GASOLINE: SUPPLY, PRICE, AND 

SPECIFICATIONS 

HEARINGS 

BEFORE THE 

COMMITTEE ON ENERGY AND 

COMMERCE 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED NINTH CONGRESS 

SECOND SESSION 

MAY 10 AND MAY 11, 2006 

Serial No. 109-94 

Printed for the use of the Committee on Energy and Commerce 

Available via the World Wide Web: http://www.access.gpo.gov/congress/house 

U.S. GOVERNMENT PRINTING OFFICE 

WASHINGTON : 2006 

For sale by the Superintendent of Documents, U.S. Government Printing Office 

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29-387PDF 
COMMITTEE ON ENERGY AND COMMERCE 

JOE BARTON, Texas, Chairman 

RALPH M. HALL, Texas 

MICHAEL BILIRAKIS, Florida 

 Vice Chairman 

FRED UPTON, Michigan 

CLIFF STEARNS, Florida 

PAUL E. GILLMOR, Ohio 

NATHAN DEAL, Georgia 

ED WHITFIELD, Kentucky 

CHARLIE NORWOOD, Georgia 

BARBARA CUBIN, Wyoming 

JOHN SHIMKUS, Illinois 

HEATHER WILSON, New Mexico 

JOHN B. SHADEGG, Arizona 

CHARLES W. “CHIP” PICKERING, Mississippi 

 Vice Chairman

VITO FOSSELLA, New York 

ROY BLUNT, Missouri

STEVE BUYER, Indiana 

GEORGE RADANOVICH, California 

CHARLES F. BASS, New Hampshire 

JOSEPH R. PITTS, Pennsylvania 

MARY BONO, California 

GREG WALDEN, Oregon 

LEE TERRY, Nebraska 

MIKE FERGUSON, New Jersey 

MIKE ROGERS, Michigan 

C.L. “BUTCH” OTTER, Idaho 

SUE MYRICK, North Carolina 

JOHN SULLIVAN, Oklahoma 

TIM MURPHY, Pennsylvania 

MICHAEL C. BURGESS, Texas 

MARSHA BLACKBURN, Tennessee 

JOHN D. DINGELL, Michigan 

 Ranking Member 

HENRY A. WAXMAN, California 

EDWARD J. MARKEY, Massachusetts 

RICK BOUCHER, Virginia 

EDOLPHUS TOWNS, New York 

FRANK PALLONE, JR., New Jersey 

SHERROD BROWN, Ohio 

BART GORDON, Tennessee 

BOBBY L. RUSH, Illinois 

ANNA G. ESHOO, California 

BART STUPAK, Michigan 

ELIOT L. ENGEL, New York 

ALBERT R. WYNN, Maryland 

GENE GREEN, Texas 

TED STRICKLAND, Ohio 

DIANA DEGETTE, Colorado 

LOIS CAPPS, California 

MIKE DOYLE, Pennsylvania 

TOM ALLEN, Maine 

JIM DAVIS, Florida 

JAN SCHAKOWSKY, Illinois 

HILDA L. SOLIS, California 

CHARLES A. GONZALEZ, Texas 

JAY INSLEE, Washington 

TAMMY BALDWIN, Wisconsin 

MIKE ROSS, Arkansas 

BUD ALBRIGHT, Staff Director 

DAVID CAVICKE, General Counsel

REID P. F. STUNTZ, Minority Staff Director and Chief Counsel

(II)
CONTENTS 

Page 

Hearings held: 

May 10, 2006...................................................................................................................... 1 

May 11, 2006....................................................................................................................... 127 

Testimony of: 

Gruenspecht, Howard K., Deputy Administrator, Energy Information Administration, 

U.S. Department of Energy........................................................................................... 31 

Wehrum, William, Acting-Assistant Administrator, Office of Air and Radiation, U.S. 

Environmental Protection Agency................................................................................. 40 

Sundstrom, Geoff, Director of Public Affairs, American Automobile Association .......... 87 

Cooper, Dr. Mark, Research Director, Consumer Federation of America......................... 93 

Wilkins, John R., Executive Vice President & CIO, Delaware Valley Wholesale 

Florists, on behalf of Society of American Florists....................................................... 99 

Cavaney, Red, President, American Petroleum Institute.................................................... 131 

Dinneen, Bob, President and CEO, Renewable Fuels Association.................................... 146 

Slaughter, Bob, President, National Petrochemical & Refiners Association..................... 153 

Becker, S. William, Executive Director, State and Territorial Air Pollution Program 

Administrators/Association of Local Air Pollution Control Officials .......................... 169 

Reid, Paul D., President, Reid Petroleum Corporation, on behalf of National 

Association of Convenience Stores and Society of Independent Gasoline Marketers 

of America...................................................................................................................... 174 

Shea, William H., President & CEO, Buckeye Partners, LP, on behalf of Association 

of Oil Pipelines............................................................................................................... 182 

Conley, John, President, National Tank Truck Carriers, Inc.............................................. 192 

Additional material submitted for the record: 

Cooper, Dr. Mark, Research Director, Consumer Federation of America, response for 

the record........................................................................................................................ 119 

Sundstrom, Geoff, Director of Public Affairs, American Automobile Association, 

response for the record ................................................................................................... 120 

Wehrum, William, Acting-Assistant Administrator, Office of Air and Radiation, U.S. 

Environmental Protection Agency, response for the record.......................................... 121 

Becker, S. William, Executive Director, State and Territorial Air Pollution Program 

Administrators/Association of Local Air Pollution Control Officials, response for 

the record........................................................................................................................ 261 

Cavaney, Red, President, American Petroleum Institute, response for the record............. 264 

Slaughter, Bob, President, National Petrochemical & Refiners Association, response 

for the record .................................................................................................................. 268 

Reid, Paul D., President, Reid Petroleum Corporation, on behalf of National 

Association of Convenience Stores and Society of Independent Gasoline Marketers 

of America, response for the record............................................................................... 271 

Dinneen, Bob, President and CEO, Renewable Fuels Association, response for the 

record.............................................................................................................................. 275 

(III) 

(1) 

GASOLINE: SUPPLY, PRICE, AND 

SPECIFICATIONS 

WEDNESDAY, MAY 10, 2006 

HOUSE OF REPRESENTATIVES, 

COMMITTEE ON ENERGY AND COMMERCE, 

Washington, DC. 

 The committee met, pursuant to notice, at 10:00 a.m., in Room 2123 

of the Rayburn House Office Building, Hon. Joe Barton (chairman) 

presiding. 

 Members present: Representatives Barton, Hall, Gillmor, Norwood, 

Cubin, Shimkus, Wilson, Shadegg, Buyer, Radanovich, Bass, Pitts, 

Bono, Walden, Terry, Rogers, Otter, Myrick, Sullivan, Burgess, 

Blackburn, Dingell, Waxman, Markey, Boucher, Brown, Eshoo, Stupak, 

Wynn, Green, Capps, Schakowsky, Solis, Gonzalez, Inslee, Baldwin, and 

Ross. 

 Staff present: David McCarthy, Chief Counsel for Energy and 

Environment; Margaret Caravelli, Counsel; Maryam Sabbaghian, 

Counsel; Sue Sheridan, Minority Senior Counsel; Bruce Harris, Minority 

Professional Staff Member; Lorie Schmidt, Minority Counsel; and Peter 

Kielty, Legislative Clerk. 

CHAIRMAN BARTON. The committee will come to order. The Chair 

recognizes himself for an opening statement. Today the committee 

begins two days of examining gasoline supply, price, and specifications. 

Just last week we completed another painful seasonal transition from 

winter gasoline to summer gasoline production at our Nation’s refineries. 

Early May is always a tough time for drivers, but this year has been 

especially difficult. As storage tanks have gone down with the old 

gasoline, prices have shot up, in some cases to all-time records. If that 

wasn’t enough, some people couldn’t buy gasoline at any price in their 

neighborhood. I know that because I was one of them up here in my 

condo in Arlington, Virginia. 

 Gasoline markets are complicated. The price is driven by many 

factors, but mostly it is the old standby of supply and demand. We 

consume about 12 million barrels of fuel in the United States every day. 

We have invited the experts today; the regulators, the producers, the 

suppliers, the transporters, the retailers, and the consumers of gasoline to 

explain what goes on from the time a barrel of oil is brought into a 

refinery to the point where you and I put it in our cars and trucks at our 

Nation’s gas pumps. The world crude oil pricing hearing last week that 
2

this committee held reminds everyone that the U.S. government cannot 

dictate worldwide crude oil prices. Developments in other parts of the 

world have brought the price of crude to $75 a barrel and when that 

happens, there is an inevitable increase in the price of gasoline that we 

pay at the pump. 

 When the price of one changes, i.e., crude oil in the world market, 

the price of the other, i.e., retail price of gasoline follows. More than 

half of the price of a gallon of gasoline is determined by the price of 

crude oil. Domestically, our gasoline production supply and delivery 

system is still recovering from the devastating effects of Hurricanes 

Katrina and Rita and is undergoing a major transition in gasoline 

formulation as we have taken MTBE off the market and are trying to 

replace it with either ethanol or reformulated gasoline. Coupled with this 

is the annual transition that I have already talked about. 

 Most fuels move across the country inside pipelines, but ethanol and 

the fuels blended with ethanol can’t do that. They move in rail cars and 

tanker trucks. Increasing our domestic ability to produce and deliver the 

finished product of ethanol enhanced gasoline, America is trying to find 

a new way to do something that it hasn’t done, as a Nation, across the 

continental United States. In the energy bill that we passed last year, we 

did many things on, what I call, the non-mobile energy side to help our 

Nation’s energy future in areas like clean coal and nuclear power and 

LNG siting facilities for new natural gas supplies. 

 We need to do things on the mobile supply side that will help the 

drivers of our cars and trucks. These include, in my opinion, opening up 

some of our domestic areas when we still have potential for large 

amounts of oil and gas to be discovered, including ANWR and OCS, and 

I believe we also need to streamline the requirements to permit new 

refineries or to expand existing refineries in our country. So today we 

are going to begin the process of determining exactly how to do that. We 

are going to, while we try to integrate ethanol into our Nation’s fuel 

supply, as we move from MTBE to ethanol. So I am going to look 

forward to hearing the testimony of our witnesses and today will be one 

of many hearings we have in the next month to get the facts on the table 

to the American people. 

 With that, I would be happy to recognize the Ranking Member of the 

Energy and Air Quality Subcommittee, Mr. Boucher of Virginia, for an 

opening statement. 

 [The prepared statement of Hon. Joe Barton follows:] 
3

PREPARED STATEMENT OF THE HON. JOE BARTON, CHAIRMAN, COMMITTEE ON ENERGY 

AND COMMERCE

Good morning. Today the Committee begins two days of examining gasoline 

supply, price and specifications. Just last week, we completed another painful transition 

from winter gasoline to summer gasoline. Early May is always a tough time for drivers, 

but it was downright painful this year. As storage tanks were drained, prices shot up. If 

that weren’t enough, some people couldn’t buy gasoline at any price in their 

neighborhood stations. I know because was one of them. 

Gasoline markets are complicated. The price is driven by many factors, but mostly 

the old standby of supply and demand. We consume about 10 million barrels of fuel in 

the United States every day. In the course of this hearing, America will use about 20 

million barrels. We have invited the experts: the regulator, the producer, the supplier, the 

transporter, the retailer and the consumer of gasoline to this hearing to explain exactly 

what goes on from the time a barrel of oil is brought into a refinery to the point where 

you and I pump fuel into our cars and trucks. 

The World Crude Oil Pricing hearing last week reminded everyone that the U.S. 

government cannot dictate crude oil prices. With major developments in other parts of the 

world bringing the price of crude to $75 a barrel, there is an inevitable and corresponding 

increase in the price of gasoline at the pump. When the price of one changes, the price of 

the other follows. More than half of the price of a gallon of gasoline is determined by the 

price of crude oil. Domestically, our gasoline production, supply, and delivery system is 

still recovering from the devastating effects of hurricane Katrina and undergoing a major 

transition in gasoline formulation by moving from MTBE to ethanol. Coupled with this 

is the annual transition from winter to summer grade gasoline. 

Most fuels move across the country inside pipelines. But ethanol and fuels blended 

with ethanol move in railcars and tanker trucks. Increasing our domestic ability to 

produce and deliver finished product, whether it be gasoline or diesel fuel, is America 

taking control of its energy future. The bipartisan Energy Policy Act passed last year was 

a critical step in the right direction. However, many of us in the Republican Party 

continue to pursue policies that would expand our energy supply and capacity. 

Unfortunately some of the most important, including ANWR, OCS, and the streamlined 

permitting of refineries, continue to be blocked by those who believe families can fill 

their tanks with excuses instead of affordable gasoline. 

They say there a no easy fix, but while we integrate ethanol into the nation’s fuel 

supply, any transitional measure that may alleviate the pressure on price should be 

welcomed and seriously considered. Congressman Shadegg’s bill, the Ethanol Tax 

Relief Act of 2006, which I cosponsored, would suspend until January 1, 2007 the 2.5 

percent tariff and 54 cent per gallon duty on imported ethanol. 

 Another logistical hurdle to the delivery of the nation’s fuel supply is the existence 

of a number of specialty fuels, commonly known as “boutique fuels.” The passage of the 

Clean Air Act Amendments of 1990 established the Reformulated Gasoline Program 

(RFG) for areas with severe air pollution. Areas not required to participate in the RFG 

program saw the environmental value of using a cleaner fuel, but were concerned with 

the higher cost associated with RFG. Another provision included in the Clean Air Act 

Amendments of 1990 permitted states to seek EPA approval for boutique fuels that 

would bring benefits similar to RFG, but for less cost. Twelve states have taken 

advantage of this provision. 

 In the Energy Policy Act of 2005 we capped the number of boutique fuels to those 

approved as of September 1, 2004 and required the EPA, in consultation with DOE, to 

determine and publish a list of those boutique fuels. I look forward to hearing from EPA 

today as to the status of that list. However, we need to learn from this hearing what this 

balkanization is doing to the delivery and price of fuel. 
4

Understanding how fuel supply and specifications affect price may shed light on steps 

Congress can take against price spikes while also advancing the cause of clean air. I 

expect to hear more today on the recent transitions our fuel supply chain has undertaken 

and a complete description of boutique fuels. 

We invited today’s witnesses to help us understand gasoline price, supply and 

specifications. Again, I would like to thank the witnesses for coming. 

 MR. BOUCHER. Well, thank you very much, Mr. Chairman. I 

commend your decision to conduct a series of hearings, today and 

tomorrow, on gasoline supply and pricing, a major concern of all 

Americans. A thorough understanding of a variety of factors affecting 

the gasoline market is the key to our ability to act thoughtfully, to 

address the national concern over gasoline prices. These hearings can 

lead to that understanding. Frequently mentioned among the factors 

leading to high crude oil prices are the dramatic growth of the economies 

of both China and India and political instability in certain oil producing 

regions. The price of crude oil carries an Iran risk component and a 

lesser Nigerian risk component; and I am interested this morning in 

learning to what extent prices are affected by these and perhaps other 

political risks. 

 But beyond crude oil pricing, another major contributor to high 

prices at the pump is our restrained refining capacity. Globally, the 

refinery utilization rate exceeds 90 percent of capacity and we have 

constrained refining capacity domestically. We are currently importing 

refined gasoline from other countries. We don’t have enough capacity in 

the U.S. to refine the gasoline that we consume in this country. Under 

current global and domestic refining restraints, any disruption in refinery 

operations drives up gasoline prices dramatically. We are operating on a 

truly thin margin. 

 I think, Mr. Chairman, you would agree that there is a consensus in 

this committee that more domestic refining capacity is needed and that 

we should diversify refinery locations throughout the country so that 

another major hurricane along the Gulf Coast does not dramatically 

reduce the flow of refined product to market and dramatically escalate atthe-pump prices. While we agree on the need for more refineries, I think 

we do differ on the method needed to obtain them. The bill that was 

debated on the floor last week would have overridden State 

environmental permitting processes based upon the assumption that 

environmental permitting obstacles have prevented new refinery 

construction. 

 The record before this committee, however, is devoid of any 

evidence that supports the assumption, that the reason that we don’t have 

more refinery construction is State permitting processes. In fact, the 

CEOs of major refining companies have testified to the Congress that 
5

State permitting is not a barrier to new refinery construction or to the 

expansion of existing refineries. The bill which the House put aside last 

week was not the answer. A more thoughtful approach is needed. This 

week, Mr. Dingell and I are introducing legislation which will make a 

genuine difference in relieving our restrained refinery capacity. 

 We seek to build upon the well-established and highly successful 

strategic petroleum reserve by creating a strategic refinery reserve for use 

in terms of times of emergency. Just as the strategic petroleum reserve 

has been an excellent shock absorber in times of crude oil supply 

disruption, we propose a national refinery reserve for use when a 

hurricane or other extraordinary event disrupts the supply of gasoline to 

markets in the United States. During normal times, the strategic 

refineries would produce gasoline for governmental use; during times of 

emergency, they would supply gasoline to the commercial market. 

 At a time when the public is looking to the Congress for answers, 

Mr. Dingell and I are offering a measure based upon a proven model that 

will make, I suggest, a genuine difference. I would welcome comments 

from our witnesses today and tomorrow on this proposal. And Mr. 

Chairman, I invite your careful review of it as we move forward. We 

would welcome a bipartisan effort to employ the same means through 

which we solved the problem of crude oil disruptions to solve the 

problems which will arise from future disruptions in the flow of refined 

gasoline. 

 Mr. Chairman, I appreciate your scheduling these hearings, and I 

very much look forward to what our witnesses will say to enlighten us on 

the problems relating to gasoline supply and pricing both today and 

tomorrow. Thank you. I yield back. 

 CHAIRMAN BARTON. We thank the distinguished Member from 

Virginia for that statement. Mr. Norwood. 

 MR. NORWOOD. Thank you very much, Mr. Chairman, for having 

this hearing on gas supply and how critically important that is. Gas 

prices are critical to our constituents and they are paying amounts. But 

just as important, gas and energy prices are critical to our economy and 

job creation. We all know the stories and the statistics of record 

increases and record prices. True also is that we know about record 

profits and record severance packages, but that really isn’t the reason we 

are here today. Today we are here to examine probably the single most 

important source of the problem and that is supply. 

 The debt-based U.S. economy has grown and demanded more fuel 

for the jobs we all say we want to see created and sustained. 

Increasingly, however, that demand was met by OPEC and other 

international oil producers. Sixty percent of our energy is now imported. 

Our energy future remains in the clutches of the OPEC cartel, at the 
6

whims of an Iranian radical, at the mercy of political unrest and civil 

wars in Africa, and at the beck and call of dictators in South America. It 

is no wonder the American people are upset. Neither they nor I accept 

the answer that oh, nothing can be done. 

 I think we all have a right to be frustrated, frustrated that some folks 

oppose a reasonable and balanced energy bill and still find time to decry 

energy prices. These same folks oppose any new domestic exploration 

and development time and time again. They oppose the development of 

nuclear and other sources of energy. They oppose the ability of 

refineries to expand and eliminate a bottleneck in our fuel supply, and 

they oppose even renewable energy off the coast. It seems to me having 

a United States refinery run by FEMA is not the answer. Energy prices 

skyrocketed because someone’s favorite vacation or wind surfing site 

might have a renewable wind energy project offshore. 

 But apparently, we can tax, which is a usual solution. Speaking of 

taxes, the Congressional Research Service noted that opening ANWR to 

just limited development would result in somewhere between $111 and 

$178 billion in new taxes and royalties. So we can’t drill, we can’t 

diversify, we can’t expand, and we can’t compete, and now we can’t 

afford the gas to go to the store or the baseball game or to the school. 

These positions are simply unsustainable. We, as a Congress, simply 

have to accept that every energy bill that comes out can’t be written 

individually by each of us. And you may not like exactly the energy bills 

that have been coming out, but the majority do and they need to get 

passed. 

 Mr. Chairman, with that, I yield back my time. 

 CHAIRMAN BARTON. We thank the gentleman. The Ranking 

Member of the full committee, Mr. Dingell, is recognized for 5 minutes. 

 MR. DINGELL. Mr. Chairman, I thank you for your courtesy and I 

thank you for holding this important hearing. Less than one year after 

Hurricanes Katrina and Rita caused some of the highest gasoline prices 

the country has seen, we are still in the midst of a struggle to understand 

the cause of high prices and determine what, if anything, the 

Administration or the Congress can do to remedy the problem. The 

Administration has been laggard in implementing the important 

provisions in the Energy Policy Act of 2005. Prices have now risen to a 

nationwide level of $2.95 per gallon, our highest level since the 

hurricanes struck, and Americans are feeling the pain. 

 The American Automobile Association estimates that current prices 

will lead an average American family to spend an additional $1,260 more 

for gasoline than they would have at January’s price levels. For many 

families, this is not an insignificant amount, especially following a winter 

of high heating costs. For some families, the costs of energy puts them 
7

in dire financial straits. I do believe it would have been far better if the 

House had taken up Representative Stupak’s price gouging bill last fall 

instead of waiting until last week to tackle this issue. It would also have 

been better if the Administration’s 2007 fiscal year budget request had 

been funded fully with regard to energy conservation, efficiency, and the 

renewable provisions of the Energy Policy Act of 2005. At this late date, 

the ability of Congress to have an immediate impact upon gas prices is 

extremely limited. 

 I think it is important to have hearings so that we can understand the 

facts and fully decide whether and how to legislate, and for that reason I 

commend you, Mr. Chairman. In fact, before we have a vote on refinery 

legislation on the House floor again, I hope that this committee will hold 

hearings and respond to the requests of State and local governments to 

testify about their permitting processes because this is an extremely 

important part of the questions before us with regard to price and supply. 

We know that the cost of crude oil has a significant impact on the price 

of gasoline and we have explored this aspect to pricing in last week’s 

hearings. 

 I look forward to the testimony from the witnesses today about 

whether the reforms adopted in the Energy Policy Act of 2005 have been 

implemented and whether they are working. I am particularly interested 

in hearing about the boutique fuel provisions of the Energy Policy Act of 

2005, which I support, that limited the number of boutique fuels, 

required the Environmental Protection Agency, EPA, and the 

Department of Energy to publish a list of current fuels, and required a 

study as to whether further legislative action is necessary. The law 

required the EPA to meet with interested parties to study this matter and 

to report to the Congress by this August, but just last week, EPA 

announced that it was taking a belated “first step” to engage the States in 

a dialogue over the issue. I think they have to explain why they have 

been so dilatory in this matter. 

 I want to know what EPA is doing and when it will do it to meet its 

statutory obligations, and I hope that the witnesses today can help 

illuminate this point. The Congress has wrestled with this difficult issue 

once, and we need to know why the Administration has failed to meet its 

statutory obligations. And I hope our witnesses will shed some light on 

other pricing issues that have received attention from energy analysts in 

the press and I would refer specifically to the phase-out of MTBE and 

the effects of this transition on supply and price and ethanol from a 

production and transportation standpoint; the role of refined products in 

meeting our daily gasoline demand and the effect of market 

concentration in the petroleum industry. 
8

 Mr. Chairman, again, I thank you for holding this hearing. I 

appreciate your courtesy in recognizing me and I look forward to the 

testimony of the witnesses. I yield back the balance of my time. 

 CHAIRMAN BARTON. I thank the distinguished gentleman from 

Michigan and recognize the gentleman from Illinois, Mr. Shimkus, if he 

wishes to make an opening statement? Does the gentlelady from New 

Mexico wish to make an opening statement? 

 MRS. WILSON. Thank you, Mr. Chairman, I do. Everyone is being 

affected by the high gas prices both in their daily lives and also in their 

small businesses as they try to get their products to where they can sell 

them. And the cost is always passed through to the consumer, so I am 

glad that you are holding these hearings, Mr. Chairman, and I thank you 

for doing so, so that we can look at ways that we can make America 

more energy independent. 

 I think we took some positive steps last August, but now we get a 

clean sheet of paper to look at the problems, to understand the factors 

driving prices, and mitigate those factors. That includes reducing 

demand for refined product and that means alternative fuels, like E85 or 

hydrogen fuels, getting America beyond its exclusive reliance on the 

gasoline powered engine; hybrids that are more efficient and can reduce 

the overall demand for gasoline, and conservation and fuel efficiency so 

that we reduce the demand for imported oil. 

 The second thing we need to do is look at diversifying supply and 

that means worldwide diversification of supply so that we are not as 

dependent upon single points where, or single countries where there is a 

great deal of volatility and political uncertainty and risk. And also 

supply within the United States so that we can use the energy resources 

that we have to get that marginal barrel of oil into the market. 

 And finally, I am glad that we are looking at the whole supply chain 

and looking at the bottlenecks between getting a barrel of oil and turning 

it into gasoline that can be used in someone’s car. Whether that is 

boutique fuels or the impact of regulations or expanding our refining 

capacity, I am glad we are looking at understanding each of these factors 

driving prices and mitigating them so that we make America more 

energy independent. And over the summer I look forward to continuing 

to work on these problems. Thank you, Mr. Chairman. 

 CHAIRMAN BARTON. I thank the gentlelady. The gentleman from 

California, Mr. Waxman. 

 MR. WAXMAN. Mr. Chairman, every American knows that gasoline 

prices are skyrocketing; at $3 a gallon, prices have doubled since 2000. 

But not every American knows what has gone on in Washington in that 

time. For the last 5 years we have lacked an effective energy policy. 

Instead, the White House, with the support of the Republican leadership 
9

in Congress, has showered the oil industry with subsidies, environmental 

exemptions, loopholes, and tax breaks. This has vastly enriched the oil 

companies and their CEOs, but it has not reduced America’s dependence 

on foreign oil and it has allowed prices to skyrocket. 

 This chart illustrates what has happened. It superimposes the 

implementation of the Administration’s energy policies on a graph of 

gasoline prices. As you can see, on May 16, the White House energy 

plan was announced. The Administration set out to implement their 

energy policy using existing authority to the greatest extent possible. By 

the end of the President’s first term, the Administration had implemented 

75 percent of its energy policy. 

 By March 2005, Energy Secretary Bodman announced that 95 

percent of the energy plan had been implemented and throughout this 

whole period of time, gasoline prices have increased. There is a direct 

correlation between the Administration’s policies and gasoline prices. 

The more success the President and the Vice President have had in 

implementing their energy policies, the higher gasoline prices go and the 

richer the oil companies become. 

 Mr. Chairman, this committee has a dismal track record on energy 

issues. In 2001, California and the West Coast were being gouged by 

Enron, Reliant, and other energy producers who were manipulating 

electricity prices and they were doing this to enrich themselves, yet our 

committee never conducted a serious investigation. Instead, our 

committee made up excuses. Now it appears we are about to repeat the 

same mistakes. I am disappointed we haven’t yet scheduled a hearing 

with the oil company executives. Members have been seeking a hearing 

with these witnesses since last fall, yet instead of investigating the oil 

industry, there appears to be a concerted effort here in Congress to blame 

gasoline prices on everyone but the oil companies. 

 Last week there was legislation on the floor designed to blame State 

and local governments for high gasoline prices. Next week there may be 

legislation brought up that seeks to blame environmental protection. Mr. 

Chairman, this committee should call the executives to testify and if 

necessary, subpoena them and their internal records so we can 

understand why prices are so high, what has happened to the refining 

capacity. We should stop defending the oil industry and start protecting 

the consumers, the American people. 

 CHAIRMAN BARTON. I thank the gentleman. Let us see. Dr. 

Burgess. 

 MR. BURGESS. Mr. Chairman, I will submit for the record and save 

for questions. 

 [The prepared statement of Hon. Michael Burgess follows:] 
10

PREPARED STATEMENT OF THE HON. MICHAEL BURGESS, A REPRESENTATIVE IN CONGRESS 

FROM THE STATE OF TEXAS

Mr. Chairman, thank you for convening this hearing this morning. And thanks to 

our panelists for coming before us today. 

As we are hearing from our constituents on this topic, I think the information 

provided by the panelists today will help this committee get beyond the rhetoric to the 

facts. 

There are a number of factors that contribute to high gasoline prices, including: 

crude oil prices, refinery capacity, environmental regulations, and consumer demand. As 

we learned during our hearing on World Crude Supply last week, approximately 55 

percent of the cost of a gallon of gasoline is the crude oil. 

The geography of oil and gas has led our country to place our energy assurance in 

the hands of leaders such as Venezuelan President Hugo Chavez and inflexible or 

unstable dictators of the Middle East. Last week, several panelists, including Dr. Daniel 

Yergin, referenced the “risk premium” associated with ongoing concerns about the 

stability of supply from Russia and the Nigeria Delta Region, as well as the impact of 

Iran’s nuclear posturing and the recent nationalization of energy infrastructure in Bolivia. 

All of these geopolitical uncertainties make foreign oil unpredictable and 

unaffordable. The best way to bring down prices is to increase supply while decreasing 

this risk premium. That means we need to increase not only production, but domestic

production. Today, we import nearly 60% of our oil, but we’ve prohibited exploration in 

the OCS, in ANWR, and on other federal land. 

I believe we should allow, and in fact, encourage exploration and production here at 

home. A barrel of oil coming from the Gulf Coast or the oil shale in Utah is significantly 

safer than a barrel of oil coming from Iran. That is the surest way to bring down gasoline 

prices in the short run. 

However, there is another phenomenon affecting the price of gasoline, especially in 

the Dallas-Fort Worth Metroplex, and that is the transition from methyl tertiary butyl 

ether (MTBE) and ethanol. Areas, such as the Dallas-Fort Worth Metroplex, which use 

RFG to meet Clean Air Act requirements during the summer driving season, have been 

more heavily impacted by this fuel switching. 

Not only has there been an inadequate supply of ethanol to meet the demand, there 

have been logistical problems due to the different physical characteristics of the two 

substances. 

Unlike gasoline containing MTBE, gasoline containing ethanol is not able to be 

transported via pipeline, which means that the ethanol must travel via truck and rail and 

mixed once it arrives to the area in which it will be used. All of these factors further push 

up the price at the pump. 

Another factor, affecting the price of gasoline is the patchwork of different 

“boutique” fuels in use across the country. Non-federal fuel specification requirements 

reduce the fungibility of gasoline. That means that gasoline that can be used in Lubbock 

cannot be used in Fort Worth. Gasoline used in Utah cannot be used in Chicago. This 

limited inability to move gasoline across the country in response to local demand results 

in increased prices at the pump. 

I am looking forward to hearing from our panelists today about how gasoline prices 

are set in general, and specifically how they are impacted by the transition from MTBE to 

ethanol and by the use of “boutique” fuels. 

I’d like to thank our panelists again for giving up their time to testify before us this 

morning. And with that, Mr. Chairman, I yield back. 

 CHAIRMAN BARTON. Okay, Mr. Pitts. 
11

 MR. PITTS. Thank you, Mr. Chairman. Few issues are of more 

concern to Americans these days than gasoline prices and while we have 

addressed the issue with a number of legislative proposals in recent days, 

the truth is that there is no quick fix to this problem. Arriving at real 

solutions will require us to take a long-term approach to the basic 

principle at work here, supply and demand. Windfall taxes, price 

controls, and new regulations are exactly the sorts of things we don’t 

need. You could eliminate all of the profit of the oil companies and you 

would only reduce the price of gasoline by nine cents a gallon, I am told. 

In fact, one of the best things Congress can do is just get out of the way. 

In a free market economy, prices will always be high when demand rises, 

and supply is tight and that is what we are seeing right now. 

 The fact is that America is not making full use of its own oil supply. 

Allowing access to the billions of barrels of oil in ANWR and off our 

coast is a common sense start. We should make that a reality this year. 

Removing the red tape required to build new refineries in America is 

another step in the right direction. Streamlining fuel regulations, 

reducing the number of blends required would also help. No amount of 

quick fix political posturing will help Americans at the pump. We need 

real energy solutions and real energy solutions must include forwardlooking supply improvements like these. We need to be less dependent 

on foreign sources of oil; that is a matter of national security. 

 I look forward to hearing the testimony of our witnesses today. I 

thank them for coming to share their expertise and I yield back. 

 CHAIRMAN BARTON. I thank the gentleman. The gentlelady from 

California, Ms. Eshoo. 

 MS. ESHOO. I will wait for the questions, Mr. Chairman. 

 CHAIRMAN BARTON. Okay. Mr. Stupak. 

 MR. STUPAK. Thank you, Mr. Chairman. I am pleased we are 

having committee hearings on the burden that high gas prices places on 

American consumers. As Ranking Member of the Energy and 

Commerce Subcommittee on Oversight and Investigations, I have asked 

for eight months for hearings on the cause of high gasoline and natural 

gas prices. I am pleased that the chairman has finally realized that these 

hearings are needed and I hope we will continue these discussions about 

what Congress can do to ease energy prices. 

 At this time last year gasoline was selling at an average of $2.18 per 

gallon. Currently, gas is at $2.90. This is a 72 cent increase. While 

switching from winter to summer seasonal blends can have some affect 

on prices, a 72 cent increase over last year, when we were also 

undergoing summer blend changes, is not acceptable. This excuse is 

getting old. Obviously, other factors need to be addressed. With regard 

to MTBE, oil companies have known for years that MTBE is a bad 
12

product. Oil companies knew they would be unable to continue to use 

MTBE and should have planned accordingly. 

 As for boutique fuels, as part of the energy bill approved last 

summer, Congress has already capped the number of boutique fuels and 

has directed the EPA to study whether boutique fuels need additional 

regulation. The EPA estimates that boutique fuels currently add only 

three cents per gallon, sometimes less. While there is a potential for 

shortages and increased costs should a production or a supply disruption 

take place, Congress has already granted the EPA the authority to issue 

boutique fuel waivers should such a situation arise. Unfortunately, this 

committee seems to be searching and continuing to rely on the oil 

companies for their excuses and scapegoats rather than investigating 

problems and finding serious solutions. 

 Instead of focusing on things like transition to summer fuel blends, a 

phase-out of MTBE, and the use of boutique fuels which either have a 

minimal effect on gas prices or have already been addressed by 

Congress, we should be holding hearings on factors that have so far been 

unaddressed. This committee should be investigating whether the 

substantial profits currently made by the oil and gas companies are 

warranted, or whether these profits are the result of unfair predatory 

pricing and market manipulation, and pass a real price gouging bill. 

 We should be holding hearings on my legislation the, Prevent Unfair 

Manipulation of Prices, or PUMP Act, to bring oversight and 

transparency to over-the-counter trading of energy commodities which 

are currently unregulated by the Federal government. We should have 

the foresight to investigate natural gas prices. High natural gas prices are 

already affecting farmers, manufacturing and electrical utilities, along 

with other industries. The EIA has projected that natural gas prices will 

be significantly higher again this winter. Rather than wait until this 

winter, we should address the issue now. As the EIA has told us since 

before Hurricane Katrina, gasoline and natural gas prices are going to 

stay high under the current climate. 

 Our constituents are waiting for Congress to take action to address 

these high energy prices, like my PUMP legislation. I welcome the 

witnesses and I look forward to their testimony and I yield back, Mr. 

Chairman. 

 CHAIRMAN BARTON. We thank the gentleman. Mr. Gillmor. 

 MR. GILLMOR. Thank you, Mr. Chairman, and I commend you on 

your swift action to address the recent rising energy prices. The matter 

of rising energy prices is an issue that impacts real lives and has real 

consequences and often we hear our gas prices affect urban commuters, 

vacationers and the transportation industry, while little is said about the 

growing hardship that rural Americans face on a daily basis. Farmers, in 
13

particular, are faced with the prospects of a difficult future as a 

continuing rise in energy prices makes it harder for them to gas up their 

tractors and combines and purchase necessary fertilizer. 

 Additionally, in an already hyper-competitive rural economy, the 

manufacturing community faces the realization that it will be necessary 

to raise prices on their products as their structural costs continue to 

skyrocket. Mr. Chairman, rural communities are already at an inherent 

disadvantage due to the proximity to suppliers and to the limited choice 

of suppliers. As the committee continues to address this matter of 

national importance, I would urge all my colleagues to not forget the 

challenges of rural areas like my district in northwest Ohio face as a 

growing threat to our manufacturing preeminence posed by rising 

gasoline prices. Thank you for yielding time and I yield back. 

 [The prepared statement of Hon. Paul Gillmor follows:] 

PREPARED STATEMENT OF THE HON. PAUL GILLMOR, A REPRESENTATIVE IN CONGRESS 

FROM THE STATE OF OHIO

I first would like to commend the swift action you have taken to address the growing 

problem of rising energy prices. 

The matter of rising energy prices is not the latest public policy trend, nor is it an 

issue to be politicized. Rather, this is an issue that impacts real lives and has real 

consequences. 

Often we hear about how gas prices affect urban commuters, vacationers, and the 

transportation industry. However, little is said about the growing hardships that rural 

Americans face on a daily basis. Farmers, in particular, are faced with the prospects of a 

difficult future as the continuing rise in energy prices makes it harder for them to gas-up 

their tractors and combines and purchase necessary fertilizer. Additionally, in an already 

hyper-competitive global economy, the manufacturing community faces the realization 

that it will be necessary to raise prices on their products as their structural costs continue 

to skyrocket. 

Mr. Chairman, rural communities are already at an inherent disadvantage because of 

proximity to available supplies and limited choice of suppliers. As this committee 

continues to address this matter of national importance, I would urge all of my colleagues 

to not forget the challenges that rural areas, like my district in Ohio, face as well as the 

growing threat to our manufacturing preeminence posed by rising gasoline prices. 

Thank you Mr. Chairman for yielding me this time and I look forward to the 

testimony from our invited witnesses and to working with you to ensure that the needs of 

rural communities are properly addressed. 

 CHAIRMAN BARTON. The gentleman yields back. The gentleman 

from Texas, Mr. Green. 

 MR. GREEN. Thank you, Mr. Chairman. Mr. Chairman, I want to 

thank you for holding this extensive hearing today and tomorrow on fuel 

supplies. Americans are upset about the gasoline prices that are the 

highest since the oil embargo in the 1970s. And then I come from Texas, 

a border State, and we hear a lot about immigration in our office, but gas 

prices are the biggest concern. Even though we produce and refine and 
14

pipeline a lot of it, we still pay the same prices as everyone else. In fact, 

it bothers me when stations in my own district where we produce and 

refine are very much higher than some other parts of the country. I know 

the reasons for it, though. 

 Unfortunately, we have been hit by a perfect storm on gas prices in 

the last few years. One, major instability in producing countries in the 

Middle East, Africa, Latin America; increasing consumption from new 

drivers in China and India; powerful hurricanes in the Gulf of Mexico; 

longstanding Congressional bans on domestic drilling, and a difficult 

switch from MTBE to ethanol. Some of these factors are beyond our 

control, such as demand in China and India or even the hurricanes in the 

Gulf, and some of the factors are the result of Congress, such as the bans 

on drilling. And some of them are actually the fault of the 

Administration when we see that our energy bill passed last year and just 

in the last few days, as the EPA started to work on ways that they can 

streamline it. 

 During the debate on the energy bill last year when we eliminated 

MTBE, there were some of us who kept saying there is going to be a 

problem and all of a sudden we do have the problem; when you add it to 

the time of year and the other things that we have no control over, then it 

becomes a big problem. I support faster permitting in expanding the 

refineries and building new ones, but permits aren’t the reason we have 

high prices. It makes a good sound bite to say we haven’t built a refinery 

in 25 years, but what matters is the barrels per day. Refining capacity 

has steadily increased for the last 10 years and it will increase further in 

the new couple of years. 

 If we could streamline some of the red tape without altering our 

environmental standards, I am for it. Boutique fuel legislation is much 

complicated because the tradeoffs are with clean air and prices are 

impossible to avoid. Some folks are trying to take advantage of the high 

prices to push their favorite cause, whether it is CAFE standards, 

investigating oil companies, ethanol, regulation, or so on. But I see we 

have three options. The status quo is a variety of State and Federal fuels 

that give us the best mix of price and quality when times are good. 

However, the system is vulnerable to disruptions. 

 If we want flexibility during disruptions, we could go to fuel that is 

still clean fuel, but prices will likely go up since clean gasoline is more 

expensive to produce. We could also go to fuel but less clean fuels to 

keep prices level, but then manufacturing industries will be required to 

make up the difference to meet our clean air standards in our urban areas. 

I know our constituents are calling for a quick fix, but I am afraid that we 

are not going to see that silver bullet today or tomorrow, but there are a 
15

lot of things we can do to help alleviate it over a period of months. 

Thank you, Mr. Chairman. 

 CHAIRMAN BARTON. Thank you. Ms. Bono. 

 MS. BONO. Thank you, Mr. Chairman, and thank you for holding 

this hearing today. I realize the entire Nation is suffering from this crisis. 

I know that the people of the 45th Congressional District in California are 

paying more for gas than the rest of the country. That, coupled with the 

high summer cooling costs in the desert Southwest make for a very 

difficult time ahead. But those of us in Congress and our constituents at 

home are smart enough to realize that there is no single solution to this 

problem we face today. 

 Last week we examined world oil prices and how a thirsty Chinese 

economy, a brash Russian march on the energy market, and a very 

unstable Iran impact the price we pay for oil. Today one aspect of the 

problem that deserves our attention is how we can use the very oil which 

lies under American soil. Currently, there seem to be some problems in 

tapping this resource. For instance, if you talk to many domestic 

producers, they might comment on how the prices they are getting for 

their oil is too low and how that threatens to put them out of business. 

We are not talking about $70 a barrel, but rather $22 to $35 a barrel for 

domestic oil. Imagine creating incentives to encourage our small 

independent producers to bring their oil to market. 

 While we have many dimensions to the supply side of the problem, 

we also need to turn our focus and American ingenuity on the demand 

side of the equation. Let us face it. We have an addiction to oil. It is 

here, where not just government, but private business and even the 

American consumer need to take action. Whether it be hydrogen or 

some other form of green power, our country must make a concerted 

effort to expand these clean, alternative fuels. 

 We need to eliminate redundancy in government programs, 

encourage the private sector to invest in new technologies, and make it 

affordable and simple for Americans to make the jump to another form 

of fuel. Oil will always have a role in our economy, but like any good 

financial plan, we need to diversify. I realize this is some time off yet, 

but if we do not take this challenge head on, we risk oil not serving as a 

bridge to the future, but rather the burden to stay in the past. 

 Again, Mr. Chairman, thank you for holding this hearing. I look 

forward to hearing from our witnesses and I thank them for being here. 

Thank you, Mr. Chairman. 

 [The prepared statement of Hon. Mary Bono follows:] 
16

PREPARED STATEMENT OF THE HON. MARY BONO, A REPRESENTATIVE IN CONGRESS FROM 

THE STATE OF CALIFORNIA

Mr. Chairman, I rise in support of the Markey amendment. I know the Gentleman 

from Massachusetts as well as Mr. Boehlert have done a great deal of work on this matter 

and I thank them for it. 

I think it is time that we challenge the auto industry to do better. We should not 

underestimate America’s ingenuity to get our cars to this standard in a safe manner. 

This is a country that put a man on the moon so to think the smartest engineers in the 

world can’t get us to this goal sorely undervalues the intelligence and sheer “know how” 

our country is known for. 

Henry Ford was a man before his time, so I think he would be the first one to roll up 

his sleeves and go to work in solving this problem. 

A challenge is a good thing. It gives us something to strive for. 

So Congress must challenge the auto industry to rise above the doubts associated 

with our ability to do this. Our country not only needs it, but must demand it. 

Thank you and I yield back. 

 CHAIRMAN BARTON. I thank the gentlelady. Ms. Capps. 

 MS. CAPPS. Thank you, Mr. Chairman, for holding this hearing 

today and welcome to our witnesses. The high price of energy is indeed 

a serious problem facing our country today. My colleague, Mary Bono, 

and I have gasoline prices in our districts that are probably some of the 

highest in the Nation, with $3 per gallon prices now a distant site in the 

rearview mirror. I hope this hearing today will explore some of the 

reasons behind this problem. Having read through some of the 

testimony, I find myself most in line with the emphasis on industry 

consolidation that we will hear more of from Dr. Cooper with Consumers 

Union. 

 The industry has consolidated to a remarkable degree and this has 

affected competition, I believe, in a very negative way. One need only 

look at the refinery situation with the closing of dozens of refineries over 

the years, and virtually no attempt to build new ones. I know the 

Majority will continue to push its refineries legislation, but I believe that 

is completely missing the mark. The issue really isn’t local and State 

permitting, the issue is that the industry hasn’t wanted to build more 

refineries and that leads to a very tight supply. And almost any time 

anything happens--a natural disaster, seasonal changeover--gas prices 

spike and industry profits swell even more. 

 I don’t think it is a big surprise that the continued record profits of 

the industry are causing outrage among the consumers and stomach 

churning among some of our Republican friends. Headlines like this 

from the Wall Street Journal yesterday, “Exxon’s Pile of Cash Keeps 

Growing; Adding Fuel to the Ire Over Oil Prices,” go straight to the 

point. 
17

Finally, I would note that earlier this year there was a lot of talk about 

how the high price of gasoline was being driven by MTBE issues. It is 

my understanding that the Energy Information Administration, EIA, has 

refuted this notion and reported that the transition away from MTBE to 

ethanol might be adding a few cents a gallon at most, that this transition 

period would be short term and by next year there would be ample 

ethanol to meet demand. 

 Furthermore, it is important to note that it is the industry that is 

choosing to stop using MTBE, just like it was the industry that chose to 

start using MTBE in order to meet the oxygenate requirement. The 

industry has been abandoning MTBE faster than big gas prices increase 

at the pump because MTBE is a problem. The contamination MTBE has 

caused to groundwater systems and the fact that the industry will be 

forced to clean up that damage is what is driving the move away from 

MTBE. 

 My hope is that the problems associated with MTBE use can be 

worked out among the various parties in order that cleanup happens and 

we don’t just see endless litigation. I look forward to the testimony 

today and yield back. 

 CHAIRMAN BARTON. I thank the gentlelady. The gentleman from 

Arizona, Mr. Shadegg. 

 MR. SHADEGG. Thank you, Mr. Chairman. I want to express my 

appreciation for you holding this hearing today. I will be brief. We will 

hear many reasons for the high price of gas over the next few days in 

these hearings; boutique fuels, transitioning to summertime gasoline, 

refinery maintenance, lack of refining capacity, and though I would 

associate my remarks to the comments of the gentlelady on the other 

side, it appears that the problem there is a lack of a will to build 

additional refining capacity. 

 The conversion from MTBE to ethanol and indeed, on that point, I 

would disagree with the gentlelady from the other side; we knew that 

MTBE was going to go away as a result of a litigation brought by the 

trial bar if we were not willing to extend any kind of protection to that 

industry. Now that has come to pass; MTBE is being withdrawn from 

the market. MTBE made up about 1.4 percent of our entire fuel supply 

prior to now and that now has to be fully replaced by ethanol. The list is 

long, but we shouldn’t forget that the main reason we have high gasoline 

prices is that the world price for crude oil has skyrocketed. 

 There are a variety of reasons for that, no doubt. In part, political 

and economic uncertainties in oil producing countries have squeezed the 

world market. But in part, speculators, I believe, are also running up the 

cost. We need to be doing everything we can to increase domestic 

production of our own energy supply, including oil, so that we can 
18

alleviate these shortages on the oil market. For one thing, we need to be 

pursuing alternatives to oil, but in addition to that, there are many places, 

as was referred to just a moment ago on the other side of the aisle, where 

we have locked up known supplies in the United States, on the outer 

continental shelf, in ANWR, in the interior west, where indeed there is 

ample fuel and oil that we could be going after and natural gas that we 

could be going after, but for political reasons we are not doing that. 

 I want to focus my remarks today on at least one possible short-term 

solution. The withdrawal of MTBE from the market as a result of the 

litigation brought against MTBE producers makes the current MTBE to 

be a defective product, has resulted, as I indicated, in a drop in the 

market of MTBE, which accounted for 1.4 percent of our gasoline 

supply. The only acceptable alternative is ethanol, yet today’s domestic 

market cannot produce sufficient ethanol to supply the demand. We 

have, over time, as a Congress, chosen to tax imports of ethanol in order 

to encourage domestic production of ethanol. We impose a tax of 2.5 

percent on the cost of the ethanol and then we impose an additional tax 

of 54 cents per gallon. 

 I would suggest that it is time to suspend, at least temporarily, those 

taxes. The reality is we cannot produce sufficient quantities of ethanol in 

the next 12 to 18 months to satisfy our demand. The EIA and others 

have confirmed this. We will be at least 130 thousand barrels per day 

short of the necessary supply of ethanol to replace the MTBE that has 

been withdrawn from the market. There is no reason to continue to 

require American consumers to pay the tax of 2.5 percent plus 54 cents 

per gallon on imported ethanol. If we were to lift those tariffs, at least 

temporarily, we would be able to bring in additional ethanol from outside 

of the country; we would deal both with the lack of supply, but also with 

the distribution problems that ethanol is currently experiencing. 

 There are many coastal areas where if we could import ethanol at an 

economic price, the cost of gasoline would go down and we would not 

suffer shortages as we have recently in Pennsylvania and in Texas as a 

result of the shortage of ethanol. This is an idea that is quickly catching 

on and gaining supporters. I have introduced legislation which now has 

over 30 sponsors; President Bush expressed his support for the idea last 

week on CNBC. Yesterday Majority Leader Boehner expressed his 

support for the idea and this morning’s paper reveals that Speaker 

Hastert has also suggested a temporary suspension of the ethanol tariff 

would be a good idea. 

 This would give immediate relief to American fuel purchasers of at 

least a portion of the cost of gasoline, and I would urge that it would be 

in the interest of the ethanol industry because it will allow them time to 

build out the ethanol infrastructure that we need. Mr. Chairman, again I 
19

thank you for holding this hearing and look forward to the testimony of 

the witnesses. 

 CHAIRMAN BARTON. We thank the gentleman from Arizona. Ms. 

Schakowsky of Illinois. 

 MS. SCHAKOWSKY. Thank you, Mr. Chairman, for holding today’s 

hearing on gasoline prices. Seven in 10 American families believe that 

gas prices will cause them financial hardship this year. I hope that we 

can use this hearing to develop immediate plans to bring prices down as 

the summer driving season begins. Talk is cheap and gasoline isn’t. In 

Chicago we are paying $3 plus for a gallon of gasoline. Secretary 

Bodman has called this an energy crisis, but let us be clear; this is not a 

crisis for everyone. Not everyone in America is suffering. For oil 

companies, friends of the two oil men in the White House, President 

Bush and Vice President Cheney, this crisis is a bonanza and the 

American people know it. 

 At over $25 billion, ExxonMobil reported the highest profit of any 

company in any year in history in 2004, and then beat its own record in 

2005 with a $36 billion profit, and this quarter ExxonMobil reported a 7 

percent increase in profits over last quarter. It is certainly not a crisis for 

ExxonMobil’s CEO, who is retiring with a $400 million retirement 

package. The overall U.S. economy, however, is suffering. A recent 

Wall Street Journal headline declared fuel prices keep economic growth 

in limbo, reducing our total GDP by 7 percent. 

 Last Friday I met with small business owners in Chicago to discuss 

how a rise in gasoline prices was crippling their business. I spoke with a 

restaurant owner who has been forced to charge more for delivery, cut 

his distribution area at the same time as his food suppliers have added a 

transportation cost for their services and he has had to hike menu prices, 

he has lost business and upset some loyal customers. So those people are 

feeling the pain, they are making the sacrifices. The only ones from 

whom nothing has been asked at all are the oil companies. And instead, 

the oil companies are being lavished with benefits and environmental 

exemptions. In the last big energy bill we gave them about $11 billion in 

tax breaks, a bill that even the Energy Information Administration at the 

time said could raise gas prices and it has. 

 Talk about increasing refinery capacity, we know that between 2004 

and 2005 refineries marked up their prices 255 percent while gasoline 

retailers only marked theirs up about 5 percent. More refinery capacity? 

In the 1990s the American Petroleum Industry sent letters, memos to the 

oil companies saying if you want to increase your profit, you know what 

you have to do? You have to decrease your refining capacity and that is 

exactly what has happened. 
20

 We have legislation proposed by Mr. Boucher and Mr. Dingell that 

would actually do something by creating a national refinery reserve. 

That has been rejected. There are things we could do. Senator Durbin, 

my Senator in the Senate, is the sponsor of the Windfall Profits Tax Act, 

which would enact a 50 percent windfall profits tax on profits earned 

above the base price of $40 a barrel of oil, adjusted for inflation. The 

revenue collected would be rebated to consumers. We could do it now. 

Invest it in energy efficient vehicles and in a low-income energy 

assistance trust fund. 

 And so we need to perhaps have these hearings, but what we really 

need to do is answer what consumers are asking for, some relief at the 

pumps. Thank you, Mr. Chairman. 

 CHAIRMAN BARTON. Thank you. Mrs. Blackburn. 

 MRS. BLACKBURN. Thank you, Mr. Chairman. I will welcome our 

witnesses and waive my statement and look forward to extra time for 

questions. Thank you. 

 CHAIRMAN BARTON. Chairman Buyer. 

 MR. BUYER. I waive my time, Mr. Chairman. 

 CHAIRMAN BARTON. Okay. Ms. Baldwin. 

 MS. BALDWIN. Thank you, Mr. Chairman. Every year around 

Memorial Day, Wisconsinites start to notice a change in the price at the 

pumps and this year is different only that we have felt that pinch well 

before the holiday. We have urged the President and this Congress to act 

on gas prices. Instead, Congress last year passed an energy bill that did 

nothing to relieve the pain at the pump. Even the Department of Energy 

acknowledged at the time that the Energy Policy Act of 2005 would do 

next to nothing to lower gas prices or reduce America’s demand for 

foreign oil. 

 Now, a year later, we could continue down the road that encourages 

reliance on finite natural resources and simply assumes that we can 

reduce our dependence on foreign oil without any strategy to get there. 

This, of course, means creating policies and incentives that inspire no 

one except the CEOs at the big oil companies. Or we could change 

course and encourage our Nation to think big and make important 

decisions about where we want to see our Nation in the coming years. 

 Included among our options are lowering the number of boutique 

fuels or establishing a regional gas reserve so that the next time there is a 

massive hurricane or other disaster, our gasoline supply can reach the 

stations without interruptions. Independently, these proposals will not 

resolve the problem of high gas prices around Memorial Day or any time 

of year, but through a collective and coordinated effort, we will be able 

to lower gas prices and reduce our dependence on foreign oil. 
21

 Our efforts must begin with more encouragement for the production 

of renewable fuels. I am proud to report that Wisconsin is doing its part 

in the production of alternative fuels. Ethanol production in Wisconsin is 

up from 90 million gallons in 2004 to over 200 million gallons today and 

as more plants become operational, Wisconsin will be producing an 

estimated 500 million gallons annually. Wisconsin is clearly not fighting 

this battle alone and I hope that our witnesses today and tomorrow will 

bring big thoughts around real steps our Nation can take to improve our 

energy policy, changes that bring relief to the pocketbooks of Americans 

and not just the special interests. 

 I look forward to the testimony at this hearing today and tomorrow 

and I yield back my remaining time, Mr. Chairman. 

 CHAIRMAN BARTON. We thank the gentlelady. Ms. Solis. 

 MS. SOLIS. Thank you, Mr. Chairman, and Ranking Member 

Dingell, for holding this very important hearing. We are here today to 

discuss the relation between gas prices, supply, and distribution, and I 

would like to point out, out of curiosity, why we don’t have any oil 

company executives here to testify. Oil companies are an integral part of 

the supply and pricing and distribution chain for gasoline. These 

companies raked in $110 billion in profits in 2005 and $16 billion in the 

first three months of 2006. Mr. Chairman, I encourage you to bring the 

oil company executives before this committee for a frank discussion 

about their role in the supply, price, and distribution of gasoline. 

 I would also like to insert into the record a letter from the 

Environmental Council of States which is relevant to the discussion. 

According to the Environmental Council of States, “It is unaware of any 

credible report that concludes that the time States take to review 

environmental permits has been or is a significant impediment to the 

issuance of refinery permits. We do not believe that such documentation 

exists.” The Los Angeles Business Journal reported that the average 

price per gallon of gasoline at self service stations in Los Angeles rose 

16 cents this week, to nearly $3.50 a gallon. 

 The price of gasoline in Los Angeles is 91 cents higher than it was a 

year ago and statewide prices are 81 cents higher than a year ago, yet our 

Nation’s energy policy has missed the mark. The Bush Administration’s 

energy policy, which was developed in secrecy and more than 95 percent 

has been implemented, yet has done nothing to reduce gas prices for 

consumers. Despite President Bush’s statement upon signing H.R. 6, and 

I quote, “Americans will look back on the energy bill as a vital step 

toward a more secure and more prosperous Nation.” 

 The price of energy and the lack of reliability hurts all working 

families. Transportation costs have increased by more than $1,400 per 

family, an increase of 75 percent since 2001. School districts in my 
22

district, for example, have to pay more costs for fueling of school buses 

than they are for paying teachers and construction of vital services that 

we need at schools. Yet President Bush’s budget significantly underfunds programs which would help working families and is failing to 

implement provisions included in H.R. 6 which would be helpful. 

 I believe that energy security, jobs and health, workplace and family 

can coexist, but the approaches traditionally taken by this committee try 

to make us choose between these priorities. This is a choice I don’t want 

to make. I believe we need a plan to create American jobs, technology, 

boost competitiveness and improve our national and economic security. 

I hope soon we will be able to have a real discussion, real debate and 

have witnesses that can actually answer some of our questions. Yield 

back the balance of my time. 

 [The information follows:] 
23

 CHAIRMAN BARTON. I thank the gentlelady. The gentleman from 

Washington State, Mr. Inslee. 

 MR. INSLEE. I will reserve my time. Thank you, Mr. Chair. 

 CHAIRMAN BARTON. The gentleman from San Antonio, Texas, Mr. 

Gonzalez. Is there any Member who has not given an opening statement 

that wishes to make an opening statement? Mr. Ross of Arkansas. 

 MR. ROSS. Thank you, Mr. Chairman. I would like to thank you for 

holding this important hearing regarding rising gasoline prices and the 

adverse impact they are having on all Americans; Americans who are 

being forced to change their way of life, being forced to choose between 

paying their rent or putting gasoline in their vehicles. Mr. Chairman, I 
24

represent a very large and rural district in the State of Arkansas. My 

district spans 21,000 square miles, 150 towns, 29 counties and most of 

my constituents don’t even live in those towns; they live down this 

gravel road or that gravel road. They live in rural America. 

 And it is not uncommon for my constituents to drive 50 miles or 

more each way to and from work and in most cases they commute these 

distances for a job that pays well below the national average and in rural 

America where mass transit is not an option. Hard working Arkansans 

who are trying to do the right thing by working to put food on the table, 

to keep the lights on, and to provide for their families are being 

devastated by these record gas prices. In order to see true reductions in 

prices, we will have to either increase supply or decrease demand; 

ideally, both. I strongly support the continued development and use of 

ethanol and biodiesel as a way to reduce the demand on costly fossil 

fuels. 

 And as we continue working to increase the use of biofuels, we must 

make the necessary investments to develop our Nation’s infrastructure to 

support an increased use of ethanol and biodiesel. I am committed to 

working with my colleagues to make these investments to advance 

alternative fuels which will provide Americans with a choice when they 

go to the pump, reduce our dependence on foreign oil, and save working 

Arkansans and working Americans money at the gas pump. The reality 

is this: the energy bill authorizes $632 million for the next fiscal year for 

renewable energy research, development, demonstration, and 

commercial application activities by the Department of Energy, $213 

million of which is for bio energy purposes, including $100 million for 

bio refinery demonstration projects. 

 This funding is authorized but not yet appropriated. My point is this, 

Mr. Chairman, there is a lot of talk about investing in alternative 

renewable energy sources and yet we send $1.9 billion to Iraq every 

week. I want to make sure the American people understand that while 

there is a lot of talk these days about alternative and renewable fuels, 

over the next fiscal year we are going to spend less than half as much 

money toward research and development of alternative and renewable 

energy as we will spend this week alone in Iraq. 

 I recognize that as we develop alternative fuels and flex fuel 

vehicles, our Nation will continue to rely on fossil fuels as a primary 

source of energy, therefore I believe we must promote further 

exploration and development of domestic oil and gas production. Mr. 

Chairman, I look forward to hearing from our panel and working with 

this committee to bring down the high cost of gas and diesel fuel and 

with that, I yield back the--well, I guess I am out of time. But I yield 

back the balance of my time, anyway. Thank you, Mr. Chairman. 
25

 CHAIRMAN BARTON. The gentleman yields back. We thank the 

gentleman for that statement. All Members not present have the requisite 

number of days to put their statement in the record, without objection, so 

ordered. 

 [The statements follow:] 

PREPARED STATEMENT OF THE HON. ROY BLUNT, A REPRESENTATIVE IN CONGRESS FROM 

THE STATE OF MISSOURI

Mr. Chairman, thank you for holding this vitally important hearing today. As we 

know, the high price of gasoline is one of the major issues facing our constituents as they 

drive to work every day. According to the Energy Information Agency, the average price 

of gasoline last week was $2.92 per gallon - that is $0.68 more than it was just last year. 

Gas prices in some cities, like here in Washington, are well above $3 per gallon. 

It is my hope this hearing will provide us with an opportunity to discuss not only 

what led to this present situation but also to develop viable solutions. Mr. Chairman, I 

think this is a step in the right direction and I appreciate the effort you and other 

colleagues on the Committee have given this problem. 

As you know, one of the issues I am very concerned about is the proliferation of 

boutique fuels. The number of fuels has expanded over the years, and we now have an 

uncoordinated and overly complex set of fuel rules that I believe is leading to increased 

costs and price spikes. We need to restore fungibility to the market. An editorial in 

Monday’s edition of USA Today equated boutique fuels to coffee at Starbucks – 

unnecessarily complex and pricy. 

Last year during debate of the Energy Policy Act of 2005 we worked very hard to 

secure a cap on existing boutique fuels to ensure this problem could not worsen. This 

was a great first step toward solving the problem. We also gave the EPA the authority to 

temporarily waive certain fuel specifications during unforeseeable fuel supply 

emergencies. As we saw, that was extremely important during the aftermath of 

Hurricane Katrina. Without that authority emergency responders would not have even 

had the ability to bring needed supplies and buses would not have been able to evacuate 

victims. 

I believe we need to take the next step in simplifying our fuel system. We need to 

also look at the ability of EPA to deal with temporary waivers and even at enhancing that 

authority. 

Mr. Chairman, once again thank you for opportunity to offer this opening statement 

and I look forward to working with you and the Committee on these complex issues. 

I yield back. 

PREPARED STATEMENT OF THE HON. SHERROD BROWN, A REPRESENTATIVE IN CONGRESS 

FROM THE STATE OF OHIO

Thank you, Mr. Chairman. 

Today’s hearing is something of an exercise in frustration for me. Because it 

reminds me yet again that a White House and a congressional leadership so intimately 

tied to Big Oil is more than happy to talk about policies to protect consumers from gas 

price spikes. But steadfast in its opposition to actually acting on common-sense ideas. 

Dr. Mark Cooper, of the Consumer Federation of America, will testify before us 

today. 

And he will tell us that regional gasoline price spikes – like the ones that hit the 

Midwest in 2000 and 2001 and the one that hit the Southwest in 2003 – are symptomatic 

of Big Oil’s historic business practice of maintaining low reserves. 
26

By maintaining low reserves, Big Oil can create a situation where consumers have 

no cushion against price spikes – if a refinery fire, a pipeline outage, or some other 

regional supply disruption occurs. 

And Dr. Cooper will testify that one common-sense policy response is for the 

government to provide that cushion for consumers – in the form of a government-run 

gasoline reserves system. 

That should be a familiar message to us in Congress. Dr. Cooper has delivered that 

same message to us before – in this committee and in others. 

And I have offered legislation to implement that idea myself: 

• I offered a gasoline reserves amendment in this committee in 2003 – it was 

opposed by the Chairman and defeated 

• I offered that amendment on the House floor – it was opposed by Republican 

leadership and defeated 

• I offered it again as an amendment in 2005 – twice – and it was opposed by the 

Chairman and defeated both times 

Several other industrialized nations maintain gasoline reserves – and they used them 

last year to ship us gasoline after Hurricane Katrina. That embarrassed the Bush 

Administration into at least recognizing the idea. 

Last October, Energy Secretary Bodman testified before the U.S. Senate that the gas 

reserves idea was being “looked at” by the White House, “quite closely.” Welcome 

news, I’m sure, to Senator Dick Durbin – who’s sponsored a bill similar to mine. 

But that was 6 months ago – and though the price of a gallon of gas has increased 

about 45¢ since then, the White House is still studying an idea we’ve known about for 

years and that our allies have already used successfully to bail us out. 

The facts are clear and simple. American consumers are hurting at the pump today, 

because Republican leadership rejected common-sense reforms that could have protected 

consumers and strengthened our economy – in favor of an energy policy written by – and 

for the benefit of – Big Oil. 

I am glad President Bush has at least begun to talk about reform. And I am glad we 

are here talking about it again here today. 

But talk is cheap, and gas is not. The American people need action. 

PREPARED STATEMENT OF THE HON. BARBARA CUBIN, A REPRESENTATIVE IN CONGRESS 

FROM THE STATE OF WYOMING

Thank you, Mr. Chairman. 

My home state of Wyoming, like the rest of the country, has faced record breaking 

prices at the gas pump for much of the last year. In our state, where driving is a necessity 

due to an essentially nonexistent mass transit system, these exorbitant fuel costs create a 

real problem commuting to work or even planning a family vacation. 

Pinpointing the reasons why gasoline prices are currently so high is not the problem. 

Domestic production and refining capacity simply haven’t kept pace with our nation’s 

ever-increasing demand for oil. Other short term factors, such as the fact that refining 

capacity in the gulf coast region is still not fully operational, has only added to the 

problem. However, the biggest challenge I believe we face is the continuing 

obstructionism here in Washington that prevents the enactment of common-sense reforms 

to encourage increased domestic production. 

It took almost five full years to get a comprehensive energy policy signed into law. 

We are still fighting to get much needed legislation enacted that would streamline the 

overly-bureaucratic process for citing new refineries in our nation. Several other wellintentioned federal laws that have unfortunately created regulatory roadblocks to 

increasing domestic production - such as the National Environmental Policy Act (NEPA) 
27

- are in significant need of reform. If we would have enacted all these reforms five years 

ago, we would not be in the situation we are in today. 

 I believe Congress needs to act aggressively and creatively to lower the cost of gas 

American consumers are being forced to stomach. From increasing our nation’s refining 

capacity to limiting the number of “boutique fuels” that have propped up gasoline prices 

through artificially supply limits, there are additional long-term solutions we can and 

must pursue. In the short term, I have supported – and will continue to support – 

temporarily suspending the federal gas tax and ensuring that price gouging is not 

occurring at any level of the wholesale or retail gas markets. 

I am hopeful that this hearing will continue to shed additional light on those steps 

Congress should be taking to help stabilize the price of gas. However, until our 

colleagues in the minority agree to place policy above politics, we will likely be unable to 

have the effect American consumers deserve. 

I thank the Chairman for holding this important and timely hearing today and I yield 

back the balance of my time. 

PREPARED STATEMENT OF THE HON. CLIFF STEARNS, A REPRESENTATIVE IN CONGRESS 

FROM THE STATE OF FLORIDA

Mr. Chairman, thank you for turning this Committee’s focus to gasoline issues. 

While last week’s look at crude oil markets was illuminating, we now get back to more 

familiar issues on which we have legislated in the past and which have a serious impact 

on the price of gas at the pump. In particular, I expect that the use of reformulated 

gasoline in the supply chain will dominate our discussions. 

The physical properties of ethanol, for instance, make it somewhat daunting to work 

with. We cannot ship gasoline mixed with ethanol via pipeline, because there tends to be 

residual water in the pipes, and ethanol is water-soluble. So, we must send the gasoline 

through the pipes, and the ethanol separately on trucks or rails, to be blended at terminals 

in what is called “splash blending.” This adds to the burden on the infrastructure for 

transportation and storage of gasoline, ethanol, and their blends, as well as raising the 

overall price tag. 

Of course, even with a sufficient supply of ethanol, sources are not always located in 

close proximity to where we need the ethanol. That is one reason why I have supported 

research into biofuels at the University of Florida, in hopes of developing cost-efficient 

and environmentally-suitable agricultural alternatives for creating ethanol. 

Meanwhile, government mandates for specially reformulated gasoline across the 

country have led to a proliferation of boutique fuel requirements – each region or metro 

area demanding a different blend in order to meet certain air pollution goals under the 

Clean Air Act’s National Ambient Air Quality Standards, particularly for ozone. The 

USA Today, finding at least 15 different fuel blend categories, declared yesterday that, 

“Gasoline is becoming like coffee at Starbucks – unnecessarily complex and pricey.” I 

look forward to hearing from Acting Assistant Administrator Wehrum about the 

Environmental Protection Agency’s implementation of provisions we passed in last 

year’s Energy Policy Act, and their efforts to reduce the number of boutique fuel 

requirements. 

Mr. Chairman, thank you again for holding these two days of hearings. 

 CHAIRMAN BARTON. We now want to hear from our first panel of 

expert witnesses on our hearing on Gasoline: Supply, Price, and 

Specifications. We are going to hear first from Dr. Howard Gruenspecht, 

the Deputy Administrator of the Energy Information Administration, and 

then after him, Mr. William Wehrum who is the Acting-Assistant 
28

Administrator for Air and Radiation at the Environmental Protection 

Agency. Gentlemen, welcome. Dr. Gruenspecht, we will recognize you 

for let us see here. Let us say about 8 minutes and if you need a little 

more time, that is fine. 

 MR. GRUENSPECHT. I will try to give back some time, if I can. 

 CHAIRMAN BARTON. We are glad to have you before the committee. 

You are recognized. 

STATEMENTS OF HOWARD K. GRUENSPECHT, DEPUTY 

ADMINISTRATOR, ENERGY INFORMATION 

ADMINISTRATION, U.S. DEPARTMENT OF ENERGY; 

AND WILLIAM WEHRUM, ACTING-ASSISTANT 

ADMINISTRATOR OFFICE OF AIR AND RADIATION, U.S. 

ENVIRONMENTAL PROTECTION AGENCY 

 MR. GRUENSPECHT. Thank you very much, Mr. Chairman and 

members of the committee. I appreciate the opportunity to appear before 

you today to discuss gasoline supply, prices, and specifications. EIA is 

the independent statistical and analytical agency within the DOE. We 

don’t promote, formulate, or take positions on policy issues and our 

views should not be construed as representing those of the Department or 

the Administration. 

 Retail gasoline prices more than doubled from the beginning of 2004 

through early September 2005 in the aftermath of Hurricane Katrina. 

Though gasoline prices declined last fall following the hurricanes, U.S. 

average regular gasoline price is once again near $3 a gallon with many 

areas above that mark, as we have heard, particularly California. Several 

different factors have contributed to the sharp increase in the price of 

gasoline seen in recent years. First and foremost, as many of the opening 

statements recognize, the price of crude oil, from which gasoline and 

other petroleum products are refined, has risen dramatically. 

 The price of West Texas intermediate crude rose from roughly $40 a 

barrel at the end of 2003 to between $70 and $75 per barrel on the spot 

market during the first week of May. Futures prices are also close to this 

level and even the long-term futures contracts are pretty high, well above 

$65. All else equal, each $1 increase in the price of crude adds about 2.4 

cents per gallon to the price of gasoline. The increase in crude oil prices 

accounts for roughly two-thirds of the increase in retail gasoline prices 

since the end of 2003. 

 Second, gasoline prices are directly affected by the balance between 

supply and demand for gasoline, itself. Both long-run forces and shortterm circumstances since last fall have contributed to a tight gasoline 

market. This has led to an increased crack spread between the price of 
29

gasoline at the refinery level and crude oil prices, reflecting changes in 

both the cost and profitability of refining gasoline. 

Starting with the longer run forces, U.S. gasoline demand has grown 

1 to 3 percent per year since the late 1980s, driven by growth in 

population, the number of vehicles, and the economy. Average fuel 

economy of new light duty vehicles has been relatively flat. Gasoline 

prices do have an impact on consumption, reflecting both travel and 

vehicle purchase decisions, but some of those decisions take a long time 

to take effect. 

 That influence is difficult to isolate from other influences. Rising 

income causes demand to grow at the same time that rising prices would 

tend to pull back demand, but the impact of prices on demand appears to 

be growing in an era of sustained higher prices. Currently available data 

suggest that the Nation’s gasoline consumption was flat in 2005. On the 

supply side, refinery capacity growth and refinery capacity has grown, 

but it has lagged behind demand growth over the past 5 years. The 

situation may be changing, however. 

 Significantly higher financial returns to refining over the past several 

years provide a strong incentive for refinery expansion. With attractive 

returns and available resources, we are now seeing significant capacity 

expansion announcements totaling approximately 1.5 million barrels a 

day of new distillation capacity planned over the next several years. And 

there is probably some additional capacity creep beyond that that we 

would expect. 

 The role of imports has grown in the past several years. About 10 

percent of our gasoline supply comes from imports, most of which go to 

the East Coast. Much of the recent growth has been from Europe, which 

has excess gasoline supply capacity, in large part because of their major 

move towards use of more diesel-fueled cars, and they produce gasoline 

that is very similar to our own and meets our standards. At the same 

time, imports from Latin America have been dropping a little bit as 

supply from Brazil and other parts of Latin America have not moved as 

rapidly to the low-sulfur, very clean fuels that we are moving toward. 

We may see a further falloff over time. 

 In terms of the shorter run activities, since last fall, several events 

have exacerbated the current tightness in the markets. Many of the 

opening statements referred to the elimination of MTBE from 

reformulated gasoline and the resulting increase in the use of ethanol. 

Again, a lot of that transition has taken place by the first week of May. 

This decision was driven both by State policy, due to water 

contamination concerns, and potential for or a perceived potential for 

increased liability exposure because of the elimination of the oxygen 
30

content requirement for reformulated gasoline in the Energy Policy Act 

of last year. 

 As discussed in my written testimony, the switch from MTBE to 

ethanol has several supply impacts. The transition on the East Coast 

resulted in some temporary terminal outages in the winter-grade to 

summer-grade transition and also the MTBE-to-alcohol transition. The 

outages definitely raised some concerns and EIA had talked about that in 

some reports in February and earlier, but no major shortages have 

occurred. The largest problems, unfortunately, Mr. Chairman, have been 

in Texas where rail bottlenecks are making ethanol delivery difficult. 

The problem is not yet fully resolved, yet much of the initial transition is 

behind us and we are going to continue to monitor the situation closely. 

 The other important short-term circumstance has been the lingering 

effects of Hurricanes Katrina and Rita, which caused significant damage 

to several refineries. In addition, while those refineries are coming back, 

some refineries had delayed their maintenance schedules last fall when 

much more refinery capacity was out and thus there has been a lot of 

capacity in maintenance, really, for longer than usual this spring. We 

estimate that about one million barrels per day of refinery capacity was 

off line during April, which is about 6 percent of U.S. capacity. Again, 

we expect these refineries to return. Hurricane-damaged refineries--the 

last of those are still returning, so the situation should improve 

somewhat. 

 On fuel specifications, cleaner-burning motor fuels generally require 

more processing; they are harder to produce, and they use a narrower 

range of fuel components, which all work to increase their production 

cost. Some requirements are imposed at the Federal level, but in many 

cases, the States and regions set them as part of their clean air strategies, 

as I am sure Mr. Wehrum will discuss. As the number of distinct fuel 

types has increased, there is an increase or a reduction in the fungibility 

of fuels across locations. 

 But there is really no simple fix because actions to ease distribution 

problems by reducing the number of gasoline formulations enhance 

fungibility, but they could also impact the U.S. refiners’ ability to 

produce enough gasoline to meet overall demand. Considerable 

investments that might otherwise be devoted to capacity expansion could 

be diverted to building the systems needed for more intensive processing 

and there would be more limited opportunity to divert some of the 

components that are harder to use to make the clean gasoline. 

 So you have sort of a tough tradeoff between the potential for shortterm regional disruptions that cause price spikes and increasing 

production challenges to make more clean gasoline. Let me end by 

turning a little bit to the outlook. We think the world oil market is tight; 
31

as we have been saying for some time, we think crude oil prices will 

remain high. Our current projection for WTI crude prices averages $68 

per barrel in both 2006 and 2007. We expect this year’s summer 

gasoline prices to average $2.71 per gallon, 34 cents higher than last 

summer’s average. We expect prices to fall over the summer. The key 

uncertainties are, not surprisingly, the potential for hurricanes that could 

impact refining and production in the Gulf region, and geopolitical 

factors affecting crude oil prices. And with that, I am done and I guess I 

didn’t meet my goal. Thank you. 

 [The prepared statement of Howard Gruenspecht follows:] 

PREPARED STATEMENT OF HOWARD GRUENSPECHT, DEPUTY ADMINISTRATOR, ENERGY 

INFORMATION ADMINISTRATION, U.S. DEPARTMENT OF ENERGY

Mr. Chairman and Members of the Committee: 

I appreciate the opportunity to appear before you today. The Energy Information 

Administration (EIA) is the independent statistical and analytical agency within the 

Department of Energy. We are charged with providing objective, timely, and relevant 

data, analyses, and projections for the use of the Congress, the Administration, and the 

public. While we do not take positions on policy issues, our work can assist energy 

policymakers in their deliberations. Because we have an element of statutory 

independence with respect to our activities, our views are strictly those of EIA and should 

not be construed as representing those of the Department of Energy or the 

Administration. 

Gasoline is an essential commodity to most Americans. Not only is our country the 

world’s biggest petroleum consumer, but to a far greater extent than the world in general, 

we consume that petroleum in the form of gasoline. Gasoline accounts for about 45 

percent of U.S. petroleum consumption, or about 18 percent of our total energy demand. 

Retail gasoline prices more than doubled from the beginning of 2004 through early 

September 2005, in the aftermath of Hurricane Katrina. Though gasoline prices fell back 

sharply last fall following initial recovery from the hurricanes, the U.S. average regular 

gasoline price is once again around $3 per gallon, with many areas already over that 

mark. 

Several different factors have contributed to the sharp increase in the price of 

gasoline seen in recent years. First and foremost, the price of crude oil, from which 

gasoline and other petroleum products are refined, has risen dramatically. Second, the 

balance between the supply and demand for gasoline has tightened. As discussed below, 

both long-run forces, such as demand for gasoline growing faster over the past 5 years 

than the capacity to supply it, and shorter-run circumstances, such as the elimination of 

methyl tertiary butyl ether (MTBE) from reformulated gasoline (RFG) on a nationwide 

basis and the lingering effects of hurricanes Katrina and Rita on refinery availability and 

maintenance schedules, are contributing to this tightness. These factors combined to 

increase the “spread” between the average spot gasoline price and the spot price of crude 

oil from about 15 cents per gallon at the beginning of March to a peak of about 60 cents 

per gallon in the middle of April. This gasoline price spread has since fallen back 

somewhat, but through March and April the spread averaged about 40 cents per gallon, 

about 20 cents per gallon higher than seen during more typical market situations during 

these months. 

As requested in your invitation, my testimony discusses the factors affecting 

gasoline supply and prices, including the effects of fuel specifications and the increased 

use of ethanol on the market, and reviews EIA’s gasoline market outlook. 
32

Factors Affecting Gasoline Supply and Prices 

Crude Oil Prices 

The price of West Texas Intermediate (WTI) crude rose from roughly $40 per barrel 

at the end of 2003 to between $70 and $75 per barrel on the spot market during the first 

week of May 2006. Futures prices are also close to this level. All else being equal, each 

$1 increase in the price of crude oil adds about 2.4 cents per gallon to the price of 

gasoline. As shown in Figure 1, the increase in crude oil prices accounts for roughly 

two-thirds of the increase in the average retail gasoline price since the end of 2003. 

Figure 1 

CRUDE OIL, SPOT GASOLINE AND RETAIL GASOLINE PRICES, 2003 to 

Present 

0

20

40

60

80

100

120

140

160

180

200

220

240

260

280

300

320

1/1/034/1/037/1/03

10/1/03

1/1/044/1/047/1/04

10/1/04

1/1/054/1/057/1/05

10/1/05

1/1/064/1/06

Cents per Gallon

$0

$10

$20

$30

$40

$50

$60

$70

$80

$90

$100

$110

$120

$130

Dollars per Barrel

WTI Crude Oil

Average Retail Regular

Average Spot Regular

At this Committee’s hearing May 4th on crude oil markets, EIA Administrator 

Caruso outlined our perspective on the forces driving crude oil prices in today’s 

marketplace. To summarize briefly, crude oil prices are set in the global marketplace and 

largely reflect the fundamentals that determine supply and demand. In recent years, 

increases in global oil production capacity have struggled to keep pace with rapidly 

growing demand, particularly in China, the other emerging economies in Asia, and the 

United States. This slower growth in productive capacity relative to growth in demand 

has resulted in a decline in global surplus capacity to produce crude oil. At the same 

time, perceived risks to supply posed by geopolitical instability and other uncertainties 

have grown. In the present environment, with a minimal cushion of surplus upstream and 

downstream capacity to meet disruptions in supply and with futures markets in contango 

(i.e., a market in which prices for commodities delivered in future months are higher than 

for those delivered in months closer to the present), market participants have a strong 

demand for inventories, so the traditional inverse relationship between inventory and 

price levels does not apply. Absent an unexpected downturn in global economic activity, 

neither demand-side nor supply-side corrections will come quickly; thus, crude oil prices 

are expected to remain at relatively high levels, supporting high gasoline prices for the 

foreseeable future. 
33

The Supply-Demand Balance in Gasoline Markets 

Beyond the cost of crude oil to refiners, gasoline prices are directly affected by the 

balance between supply and demand for gasoline itself. The difference between gasoline 

prices at the refinery level and crude oil prices, often referred to as the “crack spread,” 

reflects both the cost and profitability of refining gasoline and depends directly on market 

conditions. Historically, the price differential between crude oil and gasoline has varied 

significantly over time due both to seasonality and factors affecting market tightness. As 

with any commodity, when available production capacity is strained relative to demand, 

the price rises to keep the market in balance by attracting additional supply and/or 

discouraging consumption. As discussed below, both long-run forces and short-run 

circumstances have contributed to a tighter gasoline market, which has led to increased 

gasoline crack spreads. 

Long-run forces affecting the gasoline market balance 

U.S. gasoline demand has generally grown at the rate of about 1 to 3 percent per 

year since the late 1980s, driven by growth in population, the number of vehicles, and the 

economy. Gasoline demand growth can also be affected by changes in vehicle fuel 

economy and changes in gasoline prices. After rising from the mid-1970s to the late 

1980s, the average fuel economy of new light-duty vehicles has been relatively flat over 

the past decade, in part due the growing share of light trucks (including pickup trucks, 

sport utility vehicles, and minivans) in total sales of light-duty vehicles. The impact of 

gasoline prices on consumption, which reflects both travel decisions and, over time, 

vehicle purchase decisions, is difficult to isolate from other influences, but appears to be 

growing in an era of sustained higher prices. Based on available data, U.S. motor 

gasoline consumption exhibited almost no growth in 2005. 

U.S. gasoline supply comes mainly from domestic refineries, though with a 

significant contribution from imports. In the late 1970s, the United States had significant 

excess refining capacity, but a combination of growing demand and the closure of some 

refineries significantly raised average U.S. refinery utilization rates by the early 1990s. 

Since the mid-1990s, both demand and refinery capacity have grown, but demand has 

grown more than capacity over the past 5 years. This situation may be changing. 

Significantly higher financial returns to refining over the past several years have provided 

a strong incentive for refinery expansion. The refining industry is also completing a set 

of major process investments needed to meet low-sulfur fuel specifications that absorbed 

significant resources. With attractive returns and available resources, we are now seeing 

major capacity expansion announcements, totaling approximately 1.5 million barrels per 

day of new distillation capacity by 2010. However, much of this capacity will not be 

ready for several years, which leaves the U.S. market quite tight in the very near term. 

In recent years, product imports have met about half of U.S. growth in gasoline 

demand. Product imports will remain important to the United States. About 10 percent of 

our gasoline supply comes from imports, most of which go to the East Coast where they 

supply about 25 percent of that region’s demand. Much of the growth in U.S. gasoline 

imports during the past few years has come from European sources. An excess of 

gasoline supply in Europe, which derives from that region’s move to diesel-fueled lightduty vehicles, has found a market on the U.S. East Coast. Furthermore, European 

gasoline quality is similar to U.S. quality, so European refiners can produce gasoline that 

meets U.S. standards. Since 2003, European gasoline import volumes increased by over 

200 thousand barrels per day (almost 80 percent), notwithstanding implementation of 

reduced sulfur content standards in the United States. 

At the same time, the United States saw a drop in gasoline import volumes of 27 

thousand barrels per day from Brazil, as that country and other areas have not moved as 
34

rapidly to low-sulfur fuels. In 2006, we may see further falloff from areas in Latin 

America and other regions as the United States has moved to the final phase of the Tier 2 

gasoline program and the industry moves away from MTBE. In general, fewer sources of 

supply will be able to provide U.S.-quality imports. However, those remaining appear to 

have the potential to send increased volumes to the United States. 

Short-run circumstances affecting the gasoline market balance 

Since last fall, several events have exacerbated tightness in gasoline markets. One 

of these is the elimination of MTBE from RFG and the resulting increase in the use of 

RFG made with ethanol. The petroleum industry has moved to eliminate MTBE in 

gasoline by the first week in May 2006. Companies’ decisions have been driven by State 

bans due to water contamination concerns, continuing liability exposure from adding 

MTBE to gasoline, and perceived potential for increased liability exposure due to the 

elimination of the oxygen content requirement for RFG as part of the Energy Policy Act 

of 2005. 

Until recently, the largest use of MTBE was in RFG consumed on the East Coast, 

excluding New York and Connecticut, and in Texas. The other RFG areas in the 

Midwest, California, New York, and Connecticut had already moved from MTBE to 

ethanol. Most companies eliminating MTBE in the short run are blending ethanol into 

the gasoline to help replace the octane and clean-burning properties of MTBE. The 

switch from MTBE to ethanol in these RFG areas has several supply impacts: 

 Net loss of gasoline production capacity. During the summer months, 

replacing MTBE with ethanol in reformulated gasoline results in about a 5-to6-percent loss of production capability in order to accommodate ethanol’s 

emission properties. 

 Shift in East Coast supply sources. Without the use of MTBE, East Coast 

refiners are expected to produce less RFG, which will result in more RFG 

supply for this region coming from the Gulf Coast and from imports. 

 Loss of import supply sources that cannot deliver MTBE-free product or that 

cannot produce the high-quality blendstock needed to combine with ethanol. 

 Installation of blending equipment at terminals. Ethanol must be delivered 

separately to terminals near the retail market, where it is blended with base 

gasoline blending components before delivery to retail stations. 

 A very tight ethanol market, limited in the short-run by ethanol-production 

capacity. Until ethanol capacity catches up, ethanol is being repositioned 

from discretionary blending into conventional gasoline in the Midwest to the 

RFG areas, and EIA expects some increase in imports. 

Refiners, blenders, pipelines and ethanol suppliers have been working hard to 

accomplish the changeover. As shown in Figure 2, recent EIA weekly data show a 

steady decline in stocks of RFG with MTBE and a steady increase in stocks of summergrade reformulated blendstock for oxygenate blending (RBOB with alcohol), the base 

gasoline into which ethanol is blended. The transition on the East Coast resulted in some 

temporary terminal outages as terminal tanks were emptied of winter-grade reformulated 

gasoline in preparation to receive the first batches of RBOB with alcohol. While the 

outages raised some concerns, no major shortage occurred. The largest problems have 

been in Texas, where rail bottlenecks are making ethanol delivery difficult. This problem 

is not yet resolved. Still, much of the initial transition is behind us, and EIA will continue 

to monitor the situation this summer. 
35

Figure 2

RECENT GASOLINE STOCK LEVELS: 

FINISHED RFG (w/MTBE) and RBOB (for Blending with Ethanol) 

0

5

10

15

20

25

30

35

12/30/05

1/13/061/27/062/10/062/24/063/10/063/24/06

4/7/06

4/21/06

Million Barrels

Finished RFG (w/MTBE)

RBOB for blending with alcohol

0

5

10

15

20

25

30

35

12/30/05

1/13/061/27/062/10/062/24/063/10/063/24/06

4/7/06

4/21/06

Million Barrels

Finished RFG (w/MTBE)

RBOB for blending with alcohol

The other short-run circumstance affecting the current market is the lingering effect 

of hurricanes Katrina and Rita. The hurricanes resulted in significant damage to several 

refineries, and one large refinery suffered an explosion that has kept it off line through 

April. In addition major refinery maintenance has occurred this year as a result of, 

among other things, delayed maintenance during the fall following the hurricanes, and 

final preparations for the ultra-low-sulfur diesel program that begins this June. EIA 

estimated that about 1 million barrels per day of capacity was offline during April, which 

is almost 6 percent of U.S. capacity. These refineries represent about 500,000 barrels per 

day of gasoline production. Maintenance outages are expected to extend only into the 

middle of May, and the hurricane-damaged refineries are continuing to come back online, 

which should help to ease prices. 

Impacts of Fuel Specifications 

Apart from the current move away from MTBE as a blending component in RFG, 

the longer-term trend towards requirements for cleaner-burning gasoline and diesel fuel, 

while contributing to air quality improvement, has had several fuel supply consequences. 

In general, cleaner-burning motor fuels require more processing, are harder to produce, 

and restrict flexibility in using fuel components, which all work to increase their 

production cost. Some clean fuel requirements are imposed at the Federal level, but in 

many cases States and regions that are charged with developing plans to reduce emissions 

of air pollutants and pollution precursors in areas that do not meet ambient air quality 

standards adopt changes in fuel specification as one of their strategies. Such States and 

regions typically work with refiners to tailor gasoline specifications to meet their specific 

needs at minimum production cost. For example, some regions that are not required to 

use RFG have been able to reduce emissions of volatile organic compounds (VOCs), a 

smog precursor, by lowering the Reid Vapor Pressure (RVP) of gasoline used in their 

area to reduce evaporation. Such low-RVP fuel is cheaper to produce than gasoline that 

meets the complete RFG specification. 
36

As the number of fuel types has increased, the pipeline distribution and storage 

system, which has a limited number of pipelines and storage tanks, is facing growing 

challenges to deliver many distinct fuel types in smaller batches. The reduction in the 

fungibility of fuels across locations has tended to slow the ability of the supply system to 

respond to unexpected shortfalls. If a region runs out of its specific fuel unexpectedly, it 

can take some time for new supply to be sent to the area. Different fuels available in the 

nearby surrounding areas could not be used. Delays in responding to such unexpected 

shortfalls add to price volatility. So far, this problem has not resulted in major problems 

in most regions. The two notable exceptions are California, which requires the cleanestburning gasoline in the world, and the Chicago/Milwaukee area, which was the only 

region using ethanol-blended RFG during the change from Phase I to Phase II of the RFG 

program in 2000. 

Looking ahead, unchecked fuel-type proliferation has the potential to make the 

distribution system even more complex and further reduce fuel fungibility, causing more 

regional supply and price volatility than we have experienced historically. Yet, there is 

no simple solution. In addition to the difficulty of balancing of environmental and fuel 

supply concerns, actions to ease distribution problems by reducing the number of 

gasoline formulations could increase average gasoline production costs and reduce 

overall gasoline supply capacity. For example, moving the entire country to a single very 

clean gasoline standard would certainly enhance fungibility, but it would also impact 

U.S. refineries’ ability to produce enough gasoline to meet overall demand. Considerable 

investment in what might otherwise be devoted to capacity expansion would be diverted 

to building the systems needed for more intensive processing. A single product standard 

for gasoline, if set at very stringent levels, could also choke off imports of gasoline from 

some sources. Even though greater fungibility would reduce the potential for short-term 

regional supply shortages and price spikes, consumers could end up facing a higher 

national average price for gasoline than they would under the present regime. Timing, 

balance between supply and distribution, and potential future fuel specification and 

vehicle changes all need to be considered when trying to address this issue. 

Ethanol 

The United States is moving towards using more renewable fuels, in particular 

ethanol. Most renewable fuel use historically and over the next decade is expected to be 

as additives to traditional petroleum fuels, rather than as stand-alone fuels. Use of 

ethanol has been increasing in recent years as States have banned the use of MTBE, and 

gasoline suppliers have replaced that MTBE with ethanol, which helps to replace the 

octane and clean-burning properties lost with MTBE. In 2005, ethanol use in gasoline 

(263 thousand barrels per day) represented almost 3 percent of gasoline consumption by 

volume. The recent Energy Policy Act of 2005 added a renewable fuel standard (RFS) 

that requires the increased use of renewable fuels over time and includes provisions to 

encourage biodiesel and cellulose ethanol. 

Given EIA’s short-term outlook for crude oil prices and the reference case oil price 

projections included in our Annual Energy Outlook 2006 (AEO2006), we believe that 

there are strong prospects for growing ethanol use. Our reference case projection for 

renewable fuel use significantly exceeds the requirements of the RFS program, reaching 

roughly 10 billion gallons annually in 2012, assuming the extension of the existing 

ethanol tax credit beyond its currently scheduled expiration at the end of 2010. Even 

without extension of the tax credit, projected ethanol use exceeds the RFS-mandated 

level through 2012 in our reference case. We are projecting that nearly all of the ethanol 

will be derived from corn, with cellulose ethanol limited to the penetration levels 

mandated in the recent legislation. While cellulose ethanol has potential feedstock cost 

advantages compared to corn ethanol and tremendous progress has been made in the 
37

performance and cost of enzymes used in the conversion of cellulose material to ethanol, 

the high capital cost of cellulose ethanol plants remains a significant barrier to their 

economic competitiveness. 

The Near-Term Outlook 

Looking ahead, the prospects for significant near-term improvement in the world 

petroleum supply and demand balance appear to be fading. While U.S. crude oil 

production will grow with recovery from the hurricanes, only small increases in 

Organization of Petroleum Exporting Countries (OPEC) and other non-OPEC production 

and capacity are expected in the near future. Expected steady world oil demand growth, 

combined with only modest increases in world surplus oil production capacity and the 

continuing risks of geopolitical instability, are expected to keep crude oil prices high 

through 2007. The WTI crude oil price in EIA’s most recent short-term forecast is 

projected to average $68 per barrel in both 2006 and 2007. Retail regular gasoline prices 

are projected to average about $2.57 per gallon in 2006 and 2007. Gasoline demand is 

projected to grow 0.9 percent in 2006 and 1.5 percent in 2007. The projected growth in 

demand reflects continued economic growth and the leveling off of motor gasoline 

prices. 

During this year’s summer driving season (April 1 to September 30) the national 

average retail price of regular gasoline is expected to be $2.71 per gallon, 34 cents per 

gallon higher than last summer’s average of $2.37 per gallon. By September 2006, fuel 

prices are expected to be lower than last year. With another active hurricane season 

possible this year, news of any developing hurricanes and tropical storms with a potential 

to cause significant new outages could add to volatility in near-term prices. The 

projections outlined above do not reflect a scenario with significant new production or 

refinery outages. 

This concludes my testimony, Mr. Chairman and members of the Committee. I will 

be happy to answer any questions you may have. 

 CHAIRMAN BARTON. We knew you wouldn’t. Anyway, good effort. 

Thank you for your testimony. We now want to hear from Mr. William 

Wehrum with the EPA. 

MR. WEHRUM. Thank you, Mr. Chairman, members of the 

committee. I appreciate the opportunity to speak with you today about 

fuel quality specifications and supply concerns. I am pleased to be here 

on behalf of my colleagues at EPA, some of whom are here right behind 

me, who have been instrumental in developing our Nation’s strategy to 

reduce air pollution from motor vehicles and the fuels that run them. 

Today our focus is on existing Federal clean fuel programs and to 

provide EPA’s perspective on State clean fuel programs, often called 

boutique fuels. Reports of fuel supply shortages have led to increased 

attention to the use of boutique fuels. 

 Just two weeks ago, President Bush called on EPA to confront the 

problem of too many localized fuel blends, yet there is much confusion 

over what a boutique fuel is. Quite simply, a boutique fuel is any unique 

fuel specification developed by a State or local air pollution agency and 

approved by EPA as part of a State plan to meet our national air quality 

standards. Currently, 12 States have approved boutique fuel programs; 
38

eight States limit the volatility of gasoline during the summertime. Four 

other States control other parameters of fuels, such as aromatics and 

sulfur in gasoline or diesel. 

 These controls reduce evaporation of gasoline, which helps reduce 

smog in urban areas. We prepared a map showing the areas where these 

boutique fuels currently are required to be used. For some time there has 

been concern about potential adverse effects of boutique fuels on fuel 

pricing, supply, and distribution. Importantly, the cost of producing 

boutique fuels does not translate into retail consumer prices at the pump. 

As part of the President’s 2001 National Energy Policy Report, EPA was 

directed to conduct a study to determine whether boutique fuels were 

contributing to fuel pricing and supply problems. 

 EPA worked with DOE to issue a report to the President, concluding 

that under normal conditions, the fuel production and distribution system 

works well and is able to provide adequate supplies of boutique fuels. 

However, because boutique fuels vary from conventional fuel, if 

production or distribution disruptions occur, such as hurricanes, pipeline 

breaks, or refinery fires, boutique fuel requirements can limit the 

availability of supply and therefore contribute to potential supply 

problems and short-term price spikes. 

 In response to the report’s findings, EPA took several steps to ease 

the regulations governing the transition from winter to summer gasoline. 

For example, EPA revised its regulations to allow refiners to upgrade 

conventional gasoline to RFG, if it meets the RFG performance 

standards, thereby allowing for greater flexibility and providing RFG 

when supply is tight. Last year’s Energy Policy Act also addressed the 

issue of boutique fuels. First, the Act established a fixed limit on the 

number of boutique fuels that EPA can approve. The list will limit 

further expansion of State clean fuel programs. 

 Second, the Act instructed EPA and DOE to perform a study on the 

effects of State boutique fuel programs on air quality, fuel blends, fuel 

availability, fungibility, and costs. EPA and DOE are currently 

coordinating efforts and will work closely in preparing this report for 

Congress. Third, the Act requires the agency to prepare another report 

by June 1st, 2008, concerning variations in regional, State, and local 

motor vehicle fuel requirements. The Act also required removal of the 

Federal oxygen content requirement for RFG. Removal of the RFG 

oxygen standard will allow refiners additional flexibility in how they 

make reformulated gasoline and when and where they blend oxygenates. 

EPA completed a rulemaking, as directed by Congress, on May 3rd, 2006, 

which took effect on May 8th. 

 Finally, the Act requires EPA to develop and implement a renewable 

fuel standard or RFS. This program will require increasing amounts of 
39

renewable fuels, such as ethanol and biodiesel to be blended into the 

Nation’s fuel supply. While EPA’s regulatory improvements in the new 

Energy Policy Act provisions have significantly improved key aspects of 

the boutique fuels issue, concerns about potential adverse effects of 

boutique fuels have persisted. Hurricane Katrina provided a stark 

demonstration that when the Nation’s fuel supply is drastically reduced, 

multiple fuel regulations can complicate the recovery effort. 

 Moreover, persistently high crude oil prices and the resulting high 

gas prices have led to renewed effort to look for innovative ways to 

simplify the fuel distribution system. As a result, President Bush has 

directed Administrator Johnson to convene a Governors Boutique Fuels 

Task Force. All 50 Governors have been invited to participate. The task 

force will assess various State and local clean fuel requirements and the 

effect the requirements have on supply, quality, price and air quality. 

 Last Thursday, Administrator Johnson held a conference call 

initiating this process. Over the coming weeks we are inviting the input 

of outside experts from industry, public health organizations, and other 

interested parties. We also expect to hold a number of technical staff 

meetings to help EPA prepare a draft report for the task force’s review in 

mid-June. The options in the report will be designed to help the 

President meet his overall goal of simplifying and unifying the fuel 

regulatory system and increasing cooperation among States on gasoline 

supply decisions. 

 The current fuel situation has had some unique influencing factors 

beyond the normal winter to summer gasoline transition practices. For 

example, the market underwent withdrawal of MTBE from RFG market 

areas. This MTBE-to-ethanol transition led to some additional tank 

management practices to prepare for the new products. Crude oil prices 

also hit historic highs. These factors, among others, provided for unusual 

market conditions. Despite these conditions, the market has managed the 

transition effectively and maintained the integrity of important 

environmental programs. 

 It is also important to note that although a number of States have 

banned the use of MTBE, there is no Federal ban. Refiners of RFG who 

have phased out the use of MTBE have done so through their own 

decisions. Of course, now that the RFG oxygenate requirement has been 

eliminated, refiners are free to produce RFG with or without an 

oxygenate. 

 Again, thank you, Mr. Chairman and members of the committee, for 

the opportunity to testify before the committee on these important issues. 

I would be pleased to answer any questions you may have. 

 [The prepared statement of William Wehrum follows:] 
40

PREPARED STATEMENT OF WILLIAM WEHRUM, ACTING-ASSISTANT ADMINISTRATOR,

OFFICE OF AIR AND RADIATION, U.S. ENVIRONMENTAL PROTECTION AGENCY

Mr. Chairman, and members of the Committee, I appreciate the opportunity to come 

before you today to testify on gasoline fuel quality specifications and supply. As the 

Acting Assistant Administrator for the Office of Air and Radiation, my responsibilities 

include overseeing all air-related activities of the Environmental Protection Agency (EPA 

or Agency). I am pleased to be here on behalf of my colleagues at EPA who have 

developed and worked closely with states to implement the highly successful programs 

that reduce harmful emissions from highway and off-road vehicles, engines and fuels. 

My testimony will first provide an overview of existing federal regulatory clean fuel 

programs, followed by more discussion of state clean fuel quality programs, often 

referred to as “Boutique” Fuels. 

Overview of Clean Fuel Programs 

Fuel controls for emission reductions is often one of the most cost-effective methods 

to help reduce emissions. In the Clean Air Act Amendments of 1990, Congress directed 

EPA to develop and implement several important new clean fuel programs to improve air 

quality to reduce emissions that cause or contribute to the formation of ozone and air 

toxics. Many of these programs are national in scope, such as summertime controls on 

gasoline volatility and year round controls on gasoline sulfur. Congress set specific 

cities, performance standards and an oxygenate requirement for the reformulated gasoline 

(RFG) program which began in 1995. Provisions such as banking, averaging and credit 

trading have also been built into many of these regulatory programs and are designed to 

provide greater flexibility and reduce production costs. 

Clean fuel programs have been an integral part of the nation’s strategy to reduce air 

pollution and they have been successful. They provide significant, cost-effective and 

timely reductions in motor vehicle emissions. 

State Boutique Fuel Programs 

 There is much confusion over what a boutique fuel is. The Clean Air Act (CAA) 

allows states to implement their own clean fuel programs. Quite simply, a boutique fuel 

is a unique fuel specification that is developed by a state or local air pollution agency and 

approved by EPA as part of the State Implementation Plan (SIP) for the affected area. 

Most states that do not use RFG to address their air quality issues have elected to use 

gasoline with lower volatility than federal conventional gasoline standards. Sometimes 

states adopt these low Reid vapor pressure (RVP) fuels because the CAA does not allow 

them to join the federal RFG program. In other cases where states could have opted-in to 

the federal RFG program, local fuel providers worked with states to develop an 

alternative fuel specification that can be produced at a lower cost and still support their 

air quality needs. What this has typically meant in practice is the avoidance of the 

oxygen mandate in the RFG program because it is more expensive in some areas. It is 

worth noting that boutique fuels do not include other clean fuel requirements, such as 

Federal fuel controls (e.g., reformulated gas, winter oxygenated fuels), California clean 

fuel requirements, and area-specific fuels required by state law for purposes other than air 

quality (e.g., Minnesota’s ethanol mandate). 

Currently 12 states have approved boutique fuel programs. Eight states limit the 

volatility of gasoline and are in effect only during the summer months. Four other states 

control other parameters of fuels, such as aromatics and sulfur in gasoline or diesel fuel, 

or allow California’s cleaner burning gasoline to be sold within their boundaries. [See 

attached map.] This reduces evaporation of gasoline which helps reduce smog in urban 

areas. [See attached chart of boutique fuel programs.] The state plans are required to 

estimate the additional cost. Those state estimates range from 0.3 to 3 cents per gallon 
41

above the cost of conventional gasoline. It is important to note that the cost of producing 

boutique fuels does not translate into retail consumer prices at the pump. Since many 

economic factors influence the retail price of gasoline, I will defer to experts from the 

Energy Information Agency to describe the difficulty of translating fuel production costs 

to impacts on retail prices. 

The Clean Air Act imposes strict limitations on EPA’s approval of boutique fuels. 

Specifically, a State may prescribe and enforce a fuel quality control if, after review and 

approval of the SIP, the Administrator finds that the State control or prohibition is 

necessary to achieve the national primary or secondary ambient air quality standard and 

no other measures are available to bring about timely attainment. Where implemented, 

these fuels are an important and powerful tool for combating local air pollution problems. 

EPA’s 2001 Evaluation of Boutique Fuels 

For sometime there has been concern about potential adverse effects of boutique 

fuels on fuel pricing, supply and distribution. As part of the President’s 2001 National 

Energy Policy Report, EPA was directed to conduct a study to determine whether 

boutique fuels were contributing to such problems and if so to recommend solutions. 

EPA conducted an extensive review that included close cooperation with the Department 

of Energy (DOE) and extensive outreach to the fuels industry and other interested 

stakeholders. EPA issued a report to the President in October 2001. EPA’s report 

focused on two primary issues. First, we assessed the possible need for greater 

flexibility in the process that fuel marketers used to make the transition from winter to 

summer grade gasoline. Second, we investigated the growing number of state and local 

boutique fuel programs and the challenges this growth presented to the gasoline 

distribution system. 

The report concluded that during times of normal conditions, the fuel production and 

distribution system works well and is able to provide adequate supplies of boutique fuels 

to the required areas. However, because the specification of the fuel varies from the 

conventional fuel used in surrounding areas, if production or distribution disruptions 

occur, such as hurricanes, pipeline breaks or refinery fires, boutique fuel requirements 

can limit the availability of supply to the area and therefore contribute to potential supply 

problems and short term price spikes. 

The Agency also evaluated the costs and benefits of several different approaches to 

limit the number of fuels available for adoption by states. 

In response to the report’s findings, EPA took several steps to ease the regulations 

governing the transition from winter to summer gasoline. For example, EPA increased 

the compliance testing tolerance from 1% to 2% for a limited transition time to allow for 

a smoother switch to summer-controlled gasoline. The Agency also revised the 

regulations to allow refiners to upgrade conventional gasoline to RFG, if it meets the 

RFG performance standards, thereby allowing for greater flexibility in providing 

additional RFG when supply is tight. 

Boutique Fuel Provisions of the Energy Policy Act 

First, the Energy Policy Act of 2005 (EPAct) established a fixed limit on the number 

of boutique fuels that EPA can approve. The list will limit further expansion of the state 

clean fuel programs. EPA is preparing to publish this list for comment in a Federal 

Register notice which is expected before the end of this month. 

 EPA and DOE are also instructed by EPAct to perform a joint study on the effects of 

state boutique fuel programs on air quality, fuel blends, fuel availability, fungibility and 

costs, with a focus on making recommendations to Congress for legislative changes 

supporting developing a federal fuels system that maximizes fungibility and supply and 

addresses air quality requirements and reduces price volatility. The Agency and DOE are 

currently coordinating efforts and will work closely in preparing this report. 
42

 Further, EPAct requires the Agency to prepare another report by June 1, 2008, 

concerning variations in regional, state and local motor vehicle fuel requirements. Both 

reports will build off the EPA 2001 Boutique Fuels Report, accounting for recent and 

upcoming changes in the U.S. gasoline and diesel markets. 

EPAct also authorized removal of the federal oxygen content requirement for RFG. 

Removal of the RFG oxygenate standard will allow refiners additional flexibility in how 

they make reformulated gasoline and when and where they blend oxygenates. EPA 

completed a rulemaking, as directed by Congress, on May 3, 2006 which took effect on 

May 8, 2006. California is treated differently under the Clean Air Act, this as directed by 

Congress. EPA removed the oxygen content requirement in California RFG in April, 

prior to its removal in other states. 

 Perhaps of greater importance, EPAct also requires EPA to develop and implement a 

renewable fuels standard, or RFS. This program will require increasing amounts of 

renewable fuels, such as ethanol and biodiesel, to be blended into the nation’s gasoline 

supply. We currently are developing the program. A comprehensive proposal will be 

issued later this year. 

Governors Task Force on Boutique Fuels 

While EPA’s regulatory improvements and the new EPAct provisions have 

significantly improved key aspects of the boutique fuels issue, concerns about potential 

adverse effect of boutique fuels have persisted. Hurricane Katrina provided a stark 

demonstration that when the nation’s fuel supply is drastically reduced as it was last year, 

multiple and differing fuel regulations can complicate the recovery effort. Moreover, 

persistently high crude oil prices and the resulting high gas prices have caused a renewed 

effort to look for innovative ways to simplify the fuel distribution system. 

Consequently, on April 25th, President Bush directed Administrator Johnson to 

convene a Governors Boutique Fuels Task Force. All 50 Governors have been invited to 

participate. The task force will look to assess various state and local clean fuel 

requirements and the effect the requirements have on supply, quality, price, and air 

quality. 

Last Thursday, Administrator Johnson held a conference call initiating this process. 

Weekly meetings will be held, with our next meeting scheduled with the task force May 

12, where EPA staff will present background information on fuel regulations, the 

different boutique fuels in use in this country, the results of a 2001 review which the 

Agency conducted on boutique fuels and other related information. Over the coming 

weeks we are inviting the input of outside experts from industry, public health 

organizations, and other interested parties. We also expect to hold a number of technical 

staff meetings to help EPA prepare a draft report for the task force’s review in mid-June. 

This ambitious schedule will put us on track to provide the President with our final report 

within 8 weeks. The key elements of the report should include, a summary of the process 

we utilized to review boutique fuels; information on actions that have already been 

undertaken, including EPA’s 2001 boutique fuel report and provisions required by the 

Energy Act; our current understanding of the use and utility of boutique fuels; 

stakeholder opinion and feedback; and options, recommendations and additional 

information needs. 

The options in the report will be designed to help the President meet his overall goal 

of simplifying and unifying the fuel regulation system and increasing cooperation among 

states on gasoline supply decisions. 

Conclusion 

In closing, this year’s gasoline situation has had some unique influencing factors 

beyond the normal winter-to-summer gasoline transition practices. For example, the 

market underwent withdrawal of MTBE from RFG market areas, and the addition of 
43

ethanol into those RFG areas that had previously used MTBE. This MTBE-to-ethanol 

transition lead to some additional tank management practices to prepare for the new 

products. Crude oil prices also hit historic highs. These factors, among others, provided 

for unusual market conditions. Despite these conditions, the market has managed the 

transition effectively and maintained the integrity and benefits of important 

environmental programs. 

It is important to note that although a number of states have banned the use of 

MTBE, there is no federal ban. Refiners of RFG who have phased out the use of MTBE 

have done so through their own decisions. Of course, now that the RFG oxygenate 

requirement has been eliminated, refiners are free to produce RFG with or without an 

oxygenate. 

Again, I want to thank you, Mr. Chairman and the members of the Committee for 

the opportunity to testify before the Committee on these important issues. This concludes 

my prepared statement. I would be pleased to answer any questions that you may have. 
44
45

State Boutique Fuel Programs – May 2006

PADD 1: East Coast

PADD 2: Midwest

PADD 3: Gulf Coast

PADD 4: Rockies

PADD 5: West Coast

RVP of 7.0psi

RVP of 7.0psi w/Sulfur Content

RVP of 7.2psi

RVP of 7.8psi

Low Emission Diesel Fuel 

& RVP of 7.8psi

Cleaner Burning Gasoline

Winter Gasoline

GA

VT

NH

MA

RI

MD

CT NJ

DE

AZ

CA

NV

OR

WA

CO

ID

MT

UT

WY

AL

AR

LA

MS

NM

TX

IL IN

IA

KY

KS

MI

MN

MO

ND

NE

OH

OK

SD

TN

WI

FL

ME

NY

NC

PA

SC

VA

WV

 CHAIRMAN BARTON. Thank you, sir. The Chair recognizes himself 

for the first 5 minutes of questions. The first question to you, Dr. 

Gruenspecht. I have seen different numbers about what U.S. domestic 

refinery capacity actually is. I have seen a number as low as 15 million 

barrels per day and I have seen a number as high as about 17-1/2 million 

barrels per day. According to the EIA, what is U.S. domestic refinery 

capacity right now? 

 MR. GRUENSPECHT. Our current number is about 17.3 million 

barrels. 

 CHAIRMAN BARTON. Push that button there. 

 MR. GRUENSPECHT. Our number is 17.3 million barrels of 

distillation capacity. As you well know, there are all different types of 

units at refineries, but typically, you measure at the distillation level. 

 CHAIRMAN BARTON. So the official number is 17.3? 

 MR. GRUENSPECHT. That is our current number. 

 CHAIRMAN BARTON. All right. What is the demand for refined 

products per day in the United States? We have got capacity for 17.3. 

What is our demand for the products that the refineries produce? 

 MR. GRUENSPECHT. That is a good one. I am trying to think 

through that because our total petroleum demand is, you know, about 20-

1/2 million barrels a day, but that includes some of the liquid petroleum 

gasses and other things that don’t come through the refinery. My 
46

colleague here tells me 18.5 would be a good number, 18.5 million 

barrels. 

 CHAIRMAN BARTON. Why wouldn’t it be 20 or 21? 

 MR. GRUENSPECHT. Because again, petroleum includes things like 

some propane and other liquid petroleum gasses, some of which come 

out of natural gas production facilities and never go into a refinery. 

 CHAIRMAN BARTON. Well, what I am trying to get at, one of your 

statements was the crack spread, which I am going to give you an 

opportunity to define, because that is not what most Americans think it 

is. 

 MR. GRUENSPECHT. Okay. 

 CHAIRMAN BARTON. But before we get there, I want to determine 

what the refinery production demand spread is and according to you or 

EIA, it would seem to be about a million and a half barrels per day, as 

opposed to three or four million barrels per day. 

 MR. GRUENSPECHT. We import some products, if that is what you 

are trying to say, what we have to import in the way of petroleum 

products. We import, I think, about 10 percent of our gasoline, which is 

close to a million barrels a day of gasoline. I think we are also maybe 

importing some small amounts of distillate heating fuel and diesel. 

 CHAIRMAN BARTON. And would it be fair to say if we could 

increase domestic refinery capacity by two million barrels per day, we 

would be self-sufficient in refined product capacity in this country? 

 MR. GRUENSPECHT. Two million barrels per day of capacity, again, 

assuming the utilization maintained at the current level, I think would 

allow us to refine the products that we consume. But again, we would 

not then be taking advantage of some of the things, like in Europe, the 

shift over to diesel cars, which has given them more gasoline. 

 CHAIRMAN BARTON. Than it is as a-- 

 MR. GRUENSPECHT. Yes, if you wanted to do that. 

 CHAIRMAN BARTON. If you were me and you were setting a goal to 

be self-sufficient in refinery capacity for our domestic demand in this 

country, the goal would be an increase of around two million barrels per 

day? 

 MR. GRUENSPECHT. That sounds about right to me. 

 CHAIRMAN BARTON. Okay. Now, let us go to the crack spread. 

 MR. GRUENSPECHT. Okay. 

 CHAIRMAN BARTON. Would you explain in layman’s terms what 

that is when you relate it to refinery? 

 MR. GRUENSPECHT. If you take the value of a barrel of gasoline on 

the wholesale market and compare that to the value of a barrel of crude 

oil on the wholesale market, the spread between those two prices is the 

crack spread. 
47

 CHAIRMAN BARTON. And what has it been historically? What 

would be considered an adequate spread to make a reasonable profit? I 

know the answer, at least I think I do. 

 MR. GRUENSPECHT. Well, it varies by time of year, first of all, but I 

think for this time of year, a 20 cent per gallon gasoline crack spread 

would be considered right. 

 CHAIRMAN BARTON. Convert that to barrels. 

 MR. GRUENSPECHT. Times 42 would be $9. 

 CHAIRMAN BARTON. $8 or $9. 

 MR. GRUENSPECHT. $8 or $9. 

 CHAIRMAN BARTON. What is it now? 

 MR. GRUENSPECHT. Significantly higher than that. 

 CHAIRMAN BARTON. How much significantly higher? 

 MR. GRUENSPECHT. It is probably a good $8 or $9 higher than that. 

 CHAIRMAN BARTON. All right. 

 MR. GRUENSPECHT. I mean, $10 higher than that, perhaps. 

 CHAIRMAN BARTON. Wouldn’t it be even higher than that? 

 MR. GRUENSPECHT. Well, I haven’t looked today, but-- 

 CHAIRMAN BARTON. Well, look. Have your staff look today. If I 

were to tell you that it was around $30 a barrel, what would you say? 

 MR. GRUENSPECHT. $30 a barrel, I think, would be a little high. 

 CHAIRMAN BARTON. Well, find out. 

 MR. GRUENSPECHT. Probably $18; 45 times 42 is $20, maybe $21 a 

barrel. 

 CHAIRMAN BARTON. There is no question then. 

 MR. GRUENSPECHT. It is a lot higher than-- 

 CHAIRMAN BARTON. If you have a refinery that is operating today, 

you are doing okay. 

 MR. GRUENSPECHT. You are making good money. Doing very well. 

 CHAIRMAN BARTON. You are paying the rent with a little extra for 

contingencies. 

 MR. GRUENSPECHT. And indeed, you know, as I indicated in my 

testimony, the financial incentives for expanding-- 

 CHAIRMAN BARTON. My time has expired, but my last question, is 

there any other part of the distribution chain today, in the American 

domestic market, that has a spread as large as the crack spread at the 

refinery output level? 

 MR. GRUENSPECHT. Not to my knowledge. 

 CHAIRMAN BARTON. Not at the crude oil. 

 MR. GRUENSPECHT. No. 

 CHAIRMAN BARTON. Not at the retail. 

 MR. GRUENSPECHT. You are talking about the distribution margin. 

 CHAIRMAN BARTON. So when we look at the-- 
48

 MR. GRUENSPECHT. The people who own gas stations are not 

making that kind of margin. If you are looking at the distribution 

margin, no, they are not. 

 CHAIRMAN BARTON. My time has expired. I recognize Mr. 

Boucher. 

 MR. BOUCHER. Well, thank you very much, Mr. Chairman, and 

thank you in particular for that interesting set of questions. I intend to 

pursue some of the answers to those questions, as well. Before I do that, 

though, Mr. Gruenspecht, let me direct your attention to another matter 

and one that also might serve our country usefully in order to reduce the 

price at the pump for gasoline, and that is the potential to have coal to 

liquid fuels. Mr. Shimkus and I both have a very strong interest in 

utilizing to a far greater extent our Nation’s plentiful reserves of coal. 

 We are beginning to see ways that that is happening already in the 

generation of electricity with new technologies for coal gasification. But 

my understanding is that a great opportunity also exists to utilize coal to 

manufacture a liquid fuel that can displace petroleum and be used 

directly to power transportation. Can you tell us, is such a technology, 

given the price of oil in the United States today, would it be economic? 

Can such a technology be employed in an economically feasible way 

given today’s petroleum prices? 

 MR. GRUENSPECHT. Yes, I can. We do a long-term outlook, as you 

know, and this year we have raised substantially our oil price projections 

and in this year’s long-term outlook for the first time we have coal-toliquids coming in, so coal-to-liquids, we believe, at the reference case oil 

price path that we envision, would be economically competitive. There 

are many issues involved with siting the plants. 

 MR. BOUCHER. That is all understood, but at what price per barrel of 

oil do coal-to-liquid fuels become price competitive? 

 MR. GRUENSPECHT. I believe that investors would want to know 

that prices would be $40 per barrel or higher for a sustained period of 

time. 

 MR. BOUCHER. And do you see prices being at $40 per barrel or 

higher here for a sustained period of time? 

 MR. GRUENSPECHT. Our long-term reference projection is for prices 

at that level or higher. 

 MR. BOUCHER. And so given that economic reality, what interests 

are the companies that have expertise in converting coal to liquid fuel is 

now showing in developing that technology in the United States, that has 

a long experience in South Africa with that technology and with that 

market, might be a case in point. 

 MR. GRUENSPECHT. I have not been following the individual 

companies closely, but I do know that some projects are under 
49

consideration. I know there is a project in Wyoming that is under 

consideration. I know there are some projects, I believe, in Pennsylvania 

that are under consideration. 

 MR. BOUCHER. And the private sector is showing some genuine 

interest in this? 

 MR. GRUENSPECHT. I think there is some interest. 

 MR. BOUCHER. I would like to invite your attention to specific 

company activity and if you could become apprised of that and report to 

us, that would be extremely helpful. Let me move to another subject. 

Can you tell us today how much the political risk for instability in Iran 

contributes to the price of petroleum? 

 MR. GRUENSPECHT. As you probably heard at the hearing last week, 

there are really a whole set of factors that are driving oil prices. 

Geopolitical risk is one of them. Iran is one of those geopolitical risks. 

 MR. BOUCHER. I am asking you to quantify that to some extent. 

Can you do that? 

 MR. GRUENSPECHT. I am really not able to separate out Iran from 

the-- 

 MR. BOUCHER. Can you quantify the general geopolitical risk? 

 MR. GRUENSPECHT. Again, there is also the issue of low surplus 

capacity to produce oil, so at other times when there has been more 

surplus capacity, geopolitical risk would be less of a concern, so again, it 

is hard to separate out. 

 MR. BOUCHER. Well, give me the circumstance we confront today. 

Given the capacity that is available today, given the price of petroleum 

that we have today, can you give us a range of the percent of that price 

that is attributable to political risk generally? 

 MR. GRUENSPECHT. I would actually have a hard time doing that. 

 MR. BOUCHER. All right, let me move to another question. 

 MR. GRUENSPECHT. Um-hum. 

 MR. BOUCHER. We have already heard, in response to your answers 

to Chairman Barton, that we are importing today about 2 million barrels 

of refined product, gasoline coming into the U.S. to meet our 20 million 

barrel per day demand. Is that number correct? If not, please give us the 

correct number. 

 MR. GRUENSPECHT. I think we are probably importing a little bit 

less than two million barrels of refined product--between one and two is 

the right number. 

 MR. BOUCHER. All right, between one and two. Is there a difference 

in price for imported product as compared to domestically produced 

product and if so, what is that number? 
50

 MR. GRUENSPECHT. There does need to be an arbitrage spread 

between the U.S. market and the European market to bring product in, 

but the U.S. market clears that at one price. 

 MR. BOUCHER. Well, so you are saying the refined product that 

comes in from abroad comes in at the American domestic price, is that 

correct? 

 MR. GRUENSPECHT. I am saying if we need refined product from 

abroad to meet our demand, then the U.S. market price is going to be 

equal to the price that we pay for that overseas plus the cost of 

transportation. 

 MR. BOUCHER. If there is really no difference in price, then why 

would an outage of American refining capacity result as it did last 

August in a dramatic one-up in gasoline prices? 

 MR. GRUENSPECHT. Well, first of all, there is a time lag in the 

process. In fact, last fall, as I recall, tremendous amounts of imports did 

come in from Europe and that was one of the reasons why prices fell 

dramatically following Hurricanes Katrina and Rita after they initially 

rose. So I do think that in some places the world market does help us, 

but needing to go out to the world market does mean that, you know, we 

need to have prices high enough to attract those imports of product. 

 MR. BOUCHER. My presumption here is that there is a difference in 

price between the refined product imported from overseas and the refined 

product created domestically here, if for no other reason, then because of 

transportation. Any information that you have concerning that difference 

in price would be extremely helpful to us. And Mr. Chairman, I detect 

that my time has expired and I thank you for your indulgence. 

 MR. SHIMKUS. [Presiding] It is always educational to listen to my 

colleague, Mr. Boucher’s, questions and I do appreciate them. But he 

didn’t allow you to answer one of the dilemmas on coal-to-liquid, which 

is the siting of a refinery and the cost to do that, Dr. Gruenspecht, and as 

we debated on the floor last week, that was part of that debate. I mean, 

the capital investment for coal-to-liquid, you are correct. It is about $40 

a barrel. Someone says $35 to $45. The projection of the return over the 

advertised amount over whatever the return would be 10 to 20 years plus 

the capital risk, that is why the refinery bill is so important, because there 

is a coal-to-liquid refinery provision as part of the overall refinery debate 

and I guess we will get a chance to debate that again. 

 And I understand your inability to quantify risk because that is what 

the futures market does. I mean, that is where the futures markets really, 

they are the ones that are taking capital in a transparent process and 

trying to make an assumption of what the risk is and that is not in your 

arena, nor are you risking your own capital to do that. But let me go to 

in your testimony in the debate and discussion on transition from MTBE 
51

to ethanol and you specifically mentioned a very tight ethanol market 

limited by short-run ethanol production capacity. Can you elaborate on 

this statement specifically where we are now in terms of supply and what 

the market is demanding? 

 MR. GRUENSPECHT. Okay, let me try to do that. In 2005 the 

demand for ethanol ran about 263,000 barrels a day. Replacing MTBE 

in the reformulated gasoline that it was used in would require about 

130,000 barrels a day of ethanol. So if, and this is an important if, if you 

kept all the ethanol that was used in 2005 where it was used in 2005, and 

tried to use that 130,000 barrels a day, you would need about 390,000 

barrels a day. That is not what has happened. In February, ethanol 

supply was up around 302,000 barrels a day. 

 What is being done is ethanol is being moved out of conventional 

gasoline blends in the Midwest, so called E10 or gasohol, I think was the 

old term, and some of that ethanol is being taken and moved to the 

reformulated gasoline areas. So in fact, the ethanol is getting to where it 

is needed to substitute for MTBE, but the amount of ethanol being used 

in conventional areas is being reduced. So again, like all these questions, 

the answer ends up being somewhat more complicated. 

 MR. SHIMKUS. What kind of capacity increases are we looking at 

within the next six months? I mean, there is a lot of planned facilities, 

built and on line, so what is your projection? 

 MR. GRUENSPECHT. I had thought we were at a number like 50,000 

barrels a day over the next six months, I think, is in the ball park and I 

think there is even more coming on line by the beginning of 2007, so yes, 

I think there were 33 plants under construction as of the beginning of this 

year. 

 MR. SHIMKUS. I think that number is close. Let us talk about the 

imports, then. That is going to be a debatable issue, so what about, how 

much are we importing today? 

 MR. GRUENSPECHT. I think we had, I always go barrels and gallons. 

I think we imported something like 80 million gallons so far this year 

from the Caribbean basin countries. I think altogether, putting it on the 

same terms I have been talking to before, from the Caribbean and from 

Brazil, it is about 22,000 barrels a day. 

 MR. SHIMKUS. And what do you think this will increase to based 

upon demand and the changing markets? 

 MR. GRUENSPECHT. My understanding is that the world ethanol 

market is pretty tight this year and while there could be some increases, 

we are not expecting very large increases. 

 CHAIRMAN BARTON. Would the gentleman yield? 

 MR. SHIMKUS. If I have to. 

 CHAIRMAN BARTON. Well, you don’t have to. 
52

 MR. SHIMKUS. Yes, I will. 

 CHAIRMAN BARTON. What would the impact be if we suspended the 

tariff on imported ethanol temporarily, say, for 12 months or 24 months? 

What would that impact be on amounts imported and the domestic price 

of ethanol? 

 MR. GRUENSPECHT. When the market is in balance, the domestic 

price of ethanol, if you look, is pretty much the price of gasoline plus the 

value of the tax credit. That is what the price of ethanol has been 

running when the market is in balance. That is what the price of ethanol 

is right now. That makes sense because in the Midwest areas of 

conventional gasoline, someone is deciding whether to mix ethanol in or 

not, and what they are going to look at is can I make my fuel cheaper by 

adding this or not adding this? My guess would be that in the short run, 

you might get some more ethanol imports, but it is not a tremendous 

quantity, maybe 10,000 barrels a day, 20,000 barrels a day more, and 

what you would find is that ethanol would go back in to the Midwest 

gasoline that it has been taken out of to use in reformulated gasoline 

blending and that the price probably wouldn’t change all that much. 

 MR. SHIMKUS. And I would concur with that analysis. 

 MR. GRUENSPECHT. Well, you know, sometimes what we have to 

say is good news for people and sometimes it is not. In the longer run 

suspending the tariff could make a bigger difference. 

 MR. SHIMKUS. The tariff is not impacting the ability of people who 

want to import ethanol into this country to do that. The demand is there. 

 MR. GRUENSPECHT. I am an economist but I wouldn’t go that far. I 

think right now the market is pretty tight and the potential for the 

quantity to go up I think is limited in the short run. I think the price is 

driven by this blending of conventional gasoline in the Midwest and the 

price wouldn’t change much. I think over time it could make a 

significant difference. 

 MR. SHIMKUS. Let me follow up on this line of questioning, as far as 

the transportation issue and the transportation and the blending 

infrastructure. What is your projection as far as the time needed to 

switch in these two arenas to ensure that ethanol is getting where it needs 

to get to? Or is there a problem? 

 MR. GRUENSPECHT. My sense is that there have been some 

problems. In our February paper, we talked about the lower East Coast 

and Texas as being the two places likely to have problems. Those I think 

turned out to be the case and I think Texas is still having some difficulty. 

 MR. SHIMKUS. Currently, how is ethanol being transported? 

 MR. GRUENSPECHT. I think by railcar, barge, and some tanker truck, 

where you have real bottlenecks. 
53

 MR. SHIMKUS. So you don’t believe that some of the alternative to 

pipelines is not meeting up with the demand? 

 MR. GRUENSPECHT. I think there have been some transitional issues. 

I think most of the transition is behind us. There are still some stumbling 

blocks. It still needs to be watched closely. 

 MR. SHIMKUS. Let me quickly, I still have a minute left, go to Mr. 

Wehrum from the EPA. As I understand your written testimony, on page 

two, EPA does not view alternative fuels that may be required as part of 

an energy strategy, such as ethanol or biodiesel, to be boutique fuel. Is 

that correct? 

 MR. WEHRUM. Mr. Chairman, we define a boutique, or at least we 

use that term in EPA, to mean a particular kind of fuel and it is one that 

is adopted by a State or a local area for purposes of improving air 

quality, and that is approved into the State Implementation Plan for 

which we require States to have to show how they are going to meet our 

air quality standards. 

 MR. SHIMKUS. Through the SIP call, through the State 

Implementation Plan. 

 MR. WEHRUM. That is correct. A boutique, as we define it, is a fuel 

that is approved as a control measure in the State Implementation Plan. 

 MR. SHIMKUS. If a State or locality has a requirement in place 

related to ethanol and biodiesel and that requirement has positive benefits 

for reducing air pollution in the Clean Air Act nonattainment areas like 

St. Louis or Chicago, I assume the EPA would consider the benefits of 

those fuels in evaluating the SIP plan, is that correct? 

 MR. WEHRUM. Well, I would answer that question in two ways. In 

nonattainment areas, those that don’t meet our air quality standards, 

measures that are adopted into the implementation plan are the measures 

that are considered for purposes of judging whether the plan is sufficient 

to bring the area into compliance. So if an ethanol-blended fuel, for 

instance, were not a part of the SIP, then it would not be considered in 

that way. Having said that, if an ethanol blend is being used, whatever 

effect it is having on air quality would be manifested in the values that 

are measured by the monitors in the area and would be reflected in that 

way. 

 MR. SHIMKUS. Yes, and I will end on this. Like biodiesel, the 20/80 

mix, it is a 50 percent reduction in emittants and so we talk about 

renewable fuels, we talk about ethanol, but really biodiesel is another 

great renewable fuel that has some positive benefits. Let me now turn to 

my colleague from California, Ms. Eshoo, for 8 minutes. 

 MS. ESHOO. Thank you, Mr. Chairman. It is nice to see you in the 

Chairman’s chair. 

 MR. SHIMKUS. Thanks. It is good to be here. 
54

 MS. ESHOO. Yes. Welcome to the witnesses. This is a very 

important hearing and I appreciate the fact that the Chairman of our 

committee has begun the examination and we need to have a very good 

one, not only to examine the issues, but to understand them better, 

because there are many complexities. So I am going to try to get into 

some of the complexities. One of the issues that many constituents have 

raised with me, and I can’t help but notice we go driving through the 

areas at home and you see the gas stations. They are really only a 

handful of companies and I can’t help but think that there is fierce 

competition in my district in terms of high technology, but I don’t see the 

kind of competition amongst the oil companies. In your examination of 

things over at the EIA, have you examined the whole issue of 

competition or the lack thereof, and the impact that that has overall, or do 

you not examine that? 

 MR. GRUENSPECHT. That is generally not within our purview. The 

Federal Trade Commission, Department of Justice, I know the President 

has-- 

 MS. ESHOO. No, I am not talking about potential violations of 

antitrust. 

 MR. GRUENSPECHT. Yes. 

 MS. ESHOO. In fact, I don’t really think that matters. 

 MR. GRUENSPECHT. Okay. 

 MS. ESHOO. I don’t think they have to collude. I think that there are 

so few and that there has been such a consolidation in the industry, that, 

amongst a few, if one is going to raise the price, they know their brother 

friend across the street that represents that oil company are going to raise 

their prices too, but since that is not something under your purview, 

maybe it will be with people that come in to testify. But I think it is 

something that the committee should examine, because I do think that it 

is part of this overall challenge that we are facing. 

 I would like to read something in to the record and I will obviously 

be calling it to your attention at the same time. One of the issues, and it 

has come up today and it is a legitimate one to examine, is the whole 

issue of capacity at our U.S. refineries. This is a Reuters article that was 

published January 25 of this year, and I am just going to, if I can, Mr. 

Chairman, submit the entire article for the record, but I would like to 

read part of it to you, “An ExxonMobil Corporation official told 

congressional aides this week” now remember, this was dated January 25 

“that flat North American demand for gasoline forecast through 2030 

means there is no need to build new U.S. refineries, a congressional 

source told Reuters on Wednesday. Scott Melman, manager of Exxon’s 

economics and energy division, on Tuesday briefed aides with the U.S. 

House Energy and Commerce Committee” and I understand it was 
55

bipartisan staff “on the company’s oil demand outlook. According to a 

committee staff member who attended. ‘Exxon said they don’t want to 

build any new refineries in North America because of flat demand for 

petroleum products by 2030,’ the staff member said, speaking on a 

condition of anonymity.” 

 So would you comment on this? I mean, because this is something 

that is constantly brought up in the debate in the Congress when we talk 

about energy, that we need to drill our way to energy independence, that 

we have environmental laws that obstruct refineries from being built in 

the country, which have an effect on our overall energy scene. Would 

you comment on this? 

 MR. GRUENSPECHT. Sure. Our view is that there will be growth in 

demand for refined products in the United States, in the long run. It is 

also our understanding that there is a significant interest in the industry in 

adding to refinery capacity, if not necessarily building entirely new 

greenfield refineries. And I mentioned earlier in my testimony that there 

is by our count, at least one and a half million barrels per day of 

announced projects, and that is not to 2030, that is between now and 

2009, 2010. 

 CHAIRMAN BARTON. Well, would the gentlelady yield? 

 MS. ESHOO. I would be glad to, Mr. Chairman. 

 CHAIRMAN BARTON. What is the demand projection increase? Can 

you give us specific numbers and within a timeline? 

 MR. GRUENSPECHT. Sure. We have petroleum demand growing to 

about 26 million barrels a day by 2030. 

 CHAIRMAN BARTON. From the current 20? 

 MR. GRUENSPECHT. From the current 20. 

 CHAIRMAN BARTON. Is it a straight-line increase of 1 to 2 percent a 

year, approximately? 

 MR. GRUENSPECHT. I would have to look that up and check for the 

record. 

 CHAIRMAN BARTON. Well, that is important. 

 MR. GRUENSPECHT. Absolutely. 

 CHAIRMAN BARTON. Because if Exxon is saying, in the year 2030 

which is 24 years from now, demand will finally flatten out, that may be 

true. 

 MR. GRUENSPECHT. Right. 

 CHAIRMAN BARTON. Historically in the United States demand has 

gone up at least 1 percent and in some years as high as 3 percent, we are 

going to be using a lot more refined products in this country in 2030. 

 MR. GRUENSPECHT. Right. 

 CHAIRMAN BARTON. I thank the gentlelady for yielding. 

 MR. GRUENSPECHT. Yes. 
56

 MS. ESHOO. Glad to, Mr. Chairman. In this article, a spokesman for 

ExxonMobil, Mark Budrow, said that the fact that the company is not 

seeking to build new refineries is “very consistent with what we have 

been saying for quite some time. We think the most cost-efficient and 

effective way, the fastest way to add capacity in the United States is to 

refine our own refineries,” Budrow said. Do you know what refine our 

own refineries means? Refine our own refineries. I mean, is that-- 

 MR. GRUENSPECHT. I take it that means improve and round out the 

refineries. And again, companies do differ among themselves. I mean, 

you have some companies that are very aggressive in refining-- 

 MS. ESHOO. Mr. Chairman, on this point of the whole issue of 

refineries, capacity in our country, we really should have representatives 

from the oil companies here to answer these questions. I mean, there are 

only a handful of them, but it is-- 

 CHAIRMAN BARTON. They will be here tomorrow. 

 MS. ESHOO. But I think the institute is going to be, a trade 

association is going to be here. 

 CHAIRMAN BARTON. We have got API and both big national groups 

are having their Washington head of their office here tomorrow. 

 MS. ESHOO. The CEOs will be here? 

 CHAIRMAN BARTON. Well, I haven’t said that yet. 

 MS. ESHOO. Well, that is what I am suggesting. 

 CHAIRMAN BARTON. But I mean Red Cavaney and Bob Slaughter, 

who both head the National Refiners Institute and the American 

Petroleum Institute, will be here tomorrow sitting right where those two 

gentlemen are. 

 MS. ESHOO. Are those trade associations? 

 CHAIRMAN BARTON. Yes. 

 MS. ESHOO. All right. To Mr.--is it Wehrum? 

 MR. WEHRUM. That is correct. 

 MS. ESHOO. On the whole issue of boutique fuels, we had a very, 

very good debate and discussion when we were drawing up legislation 

here at the committee. That was passed. Can you tell us, as representing 

the EPA, how that is working today, how effective our legislation was, 

relative to boutique fuels? 

 MR. WEHRUM. Congresswoman, you are referring to the Energy 

Policy Act of 2005? 

 MS. ESHOO. Right. Yes. 

 MR. WEHRUM. We are aggressively implementing several aspects of 

the Energy Policy Act that are relevant to the fuels program. I think first 

and foremost the renewable fuel standard, EPAct as we call it, Energy 

Policy Act, required EPA to develop and implement a program that 
57

would require specified amounts of renewable fuels to be blended in to 

the gasoline supply on an annual basis, beginning with the year 2006. 

 MS. ESHOO. Yes. 

 MR. WEHRUM. We have adopted a rule, just for the year 2006, 

which we believe assures compliance with the mandate and right now are 

moving quickly to adopt or propose to publish a proposed regulation and 

as soon as we can after that promulgate that action that will set out the 

comprehensive program that would be effective from 2006 and beyond. 

 MS. ESHOO. So we are still in the process of developing how it is 

going to be administered? 

 MR. WEHRUM. As I said, Congresswoman, we moved in a step-wise 

fashion and-- 

 MS. ESHOO. I want to understand where it is. 

 MR. WEHRUM. Certainly. And the first step that we took was to 

adopt a rule that applied specifically for calendar year 2006. The 

mandate began to apply in-- 

 MS. ESHOO. Yes. 

 MR. WEHRUM. --calendar year 2006, and that rule was published 

and is effective and establishes a nationwide compliance mechanism for-

- 

 MS. ESHOO. Is this on boutique fuels, though, the question that I 

asked? 

 MR. WEHRUM. This is the renewable fuels standard. 

 MS. ESHOO. No, on boutique fuels. 

 MR. WEHRUM. It is not specific to boutiques, but it is-- 

 MS. ESHOO. But that was my question. 

 MR. WEHRUM. Okay. 

 MS. ESHOO. That was my question. So if you could address my 

question? 

 MR. WEHRUM. Sure. 

 MS. ESHOO. I appreciate the other information, but I would like to 

know about boutique fuels, because it is an area that has been raised in 

terms of cost. 

 MR. WEHRUM. Sure. 

 MS. ESHOO. And we are talking about gasoline prices, so I would 

like to know where the Administration is with this. 

 MR. WEHRUM. Sure. The provision most specific to boutique fuels 

in the Energy Policy Act of 2005 was a requirement for EPA to develop 

and publish a list of the boutique fuels that currently exist in the various 

State and local programs, and the effect of that listing would be to limit 

the number of boutiques that could be approved after that point. 

 MS. ESHOO. Actually, you were supposed to come up with that list 

nine days after the legislation was enacting. It is now May of 2006. This 
58

is a long time ago. So, Mr. Chairman, I see that I have gone over my 

time. 

 MR. HALL. [Presiding] We used some of your time, though. I will 

allow you another 30 seconds. 

 MS. ESHOO. Well, I think that I am just as frustrated as my 

constituents. It is very difficult, I think, for anyone that is listening to 

this hearing today to extract from it why we are where we are in our 

country. I mean, just a very simple question about boutique fuels which 

is going to come up in the debate, and there may even be legislative 

directives about this, we addressed here some time ago, and for me to 

hear that the EPA is working on coming up with a list, really falls far 

short. So it really is not encouraging. And so I am just going to stop and 

thank you, Mr. Chairman, for holding the hearing. We have got a lot of 

work to do. 

 MR. HALL. I thank you. The Chair recognizes the gentlelady from 

California, Mrs. Bono. 

 MS. BONO. Thank you, Mr. Hall. Dr. Gruenspecht, could you help 

me understand a little bit about the way in which domestic oils come to 

market? A mom and pop well gets their oil out. Then what happens? 

Who is the person that comes to the mom and pop wellhead and picks up 

that oil? What is that person called? What is that company called? 

They come and they bring their truck. It is not a wholesaler, is it just a 

transportation company? Is that all they are, generally speaking? 

 MR. GRUENSPECHT. I would assume it is something like that. 

 MS. BONO. So for example, Marathon Oil. So does the mom and 

pop domestic producer, is there competition with who might come? Can 

they sell their oil to multiple buyers, or is there some that it is almost a 

monopoly, they can only sell, generally speaking, to one company? And 

the reason I ask this is I don’t quite understand the domestic producer, 

the spread in which they are paid has changed dramatically. 

 MR. GRUENSPECHT. In some cases that does apply. Sometimes that 

has to do with demand for a particular grade of oil. If a particular 

refinery that uses a particular grade of oil, say, is down for maintenance, 

it can affect what a particular producer can get for that oil. 

 MS. BONO. But you know, then you would think it would be a spike 

or a certain thing. In my opening statement, I mentioned giving 

incentives to independent producers. Right now the rising spread 

between West Texas intermediate and other domestic oil is different. In 

Illinois, it is about $8. In Wyoming, it can get to $25 to $20. So I am 

trying to figure out what justifies that spread, and the spread has 

changed. It hasn’t been spiking. The spread has changed continuously 

up and the domestic producers are saying it is hard to get sympathy right 

now in this business, but they are saying they are finally making money, 
59

they are able to reinvest that money in aging equipment, that they 

couldn’t do-- 

 MR. GRUENSPECHT. Right. 

 MS. BONO. --when the price of oil was too low. So now they are 

reinvesting the profits they are having, but the spread keeps changing and 

the domestic producer is seeing less and less, compared to what the 

Chairman was saying about the refineries, and clearly the transportation 

people, or whatever they are called-- 

 MR. GRUENSPECHT. Right. 

 MS. BONO. --are taking it from the wellhead to the refineries. 

 MR. GRUENSPECHT. Again, I am not sure it is necessarily the 

transportation issue. I mean, the same thing is observed on the market, 

the spread between light oil and heavy oil, say, which is maybe a 

different spread than the one you are talking about. That had been as 

narrow as $2 to $3 a barrel and now it is up to very high levels. The 

spread has opened up because the higher quality, most in demand oils 

that produce the most light products, given the type of refining capacity, 

their value has skyrocketed relative to the heavier oils, less desirable oils 

that are more difficult to process. This is not just something 

domestically; this is something in the worldwide market. 

 MS. BONO. But the gravity of the west Texas oil might be better 

than, say, Illinois crude. 

 MR. GRUENSPECHT. Right. 

 MS. BONO. Yet Illinois has less sulfur, and that has not changed. 

That was the same way before-- 

 MR. GRUENSPECHT. No. 

 MS. BONO. --this market, so why now is the spread--and I think this-

-like the Chairman’s finding, money from the refineries and the spread 

has gone irrationally high and the same thing here, it is money. It is 

again added into the price to the consumer, that people don’t even realize 

it is happening and I think somebody ought to look at these spreads, that 

the domestic producers--it is not their fault. Oftentimes, they are seeing 

lower and lower profits. I mean, yes, they are increasing, but compared 

to everybody else in the supply chain. 

 MR. GRUENSPECHT. Well, this is something we have been asked to 

look into in the past and we do look into. But again, we find that there 

really is an extra high premium on the very high quality oil right now, 

and that is maybe part of what these producers are seeing. Again, we 

will look into it for you. 

 MS. BONO. I would appreciate that very much, and if you could 

respond in writing, that would be very helpful to me. Thank you and I 

yield back my time, Mr. Chairman. 
60

 MR. HALL. I thank the gentlelady. The chair recognizes the 

gentleman from California, Mr. Waxman, for 5 minutes. 

 MR. WAXMAN. Thank you, Mr. Chairman. Mr. Wehrum, in your 

written testimony, you and Mr. Gruenspecht both discussed how States 

and localities benefit from adopting area-specific clean fuel blends. As 

you both noted, these cleaner fuels improve air quality and are often far 

less costly than other pollution control options, including opting into 

Federal reformulated gas requirements. Yet Section 1541 of the energy 

bill passed last August sharply limits States’ ability to adopt clean fuels 

requirements. It does this in two ways. First it freezes the total number 

of unique State fuels. This will prevent States from requiring any new 

clean fuel blend unless an existing blend is dropped. Second, the energy 

law bars States from requiring even an existing clean fuel blend to be 

used in new areas of the country. The only exception is for one specified 

low volatility fuel type. Do you agree that together these existing 

provisions will substantially limit any additional State clean fuel 

requirements? 

 MR. WEHRUM. Congressman, we, as I noted a moment ago, are still 

in the process of developing the list of boutique fuels that is required by 

the Energy Policy Act. Clearly the Energy Policy Act limited the 

number of boutiques that are available to be approved in the future. 

 MR. WAXMAN. That is the question I had. So these two provisions 

in the energy bill in August will limit the number of boutiques. You 

haven’t finalized the answer. 

 MR. WEHRUM. Yes, they will, Congressman. 

 MR. WAXMAN. Now, do you believe it is important to involve the 

States which rely on benefits from these fuels in any discussion of 

whether and how to further limit State fuels? That is the President’s 

approach under the Governors Task Force, right? 

 MR. WEHRUM. That is correct, Congressman. 

 MR. WAXMAN. Now the majority of Republicans here are talking 

about adopting a new bill to further limit States’ authority to require 

clean burning gasoline. It appears they want to pass this bill by late May 

or early June. Your process with the Governors won’t be completed by 

then, will it? 

 MR. WEHRUM. We intend to complete our process by the end of 

June, Congressman. 

 MR. WAXMAN. By the end of June. Now, if the majority wants to 

further limit clean fuels, about all that is left to do is to block any State 

from ever adopting a clean fuel blend that--in the future, or to force 

States to eliminate their existing requirements. The States have asked to 

testify on any such proposal but have never been permitted to do so. 

Now the Majority wants to short circuit the President’s process to 
61

involve the States, and today we have learned EIA is testifying that 

restricting the number of fuel blends too much could actually raise gas 

prices. Seizing State authorities and circumventing the States’ 

involvement is contrary to the principles of cooperative federalism, on 

which the Clean Air Act is based; thus in itself is objectionable. But 

doing this in the name of high gas prices is simply foolish. State fuels 

requirements were never the problem. Even if they had been, Congress 

just passed a bill to strictly limit such requirements, and limiting them 

further may raise, not lower, gas prices. I put that out for my colleagues 

and for the two of you to listen to, because I think we are moving this 

thing in this legislation so quickly that I don’t think we are really going 

to get a full input from the States, and I fear that if we make the wrong 

decision, we are going to get the exact contrary of the result of what we 

are trying to achieve. I thank you, Mr. Chairman, and I appreciate both 

of your testimony, and I did want to point out what you had put in your 

written statements to us. I yield back the balance of my time. 

 MR. HALL. I thank the gentleman. The Chairman recognizes the 

gentlelady from North Carolina, Ms. Myrick, for 5 minutes. 

 MS. MYRICK. Since I had to leave the room, Mr. Chairman, I will 

pass on this round. 

 MR. HALL. I will recognize myself for a quick question of Mr. 

Wehrum, if I might ask you. Federal law, a certain part of the Energy 

Policy Act, requires the Government to examine, and I guess that means 

a study before they examine it and examine it as they study it, options to 

enhance flexibility in the fuel distribution infrastructure, reduce price 

volatility and cost to consumers, provide increased liquidity to the 

gasoline market, and enhance fuel quality consistency and supply. How 

far along is the Administration in their completion of this study? 

 MR. WEHRUM. Congressman, we are currently consulting with DOE 

and preparing to implement that study and fully intend to complete it by 

August, which is the statutory deadline. 

 MR. HALL. August of this year? 

 MR. WEHRUM. That is correct, Congressman. 

 MR. HALL. And would it be possible to accelerate the work, get it a 

little earlier for us? Some of us are rushing toward November. 

 MR. WEHRUM. We will move as expeditiously as we can manage, 

Congressman. 

 MR. HALL. That is what I am asking. One other question to--I guess 

also to you. Will any of the boutique fuels currently approved and used 

today become functionally identical to the Federal fuels requirements, 

and would they then no longer be considered boutique? 

 MR. WEHRUM. Congressman, the answer to the first question is we 

believe the answer is yes, and Atlanta is a good case in point, which has 
62

a combination of volatility standards and sulfur standards in place for 

gasoline, and we believe, once our Federal programs have been fully 

implemented, that the Atlanta program and the Federal program will be 

very consistent as it applies to those requirements. In answer to the 

second question, the boutique standard would remain part of the State 

Implementation Plan unless and until the State requested that it be 

removed and EPA approved that request. So there is not an automatic 

mechanism that would make it go away. 

 MR. HALL. I thank you very much. The Chair recognizes the 

gentleman from Texas, Mr. Green, for 5 minutes. 

 MR. GREEN. Thank you, Mr. Chairman. Mr. Wehrum, the President 

made a televised speech address in response to the public outrage on 

gasoline prices and he was going to direct the EPA to take a number of 

actions, like waivers, to try and reduce the prices. The State of Texas 

asked for a waiver from the RFG requirements due to the ethanol supply 

problems mentioned by the EIA in their testimony. A number of States 

like Virginia didn’t ask for the waiver, since EPA staff said they 

wouldn’t get one. Other States don’t think they will get a waiver, since 

they haven’t heard back, despite the President’s speech. Do you know a 

timeframe for Texas to get a response, when you consider the fact that 

the EIA says the ethanol transition in Texas is the most difficult in the 

entire Nation? 

 MR. WEHRUM. Congressman, the President has asked Administrator 

Johnson and ourselves to act quickly and aggressively on requests for 

waivers of fuel standards under the Energy Policy Act provision. To my 

knowledge, we actually have not received an official request from the 

State of Texas. Having said that, there has been a tremendous amount of 

dialogue between folks on my staff and various officials in the State of 

Texas, as well as the fuel producers and suppliers and distributors, to 

understand the situation and make a judgment as to whether a waiver is 

appropriate under the standards set by the Energy Policy Act. And to 

date, the information we have received indicates that, at least to this 

point, it doesn’t appear that a waiver is necessary. 

 MR. GREEN. Okay. But do you know you haven’t received a request 

from the State of Texas? 

 MR. WEHRUM. That is correct, Congressman. 

 MR. GREEN. Okay, I will follow up on that. Mr. Gruenspecht, your 

testimony notes that we have a very tight ethanol market due to limited 

ethanol production capacity and that this is causing some Midwest 

ethanol to be shifted to RFG areas, which many are major urban areas 

outside the Corn Belt, and again, Houston, Texas, and we benefited from 

reformulated gas, although it is all MTBE up until recently. Many States 

in the Midwest have state-level ethanol mandates. Do these mandates 
63

have the potential to limit the flexibility to move ethanol around where it 

is needed? 

 MR. GRUENSPECHT. It is our view that there is enough flexibility. 

There is enough ethanol that can be moved, that would be moved, but 

there definitely are logistical challenges in moving it. It is less the State 

policies that are the logistical challenges of moving the ethanol out of the 

Midwest. 

 MR. GREEN. So logistical is a bigger problem than a State-- 

 MR. GRUENSPECHT. I think logistical is the big problem this year. 

 MR. GREEN. You know, I have information, for example, that in 

Dallas, Texas, that there are railcars waiting to unload ethanol, but not 

enough distribution facilities available. Do you have any knowledge of 

that? Or any other urban areas like Dallas, Texas, that we have heard. 

 MR. GRUENSPECHT. I understand that there are rail bottlenecks in 

Dallas and that they need to use some tanker trucks to get the ethanol 

around rather than directly off the train. So there are some difficulties, 

but again, that is more the logistics category than the State mandates for 

ethanol. 

 MR. GREEN. Yes. That was what I was following up on, because 

our committee understood when we eliminated or didn’t provide the 

protection for MTBE, that you can’t pipeline ethanol and that is what 

you have when you can’t pipeline it. Would you elaborate and discuss 

on whether we can expect any increase in the ethanol production 

capacity here along the Gulf Coast so we don’t have to ship it from the 

Midwest by rail or even tanker truck? 

 MR. GRUENSPECHT. This is really just out of news reports, but I 

thought there was some discussion of ethanol production capacity, I 

believe, in Louisiana, as I recall, but I am not sure what the timing is. 

But I know that in the short run there is a lot of capacity planned, mostly 

in the Midwest, and I think that the bulk of it would still come from the 

Midwest. 

 MR. GREEN. Okay. So we still have problems with distribution 

because I don’t know if we are laying a lot of new rail lines, although I 

know some distribution facilities are trying to ramp up, but you know, 

the law--the energy bill was signed last August and here we are in the 

middle of May almost and we are seeing those problems come to a head. 

Could you give us some information on how the elimination of the 

oxygenate mandate and the widespread use of MTBE is leading to an 

increased reliance on gasoline imports, on the imports of both gasoline 

but also the potential for importing ethanol? The question, I guess, is the 

elimination of the oxygenate mandate and the elimination of--because we 

use MTBE in so many areas in the country outside of the Midwest. Is 
64

there any estimation of what would help us--what the percentage would 

be for gasoline imports or ethanol imports? 

 MR. GRUENSPECHT. Again, it is my understanding that there may be 

some short-term increase in ethanol imports under current law, but the 

bulk of the ethanol will be taken out of the Midwest, moved to the RFG 

areas, and again, two-thirds of the RFG had already gone over to ethanol 

before this year, in California, New York, Connecticut. The Midwest 

was already ethanol-based RFG. It was really the East Coast, outside of 

New York and Connecticut, and Texas that will still be MTBE areas. I 

think there will probably be some extra conventional gasoline used in the 

Midwest as the ethanol comes out of there and goes to the RFG areas in 

Texas and the East Coast, outside of New York and Connecticut. 

 CHAIRMAN BARTON. The gentleman’s time has expired. 

 MR. GREEN. Thank you, Mr. Chairman. 

 CHAIRMAN BARTON. Yes. The gentleman from Arizona, Mr. 

Shadegg. 

 MR. SHADEGG. Thank you. Mr. Gruenspecht, I want to clarify some 

points in your testimony. Earlier this year, you issued a report, EIA did, 

entitled, “Eliminating MTBE in Gasoline,” in which you estimated that 

U.S. domestic ethanol production would fall 130,000 barrels per day 

short on average this year. Later in March, Administrator Caruso 

testified before the Senate and reaffirmed that estimate. As I understand 

your testimony today, you are reaffirming that estimate again. You are 

saying that if we were to leave the current ethanol where it is currently 

being consumed, we would fall 130,000 barrels per day short in the 

remainder of the country. But as you explained in your testimony, what 

is in fact happening is we are reducing the amount of ethanol used in the 

Midwest and trying to ship it now, I guess, with logistic problems, to the 

other areas of the country, is that correct? 

 MR. GRUENSPECHT. We need to replace the MTBE. We need 

130,000 barrels of ethanol. Ethanol production capacity is growing, but 

it has not grown 130,000 barrels, so I wouldn’t say, you know-- 

 MR. SHADEGG. Just by your estimate, is that correct? 

 MR. GRUENSPECHT. That you need 130,000 barrels of ethanol to 

replace the MTBE where it had been used, yes. 

 MR. SHADEGG. And I that I thought was based on your testimony, it 

was 263,000 barrels per day produced in 2005. The need is 390,000 

barrels per day, absent MTBE and that is where the 130,000 barrels per 

day comes from, is that correct? 

 MR. GRUENSPECHT. That is adding up last year’s supply and this 

extra 130,000. 

 MR. SHADEGG. Right. 
65

 MR. GRUENSPECHT. And I mentioned that production capacity, or 

production in February was about 302,000. 

 MR. SHADEGG. And in response to the Chairman’s question, I 

believe you indicated that--and I am not sure, he thought it was 10,000--I 

thought I heard 20,000 barrels per day currently imported. Which was it 

or do you know? 

 MR. GRUENSPECHT. It’s 22,000 barrels per day. I was doing it in 

gallons and making the translation. 

 MR. SHADEGG. Yes, I heard that little discussion of 80 million 

gallons. 

 MR. GRUENSPECHT. Twenty-two thousand barrels a day total 

ethanol imports. 

 MR. SHADEGG. Imports now? 

 MR. GRUENSPECHT. Imports now. 

 MR. SHADEGG. And your belief was that that could climb by an 

additional 10,000 to 20,000? 

 MR. GRUENSPECHT. Yes, in that neighborhood. 

 MR. SHADEGG. Which means it would nearly double? 

 MR. GRUENSPECHT. If it was 20,000, it would double. 

 MR. SHADEGG. It would in fact double. One of the issues is, well, 

where would we get this additional ethanol, and I believe one of your 

responses was, well, you understand the ethanol market worldwide is 

tight right now. A fair amount of that ethanol is produced and consumed 

in Brazil and as I understand it, Brazil recently reduced their ethanol 

quotient or proportion from 25 percent to 20 percent, I believe, in 

response to the tight market, is that correct? 

 MR. GRUENSPECHT. I understand that to be the case. 

 MR. SHADEGG. And that is like what you are talking about in the 

Midwest right now, we are reducing the proportion of ethanol in gasoline 

in the Midwest because of the demand for that ethanol elsewhere around 

the country, is that correct? 

 MR. GRUENSPECHT. On average, that is correct. 

 MR. SHADEGG. On average. 

 MR. GRUENSPECHT. It is not like it is reduced from 10 percent to a 9 

percent blend. It is that there is less of the 10 percent blend being used. 

 MR. SHADEGG. Okay. My understanding would be that--two points 

I want to make from that. One is, to the extent that ethanol helps clean 

the air, wherever we reduce the use of ethanol in the Midwest, we are 

losing the advantage that ethanol has for cleaner air, is that correct? 

Maybe I would ask your colleague. I am sorry. 

 MR. GRUENSPECHT. Yes, I think he knows more about clean air than 

I do. 

 MR. SHADEGG. You would agree with that, wouldn’t you? 
66

 MR. WEHRUM. Could you repeat your question, please, 

Congressman? 

 MR. SHADEGG. The point is that under the current situation, because 

we do not produce enough ethanol domestically to meet domestic 

demand, we are in some locations reducing the amount of ethanol in the 

country that is in the gasoline because it is being placed somewhere else. 

That is going to lose the air cleaning advantages in those portions of the 

country where we reduce reliance on ethanol, correct? 

 MR. WEHRUM. That is correct, Congressman. 

 MR. SHADEGG. The other question I had, back from you, Mr. 

Gruenspecht, if Brazil, for example, were the import tariff to be lifted 

temporarily on ethanol, that tariff that I spoke of, 2.5 percent plus 54 

cents a gallon, there is at least a prospect that the market would cause 

Brazil to say, well, it doesn’t even need 20 percent ethanol in its 

gasoline, it could go to 15 percent if the market price, world market price 

for that ethanol made it more economical to sell it in the United States 

than to consume it in Brazil. 

 MR. GRUENSPECHT. I hate to speculate on U.S. policy, I really 

hesitate to speculate on Brazilian policy, but I do follow your logic. 

 MR. SHADEGG. You follow the point. The point is, some people 

say, well, there is no point in reducing the tariff because we are already 

importing virtually all that is bring produced. My point is, the market 

will decide that. With the tariff gone, the cost of selling that ethanol in 

the United States would go down and the incentives to import it would 

go up, which is why some of us are advocating that we ought to 

eliminate that tariff at least temporarily. I don’t advocate its permanent 

elimination, but I believe, if we are looking for immediate solutions for 

American consumers for this year, everything we can do we should be 

doing and that is one of the things that is an option open to us. And at 

least the President last week discussed the issue with several members in 

Congress, isn’t that correct? 

 MR. GRUENSPECHT. Yes, and I believe Secretary Bodman did as 

well. 

 MR. SHADEGG. I don’t have any further questions, Mr. Chairman. 

 CHAIRMAN BARTON. Before we yield to Mr. Stupak, if we were to 

eliminate the tariff, what is the estimate of the amount of ethanol that 

could be expected to immediately be imported per day? In other words, 

if we eliminate the tariff next week, when would you get a supply 

response in the U.S. market and how big would it be? 

 MR. GRUENSPECHT. Again, our review of the supply response is on 

the order of 10,000 to 20,000 barrels a day and-- 

 CHAIRMAN BARTON. And how soon? 

 MR. GRUENSPECHT. Relatively soon. 
67

 CHAIRMAN BARTON. Within two weeks after the tariff was reduced? 

I mean, it takes a certain amount of time. 

 MR. GRUENSPECHT. Yes, a certain amount of time to transit, but 

Brazil is not that far. 

 CHAIRMAN BARTON. And it wouldn’t be next January? 

 MR. GRUENSPECHT. No, it could before that. 

 CHAIRMAN BARTON. It could be this summer? 

 MR. GRUENSPECHT. It could be before then, yes. 

 CHAIRMAN BARTON. Okay. And I thought, in Brazil, the ethanol 

used was 100 percent ethanol in their vehicles. Is it a blend? I thought 

that they actually were an ethanol economy, but I am a little confused. Is 

it like a 90/10 or an 80/20 blend and it is gasoline and ethanol? 

 MR. GRUENSPECHT. I thought they have flex fuel vehicles, I believe, 

to a significant extent. 

 CHAIRMAN BARTON. See, maybe I could just be wrong, but I 

thought you could actually drive a vehicle in Brazil that used pure 

ethanol, it is 100 percent ethanol. 

 MR. GRUENSPECHT. They use something like our E-85, I think. 

 CHAIRMAN BARTON. So it is a gasoline/ethanol blend. 

 MR. GRUENSPECHT. I think they use a lot of gasoline/ethanol blend. 

 CHAIRMAN BARTON. Okay. Mr. Stupak. 

 MR. STUPAK. Thank you, Mr. Chairman. Just to follow up on that 

question, even if we looked at the import of the E-85, is there a shortage 

in America of the E-85 fuel? I mean, from where I live, it was not 

around, I mean, if even you want to use it. 

 MR. GRUENSPECHT. I think what is being suggested is that if Brazil 

would lower its proportion of ethanol use, they would not ship E-85 here, 

they would ship ethanol here. 

 MR. STUPAK. Okay. So it would be the ethanol. It is about 10 

percent in a regular gallon of gas? 

 MR. GRUENSPECHT. It is about 10 percent in gasohol and 

reformulated gasoline, and there is lots of gasoline in this country that 

doesn’t use any ethanol at all. 

 MR. STUPAK. Correct, correct. Okay. Let me ask you another 

question, Mr. Gruenspecht. Another question the Chairman had asked 

earlier. In your testimony, you referred to the crack spread, the 

difference between the value of a barrel of crude oil and an equal amount 

of refined gas. The Chairman asked you about the spread and you 

replied that the spread is currently about $20 per barrel but should be 

closer to $8 to $9 a barrel, I thought you said. Where does the extra 

money go? If it’s $8--use $8 so it is easy math for me. $8, if it should be 

$8, it is $20. Where does that extra $12 go? 
68

 MR. GRUENSPECHT. Well, it is cost and profit of the refining sector 

together. That is what the crack spread represents. 

 MR. STUPAK. So the 12 bucks would go to refiners? 

 MR. GRUENSPECHT. Profitability in the refining sector is much 

better than it has been historically. And indeed that is again why we are 

seeing more interest in refinery capacity additions. 

 MR. STUPAK. So when you speak about September 2004 until 

September 2005, there is evidence that the refinery costs went up 255 

percent in this country. Would part of that be because of this crack 

spread? 

 MR. GRUENSPECHT. Again, I think that is a discussion I believe you 

had with Secretary Bodman. 

 MR. STUPAK. Yes. 

 MR. GRUENSPECHT. Yes, this is a Washington Post number. 

 MR. STUPAK. Article, correct. 

 MR. GRUENSPECHT. Article. I am trying to get a handle on that. Let 

us see where we are on this. 

 MR. STUPAK. Yes, when the Secretary testified, he said he would 

get back with us. We are still awaiting the answers to our questions. 

 MR. GRUENSPECHT. Yes. Again, it is the crack spread. It was 

clearly heavily influenced since September 2005 by the effects of 

Hurricane Katrina. As I recall, the pipelines--including the Plantation 

pipeline--were down. U.S. refiners lost about four million barrels a day 

of capacity, so, yes, the value of a barrel of gasoline, with a loss of 25 

percent of U.S. refining capacity, shot up dramatically. 

 MR. STUPAK. We had hoped that 255 percent just wouldn’t be from 

Hurricane Katrina, which hit on August 31 and the 1st of 2005. I am 

talking about September 2004 until September 2005. So Katrina, if it 

had that dramatic of an effect, would have to make that effect in 30 days 

or 31 days and we are talking about a whole year’s spread. 

 MR. GRUENSPECHT. Well, actually, it is my understanding that the 

calculation that you are describing, I realize it is not yours, it is a 

Washington Post calculation, was comparing the average crack spread in 

September 2004 to a single day crack spread of September 5, which was 

Labor Day in 2005. 

 MR. STUPAK. Sure. So if you are using this crack spread and if you 

are using Hurricane Katrina-- 

 MR. GRUENSPECHT. Yes. 

 MR. STUPAK. --and if it represents a 255 percent increase, when it 

should be $8 a barrel, probably, as opposed to--it had to be more than 20 

bucks a barrel then, and you did take advantage of Hurricane Katrina as 

an excuse to jack up those prices, or to increase the spread, as we would 

say. 
69

 MR. GRUENSPECHT. Again, given the tremendous loss in the 

capability to produce gasoline, it is not surprising that the price of 

gasoline rose dramatically. 

 MR. STUPAK. Sure. 

 MR. GRUENSPECHT. And to the extent that the price of crude oil did 

not rise that dramatically, in part because of policy to release or make oil 

available from the strategic petroleum reserve-- 

 MR. STUPAK. Sure. 

 MR. GRUENSPECHT. --that spread would naturally open up. 

Unfortunately, there was less of an opportunity to offset the effect of 

Katrina on refined product prices than on crude oil prices. 

 MR. STUPAK. Sure. Let us go to the transition of winter fuels to the 

summer fuels. We are seeing more significant increases, compared to 

this time last year, based on what factors? We are up at least 70 cents, 72 

cents I think I said in my opening. 

 MR. GRUENSPECHT. I agree. 

 MR. STUPAK. So what would be the difference? 

 MR. GRUENSPECHT. I think crude oil is first and foremost the main 

factor that has been driving gasoline prices. That, plus, as the testimony 

also points out, there were two sort of special or shorter term 

circumstances, one being the fact that our winter-to-summer transition 

also included a transition, in certain parts of the country, from 

reformulated gasoline with MTBE to reformulated gasoline with alcohol, 

and the other being that we have still significant refinery problems. It is 

really not just the hurricanes, there was one large refinery in Texas that 

had a couple of explosions, I think, last year and that was still slow 

coming back. There are still a couple of refineries that are not fully back 

from Katrina, and there was a lot of refinery maintenance this April, a 

larger than usual amount, some of that being deferred maintenance, so 

you could attribute some of that to the hurricane. Some of that may be 

having to do with some of the specifications, like ultra-low sulfur diesel 

coming up later this year. 

 MR. STUPAK. So should we, then, if we are concerned about these 

transition periods, we can’t seem to get them leveled off, shouldn’t we be 

concerned then about-- 

 CHAIRMAN BARTON. This will be the gentleman’s last question. 

 MR. STUPAK. Thank you, Mr. Chairman--about the expected high 

cost of heating our homes this winter, home heating oil? Shouldn’t we 

really be addressing that now, then, so we can try to resolve that, so that 

transition, an increase or a spike or a spread, whatever you want to call it, 

won’t be so great this winter? 

 MR. GRUENSPECHT. The transition to the winter is a lot less 

complicated than the transition from winter to summer. Summer to 
70

winter is a lot easier because you are not worried about the mixing of 

fuels. I think the big effect, in terms of diesel fuel, will be the ultra-low 

sulfur diesel switch-over this year, and also the price of crude oil. Again, 

that is going to drive home heating oil prices this year. 

 MR. STUPAK. Thank you. 

 CHAIRMAN BARTON. Thank you, Congressman Stupak. 

Congresswoman Blackburn. And are you 5 minutes or 8 minutes? 

 MRS. BLACKBURN. I hope I am 8. 

 CHAIRMAN BARTON. Okay, I couldn’t-- 

 MRS. BLACKBURN. I waived my opening statement-- 

 CHAIRMAN BARTON. You are 8. 

 MRS. BLACKBURN. --because I have three questions for Dr. 

Gruenspecht that I would like to ask. 

 CHAIRMAN BARTON. The gentlelady is recognized for 8 minutes. 

 MRS. BLACKBURN. Thank you. And then one for Mr. Wehrum. Dr. 

Gruenspecht, I want to talk about refinery capacity utilization, and we 

had Administrator Caruso with us last week-- 

 MR. GRUENSPECHT. Yes. 

 MRS. BLACKBURN. --and talked with him a little bit about this and 

that we are at 95 percent capacity, and that is so high, especially when 

you look at world capacity as high as it is, and we have heard a lot about 

India and China and you all have mentioned repeatedly the impact that 

that has on a worldwide market. So are they building refineries or are 

they just serving as end users of the product? 

 MR. GRUENSPECHT. I believe there is refinery expansion underway 

in Asia, but my understanding is it is also having a hard time keeping up 

with demand growth, so this is a worldwide-- 

 MRS. BLACKBURN. But they are building new refineries. 

 MR. GRUENSPECHT. I believe they are, yes. 

 MRS. BLACKBURN. Okay. And then, how long does it take them to 

get one stood up over there, do you know? 

 MR. GRUENSPECHT. I think a refinery takes, as it takes here, several 

years to build. 

 MRS. BLACKBURN. It does? 

 MR. GRUENSPECHT. It does. 

 MRS. BLACKBURN. Okay. And the regulatory environment in the 

United States, have we just made it too difficult to build a new refinery? 

 MR. GRUENSPECHT. It is my understanding that the most costeffective way to add refinery capacity is, in many cases, to add to 

existing refineries and that is what many of the projects that I mentioned-

-I mentioned the total of 1.5 million barrels. I think nearly all of those 

are add-ons to existing refineries. 
71

 MRS. BLACKBURN. And do you think the permit process and 

everything is just--the add-on is much easier than trying to go the new 

route? 

 MR. GRUENSPECHT. I think the add-on is cheaper-- 

 MRS. BLACKBURN. Okay. 

 MR. GRUENSPECHT. --than going the new route. 

 MRS. BLACKBURN. It is cheaper? 

 MR. GRUENSPECHT. I believe it is cheaper. 

 MRS. BLACKBURN. Okay. 

 MR. GRUENSPECHT. Because you have a lot of the infrastructure 

already there that you can use. 

 MRS. BLACKBURN. Okay. All right. Let us talk about windfall 

profits tax, because we hear folks bringing that back around and they are 

saying that that is possibly something that they would advocate for, or 

changing the way that we measure inventory, in order to be able to 

increase taxes on oil company profits. So looking at that windfall profits 

or changing the inventory structure, the measurement-- 

 MR. GRUENSPECHT. Yes. 

 MRS. BLACKBURN. --so that you could tax more, would that have a 

positive or a negative effect on investment in the new crude oil resources 

or the refining process? 

 MR. GRUENSPECHT. Well, speaking to the crude oil resources, I can 

say that internationally, where most of the crude oil is one of the 

problems that I think has been impeding investment has been the 

tendency of some governments--I think, Venezuela, perhaps to some 

extent Russia--to sort of renegotiate deals as the market price changes to 

try to extract more. At the time a deal is put together, if there is a 

perception that the upside will be taken away--if there is an upside, but 

that if there is a downside, say, world crude oil prices turn down, then 

tough luck on the investor--that does have an effect and I think we have 

seen that internationally in the development of crude oil markets. One 

could draw an analogy, perhaps, to that type of effect domestically. In 

other words, returns from refining from 1990 to 1999 were extremely 

low and nobody was offering much in the way of added returns during 

those years. So there is a perception that if you take a risk and if things 

turn out well, you will be subject to large taxation. 

 MRS. BLACKBURN. Right. 

 MR. GRUENSPECHT. But if things turn out poorly, you are on your 

own. That does tend to have a somewhat discouraging effect. 

 MRS. BLACKBURN. Both in the near end and the long term. So you 

mentioned Contango and Administrator Caruso had talked about that last 

week. 

 MR. GRUENSPECHT. Yes. 
72

 MRS. BLACKBURN. That was one of the reasons the current market 

is in Cantango’s because of the feared disruption of the supplies, and in 

the future, either events from overseas or from the hurricanes we know 

are going to affect that, so we--going back to the refinery issue and being 

near capacity and needing expansion and needing more capacity on new-

-here, new refining capacity in the United States, one would think that 

that should be an encouragement for building refineries or getting some 

of these out of the Gulf Coast area, and also for opening up some more 

domestic supplies. Do you have any further comment on that? 

 MR. GRUENSPECHT. Again, I think we are seeing an environment 

where lots of new refinery projects are being announced. Lots of them 

are on the Gulf Coast because that is where a lot of the existing refining 

capacity is. And again, there are some economic advantages in adding 

on to that. It does create some of the risks that you have described. In 

terms of crude oil, most of the attractive prospects are elsewhere in the 

world and some of the problems that we have discussed I think are 

affecting the pace of the development of those. 

 MRS. BLACKBURN. Thank you. I appreciate that. Mr. Wehrum, I 

have got just really one thing for you, dealing with New Source Review 

primarily. I would like to get your thoughts on this, because we know in 

1998 the EPA came out with the Petroleum Refinery Initiative and we 

had actions that were taken under New Source Review, and it seemed at 

that time that--and going forward it seemed that several projects and 

things that formerly had been called routine maintenance were now 

considered to be major repairs and changes. And what I would like to 

know from you, just a point of a clarification, do you think that there is 

in the industry confusion about New Source Review and what that 

requires? 

 MR. WEHRUM. Congresswoman, we took a very close look at this 

question a couple years ago. When the President published his National 

Energy Policy, he asked EPA to investigate the impact of New Source 

Review on the energy sector, including the refinery part of that sector. In 

our conclusions, we did decide that uncertainty was one aspect. Well, 

we concluded that NSR was in fact having an impact on the energy 

sector, at least as it applied to the existing facilities, and we also said that 

uncertainty was one aspect of the program that was causing an impact. 

And I will say, we have gone to great lengths during this Administration 

to try to reform the NSR program to try to make it easier, simpler, faster 

and just a better program all the way around, and I feel like we have had 

some great--some good success at that. 

 MRS. BLACKBURN. Great. Thank you for that. And I think that is 

important. We just heard Dr. Gruenspecht use the word cheaper in 

talking about expanding and reforming existing space, rather than trying 
73

to get new refineries into the ground and of course we know that that 

means individuals are going to end up paying less when they actually go 

to the pump and make that purchase. So I appreciate your comments and 

I appreciate your testimony and being able to look at those New Source 

Review regulations and look at the effect that they are having on the 

expansion and on the building of new refineries with the expansion of 

existing ones. 

 CHAIRMAN BARTON. The gentlelady’s time has expired. 

 MRS. BLACKBURN. Thank you. 

 CHAIRMAN BARTON. The gentleman from Washington State, Mr. 

Inslee. 

 MR. INSLEE. Thank you. Gentlemen, I represent a district in 

Washington. 

 CHAIRMAN BARTON. Did you give an opening statement? 

 MR. INSLEE. I did not. 

 CHAIRMAN BARTON. So you are an 8 minute guy. 

 MR. INSLEE. Thank you very much. Well, some would say even 10, 

Mr. Chairman. We in Washington have been hit twice now with the 

second energy costs anomaly. The first was in the Enron debacle, when 

some of the raiders took over a billion dollars out of our economy, and 

now we are having sort of the second shock wave hitting, so this is of 

single moment to my constituents. And what they are telling me is what 

I think is common sense, is that Congress needs to rather than tinker 

around the edges and offer gimmicks like a hundred buck check to make 

everybody sort of have a happy meal and go away and leave Congress 

alone; it just isn’t going to cut the muster. We need to do some 

significant things to restructure the energy markets to provide 

alternatives to the existing fuels that can be, in effect, an alternative and 

can keep prices down. 

 Now, I was just reading the Wall Street Journal this morning, an 

article published some time ago about Brazil, and in Brazil the Ford 

Motor Company has an advertisement running right now that has a guy 

pull up to the pump and he can’t decide between whether he likes 

chocolate or vanilla, and he can’t decide whether he likes blondes or 

brunettes, and he can’t decide whether he likes gasoline or ethanol, but 

he can burn both, so he decides on whatever is cheapest, because in 

Brazil, unlike this country, several years ago they decided to have a real 

energy policy that would create real alternatives to gas and oil and give 

real consumers real choices. So cars in Brazil now, when you--you are 

free. You are not addicted to oil. You have got freedom because you 

drive a car that can burn either ethanol or gasoline. The Ford Motor 

Company is making them, General Motors is making, they work and as a 

result, I believe they have kept down some of the gasoline prices in 
74

Brazil, because now you have an alternative competitor with the existing 

markets. 

 So we are going to be talking. Just right after this hearing there will 

be some amendments to try to inspire the creation of a flex-fuel car 

industry here so that Americans can have that choice. So I guess the 

question I have, a long question, what are the salutary benefits of 

developing an alternative fuel to gas and oil and truly make it available 

to Americans, as far as the price, once you get a competitor fuel source in 

this economy? 

 MR. GRUENSPECHT. I will try to be brief. My understanding is that 

there are about five to six million vehicles in the United States that are 

flex-fuel vehicles that can burn E-85, which is 85 percent ethanol and 15 

percent gasoline, so we have those vehicles. The people who own those 

vehicles are not filling them up in this country with ethanol, with E-85, 

and there are some issues with the availability of it and it is my 

understanding that it is available in only 600 stations. There are also 

issues with the price of it, I would imagine, because as we discussed, 

right now the price of a gallon of ethanol, when the market is in balance 

in this country, is the wholesale price of gasoline plus about 50 cents, 

which is the tax credit that we give. A gallon of ethanol has about twothirds the energy content of a gallon of gasoline, so right now, if you 

bought ethanol at the market price and put it in your flex-fuel vehicle, 

you wouldn’t be very happy--that is my understanding. 

 MR. INSLEE. Right. But 15 years ago, those exact conditions existed 

in Brazil and they said we can’t do this because ethanol costs a little 

more than gasoline and we have only got 10 percent of our cars that are 

flex-fuel and therefore let us just go and call it a day and go home. But 

the people in Brazil said, no, we are going to develop a policy that is 

going to take care of both the chicken and the egg. It is going to drive 

the production of more flex-fuel vehicles, which creates demand for 

ethanol, which gives confidence to the investors to develop the 

distribution system for ethanol, and we are going to help the 

development of the distribution system with some tax incentives and 

otherwise to help the distributors make those investments, and they took 

care of both the chicken and the egg and now 40 percent of all their 

transportation fuels are in fact ethanol, which are as cheap or cheaper 

than gasoline under market conditions in Brazil. And the way they did 

that is that once they started to do this, they increased their sugar cane 

production by a factor of three. They now get three times as much 

alcohol per acre in Brazil as they did 20 years ago because they didn’t 

have the status quo mentality, and they got 20 times more flex-fuel cars 

on the roads because they said there is going to be a market or pumps 

available to them. I guess what I am saying is that if we look forward 
75

like we did in the space race, other than saying we don’t have computers, 

so we will never get to the moon, Brazil adopted some visionary policies. 

Now, if you assume that we are at least as smart as the Brazilians and can 

have at least the efficiency of Brazilians in cellulosic ethanol some day, 

we may not have it right now, but if you make the assumption that we 

will, and we do develop the policies that have most if not all of our new 

cars coming out as flex-fuel vehicles, will not that have a salutary benefit 

by creating a competitive fuel competitive with gasoline and at least try 

to dampen some of these price increases? And I will just tell you, that 

has been the Brazilian experience, which, by the way, last week 

celebrated national independence. They are totally self-sufficient in 

energy right now. 

 MR. GRUENSPECHT. Well, they are. 

 MR. INSLEE. So I was just wondering, if you make those 

assumptions, would it have that benefit? 

 MR. GRUENSPECHT. Well, if you make those--if you can get ethanol 

that is competitive on a fuel-value basis, there is a tremendous potential 

to displace petroleum-based fuels. Clearly Brazil has some advantages. 

They are the world’s low-cost producer of sugar. You know, that has 

been the case for a long time. I think American farmers are very smart, 

but on the other hand, there are some natural conditions in Brazil that 

make the equatorial countries more suited for cheap production of sugar. 

But again, American ingenuity is a good thing. The other thing that 

Brazil does is, of course, it allows significant offshore development, so 

part of their independence, I think, has related to their increasing oil 

production as well as, again, their very-- 

 MR. INSLEE. Right. 

 MR. GRUENSPECHT. --strong program in ethanol. 

 MR. INSLEE. We intend to have our first commercial cellulosic 

ethanol plant out of the Northwest, in Southeastern Idaho. It is ready to 

go, just waiting for the loan guarantees to get consummated. I will just 

tell you, there is an asset I think Americans have that at least equals 

Brazilians, which is technological innovation capabilities. What we have 

lacked is the Brazilian vision to make this happen and I am just hoping, 

this afternoon, we can take some modest steps in that direction to unleash 

Americans’ inventiveness, together with our top soil. I think it would 

both be a marriage. I want to ask you this quick question. If you prepare 

gasoline on a price volatility basis, many of us are concerned about the 

lack of oversight over the speculative markets that really don’t have 

much transparency or openness right now, unlike other regulated markets 

in commodities. What comments would you give us about the volatility 

of gasoline relative to other commodities that in fact are subject to the 
76

Commodities Futures Trading Program, which gives transparency and 

some degree of regulation to those speculative markets? 

 MR. GRUENSPECHT. Well, I do believe that the gasoline contracts 

that are traded on the organized exchanges are subject to the same rules 

as other exchange-traded futures contracts, so again, I am not 

representing the financial regulators. As I said in my testimony, I think 

most of what is going on is really driven by fundamental market forces. 

It is certainly true that the volume of nonphysical trade has increased in 

recent years, but I have a feeling that the speculation is more an effect of 

the real market conditions than the cause of them, than the cause of high 

prices in this setting. I think the rise in world oil prices has maybe 

attracted some types of investors who don’t have a physical interest in 

the market, but I have not seen anything that suggests that speculative 

activity is behind the trend in gasoline prices, and I think it is more, 

again, the crude oil prices, the transitions, the tight refining situation. 

The fundamentals can explain, I think, most of what is going on. 

 MR. INSLEE. Thank you. 

 MR. BOUCHER. [Presiding] Thank you very much, the gentleman 

from Washington, and the Chair recognizes the gentlewoman from 

Wyoming, Ms. Cubin. 

 MRS. CUBIN. Thank you, Mr. Chairman. Excuse me. My first 

question will to go Mr. Gruenspecht. I recently sent a letter of inquiry to 

your boss, Administrator Caruso. This goes along with what 

Congresswoman Bono was asking you. And my letter asked why the 

cost of gasoline and other refined products at the pump in Wyoming are 

not reflective of the low prices crude oil has been trading for in my home 

State, and this is not a new phenomenon with this energy crunch. This 

has been going on for a long time. I wonder if you can provide any 

insight into that matter. And as you may know, during the first week of 

March of this year, crude oil was trading for $61 a barrel nationally, but 

for roughly half of that in Wyoming. And so it isn’t exactly the same 

issue that we have been discussing here, but if Wyoming crude is selling 

so much cheaper, why are those savings not being passed on to 

Wyoming consumers? But first of all, why is Wyoming making about 

half on their crude oil that other States are? 

 MR. GRUENSPECHT. Well, again, I think, in terms of your letter, we 

are in the process of working on that, so you will have that shortly. Let 

me begin with that. But in the earlier discussion with Representative 

Bono, we discussed the different qualities of crude oil. 

 MRS. CUBIN. Right. But that doesn’t fit my situation, because I am 

talking about the qualities of the oil being the same. 

 MR. GRUENSPECHT. Right. 

 MRS. CUBIN. And we are getting half, at any given time-- 
77

 MR. GRUENSPECHT. Right. 

 MRS. CUBIN. --half to significantly less for the exact same quality of 

oil that places in Oklahoma, Louisiana or so on-- 

 MR. GRUENSPECHT. right. 

 MRS. CUBIN. --are getting and I wondered if you can explain why. 

 MR. GRUENSPECHT. Well, I want to take the time to get it right and 

again, we will answer by letter. I also understand that certain oilfields 

tend to be tied economically to certain refineries, through certain 

pipelines, and it is my understanding that changes if a particular refinery 

or buyer of a particular source of crude oil is down for maintenance, that 

can have a significant effect on the price of oil. I am not saying that that 

is the case. I am trying to be responsive at the table, but I will get back 

to you with-- 

 MRS. CUBIN. Good. 

 MR. GRUENSPECHT. --a full answer. 

 MRS. CUBIN. Good. Because, you know, just to help you avoid 

some of those-- 

 MR. GRUENSPECHT. Right. 

 MRS. CUBIN. --pitfalls that lapses in discussion that we are having 

right now, this isn’t a particular instance. This has been an extremely 

long time that this has been going on, and so that is the question I would 

like to have answered. And any possible fixes you might be able to 

suggest, as well, would be appreciated and I am willing to wait for that 

letter. I understand this isn’t an easy question because it has a long 

history. I have another question for you. What rate of growth is 

necessary, do you think, in our domestic refining capacity to keep up 

with demand? You mentioned in your testimony that “we are now 

seeing major capacity expansion announcements,” which I agree is 

encouraging. However, what level of expansion will it take to get back 

to the comfort level of excess refining capacity that we had 30 years ago? 

 MR. GRUENSPECHT. I think 30 years ago we had a comfort level 

from one side of the market, maybe not too comfortable from the other 

side of the market, in the sense that there was a lot of refining capacity-- 

 MRS. CUBIN. Yes. 

 MR. GRUENSPECHT. --in this country in the late 1970s, early 1980s, 

and then refining capacity generally declined until the, say, the early 

1990s. 

 MRS. CUBIN. Right. Wyoming shut down-- 

 MR. GRUENSPECHT. Right. 

 MRS. CUBIN. --many refineries during that period. 

 MR. GRUENSPECHT. Many I think would have been called in front 

of your committee “tea kettle” refineries. 

 MRS. CUBIN. Yes. 
78

 MR. GRUENSPECHT. I would not want to insult any refinery. 

 MRS. CUBIN. I wouldn’t find that insulting. 

 MR. GRUENSPECHT. I think that term has been used. And then, 

since about 1993, refinery capacity has been growing. But again, over 

the last 5 years, I think refinery capacity has been growing a lot slower 

than demand. The 1.5 million barrels, maybe 1.7 million barrels of-- 

 MRS. CUBIN. Million or billion? 

 MR. GRUENSPECHT. Million barrels a day-- 

 MRS. CUBIN. Yes. 

 MR. GRUENSPECHT. --that we think would come on board. Right 

now, we are doing about--we have about 17.3 million barrels a day, so 

that would be about a 10 percent increase in capacity. That is what we 

think is likely possible before 2010. That would be pretty healthy. That 

would be faster than demand growth. 

 MRS. CUBIN. Okay, that was my next question. I know that-- 

 MR. GRUENSPECHT. So that would be a 10 percent increase over 

about a 4 year period. That would be more than 2 percent a year on 

average. Again, a lot of that is sort of back-loaded, but refinery capacity 

between now and 2010 would have grown faster than demand, if in fact 

we get 1.7 additional refinery capacity by 2010. 

 MRS. CUBIN. And we don’t have announcements for that many at 

this time, right? 

 MR. GRUENSPECHT. I think we have announcements for about 1.5. 

 MRS. CUBIN. Okay. 

 MR. GRUENSPECHT. That is the way we count it. There is also a lot 

of what is called capacity creep-- 

 MRS. CUBIN. Right, right. 

 MR. GRUENSPECHT. --the very small adjustments that people don’t 

announce. And looking at the historical trends in capacity, we think it is 

reasonable to think of capacity creep adding another 200,000 barrels a 

day. 

 MRS. CUBIN. And so you are estimating future demand and future 

hopeful capacity, and by 2010, you think-- 

 MR. GRUENSPECHT. I guess, from the point of view of the 

consumer, a more comfortable situation than today. 

 MRS. CUBIN. Thank you. 

 CHAIRMAN BARTON. The gentlelady’s time has expired. The 

gentleman from Oregon, Mr. Walden. 

 MR. WALDEN. Thank you very much, Mr. Chairman. I appreciate 

having this series of hearings that you have scheduled. Dr. Gruenspecht, 

I read through your testimony and I walked away sort of depressed. 

Although it is very helpful, it is-- 

 MR. GRUENSPECHT. Only the messenger. 
79

 MR. WALDEN. I know, I know. And as I read through this, we are 

trying to figure out solutions here that will have both short-term and 

long-term benefit. We recognize with the passage of the energy bill, a 

lot of what we were investing in wasn’t going to produce immediate 

results, but would set the country finally on a path towards long-term 

improvements in making America more energy independent. And as I 

read through your testimony here, when we are trying to figure out what 

is the right number of blends for boutique fuels, if you will, there is a 

downside to going to say one blend, because the refining capacity 

changes, or the changes in refineries would have to be made. It wouldn’t 

be investments in new capacity. Is there a magic number of blends? I 

mean, are there certain blends that are made in enormous quantities 

versus others that are made in small amounts that do drive up the costs? 

 MR. GRUENSPECHT. I really don’t have that off hand. I would say 

there is, again, this trade off between the ease of distribution and the ease 

of production and that is a tough--and there is also the air quality issue, 

which I don’t mention because it is out of my jurisdiction, but-- 

 MR. WALDEN. You see where I am going with that, though. 

 MR. GRUENSPECHT. Yes. 

 MR. WALDEN. I mean-- 

 MR. GRUENSPECHT. But it is not just the number of blends. I mean, 

there is one thing to keep in mind-- 

 MR. WALDEN. The volumes. 

 MR. GRUENSPECHT. If you would have, let us say, whatever number 

of blends you have and you had it in more geographically distinct-- 

 MR. WALDEN. Right. 

 MR. GRUENSPECHT. --areas, you still have a distribution issue 

associated with getting whatever number of blends you have to a larger 

number of distinct areas. The other thing is there are differences--it is 

really the distinct fuels that matter and there are some fuels that are 

distinct, not because of State Implementation Plans, but because of other 

State requirements. Some of this relates to what has been done under the 

Clean Air Act. Some of it relates to really the number of geographic 

areas served with a fuel rather than simply the number of fuels. 

 MR. WALDEN. Well, that is, I guess, what I am trying to get at. 

 MR. GRUENSPECHT. And that is another--right. 

 MR. WALDEN. Somewhere in there you all that do this full-time 

must be able to give us some counsel about, if you eliminated these three 

or merged these two or these eight, there would be an efficiency gained 

that would help with the fungibility and not drive up price, I guess. And 

so to the extent you can get us that information, that would be helpful. 

Since I have only got like 2 minutes, I want to just fire off a couple 

others. I heard a report at some point that China and India today 
80

consume more gasoline than the world consumed 10 years ago. Is that 

an accurate-- 

 MR. GRUENSPECHT. That doesn’t-- 

 MR. WALDEN. By all--I am assuming. 

 MR. GRUENSPECHT. That doesn’t sound right to me. 

 MR. WALDEN. That is why I like to ask these questions, so we don’t 

repeat inaccuracies. But there has been an enormous growth. 

 MR. GRUENSPECHT. A tremendous growth in demand. 

 MR. WALDEN. Can you quantify that? 

 MR. GRUENSPECHT. I know that China’s demand in 2004 grew by 

over a million barrels a day. 

 MR. WALDEN. And what is our consumption? 

 MR. GRUENSPECHT. Our consumption is about 20. Theirs is, I 

think, on the order of six and a half to seven million barrels a day. So I 

think they have become the number two consumer. 

 MR. WALDEN. Is that-- 

 MR. GRUENSPECHT. And they are on an upward track. In our shortrun projections, it is growing like half a million barrels a day per year. 

 MR. WALDEN. We are sort of flat, though. I mean, it is nine-tenths 

of a percent growth is what you are seeing or what you testified to today. 

 MR. GRUENSPECHT. Yes, we are certainly not growing at the pace 

that China is growing. They are going to be a larger and larger share of 

the world oil consumption, and India as well. 

 MR. WALDEN. Okay. 

 MR. GRUENSPECHT. And we are going to grow in absolute terms, 

but our role as a share of world consumption is, in our view, likely to 

decline. We are the biggest consumer now. 

 MR. WALDEN. And now we are going to debate fuel efficiency-- 

 MR. GRUENSPECHT. Right. 

 MR. WALDEN. --standards for vehicles, which, even if we were to 

pass something today, is out several years. You made the comment 

about Brazil, that one of their keys to energy independence, in addition to 

development of ethanol through using sugar, is also their ability to access 

their own reserves. When it comes to America’s energy independence, 

how important are all these other changes we are looking at versus 

accessing our own reserves? I mean, there would have been incredible 

quantities in Alaska and offshore. 

 MR. GRUENSPECHT. I mean, I don’t think it is one--again, taking 

this longer term view-- 

 MR. WALDEN. Right. 

 MR. GRUENSPECHT. --on both the demand side and the supply side, 

I think the Minerals Management Service has recently looked at our 

continental shelf reserves or potential technically recoverable oil, and 
81

they think, in the moratorium areas, there would be, I think, 19 billion 

barrels of technically recoverable oil. ANWR, the mean estimate is 10 

billion barrels of technically recoverable oil. So to put that in 

perspective, I think total proved U.S. reserves now are about 20, 21 

billion barrels. So there is substantial amounts, I mean, relative to 

proved reserves. 

 MR. WALDEN. So it is nearly double? 

 MR. GRUENSPECHT. The proved reserves. I don’t think you would 

double production. 

 MR. WALDEN. Right. 

 MR. GRUENSPECHT. I think production--Alaska, looking at maybe 

up to one million barrels a day production at full utilization, but again, 

that is a long way off in time. 

 MR. WALDEN. Right. If we were to get that million barrels a day 

production increase, what effect would that have on price? Do you have 

a ratio in your testimony? 

 MR. GRUENSPECHT. If you got it today, it would be very helpful, I 

think, because in the short run it has a bigger difference than in the long 

run. In the long run, our feeling is the price impact would probably be 

modest, but again, the energy independence impact could be significant. 

 MR. WALDEN. Thank you. 

 CHAIRMAN BARTON. The gentleman’s time has expired. We have a 

series of three votes on the floor. We are going to recognize Dr. Burgess 

for the last 5 minutes of questions for this panel, then we are going to 

recess. When we come back at approximately 1:45, we will bring the 

second panel up. So, Dr. Burgess, are you ready to ask your questions? 

Dr. Burgess? 

 MR. BURGESS. Thank you, Mr. Chairman. 

 CHAIRMAN BARTON. This will be our last questions for this panel. 

 MR. BURGESS. I was just going to get some clarification on the 

crack spread that the chairman had brought up earlier. It was a term I 

was not familiar with. 

 MR. GRUENSPECHT. Yes. 

 MR. BURGESS. If you could perhaps go through that in simple 

declaratory sentences for me? 

 MR. GRUENSPECHT. Okay. You have a barrel of crude oil and that 

has a market value on the wholesale market. You have a barrel of 

gasoline and that has a value on the market. And the difference between 

the value of a barrel of gasoline is worth more than a barrel of crude oil 

and that difference is called the gasoline crack spread. 

 MR. BURGESS. And I missed the line of questioning from the other 

side, but is it fair for us to assume that that represents the built-in profit 

to that product? 
82

 MR. GRUENSPECHT. It is both the cost and the profit. 

 MR. BURGESS. Okay. 

 MR. GRUENSPECHT. Obviously refining is an activity that involves a 

lot of capital equipment, a lot of investment, so the crack spread 

encompasses both the cost and the profitability of refining. 

 MR. BURGESS. Is the cost of refining a fixed cost that would have 

existed at $50 a barrel oil that will now be the same for $75 a barrel oil? 

Does the cost of refining go up as the cost of crude goes up if you 

subtract the cost of the crude? 

 MR. GRUENSPECHT. There is some impact from the cost of crude 

because energy is used in refining, but there is also the impact of changes 

in specification. So, for instance, making the blendstock to blend with 

ethanol is more difficult than making the blendstock to blend with 

MTBE. So there are costs related to the specifications. They are costs 

related to the cost of energy used in the refinery, just like other producers 

who use energy in their production process, you know, their costs go up 

when energy costs go up. So the crack spread is not just a measure of 

profitability, it is a measure of cost and profitability together. 

 MR. BURGESS. Well, both of you obviously--and I appreciate your 

indulgence for being with us so long, but do either of you have an 

opinion as to what you would like to see this committee do as we go 

forward with this discussion? 

 MR. WEHRUM. I will just say, Congressman, that we stand ready to 

provide assistance. On the boutique fuels questions, there are a number 

of important questions in play right now, including, should we further 

limit beyond what the Energy Policy Act required, and should we take 

other steps directed at some of the other fuels programs that we 

implement? And those are hard questions that we are all taking a hard 

look at and we stand ready to help out with that. 

 MR. GRUENSPECHT. And we also stand ready to provide any data 

analyses that are requested by the committee and others. We both 

successfully avoided answering that. 

 MR. BURGESS. As the cost goes up--and you talked about this, 

doctor, about the utilization that--the utilization of fuel obviously goes 

down with the price spike. Has that impacted the product in the 

pipeline? Pardon the phrase. I mean, do we have more reserve available 

now because the price has gone up? Or, how has the price affected 

utilization? Is it evident enough to see that in the marketplace? 

 MR. GRUENSPECHT. Well, in 2005, we think, where previous 

gasoline demand had been growing steadily, data that we have suggests 

that it leveled off. In 2006, we are expecting some growth in demand 

again, but I think that over time, we would expect, if people believed that 

prices are going to be sustained at a high level, we think you will start to 
83

see changes in behavior and changes in vehicle purchase decisions and 

that will be reflected in the level of demand. 

 MR. BURGESS. Very well. Thank you, Mr. Chairman. I will yield 

back so we can go vote. 

 CHAIRMAN BARTON. We thank you, Congressman. I had just one 

final clarification question for our witness from EPA. Congressman 

Waxman was asking about the requirements in the Energy Policy Act 

that restrict over time the number of boutique fuels that are available 

nationwide. I was one of the co-authors of that and the intention was to 

restrict the number of boutique fuels. There is no secret about that. My 

question to you is, does anything in the act lower the standards for air 

quality on a parts per billion basis or any kind of an 8 hour standard, or 

in any way did anything in the Act do anything to lower the requirement 

of air quality? 

 MR. WEHRUM. No, Congressman, it did not. 

 CHAIRMAN BARTON. Not a bit? 

 MR. WEHRUM. Mr. Chairman, it did not. 

 CHAIRMAN BARTON. Okay. I thank each of you. We will have 

follow-up written questions on both sides of the aisle. We are going to 

recess until after these series of votes. We will have the second panel 

and we will reconvene at approximately 1:45. 

 [Recess] 

 CHAIRMAN BARTON. We want to welcome our second panel. And 

we have with us Mr. Geoff Sundstrom, who is the Director of Public 

Relations for the American Automobile Association; we have Mr. Mark 

Cooper, who is the Research Director for the Consumer Federation of 

America and a frequent testifier. We are glad to have you back again. 

And we have Mr. John R. Wilkins, who is the Executive Vice President 

and CIO of the Delaware Valley Wholesale Florists Association, and he 

is here on behalf of the Society of American Florists. We welcome each 

of you gentlemen to the committee. Your statements are in the record in 

their entirety. We are going to recognize each of you for approximately 

8 minutes to elaborate on that testimony and we will start with Mr. 

Sundstrom. Welcome to the committee. 

STATEMENTS OF GEOFF SUNDSTROM, DIRECTOR OF 

PUBLIC RELATIONS, AMERICAN AUTOMOBILE 

ASSOCIATION; MARK COOPER, RESEARCH DIRECTOR, 

CONSUMER FEDERATION OF AMERICA; AND JOHN R. 

WILKINS, EXECUTIVE VICE PRESIDENT AND CIO, 

DELAWARE VALLEY WHOLESALE FLORISTS, ON 

BEHALF OF SOCIETY OF AMERICAN FLORISTS 
84

 MR. SUNDSTROM. Thank you, Mr. Chairman. My name is Geoff 

Sundstrom and I am the American Automobile Association’s Director of 

Public Affairs. I am AAA’s primary spokesman on motor fuel issues. 

 As you may know, AAA is the largest motorist organization in North 

American, with nearly 50 million members in the United States and 

Canada. Our members drive approximately 25 percent of all the motor 

vehicles in operation in this country. Using figures from the U.S. 

Department of Transportation, we estimate that they will purchase 

approximately 33 billion gallons of gasoline this year, and at current 

prices will spend an estimated $96.4 billion on gasoline. Unlike others 

that testify on this issue, AAA has no involvement in the regulation, 

refining, shipping, blending, or sale of gasoline. We represent the end 

users of this increasingly contentious, yet completely indispensable 

product. 

 Our members are very concerned about whether gasoline is going to 

remain readily available at a reasonable cost in the United States, or if we 

are slowing moving toward an era of much higher prices with even less 

reliable supplies of fuel? After Hurricane Katrina, Americans paid the 

highest prices ever for gasoline, an average of $3.05 per gallon on Labor 

Day weekend of last year. As unpleasant as that experience was, the 

public clearly understood that the storm had harmed vital components of 

our energy infrastructure, and while fuel prices were exceptionally high, 

it was a common belief at that time that the situation would be temporary 

and that gas prices would come back down. Since the beginning of 

2006, however, the national average price of self-serve gasoline has 

jumped from $1.78 per gallon to $2.92 per gallon, a whopping increase 

of $1.14 per gallon in just a few months. 

 Many motorists are now alarmed that the rising gas prices have 

become a permanent part of our lives in this country. They are 

concerned because this year’s price increase will cost a typical family 

about $1,260 more per year in gasoline expenditures at current prices, or 

about $100 more each time the monthly gasoline credit card statement 

arrives in the mail. AAA calculates this increase on the assumption that 

the average vehicle consumes 550 gallons of gasoline each year, as 

reported by the Federal Highway Administration, and the average 

household owns more than two vehicles--actually about 2.1 vehicles per 

household. An extra $100 per month may not sound much like much to 

some people, but it is helpful to remember that an estimated 50 percent 

of American families say they always or frequently live pay check to pay 

check, according to my colleagues here from the Consumer Federation of 

America. And the median household income in the United States is only 

$45,000 per year. So with these realities in mind, it is easy to understand 
85

why a sharp unexpected hike in fuel prices can be a threatening financial 

setback for many citizens. 

 Part of the focus of today’s hearing is to discuss what else the 

Federal government might do to help rein in the price of gasoline or help 

offset its impact on motorists, and AAA has a few ideas that we would 

like to share with you. America’s energy woes are complex and far 

reaching. The gasoline price volatility consumers are experiencing at the 

pump is a result of the escalating price of world crude oil; rapidly 

increasing worldwide demand for energy; America’s growing insecurity 

as the world’s largest importer of oil and gasoline. Experts say the 

weakening of the dollar in response to our large trade and budget deficits 

may also be playing a role in the price of oil. 

 On the domestic side and clearly of our own doing, there is price 

volatility spawned by the reliance in some markets on a variety of fuel 

blends to serve clean air or local economic goals. America may not be 

able to control the world price of crude oil or influence demand in other 

countries, but we can clearly exercise more influence over our own 

destiny. But to do so will require leadership and action by the Federal 

government, as well as active participation by consumers and business 

leaders. 

 In the area of energy demand and especially demand for gasoline, 

more can and must be done to encourage conservation. Motorists must 

reduce consumption by using the most fuel-efficient cars, avoiding 

unnecessary trips, maintaining their vehicles, driving gently, car pooling, 

and using public transportation when necessary. And these are all tactics 

and techniques that we have been talking to our members about for many 

years. 

 As previously stated, all consumers do not have the same economic 

incentives to do more with less, and actually rising prices hit hardest at 

those at the lowest end of the income scale, and do not therefore 

constitute a workable fuel conservation or air quality improvement 

program, in our opinion. In fact, fuel economy of the total fleet in the 

United States has been stuck at about 24 miles per gallon for at least the 

last 10 years. So clearly, even though prices are going up, consumers 

have not made a major switch in the choice of vehicle selection when 

they enter the new car showroom. 

 AAA believes the Nation, industry, and government must commit to 

achieving higher fuel economy standards on all vehicles. Congress 

should clearly clarify that the Administration has the authority to raise 

fuel economy standards for passenger vehicles. Once that authority is 

granted, the Administration should exercise the authority so that real 

gains are achieved in fuel efficiency without compromising safety. 
86

 In the area of energy security, a previous generation of Americans 

was wise to invest in a Strategic Petroleum Reserve of the United States. 

It has somewhat lessened the dangers of an abrupt disruption of oil 

imports. Unfortunately, the same cannot be said with regard to gasoline. 

 Hurricanes Katrina and Rita have taught us that the United States 

needs a cushion of available fuel in times of emergency, especially now 

that the Nation imports more than 10 percent of its refined products from 

offshore. AAA believes Congress and the Administration should explore 

measures that would enable a minimum level of mandatory refined 

product inventories to be available in an emergency. Such a system 

exists in Europe and actually was able to provide critical gasoline to the 

United States during production shortfalls that occurred following last 

year’s hurricanes. Should similar or worse disasters occur in the future, 

our ability to immediately move gasoline to areas that need it will again 

prove critical to people and the economy. And actually, I am with 

AAA’s national office, which is in Florida, and the situation hits close to 

home. Both last year and the year before, we had local gasoline stations 

without fuel in the neighborhood of our national office. 

 In the area of boutique and biofuels, a much more coordinated 

approach is needed between the Federal and State governments and all 

the many industries affected by changes in the way we make gasoline. 

Industries that are forced to frequently change the composition of their 

products, or make specialty products for small markets, lose efficiency 

and incur costs from a variety of causes. These costs are understandably 

passed to consumers, a process that becomes especially easy when the 

industry involved is operating with a minimum of spare capacity and 

very low inventories. In our opinion, such a situation invites speculation 

of the price of that commodity, further driving up costs to consumers. 

 While this is an extremely complex problem, AAA encourages 

Federal and State officials to reach agreement on the use of a smaller 

number of fuel blends that will meet or exceed our clear air goals and be 

used as widely as possible. As these transitions are made, more careful 

attention must be paid to the implementation process by Federal and 

State agencies. For example, the transition between MTBE and ethanol 

seems to have resulted in temporary fuel shortages here on the East Coast 

and appears to be one of the contributing factors to today’s high fuel 

prices. That type of experience should not be repeated. 

 As for the value of the dollar and its implications for the global price 

of oil, AAA leaves that to others that are more qualified to comment. 

However, we think it is important that Congress and the White House 

resist measures to excessively subsidize fuels to make it cheaper for 

Americans while driving up the Nation’s indebtedness. 
87

 Thank you again, Mr. Chairman, for allowing AAA to address the 

distinguished committee. 

 [The prepared statement of Geoff Sundstrom follows:] 

PREPARED STATEMENT OF GEOFF SUNDSTROM, DIRECTOR OF PUBLIC RELATIONS,

AMERICAN AUTOMOBILE ASSOCIATION

Introduction 

AAA is the largest motorist organization in North America with almost 50 million 

members in the U.S. and Canada. AAA members drive approximately 25 percent of all 

the motor vehicles in operation in this country. We estimate they will purchase 

approximately 33 billion gallons of gasoline this year and at current prices will spend an 

estimated $96.4 billion on gasoline. 

Impact on Consumer 

Since the beginning of 2006, the national average price of self-serve regular 

unleaded gasoline has jumped from $1.78 per gallon to $2.92 per gallon: a whopping 

increase of $1.14 per gallon. This year’s price increase will cost a typical family about 

$1,260 more per year in gasoline expenditures, or about $100 more each time the 

monthly gasoline credit card statement arrives in the mail. 

Time to exercise more control over our own destiny 

1. Motorists must reduce consumption. AAA will continue to educate the public on 

steps they can take to drive more efficiently. 

2. AAA believes the nation – industry and government – must commit to achieving 

higher fuel economy standards on all vehicles. 

3. Government should work with the private sector to develop alternative fuel and 

vehicle programs. 

4. AAA believes that Congress and the Administration should explore measures that 

would enable a minimum level of mandatory refined product of gasoline inventories. 

Such a system exists in Europe and was able to provide critical gasoline to the U.S. 

during production shortfalls that occurred following last year’s hurricanes. Should 

similar or worse disasters occur in the future, our ability to immediately move gasoline to 

areas that need it will again be critical. 

5. More planning must be done to ensure fuel is available during evacuations, in the 

immediate aftermath of storms or from other widespread damage, and in areas farremoved from a disaster site that might lose access to energy resources. 

6. AAA encourages federal and state officials to reach agreement on the use of a smaller 

number of fuel blends that will meet or exceed our clean air goals and be as widely used 

as possible. 

Mr. Chairman: My name is Geoff Sundstrom, and I am the American Automobile 

Association’s Director of Public Affairs. I am AAA’s primary spokesperson on motor 

fuel issues and have oversight responsibility for AAA’s widely-sourced Fuel Gauge 

Report Web site which tracks national, state and local fuel prices each day. I also work 

with local AAA clubs on fuel price inquiries from members and the media in your home 

districts. 
88

AAA appreciates your invitation to appear before the Energy and Commerce 

Committee to discuss the rising price of gasoline. As you may know, AAA is the largest 

motorist organization in North America with nearly 50 million members in the United 

States and Canada. Our members drive approximately 25 percent of all the motor 

vehicles in operation in this country. Using figures from the U.S. Department of 

Transportation, we estimate they will purchase approximately 33 billion gallons of 

gasoline this year and at current prices will spend an estimated $96.4 billion on gasoline. 

Unlike others that testify on this issue, AAA has no involvement in the regulation, 

refining, shipping, blending or sale of gasoline. We represent the end-users of this 

increasingly contentious, yet completely indispensable product. Our members are your 

constituents and as you know, they are very concerned about whether gasoline is going to 

remain readily available at a reasonable cost in the United States, or if we are slowly 

moving toward an era of much higher prices with even less reliable supplies of fuel. 

After Hurricane Katrina ravaged New Orleans and the Gulf Coast, Americans paid 

the highest prices ever for a gallon of gasoline in this country: an average of $3.05 per 

gallon on Labor Day Monday of last year. 

As frustrating and unpleasant as that experience was, the public clearly understood 

that a dramatic natural disaster had befallen the southeastern United States. They heard 

and read that the storm harmed vital components of our energy infrastructure. And while 

fuel prices were exceptionally high, it was a common belief that the situation would be 

temporary and that gas prices would come back down. 

Since the beginning of 2006, however, the national average price of self-serve 

regular unleaded gasoline has jumped from $1.78 per gallon to $2.92 per gallon; a 

whopping increase of $1.14 per gallon. With hurricane season around the corner, and 

because fuel prices now seem to be rising significantly higher with each passing year, 

many motorists are alarmed that rising gas prices have become a permanent part of our 

lives in this country. 

They are concerned because this year’s price increase will cost a typical family 

about $1,260 more per year in gasoline expenditures, or about $100 more each time the 

monthly gasoline credit card statement arrives in the mail. AAA calculates this increase 

on the assumption that the average vehicle consumes 550 gallons of gasoline each year as 

reported by the Federal Highway Administration and the average household owns more 

than two vehicles. 

An extra hundred dollars per month may not sound like much to some people, but it 

is helpful to remember that an estimated 50 percent of American families say they always 

or frequently live paycheck to paycheck, according to research by the Consumer 

Federation of America, and the median household income in the United States is $45,000 

per year, according to the U.S. Census Bureau. With these realities in mind, it is easier 

understand why a sharp, unexpected hike in fuel prices can be a threatening financial 

setback for many citizens. 

Of course, pain at the pump is not felt equally. It depends on where you are on the 

economic ladder. If you are among the sizeable group that can readily afford a large, 

luxury vehicle that may not be especially fuel-efficient, the high price of fuel is mostly an 

annoyance. 

Or, if you are an urban dweller with access to mass transit, and one who rarely if 

ever drives a car, gas prices may be little more than an abstraction. But for most of 

America’s 200 million licensed drivers, high gas prices are a real problem. 

Part of the focus of today’s hearing is to discuss what else the Federal government 

might do to help reign in the price of gasoline or help offset its impact on motorists. 

AAA has a few ideas to share with you. 

The energy problems consumers are experiencing today will not be solved 

overnight. Although our association has worked for many years to encourage fuel 

conservation by motorists and has provided members and the public with helpful advice 
89

for doing so, the magnitude of the issues before us require an increase in thoughtful 

leadership from federal and state lawmakers. 

America’s energy woes are complex and far reaching. The gasoline price volatility 

consumers are experiencing at the pump is the result of the escalating price of world 

crude oil, rapidly increasing world-wide demand for energy and America’s growing 

insecurity as the world’s largest importer of oil and gasoline. Experts say the weakening 

of the dollar in response to our large trade and budget deficits may also be playing a 

significant role. On the domestic side – and clearly of our own doing – there is price 

volatility spawned by the reliance in some markets on a variety of fuel blends to serve 

clean air or economic goals. 

America may not be able to control the world price of crude oil or influence demand 

in other countries. But, we can exercise more influence over our own destiny. But, to do 

so, will require leadership and action by the federal government, as well as active 

participation by consumers and business leaders. 

In the area of energy demand and especially demand for gasoline, more can and 

must be done to encourage conservation. Motorists must reduce consumption by using 

their most fuel efficient car, avoiding unnecessary trips, maintaining their vehicles, 

driving “gently” and carpooling or using public transportation whenever possible. We 

should avoid the impulse to horde gas or constantly top off tanks. Even in the best of 

times there is not enough fuel in the system to fill every car and truck to the top of their 

fuel gauge. 

As previously stated, all consumers do not have the same economic incentives to do 

more with less. Inexorably, rising prices hit hardest those at the lowest end of the income 

scale, and do not therefore constitute a workable fuel conservation or air quality 

improvement program. AAA believes the nation – industry and government – must 

commit to achieving higher fuel economy standards on all vehicles. Congress should 

clarify that the Administration has the authority to raise fuel economy standards for 

passenger vehicles. Once that authority is granted, the Administration should exercise 

the authority so that real gains are achieved in fuel efficiency without compromising 

safety. 

Likewise, government should continue to work with the private sector in developing 

alternative fuel and vehicle programs. 

In the area of energy security, a previous generation of Americans were wise to 

invest in a strategic petroleum reserve for the United States that has somewhat lessened 

the dangers of an abrupt disruption of oil imports. Unfortunately the same can not be 

said with regard to gasoline. Hurricanes Katrina and Rita have taught us the United 

States needs a cushion of available gasoline in times of emergency, especially now that 

the nation imports more than 10 percent of its refined products from offshore. AAA 

believes Congress and the Administration should explore measures that would enable a 

minimum level of mandatory refined product inventories. Such a system exists in Europe 

and was able to provide critical gasoline to the United States during production shortfalls 

that occurred following last year’s hurricanes. Should similar or worse disasters occur in 

the future, our ability to immediately move gasoline to areas that need it will again prove 

critical to people and the economy. 

At present, AAA is concerned that the level of preparedness based on experiences 

from last summer’s hurricane season have not resulted in meaningful short- and longterm action to address fuel availability. More planning must be done to ensure fuel is 

available during evacuations, in the immediate aftermath of storms or from other 

widespread damage, and in areas far-removed from a disaster site that might lose access 

to energy resources as a consequence. Electricity generating equipment needs to be 

available at gas stations, for example, so fuel can be dispensed when power lines are 

down. 
90

In the area of boutique and bio-fuels, a much more coordinated approach is needed 

between the federal and state governments, and all of the many industries affected by 

changes in the way we make gasoline. Industries that are forced to frequently change the 

composition of their products, or make specialty products for small markets, lose 

efficiency and incur increased costs from a variety of causes that include raw materials, 

labor, maintenance, storage, transportation, research and regulatory compliance. Those 

costs are understandably passed to consumers, a process that becomes especially easy 

when the industry involved is operating with a minimum of spare capacity and low 

inventories. Such a situation also invites speculation in the price of the commodity, 

further driving up costs to consumers. 

While this is an extremely complex problem and there are no simple solutions, AAA 

encourages federal and state officials to reach agreement on the use of a smaller number 

of fuel blends that will meet or exceed our clean air goals and be as widely used as 

possible. As these transitions are made, more careful attention must be paid to the 

implementation process by federal and state agencies. Significant investments have 

already been made in boutique fuels, and untangling this apparatus will require careful 

oversight. For example, the transition between MTBE and ethanol seems to have 

resulted in temporary fuel shortages in some locations and appears to be one of the 

contributors to today’s high fuel prices. That type of experience must not be repeated. 

As for the value of the dollar and its implications for the global price of oil, AAA 

leaves that topic to others who are much more qualified to comment. It is important for 

Congress and the White House to resist measures that would excessively subsidize 

energy to make it cheaper for Americans while driving up the nation’s indebtedness. 

Thank you again Mr. Chairman for allowing AAA to address this distinguished 

Committee. 

 CHAIRMAN BARTON. We thank you. We now welcome Dr. Cooper, 

and your testimony is in the record and you are recognized for 8 minutes 

to elaborate on it. 

DR. COOPER. Thank you, Mr. Chairman. I appreciate the 

opportunity to testify, particularly after this morning, since I will address 

specifically many of the questions that were raised. I would like to say 

the same facts, different story. I believe the lack of competition, 

capacity, and mismanagement of short-term supplies are at the core of 

increasing gasoline prices, and this is true of the global crude market and 

the domestic refining market. 

 In recent years a frenzy of trading in energy commodity markets has 

added to the upward spiral. If this were a free market, if this were just 

supply and demand, there would be 15 million barrels a day more of 

production capacity in the crude market and at least three to five million 

barrels a day more for refining capacity in the domestic market. These 

are not decisions that are made according to simple economic supply and 

demand forces. The gasoline market is rigged. It is rigged against the 

consumer and we simply cannot allow political and strategic behaviors to 

run the price up. It would be a buck 50 if this were really a supply and 

demand market. We simply cannot allow these decisions to run the price 

up and then tell consumers to pay the price. 
91

 In the past 15 years the petroleum products supplied in the U.S. 

market has increased twice as fast as refining capacity. Gasoline 

consumption has increased over two and a half times as fast as refining 

capacity, and while gasoline consumption was increasing by about 20 

percent, the amount of gasoline and blending components in storage 

decreased by 6 percent. Self-sufficiency requires substantial spare 

capacity. We are not short one to two million barrels a day of capacity, 

we are short five to six million barrels a day, if you look at the spare 

capacity in truly competitive industries. 

 The tightening of the domestic gasoline market was a natural result 

and the intended purpose of the merger wave that took place in the 1992. 

ExxonMobil, Chevron Texaco, ConocoPhilips Tosco Unocal, BP Amoco 

Arco. There are four where there used to be eleven. As a result of that 

merger wave, four out of five regional refining markets and 47 out of 50 

wholesale gasoline markets in the United States are concentrated by the 

Department of Justice’s guidelines for measuring markets. 

 With market power overpriced, oil companies have raised the 

domestic spread; that is a little bit bigger than the crack spread we heard 

about this morning, mostly made up of the crack spread. They have 

raised that domestic spread by over 30 cents per gallon since the late 

1990s. Five years running, the return on equity earned by the major oil 

companies has exceeded the Standard and Poor’s industrials. That had 

not happened in the previous 30 years. The last two years have set new 

records. Using the S and P industrials as a base, we estimate that in the 

past 6years they have generated excess profits of over $100 billion. 

 The cash flow in the industry for the large companies exceeds the 

growth in capital expenditures by more than $100 billion. The industry 

is piling up cash at unprecedented rates. The three American majors 

alone increased their cash on hand by $30 billion, their total current 

assets by $67 billion and bought back $35 billion of their outstanding 

stock. We know where the excess profits have gone. They are sitting in 

the bank accounts of the major oil companies. The domestic refining net 

income has increased by $23 billion since 2002. That is why the crack 

spread has increased. Yes, there are some costs there, but unequivocally, 

it has become a profit center for the oil companies. 

 Now, things have gotten so bad in the domestic market that even the 

DOE has recently recognized that the upward pressure placed on the 

gasoline market by tight conditions here may, in fact, be pulling up the 

world price of crude. Let us be clear. The U.S. is by far the largest 

gasoline market in the world. When we watch when a political entity 

like OPEC watches the domestic spread go up and up, when they watch 

the profits of oil companies go up and up, they understand that there is 

more consumer surplus, more rent to be extracted from consumers. And 
92

so the price of crude may, in fact, be chasing the price of gasoline up in 

the United States. 

 And to make matters worse, the financial markets have experienced a 

massive increase in volume; $10 billion a month for the last 40 months. 

A massive increase in volatility, a massive increase in risk. Some people 

estimate that as much as 20 percent of the price of oil traded in that 

market, it has to do with the risk volume hedge premium. That works 

out to 30 cents a gallon. Interestingly, we have the question raised about 

West Texas Intermediate and why that price seems to have increased 

much more than the price of crude. In point of fact, refiners don’t pay 

West Texas Intermediate spot price for the crude they acquire, they pay a 

refiner acquisition cost and the EIA should not use West Texas 

Intermediate to calculate the crack spread. They ought to use the actual 

refiner acquisition cost of crude. 

 I would urge you to tell them to do that and show you what has 

happened to the spread, because in the last 5 or 6 years West Texas 

Intermediate has lost touch with the physical fundamentals in the market. 

That difference has increased, a study we did last year and we put in 

earlier this year on natural gas, suggests how that can operate. More 

money, ten, hundreds of billions of dollars are chasing the same amount 

of physical commodities in these markets. And frankly, when I went to 

college, they used to tell me too much money chasing too few goods is a 

prescription for inflation. That is what is happening in these financial 

markets. 

 There are obviously no short-term solutions. We wish you would 

have started a real long-term solution 5 years ago, 6 years ago when we 

first testified. In fact, we would be in the mid-term, by economic 

standards, if we had started. So we think that policymakers really have 

to look at the fundamental structure of this industry. You cannot be 

distracted by the excuse du jour that you get each spring as these prices 

go up. We have been through boutique fuels, through ethanol switch, 

through low storage to a refinery fire here, a pipeline outage there, there 

is always an excuse to explain why prices run up, but the underlying 

problem is an infrastructure, an industry that is not resilient, has no 

excess capacity, and frankly, as you heard today, the oil industry will not 

build sufficient excess capacity to put down pressure on price. 

 You are going to have to adopt public policies that get that job done. 

They have made it clear; they have shown for 10 years they won’t. In 

the short term, we think we need a strategic refinery reserve. We think 

we need a strategic product reserve. Last fall when the President 

announced that our European allies were going to send us more product, 

where were they getting it? They were getting it from their strategic 

product reserves. We don’t have one. We need anti-trust authorities that 
93

worry about unilateral actions that increase prices. Market forces are so 

weak in this sector that you don’t have to collude to raise prices. You 

raise your price, you look over your shoulder, you know what your 

fellow members of the industry are going to do. There are so few of 

them, they are easy to monitor and you can raise prices by unilateral 

action. 

 We need commodity market regulators who look at all markets. Yes, 

contracts are traded. The over-the-counter market is not regulated; it 

needs to be regulated. More changes hands there than on the regulated 

exchanges. We need joint Federal-State task forces that look at this 

industry. We need more eyeballs from different perspectives working 

together to look at these industries. The Feds alone have not done the 

job that needs to be done. 

In the long term, we really do have to address fundamentals and in 

fact, we have to rapidly increase our fuel efficiency. Yesterday we put 

out a report entitled “50 by 2030.” The idea was simple. We need to get 

to 50 MPG by 2030 and the analysis is straightforward. A family that 

walks into an auto dealership today typically takes out a 5 year auto loan. 

They can buy a 40 plus mile per gallon car, spend $4,000 more and that 

will increase their auto loan payment. But in fact, the gasoline savings at 

$3 a gallon will offset that entirely. It is cash flow neutral. 

 Now is the time to dramatically increase the target we have for fuel 

efficiency. And finally, we need to expand our research, development, 

production, and distribution of biofuels. We will need liquid fuels, no 

matter how efficient our cars get and that is where we need to find them. 

Thank you, Mr. Chairman. 

 [The prepared statement of Dr. Mark Cooper follows:] 

PREPARED STATEMENT OF DR. MARK COOPER, RESEARCH DIRECTOR, CONSUMER 

FEDERATION OF AMERICA

Mr. Chairman and Members of the Committee, 

My name is Dr. Mark Cooper. I am Director of Research at the Consumer 

Federation of America (CFA). I appear today on behalf of CFA and Consumers Union. 

The Consumer Federation of America (CFA) is a non-profit association of 300 proconsumer groups, which was founded in 1968 to advance the consumer interest through 

advocacy and education. Consumers Union is the independent, non-profit publisher of 

Consumer Reports. 

I greatly appreciate the opportunity to appear before you today to discuss the 

problem of rising gasoline prices and supply conditions. 

The Impact of Rising Gasoline Prices 

The American consumer is reacting to $3.00 per gallon gasoline prices differently 

now than they did last fall when I testified before the Committee about record high 

prices. At that time, the immediate cause was obvious, the hurricanes in the Gulf. 

Although, I raised concerns that price increases were unjustified and reflected 
94

fundamental problems in the industry. Profits soared last year, affirming the suspicions 

by many that oil the companies were exploiting severe market conditions. 

Today’s gasoline prices highlight fundamental problems in the industry – a lack of 

competition that enables oil companies to exploit a tight market that they have created 

and preserved through strategic underinvestment and mismanagement. The prospect of 

sustained high prices at these levels is alarming to the average American household. If 

gas prices average $2.75 per gallon over the course of this year, the typical family 

household will experience an increase of well over $1,000 to their annual gasoline bill 

compared to the late 1990s. 

Fundamental Flaws in Market Structure 

We have been pointing out what is wrong with this market for five years. Record 

high prices and profits today reflect a six-year trend in rising gas prices for consumers. 

The oil industry attributes this trend to rising crude oil prices and a string of supply 

disruptions in the market. A closer look at the structure and function of the oil industry 

and the economic forces at work, reveals a market in which the forces of supply and 

demand are too weak to prevent abuse of consumers. I submit for the record our study 

from 2004, which discussed this history in great detail. 

There is not sufficient competition on the supply-side to force producers to expand 

capacity and alleviate pressures on prices. Demand is so inelastic that, when prices are 

increased, consumers cannot cut back sufficiently. Having kept markets tight and 

eliminated competition, the oil companies can exploit any excuse to drive prices and 

profits up. 

To better understand what is going on with gas prices, we must look back over the 

last decade and chronicle the mergers that swept through the industry eliminating 

competition and resulting in refinery closings and reductions in storage of product, 

coupled with the long term refusals to build new refineries. I need only read the names of 

the major oil companies to remind you of the results – ExxonMobil, Chevron Texaco, 

ConocoPhilips Tosco Unocal, BP Amoco Arco. There are four, where there used to be 

eleven. As a result of that merger wave, four out of the five regional refining markets 

and 47 out of 50 state wholesale gasoline markets are concentrated. 

The antitrust authorities will say they have not colluded. They don’t have to. The 

industry has become so concentrated, the capacity has become so restricted, the barriers 

to entry so large, and it is so difficult for Americans to cut back on demand (economists 

say demand is inelastic), in short market forces in this industry are so weak, that they do 

not have to collude to raise the price level. Each company acts individually and knows 

full well that its brethren will act in a parallel way. 

The industry will tell you that existing refineries have expanded, but clearly not 

enough to build the spare capacity to put downward pressures on price. They choose to 

keep so little spare capacities that they cannot even do spring cleaning without price run 

ups. They do not fear running on short supply because there is little competition to steal 

their customers. The industry has gained market power over price by strategic 

underinvestment in refinery capacity, just as OPEC has set the conditions for increases in 

the global cost of crude by restricting the addition of production capacity. 

Excess Profits 

Last year the oil companies earned more income than in the five years between 1995 

and 1999. More importantly, four of the five highest years for profit in the oil industry 

since the Arab oil embargo of 1973 have occurred in the past six years. I have submitted 

for the record our study of oil industry profits over the past two decades, which 

demonstrates over $100 billion dollars of excess profits in the 2000 to 2005 period. We 

arrived at that estimate by comparing the return on equity of the oil companies to the 

Standard and Poor’s industrials. We corroborated it with an examination of the huge 
95

cash flow that they enjoyed, which is not being reinvested in the industry, since net new 

investment was a small fraction of net income over the 2000-2005 period. Free cash flow 

is piling up in huge masses of current assets and stock repurchases. 

 Crude prices have gone up and so has the domestic spread and refiner margins. 

Interestingly, the net income the large oil companies earn on their downstream operations 

– predominately refining but also marketing – in the U.S. has increased by almost 23 

billion dollars since 2002 compared to the increase in net income by the oil company’s 

foreign downstream operations, which have gone up by only about 7 billion dollars. 

The most obvious indicator that market forces are working against consumers can be 

seen in the “Domestic Spread” over the past six years. The domestic spread is the 

difference between the refiner acquisition cost of crude oil and the pump price, net of 

taxes. When we subtract taxes and crude costs from the pump price, we isolate the share 

that domestic refining and marketing take in the final price. The bulk of this is for 

refining. In the first quarter of 2006, it was over 30 cents per gallon above the historic 

average. In April 2006, even before the dramatic price increases of April, it was about 40 

cents per gallon higher than the average. 

The evidence is quite clear that rapid consolidation within the industry has changed 

the market fundamentals and behavior patterns. They simply do not compete on price to 

increase market share. They do not worry about running out of product, because they 

know they can simply raise the price of gas. They closed refineries for business reasons 

and refuse to build new ones for business reasons. 

Pulling Up the Price of Crude 

This huge increase in domestic spread and refiner margins may have another effect. 

Things have gotten so bad in the U.S. gasoline market that even the Energy Information 

Administration, in its most recent report This Week in Petroleum, recognizes that the tight 

U.S. gasoline market may be “pulling up” the price of crude. After all, the U.S. is the 

largest single oil consumer in the world and the largest gasoline market by far, 

accounting for over a quarter of the world-wide total. When the domestic spread and 

refining profits go up, it signals that there is more consumer surplus – more rent – to be 

extracted from the American consumer. 

In recent years the upward pressure on prices and the demonstration of more rent to 

be extracted has been reinforced by commodity markets. The New York Times recently 

(April 29, 2006) noted in an article headlined, “Trading Frenzy Adds to Jump in Price of 

Oil,” that some analysts believe a huge increase in trading volume, volatility and risk are 

adding as much as 20 percent to the price of oil. That works out to about 30 cents per 

gallon. I have submitted for the record a report I prepared earlier this spring for four 

Mid-West Attorneys General on the impact of commodity market trading on natural gas 

prices. Therein I describe in detail the same factors – a continual increase in volume, 

volatility and risk – that are affecting both the crude oil and natural gas markets. 

Recommendations 

There are no short-term solutions, but I must remind you that the American gasoline 

consumer has been afflicted by this market for six years. If we had started working on 

effective solutions six years ago, we could be well into the mid-term of a long-term 

policy shift. Policy makers are going to have to reform the fundamental structure of this 

industry and change the underlying dynamics. 

To address short-term spikes in prices, we recommend: 

• Increased oil industry revenue funneled back into expanding our refining 

capacity. 
96

• We need a strategic refinery reserve and a strategic product reserve that are 

dedicated to ensuring we have excess capacity sufficient to discipline pricing 

abuse. 

• Setting requirements that guarantee an increase in refining and storage capacity 

to deal with the industry’s failure to build capacity and keep adequate stocks on 

hand by creating strategic refinery and product reserves. 

• Mechanisms that prevent pricing abuse in the energy markets including 

formation of a joint task force of federal and state Attorney Generals to monitor 

the structure, conduct and performance of gasoline markets, with an emphasis 

on unilateral actions that raise price. 

To address long term fundamentals change the supply-demand balance in this sector, 

we recommend: 

• Accelerating the day when we will use less oil by setting aggressive, concrete 

targets for reducing America’s oil consumption. Specifically, we need concrete 

steps for reducing fuel consumption through aggressive, targeted improvements 

to vehicle fuel efficiency standards. 

• A national policy that promotes the research, production and use of biofuels. 

Hopefully, the current round of price spikes will convince policy makers to take 

steps to build a better future for American consumers by addressing market who’s forces 

that are working against the American people and for the interests of a few. 

Again, thank you for the opportunity to appear before you today. I look forward to 

working with the committee on policies that can solve the nation’s oil problem. 

 CHAIRMAN BARTON. Thank you, Mr. Cooper. We now want to hear 

from Mr. Wilkins on behalf of the florists and given that it is Mothers 

Day coming up, thank you for taking time to come talk to us. 

MR. WILKINS. Thank you. Mr. Chairman and members of the 

committee, the Society of American Florists and I greatly appreciate the 

opportunity to present testimony today on behalf of the floral industry. 

Gasoline prices, as well as all fuel prices are very important to our 

industry, maybe even more so than some of the other smaller businesses, 

as I will try to describe here today. And with your permission, I will 

submit my written statement for the hearing record and just summarize it 

here. 

 As a way of an introduction, I am the Executive Vice President and 

one of the second generation family owners of the Delaware Valley 

Floral Group, which is a floral distribution, logistics, and transportation 

provider which was founded by my father in 1959. We work hard to 

remain a family business and we have an active third generation in the 

business today. We employ over 500 people. One of our divisions is 

Delaware Wholesale Florist. We purchase and import floral products, 

including fresh cut flowers, cut greens, potted plants, and hard goods, 

which are florist supplies, from growers, manufacturers, and importers 

both domestically as well as worldwide. 
97

 We then sell these products to retail florists, mass marketers, and 

other retail outlets. They, in turn, resell them as is or convert them to a 

finished product for the end consumer. It is important to note that other 

than labor cost, perhaps no single factor plays a bigger role in the bottom 

line of the floral businesses than does the cost of fuel. Fuel costs impact 

every step in the market chain, as I would like to briefly describe. 

 It is appropriate, though, to mention that, as you actually just said, 

that this week is, for the wholesale florists or really for the florist 

industry, one of the busiest weeks of the year. And I would be really 

remiss if I didn’t remind you all to buy flowers for your mother and your 

wives and your daughters, if they happen to be mothers, as well. But 

when you do that, let us stop and think about something. We estimate 

that up to 50 percent of the cost of those flowers could be attributed to 

transportation cost. Our industry has very little ability to pass through 

added cost to our customers. 

 Quickly, here is how the market chain works. A large percentage of 

cut flowers sold in the U.S. are grown in South America, Europe, Africa, 

or Asia. Our domestic production, which is also important to us, comes 

primarily from California, Florida, Washington, Hawaii, and Oregon. 

Obviously, all fuel costs, including gasoline, will play a big role in 

getting flowers from those places to you, the end consumer. As an 

example, 32,500 boxes of flowers come in by air through the Port of 

Miami every day. They are unloaded from planes and go through 

customs. Then brokers move them again by motorized transport and 

they are reloaded onto other planes or trucks for shipments to importers’ 

and wholesalers’ warehouses. In our case, they are sent usually by one 

of our own refrigerated tractor trailers from Miami to New Jersey. And 

if they are grown in the U.S., they would come from say, California all 

the way to New Jersey, usually by tractor trailer, sometimes by air, but 

when by truck it is a 36 hour, nonstop run by a team of tractor trailer 

drivers. From our warehouses in New Jersey, the flowers are shipped via 

our fleet of 101 delivery trucks to our retail customers. And we are not 

done yet. From the retailer, they are usually delivered right to the 

customer’s door, be it their homes, offices, to churches for weddings or 

other special events. 

 The point is there are a lot of planes, trucks, and delivery vehicles 

involved in getting flowers from the grower to you and of course, they all 

use fuel: jet fuel, diesel fuel, and gasoline--all refined from oil. You will 

also notice that I said refrigerated trucks. Flowers are perishable 

products and we have to keep them cool. At Delaware Valley, our policy 

is to keep them at 30 to 35 degrees and to make sure that they have been 

kept in that range from the time they are cut at the grower until they 
98

reach the retail florist. This is what we call the cool chain. As we all 

know, however, running refrigeration increases fuel cost and energy cost. 

 How is our industry coping with all of this? Well, back in 2004, the 

Society of American Florists did a survey of retail florists. At that time 

gasoline was $2 per gallon. About 50 percent of the florists said gas 

prices were hitting their profits harder than heating prices or healthcare 

costs. Only 11 percent of the florists reported that they were able to 

increase product prices. About half said they were increasing delivery 

fees. Now gas is close to $3 a gallon. These small businesses just can’t 

cope with the continued rise in gas prices. Keep in mind that they are 

also facing double digit inflation in healthcare costs, rising labor costs 

and even things like estate tax planning costs, just to mention a few other 

concerns. Small businesses simply can’t keep absorbing all these costs, 

especially when they can’t fully pass them along to their customers. 

 At our company, we use lots of diesel fuel. In fact, we buy it in 

10,000 gallon tank loads, so we do get a discount. However, we are 

coping with increases and unpredictability in prices which makes it not 

only expensive, but hard to plan ahead. Two years ago we were buying 

diesel fuel for a $1.57 a gallon. Today it is $2.74 a gallon, almost twice 

as much. To cope with these prices, our company is experimenting with 

different kinds of fuel efficient trucks, but for us that means more capital 

investment. We are encouraging our customers to place bigger orders 

less often. We are using computer routing software to make deliveries 

more efficient. Although we try to be as efficient as possible, we still 

have to impose higher delivery charges on our retail customers and our 

trucking division currently imposes a 22 percent fuel surcharge on its 

customers. 

 I mentioned the floral industry has a limited ability to pay us through 

additional costs to our customers and why is that? Flowers are a 

discretionary purchase. We compete with wine and chocolate and teddy 

bears and jewelry and even dinners at restaurants. Almost any kind of 

gift that you can think of is a competitor of flowers. So if the price of 

flowers goes up too much, we lose market share to one of the competing 

gift items or industries. The floral industry is working together to try and 

establish the kind of joint advertising that will help us to sell more 

flowers, but we don’t want to see our efforts increase our market share 

only to be eaten away by higher prices at the pump. 

 In closing, I applaud you for holding this hearing and for having the 

courage to ask the questions you are asking. The U.S. needs a coherent 

national energy policy, but as a businessman, I am not here to 

recommend price controls or arbitrary government intervention. As 

business people, we want to keep expanding our businesses and hiring 

more employees. We very much appreciate the opportunity to be here 
99

and we look forward to continuing to work with you. I would be pleased 

to answer questions. Thank you. 

 [The prepared statement of John Wilkins follows:] 

PREPARED STATEMENT OF JOHN WILKINS, EXECUTIVE VICE-PRESIDENT & CIO, DELAWARE 

VALLEY WHOLESALE FLORISTS, ON BEHALF OF SOCIETY OF AMERICAN FLORISTS

SUMMARY OF TESTIMONY 

SOCIETY OF AMERICAN FLORISTS 

♦ The floral industry – growers, wholesalers, transporters, importers, distributors, and 

retail florists – represents a major component of the U.S. economy: $19.5 billion, at 

retail. 

♦ All of the businesses in that market chain are significantly impacted by the price of 

fuel. Other than labor costs, perhaps no single factor has more power to impact the 

bottom line of floral businesses than the cost of fuel. 

♦ The increases, and the unpredictability of changes, in fuel costs combines with other 

uncertainties and changes impacting the industry (increasing globalization of trade, 

growth of e-commerce and the Internet, other economic changes) to challenge the 

floral industry, just as those changes impact other small businesses in our economy. 

♦ Up to an estimated 50 percent of the cost of flowers is attributable to transportation 

costs. 

♦ Fuel costs impact every step of the market chain. Imported flowers travel by air 

transport, which is significantly affected by the price of jet fuel. At the port, motor 

transport moves flowers through Customs and then back onto planes, or onto 

refrigerated trucks, for shipment to wholesalers. Domestic growers also must ship 

flowers either by truck or by air. Wholesalers then must ship flowers to retail floral 

shops, supermarkets, and other customers. Finally, florists usually deliver floral 

arrangements directly to the consumer’s home, office, or event location. Each step 

in the market chain incurs transportation costs, which are significantly impacted by 

fuel prices. 

♦ Adding to transportation and storage costs, flowers are a perishable product, and 

must be shipped and stored under refrigeration. Growers and importers precool 

their products before shipping and require that trucks be precooled and stay cooled 

during transport. Wholesale and retail florists also must maintain and ship product 

under refrigeration. Running trucks and delivery vans under refrigeration adds to 

fuel consumption and, therefore, to cost of transportation. 

♦ The industry is assessing fuel surcharges, working to achieve better efficiency in 

delivery, and trying in other ways to counter increases in fuel prices. However, 

there is a limit to which fuel costs can increase without driving profits to zero – or 

into losses. 

♦ Flowers are a discretionary purchase, competing for the consumer’s dollar against 

other gift items (wine, chocolate, etc.). Therefore, increases in the cost of fuel 

cannot be fully passed through to the consumer without decreasing overall sales. 

♦ The U.S. needs a coherent energy policy, that will help our economy and our 

businesses, large and small, be able to survive and deal with energy costs as a 

predictable cost of doing business. 

Mr. Chairman and distinguished members of the Committee, the Society of 

American Florists appreciates the opportunity to present this testimony, discussing a topic 

very important to the floral industry, as it is to other segments of our economy: the price 

of fuel. 
100

I am John Wilkins, the Executive Vice President, and one of the second-generation 

family owners of the Delaware Valley Floral Group. I have served on the Board of 

Directors of the Society of American Florists, and I am also a past president of the 

Wholesale Florist and Florist Supplier Association. 

The Delaware Valley Floral Group is now in its third generation. One of our 

divisions is Delaware Valley Wholesale Florist, which was founded by my father in 

1959. Our headquarters is in Sewell, New Jersey, and we have locations in Edison, New 

Jersey; Baltimore, Maryland; and Miami, Florida. Another one of our divisions, Flower 

Transfer, provides transportation and logistical services to the floral industry, and 

operates a fleet of tractor-trailers. 

The Society of American Florists (SAF) is the national trade association 

representing the entire floral industry, a $19.5 billion component, at retail, of the U.S. 

economy. SAF membership includes some 10,000 small businesses: growers, 

wholesalers, retailers, importers, suppliers, educators, and related organizations, located 

in communities nationwide and abroad. It encompasses a market chain including 

growers, wholesalers, transporters, importers, distributors, and retail stores – all of whom 

are impacted by the price of fuel. The industry produces and sells cut flowers and 

foliage, potted foliage plants, potted flowering plants, bedding plants, and florist supplies. 

 U.S. Department of Commerce and Department of Agriculture figures show that 

there are over 10,000 floriculture growers in the U.S., over 1,000 wholesalers, and over 

22,000 retail florists. More than 350,000 people are employed in commercial 

greenhouses, wholesale florists and retail florists. Despite the industry’s large size and 

economic strength, it is made up largely of small, family-owned businesses. Many 

floriculture growers, wholesalers and retailers own businesses which have been in their 

families for several generations. 

As a wholesale distributor and logistics provider, Delaware Valley purchases floral 

products – fresh-cut flowers, greens, flowering and foliage plants and hard goods -- from 

growers, manufacturers and importers, and sells them to retail florists, supermarkets, 

mass marketers, and other retail outlets of flowers, greens, and floral products, who in 

turn resell them to the end consumer. As a result of the increasing globalization of trade, 

the growth of e-commerce and the Internet, and changes in the U.S. and global economy, 

the flower industry, just like many other small businesses across America, continues to 

experience challenges. 

FUEL COSTS IMPACT EVERY STEP IN THE MARKET CHAIN 

OF THE FLORAL INDUSTRY 

Other than labor costs, perhaps no single factor has more power to impact the 

bottom line of floral businesses than the cost of fuel. From growers to wholesalers to 

retailers, an increase in fuel prices can dramatically impact the bottom line. I want to talk 

with you more about how our industry works – the various points at which gasoline and 

diesel fuel, as well as jet fuel, impact the industry. I think it will help you move from the 

impact of fuel prices on consumers and consumer spending to the impact on businesses, 

employment, and our economy more generally. As I discuss the various parts of the 

market chain, I will talk about jet fuel, diesel fuel, and gasoline prices – all of which 

factor into the prices of floral product as it moves from grower to importer or wholesaler 

to retailer to consumer. 

As you buy flowers for your mothers, or wives, or daughters, this coming 

weekend in celebration of Mother’s Day, I am estimating that up to 50 percent of 

the cost of the flowers is attributable to transportation costs. That’s not counting the 

percentage that might be attributable to other fuel prices –heat for greenhouses and 

electricity for refrigeration, for example. Transportation costs alone, at a very rough 

estimate, account for up to 50 percent of the cost of flowers you buy. 
101

First of all, a large percentage of the most popular cut flowers sold in the U.S. are 

grown overseas – in South America or in Europe – even in Africa and Asia. And our 

domestic production of cut flowers – which remains a very important part of the industry 

as well – takes place primarily in California, Florida, Washington, Hawaii and Oregon. 

Obviously, fuel costs to transport those flowers through the market chain to consumers 

are going to play a big role. 

If produced in, say, Colombia, the flowers must come by air carrier, to one of the 

major U.S. ports – usually Miami. Depending on the country of origin, flights could 

come also through JFK in New York, through Los Angeles and San Francisco, through 

Chicago, through Houston. The cost of air transportation, obviously, is significantly 

affected by the price of jet fuel. 

When the flowers reach the port – say, of Miami – they are unloaded from the plane 

and taken through U.S. Customs. After they have cleared customs, the broker then 

moves them -- again by truck or other motorized transport – and they are loaded either 

onto another plane or to refrigerated trucks, for shipment, usually to importer’s 

warehouses or to wholesalers. From the port, the flowers are again stored under 

refrigeration until they are shipped to the retail florist or other outlet for sale to 

consumers. Taking my example, the Port of Miami alone handles 32,500 boxes of 

flowers every day – so these operations are large, complex – and when an increase in the 

price of fuel is added into each step, it has a big impact on the industry’s ability to plan 

and to survive. 

Flowers will not perform well for the consumer unless they are maintained at a cool 

temperature. Extreme heat can destroy flowers quickly. At the very least, it will result in 

a greatly reduced vase life for the consumer. Research in our industry has found that 

roses, for example, will last much longer if they are kept at something between 30 and 35 

degrees F. during the entire time from cutting until they reach the ultimate consumer. 

Delaware Valley’s policy is to require that all trucks maintain refrigeration within that 

range. Refrigeration makes truck transportation more expensive. 

The process described above is also true for flowers coming from U.S. growers into 

the market. From California, Florida, or wherever they are grown, the product must be 

carried quickly, with proper refrigeration, to the wholesale and the retail customer – and 

finally, of course, to the ultimate consumer. Again, refrigeration is required and 

contributes to the fuel costs. Growers and importers precool their products before 

shipping. They also require that the tractor-trailer rig which carries flowers from the 

farm or warehouse to the wholesaler be precooled. The truck may have to sit in the yard 

with its engine and refrigeration running, while the trailer gets cool enough to load the 

flowers safely. 

Next, the product moves again to one of the U.S. wholesale operations like 

Delaware Valley. It must be carried in refrigerated tractor-trailer rigs or by air, for 

example, from Miami to Philadelphia. Time is of the essence in floral transportation, so 

we want to get the flowers into our refrigerated warehouses and back out to our florist or 

other customers as quickly and safely as we can. 

For our operations, once the product gets to Delaware Valley, we have a fleet of 101 

refrigerated chassis-cab delivery trucks, which move floral product from our facilities to 

those of the retailers, supermarkets, and other customers all over the U.S. 

All of the Delaware Valley trucks – the tractor-trailer rigs and the chassis-cab 

delivery trucks -- use diesel fuel, although the trucks of many wholesalers may be using 

gasoline. Either way, the unpredictability of fuel prices makes business planning 

difficult. Two years ago, our price of diesel fuel was $1.57/gallon. Today, it’s 

$2.74/gallon – that’s an increase of $1.25 over two years. (It should be noted that 

Delaware Valley buys diesel fuel in 10,000-gallon lots. At the pump, the price would be 

significantly higher.) But even though we can achieve economies of scale, the price 

increases will impact our business planning, and, ultimately, our ability to make a profit. 
102

And it’s more complex than that: the average diesel fuel price in 2005 was $2.26/gallon -

- but in January of 2005, the price was $1.85. The yearly average price in 2003 was 

$1.29/gallon. For the business owner, you can see how difficult it is to predict what the 

costs are going to be and incorporate that into realistic business planning. 

Once the flowers reach the florist shop, we still aren’t finished with transportation 

costs. As you well know, florists usually deliver floral arrangements directly to your 

home or office – so we have yet another incremental, fuel-cost addition: here, the price 

of gasoline for the florist’s delivery truck. The great majority of floral purchases are 

delivered directly to the consumer – to the home, the office, or the location of a special 

event. 

HOW ARE FLORAL BUSINESSES COPING WITH INCREASED COSTS? 

At the end of 2004, SAF did a survey of retail florists which showed some of the 

following results: 

“With gasoline prices still hovering around the $2-per-gallon mark ... almost 40 

percent of recent retail florists responding say they’re absorbing higher gasoline 

prices so far – compared to the 50 percent who reported absorbing higher prices in 

May. Eleven percent of recent respondents reported they’ve increased product 

prices, versus 7 percent earlier in 2004. About half of respondents reported that 

they have raised delivery fees to compensate for higher costs. Fee increases (per 

delivery) range from 50 cents to $4. Florists reported other ways of compensating – 

including redesigning delivery routes, calling customers to make sure they’re home 

before deliveries, and urging drivers to fill tanks whenever they see lower gasoline 

prices. About 50 percent of these respondents say gasoline prices are affecting 

profits more than heating prices and health-care costs. In December, 2004, at 

the time of this survey, the national average price per gallon of regular gas was 

$1.95, about 31 percent higher than the same time the year before. The West Coast 

reported averages of $2.16 per gallon and the Gulf Coast reported a lower average 

of $1.84 per gallon.” [SAF Press Release, December 9, 2004] 

That survey was taken a year and a half ago – with prices around the $2/gallon 

mark. The average retail price of a gallon of gasoline rose almost four cents across the 

nation during the past two weeks, according to a Lundburg Survey released last Sunday. 

Self-serve regular averaged about $2.94 a gallon, and the average price of mid-grade was 

$3.04/gallon. Premium hit $3.14 a gallon, compared with $3.10 two weeks ago. SAF is 

again surveying retailers to see how they are responding, in this very busy period right 

before Mother’s Day. 

I haven’t touched, in this testimony, on the cost of natural gas, because it’s not a 

topic of this hearing. Natural gas is used to heat the greenhouses in which flowers and 

plants must be grown in most parts of the U.S. – and natural gas prices, as you know, 

have also increased dramatically. Grower after grower has mentioned to us how the 

situation is reaching crisis proportions. Growers in the U.S. are closing or sealing off 

portions of their facilities, letting greenhouses lie vacant, because it’s too expensive to 

heat them. 

Our industry can’t continue to absorb those price increases – which impact every 

step of the chain, from grower to consumer. All of the costs of transportation must get 

pushed along and reflected in the price of the product, if our market system is to work. 

Yet there is a limit to which they can be passed along to the ultimate consumer. 

We in the floral industry have an added wrinkle. Flowers are not a necessary 

purchase – they are a discretionary purchase. We compete for the consumer’s dollar 

against things like wine, chocolate, or other gifts, even in good times – and in tighter 
103

times, we have to compete against other choices the consumer might have for available 

spending – movies, college educations, vacations, and so on. The point is, there is a limit 

– and not a very high one – to how many costs we, as businesspeople, can pass through to 

the consumer. So the increases in fuel costs are tending to come out of our own profits – 

at every step along the chain: brokers and importers in Miami, trucking companies, 

airlines, growers, wholesalers and, of course, the retailer who finally sells the product to 

you. 

Even though Americans think of flowers as an integral part of holidays – 

Valentine’s Day, Mother’s Day, Thanksgiving, Christmas – and as an integral part of 

formal occasions – like weddings, funerals, christenings, business banquets, and highschool proms – Americans are not high per-capita consumers of flowers when compared 

with our European counterparts. We in the U.S. spend about $31 on cut flowers per 

capita per year, compared with $55 in Denmark or Belgium, $72 in Holland, or $112 per 

capita in Switzerland. Our industry continues to work together on joint marketing and 

promotion efforts for flowers, to increase the demand. But to make those efforts work 

well, we have to supply good-quality, long-lasting product to the consumer when and 

where the consumer wants to buy it. Fuel costs are a major consideration. 

To make matters worse, the traditional retailers in our industry – made up by far for 

the most part of small business owners, often family-owned businesses, sometimes 

owned by a family for three or four generations – are now under extreme pressure from 

the supermarkets and mass marketers. Retail flower shops are a difficult business, and 

retailers go out of business at a relatively high rate. 

All of these incremental fuel cost increases from each segment of the market chain – 

fuel for air transportation, truck fuel, gas to deliver to consumers’ homes and offices – 

add together to compound the final cost of the product, and to make business-planning 

very challenging. And of course the real question is whether those additional, sometimes 

very unpredictable costs can be passed along to the consumer or absorbed by the business 

without harming the business and ultimately, our economy. 

What are we doing at Delaware Valley to help counter these increased costs and 

avoid laying off employees or downsizing our business? We have had to increase our 

delivery charges to our retail customers. We are imposing a 22 percent fuel surcharge 

over our normal rate to our transportation customers (product that, for example, we might 

carry for other wholesalers, product carried to mass marketers, or product carried on 

“back-hauls,” (the return-run of an otherwise-empty tractor-trailer). At this point, most 

of the transportation companies are also assessing fuel surcharges. 

We are a large company, and our transportation is efficient. We utilize computer 

tracking. We are experimenting with different types of fuel-efficient trucks. We are 

encouraging our customers to place fewer, but larger orders to save on transportation 

costs. We’re doing everything we can to counter the increases in gas and other fuel 

prices. But we, as a company, would not be able to continue operations without imposing 

these fuel surcharges at this point in time. As rising fuel costs cut further and further into 

businesses’ already low margins, the additional costs added will quickly drive profits to 

zero – or into losses. 

CONCLUSION 

The U.S. needs a coherent energy policy: not price controls, not arbitrary 

government intervention – but an energy policy that will help our economy, and its 

businesses, large and small, be able to survive and deal with energy costs as a predictable 

cost of doing business. 

As a business owner, we would encourage Congress and the Administration to work 

toward a more coherent national energy policy: for example, encouraging alternate fuel 

sources, encouraging more U.S. domestic production under environmentally safe 
104

practices. Government interference in the marketplace itself is usually viewed negatively 

by business, of course. The law of unintended consequences often seems to follow direct 

government intervention. But for business owners, like me and my family, to continue to 

employ and provide benefits for our employees, and plan ahead for our business 

operations, we must be able to buy fuel at reasonable, and reasonably predictable, costs. 

I very much appreciate your giving the floral industry the opportunity to present 

some examples of the impact of fuel costs on our industry, and our employees, 

nationwide. 

 CHAIRMAN BARTON. Thank you, Mr. Wilkins. The Chair 

recognizes himself for the first 5 minute question round. Mr. Cooper, 

your testimony is always thoughtful and on the point. I appreciate that. I 

have found out that crude futures on the New York Mercantile, the 

margin rate is set by the traders themselves; it is not a regulated rate. 

And currently it is somewhere between 3 and 6 cents per dollar per 

contract, which means for about $300 to $400 you can control a thousand 

barrel contract that is worth in today’s prices, $74,000. On the other 

hand, the margin requirement on a refined gasoline futures contract is 

over $10,000. Would it be a good idea for the Congress or the regulators 

at the CFTC or the SEC to set a minimum margin requirement on crude 

futures by statute or regulation? 

 DR. COOPER. Well, I frankly think that we need to get a much better 

understanding of what those markets are doing to us. I mean, if you look 

at the growth of trading in that market, and obviously low margin 

requirements, there was a popular phrase way back when in a Texas 

company called “asset-light”, “asset-light” gets you in trouble, as we 

have learned. So what you allow here is you allow people to commit to 

huge sums of financial obligations, counter party risk, with very little 

assets behind it and that encourages more and more trading. If you look 

back at these markets, the dollar value of trading for energies, they 

include wood there, but I don’t think it is wood that is driving those 

numbers, has been increasing by something like $10 billion a month 

every month for 40 months. 

 CHAIRMAN BARTON. But my question is-- 

 DR. COOPER. Yes, and that helps. So the answer is that if you 

discipline people by forcing them to back their promises up with more 

cash, you will reduce the number of people who are-- 

 CHAIRMAN BARTON. I had the President of IMEX in my office 

yesterday and he thinks it is a bad idea, obviously. He doesn’t want 

anybody telling him how to set the margin requirement. But he does 

state that if the market rate requirement were to go up, there would be 

less speculation in the market. Now, he doesn’t necessarily think that 

would be a good thing. His opinion is the speculators provide the 

crediting and they take the opposite side of every trade and that if we 

took the speculators out of the market, the price of gasoline would 
105

probably go up because you would have a less liquid market. But it 

seems to me, to the extent there is a speculative aspect to the crude price, 

that making it more difficult to speculate would tend to cool off the 

market, which would tend to bring prices down. 

 DR. COOPER. The quick fee is not free, and that is the point they 

miss. Every time that a transaction takes place, if it is more volatile, if 

there is more risk, there are transaction costs, right? So every time those 

transactions take place, you are increasing the risk premiums. You have 

to pay more to get someone to actually part with a barrel of oil and over 

the last two or three years folks have looked at this liquidity, the 

increasing volatility and risk have added dramatically to the traded price 

of oil and we think that sets a target. The people who own the physical 

commodity then start to shoot at--that is one step. There are lots of other 

things we would like to see. I think that resides in a different committee. 

I may be wrong. 

 CHAIRMAN BARTON. We can always try. 

 DR. COOPER. But, you know, the over-the-counter market is 

unregulated. Traders don’t have to report. They are less regulated than 

bankers, for sure. With bankers we require them to register reports, have 

a clean criminal record, for instance, and then we set their margin 

requirements. And frankly, in a certain sense, energies are more 

important than money to this economy and they ought to be better 

regulated. 

 CHAIRMAN BARTON. I need to ask a question of Mr. Sundstrom. I 

think in your testimony you indicated that you supported the creation in 

the United States of a refined product reserve, is that correct? 

 MR. SUNDSTROM. Yes, that is correct. 

 CHAIRMAN BARTON. Who would pay for that? 

 MR. SUNDSTROM. Well, ultimately, the consumer would pay for it 

through taxes or through increased price in the fuel, but you were just 

talking about volatility in the futures market. Really, our concern for a 

long period of time, many years, has not been so much the price of 

gasoline, although we are mortified that it is as high as it is now. Our 

concern has been the stability of the price and we think that by having a 

cushion of reserve gasoline in this market, particularly with the smaller 

number of refiners that are operating in the United States, that ought to 

help stabilize prices, particularly when we are faced with situations such 

as we have had in the last few years, the hurricanes in Florida. 

 CHAIRMAN BARTON. Mr. Cooper mentioned this, too. Would you 

just tell the domestic distributors or refiners to maintain a higher than 

normal inventory, like they do in Europe, or would you like to see the 

Government create a stockpile? 
106

 MR. SUNDSTROM. I think the most direct way to do it would be to 

require it of those that produce the fuel. 

 DR. COOPER. You have either or both. Those are the two ways to 

get it. You could require a percentage of your expected sales to be in 

storage and/or you could have a Federal stockpile to be used for other 

purposes or similar purposes. 

 CHAIRMAN BARTON. I have got about six more questions, but it is 

not fair to the other Members. My last question is to you, Dr. Cooper. 

You always give great potential solutions and I am serious. I have never 

heard you say anything that didn’t make some sense, at least to think 

about doing and I am sincere, but as smart as you are, not once today did 

you mention any kind of a supply side component to your solution. You 

didn’t mention drilling in ANWR, you didn’t mention drilling in the 

OCS. Is it just anathema to the consumer groups to have a supply 

component to your solution matrix? 

 DR. COOPER. Well, I actually did mention a supply component. I 

talked about biofuels and alternative fuels. 

 CHAIRMAN BARTON. Well, I guess so. What percent of the market 

do you think-- 

 DR. COOPER. Well, but the problem with that supply side solution is 

one, it would not have a significant impact on the price of oil. It is a 

mature resource base, it is not going to change the balance in the world 

in the long term, and above all, the same entities will control that 

resource that have underinvested in their capacity, that are still not 

treating oil, if it is worth $50 or $60 a barrel, so when we look at supply 

side, biofuels have three characteristics that we find very interesting. 

One, it is a different raw material. It can be corn, it can be switch grass, 

it may be coal. I am sure I might get a question about that. Okay, it is a 

different raw material. 

 Two, those ethanol plants compete with refineries. They expand the 

capacity about our ability to produce liquid fuels. And three, for most of 

these, it is a different set of actors, actors who are not part of the club or 

the game, okay? And so in the scheme of things, we think that is where 

we get a much bigger bang for the buck is looking at those alternatives. 

 CHAIRMAN BARTON. Well, thank you, sir. Mr. Boucher. 

 MR. BOUCHER. Well, thank you very much, Mr. Chairman. First, 

let me say, Dr. Cooper, that I share the Chairman’s view of the quality of 

your testimony. I am continually impressed with your thoroughness and 

the fact that you research the subject completely and then make a 

comprehensive presentation. You have certainly done that again here 

this afternoon. And you have just answered my first question, which was 

the potential contribution on the supply side, that coal to liquid fuels can 

make. We heard from the Energy Information Administration this 
107

morning that at a time when oil is priced at about $40 per barrel, the coal 

conversion to liquid fuels becomes economic and EIA is projecting well 

above $40 per barrel for the long term. That is bad news, generally, for 

gasoline consumers, but it does point to the appropriateness of making 

some investments now and taking such steps as to further encourage the 

advent of coal to liquid fuels in this market. I have some other questions 

for you, but let me just ask, would you like to make a brief comment 

about that potential? 

 DR. COOPER. Well, again, I have just sort of given you the reasons 

why we look for the alternatives and I would rather not get into picking 

and choosing which of those alternatives will be best. 

 MR. BOUCHER. That is fair enough. 

 DR. COOPER. I do think what we need to look at is whether there are 

structural impediments and critical decisions that can be made to 

promote the transition. So we heard a lot today about the lack of 

infrastructure for the ethanol fuels. The question is will the industry 

provide the infrastructure? If not, how do we goose that? What is the 

automobile industry doing about it. So I think given that these 

alternatives are out there, we also need to look at the balance of 

subsidization. There are some people who say the oil industry is heavily 

subsidized; some people will say it reflects a certain set of characteristics 

about the industry in terms of depletion allowances and so forth. So we 

need to think about the balance so we are not tipping the scale one way 

or the other. 

 MR. BOUCHER. Let me move to a different area. I believe you 

indicated that the domestic spread in the United States, the difference 

between what crude oil markets for and what the price at the pump is, is 

something on the order of 40 cents per gallon above the average. Is that 

number essentially correct? 

 DR. COOPER. Above the historic average. 

 MR. BOUCHER. Above the historic average. What is the historic 

average? 

 DR. COOPER. Well, if you look over the course of a year, it is about 

30-35 cents and that is the difference between the crack spread was only 

about 20, historically. I am using the domestic spread which includes 

retailing. So it is about 30 or 35 cents. It has gotten a lot higher than that 

in the last 6 years. 

 MR. BOUCHER. And so that added component of 30 to 35 cents 

above the historic average, they would be 40 cents above the historic 

average. It is attributable, I am sure, to a variety of factors, but if you 

had to target one, what would you nominate as the most prominent factor 

that leads to that and to what extent does the shortage of an adequate 

refinery capacity in the United States contribute to it? 
108

 DR. COOPER. Well, in the report we submitted for the record, we 

looked at an interesting contrast. We look at the large American oil 

companies. They have U.S. refineries and foreign refineries. The rate of 

profit on the U.S. refineries has increased twice as fast as the foreign 

refineries in the last 5 or 6 years. The explanation for that has to be a 

difference in the market structure. Our market is much tighter and you 

heard Mr. Gruenspecht this morning talk about the fact that the European 

market had excess capacity because of the switch to diesel. We didn’t 

have that capacity and so the ability to raise the profit margin here faster 

than abroad is a function of market structure. 

 MR. BOUCHER. Some have suggested that because of the restrained 

refinery capacity in the United States we are seeing record profits for the 

refiners and the fact they are realizing those record profits is largely the 

reason that we are not seeing the construction now of adequate refinery 

capacity in the United States. Maybe that is of necessity a subjective 

conclusion that one must reach, but my question to you would be is there 

any evidence that would point to that conclusion? 

 DR. COOPER. Well, there was evidence in the mid-90s discovered in 

the merger proceedings where, and you heard mention of that this 

morning, the corporate memo said we’ve got to tighten this market up, 

and after the mergers, refineries were closed. The market was tightened 

in that respect. Studies were done of the behavior of the players in that 

market. The Iran study I cite in my testimony, in which they discovered 

that refiners used to compete for market share. They would cut their 

prices. They used to worry about going short, but now they don’t. Why? 

Because they know they can put the price up. So in a certain sense, the 

relationship between the price and the structure is always conjectural. 

Occasionally you will find a smoking gun in a corporate memo. Well, 

we got those. So at every level we have the evidence that this has hurt 

us. GAO did a study, as well, which said it also hurt us. 

 CHAIRMAN BARTON. Will the gentleman yield? 

 MR. BOUCHER. I will be pleased to yield. 

 CHAIRMAN BARTON. I think, to be fair to the refineries, and I am not 

defending their margins today, but in some of those time periods they 

were loss leaders. The refinery business, at one time in the United 

States, was not a profit center. It is now, that is not necessarily a bad 

thing that we can argue. I think your testimony about the concentration 

by region is worth further investigation. So I am not attacking your main 

point, but we need to be fair to the refiners. There was a time in this 

country that they were losing money and that is one of the reasons some 

of those mergers happened, because some of the major oil companies 

wanted to get out of the refinery business because they didn’t think they 

could make any money. 
109

 DR. COOPER. And at the same time, we have to remember that a 

great deal of the refining capacity in this country is integrated and so 

where the profits are taken is a function of the transfer price. And so 

when the price of crude oil on the market goes to $65, I am selfsupplying 50 percent of my capacity with oil I own. My cost of binding 

that crude didn’t go up to $65. I could transfer that oil to my refinery at 

the old price because my cost didn’t go up and my refinery profits would 

go way up. In the alternative, I could take the world oil price and then 

transfer that to my refineries; my profits would look smaller. So it is 

correct, I think, that we also need to look at these integrated companies 

and their overall profit. 

 CHAIRMAN BARTON. But isn’t it true that the big, big integrated 

companies tended to shed their refinery systems as opposed to acquire 

more? 

 DR. COOPER. Certainly, through the 1990s and after the mergers, we 

closed about 50 refineries. They were a function of those mergers. 

Earlier we heard about the tea kettles, that was a small refiner bias. We 

had decided in the 1980s we wanted to have these things. We can debate 

whether that was a good idea, although we look back on that excess 

capacity industry, it cost us money. We look back on that excess 

capacity industry and say hey, that turned out to be a pretty consumer 

friendly environment, even though it raised the cost a little bit. So in 

fact, we can have the refining industry we want by setting the public 

policy and you are right, it was a thin margin business for a while in an 

average margin integrated company. Now it has become a pretty fat 

margin business in a very fat margin integrated company. 

 MR. BOUCHER. Mr. Chairman, if you would indulge one further 

question, this will be brief. Dr. Cooper, you have referenced the need for 

reserves. You mentioned both the need for a product reserve and the 

need for a refinery reserve. Mr. Dingell and I are introducing a bill 

tomorrow that would call for a national refinery reserve modeled on the 

very successful strategic petroleum reserve. My question to you is if we 

had a product reserve, which we don’t have today, but there has been 

commentary from several witnesses about the appropriateness of it; if we 

had the product reserve, why would we also need a refinery reserve? Do 

we, in fact, need both? 

 DR. COOPER. Well, I would rather attack the problem at the refinery 

level. That has become the bottleneck. I think the product reserve also 

helps, because it is a very short term. Let us be clear. We have a really 

short-term problem in this industry. Americans can’t stop driving. We 

built our country around the assumption that we are going to get in our 

cars and go places and so in the short term, you have got a really 

significant spike problem. And so it just struck me that the approach that 
110

was taken to a strategic refinery reserve, and I use the word strategic. 

Let us be clear. The Strategic Petroleum Reserve is not used to 

discipline price, has never been used to discipline price. We envision the 

strategic refinery reserve and the strategic product reserve being used in 

that fashion and so I used to say about the Strategic Petroleum Reserve 

make it so big that no politician would dare not to use it when things got 

bad. It is clearly not big enough yet, by that standard. But the strategic 

refinery reserve gives you a 60, 90-day and out flexibility; a product 

reserve is that really short-term response in a very volatile market. 

 MR. BOUCHER. Thank you, Doctor. 

 CHAIRMAN BARTON. The gentleman’s time is up. Mr. Terry of 

Nebraska. 

 MR. TERRY. Thank you, Mr. Chairman. Continuing on this 

dialogue, you started your opening statement talking about how the oil 

companies are not expending their profits on infrastructure, but rather 

hoarding the cash for a variety of different reasons, but what should they 

be using by the dollars by way of infrastructure? Should they be 

building up refining infrastructure with those dollars, pipelines, 

exploration? What other areas should they be using their dollars? 

 DR. COOPER. Well, clearly they have underinvested in refining 

capacity and the statements by Exxon about not wanting to build new 

refineries has sort of reminded people that this was a business decision. 

So clearly, we are, by the standard of comparison to other sectors, 

manufacturing sectors, we are a good five million barrels a day short of 

refining capacity. They should have built it, they haven’t built it. That is 

one place to spend it and it is not that expensive compared to $100 

billion of excess cash flow, free cash flow, that you can build an awful 

lot of refineries. The numbers I have heard is $2.5 billion, so there is 

plenty of money there to build those refineries. 

 MR. TERRY. Are they just not building it here, or are they building it 

overseas? 

 DR. COOPER. In fact, looking at the Exxon spreadsheet financials, I 

didn’t look at all of them, they weren’t building any place, but overseas 

you had, you heard this morning, you had the shift in Europe to diesel, 

which created excess capacity for gasoline. 

 MR. TERRY. We had just heard, or I have been told that they are 

using money to build up the infrastructure, including refining, but it is so 

difficult to do within the United States, that they would rather set up 

refineries overseas and just bring in the refined product. That is why I 

was curious about whether it is just U.S. investment in infrastructure, or 

whether the investment is overseas and you are saying that is not even 

happening overseas. 
111

 DR. COOPER. Again, I looked at the Exxon sheet. Ask me a 

question and I will go through the financials of the American majors. 

Now, BP and Shell, they behave differently because they are not 

domiciled here. 

 MR. TERRY. Yes. You had answered the Chairman’s question and 

actually, that was leading into mine, about whether ethanol plants and 

some of the biofuel plants that are coming up, either on line now or being 

built now, are going to come on line, whether that could provide some 

relief on the supply side. And I really like that model because what I see 

is a bunch of corn growers banding together in a co-op and building an 

ethanol plant, so if you could expand on how that can and what capacity 

we need to build up with biofuels to provide some relief in the future. 

Then also, is there a way that these co-ops that are building the 50 

million gallon plants for ethanol, whatever their feedstock would be, 

whether or not they could team up and in essence become a co-op for a 

refinery and combine the two processes? 

 DR. COOPER. Well, let me give you, we have looked very hard, 

because we went out on a limb with this, with our “50 by 2030,” which is 

a 50 MPG car in a quarter of a century. I estimate that would reduce our 

oil consumption below what it otherwise would have been, by about five 

and a half million barrels a day, which is very substantial. I mean, if you 

think about the oil market today, we are told there is one million barrels a 

day of excess capacity in the whole world oil market; five million barrels 

a day is a big number in that context. 

 But the interesting thing is that there is a bill in the Senate, 

bipartisan, shooting for 10 million barrels a day reduction by 2030, 

which is my end date. Ten million barrels a day is a very big number 

and I can only get half of that out of the vehicle fleet by getting to 50 

miles per gallon. This will tell you how deep a hole we have gotten 

ourselves into here, okay? So if you look out there, I can see two and a 

half million barrels a day of biofuels, as liquid fuels coming into that 

market. You have heard the numbers today. There are hundreds of 

thousands today, right? That is a massive increase. That is a huge 

challenge. I understand the farmers say we can do it, we can do it, but 

when you look, right? So that is a real challenge and I am only three 

quarters of the way to that 10 million barrel a day goal. We have a lot of 

work to do in order to get, to use the President’s word, end our oil 

addiction. 

 MR. TERRY. Yes. 

 DR. COOPER. That is a tremendously difficult task and so two and a 

half million barrels a day of biofuels will keep a lot of farmers busy and 

it is a big job. 
112

 MR. TERRY. I think you have done a good job of showing how we 

need to have a more comprehensive approach in this. In my last few 

seconds, Mr. Sundstrom, E-85. 

 MR. SUNDSTROM. Yes. 

 MR. TERRY. Nebraska. Omaha, Nebraska. One pump for 600,000 

people. Even if I wanted to buy a flex fuel vehicle, I am not driving 186 

blocks to get to the one. One of the biggest blocks is that the gas station 

chains are not allowed to put an E-85 pump under the canopy. What are 

you all doing to see if we can’t put more flex fuel vehicles out on the 

road and that they actually have a place to fuel up? 

 MR. SUNDSTROM. Well, I am not certain that it is up to us to put the 

pumps in. Clearly, our members are interested in the alternative fuel 

vehicles and we encourage their purchase, but the reality is there a very 

small percentage of those vehicles on the road right now and I guess we 

would have some sympathy for the gasoline station owner who might put 

in one of these pumps only to have the occasional drive by and fill up 

once a week, so you know, clearly something more needs to be done to 

stimulate investment in the infrastructure. I am not sure it is going to 

come strictly from the private sector. 

 CHAIRMAN BARTON. The gentleman’s time has expired. The 

gentleman from Michigan, Mr. Stupak. 

 MR. STUPAK. Thank you, Mr. Chairman, and thank you to the 

witnesses for appearing. Mr. Sundstrom, thank you for speaking about 

the affect that high gas prices have on the American family, on the 

average American family because, you know, the price increase will cost 

the family an average about $1,200 a year. My district in northern 

Michigan, it is very dependent upon tourism. We have the Great Lakes, 

we have national forests, outdoor recreation. We drive long distances. 

Can you please address the effect of this $1,260, I believe you said in 

your testimony, would have on tourism in places like northern Michigan? 

 MR. SUNDSTROM. Well, AAA is also one of the largest travel 

agencies in the United States, so we are clearly very concerned about 

that, as well. Our members disproportionately travel at a greater rate 

than just about any other segment of the population. We do a summer 

travel survey every spring. We will actually release that on the 18th of 

this month. Frankly, we are not exactly sure what we are going to hear 

from the American public about their travel intentions this year. 

 We hope that because the economy overall is doing relatively well 

that people will feel secure enough in their jobs and their income that 

they will hit the road, but we are in uncharted territory. As I said earlier, 

the national office of AAA’s in Florida, in Orlando, which is the largest 

tourism destination in the United States. There are areas in this country 

that are extremely dependent on Americans getting in their vehicles and 
113

traveling for recreation, so you know, that is another element to the 

gasoline price situation that causes us a lot of anxiety. 

 MR. STUPAK. Thanks. Mr. Cooper, in your testimony you 

mentioned potential for energy commodity traders to take advantage of 

increased volume and validity. In fact, you specifically cite the New 

York Times article, “Trading Frenzy Adds to Jump in Price of Oil.” 

Knowing that some of us believe this adds as much as 20 percent to the 

price of crude oil in the market. As I mentioned in my opening 

statement, I have introduced legislation, the PUMP Act, H.R. 5248, that 

would extend the oversight of the Commodities Future Trading 

Commission to off-market trades, which are currently unregulated. 

Legislation such as PUMP, which would provide increased oversight and 

transparency to these markets, would that be something your 

organization could support and secondly and specifically, on the New 

York Times price of oil, that article you mentioned, what are some of the 

recommendations short term and long term? You cite some in your 

testimony, but what are some of the short term/long terms we should do, 

if not the PUMP Act, but what else should we do? 

 DR. COOPER. I submitted for the record a study I did earlier this year 

for Attorneys General in the Midwest on natural gas supply and futures 

markets, and therein we had a series of recommendations and the 

fundamentals are almost exactly the same. The regulatory structure is a 

little different at the burner tip as opposed to the pump, but the physical 

and financial markets are essentially the same. And we emphatically 

supported extending oversight to the off exchange or the over-thecounter markets. They are entirely unregulated, with vital commodities 

that-- 

 MR. STUPAK. So you would be supportive of the PUMP Act? 

 DR. COOPER. Oh, absolutely. And there is a graph in there which 

shows what happened when the Federal Energy Regulatory Commission 

said they were going to ask people to document their trades. The traders 

just, they stopped reporting. I mean, it was amazing. Effective oversight 

will scare people out of the market and frankly, as far as I can tell, the 

liquidity, the volatility, the risk premium, the volume is hurting us, not 

helping us at this stage and so oversight over those markets is critical; 

reporting requirements for large traders are critical, which has been in 

legislation that has moved around in both parties. We would also like to 

see better trading limits and position limits. 

 Chairman Barton talked about one in the gasoline oil market. We 

think there are others in the natural gas market; the positions are even 

larger and the settlement window is even smaller, so it is remarkable how 

few people can own how much gas and set that contract price. It just 

doesn’t make any sense. We regulate onions and soybeans and pork 
114

bellies better than we do natural gas and gasoline and it is a mistake we 

just made are we just modernized the act a few years ago, regulatory 

decisions were made and so I think these are decisions that need to be 

revisited. 

 MR. STUPAK. Commodity Future Trade Commission, that aspect of 

it, we actually have passed a House bill earlier this year, I believe it is 

before the Senate, and then they sort of object to any more oversight of 

this but yet, we know at least three-fourths of all the future oil trades are 

unregulated. There is no transparency to it. 

 CHAIRMAN BARTON. The gentleman’s time has expired. 

 MR. STUPAK. Thank you. 

 CHAIRMAN BARTON. Dr. Burgess. 

 MR. BURGESS. Thank you, Mr. Chairman. Mr. Sundstrom, several 

times it has been mentioned now about the mandatory refined product 

reserve in Europe. Can you tell us how much gasoline is currently in the 

reserve? 

 MR. SUNDSTROM. No, I cannot. Let me also say that AAA was 

caught unaware that Europe had gasoline reserves that they could assist 

us with and we were quite pleased to find out that they had that available. 

We had spoken with members of the industry over a number of years 

about that and we were told that it was completely unworkable, not 

feasible, and too expensive. But we were certainly gratified to find that 

Europe had that product available to us. 

 MR. BURGESS. Well, the fact that they use more diesel than 

gasoline, does it make it easier for them to have the refined product 

reserve of gasoline there? 

 MR. SUNDSTROM. Well, in recent years, yes, that is my 

understanding. 

 MR. BURGESS. And what about, would you have to rotate the stock 

so that it didn’t become stale or old? 

 MR. SUNDSTROM. That is actually one of the reasons that we were 

told it was unworkable in the United States, but again, it sounds like they 

figured out a way to do that in Europe. 

 MR. BURGESS. Do you know how they have done that? 

 MR. SUNDSTROM. No, I do not. 

 MR. BURGESS. What would be the minimum level of mandatory 

reserve for refined product, in your mind? 

 MR. SUNDSTROM. Well, to begin with, I think the citizens of 

Florida, in the Gulf Coast, would like to see a product available that 

would meet their needs for a week or two, if they were to lose their 

capacity to receive gasoline or move gasoline in the wake of a major 

hurricane. 
115

 MR. BURGESS. Dr. Cooper, you referenced a memo, and I am going 

to assume that is a memo that we have seen in the past that Mr. Markey 

has had in the committee. I don’t suppose you have a copy of that memo 

today? 

 DR. COOPER. I don’t have it today, no. 

 MR. BURGESS. If it is the same one that Mr. Markey has shown us in 

the past, the second line on that was concern about the increasing 

problem with liability and with siting new refineries. Is that still an 

issue? 

 DR. COOPER. Well, as far as I can tell, it is not an issue in the sense 

that they haven’t tried. I mean, if you think about the first time I testified 

here on this issue in 2001, they could have gotten refineries sited by now 

and you have heard, we don’t have evidence of the specific refineries 

that have been prevented. They simply haven’t tried and that was a 

business decision and now we have fairly strong affirmation of that from 

the Chairman of Exxon who says he is not going to build any new 

greenfield refineries because he sees demand easing up in 2020. 

 MR. BURGESS. Mr. Chairman, could I ask unanimous consent that a 

copy of that memo be made available to the members of the committee? 

 CHAIRMAN BARTON. Without objection, so ordered. 

 MR. BURGESS. With the bill that we passed last fall that would 

accelerate siting of refineries, is that the type of thing that you think will 

help in this regard? 

 DR. COOPER. I don’t think the industry is interested in building new 

refineries and that is the fundamental problem. They do not see it as in 

their business interests and we put the quotes from the Chairman of 

Exxon in, it is in the document we submitted. Having gained market 

power over price, it is not in their interest to lose that market power by 

building and there are so few of them that there is not a competitive 

market that forces them to make those decisions, so I don’t think that the 

impediment was, though, the siting problem. I think the problem was a 

business decision and the economics of that business decision haven’t 

changed all that much. 

 MR. BURGESS. But indeed, there are other companies that are 

smaller companies and, if the siting of refineries was not problematic and 

if they were perhaps some liability relief, might that not go toward 

creating more refinery locations? 

 DR. COOPER. There is precious entry in this business and the list of 

companies I have read you is a massive exit and so there is very little 

entry in this business. The barriers to entries are very great. 

 MR. BURGESS. But still, small start-up energy companies are not 

unheard of. Down in my district, there is a gas company which started 
116

poking holes in the Barnett Shale a few years ago and now they are a big 

player, so it does happen. 

 DR. COOPER. That is right. 

 MR. BURGESS. They started up with some of the research and 

development that this Congress, not this Congress, but Congress 

provided them, some Federal money that was provided, so it is not 

necessarily a bad thing to increase energy supply. 

 DR. COOPER. No, I just said there is precious little, not enough to 

discipline the price. 

 MR. BURGESS. Mr. Wilkins, I was grateful to hear you say that you 

didn’t favor price controls, though I will have to admit, I am not a big 

purchaser of flowers, but my district office bought Starbucks coffee for 

an academy event not too long ago and I asked them how much it cost 

and it was a 2.8 liter container and it cost $12, that is $16.29 if I 

remember my metric conversions, per gallon, if I remember my metric 

conversions. I was just going to ask if you thought we needed a price 

control on Starbucks because the price seems to be out of hand and our 

constituents can’t afford it. With that, Mr. Chairman, I will yield back. 

 CHAIRMAN BARTON. I never knew my metric conversion. The fact 

that you can remember yours is a testimony. Let us see. Does Mrs. 

Cubin want to ask questions of this panel? 

 MRS. CUBIN. Mr. Chairman, I would like to move on. I will submit 

my questions to them in writing. 

 CHAIRMAN BARTON. All right. Does Mr. Radanovich wish to ask 

questions of this panel? 

 MR. RADANOVICH. Thank you, Mr. Chairman. I will submit them 

in writing, as well. 

 CHAIRMAN BARTON. Okay. Does Mr. Bass? Mr. Bass. 

 MR. BASS. Yes, Mr. Chairman, I do not have any questions to ask 

these fine witnesses here today and I want to get on to the markup that is 

happening, but I do want to welcome a dozen or so constituents of mine 

from the Vesta Roy Excellence in Public Service who are visiting me 

right now and they are in the crowd here today and I yield back, Mr. 

Chairman. 

 CHAIRMAN BARTON. Well, if they will stand up. 

 MR. BASS. Thank you, Mr. Chairman, and I yield back. 

 CHAIRMAN BARTON. Does Ms. Bono wish to ask questions? 

 MS. BONO. Thank you, Mr. Chairman. I just have a brief one, 

actually, I think. I apologize. I have been out of the room for almost the 

entire questioning, so I hate to be redundant, but I believe that one 

question that hasn’t been asked is something communities can do, is 

synchronizing traffic lights something that we have looked at or has that 
117

question been asked? I apologize again, but synchronizing traffic lights, 

it seems like we could make a great dent in efficiency. 

 CHAIRMAN BARTON. That question has not been asked. 

 MS. BONO. Thank you, Mr. Chairman. 

 CHAIRMAN BARTON. It is a good question. 

 DR. COOPER. Well, I think there is a very broad array of things that 

we can do and anyone who can show a local government that a change in 

rules or regulations will, in fact, lower the oil consumption of their 

citizens owes it to those citizens. The example I like to use is 

remarkable; in many communities in America, it is illegal to put a 

grocery store in a neighborhood. Because of zoning laws, we have 

separated it. So people have to get in their car to go to the grocery store, 

and so there is a large array of things that we could do to save oil and 

gasoline and I think we ought to have programs to stimulate that. 

 MS. BONO. But your group hasn’t looked at specifically 

synchronizing traffic lights? 

 DR. COOPER. We haven’t. We have been focused on the automobile 

because increasing the efficiency of the automobile is the grand slam in 

this equation. 

 MS. BONO. Thank you. In my district, actually, we have a lot of 

lanes specifically designed for electric vehicles, not hybrids, but the little 

tiny electric vehicles. People do take those to the grocery store, so we 

are working on it. But also, for Mr. Wilkins, where are we here? Within 

your industry, have you witnessed more concern over fuel costs and 

impacts in certain geographic areas? I would assume the desert, 

California, southwest region would be among the higher regions and if 

so, do those of us who are mothers in the southwest region expect six 

flowers instead of a dozen on Mothers Day? 

 MR. WILKINS. Well, certainly for Mothers Day, the cost of flowers 

will vary depending upon supply and demand, and I don’t think that we 

have really heard a lot about costs being higher in certain regional areas 

of the country, although that may be. Certainly, fuel costs are higher in 

California and on the West Coast than they are on the East Coast and so I 

wouldn’t expect that you would see a cut back one way or another. 

When there are temporary price increases, you will generally see it being 

passed along in the form of the delivery charge or something like that or 

the retail florist. The provider will be absorbing at least part of that cost. 

 MS. BONO. So in your industry are you looking for more efficient 

vehicles or alternative fueled vehicles as a whole? 

 MR. WILKINS. Yes, I think a number of industry partners are doing 

that. In our particular case, we are right now looking at more fuel 

efficient vehicles and it is kind of a sort of a conundrum between picking 

the types of vehicles because what we find is that the vehicles that we 
118

have been using, always diesel fuel based powered vehicles, the vehicles 

that tend to be able to carry the most weight and to be the most reliable 

are also the less fuel efficient and we are looking at trucks like the 

Sprinters, that a lot of folks have heard of. But they are a lighter weight 

truck. They have a lot better fuel mileage, but they can’t carry as much 

load. In some cases, you are forced to have two trucks of that type to 

replace one truck that is less fuel efficient. 

 MS. BONO. All right. 

 MR. WILKINS. And so there are some of the things that we are 

involved in, but you know, we have even gone the route of consolidating 

routes using computer routing software that has allowed us to take trucks 

off the road, but it also means laying off some people at the same time 

because of that consolidation. 

 MS. BONO. Thank you. I thank you all. Mr. Chairman, I know you 

want to get on to the markup, so thank you for holding this hearing and I 

yield back. Thank you all very much. 

 CHAIRMAN BARTON. Thank you. Seeing no other Members present 

who haven’t been given a chance, we are going to adjourn this hearing. 

Thank you to you gentlemen and we will probably have written 

questions for you. This hearing is adjourned. We are going to reconvene 

the markup at 3:30, so we will change the room and reconvene for the 

markup at 3:30. 

 [Whereupon, at 3:12 p.m., the committee was adjourned.] 
119

RESPONSE FOR THE RECORD BY DR. MARK COOPER, RESEARCH DIRECTOR, CONSUMER 

FEDERATION OF AMERICA

The Honorable Barbara Cubin

1. In regards to the currently volatile energy markets, you state in your testimony 

that “if we had started working on effective solutions six years ago, we could be well 

into the mid-term of a long-term policy shift.” Would you then agree that American 

consumers would not be in this situation had the energy bill first passed by this 

committee and the larger House of Representatives in the summer of 2001 been 

enacted into law? 

No. The policies that will actually address the problem have never been included in 

legislation passed by either house. The key to a long-term solution is a substantial 

increase in the fuel efficiency of the vehicle fleet. The House has voted this down. In 

the mid-term, a strategic refinery reserve provides capacity to cushion supply shocks. 

The House voted that down. 

2. You also stated in your testimony that the refining industry have historically 

“closed refineries for business reasons and refuse to build new ones for business 

reasons.” I agree. Would it then not make sense for this Congress to pass the 

Refinery Permit Process Schedule Act (HR 5254) – a bill that would encourage new 

refining capacity by streamlining the current facility citing process? 

As I pointed out in my testimony, the industry has no desire to build new refineries. It 

does not see the business value of doing so, as surplus capacity puts downward pressures 

on prices. The solution is a strategic petroleum reserve, which can easily be built within 

the existing requirements. 
120

RESPONSE FOR THE RECORD BY GEOFF SUNDSTROM, DIRECTOR OF PUBLIC RELATIONS,

AMERICAN AUTOMOBILE ASSOCIATION

The Honorable Barbara Cubin

Q1. Are there regions in the country where your members are disproportionately affected 

by rising gas prices? In your testimony, you astutely pointed out that skyrocketing 

fuel prices do not present the same economic challenge to urban dwellers -with 

access to mass transit - as they do for regular drivers. As public transportation is 

relatively nonexistent in Wyoming and much of the rural west, driving is simply a 

necessity. What conservation measures do you recommend to your rural members 

in today’s climate of high fuel costs? 

A1. AAA has for many years published a free brochure on conserving energy and saving 

money at the gas pump called “AAA Gas Watcher’s Guide.” This publication 

offers tips and advice that can be useful to all motorists and is available at many 

AAA offices and on the Web at www.aaaexchange.com. 

With regard to the special fuel-use situation encountered by those who must travel 

long distances in rural areas, AAA suggests the purchase or lease of the most fuelefficient vehicles available that also meet the sometimes special needs of rural 

households. For some motorists this may mean a switch within the same family of 

vehicles, from a larger truck to a smaller truck for example, or from a SUV model 

with a large engine to the same model equipped with a more fuel-efficient motor. 

Other consumers may be able to move from a large car, truck or SUV into a more 

fuel-conserving car, minivan or station wagon. AAA makes this recommendation 

because many of the vehicles consumers choose to drive are much heavier and have 

a lot more power than what is truly needed to safely transport them and their 

belongings from place to place. This combination of excess weight and horsepower 

consumes more fuel than is necessary and adds expense to household budgets 

regardless of whether a consumer lives in the city or country. 

Rural motorists who frequently drive on roads with high speed limits should also be 

aware that driving safely at lower speeds generally increases fuel economy. Longdistance drivers also need to pay special attention to the importance of regular 

maintenance on vehicles that quickly accumulate miles on their odometers. 

Establishing a maintenance routine on the basis of miles-driven, rather than on 

months or years of ownership, is a best practice in this circumstance. Maintaining 

proper inflation of tires also contributes to improved fuel economy. 

Combining errands into a single continuous trip -- a technique sometimes called tripchaining -- can be an effective way of limiting miles driven and fuel consumed, and 

car pooling with others who must make regular long-distance trips to similar 

destinations can be helpful for some households. Another tip that may be useful is 

to consider driving a more fuel-efficient vehicle from day-to-day, and occasionally 

renting a larger vehicle if extra carrying capacity is necessary. Using cargo trailers 

to haul materials to the destination and then unhitching them, can allow the use of a 

smaller vehicle for everyday transportation needs. Continuously driving a large car, 

truck, van or SUV that is equipped with rarely-used excess carrying capacity, 

generally uses more fuel and costs more money at the gas pump than is necessary 

for many households. 
121

RESPONSE FOR THE RECORD BY WILLIAM WEHRUM, ACTING-ASSISTANT ADMINISTRATOR,

OFFICE OF AIR AND RADIATION, U.S. ENVIRONMENTAL PROTECTION AGENCY
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GASOLINE: SUPPLY, PRICE, AND 

SPECIFICATIONS 

THURSDAY, MAY 11, 2006 

HOUSE OF REPRESENTATIVES, 

COMMITTEE ON ENERGY AND COMMERCE, 

Washington, DC. 

The committee met, pursuant to notice, at 10:10 a.m., in Room 2123, 

Rayburn House Office Building, Hon. Joe Barton [chairman] presiding. 

Present: Representatives Barton, Hall, Bilirakis, Stearns, Deal, 

Norwood, Cubin, Shimkus, Wilson, Fossella, Bass, Pitts, Bono, Walden, 

Sullivan, Burgess, Blackburn, Waxman, Markey, Boucher, Eshoo, 

Stupak, Green, Inslee, and Ross. 

Staff Present: Margaret Caravelli, Counsel; Maryam Sabbaghian, 

Counsel; David McCarthy, Chief Counsel for Energy and Environment; 

Sue Sheridan, Minority Senior Counsel; Lorie Schmidt, Minority 

Counsel; and Bruce Harris, Minority Professional Staff Member. 

CHAIRMAN BARTON. The committee will come to order. Since this 

is a continuation of a series of hearings we have had on our gasoline 

supply situation and, more generically, the energy situation for this 

country with respect to oil and gas, we are not doing opening statements. 

Today, our witness list includes a wide range of experts: We have 

Mr. Red Cavaney, who is the President of the American Petroleum 

Institute; we have Mr. Bob Dinneen, who is the President and Chief 

Executive Officer of the Renewable Fuels Association; Mr. Bob 

Slaughter, who is President of the National Petrochemical and Refiners 

Association; Mr. William S. Becker, who is the Executive Director, State 

and Territorial Air Pollution Program Administrators of the Association 

of Local Air Pollution Control Officials; we have Mr. Paul Reid, who is 

the President of Reid Petroleum in Lockport, New York, on behalf of the 

National Association of Convenience Stores and Society of Independent 

Gasoline Marketers of America; Mr. William H. Shea, who is the 

President and CEO of Buckeye Partners, and he is here on behalf of the 

Association of Oil Pipelines; and last, but not least, we have Mr. John 

Conley, who is President of the National Tank Truck Carriers, 

Incorporated. 

STATEMENTS OF RED CAVANEY, PRESIDENT, AMERICAN 

PETROLEUM INSTITUTE; BOB DINNEEN, PRESIDENT 
128

AND CEO, RENEWABLE FUELS ASSOCIATION; BOB 

SLAUGHTER, PRESIDENT, NATIONAL 

PETROCHEMICAL & REFINERS ASSOCIATION; S. 

WILLIAM BECKER, EXECUTIVE DIRECTOR, STATE AND 

TERRITORIAL AIR POLLUTION PROGRAM 

ADMINISTRATORS/ASSOCIATION OF LOCAL AIR 

POLLUTION CONTROL OFFICIALS; PAUL REID, 

PRESIDENT, REID PETROLEUM CORPORATION, ON 

BEHALF OF THE NATIONAL ASSOCIATION OF 

CONVENIENCE STORES AND SOCIETY OF 

INDEPENDENT GASOLINE MARKETERS OF AMERICA; 

WILLIAM H. SHEA, PRESIDENT AND CEO, BUCKEYE 

PARTNERS, LP, ON BEHALF OF THE ASSOCIATION OF 

OIL PIPELINES; AND JOHN CONLEY, PRESIDENT, 

NATIONAL TANK TRUCK CARRIERS, INC. 

 

CHAIRMAN BARTON. Gentlemen, welcome. Your statements are in 

the record in their entirety. We will start with you, Mr. Cavaney. We 

have got seven witnesses on the first panel. We will give each of you, 

let’s say 7 minutes to explain your testimony, and then we will have 

obviously some questions. 

Welcome, Mr. Cavaney. 

MR. CAVENEY. Thank you very much, Mr. Chairman, honored 

members of the committee. 

U.S. oil and natural gas companies understand the frustration that 

consumers have expressed about energy prices. We recognize that high 

energy prices are adversely impacting individuals, households, 

businesses, and potentially our economy itself. Our members are 

working very hard to provide additional supplies. 

Crude oil inventories have been building and are at record levels. At 

the same time, we are meeting some of the world’s most stringent new 

environmental requirements. During the week ending April 21st

, 

refineries were operating above 90 percent of capacity, and for the month 

of March utilization was 90.8 percent, which is higher than from March 

of a year ago. 

To address refining capacity concerns, we have spent billions of 

dollars to recover from last year’s hurricanes and we anticipate bringing 

an additional 1.3 million barrels of new refining capacity per day 

onstream between now and 2011. 

The industry has also undertaken major investments to meet the 

4 billion gallon renewable fuels standard for 2006, while also delivering 

new gasoline with 90 percent less sulfur and new onboard diesel fuel 

with 97 percent less sulfur. 
129

Oil and gas is a long lead time business, and we are making the 

necessary reinvestments. Since 1992, oil companies in the United States 

have reinvested more than $1 trillion compared to their cumulative 

earnings over the same period of almost $700 billion. Our industry is 

also looking to the future. Since 2000, we have reinvested $98 billion in 

emerging energy technologies, including alternatives, an amount that 

represents 73 percent of the total U.S. investment in this area by the 

Federal government and all U.S. companies. 

Congress should not impede the industry’s efforts focused on 

reinvesting today’s earnings to meet tomorrow’s energy needs. Oil 

companies do not set the price of crude. It is bought and sold in 

international markets, and the price paid for a barrel of crude oil reflects 

the market conditions of that day. Importantly, more than half of the 

price of a gallon of gasoline is attributable to the cost of crude. 

As noted in a June 2005 Federal Trade Commission report, and I 

quote, “The world price of crude oil is the most important factor in the 

price of gasoline. Over the last 20 years, changes in crude oil prices have 

explained 85 percent of the changes in the price of gasoline in the United 

States.” As evidenced by more than 30 Federal Trade Commission and 

other government investigations over several decades, our industry has 

been exonerated of any anti-competitive behaviors. And let me again 

make clear to the committee, we condemn price gouging. 

Today’s energy situation is shaped by past government policy 

decisions made over the previous two decades. These policies have 

resulted in decreased domestic oil and natural gas production, modest 

improvements in energy conservation and efficiency, and increased 

imports as industry was left with little access to U.S. resources, and had 

no choice but to source supply from abroad in order to meet growing 

U.S. consumer demand. 

In recent years, growing demand for oil from China, India, and the 

United States, has come at a time of diminishing spare worldwide 

production capacity, and rising geopolitical tensions have placed great 

stress on the available global supply of crude oil. The solution to the 

energy challenges before us is to increase and diversify sources of 

supply, including alternatives, reduce demand, and expand infrastructure. 

We have sufficient domestic oil and gas resources remaining to be 

discovered in the U.S., enough oil to power more than 60 million cars 

and heat more than 25 million homes for 60 years, and enough natural 

gas to heat 60 million homes for 160 years. Only government policies 

stand in the way of increasing access to these resources, facilitating 

refinery capacity and pipeline expansions, and increasing energy 

security. Congress recognized the harmful effects of localized boutique 
130

fuels in last year’s Energy Policy Act, limiting the number of fuels that 

States may adopt and requiring studies of the effects of boutique fuels. 

Our industry strongly supports the use of ethanol as a valued 

gasoline additive. However, the expansion of the patchwork quilt of 

boutique fuels by States mandating ethanol use at different 

concentrations and/or under differing terms is counterproductive to 

growing ethanol presence in the gasoline supply. 

To maximize success with ethanol, we need to concentrate on its 

integration into the national gasoline pool while permitting E-85 to grow 

in those locations where it meets the test of the marketplace, not the 

reverse. 

I conclude with some additional thoughts that could further increase 

refining capacity and add additional flexibility to the distribution system: 

Streamline the permitting process to ensure timely reviews of capacity 

expansion requests and provide decisional certainty. Reform new source 

review requirements to clarify what triggers these reviews, and further 

explore former U.S. military bases as potential sites for refineries and 

related infrastructure opportunities. 

I look forward during the questions and answers to providing other 

insight, and I thank you, Mr. Chairman. 

CHAIRMAN BARTON. Thank you, Mr. Caveney. 

[The prepared statement of Red Cavaney follows:] 
131

PREPARED STATEMENT OF RED CAVANEY, PRESIDENT, AMERICAN PETROLEUM INSTITUTE

I am Red Cavaney, President and CEO of API, the national trade association of the 

U.S. oil and natural gas industry. API represents more than 400 companies involved in all 

aspects of the oil and natural gas industry, including exploration and production, refining, 

marketing and transportation, as well as the service companies that support our industry. 
132

Introduction

The oil and natural gas industry understands the frustrations that consumers have 

expressed about energy prices. We recognize that high energy prices are adversely 

impacting individual households and potentially our economy. The industry is also 

cognizant of the criticism for what may appear to some as unreasonable or unjustified 

prices and high earnings. I will attempt to address those concerns and to offer the proper 

context in which to view both prices and earnings. 

Factors in the cost of gasoline

In order to understand the higher costs of gasoline and other motor fuels, we need to 

consider them in the context of the world energy supply and demand situation. 

We currently import more than 60 percent of the crude oil and petroleum products 

we consume. American refiners pay the world price for crude and distributors pay the 

world price for imported petroleum products. It is important to understand that oil 

companies do not set the price of crude oil. Crude oil is bought and sold in international 

markets, and the price paid for a barrel of crude oil reflects the market conditions of the 

day. Whether a barrel is produced in Texas or Saudi Arabia or elsewhere, it is sold on the 

world market, which is comprised of hundreds of thousands of buyers and sellers of 

crude oil from around the world. 

There is a fragile balance between the world’s supply and demand for crude oil. 

Because of this tight market, any disruption of oil supply – or even the threat of a 

disruption – can push prices upward as buyers and sellers in the worldwide marketplace 

look to secure supplies for their customers. 

It is well recognized that the market for crude oil has tightened. World oil demand 

reached unprecedented levels in 2005 and continues to grow due to strong economic 

growth, particularly in China and the United States. EIA reports that global oil demand in 

2004 grew by 3.2 percent – the strongest growth since 1978 – and grew 1.4 percent in 

2005 to nearly 83.6 million barrels a day. EIA projects growth for 2006 at 1.8 percent. By 

comparison, world demand between 1993 and 2003 grew at an average rate of 1.6 

percent. EIA, in its Annual Energy Outlook (April 2006) estimates world oil consumption 

to be 85.2 million barrels per day, which is about 100,000 barrels a day less than 

estimated average 2006 production. 

World oil spare production capacity – crude that can be brought online quickly 

during a supply emergency or during surges in demand – is at its lowest level in 30 years 

and is a critical factor to observe. Current spare capacity is equal to only about 1 percent 

of world demand. Accordingly, the world’s oil production has lagged, forcing suppliers 

to struggle to keep up with the strong growth in demand. 

The delicate supply/demand balance in the global crude oil market makes this 

market extremely sensitive to political and economic uncertainty, unusual weather 

conditions, and other factors. Over the past several years, we have seen how the market 

has reacted to such diverse developments as dollar depreciation, cold winters, the postwar insurgency in Iraq, hurricanes in the Gulf of Mexico, the Venezuelan oil workers’ 

strike in 2002-2003, uncertainty in the Russian oil patch, ongoing ethnic and civil strife in 

Nigeria’s key oil producing region, and decisions taken by OPEC, as well as here in 

Washington, D.C.. 

This year has been described by some as the “worst political-risk year” for energy 

supplies since 1973, the year of the oil embargo. Recent weeks have seen increasing 

concern about potential supply interruptions from political turmoil, conflicts, and 

uncertainty in such countries as Bolivia, Iran, Iraq, Nigeria, and Venezuela. 

Additional factors in the increased fuel prices include the end of the reformulated 

gasoline (RFG) oxygen requirement on May 5, and the phase-out by some refiners of the 

gasoline additive MTBE. According to the U.S. Energy Information Administration 

(EIA), refiners are maximizing their effort to switch to ethanol, but they must deal with 
133

logistical challenges in its transport. Unlike MTBE, ethanol cannot be shipped through 

pipelines and must be carried by barge, railcar or tanker truck. As the market is currently 

structured, ethanol is considerably more expensive than gasoline, and imports face a 54 

cent per gallon tariff. The oil and gas industry, however, is the largest consumer of 

ethanol and will continue to play a key role in facilitating and expanding our nation’s use 

of ethanol as a key component of our nation’s transportation fuels mix. 

How U.S. oil and natural gas companies are responding to current energy challenges 

U.S. oil and natural gas companies have been working hard to provide additional 

supplies to the marketplace, while, at the same time, meeting stringent new 

environmental requirements: 

• Domestic oil production from the Gulf of Mexico continues to recover from the 

damage incurred by Hurricanes Katrina and Rita. According to the U.S. 

Minerals Management Service, 22 percent of the oil production and 13 percent 

of the natural gas production from the Gulf remains shut in. Nevertheless, 

drilling activity remains at a high level and has helped offset this reduction. As 

of May 5, 1,624 drilling rigs were at work in the U.S., the highest level in 20 

years. 

• Crude oil inventories have been building and are at record levels. For the week 

ending April 28, crude stocks were 346.9 million barrels, or 12 million barrels 

above the level of a year ago. Inventories must be built ahead of heavy summer 

demand. 

• Refineries were operating at 86.7 percent of capacity during March. Some 

refineries are undergoing routine maintenance that had to be delayed because of 

the hurricanes. Moreover, the industry is still recovering from the hurricanes’ 

extensive damage. Through March, roughly 5 percent of refining capacity was 

not yet fully operational. When this is taken into consideration, the refinery 

utilization rate was actually higher than in March 2005, at 90.8 percent versus 

90.2 percent. One refinery returned to normal operations of more than 400,000 

barrels per day in late April after seven months of repairs following Hurricane 

Katrina. Two others are not yet fully operational and represent a combined 

capacity of 247,000 barrels per day or 3.3 percent of total U.S. refinery 

capacity. As of the week ending April 21, refineries were operating at 90.1 

percent of capacity, only the fourth time that refineries were operating above 90 

percent since Hurricane Rita. 

• Despite the logistical challenges in blending ethanol in gasoline, the industry 

anticipates no problems in meeting the 4 billion gallon Renewable Fuels 

Standard for 2006. In fact, in many regions of the country, consumers are 

already driving on a mixture of gasoline and 5.7 percent to 10 percent ethanol. 

• Refiners are completing the third year of a three-year schedule to eliminate 90 

percent of the sulfur in gasoline. This already has enabled automobile 

manufacturers to begin equipping new passenger cars and light trucks with the 

advanced technology necessary to comply with the stringent Tier 2 emissions 

standards promulgated by the Environmental Protection Agency. As a result, it 

now takes 33 vehicles running on low-sulfur gasoline today to equal the 

pollution emissions of just a single 1970 vehicle. 

• Finally, refiners are reducing the maximum amount of sulfur allowed in on-road 

diesel fuel by 97 percent to enable the production of substantially cleaner new 

diesel engines. When the current on-road heavy-duty vehicle fleet has been 

fully replaced by 2030, the combination of the new fuel and new diesel engines 

should have eliminated 90 percent of the pollution that today’s trucks and buses 

produce. 
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Importance of increased energy efficiency

API supports increased energy efficiency in all sectors of the economy, including 

transportation, as an essential part of efforts to meet U.S. energy challenges. 

An important reason why hydrocarbons have been the choice of consumers 

worldwide is due to the fact that they contain nearly twice the energy per gallon as many 

other energy sources. Thanks to advances in technology and market forces, our 

hydrocarbon-based economy is getting more and more energy efficient. In 1970, the 

United States used about 1.4 barrels of oil for each thousand dollars of real GDP. By 

2000, that had fallen almost in half to about seven-tenths of a barrel. And, by 2025, our 

nation is projected to consume only about one-half a barrel of oil for each thousand 

dollars of GDP. 

An example of how technology increases energy efficiency is the use of 

cogeneration to save energy in refineries and other industrial facilities. Cogeneration is 

the simultaneous generation of heat and electricity, can be more than twice as efficient as 

conventional generation, and is increasingly being implemented by refiners to help power 

their facilities. In some instances, excess electricity is generated at the refinery, which 

can be sold off-site for use by schools, hospitals and many other facilities. 

Cogeneration is an important tool helping oil companies become more energy 

efficient. To demonstrate their commitment to continued improvement in aggregate 

energy efficiency, API member refiners have voluntarily agreed to a 10 percent 

improvement between 2002 and 2012 as part of API’s Climate Challenge Program. That 

program is contributing to a national goal of reducing greenhouse gas emissions by 18 

percent by 2012. The most recent reporting cycle indicates that API members are on 

track to achieve their 10 percent improvement goal. These efforts have already produced 

ongoing daily energy savings equal to that needed to power 475,000 cars or heat 450,000 

homes with natural gas. 

However, while increased energy efficiency is a critical component of a meaningful 

U.S. energy policy, it is not, and can not be, the only component. The U.S. energy 

Information Administration projects that by 2030, total U.S. energy demand will increase 

by 41 percent – even with a 39 percent increase in energy efficiency. 

Anti-competitive pricing

Some are again accusing the industry of “price gouging.” Our industry has been 

repeatedly investigated over many decades by the Federal Trade Commission, other 

federal agencies, and state attorneys-general. Of the more than 30 investigations, none 

have ever found our companies to have engaged in anti-competitive behavior to drive up 

fuel prices, and we are confident current reviews will arrive at the same conclusion. 

Some allege that recent oil company mergers have caused higher crude oil and 

gasoline prices. But the price of crude oil is the consequence of thousands upon 

thousands of transactional decisions made on the world market every day. No one 

company or group of companies has control over that price. In terms of market power, 

large international oil companies own less than 10 percent of the world’s oil resources. 

According to the Federal Trade Commission’s August 2004 report, The Petroleum 

Industry: Mergers, Structural Change, and Antitrust Enforcement, “recent large mergers 

among major oil companies have had little impact on concentration in world crude oil 

production and reserves.” And, as noted by the FTC in its June 2005 report, Gasoline 

Price Changes: The Dynamic of Supply, Demand, and Competition, “The world price of 

crude oil is the most important factor in the price of gasoline. Over the last 20 years, 

changes in crude oil prices have explained 85 percent of the changes in the price of 

gasoline in the U.S.” 

We are concerned about the adverse impact of the proposed Oil and Gas Industry 

Act of 2006 (S. 2557) recently introduced by Senator Specter. Section 2 of that 

proposed act would amend the Clayton Act to make it illegal to refuse to sell or to export 
135

or divert petroleum products or natural gas supplies with the intention of increasing 

prices or creating a shortage in a geographic market. In evaluating whether a marketer 

has illegal intent, a court must consider whether the cost of the products has increased, 

and if the defendant has obtained a higher price in the market to which the product has 

been exported or diverted. 

The bill has the potential of interfering with legitimate business decisions that are 

made by individuals in the oil and natural gas industry. Unilateral decisions to move 

supplies from one area to another based on supply and demand issues could be 

challenged under this provision. Moreover, the bill makes it illegal to “intend” to take 

certain actions even if the entity does not have the ability to impact supplies or prices and 

there is no showing of an actual or likely anticompetitive effect. This is contrary to 

traditional antitrust analysis. In addition, Section 2 is ambiguous and contains a variety of 

key terms such as “divert” that have not been defined. As a result, there could be 

significant questions related to compliance and enforcement. This uncertainty could 

adversely affect legitimate business decisions related to supply and ultimately have an 

adverse impact on consumers. Finally, the bill does not identify who has standing to 

enforce the provisions of the bill. 

If enacted, Section 2 could have a chilling affect on the oil and gas industry, make it 

more difficult for the industry to meet the fuel needs of U.S. consumers, and prevent the 

industry from responding quickly to emergencies such as those that occurred with 

Hurricanes Katrina and Rita. 

Fuel transitions

Complicating the overall U.S. fuel supply/demand situation are numerous 

contributing factors. The Energy Policy Act of 2005 eliminated the reformulated gasoline 

(RFG) oxygen requirement, and also set a new renewable fuel standard, requiring that the 

industry use 4 billion gallons of renewable fuel in 2006 – increasing to 7.5 billion gallons 

in 2012 and increased amounts thereafter. In addition, ultra-low sulfur diesel (15 ppm 

sulfur) will be introduced starting June 1. 

Eliminating the RFG oxygen requirement is a change in the law that the industry has 

long supported as one that will add to refiners’ flexibility to produce gasoline and allow 

those who so choose to eliminate the use of MTBE in gasoline. Similarly, the 

introduction of ultra-low sulfur diesel, despite the $8 billion in costs incurred by the 

nation’s refiners, will have major benefits and is strongly supported by the U.S. oil and 

natural gas industry. However, both of these are major fuels changes and present 

significant challenges to fuel providers. Our companies are dedicated to ensuring that 

these transitions go smoothly as possible and are making the substantial investments 

required to complete these transitions. 

API believes that, to be successful, fuel transitions should be based on the free and 

unfettered functioning of fuel markets. Market mechanisms are most effective in 

providing companies with appropriate indicators and in ensuring a rapid response to 

changes in market conditions or transitional problems that may occur. Changes to these 

market indicators by government – such as calling for waivers from clean fuel regulations 

in light of concerns about possible volatility in fuel prices – will only cause market 

uncertainty and send confusing information to markets in transition. There are already 

mechanisms in place to deal with true market supply disruptions, and we urge the 

government to use appropriate caution in exercising this existing authority. 

Operating in a free marketplace, the U.S. oil and natural gas industry has the 

technical expertise and decades of experience in successfully handling fuel specification 

transitions. Our companies have repeatedly demonstrated their capability for making 

these transitions on the national level in dealing with RFG, low-sulfur gasoline and diesel 

fuel and in meeting so-called “boutique fuels” requirements at the state level. 
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Since the Energy Policy Act of 2005 did not provide for a national, ordered phaseout of MTBE, individual companies made individual decisions on how best to deal with 

the end of the RFG oxygen mandate and the use of oxygenates. Companies took into 

account various factors such as customer preference, state laws, pipeline decisions, 

distribution system capabilities, and information from government agencies such as EIA. 

U.S. oil and natural gas companies have the expertise, experience, and resources 

required to make the fuel transitions that are required – provided fuel markets are allowed 

to function freely. We think a valuable role for the government is to help create as clear 

and transparent a picture as possible of what is occurring in the marketplace during this 

summer’s upcoming transitions. In this vein, we strongly support continued efforts by 

EIA to monitor the supply and demand dynamics of the market, and provide timely 

updates to their initial study. API and its members are very willing to cooperate in any 

such effort. 

Boutique Fuels

While the patchwork of localized “boutique fuels” is not principally responsible for 

the recent higher gasoline prices, the proliferation of these fuels in recent years has 

presented significant challenges to U.S. refiners and resulted in an inflexible fuel system. 

(See the attached map of boutique fuels.) 

Boutique fuels contribute to the tight supplies and price volatility so decried by 

consumers. A classic example of the disadvantage of boutique fuels is in the Atlanta area, 

which has a one-of-a-kind gasoline blend in the summer. Most gasoline on the major 

pipelines that service Atlanta cannot be used to address any supply shortage in that 

market. Refiners and suppliers have made the refinery and distribution system 

investments to handle the Atlanta gasoline. However, if a serious infrastructure problem 

occurs in the refineries, the pipelines, or the terminals that supply this area with gasoline, 

the boutique fuel involved could lead to serious supply disruptions. 

Of utmost importance in our business is the reliability of supply. Fuel providers need 

the flexibility to get fuel to where it is most needed and to quickly adjust to changes in 

demand. Additionally, marketers need some assurance that, if they do not have access to 

a particular supplier or terminal, they will be able to go elsewhere for product. However, 

a rigid system of state-specific boutique fuels reduces the reliability of supply and 

increases the risk of spot shortages and price volatility. 

Our industry has worked long and hard to discourage the spread of boutique fuels. 

Some success was realized when the Energy Policy Act of 2005 included a provision 

requiring EPA to publish a list of fuels identified in state implementation plans, with 

states barred from adopting new formulations unless they were to replace one fuel on the 

list with another on the list. These provisions clearly indicated that policy-makers were 

finally recognizing the harmful effects of widespread adoption of boutique fuels. 

API supports the boutique fuels provisions in the Energy Policy Act as they should 

help address the issue by limiting the number of fuels that states may adopt. In addition, 

EPA and DOE are directed to undertake two studies. The first is due to Congress August 

8, 2006 and is a study about the effects of SIP-adopted fuels programs on air quality, the 

number of fuel blends, fuel availability, fungibility and cost. 

The second study on “Fuel System Harmonization” is due June 1, 2008. This report 

is to contain recommendations for legislative and administrative actions that may be 

taken to improve air quality, reduce costs to consumers and producers and increase 

supply liquidity. DOE and EPA are directed to consult with Governors, automobile 

manufacturers, state and local air pollution regulators, public health officials, motor fuel 

producers and distributors, and the public. Last week, EPA announced that it has begun a 

dialogue with Governors to discuss boutique fuels, and we believe this is an important 

step in Congress’s desired consultation process. API looks forward to providing input to 

this process. 
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The results of these required studies should provide guidance to Congress as to 

whether further steps should be taken regarding boutique fuels. 

Ethanol and Boutique Fuels

Some are erroneously claiming that our industry is “opposed to ethanol” and is 

doing all it can to discourage its use. We believe that America needs all the energy 

resources it can obtain, and that ethanol is one of those resources. Our industry supports 

the use of ethanol as a valued gasoline additive. In our view, ethanol is here to stay, and it 

is a very important part of the nation’s gasoline pool. In fact, in many regions of the 

country, consumers are already driving on a mixture of gasoline with 5.7 percent to 10 

percent ethanol. 

However, we need to keep in mind that no energy alternative is a panacea. Each has 

its plusses and minuses, but they can each play an important role. For example, based on 

various studies, the energy savings from corn-based ethanol are moderate – 3 to 20 

percent – because production from corn requires significant energy input. And, Dow 

Jones News Service reported on May 1 that Warren Staley, Chairman and Chief 

Executive Officer of Cargill, Inc., estimated that, even if 100 percent of the U.S. corn 

crop were used to produce ethanol, it would only replace about 20 percent of motor fuel. 

Some ethanol proponents are focused almost exclusively on E-85 fuel, which 

consists of 85 percent ethanol and 15 percent gasoline. While the industry does not object 

to E-85, so long as it meets technical specifications and is of reliable quality, a sole 

national focus on growing ethanol volumes through E-85 is a risk-laden approach to 

achieving significant growth in ethanol. 

A couple of points are worth noting in that regard: 

• Of the 169,000 retail gasoline marketing outlets, only 600 are currently 

equipped to distribute E-85, and these are concentrated principally in the upper 

Midwest where the corn crop grows; and 

• Currently, there are about 6 million flex-fuel vehicles (FFVs) on the road (3 

percent of the fleet) and, even if that number increases by 1 million per year 

over the next several years, the percent share of the fleet would still be small. 

For example, 10 million FFVs in 2010 would be 4 percent of the fleet; 15 

million in 2015 would be between 5 and 6 percent. It is important to 

understand that the 97 percent of the fleet today not designed to operate on fuels 

containing more than 10 percent ethanol could well incur damage by using 

higher ethanol blends - a fact rarely mentioned by “E-85 only” proponents. 

Industry is concerned that, were government and key opinion leaders to place the 

entire focus for success in introducing ethanol on the number of new E-85 outlets, it will 

be the football equivalent of throwing a Hail Mary pass as the last play of the game -- and 

the odds for success will be equally as long. 

Our industry’s prescription for success with ethanol is to concentrate on ethanol 

integration into the full gasoline pool and to permit E-85 to grow in those locations where 

it meets the test of the commercial and regulatory marketplace. 

We also think that individual states should not force the use of ethanol by devising 

their own blend of gasoline/ethanol mandates. The last thing our nation needs now is an 

expansion of the boutique fuels patchwork of state-by-state laws by mandating ethanol 

use at different concentrations and/or under different terms. Integrating ethanol into the 

gasoline marketplace is too important – and presents too many challenges – to be 

approached in an individual, state-by-state manner. In order to meet consumer fuel needs, 

we want to produce more, refine more, and distribute more – but state ethanol mandates 

would make this difficult. Ethanol cannot be moved by common carrier pipeline, as is 

more than 70 percent of U.S. oil products, and requires a long supply chain to serve 

consumers. That means a longer reaction time when problems occur. State ethanol 
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mandates would significantly add to that reaction time. We oppose this patchwork 

approach, whose adverse impacts are felt most by individual gasoline consumers. 

What we do support is the uniform national plan enacted last year that will integrate 

more ethanol into the nation’s gasoline pool at concentrations of up to the maximum 

permissible 10 percent per gallon, which can be utilized in the entire U.S. automotive 

fleet without vehicle modifications. 

Earnings

There is considerable misunderstanding about the oil and natural gas industry’s 

earnings and how they compare with other industries. The oil and natural gas industry is 

among the world’s largest industries. Its revenues are large, but so are its costs of 

providing consumers with the energy they need. Included are the costs of finding and 

producing oil and natural gas and the costs of refining, distributing and marketing it. 

It should not be forgotten that the energy Americans consume today is brought to us 

by investments made years or even decades ago. Today’s oil and natural gas industry 

earnings are invested in new technology, new production, and environmental and product 

quality improvements to meet tomorrow’s energy needs. Oil & Gas Journal estimates 

that the industry’s total U.S. reinvestment in 2006 will reach $124.1 billion, compared 

with $115 billion in 2005 and $102.4 billion in 2004. This represents an increase of 21 

percent in just two years. Oil & Gas Journal also estimates that exploration and 

production spending in the U.S. will grow 11.8 percent this year and that total upstream 

oil and gas spending will reach nearly $88.9 billion. A single deepwater production 

platform can cost more than $1 billion. 

Moreover, since 1992, the five largest U.S. oil and natural gas companies have 

reinvested more than their total net income. Between 1992 and 2005, the industry 

invested more than $1 trillion – on six continents – in a range of long-term energy 

initiatives: from new exploration and expanding production and refining capacity to 

applying industry leading technology. In fact, over this period, our cumulative capital and 

exploration expenditures exceeded our cumulative earnings. 

Figures on earnings from investment show clearly that the oil and natural gas 

industry is in line with other industries. The U.S. Energy Information Administration 

reports that in 2004 (the latest available data), the return on investment – specifically, the 

net income divided by net investment in place – was 18.9 percent for the oil and gas 

industry and 17.4 percent for the S&P Industrials. From 2000 to 2004, the average was 13 

percent for the oil and gas industry and 12.5 for the S&P Industrials. And from 1995 to 

2004, oil and gas realized 10 percent compared to 13.9 for the S&P Industrials. 

Furthermore, the industry’s future investments are not focused solely on traditional 

hydrocarbon projects. It is important to note that – from 2000 to 2005 – the oil and 

natural gas industry invested $98 billion in emerging energy technologies, including 

renewables, in North America alone – this investment represents 73 percent of the total 

$135 billion spent by all U.S. companies and the federal government. For example, one 

oil company is among the world’s largest producers of photovoltaic solar cells; another 

oil company is the world’s largest developer of geothermal energy; and the oil and gas 

industry is the largest producer and user of hydrogen. 

It also requires billions more dollars to maintain the delivery system necessary to 

ensure a reliable supply of energy and to make sure it gets where it needs to go: to 

industry customers. Americans’ energy use is expected to grow by one-third in the next 

25 years. The industry is committed to making the reinvestments that are critical to 

ensuring our nation has a stable and reliable supply of energy today and tomorrow. 

The industry’s earnings are very much in line with other industries – and often they 

are lower. This fact is not well understood, in part, because the reports typically focus on 

only half the story – the total earnings reported. Earnings reflect the size of an industry, 

but they’re not necessarily a good reflection of financial performance. Earnings per dollar 
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of sales (measured as net income divided by sales) provide a good way to measure how 

industries perform compared to other industries. It is a figure that is the most widely 

understood and relevant to consumers interested in knowing how much companies earn 

for every gallon of gasoline sold. 

Last year, the oil and natural gas industry earned 8.5 cents for every dollar of sales 

compared to an average of 7.7 cents for all U.S. industry. Over the last five years (2001-

2005), the oil and gas industry’s earnings averaged 5.9 cents compared to an average for 

all U.S. industry of 5.6 cents. 

It is also important to understand that those benefiting from healthy oil and natural 

gas industry earnings include numerous private and government pension plans, including 

401K plans, as well as many thousands of individual American investors. While shares 

are owned by individual investors; firms, and mutual funds, pension plans own 41 

percent of oil and natural gas company stock. To protect the interest of their shareholders 

and help meet future energy demand, companies are investing heavily in finding and 

producing new supplies and in new refinery capacity. 

Windfall profits tax

The U.S. oil and natural gas industry is not earning “windfall profits.” As explained 

in the previous section, the industry’s earnings have been very much in line with those of 

other industries, and often are lower. 

A “windfall profits” tax (WPT) discourages new domestic oil production, and makes 

it more attractive to produce foreign energy resources – thereby increasing our 

dependence on imported oil. The Congressional Research Service (CRS) concluded that, 

between 1980 and 1986, the WPT reduced domestic oil production by as much as 1.26 

billion barrels. In all, the CRS estimated that the WPT caused domestic oil production to 

fall between 1 percent and 5 percent, and caused oil imports to rise between 3 percent and 

13 percent (1980-86). 

Adopting such a tax, even one that exempts new domestic investment, would set a 

precedent that could have a chilling effect on investment in U.S. energy development, 

since investors would be concerned that the tax eventually could be imposed on revenues 

from new domestic production as well. 

The WPT in the 1980s, combined with subsequent low oil prices, led to 20 years in 

which the domestic oil and gas industry was not able to attract sufficient capital for 

investment, which is contributing to the tight supply markets of today. According to the 

CRS, before the WPT was repealed in 1988, it generated about $38 billion in net 

revenues ($80 billion in gross revenues)—money that could have been used by the 

industry to invest in new energy production and infrastructure. The National Petroleum 

Council projects that producers will have to invest nearly $1.2 trillion through 2025 to 

fund U.S. and Canadian natural gas exploration and production activities. Investments of 

this magnitude require long-term fiscal stability. 

The Congressional Budget Office (CBO) estimated that the energy sector sustained 

between $18 billion and $31 billion in capital losses from Hurricanes Katrina and Rita. 

These costs will be in addition to the new capital investments that will be required of the 

oil and gas industry to meet future U.S. energy demand. 

The recent increase in crude oil prices should encourage greater production from 

existing U.S. resources and promising new, but costly, alternative sources of energy. 

Those increased supplies could help to reduce energy costs in the long run. A WPT could 

reverse that trend toward expanded production of new resources, by making many of 

those high-cost alternatives non-economic to produce in the United States. For example, 

a company that invests in the development of oil from shale could make little or no profit, 

and still pay a significant windfall profit tax. 

Domestic oil and gas companies, which are already heavily taxed relative to their 

foreign competitors, must compete for foreign investment opportunities with those 
140

competitors. The WPT would increase this already substantial tax burden and reduce the 

ability of domestic companies to compete for those foreign investment opportunities 

needed to diversify our nation’s energy supply and, in turn, support the employment of 

U.S. personnel in jobs related to those activities both here and abroad. 

Almost all large oil and gas companies are publicly-traded entities, whose shares are 

owned by millions of investors through their 401(k)s, retirement plans and pension funds. 

Taxing away the earnings of those companies negatively impacts the ability of hardworking Americans to achieve a more financially secure future. Moreover, taxes, not 

unlike amounts paid for raw materials and employee salaries, are a cost of doing business 

and are ultimately reflected either in the price paid by consumers for a company’s 

products (e.g., gasoline and heating oil) or in reduced returns to shareholders. 

Fuel prices: what can be done?

In attempting to meet the fuels challenges we face, it is important to do no harm. 

The worst thing Congress could do now would be to repeat the mistakes of the past by 

overriding the structures of the free marketplace. Imposing new controls, allocation 

schemes, new taxes on industry, or other obstacles will only serve to make the situation 

much worse. 

Because the market remains healthy and competitive, it is imperative that it be 

permitted to continue functioning as freely of artificial restraints as possible. As we have 

consistently maintained, the answer to our energy situation is to increase supply, reduce 

demand, and expand and diversify infrastructure. The nation also needs to increase 

energy efficiency in all sectors of the economy, including transportation. 

The Energy Policy Act of 2005 signals a first step in a much-needed effort to 

enhance energy security and ensure the reliable delivery of affordable energy to 

consumers. Nevertheless, much remains to be done. 

We can no longer afford to place off limits vast areas of the Eastern Gulf of Mexico, 

off the Atlantic and Pacific coasts, and offshore Alaska. Similarly, we cannot afford to 

deny Americans consumers the benefits that will come from opening the Arctic National 

Wildlife Refuge and from improving and expediting approval processes for developing 

the substantial resources on federal lands in the Mountain West. 

In fact, we do have an abundance of competitive domestic oil and gas resources in 

the U.S. According to the latest published estimates, there are 112 billion barrels of oil 

and 656 trillion cubic feet (Tcf) of natural gas remaining to be discovered in the United 

States. Consider that 112 billion barrels are enough oil to power more than 60 million 

cars for 60 years and heat more than 25 million homes for 60 years. And 656 Tcf is 

enough natural gas to heat 60 million homes for 160 years. 

Much of these oil and gas resources – 78 percent of the remaining to be discovered 

oil and 62 percent of the gas – are expected to be found beneath federal lands and coastal 

waters. Federal restrictions on leasing put significant volumes of these resources off 

limits, while post-lease restrictions on operations effectively preclude development of 

both federal and non-¬federal resources. Addressing these restrictions is critical. 

And, while we must focus on producing more energy here at home, we do not have 

the luxury of ignoring the global energy situation. In the world of energy, the U.S. 

operates in a global marketplace. What others do in that market matters greatly. 

For this country to secure energy for our economy, government policies must create 

a level playing field for U.S. companies to ensure international supply competitiveness. 

With the net effect of current U.S. policy serving to decrease U.S. oil and gas production 

and to increase our reliance on imports, this international competitiveness point is vital. 

In fact, it is a matter of national security. 

Ten of the 12 largest oil companies in the world are controlled by foreign 

governments, and only one of the two investor-owned companies in the top 12 – 

ExxonMobil – is American. Based on potential oil and gas reserves – resources essential 
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for future operations – only one of the 16 largest oil companies in the world is 

headquartered in the U.S. Most of the others are national oil companies owned by 

foreign governments. Nearly 80 percent of the world’s reserves are owned by these 

national oil companies, and a mere 6 percent are owned by investor-owned companies. 

While our nation is going through challenging times at the gasoline pump right now, 

it is important to understand how we operate in a global commodity business, and that 

these same problems are being experienced worldwide. It is critically important to note 

that the oil and gas price changes over the last two decades are in line with, and in some 

cases lag behind, other commodities. Thus, oil and gas price trends are not anomalies. 

Refineries

In considering the U.S. refining situation, it is also important to remember that the 

oil and natural gas industry operates in a global marketplace. Many oil and gas 

companies are global companies, whose U.S. investment decisions compete not only with 

decisions as to how to allocate capital investments in the U.S. among various sectors of 

the industry, but also with competing demands and investment needs overseas. In a 

global marketplace, companies will make the best economic investment decisions in 

order to bring affordable petroleum products to consumers. Imports may be the more 

economical option than new U.S. refineries, but that is a decision to be left to the global 

marketplace. Government policies should encourage, not interfere with, the global 

marketplace. 

While domestic refiners have strived to increase the efficiency, utilization and 

capacity of existing refineries, these efforts have not enabled the U.S. refining industry to 

keep up with growing demand. Imports have been helping to meet the growing U.S. 

demand, although announced capacity additions through 2011 will exceed historic 

demand increases. We have been importing an average of about 10 percent of our 

gasoline nationally for the past three years into PADD 1 (East Coast) where the harbors 

have facilitated imports. 

During the 1990s, the oil and natural gas industry earned relatively poor rates of 

return on its investments. This was especially true in the refining sector, which was hard 

hit with the need for new investment in technology and equipment to produce cleanerburning fuels, as well as additional emissions control technology on the refineries 

themselves, to meet clean air standards set by the Clean Air Act of 1990. This Act had a 

major impact on the operation of refineries in the United States and the return on 

investment realized at the time. 

Technological advancements have helped refineries produce more from existing 

facilities than they did in the past. In addition, the elimination of subsidies under 

government regulations after 1981 led to the closure of many smaller, less efficient 

refineries throughout the 1980s and 1990s. Those refineries left standing did a better job 

of bringing product to market for less. 

The last two years have been extremely challenging for consumers and refiners. The 

industry has been working very hard to meet the needs of consumers. In 2004, the 

refinery system set records for production of gasoline and diesel fuel. In 2005, about 30 

percent of the U.S. refining industry was shut down at one point as a result of Hurricanes 

Katrina and Rita. The industry is resourceful and quickly imported record amounts of 

gasoline and diesel fuel to augment this production to meet all-time high consumer 

demand and limit supply disruptions. 

Massive investments at refineries will be required in the next 10 years to expand 

refinery capacity to meet growing demand and to comply with environmental regulations. 

Domestic refining capacity has increased over the last decade to about 17 million barrels 

per day and several capacity expansion projects are currently underway. Though the 

actual number of refineries has decreased, actual refining capacity has been growing. 
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While no new refineries have been built in the U.S. since 1976, expanding and 

upgrading existing refineries is an ongoing process. The U.S. refining industry has been 

expanding a little more than 1 percent per year over the past decade – the equivalent of 

12 new 200,000-barrels-per-day refineries. And it continues to grow. 

Based on publicly available data on announced refinery capacity expansion plans, 

over 1.3 million barrels per day of additional refinery capacity projects are either planned 

or under strong consideration for the years 2006 to 2011. Such expansions will boost 

domestic refining capacity to nearly 18.5 million barrels per day - near the all-time high 

for U.S. operable refinery capacity. (This aforementioned information covers only 

expansion plans announced to the public; additional plans may be under initial 

consideration or kept confidential.) 

Some recent examples of refinery capacity expansion plans mentioned in publicly 

available information and individual company press releases include: 

• ConocoPhillips plans to invest $4 billion to $5 billion by 2011 for expansion 

and upgrade projects in nine refineries to increase its U.S. refining capacity and 

improve utilization. An overall capacity increase of 230,000 barrels per day is 

planned, with 40,000 barrels per day of added crude capacity to its Los Angeles 

refinery. 

• Marathon Petroleum Company is evaluating a $2.2 billion investment to 

increase the capacity of its Garyville, Louisiana refinery by 180,000 barrels per 

day to a total of 425,000 barrels per day. 

• Sunoco plans to invest $1.8 billion over the next three years in its refineries, 

with an emphasis on increasing capacity by 11 percent to one million barrels 

per day. 

• Valero plans to increase its North American refining capacity by 400,000 

barrels per day – the equivalent of two mid-sized refineries – by 2009 at a cost 

of $5 billion. 

• Motiva (a Shell and Saudi Refining joint venture) completed initial project 

scoping and process design for a potential 325,000 barrels-per-day/ $3.5 billion 

expansion project being considered at its Port Arthur, Texas refinery. 

Increasing capacity at existing refineries can be a challenge for a number of reasons. 

These challenges are typically even more difficult when building new refineries. A new 

refinery location must have access to crude and product pipelines and other utilities to 

obtain the multitude of required permits, gain community acceptance, and attract the 

significant capital investments to design, permit, and construct. Take the effort to build a 

new refinery in Arizona, for example: the project has been under development for more 

than a decade, the site for its location was moved, and, while EPA issued its air permit 

last year, the project has not been able to attract the financial capital necessary to start 

construction. 

Some obstacles to additional capacity expansion or new refineries include: 

• Huge capital investments, often running into the tens to hundreds of millions of 

dollars for existing refineries ($9,000-$12,000 per daily barrel to expand), and 

$2 billion to $3 billion or more for a new refinery ($17,000 per daily barrel to 

build new); 

• The return on capital investment for petroleum refining and marketing was 7.7 

percent between 1995 and 2004, which is below the average return of 13.9 

percent for the S&P Industrials, according to the U.S. Department of Energy. In 

addition, it takes several years to realize a return on a refinery investment. 

• The permitting process required to construct new refineries or modify existing 

facilities is very complex and time-consuming, involving federal, state, and 

local permitting authorities; 
143

• The combination of regulations to reformulate fuels and those aimed at 

reducing emissions from refinery operations make the refining industry one of 

the most heavily regulated industries in the U.S.; 

• The refining industry has spent more than $47 billion over the last decade to 

comply with environmental and fuels regulations – nondiscretionary 

expenditures that generally yield little or no return on investment. Moreover, by 

2010, the U.S. refining industry will have invested upwards of $20 billion to 

comply with new clean fuel regulations. All this investment results in severely 

reduced funding available for discretionary capacity expansion projects. 

• Public opposition to siting a new refinery in almost any community in the U.S. 

is highly likely, an obstacle difficult to overcome. 

In order to further increase U.S. refining capacity, government policies are needed to 

create a climate more conducive to investments in refining capacity. Many of the steps 

the federal government could take to help the refinery capacity situation are covered in 

the December 2004 National Petroleum Council (NPC) study, Observations on 

Petroleum Product Supply – A Supplement to the NPC Reports “U.S. Petroleum Product 

Supply – Inventory Dynamics, 1998” and ‘U.S. Petroleum Refining – Assuring the 

Adequacy and Affordability of Cleaner Fuels, 2000.” 

The NPC study suggested that the federal government should take steps to 

streamline the permitting process to ensure the timely review of federal, state and local 

permits to expand capacity at existing refineries. For example, new-source review (NSR) 

requirements of the Clean Air Act need to be reformed to clarify what triggers these 

reviews. Some refineries may be able to increase capacity with relatively minor 

adjustments, but are unsure if the entire facility’s permit review would be triggered – a 

burdensome and time-consuming process. 

The best long-term solution is investment toward finding new supplies and 

continuing to improve efficiency when producing and using energy. Decisions about how 

much capacity is needed and where it is needed are best left to the marketplace. There is 

spare global refining capacity, and it is important to remember that the oil and natural gas 

industry operates in a global market. It is important that government policies not 

interfere with the global market. 

Conclusion

The U.S. oil and natural gas industry is doing all it can to produce the fuel supply 

needed to meet consumer energy needs. However, the industry cannot meet U.S. energy 

challenges alone. Our nation’s energy policy needs to focus on increasing supplies; 

encouraging energy efficiency in all sectors of the economy, including transportation; and 

promoting responsible development of alternative and non-conventional sources of 

energy. 

Congress needs to allow the oil and gas industry to invest today’s earnings in 

meeting tomorrow’s energy needs. To do otherwise will threaten our energy future. 

Congress can help by opening up more of the resource-intensive areas in our nation that 

are off-limits to new production. Because the market remains healthy and competitive, it 

is imperative that it be permitted to continue functioning as freely of artificial restraints as 

possible. That is the most efficient way to provide affordable fuel to meet U.S. consumer 

needs. 
144

NV CBG

7.2 RVP

7.0 RVP

7.8 RVP, MTBE-No Increase

7.8 RVP

7.0 RVP, 30 ppm S

U.S. Gasoline Requirements

and Ethanol Mandates

RFG – North

RFG – South

Oxygenated Fuels

CA CBG

RFG/CA CBG

AZ CBG

Oxy Fuels/7.8 RVP

Oxy Fuels/7.0 RVP Ethanol Mandate- MN and HI are only mandates currently in effect.

Considering Ethanol/Renewable Mandate

Source: ExxonMobil/API

May 8, 2006

CHAIRMAN BARTON. We now want to hear from you, Mr. Dinneen. 

Your statement is in the record, and you are recognized for 7 minutes. 

MR. DINNEEN. Thank you, Mr. Chairman, and good morning. This 

is indeed an important and timely hearing, and I am pleased to be here to 

discuss the unprecedented growth in the domestic ethanol industry and 

the role that ethanol has played in helping refiners cost effectively 

replace MTBE in those areas where it is still being used. 

Today’s ethanol industry consists of 97 biorefineries located in 19 

different States with the capacity to process more than 1.7 billion bushels 

of grain into nearly 4.5 billion gallons of high-octane, clean-burning 

motor fuel and 9 million metric tons of livestock and poultry feed. It is a 

dynamic and growing industry that is revitalizing rural America, 

reducing emissions in our Nation’s cities, and lowering our dependence 

on imported petroleum. 

Mr. Chairman, in large part because of the Energy Policy Act of 

2005, the U.S. ethanol industry is today the fastest growing energy 

resource in the world. With your leadership and the tremendous support 

of members of the committee like Mr. Shimkus, the Congress last year 

enacted an historic renewable fuels standard requiring the use of at least 

7 1/2 billion gallons of renewable fuels by 2012. That provision signaled 

a clarion call to the ethanol industry and the financial community. The 
145

demand for ethanol and biodiesel was no longer uncertain, allowing the 

renewable fuels industry to grow with confidence. And grow we have. 

There are currently 35 plants under construction. Twenty-one of 

those have broken ground just since last August, when President Bush 

signed EPAct into law. With existing biorefineries that are expanding, 

the industry expects more than 2.2 billion gallons of new production 

capacity to be in operation within the next 12 to 18 months, 500 million 

gallons by July 4th, another 900 million gallons by Christmas, and it will 

just continue to grow after that. 

As the industry grows, it is changing as well. We are embracing new 

technologies. Each new plant that opens up is using the newest most cost 

effective and energy efficient technologies, and that will continue to be 

the case as well. Because we are expanding at such an unprecedented 

rate, we are actually exceeding the RFS requirement of 2006 by 

25 percent. The RFS requires just 4 billion gallons of ethanol to be used 

this year, but we will produce and sell more than 5 billion gallons this 

year. 

Ethanol supply is not a problem. Because we have grown so rapidly, 

we have been able to meet even higher demand for ethanol than required 

by the RFS, as refiners have chosen to remove MTBE from gasoline. 

With increased productions, increased imports, and some market 

reallocation of ethanol, refiners have now largely succeeded in 

transitioning away from MTBE to ethanol. Again, ethanol supply has 

not been a problem in meeting the increased demand from MTBE 

replacement. 

Getting ethanol to where it needs to be has also not been a problem. 

While ethanol is not shipped today on pipelines, the industry has created 

a virtual pipeline through aggressive use of rail, barge, and trucks to 

move ethanol quickly anywhere it needs to go. Indeed, by not moving 

our product on the pipeline, and adding to gasoline supplies at the 

terminal gate, consumers may ultimately benefit because the pipelines 

will have more capacity to move more gasoline to those areas. 

Refineries made the decision to remove MTBE from gasoline. No 

provision of the Clean Air Act or the energy bill compelled them to do it. 

But having made that decision, I give them great credit for working with 

our industry and the gasoline distribution system to assure that adequate 

infrastructure exists to make the transition successful. While there were 

very temporary challenges in a few locations, created by EPA regulations 

prohibiting commingling of RFG and RBOB, those minor transitional 

issues were addressed and the switch from MTBE to ethanol is now 

largely complete. The system works. 

Some have suggested that repealing the secondary tariff on imported 

ethanol is necessary to increase supplies and reduce gasoline prices. But, 
146

as noted, there is no shortage of ethanol. In part, because imports are 

already coming into the market. The U.S. imported 130 million gallons 

last year and looks to import even more this year. The secondary tariff is 

not a barrier to entry. 

In fact, most ethanol does come into the country today duty free 

under preferential trade agreements such as the Caribbean Basin 

Initiative. Moreover, incremental increases in ethanol supply would 

have no impact on gasoline prices. Removing the tariff would have an 

impact on the investment community, however, sending a mixed and 

chilling signal to the financial community just as ethanol, including 

cellulosic ethanol, is beginning to take flight. 

Mr. Chairman, I appreciate the opportunity to be here today, I 

appreciate your leadership on last year’s energy bill, and I look forward 

to continuing to work with you and our refiner and gasoline marketing 

customers to continue to provide high-quality, cost-effective motor fuels 

across the Nation. 

Thank you. 

CHAIRMAN BARTON. Thank you. 

[The prepared statement of Bob Dinneen follows:] 

PREPARED STATEMENT OF BOB DINNEEN, PRESIDENT AND CEO, RENEWABLE FUELS 

ASSOCIATION

Good morning, Mr. Chairman and Members of the Committee. My name is Bob 

Dinneen and I am president of the Renewable Fuels Association, the national trade 

association representing the U.S. ethanol industry. 

This is an important and timely hearing, and I am pleased to be here to discuss the 

unprecedented growth in the domestic ethanol industry, and the attendant economic, 

energy and environmental benefits resulting from that growth. 

Ethanol has become a ubiquitous component of the U.S. motor fuel market. Ethanol 

is blended in more than 40% of the nation’s fuel, and is sold virtually from coast to coast 

and border to border. As refiners have made the decision to remove MTBE from 

gasoline, ethanol has been there to replace the lost octane and volume of MTBE, without 

sacrificing the air quality benefits of the RFG program or increasing consumer costs. The 

transition from MTBE to ethanol is now largely complete, and is a testament to what can 

be accomplished when oil refiners, gasoline marketers and ethanol producers work 

together for the benefit of consumers. 

Background 

Today’s ethanol industry consists of 97 biorefineries located in 19 different states 

with the capacity to process more than 1.7 billion bushels of grain into nearly 4.5 billion 

gallons of high octane, clean burning motor fuel and 9 million metric tons of livestock 

and poultry feed. It is a dynamic and growing industry that is revitalizing rural America, 

reducing emissions in our nation’s cities, and lowering our dependence on imported 

petroleum. 
147

The 4 billion gallons of ethanol produced and sold in the U.S. last year contributed 

significantly to the nation’s economic, environmental and energy security. According to 

an analysis completed for the RFA1

, the 4 billion gallons of ethanol produced in 2005 

resulted in the following impacts: 

• Added $32 Billion to gross output; 

• Created 153,725 jobs in all sectors of the economy; 

• Increased economic activity and new jobs from ethanol increased household 

income by $5.7 Billion, money that flows directly into consumers’ pockets; 

• Contributed $1.9 Billion of tax revenue for the Federal government and $1.6 

Billion for State and Local governments; and, 

• Reduced oil imports by 170 million barrels of oil, valued at $8.7 Billion. 

In addition, because the crops used in the production of ethanol absorb carbon 

dioxide, the 4 billion gallons of ethanol produced in 2005 reduced greenhouse gas 

emissions by nearly 8 million tons.2

 That’s the equivalent of taking well over a million 

vehicles off the road. 

Energy Policy Act Has Stimulated Significant New Ethanol Production 

Mr. Chairman, in large part because of the Energy Policy Act of 2005 (EPAct), the 

U.S. ethanol industry is today the fastest growing energy resource in the world. With 

your leadership, and the tremendous support of members of the Committee, the Congress 

last year enacted an historic Renewable Fuel Standard (RFS) requiring the use of at least 

7.5 billion gallons of renewable fuels by 2012. That provision signaled a clarion call to 

the ethanol industry and the financial community that demand for ethanol and biodiesel 

was no longer uncertain, allowing the renewable fuels industry to grow with confidence. 

Indeed, there are currently 35 plants under construction. Twenty-one of those have 

broken ground just since last August when President Bush signed EPAct into law. With 

existing biorefineries that are expanding, the industry expects more than 2.2 billion 

gallons of new production capacity to be in operation within the next 12 to 18 months. 

The following is our best estimate of when this new production will come on stream. 

 

1

 Contribution of the Ethanol Industry to the Economy of the United States, Dr. John Urbanchuk, 

Director, LECG, LLC, February, 2006. 

2

 Argonne National Laboratory, U.S. Department of Energy, GREET Model, February, 2006.
148

P rojected E thanol P ro duction C apacity

0

100

200

300

400

500

600

700

800

900

1st Q tr 2nd Q tr 3rd Q tr 4th Q tr '07

M illion G allons

A nnually

This preceding chart reflects eight plants and three expansions we believe will be 

complete before July, representing more than 500 million gallons of production capacity; 

and another 16 plants and 2 expansion that will be complete before the end of the year, 

adding about 900 million gallons more. This new 1.4 billion gallons of new capacity 

represents a 32% increase in production, a phenomenal rate of growth, particularly when 

viewed in light of the 20-plus percent growth the industry has already achieved in each of 

the past several years. 

Rapidly Increasing Demand 

While ethanol supply is growing exponentially, ethanol demand is increasing as 

well. Indeed, ethanol demand in 2006 is significantly higher than that required by EPAct. 

The reason for that is refiners have chosen to eliminate the use of MTBE in many of the 

reformulated gasoline areas where it has not already been removed.3

 Those areas include 

the Mid-Atlantic, New England and Texas. The Energy Information Administration 

believes as much as 130,000 barrels per day of ethanol will be needed to meet the 

demand created by refiner decisions to replace MTBE. 

Some have questioned the ability of the ethanol industry to meet such rapidly 

increased demand. But given the tremendous growth in ethanol production capacity cited 

above, most analysts now agree there will be sufficient ethanol supplies. For example, 

Valero Energy CEO William Klesse recently stated, “[t]he US will have enough ethanol 

to blend into gasoline during the current spike in demand as companies transition away 

from the oxygenate MTBE.” 

In addition to increased production, ethanol supplies will flow from existing 

conventional gasoline markets to MTBE replacement markets where it is needed more. 

The market will also encourage increased imports in the short-term. Approximately 

130 million gallons of ethanol were imported in 2005, and even higher imports are 

expected this year. Twenty-five million gallons of ethanol were imported in February 

alone.4

 

 

3

 It is important to note that no provision of the Energy Policy Act or the Clean Air Act requires 

refiners to eliminate MTBE, nor are they required to use ethanol. This is a decision refiners are 

making because replacing MTBE with ethanol is the most cost-effective means of meeting Clean Air 

Act standards while maintaining the octane and performance consumers expect. 4

 Brazil is the world’s largest exporter of ethanol, and significant volumes of ethanol come from 

Brazil directly. Other Brazilian product is imported through the Caribbean Basin Initiative, which 

allows up to 7% of the U.S. market (~270 million gallons in 2006) to enter duty free. Ethanol 

produced in Canada and Mexico is also duty-free today.
149

Approximately 115 million gallons of ethanol per month are required to meet midAtlantic and Northeast ethanol demand as MTBE is removed from gasoline. Currently, 

there is about 95 million gallons of ethanol in working inventory at terminals in this area. 

That equates to 25 days of demand on hand in the Northeast and mid-Atlantic region. 

Ethanol supply is NOT a problem. 

Some have suggested repealing the secondary tariff on imported ethanol is necessary 

to increase supplies. But, as noted above, there is no shortage of ethanol. Moreover, the 

secondary tariff is not a barrier to entry. The secondary tariff merely offsets the tax 

incentive oil companies receive for blending ethanol, regardless of its source. 

Eliminating the secondary tariff would only result in U.S. taxpayers subsidizing already 

subsidized foreign ethanol. At a time when Congress is contemplating reduced domestic 

farm programs, it is neither wise nor necessary to begin subsidizing foreign ethanol and 

foreign sugar growers. Finally, eliminating the tariff now, as the financial markets are 

contemplating significant investments in U.S. ethanol, including cellulosic ethanol, 

would send a chilling signal to those markets at a critical time and potentially discourage 

further investment in this promising technology. 

The Transportation, Distribution and Blending Infrastructure will be Ready. 

The ethanol industry has worked diligently with our refiner customers, gasoline 

marketers, terminal operators and the fuel distribution network to assure a successful 

transition from MTBE to ethanol in these areas. 

Over the past several years, the ethanol industry has worked to expand a “Virtual 

Pipeline” through aggressive use of the rail system, barge and truck traffic. As a result, 

we can move product quickly to those areas where it is needed. Many ethanol plants 

have the capability to load unit trains of ethanol for shipment to ethanol terminals in key 

markets. We are also working closely with terminal operators and refiners to identify 

ethanol storage facilities and install blending equipment. 

Sewaren, NJ is expected to be the primary gathering point for ethanol for East Coast 

markets in 2006 because it has both unit rail car capacity and marine access. Ethanol will 

be trucked to serve New York and New Jersey, and product will flow out by barge to 

Providence, Boston and Baltimore. Additional terminal capacity exists in Albany, 

Philadelphia, Newark, Paulsboro, Carteret, Perth Amboy, Norfolk, and Richmond. 

Great credit must be given to the petroleum industry for the effort that is being made 

to assure success. Examples of some of the investments being made to accommodate the 

switch from MTBE to ethanol in key markets include the following: 

• Unit Train unloading facilities are either being built or planned for Providence, 

RI, Linden, NJ, Baltimore, MD, and Dallas, TX. Already, a unit train breakout 

facility is in operation in Albany, NY. 

• Barge receiving capability is either in place or being built in Philadelphia, 

Baltimore and Houston. 

• Transloading (rail to truck) capability is being developed as a transitional step 

for Richmond, Washington and Dallas. More permanent rail terminals are 

being developed for these areas. 

There is no question that the dramatically accelerated removal of MTBE challenged 

the marketplace. The EPA requirement to completely drain MTBE-RFG tanks and clean 

them before loading Reformulated Blendstock for Oxygenate Blending (RBOB) created 

some difficulties in a few locations. But the problems were very short-lived and the 

transition is now largely complete. As one industry analyst observed recently, “The very 
150

fact that these companies are on the record as discontinuing MTBE and replacing it with 

ethanol tells us one very important fact – they are prepared.”5

New Technologies 

The only thing more astonishing than the growth in the ethanol industry is the 

technological revolution happening at every biorefinery and every ethanol construction 

site across the country. Plants today are using such innovations as no-heat fermentation, 

corn fractionization and corn oil extraction. With today’s natural gas prices, plants are 

also looking toward new energy sources, including methane digesters and biomass 

gasification. In short, the ethanol industry is unrecognizable from what it was just five 

years ago, and it will be unrecognizable again five years from now. 

To continue this technological revolution, however, continued government support 

will be critically important. DOE’s biomass and biorefinery systems research and 

development program has been essential to developing new technologies. Competitively 

awarded grants provided by this program have played a very important role in developing 

new technology. 

Recently, DOE informed the renewable fuels industry that it was canceling research 

contracts. Many of the grants provide technologically promising projects that would help 

move the industry forward. The RFA encourages Congress to continue to provide 

additional funds for competitive solicitations. 

New Feedstocks 

To date, the ethanol industry has grown almost exclusively from grain processing. 

In the future, ethanol will be produced from other feedstocks, such as cellulose. 

Cellulose is the main component of plant cell walls and is the most common organic 

compound on earth. However, it is more difficult to break down cellulose and convert it 

into usable sugars for ethanol. Yet, making ethanol from cellulose dramatically expands 

the types and amount of available material for ethanol production. This includes many 

materials now regarded as wastes requiring disposal, as well as corn stalks, rice straw and 

wood chips or “energy crops” of fast-growing trees and grasses. Cellulosic ethanol 

production will augment, not replace, grain-based ethanol, but ultimately exponentially 

expand potential ethanol supplies. 

Many companies are working to commercialize cellulosic ethanol production. 

Indeed, there is not an ethanol biorefinery in production today that does not have a very 

aggressive cellulose ethanol research program. The reason for this is that they all have 

cellulose already coming into the plant. If they can process that material into ethanol, 

they will have a significant marketplace advantage. 

Many companies are working to commercialize cellulosic ethanol. Iogen, Inc., a 

Canadian enzyme company, has been producing cellulosic ethanol from wheat straw 

since 2004 at a one million gallon plant in Ontario. The company is planning to begin 

construction of a commercial facility in the U.S. during the summer of 2007. Abengoa 

Bioenergy Corp., which operates four biorefineries in the U.S. today, has begun 

construction of a grain and cellulose ethanol plant in Spain. The company plans to bring 

that technology to the U.S. as soon as the technology is proven successful. Numerous 

other companies are moving toward commercialization and I am confident cellulosic 

ethanol will be a reality quite soon. 

Conclusion 

In his State of the Union Address, President Bush acknowledged the nation “is 

addicted to oil” and pledged to greatly reduce our oil imports by increasing the 

 

5

 The Ethanol Monitor, published by Oil Intelligence Inc., Oceanport, NJ, Volume 2, No. 11, 

March 27, 2006. 
151

production and use of domestic renewable fuels such as ethanol and biodiesel. The 

Energy Policy Act of 2005 clearly put this nation on a new path toward greater energy 

diversity and national security through the RFS. And as the ethanol industry continues to 

grow, through new technologies and new feedstocks, we will move even closer to 

realizing the President’s vision of a more sustainable energy future for all Americans. 

Thank you. 

CHAIRMAN BARTON. We now want to hear from Mr. Slaughter, who 

is representing the refiners. 

MR. SLAUGHTER. Thank you, Mr. Chairman. Thank you again for 

the invitation to appear. 

The state of the gasoline market today reflects supply and demand, 

and the arithmetic is not complicated. What is happening is what the 

textbooks say should happen. With domestic demand for refined 

products continuing to accelerate, outpacing our ability to meet those 

needs with domestic supplies, coupled with the ever-increasing global 

demand for these same products, market volatility will continue. 

Although this situation is unsatisfactory, it can only be alleviated and 

addressed with increased supply. Recent EIA data do suggest 

improvements in the gasoline supply picture. Gasoline inventories are 

up for the second straight week, while demand is down. Refinery 

utilization rose to 90.2 percent due to the end of widespread maintenance 

resulting from last year’s hurricane aftermath. Refiners have also 

completed both the seasonal product turnaround, and among some, the 

transition from MTBE to ethanol use and RFG. This should eliminate 

some of the causes for uncertainty in the market place going forward. 

We continue to be concerned, however, about crude price levels, our 

feedstock, which have increased the cost of refiners’ raw material by 

40 percent over last year. Regardless of the 2006 demand growth rate, 

which EIA now puts at 8.9 percent, total demand for gasoline and other 

products is strong, reflecting continued U.S. economic growth. In short, 

economic growth in the U.S. and around the world is the major culprit 

behind today’s energy prices and the market situation. 

The only things that could significantly affect this strong demand 

situation are things we don’t wish to invite: recession, depression, or a 

strong shock to the U.S. or world economy due to a calamity like last 

year’s hurricanes or 9/11. These facts lead NPRA to the conclusion that 

government and industry should act to prepare for continued strong 

economic growth, both nationally and globally, leading to increasing 

demand for energy, particularly transportation fuels. 

This means continued vigorous competition for available 

international crude and oil product supplies, particularly gasoline and 

diesel. U.S. demand for both crude and product will continue to 

increase, but demand in other countries, especially Asia, will increase at 
152

a faster rate. This means that the United States will face strong 

competition for available supplies from lean and hungry new players in 

the marketplace. 

The U.S. refining industry is committed to continued heavy 

investments in projects to increase domestic refining capacity, increase 

the yield of most desirable products, like gasoline and diesel, per barrel 

of crude refined, increase the ability of domestic refineries to handle a 

broader range of crudes, including heavier and sour crudes, as well as 

crude from oil sands and other nonconventional sources, and continue 

and expand environmental improvement through production of cleaner 

fuels and facility improvements and the development and 

implementation of new technologies. 

The U.S. industry has increased domestic refining capacity by 

2 million barrels per day in the past 12 years. This is the equivalent of 

adding almost one moderate-sized refinery each year. This capacity 

increase was achieved at the same time the industry was also investing 

billions of dollars to comply with new environmental requirements in the 

Clean Air Act Amendments of 1990. 

I would also point out that mergers and acquisitions in the industry 

have increased refining capacity. Without such consolidation, some of 

the individual refineries involved might not have been economically 

viable. A close examination of mergers and acquisitions indicates that 

purchased or merged refineries continue to operate and have often been 

expanded, in Valero’s case, adding almost 400,000 barrels a day to the 

Nation’s refining capacity. 

Refiners have announced new plans for about 1.4 million barrels per 

day of additional U.S. refining capacity, most of which will come on line 

towards the end of this decade. That is an 8 percent increase in U.S. 

refining capacity. Some analysts believe that that 1.4 million barrel a 

day figure is a conservative estimate. 

Mr. Chairman, I would like to end today by talking about some 

suggestions we have for policy changes that might be advantageous to 

the U.S. energy situation. 

One, we think it is wise to move ahead with permit streamlining and 

other ways to eliminate barriers to refinery additions and new refineries. 

Congress, as part of the Energy Policy Act of 2005, passed an expensive 

provision for refinery investments. We would recommend that Congress 

take a look at that approach, perhaps extending the current effect of it to 

apply it to the needs of new refineries as a way to stimulate new refining 

investment. 

We are in favor of passage, and we hope House passage will come as 

soon as possible, of this committee’s refinery bill, which has already 

been considered once, and I understand will be brought back shortly. 
153

We do believe you should look at CAFE and tariffs for potential 

benefits. We think that all tariffs should be looked at, and we think that 

the ethanol tariff should be looked at. I would say that my good friend, 

Mr. Dinneen, has just painted a picture of an industry that to me doesn’t 

really seem to need a mandate and a tax credit, State tax incentives, and a 

tariff barrier, and I welcome your investigation of that need. 

We hope that Congress will pay more attention to the supply impacts 

of new environmental requirements. In the past, Congress has not done 

that. The impact is that I think we have less refining capacity in the U.S. 

because we have not been able to make capacity increases, because the 

investments for environmental measures have crowded out capital that 

otherwise might have been put into capacity increases. 

You have got to remember that every barrel of gasoline that is not 

produced in the United States, diesel too, is going to have to be replaced 

by imports because we require more than we can refine here. The 

competition for those imports of refined products, like gasoline and 

diesel, is going to heat up just the way the competition for crude has 

heated up in recent years. You need to remember that when Congress is 

considering new environmental legislation. 

And in closing, I would say that we would hope that everyone would 

look at the importance of keeping refining an attractive business to invest 

in. We have a broad community of companies in the refining industry 

today, some of the biggest in the world, small regional refiners, and big 

independents. We need to keep the refining industry an attractive 

investment for companies so we can keep this healthy, vibrant, and 

competitive industry that we have today. 

Thank you, Mr. Chairman. 

CHAIRMAN BARTON. Thank you, Mr. Slaughter. 

[The prepared statement of Bob Slaughter follows:] 

PREPARED STATEMENT OF BOB SLAUGHTER, PRESIDENT, NATIONAL PETROCHEMICAL &

REFINERS ASSOCIATION

Chairman Barton, Ranking Member Dingell, and members of the Energy & 

Commerce Committee, NPRA, the National Petrochemical & Refiners Association, 

appreciates the opportunity to present its views on the current gasoline market and the 

role of the domestic refining industry. I am Bob Slaughter, NPRA’s President. Our 

testimony today will concentrate on factors directly impacting the current and projected 

gasoline supply and the specifications which refiners have been or are obligated to 

achieve. As you know, NPRA is a national trade association with 450 members, 

including those who own or operate virtually all U.S. refining capacity, as well as most of 

the nation’s petrochemical manufacturers with processes similar to those of refiners. 

INTRODUCTION 

We may have reached a point in history at which the future welfare of our nation 

depends on maintaining a stable supply of transportation fuels and other forms of energy 
154

at reasonable prices. It very well could also depend upon achieving better mutual 

understanding between the domestic energy industry (petroleum, natural gas, and refined 

products) and the public—a community greatly influenced by the deeds and words of 

Congress. 

The state of the gasoline market today reflects supply and demand, and the 

arithmetic is not complicated. What is happening is what the textbooks say should 

happen. With domestic demand for refined products accelerating and outpacing our 

ability to meet those needs with domestic supplies, coupled with the ever-increasing 

global demand for these same products, market volatility will continue. Although this 

situation is unsatisfactory, it can only be alleviated with increased supply. In the 

meantime, policy makers must resist turning the clock backwards to the failed policies of 

the past. Experience with market interference in the 1970s and 1980s such as price 

constraints, allocation controls, and punitive taxes demonstrate not only the failure of 

these programs, but also their adverse impact on both fuel supplies and consumers. 

To summarize our message, NPRA urges policymakers in Congress and the 

Administration to encourage domestic production of an abundant supply of petroleum, oil 

products, and natural gas for U.S. consumers. Rather than engaging in a fruitless search 

for questionable quick-fix solutions, or even worse, taking actions that could be harmful, 

we urge Congress, the Administration, and the public to exercise continued patience with 

the free market system as the nation adjusts to a volatile global energy market. The 

nation’s refiners are working hard to meet rising demand while complying with extensive 

regulatory controls that affect both our facilities and the products we manufacture. 

Throughout this statement, NPRA will outline and discuss key factors that provide 

perspective on the current and future situation the nation confronts regarding the supply 

of and demand for refined petroleum products. 

REFINED PRODUCT MARKET FUNDAMENTALS

Any discussion of the domestic refining industry must begin with a description of 

three fundamental facts that guide refined product markets. These fundamentals are that: 

1) the cost of crude oil is the primary driver of the cost of refined product; 2) the balance 

between supply of and demand for refined products is extremely tight, and; 3) freemarket pricing balances the system to the maximum benefit of consumers. 

In June of 2005 the U.S. Federal Trade Commission released a landmark study 

titled: “Gasoline Price Changes: The Dynamic of Supply, Demand and Competition.” 

This study determined that “Worldwide supply, demand, and competition for crude oil 

are the most important factors in the national average price of gasoline in the U.S.” and 

“the world price of crude oil is the most important factor in the price of gasoline. Over 

the last 20 years, changes in crude oil prices have explained 85 percent of the changes in 

the price of gasoline in the U.S.” As the chart below clearly demonstrates, the price of 

crude oil leads the price of wholesale and retail gasoline. 
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Crude Oil and Gasoline Prices

0

30

60

90

120

150

180

210

240

270

300

330

Jan-02 Jan-03 Jan-04 Jan-05 Jan-06

WTI Crude Oil Wholesale Gasoline Retail Regul

Cents

per

gallon

Source: EIA 

In addition to the cost of crude oil, the tight balance between refining capacity and 

refined product demand must be taken into account when to understand price changes. 

Refiners have been steadily expanding capacity at facilities in order to keep pace with 

ever-growing demand. Over the past twelve years U.S. refining capacity has increased 

by over 2 million barrels/day (b/d), the rough equivalent of a new average-size refinery 

every year. In spite of this growth, refinery utilization rates remain extraordinarily high, 

often approaching 98% during the summer months. These high rates of utilization reflect 

the thin margin between supply and demand, which causes even moderate disruptions in 

the system to be reflected in significant price changes. In addition, the major event of 

2005, Hurricanes Rita and Katrina’s disruption of key U.S. refined product pipeline 

service and the destruction of significant portions of Gulf Coast refining assets, caused a 

temporary but considerable spike in transportation fuel prices. 

In spite of the serious damage these storms inflicted on the domestic refining 

industry, no significant, long-lived transportation fuel shortage occurred during this 

period. The rapid return to service of significant portions of the transportation fuels 

industry may be attributed to several factors: quick action by the federal government to 

waive temporarily regulatory requirements and release crude oil from the Strategic 

Petroleum Reserve; the efforts of the dedicated employees of the industry, as well as their 

employers, who managed to return significant assets to service in a short time; and 

importantly, higher prices. Increased prices, which averaged over $3.00/gallon 

nationwide for a brief period, moderated demand and attracted a record amount of refined 

product imports. As demand declined, imports entered the fuel system, while facilities in 

areas unaffected by the disaster ramped-up production to provide products for the 

affected areas. Subsequently, prices moderated and returned to pre-storm levels by the 

end of November. 

Without an increase in price, there would have been little incentive to attract 

increased amounts of refined products to the United States, or to run refining facilities 

outside of the affected area at higher utilization rates. Without an increase in prices, 

long-lived and wide-spread fuel shortages may have occurred. In short, the market 

worked, to the benefit of consumers and the national economy. 
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DOMESTIC REFINING CAPACITY: WORKING TO MEET DEMAND AND 

IMPROVE THE ENVIRONMENT

148 refineries currently operate in the United States, producing record volumes of 

some of the cleanest transportation fuels in the world. These refineries, located in 33 

states, have a combined capacity of over 17 million barrels per day (b/d) and, as 

previously stated, often operate at extremely high utilization rates, which approach 98% 

during the peak driving season. These figures are far above the 82% average utilization 

rate of other manufacturers. Despite these significant efforts, U.S. product demand 

continues to outstrip domestic supply. Imports now account for 10% of the gasoline used 

by U.S. consumers. Regionally, this figure is higher, as in the case of the Northeast, 

where imported products account for over 20% of total supply. In light of the strong 

demand for gasoline and other petroleum products, domestic refiners have worked hard 

to expand existing facilities. Over the past ten years, domestic refining capacity has 

increased substantially, by an average of 177,000 barrels per day (b/d) of production each 

year. In simpler terms, this means that the U.S. refining industry has added the 

equivalent of one new, larger than average refinery, each year for the past decade. 

Looking forward, the industry has announced publicly that over 1.4 million b/d in 

new capacity is slated to come online in the next few years. Some estimates project a 

possible increase of nearly 1.7 million b/d of capacity over the same time frame. With 

these expansions, total domestic capacity will reach an all time high as shown in 

Attachment I. 

It remains doubtful, however, that these expansions will be sufficient to meet expected 

U.S. demand growth, and the nation’s continued dependence on imports of finished 

product and blendstocks will continue. 

Capacity expansions have occurred and will continue despite difficult and timeconsuming obstacles, including complex permitting requirements and reviews, 

uncertainties involving the New Source Review program, increasingly stringent 

environmental requirements, and the difficulties of attracting sufficient investment in one 

of the most capital-intensive industries. NPRA continues to believe that encouraging the 

growth of domestic refining capacity is a vital component of U.S. energy policy. 

MERGERS AND ACQUISITIONS HAVE RESULTED IN INCREASED 

CAPACITY AND COMPETITION 

Much has been made of the fact that a new grassroots refinery has not been built in 

the United States in over thirty years. There are compelling reasons why: obstacles to 

permitting and constructing such a facility include enormous start-up capital 

requirements, environmental regulations, a history of low refining industry profitability, 

and the “Not In My Backyard” (NIMBY) public attitude. Equally important, costs to 

construct a new grassroots refinery would require an investment averaging $17,000 per 

daily barrel of capacity and, at a minimum, would take ten years to complete. On the 

other hand, capacity expansions at existing facilities cost in the range of $9,000 to 

$12,000 per daily barrel and can be completed in 3 to 4 years. In short, expansions can 

help meet demand more quickly and cost effectively than construction of a new, greenfield refinery complex. This means more fuel for consumers in a shorter time period than 

a hypothetical new refinery could provide. 

Significantly, while the industry has not constructed new grassroots facilities, 

improved management techniques and technological advances allow existing facilities to 

produce ever greater amounts of refined product. As previously mentioned, refiners have 

added significant capacity at existing sites. In 1981, the average refinery in the United 

States had approximately 57,000 b/d of crude oil distillation capacity. Today, the average 

refinery has a capacity of over 110,000 b/d. Due to high capital requirements and 

increasing environmental restrictions, the industry closed small, inefficient facilities and 
157

has relied on economies of scale to save on construction costs and bring new capacity on 

line more quickly through expansion at existing sites. 

 In addition, refiners have also made substantial investments in technologically 

advanced process units that have increased the yield of gasoline and other valuable “light 

end” products from the same amount of raw crude input. Further, similar investments 

have been made in units designed to process a wider slate of crude oil, enabling the 

production of light products from heavier and sour crude oil feedstocks. Lacking these 

mergers and acquisitions, some of the individual refineries now operating might not have 

remained economically viable and the capacity expansions simply could not have been 

accomplished. One such example is Sunoco’s refinery complex in the metropolitan 

Philadelphia area which now has over 550,000 barrels/day of capacity. If Sunoco were 

unable to operate these facilities as a synergistic unit, this production might not be 

available for consumers. Phillips Petroleum’s (now ConocoPhillips) acquisition of the 

Tosco refinery system increased capacity and maintained refinery viability on a nationwide basis, as did Tosco’s initial purchase of underperforming facilities. Additionally, 

Valero Energy Corporation has increased the productive capacity of the refineries it has 

acquired by an aggregate of nearly 400,000 barrels per day over the past several years 

and plans more extensive expansions in the future. An examination of other mergers and 

acquisitions tells the same story: refineries have been kept operating and have often been 

expanded as the result of mergers and acquisitions. 

REFINED PRODUCT PRICING: CRUDE OIL & COMPETITION 

Two important factors must be kept in mind when examining the price of refined 

products. First, the cost of crude oil is the single greatest driver of petroleum product 

prices. In June of 2005 the U.S. Federal Trade Commission released a landmark study 

titled: “Gasoline Price Changes: The Dynamic of Supply, Demand and Competition.” 

This study determined that “Worldwide supply, demand, and competition for crude oil 

are the most important factors in the national average price of gasoline in the U.S.” and 

“the world price of crude oil is the most important factor in the price of gasoline. Over 

the last 20 years, changes in crude oil prices have explained 85 percent of the changes in 

the price of gasoline in the U.S.” According to EIA data, crude oil constitutes 55% of the 

cost of a gallon of gasoline, refining 22%, taxes 19% and distribution and marketing 4%. 

Secondly, the refining industry is robustly competitive. Some critics of the industry 

argue that recent mergers have reduced competitiveness and led to an increase in fuel 

prices. This assertion is simply wrong. The U.S. refining industry is highly competitive. 

Fifty-four refining companies, hundreds of wholesale and marketing companies, and 

more than 165,000 retail outlets compete in the U.S. market. The largest U.S. refiner 

accounts for just 13% of the nation’s total capacity, and large integrated companies own 

and operate only about 10% of retail outlets. (For comparison, Archer Daniel Midland, 

the largest producer of fuel ethanol in the U.S., controls nearly 25% of the U.S. ethanol 

market.) No one company, or group of companies, sets gasoline prices. Rather, the laws 

of supply and demand drive competitive behavior and determine pricing in the U.S. 

refining industry. 

REFINERS REJECT AND CONDEMN IMPROPER PRICING PRACTICES 

The tight gasoline markets of the past several years have led to dozens of 

investigations of the refining industry at the state and federal levels. In each case, the 

industry has been cleared of wrongdoing. Today, as then, allegations of refiner pricefixing, price-gouging, and other illegal pricing practices are patently false. 

Most recently, the Attorney General of Nebraska appointed a task force to 

investigate prices in that state. In a report issued in January 2006, the task force found 

that “hurricanes in fall 2005 functioned similarly to OPEC supply restrictions, producing 

higher prices, lower output, and elevated profits...” Referencing price movements in 
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recent years the report notes that, “increases in the price of a barrel of oil accounted for 

62.5 percent of the rise in gasoline prices between June 2004 and October 2005. 

Declines in refinery capacity utilization and increases in the share of oil imported 

accounted for the rest of the difference.” Additionally, the task force concluded that 

similar studies at the federal and state level, “have not found violations of law, and they 

generally have found competitive markets affected by worldwide conditions.” 

Another study, conducted by the Office of the Attorney General of Florida, 

examined price increases in that state in 2004 and found that the major factors affecting 

prices in that state were: “consumer demand for gasoline,” “refinery capacity,” “refinery 

utilization,” “inventories,” “supply issues,” and “lagged response in gasoline imports.” 

Importantly, the study found no evidence of anticompetitive behavior. 

These reports repeat the findings of numerous others, including a 9-month FTC 

investigation into the causes of price spikes in local markets in the Midwest during the 

spring and summer of 2000. At the conclusion of that investigation FTC Chairman 

Robert Pitofsky (a recognized expert in antitrust law) stated, “There were many causes 

for the extraordinary price spikes in Midwest markets. Importantly, there is no evidence 

that the price increases were a result of conspiracy or any other antitrust violation. 

Indeed, most of the causes were beyond the immediate control of the oil companies.” 

NPRA regrets that the results of these investigations, and the findings of those now 

being requested, have not been and most likely will not be announced with the same 

enthusiasm and media attention given to news of their initiation. 

ETHANOL & MTBE: A CASE STUDY IN POLICY IMPACTS 

Recently, refiners undertook and completed annual turnarounds to prepare for the 

changeover from wintertime to summertime fuel blends. An unexpected complication for 

this year’s efforts was the need for additional maintenance at facilities damaged by 

Hurricanes Katrina and Rita, or in the case of one major facility, an accident. In addition, 

there was a need for deferred maintenance at those facilities originally scheduled for 

repair work during late summer/early fall of 2005, but which operated at higher rates of 

utilization and continued to produce fuel for consumers in the aftermath of these storms, 

while other refineries were shut for storm-related repairs. 

While these events could not have been predicted and both industry and government 

worked diligently to minimize their impacts, the fact remains that both direct actions and 

overt inaction by the federal government can impact and complicate the supply picture. 

The results of these policy decisions can and do influence marketplace conditions and 

volatility. For example, select provisions from the Energy Policy Act of 2005 created 

marketplace conditions that placed increased strain on the nation’s transportation fuels 

supply. 

Although The Energy Policy Act of 2005 eliminated the 2% oxygenate requirement 

for federal RFG, the act did not provide defective product limited liability relief for 

MTBE. Further, the rules implementing the removal of the 2% oxygenate requirement 

were published by EPA just this week, leaving refiners in regulatory limbo regarding 

RFG and the 2% oxygenate requirement. Refiners were thereby forced to make decisions 

regarding the transition from the production of wintertime to summertime fuels (required 

by federal environmental law) in the February/March 2006 timeframe. This situation 

evidently encouraged many refiners to move ahead quickly to remove MTBE from the 

fuel supply, to ensure that summertime 2006 RFG would still contain 2% oxygenate to 

ensure compliance with EPA regulations. This rapid MTBE removal/ethanol switch had 

been predicted by many industry observers, and Congress was informed on multiple 

occasions that the failure to adopt MTBE limited liability could impact supply. The 

result was considerable (but clearly anticipated) pressure on ethanol supply and fuel 

distribution infrastructure. It is with some irony that we note that those who demanded 

that MTBE be banned and removed from gasoline as soon as possible are now 
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questioning the actions of the refining industry as it attempts as smooth as possible a 

transition to summertime RFG while complying with the renewable fuels (ethanol) 

mandate also enacted in the Energy Policy Act of 2006. 

This substantial increase in demand for ethanol due to MTBE replacement and the 

mandate caused prices for the blendstock to rise rapidly. At the same time, the logistical 

challenges of changing from gasoline blended with MTBE to gasoline blended with 

ethanol (as well as transporting the ethanol to areas for the first time) resulted in unique 

challenges for a few wholesalers and retailers. Refiners, as well other participants in the 

transportation fuels industry, worked very hard to minimize these impacts, but they 

occurred nonetheless. The recent market disruptions were very limited and addressed in 

short order, and the system is currently adjusting to significantly reduced MTBE use. 

The experience demonstrates, however, that Congress, in spite of being informed by 

industry and outside experts and observers, often fails to consider fully the fuel supply 

impacts of legislation and implementing regulations. 

OTHER SUPPLY IMPACTS OF REGULATIONS 

Other significant government intervention and regulations, especially environmental 

requirements, have had a major impact on fuel supplies. Unlike most industries, refiners 

comply with regulations for both their product fuels and for their facilities. In essence, 

the industry is impacted doubly by many environmental programs and faces numerous 

other regulatory burdens simultaneously as illustrated by the attached Fuels Timeline (see 

Attachment II). While refiners support and encourage continued environmental progress, 

NPRA believes that policymakers have tended to overlook and take for granted the 

supply side of the environmental-energy equation. It is imperative, in our opinion, that 

determining the impact on supply must be fully embedded in the policy-making process. 

In working with policymakers on improvements to fuels and facilities, NPRA has often 

commented that industry needs time, flexibility or more realistic standards to minimize 

negative impacts on fuel supply. Policymakers, however, often opt to promulgate 

regulations that are “technology forcing,” constructed with limited and often theoretical 

“margins of safety,” and requiring implementation in the shortest time possible—all 

without adequate attention to fuel supply impacts. 

NPRA characterizes this current environmental agenda as a “regulatory blizzard,” 

consisting of about a dozen new federal programs from 2006 – 2012 (see Attachment III). 

The majority of these regulations will have a direct impact on supply. Unfortunately, 

regulators have not properly sequenced or coordinated the implementation of these 

requirements, literally stacking them one on top of the other. Current fuel markets 

reflect, in many aspects, the confluence and impacts of these multiple fuel and stationary 

source requirements. 

TAKING FUEL SUPPLY FOR GRANTED 

 NPRA had developed several supply-oriented recommendations to increase supply 

as the Energy Policy Act of 2005 was debated. Specifically, the Association 

recommended that Congress repeal the 2% oxygenation requirement for federal RFG; 

avoid a federal ban or mandatory phase-out of MTBE; resist calls for an ethanol mandate; 

extend limited product liability protection to MTBE; avoid unnecessary changes in fuel 

specifications; and take steps to increase natural gas production and supply. 

Unfortunately, political considerations resulted in the exclusion of most 

recommendations as part of the Energy Policy Act of 2005. 

Our recommendations were supported by two landmark refining studies issued by 

the National Petroleum Council (NPC), an advisory group to the Department of Energy. 

The NPC issued a report on the state of the refining industry in 2000, urging 

policymakers to pay special attention to the timing and sequencing of any changes in 

product specifications. Failing such action, the report cautioned that adverse fuel supply 
160

ramifications could result. Unfortunately, this warning has been almost totally ignored, 

resulting in the market volatility we have experienced over the past few years. 

On June 22, 2004, former Energy Secretary Abraham asked the NPC to update and 

expand its refining study and a report was released December 2004. The June 22, 2004 

NPC report included the following recommendations: immediate implementation of 

comprehensive New Source Review reform; revision of the NAAQS compliance 

deadlines and procedures to take full advantage of emission reduction benefits from 

current clean fuels and engine programs; caution in implementation of the ultra low 

sulfur diesel regulations; limited liability protection against defective product claims for 

MTBE; further study of the boutique fuels issue and approval of new fuels only when 

cost effective relative to other emission reduction options; regulations based on sound 

science, cost effectiveness, and energy impacts; streamlined permitting; and several other 

proposals. Few of the NPC recommendations have been implemented; frankly speaking, 

policymakers and opinion leaders have almost totally ignored the findings of these 

important reports. 

CONGRESS SHOULD RESIST CHANGES IN CURRENT FUEL 

SPECIFICATIONS 

As illustrated by the NPRA Regulatory Blizzard and Fuels Timeline cited 

previously, refiners face numerous challenges and fuel specification deadlines. Further 

complicating this picture by adding new programs, or even eliminating existing ones, will 

not benefit consumers. Last minute changes will increase uncertainty and upset 

expectations based on current law. 

NPRA OPPOSES FURTHER REDUCTIONS OF BOUTIQUE FUELS 

Current calls for the reduction of “boutique fuels,” for example, may not provide the 

supply-relief that many advocates think. NPRA believes that any attempt to limit the 

number of viable fuels in regions or nation-wide may be counter-productive, and 

certainly no such change would have a positive impact now or during this summer. 

Boutique fuels programs in many cases represent a local area’s attempt to address its own 

air quality needs in a more cost-effective way than with RFG. While boutique fuels are 

often blamed for episodic price variations during limited supply disruptions in specific 

regions, their overall impact on local economics is a net positive when compared to a 

constant requirement for RFG. 

Historically, the primary driver that led local areas to create boutique fuels was to 

attain the 1-hour ozone NAAQS. When considering fuel controls, such areas often 

sought to avoid RFG, either due to concerns about 1) cost, or 2) use MTBE and/or 

ethanol, or both. Areas that may need VOC (hydrocarbon) emissions reductions to 

achieve ozone attainment have been likely to favor lower RVP controlled conventional 

gasoline (CG) vs. RFG since low RVP CG is more cost effective. Areas that require 

NOx emissions reductions to achieve ozone attainment are likely to favor CG as well 

because both CG and RFG will return similar NOx emission reduction benefits with the 

implementation of the federal Tier 2 gasoline sulfur program. 

Congress passed significant provisions affecting boutique fuels just last year. They 

have not yet been fully implemented. Clean Air Act section 211(c)(4)(C) was amended 

by the Energy Policy Act of 2005 requiring a joint effort of EPA and DOE to review 

motor fuel control choices by states, and further requiring both agencies consider the 

regional supply implications of such requests (see section 1541 of P.L. 109-58). Before 

granting a waiver of federal preemption, the Administrator of EPA is required, after 

consultation with the Secretary of Energy and after notice and comment, to find that the 

fuel control choice will not cause fuel supply or distribution interruptions, or have a 

significant adverse impact on fuel producibility in the affected area or contiguous areas. 
161

NPRA strongly supports this important focus on supply-side impacts. Congress should 

allow time for implementation of this new system before contemplating any changes. 

The Energy Policy Act of 2005 includes another provision addressing boutique 

fuels. Under this provision, EPA may not approve a motor fuel in a new SIP if it 

increases the number of approved fuels as of September 1, 2004, and unless EPA finds, 

after review and comment, that the new fuel will not cause supply or distribution 

disruptions or have an adverse impact on fuel producibility in the affected area or in 

contiguous areas, and unless the fuel was already in use in the same PADD (with the 

single exception of summer 7.0 psi RVP conventional gasoline). By November 2005, 

EPA was to publish a list in the Federal Register of motor fuels in all SIPs as of 

September 1, 2004, by state and PADD for public review and comment. Additionally, 

the Act requires a report by August 2006 of a joint EPA/DOE study on boutique fuels, 

including effects on air quality, fuel availability and fungibility. These provisions have 

not yet been implemented. 

Congress should avoid further confusion and potential disruption in the fuels market 

and rely on the scheduled joint EPA/DOE study on boutique fuels as a basis for any 

future legislative initiatives on this subject. In short, NPRA supports further study of the 

boutique fuels phenomenon as outlined in last year’s energy bill, and urges Congress to 

resist imposition of any additional motor fuel specification changes. Further changes in 

motor fuel specifications in the 2004 - 2010 timeframe may very well result in additional, 

unwarranted supply constraints to a situation which already provides significant 

challenges due to the import of, Tier 2 gasoline sulfur regulations, ultra-low sulfur diesel 

regulations, revised mobile source air toxic rules, and the impact of revised ozone and 

particulate matter National Ambient Air Quality Standards, and others (see Attachment 

III). 

Certain actions could be taken by Congress to address the proliferation of fuel 

formulas without mandating specification changes. Key drivers for future boutique fuel 

proliferation are the 8-hour ozone NAAQS and PM 2.5 NAAQS. Some areas will 

doubtless seek to add fuel controls as they develop State Implementation Plans to 

demonstrate attainment. Many are looking at additional unique requirements for local 

areas, especially where stationary source options are limited or can’t be implemented 

quickly. Thus, states look to short-term, localized fuel controls to meet excessively 

compressed NAAQS attainment deadlines. These deadlines are not aligned with federal 

controls, either existing or in the early stages of implementation (Tier 2 Gasoline & 

Vehicle standards, Heavy Duty Highway and Non-road Diesel Sulfur standards, etc.). 

This situation not only prevents states from counting real and significant emission 

reductions in the time required for compliance, but also adds considerable and 

unnecessary cost to the overall NAAQS program. 

States and local areas need more time to demonstrate attainment or credit for 

existing regulatory requirements that will deliver emission reductions over time. 

Congress should direct that states be allowed credit for emission reductions through 2020 

resulting from federal fuel control programs already in place. If this is done, much of the 

interest in and perceived need for states to enact new motor fuel controls will be 

alleviated. 

Further, it is evident that variations in motor fuels may be reduced with 

implementation of current regulatory programs. For example, EPA published the Mobile 

Source Air Toxics Phase 2 proposal (71 FR 15804; 3/29/06). The primary feature is a 

proposed reduction in the average annual benzene content in all gasoline (conventional 

gasoline plus RFG) to 0.62 vol%. This would eliminate a current toxics control 

distinction between RFG and CG. Furthermore, the recent removal of the oxygen content 

requirement for federal RFG reduces the difference between winter RFG and winter CG 

and between summer RFG and summer 7.0 psi RVP CG. In addition, the average sulfur 

content of RFG and CG is identical because of the federal Tier 2 Gasoline Sulfur 
162

program. Therefore, differences between RFG and CG are diminishing, which should 

reduce the attractiveness of new boutique fuels as alternatives to RFG. 

In sum, NPRA does not support legislation to address boutique fuels that changes 

existing specifications. A new legislative menu of motor fuel choices, which NPRA does 

not support, should in any case recognize investments already made by the petroleum 

industry to produce boutique fuels and comply with existing mandates. Failure to 

consider and balance supply implications, as well as air quality impacts, risks making the 

current supply situation worse. 

EPA SHOULD PROMULGATE RFS STANDARDS THIS YEAR/ CONGRESS 

SHOULD PREEMPT STATE ETHANOL MANDATES 

The Energy Policy Act of 2005 includes a renewable content requirement for motor 

vehicle fuels, the Renewable Fuels Standard (RFS) provision. The RFS will be 

administered by EPA and require the increased use of ethanol, biodiesel or other 

renewable fuels in motor fuels. It is an obligation for gasoline refiners, blenders, and 

importers. EPA published a Direct Final Rule with a limited set of RFS standards for 

2006 that included collective compliance, not individual refinery compliance. This 

Direct Final Rule was effective on February 28, 2006. 

NPRA advocates a program that is understandable, allows unambiguous 

enforcement, promotes adequate flexibility for refiners and gasoline importers, and is 

developed with full recognition of its impact on energy supplies. The comprehensive 

RFS final rule, effective in 2007, should be in place as early as possible before January 1, 

2007. Meeting this timetable may be difficult because the Agency has not yet released a 

proposal for public comment. 

Congress set limits on the proliferation of new fuels in the 2005 Energy Policy Act. 

Unfortunately, new state ethanol, biodiesel or renewable fuel mandates can evade 

Congressional efforts to limit the number of fuels. These programs should be preempted 

by the federal Renewable Fuel Standard pending the same energy supply impact analysis 

required for changes in local gasoline and diesel standards. Congress and the 

Administration should not grant a free pass to new ethanol and biodiesel mandates that 

proliferate fuel requirements and negatively impact supply. 

OTHER RECOMMENDED POLICY ACTIONS 

Congress can and should take appropriate action to help refiners meet the 

transportation fuel needs of the American public. Regardless of industry profitability, the 

simple fact remains that supply and demand for refined products are in an extremely tight 

balance. The refining industry is still working to recover fully from the impact of 

Hurricanes Rita and Katrina. Additionally, several upcoming regulatory requirements 

should be carefully monitored for adverse supply impacts. Necessary and prudent actions 

include the following: 

• Make increasing the nation’s supply of oil, oil products and natural gas a 

number one public policy priority. Now, and for many years in the past, 

increasing oil and gas supply has often been only a secondary concern of 

policymakers. Oil and gas supply concerns have played second fiddle to 

whatever policy goal seemed politically popular at the time. As discussed above, 

the 2000 NPC study of the refining industry urged policymakers to pay special 

attention to the timing and sequencing of any changes in product specifications. 

Failing such action, the report cautioned that adverse fuel supply ramifications 

may result. We repeat that this warning has been widely disregarded. 

• Resist tinkering with market forces, including imposition of “windfall 

profits” taxes, LIFO repeal or elimination of foreign tax provisions. Market 

interference that may initially be politically popular leads to market inefficiencies 

and unnecessary costs. Policymakers must resist turning the clock backwards to 
163

the failed policies of the past. Experience with price constraints and allocation 

controls in the 1970s demonstrates the failure of price regulation, which adversely 

impacted both fuel supply and consumer cost. The state of Hawaii has just 

cancelled its less than one-year old gasoline price regulation because it led to 

higher prices and supply uncertainty. A windfall profits tax would discourage 

investment in refineries, which is needed to expand domestic production capacity 

and produce cleaner fuels. 

• Remove barriers to increased supplies of domestic oil and gas resources. 

Refineries and other important onshore facilities have been welcome in limited 

areas throughout the country, including the Gulf Coast. However, policymakers 

have restricted access to much-needed offshore oil and natural gas supplies in the 

eastern Gulf and off the shores of California and the East Coast. These areas must 

follow the example of Louisiana and many other states in sharing their energy 

resources with the rest of the nation. This additional supply is sorely needed. 

• Expand the refining tax incentive provision in the Energy Act. Reduce the 

depreciation period for refining investments from 10 to five years in order to 

remove a current disincentive for refining investment. Consider allowing 

expensing under the current language to take place as the investment is made 

rather than when the equipment is actually placed in service. Alternatively, the 

percentage expensed could be increased as per the original legislation introduced 

by Senator Hatch. 

• Review permitting procedures for new refinery construction and refinery 

capacity additions. Seek ways to encourage state authorities to recognize the 

national interest in increased domestic refining capacity by reducing the time 

needed to permit expansions and other refinery projects. 

• Keep a close eye on several upcoming regulatory programs that could have 

significant impacts on gasoline and diesel supply. They are: 

3⁄4 Design and implementation of the credit trading program for the 

ethanol mandate (RFS) contained in the recent Energy Act. This 

mechanism is vital to ensure smooth implementation without adverse 

effects on gasoline supply. Refiners have been working closely with 

EPA to accomplish this key task. 

3⁄4 Implementation of the ultra low sulfur diesel highway diesel 

regulation. The refining industry has made large investments to meet 

the severe reductions in diesel sulfur that take effect in June. We 

remain concerned about industry’s ability to produce the necessary 

volumes and the distribution system’s ability to deliver this material 

at the required 15 ppm level at retail. If not resolved, these problems 

could affect America’s critical diesel supply. Industry is working 

closely with EPA on this issue, but time left to solve this problem is 

growing very short. 

3⁄4 Phase II of the MSAT (mobile source air toxics) rule for gasoline. 

Many refiners are concerned that the proposed regulation could be 

overly stringent and impact gasoline supply. We hope that EPA will 

finalize a rule that protects the environment and avoids reducing 

gasoline supply while protecting the environment. 

3⁄4 Implementation of the new 8-hour ozone NAAQS standard. The 

current implementation schedule set by EPA has established ozone 

attainment deadlines for parts of the country that will be impossible 

to meet. EPA has not made needed changes that would provide 

realistic attainment dates. The result is that areas will be required to 

place sweeping new controls on both stationary and mobile sources 

in a vain effort to attain the unattainable deadlines. The CAIR rule 
164

and ULSD diesel program will provide significant reductions to 

emissions within these areas when implemented. These reductions 

will not come soon enough to be considered unless the current 

unrealistic schedule is revised. If not, the result will be additional 

fuel and stationary source controls which will have an adverse 

impact on fuel supply and could adversely affect U.S. refining 

capacity. This issue needs immediate attention. 

NPRA’s members are dedicated to working cooperatively with government at all 

levels to ensure an adequate supply of transportation fuels at reasonable prices. But we 

feel obliged to remind policymakers that action must also be taken to improve energy 

policy in order to increase supply and strengthen the nation’s refining infrastructure. We 

look forward to answering the Committee’s questions. 
165
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167

CHAIRMAN BARTON. And since I was the only one here, I was about 

ready to move several bills. But I am going to run and vote and come 

back, and Mr. Shimkus will continue the hearing. I apologize there are 

not more Members here, but many are watching on TV, and I am sure 

they will be here for the question period. 

Mr. Becker, welcome to the committee and you are recognized for 7 

minutes. 

MR. BECKER. Good morning, Mr. Chairman, and members of the 

committee. I am Bill Becker, Executive Director of STAPPA and 

ALAPCO, the two national associations of State and local clean air 

agencies. We commend you for convening this hearing. 

I am going to focus my testimony on State and local clean fuel 

programs, often referred to as boutique fuels. According to EPA, areas 

in 12 States currently use a total of 7 distinct fuels for boutique purposes. 

We do not dispute the serious nature of today’s high fuel prices, or the 

potential supply disruptions that could occur as a result of a natural 

disaster or other extraordinary circumstance. However, we are very 

concerned that boutique fuels have been wrongly targeted as the cause, 

especially given last summer’s changes under the Energy Policy Act. 

And we disagree with assertions that these programs are responsible for 

the significant fuel price increases and could potentially compound fuel 

supply disruptions. 
168

We believe that any further curtailment of State and local authorities 

to pursue such programs could unnecessarily jeopardize public health 

and clean air. We therefore urge that Congress not further limit our 

ability to adopt boutique fuel programs. 

Just to put this issue in context, air pollution poses a very serious 

public health problem. Notwithstanding decades of diligent efforts, at 

least 160 million people, more than half of our population, still live in 

areas of the Nation with unhealthful levels of ozone, fine particulate 

matter, or both. 

So why do States and localities adopt boutique fuel programs? The 

simple answer is to achieve air pollution emissions reductions beyond 

those provided by conventional fuels. According to GAO, for example, 

State boutique fuel programs have reduced smog forming emissions by 

up to 25 percent over conventional gasoline. 

EPA has acknowledged the importance of fuel programs to States, 

concluding, “Fuel controls can provide significant, cost-effective 

emission reductions of VOCs and NOx. Further, such fuel controls can 

often be implemented quickly and once implemented produce benefits 

immediately.” 

We believe States and localities have used their boutique fuels 

authority sparingly. In fact, most areas that have adopted boutique fuel 

programs did so at the urging of the fuel suppliers, because the industry 

preferred the less expensive boutique fuel programs over the uniform 

Federal Reformulated Gasoline program. 

According to EPA, boutique fuels deliver substantial air quality and 

public health benefits at minimal cost, ranging from three-tenths of a 

penny to three cents per gallon. When compared to today’s average 

national price for a typical gallon of regular gasoline, around $2.90 per 

gallon, boutique fuels cost literally a fraction of 1 percent of the cost of 

gasoline. 

What is clear is that gas prices are escalating for reasons unrelated to 

clean air protection. Moreover, gas prices have increased at the same 

rate nationwide, not just in areas with cleaner fuel. Even within the same 

neighborhood, the price of a gallon of gas can vary by an amount far 

greater than the cost attributed to boutique fuel. 

To the extent there is concern over the potential for boutique fuels to 

exacerbate a future fuel supply disruption, Congress addressed this issue 

just last summer under EPAct by providing the EPA with statutory 

authority to temporarily waive fuel requirements during supply 

emergencies. This authority was used almost immediately thereafter 

following the devastation of Hurricanes Katrina and Rita. 

Congress and the President have also taken other recent actions to 

further address any remaining concerns related to boutique fuels. 
169

Congress included in EPAct a provision rescinding their RFG oxygenate 

requirement that various States had expressed an interest in avoiding. In 

addition, EPAct included a provision eliminating the possibility of any 

future increase in the number of boutique fuel types. EPAct further 

called upon the EPA and DOE to undertake a study of the effects of State 

and local boutique fuels. And, finally, just last week, the EPA 

Administrator launched a Presidential Task Force comprised of the 

Nation’s Governors to review boutique fuels across the country and 

make recommendations. 

In summary, we believe the ability of States and localities to adopt 

boutique fuel programs is an essential regulatory tool for controlling air 

pollution. There is no evidence that boutique fuels contribute to high 

gasoline prices, and there are safeguards in place that allow EPA to 

respond swiftly and effectively should fuel supply disruption ever 

become an issue. In addition, several of the key reasons areas have 

pursued boutique fuels in the past have been otherwise addressed, and in 

no case can the number of types of boutique fuels expand. 

Add to this the fact that EPA has yet to report to Congress on the 

results of its boutique fuel study under EPAct, and further, that the 

President’s boutique fuel task force has just convened, in light of all of 

this, we urge the Congress not to further limit the ability of States and 

localities to adopt boutique fuel programs. 

Thank you. 

[The prepared statement of S. William Becker follows:] 

PREPARED STATEMENT OF S. WILLIAM BECKER, EXECUTIVE DIRECTOR, STATE AND 

TERRITORIAL AIR POLLUTION PROGRAM ADMINISTRATORS/ASSOCIATION OF LOCAL AIR 

POLLUTION CONTROL OFFICIALS

Good morning, Mr. Chairman and members of the Committee. I am Bill Becker, 

Executive Director of STAPPA – the State and Territorial Air Pollution Program 

Administrators – and ALAPCO – the Association of Local Air Pollution Control 

Officials – the two national associations of clean air agencies in 54 states and territories 

and over 165 major metropolitan areas across the United States. The members of 

STAPPA and ALAPCO have primary responsibility under the Clean Air Act for 

implementing our nation’s air pollution control laws and regulations and, even more 

importantly, for achieving and sustaining clean, healthful air throughout the country. 

Our associations commend you for convening this hearing to explore fuel supply 

problems and escalating fuel prices. These are certainly very important and timely issues 

and we understand the desire of this Committee, and that of your colleagues, to take swift 

action to address them. We are pleased to have this opportunity to provide our 

perspectives, particularly regarding state and local clean fuel programs, often referred to 

as “boutique fuels.” To be clear, a boutique fuel is one developed and included by a state 

or local area in an EPA-approved State Implementation Plan to reduce motor vehicle 

emissions and improve air quality. Authority for these programs is provided under 

Section 211(c)(4) of the Clean Air Act. According to EPA, areas in 12 states currently 

use a total of seven distinct types of boutique fuels. 
170

We are especially concerned by assertions that there has been a “proliferation” of 

boutique fuel programs and that these programs are responsible for fuel price increases 

and could potentially compound fuel supply disruptions should they occur. Although we 

do not dispute the serious nature of today’s high fuel prices and potential supply 

disruptions, we believe boutique fuels have been wrongly targeted as the cause, and that 

further curtailment of state and local authorities to pursue such programs could 

unnecessarily jeopardize public health and clean air. Accordingly, we strongly urge that 

Congress not further limit the ability of states and localities to adopt boutique fuel 

programs. 

It is important to consider this in the appropriate context. Perhaps the most complex 

air quality problem our nation faces is achievement and maintenance of the health-based 

National Ambient Air Quality Standards. Notwithstanding decades of diligent effort, at 

least 160 million Americans – more than half our population – still live in areas with 

unhealthful levels of 8-hour ozone, fine particulate matter or both. 

The health and environmental impacts associated with elevated levels of ozone are 

serious, including aggravation of asthma and chronic lung disease, permanent lung 

damage, reduced lung function, irritation of the respiratory system and cardiovascular 

symptoms. Although even healthy individuals can be at risk from exposure to elevated 

levels of ozone, children, seniors and those with compromised respiratory systems are 

especially vulnerable. 

Pollution from airborne particulate matter also plagues our nation. In fact, fine 

particles pose the greatest health risk of any air pollutant, resulting in thousands of 

premature deaths each year. These fine particles are also responsible for a variety of 

other adverse health impacts, including aggravation of existing respiratory and 

cardiovascular disease, damage to lung tissue, impaired breathing and respiratory 

symptoms, irregular heart beat, heart attacks and lung cancer. 

There is widespread agreement that cleaner fuels have been, and will continue to be, 

critical to reducing air pollution and protecting public health. The U.S. Environmental 

Protection Agency (EPA) has stated, “Fuel controls can provide significant, cost effective 

emission reductions of VOCs and NOx. Further, such fuel controls can often be 

implemented quickly and, once implemented, produce benefits immediately, typically 

reducing emissions from each vehicle in the fleet with no need for vehicle fleet turnover. 

This fleet-wide impact distinguishes fuels control from most other mobile source 

emission control options available to state and local areas.” In a June 2005 report, the 

Government Accountability Office reported that state boutique fuel programs have 

reduced smog-forming emissions by up to 25 percent over conventional gasoline.

The Clean Air Act gives primary authority for regulating the environmental impacts 

of fuels to EPA, preempting states and localities from controlling or prohibiting any 

characteristic component of a motor vehicle fuel or fuel additive. However, recognizing 

that there may be extenuating circumstances warranting a state or local fuel program, in 

Section 211(c)(4) of the Clean Air Act, Congress provides two specific exceptions to the 

otherwise general preemption – if the EPA Administrator finds that a special state or 

local fuel standard is necessary to attain the NAAQS because 1) no other measures exist 

to bring about timely attainment or 2) other measures exist, but are unreasonable or 

impracticable. It is important to note that in either case, EPA approval is required. 

Also noteworthy is the fact that over the years states have availed themselves of 

these limited exceptions very judiciously to address specific local air quality problems, 

resulting in just seven distinct types of boutique fuels nationwide. States pursue boutique 

fuels for various reasons. For instance, some are not eligible to opt into the federal 

reformulated gasoline (RFG) program and, therefore, adopt a boutique fuel in order to 

obtain cleaner-than-conventional gasoline in a particular area. Others, who are eligible to 

voluntarily opt into federal RFG, have elected to pursue a low-volatility boutique fuel 

instead, as a less expensive alternative to RFG. It is especially significant that in a 
171

number of instances, a state or local area seeking to reduce smog-forming emissions 

pursued a boutique fuel over opting into the federal RFG program at the urging of the 

fuel suppliers. Although federal RFG would have reduced not only ozone precursors, but 

toxic air pollutants as well, fuel suppliers argued instead for a low-volatility boutique fuel 

(i.e., one with a low Reid Vapor Pressure, or RVP) with more limited air quality benefits 

and a lower price tag. Thus, fuel suppliers were “willing partners” in advancing boutique 

fuel programs over the uniform federal RFG program. 

According to EPA, “boutique fuels deliver substantial air quality and public health 

benefits at minimal costs – ranging from 0.3 to 3 cents per gallon.” When compared to 

today’s average national price for a typical gallon of regular gasoline – $2.90 per gallon – 

boutique fuels cost literally a fraction of 1 percent of the cost of gasoline. So what does 

account for a typical gallon of gasoline? According to the U.S. Department of Energy’s 

(DOE’s) Energy Information Administration, over half (55 percent) is for domestic and 

foreign crude oil. About 22 percent is for refining (processing the crude to make 

gasoline, diesel fuel and other products for sale to refiners). Almost 20 percent goes for 

taxes or fees that are paid to the federal, state or local governments, while 4 percent is for 

distribution and marketing, including shipping by pipeline, storage at terminals and 

delivery by trucks to retail stations. 

There is no question that gasoline prices are high and climbing. However, gas prices 

are escalating for reasons unrelated to clean air protections. Moreover, gas prices have 

increased at the same rate nationwide, not just in areas with cleaner fuel. In fact, even 

within the same neighborhood, the price of a gallon of gas can vary by an amount far 

greater than the cost attributed to a boutique fuel. For example, this week, for a gallon of 

regular gas, the price differential between two gas stations supplied by the same fuel 

company, located just blocks away from each other in Arlington, Virginia, was 20 cents. 

To the extent there is concern over the potential for boutique fuels to exacerbate a 

future fuel supply disruption caused by a natural disaster or unexpected circumstance, 

such as a pipeline break or refinery shutdown, this concern should be allayed by EPA’s 

statutory authority to grant waivers. Last summer, Congress added to this authority by 

including a provision in the Energy Policy Act of 2005 (EPAct) specifically authorizing 

the EPA Administrator to temporarily waive fuel requirements during supply 

emergencies. This authority was used almost immediately thereafter, following the 

devastation of Hurricanes Katrina and Rita. 

Congress and the President have also taken other recent actions to further address 

any remaining concerns related to boutique fuels. 

Congress included in EPAct a provision rescinding the RFG oxygenate requirement 

that various states had expressed interest in avoiding. Prior to EPAct, RFG was required 

to contain 2 percent oxygen by weight – a requirement that was often fulfilled by 

blending in the controversial fuel additive methyl tertiary butyl ether, or MTBE. The 

elimination of this requirement will likely obviate the need for states to develop special 

fuel blends to avoid MTBE. 

Also included in EPAct is a provision restricting the number of boutique fuels to the 

total number of fuels approved by EPA as part of a State Implementation Plan as of 

September 1, 2004, thus eliminating the possibility of any future increase in fuel types. 

EPAct further calls upon EPA and DOE to undertake a study of the effects of state 

and local boutique fuels on air quality, the number of fuel blends, fuel availability, fuel 

fungibility and fuel costs. The results of this study are to be reported to Congress later 

this year, together with any recommended regulatory and legislative changes. 

Some boutique fuel programs require a lower fuel sulfur content. However, recent 

implementation of EPA’s landmark national low-sulfur gasoline regulation, as well as 

implementation by the agency later this year of national low-sulfur diesel fuel, should 

allow for local low-sulfur boutique fuel requirements to be phased out. 
172

And, finally, just last week, the EPA Administrator launched a Presidential Task 

Force, comprised of the nation’s Governors, to review boutique fuels across the country. 

EPA has established an ambitious schedule to provide the President with a final report 

within six to eight weeks. 

As states and localities work toward achieving the goal of clean, healthful air 

nationwide, it is critical that they preserve key regulatory tools for consideration and 

possible implementation in the future. The ability to adopt a boutique fuel program as 

part of a comprehensive clean air plan is one such tool. There is no evidence that 

boutique fuels contribute to high gasoline prices and there are safeguards in place that 

allow EPA to respond swiftly and effectively should fuel supply disruption ever become 

an issue. In addition, several of the key reasons areas have pursued boutique fuels in the 

past have been otherwise addressed and, in no case can the number of types of boutique 

fuels expand. Add to this the fact that EPA has yet to report to Congress on the results of 

its boutique fuels study under EPAct and, further, that the President has convened a 

special task force to study this issue and make recommendations. In light of all this, 

STAPPA and ALAPCO urge that Congress not further limit the ability of states and 

localities to adopt boutique fuel programs. 

Thank you again, Mr. Chairman and members of the Committee. I appreciate this 

opportunity to present STAPPA and ALAPCO’s views and would be pleased to answer 

your questions. 

MR. SHIMKUS. [Presiding.] Thank you. 

Now I would like to recognize Mr. Paul Reid, President of Reid 

Petroleum Corporation. Sir, your full statement is in the record and you 

have 7 minutes. 

MR. REID. Good morning, Mr. Chairman, members of the 

committee. My name is Paul Reid, I serve as President of Reid 

Petroleum Corporation based in Lockport, New York, near Buffalo. I 

appear before the committee representing SIGMA and NACS. 

We have one primary message to deliver today; that is, there are no 

short-term fixes to dramatically reduce gasoline prices or significantly 

increase gasoline supplies. Therefore, we urge Congress and this 

committee to focus attention on options that we think will benefit 

consumers in the long term. In addition, we feel it is important for this 

committee to understand that the overwhelming majority of retail motor 

fuel outlets are owned and/or operated by independent marketers like 

myself. Independent marketers do not refine gasoline or diesel fuel. 

Therefore, we have long supported policies that expand supplies and 

promote a competitive market. 

Gasoline supplies are currently tight, but adequate to meet consumer 

demand, in our opinion. To significantly increase gasoline supplies, 

given steadily increasing demand, either domestic producers must refine 

more or the Nation must import more. In that regard, SIGMA and 

NACS believe that Federal regulatory reforms will be necessary to assure 

that additional domestic refining capacity comes on line as quickly as 

possible. 
173

In the spring of 2006, the upward pressure on gasoline prices has 

been exacerbated by several factors. Chief among those are higher crude 

oil prices, but also EPA’s Tier 2 gasoline specs became effective, the 

phase out of MTBE occurred, and the increased price of ethanol. In fact, 

the price of ethanol has more than doubled in the past year. 

Historically, ethanol prices tracked gasoline prices rather closely. 

Currently, however, spot ethanol prices are approximately 50 cents per 

gallon over regular gasoline, currently contributing to rising gasoline 

prices. 

I feel compelled to point out there is one factor that has not 

contributed to higher gasoline prices; that is increased retailer margins. 

Rising wholesale and retail gasoline prices generally do not translate into 

higher profit margins for gasoline retailers. In fact, the opposite is true. 

My company’s recent experience provides a perfect example of what 

may be a counterintuitive fact. 

In February 2006, our average wholesale price for 87 grade regular 

unleaded gasoline cost $2.40 cents per gallon, including taxes, and our 

average retail price for this same grade was $2.52 cents per gallon, 

providing our company a gross margin of 12 cents per gallon. Compare 

that gross margin to April 24, 2006, when our wholesale cost was $2.97 

per gallon, including taxes, and our retail price was $3.03 per gallon, 

providing us a 6 cents per gallon gross profit. 

As you can see, my company was doing better; we were better off 

when the price was lower in February at $2.52 per gallon than we were 

in late April, when the price was $3.03 per gallon. 

The only near-term step SIGMA and NACS recommends that 

Congress undertake to exert downward pressure on retail gasoline prices 

is to temporarily suspend duty on imported ethanol. Such a tariff 

suspension will attract additional ethanol supplies to those markets where 

it is most needed, such as the East Coast, the Gulf Coast, and California. 

We believe such actions will put downward pressure on ethanol prices. 

We want to thank this committee, particularly Chairman Barton and 

Mr. Blunt, for authoring the boutique fuels and fuel waiver amendment 

that ultimately became Section 1651 of EPAct. The enactment of your 

amendment has slowed the balkanization of the gasoline and diesel fuel 

markets and, hopefully, has started us on a path towards a better 

harmonization of fuel specifications. 

SIGMA and NACS recommends this committee consider 

improvements to Section 1541 of EPAct. First, we urge Congress to 

adopt an amendment to the EPAct boutique fuels cap to gradually reduce 

the number of boutique fuels in use across the Nation. 
174

Second, we encourage Congress to address the proliferation of State 

alternative boutique fuel mandates, such as ethanol and biodiesel 

mandates. 

Third, we urge Congress to consider amending the fuel specification 

emergency supply waiver authority granted to EPA to include a hold 

harmless provision for States. 

As a final comment, SIGMA and NACS are very concerned about 

recent legislative proposals to mandate the use of E-85. Some 

independent marketers already sell E-85, and I expect many more will do 

so in the future. We recommend that Congress rely on market-based 

mechanisms to encourage the use of E-85, rather than a command and 

control mandate that requires retailers to sell this fuel. 

SIGMA and NACS appreciates the opportunity to present this 

testimony, and I am pleased to answer any questions you may have. 

Thank you. 

MR. SHIMKUS. Thank you very much. 

[The prepared statement of Paul D. Reid follows:] 

PREPARED STATEMENT OF PAUL D. REID, PRESIDENT, REID PETROLEUM CORPORATION, ON 

BEHALF OF NATIONAL ASSOCIATION OF CONVENIENCE STORES AND SOCIETY OF 

INDEPENDENT GASOLINE MARKETERS OF AMERICA

Good morning, Mr. Chairman, Ranking Minority Member Dingell, and members of 

the Committee. Thank you for holding this important hearing. My name is Paul Reid. I 

am the President of Reid Petroleum Corporation in Lockport, New York. My company 

owns 65 motor fuel outlets in Upstate New York and Northwest Pennsylvania and 

supplies gasoline and diesel fuel to 85 additional retail outlets in that area under longterm supply contracts. 

 I appear before the Committee representing the Society of Independent Gasoline 

Marketers of America (SIGMA) and the National Association of Convenience Stores 

(NACS). I serve as Chairman of SIGMA’s Legislative Committee and my company also 

is an active member of NACS. Together, SIGMA and NACS members sell 

approximately 80 percent of the gasoline and diesel fuel purchased by motorists in the 

United States each year. 

SIGMA is an association of more than 240 independent motor fuel marketers 

operating in all 50 states. Last year, SIGMA members sold more than 58 billion gallons 

of motor fuel, representing more than 30 percent of all motor fuels sold in the United 

States in 2005. SIGMA members supply more than 35,000 retail outlets across the nation 

and employ more than 350,000 workers nationwide. 

NACS is an international trade association composed of more than 2,200 retail 

member companies operating more than 100,000 stores. The convenience store industry 

as a whole sold 143.5 billion gallons of motor fuel in 2005 and employs 1.5 million 

workers across the nation. 

 In the United States, there are more than 160,000 retail outlets that sell motor fuel. 

Of these, less than 5 percent are owned and operated by a major integrated oil company. 

The overwhelming majority are independent marketers like me. As such, we do not 

refine gasoline or diesel fuel. Rather, we purchase fuels from producers and importers 

and sell these fuels to consumers. Because of our dependence on others in the supply 

chain, SIGMA and NACS members always seek policies that maximize both the overall 
175

amount of gasoline and diesel fuel supplies and the number of competing suppliers of 

these fuels. Independent marketers survive as the most cost-competitive segment of the 

motor fuels marketing industry because of ample supplies and diverse sources of supply. 

Without either, we would cease to be a competitive force in the market. 

 Gasoline supplies across the United States are tight, prices have been high, and the 

Energy Information Administration named 2006 the “Year of the Fuel Spec.” My 

testimony today will focus on each of these issues in turn and recommend policy 

solutions. It is very important to note, however, that there are no short-term fixes to any 

of these issues. The gasoline issues we collectively face are complex, have been building 

for at least two decades, and will not be resolved overnight. Therefore, we urge Congress 

and this Committee to focus your attention on options that will benefit consumers in the 

long-term. 

Gasoline Supply

 You have heard ample testimony from other witnesses at this hearing on the current 

state of gasoline supply. Gasoline supplies currently are tight, but adequate to meet 

consumer demand. There is not, in SIGMA’s and NACS’ opinion, a significant current 

shortfall in gasoline supplies. As a result, we have not supported recent calls for EPA to 

use the fuel specification waiver authority granted to the Agency under the Energy Policy 

Act of 2005 (EPAct). EPAct authorized such waivers to respond to “extreme and 

unusual fuel supply circumstances.” Such circumstances existed after Hurricanes Katrina 

and Rita, but they do not exist today. 

 This year, overall gasoline supplies have been constrained by several factors. First, 

the final phase-in of EPA’s Tier 2 gasoline sulfur standards took effect at the first of the 

year. It is more difficult for producers to make low sulfur gasoline and the gasoline yield 

from a barrel of oil is reduced when sulfur is removed. In addition, European refiners do 

not typically produce gasoline with the U.S. sulfur level, cutting off a possible source of 

supply relief. Second, in significant part because Congress did not enact MTBE liability 

protection as part of the Energy Policy Act last year, MTBE is being phased out as a 

gasoline additive this Spring. The removal of MTBE from the gasoline pool alone 

reduces overall supplies by approximately two percent. At the same time, many 

producers are replacing MTBE with ethanol to gain octane. In those areas of the country 

where reformulated gasoline (RFG) is required, the addition of ethanol to RFG requires a 

gasoline blendstock with lower volatility, further reducing a producer’s gasoline yield 

from a barrel of crude. 

 Thus, at a time when the public and many in Congress are calling for policies to 

increase domestic refining capacity and gasoline production, in reality the nation’s 

existing statutes and regulations are working against supply maximization. 

SIGMA and NACS believe that the unfortunate reality is that little can be done in 

the short-term to increase gasoline supplies. The existing domestic refineries are running 

at or near full capacity. To significantly increase gasoline supplies, either domestic 

producers must make more or the nation must import more. Some of the major domestic 

refiners have, over the past six months, announced close to 2 million barrels per day of 

capacity expansion at existing refineries. SIGMA and NACS welcome these 

announcements, but believe that federal regulatory reforms -- such as streamlined 

refinery permitting and new source review reform, as advanced by Chairman Barton and 

Senator Inhofe -- will be necessary to assure that this additional capacity comes on line as 

quickly as possible. Otherwise, we will have no choice but to continue to look overseas 

for our gasoline to meet increasing demand. 

Gasoline Prices

 Gasoline prices across the nation have approached or surpassed $3.00 per gallon 

over the past several weeks. It is important to remember that increased gasoline prices in 
176

the Spring of each year are not a new phenomenon. Since 2000, each Spring gasoline 

prices have risen an average of more than 30 cents per gallon because of the transition to 

more expensive “Summer” blends with enhanced ozone controls and in anticipation of 

the higher gasoline demand of the Summer driving season. 

 In the Spring of 2006, the upward pressure on gasoline prices has been exacerbated 

by several additional factors. First, crude oil prices have reached and stayed above $70 

per barrel for an extended period of time. This time last year, crude oil was trading for 

about $50 per barrel. Currently, more than 50 percent of the price of a gallon of gasoline 

flows directly from the price of the crude used to make the gasoline. Second, as noted 

above, gasoline supplies have been tight because of new sulfur regulations and the phaseout of MTBE, coupled with its replacement by ethanol. 

 Third, the price of ethanol has more than doubled over the past year. This would be 

inexplicable but for the fact that Congress itself created this market last year with a 

mandate requiring its use in ever-increasing quantities, tax credits to encourage its use, 

and import tariffs to protect domestic producers. Historically, ethanol prices tracked 

gasoline prices fairly closely. Currently, however, spot ethanol prices are approximately 

50 cents per gallon over regular gasoline. While ethanol typically comprises 10 percent 

or less of a gallon of gasoline (more for E85 blends), rising ethanol prices clearly have 

contributed to rising gasoline prices. 

 Finally, there is one factor that SIGMA and NACS assert has not been a 

predominate factor in increasing gasoline prices -- increased retailer margins. As former 

NACS Chairman Bill Douglass testified before this Committee during your post-Katrina 

hearings last year, increasing wholesale and retail gasoline prices do not translate into 

higher margins for gasoline retailers. In fact, the opposite is true. As wholesale gasoline 

prices rise, as they have for most of the past two months, retailer margins are reduced. In 

some cases, wholesale prices rise so rapidly that retailers actually have a negative margin 

on every gallon of gasoline they sell. 

 My company’s experience over the past two months has been consistent with Mr. 

Douglass’ testimony last year. On February 1, 2006, my average wholesale 87 octane 

regular gasoline cost was $2.40, including taxes, and my average retail price for this same 

grade was $2.52. As a result, my gross margin -- from which I must pay my employees, 

my rent, my utilities, my credit card fees, and all other operating costs -- was 12 cents per 

gallon. Compare that gross margin to April 24, 2006, when my wholesale cost was $2.97 

per gallon, including taxes, and my retail price was $3.03 per gallon, giving me a 6 cents 

per gallon gross profit. Once my expenses are deducted, my company was actually 

making more money on gasoline sales in February at $2.52 per gallon than we were in 

late April at $3.03 per gallon. I strongly suspect that my experience over the past two 

months is reflective of the experiences of nearly every gasoline retailer across the nation. 

 Again, there are no immediate public policy measures that this Committee and this 

Congress can take to reduce retail gasoline prices. The only near-term step SIGMA and 

NACS recommend that Congress undertake to exert downward pressure on retail 

gasoline prices would be to suspend temporarily the duty on imported ethanol. Ethanol 

prices have doubled over the past year. The market clearly is signaling high demand and 

a shortage in supply. Such a tariff suspension will attract additional ethanol supplies to 

those markets where it is most needed -- the East Coast, the Gulf Coast, and California. 

Such developments will put downward pressure on ethanol prices. 

Gasoline Specifications

 SIGMA and NACS want to thank this Committee, particularly Chairman Barton and 

Mr. Blunt, for authoring the boutique fuels and fuel waiver amendment that ultimately 

became Section 1541 of EPAct. For several years, we have appeared before this 

Committee and others in Congress warning of the negative supply, fungibility, and price 

impacts of boutique fuels. The enactment of your amendment has slowed the 
177

balkanization of the gasoline and diesel fuel markets and, hopefully, has started us on a 

path toward more harmonized fuel specifications. In addition, we congratulate you for 

your foresight in pushing for statutory authority for EPA to waive temporarily certain 

fuel specifications during unforeseeable supply emergencies -- authority that EPA 

exercised judiciously in response to Hurricanes Katrina and Rita. 

 As noted, the Energy Information Administration dubbed 2006 “The Year of the 

Fuel Specification.” In addition to the Federal gasoline sulfur program and the phase out 

of MTBE I mentioned earlier, there are several different new fuel programs that will hit 

the industry, and consumers, in 2006. First, EPAct’s renewable fuel standard takes effect 

this year and mandates that at least 4 billion gallons of ethanol and biodiesel be used by 

the nation’s refiners and importers. Second, EPA’s ultra low sulfur diesel fuel program 

will begin in June of this year. Finally, EPA has proposed a new mobile source air toxics 

regulation to reduce the benzene content of gasoline. Together, all of these programs 

have combined to produce a year in which fuel specifications will change dramatically -- 

posing challenges for refiners, the motor fuel distribution system, retailers, and 

consumers. These environmental controls do impose costs on industry -- costs that 

industry will inevitably seek to add to our selling price if competition permits us to do so. 

 The EPAct boutique fuel restrictions were a common-sense approach to the 

proliferation of boutique fuels. These provisions preserve environmental protections by 

providing states with ample authority to adopt cleaner fuels if a state’s air quality 

concerns warrant these fuels. But EPAct also seeks to impose order on this process by 

directing states towards existing fuels already in use in their region to restore fungibility, 

avert supply shortages, and reduce wholesale and retail price spikes. Federal 

coordination of, and guidance to the states on, gasoline and diesel fuel specifications was 

long overdue. 

 SIGMA and NACS do recommend that this Committee consider improvements to 

Section 1541 of EPAct. First, we urge Congress to adopt an amendment to the EPAct 

boutique fuels cap to gradually reduce the number of boutique fuels in use across the 

nation. The current cap does not reduce the number of boutique fuels -- it merely freezes 

their number at 2004 levels. The adoption of a mechanism to gradually lower this cap 

over time would complete the work started by Congress in EPAct. 

 Second, we encourage Congress to address the proliferation of state alternative 

boutique fuel mandates, such as ethanol and biodiesel mandates. These alternative fuel 

mandates are not covered by EPAct’s boutique fuels cap, but they should be. The same 

policy goals that led Congress to adopt the EPAct boutique fuels cap -- increased supply, 

increased fungibility, and decreased price volatility -- are being undermined by a new set 

of state fuel mandates. The ethanol and biodiesel industries have been granted by 

Congress a guaranteed demand for their product through EPAct’s Renewable Fuels 

Standard (RFS). SIGMA and NACS urge Congress to expand the EPAct boutique fuel 

cap to cover these new state mandates. 

 Third, we urge Congress to consider amending the fuel specification emergency 

supply waiver authority granted to EPA to include a “hold harmless” provision for states. 

After Katrina, we learned from several marketers that states were hesitant to waive state 

fuel specifications out of concern that at some point in the future EPA might force the 

states to offset the modest emissions increases that might occur during the short 

emergency waiver periods with further emissions controls on other sources. While the 

states’ concerns may seem unnecessary -- why would EPA grant flexibility in response to 

a natural disaster with one hand while taking it away with the other? -- such situations are 

not uncommon. Such a “hold harmless” provision would prevent state hesitation in 

following EPA’s emergency supply waivers and hasten the recovery of adequate fuel 

supplies after events like Katrina and Rita. 

 Finally, SIGMA and NACS are concerned about proposals on both sides of Capitol 

Hill to mandate a quick reduction in the number of fuels in use across the nation. Such 
178

so-called “fuel slate” proposals are, in our opinion, premature. EPAct directed DOE and 

EPA to study whether such a reduction in the number of fuels can be accomplished 

without reducing gasoline and diesel fuel supplies significantly. A report on this study is 

due to be delivered to Congress by mid-August 2006. SIGMA and NACS believe that 

enacting a fuel slate before the conclusions of this report are received is unwise and, 

perhaps, unnecessary. Everyone’s aim is to increase supplies and reduce price volatility. 

If EPA and DOE conclude that a fuel slate will have the opposite effect in their study, 

then it clearly is not a step that many in Congress will want to take. As a result, we 

suggest that Congress consider carefully whether the adoption of a fuel slate is 

appropriate at the current time. Once the study’s recommendations have been received, if 

the increased supply, environmental benefits, and product fungibility merits of a fuel slate 

are evident, then Congress can act at a future date. 

Alternative Fuels 

 In recent months, both the President and Congress have increased their focus on the 

alternative fuels market as a way to reduce our dependence on petroleum products. 

Currently, discussions have centered on the product E85, comprised of 85 percent ethanol 

and 15 percent gasoline. Members of SIGMA and NACS follow closely the development 

of new fuels because we operate a major portion of the refueling infrastructure for the 

American motorist. However, we are very concerned about proposals that would 

establish an alternative fuels mandate and caution Congress against such action. 

 In general, it would be premature for Congress to consider yet another alternative 

fuels mandate when the regulations to implement the renewable fuels standard of EPAct 

have not yet been written. We urge Congress to give the industry and the market the 

necessary time to adjust to new regulatory requirements and to take time to assess the 

market effects of such requirements before moving forward with additional mandates. 

Taking action without fully understanding the potential market effects of those actions 

would be irresponsible. 

With regard to E85 specifically, there are many facts that must be understood about 

the market viability of this product. First, E85 is truly an alternative fuel that can only be 

used in specially designed, flexible-fuel vehicles and less than five percent of the current 

motor vehicle fleet is comprised of these vehicles. While this percentage may rise in the 

future based on long-term plans of motor vehicle manufacturers and motorists’ behavior, 

there is no guarantee that consumer demand for these vehicles will remain constant or 

increase in the future. If demand does increase, the number of retailers offering E85 will 

likewise increase, consistent with market demand and without a government mandate. 

Second, the costs of infrastructure development for widespread marketing of E85 

will be significant. Because of E85’s corrosive properties, retailers selling E85 must 

dedicate a separate underground storage tank (UST) and dispenser system to the product. 

The most cost-effective option is to install a new UST and dispenser system, which can 

cost between $50,000 and $200,000 per location, depending upon the market in question. 

Since the majority (approximately 70 percent) of motor fuels retailers are small 

businesses with 10 or fewer stores, such costs cannot be easily absorbed. Furthermore, 

many facilities do not have the physical space/real estate to install an additional UST 

system. Since many facilities have only two gasoline USTs, one for regular unleaded and 

one for premium (mid-grade is provided by blending the two), a retailer would have to 

replace an existing UST system to accommodate E85, thereby greatly reducing the 

availability of gasoline. Such conversions will make economic sense to retailers once 

demand reaches a critical level, but forced conversions will serve only to penalize 

retailers who netted only 1-2 cents per gallon in pretax net profit in 2005. 

Third, while the domestic ethanol industry is increasing its production to satisfy both 

the renewable fuels standard (RFS) established in the EPAct and to replace the fuel 

additive MTBE, it is uncertain if this increase will be sufficient to meet current or future 
179

demand. In fact, the industry is already diverting supplies traditionally used in 

conventional gasoline markets to satisfy the demand in reformulated gasoline markets, an 

indication that supplies are not sufficiently plentiful to completely satisfy national 

demand. These distribution efforts are further complicated by the state renewable fuel 

mandates mentioned above, which lock supplies within geographic borders. In addition, 

EPA has not yet finalized rules to implement the RFS and the market effects of this 

program will not be known for years to come. Therefore, given the supply and 

distribution difficulties currently being experienced, as well as the uncertainty 

surrounding the newly enacted RFS, it would be irresponsible to enact yet another 

requirement for the use of ethanol, especially for a fuel that is not in strong demand, such 

as E85. 

Fourth, according to the Renewable Fuels Association, E85 contains approximately 

75 percent of the energy provided by regular unleaded gasoline. As a result, E85 offers 

motorists lower fuel economy and fewer “miles per dollar.” For marketers to offer E85 at 

a price competitive with regular gasoline, E85 must be priced at a level that reflects this 

decreased energy content. Given that recent wholesale ethanol prices have matched or 

exceeded those for gasoline, it has not been practical for E85 retailers in most markets to 

price their E85 below regular unleaded without losing substantial money on every gallon 

sold. Consequently, marketers of E85 have reported 70-80 percent reductions in sales 

volumes when E85 is priced equal to or above regular unleaded. 

Consequently, rather than pushing E85 to market via federal mandate, SIGMA and 

NACS would encourage Congress to consider alternative policy directions that would 

increase the production of E85 fuel and flexible fuel vehicles, reduce infrastructure 

enhancement costs to accommodate the product, improve consumer awareness and 

acceptance of E85, and increase consumer demand. This would be a much more marketoriented and consumer-friendly approach towards an alternative fuels market. 

* * * 

 SIGMA and NACS appreciate the opportunity to present this testimony. I am 

pleased to answer any questions you may have. 

MR. SHIMKUS. I would now like to recognize Mr. Shea, President 

and CEO of Buckeye Partners. Sir, your full statement is in the record 

and you have 7 minutes. 

MR. SHEA. Good morning, Mr. Chairman. My name is Bill Shea, I 

am President and CEO of Buckeye Partners, LP, one of the largest 

independent refined petroleum product pipeline systems in the U.S. I am 

appearing today on behalf of the Association of Oil Pipelines and the Oil 

Pipeline Members of API. I will summarize my testimony, and thank 

you for including my full statement in the committee’s hearing record. 

Over the coming months, a combination of trends will affect the 

functioning of oil pipelines in fulfilling their role in petroleum supply. 

First, long-term growth continues in the diversity of fuel types shippers 

seek to transport by pipeline. Growth in so-called boutique fuels. 

Second, this summer, the transition to ultra-low sulfur diesel fuels 

begins. 

Third, almost simultaneously, the Nation is entering a period of 

phaseout in the use of the oxygenate MTBE and the rapid growth in the 

use of ethanol as a gasoline fuel additive. 
180

Finally, we shouldn’t forget that experts predict a continuation of a 

trend in stronger and more frequent hurricanes, which could knock out 

the electric power on which key oil pipelines depend for operation. 

These elements in combination present a challenge to the petroleum 

supply system that the committee should monitor closely. 

Before discussing these trends, let me briefly describe the role of oil 

pipelines in the supply of petroleum fuels. Oil pipelines provide about 

two-thirds of the petroleum transportation in the U.S. Pipelines are the 

primary method of bulk transportation of petroleum over medium to long 

distances. 

Pipeline transportation has the dual advantages of efficiency and 

safety. About 17 percent of the annual ton-miles of our Nation’s freight 

are carried by petroleum pipelines at a cost of about 2 percent of the total 

U.S. freight bill. Deaths and injuries from petroleum pipeline 

transportation are rare, and the environmental impact of pipeline 

transportation is less than any of its alternatives. 

The Federal government regulates the rates charged by interstate oil 

pipelines. In fact, oil pipelines are the only part of the petroleum supply 

system that is under Federal rates regulation. The Federal Energy 

Regulatory Commission administers the Interstate Commerce Act to 

ensure that interstate oil pipelines function as common carriers and 

charge no more than the rates filed with FERC, which are typically 

limited to a few cents per gallon. 

Oil pipelines provide transportation services to their customers. 

These customers determine what to ship, where to ship and when to ship. 

The decision on how much to ship of each commodity and which 

destination is made by our shipper customers, not by the pipeline 

operator. 

Now, I would like to discuss the trends the committee should 

monitor over the coming months that could affect the role of oil pipelines 

in petroleum supply. 

First is boutique fuels. The proliferation of the types and grades of 

petroleum products pipelines must carry continues. Capacity of long 

haul pipelines as well as many regional pipelines actually declines as the 

number of products handled increases. These unique products need more 

system space in both the pipeline and in tanks, so a combination of 

increased total volume moved and the operational effects of grade 

proliferation have used up what was excess capacity for product in the 

early 1990s. 

Federal policies and State and local bans on the use of MTBE have 

led shippers to phase out MTBE as a fuel additive. As a result, the 

transition is underway to ethanol as a gasoline additive to meet local air 

quality specifications. Ethanol is not easily transported via pipelines, and 
181

as a result, nonpipeline transportation modes are being called upon to 

supply significantly larger amounts of ethanol than previously required. 

Solutions that will address or could address what pipelines carry ethanol 

are under active study by the industry and others, but at the present time, 

modes of transportation other than pipelines will carry this still relatively 

small but growing volume of ethanol in the U.S. fuel mix. 

Another transition that will take place this summer will bring 15 

parts per million sulfur diesel fuel, ULSD, into the U.S. fuel distribution 

infrastructure under rules adopted by the Environmental Protection 

Agency. Pipeline operators will continue to carry ULSD in pipeline 

systems in batch mode with higher sulfur fuels, including heating oil and 

high sulfur diesel up to 5,000 ppm and jet fuel up to 3,000 ppm sulfur. 

Experience shows that sulfur contamination of ULSD increases at 

successively distant points in the pipeline system and especially after 

transfers through tankage into other pipelines. Recognizing these 

problems, EPA has agreed to a transition period and an extension until 

October 15, 2006, the time by which fuels sold at the retail station must 

meet the 15 ppm requirement. 

AOPL and API welcome the EPA’s decision. Affected oil pipeline 

operators are now making the investments and preparing for the 

transition period that will begin in June. We will use this period to gain 

actual experience in transporting ULSD and use that experience to solve 

problems that may arise. 

Experts tell us that we are in a period of significant risk of major 

hurricanes affecting the U.S. Gulf Coast, where refining centers and 

pipelines are vulnerable to storm damage and loss of electric power. In 

2005, we all had plenty of experience with the disruption such hurricanes 

can cause. 

Lessons of that experience are, first, restoration of the grid electric 

power is critical to the resumption of pipeline service and should receive 

the highest priority during these events. The Federal government should 

be doing everything in its power to assist the electric utility industry 

generally and utilities individually to harden facilities to overcome 

threats and recover rapidly when power is lost. 

Secondly, the decision by the EPA to act quickly to waive 

temporarily area-specific fuel requirements under the Clean Air Act 

allowed the petroleum distribution system to make the most effective use 

of existing supplies. 

Oil pipelines are another component of the U.S. energy infrastructure 

that will require expansion in coming years to meet the needs of 

consumers. A supportive public policy will be required to ensure that oil 

pipeline expansions are made when needed. Elements of such a policy 

should include coordinated Federal, State, and local permitting to allow 
182

operators to comply with environmental regulations and requirements in 

a timely way. 

The Federal Energy Regulatory Commission should continue the 

recent trend to market based and adequately indexed oil pipeline rate 

treatment and needs to act promptly on requests for rates that support 

specific expansion projects. 

AOPL looks forward to working closely with this committee, the 

FERC, and the DOT to ensure that the oil pipeline industry is able to 

meet the challenges of the future. 

Thank you, Mr. Chairman. 

CHAIRMAN BARTON. [Presiding.] Thank you, Mr. Shea. 

[The prepared statement of William H. Shea follows:] 

PREPARED STATEMENT OF WILLIAM H. SHEA, PRESIDENT & CEO, BUCKEYE PARTNERS, LP,

ON BEHALF OF ASSOCIATION OF OIL PIPELINES

The principal points in this testimony are as follows: 

Over the coming months, a combination of trends will affect the functioning of oil 

pipelines in fulfilling their role in petroleum supply. 

• First, a long-term growth continues in the diversity of fuel types shippers seek 

to transport by pipeline –so-called “boutique” fuels. Proliferation of boutique 

fuels tends to reduce available pipeline capacity. 

• Second, this summer, the nation is entering a period of phase out in use of the 

oxygenate MTBE and rapid growth in the use of ethanol as a gasoline fuel 

additive. Properties of ethanol sharply limit the ability of the current pipeline 

system to carry ethanol fuel mixtures, so other modes of petroleum 

transportation must be relied on to deliver the growing volumes of ethanol that 

will be needed. 

• Third, almost simultaneously, an historic transition to ultra low sulfur diesel 

(ULSD) fuels begins. EPA has agreed to a transition period and an extension 

until October 15, 2006, the time by which fuel sold at retail must meet the 15 

ppm ULSD requirement. AOPL and API welcome EPA’s decision. The 

transition is needed to allow operators to gain needed experience with ULSD in 

their systems. Operators are now making the investments and preparing for the 

transition period that will begin in June. 

• And finally, we should not forget that experts predict a continuation of a trend 

in stronger and more frequent hurricanes, which can knock out the electric 

power on which key oil pipelines and oil refineries depend for operation. The 

federal government should be doing everything in its power to assist the 

electric utility industry generally and utilities individually to harden facilities to 

overcome threats and recover rapidly where power is lost despite all best 

efforts. 

These elements in combination present a challenge to the petroleum supply system 

that the Committee should monitor closely. 

Oil pipelines are another component of the U.S. energy infrastructure that will 

require expansion in coming years to meet the needs of consumers. Needed expansions 

would be facilitated by coordinated federal, state and local permitting to allow operators 

to comply with environmental requirements in a timely way. FERC continue market-
183

based and adequately-indexed oil pipeline rate treatment ands needs to act promptly on 

oil pipeline rate requests made to support specific expansion projects. 

Introduction

My name is Bill Shea. I am President and CEO of Buckeye Partners, LP, one of the 

largest independent refined petroleum products pipeline systems in the United States in 

terms of volumes delivered, with approximately 5,350 miles of pipeline. Buckeye also 

owns and operates 44 refined petroleum products terminals with an aggregate storage 

capacity of approximately 17.2 million barrels in Illinois, Indiana, Massachusetts, 

Michigan, Missouri, New York, Ohio and Pennsylvania, and operates and maintains 

approximately 2,000 miles of pipeline under agreements with major oil and chemical 

companies. 

I am appearing today on behalf of the Association of Oil Pipe Lines and the oil 

pipeline members of API. AOPL is a 501 (c) (6) non-profit trade association of interstate 

oil pipelines, which includes pipeline transporters of crude oil, refined petroleum 

products, liquefied gases and anhydrous ammonia. Our Association’s 49 members 

transport about 85 percent of the crude oil and refined petroleum products delivered by 

pipelines. AOPL members include pipelines that transport crude oil from production and 

import points to refineries and pipelines that transport the refined products produced in 

those refineries to end users and distributors (retailers, wholesalers, airports, railroads, 

etc.). AOPL’s membership is comprised of domestic U.S. oil pipeline companies and 

Canadian oil pipeline companies. API represents over 400 companies involved in all 

aspects of the oil and natural gas industry, including exploration, production, 

transportation, refining and marketing. Together, these two organizations represent the 

vast majority of the U.S. pipeline transporters of petroleum products. 

My testimony will cover the role played by oil pipelines in petroleum supply, 

describe government oversight of that role and sketch the challenges faced by the 

industry in providing for our nation’s petroleum transportation needs, with emphasis on 

the coming months. 

The Role of Oil Pipelines in the U.S.

Oil pipelines provide about 2/3 of the petroleum transportation in the U.S., measured 

in barrel miles. Unlike natural gas, which can only be transported by pipeline, 

alternatives to petroleum pipeline transportation exist and include tankers, barges, rail 

and trucks. However, each of these alternatives has significant limitations, and, as a 

result, pipelines are the primary method of bulk transportation of petroleum over medium 

to long distances. It is difficult to imagine how our transportation network, which is 95% 

powered by petroleum, could operate without oil pipelines. 

Pipeline transportation has dual advantages of efficiency and safety. About 17% of 

the annual ton-miles of our nation’s freight are carried by petroleum pipelines, at a cost of 

about 2% of the total U.S. freight bill. Pipelines share with tanker vessels the safest 

record in petroleum transportation, safer than barge, rail or truck. Deaths and injuries 

from petroleum pipeline transportation are rare. The environmental impact of pipeline 

transportation is less than any of its alternatives. Oil pipelines deliver petroleum safely to 

nearly every region of the U.S. for a few pennies per gallon. A typical rate to transport 

petroleum product from the Gulf Coast to the Southeast is about 2 cents per gallon, to the 

Northeast is about 3 cents per gallon and to Chicago is about 2.5 cents per gallon. 

Economic Regulation of Oil Pipelines

The federal government regulates the economics of interstate oil pipelines – in fact 

oil pipelines are the only part of the petroleum supply system that is under federal 

economic regulation. 
184

The Federal Energy Regulatory Commission administers the provisions of the 

Interstate Commerce Act to ensure that interstate oil pipelines: 

• Function as common carrier providers of transportation to any qualified 

shipper; 

• Charge no more than publicly available rates filed in advance with the FERC, 

which are typically limited to a few cents per gallon; 

• Assign space on the pipeline based on monthly nominations from all interested 

shippers and prorate access to that space among all applicants in a posted, nondiscriminatory way when the line is full; 

• Exercise no undue discrimination among shippers; 

• Maintain confidentiality of shipper records and not share information of any 

shipper with any other shipper; and 

• File annual reports on pipeline company income and cost data with the FERC 

that are available to the public. 

Oil pipelines provide transportation services and charge fees that do not fluctuate 

with the price of the products that are transported. Because oil pipelines do not own the 

products that they transport, they do not benefit from any product price increases. In fact, 

refined products pipelines are generally adversely impacted by high commodity prices, as 

higher prices increase power costs and lower consumption levels. Even when an oil 

pipeline is an affiliate of a major integrated oil company, the Interstate Commerce Act 

and FERC oversight establish a wall between the pipeline portion of the firm and the 

owners’ other operations. 

Oil Pipeline Rates

Typical oil pipeline rates range from 1 to 5 cents per gallon and are independent of 

the value of the oil being transported. Thus the revenue received by the oil pipeline is the 

same few cents per gallon, regardless of the sale price of that gallon, whether that sale 

price is $1.00, $2.00, $3.00 or more. 

Oil pipeline rates are posted in FERC-filed tariffs that normally take effect after 30 

days and are subject to protest during that period. Oil pipeline rate changes are justified 

using one of four rate mechanisms: indexation, a settlement rate agreed to by all affected 

shippers, market-basis or cost-of-service. In calendar years 2003 and 2004, there were 

1096 oil pipeline tariff rate filings. Of those, 937 (88%) were index-based, and 159 were 

justified on another basis. Of the 159 others, roughly 49% were market-based, 30% were 

settlement rates, 14% resulted from pervious settlements and 7% were cost of service 

based. 

Most oil pipeline tariffs cover a specific group of products. For instance, a 

“Products Tariff” would apply the same tariff rate to gasoline, diesel, jet fuel and 

kerosene product shipments between the same points. For instance, Colonial’s tariff 

defines “Petroleum Products” to mean “gasolines and petroleum oil distillates”, which 

would include jet fuel, diesel fuel and heating oil. There are also crude oil tariffs, 

propane tariffs, etc. 

Pipeline tariffs do not change frequently and, unlike commodity prices, are not 

adjusted as a result of short-term market circumstances. Because nearly 90% of tariffs 

are indexed, most adjustments are done on an annual basis and occur on July 1 of each 

year when the new FERC index takes effect. Even market based rate changes occur 

infrequently, with some changes actually reducing rate to meet competitive market 

conditions. 

 Pipelines also file rules and regulations tariffs that set forth the pipeline’s conditions 

of service. These filings explain such things as the pipeline’s tendering process, 

minimum batch size, allocation policy and product specifications. Such rules and 

regulations must be administered in a non-discriminatory manner. A system of checks 
185

and balances on oil pipeline behavior operates through the ability of any shipper to 

protest any alleged deviation from FERC requirements. 

Oil pipelines are providers of transportation services for generally fixed fees for our 

customers, who determine what to ship, where to ship or when to ship. The decision on 

how much to ship of each commodity and to which destination is made by our shipper 

customers. Pipelines then ship multiple products on a regular cycle of products. Normal 

practice is to provide transportation for all products to all destinations on a regular cycle. 

 

Oil Pipeline Revenues

The oil pipeline business is volume driven, and the incentive for pipelines from both 

a revenue and customer relations standpoint is to transport as much product as possible. 

Any inference that oil pipeline operators are purposely contributing to product shortages 

by reducing or shutting down capacity to cause higher product prices is simply false. In 

fact, the oil pipeline industry’s drive to transport more volumes contributes to market 

liquidity, which on the margin should contribute to more competition and lower prices. 

The extraordinary efforts of our member companies to return their systems to service as 

fast as possible in 2005 in the aftermath of hurricanes Katrina and Rita provide ample 

evidence of the pipeline industry’s motivation and commitment to business continuity 

and recognition of the critically important role played by pipelines in enabling adequate 

supplies of petroleum products to reach destination markets. 

The oil pipeline industry is not a large generator of revenue by comparison with 

other sectors of U.S. industry, including other sectors of the energy industry. For 2004 

(the most recent data available) the entire FERC-regulated oil pipeline industry received 

gross revenue of $8.0 billion to deliver 13.4 billion barrels of crude oil and refined 

petroleum products for its various customers. A single company’s revenue in many other 

sectors of the economy would far exceed the oil pipeline industry’s revenue as a whole. 

 

Oil pipeline industry structure

Pipeline ownership is diverse, with several forms of ownership as detailed below: 

• Major integrated oil companies (for example: ExxonMobil Pipeline Company, 

Marathon Pipe Line LLC, Chevron Pipeline Company, Shell Pipeline 

Company); 

• Joint venture pipelines owned by shippers and other pipeline companies (for 

example: Colonial, Explorer, Trans-Alaska Pipeline, Capline); and 

• Independents engaged primarily in oil pipeline transportation (Buckeye, 

TEPPCO, KinderMorgan, Enbridge, Plains All American). 

A substantial percentage of the pipelines are independently owned and operated, 

with the current trend towards increased independent ownership of oil pipeline assets. 

Major integrated oil company ownership of oil pipelines has been steadily decreasing in 

recent years, with major oil companies now representing a minority of oil pipeline asset 

ownership. 

Current pipeline-related issues in petroleum supply

Over the coming months, a combination of trends will affect the functioning of oil 

pipelines in fulfilling their role in petroleum supply. 

• First, a long-term growth continues in the diversity of fuel types shippers seek 

to transport by pipeline – growth in so-called boutique fuels. 

• Second, the nation is entering a period of phase out in use of the oxygenate 

methyl tertiary butyl ether and rapid growth in the use of ethanol as a gasoline 

fuel additive. 

• Third, this summer, an historic transition to ultra low sulfur diesel fuels begins 
186

• And finally, we should not forget that experts predict a continuation of a trend 

in stronger and more frequent hurricanes, which can knock out the electric 

power on which key oil pipelines and oil refineries depend for operation. 

These elements in combination present a challenge to the petroleum supply system 

that the Committee should monitor closely. I’d like to briefly discuss each in turn. 

Boutique fuels

The proliferation of types and grades of refined petroleum products shippers ask 

pipelines to carry continues. This growth in so-called “ boutique” fuels puts increasing 

pressure on pipeline operations and by itself has absorbed storage and transmission 

capacity. Pipeline companies ship petroleum products in batches, with each batch 

distinct. Before 1970, when most of the US pipeline system was designed, a pipeline 

operator typically moved of the order of 10 distinct products. The Clean Air Act of 1990, 

as implemented by EPA and various states, ultimately led to the numerous kinds of 

gasoline in demand today. Gasoline is only part of the story. Fuels oils must also be 

segregated based on sulfur content (an EPA requirement) and dyed for specific markets 

(tax collection and EPA requirements). Jet fuel also requires segregated batches to meet 

different military and domestic aviation specifications. Typical large refined products 

pipelines today have of the order of 50 products regularly moving on each system over a 

shipping cycle. However, those same pipelines also have as many as a total of 100 – 120 

product grades for which they may occasionally provide transportation services. Overall, 

the federal government requirements drive the majority of segregated batches, followed 

by customer specifications, and individual state or city requirements. 

Capacity in long-haul pipelines, as well as many regional pipelines, declines as the 

number of products handled increases. The unique products need more system space in 

both the pipeline and in tanks, so a combination of increased total volume moved and the 

operational effects of boutique fuels proliferation have used up what was excess capacity 

for product in the early 1990s. For example, some tanks must be completely emptied of 

one seasonal product before the next seasonal product can be stored, or specialized 

products may only use a portion of a tank, taking that tank out of service while that 

segregated product is moving through or temporarily stored. These factors reduce overall 

capacity. 

Capacity is also reduced from the mixing that occurs at the interface of adjacent 

product grade batches during any transportation. This volume can sometimes be mixed 

into one or both of the adjacent batches and still meet the product specifications. At other 

times this trans-mix must be removed from the pipeline system prior to delivery to the 

customer. Thus, less than 100% of some products reach their destination. If the product 

is unique and is transported in a large pipeline, this downgrade can be significant. 

Ethanol and MTBE

Federal policies and state and local bans on the use in gasoline of the oxygenate 

methyl tertiary butyl ether have led shippers to phase out MTBE as a fuel additive. As a 

result, a transition is underway to the use of ethanol as a gasoline additive to meet local 

air quality specifications. This transition produces complications for gasoline supply by 

pipeline. The U.S. industry has blended ethanol in gasoline for decades. However, a 

significant challenge to use of ethanol is that it is not easily transportable through existing 

pipeline systems. As a result, ethanol is commonly transported by means other than 

pipeline (truck, barge or rail) to terminals at the end of a pipeline and mixed with 

gasoline before final delivery for consumption. These non-pipeline transportation modes 

are being called upon to supply significantly larger amounts of ethanol than previously 

required. Ethanol is not easily transported via pipelines for several reasons. First, ethanol 

has a tremendous affinity to absorb water. Water accumulation in pipelines is a normal 
187

occurrence. In most cases water enters the system through terminal and refinery tank 

roofs or can be dissolved in fuels during refinery processes. Transportation by pipeline 

may result in sufficient water absorption to render ethanol unusable as a transportation 

fuel. If a gasoline-ethanol mixture is shipped in a pipeline, the water may strip some of 

the ethanol out, resulting in sub-octane fuel. Once an ethanol blend phase-separates it is 

extremely difficult and usually impossible to re-blend. In many cases the ethanol-water 

bottoms must be disposed of in accordance with hazardous waste regulations. 

Second, ethanol can dissolve and carry impurities that are present inside multiproduct pipeline systems, making it harmful to motor vehicle engines when blended in 

gasoline. 

Finally, ethanol is corrosive and may adversely affect pipeline parts. There is some 

evidence that ethanol in high concentrations can lead to internal stress corrosion cracking 

of the pipeline walls, which is hard to detect and manage. This may be accelerated at 

weld joints or “hard spots” where the steel metallurgy has been altered. 

Solutions that will address problems with pipelines carrying ethanol are under active 

study by the industry and others, but at the present time, modes of transportation other 

than pipelines will carry the still relatively small but growing volumes of ethanol in the 

US fuel mix. 

Ultra low sulfur diesel

Another transition that will take place this summer will bring significant volumes of 

15 parts per million (ppm) sulfur -- ultra low sulfur -- diesel fuel (ULSD) into the US fuel 

distribution infrastructure under rules adopted by the Environmental Protection Agency. 

Products pipeline operators will continue to carry ULSD in pipeline systems in batch 

mode with higher sulfur fuels, including heating oil and exempted high sulfur diesel up to 

5000 ppm sulfur and jet fuel up to 3000 ppm sulfur. The potential for contamination of 

ULSD during pipeline transportation requires attention and has been the subject of much 

study and investment in the oil pipeline industry. Inability to deliver on-specification 

ULSD product could lead to significant supply issues in some markets when EPA 

requirements go into effect. Diesel fuel is the nation’s primary commercial fuel for 

getting goods to market -- trucks, trains and coastal marine vessels all rely on diesel fuel 

to operate. The ability of specific pipelines to deliver ULSD is impacted by the sulfur 

level of tendered product, system configuration, and the difficulty, given the lack of 

operating experience, of preventing ULSD contamination. The experience we have 

shows that sulfur contamination of ULSD increases at successively distant points in the 

pipeline system, and especially after transfers through tankage and to other pipelines. 

The oil pipeline industry is aligned with the rest of the petroleum industry in 

supporting the 15 ppm maximum sulfur standard for motor fuels that the President has 

recommended and the EPA has promulgated. We have no doubt that this standard is 

achievable. Petroleum products pipeline operators will ultimately be able to handle and 

deliver on-specification ULSD in routine operations. 

However, currently operators lack sufficient experience moving ULSD to guarantee 

that ULSD can be delivered to all markets on specification in the time frames 

contemplated by the EPA. Limited experience by pipeline operators to date with ULSD 

shows that it will require significant effort and investment to prevent sulfur 

contamination of ULSD in pipeline systems that of necessity must transport other high 

sulfur products as well. Moreover, this experience is currently not extensive enough to 

allow the causes of such contamination to be sufficiently characterized to be able to 

effectively eliminate it in the short term. 

The oil pipeline industry is confident that the problems we currently see with sulfur 

contamination can be solved, given real experience transporting ULSD in our systems 

and adequate time to implement the indicated changes to our systems. However, without 
188

the benefit of the knowledge that comes from actual experience with ULSD, we can not 

know what actions are needed to solve these problems. 

Accordingly, AOPL asked EPA to allow flexibility in the supply and distribution 

system early in the program. Early flexibility will enable product to be supplied while 

the system resolves technical and operational difficulties that are likely to arise. For 

instance, at a minimum, storage tanks and other system assets must be flushed. Beyond 

that, the new fuel regulations will require new operating protocols throughout the system 

that cannot be perfected in advance of real world experience with 15 ppm diesel. 

Flexibility is reasonable when the nation is implementing an unprecedented and 

substantial change in its fuels regulations. It is essential when the nation’s fuel supply is 

at issue. 

In response, EPA agreed, to establish a transition period and during the transition 

period, to raise to 22 ppm the specification for compliant ULSD at retail. EPA also 

extended for 6 weeks, until October 15, 2006, the time by which fuel sold at retail must 

meet the 15 ppm requirement to within the agreed testing tolerance. AOPL welcomes 

EPA’s decision to implement a six-week extension to the time period for the distribution 

system to transition to 15 ppm fuel. 

Affected oil pipeline operators are now making the investments and preparing for 

the transition period that will begin in June. We are preparing to react quickly to 

experience during the transition period with transportation of actual volumes of ULSD. 

More Hurricanes like Katrina and Rita

Finally, experts tell us that we are in a period of significant risk of major hurricanes 

affecting the US Gulf Coast where refining centers and pipelines are vulnerable to storm 

damage and loss of electric power. In 2005 we all had plenty of experience with the 

disruptions such hurricanes can cause. In the aftermath of the disruptions caused by 

hurricanes Katrina and Rita, the following conclusions about petroleum supply that are 

relevant are fairly clear: 

• Restoration of grid electric power is critical to the resumption of pipeline 

service and should receive the highest priority during these events. The federal 

government should be doing everything in its power to assist the electric utility 

industry generally and utilities individually to enhance the ability of utilities to 

overcome threats and recover rapidly where power is lost despite all best 

efforts. 

• EPA needs to act quickly and decisively to waive area specific fuel 

requirements under the Clean Air Act in the widest possible area during 

emergencies. This allows the petroleum distribution system to make the most 

effective use of existing supplies. Following EPA’s decisions in 2005, several 

refined petroleum product pipelines serving the Midwest immediately began 

receiving nominations of alternative gasolines to move north and east. This was 

an important action that was taken in a timely manner. 

• Hoarding and panic buying exacerbate petroleum fuel shortages. Officials need 

to be active early and continuously to discourage, to the extent possible, these 

reactions. In addition, dissemination of false information by the media can 

make hoarding and panic buying worse and generally has a negative impact on 

markets. 

Oil Pipeline Capacity

While the cost of transporting oil by pipeline has a minimal impact on consumer 

prices, access to adequate pipeline capacity can make a substantial difference in 

consumer prices. As the aftermath of hurricanes Katrina and Rita demonstrated, when 

adequate pipeline capacity is not available, shortages, price increases and price volatility 

for petroleum consumers is the result. Even before hurricanes Katrina and Rita, we saw 
189

what happens when pipelines are not available, for example, in Arizona in 2003 and in 

the Midwest in 2002 when key pipelines were out of service. 

The U.S. oil pipeline infrastructure is a large system created over many years. 

Volumes moving on those pipelines grow only in response to increases in oil demand, 

that is, a few percent a year. Volumes seeking a pipeline can sometimes also increase or 

decrease due to changes in supply patterns, such as refinery closures, new crude supplies 

and other significant changes. Additions to capacity often present large hurdles to 

individual companies in terms of capital requirements and perhaps more importantly, 

acquisition of right of way and required permitting. The current system, constructed 

principally in the 1950s and 1960s with excess capacity for that time, is quite close to full 

capacity at today’s levels of domestic petroleum consumption, and pipelines have had to 

adjust to a just-in-time inventory mentality, boutique fuels and to seasonal fuel switches 

that put additional strain on the system. 

Recently, demand for petroleum products has been increasing, and that trend is 

expected to continue. In recent years, capacity for some pipelines has become 

constrained, particularly during the summer driving and winter heating seasons. These 

constraints, which affect both gasoline and distillates, will become more protracted as 

consumer demand continues to grow. Although alternative transportation such as longdistance trucking is an option for shippers in certain markets, those alternatives are 

typically less attractive than reliable, efficient, cost-effective pipeline service. Apart from 

the benefits to shippers and refiners, expansion of pipelines would provide increased 

stability and reliability to the nation’s overall energy supply. As demonstrated by the 

effects of Hurricanes Katrina and Rita, it has become increasingly clear that the nation’s 

energy supplies are subject to disruptions that can pose serious upsets to the national 

economy and security. The availability of additional pipeline capacity would provide 

healthy redundancy to the system and thus an additional measure of protection from 

disruptions that could otherwise lead to product price spikes and spot outages similar to 

those witnessed during and after the hurricanes. Pipeline expansion will involve right-ofway acquisition, permitting and capital investment issues, all of which could be affected 

by federal actions. 

Oil pipelines are another component of the U.S. energy infrastructure that will 

require expansion in coming years to meet the needs of consumers. A supportive public 

policy will be required to ensure that oil pipeline expansions are made when needed. 

Elements of such a policy should include coordinated federal, state and local permitting 

to allow operators to comply with environmental requirements in a timely way. The 

Federal Energy Regulatory Commission should continue the recent trend to market-based 

and adequately-indexed oil pipeline rate treatment. Finally, FERC needs to act promptly 

on oil pipeline rate requests made to support specific expansion projects. 

Summary

To summarize, the amount charged to transport oil by pipeline is limited by either 

regulation or market forces and is quite small in relation to the value of oil itself. The 

cost of transporting oil and petroleum products by pipeline has a minimal, if any, impact 

on consumer prices of petroleum products. In coming months, a number of factors 

affecting oil pipeline operations and related to fuel specifications deserve the attention of 

public policymakers. These include the continuing growth in boutique fuels and the 

transition to ethanol and ultra low sulfur diesel, as well as the need to prepare for more 

hurricanes in the US Gulf Coast. The oil pipeline industry is focused on these issues and 

is preparing to address them appropriately. 

We appreciate the opportunity to share our plans and views on these important 

issues with you. I will be glad to try to answer any of your questions, and AOPL and API 

would be pleased to work with the Committee on any follow up from this hearing. 
190

CHAIRMAN BARTON. We now want to hear from Mr. Conley, with 

the truckers. 

MR. CONLEY. Good morning, Mr. Chairman, and members of the 

committee. My name is John Conley, and I am President of National 

Tank Truck Carriers. I want to begin by thanking you, Mr. Chairman, 

for holding this hearing and for your kind invitation to my association to 

attend. 

National Tank Truck Carriers is a trade association comprised of 

approximately 200 trucking companies, the majority of which specialize 

in bulk transportation of hazardous products, such as gasoline, diesel 

fuel, and ethanol throughout continental North America. The interest of 

our membership in this matter is substantial. The National Tank Truck 

Carriers is affiliated with the American Trucking Associations. 

The Nation’s tank truck industry is a key link in the distribution 

chain that provides our economy and our citizens the petroleum products 

that allow us to maintain and improve our mobile quality of life. To 

borrow from a well-known saying, “If your car has gasoline, your farm 

tractor has diesel fuel, and your home is warmed by fuel oil, a tank truck 

brought it.” 

NTTC was asked to discuss what impact increased use of ethanol is 

having on my industry’s availability to continue providing gasoline and 

other products to service stations. The short answer is that it has 

presented additional distribution challenges, but the tank truck industry 

does have the capacity and the management skills to meet those 

challenges. 

The increased movement of ethanol has added to the logistical 

balancing act our fleets already have to do to meet the almost irrational 

petroleum smorgasbord of what products can be delivered to any 

political jurisdiction on any given day. These changes often take place 

during periods when seasonal peaks are in demand. A consistent 

national fuel policy for the country would make the distribution of these 

products less cumbersome and less costly. 

The increased demand for the transportation of ethanol at a time 

when our trucks are operating at capacity has exasperated the situation. 

However, I am again stating with confidence that our drivers and fleets 

will meet the demand. As Mr. Shea observed, ethanol does not move by 

pipeline. Our trucks are picking up ethanol directly from suppliers or 

transloading the product from railcars or barges. We are able to load 

much faster from barges, contrary to those instances where we have 

found our drivers sometimes have to wait in long lines to transfer from 

railcars. 

In trucking, time is money, and time waiting is money not well spent. 

I am sure we will be able to work with our rail partners to devise quicker 
191

ethanol transfer procedures. Obviously, as rivers freeze and the 

inevitable rail dislocations occur, more demand will exist for tank truck 

transportation from ethanol producers to our blending facilities. 

At this point, I would like to anticipate two questions and state that 

National Tank Truck Carriers would not support increasing hours of 

service or raising weight limits in existing trailers as short-term solutions 

to gasoline delivery disruptions. In our industry, everything takes a 

second seat to safety. 

As tank truck carriers, we do not set the price of fuel or determine 

what fuels will be produced. However, we are impacted by the almost 

daily changes in these two key factors. It is not uncommon for our 

drivers to be sitting in line at one terminal only to be contacted by 

dispatch and told to travel to another location because price at the 

terminal has dropped. This shopping for gas is another unproductive use 

of tank truck industry manpower and equipment, but it is a fact of life. It 

is controlled by our customers. 

As supplies of various blends ebb and flow from one site to another, 

our trucks also chase supply. We are finding that those trucks often have 

to go longer distances to load ethanol or other products because of supply 

and demand changes by producers and retailers. 

While ultra low sulfur diesel is not a subject of this hearing, 

widespread introduction of that latest new fuel will further restrict 

driving equipment capacity, especially if ULSD shippers or retailers 

decide we will have to provide dedicated equipment. 

I want to briefly describe how we transport ethanol gasoline and 

other petroleum products. Trailers for these products are built to 

specifications developed by the Department of Transportation. Our 

drivers must hold a commercial driver’s license with a hazardous 

material endorsement and a cargo tank endorsement. To qualify for the 

HM endorsement, the drivers must undergo a background check, 

including fingerprinting. Rethinking the whole approach to HM 

endorsements would enable us to hire drivers and put them to work more 

quickly. I know that is an issue for another day, yet I feel it is worthy of 

your attention. 

Tank trailers used to haul gasoline also can and are being used to 

transport ethanol. In the most productive situation, a carrier can haul 

ethanol into a petroleum trailer terminal and haul gasoline back from the 

terminal to a retailer. Hopefully, we will get to the point where we can 

see a more efficient utilization of our fleets in this way. 

In other cases, carriers are diverting trailers and drivers from 

gasoline service to handle ethanol transportation. But, again, we are 

meeting that demand as well. 
192

We even have some carriers who do not transport gasoline, but have 

become involved in ethanol. This potential additional capacity is one 

factor that makes me confident in saying we will meet the distribution 

challenges we face today. 

Thank you for your attention and, for me, the personal honor of 

appearing before you. Thank you. 

CHAIRMAN BARTON. Thank you, Mr. Conley. 

[The prepared statement of John Conley follows:] 

PREPARED STATEMENT OF JOHN CONLEY, PRESIDENT, NATIONAL TANK TRUCK CARRIERS,

INC. 

Mr. Chairman and members of the Committee. 

Good morning. My name is John Conley, and I am the president of the National 

Tank Truck Carriers (NTTC). I want to begin by thanking you, Mr. Chairman, for 

holding this hearing and for your kind invitation to my association to participate. 

National Tank Truck Carriers is a trade association comprised of approximately 200 

trucking companies, the majority of which specialize in bulk transportation of hazardous 

products, such as gasoline, diesel fuel, and ethanol throughout continental North 

America. The interest of our membership in this matter is substantial. In addition to the 

common carriers NTTC represents, petroleum products also are hauled by private truck 

fleets operated by the major oil companies and by petroleum marketers. NTTC is 

affiliated with the American Trucking Associations. 

The Nation’s tank truck industry is a key link in the distribution chain that provides 

our economy and our citizens the petroleum products that allow us to maintain and 

improve our mobile quality of life. To borrow from a well knowing saying, “If your car 

has gasoline, your farm tractor has diesel fuel, and your home is warmed by fuel oil, a 

tank truck brought it.” 

NTTC was asked to discuss what impact increased use of ethanol is having on my 

industry’s ability to continue providing gasoline and other products to service stations. 

The short answer is that it has presented additional distribution challenges but that the 

tank truck industry does have the capacity and management skills to meet those 

challenges. 

The increased movement of ethanol has added to the logistical balancing act our 

fleets already have to do to try to meet the almost irrational petroleum smorgasbord of 

what products can be delivered to what political jurisdiction on what day. These changes 

often take place during periods of seasonal peaks in demand. Our entire petroleum 

distribution system would be less cumbersome and less costly if this county had a 

realistic and consistent national fuel policy. The addition of increased demand for ethanol 

transportation at a time when our trucks are being used to capacity has exacerbated the 

situation. However, I again state with confidence that our drivers and fleets will meet the 

demand. 

As this committee is aware, ethanol does not move by pipeline. Our trucks are 

picking ethanol up directly from suppliers or are transloading the product from railcars or 

barges. We are able to load quicker from barges and have found that our drivers do 

sometimes have to wait in long lines to transfer from railcars. In trucking, time is money 

and time waiting is money not well spent. I am sure we will be able to work with our rail 

partners to devise quicker ethanol transfer procedures. Obviously, as rivers freeze and 

the inevitable rail dislocations occur, more demand will exist for tank truck transportation 

from ethanol producer to blending facilities. 
193

At this point I would like to anticipate two questions and state that National Tank 

Truck Carriers would not support increasing hours of service or raising weight limits in 

existing trailers as short-term solutions to gasoline delivery disruptions. In our industry, 

everything takes a second seat to safety. 

As tank truck carriers, we do not set the price of fuel or determine what fuels will be 

produced. However, we are impacted by the almost daily changes in these two key 

factors. It is not uncommon for our drivers to be sitting in line at one terminal only to be 

contacted by dispatch and told to travel to another location because price at that terminal 

has dropped. This “shopping for gas” is another unproductive use of tank truck industry 

manpower and equipment, but it is a fact of life. 

As supplies of various blends ebb and flow from one site to another, our trucks also 

chase supply. We are finding that those trucks often have to go longer distances to load 

ethanol or other products because of supply and demand changes by producers and 

retailers. While Ultra Low Sulfur Diesel (ULSD) is not a subject of this hearing, 

widespread introduction of that latest new fuel will further restrict driver and equipment 

capacity, especially if ULSD shippers or retailers decide that we will have to provide 

“dedicated” equipment. 

I would like to briefly describe how we transport ethanol, gasoline and other 

petroleum products. Trailers for these products are built to specifications developed by 

the Department of Transportation. Our drivers must hold a Commercial Driver’s License 

with a hazardous materials endorsement and a cargo tank endorsement. To qualify for 

the HM endorsement, the drivers must undergo a background check and fingerprinting. 

Rethinking the whole approach to HM endorsements would enable us to hire drivers and 

put them to work more quickly. I know that is an issue for another day. 

Tank trailers used to haul gasoline also can and are being used to transport ethanol. 

In the most productive situation, a carrier can haul ethanol into a petroleum terminal and 

haul gasoline back from that terminal to a retailer. Hopefully, we will get to the point 

where we will see more efficient utilization of our fleets in this way. In other cases, 

carriers are diverting trailers and drivers from gasoline service to handle ethanol 

transportation. 

We even have some carriers who do not transport gasoline that have become 

involved in hauling ethanol. This potential additional capacity is one factor that makes 

me confident in saying we will meet the distribution challenges we face today. 

Thank you for your attention and the personal honor of appearing before you. I 

would be pleased to answer any questions. 

CHAIRMAN BARTON. The Chair is going to recognize himself for the 

first 5 minutes of questions. 

Mr. Dinneen, it is obvious that you have got a success story on your 

hands in your industry, which is a good thing for America and a good 

thing for the many people that work in the ethanol industry. I am 

supportive of ethanol, but I am somewhat puzzled, and I share some of 

Mr. Slaughter’s concerns. 

Given that the United States is now the world’s largest producer of 

ethanol, we have a mandate for, I think, 7.8 billion gallons over time, 

why do we still have to have the tariff protection on imports and the 

subsidy on domestic production? 

MR. DINNEEN. Well, Mr. Chairman, I think we still have a long way 

to go before we can have the kind of domestic renewable energy that we 

want to have. We want to have continued investment in this industry. I 
194

think the notion about the tariff, as I indicated, is sort of built upon a 

series of false premises. It is a solution in search of a problem. Because 

the tariff today is not a barrier to entry. You have ethanol coming into 

this country through various preferential trade agreements, NAFTA, the 

Andean Free Trade Agreement, and most assuredly the CBI. A lot of 

ethanol comes in duty free already. If the marketplace needed additional 

imports, it could come in duty free through the CBI today. You don’t see 

a real ramp up in CBI demand. 

Even in Brazil, however, we are importing directly from Brazil, and 

they have built a heck of a program down there through 35 years of tax 

credits, of production mandates, of requirements for use, infrastructure 

development, debt forgiveness, export enhancement, all of which makes 

sense because that country today is pretty much energy independent. 

They don’t need our incentives as well. 

All the tariff does is offset the benefit that refiners get when they 

blend ethanol to the source, in effect, asking Brazilians to pay the benefit 

of the tax incentive up front. 

CHAIRMAN BARTON. Well, I am still puzzled. Now, I may not have 

the latest numbers, but I show that imports last year from the CBI in 

thousands of barrels was 1,882,000 barrels, and the allowed importation 

for the CBI this year is 6,507, which would be 6.5 million, and that there 

were no tariffs paid on those last year because they are under the ceiling, 

and that the only country that actually paid the tariff was Brazil, which 

we imported 688,000 barrels from Brazil, and they paid almost 

$16 million. 

It would seem to me when you look at the price for ethanol, and 

again, this is 3 months old, so it may have changed, but in March of this 

year, March the 5th, the spot price for ethanol on the New York market 

was a little over $2.50 a gallon. That same day the price for gasoline on 

that same market was about $1.90. 

If gasoline prices are higher than ethanol prices, and only one nation 

was paying the tariff last year, and the ceiling from the Caribbean Basin 

Initiative is over 6 million barrels this year, why would it not be 

acceptable, if for nothing else, as a symbolic gesture, to reduce the tariff 

or suspend it for a year or 2 years? I just don’t understand that. 

MR. DINNEEN. A couple of points. First of all, the spot market 

pricing, I mean it has gone up because demand has been rising. 

CHAIRMAN BARTON. What is the price for ethanol? 

MR. DINNEEN. Today, the spot market price is $2.90. 

CHAIRMAN BARTON. And what is gasoline price? 

MR. DINNEEN. $2.38. 

CHAIRMAN BARTON. So it is over the gasoline price? 
195

MR. DINNEEN. But, Mr. Chairman, that is without the incentive. 

Remember, gasoline companies are going to get a 51 cent tax incentive 

when they blend that ethanol. So net the tax incentive, the price is 

comparable. It is $2.39 versus $2.38. 

But the important point, Mr. Chairman, is the spot market price is 

almost irrelevant to how ethanol is sold in this country. Ninety percent 

of the ethanol that is sold across the country is sold under long-term 

contracts, which are generally-- 

CHAIRMAN BARTON. What are those prices? 

MR. DINNEEN. About 40 or 50 cents below the spot market 

generally. Some are even lower than that. So even on the spot market 

today, ethanol is trading at parity to gasoline, net the incentive. And as 

90 percent of the ethanol sold in this country is sold much below that, 

ethanol is absolutely saving consumers money and helping to reduce 

gasoline costs. 

The point about the tariff, however, is if we are going to start 

subsidizing Brazilian ethanol, and that country has already subsidized it 

to a great extent, you are sending a tremendously negative signal to our 

marketplace as we are trying to develop. We have plants being built 

today even in Texas. 

CHAIRMAN BARTON. I am very aware of that. 

MR. DINNEEN. It is a great thing. 

CHAIRMAN BARTON. I am for ethanol, I am just not sure with prices 

where they are at the pump, this seems to be a no-brainer that you reduce 

or suspend it. You have tariffs and subsidies and mandates when you 

have either an industry that is in an infant start-up stage, or it is 

struggling to stay in business. By your own testimony neither of those 

conditions apply to the ethanol industry. 

Again, I hope ethanol is the second coming. I would love for ethanol 

to be the alternative fuel that if you mix it with gasoline or biodiesel, and 

Mr. Shimkus, when we get to him is going to be glowing in his support 

for ethanol, as he should be, but it just doesn’t make sense to me in the 

current economic situation we face. 

The price is higher than the price for gasoline, business is booming, 

life is good. I’m getting on the oil guys on the other side of you. 

Mr. Cavaney knows well. I’m firing off letters to the CEOs of the big oil 

companies, and once a week I am talking to somebody in Mr. Slaughter’s 

shop about building more refineries. I can’t just tell the ethanol guys, 

that is fine. 

I mean it just is an amazing situation. I would think that reducing the 

tariff would be, if nothing else, an act of faith in America to show-- 

MR. DINNEEN. The act of faith in America would be making sure we 

continue to develop domestic ethanol production capacity. 
196

CHAIRMAN BARTON. Which would you rather have? 

MR. DINNEEN. The signal that is going to go to the financial 

community is we are going to subsidize Brazilian ethanol at the expense 

of domestic production. You are not going to get the construction of 

ethanol plants across this country that I think we need to do. 

CHAIRMAN BARTON. With prices like they are and the mandate, 

well, I will make you a deal. Pick one of three: Suspend the tariff for 2 

years, eliminate the mandate, or cut the domestic subsidy in half. Which 

of those would you pick? 

MR. DINNEEN. Mr. Chairman, you are asking me to pick amongst 

my children, and I love them all. I want them all to grow and develop. 

CHAIRMAN BARTON. Well, we have to do that every day on this 

committee. 

My time has expired. Mr. Shimkus for 5 minutes. 

MR. SHIMKUS. Thank you, Mr. Chairman. 

CHAIRMAN BARTON. We will do more than one round if we don’t 

have more Members show up. 

MR. SHIMKUS. Obviously, we have a full panel, and you may have 

encouraged me to just focus on the ethanol debate, which I would not shy 

away from, but I also want to obviously ask questions in other areas. 

But the basic premise of this whole debate on ethanol, as you recall, 

was how to decrease our reliance of foreign imported crude oil. It is a 

basic energy security debate. We moved from the clean air issues of the 

oxygen standard, which was the first market entry provision, and the 

public is in total agreement with us that we can’t be reliant on imported 

crude oil. So this is a curious debate on Brazil because just like we do 

not want to be reliant on imported crude oil, we do not want to be reliant 

on imported ethanol. We don’t want to be held hostage to other foreign 

interests for our energy needs. 

So the ethanol industry has shown great growth, and we are excited, 

and the numbers are stupendous. And I want to applaud the independent 

retailers, who, in my State, have stepped up to the plate, and they are the 

ones who are providing retail locations. To those who sit in these 

hearings all the time, you know I sound like a broken record, but I drive 

the E-85 flexible fuel vehicle. On average, at the pump, it is 10 to 15 

cents cheaper per gallon. Two years ago, I didn’t have a single retail 

location in my district. A single one. And I represent 30 counties in the 

southern part of the State of Illinois. Now I have 30 retail locations. 

By my act of driving around and doing my job in my Congressional 

district, I am displacing the need for imported crude oil refined into 

gasoline by my use of ethanol. And that is what the public is crying out 

for us to do in a lot of different ways, and this is one of them. 
197

The ethanol industry is still a new industry. If you look, total 

demand in this country and the available ethanol to displace that is still 

less than 10 percent, and probably 1 percent. So to say that ethanol is a 

mature industry ready to compete against the petroleum industry is not a 

correct statement. It is still in the infant cycle. 

The Brazilian ethanol industry was developed by the Brazilian 

government. They are the ones who pushed this to meet their demands. 

And the last thing we want to do is to subsidize the Brazilian ethanol 

industry. 

So having said that, the basic premise is that we have had great 

success and we want to work together with all our industry partners to 

move to address these concerns, and we are willing to do that. 

With the panel present, I would like to go to Bob for a second, and 

we will hear about the reduction in the number of refineries. We have 

tried to address that in the refinery bill. One, tell me how that bill could 

be helpful; and, two, just for the record, the great thing about southern 

Illinois is that we are an energy rich State. So as much as I love ethanol, 

I love marginal oil wells, because we have them in southern Illinois. We 

have coal. Illinois is a big nuke State. So I love especially Illinois crude 

oil. 

The ConocoPhillips’ refinery in Wood River, Illinois, used to be four 

separate small refineries that over the years, through consolidation, now 

is one major refinery; and that major one refinery now produces more 

refined product than those four small independent refineries. 

Bob, can you talk about the refinery bill that we are going to bring 

back up on the floor and how that would be helpful? 

MR. SLAUGHTER. Yes, Mr. Shimkus, I would be glad to do that. 

The refining bill really emphasizes the importance of the domestic 

refining industry in an additional capacity for the domestic industry. In 

essence, it is safe to say that the United States values refining capacity 

and that that capacity should increase. It would offer opportunities for 

permanent streamlining, and it would offer opportunities for new sites to 

be recommended for refinery construction. We think it is a very positive 

step forward, and we are hopeful that the House will adopt it. 

MR. SHIMKUS. Thank you, Mr. Chairman. I yield back. My time is 

up. 

CHAIRMAN BARTON. I thank the gentleman. 

I think Mr. Stearns is next. 

MR. STEARNS. Thank you, Mr. Chairman. 

Mr. Cavaney, in your testimony you described a few domestic 

refinery expansions; and I guess the question is, why are those overseas 

refineries economical and domestic refineries aren’t? Because we 

always say that there has been nothing done in the United States. Why 
198

are they so much more economical overseas than they are in the United 

States? 

MR. CAVENEY. They are not necessarily. It is very hard to 

generalize in that regard. 

What you sometimes find is there are, as happens in the United 

States, major shifts in the plate of products that are produced. For 

example, if you look into Europe right now, Europe is on a major 

program to shift its emphasis for fuel over to dieselization. In other 

words, significantly increasing the number of cars that use diesel, and 

therefore their refining capacity is moving in that direction. That leaves 

some refineries who produce gasoline choose not to produce diesel, and 

so they become opportunists in terms of looking for markets where they 

can go ahead and sell into. 

We just imported this past month the largest amount of gasoline we 

have ever imported. A good portion of that incremental increase came 

from Europe because they were able to swing gasoline here -- 

MR. STEARNS. How many different firms were refining oil in 1990? 

MR. CAVENEY. I couldn’t be exactly precise, but I can get you that 

number. I can tell you in 1981, it was about 350. It is about half that 

now. 

MR. STEARNS. So today half as many are doing it. 

CHAIRMAN BARTON. That is refineries. That doesn’t mean owners 

of refineries. I don’t think you have 300 owners of refineries. 

MR. CAVENEY. No, they were the properties themselves. 

CHAIRMAN BARTON. We probably have 40 owners of refineries? 

MR. CAVENEY. It is a few more than that. 

MR. STEARNS. So from the year 1990 to today, half of them are 

gone; is that true? 

MR. CAVENEY. I would have to check and find out. 

MR. STEARNS. Just approximately speaking. Because they went out 

of business? Mergers? Just why did so many leave? 

MR. CAVENEY. There were, let’s say, 350 in 1981. That is when we 

left the period of time when we had price controls, and there were huge 

subsidies that went to what we call the kettle refineries. A large portion, 

50 or so, of those refineries could no longer exist without the government 

subsidy. They just went down between 1981 and 1985. 

MR. STEARNS. We are talking about from 1990 to 2000 -- 

MR. CAVENEY. Please bear with me. 

Then what happened is, in 1995, the Clean Air Act started to kick in. 

A lot of refineries elected to not make the financial investment to stay in 

business and put in those new environmental controls, and they closed 

down for reasons that was known only by their shareholders or their 

investors. So that period of time then, from 1985 onward, took the other 
199

portion, less 50 of the half, and they have gradually either been, as Bob 

Slaughter mentioned in his testimony, those other refineries have been 

acquired. Those that weren’t sufficiently acquired couldn’t find a 

market, and they have been closed by their owners. 

MR. STEARNS. So, in one sentence, the reason why half the 

refineries are gone is because of government incentives? 

MR. CAVENEY. No, no. Fifty of the, let’s say-- 

MR. STEARNS. We are talking general here. I am just talking 

general. Give me one sentence why half the refineries are gone. 

MR. CAVENEY. Because they were not economically able to sustain 

themselves going into the future and made those decisions. 

MR. STEARNS. Okay. Mr. Slaughter, you state that refiners have 

made substantial investment in technological advance process units that 

have increased the yield of gasoline. 

MR. SLAUGHTER. That is correct. 

MR. STEARNS. Do you have any ballpark figures or percentages that 

represent this industry as a whole in how these amounts have increased 

in recent years in terms of investment? And talk a little bit about this 

technologically--because if Mr. Cavaney is saying these things 

essentially, since the year 1990 to 2006, half of them are gone, yet the 

refiners have substantial investment in technological advances, that 

should make them much more efficient. So if you could give me a little 

bit of-- 

MR. SLAUGHTER. Yes, sir. The refining industry today is very state 

of the art. There have been significant investments in the industry. The 

average refinery now is considerably larger than it was in 1990. By the 

way, it really was halved between 1980 and the current day. We 

currently have about 54 refineries in operation. 

MR. STEARNS. Maybe you can answer the question, then: What do 

you think from 1990 to 2006 the number is? 

MR. SLAUGHTER. Well, currently, we have 54 companies operating 

about 149 refineries. Many of those companies are small. 

MR. STEARNS. And how many did we have in 1990? 

MR. SLAUGHTER. Well, we would have had considerably more, sir. 

I know there was double the amount of refineries in 1980 than we have 

now. 

MR. STEARNS. Three hundred companies? 

MR. SLAUGHTER. Yes. And refineries used to get mandatory 

allocations. A lot of them went to small, inefficient refineries. When we 

left the price control regime in 1980 under President Reagan, they were 

no longer economic; and they basically went out of existence in the 

period that we are talking about. The problem was they weren’t 
200

competitive anymore, sir; they didn’t justify the tremendous investment 

that you have to put in to be in this business. 

MR. STEARNS. Thank you, Mr. Chairman. 

CHAIRMAN BARTON. The gentleman’s time has expired. 

It is Mr. Bass’s turn if he wishes to, or you can go vote, and I will go 

to Mr. Boucher. Which do you wish to do? 

MR. BASS. I will go vote. 

CHAIRMAN BARTON. He looks calm and collected. You know he is 

not worried about making the vote. He is smiling and all comfortable 

here. So Mr. Boucher for 5 minutes. 

MR. BOUCHER. Well, thank you very much, Mr. Chairman. 

Mr. Slaughter, let me propound some questions to you, if I may. 

MR. SLAUGHTER. Yes, sir. 

MR. BOUCHER. Do you believe that we have a shortage of refining 

capacity in the United States today? 

MR. SLAUGHTER. I think that we need additional refining capacity, 

yes. I don’t think that we need to necessarily produce 100 percent of 

what we consume here domestically, but I think there is a need for 

additional capacity. That is why I think the industry is announcing 1.4 

million in refinery expansions in barrels per day, and that will come on in 

the next 3 to 4 years. 

MR. BOUCHER. Are any of those investments taking place on 

greenfield sites, or is that just a proposal for expanding existing 

refineries? 

MR. SLAUGHTER. The only greenfield site that is looking to build a 

completely new refinery would be the Clean Fuels Project in Arizona, 

which is having some difficulty. They have been trying to put that 

together for most of the last decade. They have not been able to break 

ground yet. 

The economics strongly favor adding capacity at an existent site. 

You have the economies of scale. For instance, Motiva has just 

announced a 325 barrel-a-day expansion at the Port Arthur, Texas, 

facility. That is larger than many refineries are. According to their press 

announcement, they will be able to bring that on line in 3 to 4 years. If 

you tried to do that through a new refinery, sir, it probably would take 

you at least 10 years, and you wouldn’t even be certain that you could 

break ground then. 

MR. BOUCHER. Many of the individuals who have commented about 

the need for new refineries not only point to the need for a capacity 

increase but also point to the need for some diversification of the places 

where refineries are located. 

It has become a modern fact of life, unfortunately, that we are having 

more frequent and more severe hurricanes than we have had historically; 
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and I think the concern is driven largely by that fact. If another hurricane 

of major consequence were to affect the Gulf Coast--as it may very well 

happen even this year--the refinery capacity that we have would be 

placed at risk, some large portion of it could be taken off line, just as it 

was during the case of Hurricane Katrina. 

So if the expansions that are planned are largely at existing sites and 

the only greenfield site is the one you mentioned in Arizona, which is for 

clean fuels--and I gather that is not necessarily refining gasoline into--or 

refining crude oil into petroleum, although perhaps it is. You can clarify 

that. But let me just say, if most of the investment is taking place at 

existing sites, does that not give rise to concern that we are not engaging 

in an appropriate diversification of the location of these facilities so that 

they will not be subjected to disruption in the event of natural disaster? 

MR. SLAUGHTER. To answer your question about Arizona, that 

would be a modern refinery. It would be about 150,000 barrels a day and 

would cost about $2 billion. It would produce up-to-date gasoline, 

diesel, and other products, but it has been having trouble. They have got 

an air permit, but they are having trouble getting financing, actually 

getting that built. 

Your question is a good one. Yes, they have the air permit. We 

believe that it would be very good to incentivize refinery construction. 

Congress did this in the EPAct bill. There is an expensing provision 

which allows people who are expanding existing refineries or building 

new ones to expense 50 percent of the cost. Now that is a very 

significant provision. I think it is reflected in the plans for additions that 

companies have mentioned. I suggested that might be looked at again, 

and you might be able to retool that in a way that would give incentives 

for new refineries, which probably will be in other locations. There is a 

large capacity in the Gulf. 

But the problem has been the country needs more capacity, and there 

is a strong feeling that it is not only not economical, but functionally 

impossible to build those now in other parts of the country that could 

actually use them. The Northeast has no refineries. There are certainly 

other places. 

But the fact of the matter is that the alternative, if you tried to move 

the part of the industry that is in the Gulf Coast now because of the 

hurricane damage, our fear is that you would end up moving most of it 

abroad, and you couldn’t replicate it here. 

MR. BOUCHER. Please don’t misunderstand the question. I wasn’t 

suggesting moving anything. I was simply suggesting that, as the 

investments in new refinery capacity occur, perhaps it might be the better 

part of wisdom to locate some of that new investment in areas other than 

the Gulf Coast, which is where the bulk of our refineries are at the 
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present time, so as to avoid the potential of a supply disruption from 

refineries to the market in the event that we have another major disaster. 

Let me move to another subject, if I may. It has been widely 

reported that between September 2004, and September 2005, on average 

the increase in profits for the refining industry was about 255 percent, a 

truly startling number. Is that number accurate? 

MR. SLAUGHTER. I find it hard to believe that it is that large an 

increase in that period of time-- 

MR. BOUCHER. Do you have another number? 

MR. SLAUGHTER. I will get them for you, sir, but I believe that one 

is inflated. 

You know the history--I know you do because we have talked about 

it before here--of low profitability in this industry. 

MR. BOUCHER. Well, I know historically you have had some lean 

years; and that is not to be denied. However, if the increase of 255 

percent in a 1 year period is accurate, I think it obviously urges the next 

question, which is, what happened that was so extraordinary within that 

year? And if the number wasn’t 255 percent, obviously, some high 

number was the reality. So why such a major increase in that 1 year 

period? 

I am trespassing on the committee’s time, but let me give you an 

opportunity to answer that, if you would. 

MR. SLAUGHTER. All right. We have been in a period of, of course, 

higher prices driven by a lot by higher crude prices and increased 

demand in the U.S. You know, we also had the hurricane situation last 

year, which the industry responded extremely well to. We are about to 

get back into commission and produce the products that people needed. 

I do not believe the figure that you are using is correct, but, 

undoubtedly, profitability in the industry is up and certainly from what it 

has been historically, when the refining industry is known for actually 

being an area of negligible profitability that requires billions of dollars in 

investment every year. 

I will get you the figures for that last year, but the fact that we have 

had 2 good years in the industry has encouraged people to think that 

maybe the years ahead will look a little more like the last few years and 

not like the 1990s, with no profitability, so they are adding capacity. 

They are putting a lot of that money back into the business, sir. 

MR. BOUCHER. Mr. Slaughter, thank you very much. 

MR. BOUCHER. Thank you, Mr. Chairman. 

MR. SHIMKUS. [Presiding.] Thank you. 

The Chair recognizes my colleague from Florida, Mr. Bilirakis, for 5 

minutes. 
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MR. BILIRAKIS. Gentlemen, we heard yesterday a claim that OPEC 

sets its oil price based on the price signals from the United States 

gasoline market, so I ask--I have to limit this because I want to go on to 

another area--Mr. Cavaney and Mr. Slaughter, is there any truth to this 

claim? Can OPEC set the world price of oil all by itself? 

MR. CAVENEY. Mr. Bilirakis, it is a little bit the opposite right now. 

One of the frustrations OPEC is experiencing at the present time is they 

have an inability to impact, under the current environment, the price of 

oil, so it is a little bit the reverse right now. I would have no reason to 

know whether or not it was true. It is just not something that we would 

be involved in. 

MR. BILIRAKIS. Mr. Slaughter, what is your comment on that? 

MR. SLAUGHTER. Mr. Bilirakis, I doubt that that is true. Essentially, 

the only significant additional capacity for crude production in the world 

is in Saudi Arabia. It is roughly only one billion barrels per day now, the 

lowest safety margin that the world has ever had, and that corresponds to 

a significant reduction in their ability or anyone’s ability to drive this 

market. 

The international crude price is set by the competitive circumstances 

of that market, and the ability at this point of anyone to control that is at 

its lowest point because of that very small margin of safety. That means 

almost all the oil that can be produced in the world is being produced and 

sold right now. That is a strong market. 

MR. BILIRAKIS. Well, somebody makes these decisions. I know we 

talked about supply and demand and the market doing it and that sort of 

thing-- 

MR. SLAUGHTER. Well, if I could respond. If you look at what 

OPEC has said, OPEC for years has been trying to talk about the benefits 

of a $30 or a $40 environment. Recently, the Saudi Arabia Energy 

Minister was talking about a low $50 environment, which indicates that 

they have concerns over the price levels that crude has reached right 

now. 

MR. BILIRAKIS. Why has it gone all the way up to $70 then? I 

mean, if they have concerns that $50 may be a little high--and I read the 

same article--then why is it $70 at this point? 

MR. SLAUGHTER. There are a lot of guesses as to that, but nobody 

really knows why. I mean, there is a feeling that there is a risk premium 

in the crude price which reflects people’s concern that something is 

going to happen to crude supplies because of problems in Iran or 

difficulties in Nigeria and other places potentially. 

The analysts that I have talked to have a hard time explaining the 

current price level for crude. It seems to be driven by favor of adverse 

events, geopolitical events-- 
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MR. BILIRAKIS. With all due respect, sir, that is what we keep 

reading and that is what we keep hearing. I think it is probably more 

rationale than anything else, so-- 

Well, just getting away from that for a moment, let’s go to energy 

independence. To both of you, how strongly do you all feel that the 

United States should be independent from foreign oil? Mr. Caveney. 

MR. SLAUGHTER. I will just say that I think that is an admirable 

goal. I think it will be very difficult to achieve. I came to town and 

started to work for a member of this committee in the early 1970s, and 

President Nixon had that as his goal at the time. It was impossible to 

achieve. It is going to be difficult now. But it should be our goal to be 

as independent as possible. We are always going to be relying on some 

imports of fuel, but we should try to be as independent as possible. 

MR. BILIRAKIS. How would it affect your--Exxon, et cetera, if we 

had energy independence, Mr. Cavaney? 

MR. CAVENEY. First of all, energy independence is a noble goal, as 

Bob said, to work towards. It would be virtually impossible to do here in 

the short term-- 

MR. BILIRAKIS. Short term. 

MR. CAVENEY. In the short term because of the amount of imports 

we need. 

The more appropriate response to increase our energy security in the 

near term, let’s say in the next couple of decades and so forth, would be 

to focus on interdependence, which is to try and diversify the supplies in 

the international community where we get our sources of imported oil 

and also to increase our domestic production here at home. That gives us 

more options, and if some area has upsets where we can’t take advantage 

of it, it gives us more opportunity to swing and keep a stable amount of 

imported oil coming into the system. 

MR. BILIRAKIS. But, I guess my question is, if we ever were to reach 

it, and we talk about a goal and that sort of thing. We don’t really try 

very hard to reach that goal, so I am not really sure of what the definitive 

goal is. But if we ever reached it, how would it affect your member 

companies, your producing companies? 

MR. CAVENEY. It is virtually impossible to say because we don’t 

currently have the kinds of energy sources particularly that would 

support the transportation sector that you can predict there. I believe that 

we have an open trade, free-trade system in the world and that system is 

always going to provide opportunities to bring in some products at 

reduced prices. So that could happen even with the goal of energy 

independence. 

MR. BILIRAKIS. My time is up, sir, but that is really, with all due 

respect, I guess maybe I didn’t ask the question correctly. I am just kind 
205

of curious how that would affect the bottom line, the profit line, if you 

will, of these companies. 

Thank you, Mr. Chairman. 

MR. SHIMKUS. Thank you. 

The Chair recognizes the gentleman from Michigan, Mr. Stupak, for 

5 minutes. 

MR. STUPAK. Thank you, Mr. Chairman. 

Mr. Cavaney, you indicated that in the 30 investigations put on price 

gouging there has been no finding of price gouging on gas prices or 

energy prices, but the FTC has used terms like gaming the system and 

maximizing prices by the industry. But with no real Federal law on price 

gouging, it is impossible for them to find price gouging by the FTC, isn’t 

it? 

MR. CAVENEY. Well, the FTC Chairman currently has said that, 

even if Congress were to outlaw price gouging, the law would be very, 

very difficult to enforce fairly. 

MR. STUPAK. But you have got to have a law first. 

MR. CAVENEY. Well, we do have laws in the majority of the States 

right now, and a number of other States are putting in laws. The FTC 

has also spoken about the fact that these are very situational 

circumstances, and being closest to where the violation may have 

occurred is going to put someone in the best position to determine it. 

What you need to be careful of here is, if you look at a Federal law, you 

want to make sure that, if such comes to pass, that it doesn’t de facto 

create a circumstance where you have price gaps and you are back into 

the whole situation of price controls. We have been there before, and we 

know that doesn’t work. 

MR. STUPAK. But your statement in your testimony that there hasn’t 

been any price gouging, you can’t find price gouging if there is not a 

Federal law; isn’t that correct? 

MR. CAVENEY. No, there are laws in-- 

MR. STUPAK. Well, explain how this price gouging works then. 

MR. CAVENEY. Well, the problem is defining price gouging, and 

that is one of the difficulties why it is best left to the States to look at 

that. They can look at the circumstances where they are and make their 

best guess at the definition. 

MR. STUPAK. Well, if gas went up 90 cents in one day in Michigan 

in one of our cities, is that price gouging? 

MR. CAVENEY. You would have to know the circumstances of what 

that person paid for that. 

MR. STUPAK. Can you give me a scenario where 90 cents in one day 

would be justified? 
206

MR. CAVENEY. Well, the individual could have had to purchase 

gasoline and it was that much more expensive. You just can’t look at the 

surface, and that is what makes these things so difficult. 

MR. STUPAK. Let me ask you this question then. You said the world 

price of crude is the most important factor dealing with gasoline, right? 

MR. CAVENEY. Yes, that is what the Federal Trade Commission said 

in June of-- 

MR. STUPAK. Do you agree with that statement? 

MR. CAVENEY. Yes, I do. 

MR. STUPAK. So if we reduce the price of crude by $20 per barrel, 

would that be reflected then in the price of gasoline? 

MR. CAVENEY. Yes, it would. If you look historically over decades, 

you will find there is a very close correlation between gasoline and-- 

MR. STUPAK. So if it is $60, let’s say, to make easy math here, and it 

was reduced by $20, there should be one-third off at the gas pump. 

MR. CAVENEY. Generally, you can say that, but each circumstance 

would be-- 

MR. STUPAK. So then would you support our legislation, the PUMP 

Act, which would actually take the speculation, fear, and greed out of the 

price of oil and make sll trades in oil subject to the Commodities Future 

Trade Commission? Would you support that? 

MR. CAVENEY. I would have to look into it. I don’t know enough, 

but I will get back to you. 

MR. STUPAK. Well, the experts tell us that it would reduce the price 

of gas by $20, because three-fourths of the oil futures are traded without 

any oversight by the Commodities Future Trade Commission. So if we 

are interested in reducing the price of gasoline, I would think that that 

would be one good way to start. 

Let me ask you this one. We had testimony yesterday from our 

panels of witnesses about the crack spread. Are you familiar with the 

crack spread? 

MR. CAVENEY. Yes. 

MR. STUPAK. They told us yesterday that the crack spread should 

probably be about $8. But, right now, it is $20; and Chairman Barton 

thought it might be as high as $30. If we reduce that crack spread, would 

that bring down the price of gas? 

MR. CAVENEY. Well, the crack spread has a number of factors in it. 

It has all of the costs as well as whatever the margin of profit is at the 

end of the day. 

MR. STUPAK. Sure. 

MR. CAVENEY. And it is difficult to know each individual refinery, 

what their spread is at any given moment. 

MR. STUPAK. So each refinery could have a different crack spread? 
207

MR. CAVENEY. Yes, that is correct. But at the end of the day -- 

MR. STUPAK. But isn’t $20 too high? Would you agree it is too 

high? 

MR. CAVENEY. You can’t make that statement. You don’t know 

what his or her cost is. That is what the difficulty is. You have to look at 

each individual-- 

MR. STUPAK. I mean, that is why we ought to have a Federal price 

gouging law that takes these factors into consideration, shouldn’t we? 

MR. CAVENEY. At the end of the day, you should find out what the 

profit is, the earnings that that person makes. The earnings historically 

from the industry have been pretty much in line with all industries, so 

that would indicate that the cost factors in that spread are reasonably 

high. 

MR. STUPAK. Sure, reasonably high. 

Okay, let me ask you this. I have internal memos here from 

Chevron, Texaco, and Mobil in which they actually quote the American 

Petroleum Institute; and basically they say we have to reduce the number 

of refineries in this country. 

The Chevron memo states, if the U.S. petroleum industry doesn’t 

reduce its refining capacity, it will never see any substantial increase in 

profits; the Texaco memo complains that supplies significantly exceed 

demand, leading to very poor refinery margins and very poor refinery 

financial results; and the Mobil memo advocates keeping a smaller 

refinery, Powerline, from reopening, stating that a full court press is 

warranted in this case. 

Has API encouraged refineries in the past to shut down to increase 

the price of gasoline? 

MR. CAVENEY. Absolutely not, that would be a restraint of trade. 

MR. STUPAK. So if you are quoted in these memos--not you yourself 

but API--these memos would be incorrect then, is that your position? 

MR. CAVENEY. I haven’t seen any of those memos and can’t 

comment on them. 

MR. STUPAK. I will be happy to show them to you. Thank you. 

MR. HALL. [Presiding.] The gentleman yields back. 

Mr. Cavaney, I have the right and I have got the gavel, so I am going 

to ask a question of you that I have really wondered about. You have 

recommended and others recommended more areas for energy 

exploration; and, of course, we are all interested in that. We passed all 

kinds of bills. We had to leave ANWR out to get anything through the 

Senate, and we go through all these gymnastics to try to get more energy 

to lower the gasoline price and to keep us out of a war. 
208

Leaving aside all the politics, if all oil limit tracks were opened to 

exploration today, what would be the most economically compelling 

tracks to develop? Kind of rank them for me, if you would. 

I have heard John McKetta from Austin, Texas, say we have enough 

coal in the midsection of this country to almost double the output of the 

OPEC nations all combined if we could just mine it. But tell me about 

the energy and the drilling and the off-shore drilling and ultra-deep 

drilling in the shut-in areas. Just kind of rank them for me, if you can do 

so. 

MR. CAVENEY. We are going through a migration, as we have 

historically done in the oil and gas business, which is we are moving 

now to increasing more of what we call unconventional oil and gas into 

the system, rather than conventional. Conventional, if you will permit 

me to exaggerate a bit, is the easier to refine and easier to produce. The 

unconventional is things like deep gas clays, which require very 

extended and expensive technology in the Gulf, up in parts of Alaska, 

and the like. 

So what we had about 2 years ago was 10 percent of our production 

here was of that unconventional amount. EIA has predicted that by 2025 

that will be about 30 percent of our mix of production here in the U.S. 

There are other important things that are now becoming a larger 

play, which is the next generation that follows thereafter. For example, 

we have already seen the development of the tar sands up in Alaska. We 

have a situation in the western States, some shale, where the Government 

indicates that we have the potential for a trillion barrels of reserves in 

shale, which would be four times all the oil and gas that Saudi Arabia has 

right now. 

One of the things that needs to be brought to bear there is technology 

to get the cost down to produce to be able to put that forward. So there 

are also things like methane hydrate. 

So in the industry, huge amounts in technology--because not only do 

we have to serve today, but we need to be ready to serve the customers of 

tomorrow. That is why we are so capital intensive, because that money 

continually gets reinvested. 

MR. HALL. Is the quantity and quality of shale well known and can 

be documented? 

MR. CAVENEY. Reasonably well known. 

The industry with the help of the Government, and the involvement 

during the 1970s was very active out there. What happened was, as you 

recall, after the second oil shock in the 1980s, the industry underwent 

windfall profits and a number of other controls, and the price just 

collapsed. So most people abandoned their efforts out there at that time 

because it just wasn’t economic and the Government shut down their 
209

involvement. A couple of companies have stayed active in the research 

areas and think they have made some gains, and that is why we are now 

seeing more interest there. DOE has a couple of grants to look at it, and 

it may be one of those things that eventually may find a home in our mix. 

MR. HALL. How would you rank them, then? Briefly. 

MR. CAVENEY. Well, I think there are some technologies that are 

very attractive. 

MR. HALL. And assuming they are available and can be done, it is 

just a matter of money, and put R&D into the program as much as you do 

the energy program. 

MR. CAVENEY. One of the ones we are already seeing is, looking at 

the biofuels, you would have thought, 10, 20 years ago, the addition of 

ethanol into the fuel mix was seen as basically an octane enhancer. 

Increasingly now it is finding a larger and larger role. That is why we 

worked on the historic removal of the fuel standard, to be able to build 

that industry up so that it can produce more. We also have the biodiesel 

parts that are coming in. 

So the technology is doing very well there. We need cellulosic 

ethanol to be able to continue the growth of ethanol. So that one, I 

would say, is really the next one up on the platter. 

Just behind that are things like the technologies that we have heard 

about for a number of years which are a coal-to-liquid gasification, these 

kinds of technologies, which there are sample projects that are along, and 

that is probably a step ahead of looking at. Let’s say shale, which might 

be the next one beyond that. And I might also add, we don’t have much 

of an opportunity for utilization of the tar sands and the coal sands, but a 

lot of the stuff that comes from up there is now being piped down into 

the U.S., which has been very helpful to us. So technology is applied 

there in terms of pipelines reversing their historic flow. 

So those would be the areas of the largest anticipated growth as we 

go forward, the deep water, the exploration--and that is why looking at 

Lease Sale 181 and looking at the OCS are important areas for us to be 

able to define the extent of the resource there. Because it may well be 

that we can get things there more quickly and at more commercially 

available terms, which ultimately will translate to more affordable fuels 

to the consumer. 

But important among all of these things is, if we want to enhance our 

energy security, if we want to have more flexibility, looking at these 

domestic supplies makes a lot of sense. 

MR. HALL. Chairman Barton has ushered through for the first time 

in 10 years an energy bill. It is not everything we wanted, but it is an 

energy bill and signed and ready to go and working toward it. I think 

you have given him a good wish list there to get after, and we are going 
210

to be very supportive of him as we pursue those. Because those are 

things that can save a generation from having to cross the ocean and fight 

a war, and that is the goal. 

Ms. Eshoo, I am sorry. I went over a little bit. I recognize you at 

this time. 

MS. ESHOO. Good morning to all the witnesses. 

My question--I want to direct my question to Mr. Caveney. In your 

testimony, you noted that there are announced refinery capacity plans 

that will add 1.3 million barrels per day of additional refinery capacity 

between 2006 and 2011. These expansions, as you have stated, will 

boost capacity to 18 and a half million barrels per day. Current demand 

for petroleum is more than 20 million barrels per day and projected to 

continue to grow, and we make up the difference by importing product 

from overseas. 

In its 2006 annual energy report, the EIA projects that the gap 

between demand and domestic refinery capacity will grow, which means 

that, in addition to crude, we are going to import more gasoline and other 

refined products. Now if it makes us vulnerable to be increasingly 

dependent on crude imports, it seems to me that becoming increasingly 

dependent on imports of refined products carries similar dangers. Can 

you tell the committee if you believe domestic refining capacity will ever 

catch up with demand or is the gap going to continue to grow? 

MR. CAVENEY. I would like to associate myself with Bob 

Slaughter’s comments earlier. It is not necessary and probably not likely 

that we would have to have 100 percent of our usage satisfied by 

domestic production, but it is certainly healthy for us to have a strong, 

vibrant national refining network. So we feel that the additions that are 

announced, there may well be other ones under consideration. Some 

companies have a policy-- 

MS. ESHOO. So you don’t believe that it would be prudent policy to 

become dependent on refining capacity or crude--you know, the refined 

products being imported? Are you agreeing, is that what you are saying? 

MR. CAVENEY. It is not-- 

MS. ESHOO. I can’t tell by what you have said. 

MR. CAVENEY. Okay. It is not necessary that we have to produce, I 

feel, 100 percent of the product we use in U.S.-based refineries. We 

have reliable supplies from Canada coming in. 

MS. ESHOO. I think we are disagreeing with one another. 

Can you explain then--is ExxonMobil part of your trade association? 

MR. CAVENEY. Yes, they are. 

MS. ESHOO. --why ExxonMobil says it doesn’t plan to build any new 

refineries in the United States? Do you know if they are revising this, if 

they have moved in another direction, if they have any other plans? 
211

I mean, we have gas now at--well, in California, it is well over $3 a 

gallon. Are they looking for new ways to invest their record profits? 

MR. CAVENEY. Those kinds of discussions are privy to individual 

companies, and under those kind of circumstances we are-- 

MS. ESHOO. Are you aware of the comments of ExxonMobil? 

MR. CAVENEY. I am aware of those comments, yes. 

MS. ESHOO. And do you want to comment on those comments? I 

mean, they run contrary to what, the committee is basing many of its--or 

at least some of its decisions on. 

I see that the distinguished Chairman of the full committee is 

laughing, except it was our staff here at the committee-- 

CHAIRMAN BARTON. Will the gentlelady yield? 

MS. ESHOO. I would be glad to. 

CHAIRMAN BARTON. I am not laughing at you. I am just saying 

how-- 

MS. ESHOO. The subject matter. 

CHAIRMAN BARTON. I am just thinking how unfair it is of you to 

quote their own words. It is a low blow to use what ExxonMobil has 

actually said against them. I mean, that is kind of a cheap shot, don’t you 

think? 

MS. ESHOO. Well, I think that is what my constituents would want 

me to do. It is their quote. 

CHAIRMAN BARTON. I agree. I have had to defend their right to say 

what they say, but if I had just reported-- 

MS. ESHOO. Well, of course they can say what they say-- 

CHAIRMAN BARTON. I think they reported a $9 billion quarterly 

profit, and if that is true, I believe they could find the money, if they 

wanted to, to at least expand one of their existing refineries. 

MR. CAVENEY. I don’t know the exact nature of the quote, but they 

have a history-- 

MS. ESHOO. I will have my staff bring this to you. Do you want me 

to read it to you? 

MR. CAVENEY. Fine. 

MS. ESHOO. Exxon--this is a January 25 Reuters report, “An 

ExxonMobil corporation official told congressional aides this week,” this 

is the week of the 25th of January, “that flat North American demand for 

gasoline forecast through 2030 means there is no need to build new U.S. 

refineries, a congressional source sold Reuters on Wednesday.” 

“Scott Newman, manager of Exxon’s Economics and Energy 

Division, on Tuesday briefed aides with the U.S. House Energy and 

Commerce Committee on the company’s oil demand outlook, according 

to the committee staff member who attended.” 
212

“Exxon said they don’t want to build any new refineries in North 

America because of flat demand for petroleum products by 2030. 

Spokesman for Irving, Texas, based ExxonMobil, the world’s largest 

publicly traded oil company, declined to give specifics of the meeting. 

We think the most cost-effective and efficient and effective way, the 

fastest way to add capacity in the U.S. is to refine our own refineries.” 

Do you know what “refine our own refineries” means? 

MR. CAVENEY. I think what was meant there was to add capacity to 

existing refineries, which is, as Mr. Slaughter had said earlier, the 

quicker and more cost-effective way to add capacity in the U.S. And his 

statement about not doing anything was a new refinery, not additional 

capacity. ExxonMobil has a history of continuing to add capacity to 

their existing refineries. 

MS. ESHOO. Well, this runs contrary to what you are saying, but I 

appreciate your response. 

The reason why I raised the issue of demand is because Exxon 

contradicts EIA’s official projections for demand. So there is a disparity 

there, and I think it is something that the committee needs to recognize. 

I think my time has-- 

MR. HALL. The time has expired. 

MS. ESHOO. Even though the Chairman used up some of my time. 

Thank you. 

MR. HALL. And we weren’t laughing at you. We were laughing 

with you. We were thinking about the lady who came over -- 

MS. ESHOO. This is strictly business, Mr. Chairman; and I 

understand that. 

MR. HALL. We were thinking of the lady who came over yesterday 

trying to defend the Administration’s cutting Children’s Hospital’s 

teaching fund. She didn’t really want to be here, probably didn’t really 

want to answer that question. I wouldn’t have if I had been her. But you 

ask good questions. We admire you. 

MS. ESHOO. Thank you. 

MR. HALL. We weren’t laughing at you. 

MS. ESHOO. Thank you, Mr. Chairman. 

MR. HALL. Okay. The Chair recognizes Mr. Bass. 

MR. BASS. Thank you, Mr. Chairman. I want to thank the Chair for 

holding these hearings. They really are very informative and helpful. 

If we are looking for ways that we can deal with stabilizing and 

reducing energy costs over the short term, medium term, and long term; 

and as gas prices have risen, we have heard about a lot of things that we 

can do right now that would make a difference tomorrow or next week or 

the week after. Do any of you have--let me communicate a couple of 

these things that, or ideas that I have heard. 
213

One of them was that if every American consumed one less gallon of 

gasoline a week, the cost of gasoline would go down by 60 cents a 

gallon. One myth. Maybe it is a myth; maybe it isn’t. But if we were to 

use more diesel in America, we could use CAFE standards by anybody’s 

predictions almost immediately. If we could increase the use of hybrids 

significantly, immediately this would occur. 

My question is, could any of you make recommendations or 

suggestions to the committee of efforts that we could undertake that 

would make an immediate impact or have an immediate impact on the 

price of gasoline in America? I mean between now and the end of the 

year. 

Go ahead, sir, Mr. Caveney. 

MR. CAVENEY. Mr. Bass, it is hard to project anything that would 

immediately, let’s say on a 24-hour period, have an impact. 

One of the things that people can individually do without sacrificing 

anything, and we have located on our Web site, is you can actually use 

energy a bit more wisely, particularly in motor transportation. You can 

gain 4, 5, 6, 7 miles per gallon by doing some of the very simple things 

like eliminating jackrabbit starts, making sure your tires are properly 

filled with the level, having your car tuned, driving at 10 miles per hour 

less. That done broadly would not be anyone sacrificing anything, and in 

a reasonably short period of time that would show up in the data, and you 

would notice that there was less demand. Obviously, that is what you are 

hoping to do, to create a wider gap between supply and demand. 

MR. BASS. Does anybody have any comments on diesel utilization, 

use of more diesel in America? 

MR. SLAUGHTER. I would like to say something, if I could, on that, 

Mr. Bass. 

The diesel market in the United States is pretty well already 

subscribed. We are introducing a new 15 parts per million sulfur diesel 

product on June 1st, and we are putting that program into operation this 

year. We are going to see how that goes. We have been working very 

hard for a smooth transition. 

But, as has been mentioned earlier by Mr. Cavaney, Europe has gone 

to diesel for light duty vehicles, including passenger cars. It has freed up 

gasoline to be exported to the United States, particularly to the Northeast, 

which is 25 percent dependent upon imports. If the United States tried to 

switch in a big way to diesel, we might have more difficulty finding 

imports of diesel than we currently are having imports of gasoline. 

So the refining industry in the U.S. is built towards the current mix 

of about 49 percent gasoline output, less output of diesel. There is going 

to be an increase, all analysts say, in the number of diesel cars in the 
214

United States over the next few years, but it still will be significantly 

below the figure for gasoline-driven vehicles. 

MR. BASS. How practical is it for refiners to switch to diesel and 

provide more diesel in North America for a short period of time? 

MR. SLAUGHTER. Well, for a short period of time there are some 

things you can do. Refiners do respond to shifts in the market where 

there is a need for more diesel product than gasoline. There are some 

things you can do, within limits, to produce more diesel and less 

gasoline. But the kind of program you are talking about, that would be 

significant. It would take much longer and we are already having 

significant problems. We are producing a cleaner diesel product that 

already is going to require more crude to produce than the old product 

did. So it is going to be particularly difficult to do that this year. 

MR. BASS. But you do have clean diesel in Europe, right? 

MR. SLAUGHTER. There is a cleaner diesel in Europe. We are going 

to have a cleaner diesel in the United States in less than a month. 

MR. REID. Mr. Bass, in the immediate term, in terms of lowering 

gasoline prices for consumers at the pump, my testimony reflected that 

the only thing that SIGMA and NACS could recommend is temporarily 

suspending the tariff on imported ethanol, maybe worth a few cents a 

gallon. 

Beyond that, a few of us have testified that crude oil accounts for the 

largest percentage in the cost of a gallon of gasoline. The second largest 

contributor to the cost of gasoline at retail is local, State, and Federal 

taxes. So we are not advocating it. We are not recommending it, but if 

you wanted an immediate impact, a Federal excise tax would be another 

place to look. 

MR. BASS. Mr. Chairman, my short 5 minutes has expired. I yield 

back. 

MR. HALL. I thank the gentleman. 

The Chair recognizes the gentleman from Texas, Mr. Green. 

MR. GREEN. Thank you, Mr. Chairman, for the knowledge of the 

committee. 

There have been an expansion--in fact, I think our testimony 

yesterday from Dr. Yergin said that, since 1994, existing refineries added 

more than 2.1 billion barrels of capacity, the equivalent of adding a large 

average refinery each year. I will ask, is that an accurate statement we 

heard yesterday from Dr. Yergin? 

Thank you. 

And, Mr. Slaughter, you testified that refineries will be adding 1.3 

million barrels in capacity in the next few years, and that is online. 
215

MR. SLAUGHTER. We can currently count 1.4, and a lot of folks 

think it will be more than that. That is over 8 percent increase in the U.S. 

crude capacity. 

MR. GREEN. I wasn’t aware of the quote from an Exxon staff 

member to congressional staff members, but, just historically, I have 

represented now the largest refinery in the country in the Baytown, 

Texas, an ExxonMobil facility. When I was a State senator--before they 

changed our lines, and I got it back--it wasn’t the largest. 

So I am assuming, without documentation, that refineries--and I can 

say that typically up and down the Houston ship channel the refineries 

have expanded capacity over the last 10-year period, whether it is shale, 

whether it is any of our refineries, that they have expanded capacity. 

And we can find out the numbers. I think we will just have to do it 

individually. But I also understand that Exxon particularly adds about 

200,000 barrels a day, every 3 years, to five refineries that they have. So 

there is expanding refining capacity. 

There is still some space available in the Gulf Coast, although a 

question in a minute will be, we need some ethanol facilities here to 

serve our Houston markets since we no longer produce MTBE. 

The Energy Information Administration’s testimony yesterday said 

that if we reduced the number of so-called boutique fuels to improve the 

liquidity of the gasoline market we would have to sacrifice either price or 

air quality. Can you respond to that, Mr. Slaughter? 

MR. SLAUGHTER. Well, there is a balancing act that has to be done 

with boutique fuels, Mr. Green. Because, as has been pointed out earlier, 

the Energy Policy Act passed in 2005, already started the process of 

looking at boutique fuel reduction. EPA’s testimony yesterday indicates 

that there is only a handful, really, of boutique fuels in the U.S. If you 

change things right now, right away, some refiners would have to change 

specifications and invest more money than they had planned for, for the 

summer. 

So it doesn’t seem productive to go ahead with something like that 

now, although it is a good exercise; and the EPA shouldn be completing 

that exercise in just 8 weeks, is my understanding. 

MR. BECKER. Mr. Green, may I comment, too? 

This is probably one of the first times in the past 15 years where 

Mr. Slaughter’s association and our association agree on a point. 

Boutique fuels are an extremely important tool for State air pollution 

control agencies. As I mention in my testimony, they have reduced 

smog-forming emissions up to 25 percent. They have been prompted not 

so much by State and local permitting authorities but often times by the 

industry as a cheaper alternative to a uniformed Federal reformulated 

gasoline. So we agree with NPRA’s position on that. 
216

MR. GREEN. Let me get to another question, because I have run out 

of time. 

Folks, Mr. Cavaney and Mr. Slaughter, last year, there was a refining 

bill passed after the energy bill; and since the Chairman is still here I 

want to make sure he hears this. Do your members--because during Rita 

and my experience in later September last year, and we saw what 

happened in the New Orleans area and along the Mississippi River, do 

your members work with the State emergency supplies to ensure we have 

enough fuel during an evacuation? In Hurricane Rita, we tried to 

evacuate at least 2 million people in the Houston area. Do State fuel 

supplies--do they work with members of your associations? 

MR. CAVENEY. The industry, as well as local government and the 

Federal government, had post-hurricane conferences to actually go over 

the checklist of all the things that needed to be addressed, with a 

particular eye towards the human feature and then also the point you just 

raised, and they are working on that. It brought to light a number of 

things that people have taken for granted that would be done, but 

weren’t, and they are getting addressed this time. So I think we will see 

a better response. 

MR. GREEN. That is on the back end of it. 

The front end of it, we had refineries, when we thought Hurricane 

Rita was going up to the Galveston Bay, that had to shut down. To get 

those refineries back on line, you don’t just turn on a switch. It takes a 

lot of effort. And we did have some problems with power and things like 

that from other locations. 

One of the interests I have, and if this committee does another bill, is 

to have the Department of Energy directly involved with both front end, 

if there is a problem with the big picture of getting refinery capacity back 

up, whether it is in my neighborhood or anywhere else, but instead of 

having to go through FEMA, who really doesn’t understand--I mean, we 

saw what happened again from experience. Do you feel comfortable that 

the Department of Energy would be a partner that could be a problem 

solver in both getting the refining capacity back up but also looking at 

supplies for the evacuations? 

MR. CAVENEY. I think, and Bob can speak from his perspective, that 

the cooperation was incredible. When you consider that we lost 30 

percent of our refining capacity, and it came back as quickly as it did, 

some of the problems we had down there were equipment problems and 

things needed to be replaced and just couldn’t speed up. But the 

government at the State and local and Federal level in almost every 

instance was just unbelievable. 

MR. SLAUGHTER. I certainly agree with that, Congressman. It was a 

tremendous cooperative effort. 
217

And one thing, there have been meetings, we had a large conference, 

for instance, in which to share all the lessons from our members with 

their experiences with the hurricanes, and I know they have worked with 

people in their localities and States to make sure that problems don’t 

happen again. A lot of work has been done. 

We are going back into hurricane season now, but I think people 

need to know that the industry has learned a lot from what happened last 

year about working with people, how important that was, the importance 

of electricity; and all those lessons are going to be applied this year. We 

have our fingers crossed that something like that won’t happen again, but 

we have tried to be more prepared. And we were ready last year, but the 

faster you can respond, the better. 

MR. GREEN. Thank you, Mr. Chairman. I have one more question. 

I don’t know if we will have a second round. 

MR. WALDEN. [Presiding.] We will have another round, I have been 

told. 

The Chairman now recognizes the gentleman from Texas, Dr. 

Burgess. 

MR. BURGESS. Thank you. 

Mr. Slaughter, just continuing on Mr. Green’s last thought, do you 

have a distributive network in mind for people getting caught in traffic 

jams if that happens again? Are we going to use the National Guard or 

State Guard? How are we going to get the gas to the people that need it? 

MR. SLAUGHTER. Well, the industry has been working together and 

also with other folks to try to make sure that this distribution system 

works better this time than last time. What was a particular problem, as 

you know, and Congressman Green mentioned earlier, is that people 

didn’t know where that hurricane was going to hit. It takes as much as a 

month to get a refinery started and back online. 

MR. BURGESS. I was thinking specifically of the people who were 

caught in the contra flow freeway lanes, eight lanes coming out of 

Houston, Texas, when traffic wasn’t moving and they ran out of gas. 

Are we going to have a way to get gas to their tanks if we have another 

evacuation ordered? Mr. Conley? 

MR. CONLEY. If I just make one comment, I was in San Antonio last 

week for our annual conference and talked with a Mr. Jake Bailey from 

Bolero. One of his questions to me was, can we get more Texas carriers 

from other States, if need be, to help next time get the petroleum, the 

gasoline, down quicker? 

One of the things I asked him is, what can we do to get the trucks 

going this way when everybody else is swimming upstream, and he said 

that they do have information from the State that they will provide patrol 

cars, State troopers and all. There is going to be a meeting I believe 
218

Thursday, which would be today, in Houston with Bolero and some of 

the other carriers, as to how to do that better next time. 

MR. BURGESS. If you wouldn’t mind just sharing that with this 

committee--I know it is a little bit off point, but if you get the 

information from that meeting. 

Let me ask you, since we are already talking, you talk in your 

testimony about the tank trailers being used to transport ethanol; and in 

an ideal situation you would have them full both coming and going with 

ethanol to the plant and then reformulated gasoline leaving the plant. 

What are the barriers to doing that right now? 

MR. CONLEY. Well, right now, it is a time type of thing. Again, you 

don’t have as much demand certainly for ethanol as we do for the 

gasoline. 

Take as an example, what we have been doing, one of our carriers, 

either by barge or by rail, a product comes into the harbor of Baltimore. 

They will pick it up and bring it into Newington. So, in the ideal 

situation, a Baltimore or a Virginia-based carrier can pick it up, bring it 

over here, a full load of ethanol, and then load gasoline on top and go out 

and make their delivery. 

MR. BURGESS. I appreciate that. 

In the interest of time, again, if you wouldn’t mind providing us a 

written response of what we might to do make that happen with greater 

facility for your industry. 

MR. CONLEY. I would be pleased to. 

MR. BURGESS. Mr. Shea, in your testimony, you talk about 

renewable fuels. The E-85 has about 75 percent of the actual power--I 

assume E-85 means it is 85 percent ethanol--but you lose 10 percent of 

your actual power in a gallon of E-85. Do I read that in your testimony 

correctly there? 

MR. SHEA. I am not sure you read that in my testimony, but maybe 

it is in my full written statement. Yes, I think there is power loss. There 

is no question. 

MR. BURGESS. Actually, I guess it was Mr. Reid’s testimony that I 

was reading here, on page 12 of your testimony. 

MR. REID. There are fewer BTUs in the E-85 than in a regular 

gallon of gasoline. 

MR. BURGESS. And yet the price is the same. We have heard 

testimony on that various times during the week. In fact, you have that 

in your testimony, that the price is not priced at a level that matches the 

energy content of a gallon of E-85. I am just concerned. Are we getting 

some ethanol price gouging here? 

MR. REID. I am not in the ethanol business myself. I can’t really 

comment on that. 
219

MR. BURGESS. Okay. 

MR. DINNEEN. Congressman, just on the E-85 question, it is true 

that in the flexible fuel vehicles that are being produced by Ford, GM, 

Chrysler today, there is a reduction in mileage because of the reduced 

BTU content of the ethanol. I mean, that is just a fact of science. 

MR. BURGESS. But it is priced the same as a gallon of petroleum 

product? 

MR. DINNEEN. Not in all markets. In most markets where E-85 is 

sold, it is sold at a significant discount to-- 

MR. BURGESS. Yet we have heard testimony to that effect during the 

week. I am concerned about the price of E-85, whether it is reflective of 

the actual energy that you are buying. 

MR. DINNEEN. In today’s market, though, most ethanol is being sold 

as a blend component with gasoline. 

MR. BURGESS. Let me ask Mr. Becker a question before I run out of 

time. 

On the current air quality, the reformulated gasoline and the boutique 

fuels that we have been discussing all morning, is there any difference in 

the engines that are sold today and the rules made for reformulated 

gasoline 10 or 15 years ago? Are we keeping pace with the changes in 

engine technology? We have heard a lot from Mr. Markey about how 

engine technology has changed. Are we keeping pace with that with our 

design of boutique fuels and reformulated gasoline? 

MR. BECKER. Yes. The fuels have gotten cleaner, and the cars have 

gotten cleaner, and a lot of that is the credit of EPA and the stakeholders 

who have worked with EPA to make those-- 

MR. BURGESS. Does the design of our gasoline continually evolve 

then during that time? 

MR. BECKER. Yes. There is lower sulfur fuel that is taking effect 

this summer. There is lower sulfur diesel fuel, and both those fuels will 

not only clean up the air directly, but cleaner sulfur, lower sulfur fuel 

will enable advanced technologies to work more efficiently than they 

otherwise would. 

MR. BURGESS. Mr. Slaughter, you wanted very much to say 

something about the discussion of the memo earlier. Did you get a 

chance to cover your concerns, the refinery memo? 

MR. SLAUGHTER. Well, actually, it was on the question about the 

ExxonMobil comment. You know, it is true that we have been adding a 

lot of capacity domestically at existing sites. You have them on tap 

quicker than you would with a new refinery, so the product then is 

available. ExxonMobil has added the equivalent of one new 

medium-size refinery itself in recent years, and that is by adding on to 
220

existing refineries, the output of those additions were available for 

consumers much more quickly. 

So all of our companies have made substantial investments. Bolero 

has increased the capacity of their refineries. They have purchased about 

400,000 barrels a day already and are planning an additional 400,000 

barrels a day of investment across the rest of its system in the years to 

come. So the refining industry made significant investments. That 

includes ExxonMobil and the rest of our members. 

MR. BURGESS. I would point out that the profits for that don’t just 

go to executives, but they also go to teachers, policemen, and retired 

people all over the country, the stockholders of those companies. 

I yield back. 

MR. WALDEN. The gentleman’s time has expired. 

The Chair recognizes the gentleman from California Mr. Waxman. 

MR. WAXMAN. Thank you very much, Mr. Chairman. 

Mr. Cavaney and Mr. Slaughter, I want to bring to your attention an 

article in the Associated Press dated April 10, 2006, entitled “Yuma 

Refinery Project Still Seeks Investors.” As I am sure you are aware, a 

proposal to build a new refinery has twice received permits for 

construction. The first time was on January 16, 1992. Although a permit 

was in hand, the refinery was never built because the project didn’t get 

financing. 

The same thing appears to be happening today. On April 14, 2005, 

the Arizona Department of Environmental Quality issued another permit 

to Arizona Clean Fuels allowing installation and operation of the facility. 

Do either of you have any information as to whether Arizona Clean 

Fuels has found investors for their new permitted refinery? 

MR. SLAUGHTER. Mr. Waxman, they are members of our 

association. I don’t have that information on financing. But let me say 

that there are difficulties with that facility, for instance as to crude supply 

for that facility, that have not yet completely been resolved. There have 

been changes in there that I think have affected people’s ability or 

willingness to finance. 

Now, supposedly they have some financing, but that’s particular to 

the company and proprietary information, and I don’t have it. 

MR. WAXMAN. Mr. Cavaney, do you have any information on that? 

MR. CAVENEY. Not a member of ours. 

MR. WAXMAN. Okay. Well, a year after receiving their permits, 

with gasoline prices at a record high and refineries reaping record profits, 

Arizona Clean Fuels is having a problem, and the article seems to 

indicate their biggest problem is finding financing. 

The other point I would raise is that the Wall Street Journal pointed 

out that ExxonMobil now has $32 billion in cash. ExxonMobil has 
221

enough money to invest in the Yuma refinery if it wanted to, doesn’t it, 

Mr. Slaughter? 

MR. SLAUGHTER. Thank you. You know, people put their capital in 

the best investments. There is a lot of disagreement as to whether a new 

refinery is the best investment. 

For instance, you know, ExxonMobil also has returned $55 billion in 

the last 3 years to its shareholders. So a lot has been done with 

investment money and other money that ExxonMobil has. I mean, they 

look at refineries. They can look at exploration and production 

investments. 

MR. WAXMAN. Would it be unfair if someone said that ExxonMobil 

didn’t want to build any new refineries because new refineries might 

reduce their justification for higher prices? 

MR. SLAUGHTER. Yes, it would be very unfair. 

MR. WAXMAN. Okay, thanks. 

Now, Mr. Caveney. 

MR. CAVENEY. Yes, sir. 

MR. WAXMAN. In your written testimony you said API supports 

increased energy efficiency in all sectors of the economy, including 

transportation, as an essential part of efforts to meet U.S. energy 

challenges. And Mr. Slaughter emphasized the importance of CAFE in 

his oral testimony today. 

Mr. Cavaney, is it your position that if we are going to get energy 

efficiency in the transportation sectors, that if fuel economy standards are 

revised, we should, in fact, have efficiency increased and not decreased, 

and a guarantee to that effect? 

MR. CAVENEY. We feel it should be increased in all sectors, and that 

does include transportation, because there is less flexibility in the 

transportation sector than any other for the use of energy, and it would be 

very helpful. 

MR. WAXMAN. You didn’t mention that last year when you testified. 

Any reason why not last year but this year you have come out with this 

position? 

MR. CAVENEY. Well, the one thing that we have seen is that it is 

very clear the global pressure on supplies is great, and it is going to be a 

little while before that relief comes, and we think it just makes good 

sense over time to go ahead and take this particular approach. 

MR. WAXMAN. Okay. Mr. Slaughter, you indicated that NPRA 

characterizes a current environmental agenda as a regulatory blizzard, 

and you seem to be blaming a tight gasoline market and high prices on 

environmental protections. You gave us a chart listing the burdensome 

requirements on refineries that drive high gas prices, and one of them 
222

was boutique fuels cap. This is something Congress adopted last 

summer to limit States’ clean fuels. 

Isn’t it correct that your colleagues in the oil industry had been 

calling for a boutique fuels cap for years while environmental advocates 

opposed it? 

MR. SLAUGHTER. There is some disagreement in the industry on the 

boutique fuels issue. You know, we basically feel that the boutique fuels 

issue is not as serious as some people have suggested. A lot has already 

been done through EPAct. It is being looked at. We feel the tremendous 

improvements that have been made, for instance, in largely desulfurizing 

regular gasoline, is going to mean that regular gasoline and reformulated 

gasoline in the future is going to look relatively similar. We think fewer 

people will have a desire to go to boutique fuels because of that, and we 

don’t really see a need for a limitation. 

MR. WAXMAN. You also cite a renewable fuels standard, which was 

imposed by this Republican Congress, as another environmental problem 

that is driving up costs. If anything, ethanol makes smog worse, not 

better, and corn-based ethanol provides only marginal global warming 

benefits. To the extent that new ethanol plants are fueled with coal, 

ethanol doesn’t provide any environmental benefits at all and likely 

would make things worse. 

And I point that out just to challenge your assertion that Congress 

adopted the renewable fuels standard as part of an environmental agenda. 

These are not part of an environmental agenda. And I think that the 

charge that it is the environmental laws that are driving up the costs for 

gasoline is an unfounded one, and I certainly take issue with it. 

My time has expired. Thank you, Mr. Chairman. 

MR. WALDEN. The Chair recognizes the gentlewoman from 

Tennessee Mrs. Blackburn for questions. 

MRS. BLACKBURN. Thank you, Mr. Chairman, and thank you to 

each of you for your time and your patience with us this morning. 

Mr. Reid, I want to come back to you and Mr. Slaughter on the 

ultra-low diesel fuel for the summer. I am one of those, back in the late 

1970s, when I had little kids, and we had the situation with the gas lines, 

I bought a diesel vehicle and loved it, used it, and found that to be a great 

way to work around the situation. 

I know that as our constituents are looking for options, some of them 

are going to be looking at light trucks and diesel vehicles, and so I have 

talked to some of my oil marketers about the transition; the fact that you 

are going to have to have the fuel to the terminals in mid-July, and they 

have got to have it to the retailers in September. And I have listened to 

this discussion, as we are now in our third hearing on this issue, and we 

continue to come back to refinery capacity. We are at about 95 percent 
223

refinery capacity, and during the summer we can go as high as 

98 percent. 

I am looking at this adding another requirement, and you all have 

talked about the different blends and getting things to the customers. So, 

Mr. Reid, I think you are probably--looking at the panel, and listening to 

you, you are the one that lives most in the real world. You are not here 

on the Beltway, and you are dealing with people that have got to deal 

with the customer who is putting that money on the table. 

So, looking at what is considerably a high refinery utilization rate, 

and then adding on this requirement with the ultra-low diesel fuels, 

should we expect a price spike in diesel this summer? 

MR. REID. I understand your concerns. I am really unsure as to how 

the markets will respond to the roll-out of the ultra-low sulfur diesel fuel. 

We have concerns it could create a price spike, but it is really uncertain. 

Refiners tell us that supplies will be ample. There are still some issues 

with respect to how it is going to come through the distribution system. 

MRS. BLACKBURN. You are confident that the supplies will be 

ample? 

MR. REID. Yes. 

MRS. BLACKBURN. Okay. And you were just talking about your 

distribution system. Go ahead and finish that. 

MR. REID. Well, there are still challenges associated with getting the 

ultra-low sulfur diesel fuel from point A, where it is manufactured, to 

point B, where it is stored, distributed, and then down to the retail level -- 

MRS. BLACKBURN. Sure. 

MR. REID. --and maintaining the specification. It is an open question 

how that is going to work out at this point. 

MRS. BLACKBURN. Do you feel like you have enough lead time? 

MR. REID. We have as much lead time as we have. 

MRS. BLACKBURN. You have got what you got. Well, the good 

thing is you all were looking at this as kind of being the year of fuel 

specification anyway. 

MR. REID. Welcome to the party. 

MRS. BLACKBURN. Yeah. Exactly. 

Okay, Mr. Slaughter, do you want to add anything to that? 

MR. SLAUGHTER. Well, I would like to say that industry has been 

working closely with all of their stakeholders to try to make this 

transition as smooth as possible. It is a daunting challenge. We have 

never made a product this low in sulfur. The 15 ppm is measured at 

retail. At the refinery, we are going to have to put out 5 to 7 ppm sulfur. 

And the difficulty is that it is extremely difficult to make. 
224

Now, a lot of work has gone into trying to make this a successful 

transition, and our fingers will be crossed. We think we have done 

everything we can. 

MR. BECKER. May I? 

MRS. BLACKBURN. Yes, Mr. Becker, go ahead. 

MR. BECKER. Thank you. I just want to echo what Mr. Slaughter 

said. This was a rule that was developed based upon compromises from 

the environmental health groups, the States, and the oil industry. It is a 

rule that is going to result in several thousands of saved lives. It is going 

to have a huge air quality benefit. It is going to have a huge economic 

benefit to this country. And it is one of the success stories that all of us 

collectively can brag about. 

We would have preferred to see the rule implemented earlier, but as 

part of the compromise, we thought EPA did a fair job of bringing in the 

stakeholders and coming up with the deadlines that it did. 

MRS. BLACKBURN. Okay. Mr. Slaughter, go ahead. 

MR. SLAUGHTER. I wanted to add one additional point, since we 

have talked a little bit about numbers and profits today. The cost of this 

program is $8 billion. That is on top of the $8 billion the industry spent 

to reduce sulfur in gasoline. 

So I just want to point out that it is a very significant commitment of 

this industry to new investment for environmental reasons to make this 

product for the U.S. 

MRS. BLACKBURN. I appreciate that. 

Mr. Slaughter, I am going to run out of time, and I had really wanted 

to talk with you about New Source Review. We have done some things 

on that and have had some things included in the GAS Act that we 

passed in the House. It didn’t pass in the Senate. And the more I hear 

and read, and the more I look at New Source Review, I think we were 

right in the actions that we took on the GAS Act. 

I will submit this to you in writing, but I think it is an important part 

of the record in looking at New Source Review and those requirements 

and how it may either enhance or stifle and prevent investment in 

refineries here. 

I think Mr. Cavaney was trying to recall that number of refineries 

that we had had, and our committee work shows that we have not had a 

new refinery since 1976, and in 1981 we had 324 total. Today we have 

148. That is of concern to us, and I would appreciate your response in 

writing, and I will submit the question to you in writing. 

MR. SLAUGHTER. Thank you, I will. 

MRS. BLACKBURN. Thank you. I know my time has expired. Thank 

you, Mr. Chairman. 
225

MR. WALDEN. The Chair recognizes the gentleman from 

Washington State Mr. Inslee for questions. 

MR. INSLEE. Thank you. Really appreciate you all being here. 

Just to let you know, there are some sort of bold ideas floating 

around in Congress now. One is called the New Apollo Energy Project, 

something I am cosponsoring with a bunch of folks who really believe 

that we need to take some very bold steps in energy, not just little baby 

steps. We call it the New Apollo Project because we think we need 

something of the same scale as Kennedy challenged us to in 1961. We 

don’t need that little small step for man, we need a giant leap for 

mankind in here. So I appreciate your being here to talk about it. 

I want to talk to you about ethanol and flex fuels and how we 

develop infrastructure in that regard. Some of us have been looking at 

the experience of Brazil, where they have had considerable success. We 

are told about 40 percent of their transportation infrastructure is now 

fueled by ethanol, principally from sugar cane in Brazil. That resulted 

from pretty aggressive, pretty assertive, pretty visionary actions by 

Brazilian leaders over the last couple of decades actually to develop both 

a demand on the demand side for ethanol, which, as we know, is a great 

product because it reduces CO2 emissions, and we have a global 

warming issue we have to deal with, but also on the supply side to help 

development of the infrastructure so that that E-85 is available at the 

pumps for their consumers. 

Now, what the Brazilians tell me is that they sort of felt both was 

necessary; that it was necessary to help the supply side to provide some 

incentives, some assistance to the suppliers to help the infrastructure 

development to put in those E-85 pumps, and to develop the refineries 

and the transportation infrastructure, but it was also necessary to help on 

the demand side when they have helped Brazilians get these flex-fuel 

vehicles that can burn either gasoline or ethanol. 

So I guess what I would just ask for your thoughts on are, is that the 

right strategy? Do we need to do both? And if so, what are the most 

effective things on either approach to try to inspire that progress? 

MR. DINNEEN. Congressman, Brazil has done a tremendous job 

building an ethanol industry through tax incentives and mandates for use. 

And actually, they built their ethanol industry largely first, initially, 

through a blend market, requiring ethanol to be used and blended with 

gasoline. They had blended as much as 25 percent with gasoline in 

vehicles that were on the road. It has only recently been that Brazil also 

required the availability of E-85 and provided additional incentives for 

E-85 vehicles. That program has indeed proven to be extraordinarily 

successful. 
226

In this country, we are still working through ethanol as a blend 

component with gasoline, and there is tremendous room for growth as 

ethanol becomes a more ubiquitous component of the motor fuel market 

as a blend. 

For ethanol in this country to be more widely used as an E-85, 

several things need to happen. You need to have more vehicles. We 

have 5 million E-85 vehicles on the road today. That is a good start, and 

I give great credit to Ford, General Motors, and Chrysler for the 

commitment that they have made toward those vehicles, but it is not 

nearly enough. It is not enough vehicles to attract a gasoline marketer to 

put in an E-85 fuel pump. 

You need more pumps. We only have 650 E-85 pumps across the 

country, out of something like 130,000 gasoline stations across the 

country. You need to have more infrastructure. That will come as the 

vehicles come. 

But there is one other very important component. You need more 

ethanol. I mean, to really replace gasoline, you are going to have to be 

talking about ethanol from cellulose. You are going to be talking about 

30 billion, 40 billion, 50 billion, 60 billion gallons of ethanol. 

Congressman, you can’t do that from grain. 

MR. INSLEE. And I am very happy to report that the first commercial 

cellulosic ethanol plant is going to go in in my neck of the woods in 

northwest Idaho and is ready to go; construction is ready to start as soon 

as the loan guarantees are perfected. And I think that is a very exciting 

development, because cellulosic ethanol, of course, is going to have a 

production per acre severalfold what existing crops have. And when we 

do that, then we really are talking about a meaningful alternative to 

gasoline in this country. 

I just want to let you know of some efforts going on here is that 

many of us think that while Brazil has provided some good vision, we 

don’t have the luxury of time that they had, of decades, to start this 

transition. Our security needs in the Mideast, the science of global 

warming indicates that we have to get meaningful transition in the next 

decade or we are going to be eaten alive. We are going to be in areas of 

CO2 emissions that are so high that these changes are going to be 

irreversible. 

And I, and I don’t think I am alone, believe we have to act more 

quickly than Brazil did, perhaps in the same direction, but with much 

more dispatch. We just don’t have this luxury of time. So one of the 

things we are talking about is trying to inspire more flex-fuel vehicles to 

be sold so that it will increase that demand so that the person can then 

afford to put up the pump because they know the demand is there. 
227

In Brazil Ford is running commercials that has a young man pull up 

to a pump, and it shows him being indecisive. He can’t decide between a 

blond or a brunette, between one diet pop and another, or gasoline and 

ethanol. He finally punches ethanol, which is the cheapest one at the 

moment. So that is Ford’s marketing strategy in Brazil, and we want to 

have the same strategy here. 

Did you want to make one comment? I have brief time. 

MR. SLAUGHTER. Yes, Mr. Inslee. I would just say that the 

Brazilian project is very interesting, but apparently with a $2.90 price for 

crudes for gasoline and for the $2.90 price for ethanol here, and the $2.38 

price for gasoline he wouldn’t be punching the cheaper option in the 

United States. 

MR. INSLEE. That may be true today. And I will just tell you what 

my bet is on. My bet is on that there is not going to be a whole lot of 

new dinosaurs found to dramatically increase our fossil fuel production. 

My bet is we’re going to find a lot more Chinese demanding 

automobiles, and that the price of fossil fuels is going to--over a long 

term is going to go up, and the price of ethanol, when we develop 

cellulosic ethanol, is going to go down. 

So I think we should be putting our money in part on an alternative 

that is coming down rather than a horse that is going up. That is just one 

person’s view. 

MR. SLAUGHTER. Hasn’t gone down yet. 

MR. WALDEN. The Chair recognizes the gentlewoman from 

Wyoming. 

MRS. CUBIN. Thank you, Mr. Chairman. I will be brief because 

most of my questions have already been asked and answered, and I 

appreciate that. 

I would like to start with Mr. Shea. What insight can you offer as to 

what net effect the capping of boutique fuels, as mandated by Section 

1541(b) of the Energy Policy Act, will have on national pipeline storage 

and transmission capacity? 

As we continue to work to reduce the number of boutique fuels in the 

system, do you think publishing the list will be of any help in the 

management of our Nation’s pipeline system? 

MR. SHEA. I believe currently we are able to handle the 

transportation of the boutique fuels that exist. Our concern is if there is 

continued proliferation of boutique fuels and what impact that may have 

as it relates to pipeline capacity, through-put capacity, and also tank farm 

storage capacity. 

We are in a position today, I think, in the pipeline industry, with the 

advent of the growth of boutique fuels, adding to that the phase-out of 

MTBE for ethanol, the phase-in of ULSD and such low parts-per-million 
228

requirements, that the pipeline system is getting stretched to capacity in 

certain segments. So I guess my view would be that the capping of 

boutique fuels would be helpful at this point. 

MRS. CUBIN. Mr. Waxman, I think, stated in one of his questions as 

he went along that ethanol was not cleaner, or it was less pollutant, I 

should say, than oil products. Can any of you respond to that? 

MR. SLAUGHTER. I would be glad to say something. 

MR. DINNEEN. And I will probably have to say something after that, 

but go ahead. 

MR. BECKER. And then I will change his view. 

MR. SLAUGHTER. The fact of the matter is there are differences. If 

you use ethanol, you produce aldehydes, which is a form of pollutant. If 

you use ethanol in the summer in gasoline, it increases the volatility of 

the mixture, and you basically lose about 5 to 6 percent of the volume. 

MRS. CUBIN. Of the gasoline or the ethanol? 

MR. SLAUGHTER. Of the gasoline. Because you have to back out 

some of the high energy content, but more volatile parts of the gasoline 

to accommodate the ethanol volatility number. 

So there are new investments that have been made by the industry 

this year to accommodate that and to use ethanol in those areas. It is just 

that it presents different challenges, and the industry this year is learning 

how to deal with those. 

MR. DINNEEN. Surprisingly, I actually agree with much of that. 

Ethanol has tremendous exhaust emissions benefits, reducing carbon 

monoxide and exhaust VOCs. As Bob indicated, it does have a higher 

volatility when blended with gasoline, so evaporative emissions increase. 

When used in clean-burning gasoline programs, however, refiners have 

to accommodate for that increased volatility by producing a 

lower-volatility blend stock. The refiners have made the investments to 

make sure that is possible. 

So from an air quality standpoint, using ethanol in clean-fuel 

programs is going to have the same air quality benefits as any other fuel. 

MR. BECKER. And if I may add to that? 

MRS. CUBIN. Please. 

MR. BECKER. I am going to say the same thing in different words. 

In a few areas of the country, several areas of the country, where 

there is Federal reformulated gasoline and ethanol is being used, there 

shall not be any additional increase in volatility because of the specific 

cap in the Federal reformulated gasoline program. 

In Wyoming and most other areas of the country that are using 

conventional gasoline that is going to have ethanol in it possibly. 

Ethanol is allowed a waiver to the volatility limits that gasoline had to 
229

meet in the past. And so by regulation, by waiver, ethanol will be 

allowed to be more smog-forming than gasoline. 

MRS. CUBIN. More what? 

MR. BECKER. More smog-forming, more volatile than gasoline in 

the other Federal reformulated gasoline areas. 

MRS. CUBIN. And at high altitudes, of course, that volatility problem 

is worse than it is at lower altitudes. 

MR. BECKER. And this could be a problem. 

MR. DINNEEN. But if it is a problem, the States have the authority to 

petition EPA to have that volatility waiver lifted. 

MR. BECKER. And Mr. Dinneen is correct, but this is not an easy 

step, to overcome this obstacle that we face. And we are a fuel-neutral 

association. We don’t have a dog in this fight about whether it is ethanol 

or any other additive. But you raised the question. 

This is going to make it more difficult for States who want to meet 

their smog, their ozone standards to meet, because by regulation, by 

waiver we will see more emissions in conventional gasoline areas from 

ethanol. And to bring them down, we will have to convince EPA and 

seek that waiver, which is not an automatic waiver. 

MR. DINNEEN. But EPA has never not approved such a waiver, and I 

guess I just have more faith in State air quality officials than Mr. Becker. 

MR. BECKER. Excuse me a second. 

MRS. CUBIN. So it depends on what chemical it is that you want to 

decrease. I mean, if you are talking about the hole in the ozone, we are 

talking about carbon dioxide. So that isn’t an aldehyde. 

MR. BECKER. The Congress has, in the Energy Policy Act, expanded 

the amount of ethanol, have codified the expansion of the amount of 

ethanol throughout the country. You raised the issue as to whether or not 

this is going to exacerbate air pollution, or Mr. Waxman raised it and you 

are responding as to whether it is going to exacerbate air pollution levels 

in some areas of the country. 

MRS. CUBIN. So it will just be different pollution. 

MR. BECKER. Unless EPA accepts the waiver request that the State 

offers, there will be increases in smog-forming emissions in those areas 

of the country that use ethanol where there is not Federal reformulated 

gasoline. I think that is a fact. 

MR. WALDEN. The gentlewoman’s time has expired. 

MRS. CUBIN. Thank you, Mr. Chairman. 

MR. WALDEN. For the record, we have a vote on the floor with 

about 7 minutes left. So I am going to ask a couple of brief questions, 

but before I do, I want to make one statement. 

We have heard a lot over the last couple of days about the success in 

Brazil based and attributed to their increase in ethanol production, which 
230

is remarkable. But as I have looked into this, it appears that Brazil’s 

energy independence really in large measure has come about because of 

its increase in crude oil production, which I am told is nine times larger 

than its increase in ethanol production between 2004 and 2005 and four 

times larger than the 2000 to 2005 period. And they are on track to 

increase their crude oil production even more, and ethanol plays a very 

small piece. 

Now, I am an ethanol advocate, and I think we need to look at these 

alternative fuels. I think there is a lot of opportunity out there, but am I 

missing something here? 

MR. CAVENEY. No, that is absolutely correct. Another thing 

happened back in the early 1970s. Brazil was faced with this problem of 

wanting to try to become energy independent. On the one hand, they 

went down the ethanol track, which we have heard a great deal about, but 

they also formed their national oil company, Petrobras. Petrobars has 

been very, very successful offshore of Brazil, making some very 

successful finds in the deep water and using that. 

So, yes, their independence is in large part a combination of both of 

those things and not attributable to one or the other. 

MR. WALDEN. But if the amount of crude oil production is up nine 

times over that of ethanol, how can you say it is not attributable one over 

the other? I mean, ethanol represents like .25 million barrels per day, 

and crude oil is 1.65 or something. 

MR. CAVENEY. The point I was trying to make was that when it 

became clear that they were having these successes with their offshore 

production and all, they didn’t feel they had to rely exclusively on 

ethanol to carry the weight of their goal of becoming energy 

independent. 

MR. WALDEN. I guess that is what I am trying to figure out here. In 

my district we produce geothermal heat, we produce solar electricity, we 

produce wind power in copious quantities, and not just because I am 

upwind. You know, politicians. Never mind. 

But we produce a lot of alternatives, and I am a big advocate for that. 

But I am also a realist to know that you can’t rely on that totally. And it 

seems to me in America part of our energy independence has to also rely 

on increased crude oil production out of our own resources. Am I 

missing something here? 

What rate of growth are we seeing on production of crude oil in 

America? Who can address that? 

MR. CAVENEY. I can address that. 

MR. WALDEN. All right. 

MR. CAVENEY. You are absolutely right. One of the things people 

do is selectively take information out of the Brazilian experience and 
231

bring it out to serve their own interests. And as Bob mentioned earlier, 

the success of getting ethanol going in the early years was mixing it with 

alcohol, alcohol and gasoline together. That is the same approach we 

recommend here, because what you want to do is to get the ethanol 

industry up as big and as strong and as flexible as it can be to withstand 

the huge swings that the fuels industry goes through. 

And other people say, no, the Brazilian experience is you have to go 

to E-85. Well, there are 222 million automobiles and SUVs on the road 

right now, only 5 million of which-- 

MR. WALDEN. Where, here or Brazil? 

MR. CAVENEY. Here in the U.S., only 5 million of which are 

flexible fuel. So you will have a very long wait if you focus on that. 

So what we would like to see is continued U.S. production of crude 

oil here and conversion in our refineries, blending it with ethanol. We 

produce per gasoline 140 billion gallons. 

MR. WALDEN. But I want to get back, because I am out of time, and 

I have to go vote on the floor. 

How much is the crude oil production? 

One comment to ethanol and alcohol. I didn’t think you were 

supposed to drink and drive. 

But, Mr. Slaughter, you indicated you might be able to answer that 

question. What is the crude oil production in the United States; the rate 

of growth? 

MR. SLAUGHTER. Crude oil, well, it is small. Actually it has been 

negative in many years, but it has recently turned around a bit. There are 

several new projects, particularly offshore, that are very large that are 

going to increase domestic production slightly over the next few years. 

And, of course, ANWR would help a lot more. 

But the fact of the matter is U.S. crude production has been on the 

decline more often than on the incline over the past decade. 

MR. WALDEN. I am going to have to leave it at that because we are 

under 3 minutes now for the vote on the floor. 

The Committee will stand in recess until about 1 o’clock or 

thereabouts, or a few minutes after the last vote. 

Thank you. 

[Recess.] 

CHAIRMAN BARTON. [Presiding.] The committee will come to 

order. I thank you all for staying. I know it has been a long day. 

We are going to start our second round. I know Mr. Boucher has 

asked questions the first time, Mr. Hall, and I think Mr. Bass. So the 

Chair will recognize himself for the second round of questions. 

In my first round, I picked on Mr. Dinneen, so I am not going to pick 

on you this round. 
232

MR. DINNEEN. Can I go? 

CHAIRMAN BARTON. No, you can’t go. 

I want to ask Mr. Slaughter some questions. 

We are beginning to increase refinery capacity again in this country. 

That is a true statement, isn’t it? 

MR. SLAUGHTER. Yes, it is. 

CHAIRMAN BARTON. I think you said that about a million and a half 

barrels of projects have been announced. Most of those are expansion of 

existing refineries; is that correct? 

MR. SLAUGHTER. I think they all are expansions of existing 

refineries. 

CHAIRMAN BARTON. Okay. I also think you said that your trade 

group does support the refinery permitting reform bill that passed the 

House and is scheduled to come back up again next week. 

MR. SLAUGHTER. That is right, we do. 

CHAIRMAN BARTON. Now, my good friends, Mr. Boucher and Mr. 

Dingell, and I have many good friends, but those two good friends have 

announced, and may have introduced, a refinery bill. Has it been 

introduced yet? 

MR. BOUCHER. [Nodding in the affirmative.] 

CHAIRMAN BARTON. I haven’t studied the bill in its totality, so if I 

misrepresent it, Mr. Boucher can correct me, but my understanding is 

that they would require the construction of brand new refineries for 

military purposes. And do you all have a per barrel per day requirement, 

Mr. Boucher? 

MR. BOUCHER. Mr. Chairman, it would be 5 percent of the existing 

refinery capacity. 

CHAIRMAN BARTON. So that is about 850,000 barrels, somewhere in 

that range. What would the industry position be on the Boucher-Dingell 

bill? 

MR. SLAUGHTER. Well, I hesitate to say because I am not familiar 

with everything that is in the bill. I think if you are particularly talking 

about the idea of government-run refineries, you know, one of the 

questions would be what kind of role that it would play. 

We believe that the domestic industry has shown, by significant 

investment in the domestic market, that we are very committed to it. The 

problem with new refineries, I will have to say, Mr. Chairman,-- 

CHAIRMAN BARTON. Look, this is no time to be reticent. 

MR. SLAUGHTER. Well, with new refineries, just one question. We 

have always said that people who want to build new refineries should be 

encouraged to do so. One of our members is Arizona Clean Fuels, and 

we have worked with them. 
233

One of the things I don’t understand is what is the difference 

between the steel that goes into a new refinery and the steel that goes into 

an existing refinery? Because the existing refinery can produce more out 

of that steel in 3 or 4 years, when you don’t know what you are going to 

get out of the new refinery. 

CHAIRMAN BARTON. It is unusual for a witness to ask a question of 

Congress, but in the spirit of an open dialogue, to get to the bottom, I 

mean, this is a hearing about truth. So my answer to that would be that 

my understanding is that a brand-new-from-scratch refinery could use 

the best available technology, would tend to be built in a way that could 

refine any kind of crude oil and would probably be more efficient. So 

that would be the technical answer. 

The political answer would be to show that we can. To show the 

American people and the world that we can still do things in America. 

MR. BASS. Mr. Chairman, if you would yield. I am over here, Mr. 

Chairman, in front of you. 

CHAIRMAN BARTON. Oh, Mr. Bass. I am looking down here. 

MR. BASS. It is also the issue of geographical diversity which we 

need, and which you don’t get when you expand an existing facility. 

CHAIRMAN BARTON. Yes. But I would rather have existing 

refineries expanded than no capacity increase at all. But if we could do 

some diversification and take advantage of some of the newer 

technology, I think that would be a good thing. 

One of the witnesses yesterday, Mr. Cooper of a consumer group, 

indicated that according to the Department of Justice, Antitrust Division, 

or maybe it was the Federal Trade Commission, they do a generic test for 

market concentration, and that in four of the five regions of the country, 

there is market power concentration in the refinery sector--in fact, in 

every part of the country except the Southwest. 

What would your response be to that, Mr. Slaughter? 

MR. SLAUGHTER. Frankly, I find that difficult to believe, because 

the refining and distribution system, for instance, in the Gulf, the Gulf 

supplies a great many products up the East Coast and into the Northeast. 

So I don’t know exactly what they have decided the perimeters are. 

Now, in the case of California, there are a limited number of 

refineries out there because most of the independents out there have gone 

out of business, with the exception of Valero and Tesoro. That is a 

separate case. And the problem is sometimes they are unable to permit 

an ethanol tank in California, let alone a refinery. 

CHAIRMAN BARTON. I understand. My time has expired. My last 

question before I turn to--I think Mr. Stupak is the first Democrat. He 

was actually here at the opening bell this morning. 
234

For both Mr. Slaughter and Mr. Cavaney, would your group be 

willing to engage in a series of off-camera discussions with myself, Mr. 

Boucher, Mr. Dingell, and Mr. Hall on perfecting the refinery permitting 

bill that we have got up to see if we could come to an agreement that 

would be bipartisan, that the industry would support, if we wanted to 

bring a little different refinery bill up in the next 2 to 3 weeks? Would 

you all be interested in doing that? 

MR. SLAUGHTER. We would, certainly. 

MR. CAVENEY. Yes. 

CHAIRMAN BARTON. Would you? Okay. 

I will yield then to Mr. Stupak. 

MR. STUPAK. Mr. Chairman, before you have that discussion, is 

there any willingness in the industry, Mr. Slaughter, to even increase 

refining capacity? 

MR. SLAUGHTER. Well, the industry has been increasing refining 

capacity every year. For instance, we were at 16.5 million barrels per 

day about 3 years ago. We went to 17.1. We are at 17.3 this year, and as 

I said, we are adding 1.4 million over the next 3 to 4. 

MR. STUPAK. Sure, but since 1981, you have gone from 325 

refineries down to 149 refineries. 

MR. SLAUGHTER. But the refineries we have now are larger and 

more sophisticated and produce more product than those refineries did. 

MR. STUPAK. Well, what is the one issue that would reduce the price 

of gasoline for the American consumer? If there is one thing you would 

say, what would it be? More refining capacity? 

MR. SLAUGHTER. Well, the difficulty is the market situation has led 

to the prices we are seeing today, both for crude and gasoline. And I 

think the good news, as I talked about in my testimony, is that additional 

supply is coming on the way because refining-- 

MR. STUPAK. But that is in crude, right, not in refining? 

MR. SLAUGHTER. Sorry? 

MR. STUPAK. That is in crude, not refining. 

MR. SLAUGHTER. Oh, no. But you need to recognize there are 

refineries that have just been in a very heavy maintenance season 

because of the hurricane last year. Those are coming back on line now, 

and there will be additional production of gasoline out of those refineries. 

And that should be very good news for this market. We can’t offer you 

new capacity by a snap of the finger. 

MR. STUPAK. No, I know that, but it seems to me we go through this 

every year about this time where we have an increase in prices, and it is 

switching over from winter fuel to summer fuel, you say. I would think 

by now we would have that figured out, after all these years. 
235

MR. SLAUGHTER. Well, this year we had to switch over from MTBE 

to ethanol on top of it, sir, and that has greatly complicated the process. 

MR. STUPAK. But MTBE has been on sort of the hit list for some 

time. You knew that was coming, right? 

MR. SLAUGHTER. Well, it was 4 percent of U.S. gasoline supply. 

Last year it was still 1.5 percent, so it is not an easy matter to replace it. 

MR. STUPAK. So if it is 4 percent, why then have prices gone up 70 

some cents, or 72 cents? 

MR. SLAUGHTER. It used to be 4 percent. It is now far less even 

than the 1.5 percent last year. But the prices have gone up because of the 

market situation and the tight supply/demand balance. 

MR. STUPAK. How about the crack price we talked about earlier; 

that crack premium? You understand that? That is up, as the Chairman 

estimated yesterday, about $30 when it should be about $8. 

MR. SLAUGHTER. The crack spread essentially represents market 

conditions. That determines what it is, and what goes in -- 

MR. STUPAK. Who determines the crack spread? 

MR. SLAUGHTER. I am sorry? 

MR. STUPAK. Who determines the crack spread? 

MR. SLAUGHTER. The market does. 

MR. STUPAK. Who is the market? 

MR. SLAUGHTER. The market is basically what people are willing to 

buy our products, at which price and in what quantities. 

CHAIRMAN BARTON. Would the gentleman yield on that? 

MR. STUPAK. Sure. 

CHAIRMAN BARTON. Mr. Slaughter, if you tell us what it is today, 

the EIA witness was a little unclear. He estimated it was about $20, and 

my information was it was as high as $30. If you could tell us, without 

being proprietary, generically, in general where it is today. 

MR. SLAUGHTER. The charts that I have seen recently are usually 

between 30 and 20, and closer to 20 now. I will give you a new number. 

I haven’t looked in the last couple of days. 

CHAIRMAN BARTON. And what historically has been considered a 

fair spread, that at that level refineries can make a reasonable profit and 

stay in business? My number is it has been around $3 to $4 a barrel. Is 

that a good number or bad number? 

MR. SLAUGHTER. That number I can’t give you because I think it 

would vary from refinery to refinery. And, again, I would say today’s 

situation, everyone agrees, is an extraordinary situation in terms of crude 

price, demand, and gasoline supply because of coming off the hurricanes. 

That is affecting that crack spread. 

CHAIRMAN BARTON. I understand that. 
236

We will give Mr. Stupak a little more time because I took some of 

his time, and I thank the gentleman for yielding. 

MR. STUPAK. Well, between September 2004 and September 2005, 

according to charts we have seen, the refinery costs have gone up 

255 percent. How do you justify that kind of increase? 

MR. SLAUGHTER. I think you meant to say refinery profits, because 

that was the figure used earlier by the Chairman. I think that is a 

suspicious figure. I have not looked at that. I have promised to look into 

it and get back to you on the number. 

There is no doubt that in the last 2 years refiners have been making 

more money than they have in the last decade. That is because it has 

traditionally been the least profitable sector in the refining industry. 

MR. STUPAK. Sure, and that is why we have those closed refineries 

and the increase in price. 

MR. SLAUGHTER. The fact of the matter is there has been significant 

investment in the refining industry in this country, and basically the 

industry is more competitive now than it was in the past. 

MR. STUPAK. Well, how much has the refining industry reinvested 

into refineries? There has been no new ones. I mean, Valero had a 

60 percent increase in the first quarter of this year. 

MR. SLAUGHTER. And they have put 400,000 barrels of new 

capacity into the refineries they have purchased over the last few years, 

and are putting 400,000 new barrels of capacity into those refineries in 

years to come. 

MR. STUPAK. And they had--6 months, ending in June of 2005, they 

also had a 60 percent increase. So even while they are increasing supply, 

if you believe that, they are still making 60 percent. So they are keeping 

their margins where they want their profits. 

MR. SLAUGHTER. The margins are a product of market situation and 

what buyers will pay for gasoline and what crude oil costs us to make the 

gasoline. 

MR. STUPAK. So bottom line is, basically, let the buyer beware as to 

the price. 

MR. SLAUGHTER. No. The bottom line is, let the market work. It 

always provides the consumer with adequate supplies at the best possible 

price. 

MR. STUPAK. Do you agree the risk premium is probably $20 on a 

barrel of oil? 

MR. SLAUGHTER. There is considerable disagreement on that. Some 

analysts feel there isn’t any risk premium. I feel, just by reading the 

news, it looks like there probably is one, but I can’t tell you how big it is. 

MR. STUPAK. Do you think the trading of oil should be regulated by 

the New York Mercantile Exchange, as one-fourth of it already is? 
237

MR. SLAUGHTER. I have to confess that I am unfamiliar with that 

bill, and I am going to have to look at it. 

MR. STUPAK. I am not asking about the bill, I am just asking about 

the theory. If 25 percent of the oil traded on the market is regulated, why 

shouldn’t the other 75 percent of the oil trades on the market be 

regulated? 

MR. SLAUGHTER. I will tell you, I am not an expert on crude 

trading, and I just can’t answer that. 

MR. STUPAK. Mr. Cavaney, your industry is going to spend 

$30 million on educating people on the reason gas prices are so high. 

How are you going to educate them? What is the message you are trying 

to give to the American people there? 

MR. CAVENEY. What we came across was the fact that the public 

did not understand the energy industry whatsoever, particularly in oil and 

gas. And in order to help them understand, and hopefully be able to help 

guide all of us toward better solutions, we decided to have an educational 

advocacy effort, which was to explain to people where their dollar goes 

when they buy a gallon of gas and how it is distributed. We talk about 

our investment, how much it takes to put in, how long an investment you 

need to do, what the returns on the industry were. We talked about the 

commitment to reinvestment and our involvement with alternative fuels 

and the like. 

So we are just in the process of trying to bring a level of education 

that frankly the industry had not really undertaken broadly over the past 

several decades. 

CHAIRMAN BARTON. The gentleman’s time has expired. 

MR. STUPAK. Thank you, Mr. Chairman. 

CHAIRMAN BARTON. The Subcommittee Chairman for Energy and 

Air Quality, Mr. Hall of Texas. 

MR. HALL. Thank you, Mr. Chairman. 

Mr. Conley, I suppose you would be the one I would want to inquire 

about truck carriers. In a day and time when airlines are flying full and 

going broke, and everybody knows the reason, what is the situation with 

the trucking companies? What effect do higher fuel prices--what impact 

is that having on them, as on other consumers? 

And if there is a problem with truckers who may haul ethanol going 

out of business because of higher fuel costs, thereby reducing the number 

of ethanol shippers, what is the situation there? 

MR. CONLEY. I don’t think it would be fair to say there is a danger 

of the people that I represent going out of business because of fuel costs. 

They are absorbing some of them and passing some of them on. So I 

don’t see that as a real concern. 
238

There certainly are some challenges, as we talked about in the 

testimony, in trying to adjust to the different types of fuels. And with 

ULSD coming in, that is going to be another one. But the fuel prices, 

obviously, we are paying them. Some of them we are passing on, and 

some we are absorbing. 

MR. HALL. Is that partially because some haulers are switching to 

hauling ethanol, and that is one way you are confident about the ethanol 

hauling capacity? 

MR. CONLEY. It is kind of an interesting thing, and it is fortunate we 

were just down in San Antonio for our annual conference most of this 

week, as I mentioned. I was talking to people who are petroleum 

haulers, and, of course, they are hauling the ethanol. But you don’t have 

to be a petroleum hauler to haul ethanol. 

MR. HALL. Are the petroleum haulers the ones switching to ethanol? 

MR. CONLEY. Well, they are hauling it. Yes, they are. Some of 

them are using their trailers to haul ethanol. And, like I said, they can 

maybe haul gasoline back out in an ideal situation. There is just not that 

much demand right now for ethanol that that can be done in every case. 

But the other side of it is, even for a gasoline hauler, whether it is a 

private fleet or one of ours, you don’t have to have a petroleum trailer to 

haul ethanol. So people who don’t haul anything in the petroleum 

industry, or have not, are now hauling some ethanol. So that is why I am 

confident that the capacity is there. 

MR. HALL. Well, your testimony doesn’t say it, but it kind of 

implies that there is or there may be some shortage of qualified personnel 

to haul ethanol. 

MR. CONLEY. That is another issue, and I will be glad to talk about 

that. 

MR. HALL. Tell us about that. 

MR. CONLEY. Well, the biggest challenge facing the trucking 

industry today, whether it is the tank truck industry or any part of it, is 

drivers, finding the drivers we want out there, recruiting people to come 

into the industry. It is a very tough job. So that is an issue. 

Now, in the area that I talked about in my testimony, it is the whole 

HAZMAT endorsement portion, to haul gasoline or ethanol, or any of 

these, you need your HAZMAT endorsement, which requires a 

fingerprinting procedure. I talked to one of our members this week who 

lost two good drivers because they just got tired of waiting in their State 

for the stuff to come back, and they went and got another job. So that is 

kind of an artificial pressure that has been imposed. That is why I 

suggested if we could maybe take another look at how that whole process 

works. 
239

But the bottom line is, the biggest challenge we have right now is 

finding the kind of drivers that we are confident will do the job. And 

there are a lot of reasons for that we could talk about. 

MR. HALL. There is another argument going on here in Congress 

about immigration. The House has passed a bill that protects the border, 

and the Senate has done practically nothing. Will our actions on 

immigration affect your acquisition of haulers? 

MR. CONLEY. Over time it could. Again, a lot of our people are in 

the HAZMAT business, so it is almost another hurdle to get a HAZMAT 

driver. But, on balance, we have got many carriers that have immigrant 

drivers that are doing very well. 

CHAIRMAN BARTON. Would the gentleman yield? 

MR. HALL. Sure. I have sense enough to yield to the Chairman. 

CHAIRMAN BARTON. You don’t have to. 

While we are on this, I just want to ask Mr. Shea a question, with our 

friend here from the trucking industry. I am told in Brazil that they can 

actually transport ethanol by pipeline, but in the United States we don’t. 

What does Brazil know that we don’t know about ethanol 

transportation by pipeline? It would, obviously, be much easier to move 

around the country, especially to my part of the country, if we didn’t 

have to use Mr. Conley’s trucks or the railroad’s tank cars. Not that we 

don’t love our truckers or train guys, but we were able to transport 

MTBE gasoline by pipelines. What is the problem in the United States 

about pipeline transportation for ethanol? 

MR. SHEA. First, let me say I am not sure why Brazil has been able 

to transport ethanol. I am not familiar enough with that. But the 

problem that we have is that, first, as you probably know, ethanol has a 

great affinity to absorb water, and most of our refined petroleum product 

pipelines are multiproduct systems hauling diesel fuel, jet fuel, gasolines, 

all different flavors and brands of gasolines, and there is inherently water 

in the pipeline system. 

So to blend ethanol with gasoline and try and transport it is virtually 

impossible. The ethanol absorbs the water, drops out, and is out of 

specification at that point. 

CHAIRMAN BARTON. What if we put ETBE in gasoline? Could you 

transport that in a pipeline? 

MR. SHEA. I am not a chemist or an engineer. I am not sure of that. 

Now, what I can say is that there have been tests; in fact, Buckeye 

has conducted one quite a few years ago where we stopped shipping 

refined products in a system up in Connecticut and Massachusetts, 

cleaned it out, because ethanol, of course, also is a solvent. So we have 

had to run a lot of ethanol through the pipeline to clean the pipeline out, 
240

and we were successful in transporting on a dedicated basis a batch or 

two of ethanol. 

But it takes large quantities of ethanol to make that economical. In 

our view, at this point, it takes a dedicated pipeline system to be able to 

transport ethanol and make it economical. 

CHAIRMAN BARTON. It is Mr. Hall’s time, but that question, Mr. 

Dinneen, and I think Mr. Slaughter wanted to comment on it. 

MR. DINNEEN. I will be brief, Mr. Chairman, if I could, on this 

subject. 

You are correct, Brazil does ship ethanol via pipeline. They ship it 

in a common carrier pipeline with a shipment of ethanol, and then a 

divider, and then a shipment of gasoline. One of the big differences is 

Brazil built its pipeline system to accommodate ethanol. So the pipeline 

system actually originates in the sugar-growing regions of the country 

and then flows to the population centers. 

Our pipeline system was built to accommodate gasoline, as it should, 

and so it originates in the Gulf Coast and flows out to the East Coast, and 

north to the Midwest, and west to the West Coast. For us to even 

participate in that at all, we would first have to ship our ethanol from the 

Midwest down to Houston. Well, we can ship it via train or barge 

directly to the market it needs to go. 

The other issue, of course, is just one of volume, and we are such a 

small component still of the U.S. motor fuel market that you would be 

hard-pressed to make it work on our pipeline system as it is structured 

today. 

CHAIRMAN BARTON. Bob, did you want to say something? 

MR. SLAUGHTER. Mr. Chairman, I was just going to give you an 

affirmative on whether ETBE could be shipped in pipelines with 

gasoline. Like MTBE, it could. 

CHAIRMAN BARTON. It could? 

MR. SLAUGHTER. Yes. 

CHAIRMAN BARTON. Okay. 

MR. HALL. I yield back my time and thank the Chair. 

CHAIRMAN BARTON. Yeah, I took 4 minutes. 

Mr. Boucher. 

MR. BOUCHER. Well, thank you very much, Mr. Chairman, and I 

particularly want to thank you for the suggestion that we undertake a 

bipartisan conversation on a role for the Federal government in making 

sure that our Nation has an adequate supply of refinery capacity, and I 

look forward to that conversation. And I am particularly pleased to hear 

that Mr. Slaughter and Mr. Cavaney have also agreed to take part. 

As we begin those discussions, there is some sort of baseline 

information that might be very helpful to have. So Mr. Slaughter, let me 
241

ask you this: Can you tell me how many refineries have been closed in 

the U.S. over the last, say, two decades; or what the capacity of those 

closed refineries is? And then compare that refinery closure to the 

expected capacity that will come from the new investments that you have 

indicated in the expansion of current refineries now in operation. 

MR. SLAUGHTER. Let me respond to that, to the extent I can. As I 

remember, the peak year for U.S. refining, number of refineries, was 

1981. We were well over 300. In terms of capacity, we were at 

18.6 million barrels a day, if I remember correctly. If you add the 1.4- or 

1.5 billion in extra capacity to our probably 7.3 million barrels a day 

now, you would come up with 18.7. So we will be slightly above. 

But, of course, that will be modern capacity with a lot more 

sophisticated technology than those old tea kettle refineries were. They 

were really very small refineries, and they were called tea kettle 

refineries because they couldn’t really produce sophisticated products 

like gasoline in any sufficient supply. 

MR. BOUCHER. So as the consumption of gasoline has continued to 

rise in the United States, we are going to find ourselves at the end of the 

expansions that your industry is currently projecting with essentially the 

same capacity we had in the 1980s. Do I interpret that correctly? 

MR. SLAUGHTER. Well, actually, yes, 18.7 versus 18.6. But this is 

modernized capacity. You know, gasoline demand was down for most 

of the 1980s and started to come back up in the 1990s. And I don’t know 

whether you are leading to the question whether we need to refine 

100 percent of our product here in the United States or not. 

MR. BOUCHER. I will be happy to ask that question, if you care to 

answer it. I think it might be a useful illumination of the record, in fact, 

to have your position with regard to whether it would be economically 

useful to do that. 

MR. SLAUGHTER. Looking at the current situation, you would have 

to say that the market has not led to that result, which means that imports 

have optimized the system over additional refining capacity in the United 

States. It was easier to bring in the imports, cheaper, than to build the 

capacity in the United States and produce it here because of the myriad 

of difficulties, the additional costs that we have talked about all the time. 

We believe that you should encourage the construction and use of 

domestic refining capacity, but if you go to 100, and that is not the most 

economical thing to do, you are adding additional costs to the industry 

and its products. That is the trade-off. You are going something where 

economics has not taken you, so you are adding additional cost. 

Refining doesn’t really work very well with the surge capacity idea 

because it takes a considerable time to start up refineries. You can’t have 

extra refining capacity just sitting around. 
242

MR. BOUCHER. Let me ask you this. Back in the 1980s, when we 

had 18.6 million barrels of refining capacity, what was the demand for 

refined product in the U.S.? Was it that number or a higher number? 

MR. SLAUGHTER. No, sir. There was a considerable delta between 

gasoline demand in the United States and that capacity figure. 

MR. BOUCHER. Well, a delta in which direction? 

MR. SLAUGHTER. Oh, demand for gasoline at the time was 

substantially less than 18.6. 

MR. BOUCHER. So you had an excess of refining capacity? 

MR. SLAUGHTER. Yes, but-- 

MR. BOUCHER. So you have gone from a situation where you had an 

excess of refining capacity in the 1980s to a situation now where there is 

a capacity deficit, given the fact that the demand for refined product has 

increased in the U.S.; is that correct? 

MR. SLAUGHTER. There is a deficit now, that is true. It reflects 

pretty much the situation in the world refining industry as well. 

MR. BOUCHER. I think there might be some difference of opinion as 

to the economic utility of being able to refine 100 percent of the product 

here in the United States. We have heard your view. I am sure other 

contrary views would be expressed. 

Let me turn, if I may, to another topic, and that is the potential for 

fuels created from other sources to help address the need for 

transportation fuels in the U.S. 

Coal to liquids, we were told yesterday, is economic when the price 

of oil is $40 per barrel. It is obviously well above that today. EIA 

projects that it will remain above that for the foreseeable future. And so 

one would assume that profit could be made in creating coal-to-liquid 

refineries in the United States at the present time. 

So, Mr. Slaughter and Mr. Cavaney, perhaps, let me ask you if any 

of your member companies are demonstrating interest in building 

coal-to-liquids facilities? If any are, perhaps you could tell us who they 

are and where they are. And if there are barriers that are preventing that 

examination from taking place, perhaps you could tell us what those 

barriers are. 

MR. CAVENEY. There are a number of companies, particularly the 

large integrateds, who are looking at coal to liquids, gasification, and a 

number of these sort of next-generation things. And the extent to which 

they have made commitments, they haven’t made any commitments 

publicly about going full scale with a new refinery based on that. 

But we would be glad to, if it is public information, make available 

to you the list and the information we have on who is active in each of 

these areas, and you can speak with them directly because they are in a 

position where they would be able to talk to you directly about what they 
243

are doing and things like that. They just haven’t probably reached the 

point where they have their board approvals or anything like that to allow 

them to go public. 

MR. BOUCHER. I would personally appreciate that sort of 

information, and others on the committee would as well. So if you could 

perhaps facilitate that discussion, I would appreciate it. 

MR. BOUCHER. Mr. Chairman, if I could just indulge your 

cooperation for one more question, I would like to ask what our 

witnesses think the most likely source of a cellulosic feedstock for the 

United States might be. Corn is not economically efficient. According 

to many studies, you wind up spending as much petroleum to cultivate 

annually the corn and then harvest and process it as you get in ethanol on 

the other side. But with grasses and other kinds of biomass that 

regenerate naturally, that problem is not present, and perhaps those are 

economic. 

So, Mr. Cavaney, what are your members, if any, looking at? Mr. 

Dinneen, you may want to comment. 

MR. CAVENEY. Some of our members are invested heavily in 

cellulosic experimentation, and there is still some additional work that 

needs to be done on the enzyme packages. The difference is with both 

sugar cane and with corn, you can design one enzyme that will take care 

of converting the process, where, when you look at cellulosic, you have 

to be prepared to take a whole series of different materials in. 

I think one of the most attractive ones would appear to be the issue 

of wood chips. If you think about that, the processing of trees that are 

harvested for lumber or paper, in order for them to do that, they tend to 

take something with a wide geographic spread and deliver them to one 

spot. So you would be able to centralize and get your raw materials 

fairly quickly, and I know that is one of the ones everybody is looking at 

a great deal. I am sure there are others, but I am familiar with that 

industry. 

MR. BOUCHER. Mr. Dinneen. 

MR. DINNEEN. Congressman, I know it will probably not surprise 

you that I disagree with some of the premise of your question with regard 

to the energy efficiency of corn. We have had that discussion before, but 

nonetheless, there is not an ethanol company that I represent that doesn’t 

have a very aggressive cellulosic resource program going on now, in part 

because they all have cellulose already coming into the plant. There is 

cellulose in the corn itself that is not processed. So they are looking at 

that. 

But there are other companies looking at other cellulosic materials 

right now. There is a company in Canada looking to build a plant in the 

United States that is looking at wheat straw. There are companies 
244

looking to finance plants to British Ethanol from municipal solid waste. 

Certainly there has been ethanol production from waste wood, wood 

chips in the past and certainly can be again, people looking at research on 

switchgrass and other energy crops. 

I think the marketplace ultimately will decide which of these makes 

the most sense, and probably all of them will at some point, because you 

can get alcohol from virtually any starch or cellulose-based material. 

MR. BOUCHER. So you foresee a variety of refineries using various 

feedstocks placed around the country? 

MR. DINNEEN. Absolutely. 

MR. BOUCHER. Thank you, Mr. Chairman. 

MR. HALL. [Presiding.] The Chair recognizes the gentleman from 

Texas, Dr. Burgess. 

MR. BURGESS. Thank you, Mr. Chairman. 

If I could ask Mr. Cavaney and Mr. Slaughter, over the past several 

days of testimony, it seems that the revapor pressure controls on fuels 

that States use to gain emissions productions when they choose not to 

participate in the reformulated gasoline program--how many levels of 

RVP control are there in use, and could any be eliminated? 

MR. SLAUGHTER. Well, I have that here somewhere. 

MR. CAVENEY. I don’t have it, but I would like to make a comment. 

It has been said earlier several times, and I want to make a point, that the 

idea of trying to look at boutique fuels and reduce the number is going to 

cause some environmental degradation. 

We have never, ever said that that is our interest. We think if you 

work together carefully--and we agree it shouldn’t be done quickly, 

because there is a study under way--we think you can reduce the number 

of boutique fuels and do so without degrading the environment and 

harming the emissions. So both of those, especially when you look at the 

new generation of automobiles and the new cleaner fuels that are out, we 

think there is a great opportunity. 

And I would disagree a little about the fact that it does make our 

system much, much more flexible, both the pipeline and the capacity to 

distribute it there, and also the slates that the refinery produces. If you 

are going to run one or two fuels all the way around instead of four or 

five during a day, you are, by definition, going to be more efficient and 

get more output. So we think this is a goal worth pursuing. 

Bob. 

MR. SLAUGHTER. Dr. Burgess, unfortunately I have to say first that 

we have a different position on boutique fuels limitations. But we have 

currently RVP of 7.8, 7.2, 7.0, and 7.0 with sulfur provisions. So there 

are essentially four. Most of them are at 7.8 and almost an equal number 

at 7.0. 
245

We believe that the impression is wrong that there are a great deal of 

boutique fuels out there now. We are concerned about a situation in 

which there would be a whole lot of new fuels in the future. That would 

add some difficulty, but we haven’t seen that with the current slate. We 

optimize delivery of these fuels every day, Dr. Burgess. 

MR. BURGESS. Has the EPA’s waiver authority been useful in 

increasing the fungibility of the gasoline supply in times of shortages? 

MR. SLAUGHTER. Very, particularly after the hurricanes last year. 

There was a cooperative effort among everybody concerned, including 

EPA. They moved very quickly to grant waivers in that emergency 

situation. They were very helpful. 

MR. BURGESS. How long did that last, that waiver? 

MR. SLAUGHTER. It lasted a month. 

MR. CAVENEY. I think they put it in for 15 days, and I believe they 

extended a second time for 15 days, short-interval waiver. 

MR. BURGESS. We have heard a good deal on the ethanol, and I 

appreciate you all have worked so hard to improve the infrastructure 

issues, but still the delivery of ethanol in my market, in the Dallas/Fort 

Worth market, seem to lag behind. Is there a reason for that? 

MR. DINNEEN. Congressman, I think when the refiners made the 

decision to get out of MTBE and all those markets, they realized--we 

certainly did--that Dallas would be among the most difficult markets in 

which to make that turnover because the terminal servicing that area did 

not have rail access. 

The market has responded. I think our industry has worked awfully 

hard. The oil industry certainly has as well, and we are servicing that 

market today. We are using transloading, where railcars are unloading 

directly to trucks, as was noted earlier, to service that market. Our 

industry is bringing product up from Houston, bringing product down 

from Kansas by truck as well. There is a terminal that is being permitted 

that will ease that situation significantly. It may be open now. If not 

now, it will be within days or weeks. But I think, by and large, while 

there were some initial hiccups down there, and the transitional issues 

were not ideal by anybody’s standard, we are doing our best. 

MR. BURGESS. May I ask when you were aware that there would be 

a problem? Can I ask when the industry become aware that there would 

be a problem? Do you recall? 

MR. DINNEEN. I think when the oil industry decided we will get out 

of MTBE, and they evaluated the markets, I think everybody looked at 

Dallas and decided they would be a tough market. 

MR. BURGESS. Was that with the passage of our energy act in 

August? Was that with the hurricanes in September? Was that later in 
246

the fall? When did this sort of come, percolate to the top of the 

consciousness of the industry? 

MR. DINNEEN. Are you talking my industry or the oil industry? 

MR. BURGESS. Let us stick with yours since we shouldn’t speculate-

- 

MR. DINNEEN. Our industry obviously became aware of the fact that 

they were going to make this transition when their member companies 

came to our member companies and said, we need product. 

MR. BURGESS. I guess just looking at it as a consumer, we wake up 

May 1 and we have high prices and some stations running out of gas, and 

some people ask me, legitimately, how come you couldn’t see this 

coming? And apparently you did see it coming. Why we are not able to 

act fast enough to prevent or-- 

MR. DINNEEN. We have ethanol in that area. In fact, the trains are 

backing up, we have so much ethanol in that area. The terminals haven’t 

necessarily been as ready as I think they could have been, but we have 

been working around those transitional issues as well. 

MR. BURGESS. You go, but I guess it is the anticipation of the 

problem that bothers me. There will be other things that happen this 

summer. There will be other things that happen this fall. Are we looking 

out for those consumers in those markets and maybe negatively 

impacted? 

MR. DINNEEN. I think both of our industries are clearly looking for 

whatever speed bumps might be in the road in the future, but I think the 

transition has been made. It has been successful, and it is a testament to 

the effort on the part of the oil industry and to ours that we have been 

successful in addressing some of those things. 

MR. BURGESS. Mr. Chairman, may I have one additional question? 

It maybe controversial, but I would just like to follow up from some we 

have had, some of our hearings last year. Is it still necessary to have a 

subsidy for the ethanol industry? 

MR. DINNEEN. Congressman, if you can tell me what the price of oil 

is going to be down the road, I think it would be a lot easier to answer 

that question. Certainly, in the past it has been difficult to get refiners to 

utilize ethanol in very strong economic conditions. But the incentive has 

been extremely successful in helping to build the industry and build the 

infrastructure, and done so in a way that is cost-effective for the Federal 

government because it reduces farm program costs. It increases 

economic activity in the rural areas where the plants are produced, and 

the analyses are that the Government actually saves money as a result of 

this program. 

MR. BURGESS. But with oil at $75 a barrel, the question has been 

legitimately asked in Mr. Cavaney and Mr. Slaughter’s industry why 
247

they continue to need subsidies, and, I guess, has the ethanol industry 

asked the same question of itself? 

MR. DINNEEN. Certainly, it is an issue that we will work with the 

Congress on, with our member companies or with our customers on, to 

get to a day that we don’t need to have government incentives. But in 

the climate that we have seen in the past, government incentives to 

encourage oil refiners to blend some carbohydrates as opposed to 

hydrocarbons has been incredibly important. 

MR. BURGESS. What about the relaxation of the Federal motor fuels 

tax, is that still in place? The Federal excise tax on gasoline, is ethanol 

still exempted from that? 

MR. DINNEEN. It is the same; the way ethanol is incentivized is by 

providing a tax incentive to oil companies for blended. 

MR. BURGESS. Thank you, Mr. Chairman. 

MR. HALL. You have done so good, I hated to stop you. 

The Chairman recognizes Mrs. Cubin, gentlelady from Wyoming. 

MR. GREEN. Mr. Chairman-- 

MR. HALL. The Chair reluctantly recognizes Mr. Green from Texas 

for a third shot at this group. 

MR. GREEN. No. Second shot. This is only my second time. I think 

you will like what I am going to ask. 

Let me follow up on Dr. Burgess. And I know there one time was 

incentivized for using ethanol, but today since there is no MTBE in 

competition, why do we need the subsidy for ethanol? I mean, the 

refiners I know are all trying to figure out how they are going to get 

ethanol, and since there is no competition-- 

MR. SLAUGHTER. Congressman, the incentive is going to be 

incredibly important down the road to encourage additional investment 

in this industry. If you are going to have cellulose ethanol production, 

which I think everybody certainly wants to see, having economic 

incentives for that is going to be necessary. 

MR. GREEN. Okay. Let me--because I only have 5 minutes, and I 

am lucky to have that, Mr. Chairman, I guess. The concern I have in the 

Houston area, because we have used and benefited from reformulated 

gas that has been MTBE, I assume it is being barged in from the 

Midwest, not railcars. 

MR. SLAUGHTER. I believe that is true for Houston, yes. 

MR. GREEN. Those on the panel mention railcarring it or tankering it 

up from Houston to Dallas, because we checked yesterday and we were 

told that the maximum delivery of ethanol in Dallas is 23 cars a day. 

And I assume it is Union Pacific, maybe Burlington, that serves those 

areas--200 railcars, backed up waiting to unload ethanol in the 
248

Dallas/Fort Worth market. I am just glad that we can barge it in because, 

one, it is much cheaper, which gets to my next question. 

There was some discussion about pipelining ethanol in Brazil, and, 

you know, I have just taken it as a fact that you could not pipeline 

ethanol, but someone did mention that ETBE is possible to pipeline 

because of the properties that it has. 

Mr. Chairman, I don’t know if the panel knows, and I know as a 

business major and a lawyer I don’t have any idea about that, but I think 

it would be great for the subcommittee or the full committee to see if that 

is something we want to find out, maybe have another hearing with 

experts from the chemical side and people from the pipeline companies, 

see if that is a possibility, because we actually made 70 percent of the 

MTBE in my district, and back in the energy bill we talked about, well, 

we will have the option to do ETBE. And I want to see if that really is 

an option, now that we are not quite a year away from when the 

President signed the bill, that we would still have ethanol compound 

contents, but it would also be something that could be blended again in a 

chemical facility that at one time was able to do MTBE. 

Let me ask Mr. Dinneen about the testimony yesterday from the 

Energy Information Administration. Ethanol supplies are tight now, and 

they singled out Texas, and we know Dallas/Fort Worth, because 

Dr. Burgess represents Fort Worth and Denton. What about the Houston 

market? Is there a problem in getting the barges in, or is there enough 

product in the Midwest to be barged out the Mississippi and intercoastal 

to us? 

MR. DINNEEN. Absolutely, my understanding is we can’t get much 

more ethanol into Houston, and there are barges in the canal waiting to 

be unloaded there as well. Houston has not been a difficult market for 

any of us at all. As I noted in response to Dr. Burgess, some of the 

ethanol for the Dallas/Fort Worth area is coming from Houston because 

we have so much there. 

MR. GREEN. Okay. Again, Mr. Chairman. I would like to maybe--

if you could teach the Members of Congress some science on the 

possibility of pipelining either ethanol and seeing how they do it or, 

looking at the properties of ETBE, if that would make it easier to 

pipeline. Not that I want to take any business away from the railroads 

and the trucks, because, don’t worry, there will be plenty of trucks on my 

Interstate 610 in Houston even if they don’t haul ethanol. 

MR. HALL. The gentleman yields back. Is it okay now if I recognize 

the gentlelady from Wyoming? 

MRS. CUBIN. Mr. Slaughter, in your testimony you mentioned a 

number of fuels regulations coming into existence will serve to reduce 
249

the necessity for boutique fuels. Can you provide any examples of any 

of those boutique fuels? 

MR. HALL. Excuse me just a moment. Would you let me interfere? 

We have a gentleman at the table that needs to leave at this time, I am 

told. And we give you the right to go. Mr. Reid is it? 

MR. SCOTT. He has already left. I can enter to replace him, 

Mr. Chairman. 

MR. HALL. Well, you are a very good replacement. We will ask you 

about convenience stores in a little bit. Yield back. 

MR. DINNEEN. Yes. I think I got the question. If you look at the 

EIA testimony and EPA’s testimony from yesterday, a reason why 

people have gone to the boutique fuels that exist now is that they were a 

better fit for them than reformulated gasoline. They saved money. 

They had a supply of them, and they were just more economical. 

In the future, reformulated gasoline and conventional gasoline is 

going to look a lot more alike, because the sulfur level has gone from a 

500 to 30 ppm and with considerable environmental benefits, and as well 

there is going to be a limitation on benzene content. So they will look 

much more alike. 

So we think there will be a natural confluence where people are 

going to an RFG that doesn’t have a 2 percent requirement anymore. 

The oxygen requirement was removed by the EPAct. That really is what 

was driving people to other fuels. So that is going away. Conventional 

fuel is much cleaner. So we think that just naturally will mean most 

people will pick from one of those two. We can’t prove it, but, it makes 

sense because the 2 percent was just lifted, so there isn’t an example 

right now. 

MRS. CUBIN. Okay. Good. Is it easier for a major integrated refiner 

like ExxonMobil to adjust to Federal and State fuels requirements, 

changes versus a small regional refiner like I would have at Wyoming? 

And if so, why is that the case? 

MR. DINNEEN. Well, one might argue ExxonMobil is larger, has 

more investment capital, can make changes, but everybody basically 

wants to do that in an economical way. People who are writing 

regulations usually give special consideration to areas and types of 

facilities that might have different problems. Under the gasoline sulfur 

program and the diesel sulfur program, there was some special notice 

taken of the needs of smaller refiners. 

MRS. CUBIN. Right. 

MR. DINNEEN. So I guess the short answer is yes, there, are special 

difficulties that they have. I think regulators have tried to smooth it out 

as much as they could. 

MRS. CUBIN. Thank you. That is all, Mr. Chairman. 
250

MR. HALL. All right. Thank you. 

This time we recognize Mr. Greg Scott and identify you as a 

representative of the National Association of Convenience Stores and the 

Society of Independent Gasoline Marketers of America. Thank you for 

joining the panel. 

Chair recognizes Mr. Bass. 

MR. BASS. Thank you very much, Mr. Chairman. 

Mr. Dinneen, I have never been a big fan of the ethanol subsidy, but 

I was just wondering if you or anybody else has ever calculated the total 

incentives in royalty discounts that have been offered to the oil producers 

over the years and how that might compare with what is being offered in 

the area of ethanol. 

MR. DINNEEN. Well, certainly that has been calculated. There are 

reports that I could submit for the record that I don’t recall off the top of 

my head, but obviously the oil industry has been highly incentivized over 

the years and probably for all very good reasons. 

MR. BASS. Would you be willing to supply my office and perhaps 

the committee with a copy of the report that you think is the most 

accurate in this respect? 

MR. DINNEEN. Certainly. 

MR. BASS. And if Mr. Cavaney wants to do the same thing, that 

would be great. I would appreciate it. 

MR. BASS. Mr. Dinneen, I believe there are 166,000 gas stations in 

America, and probably--how many E-85 stations, 150, 160? 

MR. DINNEEN. Six hundred fifty, most of them in Minnesota. 

MR. BASS. Most of them in Minnesota. So how are we going to get 

beyond that problem? Is it not more expensive to have vehicles work on 

both versus just one, and what is going to happen with it, delivery issue? 

MR. DINNEEN. We discussed earlier several things need to happen 

for E-85 to become a more meaningful component of the U.S. motor 

fuel. Clearly you need to have more vehicles; 5 million vehicles is just 

not enough to attract the kind of investment you need at the gas stations 

for refueling infrastructure. You need to have more pumps. A lot of that 

is happening. You see a lot more investment today in the E-85 refueling 

infrastructure. 

MR. BASS. Is E-85 going to be any different in cost from gasoline? 

Car works on both, why would you bother, especially if it is more 

expensive? 

MR. DINNEEN. In those areas where E-85 is widely used in 

Minnesota, for example, E-85 typically sells at a 40-cent or 50-cent 

discount to gasoline. Importantly, that is with the technology that is 

being used today with flexible-fueled vehicles, which, quite frankly, 

while very good, does not optimize those vehicles for the use of E-85. 
251

General Motors has a new vehicle, a Saab 9-5, that is turbocharged, that 

has no mileage deduction when E-85 is used, and I think as you move 

down the road in the future, you are quite likely to see changes in 

technology on the vehicle side that make all of this a more economic 

option for consumers. The important thing is that they have that option, 

that they have the flexibility. I was able to drive here today in an E-85 

vehicle. 

So you are going to see a lot more of that on the road, but, look, it is 

going to take time, and the fact of the matter is the ethanol industry will 

need to grow as a blend component in gasoline significantly, and you 

need to have a heck of a lot more ethanol out there before E-85 can really 

take off. 

MR. BASS. Is the Renewable Fuels Association promoting ethanol 

development and production from sources other than corn? 

MR. DINNEEN. Absolutely. We are not the grain-based ethanol trade 

association. We have member companies that are looking at cellulose 

ethanol production today. One of my member companies is actually 

building a cellulose and grain ethanol production facility in Spain with 

the intention of bringing that technology to the United States very soon. 

Another member company has a cellulose plant in Canada right now that 

is looking to site a commercial facility here. 

MR. BASS. Thank you. 

Mr. Cavaney, are you aware of that bill that Senator Craig introduced 

recently that would allow us to drill or to bid in the Cuban Basin for oil--

I think it is oil and gas. What effect would that have on U.S. energy 

security if it were permitted? 

MR. CAVENEY. Well, I think it looks at the broader issue of the 

eastern Gulf of Mexico and the southern part of the tip of Florida. We 

have demonstrated, we think, through the hurricane season last time 

where we could have no production spills of any significance as a result 

of two Category 5 hurricanes. That has been the principal concern 

expressed by the State of Florida in keeping exploration and production 

so far off shore. 

We would like to be able to look at circumstances where we are now 

disadvantaged by allowing national oil companies from China, from 

Venezuela and elsewhere to get within 50 miles and be able to explore 

and produce while the U.S. companies are being held off hundreds of 

miles off of the coast. It just doesn’t seem to be a fair and equitable 

reason, so we would like to work with the Congress to try and see if we 

can’t allow more of that Eastern Gulf to be made available for bid. 

MR. BASS. Good enough. 

I have one other quick question. Mr. Chairman. What is the 

turnover in gasoline inventory in the United States? I have been told that 
252

17 days is a glut, and 10 days is a shortage. Is it that fast? Anybody 

know? 

While you are talking to each other, I will pontificate here. I always 

thought that gas stations, they filled up the tank, and they came every 

other week or so. It turns out they come every other day. If you have a 

17-day supply of gasoline nationally, you have a glut, and prices start to 

fall. And if you have a 10- or 11-day supply, you start having shortages. 

I want to know if you could correct that or tell me if it is accurate, if 

anybody knows; and if not, submit the answer for the record. 

MR. SCOTT. Mr. Bass, from a retailer’s point of view, it all depends 

on the volume of the retail outlet. A retail outlet might get a delivery of 

gasoline, say, once every 7 days perhaps if they are a fairly low-volume 

neighborhood store. A truckstop, on the other hand, may get five 

deliveries a day of diesel fuel. So it really depends on the type of the 

store. 

I also believe you are referring to wholesale stocks, and those 

gentlemen are better able to answer that question. 

MR. CAVENEY. If you take total inventory and divide it by demand, 

you are going to end up--historically would be about 22 days would be 

the inventory turn. 

MR. BASS. What would you consider to be a shortage, how many 

days? Would it be 2 weeks? 

MR. CAVENEY. Typically the Federal government, EIA, has listed 

what they considered to be a sort of a benchmark of minimum inventory 

before they start to worry, and that is 185, and that would be how many--

185. And what do we do today? About 200 plus. As we have said in 

my testimony, we have ample -- 

MR. BASS. What does 200 plus mean? 

MR. CAVENEY. Two hundred million barrels plus in inventory right 

now. 

MR. BASS. Twenty days is the average inventory time in the United 

States. 

MR. CAVENEY. Twenty-two. 

MR. BASS. Twenty-two days. But what is the flexibility? I am 

sorry, Mr. Chairman. 

CHAIRMAN BARTON. [Presiding.] We have so many other Members 

that need to ask questions. 

MR. BASS. If you would be good enough to drop me a note and tell 

me that information. 

MR. CAVENEY. We will give you some historical data as well. 

CHAIRMAN BARTON. The gentlelady from Tennessee is recognized 

for 5 minutes. 
253

MRS. BLACKBURN. Wonderful. You know us women, we are 

always talking. 

CHAIRMAN BARTON. Take your time. I have plenty of questions. If 

you want me to go while you get ready. 

MRS. BLACKBURN. No, sir, Mr. Chairman. I am ready, and I thank 

our committee Chairman for working this, and for our panelists for 

allowing us to jump in and out of this. 

Mr. Cavaney, I want to come to you. With my first round of 

testimony, I had talked with Mr. Reid and Mr. Slaughter about some of 

the diesel requirements, but I wanted to come to you, Mr. Cavaney, 

because of the group that you head. And, of course, I understand why 

we have the prices at the pump where they are. You know, we have 

talked about refinery capacity, we have talked about supply and demand, 

but there is an incredible amount of frustration that is out there. 

And I did a radio show this morning in my district in Tennessee, and 

one of the first things that came up was the retirement package from 

ExxonMobil, and this is something that gets people really angry. And I 

mentioned to the folks that were listening to the radio show today that we 

were going to have another hearing today, and that you all had consented 

to come in and to talk with us on this. 

So I went to your Website, and for your trade association--and for 

the record, it is the American Petroleum Institute--and I looked on your 

Website where it says “About Us,” and it says, and I am quoting from 

your Website, “Our association draws on the experience and expertise of 

our members and staff to support a strong and viable oil and natural gas 

industry.” 

And you also mentioned in your testimony today that the oil and 

natural gas industry understands the frustrations of consumers. And I 

just would like for you to explain for the record how in the world giving 

a $400 million retirement package during a time where we have tight 

supply lines, where we have high prices at the pump, where we have 

high market pricing on a barrel of crude, where we have lots of questions 

that are being asked by consumers, how in the world does giving that 

kind of retirement package in this environment support a strong and 

viable oil and natural gas industry? 

MR. CAVENEY. First of all, the area being discussed here, which is 

compensation, incentives, retirements, and so forth, is an area not within 

the jurisdiction of the trade association, so we do not deal in those 

specifics, so I have no basis. Typically though, as a matter of practice, 

public companies are held by shareholders who elect a board, and it is 

board and management who work out each individual company’s 

specific pathway. And so I am just not in a position to pass judgment. 
254

MRS. BLACKBURN. Well, I understand that, and we talked about that 

on the radio this morning, that it is the shareholders that are responsible 

for raising these questions, and I certainly hope that they do when you all 

have a shareholders meeting and this has the opportunity to be discussed 

with your shareholders. But I would just commend to you that that type 

action during this type environment seems to show very little 

understanding of what the consumers are thinking, which is supposed to 

be one of the missions, one of the things that you all are about. So I just-

-as a point of reflection and as a point where I commiserate with my 

constituents, that is something that is very difficult. 

Mr. Slaughter, I wanted to come back to you. Going back, and as we 

have looked at the utilization, the refinery utilization, and where we are 

on those levels, we know we have got some pressures with the boutique 

fuels, with the diesel fuel that we discussed earlier, and we thank 

everyone for the work they are doing on those. But if we are running at a 

98 percent capacity this summer, and we know at this point in time most 

of our refineries are in the Gulf, and what we are beginning to hear is it is 

going to probably be a very difficult weather season once again and 

could be for a few years to come. So going back to what we were 

discussing earlier with pricing, and looking at a price spike for diesel, if 

we have another hurricane, a Category 3 or Category 4 in August, and 

that knocks out, again, as it did last year, a large part of our refinery 

capacity, I think 25 percent of our refinery capacity was down for most 

of the month of September, then what kind of increase do you think that 

we are looking at for gasoline? 

MR. SLAUGHTER. Mrs. Blackburn, one of the things I never do is 

predict prices. I will just say that last year, of course, after Katrina hit 

and the situation that you are talking about unfolded, prices for gasoline 

went above, slightly above, $3. Those prices sufficed to bring in a record 

amount of imported gasoline into the country, as well as it encouraging 

other refiners that had any additional capacity at that time to run full out 

to try to make up for the gasoline that was not being produced in the 

affected refineries. 

The only answer I can give to you, it would depend, and we hope 

that doesn’t happen again, on the size of the outage, on the location of 

the refineries, but that the free market and market pricing will be the best 

way to get the product to consumers in that area. 

MRS. BLACKBURN. Okay. Let me ask you something, and I 

understand and appreciate your answer. If we talked a little bit about the 

New Source Review and, of course, our original version of the GAS Act, 

what we would have liked to have done there, if we could go in and 

streamline the permitting process and--as the House had passed last year, 

and if there is a commitment from the industry to build refineries outside 
255

the Gulf Coast, do you think that we will actually see refineries in other 

areas of the country, you all? 

And through our hearings we have heard expansion is the better way 

to do this. It costs less, more cost-effective, they can get it stood up more 

quickly; but then on the other hand, one of the things that frustrates our 

constituents is they turn around and they hear, well, with everything 

down in the coastal area, we are looking at the same problem. So if the 

permitting is streamlined, and if some of the regulatory burden is 

streamlined, then do you think that it is feasible that people will actually 

look at other parts of the country for refineries? 

CHAIRMAN BARTON. This will have to be the gentlelady’s last 

question. 

MR. SLAUGHTER. I suspect that would be very helpful. It would 

have to improve the economics. Right now someone looking to build a 

new refinery is looking at 10 years or more of delay. So it would have to 

be helpful. 

I would also say some of the capacity improvements we are making 

are being made in refinement centers that are outside of the Gulf. So 

some of this additional capacity will come on in areas other than the 

Gulf. 

MRS. BLACKBURN. Okay. Thank you very much. 

Thank you, Mr. Chairman. 

CHAIRMAN BARTON. And Mr. Becker wanted to respond to your 

question, too. 

MR. BECKER. Thank you, Mr. Barton. 

Mrs. Blackburn, thank you for asking that question because I would 

have liked to have responded when you asked it the first time. 

One of the reasons that our associations representing State and local 

air pollution control agencies opposed last year’s bill was because of the 

New Source Review provisions. We support the New Source Review. 

This bill would have codified into law a proposal by EPA that the courts 

have rejected, and I am going to give you an example of what it would 

do. 

To build a new refinery today would cost in excess of $1 billion. 

The EPA’s rule would allow up to 20 percent of the capital cost of that to 

be spent for capital expenditures, and not misstating how much 

additional air pollution would go into the region, the source would not be 

required to meet the New Source Review requirements. 

CHAIRMAN BARTON. That is not true. That is not true. It is required 

to expand up to 20 percent so long as the emission didn’t exceed the old 

emission cap. That is true. That is true. 

MR. BECKER. Where States have a State emissions cap, that is true, 

but many areas do not have an emissions cap. 
256

CHAIRMAN BARTON. I was one of the authors of that section. We 

very carefully crafted it so that total emissions did not increase. If they 

tried to increase above what they already were emitting, they would have 

to go through the permitting process. But as long as they were 

expanding an existing facility, and they didn’t increase emissions, they 

were constant or declined, they could do it. That is what it said. I don’t 

want to get in a fight with you, but that is what it said. 

MR. BECKER. I am not viewing this as a fight, Mr. Chairman. If a 

source makes capital expenditures without your bill or without EPA’s 

rules and doesn’t increase its emissions, then it, by law--by law you 

adopted in 1977--the source is not required to comply with the New 

Source Review. New Source Review is not triggered unless there is a 

substantial increase in emissions. 

What EPA’s rule does, and what the bill codified, is a program that 

was rejected by the courts because emissions were allowed to increase 

without triggering the New Source Review. I am happy to provide more 

information for the record so we don’t-- 

CHAIRMAN BARTON. We can hold a hearing under Ralph just on 

New Source Review. I mean, that subject is worthy of a full-day hearing 

itself. 

MR. BECKER. And I would agree with that. 

CHAIRMAN BARTON. I am not being argumentive with you. I was 

very involved in that bill and that particular section, and we do not, under 

my stewardship of this committee, want to do anything that allows 

anybody in this country to increase their emissions above the current 

baseline. We are trying to be environmentally friendly. We don’t get 

much credit from the environmental groups, but we have not done 

anything to allow industry to willy-nilly increase pollution and 

emissions. I am not going to do that during my chairmanship. Not going 

to happen. 

MR. BECKER. That is good to hear. And if I may, just along those 

lines, I think you made a very nice gesture to my colleagues in the 

refining industry to bring them in on discussions with regard to refinery 

revitalization. And I would respectfully ask that, to the extent that you 

are trying to make improvements in the air pollution permitting 

provisions of that bill, that you also consider inviting State and local air 

pollution officials into those discussions, because we will all learn 

together what the industry needs and maybe what they don’t need. 

CHAIRMAN BARTON. Well, I am willing to do that if on the 

condition that the participants engage in a positive dialogue with the 

understanding that everybody wants the product to be the possibility of 

actually building or expanding new refineries or existing refinery 

capacity in this country. I am not interested in a dialogue where one 
257

party is in there simply to sabotage, sandbag, prevent a positive outcome. 

But if your group wants to help us figure a way to do that, I would 

welcome you. 

MR. BECKER. Well, I appreciate that. We are a group of State and 

local governmental officials. We never sabotage processes. 

CHAIRMAN BARTON. I am not saying you do. I have been in 

negotiations where one party, the outcome that they wanted was nothing, 

they wanted to stop it. I would love to have the environmental groups 

participate in a positive way. That would be a refreshing change. I 

would just absolutely endorse that. 

MR. BECKER. And just to make clear, we are not an environmental 

group. We are a group of State and local governmental officials, and we 

do-- 

CHAIRMAN BARTON. And maybe I should say this. My sister is an 

enforcement attorney for EPA in Dallas, so I know very clearly what 

group you personally represent. 

MR. BECKER. I think what would be instructive is for the industry to 

challenge the premise that we bring into this debate that New Source 

Review and air pollution regulations have not interfered with the 

permitting of new facilities or delayed them. 

In fact, I had a discussion before the hearing with Mr. Cavaney that 

what is most important to industry--we know, and I think they will 

admit--is certainty and the ability to plan. The stringency of regulation is 

subordinated by certainty and the ability to plan. 

CHAIRMAN BARTON. Let me stop the clock. I want to ask a few 

wrap-up questions. Do you have one final question before I turn it over 

to myself? 

MRS. BLACKBURN. No, Mr. Chairman. I will just say--again, say 

thank you to you for your leniency on the time, and thank you to our 

panelists for being here and working with us on this. And we do want to 

find an answer to some of the questions, and we appreciate the dialogue. 

CHAIRMAN BARTON. I am going to recognize myself for the final 

question. We have a hearing on Social Security numbers in the 

Consumer Trade Protection Subcommittee that was supposed to start 20 

minutes ago. So you will be happy to know this will be the final 

question. 

I want to start with you, Mr. Becker. We have really kind of skated 

around the issue of MTBE. Would there be any interest by local and 

State air control pollution officials to find a way to bring MTBE or 

ETBE back for a period of time while we have all these gasoline supply 

problems? Because you were pretty adamant that ethanol, by itself, 

might not solve some of the air quality problems that we face. So would 

you think the group that you represent would be supportive of an effort 
258

to resuscitate the MTBE industry for some period of time until we get 

ethanol distribution up and running and some of those issues settled? 

MR. BECKER. Let me answer a couple ways. We are totally fuel 

neutral. We don’t mind ethanol so long as it meets performance 

standards on a national basis. 

With respect to MTBE, we don’t have a position on MTBE. I know 

individual States do, and some of those individual States may object. 

Our national association doesn’t have a specific favorite fuel. 

CHAIRMAN BARTON. Well, there’s no question MTBE not being in 

the fuel chain is causing price problems, and in some parts of the 

country, including the part I represent, supply availability, period. I am 

under no illusions that the MTBE industry is going to become a 

permanent part of the process, and I am not even sure it would be 

technically possible to do, but if the MTBE refiners haven’t changed 

their systems in the short term it would definitely help the supply and the 

price to have MTBE available for this summer and perhaps through next 

summer. I am just asking if the air control people would be interested in 

being supportive of that. If you want to say no, say no. You seem to 

indicate you didn’t think ethanol was going to be able to handle the air 

quality issue at least in the short term because they don’t have enough 

capacity. 

MR. BECKER. I don’t think I said that. I think somebody else said 

that. But I think there is nothing that-- 

CHAIRMAN BARTON. No. I may misrepresent what you said, but 

you are the only one that raised it earlier in the hearing. 

MR. BECKER. Well, I think I raised the issue about whether or not 

ethanol used in conventional fuels enjoyed increased flexibility, a one 

pound waiver to the volatility limits that will allow air pollution to 

increase. That is as far as I went on ethanol other than to say we are 

pretty fuel-neutral. With regard to MTBE, I don’t know anything that 

Congress has done that precludes MTBE being used now other than-- 

CHAIRMAN BARTON. It is what we didn’t do. Had we given a 

limited liability waiver for product liability--safe harbor simply is a 

defective product--the pipelines wouldn’t have chosen to stop 

transporting it, and the refiners in the area where it is available would 

have continued to use it because there is no ban against it at the Federal 

level. It is a State ban, and that is fine. But when they didn’t get the 

liability protection, primarily some of the pipelines decided they didn’t 

want to continue to transport it because they might be subject to some 

sort of a liability lawsuit, and they just said, we are not interested, and if 

you can’t transport it through the market, then that is that. No, but there 

is no Federal ban on it. 
259

MR. BECKER. And others have weighed in on that issue. We 

haven’t. 

CHAIRMAN BARTON. Okay. I want everybody to answer this 

question. We will start with you, Mr. Conley. Would you support a 

suspension of the ethanol tariff for a defined period of time, no longer 

than 2 years, yes or no? 

MR. CONLEY. We really don’t have a position. We will haul 

whatever everybody gives us to haul. So we just don’t have a dog in 

that. 

CHAIRMAN BARTON. If you don’t say yes, I am going to assume you 

are a no. 

MR. CONLEY. Then you are saying no. 

CHAIRMAN BARTON. Mr. Shea. 

MR. SHEA. I would be in the same boat. I guess I would say no. 

CHAIRMAN BARTON. Mr. Reid. 

Mr. Reid. Yes. 

CHAIRMAN BARTON. Mr. Becker. 

MR. BECKER. No position. 

CHAIRMAN BARTON. Then you are a no. 

Mr. Slaughter. 

MR. SLAUGHTER. Yes. 

CHAIRMAN BARTON. I know you are a no. 

MR. DINNEEN. Can I just get it on the record? No. 

CHAIRMAN BARTON. Mr. Caveney. 

MR. CAVENEY. No. 

CHAIRMAN BARTON. You would say no? Why would you say no? 

That is a surprise. 

MR. CAVENEY. I mentioned earlier, if you look at the CBI, 

Caribbean Basin Initiative, in other venues where ethanol can be brought 

into the United States, that is not necessarily even full up. It is only 

about half utilized, which would indicate that we don’t have a problem of 

getting that stuff in here without having to pay any tariff. So that is the 

basis for ours. 

CHAIRMAN BARTON. The Caribbean Basin Initiative hadn’t used 

their quota? 

MR. CAVENEY. Correct. There is quite a bit of room left in that. 

That comes in without the tariff. 

CHAIRMAN BARTON. I guess I have a number of other questions, but 

we will ask them for the record. Thank you to each of you gentlemen. 

MR. HALL. Mr. Chairman? 

CHAIRMAN BARTON. Mr. Hall. 

MR. HALL. Could I maybe have 30 minutes to summarize? I yield 

back my time. 
260

CHAIRMAN BARTON. Well, this is an important hearing. Every poll 

I have seen show gasoline prices are one of the top three issues that the 

constituency of this country is worried about, and some of those polls it 

is the number one issue. 

MR. HALL. Great issue. 

CHAIRMAN BARTON. I am a little surprised we didn’t have more 

Members here today, because when they go home, this is the question 

they have got to answer. 

Anyway, thank you to each of you. We are going to adjourn this 

hearing and in approximately 15 minutes, reconvene at the subcommittee 

level to have a hearing on the Social Security numbers. 

[Whereupon, at 2:25 p.m., the committee was adjourned.] 
261

RESPONSE FOR THE RECORD BY S. WILLIAM BECKER, EXECUTIVE DIRECTOR, STATE AND 

TERRITORIAL AIR POLLUTION PROGRAM ADMINISTRATORS/ASSOCIATION OF LOCAL AIR 

POLLUTION CONTROL OFFICIALS

Response of the 

State and Territorial Air Pollution Program Administrators 

and the 

Association of Local Air Pollution Control Officials 

to Questions Posed on May 26, 2006 

by Congressman John D. Dingell 

Ranking Member, 

U. S. House of Representatives Committee on Energy and Commerce 

Regarding the New Source Review Permitting Process 

and Boutique Fuels Provisions in the Energy Policy Act of 2005 

June 14, 2006 

Question 1: Section 106 of the Gasoline for America’s Security Act of 2005, as 

introduced in the House, amended the New Source Review provisions of the Clean Air 

Act. You testified in the hearing that this provision, if enacted, would allow sources to 

increase emissions significantly without going through the New Source Review 

permitting process. Please explain why you believe this to be the case. 

Response: Section 106 states that the term `modification' as used in both the New 

Source Review (NSR) program and the New Source Performance Standards (NSPS) 

program should be consistent. Section 106 would codify the NSPS definition of 

modification and apply the NSPS definition of modification in 40 C.F.R. 60.14(h) to all 

industrial sources. Finally, section 106 codifies the EPA's previously issued Equipment 

Replacement Provision rule. 

1. Codification of the NSPS Definition of Modification As defined in the Clean Air 

Act, a modification is “any physical change in, or change in the method of operation of, a 

stationary source which increases the amount of any air pollutant emitted by such source 

or which increases the amount of any air pollutant not previously emitted” (Section 

111(a)(4)). In promulgating regulations for the prevention of significant deterioration 

(PSD) and nonattainment NSR programs, EPA defined “significant” increases in 

emissions in terms of tons per year emitted by a major source. Under the NSPS 

definition, however, NSR is triggered only in the extremely rare1

 event that a 

modification results in an increase in the capacity, or maximum achievable hourly rate of 

emissions, of an emissions unit (40 C.F.R. 60.14(h)). Thus, codification of the NSPS 

“hourly” test would allow the reconstruction of process units and boilers across the nation 

without NSR, allowing all sources to make major changes to their operations and operate 

their equipment longer hours—thereby increasing their emissions thousands of tons per 

year—without pollution controls or analysis of the impacts on air quality. 

By way of contrast, when a facility currently plans a modification of its equipment at a 

given process unit, it makes a projection of the increased emissions following the change. 

Normally, sources making modifications increase their hours of operation afterward to 

benefit from the resulting increased efficiency of the upgraded unit—and correspondingly 

increase their emissions. Sources planning to increase their emissions potentially more 

than de minimis amounts (for example, 40 tons per year for SOx and NOx) currently 

 

1

 We know of only one modification in the last 15 years that has triggered NSR requirements. 
262

trigger NSR requirements to install pollution control equipment. In enacting NSR 

provisions, Congress refused to “grandfather” dirty plants indefinitely. Codification of 

the “hourly” test, however, would have the effect of allowing sources to increase their 

emissions significantly, as frequently as they desired, and for an indefinite time period. 

2. Codification of the Equipment Replacement Rule The Equipment Replacement 

Rule (ERP) was vacated in its entirety by the D.C. Circuit Court of Appeals on March 17, 

2006. The Court’s opinion in State of New York, et al., v. Environmental Protection 

Agency was based in part on the fact that the rule allows sources to significantly increase 

their emissions without triggering NSR requirements. Specifically, the Court stated, 

“...Congress defined “modification” in terms of emission increases, but the ERP would 

allow equipment replacements resulting in non-de minimis emission increases to avoid 

NSR.” In fact, equipment replacements valued at 20 per cent or less than the value of the 

total process unit were exempted by the ERP from NSR under the “routine maintenance” 

exception—even though actual emissions would increase beyond de minimis levels. 

In order to understand how emissions could increase significantly if the now-illegal ERP 

were enacted into law by Congress, it is crucial to distinguish between allowable and 

actual levels of emissions: The allowable, or permitted levels of emissions for major 

sources are generally expressed in a permit in terms of the operating capacity of a unit 

based on 24 hours per day, 7 days per week operation. The fact that the ERP requires 

facilities to remain under their permitted levels of emissions has little significance 

because sources can vastly increase their actual emissions without approaching their 

permitted, allowable levels. Thus, the ERP provides no protection from increases in 

actual emissions. 

Modifications made by the Ohio Edison utility provide an example. The enforcement 

case brought against the company’s coal-burning power plants resulted in the utility 

being held liable for making 11 modifications of process equipment without complying 

with NSR requirements. Ohio Edison subsequently entered into a settlement with EPA 

that will result in reductions of 212,500 tons per year of harmful emissions. However, all 

except one of the 11 projects would have been exempt from NSR requirements under the 

20 per cent cost level of the ERP. Thus, the significant increases in actual emissions 

caused by the utility’s modifications would have been completely legal under the ERP. 

Question 2: Please explain whether, under the current New Source Review clean air 

permitting program, sources can modify their facilities without going through the major 

New Source Review permitting process. 

Response: Under the current NSR permitting program, sources making modifications 

that result in increased emissions beyond de minimis levels must apply for NSR permits, 

install pollution control equipment (either best available control technology in PSD areas, 

or lowest achievable control technology in nonattainment areas), and, in attainment areas, 

must analyze the air quality impacts of their projects in order not to violate the clean air 

increments. One exception to the NSR requirement exists for facilities whose changes 

are considered “routine maintenance,” which has been evaluated historically by assessing 

four factors: the nature and extent of the change; the purpose of the change; its cost (i.e., 

whether it involves capital expenditures); and the frequency of the change. However, 

facilities making modifications that are located in states within the Fourth Circuit Court 

of Appeals are not currently subject to NSR unless their hourly rate of emissions 

increases after the change—which would be an extremely unusual occurrence. The 

question of which test was intended by Congress to measure increases in emissions 
263

resulting from a modification—annual actual or hourly—is now before the United States 

Supreme Court in the Duke Energy case. 

Question 3: The Energy Policy Act of 2005 included a number of provisions addressing 

potential issues related to boutique fuels. 

a. Do you believe that this Congress needs to pass additional legislation further 

limiting the number of boutique fuels adopted by states to address air quality 

issues. If yes, please explain what legislative changes you support and why. If 

no, please explain why. 

Response: STAPPA and ALAPCO oppose additional legislation further limiting the 

number of boutique fuels adopted by states to address air quality issues. We are 

concerned by assertions that there has been a “proliferation” of state clean air fuel 

programs and that these programs are responsible for fuel price increases and could 

potentially compound fuel supply disruptions should they occur. State clean air fuel 

programs have been wrongly targeted as the cause, and further curtailment of state and 

local authorities to pursue such programs – beyond the limitations already placed by the 

Clean Air Act and the Energy Policy Act of 2005 (EPAct) – could unnecessarily 

jeopardize public health and clean air. 

If Congress is interested in taking legislative action with respect to state clean air fuel 

programs, rather than limit the number of fuels, it should expand states’ authorities by 

allowing increased flexibility to adopt clean air fuel programs that will meet public health 

needs in the future. STAPPA and ALAPCO recommend that Congress consider 1) 

expanding the list of clean air fuels available under EPAct to include California Clean 

Burning Gasoline, 2) allowing all areas of the country – attainment and nonattainment – 

to opt into the federal Reformulated Gasoline program and 3) facilitating the ability of 

states and localities to adopt cleaner regional fuels, including allowing attainment areas to 

participate in such regional programs. 

b. If this Congress decides to enact legislation imposing further limitations on 

State fuel programs, do you believe that such legislation should address only 

State fuel programs adopted for air quality reasons? Or should it also address 

State fuel programs adopted for local economic or other reasons. Please 

explain why. 

Response: STAPPA and ALAPCO oppose any legislation that would impose any further 

limitations on state and local authorities to control air pollution, including state clean air 

fuel programs; we also oppose limitations on fuel programs adopted for local economic 

or other reasons. If, however, Congress is intent on responding to generic fuel supply and 

distribution concerns by enacting legislation to impose further restrictions on state and 

local fuel programs, we do not believe there is any justification for limiting such action 

only to state clean air fuel programs and not also to other specialty fuel programs. 
264

RESPONSE FOR THE RECORD BY RED CAVANEY, PRESIDENT, AMERICAN PETROLEUM 

INSTITUTE

June 16, 2006 

The Honorable John D. Dingell 

U.S. House of Representatives 

Washington, DC 20515-2215 

Dear Mr. Dingell: 

I appreciated the opportunity to testify before the May 11, 2006 House Energy and 

Commerce Committee hearing entitled “Gasoline: Supply, Price, and Specifications”. 

Attached are my responses to your additional questions. As always, please don’t hesitate 

to contact me if you have any questions or if you are in need of additional information. 

Sincerely, 

Attachment 

cc: Chairman Barton 
265

Attachment 

Red Cavaney, API Response to Congressman Dingell 

1. The Energy Policy Act of 2005 included a number of provisions addressing 

potential issues related to boutique fuels. 

a) Do you believe that this Congress needs to pass additional legislation further 

limiting the number of boutique fuels adopted by States to address air quality 

issues? If yes, please explain what legislative changes you support and why? 

If no, please explain why? 

Response 

The Energy Policy Act of 2005 (EPACT05) included a provision setting some 

restrictions on EPA for approval of states’ fuels intended for reducing air pollution. In 

addition, Congress required that EPA and the DOE complete two studies regarding 

boutique fuels (one this year and one in 2008). We look forward to the results of this 

study and its recommendation regarding how the number of boutique fuels may be 

reduced while balancing environmental needs and supply capability. In particular, we 

need such a careful study to weigh the impact of increased fuel fungibility from a reduced 

number of fuels with the reduction in production capability that will occur if the overall 

fuel specifications are made more stringent in the process of insuring continued 

environmental performance. 

b) If this Congress decides to enact legislation imposing further limitations on 

State fuels programs, do you believe that such legislation should address 

only State fuel programs adopted for local economic or other reasons? 

Please explain why? 

Response 

The bigger challenge now facing us is the recent proliferation of bio-fuel boutiques 

that are just as disruptive to supply but lack a basis in improving air quality. We feel 

strongly that the addition of provisions restricting state bio-fuel mandates would 

substantially strengthen what has been proposed. More state bio-fuel mandates could 

undo or offset much of the benefit your legislation as well as EPACT05 promises to 

provide. 

 Also, the legislation should be strengthened to further limit diesel boutiques (except 

for the existing Texas program) by preempting all state diesel programs, including those 

that address non-road fuels. 

At a minimum, we strongly recommend that this legislation amend EPACT05 to 

require study of the supply and distribution impacts of state bio-fuels mandates. Also, 

EPA should be required to review potential supply impacts of any fuel under 

consideration for approval. Simply reducing the number of fuels is not sufficient 

especially if it means moving to more stringent formulations that reduce producibility 

which, in turn, could also have adverse supply impacts. 

2. Please describe the potential impacts, if any, of State ethanol or biodiesel mandates 

on the potential to affect gasoline supply, fungibility, and price spikes. Please 

describe the ways in which these potential impacts are similar to, and different 

from, the potential impacts of State fuel programs adopted for air quality reasons. 

 

Response 

The federal Renewable Fuel Standard will ensure continued growth in renewables, 

especially ethanol. Unlike potential state mandates, the RFS builds in flexibility. Its 
266

credit banking and trading component, when established through regulations by EPA, 

should allow refiners to use renewables where they are most efficient. This is critical for 

the reliable supply of fuels. 

State mandates undermine that flexibility and create obstacles to the achievement of 

Congress’ goals. Individual states should not be permitted to force the use of ethanol or 

biodiesel by devising and mandating their own gasoline/ethanol and/or diesel/biodiesel 

blends. The last thing our nation needs now is an expansion of the boutique fuels 

patchwork of state-by-state laws mandating ethanol and/or biodiesel use at different 

concentrations and/or under different terms. 

Here are examples of the kind of problems that state bio-fuels mandates could 

create: 

- A per gallon mandate requires that E10 be available at all times. Thus, a 

shortage of ethanol for any reason means that gasoline could not be sold. 

- If the governor has chosen to eliminate the 1 pound waiver or if the state 

has a low rvp fuel requirement, refiners may need to produce a low RVP 

blendstock (BOB) for conventional gasoline. 

- For areas requiring RFG, refiners would be required to produce a lower 

RVP blend of RFG, i.e. a reformulated BOB, for blending with ethanol. 

While most are choosing to do this now, it is possible that in the future 

some will choose to produce RFG with no oxygenates. This would not be 

possible in a mandate state. 

Integrating ethanol and other biofuels into the gasoline marketplace is too important 

– and presents too many challenges – to be approached in an individual, state-by-state 

manner. In order to meet consumer fuel needs, we want to produce more, refine more, 

and distribute more – but state bio-fuel mandates would make this difficult. For example, 

ethanol cannot be moved by common carrier pipeline, unlike more than 70 percent of 

U.S. fuel production, and requires a long supply chain to serve consumers. That means a 

longer reaction time when problems occur. State ethanol mandates would significantly 

add to that reaction time. 

3. In section 1541 of the Energy Policy Act of 2005, Congress gave the EPA authority 

to issue waivers of state boutique fuel requirements in case of extreme and unusual 

circumstances. Last fall, EPA used this authority to address extreme and unusual 

circumstances related to Hurricane Katrina and Rita. Please comment on whether, 

from your perspective, this authority was helpful in addressing potential hurricanerelated supply disruptions. 

Response 

The Section 1541 fuels waivers issued by EPA were critically important in enabling 

industry to respond to the devastation of Hurricane Katrina and Rita. However, because 

of the extensive nature of the damage done by these hurricanes to U.S. refining capacity, 

the 20-day limitation in Section 1541 was problematic as it created uncertainty for 

making supply and distribution decisions. In fact, some waivers had to be reissued three 

times. 

Another problem was when there was a need for not only an EPA waiver but also 

State waivers of environmental and product quality regulations. What usually occurred 

was that EPA acted quickly to waive certain federal fuel requirements to increase fuel 

supplies but the needed state responses were not prompt. This resulted in unnecessary 

delays in increasing fuel supplies. To remedy this, during events of national significance 

or extreme supply emergencies, EPA should have authority to waive both federal and 

state environmental and product quality (situations where state adopts its own product 
267

quality regulations and situations where states adopt ASTM specifications) fuel 

requirements. 
268

RESPONSE FOR THE RECORD BY BOB SLAUGHTER, PRESIDENT, NATIONAL PETROCHEMICAL 

& REFINERS ASSOCIATION

June 16, 2006 

The Honorable Joe Barton 

Chairman 

Committee on Energy & Commerce 

U.S. House of Representatives 

Washington, DC 20515 

Dear Chairman Barton: 

Thank you for the opportunity to appear before the Committee on Energy and Commerce 

at the May 11, 2006 hearing entitled, “Gasoline: Supply, Price, and Specifications.” I 

appreciate the continuing interest that you and your colleagues give to the nation’s 

transportation fuel supplies. As you know, NPRA, the National Petrochemical & 

Refiners Association, members includes more than 450 companies, including virtually all 

U.S. refiners and petrochemical manufacturers. 

NPRA has prepared responses to questions for inclusion in the official hearing record. 

Please find NPRA’s responses attached to this letter. 

Again, I thank you for your interest in the critical issue of supplying the nation with the 

refined products that it needs. NPRA appreciates your close and cautious consideration 

of issues affecting the refining industry. 

Sincerely, 

Bob Slaughter 

Attached: Responses to Ranking Member John Dingell’s Questions for the Record 
269

Responses to Ranking Member John Dingell’s Questions for the Record 

1. The Energy Policy Act of 2005 included a number of provisions addressing 

potential issues related to boutique fuels. 

a. Do you believe that this Congress needs to pass additional legislation 

further limiting the number of boutique fuels adopted by States to 

address air quality issues? If yes, please explain what legislative 

changes you support and why. If no, please explain why. 

NPRA believes that the Committee draft is a reasonable and modest approach 

to the boutique fuels issue, representing the absolute limit that policymakers should 

consider this year. We do suggest that it would be wise to add four additional items: 

1) to include in the definition of boutique fuels all state ethanol and biodiesel 

mandates, as well as CARB fuel; 2) to require EPA to make a finding on the impact 

of state biodiesel mandates and CARB fuel on fuel supply fungibility and air 

quality; 3) to require a study of the impact of a 1-3 fuel national fuel slate on 

concentration and competition in the U.S. refining industry; and 4) to determine the 

impact of this bill on the average consumer costs for gasoline, compared to the 

current system. 

b. If this Congress decides to enact legislation imposing further 

limitations on State fuel programs, do you believe that such 

legislation should address only State fuel programs adopted for air 

quality reasons? Or should it address State fuel programs adopted for 

local economic or other reasons? Please explain why. 

See recommended additional items 1 and 2 above. 

2. Please describe the potential impacts, if any, of State ethanol or biodiesel 

mandates on the potential to affect gasoline supply, fungibility, and price 

spikes. Please describe the ways in which these potential impacts are similar 

to, and different from, the potential impacts of State fuel programs adopted for 

air quality reasons. 

The Committee draft attempts to control the total number of boutique fuels as 

defined in section 211(c)(4)(C) of the Clean Air Act in an effort to minimize fuel 

marketplace volatility and maintain air quality gains. However, while the draft 

legislation focuses on the purely legal definition of boutique fuels, it expressly allows 

the proliferation of state mandated fuels using renewable additives such as ethanol 

and biodiesel. 

The federal preemption provisions in the Clean Air Act preserve a rational 

motor fuel supply because states are precluded from unilateral adoption of unique 

specifications unless EPA grants a waiver. EPA explains the merits of federal 

preemption in the preamble for the federal RFG and anti-dumping final rules, 

which includes the following statements: 

“The regulations proposed here will affect virtually all of the gasoline in the 

United States. As opposed to commodities that are produced and sold in the same area 

of the country, gasoline produced in one area is often distributed to other areas. The 

national scope of gasoline production and distribution suggests that federal rules 
270

should preempt State action to avoid an inefficient patchwork of potentially conflicting 

regulations.” 

Because the draft legislation intends to improve fuel fungibility and alleviate 

adverse air quality impacts, it should also cover other fuels, such as state ethanol 

and biodiesel mandates—whether or not these fuels fall under the requirements of 

section 211(c)(4)(C) of the Clean Air Act. At the very least this legislation should 

require EPA to make findings regarding the impact of these mandated fuels upon 

fuel supply and fungibility and air quality. 

3. In Section 1541 of the Energy Policy Act, Congress gave the Environmental 

Protection Agency (EPA) the authority to issue waivers of State boutique fuel 

requirements in case of extreme and unusual fuel and fuel additive supply 

circumstances. Last fall, EPA used this authority to address extreme and 

unusual circumstances related to Hurricanes Katrina and Rita. Please comment 

on whether, from your perspective, this authority was helpful in addressing 

potential hurricane-related supply disruptions. 

NPRA commends the federal government for acting quickly and decisively in 

the face of supply outages. Several steps taken in the days and weeks following 

these storms helped refiners provide consumers with the products they need. EPA 

provided temporary fuel waivers that made it easier to supply fuels to affected 

areas. The waivers pertained to both gasoline and diesel specifications. NPRA 

appreciates the efforts of EPA and commends the agency for its diligence in 

gathering the necessary information to protect both fuel supply and environmental 

concerns.
271

RESPONSE FOR THE RECORD BY PAUL D. REID, PRESIDENT, REID PETROLEUM 

CORPORATION, ON BEHALF OF NATIONAL ASSOCIATION OF CONVENIENCE STORES AND 

SOCIETY OF INDEPENDENT GASOLINE MARKETERS OF AMERICA

NATIONAL ASSOCIATION OF CONVENIENCE STORES 

1600 Duke Street 

Alexandria, VA 22314 

SOCIETY OF INDEPENDENT GASOLINE MARKETERS OF AMERICA 

11495 Sunset Hills Road 

Reston, VA 22090 

June 16, 2006 

The Honorable Joe Barton 

Chairman 

Committee on Energy and Commerce 

U.S. House of Representatives 

Washington, D.C. 20515 

Re: Responses to Written Questions Submitted in Connection with the May 11, 

2006 Committee Hearing on "Gasoline: Supply, Price, and Specifications" 

Dear Mr. Chairman: 

 This letter responds to your letter of May 26, 2006 posing written questions to me 

that were submitted by members of the Committee in connection with the May 11, 2006 

Committee hearing on "Gasoline: Supply, Price, and Specifications." My answers to 

these questions, on behalf of the National Association of Convenience Stores ("NACS") 

and the Society of Independent Gasoline Marketers of America ("SIGMA"), are attached. 

 NACS and SIGMA are pleased to submit these answers to the Committee. If the 

Committee has additional questions, please do not hesitate to contact us. 

 Sincerely yours, 

 Signed 

 Paul D. Reid 

 President 

 Reid Petroleum Corporation 

 On behalf of 

 NACS and SIGMA 

Attachment 

cc: The Honorable John D. Dingell 
272

Responses to Questions from the Honorable John D Dingell

Question 1. The Energy Policy Act of 2005 included a number of provisions addressing 

potential issues related to boutique fuels.

(a) Do you believe that this Congress needs to pass additional legislation further 

limiting the number of boutique fuels adopted by States to address air quality 

issues? If yes, please explain the legislative changes you support and why. If no, 

please explain why.

Ms. Sonja Hubbard, Chief Executive Officer of E-Z Mart Stores, Inc., provided the 

following testimony to the Committee at its June 7, 2006 hearing on boutique fuels. 

This testimony speaks to this question directly: 

"NACS and SIGMA have for many years warned Congress about the 

fragmentation of the fuels markets which has resulted from various 

jurisdictions requiring their own boutique fuel blends. Nevertheless, it is our 

straightforward message to this Committee today that we are more concerned 

than reassured by the prospect of new fuels legislation this year. Our industry, 

and the entire motor fuels manufacturing and distribution industries, are still 

working very hard to implement the significant changes in the motor fuels 

markets that have been the result of the legislative mandates contained in the 

Energy Policy Act of 2006 (EPAct). Over the next six months, we also face 

significant challenges with the introduction of ultra low sulfur diesel fuel 

(ULSD). . . . 

 We welcome the Committee's focus on the continued proliferation of 

boutique fuels and believe that there should be a healthy debate on any 

additional measures that may need to be undertaken to build on the boutique 

fuels restrictions in EPAct. . . . 

 

However, we urge the Committee to be very careful when considering 

additional legislation on boutique fuels in light of the impact such legislation 

could have on an already volatile gasoline and diesel fuel market." 

Ms. Hubbard's testimony continues by recommending that, if the Committee does 

consider new boutique fuels legislation in 2006, it adhere to the following 

limitations: (1) avoid the adoption of a fuel slate until the joint Environmental 

Protection Agency and Department of Energy ("DOE") report on the effects of such 

a slate is received by Congress in August 2006; (2) adopt a mechanism to gradually 

reduce the number of boutique fuels (a so-called "ratchet"); and, (3) condition the 

implementation of state alternative fuel mandates on findings by DOE and the 

Department of Transportation that sufficient alternative fuel supplies and 

infrastructure exist to support such a state mandate. 

(b) If this Congress decides to enact legislation imposing further limitations on State 

fuel programs, do you believe that such legislation should address only State fuel 

programs adopted for air quality reasons? Or should it also address State fuel 

programs adopted for local economic or other reasons? Please explain why.

As noted in the answer to Question 1(a) above, NACS and SIGMA support 

congressional action on state alternative fuel mandates. Drawing again from Ms. 

Hubbard's June 7th testimony before the Committee: 
273

 "If state biofuels mandates continue to proliferate, the current situation 

will only grow worse. Our industry will be required to move ethanol from one 

market to another, based not on market forces but rather on artificial demand 

created through state mandates. Even worse, our industry will be prohibited 

from supplying markets in need, like those reformulated gasoline markets 

transitioning away from MTBE, because supplies will be held hostage by 

individual states. Clearly, these state mandates interfere with the efficient flow 

of interstate commerce of a very important commodity. We urge you to stand 

by the national renewable fuel standard adopted in EPAct and condition the 

implementation of any state mandate upon findings by the relevant federal 

authorities that adequate supplies and logistics exist to support the demands 

created by these state mandates." 

Question #2. Please describe the potential impacts, if any, of State ethanol or biodiesel 

mandates on the potential to affect gasoline supply, fungibility, and price spikes. Please 

describe the ways in which these potential impacts are similar to, and different from, the 

potential impacts of State fuel programs for air quality reasons.

NACS' and SIGMA's answer to Question 1(b) responds to the first part of this 

question. With respect to the second part of the question, we posit that state 

alternative fuel mandates have much the same effect on supply, volatility and price 

spikes as state boutique fuels adopted for air quality purposes. Either boutique fuel 

-- an alternative boutique fuel or a boutique fuel adopted for air quality purposes -- 

creates an island of unique fuel specifications that is both difficult to resupply in the 

event of supply shortages and acts as an artificial and arbitrary barrier to the smooth 

movement of fuels and fuel additives based on market forces. State biofuels 

mandates have the added potential effect of inhibiting the smooth implementation 

of the Renewable Fuel Standard established by the Energy Policy Act of 2005. 

That program envisioned a flexible system that would enable the petroleum industry 

to comply with the requirements in the most efficient manner possible. State 

biofuel mandates eliminate that flexibility. 

It also is important to note that this week ethanol is selling at world record levels in 

spot trading -- over $5.00 per gallon, or over $200 per barrel. Because ethanol is a 

commodity, these prices reflect the same pressures on the domestic ethanol market 

that high prices reflect on other commodities markets -- namely, high demand and 

questionable supply. In the context of an examination of state ethanol mandates, 

these historically high prices reflect both the questionable public policy of such 

mandates and the constraints that such mandates place on the movement of ethanol 

from one market to another based on actual demand, rather than artificial 

governmental mandates. Ethanol currently being used to meet state ethanol 

mandates could have a moderating effect on these ethanol prices if it is allowed to 

move to alternative markets. 

Question #3. In Section 1541 of the Energy Policy Act, Congress gave the 

Environmental Protection Agency (EPA) authority to issue waivers of State boutique fuel 

requirements in case of extreme and unusual fuel and fuel additive supply circumstances. 

Last fall, EPA used this authority to address extreme and unusual circumstances related 

to Hurricanes Katrina and Rita. Please comment on whether, from your perspective, this 

authority was helpful in addressing potential hurricane-related supply disruptions.
274

NACS and SIGMA believe that EPA exercised the emergency fuel waiver authority 

grant by Congress in EPAct wisely and judiciously in the wake of Katrina and Rita. 

The temporary waivers granted by EPA were credited by NACS and SIGMA 

members -- and by many others -- with increasing motor fuel supplies across the 

nation and moderating the wholesale and retail price volatility that followed the 

hurricanes. 

NACS and SIGMA generally do not support a substantially wider grant of waiver 

authority to EPA. However, we have urged Congress to consider two narrow 

expansions of EPA authority under the EPAct emergency waiver provisions: (1) 

the adoption of a "hold harmless" provision so that states will not hesitate to follow 

an EPA emergency waiver out of concern that the state will be forced to offset any 

increased emissions during the waiver period; and, (2) consider a grant of authority 

to EPA to issue an emergency waiver if transitions from one fuel to another are 

significantly constrained by infrastructure or transportation limitations. We would 

not oppose a proposal to grant the President authority to pre-empt state boutique 

fuel mandates in the context of a supply emergency to assure that a national 

determination of an emergency is not undercut by a state's failure to act quickly to 

suspend temporarily local fuel specifications. 
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RESPONSE FOR THE RECORD BY BOB DINNEEN, PRESIDENT AND CEO, RENEWABLE FUELS 

ASSOCIATION

June 16, 2006 

The Honorable John D. Dingell 

House of Representatives 

Committee on Energy & Commerce 

Washington, DC 20515 

Re: Additional Questions to Witnesses. 

Hearing on May 11, 2006, entitled “Gasoline: Supply, Price, and Specifications,” 

Dear Congressman Dingell: 

Attached are responses to the additional questions you submitted from the abovereferenced hearing. 

1. You testified that 35 ethanol plants are currently under construction. 

(a) How many of these facilities have obtained a major New Source Review air 

permit? 

Response: I am not specifically aware how many of the plants under 

construction have obtained a New Source Review air permit. 

(b) For those facilities that do not have a major New Source Review air permit, 

please explain why such a permit was not required. 

Response: A New Source Review permit would not be required if a plant meets 

the definition of a synthetic minor, i.e., emits less than 100 tons per year. 

Generally, plants larger than 50 million gallons must be permitted under New 

Source Review. Of the plants under construction today, 24 plants are 50 

million gallons or less. 

(c) For those facilities that do have major New Source Review air permits, how 

long, on average, did it take to obtain the permit once the permitting agency had 

a complete permit application? 

Response: In general, plants having to obtain a New Source Review air permit 

can expect 12 – 18 months to finalize the process. There have been cases where 

it has taken longer. 

2. The Energy Policy Act of 2005 included a number of provisions addressing potential 

issues related to boutique fuels. 
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(a) Do you believe that this Congress needs to pass additional legislation further 

limiting the number of boutique fuels adopted by States to address air quality 

issues? If yes, please explain what legislative changes you support and why. In 

no, please explain why. 

 Response: If the Energy and Commerce Committee concludes “boutique fuels” 

are a contributing factor to rising consumer gasoline prices, then the RFA 

would support legislation to reduce the number of fuels refiners must produce 

and improve overall gasoline fungibility. 

(b) If Congress decides to enact legislation imposing further limitations on State 

fuel programs, do you believe that such legislation should address only State 

fuel programs adopted for air quality reasons? Or should it address State fuel 

programs adopted for local economic or other reasons? Please explain why. 

 Response: States are contemplating biofuels programs to stimulate ethanol and 

biodiesel production in their respective states. They are attempting to capture 

the tremendous economic benefits local ethanol and biodiesel production will 

provide. Consider the local economic impact of just one 100 million gallon 

ethanol plant: 

• Generate $406 million for the local community; 

• Increase the state’s Gross Output by $223 million; 

• Increase household income by more than $50 million; and 

• Create nearly 1,600 local jobs. 

 Congress should not impinge on a state’s ability to pursue biofuels programs 

intended to promote such significant economic development in their states. 

3. Please describe the potential impacts, if any, of State ethanol or biodiesel mandates on 

the potential to affect gasoline supply, fungibility, and price spikes. Please describe 

the ways in which these potential impacts are similar to and different from the 

potential impacts of State fuel programs adopted for air quality reasons. 

 Response: State Biofuels Programs will not affect gasoline supply, fungibility or price. 

Simply adding ethanol to gasoline does not constitute a “boutique fuel.” Indeed, 

ethanol is blended in 40% of the nation’s fuel. Ethanol is either blended with a fully 

fungible RBOB (reformulated gasoline blendstock for oxygenate blending) in federal 

RFG areas to meet appropriate emissions standards or with a fungible conventional 

gasoline, which adds volume and octane to the motor fuel supply. Blending ethanol 

with conventional gasoline requires no unique blend from refiners and does not add to 

the complexity of the fuel distribution system. That is fundamentally different from a 

State fuel program adopted for air quality reasons that requires significant refinery 

modifications and a separate and distinct fuel distribution and storage infrastructure. 

Congressman, I appreciate your interest in renewable fuels, specifically ethanol, and 

look forward to the ongoing development of ethanol biorefineries in Michigan. Already, 

Michigan Ethanol, LLC in Caro, MI is producing more than 50 million gallons of ethanol 

in your state. However, since Congress passed the Energy Policy Act of 2005, Michigan 

has begun construction on three additional ethanol refineries. In my view, Michigan’s 

ethanol industry is a remarkable reflection of the ongoing domestic biofuels energy 

infrastructure. If you have additional questions or comments please do not hesitate to 

contact me. 
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Sincerely, 

Bob Dinneen 

President & CEO 

cc: Peter Kielty, Legislative Clerk, Committee on Energy and Commerce 
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June 16, 2006 

The Honorable Ed Whitfield 

Member of Congress 

House of Representatives 

Committee on Energy & Commerce 

Washington, DC 20515 

Re: Additional Questions to Witnesses. 

Hearing on May 11, 2006, entitled “Gasoline: Supply, Price, and Specifications,” 

Dear Congressman Whitfield: 

Attached are responses to the additional questions you submitted from the abovereferenced hearing. 

1. The biofuels industry has received immense support from the agriculture industry 

and from my colleagues in the House and Senate. There are a number of new 

technologies and advancements in the biofuels industry taking place across the 

country. I believe it is in the interest of the American consumer to support the 

development of these alternative fuels. Do you support a more expedited approach 

to marketplace introduction of new, alternative biofuels? Why, why not? 

Response: Absolutely, the Renewable Fuels Standard (RFS) as contained in the Energy 

Policy Act of 2005 is not limited to ethanol and biodiesel and was intended to expand the 

national usage of renewable fuels. Additionally, although not in production today, new 

sources of feedstock for ethanol are being created. In a few short years, I believe 

cellulosic ethanol production will dramatically expand the types and amount of available 

feedstocks used to make ethanol, including materials now regarded as wastes, corn 

stalks, rice straw, wood chips and "energy crops" such as fast-growing trees and grasses. 

Cellulose ethanol production will create new jobs and economic growth outside the 

traditional “grain belt” from locally available resources, and provide significant 

greenhouse gas emissions reductions. 

2. If new technologies are able to produce a renewable fuel from agriculturally-based 

feed stocks, albeit with different physical characteristics from conventional biofuels, 

but remain acceptable substitutes for petroleum based products, they should be 

treated equally. Unfortunately, they are all too often faced with enormous barriers 

to entry into the marketplace. The exact situation is happening in my District with a 

biodiesel producer. A farmer is using a new technology which produces a new 

horsepower, is more efficient, and cost less to produce. However, because of a turf 

battle between new and old technologies and the adoption of an international 

standard, production in my district has been shut down and forced to convert back to 

old technologies. My constituent has one of the best technologies around and prior 

to the explosion of this issue, he did not receive one complaint. However, because 

of inconsistencies in the biodiesel industry he was forced to revert back to a more 
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expensive and less efficient product. Do you believe additional regulations slow the 

influx of new alternatives into the marketplace? (i.e. ASTM International 

Standards). 

Response: Any new fuels, even derivatives from current biofuels, must be approved by 

the Environmental Protection Agency (EPA), due to environmental and health 

regulations. Additionally, ASTM is the national standard setting body for fuels and 

biofuels. The ASTM process is a science-based entity that develops standards through 

consensus of all stakeholders, including engine manufacturers, fuel producers and 

consumers. ASTM evaluates current and new standards for fuels on an ongoing basis 

and standards can be changed with sound technical support. 

The regulatory and specification process is necessary for creating new fuels in today’s 

marketplace. It ensures transportation fuels products used by consumers are rigorously 

tested and approved. The ethanol industry has worked with ASTM throughout its history, 

and standards have changed many times. The process assures the highest quality fuels 

are being introduced to the marketplace, which is absolutely essential to the long-term 

viability of the alternative fuels industry. 

I am unfamiliar with the specific circumstance facing the company in your district, and 

have no expertise on biodiesel ASTM standards generally. But from the ethanol 

industry’s experience, I can absolutely affirm the efficacy of ASTM’s standard setting 

process. It has not been a barrier to entry for ethanol companies. 

3. Similar technologies are popping up all over the country. I was reading not long ago 

of a company that is producing a renewable fuel from stale beer. Some critics argue 

that international standards ensure quality. I understand the need for quality 

assurances in the marketplace. But it is the marketplace that should make the 

ultimate determination of the product so long as the environmental protection 

agency determines the product’s viability. Do you support all technologies that 

provide a variety of choices among alternative biofuels in the marketplace? 

Response: Today ethanol is produced from corn, grain sorghum, wheat, barley, sugar 

cane, cheese whey, beverage waste, including stale beer and unused or wasted soda, 

sugar beets, the cassava root, potatoes and wheat straw. Each of these feedstocks yield a 

fuel that meets ASTM specifications. Fuel marketers will simply not purchase product 

that does not meet ASTM specifications. 

Congressman, I appreciate your interest in renewable fuels, specifically ethanol, and look 

forward to the ongoing development of ethanol biorefineries in Kentucky. Already, 

Commonwealth Agri-Energy, LLC in Hopkington, and Parallel Products in Louisville are 

producing nearly 40 million gallons of ethanol in your state. If you have additional 

questions or comments please do not hesitate to contact me. 

Sincerely, 

Bob Dinneen 

President & CEO 
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cc: Peter Kielty, Legislative Clerk, Committee on Energy and Commerce 

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