U.S. GOVERNMENT PRINTING OFFICE

65–746 cc WASHINGTON : 2000

S. Hrg. 106–650

OVERSIGHT OF RISING OIL PRICES AND THE

EFFICIENCY AND EFFECTIVENESS OF EXECUTIVE

BRANCH RESPONSE—PART II

HEARING

BEFORE THE

COMMITTEE ON

GOVERNMENTAL AFFAIRS

UNITED STATES SENATE

ONE HUNDRED SIXTH CONGRESS

SECOND SESSION

JUNE 29, 2000

Printed for the use of the Committee on Governmental Affairs

(

For sale by the Superintendent of Documents, Congressional Sales Office

U.S. Government Printing Office, Washington, DC 20402

(II)

COMMITTEE ON GOVERNMENTAL AFFAIRS

FRED THOMPSON, Tennessee, Chairman

WILLIAM V. ROTH, Jr., Delaware

TED STEVENS, Alaska

SUSAN M. COLLINS, Maine

GEORGE V. VOINOVICH, Ohio

PETE V. DOMENICI, New Mexico

THAD COCHRAN, Mississippi

ARLEN SPECTER, Pennsylvania

JUDD GREGG, New Hampshire

JOSEPH I. LIEBERMAN, Connecticut

CARL LEVIN, Michigan

DANIEL K. AKAKA, Hawaii

RICHARD J. DURBIN, Illinois

ROBERT G. TORRICELLI, New Jersey

MAX CLELAND, Georgia

JOHN EDWARDS, North Carolina

HANNAH S. SISTARE, Staff Director and Counsel

PAUL R. NOE, Senior Counsel

CATHERINE C. WALTERS, Legislative Assistant for Senator Voinovich

KRISTINE I. SIMMONS, Staff Director, Oversight on Government Management,

Restructuring and the District of Columbia Subcommittee

JOYCE A. RECHTSCHAFFEN, Minority Staff Director and Counsel

KENNETH R. BOLEY, Minority Counsel

DARLA D. CASSELL, Administrative Clerk

(III)

C O N T E N T S

Opening statements: Page

Senator Voinovich ............................................................................................. 1

Senator Lieberman ........................................................................................... 3

Senator Levin .................................................................................................... 6

Senator Akaka .................................................................................................. 15

Senator Durbin ................................................................................................. 36

Senator Domenici ............................................................................................. 42

Prepared statements:

Senator Cleland ................................................................................................ 59

WITNESSES

THURSDAY, JUNE 29, 2000

Hon. Robert Taft, Governor, State of Ohio ............................................................ 8

Hon. Ernest J. Moniz, Under Secretary for Energy, Science and Environment,

U.S. Department of Energy ................................................................................. 12

John Cook, Ph.D., Director, Petroleum Division, Energy Information Administration, U.S. Department of Energy ................................................................... 16

Denise A. Bode, Vice Chairman, Oklahoma Corporation Commission ............... 18

Robert Perciasepe, Assistant Administrator, Office of Air and Radiation, U.S.

Environmental Protection Agency ...................................................................... 27

Phyllis Apelbaum, Owner, Arrow Messenger Service .......................................... 34

Hon. Richard Blumenthal, Attorney General, State of Connecticut ................... 37

J. Louis Frank, President, Marathon Ashland Petroleum, LLC ......................... 39

Red Cavaney, President and Chief Executive Officer, American Petroleum

Institute ................................................................................................................ 45

ALPHABETICAL LIST OF WITNESSES

Apelbaum, Phyllis:

Testimony .......................................................................................................... 34

Prepared statement .......................................................................................... 110

Blumenthal, Hon. Richard:

Testimony .......................................................................................................... 37

Prepared statement .......................................................................................... 113

Bode, Denise A.:

Testimony .......................................................................................................... 18

Prepared statement .......................................................................................... 96

Cavaney, Red:

Testimony .......................................................................................................... 45

Prepared statement .......................................................................................... 270

Cook, John:

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

Prepared statement with attachments ........................................................... 89

Frank, J. Louis:

Testimony .......................................................................................................... 39

Prepared statement with attachments ........................................................... 120

Moniz, Hon. Ernest J.:

Testimony .......................................................................................................... 12

Prepared statement .......................................................................................... 67

Perciasepe, Robert:

Testimony .......................................................................................................... 27

Prepared statement .......................................................................................... 101

Taft, Hon. Robert:

Testimony .......................................................................................................... 8

Prepared statement .......................................................................................... 60

Page

IV

APPENDIX

Prepared statements from:

Hon. Evan Bayh, a U.S. Senator from the State of Indiana ......................... 283

Steven R. Smith, President, National Rural Letter Carriers’ Association .. 286

Chart referred to by Senator Levin ........................................................................ 289

Copy of Corporate Scoreboard ................................................................................ 290

(1)

OVERSIGHT OF RISING OIL PRICES AND THE

EFFICIENCY AND EFFECTIVENESS OF EXECUTIVE BRANCH RESPONSE—PART II

THURSDAY, JUNE 29, 2000

U.S. SENATE,

COMMITTEE ON GOVERNMENTAL AFFAIRS,

Washington, DC.

The Committee met, pursuant to notice, at 1 p.m., in room SD–

342, Dirksen Senate Office Building, Hon. George Voinovich presiding.

Present: Senators Voinovich, Domenici, Lieberman, Levin,

Akaka, Durbin, and Cleland.

OPENING STATEMENT OF SENATOR VOINOVICH

Senator VOINOVICH. The Committee will please come to order. I

want to welcome all of you this afternoon.

Two weeks ago, I asked the Committee Chairman, Senator

Thompson and Ranking Member Senator Lieberman, to conduct a

hearing on the subject of the high price of gasoline. I am pleased

that they responded positively, and I appreciate Senator Thompson’s willingness to allow me to Chair this hearing of the Committee on Governmental Affairs.

Today’s hearing is the second that this Committee has held to

look into the high cost of gasoline in our Nation. This Committee

held its first gas price hearing on March 24, and we were assured

that things would get better. Unfortunately, they have not.

Ladies and gentlemen, today you cannot pick up a newspaper or

turn on a television without reading or hearing about the high

price of gasoline. People are mad, and I don’t blame them. They are

angry because the increase is affecting them where it hurts: Right

in their pocketbook.

Last year at this time, the prices we are experiencing today

would have been considered inconceivable by most Americans. One

year ago, the national average for a gallon of regular unleaded gas

was about $1.15, according to the American Automobile Association. The last time I filled up in Ohio it was $1.94. Today the national average for gasoline in the country is $1.65, which is 50

cents more than a year ago.

But nowhere has the price increase been so dramatic than in the

Midwest where gas prices have skyrocketed in the last 4 weeks.

Earlier this month, prices in Ohio and other parts of the Midwest

increased by as much as 30 or 40 cents in a matter of hours. Prices

in many cities and States went over the $2 mark for a gallon of

2

gas, setting all-time high price records. In my county, Cuyahoga,

just 10 days ago we were hovering at the $2 a gallon mark with

prices averaging $1.98 a gallon.

Although there are signs that prices are dropping, this is of little

consolation to families, particularly in the Midwest, where the

prices are so high. Prices in most major cities in the Midwest are

well above the national average of $1.65, and $2 a gallon and higher are still prevalent in many areas.

The kind of gas price increase we have seen lately does more

than just raise eyebrows. Do you know what it does? It raises questions, significant questions. Politicians, analysts, business owners

are busy pointing to a whole host of reasons for the recent hikes:

Alleged collusion among oil companies who have sent crude oil

prices through the roof, lack of domestic production, reformulated

gasoline, alleged price gouging and collusion by the oil companies,

economics and the law of supply and demand, pipeline and other

transportation problems. You name it.

Frankly, most people I talk to don’t care what the reason is, and

they are getting tired of the finger-pointing. What most people

want to know, including this Senator, is: When are we going to see

the prices go down? And what are we going to do as a Nation to

make sure that we don’t end up in the same predicament we find

ourselves 5 years from now?

Most people that have been around as long as I have remember

the Arab oil embargo in 1973, and when costs went up, gas shortages were everywhere, and people sat in long lines. At that time

the United States only relied on 35 percent foreign oil to meet our

domestic needs. Today our reliance on foreign oil averages 56 percent, and in some months out of the year, it reaches 62 percent reliance.

The American people want to know why hasn’t something been

done in the last 27 years to reduce our dependence on foreign oil.

All too often in government when a problem comes up, we have

a tendency to treat it like a barking dog. You know, give it a bone,

a little attention to make it stop barking, and when it stops barking, ignore it until it starts barking again. And that is what we

have done in terms of the price of gasoline in our energy policy in

this Nation.

Such neglectful treatment of such a vital component of our Nation’s economy is unconscionable, and the major part of the problem that I see in this regard is the lack of an energy policy by this

administration. And I am not even going to point the finger at this

administration because that has been happening. It can be pointed

at administrations since 1973 who have not developed an energy

policy. And, quite frankly, and I don’t want to make my colleagues

feel uncomfortable, but I think the Congress has also not done the

job that we are supposed to be doing in terms of developing an energy policy.

One of the things that I am hopeful for is that on a bipartisan

basis, we can develop some kind of an energy policy between now

and the end of the year. There are a lot of good ideas. I have been

on the Leader of the Senate, Senator Trent Lott, and Senator

Frank Murkowski, to get a bill that they put together on the floor

to be debated and discussed. And if we lose this opportunity and

3

let it go and wait until next year, I think that we may find ourselves back in the same position we are in today, and that is, no

energy policy.

I recall at our hearing in March, we had David Goldwyn, who is

the Assistant Secretary of Energy, and I asked him what this Nation’s dependence on foreign oil should be. I asked him: Should it

be 45 percent? Should it be 50 percent? He couldn’t give me an answer.

We need answers. I am an old governor, and I am glad that my

successor, Governor Taft, is here today. But if we had a problem

like this in Ohio, what we would do is sit down and say we have

got to figure out how much we should be dependent on foreign oil,

set a number. We would then develop a strategy identifying all the

things that we would want to do in order to make sure that we

reached the number, and then we would start the plan and monitor

it and, of course, set a date when we expected to reach the goal.

I mean, that is the logical thing to do, and I think that is what we

need to do here in the Congress, and I think that we need to do

that with the administration.

I have a lot of other comments I would like to make, but we have

a wonderful group of witnesses here today. I guess the last thing

I will say is that I bet you that the witnesses here today that we

have—if they got in a room and we locked them up for a couple

of weeks, they could come back with a darn good energy policy for

the United States of America. And so often we have witnesses that

come before us, and they depend on us to do the job. And I have

found that if you get the people who really know what it is about

in a room and get them in the mood where they are willing to compromise with each other, they can do a whole lot better job of coming up with a solution than those of us sitting behind this table.

So, without further words, I would like to hear from Senator

Lieberman.

OPENING STATEMENT OF SENATOR LIEBERMAN

Senator LIEBERMAN. Thanks, Mr. Chairman, and I would like to

second your motion that we lock the witnesses up in a room.

[Laughter.]

I think that probably would have a good result on the problem.

Senator LEVIN. Both parts of the motion or just the first part?

Senator LIEBERMAN. Both parts.

Senator LEVIN. We can let them out afterwards.

Senator LIEBERMAN. We will let them out.

Mr. Chairman, thanks so much for your initiative which has resulted in the convening of this very timely hearing. I am glad to

join you today in trying to get to the bottom of this problem of skyrocketing oil prices that is so palpably frustrating and angering

consumers in our country today as it has every now and then for

years. As you said, every now and then the dog barks.

I remember that oversight hearing in March that you talked

about. At that time one of the witnesses told us that low inventories being kept by the oil companies might drive the cost of gasoline over $2 a gallon at the pump this summer, and I think we

were incredulous about that prediction. But here we are 3 months

later, and as you indicated, people in Chicago have been paying a

4

whopping $2.13 a gallon to fill their tanks. In Milwaukee, the price

has reached $2.02 a gallon. And even outside the particularly hardhit areas, the price has reached $1.87 a gallon in my own State of

Connecticut, and all these prices are for regular self-service unleaded.

The American people clearly want to know why is this happening, who is to blame, and what can we do to make it better and

have it not happen again? And we are holding this hearing because

we on this Committee have exactly those same questions.

I would like to just offer a few comments of my reaction to the

problem, and then I look forward to hearing the witnesses. It

seems to me to begin with that OPEC manipulates the price and

production of oil with no consideration for the consumer. And then

American oil companies and international oil companies keep their

inventories low, apparently hoping that the price of crude oil will

drop before they have to buy more to refine. As you know, there

have been questions raised, Mr. Chairman, about price gouging

along this line.

And then, finally, as you said in your very strong and independent statement, as a Nation we are still too dependent on a

source of energy—oil, fossil fuel—that we don’t control. For me, the

most infuriating factor is the behavior of OPEC. The member countries proudly call themselves a cartel. They collude and act anticompetitively. Their action in holding supply down has brought the

price of crude oil per barrel up over $30 and kept it there, even

though the consensus that I hear and read from experts is that

that price should be fairly set, not only in the interest of the consumer but of the producer nations, in the vicinity of $20, perhaps

$22 a barrel.

The practices of OPEC should be illegal under the Sherman Antitrust Act. The fact is that if businesses in the United States acted

in this way, it would be illegal. But because OPEC members have

the protection of the Foreign Sovereign Immunity Act, they do not

face a price-fixing case in the United States, although they are obviously very active here and are deriving billions of dollars of income from American consumers and businesses.

I think it is worth reaching a bit here to try to test this proposition, and maybe this is one of the expressions of globalization. We

are a global economy, and what happens elsewhere in the world affects us just as what we do here affects people elsewhere in the

world. And I have been taken by the arguments of our colleagues

Senators DeWine and Kohl who are sponsoring a bill that would

subject OPEC to American antitrust laws and remove from them

this shield of sovereign immunity when they are acting as they are

with extraordinary impact on our economy as a business selling a

precious commodity to the United States. It is called the ‘‘No OilProducing and Exporting Cartels Act,’’—NOPEC—and I have

joined as a cosponsor on that bill.

I also want to express my concern that there are some in the oil

business who are taking advantage of the current situation to exact

an even higher price at the pump than the increasing crude oil

price that OPEC is charging and market forces support. Obviously

we all want to know whether part of the reason the gas price increased results from the oil companies’ padding their profits while

5

hoping that inflated pump price will be blamed either on OPEC or

on market conditions generally.

As you know, Mr. Chairman, the Federal Trade Commission is

investigating whether the oil companies have colluded to keep

prices high in the Midwest. A group of us Senators from the Northeast have asked the commission now to extend its investigation to

cover the rest of the country and to look at the reasons for the price

increases, which might include price gouging.

We have also called on the administration to better utilize the

Strategic Petroleum Reserve in cases of what we consider to be unnatural, artificial reductions of supply and to put some of that almost 600 million barrels of crude that we own, that we have in our

possession in the Strategic Petroleum Reserve, out into the market

to begin to increase supply, reduce prices, and at least show OPEC

that we are not helpless.

Finally—and this goes to what you said, Mr. Chairman—I think

we come back to part of this problem being us and our ever-increasing demand for energy without regard to the concerns that we

have had at different times of our history since the early 1970’s

and the oil boycott for, one, more efficient use of fuel and energy

and, two, a very aggressive partnership between the Federal Government, State governments, and the private sector to develop alternative sources of energy that are more within our control and

that are renewable.

At that hearing that I referred too, and that you did, too, in

March, the Chairman of the President’s Committee of Advisers on

Science and Technology, Dr. John Holdren, gave what to me was

some very impressive testimony about the promise of simple energy

conservation, about doing what we used to do in this country,

which is to conserve, to be a bit thrifty in the use of our resources.

And he noted that if we in the United States increased our energy

consumption efficiency by just 2.2 percent per year, it would reduce

our dependence on oil by more than 50 percent, which is worth

about 5.5 million barrels of oil a day.

It seems to me that this is a goal that is within our reach. It is

not unrealistic. The United States actually decreased our energy

consumption by 1.7 percent between 1972 and 1979, which were

the years surrounding the Arab oil boycott, and by 3.2 percent, believe it or not, between 1979 and 1982. So we can do it.

I join you, Mr. Chairman, in seeing this moment of artificially reduced oil supply and outrageously but real rising prices as the time

at which we should hear the bell tolling or, to use your reference,

the dog barking, to think aggressively about the future health and

security of our Nation and, as a result, to enact a progressive, new,

comprehensive energy policy for our country.

I think you have assembled a wonderful group of witnesses. I

thank you for, on the second panel, calling the attorney general of

my home State, Dick Blumenthal, who has been active in this area,

and I look forward to the witnesses’ testimony.

Thank you very much.

Senator VOINOVICH. Thank you. Senator Levin.

6

1The chart referred to appears in the Appendix on page 289.

OPENING STATEMENT OF SENATOR LEVIN

Senator LEVIN. Mr. Chairman, thank you, and thank you for

your initiative and your commitment to this issue. I have been trying to get answers to the cause or causes of skyrocketing prices in

my home State of Michigan for many, many weeks.

Many explanations have been offered for the incredible spike in

gasoline prices, everything from the effect of reformulated gas to

rising demand, to short supply, to the fact that the hurricane season makes the petroleum companies nervous because many of the

refineries are located on the coast.

But none of those explanations explain the 70- to 80-cents-pergallon increase that we have experienced in Michigan over a 7-

week period. Gas prices went to $2.07 statewide. On June 19, that

was a statewide average increase of 70 cents per gallon. In Detroit,

prices went up to $2.14 cents in the same 7-week period. That is

an 80-cents-per-gallon increase in price. Those increases in prices

are double the price hike experienced in other parts of the country,

as can be seen on that chart.1

The United States and Michigan prices generally stayed together

until that point in May, and all of a sudden, Michigan, like other

Midwestern States, was given that dose of price increase that is reflected on that chart. So we have got to fight back on behalf of our

constituents to roll back these extreme gas price increases, and the

fight has got to be waged both short term and long term.

The Chairman has gone through some of the justifications which

have been given which just don’t hold water or don’t hold gas. One

excuse given for the gas price increase was reformulated gas, but

Michigan doesn’t have the reformulated gas requirement. We have

heard about low inventories, but the Midwest’s low inventories are

not much different from low inventories elsewhere.

High crude oil prices have been cited, but those increases have

been nowhere near as steep as retail price increases in the Midwest.

Two pipelines and their operational difficulties have been cited,

but that doesn’t wash either. The rupture of one had minimal effect

on supply. The rupture of the other came after the big increase

began, and in any event, the increase after the pipeline break in

the second case remained about the same as in those Midwest

States that were not dependent on that pipeline.

So you have got to look at other factors, including price gouging

and the possibility that oil companies are engaging in anticompetitive conduct, for instance, by refusing to deliver supply to certain

independent gas dealers.

The issue is the issue that our Chairman has indicated. What

will it take to get these prices down? I think it would help to release more oil from the Strategic Petroleum Reserve, which the

President has authority to use, to assist in relieving economic problems, and here I am quoting from the legislative history of the

most recent reauthorization, where economic problems ‘‘are directly

related to a significant increase in the price of petroleum products.’’

Well, we are seeing major economic impacts from these price hikes.

7

The investigation of the Federal Trade Commission that is now

underway has been helpful already. Just the announcement of the

investigation was followed by a significant wholesale price drop. I

don’t think that is a coincidence.

In the long term, we need to reduce our dependence on oil. We

should enact greater tax incentives to encourage consumers to purchase cars, homes, and consumer products which run on

alternative energies. We should increase Federal investments in renewable energy and natural gas programs. And, by the way, our

Chairman is absolutely right. Congress here is also carrying some

responsibility. This is not just something where we can point fingers to others. We have responsibility in this area.

Over the past 7 years, Congress has supported only 12 percent

of the administration’s proposed increases for energy programs,

such as Federal investment in efficient technologies for our factories and homes, weatherization of low-income households, technologies to produce biofuels and power from biomass, and in the

case of the Partnership for a New Generation of Vehicles, which is

a partnership between government and the automobile manufacturers, in order to produce energy-efficient automobiles, a new class

of vehicles with up to 80 miles per gallon without sacrificing affordability or utility or safety or comfort.

Just 2 weeks ago, the House cut the Department of Energy’s

budget for the PNGV so drastically that it would gut that partnership. So we do have responsibilities as a Congress, and we can’t

just point our fingers at others, although it is important that we

hold others accountable as well.

But the constituents are really being hit hard. Our citizens, our consumers, are going to have to pay $160 to $170 more for gas this

season—the small gas station owner has to get family members to

work because he can’t afford to pay employees, the motel owner

who has got to put the vacancy sign out because people don’t want

to travel and pay high gas prices, the trucking companies struggling to cover fuel costs, recreational vehicle dealers and users who

are losing sales and unable to use their vehicles, farmers whose income may be reduced by a third because of high gas prices.

So I want to commend our Chairman for his leadership in this

area. It is a critically important area to find out not only why, but

to force action to reduce these prices.

Senator VOINOVICH. Thank you, Senator Levin.

I also remind the Senator that one thing Congress did do is give

the opportunity for more oil exploration to this administration, and

that legislation was vetoed. And I think that is one of the things

that needs to be talked about in terms of our overall energy policy.

We are concentrating on some of these other things, but I think

that to ignore that aspect of it that we should be more reliant on

our own domestic supply is something that needs to be dealt with

straightforward during this discussion of an energy policy.

I am pleased to welcome my good friend, the distinguished Governor of Ohio Bob Taft, here today with us, who is going to give

us the Midwest perspective on the very serious effects of rising gasoline prices. Governor Taft is a man of great courage. He was

pushed by his legislature to eliminate the gas tax in the State of

Ohio, and he did not do so, understanding that that money is necVerDate 11-MAY-2000 15:36 Oct 02, 2000 Jkt 000000 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 65746.TXT SAFFAIRS PsN: SAFFAIRS
8

1The prepared statement of Governor Taft appears in the Appendix on page 60.

essary to maintain our roads in the State of Ohio and to do the

new construction work that is necessary. I think that was a courageous action on your part, Governor.

We also have with us the Hon. Ernest J. Moniz, Under Secretary

of Energy, Science, and Environment in the U.S. Department of

Energy; Dr. John Cook, Director of the Petroleum Division of the

Energy Information Administration; and Denise A. Bode, Oklahoma Corporation Commissioner.

We would like to welcome all of you here today, and, Governor

Taft, we are going to call on you first. I understand that you have

got to make a plane, and so we are going to let you go forward.

And, Senator Levin, if you would like to ask Governor Taft a question or two after his testimony, you will be welcome to do that.

Governor Taft.

TESTIMONY OF HON. ROBERT TAFT,1 GOVERNOR, STATE OF

OHIO

Governor TAFT. Thank you, Mr. Chairman, and good afternoon.

I am very grateful for this chance to testify today on a subject that

has the attention of motorists and consumers in Ohio and throughout the Nation. We are here today because gasoline prices affect everybody, not just the motorists at the pump, and I commend you

for holding today’s hearing.

Recent severe increases in gasoline prices in my State are, to say

the least, baffling. In Ohio, the price of regular gasoline is up approximately 16 percent, from $1.55 last month to $1.80 today, and,

more troubling, up over 50 percent from a year ago, when a gallon

of regular gasoline was selling at $1.15.

The price of gasoline in Ohio is currently 5 percent above the

national average. Our citizens are demanding, if not complete answers, at least some rational justification for this dramatic price increase. Every day I hear from people throughout Ohio about the

burdens of this price increase. I hear from senior citizens on fixed

incomes, like Robert York of Centerville, Ohio, who wrote to me

that because gas is so expensive, he is forced to choose between

going to the doctor, traveling to the grocery store, or attending

church on Sunday. I have also heard from Cheryl Dolin in Carroll

County, a single mom making $6.50 per hour. For Cheryl, a 50 percent increase in gasoline prices has placed a tremendous burden on

an already stretched household budget.

The impact of increased fuel prices on our transportation and

business sector is equally dramatic. Just last week, I heard from

Kevin Burch, the president of Jet Express Trucking in Dayton. His

company uses about 4 million gallons of diesel fuel a year. If diesel

prices stay at current levels, Jet Express Trucking will pay about

$1.8 million in higher fuel costs this year. These are real dollars

to a small business that already operates at close margins.

Ohio roadways carry the fourth largest volume of freight traffic

of any State in the Nation. We provide critical transportation links

east to west, north to south. Interstate 75, which runs from Toledo

to Cincinnati, carries $25 billion worth of goods each year by itself.

So these unexplained price increases are not only penalizing OhioVerDate 11-MAY-2000 15:36 Oct 02, 2000 Jkt 000000 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 65746.TXT SAFFAIRS PsN: SAFFAIRS
9

ans, they are also negatively affecting the Nation’s ability to move

goods from one destination to another.

I recognize that motor fuel production and distribution are very

complex processes influenced by a host of factors, and the most fundamental fact is that ours is a Nation increasingly dependent on

petroleum-based energy. Crude oil prices have almost tripled since

January 1999, and for a Nation that imports 55 to 60 percent of

its crude oil and even imports some refined products, the impact

of foreign price hikes has been significant.

The Congressional Research Service reports a number of other

factors affecting price increases to some extent, and I salute your

efforts to examine the factors that have contributed to higher gasoline prices at the pump. I think it is equally important, however,

to recognize that the underlying realities that affect our gas prices

also pose a threat to our Nation’s future prosperity. The most fundamental reality is this: For a Nation with an economy that is so

heavily dependent on oil, we have no coherent energy policy to reduce our dependence on foreign oil or to lessen our vulnerability to

rapidly escalating price spikes like this one.

This fundamental failing exposes the fragility of our Nation’s economic and national security, and it is compounded by the lack of

a sensible, coordinated approach to environmental policy at the

Federal level.

I commend the Congress for rededicating itself to the task of devising a comprehensive energy policy for the United States, and I

hope that the President and the administration will join you in

that effort. I commend Majority Leader Lott, Chairman Murkowski, and others for introducing S. 2557, which provides a useful

framework to begin work on a truly comprehensive national energy

policy.

We must also develop a sensible national environmental policy in

a manner that complements our energy policy. You, Mr. Chairman,

and also Senator Breaux and others deserve enormous credit for introducing the Air Quality Standard Improvement Act, which will

provide a common-sense approach to new regulations under the

Clean Air Act, while at the same time increasing public health,

safety, and environmental protection.

This bill comes in response to the current administration’s disturbing history of issuing environmental regulations without adequately identifying risks to health and with no consideration of

costs and benefits.

Mr. Chairman, as I said earlier, governors across the Midwest

are concerned about high gasoline prices. A number of citizens

have suggested adjusting Federal and State fuel taxes to ease the

pinch of rising pump prices.

As you point out, I have opposed the suspension or elimination

of the Federal gas tax because it is a dedicated user fee that generates needed revenues for highway safety, construction, and maintenance. Ohio maintains the fifth largest system of roadways, the

fourth largest in freight volume, the fourth largest in traffic volume, and the second largest inventory of bridges in the Nation, and

we need to maintain that system.

10

Our strategy also relies on revenues from the dedicated fuel tax

which Congress devoted solely to transportation purposes under

TEA–21.

I want to briefly, in conclusion, advise the Committee of our very

serious concerns related to ethanol consumption that I have discussed on several occasions with the Chairman. We support the environmental contributions made by ethanol, and we support the

continued use of this fuel. But we have become aware, as you have

as well, that the funding formula adopted under TEA–21 is determined in large part by our contributions to the Highway Trust

Fund. And because we utilize ethanol-blended gasoline, we suffer

significantly because of the 5.4-cent-per-gallon Federal tax break

on each gallon of ethanol-blended gasoline sold and the fact that

3.1 cents of the tax is credited to the general revenue funds and

not the Highway Trust Fund. That means that we are losing 8.5

cents for each gallon of ethanol-blended fuel sold in Ohio, a total

decrease to our State’s trust fund contributions of $185 million annually. So this is a problem which we are very pleased that the

Chairman is addressing, and we hope your colleagues will join you

in that effort.

Mr. Chairman, thank you for the opportunity to appear today,

and I would be glad to answer any questions you or the Committee

may have.

Senator VOINOVICH. Thank you, Governor Taft. I am glad that

you raised the issue of the loss of revenue to States like Ohio because of our significant consumption of ethanol. And one of the

things that I think needs to be looked at when we are putting an

energy policy together is a method to take care of that situation,

perhaps taking the taxes that are generated, instead of them going

into the general fund, have them go into the Highway Trust Fund.

Governor TAFT. That would be excellent.

Senator VOINOVICH. I think the other thing that is important

that you mentioned today, and so often people forget about it, is

that Governor Taft just recently announced that our last area of

the State of Ohio achieved the ambient air standards. Frankly, governor, they had achieved that status before I left the governor’s office, but it has taken the EPA that long to give them the status.

Governor TAFT. Right.

Senator VOINOVICH. And so the entire State today is reaching

ambient air standards, and one of the reasons why is because we

have emission testing in Ohio. We didn’t go for reformulated gasoline. And most Ohioans are not aware that if the Supreme Court

does not agree with the lower court’s decision in the issue of new

ambient air standards for ozone and particulate matter, then all of

the major 26 areas in Ohio are going to go into nonattainment,

which means that we may have to go to reformulated gasoline and

many other things in terms of businesses adding great expense in

order to meet those new standards.

Again, it was recently announced that the oil companies are

going to have to remove sulfur from gasoline, and everyone applauded that as a great environmental effort. But no one has paid

attention to the fact—and we will have some witnesses later—that

I think it is going to add 6 or 7 cents to the cost of gasoline. So,

too often, what we do is we pass these things and don’t really pay

11

attention to the fact that ultimately somebody has to pay for it, and

there is a balance between our environmental concerns and our

costs and our economy. So I think those are things that too often

get lost here in Washington.

I would just be interested—I know you are concerned about the

State, and you have heard it all, the pipelines and so forth. Governor, do you have any ideas on what you would do to take care

of this problem immediately, to get the cost down?

Governor TAFT. I appreciate that question, Mr. Chairman. As you

pointed out, we do not use reformulated gasoline in Ohio, which

makes it even more difficult to understand the causes and the reasons. But certainly I would say we need to develop a policy that

reduces our dependence on imported oil from the OPEC countries.

We are concerned for our economy in the State of Ohio. We are

very dependent on oil, obviously, our consumers as well as our

business economy, and we believe that the Congress needs to take

the lead with the administration in developing a comprehensive energy policy that is also consistent with the environmental policy

that focuses on increasing our domestic energy supplies. And there

are a number of opportunities to do so, and some of those are contained in S. 2557, which Senator Lott has introduced.

But in addition to that, obviously greater energy efficiency—and

we are working on that in Ohio. In fact, we are experimenting with

soy diesel in our Ohio Department of Transportation vehicles to see

if that is a good alternative to reducing our dependence on imported oil in the State of Ohio.

We also need to seek, obviously, alternatives to petroleum as

well. And I would support any efforts on the part of the administration to press the OPEC countries to put more oil on the market.

That is certainly the most immediate solution that would help us

in Ohio. But I believe we also need to address the long-term viewpoint as well. That is just as important.

Senator VOINOVICH. I would like to make a suggestion to you.

Governors of this country are very, very concerned about this issue.

People forget about that the economic engines of America are in

our States, and your policies have a lot to do with how competitive

your State will be.

It would be interesting if you might ask the National Governors’

Association to put a little group together to look at this issue and

come back to us with some of their recommendations on how they

think that we can do a better job.

Governor TAFT. That is an excellent idea, and we will be meeting

in a couple weeks at the National Governors’ Association, and I will

take that idea forward.

Senator VOINOVICH. Perhaps maybe a special task force that

might work with Congress on this issue, because we are going to

need support for this. Too often, these things come to the floor of

Congress, and we don’t get the kind of support that we need from

our brothers and sisters out in the State and local government.

That might be a real positive thing that you can do for us.

Governor TAFT. That is an excellent idea, Mr. Chairman.

Senator VOINOVICH. Thanks very much. I know you have to

leave, and we really appreciate your coming from Ohio to be with

us today.

12

1The prepared statement of Mr. Moniz appears in the Appendix on page 67.

Governor TAFT. Thank you very much. Thank you.

Senator VOINOVICH. I would now like to call on the Hon. Ernest

Moniz, Under Secretary, U.S. Department of Energy. Mr. Moniz,

we are very happy for you to be here. I am sure that all of you at

the Department of Energy are getting tired of going to all these

hearings, and we are grateful for your input, and hopefully after

this is all over with we will have enough information where we can

start to do some things that are going to make a difference.

TESTIMONY OF HON. ERNEST J. MONIZ,1 UNDER SECRETARY

FOR ENERGY, SCIENCE AND ENVIRONMENT, U.S. DEPARTMENT OF ENERGY

Mr. MONIZ. Mr. Chairman, we certainly have had a number of

hearings, but this is a very important issue and we certainly are

willing and happy to support you and other Members as often as

you need to help us solve this problem together.

We do appreciate the opportunity, in fact, to come and discuss

once again our energy policy and, of course, also to hear your suggestion for incarceration. I hope you have a nice location in mind

for our being locked into a room for the policy development.

The fundamental importance of energy to the Nation’s economic

and environmental health has warranted investments by the administration in a set of policies and a portfolio of technologies to

produce more energy, to use energy more efficiently, to reduce impacts on the environment, to develop alternative sources of supplies, and to provide incentives for private sector advancement towards these goals.

The administration’s core principles in energy policy really are

two: First, market forces are the best means of informing supply

and demand and getting the most for the American consumer; and,

second, environmental stewardship and abundant, affordable energy are quite compatible.

Our commitment to these principles has contributed, in fact, to

the longest period of sustained economic growth in modern times,

while leading to significant progress in a number of environmental

indicators. The reliance on free markets as the cornerstone of our

energy and oil policy is a bipartisan view. It has been expressed

over and over again in the last 20 years as the Congress and the

Executive Branch have systematically removed the Federal Government’s authorities to control oil prices or allocate supply.

Generally with the exception of emergency authorities, the Congress has taken the government out of the equation and committed

us to the free market principles of supply and demand. It is in this

context that I would like to discuss briefly the current problems in

the gasoline market and the major features of the Clinton-Gore energy policy.

For the third quarter of this year, there will be 3.5 million more

barrels of oil per day on the market than in March. Production,

however, is still being outpaced by near historic demand levels and

the need to rebuild stocks for the winter heating season. Oil prices

remain high and refinery inventories are low. These are the fundamental reasons for high gasoline prices.

13

It is in this context that we have been reviewing the gasoline

supply situation, particularly in the Midwest, where you and other

Members have clearly stated what is obviously a major problem. I

would note that DOE performs gasoline supply assessments to inform the EPA’s waiver process for cleaner gasoline as opposed to

performing any specific price analysis.

The situation, particularly in the Milwaukee-Chicago area, where

gasoline prices are the highest in the Nation, is affected by the

overall high price of crude, but also by other factors: Higher

regional demand than the national average, low inventories in the

region, distribution problems with pipelines and refineries, high regional refinery utilization rates, and an RFG formulation specific

to the area that is more difficult to produce.

These supply issues will affect the price of RFG Phase II and

conventional gasoline, but the degree to which they contribute to

price spikes is not yet known.

Because the supplies in the area are tight but adequate, because

the differential between RFG Phase II and conventional gasoline

was so large—up to 48 cents at one point—and because DOE was

not convinced that the factors I just listed were sufficient to explain

this differential, DOE and EPA referred this matter to the FTC,

the appropriate agency to review specific pricing issues. And it is

my understanding that the FTC will issue an interim report on this

matter in July.

Let me now summarize some elements of the administration’s

energy policy. Through policy choices and investments, the administration seeks to address in particular four major challenges:

Maintaining America’s energy security in global markets, harnessing the forces of competition in restructured energy markets,

mitigating the environmental impacts of energy use, and ensuring

a diverse, reliable, and affordable set of energy sources for the future.

While I discuss each of these challenges in detail in my written

testimony, I will focus here only on the first: Maintaining our energy security. To address this challenge and reduce net imports,

the administration has supported or proposed measures to spur

domestic oil and gas production, address the generally high U.S. oil

production costs relative to other regions of the world through

advanced technologies, ensure that we are not overly reliant on

imports from a single region of the world, encourage the world to

develop its oil resources and increase world productive capacity, increase the size of the SPRO, provide tax incentives for the expensing of geological and geophysical costs and delay rental payments,

provide deep-water royalty relief, simplify royalty collection on public lands, and promote the creation of a guaranteed loan program

for small domestic oil and gas producers.

Very importantly, we can also reduce net imports by focusing on

the demand side of the oil equation. Two-thirds of our oil is used

in transportation, so in the spirit of Willie Sutton’s dictum, that is

where we should look for demand-side relief.

Increasing the average fuel efficiency of America’s automobiles

by just 3 miles per gallon would save us over 1 million barrels a

day. This is why we have invested, for example, heavily in R&D

on more fuel-efficient cars. Our PNGV program, Partnership for a

14

New Generation of Vehicles, has a goal of developing an 80-mileper-gallon prototype automobile by 2004. This focus is even sharper

when we look ahead to world oil demand in this sector.

For example, take China alone. Projected economic growth in

China has led to the prediction that they will add about 150 to 180

million vehicles on the road in the next 20 years, an enormous,

again, additional demand-side draw.

In addition to technology development, therefore, the administration is also proposing tax credits to spur introduction of such advanced clean and efficient vehicles. These actions are good for the

environment, good for energy security, and good for helping position American industry for a major export market.

The administration is proud of its record on energy policy and

the demonstrable results in contributing to economic growth and

environmental stewardship. Nevertheless, the volatility in prices is

clearly leading to significant problems for Americans, certainly in

the Midwest, and we remain very concerned about high gas prices

and are doing all that we can to address this issue within the authorities given to us by Congress.

The Secretary has called on the Congress to work with us in a

bipartisan fashion to pass legislation to enhance our national

energy security, including extension of EPCA, which expired on

March 31, establishment of a regional home heating oil reserve,

additional tax incentives for domestic oil and gas production, renewable energy and increased efficiency, comprehensive electricity

restructuring, replenishment of emergency LIHEAP funds, and

funding of energy R&D to reduce demand, increase domestic supply, produce cleaner energy, and develop alternative sources.

In fact, I would note, as Senator Levin did, that the House voted

to cut $126 million from the PNGV and $45 million from the Department’s Fossil Energy Program. As noted in my testimony,

these programs support essential energy security goals on both the

demand and supply sides. We appreciate the Senate’s support of

these R&D programs. They, together with our efficiency and renewable programs, have never been more important than they are

today for meeting energy and environmental goals simultaneously.

We urge the Congress to pass these proposals, and if we are

going to meet the Nation’s energy needs in the 21st Century, as

you well know, we have neither the time nor the energy to waste.

Thank you, Mr. Chairman.

Senator VOINOVICH. Thank you.

I am really glad to hear what you had to say today, but I can’t

help but thinking back to February 16, when gas prices were in the

midst of their march upward, that the secretary of your agency

said, ‘‘The Federal Government was not prepared; we were caught

napping; we got complacent.’’ And in all due respect, I think some

of the things you have talked about today are very, very worthwhile and we should study them and incorporate them into an energy policy for our Nation.

The question you have to ask is: Why didn’t we do this 6 or 7

years ago? And I think it just underscores the administration’s responsibility to try and work with Congress between now and the

end of the year to participate in a bipartisan way of putting some

policy together that we can be supportive of.

15

You mentioned the issue of exploration—there has been one initiative after another that has been shot down because of pressure

on the administration not to do these things. And, again, ANWR,

for example, we have been up in Prudhoe Bay, the technology has

increased, but these become symbols of, well, we are not going to

do that, this is going to hurt the environment. But we never talk

about the other side of it, that right now it is hurting the people

at the gas pump. It could have been done 5 years ago, 6 years ago,

and that oil could be flowing today in this country.

We never talk about the fact that when we talk about some of

these environmental things about the defense of our Nation and

the vulnerability that we are. The man that was here before you

mentioned 65 percent reliance on foreign oil by the year 2020.

We have a serious problem here, and I think we need to talk

about it, and we need to balance out the environmental concerns

that we have in this country with the economic and with the national security interests.

Mr. MONIZ. Shall I respond later on?

Senator VOINOVICH. Pardon me. Senator Akaka is here. Senator,

would you like to make a statement or would you rather hear the

witnesses and then ask questions?

Senator AKAKA. Well, I would like to make a statement.

OPENING STATEMENT OF SENATOR AKAKA

Senator AKAKA. Mr. Chairman, I want to thank you very much

for holding this hearing. It is not only important to us but important to the Nation, and what we have been experiencing has been

something that is extraordinary, I would say.

I want you to know about how we feel in Hawaii. Let me tell you

that for most of the 1990’s, the average Honolulu price based on

a weekly survey hovered roughly 25 cents to 50 cents above the national average. And in June 1999, only 1 year ago, Hawaii’s $1.51

per gallon was ranked above Oregon’s $1.44 and the national average of $1.14.

As late as last month, according to Automobile Association of

America, Hawaii topped the Nation with an average per gallon of

$1.85 compared to the next highest State, Nevada, at $1.67 and the

U.S. average of $1.51.

Now, this month, according to AAA, Hawaii ranked fourth highest, with an average price for regular unleaded of $1.86. That fell

below Illinois with an average of $1.98, Michigan at $1.96, and

Wisconsin at $1.91.

Still, Hawaii’s average price is well above the U.S. average of

$1.63, and it is no pleasure for me to say that Hawaii has lost its

dubious distinction as the State with the Nation’s highest gasoline

prices. The pocketbooks of Americans are hurting all over the country, and that is what we are addressing at this time.

Mr. Chairman, I am pleased that you called this hearing, as I

said, and we must know why a region of the country was hit with

such high price spikes in such a dramatic manner. We must not

let this happen again to the Midwest or any other region of the

country. The rise in gasoline prices hits Americans in an extremely

uneven manner. Those who can afford it the least are affected the

most. Our import dependence has been rising for the past two decVerDate 11-MAY-2000 15:36 Oct 02, 2000 Jkt 000000 PO 00000 Frm 00019 Fmt 6633 Sfmt 6633 65746.TXT SAFFAIRS PsN: SAFFAIRS
16

1The prepared statement of Mr. Cook with attachments appears in the Appendix on page 89.

ades. The combination of lower domestic production and increased

demand has led to imports making up a larger share of total oil

consumed in the United States.

We all understand that there is no overnight solution to America’s energy problems. We can’t turn this trend around overnight.

Tax repeals and other such short-term actions may appear appealing given the political climate and may even help American pocketbooks in the short run. But they do not provide a solution for our

energy problem.

For me, the only way to reverse our energy problem is to have

a multifaceted energy strategy and remain committed to that strategy. In my judgment, Mr. Chairman, you need both of these in

equal portions, and this, I think, would send a clear message to

OPEC and their partners about America’s resolve.

I am so happy you are having this hearing, Mr. Chairman, and

I thank you for it, and I want to hear the witnesses. Thank you.

Senator VOINOVICH. Thank you, Senator Akaka.

Our next witness is Dr. John Cook, Director of the Petroleum Division of the Energy Information Administration. Dr. Cook, I want

to say that the work that your organization has done has just been

terrific, and it has been very helpful to me and, I know, other

Members of the Congress. We thank you very much and thank you

for being here today.

TESTIMONY OF JOHN COOK,1 PH.D., DIRECTOR, PETROLEUM

DIVISION, ENERGY INFORMATION ADMINISTRATION, U.S.

DEPARTMENT OF ENERGY

Dr. COOK. Thank you, Mr. Chairman. I have a lot of good staff

to thank for that.

I would like to begin today by thanking the Committee for the

opportunity to testify on behalf of Mark Mazur of the Energy Information Administration.

With gasoline prices currently averaging about $1.66 nationwide,

compared to just $1.11 last June, indeed, consumers do want an explanation. It is our view that this summer’s run-up, like other recent oil price spikes, stems from a number of factors, including

tight crude markets, resulting in low crude and product stocks and

high crude prices, from pipeline and refinery problems, relatively

strong demand, and a difficult transition to summer-grade Phase

II reformulated gasoline, or RFG.

Crude oil continues to be a significant factor in explaining these

increases. As you know, crude oil prices have risen from about $10

a barrel in December 1998 to about $34 recently. While $34 is far

from the inflation-adjusted $70 historical high seen in the early

1980’s, for many the pace of these increases may be as disruptive

as the higher absolute levels. Regardless, crude increases have contributed about 33 cents to the increase in gasoline.

In turn, these crude oil prices are up as a result of the shift in

the global balance between supply and demand. Crude markets

tightened in 1999 as OPEC and several other exporting countries

reduced supply, while at the same time economic recovery in Asia

stimulated demand growth. As a result, crude oil and product inVerDate 11-MAY-2000 15:36 Oct 02, 2000 Jkt 000000 PO 00000 Frm 00020 Fmt 6633 Sfmt 6633 65746.TXT SAFFAIRS PsN: SAFFAIRS
17

1Figures 1 and 2 appears in the Appendix on page 94.

ventories fell, and by the end of 1999, global inventories were at

very low levels, especially here in the United States, as shown in

Figure 1 on the right-hand side.1

Last year, as markets tightened, crude oil prices rose faster than

product prices, squeezing refinery margins, discouraging refinery

production, and thereby adding to downward pressure on inventories. Figure 2 shows that in June of last year,1 the difference between wholesale gasoline prices and crude prices averaged less

than 6 cents a gallon. This is compared to the more typical 10 to

12 cents a gallon seen typically in June. This year, however, by the

spring, low crude and product stocks generated much higher product prices relative to crude oil. Where these margins were low last

year, they are now high at about 20 cents a gallon, or 14 cents

more than last year. To put it another way, low gasoline inventories are probably adding about 10 cents a gallon to the price of

gasoline over what we would normally expect for this time of year.

Yet some regions have experienced much higher prices than the 47-

cent calculation I just implied.

EIA has pointed out on numerous occasions that very low gasoline stocks combined with a market short on crude oil generates an

environment ripe for price volatility, both during the spring and

the peak summer periods. The West Coast experienced such volatility in February, and the Midwest erupted in May. Several pipeline and refinery problems caused already low stocks in the Midwest to fall 13 percent below their 5-year average, while at the

same time U.S. gasoline inventories were only 5 percent below average in May.

With inventories in the Midwest at extremely low levels, prices

were bid up rapidly, as marketers scrambled for limited supplies

of both conventional and reformulated gasoline. As we know, reformulated gasoline in the Chicago and Milwaukee areas drew most

of the attention initially, as these prices increased more than 30

cents over conventional.

As shown in our last figure, the jump in Midwest reformulated

prices appeared similar to surges we saw earlier this year in California and have seen frequently since the start of that State’s reformulated program.

There are several reasons for this strong price response.

First, the Midwest reformulated market is very small, only about

13 percent of all Midwest sales. This very limited size limits nearby

supply options.

Second, this was the first year of the Phase II of the reformulated program, and it is very clear from our research, our field

work, that some refiners had added difficulty in making this transition to the summer grade. It is a more difficult product to make,

and it does cost more to do that.

In the Midwest, as you know, ethanol is used to make reformulated gasoline, which requires a unique blend of gasoline components with very low vapor pressure.

Finally, as I said, with few alternative sources of readily available supply, it simply takes time for any added supply-demand imbalances to be resolved. The reformulated markets in the Midwest

18

1The prepared statement of Ms. Bode appears in the Appendix on page 96.

and California are alike in that they are isolated and use unique

gasoline blends. As such, supply problems cannot be resolved

quickly.

Today the U.S. refinery system has little excess capacity, and the

growth in the number of distinct gasoline types increases the potential for extended supply disruptions.

Fortunately, wholesale prices in the Midwest began declining

more than a week ago, reflecting increasing supplies. Midwest

stocks have increased 13 percent over the last 4 weeks, and in response, reformulated retail prices have fallen over 12 cents a gallon

while conventional is now down about 7 cents. Much lower wholesale prices indicate we could see further declines barring any more

pipeline or refinery problems, and since retail prices normally lag

wholesale prices, both when prices are rising and when they are

declining, we can expect Midwest retail prices to fall further, barring any more supply problems.

In closing, while the first hurdle of the transition to summergrade gasoline is behind us, we may experience more volatility before the summer is over. As we enter the peak season, refiners will

be pushing production to the limit to meet demand. With low

stocks and refineries operating at high utilization rates, any more

supply disruptions can trigger yet another price run-up.

That concludes my testimony. I would be happy to answer any

questions.

Senator VOINOVICH. Thank you, Dr. Cook.

Ms. Denise Bode, thank you for being here today.

TESTIMONY OF DENISE A. BODE,1 VICE CHAIRMAN,

OKLAHOMA CORPORATION COMMISSION

Ms. BODE. Thank you. I appreciate the opportunity, Mr. Chairman. I am Denise Bode, and I am Vice Chairman of the Oklahoma

Corporation Commission.

Mr. Chairman, having worked in energy policy my whole career,

I am here to try to tell you as much of the facts as I know it, having worked through these processes and with these policymakers,

many of whom I know back here in the audience, on energy policy

to try to prevent us from being in the situation that we are right

now. And so I am going to try to give you as clear a picture as I

can as to how we got to where we got. And since you are focused

on this administration, I will focus on this administration. But let

me tell you, as you stated, the blame can go beyond this administration and the blame also lies with this Congress. And I think we

have got to go through the historical perspective, and then I will

give you some ideas as to what I think we can do short term and

long term to try to solve the problems.

Senator VOINOVICH. Great.

Ms. BODE. OK. To understand how and why America is at risk,

first understand that there is not a free market in the traditional

sense when it comes to oil. There never has been. My friend Dan

Yergin’s book on oil, ‘‘The Prize,’’ articulates convincing rationale

that all markets have always been manipulated, first by the Standard Oil Trust, then through our government through pro-rationing

19

and price controls, and finally by OPEC through the producing-nation quotas. Oil-producing countries manipulate oil inventories for

politics as well as for their own economic gain. Our reliance on foreign oil has gone from 34 percent during the 1974 Arab oil embargo

to 44 percent at the beginning of this administration, to close to 60

percent today. In fact, the dependence on oil imports has grown

twice as much in this administration than during the previous 20

years.

The problem is that each time the OPEC cartel manipulates oil

supply to create shortages or to flood the market, it causes price

shocks, making the domestic oil industry a less stable business,

driving away investment, terminating qualified employees, destroying valuable infrastructure, both exploration and refining. And it

forces more of U.S. production, 40 percent of which is marginally

economic to be plugged, to be lost forever. It is so serious now that

even with the latest OPEC price increases, domestic producers are

not drilling new wells. Of approximately 800 rigs drilling, less than

a third of them are drilling for oil, and these price shocks, as you

all well know, impact consumers as well, making it impossible for

a family or a business to budget without knowing whether their

gasoline is going to be 70 cents a gallon or $2 a gallon.

Let me run through a chronology of events and responses by this

Executive Branch since 1992 that have brought us to the dire

straits we find ourselves in today.

In 1993, at the beginning of this administration, the OPEC cartel

had increased production. Oil prices in the United States fell below

$13 a barrel and imports had risen to 44 percent. The IPAA, which

I was president of at that time, petitioned in March 1994, under

Section 232 of the Trade Expansion Act, for an investigation into

increasing oil imports and asked for action by the President. Since

the Eisenhower Administration, this Trade Expansion Act has been

used to affect American energy policy relations with the world. A

bipartisan group of members of Congress, Democrats and Republicans alike, met with the President personally in the White House

and asked him to enact, to propose, to support an energy plan that

would maintain a strong domestic production and refining option.

In fact, that bill that they proposed looks very much like S. 2557.

It said to the American industry, yes, we need your investment

here in the United States so that we can have a domestic oil option.

But no action was taken on their plan. A year later a Presidential finding of a national security threat was finally issued. No

new action there. But the Presidential finding did warn us of what

we would be facing without action. Specifically, it said, ‘‘The United

States and its allies may find themselves constrained from pursuing . . . foreign policy actions for fear of provoking producer

countries into actions that could result in the manipulation of oil

prices and increased prices for consumer countries.’’

Even after that Presidential finding, no action was taken.

During that time, domestic oil production dropped by over

500,000 barrels a day, imports accelerated, and 75,000 Americans

lost their jobs.

Congress did take the initiative to enact one item in their plan,

a royalty holiday on Gulf of Mexico deep-water drilling. This new

20

production, let me tell you, stopped the decline in domestic production by 1997, clearly demonstrating that we do have the ability to

spur domestic production.

But the most significant energy policy initiated by the administration during that time was initially a Btu tax, which ended up

being a 4.3-cent increase in the gasoline tax.

The OPEC cartel clearly understood that American energy policy

in this administration was based on instant gratification, seeking

low gasoline prices from foreign sources and ignoring future consequences with a foreign cartel in charge of our transportation fuel

and our prices. In 1997, members of OPEC acted to consolidate

their control of the American market by increasing production and

reducing world oil prices to historic low prices. Of course, everybody liked the low prices. Of course, there are other economic factors they hadn’t adequately predicted that drove the price down

even beyond their control. But the United States took no action.

Thirty thousand Americans lost their jobs. Domestic oil production

went from holding steady to a 5 percent decline, an incredible drop

of another 600,000 barrels today. Today we only have 153 refineries, down from 198 in 1990. Members of Congress clamored for

another investigation of the threat to our national security of oil

imports. The second Presidential finding in this administration was

released at the end of March, again finding an increased national

security threat. No action has been taken.

There has been a recommendation now to take some action, but,

again, no action has been taken. But 28 States have taken the initiative, including my State, with incentive programs for production.

Ohio has taken action with encouragement for domestic producers.

The Clinton Administration says they were ‘‘caught napping’’

when fuel prices jumped. I would suggest otherwise. With two

Presidential findings of national security risk in hand—and let me

tell you, DOE has been clamoring trying to get the attention of the

administration. But they are not listening. They knowingly put

American consumers at risk for these high prices with the foreign

policy of looking to OPEC for more oil imports and gasoline instead

of acting to stabilize domestic production and refining capacity.

Senator VOINOVICH. Ms. Bode, would you please summerize——

Ms. BODE. Yes, absolutely. And I have a much longer statement

that I would like to be included in the record.

A lot of folks have talked here about what has been happening

in the Midwest. Oklahoma is part of that PADD2 distribution region, so our prices were spiking, too. We looked into it. There is a

tremendous amount of complicated infrastructure issues that are

being resolved right now. Gasoline prices are continuing to fall.

Hopefully we have learned lessons in regulatory policy from this

government-caused disruption.

But that is a smaller, more temporary matter. The much more

important fundamental issue is whether we as a Nation have

learned the importance to our national security and economy of

maximizing domestic refining and production options. If we have

not learned the fundamental lesson, this episode will be replayed

in the future with even more costly effect.

Senator VOINOVICH. Thank you very much.

21

I think, Ms. Bode, one of the things that you mentioned that is

interesting that is hard for Americans to understand because we

are used to thinking of things one way, and when we are asked to

think of them another way, it is sometimes hard for us to understand, particularly when it may cost us more money. When the oil

prices went way down, they dramatically impacted upon many of

the U.S. domestic producers of oil, and that if we are going to

maintain our domestic producers, the marginal producers, ‘‘the

strippers’’ that some people refer to out there, you need to maintain

a certain level per barrel in order for them to stay in business.

One of the things that we perhaps ought to look at is working

it out so that when that price does fall way down there, that there

is some kind of incentive for them to stay in the business and not

just disappear.

I would like you to comment on that so that people can maybe

understand that concept, because I think what you said was that

when the price goes so far down, hooray, but what you are doing

is you are making yourself a lot more vulnerable so that later on

somebody could take advantage of you because you, in effect, have

eliminated part of the supply.

Ms. BODE. Absolutely. And I think most Americans understand

that, the concept. They are not saying that they have to have absolutely 25-cent gasoline. They are just saying don’t whipsaw us like

this so that we can’t even plan—from 70 cents to $1.80 all in the

period of a year. I think people understand you have to be able to

at least break even or make a little profit on producing oil and gas,

and that is all I think folks have been talking about.

But one of the things that I think is fundamentally important

that you mentioned is that there be some stability. And, in fact,

one of the things we did and many other States did in putting incentive packages together was to drop the gross production tax,

which is the State tax on oil and gas production, dropped it almost

to zero whenever oil prices fall below $14 a barrel. And that provides a stabilizing effect so people know that there is going to be

encouragement to continue to invest and stay in business. It is not

the government saying, well, our policy is basically we are going to

get all our oil from overseas, because that is a strong message to

stop doing business here in this country, and, in fact, that has been

the result.

Senator VOINOVICH. Well, if you noticed, I suggested to Governor

Taft that he might go back to the National Governors’ Association.

As a former Governor of Ohio, I don’t know whether it happened

during my administration. If it did, wonderful. If it happened

under another, God bless. But the fact is that you are pointing out

that even States can get into the act in terms of making more production available.

Ms. BODE. And they have.

Senator VOINOVICH. There is the issue of refineries, and I think

you said that at one time we had 198 refineries, and now we have

153, and I understand there hasn’t been a refinery built in this

country in the last 25 years.

I would like some comment from the witnesses on why that is,

and do you believe that if we are going to have an energy policy

that issue should be addressed? And should we build more refinVerDate 11-MAY-2000 15:36 Oct 02, 2000 Jkt 000000 PO 00000 Frm 00025 Fmt 6633 Sfmt 6633 65746.TXT SAFFAIRS PsN: SAFFAIRS
22

eries in the United States? You might even comment, if we haven’t,

why have they closed and why aren’t people building more of them

if they are needed?

Ms. BODE. I would be glad to respond. I think obviously we have

much stricter government regulation of refineries, environmental

regulations and other things that—we have the most strict environmental regulations in the world on our domestic industry. And that

is because we care about the environment, we care about health

and safety, and that is good. But the problem is we need to evaluate how to balance that and the cost of those regulations with the

needs of the country in building infrastructure, because, let me tell

you, it is pseudo-environmentalism to say that it is better not to

have domestic production and refining in this country than to ship

it in on tankers. At 60 percent oil dependence, we are talking about

10,000 tankers coming into American ports, and anybody will tell

you, particularly the Coast Guard, that that is a much greater

threat to the environmental health of this country than drilling for

oil and gas under our very strict environmental standards and refining oil under our standards. So those are some of the—and the

loss of domestic production of oil, I think, has caused refineries to

say, well, heck, we are not really needed to do business in here,

and refined products coming in is another reason, I think, that fundamentally people have said, well, we will refine offshore because

it is cheaper to refine offshore. Imported products coming in is another factor.

But I think we should have an area at the Department of Energy, frankly, that focuses on refineries and that looks at our infrastructure on a regular basis and that we should focus on these

issues and come up with a list of what we can do to encourage refinery upgrading and standards as opposed to putting new rules in

place that basically run them offshore. Because if you have refineries close to your markets, you are going to be able to provide the

product whenever you have these short-term problems. Otherwise,

the problem in the upper Midwest and Chicago is that because

they only can provide about 75 percent of the capacity for gasoline

they need, it has to be piped up from the gulf. That product has

to be piped up. If there is any disruption along the way and if anybody else needs all these different flavors of gasoline, then you are

not going to be able to get it to the marketplace. So localized refineries are fundamentally important to the distribution system.

Senator VOINOVICH. What is interesting is that I think, again,

when we think about the environment and we are saying, gee, we

don’t want to have the oil exported—or we don’t want to have the

refineries here because we are concerned about the environment, I

doubt seriously that anyone gives any consideration that it has got

to be refined someplace, and if it is coming over here in large

boats—there is a jeopardy to the environment in terms of spillage,

what we have seen over the years.

Ms. BODE. The greatest threat.

Mr. MONIZ. May I just add to the refinery question?

Senator VOINOVICH. Yes.

Mr. MONIZ. Thank you, Mr. Chairman.

First, of course, we certainly agree that we would like to see additional refining capacity in the United States, but I do want to

23

note that although it is certainly true that the number of refineries

has reduced, we should emphasize as well that there has been a

significant increase in capacity of the remaining refineries, largely

driven by new technology developments. There has been a consolidation in the industry.

Clearly, there has been a problem in terms of the profit margin,

which is one of the reasons we don’t see more refinery development, and that, again, adds to something that Ms. Bode—and I

think you have also said—that one of the real problems right now,

in addition to the too high level of cost in terms of oil, gasoline,

etc., is the volatility. The volatility—the ups and downs, the rapid

changes—makes life difficult for everyone from consumers to people

in the refining business, etc.

Finally, Ms. Bode suggested that the Department of Energy deal

more with the refining industry, and I just would note that we do.

We have several programs, for example, a couple of new programs.

First, we have before the Congress this year a proposal called

ultraclean fuels. It is precisely to work with the refining industry

in developing the technologies to meet the increasing environmental needs and developing new petroleum-based fuels. The Congress I think is looking well on that proposal, and we appreciate

it.

Second, we have an important program in the Industries of the

Future Program, working with refineries to reduce their internal

energy costs, therefore improve their posture.

Senator VOINOVICH. Can I ask, do we need more refineries?

Mr. MONIZ. Yes. Right now our refining capacity is really being

pushed to the limit. We are about 96 percent utilization today

across the country.

Senator VOINOVICH. If you are not able to answer this, I would

be interested in finding out the answer. If you looked at where we

are today and you had to calculate based on the refinery technology

that is available today and the average refinery, whatever it would

be, is one, two, five, or ten refineries?

Mr. MONIZ. I am sorry?

Senator VOINOVICH. In terms of the additional refineries, if we

need more, approximately how many more would we need in order

to be competitive?

Mr. MONIZ. Well, the issue is that—and maybe John Cook could

actually expand on this—clearly we anticipate demand growing at

somewhere between 1 and 2 percent per year in terms of domestic

use.

Senator VOINOVICH. It is interesting, I read that several years

ago China was exporting oil. Today they have become a major importer of oil.

Mr. MONIZ. Yes.

Senator VOINOVICH. In other words, we in the United States are

kind of provincial in our thinking, and what is happening is that

the market is growing by leaps and bounds around the world, and

as a result of that, we may have to reevaluate the traditional way

we have approached some of these things, for example, saying, we

are going to have to do more of our refining here because of what

is happening.

24

1Figure 2 appears in the Appendix on page 94.

Dr. Cook, would you like to comment on that? I am about out of

time.

Dr. COOK. Sure. I think they have covered it pretty well. When

we hit peak demand in July or August, utilization rates may hit

98 percent. Some areas, the Chicago area is already at 99 percent,

pretty close to flat out. The Gulf Coast and West Coast refineries

often run at peak, at pretty much flat out. So, as was stated, if demand is going to rise 1 or 2 percent a year, just to maintain this

volatile, very little excess capacity situation, it has to grow by that

amount. And we need a cushion, another 4 or 5 percent or so.

Senator VOINOVICH. What I would be interested in is if the experts looking at it say, objectively, this is what we ought to have

in order to deal with it, because what I understand, in the Midwest

we had this lack of refining capacity, then we had the reformulated

gasoline, which, Mr. Perciasepe, I think it was mandated in those

towns by the EPA. They had to have reformulated gasoline. Was

it mandated——

Mr. PERCIASEPE. It was mandated by Congress in 1990 that the

cities with those specific classifications are required——

Senator VOINOVICH. Had to have—OK. So, right, Congress, you

are implementing it.

Mr. PERCIASEPE. You had the option in Ohio when you were

there to——

Senator VOINOVICH. We took the option. We did emission testing

and didn’t go for reformulated gasoline. But a lot of them were

mandated.

Ms. BODE. The date of implementation was set by EPA.

Senator VOINOVICH. But the fact is that also was a problem, that

this was coming on. You had the refinery capacity, and as a result

of that, that interfered with the flow of oil coming into the area.

Is that right?

Dr. COOK. In my view, that is exactly right.

Senator VOINOVICH. I have had a chance. Senator Lieberman.

Senator LIEBERMAN. Thanks, Mr. Chairman. I thank the witnesses. I apologize that I had to be out for a while to go back for

a meeting in my office, but I followed your prepared testimony. I

do have some questions.

Dr. Cook, you put up a chart, which I have as Figure 2,1 components of gasoline prices. And I was interested in looking at it, and

this is a comparison of June 1999 to June 2000—$1.11 in June

1999, and $1.63 in June 2000. But what interested me is that the

biggest percentage increase, almost quadrupling, was in the refiners’ contribution to the cost per gallon of gasoline, the refiners’

share of that, because most of the rest resulted from the jump in

the price of crude oil. Distribution and marketing is a little bit

larger but not that much; tax is about the same.

So why did the refiners’ share of the cost of a gallon of gasoline

quadruple in a year?

Dr. COOK. Well, again, to keep it short, the very low gasoline

stocks, strong gasoline demand, it is not unusual when these rare

circumstances occur that this will put extra pressure at that refining level on wholesale prices. Typically in the spring, refiners are

25

doing maintenance. Their gasoline production is not at maximum

levels. Gasoline demand will start to rise as we move into the driving season. And that tighter balance will reduce stocks a little bit

and raise gasoline prices relative to crude maybe a nickel or so.

But with these extremely low stocks, especially in the Midwest,

and with very strong demand, that tightening process was just

much more severe and raised the margins more than they normally

would go up.

Senator LIEBERMAN. Do you have a basis for making a judgment

yourself—or I don’t know whether you, Secretary Moniz, wanted to

say anything—for whether this is fair? This looks like an awful

large percentage increase for refiners compared to other contributions to the cost of a gallon of gasoline. Does it look fair to you?

Dr. COOK. Well, it is extremely high, but it is important to remember that throughout the 1990’s these refining margins were

very poor, and especially in 1999. In 1999, with crude oil prices rising much faster than product prices, you had those almost nonexistent margins, and that is largely the reason that production

failed to keep up with demand and we got these low stocks. They

do have to make a healthy margin to encourage the extra production.

I will let someone else comment on what is fair. They are very

high.

Senator LIEBERMAN. They are high. I suppose it would be fair to

say that the Federal Trade Commission may be commenting on

whether these increases at the refiner level are fair or whether

they do amount to price gouging or something else.

I have been hearing about what was described as just-in-time inventory practices of the oil companies and the refineries, and I

guess it is taking the concept that is quite fashionable and productive in industry where you have just-in-time inventory so that you

are not carrying large inventories unnecessarily for long periods of

time, but you use computers and sensible management to bring in

the parts that you need as you need them.

But when you apply this—and this has been a change, I gather—

in the oil industry, it becomes a ‘‘heads I win, tails you lose’’ deal

because if they are right in their projection of the inventory they

are keeping, which presumably will be modest or more modest than

it would otherwise be, then it is OK, they make what they would

make. If for some reason there is an increase in demand, then, of

course, they benefit again because supply is low as a result of that

practice.

That is my personal layperson’s reaction to this. There is nothing

illegal, as far as I can tell, about just-in-time inventory, but they

are stacking the deck, to mix my metaphors here, against the consumer by this policy. And I just wonder from your review of the

data whether there is any causal link between just-in-time inventory practices and increased price volatility of gasoline and, during

the winter season, home heating oil.

Dr. COOK. This concept was very popular in 1996. People attributed the low stocks, even within the industry, to this practice. I

think we saw that debunked in 1997 and 1998 when we had very

low crude stimulating a very favorable economic environment for

26

refining, and cheap crude turned into cheap product. We had tons

of stocks.

Senator LIEBERMAN. In other words, the refiners did buy more

based on the lower world price.

Dr. COOK. Yes.

Senator LIEBERMAN. And, therefore, the inventories were up.

Dr. COOK. Yes.

Senator LIEBERMAN. OK.

Dr. COOK. Cheap crude eventually filters down into cheap products. It is complicated, but, that is a fair statement.

So now we have high crude and the reverse situation. It just basically discourages, with weak margins and what is called backwardation, excessive product production.

The just-in-time inventory concept you might think of as just the

normal business practice that anyone has of wanting to hold down

their inventory costs or any other business costs as much as they

can.

Senator LIEBERMAN. Yes.

Dr. COOK. But I view it as an exacerbating factor. It is mainly

the refinery economics.

Senator LIEBERMAN. Yes, I hear you. What I am concerned about

is—and I understand that there would be a natural economic incentive as the world price of oil goes higher to buy less, hoping it

will go down. But my question is—we have been following your

numbers on home heating oil stocks now because we have an obvious concern that the crisis in the Northeast is going to be repeated

again next winter. And your numbers show that the home heating

oil stocks now are lower than they have been in the past than I

would say they should be, so we are rapidly heading toward, are

methodically, unfortunately, heading toward another winter in

which if the weather is colder than we expect, the prices are going

to shoot sky high.

Of course, I wonder about the same thing as we approach the

gasoline driving season. I understand that the price of world crude

is up, but can’t you really predict or can’t they predict driving—

gasoline demand is going to go up as we get to June, and that their

stocks have been lower than predictable demand would be. This is

probably even more predictable—it is more predictable than whether the winter is going to be cold or not.

So my concern is here—and from your data, I wonder if you can

either shed some light or tell me I am wrong or right—that they

are keeping the inventory lower than in the best of circumstances

we would want it to be. And I understand they are in a business,

but you would hope for a certain amount of sensitivity to consumer

cost along the way.

Dr. COOK. Again, I think that limited excess refining capacity is

part of the problem. When stocks fell over the winter for gasoline

now to extremely low levels, even when the conditions improved,

personally I believe refiners made every effort they could to crank

up as high as they could and as quickly as they could, but they ran

into a lot of refining problems, which occurs when you try to run

at high rates.

I don’t think there is enough capacity to catch up. That is the

problem here. When you get behind and you have to meet gasoline

27

1The prepared statement of Mr. Perciasepe appears in the Appendix on page 101.

demand and you have to meet diesel and heating oil demand and

restock from low levels, there is just not enough capacity to do

that. I don’t think they are holding back. I think the economics now

are wildly favorable to maximum production, and anybody that can

produce the product will do it.

Senator LIEBERMAN. Will do it; they are catching up. Thank you,

Dr. Cook.

I wonder, Mr. Chairman, if I could ask Mr. Perciasepe to come

to the microphone. I just want to ask him in the time I have this

one question, if he would come to the table.

Senator VOINOVICH. I have no objection; it is on his time.

Senator LIEBERMAN. Yes, sir. Thank you. The question is the

broad one, which is, there are clearly those who would place much

of the blame for high gas prices on environmental regulation, specifically the reformulated gasoline requirement. In fact, I think the

representative from the American Petroleum Institute, who is testifying on the next panel, is going to call—at least he called in his

written testimony for the repeal of the RFG oxygenate requirement.

I wonder, Mr. Perciasepe, if you think the reformulated gas requirement is responsible for some or most of the price increase.

And given your review of the situation, has EPA been able to account for the entire increase in the Midwest, or is there some portion of it still that you can’t attribute to the factors suggested by

others, including the oil companies?

Senator VOINOVICH. Would the witness state his name and the

organization that he represents for the record?

TESTIMONY OF ROBERT PERCIASEPE,1 ASSISTANT ADMINISTRATOR FOR AIR AND RADIATION, ENVIRONMENTAL PROTECTION AGENCY

Mr. PERCIASEPE. Yes, sir, and I am sorry I didn’t do that when

you asked me when I was in the seat before. My name is Bob

Perciasepe. I am the Assistant Administrator for Air and Radiation

at the Environmental Protection Agency. Again, I appreciate the

question. I will try to give a general answer. I am sure it will generate more questions.

Our analysis continues to be that when you add up the additional cost of Phase II RFG on top of Phase I, which took effect in

1995—and which had a mere cost of around 3 to 4 cents per gallon.

When you add both of them up together, it is about 4 to 8 cents

impact on the cost of producing gasoline. And we have not seen any

evidence that that cost should be any different. That cost range includes the cost of making the reformulated gasoline with ethanol,

and so there has never been, back to 1993 when these regulations

were enacted, a sense that it would be a free program. And I want

to be clear about that, and I think everybody recognizes the balancing act that everyone has talked about here.

Senator VOINOVICH. Mr. Perciasepe, I can tell you that we did in

Ohio. It was a question of whether we were going one direction,

emission testing, or in another direction, reformulated gas. I figVerDate 11-MAY-2000 15:36 Oct 02, 2000 Jkt 000000 PO 00000 Frm 00031 Fmt 6633 Sfmt 6633 65746.TXT SAFFAIRS PsN: SAFFAIRS
28

ured it was going to cost my people in Ohio more money and that

the estimate of what it would be would be probably more.

Mr. PERCIASEPE. Right. The actual cost of producing Phase I

RFG turned out to be less than the estimates in the 5 years that

it was implemented, and that is a tribute to the American refining

industry who was able to do that.

The current situation in the United States, looking at today’s retail prices, if you take out Chicago and Milwaukee, the average cost

of RFG in the United States is roughly equivalent to, on average,

the cost of conventional gas in the United States. Remember, conventional gas is about 70 percent of the gas in the United States;

RFG is about 30 percent. The Chicago and Milwaukee market is

about 3.4 percent.

Now, if you look at Chicago and Milwaukee, what has happened

over the last 14 days is the wholesale price for RFG with ethanol

in it has dropped 47 cents. That has not been reflected at the retail

level. If half of that or a third of it or some of it is reflected at the

retail level, the prices in these cities would be very similar to what

it is in the rest of the country. And the differential between conventional gasoline and RFG at the wholesale level, off the rack where

the trucks fill up, is less than a penny in Chicago and 7 cents in

Milwaukee. And those are pretty much what we would expect—

those are within the range that I mentioned earlier. Obviously one

is lower.

Now, cost to produce is not price, and I want to be clear about

that. My point is that there are other things going on that are affecting the price, not the cost of producing. And we see that stabilization in the entire country now that these wholesale prices are

stabilized. We now need that pricing reality to move onto the retail

level so the consumers can be relieved of whatever happened in

early June to cause prices to reverse.

Senator VOINOVICH. I think the time is up.

Senator LIEBERMAN. My time is up. I thank you, Mr. Chairman.

Thanks, Mr. Perciasepe.

Senator VOINOVICH. Thank you.

We have some other Senators here. I am going to follow the

early-bird rule, and I think, Senator Levin, you were here.

Senator LEVIN. Mr. Chairman, thank you.

While Mr. Perciasepe is there, if you could just stay there for a

minute, you have analyzed some of the reasons—EPA has analyzed

some of the reasons which have been given for the huge increases

in prices in Michigan, Illinois, and Wisconsin, five factors: Higher

crude oil prices, use of ethanol in reformulated gasoline, pipeline

problems, low inventories, and the patented RFG process.

Have you found that any of those factors or all of them put together can explain the 80-cent increase over 7 weeks in the price

of gasoline in Michigan, Illinois, and Wisconsin?

Mr. PERCIASEPE. We have been asked by many to grant a waiver

for the reformulated gasoline program, particularly in the Chicago

and Milwaukee area. So pursuant to our analysis to see whether

there indeed is a supply problem, that there was not the cleanburning gasoline available to be sold, whether it be at the retail or

at the wholesale level, we worked together with DOE to look to see

what the supply situation was. And I think you have already heard

29

reported here by Dr. Cook that the supply in the entire Midwest

PADD was tight, and in particular, when we looked at the Milwaukee and Chicago area with field teams, we found that it was

tight but adequate to meet the demand that was available. Nobody

ran out of gasoline.

And so when we looked back to see what the issues were, and

we met with the oil industry, they brought up some of these issues.

We have pursued every one of them vigorously. And, again, there

are inadequate explanations in terms of equating that large of a

price increase with whatever effect might result from savings, a 5-

day outage of a pipeline or the cost of producing RFG.

Senator LEVIN. Or all of them put together.

Mr. PERCIASEPE. Or all of them put together.

Senator LEVIN. Now, you have given us an analysis of——

Senator VOINOVICH. I think in fairness to the other witnesses

that are here, Mr. Perciasepe was not on the witness list. He is

now here and answering the questions. We have three people that

have waited, and I think they ought to have an opportunity also

to respond to the question.

Senator LEVIN. Sure, I would be happy to.

Mr. MONIZ. I was going to add, Mr. Chairman, a footnote, a piece

of good news. Today AAA announced that in Michigan there was

almost a 10-cent price drop in the last week. It is only a datum.

It isn’t a trend yet, but hopefully it will become one.

Senator LEVIN. That was announced some days ago, as a matter

of fact.

Mr. MONIZ. I see. OK.

Senator LEVIN. The EPA analysis is, relating to the wholesale

price drop, a very significant price drop since June 15 when there

was a Federal Trade Commission investigation that was announced. And as I understand it—either one of you from EPA can

perhaps comment on this—while wholesale prices of gasoline have

dropped significantly since June 15, none of the factors that I have

just rattled off that have been given for the rise in prices have

changed. Is that correct? I am reading an EPA memo here. I don’t

know which one of you gentlemen——

Mr. PERCIASEPE. Yes——

Senator LEVIN. So, in other words, of those five factors—higher

crude, use of ethanol in reformulated gas, pipeline problems, low

inventories, and the RFG process—we have had a significant

drop——

Mr. PERCIASEPE. None of those has changed in the last 2 weeks.

Senator LEVIN. All right. So they don’t explain the increase, and

they haven’t changed, as far as you know, to explain the drop.

What, in your judgment—well, I will let it go at that.

Now, on reformulated gasoline, Michigan does not use reformulated gasoline. Is that correct? I am just asking either of the EPA

folks here. Is that correct?

Mr. PERCIASEPE. Correct.

Mr. MONIZ. Correct, yes.

Senator LEVIN. And yet the price in Michigan, is this not also

correct, the retail price has been about equivalent, if not more,

than the price in Chicago and Milwaukee? Do you know whether

that is true or not?

30

Mr. MONIZ. That is approximately correct, yes.

Senator LEVIN. As far as you know.

Mr. MONIZ. Yes.

Senator LEVIN. There has been——

Senator VOINOVICH. I would just like to mention that we have

got two back-to-back votes coming up. We have 10 minutes, and I

think that what we probably should do is go for another 5 minutes

and then go over and do our votes and recess this until we come

back.

Senator LEVIN. Do you want to recess now?

Senator VOINOVICH. Well, we have 4 or 5 minutes. But the other

thing I have to say is that these witnesses, are you able to stay

until we come back? We are imposing on you and we have a bunch

of other folks here that have been sitting around waiting to testify.

So why don’t we go on for another 5 minutes, and then we will

recess and go down and vote and come back.

Senator LEVIN. Let me ask the EPA folks this question. I believe

that, according to one press report, New York Times, June 26, the

American Petroleum Institute, ‘‘pleaded with the EPA not to lift

the rule’’ relating to, I think, reformulated gas, if I am correct.

Have they made that plea to the EPA?

Mr. PERCIASEPE. Yes, they have. When we were asked to review

a waiver request—we obviously take those very seriously—we instituted all the examinations that I just mentioned. We also asked the

refiners who are supplying the area what their views were and how

that would affect them, and all of them, I think, without exception,

including their association, recommended no granting of a waiver.

Senator LEVIN. Well, if I read the testimony today of the Petroleum Institute, however, they are urging that that requirement be

lifted. Am I reading that correctly?

Mr. PERCIASEPE. They haven’t communicated to us.

Senator LEVIN. One of you testified, I believe Dr. Cook, that the

refining capacity is at 98 or 99 percent right now. Is that correct?

Dr. COOK. In the Chicago area.

Senator LEVIN. In the Chicago area. If this is generally true that

we are refining at almost full capacity, what would be the benefit

of greater oil supplies coming in from either OPEC or from the

Strategic Petroleum Reserve? Could it be refined if we were able

to get that release from the Strategic Petroleum Reserve or get

OPEC to give us 2 million more barrels a day instead of 750,000

barrels?

Dr. COOK. Well, that is a good point. It would have a limited effect. For one thing, a large release would reduce the crude price.

It is a global market. That would undercut the crude component of

the gasoline price.

The expectation of that to happen, these markets are very important in pricing run forward, on expectations, so there could be some

decrease from that.

Not all regions are at 99 percent capacity. The Gulf Coast is not

at capacity yet, and likewise, the East Coast. There could be some

additional production there.

More importantly, Europe and Asia are nowhere near capacity,

so that to the extent that cheaper crude stimulates them to

produce more, we could certainly see more conventional gasoline

31

imported. And in your area, in your State, conventional is the problem.

Senator LEVIN. Thank you. Thank you, Mr. Chairman.

Senator VOINOVICH. I think we are going to recess the hearing,

and we will try to be back as soon as possible. Thank you.

[Recess.]

Senator VOINOVICH. We will reconvene the meeting, while I wait

until for my colleagues to return, I will ask a few questions before

they get here.

The issue of the refineries, I would like to go back to that again.

There was a question asked about if we could get more supply in,

could we handle it in terms of the refineries? And I think I heard

you say, Dr. Cook, that we do have refinery capacity out in the

West Coast. It is not at its capacity. Could you explain that? What

I am trying to get at is do we need more refineries. And if we do,

what have we got to do in order to get them?

Dr. COOK. Well, we either need more refineries, or we need more

refining capacity at the existing ones. They can upgrade, they can

add units, and they have been doing that. So I think I would

phrase it the latter.

I would also like to say there isn’t very much excess capacity left

anywhere in this country. It is a very small amount, on the West

Coast, Gulf Coast, East Coast, and virtually flat out in the Chicago

area.

Now, I think the potential for more product production of conventional and distillates, anyway, if not RFG, is globally, in Europe

and Asia. To the extent that could be imported and help the distillate stocking for next winter, which is a concern of ours, that

would be a plus.

Senator VOINOVICH. So what you are saying is you either need

more refineries or you need to have the ones that are there expand

their capacity. And the reason why we have lost the refineries that

we have is what? Why are they out of business? It is not economical or what is the reason?

Dr. COOK. Well, most of the losses were very small refineries

spawned from the regulation period that, once competition occurred, were inefficient and noneconomic to operate, so they

dropped by the wayside. And some of that capacity was picked up

by the remaining refineries.

Senator VOINOVICH. Again, how do we get more refineries?

Dr. COOK. Well, profit margins have to improve. No one is going

to invest in it, especially with stringent environmental regulations,

unless one can at least make the average of other large industrial

rates of return.

Senator VOINOVICH. Mr. Moniz.

Mr. MONIZ. The rates of return, as John just alluded to, in that

business have been rather low compared to alternative ways of investing capital.

I would just add one other thing, however, in terms of the refining equation, and that is also, again, the demand side. I think we

need to keep working on the demand side, finding environmentally

and economically attractive ways of reducing demand, like with the

advanced automobiles.

32

Senator VOINOVICH. It has to be more economical. How do you

do that? Does that have to do with the price of oil has to stay up?

What is it that is going to make it—what profit—is it more incentives from the Federal Government? What is it that is going to get

them to get in there and build more refineries?

Ms. BODE. Well, I will tell you what I think.

Senator VOINOVICH. Fine.

Ms. BODE. I think we need to have a comprehensive look at U.S.

refinery policy in this country. As you suggested, what we need to

make ourselves independent in terms of at least these short-term

problems, which is probably close to 50 percent, we have, I think,

an opportunity to get back to 50 percent domestic production, and

refining capacity is very much a part of that. We need to have a

look at comprehensive refinery policy.

I would suggest incentives may be something to look at, but also

we need to look at regulatory policy regarding refineries to make

sure, to ensure that refinery policy and regulation is cost-effective.

One of the newest things that is going to affect it coming up very

shortly is new environmental standards for diesel fuel, and that is

going to, again, cause some refineries that now may be in business

to look seriously at whether the margins are sufficient for them to

stay in business. So you may see a fall-off in new refineries or existing refineries as a result of new rules going into effect.

So I just think we need to take a comprehensive look at our infrastructure, both refining, exploration, and production, and really

see what we are doing right now to encourage having a strong domestic option so that consumers aren’t hurt in these times of short

supply, and particularly refining options, not just on the Gulf

Coast, because refining capacity has increased, but it has all increased away from where we need the product. We need to be

thoughtful about making sure the capacity is there close enough

and supplied by pipelines, sufficient pipelines so that it can get the

product to market in a timely fashion.

Senator VOINOVICH. So what about if we opened up exploration

and we had more oil produced here? Would that generate more refineries?

Ms. BODE. Well, it is a two-part equation. Exploration, production, more domestic production obviously is something that you

need in order to have domestic refineries. But you are not going to

impact margin of domestic refineries by having more produced here

at home. You are going to have to have policy that focuses on refineries and their margins as well in order to encourage more refining

capacity and more refineries to be built in areas where you really

need that capacity.

Senator VOINOVICH. Well, I would be very interested in any suggestions from you or anybody in the audience about what is it that

we would have to do in order to get our refining capacity increased.

Mr. MONIZ. Mr. Chairman, thank you. Ms. Bode addressed the

issue of looking at the infrastructure requirements in the refining

business and other parts of the business. I would just note that, in

fact, we did ask the National Petroleum Council, and they just, in

fact, produced a report looking forward on the refinery business,

particularly as one looks at what she referred to as some of the

coming requirements in terms of low-sulfur gasoline, diesel fuel

33

issues, MTBE. We have a report. They basically emphasized very

strongly the importance of sort of sequencing and phasing of these

programs, and this is something that we intend to work closely

with EPA and others in the administration to address. So that is

very directly addressing this question of the refinery business in

the next years.

Senator VOINOVICH. Senator Lieberman, I just wonder, this panel

has been here now for quite some time. I think that we ought to

excuse them and let the other witnesses that have been waiting

come forward.

Senator LIEBERMAN. Absolutely, Mr. Chairman. I agree. I thank

the panel.

Mr. MONIZ. May I add one more comment, please, Mr. Chairman? I would appreciate it. I will be very brief, and I apologize.

But I did want to go back to Mr. Lieberman’s earlier question on

heating oil and just add one fact.

Dr. Cook emphasized how tight we are right now in the refining

business and we are at capacity, and with regard to moving forward on a home heating oil reserve that we share with the Congress a desire to do so, we want to emphasize because of that fact,

the urgency that we need to be moving forward very soon, because,

frankly, in the situation he has described, the last thing we want

to do is late in the fall begin to stock up a home heating oil——

Senator LIEBERMAN. Start acquiring oil for the reserve, you

mean.

Mr. MONIZ. Exactly. So we need to really be moving quickly and

hope to work with the Congress in accomplishing that.

Senator LIEBERMAN. Thanks very much. We appreciate the department’s support of the idea of a regional home heating oil reserve and look forward to working with you in the very near future

to get this implemented. Thank you.

Dr. COOK. Could I add one last comment also? As I testified, I

would like to clarify that we do see the situation in the Midwest

improving some. Inventories have been building, refinery production has been growing for the last 4 weeks out there, and that is

behind the big wholesale price decrease.

Senator VOINOVICH. OK. One other thing. I went to a meeting

that Speaker Hastert had for the Midwest region. The EPA director

had a chart that showed the prices going up, and then when it announced that we were going to have the FTC investigate, it looked

like the prices went down. And the allegation is because of the

threat of the FTC hearings, which everybody supports, including

me, that all of a sudden the prices went down.

Would either one of you want to comment on that?

Dr. COOK. Well, I don’t want to comment on that specifically. I

just want to emphasize that supplies were increasing over this period of time.

Ms. BODE. And I have talked to the refineries as well in our

areas, because, obviously, that is something that we regulate, and

we were also part of that PADD2 distribution reach, Oklahoma

was, along with Ohio and Illinois and the upper Midwest. And

what we found basically was that we had a tight, very tight situation coming in. We are part of the region, again, that only has 75

percent capacity in our region, and as they determined up the pipeVerDate 11-MAY-2000 15:36 Oct 02, 2000 Jkt 000000 PO 00000 Frm 00037 Fmt 6633 Sfmt 6633 65746.TXT SAFFAIRS PsN: SAFFAIRS
34

1The prepared statement of Ms. Apelbaum appears in the Appendix on page 110.

line in Chicago that they were having difficulties blending the ethanol into the gasoline, and supplies became really tight and prices

went up, the gasoline for Oklahoma—and we don’t use reformulated gasoline—the gasoline in Oklahoma went up the pipeline to

where the supplies were short. And so as soon as the batches of

gasoline started getting to the marketplace up there and we started

resupplying the marketplace, in Oklahoma our prices started coming down. And it was, steadying—long before any of the hearings

or the investigation was announced—because I was talking to the

marketers every single day. So I knew when the price fell and it

was really before any investigations were announced.

Senator VOINOVICH. So your feeling is that was more coincidence

than it was any kind of——

Ms. BODE. That is my understanding as a regulator as to

what——

Mr. MONIZ. I personally believe we need to wait to see what the

FTC says. Certainly the numbers don’t all add up at the moment,

but I would just add as well that the most recent data indicates

a drop in demand, presumably as part of a price signal in the region.

Senator VOINOVICH. It is so complicated. Thank you so much.

Our next panel of witnesses, and, again, I apologize to you for

the long delay: Hon. Richard Blumenthal, the Attorney General of

the State of Connecticut; Phyllis Apelbaum, owner of Arrow Messenger Service; J.L. Frank, President of Marathon Ashland Petroleum Company; and Red Cavaney, President and Chief Executive

Officer, American Petroleum Institute.

I understand, Ms. Apelbaum, from your Senator that you have

a plane to catch? Or have you missed it?

Ms. APELBAUM. I have missed that one, but I am going to get the

next one no matter what.

Senator VOINOVICH. OK. Well, how would it be, then, if we would

start with you, Ms. Apelbaum, and your Senator thinks the world

of you, and he will be here to introduce you or say some nice things

about you, as you have come all the way here. And we would start

with you, and we will move then to Mr. Blumenthal, Mr. Frank,

and then clean-up will be Mr. Cavaney.

TESTIMONY OF PHYLLIS APELBAUM,1 OWNER, ARROW

MESSENGER SERVICE

Ms. APELBAUM. Thank you very much. Mr. Chairman, Members

of the Committee, my home State of Illinois Senator, Senator Durbin, thank you for allowing me to testify here today. My name is

Phyllis Apelbaum, and I am the owner of Arrow Messenger Service

in Chicago, Illinois. I am a member of the Chicagoland Chamber

of Commerce, and I am also the president of the Messenger Courier

Association of the Americas. The MCAA represents approximately

500 courier companies in the United States and abroad. Most of

these companies are small businesses and many are multigenerational family owned. In my brief remarks today, I hope to tell you

a little about the effects of high gas prices on small business owners in the Chicago area and throughout the courier industry.

35

Courier companies are not glamorous businesses, but we perform

a vital role. As the agents for the same-day delivery business, we

deliver the Nation’s time critical shipments. We know full well that

someone can pay 33 cents to mail a letter across town or pay

FedEx or UPS to deliver it in 3 days or overnight. We deliver critical documents, medical supplies, blood, machine parts, and even

organs for transplant. We even facilitate same-day cross-country

shipping.

The courier industry in Chicago and most major cities utilizes,

contrary to the view you might get walking the streets of Washington, DC, mostly cars, vans, and light trucks to undertake deliveries. One of our major costs has always been fuel to keep our

fleets in operation. We have always been conscious of gasoline

prices and fuel efficiency.

As the Committee knows, the rise in gas prices has been the

highest and most destructive in the Chicago area. This rise in

prices is not an abstract concern or a minor annoyance. We feel it

every day as we refuel these fleets. This is a problem that not only

inconveniences vacationers who have many travel options; it is affecting our businesses in a very real and negative manner.

In mid-May, my drivers fueled the Arrow Messenger fleet of 110

vehicles for an average of $1.77 a gallon, up from $1.47 in January.

Now we are paying $2.24 or more a gallon in the Chicago area for

regular grade gasoline. This increase is costing my business thousands of dollars a month and over $35,000 since January. These

figures are duplicated with other businesses throughout the greater

Chicago area. We already employ complex dispatching software

that allows us to do multiple pick-up and deliveries on all single

runs. If there is a way to cut down on fuel costs and miles traveled,

we are already using it. Short of refusing to make deliveries, there

is little that we can do to mitigate the fuel usage.

But it is not just couriers; the whole transportation sector in my

area of the country has been especially hard hit, as we have heard

today over and over. For example, in Chicago, we have 6,300 taxicabs and 15,000 drivers who are paying 30 percent more for fuel

and working an additional 2 to 4 hours per day to cover these increases. Multiply what the courier industry is going through by the

entire transportation industry, and you can see that millions, if not

billions, of dollars is being drained out of the economy of the Midwest. Crain’s Chicago Business estimates that the gasoline price

shock will cost the local economy 36,000 jobs over this coming year.

Gasoline is one of the largest costs for any courier business. As

president of the Messenger Courier Association, I have spoken with

members from throughout the greater Chicago area. They echo

what I know to be a fact: That the increase in gasoline prices is

hurting and even disrupting their businesses. Until the gas price

shock, one of our toughest challenges was finding enough qualified

drivers to make the deliveries that our fast-paced economy requires. After 40 years of working in this industry, I can tell you

that there has never been a more difficult time to hire and retain

drivers, and we are struggling to keep these vehicles on the road.

On top of that, companies are having drivers quit on a daily basis

rather than pay the exorbitant fuel costs.

36

There has been a variety of responses to this crisis. Many of our

companies have added fuel surcharges. This is done on either a

percentage basis or a flat fee. Others are simply having to raise

their basic rates. Most of the members report that the surcharges

don’t even begin to cover the lost revenue due to the gas price increases. So we have the dilemma of losing money to keep a client

in the hopes that the gas prices will fall or letting the client go and

jeopardizing future business.

I have heard the theories put forth to us as to why this has happened: OPEN, environmental regulations, price gouging, SUVs. I

will leave that up to the economists among us to decide. But I can

tell you that the increases have hurt my family-owned business

and many small and emerging companies in the Chicago area and

throughout the country. I urge the Committee to continue its investigation into this matter, and I strongly support the FTC investigation into price gouging.

The courier industry has faced many challenges over the past 20

years. First, the fax machine was going to wipe us out, but we survived in spite of it. Then came E-mail, and we just grew. Now, with

the passage of the Electronic Signatures Act, once again we will

have to adapt. The industry as a whole will survive this challenge

over higher gas prices as well. What I fear is that many individual,

good, hard-working family-run courier companies will be put out of

business or greatly disrupted by the gasoline price shocks. And

eventually higher costs get passed along to the customers. This is

the strongest economy that I have witnessed in my lifetime. Anything that jeopardizes this should be of the very highest concern to

the Members of Congress and this administration.

I thank the Committee for the opportunity to testify before you

today. I would be happy to answer your questions.

Senator VOINOVICH. Thank you, Ms. Apelbaum. It is nice to have

a witness like you to remind us again of what impact this is having

on small business in our country.

Senator Durbin is here. Would you like to say a few words?

OPENING STATEMENT OF SENATOR DURBIN

Senator DURBIN. I will say very briefly, because I know Ms.

Apelbaum has some time problems running out to the airport soon,

but thank you for being here and thanks for making the sacrifice

to come out and tell us your story. It makes a real difference. And

to the Committee, let me tell you, Ms. Apelbaum is known as not

only a great business leader but a great civic leader. Chicago and

Illinois are very proud of her.

I think you have made a very good statement to put in perspective the concern we have that this gas price problem is going to create a ripple effect across the economy—an economy that we are

proud of, but one that is fragile when it faces this type of energy

cost increase.

I also want to add there is some frustration, I am sure, on your

part and everyone who testifies that we have not been able to get

our hands on this and turn it around more quickly. I am glad

prices are coming down, and I hope they keep coming down more.

Ms. Apelbaum, thank you for being here.

37

1The prepared statement of Mr. Blumenthal appears in the Appendix on page 113.

Ms. APELBAUM. I hope so, too, Senator. One of the issues that

people do ask me about all the time, in reference to the deliveries,

is: When you are short of drivers and fuel is an issue and you have

to choose between delivering blood or live organs and doing corporate work for people that really need to get that moving for the

economy, there is no call. You have to make the call for life-saving

measures. And so you turn business down every day in order to do

that, and that has really become a major problem for all of us.

Senator DURBIN. Thank you.

Senator VOINOVICH. Thank you very much.

Senator Lieberman, would you like to introduce Attorney General Blumenthal?

Senator LIEBERMAN. Thanks, Mr. Chairman. It would be an

honor to introduce the attorney general, who has a distinguished

record in public service, served as a clerk to a Supreme Court Justice, as U.S. Attorney for Connecticut, a member of the State legislature, and now since 1990 is the attorney general. Am I right

about that? Right, 1990, attorney general of the State of Connecticut.

If I may impose on Richard for probably the 30th time in forcing

him to hear this small story, when I was elected to the Senate, he

succeeded me as State attorney general, and we have a mutual

friend—or he is supposed to be a friend of mine in New Haven. I

will now immortalize him by mentioning his name in the record

here. He is our probate judge, Jack Keasan.

In what I thought was a tribute to me after my election, commenting on the new offices, he said that now Connecticut not only

has a better U.S. Senator, we have a better attorney general.

[Laughter.]

This is the tribute I pay.

Attorney General Blumenthal has been a great attorney general,

a great leader in a lot of the multistate attorney general actions,

and very strong locally as a legal advisor to the governor in the

State agencies, but also has an enforcer particularly of our environmental and consumer protection laws. So I am honored to welcome

him, and thank you for calling him as a witness.

Senator VOINOVICH. Mr. Blumenthal.

TESTIMONY OF HON. RICHARD BLUMENTHAL,1 ATTORNEY

GENERAL, STATE OF CONNECTICUT

Mr. BLUMENTHAL. Thank you. Senator Lieberman, I never tire of

that story for some reason that probably most people can understand, and I want to thank the Chairman for having me today and

the Members of the Committee for being here.

I was listening earlier to the invitation—I think it was an invitation—to be locked in a room together, and I can safely say, one, I

wouldn’t volunteer; but, two, I probably would be the least expert

and qualified of all the people locked in that room. But I would volunteer to help enforce the NOPEC prohibitions that Senator

Lieberman and others have sponsored because I do think and agree

wholeheartedly, Mr. Chairman, that a great share of the blame and

responsibility for the skyrocketing prices that we have seen at the

38

pump belongs to OPEC, and we need to take more effective action

to assure that we are not at the mercy of that cartel or of foreign

oil.

I am going to briefly, very briefly, summarize my testimony in

the interest of time rather than reading it and come first and most

directly to the question that Senator Lieberman asked earlier, because I do think it is probably the central question that we confront today, looking at the margins at the refining level and seeing

the increase from 6 cents to 20 cents in the contribution, if I may

use that word, toward the increasing prices that we have seen

made at the refining level.

Is that increase fair? And my answer is unequivocally no, it is

not fair. It is too high. It is excessive. And we have seen low inventories on the part of oil companies, and we have seen low inventories on the part of all of them together. We have seen increasing

prices, again, together. We have seen profit margins increasing together. So it is not only skyrocketing prices that have precipitated

an investigation focusing on potential collusion, price gouging, and

antitrust violations; it is the fact of those trends happening together.

And we have urged for some time that the FTC take the action

that it has with respect to the Midwest price phenomenon, and I

am delighted that Senator Lieberman and others have urged that

the FTC investigation be extended to the Nation as a whole, which

we hope it will be. A number of us as attorneys general have begun

our own investigations, and we hope that the expertise and resources of the FTC and other Federal agencies will be focused on

this trend because none of the excuses, none of the reasons given

by the oil industry, even taken together, can explain the trends

that we have seen. And that fact, I think, came across very clearly

in the testimony yesterday before the House Judiciary Committee

from the head of the Bureau of Competition for the FTC, Richard

Parker, who cited, for example, the reformulated gasoline cost, the

pipeline disruptions, the other kinds of temporary phenomena that

the industry has blamed for these trends, and, again, they cannot

account for the astonishing price spikes that we have seen.

In any other industry, if there were product shortages, whether

as a result of tremendous mistakes, unanticipated shortages of supply, or concerted activity, we would not see what we have witnessed in this industry, which are also record-high profits. And so

what I have proposed in my testimony is that we take measures

to increase the stocks and inventories by releasing product from

our Strategic Reserve and creating regional reserves, such as Senator Lieberman and others have advocated, regional reserves for

home heating oil and for gasoline, that we require perhaps minimum inventory levels, much as we do for banks and insurance

companies with the same idea that we need to protect consumers

against unanticipated shortages that threaten literally their lives

if we lack the product that we need, that we adopt new merger

standards to prevent the kind of consolidation that we have seen

in the oil industry, a presumption against approval unless there

are clear benefits for consumers, eliminating zone pricing and other

abuses, and taking action now to deal with the crisis that we see

on the horizon with home heating oil, because just as surely as we

39

1The prepared statement of Mr. Frank with attachments appears in the Appendix on page

120. 2The chart entitled ‘‘Chicago Market Wholesale Gasoline Prices’’ appears in the Appendix on

page 129. 3The chart entitled ‘‘Regional Fuels Programs’’ appears in the Appendix on page 130.

have a crisis now in gasoline, we face another crisis in home heating oil if we don’t take action now to increase those stocks and inventories.

Thank you very much, Mr. Chairman.

Senator VOINOVICH. Thank you.

Our next witness will be J.L. Frank, who is President of Marathon Ashland Petroleum. Mr. Frank, we are very happy to hear you

have spent a lot of time here in Washington the last couple of

weeks. I imagine you are getting a little tired of it, but we really

appreciate the fact that you are here, and not only a spokesman

for your company but for the industry.

TESTIMONY OF J. LOUIS FRANK,1 PRESIDENT, MARATHON

ASHLAND PETROLEUM, LLC

Mr. FRANK. Thank you. I should be wearing one of these buttons,

but I am probably the least popular guy in town. I am J. Louis

Frank, of Marathon Ashland Petroleum, and my company makes

and markets most of our products in the Midwest. We are a buyer

of crude oil and a seller of products.

I welcome this opportunity to discuss the gasoline market conditions we have experienced recently in our part of the country, and

I look forward to answering your questions or those of other Members of the Committee.

Let me start by saying that a very competitive gasoline market

ultimately determines the price of gasoline.

When there is a supply shortage in a competitive market, prices

tend to rise to whatever level is necessary to balance demand with

supply. And when supplies return to more normal levels, prices

tend to return to lower levels. Adam Smith, in his writings, had

portrayed these as the customary market. Just such an imbalance

of supply and demand occurred in the Midwest over the past few

weeks, and that is the reason that prices in the area surged. And

I would like to explain that.2

First, worldwide crude oil prices have risen rapidly, as you

heard, substantially going from $10 a barrel at a low to $35 a barrel at a high. Second, Midwest refineries can supply only about 75

percent of the region’s demand. The balance is about 42 million gallons a day that must be transported to this region. That is a million barrels a day.

The vast majority of this product comes in from the Gulf Coast

by barge or two major pipeline systems. Recent events illustrate

how fragile the Midwest refining and distribution system is and

how any disruption can create a supply shortfall that will ripple

through the system for weeks or maybe even months as refiners

and pipeliners struggle to catch up.

In March, one of these critical pipeline systems, the Explorer

pipeline system—we have an exhibit that shows where the Explorer pipeline is 3—experienced a line failure north of Dallas, followed by a 6-day outage, which resulted in a shortfall of about 336

40

1The letter referred to appears in the Appendix on page 131.

million gallons of product deliveries to the Midwest—that is about

8 million barrels—markets from Tulsa to St. Louis and on to Chicago and Milwaukee. It quickly became apparent that there was no

short-term make-up capacity to replace the 23 million gallons per

day that Explorer was not moving out of the Gulf Coast market to

PADD2.

More recently, the Wolverine pipeline, which carries almost 40

percent of Michigan’s petroleum needs from Chicago, also experienced a release that resulted in a 9-day interruption of supply to

that area. With only limited alternatives available, gasoline supplies in Michigan reached dangerously low levels, which are only

beginning to recover now.

Another factor that contributed to this supply and demand imbalance in the Midwest was the new Phase II reformulated gasoline requirements which became effective on June 1, and you can

see on this map by the colored areas where different types of special gasolines, boutique gasolines, are required in the Midwest market. This gasoline is more difficult to blend to meet U.S. EPA regulations. We had to virtually drain our tanks of winter-grade gasoline at the same time as the supply disruptions with Explorer were

unfolding.

If these supply issues were not enough, EPA’s decision to grant

three waivers from the RFG requirements for the St. Louis area

without any sort of penalty became the straw that broke the camel’s back.

Conventional gasoline that was originally destined for the upper

Midwest conventional markets was immediately diverted to St.

Louis. This contributed to the conventional gasoline shortages that

in turn led to severe price increases for those products in the upper

Midwest. And the price response that should have been seen in St.

Louis was transferred up to Chicago because St. Louis went to consuming conventional gasoline while building their supplies of reformulated gasoline, so essentially in a supply-short market, they

were taking two volumes of gasoline to St. Louis. The conventional

they were burning and the replenishing of the reformulated stock.

My company responded aggressively to the gasoline supply and

demand imbalances in the Midwest. We took immediate and extraordinary steps to try to bring additional supplies into the Midwest. We have been running our refineries at capacity and pipelines are at full capacity, and we utilize trucks and barges to bring

products in from nontraditional sources, as far away as Newfoundland, Canada, into the Michigan market. We brought truck drivers

in from Texas, Florida, and Louisiana. Our comments to the EPA

and DOE on what could be done to improve the Midwest supply situation in the short run were submitted in a letter dated June 13,

2000, and were discussed prior to that, and they have been attached to my testimony.1

Our nine recommendations focused on relief from numerous regulatory restrictions that hampered our ability to move products

into the areas that needed it most. My company is working on several long-term infrastructure problems that would help eliminate

supply shortages like the one we just experienced. These include a

41

new pipeline to serve the growing central Ohio market and a joint

venture pipeline to convert an abandoned or low utilization natural

gas pipeline into products, and that line is going through the approval process with FERC. And we are trying to expedite that to

get it pulled forward. It won’t be in operation even on the regular

track until January 2002.

In our view, these recent difficulties in the gasoline market are

mere symptoms of the much deeper problem that the United States

does not have a cohesive energy policy, a policy that would recognize the importance of ample, affordable, and clean energy for the

Nation, a policy that would encourage a viable and vital domestic

petroleum industry.

Any national energy policy must recognize the need for strengthening the downstream infrastructure of the domestic petroleum industry, the sector that includes refining, pipelining, and terminaling. Investor confidence in this critical sector must be restored

if we are to stem the decade-long retreat in refining capacity and

maintain our self-sufficiency in motor fuels.

In closing, I am very proud of the way that my company has responded to the petroleum shortfall situation. And as I said in my

opening remarks, the gasoline market is highly competitive, and

market forces ultimately determine the price of gasoline. However,

the supply system remains fragile, and any disruption in a refinery

or a pipeline distribution system could result in another supply-demand imbalance in the Midwest. And I have to say, Senator, that

when I first heard of the calls of investigation on collusion and

price fixing, I was sort of outraged and indignant about it. I was

embarrassed for the 28,000 people that work at my company and

come to work every day and wonder, ‘‘is my company guilty of price

gouging and collusion,’’ and I say unequivocally ‘‘no.’’ And I now

welcome this investigation to help clear the air for the accusations

that have been validated by the President, the Vice President, and

that inflames the consumer base, and everybody is concerned about

price gouging and price fixing that the industry is being charged

of.

That concludes my remarks, and I will respond to any questions

that anybody might have.

Senator VOINOVICH. I appreciate that last comment because I

know that there were those that said you were reluctant to answer

questions, and I can understand your initial feelings about it. I am

very pleased that you are here to say that you welcome questions,

because I do think that in the next couple of months we should

clear the air just about exactly what happened and we are starting

to piece this together.

But I will say this to you, that I think too much importance is

placed on the cause of prices are high, and I would hope that in

this further testimony through the questions that we get at the

issue of what do we do now in order to systematically bring the

price down and keep it down, and it is starting to fall. We know

that. And, second, and more important, as I mentioned in my earlier remarks, we talk about what is it that we need to do to have

a comprehensive energy policy to make sure that 5 years from now

we are not in the same position that we are today.

42

Mr. FRANK. Senator, can I have one more minute to show you

what I think is an explanation of the statement that is floating

around that prices came down when the FTC said we are going to

have an investigation? If you look at this chart, that shows what

the inventory level in PADD2 did, where that inventory level actually fell to a minimum on June 2. And following June 2, the inventory started to build——

Senator VOINOVICH. I am sorry. Could somebody point that out?

I am not following the chart.

Mr. FRANK. The minimum inventory level was on June 2. Since

that date, inventories have risen in response to a decreased driving

habit of the consumer, and the inventory levels have risen to a new

level. And then on the next chart, John, if you would put that up,

it shows that the prices were at their height on June 7 and were

falling from that date. And then there was an announced fire at

the Blue Island refinery in the Chicago area. The prices spiked

overnight, 10 cents up on the spot market. The next day they were

down 10 cents as the company said they were back in operation.

And since that time, the prices have fallen.

Now, we were facing charges or allegations of price fixing and

colluding back in mid-May, but the market continued to work after

that and the prices rose. And, finally, price stifled demand and the

inventory started to build, and the price fell. And that is the normal response you would see in a supply-constrained market.

Senator VOINOVICH. Thank you.

Senator DOMENICI. Mr. Chairman.

Senator VOINOVICH. Yes, Senator Domenici.

Senator DOMENICI. I wonder if you would yield me 5 minutes. Or

do you want a witness to go first? I have to go to the floor.

Senator VOINOVICH. Senator Domenici, you were here before, and

you mentioned that you did, and I apologize. I think that Senator

Lieberman and I would more than honor your request to make a

statement here today.

Senator LIEBERMAN. Absolutely. Besides, we note that you are

still the Chairman of the Budget Committee. [Laughter.]

OPENING STATEMENT OF SENATOR DOMENICI

Senator DOMENICI. I might say to both of my friends, I am not

at all proud of what we have done today with reference to the

budget.

Senator LIEBERMAN. Understood.

Senator DOMENICI. And I am about to form a pact with my own

heart that I will never let anybody by unanimous consent waive

the Budget Act. We, today, made some horrible mistakes in terms

of taking things off budget that we just don’t understand, and there

was no way to get in front of the steamroller. But it will not happen without getting slowed down in the future.

And I might find five other Senators to agree with me, and we

will understand what we are doing rather than vote because we

think people want us to vote in a certain way.

Now, having said that, I want to thank you, Mr. Chairman, and

this Committee. I have heard enough today to know that you are

on track to getting the facts. And, frankly, I want to thank you, Mr.

Frank, and I haven’t read your testimony, Mr. Cavaney, but let me

43

say we need to know what really happened. And my friend, Senator Lieberman, will not like me to focus this on the last 71⁄2 years,

but I will for a couple of minutes.

Let me just ask a question that needs no answer. How could

crude oil prices, since January 1999, go up 300 percent and there

not be a dramatic increase in a derivative of crude oil called automobile gasoline? It is impossible to go from $11 a barrel to $33 a

barrel and to blame you for the increase in gasoline prices when

something is amiss in American policy, unless that is the way we

want to do business. To have crude oil go to $10 and then go up

to $30 and then come down to $20 and then go up to $40, I am

just projecting, but that is the roller coaster we have been on.

Now, I think the policies of our National Government are somewhat responsible, and I predict for you today the next crisis will

be brownouts. And I am crossing my fingers while I predict there

will be brownouts. And then there will be another series, Senator

Lieberman, of ‘‘we blame you.’’ And the truth of the matter is we

are not building enough power plant capacity to meet electrical

generating needs, and we are going to get stuck with that just like

we did by OPEC when they found we needed more crude oil and

they weren’t giving it to us. Instead, they decided we will not give

it to you until the price gets up where we want it.

And nobody really is going to be to blame for the brownouts, because it is the fault of an American policy of trying to get every

ounce of energy out of the utility companies without producing any

new sources. Because new sources create environmental hazards,

we better squeeze every ounce out of the existing electric generating system and swapping around rather than just build new

ones. And the only thing we are using to build new ones is very

risky. The last five, Mr. Chairman, are all natural gas—natural

gas which comes into your citizens’ households, and they are delighted to be able to afford it.

Build the next generation of plants that furnish us with electricity on natural gas, Senators, and the price in your households

will begin to rise. Folks will begin to say, ‘‘Who is responsible for

that?’’—for the enormous increase that is going to occur. And it is

a lack of a policy, that forces us to recognize that we need power

plant capacity. I am going to say from the standpoint of one Senator, and maybe Senator Lieberman has said a little bit that might

permit me to say he concurs, but another problem is an American

policy that says no activity in the nuclear power area, no nuclear

waste disposal even on a temporary basis. Even though this is done

by every European country like you get up in the morning. Eighty

percent of France’s electricity comes from nuclear power. They put

it away temporarily, and they don’t lose a wink of sleep. And we

are fussing around trying to find a place to put the temporary storage of that which comes from nuclear power plants.

Frankly, the President made a horrible mistake when he refused

to let a facility be built. And if you had nothing else to blame on

him, you can blame him for stifling the future because we are

frightened to death of the cycle on nuclear power.

Now, I want to talk one final moment on how you can send a

message to the OPEC countries. How could we have less oil production in America and take more American land out of production,

44

and send any signal to them other than we are more at your mercy

every single day? And that is what happened.

Sixty percent of the land that in 1983 was available for independents to try to produce oil is off limits now. The idea of a multiple use of the public domain is a concept that is fleeting away because it really isn’t of concern to certain people who advise this administration that national lands be used for energy production. It

is that they should be preserved, and the principal function of government is conservation and preservation, not utilization of what

God put under the ground, which is energy sources.

ANWR is off limits. Offshore drilling, which is an abundant

source of natural gas, that moratorium is preserved as if we relaxed it a little, we would imbalance the environment of America.

None of that is true.

So I have been heard to say that the chickens are coming home

to roost, and, frankly, they are going to come back in more numbers. The roost is going to get heavier, and there is going to be another roost for another source of energy, and that is going to be the

one I just told you about. And then we are going to say, as we frequently do, it is your fault, Mr. Frank, it is your fault, and it is

your fault, Exxon.

In wrapping it up, let me say we now have—did anybody quote

how few refineries we have now?

Senator VOINOVICH. Yes.

Senator DOMENICI. You already did that?

Senator VOINOVICH. We have gone into that.

Senator DOMENICI. Thank goodness that these refinery owners

have put in new equipment and new technology, because fewer are

producing more per unit, but you haven’t built one since, what

1976, Mr. Chairman?

Mr. FRANK. Nineteen seventy-six.

Senator VOINOVICH. Haven’t built one for 25 years.

Senator DOMENICI. Now, what does that say for a country? That

means we must have some policy that says it is far more important

not to build them, for some reason, than it is to build them and

have capacity of our own. And I assume it is in some part because

of the 23 environmental protection rules and regulations that apply

to the oil and gas industry, or maybe it is even beyond those 23.

But, essentially you just can’t do all of these other things and expect to do anything but grow more dependent and grow more vulnerable. And I think you are proving that today, and thank you for

the time.

Senator VOINOVICH. Thank you, Senator Domenici.

I will say this, that from everything I have heard, natural gas

and home heating oil are going to skyrocket before this winter

comes up, and I don’t know what we can do about it, but that is

what everyone is saying. And not only, Senator, I want to say, is

it in terms of nuclear power and not having a policy in regard to

that and the biggest stumbling block is not having a place to deal

with nuclear waste, but this administration also wants to eliminate

fossil fuel in this country, which is a very, very important source

of fuel in my State. That is the way it is.

Mr. FRANK. That is one answer to Senator Domenici’s question.

Why hasn’t there been a refinery built? It is because the adminisVerDate 11-MAY-2000 15:36 Oct 02, 2000 Jkt 000000 PO 00000 Frm 00048 Fmt 6633 Sfmt 6633 65746.TXT SAFFAIRS PsN: SAFFAIRS
45

1The prepared statement of Mr. Cavaney appears in the Appendix on page 270.

tration and Vice President Gore in his book ‘‘Earth in the Balance’’

has said he wants to eliminate fossil fuels and doesn’t want any

more refineries. Who is going to build one under those circumstances?

Senator VOINOVICH. We are getting into the finger pointing,

which I didn’t want—but it does get frustrating. I lived 8 years as

Governor of Ohio, and we have 15,000 less miners in our State and

costs are up.

We will hear from you now, Mr. Cavaney.

TESTIMONY OF RED CAVANEY,1 PRESIDENT AND CHIEF

EXECUTIVE OFFICER, AMERICAN PETROLEUM INSTITUTE

Mr. CAVANEY. Thank you, Mr. Chairman and Members of the

Committee. I appreciate the opportunity to present the views of

API’s members on rising oil prices and the efficiency and effectiveness of the Executive Branch’s response. Our members understand

their customers concerns over the recent higher gasoline prices.

They work hard to ensure consumers have a readily available and

affordable fuel supply, and the historical record attests to their success in that regard.

Over the past decade, gasoline has been more affordable than

ever. Adjusted for inflation, 1998 prices were the lowest in history;

in 1999, they were the second lowest. Prices have been low because

companies have competed hard to reduce their costs and because

supplies have been plentiful.

Gasoline prices in 2000, however, have increased—not to record

levels but far above where they were 12 to 18 months ago. And in

the Midwest, they are above even the higher national average.

There are four main reasons why.

First, world crude oil prices have risen sharply, the result of decisions by OPEC and several other foreign producers. Since crude oil

accounts for 60 percent of the cost of gasoline, excluding taxes, an

increase in crude prices directly impacts the price at the pump.

Over the past 2 months, the cost of crude oil has risen 35 percent.

Second, inventories have been lower than usual, and prior to

June 1, as Corky Frank testified, companies were clearing their

storage tanks of the wintertime fuel in order to accommodate the

new cleaner-burning gasoline when we experienced some shortfalls

in the Midwest due to the pipeline and to several other problems

that I will cite. Imports into the region are absolutely critical because the Midwest refineries only make a little less than 80 percent of the gasoline that is consumed in that region.

Third, demand for gasoline has been increasing, as it usually

does during the beginning of the driving season. According to the

Department of Energy’s Energy Information Administration, ‘‘gasoline demand in the Midwest seems to be growing more strongly in

2000 than it has for the past couple of years in the region.’’

Fourth, the new cleaner-burning gasoline which was introduced

at retail on June 1 causes special problems in the Midwest, a fact

EPA was aware of for over a year. Refiners weren’t able to make

quite as much of the special base fuel as quickly as needed, tightening supplies and ultimately pushing up prices.

46

Other factors have also played a role, including the Unocal patent infringement case that has created uncertainty and risk for

many companies making or importing cleaner-burning reformulated gasoline.

As DOE Energy Information Administration says in its brochure

entitled ‘‘A Primer on Gasoline Prices,’’ and I quote, ‘‘Any event

which slows or stops production of gasoline for a short time can

prompt bidding for available supplies. If the transportation system

cannot support the flow of surplus supplies from one region to another, prices will remain comparatively high.’’ That is what happened in the Midwest. But, frankly, we are very pleased to see that

the actions of the industry in bringing more supply to bear has

made significant reductions in wholesale prices, and retail prices

are moving accordingly.

For all these reasons, today’s gasoline supplies haven’t been

enough to meet the demand at the record low prices that consumers enjoyed not too long ago during this transition period involving RFG Phase II. This same conclusion was reached by two

government reports issued just last week: The Congressional Research Service report and the DOE’s EIA latest report of June 20.

Price increases have surely been painful, and companies are

rushing to get every gallon into the marketplace that they can. Refineries supplying the Midwest are running all out, and added supplies are exerting downward pressure on prices as we speak.

In fact, spot prices for the Chicago market started falling, as Mr.

Frank cited, back on June 7, less than a week after the new gasoline was introduced at the retail level, and they have fallen well

over 30 percent since that time. Prices at the consumer level typically follow such reductions at varying intervals, depending on how

much higher-priced products is still in the system and other factors. Already, as we have talked about, pump prices are falling.

Gasoline is much like many other commodity products, although

it differs in one important aspect. When a drought reduces the corn

harvest or a freeze cuts citrus production, prices go up. When corn

gets expensive, people can switch to potatoes or some other product

where supplies are more plentiful and prices are lower. For gasoline, substitutes are not readily available, so consumers feel

stressed.

Yet the system ultimately works to their advantage because over

the longer term gasoline prices for decades have been trending

downward.

The current situation underscores the need to revisit our national energy policy, and we would like to suggest at least four

areas be considered in that regard. Greater access to government

lands is needed to find and develop more domestic oil and natural

gas resources and to cut our reliance on foreign oil, which now fulfills 55 percent of U.S. needs. We also need more access to foreign

oil supplies, but government policies—specifically, unilateral sanctions—have placed some of these sources off limits. Coordinated

implementation of the environmental rules impacting consumers

and the industry are also needed. And, finally, expedited permitting for the building or modernization of facilities for the manufacture and delivery of gasoline, diesel oil, natural gas, and heating

oil is also vital.

47

U.S. oil and natural gas companies know how to make and deliver gasoline, and all strive to be an efficient provider. With a

more effective national energy policy, still fully protective of the environment, our members could even better serve the consumer, and

the risk of market volatility would be reduced as well.

Thank you.

Senator VOINOVICH. Thank you, Mr. Cavaney. What was the

third reason that you had? You had access to government land——

Mr. CAVANEY. Coordinated implementation of the environmental

rules impacting both the consumer and the industry. Oftentimes,

we and the Environmental Protection Agency get in disagreements

over impacts, and there isn’t enough time spent on looking at those

things beyond just the environmental impacts, looking at the cost

impacts, and, more importantly, in our case, the supply impacts. Is

there going to be enough supply to go around? Because that is really what is at the heart of much of what has gone on these last 4

or 5 weeks.

Senator VOINOVICH. As I said earlier in my opening statement,

we have heard a lot about the high cost and everyone has got a

different reason for it, and I am pleased to have heard the explanation here. Mr. Blumenthal, you have a theory, and we have

heard these gentlemen. But the guy at the pump that I am going

to run into this weekend—I am going to get over there—wants to

know—prices are coming down: Senator, are they going to stay

down? And, Senator, 5 years from now if I bump into you here at

this Marathon station, are we going to have the same situation

that we have today?

I would like to know what things could we do—now, I heard from

Mr. Frank, you testified before Speaker Hastert at a meeting we

had last week or the week before, and you were talking about some

things that you thought could help the situation. And I would like

to hear about them, and I am sure my colleagues would today.

What things do you think right now could help the situation so

that we stabilize this price? And then what are your thoughts

about the long run?

Mr. FRANK. Senator, our country has come to expect low energy

prices, and yet we are becoming more and more dependent on imported crude oil, and that is because of the fact that we are locked

out. The oil companies are locked out from exploring on whatever

lands are available and what kind of crude oil reserves might be

found there. Our infrastructure in this country, for all energy

sources, is tired and worn-out, and it has low profitability.

In the segment that I know about, for the last 20 years in the

refining business, the rate of return on capital employed has been

5 percent.

Senator VOINOVICH. Mr. Frank, we always use this word ‘‘infrastructure.’’ What do you mean by infrastructure?

Mr. FRANK. Pipelines, terminals, service stations, refineries and

the pipelines that serve them. I am talking about the refining industry and transportation industry now. But the electrical industry—on the panel I was with yesterday were four people testifying

on the electrical industry, and it amazed me that our problems are

very similar, that low profitability is not encouraging investments.

You are seeing major large, integrated oil companies walk away

48

from the refining business because they are saying the returns

aren’t adequate for us to have an interest in that anymore.

The refinery closures in the Midwest, 12 since 1990, they are just

closing down. And there are several marginal refineries that remain through the rest of the United States, including the Midwest.

And if they are uneconomic, something has got to happen to let

that capacity be picked up because the refining system is running

at 100 percent of capacity, the pipelines to the Midwest are at 100

percent of capacity.

What do you do when you are up against those kind of constraints? You have got to have more capacity. Who is going to build

it? How do you attract the capital to invest in building a refinery

if you are uncertain what the economic return is going to be? That

is what faces our country today.

And then there is a concept that nobody believes that you could

even build a refinery in the United States anymore, that the permitting process is so difficult, nobody wants a refinery in their area

of the country. And the time to get a permit is exceptionally long,

even for doing new capital projects. It is a very involved process.

So I think that, in short, the situation has got to find some way

to allow a return that attracts investment so that people find that

an attractive place to be in business.

Mr. BLUMENTHAL. Mr. Chairman, if I may add a word, I certainly support the idea that infrastructure needs to be improved,

that we should offer incentives for that kind of enhancement. At

the same time, fundamentally, when you deal with customers at

the pump or the man who is charging you who owns that gas station, what we are dealing with short term is a lack of inventory,

a shortage in supply, insufficient stocks. And, in fact, in terms of

infrastructure, I am told—and I believe reliably—that the industry

has excess storage capacity. I believe it may be on the order of onefifth overall nationally. We have storage capacity that is not being

used now because inventories have been so low and that the shortage of stocks has made the system susceptible to the kind of shortrun, short-term disruptions that you have heard mentioned today

and have increased the margins that Senator Lieberman cited earlier and have been responsible for those historic price hikes that we

have seen.

And so I think the immediate question is: What do we do about

inventory so as to avoid the looming crisis that you, I think, cite,

quite rightly, that we face on heating oil this very winter?

This week, in New York, the spot price for heating oil was 79

cents as compared to 46 cents per gallon last year. That gives you

some idea of where we are heading on heating oil. And I think,

quite rightly, you are focusing on long-term energy policy and so

forth, but right away, for the sake of those people who are going

to be without heating oil this winter or having to pay $2.25 per gallon, as we did in Connecticut last year, we need to increase the

supply, and I think looking to the strategic reserves that this country has.

Senator VOINOVICH. Well, I am very interested in the shorter

term, and I may be from the Midwest, but I am concerned about

the rest of the country also, and everything I have read says it is

going to skyrocket and that we are going to be hearing people

49

scream about this, as they are in the Midwest. In terms of heating

oil, it is even more severe because this is how you heat your home.

I am concerned about it, and I am interested. Are there short-term

things that we can do to avoid the crisis?

Mr. BLUMENTHAL. And I might add, Senator, that in terms of

short-term measures, the focus of this Committee—and I really

commend and salute this Committee for focusing as it is in a very

thoughtful and insightful way on this problem—does have a beneficial effect. Investigations do work. And whether it is the FTC or

the antitrust department or this Committee—as Senator Levin remarked earlier—the light and heat of public scrutiny have a beneficial effect for consumers. And so I think the attention this Committee is giving to this problem so thoughtfully will have an effect

in and of itself.

Senator VOINOVICH. Mr. Caveney.

Mr. CAVANEY. Yes, Senator, I would like to comment on what we

can do. I think the most important thing we can do right today is

let the market work and not interfere. As the chart shows here, the

industry’s traditional response over decades is to rush supplies

from wherever you can find them into areas that are getting tight.

That is what you have seen in the Midwest.

Our longer-term problem, though, which is part of this, is that

when you have the capacity pretty well matched up with demand,

when we are in the middle of a major effort to supply the needs

of the consumer—think of earlier in the year when we were asked

to go in to speak with Secretary Richardson, when we were talking

to a lot of other people, they said maximize your production of distillates so we can get home heating oil and diesel fuel. We were

told to go full up. Well, when you are going full up on that, you

don’t have the extra capacity to start to make a product to begin

to full up inventory for the next change, which was the summertime fuel. And that is going to be the challenge we are going to face

ahead of us: How do we keep producing at record levels the kind

of production we need for summertime gasoline and at the same

time make sure that there is enough extra capacity that can be

worked into the system that you can get the build on home heating

oil and the distillate fuel that we know we need for the other? So

it goes to both the short term—don’t confuse or discourage the kind

of behavior that is producing good results, but long term focus on

this idea that we are expected to change fuels by season and by

regs. But when these two match up very, very closely, there is little

give in the system.

Senator VOINOVICH. Mr. Frank, when you testified before Speaker Hastert, you mentioned there were four or five things that you

had given the administration, and one of them, I think, dealt with

this Explorer pipeline and Wolverine that is going to take 8 months

for you to test it so that it can be at full capacity. Right now it is

at 80 percent of capacity, which means that you are only getting

90 percent of the gasoline throughput.

Mr. FRANK. Yes. Both Explorer and Wolverine are restricted to

operating at 80 percent of the pressure at the point of the break,

which translates to about 10 percent reduction in volume. And the

Explorer pipeline has been down since early March, either completely out of production or at this restricted rate. The ongoing

50

1The information referred to in a letter dated June 13, 2000, sent to the EPA and the Department of Energy from Mr. Frank appears in the Appendix on page 131.

shortage in the PADD2 is 50,000 barrels a day of gasoline. That

is significant. I have heard it described yesterday in the House

hearing that the normal amount of gasoline was going to Chicago

that normally goes there, but Chicago was almost in a critical state

of supply, depleted inventories back in about the third week of

May, and there is no make-up capacity. It is sending the normal

volume in there, but that is all that can be sent by this pipeline

with the restriction it is on.

Wolverine is—and the company is trying to expedite, the Explorer pipeline company, the process of having run a smart pig,

which is a flaw detector device, electronic flaw detector, and get the

results analyzed. But they think that from the information I have

heard that that takes about 3 or 4 more months. There have been

some companies that have given up their space, other pipeline companies, to let Explorer company move to the front.

The Wolverine situation is a little bit different in that the failure

was related with a fitting, and from what I understand, they

should be back to capacity in 3 or 4 more weeks.

Senator VOINOVICH. I am very interested in any short-term

things, an administrative agency or whatever it is, to try and jack

them up and get them to do it, any way that we can tighten up

a screw here and push this here to make it——

Mr. FRANK. In the items that I listed to the Department of Energy and to the EPA, including expedite an increase in Explorer

pipeline operating pressure, restoring it, grant a relief on DOT

driver restrictions for transport, for drivers to be able to drive their

transports longer hours. We got all the trucks we could, and we

were moving gasoline from Illinois, Indiana, and Ohio into Michigan. First, it started off we were moving it into Chicago to help satisfy that problem, and then we moved it into Michigan, and longer

hours would have helped. Approve the larger tank truck for use in

other States, like is used in Michigan. It is about a 70 percent larger tank truck for transporting gasoline.

Senator VOINOVICH. Mr. Frank, I am out of my time, and I am

on my colleagues’ time, but I would like to have you submit those

letters for the record.1 I would certainly like to see them. And if

there is something that I can do to help expedite it, I am sure some

of my colleagues might be willing to do the same thing. We would

be more than happy to do it.

Senator VOINOVICH. Senator Lieberman.

Senator LIEBERMAN. Thanks, Mr. Chairman.

Attorney General Blumenthal, I know you have a plane to catch.

Do you have a moment for some questions?

Mr. BLUMENTHAL. Sure.

Senator LIEBERMAN. Incidentally, Mr. Chairman, in my recitation of Mr. Blumenthal’s background, I failed to mention one high

point in his career. He was the administrative assistant to former

Senator Abraham Ribicoff of Connecticut, who, in fact, was the

Chairman of the Governmental Affairs Committee. So there is a

nice piece of history.

51

Mr. BLUMENTHAL. The staff has improved considerably since

then. [Laughter.]

Senator LIEBERMAN. We have been talking about the reserves

here, and some of us have tried to convince the administration to

open up the Strategic Petroleum Reserve, and we are talking about

a regional home heating oil reserve. I was very interested that you

have raised the question of the possibility of requiring the oil companies to maintain some minimum reserve of their own, and I

wanted to know first—I don’t know whether you have had a chance

to go into that very much, but whether you feel we would be or the

States would be on a strong legal foundation in considering such

a requirement, and, second, whether you have thought at all about

how we would try to determine what the minimum level of reserve

required would be?

Mr. BLUMENTHAL. First, Senator, let me say that my preference

would be to use the strategic reserve concept as you and others

have suggested we do, and many of us as attorneys general have

advocated as well, not to manipulate prices or have the government

intervene in a heavy-handed way in the free market, but try to

deal with extraordinary situations such as we now have confronting us in all parts of the country, and I agree with the Chairman that it is really all parts of the country that share in this

problem.

As an alternative, the idea that some kind of reserve or minimum balance be maintained I think in principle would operate

much the same way as we now do with banks or insurance companies and other kinds of industries where the product is not a luxury or a common, everyday consumer product where there is competition and where there is an absence of government regulation,

but in this industry where we are dealing with an essential commodity that people need at affordable prices and, at the very least,

need to have at certain points of the year, for example, in the winter where consumers throughout the Northeast last year went

without the product and suffered as a result.

And so how to set what that reserve would be I can’t state with

precision at this point, but it would be based presumably on historical levels of supply and demand, and could well be enabled

through tax credits and other kinds of incentives offered, as well

as conceivably some kind of minimum requirements.

Senator LIEBERMAN. Well, I appreciate your venturing forth into

this area, and I look forward to hearing, as you and your staff develop this thought, more about it. I don’t know how—maybe I

should ask Mr. Cavaney or Mr. Frank how you respond to that proposal.

Mr. CAVANEY. Well, one of the things, when you look particularly

at the Northeast where we had the heating oil experience, the

problem in the Northeast was not one of inventories. The problem

was one of transportation. There were inventories in PADD1, but

if you will recall, the problem was that most of the harbors that

we typically moved the product up the coast and into were iced

over and we had trouble getting barges in to make deliveries. The

roads, for a long period of time we couldn’t move the trucks on

them, and, finally, thanks to Secretary Richardson, he and the

52

States up there mobilized and cleared the ice away, and we were

able to move the inventory in.

So just looking at inventories is not going to solve all of the problems that we happen to see. And then you also have to consider

that the hand of government into the business of selecting inventories, because what you wouldn’t want to do is create a law of unintended consequences that we haven’t been able to think through.

So a lot of consideration has to be given to the issue before people

go jumping off in that direction given our experience.

Senator LIEBERMAN. OK. Did you want to add anything, Mr.

Frank?

Mr. FRANK. I would say my company doesn’t market heating oil,

we are not a Northeast supplier. The things about strategic inventories, are they in the right place? How do you distribute them if

they are needed? And then what is market interference or unreasonably prices, and when does it come in? How do you set those

rules?

One of the things that intrigues me—and this is sort of going to

the SPR concept that we talked about, the last panel talked

about—as a policy, why did the SPR not fill at a more rapid rate

with these low prices last year, $10 a barrel, fill the Strategic Petroleum Reserve? It looked like an opportune time, and it could

help stabilize the crude oil price from this volatility. But it wasn’t

done. In fact, I think we decreased what the fill rate was.

Senator LIEBERMAN. So you think that we made a mistake there

in not purchasing while prices were low?

Mr. FRANK. Well, as a businessman, sir, I always like to buy low

and sell high.

Senator LIEBERMAN. Sell high, exactly. I have heard that before.

[Laughter.]

I don’t know what the explanation of that is. It is too bad the

folks from the Energy Department left. Maybe we will have another chance to come back and ask them.

General Blumenthal, I thought another—this is an area in which

we tend to hear the same ideas and remedies mentions. I thought

you had a couple of really fresh thoughts in your testimony, and

another one was the question you raised, as I heard it, of the impact that mergers in the energy industry may be having on this

problem that we are dealing with today. So I wanted to ask you

to speak at a little more length about what your thoughts are on

that one and about the extent—I think you suggested that we may

want to have new standards for mergers to consider this impact.

Mr. BLUMENTHAL. Well, thank you, Senator. Again, I can’t claim

any overwhelming expertise or wisdom, but we have among us as

attorneys general a lot of experience with antitrust law and its enforcement, and I opposed the most recent major merger in the

country, Exxon-Mobil, and was disappointed to see it approved,

even with some of the divestiture that was ordered by the FTC as

a condition.

I think that part of the reason for the diminished competition—

indeed, for the absence of real competition in many parts of the

country at the retail level and other levels in the industry is that

we have seen a wave of mergers and consolidations. And I very

simply propose that the presumption be against approval unless

53

there is clear and convincing evidence that there will be a tangible

benefit for consumers.

A lot of times we hear the companies in this industry and in a

great many others say rhetorically, somewhat vaguely, with uncertain data and predictions, that there will be benefits for consumers.

But what I am suggesting is that we should put the burden of proof

on the companies that are merging, that the presumption be

against approval, and that there be clear and convincing evidence

of real benefits, tangible ones, for consumers.

Senator LIEBERMAN. Let me ask one more question as my time

is running out. You made mention of several State attorneys general being involved in review of this matter. Is that focused on the

question of whether there is price gouging going on? And how

broad is the multistate investigation in this case? Or is it individual States that are doing it individually?

Mr. BLUMENTHAL. There are individual States coordinating our

efforts, some of them in the Midwest, obviously, that are working

with the FTC, but others of us from other parts of the country,

some of the major States that have a stake in this problem. And

we have a real tradition, as you well know, of working together in

these multistate task forces involving antitrust matters, and there

is no economic problem that is of higher priority to us than this

one.

Senator LIEBERMAN. Thank you very much for taking the time to

come down and contributing to the discussion. I am proud to have

you as my attorney general.

Thanks, Mr. Chairman.

Senator VOINOVICH. Thank you. Senator Durbin.

Senator DURBIN. Thank you very much, Mr. Chairman. Are we

on a roll call vote? I don’t know how much time is remaining. Well,

if they could check, I may not be able to come back after the vote.

I would like to make one comment for the record. If I am not

mistaken, during Senator Domenici’s testimony it was noted that

it has been 25 years since we have built a refinery in this country,

and someone—it may have been Senator Domenici, but someone

said it is because of this war on fossil fuel, and someone said, yes—

Vice President Gore.

I had my staff check. He has only been Vice President for 71⁄2

years, and if there hasn’t been a refinery built in 25 years, I think

perhaps that is overstating the politics of this issue.

Now, there was, if I am not mistaken, a Republican President for

12 years in that period of time, and if there was a war on fossil

fuels under Ronald Reagan and George Bush, I can’t speak to it.

But to assign political blame to Al Gore, the Democratic candidate

for President, for the failure to build a refinery for 25 years is a

leap that I hope we won’t take in this Committee.

Mr. FRANK. Let me elaborate on that a little bit, Senator. For the

period from 1976, which was when the last refinery was built in

the United States—and my company built it—there hasn’t been another one built. At that time there was an oversupply of refining

capacity by about 25 percent, so there wasn’t a need for a refinery

to be built.

In Al Gore’s book, Vice President Gore’s book, he says that he is

opposed to this.

54

Senator DURBIN. Opposed to?

Mr. FRANK. Fossil fuel; the internal combustion engine he wants

to obsolete.

Senator DURBIN. Well, we have had this debate on the Senate

floor, and I think if you read the book more closely, you will see

that he is suggesting—and a lot of people are joining him—that we

should be looking at energy alternatives. I support that, and I don’t

believe it is going to happen overnight.

Mr. FRANK. I am not opposed to that, either.

Senator DURBIN. I hope your industry supports it.

Mr. FRANK. I am not——

Senator DURBIN. Let me raise three questions because we have

very limited time here. One is, if the price of wholesale gasoline

has gone down 47 cents in 14 days, when will the price at the

pump go down 47 cents?

Mr. FRANK. I think my partner, who has just left here from the

table, would tell me that I can’t predict that for you. But if you look

historically, prices at the street lag going up——

Senator DURBIN. Lag by how much?

Mr. CAVANEY. I can make a comment on the last increase that

you see over there, we tracked it and it lagged by 2 weeks.

Senator DURBIN. So you would say in 2 weeks the full 47 cents

ought to be felt in the upper Midwest?

Mr. FRANK. No, sir. It did not occur all in 1 day.

Senator DURBIN. Well, why not?

Mr. CAVANEY. Let me explain why. First of all, broadly, there are

180,000 retail outlets in the United States that sell gasoline. Ten

percent of them are owned and operated by the oil companies; the

other 90 percent are owned by independent businessmen and independent businesswomen who have their own marketing and sales

strategies and determine the price of the product, how much inventory to hold, and the like. They all make these. Legally, we can’t

be privy to any information there, and even if you had the capability to do so, I don’t think it would be easy to get your hands on

it.

But if you look at it historically, you can talk about trends, and

the lag can’t be as precise as by 1 day, but it is going to happen.

Senator DURBIN. I don’t expect it to be precise, but you can understand the cynicism of the consumer when you see a 47-cent decrease in wholesale prices and you can’t tell me when they are

going to benefit from it. Let us hope that they do.

Mr. CAVANEY. They will.

Senator DURBIN. Let me ask you the second question. Some

States like Indiana and Illinois are talking about reducing their

gasoline taxes. What assurance can you give consumers, families,

and businesses across America if we reduce any tax on a gallon of

gasoline that they will be able to measure that impact in reduced

cost at the pump?

Mr. FRANK. Let me respond to that, Mr. Cavaney.

Governor O’Bannon in Indiana reduced the gasoline tax effective

July 1, and there is a roll-in period because it is taxed as what goes

into inventory. I can tell you what my company did. We made a

press announcement on Tuesday of this week that we reduced the

55

1The Corporate Scoreboard appears in the Appendix on page 290.

price of gasoline in the whole State of Indiana by the amount of

the sales tax decrease before July 1.

Senator DURBIN. I am glad you did that. I wish we could have

a similar impact in Illinois. It is going to be tough to measure how

much of that is an impact of the wholesale price going down, which

you are not sure when we are going to see the impact on.

Mr. FRANK. They are different situations, sir.

Senator DURBIN. I understand. For the consumer, it is the same

situation.

Mr. Cavaney, one of the things that you said here, I wrote down

several of your comments, and sometimes it is hard for me as a liberal arts major to follow some of this deep, dark economics. But

you said at one point, how can you invest if you are uncertain

about economic return? I thought that was kind of what capitalism

is all about. You deal with the market.

Then you went on to say, let the market work. We have some

numbers here that suggest that the members of the American Petroleum Institute have done very, very well in terms of the profitability of their operations. Let me give you a couple examples:

First-quarter profits for the major private oil companies in the

United States over the year 2000, up 500 percent; BP-Amoco, profits up 296 percent; Exxon-Mobil, 108 percent; Phillips, 257 percent;

Texaco, 473 percent. That is the year 2000 first-quarter profits

compared to the year 1999.

Now, it is interesting to me that those first-quarter profits would

be there, you would have such a good turnout for your members,

and then the consumers get nailed in the upper Midwest with 40-

, 50-, and 60-cent-a-gallon increases.

Mr. CAVANEY. Senator, that is very explainable. In 1999, the industry was in a depression. It was operating and selling gasoline

as historically low prices, lower than they sold during the depression.

What I have here that I would like to submit for the record,

Business Week, May 15 edition, this is the Corporate Scoreboard 1

that lists all corporations and their earnings over the first quarter,

the exact period you cite.

Let me just give you some examples of what we think is not any

evidence at all of getting excessive profits. These are the returns,

which is the net income as a function of sales on ongoing operations: The telecommunications industry, 10.3 percent; non-bank financial, 10.8; banks, 14.6; computer software, 17.4; electronics,

11.7; media, 11.9; all-industry, 7.3; and oil and gas industry, 5.9

percent.

So the amounts that you cite are from a low historical base. If

you compare them against all other corporations, you can certainly

not argue that there had been any excessive profits in the industry.

Senator DURBIN. I will make a matter of record here of the increases between 1998 and 1999: ARCO, up 165 percent; BP-Amoco,

35 percent. The list goes on and on. It is certainly a lot more than

5 percent.

Mr. CAVANEY. It is not.

56

Senator DURBIN. The bottom line I want to get to is this: When

it comes to the government’s involvement here, there are environmental concerns which many of us in this country share. No, we

don’t want you to drill everywhere. We don’t want you drilling offshore in vulnerable areas. Some of us were up in Prince William

Sound and saw what happened with the Exxon Valdez. We don’t

want you—some of us don’t want you to go in the Arctic National

Wildlife Refuge when you are diverting oil that is being drilled out

of Alaska to Japan instead of the United States. And some of us

believe that, yes, we can produce energy and clean air for America.

We don’t think they are inconsistent.

Mr. CAVANEY. We believe the same thing, Senator, and we would

look forward to sitting down and having a dialogue and trying to

be constructive in that regard. We are not asking to be able to drill

everywhere, but we certainly need more domestic energy sources if

we are going to have any hope of——

Senator VOINOVICH. And the public ought to understand that because we haven’t done the exploration and we haven’t gone into the

areas that that is part of the reason why they are paying increased

taxes——

Senator DURBIN. Well, let me say, Mr. Chairman——

Senator VOINOVICH [continuing]. Or increased costs for gasoline

in this country, and the fact of the matter is it is time that the environmentalists and the oil industry sat down and started to look

at balancing up the options, that there is a possibility that you can

have more domestic supply and at the same time protect the environment, and they are not separated. But for the last several years,

the attitude is that if you do any exploration, you are polluting the

environment——

Senator DURBIN. No, Mr. Chairman, on my time here—and I

have a minute and 25 seconds, and I have waited patiently all

afternoon for a chance to ask any questions. And let me just say

on my time, I don’t disagree with your premise here. There should

be this conversation. But many of us are concerned when the major

oil companies want to go on public lands and drill and not pay the

taxpayers fair compensation for the oil that they are deriving from

our land, America’s land.

And, second, it troubles me that during the course of this conversation this afternoon, there have been, I think, precious few opportunities for us to mention words like conservation and fuel efficiency. It is as if this isn’t part of the equation. I think it is a big

part. And when we talk about CAFE standards and talk about

SUVs being held to standards so that they have some fuel economy—accountability, I don’t think that is unreasonable. I would

like to make that part of the same conversation.

Mr. CAVANEY. Senator, we support conservation efforts. We support efficiency efforts. And we also would like to, hopefully, through

your good offices and some of the others, to begin the dialogue to

talk about how can we have both, because most of the clean air

gains have come from the mobile sources, which is the autos and

ourselves. So we have the capacity to do it. We would like to.

Senator DURBIN. I yield back my time.

Senator VOINOVICH. Thank you, Senator Durbin.

57

1The prepared statement of Senator Bayh appears in the Appendix on page 283.

I would like to just finish and adjourn this hearing with one last

word, and that is, shame on all of us if we don’t get together between now and the end of this year to come up with some kind of

an energy policy, and I would be very interested in hearing the industry’s point of view or anybody else that is viewing this hearing

on S. 2557, that is, the Lott-Murkowski bill—I happen to be a cosponsor of that bill, but it would be wonderful if we would be able

to perhaps refer that to a committee, get people, had testimony on

it, and did it on a kind of bipartisan basis and work on that between now and the end of the year. There are some that want to

bring it to the floor for a vote. I am not sure that would work out

because I think it would get very partisan. But perhaps it should

be referred to a committee and let’s start the dialogue. I will talk

to the Leader about it today, get it to a committee and start, get

the administration in, get the EPA in, get the environmentalists in,

get the oil companies in, and start to see if we can’t hammer out

something so that maybe before the end of the year we can pass

a piece of legislation, or maybe at least do enough work to get it

up the flagpole high enough that in the next administration we can

tackle it immediately so that, again, we don’t find ourselves where

we are today with all of this going on and nothing to show for us.

Thank you very much.

Mr. FRANK. Congratulations on taking the initiative to get that

ball rolling, Senator, because it is something that the United

States, our country, has been sorely lacking, and there needs to be

a balancing of interests, and issues, to arrive at a workable plan

that describes what our energy policy is.

Senator VOINOVICH. Thanks very much for your patience.

The record will remain open for 1 week for additional submissions.1

[Whereupon, at 4:50 p.m., the Committee was adjourned.]

(59)

A P P E N D I X

PREPARED STATEMENT OF SENATOR CLELAND

Mr. Chairman, thank you for the opportunity to come here again today to speak

on the very important topic of rising oil prices. Since this Committee’s last hearing

on this issue on March 24, oil prices have steadily increased across the country resulting in sharply higher gasoline prices, including in my own State. Only in the

last week or two have I heard reports that oil prices may have declined in certain

parts of the country. However, prices have not declined enough to offer substantial

relief to a vast majority of Americans.

I am especially concerned about the devastating effect that the high gasoline

prices may have on people with fixed incomes who lack the means to absorb the

increase in the face of other essential household and personal expenses. Additionally, our farmers in the Southeast are currently facing one of the worst droughts

in recent memory. The projections for this year’s crops do not look good. We must

realize that high fuel prices have a tremendous effect on the agriculture community.

Those who are just getting by now have to contend with the exorbitant cost of diesel

and gas.

Though oil prices in Georgia are higher than they were last summer, gasoline

prices have not yet reached the levels currently experienced in the Midwest. Since

future increases remain a distinct possibility, I am closely following the situation

in the Midwest. This hearing provides us with the opportunity to learn more about

the impact that rising oil prices have had across the country and the various reasons for the higher fuel costs associated with the increase in oil prices. The exorbitant price of gasoline in the Midwest has reached approximately $2.30 per gallon

in some cities and hopefully, today’s experts and officials will provide solutions that

will significantly reduce the cost of oil across the country.

Over the last several weeks, I have been contacted by many of my constituents

who have expressed their serious concerns about the impact of the recent dramatic

increase in petroleum prices. I must note that I have heard a great deal of concern

regarding the use of reformulated gasoline or RFGs. In the Commerce Committee,

we recently reported a pipeline authorization and reform bill. It is the first time in

many years that pipelines have been the focus of discussion. It is seldom noted that

pipelines are an important form of transportation. In Georgia, we have an excellent

network of pipelines which distributes fuel oil throughout the State. I recognize the

importance of this system to supply our pumps, and I realize that our pipelines are

one reason Georgians enjoy lower gas prices at the pump. Pipelines are an interstate mode of transportation. As such, it is a national concern that the challenges

of transporting RFGs might increase the costs of fuel to consumers.

Another aspect of this hearing is to examine the response from the Executive

Branch to rising gasoline prices. Last January, I wrote to the President in order to

express my concern over rising prices and to ask that the Administration consider

any and all policy options in order to counteract this situation. The Administration

has had some success in encouraging OPEC ministers to increase oil output. However, I feel that there is more that could be done. I look forward to hearing the Administration’s summary of actions to date, and I would be pleased to know what we

can expect in the near future. This is a desperate situation, and we must act immediately.

And, of course, I hope we can get into the issue of the role of the pricing policies

of the oil companies in contributing to the current program. As we all know, the

Federal Trade Commission launched its investigation along these lines yesterday,

but I think some of today’s witnesses could shed light on this matter as well. Our

constituents want to know what we’re doing in Washington to address the high

price of oil. As in most things, there is likely to be no single, simple explanation

but we need to do what we can to get to the bottom of this serious situation. In

an election year, there will be a great temptation for demagoguery and partisanship.

I hope we can resist that temptation and develop a bipartisan consensus and course

of action. I look forward to hearing from our distinguished witnesses.

60

61

62

63

64

65

66

67

68

69

70

71

72

73

74

75

76

77

78

79

80

81

82

83

84

85

86

87

88

89

90

91

92

93

94

95

96

97

98

99

100

101

102

103

104

105

106

107

108

109

110

111

112

113

114

115

116

117

118

119

120

121

122

123

124

125

126

127

128

129

130

131

132

133

134

135

136

137

138

139

140

141

142

143

144

145

146

147

148

149

150

151

152

153

154

155

156

157

158

159

160

161

162

163

164

165

166

167

168

169

170

171

172

173

174

175

176

177

178

179

180

181

182

183

184

185

186

187

188

189

190

191

192

193

194

195

196

197

198

199

200

201

202

203

204

205

206

207

208

209

210

211

212

213

214

215

216

217

218

219

220

221

222

223

224

225

226

227

228

229

230

231

232

233

234

235

236

237

238

239

240

241

242

243

244

245

246

247

248

249

250

251

252

253

254

255

256

257

258

259

260

261

262

263

264

265

266

267

268

269

270

271

272

273

274

275

276

277

278

279

280

281

282

283

284

285

286

287

288

289

290

291

292

293

294

295

296

297

298

299

300

301

302

303

304

305

Æ