```

[Senate Hearing 110-680]
[From the U.S. Government Publishing Office]

                                                        S. Hrg. 110-680
 
                        HIGH DIESEL FUEL PRICES 

=======================================================================

                                HEARING

                               before the

                              COMMITTEE ON
                      ENERGY AND NATURAL RESOURCES
                          UNITED STATES SENATE

                       ONE HUNDRED TENTH CONGRESS

                             SECOND SESSION

                                   TO

 EXAMINE WHY DIESEL FUEL PRICES HAVE BEEN SO HIGH AND WHAT CAN BE DONE 
                        TO ADDRESS THE SITUATION

                               __________

                           SEPTEMBER 23, 2008

                       Printed for the use of the
               Committee on Energy and Natural Resources
                              ----------
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46-171 PDF                       WASHINGTON : 2008 

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Washington, DC 20402-0001 

               COMMITTEE ON ENERGY AND NATURAL RESOURCES

                  JEFF BINGAMAN, New Mexico, Chairman

DANIEL K. AKAKA, Hawaii              PETE V. DOMENICI, New Mexico
BYRON L. DORGAN, North Dakota        LARRY E. CRAIG, Idaho
RON WYDEN, Oregon                    LISA MURKOWSKI, Alaska
TIM JOHNSON, South Dakota            RICHARD BURR, North Carolina
MARY L. LANDRIEU, Louisiana          JIM DeMINT, South Carolina
MARIA CANTWELL, Washington           BOB CORKER, Tennessee
KEN SALAZAR, Colorado                JOHN BARRASSO, Wyoming
ROBERT MENENDEZ, New Jersey          JEFF SESSIONS, Alabama
BLANCHE L. LINCOLN, Arkansas         GORDON H. SMITH, Oregon
BERNARD SANDERS, Vermont             JIM BUNNING, Kentucky
JON TESTER, Montana                  MEL MARTINEZ, Florida

                    Robert M. Simon, Staff Director
                      Sam E. Fowler, Chief Counsel
              Frank Macchiarola, Republican Staff Director
               Karen K. Billups, Republican Chief Counsel

                            C O N T E N T S

                              ----------                              

                               STATEMENTS

                                                                   Page

Bingaman, Hon. Jeff, U.S. Senator From New Mexico................     1
Charbonneau, Patrick, Vice President, Government Relations, 
  Navistar, Inc..................................................    36
Gruenspecht, Howard, Acting Administrator, Energy Information 
  Administration.................................................     4
McCurdy, Dave, President and CEO, Alliance of Automobile 
  Manufacturers..................................................    24
Scott, Gregory M., Executive Vice President and General Counsel, 
  National Petrochemical and Refiners Association................     9
Sessions, Hon. Jeff, U.S. Senator From Alabama...................     3
Windsor, Barbara, President and CEO, Hahn Transportation, Inc., 
  New Market, MD.................................................    16

                                APPENDIX

Responses to additional questions................................    39

                        HIGH DIESEL FUEL PRICES

                              ----------                              

                      TUESDAY, SEPTEMBER 23, 2008

                                       U.S. Senate,
                 Committee on Energy and Natural Resources,
                                                    Washington, DC.

    The committee met, pursuant to notice, at 10 a.m. in room 
SD-366, Dirksen Senate Office Building, Hon. Jeff Bingaman, 
chairman, presiding.

OPENING STATEMENT OF HON. JEFF BINGAMAN, U.S. SENATOR FROM NEW 
                             MEXICO

    The Chairman. Why don't we go ahead and get organized here 
to start the hearing? Please take a chair. Thank you for 
joining us at this hearing today. We knew this would be a slow 
time in Washington, a quiet period, so we decided this is a 
good time to have this hearing.
    I do think the subject of the hearing is very important. 
The diesel fuel market and also looking some at the aftermath 
of Hurricanes Ike and Gustav in the Gulf Coast, the recent 
spike in diesel demand and prices is a sign of the increased 
tightness in the market. While clearly the erratic price of 
crude oil, which we saw go up $16 in a few hours of trading 
yesterday, is a major piece of what is driving the price for 
diesel but it's also true that there are separate influences at 
work in the diesel market.
    Global demand for diesel has surged while demand for 
gasoline has declined. Meanwhile, the recent hurricanes are 
highlighting how little cushion we have in our supply system. 
As the refineries work toward restoring full operational 
capacity, there simply is not enough oil flowing in the Gulf 
Coast to completely fill the pipelines.
    While diesel market tightness is a long-term systemic 
issue, and recovering from the hurricanes is a short-time 
emergency, both of them offer an opportunity to reconsider the 
appropriateness of the policies that we currently have in 
place.
    I know that some of my colleagues are strong advocates for 
increased use of diesel fuel in our passenger fleet. I share 
their enthusiasm for the increased fuel efficiency afforded by 
diesel engines but I believe there's a suite of issues that 
need to be better understood if we're to consider shifting 
United States energy policy in this direction. We need to 
better understand, first and foremost, whether we have enough 
diesel fuel available to support this kind of increased 
consumption. The recent price surge certainly seems to suggest 
that the world does not have any diesel fuel to spare.
    We also need to consider whether diesel fuel really emits 
fewer greenhouse gas emissions than gasoline on a wheels-to-
wheels or wells-to-wheels basis. While it's clear that fewer 
greenhouse gases are emitted from the tail pipes of diesel 
cars, those greenhouse gas savings may be offset by increased 
emissions from the refineries that make the fuel.
    Finally, we need to understand the costs associated with 
making diesel fuel clean enough to meet our local air pollution 
requirements because emissions of some local pollutants are 
higher with diesel fuel than with gasoline.
    I think it's also important to know how the restoration 
efforts are progressing in the Gulf as we hear stories of fuel 
stations in the Southeast running out of fuel. We need to 
understand whether the situation is expected to improve in the 
near future or whether we need to expect further supply 
problems to work their way through the system.
    With refineries still out of power more than a week after 
Hurricane Ike, it seems our emergency response policy which 
relies completely on crude oil stored in the Gulf Coast is not 
well suited to meeting the ongoing threat of hurricane-related 
supply disruptions.
    While this is a topic that deserves a more full discussion 
than we're able to give it today, I thought it would be useful 
to suggest that we should think of the current disruption in 
the context of what policy measures could be taken to prevent 
recurrences of these kinds of disruptions.
    I thank the witnesses for being here. I'm sorry that our 
fifth witness from the National Electrical Manufacturers 
Association was unable to join us to discuss the connection 
between diesel fuel, the diesel fuel market and global 
electricity. Nevertheless, I do look forward to a good 
discussion on these interrelated topics.
    Before I introduce the witnesses, let me call on Senator 
Sessions for any opening statement he would like to make.
    [The prepared statement of Senator Domenici follows:]

    Prepared Statement of Hon. Pete V. Domenici, U.S. Senator From 
                               New Mexico
    Senator Bingaman, thank you for holding this hearing and I want to 
thank the witnesses for joining us this morning.
    In the past year we have seen gas prices climb to record levels. We 
are all aware of the difficulties those prices are causing for American 
families. Unfortunately, Congress has not taken action on the matter, 
outside of suspending oil deliveries to our strategic reserve. While I 
believe that time has run out to reach a bipartisan agreement on 
comprehensive legislation this year, I hope that the next Congress will 
meet our enormous energy challenge with solutions that are big enough 
to resolve it.
    As we have heard so much about the cost of gasoline, the price of 
diesel has undergone an even larger price spike. Over the last few 
months while gasoline rose to $4.11 per gallon, diesel soared above 
$4.80 per gallon. These added expenses have made their way into every 
aspect of our economy and it is clear that something must be done to 
reverse course.
    What is equally clear is the cause: global demand has increased 
significantly and supply has not kept pace. In the meantime, our 
country has become increasingly reliant upon foreign nations for our 
energy supplies. As proud as I am of this Committee's recent 
accomplishments, much bolder action is needed to reverse this trend.
    Today we will hear about a 200 thousand barrel per day expansion at 
a refinery in China. We will hear about a 600 thousand barrel per day 
facility opening in India. For our part, the United States' most 
significant change to the diesel supply has been a reduction in its 
sulfur content. This action was important, and will result in a great 
deal of environmental benefit, but it cost money and did not increase 
supply. After more than 30 years without a new refinery built in this 
country, it is time to seek a more balanced approach to our energy 
policy.
    I look forward to hearing from the witnesses about actions that can 
be taken to reduce the price of diesel, make better use of it, and 
continue to build on the progress that we have made in developing our 
nation's energy policy. It is my hope that our conversation today will 
inform a larger debate going forward, and I'll have some questions for 
the witnesses on what solutions they propose after we have heard their 
testimony.
            Thank you.

         STATEMENT OF HON. JEFF SESSIONS, U.S. SENATOR 
                          FROM ALABAMA

    Senator Sessions. Thank you, Mr. Chairman, for having this 
hearing. It's something you and I have talked about previously 
on several times, and it deals with questions that I am 
interested in, have discussed at some length with staff and 
actually done some research into this question.
    I believe it's Popular Mechanics that compared, I believe, 
a Volkswagen diesel engine to a Toyota Prius and concluded that 
not only was it comparable in mileage but got a good bit better 
mileage than the Hybrid Prius and emitted less global warming 
gases, and we know 50 percent of the automobiles in Europe are 
diesels and if we're getting that much better mileage and 
reducing CO2 emissions, the question I have is why 
aren't we using more diesel automobiles, and what are the 
factors that are causing this?
    One of the questions I'd like to ask--and I have a vague 
recollection that maybe a decade or so ago, some understanding 
may have been reached when the Americans were not happy with 
diesel, they thought it was dirty, were unaware of the new 
high-tech low-sulfur fuels, the high- tech engines that are so, 
so much cleaner today than they used to be.
    I've seen a Mercedes plant in Alabama, their Blue Tech 
Diesel, and the tail pipe is clean. You can put your finger in 
it and it's clean. It's not like the old black diesel pipes. So 
we've made some great steps forward.
    So I guess my question is how did we get into this 
circumstance? Are the Europeans smarter than the Americans? Do 
we need to--when we incentivize a hybrid automobile 
substantially, do we have no incentive for diesel? We know that 
diesel fuel is taxed at 24 cents a gallon whereas gasoline is 
at 18 cents a gallon. So we've got actually a disincentive for 
diesel.
    So to me, progress is progress. We certainly have a better 
understanding that a diesel engine--we have more confidence 
that it has a long lifetime of performance. We have less 
confidence about that in some of the battery- powered engines.
    So I'm not against the hybrids. I'm all for the hybrids. 
I've supported that and I look for all kind of alternatives, 
but I thank you, Mr. Chairman. I repeat again what I've said 
before. You are having hearing after hearing on issues that are 
important to helping America decide how to handle this energy 
question, and I thank you particularly for having this one. I 
think it's an important issue.
    The Chairman. Thank you very much. Let me just introduce 
our witnesses here.
    Dr. Howard Gruenspecht is the Acting Administrator of the 
Energy Information Administration. He's a frequent witness 
before our committee. We appreciate him coming back.
    Mr. Gregory Scott is the Executive Vice President for the 
National Petroleum and Refiners Association.
    Ms. Barbara Windsor is the President and CEO of Hahn 
Transportation, out of New Market, Maryland. Thank you for 
being here.
    Our former colleague, Dave McCurdy. We're very honored to 
have him here. He's President and CEO of the Alliance of 
Automobile Manufacturers.
    Why don't each of you take about 6 minutes and give us the 
main points you think we need to understand about this set of 
issues and then I'm sure both Senator Sessions and I will have 
some questions.
    Dr. Gruenspecht.

 STATEMENT OF HOWARD GRUENSPECHT, ACTING ADMINISTRATOR, ENERGY 
                   INFORMATION ADMINISTRATION

    Mr. Gruenspecht. Chairman Bingaman, Senator Sessions, I 
appreciate the opportunity to appear before you today to 
discuss the market for diesel fuel.
    The Energy Information Administration is the independent 
statistical and analytical agency within the Department of 
Energy. We don't promote, formulate or take positions on policy 
issues and our views should not be construed as representing 
those of the Department of Energy or the Administration.
    Prices for crude oil, gasoline and diesel fuel all set new 
records this year. While rising crude oil prices were the 
primary driver of record product prices, diesel prices rose 
much more than gasoline prices. The peak price of diesel in 
mid-July was $1.88 higher than the year-earlier level while the 
peak price of gasoline in early July was $1.13 higher than the 
year earlier level.
    The diesel crack spread, the difference between the crude 
oil price and the wholesale price of diesel, averaged 75 cents 
a gallon over the January through July 2008 period, 
substantially above the comparable year ago period. In 
contrast, the gasoline crack spread over January through July 
2008 declined compared to the comparable year-ago period.
    In the first half of 2008, we experienced abundant gasoline 
supplies, relatively weak demand, and increased use of ethanol, 
all of which contributed to reduced gasoline margins. Since 
gasoline accounts for nearly half the output of a typical 
United States refinery, refiners responded to the lower margins 
by pulling back on refinery utilization, measured as input to 
the refinery divided by capacity. This year, utilization 
through July has been about 6 percentage points lower than 
normal.
    Turning to distillate--that's both heating oil and diesel 
fuel--prices in the United States this year reflected tight 
world markets, not just the United States supply demand 
balance. World diesel demand growth is coming from increasing 
use, particularly in developing countries. Also, several 
unusual circumstances, including a severe drought in Chile that 
reduced its hydropower generation, earthquakes and disruptions 
of coal supply in China, and power shortages in South Africa, 
all increased the demand for diesel fuel generation, pushing up 
the price of diesel worldwide.
    Higher diesel crack spreads encouraged refiners to increase 
the yield of diesel in their output product streams. While 
yield changes are limited by both refinery equipment and crude 
oil characteristics in the near term, even small shifts in 
yields can lead to significant changes in volumes and diesel 
output is actually up over last year, despite lower refinery 
utilization rates.
    The United States has been exporting more diesel than 
usual. For example, Europe imported about three times as much 
U.S.-origin diesel in the first half of this year compared to 
2007 and Latin America imported more U.S.-origin diesel this 
year as well, about twice as much as it imported in the 
comparable period in 2007.
    Before the recent hurricanes, product prices had declined 
from their peaks in July, mainly due to a decline in the price 
of crude oil. The worldwide diesel supply demand balance has 
also eased somewhat and will likely continue to improve as 
China and India expand refinery capacity and demand in Latin 
America abates with the end of their winter season.
    Turning to our domestic situation, while the hurricane 
damage was less then feared, refineries have been slow to 
return to operation due to lack of power. Significant amounts 
of refinery production were lost and, with refineries unable to 
fill pipelines that move product to the Midwest and the East 
Coast, inventories have been dropping and spot shortages, 
mainly of gasoline, are occurring, even with imports increasing 
to help fill the gap.
    Diesel supplies are in somewhat better shape. EIA's 
petroleum data for the week of September 12 through September 
19, which are being collected yesterday and today and will be 
issued tomorrow, are likely to show low refinery runs and 
continued declines in product inventories. These data, though, 
are a lagging indicator of a situation that is improving, as 
indicated in yesterday's retail price data. Prices are coming 
down even in the affected regions.
    Our most recent short-term energy outlook released before 
Hurricane Ike hit on September 9 forecasts WTI crude oil prices 
at $120 per barrel in the fourth quarter, with residential 
heating prices averaging $4.06 per gallon and diesel at 4.11 
per gallon.
    Recently, crude oil markets have weakened and then 
fluctuated amid concerns about demand declines in the United 
States and economic slowdown throughout the world. If crude oil 
were to be $10 lower than we had projected, that would 
translate into about a 25 cent lower price for products.
    Shifting to a longer-term view, we expect world markets to 
keep pressure on the distillate fuels balance and prices. As 
discussed by Senator Sessions, Europe is continuing to shift 
more of its light-duty vehicles to diesel, in addition to 
growth for heavy-duty vehicles.
    In the United States, we expect a shift in demand from 
gasoline to diesel, due to greater use of renewable fuels 
displacing petroleum-based gasoline and increased use of diesel 
to meet the fuel economy standards enacted in last year's 
Energy Independence and Security Act. As a result, our 
reference case projections show a decline in United States 
petroleum-based gasoline demand through 2022 but a 12 percent 
increase in diesel.
    So, in addition to the operating changes to boost yields 
described above, some refiners are investing in hydro-cracking 
units and other equipment to increase their ability to make 
additional diesel fuel. The prices will likely continue to 
fluctuate, for both diesel and gasoline. However, in future 
years, we expect diesel to remain at a premium to gasoline more 
often than it has in the past.
    This completes my testimony and I would be glad to answer 
any questions you would have.
    [The prepared statement of Mr. Gruenspecht follows:]

Prepared Statement of Howard Gruenspecht, Acting Administrator, Energy 
                       Information Administration
    Mr. Chairman and Members of the Committee, I appreciate the 
opportunity to appear before you today to discuss the distillate fuel 
market and this year's distillate fuel prices.
    The Energy Information Administration (EIA) is the independent 
statistical and analytical agency within the Department of Energy that 
is responsible for producing objective, timely, and relevant data, 
projections, and analyses that are meant to assist policymakers, help 
markets function efficiently, and inform the public. We do not promote, 
formulate, or take positions on policy issues and our views should not 
be construed as representing those of the Department of Energy or the 
Administration.
           pre-hurricane diesel and gasoline market overview
    Prices for crude oil, gasoline and diesel set new records in 2008. 
After rising above $4 per gallon in June, the national average regular 
gasoline price in EIA's weekly price survey peaked at just over $4.11 
on July 7, about $1.13 higher than at the same time last year. Diesel 
prices experienced an even greater increase this year. Having passed 
the $4 per gallon mark in April, U.S. diesel prices peaked at $4.76 on 
July 14, $1.88 higher than the same time in 2007.
    While crude oil and product prices were setting new records in the 
first 7 months of 2008, the markets for gasoline and distillate fuels 
(diesel and heating oil) exhibited very different behavior. Both 
gasoline and distillate prices were pushed up by record crude oil 
prices, but gasoline prices did not rise as much as crude oil prices, 
while distillate prices rose more than crude oil prices, as illustrated 
in Figure 1.* (Note that both heating oil and diesel prices tend to 
move together since they are similar products, derived from the same 
boiling range material from crude oil.
---------------------------------------------------------------------------
    * Figures 1-4 have been retained in committee files.
---------------------------------------------------------------------------
    Figure 1 displays the basic components of average gasoline and 
diesel prices during the first 7 months of this year in relation to 
their values for the comparable 2007 period. For example, diesel prices 
averaged $4.07 per gallon from the beginning of this year through July. 
Crude oil, the feedstock for gasoline and diesel, averaged $2.56 per 
gallon. Refiners processed the crude oil and received an average of 
$3.31 per gallon, providing 75 cents per gallon of diesel fuel above 
crude oil costs to cover refining costs and profits. Pipelines, 
terminal operators, distributors and retailers received about 29 cents 
per gallon to store and move the product to retail stations, and taxes 
accounted for about 47 cents per gallon. Separating product prices into 
these components helps to explain different elements of the petroleum 
market, but the relationship between crude oil and product prices can 
be a two-way street. For example, strong demand for distillate products 
is one factor that can add pressure to crude oil prices.
    Figure 1 shows that higher crude oil prices accounted for about 
$1.14 of the per-gallon increase in the January-July gasoline and 
diesel prices over their levels in the comparable 2007 period. Figure 1 
also shows that average prices at the wholesale level were higher for 
diesel than for gasoline. During the first 7 months of 2007, the diesel 
price spread (the difference between wholesale diesel and crude oil 
prices) averaged about the same as the gasoline spread, but, in 2008, 
the average diesel price spread expanded significantly over 2007, while 
the average gasoline spread narrowed. The combination of abundant 
gasoline supply and relatively weak demand depressed gasoline margins 
this year. With gasoline accounting for nearly half the output volume 
of a typical U.S. refinery, refiners in the United States responded by 
pulling back on crude oil inputs. At the same time, world distillate 
(diesel and heating oil) markets tightened, affecting U.S. diesel and 
heating oil prices. Although refinery utilization dropped in 2008 as a 
result of the gasoline market weakness, higher diesel margins led 
refiners to increase refinery distillate yields (the ratio of 
distillate output to crude oil input), allowing for increased 
distillate production in spite of the decline in crude oil inputs.
    Figure 2, which shows the crack spreads (spot product price minus 
spot West Texas Intermediate (WTI) crude oil price) for gasoline and 
low-sulfur distillate, details the different price paths for these two 
products relative to crude oil. Abundant gasoline supplies, as 
evidenced by very high inventories early in March 2008, drove the 
gasoline crack spread to low levels, creating incentives for refiners 
to reduce production. Gasoline crack spreads were relatively weak 
through July and into August, typically the peak gasoline demand 
periods. They did, however, increase towards the end of August before 
hurricanes Gustav and Ike. At the same time, wholesale (i.e., spot) 
distillate prices were very high relative to crude oil, keeping diesel 
and heating oil prices above that of gasoline though the summer months. 
Yet, distillate inventories in the United States were generally not 
particularly low (Figure 3), indicating adequate U.S. supply.
    The price of distillate prior to the hurricanes appeared to reflect 
tight world distillate markets this year, not just the U.S. supply/
demand balance. World diesel demand growth is coming both from 
increasing transportation use and increasing use of distillate as a 
fuel for electricity generation, particularly in developing countries 
where electricity demand is outstripping generating capability. 
Generally, oil product demand in the non-OECD countries, where oil 
demand is growing fastest, is more heavily weighted towards distillate 
than is product demand in the U.S. On top of this trend, several 
unusual circumstances were boosting distillate demand further. Chile 
has been experiencing both a severe drought that reduced its hydropower 
generation and reduced imports of natural gas from Argentina. This, in 
turn, caused Chile to turn to more diesel fuel for electricity 
generation. As a result of these problems, Chile's diesel imports are 
expected to increase 5 to 10 percent in 2008 over 2007. China's demand 
for diesel also continued to increase as it turned to diesel-powered 
generators to combat shortages, stemming in part from recent 
earthquake-related disruptions of coal and natural gas supplies, and to 
provide adequate electricity for the Olympic Games this summer. South 
African mining companies are turning to diesel generators to deal with 
a power crisis in that part of the world. Even Europe experienced some 
very tight supplies of ultra-low sulfur diesel this past fall and this 
year. This very tight international situation has been pushing up the 
price for diesel worldwide, including in the United States.
    As a result of strong international diesel demand, the United 
States has exported more diesel than is typical, as shown in Figure 4. 
Both Europe and Latin America purchased unusually high volumes from the 
United States. Europe imported 119 thousand barrels per day from the 
United States during the first half of 2008, compared to 37 thousand 
barrels per day in the first half of 2007. At the same time, Latin 
America imported a record volume of distillate from the United States: 
302 thousand barrels per day compared to 147 thousand barrels per day 
in the first half of 2007.
    Prior to the recent hurricanes, product prices had declined from 
their peak July levels, mainly as a result of the decline in the price 
of crude oil. In addition, the supply-demand balance in the diesel 
market had eased, and is expected to ease further through the end of 
the year for several reasons. Specifically, the regional diesel balance 
in Asia is expected to improve due to the recent start of China's 200-
thousand-barrel-per-day refinery expansion at Qingdao and the planned 
start later this year of the 600-thousand-barrel-per-day refinery at 
Jamnagar in India. Latin America's problems may ease a bit as their 
winter season ends, particularly if Chile sees some drought relief.
      refinery response to weak gasoline and strong diesel prices
    Refiners typically modify their output of a product either by 
adjusting the inputs to the refinery, which affects the output of all 
products, or by adjusting the yield or fraction of a product produced 
from a barrel of crude oil. Both types of adjustments have been made by 
refiners in 2008 to meet the market conditions.
    Normally, refinery utilization (refinery inputs divided by 
capacity) varies seasonally with demand and maintenance outages. 
Utilization generally is highest during the summer months of May 
through August, where the industry frequently averages about 95 percent 
utilization. In the winter months of January through March, utilization 
frequently averages closer to 89 percent.
    This year, with wholesale gasoline prices sometimes below the price 
of crude oil, increased use of ethanol, and plenty of inventory volumes 
to supply the market, refiners pulled back both on refinery utilization 
and on gasoline yields. Refinery utilization averaged 86.6 percent for 
January through July 2008, which is 5.6 percent lower than typical 
January through July utilizations seen before 2006, when damage 
following the hurricanes in 2005 affected utilization patterns.
    Despite the reduction in refinery utilization rates in 2008, 
distillate production has been high due to yield adjustments. While the 
extent of changes in the product mix is limited in the short term by 
the equipment available at each refinery, even small yield shifts among 
products can still produce a significant swing in volumes. For example, 
if refinery inputs are at 15.4 million barrels per day, a one-
percentage point change in yield represents a 154,000-barrels-per-day 
change in product volume. This year, many refiners made operating 
changes to increase the amount of distillate produced for each barrel 
of crude oil that they ran.
    During early spring, refiners typically begin to adjust yields to 
maximize gasoline production. However, because of the much higher crack 
spreads for diesel fuel this year, this shift did not occur. 
Furthermore, preliminary data indicate distillate yields have been near 
or above historical highs for many months this year. At the extreme, 
data for the months of April and May indicated some refineries have 
been able to increase distillate yields as much as 10 percentage points 
over last year while decreasing gasoline yields a similar amount.
                       looking ahead--short-term
    The recent hurricanes have changed the market substantially. 
Although structural damage to refineries, pipelines, and platforms was 
less than had been feared, the lost production and the time required 
for system restart has put gasoline in short supply, and may somewhat 
delay the typical winter inventory build of distillate products, adding 
to gasoline, diesel and heating oil prices. In the week following 
Hurricane Ike, gasoline prices in EIA's weekly price survey rose 
substantially, particularly in the South Atlantic region (Petroleum 
Administration for Defense District , or PADD, 1c), the Midwest (PADD 
2) and the Gulf Coast (PADD 3). Diesel prices did not show similar 
impacts--in fact, diesel prices fell on a national average basis, in 
all but one region. Information regarding the timing of the recovery 
from hurricane-related shutdowns of refining and oil and natural gas 
production is changing on a daily basis.
    Recently, crude oil prices fell below $100 for the first time since 
early March. Perceptions have shifted from worries about having enough 
supply to meet demand to worries about demand significantly falling in 
the U.S. and spreading to other parts of the global economy. 
Additionally, some sizeable volumes of non-Organization of the 
Petroleum Exporting Countries (OPEC) production, such as in Brazil and 
Azerbaijan, recently came online, leading to an improved perception 
regarding non-OPEC supply growth for the second half of 2008 in 
comparison to the first half of the year.
    EIA's most recent monthly Short Term Energy Outlook, published 
September 9 before Hurricane Ike and before additional signs of slowing 
global economic activity, forecast crude oil markets tightening further 
with WTI price averaging about $120 during the fourth quarter. Under 
these conditions, residential heating oil would average about $4.07 and 
diesel $4.11 per gallon under normal winter weather conditions. If, on 
the other hand, crude oil averages something closer to $100, these 
estimated prices could be reduced by as much as 50 cents per gallon. We 
will be looking closely at these uncertainties in our next Outlook.
                       looking ahead--longer term
    While we expect some near-term easing in the global distillate 
balance relative to conditions experienced in the first half of 2008, 
there is a long-term underlying trend that will continue to keep 
pressure on distillate fuel. Distillate fuel consumption has been 
growing at a higher percentage rate worldwide than gasoline for many 
years. Europe has been a primary factor in this shift. In response to 
concerns about energy efficiency and greenhouse gases, Europe has been 
shifting its light-duty vehicle fleet to more diesel-fueled vehicles--
on top of the increases in diesel fuel used in commercial heavy-duty 
vehicles. The net result is that Europe consumes more distillate than 
gasoline, and distillate fuel use is growing while gasoline use is 
declining.
    Looking ahead at U.S. demand over the next 15 years, EIA also 
expects a significant shift in demand from petroleum-based gasoline to 
distillates. The Energy Independence and Security Act (EISA) of 2007 
substantially increased the renewable fuel mandate that was first 
established in the Energy Policy Act of 2005 and also significantly 
increased corporate average fuel economy standards for light-duty 
vehicles. More use of renewable fuels, primarily ethanol, will displace 
petroleum-based gasoline, as will higher fuel economy standards. In 
addition, vehicle manufacturers are expected to produce more diesel 
vehicles as part of their strategy to comply with tougher fuel economy 
standards. While the shift towards diesel is likely to be smaller than 
the one Europe has seen, U.S. refiners will be facing a significant 
change in refinery product mix that will impact investments.
    In the 15-year period from 2007 to 2022, the increased use of 
ethanol and increased light-duty vehicle efficiency standards projected 
in our 2008 Annual Energy Outlook reference case is expected to result 
in a decline in the demand for petroleum-based gasoline of about 610 
thousand barrels per day (7 percent). However, continued growth in 
heavy-duty vehicle use of diesel over the same period is projected to 
push up distillate demand by about 690 thousand barrels per day (12 
percent). As discussed in the Annual Energy Outlook 2008, EIA expects 
that a significant portion of the EISA mandate for cellulosic fuels 
could be met using a biomass-to-liquids (BTL) technology to produce a 
renewables-based diesel fuel from biomass.
    Refiners are responding to the changing demand outlook and high 
distillate margins with short-term operating changes to increase 
distillate yields over gasoline. In addition, some refiners are 
installing hydrocracking units, which are designed to take heavy 
material from the crude tower and make distillate fuel. With additional 
operating changes and with the new hydrocracking capacity being 
planned, U.S. refiners might not need to do much more to satisfy U.S. 
distillate needs, although we are continuing to monitor and analyze 
this issue.
    In summary, since hurricanes Rita and Katrina in 2005, we have seen 
continued strength in distillate prices relative to gasoline, buoyed by 
the continued world demand growth for this fuel. While diesel prices 
will probably fluctuate above and below gasoline prices from time to 
time, they may well remain at a premium to gasoline much more often in 
the future than they have historically.
    This concludes my statement, Mr. Chairman, and I will be happy to 
answer any questions you and the other Members may have.

    The Chairman. Thank you very much.
    Mr. Scott.

  STATEMENT OF GREGORY M. SCOTT, EXECUTIVE VICE PRESIDENT AND 
     GENERAL COUNSEL, NATIONAL PETROCHEMICAL AND REFINERS 
                          ASSOCIATION

    Mr. Scott. Thank you, Mr. Chairman. My name is Greg Scott. 
I am here representing the National Petrochemical & Refiners 
Association today.
    NPRA is a national trade association with nearly 500 
members, including companies that operate and own virtually all 
of the United States refining capacity as well as most of the 
Nation's petrochemical manufacturers.
    I am grateful for the opportunity to appear at this 
hearing.
    There is no one answer to the question of why diesel fuel 
prices are so high. However, there are a number of factors that 
contribute to the current situation. First and foremost is the 
current high price of the crude oil from which diesel fuel is 
derived.
    As you can see by examining Chart 1, which my human 
assistant is helping me with, there's a strong correlation 
between the price of crude oil and the price of diesel fuel. 
This shouldn't be a surprising thing, given the fact that crude 
oil costs make up over 65 percent of the price of diesel fuel. 
Refiner marketer transportation margins and Federal and State 
taxes make up the rest of the price.
    Second, like gasoline, diesel is a commodity product and 
therefore susceptible to the simple rules of supply and demand.
    Third, despite continuing domestic refinery expansions, the 
reality is that current United States refining capacity 
struggles every day and every month to meet high domestic 
demand for the full range of petroleum products, including 
gasoline and diesel.
    Finally, the United States refining industry has invested 
billions of dollars over the last several years to successfully 
implement the first portions of EPA's Ultra Low Sulfur Diesel 
Program or ULSD Program.
    This program has reduced sulfur levels in highway diesel 
fuel significantly which is a great achievement. However, ULSD 
is significantly more expensive to manufacture than traditional 
diesel fuel. In addition, the strict sulfur limits of the ULSD 
Program result in the diversion of some higher sulfur 
distillate products, products that previously were used to make 
highway diesel, into other fuel streams, such as offroad diesel 
and home heating oil.
    The relative amounts of gasoline and diesel fuel produced 
at a refinery is essentially fixed by the configuration of the 
refinery's process units. An individual refinery's ability to 
vary gasoline and diesel production, for example to increase 
diesel fuel production when demand is high, is constrained by 
its existing hardware. Refiners can and do make changes to 
their product slate and many have already done so this year in 
response to the market's high diesel demands.
    However, it is not simply a matter of throwing a switch or 
turning some knobs on the refinery. As you can see in Chart 2, 
the average ratio of gasoline production to diesel fuel 
production has been trending downward for the last several 
years and just to interpret that chart, as that line trends 
down, we are making more diesel compared to gasoline out of the 
average refinery.
    Clearly, domestic refineries are squeezing the maximum 
gallons of diesel out of their equipment. In fact, diesel fuel 
production is expected to be about 10 percent higher in 2008 
than it was last year in 2007.
    The Chairman. Let me just ask on that chart.
    Mr. Scott. Yes, sir.
    The Chairman. Since, as I understand it, when the line goes 
down, you're producing more diesel relative to gasoline.
    Mr. Scott. That's correct.
    The Chairman. When it goes up, you're producing less.
    Mr. Scott. In my written testimony, we go through a fairly 
detailed example of about 42 barrels of crude oil, what's the 
yield of different products, and it's normally, in general, 
about 20 gallons of gasoline and about 10 gallons of diesel 
fuel, 2:1. As the markets signal more gas is needed, that line 
will tend to trend upwards. As it's currently signaling more 
diesel is needed, that line's going to trend downward.
    The Chairman. Why has it been going up since--I can't tell 
what the date is there at the bottom.
    Mr. Scott. From July through August----
    The Chairman. Yes.
    Mr. Scott [continuing]. It has been going back up. You 
know, I am guessing it is probably a result of the summer 
driving season and summer gasoline demand and also the need to, 
at some point, start building winter diesel fuel stocks.
    The Chairman. OK.
    Mr. Scott. My colleagues at EIA have reported the national 
days of supply for distillate fuel oil, in essence th diesel 
inventories, were at 32.1 gallons on September 12 of this year. 
This time last year, inventories were about 32.8 days of supply 
on hand. Both of these inventory numbers are at the high end of 
the historical inventory band for diesel fuel.
    Comparing these year-to-year inventory numbers indicates 
there is no current drastic shortage of distillate fuel oil in 
the United States. As long as inventories are strong, the 
markets are signaling that current supplies are adequate for 
the current demand.
    Increasing demand for diesel in the United States and 
globally has shown little elasticity in the face of higher 
crude oil and petroleum product pricing. While higher crude oil 
prices and the resulting higher gasoline prices have led to 
reductions in domestic gasoline demand, as Dr. Gruenspecht 
indicated, such demand reductions in diesel have not occurred 
to date.
    Today, there are a 150 United States refineries owned by 
approximately 60 companies with aggregate crude oil processing 
capability of 18 million barrels per calendar day. That 
compares to 15.2 million barrels per calendar day in 1996. That 
growth of 2.8 million barrels per day of capacity is equivalent 
to building a new refinery every year for 12 consecutive years.
    Despite the significant increases in refinery capacity, the 
United States still does not possess significant capacity or 
sufficient capacity to satisfy all domestic fuel demand. If we 
collectively look at the future, there are strategies that can 
be pursued to address these issues in the years ahead.
    At a time when diesel prices are high, with adequate 
supplies, refineries need more, not less, legislative and 
regulatory certainty. In order to make current and future 
investment decisions, refiners must know what the regulatory 
and tax policy landscape will look like in 5 or 10 years. If 
Congress fails to fully consider the fuel supply impacts of 
legislation and implementing regulations, then the current 
situation will not improve.
    In our opinion, Congress should make increasing the 
nation's supply of oil, oil products and natural gas, a Number 
1 public policy priority. We can start to achieve this goal by 
allowing the moratorium on the OCS oil and gas exploration to 
expire at the end of this month.
    Congress also in our opinion should encourage continued 
domestic refining capacity expansion by extending and expanding 
the refinery expensing provision in Section 1323 of EPACT 2005.
    NPRA was pleased to see that the Senate Finance Committee 
included such a provision in its new energy tax package which 
the Senate will consider later this week, but we were 
disappointed to see that the benefits of this expensing 
provision would be overwhelmed and even contradicted by the 
punitive tax increases on domestic oil companies also contained 
within that bill.
    NPRA and its members stand ready to work with Congress to 
ensure a stable and effective fuels policy. Such a policy must 
encourage the development of a diversity of resources to 
improve our national security, assist consumers and protect our 
environment.
    I appreciate this opportunity to testify and welcome your 
questions.
    [The prepared statement of Mr. Scott follows:]

 Prepared Statement of Gregory M. Scott, Executive Vice President and 
    General Counsel, National Petrochemical and Refiners Association
                            i. introduction
    Chairman Bingaman, Ranking Member Domenici, and members of the 
committee, I am Greg Scott, Executive Vice President and General 
Counsel of NPRA, the National Petrochemical and Refiners Association. 
NPRA is a national trade association with nearly 500 members, including 
those who own or operate virtually all U.S. refining capacity, as well 
as most of the nation's petrochemical manufacturers who supply 
``building block'' chemicals necessary to produce products ranging from 
pharmaceuticals to fertilizer to Kevlar. I am grateful for the 
opportunity to share our views on why diesel prices have been so high, 
and what can be done to address the situation.
    There are a number of factors that contribute to the current high 
price of diesel. First and foremost is the high price of the crude oil 
from which diesel fuel is derived. Second, like gasoline, diesel is a 
commodity product and therefore susceptible to the basic economic rules 
of supply and demand. Domestic and global demand for diesel remains 
very high and, unlike gasoline, diesel demand has not moderated in the 
face of increased prices. Third, despite continued past and current 
domestic refinery expansions, current U.S. refining capacity continues 
to struggle to meet high domestic demand for the full range of 
petroleum products. Finally, the U.S. refinery industry has made 
significant investments over the past decade to successfully implement 
the first portions of the Environmental Protection Agency's Ultra Low 
Sulfur Diesel, or ULSD, program. While the ULSD Program has resulted in 
significant reductions in the sulfur levels in highway diesel fuel, 
ULSD is both more expensive to make and results in the diversion of 
some higher sulfur distillate fractions--fractions that in the past 
were used to make highway diesel fuel--into other fuel streams such as 
off-road diesel fuel and home heating oil.
    I will address each of these factors in more detail below and then 
provide NPRA's views on what can be done to address the situation.
                      ii. background--refining 101
    It may be helpful for members of the Committee to have some basic 
background on the chemistry and mechanics of oil refining. Such a 
framework will make it easier to answer the questions posed by this 
hearing.
    No two refineries are identical. The choice of processes and 
refinery equipment is based on crude oil type, product demand, and 
product quality requirements. Refineries process crude oil to produce 
many different types of petroleum products. Besides gasoline and diesel 
fuel, refineries also produce jet fuel, residual fuel oil, asphalt, 
lubricants, petrochemical feedstocks (i.e., ethylene, propane, 
propylene, naphtha, and gas oil), and other miscellaneous products. 
Crude oil, the basic feedstock, is not a homogenous substance. It 
varies widely in color, gravity, viscosity, sulfur content, metals 
content and other characteristics. There are hundreds of crude oils 
available throughout the world. Crude oil types include sweet (low 
sulfur), sour (high sulfur), heavy (high specific gravity), light (low 
specific gravity), paraffinic, naphthenic, and intermediate (somewhere 
in between paraffinic-and naphthenic-type).
    A refinery is really nothing more than a complex, large-scale 
chemistry set with four basic processes: distillation, hydrocleaning, 
cracking, and blending. Refining separates the many compounds present 
in crude oil by boiling it at different temperatures. The chemistry of 
hydrocarbons is the principle used in this process--the longer the 
carbon chain, the higher the temperature at which the compounds will 
boil. Generally, crude oil is heated and changed into a gas. The hot 
gases are passed into the bottom of a distillation column and become 
cooler as they move up the height of the column. As the gases cool 
below their boiling point, they condense into a liquid. The liquids are 
then drawn off the distilling column at specific heights, ranging from 
heavy residues at the bottom, raw diesel fuels in the mid-sections, and 
raw gasoline at the top. These raw fractions are then processed further 
to make several different finished products.
    The simplest refineries consist of crude and vacuum distillation, 
reforming and some hydrotreating capacity. The next level of complexity 
adds catalytic cracking and some additional hydrotreating. The most 
complex refineries include coking, more hydrotreating and 
hydrocracking. Additional processes yield the petrochemicals that serve 
as the building blocks for everything from cleaning agents to 
cosmetics, clothing, medicines and plastics.
    Gasoline is the largest volume petroleum product manufactured by 
our nation's domestic refineries (8.4 million barrels/day in 2007), 
accounting for nearly half of U.S. petroleum product production. 
Distillate fuel oil (which includes highway and off-road diesel plus 
home heating oil) accounts for the second largest petroleum product 
(4.1 million b/d at U.S. refineries in 2007). EPA reports that diesel 
fuel oil is produced at 136 continental U.S. refineries.\1\
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    \1\ ``Summary and Analysis of the 2008 Nonroad Diesel Fuel Pre-
compliance Reports,'' EPA420-R-08-017, September 2008, page 4. http://
www.epa.gov/otaq/highway-diesel/compliance/420r08017.pdf
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    Diesel fuel is a mixture of hydrocarbons for use as a heavy-duty 
truck (compression ignition engine) fuel. Key properties include 
aromatics content, cetane number/index, distillation temperatures, and 
sulfur content. To be used in the United States, diesel fuel must meet 
both EPA and ASTM specifications (ASTM D-975 (Standard Specification 
for Diesel Fuel Oils) and 40 CFR Part 80 and 40 CFR Section 69.51) . 
Distillate fuel oil is produced from hydrocarbons that are heavier than 
gasoline and lighter than lubricants. Therefore, a large fraction of a 
barrel of crude oil does not contain hydrocarbons that are suitable as 
components of distillate fuel oil. Simply put, a barrel of crude cannot 
be used to make only gasoline or diesel, but instead makes a variety of 
petroleum products.
    It is important to understand this last point. A barrel of crude 
oil is 42 gallons. From a barrel of crude, a ``typical'' domestic 
refinery can produce approximately 10 gallons of diesel fuel, 20 
gallons of gasoline, 4 gallons of jet fuel, and 6 gallons of other 
products, including LPG, fuel oil, lubricants, coke and asphalt.\2\ The 
precise volume of each product derived from a barrel of crude depends 
on many factors, including the chemical characteristics of the crude, 
the technology available at the individual refinery to distill and 
process the crude's fractions, market demands, and the regulatory 
standards a fuel must meet.
---------------------------------------------------------------------------
    \2\ The sum of these products is not 42 gallons because a portion 
of crude oil is consumed as fuel in the refining process.
---------------------------------------------------------------------------
    Thus, while most refineries have some flexibility to alter their 
production from a single barrel of crude oil between gasoline, diesel 
fuel and other petroleum products, this flexibility is very limited and 
is constrained by the basic chemistry of petroleum products, the 
equipment at the individual refinery, and the technologies of the 
engines in which these products are to be used. For example, if the 
markets are signaling that diesel fuel is in high demand, some 
refineries might be able, to a modest degree, to increase diesel fuel 
production and reduce gasoline production. The ``typical'' numbers 
above (20 gallons of gasoline and 10 gallons of diesel from a barrel of 
crude) may be altered to introduce a diesel fuel bias (19 gallons of 
gasoline and 11 gallons of diesel from a barrel of crude). However, 
there is a limit to this bias that cannot be exceeded due to the 
equipment available at each refinery.
    Domestic petroleum refiners move between a ``gasoline-bias'' and a 
``diesel-bias'' throughout an average year, on average maximizing 
gasoline production in the Spring of each year (in anticipation of the 
summer driving season and high gasoline demand) and maximizing diesel 
production in the fall of each year (in anticipation of the home 
heating oil season and high distillate demand). As depicted on Chart 
1,* the ratio of gasoline production, divided by diesel production, has 
steadily declined for the past two and one half years. A declining 
ratio translates into greater diesel fuel production.
---------------------------------------------------------------------------
    * All Charts have been retained in committee files.
---------------------------------------------------------------------------
    Similarly, there are seasonal swings in inventories: the days of 
supply of distillate fuel oil ranges from 25-35 days, at the low end at 
the beginning of summer and at the high end at the beginning of winter. 
EIA reports that the national days of supply for distillate fuel oil 
was 32.1 days on September 12, 2008 and was 32.8 on September 14, 
2007.\3\ These inventories are at the high end of the historical 
inventory band, indicating that there is not a distillate fuel oil 
supply shortage at the present time.
---------------------------------------------------------------------------
    \3\  http://tonto.eia.doe.gov/oog/info/twip/twip_distillate.html
---------------------------------------------------------------------------
    In addition, EIA reports that the days of supply of gasoline ranges 
from 21-26 days, at the low end during the winter and at the high end 
at the beginning of summer in order to accommodate the transition from 
winter to summer gasoline specifications. The national days of supply 
for gasoline was 20.1 days on September 12, 2008 and was 20.2 on 
September 14, 2007.\4\
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    \4\ http://tonto.eia.doe.gov/oog/info/twip/twip_gasoline.html
---------------------------------------------------------------------------
    Recently, statistics have been reported that indicate that our 
nation's domestic refining industry is not operating at full capacity. 
Those statistics do not reflect the full story. First, some refineries 
have been out of service for repairs, environmental upgrades, 
maintenance (``turnarounds'') and expansion. Second, over the past 
month, the operations of several dozen refineries along the Gulf Coast 
have been impacted negatively by Hurricanes Gustav and Ike and are 
either just getting back to normal operations or are in start-up mode. 
Finally, as the inventory statistics above indicate, there is no 
shortage of gasoline or diesel fuel in the United States. Thus, as long 
as inventories are strong, the markets are signaling to domestic 
refiners that current supplies are adequate for current demand. Any 
significant increase in domestic production simply is not necessary to 
maintain adequate supplies of gasoline and diesel fuel.
    Based on this background on petroleum refining and diesel fuel 
production and supply, I will now address the factors contributing to 
high diesel fuel prices.
                       iii. high crude oil prices
    As noted above, crude oil is the fundamental feedstock for diesel 
fuel. As Chart #2 indicates, crude oil prices (the solid line in the 
chart) have increased significantly over the past five years. This 
chart also tracks (the dashed line in the chart) the price of highway 
diesel fuel over this same time period. As you can see, the price of 
highway diesel fuel closely tracks the price of crude oil with some 
slight variations due to supply and demand issues.
    This correlation should not be surprising to the Committee. 
According to the EIA, the cost of crude oil makes up 64 percent of the 
cost of a gallon of diesel fuel. Refining, transportation and retail 
costs comprise another 25 percent, and federal and state taxes are the 
remaining 11 percent of the price of a gallon of diesel fuel in August 
2008.\5\
---------------------------------------------------------------------------
    \5\ http://tonto.eia.doe.gov/oog/info/gdu/gasdiesel.asp
---------------------------------------------------------------------------
    Thus, as long as crude oil prices remain high, it would be 
difficult to anticipate significant reductions in diesel fuel prices. 
Crude oil prices have come some down off their summer highs of over 
$140.00 per barrel. If this trend in crude pricing continues and past 
experience provides us with any guide to the markets' future behavior, 
moderating crude oil prices should moderate upward pressures on diesel 
fuel prices. However, additional factors are at play in the markets 
that may cause a departure from past experience.
          iv. high global demand for diesel and diesel supply
    As I am sure other witnesses before this Committee will relate, 
many consider diesel fuel to be the ``fuel of the future'' and are 
making significant investments to develop and product diesel-
poweredhighway vehicles in record numbers. In other parts of the world, 
this trend towards diesel-powered vehicles and away from gasoline-
powered vehicles is already well underway and will accelerate in the 
coming years.
    Over the past two decades, Europe has transformed into an economy 
that powers its vehicles on diesel fuel. Diesel's share of new vehicle 
sales has exceeded 50 percent annually for the last several years. 
Europe's strong shift from gasoline to diesel has created supply 
challenges for itself and its imports of diesel are growing.
    As diesel fuel demand across the world and in the United States 
increases, this demand has shown little elasticity in the face of 
higher crude oil and petroleum product pricing. While higher crude oil 
prices and the resulting higher gasoline prices have led to reductions 
in domestic gasoline demand, according to EIA, such demand reductions 
for diesel have not occurred to date. This may be due to the fact that 
substantial amounts of diesel consumption is non-discretionary (a 
school bus must still drive its route; a commercial truck must still 
deliver its goods). Conversely, some gasoline consumption appears to be 
discretionary, as both overall petroleum consumption and gasoline 
consumption has declined, month-over-month, in each of the last 12 
months, according to EIA .
    Domestic (and world-wide) refining capacity for gasoline and diesel 
fuel is increasing to respond to this increased demand. Today, there 
are 150 U.S. refineries, owned by 60 companies, with aggregate crude 
oil processing capacity of 17.6 million barrels per calendar day (as of 
January 1, 2008) as compared to 15.2 million b/d on January 1, 1996.\6\ 
And these refineries are getting larger and more complex. In 1981, the 
average refinery in the United States had approximately 57,000 b/d of 
crude oil distillation capacity. Today, the average refinery has a 
capacity of over 110,000 b/d. This growth is equivalent to building a 
new refinery every year for 12 consecutive years.
---------------------------------------------------------------------------
    \6\ http://www.eia.doe.gov/emeu/aer/pdf/pages/sec5--21.pdf 9
---------------------------------------------------------------------------
    Despite these increases in domestic refining capacity over the past 
decade, the United States continues to struggle to meet domestic 
gasoline and diesel fuel demand. The U.S. is a net importer of gasoline 
and a net exporter of distillate fuel oil.\7\ Although precise 
statistics are not available as to the specifications of the 
distillates being exported, it is likely that the distillates exported 
from the U.S. are higher sulfur diesel fuels, which is not in demand in 
this country due to the ULSD program. These higher sulfur fuels 
continue to command higher prices due to significant demand overseas. 
As a result, most distillate exports are designed to serve these 
demands.
---------------------------------------------------------------------------
    \7\ Exports of distillate fuel oil in May and June 2008 were 
444,000 and 654,000 b/d,7 respectively (by comparison, exports of 
distillate fuel oil in 2007 averaged 240,000 b/d and imports were 
301,000 b/d). Distillate fuel oil in May and June 2008 was shipped from 
the U.S. to more than 20 countries, primarily in South America and 
Europe. Imports of distillate fuel oil in May and June 2008 were 
188,000 and 179,000 b/d, respectively. The U.S. is a net exporter of 
distillate fuel in response to increasing, strong global demand and 
adequate U.S. supplies. This tight global supply-demand balance may 
result in a continuation of the recent role for the U.S. as a net 
exporter of distillate fuel oil (in 2007 and earlier years, the U.S. 
was a net importer of distillate fuel oil).
---------------------------------------------------------------------------
v. diesel product costs have increased, and highway diesel capacity has 
                  remained static, due to ulsd program
    The Environmental Protection Agency (EPA or Agency) has required 
significant reductions in the sulfur content of diesel fuel. The Agency 
issued rules in 2001 to reduce the sulfur content in highway diesel 
fuel by 97% by June 2006 and standards in 2004 to reduce the sulfur 
content in nonroad diesel by 75% by June 2007 and by 99% by June 2010.
    These regulations required the installation of new, or increased 
capacity (e.g., expanding the reactor volume) process equipment (i.e., 
distillate hydrotreater) to remove the sulfur compounds in distillate 
fuel oil-compatible streams. This equipment also results in higher 
operating costs because of the hydrogen and catalysts required for this 
equipment. For example, the sulfur in crude oil may be 5,000--20,000 
parts per million (ppm); so a considerable amount of sulfur reduction 
is required to meet EPA regulations at a cap of 15 ppm. EPA's standard 
can be technically met, but at a high cost. U.S. refiners have spent 
billions of dollars on these units. There has been considerable 
activity securing permits, ordering and installing equipment, unit 
commissioning, and integrating the equipment at the refinery.
    There are several different types of sulfur compounds in these 
streams and some are harder to remove than others. There is also 
variability depending on the type of crude oil and processing before 
the stream is desulfurized. In addition, this desulfurization step must 
be accomplished while ensuring that other key properties are on-spec 
(i.e., density, cloud point, and distillation temperatures).
             vi. impact of hurricanes on domestic refining
    Hurricane Gustav made landfall in Louisiana on September 1 and 
Hurricane Ike made landfall in Texas on September 15. These events were 
obviously disruptive to people, businesses and property. Ports, 
refineries, pipelines and offshore oil and gas platforms were closed. 
After the passage of these hurricanes, damage was assessed and 
facilities came back as power was available and safety concerns were 
considered. Some refineries are restarting production at reduced rates. 
Others have damage to repair before they are available to restore 
operations.
    Many refineries in the Houston/Galveston area are still shut down 
or in restart mode. Four refineries in the Port Arthur, Texas area are 
still shut down. In the Houston/Galveston area, five refineries are 
still shut down and four are restarting. NPRA does not have an estimate 
of when all of these affected refineries will return to full operation.
    The U.S. Department of Energy has expeditiously delivered emergency 
exchange crude oil from the Strategic Petroleum Reserve to refineries 
in response to disruptions caused by both hurricanes. The exchange 
agreement includes return of the principal amount of similar quality 
crude oil to the SPR, plus payment of an in-kind negotiated premium. 
This is an appropriate use of this resource.
                          vii. recommendations
    NPRA has several recommendations for this Committee concerning 
steps that can be taken to address current high diesel fuel prices. 
Unfortunately, in the short term, there is little that can be done in 
the public policy arena to immediately impact diesel fuel supplies and 
prices. However, if we collectively look to the future, there are 
strategies that can be pursued to address these issues in the years 
ahead.
    First, a general recommendation. At a time when diesel prices are 
high, despite adequate supplies of diesel, refineries need more----not 
less----legislative and regulatory certainty to make reliable project 
feasibility analyses and to drive future investment opportunities. If 
Congress fails to fully consider the fuel supply impacts of legislation 
and implementing regulations, then this situation will not improve. 
Refiners support and encourage continued environmental progress. 
However, if policymakers have tended to overlook and take for granted 
the supply side of the environmental-energy equation, then we are 
destined for more of the same. It is imperative, in our opinion, that 
determining the impact on supply must be fully embedded in the policy-
making process. In working with policymakers on improvements to fuels 
and facilities, NPRA has often commented that industry needs time, 
flexibility or more realistic standards to minimize negative impacts on 
fuel supply. Policymakers, however, often opt to promulgate regulations 
that are ``technology forcing,'' constructed with limited and often 
theoretical ``margins of safety,'' and requiring implementation in the 
shortest time possible--all without adequate attention to fuel supply 
impacts. Congress should make increasing the nation's supply of oil, 
oil products and natural gas a number one public policy priority.
    Let me apply this general recommendation to several specific 
legislative initiatives currently under consideration by this Congress.
    Since the price of crude oil makes up a significant portion of the 
cost of diesel fuel, reducing crude oil prices should have a beneficial 
impact on diesel prices. Applying basic economic principles, if crude 
oil supplies increase and demand remains the same, then the upward 
pressures on products derived from crude, such as crude oil, should 
lessen. To increase crude oil supplies, Congress should permit the 
moratorium on oil and gas exploration on the Outer Continental Shelf to 
lapse at the end of this month and free our nation's energy industries 
to increase crude oil supplies.
    Congress also should encourage continued domestic refining capacity 
expansion by extending and expanding the refinery expensing provision 
in section 1323 of the Energy Policy Act of 2005. We were pleased to 
see such a provision in the most recent energy tax package released by 
the Senate Finance Committee and strongly support that provision. This 
initiative encourages the expansion of domestic refineries and a 
resultant increase in diesel fuel supplies.
    However, the same Senate Finance bill that includes the refinery 
expansion provision also includes tax measures that will raise the cost 
of capital on domestic refiners--in effect, washing away the capacity 
expansion incentives in other sections of the bill. Clearly, Congress 
is sending mixed messages with respect to whether domestic refinery 
expansions should be encouraged. If this Congress wants domestic 
refinery capacity increased, then it must adopt policies that further 
these goals----not policies that work against them.
    The refining industry is further challenged to comply with mandated 
reductions in diesel sulfur content in 2010 and the enormous federal 
Renewable Fuel Standard, which includes significant submandates for 
biodiesel and renewable diesel. Again, these policies respectively 
discourage increased domestic diesel fuel production and increase the 
costs of this production.
                            viii. conclusion
    NPRA members are dedicated to working cooperatively at all levels 
to ensure an adequate supply of clean, reliable and affordable 
transportation fuels. We stand ready to work with Congress to ensure a 
stable and effective fuels policy that utilizes a diversity of 
resources to improve our national security, assist our consumers and 
protect our environment, all without jeopardizing the refining 
industry's jobs and profitability and other industries dependent on the 
financial health of the refining industry. I appreciate this 
opportunity to testify today and welcome your questions.

    The Chairman. Thank you very much.
    Ms. Windsor.

     STATEMENT OF BARBARA WINDSOR, PRESIDENT AND CEO, HAHN 
              TRANSPORTATION, INC., NEW MARKET, MD

    Ms. Windsor. Thank you, Mr. Chairman and Senator Sessions.
    My name is Barbara Windsor. I'm President and CEO of Hahn 
Transportation, headquartered in New Market, Maryland.
    My family built and grew this business over the past 75 
years and today we operate more than 100 trucks and employ over 
a 150 individuals. As a trucking company, we are dependent on a 
plentiful supply of diesel fuel. In fact, our company purchases 
approximately 2,600 gallons of diesel fuel daily to ensure that 
our trucks are able to deliver freight to our customers.
    Last year, Hahn Transportation spent over 1.7 million on 
diesel fuel and this year, we are expected to pay an additional 
$950,000 to $1 million more on that fuel. This dramatic 55 
percent year over year increase in the cost of diesel fuel is 
harmful to the trucking industry and to the United States 
economy.
    Today, I appear before you representing not just my company 
but also the American Trucking Association. ATA is the national 
trade association of the trucking industry. Through its 
affiliates, state associations and affiliated conferences and 
other organizations, ATA represents more than 37,000 trucking 
companies throughout the United States.
    Diesel fuel is the lifeblood of the trucking industry. Each 
year, the trucking industry consumes over 39 billion gallons of 
diesel fuel. This means that a one cent increase on the average 
price of diesel costs the trucking industry an additional $391 
million a year in fuel expenses.
    The national average price of diesel fuel is currently over 
$4 per gallon which is a $1.06 more than just a year ago. The 
trucking industry is on pace to spend an incredible $159.9 
billion on fuel this year. This is $47 billion more than we 
spent in 2007 and more than double the amount we spent just 4 
years ago.
    Today, it costs approximately $1,200 to refuel a truck. As 
a result of this dramatic increase in the price of diesel, 
which has coincided with the downturn in the economy and the 
softening of the demand for the freight transportation 
services, many trucking companies are struggling to survive.
    In the first half of 2008, more than 1,900 trucking 
companies with at least five trucks or more have failed. This 
was the largest number of trucking-related failures since 2001. 
It is very likely that a large number of companies that operate 
fewer than five trucks also will have turned in their keys 
during this first half of the year.
    For most truckers, fuel has now surpassed labor as the 
largest operating expense we have. Diesel fuel's a commodity 
that is refined from petroleum. Like most commodities, it is a 
competitive marketplace. Its price is determined by supply and 
demand. The dramatic run-up in petroleum product prices, 
including gasoline and diesel, is the result of a confluence of 
factors.
    First, there's been an increase in global demand for 
petroleum, primarily on the rapid growth in China and India, 
but also from the increased demand among Europe and the Persian 
Gulf countries.
    Second, there is very little excess petroleum in the market 
and any disruptions, potential and real, translates into an 
immediate price spike.
    Third, we have borne witness to a dramatic decline in the 
value of the dollar. Five years ago, the dollar was at a parity 
with the Euro. Today, the dollar is worth nearly 30 percent 
less than the Euro.
    Finally, we note that there has been a significant increase 
in the amount of dollars invested in the petroleum futures 
market by non-commercial participants and believe that this 
increased speculation may be partially responsible for the 
increase in commodity prices.
    Against this backdrop, we greatly appreciate the 
opportunity to discuss actions that Congress can take to help 
address the soaring prices of diesel fuel. The fuel prices we 
face today is very severe. There is no one single solution to 
high oil prices and Congress must embrace a multifaceted 
approach to solving this problem.
    We are not going to be able to conserve our energy, our way 
out of this crisis, nor will we increase our production, 
provide a total solution to this. We're going to need every 
tool in the tool shed to address this crisis. Keeping with this 
metaphor, we need a drill to expand the supply of petroleum, we 
need a saw to cut the demand for petroleum, and we need a 
hammer of government to ensure that the petroleum markets are 
transparent and not subject to increased speculation by 
manipulation.
    First recommendation is to increase supply, increase the 
domestic exploration, increase domestic refining capacity, and 
one national diesel fuel standard.
    The second recommendation is to demand control our speed, 
reduce main engine idling, address congestion and highway 
infrastructure, fully fund EPA's Smart Way Program, enhance 
truck productivity, support truck fuel economy standards and 
support research and development of new technology.
    Third recommendation is to ensure market transparency and 
prevent excessive speculation and manipulation.
    During the past 5 years, the assets allocated to 
commodities, commodity index trading strategies have risen from 
13 billion to 260 billion. The huge increase in dollars 
invested in the petroleum futures market and the prevalence of 
exempt transactions and/or electronic exchanges that are not 
regulated by the Commodities Future Trading Commission has led 
many experts to conclude that ``the current price of petroleum 
is artificially inflated and has departed from the fundamental 
market forces of supply and demand.''
    While we cannot quantify the extent of which speculation is 
responsible for the recent dramatic increase of the price of 
crude oil, we believe that excessive speculation is part of the 
problem. For this reason, we believe that Congress should take 
steps to increase the transparity of the petroleum exchanges 
and establish reasonable position limits for non-commercial 
traders to prevent excessive speculation.
    At a minimum, Congress should require the CFTC to regulate 
the petroleum markets to the same extent that regulates other 
commodity trading. Reasonable position limits should be imposed 
that ensure the ability of consumers of the underlying 
commodity to effectively hedge market risk while limiting 
excessive speculation from investors that have been using the 
futures market for asset accumulation.
    Mr. Chairman, ATA appreciates this opportunity to offer our 
insight into measures that the country should take to help 
address this high diesel fuel crisis and I'd be happy to answer 
any questions.
    Thank you.
    [The prepared statement of Ms. Windsor follows:]

    Prepared Statement of Barbara Windsor, President and CEO, Hahn 
                  Transportation, Inc., New Market, MD
    Mr. Chairman and Members of the Committee:
    My name is Barbara Windsor, and I am the President of Hahn 
Transportation, a trucking company headquartered in New Market, 
Maryland. My family built and grew this business over the past 75 years 
and today we operate more than 100 trucks and employ over 150 
individuals. As a trucking company, we are dependent on a plentiful 
supply of diesel fuel. In fact, our company purchases approximately 
2,600 gallons of diesel fuel daily to ensure that our trucks are able 
to deliver freight to our customers. Last year, Hahn Transportation 
spent approximately $ 1.7 million on diesel fuel and this year we 
expect to spend an additional $950,000 more for that fuel. This 
dramatic (55%) year-over-year increase in the cost of diesel fuel is 
harmful to the trucking industry and the U.S. economy.
    Today, I appear before you representing not just my company, but 
also the American Trucking Associations (ATA). I am proud to serve as 
an ATA Vice Chairman and the former Chairman of its Political Action 
Committee. ATA is the national trade association of the trucking 
industry. Through its affiliated state trucking associations, 
affiliated conferences and other organizations, ATA represents more 
than 37,000 trucking companies throughout the United States.
    The trucking industry is the backbone of this nation's economy 
accounting for more than 80% of the nation's freight bill with nearly 9 
million Americans working in trucking-related jobs. The trucking 
industry delivers virtually all of the consumer goods in the United 
States. We are an extremely competitive industry comprised largely of 
small businesses. Roughly 96% of all interstate motor carriers operate 
20 or fewer trucks.
    Diesel fuel is the lifeblood of the trucking industry. Each year, 
the trucking industry consumes over 39 billion gallons of diesel fuel. 
This means that a one-cent increase in the average price of diesel 
costs the trucking industry an additional $391 million a year in fuel 
expenses. The national average price of diesel fuel is currently over 
$4.00 per gallon, which is nearly $1.06 more than just one year ago.
    The trucking industry is on pace to spend an incredible $159.9 
billion on fuel this year. This is $47 billion more than we spent in 
2007, and more than double the amount we spent just four years ago.
    Today it costs approximately $1,200 to refuel a truck. As a result 
of this dramatic increase in the price of diesel, which has coincided 
with a downturn in the economy and a softening of the demand for 
freight transportation services, many trucking companies are struggling 
to survive. In the first half of 2008, more than 1,900 trucking 
companies with at least five trucks failed. This was the largest number 
of trucking related failures since 2001. It is very likely that a large 
number of companies that operate fewer than 5 trucks also have turned 
in their keys during the first half of this year.
    This hardship surprises few in the industry. For most truckers, 
fuel has surpassed labor as their largest operating expense. Over the 
past five years, total industry consumption of diesel fuel has gone up 
roughly 15 percent, while the price of diesel has nearly tripled during 
the same time period.
    Trucking is a highly competitive industry with very low profit 
margins. This explains why many trucking companies are reporting that 
higher fuel prices have greatly suppressed profits, if they are making 
a profit at all. Our industry cannot simply absorb this rapid increase 
in fuel costs. We must pass some of these costs through to our 
customers. So not only do high fuel prices devastate truckers, but 
their customers as well. Ultimately, the consumer is forced to pay 
higher prices for food, clothing and other basic necessities.
               a. why has the price of diesel increased?
    Diesel fuel is a commodity that is refined from petroleum. Like 
most commodities in a competitive marketplace, its price is determined 
by supply and demand. The following chart demonstrates the close 
correlation between the price of petroleum and the prices of gasoline 
and diesel fuel.
    With the exception of a brief period following Hurricanes Katrina 
and Rita in 2005, the prices of gasoline and diesel have paralleled the 
price of petroleum. The price spikes in refined products following the 
hurricanes of 2005 help illustrate the problem our nation faces when 
petroleum is available in the marketplace, but refining capacity is 
inadequate.
    The dramatic run-up in petroleum product prices, including gasoline 
and diesel, is the result of a confluence of factors. First, there has 
been an increase in global demand for petroleum primarily from the 
rapid growth in China and India, but also from increased demand among 
Europe and the Persian Gulf countries. Until recently, the United 
States demand for petroleum and refined products has steadily 
increased. This year, however, as a result of exorbitantly high fuel 
prices and a slowing economy, the U.S. has experienced some demand 
destruction. The U.S. Energy Information Administration estimates that 
U.S. petroleum consumption fell 4.5% during the first half of 2008, 
compared with the corresponding period in 2007.
    Second, the story behind the global supply of petroleum amounts to 
a wall of worry. The U.S. is the third largest oil producer in the 
world; however, our production of domestically produced oil from Alaska 
is declining and new sources of production have been placed off limits 
for environmental reasons. A large majority of the world's oil supply 
is controlled by foreign countries. Many of these countries have come 
together to form the OPEC cartel, whose mission is to restrict 
petroleum supplies and prop up prices. Other oil producing nations, 
such as Nigeria, Venezuela and Russia, are politically unstable or 
simply do not agree with U.S. policies and may intentionally withhold 
oil from the market in an attempt to hurt U.S. interests. As a result, 
there is very little excess petroleum in the market and any 
disruption--potential or real--translates to an immediate price spike.
    Added to this wall of worry is an increased risk premium on each 
barrel of oil. This risk premium is based upon geopolitical instability 
and a new found appreciation of the vulnerability of U.S. production 
and refining capabilities to hurricanes in the Gulf of Mexico and 
southern U.S.
    Third, we have borne witness to a dramatic decline in the value of 
the dollar. Five years ago, the dollar was at parity with the Euro. 
Today, the dollar is worth nearly 30% less than the Euro.
    While the weak dollar has helped U.S. manufacturers export their 
goods, it has hurt U.S. consumers who have seen significant erosion in 
their purchasing power. Since oil is denominated in dollars, a large 
percentage of the increased price of oil can be attributed to the 
significant fall in the value of the dollar relative to other world 
currencies.
    Finally, we note that there has been a significant increase in the 
amount of dollars invested in the petroleum futures market by non-
commercial participants and believe that this increased speculation may 
be partially responsible for the increase in commodities prices.
    It is clear that our energy crisis is a complex problem that 
requires a comprehensive solution.
                b. a comprehensive solution is required
    Against this backdrop, we greatly appreciate the opportunity to 
discuss actions that Congress can take to help address the soaring 
price of diesel fuel. The fuel crisis we face today is severe. There is 
no one single solution to high oil prices and Congress must embrace a 
multifaceted approach to solving this problem. We are not going to be 
able to conserve our way out of this crisis. Nor will increased 
production provide a total solution. We are going to need every tool in 
the tool shed to address this crisis. Keeping with this metaphor, we 
need a drill to expand the supply of petroleum, we need a saw to cut 
the demand for petroleum, and we need the hammer of government to 
ensure that petroleum markets are transparent and not subject to 
excessive speculation or manipulation.
1. The Drill--Recommendations to Increase Supply
    For the foreseeable future, the trucking industry will continue to 
depend upon the diesel engine and an adequate supply of diesel fuel to 
deliver America's freight. Presently, there is no technology that is 
capable of replacing the efficiency of the diesel engine for heavy duty 
trucks. As our population continues to grow and other nations continue 
to industrialize, the global demand for diesel fuel will continue to 
increase.
    The International Energy Agency has stated that global supplies may 
not keep up with demand through 2013 and that spare capacity from the 
Organization of Petroleum Exporting Countries will shrink, resulting in 
a ``tight'' market with little spare oil production capacity. The 
dramatic increase in the price of oil is partially fed by the 
perception that over the next few years there will be a shortage of oil 
as a result of the failure to invest in increasing oil supplies. For 
these reasons, in addition to reducing consumption and lessening the 
demand for petroleum, we need to focus on increasing our supply of 
crude oil.

    A. Increase Domestic Exploration.--ATA believes that increasing our 
domestic supply of crude oil will help lower diesel fuel prices. To 
achieve this goal we need to begin environmentally responsible 
exploration for crude oil in the Arctic National Wildlife Reserve and 
Outer Continental Shelf. We also must begin developing the oil shale 
resources in Colorado, Utah and Wyoming and eliminating the barriers to 
utilizing coal-to-liquid technologies to exploit our vast domestic coal 
resources. The technology exists to ensure that these resources are 
developed in a manner that protects the environment. We also must 
consider the fact that drilling in Alaska or mining in Colorado 
requires Clean Air Act permits, Clean Water Act permits and land use 
development permits, all of which contain a host of environmental 
protections. Compare this to the drilling for oil in Venezuela or off 
the coast of Cuba with virtually no environmental protections. The 
debate over whether to drill in these areas of the United States has 
been ongoing for decades. In light of geopolitical instability, the 
growing demand for energy from Asia and Europe, and new drilling 
techniques to ensure that environmentally-sensitive areas remain 
protected, it is time to change these policies and develop these 
critical domestic resources.
    B. Increase Domestic Refining Capacity.--For years now it has been 
apparent that the U.S. has underinvested in refining capacity. 
Regardless of the reason for this underinvestment (e.g., environmental 
restrictions or economic factors), it is time to reverse this trend.
    To help expand U.S. refining capacity, ATA has asked that EPA 
streamline its permitting process to facilitate refinery expansions and 
new refinery construction. Congress also should consider enacting 
incentives to encourage increased domestic refinery capacity.
    C. One National Diesel Fuel Standard.--While gasoline moves people, 
diesel fuel moves our economy. Due to the uniquely interstate nature of 
diesel fuel, Congress should take extraordinary steps to ensure that no 
state enacts a boutique diesel fuel mandate. Today, California and 
Texas require special boutique diesel fuel blends. These unique blends 
cost more to produce and prevent diesel fuel from simply being 
transported from one jurisdiction to another in times of shortage. In 
addition, boutique fuels are typically produced by only a handful of 
refineries, which results in less competition, higher refining margins, 
and ultimately higher fuel prices.

    While Congress took steps to curb the proliferation of boutique 
fuels as part of the Energy Policy Act of 2005, the Act created a 
loophole for states seeking to enact renewable fuel mandates. To date, 
five states have enacted biodiesel mandates and several others are 
considering this course of action. In light of the recently enacted 
biodiesel mandate as part of the expanded federal renewable fuel 
standard (RFS), Congress should preempt state biodiesel mandates. These 
duplicative state mandates are not needed to ensure a strong domestic 
biodiesel industry and will simply create an economic environment where 
biodiesel producers can charge extraordinarily high prices for their 
product--insulated from the checks and balances of a competitive 
market. The federal RFS guarantees that 1 billion gallons of biodiesel 
will be consumed domestically--the free market must be allowed to 
operate to ensure that this mandate is achieved in the most cost 
effective manner possible. State biodiesel mandates will distort the 
free market and prevent biodiesel from being consumed in those parts of 
the country where it is most economical to do so. Congress must preempt 
state biodiesel mandates as inconsistent with our national interest and 
efforts to promote the cost effective use of biofuels.
    While on the subject of biodiesel, we would be remiss if we did not 
call for renewed efforts to close the splash and dash loophole. The 
American public would be outraged if they knew that their tax dollars 
were being spent to subsidize biodiesel that is ultimately exported for 
sale outside the U.S. Beginning next year the Congressionally-mandated 
biodiesel standard will require U.S. companies to consume 500 million 
gallons of biodiesel. This number jumps to a billion gallons in 2012. 
For this reason, we do not believe that we should create an incentive 
to export subsidized biodiesel, which will drive up the price of this 
mandated alternative fuel for U.S. consumers.
2. The Saw--Recommendations to Reduce Demand
    Reducing the nation's consumption of diesel fuel will reduce the 
overall demand for petroleum and should result in lower prices for 
petroleum products.

    A. Control Speed.--The typical heavy-duty diesel truck travels 
between 5 and 7 miles on a gallon of diesel, depending upon load, 
route, equipment and drivers' skill. Speed has a direct correlation to 
fuel consumption. In fact, for each mile per hour that a truck travels 
above its optimal fuel efficiency point, its fuel economy decreases by 
1/10 of a mile per gallon. For example, a truck traveling at 65 mph 
that is capable of achieving 6 miles per gallon, will achieve only 5 
miles per gallon when traveling at 75 mph. For this reason, ATA 
recommends that Congress establish a national speed limit of 65 mph for 
all vehicles. Of course, to achieve the maximum benefit of this policy, 
the federal government will need to partner with States to ensure 
strict enforcement of the 65 mph speed limit.
    ATA also has petitioned the Administration to require that all new 
trucks be equipped with factory-installed devices that electronically 
limit the truck's maximum speed to 68 mph. In addition to the fuel 
conservation benefit from ensuring that trucks do not exceed this 
speed, we are confident that this measure will further reduce the 
number of truck-related fatalities that occur on our nation's roadways.
    B. Reduce Main Engine Idling.--Truck drivers idle their trucks out 
of necessity. The Department of Transportation's Federal Motor Carrier 
Safety Administration (FMCSA) Hours-of-Service regulations require 
mandatory off duty rest periods. Many over-the-road drivers rest in the 
sleeper berth compartment in their truck cabs. As the driver rests in 
the truck's sleeper compartment, he/she will often need to cool or heat 
the cab to rest comfortably. In extremely cold weather, truck drivers 
also will idle their engines to prevent the engine block from freezing. 
Argonne National Laboratory estimates that the average long-haul truck 
idles for 1,830 hours per year. With hundreds of thousands of these 
trucks on the road, idling has a significant impact on fuel consumption 
and the environment. The U.S. Environmental Protection Agency (EPA) 
estimates that idling trucks consume approximately 1.1 billion gallons 
of diesel fuel annually.
    Several options are currently available to reduce engine idling. 
Auxiliary power units (APUs) are among the most popular choices in 
anti-idling equipment providing climate control (heating and cooling), 
engine preheating, battery charging, and power for household 
accessories without use of the truck's main engine. APUs have been 
proven by the Federal Highway Administration to save up to one gallon 
of fuel per hour of idling and to substantially reduce emissions and 
greenhouse gases.
    More than 30 states, counties, or cities have adopted regulations 
limiting the amount of time a commercial vehicle can idle. While 
reducing main engine idling is a laudable goal, three major barriers 
stand in the way of trucking companies purchasing such equipment for 
their daily use: (1) the failure to grant exceptions for the additional 
weight associated with anti-idling equipment, (2) the imposition of a 
federal excise tax on the purchase of such devices, and (3) the actual 
cost of the devices themselves.
    Since idling reduction equipment will add weight to a truck, many 
fleets cannot afford to reduce their cargo capacity to compensate for 
the installation of idle reduction equipment on a truck. To address 
this concern, Congress authorized a 400-pound weight exemption for 
trucks equipped with idle reduction equipment under Section 756 of the 
Energy Policy Act of 2005. While Congress' intent was to mandate this 
exemption, the Federal Highway Administration (FHWA) has determined 
that states ``may'' adopt the exemption on a voluntary basis. FHWA's 
interpretation of the weight exemption gives states the option of 
whether to allow the exemption or not. To date, 32 states have passed 
legislation recognizing the 400-pound weight tolerance and a handful of 
states are exercising enforcement discretion. ATA asks Congress to 
clarify the 400-pound weight exemption as being applicable to idling 
reduction equipment nationwide.
    A recent IRS interpretation applies the Federal Excise Tax (FET) to 
the purchase of idle reduction equipment, which has increased the cost 
of this equipment and consequently reduced consumer demand for these 
proven anti-idling solutions. The 12 percent tax acts as a disincentive 
to truckers looking to reduce main engine idling. FET makes the 
acquisition of APUs more expensive and beyond the reach of potential 
buyers. The tax alone for a large fleet looking to buy 1,000 APUs at a 
typical retail price of $8,000 is almost $1 million. Taxing devices 
that are proven to reduce fuel consumption and diesel emissions clearly 
sends the wrong message to the nation. By taxing APUs, we are doing a 
great disservice to both our economy and the environment. To address 
these disincentives, ATA asks Congress to amend Section 4051 of 
Internal Revenue Code to make idling reduction equipment purchases 
exempt from FET. This action will increase demand for the introduction 
of idling reduction equipment, thereby ensuring greater fuel 
conservation and a cleaner environment.
    While APUs are a proven alternative to main engine idling, most 
trucking companies just cannot afford purchasing devices that can cost 
up to $10,000 per unit. ATA is seeking financial incentives from 
Congress in the way of tax credits or grants to expedite the 
introduction of idling reduction equipment across the Nation.
    C. Address Congestion and Highway Infrastructure.--Americans waste 
a tremendous amount of fuel sitting in traffic. According to the most 
recent report on congestion from the Texas Transportation Institute, in 
2005, drivers in metropolitan areas wasted 4.2 billion hours sitting in 
traffic, consuming 2.9 billion gallons of fuel annually. ATA estimates 
that if congestion in these areas was eliminated, nearly 32 billion 
gallons of fuel would be saved and carbon emissions would be reduced by 
314 million tons over a 10-year period. ATA recommends that Congress 
invest in a new congestion reduction program to eliminate major traffic 
bottlenecks, with a specific focus on bottlenecks that have the 
greatest impact on truck traffic.
    D. Fully Fund EPA's SmartWaySM Program.--In February 
2004, the freight industry and EPA jointly unveiled the 
SmartWaySM Transport Partnership, a collaborative voluntary 
program designed to increase the energy efficiency and energy security 
of our country while significantly reducing air pollution and 
greenhouse gases. The program, patterned after the highly-successful 
Energy Star program developed by EPA and DOE, creates strong market-
based incentives that challenge companies shipping products and freight 
operations to improve their environmental performance and improve their 
fuel efficiencies. To become a partner a fleet must commit to reduce 
fuel consumption through the use of EPA-verified equipment, low-
viscosity lubricants, or other measures. By 2012, the 
SmartWaySM program aims to save between 3.3 and 6.6 billion 
gallons of diesel fuel per year. EPA predicts SmartWaySM 
participants will also reduce their annual greenhouse gas emissions by 
48 million tons of CO2 equivalents. SmartWaySM is 
one voluntary greenhouse gas program that not only works, but exceeds 
expectations.
    SmartWaySM is a unique resource that reviews the use of 
new technologies that are proven to reduce fuel consumption and then 
uses market incentives to promote their deployment. The trucking 
industry has fully embraced SmartWaySM and relies upon the 
innovativeness of this cutting edge program. The entire nation benefits 
from SmartWaySM through the fuel that is conserved and the 
emissions reductions it produces. For this reason, Congress should 
increase the investment in this program to facilitate its expansion. 
While the program is growing by leaps and bounds, future funding 
remains uncertain. ATA and other freight and shipping sectors continue 
to work towards ensuring a separate line item in future EPA 
appropriations for SmartWaySM, but we are troubled by the 
FY08 funding cuts to the program. More specifically, total monies 
allocated to the program this year dropped from roughly $3 million in 
FY07 to $2 million in FY08. Funding cuts to grants, contracting, 
marketing, technology development, and other program expenses have 
severely undermined the mission of the program. It is our hope that EPA 
will redirect an additional $1 million from the Climate Protection 
Program under the FY08 budget to ensure the continued growth and 
success of this remarkable program. Given that the Energy Star 
program's annual operating budget is $50 million, we also ask that 
Congress provide a line item appropriation to ensure that 
SmartWaySM is adequately funded in the future.
    E. Enhance Truck Productivity.--By reducing the number of trucks 
needed to move the nation's freight, the trucking industry can reduce 
fuel consumption, which would produce significant environmental 
benefits. More productive equipment--where it is consistent with 
highway and bridge design and maintenance of safety standards--is an 
additional tool that should be available to states. A recent study by 
the American Transportation Research Institute found that use of these 
vehicles could reduce fuel usage by up to 39%, with similar reductions 
in criteria and greenhouse gas emissions. The reduction in truck 
vehicle miles traveled on highways such as the New York Thruway, 
Massachusetts Turnpike, Florida Turnpike, and on roads throughout the 
Western United States, has lowered the amount of fuel burned in these 
states. These examples of responsible governance could be replicated by 
other states if given the necessary flexibility under federal law.
    F. Support Truck Fuel Economy Standards.--Congress should ensure 
that fuel economy standards for commercial medium-and heavy-duty trucks 
are technologically and economically feasible, do not compromise truck 
performance, and provide manufacturers sufficient stability and lead 
time for production. Given that fuel economy in the industry has 
remained flat over the last quarter century and fuel now is the largest 
operating expense for many fleets, it is more critical than ever to 
increase fuel economy for these vehicles. ATA will be working closely 
with the U.S. Department of Transportation and the National Academy of 
Sciences as they evaluate fuel economy, fuel efficiency, and establish 
associated standards for medium-and heavy-duty trucks as directed under 
the Energy Information and Security Act of 2007.
    G. Support Research and Development of New Technologies.--As we 
look toward the future, the trucking industry will be pressured to 
reduce its carbon output. The industry will find it difficult to do 
this without new affordable technologies. To address this issue, 
Congress should fund research and development in the areas of new 
engine technologies, aerodynamics, low-carbon fuels, fuel additives, 
lubricity, tires, batteries, hybrids, anti-idling equipment, 
insulation, and rolling resistance specific to operations of line-haul 
trucks. Technology advancements have stalled for many years and an 
infusion of funding into an organized research program will be critical 
to developing the next generation of more efficient and lower carbon-
emitting trucks.
3. The Hammer--Recommendations to Ensure Market Transparency and 
        Prevent Excessive Speculation and Manipulation.
    During the past five years the assets allocated to commodity index 
trading strategies have risen from $13 billion to $260 billion. The 
huge increase in dollars invested in the petroleum futures markets and 
the prevalence of exempt transactions and/or electronic exchanges that 
are not regulated by the Commodity Futures Trading Commission (CFTC) 
has led many experts to conclude that the current price of petroleum is 
artificially inflated and has departed from the fundamental market 
forces of supply and demand. While we cannot quantify the extent to 
which speculation is responsible for the recent dramatic increase in 
the price of crude oil, we believe that excessive speculation is part 
of the problem. For this reason, we believe that Congress should take 
steps to increase the transparency of the petroleum exchanges and 
establish reasonable position limits for non-commercial traders to 
prevent excessive speculation. At a minimum, Congress should require 
the CFTC to regulate the petroleum markets to the same extent that it 
regulates other commodity trading activities. Reasonable position 
limits should be imposed that ensure the ability of consumers of the 
underlying commodity to effectively hedge market risk while limiting 
excessive speculation from investors that have begun using the futures 
markets for asset accumulation.
    Balancing the need for an efficient petroleum market with the 
desire to limit petroleum speculation could help burst any speculative 
bubble that has formed in the petroleum markets. Congress should 
consider the merits of expanding government oversight of electronic 
petroleum exchanges and establishing position limits to make it less 
attractive for Wall Street to speculate on petroleum prices, while 
ensuring that a robust market exists for legitimate purposes. Most 
importantly, we note that the recommendations to increase oversight and 
establish reasonable position limits for non-commercial traders are 
remedies that have no potential downside. Under a worst case scenario, 
the transparency of the market is improved, but the price of oil 
remains unaffected. Under a best case scenario, these remedies burst 
the speculative bubble that continues to grow, restores investor 
confidence in the futures markets, and drives asset accumulators out of 
the futures markets resulting in a relatively quick reduction in the 
price the oil.
    ATA appreciates this opportunity to offer our insight into measures 
that the country should take to help address high diesel fuel prices.

    The Chairman. Thank you very much.
    Dave, we're glad to have you here. Please go right ahead.

   STATEMENT OF DAVE MCCURDY, PRESIDENT AND CEO, ALLIANCE OF 
                    AUTOMOBILE MANUFACTURERS

    Mr. McCurdy. Thank you, Mr. Chairman and members of the 
committee.
    On behalf of the members of the Alliance of Automobile 
Manufacturers, the 10-member companies, Senator Sessions 
mentioned one, Mercedes Benz, we have 4 German members, 
Mercedes, BMW, Volkswagen and Porsche, and 3 Japanese members, 
Toyota, Mazda, Mitsubishi, and the 3 United States-based 
manufacturers, General Motors, Ford and Chrysler, and soon an 
11th member, Jaguar-Land Rover.
    But we do appreciate the opportunity to come talk to you 
about the role that clean diesel will play in reinventing the 
automobile.
    The principal challenge, as you identified, Mr. Chairman, 
will be removing both the fuel and technology cost barriers 
that currently exist. Last year, Alliance members supported a 
tough new energy law, primarily written by this committee, that 
raises fuel economy to at least 35 miles per gallon by 2020, a 
40 percent increase. Higher mileage means lower carbon dioxide 
emissions. Under this law, the auto industry will dramatically 
reduce CO2 by 30 percent. We are the first industry 
to commit to such challenging CO2 reductions.
    Currently, there are close to five million diesel vehicles 
on U.S. roads and highways, those light-duty trucks and cars. 
Over the next year, automakers will launch more than a dozen 
new clean diesel car and truck models that meet the world's 
strictest clean air standards. By providing dramatic increases 
in fuel efficiency, 20 to 40 percent better than comparable 
gasoline engines, clean diesel vehicles can play a vital role 
in reducing United States oil consumption and reducing vehicle 
CO2 emissions.
    The combination of outstanding performance with 
significantly increased fuel economy led analyst J.D. Power and 
Associates to forecast that ``diesels will account for 14 
percent of the United States market in 2017, up from 3 percent 
today.'' That level of market penetration would save more than 
29 billion gallons of gasoline and reduce CO2 
emissions by over 250 million metric tons over the lifetime of 
these vehicles.
    Now clean diesel engines of today bear no resemblance to 
conventional diesel engines that many of us saw, I even owned, 
in the 1980s. Clean diesel vehicles meet the performance 
demands of consumers. They have high torque. They're smooth and 
quiet running and they have significantly improved fuel 
economy, but they also meet the most stringent Federal and 
state emission standards.
    This environmental progress is a result of the new clean 
diesel system, combining clean diesel fuel, which we've 
discussed, with advanced turbo engines, with improved injection 
systems and effective exhaust control technology that result in 
reduced emissions more than 90 percent. This chart may be hard 
to show but we'll bring it up closer, if you'd like. It's 
really a system, fuels, engine and capture system.
    Recently, talking about incentives that was mentioned by 
Senator Sessions, the IRS announced and the EPA certified that 
clean diesel vehicles from Volkswagen and Daimler would qualify 
for the Alternative Motor Vehicle Tax Credit. Other currently 
available clean diesel models are expected to qualify for this 
credit as well.
    The Alliance and the industry applaud Congress for creating 
tax credits for clean diesel, hybrids, fuel cells and all other 
advanced technologies. These credits encourage consumers to 
purchase these vehicles by offsetting some of the price premium 
this technology requires.
    Upgrades to the fuel injection systems, the turbo-chargers, 
electrical system, mechanical components and emissions control 
system increase the cost of diesel vehicles by $5 to $10,000 
over their gasoline counterparts.
    Now, the life cycle fuel savings from diesel make up for 
the higher upfront costs, unless, and I have to emphasize that, 
unless diesel fuel is significantly more expensive than 
gasoline.
    We are concerned that the cost of diesel fuel could be a 
barrier to widespread acceptance of clean diesel technology by 
United States consumers. In Europe, as mentioned, almost 50 
percent of all new vehicles are powered by clean diesel 
technology.
    In addition to superior fuel economy, a main reason 
Europeans buy diesel-powered vehicles is that the fuel taxes 
are heavier on gasoline. In the United States, diesel fuel is 
more expensive than gasoline, as all the witnesses have 
testified, and is taxed at a higher rate. See the chart here. 
Just from yesterday, pricing impacts on the market, the 
variation, the difference between diesel and regular gasoline.
    Anything to lower the cost of diesel fuel will encourage 
consumers to consider purchasing a clean diesel vehicle. Policy 
that increases the cost of diesel fuel will certainly 
negatively impact consumer acceptance of this technology.
    Recently, Margo Oge, Director of EPA's Office of 
Transportation Air Quality, stated, and I quote, ``Diesel 
passenger vehicles are one important piece of the future 
technology puzzle. Clean diesel is a viable, efficient 
technology to help improve our air quality and energy 
security.'' Mr. Chairman, we agree.
    Given this outstanding combination of performance, low 
emissions and fuel savings, we are confident that the new 
generation of clean diesel is here to stay, and we certainly 
look forward to working with this committee and Congress to 
address barriers to expanding this exciting new technology in 
the United States market.
    Thank you.
    [The prepared statement of Mr. McCurdy follows:]

  Prepared Statement of Dave McCurdy, President and CEO, Alliance of 
                        Automobile Manufacturers
    Mr. Chairman, Good morning, my name is Dave McCurdy and I am the 
President and CEO of the Alliance of Automobile Manufacturers 
(Alliance). The Alliance is a trade association made up of ten car and 
light truck manufacturers including BMW Group, Chrysler LLC, Ford Motor 
Company, General Motors, Mazda, Mercedes-Benz USA, Mitsubishi Motors, 
Porsche, Toyota and Volkswagen. On behalf of the member companies of 
the Alliance I would like to thank you for giving me an opportunity to 
talk with you about the role clean diesel will play in reinventing the 
automobile. The principle challenge will be removing both the fuel and 
technology cost barriers that currently exist.
    Last year, Alliance members supported a tough, new national energy 
law written in large part by this Committee that raises fuel economy to 
at least 35 MPG by 2020, a 40% increase. Higher mileage means lower 
carbon dioxide (CO2) emissions. Under the energy law, the 
auto industry will dramatically reduce CO2 by 30%, which 
makes us the first industry to commit to such challenging 
CO2 reductions.
    Currently, there are close to 5 million diesel vehicles on U.S. 
roads and highways. Over the next year automakers will launch more than 
a dozen new clean diesel car and truck models that meet the world's 
strictest clean air standards.
    By providing dramatic increases in fuel efficiency--20 to 40 
percent better than comparable gasoline engines--clean diesel vehicles 
can play a vital role in reducing U.S. oil consumption and reducing new 
vehicle CO2 emissions. The combination of outstanding 1 
performance with significantly increased fuel economy is leading auto 
industry analysts like J.D. Power and Associates to forecast that 
diesels will account for 14 percent of the U.S. auto market in 2017, up 
from 3 percent today. That level of market penetration would save more 
than 29 billion gallons of gasoline, and reduce CO2 
emissions by over 250 million metric tons, cumulatively over the 
lifetime of these vehicles.
    The clean diesel engines of today bear no resemblence to 
conventional diesel engines. Today's clean diesel vehicles not only 
meet the performance demands of consumers--high torque, smooth and 
quiet-running engines, and significantly improved fuel economy--but 
also meet the most stringent Federal and state emissions standards. 
This environmental progress is the result of the new clean diesel 
system--combining clean diesel fuel, advanced turbo engines with 
improved injection systems and effective exhaust-control technology to 
reduce emissions more than 90 percent.
    In fact, the Internal Revenue Service recently announced, and the 
Environmental Protection Agency certified, that clean diesel vehicles 
from Volkswagen and Daimler would qualify for the alternative motor 
vehicle tax credit and it is expected that several other currently 
available clean diesel models will also qualify for this credit.
    The member companies of the Alliance applaud Congress for creating 
tax credits for clean diesel, hybrids, fuel cells, and all other 
advanced technologies. These credits will encourage consumers to 
purchase these vehicles by offsetting some of the price premium this 
technology requires. Upgrades to the fuel injection systems, 
turbochargers, electrical system and mechanical components and 
emissions control system increase the cost of diesel vehicles by five 
to ten thousand dollars over their gasoline counterparts. Over the life 
of the vehicle, fuel savings from diesel engines potentially make up 
for the higher upfront cost, unless diesel fuel is significantly more 
expensive than gasoline.
    Alliance members are concerned that the cost of diesel fuel could 
be a barrier to widespread acceptance of clean diesel technology by 
U.S. consumers. In Europe, almost 50% of all new vehicles are powered 
by clean diesel technology. In addition to superior fuel economy, a 
main reason Europeans buy diesel-powered vehicles is that fuel taxes 
are heavier on gasoline. In the U.S., diesel fuel is more expensive 
than gasoline and is taxed at a higher rate. Anything that can be done 
to lower the cost of diesel fuel will help encourage consumers to 
consider purchasing a clean diesel vehicle. Any policy that increases 
the cost of diesel fuel will most certainly negatively impact consumer 
acceptance of the technology.
    Recently, Margo Oge, Director of EPA's Office of Transportation and 
Air Quality stated ``Diesel passenger vehicles are one important piece 
of the future technology puzzle. Clean diesel is a viable, efficient 
technology to help improve our air quality and energy security.'' We 
agree. Given its outstanding combination of performance, low emissions 
and fuel savings, we are confident that the new generation of clean 
diesel is here to stay. We look forward to working with Congress to 
address barriers to expanding this exciting new technology in the U.S. 
market.

    The Chairman. Thank you all very much for the excellent 
testimony.
    Let me start with a few questions and then Senator Sessions 
and Senator Dorgan and Senator Murkowski will all have 
questions, I imagine.
    The trends that everyone seems to agree upon, and speak up 
if I'm misstating this, but the trends are that we're using 
more diesel relative to gasoline in the mix of fuels that we 
use. That trend has been there and it's going to continue into 
the future.
    Also, the price of diesel is higher relative to gasoline 
than it used to be. It used to be, in fact, I think just the 
opposite. I can remember when my strong impression was that 
diesel was cheaper than regular gasoline and now it's 
substantially higher and the trend seems to be toward more of a 
problem there.
    We all know that the price of oil has gone up or has gone 
up substantially in the last year and that impacts the price of 
gasoline and the price of diesel, but can we single out or 
isolate those factors that are causing the price of diesel to 
be going up at a much faster pace than the price of gasoline? 
That's the question.
    Ms. Windsor, you cite one item there. You say that the 
adoption of requirements for boutique fuel for diesel in 
California and Texas----
    Ms. Windsor. That's right, yes.
    The Chairman [continuing]. Is an increased cost that is put 
on there.
    I think, Mr. Scott, you indicated that EPA's got their new 
requirements with regard to low sulfur have increased the cost 
of producing diesel, but the difference between the cost of 
producing it and the cost that's being charged for it still is 
substantially higher, as I understand it, than is the case with 
gasoline.
    Mr. Scott. Mr. Chairman, you've noted the historical 
picture on that gas sign that Mr. McCurdy put up normally has 
diesel below gasoline prices.
    The commentary I can make is that diesel fuel is a 
commodity and it reacts. We are in a worldwide market for 
petroleum products and as the demand for diesel fuel continues 
to grow and, as Mr. McCurdy said, I think, the auto 
manufacturers would expect it to grow further, we need to keep 
pace with our refining capacity, otherwise, you know, supply 
and demand works and it's a question of where the supply and 
demand line cross at what price level.
    The Chairman. If the supply and demand works, why hasn't 
the supply of diesel that's being provided to the market kept 
pace with the demand?
    Mr. Scott. I actually believe it has. Dr. Gruenspecht may 
be better able to answer this than I am, but I know that our 
members have been switching to maximize their diesel efficiency 
and the production from the refineries, but there's only so 
much with existing equipment you can do.
    There's basic chemistry issues that come into play that 
limit how far you can, let's say, swing a refinery toward 
distillate production.
    The Chairman. Dr. Gruenspecht, why don't you comment on 
that? Also, could you comment on this issue about how I think 
you said we are exporting more to Europe, more diesel, than we 
used to, we are exporting more to Latin America than we used 
to? How does that square with the fact that demand is 
outstripping supply here and driving up prices?
    Mr. Gruenspecht. As has been suggested by others, I think 
there are world market pressures. From 2002 to 2007 we were 
importing more diesel distillate fuel than we were exporting. 
In the first 7 months of 2008, given some of the conditions I 
mentioned in my testimony--the situation in Chile, the 
situation in South Africa, the situation in China--we were 
exporting more diesel than usual.
    But I want to point out that our stocks of diesel fuel 
remained in the normal range throughout this period. By taking 
advantage of some of the high prices that were available for 
diesel, that's one of the things that kept refinery runs high 
because you could make a lot of money on your diesel at the 
same time you weren't making much money on gasoline.
    So, the issue with exports is sort of a tricky one because 
if one imagines a world where those opportunities were not 
available, you might also be imagining a world where refinery 
utilization would have been even lower than it was.
    In some sense, you sell the entire mix of products that 
comes out of the refinery. What you can produce is constrained 
by the carbon and the hydrogen inputs. What a refinery is is a 
big system for taking apart hydrocarbons in the crude oil and 
forming them into different hydrocarbon products.
    So, yes, exports were up. Those markets needed a product, 
just like, in many respects, the United States needs gasoline 
now in Senator Sessions' region of the country, and we are 
pulling in more gasoline from the rest of the world than we 
normally would.
    So, you know, sometimes we're on the receiving end of these 
extraordinary situations and sometimes we're on the sending-
product abroad-end of the extraordinary situation.
    The Chairman. Senator Sessions.
    Senator Sessions. I had a town meeting in a little 
restaurant in Alabama and I complained about the high price of 
diesel and an older gentleman, I think it turned out he was an 
engineer, came up later and said, ``Well, it's better fuel. 
That's why it's more expensive.'' I said, ``It didn't use to be 
more expensive.'' He said, ``People are smarter now. Got more 
BTUs.''
    Mr. Scott, is it a better fuel for transportation?
    Mr. Scott. I'm going to leave that to the experts on how 
various fuels----
    Senator Sessions. You get 30 percent better gas mileage.
    Mr. Scott. If that's the question, does it get better fuel 
economy, the answer to that is yes. The diesel engine generally 
is a more efficient engine for a gallon of fuel.
    Senator Sessions. It takes a certain type fuel, what we 
call the diesel fuel, to----
    Mr. Scott. Yes, sir.
    Senator Sessions. Ms. Windsor, do you have any thought 
about that?
    Ms. Windsor. Yes, I do, because after ultra-low sulfur, 
which is 15 parts per million, came into our society a year 
ago, when diesel fuel, when it went from 500 parts per million 
which there is still some produced but most of the diesel fuel 
is ultra-low sulfur, 15 parts per million, it burns cleaner. 
However, the new engines are mandated, the 2007 engines and 
newer, will be all ultra-low sulfur diesel.
    We find that the ultra-low sulfur diesel price versus the 
500 parts per million, the low-sulfur diesel, runs anywhere 
from 10 to 12 cents per gallon more and we've been told that's 
because of additional refining.
    Also, because of the quality of the burn and the lubricity 
and so forth, we find out that we are getting anywhere from one 
to two gallons at least less miles per gallon.
    Senator Sessions. On ultra-low sulfur?
    Ms. Windsor. Yes, we burn more fuel with the ultra, but it 
burns cleaner.
    Senator Sessions. Mr. McCurdy, you foresee that with the 
mileage requirements that we must meet as a nation, the 
automobile industry has concluded that one aspect or effort to 
meet that would include more diesel engines because of the 
rather dramatic mileage increase you get.
    Would that help you meet the standards that we've imposed 
on the automobile industry?
    Mr. McCurdy. Absolutely, Senator Sessions. As I indicated, 
we've committed to a 40 percent increase in CAFE, and one of 
the technologies that we believe will enable us to get there, 
if widely adopted in mass market, I diesel because of the 
efficiency and also it is cleaner as far as CO2 
emissions.
    As my colleagues here indicated, and I certainly wouldn't 
want to debate Ms. Windsor on the quality of sulfur versus low 
sulfur of the particulates, but, you know, in the United 
States, in Europe, 51 percent of vehicles are diesel now and 
they are certainly higher-efficiency vehicles, but the 
difference and the reason that we weren't able to get them as 
widely used in the United States partly is regulatory.
    California and several states have higher emissions 
requirements than the Federal Government and we couldn't 
produce the so-called 50-State car. It was a 45-State car and 
for mass manufacturers, they're not going to produce a vehicle 
or introduce a vehicle that can't be sold in all 50 States.
    Senator Sessions. Is that clarified now in the new law?
    Mr. McCurdy. As of 2000--as a matter of fact, yes, with the 
introduction of ultra-low sulfur diesel, which is kind of 
like--my basic understanding is it's like when we had moved 
from leaded to unleaded gasoline, you take the lead out, you 
take the sulfur out, and certainly it's cleaner. It's a bit 
more complicated and it affects the price some.
    But two manufacturers have just introduced diesel into 
California and so therefore it meets the highest stringency in 
the world.
    Senator Sessions. Now, could I just offer as my time winds 
down, the Europeans in their tax policies substantially favor 
diesel over gasoline. It's a dollar a gallon more. We have a 6 
percent more tax on diesel, penalizing diesel 6 cents, and it's 
24 to 18, I believe, cents a gallon difference. Is that good 
policy in your opinion for the country?
    Mr. McCurdy. Senator, I think the chairman mentioned it in 
the beginning, and I want to commend this committee because too 
often energy discussions and debates are superficial and really 
are not thought through and I think this committee is trying to 
bring some serious thought to this question.
    Some of our policies are actually inconsistent. I'll cite 
some examples. On one hand, we want to encourage conservation, 
we want to encourage efficiency, and yet many are saying that 
gas prices are too high. We have a tax policy that in Europe, 
as we indicated, encourages, pushes drivers to the utilization 
of diesel and conservation of all gasoline.
    So it doesn't make sense right now to have--if we're going 
to introduce more diesel into the United States in the car 
market, then this tax policy should be reviewed because right 
now, it's an inhibitor.
    Originally, I think tax on diesel was a consideration about 
who used the highways the most and the trucking industry bore a 
big part of that, but if we want to really focus on efficiency 
and reducing CO2, this tax policy should be 
reviewed.
    Senator Sessions. The statement here that you gave that if 
we go to 14 percent of auto market diesel, according to J.D. 
Power and Associates, up from 3 percent today, that that would 
mean a saving of 29 billion gallons of gasoline which is a 
substantial savings just on that.
    So I think, Mr. Chairman, you're having a good hearing. I 
won't belabor the point, other than to say that I do believe 
our goal as a nation must be to reduce our consumption of fuel 
and, in particular, our consumption of imported fuel. Every 
amount that we can save through conservation and efficiency 
first reduces, would you not think, Mr. Gruenspecht, our 
imports normally?
    Mr. Gruenspecht. That's correct--imports are on the margin.
    Senator Sessions. The margin. So it would tend--anything we 
save is basically a reduction of imports which is good for our 
economy and we've got a proven engine that the Europeans find 
to be very beneficial to them that uses 30 percent less and 
that has got to be a part of our mix, and thank you for 
allowing this discussion.
    The Chairman. Thank you.
    Senator Dorgan.
    Senator Dorgan. Mr. Chairman, it's usually--I should say 
it's unusual to come to a hearing and agree with almost 
everything that I've heard on this panel and also among the 
witnesses. I think----
    Senator Sessions. You haven't been hearing from your 
farmers and truckers like I have, Senator Dorgan.
    Senator Dorgan. No, I've heard from all of them. We're 
prodigious users of energy in North Dakota and I agree with you 
that conservation is critically important. I agree with Mr. 
Scott, we should drill more, produce more. We should expand our 
refining capacity. I mean, I agree with the need to do all of 
that.
    I do want to focus on the title of this hearing is why have 
diesel fuel prices been so high. Let me come back to a point 
that I've made repeatedly to this committee and that is 
unbelievable relentless speculation in the oil futures market. 
Ms. Windsor, you spoke of that especially.
    Mr. Gruenspecht, did yesterday's experience in the oil 
futures market disabuse the EIA of the notion that there's no 
speculation going on?
    Yesterday, oil jumped $25 a barrel, crushing the one-day 
record of $10 a barrel. It settled about $15 a barrel up.
    Was there some unbelievable moment in supply and demand 
relationship that caused that yesterday or was that just 
unbelievable speculation, Mr. Gruenspecht?
    Mr. Gruenspecht. I would say it's hard to provide instant 
analysis, but I would think that yesterday's experience was a 
good example of a short-term movement in prices that does not 
reflect fundamentals. It probably reflects some kind of trader 
activity. They're really two different kinds of--by the way, 
the EIA view, I think, expressed by Administrator Caruso, who 
I'm now acting for since he's left,----
    Senator Dorgan. Right.
    Mr. Gruenspecht [continuing]. Has been that fundamentals 
are the primary factor driving oil markets, but I think EIA's 
testimony has always been that other factors can affect short-
run movements.
    The most likely answer regarding yesterday's price movement 
is it was a ``squeeze'' where some trader had a short-term 
position and needed to get out of it but didn't start buying 
until too late. The other option, frankly, is manipulation and 
the CFTC has a case from July against, I think, a company 
called Optiver that discusses a manipulation designed to 
increase prices at the market close.
    I would expect the CFTC--in fact, yesterday I was thinking 
how I would answer this if it came up--I would want to look 
into the possibility of manipulation and I noticed in looking 
at the clips this morning that the director or the acting 
director, I guess, of enforcement at CFTC stated he would be 
scouring Monday's trading to determine whether anyone engaged 
in illegal manipulative activity. So I guess I would say the 
cause yesterday was trader activity.
    Senator Dorgan. Mr. Gruenspecht, well, you've described it 
as a squeeze. Some would say it's more than a squeeze 
yesterday, but let me go back here because it relates--I think 
there are a lot of things that have caused this diesel price 
issue.
    But EIA, as I've indicated before, Mr. Gruenspecht, you've 
seen this chart, we spend $100 million on the agency called EIA 
and we've got terrific people working there and so on, and we 
ask them to give us their estimate of what's going to happen to 
pricing and I assume that they use the fundamentals of supply 
and demand, projecting what will demand be, what will supply 
be, in order to evaluate what will happen with the pricing.
    If I might show on this chart, starting in May of last 
year, this yellow line is where the EIA thought prices would 
go. July, they thought this would be the line. November last 
year, this would be the line. May of this year, this would be 
the line. These are all the best estimates of the EIA using 
fundamentals to evaluate what would happen to prices. This red 
line, by the way, is what happened to prices.
    Mr. Gruenspecht, you've heard me query Mr. Caruso about 
this. The best experts in a $100 million Federal agency have 
told us the way it appears this line is going to look all the 
way along every time they've done the assessment, but in fact 
here's the way the line went.
    My guess is it went this way because it has no relationship 
to the fundamentals that you studied that produced all these 
yellow lines and yesterday was perhaps more than a squeeze.
    Ms. Windsor, when you describe this piece, if you're a 
trucker out there and you described how many truckers have gone 
under, if you're a trucker out there and you hear that there's 
a squeeze in the refining capacity or this or that, you know, 
there's not much you can do about it.
    Ms. Windsor. No.
    Senator Dorgan. This issue, this issue of a run-up in 
speculation on the futures market in which the market become 
broken and doesn't track at all with what the experts think 
should happen, that's also outside of the realm of any trucker 
to have any impact on at all and so we've had hearing after 
hearing on this and we've had all the experts come who have an 
interest in saying there is no speculation, who tell us that, 
there's nothing going on, don't believe your own eyes, and so 
that's the dilemma here.
    I think the issue that you've just described, Mr. McCurdy, 
about the engine, Ms. Windsor also has talked about a much more 
engine, all of these things are interesting to this committee 
because you made a point that is very important. We can't ask 
somebody to produce a car that's not going to have fuel in all 
50 States. The same is true with trying to move toward in the 
longer-term hydrogen fuel cell vehicles.
    How do you change an infrastructure of being able to get 
gasoline and then a month later buying a new vehicle and 
finding a place to fuel with hydrogen, right? I mean that's 
probably 20 years away.
    So these are all really interesting, challenging things, 
and I think Senator Bingaman has put us on the path to trying 
to think through bolder and more interesting and more 
innovative approaches to all of these energy challenges we 
have.
    Mr. McCurdy. If I could just respond to one point my friend 
and former colleague raised, and that is, the infrastructure 
issue which is a huge question because if you look at ethanol, 
you look at the number of stations available, there's some 
1,700 out of a 170,000, but in diesel, it's about 49 percent of 
stations offer diesel. So there is a core infrastructure that 
would allow for an expansion of diesel much more rapidly than I 
think some others--across--that's nationwide, that's true, and 
it varies by State and some States probably a little higher, in 
more rural States.
    So yes. The infrastructure could be expanded. It should be 
improved, but I think, you know, the technology barriers are 
one issue. The cost barrier and price is certainly the other 
and the disproportionate taxation and what we saw the price 
difference.
    The Chairman. Senator Murkowski.
    Senator Murkowski. Thank you, Mr. Chairman, and thank you 
to the witnesses.
    I want to try to understand just a little bit better what 
the real impact of the EPA regulations on the clean diesel and 
the ultra clean diesel fuel requirements.
    When we moved to these requirements, at that time EPA 
indicated the cost was going to be somewhere between four and a 
half to five cents a gallon. I don't know if I heard you 
correctly, Ms. Windsor, but I thought that I heard you say it's 
more like double that.
    Ms. Windsor. It can be, yes.
    Senator Murkowski. Twelve cents per gallon. Do we actually 
know how much these regulations have affected prices, and 
beyond that, is it completely factored in or are there still 
refineries that are undergoing the conversion so that we'll 
continue to see this price increase further? What do we know 
about these numbers?
    Mr. Scott. Dr. Gruenspecht.
    Mr. Gruenspecht. One way to look at this, and not in an 
engineering way but in a market way, is to look at the 
difference between heating oil prices because heating oil 
prices are a high-sulfur product and diesel fuel prices, and we 
can look at what that difference was before this ultra-low 
sulfur diesel rule came in and after. Obviously, the prices are 
changing every day but, generally speaking, I think, before the 
2005 hurricanes, typically on the Gulf Coast the prices were 
one to two cents higher for diesel oil than for heating fuel on 
the spot market.
    That gap opened up quite a bit. I think, currently, it's 13 
to 14 cents would be a typical gap. So if you take the one-to-
two cent gap that you had before and now look at the 13-to-14 
cent gap, you might say that the impact of the program as it's 
worked through the market has been to increase the size of that 
difference by a little bit more than 10 cents, maybe 11-12 
cents a gallon, which I think is consistent with what was said 
by others.
    Senator Murkowski. Then again, Mr. Scott, if you want to 
speak to that, but also, so is that what we can expect that gap 
to be or is it going to increase further as the conversion 
continues or are we done with it?
    Mr. Scott. First of all, we're not done with the 
conversion. I think it's important to distinguish between cost 
and price and the cots of mining a diamond is very different 
than the cost that you and I would pay for it.
    So the cost to the nation's refiners of the diesel sulfur 
reductions have been, I think, about $22-$23 billion to date. 
That's investments made in the facilities. The costs are 
determined--I'm sorry. The prices are determined by the market 
and if there is less diesel being made by the same machines 
because we've reduced the sulfur, then shortages tend to give 
rise to price pressures.
    We have not fully implemented the ULSD Program. We have 
implemented most of the onroad program, the highway diesel 
fuel. Offroad, meaning tractors, other diesel-powered 
generators, that sort of thing, is coming over the next couple 
of years and then there's a third phase which is marine and 
locomotive diesel which will be coming in the 2010 timeframe.
    So our folks continue to make their upgrades in order to 
take the sulfur out, but it's not over yet.
    Senator Murkowski. So, Mr. McCurdy's photograph of 
yesterday's prices in terms of what you pay for unleaded gas 
versus what you're saying for diesel as of yesterday, you would 
expect to see that differential remain for some time. Is that 
what you're suggesting?
    Mr. Scott. I would be foolish to suggest future prices, but 
unless we increase supply of diesel fuel, there's no reason to 
expect downward pressures on prices.
    Senator Murkowski. Which brings us back to Mr. McCurdy's 
point about the need to perhaps examine the tax policies.
    I know my family's a perfect case in point. My family up in 
Alaska had a diesel Suburban and as soon as my husband began to 
really appreciate what was happening with the diesel prices, we 
unloaded that vehicle and if we in fact do want to encourage, 
as the Europeans do, encourage more Americans to purchase these 
vehicles, it's not going to happen if you have that kind of a 
continuing differential in price. It's just not going to be 
there.
    Mr. Chairman, thank you.
    The Chairman. Senator Craig.
    Senator Craig. Thank you, Mr. Chairman, and to all of the 
witnesses, Dave, it's good to see you again, and to all of you, 
thank you for being here.
    I suspect we need you all in a very clear way more than we 
ever have because the Congress is falling all over itself at 
this moment trying to figure out where it should go and I am a 
living case in point.
    I just came from an EPW Committee hearing where the 
chairman is pounding on EPA for not enforcing what the courts 
said they had to do with carbon and therefore some political 
motive was moving the EPA not to do what the courts had said 
they must and that is regulating, controlling carbon emissions 
greenhouse gas. But over here, we're suggesting that we have 
cost the consumer another 15 cents a gallon because we did do 
it or at least we cleaned up diesel substantially more than it 
has been.
    Mr. Chairman, I find that a phenomenal and interesting 
contradiction, nearly, or at least one without balance because 
EPA, at the time the sulfur debate was going on, was talking 3, 
4, 5 cents, somewhere in that range, cost differential in a 
cleaner fuel. Today, you're suggesting it's anywhere from 10 to 
12 to 14 cents.
    Now if you use that indices and applied it against the 
committee's analysis of their climate change legislation, it's 
only going to cost $6.7 trillion and then you double it or 
triple it, oops, no wonder the American consumer and voter has 
decided at this moment that we don't deserve a good job 
performance rating.
    This committee, frankly, does. We've done some phenomenal 
work in energy policy, thanks to this chairman and the ranking 
member and this committee over the last good number of years, 
and we've tried to stay out or at least work out our 
differences in, if you will, competing or contradictory 
approaches.
    Congress hasn't been as successful at that. I remember 
buying diesel at 19 cents. Those were the good old days. We 
were actually using it to pump water. We quit that at 30 cents 
a gallon. It was no longer economical. We switched to 
electrical power.
    So, Mr. Chairman, I remember a time when a diesel truck 
arrived at our farming and ranching operation and literally 
unloaded the entire truck because that's the volume we were 
buying it in. Those days are long gone. Then it was considered, 
if you will, kind of a spin-off from the processing and maybe 
Senator Sessions is right, the engineers had--finally the 
consumer became smarter as it relates to the economics of 
diesel.
    But I'm not sure we have. So it's very important for us as 
we make these changes in policy that you from the private 
sector react and say here are the impacts of what we do or what 
we potentially do to the consumer.
    Right now, the one impact we ought not do to the consumer 
is cost them more money. They're, if you will, stressed out to 
the limit and that's, I think, my greatest frustration, is how 
we create these balances to address what most of us view as a 
real problem and that is we shouldn't put more carbon into the 
atmosphere, but how do we create those effective blends and 
certainly the transportation industry is going to play a very 
valuable role in that.
    I apologize for not being here for your testimony. Oil is 
trading down a $1.01 at this moment, so that there's a little 
bit of despeculation going on in the market today where there 
maybe was speculation yesterday. Sounds like a normal market 
day in the business of energy.
    Thank you, all. Thank you, Mr. Chairman.
    The Chairman. All right. Let me see. Senator Murkowski, did 
you have another questions?
    Senator Murkowski. No, thank you.
    The Chairman. If not, I want to thank the witnesses. I 
think it's been useful testimony. Obviously we haven't 
completed the right policy in all these areas, but I think it's 
useful to understand the different factors that we need to keep 
in mind.
    Thank you, all, for being here and that will conclude our 
hearing.
    [Whereupon, at 11:10 a.m., the hearing was adjourned.]

    [The following statement was received for the record.]
Statement of Patrick Charbonneau, Vice President, Government Relations, 
                             Navistar, Inc.
    Chairman Bingaman, Ranking Member Domenici, and members of the 
committee, my name is Patrick Charbonneau and I am Vice President of 
Government Relations at Navistar International Corporation (Navistar, 
Inc.). On behalf of Navistar, Inc., I would like to take this 
opportunity to thank you for allowing me to submit written testimony 
regarding the issue of diesel fuel prices.
    Navistar, Inc. (NYSE: NAV) headquartered in Warrenville, Illinois, 
is a holding company whose wholly owned subsidiaries produce 
International brand commercial and military trucks, 
MaxxForceTM brand diesel engines, IC brand school and 
commercial buses, and Workhorse brand chassis for motor homes and step 
vans. It also is a private-label designer and manufacturer of diesel 
engines for the pickup truck, van and SUV markets. The company also 
provides truck and diesel engine parts and service. Another affiliate 
offers financing services.
                               the issue
    The transportation industry has been hit by the unusual price 
disparity between diesel fuel and gasoline. Diesel has become higher in 
price than gasoline versus historic price parity.
                               the impact
Bankruptcies
    More than 1,900 trucking companies went bankrupt during the 1st 
quarter of 2008 and 42,000 trucks idled (2.1 % of the nation's trucks). 
Up to 20% cost disparity with gasoline results in over $10 billion in 
annual excess fuel costs to the diesel drivers.
Truck Sales Drastically Down
    Add on to the excess fuel costs $5k to $10k in price increases for 
new near zero emissions trucks in 2007 and again in 2010, and the 
result is truck sales down 43% and the job losses at truck and supplier 
plants. As a reference point the auto industry is down only 12% in the 
same period.
Dieselization Rates Down
    The dieselization rate of lighter vehicles, such as heavy duty 
pickups, has dropped from a historic 70% dieselization to below 50%. 
The diesel vs. gas price disparity is impacting the consumer decisions 
to buy diesel vehicles, which enjoy the 30 to 40% fuel efficiency 
improvement over gasoline.
U.S. Burns More Fuel
    Without this price difference being addressed, dieselization of 
consumer vehicles will contract instead of expand resulting in the 
United States (U.S.) burning more fuel and having to look for more 
sources of oil.
                      what is causing the problem?
    Congress is reviewing many of the factors in the fuel pricing and 
supply situation. However, insufficient attention has been given to the 
fact that the demand for diesel fuel and gasoline is changing, in an 
environment where improvements in fuel efficiency and reductions in 
CO2 emissions have become an important goal.
    Gasoline demand is dropping in the U.S. and in Europe due to the 
use of ethanol, reduced driving/smaller cars (in the U.S.) and diesel 
passenger cars demand (over 50% in Europe). Diesel demand is increasing 
in Europe, China and India. The impact of increased dieselization in 
the U.S. is clear. The Environmental Protection Agency (EPA) has 
estimated that if the U.S. passenger car market was 35% diesel, the 
U.S. would save the equivalent of the oil that we import from Saudi 
Arabia.
    If the price disparity is impacted by the shift in demand, changes 
in diesel supply can be achieved through conventional and non 
conventional means.
    A conventional means is refinery flexibility. U.S. refineries 
produce \2/3\ gas for every \1/3\ diesel. In European refineries the 
focus is for more fuel efficient diesel resulting in almost 2/3 diesel 
for every \1/3\ gas. More flexibility in U.S. refineries could 
significantly increase the production of fuel efficient diesel without 
increasing gasoline output.
    Non conventional methods for acquiring more diesel without 
generating excess gasoline include biodiesel, Fischer Tropsch fuel from 
a variety of feedstocks (biomass, natural gas, low value refinery 
products, coal, etc) and diesel from shale oil.
                        clean diesel background
    Diesel has undergone a revolution that has resulted in diesel 
emissions levels for particulates and NOX down over 90% from 
unregulated products. The fuel economy attributes of over 30% better 
efficiency than gasoline products as well as long life have made diesel 
the product of choice for the transportation industry. Because of the 
fuel efficiency and CO2 emissions benefits, passenger car 
industries such as Europe have dieselization rates of over 50%.
                               conclusion
    Congress has not focused on the specific issue of price disparity 
between diesel and gasoline. Mr. Chairman, I am pleased that you are 
focusing this committee's attention on the high diesel fuel prices. 
Ultimately, what needs to be determined is what can be done to resolve 
not only the short term diesel availability and price but the longer 
term diesel fuel availability and its impact on future fuel efficiency 
objectives.
    Again, thank you Mr. Chairman and Ranking Member and members of the 
committee for the opportunity to provide this testimony.
                                APPENDIX

                   Responses to Additional Questions

                              ----------                              

       Response of Dave McCurdy to Question From Senator Landrieu
    Question 1. As we respond to an increased global demand for diesel 
fuel and a call for increased production of biofuels, what role to you 
believe biodiesel will play in the future of diesel use?
    Answer. In enacting the Energy Independence and Security Act 
(EISA), Congress recognized the potential for biodiesel and other 
biofuels to help lessen our dependence on petroleum-based fuels, 
improving our national energy security and reducing greenhouse gas 
emissions from the transportation sector. Diesel vehicles deliver 
between 20 to 40 percent higher fuel economy than comparable gasoline 
models, providing a promising technology pathway for automakers to meet 
EISA's required 40 percent increase in fuel economy standards by 2020.
    As I state in my written testimony, diesel vehicles currently 
account for about 3 percent of new vehicle sales in the U.S. light duty 
market. J.D. Power and Associates recently forecast that diesels will 
account for 14 percent of the U.S. auto market in 2017. For comparison, 
diesel vehicles account for as much as 50 percent of the passenger 
vehicle fleet in some European nations.
    The Committee's hearing on September 23rd highlighted increasing 
pressure on diesel supply and the resulting higher price of diesel 
relative to gasoline. A growing market for diesel automobiles over the 
next decade could create additional demand pressures. Increased 
production of renewable fuels compatible with diesel engines, including 
both renewable diesel and biodiesel, could alleviate some of the 
resulting price pressure on diesel fuel as we go forward.
    Both renewable diesel and biodiesel have significant promise for 
supplementing, and ultimately displacing, conventional diesel fuel. 
However, unlike renewable diesel fuel, biodiesel fuel is not fully 
fungible with petroleum-based diesel either in the distribution 
infrastructure or in vehicle engines. Since biodiesel degrades quickly, 
care must be taken during fuel production and distribution to assure 
acceptable quality at the retail level. Poor quality fuel can cause 
serious problems that might lead consumers to reject both the fuel and 
the vehicle. Most diesel manufacturers accept the use of biodiesel at 
levels up to 5 percent by volume (B5) as long as the fuel meets 
accepted quality standards. Some vehicles may be able to use higher 
biodiesel levels, especially in light of the recently defined standards 
for biodiesel blends of between 6 and 20 percent (B6-B20).
    Congress can help assure an adequate fuel supply to support the 
growth of a diesel automobile market by making working with standards 
organizations, fuel producers and distributors to promote high-quality 
and dependable biodiesel fuel. Congress can also promote policies to 
support price-competitiveness of diesel fuel, biodiesel and renewable 
diesel fuel relative to gasoline to encourage greater penetration of 
diesel automobiles in the U.S. market.
                                 ______
                                 
                              Department of Energy,
                                 Washington, DC, November 12, 2008.
Hon. Jeff Bingaman,
Chairman, Committee on Energy and Natural Resources, U.S. Senate, 
        Washington, DC.
    Dear Mr. Chairman: On September 23, 2008, Howard Gruenspecht, 
Acting Administrator, Energy Information Administration, testified 
regarding why diesel fuel prices have been so high, and what can be 
done to address the situation.
    Enclosed are the answers to 6 questions submitted by you, Senators 
Domenici and Lincoln to complete the hearing record.
    If we can be of further assistance, please have your staff contact 
our Congressional Hearing Coordinator, Lillian Owen.
            Sincerely,
                                           Lisa E. Epifani,
  Assistant Secretary, Congressional and Intergovernmental Affairs.
[Enclosures.]
              Responses to Questions From Senator Bingaman
    Question 1. Is the recent surge in demand for diesel for electric 
generation a short term or long term factor? What arc alternative 
options for low-cost, off-grid electrification? Might this be a good 
application for biodiesel?
    Answer. Diesel generators are often used in response to emergency 
situations, when commercial electricity supplies are disrupted. As a 
result, spikes in diesel generation arc most often short-term 
phenomena, rather than long-term solutions to providing electricity. 
For instance, disruptions to coal transportation systems in China last 
year during particularly harsh winter weather resulted in an increase 
in diesel generation. Many South American countries rely on diesel 
generators when drought conditions lower hydroelectric supplies.
    In the long-run, electricity providers seek more cost effective 
solutions to supplying reliable electricity generation rather than 
continuing to rely on diesel generators. In China, for instance, there 
are plans to expand nuclear, coal-fired, and renewable generation. 
Unfortunately, these solutions can take a long time to implement 
because of the need to expand the infrastructure to support the 
expansion of electricity, including transmission lines, railroads and 
highways.
    It is likely that diesel generators will continue to be used as 
short-term solutions to emergency situations, because they can be used 
to quickly respond to power disruptions, so that the use of biodiesel 
to fuel generators would be possible. In remote areas with no access to 
national grids and where it is difficult and expensive to expand 
transmission lines, renewable energy sources--for example, micro 
hydroelectric facilities, wind, solar, and other off-grid renewable 
technologies--could also provide relatively cost-effective power 
solutions.
    Question 2. NPRA has stated that U.S. diesel exports are not clean 
enough to be consumed inside the U.S. Are there export data to back up 
this claim? Might there be other domestic applications for some of that 
diesel? For instance, could it be used for heating oil?
    Answer. This year's distillate exports include both low sulfur and 
ultra-low sulfur distillate that could be used in the U.S. EIA uses 
export data provided by the U.S. Bureau of the Census that does not 
break out ultra-low sulfur diesel from low sulfur, but we confirmed 
that some of the product being exported included ultra-low sulfur 
diesel. The high sulfur distillate market (fuel with greater than 500 
ppm sulfur) includes home hearting oil and fuel for electric generating 
use. Historically, high sulfur distillate represented more than half of 
total distillate exports. For example, in 2000 high sulfur exports 
represented 77 percent of the exported volumes, while in 2007 they 
represented 51 percent. This year, high sulfur exports dropped to 13 
percent of total distillate exports, both because most U.S. distillate 
production (88 percent) is now low or ultra-low sulfur distillate and 
because some of the major export areas needing distillate, such as 
Europe, now use low sulfur or ultra-low sulfur product.
              Responses to Questions From Senator Domenici
    Question 1. On the second page of your written testimony, I noticed 
that in the past year, the cost to refine a gallon of gasoline has 
declined, while the cost to refine a gallon of diesel has increased. 
According to your chart, the cost to refine gasoline dropped by 31 
cents, but the cost to refine diesel increased by 18 cents. Can you 
explain why these numbers went in opposite directions?
    Answer. Figure 1 of the testimony, presents a simplified view of 
price components to help explain variations in retail prices. The 
component labeled as the ``wholesale crack'' in the figure is not 
refining costs to produce the products shown. Rather, the wholesale 
crack, defined as the wholesale price of gasoline or diesel minus the 
cost of crude oil to the refinery is a measure of the revenue available 
to cover remaining refining costs and refining profits associated with 
gasoline or diesel production after crude costs are removed. This 
revenue varies in the short run as a result of basic supply and demand 
forces in the markets for crude and products.
    Figure 2 in the testimony displays time series of wholesale diesel 
and gasoline crack spreads. Looking at gasoline, it shows that during 
2007 the wholesale price were often much larger than crude oil costs, 
implying high profitability. This year. however, gasoline markets have 
had ample supply relative to demand as a result of declining demand, 
increased use of ethanol (and thus less need for crude-based gasoline), 
and increased availability of gasoline imports. This ample supply 
reduced the wholesale gasoline crack spread, and at times, pushed 
gasoline prices below the price of crude oil resulting in financial 
losses for gasoline production. At the same time, the distillate 
market, which includes diesel, and is distinct from gasoline market, 
tightened considerably worldwide as a result of growing demand, 
particularly in the electricity generating sector. That pulled diesel 
prices up relative to crude oil cost, improving refining profits from 
diesel production.
    Question 2. Since 2002, EIA has broken out the price of diesel into 
its component costs--refining, distribution and marketing, taxes, and 
crude oil. In May 2002, refining accounted for 5.1 percent of the price 
of diesel, but since then, and even as the price of oil has increased 
substantially, refining costs have consistently been much higher. I 
understand that one factor in this increase may be the decision to 
mandate the use of Ultra-Low Sulfur Diesel fuel. EPA initially 
estimated this would cost no more than 5 cents per gallon. The 
transition to ULSD is important to improving air quality, but has it 
come at a greater cost than we expected? Can you describe any other 
factors that may account for the substantial increase in refining as a 
percentage of the price of diesel??
    Answer. The data represented in Figure 1 reflects the sum of 
refining costs and profits which varies. The ``wholesale diesel crack'' 
component will vary both as a percent of total price and as an absolute 
value with the changing distillate and gasoline supply-demand balances 
in the short run. We do not have any direct measure of how the cost of 
producing diesel fuel has increased over time. Both heating oil and 
diesel fuel tend to move together with the general distillate market 
tightness or looseness, so looking at the difference between diesel 
prices and heating oil prices over time will help to isolate the impact 
diesel specification changes such as the move to ultra low sulfur 
diesel (ULSD) may have had. Prior to 2005 and the hurricane impacts on 
prices, wholesale diesel prices on the Gulf Coast would normally 
average one to three cents above No. 2 fuel oil (heating oil). After 
the ULSD program began in 2006, diesel has been averaging 13-14 cents 
per gallon over No. 2 fuel oil. This implies that the ULSD program may 
be contributing about 10 cents per gallon to the price of diesel fuel.
    This is relatively consistent with the studies done on ULSD 
production costs. For simplicity, EPA, EIA, NPC and others use single 
numbers to discuss cost estimates. But these costs are difficult to 
compare. EIA's 2001 report. Transition to Ultra-Low Sulfur Diesel 
explains the difficulties in comparing costs in greater detail. For 
example, costs will increase with the relative amount of ULSD produced 
compared to 500 ppm sulfur or high sulfur distillate, with the amount 
of ``cracked stock'' (distillate material that conies from fluid 
catalytic cracking or coking units) that needs to be desulfurized, with 
the scale of the units used to desulfurize the distillate, and whether 
new or revamped units could be used. The clean diesel program has 
grown, with more of the distillate market being required to use low or 
ultra-low sulfur fuel, which alone would be expected to result in 
increasing costs.
    Question 3. The military has undertaken a program aimed at 
providing a greater share of their energy needs with domestically 
produced fuel--much of this work has focused on taking greater 
advantage of our domestic coal reserves. What impact do you believe 
coal-to-liquids fuels could have on the price of diesel?
    Answer. Given the amount of coal-to-liquids distillate fuels EIA is 
projecting in the AE02008 reference case in 2030. approximately 137,000 
barrels per day, and the amount of diesel fuel use projected in 2030, 
4.871 million barrels per day, the price effect would be likely be 
limited. In general, adding new supply to an extremely tight market for 
all distillate range material should lower prices to some extent for 
all midrange distillate products, but EIA has not performed 
quantitative analysis on this topic.
               Response to Question From Senator Lincoln
    The rise in both gas prices and diesel prices are especially 
worrisome in a rural state like Arkansas, where families have to drive 
long miles to work and school and the grocery store. The combination of 
lower incomes, high fuel prices, and the heavy dependence on pickup 
trucks and vans and use of farm equipment is putting an even tighter 
squeeze on family budgets. Rural residents do not have mass transit or 
grocery stores nearby and few alternative fuel options available to 
ease the pain at the pump.
    Question 1. I do believe that most of our energy policy option will 
focus on the long-term, as we are not going to solve this problem 
overnight. However, in you expert opinions, what do you believe are 
Congress' most immediate options for providing relief to hard-working 
families and businesses which rely mostly on diesel fuel?
    Answer. The Administration has pursued, as you note, significant 
strategies to increase both the efficiency of motor vehicles and the 
supply of alternative fuels for transportation use. These measures have 
included increased fuel economy standards for both cars and light 
trucks, mandates for greater use of non-petroleum fuels and incentives 
for their production, biofuels research, incentives for advanced hybrid 
vehicles, and increased access to domestic resources for increased 
domestic energy production. Despite these long-term initiatives, world 
oil prices rose to very high levels, peaking in the summer of 2008. The 
resulting gasoline prices of about $4.00 per gallon, and diesel prices 
even higher prompted widespread public concern.
    Fuel prices have fallen sharply since their mid-2008 peak under the 
combined influence of consumer adjustments and weaker economic growth 
both in the United States and worldwide. These lower fuel prices 
provide significant relief to hard-working families and businesses. 
Additionally. the Department of Energy remains focused on long-term 
energy security through alternative fuels, increased domestic energy 
production and gains in enemy efficiency.
                                 ______
                                 
             National Petrochemical & Refiners Association,
                                   Washington, DC, October 9, 2008.
Hon. Jeff Bingaman,
Chairman, U.S. Senate, Committee on Energy and Natural Resources, 304 
        Dirksen Senate Office Building, Washington, DC.
Hon. Pete Domenici,
Ranking Member, U.S. Senate, Committee on Energy and Natural Resources, 
        304 Dirksen Senate Office Building, Washington, DC.
    Dear Senators Bingaman and Domenici: I testified before the Senate 
Committee on Energy and Natural Resources on September 23, 2008 on 
diesel prices.
    I am pleased to respond to the questions sent on September 25, 
2008. Please see the enclosed document.
    NPRA and its members look forward to working further with the 
Committee on this issue.
            Sincerely,
                                          Gregory M. Scott,
                      Executive Vice President and General Counsel.
              Responses to Questions From Senator Bingaman
    Question 1. Is there a channel of communication between the 
refining industry and the auto manufacturers to ensure that your 
industries move in step toward increasing both diesel engines passenger 
vehicles and diesel fuel?
    Answer. Antitrust law does not permit a trade association to direct 
oil company decisions to produce diesel fuel supplies at certain 
volumes. Oil companies are prohibited from discussing fuel production 
plans with each other. Oil companies make fuel production decisions 
independently.
    The refining industry and auto manufacturers jointly sponsor 
cooperative, precompetitive research through the Coordinating Research 
Council. The major committees of CRC are Performance, Atmospheric 
Impacts, Emissions, and Advanced Vehicle/Fuel/Lubricants. This is a 
venue for frequent communication for many employees in the refining and 
automaker industries.
    Question 2. NPRA has stated that U.S. diesel exports are not clean 
enough to be consumed inside the U.S. Are there export data to back 
this up? Might there be other domestic applications for some of that 
diesel? For instance, could it be used for heating oil?
    Answer. On page ten of NPRA's testimony, we explain that precise 
statistics are not available as to the specifications of the 
distillates being exported. EIA reports Department of Commerce data 
which labels this product as 15-500 ppm sulfur.\1\ NPRA mentioned the 
lack of precise statistics because the Department of Commerce does not 
report data for distillate fuel oil exports with less than 15 ppm 
sulfur. Therefore, there is a question as to the precise sulfur content 
of these exported volumes. The Department of Commerce plans to correct 
this confusion in the future by showing data separately for 15-500 ppm 
sulfur and less than 15 ppm sulfur.
---------------------------------------------------------------------------
    \1\ EIA http://tonto.eia.doe.govidnav/pet/pet move exp dc NUS-
Z00_mhhl_m.htm. Department of Commerce http://www.census.gov/foreign-
trade/schedules/b/2008/c27.html#2710 which shows two sulfur content 
categories for distillate fuel oil--1) less than or equal to 500 ppm 
sulfur and 2) greater than 500 ppm sulfur.
---------------------------------------------------------------------------
    Also on page ten of our testimony, we note that 15-500 ppm sulfur 
distillate fuel oil is not in demand in the U.S. highway diesel fuel 
market because of the ULSD program. This product could be used in non-
highway diesel and heating oil applications. On page six of NPRA's 
written testimony, we cite EIA data that U.S. supplies of distillate 
fuel oil (all diesel plus heating oil) are currently at 30 days, 
indicating clearly that current U.S. supplies are more than adequate.
    EIA's written testimony includes statements that this exported 
distillate fuel oil is being used for nontransportation uses such as 
for electric generation (see page 7).
               Response to Question From Senator Domenici
    Question 1. The EIA tells us that oil costs $2.65 per gallon, on 
average. After refining, we are told that refiners receive an average 
75 cents per gallon of diesel fuel to cover refining costs and profits. 
How much of the 75 cents per gallon represent a refiner's costs and how 
much is profit?
    Answer. NPRA does not have an estimate of a refiner's profit for 
production of an individual petroleum product. However, several press 
reports and the earnings statements of companies in the refining 
business show significant decreases in overall refining margins over 
the last three financial quarters--with some companies even posting 
losses. Refiners are the first to feel the impact of high crude prices. 
With the existing conditions of high crude oil prices, tight credit 
markets and demand decreases, refiners will continue to operate in a 
challenging economic environment in the foreseeable future.
                                 ______
                                 
                                                  October 23, 2008.
Hon. Jeff Bingaman,
Chairman, U.S. Senate, Committee on Energy and Natural Resources, 
        Senate Dirksen Building, Room 304, Washington, DC.
RE: Response to Follow-Up Questions from September 23, 2008 Testimony 
of Barbara Windsor, President & CEO, Hahn Transportation, Inc., and 
American Trucking, Associations Vice Chairwoman

    Dear Senator Bingaman: Thank you for the opportunity to testify 
before the Senate Committee on Energy and Natural Resources' recent 
hearing entitled Why Diesel Fuel Prices Have Been so High, and What can 
be Done to Address the Situation. Additionally, ATA appreciates and 
strongly supports the pro-active effort of Senators' Lincoln, Bingaman, 
and others, to incentivize idle reduction systems for the nation's 
truck fleet through the introduction of S. 894. This letter responds to 
your requests for additional information. The responses set forth 
herein represent the positions supported by the American Trucking 
Associations (ATA).
      Response of Barbara Windsor to Question From Senator Lincoln
    Diesel truck idling reductions considered one way to help alleviate 
diesel supply and demand imbalance. And one of the methods to help pave 
the way for increased use in anti-idling equipment is to provide tax 
credits to companies that purchase this equipment. As you may know, I 
introduced legislation last year, S. 894, the Idling Reduction Tax 
Credit Act which provides a business tax credit of 25% of the cost of 
idling reduction devices, up to $1,000.
    Question 1. Given the run-up in diesel prices and demand, how has 
the importance of such tax credits increased? In what additional ways 
can Congress help increase the availability of idle reduction systems?
    Answer. To put the importance of expediting the introduction of 
idle reduction equipment into the mainstream of trucking operations, 
one needs to go no further than looking at the amount and cost of 
diesel fuel trucking consumes on an annual basis. In 2006, trucks 
consumed over 39 billion gallons of diesel fuel at a cost of $106 
billion. According to U.S. Environmental Protection Agency estimates, 
1.1 billion gallons of diesel fuel (or nearly 3%) is attributed to 
truck idling. With trucking's diesel fuel bill reaching $113 billion in 
2007, and 2008 projections estimated at over $159.9 billion, most 
fleets today say fuel is now their highest operating expense.
    The Energy Information Administration (EIA) reported that the 
national average retail price for on-highway diesel fuel is currently 
at $3.65 per gallon, down from its historic high of $4.76 in July of 
this year. The EIA estimates that the average price for diesel fuel in 
the nation will be at $4.01 per gallon in 2008. With the fuel economy 
of large trucks remaining relatively flat over the last quarter century 
(typically 6.0 to 6.5 miles per gallon), companies are looking for 
other ways to conserve fuel, reduce carbon and emissions, and improve 
their bottom-lines. High on these company wish-lists is the purchase of 
idling reduction devices. Unfortunately, given the state of the 
nation's economy, high fuel costs, limited discretionary capital, and 
the overall slowdown in trucking, the purchase of idling reduction 
equipment remains unattainable for many businesses.
    Long-haul trucks serve both as the drivers' work place and 
residence. Therefore, trucks idle for comfort, safety, and necessity. 
The average truck consumes roughly 1 gallon of fuel an hour when 
idling. Idling reduction devices can cut these hourly diesel fuel 
consumption levels from none (assuming battery power or electrification 
options) to roughly .2 to .4 gallons per hour (assuming options such as 
direct-fired heaters, auxiliary power units, etc.).
    Recognizing that 96 percent of all trucking companies in this 
country are designated as small businesses, fleets are desperately 
seeking measures to further incentivize the purchase of idling 
reduction technologies for their trucks. To this end, Congress could 
help increase the availability of idle reduction systems through the 
following measures:
   a. issue business tax credits on the purchase of idling reduction 
                                devices
    ATA appreciates and endorses S. 894, the Idling Reduction Tax 
Credit Act, which provides a business tax credit of 25 percent of the 
purchase cost of idling reduction devices, up to $1,000 per device. 
While earlier efforts to secure business tax credits of up to $3,500 
per idling reduction device were unsuccessful in the House, a $1,000 
business tax credit would go a long way towards introducing such 
devices into trucking fleets. ATA asks the Congress to enact 
legislation affording fleets business tax credits on the purchase of 
idling reduction devices.
      b. support research and development for idling alternatives
    Technology advancements have stalled for many years and an infusion 
of funding into an organized research program is critical to develop 
the next generation of idling reduction technologies. ATA asks the 
Congress to fund research and development in the areas of new-
generation batteries and anti-idling equipment.
       c. recognize weight exemption for installation of idling 
                          reduction equipment
    Since idling reduction equipment may add substantial weight to a 
truck, many fleets cannot afford to reduce their cargo capacity to 
compensate for the installation of idle reduction devices on a truck. 
Overweight trucks can be cited by state enforcement officials and run 
the risk of receiving substantial penalties. To address this concern, 
Congress authorized a 400-pound weight exemption for trucks equipped 
with idle reduction equipment under Section 756 of the Energy Policy 
Act of 2005. While Congress' intent was to mandate this exemption, the 
Federal Highway Administration (FHWA) determined that states ``may'' 
adopt the exemption on a voluntary basis. FHWA's interpretation of the 
weight exemption gives states the option of whether to allow the 
exemption or not. ATA asks the Congress to clarify the 400-pound weight 
exemption as being applicable to idling reduction equipment nationwide.
     d. increase funding for usepa's smartwaySM program
    In February 2004, the freight industry and USEPA jointly unveiled 
the SmartWaySM Transport Partnership, a collaborative 
voluntary program designed to increase the energy efficiency and energy 
security of our country while significantly reducing air pollution and 
greenhouse gases. The program, patterned after the highly-successful 
Energy Star program developed by EPA and DOE, creates strong market-
based incentives that challenge companies shipping products and freight 
operations to improve their environmental performance and improve their 
fuel efficiencies. To become a partner a fleet must commit to reduce 
fuel consumption through the use of EPA-verified equipment. One of the 
predominant measures in the program to achieve fuel savings is to 
employ idling reduction strategies and devices. By 2012, the 
SmartWaySM program aims to save between 3.3 and 6.6 billion 
gallons of diesel fuel per year. EPA predicts SmartWaySM 
participants will also reduce their annual greenhouse gas emissions by 
48 million tons of CO2 equivalents. SmartWaySM is 
one voluntary greenhouse gas program that not only works, but exceeds 
expectations.
    While the trucking industry has fully embraced 
SmartWaySM and relies upon the innovativeness of this 
cutting edge program, future funding remains uncertain. While ATA and 
other freight and shipping sectors continue to work towards ensuring a 
separate line item in future EPA appropriations for 
SmartWaySM, we are troubled with the FY08 funding cuts to 
the program. More specifically, total monies allocated to the program 
this year dropped from roughly $3 million in FY07 to $2 million in 
FY08. Funding cuts to grants, contracting, marketing, technology 
development, and other program expenses have severely undermined the 
mission of the program. It is our hope that EPA will redirect an 
additional $1 million from the Climate Protection Program under the 
FY08 budget to ensure the continued growth and success of this 
remarkable program. Given that the Energy Star program's annual 
operating budget is $50 million, ATA asks that the Congress provide a 
line item appropriation to ensure that SmartWaySM is 
adequately funded in the future.
 e. require dedication of dera monies to state idling reduction efforts
    The Diesel Emissions Reduction Act (DERA) was passed as part of the 
Energy Policy Act of 2005. DERA is a bipartisan initiative authored by 
Senator Voinovich that authorizes $1 billion over five years to help 
states clean up diesel fleets through the establishment of voluntary 
national and state-level grant and loan programs to reduce emissions 
from existing diesel engines through clean diesel retrofits. Idling 
reduction devices are covered as retrofits under the DERA language. In 
FY 2008, the DERA program received $49.5 million to carry out its 
intent, a far cry from the $150.5 million short of the original. ATA 
asks the Congress to fully fund the annual $200 million DERA 
authorization levels over the next four years and require states 
receiving DERA retrofit funding to dedicate no less than 20 percent of 
such allocations towards the development of grants and/or low-interest 
loan programs for the purchase of idling reduction devices.

                                    

      
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