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88–463 PDF 2003

S. HRG. 107–1022

WEST COAST GASOLINE PRICES

HEARING

BEFORE THE

SUBCOMMITTEE ON CONSUMER AFFAIRS, 

FOREIGN COMMERCE AND TOURISM

OF THE

COMMITTEE ON COMMERCE, 

SCIENCE, AND TRANSPORTATION 

UNITED STATES SENATE

ONE HUNDRED SEVENTH CONGRESS

FIRST SESSION

APRIL 25, 2001

Printed for the use of the Committee on Commerce, Science, and Transportation

(

(II)

COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION

ONE HUNDRED SEVENTH CONGRESS

FIRST SESSION

JOHN McCAIN, Arizona, Chairman 

TED STEVENS, Alaska 

CONRAD BURNS, Montana 

TRENT LOTT, Mississippi 

KAY BAILEY HUTCHISON, Texas 

OLYMPIA J. SNOWE, Maine 

SAM BROWNBACK, Kansas 

GORDON SMITH, Oregon 

PETER G. FITZGERALD, Illinois 

JOHN ENSIGN, Nevada 

GEORGE ALLEN, Virginia 

ERNEST F. HOLLINGS, South Carolina 

DANIEL K. INOUYE, Hawaii 

JOHN D. ROCKEFELLER IV, West Virginia 

JOHN F. KERRY, Massachusetts 

JOHN B. BREAUX, Louisiana 

BYRON L. DORGAN, North Dakota 

RON WYDEN, Oregon 

MAX CLELAND, Georgia 

BARBARA BOXER, California 

JOHN EDWARDS, North Carolina 

JEAN CARNAHAN, Missouri

MARK BUSE, Republican Staff Director 

KEVIN D. KAYES, Democratic Staff Director 

SUBCOMMITTEE ON CONSUMER AFFAIRS, FOREIGN COMMERCE AND TOURISM

PETER G. FITZGERALD, Illinois, Chairman 

CONRAD BURNS, Montana 

SAM BROWNBACK, Kansas 

GORDON SMITH, Oregon 

JOHN ENSIGN, Nevada 

GEORGE ALLEN, Virginia 

JOHN D. ROCKEFELLER IV, West Virginia 

RON WYDEN, Oregon 

BARBARA BOXER, California 

JOHN EDWARDS, North Carolina 

JEAN CARNAHAN, Missouri 

(III)

C O N T E N T S 

Page 

Hearing held on April 25, 2001 .............................................................................. 1 

Statement of Hon. Barbara Boxer .......................................................................... 8 

Statement of Hon. Peter Fitzgerald ....................................................................... 34 

Statement of Hon. John McCain ............................................................................ 2 

Statement of Hon. Frank H. Murkowski ............................................................... 11 

Statement of Hon. Gordon Smith ........................................................................... 1 

Statement of Hon. Ted Stevens .............................................................................. 28 

Statement of Hon. Ron Wyden ............................................................................... 3 

WITNESSES

Pitofsky, Hon. Robert, Chairman, Federal Trade Commission ............................ 18 

Prepared statement .......................................................................................... 21 

Wells, Jim, Director for Natural Resources and Environment, U.S. General 

Accounting Office ................................................................................................. 40 

Prepared statement .......................................................................................... 42 

Cook, John, Director, Petroleum Division, Energy Information

Administration ..................................................................................................... 46 

Prepared statement .......................................................................................... 49 

McAfee, R. Preston, Visiting Professor of Economics and Strategy, University 

of Chicago ............................................................................................................. 56 

Prepared statement .......................................................................................... 57 

Shapiro, Carl, Transamerica Professor of Business Strategy, Haas School 

of Business, University of California at Berkeley ............................................. 63 

Prepared statement .......................................................................................... 65 

Malone, Robert, Regional President, Western United States, BP ....................... 76 

Prepared statement .......................................................................................... 78 

Mau, Chuck, Oregon gasoline dealer, Portland, OR ............................................. 89 

Prepared statement .......................................................................................... 91 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Boxer, Hon. Barbara: 

Senator Boxer’s record on high gasoline prices and mergers by oil

companies ...................................................................................................... 8 

Letter to Senator Boxer dated Dec. 14, 1999 ................................................. 31

Carnahan, Hon. Jean, prepared statement ........................................................... 97 

Seafarers International Union of North America, AFL-CIO, prepared

statement .............................................................................................................. 97 

(1)

WEST COAST GASOLINE PRICES 

WEDNESDAY, APRIL 25, 2001

U.S. SENATE, SUBCOMMITTEE ON CONSUMER AFFAIRS, FOREIGN COMMERCE AND TOURISM, COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION, 

Washington, DC. 

The Subcommittee met, pursuant to notice, at 2:36 p.m., in room

SR–253, Russell Senate Office Building, Hon. Gordon Smith, presiding. 

OPENING STATEMENT OF HON. GORDON SMITH,

U.S. SENATOR FROM OREGON 

Senator SMITH. Welcome, Senator Murkowski. You are first in 

the dock and we thank you, sir, for coming. 

Good afternoon, ladies and gentlemen. I have convened this hearing of the Senate Subcommittee on Consumer Affairs, Foreign 

Commerce, and Tourism to investigate high gasoline prices on the 

West Coast. I want to thank our Chairman, Senator McCain, who 

is present at this hearing, also Senator Fitzgerald, who is the 

Chairman of this Subcommittee, for allowing us this hearing today. 

I want to extend also a warm welcome to Chuck Mau from Portland, Oregon, who will be testifying on our third panel. 

Finally, I want to thank Senator Murkowski for being here to 

testify as well. 

In the last 2 years, the impacts of high gas prices have been felt 

by most every American. This week the national average for gas 

prices jumped nearly 13 cents per gallon, or 8.4 cents, and the 

West Coast continues to pay more than any other region in the 

United States. 

For the constituents I represent, Oregonians all, the sting of high 

gasoline prices is particularly blistering. For those with limited 

means or those who drive long distances for their livelihoods, even 

a small increase in gas prices can be disastrous. My constituents 

have already been slapped once on the cheek with inflated electricity prices and are now being asked to turn another cheek for 

record high gas prices. 

It is important to remember that there are a number of factors 

affecting consumer fuel prices, particularly on the West Coast. I believe that all of our witnesses today will converge upon this point. 

The cost of delivering gasoline in the West Coast, the lack of crude 

refining capacity, and the specialized fuel requirements for California make the entire West Coast region susceptible to supply disruption and severe price spikes. 

2

Yesterday’s refinery fire in California reminds us how fragile our 

infrastructure is and may reverberate into this summer’s gas 

prices, yet to be announced. They are already projected to be higher 

than they have ever been before. 

There are also State-specific factors that affect gas prices. In 

California, which currently faces the highest gas prices in our Nation, the cost of refining clean-burning fuel has driven up costs to 

consumers. In my State of Oregon, several inherent factors affect 

prices. In response to my request to an investigation, the General 

Accounting Office identified these factors: there are no refineries in 

Oregon, the cost of getting fuel to rural areas is high, and Oregon 

State taxes at 24 cents a gallon are some of the highest in the 

country. 

But this hearing is not just about Oregon. Our goal here today 

is to shed some light on a difficult problem that affects everyone 

in Oregon and elsewhere. As we have seen in other energy and fuel 

issues, there is no silver bullet. Just as electricity does not come 

from a flicking a light switch, gasoline does not come from a filling 

station. It must be drilled for and then shipped and piped thousands of miles, refined to meet our environmental standards, and 

distributed to customers in cities and in rural locations as well. 

I also want to note that this cannot be a partisan matter. I am 

glad to be here today with my colleague Ron Wyden. We are united 

in this effort to find out the truth. 

Ron and I have worked hard to bring together clarity and balance to this issue on behalf of Oregonians and we hope for the 

broader constituency of the American people. 

Having said these things, I want to make it very clear the seriousness of the charge that brings us to this hearing this day. I 

would say to all the public in all our constituencies, this above-thefold headline in our largest paper in Oregon, The Oregonian: ‘‘Experts: BP Rigged Prices,’’ and today apparently a memo detailing 

this. My constituents are prepared to pay the prices that are legitimate costs, but they are not willing to pay the price of market manipulation. That is the charge. There is no conviction, but we are 

due some answers. 

Senator Wyden. 

Senator WYDEN. Thank you, Mr. Chairman. 

I note the Chairman of the Full Committee is here. He has been 

very gracious in terms of letting us have this hearing and I am 

sure his schedule is short. Mr. Chairman, if you would rather go 

ahead and I will go after you. 

STATEMENT OF HON. JOHN MCCAIN,

U.S. SENATOR FROM ARIZONA 

Chairman MCCAIN. I want to thank Senator Smith and Senator 

Wyden for being involved in this issue. This hearing is important. 

I also want to applaud them for being two of the most valued Members of our Committee. 

This hearing is about the reasons why West Coast gasoline prices 

are higher than in any other part of the country. I think Americans 

around the country have been watching with dismay as the signs 

posting prices at their corner gas stations are changed daily and 

changed upwards. It has been reported that gasoline prices in the 

3

U.S., not adjusted for inflation, have risen more in the past 2 

weeks than in any other 2-week period in the past 50 years, meaning that this is an incredibly appropriate time for this hearing. 

The real hikes may be yet to come. Energy industry analysts and 

some of the witnesses who will appear today say that prices could 

go higher as we head into the summer months. Combine this with 

the news yesterday that one oil company’s profits are up 44 percent 

over last year, and analysts being reported as saying that the company’s biggest problem will be what to do with all the cash flowing 

into its coffers, and you have some perplexed drivers with lots of 

questions they want answered. 

While there may be no relationship between the high worldwide 

oil company profits and skyrocketing gasoline prices in the U.S., I 

would like to know more about the profitability of the refining sector. I understand the witnesses here today all agree that we have 

a major capacity problem in our refining sector and that this problem is going to get worse as U.S. demand for gas and oil products 

increases. 

Does the lack of refining capacity mean that every time there is 

a refinery outage prices skyrocket along with oil company profits? 

I hope this topic is covered at this hearing as it has implications 

not just for the West Coast, but for the entire country. 

I also hope that our distinguished Chairman will examine whether the balkanization of gasoline, with States adopting their own peculiar gasoline reformulations for laudable environmental purposes, 

is contributing to higher prices because we no longer have a common product that can be shipped for use to combat shortages. 

Again, I am very pleased Senator Smith and Senator Wyden are 

holding this hearing. I hope the information today helps to answer 

questions on people’s minds throughout the country, not just those 

on the West Coast. I thank my colleagues. 

Senator SMITH. Senator Wyden. 

STATEMENT OF HON. RON WYDEN,

U.S. SENATOR FROM OREGON 

Senator WYDEN. Thank you, Mr. Chairman. 

Before Chairman McCain leaves, I do want to express my appreciation to him for giving us a chance to work together on a bipartisan basis with the Committee and the staff. This hearing could 

not go forward without your leadership, Mr. Chairman and I appreciate it. 

I also want to begin by thanking my friend and colleague from 

Oregon, Senator Smith. He and I have worked together on a whole 

host of issues that have been important, but especially on this one 

today. I am very grateful. We have teamed up consistently on this 

issue and I just want the record to show that I am particularly 

grateful for your willingness to join me in the effort to try to get 

access to those 1400 boxes of records involved in the BP-ARCO acquisition case that experts have stated contain numerous smoking 

gun documents showing how consumers in western States are 

being gouged. 

Mr. Chairman and colleagues, there is substantial evidence that 

the juices of competition are being sucked out of West Coast gasoline markets and that it is no accident that Oregonians have lost 

4

more than 600 gas stations, typically pay gas prices far higher than 

the national average, and have 70 percent of our gas distributed by 

four oil companies. The evidence indicates that communities up 

and down the West Coast are being red-lined by the major oil companies. Red-lining is about as anti-free enterprise as it gets. With 

red-lining, oil companies restrict who independent gas wholesalers 

can sell to, and red-lining breaks down the marketplace forces that 

are so critical because it denies choice to whole segments of communities on the West Coast. 

There is evidence that communities up and down the West Coast 

are being victimized by zone pricing. With this form of discriminatory pricing, one oil company sells the same gas to its own brand 

service stations at different prices. The cost of the gas to the company is the same, but the price the stations pay is not. Eventually 

the station that pays the higher price cannot remain competitive 

and yet another community in the West has monopoly pricing. 

Recently, as Chairman Smith has noted, The Oregonian newspaper published a story documenting secret oil company records revealing that BP-Amoco exported Alaskan North Slope crude oil to 

keep West Coast prices higher. These documents show that BP exported oil to Asia at a lower price than what it sold the same oil 

for on the West Coast as a part of a strategy to make even higher 

profits on the West Coast sales. 

Since the newspaper story that Chairman Smith has highlighted, 

I have obtained documentation that before BP bought ARCO, 

ARCO exported gasoline—that is refined oil—out of the West Coast 

market in order to drive up West Coast prices. In fact, this documentation shows that ARCO had a business strategy to ‘‘export to 

keep the market tight.’’ Chairman Smith, I would ask unanimous 

consent that this document be made a part of the record. 

Senator SMITH. Without objection. 

[The material referred to follows:]

5

Senator WYDEN. Mr. Chairman and colleagues, this ARCO document cannot be shrugged off as inconsequential. It was prepared 

for the senior management of the company as a snapshot picture 

of what ARCO’s business strategy was at that time. The president 

of ARCO Products Company described it as a ‘‘study of our manufacturing and wholesale marketing efforts of the purpose of looking 

at strategies that were in place.’’ Now, this ARCO document is relevant because recently BP has made the argument that they are 

no longer exporting and have no plans to resume such exports. BP 

argues that any oil they produce in Alaska is less than what the 

company needs to supply its West Coast refineries and therefore 

they have no interest in exporting. 


88463.008
6

I believe that the new ARCO document knocks the legs out from 

under BP by revealing that ARCO was exporting under circumstances exactly like BP is in now. ARCO then owned and BP 

now owns the very same refineries and both companies produce 

less Alaskan oil than needed to supply those refineries. 

What is troubling with this evidence is that BP exported oil 

when they could have sold it for more on the West Coast and 

ARCO exported gas to tighten the West Coast market and consumers ended up virtually defenseless in the West. 

Here is my bottom line concern. Despite the evidence that Chairman Smith has highlighted, despite the further documentation 

from ARCO’s files, our government now simply has to take BPARCO’s word that they are going to act in the public interest in 

the future. This is hard to do, given the fact that BP-ARCO lawyers have pulled out all the stops to conceal more than 1400 boxes 

of records involved in the BP-ARCO acquisition case that several 

experts have stated contain numerous smoking gun documents 

showing how consumers in western States are getting gouged. 

I would like to conclude by referring to one other newly obtained 

document which raises additional questions about the nature of 

competition among oil companies on the West Coast. 

ARCO Products Company in 1996 stated that it was their plan 

to ‘‘exchange and trade gasoline selectively to preserve market discipline.’’ The significance of this document is that it raises serious 

questions about whether ARCO was competing against or cooperating with the other major West Coast oil companies. 

Chairman Smith, I would ask unanimous consent that this document be included in the record as well. 

Senator SMITH. Without objection. 

[The material referred to follows:]

7

Senator WYDEN. The question therefore is whether the West 

Coast is being victimized and by what amounts to a West Coastwide system where a handful of companies pretend to compete 

while quietly making certain that they profit at the consumer’s expense. It is going to be important for the Subcommittee to examine 

this issue and I am happy that we have this opportunity. 

This Subcommittee’s hearing is important because it gives us a 

chance to examine key anti-competitive practices that are distorting West Coast gas markets. But more needs to be done, and 

it is especially important to West Coast consumers that the cloak 

of secrecy shrouding the BP-ARCO case be lifted so that all the evidence can be examined. This Subcommittee has the power to examVerDate 0ct 09 2002 11:58 Jan 05, 2004 Jkt 088463 PO 00000 Frm 00011 Fmt 6601 Sfmt 6601 S:\WPSHR\GPO\DOCS\88463.TXT JACK PsN: JACKF

88463.009
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ine the documents now sealed in Federal court in San Francisco 

and I believe that this action is critical to Congress learning why 

West Coast gas prices are so high. 

Mr. Chairman, I want to wrap up by joining you in welcoming 

Chuck Mau from our home State to this hearing, and also take 

note of the fact that Senator Boxer has had a great interest in this 

issue over a number of years and has worked closely with the western delegation on a bipartisan basis as well. 

Senator SMITH. Thank you, Senator Wyden. 

Senator Boxer, do you have a statement? 

STATEMENT OF HON. BARBARA BOXER,

U.S. SENATOR FROM CALIFORNIA 

Senator BOXER. Yes, Mr. Chairman, I do. First I want to commend you, Senator Smith, and you, Senator Wyden, for your work 

here. I have to say we started working on this together a long time 

ago. 

What I would like to do is ask unanimous consent to place into 

the record all the various things that my office has been involved 

in since 1996 on this issue. 

Senator SMITH. Without objection. 

[The material referred to follows:]

SENATOR BARBARA BOXER’S RECORD ON HIGH GASOLINE PRICES

AND MERGERS BY OIL COMPANIES

• In Spring 1996, I wrote to then-Energy Secretary Hazel O’Leary asking her to 

investigate possible price gouging in California. 

• In June 1997, I wrote to FTC Chairman Robert Pitofsky, asking him to block 

the proposed joint venture between Shell and Texaco. The FTC agreed with my concerns and required the divestment of gas stations in the San Diego area before allowing the joint venture to proceed. 

• In August 1997, I wrote to then-Energy Secretary Federico Pen ̃ a and then-Attorney General Reno to take the necessary steps to ensure fair gasoline prices for 

California drivers. 

• I opposed the Shell Oil and Texaco joint venture. I wrote to the FTC to urge 

them to block it. 

• In March 1998, I wrote to the FTC to launch an investigation of anti-competitive oil company prices throughout California. 

• In August 1998, I and several gas station operators asked Pitofsky to open a 

formal investigation of anti-competitive practices in the California oil industry. He 

responded to me that he agreed that charges ‘‘warrant further inquiry.’’ He directed 

the Commission’s Bureau of Competition to investigate gasoline pricing practices in 

California. 

• I provided the FTC with information about possible harassment of gas station 

operators by major oil companies (May 1998), over a hundred pages of data on California gasoline pricing practices, and petitions containing the signatures of 50,000 

California motorists concerned about high gas prices. 

• I opposed the BP/Amoco and the Exxon/Mobil mergers by asking the FTC to oppose both mergers that the defy antitrust laws restricting the consolidation and 

abuse of market power. 

• I wrote to the FTC to call on them to require oil companies, as a condition of 

allowing mergers to proceed, to guarantee access to oil and gasoline for independent 

refiners and nonbranded gas stations. This would promote competition to keep 

prices in check. 

• In the 106th Congress, I introduced S. 1137 the Integrated Oil Company Antitrust Act, which amends the Clayton Act to give the Attorney General additional 

authority to prevent certain anticompetitive mergers and acquisitions in the oil industry. Mergers of major oil companies are banned unless: 

• The Attorney General finds that the merger or acquisition will promote competition. 

9

• The FTC has approved an agreement by the merging or acquiring company to 

guarantee adequate supplies of crude oil and petroleum products to independent refiners and marketers. • I supported a ‘‘Gas Out’’ as a day for consumers to protest higher prices. • I wrote to the FTC, in May 1999, to expand the gas price investigation to examine whether anti-competitive activities were to blame for slower than anticipated 

gas price reductions. • In the last Congress and this Congress, I have introduced legislation to ban the 

exportation of oil from Alaska’s North Slope. Currently, the companies are doing 

this on a voluntary basis.

Senator BOXER. Thank you, and I will summarize it. 

In 1996, I wrote to Hazel O’Leary asking her as the Energy Secretary to investigate price-gouging in California. In 1997, I wrote 

to FTC Chairman Pitofsky, whom we will be hearing from today, 

asking him to block the proposed joint venture between Shell and 

Texaco. The FTC did not block it, but they did agree with my concerns and required the divestment of gas stations in the San Diego 

area before allowing the joint venture to proceed. 

In August 1997, I wrote to Secretary Pen ̃ a and Attorney General 

Reno asking them to take necessary steps to ensure fair gasoline 

prices for our drivers. I then outright opposed the Shell Oil and 

Texaco joint venture and I asked the FTC to block it. 

In 1998, I asked the FTC to launch an investigation on California prices. I am very distressed to tell you that I still have not 

gotten that report. I am very disturbed about it, and it is not for 

lack of trying. I have met with them often. I have presented them 

with many documents, including hundreds of pages of data on pricing policies, petitions, the fact that we proved that there was harassment going on by big oil companies to the independent gas station owners and the independent dealers. We got them together. 

They came out there and they talked to them. But, we still do not 

have an answer. 

We know that competition has gone down. You know, if anyone 

tells you it is supply and demand I would tell you this. If the supply is manipulated, as Senators Wyden and Smith have indicated 

may well be the case, there is no real supply and demand at work. 

When supply is manipulated, that is not a fair picture. That is 

what has been going on. 

I have introduced legislation with Senator Wyden dealing with 

the exports from Alaska’s North Slope, and there are other things 

I will not go into. I want to make a couple of points. 

This is what gas prices look like in San Francisco. This was yesterday. Today who knows if it is higher? If you are lucky enough 

to take the lowest grade of gasoline, it is $2.19. This is on Franklin 

Street in San Francisco yesterday. It is higher elsewhere. If you 

have to take the special super-duper kind, it is $2.39. 

This is an outrage. People do not have a choice, especially right 

before the summer driving season. 

Senator McCain already talked about the record profits that we 

are seeing from big oil. Exxon Mobil, up 44 percent from a year 

ago. In 2000 they had record earnings of $17.7 billion, so record 

earnings in 2000 and now on top of that a 44 percent increase. 

Conoco, 59 percent increase over the quarter last year. 

So all you have to do is follow the money and talk to consumers 

in my State and talk to the independent dealers to find out how 

they have been discriminated against. I have a copy of a letter 

10

where Chevron threatened to double rents on independent gas station owners if they continued the support gas price reform legislation in California. They were being retaliated against because they 

said: It is outrageous; we do not want to charge these prices; we 

do not think we should have to. 

I have other letters that I will put in the record later from independent gas station owners about the questionable business practices of these oil companies. Oil companies came in to do an investigation of their dealers and if there was a light out in the bathroom and everything else was perfect, they said: That is a warning; 

we are going to take over your station. We have all that documented, and consumers are getting killed at the pump. 

I am all for people making a good dollar. I think it is important 

to succeed. But I have to tell you, when I read that Exxon Mobil’s 

chair—and this may be the most wonderful human being; I do not 

know him and he may even be here—earned a $13.9 million bonus 

in 2000 and a $17.4 million—a $13 million bonus in 1999 and a 

$17 million bonus in 2000, while consumers are struggling to pay 

at the pump. 

Where is the FTC? I do not know. Where is corporate responsibility? I do not know. I am waiting and I am hopeful, because we 

are getting the report supposedly in June now, just a few years 

after we asked for it. So maybe we are going to get some—you 

know, the FTC does have the power to disgorge profits that have 

been unfair. So we hope that they will maybe come down with that 

kind of a report. 

We have the highest gasoline prices in the country. Three years 

ago, I asked for this report. Yet the problem is getting worse. 

Oh, you will hear it is the environmentalists. Well, we just took 

our latest check. Eight cents a gallon absolutely for cleaner air, 

that is what we pay. I think the vast majority of Californians are 

happy to pay 8 cents a gallon for clean air. But you cannot explain 

anything because the same law has been in effect for a decade. So 

it is not clean air requirements that are causing the problem. 

In closing, let me say there are a number of things I am going 

to be working on. First, I am going to be pressing the FTC and hoping we get some redress. I am going to be appealing to the oil companies, although I know I have tried that before, but I will keep 

appealing to them, that they are going to bring down this economy. 

We are already entering a period of weakness here. This is a terrible situation, and it is not just California’s problem. You hear it 

is the West Coast’s problem. California, we are the sixth largest 

economy in the world and when we get a cold everybody sneezes. 

So we have to pay attention to what happens here. 

But there are things we can do. We can start driving hybrid vehicles. You do not make any sacrifice. You fill up your car with gas 

and you get 50 miles to the gallon. I drive one myself. Comfortable, 

wonderful, no culture shock. You do not have to plug it in. It is real 

simple. We ought to do that. 

We ought to give more incentives for that. We ought to have Senator Wyden’s and my bill on the floor to reinstitute the ban on exports of Alaskan North Slope oil. We know that the companies are 

doing it voluntarily, but it could change. 

11

SUVs, there is no reason why they cannot get the same fuel mileage as an average car. If we did that, that is equal to one ANWR 

every 6 years, a million barrels of oil a day. 

So yes, there are things we can do. But Mr. Chairman, I cannot 

thank you enough, both you, Senator Wyden, Senator McCain. It 

is just a few of us who have been talking about this for a long time. 

I know Senator Murkowski is very interested in this consumer 

issue as well. I thank you very much. 

Senator SMITH. Thank you, Senator Boxer. 

Chairman Murkowski, we welcome you, and thank you for taking 

the time to be with the Commerce Committee today in your capacity as Chairman of the Energy Committee. 

STATEMENT OF HON. FRANK H. MURKOWSKI,

U.S. SENATOR FROM ALASKA 

Senator MURKOWSKI. Thank you very much, Mr. Chairman, and 

I appreciate the opportunity to spend a few minutes with you. I 

think you have got a balanced agenda, a list of witnesses, and I 

hope that you proceed to dwell into the areas that you brought up 

in your opening statements and get some specific answers to your 

legitimate concerns. 

I am here for one purpose and that is to set the record straight 

on Alaska oil and where it goes. I think it is fair to say that the 

industry can comment on the allegations that have been made collectively by your Members here today. 

I am going to refer over here to this chart, and I will speak loudly, so hopefully, the court reporter can hear me. As you know, Alaska’s proximity to the West Coast is very real, and as a consequence 

where our oil goes today, the million barrels that we produce: 

60,000 barrels are consumed within our State. However, California 

is the second largest consumer with 395,000 barrels a day; Washington State at 495,000 barrels a day and Hawaii at 50,000 barrels 

a day. That is where Alaska oil goes. 

There is an assumption that somehow the connections between 

Alaska’s oil production and the issue of oil exports has something 

to do with the price. There has not been a barrel of oil exported 

from Alaska since last June. The record will note that. So I would 

ask you to consider the reality that, while there may have been exports up to about 60,000 barrels a day prior to a year ago, that 

does not occur as a consequence of the change in the market. 

I will explain that change very briefly in the realization that the 

West Coast consumes somewhere in the area of 2.5 to 3 million 

barrels a day. A million barrels roughly comes, as I have indicated, 

from Alaska. A million barrels is roughly produced in California. 

Approximately 700,000 barrels a day comes in from the Mideast. 

So as you can see, as Alaska’s production declined, the decline in 

Prudhoe Bay, that has been displaced with oil coming in from the 

Mideast. 

I will refer to my written comments here, because I know what 

you want to get at is the bottom line, an explanation of why prices 

are higher on the West Coast, and hopefully I can shed some light 

on that. As you know, as Chairman of the Energy and Natural Resources Committee, this matter and matters of rising energy costs 

in general are of great concern, because they affect the economy, 

12

they affect the national security of our country, and as a consequence they need explanations. 

But to a large degree, as I have indicated, you have a supply and 

demand problem. The West Coast is consuming more oil than is 

produced on the West Coast and the difference is being exported 

in. 

I would like to point out a couple of other differences. All the oil 

that moves from Alaska without exception moves in U.S.-flag vessels built in U.S. shipyards with U.S. crews. That is the Cabotage 

Law. It does not suggest that you could bring it in cheaper if you 

could bring it in in foreign vessels. It mandates that the carriage 

of goods between two American ports be carried in a U.S.-built vessel. That also occurs in the passenger service as well. It is one of 

our laws that occasionally we overlook, but recognize in the interest of protectionism of our American merchant marine it is necessary. Otherwise we would not have any U.S.-flag vessels. We 

mandate this. 

The cost of a vessel built in a U.S. yard—and we have built—

currently we have got about six under construction, three in San 

Diego and another five in Louisiana—about twice as much to build 

as you could build that ship in a foreign yard. Those ships in the 

U.S. cost about $200 million. You can build them in Korea for $100 

million. 

So you have got to recognize the reality that this is passed on 

to the consumer. I am not arguing the merits of the Jones Act, but 

I am simply explaining one reason why it costs more to move Alaskan oil down to the West Coast than it would if you were able to 

move that oil down in a foreign vessel. 

So, those facts being out there, I think it is important to recognize the recent increase in the cost of gasoline focuses again on our 

problems at the pump because States along the Pacific have traditionally had the highest gasoline prices in the country, averaging 

somewhere in the area of $1.70 per gallon. As the Senator from 

California indicated, they are going up. They may well reach $3 a 

gallon. 

But as I think all of you recognize, the price of oil is primarily 

set by the major producers. The major producers are OPEC. As you 

have observed OPEC and the discipline that has come about as a 

consequence of OPEC getting together, they have effectively put a 

floor and a ceiling on the price of crude oil. They have been able 

to reduce production, and since they are the key supplier they have 

got the leverage and will continue to have it, and will continue to 

frustrate those of us on the West Coast, and particularly my State 

of Alaska, where we have the capability of producing more domestic oil and clearly we can do it safely. 

Now, do you really care, California, Washington, Oregon, where 

your oil comes from? There does not seem to be much interest in 

where it comes from as long as you get it and that you get it at 

the lowest price. I can understand that, but there is no concern 

over the scorched earth policies of developing oil in the Mideast or 

the national security of our Nation as we become more dependent 

on importing oil from Saddam Hussein, 700,000 barrels a day. 

Is it not rather ironic that our foreign policy is so inconsistent, 

that on the one hand we would enforce a no-fly zone, we bomb him 

13

often, we cut out his radar sites, but we are importing his oil? We 

put it in our airplanes to go fly over, enforce a no-fly zone, bomb 

Iraq, with his oil. Now, what kind of a foreign policy is that? A bit 

inconsistent. 

What does he do with our money? He pays his Republican 

Guards, keep them alive certainly. He develops a missile competition, an energy competition with biological technology. Who does he 

aim it at? He aims it at our ally Israel. This is the cost of depending on foreign sources of oil. 

I am not going to give you my usual pitch about the merits of 

producing it from Alaska, but recognize where your oil comes from 

now and as we decline where it is coming from and what care and 

concern you have as long as you can get it. 

You indicated, Senator Smith, the cost associated with Oregon. 

Oregon has no refineries. That is a choice of their own to some degree. On the other hand, your taxes and your gasoline costs are 

higher than 33 other States. A portion of that is due to your tax 

rate. You set your own tax rate, 18 cents a gallon Federal and, 

what is it, 24 States, for 42 cents a gallon. Again, that is higher 

than 33 other States. 

California requires reformulated gasoline and it is necessary in 

that State, and I understand that. But what we have seen as a consequence of the previous administration opening up, if you will, the 

salt caverns in Louisiana by making that 30 million barrels available from SPRO, we did not have the refining capacity to refine it. 

So what did we do? We offset what we import by taking the oil out 

of SPRO. Was there any net increase in refined product? Clearly 

there was not, because we also have a problem of refining capacity 

in this country, have not built a new refinery in 25 years. 

If it is so profitable for the oil companies to build refineries or 

to make money in refined product, why are they not building more 

refineries? It is clear the reason they are not. The permitting time 

is of a consequence that they do not feel they can generate a return. 

But they should respond to those questions, which I agree are 

certainly legitimate. 

I am sensitive about calls for reimposing an export ban on Alaskan oil, which continually comes up even though since last June 

there has not been a drop of oil that has been exported from Alaska. There is an assumption out there that somehow we bear a responsibility for your high prices or that we are exporting oil out of 

Alaska and therefore that is the consequence of your high prices. 

We are not and I think the record should recognize that and once 

and for all put behind us the issue of exporting Alaskan oil as 

being part of your solution. 

We are tired of being a scapegoat for the failures and excesses 

of local and State actions that impact prices at the pump. We have 

all heard about ‘‘not in my back yard’’; I do not want a refinery in 

my back yard, I do not want to be exposed to developing oil and 

gas off the shores of California or Washington or Oregon. But that 

is the case, and I respect your opinions. If you do not want it, you 

should not have it. But somebody has got to produce it because you 

have got to have it. 

14

Only Alaska has ever suffered an export ban. No other State in 

the Union was precluded from exporting its oil or petroleum products—not California, not Oregon, not Washington. There have been 

no attempts to ban such exports. Why should we be treated differently? A legitimate question. If you are going to ban exports, let 

us ban them from everybody, let us ban exports from California, let 

us ban exports of refined product. Do not look at my State of Alaska. We are not exporting any oil. We are not your problem. 

Should there be a ban on exporting Boeing airplanes or 

Starbucks coffee or a ban on food products from Oregon? How 

about California wines? Hollywood films? That would be a good 

idea. 

[Laughter.] 

There is another thing I think you have overlooked, and that is 

the GAO Report, which we requested in my committee. I think 

some history is in order. When Congress passed, with the Clinton 

Administration’s support, a law to give the President the authority 

to lift the ban in 1995, it required the GAO to conduct a study 

about the impacts. That study was done in 1999. The results were 

very simple: 

One, lifting the ban increased—increased—total West Coast 

crude oil production from where it would have been, simply because it spurred development of some of the marginal wells. This 

happened because the price of crude oil on the West Coast was 

raised at that time from 89 cents to $1.30 a barrel. We all know 

that strippers cannot operate at a figure below their recovery costs. 

The third reason, consumers were not impacted. Instead, refineries who were profiting from a flood of Alaskan crude oil lowered 

their profit margins. Now, I hope the record will note that, but that 

is what the GAO said. This is not Frank Murkowski talking. 

A review of the GAO Report tells us what really happened, and 

what really happened was that Alaskan oil stopped being shipped 

through the Panama Canal and around the Horn to refineries in 

the Gulf Coast and the Virgin Islands. That was terminated because the market changed. If there is anyone who believes that reducing Alaska crude shipments to the Virgin Islands somehow affected gasoline prices in the Pacific Northwest, I would urge him 

or her to speak up, because obviously, the Virgin Islands, part of 

it is in the United States in the sense of the territorial status. 

What have we done that has been so terrible in Alaska in this 

issue of oil export? Well now, the GAO study—and this is not 

Frank Murkowski—told us that exports were averaging about 

60,000 barrels per day, 60,000 barrels, ladies and gentlemen, out 

of 1.2 million, which is what we were producing. Hardly a point of 

leverage. About 5 percent of Alaska’s North Slope production, obviously a very small percentage. 

Since that time, Alaska’s production has fallen about 200,000 

barrels a day. In fact, in the past decade, Alaska production has 

fallen by 1 million barrels. Now, that is the reality. 

If we are so concerned about 60,000 barrels of Alaskan oil that 

was being exported each day to the Pacific Rim, are we not just a 

little bit concerned today about the million barrels of extra Alaskan 

oil that was produced in 1990 but is not being produced today because Prudhoe Bay is in decline? We have the capability of proVerDate 0ct 09 2002 11:58 Jan 05, 2004 Jkt 088463 PO 00000 Frm 00018 Fmt 6601 Sfmt 6601 S:\WPSHR\GPO\DOCS\88463.TXT JACK PsN: JACKF
15

ducing more oil to replace that deficit if given the opportunity, 

which only Congress can address. Well, I think you should be concerned where you get your oil. 

Furthermore, as a result of the recent FTC-approved merger between ARCO and BP, BP now has a domestic home for virtually 

all of its Alaska crude to be refined on the West Coast because they 

acquired, if you will, ARCO’s refineries. 

Finally, I urge the Members of the Commerce Committee to look 

closely at what is happening to our Nation’s energy and stop kidding ourselves. We have a supply and demand problem. The demand is increasing and the supply is coming from overseas. We 

have different fuel standards in many parts of the country for different places at different times of the year. The refiners have to 

batch that. They have to ship it separately, they have to store it 

separately. That costs money. 

Some adjacent counties are required to use different fuels. Congress and the Federal Government first tells the refiners to add, 

what, MTBE to fuel to make it burn cleaner, and later they outlaw 

it. OK, those are the irregularities that occur in any free market. 

Well, we need to do better. As a consequence, tomorrow my Energy Committee is holding a hearing about the realities of the fuel 

situation across the country, and our goal is to shed some new light 

on the real costs of balkanization of our gasoline standards. I think 

it is time to stop scapegoating and blaming the symptoms. It is 

time to get on with the hard job of fixing the problem so the symptoms stop hurting so many American people, whether they be in 

Washington, Oregon, or California. 

I hope you will join the Energy Committee—I know two of you 

are on that Committee—in a bipartisan way to come up with some 

real solutions to real problems, because the American people certainly deserve no less. But I hope my statements here today underline the realities associated with where Alaskan oil goes and the 

realization that as Alaska oil’s contribution declines to its natural 

markets on the West Coast you are simply going to depend on oil 

coming in from someplace else, and you do not seem to care where 

or how. 

I would be happy to respond to any questions. 

Senator SMITH. Thank you, Senator Murkowski. As a Northwesterner as well, I want you to know that I have no ax to grind with 

Alaska. Yours is a great State. As I indicated in my opening statement, my real beef here is the allegation—and I emphasize, allegation—of market manipulation. Oregonians will not pay for it. We 

will pay market prices and that is fair. The other is not. 

I have no questions of our Energy Chairman. 

Senator Boxer. 

Senator BOXER. Yes. I have a couple of comments. 

I do care where my oil comes from. I want it to come from Alaska, not from Saddam. 

Senator MURKOWSKI. Well, we both share that. 

Senator BOXER. Good, good. That is why it was difficult before 

this voluntary move when we saw that oil leaving for Asia. I am 

happy to look at oil produced anywhere in America when we are 

in such a shortage situation to keep it in America. That is a patriotic thing to do. So I agree, it should not be discriminatory. I think 

16

we ought to look at it. I do not know if anyone else is exporting 

it. I do not think so. 

Senator MURKOWSKI. California exports a little bit. 

Senator BOXER. We should definitely look at that, because I do 

not think that is right. I think we ought to, certainly in California 

where we are short—and you make that point. 

I also so much agree with you that we need an energy policy in 

this country. We have needed it since the 1970s. I suspect where 

we probably differ a little bit is where to stress. I mean, I think 

we need a balance of supply and demand. I tend to look at ways 

in which we can curb usage—we are the biggest energy user in the 

world. We are fifth in population. There are really ways we can 

conserve and do very well at it and not change our lifestyle. 

I pointed out one way. If we could drive more fuel efficient vehicles, if we chose to do so, we would almost be out of our problem. 

We would be very much close to being out of our problem, because 

if you look at the gasoline use in automobiles, that is a huge part 

of the problem in transportation. 

Last, I will defend some movies. I think it would be a good thing 

for the world to see ‘‘Schindler’s List’’ and a good thing for the 

world to see the movie ‘‘Traffic,’’ Orrin Hatch was in. 

Senator SMITH. And Barbara Boxer starred as well. 

Senator BOXER. Well, I was being very humble. And Don Nickles 

was in it. It was a good movie and made a good point. And a good 

thing for the world to see ‘‘Erin Brockovich,’’ and it would be a bad 

thing for anyone to see ‘‘Sun Mothers’’—examples good and bad. 

But I just do that to defend my State. 

But I do feel that we do have agreement that we need an energy 

policy. It would be really a wonderful thing if we could come to 

some common ground on what that ought to be. But I think that 

the issues raised by Senator Wyden on the oil companies’ pricing 

strategies, I think you agree we should ask them about it. It is very 

discouraging. 

My sense in dealing all these years with it is these are multinational companies—and I used to think as a kid growing up when 

I saw those oil signs, these were our people and they cared about 

us. I’ve got to say, when I see these prices, I do not think these 

people care, because I honestly believe, when you look at the facts, 

when they are merging as they are, when they are driving independent dealers, I am deeply concerned. We have had the same environmental laws for the last 10 years. We have the same taxing 

structure. Yet, you see the profits and you see these bonuses and 

you’ve got to wonder. 

In California we are very upset. But I do thank you, Mr. Chairman for your presence here. I hope we do find some common 

ground. 

Senator MURKOWSKI. Well, I hope, Senator Boxer, that at some 

point in a time in the not too distant future you do not raise that 

up and we see $3-a-gallon, because if we do I think many Members 

will have to revisit the merits of whether or not we should look to 

Alaska and the opening up of that small segment of ANWR for relief, because many, many of our constituents are going to be asking 

why we did not support opening up a domestic supply that is believed to be of the magnitude of Prudhoe Bay that we have been 

17

relying on for the last 27 years for 20 percent of our crude oil, as 

opposed to the environmental constituency out there that says we 

cannot open it up safely. 

Clearly, we have the American engineering technology, the cando spirit. I do not know about you, but I have always believed that 

charity begins at home. We have done a good job of providing the 

United States, particularly the West Coast, with its oil needs and 

we can do so in the future, only we can do a better job in the future. 

As you know, oil is where you find it, and when you have taken 

individually the action to prohibit the exploration off the shores of 

the West Coast of the United States and duplicated that by taking 

the offshore areas off limits from the East Coast, you have left very 

little area left other than the Gulf of Mexico and the Overthrust 

Belt, where there has been a difficulty in opening that area up, and 

my State of Alaska, who I think has been responsible in the manner in which we have allowed the development of our resources. 

So with that, I would suggest that you look for oil where you are 

most apt to find it, because if you do not you probably will not find 

it. 

Thank you. 

Senator BOXER. Mr. Chairman, you know, the Chairman and I 

go at this all the time, and usually it is when I am in his Committee and he gets the last word. Since I am on this Subcommittee——

Senator MURKOWSKI. Fair enough. 

Senator BOXER. I think it is fair, it is fair. 

I think we have our very strong differences on ANWR, as does 

Senator Stevens. 

Senator MURKOWSKI. Why do you not come up there, take a look. 

Senator BOXER. Well, as you well know, I am going to do that, 

and I have sent my chief person——

Senator MURKOWSKI. Give me a date and we will set it up. 

Senator BOXER. Well, the last date you picked, it was so frozen 

I probably never would have come back, and I think that was the 

plan. 

Senator MURKOWSKI. That is the way it is 7 months of the year, 

you know. That is the way it is. 

[Laughter.] 

Senator BOXER. That was the plan. You invited me up there 

when I probably would be freezing and could never get home. 

Senator MURKOWSKI. You got the last word. 

Senator BOXER. No, I did not get the last word. I am going to 

get the last word, maybe, at least in this setting. 

Senator MURKOWSKI. I will concede the last word. 

Senator BOXER. Thank you. 

We have a huge difference on the ANWR issue and that is so 

fair, and I am not going to get into it. I did not raise it in my opening because to my view when you deal with this particular issue 

many other issues come behind it, namely how much is there, 

when will it be there for us, what does it do to the wildlife. We are 

one Nation under God. I consider all the States to be a responsibility of all of us. I want you to care as much about California as 

I care about Alaska. 

18

But on the issue of taking California off the table in terms of a 

lot of our offshore tracts, I want to tell you this is the most bipartisan decision that has ever been made in history, from Pete Wilson 

to everybody else, to Gray Davis to all of us. You know why? It is 

not just an environmental issue, although it certainly is that, but 

it is a tourism issue. Since this is the Subcommittee that deals 

with it, our tourism is based around our magnificent coast, and this 

is a decision that we have made. 

I know that you have made the decision to drill in Alaska. I just 

look at all of our States as God’s gift. It is just an issue that we 

have to deal with. But we need an energy policy. 

Senator SMITH. If I may as the Subcommittee Chair, just as a reminder, our focus is on the allegation of market manipulation, not 

the well-being of the caribou today. 

Senator MURKOWSKI. I am going to leave my closing statement 

to Senator Stevens. 

Senator BOXER. You are in good shape. You are in good hands. 

Senator SMITH. We are pleased to be joined by Senator Stevens, 

probably the most senior Member of the Commerce Committee. 

Senator, if you have an opening statement or a comment. 

Senator STEVENS. No, I shall listen. 

Senator SMITH. All right. Thank you. 

The first panel after Senator Murkowski is the Honorable Robert 

Pitofsky, Chairman, Federal Trade Commission. We welcome you, 

sir, and the mike is yours. 

STATEMENT OF HON. ROBERT PITOFSKY,

CHAIRMAN, FEDERAL TRADE COMMISSION 

Mr. PITOFSKY. Thank you very much, Mr. Chairman. As always, 

it is a great pleasure and honor for me to appear before this Subcommittee and its Members, who have supported in my years at 

the FTC so constantly the work that we have been engaged in. 

The subject today is the level of gasoline prices on the West 

Coast, which, as several speakers have noted, have been for the 

most part the highest gasoline prices in the United States for quite 

a while. As background, let me say that I can not isolate any one 

or two reasons why the West Coast prices are so high. I do think 

blaming it on OPEC—I am no defender of OPEC—but blaming 

high West Coast prices on OPEC does not make any sense. OPEC 

prices are high in New York, they are high in Louisiana, they are 

high on the West Coast. 

As to why the West Coast prices are so high, it is true, as I will 

discuss in a moment, the level of concentration on the West Coast 

is higher than in other sections of the U.S. There are fewer players. 

There are regulations, like the CARB regulations in California, designed to protect the environment, that are very special and probably add a few cents to the cost of a gallon of gasoline. There is 

no self-service in Oregon, which may be a factor there. 

I do not want to let pass, however, the opportunity to talk about 

something that Senator McCain mentioned, and also Senator Murkowski, and that is this business of refinery capacity in the United 

States. Let me put some numbers on this. In the U.S. generally, 

capacity utilization is 82 percent. Generally, in the United States, 

19

month-in and month-out, the oil industry operates at 95 percent of 

capacity. That is higher than any other sector that I am aware of. 

But that does not even tell the story, because when you roll 

around to April, May and June that percentage kicks up to 97 and 

98 percent. In different sectors of the country it is even higher. I 

would not be at all surprised to find that refinery utilization right 

now in California is 100 percent. 

The consequence of that is when anything happens, when there 

is a pipeline rupture, as there was in the Midwest last summer, 

when there is an explosion at a refinery in California, as there was 

two summers ago, prices skyrocket. Until this country addresses 

the question of refinery capacity, I think we are in danger of seeing 

this kind of behavior almost every summer. The unpredictable is 

predictable, and price spikes are going to happen. 

Specifically, I would like to address three questions: merger activity, exports out of the West Coast, and distribution practices. Let 

me say that much of this is not in the testimony of the Commission. These are my own views this afternoon. 

On mergers, we all know there has been an almost unparalleled 

merger wave in this country over the last 7 or 8 or 9 years—3 

times as many mergers, 11 times as many assets scooped up in 

mergers, than was true 9 or 10 years ago. That has been especially 

true in the oil industry. Indeed, of our resources, the FTC probably 

spends more reviewing energy mergers than any other single sector 

of the economy. 

But I do want to put this in context. I am very troubled about 

the wave of mergers in the oil industry, and I will come back to 

that. But let us recognize that even after all these mergers there 

are still ten oil companies in the United States competing and they 

have less than 70 percent of the market. 

It is more concentrated on the West Coast because there the top 

seven have something between 90 and 95 percent. But I do suggest 

that if there are reasons for these higher prices I do not think it 

is the merger activity of the last decade. First of all, there has not 

been a major merger that we reviewed and we did not require restructuring. 

Senator Boxer referred to Shell-Texaco. Exxon-Mobil was the 

largest restructuring in the history of antitrust. In BP-ARCO, we 

challenged that deal in court until the parties agreed, or when they 

agreed, because we were comfortable with the settlement, that they 

would bring Phillips in as a replacement for the competition that 

was lost by the acquisition of ARCO. If there were seven players 

on the West Coast before the merger, there were seven players 

after the merger. 

By the way, in the Midwest, where we had a price spike last 

summer, there were no significant mergers that affected competition in that area. 

Let me turn next to exports. Let me emphasize that we did take 

a position on exports in the BP-ARCO case, but it was a very, very 

narrow point. The FTC has no stake whatsoever in the question of 

whether there is a ban across the board on exports. That is a question for Congress. Congress decided it. We take the world as a 

given. 

20

In BP-ARCO, however, there was what I would describe as an 

unusual allegation. We alleged and we were prepared to prove in 

court that BP systematically had sold in Asia at a lower price, a 

lower netback, a lower profit to BP, than they could have sold on 

the West Coast, for the purpose of keeping West Coast prices high 

or raising West Coast prices. 

That was not speculation. That was discussed in the documents 

that we had in that matter. We were prepared to prove it. We alleged it in our briefs. The case was settled to my satisfaction, with 

one exception. The case was settled and therefore we were never 

put to our proof. But I think the documents were there. 

I would have preferred that our order include a provision that 

said that BP, and Phillips for that matter, could not and would not 

export in the future. My colleagues did not think that was necessary. Their position was that these companies had promised not 

to export anyway. Incidentally, as far as I know, there have been 

no exports away from the West Coast by these two companies anywhere since that case was settled. 

Since they were going to do it anyway, I would have liked to 

have seen that in the order. Circumstances change. Who knows 

what the world will be like next year. But the fact of the matter 

is that there have not been exports since the case was settled. 

I also would say that we were never called upon to quantify how 

much of a difference to West Coast motorists this export program 

to the Far East made. We could probably come up with some very 

rough estimates, and I know two witnesses later will have some 

views on that. But I emphasize, we alleged and we were prepared 

to prove that these exports did occur. 

Finally on distribution. This has to do with our ongoing investigation of red-lining and zone pricing. It is an ongoing investigation and therefore I cannot discuss the documents we have and I 

will not have anything to say about particular companies. 

Let me say that, Senator Boxer, we have been doing this for 21⁄2

years and I am not comfortable here defending a 21⁄2 year investigation. It should have been completed more promptly. I will say 

that you and Senator Wyden supplied us with witnesses and documents and we have followed up every one of those. We have attained enormous numbers of documents from the companies. 

I will predict today—we are at the end of this investigation and 

I will predict today that the Commission will come to its conclusion 

within 30 days. I cannot justify taking this long, except that it is 

a complicated question and the law that we would have to deal 

with is not hospitable to plaintiffs challenging this kind of behavior. So we have been cautious, we have been careful, we have run 

down every lead. 

What we are looking at is red-lining and zone pricing. I do not 

want to get into it too deeply, but red-lining is a practice in which 

the refineries say to the jobbers—and incidentally, the jobbers usually buy at a lower price than anybody else—you can have this low 

price, but we are telling you, or we are agreeing with you that you 

may not sell in certain parts of your market. It is usually large center cities, like San Francisco. You may not sell there without our 

permission. I think the jobbers are so convinced they will never get 

permission they do not ask in the first place. 

21

1This written statement represents the views of the Commission. My oral responses to questions are my own, and are not necessarily those of the Commission or any other Commissioner. 2 15 U.S.C. §§ 41-58. 

3 15 U.S.C. §§ 12–27. 

Site-specific red-lining, which is a different sort of red-lining, is 

one in which the refiners agree with the jobbers to control the price 

at which they sell in cities like San Francisco and San Diego. 

Zone pricing, of course, has been described. It is a technique for 

setting up pricing in particular areas of a city or particular rural 

areas depending on what the refiners think is the level of competition in those areas. 

All I can say is we will come to a conclusion in this matter and 

I am confident that it will be within 30 days or so. Let me bring 

this to a conclusion by summarizing. One, as I say, we will finish 

our investigation. Two, we have and will continue to pay special attention to merger activity in this industry. In general, I would describe the oil industry as having gone from deconcentrated to moderately concentrated. But I say again, there are still nationally 10 

oil companies that are competing for business. That is not a level 

of concentration that ordinarily concerns antitrust enforcement 

people, but the oil industry is made up of enormously large companies and there is some history of disregard for antitrust in that industry. 

Finally, I can only say again I think that Congress needs to address this question of energy policy and particularly refining capacity. There is plenty of oil in the world. There is a lot of oil in the 

world, but there does appear to be a bottleneck with respect to refineries in this country. 

Thank you very much and, of course, I would be delighted to answer questions. 

[The prepared statement of Chairman Pitofsky follows:]

PREPARED STATEMENT OF HON. ROBERT PITOFSKY,

CHAIRMAN, FEDERAL TRADE COMMISSION. 

Mr. Chairman and Members of the Subcommittee, I am Robert Pitofsky, Chairman of the Federal Trade Commission.1 I am pleased to appear before you today 

to present the Commission’s testimony concerning the important topic of competition 

in the gasoline industry in West Coast markets. Competition in the energy sector—

particularly in the petroleum industry—is vitally important to the health of the 

economy of the United States, and to the various regions of the country. Our experience has taught us that gasoline markets can be much narrower than the entire 

country, and the West Coast markets have their own particular features that set 

them apart from the rest of the country. In all markets, antitrust enforcement has 

an important role to play in ensuring that the gasoline industry is, and remains, 

competitive. Merger enforcement in particular has recently been at the forefront of 

efforts to maintain and protect a competitive environment in various gasoline markets, and our testimony today is directed at that ongoing effort. 

The FTC is a law enforcement agency with two distinct but related missions: preserve competition in the marketplace through antitrust law enforcement and protect 

the consumer from unfair or deceptive acts or practices. The Commission’s statutory 

authority covers a broad spectrum of sectors in the American economy, including the 

companies that comprise the energy industry and its various components. Among 

the statutes the Commission enforces are two antitrust laws, the FTC Act 2 and the 

Clayton Act.’’ 3 Under section 5 of the FTC Act, the Commission prohibits ‘‘unfair 

methods of competition’’ and ‘‘unfair or deceptive acts or practices.’’ The Commission 

shares jurisdiction with the Department of Justice under section 7 of the Clayton 

22

4 15 U.S.C. § 18. 

5 16 C.F.R. Parts 801, 802, and 803, Premerger Notification: Reporting and Waiting Period Requirements for Certain Mergers and Acquisitions: Implementation of Recent Amendments to the 

Clayton Act (Jan. 25, 2001). 6 Under the Commission’s shared jurisdiction with the Justice Department, antitrust investigations are allocated to one of the agencies under a long-established clearance procedure, 

based on expertise gained over the years in various industries. The Commission has expertise 

in oil mergers. 7Section 7 of the Clayton Act specifically prohibits acquisitions where the anticompetitive acts 

affect ‘‘commerce in any section of the country.’’ 15 U.S.C. § 18. 

Act, which prohibits mergers or acquisitions that may ‘‘substantially lessen competition or tend to create a monopoly.4

II. LEVEL OF MERGER ACTIVITY

It is no secret that merger activity in the United States is at an all-time high. 

The number of mergers reported to the FTC and the Justice Department pursuant 

to the Hart-Scott-Rodino Act has more than tripled over the past decade, from 1,529 

transactions in fiscal year 1991 to 4,926 transactions in fiscal 2000. Although filings 

have declined so far this year because of higher filing thresholds 5 and the slowing 

economy, the Bureau of Competition remains heavily focused on merger work. Currently, more than two-thirds of our competition resources are dedicated to merger 

enforcement, compared to an historical average of closer to 50 percent. 

While the number of merger filings has more than tripled in the past decade, the 

dollar value of commerce affected by these mergers has increased an astounding 

elevenfold during the same period. But mere numbers do not fully capture the complexity and the challenge of the recent merger wave. Today’s merger transactions 

not only are larger, but often raise novel or complex competitive issues requiring 

more detailed analysis. In the past year alone, companies filed notifications for 288 

mergers with a transaction size of one billion dollars or more, and many of these 

mergers involved overlaps in several products or services. 

There are many reasons for the current merger wave. A large percentage of these 

transactions appear to be a strategic response to an increasingly global economy. 

Many are in response to new economic conditions produced by deregulation (e.g., telecommunications, financial services, and electric utilities). Still others result from 

the desire to reduce overcapacity in more mature industries. The rapidly evolving 

world of electronic commerce has a substantial impact on the merger wave, because 

consolidations often quickly follow the emergence of a new marketplace. These factors indicate that the merger wave reflects a dynamic economy, which, on the whole, 

is a positive phenomenon. But some mergers, as well as some other forms of potentially anticompetitive conduct, may be designed to stifle competition in important 

sectors of this dynamic economy. 

III. MERGER ENFORCEMENT IN THE GASOLINE INDUSTRY

Out of necessity, our scarce resources are directed at preserving competition in 

the most important areas of the economy. The Commission dedicates the bulk of its 

antitrust enforcement to sectors that are critical to our everyday lives, such as 

health care, pharmaceuticals, retailing, information and technology, and, in particular, energy. 

Much of the Commission’s experience with enforcing the antitrust laws in energy 

industries has been in analyzing mergers.6 Merger enforcement is the first line of 

defense in protecting a competitive marketplace, because it preserves rivalry that 

brings lower prices and better services to consumers. The Commission blocks or obtains relief in those mergers that increase the likelihood that the merged firm can 

unilaterally, or in concert with others, increase prices or reduce output or innovation. The Commission has an extensive history of carefully investigating mergers in 

the energy industries, particularly petroleum, and the FTC has challenged mergers 

in those industries that would be likely to reduce competition, result in higher 

prices, and injure the economy of the Nation or any of its regions.7

In each merger investigation, the Commission will intervene if the consummated 

merger would significantly reduce competition in any sector of an industry that affects the United States or its citizens. The specific question the Commission must 

ask is whether the result of a merger ‘‘may be’’— i.e. it would be reasonably likely—

that the remaining firms in the industry could reduce output and raise prices to the 

detriment of consumers anywhere in the United States. 

The Commission approaches its antitrust mission by examining the areas in 

which merging companies compete, looking at the existing State of competition in 

that marketplace and the likely changes in that marketplace in the future, both 

23

8 Industries might also consolidate for procompetitive or competitively neutral reasons, such 

as increasing scale efficiencies or a secular decrease in demand. 9 British Petroleum Company p.l.c., C-3868 (April 19, 1999) (consent order), Analysis to Aid 

Public Comment. 10See United States Department of Justice and Federal Trade Commission, Horizontal Merger 

Guidelines § 4 (1992), reprinted in Trade Reg. Rep. (CCH) § 13,104 (1992). 11 Exxon Corp., C-3907 (Nov. 30, 1999) (consent order). 12 British Petroleum Company p.l.c., C-3868 (April 19, 1999) (consent order). 13Shell Oil Co., C-3803 (April 21, 1998) (consent order). 

from new competition entering and from existing competition exiting. We also look 

at the effect of recent mergers on competition in the particular marketplaces at 

issue, and whether the merger is a part of a trend toward concentration that limits 

competition.8 The Commission has recognized the existence of such a trend toward 

consolidation in the petroleum industry.9

On the other hand, many mergers actually increase competition. So, the Commission also considers efficiencies in deciding whether to challenge an otherwise anticompetitive merger because they may counteract the merger’s threatened anticompetitive effects. However, the Commission engages in a rigorous analysis of efficiencies. Merely claiming cost savings is not enough to allow an anticompetitive 

merger; they must be proven. The Commission demands that cost savings of the 

merger be real and substantial; they cannot result from reductions in output; they 

cannot be practicably achievable by the companies independent of the merger; and 

they must counteract the merger’s anticompetitive effect, not merely flow to the 

shareholders’ bottom line.10

Protecting competition and consumers is the goal of antitrust enforcement across 

all industries; its importance is particularly clear in the energy industry, where 

price increases can have a direct and lasting impact on the entire economy. Toward 

that end, the Commission has expended a substantial part of its resources in recent 

years in addressing the wave of consolidation in the petroleum and gasoline industry. In fiscal years 1999 and 2000, the Bureau of Competition spent almost one-third 

of its total enforcement budget on investigations in energy industries, and that level 

of effort has continued into 2001. Our merger review investigations revealed that 

several of these transactions threatened competition in local or regional markets. In 

those instances, the Commission allowed the merger only after demanding significant changes that would fully restore the competition lost as a result of the merger. 

The Commission’s investigation of the merger between Exxon and Mobil highlights many of the issues, and difficulties, in large oil company mergers. After an 

extensive review, the Commission required the largest retail divestiture in FTC history—the sale or assignment of 2,431 Exxon and Mobil gas stations in the Northeast 

and Mid-Atlantic regions, and in California, Texas and Guam.11 The Commission 

also ordered the divestiture of Exxon’s Benicia refinery in California; light petroleum terminals in Boston, Massachusetts, Manassas, Virginia, and Guam; a pipeline 

interest in the Southeast; Mobil’s interest in the Trans-Alaska Pipeline; Exxon’s jet 

turbine oil business; and a volume of paraffinic lubricant base oil equivalent to 

Mobil’s production. The Commission coordinated its investigation with the Attorneys 

General of several states and with the European Commission (about 60 percent of 

the merged firm’s assets are located outside the United States). 

There are several particularly noteworthy aspects of the Exxon/Mobil settlement. 

First, the divestiture requirements eliminated all of the overlaps in areas in which 

the Commission had evidence of competitive concerns. Second, while several different purchasers ended up buying divested assets, each purchased a major group 

of assets constituting a business unit. This replicated, as nearly as possible, the 

scale of operations and competitive incentives that were present for each of these 

asset groups prior to the merger. Third, these divestitures, while extensive, represented a small part of the overall transaction. The majority of the transaction did 

not involve significant competitive overlaps. In sum, we were able to resolve the 

competitive concerns presented by this massive merger without litigation. 

The Commission also required divestitures in the merger between BP and 

Amoco,12 and in a joint venture combining the refining and marketing businesses 

of Shell, Texaco and Star Enterprises to create at the time the largest refining and 

marketing company in the United States.13 BP/Amoco involved very large companies but relatively few significant competitive overlaps. There was competitive concern in a few local markets. The Commission ordered divestitures and other relief 

to preserve competition in the wholesaling of gasoline in 30 cities or metropolitan 

areas in the eastern and southeastern United States, and in the terminaling of gasoline and other light petroleum products in nine geographic markets. 

The Shell/Texaco transaction raised competitive concerns in markets for gasoline 

and other refined petroleum products in the Pacific Northwest (Oregon and WashVerDate 0ct 09 2002 11:58 Jan 05, 2004 Jkt 088463 PO 00000 Frm 00027 Fmt 6601 Sfmt 6621 S:\WPSHR\GPO\DOCS\88463.TXT JACK PsN: JACKF
24

14Federal Trade Commission v. BP Amoco PLC, Civ. Action No. C00 0420-SI (N.D. Cal. 2000). 15More complex refineries are usually better able to substitute different types of crude oil in 

their production mix. The Puget Sound refineries that serve Oregon and Washington are less 

complex than others on the West Coast. 16 As Judge Posner has noted, ‘‘price discrimination implies market power, that is, the power 

to charge a price above cost . . . without losing so much business so fast to competitors that 

the price is unsustainable.’’ In re Brand Name Prescription Drugs Antitrust Litigation, 186 F.3d 

781, 786 (7 th Cir 1999). 17 15 U.S.C. § 18.

ington), California, and Hawaii, for crude oil in California, and in the transportation 

of refined light petroleum products to several southeastern states. The two companies had substantial market overlaps. Both Shell and Texaco owned refineries in 

Puget Sound and, between them, made about 50 percent of the gasoline refined in 

the Puget Sound area. The Commission alleged that eliminating direct competition 

between those refineries could result in price increases for gasoline and jet fuel in 

the Pacific Northwest and California of more than $150 million per year. The Commission, in conjunction with the Attorneys General of California, Washington, Oregon, and Hawaii, required the divestiture of a refinery in Anacortes, Washington, 

which was a major supplier of refined products to Oregon via the Olympic pipeline; 

a terminal on the island of Oahu, Hawaii; retail gasoline stations in Hawaii and 

California; and a pipeline interest in the Southeast. 

During 1999, the Commission investigated the proposed $27 billion merger of BP 

Amoco (‘‘BP’’) and ARCO, the two largest competitors for the production, delivery, 

and sale of Alaska North Slope (‘‘ANS’’) crude.14 BP was the largest producer of 

ANS crude and the largest supplier to various West Coast refineries. ARCO was the 

second largest ANS producer. 

The Commission conducted its investigation in cooperation with the Attorneys 

General of Oregon, Washington, and California. As part of that investigation, the 

Commission looked at the West Coast crude oil market to determine if the acquisition would increase the likelihood that the merged firm would be able to exercise 

market power, either unilaterally or in conjunction with other firms. The Commission found reason to believe that BP was already exercising market power in the 

production and sale of ANS crude oil to refineries on the West Coast, and that the 

merger would increase BP’s ability to keep ANS prices high by eliminating the one 

firm with the ability and incentive to produce and sell more ANS crude oil. 

The Commission’s investigation revealed that BP was able to discriminate in price 

by charging some West Coast refineries higher prices than others, based on the ability of some refineries to substitute more easily other crude oil for ANS crude.15 Economic theory teaches that the ability to practice price discrimination is limited to 

firms that have market power.16 As crude oil is the major input into gasoline, preserving competition upstream directly affects retail competition. 

The Commission and the Attorneys General filed lawsuits to block the merger in 

Federal district court, and the case was settled with divestiture of all of ARCO’s 

Alaska assets, including oil and gas interests, tankers, pipeline interests (in the 

Trans-Alaska Pipeline), real estate exploration data and selected long-term supply 

agreements. Those assets, now owned by Phillips, are currently the major supplier 

to the Puget Sound refineries, which are the primary suppliers of gasoline to the 

States of Oregon and Washington. 

Much of BP’s ANS crude oil is now used in the former ARCO refineries in Los 

Angeles and Puget Sound, thus eliminating BP as the dominant supplier of ANS 

crude to other West Coast refineries. By combining BP’s ANS production with 

ARCO’s refining capacity, the Commission’s Order reduces BP’s incentive to elevate 

the price of ANS crude. By divesting ARCO’s Alaska assets to Phillips, the Order 

retains an independent competitive force with the incentive to find and deliver additional ANS crude oil. 

IV. CONCLUSION

By strictly enforcing the prohibition against mergers where the effect of the merger ‘‘may be substantially to lessen competition, or to tend to create a monopoly,’’ 17

the antitrust agencies ensure that already concentrated markets do not become 

more so. By challenging the Shell/Texaco joint venture and BP’s acquisition of 

ARCO, the Commission helped preserve competition in several West Coast markets, 

both wholesale and retail. Requiring the divestiture of Shell’s Anacortes refinery 

preserved competition in the supply of refined products to Washington and Oregon. 

Requiring the divestiture of ARCO’s Alaska assets to a rival company (Phillips), preVerDate 0ct 09 2002 11:58 Jan 05, 2004 Jkt 088463 PO 00000 Frm 00028 Fmt 6601 Sfmt 6621 S:\WPSHR\GPO\DOCS\88463.TXT JACK PsN: JACKF
25

vented BP from enhancing its dominant position in the market to supply ANS to 

West Coast refineries. 

Senator SMITH. Mr. Pitofsky, I have one fundamental question 

for you as the Chairman of the FTC. Did your Commission protect 

Oregon consumers from monopolistic pricing practices? 

Mr. PITOFSKY. Well, we certainly—yes, I think we did. 

Senator SMITH. I am troubled by that answer, frankly, because 

I think you said that you were aware of the memos Senator Wyden 

has referenced, The Oregonian has reported on, that suggest that 

there was manipulation involved. You must have concluded that it 

was manipulation, and that was not illegal. Was that what you 

found? 

Mr. PITOFSKY. Senator, I hope I did not say that. Until this 

morning I did not know about the memos that Senator Wyden 

called to my attention. When I was talking about memos and witnesses, it had to do on zone pricing and red-lining. 

Senator SMITH. So you did not know of any of the factors that 

led The Oregonian to report allegations of manipulation? 

Mr. PITOFSKY. Let me break this down. We of course knew about 

the documents that describe BP’s policy of exporting oil to the Far 

East. That was a part of our case. As far as we knew at that time, 

there was no evidence that that was other than single firm behavior. We relied on that heavily in challenging the BP-ARCO deal. 

On this more recent set of documents dealing with ARCO’s behavior, I was not aware of that and the Commission was not aware 

of it. 

Senator SMITH. Had you been aware of it, would that have affected your vote to approve the merger? 

Mr. PITOFSKY. Senator, I want to be cautious here. I have not 

seen the document. I do not know what ARCO would say about it. 

Senator SMITH. That is fair. 

Mr. PITOFSKY. But it is certainly something that one would look 

at if you had a document like that. But I have not seen it. You 

would have to ask the companies what they have to say about it. 

Senator SMITH. We intend to ask. 

Mr. Pitofsky, I believe you and Commissioner Thompson commented separately that you thought the Commission should have 

explicitly prohibited BP and Phillips from exporting ANS crude to 

Asia. Do you still think this condition should be imposed? 

Mr. PITOFSKY. I do, but can I elaborate on that? 

Senator SMITH. Yes, please. 

Mr. PITOFSKY. We were concerned about exporting it for the purpose of raising prices on the West Coast. If they want to export to 

Asia to make a profit in Japan they cannot make in California, I 

do not have any problem with that. Of course they would do that. 

This is different. This was an allegation that they were selling 

in Japan at a price that was lower than they could have received 

on the West Coast, in order to raise prices on the West Coast. 

I thought that should have been covered by the order, as did my 

colleague. 

Senator SMITH. What can be done to ensure adequate competition in the West going forward, on the West Coast for gasoline? 

What can we do specifically. Got to have more refining, more marVerDate 0ct 09 2002 11:58 Jan 05, 2004 Jkt 088463 PO 00000 Frm 00029 Fmt 6601 Sfmt 6601 S:\WPSHR\GPO\DOCS\88463.TXT JACK PsN: JACKF
26

keting sectors; those are the recommendations you have had, would 

have today to this Subcommittee? 

Mr. PITOFSKY. Well, certainly I would underscore this refining 

problem. I understand there was a fire in a major refinery in California just a day or 2 ago. Our initial reaction—we have not had 

a chance to really study it and the company says it is not going 

to affect prices. But if that refinery is put out of commission for a 

substantial period of time, history indicates that will affect prices 

in California. 

We certainly will take the most careful look at any proposed 

mergers that affect the marketplace in California, as we have in 

the past and as we will in the future. 

Senator SMITH. One more time on this earlier issue. You said 

that your concerns, except for one, were addressed in the conditioning of the merger. What was your other concern? 

Mr. PITOFSKY. It is the point you made, Senator, about exports. 

I thought the order should have covered that. Now, I know the 

companies said they would not export. They made that announcement publicly and as far as I know they have not exported since 

it went through. But I thought we ought to get that down in writing, because who knows who will be running those companies and 

what the circumstances will be next year and the year after. 

Senator SMITH. Thank you. 

Senator Wyden. 

Senator WYDEN. Thank you, Mr. Chairman. 

Chairman Pitofsky, I thank you for coming and for your service. 

I think your service is going to be marked by a standard of fairness. I have watched the Federal Trade Commission, how often decisions are not even close, that the Commissioners can come together on even some of the most difficult issues, and I commend 

you for your service to the government. 

Mr. PITOFSKY. Thank you, and I agree that the Commission can 

come together. 

Senator WYDEN. Let me start with this question of red-lining to 

begin with. In my view, red-lining is about as anti-free enterprise 

as you can possibly get. On the basis of my inquiries, there is substantial evidence that this is going on up and down the West Coast, 

and that this is, in fact, sucking the competitive juices out of our 

West Coast gasoline markets, because with red-lining there is a restriction with respect to choice and who one can sell to. 

My question to begin with for you is, in your opinion is there 

substantial evidence that red-lining of gasoline markets on the 

West Coast is taking place? 

Mr. PITOFSKY. Yes. 

Senator WYDEN. I understand that you cannot get into all of the 

details on this matter. I have essentially the same question with 

respect to zone pricing, because I again think that there is substantial evidence that West Coast gasoline markets are being priced by 

zone and that this is anti-competitive as well. 

Do you believe in your opinion that that is the case as well? 

Mr. PITOFSKY. Let me break it down. There is no question that 

it is going on. The companies do not make any apologies for that. 

They say they are engaged in these practices, what we call red-lining—I am not sure they would call it that—and zone pricing. 

27

As to whether it is anti-competitive, I wonder if I could reserve 

on that. It is a matter of concern. We would not have spent 21⁄2

years investigating in this area if it was not a matter of concern. 

I would like to reserve on balance whether or not there are justifications for that behavior. 

Senator WYDEN. Can an oil company practice be legal and anticompetitive? 

Mr. PITOFSKY. Can it be legal and anti-competitive? Well, not ordinarily, not ordinarily. If it is anti-competitive, under our statute 

that would make it illegal as an antitrust matter. 

Senator WYDEN. Beside the e-mail exchange reported in The Oregonian between BP trading managers where they talk about shorting the West Coast market to leverage up the price, did you find 

other evidence from company files that BP was exporting at a 

lower price to Asia to manipulate West Coast prices? 

Mr. PITOFSKY. I have asked about that in the past and the answer is yes. We were not a party to the effort by The Oregonian

to obtain these documents and the assignment of that matter to a 

special master. But I understand that the special master did not 

turn over all the documents that were sought and there are other 

documents of the kind that you describe. 

Senator WYDEN. The Oregonian also reported that BP used a 

computer model to manipulate West Coast prices by setting noncompetitive discriminatory prices for many years. Are there other 

company documents that have not been made public that show BP 

engaged in discriminatory pricing practices? 

Mr. PITOFSKY. This is BP’s so-called optimizer model. I believe 

there are other documents. I am not as sure of that as I am about 

the earlier question. But I am fairly sure there are other documents not yet made public, placed under seal by the judge, that 

discuss that issue. 

Senator WYDEN. Now, recognizing that it is hard to quantify, is 

it likely that I, my staff, and other Oregon consumers paid higher 

prices at the pump because of BP’s exports of Alaskan oil to Asia 

and discriminatory pricing practices? 

Mr. PITOFSKY. Yes. Our allegation was that the reason the company engaged in this practice of exporting oil was to raise prices 

on the West Coast. That was their goal. Now, I do not know that 

they achieved their goal, but that was what they were trying to do. 

Senator WYDEN. Mr. Chairman, that is essentially the reason 

why we need to get access to these other boxes of documents. What 

the Chairman has just said is there is substantial evidence in his 

opinion that red-lining is taking place on the West Coast and he 

has found evidence of zone pricing. Besides the e-mail exchange reported in The Oregonian with respect to shorting the West Coast 

market, the Chairman has indicated that there was additional evidence in documents that have not been made public with respect 

to BP’s export practices. The Chairman has indicated that there is 

evidence that BP used a computer model to manipulate West Coast 

prices. Finally, you, I, and other Oregonians, there is a likelihood 

that we paid higher prices at the pump because of BP’s exports of 

Alaskan oil and discriminatory pricing practices. 

So I am of the view that the Chairman has just spelled out why 

it is so critically important that this Subcommittee use its power 

28

to work with the Federal Trade Commission so as to see these documents, because with the answers that the Chairman just gave to 

my questions, which by the way did not even go into this matter 

of the ARCO strategy on gas prices, which I did not ask about because you had not seen, what you have painted is a very troublesome picture. 

What concerns me is that a company can go out and begin exporting in the middle of this hearing if they choose to do so. We 

can debate who did it and when they did it and the like. The fact 

of the matter is under current law they can begin to export at any 

time. The position of the government for West Coast consumers 

and others is we just have to trust them. Given the answers you 

have just given to my questions plus the memo that I did not even 

ask about today, I think we ought to get to the bottom of this and 

on a bipartisan basis look at those boxes to find out what is really 

taking place here. 

I thank you for the chance to begin this hearing and Chairman 

Pitofsky for his answers. 

Senator SMITH. Senator Stevens. 

STATEMENT OF HON. TED STEVENS,

U.S. SENATOR FROM ALASKA 

Senator STEVENS. Thank you. 

Mr. Pitofsky, I assume you are familiar with the fact that Oregon 

does not allow self-service in their service stations? 

Mr. PITOFSKY. Yes, I am. 

Senator STEVENS. They pay 5 cents more than anywhere else in 

the country just because of that, do they not? 

Mr. PITOFSKY. I do not know exactly the number. 

Senator STEVENS. That is my information. 

On September 26th the FTC wrote to Senator Wyden, and I am 

quoting from our committee memorandum here. It wrote that:

‘‘The practices of red-lining and zone pricing raise serious questions about the effects on competition in gasoline markets.’’ It went on to state how you define redlining and zone pricing. It says ‘Oil companies in Oregon and elsewhere,’ the Commission noted, ‘use red-lining. Though not all companies use red-lining on the West 

Coast, Chevron does, but BP does not.’’

As to its legality, the Commission wrote that

‘‘Arrangements by which independent business people are prevented by agreement 

from competing in the marketplace raise serious questions under antitrust laws. 

Whether they are legal or not depends on additional factors, such as market share 

and possible justifications.’’

Are you changing that statement now? 

Mr. PITOFSKY. No, it sounds right to me. 

Senator STEVENS. You just answered the question of whether it 

was legal or not without regard to the additional factors. 

Mr. PITOFSKY. Oh, I want to be clear about this. Two points. One 

is, as your comment makes clear, red-lining and zone pricing is not 

limited to the West Coast. It goes on in other parts of the United 

States. 

Senator STEVENS. It is not illegal per se? 

Mr. PITOFSKY. It is certainly not—it is neither legal nor illegal 

per se. 

Senator STEVENS. Right. 

29

Mr. PITOFSKY. You have to find out the context and that is what 

we have been about for a long time now. 

Senator STEVENS. That is the subject of another inquiry of yours, 

right? 

Mr. PITOFSKY. It is. 

Senator STEVENS. Now, my colleagues seem to believe that somehow or other you should have the power to limit where Alaskan oil 

can be marketed. To my knowledge, the only reason it was limited 

in the first place was that it was a condition required on the rightof-way permit for the Alaska oil pipeline, which was modified by 

Congress when we finally proved to Congress that it was unconstitutional. 

I know of no other commodity that is limited in terms of where 

it can be marketed. If it is being marketed for another ulterior motive, which is the process that you are going through, that might 

be a different matter. 

Do you disagree with what I have just said? 

Mr. PITOFSKY. Not at all, Senator. That is exactly the point. 

Senator STEVENS. I want to encourage my friends here from California and Oregon, the West Coast, to understand that so long as 

I am in the Senate we are not going back to the unconstitutional 

practice of limiting where Alaska products can be sold. Let us just 

make sure we have that basically understood. 

We had this fight in Maryland once, by the way, over an amendment to a treaty that we had to have defeated on the floor of the 

Senate because of a similar limitation on where products from 

Alaska could be marketed. 

Now, I do believe that there are a lot of problems involved in this 

matter today. For instance, it worries me considerably that between 1982 and 1999 the number of refineries on the West Coast 

decreased from 42 to 23. Yet somehow the decision to sell oil elsewhere—now, you may have some other facts that I do not have at 

my command. But the decision to sell elsewhere than the West 

Coast by the producers of Alaskan North Slope oil is, I think, partially reflected on the markets, is it not, down there? Their markets 

are limited because of the number of refineries. 

In addition to that, California has some specific restrictions on 

the type of oil that can be refined in specific locations. So that the 

markets down there are not free markets. They are limited by California law. They are limited by Oregon law, too, as I understand 

it. 

You understand those conditions? 

Mr. PITOFSKY. That is why I opened my discussion by saying 

there is no one reason, this is a complicated area, and there were 

many factors. I do not disagree with the factors that you are now 

calling our attention to. 

Senator STEVENS. Now, in the heyday of the Alaska pipeline 

when we were exporting 2.1 million barrels a day from Alaska, all 

of it going down to the West Coast from the North Slope, that was 

not purchased in Washington and in Oregon and in northern California. It got into southern California and the producers then faced 

the question of, shall we send that oil down and send it through 

the Panama Canal and send it back up into the East Coast or shall 

we just dump it in southern California? 

30

I think the case can be made that for years the producers 

dumped oil in California rather than pay the costs of that shipping 

because their net-net was higher because of the cost of transportation and the fees of going through the pipeline or through the 

Panama Canal pipeline. 

Since this, since the reduction in our throughput, we are down 

now to about 1.2, 1.3 million barrels a day, almost a million barrels 

a day less. There is not the supply. There is some competition now 

for Alaskan oil. I wonder about that in terms of your inquiries and 

to what extent that has been taken into account, or is that proper 

for me to ask? 

Mr. PITOFSKY. On past cases, absolutely proper. That is certainly 

an issue. I do not know as much about the history going back to 

1982, but your description of the decline in the supply of North 

Slope oil is exactly right, and we took that into account in our review of cases that affected West Coast prices. 

Senator STEVENS. You and I had a disagreement before. We 

patched that up a little bit. 

Mr. PITOFSKY. I hope so. 

Senator STEVENS. I do, too. But as a practical matter, one of our 

differences of opinion was that you had described the West Coast 

market as a separate market from the global market. Do you still 

maintain that position? 

Mr. PITOFSKY. Yes, I do. Well, no, I am sorry. Senator what we, 

what the Commission described, was a product market that was 

limited to Alaskan North Slope crude which was separate from the 

world market. It was not that the West Coast geographically was 

different. It was that those two types of oil competed in separate 

markets. 

Senator STEVENS. Well, perhaps we will have some time again to 

discuss that. I personally believe we have made a historical mistake in not establishing a posted price for oil in Alaska. We are the 

only market in the world that does not have a posted price in the 

place of production. As such, we are destination priced. As such, 

that affects this competition for Alaskan oil because of the net-net 

to the producer. The further you go, the less your net is. 

In many respects it is closer to Japan than it is to Los Angeles. 

I hope people keep that in mind in this hearing. 

Senator SMITH. Thank you, Senator Stevens. 

Senator Boxer. 

Senator BOXER. Thank you. 

First of all, Chairman Pitofsky, thank you for saying that you are 

going to have this study on California high prices completed in 30 

days. I am very grateful for that. It has been a source of tremendous frustration for me because, as you point out, it is a complicated area, but our constituencies expect us to get something 

done for them and they do not understand, and they keep asking 

me all the time, where is that? You promised us the FTC was going 

to do this. Where is it? 

So now I am going to tell them, and I’ve got you on the record 

and I am happy. May 25th I look forward to getting the report. 

These prices are hurting us in California and anyone can put any 

spin they want on it. But to me there are a lot of things that I see 

that are not right. It is not right to red-line. It is not right to have 

31

the zone pricing. It is not right to drive people out of independent 

stations. I ask unanimous consent that this letter be placed in the 

record from Gary and Deborah Ray, whose family owned a station 

for 39 years and were run out of town on a rail. I would like to 

include that. There are so many more of those. 

Senator SMITH. Without objection. 

[The material referred to follows:]

DECEMBER 14, 1999

Hon. BARBARA BOXER, 

DEAR MR. HAGEN: I spoke with you a few days ago regarding our Chevron station 

at 2007 Redwood Rd. Napa, CA. This is a three party station. My father-in-law 

opened the station 39 years ago, when he passed away 7 years ago, we purchased 

it from the estate for $300,000. My husband, Gary, has worked there since he was 

15, he is now 45. Every 2 years Chevron gives us a hard time on our lease renewal. 

Our station pumps over 230,000 gallons a month and makes a good living for us, 

even though Chevron charges us a rent of $14,000-$16,000 a month, depending on 

what we pump. 

In June, Larry Oliver had a meeting with my husband and me stating that they 

would not renew with us because they wanted all the profits and that if it was not 

a company-owned station it would not be there. Furthermore they would not be buying us out. Which means they are probably going to slide in after the lease ends. 

The land owner told us that be has to wait until they decline, stating that they have 

first right of refusal, otherwise we could go ahead and do a deal with him. So we 

have to wait until the eve of December 31, 1999, when our lease is out. If we leave 

at that time, they can say that we abandoned it. Also, for some unknown reason 

our in-house credit card accounts have been denied. 

My husband has become a Shell dealer hoping to put a Shell Station there, since 

Chevron says that they are leaving the site. We along with our Shell Rep find this 

all very hard to believe. All we request from Chevron is a letter that they are not 

renewing the lease with the land owner after we leave, but they refuse to comply. 

Please help us out if you can. If this had to go to court, we would go broke because 

we all know that we cannot afford to fight the corporations. The person to contact 

concerning the letter that states Chevron is leaving that site is Greg Wankent at 

(925) 842-9551. We would appreciate future contact with you on this matter. Thank 

you for your time. 

Sincerely, Gary & Debra Ray

Senator BOXER. Then you put all of these little pieces together 

and you have to be just born into the world yesterday not to see 

a pattern of disturbing things. Red-lining, oh, it is not illegal. Zone 

pricing, well, it is not technically illegal. Mergers, well, we do not 

know that they are responsible for the problems. 

But yet if you take a graph and you show the number of mergers 

that have been approved and then you show the price of gas, there 

is a correlation with the number of mergers and price increases. So 

somebody could say, fine, it is not illegal, it is not a problem. Meanwhile, my people are paying $2.16 for the lowest grade of gasoline 

today. That was yesterday. I do not have a later picture. I do not 

know where it is headed. It is not right. 

I see a pattern that is very disturbing to me. Then I see Ron Wyden’s work here along with The Oregonian, and I just want to read 

what he said, the little jump quote here: ‘‘When you look at the 

ARCO report, it is clear that their very business model, the essence 

of their business, was to take advantage of the lifting of the export 

ban to manipulate supply and stick it to the people on the West 

Coast.’’ 

That is a strong statement. But guess what? It is backed up 

when you read the document, which you have not had a chance to 

examine. 

Senator STEVENS. Are those documents here, Senator? 

32

Senator BOXER. I do not know. 

Senator WYDEN. Would the Chairman yield to me? These documents are not confidential. They are public documents. They come 

from the California lawsuit. I am happy to make them available to 

the Chairman. These are not the confidential documents. 

I appreciate the Chairman’s question because I want to draw the 

distinction. I think it is extremely important on a bipartisan basis 

for this Subcommittee to have access to those sealed documents involving the BP-ARCO acquisition matter. I think that that will 

shed a great deal of light on this. I am interested in working with 

you, Mr. Chairman, figuring out a way to do this in a fair process. 

But the memo that Senator Boxer is talking about is one that, 

I have obtained it already. It is a public document involving the 

California lawsuit. I am happy to make it available to you. 

Senator STEVENS. Well, I do not want to interfere with Senator 

Boxer’s comments, but I take the position that there are documents 

that the Federal Government requires to review a proposed business transaction which are by law confidential. If you want to 

make them not confidential, then pass a law to break the confidentiality. They were acquired in the process of a confidential disclosure to determine whether or not the merger was in the public interest, and I oppose and shall oppose the breaking of that confidentiality by our Committee without really advice from the Justice Department and others about what that is going to do to future disclosure by companies that are under review for antitrust, concerns 

of the government over antitrust. But it is a merger, a private series of documents that are disclosed in order to justify their case. 

Senator BOXER. This document has nothing to do with the merger, Senator Stevens, and that is what I think Senator Wyden was 

saying. 

Senator STEVENS. These are documents that were filed in connection with the merger, are they not? 

Senator WYDEN. No. 

Senator BOXER. No, this is a lawsuit because of the pricing. 

Senator STEVENS. Are they confidential? 

Senator WYDEN. No. 

Senator BOXER. No. 

Senator WYDEN. There are two sets of documents in question: the 

one involving the merger, which I think those 1400 boxes which 

have been sealed, this Subcommittee should work out a way to look 

at. That is sealed and is confidential. 

But as Senator Boxer and I have both said, this memo does not 

involve merger activity. It is not sealed. It is not confidential. It is 

a public document. 

Senator STEVENS. I will withhold until we get to the subject of 

the ones in the boxes, because those were given, as I understand 

it, under a process that confidentiality was assured in terms of 

complete disclosure, and it will harm the antitrust situation in my 

opinion if we put a mar on that by saying if we give them to the 

FTC or the Justice Department under a confidentiality restriction 

the Congress can come on later and wash it off. 

Senator WYDEN. Mr. Chairman, would you just yield further on 

that, because you are making a very important point. I am not interested in breaking that confidentiality through a public process. 

33

What I am interested in is seeing that this Subcommittee, through 

a process that protects the confidentiality, can examine those documents, because I think the Subcommittee needs to see those documents in order to address these important issues. 

Senator STEVENS. If they are confidential, how did they get into 

The Oregonian? 

Senator WYDEN. Mr. Chairman, again this story does not deal 

with those documents involving the 1400 boxes, nor does the previous story. 

Senator BOXER. If I might say, these are documents that were 

gotten during discovery process by the consumer attorneys who 

were trying to make the case that there was price collusion. If I 

could just continue my point, I agree with Senator Wyden’s conclusion here in which he says when you look at this, again you would 

have to be pretty naive not to think there was manipulation of the 

supply. 

I am all for supply and demand, but it is not real, it does not 

work, when the supply is manipulated. In this discovery—and 

again, I am reading. I have not seen the actual documents, although Senator Wyden, I assume has seen them—it describes—

there is a memo there that describes ARCO’s action plan ‘‘to export 

to keep the market tight’’ as part of ‘‘maintaining balance on the 

West Coast.’’ Then e-mails that say—records obtained included email exchanges in which BP trading managers discussed the benefits of ‘‘shorting the West Coast market to leverage up prices.’’ 

Well, maybe if you are from a State where people are not hurting 

this sort of goes over your head. But when you are hurting like we 

are in our State, this makes us get angry. I am sorry about it. 

I also feel very differently on the confidentiality. I have a different view. It is not before us now, but I believe taxpayers pay 

good money for the FTC to operate and it is a government agency. 

It does not run at the behest of oil companies, multinational oil 

companies. It is supposed to protect consumers right here in America. So I view the issue a little differently. 

I would like to work out some kind of compromise. I think I have 

been talking to the FTC Chairman for a long time about getting 

a look at some documents. He said absolutely not, cannot even look 

at them, cannot even see them, cannot even get a hold of them, you 

cannot know what I know. I mean, he defended the confidentiality, 

as he should, under the law. I want you to know that. 

But I feel at a great disadvantage. The people elected us to do 

a job. If I do not know what is going on and I have got to piece 

it together—red-lining here, zone pricing there, exporting to Asia 

when we needed the oil on our West Coast here, 60 percent increase in profits there, $17 million bonus to a CEO on top of a $13 

million bonus to an oil company, and I am adding it all up and I 

am saying on behalf of my constituents I am concerned. 

Mergers, you follow the mergers and you follow the prices. It is 

not that hard. I have got it in Los Angeles. I held a press conference at a corner where there were four different gas stations. All 

had the same price. One was a Shell, one was a Chevron, one was 

something, something, and they all had this. It is in the zone. 

It is frustrating. So today I am so relieved that we are having 

this hearing. I am relieved to hear we are going to have a report 

34

soon. I am very concerned. I know Senator Stevens probably has 

the votes on the export issue. I said that I am willing to even look 

if California companies are exporting out of the country at a time 

when—you know, this is not a piece of candy or something—this 

is a necessity for our economy, to keep our engine going. 

Anyway, I am quite concerned. Again, I just want to thank our 

two co-chairs today. 

Senator SMITH. Thank you, Senator Boxer. 

We have been joined by the Subcommittee Chairman, Mr. Fitzgerald. 

STATEMENT OF HON. PETER FITZGERALD,

U.S. SENATOR FROM ILLINOIS 

Senator FITZGERALD. Well, thank you, Mr. Chairman, I guess I 

should call on you, for the day anyway. 

Senator SMITH. Only in your stead. 

Senator FITZGERALD. Thank you very much. I would like to have 

an opportunity just to ask Mr. Pitofsky about the situation we had 

in Chicago—I remember it was a little over a year ago—when our 

gas prices in the Chicago metropolitan area were going up much 

faster than in the rest of the country. There were a lot of calls for 

investigations at that time of the oil companies, but ultimately the 

FTC did a study to see whether there had been any collusion 

amongst refiners. 

Mr. Pitofsky, if I am correct your study ultimately concluded that 

you did not find any collusion amongst oil company executives in 

the Chicago area; is that correct? 

Mr. PITOFSKY. That is correct. 

Senator FITZGERALD. There were allegations or suggestions or innuendo that there had been something amiss amongst the oil marketers in the Chicago area. There was a lot of suspicion. People did 

not know why prices were going up. But it turned out as I recall 

that your report suggested that actually two pipelines bursting, the 

taking effect of new Clean Air Act requirements in the Chicago 

area, a variety of factors caused the supply to be very low and the 

demand to be very high, and the prices went up. 

I just wonder. My experience has led me to believe that we ought 

to be kind of careful before going out and potentially ruining the 

reputation of good people by alleging criminal conspiracies before 

we have any facts. The allegation of collusion is very serious. There 

are criminal penalties in the law, are there not, Mr. Pitofsky, for 

collusion by oil companies or others? 

Mr. PITOFSKY. Price-fixing can be treated criminally. 

Senator FITZGERALD. And you can be thrown in jail for that. 

Mr. PITOFSKY. Yes. 

Senator FITZGERALD. So I think, while it is fine to have these investigations, we ought to wait until we have some evidence before 

we start throwing out those allegations, because they are very serious allegations and I think there can be good explanations for why 

prices go up. 

Do you have a copy of the report? Would your staff have a copy 

of the report that you ultimately issued on Midwest gasoline? 

Mr. PITOFSKY. Absolutely. We will get it to you promptly. 

35

Senator FITZGERALD. Mr. Chairman, I would ask for unanimous 

consent that, if we get a copy of that report on the investigation 

that was done of Midwest oil prices a year ago, that we enter that 

into the record. After a lengthy investigation, they found that there 

had been no collusion and that, in fact, supply was tight and demand was high and that is why prices went up so dramatically in 

Chicago. After it was up for a while, actually demand died down 

and product was rushed to the market and prices fell again. 

Senator SMITH. Without objection, we will include that. 

[The report is available on www.FTC.gov and in Committee 

files.] 

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

Senator SMITH. If the Chairman will yield, the point you are 

making is a good one, but what we are concerned with is the ARCO 

memo from 1996 and the internal BP-Amoco memo was from 1995. 

I guess the question is when it comes to an allegation of market 

manipulation, you approved a merger between this. Did you, Mr. 

Pitofsky, the FTC, essentially ratify a price-rigging scheme? 

Mr. PITOFSKY. In BP-ARCO? 

Senator SMITH. Yes. 

Mr. PITOFSKY. Absolutely not. 

Can I just clarify one point, Senator? You are absolutely right. 

The report speaks for itself on the Midwest gas prices. You are 

right, after a careful investigation we found no collusion. We also 

found that for the most part the reasons prices spiked up in Chicago as they did were reasons that were beyond the control of the 

oil companies, like a rupture in a pipeline and many other reasons. 

However, we also found that at least one and maybe more companies engaged in strategic behavior to make sure that prices did 

not come down. That is the sort of thing we are talking about here 

in terms of exporting oil to the Far East to make sure prices do 

not come down. But there was no collusion and I think that is in 

the report. 

Senator FITZGERALD. There is nothing illegal about that, though, 

is there? I mean, companies try every day to keep their prices as 

high as the market will bear, do they not? 

Mr. PITOFSKY. Single firm behavior taking advantage of that situation is not illegal. But we were asked by Congress, not just 

whether there was a violation of the antitrust laws, but whether 

there was profiteering of some sort, and we addressed that question. But it is not illegal, you are right. 

Senator FITZGERALD. It becomes illegal when they collude to try 

and fix the prices, and that was not found in the Chicago situation. 

But you did find, sure, companies were trying to on their own, hoping that the demand would stay high and the low supply could give 

them the opportunity to sell their product at a high cost. 

Mr. PITOFSKY. They were taking advantage of that situation, in 

some cases to the maximum extent possible. One case, a company 

kept oil that it had off the market to make sure the prices did not 

come down during that price spike. 

Senator FITZGERALD. Is there anything illegal about that? 

Mr. PITOFSKY. No. 

Senator FITZGERALD. No. 

Senator BOXER. Mr. Chairman, would you yield to me? 

36

There is a lot that is not illegal in life. You could walk up to the 

line of being unethical and not be illegal. I would hope that what 

we are about—and I agree with you, we should not throw around 

criminal terminology. That is not appropriate, to do that. But I 

would really hope that we would not sit by and be silent. 

If people were manipulating the supply, even if it is legal, and 

if it hits our people in such a way that it is disadvantageous; you 

must see this as an ugly thing. Look at this ugly thing. This is San 

Francisco gas prices yesterday. I would hope that we would work 

with the corporate community for some sense of responsibility here. 

Maybe that is impossible. Maybe the attitude is you walk up to the 

line; it is not illegal, so sue me. 

Senator FITZGERALD. But you would agree that we have a low 

supply of crude oil in this country, would you not, Senator? 

Senator BOXER. I think in this case, when you export some of it 

out to another country, yes. If you manipulate the supply, yes. 

You know, we are facing this in California, and maybe it is not 

illegal, but gee, it is amazing how many plants are shut down for 

repair all at the same time. It is amazing. It is a great concern to 

me that the consumer does not seem to have—well, I will not go 

there. 

I would just say that we are waiting for a report that we asked 

for 21⁄2 years ago. 

Senator FITZGERALD. Will the Senator yield for a question? 

Senator BOXER. Yes. I will just finish my point. 

If I might just tell my friend that in 30 days we are going to have 

a report on California pricing. I will also want to enter it into the 

record here. I do not know if it will show illegality or immorality 

or something in between or something or neither. But we are going 

to show something there, because it has taken 21⁄2 years to get it 

done. I think there is something there. But I will share that with 

you. 

Senator FITZGERALD. If the Senator would yield, you would agree 

that the oil companies are doing very well right now? They are 

making a lot of money in this current climate, where they can resell gasoline at very high prices. 

Senator BOXER. Yes, some of them are up 60 percent in their 

profits. Conoco is up 59 percent. 

Senator FITZGERALD. Now, a couple years ago when oil was close to $10 a barrel, a lot of oil companies were not doing as well. That 

is when they started doing the mergers. Their stock prices were 

low. They were not as profitable as they are today. Would you not 

think they would be more likely to collude or to have criminal behavior when they were desperate and they are not making money 

and jobs are on the line and those executives you talk about are 

not getting the bonus? 

It almost does not make sense to me that at the moment their 

companies are most profitable they would resort to illegal collusion. 

I know it is a good sound bite because a lot of politicians in Illinois 

were running up and down the State saying: We cannot explain 

these high oil prices; there has got to be criminal collusion on the 

part of the executives. But I thought, boy, that is a serious charge, 

and to think that some of those oil company executives are sitting 

in a back room engaging in a criminal conspiracy for which they 

37

could have time in a Federal penitentiary—I think we have got to 

be careful about going out and hurling those kind of charges. 

Ultimately in Chicago, after a lot of people were implying there 

was criminal allegations or criminal conduct on the part of a lot of 

oil company executives, they found nothing criminal after an investigation by Mr. Pitofsky’s agency. 

So I just wanted to share that experience with you that we had 

in Chicago. It may well be that there are very good reasons that 

the prices have gone up on the West Coast as they have gone back 

everywhere else in this country now. 

Senator BOXER. Well, Senator, let me just say the record will 

show I have not used the word ‘‘collusion’’ since I sat down here. 

What I have said is there is a lot of things going on that when you 

put it into a pattern it raises concern to me. 

No, I do not expect that corporate executives who are ethical 

would ever collude or would ever break the law, and I expect that 

they would never do that. I would hope that, in addition to never 

doing that, I hope that they would not take advantage of a situation. Again, I think asking the question, is it illegal, is a good one. 

It is a very good one, particularly in a court of law. But around this 

place I would hope we are concerned about the way consumers are 

treated, whether supply is manipulated, whether it is legal or not. 

I think it is a concern for consumers and it could impact this 

economy in a very heavy way. 

Senator FITZGERALD. Can I offer one note of encouragement to 

the West Coast? 

Senator BOXER. Yes. 

Senator FITZGERALD. After our prices were the highest in the 

country in the Midwest for a sustained period of time, for several 

weeks, they started rushing supply to the Midwest because you 

could make more reselling your oil in the Midwest than anywhere 

else in the country, and by the end of last summer the Chicago 

area had amongst the lowest gas prices in the country. 

Senator SMITH. We look forward to that this summer. I do not 

expect it, though. 

Senator FITZGERALD. That is reassurance for those who believe 

in the free market system, because I think we see this same cycle 

in agriculture. When the price of cattle is really high, people rush 

to production and then it plummets. I think that we are seeing a 

cycle that is old as the ages of supply and demand here. That was 

my impression after going through this last year in the Chicago 

area. 

I think we need to increase supplies of fuel oil and decrease demand the best we can. 

Senator SMITH. Thank you, Senator. 

Mr. Pitofsky, we are not quite done with you. Just a few more 

questions. So if anyone has a second round, we will proceed with 

that. 

You have heard the charge and my question to you is this. If the 

FTC’s allegations are true and BP kept oil prices on the West 

Coast higher by exporting Alaskan North Slope crude to Asia, is 

this a violation of Federal law? 

Mr. PITOFSKY. Is that behavior in and of itself a violation? 

Senator SMITH. A violation. 

38

Mr. PITOFSKY. No, it is not. 

Senator SMITH. If not, why not? We have not done anything 

about it. 

Mr. PITOFSKY. Even if I were on the Supreme Court, I do not 

think I—it is single firm behavior. Our antitrust laws are very generous to single firm. We are tough as can be on collusion, but on 

single firms behavior—proving an attempt to monopolize, which is 

what that is all about, is enormously difficult and there is no precedent for challenging that kind of behavior. 

Senator SMITH. The expert that you hired during the FTC’s review of the BP-ARCO merger and who we will hear from later 

today says that BP’s Asian exports increased West Coast gasoline 

prices by at most a quarter-of-a-cent per gallon. Do you agree with 

that figure? 

Mr. PITOFSKY. I do not know. We were not required to quantify. 

We did not quantify. At the time we went into court all we said 

is they had the power to do it and they did it. What the consequences were we were never called upon to address. 

Senator SMITH. Finally, without commenting too much on the investigation and the report that you are about to submit, are you 

finding any other reasons for the loss of over 600 gasoline stations 

since 1990? 

Mr. PITOFSKY. In Oregon? We have not looked at that question. 

Senator SMITH. Thank you. 

Senator Wyden had a question. 

Senator WYDEN. I just want to draw again the distinction between collusion, which is obviously illegal, and these anti-consumer 

practices. As you know, Mr. Chairman, I asked your opinion today 

because you have an ongoing inquiry. So I just ask you your opinion. I did not ask you if there was substantial evidence of collusion. 

I asked you if there was substantial evidence in your opinion of, 

in effect, supply manipulation. You indicated to me that there was. 

You said that with respect to red-lining and also laid out your 

views with respect to zone pricing as well. 

Is it not correct to say that supply manipulation can be anti-consumer? 

Mr. PITOFSKY. It can be. On the other hand, I want to be clear 

about this. In this area of the law what the courts do is they look 

at the competitive effect, but then they look at the business justifications. Generally speaking, when you are talking about where 

jobbers or distributors can sell, location, the law is very generous 

to the manufacturer or the refiner. 

I think I said to you, I once checked, and of the first 20 cases, 

the defendants won 19. That is one of the reasons that we are so 

careful about examining this situation. Yes, there can be anti-competitive effects. But unlike price-fixing, they can be outweighed by 

good business justifications. 

Senator WYDEN. One additional question with respect to the effect of the BP merger on the consumer at the pump. The Oregonian

recently quoted the economist that you hired, one of the two economists that you hired to analyze the merger, R. Preston McAfee, a 

Professor at the University of Texas at Austin, who said in his 

opinion that the merger translated to 1 to 3 cents a gallon extra 

cost at the gas pump. 

39

Now, if you were to take the millions of gallons of gas sold on 

the West Coast and Mr. McAfee was right that it was 1- to 3-centsa-gallon, we would be talking about a very substantial sum of 

money to BP, is that not correct? 

Mr. PITOFSKY. Yes, although I do want to signal that——

Senator WYDEN. You have not quantified it. 

Mr. PITOFSKY [continuing]. testimony later will be that that 1 to 

3 cents is a little on the high side. But we have not quantified it, 

but obviously, it would be a very big number. 

Senator WYDEN. Would it not be fair to say if you are talking 

about millions of gallons, even if it was 1 cent a gallon, you would 

be talking about a pretty big number in terms of the company’s 

bottom line, would you not? 

Mr. PITOFSKY. We did a rough estimate some time ago based on 

government statistics and I believe 1 cent per gallon would translate into about $200 million. 

Senator WYDEN. A year? 

Mr. PITOFSKY. A year. 

Senator WYDEN. Thank you, Mr. Chairman. 

Senator SMITH. Senator Stevens. 

Senator STEVENS. I have one last question or comment. 

Mr. Pitofsky, ARCO is gone. This is 1995-96 we are talking 

about. We have had oil and gas prices drop down to $9 to $10 a 

barrel. We have had other mergers. We have had other investigations. We have had situations where the industry tried to build up 

markets in Asia as the markets were becoming flooded with foreign 

oil in California. 

Have you had any reason to investigate as the FTC the pricing 

situation as far as the North Slope oil in terms of the Asian markets in general? 

Mr. PITOFSKY. We have not. 

Senator STEVENS. Have there been any complaints filed with you 

about unfair practices, of people being denied oil in California because oil was being shipped to Japan or Asia by our North Slope 

producers? 

Mr. PITOFSKY. I am not certain. I can find out the answer to 

that. Offhand, I do not recall. Well, there may have been. There 

may have been complaints, Senator. Let me get the answer for that 

question. 

Senator STEVENS. I would like to see that, because when I look 

at the situation here I understand that gasoline prices are up pretty high in California right now, but I also know that in the period 

of $9 to $10 a barrel oil, my State lost billions of dollars. We had 

producer after producer fold and leave Alaska. We are a very highpriced area. 

It seems to me very strange that we are going back to 1995 and 

1996 allegations concerning a company that is dead and now bringing all that and putting it on the one surviving major that is there 

in terms of this West Coast production. I would like to see if you 

have had allegations to that effect. 

Mr. PITOFSKY. We will look for that, Senator. 

Senator BOXER. If I might, Mr. Chairman. I would just say in 

this article that we have been quoting extensively from——

40

Senator STEVENS. Ma’am, I have got to tell you I did not come 

here to debate with you. I came to listen to witnesses. 

Senator BOXER. I wanted to give you the answer to your question, Senator. 

Senator STEVENS. I did not ask you a question, Senator. 

Senator BOXER. Well then, I will take my own time. That is fine. 

Mr. Chairman, may I have a minute, please? 

Senator SMITH. Yes, we are on the third round and it is your 

turn. 

Senator BOXER. Thank you very much. 

If anyone is interested as to whether there has ever been a question from California consumers about the export of Alaska oil, I 

would ask them that they should read this article and they should 

go to this particular case, which is Aguilar vs. ARCO. In fact, that 

is where these documents come from, and they are from 1997. 

So yes, there have been, if anyone is concerned—any Senator or 

any person in the audience—as to whether California consumers 

have complained, there is a class action suit filed by a number of 

California consumers dealing with this. It is actually Aguilar vs. 

Atlantic Richfield et al., a 1997 consumer class action that accused 

ARCO and other California refiners of price-fixing. It goes to all of 

these issues. 

So we have had these complaints and that is where these documents are now being made public. 

Thank you very much. Thank you again; I am looking forward 

to your report. 

Senator SMITH. Mr. Pitofsky, I think that concludes our questioning and we thank you for your appearance today. 

Mr. PITOFSKY. Thank you all. 

Senator SMITH. We will now call forward our next panel, which 

is: Mr. Jim Wells, the Director of the Natural Resources and Environment of the General Accounting Office; and also Mr. John Cook, 

the Director of the Petroleum Division of the Energy Information 

Administration.

STATEMENT OF JIM WELLS, DIRECTOR FOR NATURAL

RESOURCES AND ENVIRONMENT, U.S. GENERAL

ACCOUNTING OFFICE; ACCOMPANIED BY FRANK RUSCO, 

SENIOR ECONOMIST, RESOURCES, COMMUNITY, AND 

ECONOMIC DEVELOPMENT DIVISION, GAO

Mr. WELLS. Thank you, Mr. Chairman and Members of the Subcommittee. Accompanying me today is Frank Rusco, a fellow team 

member who worked on our gasoline work. 

As you know, gasoline prices in the West Coast States are frequently among the highest in the Nation. The West Coast States 

also tend to experience longer periods of high prices compared to 

other areas in the United States. It is sort of a legacy of the West 

Coast. High prices have caused public concern and can be a hardship to consumers, especially with low-income families and those 

that depend on driving for their livelihoods. 

GAO has done a body of work over a number of years that sheds 

some light on some of the root causes for West Coast high gasoline 

prices, which I will summarize today. But before I do, I want to 

begin with four points that will help put the discussion in context. 

41

As you, Mr. Chairman, mentioned in your opening statement about 

clarity and balance, what I want to do is talk about four comments 

here to put some balance on what is going on in the marketplace 

right now, and then we will talk about the West Coast prices. 

Gasoline prices differ from other commodities in that prices are 

very visible to the public. Prices are publicly displayed virtually at 

every station on every street and consumers are making frequent 

purchases. When prices rise quickly, as they have numerous times 

in the past, not only do the consumers immediately observe it, but 

they also feel it in their wallets. I doubt that consumers can tell 

you the same about milk or bread price behavior. 

Gasoline and oil prices typically fluctuate widely from season to 

season and even year to year. For example, in 1998, GAO was 

called upon to explain why crude oil prices were so low that some 

domestic producers were actually closing their wells and going out 

of business. One year later, GAO was called in again to explain 

how refinery outages in California led to high gasoline prices and 

price spikes. Again, high fluctuation as a commodity. 

While rising prices are alarming to consumers, it is important to 

put gasoline prices in real dollar terms to understand their actual 

economic impact. For example, the 30 cent per gallon gasoline of 

the 1960s would be equivalent to a price roughly today of $1.75 in 

today’s dollar, while the $1.25 gasoline of the 1980s would be 

equivalent to roughly $2.50 per gallon today. So to place that in 

context, the national average today, although not on the street corner of the photograph in San Francisco, of $1.65 per gallon is not 

a historically high figure. 

I want to pause just a second to point out that nevertheless, in 

terms of real dollars, these recent increases in prices and the potential for higher prices this summer is a very valid legal concern—

legitimate concern, as expressed so ably by Senator Boxer and others. 

The fourth factor I want to talk about is a consideration of the 

large and growing demand for this commodity, gasoline. While fuel 

economy efficiency for automobiles almost doubled from 1973 to 

1985, there has been very little improvement occurring today. This 

is partially explained by the increase in popularity of the SUVs and 

light duty trucks, both of which are subject to lower fuel efficiency 

standards. 

My point is, the fact today, Americans are consuming over 130 

billion gallons of gasoline per year, which equates to about 1 gallon 

of gasoline out of every 9 consumed worldwide. 

So with that context in mind, I just want to briefly turn to the 

work that GAO has done in the past 3 years and talk to some of 

the root causes, not all causes, for high gasoline prices on the West 

Coast. The West Coast market, which you have heard, is clearly 

characterized by a tight balance between supply and demand, and 

the West Coast is, in effect, isolated a little bit from the U.S. gasoline markets elsewhere. For example, in order to meet consumer 

demand in the West Coast, the refineries in California are operating flat out. 

Another important factor in determining prices in the short run 

is this level of gasoline inventory figure that can be documented. 

A disruption in production causes an immediate response to turn 

42

to inventories to meet the demand. Classic economics say that if 

the inventories are insufficient, demand will quickly push that 

price up. In recent years that is typically what has been happening 

in the West Coast. There has been low inventories of gasoline. 

There is no storage place to turn to meet that demand, and this 

has added to the tendency for prices to soar quickly. 

Our comparison of gasoline prices in the cities throughout California, Oregon, and the State of Washington, in the three States, 

confirmed to us that essentially the entire three States are part of 

a single market for gasoline. What that means is what happens in 

one State, whether it is California or Oregon, has some impact on 

all three. 

I can also say that there are individual States that have attributes that do also tend to increase the gasoline prices. For example, California uses the boutique gasoline designed to reduce harmful exhaust emissions that causes smog. This is a good thing, not 

to have smog. Oregon, on the other hand, depends completely on 

out-of-State supplies for its gasoline. It has no refinery capacity, 

but most of it must come from a single pipeline in the State of 

Washington. If something happens to that pipeline, Oregon pays 

the price. 

In conclusion, Mr. Chairman, our work has shown that prices 

have been volatile in the past and we have every reason to believe 

that this is going to continue in the foreseeable future. It is not 

going to change overnight. Unexpected events will continue to 

cause price spikes. While the timing of these events is unpredictable, clearly they will occur. 

For example, the unexpected refinery outages and pipeline disruptions cause prices to rise. More recently, there have been unexpected refinery outages in the U.K., Aruba and just last Monday, 

as mentioned in Carson, California. Looking toward this summer, 

there are also potential concerns: potential electricity blackouts in 

California and the West. Some would say the word ‘‘potential’’ is 

not the right word, but clearly this has the potential to affect refinery production and distribution on the West Coast. If they occur, 

gasoline prices, high gasoline prices this summer are a sure bet. 

I want to end here not so much on a sour note. If there is any 

kind of a silver lining in the current situation, to the current cloud 

of high gasoline prices, it is that historically we have observed that 

if you have high gasoline prices, as Chairman Fitzgerald was alluding to earlier, it has always had a tendency to encourage eventually 

a supply response that could perhaps bring down prices. So I want 

to end with: Perhaps there is hope this summer for gasoline prices. 

Thank you, Mr. Chairman, and when the panel concludes we will 

be glad to answer questions. 

[The prepared statement of Mr. Wells follows:]

PREPARED STATEMENT OF JIM WELLS, DIRECTOR, NATURAL RESOURCES AND

ENVIRONMENT, U.S. GENERAL ACCOUNTING OFFICE

Mr. Chairman and Members of the Subcommittee: I am pleased to participate in 

the Subcommittee’s hearing on the causes of high retail gasoline prices in California, Oregon, and Washington. As you know, prices in West Coast states are frequently among the highest in the Nation and these states tend to experience longer 

periods of high prices compared with other areas in the United States. As of March 

27, 2001, the retail prices of gasoline in West Coast states were higher than the 

national average—the average national price for a gallon of unleaded regular gasoVerDate 0ct 09 2002 11:58 Jan 05, 2004 Jkt 088463 PO 00000 Frm 00046 Fmt 6601 Sfmt 6621 S:\WPSHR\GPO\DOCS\88463.TXT JACK PsN: JACKF
43

1Motor Fuels: Gasoline Prices in Oregon (GAO-01-33R, February 23, 2001), Motor Fuels: Gasoline Price Spikes in Oregon in 1999 (GAO/RCED-00-100R, Feb. 23, 2000) and Motor Fuels: California Gasoline Price Behavior (GAO/RCED-00-121, Apr. 28, 2000). 2 Alaskan North Slope Oil: Limited Effects of Lifting Export Ban on Oil and Shipping Industries and Consumers (GAO/RCED-99-191, Jul. 1, 1999). 3 CARB stands for California Air Resources Board, the State agency that administers California’s emissions-reducing gasoline program. CARB gasoline is designed to reduce harmful exhaust emissions that cause smog. 

line was $1.43, compared with $1.72 in California, $1.57 in Oregon, and $1.56 in 

Washington. Furthermore, according to the Energy Information Administration, gasoline prices are expected to rise this summer and price volatility remains a concern. 

Over the last 3 years, GAO has issued several reports on gasoline prices and gasoline price behavior in two West Coast states—California and Oregon.1 Our analyses 

focused on observable factors that affect gasoline prices and did not address issues 

concerning the competitiveness of gasoline markets, which may also affect prices in 

these states. In addition, we issued a report in response to a mandate in Public Law 

104-58 to determine the effects of lifting the ban on Alaskan crude oil exports on 

crude oil prices and production, refiners, consumers, and the oil shipping industry 

on the U.S. West Coast.2 My testimony, which is based on these reports and related 

work, specifically discusses factors affecting gasoline prices in California, Oregon, 

and, more generally, the West Coast. In summary, I will make the following points: 

• The West Coast gasoline market is characterized by a tight balance between 

supply and demand, and is isolated from other U.S. gasoline markets. For example, 

in order to meet consumer demand, refineries in California operated at about 97 

percent of capacity in 1999 compared with about 93 percent nationally. In addition 

to the overall tight balance between supply and demand, the West Coast market is 

isolated from out-of-state sources of gasoline so that supply shortages cannot easily 

be replaced. Both these situations cause rapid price increases in reaction to supply 

disruptions. 

• Our comparisons of gasoline prices in cities in California, Oregon, and Washington found that individual markets in the three states are closely linked and are 

essentially part of a single market for gasoline on the West Coast. Gasoline prices 

for cities in these states, while differing at any given moment in time, generally followed similar patterns with respect to price increases and decreases. As a result, 

any event that caused a significant price change in one State could affect the gasoline prices in other West Coast states. 

• While California, Oregon, and Washington are essentially part of the same 

West Coast market, each State has attributes that tend to increase its respective 

gasoline prices. For example, California uses a ‘‘boutique’’ gasoline designed to reduce the harmful exhaust emissions that cause smog. In contrast, Oregon depends 

completely on out-of-state supplies for its gasoline, much of which comes through 

a single pipeline from the State of Washington. These attributes, among others, lead 

to higher gasoline prices in these states. Moreover, within any given state, local 

market conditions may cause prices to vary considerably. 

• Our analysis found that lifting the export ban on Alaska North Slope (ANS) 

crude oil caused the West Coast price of this oil to rise but it did not significantly 

affect the price of gasoline. 

WEST COAST MARKET IS TIGHT AND ISOLATED

The West Coast gasoline market is characterized by an especially tight balance 

between supply and demand, and is isolated from other U.S. gasoline markets. In 

general, California’s gasoline demand dominates the West Coast market. Based on 

1997 data, the last year data on international gasoline consumption were available 

to us, California is the third largest gasoline consumer in the world—behind only 

the rest of the United States and Japan—and its consumption is being met almost 

entirely by supply from refinery production within the state. In addition to making 

California’s boutique CARB gasoline, some of California’s refineries produce conventional and other reformulated gasoline to supply to western markets, such as Oregon, Arizona, and Nevada.3 To meet this high demand for gasoline, California’s refineries produce at almost full capacity. For example, in 1999, California’s refineries 

operated at about 97 percent of capacity compared with a national average of about 

93 percent. Because the existing refineries in California have virtually no spare capacity, unanticipated refinery outages, such as those caused by mechanical problems, can cause supply disruptions and rapid price increases not only within the 

State but also in other western states that it supplies. California refineries experienced unanticipated outages every year from 1995 through 1999. 

44

4The data come from survey results published weekly in the Oil & Gas Journal. We chose 

this timeframe in order to cover sufficient periods of time before and after the Olympic pipeline 

disruption of June 10, 1999.

When unanticipated refinery outages occur, other out-of market sources have to 

supply gasoline to make up for the lost production. However, the West Coast market 

is isolated from other major refining centers because it has few, if any, pipelines 

that can bring gasoline to the West Coast states. Therefore, tankers and other 

means must be used. The process is slow and costly compared with pipelines. Gasoline shipped into California (and other West Coast states) by tanker from such 

places as the U.S. Gulf Coast, the U.S. Virgin Islands, Europe, and Asia, can take 

between 11 and 40 days and add 3 to 12 cents per gallon to the retail price. In addition, the uniqueness of California’s CARB gasoline further isolates the state’s gasoline market, because only a few refineries outside California can produce CARB gasoline. Moreover, these few refineries are not designed to make CARB gasoline routinely and the refining operations have to be reconfigured to produce it. This reconfiguration process, some oil industry officials told us, can take up to a week and 

adds to the cost of production. 

WEST COAST STATES ARE ESSENTIALLY PART OF A SINGLE MARKET

Our comparisons of gasoline prices in cities in California, Oregon, and Washington found that individual markets in the three states are closely linked and that 

they are essentially part of a single gasoline market on the West Coast. When we 

compared gasoline prices in Portland, with prices in Los Angeles, San Francisco, 

and Seattle, we found that although average prices in the four cities differed, they 

generally moved in the same direction simultaneously and hence, the price differences remained fairly stable over time. Variations in price levels could be attributed in part to differences in transportation costs, taxes, and other local regulations 

and conditions. 

Figure 1 shows a comparison between retail prices of regular unleaded gasoline 

in Portland and those in Los Angeles, San Francisco, and Seattle for January 5, 

1994, through October 18, 2000.4

Gasoline prices in the four cities, while differing at any given moment in time, 

generally followed similar price fluctuation patterns. For the entire period, retail 

regular gasoline prices in Portland averaged about 4 cents higher than in Los Angeles, about 1.4 cents higher than in Seattle, and about 10 cents lower than in San 

Francisco. 

Despite these average price differences, the gasoline markets in all four cities responded similarly to rapid price fluctuations caused by supply disruptions or other 

factors. In addition to examining price trends, we conducted a statistical analysis 

of retail gasoline prices in the four cities and found that an increase in price in one 


88463.001
45

5 A similar process of supply adjustments would occur for an initial drop in price. 

6Of the three principal means of shipping gasoline—pipeline, tanker or barge, and trucking—

per gallon costs are typically lowest for pipelines and highest for trucking. 7While not included above, State excise taxes and/or other local charges may apply and these 

would also be expected to have an upward impact on gasoline prices. For example, in addition 

to California’s State gasoline tax of 18 cents per gallon, the state’s sales tax of 7.25 percent 

would, at current gasoline prices, also add about 12 cents to the price of a gallon of gasoline. 

city was quickly followed by price increases in the other cities. We found that prices 

fully adjust to the change within about 5 to 6 weeks.5

STATE-SPECIFIC ATTRIBUTES AFFECT GASOLINE PRICES

While California, Oregon, and Washington are essentially part of the same West 

Coast market, each State has specific attributes that tend to increase its respective 

gasoline prices. Moreover, within any given state, local market conditions may cause 

prices to vary considerably, as illustrated by our analyses of California and Oregon 

markets. 

For California, we identified the following specific attribute: 

• CARB gasoline requirements. In 1996, California introduced reformulated gasoline standards that were more stringent than the Federal standards and different 

from those of any other state. The additional refining cost for CARB gasoline has 

contributed to the higher retail price of gasoline in California relative to the rest 

of the United States. Also, California’s gasoline market has become more sensitive 

to supply disruptions because, as mentioned above, outside sources of CARB gasoline are not readily available to make up for disrupted supplies in a timely and costeffective manner. 

For Oregon, we identified the following specific attributes: 

• Higher transportation costs for gasoline. Oregon depends completely on out-ofstate supplies for its gasoline because it has no refineries and, thus, must acquire 

gasoline via pipeline from refineries located in northern Washington, and—to a lesser extent—in California via tanker and/or truck. As a result, transportation costs 

tend to be higher in Oregon than in areas closer to the refining centers of northern 

California, southern California, or northern Washington. Furthermore, of the West 

Coast states, Oregon has the highest proportion of miles driven in rural areas—

about 53 percent—compared with 19 percent for California and 32 percent for Washington. To meet rural demand in areas that are generally not served by pipelines, 

gasoline must be trucked in from the nearest pipeline, increasing transportation 

costs further.6

• A gasoline tax higher than the national average. At 24 cents per gallon, in 2000, 

Oregon had the highest State gasoline tax among the West Coast states and the 

eighth highest in the country.7 The average State tax on gasoline at the retail level 

in the United States is about 20 cents per gallon. 

• No self-service lanes at gasoline stations. According to industry sources, Oregon’s 

prohibition on self-service gasoline stations may add as much as 5 cents to the cost 

of a gallon of gasoline. 

Finally, local supply and demand conditions affect both California’s and Oregon’s 

gasoline prices. For example, our analysis of California gasoline prices showed that 

when CARB gasoline was introduced in 1996, the difference in gasoline prices between San Francisco and Los Angeles changed. Both wholesale and retail gasoline 

prices increased more in San Francisco than in Los Angeles—wholesale prices increased by about 2 cents a gallon and retail prices increased about 11 cents. There 

was no consensus among experts and industry officials as to why prices increased 

more in San Francisco. One explanation offered was that higher refining costs are 

easier to pass on to consumers in San Francisco because of its local supply and demand conditions. Another was that the new fuel requirements might have tightened 

the gasoline supply and demand balance more in the northern part of the State 

than in the southern part. 

Similarly, local conditions have affected Oregon gasoline prices. For example, in 

June 1999, an explosion in the pipeline connecting Washington refineries with Oregon consumers caused an immediate reduction in the supply of gasoline to Portland 

and Eugene. To compensate for this shortfall, additional gasoline had to be shipped 

in by barge or tanker from Washington and California or by truck from other locations. As a result, transportation costs for gasoline coming to Portland increased and 

prices rose compared with Seattle and Los Angeles. This supply disruption coincided 

with a period of unanticipated refinery outages in northern California, which exacerbated the region’s supply shortfall, making it more costly for Oregon to replace the 

gasoline supply lost by the damaged pipeline. 

46

8See Alaskan Crude Oil Exports (GAO/T-RCED-90-59, Apr. 5, 1990). 9 Exporting Alaskan North Slope Crude Oil: Benefits and Costs, U.S. Department of Energy 

(June 1994), and Samuel Van Vactor, ‘‘Time to End the Alaskan Oil Export Ban,’’ Policy Analysis 227 (May 18, 1995). 

LIFTING EXPORT BAN INCREASED CRUDE OIL PRICES, BUT HAD NO OBSERVABLE EFFECT

ON GASOLINE PRICES

We found that lifting the export ban on ANS crude oil in 1995 increased the price 

of crude oil on the West Coast.8 However, our analysis found no evidence that lifting 

the export ban caused increases in the prices of three petroleum products used by 

consumers—gasoline, diesel, and jet fuel. 

Lifting the export ban raised the relative prices of Alaskan North Slope (ANS) 

and comparable California crude oils between $0.98 and $1.30 higher per barrel 

than they would have been had the ban not been lifted. The higher ANS price provided North Slope producers an incentive to produce more oil and therefore should 

lead to greater total oil production in Alaska than would have occurred had the export ban remained in place. Lifting the ban also increased the efficiency of the West 

Coast crude oil market by lowering the total shipping costs associated with transporting ANS to its final destination. The magnitude of reduced shipping costs was 

at least $65 million in the first 21⁄2 years after the removal of the export ban. These 

impacts measured by GAO were consistent with predictions of prior studies by the 

Department of Energy and private sector analysts.9

Aside from higher crude oil costs for refiners buying ANS oil, we observed no increases in consumer prices on the West Coast during the period that we analyzed. 

According to GAO’s statistical and economic analyses, the prices of gasoline, diesel, 

and jet fuel on the West Coast did not significantly change as a result of lifting the 

export ban. Moreover, the consumer groups and industry experts GAO contacted 

were unaware of any adverse effects on consumers from lifting the ban. GAO’s findings were consistent with the expectations of some industry analysts. Several industry analysts believed that consumer prices would be unaffected because these prices 

were determined by the costs of foreign imported crude oil and final products and 

imported products were already selling at their world prices on the West Coast, 

rather than the artificially low ANS price. 

Mr. Chairman, this concludes my prepared remarks. We would be pleased to answer any questions you or any Member of the Subcommittee may have.

Senator SMITH. Thank you, Mr. Wells. That is the best word we 

have heard yet. 

Mr. Cook. 

STATEMENT OF JOHN COOK, DIRECTOR, PETROLEUM 

DIVISION, ENERGY INFORMATION ADMINISTRATION 

Mr. COOK. Thank you, Mr. Chairman and Members of the Subcommittee, for the opportunity to testify. 

As we have heard repetitively today, gasoline prices have risen 

sharply over the last few weeks, with regular grades now up over 

20 cents a gallon and additional increases likely to follow. While 

the largest increases have occurred in the Midwest and Gulf Coast 

regions as well, average prices remain on the West Coast somewhat higher than elsewhere, with an average of about $1.70 in our 

latest survey. 

Higher still is regular grade reformulated gasoline, RFG, in California, currently averaging about $1.83 statewide. We saw that 

there are some locations already reporting over $2-a-gallon prices 

in the San Francisco area, and premium grades are over $2 

throughout the State. 

Clearly, when gasoline prices reach these levels consumers demand to know the underlying causes. My testimony summarizes 

some of these factors, beginning with the drivers behind the West 

Coast elevated prices. Gasoline prices on the West Coast are usually the highest in the Nation, largely due to several factors. 

47

First, the West Coast is geographically isolated. That is, usually 

gasoline demand is almost entirely supplied from West Coast refineries. When supplies get tight, it can take several weeks for added 

supply to arrive from outside the region. To satisfy consumption, 

West Coast refineries normally operate at relatively high levels, especially during the peak summer season. 

When refinery or other distribution problems occur, West Coast 

markets tighten quickly, causing prices to rise behind them. Since 

the entire West Coast market is highly interconnected, price pressures in one area often affect the whole region. 

The second reason for high West Coast prices is that California 

comprises, of course, the dominant share of the market and uses 

a unique type of reformulated gasoline. California RFG must conform to more stringent requirements than federally-mandated 

RFG, making it more expensive to produce. More importantly, with 

no short-term complying supply readily available, significant shifts 

in market conditions can cause large price changes. 

Still another but often unrecognized factor is that not only does 

California consume more gasoline than any other State, but in recent years demand has grown at a pace roughly 2 to 4 times capacity growth. These factors combine to put pressure on refineries to 

produce at near-maximum rates. Thus, with the balance between 

supply and demand so fragile, any problems with infrastructure 

can be expected to cause substantial price increases. 

I think the April 2000 GAO Report has already been noted. The 

point I want to underscore here is that it showed that California 

has not experienced more price spikes, but that when they do experience these fluctuations they tend to be higher and last longer. 

This finding is exactly consistent with a system operating with a 

finely tuned balance between supply and demand, with little or no 

room for error. 

Although California strongly influences gasoline market conditions on the entire West Coast, it can also have impacts on other 

regions of the country, especially this year. A problem in California 

can result in extra supplies of gasoline being purchased on the Gulf 

Coast for delivery to the West Coast. These marginal barrels add 

price pressure to the Gulf market, which also serves the East Coast 

and Midwest. 

With gasoline balances very tight in these other regions, especially the Midwest, additional product demand from California can 

increase prices throughout areas east of the Rockies. 

For the remainder of my testimony I want to focus then briefly 

on the remainder of the country. As stated earlier, prices are increasing dramatically across all regions of the country, for a number of reasons. First, as we have heard earlier, crude prices remain 

relatively high, nearly triple what they were in early 1999. This 

change in crude oil prices since then alone explains 35 to 45 cents 

of that increase. 

Perhaps more importantly, gasoline inventories are currently 

very low in virtually every region of the country and especially in 

the Midwest. Our preliminary estimate show stocks at the lowest 

end March level since EIA began compiling these data in 1963. The 

situation has not improved in recent weeks. Mid-April levels are 

48

significantly less than the past 5-year average and especially again 

in the Midwest. 

When inventories are this low, supplies immediately available to 

cover unexpected imbalances in supply and demand are minimal. 

This raises the risk sharply of price increases. 

Since U.S. refineries operate at high utilization rates during the 

summer, absent adequate inventories, added supplies have to come 

from other parts of the country or even from foreign sources. As 

such, even the perception of tightening conditions, such as a rumored refinery problem—witness the Tosco situation the other day; 

it turned out not to be a serious gasoline impact—even rumored refinery problems can precipitate price pressure through ‘‘precautionary buying.’’ In fact, gasoline production has generally exceeded year ago levels since the beginning of this year. Despite 

that, extensive refinery maintenance this spring has begun to limit 

these production levels, even resulting in a brief dip below year ago 

levels in the second half of last month. 

On the other hand, with demand resuming growth rates so far 

this year more typical of the late 1990s, despite an apparent slowdown in the U.S. economy, this exceedingly tight balance has 

emerged, resulting in low stocks and rapidly rising wholesale 

prices. With spot prices now rising 25 to 30 cents a gallon or more 

in almost all regions since mid-March, retail prices have begun to 

respond accordingly, and further increases should be expected over 

the next several weeks. 

In particular, the Midwest is especially tight again this year. Retail prices for conventional gasoline have already risen 20 cents a 

gallon in the last 4 weeks and reformulated gasoline is up over 40 

cents a gallon, in part due to the pull on the Gulf Coast clean products by California. Like California, parts of the Midwest also use 

a unique reformulated gasoline, one blended with ethanol rather 

than MTBE. This unique nature of gasoline consumed in the Chicago and Milwaukee areas is one of the reasons Midwest gasoline 

prices temporarily rose above West Coast prices last summer. 

While not geographically isolated per se, the Chicago-Milwaukee 

market is partially depending on distant Gulf Coast production. 

This combination effectively makes the Chicago-Milwaukee area an 

RFG island and can result in very high prices. This is because significant distances are involved in acquiring this unique blend of 

RFG not produced by many refineries outside the Chicago market. 

Like my colleague, to conclude on a brighter note, retail prices 

may be nearing an early seasonal peak barring further significant 

operating problems. Preliminary EIA data show that currently high 

prices have sparked the expected sharp increase in refinery production and imports over the last 2 weeks. For illustration, refinery 

production is up maybe a million barrels a day in the last 2 weeks, 

fairly close to flat out, and we have not even gotten into the summer season. 

If these continued high supplies occur, we may yet see inventories stabilize and prices weaken as we go forward into the summer. 

This concludes my testimony. 

[The prepared statement of Mr. Cook follows:]

49

PREPARED STATEMENT OF JOHN COOK, DIRECTOR, PETROLEUM DIVISION,

ENERGY INFORMATION ADMINISTRATION

Thank you, Mr. Chairman. I would like to thank the Committee for the opportunity to testify on behalf of the Energy Information Administration (EIA). 

As you know, gasoline prices have increased substantially in recent weeks. Prices 

for regular grade gasoline have risen over 20 cents per gallon across the country 

over the past 4 weeks, with additional increases likely to follow. While the largest 

increases in gasoline prices over this period have occurred in the Midwest and Gulf 

Coast regions of our country, average prices along the West Coast are still the highest in the country at over $1.70 per gallon (Figure 1). Regular grade Reformulated 

Gasoline (RFG) prices along the West Coast are currently averaging nearly $1.83 

per gallon, with premium grade RFG averaging over $2.02 per gallon. When gasoline prices reach these levels, consumers, industry, and policymakers alike demand 

to know the underlying causes. In my testimony before you today, I will attempt 

to describe these factors. 

WHY WEST COAST GASOLINE IS OFTEN THE MOST EXPENSIVE IN THE NATION

Typically, gasoline prices on the West Coast, are the highest in the nation. This 

is largely due to two factors. First, the West Coast is geographically isolated from 

the rest of the country; petroleum markets in this region are mostly self-contained 

(i.e., supplied by West Coast refineries). Thus, if supplies get tight, it can take 

weeks for resupply to arrive from outside the region. To satisfy demand, West Coast 

refineries operate at relatively high utilization rates, especially during the peak 

summer season. If there is a problem with a refinery or the distribution of supplies, 

or demand increases dramatically, markets along the West Coast can tighten very 

quickly, thus causing prices to rise quickly. Since the entire West Coast market is 

interconnected, price pressures in one area often affect the whole region. 

The second reason gasoline prices are typically higher along the West Coast is 

that California, which represents a dominant share of the West Coast market, uses 

a unique type of reformulated gasoline. California RFG has more stringent requirements that federally mandated RFG. Not only is California RFG more expensive to 

produce, but when supplies get tight, there is not a ready source of gasoline available immediately outside the region. By having a ‘‘boutique’’ blend of gasoline (i.e., 

a type only used in a limited area) changes in market conditions may cause larger 

price changes than might otherwise occur. 

Parts of the Midwest have their own ‘‘boutique’’ blend of RFG, one that is blended 

with ethanol, rather than MTBE, which is used by most of the rest of the country 

as a blend stock for the federally mandated RFG. The unique nature of gasoline in 

the Chicago and Milwaukee areas was one of the reasons why Midwest gasoline 

prices temporarily rose above West Coast prices last summer when supplies were 

initially unable to meet demand at the start of the summer season. While not geographically isolated per se, the Chicago/Milwaukee market is partially dependent on 

distant Gulf Coast production. This combination, which effectively makes the Chicago/Milwaukee area an ‘‘RFG island’’, can result in very high prices, because significant distances are involved in acquiring a blend of RFG not produced by many 

refineries outside their market. 

GASOLINE PRICES ARE HIGH ACROSS THE COUNTRY

As I stated earlier, prices are increasing dramatically across all regions of the 

country. There are a number of reasons for this. 

First, crude oil prices remain high, nearly triple what they were as recently as 

early 1999. The change in crude oil prices alone would explain about 35-45 cents 

per gallon of the increase in gasoline prices since that time. 

As importantly, gasoline inventories are currently very low throughout most of 

the country. EIA’s preliminary estimate has total gasoline inventories at the lowest 

end-March level since 1963, which is as far back as EIA has compiled data. The situation has not improved in recent weeks, with mid-April gasoline inventories significantly less than has been averaged over the previous 5 years (Figure 2). For example, as of April 13, gasoline inventories in the East Coast (PADD I) and the Midwest (PADD II) are 10-15 percent less than the 5-year average for this time of year 

and even about 10 percent less than last year’s low levels. When inventories are 

low, supplies immediately available to cover any imbalances in supply and demand 

are reduced and prices can become more volatile. Since U.S. refineries operate at 

very high utilization rates throughout the gasoline season, without inventories on 

hand, additional supplies must come from farther away, either from other parts of 

the country, or even foreign sources. As such, even the perception of tightening conVerDate 0ct 09 2002 11:58 Jan 05, 2004 Jkt 088463 PO 00000 Frm 00053 Fmt 6601 Sfmt 6621 S:\WPSHR\GPO\DOCS\88463.TXT JACK PsN: JACKF
50

ditions, such as rumored refinery problems, can precipitate price pressure through 

‘‘precautionary buying’’. In fact, while gasoline production has generally exceeded 

year-ago levels since the beginning of the year, extensive refinery maintenance this 

Spring has somewhat limited recent operations, resulting in a brief dip below yearago levels in the second half of March. With demand resuming growth rates so far 

this year typical of the late 1990s, despite an apparent slowdown in the U.S. economy, an exceedingly tight gasoline balance has emerged, resulting in very low stocks 

and rapidly rising wholesale prices. With spot prices rising 25 to 30 cents per gallon 

since mid-March in almost all regional markets, retail prices have begun to respond 

accordingly. Of course, high gasoline prices would encourage additional supply, both 

through increased production and imports. Thus, barring a sudden reversal in current patterns, further retail increases should be expected over the next few weeks, 

but prices could fall some thereafter if increased gasoline supplies enter the market. 

While gasoline inventories are much lower than is normal for this time of year, 

crude oil inventories remain below typical levels as well, despite a dramatic increase 

in recent weeks. Nationally, crude oil inventories have improved considerably in the 

last few weeks, rising by over 35 million barrels to 313 million barrels, with the 

Gulf Coast region (PADD III) finally returning to 5-year average levels this past 

week. But, the situation is much worse in the West Coast (PADD V), where crude 

oil inventories are over 17 percent less than the 5-year average and more than 6 

percent less than last year’s low levels. With the West Coast a largely self-contained 

region, low crude oil inventories could contribute added pressure to already high 

product prices in the near future. 

CALIFORNIA AND OREGON GASOLINE MARKETS

As I mentioned earlier, the West Coast gasoline market is an interconnected one, 

where price pressures in one area can affect other areas in the West Coast. However, there are a few unique characteristics about both the California and Oregon 

gasoline markets that I would like to take a moment to address now. 

Certainly, the use of California RFG is the most unique factor affecting California 

gasoline markets. But an often, unnoticed factor is that California consumes more 

gasoline than any other state, nearly 39 million gallons daily in 1999, and whose 

demand is growing at 2 to 4 times the rate of California’s gasoline production 

growth in recent years. These two factors combine to put pressure on refineries to 

produce at near maximum rates. With the balance between supply and demand so 

fragile, any problems with infrastructure, whether refining or distribution, could 

cause prices to increase substantially. An April 2000 General Accounting Office 

(GAO) report noted that while California had not experienced a greater number of 

price ‘‘spikes’’ than other regions of the United States, the increases experienced 

were larger. This finding is consistent with a system that has a finely tuned balance 

between supply and demand, with little or no room for error. 

A new concern for California this summer is the possibility of rolling blackouts. 

California has already experienced rolling blackouts this Spring and hot summer 

weather suggests more are likely this summer. Without sufficient backup capability 

offline from the California grid, a rolling blackout could cause an entire refinery to 

have to shut down, which besides meaning less product being made available, would 

also disrupt pipeline flows. Typically, refineries are not built to shut down abruptly 

or to begin smooth operations immediately following a ‘‘cold start’’. With the delicate 

system that I have already described, many analysts are concerned rolling blackouts 

could further affect gasoline prices this summer. We are in communication with the 

California Energy Commission, as well as industry groups regarding this issue and 

will be closely monitoring the situation this summer. 

Although California strongly influences gasoline market conditions for the entire 

West Coast, there are a few unique factors unique to Oregon that I would like to 

address. 

Oregon’s gasoline prices are usually about 15 cents per gallon higher than the national average, although currently they are about 10 cents below the national average, since prices have been increasing more elsewhere in the country than in Oregon recently. Oregon is one of only two states (the other being New Jersey) which 

has a ban on self-service gasoline stations. A GAO memo on Oregon gasoline prices 

released in March 2001 cited ‘‘industry experts’’ estimating that the self-service ban 

could add as much as 5 cents per gallon to the final retail price. In addition, Oregon’s lack of refinery capacity makes it dependent on product shipments from outside the state, primarily California and Washington, thus increasing the transportation costs to get gasoline into the state. Then once in the state, transportation 

costs to get the gasoline to the retail station is generally higher than in other states 

since a large proportion of Oregon’s gasoline is in rural areas. A tight supply and 

51

demand balance, a lack of excess refining capacity, stringent standards on California reformulated gasoline all impact the West Coast conventional gasoline market by effectively reducing the capacity available to make other products, including 

the conventional gasoline used in Oregon. 

CONCLUSION

U.S. retail gasoline prices have risen substantially in the last three to 4 weeks, 

with further increases likely since even greater jumps have occurred at the spot 

level. This situation has come about as a result of low gasoline inventories across 

the country, a tight supply and demand balance, little excess refining capacity, and 

low crude oil inventories, particularly in the West Coast. With California requiring 

some of the cleanest gasoline in the world and the geographic isolation of West 

Coast markets from other regions, West Coast gasoline prices are typically the highest in the country, as they are now. The specter of rolling blackouts this summer 

adds uncertainty to a typically delicate balance between supply and demand. The 

potential exists for a substantial price ‘‘spike’’ to occur on the West Coast this summer, even from already high levels, if problems are experienced at refineries or in 

the delivery system. Although it may take weeks to arrive, if gasoline prices get 

high enough, supply into the West Coast system would be encouraged, thus reducing prices eventually. But of course, no one really knows what will happen this summer. I can assure you that EIA will be actively monitoring the summer season and 

will provide as timely analyses as possible throughout the summer months. 

This concludes my testimony, and I would be pleased to answer any questions the 

Committee may have.


88463.002
52

Senator STEVENS. Could you repeat that, Mr. Cook? Up from 

what? You said a million barrels up from what? 

Mr. COOK. Would you like the number? 

Senator STEVENS. I mean, for what date. 

Mr. COOK. Oh, just over the last 2 weeks. As the maintenance 

has wound down, these fellows have cranked up from already fairly 

high levels to fairly close to peak levels, levels like we saw last 

summer. If this continues and the high level of imports that we 

have seen in the last few weeks continues—well, it is not a surprise stocks have built a little bit in the last couple of weeks. 

Senator SMITH. Do you anticipate that the fire in California at 

the refinery, will that have an impact on the fragile supply and demand existing on the West Coast? 

Mr. COOK. Well, it is too early to say one way or another, really. 

It will have an impact, but it is currently expected to be a minimal 

impact. This is because the fire occurred in a unit that does not 

produce a lot of gasoline. 

On the other hand, that balance is so tight that any loss for any 

period of time of gasoline can have some effect on prices. 

Senator SMITH. Have you concluded your statement, then? 

Mr. COOK. Yes. 

Senator SMITH. I thought so. My first question was about that refinery and the balance. But I am wondering. We have talked a lot 

about supply and demand here and we have all mentioned how 

long it has been since a refinery has been built. If it is so profitable 

in the oil business right now, what is holding back new refinery 

construction? 


88463.003
53

Mr. COOK. Well, I think someone alluded to the fact that it has 

not always been that way. Even as recent as a little over a year 

ago, refinery margins, well, throughout 1999, refinery margins 

were almost nonexistent. Profits were almost nonexistent. Obviously, not an environment to attract capital. In fact, if you look 

over the last 20 years or so, on average the U.S. refining sector has 

done rather poorly. 

Senator SMITH. Has that not changed? It seems to me enough 

have gone out of business, and they are running at 98 percent capacity. That is an extraordinary use of assets. I wonder if there is 

not some incentive there for somebody to build another refinery. 

Mr. COOK. Well, that only occurs in the summertime. 

They do not run at anywhere near that rate during the wintertime. Although you did not ask, they would run at higher rates 

during the wintertime barring non-discretionary maintenance that 

has to be performed if the economics of crude are attractive. But 

as long as crude prices are relatively high, the law of demand says 

refiners are going to buy less, stock less, produce less product over 

time in the face of continuing rising gasoline demand, diesel demand, and what have you. Therefore, product stocks will erode to 

the point where you have this fragile situation. 

Senator SMITH. Thank you. 

Senator Wyden, do you have a question? 

Senator WYDEN. Just a couple, Mr. Chairman. 

With respect to GAO’s report on Alaskan oil exports, did GAO 

have access to the various issues raised by The Oregonian, the email exchange between BP trading managers where they talk 

about shorting the West Coast market to leverage up the price, the 

question of BP selling oil to Asia at lower net prices than they 

could get on the West Coast? You did not have access to any of that 

information that was in The Oregonian article, did you? 

Mr. WELLS. That is correct, we did not see those documents. Our 

work started in 1998, completed in early 1999. Our audit teams 

did, in fact, talk to the FTC. We talked to the oil companies during 

the work. But we did not see those documents, no, sir. 

Senator WYDEN. You did not have any access to the documents 

that are under seal in Federal court in San Francisco, either? 

Mr. WELLS. Did not. 

Senator WYDEN. Is that right? 

Mr. WELLS. Yes. 

Senator WYDEN. One other question for the GAO folks. BP asserts that your July 1999 report on the effects of lifting the ban on 

exporting Alaskan North Slope oil shows there was no increase in 

prices. But my understanding is on page 6 of your report you state 

that that is not the case. Could you describe what the ramifications 

are with respect to lifting the ban as it relates to prices? 

Mr. WELLS. We have page 6 here. I will be glad to let Mr. Frank 

Rusco answer this question. 

Mr. RUSCO. Yes, Senator. What we found was that the price of 

Alaskan North Slope crude oil did rise on the West Coast, somewhere in the neighborhood of $1 per barrel. But we found that that 

was not passed on to consumer prices. There are a number of explanations for why that might not have been the case. 

54

For one, the amount of Alaskan North Slope oil that was sold in 

third party transactions on the West Coast was relatively small 

compared to the total amount of Alaskan North Slope oil. On the 

West Coast there was ARCO and Exxon that produced Alaskan 

North Slope oil and largely refined their own product. So that oil 

never saw a third party transaction or a market price. 

Senator WYDEN. What were you saying, then, at page 31 of the 

report, where you said: ‘‘West Coast refiners we contacted did not 

reveal the extent to which they passed on increased acquisition 

costs for crude oil to consumers?’’ 

Mr. RUSCO. Yes. No refiner told us that they had passed on any 

of the increased crude oil costs. We did not have access to proprietary information to determine that ourselves. We did our own 

analysis of what happened to prices at the time that the export ban 

was lifted and found an effect on crude oil prices, but not on consumer prices, consumer product prices, I should say. 

Senator WYDEN. I will tell you, I question that finding. I think 

it is late in the day and I am not going to belabor this, but you 

say at page 6 ‘‘Lifting the ban caused the relative prices of Alaskan 

North Slope and California oils with comparable characteristics to 

be between 98 cents and $1.30 higher per barrel than they would 

have been had the ban not been removed.’’ 

Then of course you all were not able—and I understand it—to 

look at the sealed documents and the e-mail exchange that talks 

about shorting the West Coast market. So I want to be clear that 

at least this Member of the U.S. Senate feels that you worked with 

the information you had, but it was very, very limited. At least 

from my standpoint, I want the record to show that. 

I thank you, Mr. Chairman. 

Senator SMITH. Thanks, Senator Wyden. 

Senator Stevens, do you have a question for these witnesses? 

Senator STEVENS. No, I have no question for these witnesses. 

Senator SMITH. Senator Boxer. 

Senator BOXER. Thank you. 

Mr. Cook, what did you say the average price of gasoline was in 

California when you opened up your remarks? 

Mr. COOK. The average price as of our Monday survey was $1.83. 

Senator BOXER. I just wanted to point out that the AAA said it is $2.03. So I don’t know. 

Mr. COOK. Well, you showed a sign of a Shell price of $2.02 in 

San Francisco and our survey is consistent with that. It does show 

San Francisco——

Senator BOXER. I am not talking about San Francisco. I represent the whole State. 

Mr. COOK. I know. 

Senator BOXER. I am just suggesting to you that AAA has a different price, average price. I would like us to get together and figure out exactly why there is this difference. 

Mr. COOK. Well, we may be comparing apples and oranges. I am 

not sure, because I have not seen that survey. But usually our surveys are within a penny or two of theirs. 

Senator BOXER. Yes, that is why—well, we will get that to you, 

because my understanding is—I showed you one gas station that 

is higher than lots of others for the regular gas. But I wanted to 

55

show it to you, because if you are more than a penny or two off, 

then I think that is a problem. 

Mr. COOK. Right. I think that survey—they tend to do city pricing, so maybe the survey that you are thinking of was for San 

Francisco at over $2, and we show that in our survey also. 

Senator BOXER. Laurie Saroff, what did you tell me that the AAA 

said was the average price of gasoline? 

Ms. SAROFF. $2.03. 

Senator BOXER. For gasoline across the whole State? 

Ms. SAROFF. San Francisco. 

Senator BOXER. You are right. She said San Francisco. 

I mean the whole State. What do they show for the whole State? 

Ms. SAROFF. I do not have that. 

Senator BOXER. Let us get that number. 

Then you are right. I stand corrected. 

I would like to say that two Commissioners, FTC Commissioners, 

did believe that the shipping of the Alaska oil to Asia had a direct 

impact on California prices. I do not know whether or not you 

saw—and one of them happened to be Chairman Pitofsky. They 

tried to make it a part of that last merger, BP merger, a condition 

in the merger that they will not be able to export it. He lost on the 

vote. I believe it was a 3-2 vote. 

So did you not have access to that information that he had access 

to? This gentleman, I am not sure your name, sir. 

Mr. RUSCO. Thank you, Senator. No, we did not have access to 

any FTC documents related to the merger, and our report came out 

about the time that the merger was getting underway as well as 

the investigation. 

Senator BOXER. I disagree with Senator Wyden. I just do not 

think that there is a question there, because you have to realize 

we are not talking about the whole country. We get our oil essentially from Alaska and California and the rest of it is elsewhere. 

We get a third from Alaska, a third of our oil. So if they short us, 

if a third of our supply that we count on is somehow shorted—and 

I do not know about Oregon. I do not know what the sources of 

your oil. But you probably depend, maybe even more, on Alaska. 

It just does not add up that you could possibly say that there is 

no proof that it had any impact. So I would like you to go back and, 

since you did not have the benefit of the FTC’s information, I would 

like you to take a look at that because I think it is pretty relevant. 

Mr. RUSCO. May I respond? The work that we did was based on 

a statistical model of prices. The increase in crude oil prices that 

we found was precisely the same model that we employed for product prices. So we looked for an effect in the prices themselves. The 

documents I think that you are referring to would not have 

changed the statistical results of the model. 

Senator BOXER. Let me just talk common sense. You get a third 

of your supply from a place that now decides to export it. That is 

a problem. If you are counting on a certain supply and it is shorted 

and then the market is shorted, if we are a capitalistic society, 

which we are, why would it not have an impact if less supply is 

going there? 

Mr. RUSCO. Yes, Senator, it does have an impact on the price of 

crude oil. The question is whether that price is then passed on to 

56

consumer products. That I think is where the disconnect is. What 

many analysts said going into the lifting of the export ban was that 

prior to the lifting of the export ban, refiners were earning high 

margins as a result of getting what they said were artificially low 

Alaskan North Slope oil prices prior to the lifting of the ban. 

After the ban was lifted, the price of Alaska oil rose in the West 

Coast to closer to world levels and the refining margins shrank, but 

that was not passed on to consumers, just as the low oil prices 

prior to the ban being lifted were not passed on to consumers in 

the form of low consumer prices for all those years prior to the ban 

being lifted. 

Senator BOXER. Yes, we know that. I do not know. I have a problem with the logic of it all. I was an economics major, but that was 

a long time ago. It seemed to me you have a cost; the bottom line 

price is going to be reflective of that. As I say, two of the FTC Commissioners did not agree. 

Well, we are going to have this debate about this export question, 

but it seems to me just common sense, but maybe common sense 

does not apply in this case, which would not be the first time. But 

thank you very much. 

Senator SMITH. Gentlemen, thank you for your testimony, and 

Frank as well. We did not announce you, but we are glad you are 

here. Thank you for your contribution. 

We will now call on our third panel. We invite Professor Preston 

McAfee, Visiting Professor of Economics and Strategy of the University of Chicago; Professor Carl Shapiro, Transamerica Professor 

of Business Strategy at the Haas School of Business, University of 

California at Berkeley; Mr. Robert Malone, the Regional President, 

Western United States, of BP; Mr. Chuck Mau, Oregon gasoline 

dealer from Portland, Oregon. 

Senator Stevens has asked that we proceed in the order that 

they were announced, because he is hoping to return and ask some 

questions as well. So, Professor McAfee, we thank you for being 

here and the microphone is yours. 

STATEMENT OF R. PRESTON MCAFEE, VISITING PROFESSOR 

OF ECONOMICS AND STRATEGY, UNIVERSITY OF CHICAGO 

Dr. MCAFEE. Mr. Chairman and Members of the Subcommittee: 

My name is Preston McAfee. I am a Professor at the University of 

Texas and I am currently visiting the University of Chicago. I assisted the Federal Trade Commission in its analysis of the ExxonMobil mergers and the BP-ARCO merger, and I am pleased to have 

the opportunity to address this Subcommittee and have provided a 

report which makes the following points. 

First, the West Coast gasoline market is integrated. Supply and 

demand events in California, Oregon, or Washington affect all 

three States. Generally, Nevada and Arizona are part of this market area as well. 

West Coast gasoline refining is concentrated in the hands of a 

relatively small number of firms and the fact that the same firms 

control terminaling, refining, and retail exacerbates antitrust 

issues. So that is to say it does not necessarily imply uncompetitive 

behavior, but it would raise flags in the event for merger analysis. 

57

Third, inelastic demand for gasoline implies that modest supply 

disruptions have very large impacts on prices. Inelastic demand 

also exacerbates antitrust concerns. 

The divestitures that were obtained in the Exxon-Mobil merger 

ensured that the competition by refineries and retailers was maintained. So that is, the level of competition that existed prior to the 

merger persisted after the merger. 

Absent the divestitures in the BP-ARCO merger, there would 

have been a reduction in competition for bidding, exploration, and 

development of oil resources in Alaska. However, the divestitures 

of ARCO’s Alaskan assets to Phillips has preserved competition for 

the oil bidding, exploration and development and ensured an increased flow of oil. 

BP in the past has exercised some monopoly power in the sale 

of oil to refineries, and that is evidenced by price discrimination. 

Price discrimination is very common. In fact, whenever you see a 

store advertise ‘‘Buy one, get a second at half price,’’ that is the 

same phenomenon. That is price discrimination. It is very common. 

BP’s attempts to increase West Coast oil prices had a very, very 

small impact on West Coast gasoline prices, and the manipulation 

of oil prices certainly does not account for the extent to which West 

Coast residents pay higher prices for gasoline than are paid in 

other parts of the country. 

The divestiture of ARCO’s Alaska assets has eliminated BP’s 

profits from increasing West Coast oil prices. So now as a major 

buyer of oil on the West Coast their incentive to increase prices has 

vanished. 

Let me also say that to my knowledge—and I have read a very 

large number of BP documents—to my knowledge, BP has never 

engaged in rigging prices. Now, I understand ‘‘rigging’’ to imply collusion. I have tried to find out where this got into the newspaper 

record and as far as I can tell it was a reporter paraphrasing the 

term ‘‘manipulation.’’ Manipulation can be done by a single firm. 

‘‘Rigging’’ as I understand it, implies two firms or more, and I know 

of no event, no instance of BP rigging prices on the West Coast. I 

have not seen Senator Wyden’s new documents concerning ARCO. 

Let me finally say that the major factors that have increased the 

West Coast prices include the increased world oil prices that have 

increased the price for gasoline all Americans pay, increased West 

Coast demand, the CARB requirements over the last decade have 

decreased West Coast supply, there have been no new refineries 

and limited expansion of refineries and, in fact, mothballing of 

some. Also, the West Coast market is isolated, say, from the Gulf 

Coast and that increases its sensitivity to refinery outages. 

Thank you. 

[The prepared statement of Professor McAfee follows:]

PREPARED STATEMENT OF R. PRESTON MCAFEE, VISITING PROFESSOR OF

ECONOMICS AND STRATEGY, UNIVERSITY OF CHICAGO

Mr. Chairman and members of the Committee, my name is R. Preston McAfee. 

I am Murray S. Johnson Professor of Economics and former Chair of the Department of Economics at the University of Texas at Austin, and Visiting Professor of 

58

1 I attach a copy of my curriculum vita for the Committee’s reference. (Maintained in the Committee’s files.) 2 I have not made any study of gasoline prices in Oregon beyond what I have done in preparing for this testimony and my knowledge of the subject is necessarily limited. 3 I was authorized to receive FTC confidential information as a consultant to the FTC, and 

I gave the FTC written assurances that I would not disclose confidential information that I received from the FTC. 4 It is estimated to cost 8 to 12 cents, Oxy Fuel News, September 6, 1999. The Jones Act accounts for about four cents per gallon in added shipping costs. 

Strategy at the University of Chicago Graduate School of Business.1 In 1999 and 

2000, I was retained by the Federal Trade Commission (‘‘FTC’’) to provide expert 

economic analysis and potential testimony in connection with the FTC’s investigations of the mergers of Exxon Corporation (Exxon) and Mobil Corporation (Mobil) 

and of British Petroleum PLC (BP) and the Atlantic Richfield Company (ARCO). In 

addition, I provided assistance to the FTC in its investigation of last summer’s price 

increase in the Midwest. I am pleased to be here today to discuss the economic 

issues that I researched, as they pertain to your examination of West Coast gasoline 

prices in general and Oregon in particular.2

As part of my studies of the two mergers, I had access to and studied a substantial amount of information, including the documents that the FTC had gathered in 

the course of its investigations. I am advised that much of this information was provided to the FTC under statutory authority that generally requires the FTC to keep 

the information submitted to it confidential,3 and, except to the extent that information has independently been made public, I am not at liberty to disclose today information submitted to the FTC pursuant to confidentiality restrictions. 

However, as the Committee is aware, the U.S. District Court for the Northern 

District of California has ordered the release of some of the documents filed under 

seal in FTC v. BP Amoco, and I understand that I am at liberty to discuss those 

documents. In addition, some of the information I examined as part of my analysis 

was obtained from public sources. 

EXXON MOBIL

One of the major focuses of my Exxon Mobil investigation was the West Coast refining and retailing markets, where Exxon and Mobil had been the fifth and sixth 

largest firms. Six firms, including Chevron, ARCO, Equilon, and Tosco refined over 

90 percent of all California Air Resources Board (CARB) gasoline. There has not 

been a new refinery built on the West Coast, or anywhere else in the United States 

for that matter, for decades, and there was no prospect of new entry into the market 

in the foreseeable horizon. Older refineries that have been mothballed, such as the 

Powerine refinery in Southern California, could theoretically be returned to the 

market to produce conventional gasoline, but they would face extraordinary and 

probably prohibitive costs in upgrading to produce a significant quantity of CARB. 

Furthermore, it is very expensive to ship refined products to the West Coast from 

the nearest major refining center,4 the Gulf Coast, in part because of the Jones Act 

requirements that such shipments be made on U.S. built, owned, and crewed vessels, but also because of size restrictions in the Panama Canal as well as its costs, 

and the lack of a gasoline pipeline alternative. Moreover, even provided a company 

succeeded in bringing CARB gasoline from the Gulf Coast or the Caribbean, it is 

not trivial to get the gasoline to consumers. In particular, transporting gasoline to 

consumers requires terminaling facilities and retailing facilities, which are in large 

part controlled by incumbent refiners. Thus, it is unlikely that imports of CARB 

gasoline will enhance West Coast supply at current, or even moderately higher, 

prices. 

Demand for gasoline is highly inelastic, meaning that small reductions in supply 

that are not offset by other increases can lead to significant price increases. Thus, 

even quite modest levels of market power may translate into significant producer 

margins. Inelastic demand exacerbates concerns about any enhancement of market 

power. 

For these reasons, it is my opinion that the FTC was right to be concerned about 

the increase in market concentration that the Exxon Mobil merger would have 

caused on the West Coast. I believe that the Commission was right to require the 

divestiture of the Exxon refinery in Benecia, California as a condition for approval 

of the merger. 

BP-ARCO

The combination of BP and ARCO would have meant that a single company would 

have dominated oil exploration and production in Alaska. This domination would 

59

5 Exxon, the next largest producer in Alaska, had essentially dropped out of bidding and exploring. While Exxon had made 276 bids (winning 123) from 1959 to 1982, it made only 13 bids 

from 1989 to 1999, winning 2. It appears that Exxon has taken a ‘‘harvest’’ strategy with respect 

to Alaska. 6The risk of this happening was much greater at the time the merger was announced than 

it would be now, because of the large increase in world crude oil prices. 7 BP described the means by which it sets the prices as follows: ‘‘By building computer models 

of each major WC refinery and our knowledge of product and import crude prices, we can approximate the required ANS price to displace the foreign imports for each refinery. Integrating 

the individual refinery models together along with transportation costs into a single ANS model, 

allows determination of the optimum ANS price and geographic disposition that maximizes BP’s 

overall ANS revenues. As exports are allowed, Far East sales will replace Gulf Coast, Virgin 

Island and Mid-continent placements. The model will be modified to take into account the Far 

East refineries.’’ [PX 425, BPA-ORG 003830] 8This estimate comes from BP’s optimizer model, which was used by its traders as a tool for 

making export decisions. This model indicated in some months that for every 10 thousand barrels per day the company exported, it would be able to raise the price of Alaska North Slope 

crude oil (ANS) by perhaps a tenth of a cent per gallon, or 4 cents per barrel. Because sales 

to Asia would raise the spot price on the West Coast, and therefore BP’s price to all consumers 

who had contracts tied to that spot price, BP was willing to export oil to Asia even when the 

profit margins on such sales were smaller than what could have been earned on the West Coast. 

While BP’s exports are not a matter of public record, total exports from the region have averaged 50 to 60 thousand barrels per day since 1996 and 74 mbd in 1999. Therefore a rough estimate would be that BP’s exports raised the price of ANS by about half a cent per gallon at the 

refinery level. Prior to 1996 there was a ban on exports abroad, although oil was shipped to 

the Gulf. Not all of BP’s exports were at net prices below what could have been earned on the 

West Coast. At times when West Coast supply was high relative to demand, for example when 

a refinery was shut down, there were no buyers in California willing to pay as much as the 

export price (less a transport discount). Public data source: Petroleum Supply Annual, Table 13; 

Petroleum Supply Monthly, Table 25. 9 ‘‘Statement of Commissioners Anthony, Swindle, and Leary in BP Amoco/ARCO, File No. 

991-0192, Docket No. C-3938’’, footnote 3: ‘‘We have reason to believe that the upward price effects of these sporadic sales amounted to no more than one-half cent per gallon at the pump.’’ 

likely have given the combined company a great deal of monopsony power in the 

purchase and development of oil leases on the North Slope of Alaska. (Monopsony 

power is power for buyers corresponding to monopoly power for sellers.) This power 

covers negotiations with Federal and State authorities as well as other producers 

that depend on BP and ARCO infrastructure. 

BP and ARCO were the two largest firms in bidding for exploration leases in Alaska, in exploring for oil in Alaska, in producing oil in Alaska, in transporting oil from 

the North Slope of Alaska to the port of Valdez via the Trans-Alaska Pipeline, and 

in shipping Alaskan oil to refineries on the West Coast. From 1989 to 1999, ARCO 

and BP were first and second respectively in dollar value of bids made and bids won 

for Northern Lease Area auctions held by Alaska and the Federal Government. During that 10-year period, the two firms submitted 85 percent of the winning bids, won 

70 percent of all leases sold, drilled 90 percent of the wells, ran 10 of 11 

operatorships, and produced 74 percent of the crude oil.5 BP and ARCO owned 72 

percent of the Trans- Alaska Pipeline and 70 percent of the tankers in the Alaska 

trade. 

Absent the divestiture ordered by the FTC, the merger would have eliminated the 

competition BP faced from ARCO to find and produce ANS crude oil. This reduction 

in competition would have reduced revenues on the oil, and might have led to a reduction in exploration and development in Alaska. Economic theory makes a strong 

presumption that a monopsonist would have been likely to eliminate some investments in oil production that likely would be made in a more competitive environment.6 Primarily for this reason, I believe the FTC was justified in imposing a requirement that BP divest itself of most or all of ARCO’s Alaskan properties as a 

precondition for the merger. The sale of all the stock in the ARCO Alaska company 

to Phillips Petroleum gave me great confidence that the merger would not harm 

competition on the North Slope. 

A second issue that arose in the BP ARCO merger was BP’s efforts to raise price 

on the West Coast through price discrimination, including most prominently the 

sale of some oil in the Far East, but also differences in prices charged to refiners 

on the basis of their willingness to pay.7 While this issue has received a great deal 

of publicity, and was important to the evaluation of the merger, it was a very minor 

factor in determining West Coast gasoline prices: at the most a penny per gallon 

and probably less than half that.8 FTC Commissioners Anthony, Swindle, and Leary 

have also stated that they believe that half a cent is the upper bound.9 The desire 

of BP to export even with net earnings on exports (the ‘‘netback’’) lower than those 

prevailing on sales to the West Coast was important for the analysis of the proposed 

merger, even if it ultimately had little to do with West Coast gasoline prices. BP’s 

60

10GAO, ‘‘Alaska North Slope Oil: Limited Effects of Lifting Export Ban on Oil and Shipping 

Industries and Consumers,’’ Report No. RCED-99-191 (July 1999). The GAO report states: ‘‘Despite higher crude costs for some refiners, no observed increases occurred in West Coast consumer prices as a result of lifting the export ban.’’ Id. at 8. However, this issue is complicated 

by the fact that increased ANS prices might increase prices of California crudes. 11Price discrimination can either increase or decrease total output—that is, the effect of price 

discrimination to the West Coast may have been to increase the total sales of oil, which would 

have reduced gasoline prices overall. BP had an incentive to keep inefficient refineries in business as consumers of oil, and thus may have offered lower prices to refineries that would otherwise shut down. However, BP’s pricing could discourage refinery investment. The main importance of price discrimination for the merger is its evidence of market power, and thus an increased concern in bidding, exploration and production, rather than its direct impact on gasoline 

consumers. 12Price discrimination involves reducing prices to some refineries while increasing prices to 

others, so the average price increase even at the refinery level would be much less than the 

difference between the average and lowest prices charged. 

price discrimination demonstrates that BP’s marginal value of ANS was lower than 

ARCO’s, because ARCO’s marginal value was typically determined by transactions 

at or near the spot price. Thus, the merged entity could inherit BP’s lower value 

for oil, which would lead to reduced efforts to explore and develop ANS. BP’s perception that it faced a downward sloping demand exacerbates concerns about the increased concentration in Alaska. 

ANS represents less than half of all the crude used in West Coast refineries, so 

a reasonable estimate is that the typical refinery might have experienced one quarter of a cent price per gallon increase because of the exports. Some of that price 

increase may have been absorbed by firms rather than passed on to consumers, so 

the impact of the exports on consumer prices was probably even lower.10 I do not 

know if BP was able to earn the margins suggested in their theoretical Optimizer 

model. 

That the maximum amount that BP could leverage prices in the US West Coast 

is small is also guaranteed from the existence of substitutes. There are good substitutes for ANS available, although at somewhat higher transportation and logistics 

costs. These substitutes insure that the maximum possible price variations that 

could be sustained are modest. In addition, BP’s ability to export is constrained by 

the availability of shipping. Few ships meet Valdez requirements and existing ships 

are being retired. It is implausible that new ships would be built for the purpose 

of exports, and thus BP’s ability to restrict sales to the West Coast was diminishing 

even absent the merger. Exports to the Far East essentially ended in May, 2000. 

Exports serve a potentially useful role in promoting exploration. A very large discovery or a sequence of medium discoveries in Alaska could produce more than the 

West Coast can absorb at world prices; in this happy circumstance basic economic 

theory suggests that our Nation is better off selling oil at high prices rather than 

consuming at artificially low prices. BP’s modest attempt at increasing West Coast 

oil prices in the recent past does not economically justify a return to the export ban. 

The Nation prospers by exporting resources and other goods and services for high 

market prices, not consuming internally at lower prices, and the primary effect of 

the export ban was to reduce the value of Alaskan exploration and production, by 

reducing the options available to explorers. 

BP also discriminated among targeted West Coast refineries, charging what BP 

estimated the refinery was willing to pay. This discrimination presumably was done 

to raise BP’s profits, but it is unclear whether the effect on consumer prices was 

to increase them or lower them.11 In any event the overall effect on gasoline prices 

of BP’s discrimination was probably very small, and might have even contributed 

to lowering the prices.12 It would be important for the refineries themselves, of 

course. 

The divestiture of ARCO’s Alaska assets to Phillips has preserved existing competition in Alaska—Phillips should become a strong competitor to BP in the same 

way that ARCO was. Moreover, the incentive of BP to export in order to increase 

West Coast prices is mitigated or eliminated by the terms of the merger. The acquisition of ARCO’s West Coast refining assets substantially reduces the value of increased West Coast oil prices to the combined entity. Overall, the divestitures required by the FTC have definitely preserved and likely enhanced competition to supply Alaskan oil to the West Coast. 

OTHER FACTORS INFLUENCING CURRENT WEST COAST PRICES

If not exports, then, what does account for the higher prices in places like California and Oregon? As noted above, exports account for only a small portion of the 

higher West Coast prices. I claim no special expertise relative to many other econoVerDate 0ct 09 2002 11:58 Jan 05, 2004 Jkt 088463 PO 00000 Frm 00064 Fmt 6601 Sfmt 6621 S:\WPSHR\GPO\DOCS\88463.TXT JACK PsN: JACKF
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13See California Energy Commission, ‘‘Estimated 2000 Gasoline Price Breakdown and Margin 

Details’’ and ‘‘Estimated 2001 Gasoline Price Breakdown and Margin Details’’, available at 

www.energy.ca.gov. Dealer Cost and Profit Margin includes all costs associated with the distribution and retailing of motor fuel, including but not limited to: franchise fees, and/or rents, 

wages, utilities, supplies, equipment maintenance, environmental fees, licenses, permitting fees, 

credit card fees, insurance, depreciation, advertising and profit. Dealer Margin normally lags 

changes in the wholesale price of gasoline. Refinery Cost and Profit Margin must cover all costs 

associated with production, distribution, and acquisition of gasoline. The Refinery Margin covers 

all costs associated with refining and terminal operation, crude oil processing, oxygenate additives, product shipment and storage, oil spill fees, depreciation, brand advertising, purchases of 

gasoline to cover refinery shortages and profits. The CEC acknowledges that the refiner margin 

estimates may not equal actual margins. 14State excise taxes in Oregon are 24 cents, to which must be added 1.5 to 3 cents per gallon 

for local taxes (3 cents in Portland). Steve Sou, ‘‘Taxes help State prices float near top of nation’’, 

The Oregonian, February 24, 1999. 15 In Oregon, for example, refiner sales of conventional gasoline for resale were at prices that 

were about 9 cents above the national average in December 2000 and 4 cents below the national 

average in January 2001, the last 2 months for which data is available. (Petroleum Marketing 

Monthly, April 2001, table 35.) 16 A 1999 Energy Information Administration (EIA) report on Phase II reformulated gasoline 

(RFG) regulations estimated that the Phase II RFG standard would increase costs by approximately 3.5 to 4 cents per gallon over the cost of conventional gasoline. (California’s CARB standard is even more stringent than Phase II RFG.) Although that report did not directly estimate 

the cost of the CARB standard, the EIA observed that the actual wholesale price difference between CARB and conventional gasoline was 4.2 cents per gallon between January 1997 and December 1998. See Tancred Lidderdale and Aileen Bohn, EIA, ‘‘Demand and Price Outlook for 

Phase 2 Reformulated Gasoline, 2000’’ (Aug. 6,1999), www.eia.doe.gov/emeu/steo/pub/special/

rfg4.html 17During the 1990s, four smaller refineries in California shut down: Golden West and Fletcher in 1992 and Pacific Refining and Powerine in 1995. In addition, Paramount Refining continues to produce conventional gasoline, but has not upgraded to produce CARB. See Leffler, 

Keith and Barry Pulliam. ‘‘Preliminary Report to the Attorney General Regarding California 

Gasoline Prices,’’ November 22, 1999, p.8. 18See California Air Resources Board press release, ‘‘Fuel-Economy Reduction From CleanerBurning Gas Within Expected Range, According To Statistics’’, October 10, 1996. 

mists in answering this question: I have not performed the sort of detailed analysis 

required for the Exxon-Mobil and BP-ARCO mergers. However, there are a number 

of causes, besides OPEC, that are uncontroversial among economists. The California 

Energy Commission breaks down prices every week. For the 52 weeks ended April 

16, 2001 the prices for branded gasoline broke down in the following way: 13

Gasoline Cost Breakdown

Dealer Cost and Profit Margin: $.07 

Crude Oil Cost: .66 

Other Refining Costs and Profit Margin: .48 

State and Local Taxes: 14 .31 

Federal Taxes: .24 

Total Retail Price: $1.76

Increases in crude oil costs, which averaged about 30 cents a gallon in 1998 when crude prices were $12-13 per barrel, is the single largest contributor to the recent 

price increases. I will focus my comments on the Refiner Cost and Profit margin, 

which usually though not always is higher on the West Coast than it is elsewhere 

in the country.15

First, CARB gasoline costs refiners an additional 3-4 cents per gallon in marginal 

production costs to manufacture, after producers have incurred the fixed expense of 

upgrading their refineries to make them capable of producing reformulated gasoline.16

Second, in addition to the higher marginal costs West Coast refiners incurred around $3 billion in fixed costs to be able to produce CARB. These expenses would 

not be incurred unless higher retail prices justify the expenditures, and consequently we should expect these costs to be reflected in the average price of CARB 

gasoline. The cost of upgrading was enough to cause some smaller refiners to shut 

down, thereby reducing California refining capacity.17 Furthermore, because CARB 

gasoline gets 1 to 3 percent less miles per gallon than conventional gasoline, the 

switch to CARB likely caused California consumers to demand more gasoline just 

to go the same distance.18 The combination of higher demand and lower supply 

would be expected to lead to higher prices as a matter of basic economics. These 

higher prices in part compensate the suppliers for large expenditures in refinery upgrades. 

As there are no refineries in Oregon, Oregonians must compete for the gasoline 

from the same refineries that supply California and Washington. That is why a 

62

19During the summer months, the Portland area uses an oxygenated, low-Reid Vapor Pressure (RVP) gasoline, which contains some of the same blending components employed in the production of California’s CARB gasoline. This low-RVP product is not as expensive as CARB but 

costs more than conventional gasoline. The Klamath Falls area also requires a low-RVP gasoline 

in the summer, which would be less expensive than Portland gasoline but more expensive than 

the conventional gasoline used elsewhere. 20See Energy Information Administration, Petroleum Marketing Monthly, Table 31, various 

issues. The retail price includes full service in Oregon, but in the rest of the country, only about 

10 percent of customers opt for full service. In January 2001, the latest month available, the 

rack price in Oregon was 5.5 cents below the national average. The rack price is a wholesale 

price at the terminal. 21Since 1990 California refining capacity has fallen by about 9 percent while capacity in the 

rest of the country has risen by about 11 percent. See Petroleum Supply Annual, Table 38. 22While antitrust authorities can prevent further consolidation of the West Coast refineries, 

they are not in a position to encourage or promote new entry of refineries. 23The Olympic Pipeline is a 400-mile system running from Ferndale, Washington to Portland, 

Oregon, that connects the four main Puget Sound refineries. 24Overall shipments on the Olympic Pipeline in 1999 were 25 percent below 1998 levels, while 

overall shipments in 2000 were more than 45 percent below 1998. As for gasoline and jet fuel, 

1999 shipments were 27 percent below 1998 levels, while shipments in 2000 were 26 percent 

below the levels of 1998. Olympic Pipeline Company, FERC Form 6, 1998-2000. 25Kim Christensen and James Long, ‘‘Lack of competition holds Oregon hostage at the pump,’’ 

The Oregonian (Aug. 29, 1999), www.oregonlive.com / news / 99 / 08 / st082901.html (quoting an 

employee of a barge company to the effect that shipping by barge should cost around 2 cents 

per gallon more than shipping via pipeline). 26 Atlantic Richfield Company S.E.C. report 10k for 1999, pp. 9-10. 27 Michael G. Vita, ‘‘Regulatory Restrictions on Vertical Integration and Control: The Competitive Impact of Gasoline Divorcement Policies,’’ 18:3 J. Regulatory Econ. 217 (2000). In areas 

that permit self-service stations, sales through full-service pumps represent only about 10 percent of all gasoline sales. 

shortage of CARB gasoline that leads to a price increase in California should lead 

to a similar price increase in Oregon, even though Oregonians usually consume conventional gasoline.19 The wholesale price of conventional gasoline in Oregon, which 

was, on average, about eight cents higher than in the rest of the country 20 in 2000, 

reflects the shortage of refining capacity on the West Coast. 

The most significant gasoline problem facing the West Coast is the lack of new 

refineries. The West Coast market, which largely operates separately from the rest 

of the country in terms of gasoline production, has a relatively small number of 

large firms. The fact that the industry is so stable, with no entry and the small 

number of firms, creates an oligopoly rather than a perfectly competitive market. 

This oligopoly is reinforced by concentration by the same firms at the terminaling 

and retail stages of production. Concentration of production facilities was a key reason for requiring a divestiture of a refinery in the Exxon and Mobil mergers.21 Oligopolies may charge prices above competitive levels without explicitly coordinating 

or colluding, by following their individual interests.22

Fourth, it is expensive to ship refined products to the West Coast. While there 

are serious logistical problems associated with bringing gasoline to the West Coast, 

the threat of imports exerts some pressure on West Coast gasoline prices. These 

costs are increased by the Jones Act, which increases transportation costs by around 

four cents per gallon. 

The tight supply situation on the West Coast, combined with the expense of shipping into the region, means that supply disruptions are likely to lead to price increases. A fifth major factor in the high prices that Oregonians paid in 2000 was 

the rupture of the Olympic pipeline, which is normally the main source of gasoline 

in Oregon.23 The pipeline ruptured in Bellingham, Washington, on June 10, 1999, 

and remained closed for shipments from BP’s Cherry Point refinery and Tosco’s 

Ferndale refinery throughout the remainder of 1999 and all of 2000. Gasoline shipments did not resume until February 3, 2001, and operations on the Olympic system 

will be limited to 80 percent of capacity until sometime in 2002.24 Inelastic demand 

insures that modest supply disruptions have a significant impact on prices. 

The pipeline shutdown required the four main Puget Sound refineries to ship gasoline to Oregon via barge, which increased costs by about 2 cents per gallon 25 or 

more. In addition to refinery production problems, at least one refinery, the ARCO 

(now BP) refinery at Cherry Point, Washington, was forced to reduce production as 

a result of logistical constraints that arose out of the Olympic Pipeline break.26 Oregon is one of only two states (with New Jersey) to ban self-service gasoline sales. 

Nationally, about 90 percent of all consumers choose self-serve. The Oregon law 

means that consumers are forced to buy gasoline bundled with some services that 

are costly to produce. One estimate by an FTC economist implies that the self-serve 

ban adds about 3.5 cents to average prices in Oregon.27 This calculation is conVerDate 0ct 09 2002 11:58 Jan 05, 2004 Jkt 088463 PO 00000 Frm 00066 Fmt 6601 Sfmt 6621 S:\WPSHR\GPO\DOCS\88463.TXT JACK PsN: JACKF
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28See for example, the EIA’s Petroleum Marketing Monthly for April 2001, Table 31. The difference between the pre-tax prices for ‘‘sales to end users’’ and ‘‘sales for resale’’ are typically 

several cents per gallon higher in Oregon than they are in the U.S. as a whole. 29The proposed ban on MTBE as an oxygenate additive in gasoline will likely exacerbate the 

already tight supply situation. This ban will effectively reduce the capacity of refineries producing CARB by as much as 11 percent, making it more likely that in the future the marginal 

source of supply for gasoline in California will be the Gulf Coast, for all or at least most of the 

year, unless substantial refining capacity is added. 

sistent with Oregon’s higher than average retailing costs and margins as reported 

by the Energy Information Administration.28

Many of these factors that lead to higher prices reflect the public policy choices 

of government officials whose concerns are not limited to the price of gasoline, but 

include clean air, land use, and other factors. It should not be surprising that cleaner-burning, lower pollution gasoline, regulations on refineries, zoning rules limiting 

entry, and laws designed to protect maritime and gasoline station jobs will lead to 

higher consumer prices. I have not performed any analysis of the benefits of these 

governmental policies, nor their overall costs. 

CONCLUSION

The main points I would make before this committee are: 

• The West Coast gasoline market is integrated: supply and demand events in 

California, Oregon and Washington affect all three states. 

• West Coast gasoline refining is concentrated in the hands of a small number 

of firms. 

• Inelastic demand for gasoline implies that modest supply disruptions have significant impacts on prices. 

• The divestitures obtained in the Exxon-Mobil merger insured that competition 

by refineries and retailers was maintained. 

• The merger of BP and ARCO, absent the divestiture, would have reduced competition for bidding, exploration and development of oil resources in Alaska. 

• The divestiture of ARCO’s Alaskan assets to Phillips preserves competition for 

oil bidding, exploration and development in Alaska. 

• BP exercised monopoly power in the sale of oil to refineries, evidenced by price 

discrimination, which requires monopoly power. 

• BP’s attempts to increase West Coast oil prices had a very small impact of West 

Coast gasoline prices, and manipulation of oil prices does not account for the extent 

to which West Coast prices are higher than in other parts of the country. 

• The divestiture of ARCO’s Alaska assets reduces or eliminates BP’s potential 

profits from increasing West Coast oil prices. Thus, it is unlikely that BP-ARCO will 

attempt to increase West Coast prices by exporting. 

• Major factors that have recently increased Oregon prices include: 

• Increased world oil prices. 

• Growing West Coast demand. 

• Reduced West Coast supply due to CARB requirements. 

• The absence of new refineries 29

• The isolation of the West Coast market.

Senator SMITH. Let us go on to the next panel. I will come back 

to you, professor, for questions. 

Professor Shapiro. 

STATEMENT OF CARL SHAPIRO, TRANSAMERICA PROFESSOR 

OF BUSINESS STRATEGY, HAAS SCHOOL OF BUSINESS,

UNIVERSITY OF CALIFORNIA AT BERKELEY 

Dr. SHAPIRO. Thank you very much, Mr. Chairman. I am Carl 

Shapiro. I am a Professor at the University of California at Berkeley. I do a lot of work in the antitrust area and I worked with BP 

and ARCO studying the effects of their transactions for their FTC 

investigation and the subsequent litigation. I am now appearing on 

my own behalf, however, and I believe I am probably the person 

in the room who has most recently suffered the high prices, at least 

in California, since I filled up my car on the way to the airport yesterday before I came here. 

64

I actually am a big believer in antitrust enforcement and have 

served previously in the Justice Department as their Chief Economist in the Antitrust Division. 

I would like to make two main points and then I will articulate 

them. First, I believe that the higher West Coast gasoline prices 

are fundamentally not based on what is going on at the level of 

crude oil. We are all throughout the country paying basically 

worldwide crude oil prices. That does not explain the problems with 

the high prices on gasoline on the West Coast. The same is true; 

the Alaskan exports when they were taking place were not the 

cause of the price premium on the West Coast. 

The second point is what is the cause and I think there is really 

a chorus, a consensus on this, and I would particularly agree with 

Chairman Pitofsky that fundamentally it is a problem of limited refinery capacity on the West Coast which reflects somewhat higher 

refinery costs that is the root of the problem. 

As far as the crude oil, let me talk about crude and then the 

products. I provided a series of exhibits with my prepared testimony that demonstrate how the Alaskan crude oil prices move 

very, very closely over time with a number of other crude oil prices 

throughout the world and the increasing importance of imported 

crude oil on the West Coast. This is a classic economic situation 

where the prices for this commodity, crude oil, are governed by 

worldwide conditions. 

In fact, one of the clearest things from the study I did in the 

merger context between BP and ARCO was that the prices that BP 

could get for its crude oil were based on competition with imported 

crude oils. 

So yes, I suppose there is collusion going on, but it is OPEC and 

that is at the crude oil level the fundamental factor. Now, I understand, of course, both of you Senators from Oregon in particular 

are very concerned about the issues about BP’s conduct and pricing 

in exports. That is very clear to me. I have looked at this very 

closely. It is my belief that the price that BP received for selling 

its Alaskan oil on the West Coast was at what can reasonably and 

I think accurately be called a competitive level, not a monopoly 

level. 

I think there is agreement here among economists that the competitive level is the level that would give the same return on the 

West Coast versus an export opportunity. On average—not every 

single transaction, but on average—that is what BP was able to get 

for its oil on the West Coast. There has certainly been a focus on 

certain transactions where it was out of balance, as you put it, and 

I recognize that and the documents indicate that. But on average, 

the prices were at this competitive level, and I think that is, I 

think, a key point here. 

Also I would say the notion that if there had been, at a time 

when BP was exporting 50- or 60,000 barrels a day to the Far East, 

if those barrels had appeared on the West Coast instead, that it 

would have really made a significant difference for West Coast 

prices I just do not think is correct. We can go back a few years 

and the shipments to the West Coast of Alaskan oil were considerably higher—several hundred-thousand barrels a day higher—and 

the Alaskan prices were no lower. So we do not need to theorize 

65

or speculate about that. The West Coast did absorb considerably 

higher volumes of Alaskan crude oil in the years past when the 

production was higher, without any reduction in price. This is 

again perfectly consistent with the worldwide market in which they 

are trading. 

I also want to say I think there is a considerable degree of agreement, even if you accept some of the short-run trading documents 

and the calculations you have asked about what is the effect, is it 

1 cent a gallon, 3 cents a gallon, this question about pass-through. 

I have done also a statistical analysis. I know that you questioned 

the GAO results, but it is a question of pass-through and there is 

no evidence of any significant pass-through that we can detect of 

Alaskan prices to West Coast gasoline prices. So GAO has looked 

at that, just testified about that. I have done the same. 

But even if you believe there was some pass-through and recognizing how much of the Alaskan crude oil actually gets purchased 

at these prices that you are concerned about, my calculations I put 

in my prepared statement, if you would take that approach you are 

talking about something like one-tenth-of-a-cent a gallon. Professor 

McAfee has indicated something less than one-quarter-of-a-cent a 

gallon. 

We can quibble about that, but I think it is sort of ancient history in the sense it does not really matter in today’s market and 

that it is just not going to solve the problem that we have on the 

West Coast. That really goes, to return to what are the problems, 

it would be the refinery capacity. I think we have heard pretty 

clearly, and I have seen statistics to this, that the refineries are 

running flat out. So they are producing what they can. 

It is not a problem of crude oil supplies. We need more gasoline 

on the West Coast to drive the prices down. We need to think about 

how long it takes to build a facility, the permitting. The environmental restrictions obviously have to be respected, but is there a 

way to get more capacity. 

The alternative would be to import more gasoline from other 

parts of the country, which is pretty expensive. So it is a supply 

problem that needs to be addressed. 

[The prepared statement of Professor Shapiro follows:]

PREPARED STATEMENT OF CARL SHAPIRO, TRANSAMERICA PROFESSOR OF BUSINESS

STRATEGY, HAAS SCHOOL OF BUSINESS, UNIVERSITY OF CALIFORNIA AT BERKELEY

1. INTRODUCTION AND SUMMARY

I am Carl Shapiro, Transamerica Professor of Business Strategy at the Haas 

School of Business, and Director of the Institute of Business and Economic Research, both at the University of California at Berkeley. I regularly conduct research 

and provide economic advice in the area of antitrust economics and business strategy. I served as Deputy Assistant Attorney General for Economics in the Antitrust 

Division of the Department of Justice from 1995 to 1996, and have recently testified 

as an expert witness on behalf of the Department of Justice and the Federal Trade 

Commission in antitrust cases. My curriculum vitae is available on my web site at 

U.C. Berkeley, www.haas.berkeley.edu/shapiro. I thank the Committee for inviting 

me to offer an economic analysis of West Coast crude oil and gasoline prices here 

today. 

Two years ago, when BP Amoco (‘‘BP’’) and ARCO announced their plans to 

merge, I was retained by BP and ARCO to conduct an economic analysis of the antitrust issues associated with their merger. During the subsequent year, I closely 

studied West Coast crude oil and refined-product markets, focusing on the supply 

of Alaskan North Slope (‘‘ANS’’) crude oil and the role of ANS crude oil in West 

66

1Shipments of ANS crude oil to the West Coast were 1314 MBD in 1995, 1348 MBD in 1996, 

1222 MBD in 1997, 1184 MBD in 1998, 1070 MBD in 1999, and 1012 MBD in 2000. Department 

of Energy, Petroleum Supply Monthly, DOE/EIA 0109, Table 28, various issues. 2 Along with my colleagues John Hayes and Robert Town, I have performed an econometric 

analysis to estimate the elasticity of demand for ANS crude oil on the West Coast. This analysis 

Coast crude oil and refined-product markets. My analysis included an examination 

of competition and pricing in these markets, BP’s strategy regarding the sale and 

disposition of its ANS crude oil, and the impact of ANS crude oil supply and exports 

on West Coast prices. I am now appearing before the Committee on my own behalf 

as an antitrust economist and California citizen, not on behalf of BP. 

I offer the following observations to the Committee: 

West Coast Crude Oil Prices 

• The price paid by West Coast refineries for crude oil, including Alaskan North 

Slope crude oil, is governed by conditions in the worldwide crude oil market. 

• Over the 1995 to 2000 time period, BP was a major supplier of ANS crude oil 

to West Coast refineries. During that time, the price BP received for its ANS crude 

oil was at a competitive level, not a level reflecting monopoly power. BP’s exports 

did not have a material effect on the price of ANS crude oil, much less the price 

of gasoline. 

• BP’s historical trading strategies as a net seller of ANS crude oil are no longer 

relevant in today’s markets. Today, BP is a net buyer of ANS crude oil to serve its 

refineries at Los Angeles and Puget Sound. 

West Coast Gasoline Prices 

• West Coast gasoline prices move up and down directly with movements in world 

crude oil prices. But crude oil prices do not explain the higher level of gasoline 

prices that prevails on the West Coast vs. the rest of the country. 

• Reimposing the ban on the export of ANS crude oil is not a solution to the problem of high West Coast gasoline prices. There have been no exports of ANS crude 

oil to the Far East since May 2000. 

• The West Coast gasoline price premium is primarily explained by (a) the higher 

costs of refining gasoline to meet California’s more stringent requirements for reformulated gasoline, (b) the limited amount of refinery capacity on the West Coast, 

along with (c) the cost of importing gasoline from refineries in other parts of the 

country. 

2. ALASKAN NORTH SLOPE CRUDE OIL PRICES ARE DRIVEN BY WORLD CRUDE OIL PRICES

The West Coast is part of the worldwide crude oil market. Alaskan North Slope 

crude oil prices closely track the prices of other grades of crude oil. As shown in 

Exhibit 1, ANS crude oil prices move up and down extremely closely with other 

prices in the world crude oil market such as the widely traded benchmark crude 

oils West Texas Intermediate (WTI) and Brent. Exhibit 2 measures the correlation 

between ANS crude oil prices and the prices of some other benchmark crude oils. 

The correlations shown in Exhibit 2 are exceptionally high and indicate that ANS 

crude oil trades in a market with these other crude oils. 

For the past 5 years, the West Coast has been a net importer of crude oil. From 

1995 to 2000, Alaskan North Slope production declined by 516 thousands of barrels 

per day (‘‘MBD’’), and shipments of ANS crude oil to the West Coast declined by 

302 MBD.1 Since the production of California crude oil has been approximately constant, at roughly 800 to 900 MBD, and since total usage of crude oil on the West 

Coast also has been approximately constant, at roughly 2500 MBD, the shortfall created by declining ANS production has necessarily been made up by imports. Exhibit 

3 shows the increasing volume of imports of crude oil into the West Coast from 1989 

through 2000. As shown in Exhibit 4—a pie chart of crude oil sources in 2000—last 

year imports made up 28 percent of the supply of crude oil on the West Coast. 

Under these conditions, the price of crude oil on the West Coast, including ANS 

crude oil, has been determined by the delivered price of imported crude oil to the 

West Coast. The fact that there has been no increase in the price of ANS relative 

to the prices of other crude oils, despite a very large decline of 302 MBD in ANS 

shipments to the West Coast, is powerful evidence that ANS crude oil prices on the 

West Coast are governed by world crude oil prices, not by the volume of ANS 

shipped to the West Coast. This is a classic economic demonstration that ANS crude 

oil competes directly with these other crude oils. Technically, the demand for ANS 

crude oil exhibits a very high price elasticity.2 These facts are central to any assessment of the impact of ANS exports. 

67

shows an extremely high elasticity of demand for ANS crude oil. See John Hayes, Carl Shapiro, 

and Robert Town, ‘‘The Extent of the Market: Estimating the Effects of the BP/ARCO Merger.’’ 3 According to a November 9, 2000 press release, ‘‘Valero plans to import crude to the US West 

Coast from the mideast over the next few months to compete with Alaska North Slope crude 

and drive ANS prices lower, a Valero official told analysts Thursday. The refiner will be bringing in three cargoes of imported crude which will ‘put pressure on the ANS price,’ improving 

the economics at the company’s Benicia, California refinery.’’ 4My calculations show that BP’s netback on sales to the West Coast were approximately equal 

to BP’s netback on sales to the Far East over the 1997-1999 time period. These calculations include both spot and term contract sales. 

By looking at specific West Coast refineries, we can see just how competition between ANS crude oil with other grades of crude oil plays out in the marketplace. 

As ANS supplies and shipments have fallen, refineries have smoothly substituted 

imports for ANS crude oil. For example, market intelligence indicates that Chevron’s Richmond and El Segundo refineries replaced significant volumes of ANS 

crude oil with imported crude oils during 1995-2000, and that UDS eliminated ANS 

at its Wilmington refinery in favor of imports. Likewise, Valero announced last November its plans to import crude oil from the Mideast to compete with Alaskan 

North Slope crude and drive ANS prices lower.3 I say this substitution has been 

very ‘‘smooth’’ because there has been no increase in the relative price of ANS crude 

oil. This tells us that a number of West Coast refineries were able to switch from 

ANS to imported crude oils at minimal expense. In contrast, when a freeze in Florida reduces the supply of oranges, the price of orange juice rises. In that case, many 

orange juice drinkers find it ‘‘costly’’ to switch to other drinks, and will keep drinking orange juice even if orange juice prices go up. 

3. BP’S HISTORICAL TRADING STRATEGIES FOR ALASKAN NORTH SLOPE CRUDE OIL

I understand that the Committee is interested in BP’s historical ANS trading 

strategies, and specifically in understanding the impact of BP’s exports of ANS 

crude oil on West Coast crude oil and gasoline prices. I now address those issues. 

I believe the starting place for this inquiry is to ask whether BP received prices 

for ANS crude oil from West Coast refineries that exceeded the prices that would 

prevail in a competitive market. In a perfectly competitive market, a company selling ANS crude oil would ship that oil to the location giving the highest price, net 

of transportation costs. This net price is known as the ‘‘netback,’’ in this case measured from Valdez, Alaska, where the oil exits the Trans-Alaska Pipeline and is put 

onto tankers. The ‘‘competitive price’’ for ANS crude oil on the West Coast is the 

price that yields equal netbacks (out of Valdez) to the Far East, which has been the 

most attractive alternative destination over the past 5 years. 

In fact, the netback that BP received from its sales of ANS to the West Coast was 

no higher than the netback it received from its exports to the Far East.4 In other 

words, BP’s prices for Alaskan North Slope crude oil were at competitive levels. The 

prices BP actually received for its ANS crude oil simply do not indicate that BP had 

monopoly power. 

Economists generally regard trading and arbitrage activities as an important part 

of the operation of competitive markets. When a market participant sells its output 

in the geographic location yielding the highest price, market efficiency is promoted 

because products flow to the buyers who value them most highly. This is a general 

principle in commodity markets, from crude oil to bulk chemicals to agricultural 

markets. In my opinion, BP’s trading activities and exports are best seen in this 

light, namely as a normal part of the workings of competitive markets. Exports certainly are a normal part of competitive commodity markets. Given that BP had sufficient shipping capacity to send some ANS crude oil to the Far East rather than 

the West Coast, and given the willingness of some customers in the Far East to pay 

enough to compensate BP for the extra cost of shipping the oil to the Far East (so 

that the Far East netback was equal to the West Coast netback), we should expect 

to see exports in a competitive market. 

I understand that FTC Chairman Robert Pitofsky has suggested that BP’s exports 

may be indicative of monopoly power, because BP recognized that selling additional 

ANS crude oil on the West Coast at certain times would tend to lower the West 

Coast spot price of ANS. Of course, it is common for traders in competitive markets 

to have small, transitory effects on prices. In financial markets, for example, the 

price of a stock may fall by 1 percent (e.g., 25 cents for a $25 stock) or more as 

a result of a single trader unloading his or her position. In BP’s case, since BP sold 

significant volumes of ANS crude oil under long-term contracts with prices indexed 

to the West Coast spot price of ANS, BP naturally accounted for the fact that tempoVerDate 0ct 09 2002 11:58 Jan 05, 2004 Jkt 088463 PO 00000 Frm 00071 Fmt 6601 Sfmt 6621 S:\WPSHR\GPO\DOCS\88463.TXT JACK PsN: JACKF
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5 Now that ANS term contracts (which Phillips has taken over from BP) are indexed to crude 

oil prices other than the ANS spot price, with these other crude oils being much more thickly 

traded, neither BP nor Phillips has the same incentives to refrain from specific ANS spot market trades that have the effect of temporarily lowering the spot price of ANS. 6General Accounting Office, ‘‘Alaskan North Slope Oil: Limited Effects of Lifting Export Ban 

on Oil and Shipping Industries and Consumers,’’ GAO/RCED-99-191, July 1999, p.6. 7 See Statement of Commissioners Anthony, Swindle, and Leary in BP Amoco/ARCO, April 

13, 2000, available at http:2 // www.ftc.gov / os / 2000 / 04 / bpstateasl.htm. It is my understanding that the FTC’s economic expert in the BP/ARCO case, Professor Preston McAfee, 

agrees that BP’s ANS exports had at most a very small effect on West Coast gasoline prices. 8 Even this number is too high, for two reasons: (1) There is no allegation that all of BP’s 

exports to the Far East were at netbacks less than BP could have earned selling those cargoes 

on the West Coast. Even Chairman Pitofsky objects to BP’s exports only when the Far East 

netback is less than the West Coast netback. Therefore, a number smaller than 60 MBD should 

be used for these calculations. (2) There is no reason to expect 100 percent of any increases in 

refineries’ cost of purchasing ANS crude oil to be passed on to motorists in the form of higher 

rarily lowering the ANS spot price by, say 0.5 percent (10 cents per barrel on a $20 

barrel of oil) would lower BP’s revenues under its term contracts.5

I believe it is mistaken to characterize this type of short-run impact on spot prices 

as monopoly power. As I indicated earlier, BP’s sales of ANS crude oil to West Coast 

refineries were at competitive prices, not monopoly prices. Furthermore, we directly 

observe a reduction in ANS shipments to the West Coast from 1314 MBD in 1995 

to 1070 MBD in 1999. Compare this number to the average level of ANS exports 

by BP during 1998 and 1999 of 60 MBD. We can ask how much lower West Coast 

ANS prices would have been, had BP exported no ANS crude oil, so that ANS shipments to the West Coast in 1999 would have been 1130 MBD rather than 1070 

MBD. Well, we know that ANS prices were not lower relative to other crude oil 

prices even when ANS shipments were as high as 1314 MBD, as they were back 

in 1995. The inescapable conclusion is that 60 MBD more ANS shipments to the 

West Coast would not have led to lower ANS prices during the 1998-1999 timeframe. BP’s exports of ANS did not have any measurable impact on the West Coast 

price of ANS, much less the price of gasoline. 

In any event, for three powerful reasons, BP’s historical trading strategies are not 

a fruitful place to look to explain why West Coast gasoline prices are higher than 

gasoline prices elsewhere in the country. 

First, while the overall level of worldwide crude oil prices directly affects gasoline 

prices, no connection has been found between the level of ANS crude oil prices (moving alone) and West Coast gasoline prices. The GAO studied this question and was 

unable to detect any impact on West Coast gasoline prices even when ANS prices 

rose by roughly $1 per barrel. According to the GAO, ‘‘Despite higher crude oil 

prices for some refiners, no observed increases occurred in the prices of gasoline, 

diesel, and jet fuel.’’ 6 I have conducted my own study of the relationship between 

ANS crude oil prices and West Coast gasoline prices, and I find no statistically significant relationship between ANS prices (moving alone) and West Coast gasoline 

prices. 

Second, even those who suggest that BP’s exports of ANS crude oil led to higher 

prices on the West Coast recognize that any such effects are small as regards ANS 

crude oil prices, and smaller still when it comes to West Coast gasoline prices. The 

majority of the Federal Trade Commission indicated at the time of the BP/ARCO 

merger that ANS exports at most raised gasoline prices on the West Coast by onehalf cent per gallon. Referring to BP’s exports of ANS crude oil, Commissioners Anthony, Swindle, and Leary said: ‘‘We have reason to believe that the upward price 

effects of these sporadic sales amounted to no more than one-half cent per gallon 

at the pump.’’ 7 They go on to say: ‘‘We acknowledge the public concern over the relatively high price of gasoline on the West Coast, but people will be cruelly disappointed if they are led to believe that the export restriction would have a detectable effect on the situation.’’

In fact, going back to the model from which the FTC majority calculated the halfcent per gallon of gasoline upper bound , it is clear that the actual effect estimated 

using this model would be no more than one-tenth of a cent per gallon of gasoline. 

The underlying model upon which the FTC relied translated 60 MBD of exports to 

a temporary increase of about one-half cent per gallon in the price of ANS crude 

oil . But higher ANS crude oil prices, moving apart from other crude oil prices, simply do not translate one-for-one into higher gasoline prices. In fact, during 1998 and 

1999, only around 25 percent of the crude oil used on the West Coast was sold at 

prices tied to the ANS spot price. So, even if refiners fully passed on an increase 

of one-half cent per gallon in the price of ANS crude oil, this would only correspond 

to an increase in gasoline prices of about one-tenth of a penny per gallon.8 FurtherVerDate 0ct 09 2002 11:58 Jan 05, 2004 Jkt 088463 PO 00000 Frm 00072 Fmt 6601 Sfmt 6621 S:\WPSHR\GPO\DOCS\88463.TXT JACK PsN: JACKF
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gasoline prices. Generally, the passthrough rate for higher input costs depends upon how much 

marginal costs are affected, and the ratio of the elasticities of supply and demand. 9See Department of Energy, Petroleum Supply Monthly, DOE/EIA-0109, Table 46, various 

issues. 10 As noted above, there have been no exports of ANS for nearly a year. Re-imposing the ban 

on ANS exports would not have any material impact on West Coast crude oil or gasoline prices. 11Many West Coast refineries have expanded their capacity over time through 

debottlenecking and other capital expenditures. However, the ability of these refineries further 

to expand capacity is limited by a range of permitting requirements and environmental restrictions, as well as various other factors. 12Since its introduction in 1996, the wholesale price for CARB has averaged roughly 4 cents 

per gallon more than conventional gasoline. ‘‘Report on Gasoline Pricing in California,’’ Staff Report and Attorney General’s Comments and Recommendations, May 2000, p. 5. Before CARB 

regulations were implemented in 1996, the California Air Resources Board estimated the new 

formulation would cost between 5 and 15 cents more per gallon than conventional gasoline. 

Keith Leffler and Barry Pulliam. ‘‘Preliminary Report to the Attorney General Regarding California Gasoline Prices,’’ November 22, 1999, n. 11. 

more, for the reasons I gave above, I believe it is mistaken to rely on a short-run 

trading model, rather than longer-term data on ANS production and shipments, to 

estimate the effects of ANS exports on ANS crude oil prices. Looking at longer-term 

production and shipment data, 60 MBD of exports in 1998 and 1999 had no measurable effect on the price of ANS. 

Third, BP’s historical trading strategies and exports of ANS are simply not relevant in today’s market. BP produces about 280 to 290 MBD of ANS and uses about 

350 to 400 MBD of ANS crude oil at its two West Coast refineries at Carson and 

Cherry Point. So BP is a net buyer of ANS crude oil of more than 70 MBD. Phillips, 

which acquired ARCO Alaska as part of the settlement between BP and the FTC, 

also inherited term contracts that BP had signed with Equilon, U.S. Oil, and Tosco. 

None of these term contracts are now indexed to ANS spot prices. As a result, both 

buyers and sellers in the (very thin) ANS spot market no longer have incentives to 

influence the ANS spot price as a result of having term contracts tied to that price. 

Finally, there have been no exports of ANS since May 2000.9 Phillips appears to 

lack sufficient shipping capacity to export its ANS to the Far East, even when 

netbacks to the Far East (calculated based on excess tonnage economics) are higher 

than netbacks on the West Coast. 

4. EXPLAINING THE WEST COAST GASOLINE PRICE PREMIUM

The evidence is compelling that the higher West Coast gasoline prices we are now 

experiencing, in comparison with the rest of the country, are not the result of higher 

West Coast prices for crude oil, either for imported crude oil or for Alaskan North 

Slope crude oil. The West Coast gasoline price premium certainly is not today, and 

has not been, the result of ANS exports.10 What does explain these prices differences, and what can be done to reduce gasoline prices on the West Coast? 

The causes of the West Coast gasoline price premium have been closely studied 

by many others, including the Energy Information Administration and the California Energy Commission. Happily, there is considerable consensus as to the 

causes of the West Coast gasoline price premium. I will simply summarize what I 

consider the consensus findings on this issue, adding in my own observations on 

possible policy responses. 

First, refinery capacity on the West Coast is limited. Building new refineries appears to be nearly impossible, and existing refineries have limited ability to expand 

their capacity.11 The result is that the West Coast is perilously close to having insufficient refinery capacity to meet its needs. Since the demand for gasoline is quite 

inelastic, this creates a situation where disruptions in supply (e.g., from refinery 

outages) create a genuine scarcity, causing price to rise sharply to clear the market. 

In other words, at the refinery level, West Coast gasoline markets are habitually 

tight, leaving no margin for error. Inventories are not sufficient to buffer shocks resulting from supply disruptions. Consumers on the West Coast are thus vulnerable 

to price spikes as a result of refinery outages or breaks in pipelines. Policies to encourage the addition of refinery capacity on the West Coast would help ease these 

problems. The Federal Trade Commission should also scrutinize any mergers or 

joint ventures that would increase the concentration of ownership of West Coast refinery capacity. 

Second, refinery costs are higher in California than in the rest of the country, due 

in part to California’s stringent rules for reformulated gasoline (RFG), specifically 

the California Air Resources Board (CARB) standard for RFG. The CARB standard 

raises the cost of gasoline refining by about four cents per gallon.12

70

13 It costs 8 to 12 cents per gallon to import gasoline from the Houston area. Keith Leffler 

and Barry Pulliam. ‘‘Preliminary Report to the Attorney General Regarding California Gasoline 

Prices,’’ November 22, 1999, p. 7 (citing Octane Week, August 2, 1999). 14 Refineries outside California that produce CARB include Valero (Gulf Coast), Amerada Hess 

(Caribbean), and Neste (Europe). ‘‘Report on Gasoline Pricing in California,’’ Staff Report and 

Attorney General’s Comments and Recommendations, May 2000, p. 5. These refineries do not 

produce CARB gasoline on a regular basis. 15 A jury decision awarding Unocal 53⁄4 cents per gallon on its 393 patent was affirmed on 

appeal in March 2000. Unocal claims a total of five RFG patents. 16MTBE is prohibited in California gasoline after December 31, 2002. California Air Resources Board Press Release, March 10, 2000 ( http: // www.arb.ca.gov / newsrel / ph3cbg.htm). 

Removing MTBE from gasoline will cause effective production capacity to decline by from 5 to 

11 percent. Gordon Schremp, ‘‘Staff Findings: Timetable for Phaseout of MTBE from California’s 

Gasoline Supply,’’ California Energy Commission, presentation dated June 18, 1999, and Keith 

Leffler and Barry Pulliam. ‘‘Preliminary Report to the Attorney General Regarding California 

Gasoline Prices,’’ November 22, 1999, p. 8. Replacing MTBE with ethanol will initially add 4 

to 7 cents per gallon to the price of gasoline; over the long term, removing MTBE is expected 

to raise gasoline prices by to 2 to 6 cents per gallon. ‘‘Supply and Cost of Alternatives to MTBE 

in Gasoline,’’ California Energy Commission, P300-98-013, February 1999, and California Air 

Resources Board Press Release, March 10, 2000 (http: // www.arb.ca.gov / newsrel /

ph3cbg.htm). 17The Los Angeles Times reported that blackouts have already shut down product pipelines, 

and threatened to shut down refineries in California. Chris Kraul, ‘‘Gas Shortage Possible as 

Crisis Affects Refineries, Pipelines,’’ LA Times, January 20, 2001. I understand that BP reduced 

production at its Cherry Point refinery for a brief period of time because of the high price of 

electricity.

Third, it is costly for the West Coast to import gasoline from other parts of the 

country.13 On top of these transportation costs is the fact that California standards 

for RFG are more stringent than Federal standards, so refineries elsewhere in the 

country cannot simply ship to California the gasoline they normally produce. In fact, 

there are a limited number of refineries outside California that produce CARB gasoline.14 Thus, refinery capacity outside PADD V has very limited ability to keep West 

Coast gasoline prices in line with gasoline prices elsewhere in the country. Policies 

designed to reduce the cost of transporting gasoline from the Gulf Coast to the West 

Coast would help integrate gasoline markets on the West Coast with those in the 

rest of the country. 

Unfortunately, there is reason to believe that the West Coast gasoline price premium is likely to grow rather than shrink in the near future. First, as West Coast 

demand for gasoline slowly grows and refinery capacity does not, the basic problem 

of supply/demand imbalance on the West Coast will tend to worsen. Second, the 

price premium for CARB gasoline over conventional gasoline may rise as California 

refineries are forced to pay royalties to Unocal on Unocal’s RFG patents.15 Third, 

as MTBE is phased out in California, effective refinery capacity will be further reduced and refinery costs will likely rise.16 Finally, the West Coast electricity mess 

may spill over and cause disruptions in the supply of gasoline on the West Coast.17

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Senator SMITH. I think it is important right now to stop and ask 

questions of these two professors. This is important for the constituents Senator Wyden and I serve. BP has taken a hammering 

in our State because of an article in our State-wide newspaper. Are 

you aware of that? 

Dr. SHAPIRO. I certainly am. 

Dr. MCAFEE. Yes, sir. 

Senator SMITH. In fairness to this company, I want to ask you 

some questions, not impugning your integrity at all, but I think 

people need to know the truth. You have no affiliation with BP, do 

you? 

Dr. SHAPIRO. I do not, that is correct. 

Senator SMITH. Professor McAfee. 

Dr. MCAFEE. I do not and never have. 

Senator SMITH. I think it is important that people know. 

Professor McAfee, you are aware of this article in The Oregonian, 

is that correct? 


88463.007
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Dr. MCAFEE. Is that the one I am quoted in? 

Senator SMITH. You are front and center. You are the first witness, and this is ‘‘Experts: BP Rigged Prices.’’ Now, you are here 

today saying you never said they rigged prices? 

Dr. MCAFEE. Correct. I said they manipulated prices. I have 

never used the phrase ‘‘rigged’’ because that means collusion. 

Senator SMITH. No collusion. So in your view, your understanding of the law and their business practices, they did not break 

any law? 

Dr. MCAFEE. They did not break any law that I know of. 

Senator SMITH. You have also testified that at one time that 

what they did translated in a cost to Oregonians of 1 to 3 cents a 

gallon higher. Have you revised your testimony now down to a 

quarter-of-a-cent? 

Dr. MCAFEE. The quarter-of-a-cent referred to gasoline, not oil. 

The 1 to 3 cents was intended to refer to oil on a per-gallon basis. 

So translating into barrels would be 40 cents to $1.20 on a barrel. 

But that was also intended to be an upper bound. That is, the largest extent of manipulation, not the average extent of manipulation, 

was on that order. 

Senator SMITH. So you think it is a fairly de minimis impact, if 

at all? 

Dr. MCAFEE. Absolutely. 

Senator SMITH. Notwithstanding that it was de minimis, your 

testimony is that there was overwhelming evidence that the company manipulated West Coast oil prices? 

Dr. MCAFEE. That is correct. 

Senator SMITH. But there is no evidence that they broke any 

law? 

Dr. MCAFEE. Not that I know of. 

Senator SMITH. Because you have not seen the documents Senator Wyden has referenced? 

Dr. MCAFEE. I have not. Am I correct, Senator, that those documents refer to ARCO’s behavior and not BP’s? 

Senator WYDEN. I think both the Chairman and I would be interested in whether you have seen the FTC documents that are under 

seal in court for purposes of the question he just asked you. 

Dr. MCAFEE. I have seen very extensive—there were millions of 

pages of documents. I have read a very small fraction of those, but 

I have seen many documents that remain under seal, including the 

report I wrote. Parts of that were released, but parts—it was a redacted version. 

Senator WYDEN. I was not going to ask either of you any questions because I have many for the other two. I think what I feel 

very strongly about is that it seems that virtually no one here has 

seen those documents that are under seal, the 1400 boxes, and has 

seen various and sundry other things. I gather you as part of your 

assignment—and that is why I happen to think it is critical to get 

to the bottom of this issue, that there be a process for examining 

those documents. 

Dr. MCAFEE. May I respond to that? 

Senator WYDEN. Of course. 

76

Senator SMITH. May I ask to Senator Wyden’s comment. Frankly, 

I believe you two are the experts on this merger, so you surely saw 

all the documents involved. 

Dr. SHAPIRO. I certainly have had access to and seen mountains 

of documents. I believe the same is true for Professor McAfee. I do 

not think either of us—I think there is a tremendous amount of 

consensus between the two experts who have seen these documents 

and reviewed this case. 

Senator WYDEN. But have you, in fact, seen the 1400 boxes that 

are under seal, and also have had access to the full extent of the 

information, rather than the redacted version? That is what is 

under question. 

Dr. SHAPIRO. I have had full access to all this information as part 

of my role as an expert witness in the case. Professor McAfee can 

speak for himself. 

Dr. MCAFEE. I have had full access. I have actually seen all 1400 

of the boxes and I have gone through, not 1400, but a large number 

of them personally. 

Senator WYDEN. We are glad to have that resolved. 

Senator SMITH. Professor McAfee, on the basis of having seen all 

of that and read this article in which you are the featured character, is this an unfair characterization of what BP has done? 

Dr. MCAFEE. I objected to the headline on that article strenuously because I have seen no evidence of rigging prices. I have seen 

evidence of manipulating prices. Now, this is not manipulating at 

the level of 20 cents per gallon. It is much, much smaller than that. 

But there is evidence of trying to affect the prices. 

Senator SMITH. Very good. 

Senator Wyden, do you have any further questions? 

Senator WYDEN. Not for the two professors. As I indicated, I have 

questions for Mr. Malone and Mr. Mau. 

Senator SMITH. OK. 

Mr. Malone, the mike is yours. 

STATEMENT OF ROBERT MALONE, REGIONAL

PRESIDENT-WESTERN UNITED STATES, BP 

Mr. MALONE. Thank you, Mr. Chairman and Members of the 

Subcommittee. Good afternoon. My name is Bob Malone and I am 

the Regional President for BP based in Los Angeles. I want to 

thank you for inviting me to testify. 

I am here to talk about gasoline prices on the West Coast today. 

That is a matter of concern to you because of the impact of gasoline 

prices on your constituents and to me because your constituents 

are my customers. I think it is particularly important that the 

main focus for discussion be firmly grounded in the present context, the West Coast as it is today. A lot has changed during the 

last several years and BP is a new and a different company. We 

have combined the best of five great companies: British Petroleum, 

Amoco, ARCO, Vastar, and Castrol. 

Our role on the West Coast has changed, too. Two years ago, BP 

was an ANS producer and a seller. Today BP is an ANS producer, 

an ANS buyer, a refiner, and a gasoline marketer. 

Other West Coast participants have changed, too. Phillips acquired ARCO’s Alaskan operations. Exxon and Mobil merged. 

77

Valero acquired Exxon’s Benecia refinery, and relative shares of 

ANS production were reallocated with the realignment of Prudhoe 

Bay interests among BP, Exxon, and Phillips. 

All of these changes took place under FTC review and with the 

FTC’s close involvement and understanding of the details of these 

changes. Our perspective and our comments on gasoline prices 

today take into account all of these changes. 

Before focusing on the main topic of West Coast gasoline prices 

today, I feel I need to address some of the historic topics. That is, 

BP’s historical ANS exports and our trading documents. Let me 

begin with ANS exports. In spite of some press reports to the contrary, ANS exports do not affect the price of gasoline on the West 

Coast. In 1999, the GAO found no observed increases occurred in 

West Coast consumer prices as a result of lifting the export ban. 

The FTC made a similar observation in their statement on the BPARCO merger approval, stating: ‘‘We acknowledge the public concern over the relatively high price of gasoline in the West, but people will be cruelly disappointed if they are led to believe that the 

proposed ANS export restriction would have detectible effect on the 

situation.’’ 

We just heard now from noted economists that there is no significant correlation between ANS exports and gasoline prices on the 

West Coast. Today BP does not export any ANS crude. We stopped 

those shipments last June for commercial reasons. 

There have been allegations that BP was manipulating retail 

gasoline prices on the West Coast by shipping ANS crude to Asia. 

Let me be clear that one company’s ANS trades cannot manipulate 

the global oil market. If you consider this just for a moment, on average we exported at the highest peak about 76,000 barrels a day. 

These exports equated to 3 percent of West Coast consumption, 

which is four-tenths of 1 percent of refining consumption and less 

than one-tenth of 1 percent of world consumption. 

I would like to now turn to the confidential documents. We 

strongly disagree with those who suggest that confidential documents held in agreement with the Federal Trade Commission be 

released. Confidential documents are standard procedures for all 

merger applications. This request affects a number of companies 

other than BP who are not here today. Some of these companies 

currently have matters that are pending before the Commission. 

This matter has been given rigorous Federal court review and a 

Federal judge, the FTC, the attorneys general of Oregon, California, Washington, and Alaska participated and endorsed the 

process and its outcome. 

My last point is the trader e-mails. I will say this, that our traders were doing what traders do, which is to try to aggressively 

work to maximize profits. This is the fundamental notion behind a 

strong U.S. economy. Are some of the trader e-mails poorly worded? Yes? Did they do anything illegal or improper? No. Did they do 

anything that affected the world price of oil? Absolutely not. Did 

they do anything that impacted the price of gasoline on the West 

Coast? Absolutely not. 

I would like to turn to today. Today BP produces 290,000 barrels 

a day on the North Slope of Alaska. All of this production is transported to our refineries in California and Washington State, where 

78

it is refined and sold through our ARCO branded retail stations. 

We are very proud of our ARCO brand and the long history it has 

providing consumers with competitively priced gasoline in the western United States. 

In general, gasoline prices on the West Coast tend to be higher 

for three reasons: Logistically, it is difficult for products to reach 

the West Coast; State taxes on the West Coast are generally higher; and West Coast fuel specifications are among the most stringent 

in the country. In particular, California Air Resource Board gasoline is unique and more expensive to manufacture. 

There are specific actions that we can take that will help alleviate this for our customers and your constituents. A national energy 

policy should consider the following. The required use of 

oxygenates in gasoline complicates my industry’s ability to move 

gasoline to areas in short supply. This happens frequently on the 

West Coast. Simplicity and consistency in fuel specifications are 

needed. 

We need infrastructure to ensure that growing energy demand 

can be managed. The current pipeline network must be expanded 

to ensure that natural gas, crude oil, gasoline and other fuels are 

efficiently delivered to customers. We have to stop polarizing the 

debate between energy issues and the environment. We must be 

able to strike a balance so that we can continue to meet our commitment to a clean environment while allowing for the building of 

additional capacity to manufacture these cleaner fuels. 

Again, I want to thank you for the opportunity to work with this 

Subcommittee and others as we move forward on an energy policy. 

[The prepared statement of Mr. Malone follows:]

PREPARED STATEMENT OF ROBERT MALONE, REGIONAL PRESIDENT, BP 

My name is Bob Malone and I am Regional President for BP. BP is a global energy company, formed from the recent mergers of five great companies, BP, Amoco, 

ARCO, Vastar and Burma Castrol. We are proud of our heritage and the conduct 

of each company that came together to form BP. Today we stand in front of the 

Committee as a completely new company. 

Energy policy has been in the news on a daily basis over the past few months 

and West Coast energy concerns have been given particular focus. At BP we are 

committed to working together with this committee and all stakeholders to better 

understand the forces at work in the energy marketplace. We must also remain vigilant on behalf of our employees, contractors, shareholders and customers to ensure 

that the record is accurate as to how we operate in the market. 

Our intention is to once again provide answers to any remaining questions regarding the past, with an eye to solving the future energy challenges of our customers, 

your constituents. We are fundamentally committed as a company and members of 

the community to give our customers choice for heat, light and mobility; these are 

the products we sell. We believe our record is second to none in the United States 

with regard to cleaner fuels, climate change initiatives and openness to the community. 

I thank the Committee for this opportunity to address the topic of West Coast gasoline prices. Let me turn directly to some of the issues that I was told would be 

the subject of today’s hearing. 

WEST COAST GASOLINE PRICES

West Coast gasoline marketing is extremely competitive, yet West Coast gasoline 

prices are among the highest in the nation. Numerous studies and findings have determined that the situation is caused by a variety of market conditions. Specifically, 

West Coast gasoline prices are higher because: 

1. Logistically, the West Coast is not easily accessible as compared to other regions. The West Coast infrastructure is challenged in that there is limited pipeline 

79

connection to other regions, and the primary mode of product import is by tanker 

and barge. Additionally, manufacturing is operating at full capacity resulting in significant risk to supply should an unexpected outage occur. 

2. State gasoline taxes on the West Coast are among the highest in the nation. 

3. West Coast fuel specifications are among the most stringent in the country. In 

particular, California Air Resources Board (CARB) gasoline is unique and more expensive to manufacture. California gasoline demand cannot easily be satisfied 

through imports from adjacent regions nor from other refineries within PADD V. 

Since CARB gasoline is not fungible among other western states, supply volatility 

is increased. 

PRICING PRACTICES

We have fully cooperated with an ongoing FTC investigation of West Coast gasoline prices and expect the results soon. We believe the evidence will show that BP 

is one of the most competitive marketers in the region and show no findings of 

wrongdoing, similar to findings from past investigations. 

We also understand that the FTC investigation has become primarily focused on 

the practice of ‘redlining.’ Our distributor supply contracts do not contain territorial 

restrictions, sometimes called ‘redlining.’ On the West Coast, we have very few distributor supply agreements and this practice does not apply to us. Our decision to 

use direct marketing facilities is based on the efficiencies of the supply chain for 

effective cost management. 

Concerning dealer pricing practices, we use price zones to meet competition and 

comply with the law. The Robinson-Patman Act prohibits a supplier from discriminating in price among its customers who are in direct competition. We use price 

zones to ensure that all branded facilities in a price zone receive the same wholesale 

price. Price zones are defined through analysis of traffic patterns and physical 

boundaries such as rivers, freeways and industrial parks, etc. There is no station 

count criterion for establishing a price zone. As a result, while the wholesale price 

is the same for every site within a price zone, each station operator independently 

sets its retail or street price. 

ANS EXPORTS

A coalition of Alaska and California oil producers, Maritime Labor, shippers and 

contractors banded together to repeal the ANS export ban in 1995. The idea originated in Vice President Gore’s Report, Reinventing Government that was acted 

upon through a study by then Secretary of Energy Hazel O’Leary. Legislation was 

introduced in the House of Representatives where it passed by a vote of 361 to 54, 

and in the Senate where it passed a vote of 69 to 29. President Clinton signed the 

bill into law on November 28, 1995. 

Regarding the suggestion that BP’s ANS exports have increased West Coast gasoline prices, several things can and should be said on this topic: 

1. BP’s ANS exports have not affected West Coast crude oil prices. Crude oil is 

a global commodity, and ANS is traded in that global market. The trading activity 

of no single person or company can affect crude oil prices. On the West Coast as 

elsewhere, exports are balanced by imports, and the global forces of supply and demand establish prices. 

2. ANS exports have had no effect on West Coast gasoline prices. According to 

the General Accounting Office’s statistical and economic analyses in this connection, 

‘‘the prices of gasoline, diesel, and jet fuel on the West Coast did not significantly 

change as a result of lifting the [ANS] export ban.’’ The same study found that, 

‘‘West Coast consumers appear to have been unaffected by lifting the [ANS export] 

ban, because the prices of important petroleum products they use have not increased.’’ General Accounting Office, ‘‘Alaskan North Slope Oil: Limited Effects of 

Lifting Export Ban on Oil and Shipping Industries and Consumers,’’ GAO/RCED99-191, (July 1999) at 30,31. Economist Carl Shapiro’s own study of the relationship 

between ANS prices (moving alone) and West Coast gasoline prices came to the 

same conclusion—increases in the price of ANS crude relative to other crude oils 

does not affect the price of gasoline. 

3. ANS exports have no relevance to current discussions of West Coast gasoline 

prices. Today, BP is a West Coast refiner and currently refines more Alaska North 

Slope crude oil than it produces. We have not exported ANS crude since June 2000. 

To our knowledge, no other company has exported Alaska North Slope crude since 

that time, either. BP has no plans to export ANS crude at this time. 

80

CRUDE TRADING

We also would like to take this opportunity to address the suggestion made in the 

press recently that documents produced to the FTC in connection with BP’s acquisition of ARCO somehow reflect illegal or improper conduct. The suggestion is simply 

not true. Some of BP’s trading documents may have been unfortunately worded, and 

the press has highlighted that fact, but the documents do not change the global nature of these West Coast crude markets. Considered in the context of these market 

realities, BP’s trading documents reflect nothing more than efforts to engage in normal trading activities, which are not only proper, but, in the larger view, essential 

to the efficient operation of global markets. 

In this connection, the FTC, in approving the BP/ARCO merger, specifically noted 

that BP’s trading activity was legal: ‘‘It is important to emphasize that BP’s unilateral actions were not illegal under the antitrust laws—and, indeed, the complaint 

makes no allegations that exports were illegal.’’ Further, as most relevant to the 

focus of the hearing, BP’s ANS exports have not been a factor in West Coast gasoline prices as established by the General Accounting Office and Shapiro analyses 

referenced earlier. 

CONFIDENTIAL DOCUMENTS

We strongly disagree with those who suggest that confidential documents held in 

agreement with the Federal Trade Commission be released. These documents must 

remain confidential. 

1. Confidential documents are standard procedure for all merger applications. 

2. This request affects a number of companies other than BP, who are not here 

today and some of these companies currently have matters pending before the Commission. 

3. This matter has been the subject of a rigorous Federal court review, and a Federal judge, the FTC and the Attorneys General of Oregon, California, Washington 

and Alaska have participated in and endorsed this process and its outcome. 

The essential information concerning BP’s pre-merger ANS exports and trading 

activity is summarized in the public record. The FTC’s interpretation of those documents and activities was included in public filings as part of the FTC’s BP/ARCO 

merger lawsuit last year, and many of the documents themselves were made public 

as the result of proceedings to unseal the record. The only portions of the BP documents that have not been made public have been determined by Federal court proceedings to contain confidential and legitimately protected trade secret information. 

BP and third parties alike provide large volumes of sensitive documents to the FTC 

in reliance upon the continued confidentiality of their trade secrets. These expectations of continued confidentiality need to be honored for the proper and efficient conduct of this system of regulatory review. We have confidence that these rigorous 

Federal proceedings have struck a proper balance concerning what information 

should be made public, and what information is properly kept confidential. 

RECOMMENDATIONS

Returning to the specific issue for this hearing, West Coast gasoline prices are 

higher than the national average. We have listed some of the reasons for this fact. 

While some of these factors can be managed through public policy, we need a national energy policy. We recommend the following: 

1. Gasoline must be made more fungible to reduce supply volatility and increase 

flexibility. Oxygenates are not required in gasoline to meet air emission standards. 

The required use of oxygenates in gasoline complicates the industry’s ability to move 

gasoline to areas in short supply. 

2. We need infrastructure to ensure that growing energy demand can be managed. 

The current pipeline network must be expanded to ensure that natural gas, crude 

oil, gasoline and other fuels are efficiently delivered to customers. 

3. The tradeoff between energy and environmental policy must be managed so 

that we continue to meet our commitment to a clean environment, while allowing 

for the building of new units required to manufacture the new cleaner fuels, which 

BP supports. 

4. The Unocal fuels patent unnecessarily complicates the manufacturing process 

and increases costs. The patent formulation adds little value and should be reviewed 

by the United States Patent office. 

I thank you for the opportunity to testify.

Senator SMITH. Thank you, Mr. Malone. I want to ask you this 

because I want to give BP a fair shot at making its case to Oregon, 

81

and I think your testimony has done very well. No one here is 

under oath, so we want people to just tell us the truth. You are 

not under oath, but I hope you would answer as though you were. 

This probably would never have made The Oregonian had there 

not been an e-mail correspondence between BP employees that was 

somehow obtained by them, where it was discussed that exporting 

Alaskan North Slope crude to the Far East was a way that the 

company could short West Coast refiners in order to short the West 

Coast and leverage up prices. A BP spokesman is quoted in the article as saying that this conduct was well within the bounds of the 

law. 

Does BP deny that it sought to inflate the West Coast price of 

crude oil by selling its Alaskan North Slope crude to the Far East 

or does the company just claim that in its opinion its conduct was 

not illegal? Do you deny it happened or do you deny that it is illegal? 

Mr. MALONE. I am that spokesperson with The Oregonian. Let 

me begin there. I will answer your questions absolutely direct, Mr. 

Chairman. 

Mr. Chairman, that particular e-mail I am familiar with, but I 

have not been able the get the whole document. So let me begin 

by saying just a couple of things to set the direct response to your 

question. Number one, again that document was produced when we 

were an ANS trader. We had excess and we were selling on the 

market. Today we do not. We consume all of our ANS as a result 

of the ARCO acquisition. So the conditions that are referenced in 

that memorandum do not exist today. 

Second, crude oil is a world commodity and traders are looking 

for arbitrage opportunities within a very narrow band on a product 

that is sold on a global basis. So if the world price of crude oil is 

$24.25, we are looking at opportunities to maximize our earnings 

around $24.25, but we are not going to impact a global commodity 

on a sustained basis. 

Third, I just would like to emphasize that we have heard from 

our experts and we also heard from the GAO about the relationship 

of exports to the retail market, and that it is inconsequential if 

even measurable. So much of the implication for your constituents, 

Senator, was that they were paying for that at the retail price, 

versus a document that is talking about looking for opportunities 

to enhance profitability around a band of crude oil trading, not retail market pricing. 

Senator SMITH. Mr. Malone, these experts, who are unrelated to 

your company, have testified, and I assume you would swear to it, 

that you have seen all of the confidential documents? You have 

seen everything that there is to see, and there was not illegal practice? 

Dr. MCAFEE. That is correct. 

Senator SMITH. The same, Dr. Shapiro? 

Dr. SHAPIRO. I agree. 

Mr. MALONE. Mr. Chairman, to your question, there were times 

when we were selling ANS and we were selling those on term contracts. We could have multiple term contracts at the same time. 

Those term contracts were normally based upon a spot price, and 

there were times that we shipped that last cargo to the Far East 

82

because, not necessarily at a lower price, but maybe at a lower 

netback, in order that our term contracts already in place, the spot 

price would be higher than if we brought that last cargo to market. 

Mr. Chairman, that is working with the market in order to be 

able to look for those type of opportunities to maximize our product. We did not have a downstream marketing system at that time, 

nor a refining system. 

Senator SMITH. Very good. One last question that I had. Senator 

Stevens has indicated his implacable opposition to any export ban 

of Alaska oil. I wonder how you feel about such legislation should 

it prohibit export of Alaskan oil. Would BP be opposed to that and, 

if so, why? 

Mr. MALONE. Yes, we would be opposed to putting the ban back 

in place, although as has been in my statement and others we have 

not exported ANS since June of last year. The idea that we would 

try to restrict a product to try to create a false market versus letting it be with the rest of crude oil in the world is to us restrictive. 

Second, we never know when, either for commercial reasons, but 

maybe more importantly, the importance of moving crude oil off of 

the pad to other locations in order to alleviate an oversupply which 

could shut down North Slope operations. We have seen that happen, sir. 

Senator SMITH. You undoubtedly do not have any current plans 

to export that oil to Asia at this point. You have need for it on the 

West Coast. But can you—as the leader of BP on the West Coast—

do you understand the political dilemma that creates for some of 

us who have to explain to constituents why it is, when we are already so dependent upon foreign oil, we would be exporting oil that 

comes off American shores? 

I am trying to get you to say: We will not do it any more. 

Mr. MALONE. I cannot say that, Chairman. It is very important, 

I think, that oil be able to move at a fair market value on a world 

price. Any commodity that is world priced should be able to do 

that. 

Senator SMITH. You understand the political down side of it? 

Mr. MALONE. I do. But I also understand the importance of that 

to my former home State of Alaska and the importance in what we 

are able to do now as a refiner and marketer on the West Coast. 

If I could also just add, we buy ANS on the open market right 

now. We are buying all the ANS to meet our needs. We are also 

importing other crudes on occasion to meet the needs of our refining system. I might also mention, we are also buying gasoline on 

the market today in order to meet the needs of the California market. 

Senator SMITH. Thank you. 

Senator Wyden. 

Senator WYDEN. Mr. Chairman, I have a number of questions for 

Mr. Malone, but Senator Stevens indicated he was under a tight 

time schedule. 

Senator STEVENS. No longer. 

Senator SMITH. He is back from the doctor. He is going to live, 

too. 

Senator STEVENS. I got my ear fixed. 

83

Senator WYDEN. Well then, let me begin by focusing on this 1995 

e-mail exchange. My colleague described it, well, we have got this 

situation where these BP trading managers are I gather sitting 

around talking about the benefits to the company of shorting the 

West Coast, in their words, to leverage up prices, and they described this as being a no-brainer. 

Mr. Malone, this took place in 1995. You were not in charge of 

BP’s West Coast operations in 1995, were you? 

Mr. MALONE. No, I was not. 

Senator WYDEN. I understand the individual who held your job 

for West Coast operations in 1995 is still working for BP and that 

person, in effect, was the supervisor of these people, but BP chose 

to send you to the Subcommittee as its witness. Would you just tell 

us whether that is correct? 

Mr. MALONE. There was not a regional president on the West 

Coast until I arrived. 

Senator WYDEN. No, I understand that. But the person that supervised the people wrote this e-mail and is still with the company, 

is that not correct? 

Mr. MALONE. Both are with the company. 

Senator WYDEN. Both the people and their supervisor, is that not 

correct? 

Mr. MALONE. Senator Wyden, I am not sure who their supervisor 

was, so I cannot say whether they are still with the company or 

not. I assume so. 

Senator WYDEN. My understanding is that the person who was 

in charge of the folks doing the e-mail who we asked for is still 

there and you have been sent instead. 

You indicated to me in a meeting that you have not reviewed the 

documents under seal in the FTC matter. Have you reviewed them 

since we spoke? 

Mr. MALONE. No, Senator Wyden, I have not. 

Senator WYDEN. Mr. Chairman and Chairman Stevens as well, 

this is to me the key point in terms of where we are. I have met 

with Mr. Malone on a number of occasions now and he strikes me 

as a decent person, an easy to talk to, decent person. But it seems 

to me what your company is essentially asking is that this Subcommittee trust BP on a matter that occurred long before you took 

over the West Coast operation, involving documents you have never 

seen. 

You just said, in response to questions from my colleague Senator Smith, that you will start selling the oil to Asia any time you 

feel like it, that you are going to just do it when you think it is 

in your interest. Given that, and given the fact that you are asking 

this Subcommittee to trust BP when there is documentary evidence 

uncovered by The Oregonian that you all exported crude oil to Asia 

to keep West Coast prices high, that your employees were sitting 

around and talking about the benefits of doing it, I sort of feel like 

President Reagan. President Reagan said: I want to trust you, but 

I have got an obligation to verify. 

So my question to you at this point is would you be willing—

would BP be willing—to make arrangements with this company to 

provide all of the documents under seal if this Subcommittee 

assures the security of those documents? 

84

Mr. MALONE. Senator Wyden, as we have talked about before, we 

would object because the assumption that you have said is that I 

ask you to trust me and my company. But in my statement, as you 

heard, the FTC has seen those documents, the Federal court has 

seen those documents, a special master has seen those documents, 

and they released, and we did not object, including that memo—

we did not object, Senator Wyden, to that being released to The Oregonian.

The other documents the special master and the Federal court 

found to be competitively sensitive material and that it should remain confidential. 

Senator WYDEN. I have no quarrel with your asserting that these 

are proprietary. But when you say you have nothing to hide and 

yet you go to great lengths to keep them under seal, even saying, 

as you just have, that you are not willing to work out an arrangement. I sit on the Senate Intelligence Committee, Mr. Malone, and 

so I work with secret documents quite a bit. What you are saying 

is in effect that Members of the U.S. Senate, this Subcommittee, 

cannot be trusted to see these documents, and I think that is a regrettable statement. 

If you are going to assert that you have nothing to hide, your 

company ought to be willing to work out an arrangement with this 

Subcommittee to let us take a look at them. 

Mr. MALONE. Senator Wyden, if you interpreted my remarks to 

have shown lack of the least bit of respect for the U.S. Congress 

and the U.S. Senate, then I apologize, because I have the utmost 

respect for this body. That is why I am here today. 

What I said is that the very agencies that are entrusted by us 

to look through those documents have looked through them on behalf of all of us, as has a Federal court, and that we were guaranteed the protection of those documents by the Federal Trade Commission. 

Senator WYDEN. But none of those people gave Senator Smith 

and I an election certificate. We got an election certificate to represent more than 3 million Oregonians, and those people are asking questions when they read in their morning newspaper about email, e-mail that says that your people sat around and talked 

about the benefits of sticking it to our constituents. When you tell 

us you have nothing to hide, and yet go to great lengths to describe 

all these convoluted processes where you tell Members of the U.S. 

Senate who sit on the Senate Intelligence Committee that you cannot work out an arrangement to see documents and have them 

treated confidentiality, I have got to tell you I do not think that is 

in the public interest. 

I know the light is on and I do not want to hold up Senator Stevens. I have other questions in a moment, but I want to yield to 

the Chairman for his time. 

Senator SMITH. Senator Stevens. 

Senator STEVENS. Well, Senator, I am prepared to stay here as 

long as you are, but I take offense at that comment. I presume we 

are all familiar with the process and the processes of the various 

courts. As a Senator, we do not have a right to tell the courts to 

release documents that they received under a seal of confidentiality. 

85

I think this is rather absurd, as a matter of fact. 

Mr. Malone, as I understand this e-mail, it pertained to wholesale prices of crude oil, did it not? 

Mr. MALONE. Yes, sir, it did, the market price of crude. 

Senator STEVENS. The market price of crude, right. It did not 

concern consumer pricing in Oregon or California, did it? 

Mr. MALONE. No, it did not. 

Senator STEVENS. I do not understand this failure to really examine the difference between that. These people have told us that, 

yes, it might have affected the price of crude oil, but it has not affected the consumer prices in these States. 

Is there any evidence here that has been brought to your attention that your company tried to manipulate consumer pricing? 

Mr. MALONE. No, Senator. 

Senator STEVENS. I really would urge my colleagues to consider 

the difference. We produce crude oil. Unfortunately, we do not have 

many refineries. We do not have a posted price. I do not even know 

if these gentlemen understand that, but as a practical matter our 

oil is priced at the destination. And there is a process—is there not 

a building up of a market, like a market in Japan, for instance? 

We never were able to export before under that ban, which I always thought was unconstitutional. Once the ban was lifted, you 

did have sort of a responsibility to find out if it was possible to 

build up a market in Japan, is that not correct? 

Mr. MALONE. That is correct, Senator. 

Senator STEVENS. Now, if you look at—I do not know if I am 

overstepping my own band of expertise, but I have always thought 

that there was a crude stream in the world and that really it would 

be to the great advantage of the world if the oil was delivered to 

the nearest destination and we did not have oil coming from Saudi 

Arabia into California and oil going from Alaska to California. I 

really think we would be better off in the long run, if we did not 

have all these political problems, having a destination concept, to 

ship it to the nearest place, so the risk to the oceans would be less. 

We have tried to bring up a concept of cutting down the distance 

that we ship oil. Your shipments to Japan, they were not under 

any long-term contracts, were they? 

Mr. MALONE. No, most were spot shipments. 

Senator STEVENS. Spot shipments. Once you had this merger, as 

I understand Mr. Pitofski and I think your statement, too, you 

have retail markets, marketing capability now, right? 

Mr. MALONE. We take all of our production and run it through 

our refineries. 

Senator STEVENS. So are we not just sort of beating a dead horse 

of 1995, 1996, 1997, something that cannot happen again, will not 

happen again? You have got the marketing capability for your 

crude. You are not going to sell it to Japan when you need it in 

California, are you? 

Mr. MALONE. We have no plans to export because we need it in 

our refineries. 

Senator STEVENS. I would like to some time, Mr. Chairman to get 

into the reason why Oregonians and Californians pay more for gasoline. I do not think I have the time right now, but clearly, gasoline 

taxes are higher than anywhere else. You prohibit your people from 

86

having self-service. You limit yourself in terms of refineries. Oregon has been unwilling to even build one single refinery, in a 

State that has the demand that it has. 

The West Coast in general went down from 42 to 23 refineries 

on the whole West Coast, despite the fact that we were increasing 

the supply. The refinery capability went down. And everyone says, 

‘‘Oh my God, what has happened?’’ Alaska has driven up the price 

of oil in California and Oregon. 

Now, he is ‘‘Bob’’ to me. Bob, you have been around that company 

long enough to answer me. Have you been involved in any collusive 

activity to drive up consumer prices? 

Mr. MALONE. Absolutely not, Senator. 

Senator STEVENS. I know this guy. We have spent Christmas arguing with one another, things like that. He will tell you that, but 

about other things rather than this. 

But this concept that you two are driving home, that somehow 

or other back in 1995, 1996, 1997 our oil people tried to drive up 

consumer prices, is wrong. I do not think you have any evidence 

to justify that statement. You have made it repeatedly, Senator, 

and I think you are ignoring the fact that the testimony here shows 

they were talking about crude oil prices and not about consumer 

prices. 

There is no connection in this market, direct connection, between 

those two. Is that not a fair statement? 

Senator WYDEN. Would the Chairman just yield? 

Senator STEVENS. Yes, sir. 

Senator WYDEN. Because I do not want to encroach on your time. 

First I would like to note I was the first person so far today to 

say that Mr. Malone seems like a decent guy. 

Senator STEVENS. You said ‘‘seems.’’ I will say is. 

[Laughter.] 

Senator WYDEN. I will be willing in the name of Subcommittee 

comity to stipulate to the fact that Mr. Malone is a decent guy. 

Senator STEVENS. You have a new friend, Bob. 

Senator WYDEN. He had before. 

I also want to again reiterate that I am not talking about any 

confidential document getting out to the public. What I have been 

interested in, which I think my constituents feel strongly about, is 

setting up a process by which this Subcommittee, while assuring 

the confidentiality of documents that are considered proprietary, 

can examine them. That is what is in question. 

Senator STEVENS. I think it is still my time, if I may. 

Do you have any evidence that there is anything in those boxes 

that pertains to consumer pricing? The two documents that I have 

heard pertain to crude oil pricing, and I hope you will understand 

the difference in this concept of crude oil marketing. Is there anything that has been brought to your attention that affected consumer pricing? 

Senator WYDEN. Mr. Chairman, all we have with respect to this 

issue is we have lost these stations. Bob Pitofsky says that there 

is evidence of red-lining, evidence of zone pricing. We have got email that talks—these are their quotes—the benefits of shorting 

the West Coast to leverage up prices, it is a no-brainer. 

87

Senator STEVENS. At that time they were dealing with exporting 

crude, not consumer pricing. 

Senator WYDEN. Mr. Chairman, what I would say, again as a 

way to resolve this issue, is that we would set up a process to confidentially examine these documents so as to address the question 

you are talking about. 

We have been here for—I do not know, well over 3 hours. I have 

not used the word ‘‘collusion.’’ Not once. I have not used the word 

‘‘illegal conduct.’’ 

Senator STEVENS. I heard it here today, though. 

Senator WYDEN. Not by me, because I went in here with a very 

detailed set of questions and they were designed to elicit what Bob 

Pitofsky told us, which is in his opinion he has found substantial 

evidence of market manipulation. That was essentially his words. 

Senator STEVENS. He also said it was not illegal. 

Senator WYDEN. Correct. 

Senator STEVENS. All right. Why do you want the documents? 

Senator WYDEN. Because I think we need to find out exactly 

what was going on when you have got management sitting around 

talking about the benefit of sticking it to the West Coast. 

Senator STEVENS. I do not think you have any evidence that we 

stuck it to the West Coast. That is the bottom line, and I join my 

colleague in saying no to opening up documents unless you have 

some proof that there is evidence in those documents of manipulating consumer pricing. Again, there could be evidence of manipulating, trying to manipulate, the market for crude oil. They needed 

more markets for crude oil. 

Senator WYDEN. I have great respect for the Chairman. I think 

he knows that we have worked together on a lot of matters. But 

I do think that when you have people in our State consistently paying gasoline prices over the national average and you have the testimony we even heard from Bob Pitofsky today, it is not too much 

to ask that we examine these documents, not in public, not on the 

streetcorner in the National Enquirer, but in private, to essentially 

assess what is going on. 

I will tell my colleagues at least today that I feel even stronger 

about this than I did coming in, because Bob Malone, to his credit, 

said that he is prepared to resume exporting gas to Asia any time 

he feels like it. 

Senator STEVENS. Gas. 

Senator WYDEN. Again, we can have the debate about what is exported. The documents that I have been dealing with, the BP issue 

involved oil. With respect to ARCO it involved gas. As the Chairman of the Appropriations Committee knows, these lines can blur, 

which is all the more reason for us to look at these documents confidentially to try to assess what was going on. 

Senator STEVENS. Mr. Chairman, I do not want to prolong this, 

but I hope my friend understands that about one-half of a barrel 

of crude oil goes into other than gasoline. 

Senator WYDEN. Correct. 

Senator STEVENS. And when you export crude oil you are dealing 

with a lot of other prices than gasoline. 

Senator WYDEN. That is correct. 

88

Senator STEVENS. That is one of the reasons why I think you 

cannot draw the direct connection between crude oil pricing and 

consumer pricing in California. But for the purpose of this goround, let me tell you. We have fought a lot of battles in our lives 

and we have probably more oil than anywhere in the country, and 

one of the things that we do is produce it. We are the only State 

that ever faced a ban on an export of the product from that State, 

the only State in the Union that ever had that. 

It was unconstitutional to start with, and you are suggesting initiating it once again. I think that is where I draw the line. 

Thank you, Mr. Chairman. 

Senator SMITH. Thank you, Senator Stevens. 

Mr. Malone, here is the article. You have read it. I believe you 

disagree with it, do you not? 

Mr. MALONE. Yes, I do. 

Senator SMITH. It says, the headline, ‘‘Experts: BP Rigged 

Prices.’’ You believe that is wrong? 

Mr. MALONE. I believe it is wrong and I went to Oregon and met 

with The Oregonian and told them so. 

Senator SMITH. If it read ‘‘Experts: BP Rigged Prices, But Acted 

Legally,’’ would you agree with that? 

Mr. MALONE. I would object to that as well. 

Senator SMITH. Senator Wyden, any further questions? 

Senator WYDEN. Does Senator Stevens want to go next? 

Senator STEVENS. No, no. Go ahead and I will interrupt you. 

Senator WYDEN. All right, fair enough. 

[Laughter.] 

Senator WYDEN. I want to ask a question about the ARCO documents, recognizing again, Mr. Malone, you have not seen this. So 

I want to talk conceptually about it. You say in your testimony: 

‘‘Logistically, the West Coast is not easily accessible as compared 

to other regions. There is limited pipeline connection to other regions.’’ That is your quote. 

Given these logistics, if gasoline supply to the West Coast is reduced because of a refinery fire or other disruption, it would be fair 

to say that it would be difficult to replace that gas, is that not correct? 

Mr. MALONE. Yes, sir. 

Senator WYDEN. When the supply is reduced, that typically 

raises the price, does it not? 

Mr. MALONE. It depends on the gasoline market itself at that 

time. I think the assumption is that if there is a shortage of it 

what you would buy on the market would probably have a premium on it. So if there is a shortage in the market and you buy 

it, it is probably more expensive than the average price. 

Senator WYDEN. That is what the GAO said as well, that supply 

disruptions would increase prices. So my question is, if a company 

could reduce the supply by exporting gas or through other means, 

I could create a shortage and increase the price. Given the difficulty of bringing in alternate supply that you have testified about, 

having a business strategy to ‘‘export to keep the market tight,’’ as 

ARCO did in the mid-1990s, would make pretty good sense for 

them, would it not? 

89

Mr. MALONE. Senator, I have not seen the memo. I do not know 

that document. One of the documents, I received a call last night 

from The Oregonian about it. I followed up and found out that that 

one particular recommendation that was attached to the Aguilar 

case they did not, ARCO did not act on that. In fact, there have 

been four judges now that have reviewed that case and found no 

collusion by ARCO. 

Senator WYDEN. Well, no, I recognize that this is a document 

that, though public, is still being considered in the legal process. 

What I am concerned about, and I went through it in my opening 

statement, is that there was by appearances certainly to a significant degree a strategy to keep the market tight and export and inevitably drive up prices on the West Coast. 

As you heard me say in my opening statement, I see an awful 

lot of parallels between ARCO then and the new entity now, which 

is why I am so troubled. 

Senator STEVENS. Would you yield just a moment? 

Senator WYDEN. Of course. 

Senator STEVENS. Did you know that was jet fuel that you were 

referring to and not crude oil? 

Senator WYDEN. Again, Mr. Chairman, we do have some questions about exactly what the fuel was used for. 

Senator STEVENS. No, no. It was jet fuel when it was exported. 

It had been refined in my State. 

Senator WYDEN. You are certain of that? 

Senator STEVENS. That is what I am told. 

Senator WYDEN. Well, again, my central interest here is not for 

more legislation. This Subcommittee has jurisdiction to really get 

to the bottom of this issue, and again, without sounding repetitive, 

it is late in the day, I think it is important to set up a process to 

examine these documents, rather than to have Senator Smith and 

I go back to the people of Oregon and say: Well, Mr. Malone is a 

good guy, he met with us, so we are going to trust him. 

I think it is especially hard to do that given he said: It is our 

business judgment; we will start exporting tomorrow if we think it 

is in our interest. We will export to Asia or South America or anywhere else. 

I thank you, Mr. Chairman. 

Senator SMITH. Thank you, Senator Wyden. 

There have been a lot of tough words used in this hearing and 

they have always been preceded by ‘‘alleged.’’ I think that is important, that we bear this in mind. Part of the purpose of this hearing 

is to bring light to an issue that just has questions to date, but I 

think there is a lot more light now. We appreciate very much, Mr. 

Malone, your testimony. 

Mr. Mau from Portland, Oregon, you are the cleanup hitter. We 

look forward to hearing where the gasoline hits the road. 

STATEMENT OF CHUCK MAU, OREGON GASOLINE DEALER,

PORTLAND, OREGON 

Mr. MAU. Thank you, Senators, for the opportunity to come here 

and testify. My name is Chuck Mau and I have been a gasoline 

dealer in Oregon for 15 years, the last 12 selling Texaco branded 

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fuel. My station is located in southwest Portland about one mile off 

of I–5. 

Less than one mile away is another Texaco station that regularly 

sells gasoline for 5 to 10 cents less than I can afford to sell. At one 

point, my competitor’s cost was 18 cents cheaper than mine, plus 

the county tax difference of 2 cents, which totaled 20. It translates 

out I could sell my fuel at cost and go broke and he still makes a 

living at 20 cents a gallon. What kind of competition is that, is my 

question. 

The reason for these price differences are I have to buy my fuel 

directly from Texaco. My competitor buys from a jobber, an independent wholesaler. The gasoline I buy and my competitor buys is 

delivered from the same terminal. Sometimes even the same truck 

delivers to me and my competitor. The same gasoline, delivered by 

the same truck, the same driver, but I get charged a higher price 

than the same station, less than one mile away. 

I tried to get wholesalers to sell to me at the price my competitor 

pays and the answer was no. They said if they did it would jeopardize their relationship with Texaco. 

The consumer does not know there is a difference in the price 

that each station pays. They just think that I am the one that is 

gouging them because I have to charge a higher price because I am 

being charged a higher price. 

Today in Oregon, a consumer can pay a lower retail price in central Oregon than the wholesale price that I pay in Portland. It 

costs more to transport gasoline to central Oregon from Portland. 

It should be cheaper in Portland. The fuel gets trucked from Portland. The consumer is really the loser, paying far more than they 

should in the Portland metro area. 

Several years ago, Texaco began to turn dealer-operated stations 

into company-operated stations. Now their operations in the Portland metro area are dominated by company-operated units. There 

are far less of us independents left today. 

I watched Texaco push out one dealer by not taking care of his 

station. They would replace the pipes, repair the furnace when they 

needed to be. The dealer finally gave up. Texaco took it, turned it 

into a company store, and made a huge investment, turned it into 

one of their Price Starmarts, run by the company. 

I have also experienced firsthand how Texaco can squeeze dealers by charging high rents for leased stations. My station was an 

Exxon station. In November 1988, it was sold to Texaco. I had no 

choice. Texaco more than doubled the rent on my station. I know 

that Texaco paid the landlord of the property it was on $1500 per 

month. They in turn charged me $6700 per month. 

Texaco also squeezes dealers out by lowering the price at their 

company-operated stations and controlling the street. During the 

fall of 1999, Texaco lowered the street price of all company stations 

in the Portland area 2 cents overnight, with no reduction in the 

wholesale cost as a factor for the move. All of a sudden, my customers are asking: Why is not your price going down? All the other 

Texacos have gone down 2 cents. Well, I cannot compete with a 

company the size of Texaco. 

It looks to me like Texaco does not want to have dealers. They 

squeeze out their dealers to get control of the entire gasoline marVerDate 0ct 09 2002 11:58 Jan 05, 2004 Jkt 088463 PO 00000 Frm 00094 Fmt 6601 Sfmt 6601 S:\WPSHR\GPO\DOCS\88463.TXT JACK PsN: JACKF
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ket, from refinery all the way down to retail. It is like we are in 

a lobster pot and they are slowly turning up the heat. We do not 

know we are getting cooked because it has been happening little 

by little. 

I worry about what Texaco is going to do next. They could put 

me in my own zone and charge me 20 cents more a gallon than my 

competition. 

I fear retribution for me testifying here today. The way things 

are going, we will only have about two brands left in Oregon. We 

will not have any more dealers, and that is not good for dealers 

and it is not good for our consumers. 

I hope that Congress will look into what is happening to the 

dealers and how there is less and less competition in the gasoline 

market. 

Thank you. 

[The prepared statement of Mr. Mau follows:]

PREPARED STATEMENT OF CHUCK MAU, OREGON GASOLINE DEALER

My name is Chuck Mau. I have been a gasoline dealer in Oregon for 15 years, 

the last 12 selling Texaco brand. 

My station is located in Southwest Portland about one mile from Interstate 5. 

Less than one mile away is another Texaco station that regularly sells the same 

gasoline for 5-6 cents less than I can afford to sell. At one point last year, my competitor was 18 cents cheaper plus there’s a 2 cent difference in county tax, making 

the total price difference 20 cents per gallon. With this 20 cent price difference, I 

could sell my gasoline at cost and still go broke. And my competitor would make 

20 cents per gallon. 

The reason for these price differences is I have to buy my gasoline from Texaco 

directly. My competitor buys from a jobber—an independent wholesaler. The gasoline I buy and my competitor buys is delivered from the same terminal. Sometimes 

even the same truck that delivers to me also delivers to my competitor. The same 

gasoline delivered by the same truck charges me a higher price than the station less 

than a mile away. It’s the same fuel in the same truck with the same driver. 

I have tried to get jobbers to sell to me at the price my competitor is getting. They 

wouldn’t. They said if they did, it would jeopardize their relationship with Texaco. 

The consumer doesn’t know there’s difference in the prices dealers pay. They 

think I’m the one who’s gouging the price. But I have to charge a higher price because Texaco is charging me a higher price than my competitor. 

Today in Oregon, a consumer can pay a lower retail price in Bend in Central Oregon than the wholesale price I pay in Portland. It costs more to transport the gasoline to Bend than to Portland. It should be cheaper in Portland than in Bend. 

There’s no way the price in Portland should be as high as it is. 

Several years ago, Texaco began to turn dealer operated stations into company operated stations. Now, Texaco’s operations in Oregon are dominated by company stations. 

I’ve watched Texaco push out one dealer by not taking care of his station. They 

wouldn’t replace the pipes when they needed to be fixed. When the dealer gave up 

the station, Texaco turned it into a company store and made the investment to fix 

it up. 

I’ve also experience firsthand how Texaco can squeeze dealers by charging high 

rents for leased stations. My station was an Exxon station. Then, in November 1988, 

my station was sold to Texaco. I had no choice. Texaco more than doubled the rent 

on the station. I know that Texaco paid the landlord $1500 per month, but they 

charged me $6700 per month. 

Texaco also squeezes dealers out by lowering the price of gasoline at their company operated stations. During the fall of 1999, Texaco lowered the price of all company stations in the Portland area 2 cents at the same time. There was no reduction 

in the wholesale price Texaco charged to dealers. A dealer can’t compete with a company the size of Texaco. 

It looks to me like Texaco doesn’t want to have dealers. They want to squeeze out 

dealers to get control of the entire gasoline market—from refinery down to the retail 

gasoline stations. 

92

It’s like we’re in a lobster pot and they’re slowly turning up the heat. We don’t 

know we’re getting cooked because it’s happening little by little. 

I worry about what Texaco will do next. They could put me into my own zone, 

charge me 20 cents more a gallon than my competition. I am sure there will be retribution against me for testifying about Texaco’s actions. 

With the way things are going, we’ll have only two brands of gasoline in Oregon. 

We won’t have any more dealers. That’s not good for dealers and it’s not good for 

consumers. I hope that Congress will look into what’s happening to dealers and how 

there’s less and less competition in gasoline markets.

Senator SMITH. It sounds like you are about cooked already. 

Mr. MAU. Yes. 

Senator SMITH. Are you familiar with the legislation in the Oregon legislature on open supply? 

Mr. MAU. Currently, yes. 

Senator SMITH. If that passes, does that help? 

Mr. MAU. Yes. It would benefit me greatly. 

Senator SMITH. Will it pass? 

Mr. MAU. Will it pass? I do not know. 

Senator SMITH. If it did pass, what assurance would consumers 

have that dealers would pass any savings along to their customers? 

Mr. MAU. Well, the way the legislation is written, I believe, in 

a divorcement issue, in an open contract it would divorce the refineries from having more than 25 percent company-owned stations in 

the marketplace, which in the Portland metro area would gather 

quite a few more units up for lease by dealers. 

Senator SMITH. Is there anything that you think this Congress 

should do that could be helpful to you? 

Mr. MAU. I think looking into that red-lining and the zone pricing is a big issue. 

Senator SMITH. You think that one of the reasons 600 stations 

have disappeared is what you are experiencing? 

Mr. MAU. Yes. 

Senator SMITH. Senator Wyden. 

Senator WYDEN. Thank you, Mr. Chairman. 

Chuck, first thanks for coming. I have done a lot of work on consumer rights issues over the years, really going back to my days 

when I was director of the Grey Panthers. I do not think I have 

ever seen a small business sector like yours as frightened as the 

small gas stations are about their relationship with the suppliers. 

I have been out talking to the small service stations now for over 

2 years and the very first thing that they tell me when I talk about 

taking notes and getting it down is they say: Ron, I am really worried about retaliation. 

Are you worried that you are going to face retaliation for coming 

to the U.S. Senate today? 

Mr. MAU. Yes, I am. 

Senator WYDEN. What are you worried about? 

Mr. MAU. I am worried about my supply. I am worried about how 

transactions get taken place with electronic funds transfers and applying of credit cards, and also my price. I have watched as zone 

pricing—Texaco did not used to do that. But a few years ago they 

started that. It used to be an east and west, and then all of a sudden it got down smaller and smaller, and I see it going smaller and 

smaller and ending up being station by station. That is the way I 

see it could go to. It is very close now. 

93

Senator WYDEN. Does that affect your livelihood? When a small 

station like yours comes to the Congress or the legislature, you are 

basically taking the livelihood and your well-being in your hands 

by coming and speaking the truth? 

Mr. MAU. Well, I am coming here with several other Texaco dealers knowing that I am here, and trying to speak out for what is 

going on there in the State of Oregon. 

Senator WYDEN. You say in your statement that you are paying 

more for the gas you buy from Texaco than other dealers are. How 

did you go about coming to that conclusion? 

Mr. MAU. Well, we get e-mails every day or faxes on our prices, 

what it is going to be for the next day. 

Senator WYDEN. You have invoices showing? 

Mr. MAU. Yes. I have provided you with the invoices showing one 

Texaco retailer who is a lessee dealer at one unit and a wholesalersupplied in another unit, and on the same day in December of last 

year the price differential was 15.4 cents for the same gasoline. 

Senator WYDEN. When you bring this to Texaco’s attention, this 

huge price differential, what do they say? 

Mr. MAU. Nothing. 

Senator WYDEN. They do not even try to——

Mr. MAU. No. I have talked to my rep about it and there is nothing we can do. At one point, I e-mailed my dissatisfaction with that 

procedure, price differential—I call it price discrimination—and my 

Texaco rep showed up the very next day and he was halfway out 

of his car asking me: Chuck, who did you send that e-mail to? 

Senator WYDEN. You are not the only dealer charged these higher prices or with what certainly does it seem to you to be discriminatory prices? 

Mr. MAU. No, I am not. 

Senator WYDEN. You have got others? 

Mr. MAU. Yes. There is a gentleman in Salem—Salem is dominated by a wholesale market and he is a lessee dealer and he has 

to buy his fuel directly from Texaco. Well, it comes out of Portland. 

He pays the Portland price. He is surrounded by wholesale-operated stations, wholesale-supplied stations, company-run stations by 

Chevron, consistently pricing 10 to 15 cents below him. What kind 

of competition is that? 

Senator WYDEN. I think you have summed it up. We have been 

talking about theories for over 3 hours. Chairman Pitofsky told me 

he found in his opinion substantial evidence of red-lining. Mr. Malone says he will resume exporting whenever he feels like it. But 

you are the human face on it. 

You are the human face that I have been talking to over the last 

2 years. It is why I feel so strongly about this subject. 

I just want to wrap this up by expressing my gratitude to Senator Smith for being willing to work with me on this on a bipartisan basis, because I think at the end of the day what we are talking about, I do not think we need to pass new laws. This is not an 

area where you have got to run around and pass new laws and 

have new bills. What you have got to do is try to bring some free 

enterprise and marketplace forces back to this industry in Oregon, 

so people like you can go do your thing and give good service to 

94

the people of Oregon. That is what I am committed to doing. I am 

glad you put a human face on this to wrap it up. 

I thank you, Mr. Chairman. 

Senator SMITH. Thank you, Senator Wyden. 

Senator Stevens. 

Senator STEVENS. I went to Oregon State before any of you were 

born. Maybe I am missing the point here, Mr. Mau. Are you telling 

me these people are charging less money than you are charged for 

gasoline? 

Mr. MAU. Yes. 

Senator STEVENS. And the consumers from those stations are 

paying 12 to 15 cents less a gallon? 

Mr. MAU. Sometimes. 

Senator STEVENS. I thought this was the Consumer Subcommittee. Is there a complaint that some people in Oregon are 

getting gasoline cheaper, priced below what you can sell it for? I 

do not quite get the point, Senator. If you want to talk something 

about collusion or something, that usually is associated with raising consumer prices. There seems to be objection here that someone 

can sell gasoline in Portland for less price than Mr. Mau can sell 

it. 

Is that your objection, Mr. Mau? 

Mr. MAU. My objection is that there is no way for me to compete 

and the consumer can drive right by my station and see the red 

and the black and the white and drive right down the street. 

Senator STEVENS. And get gasoline for less money. 

Mr. MAU. Yes, and I would like to be able to sell it. 

Senator STEVENS. That is free enterprise as far as I am concerned. I thought we were trying to protect the consumer in this 

Subcommittee. 

Senator WYDEN. Would the Chairman just yield briefly? 

Senator STEVENS. Sure. 

Senator WYDEN. What Mr. Mau is saying is he would like the 

same deal as that guy down the street, and that when Mr. Mau 

gets the same deal as the guy down the street, then we can have 

the kind of competition that Chairman Stevens wants and that I 

want, too. 

Senator STEVENS. Well, I would like to be able to buy gasoline 

for the price you can buy it in Oregon. We produce the oil, but we 

pay more for gasoline than you do. 

Thank you very much. I am sorry, Mr. Mau. I understand your 

situation, but I do not think that it is a consumer matter. Consumers ought to be happy to be able to drive by your station and 

buy it for less money. I will tell you, if I was buying gasoline I 

would drive right by you, because I buy the lowest priced gasoline. 

I am sorry to say, I think you are off the mark. 

Senator SMITH. I think, Chuck, your point is that you would like 

to be able to buy it at a price that is competitive as well. 

Mr. MAU. I would like to be able to buy it at the lowest price, 

so that I can offer it, because the way I view competition is that 

in the gasoline market, when you price gasoline you decide, I am 

going to sell it cheaper than that guy down the street, because you 

would like to sell it, so you do it, because I want to sell the gallons. 

95

Obviously, the oil companies, as well as me, like to move the gallons. 

Senator SMITH. But you feel trapped, obviously? 

Mr. MAU. Obviously. 

Senator SMITH. You must have felt pretty desperate to come to 

this Subcommittee knowing that retribution could be taken against 

you. 

Mr. MAU. The other issue that I think is involved here is, in the 

Portland metro area all the people that live there are consistently 

paying 15 cents a gallon more than in the central part of the State. 

80 percent of the population of Oregon lives in that 5-county area 

and we have the highest prices in the State there. It has to be 

trucked everywhere else. 

The consumer in the Portland metro area is the loser, not me. 

Senator SMITH. A reasonable question. Mr. Mau, thank you. I 

think Senator Wyden and I would be very interested to know if you 

suffer any retribution for appearing before a Subcommittee of the 

U.S. Senate. We would hate to see that and would not be amused 

by it at all. So we hope you will stay in touch. 

Mr. MAU. Thank you. 

Senator SMITH. Ladies and gentlemen, we are appreciative of 

your attendance, your participation, your testimony. We hope there 

is more light now, less heat, but hopefully, prices we can all afford 

this summer. 

We are adjourned. 

[Whereupon, at 6:07 p.m., the hearing was adjourned.] 

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APPENDIX

PREPARED STATEMENT OF HON. JEAN CARNAHAN,

U.S. SENATOR FROM MISSOURI

Thank you, Mr. Chairman, I welcome this opportunity to be with you, our fellow 

Committee members and distinguished guests to participate in this important hearing. 

Although our focus here today is on the price of gas on the West Coast, this is 

an issue that affects all of us nationwide, no matter where we reside. 

As you know, I have been in office only a few short months. However, I have received hundreds of phone calls and letters from angry and distraught constituents 

in Missouri who, like your constituents in Oregon, California or most anywhere on 

the West Coast, are faced with the somewhat painful reality of today’s national energy market. 

Many consumers have experienced sharp increases in the prices of gasoline, natural gas, home heating oil and electricity. Many in Missouri who use natural gas 

are paying double and triple what they paid last year to heat their homes and businesses. The cost of a gallon of unleaded, self-serve regular gasoline in the St. Louis 

area has shot up from $1.31 to $1.69. That’s 38 cents in less than 4 weeks. 

And with the high-demand summer season less than 5 weeks away, we are hearing that we should brace ourselves for more price spikes in the near future. 

These price spikes, combined with the crisis in California and the current debate 

about a national energy policy, have left many consumers surprised and angry about 

energy costs and anxious about the immediate future. 

Further complicating this issue and contributing to consumer unease are reports 

in the media about the possibility of companies intentionally manipulating the oil 

and gas markets to strategically benefit from certain market conditions. 

These types of allegations are of great concern to all of us nationwide. We would 

like to believe that, in the complicated world of energy transactions, we have a 

structure in place that would look out for the general public and would protect the 

interests of working families, our elderly on fixed incomes, and others who often 

struggle to make ends meet. 

As many of you may know, Senator Lieberman and I, on behalf of a number of 

our colleagues on the Governmental Affairs Committee, recently wrote to the General Accounting Office to express our concern about recent reports that market 

power has been abused in the transmission of natural gas in California. It is alleged 

that this, in turn, has contributed to the spiraling cost of electricity generation in 

the state. 

We have asked Mr. Wells and his colleagues at the GAO to use their oversight 

authority to review whether the Federal Energy Regulatory Commission, or FERC, 

is up to the task of protecting consumers and safeguarding the public interest as 

it works to promote competitive energy markets. 

Although this review will take some time, I hope that anything we learn from the 

GAO review will help us position ourselves to better handle changes not only in the 

natural gas market, but in all of our energy markets. 

In that light, I hope our review today of West Coast gas prices will help us as 

well. I look forward to hearing from each of you. 

Mr. Chairman and Senator Wyden, I thank both of you for calling for this hearing 

today and look forward to working with the Subcommittee on an ongoing basis to 

review this issue that affects us all. 

PREPARED STATEMENT OF THE SEAFARERS INTERNATIONAL UNION

OF NORTH AMERICA, AFL-CIO 

Mr. Chairman and Members of the Committee: The Seafarers International Union 

of North America, AFL-CIO, shares the concerns of the members of this panel regarding the rising cost of fuel on the West Coast of the United States and appreVerDate 0ct 09 2002 11:58 Jan 05, 2004 Jkt 088463 PO 00000 Frm 00101 Fmt 6601 Sfmt 6621 S:\WPSHR\GPO\DOCS\88463.TXT JACK PsN: JACKF
98

ciates the opportunity to share our thoughts on this most pressing issue. The SIU 

represents the unlicensed crew on U.S.-flag vessels engaged in all aspects of the Nation’s waterborne commerce. A number of our members are employed by U.S.-flag 

vessel operators engaged in the U.S. West Coast shipping trades and live with their 

families in port communities in California, Oregon, Washington and Alaska. Like 

other Americans, our members have been faced with high home-heating costs and 

high prices at the gasoline pumps and personally feel their wallets and checkbooks 

pinched each time they fill up their cars or pay their monthly energy bills. 

The energy difficulties we face today are not new. Over the last 30 years, Americans have witnessed firsthand fluctuating energy prices, long gas lines at the 

pumps, OPEC production cutbacks, and even the engagement of our troops in a war 

in the Persian Gulf in an effort to protect vital energy interests. Time and again, 

we have heard the Congress and the Administration speak of the need for a revitalized national energy policy. As we begin the 21st Century, the SIU joins concerned 

Members of Congress and the Administration in calling for a re-examination of our 

long-term energy goals. It is time that the Nation formulates a program that will 

ensure energy independence to future generations. 

The SIU’s expertise is in the maritime industry and therefore we do not suggest 

that we are experts in energy policy. However, at home we are consumers of the 

product and at work we are often engaged in its transport. As such, we take a great 

interest in national policy as it impacts our daily lives. In our view, a number of 

factors have coalesced to result in the escalating fuel prices the Nation is presently 

encountering. In recent testimony before the Senate Energy and Natural Resources 

Committee, the National Association of State Energy Officials pointed out that the 

Nation’s energy infrastructure (e.g., production capacity, refinery utilization, pipeline capacity and terminal storage) is stretched to its limits. Historically low energy 

product inventories have been coupled with tremendous price volatility over the last 

2 years. While benefiting from downward price swings as low as $11 per barrel of 

oil in 1998, consumers were faced with historically high heating fuel and gasoline 

prices a year later. Adding to the high costs of energy products in the United States 

are actions recently taken by the OPEC nations. In March, OPEC members agreed 

to reduce production quotas an additional one million barrels per day effective April 

1st. This follows an earlier production quota cut of 1.5 million barrels per day announced at the beginning of this year. Unfortunately, these actions will not result 

in price reductions for the average American, but most likely will result in higher 

prices to drive our cars and cool our homes during the upcoming hot summer 

months. 

Recently, some Members of Congress have suggested that the House of Representatives and the Senate adopt legislation prohibiting the export of Alaska North Slope 

oil as one way to address the Nation’s high energy costs. The SIU does not agree 

with that position. Since the ban on exports was lifted in 1995, only about 5 percent 

(60,000 barrels per day) of all Alaska North Slope oil has been exported. In fact, 

since June 2000 exports of Alaska crude oil have stopped and are not expected to 

resume in the near future. A 1999 Government Accounting Office (GAO) report 

found that ‘‘lifting the export ban generally had limited effects on refiners, consumers, and the shipping industry on the West Coast.’’ While finding that lifting 

the export ban raised the relative price of Alaska North Slope oil for refiners, higher 

market prices have given oil producers more incentive to develop new oil fields. In 

addition, despite higher crude oil prices for some refiners, the GAO report found 

that ‘‘no observed increases occurred in the prices of three important petroleum 

products used by consumers on the West Coast—gasoline, diesel, and jet fuel.’’ The 

GAO also concluded in its 1999 report that ‘‘future production should increase because the ban was lifted.’’ It is understandable that concerned Members of Congress 

are looking at the ability to export Alaska oil as a. threat to their constituents’ energy well being. When the Congress began contemplating legislation in the mid1990s, the SIU was apprehensive at first, as there was minimal communication between the seafaring unions and its contracted-tanker companies and the oil companies. However, we became convinced after discussions with BP that a change in policy would reverse the decline in oil production and would be in the national good 

and to the benefit of our membership. Through the requirement that exported oil 

must be transported on U.S.-flag tankers, we were able to retain and improve the 

jobs of U.S. seafarers. Working closely with BP over the last several years, the SIU 

has the highest respect for the BP management team as they are of high integrity 

and committed to their word. 

The 107th Congress and the Bush Administration face rather difficult energy policy challenges. The SIU is pleased that members from both sides of the aisle have 

focused on this complex issue and have introduced comprehensive legislation for discussion and debate. We are gratified that the Bush Administration has created a 

99

cabinet-level task force and look forward to their recommendations in the very near 

future. The SIU pledges to work with the Congress to develop a balanced energy 

policy—a policy that addresses supply side needs by promoting responsible oil and 

gas development and incentives for the development of renewable energy sources 

with a policy that addresses demand side issues concerning energy efficiency and 

conservation. With all parties working together, a reasonable and realistic national 

energy policy can be a gift we present to the next generation.

Æ