non-profit 501(c)(3) corporation, whose goal is to achieve a cultural 

change in how members of society view the role energy plays in their daily lives. 

For more information about the ELP, our participants and plans, see our web site 

at www.energy-literacy.org. 

In order to achieve this goal, we realize that a broad-based national energy education program will be necessary. Therefore, the ELP is teaming with the Colorado 

School of Mines, the National Science Teachers Association and others to promote 

such a national program. 

We firmly believe in the need for and the benefits of a long-term national program 

for energy information and education. However, it is especially important today to 

educate the public about the realities of the energy markets and prices to mitigate 

the emotional reaction to these prices. The primary interim means to address concerns about energy and in particular gasoline prices is for the public to understand 

the factors affecting these prices. Then, and only then, can the public support appropriate governmental actions addressing those factors. 

In introducing the energy bill in the Senate last year, Sen. Domenici said, ‘‘Energy 

is one of the most fundamental underpinnings of the U.S. economy. Its price and 

48

availability affect all subsequent prices in the U.S. market and without adequate, 

affordable supplies, our economy and standard of living would collapse.’’

The American public, and, indeed, the global society, has come to rely on cheap 

and abundant energy to fuel the global economy. For many, this reliance is perceived as almost a Constitutional Right, because the public at large lacks the understanding of the realities of the energy industry’s ability to supply this commodity. 

Yet, only when energy prices spike up, or there is a perceived shortage of supply, 

does the public act concerned about energy. Even Federal Reserve Chairman Greenspan’s remarks to both the House and Senate committees in 2003 on the natural 

gas crisis noted that energy is a pocketbook issue. While Congress and the media 

have picked up on this economic fact, the emotional reaction to the current level of 

gasoline prices suggests that the public does not fully understand the economics of 

energy. 

GASOLINE PRICE

The following discussion is a composite view of energy prices held by experts who 

are supporting the ELP’s efforts at bringing more literacy on energy to the public. 

These observations are given in the form of probability distributions because we believe that this approach is intellectually honest, maximizes information, and minimizes unwarranted detail. 

Energy prices, just like any other commodity, are generally cyclical. They are not 

mean reverting but tend to swing about a long-term mean or average value. However, the timing of these cycles and the degree of the swings are not truly predictable. It is only the relative degree that price is away from its mean and current 

or short-term fundamentals that trigger the next correction. 

In addition, all commodity prices also tend to decrease in constant dollar terms 

(adjusted for inflation) and in terms of purchasing power over time. This benefit to 

the economy comes from efficiencies in the production of and the consumption of 

these basic commodities. Nevertheless, it is today’s price that stimulates current 

concerns and is the reason an explanation of the facts must be communicated to the 

public. 

To explain our views on gasoline I will decompose the prices of this critical commodity into three basic components.

• Raw Material (Crude Oil) 

• Normal Profit Margins 

• Costs mandated by ‘‘We the People’’

Crude Oil 

Since 1890, oil prices have ranged from a low of about $8 per barrel to a high 

of about $65 per barrel expressed in 2003 dollars. There have been different drivers 

over the past 114 years beginning with the Standard Oil Trust, followed by a period 

of free markets. This was followed by a period of ‘‘legislated stability’’ controlled essentially by the Railroad Commission of Texas, then by the ‘‘Seven Sisters’’, followed 

by the OPEC era. Since the mid 80s the oil markets have been once again relatively 

free. Today the energy markets in general and the oil market in particular are responding to the ‘‘Global Market’’. This global market no longer respects political borders, and represents a world where the US may still be the biggest kid on the block, 

but there are many other large players such as the EU, China and other emerged 

economies. While oil has averaged $20.23/bbl over this time, we see a future that 

is very volatile and that will average $25 to $28/bbl. 

The current price of $38.00/bbl results from many short-term forces that pull up 

and push down oil prices from this average.

Per bbl 

Upward Forces: 

Fears over terror and unrest in the Middle East ................................ $1 to $5

Concerns over production capabilities in Iraq, Venezuela, etc. .......... $1 to $3

Competing Governmental demand (Strategic Petroleum Reserve) .... $2 to $4

OPEC discipline ...................................................................................... $0 to $1

Near term concerns over weather (Inventory) ..................................... $0 to $1

Weak US Dollar ...................................................................................... $0 to $2

Lowering Forces: 

Cheating within OPEC .......................................................................... ¥$1 to ¥$2

Non-OPEC production ............................................................................ ¥$2 to ¥$3

Substitution to other forms of energy ................................................... ¥$1 to ¥$3

49

There are many other players in this tug of war. While energy analysts can assign 

different ranges to these factors, this forecast suggests that there is an 80% confidence that oil prices will be within a range of a low of $23 to a high of $37/bbl, 

with an average in the high 20s to low 30s for 2004. In exceptional times there is 

a 10% chance that oil could trade below $23/bbl and 10% of the time oil could trade 

above $37/bbl (as seen today). However, the current bias is to the high side of the 

components impacting oil prices. 

In summary, the raw material, crude oil, is a fungible commodity that is traded 

globally. It is a very delicate balance. While OPEC tries to control the price of oil, 

in the long run it is only one player and the price must reflect global market economics of supply and demand. 

It should also be noted that it is in OPEC’s best interest to keep oil prices in a 

‘‘reasonable’’ range to maintain global economic growth and to discourage competition that would cut into its market share. It is our belief that recent OPEC actions 

reflect this reality. 

Crude oil is usually the predominant cost factor seen in gasoline prices. Futures 

prices for gasoline on the NYMEX and crude prices track very closely (R2= 0.894). 

Retail gasoline prices also track this trend (R2= 0.795 with respect to oil). 

The result is a range of raw material costs in gasoline for 2004 of $0.60 to $1.00 

per gallon. 

Normal Profit Margins

Per gallon 

Refining Margin ...................................................................................... * 20¢ to 65¢

Transportation ........................................................................................ 5¢ to 10¢

Gas station profit margin ...................................................................... 5¢ to 10¢

* Note: Volatile prices, especially at the high end of the range, encourage financial players to 

participate in the futures market. Financial hedging and speculation of up to 10¢/gal or more 

is seen in the net NYMEX Unleaded Gasoline price of 80¢ to $1.75/gal. At the time of preparing this testimony, crude oil was trading at about $38/bbl and NYMEX unleaded gasoline 

at about $1.20/gal. 

Profit margins in the transportation and local retailing segments do not include 

any potential for local market discontinuities or even local market manipulation. 

This results in a cost on top of the raw material of between 30¢ to 85¢ per gallon. 

‘‘We, The People’’

However, the retail consumer sees many more costs as he fills up his SUV. 

Refining costs shown above are also somewhat influenced by ‘‘We, The People’’ 

who have indicated through our votes regarding environmental and other regulations that we are discouraging the building of any new refineries in the US. While 

incremental refining expansions have been seen at existing facilities, there has been 

no new refinery built in this country in the past quarter century. There is some incremental supply of gasoline imported if it can meet local blend requirements. 

In addition we have mandated:

Federal Taxes ......................................................................................... 18.4¢

State and local taxes .............................................................................. * 24¢

* Typical 

Again, the electorate has decided to fund our highways and other governmental 

activities with these added costs. While this 35¢ to 50¢ can represent about 25% of 

the retail price of gasoline in ‘‘normal’’ times, it pales in comparison to taxes seen 

by European drivers that can be over $4.00/gal in gasoline taxes. 

The public has also mandated some 20 specific blends of gasoline that we want 

in various markets for environmental reasons, which can add up 20¢ per gallon. 

This does not include the tax credit all the nation’s taxpayers transfer to the ethanol 

producer from our other taxes we pay the government. The net costs that the public 

has mandated and must pay for can be between 40¢ and $1.00 per gallon. 

Summary 

As with the analysis of crude oil above, these ranges represent an 80% confidence. 

With these ranges in mind, there should be little surprise to expect gasoline prices 

to be very volatile in the 2004 energy environment and range from as low as $1.30/

gal to as high as $3.40/gal in some markets for a period of time. 

50

Note: In a relatively high price, high cost scenario the components of regular unleaded self service gasoline prices could be as high as:

Per gallon 

Crude Oil at $40/bbl ............................................................................... $1.00

Refining Costs of Operation ................................................................... 0.30

Normal Profit Margins ........................................................................... 0.30

We, The People 

Taxes ................................................................................................ 0.50

Refining Capacity Constraints ....................................................... 0.20

Boutique Fuels ................................................................................. 0.30

Financial Hedging .................................................................................. 0.20

Net retail price ....................................................................................... $2.80

While pre-Memorial Day gasoline prices have begun to decline, the primary source 

of uncertainty is geopolitical. Further issues that cloud the picture of future supply 

are the narrow reporting restrictions allowed by the SEC and the lack of good data 

globally as seen by the different inventory reports from the DOE and the API, etc. 

Overall, this analysis is basic economic. High demand (improving global economy 

and the ‘‘right’’ to drive SUVs) and tight supplies and tight refining capacity are 

pulling up prices for all energy. In an ever-expanding global economy any additional 

BTU helps. US efforts to increase domestic supply are limited by geology, but should 

be encouraged rather than restricted. As noted in the discussion of crude oil prices, 

the gasoline commodity must also obey the laws of supply and demand, especially 

in the segmented markets we see in this country today. 

EDUCATION

This and similar hearings are generating a great deal of very valuable factual information from many experts regarding a number of factors affecting energy in general and fuel prices in particular, including those factors deemed important safeguards or priorities by the voting public. However, most of the general public remains uninformed about these different elements and can quickly react to single 

issues without understanding the complexity and the tradeoffs of the full situation. 

We suggest that follow up efforts looking into solutions to these concerns over energy include a very strong initiative for a broad based public energy education and 

information program. 

In May of 2001 the President of the United States’ National Energy Policy Development (NEPD) Group made the following recommendation in Chapter 2 of the proposed National Energy Policy.

‘‘The NEPD Group recommends that the President direct the Secretary of Energy to explore potential opportunities to develop educational programs related 

to energy development and use. This should include possible legislation to create public education awareness programs about energy. Such programs should 

be long-term in nature, should be funded and managed by the respective energy 

industries, and should include information on energy’s compatibility with a 

clean environment.’’

We believe that this statement recognizes the need for a national energy education program in the broadest sense, to support a stable and sustainable energy 

policy. We urge the Congress to adopt the President’s recommendation in the NEPD 

and direct the Department of Energy to make such a program, which improves the 

energy LITERACY of the nation, an immediate priority. 

Thank you again for the opportunity to provide this testimony. 

(51)

APPENDIX 

RESPONSES TO ADDITIONAL QUESTIONS

FIMAT USA, INC., 

New York, NY, August 2, 2004. 

Hon. PETER DOMENICI, 

Chairman, Committee on Energy and Natural Resources, U.S. Senate, Washington, 

DC. 

DEAR MR. CHAIRMAN: Enclosed herewith are my responses to the questions submitted to me for the record. 

I thank you, again, for the opportunity to appear before the Senate Committee 

on Energy and Natural Resources and give testimony regarding what drives crude 

oil supply, gasoline demand and the effect on prices. 

If I can be of any further assistance to you or the other members of the committee 

or your respective staff, please contact me. 

Very truly yours, 

JOHN P. KILDUFF, 

Senior Vice President, 

Energy Risk Management. 

[Enclosure.] 

ANSWERS OF JOHN P. KILDUFF TO QUESTIONS SUBMITTED FOR THE RECORD

MINIMUM INVENTORY OPERATING LEVELS—SENATOR BINGAMAN

The latest data from the Energy Information Administration show that commercial crude oil inventories consisted of 303 million barrels, slightly above the five-year 

average of 296 million barrels. The perspective provided by the five-year average, 

and even the ten-year average, remains valid. As with any analysis dealing with 

probability, the greater the number of observable events the higher confidence one 

can have in predicting an outcome. 

Many factors drive prices, at a particular moment in time. I can recall when ‘‘justin-time’’ inventory management came into vogue in the oil industry and was cited 

as a major factor for higher prices that were, supposedly, here to stay. That was 

in 1996, and, in 1998, a global supply glut caused prices to crash. Strong demand 

in 2000, that appeared to be insatiable and was quelled by a release of oil from the 

Strategic Petroleum Reserve (‘‘SPR’’), was followed, again, by a steep price decline 

in 2001, as the global economy slowed and the events of September 11, 2001 further 

dampened the expectation for future crude oil demand. Subsequently, a series of 

production cutbacks by Oil Producing Exporting Countries (‘‘OPEC’’) and the runup to Iraq war, among other factors, fostered a rally in prices that we are continuing 

to experience. 

In the context of the current rally, inventories for the past two years have averaged 285 million barrels and 295 million barrels for the past two years. This is one 

million and eleven million barrels below the five-year average, respectively. Currently, inventories are 18 million barrels above the two-year average and eight million barrels above the three-year average, which, for now, argues for the utility of 

the five-year average, due to where prices are in relation to each of these measures. 

As we have both noted, the low point for inventories occurred in January of 2004 

and coincided with some of the highest nominal prices on record. There are myriad 

factors that determine crude oil prices, at any one time; however, the inverse correlation between inventories levels and prices is most compelling, most of the time. 

Currently, prices are continuing to approach their nominal price highs, even with 

inventories indicating adequate supply levels, on any multi-year measure, proving 

that no one measure dictates prices. Hence, there is no absolute rule-of-thumb, and 

52

we use all measurement tools available to us, in order to provide as reliable a forecast as possible. 

NPC STUDY ON INVENTORY DYNAMIC—SENATOR BINGAMAN

For the record, I am not completely familiar with the NPC study. However, as 

with any study, it’s conclusions appear to be driven by factors being observed at the 

time of publication. Certainly, neither the NPC nor just about anyone else could 

have foreseen the supply glut and energy price crash experienced in late 1998. Accordingly, in the intervening time frame, the various political events that have occurred were difficult to predict. What has occurred is tremendous strain on crude 

oil production and refined product output. Demand for petroleum products has been 

growing steadily, over the past several years, and production has not kept pace. Refiners must, basically run at full capacity, year-round, in order to meet demand. For 

example, in 1998 gasoline demand averaged 8.5 million barrels per day, and it now 

averages over 9.0 million barrels per day, with record setting weeks, approaching 

10 million barrels per day, occurring with some frequency. China’s voracious appetite for energy has been well chronicled as a recent phenomenon. In the fifteen years 

prior to 1994, China’s energy consumption doubled and is expected to double again 

by 2006. This borne out by more recent data which show that in the first six months 

of the 2004, crude oil imports into China have soared, setting a record in June, and 

are 39% higher than the first six months of last year. 

For the time being, as exhibited by the price spikes of the past several years, I 

believe the highly volatile market state remains extant. The marketplace is extremely vulnerable to even the slightest refinery outages, and transportation and 

storage constraints also add to this vulnerability. The current price environment has 

made refining an extremely profitable venture for the first time in many years. This 

environment has caught the attention of foreign refiners who have attempted to 

supply gasoline and other refined products to the U.S. in increasing amounts. Increased reliance on foreign source refined products and crude oil is hardly an ideal 

situation, however. Similarly, it appears to be a tremendous challenge to increase 

refinery capacity within the United States given the perceived public resistance to 

such an undertaking. The simple answer to your question of what can be done is 

that we need to increase supply and/or reduce demand, in order to lower prices. This 

declaration leads us to consider much harder questions about how these ends are 

achieved. A combination of allowing the existing refineries to expand their capacity 

and stretching each and every B.T.U. consumed, in terms of increased efficiencies, 

would logically serve both of these ends, until such time as other fuel sources can 

effectively compete with traditional fossil fuels. 

Regarding this last point, we cannot change our fuel supply infrastructure overnight. I also don’t believe anyone is unwelcoming of clean, renewable fuel sources, 

in the future. There appears to be a readily identifiable middle-ground, where the 

acceptance of dirty or even dirtier fuels are accepted by all sides in the short run, 

as long as a real commitment to transitioning out of these fuels in the long run is 

secured. 

QUESTIONS ON C.A.F.E.—SENATOR FEINSTEIN

As I cited in my opening remarks, China is keenly aware of the problems presented by their dependence on foreign oil. I have been extremely impressed with 

their foresight and concern in this area. We cannot stabilize gasoline prices without 

managing our demand for oil. While we are in a situation where every available barrel of oil counts, it is hard to envision the United States being able to substantially 

increase production of either crude oil or refined products given a lack of proven reserves and community opposition to new or expanded refineries. 

It would appear counter-intuitive that the government would be encouraging the 

purchase of less-fuel efficient Sport Utility Vehicles (‘‘SUV’’), based solely on the energy challenge facing the country and the world. Different policy choices could attempt to correct this situation, but other disruptive side effects could ensue, requiring additional policy considerations. For example, changing the treatment of SUVs 

and lessening their purchase may adversely affect the profitability of the domestic 

auto industry, which could result in further contraction and a loss of jobs. The 

weighing of these factors and the ultimate decisions are—to use a popular Washington expression—above my pay grade, however. 

We would certainly do ourselves a tremendous favor to encourage and succeed in 

increasing automobile fuel efficiencies. With all the technological advances of the 

past thirty years, it is hard to understand why fuel efficiencies are not extraordinarily higher than they are at present. Each mile per gallon of increase fuel efficiency results in a reduction of almost 750,000 barrels of crude oil per day. EncourVerDate 0ct 09 2002 09:38 Oct 20, 2004 Jkt 000000 PO 00000 Frm 00056 Fmt 6601 Sfmt 6621 P:\DOCS\96370.TXT SENE3 PsN: SCAN
53

aging the purchase of more fuel efficient vehicles would seem to be a terrific approach toward managing demand and encouraging the types of technological breakthroughs that seem too long in coming. 

GASOLINE INVENTORIES—SENATOR FEINSTEIN

A common thread of my testimony has been the inverse correlation between inventories and prices. Certainly, anything that can be done to increase inventories 

and have a steady and stable stream of supply will help keep prices low. The idea 

of requiring a minimum amount of gasoline in storage might not assist in achieving 

this goal. If I understand the proposal correctly, this prescription may result in refiners being forced to keep gasoline off the market, in order to meet the minimum 

requirements. A slightly different approach may be to create a gasoline reserve, just 

as we have the SPR for crude oil and the Northeast heating oil reserve. I remain 

of the opinion that the SPR provides a relatively effective lever for the United 

States, in balancing against the sometimes-divergent interests of oil producing countries. A gasoline reserve, built up, slowly, over time, with a clearly defined mechanism for triggering releases may help to quell price spikes, when they occur. There 

would be many challenges, including the need for the reserve to be regional in nature, in order to allow for gasoline that can quickly reach the marketplace and meet 

the specific grade and formulation of the affected area. 

HYDROGEN ECONOMY—SENATOR FEINSTEIN

Regarding this topic, I regret that I am able to offer only a few limited insights. 

From my research, it appears a viable and reliable hydrogen fuel infrastructure 

is, unfortunately, 20-30 years in the future. The principal problem centers on the 

price competitiveness of hydrogen fuels, as fossil fuels remain the cheapest form of 

energy by far, even in today’s high crude oil and natural gas marketplace. 

In the short-run, hybrid implementations appear to hold the most promise. By 

this, I am referring to technologies that utilize fuel cell technologies that are powered by hydrogen, derived from fossil fuels. This appears to be the most practical 

approach, which also serves to introduce hydrogen technology to the public and further its acceptance. The increased fuel efficiencies generated from these implementations in passenger cars has been impressive, if not extraordinary. For example, 

the Toyota Prius hybrid vehicle achieves 60 miles per gallon, and it is competitively 

priced at around $20,000. As referenced above, regarding fuel efficiency standards, 

it does not take very much, in terms of increased efficiencies, to displace the need 

for millions of barrels of crude oil. 

I have not conducted an independent analysis of the cost to develop a hydrogen 

fuel infrastructure. The costs that I have seen put forward by others seem extraordinary and, if accurate, would appear to present a significant barrier to implementation. However, as the committee is aware, there is a great deal of research and development being undertaken in this area, and I would not be surprised to see a significant breakthrough in the next ten to fifteen years. It is clear that hydrogen fuel 

cell technology is on the verge of becoming commercially viable, and its appeal is 

furthered by its use of existing infrastructure, due to its combination with traditional fuel sources. If this approach is continued, a transition to a more complete 

hydrogen future should be smoothed. 

DEPARTMENT OF ENERGY, 

CONGRESSIONAL AND INTERGOVERNMENTAL AFFAIRS, 

Washington, DC, August 20, 2004. 

Hon. PETE V. DOMENICI, 

Chairman, Committee on Energy and Natural Resources, U.S. Senate, Washington, 

DC. 

DEAR MR. CHAIRMAN: On June 15, 2004, Guy F. Caruso, Administrator, Energy 

Information Administration, testified regarding what drives crude oil supply, gasoline demand and the effect on prices. 

Enclosed are the answers to three questions that were submitted by Senators 

Bingaman and Cantwell for the hearing record. The remaining answers are being 

prepared and will be forwarded to you as soon as possible. 

If we can be of further assistance, please have your staff contact our Congressional Hearing Coordinator, Lillian Owen, at (202) 586-2031. 

Sincerely, 

RICK A. DEARBORN, 

Assistant Secretary. 

54

1 Energy Information Administration, Supply of Chicago-Milwaukee Gasoline Spring 2000, 

http://www.eia.doe.gov/pub/oillgas/petroleum/presentations/2000/supplyloflchicagolmilwaukeelgasolinelspringl2000/cmsupply2000.htm.

[Enclosures.] 

QUESTION FROM SENATOR BINGAMAN

Question. Energy experts tell us that the method IEA uses to calculate monthly 

demand and supply figures is flawed, and that it encourages OPEC to ‘‘undershoot’’ 

the market in terms of the amount of crude oil it supplies to the world market. The 

IEA market report treats stocks of oil in the major consuming countries as a fixed, 

invariable amount. But this treatment of stocks is not realistic, and its effect on 

IEA’s models is to bias them towards understating the amount of oil that OPEC 

needs to produce for the world market—the so-called ‘‘Call on OPEC.’’ A revision 

to the strategic stock calculation methodology could fix this. Will you comment on 

how you interpret the statistic and what could be done to improve its computation? 

Answer. The IEA does not actually forecast OPEC oil production in its monthly 

Oil Market Report. Instead, it reports a memo item in its world oil supply and demand outlook called the ‘‘call on OPEC crude oil plus stock change’’. It is essentially 

a balancing item that is calculated as the difference between world oil demand and 

the supply of oil from all sources other than OPEC crude oil production. Because 

it is a balancing item, by definition it reflects any judgments in the IEA’s estimates 

of world oil supply and demand. 

While the statistic has been commonly used as a proxy for an estimate for the 

need for OPEC crude oil, this usage is misleading because, as the IEA says in its 

monthly report, it also includes stock change. Unless the stock change was assumed 

to be zero, the statistic would not, by definition, be equivalent to the need for OPEC 

crude oil. 

EIA does not follow the IEA’s approach. Our customers have found it useful to 

have a breakout of both OPEC production and stock change. In addition, providing 

this breakout also serves as a useful check to see whether the analysis behind EIA’s 

oil market forecast makes sense; that is, would a given forecast for OPEC oil production result in the kind of stock change that our forecast implies? 

QUESTIONS FROM SENATOR CANTWELL

Question 1. Has the EIA ever analyzed how the fuel mix from a certain refinery 

is calibrated to meet, or avoid meeting, the supply needs of a particular region? 

Answer. No. EIA does not generally analyze how individual refineries are calibrated, but rather how supply responds to changing market conditions on an aggregate basis, using individual refinery data for more in-depth understanding. There 

are several reasons for this approach. 

First, the data we collect from refiners is not detailed enough to allow us to fully 

evaluate refinery operating options. 

Second, companies generally plan their supply from a system perspective, including both refinery supply from all of their refineries as well as purchasing supplies. 

For example, if they know one refinery needs to undergo some maintenance, they 

would typically alter production at their other refineries and their purchases to 

make up for that one refinery’s downtime. Thus, what an individual refinery is 

doing may not be revealing. Furthermore, we do not know which markets a particular refinery’s supply may be serving. 

Third, EIA is unable to separate planned operations from operational changes 

made in response to unexpected market shifts. A refinery may not be able to adjust 

its operations quickly for unexpected needs. Refinery planning for crude runs and 

product production requires long lead times in many cases. Refineries may use 

crude oil that can require months to contract and deliver. Product from refineries 

on the Gulf Coast may need to be produced 21 days ahead of when it is needed so 

that it can travel up a pipeline to the market area where it will be consumed. While 

a particular refinery may have little or no discretionary volume that can respond 

to short-term market signals, other refineries may have some discretion in changing 

crude oil inputs or adjusting the mix of products they are getting from that crude 

oil. Because changing operations can be complex, such diversions from planned operations would not be expected to be made until market signals were clear. 

For the reasons outlined above, EIA does not focus on individual refinery data in 

analyzing regional markets. However, several recent analyses, including studies of 

gasoline price spikes in 1977 and 2000, have used such data to provide additional 

insights.1

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Question 2. Mr. Caruso, do you agree that the EIA analysis of the H.R. 6 conference report requested of Mr. Sununu, which states ‘‘on a fuel-specific basis, 

changes to production, consumption, imports, and prices are negligible,’’ confirms 

that H.R. 6 would have negligible impact on gasoline prices? 

Answer. In EIA’s Summary Impacts of Modeled Provisions of the 2003 Conference 

Energy Bill (February 2004), the Conference Energy Bill (CEB, or H.R. 6) Case 

projects an increase of 0.3 cents per gallon (0.2 percent) in the average gasoline 

price and an increase of 0.4 cents per gallon (0.26 percent) in the average reformulated gasoline (RFG) price compared to the Reference Case in 2010. These estimated 

price increases result mainly from the renewable fuels standard (RFS) which would 

lead to additional ethanol blended into conventional gasoline. 

By 2015, the CEB Case projects an increase of 3.0 cents per gallon (2.0 percent) 

in the average gasoline price and 8.1 cents per gallon (5.3 percent) in the average 

RFG price, relative to the Reference Case. Included in this price is the elimination 

of the ethanol tax credit in 2011, which is expected to increase the gasoline price 

by the amount of ethanol blended, about 1.2 cents per gallon for all gasoline and 

2.7 cents per gallon for all RFG. The remaining cost increases result from the phaseout of MTBE use by 2015. Therefore, the CEB would have the most impact on RFG 

price when fully implemented in 2015. 

The fuel ethanol consumption in 2003 was 2.81 billion gallons. By 2015 when 

MTBE would be completely phased out, the CEB Case projects the fuel ethanol consumption of 5.57 billion gallons, almost doubling the current consumption level and 

an increase of 1.81 billion gallons over the Reference Case of 3.76 billion gallons for 

projected fuel ethanol consumption in 2015. 

The EIA study only simulated major CEB provisions that could be modeled, such 

as the RFS, a nationwide MTBE ban, and termination of the ethanol tax credit. 

Other petroleum fuel-related provisions such as repealing the motor fuel tax for railroad and inland waterway transportation, small ethanol producer credit, credit for 

ultra-low-sulfur diesel production, etc. were not modeled. These other provisions 

were not expected to have a significant impact on gasoline prices even they had 

been included in the CEB study. 

DEPARTMENT OF ENERGY, 

CONGRESSIONAL AND INTERGOVERNMENTAL AFFAIRS, 

Washington, DC, September 7, 2004. 

Hon. PETE V. DOMENICI, 

Chairman, Committee on Energy and Natural Resources, U.S. Senate, Washington, 

DC. 

DEAR MR. CHAIRMAN: On June 15, 2004, Guy F. Caruso, Administrator, Energy 

Information Administration, testified regarding what drives crude oil supply and 

gasoline demand, and the effect on prices. On August 20, 2004, we sent you the answers to three questions for this hearing. 

Enclosed are the answers to three remaining questions that were submitted by 

Senator Feinstein to complete the hearing record. 

If we can be of further assistance, please have your staff contact our Congressional Hearing Coordinator, Lillian Owen, at (202) 586-2031. 

Sincerely, 

RICK A. DEARBORN, 

Assistant Secretary. 

[Enclosures.] 

QUESTIONS FROM SENATOR FEINSTEIN

Question 1a. Given both rising gasoline prices and geopolitical concerns, do you 

believe that we can stabilize gasoline prices without managing demand for oil? 

Answer. Given the strong growth in both the U.S. and the rest of the world in 

gasoline demand, the increasingly stringent specifications for gasoline to meet environmental requirements, the difficultly of building new refining capacity in the U.S., 

and our need to import more gasoline to meet rising demand stabilization of gasoline prices in the long term will require both an increase in efficiency and an increase in production of gasoline and a delivery infrastructure that operates with 

minimal upsets. With respect to fuel efficiency, the Bush Administration is committed to improving vehicle fuel economy while saving lives and saving American 

jobs. This Administration has led the effort to improve fuel economy by urging the 

Congress in 2001 to lift the prohibition against the National Highway Traffic Safety 

Administration (NHTSA) studying CAFE. The Administration has finalized an inVerDate 0ct 09 2002 09:38 Oct 20, 2004 Jkt 000000 PO 00000 Frm 00059 Fmt 6601 Sfmt 6621 P:\DOCS\96370.TXT SENE3 PsN: SCAN
56

crease in the CAFE standard for new light trucks and SUVs, announced options to 

reform CAFE to achieve all of its goals (including greater fuel economy) more effectively, implemented tough new emissions controls on fuel-efficient diesel engines 

and fuels, and committed $1.7 billion over 5 years for a visionary hydrogen vehicle 

program to substantially reduce our need for petroleum products in the future. 

EIA analyzed the impact of the new light truck CAFE standards on imports of 

petroleum products. The new light truck CAFE standard requires an average fuel 

economy of 21.0 miles per gallon (mpg) in 2005, 21.6 mpg in 2006, and 22.2 mpg 

in 2007 and beyond. Results of the analysis show that the increased fuel economy 

standard will save approximately 52 billion gallons of gasoline over 10 years and 

will reduce imports of petroleum products are reduced 0.25 million barrels per day 

by 2020. 

Question 1b. To follow up, do you believe that the first step we should take is to 

close the SUV loophole? 

Answer. The term ‘‘SUV loophole’’ is a misnomer. By statute, vehicles with certain 

capability—SUV’s—are subject to the average fuel economy standards for light 

trucks, as opposed to those of smaller, passenger vehicles. Incidentally, the Bush 

Administration has raised the CAFE standard on light trucks by 1.5 mpg-more than 

the increases in the previous 20 years combined. 

Question 2. One of the factors given as a cause for the increase in gasoline prices 

is the fact that refineries have had low gasoline inventories for much of the spring. 

By February 27th, California reformulated gasoline inventories stood at 11.5 million 

barrels—about 800,000 barrels below last year’s inventory low of 12.3 million barrels. As a result, during times of unexpected outages, the refineries have not been 

able to make up lost volume. Nationwide, US crude oil inventories are currently 

11.8 million barrels less than the 5-year average for this time of year. Given that, 

do you believe that Congress should enact a minimum requirement for gasoline inventories in order to keep gasoline prices more stable in time of unexpected outages? 

Answer. The Secretary recently requested that the National Petroleum Council reexamine its 1998 advice on lower operational inventory levels for crude oil and petroleum products. This work will build on a previous NPC petroleum product reports: U.S. Petroleum Product Supply—Inventory Dynamics, December 1998. This 

report provided important advice on the interrelationships between product inventories and retail prices and suggested lower operating inventory levels for crude oil, 

gasoline, distillate, and kerosene jet fuel. 

The advice of the NPC will be valuable in considering any potential actions needed to address inventory holdings and their effect on price. . However, we believe 

that statutorily mandated gasoline inventories would likely add inflexibility to an 

increasingly dynamic and ’just-in-time’ crude and product delivery system and may 

increase overall prices to consumers. 

As a supporter of the development of fuel-cell technology, I have followed the news 

concerning the development of this alternative fuel technology closely. I am concerned that advocates of this technology have created a misperception as to when 

this technology will be readily available for everyday use in the United States. 

Recent studies, such as the National Academy of Sciences (NAS) recent report entitled The Hydrogen Economy: Opportunities, Costs, Barriers, and R & D needs, suggest that while hydrogen is a potential long-term energy approach for the nation, 

the government should keep a balanced portfolio of research and development efforts to enhance U.S. energy efficiency and develop alternative energy sources. 

Question 3. When do you foresee the U.S. having a reliable hydrogen fuel infrastructure? How much will it cost to develop this infrastructure? 

Answer. If the Department meets the performance and cost targets for hydrogen 

and fuel cell technology established through the President’s Hydrogen Fuel Initiative and the FreedomCAR Partnership, industry will be able to make a commercialization decision in 2015. 

Assuming this decision is positive, our planning indicates that by 2020, industry 

will be able to install manufacturing capability for fuel cell vehicles and a limited 

number of hydrogen stations to serve initial market penetration. If hydrogen fuel 

cell vehicles are a market success, a fully reliable, national infrastructure could be 

installed by 2035. 

More information on the timeline for the hydrogen economy can be found in the 

Posture Plan, which is available at http://www.eere.energy.gov. 

The President’s Hydrogen Fuel Initiative is focused on research to overcome the 

barriers related to the hydrogen production and delivery infrastructure. Except for 

‘‘learning’’ demonstrations to identify ‘‘realworld’’ operating issues and to help guide 

the research, the Initiative does not include installing the infrastructure. 

Because many hydrogen production and delivery technologies are immature, cost 

estimates for building the hydrogen infrastructure vary greatly. General Motors has 

57

estimated $10-15 billion to provide the necessary hydrogen refueling station infrastructure for about 70% of the U.S. light duty vehicle market. (Source: GM presentation by T. Vail at the U.C. Davis ITS Hydrogen Demand Workshop, June 21, 

2004). Argonne National Laboratory has estimated $600 billion for a full production, 

delivery, and refueling infrastructure over a 35 year time frame for U.S. light duty 

vehicles based on a specific hydrogen production scenario. (Source: M. Mintz, et al, 

First International Workshop, American Institute of Physics, Newport News, VA, 

Nov. 2002). 

It should be noted that investment to maintain today’s petroleum fuel infrastructure is about $40 billion per year (Source: 2002 Oil and Gas Journal Capital Expenditures Survey). However, it is rate of return on investment, i.e. the viability of 

the business case, which is the deciding factor for fuel infrastructure investment, 

rather than the absolute investment required. 

During the transition to a hydrogen economy, distributed natural gas and electrolysis systems located at the retail fueling station could negate any immediate 

need for a centralized hydrogen infrastructure. This approach could enable time to 

ensure consumer acceptance of hydrogen fuel cell vehicles before large investments 

are made in developing a centralized, national infrastructure, thereby minimizing 

the investment risk.

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