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24–246PDF 2005

HURRICANE KATRINA’S EFFECT ON GASOLINE

SUPPLY AND PRICES

HEARING

BEFORE THE

COMMITTEE ON ENERGY AND

COMMERCE

HOUSE OF REPRESENTATIVES

ONE HUNDRED NINTH CONGRESS

FIRST SESSION

SEPTEMBER 7, 2005

Serial No. 109–32

Printed for the use of the Committee on Energy and Commerce

(

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

2

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, Deputy Staff Director and General Counsel

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

(II)

C O N T E N T S

Page

Testimony of:

Angelle, Scott A., Secretary, Louisiana Department of Natural Resources 124

Barbour, Hon. Haley, Governor, State of Mississippi ................................... 18

Caruso, Hon. Guy F., Administrator, Energy Information Administration . 48

Cavaney, Red, President, American Petroleum Institute ............................. 136

Cooper, Benjamin S., Executive Director, Association of Oil Pipelines ....... 175

Cooper, Mark N., Research Director, Consumer Federation of America ..... 206

Douglass, Bill, CEO, Douglass Distributing Company, on behalf of the

National Association of Convenience Stores and the Society of Independent Gasoline Marketers of America ..................................................... 181

Garman, Hon. David K., Under Secretary for Energy, Science and Environment, Department of Energy; ................................................................. 44

Lashof, Daniel A., Science Director, Climate Center, National Resources

Defense Council ............................................................................................. 199

Moran, Kenneth P., Acting Director, Office of Homeland Security, Enforcement Bureau, Federal Communications Commission ........................ 68

Newsome, James, President, New York Mercantile Exchange, World Financial Center ............................................................................................... 170

Seesel, John H., Associate General Counsel for Energy, Federal Trade

Commission ................................................................................................... 56

Slaughter, Bob, President, National Petrochemical and Refiners Association ................................................................................................................. 146

Smith, William L., Chief Technology Officer, Bellsouth Corporation .......... 193

Additional material received for the record:

Dingell, Hon. John D., a Representative in Congress from the State

of Michigan, letter dated March 3, 2005, enclosing questions for the

record, and responses to same ..................................................................... 248

Newsome, James, President, New York Mercantile Exchange, World Financial Center, letter dated October 6, 2005, enclosing response for

the record ....................................................................................................... 242

Slaughter, Bob, President, National Petrochemical and Refiners Association, response for the record ........................................................................ 246

(III)

(1)

HURRICANE KATRINA’S EFFECT ON

GASOLINE SUPPLY AND PRICES

WEDNESDAY, SEPTEMBER 7, 2005

HOUSE OF REPRESENTATIVES, COMMITTEE ON ENERGY AND COMMERCE, Washington, DC.

The committee met, pursuant to notice, at 11:05 a.m., in room

2123, Rayburn House Office Building, Hon. Joe Barton (chairman)

presiding.

Members present: Representatives Barton, Hall, Upton, Stearns,

Gillmor, Deal, Whitfield, Norwood, Shimkus, Wilson, Shadegg,

Fossella, Radanovich, Bass, Pitts, Bono, Walden, Terry, Ferguson,

Rogers, Otter, Myrick, Sullivan, Murphy, Burgess, Blackburn, Dingell, Waxman, Markey, Pallone, Brown, Rush, Eshoo, Stupak,

Engel, Wynn, Green, Strickland, DeGette, Capps, Doyle, Allen,

Davis, Schakowsky, Solis, Gonzalez, Inslee, Baldwin, and Ross.

Staff present: Bud Albright, staff director; Andy Black, deputy

staff director/policy coordinator; Mark Menezes, chief counsel for

energy and the environment; Margaret Caravelli, majority counsel;

Maryam Sabbaghian, majority counsel; Tom Hassenboehler, majority counsel; Kelly Cole, majority counsel; Peter Kielty, legislative

clerk; David Schooler, minority general counsel; Sue Sheridan, minority senior counsel; Michael Goo, minority counsel; Bruce Harris,

minority professional staff; and Reed Stuntz, minority staff director.

Chairman BARTON. The committee will come to order. We are

going to have a very important hearing this morning and this afternoon but also a very long hearing.

The Chair should not have to announce this, but the Chair is

going to announce it: There will be regular order.

All members that wish to will be allowed to give their opening

statements. Those members that wish to defer the opening statements will be given extra time in the Q and A period.

At noon today, approximately, we are going to have a video presentation by the Governor of Mississippi, Mr. Barbour.

We asked the Governor of Louisiana if she would also like to participate by video conference. She is not able to do so, but she is

going to ask one of her assistants, who I believe is in the room, to

read her statement into the record.

So whenever Governor Barbour is able to teleconference with us,

we will suspend what we are doing at that moment for that to happen. Then we will give the Governor of Louisiana’s representative

an opportunity to read a statement into the record, and then we

will resume.

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I also want to make a point of personal privilege before beginning our opening statements to announce that Baby Barton has not

yet joined us in the world. He is due any day now. And I know the

airline schedule back to Texas. I have it memorized. So if you see

me hopping out and running out of here, it means that I have received a phone call that I need to get home. But we expect Baby

Barton to be here any time between today and next Friday.

Mr. HALL. Will the chairman yield?

Chairman BARTON. Briefly.

Mr. HALL. Did you ever know where the term ‘‘son of a gun’’

came from?

Chairman BARTON. I hesitate to ask.

Mr. HALL. Sailors used to take their wives to sea with them. And

when they were enceintes and they could not deliver, they would

walk them past the big guns, shoot the big guns off. That is a son

of a gun.

Chairman BARTON. Okay. That is one theory.

Now we are going to resume regular order, and the Chair recognizes himself for an opening statement.

I want to begin by expressing the deep sorrow that everybody on

this committee, on both sides of the aisle, has for the families and

friends who have lost loved ones and who are experiencing, as we

speak, the tragedy and loss as a result of Hurricane Katrina.

This is one of the worst natural catastrophes to ever hit our

country, and I would remind us that we are the United States of

America, so our hearts reach out to those citizens in Louisiana,

Alabama, and Mississippi. Our thoughts and prayers go out to

them.

Many of the constituents hurt by Katrina are represented directly on this committee. Vice-Chairman Chip Pickering of Mississippi has had the benefits of representing his constituents in

Mississippi for a number of years.

Our former chairman, Billy Tauzin of Louisiana, represented his

constituents on this committee for years and years.

This storm is not a burden on any one State, it is a burden for

the entire Nation, and we will deal with it as a united Nation.

Some States have come forward already to give aid and comfort.

To name a few: Texas, Arizona, Alabama, Tennessee, Arkansas,

Georgia, Florida, Kansas, Utah, and Ohio have all opened their

doors to Katrina refugees; we thank them for that.

In my congressional district in Texas, I know of at least 2,000

refugees in shelters as of the day before yesterday. The Energy and

Commerce Committee is going to do the very best it can to help

and alleviate pain and suffering and hopefully prevent future

events of this type from having the kind of impact that it has had.

This hearing is the first of several hearings that we hope to hold

on the impact that Katrina has had on our energy policy, our

health care policy, and our telecommunications policy.

Unlike hurricanes of the recent past, Katrina has been destructive and disruptive. The disruptions have had an impact on energy,

telecommunications, health, interstate commerce, and all sectors of

our Nation’s economy. These are all areas that are within the purview of the Energy and Commerce Committee.

3

This is not a hearing today to engage in a blame game, or to pose

recriminations against anybody at any level. This is a hearing to

begin to understand the effect Katrina has had on our committee’s

area of responsibility. There will be numerous opportunities to determine where the blame should be placed. I hope that we can

spend time learning from our mistakes and taking positive actions,

if possible, to correct those mistakes.

I want to thank the witnesses that are here today for their time

and their preparation to appear before the committee. Many of you

are here to discuss energy security. As we confront the human

tragedy from Katrina, the consequences force us to think more expansively about energy security and to focus harder on matters

that the recently passed energy bill have already emphasized.

If there is a silver lining, and I am not saying there is, but if

there is, it may be that our country is beginning to realize how

fragile our energy sector is and how easy it is to disrupt it. It is

my opinion that we have an energy infrastructure based on a

1970’s population and a 1970’s demand, and obviously we are in

the 21st century and we have not kept pace.

The U.S. oil infrastructure is operating at maximum capacity. It

has done so for the past 2 to 3 years. It was stressed before

Katrina. We have just signed the most comprehensive energy bill

I think that the Congress has ever passed. We did that on a bipartisan basis. A majority of the Democrats on this committee voted

for that bill, and I wish to thank them. I wish to thank the ranking

member, Mr. Dingell, for his support in that effort. So this committee should not have to have a wake-up call, but Hurricane

Katrina is definitely a reminder that there is more to be done. It

is always easier to say after the fact what we should have done before the fact.

Katrina reminds us of the need to protect and expand resources

and infrastructure not just in the Gulf-producing States but in all

areas of our Nation. I am pleased that our recently passed energy

bill did include a $500 million provision directed at coastal restoration. So we have already made a start in helping that region.

My time has expired, so I am going to put the rest of my statement in the record.

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

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

AND COMMERCE

I want to begin by expressing my deep sorrow to the families and friends who are

experiencing such unimaginable loss from Hurricane Katrina. I honestly can’t imagine the terrible feeling of loss and displacement that so many fellow Americans are

being forced to face right now. People have lost their loved ones, their friends, their

homes and their livelihoods. My thoughts and prayers and the thoughts and prayers

of America go out to the many.

Many of the constituents hurt by Katrina’s wrath are represented directly on this

Committee by Vice Chairman Pickering, and the Committee for years has had the

benefit of representation from Louisiana, including its former Chairman, Chairman

Tauzin. But this storm is not the burden of any one state, it has damaged a nation

and if the nation is going to survive, we must turn to one another for support. To

name a few, the States of Texas, Arizona, Alabama, Tennessee, Arkansas, Georgia,

Florida, Kansas, Utah and Ohio have all opened their doors to Katrina refugees and

we thank them for that.

The Committee too will do its part to help. This hearing will be the first of several

hearings that the Committee plans to hold on the impact that Katrina had on energy, health and telecommunications. Unlike hurricanes of the recent past, Katrina

4

has been both destructive and disruptive. The disruptions have had an impact on

the energy, telecommunications, health and commerce sectors of the nation’s economy—all areas within the purview of this Committee’s broad jurisdiction. Let me

say at the very beginning today that this is not a hearing to engage in a blame

game or to pose recriminations against one another. This is a hearing to begin to

understand the effect Katrina had on our committee’s areas of responsibility. There

will be plenty of time to determine where blame should be placed. I hope we spend

more time learning from our mistakes, and taking positive action to correct our mistakes, than we do in finger pointing. The American people deserve no less.

I want to thank our witnesses for their time and preparation to appear before the

Committee today. Many of you are here today to discuss energy security. As we confront the human tragedy from Katrina, the consequences force us to think more expansively about energy security, and to focus harder on matters that the recently

passed Energy Bill already emphasized.

If there is a silver lining in this tragic situation, it is that it may finally bring

home to the American people how fragile our energy sector is and our energy infrastructure is.

The U.S. oil infrastructure is operating at maximum capacity and has done so for

the past 2-3 years. It’s stressed. We just signed the most comprehensive energy bill

in the last 15 years. There are lots of things in that bill to help and we’re fortunate

to have it. This hurricane is a wake up call that we need to do things across-theboard on infrastructure and to also expand the base.

It’s always easier to say after the fact what should have been done before the fact.

Katrina reminds us of the need to protect and expand resources and infrastructure

in the Gulf producing states to encourage continued operations. For example, the

recently passed Energy Bill included a $500 million provision directed at Coastal

Restoration, but we should and will need to do more.

Katrina also reminds of how centralized our nation’s energy infrastructure is and

the need to encourage investment and diversification. For a sense of the numbers,

29% of our oil production and 20% of the natural gas is in the Gulf of Mexico. It

doesn’t have to be that way. We could be drilling in Alaska right now; we could be

drilling off the coasts of several other states. It would make a difference today if

we were not as restrictive as we’ve been the last 20 years in where we drill. We

can’t just get our oil and gas from Texas, Louisiana, Mississippi and the Gulf of

Mexico. We need to diversify our domestic oil resources.

We have not built a new refinery in the U.S.A. in over 30 years and Katrina has

shown us that our refinery capacity is inadequate. Last week Katrina forced a shutdown of approximately 25% of our refining capacity. Relief efforts have brought

much of this capacity back on line, but my understanding from recent Department

of Energy reports is that 10% of our gasoline refining capacity will nevertheless be

out of commission for some time. To encourage new refineries the Energy Bill has

a provision that allows a governor of a state to petition the Environmental Protection Agency for technical and financial assistance in the refinery permitting process.

We need to encourage states outside of the Gulf to take advantage of Energy Bill

provisions like this.

Also today I expect to hear more about gasoline pricing. I think a good case can

be made today that some retailers may have taken advantage of the Katrina emergency. If that’s true, that is something that needs to be investigated and, in all probability, prosecuted. Among other issues, we’re going to investigate the price increase

at retail today. I believe in a market economy and there is no need for price controls

and price freezes at any level, but I think there may be a need at the retail level

to make sure we have adequate enforcement tools to prevent pure price gouging

Also today we welcome witnesses that will help us begin developing an understanding of Hurricane Katrina’s effect on the communications systems in the region

and begin understanding the road to rebuilding critical infrastructure that has been

damaged or lost.

Again, this hearing will be the first of several hearings that the Committee plans

to hold on Katrina. We will have further hearings in other areas of Committee jurisdiction. I thank you all for your time in appearing today and look forward to hearing

what you have to say. And without objection, the Committee will proceed pursuant

to Committee Rule 4(e), allowing Members the opportunity to defer opening statements for extra questioning time.

Chairman BARTON. As I said at the beginning, we are proceeding

pursuant to Committee Rule 4(e), which will allow members that

wish to defer opening statements additional time on their questionand-answer period.

5

I would now like to recognize the distinguished ranking member

of the committee, Mr. Dingell of Michigan.

Mr. RUSH. Mr. Chairman, I have a unanimous consent request.

Chairman BARTON. If it is in order. I am going to assume it is.

What is the gentleman’s unanimous consent request?

Mr. RUSH. Mr. Chairman, I would just ask for unanimous consent that all members of this committee please join with the President in refraining from calling American citizens who are distressed refugees. They are not refugees. They are American citizens. They pay taxes. They have been involved in helping to build

this country, and they are not refugees, and I think it is a disservice to them.

Chairman BARTON. I am not sure that is a unanimous consent.

The Chair would encourage members to use the appropriate terminology.

Mr. RUSH. I just ask, Mr. Chairman, if they would just join the

President and others in refraining from using the word refugee.

Chairman BARTON. I support the gentleman of Illinois’ intention.

Mr. RUSH. Thank you.

Chairman BARTON. I am going to recognize the distinguished

ranking member from Michigan for an opening statement. Mr. Dingell.

Mr. DINGELL. Mr. Chairman, thank you; and I commend you for

holding this hearing. It is very important that it should be held at

this time. The committee has many matters of interest here related

to the events that have followed Katrina; and under your leadership, as under your leadership on the recent energy bill, I am satisfied that we will address them well.

The hearing today takes place while vital rescue relief efforts are

still under way in New Orleans and our Gulf State communities

devastated by Hurricane Katrina. As we continue to consider how

this Nation will recover, we must also be mindful of the scale and

severity of the destruction in the Gulf and the challenge of caring

for those whose homes have been destroyed and whose lives will

not soon return to anything resembling normal.

Our first efforts must be to take care of those who are suffering,

their families, and the families of those who have been killed or seriously injured in these events. In the coming months, the effects

of this disaster will continue to ripple through the economy. Several critical sectors are affected by Katrina: health, energy and

telecommunications. All of these fall within this committee’s responsibilities; and, again, Mr. Chairman, I commend you for holding this hearing to help our members focus on the work that lies

ahead.

We know that the Federal response to Hurricane Katrina, particularly that of the Federal Emergency Management Agency,

FEMA, has been just plainly disgraceful. But we must now focus

our attention on the tasks ahead. As a preliminary but very important matter, I have introduced legislation to restore FEMA to an

independent agency with Cabinet-level status reporting directly to

the President.

With respect to gasoline, which was part of the original focus of

this hearing, it is important that the committee provide strong

oversight to ensure that consumers are not subject to price gouging

6

for gasoline and other energy supplies and that recovering energy

markets are not manipulated.

While local gas stations are usually the easiest target, we

learned in the 1970’s—and again this is a little bit like deja vu—

that the major violators were elsewhere. They were the oil price

controls that were in effect then, and they were also the persons

who were compelled to disgorge billions of dollars in overcharges.

Those were people who—largely who were traders in the industry,

and people at the different major oil companies and in major institutions inside that industry. Any examination of price gouging

must begin with a review of practices by persons like this.

Already, a number of States have acted to stem gasoline price increases, from suspension of State gas taxes to invoking State emergency authorities limiting price increases; and it appears that the

announcements of release from the Strategic Petroleum Reserve,

the ‘‘SPR,’’ and from the International Energy Agency Stockpile

will temper escalating prices to some degree.

But we cannot focus solely on gasoline. Natural gas and heating

oil prices could very well pose an even greater challenge for our

constituents as winter approaches. I applaud Saturday’s release of

$27.25 million in LIHEAP funds to the affected States, but we

should recognize that we will need a significant increase in

LIHEAP funding in the coming months.

While the Nation’s energy needs are critically important, we cannot forget the real human need that exists in the Gulf States right

now.

First, how has our public health infrastructure met the challenge? I hope that we can have hearings focusing on this vital

question.

Second, what do we do to provide for ongoing care of those who

were suffering in this area, for the industries and for the institutions and for the States in the area and for hundreds of thousands

of displaced families? I note Medicaid is going to be a lifeline in the

coming months.

Earlier this year, Democrats strongly opposed the budget plan

that included $106 billion in new tax cuts benefiting mostly

wealthy people while requiring our committee to cut a likely $10

billion in Medicaid. That budget must be scraped and instead immediately replaced with a package of assistance to assure that the

health care needs of families and children do not go unmet.

Hurricane Katrina has created an environmental catastrophe for

the Gulf region that will require significant Federal assistance.

This committee should monitor the environmental issues that are

arising, from Clean Air Act waivers to the rebuilding of the safe

water drinking water infrastructure, and we must pay careful attention to the environmental consequences as we consider best how

to make the needed improvements in our refining capacity.

Finally, the committee must also look closely at how the communications and media sectors responded to Katrina and what steps

should be taken to better prepare for and to warn people about and

how to respond to emergencies. Functioning communications networks are critical for first responders to do their jobs efficiently and

safely as possible and for victims to call for help or communicate

with loved ones.

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I look forward to hearing from today’s witnesses about the response of the Federal Government and industry to the current disruptions in these and all of the other vital sectors which are affected and their plans for the coming months as we try to help the

Gulf region and its people to recover.

I thank you, Mr. Chairman.

Chairman BARTON. I thank the gentleman for the opening statement.

We want to recognize the distinguished chairman of the Energy

and Air Quality Subcommittee, Mr. Hall, for an opening statement.

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

Just as a foreigner attacked New York on 9/11 and devastated

a great city and a great State, another foreigner called Katrina hit

New Orleans, Louisiana, and sister cities in various States. I think

we have a lot of work to do to meet the challenges that are posed

by the devastation that Katrina inflicted on thousands of families

and communities along the Gulf; and we look for answers, not accusations. I think we must also address the disruption to our Nation’s infrastructure in the wake of Katrina, particularly the impact

on our energy supply and delivery system.

Gasoline prices were already too high in August as a result of increased worldwide demand and limited spare capacity. The disruption of our energy infrastructure from Katrina compounded the program. Actually, Americans are alarmed at the raising cost of gasoline and the projected higher cost of natural gas, and they are looking to Congress to address their concerns. The Energy Policy Act

of 2005 is certainly a step in the right direction, and Katrina lends

a sense of urgency to provisions in that Act that need to be expedited.

A diversification of energy supplies is an important component.

Diversification could help ensure energy security and thereby national security from disruption due to natural disasters or terrorist

acts.

Too much of our national gas supply comes from one region, the

Gulf of Mexico. By ultra deep provisions—the amendment that we

passed, we passed it two sessions ago, it got by, the conference

committee had accepted it, we passed it this time—drilling deeper

in the Gulf is going to make drilling operations less susceptible to

hurricane damage, for one thing.

Another thrust for diversification would be to streamline the permit process for new refineries in each of the 50 States as outlined

in Section 392 of the Energy Act, and Governors have been alerted

and are alerted and are looking at that at this time because that

will allow them to seek at least a refinery per State with a lot of

encouragement from the Act itself.

Drilling off the other coast is another option that would us far

less susceptible to disruption.

So these and other policies will help us achieve energy security

in the long term, but we also need to consider what actions will

give us immediate relief. Our citizens are paying the price for our

dependance on foreign sources for too many years, and we need to

stop that. The margins are just too thin in our energy market to

absorb the fluctuation in supplies and prices due to catastrophic occurrences such as Hurricane Katrina.

8

The hearing gives us opportunity to hear from experts in the

Government and industry about the magnitude of the problems we

face and suggestions for corrective action.

Mr. Chairman, thank you again for scheduling this hearing; and

I thank the panelists for giving us their time, their time for preparation, their time for attending.

I thank you very much. I yield back my time.

Chairman BARTON. We thank the gentleman.

The Chair recognizes the gentleman from California, Mr. Waxman, for an opening statement.

Mr. WAXMAN. Thank you, Mr. Chairman.

The Federal response to Hurricane Katrina has been woefully inadequate. Hurricane Katrina was an unstoppable force of nature,

but it is plain that the Federal Government could have done much

more far sooner to respond to the immediate survival needs of the

residents of Louisiana and Mississippi.

Congress has a responsibility to understand what went wrong

and why, and unless Congress conducts thorough oversight investigations to examine the preparation for and response to Hurricane

Katrina, few lessons will be learned and the Nation will remain

vulnerable to future natural disasters.

The administration has told us that they were prepared for this

kind of disaster. Two years ago, FEMA Director Michael Brown

testified before Congress that FEMA would be able to respond to

disasters within 12 hours. Well, FEMA failed miserably. Relief and

supplies took days, not hours, to arrive; and the toll on those affected was terrible.

Today’s hearing focuses on the energy implications of Katrina,

but the pattern is the same. The administration policies that we

were told would protect Americans from skyrocketing fuel prices

and price gouging have failed. The administration’s energy policy

is based on a trickle-down theory: If we give the big energy companies enough subsidies, tax cuts, and regulatory relief, then they

will keep gasoline prices low. This policy is great for the oil companies, but it simply does not work. For the past few years, long before Katrina, gasoline prices have been on a steady march upwards; and the oil company profits tripled between 2002 and 2004

to $87 billion.

Since last month, gasoline prices have shot up another 30 percent. Oil companies appear to have taken advantage of this crisis

to earn even higher profits, and now some Republicans are saying

that the answer is to give the industry even more subsidies and

breaks.

Our energy policy is fundamentally broken. As the hurricane

proved, we are exactly on the wrong track. To keep gas prices down

and to protect our energy security, we need conservation, increased

fuel efficiency, new technologies and not another round of industry

handouts.

Hurricane Katrina showed the bankruptcy of our policies. It is

not enough to look after the interests of the special interests. We

need to be focused on providing good government and life-saving

services to all Americans.

Thank you, Mr. Chairman.

Chairman BARTON. We thank the gentleman.

9

The gentleman from Michigan, Mr. Upton.

Mr. UPTON. I am going to take the extra time and defer.

Chairman BARTON. The gentleman defers.

The gentleman from Florida, Mr. Stearns.

Mr. STEARNS. Thank you, Mr. Chairman; and I want to thank

you for holding this hearing.

As chairman of Commerce, Consumer Protection and Trade, I

have jurisdiction over the Federal Trade Commission; and I want

to welcome their counsel this morning for coming here.

Maybe in the near future we can also have a hearing out of my

subcommittee where we talk about the study that you did recently.

I hope that Cecil will mention a little bit about the study, and I

compliment the Federal Trade Commission, because that study was

done well before Katrina.

I have to tell my colleagues that the Federal Trade Commission

looks at the price of gasoline in a continuous operation mode with

a modeling, a simulator; and I think a lot of Americans do not realize that they have this jurisdiction in which they can stop price

gouging and can stop collusion between oil companies. Some of the

actions that they have done, the American people should realize,

have been beneficial in stopping some of this monopoly practices.

So I went to commend them this morning.

But I think Katrina, the hurricane, has highlighted a very serious problem that we have in this Nation with crude oil and gasoline supply and demand that is out of balance. Before Katrina, this

balance was already very tight and prices were already at record

highs. Thus, by removing nearly a third of the United States’ crude

oil production and 10 percent of the Nation’s refining capacity at

a time of very high demand, we caused gas prices to spike even further. This confluence of events is precisely the situation the United

States faced during the Labor Day holiday.

The future is not bleak, though. We have new technologies that

are being developed in this country. As Chairman Barton has mentioned, we tried to give incentives, we tried to give alternative ways

for Americans to view the problem.

For example, in Alberta, Canada, for example, a method of producing oil out of deposits of Bitzium buried in the ground—this is

called oil shale—oil sands—is now finally becoming very profitable

and a viable alternative for crude oil production. So I think the

United States should realize right there, close by in Canada, with

oil sands we have a possibility of a viable alternative for crude oil.

Alberta’s oil sands deposits are second only to Saudi Arabia’s reserves, and estimates have shown it could satisfy the world’s demand for petroleum for the next hundred years. So there is some

light at the end of the tunnel.

In closing, Mr. Chairman, even under the best circumstances, a

storm like Hurricane Katrina would have had a noticeable impact

on gas prices no matter what we did. However, at a time of extremely high demand and tight supplies practically shutting down

the United States largest oil refining region, obviously gas prices

are going to spike even higher.

So I look forward to our witnesses today, and again I commend

the Federal Trade Commission for the study that they did much

before the hurricane.

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Thank you, Mr. Chairman.

Chairman BARTON. We thank the gentleman.

The gentleman from New Jersey.

Mr. PALLONE. Thank you, Mr. Chairman.

Mr. Chairman, I have to say that I am kind of torn today. Because, on the one hand, I admire the fact that this committee,

under your chairmanship, is holding this hearing today and is trying to take quick action to address the crisis from Hurricane

Katrina. On the other hand, I feel that the Bush administration

has been totally incompetent in handling this situation and the

emergency response in particular; and I do—I, amongst others,

have called for the FEMA director to resign, because I think that

he has acted in a totally unconscionable way.

I also agree with Mr. Dingell’s comments about how we need to

change FEMA because of it. But, in addition to that, I must say

that my constituents are outraged and actually shameful about the

way our government reacted in terms of the emergency response

but also feel that the oil companies are taking advantage of the situation to gouge and to increase prices in a way that is also unconscionable.

So I appreciate the fact that you are having the hearing today.

I think it shows leadership on your part. But as far as the Bush

administration, they have acted in a shameful way, and my constituents are absolutely outraged by what this administration has

done in response to the hurricane and by what they think the oil

companies are doing to gouge prices.

Now, in our committee, of course, we deal with the energy issues;

and I think that the devastation in the Gulf region and the spike

in prices is a wake-up call for our Nation, which is accustomed to

cheap oil, and raises several important questions.

First, why were gas prices rising even before the hurricane while

oil companies were seeing record profits? Second, how can a country that consumes 25 percent of the world’s oil but produces only

3 percent continue to use as much oil as we do without being left

vulnerable to severe price volatility? And, third, how much price

gouging occurred in the wake of the hurricane? Do we need to consider implementing Federal anti-gouging authority?

I introduced a bill on Friday which tries to deal with some of

these things because of the gouging and because of the high prices.

The bill would specifically limit the profits of big oil companies that

sell on the wholesale market to their average over the past 5 years

so profits do not continue to skyrocket as consumers struggle in the

wake of the hurricane. The bill would also reduce gas price volatility by limiting companies that sell on the wholesale gasoline

market to only one price increase per day. It also directs the FTC

to investigate whether there has been gas price gouging in the

wake of the hurricane. But, most important, the bill requires the

President to find ways to reduce our national oil consumption.

The truth of the matter is that, over the long term, the only way

we will be able to keep gas prices down will be to reduce our consumption of oil. That means increased fuel efficiency of our cars

and trucks. It does not mean the administration’s recently announced new rules concerning light truck fuel efficiency, which will

11

do little to solve the problem. Indeed, it may encourage manufactures to make existing models even bigger.

Again, I want to thank you, Mr. Chairman, for having this hearing, but your response is so different from that of the Bush administration.

Chairman BARTON. Does Mr. Deal wish to make an opening

statement?

Mr. DEAL. I would reserve my time for questions, Mr. Chairman.

Chairman BARTON. Does Mr. Whitfield wish to make an opening

statement?

Mr. WHITFIELD. I do, Mr. Chairman.

Chairman BARTON. The gentleman from Kentucky is recognized

for 3 minutes.

Mr. WHITFIELD. Thank you, Mr. Chairman.

Today’s hearing is vitally important. Despite the widespread destruction and personal tragedy inflicted by Katrina, it does raise an

issue of utmost importance not only for our country but I think for

the world, and that relates to this whole question of energy.

Gasoline prices are skyrocketing. There is no question about it.

There are examples of price gouging. We know that. But I think

that Katrina has demonstrated that we have a more systemic problem relating to energy.

First, worldwide consumption of oil is presently at a staggering

83 million barrels a day; and worldwide production is around 84 to

85 million barrels a day. Worldwide demand has been increasing

at a faster rate than at any time in history. As a matter of fact,

in China alone last year demand increased by 16 percent.

A new refinery has not been built in the United States since

1976, but half of the refineries in the U.S. since that time have

been closed. In the U.S. alone, consumers are using right around

21 million barrels of oil a day.

We use six times as much fuel per day as people in Europe. Their

gasoline taxes are much higher in Europe than they are in the

U.S., so we have become accustomed to low prices compared to the

rest of the world, and all of a sudden we find ourselves in a situation that we do not particularly like.

I might also add that contributing to the situation today we have

speculators in oil futures more than at any other time. That is putting a burden on higher prices.

We see other countries nationalizing oil reserves more than at

any other time in our Nation’s history. Reserves available to U.S.

companies are not being produced the way and located the way

that they have in the past. We are, for the first time in a long time,

being forced to use reserves from our Strategic Petroleum Reserve.

Even the European reserve is going to be providing the U.S. 2 million barrels a day for the next 30 days.

So we have some significant issues affecting this country in the

area of energy. It is going to require us as a Nation to reexamine

the way that we need to go. I think the energy bill that we passed

is going to help answer some of those questions.

But I want to commend the chairman for having this hearing

and allowing us to focus on an issue of utmost importance not only

for us but for the world. I think that is the only bright spot that

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I have seen from Katrina, is it is going to require us to focus on

this issue.

Chairman BARTON. We thank the gentleman.

Does the gentleman from Ohio wish to make an opening statement?

Mr. BROWN. Yes, I do.

Chairman BARTON. The gentleman is recognized.

Mr. BROWN. Thank you, Mr. Chairman.

As I wrote to you yesterday, I believe the committee staff should

be begin a jurisdiction-wide review to identify policy areas where

our committee can act; and particularly it is important to examine

the public health consequences of this disaster, again with an eye

toward identifying unmet needs. I hope these questions will be the

subject of another hearing in the near future, especially Medicaid,

hospital funding, long-term health consequences to those victims of

the hurricane, and especially in New Orleans.

This hearing was originally focused on gas price consequences of

the disaster. I want to talk for a moment about that.

One of our witnesses today, Dr. Mark Cooper of the Consumer

Federation of America,reminds us that Congress has missed opportunities to provide a cushion to protect consumers when supply disruptions cause price spikes. His testimony attaches a 2001 report

calling for a regional reserve of gasoline similar in concept to the

Strategic Petroleum Reserve. Twice in our committee, once on the

House floor, we failed to take that commonsense step.

It is also indefensible that, as gas prices break record after

record after record, that we continue to pump oil into the ground

without regard to price. Before 2002, the Energy Department took

price into account before deciding whether to take oil off the market, but, since then, price has literally been no object.

Congresswoman Baldwin and I offered an amendment during

this year’s energy bill debate to correct that. Our amendment

would have required the Department to consider price before making SPR acquisitions. It would have allowed the agency to weigh

the further energy security merits of acquiring oil at times of high

price against the cost to consumers. That proposal was also rejected by this committee.

This committee and this Congress have not taken the lead from

States that have already acted to protect their consumers. My

State of Ohio and other States have enacted quote, unquote, unconscionable sales practices laws that have been used to enforce gasoline price gouging. But many States have no such protections; and

even for those States like mine that do, the absence of a Federal

standard contributes to a confusing and chaotic environment that,

frankly, provides ample cover for those who would take advantage

of national tragedy to abuse consumers and pad their profit margins.

Our first priority should be to find unmet needs and act to meet

them, but we also must look at the lessons learned from this tragedy. As we do so, we ought to begin by looking at the opportunities

that we ourselves have missed.

Thank you again, Mr. Chairman, for scheduling today’s hearing.

Chairman BARTON. I thank the gentleman.

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Does the gentleman from Georgia wish to make an opening statement?

Mr. NORWOOD. I do, Mr. Chairman.

Thank you, Mr. Chairman, for having this hearing; and I do

want to thank all of our witnesses for their time and their willingness to help analyze this dire situation. We know that all of you

are working overtime and your staffs have been working overtime

and probably will have to continue to do so for days and weeks to

come.

I would like to join all of my colleagues in expressing my deepest

and most heartfelt sorrow for those struggling along the gulf coast.

The devastation and the scope of the tragedy there is beyond anything we have recently or ever seen in this country. Our thoughts

and our prayers have been with our fellow Americans. Our assistance in just about anything that Congress can do is coming and

will continue. Hopefully, this panel can help us identify exactly

how to provide that assistance and the best way to deliver it.

At some point in time, I hope that we have an opportunity to examine how to better deal with situations like this regarding energy

and telecommunications, if and when there is another time.

First, the short term. What is needed now and in the near future

to help deal with this tragedy, is dealing with the human suffering.

Of course, all of us recognize that dealing with the human side of

this will take longer than a few days. Lives, not just homes, need

to be rebuilt in so many cases.

The effects of this tragedy also reach beyond the Gulf. As many

of you know, the original scope of this hearing was high gas prices,

but, smartly, the chairman changed it and expanded it to be much

more than that.

I am very interested in this important issue because so much of

our Nation’s infrastructure, energy infrastructure, is in the Gulf.

Second, long term. We have had the reports of what went wrong

already. But I think many want to know what we can do to prevent

those same problems in the future. By the very nature of a disaster

like this, unexpected things happen. We need to expect the unexpected and be prepared with a comprehensive plan B, C and even

D. A future tragedy maybe averted or at least our response improved by learning lessons. I value your insight, gentlemen, on this

point.

Thank you, Mr. Chairman. I yield back.

Chairman BARTON. Does Mr. Rush wish to make an opening

statement?

Mr. RUSH. I would, Mr. Chairman.

Thank you, Mr. Chairman. I also want to join with my colleagues

in thanking you for holding this on-time hearing.

Mr. Chairman, when I think of the devastating effects of Hurricane Katrina, I cannot help but wonder at the value of some

human life in this country, along with the rest of the world, outraged by the slow response to take action and provide aid to the

thousands of individuals who were left to die and fend for themselves in the aftermath of the worst national disaster in American

history.

Those who did not die were subject to the most dehumanizing

conditions imaginable. The demoralizing squalor in the Superdome

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and other relief centers in New Orleans has been compared to the

conditions in the hulls of slave ships, and this is not an exaggeration. This is an example of how government failed, a complete

breakdown when responding to the needs of those who needed help

in critical times. In times of national crisis, the cries from Louisiana, Mississippi, and Alabama went unheard.

Mr. Chairman, I am concerned about price gouging at America’s

pumps, but at the same time I am more concerned about the price

of human suffering being paid by the most vulnerable segment of

our society. I fully realize this committee does not have jurisdiction

over FEMA or the National Guard, but this committee has jurisdiction over multiple areas of immediate and emergency concerns including water, the purification of drinking water, the abatement of

dreaded diseases, including e-coli, Hepatitis A, cholera, salmonella,

West Nile and other mosquito and other waterborne diseases.

Clearly, the public health concerns of this Nation and particularly the devastated Gulf region are of paramount importance. That

said, I want the record to reflect that we will be quite intentional

regarding conducting hearings to determine what is the appropriate Federal response to this acute and critical crisis.

Additionally, Mr. Chairman, I join with the ranking member, Mr.

Dingell, and I share the opinion that we as an authorizing committee of jurisdiction has the authority to increase our commitment

to the LIHEAP program.

Mr. Chairman, with that, I yield back the balance of my time.

Chairman BARTON. The gentleman yields back.

Does Mr. Shimkus wish to make an opening statement?

Mr. SHIMKUS. Yes, sir, thank you. Just a couple comments.

I want to thank the panelists for being here.

When we passed the energy bill, we set out on a process so that

we could have a diversified energy portfolio; and I think the Chairman was correct in that, in saying that what this tragedy highlights is how fragile our infrastructure has been for many, many

years. Obviously, we hope that with a new look at energy we can

start reclaiming some independence and diversifying our portfolio.

That is not just electricity generation but also in the fuel arena.

I, like everybody else, travel around our districts numerous times,

and there are parts of our policies on the energy issues that there

is some optimism out there.

I drive a Ford Explorer flexible-fuel vehicle. It runs on 85 permanent ethanol. Years ago, I had a flexible-fuel Ford Taurus. Two

years ago, I could not fill up this Taurus at a single retail location

in my district. Now I can fill it up all throughout my district, probably 30 retail sites. In fact, I have a picture of one.

Now the prices are still pretty scary: unleaded, $3.69; E85, $3.09.

That is a 60 cent price deferential for a vehicle that runs on 85 permanent ethanol. Now this is an example of public policy moving in

the right direction.

I also have another article from a stop in Nashville, Illinois, at

a—this is a State and Federal addressing of our reliance on imported crude oil; and the State has also pushed and helped the rollout of biodiesel. Now most of—a lot of the fleets in Illinois are moving to 11 percent bio, soy diesel, or another formulation; and this

article says trucking firm embraces biodiesel. So this—over the

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long haul a truck company of 150 tractor trailers runs his operations across the Nation with 11 percent. Now you might say 11

percent is not much. Well, just add that 11 percent back into the

petroleum-based diesel fuel and see what happens to prices.

So we have great challenges to deal with. The energy bill talks

about a hydrogen economy and moving to hydrogen fuels. So we

need to diversify our energy fuel.

The infrastructure is weak. The hurricane showed that. Let’s go

about the job of diversifying our fuel portfolio.

Thank you, Mr. Chairman. I yield back.

Chairman BARTON. The gentleman yields back.

The gentlewoman from California.

Ms. ESHOO. Thank you, Mr. Chairman, for your leadership in

calling this hearing. It is an important one and I think underscores

the very broad and powerful jurisdictions of the House Energy and

Commerce Committee. We are the oldest committee in the Congress, and we are one of the most powerful. Today and I think in

subsequent hearings and the action that this committee can take

are going to flow from the power that this committee has.

I want to express my sympathy and the sympathy of my constituents very directly to members of this committee whose congressional districts have been hardest hit.

Now, having said that, Mr. Chairman, there are two things that

I want to highlight today.

First of all, is there a commitment of the participants, the leaders of the energy industry, most specifically the oil industry, to go

on record that they will not tolerate price gouging? The answer has

to come from them. If we try to do this and address it legislatively

through the various agencies of the Federal Government, we are

going to get hung up on the ropes. I would like to hear very directly

from the leadership of the oil industry in our country that they will

not engage or tolerate price gouging. It is the simplest, most eloquent way for this to be handled. So, No. 1, I think we need to

have an answer from them.

No. 2, Mr. Chairman, I think the next answer needs to come

from the leadership here, certainly yourself and the leadership in

the House, that the cuts to Medicaid will be suspended.

Front and center, we heard from more than one Secretary last

night as they came to the floor of the House to address the Congress of what the safety net is in this country, how it will be used

and put out there effectively for tens of thousands of our follow citizens, that they need this program, wherever they are, whether they

have been moved to different cities in Texas, your home State, to

California, to the District of Columbia, to other places in our Nation.

This is not the time, this is not the time to be moving forward

with the cuts that the committee took up and that the Congress is

considering. This is wrong, it is hurtful, and it is not the message

to send to the victims. So when we speak about compassion, when

we speak about being effective, when we speak about standing next

to our colleagues whose districts have been wiped out, whose constituents are seen floating in contaminated waters, this committee

has to respond and respond effectively.

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So those are the two things that I would highlight today. We

have our work cut out for us.

Now when the words ‘‘blame game’’ are used, I really resent that;

and I think that we all should. This is not a game. This is not a

game. People are dying, have died, people have been displaced,

taken away from their communities. We have long-term and shortterm work to do.

One of the great hallmarks of our Nation is that the American

Congress, that the Congress of the United States of America, has

been able to take up both a critical role of being critical so that we

learn from the mistakes that have been made.

So this is not a game, Mr. Chairman. This is sobering work as

we try to adjust to the horrific catastrophe that has happened to

our country.

So, with that, I do not have time to yield back, but I believe that

these two issues need to be taken up front and center. Thank you.

Chairman BARTON. We thank the gentlelady.

We encourage members to try to stay within their 3-minute limit,

if possible.

The gentlewoman, Mrs. Wilson, is recognized for 3 minutes. We

are trying to get the Governor of Mississippi up on the live video.

So I think we can get you in before that happens.

Mrs. WILSON. Thank you, Mr. Chairman.

We have had a devastating storm, and it is not over. We are still

in the middle of the process of saving life and sustaining life and

recovering and rebuilding, and that will go on for a long time.

Nothing should distract us from those priorities.

Sometimes, you know, my husband is kind of—he has got a great

sense of humor. And sometimes when he watches people often criticizing with only partial information, he just kind of laughs and

says, you know, they should shut up and start bailing. I think that

is good advice, and a lot of ordinary Americans have taken it.

I think we have seen across this country people opening their

homes and their wallets and their churches, our wonderful National Guard and medical doctors embracing the displaced and

doing what they can from where they are with what they have got.

One of the great lessons of this disaster is that the real strength

of America is in the goodness of ordinary Americans, and we have

seen that again and again and again across this country.

We also need here to continue to pursue policies that create jobs

and keep our economy on track. A disaster and a tragedy should

not be windfall, a windfall for opportunists. All of us have seen

prices go up at the gas pump and in some communities exorbitantly. Most gouging laws are State laws, but only 23 States have

anti-gouging laws, and the standards and definitions vary widely.

I think we need to take a serious look at how we dissuade and

deter and punish those who would gouge people in a time of tragedy.

We also have an opportunity here to put politics aside and to

look at our energy policy anew, with conservation, exploration, production and refining, things that we look at routinely here, but also

to look at our own perhaps failures of imagination. What are we

going to do as a Nation to get beyond the gasoline engine? We are

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here at a historic turning point to make some serious decisions and

have a serious debate about the follow-on to the gasoline engine.

Because world oil supplies are not increasing, and we need to

make those decisions and investments now so that we change the

way in which we get things and people across the country and back

and forth to work.

Mr. Chairman, thank you for this hearing. I am sure it is going

to be the first of many. And God bless the people of the gulf coast.

Chairman BARTON. Does the gentleman from Michigan wish to

make an opening statement?

Mr. STUPAK. No, Mr. Chairman, I will waive.

Chairman BARTON. Does Mr. Green wish to make an opening

statement?

Mr. GREEN. Yes, sir, Mr. Chairman.

Chairman BARTON. The gentleman is going to start, understanding that we are trying to get this thing set up.

Mr. GREEN. I would like to have the full statement placed in the

record.

One, I want to thank you for having this timely hearing on the

second day we are actually back. I am glad we broadened the scope

to beyond just energy impacts, which is quite severe; and I respectfully suggest a further hearing on the serious public health impacts

and our response in the near future.

Our pressing need in the Houston area, where we are home now

to about 140,000 plus residents from Louisiana, is health care.

With thousands in tight quarters, infectious disease a real threat,

we need to provide the necessary assurances to our States who are

the recipients that the health care providers, that they will be reimbursed.

I asked Secretary Levitt last night at our briefing to agree to provide a 100 percent Medicare/Medicaid reimbursement rate when

caring for out-of-State Medicaid beneficiaries. I hope the administration will ease the Medicaid eligibility requirements for Hurricane Katrina evacuees.

Again, the State of Texas is the biggest recipient; and our Medicaid budgets are already stretched with our own constituents,

much less adding rolls from Louisiana and the neighboring States.

We want to be welcome neighbors, and we are. In fact, I am so

proud of what Houston has done and the State of Texas.

The neighboring States of this disaster need massive Federal assistance to care for these victims. When a neighbor is in need, our

neighboring States have opened—again, Texas has 250,000 out-ofState evacuees. That is unprecedented.

I have been first hand every day we have been home by both the

Reliant Astrodome and the George R. Brown to see the massive

shelters. Again, we need to be able to eliminate red tape now and

get those folks out of those shelters into some reasonable living

conditions, both for health reasons but also to try to return them

to normalcy.

I am glad that, just today, we were notified that yesterday at our

dealing meeting that the Houston area leaders, the mayor and the

county judge and the business community, we found out that people are having their cell phone service disconnected from Louisiana. That is the only number most of the time their relatives

18

know how to reach them. The FCC this morning announced, in

working with CTIA, that those numbers and in compelling businesses and companies, not to disconnect those cell phones. One,

that is a great declaration. The Federal Government should interpret our ability broadly and flexibly to make sure that we can handle the disaster and the relief that we need.

Turning to energy, gasoline prices are already high due to tight

global supply and stretched energy infrastructure. Now that has

gotten pounded by a hurricane. Gas, oil and natural gas will even

be higher after most of the Gulf’s production is halted; and, thank

goodness, a lot of those platforms are trying to get back in use and

even some of the refineries.

All of the pieces are connected when there is huge action on the

market like Hurricane Katrina and a huge reaction throughout the

system, and can we help without doing more harm than good? I

gather from the Senate hearing yesterday that the FTC has no authority to investigate price gouging. We need to know who does, if

anyone; and if there is some stations taking advantage, we need to

stop them.

Even my Texas constituents want price caps, but if the Government tries caps for any length of time, supply will literally disappear. Let us not repeat the mistakes of President Richard Nixon.

Large companies typically don’t set the price at the pump, which

is up to the individual station owner.

Chairman BARTON. Mr. Green, will you suspend so we can hear

from the Governor?

Mr. GREEN. Mr. Chairman, I would be glad to yield to the Governor of Mississippi.

Chairman BARTON. We are going to suspend our opening statements. We do have video contact and, apparently, audio contact

with the Honorable Governor of the great State of Mississippi, Governor Haley Barbour.

Governor, if you can hear me, you have got the full panoply of

the Energy and Commerce Committee waiting for your statement;

and then, once you have spoken, we are going to have a written

statement read in the record by a representative of your companion

Governor, Governor Blanco of Louisiana.

So, Governor Barbour, our hearts and our prayers are with you;

and you have our undivided attention.

STATEMENT OF HON. HALEY BARBOUR, GOVERNOR, STATE OF

MISSISSIPPI

Governor BARBOUR. [Via teleconference.] Mr. Chairman, thank

you very much; and to all of the members of the committee, I appreciate the chance to try to share with you what has been going

on in Mississippi for the last 9 days.

I do not have to tell you that this was the worst hurricane to

ever hit the United States, and it struck us a grievous blow in Mississippi. The devastation is genuinely unimaginable and indescribable. Total obliteration of many things, some of which are the

things that your committee is interested in.

I want to say to you that we appreciate you and the Federal Government. Nothing is perfect when you have an epic disaster like

this. I told my wife as the week went on, every day we made

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progress. But there was not any day that we made as much

progress as I wanted to.

Our Federal partners were great help, but there were days when

we wished they would have been faster. There were days when we

wished they would have done more. But when you consider the way

all of our systems were overwhelmed, we are very grateful, and so

thank you all.

Let me just say on the terms of energy, our energy situation the

first few days was cataclysmic. This disaster is not just a coastal

calamity. It goes 150 miles north. We had 130-mile gusts 90 miles

inland. We had 90-mile an hour winds 150 miles inland. There is

tremendous damage way, way north of the coast. But the 80 miles

across the Mississippi gulf coast is largely destroyed. A town like

Waveland, Mississippi has no inhabitable structures. None. The

fire, the 26 policemen on Monday of last week went to the second

floor, then got on the roof of their headquarters, and then all 26

of them swam off. Some of them hung in trees holding on until the

storm was over. The destruction is unbelievable, and it overwhelmed our infrastructure.

Our utility that serves the coast in the southeastern part of the

State lost every transmission line, had two power plants put out

of commission, and virtually 100 percent of their customers lost

power. The company that serves the southwestern part of the

State, which is well inland, 75 percent of their customers lost electricity. Our rural electric power associations had similar percentages based on the geography. Even the Tennessee Valley Authority,

as far north as it is, had tens of thousands of customers lose power.

When you lose power, the telecommunications systems falls down

because of the need for electricity, not to mention the fact that virtually all the towers are blown down. We lost water because the

water systems run and the sewer systems run on electricity. So we

had a huge need, and one of our first goals was to try to get fuel,

particularly diesel fuel, to run the generators that were powering

our hospitals, our emergency operations centers, the ones that

weren’t destroyed, our sheriff departments, police departments, fire

departments. So from an energy standpoint, for about 5 days we

were hustling to keep people from running out.

Ultimately, the Federal Government started on Friday by the activities of the U.S. Department of Transportation, the U.S. Coast

Guard, and FEMA was able to provide us with enough fuel for all

of our emergency vehicles, and since Friday we have had an assured source of fuel for all our emergency vehicles, whether it is

fire trucks, police cars, National Guard trucks, et cetera, and we

are appreciative of that.

Today, we have about 288,000 customers who still don’t have

power. The peak was about 1 million, on the report Tuesday was

about 1 million customers; we are down to 288,000. Mississippi

Power Company, which is the southeastern coastal industrial utility, reports that they will have power to every customer who can

receive power by Saturday, which is incredibly remarkable that in

less than 2 weeks they can have restored power, because every one

of their customers had just about lost power and their power plants

are out.

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They have about 7,000 people on the ground, pole climbers and

tree cutters, and Entergy Mississippi is making the same kind of

effort. And we are grateful. We have power, we have linemen and

tree people from all over the United States and Canada who are

down here helping our people getting electricity back on.

As I say, we are about 75 percent recovered, and because of their

response. Except for the rural electric power associations who don’t

have as much equipment, they are further apart, you know, you

may have to put back up 10 poles to serve one customer. We are

getting over the hump, and by the end of the week should be over

the hump on electrical power.

For telecom, the phone companies have really humped it to get

service back. The first few days, there was as close to literally no

communications, as you can believe. We couldn’t in Jackson get

people on the phone, even the emergency operations centers on the

coast. And where there was particularly bad is that people in the

affected areas and near the affected areas, they had no phone service, they didn’t know what was going on, they had no television so

they didn’t have that as a source of information. A few of them had

done like we asked people, and that is to have battery powered radios, but most people had no way to communicate and they were

utterly isolated after living a life with our information-rich environment. It was a huge problem. It also led to some of the worst rumor

mongering that you ever can imagine. But the phone companies

have restored at least cellular telephone service to most of the populated areas, and they are getting it better out into the countryside.

But Cellular South, which is our home-owned cellular company,

and BellSouth, which is our biggest provider and also is a partner

in Cingular, again, their people have worked untold hours just like

the electric utility people and made huge sacrifices.

And, Mr. Chairman, we have got a lot of people here who are

first responders or utility people whose homes are blown down, and

they are out getting the other people’s electricity back on, or they

are out digging through debris, firemen and search and rescue,

while their wives and children are having to stay somewhere inland because their house isn’t there anymore. The stories of sacrifice and selflessness that come out of this are pretty remarkable.

In fact, they are not pretty remarkable, they are mighty remarkable.

The U.S. Coast Guard helicopter team, starting Monday night

when the wind was still howling, have taken 1,700 Mississippians

off of roofs or out of isolated places where people couldn’t get out

because of the debris and wreckage, 1,700 by the Coast Guard

alone. Over 5,000 when you include the other first responders like

firemen and policemen and National Guardsmen. We appreciate all

the States that have let us have National Guard. We have more

than 11,000 National Guard here. And they were particularly critical last week when our law enforcement people who had worked

18-hour and 20-hour days, 120 patrolmen, narcotics officers, and

investigators from the State law enforcement down on the coast

who slept in cars for 5 nights but worked 18-hour days to help people. It has been an incredible effort, and lots of people deserve credit.

21

I know that health is one of your issues. And I want to report

to you that we in the last 24 hours had four deaths in Mississippi

from a Vibrio type diarrheal disease, but the CDC and the Health

Department report to us that this is not contagious, that this is the

kind of disease that we common folks think and get from eating

bad oysters; and, that people that have diminished immune capacity because of some other disease like HIV or cirrhosis or something, that all four of these people died of that disease. Because of

HIPPA, we can’t tell, we are not allowed to know any more about

who those people were and what their conditions are. But the CDC

tells us it is not contagious, and the disease is normally gotten by

somebody that eats bad food, drinks bad water, or perhaps gets an

open wound. But, again, we have had that in the last 4 days, which

is I know a significant health thing that you would want to know

about.

The search and rescue wasn’t as fast as we wanted, but if you

could come down here and see the devastation. We have areas, tens

of square blocks in a row, that have debris waist high, head high,

and search and rescue means people walking through there and

moving all that stuff out and looking to see what is under it. As

late as Friday we were finding people alive buried in the debris,

but unfortunately we are finding people buried in the debris that

are not alive. The official fatality as reported is about 148—that is

not right, 154. The news reports, which we consider credible and

relative and reliable, are closer to 200, and the likelihood is that

the number will go up.

Let me just close by saying I am old enough to remember

Camille. As a college boy I drove a dump truck full of blankets and

pillows and baby clothes down to Gulfport in the wake of Camille.

Down here, we have always thought Camille was the benchmark

for what a hurricane could do. Katrina was worse than Camille.

The devastation is wider spread in terms of breadth. Where Senator Lott’s home was totally wiped off the beach in Pascagoula that

is about 75 miles east of the eye of the storm. This storm’s breadth

was unbelievable, but its power was, too. You know, I am not a meteorologist or a scientist. For some reason, this storm’s storm surge

was much, much worse than Camille. Places where people thought

it was safe because Camille didn’t do any damage got 10 feet of

water, and we had some people that died because they thought it

can’t be worse than Camille.

Again, in all of these things that we have talked about, the Federal agencies have worked very hard to help us, and their people

have been down here busting it just like I talked about, the Coast

Guard and others, and we appreciate that. We are going to need

a lot more help. We are kind of turning the corner to where we are

starting recovery, we are starting cleanup in most of our towns, we

are going to start rebuilding.

Our attitude is on the future, and we are going to rebuild. We

are going to rebuild the gulf coast bigger and better than ever it

was, and all of the south part of Mississippi is going to be improved

when we get finished, but we are going to need a lot of help and

it is going to take a lot of time.

Thank you for letting me have a chance to tell you what is going

on, Mr. Chairman.

22

Chairman BARTON. Well, Governor, we first of all want to commend you for what you have done for the citizens of Mississippi the

last week or so. Your leadership has been invaluable. We are not

going to take questions because we still have about 20 members

that need to give an opening statement and we have five witnesses

that have waited patiently for the last hour to give their statements. But we do want to commend you for what you have done.

You have got two United States Senators and a United States Congressman who is a member of this committee, plus several other

Congressmen in the House. Whatever you need from the Federal

Government, if you will work through them or directly with us if

it is within this committee’s jurisdiction, we are going to do everything we can to make it happen sooner rather than later and bigger rather than smaller. And God bless you and God bless the

great State of Mississippi.

Governor BARBOUR. Thank you, Mr. Chairman.

Chairman BARTON. We have as a representative of the Governor

of Louisiana, Governor Blanco, we have Mr. Scott Angelle, who is

the Secretary for the Louisiana Department of Natural Resources.

We would now recognize you, Mr. Angelle, to read the Governor’s

statement. And Governor Barbour, you are welcome to leave. Mr.

Angelle.

Mr. ANGELLE. Thank you, Chairman Barton, and committee

members. Governor Blanco sends her greetings and her thanks for

all the prayers and support that are flowing into the gulf coast and

southeast Louisiana.

I am pleased to be here as a member of the second panel to give

you Louisiana’s views on energy policies post Katrina, but in her

absence Governor Blanco has asked me to share this brief statement with you.

Katrina dealt southeast Louisiana a devastating blow, but I also

know that this storm did not and will not destroy the spirits or the

hope of our citizens. I wish I could join you today, but we, all of

us here, are working hard and working together to finish the rescues and begin the reconstruction.

The people of southeast Louisiana are already making plans to

rebuild their lives and their communities, and we will help them

do it. Our people, our most valuable asset, have been forced to take

shelter all across the country. We know Louisiana will not fully recover until those displaced by this storm rejoin their families and

rebuild their communities. Part of rebuilding Louisiana will be rebuilding our oil and gas infrastructure. In the wake of all of this,

we still understand that America counts on Louisiana to produce

the energy to fuel this great Nation. We will focus on restoring and

repairing the offshore and onshore assets that are so vital to this

region’s economy and so vital to America’s economy. At this moment, while we are focusing on the immediate needs of our people,

we also are looking forward to the rebuilding.

Thank you again for your prayers and your aid, and thank you

for also looking forward to the future of Louisiana and the future

of America’s energy economy. Thank you, sir.

Chairman BARTON. Mr. Angelle, I know you are going to be on

the second panel. But in response to the Governor’s statement, if

you talk to her later today, you tell her that our prayers are with

23

the great State of Louisiana and with her, and that we make the

same offer to your Governor that I just made by teleconference to

the Governor of Mississippi: Whatever we can do to help, if it is

within our jurisdiction, we are going to try to do it sooner rather

than later and larger rather than smaller.

Mr. ANGELLE. Thank you, sir.

Chairman BARTON. We are now going to go back to our opening

statements. And I believe Mr. Green had finished his, so it would

be Mr. Shadegg’s opportunity if he wishes to make his opening

statement.

Mr. SHADEGG. Thank you, Mr. Chairman, for holding this important hearing on the devastating impact of Hurricane Katrina. My

heart and my prayers go out to those whose lives have been impacted and devastated by this disaster.

In 1969, I was stationed at Keesler Air Force Base in Biloxi, Mississippi, and I arrived there literally days after Hurricane Camille

struck. It is tragic to see this kind of devastation again to the gulf

coast, and as the Governor pointed out, to see that it is even worse.

I wholeheartedly agree with my colleague Mrs. Wilson regarding

the importance of moving beyond the gasoline engine in the long

run. But today, whether we like it or not, America runs on refined

oil products, and our transportation sector, airlines, trucking industry, and railroads, require a steady supply of fuel to keep our economy moving. In addition, families across our Nation require that

fuel to heat their homes, and they will need it this winter and for

winters to come.

The damage that Hurricane Katrina has done to this energy infrastructure, which has rippled from coast to coast, raises many important policy questions for this Congress and this committee to

address, not the least of which are: Do we have the facilities that

we need to meet America’s demands? And, is our energy infrastructure too heavily concentrated along the gulf coast?

Hurricane Katrina’s impact on an already strained refining industry has had a dramatic impact, most notably on the recent stunning price spikes seen by Americans at their local gas stations.

While I am encouraged that some refineries closed by Katrina

have already opened or are close to reopening, reports indicate that

several large refineries have experienced significant flood damage

and will not reopen for some time to come. This is especially troubling because U.S. refineries were already operating at over 97 percent capacity before Hurricane Katrina hit.

As has already been noted here this morning, we have not built

a new refinery in the United States since 1976, a span of 29 years.

Currently, we import roughly 12 percent of the gasoline and diesel

fuel we consume in this country from foreign refineries. Yet, not

long ago we refined all of the gasoline and diesel fuel used in the

U.S. from refineries here in the U.S.

We should not be outsourcing the refining of the fuels we need

to run this country’s economy. We must do more to bring our refining capacity in line with all of our domestic demands.

Currently, this critical portion of our industry is operating with

no margin for error. Whenever a U.S. refinery needs to interrupt

production for any reason, including just routine maintenance,

Americans pay an unnecessary price because we have insufficient

24

domestic refining capacity. When a disaster like Katrina strikes,

we are in much worse shape. This problem is exacerbated by the

fact that there is a worldwide shortage of refining capacity.

It is preposterous to argue that we do not need to fix this system

or that we can continue down a path of reliance on foreign refining

capacity. As America grows, total miles driven each year go up. Demand for refined petroleum products also goes up. The price of a

barrel of oil is ever increasing, yet just last year this committee

heard testimony that investors would frown on any decision by an

energy firm to meet the rising demand here in the U.S. for refined

product by building new refineries.

Let me illustrate how this point impacts us directly and why it

is more than a crude oil problem. Crude oil futures have gone up

over 60 percent over the last year, but refined gasoline futures

have more than doubled. We must address this critical problem.

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

Mr. WHITFIELD [presiding]. Thank you. At this time I recognize

the gentleman from New York, Mr. Engel, for his opening statement.

Mr. ENGEL. Thank you, Mr. Chairman. Let me first of all say

that my heart and prayers go to the brave people of Louisiana,

Mississippi, and Alabama, and anything that we can do to help

them, we should and we will.

Mr. Chairman, in the 1970’s there was a movie where the lead

character gets up and he says: I am mad as hell, and I am not

going to take it anymore.

Well, I think the American people are rightfully mad as hell, and

we are not going to take it anymore. We are mad as hell about rising gas prices, price gouging, and all things that we have seen disgracefully over the past week. We have seen on TV many pictures

of people looting stores. Well, I would say that the biggest looters

have been the big oil companies. They are looting the American

public. There is no way that increased gas prices at the pump could

have been reflected in 2 days after the hurricane with spikes of 30

to 50 cents per gallon. It is absolutely shameful and unconscionable

that big oil companies are making profits off people’s misery with

this hurricane. There is no other way to say it. Because when the

cost of oil drops a barrel—a gallon drops, it takes several weeks for

it to be reflected at the pumps. So how could this be reflected in

a matter of 2 days? These increases in gasoline prices are unconscionable and should not stand. The oil companies own the means

of cost and production. They have long-term contracts on the oil

fields. They own their drilling equipment, they own their tankers.

These haven’t changed. Their costs haven’t changed. That is why

their profits are soaring to record levels. Why make profit off people’s misery and cause the entire American public to suffer? Gasoline over $3 a gallon? Unconscionable. Now, they are saying that

prices will drop, and it will only be $2 and change a gallon what

was before. We are supposed to be grateful that it is going to drop

to $2 and some odd cents a gallon. There is no way that this should

continue.

Now, it is not a matter of the blame game. I ask unanimous consent for an editorial of the New York Times today called ‘‘It is not

25

a blame game.’’ I ask unanimous consent for it to be inserted into

the record.

Mr. WHITFIELD. Without objection, so ordered.

[The article follows:]

[Wednesday, September 7, 2005—The New York Times]

IT’S NOT A ‘‘BLAME GAME’’

With the size and difficulty of the task of rescuing and rebuilding New Orleans

and other Gulf Coast areas still unfolding, it seemed early to talk about investigating how this predicted cataclysm had been allowed to occur and why the government’s response was so slow and inept. Until yesterday, that is, when President

Bush blithely announced at a photo-op cabinet meeting that he, personally, was

going to ‘‘find out what went right and what went wrong.’’ We can’t imagine a worse

idea.

No administration could credibly investigate such an immense failure on its own

watch. And we have learned through bitter experience—the Abu Ghraib nightmare

is just one example—that when this administration begins an internal investigation,

it means a whitewash in which no one important is held accountable and no real

change occurs.

Mr. Bush signaled yesterday that we are in for more of the same when he sneered

and said, ‘‘One of the things that people want us to do here is to play a blame

game.’’ This is not a game. It is critical to know what ‘‘things went wrong,’’ as Mr.

Bush put it. But we also need to know which officials failed—not to humiliate them,

but to replace them with competent people.

It’s obvious, for instance, that Michael Brown has met the expectations of those

who warned that he would be a terrible director of the Federal Emergency Management Agency. This is no time to be engaging in a wholesale change of leadership,

but in Mr. Brown’s case there seems to be precious little leadership to lose. He

should be replaced with someone who can do the huge job that remains to be done.

But the questions go way beyond Mr. Brown—starting with why federal officials

ignored predictions of a disastrous flood in New Orleans—and the answers can come

only from an independent commission. We agree with the Senate minority leader,

Harry Reid, Senator Hillary Clinton and others who say that such a panel should

follow the successful formula of the 9/11 commission: bipartisan leadership and

members chosen by the White House and both parties in Congress on the basis of

real expertise. It should have subpoena power and a staff expert enough to find answers and offer remedies.

Mrs. Clinton has also proposed pulling FEMA out of the Homeland Security Department and restoring its cabinet-level status. That is premature. The current

setup makes sense, at least in theory. The nation should not have to support two

different bureaucracies for dealing with sudden disasters.

Before throwing the system into chaos again, an investigation should determine

whether the problem lies in the structure or in execution. Yesterday, The Wall

Street Journal showed how the Bush administration had systematically stripped

power and money from FEMA, which had been painfully rebuilt under President

Bill Clinton but had long been a target of Republican ‘‘small government’’

ideologues. The Journal said state officials had been warning Washington—as recently as July 27—that the homeland secretary, Michael Chertoff, was planning further disastrous cuts.

This page supported the creation of Mr. Chertoff’s department. But it was poorly

run by the first secretary, Tom Ridge, with his maddening color-wheel alerts.

It is clearly in need of a hard look and perhaps serious reorganization. Senators

Susan Collins, Republican of Maine, and Joseph Lieberman, Democrat of Connecticut, have plans for hearings, which is fine. But they created the department

in the first place and may have more of a stake in the outcome than a panel of impartial experts.

The panel should also look at the shortcomings of local officials and governments.

It was chilling, to put it mildly, to read Mayor Ray Nagin’s comment in The Journal

that New Orleans’s hurricane plan was ‘‘get people to higher ground and have the

feds and the state airlift supplies to them.’’

But disasters like this are not a city or a state issue. They concern the entire nation and demand a national response—certainly a better one than the White House

comments that ‘‘tremendous progress’’ had been made in Louisiana. We’re used to

that dismissive formula when questions are raised about Iraq. Americans deserve

better about a disaster of this magnitude in their own country.

26

Mr. ENGEL. Thank you. One of the things that we ought to have

is we ought to have an independent commission to investigate what

happened. The panel should follow the successful formula, as the

New York Times says today, of a September 11 Commission, bipartisan leadership, members chosen by the White House and both

parties in Congress on the basis of real expertise. It should have

subpoena power and a staff expert enough to find answers and

offer remedies. We cannot allow the administration to investigate

itself to have a whitewash and a coverup.

Now, as soon as the enormity of the approaching storm became

clear, obviously preparations should have been immediately

ramped up. It wasn’t. FEMA failed miserably. Provisions and assistance should have been ready so that, hours after the storm

moved on, food, water, medical supplies would be on their way. We

must not ignore the mistakes that have been made. We must fix

them immediately and learn from them for the future. And I want

to add my voice to the other members who have said that it is now

again unconscionable to have these huge Medicaid cuts. As hundreds of thousands of people have lost their jobs and net worth, it

is more clear than ever how much our citizens need Medicare and

to be flexible and responsive in times of crisis.

Now, we need to look to the future. For years I have been talking

about the need to wean ourselves off of oil because we have to rely

on sheikdoms that are either unstable, unfriendly to the U.S., or

even supporters of terrorism. We need to improve the fuel economy

of passenger cars and SUVs to a level of our advanced technology

that makes it possible, not issue CAFE standards as the administration did last month, which do nothing to improve fuel efficiency.

I hope that this committee will continue to hold hearings, and I

hope that we will get to the bottom, again, not because of the

blame game, but the people of the United States particularly in

those three States affected deserve nothing less, and I thank you.

Mr. WHITFIELD. Thank you. And I would remind the members

that these opening statements are 3 minutes. And we do have a

number of witnesses today and we have a lot of other people. So

I would urge you to try to confine yourself to 3 minutes.

At this time I would recognize the gentleman from Pennsylvania,

Mr. Pitts.

Mr. PITTS. Thank you, Mr. Chairman. Thank you for holding this

hearing. I would like to thank the panelists for coming. And first,

again, our thoughts and prayers are with those undergoing this

disaster.

Mr. Chairman, we need to look at price gouging today, and we

need to encourage fuel efficiency and new technology and conservation. But we also need to look at refining capacity in our deliberations. And I would like to make a few comments on that issue.

There are 149 oil refineries in the United States. And before the

disruption of Hurricane Katrina, the tragedy that occurred in the

gulf coast, they were all running at full capacity. But we have yet

to build any new refineries, despite the fact that our aging system—none has been built in 30 years—cannot handle the increasing demand that we are placing on them. ABC News reported last

month that, ‘‘analysts say just a few new big refineries could

produce enough extra gasoline to make a dent in prices.’’

27

The problem, according to ABC’s report, is that building even the

smallest refinery is an uphill task. Faced with a complicated morass of local and State and Federal regulations, as well as residents

who do not want a refinery in my back yard, companies simply are

not willing to shoulder the cost of complying with regulations or

fighting protracted legal battles over land use, and so the problem

remains.

Rising gas prices are the result of supply problems. And supply

problems are the result of refining capacity that cannot keep pace

with demand. And this is most apparent during times of crisis,

such as we face now. Hurricane Katrina knocked out a significant

portion of our refining capacity. Because we have been unable to

build refineries in other areas of the country, our economy must

wait until these refineries come back on line.

We need only to look as far as Arizona to see the obstacles that

the government has placed in front of those trying to build new refineries. The Maricopa Refining Company received a permit to

build a 50,000 BPD refinery on January 16, 1992. MRC, operating

under the name of Arizona Clean Fuels, continued to develop its

refinery project through the 1990’s, and because of delays presented by the government, lost a significant investor; in 1999 the

project scope was changed, and ACF applied for a new permit. That

permit, however, was lost in red tape as the EPA and other agencies squabbled about whether a refinery could be built on the originally proposed site. The permit application is still under review as

ACF attempts to hit the moving target presented by bureaucrats,

EPA, and Federal regulations.

This story is not unusual. It is not an anomaly. It is common.

And it is one reason we are facing these shortages. No one is suggesting that we sacrifice environmental stewardship to power

SUVs. However, we must face the reality that our economy, whether we have SUVs or not, needs oil to run. And while there might

come a day, and I hope this day comes, when we find a suitable

alternative to oil and gas, we are still far away from discovering

or developing a source of energy as potent or reliable as oil. So we

must find an environmentally responsible way to increase our refining capacity. We simply cannot go any longer without expanding

our capacity to refine oil.

Since my time is up, I will submit the rest of my statement for

the record. I look forward to the hearing today, and thank the witnesses for sharing their expertise.

[The prepared statement of Hon. Joseph R. Pitts follows:]

PREPARED STATEMENT OF HON. JOE PITTS, A REPRESENTATIVE IN CONGRESS FROM

THE STATE OF PENNSYLVANIA

Mr. Chairman, thank you for holding this hearing and thank you to the panelists

for coming.

Our thoughts and prayers are will those enduring this disaster.

We need to look at price gouging today, and we need to encourage fuel efficiency,

new technology, and conservation.

But we also need to look at refining capacity in our deliberations.

I’d like to make a few comments on that issue.

Today, there are 149 oil refineries in the United States.

Before the disruption of Hurricane Katrina and the tragedy that occurred on the

Gulf Coast, they were running at full capacity.

28

But we have yet to build any new refineries despite the fact that our aging fleet—

none have been built in thirty years—cannot handle the increasing demand we are

placing on them.

ABC News reported that last month that ‘‘analysts say just a few new big refineries could produce enough extra gasoline to make a dent in prices.’’

The problem according to ABC’s report is that building even the smallest refinery

is an uphill task.

Faced with a complicated morass of local, state, and federal regulations as well

as residents who do not want a refinery ‘‘in my back yard,’’ companies simply are

not willing to shoulder the costs of complying with regulations or fighting protracted

legal battles over land use.

So, the problem remains.

Rising gas prices are the result of supply problems.

Supply problems are the result of refining capacity that cannot keep pace with

demand.

This is most apparent during times of crisis such as we face now.

Hurricane Katrina knocked out a significant portion of our refining capacity.

Because we have been unable to build refineries in other areas of the country, our

economy must wait until these refineries come back on line.

We need only look as far as Arizona to see the obstacles the government has

placed in front of those trying to build new refineries.

The Maricopa Refining Company received a permit to build a 50,000 BPD refinery

on January 16, 1992.

MRC, operating under the name Arizona Clean Fuels continued to develop its refinery project through the nineties.

However, because of delays presented by the government, it lost nificant investor.

In 1999, the project’s scope was changed and ACF applied for a new permit.

That permit however was lost in red tape as the EPA and other agencies squabbled about whether the refinery could be built on the originally proposed site.

The permit application is still under review as ACF attempts to hit the moving

target presented by bureaucrats at the EPA and federal regulations.

This story is not unusual.

It’s not an anomaly.

It’s quite common.

And it’s one reason why we’re facing these shortages.

No one is suggesting that we sacrifice environmental stewardship to power SUVs.

However, we must face the reality that our economy, whether we have SUVs or

not, needs oil to run.

And while there might come a day—and I hope this day comes—when we find

a suitable alternative to oil and gas, we are still far away from discovering or developing a source of energy as potent or reliable as oil.

So, we must find an environmentally-responsible way to increase our refining capacity.

We simply cannot go any longer without expanding our capacity to refine oil.

Even if we wanted to import more oil or produce more, it wouldn’t matter.

This harms our ability to respond to increased demand or deal with crises that

disrupt oil refining.

Our economy depends on a reliable and affordable source of energy.

Frivolous and costly regulations make it impossible to build new refineries.

Whatever their intent, these regulations harm the economy and drive up the price

of gas more than they protect the environment.

There must be a middle-ground between no regulation and so many regulations

that consumers suffer.

We can find that middle ground and build new refineries while still protecting the

environment.

I look to hearing today.

Thank you again to the witnesses for sharing their expertise.

Mr. WHITFIELD. I thank you very much, and at this time recognize the gentlelady from Colorado, Ms. DeGette, for her opening

statement.

Ms. DEGETTE. I believe Mr. Strickland——

Mr. WHITFIELD. Well, I was told at the time the gavel went down

that Mr. Strickland was not here at that time, and that we are

going down the order of appearance.

29

Ms. DEGETTE. All right. Thank you, Mr. Chairman. Thank you,

Mr. Strickland.

I have been sitting here listening to everybody, and I agree with

a lot of what everyone has said. We are angry and sickened by

what happened on the gulf coast, and we all hope that we can get

as much help as we can. It looks like maybe a million people have

either lost their homes or their loved ones or both, and their lives

will be changed forever. But as we assess the damage and we bury

the dead and we begin to rebuild, we also really do have to have

a full accounting of the actions. And it would frankly be political

malfeasance of us not to do that, which is why it is good we are

having the hearing today.

I think what we are seeing in Louisiana, Mississippi, and Alabama is an echo of the Federal Government’s failings on September

11. We have seen an appalling lack of imagination, planning, or

preparation for a mass casualty disaster, and an inept response to

the disaster once it occurred that cost people their lives. Now, all

of this was supposed to be solved when we created the Department

of Homeland Security. And instead, it seems to me like things just

got worse. My constituents are flooding my office with calls saying

that the Federal Government failed Americans in their time of

need. And I know that this is common to all of us in this room.

So what we need to talk about in this hearing is within this committee’s jurisdiction: What can we do to fix the problems and make

sure we can minimize disasters in the future. And I don’t mean the

disaster of the hurricane. I mean the disaster of the response.

Just talking about energy for a minute, because that is what this

hearing is about, the Nation faced a surge in gas prices in the

hours and days after Hurricane Katrina. In my district of Denver,

Colorado, far from the eye of the hurricane, we saw gas prices

going up almost hourly at some of these pumps. And I know that

there were some disruptions in service in the Southeast and midAtlantic, expectedly so, prices expected to jump everywhere in the

country without reason.

I went to the briefing, as many of us did last night. The members

of the cabinet briefed the Members of Congress about what happened. And it was all very Pollyannish and everything was going

well. What really struck me about energy was when Secretary

Bodman said there were no real long-term disruptions in supply.

So what I want to know is why were prices of gas skyrocketing in

Colorado even though there was ample supply at that time and

frankly no connection to the distribution network in the gulf? To

us, this looks like price gouging, not disaster impact, and it is

frankly immoral and it is illegal in a lot of places, too.

Now, we have been struggling for months with rising costs, and

it has been fueled by surging worldwide demand for oil, infrastructure operating at near capacity, and also the increasing profits of

oil companies. So why did we have to add to this price gouging as

a result of a naturally occurring disaster? I think it is wrong. I am

glad we are having this hearing. And I am very interested in hearing the testimony.

Mr. WHITFIELD. The gentleman Mr. Otter is recognized for an

opening statement.

Mr. OTTER. I will pass.

30

Mr. WHITFIELD. Ms. Myrick.

Mrs. MYRICK. Thank you, Mr. Chairman. And thank you for the

hearing today. All of us of course send all of our prayers and lots

of other things that we can send to help to the Katrina victims.

And we have been doing that, we will continue doing so, and I

want to thank all the volunteers as well who have pitched in to

help. Thank you to all the panelists who are sitting here patiently

waiting. I will be brief. I just have two things I want to touch on

today.

One of them is what I call price gouging, because in my own area

of Charlotte, North Carolina, it was mind boggling how fast the

prices rose at the pump. They no more than posted the high premium price and they were right back upping the regular. It was

just a continual circle over and over again. And it is not that I

don’t want people to make a fair profit. Of course, that is what we

are all about in America. That is not the point. I just want to make

sure that people aren’t arbitrarily raising their prices. And it is a

serious issue that we need to examine.

Second is the oil and gas futures market. I have been concerned

about this for some time because I think we can reel this in in a

way that is going to have an effect on prices in the near future,

not like the long-term remedies of building refineries which we also

need to look at. But I have had concerns for many months that

some speculators have been driving prices of gas higher than the

factors of supply and demand really warrant. And I am particularly

concerned about the over-the-counter market for energy derivatives

which is subject to very limited oversight under the Commodities

Future Trading Commission, the way I understand it.

I know there are many factors involved in the final price of gas

in our neighborhood stations, such as the taxes and the refinery

costs and the distribution costs and the profits, which I said before

need to happen. But we need to examine what is going on here, because it appears to me that it is abusive and manipulative trading

in some cases.

And so I thank you again, Mr. Chairman, for this hearing. I truly

believe this gives us an opportunity to look closely at what we need

to be doing for the future, because the global situation is not going

to change and, as was stated before, our committee has jurisdiction

over a lot of the health issues that are going to be coming up and

we need to be doing those, too. And I yield my time.

Chairman BARTON. The gentlelady yields back. The gentlelady

from California, Ms. Capps.

Mrs. CAPPS. Thank you, Mr. Chairman, and to our witnesses for

being here today. We have all been moved by the tragedy on the

gulf coast and our thoughts and prayers are with the thousands of

Americans, fellow citizens of ours so painfully and personally affected. We also are thankful and need to keep thanking folks for

the countless acts of heroism and selflessness, from both the area’s

residents and from people across the country responding to this

tragedy. And now Congress has a critical role to play here in the

aftermath of Katrina. I believe there are two significant areas in

which Congress has major responsibility.

First, we have to provide the financial support for the people affected by Katrina. I am glad we have moved the emergency funding

31

bill last week to start this process and there will be more funding

requests coming. We are going to have to do a lot more to help

these folks put their lives back together, and I hope we will work

in a bipartisan fashion to do so.

And the second thing we must do is to figure out what went

wrong with the Federal response and why so that it never happens

in this way again. And I believe we need to do this in a bipartisan

way as well. The Federal response, as has been said over and over

again, was late and it was ineffective. This administration utterly

failed in its responsibility to help prepare for the disaster ahead of

time and to help in its aftermath. There are disasters waiting to

come, so we must do this work. Hundreds of thousands of gulf

coast residents have paid a very high price for our failure. The administration’s actions or inactions were an insult to all Americans

and simply inexcusable. I believe that Congress has an important

job in investigating these shortcomings, and I hope this committee

will be vigilant in pursuing this inquiry, and I am thankful that

this hearing will start this process. The lives of Americans will be

affected by how well we do our job and by how well the administration does its job and the private sector as well, this time and the

next time. There will be a next time.

So I hope, Mr. Chairman, that this hearing is only the first of

many that we can be holding, because studying the lessons of

Katrina should help us to avoid similar problems in the future.

Finally, Mr. Chairman, I know there are many calls now for congressional action to address the high gas prices. There are things

we should do and things we shouldn’t do. For example, resuscitating the ill-conceived refinery legislation is one we shouldn’t do.

We do need more refineries. But as has been noted, environmental

regulations aren’t the problem here. So you don’t need to waive

them to get a refinery bill. The problem is that the refining industry makes a lot more money with a tight refining capacity. The industry doesn’t want to build more refineries because it makes too

much money the way things are. On the other hand, if we had cut

down on some of our demand over the last decade or so, we

wouldn’t be in such a predicament right now. Demand reduction

works, even as the President now belatedly recognized, evidenced

by his call last week for conservation.

Mr. Chairman, you scheduled this hearing long before Katrina,

and I would remind committee members that record gas prices

were here long before Katrina hit and they will be here long after

the effects of Katrina are dealt with. If we don’t do something

about our insatiable appetite for fossil fuel, shoving more tax

breaks to industries making record profits and gutting the laws

that protect our environment are simply uncalled for. It should be

rejected. And I do yield back.

Chairman BARTON. The gentlelady yields back. Mr. Sullivan to

make an opening statement?

Mr. SULLIVAN. Saving my time.

Chairman BARTON. The gentleman defers. Does Dr. Burgess wish

to make an opening statement?

Mr. BURGESS. I will defer.

Chairman BARTON. All right. Mr. Walden?

32

Mr. WALDEN. Mr. Chairman, I will defer as well and save my

time for the witnesses.

Chairman BARTON. All right. Mr. Otter? He defers. I think we

have deferred on the Republican side, so we go to the gentleman

from Pennsylvania.

Mr. DOYLE. And I will also defer.

Chairman BARTON. We have got a string going here. Mr. Allen.

Mr. ALLEN. I am afraid I am going to break the string, Mr.

Chairman.

Chairman BARTON. The gentleman is recognized for 3 minutes.

Mr. ALLEN. Thank you, Mr. Chairman, for convening this hearing. The victims of Hurricane Katrina remain in our thoughts and

prayers. When the 1998 ice storm crippled Maine, the Nation rallied to our aid. Maine is prepared to do the same for the people of

the gulf coast in their hour of need. We are a nation that draws

strength from shared adversity, and I hope that, working together,

we will emerge from this terrible tragedy a stronger and more

united people.

The Federal Government’s response to this crisis has been, in a

word, pathetic. But that response should be the subject of another

hearing. Today we will be focusing on Hurricane Katrina’s effect on

energy prices, but let us not deceive ourselves or our constituents:

Gas prices, heating oil futures, and oil company profits were at

record highs before Katrina struck. We cannot blame high gas

prices on Katrina alone.

From 1977 through 2002, the number of refineries in the U.S. decreased from 282 to 153. During this period of time, gasoline demand rose 27 percent. Refiners in the last decade have spent $47

billion to expand existing capacity by 13 percent, but demand has

grown even faster.

Why not more refineries? The answer is profit margin. Fewer refineries mean higher profits. The strategy has worked; oil profits

have soared into the billions. That may be all well and good for

ExxonMobil, and for others, but what about everyone else? The increased profit margins for the oil companies are driving my constituents out of business. Small businesses in Maine are being

crushed by increased gas prices, not to mention the spike that is

coming in their heating oil bills.

Maine’s large fleet of independent truckers are suffering and at

grave risk of going out of business. Maine’s fishing fleet is suffering

as well.

In 1962, facing a similar threat to the Nation’s economy due to

the pricing practices of the Nation’s steel manufacturers, President

Kennedy summoned steel barons to the White House and demanded that they reduce prices. They backed down. This President, President Bush, needs to call oil company CEOs to the White

House and demand sacrifice on their part. That may seem like fantasy, but it is the kind of leadership that we need today.

I would just add one other point. On Thursday, Valero’s chief executive Bill Greehey, commenting on the FTC’s decision last week

to authorize Valero’s $8 billion purchase of Premcor, said that: We

are in a new era for refining where I believe you will continue to

see higher highs and higher lows, among other things, for product

margins.

33

That is what has been going on in that industry, and Mr. Chairman, that is what we need to investigate here. I yield back.

Chairman BARTON. The gentleman yields back. The gentlelady

Ms. Schakowsky wish to make an opening statement?

Ms. SCHAKOWSKY. Yes, Mr. Chairman. And thank you for calling

this timely hearing. Americans have been riveted to their televisions watching with shock and shame, not shock and awe, as the

Federal Government failed in its primary mission, providing for the

safety and security of its citizens. As reporters and camera crews

brought images that look like they came from another country instead of the superpower of the world. As they were able to make

it to the Superdome and convention center, Americans watched and

waited in disbelief for help to arrive. For many, help came too late.

This predictable and predicted catastrophe, as the Sun Times editorialized, exposed the plight of the Nation’s have nots, all those

Americans, not refugees from another country, but the millions of

American citizens who are not part of the ownership society. Now

we know what that means. If you own a car, you can escape disaster. If you own a tank of gasoline or enough money to buy a hotel

room, you might survive in this ownership society.

Make no mistake, millions of Americans are angry, millions of

Americans are ashamed. And, yes, no matter how they and we may

be scolded for doing so, they blame the Federal Government, they

blame this administration for failing to do its job, failing to prepare

for this crisis, and failing promptly to deal with it. Many Americans shook their heads and asked: Is this my country? Newt Gingrich said, quote: As a test of Homeland Security, this was a failure.

He said this is not a moment to defend inadequacy. End quote.

Other crises and potential crises are now looming, and we in

Congress have responsibility as well to face up to that fact and deal

with it. One of those is an energy crisis. The question is, are we

going to act now to prevent a catastrophic energy crisis, or will we

wait to scramble to pick up the pieces in the aftermath? This time,

the President and the Congress have to anticipate a breach in the

levees. In my view, we already squandered an opportunity to look

ahead and mitigate an energy crisis that leaves our country at the

mercy of hurricanes and vulnerable oil rigs and oil refineries and

foreign countries when this committee and this Congress passed an

energy bill that the President’s own experts said could increase

prices at the pump.

Days before Katrina struck, the price of a barrel of crude was

$66, double what it was in January 2004. In Chicago the price was

already nearly $3 a gallon, the highest in the country. Katrina exacerbated a preexisting condition. Now we must assure that immediate needs are met and that we look ahead at the cost and availability not only of gasoline, but, as the cold weather approaches,

heating oil and natural gas. How are the poor, several of whom because of Katrina now have to face, going to stay warm. And what

about middle-class families, small businesses, and farmers? Our

constituents can’t afford $1,000 monthly heating bills.

Can we look that far ahead and plan? In the aftershocks of

Katrina, can we leave Americans out in the cold while energy companies are left with money to burn?

34

I hope that no member has the audacity to suggest that weakening environmental standards or drilling in the Arctic wilderness

or any other transparent political fix will alleviate this energy crisis. The only way to mitigate this pending catastrophe is for Congress, with this great committee taking the lead, to be bold enough

to enact laws that will hold down costs, prevent profiteering off the

backs of the American people, and protect those who are hit hardest by increases in energy costs.

Thank you, Mr. Chairman.

Chairman BARTON. We thank the gentlelady. Mr. Radanovich,

would you like a statement?

Mr. RADANOVICH. Waive.

Chairman BARTON. Okay. The gentlelady from California, Ms.

Solis.

Ms. SOLIS. Thank you, Mr. Chairman. Yes, I have a statement.

As we sort through the issues surrounding recovering from

Katrina, it is important for us to remember many of the communities that are still suffering right at this moment. First responders

and other emergency personnel volunteers and even firemen from

the local D.C. Area are training and working to continue finding

survivors and evacuating the rest.

I am glad that we are here today to begin to address this issue.

As we begin to learn, these evacuees and emergency responders are

at increased risk for disease and infection caused by the mix of contaminants in the water they are wading through, particularly to

those engaging in rescue and recovery missions, but also to those

who lived in the Superdome and struggled through the water to escape the city. All, regardless of race, income, ethnicity, and country

of origin, must receive adequate health care and treatment and

counseling, mental counseling. I hope, Chairman Barton, that we

will have a hearing to better understand the health implications of

this hurricane. And I am also extremely concerned about the environmental and drinking water infrastructure implications of Hurricane Katrina.

On Sunday, on Meet the Press, Secretary Chertoff commented:

We are going to have to clean probably the greatest environmental

mess we have ever seen in this country.

Today’s Washington Post identified just the beginning of the environmental problems the gulf coast will be facing. These include

contaminated water which will likely be undrinkable for many

years to come, unknown damage to the drinking water infrastructure, toxic fumes from fires which continue to burn. State authorities announced a litany of contaminants which are likely to be

found in the flood waters, including tens of millions of pounds of

concrete, lumber, cars, and animal carcasses. Sewage treatment

plants were destroyed. Two major spills sent 78,000 barrels of oil

into a local lake there, and fuel from 2,000 fuel tanks and leaking

gasoline from flooded cars and boats also coated the city.

As ranking Democrat on the subcommittee with jurisdiction over

these environmental hazards, I call on the Chair of the subcommittee, Mr. Gillmor, and Chairman Barton to begin hearings on

the environmental implications of Hurricane Katrina. It is critical

that as we move forward to clean up we rebuild New Orleans, that

it be done in a manner which will protect the health and safety of

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our communities. So I encourage our colleagues not to disregard

public health and environmental regulations.

And, last, with respect to the gasoline prices, we do have to have

a thorough investigation here. In California for the last 3 months

we have experienced high rates of gasoline prices far beyond the

$3 mark. We need to do something now. We need to call in all, all

resources that we can to look at what kind of price gouging has

gone on.

I also would like to submit that there are several refineries that

are dormant right now in our country. We should probably be going

back and looking at those current refineries and trying to provide

assistance there so we can startup and provide the kind of assistance that our consumers are waiting for.

Thank you very much, Mr. Chairman.

Chairman BARTON. We thank the gentlelady.

Does Mr. Fossella wish to make an opening statement? The gentleman defers. Does Mr. Gonzalez wish to make an opening statement?

Mr. GONZALEZ. Yes, Mr. Chairman. And I will be quick. I think

what we see today as far as any shortages, price increases, and

such, and the crisis that we face truly are just symptoms of underlying policies that have been inadequate and unrealistic. I think we

need to start off with a firm understanding, if we are going to do

something that is realistic and substantive, that there are no quick

fixes, first of all; that there should not be any sacred cows. All of

us represent a sacred cow or two. And, of course, it is not going

to be pain-free. And that means for the industry and for the consumer. And if we believe we can get away with any kind of substantive policy changes that will address these problems without

what I have just said, and that is the sacred cows and foregoing

some of those interests, and that there is not going to be some pain

felt by every American, then we will not accomplish what needs to

be accomplished.

I think the American public will grasp certain concepts that we

will discuss here today and that witnesses will touch on, such as

production capacity on the domestic side. The location of where we

have our facilities, they will understand that. And, again, just on

the capacity side. But will they really understand other things that

really come into this mix and I think have already been referred

to by Congressman Shadegg? And we are talking about the futures

market. How many Americans understand the futures market, the

oil futures market? Or hedging? What does all that mean to them?

What it means is exactly what is happening to them today when

it comes to the volatility of the marketplace.

And with that in, Mr. Chairman, I hope that we will realistically

promote policies that take all of this into account. Thank you.

Chairman BARTON. Does the gentlelady from Wisconsin wish to

make an opening statement? The gentlelady is recognized for 3

minutes.

Ms. BALDWIN. Yes. Thank you, Mr. Chairman. My thoughts are

with all of those who are suffering the effects of Katrina and also

with those who are suffering the consequences of a painfully slow

and uncoordinated response to Katrina.

36

I keep asking myself how a country that has spent the last 4

years planning for catastrophe found itself so ill-prepared for this

catastrophe. There is a huge public call to assign blame to the

planners and to name the stunning vacuum of leadership from this

President and his FEMA Director immediately following this disaster. I know there is also an effort to subdue congressional critique and inquiry at least while the rescue and relief operation is

still ongoing.

We have been urged to focus on the present and the future. But

how can we do that properly without understanding the past? Our

history? And which decisions, both recent and in the more distant

past, have exacerbated and intensified last week’s natural disaster?

Last week showed us and all of America, and in fact the world,

many things, among them that our social safety net has been badly

neglected. It showed us that we have been inadequate stewards of

the environment, whether it is our failure to fight poverty and provide health care to all in America or our failure to protect the natural buffers, the coastal wetlands, the barrier islands which serve

as Mother Nature’s shock absorbers, the failure to make proper

and adequate investments in infrastructure, including our emergency communication infrastructure, our failure to listen to scientists long warning us of climate change, or our failure to embark

upon a path that decreases rather than increases our dependence

on finite resources so that future generations won’t experience the

fear and anxiety that grips all of our constituents when fuel becomes unaffordable. All of this was stunningly revealed last week.

Let us not ignore what was exposed. I have talked about the public calls for blaming the planners. In a real way, we on this committee and in this Congress are planners, planners for the future.

This time, let us seize the opportunity to work for the common

good, to help those with the least, not just those with the most, and

to make good upon the social compact.

Mr. Chairman, I look forward to working with you on these very

big challenges.

Chairman BARTON. I thank the gentlelady.

Does Mr. Ross wish to make an opening statement?

Mr. ROSS. Yes, sir, Mr. Chairman. In fact, I just left a conference

call which I will soon be joining again with our Governor of Arkansas, who is housing about 60,000 of our neighbors from Mississippi

and Louisiana. As you can imagine, we have a lot of challenges

that we want to meet, and we want to be there for them and lend

a helping hand.

I have grave concerns about the response time in the aftermath

of this hurricane and subsequent flooding and levee failures as it

relates to FEMA, and I believe that we need to make FEMA a cabinet level position and remove it from Homeland Security. We have

some short- and long-term needs that are going to have to be met

for the people of Mississippi, Louisiana, and Alabama. I believe

that we must have a bipartisan commission, much like the 9/11

Commission, to figure out what went wrong and how to avoid this

from happening in the future. But there is time for those things.

Right now is the time I believe to try and restore order in New Orleans, to help the people of these three States get their lives back

37

together, and obviously the challenge of recovering the bodies that

remain in the devastation of this hurricane.

But today, this hearing before the Energy and Commerce Committee is, quite frankly, about dealing with the aftermath of

Katrina as it relates to energy, to gasoline supply and prices, and

so let me say this: That over the August district work period I traveled the fourth district, in fact about 8,000 miles worth of traveling

in my district, listening to the concerns of constituents about rising

gas and diesel prices. I heard this before the hurricane. Obviously,

it was compounded by the hurricane. I witnessed firsthand already

inflated gas prices jump from $2.45 a gallon to $3.25 a gallon in

communities throughout Arkansas. These are the very towns and

communities our neighbors from Mississippi and Louisiana and

Alabama have traveled to seeking shelter. Many citizens in my

rural congressional district commute over 100 miles round trip for

work each day. Many farmers in my district face hardships in operating the necessary equipment, especially in this drought, to harvest their crops due to high diesel prices.

These citizens, as well as those impacted by the hurricane in

Mississippi and Louisiana and Alabama, simply cannot afford these

drastic increases in fuel prices.

We need to ensure the people of this country that oil market manipulation and price gouging are not occurring; and, if the Federal

Trade Commission’s ongoing investigations do find manipulations,

we need to move swiftly and effectively to punish those taking advantage of this situation. Oil production platforms, import terminals, pipelines, and refineries were all affected as a result of Hurricane Katrina. The full impact that Hurricane Katrina will have on

oil markets will depend on how quickly these facilities will be able

to recover to pre-hurricane status.

And, Mr. Chairman, finally let me just encourage this committee

to work to do all it can in a bipartisan way to bring down the high

cost of gasoline, to maintain an adequate supply while also meeting

the needs and challenges of the people that have been directly impacted by this horrible natural disaster. And, with that, I yield

back the balance of my time.

Chairman BARTON. We thank the gentleman.

Does the gentleman from Massachusetts, Mr. Markey, wish to

make an opening statement?

Mr. MARKEY. I do, Mr. Chairman.

Chairman BARTON. The gentleman is recognized.

Mr. MARKEY. Thank you, Mr. Chairman. When the price of gasoline is $2.50 at the pump and 3 days later $3.50 is what is being

charged to consumers as they are tipped upside down in gas stations across America and having money shaken out of their pockets, then there is profiteering, there is price gouging which happens.

The President should have announced that he was deploying the

Strategic Petroleum Reserve on the first day of the crisis last week,

at the very beginning, not 5 days later after the oil speculators

were able to take advantage of consumers all across our country.

The President was at least 5 days late in deploying the Strategic

Petroleum Reserve and asking for help from our allies around the

world. We only have 3 percent of the oil reserves in the world. God

38

put most of the reserves under certain Middle Eastern countries,

but we put 70 percent of that oil into our gasoline tanks.

The Republican energy bill which was passed and signed by a

Republican President was an historic failure. It did not deal with

the issue of fuel economy standards for SUVs and automobiles, it

did not have a renewable portfolio standard so that all utilities in

America increased dramatically their use of renewables. I believe

that what we should be doing right now is suspending all royalty

relief for oil and gas companies across America, and giving that relief to the victims of Hurricane Katrina.

Here is the oil company profits over the last 3 years. It has just

skyrocketed. And there are estimates that ExxonMobil can make

upwards of $40 billion this year. We just gave $10 billion for relief

down in the gulf area. $40 billion for one company. And the prices,

the prices at the pump have just skyrocketed over the last very

brief period of time. And no relief, no answer from this administration. In fact, they admit that their bill does nothing.

So we continue to pollute our air, we continue to have increases

in climate change, we continue to see our wetlands disappear, we

continue to turn a blind eye to human rights abuses by our OPEC

suppliers, we continue to not really complain about these incubators of terrorism over in the Middle East, and we continue to

argue—this administration continues to argue that we need to give

more royalty relief to oil and gas companies.

This hearing is a very important first step. But what we need is

every CEO of every oil company, and I would also recommend

OPEC ministers, come in here and that they be requested—we

can’t make them, but we request them to testify as to what they

are going to do in order to ensure that there is an adequate supply

of oil for our country.

Chairman BARTON. The gentleman’s time has expired. We thank

the gentleman. Does the gentleman from New Hampshire wish to

make an opening statement?

Mr. BASS. I will be brief.

I want to thank you for holding the hearing. I understand that

subject matter has been broadened from just talking about gasoline

and energy to talking about elements relating to the latest catastrophe that has beset our Nation.

I just want to say that it is obvious that our Nation has been

lulled into complacency with respect to the availability of cheap

gasoline in the past; and we really haven’t planned for a perfect

storm like that which we are experiencing today with tight supplies, massive global demand and political unrest and then, of

course, Katrina. Maybe we could never have been prepared for this

kind of an event.

But I just want to say that last week I set up a special Web site

that would allow constituents in the Granite State to fill out a form

if they—which would be e-mailed to me directly which would outline instances of—specifically about price changes: the date, the

reason, the period of time it occurred between one price and another price. And I have notified these citizens—I would say there

have been well over 100 responses in the last 7 days—that I will

turn all of this information over to the Department of Energy and

39

the Federal Trade Commission so that the appropriate action be

taken, if it is justified.

You know, I think it is appropriate to look into the processes

whereby oil is extracted from the ground, transported, marketed,

delivered and so forth and see if there are areas that require policy

attention. But I personally find it difficult to define the term ‘‘price

gouging,’’ and I will be interested to hear what our witnesses have

to say about that.

Mr. Chairman, I will stop my statement here so that we can get

on with the important testimony that we are about to hear from

the people who are here today. Thank you.

Chairman BARTON. Does the gentleman from Ohio wish to make

an opening statement?

Mr. STRICKLAND. Yes, sir.

Mr. Chairman, I was reading in the New York Times comments

from an engineering professor at the State University of Louisiana

who had served as a consultant on the Louisiana State evacuation

plan. He said that little attention has been paid to the evacuation

of New Orleans’s low mobility population: the elderly, the infirm

and the poor without cars or other means of fleeing the city, about

100,000 people.

Mr. Chairman, we knew this disaster was upon us days before

it reached our shore. In fact, the President went on television and

urged people to evacuate the city. We saw the TV pictures of cars

lining the freeways as they were heading northward out of harm’s

way. But apparently there were many in New Orleans and elsewhere along the Hurricane’s path that did not have cars, that did

not have credit cards. They had no means of renting an automobile

for transportation. They could not afford a bus ticket. They simply

were left behind. They were the poorest among the region’s population.

Then the flooding came; and these—the sickest, the poorest, the

oldest, along with children—have died. And the sad truth is that

many have died unnecessarily. Many have died simply because

they lacked for water, for food; they lacked for timely medical attention.

Mr. Chairman, we are the greatest and most advanced Nation on

the face of the earth. We have at our disposal every resource that

is known to mankind. Yet when disaster hit our own country, when

our own citizens were without food, water and medical care, we did

not respond in a timely manner. So many were lost. And those who

lost their lives were primarily black, and they were primarily poor,

and that should strike at the conscience of every one of us.

Mr. Chairman, one of the things that must be done is for us to

examine ourselves as a Federal Government and as a people why

is it, why is it that it is the poor, the minority, the child, the elderly and the infirm who are most likely to suffer in times of disaster?

But we are here today to talk about our Nation’s energy. I noticed that the President said a few days ago he had zero tolerance

for looters. This Nation is waiting for the President to speak so

strongly about gougers. Will he tell us and will he tell the oil company executives that he has zero tolerance for gouging at the gas

pumps?

I yield back the remainder of my time.

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Chairman BARTON. The gentleman yields back 3 seconds. We appreciate it.

Does Mr. Terry wish to make an opening statement?

Mr. TERRY. No.

Chairman BARTON. Does Mrs. Blackburn wish to make an opening statement.

Mrs. BLACKBURN. Mr. Chairman, having been in Mississippi with

my family in the middle of this for the last few weeks I will submit

my statement and look forward to hearing from our panel.

[The prepared statement of Hon. Marsha Blackburn follows:]

PREPARED STATEMENT OF HON. MARSHA BLACKBURN, A REPRESENTATIVE IN

CONGRESS FROM THE STATE OF TENNESSEE

Mr. Chairman, during the past decade Congress waged debate over whether to

increase domestic oil exploration and encourage construction of new refineries.

Hurricane Katrina made it abundantly clear that this nation can no longer engage

in seemingly endless debate, but must actively work to discover and harvest American oil. We must encourage construction of new refineries. This is not to say that

we should end our alternative fuel research and development efforts, but that we

must have a realistic view of our current consumption needs.

Over the past few decades, environmental groups and some of my colleagues

across the aisle have been very successful in their efforts to stymie domestic exploration. The National Energy Policy Act which we passed this July after several

years of effort took steps to ease the regulatory red tape that has prevented us from

accessing domestic oil supplies and constructing refineries. In light of what we’ve

learned from Hurricane Katrina, I’d suggest we build on that legislation and taking

immediate steps to open ANWR.

Today we know that had we been able to pass that legislation years ago we’d very

likely be less reliant on the gulf region’s oil industries and the current price increases and periodic supply shortages would not be nearly as painful.

This is not as complicated a problem as some would have us believe. We need

more domestic oil and we must increase our refining capacity. Both of those needs

are within our power to address. Our energy security absolutely cannot remain so

vulnerable to a single although significant natural disaster like Hurricane Katrina.

Mr. Chairman, I thank you for holding this important hearing today and I look

forward to taking the steps necessary to strengthen our energy infrastructure.

Chairman BARTON. Seeing no other member present who wishes

to make an opening statement, the Chair asks unanimous consent

to put into the record at this point in time the statement from the

distinguished chairman of the Small Business Committee, Congressman Manzullo.

Hearing no objection, so ordered.

[The prepared statement of Hon. Donald A. Manzullo follows:]

PREPARED STATEMENT OF HON. DONALD A. MANZULLO, CHAIRMAN, HOUSE

COMMITTEE ON SMALL BUSINESS

As the Chairman of the Small Business Committee, I hear everyday how the price

of energy affects entrepreneurs. It costs more everyday to simply turn on the lights

of a business when it opens its doors. It costs more to ship merchandise, both raw

material and finished products. Every consumer sees prices rising on the most basic

products. Every time people add gasoline to their car, there is less money in their

pocket for other purchases.

In the northern Illinois Congressional district I am proud to represent, many of

my constituents have already been hurt by the increase in energy prices. Richard

Beuth is a farmer in Seward, Illinois and he has told me how every facet of his operation rising fuel prices has impacted. He explains that the cost of fertilizer has doubled over the past year. A year ago at this time, fertilizer cost $250 a ton and when

it increased to $350 a ton he wondered how he would absorb this increase. Now,

in the span of a year, it has increased to $500. Also, he tells me there is a scarcity

of fertilizer on the market for purchase.

Additionally shipping costs are hurting his farming operation. It costs more to buy

seeds, fertilizer and other products have increased because of shipping costs. FarmVerDate 11-MAY-2000 09:17 Nov 08, 2005 Jkt 000000 PO 00000 Frm 00044 Fmt 6633 Sfmt 6621 24246.TXT HCOM1 PsN: HCOM1
41

ers also get hit with shipping costs as they send their crops to market. Richard explained to me that the cost to farm an acre has increased between 15 and 20 percent. He explains that because the price of corn is down, he is operating at a loss.

Richard Todd runs Todd Transfer Trucking of Rockford, Illinois. Richard tells me

that the cost of fuel is tipping the balance of the scales to where he is operating

without any profits. His company normally runs on a margin of two to three percent

and fuel increases are eating into that margin. He says that his fuel prices are up

$90,000 in the last six months, with all other factors remaining the same.

Additionally, his company is forced to absorb more of the costs because their biggest customers will not accept a fuel surcharge. He is only able to pass on his additional fuels costs or surcharges to his smaller customers, who themselves are struggling.

Another example is Bob Trojan of Rockford Linear Actuation, a hydraulic cylinder

manufacturer. Bob explains that the cost to run his plant has increased between 20

and 30 percent because of soaring fuel prices. He says that he fully expects to the

price of steel to rise, because of production costs, which will again increases his

input costs.

Because he is a small manufacturer, trucking companies have passed surcharges

on to his shipments. He ships his products all over the United States and Europe.

Bob says that customers and vendors are more cautious in taking trips to see products because travel costs are so expensive.

Rising energy costs hurt every aspect of business. These costs are spiraling out

of control. It is imperative that we find ways to curtail energy prices before businesses are forced to close their doors. The economic aftershocks of Hurricane

Katrina affected communities all across this nation. Mr. Chairman, I trust that as

oil refineries come back on-line in Louisiana and production is restored to pre-storm

levels, we will see a decrease in energy costs so that our small businesses and small

manufacturers will remain open. Any change in U.S. government policy to address

the high cost of energy should keep in mind the perspective of small business because this sector of our economy generates most of the new jobs and economic

growth in this country. Thank you, Mr. Chairman, for allowing me this opportunity.

[Additional statements submitted for the record follow:]

PREPARED STATEMENT OF HON. MICHAEL C. BURGESS, A REPRESENTATIVE IN

CONGRESS FROM THE STATE OF TEXAS

First, I want to thank Chairman Barton for convening this hearing today. The

Chairman has indicated that this will be the first of a series of hearings to examine

impact of Hurricane Katrina.

In the wake of Hurricane Katrina, many of my constituents have contacted me

with concerns about price gouging by gasoline retailers.

It is tempting to be led by emotion and make quick decisions in order to show

that we are ‘‘doing something.’’ But I believe that the best thing to do in this situation is to study the issue as deliberately as possible.

In the Dallas-Fort Worth area gasoline prices increased by anywhere between 30-

50 cents per gallon in the last week alone. I know Chairman Upton indicated that

he received reports that one point that gasoline increased by a dollar per gallon

overnight in Michigan.

At the same time, we know that Hurricane Katrina resulted in the suspension

of 25 percent of U.S. oil production and took 25 percent of U.S. refining capacity

offline. Since domestic oil and gas refineries have operated at nearly 100 percent

capacity over the last few years, the loss of even one U.S. refinery would have reduced supply and increased prices at the pump.

We need to determine if the problem is inappropriate pricing or a problem with

supply.

We need to make sure to fix the right problem. Trying to fix the wrong problem

can only make things worse—we all remember the long lines at the gas pump in

the 1970s.

If it is determined that illegal pricing has occurred, I will support prosecution of

wrongdoers to the utmost of my ability. I think it is unconscionable that opportunists would take advantage of this national tragedy for financial gain.

But, it is important that we, as policy makers, avoid single synapse reactions

which can translate into untenable public policy. We should examine the strategy

in place for dealing with this type of emergency situation; and if no such strategy

exists, we should work to develop one. We need to learn from this experience and

determine how we can prevent this loss of supply in the future.

42

In conclusion, I’d like to again thank the Chairman for holding this hearing. I look

forward to hearing from the witnesses who are appearing before us.

PREPARED STATEMENT OF HON. BART STUPAK, A REPRESENTATIVE IN CONGRESS

FROM THE STATE OF MICHIGAN

Thank you Chairman Barton and Ranking Member Dingell for calling this hearing today and welcome to the witnesses. This hearing comes at a time when our

southern states are struggling with the ramifications of a devastating natural disaster and the rest of our Nation is being hit with gas and oil prices that are the

highest this Country has ever seen.

I hope that the witnesses here today will provide information that will help this

Committee understand why these high prices are occurring and when the American

people can expect a reprieve.

As every member of the Committee knows first hand, our constituents are angry

about high gas prices—and they have a right to be!

More than 5,000 complaints have been logged in at the Energy Department’s gasprice gouging hotline, and there have been reports of pump prices hitting $6 per

gallon in some parts of the country where gas prices were in the range of $2.50 per

gallon. Furthermore, oil prices have reached as high as $70 per barrel.

My home state has been hit particularly hard by these prices, especially in my

Northern Michigan district. With tourism as the largest industry in the region during the summer months, gas prices have taken a toll on small businesses this year

even before Katrina.

Many Northern Michigan residents who must commute to distant communities for

work find themselves putting in the first hour or two just to pay for the gas to and

from their job.

The fact is we rely on oil to fuel our cars, homes and economy, so we’re forced

to pay the price. Like my constituents, I find myself at the pump feeling completely

helpless to stop the seemingly endless rise in cost.

Many weeks prior to Hurricane Katrina’s wrath, gas prices had been increasing

at an alarming rate. These prices have been pinching the pockets of the middle class

for well over a year.

During this time, the Administration did nothing to curb these rising prices despite the urging of myself and other Members of Congress to defer shipments of oil

and tap into the Strategic Petroleum Reserve.

Instead, the Administration chose to wait until Hurricane Katrina put the country

in dire straights before releasing this desperately needed oil. Had they immediately

released this oil, the situation after Katrina might not have been so grim.

However, supply of oil is not the only factor that is affecting gas prices. The

United States refining capacity is concentrated in the southern states and some of

those states have unfortunately been devastated by Katrina.

While many existing refineries have expanded operations, it has barely kept pace

with demand. Most U.S. refineries are operating at or near 94 percent capacity, and

the United States now has to import 10 percent of already refined gasoline.

For the current refiners, this limited capacity keeps gasoline prices high and profits up. But for the consumer, and the overall health of the American economy, it’s

a potential disaster.

Hurricane Katrina is not the only cause of these independent gas prices. This Administration’s foreign policy has also directly influenced the price of gas we are paying today. Poorly planned foreign policy and mismanaged international diplomacy

have created major instability in the oil rich regions of the world, including Venezuela which has been one of our largest suppliers.

This pervasive instability in the Middle East and the Iraq war has lead to a commodity futures market where an additional $10 to $15 ‘‘risk premium’’ is added to

each crude oil contract sold on the market. This directly correlates to higher prices

at the pump for consumers and only increases with concerns over natural disasters

such as Hurricane Katrina.

I hope the witnesses here today will address these issues. Thank you.

PREPARED STATEMENT OF HON. ALBERT R. WYNN, A REPRESENTATIVE IN CONGRESS

FROM THE STATE OF MARYLAND

Chairman Barton and Ranking Member Dingell, thank you for holding this hearing at such a critical point during this state of national crisis. Hurricane Katrina

has ravaged the Gulf Coast region, leaving thousands without a place to call home,

43

crippling and separating families, and the death toll continues to rise as we press

forward with relief efforts.

The Administration, state, and local officials’ sluggish response and incompetence

in addressing this catastrophic natural disaster are unacceptable. The lack of coordination, limited military presence, and insufficient supplies reveal a shocking ineptitude in planning for emergency situations, such as witnessed along the Gulf Coast.

In addition to the human tragedy, in the context of this committee’s jurisdiction,

Hurricane Katrina resulted in a significant loss of refining capacity, intensifying already high gas prices. At least 20 percent of the nation’s refining capacity ceased

operations or reduced runs as a direct result of the disaster. No new refineries have

been built in this country since 1976, yet over the past 20 years U.S. demand for

gasoline has increased over 20 percent. Correspondingly, refining capacity has decreased by ten percent over the same time period. This is an unsustainable situation

and we must work towards increasing domestic refining capacity.

The current price of gasoline, when adjusted for inflation, is as high as gas prices

during the 1979 crisis! What makes matters worse is that even before the hurricane,

crude oil and gas prices were inching towards unprecedented heights.

Unfortunately, in the aftermath of Hurricane Katrina, the issue of price gouging

has been illuminated. In the witnesses’ testimony they do not address the jurisdiction of the federal government over price gouging; nor do they specify what specifically defines price gouging. These are matters that must be addressed given the current crisis. We need federal authority over price gouging; the American people

should not be subjected to artificially high prices without an effective means of recourse.

We should also remember that the reduced refining capacity and supply will impact the price of home heating oil this winter. While it is currently a warm day in

D.C., in a couple of months the weather will cool significantly. For low-income residents, this could mean the difference between putting food on the table and surviving the cold winter. Given the high prices in energy, we should ensure that our

low income heating assistance is sufficient to support the inflated prices.

Adjustments in international supply and demand of oil, continually increasing refining capacity, speeding up our energy independence from foreign sources of oil,

and ultimately shifting towards a hydrogen economy are necessary to address America’s energy crisis.

I look forward to hearing the testimony of those present today and I thank you

all for speaking with my colleagues and I about the aftermath of Hurricane Katrina

and her impact on oil and gas production.

PREPARED STATEMENT OF HON. JIM DAVIS, A REPRESENTATIVE IN CONGRESS FROM

THE STATE OF FLORIDA

Mr. Chairman and Members of the Committee, thank you for holding this hearing

on the effect that Hurricane Katrina has had on the supply and prices of gasoline

in the United States. Last month, Congress passed a massive energy bill that did

nothing to address the price of gas at the pump. It is unfortunate that it took this

natural disaster to finally get Congress to act on addressing the price consumers

pay at the pump.

Today, we are here to specifically look at the economy of gasoline—a system that

has proven to be fundamentally flawed, even before Katrina devastated our coasts.

It is my hope that we will uncover long term solutions to address the supply and

pricing of gasoline in this process of Congressional hearings and investigations that

are sure to come.

We have all heard the stories of price gauging at the pump—I urge the witnesses

at this hearing today to heed the call of this Congress and keep in mind that America is watching your actions closely to ensure that suppliers of gasoline are not unfairly profiting in this time of national crisis.

Gasoline is unlike any other US commodity. The fuel that every American relies

on in one way or another is impacted by a global market of supply and demand

which alters the prices of products from Tupperware to jet fuel. The refining process

is one of the steps in the pricing of gasoline. Some Members of the House of Representatives argue that relaxing the laws that protect consumers will assist in easing this severely bottlenecked market. I don’t believe that approach will really address the problem or tell us why the years of bottlenecks and tight supplies have

allowed the refineries to maintain and increase their profit margins. The Members

of this Committee must be aware that opportunistic exploitation of consumer protections will not be tolerated by the American people.

44

Today, it is as clear as it has ever been that we are unable to drill our way out

of oil and gas dependence. While solutions to short term disruption solutions are

needed at this time to help address the impact of Hurricane Katrina, we must look

to solutions that will affect the long term energy markets and keep in our minds

the economic, environmental and homeland security of our children’s and grandchildren’s futures. I am eager to work with the Members of this committee towards

the goal of finding real solutions to obstacles that will be outlined in the witness’s

testimonies.

I also look forward to hearing from the courageous Governors of Louisiana and

Mississippi. All of America appreciates their leadership through these difficult and

trying times for their state and our nation. Floridians are said to have PhD’s in hurricane preparedness, and it is with this knowledge that we will help in the recovery

process for Hurricane Katrina in any way we can.

Mr. Chairman, I urge the Committee to put partisan politics aside; we Floridians

cannot wait through a year of hearings and investigations to find out what failures

occurred in the preparation and response to Katrina as hurricane season is not yet

over for us. We must get to the bottom of this as no state stands to gain or loose

from learning the lessons of Katrina and the aftermath quickly.

Mr. Chairman, again, I thank you and the Members of this Committee for the

opportunity to discuss gas prices today and look forward to working with you on this

and many other issues in the future.

Chairman BARTON. The Chair now is going to recognize its first

panel. We appreciate your patience, gentlemen.

I think it shows the importance of this hearing that, of the 56

members of the Energy and Commerce Committee, 45 have made

an appearance and, of those 45, over 30 have made opening statements. That shows the concern the country has about what has

happened and is worried and concerned about the response of the

Federal Government to the catastrophe. So I do thank you again

for your patience.

We are going to recognize David Garman, who is the Under Secretary for Energy, Science and Environment at the Department of

Energy for 7 minutes; and then we will go to Mr. Caruso, Mr.

Seesel and Mr. Moran. Thank you, gentlemen, for waiting.

Secretary Garman, you are recognized for 7 minutes.

STATEMENTS OF HON. DAVID K. GARMAN, UNDER SECRETARY

FOR ENERGY, SCIENCE AND ENVIRONMENT, DEPARTMENT

OF ENERGY; HON. GUY F. CARUSO, ADMINISTRATOR, ENERGY INFORMATION ADMINISTRATION; JOHN H. SEESEL,

ASSOCIATE GENERAL COUNSEL FOR ENERGY, FEDERAL

TRADE COMMISSION; AND KENNETH P. MORAN, ACTING DIRECTOR, OFFICE OF HOMELAND SECURITY, ENFORCEMENT

BUREAU, FEDERAL COMMUNICATIONS COMMISSION

Mr. GARMAN. Mr. Chairman and members of the committee,

apart from the human dimension, which weighs heavily on all of

our minds, Hurricane Katrina had a devastating impact on energy

infrastructure, prices and markets.

For example, Katrina shut in roughly 1.4 million barrels of crude

oil production, roughly 95 percent of all U.S. Gulf production.

Katrina halted 25 percent of all gulf coast refining, or approximately 2 million barrels per day. Ten refineries were totally shut

down, and six were reduced in their runs. Some undamaged refineries suffered from crude oil supply shortfalls.

Approximately 2.7 million households were without electricity at

one point, in addition to the loss of electricity to refineries and

pipelines. Three major pipelines carrying crude and petroleum

45

products to large portions of the Nation were out of service, with

estimates of repairs ranging from days to weeks.

Mindful of these impacts, we did the following:

First, the Department of Energy, within 48 hours of receiving the

first requests, approved loans of crude oil from the Strategic Petroleum Reserve to refineries, 12.6 million barrels as of yesterday

afternoon. Some of that oil is being delivered as we speak.

Second, the President has authorized the release and sale of oil

from the Strategic Petroleum Reserve. The Department has issued

the formal notice of sale of an initial 30 million barrels of oil yesterday. Bids will be opened on Friday, assessed over the weekend,

and we should be in a position to issue a notice of apparently successful offerers by Monday, September 12. Oil will flow from that

release and sale as soon as the winning bidders provide for the oil’s

transportation.

Third, the Department has worked with the International Energy Agency to coordinate the release of an additional 33 million

barrels of crude oil and refined product from reserves of our nations to provide additional supply to global markets.

Fourth, DOE’s Office of Electricity Delivery and Energy Reliability began working with other Federal, State and local officials,

utilities, municipalities, power marketing administrations and cooperatives even before the storm struck to accelerate the restoration of power. This was important not only to the affected populations but the Nation as a whole since the refineries and the product pipelines depend on this power to deliver gasoline, diesel and

other petroleum products to demand.

Fifth, the Environmental Protection Agency issued a nationwide

waiver to allow the use of winter blend reformulated gasoline in

stock to increase the flow of refined products to consumers. EPA is

also allowing the use of diesel fuel with sulfur content exceeding

the 500 parts per million limitation.

Sixth, the Department of Homeland Security temporarily waived

Jones Act restrictions on transportation fuel supplies by tanker.

Seventh, the Treasury Department announced that off-road diesel would be permitted for road use to bring more diesel into the

market during this emergency.

Eighth, the Department of Transportation waived the restriction

on hours that can be driven by truckers to keep goods and services

and products, including energy, moving.

Ninth, the President and the Secretary have repeated their calls

for all Americans to use energy wisely. Energy efficient practices,

exercised by millions of American consumers, can have a substantial impact.

Tenth, the Navy and Coast Guard are surveying and, as necessary, clearing shipping channels of sunken obstructions that

would affect gasoline or crude shipments.

While we still face a difficult situation, there are encouraging developments. Four hundred thousand barrels of the lost production

in the gulf have already been restored. The latest assessments from

the Department of the Interior suggest that 99 percent of prior

platform production will eventually be restored.

Of the 10 refineries that were completely shut down, we expect

four to be operational within the next week or so. Of the six that

46

went to reduced runs, all are expected to be fully operational by tomorrow. I am informed that five more that were undamaged are

now receiving supplies of oil from the Strategic Petroleum Reserve.

Of the 2 million barrel a day of refining capacity lost, roughly half

that capacity is now back on line.

Meanwhile, we understand that over 20 tankers carrying gasoline are currently en route to the United States from Europe. I am

also informed that, as of this morning, power has been restored to

over 1.8 million households of the 2.7 million households without

power at peak impact. We are most grateful for the work of thousands of utility crews working nearly nonstop, many of whom who

have been sleeping in their trucks while they have not been working to restore power.

Also of good news for all consumers around the Nation is the fact

that all three of the major pipelines are back in service at full or

nearly full capacity far sooner than most observers had predicted.

In the near term, we need to get these production and refining facilities back on line while encouraging Americans to use energy

wisely.

Again, millions of American consumers can have an impact by

doing simple things such as consolidating trips, keeping their vehicles in tune, keeping tires at their proper inflation and by driving

more slowly and smoothly.

In the longer term, new supplies of petroleum and alternatives

to petroleum, including hydrogen fuel as the President proposed

back in January, 2003, along with provisions of the just-passed energy bill can help us overcome these challenges.

I would be pleased to answer any questions the committee might

have either today or in the future. Thank you, Mr. Chairman.

[The prepared statement of Hon. David Garman follows:]

PREPARED STATEMENT OF HON. DAVID GARMAN, UNDERSECRETARY, DEPARTMENT OF

ENERGY

Mr. Chairman and Members of the Committee, thank you for the invitation to appear this morning on the subject of Hurricane Katrina and its effect on energy supply and prices.

Let me start by saying this is a tragedy of monumental proportions. Hurricane

Katrina is one of the worst national disasters in our nation’s history.

It has been responsible for an unknown number of deaths—possibly in the many

thousands.

And for those who survived, it has utterly destroyed homes, schools, businesses

and livelihoods. For them, it will be years before life returns to normal—if it ever

can. It is also the largest single disaster impacting the energy infrastructure of this

country.

At the Department of Energy, our focus is on two aspects of the events in the Gulf

of Mexico.

First, obviously, we are concerned about the direct impact of the storm on the

residents of Louisiana, Mississippi, Alabama, Florida and other affected states.

And because the Gulf Coast plays such a critical role in supplying much of the

nation’s energy needs, we are also concerned about the hurricane’s broader effect

on the country as a who le and on international markets.

I want you to know at the outset that Secretary Bodman has committed the Department of Energy to doing everything in its power to meet the immediate needs

of those affected by Hurricane Katrina—both on the Gulf Coast and throughout the

rest of the country—and we have marshaled all of our resources to fulfill that commitment.

Within the last week, the Department of Energy dispatched employees to emergency response centers throughout the southeastern United States to coordinate

power restoration efforts. DOE staff are working closely with state and local offiVerDate 11-MAY-2000 09:17 Nov 08, 2005 Jkt 000000 PO 00000 Frm 00050 Fmt 6633 Sfmt 6621 24246.TXT HCOM1 PsN: HCOM1
47

cials, first responders, and power companies to begin restoring power and fuel supplies as quickly as possible, wherever possible.

In the immediate aftermath of Katrina, upwards of 2.7 million customers were

without electric power in Louisiana, Mississippi, Alabama, Florida, Georgia, and

Tennessee. One week ago, for instance, more than 90 percent of the residents in the

state of Mississippi had no electricity—including those hundreds of miles from

where the hurricane made landfall.

Power has been restored in many of these areas. As of 11 a.m. yesterday, fewer

than a million customers remained without electric power due to Hurricane Katrina.

In Louisiana and Mississippi, 971,360 were without power. Alabama has essentially

restored all customers without electric power.

In some places—and not just New Orleans—it may be weeks, perhaps months, before power can be restored. In Biloxi, Gulfport, and elsewhere on the Coast, the electricity infrastructure of transmission, substations, and distribution has been damaged or destroyed. Those capabilities must be restored and rebuilt, and this cannot

be done overnight. The publicly owned municipal and cooperative utilities in these

states, with the help of other utilities and contractors from many states, are undertaking the massive job of restoring the system. But it will take time.

A number of challenges are hindering this effort. One is just the massive scope

of the destruction, as we have all seen on television. Not to minimize the suffering

caused by the hurricanes that battered Florida last year, but Hurricane Katrina’s

devastation is in an entirely different category. Upon seeing what Katrina had

wrought on the Mississippi coast, Governor Barbour remarked that it is what Hiroshima must have looked like 60 years ago. I don’t think anyone could accuse the

Governor of hyperbole.

On top of the sheer devastation caused by the storm as it passed through, the

subsequent flooding in New Orleans, Mobile, and elsewhere adds further huge complications.

Well over 10,000 crews have arrived throughout the affected region to work on

electricity restoration. As they finish their work in certain places, they move on to

the next ones. As Florida utilities have completed their work, crews from these companies and their contractors have moved to the Gulf Coast to support restoration

work. Crews have come from many states and Canada to support utility restoration.

But this is a massive area we are talking about, and a number of factors are slowing progress. At this point inaccessibility and the extensive damage from flooding

and saltwater are the biggest challenges. We have heard from Entergy that its single biggest problem to restoring power in the greater New Orleans area is the lack

of food and water for its repair crews, who have literally been sleeping in their

trucks.

The affected states face a massive challenge, but we will work with state and local

leaders, with utilities and power companies, and with anyone else to try to restore

power wherever possible as quickly as possible.

While the Department works with people on the ground to restore power, we are

also monitoring the effects of the storm on the nation’s energy markets.

Nine refineries that supply nearly 10 percent of the nation’s gasoline were shuttered by the storm.

Thousands of energy industry workers in the Gulf Coast had to be evacuated.

Oil and Gas production rigs and other infrastructure were damaged.

The pipelines supplying Gulf Coast gasoline and natural gas to the Midwest and

Eastern part of the country were affected, as well. However, damage was not as severe as we at first had feared.

One week after the storm, these are back at full or near full capacity. Meanwhile,

95 percent of the nation’s refining capacity should be operating by mid-September.

Despite this news, it is not clear how long it will be before energy production and

distribution in the Gulf is back to normal.

The Department of Energy and the Bush Administration are very concerned about

the effects of this disaster on already tight markets.

And we are concerned about the impact of higher gasoline prices on the average

American.

Accordingly, we have taken a number of steps to try to alleviate the situation.

Last week, the Department of Energy entered into separate agreements with several energy companies to loan more than 12 million barrels of oil from the Strategic

Petroleum Reserve in order to limit disruptions in crude supplies for refineries.

The crude oil will be loaned from the SPR under short-term contractual agreements and returned to the Reserve once supply conditions return to normal.

I want to point out we have taken very quick action in this regard. Oil was on

the way to refineries within 48 hours of loan requests being made.

48

Further, in the aftermath of the storm, we outlined the impact on our energy sector for the members of the International Energy Agency to determine whether it

was necessary to supply additional crude oil and gasoline products to the market.

On Friday, the members of the IEA made a historic decision to provide crude oil

from each member’s strategic reserves.

Under this agreement, IEA member countries have agreed to make available 60

million barrels, or an average of 2 million barrels per day, for 30 days beginning

immediately. This will consist of both oil and gasoline, with an emphasis on refined

product.

The United States is a member of the International Energy Agency, of course, so

to meet our obligations as a member of the IEA, we will be releasing 30 million barrels of crude oil from the United States Strategic Petroleum Reserve.

In addition to these efforts, I want to add that the Environmental Protection

Agency has granted a nationwide waiver for fuel blends to make more gasoline and

diesel fuel available throughout the country. The EPA action will permit the early

use of wintertime gasoline blends and, we expect, will take some pressure off the

price of gas.

On top of this, I want to point out that the President has made an appeal to the

American people to conserve gasoline during this time of tightened supply. There

are a number of things that people can do to reduce their use of gasoline, such as

carpooling, driving slower, bundling errands together to make fewer trips, and telecommuting.

One final point I want to make concerns the anecdotal reports all of us have

heard about price gouging in various parts of the country in the days after Katrina

hit. Our Department and our Administration take the subject of excessive pricing

very seriously. It is unconscionable that Americans would seek to exploit a tragedy

for profit.

DOE has established a web site where Americans can report gasoline price

gouging. All complaints registered with the Department of Energy will be collected

and transmitted to the Federal Trade Commission, U.S. Department of Justice, and

individual State Attorneys General for investigation and prosecution where appropriate.

Chairman Barton—members of the Committee—I want to thank you for the opportunity to come before you this morning to apprise you of our Department’s efforts

in the wake of Hurricane Katrina.

I would be happy to respond to any questions you and the other members may

have.

Chairman BARTON. We thank you, Mr. Secretary.

We now want to hear from the Honorable Guy Caruso, who is

the Administrator of the Energy Information Administration.

Welcome, Administrator Caruso. You are recognized for 7 minutes, also.

STATEMENT OF HON. GUY F. CARUSO

Mr. CARUSO. Thank you very much, Mr. Chairman, for this opportunity to present the Energy Information Administration’s

views and analysis of energy markets in the aftermath of Katrina.

As you know, EIA is the independent statistical and analytical

agency in the Department of Energy; and we do not promote, formulate or take positions on policy issues.

As the Chairman has mentioned, even before the tragic hurricane, crude oil and gasoline prices were already at high levels. On

August 29, average gasoline prices were $2.61 per gallon, and diesel prices were $2.59 per gallon. Crude oil prices on the futures

market had increased by nearly 60 percent over the same period

compared with last year, due in large part to substantial growth

in world oil demand, which has used up much of the world’s productive capacity. Refineries have been running at high levels of utilization in many parts of the world, including the United States;

and the high production of distillate fuels and higher-than-average

refinery outages this summer added to the tight gasoline markets.

49

Natural gas markets were also tight on the eve of the hurricane

and futures prices were $10.85 per million Btus or more than double year earlier levels.

Hurricane Katrina has had a significant impact, particularly on

gasoline, diesel fuel and natural gas prices. For example, EIA’s survey data released yesterday showed that the national average price

of regular gasoline prices rose 46 cents per gallon, to $3.07, between August 29 and Labor Day, while diesel prices rose 31 cents,

to $2.90 per gallon. While prices rose throughout the country, the

East Coast experienced the largest price increase in both fuels.

The near-term outlook for the oil and gas markets will depend

on a number of factors, most importantly the timing and pace of

the recovery of the infrastructure and operations in the Gulf.

Production of both oil and natural gas in the Gulf of Mexico has

already recovered substantially from the peak impacts, as Mr.

Garman has pointed out in his statement.

The infrastructure has been coming back more quickly than

many had expected, as Mr. Garman has mentioned, and, fortunately for natural gas markets, we are in the shoulder season, between the period of high demand for electricity generation for air

conditioning and the high demand for heating fuel.

The level of natural gas in storage remains above the 5-year average, but the disruption in operations due to Katrina is likely to

reduce the amount put in storage during the remainder of the injection season.

Today, we released our September Short-Term Energy Outlook;

and, as you can imagine, the uncertainty in this outlook, which

goes out to the remainder of 2006, is greater than ever. Nevertheless, we consider three cases in this current outlook based on the

speed of recovery from the effects of Hurricane Katrina. We include

in that report a slow, a medium, and a fast recovery case. The fast

recovery case assumes a very favorable set of circumstances for returning operations to normal, while the slow recovery case assumes

that significant impacts on oil and natural gas production and delivery continue at least into November. In all cases, normal operations are achieved or nearly achieved by December. We assume

that the loans and releases of crude oil and products from Government stocks will help to offset the price increases due to Katrina.

The WTI crude oil price averaged $65 per barrel in August and

reached $70 in peak trading last week. Crude oil prices have retreated from those heights in recent days, and we expect they will

trend downward in the fourth quarter of 2005, although staying

above $60 for the remainder of the year and into 2006.

The national average price of unleaded gasoline was $2.49 per

gallon in August, with prices generally rising throughout the

month. Projected gasoline prices in the near term are very sensitive

to the assumptions that I have mentioned in the three cases. Gasoline prices, however, should ease in the coming weeks as supply

improves. We project $2.60 per gallon gasoline in the fourth quarter and an average price for 2006 of $2.40.

The heating oil prices, however, will show a substantial increase

this winter compared with last year. Assuming normal winter

weather, heating oil prices are expected to be about 30 percent

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higher this winter compared with last winter in the medium recovery case. Of course, this assumes a normal winter.

Natural gas prices probably will be impacted even more than

heating oil and are likely to stay tight over the next couple of

months as the heating season begins. We anticipate the September

spot price for natural gas to average about $13 dollars per million

Btus and about $11.50 per million Btus in the fourth quarter.

Based on the present trends, natural gas price this winter are expected to be significantly higher than last winter.

In sum, Mr. Chairman, the impact of Katrina on energy prices

has been to make a tight market situation for oil and natural gas

even more challenging for the industry and for consumers.

This concludes my statement. I would be happy to answer any

questions now or at any time that you deem appropriate, sir.

[The prepared statement of Hon. Guy Caruso follows:]

PREPARED STATEMENT OF HON. GUY CARUSO, 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 to discuss gasoline prices in the United States and recent developments in world oil markets.

The Energy Information Administration (EIA) is the independent statistical and

analytical agency within the Department of Energy. We are charged with providing

objective, timely, and relevant data, analysis, and projections for the Department of

Energy, other government agencies, the U.S. Congress, and the public. We do not

take positions on policy issues, but we do produce data and analysis reports that

are meant to assist policymakers determine energy policy. Because the Department

of Energy Organization Act gives EIA an element of independence with respect to

the analyses that we conduct and publish, our views should not be construed as representing those of the Department of Energy or the Administration.

The devastation of Hurricane Katrina included offshore production, refineries, and

loss of power to run pipelines and otherwise-working refineries. Damage assessments are ongoing but still incomplete. With the current tight global petroleum

market, gasoline and distillate prices have risen sharply. How far and how long they

remain elevated will depend on the severity of damage to petroleum facilities. Our

understanding of the situation is rapidly evolving, and I will discuss this in my oral

remarks. This written testimony focuses on events prior to the hurricane and challenges to gasoline markets following the recovery.

Even prior to Hurricane Katrina, petroleum prices, including gasoline, were setting new records as crude oil prices climbed. Gasoline prices as of August 29 were

$2.61, which was 73 cents per gallon higher than a year ago, and, on average for

the month, were 58 cents per gallon higher. Yesterday’s prices, which will be released late this afternoon, will undoubtedly be—much higher given the significant

disruptions experienced due to Hurricane Katrina. A consumer who drives about

1,000 miles per month in a car that gets about 20 miles per gallon paid almost $30

more for that car’s fuel during August this year than last August. Businesses and

government budgets are also affected, as it costs more to fill their vehicle fleets.

The remainder of this testimony describes the fundamentals affecting petroleum

prices, focusing on crude oil and gasoline. The underlying market situation today,

even before Katrina, is one in which the spare crude oil production, refinery, and

tanker capacities that existed for more than a decade prior to 2003 were reduced

more quickly than EIA or other analysts anticipated. Little spare capacity, both upstream and downstream, not only supports higher prices, but they also add to price

volatility, since any upset to supply/demand balances regionally cannot be resolved

quickly. Restoring spare capacity will not be easy or rapid, because an increase in

capacity takes time and investment, and growing demand will require capacity increases just to maintain current cushions, which suggests that high prices and potential volatility will be with us for some time.

Changes in the gasoline price at the pump are driven mainly by changes in crude

oil prices and changes in wholesale gasoline prices. Crude oil cost represented nearly 60 percent of the gasoline price this summer and explains much of the variation

in gasoline price. Crude oil prices are driven and set by international markets. The

wholesale price of gasoline or its spot price is influenced first by crude oil but also

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by seasonal demand variations and by regional refinery and distribution supply and

demand balances. Retail price changes generally lag behind wholesale price

changes.

INTERNATIONAL CRUDE OIL MARKETS

Turning to crude oil prices first, Figure 1 shows that the current crude price increase began in 2004, when crude oil prices almost doubled from 2003 levels, rising

from about $30 per barrel at the end of 2003 to peak at $56.37 on October 26, 2004.

After falling back briefly, prices then continued to rise in 2005.

This is a significant change from what we experienced during much of the 1980s

and 1990s. For most of the time since the early 1980s, we have lived in a market

in which spare crude oil production, refining, and delivery system capacity existed.

Crude oil suppliers outside of the Organization of Petroleum Exporting Countries

(OPEC) produce at maximum rates (i.e., no surplus production capacity) for economic reasons, thus, the world’s surplus crude oil production capacity resides in

OPEC (mainly Saudi Arabia). The large growth in non-OPEC capacity and production in areas like the North Sea and Alaskan North Slope, along with softening demand from high prices, led to major cuts in OPEC production in the 1980s, creating

large capacity surpluses. As demand grew through the 1990s, OPEC production increased, but new productive capacity was not added. Short-term imbalances between

supply and demand occurred and we experienced some price swings, but those imbalances did not last long, as capacity generally existed to remedy the situation

within a year.

During most of the 1990s, the West Texas Intermediate (WTI) crude oil price

averaged close to $20 per barrel, but plunged to almost $10 per barrel in late 1998

as a result of the Asian financial crisis slowing demand growth, at the same time

as extra supply from Iraq was entering the market for the first time since the Gulf

War. OPEC producers reacted by reducing production, and crude oil prices not only

recovered, but increased to about $30 per barrel as demand grew in the face of

OPEC production discipline.

Beginning in 2004, world oil demand growth accelerated significantly. For the 10

years prior to 2004, world oil demand growth had averaged 1.2 million barrels per

day. But in 2004, world demand jumped by 2.6 million barrels per day, led by an

unprecedented increase in demand from China of about 1 million barrels per day,

compared to that country’s increase of 0.4 million barrels from 2002 to 2003. This

unusually rapid demand growth along with growth in the United States and the

rest of the world, quickly used up much of OPEC’s available surplus crude oil production capacity (Figure 2). As the world balance between supply and demand tightened considerably, ongoing supply uncertainties associated with Russia, Iraq, and

Nigeria added to market concerns over the availability of crude oil, and prices rose.

In 2005, Iran, Ecuador, and Venezuela added new uncertainties.

Global oil demand is expected to grow more slowly during 2005 and 2006, increasing by about 1.7 to 1.8 million barrels per day. China’s demand is projected to increase by 0.5 million barrels per day and U.S. demand by 0.4 million barrels per

day in 2006. Together, these two areas are projected to account for about 50 percent

of the world’s petroleum demand growth next year.

Crude oil production capacity increases are expected to keep up with these demand increases. Production increases from OPEC members are projected to represent almost one-third of the world production growth next year, and the former

Soviet Union is expected to provide an additional 40 percent of the increase. Other

areas such as the United States and other non-OPEC countries will provide additional production volumes. However, EIA is not projecting much increase in the surplus capacity cushion any time soon. Spare capacity is projected to remain at or

below 1.2 million barrels per day in 2005.

We are facing tight crude oil markets for a number of years. EIA’s Short-Term

Energy Outlook is projecting WTI crude oil prices to remain above $55 through

2006. Even if demand softens or capacity is developed faster than anticipated, statements from OPEC members indicate an intention to keep prices from falling below

$50 per barrel. While high relative to recent years, the price of crude oil, adjusted

for inflation, is still below the levels seen in the early 1980s.

This tight balance results in different behavior and price implications than exhibited by the short-term market imbalances seen for the past 20 years. Instead of high

prices being accompanied by low inventories and expectations for prices to be falling

quickly in the future, today, in both crude oil and product markets, we see high

prices with high inventories. Consumers exhibit similar behavior when they expect

to experience higher prices in the near future. For example, consumers top off their

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gasoline tanks before a bad storm that could limit supplies and drive prices up in

their region.

Prior to Hurricane Katrina, crude oil prices increased about 39 cents per gallon

in summer 2005 over summer 2004, while gasoline prices only increased 34 cents

per gallon (Figure 3). Although refinery and distribution and marketing contributions to gasoline prices were on average lower this summer on average than last

summer, seasonal and local supply conditions affected these refinery contributions

to price gasoline more strongly at the end of the summer, as described next.

U.S. PRODUCT MARKETS

Tightening in other parts of the supply chain beyond crude oil exacerbated product price increases in the United States and in the rest of the world. World refining

capacity utilization increased from 85 percent to 87 percent from 2003 to 2004, driven in large part by increases in demand and utilization in areas like China and

India. While adequate refining capacity is available to meet demand today, the refining system cannot shift quickly to meet unexpected needs. With refinery capacity

running at high utilization levels in many parts of the world, including the United

States, product balancing is frequently done through international trade, which

means products must travel long distances, stretching out the time it takes to resolve imbalances. This sluggish response puts additional pressure on product prices

beyond the effect of high crude oil prices and can result in price spikes if a regional

shortage evolves.

Product markets in the United States provide an example of various supply and

demand balancing effects on price. In the United States, the spread between wholesale product prices and crude oil prices is often higher in spring and summer than

during the rest of the year. Gasoline is the highest volume product refineries

produce, and spring and summer are when gasoline demand is typically the highest.

Gasoline spreads typically increase at this time of year, lifting overall refinery margins to their highest seasonal level. Distillate product (diesel and heating oil)

spreads are usually lower in spring and summer, but they represent only about half

as much volume as gasoline production.

U.S. petroleum product price spreads were very unusual in spring and summer

2005. Wholesale gasoline price spreads through July were slightly above the average

for the past 5 years, but lower than spreads seen in 2004. Heating oil and diesel

spreads were unprecedented, exceeding gasoline spreads from April through July.

This unusual distillate market was seen throughout the world as distillate demand

grew rapidly and ultra-low sulfur diesel demand in Europe pulled on tight supplies.

Distillate prices remained above gasoline prices in Europe as well as Asia. This unusual distillate market ultimately affected gasoline.

Gasoline and distillate products are produced together at the same refineries. In

the spring, the U.S. inventories for gasoline were high and prices were lower than

for distillates. Distillate inventories were low, and the price incentives caused refiners to respond by producing unusually high yields of distillate, which resulted in reduced gasoline yields. The consequence was that U.S. distillate inventories rose from

below normal to above normal, and gasoline inventories fell from above normal to

normal into July.

In addition to the switch in yield patterns, unplanned refinery outages in July

and August added to the tightening gasoline market. The high demand summer season is when U.S refiners run close to or at full utilization rates, but outages always

occur. The degree of outages varies, and preliminary data indicate a higher level

than average occurred in July and August of this year. Had refineries been able to

run at the same utilizations as last year, they would have run about 200 thousand

barrels per day more crude oil, and the gasoline inventories in the July/August period would now be in the middle of their seasonal range, even with the higher-thanusual distillate yields.

The loss of supply and rapid decline in gasoline inventories starting in July resulted in an increase in gasoline price spreads (Figure 4). Higher gasoline spreads

encourage more gasoline imports, and some refiners may have shifted yields to

produce more gasoline, but with the peak summer driving season at an end, and

winter heating needs ahead, we would expect a continued focus on maximizing production of distillates.

The high level of refinery outages in July and August increased pressure on gasoline prices, adding possibly 8 to 15 cents per gallon. Wholesale prices were poised

to decline as some of the refinery problems were being resolved, but then the Gulf

Coast was hit by Hurricane Katrina. Both spot market prices and near-month futures prices for gasoline and distillate products have risen dramatically in the days

following the hurricane. Retail prices, which follow wholesale prices with a lag, are

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also rising. We expect that prices will begin to fall back as production and refining

capacity are restored, although the pace of restoration is at present highly uncertain. While the gasoline price and supply situation will also be helped by the seasonal decline in U.S. gasoline demand after Labor Day, seasonal trends in crude oil

markets will work in the opposite direction as world crude oil demand begins to increase in the fall with the onset of the Northern Hemisphere heating season.

Looking ahead to next summer, high crude oil prices are expected to continue to

support high prices for all petroleum products, including gasoline. In addition, gasoline prices may see some additional pressure since the industry is moving quickly

to eliminate methyl tertiary butyl ether (MTBE). While the removal of the oxygen

content requirement in the recently-enacted Energy Policy Act of 2005, without

some accompanying liability protection, may have hastened companies’ decisions to

remove MTBE, companies were moving in that direction anyway. Removing the oxygen content requirement will help consumers in the long run by providing more supply options for refiners and blenders. In the short run, however, the loss of gasoline

production capability and some potential sources of gasoline imports that will occur

when phasing out MTBE cannot be made up easily. The distribution system will

also have to adjust, depending on how the industry shifts. The result is that we may

see increased volatility during the transition, as we have seen with other fuel specification transitions.

In addition to potential supply problems due to removal of MTBE, the United

States will begin the ultra-low sulfur diesel program. In June 2006, suppliers will

begin providing diesel fuel to the on-road market that contains less than 15 parts

per million sulfur. Following a full recovery from Katrina, production capability to

produce ultra-low sulfur diesel is felt to be adequate, but the industry is still struggling to determine how to deliver the product through its pipeline and storage tank

system without contamination. Many issues remain to be resolved, implying this

transition may also add pressure to the system, and can be expected to affect gasoline as well as distillate prices.

Next year is also the first year of the renewable fuel standard established under

the new energy bill, and while meeting the total volumes of ethanol required under

this standard should not be difficult, a credit trading program must be in place and

operating smoothly to enable each gasoline supplier to meet its obligation. It is our

understanding that Environmental Protection Agency (EPA) and the industry are

working towards this goal, but little time exists for EPA and the industry to get

everything prepared.

One more specification change slated for 2006 is the final phase of the Tier 2 lowsulfur gasoline program for refiners and importers, who will be providing gasoline

with an average sulfur content of 30 parts per million or less, which is less than

one-tenth the average sulfur content before the program began. With many refiners

already producing gasoline at 30 parts per million, this last phase may be less challenging than the removal of MTBE and the start of ultra-low sulfur diesel. It is one

more additional strain on the supply system, however. For example, if a refinery

loses a desulfurization unit, the stricter specifications may result in no production

of gasoline, whereas, in the past, the refinery might have been able to produce more

volumes at higher sulfur levels for a longer time.

CONCLUSION

In conclusion, the world is experiencing an underlying change in petroleum markets with the development of tight supplies that will not likely change quickly. Hurricane Katrina has significantly exacerbated the near-term supply tightness, especially in the U.S. market for gasoline and diesel fuel. Even after production and refinery operations fully recover from the effects of Katrina, capacity increases will be

needed throughout the supply chain to keep up with demand. Until the world returns to more spare capacity, particularly in crude oil supply, crude oil and petroleum product prices will remain high. Even if the balance should relax unexpectedly, OPEC members have expressed an interest to maintain prices well above their

prior target range. While the system currently can meet demand, it cannot respond

quickly to unexpected changes. We will see shifts in imbalances from one region of

the world to another and from one product to another, as we saw with gasoline and

distillate in the United States. The gasoline market in the United States is subject

not only to the higher crude oil prices and generally tight market conditions, but

also to volatility from continuing specification changes down the road, with next

summer presenting a number of such specification challenges.

This completes my testimony, Mr. Chairman. I would be glad to respond to any

questions you and the other Committee members may have.

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Chairman BARTON. Thank you, Mr. Director.

We now want to hear Mr. John Seesel, who is the Associate General Counsel for Energy at the Federal Trade Commission.

Welcome, Mr. Seesel; and you are recognized for 7 minutes.

STATEMENT OF JOHN H. SEESEL

Mr. SEESEL. Thank you, Mr. Chairman.

Good afternoon, Mr. Chairman and members of the committee.

I am John Seesel, the Associate General Counsel for Energy at the

Federal Trade Commission. I am pleased to have this opportunity

to discuss the FTC’s actions to promote competition in the petroleum industry and to protect consumers who use gasoline, diesel

fuel and the other petroleum products so vital to our Nation’s economy.

The Nation, indeed the world, continues to witness the heartrending destruction and misery that Hurricane Katrina left in its

wake. The Commission mourns the loss of life and the many other

tragedies that have unfolded in the past 10 days in the States

along the gulf coast.

Today’s hearing focuses on one of Katrina’s most important economic consequences, the storm’s impact on the Nation’s gasoline

supply and on gasoline prices. I want to assure this committee that

the FTC is acutely aware of the pain that high gasoline prices that

we have experienced recently has caused American families and

businesses, and we are continuing our intense scrutiny of conduct

in the petroleum industry in the aftermath of Katrina.

The FTC will proceed aggressively against any violations of the

antitrust and consumer protection laws that it enforces. We are on

high alert.

The Commission is committed to maintaining competitive markets in refined petroleum products. We achieve this objective

through a three-pronged approach: vigorous law enforcement

against anti-competitive mergers and business behavior, careful

study of various developments with competitive implications for the

petroleum industry, and an ongoing project to monitor gasoline and

diesel prices in order to detect unusual price movements.

A significant recent development in the FTC’s law enforcement

program is the issuance of dual consent orders in late July designed to remedy the anti-competitive effects of Unocal’s allegedly

deceptive conduct in connection with the development of reformulated gasoline in California, as well as the alleged anti-competitive

effects that were anticipated from Chevron’s acquisition of Unocal.

The Commission’s first complaint alleged that Unocal had deceived the California Air Resources Board, CARB for short, in developing standards for reformulated gasoline. The Commission

challenged Unocal’s misrepresentation that certain technology was

in the public domain while it pursued patents on that technology

to enable it to charge substantial royalties. The proposed merger

between Chevron and Unocal raised the concern that if Chevron

had acquired Unocal’s patents, Chevron could have obtained sensitive information and thus could have used this information and

power to facilitate coordination among competitors to raise gasoline

prices.

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The two consent orders embodying Chevron’s commitment not to

enforce the Unocal patents provided a significant victory for consumers. The Commission has estimated that the main relief provided by these orders could save California gasoline consumers

around $500 million dollars per year. The FTC will continue its energetic enforcement of the antitrust laws against collusive and monopolistic practices in this country.

In aid of its extensive law enforcement work, the FTC also conducts careful research on key competitive issues in the petroleum

industry. I especially commend our recent report on gasoline price

changes to the committee’s attention. The report sets forth in detail

the numerous supply, demand and competitive factors that influence gasoline prices or cause gasoline price spikes.

The report shows that the market for gasoline functions as any

other market is expected to when supply is significantly constrained and demand keeps rising. As important, the report also

shows that market forces in the form of changes in how much gasoline can producers supply and consumers demand can ameliorate

price increases.

A related FTC study issued last year was our staff report on

mergers, structural change and antitrust enforcement in the petroleum industry over the last 20 years.

The third prong of our approach is a continuous effort by our

staff to identify unusual gasoline and diesel price movements. Our

economists monitor daily pricing data from 20 wholesale and approximately 360 retail areas across the Nation. If the statistical

model that they apply detects any unusual price movement that

cannot be explained by refinery outage, a pipeline break or another

business related cause, the FTC staff, in consultation with other

Federal and State officials, will examine whether a law violation

has occurred.

The Commission is acutely aware of the escalating prices that

consumers pay for gasoline, and we will examine any information

that we receive about pricing to determine whether there is a basis

for legal action under the anti-collusion and anti-monopoly statutes

that the FTC enforces. For those complaints that are not a violation of Federal law, the State attorneys general appear to have

begun major multi-State initiatives to pursue any such complaint

under State statutes.

The energy industry, especially the petroleum sector, has been a

centerpiece of FTC antitrust enforcement for decades, and the

Commission expects to devote substantial resources to policing the

competitiveness of the industry in this time of economic duress for

many of our fellow citizens. Moreover, as it always does, the Commission will give State and local officials as much assistance as it

can as those authorities carry out their responsibilities.

Thank you again for the opportunity to present the FTC’s views,

Mr. Chairman. I will be happy to answer any questions.

[The prepared statement of John H. Seesel follows:]

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1This written statement represents the views of the Federal Trade Commission. My oral presentation and responses to questions are my own and do not necessarily represent the views of

the Commission or any Commissioner. 2See Minerals Mgmt. Serv., U.S. Dep’t of the Interior, Release No. 3328, Hurricane Katrina

Evacuation and Production Shut-in Statistics Report as of Tuesday, August 30, 2005 (2005), at http://www.mms.gov/ooc/press/2005/press0830.htm. 3FEDERAL TRADE COMMISSION, GASOLINE PRICE CHANGES: THE DYNAMIC OF SUPPLY, DEMAND, AND COMPETITION (2005) [hereinafter GASOLINE PRICE CHANGES], available at http://

www.ftc.gov/reports/gasprices05/050705gaspricesrpt.pdf. 4 BUREAU OF ECONOMICS, FEDERAL TRADE COMMISSION, THE PETROLEUM INDUSTRY: MERGERS,

STRUCTURAL CHANGE, AND ANTITRUST ENFORCEMENT (2004) [hereinafter PETROLEUM MERGER

REPORT], available at http://www.ftc.gov/os/2004/08/040813mergersinpetrolberpt.pdf. 5See FTC, Oil and Gas Industry Initiatives, at http://www.ftc.gov/ftc/oilgas/index.html. 6 An ‘‘unusual’’ price movement in a given area is a price that is significantly out of line with

the historical relationship between the price of gasoline in that area and the gasoline prices prevailing in other areas.

PREPARED STATEMENT OF JOHN H. SEESEL, ASSOCIATE GENERAL COUNSEL FOR

ENERGY, FEDERAL TRADE COMMISSION

I. INTRODUCTION

Mr. Chairman and members of the Committee, I am John Seesel, the Federal

Trade Commission’s Associate General Counsel for Energy. I am pleased to appear

before you to present the Commission’s testimony on FTC initiatives to protect competitive markets in the production, distribution, and sale of gasoline, and to discuss

an important recent Commission study on the factors that affect gasoline prices. 1

The petroleum industry plays a crucial role in our economy. Not only do changes

in gasoline prices affect consumers directly, but the price and availability of gasoline

also influence many other economic sectors. No other industry’s performance is more

deeply felt or carefully scrutinized.

Gasoline prices are among the most visible prices in our complex economy. Consumers closely follow gasoline prices, and in recent months these prices have experienced dramatic increases. In recent weeks, prices of gasoline have exceeded $3.00

a gallon in some markets. Despite higher prices, demand for gasoline continues to

grow, increasing at a 1.6 percent rate over the most recent four-week period for

which data are available (August 19), over that same period for last year. Gasoline

inventories remain at the lower end of the average range. These rising prices command our attention.

On top of this tight market, Hurricane Katrina has temporarily disrupted an important source of crude oil and gasoline supply. At one point, over 95 percent of Gulf

Coast crude oil production was shut in, and numerous refineries and pipelines were

either damaged or without electricity.2 Because of this massive supply disruption,

price relief has been and will be delayed.

The FTC has been and remains vigilant regarding anticompetitive conduct in this

industry. Recent activity includes, on June 10, 2005, the acceptance of two consent

orders that resolved the competitive concerns relating to Chevron’s acquisition of

Unocal and settled the FTC’s 2003 monopolization complaint against Unocal. The

Unocal settlement alone has the potential of saving billions of dollars for consumers

nationwide in future years. In addition, in early July 2005, the Commission published its study of the factors that affect gasoline prices.3 This study grew out of

conferences of industry, consumer, academic, and government participants held by

the Commission over the past four years, as well as years of research and experience, and sheds light on how gasoline prices are set.

In 2004, the FTC staff published a study reviewing the petroleum industry’s

mergers and structural changes as well as the antitrust enforcement actions the

FTC has taken.4 Commission enforcement statistics show that the agency has taken

action against proposed mergers in this industry at concentration levels lower than

in other industries. Since 1981, the FTC has filed complaints against 19 large petroleum mergers. In 13 of these cases, the FTC obtained significant divestitures. Of

the six other matters, the parties in four cases abandoned the transactions altogether after our respective antitrust challenges; one case resulted in a remedy requiring the acquiring firm to provide the Commission with advance notice of its intent to acquire or merge with another entity; and the sixth case is ongoing.

In addition to litigation and industry studies, the Commission also protects consumers through other initiatives. The Commission actively monitors wholesale and

retail prices of gasoline.5 Three years ago, the FTC launched an initiative to monitor

gasoline prices to identify ‘‘unusual’’ movements in prices 6 and then examine whether any such movements might result from anticompetitive conduct that violates Section 5 of the FTC Act. FTC economists developed a statistical model for identifying

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7 Natural causes include movements in crude oil prices, supply outages (e.g., from refinery

fires or pipeline disruptions), or changes in and/or transitions to new fuel requirements imposed

by air quality standards. 8See GASOLINE PRICE CHANGES, supra note 3, at 13. 9Section 7 of the Clayton Act prohibits acquisitions where the anticompetitive effects may

occur ‘‘in any line of commerce or in any activity affecting commerce in any section of the country.’’ 15 U.S.C. § 18. 10Federal Trade Commission Horizontal Merger Investigation Data, Fiscal Years 1996-2003

(Feb. 2, 2004), Table 3.1, et seq.; FTC Horizontal Merger Investigations Post-Merger HHI and

Change in HHI for Oil Markets, FY 1996 through FY 2003 (May 27, 2004), available at http:/

/www.ftc.gov/opa/2004/05/040527petrolactionsHHIdeltachart.pdf.

such movements. The agency’s economists daily scrutinize price movements in 20

wholesale and approximately 360 retail markets across the country. In no other industry does the Commission so closely monitor prices.

This gasoline monitoring and investigation initiative focuses on the timely identification of unusual movements in gasoline prices (compared to historical trends) to

determine if a law enforcement investigation is warranted. If the FTC staff detects

unusual price movements in an area, it researches the possible causes, including

consultation, if appropriate, with the state Attorneys General, state energy agencies,

and the Department of Energy’s (‘‘DOE’’) Energy Information Administration. The

FTC staff also monitors DOE’s gasoline price ‘‘hotline’’ complaints. If the staff concludes that the unusual price movement likely results from a ‘‘natural’’ cause (i.e.,

a cause unrelated to anticompetitive conduct), absent other evidence of potential

anticompetitive conduct, it does not investigate further (although it continues to

monitor).7 The Commission’s experience from its past investigations and the current

monitoring initiative indicate that unusual movements in gasoline prices typically

have a natural cause. FTC staff further investigates unusual price movements that

do not appear to be explained by ‘‘natural’’ causes to determine whether anticompetitive conduct may be a cause. Cooperation with state law enforcement officials is an important element of such investigations.

The Commission’s testimony today addresses the Committee’s inquiries in two

parts. It first reviews the basic tools that the Commission uses to promote competition in the petroleum industry: challenging potentially anticompetitive mergers,

prosecuting nonmerger antitrust violations, monitoring industry behavior to detect

possible anticompetitive conduct, and researching petroleum sector developments.

This review of the Commission’s petroleum industry agenda highlights the FTC’s

contributions to promoting and maintaining competition in the industry. The Commission places a premium on careful research, industry monitoring, and investigations to understand current petroleum industry developments and to identify accurately obstacles to competition, whether arising from private behavior or from public

policies. The petroleum industry’s performance is shaped by the interaction of extraordinarily complex, fast-changing commercial arrangements and an elaborate set

of public regulatory commands. A well-informed understanding of these factors is

essential if FTC actions are to benefit consumers.

The second part of this testimony reviews the learning the Commission has derived from its conferences and research and its review of recent gasoline price

changes. Among other findings, this discussion highlights the paramount role that

crude oil prices play in determining both the levels and the volatility of gasoline

prices in the United States. Changes in crude oil prices account for approximately

85 percent of the variability of gasoline prices.8 When crude oil prices rise, so do

gasoline prices. Crude oil prices are determined by supply and demand conditions

worldwide. The supply of crude is strongly influenced by production levels set by

members of the Organization of Petroleum Exporting Countries (‘‘OPEC’’). Demand

has increased substantially over the past few years, both in the United States and

in the developing economies of China and India. When worldwide supply and demand conditions result in crude oil prices in the range of $70 per barrel, it is not

surprising that we see higher gasoline prices nationwide.

II. FTC ACTIVITIES TO MAINTAIN AND PROMOTE COMPETITION IN THE PETROLEUM

INDUSTRY

A. Merger Enforcement in the Petroleum Industry

The Commission has gained much of its antitrust enforcement experience in the

petroleum industry by analyzing proposed mergers and challenging transactions

that likely would reduce competition, thus resulting in higher prices.9 In 2004, the

Commission released data on all horizontal merger investigations and enforcement

actions from 1996 to 2003.10 These data show that the Commission has brought

more merger cases at lower levels of concentration in the petroleum industry than

60

11 Chevron Corp., FTC Docket No. C-4144 (July 27, 2005) (consent order), at http://

www.ftc.gov/os/caselist/0510125/050802do0510125.pdf; Union Oil Co. of California, FTC Docket

No. 9305 (July 27, 2005) (consent order), at http://www.ftc.gov/os/adjpro/d9305/050802do.pdf. 12 Valero L.P., FTC Docket No. C-4141 (June 14, 2005) (complaint), at http://www.ftc.gov/os/

caselist/0510022/050615comp0510022.pdf. 13 Id. 14 Valero L. P., FTC Docket No. C-4141 (July 22, 2005) (consent order), at http://www.ftc.gov/

os/caselist/0510022/050726do0510022.pdf. 15 Aloha Petroleum Ltd., FTC File No. 051 0131 (July 27, 2005) (complaint), at http://

www.ftc.gov/os/caselist/1510131/050728comp1510131.pdf . 16 Chevron Corp., FTC Docket No. C-4023 (Jan. 2, 2002) (consent order), at http://www.ftc.gov/

os/2002/01/chevronorder.pdf. 17 Id. 18Shell and Texaco jointly controlled the Equilon venture, whose major assets included full

or partial ownership in four refineries, about 65 terminals, and various pipelines. Equilon marketed gasoline through approximately 9,700 branded gas stations nationwide. 19Motiva, jointly controlled by Texaco, Shell, and Saudi Refining, consisted of their eastern

and Gulf Coast refining and marketing businesses. Its major assets included full or partial ownership in four refineries and about 50 terminals, with the companies’ products marketed through

about 14,000 branded gas stations nationwide.

in other industries. Unlike in other industries, the Commission has obtained merger

relief in moderately concentrated petroleum markets.

Several recent merger investigations illustrate the FTC’s approach to merger

analysis in the petroleum industry. The most recently completed case involved

Chevron’s acquisition of the Union Oil Company of California (‘‘Unocal’’). When the

merger investigation began, the Commission was in the middle of an ongoing monopolization case against Unocal that would have been affected by the merger.

Thus, the Commission settled both the merger and the monopolization matters with

separate consent orders that preserved competition in all relevant merger markets

and obtained complete relief on the monopolization claim.11 The nonmerger case is

discussed below.

Another recent merger case that resulted in a divestiture order resolved a complaint concerning the acquisition of Kaneb Services and Kaneb Pipe Line Partners,

companies that engaged in petroleum transportation and terminaling in a number

of markets, by Valero L.P., the largest petroleum terminal operator and second largest operator of liquid petroleum pipelines in the United States.12 The complaint alleged that the acquisition had the potential to increase prices in bulk gasoline and

diesel markets.13

The FTC’s consent order requires the parties to divest assets sufficient to maintain premerger competition, including certain Kaneb Philadelphia-area terminals,

Kaneb’s West pipeline system in Colorado’s Front Range, and Kaneb’s Martinez and

Richmond terminals in Northern California.14 In addition, the order forbids Valero

L.P. from discriminating in favor of or otherwise preferring its Valero Energy affiliate in bulk ethanol terminaling services, and requires Valero to maintain customer

confidentiality at the Selby and Stockton terminals in Northern California. The

order succeeds in maintaining import possibilities for wholesale customers in Northern California, Denver, and greater Philadelphia and precludes the merging parties

from undertaking an anticompetitive price increase.

Most recently, the Commission filed a complaint on July 27, 2005, in federal district court in Hawaii, alleging that Aloha Petroleum’s proposed acquisition of

Trustreet Properties’ half interest in an import-capable terminal and retail gasoline

assets on the island of Oahu would reduce the number of gasoline marketers and

could lead to higher gasoline prices for Hawaii consumers.15 Because this matter is

currently in litigation, this testimony will not discuss it in any more detail.

In the past few years, the Commission has brought a number of other important

merger cases. One of these involved the merger of Chevron and Texaco, 16 which

combined assets located throughout the United States. Following an investigation

in which 12 states participated, the Commission issued a consent order against the

merging parties requiring numerous divestitures to maintain competition in particular relevant markets, primarily in the western and southern United States.17

Among other requirements, the consent order compelled Texaco to (a) divest to Shell

and/or Saudi Refining, Inc., all of its interests in two joint ventures—Equilon 18 and

Motiva 19—through which Texaco had been competing with Chevron in gasoline

marketing in the western and southern United States; (b) divest all assets relating

to the refining, bulk supply, and marketing of gasoline satisfying California’s environmental quality standards; (c) divest assets relating to the refining and bulk supply of gasoline and jet fuel in the Pacific Northwest; and (d) divest various pipelines

used to transport petroleum products.

61

20 Valero Energy Corp., FTC Docket No. C-4031 (Feb. 19, 2002) (consent order), at http://

www.ftc.gov/os/2002/02/valerodo.pdf. 21 Valero Energy Corp, FTC. Docket No. C-4031 (Dec. 18, 2001), at http://www.ftc.gov/os/2001/

12/valerocmp.pdf. 22 Valero Energy Corp., supra note 20. 23 Conoco Inc. and Phillips Petroleum Corp., FTC Docket No. C-4058 (Aug. 30, 2002) (Analysis

of Proposed Consent Order to Aid Public Comment), at http://www.ftc.gov/os/2002/08/

conocophillipsan.htm. Not all oil industry merger activity raises competitive concerns. For example, in 2003, the Commission closed its investigation of Sunoco’s acquisition of the Coastal Eagle

Point refinery in the Philadelphia area without requiring relief. The Commission noted that the

acquisition would have no anticompetitive effects and seemed likely to yield substantial efficiencies that would benefit consumers. Sunoco Inc./Coastal Eagle Point Oil Co., FTC File No.

031 0139 (Dec. 29, 2003) (Statement of the Commission), at http://www.ftc.gov/os/caselist/

0310139/031229stmt0310139.pdf. The FTC also considered the likely competitive effects of Phillips Petroleum’s proposed acquisition of Tosco. After careful scrutiny, the Commission declined

to challenge the acquisition. A statement issued in connection with the closing of the investigation set forth the FTC’s reasoning in detail. Phillips Petroleum Corp., FTC File No. 011 0095

(Sept. 17, 2001) (Statement of the Commission), at http://www.ftc.gov/os/2001/09/phillips

toscostmt.htm.

Acquisitions of firms operating mainly in oil or natural gas exploration and production are

unlikely to raise antitrust concerns, because that segment of the industry is generally

unconcentrated. Acquisitions involving firms with de minimis market shares, or with production

capacity or operations that do not overlap geographically, are also unlikely to raise antitrust

concerns. 24 Union Oil Co. of California, FTC Docket No. 9305 (Mar. 4, 2003) (complaint), at http://

www.ftc.gov/os/2003/03/unocalcmp.htm.

Another petroleum industry transaction that the Commission challenged success- fully was the $6 billion merger between Valero Energy Corp. (‘‘Valero’’) and

Ultramar Diamond Shamrock Corp. (‘‘Ultramar’’).20 Both Valero and Ultramar were

leading refiners and marketers of gasoline that met the specifications of the California Air Resources Board (‘‘CARB’’) and were the only significant suppliers to

independent stations in California. The Commission’s complaint alleged competitive

concerns in both the refining and bulk supply of CARB gasoline in two separate geographic markets, the state of California and Northern California, and the Commission contended that the merger could raise the cost to California consumers by at

least $150 million annually for every one-cent-per-gallon price increase at retail.21

To remedy the alleged violations, the consent order settling the case required Valero

to divest: (a) an Ultramar refinery in Avon, California; (b) all bulk gasoline supply

contracts associated with that refinery; and (c) 70 Ultramar retail stations in Northern California.22

A final example is the Commission’s 2002 challenge to the merger of Phillips Petroleum Company and Conoco Inc., alleging that the transaction would harm competition in the Midwest and Rocky Mountain regions of the United States. To resolve that challenge, the Commission required the divestiture of: (a) the Phillips refinery in Woods Cross, Utah, and all of the Phillips-related marketing assets served

by that refinery; (b) Conoco’s refinery in Commerce City, Colorado (near Denver),

and all of the Phillips marketing assets in Eastern Colorado; and (c) the Phillips

light petroleum products terminal in Spokane, Washington.23 The Commission’s

order ensured that competition would not be lost and that gasoline prices would not

increase as a result of the merger.

B. Nonmerger Investigations into Gasoline Pricing

In addition to scrutinizing mergers, the Commission aggressively polices anticompetitive conduct. When it appears that higher prices might result from collusive

activity or from anticompetitive unilateral activity by a firm with market power, the

agency investigates to determine whether unfair methods of competition have been

used. If the facts warrant, the Commission challenges the anticompetitive behavior,

usually by issuing an administrative complaint.

Several recent petroleum investigations are illustrative. On March 4, 2003, the

Commission issued the administrative complaint referred to above, stating that it

had reason to believe that Unocal had violated Section 5 of the FTC Act.24 The Commission alleged that Unocal deceived the California Air Resources Board (‘‘CARB’’)

in connection with regulatory proceedings to develop the reformulated gasoline

(‘‘RFG’’) standards that CARB adopted. Unocal allegedly misrepresented that certain technology was non-proprietary and in the public domain, while at the same

time it pursued patents that would enable it to charge substantial royalties if CARB

mandated the use of Unocal’s technology in the refining of CARB-compliant summertime RFG. The Commission alleged that, as a result of these activities, Unocal

illegally acquired monopoly power in the technology market for producing the new

CARB-compliant summertime RFG, thus undermining competition and harming

62

25 Union Oil Co. of California, supra note 11. 26FTC Press Release, FTC Closes Western States Gasoline Investigation (May 7, 2001), available at http://www.ftc.gov/opa/2001/05/westerngas.htm. In part, this investigation focused on

‘‘zone pricing’’ and ‘‘redlining.’’ See Statement of Commissioners Sheila F. Anthony, Orson Swindle and Thomas B. Leary, available at http://www.ftc.gov/os/2001/05/wsgpiswindle.htm, and

Statement of Commissioner Mozelle W. Thompson, available at http://www.ftc.gov/os/2001/05/

wsgpithompson.htm, for a more detailed discussion of these practices and the Commission’s findings. See also Cary A. Deck & Bart J. Wilson, Experimental Gasoline Markets, Federal Trade

Commission, Bureau of Economics Working Paper (Aug. 2003), available at http://www.ftc.gov/

be/workpapers/wp263.pdf, and David W. Meyer & Jeffrey H. Fischer, The Economics of Price

Zones and Territorial Restrictions in Gasoline Marketing, Federal Trade Commission, Bureau

of Economics Working Paper (Mar. 2004), available at http://www.ftc.gov/be/workpapers/

wp271.pdf. 27Midwest Gasoline Price Investigation, Final Report of the Federal Trade Commission (Mar.

29, 2001), available at http://www.ftc.gov/os/2001/03/mwgasrpt.htm; see also Remarks of Jeremy

consumers in the downstream product market for CARB-compliant summertime

RFG in California. The Commission estimated that Unocal’s enforcement of its patents could potentially result in over $500 million of additional consumer costs each

year.

The proposed merger between Chevron and Unocal raised additional concerns. Although Unocal had no horizontal refining or retailing overlaps with Chevron, it had

claimed the right to collect patent royalties from companies that had refining and

retailing assets (including Chevron). If Chevron had unconditionally inherited these

patents by acquisition, it would have been in a position to obtain sensitive information and to claim royalties from its own horizontal downstream competitors. Chevron, the Commission alleged, could have used this information and this power to facilitate coordinated interaction and detect any deviations.

The Commission resolved both the Chevron/Unocal merger investigation and the

monopolization case against Unocal with consent orders. The key element in these

settlements is Chevron’s agreement not to enforce the Unocal patents.25 The FTC’s

settlement of these two matters is thus a double victory for California consumers.

The Commission’s monopolization case against Unocal was complex and, with possible appeals, could have taken years to resolve, with substantial royalties to

Unocal—and higher consumer prices—in the interim. The settlement provides the

full relief sought in the monopolization case and also resolves the only competitive

issue raised by the proposed merger. With the settlement, consumers will benefit

immediately from the elimination of royalty payments on the Unocal patents, and

potential merger efficiencies could result in additional savings at the pump.

The FTC undertook another major nonmerger investigation during 1998-2001, examining the major oil refiners’ marketing and distribution practices in Arizona,

California, Nevada, Oregon, and Washington (the ‘‘Western States’’ investigation).26

The agency initiated the Western States investigation out of concern that differences

in gasoline prices in Los Angeles, San Francisco, and San Diego might be due partly

to anticompetitive activities. The Commission’s staff examined over 300 boxes of

documents, conducted 100 interviews, held over 30 investigational hearings, and

analyzed a substantial amount of pricing data. The investigation uncovered no basis

to allege an antitrust violation. Specifically, the investigation detected no evidence

of a horizontal agreement on price or output or the adoption of any illegal vertical

distribution practice at any level of supply. The investigation also found no evidence

that any refiner had the unilateral ability to raise prices profitably in any market

or reduce output at the wholesale level. Accordingly, the Commission closed the investigation in May 2001.

In conducting these and other inquiries, the Commission makes the important distinction between short-term and long-term effects. While a refinery outage on the

West Coast could significantly affect short-term prices, the FTC did not find that

it would be profitable in the long run for a refiner to restrict its output to raise the

level of prices in the market. For example, absent planned maintenance or unplanned outages, refineries on the West Coast (and in the rest of the country) generally run at full (or nearly full) capacity. If gasoline is in short supply in a locality

due to refinery or pipeline outages, and there are no immediate alternatives, a market participant may find that it can profitably increase prices by reducing its refinery output—generally only for a short time, until the outage is fixed or alternative

supply becomes available. This transient power over price—which occurs infrequently and lasts only as long as the shortage—should not be confused with the durable power over price that is the hallmark of market power in antitrust law.

In addition to the Unocal and West Coast pricing investigations, the Commission

conducted a nine-month investigation into the causes of gasoline price spikes in

local markets in the Midwest in the spring and early summer of 2000.27 As exVerDate 11-MAY-2000 09:17 Nov 08, 2005 Jkt 000000 PO 00000 Frm 00066 Fmt 6633 Sfmt 6621 24246.TXT HCOM1 PsN: HCOM1
63

Bulow, Director, Bureau of Economics, The Midwest Gasoline Investigation, available at http:/

/www.ftc.gov/speeches/other/midwestgas.htm. 28FTC Press Release, FTC to Hold Second Public Conference on the U.S. Oil and Gasoline

Industry in May 2002 (Dec. 21, 2001), available at http://www.ftc.gov/opa/2001/12/gasconf.htm. 29GASOLINE PRICE CHANGES, supra note 3.

plained in a 2001 report, the Commission found that a variety of factors contributed

in different degrees to the price spikes. Primary factors included refinery production

problems (e.g., refinery breakdowns and unexpected difficulties in producing the

new summer-grade RFG gasoline required for use in Chicago and Milwaukee), pipeline disruptions, and low inventories. Secondary factors included high crude oil

prices that contributed to low inventory levels, the unavailability of substitutes for

certain environmentally required gasoline formulations, increased demand for gasoline in the Midwest, and ad valorem taxes in certain states. The industry responded

quickly to the price spike. Within three or four weeks, an increased supply of product had been delivered to the Midwest areas suffering from the supply disruption.

By mid-July 2000, prices had receded to pre-spike or even lower levels.

The Commission’s merger investigations also are relevant to the detection of nonmerger antitrust violations. FTC oil and gas merger investigations during the past

decade uniformly have been major undertakings that have reviewed all pertinent

facets of the relevant petroleum markets. These investigations have involved the review of thousands of boxes of documents in discovery, examination of witnesses

under oath, and exhaustive questioning of outside experts. The FTC staff, therefore,

have learned information that also could assist in detecting and investigating potentially anticompetitive conduct.

III. COMMISSION REPORT ON FACTORS THAT AFFECT THE PRICE OF GASOLINE

What are the causes of high gasoline prices and gasoline price spikes? These important questions require a thorough and accurate analysis of the factors—supply,

demand, and competition, as well as federal, state, and local regulations—that drive

gasoline prices, so that policymakers can evaluate and choose strategies likely to

succeed in addressing high gasoline prices.

The Commission addressed these issues by conducting extensive research concerning gasoline price fluctuations, analyzing specific instances of apparent gasoline

price anomalies, and holding a series of conferences 28 on the factors that affect gasoline prices, leading to the publication of a report 29 that draws on what the Commission has learned about the factors that can influence gasoline prices or cause gasoline price spikes. We discuss the findings of our study, but first set out three basic

lessons that emerge from our collective work.

First, in general, the price of gasoline reflects producers’ costs and consumers’

willingness to pay. Gasoline prices rise if it costs more to produce and supply gasoline, or if people wish to buy more gasoline at the current price—that is, when demand is greater than supply. Gasoline prices fall if it costs less to produce and supply gasoline, or if people wish to buy less gasoline at the current price—that is,

when supply is greater than demand. Gasoline prices will stop rising or falling when

they reach the level at which the quantity consumers demand matches the quantity

that producers will supply.

Second, how consumers respond to price changes will affect how high prices rise

and how low they fall. Limited substitutes for gasoline restrict the options available

to consumers to respond to price increases in the short run. Because gasoline consumers typically do not reduce their purchases substantially in response to price increases, they are vulnerable to substantial price increases.

Third, producers’ responses to price changes will affect how high prices rise, and

how low they fall. In general, when there is not enough gasoline to meet consumers’

demands at current prices, higher prices will signal a potential profit opportunity

and may bring additional supply into the market. Additional supply will be available to the extent that an increase in price exceeds the producers’ cost of expanding

output.

The vast majority of the Commission’s investigations and studies have revealed

market factors as the primary drivers of both price increases and price spikes. There

is a complex landscape of market forces that affect gasoline prices in the United

States.

A. Worldwide Supply, Demand, and Competition for Crude Oil Are the Most

Important Factors in the National Average Price of Gasoline in the

United States

Crude oil is a commodity that is traded on world markets, and the world price

of crude oil is the most important factor in the price of gasoline in the United States

64

30 A simple regression of the monthly average national price of gasoline on the monthly average price of West Texas Intermediate crude oil shows that the variation in the price of crude

oil—based on data for the period January 1984 to October 2003—explains approximately 85 percent of the variation in the price of gasoline. This is similar to the range of effects given in

United States Department of Energy/Energy Information Administration, Price Changes in the

Gasoline Market: Are Midwestern Gasoline Prices Downward Sticky?, DOE/EIA-0626 (Feb.

1999). More complex regression analysis and more disaggregated data may give somewhat different estimates, but the latter estimates are likely to be of the same general magnitude.

This percentage may vary across states or regions. See Prepared Statement of Justine

Hastings before the Committee on the Judiciary, Subcommittee on Antitrust, Competition Policy

and Consumer Rights, United States Senate, Crude Oil: The Source of Higher Gas Prices (Apr.

7, 2004). Dr. Hastings found a range from approximately 70 percent for California to 91 percent

for South Carolina. South Carolina uses only conventional gasoline and is supplied largely by

major product pipelines that pass through the state on their way north from the large refinery

centers on the Gulf Coast. California, with its unique fuel specifications and its relative isolation

from refinery centers in other parts of the United States, historically has been more susceptible

to supply disruptions that can cause major gasoline price changes, independent of crude oil price

changes. 31GASOLINE PRICE CHANGES, supra note 3, at 43-45. 32 Id. at 19. 33This phenomenon was not limited to crude oil: other commodities that form the basis for

expanded growth in developing economies, such as steel and lumber, also saw unexpectedly

rapid growth in demand, along with higher prices. Id. at 27. 34 Id. at 48. 35 Id.

and all other markets. Over the past 20 years, changes in crude oil prices have explained approximately 85 percent of the changes in the price of gasoline.30 United

States refiners compete with refiners all around the world to obtain crude, and the

United States now imports more than 60 percent of its crude from foreign sources.

If world crude prices rise, then U.S. refiners must pay higher prices for the crude

they buy. Facing higher input costs from crude, refiners charge more for the gasoline they sell at wholesale. This requires retail stations to pay more for their gasoline. In turn, retail stations, facing higher input costs, charge consumers more at

the pump. In short, when crude oil prices rise, gasoline prices rise because gasoline

becomes more costly to produce.

Crude oil prices are not wholly market-determined. Since 1973, decisions by

OPEC have been a significant factor in the prices that refiners pay for crude oil.

Over time, OPEC has met with varying degrees of success in raising crude oil

prices. (For example, OPEC members can be tempted to ‘‘cheat’’ and sometimes sell

more crude oil than specified by OPEC limits.) Higher world crude prices due to

OPEC’s actions, however, increased the incentives to search for oil in other areas,

and crude supplies from non-OPEC members such as Canada, the United Kingdom,

and Norway have increased significantly. Nonetheless, OPEC still produces a large

enough share of world crude oil to exert market power and strongly influence the

price of crude oil when its members adhere to their assigned production quotas. Especially when demand surges unexpectedly, as in 2004, OPEC decisions on whether

to increase supply to meet demand can have a significant impact on world crude

oil prices.

Crude oil consumption has fallen during some periods over the past 30 years, partially in reaction to higher prices and partially in response to federal laws, such as

requirements to increase the fuel efficiency of cars. Gasoline consumption in the

United States fell significantly between 1978 and 1982, and remained lower during

the 1980s than it had been at the beginning of 1978.31 Overall, however, the longrun trend is toward significantly increased demand for crude oil. Over the last 20

years, United States consumption of all refined petroleum products increased on average by 1.4 percent per year, leading to a total increase of nearly 30 percent.32

Crude oil prices have been increasing rapidly in recent months. Demand has remained high in the United States, and large demand increases from rapidly industrializing countries, particularly China and India, have made supplies much tighter

than expected.33

B. Gasoline Supply, Demand, and Competition Produced Relatively Low

and Stable Prices From 1984 Until 2004, Despite Substantial Increases

in United States Gasoline Consumption

Consumer demand for gasoline in the United States has risen substantially, especially since 1990.34 In 1978, U.S. gasoline consumption was about 7.4 million barrels

per day. By 1981, in the face of sharply escalating crude oil and gasoline prices and

a recession, U.S. gasoline consumption had fallen to approximately 6.5 million barrels per day.35 As gasoline prices began to fall in the 1980s, U.S. consumption of

gasoline began to rise once again. By 1993, consumption rose above 1978 levels, and

65

36See id. at 49; EIA, DOE/EIA-0202, Short-term Energy Outlook, Apr. 2005, app. at 5 tbl.A5,

at http://www.eia.doe.gov/pub/forecasting/steo/oldsteos/apr05.pdf.

37 EIA, DOE/EIA-0208(2005-34), WEEKLY PETROLEUM STATUS REPORT, August 31, 2005, at 17,

tbl.11, at http://www.eia.doe.gov/pub/oillgas/petroleum/datalpublications/weeklylpetroleum

lstatuslreport/historical/2005/2005l08l31/pdf/wpsrall.pdf. 38 ‘‘Real’’ prices are adjusted for inflation and therefore reflect the different values of a dollar

at different times; they provide more accurate comparisons of prices in different time periods.

‘‘Nominal’’ prices are the literal prices shown at the time of purchase. 39See GASOLINE PRICE CHANGES, supra note 3, at 43-47. 40The higher prices in 2005 appear to be the result of market factors that have uniformly

affected the entire country. At least for the part of this year that preceded Hurricane Katrina,

the FTC’s Gasoline Price Monitoring Project has detected no evidence of significant unusual

local or regional gasoline pricing anywhere in the United States during this summer driving season. This contrasts with the past two summers, during which various regional supply shocks,

such as the Arizona pipeline shutdown and Northeast blackouts of August 2003, and the several

unanticipated regional refinery outages and late summer hurricanes during the summer of 2004,

significantly increased prices in some areas above levels that might be expected based on historical price patterns. 41PETROLEUM MERGER REPORT, supra note 4, at 196, tbl.7-1; EIA, DOE/EIA-0340(04)/1, 1 PETROLEUM SUPPLY ANNUAL 2004, at 78, tbl.36 (2005), at http://www.eia.doe.gov/pub/oillgas/petroleum/datalpublications/petroleumlsupplylannual/psalvolume1/current/pdf/

volume1lall.pdf. EIA, DOE/EIA-0208(2005-33), WEEKLY PETROLEUM STATUS REPORT, August

24, 2005, at http://www.eia.doe.gov/pub/oillgas/petroleum/datalpublications/weeklylpetrole

umlstatuslreport/historical/2005/2005l08l24/pdf/wpsrall.pdf.

it has continued to increase at a fairly steady rate since then. In 2004, U.S. gasoline

consumption averaged about 9 million barrels per day, and the EIA’s forecast is for

9.2 million barrels per day this year.36

Despite high gasoline prices across the nation, demand has not fallen off in 2005.

Gasoline demand this summer driving season has been above last year’s record driving-season demand and well above the average for the previous four years. Average

daily demand of finished gasoline for May was 9.3 millions barrels per day, an increase of 1.2 percent over May of 2004, and 5.5 percent higher than the average

demand for the previous four summers. Similarly, June’s demand was up 2.8 percent over last June (up 5.4 percent from the average of the previous four years) and

July’s demand increase was up 3.2 percent over July of 2004 (up 4.6 percent from

average of the last four years). Gasoline demand for the last four weeks ending August 26 was level with the demand for the same period last year, despite much higher prices.37

In spite of these substantial demand increases, increased supply from U.S. refineries and imports have kept gasoline prices relatively steady until 2004. A comparison of ‘‘real’’ average annual retail gasoline prices and average annual retail gasoline consumption in the United States from 1978 through 2004 shows that, in general, gasoline prices remained relatively stable despite significantly increased demand.38 Indeed, over the very long run in the 84-year period between 1919 and

2003, real annual average retail gasoline prices in the United States did not increase at all. The data show that, from 1986 through 2003, real national average

retail prices for gasoline, including taxes, generally were below $2.00 per gallon (in

2004 dollars). By contrast, between 1919 and 1985, real national average retail gasoline prices were above $2.00 per gallon (in 2004 dollars) more often than not.39

Average U.S. retail prices have been increasing since 2003, however, from an average of $1.56 in 2003 to an average of $2.04 in the first five months of 2005.40 In

the last two months, the prices have moved even higher. It is difficult to predict

whether these increases represent the beginning of a longer-term trend or are merely normal market fluctuations caused by unexpectedly strong short-term worldwide

demand for crude oil, as well as reflecting the effects of instability in such producing

areas as the Middle East and Venezuela.

One of the reasons why long-term real prices have been relatively contained is

that United States refiners have taken advantage of economies of scale and adopted

more efficient technologies and business strategies. Between 1985 and 2005, U.S. refineries increased their total capacity to refine crude oil into various refined petroleum products by 8.9 percent, moving from 15.7 million barrels per day in 1985 to

17.133 million barrels per day as of August 2005.41 This increase—approximately

1.4 million barrels per day—is roughly equivalent to adding approximately 10 to 12

average-sized refineries to industry supply. Yet U.S. refiners did not build any new

refineries during this time. Rather, they added this capacity through the expansion

of existing refineries. They also have adopted processing methods that broaden the

range of crude oils that they can process and allow them to produce more refined

product for each barrel of crude processed. In addition, they have lowered inventory

holdings, thereby lowering inventory costs (although lower inventory holdings may

66

42 Beginning with the Clean Air Act Amendments of 1970 (Pub. L. No. 91-604, 84 Stat. 1698)

and continuing with further amendments in 1990 (Pub. L. No. 101-549, 104 Stat. 2468) and the

Energy Policy Act of 1992 (Pub. L. No. 102-486, 106 Stat. 2776), Congress has mandated substantial changes in the quality of gasoline, as well as diesel, that can be sold in the United

States. 43 Robert Larson, Acting Director of the Transportation and Regional Programs, Environmental Protection Agency, Remarks at the FTC Conference on Factors that Affect Prices of Refined Petroleum Products 79-80 (May 8, 2002). 44See EIA, 1995 Reformulated Gasoline Market Affected Refiners Differently, in DOE/EIA0380(1996/01), PETROLEUM MARKETING MONTHLY (1996), and studies cited therein. Environmental mandates are not the same in all areas of the country. The EPA requires particular gasoline blends for certain geographic areas, but it sometimes allows variations on those blends.

Differing fuel specifications in different areas can limit the ability of gasoline wholesalers to find

adequate substitutes in the event of a supply shortage. Thus, boutique fuels may exacerbate

price variability in areas, such as California, that are not interconnected with large refining centers in other areas. 45See GASOLINE PRICE CHANGES, supra note 3, at 61. 46 Id.

also make an area more susceptible to short-term price spikes when there is a disruption in supply).

Offsetting some of the observed efficiency gains, increased environmental requirements since 1992 have likely raised the retail price of gasoline by a few cents per

gallon in some areas. Because gasoline use is a major factor in air pollution in the

United States, the U.S. Environmental Protection Agency—under the Clean Air

Act 42—requires various gasoline blends for particular geographic areas that have

not met certain air quality standards. While available information shows that the

air quality in the United States has improved due to the Clean Air Act, 43 as with

any regulatory program, costs come with the benefits. Environmental laws and regulations have required substantial and expensive refinery upgrades, particularly

over the past 15 years. It costs more to produce cleaner gasoline than to produce

conventional gasoline. Estimates of the increased costs of environmentally mandated

gasoline range from $0.03 to $0.11 per gallon.44

Our studies indicate that higher retail prices are not caused by excess oil company

profits. Although recent oil company profits may be high in absolute terms, industry

profits have varied widely over time, as well as over industry segments and among

firms.

EIA’s Financial Reporting System (‘‘FRS’’) tracks the financial performance of the

28 major energy producers currently operating in the United States. In 2003, these

firms did have a return on capital employed of 12.8 percent, as compared to the 10

percent return on capital employed for the overall Standard & Poors (‘‘S&P’’)

Industrials. Between 1973 and 2003, however, the annual average return on equity

for FRS companies was 12.6 percent, while it was 13.1 percent for the S&P

Industrials.45 High absolute profits do not contradict numbers showing that oil companies may at times earn less (as a percentage of capital or equity) than other industrial firms. This simply reflects the large amount of capital necessary to find,

refine, and distribute petroleum products.

The rates of return on equity for FRS companies have varied widely over the

years, ranging from as low as 1.1 percent to as high as 21.1 percent during the period from 1974 to 2003.46 Returns on equity vary across firms as well. Crude oil exploration and production operations typically generate much higher and more volatile returns than refining and marketing. In essence, companies with exploration

and production operations now find themselves in a position analogous to that of

a homeowner who bought a house in a popular area just before increased demand

for housing caused real estate prices to escalate. Like the homeowner, crude oil producers can charge higher prices due to increased demand. If high prices and high

profits are expected to continue, they may draw greater investments over time into

the oil industry—in particular, to crude exploration and production. Over the long

run, these investments are likely to elicit more crude supply, which would exert a

downward pressure on prices.

C. Other Factors, Such as Retail Station Density, New Retail Formats, and

State and Local Regulations, Also Can Affect Retail Gasoline Prices

The interaction of supply and demand and industry efficiency are not the only factors that impact retail gasoline prices. State and local taxes can be a significant

component of the final price of gasoline. In 2004, the average state sales tax was

67

47See GASOLINE PRICE CHANGES, supra note 3, at 111—(noting that the other four states with

the highest average taxes on gasoline in 2004 were Wisconsin ($0.33 per gallon), Connecticut

($0.325 per gallon), Rhode Island ($0.306 per gallon), and California ($0.301 per gallon)). 48 Id. For example, all areas in Florida also have a local tax between $0.099 and $0.178 per gallon. Similarly, Honolulu has a local tax of $0.165 per gallon. 49See, e.g., OREGON REV. STAT., ch. 480, § 480.315. 50See Michael G. Vita, Regulatory Restrictions on Vertical Integration and Control: The Competitive Impact of Gasoline Divorcement Policies, 18 J. Reg. Econ. 217 (2000); see also Ronald

N. Johnson & Charles J. Romeo, The Impact of Self-Service Bans in the Retail Gasoline Market,

82 REV. ECON. & STAT. 625 (2000); Donald Vandegrift & Joseph A. Bisti, The Economic Effect

of New Jersey’s Self-Service Operations Ban on Retail Gasoline Markets, 24 J. Consumer Pol’y

63 (2001). 51See GASOLINE PRICE CHANGES, supra note 3, at 113. 52 JOHN M. BARRON ET AL., CONSUMER AND COMPETITOR REACTIONS: EVIDENCE FROM A RE- TAIL-GASOLINE FIELD EXPERIMENT (Mar. 2004), at http://ssrn.com/abstract’616761. 53 Id. at 13, 15, 30-31. 54See id. at 30-31; GOV’T ACCOUNTABILITY OFFICE (GAO), GAO/RCED-00-121, MOTORFUELS:

CALIFORNIA GASOLINE PRICE BEHAVIOR 20 (2000), available at http://www.gao.gov/new/items/

rc00121.pdf. 55PETROLEUM MERGER REPORT, supra note 4, at 246 tbl.9-5. 56 Id. at 239.

$0.225 per gallon, with the highest state tax at $0.334 per gallon (New York).47

Some local governments also impose gasoline taxes.48

Local regulations may also have an impact on retail gasoline prices. For example,

bans on self-service sales or below-cost sales appear to raise gasoline prices. New

Jersey and Oregon ban self-service sales, thus requiring consumers to buy gasoline

bundled with services that increase costs—that is, having staff available to pump

the gasoline.49 Some experts have estimated that self-service bans cost consumers

between $0.02 to $0.05 per gallon.50 In addition, some 11 states have laws banning

below-cost sales, so that a gas station is required to charge a minimum amount

above its wholesale gasoline price.51 These laws harm consumers by depriving them

of the lower prices that more efficient (e.g., high-volume) stations can charge.

Not surprisingly, retail gasoline prices are likely to be lower when consumers can

choose—and can switch their purchases—among a greater number of retail stations.

A small number of empirical studies have examined gasoline station density in relation to prices. One study found that stations in Southern California that imposed

a 1 percent price increase lost different amounts of sales, depending on how many

competitors were close by.52 Those with a large number of nearby competitors (27

or more within 2 miles) lost 4.4 percent of sales in response to a 1 percent price

increase; those with a smaller number of nearby competitors (fewer than 19 within

2 miles) lost only 1.5 percent of sales.53 With all else equal, stations that face greater lost sales from raising prices will likely have lower retail prices than stations

that lose fewer sales from raising prices.

Station density depends on cost conditions in an area. For example, the size and

density of a market will influence how many stations can operate and cover their

fixed costs. Fixed costs will depend on the costs of land and of building a station.

Zoning regulations also may limit the number of stations in an area below what

market conditions indicate the area could profitably sustain. Studies suggest that

entry by new gasoline competitors tends to be more difficult in areas with high land

prices and strict zoning regulations.54

One of the biggest changes in retail sales of gasoline in the past three decades

has been the development of such new formats as convenience stores and high-volume operations. These new formats appear to lower retail gasoline prices. The number of traditional gasoline-pump-and-repair-bay outlets has dwindled for a number

of years, as brand-name gasoline retailers have moved toward a convenience store

format. Independent gasoline/convenience stores—such as RaceTrac, Sheetz,

QuikTrip, and Wawa—typically feature large convenience stores with multiple fuel

islands and multi-product dispensers. They are sometimes called ‘‘pumpers’’ because

of their large-volume fuel sales. By 1999, the latest year for which data are available, brand-name and independent convenience store and pumper stations accounted for almost 67 percent of the volume of U.S. retail gasoline sales.55

Another change to the retail gasoline market that appears to have helped keep

gasoline prices lower is the entry of hypermarkets. Hypermarkets are large retailers

of general merchandise and grocery items, such as Wal-Mart and Safeway, that

have begun to sell gasoline. Hypermarket sites typically sell even larger volumes of

gasoline than pumper stations—sometimes 4 to 8 times larger.56 Hypermarkets’ substantial economies of scale generally enable them to sell significantly greater volumes of gasoline at lower prices.

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The list of factors that have an impact on retail gasoline prices is not exhaustive,

but it shows that prices are set by a complex array of market and regulatory forces

working throughout the economy. In the long run, these forces have combined to

produce remarkably stable prices in the face of consistently growing demand. Shortrun variations, while sometimes painful to consumers, are unavoidable in an industry that depends on the demand and supply decisions of literally billions of people.

IV. CONCLUSION

The Federal Trade Commission has an aggressive program to enforce the antitrust laws in the petroleum industry. The Commission has taken action whenever

a merger or nonmerger conduct has violated the law and threatened the welfare of

consumers or competition in the industry. The Commission continues to study this

industry in detail, to monitor wholesale and retail gasoline prices, and to search for

instances of illegal mergers or anticompetitive conduct.

Thank you for this opportunity to present the FTC’s views on this important topic.

I would be glad to answer any questions that the Committee may have.

Chairman BARTON. Thank you, Mr. Seesel.

We now want to hear from Mr. Kenneth Moran, who is the Acting Director of the Office of Homeland Security Enforcement Bureau at the Federal Communications Commission.

Welcome, Mr. Moran, and you are recognized for 7 minutes.

STATEMENT OF KENNETH P. MORAN

Mr. MORAN. Thank you, Mr. Chairman.

Good afternoon, Mr. Chairman and distinguished members of the

committee. My name is Ken Moran, and I serve as the Director of

the Federal Communication’s Commissions Office of Homeland Security. In that role, I am primarily responsible for coordinating the

Commission’s support of the Hurricane Katrina disaster relief efforts.

In my written testimony, I describe some of the damage to the

communications industry resulting from Hurricane Katrina and the

Commission’s efforts to assist consumers, the industries that the

agency regulates, and other Federal agencies during this difficult

crisis. I ask that my written testimony be submitted into the

record, and I will summarize those comments now.

Hurricane Katrina caused catastrophic damage and massive

flooding in areas of Louisiana, Mississippi and Alabama. The loss

of life and damage to property is astounding, and our thoughts and

prayers go out to those affected by the disaster. Most of the communications industry sustained tremendous damage to their facilitates in the affected area, hampering rescue operations or emergency responders and affecting the communications of those still

struggling with the affects of the hurricane.

Hurricane Katrina knocked out more than 3 million customer

phone lines. Wireline communications networks sustained enormous damage both to the switching centers that route the calls and

the lines that connect the buildings and the customers to the network.

Local wireless networks also sustained considerable damage.

More than 1,000 cell sites were knocked out of service by the hurricane. During this disaster, millions of telephone calls simply have

not been able to get through.

Also, of the 41 broadcast radio stations located in New Orleans

and the surrounding area, only two AM and two FM stations remained on the air in the wake of the hurricane.

69

We know that extraordinary efforts are being made to maintain

and restore service in the disaster zone. Broadcasters are getting

some stations on the air, albeit at significantly reduced power, to

provide survivors with important information. Wireline and wireless carriers have crews working around the clock to repair switching centers, customer lines and cell towers. Satellite service providers have helped bridge some of the gaps left by the outages by,

for example, providing satellite phones and video links to law enforcement officials and medical personnel, emergency relief personnel and news outlets. Even with these efforts, though, many of

the communications services in the affected areas remain down.

Today, we estimate that 1 million customer lines remain out of

service. Six 911 centers still remain out of service, and approximately 30 percent of wireless telecom cell sites are not operational.

Also, more than 50 radio and TV stations remain off the air. Many

of these sites that are operational are dependent on the back-up

energy supplies.

On August 30, the Commission established an internal task force

consisting of senior executives and management from within the

Commission. Chairman Martin directed the task force to coordinate

the FCC’s hurricane response activities which fall into two categories: regulatory relief; and industry outreach and coordination

with other Federal agencies. The task force has been working on

these assignments continuously since August 30, and the Commission was open throughout the Labor Day weekend to continue the

work. To date, nearly 200 FCC employees have assisted in this effort.

The Commission has taken a number of steps to facilitate resumption of communication services in the affected areas and to

authorize use of temporary communication services for use by disaster relief personnel and evacuees in shelters.

At the start of this disaster, the Commission notified communications providers that it would provide streamlined treatment for requests for special temporary authority in order to aid them in resuming and maintaining operations in the areas impacted by Hurricane Katrina. The FCC has received 22 special temporary authority requests and 77 requests for temporary frequency assignments.

The Commission has also received a number of requests for temporary waiver of its rules. The Commission has granted most of

these requests within 4 hours of their receipt and all requests within 24 hours. In addition, the Commission has released several public notices and quickly adopted orders to provide temporary relief.

My written testimony provides many examples of the Commission action to date.

The Commission has been working closely with industry as well

as FEMA and the National Communications System consistent

with procedures established in the National Response Plan. The

Commission continues to reach out to the communications companies serving the affected areas to assess their operational status

and determine the resources that they need to resume full operations.

The FCC provides the critical information about resources that

communications providers need to restore and maintain service in

the area to both FEMA and the NCS, who are responsible for enVerDate 11-MAY-2000 09:17 Nov 08, 2005 Jkt 000000 PO 00000 Frm 00073 Fmt 6633 Sfmt 6602 24246.TXT HCOM1 PsN: HCOM1
70

suring that priority needs are met. The agency updates FEMA and

NCS daily on the evolving needs.

The Commission is also responsible for providing the National

Coordinating Center for Telecommunications with information on

communications companies’ operational status for incorporation

into the governmentwide situation reports. Again, the agency gathers and submits this data daily.

In addition, the Commission has worked closely with the communications industry to help identify resources for use by disaster response personnel. The agency both transmits this information to

the NCS and facilitates the industry’s communication with other

Federal officials.

Finally, the Commission has been coordinating with the Interagency Coordination Council on Individuals with Disabilities to ensure that the needs of the disability community are addressed in

the coordinated Federal relief efforts.

In conclusion, the Commission is continuing to work with key

Federal agencies and the communications industry to determine

what additional actions can be taken to assist in the disaster relief

and restoration effort. More information about these efforts is

available on our Web site.

The Commission stands ready to work with the Congress, our

colleagues at the State, Federal and local agencies and the American public to do whatever we can to help with disaster relief and

restoration efforts. I would be pleased to respond to your comments. Thank you.

[The prepared statement of Kenneth P. Moran follows:]

PREPARED STATEMENT OF KENNETH P. MORAN, DIRECTOR, OFFICE OF HOMELAND

SECURITY, ENFORCEMENT BUREAU, FEDERAL COMMUNICATIONS COMMISSION

Good morning, Mr. Chairman and distinguished members of the Committee. My

name is Ken Moran and I serve as the Director of the Federal Communications

Commission’s Office of Homeland Security. In that role, I am primarily responsible

for coordinating the Commission’s support of the Hurricane Katrina disaster relief

efforts.

In my testimony today, I will describe some of the damage wrought by Hurricane

Katrina to the communications industry and the Commission’s efforts to assist consumers, the industries the agency regulates, and other Federal Agencies during this

difficult crisis.

Hurricane Katrina caused catastrophic damage and massive flooding in areas of

Louisiana, Mississippi, and Alabama. The loss of life and damage to property is astounding, and our thoughts and prayers go out to those people affected by this disaster. As I am sure you are aware, most of the communications industry sustained

tremendous damage to their facilities in the affected area, and the damage has had

a significant impact. The damage to the communications infrastructure hampered

the rescue operations of emergency responders. Relief efforts and survivors are still

struggling with the effects of the hurricane. Survivors lack information about relief

efforts. People displaced from their homes do not have the means to contact their

loved ones to let them know they are safe. And of course, survivors remaining in

the affected area lack a reliable means of contacting the authorities and getting help

in life threatening situations.

STATUS OF COMMUNICATIONS NETWORKS

Hurricane Katrina knocked out more than 3 million customer phone lines in the

Louisiana, Mississippi, and Alabama area. The wireline telecommunications network sustained enormous damage both to the switching centers that route calls and

to the lines used to connect buildings and customers to the network. Local wireless

networks also sustained considerable damage—more than a thousand cell sites were

knocked out of service by the hurricane. During this disaster, millions of telephone

calls simply have not been able to get through. Of the 41 broadcast radio stations

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located in New Orleans and the surrounding area, only two AM and two FM stations remained on the air in the wake of the hurricane.

Through network outage reports filed in accordance with the Commission’s rules,

and through data given to us voluntary by the industry, we understand that an extreme effort is being made to maintain and restore service in the disaster zone.

Broadcasters are making every effort to get stations on-the-air, even at significantly

reduced power, to provide survivors with important information. Wireline and wireless carriers have crews working to repair switching centers, customer lines, and

cell towers. Satellite service providers have helped bridge some of the gaps left by

the outages by, for instance, providing satellite phones and video links to law enforcement officials, medical personnel, emergency relief personnel, and news outlets.

Even with these efforts, given the enormity of the disaster, many of the communications services in the affected areas remain down. Today, we understand that

more than one million customer lines and over 20 switching centers remain out of

service. Approximately 1700 DS-3 interoffice facilities remain down. Six public safety answering points remain out of service. Approximately thirty percent of cell sites

are not operational. Fifty to 100 radio and television stations remain off the air.

Many of the sites that are operational are dependent on back-up energy supplies.

COMMISSION ACTIONS

On August 30th, Chairman Martin established an internal Task Force consisting

of senior executives and management from within the Commission. Chairman Martin directed the Task Force to coordinate the FCC’s hurricane response efforts,

which fall into two categories: (1) regulatory relief; and (2) industry outreach and

coordination with other federal agencies. The Task Force has been working on these

assignments continuously since August 30th, and the Commission was open

throughout the Labor Day weekend to continue the work. To date, nearly 200 FCC

employees have assisted in this effort.

Regulatory Relief

The Commission has taken a number of steps to facilitate the resumption of communications services in the affected areas and to authorize the use of temporary

communications services for use by disaster relief personnel and evacuees in shelters.

At the start of the disaster, the Commission notified communications providers

that it would provide streamlined treatment for requests for special temporary authority (STA) in order to aid them in resuming and maintaining operations in areas

impacted by Hurricane Katrina. The FCC has received at least 22 STA requests and

77 requests for temporary frequency assignments. The Commission also has received a number of requests for temporary waiver of its rules. The Commission has

granted each of these requests within 4 hours of receipt of all necessary information

from the requestor, except in instances requiring coordination with other government agencies. Even in those cases, requests have been granted within 24 hours.

In addition, the Commission has released several public notices and quickly adopted

orders to provide temporary relief.

Examples of the many steps the Commission has taken to assist disaster relief

efforts and affected providers are listed in the attached appendix.

Industry Outreach and Coordination with Other Federal Agencies

The Commission has been working closely with industry as well as the Federal

Emergency Management Agency (FEMA) and the National Communications System

(NCS) pursuant to the procedures established in the National Response Plan. The

Commission is continuously reaching out to communications companies serving the

affected area—wireline and wireless network providers, broadcasters, cable providers, satellite providers—and to trade associations for these providers to assess

the companies’ status and determine what they need to resume operations. These

efforts include Commission staff contacting each of the approximately 160 broadcast

stations in the affected region.

The FCC provides the critical information about resources that communications

providers need to restore and maintain service in the affected area to FEMA and

NCS, who are responsible for ensuring that priority needs are met. For instance,

the Commission identified wireline central offices and radio and television broadcasters that could be operational if provided fuel to power on-site generators. The

agency updates FEMA and NCS daily on evolving needs.

The Commission also is responsible for providing the National Coordinating Center (NCC) with information on communications companies’ operational status for incorporation into the government-wide situation reports. Again, the agency gathers

and submits this data daily.

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In addition, the FCC has worked closely with the communications industry to help

identify resources for use by disaster response personnel. The agency both transmits

this information to NCC and facilitates industry’s communication with other federal

officials. For example, Commission staff coordinated discussions between FEMA and

a major Direct Broadcast Satellite (DBS) provider to set up free televisions at disaster relief facilities and to provide a nationwide channel for disaster emergency

services programming. Staff also worked with a wide range of providers—including

those offering competitive facilities-based telecommunications, satellite, wireless,

wireless internet access and WI FI services—to identify those providers capable of

offering facilities and services that can assist those in the affected area.

Finally, the Commission has been coordinating with the Interagency Coordinating

Council on Individuals with Disabilities, organized by the Department of Homeland

Security, to ensure that the needs of the disability community are addressed in the

coordinated federal relief efforts.

CONCLUSION

FCC Chairman Kevin Martin, Commissioners Kathleen Abernathy, Michael

Copps and Jonathan Adelstein, along with the FCC staff, commend the industry and

the tremendous efforts it has made to begin to repair the infrastructure and restore

communications service to the Gulf Coast. These extraordinary efforts to restore

communications services are being performed by employees of the communications

industry—many of whom may be personally impacted by this tragedy.

The Commission is continuing to work with other Federal agencies and the communications industry to determine what additional actions can be taken to assist

in the disaster relief and restoration effort. More information about these efforts

is—and will continue to be—available on the Commission’s web site: http://

www.fcc.gov/cgb/katrina/.

The Commission also will continue its important work in reaching out, and responding to, consumers affected by this tragedy. Since the hurricane struck, including over the Labor Day weekend, the Commission manned its toll-free consumer line

to help individuals get access to critical information about telecommunications and

broadcast services in the affected area. The agency will continue these and other

efforts to address consumer concerns, in coordination with other government agencies, relief organizations, consumer groups and industry.

The damage wrought by Hurricane Katrina is tremendous and its effects will be

felt for months and possibly years to come. The Commission stands ready to work

with Congress, our colleagues at federal, state, and local agencies, and the American

public to do whatever we can to help with the disaster relief and restoration efforts.

I would be pleased to respond to your questions.

APPENDIX

Since Hurricane Katrina struck the Gulf Coast, the Commission has taken a number of steps to help the industry resume service and to assist the communications

needs of disaster relief personnel and evacuees in shelters. Following are some examples of Commission actions:

• On September 2nd, the Commission granted STAs to operate ultra-wide band

services ‘‘through-the-wall’’ imaging systems to locate survivors. • On September 5th, the Commission temporarily authorized the Department of Defense to conduct ship-to-ship, ground, and air-to-ground operations in the affected area. • Over the past week, the Commission granted STAs and temporary frequency authorizations to parties working to support relief efforts and to utilities working

to restore phone and electric service in the affected area. • Over the Labor Day weekend, the Commission granted a temporary waiver of its

‘‘slamming rules,’’ which require carriers to ensure subscribers are notified before their long distance service is switched. This temporary waiver will permit

carriers to temporarily transfer customers to long distance carriers with working facilities while restoration efforts are under way. • On September 2nd, the Commission acted upon the request of the American Red

Cross and temporarily reassigned the toll free 800 number ‘‘1-800-RED-CROSS’’

to the National Chapter of the American Red Cross. This action will facilitate

the disaster relief operations and fundraising efforts of the American Red

Cross—the only non-governmental agency with a specified lead role in the National Response Plan—by providing an easily-recognizable centralized telephonic point of contact for this important organization.

• Also on September 2nd, the Commission suspended its rules in order to permit

noncommercial educational (NCE) radio and television stations in New Orleans

73

to rebroadcast programming, including commercial matter, received from commercial broadcast stations. This special relief is designed to bring immediate life

saving and other important program information to the residents of New Orleans in the most expeditious manner possible.

• Between September 2nd and September 4th, the Commission granted STAs to

provide Internet connectivity to more than 200 shelters operated by the American Red Cross.

• On September 1st and 2nd, the Commission temporarily waived certain rules applicable to NCE television and radio stations, allowing those stations to air

fundraising programming to aid disaster relief efforts.

• On September 5th, the Commission granted experimental authorizations to permit the use of 3 FM signals to broadcast emergency information to the approximately 24,000 evacuees in the Houston Astrodome.

• Over the Labor Day weekend, the Commission granted a waiver of its numbering

rules that require carriers to return certain unused telephone numbers. This action will permit carriers in the affected area to retain telephone numbers that

are not in use for longer than 90 days in order to allow consumers returning

to the affected area continued use of their telephone numbers.

• On September 1st, the Commission waived its rules in order to permit wireline

and wireless carriers to port telephone numbers geographically outside of rate

centers during this period of service disruption. This action is intended to help

consumers keep using their telephone numbers during the crisis, to the extent

facilities are available.

• Also on September 1st, the Commission granted an equipment authorization for

a new digital microwave radio system. One of the major wireless carriers will

use this equipment to replace equipment in Baton Rouge and southern Louisiana that was destroyed by the hurricane.

• On September 2nd, the Commission granted a request from the 800 MHz Transition Administrator to move Louisiana from Wave 2, which begins relocation negotiations in October 2005, to Wave 3. This action enables public safety entities

in Louisiana to focus on more immediate public safety needs.

• On September 1st, the Commission issued informal guidance to amateur radio operators that they have authority to make transmissions necessary to meet essential communication needs and facilitate relief actions, and that prior Commission approval is not required for such transmissions.

FCC granted STA to the California Highway Patrol to operate portable and mobile radios in support of other law enforcement and relief agencies in Louisiana and

Mississippi (9/6/05).

FCC granted STA to LifeCom/Air Methods to set up a control center with mobile

radio communications in the 460 MHz band in the New Orleans area for disaster

relief (9/6/05).

FCC granted an STA for stations licensed to American Family Association in Mississippi and Louisiana that ceased operations on August 28, 2005 to remain silent

(9/6/05).

FCC granted an STA for WFMM(FM), Telesouth Communications, Inc., Sumrall,

Mississippi, to remain silent after it went silent on 8/29/05 (9/6/05).

Chairman BARTON. Thank you, Mr. Moran.

The Chair now recognizes himself for the first 5 minutes of questions.

Secretary Garman, I want to commend you, the Deputy Secretary, and the full Secretary for your expeditious work on the

SPR. I made a phone call to Secretary Bodman on Monday. I sent

him a letter Monday afternoon asking that the SPR be utilized,

and oil was released from the SPR on Thursday.

Crude prices on world markets have actually—they went up to

over $70 a barrel briefly, but as of late yesterday they were down

in the $65 to $66 range, and I do not know what the market is

today. But one thing that the President and the Secretary of Energy have done right in the last week is use the SPR, and I want

to publicly commend the Secretary and you for that decision.

I do have a question for you on refinery needs and this may be

Mr. Caruso, also. Do you, Mr. Garman, and you—especially Mr.

74

Garman as a policymaker—think that we should have 100 percent

refining capacity for our demand in this country?

Mr. GARMAN. Clearly, the margins that we have suffered under

with inadequate refinery capacity in this country has had consumer

impacts; and if we want to address that consumer impact, if we do

not want to be dependent on foreign sources for petroleum product

as we are on foreign sources for crude, then, yes, we ought to have

sufficient refining capacity in this country to serve our needs, in

my view.

Chairman BARTON. Okay. Mr. Caruso, as the director at EIA, my

information is that we are consuming around 21 million barrels of

refined products per day in this country, but our refinery capacity

before Katrina was less than 17 million barrels per day. Do those

numbers conform with your official numbers?

Mr. CARUSO. Yes, Mr. Chairman. The consumption for 2005, we

are estimating, is 20.8, so very close to 21; and primary distillation

capacity is 17.1 million barrels per day as we speak, prior to

Katrina.

Chairman BARTON. Now the information that our staff has prepared in the aftermath of Katrina, even given the amazing efforts

to bring refinery capacity back on line, showed about a million barrels per day of refinery capacity is out indefinitely because of water

damage or power damage or hurricane damage. That is primarily

a big refinery in Pascagoula and two refineries that are in or near

New Orleans. Does that million barrels per day again conform with

what you officially think is going to be long term out of order, either Mr. Caruso or Mr. Garman?

Mr. GARMAN. Roughly, yes. Those refineries, with minor damage,

minor flooding or lack of power, have largely been brought back on

line.

Those refineries—by my count, there are currently six of them

that are off line—will probably take a bit longer to bring on line.

I do not have a good damage assessment to be able to estimate.

Perhaps some of the witnesses later in the day do.

Chairman BARTON. Mr. Caruso, do you want to do add anything

to that?

Mr. CARUSO. The only thing that I would add is that those four

that appear to have suffered major damage will be off line for a

matter of months. So I probably would not use the word ‘‘indefinitely,’’ depending on what you——

Chairman BARTON. I understand.

Now this is for Mr. Garman. We are seriously thinking about

preparing a refinery revitalization bill. In the current law that the

President just signed, we give Governors of the 50 States the authority to request the EPA to appoint a facilitator to help facilitate

and coordinate the various permit applications for refineries in this

country. The House had passed a more comprehensive Refinery Revitalization Act, but the Senate would not agree to that in conference. So, Mr. Garman, if it is the will of this committee to expeditiously move on a Refinery Revitalization Act, do you believe that

the Bush Administration, the Secretary would be supportive of

that?

Mr. GARMAN. Without knowing the specific provisions, of course,

we could make no commitments. But, clearly, refinery capacity is

75

an issue. I am not certain why investment dollars and capital flows

are not going into this opportunity. I would imagine, as is the case

with many very large capital projects, people do not want to put

their money at risk for a long period of time awaiting return in the

face of regulatory uncertainty. We have seen that in the nuclear

plant business where utility executives do not want to make that

commitment and that large capital up-front commitment. A refinery is very much the same story, with a very uncertain regulatory

path and very uncertain timing associated with that permitting

process.

We have watched with some amazement as a potential refinery

project in Arizona has been attempted to be built for the better

part of a decade, if I am not mistaken; and investors have come

and gone, somewhat frustrated by the inability to get the project

under way.

Clearly, something needs to be done; and we would take a look

at whatever the committee—and would be happy to work with the

committee in brainstorming some of the ideas that might be employed.

Chairman BARTON. Thank you.

My time has expired, but I want to ask Mr. Seesel one question.

It is my understanding that, under current law, there is no specific

Federal legislation directly on point against price gouging. That is

primarily a State issue, not a Federal issue. My question to you,

Mr. Seesel, is there a standard definition of just exactly what price

gouging is?

Mr. SEESEL. Mr. Chairman, I think there probably is a wide variety of definitions for that term. As far as I have been able to determine, for example, the States that have various laws against price

gouging or similar terminology such as unconscionably high prices

apply a lot of different criteria for measuring it either quantitatively in terms of a percentage over the usual price level before

a certain event occurred or just more general language in terms of

unconscionability or shockingly high. There is a lot of variations

just among the 23 or so States that have those statutes on the

book; and I think they are probably—it would be hard to find a

consensus among just people in their normal everyday parlance on

what they mean by gouging. I think there is a sort of ‘‘I know it

when I see it’’ sort of sense among a lot of people about very high

prices, but I think there is no real thing close to uniformity.

Chairman BARTON. Well, is it your view or the Federal Trade

Commission’s view that the State laws are adequate to handle

price gouging, however one defines it, or would it be the FTC’s view

that we need specific Federal legislation on price gouging preempting State law? Do you have a position one way or the other

on that?

Mr. SEESEL. Mr. Chairman, I don’t think I can give you what the

official FTC position on that would be. That would really require

a determination by the Commission. But I can tell you that the

issue of a Federal law about price gouging really has—sort of, it

raises several issues, and I will try to do this quickly.

But one, obviously, is this difficulty of ascertaining how to measure what price gouging is and the fact that a lot of people have

very different views on what that is.

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In addition, I think any kind of effort to establish a Federal prohibition of price gouging, given the sort of uncertainty about what

the term means, could also possibly create a replication of the experience this country went through in the 1970’s. Essentially a wellintentioned effort to sort of stop what many might consider unconscionable pricing could essentially turn into an effort to control

prices and profits, which certainly in the 1970’s’ experience led to

a lot of unhappy experiences for this country in terms of gas lines

and rationing and stations running out of gasoline entirely.

I think there is generally a sense, though—and, again, I am not

speaking for the Commission officially—that the States have adequate firepower in their statutes to deal with this issue; and, as I

said in my statement, I think a lot of Governors and attorneys general around the country are vigorously addressing that issue in the

last few days.

Chairman BARTON. Thank you. I apologize to the committee for

extending my time. I do not normally do that.

The Chair is trying to see who is the senior Democrat in attendance at the gavel, and I think it is Mr. Green. Mr. Green is the

senior member. Mr. Gonzalez is closest to the Chair, but he just

kind of cheated and moved up. So we are going to go to Mr. Green.

Mr. GREEN. Thank you, Mr. Chairman.

I know that we need to have a separate health hearing. I would

hope we would, because I have some concern, like I said in my

opening, about States’ responsibility for their portion of Medicaid

for people who are guests and not necessarily residents of that

State. Ultimately, they may be, though.

Let me ask a question about high prices. It seems to me that

high prices were caused originally, before we even had Katrina, by

the global demand, the tight global supply, the limited domestic

production and infrastructure. If it were possible in this—I guess

the AEI. If it were possible to produce off shore on the east and

west coast and site more energy infrastructure there, would a

tricoastal energy infrastructure mean strategic stability for our energy section and wouldn’t we also be more resistant to shocks like

this one? Because I have lived on the gulf coast my whole life in

Houston and, sure as you know, July comes around—to the end of

October, in some cases—we are going to have a hurricane or tropical storm, and we will have a problem. But if we actually had a

tricoastal energy production, instead of just the Gulf of Mexico and

Alaska?

Mr. CARUSO. Well, it certainly would be my opinion that that

would help the situation. Obviously, it is not a silver bullet, but it

definitely would be a movement in the right direction.

Mr. GREEN. Any other response from anyone?

Mr. GARMAN. I would agree with that. Clearly, why is this energy infrastructure located on the gulf coast? And the answer is

that is where it has been allowed to develop. That is where refineries have been allowed to be built. It is a lesson for all of us as

we consider the location of new LNG terminals, as we become more

dependent on natural gas. If we once again concentrate all of our

LNG facilities on the gulf coast, as we have concentrated—and

thank goodness for Point Cove in Maryland—but if we continue to

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do that, then we will be vulnerable by putting all of our energy

eggs in one basket, so to speak.

Mr. GREEN. That leads to my next question. If your strategic energy situation is vulnerable and energy shocks travel so fast in our

economy, I believe a national oversight is proper to ensure a national policy is made. You mentioned the example in the energy bill

that just passed FERC will do the siting now on LNG terminals,

and that was in the energy bill that the President signed over the

break. Beyond the limited steps we can take in these situations

with current authority, what else can be done to improve our ability to generate the most robust energy sector in the medium term?

Should we have a Federal coordinating of these permits so we have

a really a tricoast strategy? Are there solutions on that? Should we

use the example of the energy bill on LNG for other production?

Mr. GARMAN. My own view is that it is prudent for us to allow

the States to undertake their regulatory authority but to have

back-stop capability in those key areas where it is needed, and that

back-stop capability was provided in the energy bill for both electricity transmission and LNG siting.

But I think it is probably prudent, and I think the States would

object, understandably, if we were to seize the powers and authorities that have been vested in them from them inordinately. But

clearly it is something that, if the infrastructure is not being built,

we have to ask the tough questions, why is that the case?

Mr. GREEN. So in the energy bill we did electricity and LNG.

Now because of the production predominately in the Gulf of Mexico—and maybe instead of—you know, maybe we need to look at

it and our committee needs to look at, like you said, a back-stop,

some type of frame frames, maybe, that if you lease off of California or Florida that, you know, the States would have a certain

period of time to approve, disapprove or whatever.

But, again, because we are not just talking about States’ issues,

we are talking about a national policy and actually international,

which is the reason the energy bill dealt with the LNG terminal

sitings.

So, Mr. Chairman, I guess I have only 30 seconds. But I know

the issue of price gouging—what have past price gouging investigations found? Is it usually the large or small scale and is it usually

large or small operators? Is the problem with oil companies or with

retailers and distributors? And has that been—what has the history been? Because this is something—we have repeated this, I

guess, for the last 30 years or more.

Mr. SEESEL. Representative Green, I guess the Commission’s activity in the pricing area has largely involved receiving complaints

about pricing behavior that violates one of the statutes that we enforce. So, generally, the investigations we have undertaken have

looked at pricing that might have been collusive pricing and other

activities.

For example, we had investigations in both the Midwest after the

price spike about 5 years ago and in the Western States, an investigation that really lasted several years, between 1998 and 2001.

And those were both really designed to look at whether pricing

going on there was the result of collusive and coordinated activity

among—at firms at various levels of the industry. There were long,

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arduous, detailed investigations that resulted in public reports and

so forth, but they didn’t turn up evidence of collusive behavior.

There hasn’t really been an effort to look at individual firm pricing

behavior because of the problem that the Commission runs up

against, that essentially it is dealing with a statute that primarily

goes after collusive behavior, not individual firm behavior.

Mr. GREEN. Thank you.

Mr. HALL [presiding]. Thank you, Mr. Green.

I will recognize myself for my time, and I will not use the full

amount, paying back some that the Chairman took on his own to

extract questions and answers from you.

Mr. Garman, you were asked about the provisions in the Energy

Policy Act. As we search for these policies that will relieve some

pressure on the energy sector, both short term and then long term,

I guess I want to focus on that Energy Policy Act. You spoke of the

reticence or the lack of any indication of investors. It is a problem

because, I guess, of the length of the return of their capital; and

there are some incentives, though, that the EPA can make certain

concessions or give certain instructions.

I guess what I want to know is whether or not—I know the Governors of the States have read the Energy Act, and I know that you

all have gone over it and back and forth and everything. But everybody is aware of the provision in there and the number of the provision. I do not have to list that even for the policy. But have any

of the States moved forward on this? Have you had any correspondence with them or any discussions with them for the use of this

particular section of this Act?

Mr. GARMAN. I have not personally, nor am I aware that any

States have focused on this provision yet. We are just at the interagency level. In fact, there is another meeting tomorrow at the

White House, if I am not mistaken, where we are gathering to ensure that we have all of the implementation bases covered on the

Act, that we are meeting, that assignments are made, that timeframes are being laid out, that we are making sure that the interagency cooperation that is needed to implement this Act is indeed

under way.

Mr. HALL. Mr. Caruso, do you have any suggestions or any—

have you had any contact or any inquiries from any of the States?

Mr. CARUSO. I have not, Mr. Chairman.

Mr. HALL. I am optimistic that one of the States other than one

of the producing States might move forward with this policy. It is

available to all of them.

What are the drawbacks, other than lack of expectation of early

return on investment?

Mr. GARMAN. I think history has shown us that anyone trying to

put a new energy facility of almost any kind—generation, transmission, LNG facility—faces a lot of local opposition. And

NIMBYism rears its head, issues of environmental justice are

brought to bear, and so investors tread lightly into that realm.

Mr. HALL. Well, I think one of the reasons that Joe Barton was

able to pass an energy act when no one has been able to in the last

10 years is that he couched it with a lot of research—R&D, really

mostly an R&D act, rather than an energy act.

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But with the additional provisions and additional incentives in

there and the situation we find ourselves in, there is increasing on

an increasing ratio the difficulty of dealing with the people who are

selling us energy that we have to rely on, that we do not really

trust, and they do not really trust us.

With that ability to fall back on that new technology, it looks like

we could shorten the time and make it a little more appealing to

the investing public. They want a return, but they also want to see

us solve a problem that might keep our kids out of the war, and

that is to solve the energy problems of this country.

Mr. GARMAN. Yes, sir; and I think it is very important that we

score a quick success on this. I think if the first new refinery gets

built in 30 years, that will be a message to investors that this is

an area that is ripe for new investment and new capital flow, and

we can hopefully buildup the thin margins of capacity that we have

suffered under for some time and have more cushion there to protect consumers.

Mr. HALL. All right. If I yield back 33 seconds, I have kept the

faith with the chairman. I yield back.

The Chair at this time recognizes Ms. DeGette from Colorado for

5 minutes.

Ms. DEGETTE. Thank you, Mr. Chairman.

Mr. Garman, I wanted to ask you, as I mentioned in my opening

statement, last night at the members briefing, Secretary Bodman

told us that, aside from some short-term disruptions in the natural

gas and also gasoline supplies in the southeastern United States,

pretty much there were minimal disruptions in fuel supply. So I

guess I am wondering, if that was the case, why did prices jump

so significantly? For example, in Denver, Colorado, where my district is, not even in the supply chain of the gulf, the prices were

going up as early as Tuesday of last week. I am wondering if the

Department has some sense of why that happened?

Mr. GARMAN. I will provide an answer and then turn to my colleague from the EIA who actually is closer to the price situation.

But let me first make the comment that I believe Secretary

Bodman, in making the comment that he made last night, was referring to permanent damage.

Ms. DEGETTE. Actually, I do not think that was true. I was

there. But if you want to clarify his remark that way.

Mr. GARMAN. Because—I do. As I point out, Katrina, had a devastating impact on energy.

Ms. DEGETTE. But did it have a devastating impact as early as

Monday and Tuesday in areas of the country that aren’t even supplied by that region?

Mr. GARMAN. Yes. Refineries were shut down prior to the storm

striking on Monday, and petroleum product and crude oil is a fungible material that affects prices outside a direct supply chain. Guy

might have more to say on that.

Mr. CARUSO. Yes, there are two comments I could add. One, the

market impact started on the weekend, actually, because some refineries were shut as early as Saturday.

And the second thing is that markets react to uncertainty. When

there was uncertainty as early as Monday as to how much damage

there would be, and how long it would last, the NYMEX futures

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market already started to rise. In fact, European markets rose, too

so there are people in Paris and London today paying more for gas.

Ms. DEGETTE. And I guess it is a fine line between market uncertainty and price gouging, in many of our minds, because people

price gouge because consumers are uncertain, and they know gas

costs are rising, correct?

Mr. CARUSO. Well, as Mr. Seesel pointed out, the definition of

price gouging is very nebulous. But, nevertheless, collusive and

anticompetitive behavior is certainly——

Ms. DEGETTE. Well, and I want to ask both of you gentlemen just

briefly, with respect to the Department’s registration of consumer

complaints about gasoline price gouging through its Web site and

telephone hotline, how many complaints have been registered with

the DOE?

Mr. GARMAN. The last time that I had checked, as of yesterday

morning, I believe we had received on the order of 7,000 calls,

which we were distributing to appropriate authorities at the Federal Trade Commission and States’ attorneys generals.

Ms. DEGETTE. And what is the DOE going to do with this information after they distribute it to those appropriate agencies?

Mr. GARMAN. We do not have any regulatory or enforcement authority. They are the parties that do. So we are a collector of information, and we provide it——

Ms. DEGETTE. You are just going to pass that on.

Mr. GARMAN. We provide that information to the appropriate

parties with the enforcement authority.

Ms. DEGETTE. Are you going to provide it also to the Department

of Justice?

Mr. GARMAN. Yes, we are. And, yes, we have.

Ms. DEGETTE. Mr. Seesel, I would like to ask you, I was intrigued by your testimony, and we all know about half of the States

currently have antigouging authority on their books, correct?

Mr. SEESEL. That is my understanding.

Ms. DEGETTE. And I think you were saying is that it is your view

of the Federal statutes that if there is no proof of anticompetitive

practices, then the Federal Government does not have the authority to prevent and punish price gouging. Would that be accurate?

Mr. SEESEL. I believe that would be accurate.

Ms. DEGETTE. So if one oil company is not colluding with another

one, they just decide to price gouge on their own, it is your agency’s

view that, really, the Federal Government can’t take any role in

prosecuting that action, right?

Mr. SEESEL. Well, Representative DeGette, the antitrust laws

that we enforce have historically consistently been interpreted not

to give us the power to second-guess or sit in judgment on an individual firm’s selection of a price.

Ms. DEGETTE. Exactly. So, really, State laws would be the only

recourse for that kind of anticompetitive behavior, right?

Mr. SEESEL. That is correct.

Ms. DEGETTE. And for the half of the States that don’t have that

law on their books, there wouldn’t be any recourse at all.

Mr. SEESEL. Well, I think there are a number of States have actually said they have more general consumer protection statutes

that they are interpreting to deal with the gouging issue. Not the

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States, the 23 or so States, that have explicit gouging prohibitions,

but there are some other States that are starting to invoke their

more general consumer protection laws.

Ms. DEGETTE. Just one last question. Do you think that it would

be useful to give additional Federal authority to an agency like the

FTC to be able to prosecute anticompetitive behavior in gas pricing?

Mr. SEESEL. Well, I certainly think that the FTC needs to deal

with anticompetitive conduct in the sense that I have been talking

about it, as the antitrust laws are historically interpreted.

Ms. DEGETTE. Right. But there is anticompetitive behavior that

is not necessarily collusive behavior, Correct?

Mr. SEESEL. That is correct.

Ms. DEGETTE. And would you require additional Federal authority to do that?

Mr. SEESEL. I think in order for the FTC to deal with a unilateral price selection by a firm, we would need additional authority.

Ms. DEGETTE. Thank you, Mr. Chairman.

Mr. UPTON [presiding]. If I had known I was going to be chairman when it was time for my question, I might not have deferred

on my opening statement but just stolen my 3 minutes. But I will

now recognize myself for 8 minutes.

My first question has to deal with interoperability and public

safety radio. As you know, this committee is poised to process a

transition to digital bill, which would set a hard date for the broadcasters’ return of their analog spectrum so it could be used for,

among other things, public safety radio interoperability. And the

tragic events of 9/11 underscored that dire need for a hard date so

that we can clear the spectrum for public safety interoperability.

My understanding is that, in the wake of Katrina, public safety

entities at all levels were not able to effectively communicate with

each other, and I am hearing that there may have been a host of

reasons for that, including the fact that police radio towers were

knocked down, police radio batteries could not be recharged, no

electricity. But can you tell me, Mr. Moran, about what, if anything, you have learned so far about the situation on the ground

with respect to the lack of interoperability as a contributing factor

to that situation?

Mr. MORAN. Yes, certainly. In the wake of the events in the gulf,

the FCC works very closely with the National Communications

System and other Federal agencies, so we do a lot of coordination,

and we attempt to determine the status of the communications networks, which ones are working, which ones are not working. Also

in those discussions there are—certain aspects of them, industry is

directly involved. And the Commission, initially we went in there

to see what we could do to expedite matters. And we would talk

to the industry to see what their problems were, what systems

were down, what could be done about it to quickly effect a good result there.

And I will tell you, the primary things that we were dealing with

in the initial days were that the commercial power was out. Once

it is out for a long period of time, backup batteries in the telecom

and the communications systems will run down. Of course, many

of the big installations have emergency generators; however, you

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have to get fuel to those generators to keep them running. And so

what we were seeing in the first days after this was most of the

infrastructure in the worst-hit areas were—communication infrastructure was not working because of power. But the biggest problems were as the carriers, as the communications carriers, were

getting assets ready to get in there to see what they could fix, see

what they could keep up, and try to assess the situation, the biggest problems we heard were they did not have security that would

enable them to get their assets into the areas, and also transportation was really a serious problem trying to get fuel into these

areas.

So the initial thing was it was a commercial power—it was a

power issue, starting with commercial power and getting worse because facilities could not get in there.

Now, we dealt extensively with industry, and those were big

issues that we were seeing and that we were dealing with FEMA

and the NCS. We, of course, have all—we were watching this carefully, and we see the same videos that people around here are seeing where an emergency responder is using a couple of different

communications devices because of an interoperability issue. And,

of course, the underlying issue is that if some of the systems aren’t

even working, they might need more than one piece of equipment.

Clearly that is not an acceptable situation. The Commission—the

effective communications for emergency responders is a priority for

the Commission. We are looking into it; we will be working with

the industry. And we have actually done a number of things in recent years to try to provide additional spectrum, for example, for

the emergency service providers.

And so the initial problems we saw, we did see interoperability

problems, but the biggest problems we saw initially were things

that were needed to do to get the networks up. And that tended

to be security issues, staging of personnel, to get them in there and

have them secure, and also trying to get fuel into the areas until

the power would come up.

Mr. UPTON. Mr. Caruso, in your statement you talked about the

future particularly with home heating oil as well as natural gas.

Now, you said that there were going to be significant increases in

natural gas beginning this winter. Did Katrina seriously impact

our natural gas supplies coming into the United States?

Mr. CARUSO. Yes.

Mr. UPTON. Tell me precisely what it was.

Mr. CARUSO. Yes. Initially—the Gulf of Mexico production of natural gas is about 21 percent of our national total.

Mr. UPTON. And where is that in terms of ramping back up to

where it was?

Mr. CARUSO. It was 8.8 MMBtu per day shut in initially. As of

yesterday, it was down to about 5 million Btu still shut in.

Mr. UPTON. And so it has come back to about 55 percent?

Mr. CARUSO. It is about 50 percent. And in addition to that,

there are natural gas processing units onshore which were damaged, and that will affect the ability to——

Mr. UPTON. And do you think that will be a long-term problem,

then, to get that back up to 100 percent where it was in natural

gas?

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Mr. CARUSO. In our preliminary assessment, we have it all back

by end November. But certainly, until the investigators are able to

get on the platforms and to actually test some of the pipeline infrastructure, we really don’t know.

Mr. UPTON. I want Mr. Garman and Mr. Caruso and Mr. Seesel

to respond to this question. Last week I drove probably every day

a couple hundred miles in my district. And on Tuesday the gas

price on average in our district in southwest Michigan went from

2.61 a gallon to some stations that day to 3.58, almost $1 increase

within a couple of hours. When you talked about the price of oil

per barrel going from $65 to $70, that is about a 7 percent increase. I think there are a lot of us that thought maybe gasoline

would go up 7 to 10 percent, not literally $1 a gallon. Would you

consider that type of an increase, knowing that we did have the

supply—none of my stations in my district were out of gas. Would

you consider that price gouging? Mr. Garman.

Mr. GARMAN. With that information alone, I couldn’t make a

judgment.

Mr. UPTON. Yes. The answer is yes. Mr. Caruso. I know you too

well. Mr. Caruso.

Mr. CARUSO. I would have to say the same, but make the comment that the gasoline markets often times behave differently than

crude markets, and vice versa, and it very much depends on the

individual markets. For example, the NYMEX gasoline market, as

I mentioned, went up sharply between Monday and Wednesday,

much more sharply than crude, and many contracts are indexed to

the NYMEX futures market. So part of that is explained by the

wholesale and futures market rate.

Mr. UPTON. I look forward and I know we are going to have the

witness from NYMEX in the second panel.

Mr. Seesel.

Mr. SEESEL. Again, Mr. Chairman, with the understanding of the

sort of squishiness of the definition of the term ‘‘gouging,’’ I would

say that, again, I can’t answer that, as Mr. Garman said, without

information, but what you might be observing is a couple of things

going on. One is a gasoline retailer hiking its price significantly because it expects to be paying a whole lot more for supplies that will

be coming in the next day or the day after that, and generally an

effort by the retailer sometimes to stay in business, at least to stay

open and not put out a ‘‘no gas’’ sign, and essentially raising the

price significantly in order to ration demand to accomplish that. It

is—whether one calls it gouging, I don’t know. It could be very well

just fairly reasonable and expectable demand-and-supply responses

to a situation of great shortage.

Mr. UPTON. Even though I am chairman for the moment, temporarily, my time has now expired. I yield to the gentleman from the

great State of Michigan Mr. Stupak for 8 minutes, who also deferred.

Mr. STUPAK. Thank you.

Mr. Caruso, you are familiar with the term called ‘‘risk premium’’; are you not?

Mr. CARUSO. Yes, Congressman.

Mr. STUPAK. And in layman’s terms, risk premium is essentially

the amount of money that is built into the future price of a good,

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in this case oil, that is above and beyond the amount of the normal

price based on a number of factors that may impact the price of a

good, such as terrorism, natural disasters, refinery problems, et

cetera, right?

Mr. CARUSO. That is correct.

Mr. STUPAK. I have seen a number of articles that said that prior

to the war in Iraq and prior to Hurricane Katrina, the risk premium on a barrel of oil, of crude, was in the neighborhood of about

$2 to $4. Is that about right?

Mr. CARUSO. That is what a number of trade journals have said.

It is not the position of EIA.

Mr. STUPAK. Right. Now, today, in the last couple of weeks here,

the last couple of months, that terrorist premium risk, if you will,

has gone up to $15 to $30 a barrel; is that correct?

Mr. CARUSO. I have not seen that large a number.

Mr. STUPAK. What would you think it is at right now, then, the

risk premium on a barrel?

Mr. CARUSO. I think our models for crude oil indicate that you

can explain most of the run-up in prices based on the lack of spare

productive capacity for crude oil.

Mr. STUPAK. But to get back to the risk premium, though, As

Kiplinger forecasts here, they say 15 to $20 a barrel, right? Would

you disagree with that?

Mr. CARUSO. Yes.

Mr. STUPAK. What do you think it is then?

Mr. CARUSO. I think the risk premium for crude oil is very low.

I think it——

Mr. STUPAK. Give me a number. What do you think it is?

Mr. CARUSO. I think it is probably only a few dollars.

Mr. STUPAK. You think it is still $2 to $4?

Mr. CARUSO. In that range. It hasn’t changed that much for

crude oil as a result of the recent event.

Mr. STUPAK. Here is another article that is within the last year,

MSNBC, and this actually shows it about 15 to $30. And they talk

about terrorism. Here is a—from Bloomberg.com which shows that

the risk premium has substantially gone up, and this is actually

from August 30, 2005, about $15 a barrel. So you are not familiar

with any of these articles?

Mr. CARUSO. I am familiar with them. Yes. I disagree with them.

Mr. STUPAK. You disagree with them?

Mr. CARUSO. Yes, sir.

Mr. STUPAK. Well, let us assume that they are right and you are

wrong. Okay? Apparently these authors in these articles disagree

with you. So the price of oil right now per barrel is probably about

25 percent more, if we believe this risk premium is at $15, than

what it should be, Right?

Mr. CARUSO. If you believe that, yes, sir.

Mr. STUPAK. How do you get your hands on this risk premium?

I know you don’t agree with us that it is $15 a barrel. You think

it is much less than that. If it is not the risk premium, then what

is making these prices fluctuate so much? And, really, the issue is

$35, right? Now we are paying around $70, roughly.

Mr. CARUSO. That is right. It is 65 or——

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Mr. STUPAK. Okay. So it has almost doubled in a year. If it is

not a risk premium, then what is the factor that is causing it?

Mr. CARUSO. There are a number of factors. The first one is that

world oil demand has grown rapidly in the last several years, putting upward pressure on price. There has not been sufficient productive capacity to meet that demand in the short term, there has

been a lack of inventory to meet short-term demand, all of which

means that we are operating an industry of 83 million barrels a

day, on a global basis, at about 98 percent of capacity. So any

short-term perturbations in either supply or demand, because of

the low short-term elasticity of price or income, mean volatility and

sharp price rises. And Katrina is a perfect example of that.

Mr. STUPAK. But actually once the administration finally heeded

the advice of myself and others who have been for months saying

release the SPR, didn’t the price of oil go down after the barrels

of oil were released from the SPR?

Mr. CARUSO. Yes, it did. As the Chairman mentioned, it had

reached the peak of 70 in interday trading 1 day last week. It is

now between 65 and 66 as of this morning.

Mr. STUPAK. So it has actually gone down. So isn’t really the

price that keeps it up is like instability in the world, such as like

in Venezuela, one of our larger suppliers that we had some disagreements with, Iran that we have disagreements with over nuclear issues, Gulf, the war going on in Iraq, things like that?

Mr. CARUSO. Part of the reason that there is so much uncertainty

and that refiners are willing to pay those prices is they don’t know

what is going to happen in places like those you have just mentioned.

Mr. STUPAK. Well, as these prices go up like this, whether it is

risk premium or not, it has gone from 35 earlier this year to—

peaked at 70. And who benefits? And take the case of Saudi Arabia; Aramco, right?

Mr. CARUSO. Yes, sir.

Mr. STUPAK. The people who purchased the oil from Saudi or

Aramco, they would benefit, right? The refineries would benefit,

Correct?

Mr. CARUSO. If they are able to sell it with enough of a profit

margin, they benefit, yes, sir.

Mr. STUPAK. Sure. But the Saudis, if it takes $10 to get it out

of the ground, and they sell it at whatever they sell it at, 40, there

is a profit there. And they turn around and sell it somewhere else.

And these futures are up to, what, 65 right now? So we have got

some pretty good profits going right now, Right?

Mr. CARUSO. Absolutely. And——

Mr. STUPAK. In fact, every article I have seen, we have got record

profits in parts of the industry, right?

Mr. CARUSO. That is correct.

Mr. STUPAK. Has the administration given any consideration to

a windfall profits tax then? Mr. Garman, do you want to answer

that?

Mr. GARMAN. I will, and say that, to my knowledge, no.

Mr. STUPAK. Is there—there is actually more—less refineries in

the United States, but we are refining more oil into gas than ever

before in the Nation’s history, correct?

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Mr. GARMAN. That is correct.

Mr. STUPAK. So everyone is making a pretty good profit here, and

yet we are not doing anything to try and get control of the price

of this oil other than release oil from this SPR, correct, trying to

get your hands on this price’s volatility. If it is not a risk premium,

then, Mr. Caruso, if it is just supply and demand, but we have

more, we are refining more, how do you account for those high

prices then?

Mr. CARUSO. We don’t have enough refining capacity. We are—

as Mr. Garman mentioned, we are having to import more and more

refined products from abroad.

Mr. STUPAK. We are importing about, what, 10 percent?

Mr. CARUSO. In refined products, a little over 2 million barrels

a day on a net basis out of our 20-. So that is about right.

Mr. STUPAK. So what is the answer then to get control of these

prices? More refineries?

Mr. GARMAN. There is a multitude of answers, and I don’t think

we should depend on any one answer. First, we should encourage

new supply. In fact, let me make that second.

First, we should encourage conservation and efficient use of the

supplies that we have. That is the quickest, cheapest, most dramatic effect that one can have in the short term, because it takes

time to bring new production on line. New production is very important.

And then I think these two thin-capacity margins that Mr. Caruso have talked about are very, very important, both the thin-capacity margin on the production side. You know, for many years we

had a production capacity margin of 3- to 5 million barrels a day.

Now we are down to 1 million barrels a day, and most of that capacity margin exists in Saudi Arabia. It is in our interest to see

capacity margins increased on the supply side upstream. It is also

in our interest to see capacity margins increase down, on the downstream side, at the refinery side.

I think all of these are components, and I don’t think we should

hitch our wagon to any single effort. I think we have to take a comprehensive effort approach and urge Americans to conserve, urge

producers to produce, urge refiners to invest in new refinery capability and capacity. We have to do all of those things if we expect

to have a long-term impact on price.

Mr. STUPAK. So, in summation, when the President said in 2000

that he would just jawbone the Saudis into producing more crude,

that really wasn’t an answer or a correct answer to a complex problem.

Mr. GARMAN. The President, in my view, had a very comprehensive answer in his May 2001 energy plan that depended on both

supply options and demand options. Roughly half, if I recollect correctly, of the recommendations in the President’s original plan had

to do with energy efficiency, renewable energy, and other alternatives to the status quo.

Mr. HALL [presiding]. The gentleman’s time has expired.

The Chair recognizes the gentleman from Florida Mr. Stearns for

5 minutes.

Mr. STEARNS. Yes. Thank you, Mr. Chairman.

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My colleague from Michigan, Mr. Upton, asked each of you a

question about his experience driving around his district, and it appeared to me that we couldn’t have a definition among you on what

price gouging is. It seemed to me there is lots of factors. So when

he tried to present you a case example, you really couldn’t agree

with him because you said there is other factors.

Now, if I describe cheating to you, I think we can all agree what

cheating is. If I describe stealing, I think we could all agree what

stealing is. It seems to me we just have to understand that gouging

is something that we can discern and involves several components.

I looked up the definition of it, and it comes from old Middle

English which comes to sting. Now, following that definition is to

basically—to cut or force out a rough cut of something.

I submit that gouging involves a couple things: It has a moral

component; that is, it is a necessity that we need to have, so we

are forced to buy it. Just before Valentine’s Day, I notice that roses

go up. But I don’t necessarily have to have those roses, I can get

carnations or something else. But if I have to get to work, I am

going to need gasoline. So I think gouging involves a moral component.

Second, I think it involves a time factor, generally 1 or 2 days.

If the price goes up, as Mr. Upton indicated, almost doubled in a

period of 1 day, that is obviously price gouging.

And, last, I submit that the buyer is coerced and intimidated.

So I don’t think—if you throw those three components in, it is

not hard to discern and to see what is gouging.

Now, as I understand it, on the Federal level we do not directly

have laws on gouging. Is that right, Mr. Seesel?

Mr. SEESEL. That is my understanding, Congressman.

Mr. STEARNS. But we do in the event of collusion. So, if companies work together, then we can step in and say there is collusion,

but also price gouging; is that correct?

Mr. SEESEL. Well, collusion may take a number of forms. Traditionally, classically it would take the form of conspiracy to raise

prices or reduce output. And so it might not take the form of

gouging in the sense that you may be thinking of it going from 2.50

to 3.50 a gallon.

Mr. STEARNS. Do you think we should have Federal laws dealing

with price gouging separate from the idea that you have to have

collusion first?

Mr. SEESEL. As I said before, I think the Congress needs to tread

quite carefully in this area because——

Mr. STEARNS. What about the idea that, even in the States where

they have laws dealing with price gouging, it only generally applies

in state of emergencies? So in this case we had four States declare

a state of emergency. What about the other 46 States? How do you

handle price gouging in those States?

Mr. SEESEL. I have seen quite a few media reports in the last few

days, Congressman Stearns, of attorneys general and Governors in

States quite far away from the gulf region that are applying either

their specific price-gouging statutes or their more general consumer-protection statutes to deal with the gasoline pricing situation. And I think their sense is there is an economic emergency

going on in their States. I think that is one of the rationales I have

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read. So that irrespective of the physical emergency of the hurricane, a lot of States have been able to proceed, begin investigations

under the rubric of their general statutes.

Mr. STEARNS. In the State of Georgia, there was an example where gasoline was selling for $6.38 a gallon, yet that was not one

of the States where there is an emergency. Texas, South Carolina,

there was huge increases. Surely I would think from your standpoint that those would be areas you would investigate, because

they are not in a state of emergency, yet it appears that the States

are almost helpless to stop price gouging.

Mr. SEESEL. Well, Congressman, my understanding—and I may

be wrong about one or two of the States you mentioned, but I think

the attorneys general actually have announced they are looking at

pricing issues for gasoline in those States. Even though—again,

even though they are outside the Louisiana, Mississippi, Alabama,

Texas area, they are still invoking their price-gouging or general

consumer statutes to look at what has been going on.

Mr. STEARNS. Let me conclude before my time is out that you

had a report that you issued, and this report came out before

Katrina, before the hurricane, entitled: Commission Report on Factors that Affect the Price of Gasoline.

How has this report affected your ability to scrutinize the marketplace for collusion, for price gouging, for any things, even such

things as State and local regulations that affect it? Maybe you can

give me just a summary of what your report provided so that you

could help us in the future on this matter.

Mr. SEESEL. Well, the report really—we have a fairly broad panoply of statutes that we enforce that we use in our law enforcement

program. The report was really an attempt to set out in a very concise way all of the learning we have accomplished over the last 20

or 25 years in the petroleum industry on analyzing the various factors that will go into driving the price of gasoline, whether you are

talking about supply factors, demand factors, competition for the

various resources that go into the product such as crude oil and refining capacity and so forth. So what we attempted to set out here

was a—I am sorry.

Mr. STEARNS. Mr. Chairman, could we allow him to finish his answer?

Mr. HALL. The gentleman will be allowed to finish his answer,

if he wants.

Mr. STEARNS. Thank you, Mr. Chairman.

Mr. SEESEL. We essentially try to set out the entire spectrum of

supply, demand, regulatory, and other factors that result in prices

and volatility in gasoline.

Mr. STEARNS. Thank you, Mr. Chairman.

Mr. HALL. I thank you.

The Chair recognizes the gentleman New York, Mr. Engel, for 5

minutes.

Mr. ENGEL. Thank you, Mr. Chairman.

Gentlemen, with all due respect, and I think you have heard the

frustrations of all of us, you know, if it looks like a rat and smells

like a rat, it is a rat. The American people aren’t stupid. And I remain totally unconvinced that 2 days after Hurricane Katrina happened, gasoline prices went sky high as a result of the catastrophe

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of that hurricane. It would certainly take much longer to have the

hurricane’s catastrophe translated into higher gas prices at the

pump. There is no way other than price gouging that it could happen within 2 days. And, again, we all have seen that, when the

price of oil drops, it takes several weeks, if not months, for that to

be reflected at the pump with prices of gasoline dropping. So I just

think that there is no way we can excuse it.

The American people aren’t stupid. The Representatives on both

sides of the aisle aren’t stupid. We know that there was price

gouging. And I just think it is absolutely unconscionable.

Last week I went to get gasoline right here on South Capitol

Street, and there were two gasoline stations within a block from

each other, and there was a 40-cent difference in the price of gasoline between those two stations. I have spoken with gasoline owners, owners of gas stations, who said that they were told by the

companies to increase the prices.

I don’t think this is something we can kind of talk away or just

kind of have business as usual. The American people are sick and

tired of it and want an explanation and don’t want it to happen

again. And, again, when prices sink next week or in a month or

whenever it is to below $3 a gallon, we are not going to jump for

joy, because as far as I am concerned, $2 and change is too much

to pay.

I want to ask Mr. Garman, yesterday Senator Domenici said: We

are too dependent on this part of the country. Congress must do

something on offshore drilling because we need more diversity than

what is out there.

I agree that we need to diversify our energy sources, but I respectfully disagree with the Senate chairman about how. To me,

Hurricane Katrina has shown again that our Nation is overly dependent on oil itself, not gulf coast oil. If we are going to create

a stable energy future for our country, we need to diversify away

from our oil. The answer, in my opinion, is not opening drilling in

Alaska or all along our Nation’s coasts to increase oil supplies on

the mere margins, but to aggressively promote technology such as

advanced hybrid automobiles which will substantially reduce our

demand for oil. If we were serious about energy policy in the wake

of Katrina, we would significantly increase CAFE standards for

passenger vehicles, not propose insignificant adjustments as the

Bush administration recently did.

Next week I and a bipartisan group of Members will announce

the founding of a new Oil and National Security Caucus. The purpose of our group will be to highlight bipartisan, common-sense

ways to reduce our dangerous overreliance on oil. We will work

with members of the committee and the administration to offer serious practical proposals to provide more balance in our energy

mix.

Now, Mr. Secretary, in the wake of Hurricane Katrina, what policy adjustments are you and the administration proposing to diversify our Nation away from oil?

Mr. GARMAN. As you know—and admittedly this is a long-term

approach—back in January 2003, the President in his State of the

Union Address announced his hydrogen fuel initiative, which is a

long-term effort to totally take our personal transportation off of

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petroleum, completely, through the use of hydrogen and fuel cell

vehicles fueled by hydrogen fuel that can be produced here domestically from a variety of different energy, primary energy inputs.

That is a long-term goal, admittedly, and we do not expect to see

affordable hydrogen fuel cell vehicles that need no petroleum and

emit no pollutants in an affordable fashion available to consumers

prior to 2020. They are on the road today, but neither you nor I

can probably afford them. So we have to bring down the cost.

In the energy bill that was just passed, a proposal that the President made back in January 2001, production tax—I am sorry, a

consumer tax credit for hybrid vehicles to get more of these vehicles on the road is another very, very important component. We

want to encourage that.

There are a lot of things in the energy bill that have not yet been

implemented.

Mr. ENGEL. Let me just say, because I know my time is over, I

am told that the FTC maintains a gasoline price monitoring

project, and the DOE has a Web site for filing gasoline pricegouging complaints. What do you do with the Web site which permits the filing of complaints? Is it just for people to let off steam

and feel good? What practical substance can we tell the American

people that, if they feel they have been ripped off at the pump, that

they can effectively do something and that government will move

to make sure that it doesn’t happen again?

Mr. SEESEL. Congressman, the Commission receives complaints

from all kinds of sources. If we get a complaint that deals with gasoline pricing, to the extent the complaint spells out a law violation

of the kind that we can go after, we will proceed vigorously against

that. If it spells out an issue that the FTC really does not have authority to go after, that is the kind of thing we would refer to State

attorneys general. It is not just a mechanism for people to let off

steam; it is a way for us to learn information from consumers, some

of which will be turned into law enforcement investigations that we

can pursue.

Mr. WHITFIELD [presiding]. The gentleman’s time has expired. It

is my time to ask questions, so thank you.

You know, as elected representatives, and as people who depend

upon being reelected to their position, obviously all of us are very

much concerned and want to do everything we can to defend

against higher gas prices. And our ability to do that will oftentimes

depend upon whether or not we are reelected. But I was reading

an article recently, on August 26, that indicated that in Amsterdam

the price of gasoline was $7.13 per gallon. The price in Great Britain was $6.43 per gallon. The price in France was $6.90-some cents

per gallon. The price in Belgium was in the $6 range. And the price

in Greece was about $4.80 per gallon. And in the U.S., on August

26, it said the price was about $2.61 per gallon.

So the question I would ask: Is it realistic for the American people to expect low gas prices, maybe the lowest gas price in the

world, when we have—is that not? What is the lowest gas price in

the world?

Mr. CARUSO. The lowest is in places like Saudi Arabia and Iraq.

Mr. WHITFIELD. And how much are they paying per gallon?

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Mr. CARUSO. Saudi Arabia, when I was there in May, they were

paying about $1.50 a gallon. But they are much lower in Iran.

Mr. WHITFIELD. And how much are they paying in Iran?

Mr. CARUSO. Less than $1; 50 cents probably.

Mr. WHITFIELD. But is it realistic for a country like America

where we have such a small amount of reserve. We do consume

more than any other country in the world. Out of the 84 million

barrels being consumed each day, we are consuming around 21 million barrels a day. Is it unrealistic for the American people to expect prices below $3 a gallon?

Mr. CARUSO. I mentioned that in our short-term outlook, prices

are likely to come down below $3 in the coming days and weeks

and to be back to about $2.60 in the fourth quarter. In the long

run, the main difference between the European prices and the U.S.

is taxes. They are a large component of the high price in the U.K.

Mr. WHITFIELD. It is my understanding that in Europe, I mean,

the taxes might reflect 60 percent of the overall price of the gas,

which might ask the question: Should we—I am not advocating

this, but should we increase price on the gas for taxes?

There has been a lot of comments today about refineries and the

lack of investment in refineries. And I read an article recently that

said major oil companies are keeping a tight rein on their capital

expenditures, and that they typically for any project will do a

stress test for profitability at $20 a barrel or below; that they are

making their decisions based on a price of $20 a barrel and below.

Have you heard any comments about that, or do you think that is

true? Or does that explain why we have not had a new refinery

since 1976?

Mr. GARMAN. I am not familiar with the specific article that you

read, but I am surmising that that $20 figure may relate to exploration and production investments by oil companies. They have

been burned before when they have made their exploration and

production investments in new finds expecting to find 25 or $30 a

barrel oil, and then it fell to 18 or 19, and have been—had an unprofitable investment. So I have heard anecdotally that oil companies are now looking for 25 or even $30 investment, which is up

from the past, in analyzing whether a new exploration and production investment is worthy of a payoff.

Mr. WHITFIELD. And I would be willing to stipulate that there

has probably been some price gouging going on. My understanding,

that at the retail level, that major oil companies own, what, like

10 percent of the retail outlets? Or is it more than that, or do you

all have any idea?

Mr. CARUSO. I don’t have that number off the top of my head,

but I would certainly be able to provide it for the record.

Mr. WHITFIELD. Mr. Seesel, when was the last time a major oil

company was successfully prosecuted for collusion or for monopolistic pricing of gasoline in the U.S.?

Mr. SEESEL. Mr. Chairman, I don’t recall the last time. If what

you are talking about was a criminal prosecution, which, of course,

would be handled by the Justice Department, I don’t recall the last

instance of that, I am afraid.

Mr. WHITFIELD. What about from a civil standpoint?

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Mr. SEESEL. From a civil standpoint? Could you hold on 1 second,

sir? I am reminded, and I should have remembered, that the Federal Trade Commission’s own administrative complaint against

Unocal was essentially a monopolization complaint. So the allegation that Unocal had deceived the California Air Resources Board

with regard to its patents on CARB gasoline was a monopolization

case. That is the one that I mentioned in my opening statement.

Mr. WHITFIELD. What year was that?

Mr. SEESEL. The complaint was issued in 2003; the case was just

settled about a month or so ago, about a month and a half ago.

Mr. WHITFIELD. And wasn’t there some $20 million fine against

some companies in Hawaii recently? Or was that a couple years

ago? Or are you familiar with that?

Mr. SEESEL. I am not that familiar with that, Mr. Chairman.

Mr. WHITFIELD. Okay. Thank you.

My time has expired. I recognize the gentlelady from California

Mrs. Capps for 5 minutes.

Mrs. CAPPS. Thank you, Mr. Chairman.

And I want to turn again to Mr. Moran, the FCC’s topic. It is

now 4 years after the tragic events of September 11 when this

country made many promises and pledges to look carefully at what

needed to be improved at that time. I want to ask you if you consider today’s emergency alert system to be the most robust and effective mechanism for warning the American public of an emergency? And, if not, what steps has the FCC taken in the past 4

years to make the EAS more effective?

Mr. MORAN. Well, the EAS system is designed really to deliver

the Presidential message to all Americans through the broadcast

process when the Nation’s security is at risk. It is available for use

on a voluntary basis for State and local emergencies, and it can be

used for that purpose, too.

The Commission—it is an operational system. It is tested all the

time. We work with FEMA to ensure that this thing is operational.

There haven’t really been any changes in the EAS system over the

last 4 years, if that is your question.

Mrs. CAPPS. Well, there have been no steps, no rulemaking?

Mr. MORAN. Yes. The Commission has a rulemaking—the Commission began a rulemaking a year ago. That rulemaking is in

process. We are looking at a number of things. Among the things

we are looking at, to see if we should make the use of the system

by State and locals mandatory. Right now broadcasters have to

agree to accept the State and local messages in order for it to work.

We also are looking to make sure—the current system actually

does not require digital broadcasters to be in the system, and we

are looking at that——

Mrs. CAPPS. But I want to ask, when does the FCC plan to conclude this proceeding? And why is it taking so long?

Mr. MORAN. Well, we have an open proceeding. I really couldn’t

give you a timeframe as to exactly when it is going to happen, but

the record has closed, and we are looking at—we are working on

it actually right now. There is also, you may be aware that there

is an executive branch—the executive branch began an overall review of all the emergency alert processes in recent months.

93

Mrs. CAPPS. In addition? That is a separate action from the

FCC’s action?

Mr. MORAN. Yes. There is a committee that has been established.

Mrs. CAPPS. So another committee. Another way of—- Mr.

MORAN. By the executive branch. But it is actually much broader

than just EAS system. It is to look at such things as should we involve cellular phone systems in the system.

Mrs. CAPPS. Yes, I want to get to that, too. Was the emergency

alert system activated with respect to Katrina and the breach of

the levees?

Mr. MORAN. My understanding, it was not used in this instance.

Mrs. CAPPS. It wasn’t used at all. And it has been 4 years. So

nothing——

Mr. MORAN. Well, but the issue of is it used, that is an issue—

the FCC, we have responsibilities to make sure we have an operational system, and we do, and we have testing rules, and we are

involved in that.

Mrs. CAPPS. But you don’t even know if it works because it

wasn’t used for Katrina.

Mr. MORAN. We do know that it works because there is a lot of

testing procedures that we do to make sure that——

Mrs. CAPPS. Why wasn’t it used?

Mr. MORAN. The decision as to if it is used or not even on the

national message, that is a decision by the executive branch; but

on the State and local side, it is the State and local government’s

decision as to whether or not to use it.

Mrs. CAPPS. Okay. Can I ask you how many times the Federal

authorities have activated it since it has been put in place?

Mr. MORAN. The current EAS, I believe, was put in place in

1994, and it has not been used for the Presidential message; however, it has been used hundreds of times for State and local messages, for hurricane and tornadoes——

Mrs. CAPPS. But in this case, when the President activated the

Federal Government’s involvement after the hurricane, it still

wasn’t——

Mr. MORAN. It was not used by the Federal, and it is my understanding that State and local authorities have not used it either.

Mrs. CAPPS. They didn’t use it either in this case?

Mr. MORAN. In this instance. I think the warning that the hurricanes were coming were so broadly known by everyone, it didn’t

probably need to be activated at that point.

Mrs. CAPPS. Well, that is a different question, isn’t it, sir?

And then you started to—if I could just use the last few seconds.

And, by the way, many States now have Amber Alerts. My State

has one that works very well for child abductions all the time. So

this technology is there.

But let me ask you finally to talk about the digital broadcasting.

More and more people are watching digital television. That is a

subject of concern to this committee as well. Does the FCC plan to

institute that part of this? Will digital requirement become part of

whatever is done?

Mr. MORAN. That is an issue in this proceeding, but I can’t speak

to the proceeding until the Commission decides how it is going to

act in that. That is an issue before the Commission in this proVerDate 11-MAY-2000 09:17 Nov 08, 2005 Jkt 000000 PO 00000 Frm 00097 Fmt 6633 Sfmt 6602 24246.TXT HCOM1 PsN: HCOM1
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ceeding that I told you about. That is before the Commission,

should we direct the digital broadcasters also to participate. That

is before the proceeding, but it is an open proceeding.

Mrs. CAPPS. One final, because I have a lot more questions to

ask. Who in the executive branch triggers the alert, if I could ask

you that?

Mr. MORAN. It is in the White House. I think it might be the Office of Science and Technology Policy.

Mrs. CAPPS. But you don’t know?

Mr. MORAN. I don’t know for a fact.

Mr. SHADEGG [Presiding]. The gentlewoman’s time has expired.

The Chair recognizes the gentleman from Georgia for 5 minutes.

Mr. NORWOOD. Thank you very much, Mr. Chairman.

Mr. Garman, can you tell me once again how many refineries in

this country are in operation?

Mr. GARMAN. There are a total of 10 refineries that are out of

operation, that are shut down at this moment. However, we expect

four of those to come back up relatively quickly, maybe one of them

as soon as today.

Mr. HALL. But the total in the Nation?

Mr. GARMAN. We are hearing 136 from the folks behind us.

Mr. NORWOOD. And the percent of those in the gulf coast, Whether they are working or not?

Mr. GARMAN. There was 8 million barrels a day of refining capacity in the gulf coast; 2 million barrels a day were down at the

height of the storm, and we have got about 1- of those back.

Mr. NORWOOD. But the percent at full production out of the Gulf

of Mexico is what for the Nation?

Mr. GARMAN. Roughly 50 percent.

Mr. NORWOOD. That is what I thought.

Now, why is it all there? Why did so much accumulate in the gulf

coast?

Mr. GARMAN. My theory is that, No. 1, that is where the production, most of the offshore production, virtually all of Nation’s offshore production, is located there. That is where investors have

been successful in building refineries.

Mr. NORWOOD. Because of why? Why were they successful there?

Mr. GARMAN. For a reason they found that closer to product, and

they possibly found a more willing and obliging State regulatory regime.

Mr. NORWOOD. We haven’t had a refinery in 30 years because of

State regulation?

Mr. GARMAN. It is not solely State regulation.

Mr. NORWOOD. Okay. A good bit of it?

Mr. GARMAN. It is the willingness of the community to host a refinery.

Mr. NORWOOD. That is where I am sort of going. Are there many

refineries in California?

Mr. GARMAN. I am told there are 21 refineries in California.

Mr. NORWOOD. And how about Massachusetts?

Mr. GARMAN. I am not aware of a refinery in Massachusetts.

Mr. NORWOOD. The problem is we don’t have our refineries distributed around the country appropriately, I guess, and I think

that is something that we significantly need to deal with, and I

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hope the energy bill does. And Chairman Barton says perhaps we

go back and look at that again, but I view that as a major part of

the problem, not just because of the hurricane which knocked out

so much of our capacity but because it was in one spot.

One of you have said that the price of crude oil is the single largest factor in the price of gas. Am I correct in thinking that?

Mr. CARUSO. That is correct. It accounts for about 60 percent

right now.

Mr. NORWOOD. And the price of crude oil then is determined by

supply and demand?

Mr. SEESEL. Yes, sir.

Mr. NORWOOD. And a great deal of the supply today is from

India—I mean, the demand is from India and China?

Mr. CARUSO. China is second largest.

Mr. NORWOOD. Are they making gasoline?

Mr. CARUSO. Not enough.

Mr. NORWOOD. Do they demand that much gasoline in China

that the amount of crude that they are buying is going to gasoline?

Mr. CARUSO. In China there is a much smaller percentage of the

total barrel going into gasoline because of their small passenger car

fleet.

Mr. NORWOOD. So what do they do with that crude if they are

not making gasoline?

Mr. CARUSO. Diesel fuel for generators and trucks and jet fuel,

of course, and also diesel for railroads. And they do burn some for

electric power, but not a lot.

Mr. NORWOOD. Well, the crude oil we purchase, what percent of

it goes toward fuels, gasoline, diesel?

Mr. CARUSO. Approximately 70 percent of our oil.

Mr. NORWOOD. That is what I thought.

Is China anywhere near that?

Mr. CARUSO. No, sir. They are much lower. I would say probably

about 25 percent.

Mr. NORWOOD. Let me just make one last comment, Mr. Chairman, to these gentlemen. And we thank you so much for your time.

Mr. Upton made a point earlier asking, ‘‘was an increase of almost

$1 or 75 cents over a period of 24 hours or 48 hours, is that called

gouging?’’ And none of you could answer that or would answer that.

And I think you are doing a disservice to your boss. The fact is it

is gouging, and the reason it is gouging is because the American

public perceive it as gouging.

I know there are other factors out there, there are other things,

but the fact is most Americans don’t understand and are not willing to understand why gas could go up 75 cents in 2 days. And we

need to deal with that as we speak, I think, in an appropriate manner, and we, too, should agree that something is bad, wrong for

that to go up 75 percent. Many people think that individual service

stations are trying to make an extra buck—maybe they are, maybe

they aren’t—but I don’t want you to deal with it, I don’t want the

Feds to deal with it. In my State of Georgia, as was pointed out

by Mr. Stearns, some of them went up $6 a gallon. Our Governor

took care of it: He sent the State Patrol over and arrested them.

Now, that is who I want to deal with that. He called it gouging.

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Most of us thought it was gouging. And he put a stop to it in Georgia very quickly.

And that is how I think we need to do it. We really don’t need

the Feds to help us with that. But I wish you would be careful of

how you speak of the increased price of gasoline that has sometimes gone up in a most unreasonable manner.

With that, Mr. Chairman, I am happy to yield back.

Mr. HALL [presiding]. I thank the gentleman. I thank him for

being so plainspoken. Did they torture that guy before they put

him in jail?

Mr. NORWOOD. No. They even fed him, too. It stopped it, Mr.

Chairman, I promise you.

Mr. HALL. I thank you.

The Chair recognizes the gentleman from Texas Mr. Gonzalez for

5 minutes.

Mr. GONZALEZ. Thank you very much, Mr. Chairman. I always

wanted to be on this committee, got my wish, and of course the

first thing we were dealing with was whether people’s TVs would

go dark after we converted to a digital system. It appears now we

have to make a decision about gasoline, whether people are going

to be able to afford gas to leave their homes; and, if they can’t, they

are going to stay home, and then when they turn their TVs on,

they won’t be able to get a picture once we convert over to digital.

But on the serious side, I had a question for Mr. Caruso. I think

you are going to be the most quoted guy on Capitol Hill after today.

What you are saying, in the fourth quarter gasoline prices will recede somewhere around to $2.60; is that correct?

Mr. CARUSO. That is correct.

Mr. GONZALEZ. And then next year, 2006, it will be around $2.40

nationwide average?

Mr. CARUSO. Yes, sir.

Mr. GONZALEZ. Because, believe me, our constituents are waiting

for some sort of word about what they are going to be paying, and

the fact that it is going to be coming down. For the first time, I

think we have heard some discussion regarding efficiency and conservation.

And I am going to ask Mr. Caruso, and, of course, Mr. Garman,

you can have your own opinion on this, this is from an article that

appeared in the Wall Street Journal, And it said: Last month, the

administration proposed a sweeping restructuring of the light truck

fuel economy rules, claiming the new policy would save the country

10 billion gallons of gasoline over the lives of vehicles bought from

2008 to 2011. Critics say the administration’s move wasn’t enough.

David Friedman of the Union of Concerned Scientists, environmental advocacy group, noted that 10 billion gallons of gasoline is

the amount that the United States uses approximately every 25

days. Quote: It is meaningless, he said, of the administration’s new

fuel economy proposal. The administration is bragging about saving

less than a month’s worth of oil over two decades.

Would you agree with I guess it is Dr. Friedman’s analysis of the

administration’s proposal, Mr. Caruso, as its real effectiveness?

Mr. CARUSO. I would not agree. I think that any savings is better

than no savings. So the statistics that you have quoted I believe

are accurate, but I would disagree with the characterization.

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Mr. GONZALEZ. Well, something is better than nothing. I guess

we can all agree on that. But sometimes something is not meaningful, and that is what I am getting at is we could do something that

is more meaningful, or people will be staying home a lot longer.

And if we don’t do the digital conversion, right, then they won’t

even have a television either.

Mr. Garman, do you agree with David Friedman’s analysis that

it really isn’t meaningful or substantive?

Mr. GARMAN. I would make a couple of observations. First, the

administration previously raised CAFE standards on light-duty

trucks in the 2005 to 2007 frame. I mean, we have raised—the administration has raised CAFE standards now twice, standards that

had not been raised at all prior to or since the 1996 model year.

And I think it is also important to point out that consumers have

the opportunity to choose high-mileage vehicles today. They don’t.

It is not a requirement that the government require manufacturers

to make these vehicles. I drive a vehicle today, and have since

2001, that gets more than 50 miles per gallon, and that is a choice

that I as a consumer can make and have made that choice.

So I think the question is consumers can buy vehicles today that

deliver great efficiency, and we should encourage them to do so.

The question is do we force markets and mandate consumer behavior and look to that as the answer? It is certainly an approach, and

it is a tool that we have used in the administration, but we also

want to encourage consumers to buy fuel-efficient vehicles not because the government is telling them they must, but because they

realize that it is in their own self-interests.

Mr. GONZALEZ. And I understand the big argument about choice;

consumers should be given choice. But, you know, policy and regulation and such is guidance so that you avoid a situation where

maybe our oil industries and others aren’t really prepared for suddenly a drastic shift in consumer choice. And that is what I am

talking about. When you are talking about the price of gasoline

reaching $3, $4, and $5, it definitely will cause a tremendous shift

in the way the consumers will choose. And I do think we need responsible policies that will point us in the right direction. You are

talking about hydrogen, we are talking about hybrids, we are talking about greater efficiencies. Those are realistic goals and policies

that we should be instituting. And I think to simply say, well, we

are going to deprive people of choice if we don’t do these things,

I don’t think that that is really what is going on.

I have a real quick question for Mr. Moran, and my time is up,

and I am hoping that they will allow you, and that is voice over

Internet protocol. We know that you have policies, programs, regulations, and coordination of what is going on out there. But what

about this new method or manner of providing phone service to

households? That is not incorporated in any of your plans, is it?

Mr. MORAN. It is incorporated. We have done some things to

allow voice over Internet to work and also to allow 911—to make

it mandatory, actually, for voice over Internet providers to provide

911 services. But do you mean in the emergency alert?

Mr. GONZALEZ. In the emergency alert system, sure, Because I

am just thinking that traditional providers come under the scheme.

But I don’t think voice over Internet protocol would.

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Mr. MORAN. I think we may have had some questions in our proceeding. I would have to check, though. We cast a pretty wide net

in our proceeding that is ongoing right now. I would have to ask

to see if we asked questions about voice over Internet, and I don’t

recall if we did.

Mr. GONZALEZ. If you could get back to me on that.

Mr. MORAN. Sure.

Mr. GONZALEZ. Thank you very much, Mr. Chairman.

Mr. HALL. The gentleman’s time has expired. Don’t worry about

us over in my area; we are still watching radio over there.

Mr. Shimkus, the gentleman from Illinois, is recognized for 5

minutes.

Mr. SHIMKUS. Thank you, Mr. Chairman. We have already mentioned about the inability to build a crude oil refinery, but it is not

true that we haven’t built refineries in this country; is that correct?

I don’t care who wants to jump up there. How about Mr. Garman?

Mr. GARMAN. Are you speaking of ethanol production?

Mr. SHIMKUS. Any.

Mr. GARMAN. Yes, sir. We have built—there are in excess of 70

ethanol production facilities in operation today, and that number is

growing as the weeks go by.

Mr. SHIMKUS. And so I have always chided my friends that, for

us in the Midwest, they don’t want to move and build petroleumbased refineries; we will continue to build renewable-fuel refineries.

In fact, I have got 90 ethanol plants that are on line today. There

are 17 plants that are under construction as we speak. There are

seven in Illinois, and 17 are planned for Illinois as we speak. That

kind of talks to some of the benefits of what we did in the energy

bill. We have to decrease our reliance on foreign oil, we did make

great progress on this issue, and I would encourage other feedstocks to look at this as an alternative.

I also wanted to direct my colleagues, I do a lot of energy debates

and discussions back in my district because of the expertise or lack

thereof that you develop over the years. And one of the slides I had

was China crude imports. In 1996, China demanded—and this is

from the International Energy Agency, it is out of the National

Journal—22,828 million tons of crude imports in 1996—that is a

billion; 122—then there is 122,699 million tons in 2004, which is

a sixfold increase in 6 years.

So for people to—so when I am asked by my public how—what

is going on, I have to talk about that fuel tanker that is loaded

with crude oil that is going to go to some port, it is either going

to go to India or it is going to go to the United States, or it is going

to go to China, what is going to determine where that tanker of

crude oil is going to go, to what port? And, Mr. Garman, what

would you say?

Mr. GARMAN. The willing buyer that will pay the highest price.

Mr. SHIMKUS. And that is what the public has to understand.

Now, I would like—Mr. Caruso, how much crude oil reserves do

we have within the continental United States or off our Outer Continental Shelf?

Mr. CARUSO. We had proven reserves at the beginning of this

year of about 28 billion barrels total, and that is in those areas

that have been drilled.

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Mr. SHIMKUS. How much do we not have access to?

Mr. CARUSO. I don’t have that precise number, but there is a significant amount of resources that haven’t been drilled and proven,

but that the USGS believes are available to be discovered. And I

could provide that number for you. But it is a significant—it will

be a significant increment to the proved number I just gave you.

Mr. SHIMKUS. And so many of us are very frustrated by this debate. It is incomprehensible that we in this country are importing

refined product. Just think of it from the job creation aspect. We

allow someone else to get the crude oil in some other refinery, so

they have got the tax base, they have the jobs, and we get the refined product? My constituents don’t really understand that.

In 1998, my first term as a Member of Congress, myself and a

colleague of mine, Karen McCarthy from the great State of Missouri, worked on changing Federal law under EPAct on which we

were able to give biodiesel credit, which changed the debate from

just vehicles purchased to fuel usage. And we have got a 50 percent

credit now for fleets, and many fleets are moving to biodiesel, decreasing reliance on foreign oil. In fact, it has really hit now. Willie

Nelson and all these stars are into soy diesel, and we are glad to

have them on board.

Has the administration thought about working with us to move

that credit to 100 percent?

Mr. GARMAN. We will certainly engage with the Treasury Department and have those discussions. To my knowledge, I have not

been part of any such discussions.

Mr. SHIMKUS. If you can get back to me, I would appreciate it.

And if we can be helpful, I would like to be.

Mr. Chairman, thank you. I yield back my time.

Mr. HALL. I think the gentleman’s time has expired.

The Chair recognizes Mr. Inslee from the State of Washington for

5 minutes.

Mr. INSLEE. Thank you.

Last weekend I went down to the Astrodome to work with the

evacuees, and I can tell you, I was so inspired talking to these people. The resilience, the graciousness, the appreciation of these people for what the country is doing for them, it was really inspiring.

On our way back, we were flying back from Houston to D.C.,

halfway through the flight one of the evacuees who was heading

from Florida took out a razor blade and slashed his wrist to cut it

and take his life. He had just simply had it. And the reason I mentioned, that we diverted our flight plan to Nashville to rescue him,

and he is okay; we had two EMTs on the flight, and it was a happy

ending of sorts. But we changed our flight plan to accommodate

that.

And it is clear to me that we need to have some major flight plan

changes in this country. We need a flight plan change on our fiscal

policy to pay for this what is going to be close to a $100 billion disaster by the time we are done. We need a flight plan change to deal

with global warming, which has the capacity to make these hurricanes more intense. And it is clear to me listening to you today we

need a flight plan change on dealing with gouging and those who

take advantage of these poor, not just evacuees, but all of us.

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Now, what I would like to make real clear on, we have heard

that the Federal Government does not have the ability to force

these antigouging laws in the absence of collusion. I would like to

know whether your administration is here asking the U.S. Congress to take action to give the administration more authority to

prevent gouging from taking place. And the reason I ask you that

is that this administration sat on its hands and let Enron abuse

us to the tune of $1 billion and did nothing in the State of Washington. We don’t want that to reoccur. So the question to you gentlemen: Are you asking us to do something to prevent gouging?

Mr. GARMAN. No, sir, I am not here today for that purpose.

Mr. INSLEE. Anyone else?

Mr. SEESEL. Congressman, as I said to some of your colleagues,

I would need to check with the full Federal Trade Commission on

what it is asking for, but I don’t believe the Commission——

Mr. INSLEE. Well, I have to tell you, that is extremely disappointing. You know, when we heard the President say that no

one could have anticipated that these levees would have been

breached, and as a result we had a pathetically indifferent Federal

response to this terrible tragedy, and those people ended up on the

Astrodome floor, to see another pathetically indifferent response to

gouging is very, very disappointing. We on this side will be introducing legislation which will call for giving you authority to prevent gouging in the case of natural disaster, taking into consideration the real prices, taking into consideration the amount of rampup. And when that happens, I hope you will come back to us and

support that legislation to show a little more aggression dealing

with this problem.

I want to go to the second issue. Mr. Garman, have you read the

National Oceanographic and Atmospheric Agency report on global

warming and its impact on hurricanes?

Mr. GARMAN. No, sir I have not.

Mr. ROSS. Let me help you out. The National Geographic Pollution Dynamics Agency of the administration—not a bunch of granola eaters in Berkeley—the administration says, and I quote, ‘‘the

strongest hurricane in the present climate may be upstaged by

even more intense hurricanes over the next century as the earth’s

climate is warmed by increasing levels of greenhouse gases in the

atmosphere. Although we cannot say at present whether more or

fewer hurricanes will occur in the future due to global warming,

the hurricanes that do occur near the end of the 21st century are

expected to be stronger, more intense, significantly more intense

rainfall than the present day climate.’’ No one is saying this is

caused by global warming, but some have suggested before you

spend $20 billion in rebuilding New Orleans and Mississippi, we

should do so with a national policy that pays attention to science

and that your administration, says the hurricanes will become

more intense in the next several decades, and you are encouraging

a policy which occurs in the development to reduce the barrier island protection, you cut the budget dealing with levees, we have

now had the most horrendous hurricane in American history. Do

you think the administration should rethink its refusal to consider

global warming?

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Mr. GARMAN. I think the president has said in February 2003,

with regards to global warming, it is a serious issue. I think the

President repeated that at the G-8 meetings in Gleneagles most recently this year. We believe that we have a response. And I think

if you actually look at actual carbon emissions performance of the

U.S. Versus the EU and other nations, you will see that we have

a very, very good record. Our rhetoric may not be as forward leading as some of our EU partners, but the performance in actually

avoiding greenhouse gas emissions is actually among the very best

among the signatories to the framework convention on climate

change.

Mr. ROSS. Let me suggest a different viewpoint. If the administration policy on global warming is similar to the policy on levees

in New Orleans, which is not listening to science that specifically

refused to adopt a elimination of this issue which occurred, which

many of us here want to propose, you refuse to block efforts to increase and reduce oil consumption in the energy bill just passed.

You refused.

Mr. Chairman, I think I have 8 minutes. I waived my opening

statements. I probably have a couple more minutes. Am I right on

that?

Mr. HALL. I don’t recollect that, but if that is your recollection,

I will honor it.

Mr. ROSS. You refuse to embrace something meaningful and that

has to do with price with global warming. We have a CAFE standards that are so abysmal. China has better corporate standards

than we. In the past years they had improved their output. If you

want to talk about the way to reduce prices, let me ask you this,

don’t we have to find a way to reduce demand in the most effective

way? We have advanced in the last few decades what we demonstrated in 1975 and 1973 when we almost doubled a 60 percent

increase at least in our fuel economy standards which this administration refuses to take action.

Mr. GARMAN. Sir, again, this administration has raised or proposed increases in corporate average fuel economy standards

twice—the first increases since the 1996 model year. I can understand that we can have disagreements about the scope of that increase and whether that increase should be more or less, and that

is what we propose.

Mr. ROSS. Perhaps there will be a reconsideration, I don’t know,

but we hope you will reconsider. And I will tell one would think

after the hurricane, after we have seen these prices, outrageous

prices at the pump, after we have seen the destruction or diminishing of our refineries on the southern coast, which has always

been vulnerable to hurricanes, one would think that we would have

administration policy to increase CAFE standards enough to at

least reduce our dependence on foreign oil.

Now, according to the energy information office, I am told that

the policy that the administration has proposed, what they want to

do with CAFE, which was almost nothing, would result in our foreign fuel energy policy actually rising in next decade.

Is that true that under the policy that your administration proposed, our dependence on SaudiArabian and Mid East oil—in part

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because of your refusal to adopt fuel efficiency standards—will actually go up?

Mr. GARMAN. Again, if one were to look at that single policy in

isolation, I wouldn’t dispute the contention that that single policy

in isolation will not reverse our petroleum dependence. But I would

submit to you that were we to do that and a good deal more, including opening the Arctic National Wildlife refuge to production

and increasing CAFE standards, even beyond that, we would still

looking at a situation of increasing dependence on foreign petroleum.

Looking at these policies in isolation will not give us the result

that we need. There is no silver bullet. We need comprehensive

policies of a variety of different things.

Mr. ROSS. We just feel that we are not doomed if we start to embrace the new technologies. Thank you, Mr. Chairman.

Mr. HALL. Thank you, and the gentleman’s time has expired.

Let’s see. Chair recognizes Mr. Bass, gentleman from New Hampshire, for 5 minutes.

Mr. BASS. Thank you, Mr. Chairman. Mr. Caruso, I was wondering if you could help me understand why retail gasoline prices

moved up so rapidly in my neck of the woods in New England,

since New England sources a significant amount of its gasoline, finished gasoline supplies from Canada, I believe some of it from the

Virgin Islands, but virtually none of it from the gulf. Shouldn’t

there have been some more protection in our region than there

have been in others?

Mr. CARUSO. Well, not all States’ prices did rise. The main reason prices rose is that the market’s fungible, and, therefore, when

gasoline goes up at the NYMEX futures market, often wholesale

prices and contracts that retails are indexed to that, so that is part

of the reason. I can’t really speak specifically to New Hampshire.

Mr. BASS. I guess the fact is that prices for all fuel went up because of the gulf crisis, even though the actual cost to the manufacturer didn’t go up, because there was no impact, the refineries, all

the fuel, most of the fuels in New England came from—had nothing

to do with the gulf.

Mr. CARUSO. That is correct. As I mentioned earlier, it is a global

market and prices went up in Europe as well for example.

Mr. BASS. Different subject. You testified earlier that home heating oil would be 30 percent more expensive than last year as a result of Katrina and the market disruptions caused by it. So for low

income Americans, do you believe the government’s low, major fuel

assistance program, LIHEAP, would be need to be funded at a level

30 percent or so higher than last year’s just to keep the purchasing

power the same. Forgetting the weather issues and how this winter

may come, if fuel prices are up 30 percent, should low income energy be up 30 percent?

Mr. CARUSO. Just a clarification, the 30 percent increase includes

the fact that prices had already risen before Katrina, so that they

would have—it would have been up year on year regardless——

Mr. BASS. So it might be more than 30 percent.

Mr. CARUSO. No. 30 percent includes our latest assessment, including the impact——

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Mr. BASS. Fair enough. So you think it is going to take, is it fair

to say you think it will take 30 percent more money to fund

LIHEAP?

Mr. CARUSO. I am not really familiar with the relationship between the LIHEAP budget and the current price. I would have

to——

Mr. BASS. But if any panelist—it is intuitive if price of heating

oil goes from 150 to 250 a gallon, that is a third increase, it will

take more money to fund LIHEAP?

Mr. CARUSO. Absolutely: whether it is 30 percent or not, I have

no idea.

Mr. BASS. I have one further question because I am running out

of time.

Mr. Garman, it would be fair to describe some elements of the

energy infrastructure as being a total loss. I am not talking about

production capacity, but on the consumption side. And are going to

go through a period spending a lot of money on rebuilding that infrastructure.

Is there not an opportunity here to implement other kinds of

outer energy consumption patterns, distributed energy, distributed—other ideas, if you will, that would lead to a somewhat different infrastructure, a 21st century infrastructure, rather than an

early 20th century, or is it going to be the Agency’s position, if it

has a position, that we are just going to try to duplicate what was

there before?

Mr. GARMAN. I would hope that any rebuilding effort that results

as a consequence of Katrina will encourage folks to look at new

technologies, distributed generation, micro grids, solar, very highly

energy efficient housing. I would like to think that as houses are

rebuilt, they are rebuilt at a much higher level of energy efficiency.

And I would hope that consumers, who are in a position to make

those choices, would ask their builders for these new technologies

and a higher energy efficiency than the house that they lost.

Mr. BASS. One last question for Mr. Caruso.

Are you aware that there might have been any gasoline stocks

that were diverted from, originally designated for the Port of Portsmouth, which is in New Hampshire, or elsewhere in New England,

were they diverted to any other region of the country after

Katrina?

Are you aware of any? And I don’t have a follow-up. If you don’t

know, would you be willing to look into the possibility that one of

the problems of fuel prices was that supplies were diverted away

from the northeast for one reason or another?

Mr. CARUSO. I am not aware of any such diversions, but I can

certainly check our sources.

Mr. BASS. Thank you. I yield back, Mr. Chairman.

Mr. HALL. Thank the gentleman. The Chair recognizes the

gentlelady from Wisconsin, Ms. Baldwin, 5 minutes.

Ms. BALDWIN. Thank you, Mr. Chairman. I wanted to follow a little along the lines of earlier questions by Mr. Upton and Ms.

Capps. Mr. Moran, you are the director of the Federal Communications Commission’s Office of Homeland Security?

Mr. MORAN. Yes I am.

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Ms. BALDWIN. And in addition to the disaster response that you

have been describing, what the commission has been up to over the

last week, does your office also engage in planning ahead for

threats and other disasters that could impact our homeland security?

Mr. MORAN. We—I have responsibilities in that area.

Ms. BALDWIN. And does your office also work with other agencies

across the Federal Government in order to come up with such

plans and recommendations for——

Mr. MORAN. Yes. We work very closely, especially with national

communication systems and the Department of Homeland Security.

Ms. BALDWIN. So, in that role of planning ahead and interagency

planning, have plans been developed for emergency communications in the event of a hurricane or other disaster that can be expected to topple power lines, phone lines and wireless towers as we

have seen in the past week?

Mr. MORAN. Well, the Federal Government’s role primarily in the

communication, emergency communications you are talking about,

are really to make sure that the carriers’ processes and systems

can work. And the carriers themselves have—all the major carriers

have detailed emergency plans. There is a lot of dialog between the

carriers and the FCC and the NCS on these plans, and many——

Ms. BALDWIN. So is what you are saying is you try to prompt the

private sector and the regulated sector to do the right thing, but

the Government itself does not have its own set of detailed plans

on how to have communication occur in the event of a catastrophe

like this one?

Mr. MORAN. I would say the biggest role we have is perhaps as

a catalyst. We have a number of advisory committees. We have two

major advisory committees that look at these things, and we set

the direction for the advisory committee. They run for 2 years. One

of them is called the National Reliability and Interoperability

Council. It is all major carriers, manufacturers participated in this

advisory panel, committee. And the Commission establishes the

agenda basically for it. Right now, it is primarily focused on actually public safety communications.

Ms. BALDWIN. I am pleased to hear that emphasis. It seems in

your testimony you point to, I guess, sort of four issues of communication challenges, problems, things that were hampered during

this last week. One was the ability to communicate between first

responders within an entity or department. A second was that communication between first responders in various levels and jurisdictions. A third was problems with communication between first responders, government officials and hurricane survivors and telling

them about the availability of and where the relief effort was going.

And then last, you pointed out too the challenges in assisting survivors to figure out how to communicate with and where are their

loved ones, et cetera.

Do Federal plans or recommendations to localities and States

exist with regard to all four of these critical areas so that in the

future, we have backups and redundancies, perhaps not relying totally on the private and regulated sector, but that we can step in

and make sure that this type of lack of communication never happens again to Americans.

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Mr. MORAN. Well, approximately 90 percent of all the communications assets that we are talking about that are relevant here,

that infrastructure is really a privately owned infrastructure. Our

primary focus is to make sure that that is as robust as it can be

and that we know that the major—we know that they all have

emergency plans. We discussed their plans with them.

I would say that the primary parties who are responsible for the

Federal Communications assets that we put to bear on these functions are really not with the FCC.

Ms. BALDWIN. But it does sound like you are saying that this

could happen again.

Mr. HALL. Gentlelady’s time has expired.

Chair recognizes Mrs. Myrick, the gentlelady from North Carolina, 5 minutes.

Mrs. MYRICK. Thank you, Mr. Chairman. Thank you all for your

patience. Next time you need to bring your lunch.

I had a question for Mr. Caruso. Can you tell me if there was

any pressure taken off the gasoline prices by the easing of the restrictions on the Clean Air Act probiotic fuels?

Mr. CARUSO. We saw a fairly rapid response to the waiver by the

EPA and the other regulatory relief that was granted last week.

Within 24 hours of that, NYMEX gasoline prices started to fall.

Mrs. MYRICK. So it was helpful?

Mr. CARUSO. Yes.

Mrs. MYRICK. I appreciate that. We talked a lot about not having

a refining capacity cushion in this country. What would you say

does our country need? What type or what would you need to do

to create that? How much do we need? That kind of thing.

Mr. CARUSO. I think the two most important things are regulatory certainty,, which Mr. Garman mentioned in his comments,

and the other one is really not something that we think can be legislated. The return on investment had been so poor in the 1980’s

and 1990’s that that inhibited investment during those 2 decades.

And now we have had 3 years or so of pretty high refinery margins.

Whether that is sufficient to attract upstream investment is unclear; so far we haven’t seen much. There is one case in Arizona,

a project that has continued to languish, I think, partly through

regulatory problems, permitting, as well as financing. So I think at

least from a Government perspective, the most important thing

would be regulatory certainty.

Mrs. MYRICK. I know in our area we have a couple of companies

that are looking at nuclear power again very seriously because of

what was done in the energy bill, something I feel strongly about,

too.

I appreciate your time. Again, I yield back, Mr. Chairman.

Mr. HALL. I thank you for yielding back, and the Chair at this

time recognizes a fine member of this committee, Mr. Albert Wynn.

Gentleman has 5 minutes.

Mr. WYNN. Thank you, Mr. Chairman. Thank you for your flattery as well.

Mr. Garman and Mr. Seesel today cited the need for increased

refining capacity. There is a very significant criticism being leveled

at the FTC, Mr. Seesel, that the FTC is not taking a hard enough

look at this issue as it reviews acquisitions, according to an article

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in the Washington Post entitled Refiners Mergers Good For Business Not Consumers. It indicates that the Commission last week

approved a purchase of Premcor by Valero making the latter the

Nation’s largest oil refinery.

Are you familiar with the article?

Mr. SEESEL. Yes, Congressman, I am.

Mr. WYNN. The article States that the FTC and its staff never

seem to make the link between industry consolidation, rising energy prices and record profits and suggested there is a gentlemen’s

agreement against investing too heavily in new capacity that the

FTC’s analytical approach does not seem to take into account. The

article goes on to cite the fact that the rate of return on shareholder equity is 23.9 percent last year and 16 percent over the past

decade. I think this is a pretty serious criticism in light of what everyone seems to be saying is the need for more refining capacity.

It appears there is no incentive for expanding refinery capacity because of profits being made through mergers and basically maintaining the status quo.

How do you respond to this criticism?

Mr. SEESEL. As Mr. Caruso has pointed out, I think one of the

primary reasons refining capacity has really been sort of stalled in

recent years is that until the last couple of years, it has fairly low

return on investment. So the idea of investing in new refining capacity has been quite unattractive.

Mr. WYNN. 16 percent over the last decade.

Mr. SEESEL. Well, I think it probably reflects the uptick of the

last several years because over the last 10 years or so, and Mr. Caruso probably has better figures on that, I think, for example, several years ago I think the return on investment was abysmal. And

I don’t know exactly what the number was——

Mr. WYNN. Can you get us that information about the return of

investment over the past few years because it seems to me that the

return actually has been pretty good.

Mr. SEESEL. I will be glad to, Congressman.

Mr. WYNN. So your bottom line response is you don’t accept the

criticism.

Mr. SEESEL. Well, the author of that article is entitled to have

any thoughts he wants about gentlemen’s agreements and so forth.

We have looked at many, many, many mergers and millions of

pages of documents in this industry over the 25 years we have been

looking at this and have come up with virtually no evidence of anything like that.

Mr. WYNN. Did you find it interesting that the article says that

when President Bush sited the availability of inactive military

basis as possible locations for expanded refinery capacity, that the

spokesman for the Valero said they weren’t interested in that?

Mr. SEESEL. I hadn’t really focused that much on that part of the

article. I am aware, Congressman, that some refining executives

found the proposal about military bases to be interesting, although

some had some concerns about how close they were or not to crude

oil supplies. So that the idea of siting a refinery on certain military

bases didn’t have much appeal to them.

Mr. WYNN. Let me move on to another question that has been

talked about at some length today, and has to do with price

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gouging. And I think you, in fact, testified it was very complicated

and depended upon circumstances, et cetera. Has FTC ever studied

this issue?

Mr. SEESEL. The Commission has looked at pricing issues in the

context of claims and allegations that there is collusive activity

going on.

Mr. WYNN. Is there a report?

Mr. SEESEL. The Commission did some investigations of petroleum and gasoline prices.

Mr. WYNN. Is there a report on price gouging?

Mr. SEESEL. On price gouging per se, no, sir.

Mr. WYNN. In view of the complaints that you received, don’t you

think that is an appropriate role for the Agency?

Mr. SEESEL. I certainly think, Congressman, that to the extent

we get complaints that are phrased in terms of price gouging, it is

appropriate for the FTC to look at whether or not there is any violation of any law.

Mr. WYNN. So can we expect that you will, in fact, conduct a

study because you have already testified that you got the complaints and that you forwarded to them to the States’ attorneys

general. So presumably you think they have some credibility.

Mr. SEESEL. As you know, under the new Energy Act, we are

under section 1809, the Commission is going to conduct a study

starting right now of manipulation of gasoline prices in this country.

Mr. WYNN. So you are telling us, the committee, that you will be

studying and reporting back on price gouging?

Mr. SEESEL. Really, all aspects of possible manipulation of gasoline supply and prices.

Mr. WYNN. I appreciate that. Mr. Garman, you talked about hydrogen. You said 2020 would be the year we would have hydrogen

cars. What is the administration doing to speed that up?

Mr. GARMAN. We think that the—frankly because we are dependent on certain technological breakthroughs that aren’t necessarily

mindful of a timeframe, we have to have some success in the lab.

As you and I have talked about before, hydrogen storage is a technical barrier that we are confronting.

We don’t know what the answer is. So we are putting more

money into that effort to find, you know, to research different and

new compounds, halides and chemical and metal hydrides that

might be good storage media, but you know what we need in addition to the funding is time—it is a learning process. So I am not

certain that there is a lot that can be done to speed that up.

It has been suggested in the past we put more money in it and

that would be an approach because it might enable us to study two

pathways at once or three pathways or multiple pathways. But

what we really need is time.

Right now, we have several—we have a number of hydrogen vehicles on the road. We are collecting data, performance data. And

what we need to do is take that data back to the laboratory and

then come up with the next iteration. So it is not—there is not a

whole lot that we can do to speed that up if the ultimate goal is

a product that consumers will choose and consumers will buy.

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We can produce a car tomorrow that has performance characteristics that we want but not at a price that consumers can afford.

That is going to take some time.

Mr. WYNN. Thank you. I yield back the balance of my time.

Mr. HALL. Thank the gentleman. Chair recognizes Mr. Sullivan,

gentleman from Oklahoma, 5 minutes.

Mr. SULLIVAN. Thank you, Mr. Chairman. And you know, this

was a horrible tragedy, Katrina.

Mr. HALL. Sir, you get 8 minutes in all.

Mr. SULLIVAN. 8 minutes. It is horrific the things that happened

and it disrupted our energy sector, it has affected this country in

many ways. I was in the State legislature when the Oklahoma city

bombing occurred, too, and that was horrific as well. And one thing

that, you know, does come out of these horrific tragedies is sometimes something good. And I think that we do need to look at our—

examine our energy infrastructure, energy needs in general, even

better than we did on the last energy bill. I don’t think that went

far enough. And we need to look at the long-term overall strategy

of energy looking at nuclear power, all the alternative energy

sources, because I do believe that some day, and it won’t be in our

lifetimes or our kids’ lifetimes or even our grandkids’ lifetimes, but

we will run out of oil and gas or it will become too expensive to

produce. And one thing I do want to bring to peoples’ attention is,

I guess, Mr. Garman, I will focus this to you.

Right now in this country if we were to find, let’s say you and

I found a billion barrel reserve today somewhere here in this country, would we be able to refine it?

Mr. GARMAN. We would be competing with many other—with

others.

Mr. SULLIVAN. Outside the country?

Mr. GARMAN. Probably what would happen is we would displace

foreign oil into that—domestically produced crude would displace

foreign oil that was coming into those refineries is what most likely

would happen, is my estimation.

Mr. SULLIVAN. But we are at maximum capacity with our existing refineries; now, would you agree?

Mr. GARMAN. That is correct. We actually do not have refining

capacity to refine all of our needs today.

Mr. SULLIVAN. And there is a place, I don’t know if you are familiar with Cushing, Oklahoma, it is just outside my district, but

there are 23-some odd pipelines go through that area, and there

have been refineries there in the 1920’s and I think up to the

1970’s. Kerr-McGee had a refinery there. They had like Citgo, Conoco Philips refinery, Embridge, Shell Sunoco, Texas Eastern Pipeline Partners, Magellan, Plains All American, just to name a few.

Many pipelines intersect in that area in Oklahoma. And also it is

the delivery point for NYMEX crude oil futures contracts.

Would this be a good idea? And I have always said since I got

elected, wouldn’t it be a great idea to build a super mega refinery

in that area? We have the supply coming in. We are not next to

an ocean. We do have a great infrastructure of pipelines there, as

you know.

But could you see that becoming a reality if maybe we lessened

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ting, kind of like what we did in the House version of the energy

bill, maybe we can go back and revisit that and make it even better, but to build a megs refinery there, maybe making let’s say 2

million barrels a day. I don’t know. But would that be a reality?

Mr. GARMAN. The Nation needs more refineries. And if Oklahoma is willing to host a refinery, then I hope investors are listening, and if there is anything we can do to help make that come to

pass, we would be happy to do that.

Mr. SULLIVAN. Well, if Oklahoma decides that is something we

want to do, I think that is something Oklahomans want to do,

would you be willing to help us along the EPA and all of that as

well?

Mr. GARMAN. Yes, sir.

Mr. SULLIVAN. Are you committed to doing that? Thank you very

much.

Mr. HALL. Gentleman yield back.

Mr. SULLIVAN. I will yield back, yes.

Mr. HALL. Chair recognizes Mr. Markey, 5 minutes.

Mr. MARKEY. Thank you, Mr. Chairman. Over the course of the

last few years, the oil companies have earned record profits as this

chart indicates. Exxon-Mobil’s profits have risen from $11 billion to

a projected $31 billion this year. Chevron-Texaco’s profits have

risen from $1 billion to $13 billion; BP’s from $8 billion to $21 billion; Shell’s profits have risen from $10 billion to $20 billion.

These are huge numbers. And they are the direct result of soaring oil and natural gas costs. Gasoline has risen from $1.85 to

$3.04 on the average.

In the last year, heating oil has risen from $1.36 a gallon in 2003

to a projected $2.22 a gallon this winter. Natural gas has risen

from $9.85 per thousand cubic feet a few years ago to a projected

$12.81 this winter. We need to know why. This is all before

Katrina. This is just what has been going on in the market.

Mr. Garman, in the last 10 years, at least 30 refineries have

closed.In the last 10 years, at least 30 refineries have closed. These

refineries were all fully permitted and were producing gasoline for

the American public.

Do you know of a single refinery the oil industry is seeking to

reopen to produce gasoline in the U.S. Market?

Mr. GARMAN. I am not aware of one, no, sir.

Mr. MARKEY. No. Mr. Caruso, last year, Business Week reported

that refineries are running near capacity because they have little

incentive to build more. For starters, they make more money when

supplies are tight, says Business Week.

Do you agree that reduced refining capacity means higher profits

for oil companies?

Mr. CARUSO. Well, profitability really has more to do with the demand, the competitiveness in the world market than that single

data point that you just mentioned. But that is one of the components.

Mr. MARKEY. Haven’t refinery margins increased, that is, refinery profits increased?

Mr. CARUSO. They have increased.

Mr. MARKEY. The less refining capacity, that is, the more refining capacity that American oil companies have closed is the more

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money refiners are making. Their profits are going up. Is that correct?

Mr. CARUSO. That is accurate and it is also accurate on a global

basis, not just in the United States.

Mr. MARKEY. You are saying the whole world is shutting down

refineries?

Mr. CARUSO. The refining capacity on a global basis is tight. Yes.

Mr. MARKEY. Is tight. So this is a global pattern where the largest oil companies, not only here, but across the world, have been

shutting down refining capacity, without a government mandate to

do so over the last 10 years.

Now Mr. Garman, in the past, oil industry has suggested that

somehow environmental permitting requirements were to blame for

the industries failure to build new refineries. However, let me read

to you from an internal Chevron document in 1995, ‘‘If the U.S. Petroleum industry doesn’t reduce its refining capacity, it will never

see any substantial increase in refining margins.’’

So Mr. Garman, by closing 30 refineries since 1995, not building

new ones, but closing 30 already existing operating refineries, the

oil industry seems to have achieved their goal of 1995 of higher refining profits, have they not?

Mr. GARMAN. My understanding is that smaller, less efficient refineries have shut while existing refineries have expanded capacity.

And the strategy—and I am not the right person to ask. You

should ask—you will have a witness in the next panel to ask specifically what is their motivation, but my observation has been

there is a component of the environmental standards to comply

with environmental standards and maintain an update refineries

to——

Mr. MARKEY. But this was not building—these are not building

new ones. These were the old ones. And instead of continuing to

maintain them, they just decided to shut them down. But they

could have, with their profits, maintained them and kept them

going.

Mr. GARMAN. Actually many times—and Mr. Caruso has better

data—but many times, refinery margins have been quite small and

not been conducive to new invest and expansion.

Mr. MARKEY. Exactly. Chevron said that in its document in 1995,

they said, we will never see any substantial increase in refining

margins if we don’t reduce—if we don’t reduce, that is, Chevron

doesn’t reduce its refining capacity.

And Mr. Seesel, the FTC is supposed to be in charge of monitoring the oil and gas industry for evidence of anti competitive or

manipulative activities.

Has the FTC examined whether current situations that now

have, with respect to refining capacity, may be the result of a deliberate strategy by the oil industry to reduce capacity in order to

drive up the profit margins and prices to consumers? Have you

ever had an investigation?

Chairman BARTON. If you can answer that please answer that

and that will be his last question.

Mr. SEESEL. Congressman, I don’t think the Commission is

aware there is any evidence, there is any collusive or anti competitive scheme among oil companies to reduce refining capacity.

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Mr. MARKEY. Have you ever investigated it?

Mr. SEESEL. The Commission looked at the Shell Bakersfield refinery situation in California. The situations we are aware of are

individual unilateral decisions by refineries.

Mr. MARKEY. Did you ever look at what—30 refineries all shut

down?

Chairman BARTON. Gentleman’s time has expired. The gentleman is obviously entitled to provide written questions to this

panel in addition to the questions he has already asked.

Mr. Murphy of Pennsylvania has 8 minutes, if you chose to use

them.

Mr. MURPHY. Thank you, Mr. Chairman. I am trying to summarize what I have learned so far in the last 5 hours.

It comes to this, that I think what you are saying is when it

comes to defining these price jumps, price gouging, it is much like

the Supreme Court’s definition of obscenity. You can’t tell us what

it is, but you know it when you see it.

Which doesn’t leave us, our constituents, or Americans in general, with a lot of comfort, although I say that tongue in cheek.

I just want to review a few things, and whoever is best to answer

this, I appreciate that. We do not have enough oil to meet the

needs of our citizens. Therefore, we have to import. When we do

produce more oil to meet our needs, other areas like OPEC reduce

their production in order to keep prices high. When we have catastrophes such as what we just experienced in the Gulf Coast, we

have to raise prices to pay for future costs, increased costs of gasoline and also anticipated costs. If we are importing more, other

countries can also raise that price. Am I correct so far, anybody,

Mr. Caruso?

Mr. CARUSO. I think that is generally accurate.

Mr. MURPHY. Now on this, I have a question. I want to know

what the Department of Energy has done on this particular issue.

I want to read a couple of quotes from something, and I would like

to ask unanimous consent an article from the October 2004 National Geographic be entered into the record. This article made a

chilling prediction of this whole event. I will read a couple quotes

from this.

It says the ‘‘Federal Emergency Management Agency lists a hurricane strike on New Orleans as one of the most dire threats to the

Nation, up there with a large earthquake in California or terrorist

attack in New York City. Even the Red Cross no longer opens hurricane shelters in the city claiming the risk to its workers is too

great.’’ It goes on to say, ‘‘the most startling impact has only recently come to light. From concerns about tidal surges, the effect

of oil and gas and petroleum subsidence rates—there is another aspect there. For decades geologists believed that the petroleum deposits were too deep and the geology of the coast too complex for

drilling to have any impact on the surface. But 2 years ago, petroleum geologist Bob Morton, now with the U.S. Geological Survey,

noticed the highest rates of wetland loss occurred during or just

after the periods of peak oil and gas production in the 1970’s and

1980’s and concluded that that had an impact on reducing some of

the areas of the wetlands.’’

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We knew before then that this area was prime for huge devastation from tidal surges, and we knew we had huge loss of wetlands,

and some of this might have been gue to oil exploration. Was there

something the Department of Energy did or should have done with

regard to alerting the oil companies and saying we can’t have 25

percent of our oil production or refinery production situated in an

area which is considered by FEMA to be at extremely high risk for

devastation.

Did we know it was coming? And did we do anything about it?

Mr. GARMAN. No, sir. I cannot say that we made a connection between oil production and subsidence. I would note that I haven’t

seen the scientific literature behind that National Geographic article. My observation would be the old warning of every statistics

professor that correlation does not necessarily mean causation. But

that is a very interesting possibility——

Mr. MURPHY. But still we knew there was a large loss of the

marshlands which were the natural buffer for storm surges, and we

did know that with all the oil refineries clustered around there that

there would be trouble for category 3, 4, especially 5 hurricanes. I

am curious if anybody from the Department of Energy began to

raise questions and say we need to put some pressure on oil companies to change this and not wait 30 years.

Mr. GARMAN. My understanding is that refinery siting—and we

had a discussion I think about some of this while you were out of

the room, but refineries are sited where they can be based on market conditions and the willingness of local population to accept

them.

Yes. In a perfect world, it would be better to have refineries distributed geographically around the country. And I think that recognition is well understood. I am not sure that we have the tools

or the capability to force anyone to do that distribution. I dare say

that the market and the insurance market and the reinsurance

market might as a consequence of these losses. It would probably

be more difficult in the future to site a refinery or some of this infrastructure that close to the coast. And I think the market will respond, and folks looking to site a new refinery will site their new

refinery elsewhere.

Mr. MURPHY. So what you are saying is perhaps our minds will

change, at least the minds’ of those who are otherwise opposed to

siting refineries and distributing them around the country. Otherwise we could remain extremely vulnerable to a natural disaster or

terrorist attack.

Mr. GARMAN. I think it would be a mistake for us to ignore a lesson that has been so devastatingly made clear to us in this instance, yes.

Mr. MURPHY. Does anybody else on the panel have a comment

on those issues? Mr. Chairman, it comes down to this: A lot of our

constituents are enraged about fuel prices. And seems sometimes

the best we can offer them is what people have said, is either there

is some intentional price gouging, or it is the marketplace and a

shortage and we don’t have the refinery capacity.

What the American people look upon in times like this is that

we have to show them that we are working together in a bipartisan

way to come up with some solid solutions on this. And that is why

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I am really hoping we can move vigorously forward in a couple of

areas, and that is that we have to explore for more oil in this country, we have to move more vigorously toward clean coal technology

and nuclear energy, and we have to build more refineries because

to wait longer is going to have a more devastating and far-reaching

effects on our economy. And with that, I will yield back the balance

of my time.

Chairman BARTON. Gentleman yields back. The gentlelady from

California, long, patient Mrs. Solis is recognized.

Ms. SOLIS. Thank you, Mr. Chairman. I appreciate that.

My question is for Mr. Caruso. I wanted to bring to your attention report that I came across. The investment firm, Friedman, Billings, Ramsey & Co. noted that in early August 2005, refinery margins rose 54 percent, and that these profit margins were responsible for 60 percent of increased cost of fuel at the pump. Other estimates say as much as two thirds of the increased cost of gas at

the pump is a direct result of profit margins of refiners.

Murphy Oil, a company with refineries impacted by the gulf

coast, yesterday lamented the fact that it has refineries offline and

is missing out on record margins. It seems from these reports that

the refinery business is quite profitable, more profitable than any

other sectors of our economy.

Do you agree with this assessment of these reports which identify a link between the increase of refinery profits and the cost of

gasoline at the pump?

Mr. CARUSO. I haven’t seen those specific reports, but clearly,

even before Katrina, particularly in July and August, there was a

significant run-up in refinery margins as a result of the very tight

gasoline supply situation during the time of peak driving. So while

I can’t subscribe to those numbers because I haven’t seen them,

they are consistent with the general trend in prices and margins.

But I would also caution that this was a very short term situation.

Over a long-term period, the refinery sector has not had the kind

of margins that you have just referred to.

Ms. SOLIS. It is unusually high, though? Do you agree? And just

a comment, of the 95 percent of the Bush administration energy

plan which has been implemented, what specific parts, in your

opinion, would address the costs to consumers at the pump from

the high profit margin of refiners?

Mr. GARMAN. I would point out that, you know, this legislation

that has just passed, while we are proud of it, and the President

signed it, was a product of this Congress and this committee and

other committees of the Congress, developed as a compromise. And

I think the Secretary has said, clearly, that the bill is not expected—we cannot reasonably expect the bill in the short term to

do much to deliver relief at the pump. It is a long-term bill. It is

primarily a research and development bill focused on the opportunity to move us toward new alternatives. But that will not happen overnight.

Ms. SOLIS. One of my other questions that I wanted to raise was

with respect to where some of these refineries are sited. And this

is for Mr. Garman.

It appears that the Chevron Texaco refinery in Pascagoula—excuse my pronunciation—Mississippi and Conoco Phillips refinery in

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Belle Chasse may have suffered the most significant damage from

Hurricane Katrina. No. 1, does the Department of Energy or any

other Federal agency have regulations which require refineries,

such as these, which are constructed in areas of high risk, such as

a ‘‘hurricane,’’ is there any standards that would prevent a refinery

from being placed in an area that we know could possibly be affected by a disaster of this magnitude?

Mr. GARMAN. The two refineries you mentioned are very important refineries, with a combined capacity exceeding 500,000 barrels

a day between those two. They represent a substantial investment

by the private sector investors.

It is also our understanding that both of those refineries have

suffered major damage, and that they will take some time bringing

back.

Ms. SOLIS. We currently know there are standards in place to

protect nuclear power plants. I am wondering is there any discussion in the administration to look at potential safety standards for

refineries.

Mr. GARMAN. There are safety standards in place for refineries,

to be sure, to protect public health and safety but——

Ms. SOLIS. But to anticipate a hurricane at the force of category

4, is that something that the administration may look at in the future if, given what you just said, that these are two very important

refineries?

Mr. GARMAN. We are willing to look at any variety of ideas and

to work with the Congress on any variety of ideas and thoughts

that you all may have. But my threshold observation would be

someone spent a tremendous amount of money building this refinery.

It is a potential hundreds of millions or billion-dollar investments. And I think that, you know, perhaps they bet wrong, putting such a high investment, high value investment right there at

the coast. And they weighed that when they made that investment.

I am not sure this is something that is right for some kind of Federal intrusion into the market. But as I said, we are willing to take

and consider any ideas and discuss them with this Congress and

this committee that you might deem appropriate.

Chairman BARTON. The gentlelady’s time has expired. Dr. Burgess has 8 minutes.

Mr. BURGESS. Thank you, Mr. Chairman. Mr. Garman, continuing on that same line, I can’t help but observe, we are just a

day or two away from the 105th anniversary of the big storm, the

Galveston. Galveston, at the time, was the largest city in Texas

and after that storm, they never totally recovered. In fact, it was

50 years before they got back to the population they enjoyed in

1900. I don’t think there is any question that we will see the location of things change as a result of this storm, regardless of our

intention here in Congress. I think insurance companies—just people’s behavior would have to question whether or not it is reasonable to live or develop infrastructure in an area that has been proven to be unsafe.

Let’s talk—Mr. Seesel, let’s talk about price caps because it

seems like that is what is on everyone’ mind. Now, Hawaii did

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price caps about a month ago. What has been the experience with

Hawaiian price cap? Do they work?

Mr. SEESEL. Actually, Congressman, I believe the price caps in

Hawaii went in effect September 1. So it has been a little bit early

to tell. The Hawaii price caps, as you know, are geared toward

prices on the west coast, the east coast and the gulf coast.

So probably contrary to the expectations in Hawaii, some of the

price there may have gone up, along with what has happened to

the prices on the gulf coast, which is obviously lower than other

parts of the country. But I think it is something that time will tell

what will happen with Hawaii’s situation. It is hard to tell. As you

know, there is cap on the wholesale level not retail level.

Mr. BURGESS. Do you think it is good policy, one that should be

practiced in other areas of the country?

Mr. SEESEL. I don’t think—in fact, the FTC has testified against

price caps, including Hawaii price caps a couple of years ago. And

I think efforts to cap prices like that are probably going to result

in—a reasonable prediction is that they could result in shortages

and decisions by businesses in the market to leave the market and

other unintended consequences of that.

Mr. BURGESS. Is there any thought to perhaps allowing States to

have price caps if they have a refinery within their borders? I will

withdraw the question. I was just wondering about Massachusetts

not having any refineries? I am shocked that they do not. Let’s talk

about the——

Chairman BARTON. You are easily shocked.

Mr. BURGESS. I understand. Round up the usual suspects. I had

my staff, a couple of weeks ago when I was getting bombarded with

questions by constituents about why not do something about gas

prices, and I asked them to just break down for me, when gas was

$2.29 a gallon for regular, give me a breakdown on what the—what

were the components, what made up that $2.29.

And I was given these figures. Tell me if they are correct or not: $1.25 for crude; 43.9 cents for taxes, State and Federal, I am in

Texas; 40 cents for refining; 18.3 cents for distribution and marketing; and total profit of about 17 cents. Is that—would you agree

with that breakdown? Is that an accurate representation?

Mr. SEESEL. Congressman, those numbers are fairly consistent

with what I am familiar with, but I might defer to my more expert

colleagues on that, too, and see what they say.

Mr. CARUSO. I believe those are accurate.

Mr. BURGESS. So just going back to a couple of weeks ago, in prehurricane terms, 17 cents a gallon profit, that is okay, but that is

not exorbitant. So the high profits that Mr. Markey showed us on

his graph, which was before the hurricane, it seems to me those

high profits would indicate that companies are selling a lot of gas.

Is that right? If they are only making 17.4 cents a gallon, when it

is selling for $2.29, the profit is because there is a lot of those 17-

cent gallons that are sold. Is that correct?

Mr. SEESEL. I presume the 17-cent profit is at the retail level?

Mr. BURGESS. Well, even if it was 19 or 22 cents, it is a smidgen

of what the total cost of a gallon of gasoline is. The profits are not

coming from the $2.29; they are coming from that very narrow bit

that is the gasoline or the oil company’s profit.

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I guess I would be interested to know, and if I could ask one of

you to follow up with my office, what would that breakdown be now

with gas at $3.10 or whatever it is, again, remembering that I am

in Texas, and our State taxes are about a quarter a gallon? I would

be very interested to know what that breakdown is now, and perhaps then we could make a judgment if that 17 cents has jumped

and is now 34 cents or 50 cents profit per gallon, then perhaps people have a case to be made for excess profits. Otherwise, it is an

argument that we should probably abandon.

I could not help but think the day—the Wednesday when you realized that all of the water was in New Orleans—and with all due

respect to my colleague here, the wetlands would not have stopped

that, the hurricane remember, the puff of dry air that somehow

Bush managed to push the hurricane over a little bit so he could

do maximum damage to New Orleans, the hurricane did not come

across the wetlands, it went in in Biloxi.

But the day that all of the water came into New Orleans, I found

myself asking, where is the contingency plan that we have for this

type of disaster? Mr. Garman, is there a contingency plan for an

energy emergency that you can pull off the shelf in the Department

of Energy? And if so, what is the plan, and why wasn’t it enacted?

Mr. GARMAN. Well, we do have—our major contingency plan and

our major asset for a supply disruption is the Strategic Petroleum

Reserve. And as I indicated in the testimony, within 48 hours of

the time that we had a request for a loan or a diversion of oil from

the Strategic Petroleum Reserve, we approved that loan, and that

oil was flowing very, very quickly.

So I would submit that that is our primary method of responding

to a severe petroleum supply disruption. And in this instance, it

was used, and it was used quickly.

Mr. BURGESS. Are there any other levers that we can pull to

manage an emergency? Is that the only tool in our tool box?

Mr. GARMAN. With respect to crude oil and product, the Strategic

Petroleum Reserve is the primary tool that we have got. We do not

have, as some our Nations have, for example, a refined product or

requiring refiners to keep a certain amount of refined product in

stock as a reserve. We do not do that.

Mr. BURGESS. Do you think that is policy worth pursuing?

Mr. GARMAN. It is something that I think that—within a full

range of things that we ought to be thinking about it. It is hard

to dismiss anything out of hand.

Mr. BURGESS. My time is drawing short. There are four locations

for the Strategic Petroleum Reserve, two in Louisiana, two in my

State of Texas. Do we need to think about locating other areas in

the country for the Strategic Petroleum Reserve, since both of these

States share the gulf coast and the inherent vulnerability of this

type of storm.

Mr. GARMAN. Well, I think it is again instructive, and we will

continue to learn from—but we are offering strategic—we are offering oil from terminals that were hit directly by the storm. So it

shows that the reserve is quite robust, and the infrastructure that

we have around the reserve is robust, and we have the capability

to respond, even in this seemly worst-case scenario. So I think that

speaks well of the planning that went into the reserve itself.

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Mr. BURGESS. Very well. I yield back.

Chairman BARTON. I thank the gentleman. The gentlelady from

Tennessee, Mrs. Blackburn.

Mrs. BLACKBURN. Thank you, Mr. Chairman. Thank you all for

your patience. We appreciate that very much. It has been so interesting sitting here listening to this today. I think this is an industry when you talk about the petroleum industry, it is an industry

we have all got a love-hate relationship with.

And I think you all have shown that today, and you have probably heard it from the questions. I also sit here, and I realize that

much of what we are asking and saying today probably to many

of our constituents appears to be Monday morning quarter-backing.

And to our friends in Mississippi and Louisiana, we extend our

condolences and hopefully understanding hearts that this is a really rough, rough time for you all. I have been in Mississippi, as I

said, when I waived my opening statement. And I have been there

where there was no cell service; nothing was working. I have stood

in gas lines with people that have driven 150 miles to get to an

open tank so that they could fill up their drums, 55-gallon drums

to go run a generator.

I have been at a shelter trying to run down somebody from a

Federal agency who could help somebody with something else. And

there are plenty of lessons learned. And there is plenty of education and character-building that has probably taken place

through this for everyone involved.

And I thank you all for taking the time to come here and spend

a good part of your day with us. And I hope that those who have

watched this hearing today understand that we do this in the spirit

of trying to be certain that everybody functions well, and that we

learn how we responded, we learn what problems were with communication, that we learned a lot about leadership and different

leadership styles, and how we handled a team effort from the local,

State and Federal agencies that are to be involved with this.

I hope also that we are going to see some changes come out of

this. I hope that we will see some changes when it comes to looking

at burdensome regulation that makes it very difficult for the petroleum industry to operate in this country.

I have a father who is 80-years old who sells oil field production

equipment and goes to work every single day, every single day, and

has for many years. I hope that we will see the need to address

taxes. I hope that we will see the need to address rules. And I hope

we will apply some common sense to this, that we do use it as an

opportunity to learn and that we as Members of Congress accept

our part of the responsibility in making the appropriate changes.

Transportation permitting, environment, how those regulations

affect every bit of this is going to be important. But rather than

spending a lot of time on questions, and I have already used a good

bit of my time, I want to pose some questions for you all to answer,

not now, but in the next 30 days.

And for those of you who are on the next panel, these questions

also go to you. I am not going to keep you here that long. Let us

look at this, looking at it long range. I want to know what your

people in the field say. I want to know what your people that are

out there are going to tell you that they learned from this. I would

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like to know how many States removed or reduced their tax on gas

and diesel?

How many are going to move forward and do that? In Tennessee,

we have got 21.4 cents on a gallon of gas and 18.4 on diesel. How

many are going to step up to the plate and work with us on this?

How many are going to report daily price fluctuations in their district? You know, seeing a dollar change, a 50-cent change in a day,

that is something that infuriates my constituents. We saw that in

Tennessee. We saw that in Tennessee. And it is something that

people are not happy about. Our Governor is working on that issue

now, so are some of our State legislators.

Mr. Moran, this one would really come through your plan, and

the folks in the telecommunication agencies that are going to speak

next. How many local governments have a communications plan

when everything fails? When you do not have cell phones, when

you do not have hardwired phone service, how many have a backup plan with satellite or with radios or some other frequency?

How many companies have emergency disaster communications

plans? How many local governments have a plan for getting those

first-responder vehicles filled so that the tanks are full, so that

they are able to carry on with the work that they have to do? How

many of them were just planning on people having gas in the pickup to get fuel out to the areas where it was needed? I would also

like to know how many of our State governments use all of The

Homeland Security funds that are allocated to them? How much

are they drawing down, and then how much are they sending on

to those local governments? And are those State governments

working with those local governments on these energy distribution

plans, on these communication plans?

Are they working with their major employers to be certain that

there is some kind of back-up system there? And also from the

communication and who is taking the responsibility? Is it going to

be Red Cross, is it someone else, to be certain that there is a way

for individuals to communicate?

It is so difficult standing in one of those shelters when you have

got people who desperately, desperately want to find their relatives, and there is no gas within 150 miles, and they drove out

on Sunday to come to a shelter, and they ended up there with

about an eighth of a tank of gas left. That is a pretty tough spot,

pretty tough spot to be in.

In my minute that is left, Mr. Caruso, I did have some questions,

I think are most appropriately directed to you, in having listened

to your testimony. When we talk about refining capacity here in

the U.S., we know we have pretty much been at capacity, we have

been at about 94 percent of capacity for refining, and people wonder why we do not have refineries all over the country.

One reason is transporting the fuel. You know, we have got a refinery in Memphis right at the edge of my district, and sometimes

you have to go dredge the river in order to get enough depth to be

able to unload those barges. So you get a whole other set of problems when you move away from the coast. But we talked about refinery capacity.

Are we higher or lower than the worldwide average on refinery

capacity when we talk about other nations and their capacity? How

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are we measuring up there? And I am going to run out of time, so

I will just let you answer at a later time.

And then if we had opened ANWR in 2001, when there was a

debate about opening it in 2001, and oil was currently being produced, what effect would that have on the cost of crude today? I

would like answers to those, too. And, Mr. Chairman, I am over,

so I will yield back.

Chairman BARTON. We thank the gentlelady. The gentlelady

from Illinois, Ms. Schakowsky, is recognized for 5 minutes.

Ms. SCHAKOWSKY. Thank you, Mr. Chairman. I just wanted to

say that before we start seeing as the main solution to the high

gasoline cost the eliminating of gasoline taxes, money that right

now is desperately needed by States and communities, not only

those that are affected by Katrina but many others who have been

affected by budget cuts, health care needs, education, environmental protection, housing, many of which are also being called

upon to address other problems, I think we ought to look first at

the record profits of the oil companies and start asking our companies to share sacrifice.

You know, we have seen now a million people displaced, and we

have seen lots of families, now that we have sort of lifted the veil

on poverty in this country, who are barely making ends meet and

who are suffering in cities and rural areas all around our country,

that maybe those taxes, we have seen tax cuts at the Federal level,

for those who have the most, maybe we ought to first look at some

of the companies who are profiting most, and maybe we ought to

even consider rolling back some of the tax cuts that have already

been given.

But, what I am concerned about now and wanted to look ahead

a little, in addition to the cost of gasoline, in Chicago before

Katrina was paying the highest prices for gasoline, what about the

winter heating season? And what about natural gas, and heating

oil, and what can we expect in the way of price increases? I just

feel so strongly that we need to be planning for that potential eventuality, and I would like to hear what you think the odds are in

order of magnitude if we are going to see price increases? Anyone

can answer for whom it is appropriate.

Mr. CARUSO. We released our latest short term energy outlook

this morning. It indicates that heating oil will be up about 30 percent this winter compared with last winter. Unless there is a significant improvement in the natural gas situation, we think the

natural gas prices for heating this winter will have an even higher

percentage increase than that. The details are in our report released this morning. I would be happy to make that available directly to you.

But, the bottom line is, heating oil, natural gas and propane will

all have significant year-on-year increases this winter compared

with last winter.

Ms. SCHAKOWSKY. Well, and I think that that ought to be, sound

the alarm for this committee and for this Congress to, you know,

we do not want anybody saying we did not expect the levees to

break. In many ways, for many families, these kinds of increases

in heating bills are—I do not want to say, get equivalency, but is

a serious crisis that could put poor families particularly over the

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edge, but not just, you know, my constituents really cannot afford

to pay, middle-class constituents, $1,000 a month to heat their

homes in Chicago where we rely mostly on natural gas and have

already seen major increases in the price of natural gas.

Small businesses that are, you know, struggling right now and

could potentially go under and farmers who rely on natural gas,

and you know, so we need to start planning now about what we

are going to do. And it is not just about LIHEAP, I want that to

go on the record as well. It is not just about LIHEAP. That is needed to expand the funding for LIHEAP, but it goes way beyond that,

and we need to have better planning.

I want to—Mr. Caruso, your agency had predicted that as a result of the energy bill that was passed, that at least potentially, gas

prices could go up. As I understood, not just understood, we had

quotes from the report that gas prices—this is before Katrina—that

you know there was a lot of talk about how great the energy bill

was, but when it comes to prices at the pump, my understanding

was that you thought that that bill could actually raise prices?

Mr. CARUSO. There was an analysis done of the House version

of the bill that indicated that there might be some—I think there

was a little bit of mischaracterization of that, in that one component of the gasoline mix could actually increase in order to meet

the requirements in the bill. Overall, we did not expect the bill to

increase gasoline prices. But, I will provide that specifically.

Chairman BARTON. The gentlewoman’s time has expired.

We are going to recognize Mr. Walden. I believe he is the last

questioner for this panel, and I will announce to the audience our

next panel at the conclusion of this panel. We are going to take a

very short 5-minute break, just to give people a chance to do personal conveniences and things like that. But we will reconvene very

quickly.

So Mr. Walden is recognized for 8 minutes.

Mr. WALDEN. Thank you very much, Mr. Chairman.

First of all, along with my other colleagues on both sides of the

aisle, we express our deep sorrow for those who have suffered so

much in the South, and we will do everything we can to help them.

In fact, my own State of Oregon is opening its door to 1,000 evacuees, coming all of the way up to Oregon. We are sending about

as many as 1,700 National Guard troops down to the Gulf States

to lend a hand and do what we can.

Mr. Caruso, I want to follow up real briefly on the tail end of Ms.

Schakowsky’s question. So your analysis never showed that the

congressionally passed energy bill was going to drive up the price

of gasoline overall?

Mr. CARUSO. As I understand it, there were certain types of gasoline for which the price would go up; I believe the reformulated

component. But, as I mentioned to——

Mr. WALDEN. Is that like the ethanol version?

Mr. CARUSO. I believe it was either the ethanol or the MTBE, the

combination of the MTBE ban being replaced by——

Mr. WALDEN. So the MTBE ban and replacement fuel might

drive up the cost of gasoline?

Mr. CARUSO. Yes. But I would like to provide the actual——

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Mr. WALDEN. That would be good. I want to move onto a couple

of other issues, because these are certainly ones that I am concerned about. They relate to the markets, both CFTC and NYMEX

and I want to—I do not know who is best to address this, maybe

Mr. Seesel.

But in the September 2 issue of Dow Jones Newswire, a Mr.

Addison Armstrong, manager of the exchange traded markets TPS

Energy Futures LLC in Stanford, Connecticut, said, and I quote,

there are, and in parens, oil commodities, quote, traders who made

so much money this week following Hurricane Katrina, they will

not have to punch a ticket for the rest of the year.

Is anybody here concerned about this whole trading issue? I,

along with Ms. Baldwin and about 18 other Members of the House

have initiated a letter to the Government Accountability Office asking for a full investigation. We did that back in May of the trading

market. Is this something you all have looked at at FTC, the volatility? Does the hedging affect the volatility of the spot market?

Mr. SEESEL. Congressman, that is really not an area that the

Federal Trade Commission has looked at very much. I know, obviously, that the CFTC has the great bulk of expertise on that. And

perhaps some of my colleagues here do, too. But we have really not

focused on the NYMEX markets.

Mr. WALDEN. Is that something that you have the authority to

focus on?

Mr. SEESEL. I think the regulatory authority is in the CFTC commission.

Mr. WALDEN. All right. Mr. Garman, Mr. Caruso. Mr. Moran.

Mr. Moran, I want to follow up on the question my colleague

from California asked about the emergency alert system and the

national notification system. By way of record, I am a broadcaster,

so I am intimately familiar, even wired them in and run the test.

It would be highly unusual for the President to trigger a national

emergency alert notification on a regional problem, wouldn’t it?

Mr. MORAN. Well, that is up to the President. That has not happened. I guess that would be unusual. It has not happened.

Mr. WALDEN. It would be very unusual, wouldn’t it, announcing

a hurricane off the gulf coast, in Oregon or in New Hampshire,

there wouldn’t be much relevance to trigger a national EAS, would

there?

Mr. MORAN. It would be totally up to the President. However——

Mr. WALDEN. But no president has never done that on a regional

event, have they?

Mr. MORAN. That is correct.

Mr. WALDEN. Isn’t there a hierarchy of who does notify? Aren’t

there emergency plans in every community, and generally, they are

triggered by whoever the emergency coordinator is in that community?

Mr. MORAN. There are State—local and State plans. The State

plans, most of them are filed with the FCC. We are aware of the

plans. There is a whole hierarchy of how the various broadcast

stations——

Mr. WALDEN. It is built from the grass roots up. I have to have

one in each of my studios. You all—you require that. So you know

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that that has to be the case, that they are triggered from bottom

up, unless there is some national emergency.

Mr. MORAN. But if there is a national emergency, the President

could—it is automatic.

Mr. WALDEN. What was the status of the broadcast facilities at

the time the levees broke? Were any of them on the air? If power

was out and towers were down, didn’t you testify there may be two

AM stations?

Mr. MORAN. There were two on the air. They had—they were on

emergency power. And we got word—the FCC mobilized. We had

people there 24/7. We had our watch center there. We were working with the NCS and the FEMA. We were notified early on that

one of the AM stations, actually I believe several AM—several stations got together and were operating off the same tower.

And they said early on that they were nearly running out of fuel.

Getting fuel in there was very, very difficult. It wasn’t a matter of

getting pickup trucks. It was a matter of getting tankers in there.

And it was extremely difficult. I believe that—that that last station

in downtown New Orleans, it stayed up the whole time because

within I believe hours of when it was going to run out of fuel, it

got a tanker in there.

Mr. WALDEN. They were broadcasting full time?

Mr. MORAN. Yes, they were.

Mr. WALDEN. It was all focused on the hurricane? They weren’t

playing music?

Mr. MORAN. Absolutely. As I recall, ultimately, they had to relocate their studio, I believe up to Baton Rouge, I believe. And they

actually were provided special housing in the dorm up there, I believe.

Mr. WALDEN. Were they given notification that the levee might

fail, and did they broadcast that, do you know?

Mr. MORAN. I really don’t know the answer to that.

Mr. WALDEN. I assume if they would have been given

notification——

Mr. MORAN. We have actually—one of the things we did when

this happened was, we didn’t know who was up and who was down.

And we actually have some equipment at the FCC where we can

actually sort of scan the air to figure out what is up and what is

down.

And after that, by the way, we made calls to every single station

in the area. When I last checked here this morning, we hadn’t actually contacted all of them. We believe in some cases the phone systems are out, so we could not get to them. But we have contacted

most of them, and we have a pretty good idea of the status. And

actually if you—we would perhaps be able to ask what it was they

knew.

Mr. WALDEN. My experience—and in Oregon, we do not have

many hurricanes thankfully, but we do get ice storms, and we get

some floods and things like that—is that most stations just go immediately 24/7 doing whatever the emergency report is.

And, I mean, we went through a flood, and we did, you know,

trigger an EAS occasionally. But that is generally triggered by the

local sheriff or the State police.

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Mr. MORAN. Right. So a lot of those sorts of things, the message

is getting—if the message is getting out, it does not necessarily

have to come from the EAS.

Mr. WALDEN. I remember in our post-9/11 hearing here that the

then-chairman of the Commission, Mr. Powell, suggested that in

New York, that they actually told the broadcasters to stop using

the EAS, because it was scaring people. They actually shut down,

asked broadcasters not to do that, not to use EAS, because they

were all reporting everything anyway.

So I just wanted to clarify, and you have helped me clarify in

terms of how the emergency alert system works. We have to do

tests every week. We have to record certain monthly tests. It is—

and you rigorously enforced all of that, don’t you?

Mr. MORAN. That is absolutely right. And we work with FEMA

on that.

Mr. WALDEN. Mr. Chairman, my time has expired. Thank you.

And thank you, Mr. Moran.

Chairman BARTON. Thank you. I think that is all for the first

panel. I have to commend you, gentlemen. I did not see any of you

take a bathroom break in almost 6 hours. That has got to be a

record. So go to it.

We are going to take a recess until 5 p.m. So we are going to

reconvene with our second panel at 5 p.m.

[Brief recess.]

Chairman BARTON. The committee will come to order. We are

now going to begin our second panel. I think we have nine distinguished witnesses, which is not a record, we have had 10 distinguished witnesses on one panel. So you are one away from the

record, but you may be the record for distinguished-ness.

We are going to start with Mr. Angelle, who is representing the

Louisiana Department of Natural Resources. We will give each of

you 7 minutes. And we will just go right down the aisle. There are

going to be a series of votes beginning in the next 10 to 20 minutes,

but we will attempt to keep the hearing going.

So we thank you folks for your patience and recognize Mr.

Angelle for 7 minutes.

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STATEMENTS OF SCOTT A. ANGELLE, SECRETARY, LOUISIANA

DEPARTMENT OF NATURAL RESOURCES; RED CAVANEY,

PRESIDENT, AMERICAN PETROLEUM INSTITUTE; BOB

SLAUGHTER, PRESIDENT, NATIONAL PETROCHEMICAL AND

REFINERS ASSOCIATION; JAMES NEWSOME, PRESIDENT,

NEW YORK MERCANTILE EXCHANGE, WORLD FINANCIAL

CENTER; BENJAMIN S. COOPER, EXECUTIVE DIRECTOR, ASSOCIATION OF OIL PIPELINES; BILL DOUGLASS, CEO, DOUGLASS DISTRIBUTING COMPANY, ON BEHALF OF THE NATIONAL ASSOCIATION OF CONVENIENCE STORES AND THE

SOCIETY OF INDEPENDENT GASOLINE MARKETERS OF

AMERICA; WILLIAM L. SMITH, CHIEF TECHNOLOGY OFFICER, BELLSOUTH CORPORATION; DANIEL A. LASHOF,

SCIENCE DIRECTOR, CLIMATE CENTER, NATIONAL RESOURCES DEFENSE COUNCIL; AND MARK N. COOPER, RESEARCH DIRECTOR, CONSUMER FEDERATION OF AMERICA

Mr. ANGELLE. Thank you, Mr. Chairman. It is with a heavy

heart that I come to our Nation’s capital today. Although we are

here to discuss the effects of Hurricane Katrina on our national energy supply, let us all be reminded of the human tragedy on the

gulf coast.

A special thanks to you, Mr. Chairman, and to the ranking member for your fight to help coastal producing States in the recent energy bill. Both of you were stand-up guys for Louisiana. Over

strong objections of the administration, you gave us hope by providing resources for coastal restoration. And it is only fitting that

we return and thank you and now ask your assistance for what is

now our very survival.

The citizens of my State are still in the eye of Hurricane

Katrina’s wake, and many are experiencing the tragedy that is still

unfolding; 899,000 people were without power and, currently,

503,000 now. On behalf of our great people, I thank you for your

assistance in our rescue and recovery operations. Together, we

know we can rebuild a strong and great Louisiana. So I come here

today seeking help, bipartisan help, not assessing blame.

It was a wise Thomas Jefferson some 200 years ago who sought

what would become the most valuable acquisition in the history of

this country, the Louisiana Purchase, including the Orleans Territory. He understood the strategic importance of New Orleans and

the Mississippi River for navigation interests and economic prosperity, but he had no way of knowing then the additional resources

this Nation would acquire from Louisiana’s rich delta land and the

bounty off its shore. When it comes to energy production, energy

refining, energy distribution and, indeed, America’s energy security, this is the most important piece of real estate from sea to

shining sea, and every American is connected to it through the gas

pump and family energy costs.

We must do everything we can to protect it because most of

America has resisted energy development. In fact, it has been over

25 years since America has built a new refinery in the continental

United States. On the other hand, Louisiana has a strong and distinguished history of oil and gas production.

Let me tell you a little bit about my Louisiana. We host more

than 80 percent of America’s offshore oil and gas production and

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distribution, 34 percent, of the Nation’s natural gas supply, and almost 30 percent of the Nation’s crude oil supply is either produced

in Louisiana, produced offshore Louisiana, or moves through the

State and its coastal wetlands.

This production is connected to nearly 50 percent of the country’s

refining capacity, and Louisiana alone hosts more than 16 percent

of the total U.S. refining capacity, second only to the great State

of Texas. We host the Strategic Petroleum Reserve. Port Fourchon

alone services 16 percent of the Nation’s oil supply.

The Louisiana offshore oil port is the only port in the Nation that

can handle the large super tankers from the Persian Gulf. This

port alone is responsible for some 13 percent of America’s foreign

oil supply. We are home to America’s most recently permitted LNG

facility, as well as America’s largest LNG facility, and we do all of

this at the same time we produce 30 percent of our Nation’s fisheries; catch and drain 41 percent of the Continental United States.

We have embraced the concept that we can improve the quality

of life for all Americans with the responsible management of our

natural resources, and we do all of this when most coastal States

continue to say no, and not in my back yard.

We all know good relationships are like bank accounts, and it

takes a few deposits to make a few withdrawals. When it comes to

energy production, the 18th State of this Great Union has made its

share of deposits, and it is in desperate need of a major withdrawal.

Louisiana Governors and Congressmen and DNR secretaries before me, along with Federal agency heads, scientists, economists,

business and industry leaders, environmental representatives, have

together sounded the alarm for years and respectfully, Mr. Chairman, neither Congress nor the White House, past or present, have

answered the call.

We have continuously asked for the Federal commitment to restore our wetlands that protect this Nation’s strategic energy infrastructure off the coast of Louisiana, that protect its No. 1 port system, the great city of New Orleans, and our coastal residents from

storm surge.

But we have been told that we should scale back our plans and

be satisfied with business as usual, that our Nation simply cannot

afford it right now. Yet Louisiana State University research indicates that every 2.7 miles of healthy marsh can reduce storm surge

by a critical 12 inches.

We have the science and technology to make a difference. We

simply need the financial resources. We have asked for the Federal

commitment it would take to raise our levees and build and upgrade flood and hurricane protection for our citizens and for the

most strategic of American real estate, but so far, we have been

shortchanged.

We have continuously asked, pleaded and begged for a true sharing of OCS revenues for the coastal producing States. We were on

a course to adopt a constitutional amendment next fall in Louisiana that would dedicate any future OCS funds the State receives

to rebuilding our wetlands.

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Simply put, unless we invest in protecting the huge concentration of energy assets in Louisiana by restoring our wetlands and

building levees, America’s energy supply remains exposed.

Gratefully, because of your help, Mr. Chairman, we received the

first step in that sharing through coastal impact assistance for 4

years in the recently passed energy bill.

But even that is woefully inadequate for such a challenge. We

need true permanent revenue sharing like that with States that

produce oil and gas on Federal lands on shore so that we may have

the resources to protect our infrastructure.

You can imagine how amazed we were in July when our Nation’s

Energy Secretary wrote a letter to the House and Senate leaders

opposing the sharing of OCS revenues through direct spending and

authorized appropriations for coastal States.

What more must Louisiana do when it comes to energy leadership and development to get a share of these resources so that they

can be used to help protect the energy infrastructure of our Nation?

I think every American would agree that it just makes good common sense to take a portion of the OCS revenues to protect the infrastructure that makes this production possible.

In his letter dated July 15, 2005, the Energy Secretary said, ‘‘We

can’t afford to share revenues with the coastal producing States

that host our Nation’s energy production.’’ It is right here in writing.

Well, let me share with you what we can’t afford: A 50 cent increase in the average cost per gallon of gasoline because infrastructure was exposed. That equates to nearly $1.3 billion a week in increased fuel costs based on the daily consumption of America.

That says nothing of the increased cost of plastics, building materials, home energy costs, and transportation of products. When the

Department of Energy doesn’t think it is important to share OCS

revenues to allow Louisiana to protect a high concentration of energy assets, Washington, we have a problem.

I hear a lot about SPR. That will do nothing to reduce the price

of natural gas, and old man winter is just around the corner. Concerted voices, both Republicans and Democrats, have sounded the

alarm: If the commitment wasn’t made, the Nation would pay a far

greater price. But the Office of Management and Budget continued

to demand we justify the cost of our project through years of feasibility studies. We have had studies to study studies.

We do not have the luxury of time, especially now, and we ask

OMB: Is the cost now justified? We branded Louisiana’s coast

America’s wetland, and sounded the alarm that it is of great significance to the world ecology and that it impacts the Nation’s

economy and economic security. Restoration must be treated as a

special circumstance because there is no comparison with how this

coastline benefits the Nation or how it impacts the Nation if it is

lost.

We sounded the alarm that what would happen if the big one

ever hit New Orleans both in human cost and in energy infrastructure cost. And we are seeing those results firsthand. Our wounds

are still gaping, and if these words sound strident, I’m sure you

agree that this is not rhetoric.

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It is just amazing just how accurate the October 2004 edition of

the National Geographic was in laying out the tragic predictions

that actually played out this week. Yet the opposition for revenue

sharing for coastal producing States continues in Washington. It is

no wonder many other States won’t allow drilling offshore.

The worst case scenario the experts have long predicted is now

reality. But yet in the midst of an ongoing crisis, Louisiana remains committed to the fueling of this great Nation as a world energy leader. Energy companies are working to reestablish families,

so that the work to rebuild may begin.

I hear a lot of things about ExxonMobil on the screen up here,

but keep in mind that 91 percent of the wells that were drilled last

year in Louisiana were by independents who, along with the majors, will need Federal assistance to repair infrastructure, low- or

no-interest loans, permit streamlining and immunity from outside

litigation during this rebuilding process.

What sits off Louisiana’s coast cannot be compromised. Estimated depreciated investment in offshore production facilities is

more than $85 billion; pipeline infrastructure, more than $10 billion; and public coastal port facilities, $2 billion.

Production off Louisiana’s shore alone contributes an average of

$5 billion a year to the Federal Treasury, and that was when oil

was less than the $68-a-barrel-plus today. A week after Katrina’s

landfall, a whopping 58 percent of oil production and 42 percent of

natural gas from the OCSs remains shut in.

As of yesterday, we still have six refineries in Louisiana shut

down from storm damage or lack of electric power. And a huge unknown in all of this is the condition of the pipeline infrastructure.

When Hurricane Ivan made landfall two States away last year,

pipeline infrastructure took months and months to rebuild.

As more of the protection from Louisiana’s barrier islands and

coastal wetlands wash away, more onshore and offshore production

will be damaged or destroyed by storms. And according to scientists, the increase in frequency and strength of gulf hurricanes

will be with us for years to come.

Louisiana needs America more than any State has ever needed

her mother country. And yet, America needs Louisiana more than

ever. It is vital to the Nation’s security and economic future that

Louisiana is not only restored, both its infrastructure and its wetlands, but that it is strengthened in the process.

Thank you for inviting me here to be with you. And to the American people for the outpouring of your generosity, we say thank you

in this time of need.

May God continue to bless America and may God restore Louisiana. Thank you.

[The prepared statement of Scott A. Angelle follows:]

PREPARED STATEMENT OF SCOTT A. ANGELLE, SECRETARY, LOUISIANA DEPARTMENT

OF NATURAL RESOURCES

INTRODUCTION

Mr. Chairman, Mr. Ranking Member, and distinguished members of the House

Committee on Energy and Commerce, thank you for your gracious invitation to address your Committee. Unfortunately, as you know, I come to you today with a somber heart from the frontlines of the worst natural disaster in our nation’s history.

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My home state will never be the same again, nor will America. Almost no enemy

of this nation, or terrorist of any kind, could have wrought the terror and devastation to my state and to this nation as the fury of nature with the name of Katrina

did on August 29 and the ensuing days. Overnight, upwards of a hundred thousand

citizens of my state and our neighbors in Mississippi and Alabama lost everything

they had—homes, jobs, businesses, cars, and for some, their very lives. Hundreds

of thousands of others were dramatically affected to a lesser, but significant degree.

Suddenly, we find ourselves in the midst of an ongoing crisis, faced with restoring

the basic elements of civilization—food, safe drinking water, shelter, clothing, fuel,

and sanitation.

I want you to know that the people of Louisiana are deeply touched by the outpouring of concern, prayers, help, and generosity from Americans from every walk

of life from all over the country. To all of you, we give you our heartfelt thanks.

Now, I will focus on the subject of this hearing—the impact of Hurricane Katrina

on gasoline and petroleum supplies.

SUPPLYING THE NATION: LOUISIANA—AMERICA’S ENERGY CORRIDOR

Louisiana has a long and distinguished history of oil and gas production, both onshore and offshore. Currently, approximately 34% of the nation’s natural gas supply

and almost 30% of the nation’s crude oil supply is either produced in Louisiana, produced offshore Louisiana, or moves through the state and its coastal wetlands. Together with the infrastructure in the rest of the state, this production is connected

to nearly 50% of the total refining capacity in the United States. Based on its energy producing value to the nation, acre for acre, Louisiana is the most valuable

real-estate in the nation.

Louisiana has 17 petroleum refineries, most of them large, world scale facilities,

with a combined crude oil distillation capacity of approximately 2.77 million barrels

per calendar day, which is 16.2% of total U.S. refinery capacity of 17.1 million barrels per day, the second highest in the nation after our sister Gulf Coast state,

Texas. Louisiana produces approximately 42.1 million gallons of gasoline per day

and 29.9 million gallons of distillate fuel (that is, jet fuel and diesel fuel) per day.

Two of the four Strategic Petroleum Reserve storage facilities are also in Louisiana.

The other two are in Texas.

Louisiana is not some far off energy producing colony. Louisiana and its citizens

are fundamental elements from which this great nation was forged. Dating back to

Thomas Jefferson’s signing of the Louisiana Purchase in 1803, Louisiana has indelibly stamped its mark on this country, becoming the 18th state in the Union in 1812.

Even today, Louisiana has provided more national guardsmen to the war against

terrorism in Afghanistan and Iraq than any other state, though we rank only 22nd

in population. Approximately 41% of the continental land mass of the U.S. drains

through Louisiana via the Mississippi River. The Port of greater New Orleans is the

largest port in total tonnage the U.S., and the port of Baton Rouge is 10th.

When it comes to developing the nation’s offshore petroleum resources, there simply would not be much if it were not for Louisiana’s leadership and participation.

The offshore territory off Louisiana’s coast is the most extensively developed offshore territory in the entire world. As most of you know, the offshore area beyond

3 miles from Louisiana’s coast is federal territory called the Outer Continental

Shelf, or OCS. Other than in a 3-mile transition zone, the federal government receives ALL of the mineral revenue from production in the OCS. Based on 2004 data,

OCS production off Louisiana’s coast constitutes 91% of oil and 75% of natural gas

production from all U.S. OCS areas combined. Additionally, Louisiana OCS territory

has produced 88.8% of the 14.9 billion barrels of crude oil and condensate and 82.3%

of the 150 trillion cubic feet of natural gas ever extracted from all federal OCS territories since the beginning of time.

Offshore Energy Development and Economic Prosperity

This service that Louisiana provides to the nation is one of the largest contributing factors to America’s strategic security and economic prosperity, which make

possible the high standard of living that we all enjoy in this country. Let’s look at

just one example of how this translates to you. Prior to Hurricane Katrina, the

pump price of gasoline was already hitting the $2.50 per gallon range in many parts

of the country. If it were not for Louisiana’s role in the petroleum supply of the nation, you and your constituents would likely have been paying in the range of $4.00

per gallon for gasoline pre-Katrina, and more than that post-Katrina. And, that does

not address how sky-high prices would be for electricity, food, and all of the other

things fueled by, or made from, oil and natural gas.

Offshore petroleum production is not only good for the country, but it is essential

to the well-being of the USA. Offshore production is also good for coastal producing

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states, and there are not many of us—coastal states, that is, that allow new production off our coasts. The list currently consists of only Alabama, Alaska, Mississippi,

Louisiana, and Texas. Even without being able to share in the mineral revenue produced for the federal treasury off our coasts, offshore production produces economic

prosperity for coastal states in the form of jobs for the service industries providing

the logistics support for the offshore industry. This includes, among others: equipment and materials suppliers; food service; helicopter and boat transportation; communications services; engineers, geologists, boat and rig crews; other industry staff

and employees; and many others. The offshore industry also supports many jobs far

removed from the coastal states, including a multitude of employees who, because

of the week on, week off type of schedules, commute up to 500 miles or more from

places like Arkansas, Tennessee, and Georgia to work offshore in the Gulf.

Offshore Development Includes LNG

Stepping up to the plate to help the nation obtain new supplies of energy including LNG (liquefied natural gas), Louisiana is the home of the largest throughput

facility (Southern Union in Lake Charles) of the four existing LNG import terminals

in the U.S., and it is undergoing more than a doubling of capacity from 1 billion

cubic feet per day to 2.5 billion cubic feet per day. While almost every state in the

nation is trying to prevent the siting of any new LNG facilities, Louisiana is the

site of the largest permitted LNG import terminal in the nation (Cheniere Energy’s

2.6 billion cubic feet per day facility in Sabine Parish).

Offshore Development and Preserving the Environment Are Compatible

I am also here to tell you, that oil and gas production is compatible with protecting and preserving the environment. Louisiana can look at experience and footnote that offshore development and the associated onshore infrastructure construction and operations are done in an environmentally responsible way today and are

done so under the oversight of several state and federal regulatory agencies.

Louisiana has suffered some negative impacts in the past from offshore production. And, yes, we still have to deal with some of those legacies of the past, but that

is because Louisiana pioneered offshore production in the days before modern technology, before the awakening of America’s environmental consciousness, and before

the advent of environmental regulatory agencies and regulations.

Louisiana’s first well (a dry hole) was drilled in 1868. Our first oil well was drilled

in 1901. The first oil well over water in the world was in Louisiana in 1910 in

Caddo Lake. The first well drilled off the coast of Louisiana was in 1938 near Creole, Louisiana. Louisiana was the site of the first well drilled out of sight of land

in 1947. Things have changed dramatically since 1910, 1938, 1947, or even 1960,

1970, or 1980. Simply put, it was like the old Wild West out there. Just as in other

industries in other parts of the country in other times, there was once a time, long

ago, when almost anything in the name of progress was accepted. Everything is different now. That era and those practices have nothing more in common with modern exploration, production, and environmental techniques than transportation by

horse and buggy in 1800’s has in common with jet airliners flying overhead today.

THE CONSEQUENCES OF CONCENTRATING OIL & GAS DEVELOPMENT IN ONE AREA

This country now faces an energy disaster of both short-term and long-term

causes, implications, and solutions. Our present energy crisis is caused by the immediate effects of Hurricane Katrina, compounded by the long term consequence of decades of having had no meaningful energy policy, concentrating energy production

and processing in the Gulf Coast area, the aversion to energy development in most

other areas of the country, and this country’s insatiable appetite for energy. The Energy Policy Act of 2005 (EPAct 2005) that was just enacted is a good step in the

right direction, but it is not soon enough and not enough. For the foreseeable future,

EPAct 2005 will not meaningfully reduce this country’s increasing energy appetite.

It will not reduce this country’s increasing dependence on unreliable foreign sources

of crude oil AND, NOW, liquefied natural gas. It will not significantly increase domestic energy supply or diversity. And it will not protect, much less rebuild, the

Louisiana energy production infrastructure and the eroding and decimated coastal

wetlands that protected and made the offshore production possible off Louisiana.

We are all familiar with the old adage, ‘‘Don’t put all of your eggs in one basket.’’

We all also know the reason for that: If you drop that basket, what are you going

to do? Well, ladies and gentlemen, this nation’s oil and gas offshore production, foreign import capability, refining, and basic petrochemical eggs have been placed in

one basket called the Louisiana and the Gulf Coast, and that basket has not only

been dropped, it has been run over by Hurricane Katrina.

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I am not here to chastise anyone from those states that will not allow drilling off

their coasts, or drilling rigs, petroleum refineries, or petrochemical plants in their

states. What I am here to say is that since Louisiana has welcomed those facilities

and operations and has become America’s Energy Corridor, help us. And, by helping

us, you are helping yourselves and all Americans.

Energy is the lifeblood of an industrialized nation and a prosperous society, and

none is more of both than this country. The mainline artery supplying that sustaining life blood of oil, natural gas, petroleum products such as gasoline, jet fuel,

and diesel fuel, is Louisiana. Louisiana has over 40,000 miles of pipelines just within our state as part of the infrastructure that receives offshore and foreign oil and

gas, and feeds it through processing facilities, refineries, and petrochemical plants

that then distribute it to the rest of the nation.

A PLAN NEEDED TO REBUILD LOUISIANA

Most of this offshore and onshore production is shutdown, and much of the onshore infrastructure is either shutdown, damaged, destroyed, or underwater. We

will not know the full extent of either the short-term or long-term damage for some

time. Until that information is available, a reasonable assessment of the cost and

time to repair or replace it and to restore energy flow to the pre-storm level will

not be known.

Here are just a few of the challenges we face in even determining the damage:

The communications infrastructure is in ruins.

Telephone lines, cell phone towers, radio towers, repeaters and remote data telemetry are either destroyed or have no power.

Advance rescue and assessment teams have to resort to carrying in satellite phones

just to communicate from sites they are able to reach.

Accessibility to wells, pipeline pumping stations, and processing facilities is limited

by flood waters, downed trees, washed out roads, lack of vehicle fuel and other

impediments.

Complicating this even further, hundreds of thousands of people have been dislocated to other cities throughout Louisiana and other states.

The people who are most familiar with the damaged areas and who operate the affected oil and gas facilities are among the hundreds of thousands of displaced

citizens.

Untold tens of thousands, or even hundreds of thousands of these evacuees cannot

return to homes for months, if they still have homes to return to. Even the facilities

that can be restarted and operated soon, need the people who operate them, and

those people need food, water, and a place to live. The people and their needs cannot

be separated from the infrastructure.

Refineries are shut down, wells are shut in, and bodies are floating in the streets.

As the floodwaters recede, fires are burning uncontrolled in New Orleans because

there are no firefighters to put them out. Businesses have been destroyed. Most of

the oil and gas exploration and development onshore in Louisiana, and a large portion in the shallow waters offshore are done by independent companies. These are

small operations, many with only a half dozen to a couple of dozen employees. These

people would be your typical neighbors, not large corporations with extensive resources. Without help, many of them will never drill another well, because their employees are dislocated, their equipment ruined, their offices and workshops destroyed, and their financial resources gone.

It is expected that unemployment in Louisiana has almost overnight, jumped to

about 25%. Tens of thousands of people who once had jobs, many in the oil and gas

industry, have now lost homes, jobs, or both.

These are extraordinary times, and extraordinary times call for extraordinary

measures. Louisiana needs the rest of America more now than ever before, and

America needs Louisiana and its lifeblood energy supply more now than ever before.

The U.S. had a Marshall Plan to rebuild Germany, the defeated enemy, after World

War II; the U.S. now needs to institute a massive rebuilding plan for its own people

in Louisiana, Mississippi, and Alabama.

A Rebuild Program from the Past to Inspire Us Today

In 1932, there was a cry for help from a desperate people near panic. The nation

turned to its leaders searching for an end to the rampant unemployment and economic chaos that gripped the country. They were not disappointed. A plan was needed to fight soil erosion and declining timber resources, utilizing the unemployed of

large urban areas. Congress and the President initiated several actions, one of

which was the Emergency Conservation Work (ECW) Act, more commonly known

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as the Civilian Conservation Corps. With this action, two wasted resources were

brought to bear, the young men and the land, in an effort to save both.

President Roosevelt called the 73rd Congress into Emergency Session on March

9, 1933, to hear and authorize the program. It included recruiting thousands of unemployed young men, enrolling them in a peacetime army, and sending them into

battle against destruction and erosion of the nation’s natural resources. Before it

was over, over three million young men engaged in a massive salvage and public

works operation. We are all familiar with the public works facilities these hard

working men built throughout the country. These facilities—post offices, other public buildings, roads, parks, fire towers, telephone lines and many other facilities that

Americans still use today.

A massive rebuilding program is needed to replace and restore all that Katrina

destroyed. This includes the whole infrastructure of a modern civilization such as

housing, public buildings, communications, energy production facilities, offices, etc.

As the infrastructure is rebuilt and financial assistance is provided, more businesses

can be reopened, creating more jobs, reducing unemployment, and restarting the

decimated economy of the area. Today, skilled, hard-working men and women of

Louisiana, who until a few days ago, were going to their jobs and returning home

each day, need America’s help, not charity, to restore those jobs, homes, and lives.

Maybe the legacies of the Marshall Plan and the Civilian Conservation Corps can

serve as an inspiration for developing the rebuild program direly needed today for

Louisiana, Mississippi, and Alabama.

LOUISIANA’S ROLE AS A PRODUCING AND CONSUMING STATE

A reliable and affordable supply of energy is necessary for economic development,

prosperity, and expansion. Although technological improvements and investments in

energy efficiency have reduced this country’s energy consumption per unit of Gross

Domestic Product over the past 20 years, increased economic prosperity is still dependent on increased energy consumption. In the U.S., the availability of energy has

generally been taken for granted, but recent blackouts in California and other parts

of the country, the emergence of 70 plus dollar per barrel oil and $11 to $12 per

million BTU natural gas, and the drive to build terminals to import foreign natural

gas in the form of a cryogenic liquid, have highlighted the need for addressing energy supply.

I come to you representing a state to which energy is its middle name. The words

Louisiana and energy are almost synonymous. Among the 50 states, Louisiana

ranks (2004 Energy Information Administration—EIA data):

1st in crude oil production

2nd in natural gas production

2nd in total energy production from all sources

The importance of energy to Louisiana is further highlighted in the following

rankings in which Louisiana is (2003 EIA data latest available):

2nd in petroleum refining capacity

2nd in primary petrochemical production

3rd in industrial energy consumption

3rd in natural gas consumption

5th in petroleum consumption

8th in total energy consumption

But, only 22nd in residential energy consumption

Usually, when national energy issues are discussed, Louisiana is cast in the

image of a rich producing state floating in a sea of oil and gas that is being inequitably shared with the consuming states. Often misunderstood or overlooked, is the

fact that about two thirds of the production from the state is in the Louisiana federal OCS territory and, hence, produces no revenue for the state, while at the same

time incurring significant infrastructure support costs to the state, which I will discuss in more detail later.

Also often overlooked or not explained, is the fact that, though Louisiana is the

2nd highest energy producing state in the nation, Louisiana is also 8th highest in

total energy consumption. Therefore, Louisiana is more of a consuming state than

42 other states! This story is never told, nor are Louisiana’s difficulties as a key

consuming state given much concern at the federal energy policy level. Thus, when

Louisiana, the energy producing state speaks, it is also Louisiana, the energy consuming state speaking. Louisiana is inexorably tied into the issues of all states in

the nation, whether considered producing states or consuming states. However goes

the energy situation in Louisiana, so goes the energy situation in the United States

of America, and things are not going well for Louisiana today.

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Louisiana’s Role as a Through-Processor of Hydrocarbons for the Nation

All of the preceding represents only the direct supply line of oil and natural gas.

Additionally, Louisiana’s 8th highest ranking among the states in energy consumption is attributable to the fact that Louisiana is consuming most of this energy as

a through-processor of energy supplies for the rest of the nation, consuming colossal

amounts of energy for their benefit.

An example of how Louisiana is consuming energy resources for the primary benefit of other states is petroleum refining. The energy equivalent of 10% of Louisiana’s entire petroleum product consumption is required just to fuel the processes

that refine crude oil into gasoline, diesel fuel, jet fuel, heating oil and other products

consumed out of state. The oil refining industry employs only about 10,400 workers

in the state; whereas tens of millions of jobs throughout the country are dependent

on the affordability and availability of the products from the continued operation of

these refineries and associated petrochemical facilities in Louisiana.

Many other examples could be cited of the numerous energy intensive natural gas

and oil derived chemical products Louisiana (and also Texas, Oklahoma, and California) through-processes for the rest of the U.S. Per unit of output, these industrial

processes in Louisiana are characterized as capital (equipment), energy, raw material, and pollution discharge intensive, and low in labor requirements and dollar

value added, essentially the opposite of the downstream industries in other states

that upgrade these chemicals into ultimate end products. Much of the energy Louisiana technically consumes is really the transformation of oil and gas into primary

chemical building blocks that are shipped to other states where the final products

are made, whether it be plastic toys, pharmaceuticals, automobile dash boards,

bumpers and upholstery, electronic components and cabinets, synthetic fibers, or

thousands of other products dependent on this flow of energy and high energy content materials out of Louisiana.

OCS INFRASTRUCTURE AND ITS IMPACTS AND NEEDS

It is important to understand that there is no free lunch. Louisiana, like other

coastal producing states, sustains impacts on coastal communities and bears the

costs of onshore infrastructure required to support this production activity.

Saving Louisiana’s Wetlands that Protect Offshore and Onshore Production Infrastructure

Louisiana’s unique and fragile coastal wetlands introduce yet an additional issue:

land loss. Prior to Hurricane Katrina, Louisiana was losing more than 24 square

miles of our coastal land each year. In fact, if what is happening today in coastal

Louisiana were happening in our nation’s capital, the Potomac River would be washing away the steps of the Capitol today, the White House next year, and the Pentagon soon after that. In fact, during the course of this morning alone, Louisiana

will lose a football field wide area from the Capitol Building to the Washington

Monument. It is feared that the ferocity of Hurricane Katrina may have accelerated

the land loss by several years.

There are many causes of this coastal erosion in Louisiana, including what may

be the most significant factor: building levees and channeling the Mississippi River.

Whatever the cause of its demise, the health and restoration of Louisiana’s coastal

wetlands are vital to protecting the offshore and onshore infrastructure that is essential for the continuation, as well as the expansion, of offshore energy production

in the Gulf of Mexico.

Once the State realized the magnitude of the coastal erosion problem, we got serious about doing something about it. In 1980, the coastal restoration permitting program was moved to the Department of Natural Resources (DNR). In 1981, $40 million of state oil and gas revenue was set aside in a legislative trust fund for coastal

restoration projects. The State has a dedicated revenue stream of up to $25 million

per year, depending on the level of revenue collections from oil and gas production

within the state, to replenish the fund. In the past few years, that replenishment

stream has been at the $25 million level. In 1989, the Office of Coastal Restoration

and Management was created in DNR, and the magnitude of the program was

greatly expanded.

The War against the Elements

Let me emphasize something extremely important to this nation’s energy supply.

Here along the coast, WE ARE AT WAR. It is a war in which the enemy is nature.

It is an enemy with names like Andrew, Ivan, Dennis, and Katrina—hurricanes. It

is an enemy with names like wave erosion, storm surges, sedimentary subsidence,

soil consolidation, salt water intrusion, and leveeing of the Mississippi River. As

Hurricane Katrina demonstrated last week, it is a war we are losing in Louisiana.

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Prior to Hurricane Katrina, Louisiana needed a minimum of $14 billion (in today’s

dollars) over the next 20 to 30 years for coastal restoration projects. Louisiana has

quite a unique geology relative to the rest of the country. The Louisiana coast is

geologically the youngest part of the U.S. and, prior to manmade interference from

leveeing and channeling the Mississippi River and other activities, was still

accreting land mass faster than it was losing it to subsidence, erosion, salt water

intrusion, sea level rise from global warming, and other causes. The science of coastal geology and the expertise of coastal engineering to counter these forces is in its

infancy, as it has never in the history of civilization, been attempted on the scale

it must be implemented in South Louisiana. Also, we are dealing with a situation

that is continuously subject to changing dynamics, such as more frequent and more

powerful hurricanes, the apparently increasing effects of global warming, etc.

Extent of Louisiana Infrastructure Supporting OCS Production

The total value of the Louisiana OCS infrastructure and the onshore infrastructure supporting it is difficult to ascertain. The estimated depreciated investment in

offshore production facilities is over $85 billion, depreciated offshore pipeline infrastructure is over $10 billion, and public coastal port facilities is $2 billion, for a total

of approximately $100 billion, depreciated, and not counting highways, sewer, water,

fire and police protection, schools, and other public works structures that also have

ongoing operation and maintenance costs. The replacement of all of this would be

several times the $100 billion depreciated figure. It also does not count the onshore

coastal infrastructure of pipelines, storage facilities, pumping stations, processing

facilities, etc.

This infrastructure is vulnerable if not protected by the State’s barrier islands

and marshes. As these erode and disappear, infrastructure is exposed to the open

sea and all of its fury. As the coast recedes, near shore facilities become further offshore and subject to greater forces of nature, including subsidence, currents, and

mudslides. Erosion in the coastal zone is already beginning to expose pipelines that

were once buried.

A Wake-up Call from Hurricane Ivan

To bring home the point of infrastructure vulnerability, we need only look back

to this past Summer. Hurricane Ivan was not even a direct hit on Louisiana’s offshore and coastal oil and gas infrastructure, striking two states away; yet, its effects

on the nation’s supply of oil and gas were significant, even many months after it

hit. Most of the damage occurred along pipeline routes rather than actual structural

damage to the producing platforms. As of February 14, 2005, when the Minerals

Management Service (MMS) released its final impact report on Ivan, 7.42% of daily

oil production and 1.19% of daily gas production in the Gulf of Mexico was still shutin. The cumulative shut-in production through February 14 was 43.8 million barrels

or 7.25% of annual Gulf of Mexico OCS production and 172.3 billion cubic feet of

natural gas or 3.9% of annual Gulf of Mexico OCS gas production.

With Katrina, that infrastructure has sustained a direct hit. As of Saturday, September 3, the Minerals Management Service (MMS) reported that 70% of manned

platforms and 71% of the drilling rigs in the Gulf were not operating. Saturday’s

shut-in oil production was 1.2 million barrels per day, or 79% of Gulf production.

Shut-in gas production in the Gulf was 5.8 billion cubic feet per day, or 58% of daily

gas production in the Gulf.

Also, as of noon Sunday, 7 refineries in Louisiana and 1 in Mississippi were still

shutdown from storm damage and/or lack of electric power. An additional 4 refineries in Louisiana were operating at reduced rates due to storm damage or lack of

crude supply.

As more of the protection from Louisiana’s barrier islands and coastal wetlands

wash away, increasingly more onshore and offshore production will be damaged or

destroyed by even less powerful storms than Ivan and Katrina, and particularly by

storms whose paths more directly pass through the producing areas off of Louisiana’s coast, as did Katrina. Direct hits to the prime production area by hurricanes

and tropical storms will cause incalculable damage to this production infrastructure,

as well as to the onshore support infrastructure, as Katrina is proving.

HOW TO INCREASE OFFSHORE ENERGY PRODUCTION

Share Offshore Revenue with the States that Allow Offshore Production

The most effective way to help is to assist those states that make offshore energy

production possible off their coasts. This can be accomplished by sharing with those

coastal producing states some of the offshore revenues generated off their coasts.

This would encourage those states to pursue more development, and it would help

offset infrastructure costs those states incur that is associated with that developVerDate 11-MAY-2000 09:17 Nov 08, 2005 Jkt 000000 PO 00000 Frm 00137 Fmt 6633 Sfmt 6621 24246.TXT HCOM1 PsN: HCOM1
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ment. Louisiana, like other coastal producing states, sustains impacts on coastal

communities and bears the costs of onshore infrastructure to support this production activity.

When states like Wyoming, New Mexico, Colorado, and others host drilling on federal lands onshore, they receive 50% of those revenues in direct payments, and consequently have the financial resources to support that infrastructure. In Fiscal Year

2004, Wyoming and New Mexico together received about $928 million from those

revenues, which IS an appropriate revenue sharing procedure.

In contrast, for example in 2001, of the $7.5 BILLION in revenues produced in

the federal OCS area, only a fraction of one percent came back to those coastal

states. The inequity is truly profound.

We are pleased this committee is investigating gasoline supply and pricing. The

need to sustain the existing supply that Louisiana provides must simultaneously be

addressed. The most effective answer to both issues is to share offshore revenues

with the coastal producing states that make that production possible. It is critical

that coastal producing states receive a fair share of revenues to build and maintain

onshore infrastructure and, in Louisiana’s case, to help stem our dramatic land loss,

which is occurring at a rate believed to be the fastest on the planet.

Production off Louisiana shores alone contributes an average of $5 BILLION dollars a year to the federal treasury, its second largest source of revenue. And, that

was when oil was less than half of the $60 plus per barrel price it is selling for

today.

Does it not make sense to encourage the coastal producing states which provide

that revenue for the benefit of the rest of the nation? Does it not make sense, that

when so many, like the U.S. Ocean Commission, are targeting offshore OCS revenues to pay for worthwhile preservation of natural resources, that this nation first

protect those who make these resources possible?

Prior to Katrina, in Louisiana’s coastal zone, many of the pipelines and other infrastructure that our wetlands have historically protected had become exposed to

open Gulf of Mexico conditions. I shudder to think of the extent of production infrastructure damage that we will learn that Katrina caused once we are able to get

a full damage assessment.

To maintain, much less increase, production from off our coasts, we must reinvest

in the infrastructure that makes all of the activity possible, whether it be port facilities, roads to transport equipment and supplies, erosion control, or barrier island

and wetlands storm protection.

Assistance from the Energy Policy Act of 2005

The Coastal Impact Assistance Money provided in the Energy Policy Act of 2005

that you just helped pass is tremendously good news for the state’s coastal restoration efforts. Yet, the $540 million provided over four years for coastal restoration

is only a drop in the bucket compared to the total of $14 billion needed, prior to

Katrina, over 20 to 30 years for Louisiana’s unique coastal restoration needs.

Enact Legislation to Extend Section 29 Tax Credits to Deep and Ultra-Deep Production in States Allowing Offshore Production

Section 29 of the Internal Revenue Service (IRS) Code granted a tax credit for

the production of natural gas from unconventional resources (coal bed methane and

tight sands gas). The effect of the application to coal bed methane gas production

was astounding in those areas of the country that have significant deposits of this

kind, which is not along the Gulf Coast. Natural gas reserves from coal bed methane

rose from 6.3% of U. S. reserves at the end of 1993 to 9.9% at the end of 2003. Annual natural gas production from coal bed methane rose from 4.2% of U. S. dry gas

production in 1993 to 8.2% by the end of 2003.

Deep natural gas reserves (15,000-24,999 feet sub-surface) and ultra-deep gas reserves (greater than 25,000 feet sub-surface) are the most immediately available resources capable of providing a substantial increase in domestic production of natural

gas. Substantial deep gas reserves are known to exist, and a deep gas well can have

the productive capacity many fold over that of coal seam wells and as much as five

to ten times that of conventional shallower wells. For example, a typical coal seam

gas well may produce 100,000 cubic feet (CF) per day, a good conventional 15,000

foot well could produce 1 to 2 million CF per day, and a deep gas well could produce

in excess of 50 million CF per day. The richest deep gas domain known in the U.S.

underlies the onshore area and adjacent offshore shallow water shelf of the Gulf of

Mexico. A 1998 study of the Potential Gas Committee put estimates of the U.S. deep

gas resource base at possibly 170 Trillion Cubic Feet. The deep gas domain along

the Gulf Coast underlies the existing surface infrastructure of pipelines, gas procVerDate 11-MAY-2000 09:17 Nov 08, 2005 Jkt 000000 PO 00000 Frm 00138 Fmt 6633 Sfmt 6621 24246.TXT HCOM1 PsN: HCOM1
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essing plants, and other drilling/production support infrastructure to move this gas

into the U.S. gas supply immediately.

One problem is that, while productivity increases with depth in elevated reservoir

pressure wells, drilling costs rise exponentially with well depth, and the drilling of

one deep well takes a year or more. For example, conventional wells less than

15,000 feet normally cost between $100,000 and $2 million to drill. The deeper

15,000, plus foot range wells average around $6 million, 20,000 foot wells about $16

million, and 25,000 to 30,000 foot wells are in the range of $25 million, plus. Hence,

the capital at risk for a dry hole is substantial, which makes the ability to fund such

ventures difficult. Additionally, deep wells require leading edge drilling technology.

Due to the limited amount of deep drilling done, few companies have the experience,

technological capabilities, and financial resources to undertake this high return, but

high risk activity. Of the few companies that have the ability to drill in this domain,

most are the major oil companies, who have focused their financial resources on the

more lucrative oil reserves of the deep water Gulf and drilling in foreign countries.

Substantial new financial incentives could significantly reduce the entry hurtle, increase the reward to risk ratio, and reduce barriers to capital access, particularly

for the independent companies who now do most of the onshore drilling in this country.

Immediately Share with the States A Percentage of Royalties from Deep Drilling in

the Shallow Waters of the Gulf:

Another thing that is needed immediately, is to share with coastal producing

states 50% of the royalties from new deep drilling in the shallow federal waters on

the shelf. The MMS royalty deep shelf suspension program is a good program, but

it is draining investment from our parishes by shifting drilling across the boundary

line into federal waters, causing loss of investment and tax revenue from lost drilling in state territory. Louisiana should receive a substantive percentage of royalties

from deep drilling on the shelf immediately.

Encourage New Energy Sources and Technology

Recent studies show that the Gulf of Mexico has a significant wind energy potential. Although wind power does not have the energy density of petroleum, it is an

inexhaustible, renewable source of clean energy. Again, much to my consternation,

it appears that there are many parts of the country that use a lot of energy and

want it at low prices, but do not want production of any kind, anywhere near them,

including wind energy. Again, Louisiana is stepping up to help encourage this clean

energy source. The State of Louisiana is currently working with private sector investors who are interested in developing wind farms in state and federal waters off

Louisiana’s coasts. My office submitted wind power legislation which the Louisiana

Legislature passed earlier this year to facilitate offshore wind power development

in Louisiana’s State offshore waters.

Natural gas hydrates probably offer the greatest untapped energy resource the

nation has. The Oil and Gas Journal recently reported that the U.S. Geological Survey estimates that methane hydrate deposits are greater than all other forms of fossil fuels combined. Large deposits of gas hydrates are believed to lie below the offshore waters of the U.S. Unfortunately, technology to tap these resources needs to

be developed. Once the technology is available, the first areas to be developed will

be the areas adjacent to the existing offshore producing areas where the infrastructure is in place to get it to shore and into the nation’s pipeline distribution system.

The federal government needs to fund meaningful research into developing the technology to produce gas hydrates, assessing the resource base, and delivering it.

IN CONCLUSION

It is vital to the nation’s security and prosperity that new energy sources be developed. The federal government has proven that it has the ability to steer investment,

as in the case of deep water drilling in the Gulf and coal seam gas. In addition to

its significance in producing 30% of oil and 23% of natural gas produced domestically, which is mostly off Louisiana, the OCS is probably the single most promising

area for the U.S. to obtain significant new energy supplies. These supplies, whether

conventional oil and gas, imported oil, imported LNG, wind and ocean energy, or

gas hydrates, need the support of coastal states to cooperate and to supply and

maintain critical production and support infrastructure.

LNG facilities are being built where the existing U.S. pipeline infrastructure exists (essentially Louisiana and Texas) in order to get the gas from the coast into

the delivery system to supply the nation. The same will be true when the technology

is developed to commercialize methane hydrate production off the coasts. This Louisiana and Texas infrastructure will also be used when deep and ultra-deep shelf

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production comes on stream. This is another reason why offshore revenue should be

shared with the coastal producing states and why the extension of Section 29 tax

credits should be extended to deep gas exploration at least in the states that are

allowing onshore and offshore drilling and allowing the siting of LNG facilities to

make energy available to the rest of the country.

With effective policies and incentives, the federal government can steer investment into the offshore areas, and by receiving an equitable share of revenue generated offshore, the coastal producing states can be in a position to ensure that this

production will be made available to the rest of the nation. Louisiana desperately

needs immediate revenue sharing financial assistance from a source not subject to

annual appropriations, to continue to maintain existing, and to develop future energy supplies for the nation.

Although the Congress enacted national energy legislation that included direct

payments to the coastal producing states for four years for coastal impact assistance, it did not enact true sharing of OCS revenues on a permanent basis that

would be similar to the automatic payments for drilling on federal lands onshore.

This must be addressed.

Now that Hurricane Katrina has laid waste to Louisiana’s largest city, the entire

southeastern portion of the state, the state’s coastal oil and gas infrastructure and

its protective wetlands, a massive national rescue and rebuilding program is imperative to bring the state back from this crisis and to enable us to continue to supply

a critically needed portion of this nations energy needs.

Thank you for this opportunity to appear before you.

Mr. HALL [presiding]. We thank you, Mr. Angelle. And thank you

for your patience today, and thank you for the things you have

seen and witnessed and suffered through the last several days.

All right. The Chair recognizes Mr. Red Cavaney. Thank you,

too. And thank you for the courtesy you extended to the President

of the United States out in New Mexico 2 weeks ago. Appreciate

that very much.

I recognize you for—we are not going to blow the whistle on you.

You have been so patient. You are really valuable people. You have

expended a lot of time and money to get here, and you still got to

go home sometime tonight, maybe. The Chair is willing to recognize you for as long as it takes, but roll around, if you can, pretty

quick.

STATEMENT OF RED CAVANEY

Mr. CAVANEY. Mr. Chairman, we will give you some time back.

The gulf coast is the very heartland of our industry, and our

prayers and support go out to each and everyone there. We are not

just responding to this disaster; we are living it.

Thousands of our husband and wives, sons and daughters and

friends and neighbors are suffering the hardships of others living

in this devastated region. They are the ones restoring the production, bringing the refineries back on line and restarting the pipelines. Facilities are coming back on line. And we are grateful to the

administration for access to the Strategic Petroleum Reserve and

for waivers to expedite the flow of fuels, particularly to emergency

responders.

The gulf coast region includes some 4,000 offshore platforms in

Federal waters, a dozen refineries, and hundreds of production,

transportation and marketing facilities. There is a reason for this

geographic concentration in the high-risk hurricane area. Government policies have largely limited offshore exploration and production to the central and western gulf, and our on-shore facilities

have been welcomed in the communities in the region.

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Unfortunately, offshore oil and natural gas development has

been barred elsewhere, including the eastern half of the gulf and

the entire Atlantic and Pacific coasts. On-shore construction has

been held back by Government restrictions, permitting delays and

the not-in-my-back-yard or NIMBY sentiments.

It is ironic that we talk so much about diversifying the sources

of our energy supplies from abroad; yet we have done so little to

geographically diversify our oil and natural gas presence here at

home.

In an area of much recent concern has been the need to bring

additional clean-burning natural gas to industries and consumers

nationwide. Yet, efforts to increase domestic natural gas production, both in the Rocky Mountain west and offshore, have largely

been stymied. And efforts to build more terminals outside the gulf

region to permit increased imports of liquified natural gas or LNG

have also been largely blocked.

Oil companies recognize the urgent need to expand refining capacity. But they cannot do it alone. Chairman Barton, and the rest

of you, are particularly appreciated for your leadership in this area.

Government policies are needed to create a climate conducive to investments to expand refining capacity.

For example, the Federal Government should take steps to

streamline the permitting process, to expand capacity at both existing refineries and possibly even to build a new refinery or two. We

know that Hurricane Katrina’s effects on our industry are having

a nationwide impact through skyrocketing prices for gasoline and

other fuels.

Our fuels are sold at more than 168,000 retail outlets nationwide, and less than 10 percent of those outlets are actually owned

by the large oil companies. The remaining 150,000 outlets are

owned by independent small businessmen and women. They are

making business judgments each and every day, as is their right.

However, for any of us that break the law, prosecution must follow. Let me be very clear. API and its member companies condemn

price gouging. History provides an important guide here. Our industry has repeatedly been investigated over many decades by the

Federal Trade Commission, other Federal enforcement agencies

and States attorneys general, among a few.

In each and every instance, our companies have been exonerated

of price gouging or other anticompetitive behavior. In conclusion,

let us all not be diverted from the serious work needed to ensure

Americans continue to get the fuel they deserve. We look forward

to working with the committee in that regard. Thank you, Mr.

Chairman.

[The prepared statement of Red Cavaney follows:]

PREPARED STATEMENT OF RED CAVANEY, PRESIDENT AND CEO, AMERICAN

PETROLEUM INSTITUTE

I am Red Cavaney, President and CEO of the American Petroleum Institute—the

national trade association for the U.S. oil and natural gas industry, representing all

sectors of the industry, including companies that make and market gasoline.

The Gulf Coast is the very heartland of our industry. We are not just responding

to this disaster. We are living it. Thousands of our husbands and wives, sons and

daughters, and friends and neighbors are suffering the hardships of those living in

this devastated region. Fitch Ratings, a leading global ratings agency, reports that

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Hurricane Katrina has caused the largest insured loss in U.S. history—more than

9/11 and more than any previous natural disaster.

Facilities are starting to come back online, and we are grateful to the Administration for access to the Strategic Petroleum Reserve and for waivers to expedite the

flow of fuels, particularly to emergency responders.

The Gulf Coast region includes some 4,000 offshore platforms in federal waters,

major refineries, and hundreds of production, transportation and marketing facilities. There is a reason for this geographic concentration in a high-risk weather area.

Government policies have largely limited offshore exploration and production to the

Central and Western Gulf—and our onshore facilities, including refineries, have

been welcomed in communities in the region. Unfortunately, offshore oil and natural

gas development has been barred elsewhere—including the eastern half of the Gulf

and the entire Atlantic and Pacific Coasts. Onshore construction has been held back

by government restrictions, permitting delays, and not-in-my-backyard NIMBY sentiments.

It is ironic that we talk so much about diversifying the sources of our energy supplies from abroad, yet we have done so little to geographically diversify our oil and

natural gas industry here at home.

An area of much recent concern has been the need to bring additional clean-burning natural gas to industries and consumers nationwide. Yet, efforts to increase domestic natural gas production, both in the Rocky Mountain West and offshore, have

been stymied—and efforts to build more terminals outside the Gulf region to permit

increased imports of LNG have also been largely blocked.

Impact of Hurricane Katrina

While it is still too soon to know the full effects of Hurricane Katrina on production and refinery facilities in and along the Gulf of Mexico, it is clear that the impact of this devastating storm on oil and natural gas operations will be significant

and protracted.

I know that I speak for every one of our member companies when I say that our

first concern—from the moment it becomes evident that a hurricane is approaching

the Gulf—is for the wellbeing and safety of the thousands of men and women from

across the country who work on offshore facilities, on the vessels that serve them,

in the refineries, distribution networks, and retail outlets around the Gulf coast.

Equally as important is the welfare and recovery of the communities in the Gulf

region. Millions of people in the area are experiencing firsthand the physical and

emotional hardship of the death and devastation caused by Katrina, and our hearts

and our prayers are with them.

API is working with the American Red Cross to facilitate U.S. oil and natural gas

industry efforts to help people throughout the Gulf region. We have informed our

companies that the Red Cross has described how they can help relief efforts through

corporate contributions and by encouraging customer and employee contributions.

Effects of Hurricane Katrina on Industry Facilities

We are concerned, also, about our facilities in the area. While they are designed

to withstand the forces of the most severe storms, extraordinary circumstances do

occur. Therefore, one of our industry’s top goals is always to ensure minimal impact

on the Gulf of Mexico and coastal environments. The industry takes pride in its outstanding record for safety and environmental protection in the Gulf region, and we

intend to live up to that record. Let me review the latest information (as of September 4) we have from the Department of Energy (DOE) and the Minerals Management Service (MMS) on the status of our facilities:

Offshore Production Facilities. According to the latest MMS reports, 30 percent of

the 819 manned platforms and 29 percent of the 137 rigs are currently operating

in the Gulf of Mexico. Shut-in oil production is at 1,184,747 barrels of oil per day,

which is equivalent to 78.9 percent of the daily oil production in the Gulf. Shut-in

gas production is 5.779 billion cubic feet per day, which is equivalent to 57.8 percent

of the daily gas production in the Gulf.

Refineries. A significant volume of refining capacity in the Gulf Coast and Midwest remains impacted by Katrina. According to DOE, 11 percent of U.S. refinery

capacity is shut-in, and refineries representing another 14 percent of U.S. capacity

are operating at reduced levels because of a lack of crude supplies. Lack of electricity has also been an issue in restarting refineries. Much progress has been made

and Entergy reports that it has restored electricity to all but three refineries in the

New Orleans area.

Pipelines. DOE reports that the Colonial and Plantation pipelines, critical for distributing petroleum products from the Gulf Coast to the Southeast and Mid-Atlantic

regions, have resumed operations, albeit at reduced rates. Colonial is operating at

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66 percent of normal operating capacity. Both gasoline and distillates are currently

being transported and delivered. Colonial’s capacity is about 2.4 million barrels per

day. Plantation announced it would be 100 percent operational by late on September

2. Plantation moves about 620,000 barrels of gasoline, diesel, and jet fuel per day.

The Capline pipeline is also now operational at reduced rates, according to DOE.

Capline will operate at reduced rates until the Louisiana Offshore Oil Port (LOOP)

is fully operational. Capline runs roughly 1.2 million barrels a day of crude oil to

the Midwest.

LOOP. LOOP is operational at the Clovelly terminal. Entergy energized a line to

Clovelly and the terminal is now capable of operating at approximately 75 percent

of capacity. The Fourchon terminal remains shut down.

Katrina Impact on Jet Fuel Supply

The Committee has expressed interest in the impact of Hurricane Katrina on jet

fuel supply. It is too soon to assess that impact, but we are hopeful that restoration

of refineries and pipelines to at least partial operation will increasingly alleviate

whatever supply shortfalls are caused by the hurricane.

The Louisiana Gulf Coast District, the region hit by Katrina, accounts for about

23 percent of U.S. jet fuel production. In 2004, the region’s refineries produced

355,000 barrels per day of the national output of 1.547 million barrels per day. The

Gulf Coast region as a whole accounts for about half of U.S. jet fuel production, or

779,000 barrels per day in 2004.

The Gulf Coast region ships about two-thirds of what it produces to the East

Coast (about 500,000 barrels per day), and more than 80 percent of those shipments

are by pipeline. Some jet fuel is also shipped by tanker and barge to the East Coast,

mainly to the South Atlantic states. The Gulf Coast region ships approximately another 135,000 barrels per day to the Midwest, mostly by pipeline. The United States

also imports about 125,000 barrels per day of jet fuel.

Responding to Hurricane Katrina

In the coming days and weeks, we are committed doing our best to minimize the

impact of Hurricane Katrina on the flow of fuels to consumers.

Even before the hurricane’s devastating impact, American consumers were concerned over the rising cost of gasoline, diesel and other fuels. Katrina’s aftermath,

however, underscores the need for all drivers to take seriously common-sense energy

conservation recommendations—found on API’s website and elsewhere—for reducing

the amount of fuel they consume.

We also want to thank President Bush for making available crude oil from the

Strategic Petroleum Reserve to address circumstances for which it was intended and

appreciate the IEA member nations’ contributions as well. We are also grateful that

EPA and the Department of Transportation have granted waivers to expedite the

flow of fuels, particularly to emergency responders—an action that is very helpful

at a time when logistics and distribution of fuels are extremely difficult and critical.

The Departments of Energy and Homeland Security have also been helpful in many

ways.

We believe Congress can take action to help alleviate the hardships Americans

are suffering from Hurricane Katrina. One action involves LNG. I earlier mentioned

the importance of siting LNG receiving terminals in areas beyond the Gulf region.

This diversification is helpful, and your support in facilitating it would be much appreciated.

These and other positive steps by government can be most helpful in dealing with

this catastrophe. We believe it is particularly important for government officials at

the federal, state and local levels to urge citizens nationwide to use energy wisely,

particularly in terms of not hoarding gasoline and not ‘‘topping off’’ their vehicle

tanks. Effective conservation measures are vital in helping meet the fuel needs of

U.S. consumers in this difficult situation.

In attempting to meet the challenges we face, it is also most important to do no

harm. The worst thing Congress could do in these challenging times would be to

repeat the mistakes of some past energy policies by trampling the structures of the

free marketplace. Imposing new controls, allocation schemes, or other obstacles will

only serve to make a bad situation much worse. (See the attachment, ‘‘Hurricane

Katrina and U.S. Energy Policy: Do No Harm.’’)

Why Have Gasoline Prices Risen?

We know that Hurricane Katrina’s effects on our industry are having a nationwide impact. We understand how Americans throughout the country are facing skyrocketing prices for gasoline and other fuels. What follows is background on two key

components of the price of gasoline: crude oil price and taxes.

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Crude Oil Price. Before Hurricane Katrina struck, the price of gasoline was rising

primarily because U.S. refiners are paying more for crude oil, the principal cost component of a gallon of gasoline. In fact, the Federal Trade Commission noted this

exact point in a report this July: ‘‘To understand U.S. gasoline prices over the past

three decades, including why gasoline prices rose so high and sharply in 2004 and

2005, we must begin with crude oil. 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.’’

The crude oil price is set in the international oil marketplace by the forces of supply

and demand for oil worldwide.

Tax Component. While more than half the cost of gasoline is for crude oil, every

time a motorist pulls up at the pump, he or she pays 46 cents in federal and state

taxes per gallon of gasoline. The remainder is the cost to refine and market the gasoline. The average price of a gallon of regular gasoline reached $2.85 on September

2, according to AAA. When the price of a barrel of crude oil is $67, as it was at

the end of last week, a refiner paid about $1.61 per gallon for the crude oil in order

to make a single gallon of gasoline. As noted above, taxes average 46 cents per gallon nationwide. The remaining 78 cents per gallon includes the cost of running refineries, transporting the finished gasoline to markets via pipelines and tank trucks,

and operating retail outlets. The cost to refine, market and distribute gasoline has

been trending downward for many years. The recent price spikes are a direct consequence of disruptions in crude oil and gasoline supplies. (Attached is a chart

showing combined federal, state and local gasoline taxes for each state.)

How Fuels Are Marketed. It is important to recognize that our fuels are sold at

more than 168,000 retail outlets nationwide—and less than 10 percent of those outlets are actually owned by refiners. The remaining 150,000 outlets are owned by

independent small businessmen and women, who are your neighbors. They are making business judgments every day, as is their right. However, if any of us breaks

the law, prosecution should follow.

History provides an important guide here. Our industry has been repeatedly investigated over many decades by the Federal Trade Commission, other federal agencies, and state attorneys-general. None has ever found evidence that our companies

have engaged in price gouging or other anti-competitive behavior to drive up fuel

prices.

The gasoline marketing system has the complexity and flexibility required to meet

the varying needs of both companies and consumers. Companies have three basic

types of outlet options and may employ any and all in their marketing strategies

to maximize efficiencies and compete in the marketplace. First, they can own and

operate the retail outlets themselves (company owned and operated outlets). The

second option is to franchise the outlet to an independent dealer and directly supply

it with gasoline. This option may have three different forms of property ownership:

The operator can lease from the refiner, lease from a third party, or own the outlet

outright. The third option is to utilize a ‘‘jobber,’’ who gains the right to franchise

the brand in a particular area. Jobbers can choose to operate some of their outlets

with their own employees and franchise other outlets to dealers. The mix of distribution methods varies widely across firms. Different refiners, depending on which

type is perceived as most efficient, use different types of outlets.

Supply and Demand in the World Market. Prices are rising because of the forces

of supply and demand in the global crude oil market. Supply and demand is in a

razor-thin balance in the global market. Small changes in this market have a big

impact.

World oil demand reached unprecedented levels in 2004 and continues to grow.

Strong economic growth, particularly in China and the United States, is fueling a

surge in oil demand. The U.S. Energy Information Administration (EIA) reports

that global oil demand in 2004 grew by 3.2 percent—the strongest growth since

1978—and projects growth to increase by about 2.1 percent this year and next. By

comparison, world demand between 1993 and 2003 grew at an average rate of 1.6

percent.

At the same time, 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. Current spare capacity is equal to about 1 percent of world

demand. EIA projects spare capacity for 2005 at just over 1.0 million barrels a day.

Thus, 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 year, we have seen how the market has

reacted to such diverse developments as dollar depreciation, an unusually cold winVerDate 11-MAY-2000 09:17 Nov 08, 2005 Jkt 000000 PO 00000 Frm 00144 Fmt 6633 Sfmt 6621 24246.TXT HCOM1 PsN: HCOM1
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1 Earnings equal profits divided by sales calculated from ‘‘Corporate Scorecard,’’ Business

Week, August 22/29, 2005; and from company financial reports for oil and natural gas figures.

ter, the post-war insurgency in Iraq, hurricanes in the Gulf of Mexico, the continued

impact on the Venezuelan sector from the oil workers’ strike in 2002-03, uncertainty

in the Russian oil patch, ongoing ethnic and civil strife in Nigeria’s key oil producing region, recent mass protests targeting Ecuador’s oil infrastructure, and decisions by OPEC.

Gasoline Prices Mirror Crude Oil Prices

While consumer concern about high gasoline prices is very understandable, we

must recognize that gasoline prices mirror crude oil prices. Crude oil costs make up

more than 50 percent of the cost of gasoline. Retail gasoline prices and crude oil

prices have historically tracked, rising and falling together. We 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. U.S. oil companies don’t set crude oil prices. The world market

does. Whether a barrel is produced in Texas or Saudi Arabia, 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.

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. The energy Americans consume today is brought to them 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.

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 of sales (measured as net income divided by sales) provide

a more relevant and accurate measure of a company’s or an industry’s health, and

also provide a useful way of comparing financial performance between industries,

large and small.

For the second quarter of 2005, the oil and natural gas industry earned 7.6 cents

for every dollar of sales compared to an average of 7.9 cents for all U.S. industry.1

Many industries earned better returns in the second quarter than the oil and natural gas industry. For example, banks realized earnings of 19.6 cents on the dollar.

Pharmaceuticals reached 18.6 cents, software and services averaged 17 cents, consumer services earned 10.9 cents and insurance saw 10.7 cents for every dollar of

sales. Last year, the oil and natural gas industry realized earnings of 7 percent compared to an average of 7.2 percent for all U.S. industry. Over the last five years,

the oil and natural gas industry’s earnings averaged 5.7 cents compared to an average for all U.S. industry of 5.5 cents for every dollar of sales.

Some are calling for reinstatement of a windfall profits tax as a response to the

nation’s energy challenges. As the figures I just cited demonstrate, our industry’s

earnings are hardly a ‘‘windfall.’’ Strong earnings enable our industry to remain

competitive globally, benefit millions of shareholders—your constituents—and enable the industry to invest in innovative technologies that improve our environment

and increase energy production to provide for America’s future energy needs. Levying new taxes would likely end up harming consumers. As The Wall Street Journal

editorialized recently, (‘‘China Does Carternomics,’’ August 19), ‘‘A windfall profits

tax only discourages increases in supply by disincentivizing further production.’’ According to the Congressional Research Service, the windfall profits tax drained $79

billion in industry revenues during the 1980s that could have been used to invest

in new oil and natural gas production. In fact, 1.6 billion fewer barrels of oil were

produced domestically due to the windfall profits tax—barrels that instead had to

be secured from foreign sources.

Perspective: The Role of Oil and Natural Gas

High gasoline prices have caused some to call for us to decrease, if not eliminate,

our nation’s reliance on oil and natural gas. However, if we are to understand and

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address the causes of the high prices, we need to recognize the energy realities that

our nation faces.

These realities could not be clearer: We live in a global economy, and there is a

strong link between energy and economic growth. If we are to continue to grow economically, we must be cost-competitive in our use of energy. We need all sources

of energy. We do not have the luxury of limiting ourselves to one source to the exclusion of others. Nor can we afford to write off our leading source of energy before

we have found a cost-competitive and readily available alternative.

Consider how oil and natural gas enhance our quality of life—fueling growth and

jobs in industry and commerce, cooling and warming our homes, and getting us

where we need to go. Oil provides about 97 percent of U.S. transportation fuels,

which power nearly all of the cars and trucks traveling on our nation’s highways.

More than 60 million American households are heated and/or cooled by natural gas.

And plastics, medicines, fertilizers, and countless other products that extend and enhance our quality of life are derived from oil and natural gas.

The U.S. Energy Information Administration has projected that fossil fuels will

continue to dominate U.S. energy consumption, with oil and natural gas providing

nearly two-thirds of that consumption in the year 2025, even though energy efficiency and renewables will grow faster than their historical rates. However, renewables, in particular, start from a very small base; and the major shares provided

by oil, natural gas, and coal in 2025 are projected to be nearly identical to those

in 2003.

Our nation cannot afford to leave the Age of Oil before a realistic substitute is

fully in place. We will leave the Age of Oil, not because we will run out of oil. Yes,

someday oil will be replaced, but clearly not until a substitute is found—a substitute

that is proven more reliable, more versatile, and more cost-competitive than oil.

There is a misperception by some about the time and costs involved in any such

transition. Consider what would be involved in replacing the dominant role of oil

with a substitute like ethanol, hydrogen, or solar power. Most experts agree that

finding and transitioning to a substitute for oil will require dramatic advances in

technology and massive capital investments—and that such a displacement will

take many years to accomplish.

In the early 1970s, many energy policymakers were ‘‘sure’’ that oil and natural

gas would soon be exhausted, and government policy was explicitly aimed at ‘‘guiding’’ the market in a smooth transition away from these fuels to new, more sustainable alternatives. Price controls, allocation schemes, limitations on natural gas,

massive subsidies to synthetic fuels, and other measures were funded heavily and

implemented.

Unfortunately, the key premises on which these programs were based, namely

that oil and gas were nearing exhaustion, and that government ‘‘guidance’’ was desirable to safely transition to new energy sources, are now recognized as having

been clearly wrong—and to have resulted in enormously expensive mistakes.

The leading role that oil and natural gas will continue to play makes it all the

more important for our government to adopt policies that do not prevent or delay

oil and gas development before substitutes are ready to satisfy consumer needs and

to meet the economic investment demands.

In considering future U.S. energy needs, we need also to understand that gasoline-powered automobiles have been the dominant mode of transport for the past

century. Regardless of fuel, the automobile—likely to be configured far differently

from today—will remain the consumer’s choice for personal transport for decades to

come. The freedom of mobility and the independence it affords consumers are highly

valued.

Moreover, we expect that the dominant transport fuels will remain gasoline and

diesel for decades—the minimum amount of time required to fully retire any existing and still growing fleet of automobiles and trucks powered by these fuels and to

deploy any replacement fuel source throughout our nation. We cannot afford to prematurely retire a century-old champion. And, sulfur-free diesel and sulfur-free gasoline could well live on as the preferred sources for fuel cells well into the future.

Gasoline Prices: What Can Be Done?

The solution to high gasoline prices is more supply of crude oil and gasoline and

less demand, but there is no simple strategy to make that happen. Now that the

long Congressional debate over energy legislation has come to an end, the United

States is at a critical turning point in shaping its future energy policy. The legislation signed by the President signals a first step in a much-needed effort to enhance

energy security and ensure the reliable delivery of affordable energy to consumers.

But much remains to be done.

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The problems we face are very real: growing world demand for energy at a time

when many oil-producing countries around the world are increasingly limiting or restricting our industry’s access to new resources; a lack of national commitment to

develop our abundant domestic energy resources and critical infrastructure; and

scant attention to energy efficiency. These factors have resulted in a tight supply/

demand balance for U.S. consumers, causing recurring price spikes, greater market

volatility, and overall strain on the nation’s energy production and delivery systems.

Energy demand continues to grow. The Energy Information Administration (EIA)

forecast that by 2025, U.S. energy consumption will increase by 35 percent, with petroleum demand up by 39 percent and natural gas up by 34 percent. These demand

increases occur despite expected energy efficiency improvements of 33 percent and

renewable energy supply increases of 41 percent.

Additional EIA forecasts point out our basic problem: Domestic energy supplies

are not keeping up with increased demand; and we are relying more and more heavily on imports to meet our energy needs. EIA projects that U.S. crude oil production

will fall by 17 percent by 2025 (assuming no production from ANWR), while crude

oil imports will increase by 67 percent, and net petroleum product imports increase

by 90 percent. Given these trends, it comes as no surprise that EIA forecasts that

our nation’s dependency on foreign sources of petroleum will rise from 59 percent

today to 68 percent in 2025.

This increase, to the extent that it reflects import costs lower than domestic supply costs, would represent a gain from trade which should be encouraged. However,

when we have resources that can be developed at prices competitive to imports, and

we choose not to do so, we place a wasteful and unnecessary burden on our own

consumers,

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 more than 131

billion barrels of oil and more than 1000 TCF of natural gas remaining to be discovered in the US.

However, 78 percent of this oil and 62 percent of this 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. The most comprehensive study of the effects

of such constraints was the 2003 National Petroleum Council study of natural gas,

which included an analysis of federal constraints on U.S. gas supply in two key

areas—the Outer Continental Shelf (OCS) and the Rockies. The study found that

in key areas of greatest supply potential, federal policy precludes or seriously constrains development. For instance, of the 209 TCF of estimated undiscovered gas in

the Rockies, 69 TCF is completely off limits, while another 56 TCF is seriously constrained by federal policy. On the OCS, the entire Atlantic, Pacific, and most of the

Eastern Gulf of Mexico are off limits to development. Furthermore, the study found

that sustaining these constraints over the next 20 years would cost U.S. consumers

more than $300 billion in increased energy costs.

We are aware that opponents of oil and natural gas development still raise environmental concerns. However, we would point out that history provides overwhelming evidence that our industry can find and develop oil and natural gas resources safely and with full protection of the environment, both on land and offshore. For example, according to the U.S. Coast Guard, for the 1980-1999 period,

7.4 billion barrels of oil were produced in federal offshore waters, with less than

0.001 percent spilled. That’s a 99.999 percent record for clean operations—a statistic

few others can likely match or best, and far less than the volumes of natural seeps

that occur on ocean and gulf floors.

Using advanced technology and sound operational practices, our industry has

steadily reduced the impact of oil and gas development, both onshore and offshore.

The surface presence for exploration and development wells has shrunk significantly. For example, a drilling pad the size of Capitol Hill is all that is needed to

access any oil reserves that might exist in the entire 68.2 square mile District of

Columbia. Horizontal and directional drilling now enables our industry to drill multiple underground wells from a single pad, sometimes reaching sites as far away as

10 miles from the drilling pad.

Additionally, the U.S. oil and natural gas industry is among the most heavily regulated industries in our country. Every lease contains a standard stipulation to protect air, water, wildlife and historic and cultural resources, but leases may also include any number of a additional stipulations to further protect resources.

The recently enacted energy legislation takes a positive step by requiring an inventory of OCS oil and natural gas resources. It will not, by itself, result in new

energy supplies.

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We need to build on the energy legislation by encouraging the flow of more natural gas and oil to the marketplace. 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 the U.S. 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.

We can no longer wait 15 years, as we have, to address our nation’s energy policy.

The energy legislation is a foundation, but it must be built upon. More needs to be

done and more quickly, particularly increasing access to offshore resources. We have

the ingenuity, the technology, and environmental protections. If enactment of the

energy legislation means we have a commitment to continued action, then it will

truly be a turning point in reshaping U.S. energy policy.

Refineries

We cannot understand or deal with high gasoline prices if we do not consider the

state of refineries in the United States. During the 1990s, the oil industry earned

relatively poor rates of return on their 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 cleaner burning fuels to meet clean air standards set by

the Clean Air Act of 1990. The act had a major impact on the operation of refineries

in the U.S. and the return on investment realized at the time.

From 1994 to 2003, the industry spent $47.4 billion to bring refineries into compliance with environmental regulations. That included $15.9 billion in capital costs

and $31.4 billion in operations and maintenance costs to comply with regulations

covering air, water and waste rules. Moreover, by 2010, the U.S. refining industry

will have invested upwards of $20 billion to comply with new clean fuel regulations.

This is in addition to the cost of compliance with many dozens of other environmental, health, safety and security regulations. All this investment severely reduces

the funds available for discretionary capacity expansion projects.

Technological advancements have helped refineries produce more from existing facilities than they did in the past. In addition, the elimination of subsidies under the

government price and allocation controls in 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.

This consolidation benefited consumers. We can see this in the decline in the refiner/market margin (measured as the difference between the retail price of gasoline

minus taxes and minus the refiner’s composite crude oil price). Back in 1980, the

cost to refine and market and distribute gasoline averaged about 95 cents per gallon

(in inflation-adjusted terms). By 1990, it averaged more than 61 cents per gallon,

and, by 2000, it was 52 cents per gallon, which is about where it has averaged over

the last five years. Multiplying these reductions by the 330 billion gallons of petroleum products consumed translates into billions of dollars of savings for consumers.

We all benefit every day from these improvements and efficiency gains.

The Need to Expand Refinery Capacity

The expansion of refinery capacity must be a national priority. The record-high

gasoline prices, while primarily caused by increased crude oil prices and exacerbated

by Hurricane Katrina, have underscored the fact that U.S. demand for petroleum

products has been growing faster than—and now exceeds—domestic refining capacity. While refiners have increased the efficiency, utilization and capacity of existing

refineries, these efforts have not enabled the refining industry to keep up with

growing demand. Even with a projected expansion of product imports of 90 percent,

the Energy Information Administration (EIA) forecasts a need for 5.5 million barrels

a day of additional refining capacity by 2025 beyond today’s 16.9 million barrels a

day of capacity, even with higher utilization rates.

The fact is that—faced with increasingly more challenging fuels regulations—only

major refineries have the resources needed to expand their capacity. Smaller refineries are increasingly unable to afford to expand. Moreover, local opposition and not

in my backyard (NIMBY) attitudes persist and prevent new refineries from being

constructed. The steady growth in U.S. fuels demand must increasingly be met by

foreign product imports. Thus, in addition to blocking or delaying refinery expansion, the extensive federal regulatory burden is contributing to increased reliance

on foreign product imports. This is a result that neither serves the best interests

of U.S. consumers nor bolsters the U.S. economy and American jobs.

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Oil companies recognize the urgent need to expand refining capacity, but they

cannot do it alone. Government policies are needed to create a climate conducive to

investments to expand refining capacity. The President’s innovative proposal earlier

this year to build new refineries on closed military bases deserves serious consideration. In addition, 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.’’ For example, that 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 and possibly even build a new refinery.

In addition to the myriad of permitting issues deterring new refining capacity investments, there are financial constraints as well. Attracting capital for new refinery capacity has been difficult with refining rates of return historically averaging

well below the average for S&P Industrials. Over the 10-year 1994-2003 period, the

return on investment for the refining sector was 6.2 percent or less than half as

much as the 13.5 percent for S&P Industrials.

U.S. tax policy has also hindered the refining industry’s ability to attract new investment capital. New refinery investments are depreciated over 10 years, while

comparable assets in other industries are recovered over five or seven years. The

recently enacted energy legislation takes a small, but positive, step in addressing

this inequity by allowing 50 percent of those investments to be currently expensed

through 2011. However, much more needs to be done to make U.S. refinery investments more economically attractive, and, thus, better able to compete for limited

available capital.

Conclusion

The U.S. oil and natural gas industry recognizes the catastrophic impact that

Hurricane Katrina has had on millions of Americans and our industry is working

with government and others in the private sector to do all we can to alleviate their

suffering.

If we all do our part—industry providing supplies and repairs as expeditiously as

possible, government facilitating needed approvals, and consumers adjusting their

driving habits to consume less fuel—Americans can overcome this challenge as we

have others in our nation’s history.

ATTACHMENT: HURRICANE KATRINA AND U.S. ENERGY POLICY: DO NO HARM

Hurricane Katrina has brought devastation to much of the Gulf Coast, interrupting operation of significant parts of the nation’s oil and natural gas production

facilities, refineries and pipelines. In addressing this catastrophe, energy policymakers should do no harm. They should avoid repeating past energy policy mistakes

which could make a bad situation much worse. The following are examples of actions that should be avoided:

• Windfall Profits Tax: This was tried before. Backers of the 1980 tax claimed it

would raise revenue and prevent oil companies from benefiting from higher

crude oil prices and the removal of price controls. The tax drained $79 billion

in industry revenues that could have been used to invest in new oil production—leading to 1.6 billion fewer barrels of oil being produced domestically. The

industry uses profits to invest in new technology, new production, and environmental and product quality improvements. The National Petroleum Council

projects that producers will have to invest a total of almost $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.

• Price Controls: As seen the 1970s, price controls further reduce product availability as suppliers are unable or unwilling to bring product to market if they

cannot recover the cost of doing so. The result is less product available, potential outages, and long lines at service stations.

• Rationing/Product Allocation: Rationing results in too much product being sent

to some areas and too little product being sent to other areas. The reason is

that rationing ignores the market price signal that producers use to decide

which areas are in greatest need of product. The result would be an inefficient

distribution of product with some areas of the country having too much motor

fuel while shortages develop in other areas.

• Moratorium on Mergers: As noted by the Federal Trade Commission in its August

2004 report, The Petroleum Industry: Mergers, Structural Change, and Antitrust

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2 National Petroleum Council, Observations on Petroleum Product Supply, December, 2004 p.

II-4

Enforcement, merger activity in the U.S. refining sector over the last several

years has not adversely affected competition in the sector, and has resulted in

greater operational efficiencies in the refining sector and lower costs to consumers. Government policy prohibiting mergers would slow or reverse this positive trend and ultimately result in higher fuel costs to the motoring public. • Regional Strategic Reserves of Refined Products: While the concept behind the

Strategic Petroleum Reserve (SPR) has merit, the same cannot be said of regional strategic reserves of refined products. Holding and managing refined

products is much more complex and impractical than holding and managing

crude. The large number of boutique fuels (17) would require a diverse number

of storage facilities for each chosen location. Additionally, product degradation

means that the product in the reserves would have to be continuously rotated.

Because of this it is unlikely that there would be sufficient product of the right

specification in the right location to be helpful during a supply disruption. 2

• Mandatory Minimum Inventory Levels: Since fuel producers have considerable incentive to maintain sufficient inventories so as to not forfeit sales, a minimum

inventory mandate could result in an inefficient level of inventory being held.

Inventory is considered working capital and as such is a cost of doing business.

Inefficient levels of inventory arising from mandatory minimum inventory levels

would unnecessarily raise the cost of providing fuel to consumers.

• Price Trigger for the SPR: Industry has long supported government holdings of

strategic stocks in the SPR, under one condition: that it be used only to replace

volumes of oil lost in an emergency, not as an instrument for government price

tinkering. The current mechanism allows the President a wide range of discretion to determine what constitutes an emergency. Some argue that this essentially makes the SPR a political instrument, subject to the President’s whim.

Setting a price trigger, some argue, would leave the trigger decision to the market. However, setting the price for the trigger is no less arbitrary than the existing trigger, and puts the government directly in the role of manipulating price.

• Oil Import Tariff: Oil import tariffs have been proposed, and used, in the past as

an instrument of energy policy. The key motive of such an approach stems from

a belief that reducing imports is unambiguously beneficial. However, when we

look carefully at each of the claimed benefits, we find them all to be dubious

at best, not to mention illegal under existing trade agreements with many of

our trading partners.

Chairman BARTON. We thank you, Mr. Cavaney.

We now would like to hear from Mr. Bob Slaughter, who is president, and is representing the National Petroleum and Refiners Association.

Welcome, Mr. Slaughter. You are recognized for 7 minutes.

STATEMENT OF BOB SLAUGHTER

Ms. SLAUGHTER. Thank you, Mr. Chairman. I wanted to associate NPRA with the comments that API has just made, particularly, especially mentioning no toleration of profiteering or price

gouging. And I think that is a very important matter. Also, I think

it is very important to take note of the statement that the industry

has been intensively investigated many times, and a monitoring

project is ongoing at FTC for gasoline prices in 360 cities, and the

industry has never—there has never been any evidence of gouging

or any kind of price manipulative behavior on the part of our members.

I particularly want to focus, however, on the refining questions

that were raised earlier, and I want to actually show a couple of

charts. The first chart just shows the very strong relationship between crude price and the price of gasoline. You will see the curves

are essentially the same. And the FTC, in its publication a couple

of months ago, it was a very large study on gasoline, said that 85

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percent of the price movements in gasoline over the last 20 years

were attributable to changes in the price of crude.

The second chart, if we can show it, points out—and this is an

EIA chart—it shows the extent to which gasoline prices are determined mostly by crude but, second, by taxes.

And if you put your crude price, which is the price of our raw

material, together with taxes on gasoline, when the gasoline gets

to the pump, 80 percent of it is out of our control. The cost of actually refining and then the cost of distributing and marketing is

quite small. And those numbers hold over considerable time.

The third chart, if I could. I would like to hold there for a second.

One thing I would like to say and I wouldn’t like to forget is, my

first summer in Washington was 1971, and that was the summer

in which President Nixon imposed wage and price controls. And it

was 10 years before the wage and the price controls on energy

could be removed, 1981.

Gas price controls were put on in 1952, and they weren’t removed until 1983. So I just want to caution the committee in everything that it does that we do not want to take a giant step backward into the world of price control or other government intervention in this market. It takes a great deal to get rid of the shortages,

lines and other negatives that result from that policy.

This particular chart shows the many programs that refiners

have to comply with over this decade. The red ones are fuel controls. The blue ones are stationary source controls. There is well

over $20 billion worth of investment on that chart. And frankly,

most of it did not get a very good review for impact on supply.

One of our strong recommendations is supply, particularly oil

and gas supply, needs to be job No. 1. Those are the fuels we depend on, and frankly, they always end up being the second priority,

behind whatever people wanted to really do at that time.

Environmental regulations should go forward. We spend a great

deal of money on them. And the industry has contributed greatly

to environmental clean-up. But we should also look seriously at the

impact on supply of these regulations. And these have not even

been well sequenced, so we get many, many expensive regulations,

one on top of another.

I asked a gentleman who has been in the refining industry for

many years just a couple of years ago, why he found it difficult. He

has been involved in transactions involving refineries. To get why

it has been difficult to get new people into the refining business,

he said, Well, because—he said—they know that it will take millions, maybe up to a billion dollars to get in the industry. And then

they have the fear that Government at some level, whether it be

legislative or regulatory, will come along and suddenly impose additional hundreds of millions of investment on them.

And if you will see that chart, that is pretty much what happens.

That is one of the deterrents to more investment in the refining industry. A lot of people have jumped to the conclusion that there

hasn’t been a lot of investment in the industry. Mr. Chairman,

there has been a great deal, billions and billions of dollars.

Over the 1990’s, the industry invested billions of dollars to comply with the requirements of the Clean Air Act. You see what it

is going to have to comply with this decade. On top of this, these

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are environmental programs, you have got to basically spend billions of dollars to stay in business and hopefully increase capacity.

So there has been a lot of money spent on the business.

Someone mentioned mergers earlier, and said that that might be

anticompetitive and lead to less capacity. But, I can just mention

one case, I know Valero, and this was quoted in the Post this morning. That part of the article previously read wasn’t mentioned.

Valero has added 380,000 barrels of oil a day capacity to the refineries that it has purchased over the last 8 or 9 years. So often

times mergers, you know, someone gets an asset who sees new possibilities in it and will put additional investment in it.

I would like to see that next chart if we could for just a minute.

That really shows what has to be done in 2006 and 2007. It includes also the few programs that were imposed by the Energy Act.

And there are a couple of things there that the industry has to do,

but that is the agenda just for the next couple of years. You can

see that refineries have a lot on their plate.

I know it is not in your jurisdiction, Mr. Chairman, but the recent Energy Bill also included some tax treatment for refinery investments. And it basically would allow expensing 50 percent of the

cost of increasing refinery capacity by more than 5 percent. It

would be very useful also to have a look at the depreciation rate

for refining investments where 10-year property now, and all of

their businesses like ours are 5-year property.

That would basically allow more investment in the industry. And

the other thing would be, you know, there is going to have to be

a lot of reconstruction done in these areas that have been affected

by the flood and the hurricane. It would certainly be helpful to

have assistance in getting the necessary permits to rebuild, and

perhaps harden those facilities.

You know, we have heard several times today comments that it

is bad that the industry is centered in this area of the country, as

if we could pick it up and put it anywhere else in the country. The

fact of the matter is that we have got to keep those assets there,

hope they keep operating, which I believe they will, and help them

harden themselves against hurricanes, because they are either

there or they are nowhere is the history that we have seen.

Although, we would hope that other areas of the U.S. would take

refineries, we have not found them willing to do that. So thank

you, Mr. Chairman.

[The prepared statement of Bob Slaughter follows:]

PREPARED STATEMENT OF BOB SLAUGHTER, PRESIDENT, NATIONAL PETROCHEMICAL

& REFINERS ASSOCIATION

Mr. Chairman and members of the Committee, thank you for the opportunity to

appear today to discuss the impact of the wide-spread devastation caused by Hurricane Katrina on transportation fuels markets. While I will focus on that urgent matter, I will also discuss the many other factors impacting current transportation fuels

markets. My name is Bob Slaughter and I am President of NPRA, the National Petrochemical & Refiners Association. NPRA is a national trade association with 450

members, including those who own or operate virtually all U.S. refining capacity,

and most U.S. petrochemical manufacturers.

PART I. RESPONDING TO HURRICANE KATRINA

In the aftermath of Hurricane Katrina our nation confronts death, injuries and

devastation of staggering proportions. The images of the tragedy displayed in the

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last several days on television and other media underscore the human toll and

seeming hopelessness in ways more eloquent and compelling than could ever be captured in testimony. We share both the sense of dismay and increased humility felt

by all Americans before this latest reminder of nature’s power to devastate and confound the best efforts of human beings. NPRA offers our sympathy and prayers to

those who have suffered the loss of loved ones among family members, or their

neighbors and colleagues, as well as to those who have lost much or all of their personal assets and livelihood in this worst U.S. natural disaster.

Today’s hearing has been called to inquire into the impact of Hurricane Katrina

on the nation’s energy supply. It is appropriate that Congress turn immediately to

such questions because of the huge impact of that storm on the Gulf Coast, the energy heartland of the United States. This is a time when national attention is and

should be focused on human needs. Many industry employees and their families

have been victims as you will hear. Nevertheless, NPRA appreciates the committee’s

immediate attention to the issue of energy supply, which was the subject of considerable debate and attention even before the hurricane disaster occurred. We also appreciate the opportunity to respond to the committee’s questions in person on this

matter of critical national importance. Because our expertise lies in the area of refining and petrochemicals, we will focus on those areas, but will try to provide other

available information insofar as is possible.

Thus, on behalf of our refining and petrochemical industry members we have attempted to respond to the questions most asked about Hurricane Katrina’s impact

on the industry and energy supply, as follows:

1. How much of the nation’s oil and gas supplies come from this region?

According to the U.S. Energy Information Administration (EIA), the Gulf of Mexico produces 1.582 million barrels per day (mmb/d) of federal crude production,

which is 28.5% of the U.S. total crude production (5.488 million barrels per

day).

Again according to EIA, the region contains 8.068 million barrels per day of refining capacity, 47.4% of the nation’s total refining capacity (17 million barrels per

day).

The Gulf Coast region receives 6.490 mmb/d of crude oil imports, 60.4% of the

nation’s total crude oil imports (10.753 mmb/d). (23.5% of the nation’s total

comes into ports in Louisiana, Mississippi and Alabama, and 8.5% of the nation’s

total crude imports come into the LOOP.)

The Gulf Coast region produces 10.4 billion cubic feet (bcf/d) of natural gas per

day, 19.2% of the nation’s total natural gas production (54.1 bcf/d).

2. How extensive was the damage?

Crude Oil, Natural Gas Production

According to the U.S. Minerals Management Service (MMS), as of September 2,

88.53% (1.328 mmb/d) of Gulf crude oil production was shut-in, and 72.48%

(7.248 bcf/d) of Gulf natural gas production was shut-in. This amounts to 25%

of total federal crude production and 14% of the nation’s natural gas production.

Crude Oil Import Facilities

The storm resulted in temporary closure of LOOP, the Louisiana Offshore Oil

Port. More than 10% (900,000 b/d) of the nation’s crude oil imports enter through

LOOP. Roughly 500,000 b/d of crude produced offshore is also unloaded at LOOP,

which ceased operations on Sunday, August 28 as the storm approached.

Refineries

The following refineries were directly affected by Hurricane Katrina:

Belle Chasse, Louisiana (ConocoPhillips) 247,000 b/d; shut

Chalmette, Louisiana (ExxonMobil/PDVSA) 190,000 b/d; shut

Convent, Louisiana (Motiva) 235,000 b/d; shut

Garyville, Louisiana (Marathon) 245,000 b/d; shut

Meraux, Louisiana (Murphy) 125,000 b/d; shut

Norco, Louisiana (Motiva) 227,000 b/d; shut

Pascagoula, Mississippi (Chevron) 325,000 b/d; shut

Port Allen, Louisiana (Placid) 48,500 b/d; shut

St. Charles, Louisiana (Valero) 260,000 b/d; shut

Vicksburg, Mississippi (Ergon) 23000; shut

Together, these facilities constitute about 2 mm/b/d, 12% of the nation’s total refining capacity (17 mmb/d).

In addition, the following refineries were forced to reduce operations because of

the impact of Hurricane Kristina:

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Baton Rouge, Louisiana (ExxonMobil) 488,000 b/d; reduced runs

Krotz Springs, Louisiana (Valero) 85,000 b/d; reduced runs

Memphis, Tennessee (Valero) 180,000; reduced runs

Port Arthur, Texas (Total) 285,000 b/d; reduced runs

Tuscaloosa, Alabama (Hunt Refining Co.), 35,000 b/d; reduced runs

In addition, several Midwestern refineries were affected by shutdown of the

Capline Pipeline, which supplies crude oil from the Gulf region to refineries in the

Midwest (16% of the nation’s refining capacity is in the Midwest). For example,

Marathon’s refineries at Catlettsburg, West Virginia (222,000) and Robinson, Illinois

(192,000) were affected by Capline’s closure, as were other Midwestern facilities.

In total, we believe that at least 20% of the nation’s refining capacity (3.4

mmb/d) ceased operations or reduced runs at some time due to the direct impact

of Hurricane Katrina and the loss of crude supplies from pipelines affected by the

storm. This is probably a conservative estimate.

Recent reports indicate that many of these refineries are either up and running

or anticipate start-up as early as this week. But, unfortunately, there are some refineries representing a significant amount of capacity that will remain shut for an

undetermined period.

The Gulf refineries were first impacted by the need to protect the personal and

family safety of employees, as well as the high likelihood of wind and flood damage

as a result of the hurricane. After the hurricane passed, many of these facilities remained totally off-line as damages were assessed. In some instances companies

could not physically enter the facilities to conduct an assessment for several days,

and had to first depend on flyovers to study the plant. Damages included flooding,

wind damage, and lack of electricity.

Pipelines

In addition, the widespread damage caused by the storm disrupted the electricity

supply, which affected all industry operations. From a refiner’s point of view, among

the most serious was closure of three pipelines:

The Colonial Pipeline, 5,500 miles of pipeline originating in Houston and ending

in New York Harbor, carries a daily average of 100 million gallons of gasoline, diesel and other petroleum products from refineries in the Gulf to customers in the

South and Eastern United States.

The Plantation Pipe Line, 3,100 miles of pipeline, performs a similar function

along a slightly different route, delivering a total of 620,000 barrels (26 million gallons) of refined petroleum products per day to Birmingham, Alabama; Atlanta, Georgia; Charlotte, North Carolina; and Washington, D.C., among other cities.

The Capline Pipeline (previously mentioned), which carries 1.1 million b/d of

crude oil to refineries in the Midwest where it is refined to produce gasoline, diesel

and other petroleum products for distribution primarily in the Midwest.

All three of these pipelines were totally or partially out of service due to disruption of electricity supplies as a result of Hurricane Katrina. As a result, the major

supply lines of refined products to the Southern and Eastern states were

unavailable for shipment in whole or in part, during the initial period after

the storm. Midwestern gasoline and diesel production was affected by lack

of supply from the Capline Pipeline. This led to reduced supplies of gasoline, diesel, and other products in parts of the country often far removed

from the Gulf area.

Petrochemical Facilities

The Gulf region is home to many of America’s petrochemical plants, which manufacture plastics and other products made from oil and natural gas feedstocks, and

which rely on these energy sources for fuel and electricity for power. The impact

of Hurricane Katrina on these facilities is not currently known but is potentially

quite serious, both in terms of facility damage due to water or wind damage and

temporary closure or reduced operations due to feedstock shortages, lack of fuel or

electricity and transportation problems.

Petrochemical products serve as the building blocks for many ultimate products

such as computers, medicines and other medical products, plastic packaging for

food, and also automobile components, to name just a few. Disruption of petrochemical production due to the storm, if it continues, could affect the economy considerably due to the economic importance of petrochemical-based products.

Other Facilities

In addition to the major impacts outlined above, company pipelines and shore facilities and other operations were impacted by the hurricane, but information on

these matters is less readily available to us. Company and government statements

indicate that many of these facilities were not operating due to lack of electricity

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or because other related facilities (e.g. refineries) were down. Some natural gas processing plants were affected but NPRA does not have more information on this sector

of the industry.

3. What is the current state of repairs?

The many different sectors of the energy industry, working around the clock together with core service providers and with important help from local, state and federal government agencies, have made considerable progress in restoring some of the

operations affected by the storm.

The magnitude of the impact outlined above clearly dictates caution in any assessment of when the energy production, refining, distribution and related facilities will

be back in service and industry conditions will return to normal. Clearly, our national energy infrastructure has suffered a setback from which it will take some

time to emerge completely.

Crude Oil, Natural Gas

According to the MMS as of Saturday, September 3, 78.98% of Gulf of Mexico

crude oil offshore production remained shut-in, an improvement of 10% over Friday.

Shut-in Gulf natural gas production stood at 57.80% of total Gulf gas marketed production, an improvement of 21% over Friday’s figure. The number of manned offshore platforms that are evacuated declined by 25% over the same period. Thus, important but limited progress has been made both in restoring the flow of crude and

natural gas necessary for refiners to manufacture gasoline, diesel, jet fuel and other

petroleum products and to meet the needs of petrochemical manufacturers. In addition, it is reported that LOOP is operating at 75% of capacity.

These figures still leave significant amounts of offshore Gulf crude oil and natural

gas shut-in, and oil and gas volumes not produced in the past several days are

large. During the period 8/26-9/3 9.8 million barrels were shut-in, totaling 1.8% of

yearly crude oil production in the Gulf. During the same period 53.2 billion cubic

feet of natural gas were shut-in, roughly 1.45% of annual gas marketed production

from offshore.

There are indications of progress as well regarding refineries. Marathon announced this weekend that, barring unforeseen problems, all seven of its refineries

would be operating at capacity on Monday. This includes the Midwestern refineries

impacted by the Capline Pipeline closure as well as the Garyville, Louisiana refinery

impacted directly by the hurricane. Valero has announced that its St Charles refinery will probably return to operation in the next two weeks. Shell has stated that

the Convent refinery may be restarted Sunday and the Norco refinery midweek.

Those refineries will be returned to full production gradually and safely as soon as

start-ups take place. Assessments of physical damage to the Chalmette and Meraux

refineries last week helped ascertain the extent of damage was limited; no start-up

date has been set.

The Colonial Pipe Line expected to return to 86% capacity service by the end of

the Labor Day weekend. Plantation Pipe Line has returned to 100% operation as

has the Capline crude oil pipeline. This means that major pipeline links to the Midwest, South and East have been gradually restored. Serious problems remain, however, due to the significant loss of product and crude volumes which would have

been shipped on these lines last week.

In addition, it remains unclear when many, if not most, of the refineries impacted

directly by Hurricane Katrina in the Gulf can return to service. Problems with wind

and water damage, electricity supply and other infrastructure remain to be addressed despite the best efforts of facility owners and operators. Thus, although

some of the affected refineries may restart and return to capacity or near-capacity

levels this week, there are indications that several facilities may be out of service

for a longer period.

The industry is committed to operation of these facilities as soon as possible, but

employee safety and overall safe start-up and operation concerns are paramount.

Significant flooding and damage still affects some facilities. However, some refiners

with operating facilities have indicated that they will be able to ramp-up production

from currently reduced levels at refineries near the affected areas which should

have a positive impact on product supplies.

4. What else is industry doing to improve the situation?

As indicated above, the industry has moved with considerable speed to restart the

nation’s energy infrastructure so severely damaged by Hurricane Katrina. Even

more important than assessing and repairing physical damage however, was the

need to locate and assist employees, many of whom experienced significant personal

losses of family or friends in the tragedy as well as loss of or severe damage to their

homes. (All industry companies throughout this region have been deeply involved

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in locating and providing for the needs of their employees at the same time they

were attempting to assess and respond to facility damages and restore energy production).

Many companies are offering varying types of assistance to personnel and their

families who were impacted by the hurricane. These include interest free loans; temporary living supplements for housing and food; pay continuation while facilities are

closed; transportation assistance; paid time off; medical and prescription drug assistance; temporary housing, including trailers, tents, and other available housing.

The oil, gas and petrochemical industries have already contributed millions of dollars to the American Red Cross and other relief agencies involved in assisting all

residents of the affected communities. They are also matching employee contributions. Companies are also supplying in-kind assistance, often including fuel, for relief efforts as well. The industry will doubtless maintain its deep commitment to

help end the suffering in the affected communities and to begin planning for the

future.

5. What has the federal government done to address these emergency conditions?

Federal authorities have taken several decisive actions to help relieve the many

energy-related problems left in the wake of Hurricane Katrina.

SPR Release

The Administration has released 9 million barrels of crude oil from the Strategic

Petroleum Reserve (SPR) to assist refiners who are short crude supplies as a result

of hurricane damage. The recipients will use this crude to manufacture more gasoline, diesel, jet fuel and home heating oil to be supplied to consumers across the

nation. This is a dynamic process, and additional volumes may be needed as more

refineries restart.

The current situation is precisely the type of event meant to trigger SPR release.

It demonstrates the importance of careful SPR management.

Waivers to Increase Fuel Flexibility

EPA has provided temporary fuel waivers that will make it easier to provide fuels

to affected areas. This action pertains to both gasoline and diesel specifications, and

will help alleviate some of the supply problems in these areas by increasing the

available supply of both domestic production and imports. Affected states participated in the EPA’s decision process on this action.

Jones Act Waiver

DOT has temporarily lifted Jones Act requirements to allow non-U.S. flag vessels

to transport much needed refined products from one U.S port to another.

IEA (International Energy Agency) Exchange

The Secretary of Energy has announced that the IEA will make available 60 million barrels of petroleum. This will provide relief in the form of refined products

(gasoline, diesel, jet fuel, home heating oil) which are much needed due to disrupted

supplies from several refineries. These products should begin to reach the U.S in

one to two weeks. The agreement with the IEA also requires the U.S. to release an

additional 30 million barrels of SPR crude.

Industry appreciates these actions, which were taken by the Administration with

bipartisan support from the Congress. They will be very helpful in dealing with the

serious supply problems that have resulted from Hurricane Katrina.

6. What is the impact on fuel supply? When will the situation return to normal?

As indicated above, Hurricane Katrina’s direct hit on the energy heartland of

America resulted in significant damage to offshore energy production in the Gulf,

to facilities that are critically important to imported oil supplies, to refineries in the

affected states and beyond, and to pipelines that serve as the major providers of refined products and crude to large parts of the East, South and Midwest.

All segments of the industry are working together in an intensive effort to repair

as much of the damage as is possible at this time in order to increase the flow of

crude oil to refineries and refined products to consumers throughout the country.

Safety considerations and the immediate needs of the industry’s workforce are of

course taken into account at all times.

Industry and government are working together to provide available supplies of

product to areas that are experiencing supply concerns. The fuel and Jones Act

waivers mentioned above will be of immediate and near-term assistance. Increased

product imports through the IEA should also help when they arrive. Refiners who

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have the ability to do so will attempt to increase production to help meet the needs

of the affected areas. The release of oil from the SPR will be helpful in supplying

them with some of the crude needed to make these products.

Despite this hopeful news, our nation faces a disruption of the fuel supply system

that should not be understated. The hurricane temporarily affected more than 90%

of the Gulf’s oil production and 80% of its gas production. It effectively removed 10%

of the nation’s gasoline supply by its impact on U.S. refining capacity located near

the Gulf. It also impacted refineries hundreds of miles away that lost access to

crude oil supplies. Although important progress has been made through the efforts

of government and industry, and with some help from abroad, full recovery will take

time. Hard work and cooperation throughout this difficult period will certainly help

speed the return to normal conditions. The direct and indirect impact of the hurricane on energy demand, which cannot yet be determined, will also be a major factor

during this period.

7. Should we continue to rely on free market forces during this period?

Absolutely. Continued reliance on market forces provides appropriate market signals to help balance supply and demand even during difficult times. President

Reagan eliminated price controls on oil products immediately upon taking office in

1981. He was outspoken about the inefficiencies and added costs to consumers as

a result of America’s ten-year experiment with energy price controls.

The energy price and allocation controls of the 1970s resulted in supply shortages

in the form of long gas lines. Studies have shown that, although intended to reduce

costs, they actually resulted in increased costs and greater inconvenience for consumers. The benefits of market pricing became clear soon after their elimination.

The U.S. Federal Trade Commission stated in an extensive study published this

June that ‘‘Gasoline supply, demand and competition produced relatively low and

stable annual average real U.S gasoline prices from 1984 until 2004, despite substantial increases in U.S. gasoline consumption’’ and ‘‘. . . For most of the past 20

years, real annual average retail gasoline process in the U.S., including taxes, have

been lower than at any time since 1919.’’ Price caps and other forms of price regulation are no more effective in the 21st century than they turned out to be in the

1970s. Interference in market forces always creates inefficiencies in the marketplace

and extra costs for consumers.

The same holds true for ‘‘windfall profit taxes.’’ The U.S. had a ‘‘windfall profit

tax’’ on crude oil from 1980 until 1988. That tax, which was actually an ad valorem

tax imposed on crude oil, discouraged crude oil production in the United States and

resulted in other market distortions. It was repealed in 1988.

Calls for re-imposition of a windfall profits tax on refiners reflect a misunderstanding of refining industry economics. In the ten-year period 1993-2002, average

return on investment in the refining industry was only about 5.5%. This is less than

half of the S&P industrials average return of 12.7% for the same period. Refining

industry profits as a percentage of operating capital are not excessive. In dollars,

they seem large due to the massive scale needed to compete in a large, capital-intensive industry. For example, a new medium scale refinery (100,000 to 200,000 b/d)

would cost $2 to $3 billion. In short, company revenues can be in the billions, but

so, too are the costs of operations.

The FTC June 2005 study cited above had the following comments on industry

profits: ‘‘Profits play necessary and important roles in a well-functioning market

economy. Recent oil company profits are high but have varied widely over time, over

industry segments and among firms...Profits also compensate firms for taking

risks, such as the risks in the oil industry that war or terrorism may destroy crude

production assets or, that new environmental requirements may require substantial

new refinery capital investments.’’

Many other industries enjoy higher earnings than the oil industry. Among these

are telecommunication services, software, semiconductors, banking, pharmaceuticals, coal and real estate, to name just a few. Imposition of a windfall profits

tax on the industry would discourage investment at a time when significant capital

commitments to all parts of the industry, including refining, will be needed.

Tight gasoline market conditions have often led to calls for industry investigations. More than two dozen federal and state investigations over the last several

decades have found no evidence of wrongdoing or illegal activity on our industry’s

part. For example, after a 9-month FTC investigation into the causes of price spikes

in local markets in the Midwest during the spring and summer of 2000, former FTC

Chairman Robert Pitofsky 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

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of the causes were beyond the immediate control of the oil companies.’’ Similar investigations before and since have reached the same conclusion.

There have been, however, reports of price gouging by unscrupulous individuals

who seek to profit during this time of national emergency and crisis. Federal and

state laws prohibit actions of this kind in emergency situations like the present.

Each alleged situation should be thoroughly investigated by the appropriate state

and federal authorities and prosecuted when the law has been broken.

PART II. A SHORT DISCUSSION OF OIL AND OIL PRODUCT SUPPLY DRIVERS

1. INTRODUCTION

This hearing was originally intended to inquire into the factors affecting the gasoline market. The natural disaster resulting from Hurricane Katrina required an understandable shift in emphasis to the human needs damages resulting from that

storm and only then to supply impacts. But it is important to remember that the

effect of Hurricane Katrina is an overlay on a pre-existing condition. That was and

is a situation characterized by high crude prices, strong demand for gasoline, diesel

and other petroleum products, and a challenged energy infrastructure, especially in

refining. In the interest of space and time, NPRA has shortened the following discussion of these conditions and policy recommendations for improving them. We

urge members of the committee to consider the need for policy changes to increase

the nation’s supply of oil, oil products and natural gas as soon as possible.

As the nation moves forward in its resolve to address and overcome the effects

of Katrina and the transportation fuels production and distribution systems regain

much-needed pre-storm productivity levels, an underlying domestic fuel supply problem remains that requires immediate, bold, and perhaps politically unpopular actions. NPRA believes that policy changes must be put in place to enhance domestically-produced supplies of oil, oil products and natural gas. NPRA has consistently

urged policy makers in Congress and the Administration to support environmentally

sound, economically justifiable policies that encourage the production of an abundant supply of petroleum and natural gas products for U.S. consumers.

NPRA supports requirements for the orderly production and use of cleaner-burning fuels to address health and environmental concerns, while at the same time

maintaining the flow of adequate and affordable gasoline and diesel supplies to the

consuming public. Since 1970, clean fuels and clean vehicles have accounted for

about 70% of all U.S. emission reductions from all sources, according to EPA. Over

the past 10 years, U.S. refiners have invested about $47 billion in environmental

improvements, much of that to make cleaner fuels. For example, according to EPA,

the new Tier 2 low sulfur gasoline program, initiated in January 2004, will have

the same effect as removing 164 million cars from the road when fully implemented.

Unfortunately, however, federal environmental policies have often neglected to

consider fully the impact of environmental regulations on fuel supply. Frankly, policy makers have often taken supply for granted, except in times of obvious market

instability. This attitude must end. A healthy and growing U.S. economy requires

a steady, secure, and predictable supply of petroleum products.

Unfortunately, there are no silver bullet solutions for balancing supply and demand. Indeed most of the problems in today’s gasoline market—without factoring

the market disruptions caused by Katrina—result from the high price of crude oil

due to economic recovery abroad together with strong U.S. demand for gasoline and

diesel due to the improving U.S. economy.

2. UNDERSTANDING GASOLINE MARKET FUNDAMENTALS: HIGH

CRUDE PRICES; STRONG GASOLINE DEMAND GROWTH

It is important to recognize the overwhelming factor affecting gasoline prices:

crude oil. In June of this year the U.S. Federal Trade Commission released a landmark study titled: ‘‘Gasoline Price Changes: The Dynamic of Supply, Demand and

Competition.’’ To quote from the FTC’s findings: ‘‘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.’’

Crude prices have been steadily increasing since 2004, largely because of surprising levels of growth in oil demand in countries such as China and India, and

in the United States as well. Actual demand growth for oil and oil products in these

countries in 2004 exceeded the experts’’ predictions and has remained strong this

year. As a result, world demand for crude is bumping up against the worldwide ability to produce crude.

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Strong demand for crude has dissipated the cushion of excess available worldwide

oil supply, just as strong U.S. demand for refined products has eliminated excess

refining capacity in the United States. The good news is that producing countries

will probably be able to add crude production capacity in the years to come. The

bad news is that the United States has thus far shown only limited willingness to

face up to its own energy supply problems.

As shown in Attachment I, gasoline costs closely track the cost of crude oil. Before

hurricane Katrina, gasoline price increases lagged crude oil price increases on a gallon for gallon basis. This means that refiners did not pass through all of the increased costs in their raw material, crude oil. Crude oil accounts for 55-60% of the

price of gasoline seen at the service station.

The cost of federal and state taxes adds another 19% to the cost of a finished gallon of gasoline. Therefore under current conditions, 74-79% of the total cost of a gallon of gasoline is pre-determined before the crude is delivered to the refiner for manufacture into gasoline. (See Attachment 2)

Another contributor to gasoline costs is tightness in our nation’s gasoline markets.

While U.S. refiners are producing huge volumes of products, strong demand has

tightened supply. Gasoline demand currently averages approximately 9 million barrels per day. Domestic refineries produce about 90 percent of U.S. gasoline supply,

while about 10 percent is imported.

Thus, strong and increasing demand can only be met by either adding new domestic refinery capacity or by relying on more foreign gasoline imports. Unfortunately,

the desire for more domestic gasoline production capacity is often thwarted by other

public priorities.

3. U. S. POLICY SHOULD ENCOURAGE ADDITIONAL DOMESTIC REFINING CAPACITY.

Domestic refining capacity is a scarce asset. There are currently 148 U.S. refineries owned by 55 companies in 33 states, with total crude oil processing capacity

at roughly 17 million barrels per day. In 1981, there were 325 refineries in the U.S.

with a capacity of 18.6 million barrels per day. Thus, while U.S. demand for gasoline has increased over 20% in the last twenty years, U.S. refining capacity has decreased by 10%. No new refinery has been built in the United States since 1976,

and it will be difficult to change this situation. This is due to economic, public policy

and political considerations, including siting costs, environmental requirements, a

history of low refining industry profitability and, significantly, ‘‘not in my backyard’’

(NIMBY) public attitudes.

Nevertheless, existing refineries have been extensively updated to incorporate the

technology needed to produce a large and predictable supply of clean fuels with significantly improved environmental performance. Capacity additions have taken

place at some facilities as well; several of these projects implemented over several

years can actually increase product output as much as a new refinery. But this increase in capacity at existing sites has not kept pace with the growth in U.S. demand for products, meaning that the nation is increasing its reliance on imports of

gasoline and other petroleum products each year.

Proposed capacity expansions can often become controversial and contentious at

the state and local level, even when necessary to produce cleaner fuels pursuant to

regulatory requirements. We hope that policymakers will recognize the importance

of domestic refining capacity expansion to the successful implementation of the nation’s environmental policies, especially clean fuels programs. The Administration’s

New Source Review reform program will also provide one tool to help add and update capacity.

NPRA wants to recognize a provision in the recently enacted energy legislation

that will help encourage additional refining investment. The provision allows 50%

expensing of the costs associated with expanding a refinery’s output by more than

5%. The refiner must have a signed contract for the work by 1/1/08, and the equipment must be put in service by 1/1/12.

Common sense dictates that it is in our nation’s best interest to manufacture the

lion’s share of the petroleum products required for U.S. consumption in domestic refineries and petrochemical plants. Nevertheless, we currently import more than 62%

of the crude oil and oil products we consume. Reduced U.S. refining capacity clearly

affects our supply of refined petroleum products and the flexibility of the supply system, particularly in times of unforeseen disruption or other stress. Unfortunately,

EIA currently predicts ‘‘substantial growth’’ in refining capacity only in the Middle

East, Central and South America, and the Asia/Pacific region, not in the U.S.

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4. THE U.S. REFINING INDUSTRY IS DIVERSE AND COMPETITIVE.

Today’s U.S. refining industry is highly competitive. Some suggest past mergers

are responsible for higher prices. The data do not support such claims. In fact, companies have become more efficient and continue to compete fiercely. There are 55

refining companies in the U.S., hundreds of wholesale and marketing companies,

and more than 165,000 retail outlets. The biggest refiner accounts for only about

13 % of the nation’s total refining capacity; and the large integrated companies own

and operate only about 10 % of the retail outlets. The Federal Trade Commission

(FTC) thoroughly evaluates every merger proposal, holds industry mergers to the

highest standards of review, and subjects normal industry operations to a higher

level of ongoing scrutiny.

Critics of mergers sometimes suggest that industry is able to affect prices because

it has become much more concentrated, with a handful of companies controlling

most of the market. This is untrue. According to data compiled by the U.S. Department of Commerce and by Public Citizen, in 2003 the four largest U.S. refining companies controlled a little more than 40 % of the nation’s refining capacity. In contrast, the top four companies in the auto manufacturing, brewing, tobacco, floor coverings and breakfast cereals industries controlled between 80% and 90% of the market.

5. INDUSTRY IS WORKING HARD TO KEEP PACE WITH GROWING DEMAND FOR FUEL.

Despite the powerful factors that influence gasoline manufacturing, cost and demand, refiners are addressing current supply challenges and working hard to supply

sufficient volumes of gasoline and other petroleum products to the public. Refineries

have been running at very high levels, producing gasoline and distillate. Refiners

operated at high utilization rates—even before the start of the summer driving season. To put this in perspective, peak utilization rates for other manufacturers average about 82 %. At times during summer, refiners often operate at rates close to

98 %. However, such high rates cannot be sustained for long periods.

In addition to coping with higher fuel costs and growing demand, refiners are implementing significant transitions in major gasoline markets. Nationwide, the

amount of sulfur in gasoline will be reduced to an average of 30 parts per million

(ppm) effective January 1, 2006, giving refiners an additional challenge in both the

manufacture and distribution of fuel. Equally significant, California, New York and

Connecticut bans on use of MTBE are in effect. This is a major change affecting

one-sixth of the nation’s gasoline market. MTBE use as an oxygenate in reformulated gasoline accounted for as much as 11% of RFG supply at its peak; substitution

of ethanol for MTBE does not replace all of the volume lost by removing MTBE.

(Ethanol’s properties generally cause it to replace only about 50% of the volume lost

when MTBE is removed.) This lost volume must be supplied by additional gasoline

or gasoline blendstocks. Especially during a period of supply concerns it is in the

nation’s interest to be prudent in taking any action that affects MTBE use. That

product still accounts for 1.6% of the nation’s gasoline supply on average, but it provides a larger portion of gasoline supplies in areas with RFG requirements that are

not subject to an MTBE ban.

Obviously, refiners face a daunting task in completing many changes to deliver

the fuels that consumers and the nation’s economy require. But they are succeeding.

And regardless of recent press stories, we need to remember that American gasoline

and other petroleum product prices have long been low when compared to the price

consumers in other large industrialized nations pay for those products. The Federal

Trade Commission recently found that ‘‘Gasoline supply, demand and competition

produced relatively low and stable annual average real U.S. gasoline prices from

1984 until 2004, despite substantial increases in U.S. gasoline consumption.’’

6. REFINERS FACE A BLIZZARD OF REGULATORY REQUIREMENTS AFFECTING BOTH FACILITIES AND PRODUCTS.

Refiners currently face the massive task of complying with fourteen new environmental regulatory programs with significant investment requirements, all in the

same 2006-2012 timeframe. (See Attachment 3.) In addition, many programs start

soon. (See Attachment 4.) For the most part, these regulations are required by the

Clean Air Act. Some will require additional emission reductions at facilities and

plants, while others will require further changes in clean fuel specifications. NPRA

estimates that refiners are in the process of investing about $20 billion to sharply

reduce the sulfur content of gasoline and both highway and off-road diesel. Refiners

will face additional investment requirements to deal with limitations on ether use,

as well as compliance costs for controls on Mobile Source Air Toxics and other limiVerDate 11-MAY-2000 09:17 Nov 08, 2005 Jkt 000000 PO 00000 Frm 00160 Fmt 6633 Sfmt 6621 24246.TXT HCOM1 PsN: HCOM1
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tations. These costs do not include the significant additional investments needed to

comply with stationary source regulations that affect refineries.

Other potential environmental regulations on the horizon could force additional

large investment requirements. They are: the challenges posed by increased ethanol

use, possible additional changes in diesel fuel content involving cetane, and potential proliferation of new fuel specifications driven by the need for states to comply

with the new eight-hour ozone NAAQS standard. The 8-hour standard could also result in more regulations affecting facilities such as refiners and petrochemical

plants.

These are just some of the pending and potential air quality challenges that the

industry faces. Refineries are also subject to extensive regulations under the Clean

Water Act, Toxic Substances Control Act, Safe Drinking Water Act, Oil Pollution

Act of 1990, Resource Conservation and Recovery Act, Emergency Planning and

Community Right-To-Know (EPCRA), Comprehensive Environmental Response,

Compensation, and Liability Act (CERCLA), and other federal statutes. The industry also complies with OSHA standards and many state statutes. A complete list

of federal regulations impacting refineries is included with this statement. (See Attachment 5.)

API estimates that, since 1993, about $89 billion (an average of $9 billion per

year) has been spent by the oil and gas industry to protect the environment. This

amounts to $308 for each person in the United States. More than half of the $89

billion was spent in the refining sector.

Obviously, refiners face a daunting task in completing many changes to deliver

the fuels that consumers and the nation’s economy require. But they are succeeding.

And regardless of recent press stories, we need to remember that American gasoline

and other petroleum products have long been low when compared to the price consumers in other large industrialized nations pay for those products. The Federal

Trade Commission recently found that ‘‘Gasoline supply, demand and competition

produced relatively low and stable annual average real U.S. gasoline prices from

1984 until 2004, despite substantial increases in U.S. gasoline consumption.’’

7. A KEY GOVERNMENT ADVISORY PANEL HAS URGED MORE SENSITIVITY TO SUPPLY CONCERNS.

The National Petroleum Council (NPC) issued a landmark report on the state of

the refining industry in 2000. Given the limited return on investment in the industry and the capital requirements of environmental regulations, the NPC 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. Unfortunately, this warning has been widely disregarded. On June 22, 2004 Energy Secretary Abraham asked NPC to update and

expand its refining study and a report was released last December. NPRA again

urges policymakers to take action to implement NPC’s study recommendations in

order to deal with U.S. refining problems.

8. NPRA RECOMMENDATIONS TO ADD REFINING CAPACITY AND INCREASE FUTURE PRODUCT SUPPLY

• 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 a number 2 priority. Thus, oil and gas supply concerns have been secondary and subjugated to whatever policy goal was more politically popular at the time. Enactment of the recent Energy Bill is a first step to making a first priority the supply of energy sources the nation depends upon.

• Remove barriers to increased supplies of domestic oil and gas resources. Recent

criticism about the concentration of America’s energy infrastructure in the western

Gulf is misplaced. Refineries and other important onshore facilities have been welcome in this area but not in many other parts of the country. Policymakers have

also 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 these energy resources with the rest of the nation because they are sorely needed.

• Resist tinkering with market forces when the supply/demand balance is tight.

Market interference that may initially be politically popular leads to market inefficiencies and unnecessary costs. Policymakers must resist turning the clock backwards to 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.

• Expand the refining tax incentive provision in the Energy Act. Reduce the depreciation period for refining investments from 10 to seven or five years in order

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to remove a current disincentive for refining investment. Allow expensing under the

current language to take place as the investment is made rather than when the

equipment is actually placed in service. Or 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 more domestic capacity.

• Keep a close eye on several upcoming regulatory programs that could have significant impacts on gasoline and diesel supply. They are:

—Design and implementation of the credit trading program for the ethanol mandate

(RFS) contained in the recent Energy Act. This mechanism is vital to increase

the chance that this program can be implemented next year without additional

gasoline supply disruption. Additional resources are needed within EPA to accomplish this key task.

—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 next June. We remain concerned about 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 with EPA on this issue, but time left to solve this problem

is growing short.

—Phase II of the MSAT (mobile source air toxics) rule for gasoline. Many refiners

are concerned that this new regulation, which we expect next year, will be overly stringent and impact gasoline supply. We are working with EPA to help develop a rule that protects the environment and avoids a reduction in gasoline

supply.

—Implementation of the new 8-hour ozone NAAQS standard. The current implementation schedule determined by EPA has established ozone attainment deadlines for parts of the country that will be impossible to meet. EPA has to date

not made changes that would provide realistic attainment dates for the areas.

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. The

new lower-sulfur gasoline and ULSD diesel programs will provide significant reductions to emissions within these areas once implemented. But they 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 actually reduce

U.S. refining capacity. This issue needs immediate attention.

NPRA’s members are dedicated to working cooperatively with government at all

levels to resolve the current emergency conditions that result from Hurricane

Kristina. 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.

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Chairman BARTON. We thank you. Your time has expired.

We now want to hear from Mr. James Newsome, who is the

President of the New York Mercantile Exchange.

You are recognized for 7 minutes, sir.

STATEMENT OF JAMES NEWSOME

Mr. NEWSOME. Thank you, Mr. Chairman. And as a native Mississippian, I want to thank you for holding this committee meeting,

for having our Governor Haley Barbour on earlier, and for the leadership that you are providing through what may come from this

hearing.

NYMEX is the world’s largest forum for trading and clearing

physical commodity-based futures contracts, including energy and

metals. NYMEX provides an important economic benefit to the

public by facilitating competitive price discovery and hedging.

As the benchmark for energy prices around the world, trading on

NYMEX is transparent, open, competitive and heavily regulated.

Contrary to some beliefs, NYMEX does not set prices for commodities trading on the exchange. NYMEX does not trade in the

market, and, being price neutral, does not influence price movement. NYMEX provides a forum for traders to come together and

execute trades at prices which best represent what market participants think prices should be in the future, given today’s information.

Periods of market uncertainty and volatility often result from extreme supply disruptions, as we saw with the numerous refineries

shut down due to Hurricane Katrina. Price volatility following Hurricane Katrina drove many to the futures markets, as is reflected

by the record volumes traded on NYMEX since the hurricane.

Futures markets fulfill two primary functions. They permit hedging, giving market participants the ability to shift risk. And, two,

they facilitate price discovery and market transparency.

Transparency involves many factors, including continuous price

reporting during the trading session, daily reporting of trading volumes and open interest, and monthly reporting of deliveries

against the futures contracts.

NYMEX energy futures markets are highly liquid and transparent, representing the views and expectations of a wide variety

of participants from every sector of the energy marketplace. The

price agreed upon for sale of any futures contract trade is immediately transmitted to the exchange’s electronic price reporting system and to the news wires and information vendors who inform the

world of accurate futures prices.

Gasoline is the largest single volume refined product sold in the

United States and accounts for almost one-half of national oil consumption. It is a highly diverse market with hundreds of wholesale

distributors and thousands of retail outlets, making it subject to intense competition and occasionally price volatility. Average daily

volume in these contracts has hit record levels in recent months,

and prices have been volatile. These market conditions reflect the

basic market fundamentals where there is an imbalance of supply

and demand. Tight gasoline supplies due to the lack of refinery capacity compounded by the impact of Hurricane Katrina drove

prices upward dramatically in the cash and in the futures markets.

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The importance of the gulf coast refineries as a key supply source

for the New York Harbor via Colonial Pipeline directly impacts the

physical and the futures gasoline markets. During the 1-week period prior to Hurricane Katrina, the cash market price for gulf

coast gasoline averaged $1.82 per gallon, which was 8 cents per

gallon lower than the weekly average NYMEX futures settlement

price. After the supply disruption, the gulf coast gasoline cash market rose more than $1, to $2.84 per gallon for the daily average on

August 30, 37 cents higher than the NYMEX futures settlement

price on August 30.

A number of refineries in the Gulf of Mexico were damaged beyond immediate repair and critical petroleum supplies were lost.

Prior to Hurricane Katrina, the U.S. refineries had already begun

running at maximum capacities struggling to keep up with gasoline

demand. This disaster in a key refining region only further exasperated an already growing problem.

It is widely theorized, Mr. Chairman, that speculators can drive

up prices. Placing blame on speculators may grab the attention of

the media but does not accurately reflect the realities of how markets work. With hundreds of commercial participants and instantaneous price dissemination, any speculative price would be met with

an equally strong commercial reaction. If markets move in a direction inconsistent with actual market factors, there are a vast number of participants, including energy producers, wholesalers, retailers, and government agencies, that have comparable access to information.

During the August 30 trading session, NYMEX set daily volume

records for overall exchange volume and for gasoline and crude oil

futures. These volume numbers clearly reflect NYMEX’s importance as a transparent trading forum where customers can effectively manage their price risk. It is precisely during such times of

market volatility uncertainty that the Exchange’s vital role in facilitating price discovery and risk management is most crucial to

our customers.

At all times during this period of extreme uncertainty in the

market, NYMEX has been the source for transparent prices in the

energy markets. Our trading systems and price reporting systems

to the world’s vendors worked flawlessly and without delay. Even

though as consumers we may not necessarily like the result, the

NYMEX marketplace performed its responsibility to create open,

competitive, and transparent pricing. We can only imagine the

market uncertainty and further devastation to consumers if

NYMEX were unable to perform its duty and prices were determined behind closed doors.

Thank you, Mr. Chairman, for the chance to be here.

[The prepared statement of James Newsome follows:]

PREPARED STATEMENT OF JAMES NEWSOME, PRESIDENT, NEW YORK MERCANTILE

EXCHANGE, INC.

Mr. Chairman and members of the Committee, my name is Jim Newsome and I

am the President of the New York Mercantile Exchange (NYMEX or Exchange).

NYMEX is the world’s largest forum for trading and clearing physical-commodity

based futures contracts, including energy and metals products. We have been in the

business for 135 years and are a federally chartered marketplace, fully regulated

by the Commodity Futures Trading Commission. On behalf of the Exchange, its

Board of Directors and shareholders, I thank you and the members of the ComVerDate 11-MAY-2000 09:17 Nov 08, 2005 Jkt 000000 PO 00000 Frm 00175 Fmt 6633 Sfmt 6621 24246.TXT HCOM1 PsN: HCOM1
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mittee for the opportunity to participate in today’s hearing on Hurricane Katrina’s

devastating effect on gasoline supply and prices.

First and foremost, we would like to acknowledge that not only has the nation’s

energy supply been severely affected, but lives have been lost, homes have been destroyed, and entire cities are in ruins. Our thoughts and prayers are with all the

families that have suffered from the destruction of Katrina.

INTRODUCTION

NYMEX provides an important economic benefit to the public by facilitating competitive price discovery and hedging. As the benchmark for energy prices around the

world, trading on NYMEX is transparent, open and competitive and heavily regulated. Contrary to some beliefs, NYMEX does not set prices for commodities trading

on the exchange. NYMEX does not trade in the market and, being price neutral,

does not influence price movement. NYMEX provides the forum for traders to come

together and execute trades at prices which best represent what market participants think prices should be in the future, given today’s information.

Periods of market uncertainty and volatility often result from extreme supply disruptions as we see with the numerous refineries shut down due to Hurricane

Katrina, which brings me to the reason I was asked to testify today. There is a

strong beneficial and interdependent relationship between the futures and cash

markets. The primary motivation for using the futures market is to hedge against

price risk in the cash market. Prudent business managers rely on the futures market to protect their business against price swings in the cash market. Price volatility

following Hurricane Katrina drove many into the futures markets, as is reflected

by the record volumes traded on NYMEX since the hurricane.

Futures markets provide a reference point for use in arranging trades at competitively determined prices. An understanding of the NYMEX market, its pricing mechanism and the relationship between the futures price and the cash price will provide

useful instruction and clarity to what is often perceived as an esoteric area of financial dealings.

OVERVIEW

Futures markets fulfill two primary functions: (1) They permit hedging, giving

market participants the ability to shift price risk to others who have inverse risk

profiles or are willing to assume that risk for profit; and (2) They facilitate price

discovery and market transparency. Transparency involves many factors, including:

(1) Continuous price reporting during the trading session; (2) Daily reporting of

trading volume and open interest; and (3) Monthly reporting of deliveries against

the futures contract.

NYMEX futures contracts trade by open outcry on the Exchange floor during the

day and during the evening on NYMEX ACCESS , our after-hours electronic trading platform. Transactions are executed in a transparent and competitive environment between NYMEX members who are registered futures industry professionals.

The daily settlement price for each contract is calculated pursuant to Exchange

rules, which generally is the average price for all outright transactions during the

closing range.

NYMEX energy futures markets are highly liquid and transparent, representing

the views and expectations of a wide variety of participants from every sector of the

energy marketplace. Customers from around the globe can call into a broker on the

NYMEX trading floor to place buy and sell orders. On behalf of the customers, buyers announce their bids and sellers announce offers. The price agreed upon for sale

of any futures contract trade is immediately transmitted to the Exchange’s electronic price reporting system and to the news wires and information vendors who

inform the world of accurate futures prices.

Price signals are the most efficient transmitters of economic information, telling

us when supplies are short or in surplus, when demand is robust or wanting, or

when we should take notice of longer-term trends. NYMEX futures markets are the

messengers carrying this information from the energy industry to the public. The

wide dissemination of futures prices generates competition in the establishment of

current cash values for commodities.

GASOLINE

Gasoline is the largest single volume refined product by volume sold in the United

States and accounts for almost half of national oil consumption. It is a highly diverse market, with hundreds of wholesale distributors and thousands of retail outlets, often making it subject to intense competition and price volatility.

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NYMEX trades, among other things, New York Harbor leaded and unleaded regular gasoline futures contracts. The New York harbor gasoline futures contract

trades in units of 42,000 gallons (1,000 barrels). It is based on delivery of petroleum

products to terminals in the New York harbor, the major East Coast trading center

for imports and domestic shipments, from refineries in the New York harbor area

or from the Gulf Coast refining centers.

Average daily trading volume in these contracts has hit record levels in recent

months and prices have been volatile. These market conditions reflect the basic

market fundamentals where there is an imbalance of supply and demand. Tight gasoline supplies due to lack of refinery capacity, compounded by the impact of hurricane Katrina, which resulted in the closing of 9 refineries, has driven prices upward

dramatically in the cash and futures market.

The importance of the Gulf Coast refineries as a key supply source for the New

York Harbor via Colonial Pipeline directly impacts the physical gasoline market and

the futures gasoline market. During the one-week period prior to hurricane Katrina,

the cash market price for Gulf Coast gasoline averaged $1.82 per gallon (using the

Platts wholesale assessment at the Colonial Pipeline), which was $.08 per gallon

lower than the weekly average NYMEX futures settlement price. After the supply

disruption due to hurricane Katrina, the Gulf Coast gasoline cash market rose more

than one dollar to $2.84 per gallon for the daily average on August 30 (one day after

the storm), $.37 higher than the NYMEX futures settlement price on August 30.

This differential between the cash and futures prices represents the free market

price that is derived in light of the extreme supply disruption and reflects a new

equilibrium in the marketplace in response to the shock to the demand and supply

balance.

NYMEX has closely monitored the gasoline futures market during this recent period of price increases in the aftermath of hurricane Katrina and has initially concluded that the market behaved rationally and the market participants acted responsibly in their futures and options trading.

SURVEILLANCE

Hurricane Katrina has had a devastating economic impact. Nine refineries in the

Gulf of Mexico have been damaged beyond immediate repair and critical petroleum

supplies have been lost. Prior to Hurricane Katrina, the U.S refineries had already

been running at maximum capacity for years, struggling to keep up with rising gasoline demand. This huge natural disaster in a key refining region only further exacerbated an already growing problem.

The NYMEX Market Surveillance staff routinely follows trends in the cash markets, focusing on whether the futures markets are converging with the spot physical

market as the NYMEX contract nears expiration. In light of the market uncertainties that resulted from hurricane Katrina, the NYMEX staff also monitored the supply and demand fundamentals in the underlying cash market to ensure that

NYMEX prices reflect cash market price movements, that there are no price distortions and no market manipulation.

After analyzing events and developments over the past week, NYMEX staff believes that price increases experienced were due to fundamental market factors tied

to supply disruptions in the wake of hurricane Katrina. The NYMEX system worked

according to design, and added a level of economic stability to the situation by providing a viable price discovery and risk management forum.

SPECULATORS

It is widely, yet inaccurately, theorized that speculators can drive prices up. Placing blame on speculators may grab the attention of the media, but does not accurately reflect the realities of how markets work. With hundreds of commercial participants and instantaneous price dissemination, any ′′speculative′′ price would be

met with an equally strong ′′commercial′′ reaction. If markets move in a direction

inconsistent with actual market factors, there is a vast number of participants including energy producers, wholesalers, retailers, and government agencies that have

comparable access to information. These participants will respond to ensure that

prices rapidly return to where the industry consensus believes they should be.

Speculators do exist and they actually play a valuable, even necessary role in the

market. They add liquidity to the market and enable commercial traders to get in

and out of the market when necessary. By the nature of their role, speculative traders seek to take advantage of price trends, but because they lack the real product

to back up their investment, they cannot control the price. They create virtually no

impact on daily settlement prices, the primary benchmark used by the marketplace.

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The Exchange has been scrutinized in the past on the role of hedge fund participation in causing market volatility. The effects of hurricane Katrina further emphasize the minimal impact hedge funds and speculators have on futures prices when

compared to the real impacts of true market factors. hurricane Katrina is a natural

disaster that severely disrupted the U.S. supply system and in effect drove prices

higher.

Hedge funds do not account for anywhere near enough volume to affect prices.

According to a NYMEX study on the participation of hedge funds in the energy

markets over a one year period beginning in January 2004, hedge funds only accounted for 4.6% of overall futures volume. Of this total, the crude oil futures market had 3.07% hedge fund participation and, its products, heating oil and unleaded

gasoline, had 3.62% and 3.26% hedge fund participation, respectively.

MARKET IMPACT OF KATRINA

NYMEX directly felt the disruptive effects of Katrina in our energy futures markets. The Exchange experienced several unprecedented market events in the aftermath of Katrina. Significant price moves occurred in the energy complex on Sunday

evening during the NYMEX ACCESS  trading session which commenced at 7:00

PM. During this session (which is effectively the commencement of the Monday

business day) gasoline moved upward due to severe concerns around the immediate

and longer term effect to refineries in Louisiana, as well as pipeline distribution systems in the region.

During regular trading hours on Tuesday, August 30, the September 2005 unleaded gasoline contract traded to its maximum upward price limit, resulting in a

temporary trading halt. Exchange rules impose a price fluctuation limit of $0.25 per

gallon of unleaded gasoline above or below the previous day’s settlement price.

When that limit is hit, a five minute temporary trading halt is triggered. This limit

was reached last Tuesday when the September 2005 contract traded at $2.31. In accordance with NYMEX Rules, the market was halted at 11:15 AM and re-opened

after 5-minutes with an expanded limit of $0.50 cents above the previous day’s settlement.

In response to the price volatility, NYMEX increased margins on several occasions

for a variety of the energy futures contracts, including gasoline and crude oil. Margin is the money or collateral deposited with the clearinghouse to protect the clearinghouse against loss on open futures or options positions. In all cases, NYMEX required additional margin to maintain the integrity of the clearinghouse. Margin is

vital to ensuring the financial integrity of the Exchange and provides the clearinghouse with the ability to protect customers against counterparty credit risk. On August 30, 2005, NYMEX managed and cleared the greatest single intra-day variation

margin call scenario, when it moved nearly $2 Billion.

During the August 30 trading session, NYMEX set daily volume records for overall Exchange volume and for gasoline and crude oil futures, as well as for the Exchanges electronic clearing platform NYMEX Clearportsm. The following day, August 31, Exchange-wide options, NYMEX Division options, and NYMEX

ClearPortsm clearing once again reached record volumes. These record volume numbers, clearly reflect NYMEX’s importance as a transparent trading forum where customers can effectively manage their price risk. It is precisely during such times of

market volatility and uncertainty that the Exchange’s vital role in facilitating price

discovery and risk management is most crucial to our customers.

During the entire week following hurricane Katrina, NYMEX Compliance and

CFTC officials have had a heightened presence on the trading floor overseeing all

markets. All activity has been thoroughly reviewed utilizing all available electronic

tools to detect any abusive activities.

CONCLUSION

At all times during this period of extreme uncertainty in the market, NYMEX has

been the source for transparent prices in the energy markets. Our price reporting

systems to the world’s vendors have worked flawlessly and without delay. Our trading systems during regular trading hours and during after hours trading on our

electronic platforms have performed flawlessly.

Even though as consumers we may not like the result, the NYMEX marketplace

performed its responsibility to create open, competitive and transparent energy pricing. We can only imagine the market uncertainty and further devastation to consumers if NYMEX were unable to perform its duty and prices were determined behind closed doors.

I thank you for the opportunity to share the viewpoint of the New York Mercantile Exchange with you today.

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Chairman BARTON. Thank you, Mr. Newsome.

We now want to hear from Mr. Cooper. And Mr. Cooper is the

Executive Director of the Association of Oil Pipelines. You are recognized for 7 minutes, sir.

STATEMENT OF BENJAMIN S. COOPER

Mr. BENJAMIN COOPER. Thank you, Mr. Chairman. I am Ben

Cooper with the Association of Oil Pipelines, a nonprofit trade association of oil pipelines. We very much appreciate the opportunity

to be here today. I filed a full statement with the committee and

will summarize here, and I will give you the short summary first.

Oil pipelines affected by Hurricane Katrina were rapidly restored

to service, are now in service, and are able to carry oil from imports, offshore platforms, and refineries that provide supply. Second, oil pipeline transportation rates are a few cents per gallon and

have not changed during the hurricane, so oil pipeline rates have

had no role in the recent petroleum price increases.

Hurricane Katrina affected the operations of several major oil

pipelines and facilities in the gulf coast. Today, the capacity of

these pipelines has been substantially restored. The good news is

that all of these pipelines weathered the hurricane with little damage and no spills. However, in the aftermath of the hurricane they

were taken out of service, among other things, by the loss of grid

electric power. Oil pipelines operate using large electric pumps.

The electricity needed to run even one pump is enough to supply

a small town.

After the hurricane, transmission and generation in south Louisiana and Mississippi were shut down, yet 3 days later our pipelines began to come back on line. Within 6 days, most were at or

could anticipate full operation. The extraordinary efforts of pipeline

employees, of the employees of the electric utility companies that

supply power to these pipelines, and of some very dedicated public

servants has restored the capacity of these pipelines. One pipeline

operator, for example, located several large, many large portable

generators all over the country, and with the help of the Department of Transportation’s Pipeline and Hazardous Materials Safety

Administration, moved them to the affected areas to enable key

pumps to restart. Another operator actually rewelded bypass lines

to allow pumps on either side of a shut-in facility to operate to restore partial service.

Pipelines are motivated to get their systems operating as soon as

possible. The interests of the public and the pipelines are aligned

in this. Of course, the shutoff of major offshore platforms and refining capacity in the storm’s wake means that supply may still be affected even after the pipeline transportation system is fully restored. But when the supply does become available, oil pipelines

will be ready to transport it.

Let me talk about oil pipeline rates, because we have been asked

to address whether oil pipeline companies have contributed to the

sudden increase in gasoline prices by raising the rates charged for

transportation. The facts are that pipeline rates did not change

during the past week. The Federal Government regulates the rates

of interstate oil pipelines. We are the only part of the petroleum

supply system that is under Federal regulation.

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Our member companies deliver petroleum safely to nearly every

region in the United States for a few cents a gallon. A typical rate

for transport of petroleum product from the gulf coast to the Southeast is about 2 cents a gallon, to the Northeast about 3 cents a gallon, and to Chicago for about 21⁄2 cents a gallon. Oil pipelines provide transportation services to customers. The customers are the

ones who decide what to ship, where to ship, and when to ship. The

decision of how much to ship of each commodity and to which destination is made by our shipper customers, not by pipeline operators.

I would like to share a couple of lessons at least for our industry

from this experience. Federal policy should assign a leadership role

from within the Federal family to address oil pipeline problems

during these events. In the wake of Hurricane Katrina, DOT’s

Pipeline and Hazardous Materials Safety Administration performed highly useful services in coordinating and addressing bottlenecks as oil pipeline operators sought to locate and deliver emergency equipment and specialized generators to particular pump

stations.

The Pipeline and Hazardous Material Safety Administration is

the Federal agency most knowledgeable about oil pipelines and is

an excellent choice for the role of assisting oil pipelines during

emergencies. Legislation may be required to authorize this.

Second, restoration of grid electric power is absolutely critical to

the resumption of pipeline service and needs to receive the highest

priority during these events. We have a new appreciation of the

interdependency of pipelines with electric power. 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 to rapidly recover when power is

lost despite all efforts.

A final note. Today oil pipeline capacity is near full under normal

conditions. Oil pipeline infrastructure will soon require expansion

to meet the needs of consumers, to accommodate changing supply

patterns, for example, such as the growth of Canadian tar sands

production, to meet stricter requirements for product quality such

as ultra load sulfur diesel fuel, to meet stricter requirements for

product composition such as boutique fuels, and to provide infrastructure security.

A support of public policy, including continuation of flexible rate

treatment, permitting assistance, and creative approaches to acquiring pipeline rights-of-way will be required to ensure that oil

pipeline expansions are made when needed, are there to meet expectations that the committee may have about refinery capacity.

AOPL looks forward to working closely with the Department of

Transportation, the Federal Energy Regulatory Commission, this

committee, and the rest of Congress to ensure that the oil pipeline

industry is able to meet the challenges in the future, and we thank

you for our opportunity to appear today.

[The prepared statement of Benjamin S. Cooper follows:]

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PREPARED STATEMENT OF BENJAMIN S. COOPER, EXECUTIVE DIRECTOR, ASSOCIATION

OF OIL PIPE LINES

INTRODUCTION

My name is Benjamin S. Cooper. I am the Executive Director of the Association

of Oil Pipe Lines. 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 53 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 two Canadian oil pipeline companies.

My testimony will first discuss the impact that hurricane Katrina has had on oil

pipeline operations and lessons learned during the past week. I then 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 sufficient capacity to meet our nation’s current and future petroleum transportation needs.

Impact of Hurricane Katrina

As the Committee knows, the major impact of the hurricane was felt in Louisiana

and Mississippi. Four effects of the storm have been important to oil pipelines with

operations in these states:

• The lives of local pipeline personnel have been severely disrupted;

• Key pipeline facilities have been flooded;

• Electric power has not been available; and

• The supply of crude oil and products to ship in pipelines has been disrupted

The major affected pipelines have been Colonial and Plantation, which together

account for a major share of the refined petroleum products transported along the

eastern seaboard, as much as 60% of the supply in some areas of the southeast.

Both pipelines were shut down in an orderly way to maintain product quality and

pipeline integrity in anticipation of the storm. They then were prevented from restarting by the severity of the storm’s impact, in particular, by the loss of electric

power. Both companies were able to resume limited service on Wednesday, August

31, when they were able to arrange for alternative power sources. As of September

3, both were receiving some utility electric power. Colonial was running at 80% of

capacity, and Plantation was running at 95% of capacity.

Capline, a crude oil pipeline that transports crude oil from the Gulf of Mexico to

refineries in the mid west, and one of the pipelines that would carry oil from the

Louisiana Strategic Petroleum Reserve sites, was also shut down. As of September

3, service on Capline was restored to 80% of capacity after the integrity of the pipeline was established and utility electric supply to some pumps was re-established.

Dixie, a propane pipeline serving markets in the Southeast could not reopen after

the storm due to loss of power. Dixie has also partially resumed service with the

restoration of some utility electric power, and as of September 3 was operating at

50% of capacity.

Finally, Louisiana Offshore Oil Pipeline, which operates facilities for receipt and

transport of crude oil imported in large tankers was also shut down, but as has

since resumed operation at 75% of capacity.

The common denominator in these shut downs is the location of key facilities in

areas in the direct path of the storm where flooding was extensive and electric

power was out for considerable periods of time. All have substantially recovered as

facilities formerly isolated by flooding are reactivated and electric power comes on

line. The impact of the shut down of Colonial and Plantation continues to be felt

in areas where alternative supply, for example, from imports or waterborne carriers,

is not feasible. Of course, the massive shut down of refining capacity in the storm’s

wake meant and will mean for some time that quantities of supply from these

sources will be limited, even after the transportation system is fully restored.

Some questions have arisen regarding whether these pipeline companies were economically advantaged by the hurricane and contributed to the sudden increase in

gasoline prices by raising the rates charged for transportation. The facts are that

pipeline rates did not change during the past week. For example, Colonial Pipeline’s

tariff from Pasadena, Texas to Atlanta Georgia (82.82 cents/barrel—less than 2

cents/gallon) was set on July 1st and remains unchanged. In fact, several pipeline

companies were negatively impacted by the loss of revenue and extraordinary costs

incurred to bring their operations back in service as soon as possible.

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Lessons Learned from Hurricane Katrina

• The decision by the EPA to act quickly to waive temporarily area specific fuel requirements under the Clean Air Act in the widest possible area allows the petroleum distribution system to make the most effective use of existing supplies.

Several 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.

• Federal policy should assign a leadership role from within the federal family to

address oil pipeline problems during these events. In the wake of hurricane

Katrina, DOT’s Pipeline and Hazardous Materials Safety Administration performed highly useful services in coordinating with the Federal Emergency Management Agency and addressing bottlenecks as oil pipeline operators sought to

locate and deliver emergency equipment and specialized generators to particular pump stations. PHMSA is the federal agency most knowledgeable about

oil pipelines, and is an excellent choice for the role of assisting oil pipelines during emergencies.

• 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.

• 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.

• Finally, hurricane Katrina provides a sobering data point in the nation’s understanding of the interdependency of the energy supply system and a highly painful real world experience with the impact of a loss of key energy services and

infrastructure that approximates many homeland security emergency scenarios.

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 and the environmental impact of pipeline transportation is less than any of its alternatives. Oil

pipelines are able to 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.

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.

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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 marginally result in

lower consumption levels. Even when an oil pipeline is an affiliate of a major integrated oil company, the Interstate Commerce Act and FERC oversight establishes

a wall between the pipeline portion of the firm and the owners’ transportation operations.

Oil Pipeline Transportation 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 a 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

must be 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 tend to change frequently and, unlike commodity prices, are

not adjusted as a result of short-term market circumstances. Since 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 rate decreases 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 are required to be administered in a non-discriminatory manner. A system of checks 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. On a normal basis, we provide transportation for all products to all destinations on a regular cycle.

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 the aftermath of hurricane Katrina provides ample evidence of the pipeline industry’s motivation and commitment to resume business 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

2003 (the most recent data available) the entire FERC-regulated oil pipeline industry received gross revenue of $7.7 billion to deliver 13.2 billion barrels of crude oil

and refined petroleum products to 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

Pipeline ownership is diverse, with several forms of ownership as detailed below:

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• 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.

In sum, the amount charged to transport oil by pipeline is controlled 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.

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 we have seen following hurricane Katrina, when adequate pipeline capacity is not available, shortages, price increases and price volatility for petroleum consumers are the result. Even before hurricane Katrina, we saw this, for

example, in Arizona in 2004 and in the Midwest in 2003 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 can sometimes also increase or decrease dramatically 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 and to

seasonal fuel switches that put additional strain on the system.

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, including continuation of the recent trend to market based and indexed rate treatment, permitting assistance and creative approaches to rights of

way, will be required to ensure that oil pipeline expansions are made when needed.

Key Aspects of Oil Pipeline Operations

Oil is moved through pipelines by large pumps powered by electricity. Oil pipeline

companies are large consumers of base-load electricity. Pumps are located at the origin point of the pipeline and at intervals typically 30 to 50 miles apart, depending

on terrain and the location of major facilities for pickup or delivery of oil. For a pipeline of significant size, pumps at these stations of 3,000-5,000 horsepower are typically used, requiring megawatt quantities of electric power. The only feasible method for delivery of electricity in these quantities is through connection to the utility

grid.

Oil pipelines maintain tanks at points along the line to facilitate the scheduling

of pipeline transportation. For refined product pipelines, the need for tankage is a

significant issue as the number of distinct products shipped increases. Pipeline

transportation tanks hold oil that is owned and controlled by shippers. The volume

in these tanks typically only represents a limited supply in relation to overall petroleum demand.

I will be glad to try to answer any of your questions, and our Association would

be pleased to work with the Committee on any follow up from this hearing.

Chairman BARTON. We thank you, sir. We now want to hear

from Mr. Bill Douglass, who is here representing the National Association of Convenience Stores and the Society of Independent

Gasoline Marketers of America. You are recognized for 7 minutes.

Welcome.

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STATEMENT OF BILL DOUGLASS

Mr. DOUGLASS. Good evening, Mr. Chairman, and members of

the committee. As you said, my name is Bill Douglass. I am Chief

Executive Officer of Douglass Distributing Company headquartered

in Sherman, Texas. Thank you for inviting me to testify before you

today on behalf of NACS and SIGMA

On the impact of Hurricane Katrina on the Nation’s wholesale

and retail fuel supply and prices. I will concentrate my testimony

on my personal experiences over the past 10 days as a marketer

in Texas and on the experiences of fellow marketers and other

areas during the past 10 days. In the interest of time, I will have

to move through the charts I brought with me this afternoon fairly

quickly.

The first chart depicts the daily movements of wholesale prices

in the Dallas-Fort Worth market last week. These wholesale prices

jumped an average of over 11 cents per day, for a total increase between Monday August 29 and Friday September 2 of 44 cents a

gallon.

The second chart shows how my company reacted to these rack

price increases in terms of our retail outlet prices. As you can see,

our retail prices in general rose by a similar and in some cases

lower amount than our wholesale costs.

Chart 3 provides a broader look at wholesale prices in the Dallas-Fort Worth market last week. My company’s experience was not

unique. These prices happen to be on branded racks, and they went

all the way to $3.10 when you add the tax.

Chart 4 summarizes the changes in rack pricing in each region

of the country broken down by pad.

Chart 5 provides a look at wholesale prices, that is, rack prices,

last week in five randomly chosen cities: Atlanta, Boston, DallasFort Worth, Detroit, and Philadelphia. All of these cities witnessed

substantial increases in rack gasoline prices last week, and these

figures do not include the taxes or fees or freight.

There has been widespread media reports and even some comments by congressional leaders of gasoline price gouging by gasoline marketers in the wake of Katrina. I cannot assure the committee that isolated incidents of profiteering for personal gain in

the midst of this crisis did not occur last week. It is important for

this committee to understand, however, before you rush to judgment on whether my or other retailers actions were proper, how I

and other retailers establish our retail prices in a market with escalating wholesale prices.

Simply stated, I try to set my retail prices on the basis of the

replacement costs of the gallons I have at my outlets. When the

wholesale prices are rising, I know the next load of gasoline I purchase from my supplier will cost me substantially more than my

last load. My sales must generate sufficient cash for me to make

the next purchase and pay my supplier.

If the only thing you knew about my company was that I raised

retail gasoline prices by over 40 cents per gallon last week, would

you suspect that I was attempting to profit from this crisis? Maybe.

But based on the information I have given you today, I trust that

you would reach a different conclusion after you have investigated

the facts. I urge this committee and your colleagues to gather the

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facts on last week’s gasoline supply and retail pricing situation before reaching conclusions about my actions or the actions of other

motor fuel marketers.

The enactment of the Energy Policy Act of 2005 is a good first

step toward addressing the Nation’s problems of shrinking refining

capacity and a trend toward higher gasoline prices. I commend you,

Mr. Chairman, and your colleagues for taking the lead in making

this important legislation a reality after 5 long years. Specifically,

your provisions gave the Environmental Protection Agency the

statutory authority to waive certain gasoline and diesel fuel controls last week, providing the market with much needed flexibility

to move product between markets to mitigate the supply disruptions. This is an immediate example of the positive impact this energy bill has had on the market. There are other important provisions in the 2005 energy bill that will assist in expanding domestic

refining capacity and in mitigating gasoline supply dislocations and

price spikes.

NACS and SIGMA urge this committee and this Congress to

build on the progress made through the Energy Act of 2005 in the

following ways: Assure prompt implementation of EPAC’s 2005 provisions, including the joint Environmental Protection Agency and

Department of Energy study on increasing gasoline and diesel fuel

supplies while protecting the environment. Streamline permitting

and siting procedures for expanding existing domestic refining capacity, and for the construction of new grassroots refineries. Adopt

additional incentives to expand our domestic refining capacity.

And, investigate the pricing policies of credit card companies,

whose charges make up an ever increasing portion of the price of

gasoline at retail outlets, particularly when gasoline prices are

high.

Thank you for inviting me to testify here today on this important

topic, and I would be pleased to answer any questions my testimony may have introduced.

[The prepared statement of Bill Douglass follows:]

PREPARED STATEMENT OF BILL DOUGLASS, CHIEF EXECUTIVE OFFICER, DOUGLASS

DISTRIBUTING COMPANY REPRESENTING THE NATIONAL ASSOCIATION OF CONVENIENCE STORES AND THE SOCIETY OF INDEPENDENT GASOLINE MARKETERS OF

AMERICA

I. INTRODUCTION

Good afternoon, Mr. Chairman and members of the Committee. My name is Bill

Douglass. I am Chief Executive Officer of Douglass Distributing Company,

headquartered in Sherman, Texas. My company operates 14 convenience stores and

supplies gasoline and diesel fuel to 165 retail locations throughout the Dallas-Fort

Worth area.

I appear before the Committee today representing the National Association of

Convenience Stores (‘‘NACS’’) and the Society of Independent Gasoline Marketers of

America (‘‘SIGMA’’).

II. THE ASSOCIATIONS

NACS is an international trade association comprised of more than 2,200 retail

member companies operating more than 100,000 stores. The convenience store industry as a whole sold 142.1 billion gallons of motor fuel in 2004 and employs 1.4

million workers across the nation.

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

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United States in 2004. SIGMA members supply more than 35,000 retail outlets

across the nation and employ more than 350,000 workers nationwide.

Together, NACS and SIGMA members sell approximately 80 percent of the motor

fuel retailed in the United States each year.

III. SUMMARY OF TESTIMONY

Thank you for inviting me to testify before you today on the impact of Hurricane

Katrina on the nation’s wholesale and retail motor fuel supply and prices. The past

ten days have been some of the most challenging in my thirty years as a motor fuel

marketer and I welcome this opportunity to share my personal experiences, and the

experiences and impressions of other NACS and SIGMA members with whom I have

talked, with you.

As an initial matter, I would like to express my personal sympathy, and the sympathy of our entire industry, for the victims of Hurricane Katrina. Individually and

collectively, our industry shares the suffering of our fellow citizens and will do all

in our power to alleviate this suffering at the earliest possible date.

My testimony will touch on three broad topics today. First, I will provide the committee with as much information as I have available on the impact of Hurricane

Katrina on gasoline supplies and prices. Specifically, I will share with you my personal experiences over the past ten days and summarize, to the extent possible, the

information I have received from my fellow retailers.

Second, I am here to respond to allegations that I, and my industry, have taken

advantage of this tragedy by ‘‘gouging’’ our customers by raising retail motor fuel

prices. Such allegations are personally offensive to me, and in general reflect a lack

of understanding of the market events that have led to the gasoline and diesel fuel

price spikes of the last ten days. While it is certainly possible that some ‘‘bad actors’’

have sought to exploit this crisis for personal gain, I can assure you that their actions are not the actions of the vast majority of our industry.

Third, my testimony contains recommendations to the committee on steps that

should be taken to lessen the likelihood that such supply disruptions and wholesale

and retail price spikes will occur in the future. Unfortunately, these recommendations are remarkably similar to the steps NACS and SIGMA have been urging public policymakers to take for the last ten years. While the enactment of the ‘‘Energy

Policy Act of 2005’’ earlier this summer was a good first step towards implementing

some of these recommendations, much remains to be done.

IV. IMPACT OF HURRICANE KATRINA ON WHOLESALE AND RETAIL GASOLINE PRICES

For much of the eastern two-thirds of the nation, the impact of Katrina on wholesale and retail gasoline prices could not have been more immediate and profound.

I will leave it to other witnesses here today to discuss the impact Katrina had on

crude oil production and imports, crude oil movements from production to refineries,

domestic refining capacity, and the movement of finished gasoline and diesel fuel

throughout the country via pipeline, barge, and truck. That is not my area of expertise. Instead, I will concentrate my testimony on my personal experiences over the

past ten days as a marketer in Texas, and on the experiences of fellow marketers

in other areas over the past ten days.

It will be helpful for me to use several charts to graphically make these points.

This first chart (Chart 1) depicts the daily movements of wholesale prices in the

Dallas/Fort Worth market last week. This is the ‘‘rack,’’ or wholesale price—the

price at which my suppliers are willing to sell me, and other marketers, truckloads

of 87 octane conventional gasoline. As you can see, these wholesale prices increased

daily, and dramatically, last week. On August 28th, before Katrina struck, my

wholesale gasoline cost was $2.36 per gallon including federal, state, and local taxes.

Early last week, as Katrina struck the Gulf Coast, these wholesale prices jumped

an average of over eleven cents per day, for a total increase between Monday, August 29th and Friday, September 2nd of 44 cents per gallon.

I must point out that I am a branded marketer—the stations I own and supply

fly the flag of a major refiner. The wholesale prices in this chart reflect branded

rack prices, not unbranded, or independent, rack prices. During this same five day

period, wholesale prices for these unbranded stores rose 73 cents per gallon, or over

18 cents per day.

This second chart (Chart 2) shows how my company reacted to these rack price

increases in terms of our retail outlet prices. As you can see, our retail prices in

general rose by a similar, and in some cases, lower amount than our wholesale

costs. In short, my company reacted primarily to changes in wholesale price increases when determining where to set our retail prices. In some cases, because of

competition from other retailers in our market area, we did not pass the entire inVerDate 11-MAY-2000 09:17 Nov 08, 2005 Jkt 000000 PO 00000 Frm 00187 Fmt 6633 Sfmt 6621 24246.TXT HCOM1 PsN: HCOM1
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crease in rack prices through to retail. On these days, virtually every gallon we sold

from our stations resulted in no or negative profit margins for our company, once

our operating costs are taken into account.

My personal experience is similar to the experiences of other retailers across the

nation. NACS and SIGMA obtained rack pricing data from the Lundberg Survey,

an independent report on wholesale motor fuel prices, for several major metropolitan areas for the past two weeks. This chart (Chart 3) provides a broader look at

wholesale gasoline prices in the Dallas-Fort Worth market last week.

The next two charts (Charts 4 & 5) indicate that my experience in Texas was not

unique. Chart 4 summarizes the changes in rack pricing in each region of the country, broken down by PADD. As you can see, wholesale prices were up significantly

last week in all areas of the country. Chart 5 provides a look at wholesale rack

prices last week in five randomly chosen cities—Atlanta, Boston, Dallas/Fort Worth,

Detroit and Philadelphia. All of these cities witnessed substantial increases in rack

gasoline prices last week.

I have used these charts to provide you with detailed evidence that Katrina had

a widespread impact on gasoline prices in much of the country over the past two

weeks—not just in the areas devastated by the storm itself. Because crude production was reduced, refineries crippled, and gasoline pipelines were taken out of service, gasoline supply shortages began to occur, first in areas close to the areas hit

by Katrina and rapidly moving outwards to areas of the country served directly or

indirectly by the production, refining and transportation hub of the nation’s Gulf

Coast.

These statistics confirm that retail gasoline price increases last week were justified by movements in the wholesale cost of gasoline. While two months from now

hindsight may provide us with additional facts that will indicate that the markets

could have responded to this supply crisis differently, as we are going through this

crisis, the fundamental laws of economics tend to apply forcefully—if demand remains the same or increases and supply is reduced, prices will rise. This is the situation we have experienced for the last ten days.

V. ALLEGATIONS OF PRICE ‘‘GOUGING’’

Last week, there were widespread media reports, and even some comments by

congressional leaders, of gasoline price ‘‘gouging’’ by gasoline marketers in the wake

of Katrina. I can not assure the committee that all of these reports are false or that

isolated instances of profiteering for personal gain in the midst of this crisis did not

occur last week. I wish I could.

However, I can tell you that such actions were not the norm in our industry. The

vast majority of gasoline marketers are fair and scrupulous businesses. As my testimony has shown, I personally responded to wholesale price hikes in my area in setting my retail prices. I am not aware of any credible instance in which retail price

increases were not justified by the supply crisis faced by a retailer.

It is important for this committee to understand how I and other gasoline retailers establish our retail prices in a market with escalating wholesale prices. Simply

stated, I try to set my prices on the basis of the replacement cost of the gallons I

have at my outlets. This is an important concept which may not be readily grasped.

When wholesale prices are rising, and I know that the next load of gasoline I purchase from my supplier will cost me substantially more than my last load, my sales

must generate sufficient cash for me to make that next purchase and to pay my supplier.

For example, assume the gasoline at one of my retail stations cost me $2.00 per

gallon yesterday. I know that the next gasoline truckload from my supplier, to be

purchased tomorrow, will cost me $2.25 per gallon. I will, if I can based on competition in my area, set a retail price at my outlet today that will cover the higher price

I will have to pay tomorrow. If I don’t, I will be forced to borrow money from my

company’s banks to pay for tomorrow’s gasoline. Such debt only increases my cost

of staying in business and adds to the upward pressure on retail gasoline prices.

It is a sound business practice for a retailer to price today on the replacement cost

of gasoline at the outlet, not the cost of product actually at the outlet.

If instances of profiteering on this tragedy have occurred, federal and state officials have ample legal recourse for dealing with those bad actors, including Section

5 of the Federal Trade Commission Act. Such behavior must not be tolerated now

or in the future in our industry or any industry.

However, just as such behavior must not be tolerated in our industry, neither

should the media or opinion leaders react to such anecdotal reports by issuing blanket indictments of all motor fuel marketers. Such generalizations may make for

good ‘‘sound bites,’’ but they do not reflect what is actually happening across the

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1 All information based on publicly available sources.

country and unfairly damage the reputations of many companies that are struggling

to meet the challenges of the current crisis.

If the only thing you knew about my company was that I raised by retail gasoline

prices by over 50 cents per gallon last week, would you suspect that I was attempting to profit from this crisis? Maybe. But based on the information I have given you

today, I trust that you would reach a different conclusion after you had investigated

the facts. I urged this committee and your colleagues to gather the facts on last

week’s gasoline supply and retail pricing situation before reaching conclusions about

my actions or the actions of other motor fuel marketers.

As a final point with respect to retail pricing, I have one more chart to share with

you (Chart 6). This chart outlines the approximate gross revenues that several different parties in the petroleum exploration, refining, and distribution system realize

from each barrel of crude oil. Simply stated:

• In August 2003, the royalty owner of the crude oil received approximately $4 per

barrel; in August 2005, the royalty owner received about $8 per barrel; • In August 2003, the crude exploration and extraction company was receiving approximately $28 per barrel of oil; in August 2005, this company received about

$67 per barrel; • In August 2003, a refiner was receiving around $11 per barrel; in August 2005,

this company received about $27 per barrel; • In August 2003, a gasoline retailer was receiving approximately $6 per barrel; in

2005, that retailer still received about $6 per barrel; and, • In August 2003, a credit card company was receiving approximately $1.50 per

barrel; in 2005, that company is receiving approximately $3 per barrel.1

Based on this information, I question whether it is appropriate to single retailers

out for pricing scrutiny.

VI. RECOMMENDATIONS FOR THE FUTURE

In 1996, Tom Robinson, a former president of SIGMA, offered the following testimony before the Senate Energy Committee as part of a hearing on ‘‘Recent Increases in Gasoline Prices.’’ ‘‘The federal and state governments regulate the gasoline refining and marketing industry with little or no thought given to costs, distribution difficulties, or market efficiencies. Congress must acknowledge that . . . the

present course will lead to further market disruptions and higher gasoline prices at

the pump.’’ Mr. Robinson made that statement over nine years ago.

Last year, I testified on behalf of NACS and SIGMA at a subcommittee hearing

of this committee and stated:

‘‘Our nation’s gasoline and diesel refining industry is shrinking at a time

when consumer demand continues to rise. Unless we collectively change course,

domestic refining capacity will be unable to keep pace with demand, gasoline

and diesel fuel price spikes such as the one we have experienced this year will

become the norm rather than the exception, and our nation will become more

reliant on imports of gasoline and diesel fuel to meet increased consumer demand in the coming years. Congress has a choice, it can either pursue policies

that will encourage the expansion of domestic refining capacity, or it can turn

its gaze overseas for our nation’s future gasoline and diesel fuel needs.’’

Unfortunately, both Mr. Robinson’s and my predictions have come true. Domestic

refining capacity continues to shrink, wholesale and retail motor fuel price spikes

have become the norm rather than the exception, and more of our nation’s gasoline

needs are being met by foreign sources. NACS and SIGMA assert that it is time

to stop talking about these problems and do something about them.

In my opinion, the enactment of the ‘‘Energy Policy Act of 2005’’ (EPAct 2005) is

a good first step towards addressing these problems. I commend you, Mr. Chairman,

and your colleagues for taking the lead in making this important legislation a reality after five long years. Specifically, your provisions gave the Environmental Protection Agency the statutory authority to waive certain gasoline and diesel fuel controls last week, providing the market with much needed flexibility to move product

between markets to mitigate supply disruptions. This is an immediate example of

the positive impact this energy bill had had on the market.

There are other important provisions in the 2005 energy bill that will assist in

expanding domestic refining capacity and in mitigating gasoline supply dislocations

and price spikes, including:

• Repeal of the reformulated gasoline program’s oxygenate mandate; • Restrictions on creation of new ‘‘boutique fuels’’ which strain refining capacity and

the distribution system;

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• Authority for retailers to blend compliant RFGs for limited periods each summer;

and,

• Federal tax incentives to encourage the expansion of domestic refining capacity.

NACS and SIGMA urge this committee and this Congress to build on the progress

made through EPAct 2005 in the following ways:

• Assure prompt implementation of the EPAct 2005 provisions outlined above, including the joint Environmental Protection Agency and Department of Energy

Study on increasing gasoline and diesel fuel supplies while protecting the environment;

• Streamline permitting and siting procedures for expanding existing domestic refining capacity and for the construction of new grassroots refineries;

• Adopt additional tax incentives to expand our domestic refining capacity, or a federal government-led effort to site and build three new 500,000 barrels per day

refineries on federal lands to augment domestic production;

• Encourage increased price transparency and lower price volatility in the nation’s

gasoline futures markets by increasing the number of delivery points and product types under such contracts; and,

• Investigate the pricing policies of credit card companies, whose charges make up

an ever-increasing portion of the price of gasoline at retail outlets, particularly

when gasoline prices are high.

None of these recommendations will result in a substantial short-term increase

in gasoline supplies or retail price decreases. However, if we do not undertake these

initiatives now, we will be sure to repeat the experiences of the past two weeks in

the future.

VII. CONCLUSION

Thank you for inviting me to testify today on this important topic. I would be

pleased to answer any questions my testimony may have raised.

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Mrs. MYRICK [presiding]. Thank you, Mr. Douglass. Thank you

very much. Mr. Smith. Welcome.

STATEMENT OF WILLIAM L. SMITH

Mr. SMITH. Thank you. My name is Bill Smith, and I am the

Chief Technology Officer for BellSouth. The purpose of my testimony today is to address the impact of Hurricane Katrina on

BellSouth’s people and our network. I will describe the damage

that Hurricane Katrina has caused, which has been unlike any

other hurricane we have experienced, and I will give you a status

of the restoration efforts.

Given the area that we serve, BellSouth has dealt with hurricanes for years; however, we rarely lost operational status of an entire central office. Katrina has been very different. We have lost

service at some point during the storm in 24 BellSouth central offices in the impacted area. The majority of these central offices

were in the New Orleans area that was flooded. These central offices failed due to flooding and logistical problems presented by the

security in the area and the ability to get fuel to the emergency

generators.

Our operations in Florida, Alabama, Mississippi, and Louisiana

have all been impacted by Hurricane Katrina. In places like Gulfport and Biloxi and New Orleans, the impact on our customers, our

employees, and our network have been catastrophic, and restoration efforts are still encumbered by flooding, debris, and security

issues. In other areas of Louisiana and coastal Mississippi and Alabama, we are well under way in our restoration efforts and are progressing well. In Florida, we are actually wrapping up our restoration efforts and freeing up resources like generators and technicians to move into the areas that are still impacted.

Let me move to the impact on our people. BellSouth has approximately 13,000 employees in the States of Alabama, Mississippi,

and Louisiana, and approximately 6,500 of those were in the impacted area. I am pleased to say that as of today we have located

all but 65 of those employees and we are working very hard to find

the others.

Immediately prior to Katrina, we took steps to ensure that supplies and services would be on hand. We knew that employees

would be called upon to work around the clock, and, as Governor

Barbour said this morning, many of our employees actually lost

their own homes. So we established what we call BellSouth tent

cities that we can actually house, shelter, feed our employees and

their family, because we knew that we would be counting on them

to operate to help us restore our network. And, in fact, we are currently operating six of these tent cities in the impacted area and

serving over 8,000 meals a day to provide assistance for our employees and their families.

Let me move to the impact on our network. Our network operations team actually started tracking Hurricane Katrina as early

as August 23. We began making preparations for landfall in south

Florida as a Category 1 hurricane. That actually occurred on

Thursday evening, August 25. Then we tracked Katrina as she became a Category 4, 5, and then made landfall as a Category 4

storm in New Orleans or just east of New Orleans at approxiVerDate 11-MAY-2000 09:17 Nov 08, 2005 Jkt 000000 PO 00000 Frm 00197 Fmt 6633 Sfmt 6602 24246.TXT HCOM1 PsN: HCOM1
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mately 2 p.m. on Monday, August 29. There were reported wind

speeds of over 145 miles an hour and the storm surge was reported

as high as 25 feet.

I have this chart you can see that we have used to assess the

impact on our network. We have categorized the damage in geographic areas as catastrophic indicated by red, severe indicated by

yellow, or moderate indicated by green. We have restoration efforts

well under way in the green areas and are moving into the yellow

areas and the red areas as well. The unique problem that we have

experienced with Katrina has been the severe flooding, particularly

in New Orleans. It is not unusual in these situations for a central

office to lose its commercial power and for BellSouth to continue to

provide power using generators. These generators, however, require

fuel and they require technician access to maintain them. With

Katrina, the continued flooding and security issues severely hampered our ability to maintain our network as we would normally

do.

Now, I will spare you a lot of the details, but suffice it to say that

our experience in New Orleans’ main central office at 840 Poydras

Avenue was an example of what we saw. We actually had 82 people in that office working to man our equipment and our emergency

operations center. And everything was fine until the flooding started after the hurricane. At that point and subsequently, we were advised that there was gunfire in the area, it was not safe to keep

our employees there, so we actually made arrangements to evacuate those employees with heavily armed State police. We later got

FBI and Federal Marshal protection back into the area to secure

the central office, and had heavily armed convoys taking fuel and

water back into the location. Obviously, that is not something that

we normally see in normal hurricane restoration activities. I am

happy to say, however, that office has maintained operational status throughout this period.

Nevertheless, with all these difficulties, we have made huge

strides to restoring our network. As of yesterday morning we actually had 506,000 lines remained out of service, and that is less

than one-fourth of the original number. We have restored service

to all but 18 of those central offices that were impacted.

Now, let me move to what we can ask from the government for

help. Overall, the cooperation and assistance from state, local, and

Federal agencies has been very good. The FCC led by Chairman

Martin has been extraordinarily helpful. They have reached out to

offer assistance in many areas, in particular, waiving rules that

would have hampered our ability to restore service in a quick manner. We will continue to need this kind of assistance. The Louisiana and Mississippi Public Service Commissions have also

stepped up to provide assistance, as well as the Department of

Homeland Security, the White House, and the Department of Defense, Northern Command. We have also had great cooperation

from the FAA, the Bureau of Alcohol, Tobacco, and Firearms as

well as the U.S. Marshal Service.

Right now we need three things. First, we need safe access to our

facilities and adequate security for our personnel. Second, it will

take many months for us to complete our repair work even though

we will be working around the clock. We have engaged and reVerDate 11-MAY-2000 09:17 Nov 08, 2005 Jkt 000000 PO 00000 Frm 00198 Fmt 6633 Sfmt 6602 24246.TXT HCOM1 PsN: HCOM1
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stored 22 hurricanes since 1992, including storms such as Hugo,

Andrew, and now Katrina. Congress and the private sector alike

should be cautious about building unrealistic expectations about

how quickly we can fully recover from the impact of this storm.

Third, the government needs to recognize that the cost to

BellSouth to restore these communications infrastructure items

will be significant. We have estimated those costs to be between

$400 and $600 million. Now, to put this in perspective, the storms

that we experienced last year, the four hurricanes, cost $200 million, and we are still in the middle of the hurricane season. So restoration of this infrastructure will require that we deploy capital

not as a cost plus utility but in a very competitive industry. We

will deploy this with other companies, depending on our facilities,

despite the fact that we don’t share the burden of this restoration

between those companies.

Thank you.

[The prepared statement of William L. Smith follows:]

PREPARED STATEMENT OF WILLIAM L. SMITH, CHIEF TECHNOLOGY OFFICER,

BELLSOUTH

I. INTRODUCTION

My name is Bill Smith, and I am the Chief Technology Officer for BellSouth.

BellSouth is a full-service communications company providing service to customers

in the nine southeastern states of Alabama, Florida, Georgia, Kentucky, Louisiana,

Mississippi, North Carolina, South Carolina, and Tennessee. I have worked for

BellSouth for 26 years, and in my current position I am responsible for overseeing

the planning of our overall network, integrating new technology into our network,

and ensuring the interoperability between our networks and those of other carriers.

The purpose of my testimony is to address the impact of hurricane Katrina on

BellSouth’s people and our network. I will describe for you the damage that Katrina

has caused, which is unlike any hurricane BellSouth has experienced, and to give

you the current status of our restoration efforts. What I will give you today is a

snapshot—the situation changes literally every few minutes, as power is restored,

flood waters recede, field surveys occur, and repairs are made. Furthermore, because we are still assessing the full impact of the storm on our network and our

customers, our damage estimates are preliminary. It will take some time for us to

know with certainty the total magnitude of the destruction caused by hurricane

Katrina.

Given where our network is located, BellSouth has dealt with hurricanes for

years. However, with most hurricanes, from Camille to Andrew, we rarely lost operational status for an entire central office. A central office is a building that houses

the switching and transmission equipment for a geographic area; it is usually the

first ‘‘building’’ that all of the wires coming from houses and offices go in connecting

to BellSouth’s regional network.

But Katrina was different. Based on what we know today, we lost service in 24

of BellSouth’s central offices in the impacted area. Some of these offices were located

in coastal Mississippi and were destroyed by the storm surge when Katrina came

ashore. The vast majority of BellSouth’s central offices that are currently out of

service are located in greater New Orleans. These central offices failed due to flooding and logistical problems presented by security on the street. The flooding and security issues that BellSouth has had to confront is what makes Katrina different

from other hurricanes—both in terms of impact to the network and on our ability

to restore service.

Operations in Florida, Alabama, Mississippi and Louisiana, all have been impacted by hurricane Katrina. As I will describe in more detail below, we have 3 different types of restoration efforts underway. In places like Gulfport and Biloxi, Mississippi and New Orleans, the impact on our customers, our employees and our network have been catastrophic and basic restoration is still encumbered by flooding,

debris and security issues. In other parts of Louisiana, coastal Mississippi and Alabama, we are well into our restoration efforts and progressing well. In Florida, we

are wrapping up our restoration efforts, and freeing up resources like generators,

and of course technicians, to move to the other areas where they are needed.

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1 Because restoration efforts in Florida are mostly complete, the network impacts in section

III will focus on operations in Alabama, Mississippi, and Louisiana.

As is standard operating procedure for us during hurricane season, on August 23,

BellSouth’s network operations team began tracking Tropical Depression 12, then

located over the southeastern Bahamas with 35mph winds, moving northwest at 10

mph. This is business as usual for us, but none could have imagined what was to

follow. There are two integral pieces to this story: the network, and the people. I

plan to first walk you through the people side of this story, because without our people, we would have no company and no network. It is our employees who make

BellSouth what it is.

II. KATRINA’S IMPACT ON PEOPLE

BellSouth has about 13,000 employees in the states of Alabama, Mississippi, and

Louisiana, approximately 6500 of whom were in the hardest hit areas affected by

the storm. As of now, we have located or made contact with all but about 110 of

those employees, and we are making every effort to locate these employees. Prior

to Katrina, BellSouth already had in place an 800 number for BellSouth employees

to call to report their status in the event of an emergency and a separate number

employees could call to get emergency information. Immediately prior to Katrina,

we also took steps to ensure adequate supplies and services were on hand, sending

non-perishable food to strategic areas where employees could be stationed, setting

up structural materials including tents, showers, toilets, tables, and chairs, and engaging janitorial and guard services. Our experience with prior hurricanes has

taught us that our employees will be called upon to work round the clock, and they

can best perform the extraordinary tasks expected of them if their basic needs for

food, shelter and the safety of their family are addressed.

As Katrina hit the Gulf Coast on August 29th, we assessed potential locations for

what we call BellSouth tent cities—stations where employees in affected areas could

seek shelter, receive food, ice, water, showers, laundry services, air mattresses, linens and clothing, medical care and financial loans. In addition, we had on hand access to our employee assistance program to provide counseling services as needed.

The first tent city was set up in Gulfport, Mississippi on August 30th, a second

opened in Baton Rouge on September 1st, and a third on September 2nd in Covington, Louisiana. With the addition of tent cities in Hattiesburg and Jackson, Mississippi, and Kenner, Louisiana by the end of this week, BellSouth will be operating

six tent cities that will serve over eight thousand meals daily, and provide assistance for our employees and their families, including medical care.

III. KATRINA’S IMPACT ON BELLSOUTH’S NETWORK—RESTORATION EFFORTS 1

BellSouth has 1591 central office buildings across its region. 578 of these central

office buildings are located in Alabama, Louisiana and Mississippi. As we do with

every storm, our network operations team was tracking Katrina as early as August

23, and began making preparations for potential landfall in the Florida Gulf Coast

area. Because our network equipment requires power to operate, our standard hurricane procedures include ensuring that generators are in working order and fuel

tanks filled for our central offices and our key administration offices, closing shutters and sealing windows, sandbagging critical facilities, and making arrangements

for additional generators where needed.

Despite these precautions, Katrina brought considerable damage to BellSouth’s

network. Katrina first made landfall in South Florida as a Category 1 hurricane on

Thursday evening, August 25, and caused considerable damage to the area. Katrina,

a Category 5 hurricane that dropped to a Category 4 just before landfall, made landfall in our operating area for the second time at approximately 2 p.m. on Monday,

August 29, just east of New Orleans. In some areas, winds exceeded 145 miles per

hour and the storm surge was reported as high as 25 feet. In assessing the impact

on our network, we have categorized damage to geographic areas caused by Katrina

as ‘‘catastrophic’’, ‘‘severe’’ or ‘‘moderate’’. The ‘‘catastrophic’’ areas are red on the

map attached as Appendix 1; severe areas are yellow; and moderate areas are green.

Much progress has already been made restoring service in the ‘‘moderate’’ areas of

the region.

In the Gulf region of Mississippi, Alabama, and Louisiana, we had 4.9 million access lines prior to the storm. Of those 4.9 million lines, 1.6 million were in the red

zone, 782,000 were yellow and 2.6 million were green. A snapshot on August 30

after the storm estimated that 2.475 million lines were actually affected. All 1.6 million lines in red zones were affected; 500,000 of the 782,000 lines in yellow zones

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were affected; and 440,000 of the 2.6 million lines in green zones were affected. Details on a state by state basis are attached as Appendix 2.

The unique problem that BellSouth has experienced with Katrina is that the severe flooding, particularly in New Orleans, has made it difficult to get a clear assessment of the extent of the damage. Normal hurricanes have an initial surge, the

water recedes, power begins restoration, and we follow power with sweeping telecom

restoration resources. When the levees broke in New Orleans, the water did not recede. The flooding has greatly complicated our restoration efforts. In most hurricanes, it is not unusual for a central office to lose commercial power and for

BellSouth to continue providing service using generators. Those generators require

fuel, and we have to be able to get our network technicians to those central offices

in order to ensure that the generators are fully fueled and operating correctly. With

Katrina, we have 24 central offices that are without commercial power and are operating under generators. However, because of the continued flooding we have not

been able to access or support many of these central offices in New Orleans as we

would in normal hurricane restorations.

Our experience in the New Orleans Main Central Office at 840 Poydras Street

gives a sense of the situation on the ground. BellSouth employees began staffing an

Emergency Operations Center (EOC) on the 12th Floor of the building on Sunday,

August 28. The office lost power and engaged generators when the storm hit on

Monday, but occupants breathed a sigh of relief that there was no flooding. Then,

the levy broke and conditions rapidly deteriorated on Tuesday. Technicians and engineers in the office were trying to re-establish service and maintain power by keeping the generators fueled and running. As the situation in New Orleans deteriorated

with violence and looting, the New Orleans police and the Louisiana State Police

told us to evacuate the building. There was gunfire in the area and it was therefore

unsafe for our employees to remain in the area. At 3:00 p.m. CST, the Louisiana

State Police arrived and provided us with an armed escort so we could leave the

building. We moved to Baton Rouge and, concerned for the security of the building,

we arranged for FBI agents to take occupancy of the building at approximately 9:00

that evening. By Friday morning, the Louisiana State Policy and the FBI occupied

the building. At that time, we began armed and escorted caravans to the building

to bring fuel for the generator, water for the coolers, and BellSouth personnel to

maintain the equipment. We are not yet back to full support but have managed to

keep this key switch operations despite the flooding and security concerns.

And another example heroic story rises out of the coastal town of Gulfport, MS.

On September 3, a brick wall protecting the main generator keeping the central office alive started to give way. Nine workers from that central office ran from the

basement, where they had been working while riding out the storm, to the rooftop

room and fortified the walls with whatever they could find—plastic tarps, plywood

and even the cardboard from a science project of one worker’s son.

Nevertheless, we have made huge strides towards restoration of communications

capabilities. As of the morning of Tuesday, September 6, 506,000, less than onefourth of the original 2.475 million lines, remained impacted. Only 4,900 of the

440,000 lines remained impacted in the green areas; 23,200 of the 500,000 lines in

the yellow zone remained impacted; and 478,500 of the 1.6 million lines in the red

zones remained impacted.

As of September 6, we have restored service to all but 20 central offices. This restoration is due to the tireless efforts of our employees on the ground who are working around the clock with a single minded mission of restoring communications to

these hard hit areas, and to the efforts of our wireless and wireline industry colleagues who have partnered with us with an unwavering commitment to enable

communications.

Of course, other carriers rely upon BellSouth’s network in order to provide service

to their customers. We have an Emergency Control Center in Atlanta, which is the

control center from which we are coordinating our hurricane response, overseeing

network restoration efforts, and working with other carriers to restore communications. We are coordinating a contingent of impacted carriers with one mission—to

make communications work. We collaborated with other carriers, without regard to

ownership or jurisdiction, and brokered capacity and worked through technical

issues. We conduct two daily calls—one with wireless carriers and one with wireline

carriers. Using our network data and resources we assisted in developing a joint

wireless restoration plan, now underway, bringing competitive service providers together to serve a single goal of restoring communications. A joint industry team has

agreed on a list of prioritized sites and are working together to restore wireless

service to these sites in the New Orleans area. This has included traveling by boat

to several of the sites in order to survey what equipment is needed to restore service. They traveled by boat to survey sites on Sunday and Monday, and may have

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already enabled communications from some of these towers while I am speaking

with you. This has been a remarkable collaborative effort.

In terms of restoration priority, we have been and continue to focus our support

on public safety concerns, including hospitals, E-911 centers and law enforcement.

Following the storm, in Florida and Alabama, there were no E-911 centers that incurred outages. For Mississippi, service was impacted to 43 E-911 centers, and service to all 43 centers has been restored on site or by re-routing the calls to other centers. In Louisiana, 35 E-911 centers were impacted, and 28 of these are back in

service, either partially on site or through re-routing of calls to other centers. Seven

of the centers are out of service. Of the 7 E 911 centers that remain out of service,

all are located in the New Orleans area and are served by the Franklin tandem,

which is flooded. Four of the centers are located in Plaquemine and St. Bernard parishes, low lying parishes along the Mississippi River below New Orleans which were

in the eye of the storm as it came inland.

We are continuing to work around the clock to restore service. Our restoration efforts involve surveying the damaged area. That activity is approximately 80% complete. Next we concentrate on restoration of highest priority circuits, specifically

those which support public safety including hospitals, E911 centers and law enforcement. Then we focus on supporting other carriers, including the wireless industry.

IV. NEEDS FROM GOVERNMENT

What can the government do to help? The cooperation and assistance from local,

state and federal agencies overall has been good. The FCC, led by Chairman Martin,

has been extraordinarily helpful. The FCC has reached out to offer assistance in

many areas: waiving rules that will help customers who are without service; taking

actions that have and will allow for the quick restoration of network facilities (including the emergency routing of traffic over whatever facilities are available for

use); and helping with the publication of ‘‘find me’’ numbers to help locate BellSouth

employees. We will continue to need this type of help, particularly related to the

efforts to restore communications in Louisiana and the Mississippi Gulf Coast areas.

The magnitude of the damage will present unique issues that will need to be resolved quickly and efficiently in order to restore service.

The Louisiana and Mississippi Public Service Commissions have also stepped up

to provide assistance to the industry in efforts to assess damage, maintain the operation of the remaining network, and restore service to impacted areas.

BellSouth has been extremely engaged with the Department of Homeland Security’s Infrastructure Protection Directorate, headed by Bob Stephan, and most specifically, DHS’s National Coordinating Center (NCC). The NCC, which is a division

of the National Communications System of DHS, provides a focal point for industry

and the Federal government to share operational information and coordinate needs

to respond to crises just like this. BellSouth maintains an office at the NCC headquarters, along with many other major wireline, wireless, and satellite providers.

Our representatives there work around the clock to facilitate response efforts for

FEMA, DHS, the National Guard, State Emergency Management Agencies and Operations Centers, NORTHCOM, and many other organizations. On industry’s behalf,

the NCC works through a myriad of concerns, with security and fuel at the top of

the list, along with abatement of the flood waters. Industry has also worked together to coordinate fuel convoys, search and rescue, network impacts, and logistics.

It’s been an outstanding example of the public-private partnership in action.

Through the NCC, and through direct sources, BellSouth has been in communication with the Department of Energy and the Nuclear Energy Regulatory Commission (NERC), which has provided status information on power and electricity. The

White House Executive Office of the President has also been strongly supportive in

responding to specific issues that required support. We have had good coordination

and information from the FAA and DHS on aviation needs. The Department of Defense’s Northern Command has also been very helpful, providing information, support, and logistics as well. BellSouth has also had outstanding security support from

the Bureau of Alcohol, Tobacco and Firearms, as well as the US Marshal Service,

which were coordinated through FEMA. Keith Hennessey—Deputy Director of national Economic Council at the White House Executive Office of the President,

helped BellSouth get the employee hotline number that I described earlier publicized on Fox, CNN, and MSNBC Cable networks, as well as Direct TV satellite

network.

Right now, we need several things. First, we need safe access to our network facilities. This will require the abatement of the flooding in New Orleans, which I understand is underway. Once the flood waters have receded, we need adequate secuVerDate 11-MAY-2000 09:17 Nov 08, 2005 Jkt 000000 PO 00000 Frm 00202 Fmt 6633 Sfmt 6621 24246.TXT HCOM1 PsN: HCOM1
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rity measures to ensure the safety of our technicians trying to assess and conduct

repairs.

Second, it will take many months for BellSouth to completely repair the damage

caused by Katrina. We will continue to work around the clock to restore service to

our customers as they have rebuilt and are ready to be served. BellSouth has engaged and restored 22 hurricanes since 1992, storms such as Andrew, Hugo and

now Katrina. Congress and the private sector alike should be cautious about building unrealistic expectations about how long it takes to fully recover from a storm

packing the furor of a Katrina.

Third, the government needs to recognize that the cost to BellSouth to restore the

communications infrastructure will be significant. BellSouth has estimated that the

cost to restore our network as a result of hurricane Katrina will be between $400

and $600 million. By comparison, the cost to BellSouth of the damage caused by the

four hurricanes that hit Florida last year was approximately $200 million. And, of

course, we’re still in the middle of the hurricane season, and the long term impacts

of the flooding in New Orleans are hard to estimate.

Restoration of our near ubiquitous infrastructure will demand that we deploy capital, not as a cost plus utility, but as a company in a very competitive industry. We

will be expected to rebuild without knowing what our ultimate demand will be. And,

we will rebuild this network in an environment where many companies depend on

our network for providing service to their customers, but policy doesn’t equally distribute the burden of restoration among all players. The FCC has been very helpful

in waiving rules that hamper restoration. We will need continued focus from the

policy community on rules and regulations that hamper access to capital. Timely

restoration requires that we spend this money now, well in advance of knowing

what people and businesses will actually return to affected areas, and when.

Mrs. MYRICK. Well, thank you for what you have done. And also,

please thank your employees for their commitment as well. It is

important to all of us, and I know it means a great deal.

Mr. Lashof.

STATEMENT OF DANIEL A. LASHOF

Mr. LASHOF. Thank you very much, Madam Chairwoman, and

members of the committee, I appreciate the opportunity to participate in today’s hearing. And first let me add my voice to those of

the other witnesses and members of the committee in expressing

deep sympathy for the victims of Hurricane Katrina and great appreciation for the emergency responders who are on the ground

struggling to restore service and provide emergency services.

While Katrina has produced a horrendous catastrophe along the

gulf coast, its impact has also rippled across the country. And, for

many Americans, that has been most evident in the price of gasoline. Both immediate and long-term responses are needed to address the fundamental vulnerability that Hurricane Katrina has revealed. But let me start with the Hippocratic Oath: In searching

for the right responses, let us first do no harm. Let us be sure that

we avoid counterproductive actions that don’t actually address the

real problems, and would needlessly expose people to higher pollution levels and harm to the environment.

First let me address fuel standards which we have discussed

here. Certainly EPA’s prompt action to temporarily waive certain

fuel requirements has ensured that these standards are not responsible for the increases in gasoline prices that consumers have seen

during the last week. It also shows that EPA has the statutory authority that it needs to respond to supply disruptions and other

emergencies. No permanent changes in the Clean Air Act can be

justified based on the aftermath of Katrina, and responsible policy

and law require the clean air waivers should not be extended any

longer than necessary to respond to the immediate supply disrupVerDate 11-MAY-2000 09:17 Nov 08, 2005 Jkt 000000 PO 00000 Frm 00203 Fmt 6633 Sfmt 6602 24246.TXT HCOM1 PsN: HCOM1
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tions. If Congress does wish to reduce the number of fuel specifications to provide additional flexibility in the market, it should harmonize these standards upwards by making it easier for States and

regions to opt in to Federal formulated gasoline programs and protect their citizens with clean air.

Turning to refinery capacity, similarly, while it may be desirable

to increase refinery capacity, particularly outside the gulf region,

there is no justification for relaxing environmental requirements in

order to site new refineries. There simply is no credible evidence

that environmental requirements have played a significant role in

the economic decisions that refiners have made to consolidate and

to reduce spare capacity. We have heard other testimony that it is

primarily an economic driver with respect to margins. In fact, in

response to an inquiry from the ranking member of this committee,

EPA has said that there are no pending applications to restart any

of the refineries that have closed since 1980. And with respect to

new refineries, the only application that I am aware of, which is

the Yuma facility which has been mentioned here in Arizona, it has

actually already received an air permit which was granted less

than 1 year after a complete application was submitted.

Now, let me turn to the Arctic Refuge, where we have heard,

since Katrina, renewed cause to open the Arctic National Wildlife

Refuge to oil exploration and production. And these are also impossible to justify based on the short-term supply disruption caused by

Katrina. Even if you take EIA’s optimistic estimates of potential

annual production from the Arctic Refuge, drilling would affect by

their estimate gasoline prices by less than 1.5 cents per gallon and

then not until 2025. As shown in my exhibit, oil from the Arctic

Refuge would be a drop in the bucket—it is the red curve there just

hugging the bottom—compared with the oil demand reduction we

could achieve with a national commitment to oil savings which I

will address in a minute.

We need a national commitment to reduce our dependence on oil

because currently our dependence is very dangerous to our security

and economy. With only 3 percent of the world’s oil reserves and

25 percent of the world’s oil demand, there is no way for the United

States to drill its way into energy security. The only effective way

to reduce our vulnerability to oil price shocks is to significantly reduce our dependence on oil.

This is true for family budgets as well as for the national energy

security. For example, for an average family driving 2,500 miles a

month, a $1 gallon run-up in gasoline prices as we have seen in

recent weeks takes $120 out of their monthly budget if they are

driving vehicles that average 21 miles per gallon; but it would only

take $60 out of their budget if those vehicles average 42 miles per

gallon, which is within our technical capability.

Turning to short-term action, to respond to the short-term disruption in oil, I believe the President should call on the Nation to

conserve gasoline. And I don’t think it is enough for him to simply

say people shouldn’t buy gasoline if they don’t need it. The President should specifically ask for consumers to pitch in by taking five

immediate and relatively simple steps that would save 7 percent of

our gasoline demand: First, by keeping tires inflated; second, by

sticking to the speed limit; third, by reducing engine idling; fourth,

201

by using car pools, transit, and telecommuting; and, fifth, by keeping cars tuned and using efficient engine oils. These are sensible

steps that all Americans can take that can help us all through this

short-term problem.

To reduce our vulnerability and increase our security in the future, a broad coalition called Set America Free, which involves national security organizations, religious leaders, and energy experts,

calls on Congress to establish a minimum national commitment to

reduce our oil commitments by saving 2.5 million barrels of oil a

day within a decade and 10 million barrels of oil a day by 2025.

We can achieve that with a combination of diversifying our supplies away from petroleum, using biofuels that Mr. Shimkus has

mentioned earlier in the hearing, as well as American know-how

and technology to make sure that every gallon of fuel that we use

is used with the utmost efficiency. By doing that, we could save

more than 15 times as much as the production from the Arctic Refuge could potentially deliver cumulatively over the next 20 years.

Equally important, in contrast to oil savings, Arctic Refuge drilling would do nothing to insulate our economy from the effects of

future oil supply disruptions, because those would ripple through

the economy and affect the price that everyone pays regardless of

how much crude oil we import or how much comes from domestically because we have national and global markets.

So, in conclusion, Mr. Chairman, I believe that there are shortterm measures that we should call on all Americans to take to

pitch in to help us through the immediate supply disruption. In the

longer term, we need a real commitment to oil savings, and we

should move forward with approaches that really respond to the

problems we have and not use the short-term crisis to justify permanent changes that are inappropriate.

Thank you.

[The prepared statement of Daniel A. Lashof follows:]

PREPARED STATEMENT OF DANIEL A. LASHOF, SENIOR SCIENTIST, NATURAL

RESOURCES DEFENSE COUNCIL

INTRODUCTION

Thank you Mr. Chairman. My name is Daniel Lashof and I am a senior scientist

at the Natural Resources Defense Council. I appreciate the invitation to participate

in today’s hearing.

Mr. Chairman, it is now clear that hurricane Katrina is among the worst natural

disasters in American history. My deepest sympathy goes to the victims and their

families and my deepest respect goes to the emergency workers who are struggling

to provide relief in almost unimaginable conditions.

While Katrina produced a horrendous catastrophe along the Gulf Coast its impact

has also rippled across the country. For many Americans this is most evident in the

price of gasoline. For some of us this is an annoyance that means that our Labor

Day trip to the beach was a little more expensive than we had anticipated. But for

millions of low-income Americans higher energy costs have thrown carefully balanced family budgets out of whack, creating real hardship.

With tempers running short as some motorists have watched the price of gasoline

increase as they were waiting in line to fill up, it is natural to look for someone

to blame. I urge that we resist the temptation to offer simplistic explanations or

simplistic solutions. Where there is evidence of price gouging it should be investigated and prosecuted to the full extent of the law. But we also need both immediate and long-term responses that address the fundamental vulnerability that hurricane Katrina revealed.

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1Letter from Charles Ingebretson, EPA Associate Administrator, to Congressman Dingell,

dated September 29, 2004. 2The permit was granted on April 14, 2005. Letter from Nancy Wrona, Director Air Quality

Devision, Arizona Department of Environmental Quality, to Jeff Donofrio, Committee on Energy

and Commerce Democratic Staff, dated July 29, 2004 shows that the complete application was

received on July 14, 2004. 3 Arctic National Wildlife Refuge production analysis conducted by Richard A. Fineberg (Principal Investigator, Research Associates), January 2005. 4 U.S.DOE/EIA. Impacts of Modeled Provisions of H.R.6 EH. h. EIA estimates that allowing

drilling in the Arctic Refuge will reduce world oil prices by $0.57 per barrel in 2025. Assuming

a one-to-one impact on gasoline prices, this translates into $0.57/42 = $0.014 per gallon.

FIRST, DO NO HARM

Some argue that America should open its wild lands for oil exploration and drilling or relax environmental safeguards to reduce gasoline prices and U.S. dependence on imported oil. But these are inappropriate, wasteful, and ineffective responses to the aftermath of Katrina.

EPA’s prompt action to temporarily waive certain clean fuels requirements has

ensured that these standards are playing no role in the gasoline price increases that

consumers have seen during the last week. EPA’s action also demonstrates that current law already provides the necessary authority to respond to short-term supply

disruptions. No permanent changes to clean air laws can be justified based on the

aftermath of Katrina, and responsible policy and the law require that clean air wavers should be extended no longer than necessary to respond to the actual supply disruption. If Congress wants to reduce the number of different fuel specifications it

should make it easier for states and regions to adopt the federal reformulated gasoline program, and not lock in the use of dirtier conventional fuels.

Some have cited a decline in the number of refineries operating in the United

States as evidence that environmental regulations have discouraged investment in

new capacity, driving up gasoline prices. The facts do not support this claim, however. While the total number of refineries has declined, total capacity has increased

as refiners have found it to be more cost effective to expand capacity at existing facilities than to operate small refineries or build new green field plants. Refiners

have also consciously sought to reduce excess capacity to improve refinery margins.

Environmental permitting has not played a significant role in these decisions. In response to an inquiry from the Ranking Member of the Committee, EPA has said

that there are no pending environmental permit applications from any of the U.S.

refineries that closed since 1980.1 With regard to new refiners, the record shows

that in the case of the proposed facility in Yuma, Arizona, an air quality installation

and operating permit was granted by the Arizona Department of Environmental

Quality less than a year after a complete application was received.2

Similarly, renewed calls to open the Arctic National Wildlife Refuge to oil exploration and production are also impossible to justify based on the short-term supply

disruption caused by Katrina. Although drilling advocates claim there is potentially

16 billion barrels of oil in the Arctic National Wildlife Refuge, this figure is an

upper bound estimate (one-in-twenty chance) for the amount of oil that is potentially recoverable, regardless of extraction costs. Using a price-adjusted mean estimate (which better represents the basis for production decisions regarding potential

future discoveries), the actual amount of oil that is economically extractable would

be far less. Investment decisions would be made based on expectations of long-term

average prices, which are far lower than current peaks. For example, at $40 per barrel the economically recoverable total would be about 6.7 billion barrels. Moreover,

it would take 10 years for any oil from the Arctic Refuge to reach the market. Even

during the predicted production peak in 2027, the coastal plain would produce about

3 percent of America’s daily oil demand.3 Even with EIA’s optimistic estimate of potential annual production from the Arctic Refuge, which is much higher than can

be justified by actual experience with North Slope fields, drilling would affect gasoline prices by less than 1.5 cents per gallon in 2025.4

A national commitment to oil savings could yield more than 15 times as much as

production from the Arctic Refuge cumulatively over the next 20 years (see exhibit).

Equally important, in contrast to oil savings, Arctic Refuge drilling would do nothing to insulate our economy from the effects of future oil supply disruptions, which

would ripple through the oil market and affect the price of domestic and imported

crude equally.

DANGEROUS DEPENDENCE

Our fundamental vulnerability is rooted in America’s dangerous dependence on

oil. Thirty years after the first Arab Oil Embargo our transportation sector remains

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5Light-Duty Automotive Technology and Fuel Economy Trends: 1975 Through 2005. EPA420-

R-05-001. July 2005. 6 U.S. Department of Energy, Energy Information Administration. http://www.eia.doe/pub/

oillgas/petroleum/datalpublications/petroleumlmarketinglmonthly/current/txt/tables01.txt

Accessed September 2, 2005. 7 U.S. Department of Energy, Energy Information Administration. http://www.eia.doe.gov/

emeu/ipsr/t24.xls Accessed September 2, 2005.

97 percent dependent on oil; imports account for over half of our supply; and our

vehicle fleet remains woefully inefficient. In fact, after increasing from 13.1 to 22.1

miles per gallon between 1975 and 1987 the average fuel efficiency of new personal

vehicles has actually declined to 21 miles per gallon in 2005, according to the latest

government report.5

As a result of rising global demand, particularly in the United States and China,

and unrest in the Middle East and other major oil producing areas, oil markets were

already tight before Katrina struck. Refinery acquisition costs for crude oil had more

than doubled from $24 per barrel in 2002 to almost $53 per barrel in July 2005.6

China’s 32 percent, or 1.6 million barrel per day, increase in oil consumption between 2001 and 2004 was the largest single factor increasing global demand, but

the United States was not far behind. Although U.S. consumption grew by only 5.5

percent over this period, that represented more than a 1 million barrel per day increase due to our much larger consumption base.7

With only 3 percent of the world’s oil reserves and 25 percent of the world’s oil

demand, there is no way for the United States to drill its way to energy security.

The only effective way to reduce our vulnerability to oil price shocks is to significantly reduce our dependence on oil. For example, if the fuel efficiency of our personal vehicle fleet was 42 miles per gallon today, rather than 21 miles per gallon,

U.S. oil demand would be lower by 4 million barrels per day, oil markets would have

spare capacity, and the impact of any gasoline price spike would be far smaller. For

an average family driving 2500 miles in a month, a $1/gallon run up in gasoline

prices takes $120 out of their monthly budget at 21 miles per gallon, but only $60

at 42 miles per gallon.

Unfortunately, neither the energy bill enacted last month nor the fuel economy

standards proposed on August 23rd will achieve substantial oil savings.

The United States needs to make a national commitment to reduce our oil dependence, through both immediate conservation measures and through investments

that increase our efficiency and diversify our sources of fuel.

IMMEDIATE CONSERVATION MEASURES

During the Second World War, Americans met our nation’s energy challenges with

an unprecedented spirit of conservation, using every gallon of gasoline wisely. Californians showed again during the electricity crisis in 2001 that the conservation

spirit is alive and well today, responding by cutting their power demand by 10 percent without any draconian measures.

The President should announce a ‘‘National Emergency Gasoline Conservation

Program’’ to respond to the short-term supply disruption caused by Katrina. There

are five simple steps American consumers and businesses could begin taking immediately to reduce gasoline consumption. These steps could cut gasoline consumption

by several percent, helping to relieve gasoline shortages, save money, and cut pollution at the same time.

In contrast to drilling in the Arctic National Wildlife Refuge, which would not

begin to produce oil for many years, these measures would yield immediate benefits.

1. Check tire pressure.

• More than a quarter of all cars and nearly one-third of all SUVs, vans, and

pickups are driven with tires at least 8 pounds below their proper levels, according to a new survey by the Department of Transportation.

• If all Americans kept their tires properly inflated, our nation would cut its gasoline use by 2 percent.

• Maintaining the correct tire pressure also would save lives. Under-inflated tires

are more prone to tread separation and blowouts, which can cause fatal accidents.

• Congress should help by authorizing the president to require all service stations

to offer free air and to post prominent signs and stickers that say, ‘‘Check your

tire pressure every time you fill up—For your safety and America’s energy security.’’

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2. Obey the speed limit.

• Slowing down from 75 to 65 miles per hour would reduce highway gasoline consumption by about 10 percent.

• If Americans followed the speed limit on our nation’s highways, we would cut

total national gasoline use by about 2 percent.

• Slowing down also would save lives.

• Congress should provide extra funding for states that strictly enforce speed limits

and post signs that encourage slower driving: ‘‘Drive 65—for your safety and

America’s energy security’’

3. Turn off the car engine while waiting in line.

• Americans who run their engines while they are parked or waiting in line waste

as much as 4 million gallons of gasoline every day, according to the U.S. Department of Energy.

• Drivers cannot avoid idling in traffic jams, but they should turn off their engines

while parked or waiting at drive-in windows. If the wait is longer than 30 seconds, starting up a car again uses less gasoline than leaving it running.

• If drivers turned off their engines while parked or waiting in line, we would cut

national gasoline use by about 1 percent.

• Congress should help by authorizing the president to require parking lots, banks,

fast-food restaurants, and other drive-through stores to post signs stating:

‘‘Turn off your engine while you wait—for cleaner air and America’s energy security’’

4. Use car pools and public transit, and telecommute.

• If each commuter car carried just one more passenger once a week, we would cut

gasoline consumption by about 2 percent. That would translate into big savings

for the average American worker. Someone with a daily commute of 10 miles

each way and a 20- mpg vehicle would save 236 gallons of fuel per year by opting to carpool, telecommute or use transit, according to the American Public

Transportation Association.

• A study in Minneapolis-St. Paul found that more than one in 10 employees shifted

from driving to some other way of commuting when offered tax-free commuter

benefits equal to those provided in the form of free parking.

• Congress should promote commuter choice with a tax-free benefit for employees

who car-pool, use transit, bike to work, or telecommute (currently limited to

$100) equal to that provided in the form of free parking (currently limited to

$175). The federal government also should support and promote Web sites that

help commuters find drivers traveling similar routes at similar times. Posters

at workplaces could say: ‘‘Car pool or ride the bus—for America’s energy security’’’

5. Keep cars tuned and use fuel-efficient engine oil.

• A poorly tuned or poorly maintained engine can increase gasoline consumption by

as much as 10 to 20 percent.

• Following the recommended maintenance schedule in your owner’s manual will

save drivers fuel and cars will run better and last longer.

• Motor oils with additives that reduce friction may increase a vehicle’s fuel economy by 3 percent or more. Fuel-efficient oils are marked with an ‘‘Energy Conserving’’ label by the American Petroleum Institute (API).

• Congress should authorize the president to require service stations to post prominent signs trumpeting the benefits of keeping cars tuned and using fuel-efficient

oil. Signs could say: ‘‘Keep your car tuned to save gas for America’s energy security’’ and ‘‘Use fuel-efficient motor oil to save gas for America’s energy security’’

A NATIONAL COMMITMENT TO REDUCE OIL DEPENDENCE

To reduce America’s vulnerability to future oil supply disruptions, whether from

natural disasters, war, or terrorist attacks, we need to make a national commitment

to invest in reducing our dependence on oil.

While there are many views of the energy bill enacted last month, everyone

agrees that it does not represent such a commitment. In fact, the administration

strongly opposed the Senate-passed measure that would have required the president

to develop and implement a plan save at least 1 million barrels per day of oil and

this critical proposal was not included in the final bill. Yet the conference report

retained a provision that effectively lowers fuel economy standards by extending a

loophole that allows automakers to claim credit for producing ‘‘dual fuel’’ vehicles,

boosting their fuel economy numbers on paper by as much as 1.2 miles per gallon,

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8Department of Transportation. Effects of the Alternative Motor Fuels Act CAFE Incentives

Policy. Report to Congress. March 2002. 9 Bordetsky, A. et al., Securing America: Solving Our Oil Dependence Through Innovation.

NRDC and IAGS, 2005. http://www.nrdc.org/air/transportation/oilsecurity/plan.pdf 10 McManus, W. et al., In the Tank: How Oil Prices Threaten Automakers’ Profits and Job.

NRDC and OSAT, July 2005. http://www.nrdc.org/air/transportation/inthetank/contents.asp

even though these vehicles use gasoline more than 99% of the time.8 While biofuels

have great potential to reduce our oil dependence, rather than promote use of alternative fuels this provision will increases gasoline consumption by 15 billion gallons

over the life of its 10-year extension. Wasting 5 billion gallons of gasoline more than

the estimated fuel savings from the administration’s proposed light truck fuel economy standards.

The fuel economy standards proposed by the administration on August 23rd miss

a critical opportunity to seriously address America’s oil dependence. Despite record

oil prices and mounting instability in oil producing countries such as Iraq and Iran,

the new administration plan actually calls for a slower increase in light truck standards than the modest 1.5 mpg increase adopted by the administration in 2003 when

oil was selling for less than $30 a barrel. The proposal also exempts the heaviest

SUVs and pickup trucks that weigh over 8500 pounds, such as the Hummer H2 and

Ford Excursion, and does not address the car standard, which hasn’t been updated

in nearly 20 years. As an example of how out of touch this proposal is, its benefits

were calculated assuming that the average price of gasoline over the next 25 years

would be less than $1.60 per gallon.

Technologies and fuels exist today that can reduce wasteful use of oil in vehicles,

industry, aviation, and buildings, delivering savings of at least 3.2 million barrels

of oil per day (mbd) by 2015. By 2025 we could save at least 11.2 mbd, cutting our

demand in half. We can reach these goals while enhancing the competitiveness of

U.S. automakers and farmers by combining efficiency standards with incentives to

retool factories, accelerate the production of gasoline-efficient vehicles, and deliver

alternative fuels to consumers. Because our economy and national security are tied

to America’s dependence on oil, smart energy policies that deliver near term results

would reduce America’s vulnerability, stimulate our domestic economy, and help

keep our nation safe

The Set America Free coalition has brought together national security

and religious leaders, as well as energy experts, in calling on Congress to

take immediate action and establish a national commitment to save 2.5 million barrels per day by 2015—as much as we currently import from the Persian Gulf—and at least 10 million barrels per day by 2025.

Saving oil requires mobilizing American ingenuity, factories, and farms around a

clear goal. The first, most critical, step is for Congress to establish a national commitment to cut oil expenses and reinvest the resources—otherwise sent to oil producing countries—in American factories and farms. During World War II, American

factories converted in just months from building cars to building tankers and bombers that became the arsenal of democracy. And after the first oil crisis in the early

1970s, America cut its oil demand to keep our economy strong. Although some may

doubt the ability to turn this ship around, history shows us that American efficiency

and ingenuity can meet the challenge. Given technologies and fuel available today

we know that saving 2.5 mbd by 2015 and at least 10 mbd by 2025 is an achievable,

practical goal that would deliver near term benefits in the next 5 to 15 years, while

also starting the United States on a new path toward significantly greater energy

independence and security thereafter. An analysis of how these savings can be

achieved is attached to my testimony.9

Failure to take these steps would perpetuate unacceptable risks for our economic

and national security, American jobs, and consumers. Rising oil prices have placed

a devastating and disproportionate burden on U.S. automakers, according to a report released last month by NRDC and the University of Michigan. Without serious

action to improve fuel economy performance, Detroit automakers will continue to

lose thousands of jobs and millions in earnings, leaving them at a sharp disadvantage to their Japanese competitors. This report is also attached to my testimony.10

Rather than exporting billions of dollars more to oil regimes with every rise in the

prices of oil, the United Sates should be investing those dollars at home to support

domestic industries and jobs, and leading the world in reducing global demand for

oil.

CONCLUSION

Katrina has highlighted the vulnerability of our energy system due to our dangerous dependence on petroleum to fuel our transportation system. The best way to

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reduce our vulnerability—both immediately and in the longer term—is to reduce demand by becoming more efficient with every barrel of oil we use and to diversify

our supply by relying more on homegrown biofuels. A national commitment to saving oil is long overdue. If we make the commitment now America’s oil dependence

could be reduced by 2.5 million barrels per day by 2015 and by at least 10 million

barrels per day by 2025. Meeting such a commitment will reduce our vulnerability

to catastrophes like Katrina, protect the environment, and make us more secure.

Chairman BARTON. We thank you. Last but not least, a good

friend to the committee who has testified numerous times, Mr.

Mark Cooper, the Research Director for the Consumer Federation

of America. You are recognized for 7 minutes, sir.

STATEMENT OF MARK N. COOPER

Mr. MARK COOPER. Thank you, Mr. Chairman. There is a real

benefit to going last today, and you will see why.

Chairman BARTON. You know what everyone said, for one thing.

Mr. MARK COOPER. That is right, and I have gotten some interesting numbers today. Again, let me stress as all of us have, we

have had a catastrophe of immense proportions, human proportions, physical proportions, economic proportions. And it is extremely important I think to act very, very quickly and seize this

moment to reorient the way we address these fundamental problems. And as my testimony points out, we have been saying the

same thing for 4 years. Maybe folks will start listening.

Public policy cannot prevent accidents or catastrophic acts of nature, but it can build systems that are resilient, robust, and flexible

to minimize the impact of those inevitable accidents on our society.

We believe it is quite clear that the business practices and public

policy in the oil industry have combined to create a gasoline sector

that has difficulty coping with even minor events, not to mention

the disaster that struck the gulf coast. If the measure of performance of an economic sector is adequate supplies at stable prices,

then this industry and the public policy under which it operates

has failed, not just in the wake of Katrina, but also repeatedly over

the past 5 years.

The bulk of my testimony today presents word for word the policy conclusions that we reached in a report over 4 years ago. There

is no Monday morning quarterbacking here. After analyzing the industry structure conduct and performance, we urged policymakers

to move aggressively in five areas. And we gave specifics. We said:

Restore reserve margins by developing efficiency. The first and

most important thing is to get the fuel efficiency of our fleet increased. The pitiful proposal of increase that we got last month was

based on a price of gasoline of $1.80 a gallon, including taxes, in

2012. That number is economically irresponsible and socially irrational. They should have done the analysis with a much higher

price, with the social value of gasoline, and we would have asked

for much more efficiency.

Second, we ask for expansion of refinery capacity by redeveloping

the 50 sites that had been closed. And as you have heard today,

not one of them has applied for reopening. They were closed for

business reasons, not environmental reasons. They should have

been reopened. We wanted a list, we wanted a study. Those are

sites that you can’t hide behind the environmental laws for.

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Second, we call for increasing flexibility in storage and stock policy. We talked about strategic product reserves. Mr. Chairman, our

friends in the IEA who are giving us product are drawing down

their own strategic product reserves to help us. We don’t have a

strategic product reserve. We should have one. We should also have

a policy requiring storage. This is not an industry that can function

without storage. In the electric utility industry we have reserve

margin requirements of 15 to 20 percent above peak precisely because they are high capital, high intensity, inflexible industries. We

need to think about that here as well.

I said discourage private actions that make markets tight or exploit markets. And you have the numbers before you today. I have

done this quickly, but here are the numbers you heard today about

gouging.

Mr. Caruso told us that the price of gasoline went up the equiva- lent of $19 a barrel. Mr. Douglass told us that his rack price went

up $18 a barrel. That is the wholesale price he pays. Mr. Cooper

told us that there were no increases in transportation costs because

they are regulated. Mr. Caruso also told us that the WTI price

went up $5. The difference between that WTI price and the rack

price is $13. That is the refiner margin. And if you look over at the

charts that were taken down, unbranded went up $26 equivalent

per barrel. That is the refiner margin against unbranded gasoline.

If you want to look for gouging, take a hard look at those numbers.

Get the record, find out what happened. There is a good case there

that it wasn’t crude and it wasn’t the retailer and it wasn’t the

transport; it was the refining sector that sets the wholesale price

of gasoline.

Finally, we said promote a competitive industry. Almost every

wholesale market in this country is concentrated, every regional retail market is concentrated, every regional refining market is concentrated. They got that way over the past 15 years as a result of

mergers. Now, the FTC says they are not highly concentrated. In

this industry, you get a lot of market power with a little bit of market share, and these firms have a sufficient market share to affect

the price. The GAO discovered that, found that, showed that, and

the FTC attacked them for showing us the facts.

I have attached to my testimony three graphs, one which shows

the growth of gasoline since I last testified or since we did our report of 6 percent, one which shows an elimination of oil spare capacity and refineries, and one which shows no increase in our

stocks.

Essentially, we were living on the razor’s edge, and Katrina

pushed us off. But Katrina is only the last in a series of accidents

and interruptions that have hit this industry. It was the worst possible single event that we could have suffered, yet its impact is only

an extrapolation of what has been going on. Four times in the last

5 years we have had these price spikes, and everyone said: Stocks

were low, refinery capacity was stretched to the limit, and we had

an incident, a pipeline broke, a refinery had a fire, a storm. Once

is a surprise, twice is bad luck, but three times is a systematic pattern, and it is incumbent upon this Congress and our government

officials to take action to insulate us against these kinds of events

because they do happen and they will happen.

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1 I have submitted for the record four reports on the oil and gas industry that we have prepared over the past four yours. Our policy discussion from the first of these in July 2001 are

included as part of this statement.

So it is time for a dramatic change in our approach to policies.

I offer the same advice I gave 4 years ago but only with greater

urgency. We should pursue each of these options twice as fast, aim

twice as high, because we have wasted a critical 4 years in providing the American consumer with the gasoline sector that they

need and deserve.

Thank you.

[The prepared statement of Mark N. Cooper follows:]

PREPARED STATEMENT OF MARK N. COOPER, DIRECTOR OF RESEARCH, CONSUMER

FEDERATION OF AMERICA

Mr. Chairman and Members of the Committee, my name is Mark Cooper. I am

Director of Research at the Consumer Federation of America (CFA). CFA is a nonpartisan, non-profit association of 300 pro-consumer groups, which was founded in

1968 to advance the consumer interest through advocacy and education. We have

been analyzing the petroleum industry for decades and have issued numerous reports in the past five years, as the seeds of the underlying conditions for the current

crisis became apparent.1 I greatly appreciate the opportunity to share our views

with the Committee today.

Public policy cannot prevent accidents or catastrophic acts of nature, but it can

build systems that are resilient, robust and flexible to minimize the impact of the

inevitable accidents on our society. It is evident that the business practices of the

oil industry and public policy in this country have combined to allow a gasoline industry that cannot respond to even minor incidents, not to mention the disaster that

struck the Gulf Coast last week. If the measure of performance of an economic sector is adequate supplies at stable prices, then this industry has failed the consumer,

not just in the wake o Katrina, but also repeatedly over the past five years.

The bulk of my testimony today presents word-for-word the policy conclusions

that we reached in a report released over four years ago. After analyzing the structure, conduct and performance of the oil industry, we urged policymakers to move

aggressively in five areas.

• Restore reserve margins by developing both efficiency (demand-side) and production (supply-side). • Increase market flexibility through stock and storage policy. • Discourage private actions that make markets tight/or exploit market disruptions

by countering the tendency to profiteer by withholding of supply. • Promote a more competitive industry. • Address the disproportionate burden that rising energy price place on lower income households.

Unfortunately, these policy recommendations were not included in any significant

way in the recent energy legislation and actions by Federal agencies. For example,

the single most important mid- and long-term policy we advocated, improving the

fuel efficiency of the vehicle fleet, could have taken significant pressure off of gasoline markets, if it had been embraced four years ago. In the past four years, gasoline

consumption in America increased by about 6 percent.

Regrettably, just last month the Department of Transportation proposed timid improvement in fuel efficiency standards, gerrymandered the calculation to let more

gas guzzlers escape scrutiny, and exempted some of the worst gas guzzler from fuel

consumption standards altogether. Simultaneously, it threatened to preempt states

like California from imposing stricter standards. That proposal, which would take

ten years to lower consumption by the equivalent of less than what we use in one

month, does not address the problem in any meaningful sense.

Similarly, the key short-term policy we recommended of increasing reserve margins and stocks has been neglected. I have attached to my testimony three updated

graphs from our July 2001 analysis. The first shows gasoline consumption. The second shows refinery capacity compared to demand and the second shows gasoline

stocks above minimum operating levels. Together these show that we were living

on the razor’s edge, with rising demand, little excess capacity and small stockpiles.

Katrina pushed us off the edge.

Hurricane Katrina is just the latest in a series of accidents and interruptions that

have hit the oil industry and consumers hard. It is the worst possible single event

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one could imagine from the point of view of the domestic gasoline sector. Yet, its

impact reflects the same underlying problems that have afflicted the industry for

the past half-decade. At the start of each price spike in the past few years we hear

the same refrain. ‘‘Stocks were low, refinery capacity was stretched to the limit.’’ A

refinery fire here, a pipeline breach there, or a storm triggers a spike.

Once may be a surprise; twice may be bad luck; but by the third time, it is a pattern that demands a systematic response, not hand wringing. Moreover, if many different accidents keep happening, if many different things can go wrong, and if running an overtaxed system makes outages more likely, it is incumbent upon policy

makers to do something about it. The industry and public policy have failed to create a system that can meet the needs of the American consumer and America as

a nation is paying the price for that inaction.

It is time for a dramatic change in the approach to policy. I offer the same advice

we gave four years ago. The only thing I would change is the urgency in the recommendations. We should move twice as fast and set our goals twice as high because past inaction has made the problem we face even more critical.

ENDING THE GASOLINE PRICE SPIRAL

MARKET FUNDAMENTALS FOR CONSUMER-FRIENDLY POLICIES TO STOP THE WILD RIDE

JULY 2001

V. POLICY RESPONSES

A. ECONOMIC FUNDAMENTALS AND POLICY PRINCIPLES

Public policy responses must reflect physical and economic reality. Since the laws

of physics cannot be repealed, public policy must be cognizant of the increased likelihood and severe impact of accidents in energy industries, like refineries and pipelines. Physical and institutional structures must be prepared to deal with accidents

in this industry.

The low short run elasticity plays a critical role in price volatility and the exercise

of market power. The extremely low elasticity of demand is one of the key characteristics of the gasoline market. Suppliers are well aware of the rigidities in the market

and can take advantage of them under the right circumstances. Because the gasoline market is so large, even small and short term pricing abuse imposes substantial

costs on the public.

Under these circumstances, firms with relatively small market shares can increase profits by withholding supplies, unless the elasticity of supply is high. Unfortunately, petroleum product markets do not exhibit very elastic supply. Reserve

margins and stocks are crucial.

1. Supply

Avenues for increasing supply are available, but they may not be pursued, if left

to industry business decisions. Since short-term elasticities are quite low, a variety

of resources that can be called upon to meet demand quickly are necessary to prevent price volatility. Having reserve margins of production and transport capacity

would dampen price volatility. Stockpiles and storage are the best option when demand shifts or supply is interrupted. Import of product is an important option when

refinery capacity is not available or, depending on geographic location, when pipeline capacity is not available.

The recent closure of refineries also suggests an avenue for expanding capacity.

The most readily available path to expanding capacity may be to identify existing

facilities that have been shuttered, or sites that have been recently abandoned to

expand capacity while minimizing environmental impact should be explored. Each

of these options should be considered, particularly in markets where capacity is

tight and ownership is concentrated.

The behavior of small refiners in response to the elimination of programs that

supported their existence makes it clear that public policy can affect the number

and geographic distribution of refinery capacity. If we want geographically dispersed

refinery capacity to promote local responses to supply problems, we just have to pay

for it.

2. Demand

In the long run, reducing the size of the market, without imposing deprivation on

consumers, is the major policy challenge.

The consumption patterns deeply embedded in spatial relationships lead us to

conclude that increased fuel economy is the more readily achievable approach to reducing gasoline consumption than changing living patterns. Reducing fuel use per

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vehicle allows existing mobility patterns to be preserved, while consumption is reduced.

Shifting preferences for vehicles (toward higher efficiency vehicle types) requires

greater change in social behaviors. It is also vulnerable to changes in taste. Moreover, it requires a change in the stock over a substantial period of time, perhaps

a decade. While policies to affect these behaviors should be pursued, their complexities and difficulties should be recognized.

Attempting to overlay mass transit on existing living patterns may be pursued as

a long-term strategy. However, given consumer preferences and the spatial distribution of activity, this is a substantial task. The increasing suburbanization of living

patterns frequently results in relatively low densities and high costs for mass transit. Changing the geographic distribution of work, home and play, requires the

greatest amount of social change.

3. Distributional Effects

Equity impacts of rising energy prices, particularly as they affect low and lower

middle income households, must be dealt with directly. Neither general tax cuts nor

existing energy assistance programs, such as the Low Income Home Energy Assistance Program (LIHEAP), address the problem of rising or volatile transportation energy costs. Even if it could be argued that LIHEAP addresses the general energy

needs of groups, ad hoc efforts to increase programs like LIHEAP tend to fall short

and come long after the impacts of rising energy prices have been felt.

B. POLICY TARGETS

It is time for public policy to seek permanent institutional changes that both reduce the chances that markets will be tight and reduce the exposure of consumers

to the opportunistic exploitation of markets when they become tight. To achieve this

reduction of risk public policy should be focused on achieving five primary goals.

• Restore reserve margins by developing both efficiency (demand-side) and production (supply-side).

• Increase market flexibility through stock and storage policy.

• Discourage private actions that make markets tight/or exploit market disruptions

by countering the tendency to profiteer by withholding of supply.

• Promote a more competitive industry.

• Address the disproportionate burden that rising energy price place on lower income households.

1. Expand Reserve Margins By Striking A Balance Between Demand Reduction and Supply Increases

We have earlier identified the hierarchy of policies to reduce demand. Increasing

the fuel efficiency of the fleet through increased standards for mileage and use of

hybrid vehicles should be given top priority. Shifting preferences for vehicle types

and modes of transportation through taxes and incentives are a second category to

be considered.

A goal of achieving an improvement of vehicle efficiency (reduction in fleet average miles per gallon) equal to economy wide productivity over the past decade (when

the fleet failed to progress) would have a major impact on demand. It would require

the fleet average to improve at the same rate it did in the 1980s. It would raise

average fuel efficiency by five miles per gallon, or 20 percent. This is a mid-term

target. This rate of improvement should be sustainable for several decades. This

would reduce demand by 1.5 million barrels per day. This would return consumption

to the level of the mid-1980s.

Expanding refinery capacity by 10 percent equals approximately 1.5 million barrels per day. This would require 15 refineries, if the average size equals the refineries currently in use. This is less than one-third the number shut down in the past

ten years and less than one quarter of the number shut down in the past fifteen

years. Alternatively, a ten percent increase in the size of existing refineries, which

is the rate at which they increased over the 1990s, would do the trick, as long as

no additional refineries were shut down.

Placed in the context of redevelopment of recently abandoned facilities or expansion of existing facilities, the task of adding refinery capacity does not appear to be

daunting. Such an expansion of capacity has not been in the interest of the businesses making the capacity decisions. Therefore, public policies to identify sites,

study why so many facilities have been shut down, and establish programs to expand capacity should be pursued.

Once the magnitude of the task on the supply-side is placed in perspective, and

given the objective analysis of the environmental costs involved, the call to overturn

environmental laws loses its force. It seems that expansion of supply-side capacity

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can be accomplished within the current confines of environmental laws. To the extent that the costs of compliance can be demonstrated to be a significant problem,

then underwriting compliance (directly through financial subsidies or indirectly

through research) rather than relaxing standards should be pursued.

This combination of demand-side and supply-side policies to improve the long run

market balance would restore the supply/demand balance to levels that typified the

mid-1980s.

2. Expanding Storage And Stocks

It has become more and more evident that private decisions on the holding of

stocks will maximize short term private profits to the detriment of the public. Increasing concentration and inadequate competition allows stocks to be drawn down

to levels that send markets into price spirals. While the strategic petroleum reserve

has been developed as a strategic stockpile and companies generally take care of operating stocks, the marketplace is clearly not attending to economic stockpiles. Companies will not willingly hold excess capacity for the express purpose of preventing

price increases. They will only do so if they fear that a lack of supply or an increase

in brand price would cause them to lose business to competitors who have available

stocks. Regional gasoline markets appear to lack sufficient competition to discipline

anti-consumer private stock policies.

Public policy must expand stocks. Participants in the distribution of gasoline can

be required to hold stocks as a percentage of retail sales. Public policy could also

either directly support or give incentives for private parties to keep storage. It could

lower cost of storage through tax incentives by draw down stocks during seasonal

peaks. Finally, public policy could directly underwrite stockpiles. We now have a

small Northeast heating oil reserve. It should be continued and sized to discipline

price shocks, not just prevent shortages. Similarly, a Midwest gasoline stockpile

should be considered.

3. Taking The Fun And Profit Out Of Market Manipulation

In the short term, government must turn the spotlight on business decisions that

make markets tight or exploit them.

Withholding of supply should draw immediate and intense public scrutiny. It

needs to be backed up with investigations. Since the federal government is likely

to be subject to political pressures not to take action, state government should be

authorized and supported in market monitoring efforts. A joint task force of federal

and state attorney’s general could be established on a continuing basis. The task

force should develop databases and information to analyze the structure, conduct

and performance of gasoline markets.

As long as huge windfall profits can be made, private sector market participants

will have a strong incentive to keep markets tight. The pattern of repeated price

spikes and volatility has now become an enduring problem. Because the elasticity

of demand is so low—because gasoline is so important to economic and social life—

this type of profiteering should be discouraged. A windfall profits tax that kicks in

under specific circumstances will take the fun and profit out of market manipulation.

Ultimately, market manipulation could be made illegal.

4. Promoting A Workably Competitive Market

Further concentration of these industries is quite problematic. The Department of

Justice Merger Guidelines should be rigorously enforced. Moreover, the efficiency

defense of consolidation should be looked on skeptically, since inadequate capacity

is a market problem.

Restrictive marketing practices, such as zonal pricing and franchise restrictions

on supply acquisition should be examined and discouraged. These practices restrict

flows of product into markets at key moments.

Markets should be expanded by creating more uniform product requirements.

These should not result in a relaxation of clean air requirements.

5. Low-income assistance

Rather than fight repeated battles over supplemental appropriations, it would be

more effective to index assistance payments to energy prices. It may be time to consider new programs that deal directly with transportation fuel costs. Transportation

energy is a necessity in the 21st century.

Chairman BARTON. Well, thank you, Mr. Cooper.

The Chair is going to recognize himself for the first 5 minutes

of questions. I want to ask Mr. Cavaney—and you may have said

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this in your testimony; I was having to go to vote and come back—

is there evidence that any of the oil production or distribution gathering or transportation pipelines or production platforms in the

Gulf of Mexico have not performed as desired in terms of preventing spills during the hurricane? In other words, I have not

seen in the popular press any story about a rupture or a spill, so

I am assuming that part of the system has performed as designed.

Is that your understanding also?

Mr. CAVANEY. It is. Daily, Mr. Chairman, the MMS reports all

the activity that they have done through their overflights and the

searches in the area. There have been no spills related to production.

Chairman BARTON. So we have had a Category 5 hurricane take

a huge swath out of three of our coastal States, but in terms of the

offshore oil and gas production and delivery system, while it has

been shut down, it has not spewed any environmental damage into

the gulf coast?

Mr. CAVANEY. No, Mr. Chairman. Another point, too, is these

platforms out there, particularly those in the deep water, are designed to withstand the roughest of conditions, conditions like what

they experienced. There are over 4,000 total operating platforms

out in the Federal section of the OCS area, and of those we have

had reports of 41 of them which were all very close inshore and basically first generation platforms with very little production receive

damage or were effectively destroyed. But of all the rest in deep

water, only four platforms have experienced damage. We learn lessons when we go through these things, and those will help us going

forward. So I think fairly much, if you look at 95 percent of the

production was shut in because we abandoned all those and shut

them down properly, now we are at a stage back where only 57

percent is shut in within a week after the storm went through

there. So I think the design parameters and the safeguards performed as expected and as anticipated, but we do learn some new

things each time and we will from this one.

Chairman BARTON. Now, we have before us on my far right two

of the watchdogs for the consumer, and to the left, with the exception of the telephone gentleman and the Governor of Louisiana’s

representative, I have got the full panoply of the oil and gas industry from Mr. Cavaney of API who goes out and finds and hopefully

produces the oil, to the gentleman on the New York Mercantile who

helps create a market for the crude, to Mr. Slaughter who helps

purchase and refine the crude, and Mr. Cooper who helps transmit

both the crude and the refined products, to Mr. Douglass who actually sells them at retail—not you individually, but the groups that

you represent.

My first question: Do any of you gentlemen have any knowledge

of any attempt to collude, to set a price because of this shortage?

Do you have any personal knowledge of attempting to coordinate

an orchestrated increase in the price that has resulted in the gasoline prices being as high as they are right now across the country?

Mr. CAVANEY. Mr. Chairman, I can speak for API and its members. We have no knowledge. We have cooperated, as I mentioned

in my testimony, for decades and decades on dozens of investigations by the FTC, and we are daily monitored, as Bob Slaughter

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had mentioned, by the FTC in 360 different cities. This industry

operates, because it is incredibly, incredibly efficient and it is highly diverse particularly as you get closer to the retailer. And I think

that is our protection.

Chairman BARTON. Now, Mr. Cooper has pointed out in his testimony that if you have consolidation and if you have a concentration, even at what would normally be considered a low level, 10 to

15 percent of a given market, that in and of itself can result in

prices going up disproportionately. I am going to ask the indulgence of the full committee. I want to start with Mr. Cavaney and

then work my way through the system and have each of you try

to explain how your segment sets the price or how it is created. In

other words, I want Mr. Cavaney to explain to the best of his ability where this world price, the raw material price comes from, and

Mr. Newsome to explain if there is any group of people like the

Hunt brothers or somebody who could create a position to move the

market artificially, and just work our way down. Because I am like

everybody else, I don’t like going from 2.47 a gallon Tuesday morning to 2.79 a gallon Tuesday night, which I had to do down in

Texas, and I just thought I was getting ripped off big time until

I heard from Mr. Upton in Michigan that the price went to 3.50,

and then when I watched on TV and saw it Georgia it was at $6.

So I felt a little bit better about only having to pay 40 cents a gallon more when I found out about the rest of the country. But I

think it is a fair question that the American people ask, is why,

when we have such a little—and 2 million barrels a day in terms

of production and 4 million barrels a day in terms of refinery capacity and two major pipelines being shut down is not little, but

in the overall scheme of things why that would cause prices to go

up everywhere in this country.

So, Mr. Cavaney, can you briefly explain to the best of your

knowledge how the market price is set for crude that your people

produce?

Mr. CAVANEY. Yes. Mr. Chairman, I might just comment, we

share the same concern; we don’t like the prices, either. But we

just went through an experience down in the gulf that is a once in

a generation or once in every several generation experience.

Directly to your point, the products that we produce, natural gas

and crude oil, those are set and traded in worldwide markets.

Crude oil is the world’s largest commodity, it is highly transparent,

and the prices are established off of what are called benchmarks,

which are certain quality parameters, certain viscosity, certain

amounts of sulfur. And then those that are considered to be more

attractive have an established differential that floats around. The

more attractive lighter grades, which are more efficient, you can

get higher yield, trade a little higher. The lower ones trade a little

lower.

Chairman BARTON. But can any company——

Mr. CAVANEY. Everyone pays the same price.

Chairman BARTON. Can any producer, ExxonMobil, the biggest

in the world, can they or the Saudis last week, could they have

moved the market, the crude price higher by something that they

did or colluded with other producers?

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Mr. CAVANEY. Not in that short period of time. Nobody could do

any of that, because the market is so transparent and so large.

Chairman BARTON. Do you agree or disagree with that, Mr. Cooper? I am going to use you as my referee here.

Mr. MARK COOPER. Well, collusion is not the issue. And you——

Chairman BARTON. Well, I am trying to get to——

Mr. MARK COOPER. But you posed the question properly. It is

that, it is not the crude market. I mean, the crude price is set by

a cartel primarily, and it is a political price, it is not an economic

price. The refinery market——

Chairman BARTON. If you have a surplus, I agree with that. But

we don’t have a surplus of production.

Mr. MARK COOPER. But the quantity of supply, the amount of

production capacity is a strategic variable. When you have a small

number of people who decide what to do, then supply is not out.

It doesn’t happen in nature, it comes out of political decisions.

Chairman BARTON. I am just asking, do you have any—I am

going to give you a chance after each person speaks, because you

are a smart guy. Okay? But on the crude price, do you stipulate

that any producer in the world tried to raise the price above a market level in the last 2 weeks?

Mr. MARK COOPER. Certainly not in the last 2 weeks. The conditions were set over a period of time by political decisions among the

people.

Chairman BARTON. Now, Mr. Newsome, is there anybody on the

New York Mercantile Exchange or any other commodity exchange

that, in a market this big, has the ability to move the price higher

on a purely speculative play?

Mr. NEWSOME. No, sir. As you know, I come from the regulatory

side of the equation, not as a trader or anything else, and so monitoring markets, market surveillance is something that is very near

and dear to me. That is one of the reasons that NYMEX is considered the benchmark in many energy products is because you have

hundreds of companies, representatives that all come together to

compete in a very open, transparent environment to come up with

a price.

Chairman BARTON. So there is nobody out there that could try

to corner the oil market or the natural gas market and move the

price higher for purely speculative purposes in the last 2 weeks?

Mr. NEWSOME. No.

Chairman BARTON. Do you agree or disagree with that, Mr. Cooper?

Mr. MARK COOPER. I would like people to look at that one very

carefully. You would have gotten the same answers, and you probably did, about the electricity market in California 4 years ago.

There are a lot of people chasing a lot of oil out there, a lot of financial transactions, but very little physical product changing

hands. That is a concern to me. He has got the data, you can take

a look at it.

Chairman BARTON. In your opinion, how big of a position would

you want or a group colluding have to take to move the market?

Mr. MARK COOPER. In a market that is this tight, you know, the

tighter the market, the smaller the position you need to have that

influence. But I am not asserting that. But that is a good question

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and there is data that you can look at these transactions, ask how

many times this oil, this single barrel of oil changed hands, just

like we asked how many times the electrons changed hands.

Chairman BARTON. You believe, while on the crude—the producers, while you think there are political considerations over time

that have tightened the market or prevented production coming on

line, on the commodity exchanges do you think it is possible somebody could have moved the market differently than pure market

pressures moved it?

Mr. MARK COOPER. The amount of speculation going on is a

source of concern. We have seen it in the Wall Street Journal and

a number of other places. It is an objective study. Absolutely.

Chairman BARTON. We will put a question mark there. Now we

go to Mr. Slaughter, who takes the products that have been produced and purchased, and it is your job now to refine those products. You take the price coming in that is set on the exchanges.

The refined products that are coming out, your refiners have the

ability to set a price. How is that going out price set?

Mr. SLAUGHTER. It is basically set from market conditions. There

are two factors: One is the cost of production, and the second is the

market that it is being sold in.

Chairman BARTON. Well, when Mr. Douglass, I think he had the

chart showing the rack price going up everywhere in the country

over a period of I think 3 days. It went up faster in some regions

than it did in others, but that is a refinery setting that price. Why

did it? Your crude input didn’t really go up that much. It went from

about $65 a barrel to $70, and then when the President announced

the release of the SPR the crude price went back down. Unless it

went up big time today, it is $65, $66, $67. But the price that Mr.

Douglass is paying went up and it stayed up. Now, what happened

there?

Mr. SLAUGHTER. First of all, there are 48 refining companies and

149 refineries. Each sets prices, of course, individually. But what

happened was that with what happened in the gulf last week, as

Mr. Cavaney pointed out, was a once in a lifetime event. It knocked

out 20 percent plus of the Nation’s refining capacity, and it also

knocked out the major supply pipelines for about one-third of the

country to a half of the country, as well as the Midwest as well as

the East and the South. When that happens, basically prices go up.

Prices went up. If you look at what happened to gasoline on the

exchanges, gasoline prices went way up because people were anticipating that there would be a supply shortage as a result of what

had happened with Hurricane Katrina.

Chairman BARTON. I am not being argumentative, Mr. Slaughter, but I am trying to understand. Your input price did not go up.

There is obviously some supply disruption to these pipelines that

got shut down, and we know that overall there is going to be a

shortage because we have less refined product because the refineries themselves are down. But I am still trying to understand why

the refiners’ posted prices went up everywhere as quickly as they

did. I understand raising a price to alleviate a shortage. If I don’t

have any gasoline coming into Atlanta, I know why that price is

going up: Because you are not getting any more gasoline. I don’t

quite understand why it is going up in Texas and California where

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the refineries are still operating, the distribution systems are still

operating; you just have to allocate across the 21 million barrel a

day market, you have got to allocate a shortage overall of somewhere between 2 and 3 million barrels once you go through your

inventory.

Mr. SLAUGHTER. What happens in the event of a supply disruption is that basically, you know, prices throughout the country will

basically go up to try to allocate the product through market forces.

And——

Chairman BARTON. So is there a marketing manager at each refinery who takes it upon himself or herself to set the price? Does

it come down from the corporate office? I mean, how do you get to

that price?

Mr. SLAUGHTER. Basically, the companies have their own pricing

strategies and they respond to market conditions and what they

also perceive as replacement cost and what the marketplace is basically going through in terms of general supply problems.

Chairman BARTON. Mr. Cooper, do you want to comment on

that?

Mr. MARK COOPER. They have market power. There is a line in

the movie, A Beautiful Mind, about John Nash. And the key line

he says is: Adam Smith was wrong. When he realizes that nine

people can cooperate, a small group of people, maximize their profits by observing each other’s behavior. Right? It is called the Nash

equilibrium. He won the Nobel Prize for it and he spent 25 years

learning how noncollusive games, noncooperative games—every refinery market in this country is concentrated. Several of them are

highly concentrated. So he told you the right answer; he says: We

will charge whatever the market will bear. And in this particular

market, there is only a small number of other players out there to

observe. So they all put their prices up at the same time. And people call me all the time and say they all did 15 cents overnight.

How can that happen? Because most experience is that someone in

that market would say, hey, I will eat a little bit of that to expand

my market share.

The refinery industry doesn’t behave that way. The RAND study

showed that coming out of the mergers of the 1990’s. You put your

finger on it. They have the market power to charge whatever the

market will bear.

Chairman BARTON. I am not stipulating they have the market

power. I am trying to find out what they are really doing.

Mr. MARK COOPER. Well, his answer is that is where the wholesale price is set. And the numbers you see today are damning numbers, that $18 a barrel and $13 a barrel.

Chairman BARTON. Well, it is not automatically a damning number if it prevents a shortage. If you raise the price to prevent a

shortage so that willing buyers have an opportunity to purchase,

that is not damning. If it is artificially created for whatever reason,

that is damning.

Mr. MARK COOPER. It is damning if there are not enough willing

sellers to prevent excess profits.

Chairman BARTON. Well, do you know of any refinery that held

refined product off of any given market?

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Mr. MARK COOPER. Well, they created a market in which there

was no surplus. That is the long-term problem of letting those 50

refineries get closed.

Chairman BARTON. We are going to encourage cooperation to get

some of them reopened and build some new ones.

Mr. MARK COOPER. But it would be real important to get some

other players, some independents in those markets. If those same

folks own those refineries, you are at the same point.

Chairman BARTON. Let us go to Mr. Cooper. I am going to stipulate, since you are regulated and you testified that the pipelines

didn’t change their price.

Mr. BENJAMIN COOPER. That is described on page 4 and 5 of my

testimony.

Chairman BARTON. So we are going to pass you over. Now we go

to Mr. Douglass. You are getting these higher prices from Mr.

Slaughter’s group, but you didn’t just pass those through. The retail price went up too.

Mr. DOUGLASS. Correct.

Chairman BARTON. Okay. Do you want to explain how that happened?

Mr. DOUGLASS. Yes. May I be allowed to put up chart 2?

Chairman BARTON. You may.

Mr. DOUGLASS. If we can put up the second chart that we have

that was an attachment to our statement that was filed, you will

see that refiners—in this particular case I am a branded marketer

and this is a branded supplier, my biggest supplier. They raised

the price 13 cents the first day. By the way, they lagged the market. I had other suppliers who raised it 37 for their branded stores

and 70 cents for the unbranded business that I use commercially.

So this is a very restrained marketing company.

And for the benefit of those who have called them names today,

it is ExxonMobil. So they were dragging. They were actually being

very conservative in their price moves compared to the others.

However, they did raise my price 13 cents a gallon. And the way

it works in our business is you have to pay—the next truckload,

you have to pay that extra 13 cents. So you immediately identify

that as part of your inventory. So we price on the basis that what

is in the inventory at the time of an escalating market, we better

move consistent with that, or if we sell that other inventory and

don’t get back the 13 cent increase, we will end up losing money.

Chairman BARTON. You fast-forward to replace your inventory.

Mr. DOUGLASS. Correct. We are definitely trying to put a replacement cost——

Chairman BARTON. And you are stipulating that the retail price

just went up whatever the wholesale price you had to pay went up.

Mr. DOUGLASS. Actually, we lost 5 cents in the transaction over

time.

Mr. MARK COOPER. He lost because the credit card companies

charge him a percentage of the sale, and that went up as well even

though the cost of that transaction didn’t go up at all, and that is

3 percent. So if you went from $2 to $3, he lost 3 cents out of that.

They took a bigger bite out of it.

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So those are the numbers that suggest where the price increase

came from. That doesn’t mean there weren’t individual stations

who may have gone hog wild.

Chairman BARTON. You think the retail guys are okay?

Mr. MARK COOPER. As far as I can tell, and these numbers nailed

it, and I have been talking with people, and the rack price was just

going up. And this gentleman had to come here and put it on the

screen.

Chairman BARTON. If we had any black hats in the room—and

I am going to stipulate that everybody here has at least a gray hat

on, and I want to say everybody has a white hat on, but if we had

to go from white to shades of gray, you are going to say the speculators on the commodity markets and the refiners are the ones that

are not lily white?

Mr. MARK COOPER. The latter I have seen some numbers; the

former I would like to see some analysis.

Chairman BARTON. I am going to give those two guys a chance

to rebut, and then I am going to deal the next person.

Mr. Slaughter or Mr. Newsome.

Mr. SLAUGHTER. Yes, Mr. Chairman. The point that Mr. Douglass raised, the antitrust laws prevent collusion in our industry, as

you know.

Chairman BARTON. I don’t think anybody is alleging collusion

based on what I have heard today.

Mr. SLAUGHTER. The spot price, because of the anticipation of

supply shortages for products, went up considerably during this period of time when there was the greatest disruption. A number of

our companies froze prices or were selling prices well below spot

price during that period of time. So, I mean, there is different behavior by each individual company.

The point I had before, the tremendous amount of our cost of our

product is involved with a cost accrued, plus the cost of taxes. Different people behave differently, but everybody could see that that

situation that we had this week was a cataclysmic event threatening so much of the market for our products. The people responded accordingly. And, you know, basically it is a market situation. It was a cataclysmic event. It knocked out 20 percent of the

refining supply, and everyone responded accordingly. A number of

them took the steps that Mr. Douglass has suggested and froze

prices or actually sold below spot.

Chairman BARTON. Mr. Newsome.

Mr. NEWSOME. Thank you, Mr. Chairman.

As I commented in my testimony, speculators have become easy

fodder to pick on by the media, but they play an important role in

the market.

Chairman BARTON. I am not picking on them. I am trying to give

an explanation to the average citizen, if they are lucky enough or

bored enough to watch this entire hearing, about what the best experts in the country explained is our pricing. We will politicize it,

but I at least want to try to get on the record what it is.

Mr. NEWSOME. The reality of how the marketplace operates

keeps speculators from pushing the price. It is a very open, competitive marketplace. And in one pit you have got commercials, you

219

have got the banks and brokers, you have got the locals or the

speculators that are all bidding and competing one for another.

The markets move based upon fundamentals. If a speculator

tries to take the market in a direction that is not fundamentally

sound, there is someone always there ready to make him pay, saying, yeah, do it, and we will turn around, and it will cost you a lot

of money. The reality of the market is that everyone can’t move in

one direction whether that is high or whether it is low. The futures

markets are a zero sum game. For every winner, there is a loser.

So, that, just the way that the markets operate don’t allow it to get

away from the fundamentals.

Chairman BARTON. I want to thank the committee for indulging

me. I don’t normally take that much time, but this is such an important issue that I wanted to try to get on the record at least how

the pricing system works or doesn’t work depending on your point

of view. And I want to again thank the committee for letting me

do that.

Mr. Rush is recognized for 5 minutes.

Mr. RUSH. Thank you, Mr. Chairman. Mr. Chairman, I don’t expect to take my 4 or 5 minutes. I just have a question that is not

in line with your line of questioning.

I want to ask Mr. Angelle, I had occasion this morning to be at

a meeting with the president of the American Red Cross as it relates to the problem that we are experiencing in the gulf coastal

region, and I asked her a specific question. And I asked her, why

didn’t the Red Cross go into New Orleans earlier? And her response to me startled me really. And she said that the Governor

did not—ordered her not to go into New Orleans to conduct rescue

and recovery or relief work, for her to conduct relief efforts in New

Orleans. And that astounded me. And I expected to—I wanted to

ask the Governor. I thought that maybe she would be here, but you

are a representative. Are you aware of that?

Mr. ANGELLE. No, sir. In my role as secretary of the Department

of Natural Resources, I obviously have primary jurisdiction over

managing our energy resources in Louisiana, and I am not qualified to answer that question.

Mr. RUSH. Thank you.

Mr. Chairman, I yield back.

Chairman BARTON. Did you yield back? Wow, thank you.

Mr. Hall, 5 minutes.

Mr. HALL. Thank you, Mr. Chairman.

All of you probably sat through the first session and heard our

questions and answers, and I guess, Mr. Cavaney, I will start with

you. And I thank you for being here and sharing your knowledge

with us.

What is needed—what we need to do is to bring some stability

to the energy market, and that is easy to say and hard to do. It

is going to require long-term investments and strategies.

What, in your opinion, will be the most effective strategy for

dealing with the spiraling cost in the short term first? We got an

idea on the long term, but what can we do tonight or before milking time tomorrow, or within the reasonable foreseeable future?

Mr. CAVANEY. I think the steps that were undertaken by the administration and by the IEA in terms of making available some finVerDate 11-MAY-2000 09:17 Nov 08, 2005 Jkt 000000 PO 00000 Frm 00223 Fmt 6633 Sfmt 6602 24246.TXT HCOM1 PsN: HCOM1
220

ished product, which is being brought over from their reserves, did

about as much as one could expect. We have seen over the last several days both drops, pretty significant, in the futures markets of

both crude oil and finished product. I am not forecasting here, but

we may well look back and see that the peak here occurred the last

several days ago, because with the passage of time, what we are

finding is both the refineries are, in fact, coming back; the pipelines

are up, as we mentioned; and the refined product that is coming

over is helping fill a void. So we are on the right track in the near

term.

What we ought to focus on is trying to help work together instead of actually working against one another. And by that I mean

we in the industry as we are, we ought to be out there getting supplies we need, getting the repairs, getting our people down there

and cooperating with the other entities which are so important.

Utilities have done a terrific job of getting power down there.

Government ought to be in place to be able to provide help when

needed, and that is quick approval on permits, helping to expedite

things that need to go through the process of getting approval, and

in some cases possibly even helping coordinate closely the various

different entities within the government itself.

And finally, consumers, and I think this is the part where the

biggest savings can be made. And I don’t think we as a country

have done anywhere near the job we can, and that is in energy conservation. We can give you on our Web site api.org a whole litany

of things that a driver can do in his or her automobile that can actually improve the miles per gallon by as much as 10 or 12. That

is fairly significant if you are driving a car that gets about 25 miles

per gallon. And there is also, very obviously, that if you have two

cars, one gets good mileage and other gets less so, try and plan

your longer trips for the other. That is the equivalent of actually

adding product instantaneously.

The problem is most people think, I am just an individual, and

my little contribution won’t mean much. But if you do a few simple

things and multiply that by several million, you are adding more

production than we can ever find overnight.

So the answer to your question is individuals can look at this

and begin to create, I think, an approach that won’t only serve us

well during this immediate postrestoration period, but can serve us

well going forward, and that is energy conservation not only in

transportation sector, but in all sectors.

Mr. HALL. Would you repeat that?

Mr. CAVANEY. I will do it a little more passionately next time.

Mr. HALL. Seriously, I know you are a little disgusted that you

don’t have a better audience. Everything is being taken down by

the reporter, every Member of Congress, and we will read and

reread it. That is the way we make decisions. I was kidding you.

I don’t expect you to repeat it.

But Mr. Cooper made a great case for more refineries, and the

chairman, and the chairman’s committee, those that work with him

and support him and advise him, worked with him, and in his—

I guess in his good judgment, he put subtitle H, sections 391, 392,

their aim toward the Governors of this State to make it more possible and more likely that they could pursue the construction of a

221

refinery. And I am not sure, I don’t think we had any report language or anything telling him exactly how to do it, because probably it will be done slowly and by people that are more knowledgeable about the business certainly than I am. But if we have the

support of the EPA, and we set that out in the bill itself, there is

a lot of ‘‘thou shalts’’ in there that ought to make the acquisition

of a refinery a little more attainable for the people, Governors of

the State, with a lot of their finances; that they have to reduce the

time that it takes to build one and might make it more attractive

for investors to shorten the time for them to have some expectation

of their payback.

But what are the—do you know—I asked someone who represented the Federal Government if they had any anybody from

any of the 50 Governors tie into them on this, and I think maybe,

Mr. Chairman, our Governor has discussed it with you, and you

discussed it with several other Governors. Chairman BARTON. I

asked the President to send a letter to all 50 Governors asking

them if they want to consider using this particular provision, and

I talked directly with Governor Perry of Texas, who is considering

strongly doing just that.

Mr. HALL. Maybe I am talking to the wrong bunch, Mr. Chairman. When did you send that letter?

Chairman BARTON. I haven’t sent the letter yet. I just made a

phone call. I asked the President of the United States——

Mr. HALL. I will follow up and I will send Red a copy so he can

help me answer that and help us work that out. But it is up to—

how much more time do I have?

Chairman BARTON. You have been out about a minute and a

half.

Mr. HALL. Could I ask one real quick question of Mr. Douglass?

He is my constituent and my good friend. He has been an effective

witness before this committee before.

Bill, would you clarify how individual stations make adjustments

in pricing in times of market fluctuations; do suppliers give you anticipated prices?

Mr. DOUGLASS. When you say anticipated, we get our price

changes every day. But in a volatile market like we are presently

in, they may be twice a day, anticipated in the sense that if they

told us at noon, they would raise the price at 6; if they told us at

6, they would raise it at 12.

Mr. HALL. Who is they?

Mr. DOUGLASS. The oil companies.

Mr. HALL. Do you deal with the same one all the time?

Mr. DOUGLASS. We have eight different suppliers, but we have

one principal supplier, a branded company. But what you have to

do is look at your replacement costs, because they draft you as soon

as they load the truck. They literally have you on the computer,

and when that truck is loaded, they draft your account. So you

have to pay when you buy, and if you don’t pay, obviously they

don’t let you buy.

Mr. HALL. What are the prices based on?

Mr. DOUGLASS. The price that we pay?

Mr. HALL. Yes.

Mr. DOUGLASS. Or the price that we charge?

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Mr. HALL. The price that you set. You set a price to sell.

Mr. DOUGLASS. Essentially we try to recover our costs, because

when I used my chart, one, I had a 14-cent margin at that point,

which is a gross margin before any expenses are taken out. And

when the truck picks up that fuel, and it is 10 cents, in this case,

13 cents higher on the next day, we have to raise our price because

our costs remain. And as they pointed out, the credit card costs

alone range from 5 to 7 cents a gallon of that 14 that I had. But

if you will notice on that chart, my margin went down to 10, so I

had a net margin, if you will, of 3 cents to pay all the expenses

associated with it.

So you must move forward. You must take your inventory.

Mr. HALL. My time is really up. I will write you a letter and ask

you to give some more answers, really to follow your invoice right

from the time you got it and the time you pay it, and how much

you raised your prices compared to how much the people that sold

to you raised theirs.

Did you ever raise yours in excess of what——

Mr. DOUGLASS. No, sir. No, sir. In fact, we lost margin, if you

look on this transaction. We lost margin as it went up, and our expenses went up, as I indicated, through credit card expense and so

on.

Mr. HALL. The only way you could have kept from losing that

was to arbitrarily raise yours above what you were paying directly

for it?

Mr. DOUGLASS. That is correct.

Mr. HALL. You didn’t do that?

Mr. DOUGLASS. I did not do that.

Chairman BARTON. Before I recognize Mr. Stupak, I want to understand something. You just said if I come into one of your stations, and I use my Visa credit card, and I buy 1 gallon of gasoline,

you are charged 7 cents?

Mr. DOUGLASS. Yes, sir.

Chairman BARTON. But if I buy two gallons, you are charged 14

cents? And——

Mr. DOUGLASS. Yes, sir.

Chairman BARTON. And if I charge 10 gallons, you are charged

70 cents?

Mr. DOUGLASS. Yes, sir.

Chairman BARTON. So the more I buy, the more you are charged?

Mr. DOUGLASS. Absolutely.

Chairman BARTON. Even though it doesn’t cost any more for a

transaction if I buy 10 gallons than if I buy 1.

Mr. DOUGLASS. That’s correct.

Chairman BARTON. That doesn’t make a whole lot of sense.

Mr. DOUGLASS. In my testimony I asked that we investigate the

pricing of the credit card companies.

Chairman BARTON. Interesting.

Mr. Stupak.

Mr. STUPAK. Thank you, Mr. Chairman.

Mr. Newman—I am sorry, Newsome—the risk premium, what is

it right now on a barrel of oil?

Mr. NEWSOME. I think it would vary depending upon what analyst you talk to.

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Mr. STUPAK. All right. Most papers are saying 15 to 20 dollars;

is that correct?

Mr. NEWSOME. I am not an oil analyst, so it would be difficult

for me to say, but my opinion would be that is very high.

Mr. STUPAK. What do you think it is?

Mr. NEWSOME. I would say it is much lower than that, below $5.

Mr. STUPAK. So Bloomberg, Kiplinger, all these people are just

wrong?

Mr. NEWSOME. Well, they all have their opinions.

Mr. STUPAK. Okay. Thank you.

Mr. Douglass, certainly I enjoyed your testimony. I really found

your charts quite interesting. The chairman was just asking you

about if you take a look at your chart number 6 about the credit

card companies, as you can see right there, they went up twice, or

200 percent; average 2003 revenue was a buck 50. They are up to

$3 now, 200 percent increase, royalty owners. They have doubled,

if you will, their cost to a retailer?

Mr. DOUGLASS. Sure.

Mr. STUPAK. Royalty owners, they doubled, crude exploration and

extraction, two and a half times, if my math is correct; refiner, two

and a half times; and retailer stayed the same.

Mr. DOUGLASS. Correct.

Mr. STUPAK. Is that a set margin you work off?

Mr. DOUGLASS. Well, actually, I was reflecting incidentally on

this chart. It says average 2003 revenue. My staff didn’t understand my cursive. It was August 2003 revenue and August 2005.

And, in fact, what I did, in the event I got challenged, I brought

invoices with me.

Mr. STUPAK. So everybody in the industry has gone up at least

200 percent in the last 2 years except the retailer?

Mr. DOUGLASS. That is correct.

Mr. STUPAK. If you look at your chart, go to chart number 4, if

you will. You start on August 26 and go to close of September 2.

That is a week’s time. Katrina hit land on August 29. Shortly

thereafter the President released an SPR, or oil out of SPR, as I

and others have been advocating for some time to try to bring some

stability here. And Mr. Caruso testified earlier that once the oil

was reduced from the SPR, the cost of a barrel of oil actually went

down.

Mr. DOUGLASS. Yes, sir.

Mr. STUPAK. But the price keeps going up.

Mr. DOUGLASS. Well, we have a chart, chart 3 here, which does

not reflect taxes or, if you will, freight, but it is the price for

unbranded fuel, and you will see that it did drop off from its high

of 831 for unbranded fuel. What happened with the branded companies, they were lagging that particular pricing strategy, so they

were still catching up. They were still passing through the——

Mr. STUPAK. But then the next day on September 2, it is going

back up again.

Mr. DOUGLASS. Yes, sir.

Mr. STUPAK. Where would it be on the 3rd, 4th? Has it gone up,

stabilized? I am just asking you to guess. It is just on your chart.

Mr. DOUGLASS. It has actually dropped.

Mr. STUPAK. Dropped again?

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Mr. DOUGLASS. Yes, sir.

Mr. STUPAK. We appreciate your charts and appreciate the suggestions you have.

Mr. Slaughter, I got a number of questions for you. And the

chairman is turning on the clock, so I am going to have to move

quickly, so my time is limited. If you answer yes or no, I certainly

would appreciate it.

Allow me to begin by quoting a 1995 industry document in which

the oil industry noted that—I am quoting now—that if the U.S. Refining industry does not reduce its refining capacity, it will never

see any substantial increase in refining margins.

And that is an internal Chevron document dated November 30,

1995. That suggests to me that the industry itself has played an

important role in the lack of refining capacity in the U.S. So my

question is in your testimony, you indicated that in 19—you indicated that 177 refineries have shut down since 1977. Is it true that

there are no requests for environmental permits to reopen any of

these facilities, yes or no?

Mr. SLAUGHTER. To my knowledge, there are not. Many of them

have been sold or moved, or many of them could not get another

permit.

Mr. STUPAK. But there is no request to reopen these 177 refineries; the answer is no?

Mr. SLAUGHTER. There may not even be a refinery on that site

any more, Congressman.

Mr. STUPAK. Isn’t italso true that since 1995—I should say in

1995 alone, 30 refineries have shut down, right?

Mr. SLAUGHTER. Many of them shut down because of the cost of

the Federal programs that I displayed on my third chart, Congressman.

Mr. STUPAK. Sure. So 30 of them shut down. So now we are up

to 207. Of the 30 that have shut down, are any of them seeking

permits to reopen?

Mr. SLAUGHTER. It is funny you had mentioned that. There was

a refinery in California, the Powerine refinery, two summers ago

when there were supply problems in California applied to reopen,

and the application was denied.

Mr. STUPAK. Denied by California?

Mr. SLAUGHTER. Denied by the local authorities.

Mr. STUPAK. Well, there have been no new refineries built since

1976, and over the past 13 years only one refinery, the Arizona

clean fuels facility, has sought a permit to rebuild a new refinery;

isn’t that correct?

Mr. SLAUGHTER. That is correct.

Mr. STUPAK. Isn’t it also true that in 1992, the State of Arizona

granted a permit to the Arizona facility for construction and operation, and the company sat on the permit for nearly 8 years without actually building a refinery?

Mr. SLAUGHTER. Not to my knowledge, no. They had to remove

the refining site——

Mr. STUPAK. They didn’t move the refinery site until 2003 from

Maricopa County to Yuma, Arizona. So from 1992, after it was approved, it sat 8 years without actually building a refinery.

225

Mr. SLAUGHTER. There was a lot of activity on that in the meantime, Congressman.

Mr. STUPAK. They got the permit, and they still to this day have

not built a refinery.

Mr. SLAUGHTER. It is more than just one permit, Congressman.

They did just get an air permit, which is a good sign, but you know

there is a problem because it costs $3 billion to build a refinery of

that size today. There is a lot of upfront money you have to pay,

and you may have to wait 15 years until you know whether you

will ever get a drop out of that refinery. There is a lot of uncertainty in making an application to build a new refinery.

Mr. STUPAK. They have all the permits they needed. What permit

did they not have after 1992?

Mr. SLAUGHTER. They need air permits, and they need other permits.

Mr. STUPAK. Tell me the ones specifically they did not receive for

this one. I don’t want general answers. I am talking about a very

specific refinery, because I found—and today’s Washington Post

backs up the stories here. You claim you can’t get permits because

of environmental reasons, yet everything we have examined finds

just the opposite. And when you started off with the first quote I

gave you, which was 1995, in which the refining industry says, if

you don’t reduce your refining capacity, you will never see any substantial increase in refining margins.

Mr. Douglass’ chart here, which shows just in the last 2 years

you were able to increase your revenue by decreasing refining capacity by 21⁄2 percent, from $11 in August 2003 to $27 per barrel

in 2005.

Mr. Douglass’ charts sort of indicate what we are driving at here.

The issue isn’t environmental laws. The issue is there is no need

to take refinery capacity because if you do, your margins are going

to go down.

Are you familiar with the Government Accounting Office report

of May of this year which says exactly the same thing?

Mr. SLAUGHTER. I am aware of that GAO report. I am also aware

of a FTC report that rebuts it. You keep citing a 1995 document

by one person in one company which I have not seen, and there is

no evidence at all that anyone ever acted on whatever suggestion

is there.

Mr. STUPAK. Really, since that time you have closed 203 refineries. I think that is quite a bit of action; 177 and 30, unless my

math—you are right, it is 207.

Mr. SLAUGHTER. That is right.

Mr. STUPAK. One hundred seventy-seven——

Mr. SLAUGHTER. Actually refining capacity has increased over

that period.

Mr. STUPAK. In refineries that are left.

Mr. SLAUGHTER. It is still capacity.

Mr. STUPAK. Actually it is increased by 13 percent only since

change is made. I keep hearing this, and even the questions of the

chairman and Mr. Hall was if we would build more refineries, and

even in the energy bill, which I supported, there was movement to

waive environmental laws to make the Department of Energy, the

Secretary, the head person who would decide the environmental

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laws of this Nation. I think it is a lame excuse for putting forth

when you see prices and profits like this by the refineries.

Mr. SLAUGHTER. Crude price remains the biggest determinant of

product prices, Congressman. The EIA testimony today demonstrated that, what happens in the marketplace demonstrates it.

The industry has been adding capacity at existing sites consistently

over the time period that you have mentioned, and we have increased the actual refining capacity in the United States over the

last 10 years. A number of the refineries that are cited in the larger number were inefficient, small refineries that were basically

supported by the price control system of the 1970’s——

Mr. STUPAK. Or, as Mr. Cooper says, the bigger ones bought up

these little refineries, put them out of business; therefore, it is easier to control the price when very few are controlling the process.

That is what Valero and others have done.

Mr. SLAUGHTER. Valero has bought a number of refineries in the

last several years and they have added 400,000 barrels of capacity

to them, Congressman.

Mr. HALL [presiding]. Mr. Stupak, have you got the answers you

want?

Mr. STUPAK. No. Mr. Chairman, can we be allowed to follow

those up, though, with more written questions?

Mr. HALL. I will allow you an additional 2 minutes. I will allow

you an additional 2 minutes if you are trying to close up because

we are not going to have a second round.

Our chairman took 20 minutes, and we will yield you 2 or 4 of

those. I am not mad at him about it. Let the record show that.

Mr. STUPAK. Mr. Cooper, I brought up about the refineries being

closed, more people control it, and therefore they can control also

the price or the profit margin. Would you care to comment on my

question to Mr. Slaughter on that line?

Mr. MARK COOPER. It is a simple proposition that we have understood for quite some time that when the number of actors in the

market gets small, they can exercise market power.

In this industry, because supply and demand are so weak, market forces are weak, people can’t come back, you can’t increase supply, you get more market power at a lower level of concentration.

And we submitted for the record a very detailed analysis of this debate between the FTC and the GAO. The FTC has a theory that

mergers that don’t increase the market power—the concentration

ratios above a certain level don’t hurt. The GAO analysis shows

they do.

And let me be clear. The FTC and the GAO do not treat capacity

as a strategic variable. If you look at the GAO’s analysis, as capacity utilization goes up, price goes up. If you cut back on capacity,

you can expect the price increase. As stocks go down, price goes up.

The GAO considers those to be exogenous; that is, they are not

part of the market power problem.

Your memo, the behavior over the past 4 years shows—or 10

years—shows quite clearly an industry that has got concentrated,

and as a result of concentration at the refinery level, they have

power over price. That is what we call market power.

I think the numbers you have seen today suggest that they set

the price at what the market will bear—you can put it that way—

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but there is not enough supply side competition, which is what we

like in our markets, to protect consumers from the abuse of market

power. I think that is a good case, and you have good empirical evidence of that today during this crisis.

Mr. STUPAK. Then what should the Congress do to take—if I use

the word we have heard a lot today—the U.S. Off the razor’s edge

of tight refining capacity? What should we do?

Mr. MARK COOPER. Well, we tried to emphasize the demand side.

So Mr. Hall’s question, what can I do before I have to milk the

cows tomorrow, I talk about three Ts. Two of them I can do before

tomorrow; that is, trips and tires.

You heard the suggestion. You inflate your tires, and you think

about your trips. And it is not deprivation. I think about how many

times I am going to the store and which car I am going to drive

to the store. I agree on something with Mr. Cavaney—I hope this

place doesn’t get struck by lightning—and then the third one is

tune-ups. Those are near-term things. In the long term, we have

to get the efficiency of our fleet increased.

Because reducing our consumption affects the world market—Mr.

Lashof showed you why it is a big impact on the world market. It

affects the domestic market. It alleviates the refinery problem. Producing more domestic oil will not alleviate the pressure on the refineries.

Those are the things to do. I think the Government agencies that

worry about gouging should stop saying there is no collusion and

start saying consumers aren’t being treated fairly. We should worry

more about the unilateral exercise of market power.

Mr. HALL. All right. Mr. Cooper took the 2 minutes. Now, you

want to——

Mr. STUPAK. I thank you for the extra time.

Mr. HALL. You yield back?

Mr. STUPAK. Yield back.

Mr. HALL. Thank you, Bart.

Chair recognizes Mr. Shimkus for 5 minutes, which will probably

be 7, 8 or 9 or 10 minutes.

Mr. SHIMKUS. Thank you, Mr. Chairman.

First of all, I want to thank Chairman Barton for actually using

a lot of time, because going through the chain process is really

helpful because the average consumer just gets lost, and it is a

great educational process.

We used to have on this committee jurisdiction over financial

services. We lost that with Gramm-Leach-Bliley, and I think we

have lost some of our financial service expertise on markets and futures in the issue.

So, Mr. Newsome, could you briefly explain and answer this

question: If futures causes us to hedge risk, by looking at the futures market, should we have been able to predict the high prices

we saw this summer? I am not talking about the hurricane, but the

escalation. By looking at the futures market, should that have told

us where we were headed?

Mr. NEWSOME. Well, certainly futures markets are no crystal

ball, but high energy prices are not new. I mean, the market has

been reacting to market fundamentals for over a year, and if you

start looking at those fundamentals of record high usage from

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China, India and the U.S., China is still considered potentially the

800-pound gorilla because most of their usage is industrial. And as

they move to normal usage as in the U.S. Is the middle class, I

think their demand for energy is going to blow through the roof.

You combine that with a political unrest in the Middle East, political unrest in Venezuela, and you get in the situation that Mr.

Cooper has talked about where you have got such a tight margin

that anything that happens around the globe—because these market are global—anything that happens has an impact. A refinery

goes down in Venezuela, it has an impact on our market. I mean,

that is how thin the margin is.

So certainly the markets have been moving in that direction over

time.

Unfortunately, the hurricane became a market fundamental very

quickly, and the markets reacted to that fundamental.

Mr. SHIMKUS. Thank you.

Mr. Douglass, I really appreciate this chart because I have gone

to a lot of retailers, and they have talked to me about price inversion in this issue, and I think it is really helpful.

The other thing, based upon financial services aspects, they also

raised the credit card issue. And I have heard that in my district,

and that is part of the financial services background that we have

kind—of our expertise on this committee we have kind of lost. But

there are some savings. The consumers choose to use credit cards;

you choose to accept credit cards instead of cash transactions. No

one is being forced to either use a credit card or pay for their gas

by credit card; is that correct?

Mr. DOUGLASS. That’s correct, Congressman.

Mr. SHIMKUS. There are benefits to that because you get immediate payment versus if someone comes in to the quick mart and

wants to write a check that may clear or may not, and you have

to decide whether—at what level are you going to accept the check,

$20 or $50 or—use of the credit card hedges some of your risk.

Mr. DOUGLASS. The credit card does take some of the risk, but

the obvious costs of the credit card have accelerated.

Mr. SHIMKUS. And I think that—one of the issues here is that

we need more competition across the board in the markets. We

need more competition in the refinery industry. We need more competition for you to have selected credit cards that would have a different type of standard by which to, in essence, loan money to individuals and then pay the retailers. But how do you—government,

how does government intervene to get involved in the market? And

that is a huge challenge.

I was asked by my friend Vito Fossella to ask this question, and

I looked at it, and I did think it is a pretty good question. It is you,

Mr. Douglass, from August 29 to September 2, your testimony says

that prices jumped 44 cents for branded stations—those flying the

flag of the major refiners—but for unbranded, independent folks

like the one I—the picture I showed earlier, Rock stations in my

district, it went up 73 cents per gallon. Can you explain the difference?

Mr. DOUGLASS. I think essentially the suppliers started to be

concerned that they couldn’t meet their contractual obligations.

And the branded stores, we are contractually obligated to our supVerDate 11-MAY-2000 09:17 Nov 08, 2005 Jkt 000000 PO 00000 Frm 00232 Fmt 6633 Sfmt 6602 24246.TXT HCOM1 PsN: HCOM1
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plier, and they to us, to supply us at the historical average, and

they have us on allocation currently. We are restricted in ourselves.

We can’t buy more each day than we bought the same day last

year. So they look at that and they say, this is going out of control;

I am going to be able to supply the branded people. So then they

take the unbranded, if you will, or the surplus sale and take it off

the market by virtually pricing it so high, it squashes the transaction.

Mr. SHIMKUS. Thank you. And this has been a long day, and I

appreciate you all being here. I think we have learned a lot. We

have a lot of work to do. I am for more competition across the

board, and that is what makes America best. And we have to move

somehow incentively to get more refineries, more independence. Of

course, as I said earlier, and I was going to try to go without saying

anything, ethanol and biorefineries are growing, and I encourage

that also.

Thank you. I yield back, Mr. Chairman.

Mr. HALL. I thank you.

Chair recognizes the gentlelady from California Mrs. Capps for

what we hope will be 5 minutes.

Mrs. CAPPS. Thank you, Mr. Hall. And I was going to offer my

thanks to the person whose chair you succeeded here, Mr. Barton,

because I thought the exchange that he had early in the hearing

was very instructive, especially, from my point of view, that Mr.

Cooper, Dr. Cooper, was allowed to respond each time, and that

gave me the opportunity to learn.

Mr. Cavaney, I want to congratulate the people you represent for

the lack of any accidents in this massive assault on the oil platforms. I come from California. We have a lot of oil platforms on our

coast. It is not hurricanes we are terrified of, it is earthquakes.

And I have several in my district—off my district—that sit on

earthquake faults. And I want to say a word about taking advantage of technology that is the very best there is, and this is an example. I hope you will carry back to the industry that this happens.

Now, at the same time, I want to say, I believe—and I am going

to say it to you folks in the industry—that these high gas prices

and these disruptions in the oil market that we have been talking

about all afternoon—all day bring home the point that we are too

dependent on oil as a Nation. I believe that America needs to diversify our energy portfolio. I have actually heard more about conservation and diversification today than I heard during our preparations for our energy policy. I wish we had had more of this language that I have heard today in this hearing in that markup.

I also want to say that I think it is really unfortunate that some

Members of—colleagues of mine, and some in the industry, may

use this tragedy to push unpopular plans for new drilling in protected areas, and that they say we need to drill in these areas in

order to deal with the high gasoline prices. And I understand there

is a number of businesses and trade groups that are planning to

send a letter to the Republican House leadership asking them to

allow new drilling in protected areas. Their letter specifically cites

Lease 181 in the eastern gulf as a priority area.

230

This is nothing new. Many of us have experienced this before in

this body. These businesses and groups have been asking for this

for years, and for years the House has rejected these drilling plans,

most recently during House consideration of the Interior bill.

What is new, however, is the desire to use Hurricane Katrina as

a motivating factor. And I think this goes right to the heart of profiteering motivation in the face of human tragedy, and I hope we

can avoid it.

We know MMS does an inventory every 5 years. We have within

our area, or confines, something like 3 percent of the known oil and

gas reserves, while we are responsible for 25 percent of the world’s

demand.

So my question to you, Dr. Lashof, I want to ask from your perspective and your studies, would drilling off the west coast, off the

east coast or in the eastern Gulf of Mexico, where there are prohibitions currently, do anything for gas prices now, or would it do

also anything to lower oil prices in the future?

Mr. LASHOF. No, I don’t believe it would.

Mrs. CAPPS. Maybe you could include ANWR in the same.

Mr. LASHOF. The chart I had specifically related to the Arctic National Wildlife Refuge, but it is much the same story with regard

to protected areas off the coast.

In fact, if you look at the areas that are already available for oil

and gas development, they contain 80 percent of the estimated resources. So the areas that are protected are a small fraction of the

total resource base offshore, and, you know, overall, as you mentioned, the United States only has 3 percent of the world’s reserves.

Two-thirds of the world’s reserves are in the Middle East. So any

supply side strategy that we might adopt that involves petroleum

simply can’t change the balance in a significant way. And the EIA

analysis estimating the effects of the energy bill, for example, even

including the Arctic Refuge, which wasn’t in the final bill, suggested that its maximum impact would be less than 1.5 cents in

2025. This is a trivial number compared with the kind of price

movements we have seen.

Another point, as we have heard, the price movements that we

have seen in the short term are mostly related to the price coming

from the refineries rather than crude oil. So any drilling for crude

oil has no impact on that. The price impacts we are seeing are at

the refinery gate rather than due to increases in crude prices.

As Mr. Cooper said, and as I said in my testimony, improvement

in efficiency, both the short-term conservation effort and the longterm commitment to real efficiency improvement and diversifying

supply away from petroleum itself, can have a big impact, and it

affects both the crude supply and the refinery supply, whereas a

drilling response will not do that.

Mrs. CAPPS. And diversifying our energy portfolio is something

we could be emphasizing more in our energy policy?

Maybe I will use my last minute to ask Dr. Cooper, last month

the administration proposed a restructuring of light truck fuel

economy rules claiming the new policy would save the country 10

billions of gallons of gasoline over the lives of vehicles bought from

2008 to 2011. I know there is not much time, but could you comment on this? Was this move enough? Would you recommend we

231

de lower? And this—I am talking about regulations from the administration or from Congress.

Mr. MARK COOPER. Well, as I mentioned, you might not have

been in the room, the price of gasoline used in that cost-benefit

analysis was $1.80 a gallon in 2012, including taxes. So they have

undervalued gasoline dramatically.

Mrs. CAPPS. What should we do instead?

Mr. MARK COOPER. Well, the answer is you should adopt a much

higher standard. And we called for that last week at a press conference, and, you know, the off-the-shelf technologies can dramatically improve efficiency. People calculate to double it in new cars,

and then over the course of the life of the cars, we will have a dramatic increase in efficiency.

And if we take a leadership position, the question comes up, the

automobile industry says, it will kill us. That is what they told us

about airbags, which is in the purview of this committee. They

said, airbags is the end of the industry, and all these safety measures. And, of course, they adopted it. They adjusted to it.

So from our point of view, the most important thing we can do

for our automobile industry is reorient their thinking. Instead of

giving people discounts to keep them hooked on fuel-inefficient

automobiles—I mean, they have lowered the private cost of the

automobile sufficiently to make it economic for individuals to buy

it on a private basis. There is no doubt about that. I think that is

clear.

But as a society, this is suicidal, because those vehicles will be

in this fleet guzzling gasoline for a decade. So there is a big gap.

And Mr. Garman really all day he does not understand the gap between the private costs of gasoline and the social costs of gasoline.

The price at the pump does not reflect the economic slowdown,

the trade deficit, the currency instability, the political vulnerability, all of the environmental harm. There is a social cost to gasoline. These guys couldn’t even get the economic cost right.

We have to start viewing gasoline as a critical public problem.

The example I use, the analogy I use, is cigarettes. And maybe

there are some people from tobacco-growing States. Forty years ago

this room would have been filled with people who were smoking.

Half the people in this room would have been smoking. They all

kind of knew it was bad for them, and they couldn’t kick the habit.

We as a society, through a combination of education and regulation, changed that behavior.

Gasoline is a bigger threat to our national health and welfare,

and we need that same sort of commitment to education and regulation to change behaviors. And that is where I think we have to

go as a society. It can make a big difference for our industry and

our Nation.

Mr. HALL. A little relief now.

Mr. CAVANEY. Mr. Chairman, I would like to just take exception

to that comment about comparing some of the dangerous health effects that come from smoking with our products. Most of the various pharmaceutical company inputs come from hydrocarbons that

we produce and make the various drugs that save people’s lives in

an immense amount. So to equate one with the other is really not

a fair comparison in that same sense.

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Our products save lives. The plastics that come from our products that are found throughout hospitals, the drugs that we use are

incredibly valuable, and so it is just not a fair comparison to equate

us with some of the problems that were associated with the other

industry.

Mr. HALL. Gentlelady has the right to close. I will give you a

minute to close, Mrs. Capps. Is that enough?

Mrs. CAPPS. Less than that. And I want to wear another hat now

as someone who has worked in health care all my life and to say

I think the industry that you represent has enormous products that

benefit our health very much, and the use that Mr. Cooper—I know

I am putting words in his mouth when I say this, but you gave the

time to me, Mr. Hall—the uses that he is talking about are very

different uses of gasoline and oil.

I think actually you could make the case if we saved the product—because it is fossil fuel, it is limited—over a lifetime if we

saved it for its more beneficial therapeutic uses and life-enhancing

uses and did that by—you know, we are not going to stop using

gasoline in our cars anytime soon, but over the long haul, I have

heard advertisements from the oil industry on television talking

about diversification as part of their portfolio, and that is what we

are talking about here.

Mr. HALL. All right. I thank you. Does gentlelady yield back the

balance of her time?

Mrs. CAPPS. I do yield back, finally.

Mr. HALL. I recognize the gentleman from Oregon.

Mr. WALDEN. Thank you very much, Mr. Chairman. I have got

a number of questions I would like to work through here, so I appreciate your indulgence today and your testimony. It has been

most helpful.

Mr. Slaughter, you made a comment about the spot price and

how prices get adjusted because the spot price goes up. What percent, though, of the market is traded in the spot market? You

know, we saw with energy pricing a spot market that went to

$1,900 a kilowatt hour at one point.

Mr. SLAUGHTER. I can’t give you a number on that. Mr. Walden.

It is essentially a wholesale price at the rack. It generally is a

higher price because it is something that someone basically is going

out in the marketplace and buying, who doesn’t have a contractual

relationship.

Mr. WALDEN. Is there anyone on the panel that can tell me how

much is contracted out and how much is bought on the spot market? Don’t you maintain portfolios of different——

Mr. NEWSOME. If you look at, Congressman, the way the market

is set up, you have the futures, which is a slice, and then you have

got cash, which is the bulk of the marketplace.

In futures, it varies by contract. And natural gas, most of our

trading is in the back months; less of it is in the spot. Gasoline and

crude oil, it tends to be a little more even between spot and back

months, but it depends very much on which markets you are talking about and whether it is futures or cash.

Mr. WALDEN. So in gasoline, am I correct, then, hearing what

you have said, about half of it would be in the spot market? Is that

a daily or hourly——

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Mr. NEWSOME. No. It is not going to be half of it. But again, it

depends if you are just talking spot market or cash market.

Mr. WALDEN. One of the things we heard was that the price went

up at the rack—I don’t know all your terminology—based on the

spot market going up, and you were somewhat under the spot market. And I guess my question is if you have already got a reserve

of gas or crude oil or whatever part of the business you are in already purchased and handled, then what percent, how big an impact does the spot market really have on your actual cost?

Mr. CAVANEY. In our testimony that we submitted in a written

form, there is a little explanation. As the oil companies utilize different arrangements with their distribution chains—there are company-owned stores, and there are stores that are leased, and there

are three different ways you can work under those, and then there

is the independent. Under each of those scenarios, there can be arrangements to either go under a contract, which was mentioned

here, or if someone has a financial difficulty or somebody has a new

rip-roaring contract, you might say, let’s work on the spot market.

Let’s go for a while and see if we can develop a credible history.

It is changing all the time. There isn’t one place you can go to get

a data point that would tell you that.

Mr. WALDEN. I am trying to get a handle on this. I sat through

here as my colleague from Washington—we heard virtually the

same sort of panels telling us why the energy market and electricity was all fine, and there was no problem out there. And then

we hear the tapes of the traders. And I will tell you what, I am

not from Missouri, but a lot of companies lost a lot of credibility

with this Republican business member because I had to sit here

and listen to the testimony, and I believed it. And then I found out

the truth. And I will tell you as vice chairman of the Oversight Investigation Subcommittee, if we find that traders have been manipulating the market, we are going to go after them, because we

found that to be the case long after the fact, and it cost ratepayers

in my State an enormous sum of money.

And I have already asked the Government Accountability Office

to look into the trading issues. I am sure you know, Mr. Newsome,

to make sure that isn’t happening because consumers deserve that

right to know if these markets are being operated in an honest,

above-board, direct way. And I am not casting aspersions, but, you

know, it is like Mr. Cooper said, you know, first time or second

time, you learn from it. Third time, I am not taking any prisoners.

Mr. NEWSOME. But only thing I would say when you talk about

traders, again, there are traders on future markets, traders on

over-the-counter market. I was chairman of the CFTC during the

whole Enron situation, brought multiple charges against energy

companies. Attempted manipulation did not take place in the regulated futures market. It was an attempt through the false reporting

of prices to move those prices and then take advantage through the

positions they had in the over-the-counter——

Mr. WALDEN. They did the round-tripping.

Mr. NEWSOME. Round-tripping, the false reporting of prices to

the indexes. But just to say traders are manipulating, I want to

clarify that it wasn’t traders on the regulated exchanges.

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Mr. WALDEN. All right. But then I read this quote, as you probably heard me read earlier today, on the Dow Jones news wire

from Mr. Addison Armstrong, manager of the exchange trade markets, TFS Energy Futures, LLC, in Stamford, Connecticut, and I

quote the wire here: There are oil commodities traders who made

so much money this week following Hurricane Katrina, they will

not have to punch a ticket for the rest of the year.

What does that mean?

Mr. NEWSOME. Traders on the floor can make money from two

different methods; one through brokerage fees, they are trading the

accounts of customers. Obviously we had record volume last week,

so brokerage fees were the highest they have ever been.

The second component would be the position that the traders had

coming into the trading week. Typically on a Friday, traders try to

get flat their positions so they don’t have to take that risk over the

weekend. But all traders cannot get flat. Some are long. Some are

short coming into Monday. Obviously conditions changed drastically from the end of the trading day Friday.

Mr. WALDEN. But they knew the hurricane was coming.

Mr. NEWSOME. Well, they knew it was coming, but they didn’t

know the path it was going to take, they didn’t know how hard it

would hit the oil refinery section, and certainly had no idea it was

going to be as strong as it ended up being. So depending on what

your positions were on Monday, some were big winners, but some

were big losers.

It is a net zero sum game. So for every guy that made it, there

was an equal and offsetting person who lost it.

Mr. WALDEN. So as the regulator—you do, NYMX, right?

Mr. NEWSOME. Yes.

Mr. WALDEN. And do you regulate that? What is your role?

Mr. NEWSOME. I am the president of NYMX.

Mr. WALDEN. Who is your regulator?

Mr. NEWSOME. The CFTC.

Mr. WALDEN. I will follow up with them.

Mr. NEWSOME. They have been on the floor every morning with

physical surveillance. They look at our large trader reports every

day. They also have analytical programs that look at how traders

trade, how they handle their customers’ accounts, whether they are

trading their own accounts, et cetera, et cetera.

Mr. WALDEN. I want to go to just a couple other quick points

here. One is we have talked about a lot of—about the lack of supply because of the shutdown of the refineries and the pipelines and

everything else. I haven’t heard anything today about a drop in demand in that region.

I am curious about that, because if we had half a million or a

million people displaced that aren’t driving, that aren’t moving—

did anybody see a demand reduction?

Mr. CAVANEY. Yes. There is demand reduction. We can’t really

quantify because we collect data, and weekly data, and put it out.

Tomorrow morning we will be putting out a report, and we will be

glad to send you something on that.

But we have already seen in the previous month before the hurricane was coming up that higher prices were having an impact,

and, typically, demand had flattened out year-over-year basis. So

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trading nationally was already down, and when you see something

like this, you can fully expect that it is going to be down pretty significantly.

Mr. WALDEN. One final question for Mr. B. Cooper—it says B.

Cooper and M. Cooper. This is a question I get a lot. I was out 851

miles around part of my district. My district is bigger than any

State this side of the Mississippi. A question I would ask is the gas

station set this price in the afternoon, and that price—I can find

2.79 gas today—when you talk about forward pricing and how

when they call and tell you at noon it is going to go up 13 cents

or whatever, and you immediately then raise prices, right? No.

Mr. BENJAMIN COOPER. You got the wrong guy.

Mr. WALDEN. I am sorry. Mr. Douglass, I am sorry, because you

just do the pipelines, and you are not party to any side of this because you didn’t do anything.

Mr. Douglass, I apologize. The question that comes in is, okay,

you move your prices up immediately. Do they go down immediately when they call and say tomorrow it is going to be 13 cents

less? Does it take the same time to go down as it is to go up?

Mr. DOUGLASS. Actually it is driven by several factors. First obviously is the cost. When the cost went up 13 cents, we attempted

to erase 10 cents; you know, the next day we attempted to go up

10 cents. The market then determines whether you get to keep that

10 cents or whether you have to roll it back to zero. You may have

no margin.

Mr. WALDEN. Market being competitors and the community?

Mr. DOUGLASS. Correct.

Mr. WALDEN. So when the supplier comes to you and says, I am

going up 13 cents, you automatically go up. But it is the community that decides how soon you go down?

Mr. DOUGLASS. Absolutely. They will discipline you in a hurry.

If you are overpriced, your business will drop in half.

Mr. WALDEN. All right. Mr. Chairman, thanks for your indulgence. Gentlemen, thank you for your testimony.

Mr. HALL. We recognize Mr. Inslee, the gentleman from Washington, for 5 minutes.

Mr. INSLEE. Thank you.

I am assuming, in talking to the gentlemen from the petroleum

industry, that anything that reduces demand or reduces the rate

of increase of demand has the capacity to reduce the price. We

have been talking to you about supply, but it is a supply and demand they taught me in economics at UW.

I want to ask you about what the Federal Government has done

or not done to reduce demand, which could have the capacity of reducing the price you charge; and I want to refer you to a chart over

here to your left. This chart shows what has happened with average fuel economy since 1975 to 2005. You will see the middle line

there—the top line are cars, the bottom line are trucks. The middle

line is the average of both.

You will see that the average in 1975 was about 14 miles per gallon. The Congress moved at that time to increase the CAFE, the

Corporate Average Fuel Economy standards, to significantly increase it. As a result of that action by the U.S. Congress, that went

up in about 1986 to about 23 miles a gallon, a very, very significant

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increase; and that had the result of reducing demand or reducing

the rate of increase in demand, which had a capacity to reduce the

price.

Since then, Congress fell off the wagon of fuel efficiency in about

1985; and, in fact, the fuel efficiency of our cars and trucks have

gone done on average since 1985, have actually been reduced in

2005 now to about 21 or 22.

So while we have created the Internet, we have mapped the

human genome, because the U.S. Congress has been asleep at the

switch, we have gone down on our efficiency of cars. As a result,

the demand has skyrocketed and one of the reasons our price has

skyrocketed.

If the U.S. Congress wants to be serious about reducing the price

of fuel, would you not suggest to us to get back on the wagon of

increasing the efficiency of the cars and trucks we drive by increasing the CAFE standards? I ask Mr. Cavaney and Mr. Slaughter

that question.

Mr. CAVANEY. I think your initial point is exactly correct, and

that is where I differ from my colleague from the NRDC, is extra

supply, whether it comes from drilling or from conservation, is beneficial to the consumer. It is going to help. And if you believe it in

one area, then you have to believe in another.

Now the answer to your question is we feel very strongly that not

only individuals but industries and companies ought to practice

conservation and energy efficiency, and our record as an industry

is very strong in that regard. We do not know—it is not our business—how to make cars and how to make trucks. But the idea that

everybody ought to become more efficient, as efficient as they can,

consistent with safety and the like, is something that we can support.

So I can speak to it on only the most general of terms. But you

are absolutely right on in terms of reduced conservation helps people.

Mr. SLAUGHTER. I would concur in that, Mr. Inslee. We are definitely in favor of anything that creates additional supply. The Association has always advocated trying to maximize supply of fuels.

We have always advocated that we do need additional refineries in

the United States; and conservation will definitely help that, too.

Mr. INSLEE. Now let me move to the supply side as far as price

for a minute. We went through the Enron and other energy debacle. We saw an administration that was callously indifferent, did

nothing while Enron and other companies took over a billion dollars out of the Pacific Northwest in their rapacious behavior. So we

are a little sensitive to supply pricing issues up in the Northwest

and on the West Coast.

We have heard discussions today that the Federal Government

really is very impotent in dealing with gouging issues in the absence of collaborative behavior by various suppliers, that if there

is gouging done unilaterally or by one, we really do not have a tool

in our tool box federally to enforce this, and there is 23 states that

have anti-gouging laws specifically in emergency context, but only

23 States.

Some of us think that we need a Federal tool to deal with

gouging, and we have proposed—today, I have introduced a bill

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with a bunch of Members that would essentially give the Federal

Government an anti-gouging tool which—and it is just very summary fashion—would amend the Clayton Act to bar charging prices

that are unconscionable in comparison to recent prices.

It would take into account the upstream components that you all

have to pay for the people ahead of you in the stream. It would

apply to necessary goods, which include gasoline, and would apply

during times of natural or man-made disasters, pretty tightly

woven bill, fairly consistent with some of the State approaches.

Now assuming that you all want to demonstrate the effort to

show good corporate citizenship, which I believe—I hope that you

do, is this something that you think Congress ought to at least consider, to have some type of anti-gouging regulation to give us the

authority to deal with this type of issue?

Mr. CAVANEY. Well, first of all, we feel very strongly and condemn any kind of gouging. I think just the discussion of it and the

fact that people are aware of it is going to have a quiescent effect

on it. Besides the 23 States that actually have regulations that the

Governor can enact, also any time a Governor typically declares a

state of emergency he can also include gouging in there and do it.

So the States do have some authority if they choose to exercise it.

One of the challenges, I think, in approaching this from a Federal level is going to be, like what we heard earlier today, is really

what is the definition of gouging? If it is a one-person behavior?

Does it mean, if you sell above a suggested retail price, is that

gouging one industry, or do you sell within a range? And who determines it?

One of the things you need to sort of, I think, keep in mind as

you look at these things is the people who are closest to where the

occurrence may have happened are probably in the best position to

really get all of the facts and decide what is there. So that would

say at least there ought to be, in any discussion, some consideration of making sure that you work closely with the States and

look at them as you go forward.

I cannot speak to whether Federal law is good or bad, but I think

the discussion certainly can inform people.

Mr. HALL. The gentlewoman from North Carolina, Mrs. Myrick.

Mrs. MYRICK. Mr. Smith, you made comment that it was going to cost between $400 and $600 million for getting service back up

again. But that is a cost that BellSouth absorbs as part of what

you do.

Mr. Slaughter, with the refineries—it is the same thing with the

refineries. You absorb the cost of whatever it costs you to rebuild,

et cetera? Am I correct? Because we have been talking a lot today

of what is the Federal responsibility and all, but I am in my own

mind clarifying that is your cost of doing business, correct?

Mr. SLAUGHTER. To rebuild the facilities that have been damaged?

Mrs. MYRICK. Yes.

Mr. SLAUGHTER. That is what usually happens. Yes.

Mrs. MYRICK. We appreciate that. Thank you.

And thank you all again for your patience in staying this long

and giving us a day of your time. We did not mean it to end up

this way. But I do have just two things.

238

Mr. Newsome, this is not at all—I wanted to ask you, because

this is not at all adversarial, so please help me. Explain two things.

First one was about the hedging and short-selling that goes on and

has gone on over the last, say, 4-year period. Does that have anything to do with exacerbating the price of oil by the barrel?

Mr. NEWSOME. No. Hedging is used by the market participants

who actually own the product that are trying to set a price or a

floor on what they think that product may be worth in the future.

Mrs. MYRICK. So that is produce moving? They would then be

moving product?

Mr. NEWSOME. Well, our contracts are deliverable. Most do not

go to delivery. They trade out of the contract at a moment that is

advantageous. But we maintain delivery of the contract, so it gives

the commercial participants an advantage over a speculator or

somebody who does not own the physical product that they could

be forced to make or take delivery. So unless you have the ability

to make or take delivery, you are not going to go to expiration with

a contract.

Mrs. MYRICK. Then you said that there are a couple of ways that

traders get paid. One is a brokerage fee. Do they make more money

based on sales volume?

Mr. NEWSOME. Yes. Absolutely.

Mrs. MYRICK. So if the market is volatile, then they personally

benefit from that?

Mr. NEWSOME. Well, it depends. You know, for every winner

there is going to be a loser. So, you know, some will benefit; and

there will be an equal and offsetting loser. Because, at the end of

the day, it is a zero sum game. But the speculators, which I know

you mentioned earlier in your opening——

Mrs. MYRICK. That is my concern.

Mr. NEWSOME. It is an inaccurate theory that speculators can

move the market. Because if a speculator—if you look at them,

they try to operate off price trends and to profit off of trends in the

market, whether that price is up or whether it is down. But if they

try to move out of a fundamental range, you have got hundreds of

commercial participants who are in that competitive environment

with them that pull them right back into the range or the speculator faces a severe financial penalty.

Then, at the end of the day, the speculators do not own the physical product, so they cannot move the price. They won’t go to the

delivery of a product, and they create virtually no impact on the

settlement price, which is the price used by commercial market

participants.

Mrs. MYRICK. You feel that there is sufficient oversight on this

trading?

Mr. NEWSOME. Yes. The Exchange itself, through its self-regulatory function, serves the front line of enforcing the rules. Our

compliance staff is the second largest behind our technology staff

at the Exchange. We have many, many tools, and we utilize all of

those tools to oversee the market.

The CFTC serves as our oversight regulator. They have physical

bodies on the floor watching the trading. They do a rule enforcement review of us every year to see what kind of actions we have

brought, what the penalties were, to make sure they are in line

239

with the crime, whether that is a fine or suspension of trading. And

they make sure that we are enforcing all of our rules.

So we use a multitude of compliance and enforcement activity to

monitor our markets. The integrity of the marketplace is critical to

the reputation of the Exchange.

Mrs. MYRICK. Sometime I would like to talk to you further about

that.

Mr. NEWSOME. I would love to.

Mrs. MYRICK. I yield back my time, Mr. Chairman.

Mr. HALL. All right. Thank you.

The Chair recognizes the gentleman from Texas, Dr. Burgess.

Mr. BURGESS. I thank the chairman.

Mr. HALL. You are going to close for us. Do a good job.

Mr. BURGESS. All right.

Well, Mr. Chairman, we have quoted to us from the other side

several times today what has been characterized as an internal

Chevron document. Have you seen this?

Mr. HALL. Not tonight.

Mr. BURGESS. Well, it is stamped ‘‘Chevron pricing exhibit 156.’’

the date underneath there, as best as I can make out with my bifocals, is sometime in 1996.

Up at the top it says: Note. This product is gathered from industry publications. And the rest of the line is unreadable. But the

paragraph that has been oft quoted today—and I wanted to give

Mr. Cavaney and Mr. Slaughter an opportunity to respond to the

second paragraph, if they would like to, talking about Unocal:

Unocal is exploring the sale of three refineries in California due to

high capital expenditures required to comply with stringent environmental regularities.

I would just submit that for counterbalance to what you were

struck with earlier today.

Mr. SLAUGHTER. Yes. Dr. Burgess, that is fairly typical. Because

the investments required to comply with the Clean Air Act particularly—Unocal was operating in California, which has the strictest

environmental standards that require huge amounts of investment.

The gasoline sulfur, diesel sulfur regulation the industry is complying with now each costs $8 billion across the industry; and over

the last several years, several refining organizations or individual

refineries were sold or shut down, in rare instances. Many of them

were sold because their owners felt that they could not economically invest that much money in that particular facility.

And you have to remember that before 2004 and 2005 return on

investment in our industry was only 5 percent. That is very low,

well below the median for all industries; and so it is understandable that companies would respond that way.

Mr. BURGESS. Mr. Cavaney, do you have any further that you

want to add?

Mr. CAVANEY. No, that is fine.

Mr. BURGESS. One of the questions that I posed to our friend

from the Department of Energy earlier today, as I was driving

around in my district last Wednesday, when it really became apparent the extent of the trouble that was going on in Louisiana, did

the Department of Energy have a contingency plan that they could

pull off the shelf to deal with this type of emergency? And the anVerDate 11-MAY-2000 09:17 Nov 08, 2005 Jkt 000000 PO 00000 Frm 00243 Fmt 6633 Sfmt 6602 24246.TXT HCOM1 PsN: HCOM1
240

swer that I got was, basically, the Strategic Petroleum Reserve, but

there wasn’t much of any kind of lever that the Government could

pull.

Does industry have a contingency plan, given the concentration

of the refining and drilling capacity that we saw on the map? Does

industry have a contingency plan? Because it is not new information that hurricanes strike the gulf coast.

Mr. CAVANEY. We do have elaborate contingency and security

plans. And when you go into these kind of circumstances, as you

point out, this is something that we have to deal with regularly,

not to the level of seriousness that this was, and that is what differentiates it, I think, from previous experiences.

Every single one of our companies at every single location has an

action plan that goes into effect. They are drilled on it. They know

what it is. We had abandoned all of those rigs out in the gulf. We

had abandoned and shut down properly all the refineries along the

coast well before the hurricane was on top of us.

Part of these procedures are safety for the personnel. They are

to put the safes or the shut-downs on the various connect points,

which is why we did not have any spills, because they worked.

When you think of those refineries, the fact that there are only

three of them now that have power and are not in the process of

soon to be brought on board speaks well for the systems and the

safety that is done there.

One of the concerns we had—and we have worked with the Department of Homeland Security who has looked at our various

plans and the like—is the physical security of these spaces in that

environment, which was something we had not too often had to

deal with. So those plans were not as far along as they would otherwise be but will be.

So our industry, the ones that operate worldwide, these are the

kinds of environments, the kinds of conditions that we face all of

the time and have throughout the many, many decades that we

have been operating there. So it is not a totally new experience,

which is why I think you have been able to see the return as fast

as you have seen it, because there had been plans in place.

I do want to say one thing about the Department of Energy and

about the administration and about the Governors, even up here in

some of the committees of jurisdiction. When this started to happen, everybody called us. We called them, and we have checklists

about various things that could be done besides the SPR, the idea

of waivers for Clean Air Act to allow us to have different fuels, the

idea of letting the drivers stay in the trucks a bit longer than the

Department of Transportation regs allow. So we all go down those,

and to everyone’s credit, nobody was in opposition to these things,

and I think there was a lot of positive reinforcement which helped

them go very fast.

So, in the aggregate, that was a pretty good plan, the way it

worked out, because everybody knew things need to be addressed.

So I think the response of the Government, while in some areas

may not have been that good, certainly in terms of the oil and gas

industry, I think it was quite responsive.

Mr. HALL. I am not going to cut you off. You go ahead.

241

Mr. BURGESS. Mr. Inslee took his chart about the CAFE standards. Let me stay with you, Mr. Cavaney, if I could, on the CAFE

standards.

I have only been here a term and a half, and I am just a simple

country doctor. But, as I recall, back in 1980 and 1981, the days

that we had gas lines, of course, then the price of gas rose to over

$1 a gallon, and the industry picked up its production, and more

gas became available. But what drove the mileage, increased mileage in cars, my observation, back then was not the U.S. Congress,

but the simple country doctor back in Texas who was trying to save

a little cash.

Now I will just tell you, because I live in a district that has severe problems with air quality, that I tried to do the responsible

thing a year and a half ago and ordered a car that was a hybrid

car, gets 50 miles to the gallon. So now I look positively brilliant.

It is a good feeling to drive along the road with a feeling of moral

superiority to everyone else, and I do enjoy doing that.

But I guess what I am saying is, I will trust the American consumer, I would trust American ingenuity before I would trust the

U.S. Congress with increasing CAFE standards. Do you have a feel

about that?

Mr. CAVANEY. I am inclined to agree with you to that extent. I

mean—but what we do need is we can use leadership on stressing

the importance of energy efficiency and conservation. Because I do

think, all of us, we find it in our own facilities constantly if you

go in and relook at things with new technology. Because it changes

and thinks a different way, and if you can create some lighter

weight and gain some, so much better.

But the idea of command and control in terms of how you design

cars, that is not our business. I can tell you that we have worldwide companies that operate, and we were talking earlier about

greenhouse gas emissions reduction and the various records.

We here in the United States, our company is using voluntary

systems that they are doing, because they own the same kind of

refineries and other places, actually can give you better marks of

reduction here by allowing the resourcefulness to tackle the system

than they can and this is how you do it precisely.

So my comments before were because of the concept, and I think

we ought to do more. But the idea that you draw the actual blueprints for people to do that I think is probably overreaching, and

the industry ought to be the ones that make those decisions.

I worked in a gas station during that period of time. It was consumers coming in, and they were the ones that stated the preference for cars. They were not going to pay those terrible prices.

Mr. BURGESS. And, of course, you can go on the Internet today

onto Google and type in Prius plus under the search engine; and

eggheads across the country have figured out ways of squeezing

100 miles to the gallon. I do not have enough confidence in my own

engineering ability to do that.

Mr. Chairman, I am going to wrap up. I just wanted to say to

Mr. Angelle, I did not ask you a question. I did read your testimony. I apologize I wasn’t here when you spoke. Many of your constituents are in my district and Tarrant and Denton and Cooke

Counties, and I have heard their stories this past week. And it a

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cliche to say it, but I truly do feel your pain. I feel their pain. We

have new mothers separated form new babies, and a real big question mark as to how we are going ever going to put all of these

pieces back together again. You have got a tremendous job ahead

of you in Louisiana.

But, as your neighbor in Texas, we have been proud to help, and

certainly wish you all of the best as you go through those next several weeks and months. I know it is going to be a challenge to you.

Mr. Chairman, with that I will yield back.

Mr. HALL. I thank you. And you missed a good bit of testimony

from—Mr. Angelle’s testimony. But we have a record, and you will

have copies of it.

Thank every one of you. You have been great. The chairman

chose well in getting both of these groups. Thank you for leaving

your homes. One of you missed your anniversary tonight. You are

in trouble tomorrow.

But God bless all of you, and thank you very much for what you

have done for this country.

[Whereupon, at 7:50 p.m., the committee was adjourned.]

[Additional material submitted for the record follows:]

NEW YORK MERCANTILE EXCHANGE

October 6, 2005

The Honorable JOE BARTON

Chairman

Committee on Energy and Commerce

U.S. House of Representatives

2125 Rayburn House Office Building

Washington, D.C. 20515-6115

DEAR MR. CHAIRMAN: Thank you again for the opportunity to testify before the

Committee on Energy and Commerce hearing entitled ‘‘Recovering from Katrina’’ on

September 7, 2005. I am pleased to submit the following responses to questions from

Members of the Committee for inclusion in the hearing record.

Please contact me if you should have any additional questions regarding these responses, or any other matter.

Sincerely,

JAMES E. NEWSOME

President

RESPONSES TO FOLLOW-UP QUESTIONS FOR THE RECORD SUBMITTED BY THE

HONORABLE PAUL E. GILLMOR

Question: What oversight body currently patrols your industry for pricing abuses

that directly affect the amount that gas stations pay for their products?

Response: Gasoline futures market prices do not automatically or directly reflect

the amount that gas stations pay for their product. As we understand it, gas stations receive fairly frequent deliveries of their product and so the prices they pay

to their suppliers are closely tied to the near term market for delivery of the product

in their geographic area.

By contrast, NYMEX lists a series of separate calendar months in its New York

Harbor Unleaded Gasoline futures contract. Each of these calendar months is separately traded. For market participants that stay in the market through the termination of trading in a particular listed calendar month, this gasoline contract provides physical delivery of tankers of gasoline during a specified delivery period of

several days during the specified month between two commercial market participants in the harbor area adjacent to New York City. NYMEX does not list any gasoline contracts for next-day or day-ahead delivery of the physical ‘‘cash’’ commodity.

On the other hand, it is our understanding that there are frequent transactions in

the off-exchange ‘‘over-the-counter’’ (OTC) market for day-ahead or other near term

delivery of the cash commodity in various geographic regions.

Any regulatory body that polices abuses affecting the price of gas at the pump,

such as price gouging, has no connection to futures and would exist outside of the

framework of futures regulation. NYMEX is under the full and direct regulatory auVerDate 11-MAY-2000 09:17 Nov 08, 2005 Jkt 000000 PO 00000 Frm 00246 Fmt 6633 Sfmt 6621 24246.TXT HCOM1 PsN: HCOM1
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thority of the Commodity Futures Trading Commission, which has exclusive jurisdiction over futures trading and has broad anti-fraud and anti-manipulation authority over its regulated markets. In addition, manipulation of cash market prices that

impact prices on a futures market would be subject to the CFTC’s anti-manipulation

authority.

Question: The public debate is focused on the revenues of petroleum producers

and retail gasoline outlets, however, little attention has been paid to the increasing

income of oil commodities traders. What activities do you think can be meaningfully

done to restrain the consistent and upward movement of gasoline futures?

Response: This question seems to be based on two premises: (1) that income for

oil commodity traders is uniformly increasing; and (2) that this rise in income is

somehow responsible for ‘‘consistent and upward movement’’ of gasoline futures

prices. Both premises need to be re-examined carefully.

In discussing futures trading, it is important to understand how futures trading

works and to understand the nature of futures markets. Futures markets allow

market participants either to buy a contract that requires one to receive future delivery of the product (also referred to as a ‘‘long’’ contract) or to sell a contract that

requires the company to make physical delivery of the product (also referred to as

a ‘‘short’’ contract). The vast majority of open positions are not held through to delivery of the product. Instead, market participants close out or liquidate their open positions by buying a contract on the other side of the market that offsets their existing position (e.g., a long market participant buying a short contract to zero out its

existing market exposure). For such participants who close out their positions,

whether they make or lose money on the two transactions, i.e., the initial transaction and the close-out transaction, depends on the difference between the prices

of their long and short contracts, which depend on where the market was at the

time of those transactions.

The critical point to note is that a futures market is a zero sum type of market.

In other words, for every winner there is also a loser. We believe that this basic

reality needs to be kept in mind before placing too much faith in a wholly speculative statement made by someone sitting in an office 75 or 100 miles away from our

trading floor. Clearly, there was a significant shift in energy prices, including gasoline prices, in the wake of Hurricane Rita. The impact of this shift in prices on the

broad category of oil traders was related to a considerable extent to which side of

the market they were on when the market moved. Some traders made money. On

the other hand, as gasoline futures trading is a zero sum market, other traders necessarily lost substantial sums of money during the same period.

Turning specifically to NYMEX floor members, many floor members focus upon

trading for their own personal or proprietary trading accounts. In general, these

floor traders prefer to limit sharply their market risk exposure to overnight changes

in market prices. Simply put, these traders prefer to go home at night being ‘‘flat’’

in the market and having neither a long or a short position. To the extent that such

traders are successful in their trading activity, they do so by providing short-term

liquidity to the market during the trading day and fluctuations in market price during a given trading session may increase the value of that activity. On the other

hand, these floor traders have no incentive to gain from a consistent, upward movement in price that occurs over an extended period of time because, as noted, they

close out their market positions at the end of each trading session.

Even with respect to other non-floor market participants who do maintain open

positions over a period of time, NYMEX maintains strict position limits on their

market activity and engages in extensive market surveillance to restrict sharply the

ability of any market participant to engage in prohibited manipulative activities.

The CFTC additionally has extensive resources devoted to market surveillance and

enforcement efforts.

As to the broader question of possibly trying to restrict price movement in gasoline futures, a central role of futures markets is to provide a price discovery service

for future prices. In this way, futures markets provide a neutral tool or a gauge as

to these future prices. Futures markets are simply auction markets where buyers

and sellers come together and as a result a market price is determined through

open and competitive execution. This market price is derived through basic demand

and supply fundamentals.

In particular, the gasoline futures price of an expiring contract month is designed

to converge with the cash market price at expiration of that contract month. The

futures market is a derivative of the cash market. Futures prices, which reflect the

underlying cash market, are closely related to cash prices and are driven by the

same economic factors. At expiration of the contract during the spot (delivery)

month, the futures price converges to a single price with the cash price, which provides transparency and an efficient hedging tool for the market. Any thing that artiVerDate 11-MAY-2000 09:17 Nov 08, 2005 Jkt 000000 PO 00000 Frm 00247 Fmt 6633 Sfmt 6621 24246.TXT HCOM1 PsN: HCOM1
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ficially restricts futures prices will have no effect on the cash market. Instead, such

artificial restraints would remove liquidity and price transparency from the futures

market (and shift it to the less-regulated and less transparent OTC market), and

the futures market consequently would no longer be a reliable hedging tool.

In our view, the real key to truly meaningful attempts to address gasoline prices

is to focus upon fundamental supply and demand issues. A comprehensive energy

policy that focuses on rebuilding the US refining infrastructure is critically needed

to address the supply issues, which are causing gasoline prices to be high. No refineries have been built in the US in 20 years and small ones keep going off-line. Congress should review this trend and consider whether any federal policies, including

increasingly stricter EPA standards, play any role in the shrinking supply of refineries.

Question: Do you think that the anti-competitiveness and pricing protections in

the petroleum marketing practices act should be extended to transactions involving

oil commodities traders?

Response: We understand this question as directed to NYMEX to be referring to

oil commodity traders in our futures markets. In response, we do not believe that

it should be extended because the goals of that act do not apply to trading in our

markets. The stated goals of this act are as follows:

‘‘[t]o provide for the protection of franchised distributors and retailers of

motor fuel and to encourage conservation of automotive gasoline and competition to the marketing of such gasoline by requiring that information regarding

the octane rating of automotive gasoline be disclosed to consumers.’’

Our gasoline futures contract is a standardized contract with established product

specification terms that are consistent for all contracts. Our market participants are

focused on our markets and generally have no awareness or interest or control over

what may eventually happen with respect to disclosure of octane ratings at individual gas stations. This reflects a fairly basic instance of a difference between apples and oranges, and thus the goals and scope of that act are inapplicable to what

happens on our markets.

RESPONSES TO FOLLOW-UP QUESTIONS FOR THE RECORD SUBMITTED BY THE

HONORABLE BART STUPAK

Question 1. Do you believe ‘‘risk premium’’ plays a role in high oil and gas prices

in our country?

Response. It may be useful to clarify NYMEX’s role in connection with market activity. NYMEX provides a neutral market forum for the open and competitive execution of trades in our listed contracts. NYMEX does not itself engage in any trading

activity or establish any market positions. Furthermore, NYMEX does not provide

any services as a market advisor or analyst, and so our comments below are necessarily somewhat general in nature.

Academics have debated this issue for quite some time. The existence of ‘‘risk premium’’ can be neither proved or disproved because it is an abstract concept and cannot be observed directly and may be interpreted differently by different analysts or

scholars. However, the implication is that ‘‘risk premium’’ would cause the expected

futures spot price to be either higher or lower than the cost adjusted futures price.

If a market participant is concerned about future tight supplies or concerned about

the possibility of supply interruptions due to some type of extrinsic shock such as

a political event or terrorist activity at some point along the supply chain and that

participant is risk averse, then it is possible that the participant may be willing to

pay a higher market price, than a participant that is risk neutral. These market

decisions are based strictly on personal judgments and there are individuals in the

market who are risk averse and willing to pay a premium. Alternatively, there may

be those who are risk neutral and are indifferent to risk and may not be willing

to pay a premium.

Although we cannot say a risk premium absolutely exists, NYMEX is a liquid and

transparent market and provides the most efficient and reliable mechanism for price

discovery as to future prices. By providing a centralized auction market for discovery of future prices, our markets allow market participants both to incorporate

current known information as to demand and supply as well as to reflect their various views as to future demand and supply, including the views of the risk-averse

as well as the risk-neutral.

Question 2. I’ve seen several articles that have said that prior to the Iraq war and

prior to Hurricane Katrina, the risk premium on a barrel of oil was in the neighborhood of $5 per barrel. Since the beginning of the war and since Katrina, I have seen

articles stating that the risk premium is now anywhere from $15-$30/barrel. Is this

your understanding?

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Response. Such an assertion (about a current risk premium of that size) is questionable for the reasons discussed below. As background, academics have argued

that producers looking to hedge future production tend to push down futures prices

by the nature of their selling activity. Buyers (speculators) of futures contracts incur

the price risk and theoretically would be willing only to buy the contracts at below

fair expected price due to the risk premium that would be incurred by this price

risk. The result would be what is referred to in futures markets as a

‘‘backwardation’’ in the market where the futures price would decline progressively

out into the future for the distant contact months in relation to the current or front

calendar month of that futures contract. However, a review of recent crude oil prices

at NYMEX reveals that this is not the case at present in the NYMEX market.

Since the passage of time that has now occurred following Hurricane Katrina and

Hurricane Rita, the market has had sufficient time to absorb currently available information regarding the impact of the hurricanes on possible future demand and

supply of the commodity. Prices traded in expectation of the hurricanes have adjusted since then with increasingly better information about the market consequences of those major events in the Gulf Coast region. As noted in our response

to the prior question, the existence of and extent of any risk premium is open to

discussion and is not susceptible to precise measurement. Instead, these topics

would seem to be a matter of fairly broad estimates and conjecture. That stated,

however, from our modest vantage point as a neutral market forum and in light of

the improving quality of market information regarding the actual impact of the hurricanes, an estimate of a $15-30 risk premium at this point in time strikes us as

questionable at best. Such an estimate suggests that the market is substantially

overpriced and inefficient.

Currently, there is little difference between crude oil prices for 2005 and prices

for 2006 and 2007, i.e., futures prices are approximately equal to futures spot (cash)

prices. On October 3, 2005, the November 2005 crude oil futures contract settled at

$64.47/barrel. The December 2006 contract was virtually the same at $65.49/barrel.

The inference to be drawn is that to any extent that risk is being shifted in the

market, it is being equally shifted between buyers and sellers. If this were not the

case, there would be either a backwardation or contango (the opposite of

backwardation where the prices for distant contract months are progressively high- er than the current contract month) in the market. Current price trends indicate

otherwise.

Question 3. Do you believe that the instability in the Middle East and Venezuela

and the War in Iraq have caused the price of crude oil contracts on the NYMEX

to increase?

Response. NYMEX provides a neutral market forum for open and competitive execution of trading in our products. We do not provide market analysis or market advice and our response should be considered in this context accordingly.

That stated, the United States now obtains a substantial amount of the crude oil

needed for our economy from foreign imports, including the areas noted in the question. Specifically, the United States—averaged total net oil (crude and products)—

imports of—an estimated 11.8 million bbl/d—during January-October 2004, representing around 58% of total U.S. oil demand. Crude oil imports from Persian Gulf

sources averaged 2.4 million bbl/d during that period. Overall, the top suppliers of

crude oil to the United States during January-October 2004 were Canada (1.6 million bbl/d), Mexico (1.6 million bbl/d), Saudi Arabia (1.5 million bbl/d), Venezuela

(1.3 million bbl/d), and Nigeria (1.1 million bbl/d).

What seems clear is that the price of crude oil and other energy products has

risen due to both supply and demand factors. Instability in the Middle East, Nigeria, and Venezuela, along with rapid demand growth in emerging market countries

such as China and India seemingly have both contributed to the higher price levels.

More temporary setbacks from recent hurricanes also appear to have further exacerbated the trend.

Question 4. If investors are concerned about possible terrorist attacks and the risk

premium per barrel goes up an additionally $15-$30 per barrel, who reaps these

benefits?

Response. As noted previously, we cannot state definitively that there is a risk

premium and we do not have any conclusive views as to the size of any such premium. Indeed, stating that a risk premium is between $15-$30/barrel essentially

translates to saying that oil is overpriced by that amount. Anyone who believes this

is true would attempt to take advantage of the arbitrage opportunity available. A

market participant would be able to sell oil now and cover his position later in the

spot market for delivery. By the time of delivery, if the market participant’s belief

that crude was overvalued was correct, the price would be $15-$30 cheaper. For anyone who believes this scenario it would be an unprecedented opportunity to profit,

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however, the selling would in effect make the price go down more and more removing the premium.

In response to the premise of the question, though, in general and to the extent

that oil prices rise, producers gain at the expense of consumers. Since much of the

production occurs outside of the US, the benefits of higher prices generally would

accrue to countries and companies that produce oil for export.

Question 5. To what extent do you believe that the futures prices for both crude

and refined products supported or even advanced the sharp increases in crude and

product prices?

Response. This question suggests a possible connection between the prices for

crude oil and gasoline futures contracts for future periods of time and the prices for

current delivery of these products in the cash market. Futures market prices do not

automatically or directly reflect the amounts that are paid in the cash market for

near term deliveries. Taking gasoline as an example, as we understand it, gas stations receive fairly frequent deliveries of their product and the prices they pay to

their suppliers are closely tied to the near term market for delivery of the product

in their geographic area.

By contrast, NYMEX lists a series of separate calendar months in its New York

Harbor Unleaded Gasoline futures contract. Each of these calendar months is separately traded. For market participants that stay in the market through the termination of trading in a particular listed calendar month, this gasoline contract provides physical delivery of tankers of gasoline during a specified delivery period of

several days during the specified month between two commercial market participants in the harbor area adjacent to New York City. NYMEX does not list any gasoline contracts for next-day or day-ahead delivery of the physical ‘‘cash’’ commodity.

On the other hand, it is our understanding that there are frequent transactions in

the off-exchange ‘‘over-the-counter’’ (OTC) market for day-ahead or other near term

delivery of the cash commodity in various geographic regions.

However, while futures market prices do not automatically translate into the price

for next-day delivery in the cash market, futures markets do provide one stream of

information that may be considered by market participants in the cash market. Indeed, the availability of NYMEX’s reliable and neutral market prices for future periods of time may actually reduce the possibility of price shocks in the cash markets.

In other words, the futures market can play an enormously constructive role in

keeping prices in the cash market from unnecessary spikes. From time to time, cash

markets may over react in the short term to breaking news about demand and supply based on the predicted severity of an event. As information becomes more and

more available, as was the case after Katrina and Rita, the extent of damage was

better understood and market prices came down very quickly. The futures market’s

role as a price discovery vehicle for future prices arguably prevented the prices in

the cash market from going up as much as they may have in the absence of

NYMEX’s stable and neutral market forum.

By contrast, a historical example may further illustrate how the cash market operates less efficiently if an effective futures market price discovery service is not

available. During the historical gasoline crisis that began in 1979, there was limited

price transparency in US energy cash markets. Between 1979 and 1981 (before gasoline futures prices were fully embraced and accepted by the energy industry as a

benchmark for future prices), the Exchange was receiving information from price reporters for cash markets that high prices would be sustained for extended periods

of time, months, possibly years. During this period, US government price allocation

controls were in effect and prevented an easing of the imbalance between supply

and demand by restricting the market from reacting to weakening demand. Market

prices went up quickly and dramatically and stayed there beyond what the current

events would have been able to explain.

QUESTIONS FOR BOB SLAUGHTER, PRESIDENT, NPRA, FROM CONGRESSMAN BART

STUPAK

1. During your appearance before the Committee, I asked you the following question:

‘‘Isn’t it true that in 1992, the State of Arizona granted a permit to the Arizona

facility for construction and operation, and the company sat on the permit for nearly

8 years without actually building a refinery?’’

You responded by stating: ‘‘Not to my knowledge, no’’ and you went on to state

that ‘‘they had to move the refining site.’’

QUESTION: Isn’t it true that in a response you provided this committee earlier

this year, answering follow-up questions from congressman Dingell for the February

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16, 2005 hearing entitled: ‘‘The Energy Policy Act of 2005, Ensuring Jobs For Our

Future With secure and Reliable Energy,’’ you indicated that:

‘‘Maricopa Refining Company (MRC) was issued an installation permit for a

50,000 BPD refinery by the ADEQ on January 16, 1992,’’ and you later acknowledged in that same response to Congressman Dingell that ‘‘the above permit was

allowed to lapse and a new permit for a larger facility was submitted to ADEQ on

December 23, 1999’’?

NPRA Response and Background

The following is a chronology from Arizona Clean Fuels in response to the above

questions:

1. Maricopa Refining Company (MRC) was issued an ‘‘Installation Permit’’ for a

50,000 BPD refinery by the ADEQ on January 16, 1992.

2. MRC (under the name of Arizona Clean Fuels-ACF) continued development of its

refinery project in the early and mid-nineties. A significant financial investor

left the project. The project was re-scoped as to refinery capacity and feedstock.

The above permit was allowed to lapse and a new permit for a larger facility

was submitted to ADEQ on December 23, 1999.

3. The ADEQ hired an outside contractor to prepare the permit. This contractor

worked with ACF, ACF’s contractor and the ADEQ to perform the BACT reviews, etc. required by the Clean Air Act. In September 2002, the above parties

agreed that the information required to perform all of the permit reviews was

complete and the ADEQ confirmed this on September 4, 2002.

4. During the summer of 2003, the EPA and ADEQ declared an expansion of the

ozone non-attainment area in Maricopa County that included the site of the proposed refinery. ACF advised the ADEQ that it was considering alternate sites

for the refinery outside Maricopa County.

5. On October 30, 2003, the ADEQ issued a proposed Draft Air Permit to the company only, for the refinery based on the December 1999 application and the

Maricopa County site. This permit was not formally issued pending decision by

ACF on location.

6. In October 2003, ACF advised the ADEQ that the company was proposing a new

site for the refinery in Yuma County and the information required to revise the

permit for the new location was submitted during the November 2003 to March

2004 period. This information was consolidated into a ‘‘new permit application’’

document that was submitted to ADEQ on June 28, 2004. The refinery facility

was identical to that proposed in 1999 so the BACT analysis remained valid.

Revisions required for the new site consisted primarily of new air emission impact modeling

7. The ADEQ issued the Draft Air Permit on September 14, 2004. Public meetings

and hearings were held during October and November 2004 with the public notice period closing on January 10, 2005.

8. The permit is currently in review by the EPA with a formal response required

by March 18, 2005

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