S. HRG. 109–939

CONSOLIDATION IN THE ENERGY INDUSTRY:

RAISING PRICES AT THE PUMP?

HEARINGS

BEFORE THE

COMMITTEE ON THE JUDICIARY 

UNITED STATES SENATE

ONE HUNDRED NINTH CONGRESS

SECOND SESSION

FEBRUARY 1, AND MARCH 14, 2006

Serial No. J–109–57

Printed for the use of the Committee on the Judiciary

(

CONSOLIDATION IN THE ENERGY INDUSTRY: RAISING 

PRICES AT THE PUMP? 

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33–417 PDF 2007

S. HRG. 109–939

CONSOLIDATION IN THE ENERGY INDUSTRY:

RAISING PRICES AT THE PUMP?

HEARINGS

BEFORE THE

COMMITTEE ON THE JUDICIARY 

UNITED STATES SENATE

ONE HUNDRED NINTH CONGRESS

SECOND SESSION

FEBRUARY 1, AND MARCH 14, 2006

Serial No. J–109–57

Printed for the use of the Committee on the Judiciary

(

(II)

COMMITTEE ON THE JUDICIARY 

ARLEN SPECTER, Pennsylvania, Chairman 

ORRIN G. HATCH, Utah 

CHARLES E. GRASSLEY, Iowa 

JON KYL, Arizona 

MIKE DEWINE, Ohio 

JEFF SESSIONS, Alabama 

LINDSEY O. GRAHAM, South Carolina 

JOHN CORNYN, Texas 

SAM BROWNBACK, Kansas 

TOM COBURN, Oklahoma 

PATRICK J. LEAHY, Vermont 

EDWARD M. KENNEDY, Massachusetts 

JOSEPH R. BIDEN, JR., Delaware 

HERBERT KOHL, Wisconsin 

DIANNE FEINSTEIN, California 

RUSSELL D. FEINGOLD, Wisconsin 

CHARLES E. SCHUMER, New York 

RICHARD J. DURBIN, Illinois 

MICHAEL O’NEILL, Chief Counsel and Staff Director 

BRUCE A. COHEN, Democratic Chief Counsel and Staff Director 

(III)

C O N T E N T S 

FEBURARY 1, 2006

STATEMENTS OF COMMITTEE MEMBERS 

Page

Coburn, Hon. Tom, a U.S. Senator from the State of Oklahoma ........................ 9

Cornyn, Hon. John, a U.S. Senator from the State of Texas ............................... 4

DeWine, Hon. Mike, a U.S. Senator from the State of Ohio ................................ 7

prepared statement .......................................................................................... 104

Feingold, Hon. Russell D., a U.S. Senator from the State of Wisconsin ............. 8

prepared statement .......................................................................................... 107

Feinstein, Hon. Dianne, a U.S. Senator from the State of California ................. 6

Kohl, Hon. Herb, a U.S. Senator from the State of Wisconsin ............................ 2

prepared statement .......................................................................................... 114

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

statement .............................................................................................................. 142

Schumer, Hon. Charles E., a U.S. Senator from the State of New York ............ 10

Specter, Hon. Arlen, a U.S. Senator from the State of Pennsylvania ................. 1

WITNESSES 

Blumenthal, Richard, Attorney General, State of Connecticut, Hartford, Connecticut .................................................................................................................. 15

Hamilton, Timothy A., Founder and Executive Director, Automotive United 

Trades Organization, Seattle, Washington ........................................................ 20

Kovacic, William E., Commissioner and former General Counsel, Federal 

Trade Commission, Washington, D.C. ................................................................ 11

McAfee, R. Preston, J. Stanley Johnson Professor of Business, Economics 

and Management, and Executive Officer for the Social Sciences, California 

Institute of Technology, Pasadena, California ................................................... 16

Slocum, Tyson, Director, Public Citizen’s Energy Program, Washington, D.C. . 18

Wells, Jim, Director, Natural Resources and Environment, Government Accountability Office, Washington, D.C. ................................................................ 13

QUESTIONS AND ANSWERS 

Responses of Richard Blumenthal to questions submitted by Senators Specter 

and Kohl ................................................................................................................ 36

Responses of Tim Hamilton to questions submitted by Senators Specter, 

Feingold, and Kohl ............................................................................................... 40

Responses of William E. Kovacic to questions submitted by Senators Specter, 

Kohl, and Feingold ............................................................................................... 47

Responses of Preston McAfee to questions submitted by Senators Specter 

and Kohl ................................................................................................................ 62

Responses of Tyson Slocum to questions submitted by Senators Kohl and 

Specter .................................................................................................................. 67

Responses of James Wells to questions submitted by Senators Feingold and 

Kohl ....................................................................................................................... 72

SUBMISSIONS FOR THE RECORD 

American Petroleum Institute, Houston, Texas, statement ................................. 74

Blumenthal, Richard, Attorney General, State of Connecticut, Hartford, Connecticut, statement ............................................................................................... 96

Hamilton, Timothy A., Founder and Executive Director, Automotive United 

Trades Organization, Seattle, Washington, statement ..................................... 108

Page

IV

Kovacic, William E., Commissioner and former General Counsel, Federal 

Trade Commission, Washington, D.C., statement ............................................. 116

McAfee, R. Preston, J. Stanley Johnson Professor of Business, Economics 

and Management, and Executive officer for the Social Sciences, California 

Institute of Technology, Pasadena, California, statement ................................ 144

Slocum, Tyson, Director, Public Citizen’s Energy Program, Washington, D.C., 

statement .............................................................................................................. 167

Wells, Jim, Director, Natural Resources and Environment, U.S. Government 

Accountability Office, Washington, D.C., statement and attachment ............. 176

MARCH 14, 2006

STATEMENTS OF COMMITTEE MEMBERS 

Page

Cornyn, Hon. John, a U.S. Senator from the State of Texas, prepared statement ...................................................................................................................... 450

DeWine, Hon. Mike, a U.S. Senator from the State of Ohio ................................ 191

prepared statement .......................................................................................... 452

Durbin, Hon. Richard J., a U.S. Senator from the State of Illinois, prepared 

statement .............................................................................................................. 454

Feingold, Hon. Russell D., a U.S. Senator from the State of Wisconsin, prepared statement ................................................................................................... 457

Feinstein, Hon. Dianne, a U.S. Senator from the State of California ................. 188

Kohl, Hon. Herb, a U.S. Senator from the State of Wisconsin, prepared 

statement and press release ................................................................................ 472

Leahy, Hon. Patrick J., a U.S. Senator from the State of Vermont .................... 190

prepared statement .......................................................................................... 480

Specter, Hon. Arlen, a U.S. Senator from the State of Pennsylvania ................. 187

WITNESSES 

Alioto, Joseph M., Partner, Alioto Law Firm, San Francisco, California ........... 198

Boies, David, Chairman, Boies, Schiller and Flexner, LLP, Armonk, New 

York ....................................................................................................................... 193

Borenstein, Severin, E.T. Grether Professor of Business and Public Policy, 

Haas School of Business, University of California at Berkeley, Berkeley, 

California .............................................................................................................. 200

Greene, Thomas, Chief Assistant Attorney General, California Department 

of Justice, Sacramento, California ...................................................................... 196

Hofmeister, John, President, Shell Oil Company, Houston, Texas ..................... 227

Klesse, Bill, Chief Executive Officer, Valero Energy Corporation, San Antonio, 

Texas ..................................................................................................................... 226

Lautenschlager, Peg A., Attorney General, State of Wisconsin, Madison, Wisconsin .................................................................................................................... 195

Mulva, James J., Chairman and Chief Executive Officer, ConocoPhillips, 

Houston, Texas ..................................................................................................... 223

O’Reilly, David J., Chairman and Chief Executive Officer, Chevron Corporation, San Ramon, California ................................................................................ 225

Pillari, Ross J., President and Chief Executive Officer, BP America, Inc., 

Chicago, Illinois .................................................................................................... 229

Tillerson, Rex W., Chairman and Chief Executive Officer, ExxonMobil Corporation, Irving, Texas ......................................................................................... 221

QUESTIONS AND ANSWERS 

Responses of Joseph M. Alioto to questions submitted by Senators DeWine, 

Specter, Leahy, Kohl, and Schumer ................................................................... 249

Responses of David Boies to questions submitted by Senators Specter, Leahy, 

DeWine, Kohl, and Schumer ............................................................................... 270

Responses of Thomas Greene to questions submitted by Senators Specter, 

Feingold, DeWine, Kohl and Schumer ............................................................... 279

Responses of John Hofmeister to questions submitted by Senators Specter, 

DeWine, Feingold, Kohl, and Schumer .............................................................. 296

Responses of Bill Klesse to questions submitted by Senators Specter, DeWine, 

Feingold, Kohl, and Schumer .............................................................................. 306

Page

V

Responses of Peg A. Lautenschlager to questions submitted by Senators Specter, Leahy, Kohl, DeWine, and Schumer ............................................................ 318

Responses of James J. Mulva to questions submitted by Senators Specter, 

Schumer, Kohl, DeWine, and Feingold .............................................................. 324

Responses of David J. O’Reilly to questions submitted by Senators Specter, 

Schumer, DeWine, Feingold, and Kohl .............................................................. 350

Responses of Rose J. Pillari to questions submitted by Senators Specter, 

DeWine, Feingold, Kohl, Schumer ...................................................................... 362

Responses of Rex W. Tillerson to questions submitted by Senators DeWine, 

Feingold, Kohl, Schumer and Specter ................................................................ 375

SUBMISSIONS FOR THE RECORD 

Alioto, Joseph M., Partner, Alioto Law Firm, San Francisco, California, statement ...................................................................................................................... 398

Boies, David, Boies, Schiller and Flexner, LLP, Armonk, New York, statement 

and attachments ................................................................................................... 400

Borenstein, Severin, E.T. Grether Professor of Business and Public Policy, 

Haas School of Business, University of California at Berkeley, Berkeley, 

California, statement ........................................................................................... 447

Greene, Thomas, Chief Assistant Attorney General California Department 

of Justice, Sacramento, California, statement ................................................... 458

Harris, John, Speaker of the House, Alaska State Legislature, Anchorage, 

Alaska, letter ........................................................................................................ 464

Hofmeister, John, President, Shell Oil Company, Houston, Texas, statement .. 465

Klesse, Bill, Chief Executive Officer, Valero Energy Corporation, San Antonio, 

Texas, statement .................................................................................................. 469

Lautenschlager, Peg A., Attorney General, State of Wisconsin, Madison, Wisconsin, statement ................................................................................................. 474

Mulva, James J., Chairman and Chief Executive Officer, ConocoPhillips, 

Huston, Texas, statement .................................................................................... 484

O’Reilly, David J., Chairman and Chief Executive Officer, Chevron Corporation, San Ramon, California, statement ............................................................. 507

Pillari, Ross J., President and Chief Executive Officer, BP America, Inc., 

Chicago, Illinois, statement ................................................................................. 531

St. Albans Cooperative Creamery, Inc., Leon Berthiaume, General Manager, 

St. Albans, Vermont, statement .......................................................................... 535

Tillerson, Rex W., Chairman and Chief Executive Officer, ExxonMobil Corporation, Irving, Texas, statement ..................................................................... 538

(1)

CONSOLIDATION IN THE ENERGY INDUSTRY: 

RAISING PRICES AT THE PUMP? 

WEDNESDAY, FEBRUARY 1, 2006

U.S. SENATE, COMMITTEE ON THE JUDICIARY, Washington, DC. 

The Committee met, pursuant to notice, at 9:31 a.m., in room 

SD–226, Dirksen Senate Office Building, Hon. Arlen Specter, 

Chairman of the Committee, presiding. 

Present: Senators Specter, DeWine, Cornyn, Coburn, Kohl, Feinstein, Feingold, and Schumer. 

OPENING STATEMENT OF HON. ARLEN SPECTER, A U.S. 

SENATOR FROM THE STATE OF PENNSYLVANIA 

Chairman SPECTER. Good morning, ladies and gentlemen. The 

Judiciary Committee will now proceed with this hearing on the 

consolidation in the energy industry, and the impact of raising 

prices at the pump, and the impact on natural gas, and the impact 

on so much of the core concerns of our economy. 

We have seen a spike in gasoline prices to extraordinary heights. In the wake of Katrina they were $3.07 a gallon. They are now at 

virtually record highs at $2.38 a gallon, so we know it was not all 

Katrina. 

We have seen extraordinary concentration in the energy industry. We have had a string of consolidations which are really staggering when you see a list of them. I knew about them, but when 

I see them itemized, it is overwhelming. This summer the FTC approved Chevron’s acquisition of Unocal and Valero’s acquisition of 

Premcor. A couple of years ago Valero acquired Ultramar Diamond 

Shamrock, and Phillips merged with Conoco. In 2001 Chevron 

bought Texaco, and Ultramar Diamond Shamrock acquired Total, 

and it is a very long list which I will put in the record because I 

am not going to take more than 5 minutes in an opening statement. 

You had the disclosures this week that Exxon Mobil reported that it earned more than $36 billion in the year 2005, which is the 

largest corporate profit in United States history, and similar profits 

were reported by Chevron and Valero. I must say, that having been 

an appropriator for a long time in this Senate and seeing big figures in the billions, I am somewhere between impressed and astounded by these profits. It raises a real question as to whether 

something has to be done on the merger and acquisition field. We 

have had the Sherman Act for a long time. We have had the Clayton Act for a long time, and Congress has sat back and has not legVerDate 0ct 09 2002 09:17 Jul 19, 2007 Jkt 033417 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 S:\GPO\HEARINGS\33417.TXT SJUD1 PsN: CMORC
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islated in the field, and it just may be time to legislate in this field 

with what is going on with all of the complexities of OPEC oil and 

our dependence, which we heard the President talk about last 

night, and we see these record profits, and we see really serious 

questions raised about the citizenship of the oil companies. 

This Committee has been very, very heavily engaged on many, 

many matters the past few months, class action and bankruptcy, 

circuit judges, two Supreme Court confirmations, and we have not 

had a chance to really look at this field, but when we saw an open 

Wednesday we decided to schedule these hearings, and we got the 

cold shoulder from the oil industry. We were turned down by oil 

executives, the CEOs, seriatim. We were turned down by Mr. John 

Hofmeister, President of Shell; Ross Pillari of BP America; James 

Mulva of ConocoPhillips; Rex Tillerson of Exxon Mobil; David 

O’Reilly of Chevron Corporation; and Bill Gray of Valero Energy 

Corporation. We only provided a week’s notice, but that is not too 

bad for the Judiciary Committee on the kind of schedule we undertake and we maintain. We do know that when these companies or 

other constituents have a problem, they want action from us in less 

than a week. If somebody calls for an appointment, it is usually for 

the same day, maybe the next. A week is a lot of notice to give a 

Senator around here to get some action from us. 

We are going to be holding a followup hearing on February 28th, 

where we will expect those individuals to appear. We said if they 

could not make it on their personal schedules, we could understand, but we want somebody from their departments to come in 

and answer some very basic questions. I do not like to have to 

issue subpoenas. We had to issue a subpoena recently in our asbestos issue when we could not get disclosure as to who was contributing how much money, and if we need to issue subpoenas we can 

do that too. We face enormous problems which are impacting in an 

overwhelming way on Americans at the gas pump and heating oil, 

and we intend to do something about it. 

I will now yield to the distinguished member of the Antitrust 

Subcommittee. 

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

STATE OF WISCONSIN 

Senator KOHL. I thank you, Mr. Chairman, for calling this hearing today. 

Let me begin by saying how disappointed I am, as the Chairman 

is, that the representatives of the oil industry have refused to appear here. It is not right that this industry will not answer questions of the American people through their elected representatives 

about the historically high prices of gasoline and home heating 

fuels. Therefore, I urge, as the Chairman has suggested, that we 

might just have to issue subpoenas under our jurisdiction to compel 

the attendance of the industry CEOs. 

Throughout the last few years the oil and gas prices have continued to spike upwards, repeatedly reaching new highs. After retreating from last summer’s record prices of more than $3.00 per 

gallon, gas prices are moving up once again. Yesterday the Milwaukee General Sentinel reported gas prices jumped 25 cents just 

on Monday in the Milwaukee area, reaching nearly $2.50 a gallon. 

3

The national average has risen 51 percent from its level of just a 

year ago. Price increases for home heating oil and natural gas are 

following closely behind. 

The pain felt from consumers for these price increases is real and 

it is growing. Price increases are a silent tax that steals hardearned money away from American consumers every time they 

visit the gas pump and every time they raise their thermostat to 

keep their home warm. In my own State of Wisconsin the Governor 

recently estimated that families with an average annual income of 

$40,000 a year will pay $2,000 more this year to drive their cars 

and heat their homes than last year. 

While consumers suffer from these price increases, the oil industry seems only to get richer and richer. Yesterday we all read the 

astounding news of Exxon Mobil’s profit reports, $36 billion for all 

of last year, which as the Chairman indicated, is a record high for 

any company in the history of our country. Exxon Mobil is not 

alone. Chevron reported that its fourth quarter profit climbed 20 

percent over last year, a record that continued the most prosperous 

stretch in that company’s 126-year history. 

Oil companies defend high energy prices as merely a reflection 

of higher worldwide crude oil prices, prices which they argue they 

must pass on to consumers. There is no doubt that the selfish and 

illegal actions of the OPEC oil cartel raises the price for crude oil, 

but the basic question remains, why should paying higher prices 

for crude oil lead to record high profits for the companies that refined this oil? One obvious answer is that oil companies are charging high prices and gaining record profits simply because they can. 

Every American needs to purchase gas to fuel our cars to get to 

work or to go to school, and all of us need to heat our homes. 

Of course, we can expect private businesses like the oil companies to seek to charge the highest prices they can to maximize return to their shareholders. But energy is a necessity for millions 

of Americans, so our obligation in Government is to protect consumers when the market does not. 

The Government is not doing nearly enough to protect consumers. Mergers and acquisitions in the oil industry, more than 

2,600 since the 1990’s, as counted by the GAO, have left a dangerous level of consolidation in their wake. GAO has found that 

this has led to higher gas prices, so we need to ask the question 

as to whether our antitrust laws are sufficient to handle this level 

of consolidation? 

This increased industry concentration has another effect as demand in prices increase. We would expect refining capacity to expand if the market were competitive. Instead, numerous refineries 

have been closed. More than half of all those existing 25 years ago 

have been closed, and none have been opened recently. Refining capacity has become a bottleneck, limiting supply and causing price 

spikes whenever an accident occurs. Indeed, oil industry critics 

argue that oil companies have not chosen to expand refining capacity in order to gain market power to keep prices high, and the stats 

seem to bear this out. 

So it is time for us to think of new solutions and new policies 

to restore competition in this industry. I believe we need to start 

by ending the refining bottleneck. That is why I have introduce S. 

4

1979, a bill to direct the Secretary of Energy to establish and operate a strategic refining reserve. 

Second, oil companies should not be able to tighten supplies further in time of shortage by exporting needed fuels abroad. So I 

would also urge passage of S. 1996, which is my bill to authorize 

the Secretary of Energy to stop the exportation of gasoline and 

home heating oil when supply falls short. 

Reform of our antitrust laws, I believe is needed. A first step 

would be passage of our NOPEC legislation to subject the members 

of the OPEC oil cartel to U.S. antitrust law. The increasing level 

of consolidation and record industry profits also leave little doubt 

that merger enforcement should be strengthened. In this regard we 

should give serious consideration to revisions of the antitrust agencies’ merger guidelines to take into account the special circumstances of the oil industry. 

I think this is an important hearing. We thank our witnesses for 

being here, and I very much appreciate the Chairman calling this 

hearing. 

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

Chairman SPECTER. Thank you very much, Senator Kohl. 

Senator Cornyn, would you care to make some introductory comments? 

STATEMENT OF HON. JOHN CORNYN, A U.S. SENATOR FROM 

THE STATE OF TEXAS 

Senator CORNYN. Thank you very much, Mr. Chairman. I appreciate this opportunity. Thank you for convening this hearing. I regret, like you, and Senator Kohl do, that on short notice the CEOs 

of a number of the oil companies were unable to change their 

schedule to be here with us. But, I trust they will be in attendance 

on February 28th, and look forward to hearing from them. 

I know this hearing follows on an earlier hearing that was held 

before a combined Committee of the Energy and Commerce Committee, where many of those oil executives did appear. I look forward to hearing the testimony of the representatives of the Government Accountability Office and the Federal Trade Commission. It 

sounds like they have a little different analysis in terms of the impact of consolidation on oil and gas prices. Congress can legislate, 

and we can actually repeal laws from time to time, and do, but we 

cannot repeal the laws of supply and demand. The fact is that 

there is growing demand in a globalized economy for limited and 

scarce natural resources. I applaud the President’s emphasis last 

night on trying to further limit our dependence on imported energy, 

which obviously has national security implications. It has tremendous implications for our economy. 

I see my former colleague, Attorney General Blumenthal, at the 

table, and we served together as State Attorney Generals, and I 

know the State Attorney Generals play an important role when it 

comes to enforcement of antitrust laws, and look forward to hearing from him and others. 

Just to make sure that we begin to scrape the surface of what 

is necessarily a very complex issue, the question of causation is one 

that intrigues me the most. Is consolidation the cause of high 

5

prices at the pump, the high price of oil, or is it something else? 

Is it a range of other factors? My own impression is that it is a 

range of factors, and I hope we get a chance to explore that range 

in the course of these hearings, both today and on the 28th. 

I have a chart here from the American Petroleum Institute, 

which shows where those profits go. According to at least the API—

and I would like, if I may, have it made part of the record. 

Chairman SPECTER. Without objection it will be made part of the 

record. 

Senator CORNYN. It shows that in 2005, 64 percent of the profits 

of oil companies went into exploration. Certainly, I know that none 

of us would want to do anything that would have an impact on our 

ability to explore for and develop more resources. Obviously, increasing the supply, if demand remains static, would necessarily 

decrease the cost. 

The other sort of dichotomy I hear set up sometimes when people 

talk about this issue is big oil and big corporations on one hand, 

and consumers and little people on the other. But, I just want to 

point out that, here again, the question of who owns big oil? The 

fact is that there are a lot of shareholders, people maybe even in 

the audience or listening on C–SPAN or wherever that own stock 

in some of these companies. Certainly, their pension plans and retirement plans may own stock in them. So, I think it is important 

that we recognize that this is not some monolithic faceless, nameless creature that is easy to demonize, but rather, this has an impact on real people and their ability to support themselves or their 

families or provide for their retirement. 

I know there are a lot of different issues that we need to talk 

about here, and certainly, I believe our antitrust laws are important. We believe in competition. We believe in fair competition, not 

unfair competition, and certainly, I share the concerns of all the 

Committee in making sure those laws are complied with. 

If there are additional laws that need to be passed, I look forward to working with you, Mr. Chairman, and Senator Kohl, who, 

of course, is Ranking Member of the Antitrust Subcommittee, to try 

to come up with sensible solutions to the challenges that confront 

us. I hope we do not engage, and I trust we will not—I know how 

careful and how thorough this Committee has typically been—in 

knee-jerk solutions, which actually have the impact of exacerbating 

the problem, such as some of the ill-conceived windfall profits legislation that has been proposed, that actually, would hurt our domestic production, would increase our dependence on imported energy, 

and ultimately hurt the consumer. 

So, I look forward to working with you. Thank you for giving me 

the opportunity. 

Chairman SPECTER. Thank you, Senator Cornyn. We ordinarily 

do not have opening statements beyond the Chairman and the 

ranking member, but I know Senator Cornyn has a very key constituent interest here. From my early days in the Kansas oil fields, 

I have great admiration for what happened in Texas compared to 

the stripper production that was in my home county, and I wanted 

to give Senator Cornyn an opportunity to speak early on the subject. 

6

In the interest of fairness, we are going to have opening statements from all those present. I think we can manage that within 

the 2-hour time limit. Senator Feinstein? 

STATEMENT OF HON. DIANNE FEINSTEIN, A U.S. SENATOR 

FROM THE STATE OF CALIFORNIA 

Senator FEINSTEIN. Thank you very much, Mr. Chairman. 

I also serve on the Energy Committee. I did not hear your statement, but I identify very strongly with the statement of Senator 

Kohl, and I think he is right on. I am one that has watched this 

happen over the years. Oil prices have risen 118 percent, just to 

take a time during the Bush presidency, and gas prices have gone 

up 58 percent. You have the 2005 Exxon Mobil annual profit, $36 

billion, you have $11 billion in the fourth quarter, and I can go on 

for some of the others. 

I was very interested by a comment in the GAO report, which I 

would like to read, because I think it strikes at the heart of what 

this hearing is about. Before I read it, let me just say that what 

I have noticed is a kind of purposeful oil restraint on refineries. No 

one builds new refineries. Consequently, in California, they function at maximum capacity all the time. So given more oil, they are 

constrained, they cannot refine it. 

Let me quote from the report. ‘‘The 1990s saw a wave of merger 

activity in which over 2600 mergers occurred involving all three 

segments of the U.S. petroleum industry—almost 85 percent of the 

mergers occurred in the upstream segment (exploration and production), while the downstream segment (refining and marketing of 

petroleum) accounted for about 13 percent, and the midstream segment (transportation) accounted for about 2 percent. Since 2000, 

we found that at least 8 additional mergers have occurred, involving different segments of the industry.’’

‘‘This wave of mergers contributed to increases in market concentration in the refining and marketing segments of the U.S. petroleum industry. Econometric modeling we performed of eight 

mergers that occurred in the 1990s, showed that the majority resulted in small wholesale gasoline price increases—changes were 

generally between 1 and 7 cents per gallon.’’ I think that is interesting, small wholesale prices, but extraordinary retail prices right 

now. 

What I have learned is that although a certain cost center will 

do very well and another cost center will not, that the industry 

does not really shift from one cost center to the other to reduce the 

price at the pump. The cost center sort of has to sustain itself, and 

I think there is probably no issue in which people are more 

aroused, and has a bigger dent, at least in my State, on the average person’s pocketbook, because if you fill up your tank at $20 a 

tank it is one thing, if you are filling it up at $40 and $50 a tank 

and you have to use two to three tanks a week to get to and from 

work, it is a very big deal in your life. 

What I found—and I hope the gentlemen will comment on it—

is an absolute resistance of the industry to any sounding of an 

alarm bell. Nothing changes. The profit margins just continue to go 

way up, and there seems to be no consumer loyalty. That is what 

we all found with Enron. So if we look deeply, we find there is very 

7

little oversight of the entire energy sector of our economy, and this 

is showing that it is a problem. It is showing that you can really 

increase gas prices to the sky’s the limit, and continue to rake in 

tremendous profits. People say, ‘‘Oh, no, you cannot consider a 

windfall oil profits tax.’’ Well, if the industry will not respond and 

will not help the consumer out, what course is Government left 

with? That is really my question, and I really hope the panel will 

address that. 

Chairman SPECTER. Thank you very much, Senator Feinstein. 

We had not intended to go to opening statements, but we have, 

and I called on Senator Feinstein ahead of Senator Feingold. That 

is the second time I have done that. I will try not to do it in the 

future. We will come to you, after we hear from Senator DeWine, 

who is the Chairman of the Antitrust Subcommittee. 

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

THE STATE OF OHIO 

Senator DEWINE. Mr. Chairman, thank you very much. I want 

to thank you for calling this very important hearing today. 

As we all know, our energy costs are soaring. In my home State 

of Ohio, like most places in the United States, gas prices have been 

rising steadily. Making matters worse, many analysts predict these 

prices only will get higher in the coming months. Prices for home 

heating oil are also on the rise, which is extremely disturbing to 

our constituents. These price hikes hit all of us in our day-to-day 

lives, and hit the most vulnerable Americans the hardest. Even 

more frustrating, it seems that every day another oil company reports record-breaking profits while American consumers pay higher 

prices. So it is critical that we take steps to figure out the problem 

and ultimately fix it. 

We recently have seen a wave of mergers in the oil industry, and 

these mergers and their effects on consumer prices have been a priority of the Antitrust Subcommittee. Senator Kohl and I have 

worked together for years to preserve competition in the petroleum 

industry. We have conducted investigations into many of these 

mergers, and raised numerous concerns about them with the FTC. 

Additionally, back in the year 2000 we asked the FTC to investigate the gasoline price spikes which hit the Midwest. In response, 

they set up an intensive ongoing monitoring program within the industry to make sure that they could find and stop illegal price 

gouging. We believe this program has been an effective law enforcement tool and it has prevented at least some of the abuse that 

might have otherwise occurred. 

Nonetheless, fuel prices continue to rise, and naturally, this has 

led to discussion about whether oil industry mergers have increased prices to consumers. 

Today’s hearing will be a good opportunity to explore this very 

issue, but I think it is important to note that even those who think 

that these mergers have increased price, such as the GAO, believe 

that the effect has been relatively small, usually about a penny or 

two per gallon. Others argue that the price effect is somewhat 

higher. But either way, it is clearly not the biggest part of the 

problem. 

8

The biggest problem is simply crude oil. Bluntly, we do not have 

enough of it, and we rely too much on it. Our country, although 

blessed with great natural resources, is sorely lacking in crude oil. 

Try as we might, we cannot drill our way out of this crisis. So we 

must take a much broader approach to our energy problem and 

limit our reliance on oil. 

Mr. Chairman, we have the ability to do just that. The United 

States does have one fossil fuel in great abundance, and that, of 

course, is coal. Of course, coal brings its own challenges. We have 

all seen and been horrified by the tragic deaths of the miners recently in West Virginia and also Kentucky. As a member of the 

HELP Committee and Appropriations Committee, I participate in 

hearings on mine safety issues. We cannot emphasize enough that 

we must take aggressive and prompt action to improve mine safety, 

and protect the life and health of our miners. We need to invest 

the time and the money to figure out how to mine coal more safely, 

burn it more cleanly, and use it to power our economy, but coal, 

clearly, can work for America. 

We need to go further, however, than that. We need to conserve, 

we need to increase fuel efficiency, and we need to invest in safer 

nuclear technology, wind power, solar power, biomass, as well as 

in fuel cells. My home State of Ohio is a leader in developing fuel 

cell technology, and I have been very supporting of efforts to fund 

this technology. It is extremely promising. 

Clearly, Mr. Chairman, we have a lot to do on energy policy in 

general, as the President pointed out last night. In the meantime, 

however, this hearing is an excellent opportunity to make sure that 

our antitrust laws are being applied properly, and eliminate any 

opportunities for companies in the petroleum industry to unduly increase the fuel prices we all pay. 

On a final note, Mr. Chairman, I want to say how disappointed 

I am as well that the oil executives declined to attend our hearing 

today. It would be useful to the Committee to hear their views on 

fuel prices, and I welcome the announcement that you made hear 

this morning. 

I thank you. 

Chairman SPECTER. Thank you, Senator DeWine. 

Senator Feingold, I understand that you do not wish to make an 

opening statement. 

Senator FEINGOLD. No, I would like to make a very brief opening 

statement. 

Chairman SPECTER. Fine. You are recognized. 

STATEMENT OF HON. RUSSELL D. FEINGOLD, A U.S. SENATOR 

FROM THE STATE OF WISCONSIN 

Senator FEINGOLD. Mr. Chairman, I want to thank you, and of 

course, the ranking member, Senator Kohl, for holding this important hearing today, and I do appreciate the chance to say a few 

words. I want to thank the witnesses for agreeing to participate in 

today’s discussion. 

I am here this morning because I am deeply concerned about the 

high gasoline prices that are hurting especially Wisconsinites and 

consumers across the country. It is as if we are conducting an uncontrolled experiment into how far our constituents’ pocketbooks 

9

can be stretched. That cannot go on. It is time for the Federal Government to grab the reins back, conduct the necessary oversight 

over these energy markets, and adopt appropriate solutions. Our 

constituents are demanding action, and they deserve it. 

Even a casual reader of the news knows that the oil industry is 

coming off a record-breaking year of profits, with one company, 

Exxon Mobil, becoming the most profitable company in U.S. history, the most profitable quarter of any company at any time in our 

Nation’s history. 

As these profit reports come out, my constituents are asking 

many questions such as why high prices do not seem to be bringing 

new investment in the oil and gas sector to increase the supply of 

refined petroleum products. Wisconsinites always expect straight 

talk, and it is long past time that they got it from Congress and 

from the oil industry, which as everyone said, I am pleased to 

hear—although we are not pleased about it—that they are not 

present today. I have been concerned about consolidation in the oilgas sector for a while, just as I have been concerned about consolidation of the electricity sector due to the repeal of the Public Utility Holding Company Act. I strongly opposed that step in the Energy Policy Act of 2005. The country is now seeing the consequences, and unfortunately, they are not positive, so I hope we 

learned some lessons from that. 

I do thank the witnesses, and I thank you, Mr. Chairman. 

Chairman SPECTER. Thank you, Senator Feingold. 

Senator Coburn? 

STATEMENT OF HON. TOM COBURN, A U.S. SENATOR FROM 

THE STATE OF OKLAHOMA 

Senator COBURN. Thank you, Mr. Chairman. 

I think it is really important for us to focus on markets. There 

is no question if there is collusion, we ought to be about fixing that 

and changing the law to affect it. But some of the things I have 

heard today disturb me. One is nobody mentions the impact that 

speculators on NYMEX have had. All you have to do is look at natural gas. It has been as high as $15.60 per million BTU. It hit 7.60 

last week, it is about $9.00 now. Most of that is not based on true 

takings and hedging of consumers or distribution companies, it is 

based on pure speculation. I remember back in the 1970s when silver was trying to be cornered by one group of individuals. The way 

they solved that problem is they took the hedging out, the speculative hedging out, by saying you have to take delivery. It might be 

very wise for us to look at the component of speculation. 

The second thing, the reason new refineries are not being built 

is because the bureaucracy and the cost to establish new refineries 

is about 10 times higher than expansion of existing refineries. 

Somebody mentioned Valero. Valero is expanding refineries like 

crazy, but they do not build new ones because we have set up so 

many impediments, that they cannot, the cost to do that. 

Finally, the very idea that somebody would suggest that the increased prices are not leading to new exploration, all you have to 

do is look at the exploration companies and the major oil companies that they are doing. There is significant increase in exploration. It is growing like crazy. Multiple exploration companies are 

10

based in Oklahoma, and they are building rigs, and we are using 

the rigs as fast as we can in this country based on demand. 

The final thing I would say, is with increased prices coming, decreased overhead has relationship to that price, and I am not at all 

surprised by the increase in profits, because as you increase volume over a fixed overhead, it all falls directly to the bottom line. 

I would also note that the oil and gas industry’s average Federal 

tax bite is 38.5 percent. They paid $44 billion into the treasury of 

this country this last year, $44 billion from one industry. It is going 

to be greater than that this year. So it is fine for us to say that 

there should not be collusion, and I agree with that. We should be 

aggressive to make sure that does not happen, but it is not fine for 

us to say that we do not want markets to help us allocate scarce 

resources, and if our tendency is to control prices or to put a windfall profit tax, all we are doing is shooting ourselves in the foot. 

Let’s go prosecute those people who are colluding, those people 

who are fixing prices, but let’s let the market help us solve our energy needs. 

Thank you, Mr. Chairman. 

Chairman SPECTER. Thank you, Senator Coburn. 

Senator Schumer.

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

FROM THE STATE OF NEW YORK 

Senator SCHUMER. Thank you, Mr. Chairman. I thank you for 

holding this hearing. 

Let me just say that, you know, as somebody who loves America, 

I try to study what makes other societies that have achieved greatness decline. The one issue that seems to be throughout, Roman 

Empire, British Empire, is failure to deal with problems ahead of 

time, waiting till those problems are right at the door and it is 

much too late. And if there was ever an example of that, it is the 

energy problems that we have. We could solve those much more 

easily today than we will be able to in 10 or 15 years, and we are 

not, and I worry about it. 

I was disappointed, Mr. Chairman, in the President’s state of the 

union. I do not think you can solve the oil problems unless you 

solve the problems of oil companies. The President said last night 

that Americans were addicted to oil, but this administration is addicted to oil companies, and we are not going to achieve energy 

independence until the administration breaks its addiction. Just 

look at last year’s heralded energy bill. Last year’s energy plan 

gave Americans $3.00 a gallon gasoline and record profits for the 

oil companies. 

So one can hope that this new plan is better, but a plan that 

does not mention raising mileage standards for cars, does not mention ways to really conserve, which is the No. 1 way to deal with 

our problems, is not going to get very far in terms of energy independence. 

On the issue of the large oil companies, I have talked to CEOs—

these are not average consumers or liberal Democratic think 

tanks—CEOs of major companies that buy things like jet fuel, diesel fuel, heating oil, every one of them thinks there is not real competition. How can there be when you have so few companies out 

11

there. One of the great mistakes this country made was to allow 

Exxon and Mobil to merge. That was done during a Democratic administration, but it never should have happened. Let No. 1 and No. 

2 merger when you only have a handful of big producers? And as 

long as there is not much more competition, you are not going to 

get anywhere. Why did all the prices spike up at the same time, 

why on the West Coast right after Katrina, where there is no Gulf 

oil, did the price almost go up as much as it did in places like New 

York that use Katrina Gulf oil? And why is it that when the spot 

market goes up, the price at the pump goes up two, 3 days later; 

when the spot market goes down, it takes weeks for it to go back 

down? 

The answer is simple: there is not real competition. There is 

what they call price leadership. No one is saying there is collusion. 

That would be, as my good friend from Oklahoma said, against the 

law. But everyone follows one another. This happens in any major 

industry where there are only a few competitors. It happened in 

the credit card industry, for instance, when everyone’s rate was at 

19.8 percent a few years ago. 

The idea of looking into big oil from an antitrust perspective, I 

think, Mr. Chairman and Senator Kohl, are extremely timely. I do 

not know if we can ever undo the mergers that were done, but the 

best antidote here is real competition. When the oil companies are 

not interested really in alternatives, they make their money in fossil fuel, when there are so few of them, and when the policies that 

this administration proposes do not work, when it seems that the 

oil companies have a veto over any proposal the administration 

makes, so you do not get anything real tough, I worry about the 

future of this country. 

Chairman SPECTER. Thank you, Senator Schumer. 

We now turn to our first witness, Federal Trade Commissioner 

William Kovacic; a very distinguished record, extensive work with 

the Federal Trade Commission, being an attorney there in 1979 to 

1983 time range, and currently a Commissioner; educational background is from Princeton bachelor’s degree and law degree from 

Columbia; and a professor at Georgetown University Law School, 

and formerly a professor at Washington College of Law, American 

University, and George Mason University School of Law. 

Thank you for joining us today, Commissioner Kovacic, and we 

look forward to your testimony. 

STATEMENT OF WILLIAM E. KOVACIC, COMMISSIONER AND 

FORMER GENERAL COUNSEL, FEDERAL TRADE COMMISSION, WASHINGTON, D.C. 

Mr. KOVACIC. My pleasure, and thank you, Mr. Chairman, and 

the other members of the Committee. I am grateful for the opportunity to discuss consolidation in the petroleum industry and to review the FTC’s program to protect consumers in this singularly important sector. My written statement provides the views of the 

Commission, and my spoken comments and responses to your comments and questions do not necessarily reflect the views of my colleagues. 

Since the turn of the 20th century, no industry in this country 

has commanded closer attention from the U.S. antitrust authoriVerDate 0ct 09 2002 09:17 Jul 19, 2007 Jkt 033417 PO 00000 Frm 00019 Fmt 6633 Sfmt 6633 S:\GPO\HEARINGS\33417.TXT SJUD1 PsN: CMORC
12

ties. So it is today for the Federal Trade Commission. I want to 

highlight four dimensions of the FTC’s competition policy program 

for the petroleum sector. 

First and foremost is law enforcement. I think everything that a 

competition agency does is based on its willingness to enforce the 

laws. Collateral policies are important, but that is the foundation 

of what an agency does. Activities of the past year attest to the significance and scope of the FTC’s law enforcement program. The 

Commission achieved a major settlement to resolve competitive 

concerns associated with Chevron’s acquisition of Unocal. The centerpiece of this settlement was Chevron’s agreement not to enforce 

certain of Unocal’s patents. The enforcement of those patents would 

have caused California consumers to spend hundreds of millions of 

dollars per year for gasoline. The settlement resolved earlier FTC 

allegations that Unocal had wrongfully manipulated the process by 

which the State of California set standards for gasoline. 

In the Aloha case, the FTC sued to block a merger that allegedly 

would have increased concentration in the distribution of gasoline 

in the Hawaiian Islands. The suit induced the parties to take 

measures that resolved the FTC’s concerns. 

These matters reflect the FTC’s consistent practice of the past 25 

years of eliminating anticompetitive overlaps and addressing serious problems where they arise. 

The second element is in the investigation, monitoring and analysis of developments involving petroleum products. As this Committee is well aware, Congress has requested the FTC to undertake 

two closely related studies which have been combined in a single 

undertaking, and the FTC is now conducting an investigation of 

whether petroleum companies improperly manipulated supplies or 

wrongfully boosted prices in the wake of Hurricanes Katrina and 

Rita. To this end, the FTC recently denied a petition by Exxon 

Mobil to curtail the scope of its inquiry. We will publish the results 

of the study in the late spring, as mandated by Congress. In performing this investigation the FTC is drawing upon the knowledge 

it has gained from two major reports it published in the past 2 

years on mergers and product pricing respectively. The FTC also 

will use what it has learned from its continuing program referred 

to by Senator DeWine, and program partly inspired by the advice 

of Senators DeWine and Kohl on the Antitrust Subcommittee. It is 

a program to monitor pricing anomalies in over 300 metropolitan 

areas in the United States. 

The third ingredient is to assess the soundness of our program. 

One year ago the FTC hosted a conference to discuss efforts by the 

FTC and the Government Accountability Office, represented here 

today by my colleague, Jim Wells, to assess the impact of FTC 

merger policy. In the past year the FTC has used the results of this 

conference to refine its techniques for assessing the effects of its 

merger enforcement program. I agree wholeheartedly with the spirit expressed by members of this Committee today that it is essential for us to continually review and assess the soundness of what 

we have done before. Where these and related inquiries suggest improvements, be assured that we will make them. 

Finally, the FTC is working to improve cooperation within the 

large archipelago of Federal agencies and State authorities curVerDate 0ct 09 2002 09:17 Jul 19, 2007 Jkt 033417 PO 00000 Frm 00020 Fmt 6633 Sfmt 6633 S:\GPO\HEARINGS\33417.TXT SJUD1 PsN: CMORC
13

rently engaged in policy activities that affect competition in this 

sector. Improvements in the framework of information sharing and 

consultation have genuine promise to improve the Nation’s competition policy initiatives involving petroleum products. 

Let me close on a personal note, in this, my first appearance before this Committee since becoming a Commissioner less than a 

months ago. Thirty years ago I spent 1 year working as a legislative assistant on Philip Hart’s Antitrust Subcommittee staff. One 

of my main responsibilities was the petroleum industry. That experience gave me a strong and continuing interest in energy policy. 

During my tenure as an FTC Commissioner I will give energy 

issues my highest priority. I hope today is the first of many occasions that I will have to meet with you, your colleagues and your 

staff to discuss the FTC’s efforts to develop competition and consumer protection programs that best serve American consumers. 

I look forward to your questions and comments. 

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

for the record.] 

Chairman SPECTER. Thank you very much, Commissioner 

Kovacic. 

We now turn to Mr. James Wells, who is the Director of the GAO 

Department on Energy, Natural Resources and Environment, a 

graduate of Elon College and the Executive Development Course at 

Harvard University Kennedy School of Government. He has been 

with the Government Accountability Office since 1969 and has authored several important GAO reports, including the recent one on 

the Effects of Merger and Market Concentration in the Petroleum 

Industry. 

Thank you for coming in today, Mr. Wells, and we look forward 

to your testimony. 

STATEMENT OF JIM WELLS, DIRECTOR, NATURAL RESOURCES 

AND ENVIRONMENT, GOVERNMENT ACCOUNTABILITY OFFICE, WASHINGTON, D.C. 

Mr. WELLS. Thank you, Mr. Chairman, and members of the Committee. We too welcome the opportunity to participate in this important hearing today. 

When gasoline prices go up, people notice. According to the experts, each additional 10 cents per gallon of gasoline adds $14 billion to America’s annual gasoline bill. The daily press reporting of 

record industry profits is creating a heightened tension between 

those that supply the product and those that use and pay for it. 

The absence of the CEOs of the major oil companies today doesn’t 

help that. When GAO issued its report detailing our extensive 

study of the impacts of mergers in the gasoline industry, people noticed. 

The industry currently can only make so much gasoline from the 

available crude oil. Our cars, our trucks, they need more than we 

can make domestically, and we are paying to import more than 40 

million gallons of gasoline a day to meet our needs. Given the importance of gasoline to our economy, it is essential to understand 

the market for gasoline and how prices are determined. In summary, we would say crude oil prices are clearly the fundamental 

14

determinant of gas prices paid at the pump. With crude oil prices 

at about $67, as they are today, we have $2.50 gasoline. 

However, other factors also affect the gasoline prices, including 

things like the limited refining capacity here in the United States. 

The gasoline inventories being maintained currently by the refiners 

and marketers of gasoline are only half of what it was a few years 

ago. There are regulatory factors placed on the gasoline marketplace, such as national air quality standards, introduced special 

blends that have been linked to higher gasoline prices, and we 

would add, a determining cost at the pump is the large number of 

oil company mergers that raises concerns about potential anticompetitive effects, as we have talked about today, because mergers and increasing numbers of mergers could result in greater market power, and potentially allowing prices to rise and be maintained over a period of time above competitive levels. 

We studied the merger activities in the 1990s and coined a 

phrase, the wave of over 2,600 mergers that led to the increased 

market concentration in the refining and market segments or 

downstream segments of the industry. Clearly, in the mid 1990s 

there were 24 States that had moderately concentrated markets. 

Four or 5 years later, after this wave of mergers, 46 States, including the District of Columbia, had moved from mildly or moderately 

concentrated to highly concentrated. 

Since our study, another 8 fairly significant mergers have occurred. Our detailed study of the 8 that we did in the earlier study 

found that in the majority of these mergers wholesale prices, as 

Senator Feinstein had alluded to, had increased, typically being 

passed on at the retail level anywhere from 1 to 7 cents per gallon. 

Since 2000 we found at least another 8 fairly significant additional mergers have occurred, and while we have not performed 

tests on these mergers that have involved over $90 billion worth 

of assets, these additional mergers would further increase industry 

concentration. 

Mr. Chairman, I will stop here and just say that there are a 

whole lot of things beyond just the high cost of crude oil that are 

causing consumers to pay more. The gasoline industry is very complex. It is true that forces such as the rapid growth of world demand, boosted by China’s extraordinary pace of development, have 

put unprecedented pressure on the global crude oil supply and demand balance. The resulting high prices of crude oil have clearly 

pushed company profits dramatically higher at the same time that 

the consumers are feeling this pinch of higher gasoline prices at 

the pump. 

However, in a concluding type of way, while the global oil market 

may be beyond our immediate control, at least in the short term 

we can ensure, as this Committee hearing will help address the 

proper application of oversight, that our domestic market remains 

competitive. A hearing like this is clearly an important one to ensure that all the players in this environment, you, the Congress, 

the regulatory agencies with the FTC and Department of Justice, 

and even, yes, the GAO auditors here who do work for you, that 

we are engaged in performing oversight to see what is causing the 

marketplace to react the way it is. 

Thank you, Mr. Chairman. 

15

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

for the record.] 

Chairman SPECTER. Thank you very much, Mr. Wells. 

We turn now to Connecticut Attorney General Richard 

Blumenthal, a position he has held for 15 years. He has an undergraduate degree from Harvard, Yale Law School, U.S. Attorney for 

Connecticut, Administrative Assistant to Senator Ribicoff and also 

assistant to Senator Moynihan, law clerk to Justice Blackmun, 

brings a very, very distinguished record to the witness table. 

Thank you for coming down today, Mr. Attorney General, and we 

look forward to your testimony. 

STATEMENT OF RICHARD BLUMENTHAL, ATTORNEY GENERAL, STATE OF CONNECTICUT, HARTFORD, CONNECTICUT 

Mr. BLUMENTHAL. Thank you, Mr. Chairman, and Senator Kohl 

for having us today and giving us this opportunity to speak about 

an issue that is so tremendously important to my constituents, as 

it is to yours. I want to thank my former colleague, the Senator 

from Texas, for being here, and I know he still shares the perspective that I bring to this table, which is one of State law enforcement and trying to use the laws that we have now to make sure 

that there is real competition. 

If I have one message for you today, it is that we need help. 

There needs to be a sense of outrage among Federal law enforcement as there is among State law enforcement about the results 

that we see, and the damage that we see to our economies from 

anticompetitive conduct. 

We formed a task force. It includes virtually every Attorney General in the United States. I am on the Executive Committee of that 

task force. We have taken action against price gouging in many 

States. We have either prosecuted or we are initiating action 

against retailers and some wholesalers, who misuse their market 

power. But our reach, in terms of authority, and our resources, are 

limited. We need help, and we are not getting it. That is, very simply, the bottom line for me as a law enforcer. 

I know from all of the studies that I have reviewed—and they go 

back to 2001 with the FTC’s own report on withholding of supplies, 

although it found no overt, purposeful collusion, the 2004 GAO 

study, a raft of other studies that show increasing concentration so 

that now about 50 percent of all the domestic refining capacity and 

oil production is controlled by just five companies, and 60 percent 

of the retail market by those same five companies. Even without 

collusion, what we see on the streets and the gas stations of Connecticut and throughout the country is that that market power 

leads inexorably to anticompetitive conduct. That is what we need 

to stop through measures that I believe should avoid, as Senator 

Cornyn observed, simplistic solutions or knee-jerk reactions. I happen to favor a windfall profits tax, but that tax will not change the 

structure of the industry. 

I propose some measures in my testimony—and I will be brief in 

closing because I know the time is limited—such as a 1-year moratorium on all mergers; a focused investigation going to the very top 

of this industry at every level, involving States as well as the FTC 

and the Department of Justice, that focuses attention, and gets the 

16

attention of this industry; a ban on zone pricing which divides 

States and even cities into different geographic areas, and thereby 

inhibits competition by, in effect, curtailing competition among the 

retailers; expanding refinery capacity; mandating minimum levels 

of inventory; lessening our dependency on gasoline through conservation efforts and alternative fuels. I welcome the President’s 

focus on this aspect of the problem, but we need to deal with the 

world as we face it now. 

The concentration of power that we see has real-life consequences for our consumers, and the mere fact of an investigation 

focused on the industry and on the New York Mercantile Exchange, 

as Senator Coburn suggested, I think will itself have a very important effect. What we saw in the wake of our investigation was that 

prices began to come down as soon as we sent subpoenas, as soon 

as we issued letters, as soon as our focus was on the industry, and 

I think that, at other levels, conduct can be affected as well. I think 

the law needs to be changed. We need tougher laws, but we also 

need a sense of urgency from Federal law enforcement in this area. 

Thank you, Mr. Chairman. 

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

Chairman SPECTER. Thank you very much, Attorney General 

Blumenthal. 

Our next witness is Professor Preston McAfee, who is with the 

California Institution of Technology, bachelor’s degree from the 

University of Florida, master’s from Purdue and PhD in economics 

also from Purdue; been a Professor of Economics at the University 

of Texas and University of Chicago, and MIT; has written extensively on antitrust monopolies mergers; author and co-editor for economics journals for more than 25 years. 

We appreciate you being with us today, Professor McAfee, and 

we look forward to your testimony. 

STATEMENT OF R. PRESTON MCAFEE, J. STANLEY PROFESSOR 

OF BUSINESS, ECONOMICS AND MANAGEMENT, AND EXECUTIVE DIRECTOR FOR THE SOCIAL SCIENCES, CALIFORNIA 

INSTITUTE OF TECHNOLOGY, PASADENA, CALIFORNIA 

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

Committee. 

I have worked extensively with the Federal Trade Commission in 

evaluating mergers, including the Exxon Mobil and BP Arco mergers. As part of my study of these mergers, I had access to a substantial number of documents, on Exxon Mobil in particular, 125 

million pages of documents. I am pleased to be here today to discuss the economic issues I have researched and how they pertain 

to the examination of antitrust applied to the oil industry. 

Let me start by applauding the Committee’s investigation of the 

sequence of mergers, rather than focusing on any specific merger. 

All too often antitrust enforcement focuses only on the merger at 

hand, without asking how that merger fits into the larger picture 

of industry evolution. It is my understanding—and I am not an attorney—that comparing mergers to the status quo, as dictated by 

court precedent—and in many cases this is not appropriate—there 

are circumstances where the status quo is unlikely to persist, and 

17

hence, is not the relevant benchmark for comparison. In the oil industry, as I will discuss in a moment, there is pressure to create 

very large firms. A decision made by antitrust authorities to block 

or permit a specific merger does not eliminate that pressure. 

How does this logic apply to the oil industry? For a medium-sized 

oil company, development of a single field can be ‘‘bet the company 

project.’’ The risk of bankruptcy is deadly on Wall Street, so a medium-sized oil company is just not in a position to take on the very 

large risks of large developments. Many of these risks associated 

with international development are not created by physical and 

technical challenges, although, of course, there are plenty of these, 

but are in fact created by political challenges like unstable governments, rebel groups and the like, shifting national borders. So size 

helps here as well by improving a company’s bargaining power. 

So while I think in general it’s very important to consider industry evolution in the context of evaluating mergers, in the specific 

case of oil industry, the industry evolution is putting great pressure 

on the firms to grow internationally. 

The Federal Trade Commission does a very thorough job investigating oil company mergers. I should know. And if you do not like 

what their conclusions are, you can actually blame me for part of 

it. Big mergers have generally required extensive divestitures to 

preserve domestic competition, and the production and retailing of 

gasoline have not become more concentrated in recent years. 

Let me turn to vertical integration. Oil companies are the quintessential vertically integrated firms, a phrase which here means 

that a single company performs all of the activities to get oil from 

the ground and into gas tanks: exploration, drilling, pumping, oil 

transport, refining, gasoline transport and retailing. In recent decades economists’ understanding of the effects of vertical integration 

have changed. The classical Chicago School view of vertical integration is that vertical integration had no effect. Based on this view, 

mergers could be analyzed level by level. But we now know that 

that is not a good plan, that vertical integration does have an effect. 

The problems of firms that meet each other in multiple markets 

is clearest in my home State of California. West Coast gasoline 

transport is controlled by an oligopoly of 7 firms, who also control 

refining and retailing. These firms use each other’s transport facilities and trade gasoline, and to put it bluntly, they have a gun to 

each other’s head, which makes it very difficult for any firm to engage in aggressive pricing, or even to sell gasoline to entrants like 

Costco. The Federal Trade Commission is well aware of this threat, 

and we were very careful to make sure that it did not get worse 

during the recent mergers. 

Unilateral effects. Game theory has been popularized by the book 

and movie ‘‘A Beautiful Mind,’’ and in fact, since 1994, 23 individuals have received the Nobel prize in economics, and 12 of those 

prizes were for game theory. In antitrust game theory issues are 

known as unilateral effects, and they barely register in antitrust 

court cases even though they have been present in the DOJ Merger 

Guideline since 1982. 

I am running out of time. I will sum up. 

18

Perhaps the most important conclusion I would leave with the 

Committee is that we are fortunate that the hysteria of the 1970s 

has not returned and that Americans have accepted the high price 

of fuel without demanding regulations that caused so much damage 

to our fuel supply back then. Over the past 30 years this country 

has deregulated trucking, airlines, rail, gasoline, oil, natural gas 

and long distance telephony. It is in the process of deregulating 

electricity and local telephony, and overall, the deregulation of the 

U.S. economy has produced enormous gains for American consumers. We should not let problems—and this is not to say that 

they are not real problems, because they are—return us to the 

1970s. 

Finally, I appreciate the questions and issues that motivate these 

hearings. Our understanding of antitrust continues to progress, 

and the oil industry has been a test case for antitrust enforcement 

for nearly a century. I also suspect that to oil company executives, 

it feels more like the cross-hairs antitrust than a test case. 

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

for the record.] 

Chairman SPECTER. Thank you, Mr. McAfee. 

Our next witness is Mr. Tyson Slocum. He is the Acting Director 

of Public Citizen’s Energy Program, a position he has had since the 

year 2000. He has a bachelor’s degree from the University of 

Texas—

Mr. SLOCUM. Bachelor degree, although University of Texas is 

such a great school, that I think a bachelor’s degree equals a master’s degree. 

Chairman SPECTER. So be it. 

[Laughter.] 

Chairman SPECTER. Author of three books on energy issues. 

Thank you for coming in today, Mr. Slocum, and the floor is 

yours. 

STATEMENT OF TYSON SLOCUM, DIRECTOR, PUBLIC 

CITIZEN’S ENERGY PROGRAM, WASHINGTON, D.C. 

Mr. SLOCUM. Mr. Chairman, thank you very much. I too am disappointed that the oil companies are not here to defend their 

record profits. The last time the oil companies were before Congress, in November, they were allowed to present their testimony 

without testifying under oath, and today I was not administered 

such an oath, and I do not know if it is possible for me to be administered an oath for my testimony today, Mr. Chairman. I would 

like—

Chairman SPECTER. Yes, it is. 

Mr. SLOCUM. May I be administered an oath, Mr. Chairman? 

Chairman SPECTER. No. 

[Laughter.] 

Mr. SLOCUM. OK. 

Chairman SPECTER. You are not the Chairman of this Committee, Mr. Slocum. 

Mr. SLOCUM. Yes, sir, that is correct. 

Chairman SPECTER. Somebody else got confused about that a 

couple of weeks ago. 

[Laughter.] 

19

Mr. SLOCUM. I would just to, for the record, say that my testimony today, I swear to be the truth, so help me God, Mr. Chairman. 

Chairman SPECTER. You can be charged with making a false official statement even though you are not sworn, so there are criminal penalties available to you, Mr. Slocum. They are available to 

you, so be careful. 

[Laughter.] 

Mr. SLOCUM. Yes, sir. Mr. Chairman, I have done an enormous 

amount of research into the correlation between the record profits 

by the industry, and the record prices that consumers are paying. 

My research clearly shows that there is a direct connection between all the recent mergers that we have allowed in the petroleum industry and these record prices which translate into the 

record profits. 

Now, my research, I took a look at what the market concentration was in the refining sector 10 years ago and compared it to 

what the market concentration is today after a number of very 

large mergers of not only vertically integrated oil companies, but 

refining companies as well. 

In 1993, the largest five oil refiners in the United States controlled 34.5 percent of national refining capacity. The largest 10 in 

1993 controlled 55.6 percent of capacity. Now fast forward to 2004 

after a number of very large mergers. The largest five now have 

56.3 percent of capacity, so today the largest five refiners control 

more capacity nationally than the largest 10 did a decade ago, and 

the largest 10 refiners today control 83.3 percent of national refining capacity. That is alarming levels of concentration. 

My findings have been confirmed by various Government investigations, including the Government Accountability Office. They 

issued a great report in May of 2004 which clearly showed a link 

between all of these recent mergers that led to industry consolidation, which translated into higher gasoline prices. The GAO report 

specifically found high levels of concentration on the East and West 

Coast and in the Midwest, where we have seen a majority of the 

severe price spikes. It is very important to know that this GAO report underestimates the true price influence because their analysis 

of market concentration refining industry ends in the year 2000. 

Since 2000, of course, we have allowed the mergers of Chevron 

and Texaco, and Conoco and Phillips, and a large independent refiner, Valero, has acquired a number of refining companies. So if 

anything, the analysis done by GAO has become much worse from 

a consumer and antitrust standpoint since their analysis ends in 

2000. 

The Federal Trade Commission issued a very interesting investigation in March of 2001. They took a look at price spikes specifically in the Midwest. They found evidence of unilateral withholding 

on the part of oil refiners, and I am quoting from an excerpt from 

that FTC report. They say, ‘‘An executive of one company made 

clear that he would rather sell less gasoline and earn a higher margin on each gallon sold, than sell more gasoline and earn a lower 

margin. Another employee of this firm raised concerns about oversupplying the market and thereby reducing the high-market prices. 

A decision to limit supply does not violate the antitrust laws absent 

20

some agreement among firms. Firms that withheld or delayed shipping additional supply in the face of a price spike did not violate 

antitrust laws. In each instance the firms chose strategies they 

thought would maximize their profits.’’

Most certainly the companies are maximizing their profits, 

Exxon Mobil, $36 billion in last year alone. What is interesting is 

that Federal Trade Commission has disputed some of the GAO 

findings, saying that their methodology was wrong. But how can 

the FTC certify that markets are fully competitive, if they themselves have found evidence of unilateral withholding? If one company can unilaterally withhold, that clearly means that there is inadequate competition, because if there was plenty of competition, 

another competing firm would be very happy to step in and supply 

the market. So the fact that evidence of unilateral withholding exists is clear evidence that we uncompetitive markets, and again, it 

is due to all the recent mergers that we have allowed. 

What is the exact financial result from all this—

Chairman SPECTER. Mr. Slocum, could you summarize at this 

point, please? 

Mr. SLOCUM. Yes. There is a table that the Department of Energy puts out that shows refiner profit margins by year. In 1999, 

for example, U.S. oil refiners made 22.8 cents per gallon refined. 

By 2004 that margin had increased to 40.8 cents per gallon refined. 

That is an 80 percent jump, and I think that clearly illustrates the 

lack of adequate competitiveness. 

Thank you very much, Mr. Chairman. 

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

for the record.] 

Chairman SPECTER. Thank you, Mr. Slocum. 

Our final witness is Mr. Tim Hamilton. He is the founder and 

Executive Director of the Automotive United Trades Organization, 

a position he has held and an organization he has run for some 20 

years now; has been a petroleum industry consultant, and he has 

testified before many legislative bodies and assisted the FTC and 

Department of Justice in investigations. Mr. Hamilton, we appreciate you coming in, and we appreciate your testimony. 

STATEMENT OF TIMOTHY A. HAMILTON, FOUNDER AND EXECUTIVE DIRECTOR, AUTOMOTIVE UNITED TRADES ORGANIZATION, SEATTLE, WASHINGTON 

Mr. HAMILTON. Thank you. For the record, my name is Tim 

Hamilton. There is some good news here: I am not an economist, 

so I am going to do this as simple as I can. 

I got in the business in 1974 with Exxon when I was 24-yearsold. I filed my first tax return when I was 12. I learned from the 

street up. If you want to know what happened with Katrina, if you 

want to know why San Francisco is higher than LA, I can show 

you. I know how the gasoline moves. In the industry you would 

come to me if you wanted to figure out how to build a gasoline convenience store or purchase a string of stations, and try to figure out 

what the oil companies are doing. I do not care about their profits, 

does not bother me. ‘‘Profit’’ is not a bad word. I worry about the 

way they get it. 

21

The way they get it is simple: count the trucks. When we consolidated the industry, not having a law degree, I learned very simple 

phenomena. Antitrust laws busted up the Rockefeller Trust, so we 

did not have one company holding all the gas in one tank and dictating terms. What happened through mergers and acquisitions 

and changes in industry, is that the industry put all of its gas back 

in one tank. Today the Standard Oil Trust has been restructured 

physically and logistically, but on paper there are four identities. 

So there is an incentive to short market. 

And what happens is real simple. Following Katrina or following 

a refinery fire in California, what you see is they count the trucks. 

As the gas comes into the tank from the refinery, they have removed it by exporting or curtailing production so there is very little 

there, minimal reserves. So when we have a problem with the increase in price or increase in demand, spring plant, kids get out of 

school, or a refinery problem, what happens is there is a draw. It 

is called a drawdown. So as the trucks go out and the level of the 

tank starts to hit the bottom—and we are sitting on sometimes a 

two or 3-day supply—they go, ‘‘How many trucks came in today? 

90. How much gas came in? 90 trucks worth or 95, or 80. Oh, 80? 

Raise the price 10 cents. How many came in today? 85. Raise the 

price 10 cents.’’ And they do it until it balances. 

I went into the first gas lines in 1974 when I tried to order my 

first load of gas. I have been experiencing and watching and analyzing gas rationing at the pump. The market now calls it allocation by the market supply. It is rationing, it is eBay. We have a 

shortfall. The bigger the shortfall you make it, the more trouble 

you are in. 

Antitrust laws prevented collusion. We have an Internet and 

technology today where I can show you that every one of these limited suppliers that is left, can change their price instantaneously. 

The other ones, no. They know how many gallons they have. They 

share the same tank. They know when the fuel is coming in. They 

know what transport is coming, everything. There is no trade secrets in the gasoline business. When you know this, you are provided an incentive to raise price by rationing it. We get the price 

up so high because of restriction at the refinery, that it brings the 

price of crude up. If you got the price of crude to fall dramatically, 

but it took $3.00 a gallon to keep you from running out today, the 

price would not go down. In fact, if you were OPEC and you wanted to get a share of that money, you did not want Exxon Mobil to 

have it all, you would raise the price of crude. Like if we went from 

14.95 for a 2 by 4, what do you think it does to logs on a landing? 

It is sucking the crude oil up, unless you have a disruption, such 

as in Iran, that people are worried about. 

I will summarize by saying this. I work all over the West with 

folks trying to figure out alternative fuels, trying to figure out how 

to use ethanol, how to do everything that the President mentioned 

last night. It is going to take 15, 20 years, trust me. Between now 

and then we have got this Committee. How do we use oil we are 

hooked on and stuck with and how is it sold? And you need to understand how to count the trucks, and to know who bought the gas 

and who is on first, and how none of the fuel sold in the futures 

market goes anywhere other than one dock in New York Harbor, 

22

but can affect the price of gasoline in Idaho. These things you need 

to know. 

Thank you. 

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

Chairman SPECTER. Thank you very much, Mr. Hamilton. 

We will now proceed to 5-minute rounds of questioning, and to 

the extent witnesses can make answers brief, all of the Senators 

would be appreciative because we do not have a whole lot of time. 

Commissioner Kovacic, beginning with you, you have heard the 

testimony of Mr. Wells about concentration of power, Attorney General Blumenthal about concentration of market power leads inexorably to increased prices, an interesting conclusion by Mr. Hamilton about restructuring of Standard Oil, kind of have some of the 

overtones of collusion in all six companies agreeing not to appear 

here today. What can the possible justification be for some 2,600 

mergers in the last 15 years, including the merger of the biggest 

and the second biggest company, in a context where the prices are 

sky high, $2.36 a gallon; every 10-cent increase leads to $14 billion 

from the American consumers; cries of pain coming from everybody 

who goes to the gas pump. How can the FTC justify allowing so 

many mergers? 

Mr. KOVACIC. Senator, in most instances the significant mergers 

were not allowed to proceed without qualifications, and as Professor McAfee mentioned, in the large number of transactions, the 

Commission took a great deal of care to demand divestitures where 

the Commission believed that any competitive overlaps would lead 

to price increases. 

Chairman SPECTER. Well, you could have some qualifications, but 

you still end up with a merger. Commissioner Kovacic, would you 

like to slow down that merger process if you had different statutes 

to work under? When you worked as an attorney for the Commission, did you ever say, ‘‘I wish Congress would do something here 

to give us some more power to stop this. We do not have the power 

under existing law?’’

Mr. KOVACIC. In many respects, as your question suggests, our 

decisions take place in the context of what courts are permitting 

us to do. For my own part, I do have concerns when we look at the 

general direction of our merger jurisprudence over the past 30 

years. I wonder whether or not that jurisprudence has begun in 

some instances to place excessive demands on the agencies in the 

type of proofs that’s required. 

Chairman SPECTER. Excessive demands on the agencies and not 

enough demands on the Congress. That is a fair accusation. Is that 

what you are saying? 

Mr. KOVACIC. I would say that I think we are approaching the 

point at which a broader reconsideration of whether the lines are 

drawn in the right place is appropriate, and I—

Chairman SPECTER. I have watched the merger and acquisition 

field in more than oil, everywhere you turn around. 

Attorney General Blumenthal, you have had a lot of experience. 

Do you think we need to revise Federal laws? 

Mr. BLUMENTHAL. I do, Mr. Chairman, and the Commissioner 

has put it very politely, that the law places excessive demands on 

23

the agencies like the FTC. I would establish a presumption in the 

law that, for example, if the HHI index, the Herfindahl-Hirschman 

Index, is at a certain level, the presumption should be against a 

merger. I would put a presumption in the law that the industry 

bears the burden of showing a benefit to the consumer from any 

merger in a concentrated market. 

Chairman SPECTER. That is a good idea on shifting the burden 

of proof and the presumption, but how about some fundamental restructuring of our antitrust laws? We have not done a bit of that 

in decades. They have just been static. And there have been enormous changes and enormous resiliency and enormous innovation 

and brilliance on the part of the companies in all fields. How about 

something very fundamental on changing our laws? 

Mr. BLUMENTHAL. I think that the Congress ought to consider 

fundamentally restructuring the law to take account of the challenges of enforcement that relate to modern technological advances, 

the use of e-mail, for example, that may disguise or inhibit prosecution of collusion, making detection, apprehension and prosecution 

more difficult. I think that there needs to be a restructuring that 

essentially takes account of the anticompetitive trends in the 

American corporation today, and—

Chairman SPECTER. My red light is about to go on. Years ago, 

a judge in the Eastern District of Pennsylvania named Ganey, sent 

some electric company officials to jail. Do you think that might be 

salutary? 

Mr. BLUMENTHAL. Any time an executive goes to jail, it has a 

very salutary effect, as I know from my personal experience, as you 

do from yours. But let me just add, on the Exxon Mobil merger, I 

opposed that merger repeatedly. I opposed the merger even after 

the divestiture, which we called completely inadequate. It involved 

some sale of retail outlets in the Northeast. I had no significant or 

material effect, and that is another area where restructuring the 

law may be appropriate. 

Thank you, Mr. Chairman. 

Chairman SPECTER. Thank you. My red light went on in the middle of your answer. 

Senator Kohl? 

Senator KOHL. Just to followup on the Chairman’s point, the 

merger has already occurred. You know, it is not as though we can 

fix the problem by tightening up our restrictions and laws on mergers. The mergers have occurred, and as you point out, Mr. Slocum, 

some 10 companies control 80 some percent of the capacity. So if 

we are going to do something significant and serious, do we need 

to undo these mergers? Should we be breaking up some of these 

largest companies to get back to a status of true competition? What 

do you think, Mr. Kovacic? 

Mr. KOVACIC. I do not think we have seen any basis for going 

back and rolling back specific transactions to effectuate 

divestitures, but I would add that I think a major focal point of the 

investigations that this body has insisted that the FTC perform is 

indeed to develop a better basis for understanding precisely what 

effects we have had with merger policy over time. This collaboration, which I would add does involve a close cooperation with our 

24

State counterparts, is designed in many respects to answer these 

questions. 

Another hesitation I would have, Senator—and I would agree 

completely this is an area which merits continuing attention—is as 

we have alluded to in the comments so far, our own assessment 

and those of outsiders who have looked at the work of the GAO, 

that we applaud the effort they have taken, we do dispute the 

soundness of some of the specific findings. So my general view is 

that an effort to go back and restructure transactions that have 

taken place would not be merited at this time, but I agree with you 

completely, and the tenor of many comments on this panel, that 

this is an area that warrants our continuing efforts to ask whether 

we got those transactions right. 

Senator KOHL. Who would like to comment that we should, in an 

effort to get back to competition, that we really need to undo some 

of these mergers? Mr. Blumenthal. 

Mr. BLUMENTHAL. Yes, Senator Kohl. Even under current law, 

breaking up a company would be an appropriate remedy for a court 

to order if there has been misuse of monopolistic power, if there 

has been predatory pricing, or if there has been other misuse of 

market power, breaking up, cracking down on bigness, is an appropriate remedy, even under current law. So that is why I think the 

investigation is essential, and it ought not be just a survey or a 

study, it should go to the misuse of monopolistic power that all of 

us sense exists to some extent. We know at the State level it exists 

to some extent. There are indications of it from our investigation. 

But, really, we need effective partners in this effort. 

Senator KOHL. Another question before my time expires, a strategic refining reserve operated by the Government to really act as 

a break on the monopolies that the industry has on refining capacity, I have a bill in to authorize the Government to build a strategic refining capacity reserve. Do you think this would be a good 

idea? Do you think we ought to do it, or wouldn’t that have an impact on the ability of these companies to just summarily raise 

prices? Mr. McAfee? 

Mr. MCAFEE. Canada tried this with Petro-Can, and Petro-Can 

became the high-priced firm in the industry. Generally, running a 

refinery is quite a complex task. If the Federal Government decides 

that is what it wants to do, it should probably subcontract the 

work, and if it doing that, then in essence all it is doing is becoming a guaranteed buyer. So I think that it is going to be hard to 

make that actually add to our capacity. 

In contrast, working to try to make it possible for new entrants 

to enter and to remove the restrictions that block new entrants 

from entering the refining business would actually be a great help 

to the industry in improving competitive effects. 

Senator KOHL. Mr. Slocum? 

Mr. SLOCUM. I actually think that it is a very sound idea. I think 

that having the Government build at least one refinery would help 

mitigate some of the market power that we have seen, and quite 

frankly, I do not understand why the large oil companies are not 

building new refineries. Just like Enron and Ken Lay during the 

California energy crisis, when that company blamed environmental 

laws for the lack of adequate supply, I think too, I see similar probVerDate 0ct 09 2002 09:17 Jul 19, 2007 Jkt 033417 PO 00000 Frm 00032 Fmt 6633 Sfmt 6633 S:\GPO\HEARINGS\33417.TXT SJUD1 PsN: CMORC
25

lems with the oil industry’s arguments. The fact is, is that there 

is a small company called Arizona Clean Fuels, it is not affiliated 

with any of the vertically integrated companies. They have obtained State air quality permits, they have obtained draft Federal 

air quality permits to build a very large refinery outside of Phoenix, Arizona. My question to the oil companies is, if a small startup 

company can go through the permitting process to build a refinery, 

why cannot the world’s richest corporation, Exxon Mobil, do the 

same with its almost unlimited resources? It is not in their financial interest. 

Senator KOHL. Thank you. 

Thank you, Mr. Chairman. 

Chairman SPECTER. Thank you very much, Senator Kohl. 

Under our early bird rule, we go next to Senator Cornyn. 

Senator CORNYN. Thank you very much, Mr. Chairman. 

Thank you. There is so much to talk about and so little time. I 

am reminded of a quotation I have read and heard that says, when 

your only tool is a hammer, you tend to think of every problem as 

a nail. Translating that into the present context, obviously, there 

are some things Congress can do, and I am glad we are looking 

into what we can do, but there are some things we cannot do. For 

example, the largest single factor in the price of gasoline is the 

price of a barrel of oil. Obviously, we have some problems with 

that. One has to do with our own sort of shooting ourselves in the 

foot by putting a lot of our domestic oil reserves out of bounds, particularly off of the Pacific Coast, off of the coast of Alaska, and onshore at ANWR, along the Gulf Coast, closer to where I live, and, 

of course, along the Atlantic Coast. Obviously, that reduced supply 

increases the price, and translates into higher prices at the gas 

tank. 

When it comes to actual refining capacity, the number of refineries has gone down, that is true, and I think we have heard an 

explanation or at least a partial explanation for that. The environmental regulation—overlays Government imposes on the creation 

of new refineries—makes it not as economically advantageous as 

increasing the capacity of existing refineries. And, in fact, while the 

number of refineries has gone down, the refining capacity has expanded dramatically by expanding existing refineries and thus the 

supply. 

We all know political instability is a problem. When Iran says, 

‘‘If you vote to refer us to the IAEA because of our nuclear ambitions and we threaten to cutoff the oil supply, our oil exports, it 

sends shock waves throughout the market, creating instability.’’ 

And, of course, as I mentioned earlier, the matter of demand continues to be a chronic problem. 

Professor McAfee, if I may ask you this, with regards to the profits of oil companies, which seem to be the focus of concern for so 

many, my understanding is that their profits, in terms of the dollar 

profit based on sales, is actually not out of line with other industry. 

For example, over the last 5 years, the oil and natural gas industry’s earnings averaged 5.8 cents compared to an average for all 

U.S. industries of 5.5 cents. If we want to get into the business of 

windfall profits taxes or regulating American industry, there are a 

number of other industries including the banking industry, the 

26

pharmaceutical industry, the real estate industry, health care, insurance, software and services, consumer durables, food, beverage 

and tobacco, that actually generate a greater profit for each dollar 

sale. Could you respond to or comment on that, please, sir? 

Mr. MCAFEE. Absolutely. The way economists and Wall Street 

looks at profits are, are the profits large enough to cover the risk? 

So if the oil industry is composed of various levels of risk, exploration, extremely risky. Rates of return for exploration should be 

in the 17 to 20 percent range. On the other hand, refining, less 

risky but still fairly risky, what with price volatility, so again, you 

would be looking at 15 percent. The actual percentage return in the 

oil industry is on the order of 10 percent, and so in fact, looks low 

by Wall Street standards. That is why you see that it is lower than 

many other industries like banking in rates of return, or newspapers, for example. And newspapers, not so risky, and yet, much 

higher rates of return. 

Senator CORNYN. Thank you, Mr. Chairman. 

Chairman SPECTER. Thank you very much, Senator Cornyn. 

Senator Feinstein? 

Senator FEINSTEIN. Thank you. Mr. Chairman, I was just thinking, you know, this is really an interesting hearing. I thank you. 

I think people testifying are very candid and very frank, and I 

think that’s very useful. 

And I think it leaves us with a very big problem. We have a 

whole airline industry capitulating partially because of the price of 

fuel which drives astronomical problems for the industry because 

they cannot raise prices because of deregulation. Just look at the 

profits of these companies in 2005 over 2004: Exxon, 43 percent 

profit; Chevron, the best, 6 percent; ConocoPhillips, 66 percent 

profit; Valero, 100 percent profit in a year, despite all of the things 

that are happening. I think that big oil in America has the consumer in a real vise, and I think it is up to us to do something 

about it. 

Dr. McAfee, let me ask you this question. You study this. You 

have no axe to grind in this thing at all. If we could do one thing 

to create a sense of responsibility in this sector of the energy economy in one sense of consumer respect, what would that one thing 

be? 

Mr. MCAFEE. You kind of caught me off guard. 

Senator FEINSTEIN. I know, it is hard to answer. 

Mr. MCAFEE. Let me start with the consumers because that is 

actually part of my prepared statement. Many Americans do not 

shop around, and in my home in Pasadena, going two miles distance you can find prices that vary by 10 cents. The only reason 

you can find that is because people, some people are buying at 10 

cents more, and a sort of ‘‘back of the envelope’’ calculation says if 

a third of the population will pay an extra dime, the average price, 

not the maximum price, but the average price will rise also by a 

dime, and the maximum price by 20 cents. This is just the rational 

response of profit-seeking firms to the fact that some consumers 

are not shopping around. 

Now, we may not want them to shop around, but that would be 

a way of reducing some of the profits on refining and on retailing, 

as if people were more cognizant of the price. One thing that is imVerDate 0ct 09 2002 09:17 Jul 19, 2007 Jkt 033417 PO 00000 Frm 00034 Fmt 6633 Sfmt 6633 S:\GPO\HEARINGS\33417.TXT SJUD1 PsN: CMORC
27

portant is shopping around confers effects on other people. That is, 

if I shop around, because that pushes down the prices, makes demand more elastic, that will cause the other people to benefit. 

Senator FEINSTEIN. That is fine, but we are a legislative body. 

And if the figures are correct—and I have no reason to doubt this 

study that Mr. Slocum has done—and you have 10 companies controlling 85 percent of the market, and 5 companies controlling, 

what is it, 55 percent of the market? 

Mr. SLOCUM. That is correct. 

Senator FEINSTEIN. Something is wrong. What can we do to 

break this up? I thought Senator Kohl asked a very pertinent question, and everybody kind of backed away from it. But there is a 

problem out there and it is an oligarchy. 

Mr. MCAFEE. Most of our largest industries, in fact, pretty much 

every mature industry—that is to say not a brand new industry—

is controlled by an oligopoly. When you have two, three firms you 

get pretty nervous. Four firms, five firms, you are starting to see 

pretty competitive pricing, and when you get to seven or eight, usually—and of course, vertical integration is a problem here—but 

usually you start to see quite competitive outcomes. 

One thing I would like to say about breaking up the industry is 

if you break up the oil industry with its current level of concentration because of the level of concentration, you are going to have to 

go after airlines, automobiles, steel and many other sectors of the 

economy where the concentration levels look at least as large. 

Senator FEINSTEIN. Mr. Blumenthal, do you see where I am 

going? I mean, there is so much force not to touch big oil in this 

Congress, I am looking for one thing that is doable that we can do 

that will be helpful, that will give the consumer a market that at 

least relates to their concern. I do not understand how in the energy sector—and this I found through Enron and others in California—there is no consumer loyalty, as there might be in any 

manufacturing or other things. 

Mr. BLUMENTHAL. If I can answer very directly, although it is 

not a panacea, it is not a magic bullet, abolishing zone pricing 

would not only make consumers more aware of the phenomenon 

that Professor McAfee has so ably described, but also eliminate 

some of those disparities and drive prices down, because right now 

a lot of retailers are bound by the price that they are charged, 

which in turn is dictated by computer runs that the big oil companies do in deciding who can bear what kinds of burdens. And they 

divide the States and the city of San Francisco or Los Angeles or 

Pasadena into different areas, more likely the States into different 

areas, and charge disparate prices, often higher in the inner cities 

because they know those consumers are less likely to shop around, 

as well as higher in the suburbs. 

But I just want to add a footnote. I think that any sort of breaking up of a company depends on a finding of misuse of its power. 

So if you talk about airlines or automobiles which are certainly by 

no means in the same economic position, and perhaps not misusing 

their power in the same way, you are not talking about that remedy. 

Senator FEINSTEIN. Excellent point. Thank you. I think my time 

is up. 

28

Thank you, Mr. Chairman. 

Chairman SPECTER. Thank you Senator Feinstein. 

Senator Coburn? 

Senator COBURN. Thank you. 

I was pretty interested in Senator Kohl’s idea about a distillate 

reserve, not distillate refineries capacity, but distillate reserves. I 

would like your comment. If we had a significant distillate reserve 

in this country, much like our petroleum reserve, but it was designed to use and smooth out price disruptions, what would you 

think of that? Anybody want to answer? Go ahead. 

Mr. HAMILTON. The Northeast heating oil reserve, the same 

problem we had in Canada, it is triggered by a price that gets so 

high, you know, they did not want to let go of it. So if you created 

a reserve like that—and it is important to understand that diesel 

is the key, everybody says gas, follow the diesel. It went up way 

above regular unleaded because when we raised the price, we did 

not have discretionary driving. So we are driving this diesel up, 

killing everybody out there in small business and agriculture, and 

it is the one thing that you could do, but you would have to do it 

in multiple spots. You would have to do it in six or seven spots, 

and then the most important thing that you do is follow the industry. 

When the price started to move, dump it. Do not let some unforeseen thing happen or get it real complicated on the trigger mechanism. Trigger it by the price because that is what you are after, 

and everything else will flow. 

Senator COBURN. I want to ask this question, and anybody that 

wants to answer it, can. If there are anticompetitive behavior ongoing, whether it is through vertical integration or through pricing 

mechanisms at the wholesale level, where is it? If it is there, where 

is the anticompetitive behavior? What level? Is it in exploration? Is 

it in production? Is it in refining? Is there anticompetitive behavior 

in refining, or is it in distribution? Where is the anticompetitive behavior that would create artificial price increases? 

Mr. SLOCUM. I think the evidence suggests that the bulk of it is 

in downstream, in refining, because that is where we have seen 

very, very high levels of concentration, and the practices by the refiners ends up having an influence on the price of crude oil, which 

does not make any sense, but often I see traders changing their positions on crude oil depending upon what stocks are of gasoline. 

Then when you add in the fact that we have got a number of 

vertically integrated companies that are into exploration and production, and they own their own downstream facilities, you have 

got a lot of trading within affiliates that the Government does not 

seem to be very good at tracking at this point. 

Senator COBURN. Yes, sir? 

Mr. KOVACIC. Senator, one consequence of the merger reviews 

that we do—and I think Professor McAfee gave you a flavor of 

what we do—we look at extraordinary volumes of information when 

we look at mergers, sometimes what the parties call outrageously 

extraordinary volumes of information. Sometimes it is like standing 

under Niagara Falls with a Dixie cup when you look at the amount 

of material that comes in. But in our merger reviews we are extraordinarily attentive to finding, written in electronic evidence of 

29

classic anticompetitive behavior, that is, illegal agreements under 

rivals, illegal improper exclusionary behavior among rivals, and in 

our many examinations we have seldom found that kind of classic 

anticompetitive behavior. On some occasions when we have found 

it, we have challenged it separately. That was the essence of the 

Unocal case. 

What we are doing again in the current investigations, which involve the use of compulsory process—these are not mere surveys or 

voluntary inquiries—is taking another look to look again for this 

information, because what we found from our experience is that for 

both express collusion, but even for tacit agreements where you 

have arms-length understandings, people have to write that down. 

They have to document how the system operates, and communicate 

that to people who day in and day out make hundreds of decisions. 

I want to assure you that we look carefully for exactly that evidence. 

Senator COBURN. Thank you. 

Professor? 

Mr. MCAFEE. The place that I am most concerned has to do with 

entry of independents, independents like Race Track or Wa-Wa or 

Costco are actually quite disruptive on any kind of cooperative 

agreements. They serve us well as consumers. The problem, say for 

Costco, is that in order for Costco to start selling gasoline, it has 

to buy it from a refiner. If the refiners all understand that that will 

undercut them at the retail level, and there are not very many of 

them, and in some sense, there is no one to break out as an independent refiner, it is very hard for Costco to enter, and it has not 

entered very strongly on the West Coast relative to the East Coast 

where you have independent refiners. 

My major concern is actually the vertical integration concern, 

and not that these companies are not building refinery capacity as 

best they can, but that they are not letting independents in, and 

that makes for a cushier environment. But east of the Mississippi—excuse me—east of the Rockies, with so many refineries 

and so much interconnectedness, it is not really as serious an issue 

as it is west of the Rockies where you only have seven firms. 

Senator COBURN. Thank you, Mr. Chairman. 

Chairman SPECTER. Thank you, Senator Coburn. 

Senator DeWine? 

Senator DEWINE. Mr. Kovacic, in response to the price spikes on 

the West Coast and the Midwest in 2000, Senator Kohl and I, as 

Chair and Ranking Member of the Antitrust Subcommittee, sent 

the FTC letters requesting that the Commission investigate the 

causes of these price hikes, and look for possible price gouging and 

price manipulation. As a result, as you know, the FTC has developed and maintained a program of gasoline price monitoring, which 

continues to this day. We are hopeful that your numerous investigations and price monitoring has prevented at least some anticompetitive behavior in these markets. 

First, let me ask you, do you think the program has been helpful? And next, do you have a sense of whether the illegal price 

gouging or price manipulation is still happening today? 

Mr. KOVACIC. I think it has been very helpful, Senator. It has 

given us a much better market-by-market appreciation for what is 

30

taking place in the market that not only informs our understanding 

of phenomena in the individual metropolitan areas, but it feeds 

back into what we do when we look at mergers. Second, it has been 

a good platform for developing cooperation with our State counterparts and the State Attorneys General office to build a form of information sharing and cooperation that did not exist before. I think 

there is a lot more we can do to put information that we gather 

in the course of these activities into the public domain to facilitate 

debate in this body and discussion among our energy policy counterparts. 

I do think what we are seeing in the course in the course of that 

inquiry—and I think it will be enriched by what we learn in the 

course of the pending investigations—is a better understanding of 

precisely why prices went up, in what instances did firms make a 

conscious decision or not to withhold product from the market? I 

think that the inquiry that we are doing now is very much informed by what we learn through this process, so that I expect that 

what we will be able to report to you at the end of the spring is 

a fuller assessment and a more complete factual assessment of exactly why the phenomena we saw took place. 

Senator DEWINE. We can look for that at the end of the spring? 

Mr. KOVACIC. Yes, sir, and I am failing to recall the exact date 

by which that is required, but we will be on target. 

Senator DEWINE. That is fine. 

Mr. WELLS. Senator? 

Senator DEWINE. If you could? 

Mr. WELLS. Absolutely. I could quickly respond that we appreciate the excruciating detail in which the FTC has designed their 

studies to assess mergers, and I think the big fundamental difference between what they do and what we did in our study was, 

they typically look at the trees, and we had an opportunity to look 

at the forest, and we came up with different results. So maybe they 

need to consider how they actually are assessing mergers. 

Senator DEWINE. Mr. Wells—yes? 

Mr. BLUMENTHAL. If I could? 

Senator DEWINE. Quickly, please. Five minutes is not long. 

Mr. BLUMENTHAL. Resources for both the FTC—Mr. Kovacic, I 

know of his work as General Counsel, he has worked very hard and 

energetically. The Congress could make a very profoundly important statement by mandating additional resources for exactly the 

kind of antitrust work that we have been discussing this morning. 

Senator DEWINE. Mr. Wells, Mr. McAfee, Mr. Blumenthal, Mr. 

Hamilton, have testified that the oil companies have been shutting 

down refineries to manipulate the supply of gasoline and increase 

their profits. On the other hand, the oil companies claim that refining is a real boom or bust industry which makes it hard to estimate 

how much capacity they really will need, and that too many regulations really prevent them from building new refining capacity. Who 

really is right? 

Mr. WELLS. I know we have heard that from the industry. I 

know there were 300 refineries, and now there are fewer than 150. 

Instead of building new refineries, they mention deterrents like 

‘‘not in my back yard,’’ or ‘‘it costs too much.’’ We also know that 

we are going offshore and buying and bringing in gasoline. It is 

31

cheaper to buy it in Europe and bring it here than it is to produce 

it, from an economic standpoint. 

I think a big question to ask the industry today, given the record 

profits that they are entertaining today, do they still stand behind 

the statement that it is too expensive to build a new refinery? 

Senator DEWINE. Good question. 

Professor McAfee? 

Mr. MCAFEE. One thing, ski resorts make their money in the 

winter. The oil industry is much the same. In 1998 and 1999, when 

prices were very low, the oil industry was actually not making 

much money, and that reason for not building new refinery capacity made a fair bit of sense. 

Today with the prices so high, we would expect to see more investment in refinery capacity. 

Senator DEWINE. Mr. Slocum? 

Mr. SLOCUM. I spent a lot of time reading the corporate annual 

reports of oil companies, and Exxon talks about and breaks down 

its profit margins in its U.S. oil refining business, and they have 

not released their 2005 annual report yet, so we do not have that 

level of detail, but their 2004 annual report, available at 

exxonmobil.com, shows that their U.S. oil refining return on average capital employed in 2004 in the United States was 28.6 percent 

rate of return. 

And Exxon Mobil, when they are talking to shareholders and to 

Wall Street, they emphasize the return on average capital employed, and they never use this other thing that they talk about 

when they are dealing with the general public, trying to deflect attention away from their profits. Exxon Mobil, when they are talking to the general public, uses the simplistic return compared to 

total revenues. But if you look at the way they talk to Wall Street, 

they use return on average capital employed, in 2004, 29 percent 

rate of return on their oil refining business. That is a pretty 

healthy margin. 

Senator DEWINE. Mr. Hamilton? 

Mr. HAMILTON. Look to Bakersfield, and the highest prices, the 

higher margin of what Wall Street calls refinery heaven, and a 

company decided to close their refinery rather than sell it in a 

monumental fight over that that I was involved with, and the great 

discrepancy between what the company said and what everybody 

else said, and their own internal documents. They made a lot of 

money back at other refineries by closing that one down. That 

shortened the market, and those are the people you return to to 

cure the problem, and it still continues one. When you go to the 

environmental rules and regulations, in the old days, you could not 

meet to decide how many refineries you had and who had them 

and what size they were. It would have broke antitrust laws. 

But even in the environmental rules and regulations—and I sat 

in a lot of them—and we had annoyingly environmental regulators 

acting as meeting facilitators to determine who would market and 

who would set up barriers to entry, and how much volume would 

be there, and the companies had an opportunity that was never 

granted them before, and it is something that was missed. 

Senator DEWINE. Thank you, Mr. Chairman. 

Chairman SPECTER. Thank you very much, Senator DeWine. 

32

Without objection, we will put into the record a statement by 

Senator Leahy, ranking member. 

Senator Schumer? 

Senator SCHUMER. Thank you, Mr. Chairman. I thank our witnesses. 

I would like to get into the mechanisms of supply and demand, 

and start off by asking Mr. Kovacic and Professor McAfee questions, and then ask some of the others to respond. 

Now, if supply and demand were working in a Adam Smithian 

sense, we had 10,000 suppliers that could supply oil to anybody, 

and there were a spot market, as there is now, which is a pretty 

free market type situation, would it not be that two things would 

not happen that happen now. First, the price goes up on the spot 

market 10 cents a gallon, but because there is oil in the pipeline 

that has not been purchased for weeks or even months, that if 

there were real competition, anybody who raised their price immediately just reading in the newspaper that the spot market is 10 

cents higher, would be undercut by somebody else? Question one. 

Second. If we had a real supply and demand model, wouldn’t it 

be such that the price would go—there would not be any stickiness 

when the price goes down, it would go up and down related to the 

spot market equally? 

Mr. KOVACIC. With apologies to Adam Smith, most of the economic commentary since his formative work had suggested that he 

missed the lot, and among the things he missed are how sticky in 

both directions adjustments can be. 

I would say that over a reasonable period of time you would expect those phenomena to take place. There has been a lot of attention devoted—

Senator SCHUMER. OK, but you are not—I am not asking whether we agree with Adam Smith or not, and I think the people who 

picked you for the FTC would be surprised that you do not agree 

with Adam Smith. I am asking, if we had 1,000 suppliers and there 

were real competition, would the price go up immediately to where 

the spot market is a day later, even though supply in the pipelines, 

so to speak, the price had been lower for the two, 3 weeks? You 

want to answer that, Professor? 

Mr. MCAFEE. I would be glad to. The answer is it should go up 

immediately, and it should go down immediately, according to 

Adam Smith. It does neither, as measured, and that can be a lot 

of reasons for that, in particular—

Senator SCHUMER. Why would it go up immediately? Why 

wouldn’t Company 212, which would make a nickel profit rather 

than the full dime profit, sell it for the nickel? 

Mr. MCAFEE. Because we know that it is going to be a dime, say, 

2 months from now, and by waiting 2 months and holding onto my 

gasoline—

Senator SCHUMER. No, they are not holding onto it. You are 

missing the model, and you know more about economics than I do. 

But this is an ideal situation. I am a gas station. I have 1,000 suppliers. Somebody is going to say tomorrow, even though the spot 

market went up 10 cents, since my costs were the 10 cents lower, 

I will only charge 9 cents or I will only charge 8 cents. 

Mr. MCAFEE. No, sir. 

33

Senator SCHUMER. Why? 

Mr. MCAFEE. Because those holders of gasoline, the people that 

you are asking to sell it for 9 cents have the option of delay, and 

that option alone is—

Senator SCHUMER. Not if there are 1,000 suppliers competing. 

Mr. MCAFEE. A billion suppliers does not matter. What matters 

is the amount of gasoline, and the hypothesis you have put on the 

table is that gasoline is now worth 10 cents more than it was yesterday. If that is true, everyone should get the 10 cents. Now—

Senator SCHUMER. OK. Second point you agree with—no, no, I 

only have a limited amount of time. 

Mr. MCAFEE. And the second point is absolutely right, and the 

people that study this find that in fact prices go up in about 2 

weeks, but it takes them 6 weeks to come down. 

Senator SCHUMER. What does that indicate? 

Mr. MCAFEE. Well, there is a lot of dispute about what that indicates, but it certainly does demonstrate that it does not function 

like an Adam Smith market. 

Senator SCHUMER. I would say it indicates that there is a lack 

of competition of real free market Adam Smithian competition. 

Do you want to comment, Mr. Hamilton and Mr. Blumenthal? 

Mr. BLUMENTHAL. I will just say briefly, because I know your 

time is limited, that I made some statements earlier about one of 

the practices that creates this stickiness, which is zone pricing. 

There are all kinds of rules. The retailer, the gasoline station, the 

guy who pumps your gas, is a franchisee very often. He is bound 

by all kind of rules as to how he can sell his gas, as to what gas 

is sold to him. He cannot buy from those 1,000 suppliers. He is limited. And those kinds of limits in the market are what inhibit competition. 

Senator SCHUMER. Mr. Hamilton? 

Mr. HAMILTON. Through an event that can be triggered by them, 

the branded refiners, and separate the two branded refiners, the 

prices they charge the unbranded stations that do not carry a 

major flag, are often referenced to the spot. So if these boys triggered the spot, which they do regularly, sometimes with a phone 

call, that jumps up 10 cents. That raises the wholesale price to all 

these stations that compete with the branded refiner. 

Senator SCHUMER. Understood. 

Mr. HAMILTON. They can right behind it, OK? And up goes your 

price. And this is done through the Internet just like, boom. And 

to quote one up and down overnight mass, OK? Now they get it up. 

Now the spot goes back down. The guys who were forced up by the 

spot increase, margins increase tremendously, but there is a reluctance to lower their price on the street because they know it will 

trigger response from the guys, it is going to trigger response from 

Exxon Mobil. So there is—

Senator SCHUMER. What kind of response would that be? 

Mr. HAMILTON. They would go down with them, and so the volumes will not change, they will not increase their market share, so 

I am not going to screw with the big boys, and the way they are 

going to do it is what he said, zone pricing. I lowered the price 

across the street wherever you have your station. If you try to 

34

lower yours back, you are not going to get any market share. These 

boys control—

Senator SCHUMER. So there is no elasticity in a classic free market sense. 

Mr. HAMILTON. The seven players control the business, period. 

Senator SCHUMER. One final quick question, just yes or no—

Chairman SPECTER. You are way over time, Senator Schumer, 

but go ahead. 

Senator SCHUMER. If there were 25 players instead of 7, would 

it be better. Just yes or no? How many of you think it would be 

better? 

Mr. HAMILTON. Yes, it would be better. 

Senator SCHUMER. OK. Mr. Blumenthal is shaking his head yes. 

Mr. BLUMENTHAL. I would agree it would be better. 

Senator SCHUMER. Professor? 

Mr. MCAFEE. Better for domestic supply, worse for international 

supply. 

Senator SCHUMER. OK. We will figure that one out another time. 

What will you say, Mr. Kovacic? 

Mr. KOVACIC. Better in some markets, perhaps worse in others. 

Senator SCHUMER. Thank you, Mr. Chairman. 

Chairman SPECTER. Thank you, Senator Schumer. 

Professor McAfee, we push ahead sometimes interrupting because we want to get more answers, and I think that is understandable, but you were in the middle of one answer for Senator 

Schumer. Did you want to supplement that or finish that? 

Mr. MCAFEE. I thought I had finished it, but I am happy to 

elaborate. 

Chairman SPECTER. If you finished it, that is fine. 

Thank you very much, gentleman. We very much appreciate your 

testimony. We would like you to do a couple of things on 

supplementing the record if you would. We would be interested to 

know from each of you whether you think the concentration of 

power in and of itself increases prices, and if so, why? 

We would also be interested in having a written response as to 

whether you think legislation would be appropriate here, and what 

kind of legislation you would suggest? You do not have to be a lawyer to give us your ideas—a number of you are not. It may be helpful not being a lawyer. Just give us your ideas as to the direction 

you think the legislation, where it ought to go. 

And the third response that we would appreciate is to what extent do you think the increased profits will really find their way 

into exploration, where we are very concerned about not impeding 

exploration? And you have some evidence already which Commissioner Kovacic and GAO and Mr. Wells would know about, but to 

the extent any of you have any insights on that, I think the Committee would be very interested to know your feeling there. 

I think it has been a very productive—sure, go ahead, Senator 

Kohl. 

Senator KOHL. I would like also to ask one inquiry maybe from 

the GAO. If the seven big guys that you refer to, if their profits 

were cut in half in any given year, because people think that it is 

all about they are making so much money and the consumer is 

paying a fortune for it. That may be true. But if their profits were 

35

cut in half, what impact would that have on the price of gasoline 

to a consumer over a year’s time. If you could get that information 

to us, I think that would give us some indication of where we are 

in terms of trying to figure out what is going on here. 

Senator FEINSTEIN. Mr. Chairman, could I ask one question, 

something that they might fill us in on. 

Chairman SPECTER. Go ahead, Senator Feinstein. 

Senator FEINSTEIN. How you would see zone pricing being 

changed to bring about the best effect for the consumer. 

Chairman SPECTER. You are asking this for the record for written supplements. 

Senator FEINSTEIN. For the record. 

Chairman SPECTER. Yes, that is fine. 

Thank you all very much. This is the first of a number of hearings we are going to have on this subject, and we are going to actively review the legislative course, perhaps with Commissioner 

Kovacic’s statement that Congress should do a little more here, 

what Attorney General Blumenthal said, and what GAO has done, 

and those of you who are consumer advocates. 

Thank you very much, and stay tuned. 

[Whereupon, at 11:29 a.m., the Committee was adjourned.] 

[Questions and answers and submissions for the record follow.]

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(187)

CONSOLIDATION IN THE OIL AND GAS 

INDUSTRY: RAISING PRICES? 

TUESDAY, MARCH 14, 2006

U.S. SENATE, COMMITTEE ON THE JUDICIARY, Washington, DC. 

The Committee met, pursuant to notice, at 10:30 a.m., in room 

SD–226, Dirksen Senate Office Building, Hon. Arlen Specter, 

Chairman of the Committee, presiding. 

Present: Senators Specter, Hatch, Grassley, DeWine, Cornyn, 

Coburn, Leahy, Biden, Kohl, Feinstein, Schumer, and Durbin. 

OPENING STATEMENT OF HON. ARLEN SPECTER, A U.S. 

SENATOR FROM THE STATE OF PENNSYLVANIA 

Chairman SPECTER. It is 10:30. The Judiciary Committee will 

now proceed with our hearing on concentration in the oil and gas 

industry, whether it has resulted in the raising of gas prices. 

It was reported yesterday that the price of gasoline rose 11 cents over the past 2 weeks to $2.35 for a gallon nationally. At the same 

time, the price of crude oil dropped, a 7-cent-per-gallon drop. The 

Governmental Accounting Office in 2004 concluded that the increased concentration in the oil and gas industries has resulted in 

higher wholesale gasoline prices. 

We have seen a phenomenal rise in the concentration with oil 

and gas companies. In the past decade, there have been some 2,600 

mergers. This year the FTC approved Chevron’s acquisition of 

Unocal and Valero’s acquisition of Premcor. The largest transaction 

occurred in 1999 when Exxon merged with Mobil. Other transactions have included British Petroleum’s acquisition of Amoco, 

Marathon’s joint venture with Ashland Petroleum, and another 

joint venture which combined the refining assets of Shell and Texaco. ExxonMobil recently reported that it had earned over $36 billion in the year 2005, which is the largest corporate profit in U.S. 

history. 

There are a variety of interpretations by the economists whether 

the mergers result in efficiencies in scale, whether they result in 

lower prices to the consumers. We do know that there have been 

a wave of mergers and acquisitions, and we do know at the same 

time that gasoline prices have risen and that the largest profits in 

the history of corporate America were reported by ExxonMobil last 

year, as I say, some $36 billion. 

The Judiciary Committee has wrestled with this issue over the 

years, and this is the second of our hearings on this particular subject. Last week, I put into the Congressional Record a proposal for 

188

legislation which was designed to bring comments. I did not introduce a bill, but only sought comments. Section 1 of the legislation 

would amend the Clayton Act by prohibiting oil and gas companies 

from diverting, exporting, or refusing to sell existing supplies with 

the specific intention of raising prices or creating a shortage. Section 2 amends the Clayton Act by prohibiting the acquisition of an 

oil or gas company or the assets of such company when the acquisition would lessen competition. That would modify Clayton on the 

language of substantially modifying competition. 

The bill was reported inaccurately in a number of the media outlets. Section 3 would require the Governmental Accounting Office 

to evaluate whether divestiture is required by the antitrust agencies in the oil and gas industry. Mergers have been effective in restoring competition. Section 4 references a joint Federal-State task 

force, and Section 5 would eliminate the judge-made doctrine which 

prevents OPEC members from being sued for violations of U.S. 

antitrust laws. 

Since the suggested legislation was circulated, I have had a number of comments from members on the Committee, and with some 

modifications, there are prospects of having a fair number of cosponsors of the legislation. 

I have one inquiry. Why do I have a television screen with an 

unfamiliar face occurring? 

OK. He is a witness who will be testifying. May we black him 

out until he appears as a witness, please? 

[Laughter.] 

Chairman SPECTER. A little startling to see him in my hearing 

room, not knowing why he was there. 

Excuse us, Professor. We will come back to you. 

Senator Leahy will be joining us momentarily. He and I were 

just over at the Judicial Conference, invited by the Chief Justice 

to update the chief judges of the circuits and the district courts, 

and I know he will be along shortly. 

In his absence, let me yield to Senator Feinstein as the ranking 

Democratic present for an opening statement. 

STATEMENT OF HON. DIANNE FEINSTEIN, A U.S. SENATOR 

FROM THE STATE OF CALIFORNIA 

Senator FEINSTEIN. Thank you very much, Mr. Chairman. 

Mr. Chairman, I also sit on the Energy Committee, and we have 

had the five big CEOs of the oil companies before us there, and I 

note that you will be having them here in the second panel this 

morning. And I appreciate that very much. 

I would also like to welcome two Californians to the panel: Mr. 

Tom Greene of the California Attorney General’s Office, and Mr. 

Joseph Alioto, a distinguished San Francisco attorney, which 

brings back a lot of memories for me. 

You have pointed out, Mr. Chairman, that in the last decade we 

have witnessed dramatic consolidation of the oil and gas industry, 

and that consolidation has gone largely unchecked by the Federal 

Government. Highly concentrated oil and gas markets that exist 

today really raise very serious questions about the degree of competition that is actually left in the industry and the huge amount 

of market power that some of these companies now wield. 

189

The GAO’s testimony from the last hearing provides a picture of 

the vast scope of this consolidation: more than 2,600 mergers since 

1991, most of them occurring in the second half of the 1990’s, including those involving large partially or fully vertically integrated 

companies. 

You mentioned in 1998 British Petroleum and Amoco to form BP 

Amoco, later merging with ARCO; in 1999, Exxon, the largest 

United States oil company, merging with Mobil, the second largest. 

Since 2000, we found that at least eight more large mergers have 

occurred. 

In his testimony, Joseph Alioto likens the recent spate of mergers 

of U.S. companies to the reconstitution of the Standard Oil Monopoly that was broken up nearly a century ago. Although each of 

these mergers reduced the companies’ costs, they were, nevertheless, followed by increases in prices for consumers. These price increases cannot be explained solely by the increase in the cost of 

crude oil. Last year was the most profitable year ever for American 

oil companies, and Exxon had the single most profitable year of 

any company in our Nation’s history. 

How much has the oil industry been consolidated? In 1991, the 

five largest oil companies controlled 27 percent of the Nation’s gasoline stations. Today, five companies control 61 percent of those 

stations. A decade ago, the five largest oil companies controlled 

one-third of the Nation’s refinery capacity. Today, five companies 

control 50 percent of the refinery capacity. In the last decade, five 

largest oil companies have doubled their control of oil production. 

In my State, the top four refiners own nearly 80 percent of the 

market. Six refiners also own 85 percent of the retail outlets, selling 90 percent of the gasoline in California. 

Now, even these numbers do not reveal the extent to which the 

oil market has been concentrated as the effect of market concentration is heightened by the high level of cooperation in the oil industry and the joint ventures that exist between many of the remaining companies. For example, as also described in Mr. Alioto’s testimony—you won’t have to give it, Joe—oil in terminals and refineries is exchanged and shared, depending on the needs of any particular company, due in part to this cooperative behavior, no company has built a new refinery in the United States in 30 years. 

These mergers have had real impacts on Americans. A study of 

eight mergers in the 1990’s by the GAO determined that a majority 

of the mergers resulted in increases in the wholesale price of gas, 

with each of these mergers costing between 1 and 7 cents per gallon. Another impact of the mergers is that they provided the oil industry with enough market power to create a zone pricing system, 

where refiners can target specific areas in a city where independent dealers are located and undersell them. We heard about 

that in the Energy Committee. 

Attorney General Blumenthal testified at the previous hearing 

that, ‘‘If the wholesale supply of gasoline were truly competitive, 

the major oil companies would not be able to dictate the price of 

wholesale gasoline based on location.’’ In order to respond to the 

problems posed by consolidation, I would like very much to work 

with you, Mr. Chairman, to craft legislation to help address these 

concerns. I think we have a real problem. I think we must address 

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it, and I thank you for taking the leadership with your suggested 

legislation in so doing. 

Chairman SPECTER. Thank you very much, Senator Feinstein. 

I now yield to our distinguished Ranking Member, Senator 

Leahy. 

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

FROM THE STATE OF VERMONT 

Senator LEAHY. Well, thank you, Mr. Chairman. I also commend 

you for doing this. 

Chairman Specter and I were over at the Supreme Court earlier 

this morning. Mr. Boies and others have spent far more time over 

there than I have. 

I am concerned this fuel crisis is draining hard-earned money 

from our families, our farmers, our factories, our businesses. I actually agreed very much with President Bush when he said in his 

State of the Union message that we are addicted to oil in this country. There are a number of things we should do. One is we should 

find, should really find alternatives, because right now we have foreign policy crises that are able to go on because we, the American 

public, are fueling some of these countries with what we are paying 

them, but also we lose our own flexibility. 

I think as a first step we ought to enact a NOPEC bill into law. 

You know, for weeks we have been evaluating the security concerns 

prompted by a foreign government’s ownership of a company to 

take over effective control of port facilities in six of our major ports. 

But at the same time, in the case of the oil cartels, governmentcontrolled entities routinely collude to set prices, and they have 

also wielded their power to purposes create major supply and security concerns in the United States. We ought to be able to react to 

that, and I hope to join with the Chairman and Senators Kohl and 

DeWine and others on a new bill which would include this NOPEC 

legislation. 

Oil companies have to realize they are not just in the business 

of making oil. They are in the business of supplying a reliable energy source to millions of Americans and are given numerous benefits and abilities to do that. 

Now, it has not being parochial to say that this energy source is 

crucial to many in my home State of Vermont. I say that because 

you would see the same thing in many other parts of the country. 

Vermont’s businesses, their families, their farmers, their hospitals, 

their colleges, they cannot operate without it. For a typical 

Vermont farmer, the impacts of the lousy planning of our oil giants 

can be catastrophic. 

One farmer I have known for years, Harold Horgen, his dairy operation fuel costs on about 800 acres increased by $10,000 in 1 

year. His costs went from just under $50,000 to just under $60,000 

in 1 year. The overall increase in fuel costs for an average Vermont 

farmer last year was 43 percent. That is very significant in a small 

farming operation, a very significant surcharge. It may seem like 

pennies compared to the huge profit sums we are going to be discussing today, but to me and to all Vermonters, we know what the 

terrible consequences can be, forcing many farmers to make unfair 

choices between running their farms or heating their homes. 

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These are not choices anyone should be faced with, certainly not 

our hard-working farmers, and in a State where the temperature 

can drop to 10 degrees below zero, it is forcing many of our families 

to determine whether they are going to heat or eat. 

Now, it is not just farmers in my home State of Vermont, but you 

have the same thing in Wisconsin and Pennsylvania and Idaho and 

California and others. I look at the record gasoline and home heating prices in comparison to the record profits of the oil companies. 

The answer may not be easy, but, boy, there is an enormous disconnect when oil companies are making more money in 1 year than 

many countries, than the net income of many, many countries. 

So, Mr. Chairman, I commend you for doing this. You have a 

great panel here. I would ask to insert for the record a statement 

by Senator Feingold and also ask to include in the record a statement from the St. Albans Cooperative Creamery. 

Chairman SPECTER. Without objection, those statements will be 

made a part of the record. 

Our customary practice is just to have opening statements from 

the Chairman and Ranking, but I yielded to Senator Feinstein in 

Senator Leahy’s absence, and we make an exception on antitrust 

cases because we have a very active Antitrust Subcommittee, and 

I want to yield now to the Chairman of that Subcommittee, who 

has authored some very impressive legislation. We have offered 

some in the past together, and some of it has been incorporated in 

the prospective bill which I introduced to the Congressional Record 

last week. 

Senator DeWine? 

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

THE STATE OF OHIO 

Senator DEWINE. Mr. Chairman, I want to thank you for incorporating our NOPEC legislation in your bill, and I want to thank 

you also very much for holding this hearing. I am glad, Mr. Chairman, that we have representatives here today of the oil industry 

to discuss this very critical question that my constituents are asking. The question is: What is causing the high fuel prices that we 

are all so sick of paying? 

We hear so many people who come and testify in front of Congress and say there is nothing wrong in the industry, and they tell 

us that the market is functioning normally. Yet my constituents in 

Ohio feel there is something wrong when they are paying record 

prices at the pump while oil companies are making record profits. 

One of the causes of the skyrocketing gas prices certainly could 

be the mergers in the oil industries. Did the FTC allow to many 

oil industry mergers? Are the antitrust laws up to the challenges 

of dealing with the modern energy market? Should the antitrust 

agencies take a more aggressive approach in this market? These 

are all very legitimate questions. 

I think it is clear that the agencies need to take a very hard look 

at any future mergers in this industry, and they should examine 

their past enforcement actions. Senator Kohl and I have worked 

hard in our Antitrust Subcommittee to encourage FTC monitoring 

and enforcement. And I am pleased that the Committee is considering your draft legislation, Mr. Chairman, which includes a proviVerDate 0ct 09 2002 09:17 Jul 19, 2007 Jkt 033417 PO 00000 Frm 00199 Fmt 6601 Sfmt 6601 S:\GPO\HEARINGS\33417.TXT SJUD1 PsN: CMORC
192

sion that Senator Kohl and I have pursued since the year 2000 and 

that Senator Leahy just mentioned. That provision, of course, contains the language from our NOPEC bill, which the Senate passed 

last year. 

Mr. Chairman, the biggest thing that we can do to control gas 

prices in the future is to lower crude oil prices, and one of the biggest causes of high crude oil prices is the illegal price-fixing of the 

OPEC cartel. Our NOPEC language makes it clear that the Antitrust Division of the Justice Department can prosecute OPEC for 

its illegal activities. America needs NOPEC as an effective tool to 

hold down prices. 

The Chairman’s draft legislation also addresses a concern some 

have expressed that certain oil companies may have acted to manipulate supply and requires a very important study of the legal 

standards for mergers and also of industry data sharing. 

Mr. Chairman, I think this information will be very useful as we 

figure out what we can do to combat high energy costs. I look forward to discussing this draft legislation today. 

Mr. Chairman, just to put this issue into historical context, I 

think it is interesting to remember that one of the first big antitrust cases ever prosecuted was, of course, the famous Standard Oil 

case. That case established most of the fundamental principles of 

antitrust law that continue to this day. One of those principles, to 

put it in everyday terms, is simply this: It is not illegal just to be 

big. In fact, it is even legal to be a monopoly. But what is not legal 

is when a company abuses its size or uses unfair tactics to shut out 

its competitors or harm competition. 

As we examine the impact of mergers in the oil industry today, 

we should remember that we need to evaluate the conduct of these 

companies, not just the fact they have grown in recent years. It 

goes without saying, Mr. Chairman, that nobody is satisfied with 

the way this market is behaving, and none of us is happy with the 

high gas prices that we are paying. 

So we do need to keep looking at the conduct of this industry and 

the role of the antitrust laws, and we need to keep looking very 

carefully. But most important, we need to find some way, any way, 

to help our citizens and businesses as we all struggle with increasing energy prices. We owe it to the American people and we owe 

it to our constituents at home. 

Thank you, Mr. Chairman. 

Chairman SPECTER. Thank you very much, Senator DeWine. 

Would the witnesses please rise, and may we bring back Professor Borenstein on the monitor? Professor Borenstein has already 

got his right hand raised. 

Raise your right hands. Do you solemnly swear that the testimony you will give before this Senate Judiciary Committee will be 

the truth, the whole truth, and nothing but the truth, so help you 

God? 

Mr. BOIES. I do. 

Ms. LAUTENSCHLAGER. I do. 

Mr. GREENE. I do. 

Mr. ALIOTO. I do. 

Mr. BORENSTEIN. I do. 

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Chairman SPECTER. May the record show that each has said ‘‘I 

do’’ in response to the question. 

We are going to lead this morning with Mr. David Boies, who is 

Chairman of Boies, Schiller and Flexner, serves as counsel for the 

plaintiffs in a case alleging that ExxonMobil and British Petroleum 

have conspired to withhold supplies of Alaska North Shore natural 

gas from the market. This litigation raises the issues which are articulated in Section 1 of the draft bill which has been circulated 

and put into the Congressional Record, which would amend the 

Clayton Act by prohibiting oil and gas companies from diverting, 

exporting, or refusing to sell existing supplies with the specific intention of raising prices or creating a shortage. 

Thank you for joining us, Mr. Boies, and we look forward to your 

testimony. 

I might add that, in accordance with our rules, statements will 

be 5 minutes in duration. We ask you to stay within that time limit 

to allow maximum time for dialog, questions and answers by the 

members. And we have, as you see, a very large representation of 

the Committee here today. 

Mr. Boies, the floor is yours. 

STATEMENT OF DAVID BOIES, BOIES, SCHILLER AND 

FLEXNER, LLP, ARMONK, NEW YORK 

Mr. BOIES. Thank you, Mr. Chairman. I appreciate the opportunity to appear to address the important issues that the Committee has raised. 

Let me begin by emphasizing something that I think we all know 

but is, nevertheless, worth talking about in a context of natural 

gas. And my remarks are going to be primarily limited to natural 

gas today. 

We are paying in the United States record-high prices for natural 

gas. What you can see is the tremendous increase just from 1999 

to 2005 to where it is virtually $13 per 1,000 cubic feet for gas. 

That is a price that imposes enormous hardships both on individual 

consumers and on businesses in this country. It causes individual 

consumers, even middle-class consumers, to have to choose between 

heating their homes in the wintertime and other needed expenses. 

Now, we know that this is a function of supply and demand. I 

want to focus also on what the consequences of this supply and demand imbalance is to the companies that are the primary suppliers 

of natural gas. And, of course, what the Chairman has already indicated and other people have talked about are the tremendous increases in profits for Exxon and British Petroleum in the last few 

years. And profits by themselves are not bad. Profits often are indications of where there are opportunities to exploit the market. But 

where you have a market that is controlled not by the competitive 

free market forces but by the power of one or two or a few companies, what happens is that the free market forces break down. The 

role of profits breaks down. And what happens is that you have private companies in effect taking the consumer surplus that should 

be available to individuals, should be available to businesses. 

What you can see, this is the $36 billion in 2005 that several people have mentioned. British Petroleum has less, only $22 billion in 

2005. But, nevertheless, what is as important as the absolute size 

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is the trend line because you see the increase in profits together 

with the increase in natural gas prices. 

Now, the reason for this is a supply and demand imbalance, and 

what I am trying to—one of the points I want to address today is 

the reason for that imbalance. 

We all know that there are tremendous gas reserves in Alaska, 

but over decades of having control over those natural gas reserves, 

zero has been transported to the United States. Although in 

Prudhoe Bay the majority of oil has been produced, no natural gas 

has been exported off of the North Slope, either from Prudhoe Bay 

or Port Thompson or any other source. Despite the need for natural 

gas here in the United States, despite the availability of that natural gas in Alaska, none of it has been exploited. And in the United 

States we use approximately 22 trillion cubic feet of natural gas a 

year. There are 35 trillion cubic feet of proven reserves in Alaska 

and probably another 140 to 160 additional trillion cubic feet available. If you simply transported 4 to 6 billion cubic feet a day to the 

United States, it would have a tremendous effect on increasing 

supply, reducing price, and that could go on for 35 or 40 years, just 

utilizing what we know are the reserves in Alaska. And those reserves are probably actually much higher than the figures here indicate. 

Eight billion cubic feet of gas a day is already extracted, comes 

out of the ground as a consequence of oil production. But instead 

of transporting that to the United States, it is reinjected in the 

ground. If they simply sold half of that into the United States, 4 

billion cubic feet a day, it would have a tremendous effect on natural gas prices and supply. And there have been many pipeline 

proposals that have been made over the last 10 years to do just 

that. Yukon Pacific, MidAmerican Energy, TransCanada, and Alaska Gas Port Authority, which is my client, have all made proposals 

to bring this natural gas to market. In a competitive market, that 

is what would have happened. But, in fact, every single one of 

those proposals was refused, and the reason it was refused was because that allows the oil companies to keep control. 

Here is a statement just last year from the CEO of Exxon about 

why they are refusing: because they know that by refusing they 

prevent the development of a pipeline that will bring the gas to the 

United States. As he says here, ‘‘We control it. If we won’t commit, 

nobody will finance it, even with Federal loan guarantees which 

Congress passed. Nobody is going to finance it.’’ So by controlling 

it, they, in effect, prevent the export of natural gas to the United 

States. 

My time is up, and I would be pleased to respond to any questions that the panel will have later. 

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

for the record.] 

Chairman SPECTER. Thank you very much, Mr. Boies. 

We now turn to Attorney General Peg Lautenschlager, Attorney 

General of the State of Wisconsin, who, along with four other State 

Attorneys General, conducted an investigation into natural gas 

pricing. According to information provided to me, that investigation 

concluded that volatility and increases in natural could not be entirely explained by changes in supply and demand. Thank you for 

195

joining us, Madam Attorney General, and we look forward to your 

testimony. 

STATEMENT OF PEG A. LAUTENSCHLAGER, ATTORNEY 

GENERAL, STATE OF WISCONSIN, MADISON, WISCONSIN 

Ms. LAUTENSCHLAGER. Thank you, Mr. Chairman. It is a please 

to be here today, Mr. Chairman, and I thank you for affording us 

an opportunity to participate in this panel. As you indicated—and 

let me also say, too, that in seeing the draft that you are proposing, 

when to only are appreciative that you are considering some 

changes to this structure about these things, but also that you have 

included Attorneys General from the States as people who may be 

doing some enforcement, and we appreciate that inclusion. 

That being said, for the States of Iowa, Missouri, Illinois, and 

Wisconsin, all consuming States of natural gas, the issue of natural 

gas prices, the continued upward increase of those prices, and the 

volatility of those prices has been of great concern. In the wake of 

Katrina and other events, we accordingly got together, the four 

States and the Attorneys General therefrom, in order to discuss 

natural gas prices. We brought in a variety of folks, talked to everybody from the industry to suppliers, utilities, and the like. And 

among the things we found is that while the tight supply in demand does in many ways deal with the gradual upward increase, 

it does not explain the volatility of the market. 

So as a result of that, we started looking to try to determine exactly what does explain that, and among the things we found was 

this incredible correlation between the frequency of trading in the 

commodity market and the spikes in price that were going on. And 

this we found to be disconcerting, because as we looked at possibilities regarding things like market manipulation, we found out that 

indeed probably about 80 percent of the trading that goes on in 

these markets is unreported and not in any way recorded in a way 

which we can do an analysis. 

So as a result of that, we became very concerned because we felt 

as though, you know, something did not pass what we would call 

in Wisconsin the so-called smell test, and as a result of that, we 

would like to explore further, but kind of met dead ends as we had 

no answers to this trading. 

What we do know is this: We know that the upward volatility of 

natural gas prices cannot simply be explained by traditional supply 

and demand, and that is not to diminish the need for alternative 

fuel sources. It is not to say that demand reductions are not merited or worthy. But what it is to say is that we need to explore further. 

Second, we found that obviously the financial markets are complex and lack almost completely any kind of transparency. 

Third, we found that indeed there is consolidation in natural gas 

pricing. Right now about 20 percent of the market is controlled by 

one oil company, BP. The next three largest firms having market 

shares of about 10 percent, two of which are major oil companies, 

collectively control over 50 percent of the market. 

Given the low elasticities of supply and demand, the reactions to 

the market to relatively small changes in the supply demand balance, the growing consolidation of ownership in the natural gas 

196

market by companies that often have arms that engage in extensive trading presents a potential for market manipulation and 

other kinds of abuses. Accordingly, we believe that kind of putting 

all of your eggs in one basket when it comes to just a few energy 

companies has not served the American people well, particularly 

those of us in places that are cold, places that do not produce natural gas, and places which are very reliant on that product. 

Thank you. 

[The prepared statement of Ms. Lautenschlager appears as a 

submission for the record.] 

Chairman SPECTER. Thank you very much, Attorney General. 

Our next witness is Senior Assistant Attorney General of the 

State of California, Mr. Tom Greene, California’s chief antitrust attorney, and he conducted several investigations into the energy industry. He argued the celebrated case of California v. ARC America

and won, upholding State indirect purchaser remedies. 

Thank you for joining us, Mr. Greene, and the floor is yours for 

5 minutes. 

STATEMENT OF THOMAS GREENE, CHIEF ASSISTANT ATTORNEY GENERAL, CALIFORNIA DEPARTMENT OF JUSTICE, SACRAMENTO, CALIFORNIA 

Mr. GREENE. Thank you, Mr. Chairman and members. At the 

outset, let me submit my prepared remarks for the record, and I 

would like to summarize briefly my comments. 

Chairman SPECTER. Without objection, your full statement will 

be made a part of the record. 

Mr. GREENE. Thank you, Mr. Chairman. And let me say as a line 

prosecutor that I am enormously pleased to see the language in 

your draft legislation. Let me turn to the high points, at least from 

my perspective. 

With respect to NOPEC, we are prosecuting a case right now 

against Powerex arising from the electric emergencies in California 

in 2000–2001. Powerex is a wholly owned subsidiary of the government of British Columbia. They have asserted both of the defenses 

which your legislation and Mr. DeWine’s legislation would address, 

that is, act of state and sovereignty immunity. 

I must tell you as a prosecutor that it is enormously frustrating 

to have a company which, from my perspective and the perspective 

of most Californians, grossly abused our markets, simply say in essence the legal version of Olly, Olly, Oxen Free based on these two 

doctrines. If you could change this, we could have enormous impact 

in the courtrooms of America, and I think that we could make a 

big difference for the consumers of America as well. 

Let me turn to the merger analysis. You have proposed a significant change in the standard under Section 7 to appreciable effects 

on markets. I can tell you, as someone who worked on all of the 

mergers that you discussed earlier, that standard change would 

make, again, a significant difference in the real world of antitrust 

litigation on the ground. These are extremely complex markets. 

When we dealt with ExxonMobil, for example, the focus was on the 

notion that these markets are international. At some level that is 

absolutely true, but they also have appreciable local effects, and we 

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need the tools—and I think this would provide an important tool—

for us to be able to address those kinds of problems. 

Finally, let me turn to the idea of a joint task force. As the 

former Chair of the Multistate Antitrust Task Force of the National Association of Attorneys General, let me share the perspective of the Attorney General to my left that this is an enormous 

recognition of the important role of State Attorneys General and 

State prosecutors. But I would like to mention something that is 

slightly orthogonal to the proposal you have here, which is the 

problem we have under Section 1 of the Sherman Act. 

As Judge Posner and others have articulated, we are in a bit of 

a bind. Indeed, there is a fundamental paradox currently in the 

case law in the basic jurisprudence of antitrust to the effect that 

the more concentrated an industry—the economics of this suggest 

that the more concentrated the industry, the easier it is for the industry to coordinate with relatively little in the way of additional 

communications. The petroleum industry is classically a highly concentrated oligopoly. 

So, on the one side, we have the economics of this suggesting 

that with great concentration comes the ability to communicate in 

a way which will allow firms to essentially reach a tacit agreement 

as to pricing and other important aspects of production. 

On the other side of that, the emerging jurisprudence, at least 

in some of the most important circuit courts of the United States, 

taking what from my perspective—again, I am mostly a plaintiff in 

these kinds of cases. Taking a perspective on both Monsanto and 

Matsushita to the effect that you need very compelling evidence of 

the existence of an agreement, the combination of that jurisprudence and that economic reality is increasingly creating what I described, I think, in my prepared testimony as ‘‘the dirty secret of 

antitrust jurisprudence,’’ which is that it is increasingly difficult to 

prosecute large concentrated industries in any effective way under 

Section 1 of the Sherman Act. 

I think it would be an enormous contribution to your proposed 

joint task force’s agenda if you took a look at that aspect of Section 

1 in increasingly concentrated industries. 

With that, Mr. Chairman and members, thank you for your attention, and I am certainly available to answer questions. 

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

for the record.] 

Chairman SPECTER. Thank you very much, Mr. Greene. 

Our next witness is Mr. Joseph Alioto, who represented clients 

in more than 3,500 antitrust cases, according to his resume—that 

is a phenomenal number—and gone to trial, I am advised, in approximately 75 of those. He represented the plaintiffs in Bray v. 

Safeway in which he won the largest judgment in the history of 

antitrust at that time. Years ago, I think it was your father, Mayor 

Alioto, who appeared before this Committee. I think people would 

be interested to know that you are not Mayor Alioto, but you are 

his son, if that is correct. 

Mr. ALIOTO. Yes, sir. 

Chairman SPECTER. Because that is a question which has come 

to several of us in the interim, and your youthful appearance tells 

198

us that you are not the former mayor, but I thought it would be 

worth just a moment to state that explicitly for the record. 

Thank you for coming to Washington to testify, Mr. Alioto, and 

we look forward to your testimony. 

STATEMENT OF JOSEPH M. ALIOTO, PARTNER, ALIOTO LAW 

FIRM, SAN FRANCISCO, CALIFORNIA 

Mr. ALIOTO. Thank you, Mr. Chairman, and thank you, members 

of the Committee. It is a pleasure and an honor to be able to appear before you on this important issue, and also it is wonderful 

to be able to appear before the former mayor of San Francisco, now 

Senator from California, Senator Feinstein, whom I have known for 

many, many years. 

I tried in my testimony to be as factual as I could, and the facts 

that I stated are not rumors and they are suppositions or they are 

not economic theories. These are facts which I developed from time 

to time during various cases, and they are important facts, and in 

many instances they involve cases in which the Federal Trade 

Commission or the Department of Justice previously allowed these 

kinds of activities to go forward, and I think without proper investigation. And I want to point out why I think that and what I think 

could be done. 

But, first, I pointed out that in the Shell-Texaco joint venture situation, this was a situation in which the two companies combined 

their refining and marketing, and immediately after doing so—this 

is in the late 1990’s. Immediately after doing so, when the crude 

oil was at its lowest since the Depression, when their own costs 

were at their lowest—that is what they claimed was the purpose 

of the joint venture—and when there was substantial overcapacity, 

they first raised the price of Texaco to equal Shell, which Texaco 

had ordinarily been below, and then they increased their prices by 

50 to 70 percent. And there was absolutely no justification for it 

at all. 

The second instance that I wanted to show you where they would 

act against the economic interests—and these are the chief executive officers, by the way, that are making these decisions. The second instance I gave to you in my program was Conoco and Phillips, 

and in Conoco and Phillips, the chief executive officers met some 

40 times or more. One of the executive officers kept notes, and in 

those notes he revealed a number of different things, one of which 

was that the chief executive officer of Phillips wanted to go ahead 

with the merger because he was afraid that the oil prices would 

drop otherwise, and that he felt that this was a necessary thing to 

keep that going. 

He also mentioned there that the idea was that the industry 

would be reduced to six or seven of the fully major integrated oil 

companies in the United States, and that, in fact, happened. He 

also mentioned—and I say it because Mr. Boies, my friend, had 

mentioned it. He also mentioned in these notes that, as far as Alaska goes, there was an informal agreement between Exxon and British Petroleum to operate the area, and Phillips itself that went into 

the area with $7 billion couldn’t even go in to operate its own business, but had to yield to British Petroleum. 

199

Now, all of these are matters of evidence, and they could have 

and should have been taken by the Government. But the Government never cross-examines any of the executives. At least that is 

what I have found. And there were two instances, which I also 

wanted to repeat in these areas, too, Mr. Chairman, and that is 

that it has been an excuse for most of these mergers that they are 

supposed to create efficiencies and they are also supposed to pass 

costs on to the consumer. But that, in fact, does not happen, and 

you can find that out if you question the chief executive officers, 

which I did. And I asked them in each of these instances, you were 

given this—the idea was it was supposed to be efficient, and you 

were going to pass these costs on to the public. Did you do that? 

And the answer was no. Do you intend to do it? No, of course not. 

And the efficiencies they are talking about are not efficiencies of 

the market; they are efficiencies of cartel. They agree to shut down 

various plants in order to create capacity, instead of modernizing 

the plants and hiring people. 

I also gave you the evidence with regard to their meetings. They 

meet at least once a month, all the top executives. They exchange 

everything. They use each other’s facilities. They use each other’s 

refineries. They use each other’s tankers. They swap their different 

stations. They swap their refineries. They have agreements. All of 

these were approved by the FTC, and when we fought them, we 

were able to show otherwise. 

Finally, I just wanted to point out that the law itself under Section 7, under these mergers, I point it out that all of these are all 

the old Standard Oil Companies—Exxon, Standard Oil of New Jersey, buying Mobil, Standard Oil of New York; British Petroleum 

buying SOHO, Standard Oil of Ohio; and then as a combine, buying Amoco, Standard Oil of Indiana; and then as a combine, buying 

ARCO; Chevron buying Texaco; Chevron and Texaco having an 

agreement in Indonesia under Caltex that they would not import 

the oil Indonesia into the United States during the surplus problem. All of these issues are basic facts. All of them could be enumerated if the Government took a bit of time just to look at them. 

Just briefly, I wanted to say this. I think the Committee should 

consider a private right of action. The farmers and the citizens are 

not able to bring these lawsuits because of the Illinois Brick case, 

and because of that, then there is no real prosecution except by the 

Government, and the Government simply will not do it. 

Thank you. 

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

for the record.] 

Chairman SPECTER. Thank you very much, Mr. Alioto. 

We now turn to our final witness on the panel, Professor Severin 

Borenstein, who is the Grether Professor of Business Administration and Public Policy at the University of California, Director of 

the University of California’s Energy Institute, Ph.D. in economics 

from MIT. 

Thank you very much for joining us via satellite, Professor 

Borenstein, and we look forward to your testimony. 

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STATEMENT OF SEVERIN BORENSTEIN, E.T. GRETHER PROFESSOR OF BUSINESS AND PUBLIC POLICY, HAAS SCHOOL 

OF BUSINESS, UNIVERSITY OF CALIFORNIA AT BERKELEY, 

BERKELEY, CALIFORNIA 

Mr. BORENSTEIN. Thank you very much. Can you hear me? 

Chairman SPECTER. We do. 

Mr. BORENSTEIN. OK. Thank you for inviting me. I am sorry I 

couldn’t appear in person. My teaching schedule unfortunately conflicted with this. 

I want to start out by pointing out that as of Friday, the whole- sale price of gasoline was $1.66 a gallon on the New York Mercantile Exchange. Of that, $1.43 was the price of crude oil, so I 

think that puts in context right away that of that $1.66, only 23 

cents is the refining margin. When we start talking about attacking market power in the refining industry, which I think there are 

real concerns about, we have to recognize that that is not going to 

do anything to change the world price of oil. 

The world price of oil is set in the single world market for oil, 

which the U.S. oil companies really are not able to control. They 

are small players in that market. For the same reason that they 

are not big enough to control the price of oil or influence it significantly, their claims that we could have some real effect on the price 

of oil, for instance, by opening ANWR or drilling in more places in 

the United States are also not plausible. This is one big bathtub 

of oil, and the United States is a very, very small player in it. 

The high oil prices right now are due to very strong growth in 

demand over the last 5 years and, as many of the panel members 

pointed out, the restriction of supply or the ability of OPEC to restrict supply. It is not just OPEC, I think, actually, because most 

of the members of OPEC actually are producing all they can. The 

real issue here is Saudi Arabia and, unfortunately, the NOPEC legislation I think would not get at that because Saudi Arabia holds 

the only real slack capacity now, and they are the ones who are 

really able to move the price of oil. That high oil price is most of 

the high price of gasoline right now. 

Refining margins, the difference between the wholesale price of 

gasoline and the world price of oil, are higher than they have been 

up to about 5 years ago. For the prior 30 years, refining was a very 

bad business. These refineries made very poor returns. Basically, 

they built a bunch of refining capacity going into the early 1970’s 

and then found themselves with much too much capacity after the 

oil shock. As a result, those margins were very low. They made 

very poor returns. That continued into the 1990’s when demand 

growth finally caught up, and now instead of running at capacity 

utilizations of 75 percent, they are up to the 95-percent level; that 

is, this is a very tight refining market. 

At the same time, as many have pointed out, concentration in 

the refining industry rose. The problem that we run into when we 

get into the situation of tight refining markets and concentrated 

markets is that there are two types of scarcity that can occur: natural scarcity because we actually really are short of refining capacity; and when there really is natural scarcity, prices should rise to 

reflect that. If we do not let them rise, we are going to get gas lines 

and shortages. The other possibility is artificial scarcity, that is, 

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scarcity created by players who find it in their interest to restrict 

output so that prices will go up. Unfortunately, when you get into 

a tight market and some of the players are of significant size, both 

of those outcomes are possible. And, unfortunately, in the oil industry it is very difficult to tell them apart. 

A few years ago, I testified before the Senate Governmental Affairs Committee during the California electricity crisis and argued 

that we could see quite clearly the exercise of market power in that 

business. The reason I argued there that I thought we could see 

market power was it was a straightforward production process, put 

natural gas into a generating plant and electricity comes out, and 

you have a good idea of what the costs are. Unfortunately, the refining business is much more complex and second-guessing the refineries and offering incentives to produce a little more is quite difficult. As a result, I think it is extremely difficult to do empirical 

studies after the fact that actually show that the refiners are exercising market power. And with due respect to the General Accounting Office, I actually don’t believe that their study does show that. 

I think it does show a correlation, but it falls well short of showing 

a causal effect of the mergers. 

That said, I think now in a situation where the industry is sufficiently concentrated that we are in real danger of these firms having the incentive to raise prices by restricting output. As a result, 

I think what we need is a change in the enforcement of the antitrust law, at the very least. In the past, essentially what has happened in practice at the FTC is oil refining companies have said, 

look, there are big economies from this, you should let us merge. 

The FTC economists understand that it is very difficult to diagnose 

whether those economies are real or the companies are making 

them up. And, in fact, the companies don’t have a clear idea of how 

big those economies are. So what we will do is we will look for the 

potential for an increase in market power. 

I think we are now at the point where the potential for market 

power increases from additional mergers are quite serious, and we 

need a real shift in the burden of proof. Unless the refiners can 

show very clear, definitive economies, not hand-waving that says, 

of course, things get cheaper when we get bigger, mergers should 

not be allowed. I actually do not think that there is much evidence 

that the current market is exhibiting significant market power. I 

think if you look at the margins, they are higher. They are probably about 8 to 10 cents higher than they have been 5 years ago. 

Some of that is certainly natural scarcity. A few cents of it might 

actually be market power. But when you start looking at it in the 

context of today’s prices, that is not where the big money is. The 

big money is in the extremely high price for crude oil that is being 

caused by the world market, and that is a result of very strong demand, and Saudi Arabia in particular may well restrict supply to 

keep prices high as they politically feel they can. 

Thank you very much. 

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

Chairman SPECTER. Thank you very much, Professor Borenstein. 

We will now go 5-minute rounds by the members of the Committee. Beginning with you, Mr. Boies, if ExxonMobil and British 

202

Petroleum were to change their practice, do you have any idea as 

to what the impact would be on natural gas prices in the United 

States? 

Mr. BOIES. I think you can certainly say that the natural gas 

prices will go down. I think you can say they would go down substantially. I think it is difficult— 

Chairman SPECTER. Can you be any more specific than that? 

Mr. BOIES. Well, what I can say is that a single gas pipeline such 

as my client has proposed would bring 7 to 10 percent new capacity 

in. If you look historically, that would—if you looked at the price 

chart that we saw, that would bring the price down maybe as much 

as 20, 25 percent from the high that it is now. 

Chairman SPECTER. Mr. Boies, we have very limited time. If you 

could supplement your answer by quantifying that and giving us 

the basis for your conclusion? 

Mr. BOIES. Absolutely. 

Chairman SPECTER. On your litigation, do you seek a mandatory 

injunction to compel them to sell the gas or to cooperate with somebody who builds a pipeline? 

Mr. BOIES. We do. We do, Mr. Chairman. 

Chairman SPECTER. Mr. Greene, you testified that more concentration brings a tacit agreement, I believe were your words. You 

cannot prosecute a tacit agreement. Or can you? You have to be 

able to prove it. Could you expand on your basis for concluding 

there is an agreement? That would be a conspiracy and restraint 

of trade. When you say tacit, you are putting it outside the ambit 

of a lawyer’s proof, are you? 

Mr. GREENE. I think I am trying to articulate to the Committee 

that highly concentrated industries oftentimes find their way to 

mutual accommodations, which is a classic of oligopoly behavior 

and is widely understood— 

Chairman SPECTER. You say ‘‘usual accommodations’’? 

Mr. GREENE. They can frequently find their way to reducing output, increasing prices, simply because they understand each other’s 

business. 

Chairman SPECTER. How does that happen when it is outside of 

the purview of the tough prosecutor to be able to prove? 

Mr. GREENE. Well, what has happened recently is that those 

agreements are facilitated by, in essence, the sharing of certain 

kinds of information, and I have suggested some of the ways that 

that is done in my prepared testimony. But because of the way the 

law is working currently, at least in many of the circuits in the 

United States, that is insufficient to establish the notion of an 

agreement or a combination within the purview of section— 

Chairman SPECTER. Mr. Greene, because of the limitations of 

time, let me ask you to supplement your answer. 

Mr. GREENE. Certainly. 

Chairman SPECTER. To be as specific as you can on that point. 

Mr. GREENE. I would be pleased to. 

Chairman SPECTER. Madam Attorney General, you say that the 

volatility and increase in natural gas prices could not be entirely 

explained by changes in supply and demand. Are you suggesting 

that concentration of ownership could explain the volatility and increase in natural gas prices? 

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Ms. LAUTENSCHLAGER. Among the things we have looked at, Mr. 

Chairman, are indeed that. We have also looked at the trading activity that is done in the commodity market as best we can, given 

its opaqueness. 

If you were to look at our written testimony, you can see from 

Exhibit ES–7, which is on page 6 of that testimony, a graph which 

shows the price at the wellhead of natural gas, and then you can 

the various spikes in that, and if you compare that with the 

changes in trading activity, you can see a pretty direct correlation. 

Chairman SPECTER. Let me interrupt you again. Will you supplement that with specifics? 

Ms. LAUTENSCHLAGER. Absolutely. 

Chairman SPECTER. Mr. Alioto, when you testify about all of 

these concessions you have gotten from these CEOs, I would like 

to followup with you and get the specifics, get the specific cases and 

the specific language and the notes of testimony and the transcripts. But the question I have for you, when you have confronted 

the regulatory authorities and you chastise them for not doing 

cross-examination or the kind of skilled, incisive lawyer’s work, 

what do they say? 

Mr. ALIOTO. Well, what they do, Senator, is the law has always 

been clear in mergers, and we have had some very good decisions 

by the Supreme Court in the 1960s and 1970s. That is still the law. 

But what they now use is something called Merger Guidelines that 

is written by, apparently, attorneys in the Department of Justice 

and in the Federal Trade Commission, and they are very, very lenient, and they certainly are not in accord with what the Supreme 

Court decisions were. 

So when we go into court, we have two things that we have a 

problem with. We are trying to use the law of the Supreme Court, 

but the Government comes in against us, along with the oil companies or others in anti-merger cases, and they are using their guidelines and they are using their authority, which is very effective 

with judges, especially in injunction cases when you are trying to 

break up mergers. 

Chairman SPECTER. Thank you, Mr. Alito—Alioto. My red light 

went on— 

Mr. ALIOTO. Not quite Alito, Senator. 

[Laughter.] 

Mr. ALIOTO. He cannot spell. 

Chairman SPECTER. Thank you very much, Mr. Alioto. We are 

going to followup with you on the specifics. I am not going to ask 

any further questions because my red light is on. But I would ask 

Mr. Greene for an amplification of why he thinks amending Section 

7 for appreciable lessening would help you more than substantial 

lessening. 

Senator Leahy? 

Senator LEAHY. Thank you. And Mr. Alioto is the only ItalianAmerican on this panel. I will make sure I get it right. Later in 

this week I will be the Irishman on this panel. 

[Laughter.] 

Mr. ALIOTO. We are all Irish, Senator. 

Senator LEAHY. Well, except for—not the only Irishman. As my 

mother would point out, she came from Italy. 

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Mr. Alioto, in your testimony—and this is sort of a followup on 

what Chairman Specter was saying—you mentioned that Congress 

does not need to pass new legislation to address the problems associated with the heavy consolidation in the energy industry, but we 

ought to enforce what is on the books. More specifically, you talked, 

if I am correct, of Section 7 to the Clayton Act. But if the Justice 

Department is unwilling to enforce the laws that are already on 

the books, what does Congress do to obtain stricter enforcement? 

I am concerned about what you said about the—very concerned 

about what you said about the guidelines the Department of Justice sets down. What do you do if they are not going to enforce the 

laws? 

Mr. ALIOTO. I think that it is extremely important that the private right of action be reinforced by the Congress, that it be made 

clear that the private parties can bring actions under the antimerger statute. As I think that that you know, Senator, farmers 

and citizens—many people are concerned about the farmers. They 

have basically no standing. They are not allowed to come in and 

file under the antitrust laws, and they are even given problems in 

the anti-merger statute. 

Senator LEAHY. Am I correct that you feel that the Justice Department does not enforce Section 7 of the Clayton Act? 

Mr. ALIOTO. There is no question about it, yes, and I told both 

of them that, and I just think it is terrible. I think they have abdicated their responsibility to the people with regard to the antitrust 

laws. 

Senator LEAHY. Thank you. 

Dr. Borenstein, can you hear me OK? Of course, now we have to 

turn you back on here. All right. Your written testimony states—

let me read it—that ‘‘Oil industry claims that their profits are comparable to other industries are not credible.’’ You also note that a 

major cause of high prices is that ‘‘some producers are able to exercise market power, most notably Saudi Arabia, which is able to 

move oil prices significantly with its output decision.’’ 

Now, Senator Specter, Senator DeWine, Senator Kohl, and I are 

going to introduce legislation called NOPEC that would allow, as 

you know, the Justice Department to take action against foreign 

entities, including governments, that manipulate prices. If Saudi 

Arabia was deterred by exercising its market power by limiting 

output, what effect would that have on American consumers at the 

pump? 

Mr. BORENSTEIN. Well, I think right now the effect would actually be fairly small. Even Saudi Arabia has very little slack capacity. If they increased output by a couple million barrels a day, 

which is about as—well, one million is probably about as much as 

they could realistically get on the market—right now that could 

lower prices at the pump, somewhere off the top of my head I 

would guess about 10 cents a gallon. That still could be a fairly 

small piece because the world supply and demand situation is so 

tight right now. 

Senator LEAHY. And is growing. 

Mr. BORENSTEIN. And is growing. This situation is likely to get 

worse with real scarcity, regardless of any attempts to manipulate 

prices. 

205

Senator LEAHY. Well, let me ask you another thing. For several 

years, the largest oil companies have received some significant tax 

breaks. They have insisted the windfall tax on their profits would 

hurt their business, probably raise prices at the pump. Senator 

Kohl had asked a question in a hearing in February on energy consolidation, and let me just followup. 

If the six big oil companies had their profits halved for a year, 

what impact would that have on the oil companies? 

Mr. BORENSTEIN. Well, I am not sure how they would have their 

profits halved. If you meant a windfall profits tax, essentially that 

would just come out of the oil companies. There is no way they 

could pass that on to consumers because they sell in the world oil 

market. In the longer run, it could change their incentives to invest 

in new oil exploration, and likely would. Would that have a significant effect on the oil market? That depends on how big they are 

in the world oil market, and the answer is actually they are probably not that large. 

Senator LEAHY. Well, and a question that I would ask, Madam 

Attorney General, how does Congress go about bringing about more 

transparency? I mean, everybody has talked with us. I could ask 

the same question of everybody. I won’t because my time is up, but 

how do we go about getting more transparency in these companies 

so we know what they are doing? 

Ms. LAUTENSCHLAGER. Well, among the things that we would be 

very anxious to see Congress do would be to look at the trading 

markets themselves. As I indicated in that last graph that is in the 

written testimony, there seems to be a distinct correlation between 

volatility in the marketplace and the amount of trading. Some of 

the trading that is being done in over-the-counter markets and the 

like—which is not being done by registered traders, nor is it being 

reporter—oftentimes a commodity can exchange hands as many as 

30 times from the wellhead until it gets to the market. These sorts 

of factors seem to be impacting this greatly, and just the registering of traders and the reporting of trades we think would lend 

some greater certainty to that market and afford us the opportunity to determine whether or not manipulation is taking place. 

Senator LEAHY. I appreciate that, Mr. Chairman. I am wonder on 

this question of transparency if the other panel members could submit for the record. I raise this because I am also on the Agriculture 

Committee, which has jurisdiction over CFTC, and we will be looking at that question there, too. 

Chairman SPECTER. We will hold the record open for at least a 

week. 

Senator LEAHY. Thank you. 

Chairman SPECTER. Supplemental questions can be submitted. 

Senator DeWine? 

Senator DEWINE. Thank you, Mr. Chairman. 

Mr. Borenstein and Mr. Greene, a question for you. The oil companies claim increased capacity of about 14 percent. On the other 

hand, at the Committee’s last hearing in February, several of our 

witnesses testified that the oil companies had been shutting down 

refineries to manipulate the supply of gasoline and to increase 

their profits. Who is right? Mr. Greene? 

206

Mr. GREENE. I can only speak to the California markets with any 

particularity. 

Senator DEWINE. You have to push that closer, Mr. Greene. 

Mr. GREENE. I can only speak to the California markets with any 

particularity. At least at the refinery level of the industry that 

serves the State of California, I think that we have seen some modest increases in capacity. Attorney General Lockyer and our antitrust staff worked very hard with Shell Oil Company to make sure 

that they did not shut down their Kern County facility. That would 

have represented a reduction of roughly 10 percent of California’s 

diesel supplies and 6 percent of our gasoline supplies. We were 

quite pugnacious, truthfully, with Shell, and they were going to 

simply shut that plant down. At the end of the day, we were very 

pleased that they, from our perspective, stepped up, did the right 

thing, and sold it. It has now been sold to a firm called Flying A. 

Flying A has made a commitment to the Attorney General that it 

will both continue to run the plant as a major refinery for both diesel and gasoline, and they have told us they will also expand capacity. That would be the report from the Far West. 

Senator DEWINE. Professor Borenstein? 

Mr. BORENSTEIN. Actually, both parties are probably right. The 

refiners are every year increasing the capacity of the refineries 

within their existing footprints. At the same time, a number of the 

older refineries have been shut down. 

Are the refineries doing as much as they should be doing in a 

competitive market? That is very difficult to diagnose, unfortunately. They can certainly make a credible defense that they are 

doing all they can within economic standard to expand their output. At the same time, if you look at their incentives, certainly the 

amount of money they make does depend on how much refining capacity is off-line or brought down. The Katrina experience is quite 

clear on this. We saw refineries go out, and yet the refining profits 

of the companies went up, and that is because we are in a very 

tight refining market. Did they do everything they could to bring 

those refineries back up as quickly as possible—and they may 

have, but it is certainly very difficult to second-guess. And it is certainly the case that while those refineries were down, they were actually making more money. But that probably was primarily due 

to real scarcity. When there is a real scarcity, the prices should go 

up. 

Senator DEWINE. Let me ask anybody on the panel who wants 

to respond, when we look at gasoline markets, it seems the consumers have more options than they do in some other industries, 

but despite the recent mergers, we still have half a dozen major oil 

companies testifying here today, and most of us have a variety of 

gas stations nearby where we live and work. Despite all these different competitors, gasoline prices keep going up. 

Now, of course, crude oil prices are a big part of that, but some 

have also argued that the reason oil companies can get away with 

raising prices is that people have to buy gasoline. We have to do 

it every day. We need to drive, and we do not really have any other 

viable alternatives. 

Do you think this means our antitrust laws should be tougher on 

mergers in the oil industry and use possibly different standards 

207

when looking at these deals? Or is that factor already built into our 

legal analysis? And is there anything else that the antitrust laws 

can do to protect consumers from high gasoline prices? Anyone 

want to jump in on that? 

Mr. ALIOTO. Well, I think, Senator, that it is not absolutely—it 

is not correct to suggest that because there are different brands in 

different areas that there is competition, because in many instances one oil company will own and operate under a number of 

different names, including, for instance, on the West Coast it was 

not Exxon, for example, or Shell or Texaco that were actually operating those stations, but it would be another station altogether. 

And what they do is when they swap their stations, they also swap 

their names. And so it is not really competitive. 

And as I pointed out in my opening statement here, for instance, 

you had Shell and Texaco. There was always a price differential between Texaco and Shell, and Texaco and everyone else. But as soon 

as they had the joint venture, the first thing they did was to bring 

the Texaco price up and then they raised everything by 70 percent 

throughout the country. 

Senator DEWINE. Mr. Borenstein? 

Mr. BORENSTEIN. I think that the treatment—the law is certainly 

the same for oil and energy companies, so unfortunately, the treatment really shouldn’t be. The DOJ guidelines that were referred to 

are very rough guidelines about market shares that don’t take account of the inelasticity of demand, as you pointed out, that people 

need to buy gasoline and the fact that you can run into real supply 

constraints. So a simple-minded application of those Merger Guidelines is likely to lead you astray. 

We saw this when the Federal Energy Regulatory Commission 

tried to use those guidelines in the electricity business. Likewise in 

the oil business, it is not a good economic analysis to take those 

guidelines and to slap them onto the oil business because the demand is so inelastic and because we are running into real supply 

constraints. At that point even firms with a fairly small market 

share are able to move the market. 

Senator DEWINE. Thank you, Mr. Chairman. 

Chairman SPECTER. Thank you very much, Senator DeWine. 

Under the early bird rule, Senator Feinstein and Senator Schumer were here at the start. Senator Feinstein, you are recognized. 

Senator FEINSTEIN. Thank you very much, Mr. Chairman. 

Gentlemen and Madam Attorney General, ever since the California energy crisis, I have really been profoundly impacted by the 

way this energy sector of our economy functions. It seems to have 

no consumer loyalty, no real care or concern with what happens to 

the consumer. And I found this deeply disturbing. We are listening 

to the Enron trials. We have read transcripts of traders saying, 

‘‘Let’s just stick it to Grandma Millie.’’ We have seen El Paso plug 

a pipeline with the purpose of forcing up the price of gas. 

Mr. Attorney General, I want to thank you for the Attorney General’s, you know, really, I think, effective litigation which has 

brought on literally millions of dollars of settlements in this case. 

But one of the things that is happening is that an increasing share 

of trading is now moving off of the regulated exchanges onto the 

unregulated over-the-counter exchanges, and more companies are 

208

running these electronic trading facilities. Eighty percent of the energy markets are not regulated by the Federal Government. 

I have tried twice in the past, and the Commodity Futures Modernization Act for reauthorization will shortly be before the floor of 

this body. It exempts energy trading from any regulation. I will 

have an amendment to provide transparency to the energy markets 

by requiring energy traders on electronic trading platforms to keep 

records and report their trades to the Commodity Futures Trading 

Commission so that Commission can exercise due anti-fraud and 

anti-manipulation oversight. 

I would like to know if the Attorneys General will support this 

legislation. 

Ms. LAUTENSCHLAGER. I think I could probably speak for all four 

of us who were involved in this Midwest thing in saying we absolutely would. That is one of our primary conclusions. While supply 

and demand and the inelasticity of these markets explains perhaps 

the gradual upward increase of prices, particularly of natural gas, 

it doesn’t explain the volatility. But, clearly, that volatility has a 

direct correlation between increased trading and spikes in the market. 

Our inability to access information about those trades is particularly frustrating to us, and your legislation would address just that. 

So we thank you for that, Senator. 

Senator FEINSTEIN. So, in essence, this is a secret, hidden trading market. 

Ms. LAUTENSCHLAGER. Absolutely. You know— 

Senator FEINSTEIN. No audits, no records kept. 

Ms. LAUTENSCHLAGER. Absolutely. Pork bellies, orange juice, soybeans—all of those things are more transparently traded than are 

these energy commodities. 

Mr. GREENE. And if I may, Senator? 

Senator FEINSTEIN. Mr. Greene? 

Mr. GREENE. If I might add, the exemption from CFTC rules and 

regulation also means that the anti-fraud and anti-manipulation 

rules that the CFTC enforces are not applicable to those essentially 

off-book kinds of exchanges. And, indeed, when you look at some 

of the electronic exchanges that Enron, in fact, pioneered, sadly, for 

the consumers of California, that was exactly one of the major 

problems behind it. It was secret, and it was highly manipulative, 

and we all paid the price. 

Ms. LAUTENSCHLAGER. Senator, if I might, too, you know, the 

price indices on which prices are based also come from only that 

20 percent of the market share which are report and not necessarily well reported. So not only are we seeing that impact in 

terms of what seems to be the volatility of the market based on increased trading that is unreported, but also that impacts on where 

those price indices go, which causes a chain reaction. So we might 

add that to that, too. 

Senator FEINSTEIN. Do you think any of this is responsible for 

this spike in natural gas? 

Ms. LAUTENSCHLAGER. My sense is yes. I mean, the spikes that 

come and go tend to be absolutely related to trading numbers, and 

there has to be some sort of correlation. And, again, our ability to 

209

see those markets better I think would afford us the opportunity 

to better analyze that and come up with answers for consumers. 

Senator FEINSTEIN. Because my concern is what we are now seeing is the rebirth of fraud and manipulation, but in the natural gas 

market. 

Ms. LAUTENSCHLAGER. It is hard to tell because we don’t know 

what is going on. So I think you are getting precisely to the point, 

which is we need to be able to have information. 

Senator FEINSTEIN. Thank you. 

Thank you, Mr. Chairman. 

Chairman SPECTER. Thank you very much, Senator Feinstein. 

Senator Cornyn? 

Senator CORNYN. Thank you, Mr. Chairman. 

Thank you, ladies and gentlemen, for being here today and offering your expertise. You know, it is kind of confusing for all of us. 

As a matter of fact, the Federal Government is confused among 

itself. As you know, the Federal Trade Commission and the General Accounting Office have different views on the question before 

the Committee today—consolidation in the oil and gas industry, is 

it raising prices? And, of course, the Federal Trade Commission 

disagrees with the General Accounting Office’s methodology and 

the like. But even assuming that the General Accounting Office’s 

methodology is correct, it concludes that it probably had a difference of maybe 2 cents per gallon on gasoline, or perhaps under 

some instances it actually said that there were decreases of about 

1 cent per gallon on average. 

So I guess all of us can be forgiven, I hope, a little bit at being 

confused if, in fact, the two entities—the Federal Trade Commission and the General Accounting Office—that are supposed to understand and evaluate these issues and explain them to the rest of 

us appear to be in disagreement. 

But while we are all looking for answers to the important questions of how we can get more supply and how we can help bring 

prices down, while Congress can pass new legislation—and I think 

Senator Specter has taken a serious attempt to try to address it, 

although I have some concerns about it—I think we ought to look 

perhaps at ourselves. I am talking about Congress being part of the 

problem here. 

It strikes me that we are schizophrenic when it comes to our energy policy in this country because, on the one hand, we know that 

more supply, as Mr. Boies said, when it comes to natural gas, 

means that there will be a lower price, but yet we have policies in 

this country that enact moratoria on exploration and development 

of known reserves of natural gas offshore. We know that there is 

oil and gas available in places like the Arctic National Wildlife Refuge, and Congress has chosen to deny the exploration and development of that, which is strikes me if it would increase supply, then 

it would necessarily help bring the price down. 

But I want to maybe ask Professor Borenstein, you talk about 

the demand and the scarcity of supply. Would you sort of put in 

a global context of why things have changed so dramatically here 

over the last 5 or 10 years in terms of competition for that supply 

between emerging economies like China and India? Has that had 

210

a very direct impact on the costs we are seeing both on oil and refined product as well as natural gas? 

Mr. BORENSTEIN. There is no question that the growth in world 

demand has been the major factor driving up crude oil prices over 

the last 5 years. I certainly do not believe, though, that we should 

view this as a problem created by China. China’s demand is growing because it is a very underdeveloped country that is now trying 

to become a moderately underdeveloped country, and as a result, 

they want to consume more oil. I think certainly in my opinion 

they have just as much right to buy oil as we do on the world market, but the fact is as more of the world develops and wants to become particularly an oil-dependent transportation economy—because there are very few substitutes—it is going to drive up the 

world price of oil. That is an inexorable direction that we are going. 

Frankly, drilling in the United States is not going to change that 

more than a very minute amount, and, in fact, over the medium 

run, it doesn’t look like we are going to bring on enough new oil 

supplies to significantly dampen the price. And I say that both 

reading the press about the oil exploration and looking at the oil 

futures market where people are making their own monetary bets 

on prices, and they see it staying around $60 a barrel as far as the 

eye can see. 

Senator CORNYN. Well, it strikes me that part of our National 

Energy Policy has got to be reducing our almost complete dependence on oil and gas. As the President said, we need to diversify, as 

the Congress has passed an energy bill which has encouraged the 

use of nuclear power, for example, and finding ways to use the 300-

year supply of coal that exists in this country that produces electricity for an awful lot of people. 

Mr. Chairman, my time is up. 

Chairman SPECTER. Thank you very much, Senator Cornyn. 

Senator Schumer? 

Senator SCHUMER. Thank you, Mr. Chairman. 

Mr. Chairman, in the past, this Committee has received statements that discuss the economic vagaries and jargon used to justify 

a rubber-stamp mentality at the FTC. And I want to thank this 

panel because they break through a lot of that. 

I think we need to step back and apply some common sense here. 

There are fewer more massive players in the markets. Prices have 

spiked. And what has gone up has not come down. Coincidence? I 

don’t think so. 

The result, of course, has been egregious profits for the mega oil companies. Exxon announced a record-breaking $10 billion in profit 

in the last quarter, with $36 billion in profit for all of last year, 

which is a record in corporate history. 

Examine the numbers and it yields an inexorable equation. Concentration in the industry equals obscene prices plus record profits. 

My constituents experience this all the time, and we see prices 

going up by 50 cents in a day. 

We hear, of course, that the price of oil is set on the world market and supply and demand are the root drivers. True as these 

things may be, it is simply naive to think that massive consolidation of the industry has no impact, particularly with the vagaries 

of price. Not only does it keep the price of oil high, but since these 

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companies don’t invest in new sources of energy, it stifles innovation and leaves us dependent on oil. 

In his State of the Union address, we heard the President say 

that America is addicted to oil. If that is so, then these behemoth 

oil companies are some of our biggest dealers. And we have heard 

a great deal of talk about the need for an international market, 

prices go up, we need consolidation to explore. That doesn’t answer 

the consolidation in the downstream market. In other words, even 

if you have to consolidate for exploration, which I wouldn’t concede, 

why do you have to consolidate with refineries and retail, which 

has happened as well? And consumers have been backed into a corner because the oil companies have been given free rein to corner 

the market, even in areas that have nothing to do with production. 

Mr. Chairman, I think we should seriously explore divestiture, 

particularly on the downstream side, refining and retail, because 

what happens very simply is that the price of gasoline goes up even 

when there is an adequate supply of crude because of the consolidation in the downstream market. 

So I would like to ask each of you two questions. First, do you 

agree with that downstream analysis? Wouldn’t the market benefit 

from more independent activity in the downstream sector? 

Wouldn’t the consumer be better served by competition, more of it 

among refiners and retailers, regardless of the issue of exploration 

and the high costs there? And, second, don’t you think that if we 

had 100 or even 1,000 smaller oil companies selling oil, refining oil, 

that after Katrina we wouldn’t have seen everybody, no matter how 

much Gulf oil they got, march in lockstep in terms of the prices? 

The West Coast, for instance, gets no Gulf oil, and their prices 

went up almost exactly the same as the areas that use Gulf oil? 

Let me just start with Mr. Boies and work my way over, and I 

am not asking any more questions. 

Mr. BOIES. I would agree, Senator. I think that everybody knows 

and certainly every businessman knows that if you can increase 

concentration, you can increase prices, you can increase profits. 

And while it is often very difficult to determine how much the profits have increased and how much the prices have increased as a 

result of concentration, we know the right direction and we know 

that competition is better than concentration. We know that the 

more competition you have at the downstream market, the better 

price and the better service consumers will get. 

Senator SCHUMER. Ms. Lautenschlager? 

Ms. LAUTENSCHLAGER. Thank you, Senator. Let me just say one 

quick thing, and that is in respect to the natural gas markets. And 

we in Wisconsin obviously—we were not impacted necessarily by 

suppliers in the Southeast during Katrina, and yet we saw those 

like spikes. 

The natural gas market saw perhaps a 5-percent hit as a result 

of Katrina, but natural gas demand during that time also went 

down because of the loss of industry there. So maybe a 2-percent 

hit to the market, and yet we saw those incredible spikes. I think 

you are absolutely right. It is inexplicable for those reasons. 

Senator SCHUMER. Mr. Greene? 

Mr. GREENE. Thank you, Senator. Very thoughtful questions. 

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Our experience is that antitrust authorities have by and large 

not understood until recently the critical importance of retail and 

the downstream aspects of the business. What we perceive generally and I think what consumers oftentimes see is a pattern that 

we sometimes call a ‘‘rockets and feathers’’ pattern. Prices will 

rocket up, as they did post-Katrina. Actually, in California, our 

prices skyrocketed within 24 hours, and indeed none of our refineries are actually based in the Gulf Coast. But what happens is because of a relatively limited amount of competition at retail, it 

feathers down. 

What I think is needed here, if it is at all possible, is an injection 

of competition at retail. The battleground frequently on the price 

of gasoline is fundamentally at the intersection level. If it is all majors at that intersection, those prices will feather down very, very 

slowly. If we could reinject more competition, more independence 

into that marketplace, that would be a definite plus. 

Senator SCHUMER. Mr. Alioto? 

Mr. ALIOTO. Thank you, Senator. I don’t think that there is any 

question that if there were more competition, and especially in the 

refining and the retailing, that there would be significant decreases 

in prices. I think that it needs to be understood that these companies are exchanging their refined product, and they exchange the 

refined product between themselves at a price substantially less 

than the price they sell to their own retailers. The retailers are 

under complete control of the oil company. They are the buffer zone 

between the oil companies and the public. And as a result, if their 

price is going up, their margins are not much different, regardless 

of where it goes. 

The Supreme Court once referred to them as ‘‘the vassals of the 

oil industry.’’ There is no question that is exactly what happens. 

And there should be much more competition and divestiture in that 

area because a dealer cannot sell other gasoline even though it is 

coming out of the same refinery. And so they have to stick with 

their so-called brand, and the brands are insignificant because the 

owners of the various brands may be one company that is not the 

original competitor’s. 

Senator SCHUMER. Finally, Mr. Borenstein? 

Mr. BORENSTEIN. Well, I am concerned about concentration in 

the refining business, the increase you see. I am more concerned 

still about potential future increases. I think that we are now on 

the cusp of being in a position where more increases would literally 

cause a problem. 

At the same time I think that realistically this is not an issue 

that is going to affect the world price of oil, and it is a world market for oil, and that is the biggest reason that we are seeing high 

gasoline prices right now. 

I also want to address the retail end. The fact of the matter is 

that although there is a lot of disagreement and tension between 

retailers and refiners, retail margins have fallen over the last few 

decades. 

And it is very high to put the current high price of gasoline on 

some sort of problem of competition at the retail end. I think the 

concern we should have is at the refining end, and I think that 

might explain a few cents—market power in that area might exVerDate 0ct 09 2002 09:17 Jul 19, 2007 Jkt 033417 PO 00000 Frm 00220 Fmt 6601 Sfmt 6601 S:\GPO\HEARINGS\33417.TXT SJUD1 PsN: CMORC
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plain a few cents of the current pricing, but to be completely honest, it is going to explain for more than 5 or 10 cents at the very 

most. All of what is going on right now is the very high price of 

world oil and that is because the world oil market is tight, and 

Saudi Arabia in particular is able to make it tighter. 

Chairman SPECTER. Senator Coburn. 

Senator COBURN. Thank you, Mr. Chairman. I would note for the record that the price of natural gas this morning is around $7 a 

million BTU, and in fact, we did see a tremendous spike in natural 

gas prices. Anybody want to explain why we saw that, any of our 

panelists? 

Mr. BOIES. This spike in natural gas prices is due to an excess 

of demand over supply, and the issue is why do you have that excess, and whether or not what is happening is supply is being manipulated for purposes of restricting output and increasing price. 

Senator COBURN. I would tend to disagree with that. I think the 

reason the price went up is pure speculation on the commodities 

exchange by people who did not have to take delivery of natural 

gas, and if you will recall, what did we do with silver and the Hunt 

brothers? How did we eliminate the manipulation of that market? 

What was the technique that was used? 

Mr. BOIES. Well, actually, the Hunt brothers ran out of money. 

Senator COBURN. But we also said you had to take delivery. 

Mr. BOIES. Yes. But the problem is, as I indicated before, is that 

you have vast reservoirs of natural gas in Alaska, and none of it 

is being exported to the United States, zero over decades, and that 

elimination of that supply— 

Senator COBURN. That is right. And none is being exported 

today, and the price is half of what it was 2 months ago. The point 

I am wanting to—I want to get back to what Senator Feinstein was 

talking about—is manipulation on the commodity markets of price 

based on speculators. 

Mr. BOIES. There is no doubt that there is a tremendous amount 

of volatility that is increased and results from that speculation. I 

agree with you, and I agree with what was said earlier by the Attorney General completely, that without the transparency, those 

markets lead to a great deal of volatility. But if you look at the 

long-term increase, that is going to be due to supply as well. You 

have to address both of those issues. 

Senator COBURN. I do not disagree with you, but the chart that 

Attorney General Lautenschlager put forward, if you go back to 

1990—I can tell you, being from Oklahoma, $2 natural gas is not 

going to get any exploration for it. Nobody is going to hunt for natural gas at $2 at the wellhead. It does not pay, will not pay, will 

never pay again because of the cost. So let’s assume that we have 

a $4 or $5 natural gas. My question to you is that price ought to 

increase demand. I am not denying your legitimate point that you 

see a problem with delivery there, but I think the big run-up that 

we saw here has more to do with speculation on the commodity 

markets than it has to do with price manipulation of either the gas 

producers or the consumers. In fact, there was artificial demand 

created on the basis of a run on the commodity markets, and there 

ought to be something either going to the Banking Committee or 

the Finance Committee to create the transparency in those marVerDate 0ct 09 2002 09:17 Jul 19, 2007 Jkt 033417 PO 00000 Frm 00221 Fmt 6601 Sfmt 6601 S:\GPO\HEARINGS\33417.TXT SJUD1 PsN: CMORC
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kets, and also with a little rule, if you are going to do it, you have 

to take delivery. 

Mr. BOIES. Right. 

Senator COBURN. Take your trillion cubic feet of natural gas if 

you want to speculate on it, and let the hedge funds take it, and 

then let’s see what they will do with it. They will choke on it. 

And the same thing, I had a producer in my office that his estimate—Professor Borenstein, I would be interested in your response—he still thinks that there is $7 to $8 speculation priced 

into the world price of oil based on speculators only, not on people 

who are actually consumers of oil, and I would wonder what your 

thought is on that. 

Mr. BORENSTEIN. Actually, I do not think that speculators are 

able to keep a long-term price spike in the market. I think certainly they participate in changes in beliefs about whether we are 

going to see a shortage. For instance, after Katrina, a number of 

non-gas companies got into the market, which was very tight, and 

thought that the price was going to spike substantially, and sure 

enough, that contributes to driving the price up. 

However, the reason the prices have not gone up substantially is 

we have had until fairly recently a very mild winter, and that took 

the pressure off of those very limited supplies, and as a result we 

have seen the price, thankfully, come back down. 

That said, I agree entirely with Senator Feinstein. In fact, back 

in 2001 when it first raised, that we need more transparency in 

these markets. The CFTC has rules to prevent the sort of squeezes 

that the Hunt brothers engaged in, but those rules need to be applicable. I am not sure you want to force the hedge companies to 

take delivery, but you certainly want to force them to unwind their 

position in a reasonable and timely way so it does not have disruption in the market. 

Senator COBURN. I just have one other question for you, kind of 

as a free marketer. If I go out and produce 100,000 bushels of corn 

and the price is not any good, should I be forced to sell that? 

Mr. BOIES. No. But I think that that does not really address the 

issue here, because certainly over the last 30 years the price of natural gas has been extremely high, and what you have seen is holding the natural gas off the market at a time when the price has 

been spiking. So this is not a situation in which you have very low 

prices and people are simply waiting. What you have are people 

holding the supply off the market for purposes of keeping prices 

high and making prices go higher. 

Senator COBURN. Did you say over the last 30 years that the 

price of natural gas had been high? 

Mr. BOIES. No. What I said is it has been increasing and they 

have had the natural gas there for 30 years. In order to believe 

that this is simply waiting for the price to go up, you would have 

to believe that there was not a time over the last 30 years when 

they thought it was profitable to market natural gas. You have arguments for exploration, drilling, and we need to drill more. We 

need to find more natural gas. And yet they have trillions and trillions and trillions of cubic feet of natural gas that are sitting there, 

already discovered, ready to be developed and they are not being 

developed. What I am saying is that there is a disconnect between 

215

the argument—which I agree with—which we need to have more 

exploration, and the argument that says, well, we are just going to 

hold all this supply off the market. 

Senator COBURN. Any other comments on that? 

Mr. ALIOTO. I think that in the production you have to look at 

what Senator Schumer was talking about, but in production and 

exploration you have to deal with the numerous joint ventures 

among and between the oil companies so that the risk factor is very 

limited, and so they all share in what happened. So no one takes 

the major risk, and that when they do in fact get a find and get 

a product, they also have certain sharing and agreements. Like I 

pointed out, Senator, in your State, Phillips actually, the chairman 

of Phillips, in the notes with the Chairman from Conoco, had made 

a substantial investment in Alaska, some $7 billion. But he could 

not even operate it in Alaska, and the reason he could not was because he recognized, and the folks from Conoco recognized, that 

there was an agreement between Exxon and BP that the only operators in Alaska were going to be those two. And so he conceded to 

BP to operate what he bought. 

Senator COBURN. Mr. Chairman, could I ask indulgence to ask 

one question of Professor Borenstein? 

Chairman SPECTER. Yes, Senator. 

Senator COBURN. In this makeup of the majors who have consolidated through the years, as a percentage of the natural gas market 

in this country, compared to the petroleum—excuse me—in comparison to the crude oil market, is there a big differential between 

market control on natural gas and on crude oil in this country 

among these majors? 

Mr. BORENSTEIN. Look at the natural gas market. It is a continental market since it is very hard to import, and so the positions 

of these producers are much, much larger, even with the same domestic market share. The natural gas market has historically been 

considered very competitive, but in the last decade we have seen 

increases in concentrations and certainly there is increased concern 

when these markets get very tight as they are now, that have been 

met with even 20 percent or 10 percent market share, is able to 

move the market. In the world oil market these companies really 

are small players and really are not going to be able to move the 

market. They are going along for the ride, and, of course, they are 

making a lot of money at it. 

Senator COBURN. But it is true that they control less natural gas 

than they do oil products in this country? 

Mr. BORENSTEIN. That is true, I believe. Actually, I am not sure 

off the top of my head, but I think that looking at their control of 

natural gas, you have to recognize it within a domestic market, 

whereas looking at oil, you have to recognize that it is in the context of the world oil market. 

Senator COBURN. Thank you, Mr. Chairman. 

Chairman SPECTER. Senator Durbin. 

Senator DURBIN. Thank you very much, Mr. Chairman. 

Chairman SPECTER. I want to make a comment that Senator 

Coburn went a little over time. He has yielded back more time, 

however, in the past than any other member of the Committee, so 

216

we gave him a little extra license. I just want the record to show 

that. 

Senator Durbin. 

Senator DURBIN. Thank you, Mr. Chairman. I want to thank the 

panel. 

We write laws. We like to think that they will change things for 

the better. Senator Specter has a bill which he is introducing, 

which I would be happy to co-sponsor, the Petroleum Industry— 

Chairman SPECTER. Thank you very much, Senator Durbin. 

Senator DURBIN. Senator DeWine has a bill called the NOPEC 

bill, that I have co-sponsored in the past, that I believe is part of 

it. But when I listen to your testimony here, all the laws we pass 

may not make any difference at all. When I hear you give comment 

on the antitrust section of the Department of Justice and the Federal Trade Commission, they sound like lap dogs in a roomful of 

energy pit bills. So the question I have is this, even if we pass 

these new laws and create this new enforcement authority to try 

to break up some of this concentration of ownership, to try to create competition and give the consumers a fighting chance, do they 

have a fighting chance if the administration will not aggressively 

enforce the current laws or any new laws that we would enact? 

Mr. ALIOTO. They have a fighting chance, Senator, if they are 

given the right to file suit under these laws. 

Senator DURBIN. Private causes of action. 

Mr. ALIOTO. Pardon me? 

Senator DURBIN. Private causes of action. 

Mr. ALIOTO. Private cause of action, because they are the only 

suits that are being brought. The Government, I would say in 

many of the antitrust cases in the last 10 years, the Government 

is on the side of the defendant, so the private right of action is the 

only one that is being effective, and if we have the right—unfortunately, in Senator Specter’s legislation, this is just confined to—enforcement is just confined to the Attorney General. Give enforcement to the private party, and if you can, in terms of damages as 

well for what is going on, make it an indirect purchaser as well, 

that they can file suit, because if we cannot, the Government will 

not. 

Senator DURBIN. I think that is a good suggestion. 

Let me ask the others on the panel, have you seen evidence in 

the last 5–1/2 years of this administration, as we have watched the 

cost of energy bankrupt airlines, and cause such a tremendous drag 

on our economy, not to mention the hardship on businesses and 

families, have you see evidence of this administration, that they 

understand this concentration of power and the damage that these 

high energy prices are doing to our economy? 

Ms. LAUTENSCHLAGER. Let me just say, Senator, that I agree 

with you on that premise, and I think that you are absolutely right. 

That being said, from a practical standpoint, and somebody who 

has been involved in a variety of Government institutions over my 

professional career, that is why somebody like me comes to a Committee today and says, can we at least get transparency? Can we 

at least know who is doing what and hold them accountable, because at that point at least the ordinary citizen, somebody who is 

217

not part of a special interest group, has at least the opportunity to 

see what is being done institutional. 

Senator DURBIN. What I hear from you and Mr. Alioto, is at least 

give somebody on the outside of Government a chance to fight for 

consumers, because no one on the inside is doing it. 

Ms. LAUTENSCHLAGER. I like fighting for consumers, Senator, but 

certainly, the Federal Government’s practices have changed over 

the years. 

Mr. GREENE. If I may, Senator? 

Senator DURBIN. Mr. Greene. 

Mr. GREENE. I do have the opportunity to work with people I 

think are quite good at both the U.S. Department of Justice and 

at the Federal Trade Commission, and I have been very impressed 

with their commitment to the public interest. 

They do, however, operate within a structure, a legal structure 

which has become the legal equivalent of a hot house petunia. The 

elaborate economic analyses that are done really cut against sort 

of the common-sense notion that many of you have articulated 

today. Within that structure I think they are making a very sincere 

effort. 

The kinds of statutory changes that Senator Specter and others 

are endorsing with his legislation changing the standards with respect to mergers, would be extremely helpful. I mean these cases 

are extremely time consuming. They are extremely expensive. All 

these merger cases, in ExxonMobil, for example, we took a portion 

of the document production from Exxon. I took over, essentially, 

half of our library in Los Angeles. I had, literally, 10,000 boxes of 

materials. 

Senator DURBIN. Let me just say I understand it is a big fight, 

and it is a big issue. And when companies like United Airlines and 

other airlines are going into bankruptcy because of the cost of jet 

fuel, and because we see companies across America and families 

across America in hardship, I think it is worth the fight. 

And one thing I want to add, and I do not know if Professor 

Borenstein will have a chance to reply, but when I listened to your 

first comment about the cost of gasoline on the market being $1.66 

gallon, and a $1.43 can be attributed to crude oil prices, we know 

the price of a barrel of oil has gone up $60 and $70 a barrel. All 

of that is a good explanation for the high prices at the pump unless 

and until you consider that ExxonMobil registers record multibillion dollar profits in this atmosphere. So it is not input costs that 

are driving these alone. Clearly, there is profit-taking, the most 

massive profit-taking in the history of American industry at the 

same time. 

We are in a situation now where we have no voice in saying to 

these giants, ‘‘You should not have done that. Your money ought 

to be coming back for the good of society that has paid the price 

for the gouging that is taking place at the gasoline pumps.’’ So 

what do we get every day? We get a full-page ad in the Washington 

Post, explaining, ‘‘We really need this money, and we promise we 

are going to spend it well. We got some great ideas.’’ 

Mr. GREENE. I saw that ad myself this morning, Senator. 

Senator DURBIN. Is it not wonderful that we get these ads every 

day? It makes me feel good. 

218

Mr. GREENE. But I do think it is a fight, but it would be mst 

helpful if you would give us new tools to bring to that battle. 

Senator DURBIN. New tools and new mechanics. 

Chairman SPECTER. Thank you very much, Senator Durbin. 

Senator Biden. 

Senator BIDEN. Thank you very much, Mr. Chairman. Thank you 

for holding the hearing. 

Professor, I would like to ask you a question. How much of the $1.66, as it relates to the crude oil cost, the world market price, 

how much of that would you call a terror premium? In other words, 

a lot of it is obviously supply and demand. Demand has increased 

greatly. The ability to increase supply rests basically only with 

Saudi Arabia now to any amount, a couple million barrels a day. 

But how much of that is a terror premium? 

Mr. BORENSTEIN. I actually think relatively little of it is a terror 

premium because what we are facing right now is not supplies 

being held back in concern that they will maybe be needed later 

after a terrorist attack, but the world production capacity is really 

being pushed to its capacity. And all the other OPEC members, the 

United States and all the non-OPEC members, other than Saudi 

Arabia, are cranking out all the oil they can. Saudi Arabia is 

cranking out a lot of oil, though they are withholding 1 or 2 million 

barrels a day in capacity from the market. So it is very hard to attribute the high price to today’s price of oil to a terror premium. 

I think most of it is being driven by the fact that we have strong 

demand, we have very inelastic demand, and we have one player 

who can restrict supply. Everybody else is already restricted by 

their capacity constraints. 

Senator BIDEN. My second question, Professor—I did not support 

it, but we passed an energy bill in 2005 that has $2.6 billion in incentives for oil and gas incentives, and based on the profits, is any 

of that needed? I mean I do not quite get it. I was really impressed 

with your testimony. You seem balanced as can be. What is the 

deal? If we did not have any of that $2.6 billion in incentives for 

oil and gas companies, would they in any way alter their behavior, 

from an economic standpoint? 

Mr. BORENSTEIN. I was certainly very sorry to see those incentives in the energy bill. I think with the price of oil where it is now, 

offering more incentives for oil exploration in the United States is 

just not a good policy. It is essentially handing money to the shareholders of the oil companies. 

Before we start talking about windfall profits taxes, I think the 

first thing legislatively that should be done is a serious exploration 

of all the tax breaks that the oil companies got, and removal of 

most of them, because at this point I do not see the reason for the 

United States intervening to try to encourage certain things to the 

market, when the price is $60 a barrel. 

Senator BIDEN. I find it fascinating that we want market forces 

to function, and I am preparing legislation to do just that, eliminate all the incentives. I was here during wage and price controls, 

and I was here during the time when we put a excess profit tax 

on oil companies. That is how long I have been here, Professor. I 

used to have hair like you, and that is how long ago it was. I think 

the chances of that happening are zero. But I think the changes 

219

of—and we are going to get a chance to ask the oil executives 

this—let’s just be free market guys here. Let’s just get rid of all 

these incentives. You do not need them now. Granted, $2.6 billion 

over 10 years is not the end of the world, but it is a good place to 

start. 

Let me ask David Boies, if I may. You heard earlier the Professor’s testimony, where he basically is saying, as I understood him—

and you correct me if I am wrong, Professor—that there is not a 

whole lot—I think your phrase was, there is a whole sea out 

there—what was the phrase you used—one big bathtub of oil, and 

we are very small players in it. And so as a practical matter, there 

is not much we are going to do in that big bathtub to affect the 

price of crude oil. I wonder whether, starting with you, David, if 

the panel agrees with that assertion? 

And the second question I will get in before my 43 seconds is up, 

is if there is only one thing we could do from this panel, including 

you, Professor, what was the one thing you would like to see us attempt to change legislatively? There are my two questions. 

Mr. BOIES. With respect to the bathtub of oil, my remarks were 

primarily directed toward natural gas, and I think the Professor 

would agree that the natural gas market is not a worldwide market. It is much more of a continental market. If you look at the 

spike in prices that came from about a 5 percent, 6 percent interruption in terms of Katrina, and you think that the Alaska gas 

supplies, if they would simply commit the gas to the pipeline, 

would increase supply in the United States between 7 and 10 percent, substantially more, maybe twice as much, you can get some 

idea of what the order of magnitude of the effect on price could be 

in the natural gas market if we could simply make them stop withholding that supply from the market. 

Senator BIDEN. General? 

Ms. LAUTENSCHLAGER. Thank you, Mr. Biden. I had the good fortune of meeting your delightful son a few weeks ago. 

Senator BIDEN. He is smarter than I am. 

Ms. LAUTENSCHLAGER. Let me say that from an enforcement 

standpoint, I think the transparency issue is huge, and I think it 

is something which is doable within the context of this Congress. 

Senator BIDEN. Mr. Greene? 

Mr. GREENE. I think, Senator, that the oil industry actually at 

some level is quite localized. Refineries are optimized for certain 

kinds of oil. For example, refineries in California, several of them 

are specifically designed to take Alaskan crude. They are not designed to take any other kind of crude. So when you are taking a 

look at a merger, for example, you have to take that into account. 

At a higher level, of course, oil at some level is an international 

product and we have to think of it that way, but it is, in important 

ways, very local, and you can sort of analyze it that way. 

In terms of the single most important thing I think you could do 

today for the people of the United States would be to enact 

NOPEC. That puts into play the power of the United States Judiciary and its prosecutors to address what I think is the single most 

important problem here, which is the international oil markets. If 

you do one thing, that is the thing I would certainly suggest. 

Senator BIDEN. Mr. Alioto? 

220

Mr. ALIOTO. I would point out, Senator, that I think one of the 

things is, as in this legislation, to prohibit—especially Americans—

from agreeing not to import into the United States, like Chevron 

and Texaco had in their agreement, the Caltex agreement, for all 

the gas that they explored in the Far East. I think also that Saudi 

Arabia, as you may know, Saudi Refining Company is run by the 

Saudi Arabians. They were part of, and are part if, the Star Joint 

Venture that was part of Texaco. And they were part of that ShellTexaco agreement, and they were part of the increasing in the 

prices when the crude oil was at its lowest since the Depression. 

So they are aware of that. 

And I think NOPEC, I do not know whether or not it would be 

effective, but certainly a law like that—I think we have that under 

continental law—but certainly a law like that, that if they affect 

the United States, that we ought to be able to do something about 

it. But so long as we do not have to hear from the State Department that prevent us from—especially if you allow private parties 

to do it—so long as we do not have to hear from the State Department, which they come to us a lot if they think that we are interfering with international politics. 

Senator BIDEN. Professor? 

Mr. BORENSTEIN. Well, I think the one thing that this Committee 

could do practically is try to change the burden of proof in these 

merger cases, to tilt it more toward a real showing of economies. 

At the same time though I think this Committee has to recognize 

and help the public recognize that the main reason the gasoline 

prices are so high is out of our control and is a result of strong demand in the world market, and that that is a reality going forward. 

And the idea that Americans have a right to cheap, plentiful fossil 

fuel energy supplies is just out of sync with reality, and we need 

to explore alternatives so that we can reduce our addition to oil. 

As long as we are using oil as a transportation fuel, we are going 

to continue to be held up by the world oil market, particularly by 

the Middle East. 

Mr. ALIOTO. I want to say that the idea that the prices of oil are 

out of our control is absolutely incorrect, and that it is a matter of 

combination and whether combinations can be broken up. These 

folks meet all the time, every month. They use the same facilities. 

They know exactly what they are doing. If they want to raise the 

price or lower it, they can. 

Chairman SPECTER. We are going to proceed with the second 

panel. The Senate schedule calls for the budget resolution voting 

to start this afternoon at 3 o’clock. We had to start late today because of the Judicial Conference. Customarily this Committee begins promptly at 9:30, but we made the 10:30 start for that reason, 

and we are going to proceed right through. 

Professor Borenstein, Thank you very much. Thank you very 

much, Mr. Alioto, Mr. Greene, Attorney General Lautenschlager 

and Mr. Boies. Your testimony has been very, very forceful and illuminating, and helpful. Thank you. 

Senator BIDEN. I agree. 

Mr. ALIOTO. Thank you, Senators. 

Chairman SPECTER. We now call Mr. Rex Tillerson, Chairman 

and CEO of ExxonMobil; Mr. James Mulva, Chairman and CEO of 

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ConocoPhillips, Mr. David O’Reilly, Chairman and CEO of Chevron 

Corporation; Mr. Mr. Bill Klesse, CEO of Valero Energy Corporation; Mr. John Hofmeister, President, Shell Oil Company; and Mr. 

Ross Pillari, President and CEO and BP America, Inc. 

Thank you for joining us, gentlemen. And if you will all rise, we 

will administer the oath. 

Do each of you solemnly swear that the testimony you will give 

before this Judiciary Committee of the United States Senate will 

be the truth, the whole truth and nothing but the truth, so help 

you God? 

May the record show that each answered in the affirmative. 

We have been joined by Senator Kohl, who is the ranking on the 

Subcommittee, and I think it would be in order to recognize you, 

Senator Kohl, for an opening statement. 

Senator KOHL. I thank you very much for that courtesy, Mr. 

Chairman. I do have a statement which I will insert into the record 

so we can get to questions. 

Chairman SPECTER. Without objection, it will be made a part of 

the record. 

Senator KOHL. Thank you. 

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

Chairman SPECTER. Our first witness will be Mr. Rex Tillerson, 

Chairman and CEO of ExxonMobil Corporation. Mr. Tillerson 

began his career with Exxon in 1975, holding numerous engineering, technical and supervisory assignments. More recently he 

served in several high-level positions with responsibility for 

Exxon’s holdings in Russia on the Caspian Sea Region. 

Thank you very much for joining us, Mr. Tillerson, and as announced previously, our Committee proceedings call for 5-minute 

opening statements. The floor is yours. 

STATEMENT OF REX W. TILLERSON, CHAIRMAN AND CHIEF 

EXECUTIVE OFFICER, EXXONMOBIL CORPORATION, IRVING, 

TEXAS 

Mr. TILLERSON. Thank you, Chairman Specter and members of 

the Committee. With respect to the Committee’s specific question, 

whether mergers and acquisitions in our industry have contributed 

to higher prices at the pump, my answer is no, and an examination 

of the facts do not support any other conclusions. 

In our view the fundamental question is, if Americans are to continue to have access to secure, affordable energy from today’s global 

marketplace, what qualities must U.S. energy companies have to 

successfully compete? We need companies that have the scale to 

compete, the financial strength to undertake the risk involved to 

make enormous investments, and the technological expertise to 

meet future needs and environmental expectations. 

Let me begin with a scale. The energy industry follows what I 

call the law of large numbers. Although each unit of energy consumption is relatively small, multiply it by billions of consumers 

daily, it adds up to the world’s largest industry. To give you a 

sense, in the amount of time scheduled for our panel, American 

will have consumed about 54 million gallons of oil. Given these volumes, naturally our earnings are large. For an American company 

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to succeed in this enormous industry, it needs sufficient scale. Having said that, ExxonMobil today accounts for a smaller global market share than Exxon and Mobil did together either years ago. And 

believe it or not, our share of the world’s total energy production 

is less than 2 percent, and our share of global oil production is 3 

percent. 

The second quality American companies need to compete is financial strength. Financial strength allows us to undertake the 

enormous risk involved in making huge investments in energy-producing projects that take years to develop and bring into the global 

supply pool. Our costs are enormous. For ExxonMobil they included 

$185 billion last year to buy crude in the global market. That is 

because we do not produce enough crude oil to sufficiently feed our 

refineries. We produce about 2–1/2 million barrels a day of crude 

oil. That is about 3–1/2 million barrels a day less than we refine. 

Subtract the taxes and the cost from the price of gasoline, and our 

downstream earnings were less than 10 cents a gallon. 

Over the last 5 years we have invested $74 billion in adding 

crude oil producing capacity, and developing liquified natural gas, 

and in building refining capacity, and in other projects to bring 

more secure, reliable, clean energy to Americans. If you look at our 

investments over the last 15 years, $210 billion in all, that exceeded our cumulative earnings. 

Finally, U.S. energy companies need technology leadership. Sophisticated technology allows us to bring harder-to-reach energy resources to American markets in a safe and environmentally sound 

way. ExxonMobil is spending millions each day to extend efficiencies, develop new production capabilities, blend cleaner fuels, 

and fund breakthrough emissions reducing technologies. 

One example of our scale, investment and technology at work, is 

the Alaskan natural gas pipeline. If this historic project proceeds 

as we hope, and with the support of Congress, the executive 

branch, and the State of Alaska, it will create 6,500 jobs, entail 54 

million hours of work, and require over 5 million tons of steel. It 

will be the largest construction project of any kind ever undertaken 

in North America, requiring an investment of over $20 billion. 

When it is completed, it will provide Americans with access to a 

new source of secure, clean-burning natural gas. 

In conclusion, we need energy companies that have the scale and 

financial strength to make the enormous investments, undertake 

the risk, and develop the new technologies necessary to provide 

Americans with greater energy access and greater energy security. 

ExxonMobil is one such publicly owned energy company, and one 

that I believe all Americans can be proud of. 

Thank you. 

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

Chairman SPECTER. Thank you very much, Mr. Tillerson. 

Our next witness is Mr. James Mulva, Chairman of the Board 

of Directors, President and Chief Executive Officer of 

ConocoPhillips; became President and CEO after the 2002 merger 

between Conoco and Phillips. Prior to the merger he served as 

President and CEO for Phillips Petroleum. 

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Thank you very much for being with us today, Mr. Mulva, and 

the floor is yours for 5 minutes. 

STATEMENT OF JAMES J. MULVA, CHAIRMAN AND CHIEF 

EXECUTIVE OFFICER, CONOCOPHILLIPS, HOUSTON, TEXAS 

Mr. MULVA. Mr. Chairman, members of the Committee, thank 

you. Our company appreciates the opportunity to share the experience we have gained from the merger of Conoco and Phillips, and 

to demonstrate how such combinations of expertise and resources 

has benefited the U.S. consumers. 

Recent consolidations in the petroleum industry have been driven by an increasingly challenging business environment. The principal challenge is access to oil and natural gas resources, not only 

here in the United States, but in many other nations around the 

world that supply about 60 percent of our country’s petroleum 

needs. Government policies in the U.S. put the most highly prospective natural gas acreage off limits, and make it difficult to permit key energy infrastructure. Resources outside the United States 

are often controlled by host country national oil companies, which 

allow limited or no access by international oil companies, and 

which have recently increased competitive intensity by vying for 

the opportunities beyond their borders. 

The most significant opportunities that are available to international oil companies today are generally projects that host country national oil companies decide to undertake jointly with foreign 

participants. These projects are often very large, complex and 

risky. They require financial strength, proven technologies, highly 

trained personnel and reliable access to the marketplace. Only 

large companies that have the financial capacity and technical resources to effectively develop these projects, and have sufficient diversification to manage the risk. 

For U.S. companies to compete in today’s environment of mega 

projects, they have grown in size commensurate with the growing 

magnitude, complexity and risk of available opportunities. The $36 

billion merger of Conoco and Phillips was completed in 2002, was 

undertaken to form a company of sufficient size and scale to capture opportunities that could not be achieved by either company on 

a stand-alone basis. The combination also created a new U.S. company better able to compete in the world energy market through 

its stronger financial position, improved capital efficiency, and a 

leaner cost structure. The merger was necessary to sustain the 

company’s long-term viability. 

Briefly, here are two specific examples of benefits to the U.S. consumers that in all probability would not have happened without 

the combination of the companies’ complementary technology and 

competencies. By coming Phillips LNG technical expertise with 

Conoco’s gas marketing experience, ConocoPhillips has become a 

successful player in the global LNG business. Over the next decade, LNG will become a crucial component of America’s gas supply 

in refining. The complementary refining technologies and best practices of the two companies are being shared across our entire refining system. These efforts have helped lower our cost structure, improve efficiency, and expand our capacity. Furthermore, the combination will help improve the feed stock position at several of our 

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U.S. refineries, by linking them with growing supplies of crude oil 

from the Canadian oil sands. 

In short, the merger has opened the way for ConocoPhillips to increase supplies, which benefits U.S. consumers through lower 

prices and greater energy security. U.S. consumers also have benefited from the reduced cost and improved efficiency of our business, 

as this has allowed us to provide more reliable supplies at the lowest possible cost. 

Looking ahead, ConocoPhillips is planning an expanded investment program in U.S. refining, which will produce 15 percent more 

clean fuel such as gasoline and diesel by the year 2011. The equivalent of adding one world-scale refinery to our domestic refining 

system. And we are also working close with the State of Alaska 

and others to bring North Slope natural gas to the lower 48 market 

through a new pipeline expected to cost over $20 billion. 

We are investing aggressively to bring liquified natural gas to 

the U.S. market through our multibillion dollar projects in Qatar, 

Nigeria, while simultaneously pursuing opportunities in Russia, 

Venezuela and Australia. 

Mergers and acquisitions have allowed ConocoPhillips to create 

a global petroleum company that is more capable of deploying significant investments to increase the supply of crude oil, natural gas 

and refined products to U.S. consumers. In fact, over the last 3 

years, when our earnings totaled about $26 billion, our investments 

back into the business exceeded $27 billion. We intend for our high 

levels of reinvestment to continue with a 2006 investment program 

of nearly 17 to 18 billion dollars. 

The key to improving energy security and reducing prices is increased investment by the energy industry across a diverse set of 

energy projects in both the upstream and downstream business 

segments. ConocoPhillips could not make the investments we are 

making today to increase energy supplies to American consumers 

without the company we have built in part through mergers and 

acquisitions over the last decade. We would not have the financial 

strength, the ability to handle large and complex projects, technologies, commercial skills or resource prospects. We believe that 

large, vigorous companies give consumers a stronger American 

voice in competing for the world’s energy resources and providing 

them at a reasonable cost. 

Therefore, we believe the Americans have a stake in keeping 

U.S. companies like ConocoPhillips competitive for the sake of our 

economy, as well as our energy security. 

Thank you, Mr. Chairman, for allowing me to make these comments. 

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

for the record.] 

Chairman SPECTER. Thank you very much, Mr. Mulva. 

We now turn to Mr. David O’Reilly, Chairman and Chief Executive Officer of Chevron Corporation since the year 2000. A native 

of Dublin, Ireland, Mr. O’Reilly began his career with Chevron in 

1968 as a process engineer. 

Thank you for joining us today, Mr. O’Reilly, and we look forward to your testimony. 

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STATEMENT OF DAVID J. O’REILLY, CHAIRMAN AND CHIEF EXECUTIVE OFFICER, CHEVRON CORPORATION, SAN RAMON, 

CALIFORNIA 

Mr. O’REILLY. Thank you, Chairman Specter and Senator Leahy 

and members of the Committee. I am pleased to have the opportunity to discuss some of the important energy issues facing our 

country today. 

I would like to make two points in my oral testimony. First, 

mergers in our industry over the past two decades have made U.S. 

companies more competitive and efficient in the production, refining and marketing of energy supplies. 

For example, refining has seen remarkable productivity gains. 

Two decades ago there were about 220 refineries in the U.S. with 

a capacity of roughly 14.5 million barrels a day. Today there are 

one-third fewer refineries, but producing 20 percent more. Despite 

mergers, the top five U.S. refiners today have less market share 

than the five top competitors in many other business sectors, including airlines, long distance carriers, department stores and auto 

makers. 

The gasoline market is also highly competitive. During Chevron’s 

mergers with Gulf and Texaco, we divested significant marketing 

assets. Today Chevron is the No. 1 marketer in only three States—

Nevada, Mississippi and Oregon. 

All of these factors have helped moderate gasoline prices. Over 

the last several decades gasoline prices have increased at a lower 

rate than many other staples like food, housing and health care. 

My second point is that scale matters. To illustrate this, I would 

like to show a chart that puts the size of our industry in perspective. At my left you can see that this chart shows who controls the 

world’s oil and gas reserves. You will find it difficult to locate companies such as ours on this chart. We are dwarfed in size by national oil companies such as Saudi Aramco and Russia’s Gazprom. 

ExxonMobil is the small red bar in the middle, and moving to the 

right, the next red bars are BP, Chevron, and Shell. 

Today’s energy projects, like the kind we are developing in the 

Gulf of Mexico deep water, are big and complex. They require highly skilled, large technologically advanced and well capitalized companies to manage them. 

U.S. companies must develop the economies of scale to compete 

in the global marketplace. This helps us to gain access to additional and diverse supplies that find their way to the U.S. markets. 

Investments by U.S. companies have helped increase oil production outside of OPEC. Since 1975, non-OPEC production has nearly 

doubled. Because we import over 60 percent of our oil and over 15 

percent of our natural gas, the United States is now more energy 

interdependent than it ever has been. As the world’s largest consuming Nation, the United States bears a unique responsibility in 

addressing global energy supply issues. 

There are steps that policymakers can and should take to ensure 

more reliable and affordable energy supplies for American consumers. These include, first, improving the climate for investment 

in energy infrastructure; second, rationalizing U.S. gasoline supply 

to make it more fungible; third, increasing access to domestic oil 

and gas supplies; fourth, recognizing in U.S. trade and foreign polVerDate 0ct 09 2002 09:17 Jul 19, 2007 Jkt 033417 PO 00000 Frm 00233 Fmt 6601 Sfmt 6601 S:\GPO\HEARINGS\33417.TXT SJUD1 PsN: CMORC
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icy that the United States and the rest of the world are interdependent; and finally, promoting further improvements in energy 

efficiency and diversification of U.S. energy supplies. 

We stand ready to continue a productive dialog on how we can 

work together to create these policies. 

Thank you, and I will turn back the rest of my time, Senator. 

[The prepared statement of Mr. O’Reilly appears as a submission 

for the record.] 

Chairman SPECTER. Thank you very much Mr. O’Reilly. 

We turn now to Mr. William Klesse, Chief Executive Office and 

Vice Chairman of the Board of Valero Energy Corporation. He previously served as Executive Vice President and Chief Operating Officer with the responsibility for all operations, including marketing 

and refining. He began his career as a junior process engineer with 

Diamond Shamrock, was later acquired by Valero. 

We appreciate your coming in today, Mr. Klesse, and the floor is 

yours for 5 minutes. 

STATEMENT OF BILL KLESSE, CHIEF EXECUTIVE OFFICER, 

VALERO ENERGY CORPORATION, SAN ANTONIO, TEXAS 

Mr. KLESSE. Thank you, Mr. Chairman, Ranking Member Leahy, 

members of the Committee. Thank you for having us here today. 

Valero Energy Corporation is an independent refiner. We entered 

the refining business in 1981 when we bought a 33,000-barrel-aday refinery in Corpus Christi. Today, that refinery has a throughput capacity of 340,000 barrels a day. During the 1980s and most 

of the 1990s, refining was at a cyclical low. Other companies were 

exiting the business because of the continuing low profit margins 

and escalating environmental compliance costs, but Valero believed 

that the move toward cleaner fuels would tighten supplies and as 

demand grew, margins would improve. Valero was able to buy 

many refineries for as little as 10 to 20 percent of replacement 

costs. Since 1997, Valero has purchased 17 refineries, improving 

and expanding every one. 

And while much has been made of the fact that no new refineries 

have been built in this country for more than 30 years because of 

poor returns, siting issues, and permitting, Valero has increased 

capacity of its 18 refineries by almost 20 percent, adding 533,000 

barrels per day of refining capacity, including since 1997 nearly 

400,000 barrels a day. That is equivalent to three world-scale 

grassroots refineries. 

It is fair to say that if Valero had not acquired those refineries, 

much of that capacity expansion would not have occurred, and 

some of those facilities might have closed. 

Improving refineries takes expertise and capital, and Valero has 

more in-house expertise and greater access to capital than many of 

the companies from which we have purchased the refineries. 

Valero has invested approximately $8.2 billion to improve its refineries. Since 1997 through 2005, in refining we have spent 92 

percent of our total net income. Since 1997, we have spent $2.4 billion on regulatory and environmental compliance. To completely 

comply with regulatory and fuel specifications, we will need to 

spend another $3.5 billion over the next several years. And new 

regulations continue to be drafted and adopted. Given the magVerDate 0ct 09 2002 09:17 Jul 19, 2007 Jkt 033417 PO 00000 Frm 00234 Fmt 6601 Sfmt 6601 S:\GPO\HEARINGS\33417.TXT SJUD1 PsN: CMORC
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nitude of the investments required to meet new requirements, 

agencies must consider and mitigate their impact on supply and 

cost as well as on the refining industry’s ability to remain profitable. 

Each of Valero’s acquisitions was thoroughly reviewed by the 

Federal Trade Commission and State Attorneys General. In fact, 

the FTC holds our industry to a much higher standard. In some 

cases, Valero had to divest some assets in a transaction. But in all 

cases, more refining capacity and higher annual production has resulted. And we have improved safety and reliability of all of those 

refineries. 

Aside from supply disruptions like hurricanes, where our dedicated employees were able to get those refineries on very quickly, 

the largest single factor in rising fuel prices has been the cost of 

crude oil, which last year averaged $1.20 per gallon, or about 53 

percent of the cost of gasoline. Valero is not in the exploration and 

production business. We do not benefit from the high oil prices. We 

purchase all our crude and feedstocks on the open market, and we 

are a large spot seller of gasoline. 

It is also important to note that last year, a record year, the Gulf 

Coast crack for gasoline was $10.57 a barrel, or about 25 cents a 

gallon. The return on investment for Valero is good, but even at 

these numbers, if these refineries were on our books at full replacement cost, our return on investment would be low. Refining is a 

world business with thin margins and high capital costs. We must 

be careful about passing laws and regulations that negatively impact the business. 

In summary, Valero has been saying since 1997 that worldwide 

demand for clean refined products would grow faster than supply, 

and we have been investing accordingly. Our investments and acquisitions have clearly increased U.S. gasoline and diesel production. 

Thank you, sir. 

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

for the record.] 

Chairman SPECTER. Thank you very much, Mr. Klesse. 

Our next witness is Mr. John Hofmeister, President and Chairman of Shell Oil’s U.S. affiliate. He joined Shell in 1997 as Director 

for Human Resources, and prior to that, served as Vice President 

for Human Resources for AlliedSignal. 

Thank you very much for being with us today, Mr. Hofmeister, 

and we look forward to your testimony. 

STATEMENT OF JOHN HOFMEISTER, PRESIDENT, SHELL OIL 

COMPANY, HOUSTON, TEXAS 

Mr. HOFMEISTER. Chairman Specter, Ranking Member Leahy, 

members of the Committee, I appreciate the opportunity to discuss 

the energy issues of concern to you, to Shell, and to the American 

people. 

Shell has been producing energy in the United States for nearly 

100 years. I am fiercely proud of the work of our tens of thousands 

of U.S. employees, and especially of the way that they have stepped 

up to the challenges of the past year. 

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Our U.S. operations are heavily concentrated in the Gulf Coast 

area. Hurricane Katrina knocked out more than half of our offshore 

production for more than 3 months. Two of our Louisiana refineries 

were damaged by Katrina, and two more in Texas were hit by Hurricane Rita. Nearly 4,600 employees were displaced by these 

storms. 

Our people put in endless hours, even as they dealt with their 

own crises, to minimize supply disruptions to those who depend on 

fuel for the cars, homes, and businesses. 

As a recent testament to our employees’ resilience and commitment to our communities, Shell’s evacuated operations have now 

returned to New Orleans. 

Why am I describing all of this, Mr. Chairman? Lack of access 

to energy resources and the hurricanes are the roots of the angst 

American consumers are currently experiencing. When supply is 

limited and demand is not reduced, the consequence is higher 

prices. In a free market, that is how it works. 

Growing global demand has been a major factor behind rising 

crude oil prices. Shell is making significant investments to meet 

this challenge. 

Over the past 5 years, Shell has reinvested virtually all of our 

U.S. earnings into finding new supply, increasing production, improving refining capabilities, and developing new technologies: 

For the past 5 years alone, Shell has invested over $1 billion per 

year in developing offshore oil and gas resources in the Gulf of 

Mexico. 

We are aggressively pursuing natural gas prospects in North 

America, including Alaska. 

We are making significant investments in unconventional resources—oil sands in Canada, oil shale in Colorado, and new cleaner coal technologies in 12 States. 

We are investing in liquid natural gas projects that could result 

in 2 to 3 billion cubic feet per day of capacity by the year 2010. 

We are investing in renewable energy sources as well—wind energy, solar CIS thin film technology, biofuels, and hydrogen. 

On the refining side, we are looking at multi-billion-dollar expansion projects equal to the construction of a moderate-sized new refinery. 

It takes an extraordinary level of financial strength to deploy 

such large amounts of capital in risky environments and in a cyclical industry. Fragmented or financially insecure players cannot afford such risk. To achieve what we have set out to do, we need your 

help, not new barriers. 

Despite the apparent size of the major investor-owned energy 

companies, this remains a highly competitive industry. Consider 

the structure of our retail gasoline business, where the Shell brand 

has a 12-percent market share nationwide. Roughly 90 percent of 

Shell branded stations are owned by independent jobbers and retailers. Just last week, I met with over 1,700 wholesalers—all independent American business men and women, not one of whom was 

required to choose the Shell brand to display on their businesses. 

We are seeing healthy new retail competition emerging with 

brands such as WaWa, Sheetz, and Turkey Hill. 

229

From the perspective of Shell’s transactions experience, in markets of concern to both Federal and State antitrust law enforcement agencies, mandatory divestitures were designed to prevent 

declines in the number of competitors or increases in concentration. 

And we have fully complied with such divestitures. 

Prices are set on a competitive global market. The biggest component of the retail price of gasoline—and we have heard testimony 

this morning—is the price of crude oil. Crude oil prices are set on 

the deepest and most liquid commodity market in the world. Companies of all sizes populate these markets, and investor-owned companies such as Shell provide some competitive balance to large 

Government-owned oil companies. 

The key to providing reliable and affordable energy for America’s 

future is new supply. Some of the greatest potential untapped resources in the world are off limits here in the United States. It is 

ironic that some of the same voices that cry out for the lower prices 

also advocate restricting access to domestic sources that, with today’s technologies, could be developed in an environmentally responsible manner. 

Beneath Federal lands and coastal waters, there are estimated 

to be 102 billion barrels of recoverable oil and 635 trillion cubic feet 

of natural gas whose development is limited by Federal policies. If 

Congress wants to address supply and help consumers, provide a 

way to tap these resources. 

Shell is committed to meeting America’s energy needs. We stand 

ready and willing to work with Congress cooperatively to ensure 

that the United States has the energy required for continued economic growth and a sustained quality of life. 

Thank you. 

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

Chairman SPECTER. Thank you very much, Mr. Hofmeister. 

Our next witness is Mr. Ross Pillari, President and Chief Executive Officer of BP America and senior British Petroleum executive 

in the United States. He began his career with Standard Oil in 

1972 where he served in a variety of positions, including Vice 

President of Wholesale Marketing and Distribution. 

We appreciate your being with us today, Mr. Pillari, and the floor 

is yours. 

STATEMENT OF ROSS J. PILLARI, PRESIDENT AND CHIEF 

EXECUTIVE OFFICER, BP AMERICA, INC., CHICAGO, ILLINOIS 

Mr. PILLARI. Thank you, Chairman Specter, Ranking Member 

Leahy, and members of the Committee. My written testimony can 

be summarized in five points. 

First, BP’s growth has been a competitive response to marketplace realities. BP is in a competitive global business that requires 

broad capability and scale to participate effectively. Finding and 

producing new oil and gas to meet increasing demand requires significant financial resources and the ability to manage the associated risk. BP’s growth has been a response to these market conditions and has provided the capability required to compete and meet 

the energy needs of the U.S. and global economies. 

230

Second, our recent growth has been weighted toward exploration 

and production where scale is increasingly necessary to compete. 

Since consolidation in the late 1990s, the major part of BP’s investments have been to find and produce oil and gas, which requires 

scale to meet the challenges posed by technical, logistical, financial, 

and permitting hurdles. Just one of these projects, the natural gas 

pipeline from Alaska, is expected to require investment of more 

than $20 billion over 10 years. A smaller BP would have found it 

difficult to participate. Similarly, a smaller company would have 

been greatly challenged to make the long-term investments required to find new oil and gas reserves in the Rockies and the 

deepwater Gulf of Mexico. These projects are high risk as they cost 

billions of dollars to complete and operate with no guarantee of 

success. But for all our current scale and breadth of capability, we 

still remain a small player in this global business, as you have already seen. Foreign national oil companies control more than 90 

percent of the world’s oil and gas reserves. By comparison, BP represents roughly 3 percent of global oil and gas production and less 

than 1 percent of global oil and gas reserves. Publicly owned global 

companies like BP play an essential role in competing for the supplies necessary to meet U.S. energy needs. Understanding this 

global role is an important consideration in any analysis of consolidation. 

My third point is that BP’s current refinery portfolio is designed 

to allow us to effectively compete in the U.S. refining industry. The 

U.S. industry today is more competitive and productive because of 

investment and improved efficiency. Today’s refineries produce 80 

billion gallons a year more product than U.S. refineries did 20 

years ago. Additionally, today’s refiners must respond to new regulatory requirements and make a greater variety of more costly and 

complex fuels. During the past 5 years, BP has invested roughly 

$3.5 billion in order to meet environmental regulations, fuel specification requirements, and maintain reliability and efficiency. 

My fourth point is that the U.S. consumer today benefits from a 

highly competitive, diversified, and reliable retail gasoline market. 

The retail gasoline business in the U.S. has been through great 

change in the last 10 years and U.S. consumers have benefited as 

a result. We have seen increased competition from convenience 

store chains, large independent distributors, and the hypermarket 

share has quadrupled in this time period. Today, over 90 percent 

of BP’s branded retail outlets are operated by independent business 

men and women who make their own decisions about which brand 

they choose and how they price. BP also supplies unbranded gasoline to independent retailers in many of our markets. All of these 

factors contribute to a highly competitive and reliable retail market. 

Last, U.S. gasoline prices in 2005 were primarily impacted by 

supply/demand imbalances, not growth from consolidation. The 

price of gasoline in the U.S. is primarily a function of demand for 

crude oil and products relative to available supply, which is affected by both the domestic and global markets. These market factors would have been present whether the companies of the 1990s 

had consolidated or not. However, it is likely that the increased capability and scale of today’s companies contributed to a more effiVerDate 0ct 09 2002 09:17 Jul 19, 2007 Jkt 033417 PO 00000 Frm 00238 Fmt 6601 Sfmt 6601 S:\GPO\HEARINGS\33417.TXT SJUD1 PsN: CMORC
231

cient restoration of supply when it was necessary than we would 

have seen in the last 5 to 10 years. Going forward, BP will continue to invest nearly $15 billion per 

year to find and produce new sources of hydrocarbon-based energy 

for our customers. For the longer term, BP expects to spend $8 billion globally over the next 10 years to develop solar, wind, and 

other forms of low-carbon energy. 

In closing, 2005 reflects both the unusual challenges and opportunities of the global markets for oil and gas. BP benefited from 

participating in these markets but has also experienced less attractive outcomes in many previous years. This is a business that must 

have the economic capacity to operate on committed long-term investment cycles, yet manage through volatile revenue cycles. Creating the capacity to take these risks and supply the Nation’s energy needs are important outcomes of the consolidation over the 

past 5 years. 

Thank you. 

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

for the record.] 

Chairman SPECTER. Thank you very much, Mr. Pillari. 

We will now start the 5-minute rounds by each Senator. I will 

begin with you, Mr. Tillerson. Senator Durbin has stated his intention to co-sponsor the draft bill, and a number of other Senators 

on the Committee have indicated similar interest, and other Senators as well. Section 1 provides for an amendment to the Clayton 

Act by prohibiting oil and gas companies from diverting, exporting 

or refusing to sell existing supplies with the specific intention of 

raising prices for creating a shortage. Would you object to that 

amendment to the antitrust laws? 

Mr. TILLERSON. Senator, I think the current antitrust laws are 

sufficient in terms of providing the oversight of the industry’s activities in all areas, including that particular area. The concern I 

would have is that would put at risk certain optimization steps 

that the industry takes routinely to ensure supplies are made 

available around all regions of the United States. 

Chairman SPECTER. If you have a specific intent to raise prices 

or create a shortage, you still would disagree with that provision? 

Mr. TILLERSON. That’s never been the intent of our activities in 

moving supplies around. 

Chairman SPECTER. Then you would have a defense. But the 

point is, if you had a law which dealt with that kind of specific intent—I am looking at what Mr. Boies has testified to on the Northern Slope, and I think a lot of people are concerned that there has 

never been any natural gas come out of the Northern Slope. 

Let me turn to you, Mr. Pillari, on this point. Why is there an 

arrangement between ExxonMobil and BP to reinject into the 

ground, rather than being sold to willing buyers in the face of concern that that natural gas is being diverted to keep prices high? 

Mr. PILLARI. I think, Senator, I would make two points. First of 

all, the injection of natural gas back into the fields is significant 

in its ability to increase the amount of oil that comes out. It is used 

as part of enhancing the oil production of the field. 

During the early years of— 

Chairman SPECTER. Are there not other ways to do that? 

232

Mr. PILLARI. There are many ways to do it, but during the early 

years of the field—don’t forget the price of natural gas was quite 

low—during that time period we’ve always been interested in finding a project to bring that gas to the lower 48, and in fact, there 

is a proposal in front of the Alaskan legislature right now that has 

been agreed between the State of Alaska, the Governor and us, to 

make that happen. 

Chairman SPECTER. Are you going to bring that natural gas from 

the Northern Slope to the United States? 

Mr. PILLARI. That is the intent, sir, yes. 

Chairman SPECTER. When? 

Mr. PILLARI. As soon as we can. It will take anywhere from 8 to 

10 years to build the pipeline. 

Chairman SPECTER. Are you planning to build that pipeline? 

Mr. PILLARI. We are planning to if the final legislation passes 

through the State of Alaska. 

Chairman SPECTER. Mr. Mulva, the testimony of Mr. Alioto this 

morning you probably heard, in part said that the ConocoPhillips 

situation, the two chairmen and executive officers of the companies—and you were one of those people prior to the merger—met 

privately on many occasions. One of them kept notes of their meetings. Those notes reflect that the reason for the merger was a fear 

of oil prices decreasing, and that it would be necessary to reduce 

the number of major integrated oil companies in order to keep 

prices high. And after the merger, according to Mr. Alioto’s testimony, sworn testimony today, prices were increased. Were you a 

party to any such meetings? 

Mr. MULVA. Mr. Chairman, I don’t recall any discussions along 

those lines. 

Chairman SPECTER. Was there any meeting—were there meetings between the two CEOs? Must have been meetings. 

Mr. MULVA. Absolutely there were meetings between the two 

CEOs, the former CEO of Conoco and myself as former CEO of 

Phillips. 

Chairman SPECTER. Did either of you take notes? 

Mr. MULVA. I believe the CEO of Conoco did. I did not. I can tell 

you— 

Chairman SPECTER. Do you know whether his notes contained 

the information that Mr. Alioto has sworn to? 

Mr. MULVA. Mr. Chairman, the purpose of discussions in the ultimate merger of Conoco and Phillips was essentially and totally directed towards making and creating a more competitive company 

than either— 

Chairman SPECTER. Let me ask one final question before my red 

light goes on— 

Senator BIDEN. Take more time. 

Chairman SPECTER. No, no. I am going to quit. Is it a relevant 

question— 

Senator BIDEN. You are on a roll. You can have my time. 

Chairman SPECTER. I am going to finish my question because of 

two interruptions. If it had only been one interruption I would not 

finish the question. 

Is it a relevant question to ask why the price of gasoline goes up 

11 cents in a time period when the price of oil goes down on a 7-

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cent per gallon drop? Is that a relevant question, Mr. O’Reilly? I 

am not asking you for the answer. I just want to know if it is a 

relevant question. 

Mr. O’REILLY. Of course, Senator. If you have asked, it is a relevant question. 

[Laughter.] 

Mr. O’REILLY. It is. 

Chairman SPECTER. Not necessarily. I have been in many court 

proceedings where the judge has sustained objections on relevancy 

lines. 

Senator Leahy, if you want to pick it up, or somebody else does? 

But I want to stick with the time limits. 

Senator LEAHY. Mr. Chairman, I have found this interesting, and 

I am sorry, because of my accident over the weekend, I have been 

in and out of this, but I listened to what Tom Greene said from 

California this morning. He said the enactment of NOPEC, our legislation, could provide them with the tools to get a price manipulation and price gouging by foreign oil cartels. The Committee has reported out NOPEC three times in the last 5 years. We even passed 

it, as I recall, sent it to the other body. Under heavy pressure, they 

killed it. I hope we may pass it again. 

My question is this though. The President said in his State of the 

Union message—and I completely agreed with this—Congress must 

act to encourage conservation, promote technology, build infrastructure, must act to increase the energy production of homes so America is less dependent on foreign oil. 

I went back and read the transcript of the joint hearing of the 

Energy and Commerce Committee in November. Each of you were 

asked what percentage of profits over the last 10 years have your 

companies reinvested in non-petroleum energy supplies in the 

United States. BP boasted quite a bit that they had had a $600 

million investment in their alternative energy business over the 

last 5 years. That would be about 3 percent of BP’s profits, not over 

the past 5 years, but in 2005 alone. And Exxon, Mr. Raymond simply replied a negligible amount. 

Mr. O’Reilly, you said that the question of non-petroleum energy 

investments in the United States is not readily available in the 

company’s accounting records. Are they available now? 

Mr. O’REILLY. Yes, Senator. In fact, I responded in a subsequent 

followup written question on this matter. 

Senator LEAHY. So how much? 

Mr. O’REILLY. $300 million per year, Senator. 

Senator LEAHY. Many would call these negligible, and I wonder 

where the investment goes. Chevron and Texaco has 2004 net income of $13.3 billion, buy back of $2.1 billion of its stock, accumulated 5 billion in cash. Where did the rest of it go? 

Mr. O’REILLY. Well, Senator, our capital investment in that years 

was approximately $10 billion, so we reinvested the majority of 

what we earned in that particular year, and $3 billion went in dividends to our shareholders. 

Senator LEAHY. And 2.1 billion went for buying back stock? 

Mr. O’REILLY. That is correct, Senator. And over the last four 

years, as I testified, we’ve reinvested in the business everything 

234

we’ve earned, and last year we made about $14 billion. Our capital 

budget for this year, 2005, is $15 billion. 

Senator LEAHY. How do you respond to the testimony of Mr. 

Alioto, when he said consolidations led directly to the increases in 

prices in gasoline. He talked about 1999 and the FTC about Shell 

and Texaco had entered into a joint venture by their assets, and 

then Shell and Texaco first increased the price of Texaco gasoline 

to bring it in line with Shell, and then decided, well, heck, let’s 

raise the price of both, 50 to 70 percent. He said a similar thing 

occurred when Conoco and Phillips merged. Judge Posner of the 

Seventh Circuit has noted the more contrary the industry, the less 

explicit the communication required to organize price limit production. 

Every time there has been a merger, prices have gone up. Anybody want to respond to that? Is that just coincidence? Mr. Mulva? 

Mr. MULVA. Mr. Senator, I think we can show for our company, 

and certainly for the industry, over the last decade, the results of 

inflation-adjusted real terms. In other words, the price of oil goes 

up or down, obviously, the cost of gasoline goes up or down. But 

if you take out the cost of oil, what you can see over this past decade is the efficiencies that have been gained by the companies as 

a result of consolidations, investments and organic growth. 

Senator LEAHY. But the prices always go up after— 

Mr. MULVA. Actually, the cost of operation has gone down during 

this time period. Obviously, in this past year it has gone up, and 

that’s primarily as a result of inflation. It’s the result of cost structure. It is also the result of the cost of crude oil. But over the past 

decade, results of our operations, they run more reliably, environmentally much stronger, much better, and the cost structure has 

come down for the reasons that other individuals who have given 

testimony, the industry, with fewer refineries, is running with 

much larger volumes, and therefore, the cost structure has actually 

come down. 

Senator LEAHY. Anyone disagreeing with that? 

Mr. KLESSE. I can say from Valero, every time we have made an 

acquisition, production has gone up afterwards. 

Senator LEAHY. Does anyone disagree with Mr. Mulva? 

[No response.] 

Senator LEAHY. I will assume that nobody disagrees and everybody agrees. 

Thank you, Mr. Chairman. 

Chairman SPECTER. Thank you, Senator Leahy. 

Senator DeWine. 

Senator DEWINE. Thank you, Mr. Chairman. 

Mr. Boies testified on the first panel and discussed the lawsuit 

which his client has brought against BP and ExxonMobil. So I have 

a question for Mr. Tillerson and Mr. Pillari. The basic allegation 

of the lawsuit is that the U.S. market needs natural gas, but instead of building a pipeline to ship natural gas from the Alaskan 

North Slope into the mainland U.S. market, BP and ExxonMobil 

have refused, and in fact, have acted together to prevent others 

from building pipelines as well. Let me quote from his testimony 

earlier this morning. 

235

‘‘ExxonMobil and BP have used a variety of illegal means to 

maintain a strangle-hold on the supply of natural gas on the North 

Slope and prevent it from ever reaching a market. They’ve acted 

together with the purpose of eliminating competition that could 

threaten their control over the development, marketing and pricing 

of natural gas.’’ 

Obviously, these are very serious allegations, and if they are accurate, they are extremely troubling. We need to increase, obviously, our supply of natural gas, and North Slope natural gas is an 

important potential source. Any action to prevent it from reaching 

American consumers is certainly something we would all be concerned about. 

I realize, gentleman, there is a pending lawsuit. You may want 

to be careful in what you say, but I want to give you an opportunity to respond. First, maybe Mr. Tillerson. 

Mr. TILLERSON. Well, Senator, I think it’s regrettable that Mr. 

Boies has decided to attempt to try this case in front of this Committee. I would categorically state that his allegations are untrue, 

and we look forward to defending ourselves in that lawsuit, which 

is active, as you noted, and I think to say anything further than 

that would be inappropriate. 

Mr. PILLARI. I would also say, Senator, that we also disagree 

with what he said. We’ll defend it in court, but would add what I 

said earlier. There is a very strong, high-quality proposal sitting in 

the legislature in Alaska today which will bring that gas to market. 

Senator DEWINE. As I said, it is a pending lawsuit, and you have 

to follow the advice of your lawyers, but that has been the testimony, and, of course, that is the testimony that we have in front 

of us, and, of course, that the American people have in front of 

them. 

Mr. Mulva, many of you have stated that merging has given you 

the size that you need to engage in increasingly more expensive 

and riskier investments. You in particular said the market forces 

that push for larger and more diverse oil companies will continue 

to grow. Just how much bigger do you think that you really need 

to be? Could you give us any preview of what kind of merger activity we might expect in the future? 

Mr. MULVA. My comments primarily relate to the merger of Phillips and Conoco back in 2002. We foresaw that the cost of the large 

projects, both in the upstream part of the business, exploration and 

production becoming more internationally focused, more challenging. We’re going into deeper waters, more exotic environmental 

arctic regions. The cost of projects, exploration, production, LNG 

projects are billions of dollars. So we looked at the size of our company, the old Phillips and the old Conoco, and we felt that the 

merger of the two companies would give us the critical size financially, and the technology and resources to compete. So, therefore, 

we felt we are of the size that we can compete. We do not see that 

there is any necessity for our company to be looking at further acquisitions— 

Senator DEWINE. I appreciate that. My time is almost out. Anybody else anticipate needing to be bigger? 

[No response.] 

Senator DEWINE. I take it by your silence the answer is no. 

236

Mr. PILLARI. Sir, I would add that I think it’s important for us 

to continue to look to grow on a global basis, and that will come 

through a variety of ways, including enhancements to our refineries, enhancements to our fields. So I think the issue of growth 

is one that, yes, in a continuously growing world, we will want to 

be a part of that. 

Senator DEWINE. Does that include mergers? 

Mr. PILLARI. I don’t think we have any anticipated right now, but 

I wouldn’t exclude anything. 

Senator DEWINE. Mr. Hofmeister? 

Mr. HOFMEISTER. Senator, I think it’s important to note that I 

get approached repeatedly by small companies who do not have the 

financial capital or the human capital to achieve what they have 

set out to achieve what they’ve set out to achieve and ask to be 

bought. We look at those periodically and make decisions which we 

think are in the best interest of our shareholders. But in addition, 

we are in a race with oil companies, as you probably recognize from 

the chart, to increase our reserves. One way to increase reserves 

is by acquiring those reserve by purchasing them, basically, and I 

wouldn’t rule out those possibilities. 

Mr. KLESSE. Senator, we view ourselves, Valero, as a growth 

company in this business. It’s been a relatively low-growth business my entire career, but we view ourselves as growth. So if a 

proper opportunity where the economics worked became available 

to us, we would continue to be very interested, and my comments 

demonstrated our commitment to the business and to the consumer. 

Senator DEWINE. Thank you, Mr. Chairman. 

Chairman SPECTER. Thank you, Senator DeWine. 

Senator Biden. 

Senator BIDEN. Mr. Chairman, thank you. Mr. Chairman, this is 

a really complicated subject, at least for a guy like me, and I understand the 5-minute rule, but I sometimes think in the interest 

of time we—at least for a guy like me—I find it hard to understand 

all of this in that quick a time. So I wish you had continued to ask 

questions. 

But let me go to my questions. Mr. Tillerson, you pointed out 

that your profit was in line historically with other major corporations, but am I right or wrong that you all had a 30 percent return 

on equity last year? 

Mr. TILLERSON. That’s correct. 

Senator BIDEN. And the average American corporation at a historic high had a 17 percent return in equity, right? Are you aware 

of that? 

Mr. TILLERSON. That would sound about right. 

Senator BIDEN. Any of you guys see the movie ‘‘Field of Dreams?’’ 

Seriously, it is a serious question. 

Mr. TILLERSON. Yes, I saw it. 

Senator BIDEN. Remember that line, ‘‘Build it and they will 

come?’’ Now, both ends of the table here have indicated that there 

is a need—you all have—for size and scale. Am I mistaken, or were 

there not at least three other outfits that were able to amass the 

19 to 20 billion to build that gas pipeline? Didn’t AGPA have Federal loan guarantees of $19 billion? They did not seem to have any 

237

problem being able to guarantee the ability to build a pipeline, 

right? Or am I wrong about that? 

Mr. TILLERSON. Well, Senator, as I indicated, there is some litigation surrounding this whole— 

Senator BIDEN. No, no, that has nothing to do with litigation. 

Don’t play that game. 

Mr. TILLERSON. OK. All I would say is that the proposals had a 

number of flaws in them that made them, in our view, nonfinanceable. Those were never addressed. Those discussions were 

ongoing for some time. We have looked for options over many, 

many years of ways to bring the Alaska gas to the markets. 

Senator BIDEN. You have been looking at it since 1990, have you 

not? 

Mr. TILLERSON. I have been looking at it since the mid 1980s, 

Senator. That’s the first time I worked on it. 

Senator BIDEN. And for the record, by the way, we are not talking about exploration. Someone said the guys who criticize this are 

the same guys who talk about not wanting to drill in the North 

Slope. This gas pipeline has nothing to do with that legislation. 

This is fact. You are able to build it now. You were able to build 

it since 1980, I mean, at least legally able to build it if you wanted 

to build it, right? There is no question about that, assuming the 

State signs off, right? 

Mr. TILLERSON. It’s just a question of economics. 

Senator BIDEN. And so I count here one, two, three, four, five, 

six times just in 2000, when six different operations have come to 

you guys and said, ‘‘We’ll build it if you will guarantee us you will 

put gas in it.’’ And you all said no, right? 

Mr. TILLERSON. Yes. 

Senator BIDEN. That is what I thought. Let me ask you another 

question. 

Mr. TILLERSON. We were unwilling to be the financial guarantors 

of that pipeline, correct. 

Senator BIDEN. Well, you were not a financial guarantor. That 

sounds good. But all you were doing was guarantee that you would 

supply the gas for the pipeline, right? 

Mr. TILLERSON. That would provide the financial underpinnings 

for it. 

Senator BIDEN. Well, I mean, that is like saying—anyway, I do 

not have time because of the 5-minute rule here. Let me ask you, 

do any of you need, to be able to do what you are doing now, $2.6 

billion in incentives the Federal Government is having other taxpayers pay for? 

Mr. TILLERSON. Well, Senator, we did not lobby for any— 

Senator BIDEN. I did not say you did. I am just asking, do you 

need it? 

Mr. TILLERSON. No. 

Senator BIDEN. Because you all point out we have to find alternative energy. It seems to me we should take the $2.6 billion that 

you all are getting, and we should put it into encouraging alternative energy. We should go out and do that—right? What do you 

think? 

238

Mr. MULVA. Senator, most of those incentives are directed toward energy in total, which is not necessarily the oil and gas business. 

Senator BIDEN. Oh, it is mostly you guys. 

Mr. MULVA. And second, it goes to independent producers, which 

are primarily the bedrock of most of our— 

Senator BIDEN. But your company will not be upset if we take 

those away, right? 

Mr. MULVA. Correct. 

Senator BIDEN. None of you will object to us taking away those $2.6 billion of incentives as they apply to you, is that right? 

I note for the record, everyone is saying OK. 

Mr. KLESSE. Senator, excuse me. 

Senator BIDEN. Do it quickly, I only have 24 seconds. 

Mr. KLESSE. OK. Valero, we were interested in the incentives to 

expand refining capacity. That’s our business, and we were interested in it. 

Senator BIDEN. Do you still need it? 

Mr. KLESSE. Do we need it? 

Senator BIDEN. Do you need them to expand? 

Mr. KLESSE. No. 

Senator BIDEN. Good, OK, that is all I need. So they are all for 

my bill. I want the record to show no one thought it would be any 

problem withdrawing it for all of them. Even though I only have 

2 seconds left, I yield. 

Chairman SPECTER. Thank you very much, Senator Biden. 

Senator Biden has the knack of finishing his questions within his 

time limit, so he does not have to abbreviate his questions. 

Senator BIDEN. That is right. 

Chairman SPECTER. I learned a lot from Senator Biden when he 

was Chairman of this Committee, and I am still learning. 

Senator Cornyn. 

Senator CORNYN. Thank you, Mr. Chairman. 

We have heard some suggestions about what the U.S. Congress 

might be able to do to help bring down the cost of oil and gas for 

the American consumer, and each of you have explained, in your 

own way, why it is that the oil and gas industry has made quite 

a bit of money over the last year or so, but I must say, while each 

of you might be accused of your companies making quite a bit of 

money, that is not yet a crime in America. As long as we are going 

to be investigating companies making profits, you all actually fall 

way down on the list. 

I note that all U.S. industry over the last 5 years, the profit averages were 5.5 percent. For the oil and natural gas industry it was 

5.8 percent. And that if we really wanted to go with the industries 

that are making large profits over those large 5 years, we would 

be holding hearings on the banking industry or pharmaceutical industry or real estate, health care industry or the like. 

But since it is not a crime to make a profit, and you have explained that the profits that you have made have allowed you to 

invest in further exploration and production, and hopefully, to increase supply to help bring prices down. 

What I would be interested in hearing from you is what can the 

Government do that would be actually positive in terms of bringing 

239

down the price of oil and gas? For example, would it be constructive or destructive of our goal of bringing that price down for the 

average consumer to pass a windfall profits tax, such as has been 

proposed in the United States Congress? Mr. Tillerson, do you have 

any comment on that? 

Mr. TILLERSON. Well, Senator, the cost of gasoline, as I think 

others have stated, is comprised about 60 percent the cost of crude 

oil, about 20 percent the taxes that you and the State and local 

municipalities levy, and the other 20 percent is a function of our 

cost of refining, manufacturing, transportation and providing it to 

the retail outlet. So the piece that we work on is that 20 percent 

that we—on the oil side we buy it. You set the taxes. We work on 

it. So we need to be efficient. 

One of the ways that you could improve the efficiency is to reduce the number of fuel specifications that are out there, the number of so-called boutique fuels, of which there have been some 20 

in the past, and I know there are proposals to take this down to 

5, which would greatly simplify the whole logistics and supply system within the country, and allow greater movements and freedom 

of movements of product around, which should benefit the consumer, because that brings efficiency to that 20 percent that we 

work on. To the extent we’re efficient, that’s what leaves us the 

profit margin we have, so we always are working hard to be efficient to create a penny, or two, or three, or four cents of profit that 

we can capture through our efficiencies. 

On the oil supply side, it means investing heavily, broadly, globally around the world, and that takes huge sums of money, and to 

enact a so-called windfall profits tax certainly does not do anything 

to increase the supply of crude oil available for refining and making gasoline in the U.S. 

Senator CORNYN. And I believe, Mr. Hofmeister, that you mentioned the last item that Congress has placed out of bounds on the 

natural gas reserves and oil reserves here in the United States that 

would, if tapped, explored, and developed, would increase supply 

and would help bring down that price of a barrel of oil, wouldn’t 

it? 

Mr. HOFMEISTER. There are numerous examples we could point 

to, Senator, of areas where we actually have licenses but we can’t 

get permits because the MMS does not have sufficient staffing to 

review our license applications in order to grant a permit. So 

human resources going into that Department would certainly help 

us increase gas exploration, particularly in the Western Rockies. 

There are many other examples of opening up the outer continental shelf that we could point to where we could explore. We 

can’t produce, obviously, in the near term because we require exploration and engineering and so forth to take the time. But in addition, there are many opportunities in the new 5-year plan put 

forward by the Interior Department which give us opportunities—

offshore Alaska, for example, or Chuckchi Sea or Bristol Bay. These 

are examples of areas where we could explore for gas and oil and, 

I think, bring many new supplies to the American people. 

Senator CORNYN. Mr. Klesse, in terms of the regulatory environment and how it impacts the refinery capacity, I know Valero, as 

you pointed out, has expanded its refinery capacity quite a bit. But 

240

in terms of what Congress has done or perhaps what it could do 

to make it more feasible to open new refineries, as opposed to just 

expanding existing refineries, are there things that you would advise Congress to do to help expand refinery capacity and then to 

make that supply greater, and then bring down the price of a gallon of gas at the pump? 

Mr. KLESSE. Yes. When you look just at the refining piece, all of 

these regulations that keep coming out, when you give good people 

an opportunity to draft regulations when they don’t have to consider cost or anything associated with it—supply, other items—you 

could imagine that we get very strict regulations. January 1st, 

lower gasoline sulfur. This summer, lower diesel sulfur for on-road. 

Next year, we have off-road diesel lower. It just goes on and on. 

To give you an example, we are building a scrubber in Delaware 

at our refinery, $130 million. We are doing a second one on a coker, 

$130 million. So we need to be very careful on these type of laws. 

Concerning the new refinery, Senator, I don’t think the economics can support that. We would not have a new refinery on line 

today for 5 or 6 years if we started in the U.S. Southern California, 

East Coast, 2 years to get a permit, at best. 

You have heard of NIMBY. Have you ever heard of BANANA—

Build Absolutely Nothing Anywhere Near Anybody? 

Senator CORNYN. Thank you. 

Chairman SPECTER. Thank you, Senator Cornyn. 

Senator Kohl. 

Senator KOHL. Thanks, Mr. Chairman. 

Mr. Tillerson, you and your colleagues place most of the blame 

on OPEC, arguing that you must pay higher and higher prices on 

the world market to obtain crude oil, which of course you refine 

into your products. Somehow, as the price that you have paid for 

this raw material has risen—and this is why we are here today—

your profits also rose to record levels. To me, this is odd because 

in most competitive businesses with which I am familiar, profits 

fall, not rise, as the prices of raw material go up. 

For example, the airline industry has seen the cost of its jet fuel 

rise sharply and this has not resulted in profits for the industry, 

but instead losses and bankruptcy for many of the companies in 

that industry. 

So how can it be that your profits have reached record levels as 

the worldwide price of your major raw material, crude oil, has risen 

to record high prices? What is different about your industry? 

Mr. TILLERSON. Well, first I would take exception to your statement that I blame OPEC for the high oil prices. I do not blame 

OPEC for the high oil prices. The high oil prices are a function of 

the global supply and demand, which is being driven by significant 

economic growth in some very large developing economies. 

More than two-thirds of our earnings, our profits, are generated 

by our activities not in the United States. So they are generated 

in a number of countries around the world, some of which involved 

downstream activity, some of which don’t. A lot of our earnings are 

generated in the E and P side of our business globally. So we are 

an accumulation of earnings from an upstream business, our downstream business, our petrochemicals business. So that— 

241

Senator KOHL. I don’t want to miss my chance to get a clear answer to the question. As the price of raw materials rises to a record 

level, every business I know loses money, or it doesn’t make the 

profits it wants to make, unless it is able to pass that on directly 

to consumers, which in most competitive industries is not easily 

done. I mean, we all understand that dynamic. Well, how is it that 

you all can be paying record prices for raw material, for whatever 

reason, and yet have record profits, unless you are successfully 

able—as, for example, the airlines have not been able to do because 

that is such a competitive business, such a resistance from customers as prices go up. In your business, apparently, the resistance 

is not so deep from the customer at the pump so that you are able 

to pass that record-high price of raw materials on to your customer 

finally at the pump, and so you make record-high prices. 

I am not suggesting this is necessarily wrong. I mean, I am not 

drawing that. I am just trying to understand clearly if that isn’t 

what is happening. 

Mr. TILLERSON. Well, your description is correct. The high price 

of crude oil has been passed ultimately along to the consumer of 

whatever the finished product may be, whether it is motor gasoline, 

jet fuel, lubricants, or subsequent petrochemical products that are 

affected by those prices. 

Senator KOHL. And I appreciate that. And I am also, then, pointing out what we know here, is that your ability to pass that on to 

consumers has been so successful that, at least in this past year, 

you have made more money than you or any other company has 

ever made before. Just simply wanting to understand that. And I 

am not—you know, we are not here—at this point, I am not making a judgment. I am just trying to the fact. 

Mr. O’Reilly, would you dispute what Mr. Tillerson has said? 

Mr. O’REILLY. Senator, in recent times there has been an ability 

to pass it along because the economy has been so strong from a 

global perspective. But go back about 3 or 4 years in 2002, when 

the economy was very weak after 9/11, we were unable to do that. 

And actually, we had zero earnings in our refining and marketing 

business. So a lot depends on the economic conditions. But in the 

strong economic world we have had not just in the U.S. but globally in the last year or two, it has been possible to do that. 

Senator KOHL. Yes, Mr. Mulva. Then I would like to make one 

comment. 

Mr. MULVA. Senator, we are very different than the airlines because our fundamental business is we invest to explore and 

produce. So we participate in that. And along with the earnings 

that we make, with prices go up and they go down, which they do 

over time, also the governments who participate where we explore 

and produce—North America, the United States, and around the 

world—they also participate in terms of revenues as a result of 

this. 

Senator KOHL. I appreciate that. And before I turn it back to 

chairman, I just—you know, we have different constituencies here. 

We are representing people back in our States and all across the 

country who are very upset, you know, with the price of gasoline. 

And it is hard to explain to them how you all, at a time of recordVerDate 0ct 09 2002 09:17 Jul 19, 2007 Jkt 033417 PO 00000 Frm 00249 Fmt 6601 Sfmt 6601 S:\GPO\HEARINGS\33417.TXT SJUD1 PsN: CMORC
242

high prices that you are paying for your raw material, are able to 

generate record profits. 

And the answer we understand is that you are able to pass it on 

to the consumer, because you say it is a matter of, you know, demand and supply. But our constituents, your customers, who even 

though they need your product, and so they still buy it, aren’t very 

happy with that explanation. I mean, if you all were losing money, 

they wouldn’t have so much to complain about. But you can understand how—correctly or incorrectly, you can understand how they 

are upset at paying record-high prices while you all are making 

record-high profits. And we all understand this, because you are 

able to pass it on and they are not able to resist. 

Thank you, Mr. Chairman. 

Chairman SPECTER. Thank you, Senator Kohl. 

Senator Grassley. 

Senator GRASSLEY. I don’t know what you ask when you are at 

the tail end of the questioning. You know, where Senator Kohl left 

off is what we hear all the time from our constituents, and you understand that is why we are here. It is an odd situation in America 

when you have water like this in a half pint, if you go downstairs 

in the dispenser you would pay a dollar for a pint. That is $8 a 

gallon. I never hear anybody complain at our convenience stores in 

Iowa about the price of water. There is probably more profit in this 

water and as much gouging as there is in gasoline, and yet I paid 

$2.25 in Des Moines for gas last weekend, which is higher than I 

want to pay—and I am not here to have a love fest with you, because I raise a lot of questions about what you folks do. But I wish 

that the consumers were consistent in the sense of having the outrage over water that I drink out of a tap. I am not going to pay 

this kind of price for this water. 

[Laughter.] 

Senator GRASSLEY. You folks have me kind of over a barrel. I 

need gasoline. I don’t need this stuff. 

But if you wonder why people are price-sensitive about gas and 

they are not price-sensitive about this, I can’t explain it. 

I am going to start with Mr. Tillerson. And it doesn’t just relate to your $33 billion cash on hand, but more to a statement that you 

made that I take from the Wall Street Journal,quote, Growing volumes simply for the sake of increasing volumes does not produce 

superior returns. 

Now, if that is not taken out of context, considering the cash on 

hand, considering the fact that I think most people think you are 

using that money for more production, to increase supplies and 

lower prices, isn’t a statement that you just made kind of a form 

of market manipulation, or gouging at the pumps when you have 

the option of increasing supplies, but choose not to in an effort to 

boost the bottom line? Because that is what it seems the ‘‘produce 

superior returns’’ refers to. 

Mr. TILLERSON. Senator, our shareholders have certain expectations of our success today and in the future. And these high earnings that we have enjoyed last year—and they are extraordinary; 

they come in an extraordinary environment—those accrue to the 

more than 2 million individual Americans who own our shares. A 

lot of pension plans, a lot of mutual funds that people own that 

243

they are relying on for their retirement, I suspect a lot of people 

on this committee benefit from our success last year. 

That statement that I made was to say if you are going to continue to be successful the way we have been successful, then you 

must invest wisely. And that means investing in volumes that will 

continue to generate positive results for our shareholders. 

Now, having said that, we are investing at record levels today 

and have indicated that our expectations are we will continue to 

invest and increase those investments around the world. Our levels 

of investment are entirely a function of attractive opportunities 

available to us. And we would invest more if we had a greater 

array of attractive opportunities in which to invest and that we 

knew we could invest and carry those out in a prudent manner. 

So we are not—we certainly, as you point out, we are not limited 

by our ability to invest as much as it is finding the sufficient quality opportunities to invest in. And that is why we have said for 

some time we would love to invest more in the United States, in 

North America. We already invest heavily in North America. It is 

the highest region of investment over the last 5 years for us. But 

we know there are other prospective areas in which we would invest if we were given access to those. 

Senator GRASSLEY. I want to ask a question of any of you, and 

this is in regard to alternative energy. And most of you know I am 

a big promoter of ethanol. I have heard stories after stories about 

independent owners of franchised or branded stations who are prohibited from selling alternative or renewable fuels, so I would like 

to hear from some of you—will you commit to allowing independent 

owners of branded stations who choose to sell E–85 or B–20 to do 

so? Would you allow independent owners to purchase alternative 

fuels from any outlet so that they can purchase a fuel at the lowest 

cost? 

Mr. TILLERSON. Senator, we have denied no request from any of 

our dealers who have asked for permission to sell unbranded E–85 

at their sites. We have asked that they make it clear that it is not 

an ExxonMobil product, that we do not manufacture it, therefore 

we can’t stand behind the quality. But we have granted every request by our dealers who wanted to install separate pump facilities 

under their canopy for E–85. 

Senator GRASSLEY. I would like to hear from other companies, 

maybe not all of you, but at least— 

Mr. O’REILLY. Senator, I would be willing to say that we already 

have what you have asked for. It is already out there. It can be 

under the canopy. Same quality issue. I would also add that we are 

probably the largest, certainly one of the largest sellers of ethanol 

today. 

Mr. HOFMEISTER. Senator, we are in the same position as has 

been described. You may be aware that we are currently launching 

a pilot in Chicago, in conjunction with one of the automobile manufacturers, to test E–85. And I think that is an important point. E–

85 needs to be tested in the marketplace before we go full-scale 

into E–85 supply. The reason for that is we don’t fully understand 

or know the implications of E–85, and as a major brand, of course, 

the provider of that fuel will often be considered liable for such 

244

fuel. And until we understand it, I think we need to really work 

at what are the conditions under which this would be sold. 

Senator GRASSLEY. Most of the people I hear complaints from 

will assume liability. You don’t have to have that liability. 

Other companies? Are you willing to cooperate with E–85? 

Mr. KLESSE. Senator, I would agree with what has been said. 

Mr. PILLARI. Senator, of our 9,300 stations, 8,900 of them are 

independently operated and they are free to deploy E–85. We are 

also running a test program on E–85 in California to test its efficacy and its air pollution impacts, because California restricts how 

much ethanol can be used in gasoline today. 

Mr. MULVA. Senator, we have the same comments that you have 

heard from the responses from the others already. 

Senator GRASSLEY. My time is up, but this business of you having to test something when you have the president of—I think it 

is the CEO of Ford on television all the time saying how they are 

promoting their E–85 cars, it seems to me if you have the president 

of a major corporation like that, that is all the test you need. Leave 

it up to the consumer to make the decision. 

Chairman SPECTER. Thank you, Senator Grassley. 

Senator Schumer. 

Senator SCHUMER. Thank you, Mr. Chairman, and thank you all 

for coming. 

My first question is to Mr. Tillerson. In this Committee we have 

heard testimony before on differences on how oil companies report 

earnings, depending on whom they are reporting to. For instance, 

you use net income as a share of total revenues produced with Congress, and return on average capital employed with stockholders. 

So in Exxon’s case, the metric used with the public shows earnings 

of 8 to 10 percent, while the metric used with stockholders shows 

earnings of 24 percent. Saying one thing to the public, and then in 

your annual report you are talking another, with different metrics. 

I want to know which set of earnings and profits did you report 

to the IRS last year. Were they identical to what your reported to 

shareholders? 

Mr. TILLERSON. Senator, our reporting of our financial results 

have been consistent for years. 

Senator SCHUMER. So you reported— 

Mr. TILLERSON. There are no two sets of numbers anywhere. The 

numbers you refer to, one is a percent of net income on revenues, 

the other is a return on capital employed, which is a reflection of 

return on investments that have been made over many, many 

years. 

Senator SCHUMER. So with the IRS, were your profits 8 to 10 percent or were they 24 percent? 

Mr. TILLERSON. Our profits are reported on the basis of our net 

income, that is on our taxable net income. 

Senator SCHUMER. Right. And what were they? Which number 

was it closer to when you had to pay your taxes? 

Mr. TILLERSON. Well, we reported our profits on U.S. earnings 

last year and on our, on any— 

Senator SCHUMER. What was the—for the IRS, what was the 

rate of return. 

245

Mr. TILLERSON. I don’t—well, we are in—our effective tax rate is 

above 41 percent. 

Senator SCHUMER. Based on? 

Mr. TILLERSON. Based on our net income. 

Senator SCHUMER. And your net income was what percentage of 

your revenues? 

Mr. TILLERSON. Well, our net income last year was 39 billion— $36 billion on revenues of $336 billion, roughly, something like 

that. 

Senator SCHUMER. And that is what is in your IRS statement? 

Mr. TILLERSON. Well, our tax filings are consistent with our financial reporting. 

Senator SCHUMER. So that is what is in your IRS statement, revenues of whatever it was, 300-something in profits of 36 to 39. Is 

that right? 

Mr. TILLERSON. It would be consistent with our SEC filings. 

Senator SCHUMER. So that is what is in it, 36 to 39, right? 

Mr. TILLERSON. Yes. 

Senator SCHUMER. Thank you. 

Next question, you have said, Mr. Tillerson, that you have no 

need, really, to pursue alternative fuels. OK? It seems to me your 

investment in alternative fuels, non-fossil fuel sources, is close to 

zero. Do you think that serves the public—first, is it? And second, 

do you think that serves the public interest as prices go up, up, up, 

up, up? 

Mr. TILLERSON. Our investments in alternative fuel sources is in 

the area of technology. We do not see any of the currently available 

alternatives— 

Senator SCHUMER. Technology on fossil fuels? 

Mr. TILLERSON. Technology on alternatives, whether it be 

biofuels, breakthrough research on cellulosic conversion techniques, 

breakthrough research on other ways to commercialize coal, breakthrough research on, you know, on other sources of energy. 

Senator SCHUMER. My time is limited, so what—how much did 

you invest in coal, the cellu—what is it?, cellu-what? 

Mr. TILLERSON. Well, we are supporting— 

Senator SCHUMER. How much did you invest in coal research? 

Mr. TILLERSON. We are supporting breakthrough research at 

Stanford University. 

Senator SCHUMER. How much did you invest? 

Mr. TILLERSON. We committed $100 million to them over a period of time for work that they have under way. 

Senator SCHUMER. One hundred million over how many years? 

Mr. TILLERSON. Ten years. 

Senator SCHUMER. That is $10 million a year. OK? How much 

did you invest in the biofuels? 

Mr. TILLERSON. Well, that is part of that research— 

Senator SCHUMER. That is part of the $10 million, OK. And how 

much did you invest in the cellulitic—I hope I am pronouncing it 

right. 

Mr. TILLERSON. Well, Senator, I think your question is— 

Senator SCHUMER. How much? 

Mr. TILLERSON [continuing]. Are we investing heavily in alternatives, and we are not. 

246

Senator SCHUMER. You are not. 

Mr. TILLERSON. We are investing in technology and we are investing heavily in conventional oil and natural gas, which is the 

business we are in. We are not in those other businesses. 

Senator SCHUMER. Right. OK. I just think the public ought to 

know how little. Ten million dollars a year in alternative-type 

fuels, when the price of fossil fuels is through the roof, to me 

doesn’t seem to be serving the public. Now, you have a different 

view in terms of your shareholders, I understand that. But we have 

a public view. 

Next question. This is on the royalties that you receive on Government lands. How much royalty relief have you received from the 

Department of Interior for exploration on public lands—I would 

like to get a number. With the prices this high, do you think you 

are still entitled to these royalties? And three, at what price 

threshold have you internally predicted that you wouldn’t need a 

royalty to make exploration viable? 

Mr. TILLERSON. Senator, we are currently not receiving any royalty relief on any Federal leases today. I don’t know over what period of time you are asking your question, but I would be happy 

to— 

Senator SCHUMER. Did you receive any last year? 

Mr. TILLERSON. I don’t believe so. 

Senator SCHUMER. So you are not getting any royalties? Do think 

anybody else should? 

Mr. TILLERSON. We are not receiving royalty relief today and I 

don’t believe that we had any royalty relief that we took advantage 

of last year, either. 

Senator SCHUMER. OK. And you don’t expect to next year? 

Mr. TILLERSON. I would not expect to next year. 

Senator SCHUMER. With the price this high? 

Mr. TILLERSON. Correct. 

Senator SCHUMER. Thank you, Mr. Chairman. 

Chairman SPECTER. Thank you very much, Senator Schumer. 

The Committee would appreciate it if you would submit for the 

record and for our information and analysis of the draft bill, which 

is in the Congressional Record, we would like to have you take a 

look at it, have your lawyers take a look at it, tell us what part 

or parts give you heartburn, what you don’t like, what you think 

might be done to accomplish the same objectives, give us the benefit of your thinking. 

We would also like to have your thinking on what we might do 

to reduce consumption, something which is very much on the agenda. A number of the economists have commented about Congress 

ought to be doing more to reduce consumption. I have cosponsored 

some legislation trying to hold down the importation of fuel in the 

future, our own resources, but your companies are experts in this 

field and I have a hunch that you have a lot of insights as to what 

might be done to reduce consumption. We would appreciate your 

suggestions along that line. 

Senator Biden asked you the question about incentives. We don’t 

have enough time to really explore all of the issues that we would 

like. The Judiciary Committee has a very, very crowded agenda, as 

I think you know. You knew that from our Supreme Court conVerDate 0ct 09 2002 09:17 Jul 19, 2007 Jkt 033417 PO 00000 Frm 00254 Fmt 6601 Sfmt 6601 S:\GPO\HEARINGS\33417.TXT SJUD1 PsN: CMORC
247

firmation hearings on Chief Justice Roberts and Justice Alito, but 

we have been working on asbestos, which touches your industry, 

and we have been working on immigration and many, many items. 

So that when we invite you in and we have 5 minutes for you 

to talk—you all did a good job. You were well-prepared and your 

statements were concise, and we appreciate that. The Senators 

don’t do quite such a good job. I try to limit my questions—I do 

limit my questions to 5 minutes. I stop when the red light goes on. 

Because if the Chairman doesn’t, nobody else will. And if the 

Chairman doesn’t, he can’t ask the others to do so. Sometimes I 

have to interrupt people to keep us on time limits, even if it is a 

good line of questioning. If you see me running out of this hearing 

it is because I have a lot of constituents in the hall. I have a lot 

of Pennsylvanians in the hallway today. And you would think you 

would meet your constituents under some better circumstances, invite them into your office and your conference room, give them a 

cup of coffee. Well, you have to meet them in the hall. 

And we would like to have gone into quite a number of other 

subjects, but we can’t do everything. 

On the incentives, there are a great many of them and there is 

active consideration as to whether they ought to all be maintained 

in the light of the current profits. We understand that the profits 

tend to be transitory—up and down, and lots of factors go into that. 

But if you could give us an analysis of the incentives, and you can 

doubtless particularize them faster than we can. You know what 

they are, which ones are important to you, which ones are the most 

important to you, and why they ought to be maintained. Because 

we are going to be looking at that issue and we want to give you 

a chance to put your best case forward. 

I didn’t pursue the question about the price of gas going up in 

the last 2 weeks by 11 cents when the oil prices dropped 7 cents 

per gallon, because I know there are a great many factors involved. 

But those are some of the considerations we have to deal with our 

constituents. If you would care to address that question in your 

written responses, I would appreciate it. 

Well, that concludes our hearing. Again, my— 

Senator KOHL. Could I just ask one more question? 

Chairman SPECTER. Sure you may, Senator Kohl. 

Senator KOHL. I thank you. I will just make this— 

Chairman SPECTER. Senator Kohl is one of the most parsimonious members of this Committee in terms of the amount of 

time he consumes. 

Senator KOHL. I thank you. And I will just ask this of Mr. 

O’Reilly. It could be anyone, but I don’t want to prolong the hearing. 

Much of the crude oil that your company and other U.S. oil companies refine into gasoline and other petroleum products, as we 

know, comes from your own oil fields. For example, according to 

your annual report, in 2004 Chevron produced 505,000 barrels of 

oil per day in the United States, more than 55 percent of your domestic refining capacity coming from product taken out of the 

ground by you in this country. And overall, the U.S. produces about 

40 percent of the crude oil that we consume here in this country. 

So the cost to produce this oil domestically should not be affected 

248

by the rising worldwide price of crude oil. Indeed, we have heard 

estimates that it costs only about—and it is an estimate; you can 

correct it—$12 to produce each barrel of oil from a U.S. oil field, 

which is a far cry, of course, from the $60 per barrel on worldwide 

commodity markets. 

So the question is, why should the rising price of crude oil on 

international markets lead to higher prices with respect to petroleum products refined from your own domestically produced oil? 

Mr. O’REILLY. Well, Senator, it is a truly global market. And 

with the increase in demand that we are experiencing around the 

world, there is a tremendous draw on crude from all parts of the 

world. Somebody mentioned earlier in the testimony, think of it as 

a big bathtub where oil goes into it and then people buy it out. And 

with the growth in demand in places like China—and by the way, 

not just China, the United States itself is growing. Demand is high 

and therefore higher prices are the natural response. The higher 

price is what then sends everyone to invest to grow production further. So the market is sending a signal at these higher prices. 

The second point I would like to make is that the investment 

costs today of drilling for oil and producing it are very high. One 

example in the Gulf of Mexico that will yield about 120,000 barrels 

a day of crude oil is our Tahiti investment, which is $3.5 billion of 

investment to produce 125,000 barrels a day. I think that tells you 

a little bit that the market is incenting everyone to invest and that 

the capital costs, in addition to the operating costs, must be recovered from those investments. 

Chairman SPECTER. Thank you very much, Mr. O’Reilly. Thank 

you, Senator Kohl. 

That concludes our hearing. 

[Whereupon, at 1:59 p.m., the Committee was adjourned.] 

[Questions and answers and submissions for the record follow.]

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Æ


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