```

[Senate Hearing 108-644]
[From the U.S. Government Publishing Office]

                                                        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

                                 ______

                    U.S. GOVERNMENT PRINTING OFFICE
96-370                      WASHINGTON : 2004
____________________________________________________________________________
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               COMMITTEE ON ENERGY AND NATURAL RESOURCES

                 PETE V. DOMENICI, New Mexico, Chairman
DON NICKLES, Oklahoma                JEFF BINGAMAN, New Mexico
LARRY E. CRAIG, Idaho                DANIEL K. AKAKA, Hawaii
BEN NIGHTHORSE CAMPBELL, Colorado    BYRON L. DORGAN, North Dakota
CRAIG THOMAS, Wyoming                BOB GRAHAM, Florida
LAMAR ALEXANDER, Tennessee           RON WYDEN, Oregon
LISA MURKOWSKI, Alaska               TIM JOHNSON, South Dakota
JAMES M. TALENT, Missouri            MARY L. LANDRIEU, Louisiana
CONRAD BURNS, Montana                EVAN BAYH, Indiana
GORDON SMITH, Oregon                 DIANNE FEINSTEIN, California
JIM BUNNING, Kentucky                CHARLES E. SCHUMER, New York
JON KYL, Arizona                     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

                            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

 
      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 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 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.
                                 ______
                                 
         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 scaled-back 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 
Subcommittee 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 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-adjusted 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.
---------------------------------------------------------------------------
    * Figures 1-5 have been retained in the committee files.
---------------------------------------------------------------------------
    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 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 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.

        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, increasing 
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 
percent 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.
    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 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 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 interests. 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.
    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 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.
---------------------------------------------------------------------------
    * NOTE: All charts have been retained in the committee files.
---------------------------------------------------------------------------
    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 pre-war 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 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 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 five-year 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 national 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:]

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 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.

     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 
heavy-duty 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.
    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.
    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 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.
    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?
    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 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 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 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.*
---------------------------------------------------------------------------
    * The report has been retained in the committee files.
---------------------------------------------------------------------------
    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 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 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, indeed, 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?
    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 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. 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.
    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.
    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.
    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 short-term 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, 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.
    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?
    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.
    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.
    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 removal 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 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,                  $1 to $3
 Venezuela, etc.........................................
Competing Governmental demand (Strategic Petroleum              $2 to $4
 Reserve)...............................................
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

    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 (R\2\ = 0.894). Retail gasoline prices also track this 
trend (R\2\ = 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 cents to
                                                                65 cents
Transportation..........................................   5 cents to 10
                                                                   cents
Gas station profit margin...............................   5 cents to 10
                                                                   cents

* 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 cents/gal or more is
  seen in the net NYMEX Unleaded Gasoline price of 80 cents 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 cents to 85 cents 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 cents
State and local taxes...................................      * 24 cents

* Typical

    Again, the electorate has decided to fund our highways and other 
governmental activities with these added costs. While this 35 cents to 
50 cents 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 cents 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 cents 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.
    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.

                                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 ``just-in-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 run-up 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 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. 
Encouraging 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.
[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\
---------------------------------------------------------------------------
    \1\ Energy Information Administration, Supply of Chicago-Milwaukee 
Gasoline Spring 2000, http://www.eia.doe.gov/pub/oil_gas/petroleum/
presentations/2000/supply_of_chicago_milwaukee_gasoline_spring_2000/
cmsupply2000.htm.
---------------------------------------------------------------------------
    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 phase-out 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 increase 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 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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