[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]
PRICE FLUCTUATIONS IN OIL MARKETS
=======================================================================
HEARING
before the
SUBCOMMITTEE ON ENERGY AND POWER
of the
COMMITTEE ON COMMERCE
HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTH CONGRESS
SECOND SESSION
__________
MARCH 9, 2000
__________
Serial No. 106-149
__________
Printed for the use of the Committee on Commerce
U.S. GOVERNMENT PRINTING OFFICE
62-977CC WASHINGTON : 2000
------------------------------------------------------------------------------
For sale by the U.S. Government Printing Office
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COMMITTEE ON COMMERCE
TOM BLILEY, Virginia, Chairman
W.J. ``BILLY'' TAUZIN, Louisiana JOHN D. DINGELL, Michigan
MICHAEL G. OXLEY, Ohio HENRY A. WAXMAN, California
MICHAEL BILIRAKIS, Florida EDWARD J. MARKEY, Massachusetts
JOE BARTON, Texas RALPH M. HALL, Texas
FRED UPTON, Michigan RICK BOUCHER, Virginia
CLIFF STEARNS, Florida EDOLPHUS TOWNS, New York
PAUL E. GILLMOR, Ohio FRANK PALLONE, Jr., New Jersey
Vice Chairman SHERROD BROWN, Ohio
JAMES C. GREENWOOD, Pennsylvania BART GORDON, Tennessee
CHRISTOPHER COX, California PETER DEUTSCH, Florida
NATHAN DEAL, Georgia BOBBY L. RUSH, Illinois
STEVE LARGENT, Oklahoma ANNA G. ESHOO, California
RICHARD BURR, North Carolina RON KLINK, Pennsylvania
BRIAN P. BILBRAY, California BART STUPAK, Michigan
ED WHITFIELD, Kentucky ELIOT L. ENGEL, New York
GREG GANSKE, Iowa TOM SAWYER, Ohio
CHARLIE NORWOOD, Georgia ALBERT R. WYNN, Maryland
TOM A. COBURN, Oklahoma GENE GREEN, Texas
RICK LAZIO, New York KAREN McCARTHY, Missouri
BARBARA CUBIN, Wyoming TED STRICKLAND, Ohio
JAMES E. ROGAN, California DIANA DeGETTE, Colorado
JOHN SHIMKUS, Illinois THOMAS M. BARRETT, Wisconsin
BILL LUTHER, Minnesota
LOIS CAPPS, California
James E. Derderian, Chief of Staff
James D. Barnette, General Counsel
Reid P.F. Stuntz, Minority Staff Director and Chief Counsel
______
Subcommittee on Energy and Power
JOE BARTON, Texas, Chairman
MICHAEL BILIRAKIS, Florida RICK BOUCHER, Virginia
CLIFF STEARNS, Florida KAREN McCARTHY, Missouri
Vice Chairman TOM SAWYER, Ohio
STEVE LARGENT, Oklahoma EDWARD J. MARKEY, Massachusetts
RICHARD BURR, North Carolina RALPH M. HALL, Texas
ED WHITFIELD, Kentucky FRANK PALLONE, Jr., New Jersey
CHARLIE NORWOOD, Georgia SHERROD BROWN, Ohio
TOM A. COBURN, Oklahoma BART GORDON, Tennessee
JAMES E. ROGAN, California BOBBY L. RUSH, Illinois
JOHN SHIMKUS, Illinois ALBERT R. WYNN, Maryland
HEATHER WILSON, New Mexico TED STRICKLAND, Ohio
JOHN B. SHADEGG, Arizona PETER DEUTSCH, Florida
CHARLES W. ``CHIP'' PICKERING, RON KLINK, Pennsylvania
Mississippi JOHN D. DINGELL, Michigan,
VITO FOSSELLA, New York (Ex Officio)
ED BRYANT, Tennessee
ROBERT L. EHRLICH, Jr., Maryland
TOM BLILEY, Virginia,
(Ex Officio)
(ii)
C O N T E N T S
__________
Page
Testimony of:
Cavaney, Red, President and CEO, American Petroleum Institute 75
Cook, John, Director of Petroleum Division, Energy
Information Administration................................. 30
Crowley, Hon. Joseph, a Representative in Congress from the
State of New York.......................................... 37
D'Arco, Peter, Vice President, S.J. Fuel Company............. 119
Farruggio, Samuel, President, Farruggio Express.............. 116
Mazur, Mark, Director, Office of Policy, Department of Energy 41
Moran, Hon. Jerry, a Representative in Congress from the
State of Kansas............................................ 26
Murphy, Mark B., Strata Production Company................... 81
Parker, Richard G., Director, Bureau of Competition, Federal
Trade Commission........................................... 46
Sherwood, Hon. Don, a Representative in Congress from the
State of Pennsylvania...................................... 28
Slaughter, Bob, General Counsel and Director of Public
Policy, National Petrochemical and Refiners Association.... 109
Sweeney, Hon. John E., a Representative in Congress from the
State of New York.......................................... 22
Wolkoff, Neal, Executive Vice President, New York Mercantile
Exchange................................................... 88
Material submitted for the record by:
Air Transport Association of America, prepared statement of.. 123
Gekas, Hon. George W., a Representative in Congress from the
State of Pennsylvania, prepared statement of............... 125
Smith, Hon. Lamar S., a Representative in Congress from the
State of Texas, prepared statement of...................... 125
(iii)
PRICE FLUCTUATIONS IN OIL MARKETS
----------
THURSDAY, MARCH 9, 2000
House of Representatives,
Committee on Commerce,
Subcommittee on Energy and Power,
Washington, DC.
The subcommittee met, pursuant to notice, at 10:05 a.m., in
room 2123, Rayburn House Office Building, Hon. Joe Barton
(chairman) presiding.
Members present: Representatives Barton, Bilirakis,
Largent, Burr, Norwood, Shimkus, Wilson, Shadegg, Fossella,
Bryant, Boucher, Hall, McCarthy, Sawyer, Markey, Rush, Wynn,
and Strickland.
Also present: Representative Greenwood.
Staff present: Cathy Van Way, majority counsel; Miriam
Erickson, majority counsel; Elizabeth Brennan, legislative
clerk; Sue Sheridan, minority counsel; and Rick Kessler,
minority professional staff member.
Mr. Barton. The Subcommittee on Energy and Power of the
Energy and Commerce Committee hearing on Oil Price Fluctuations
will please come to order.
I would like to welcome everybody to today's hearing. I
believe it's going to be educational, and I hope that we will
learn quite a bit about how oil markets work and their impact
on the U.S. economy.
Before we begin, I would like to personally welcome our new
ranking member, Congressman Rick Boucher of the great State of
Virginia.
I have enjoyed working with Congressman Boucher on a number
of other issues, and I look forward to working with you on the
issues before this subcommittee for the remainder of this
Congress.
I think everyone that knows Congressman Boucher knows that
he's a very thoughtful legislator, and he pays close attention
to the issues that he has responsibility for.
He does have some big shoes to fill. The great Congressman,
Ralph Hall of Rockwall is a tough act to follow, but I'm sure
that he'll be up to the task.
Congressman Hall is now the ranking member on the Science
Committee, but he will remain a member of this subcommittee.
I'd like to take note of what a difference a year makes.
Last Spring I was hearing daily from my independent producers
down in Texas that the price of oil was too low.
The independent producers were shutting in wells, companies
were going bankrupt, people were being laid off. Out in West
Texas, when they deducted for the cost of transportation, there
were stripper well producers that were getting less than eight
dollars a barrel for oil.
What a difference a year makes. Prices are now above $30 a
barrel. Instead of hearing from oil producers, all of our
colleagues that are before me are hearing from their oil
consumers.
That's democracy, and there is absolutely nothing wrong
with the communication channel in a democracy.
So the question arises, what, if anything, should we do,
we, being the U.S. Congress and the Federal Government, about
oil prices?
Since 1981 the price of oil has been deregulated, and has
been set exclusively in the marketplace. Admittedly, the
marketplace is not an open marketplace because as we all know,
the OPEC cartel, most of which members have nationalized their
oil production, does, for all intents and purposes, set the
price.
The United States, however, has eliminated price and
allocations controls for oil, recognizing that those policies
had been failures and had resulted in shortages and gasoline
lines.
Anybody in this room who is over 40 years old certainly
remembers the gasoline lines of the late 1970's and early
1980's. Allowing the marketplace to set oil prices has resulted
in more than adequate supply, and has resulted in lower prices.
However, unfortunately, one result of the price being set
by the marketplace is that it does fluctuate. Just yesterday,
for example, the price of oil dropped $2.85 a barrel, closing
at $31.28 a barrel on the New York spot market.
In recent years, these price fluctuations have been in
favor of consumers. I did not have one person call me last
year, asking if the Government could do something about low oil
prices, not one.
By and large, allowing oil markets to operate free of
government intervention has worked, and even at today's prices,
oil and the byproducts that are refined from it is a bargain.
According to the Energy Information Administration, which
we will hear from later today, in 1991, the price of oil, when
adjusted for inflation to 2000 dollars, was over $70 a barrel,
which is more than double today's price.
Considering the poor track record of the U.S. Government in
trying to regulate oil prices, I, for one, do not believe that
we should get back in the business of setting oil prices, even
in a back-door fashion by drawing down the Strategic Petroleum
Reserve as some have requested.
In addition to being against the Congressional intent and
spirit of the law, it is just quite simply bad public policy.
I agree with former Secretary of Energy, James Schlesinger
who said earlier this week, ``. . . the Reserve was adopted for
an entirely different reason--to help tide this country over in
a supply cutoff--and to deter political blackmail. It was not
intended as a short-term economic instrument to modify price
swings. To use it would make the U.S. Government just another
player in the oil market, adding another unpredictable element
that would likely deter new company investment in exploration
and production.''
That's from Jim Schlesinger, the former Secretary of Energy
in the Carter Administration.
I am also not a fan of investing money in a heating oil
reserve in the Northeast as some have advocated, for basically
the same reasons.
I do, however, believe that there are some things that we
can do to address this problem. No one in this room wants
higher and higher energy prices. If we're going to try to
stabilize our energy infrastructure and our energy markets, we
should be looking for ways to improve many areas.
For one, we could begin to add to and improve the natural
gas infrastructure in this country, especially in the
Northeast. Natural gas is a clean fuel; it's environmentally
safe. We have adequate supplies in the United States. We could
do much to improve and increase our production of clean-burning
natural gas.
Second, we could at least consider to reduce, on a
temporary basis, some of the Federal Excise taxes that we now
have on energy products, such as fuel oil, diesel fuel, and jet
fuel, perhaps even gasoline.
The gasoline Federal Gas Tax is 18.4 cents a gallon. Each
penny of the gas tax is a billion dollars a year in revenue to
the Federal Government.
Third, and most importantly, we need to focus on improving
our energy base in this country by improving and increasing
domestic production. If we really want to decrease our
dependence upon foreign oil imports, and decrease our
dependence on the quotas that OPEC sets, we need to offer
whatever support we can to our independent oil and gas sector.
Our marginal-well producers should be kept operating as
long as is possible. When oil prices hit their low last year,
for example, many independents were forced to cease production
from their marginal wells.
These are wells that produce less than 10 barrels as day.
We lost, according to the Independent Petroleum Association of
America, approximately 600,000 barrels of oil production per
day in this country last year--600,000 barrels a day.
It's estimated right now on the world market that there is
a shortage of somewhere between 1 million and 1.5 million
barrels a day. Think what prices would be if we hadn't shut in
those wells last year. This lost production would have
certainly minimized the price spike that we've had this year.
We should also discuss environmentally safe ways to harness
our Nation's natural resources in the outer continental shelf
and in the Alaska National Wildlife Reserve. Producers have
been unable to employ modern drilling technologies which are
more efficient, less costly, and much more safe than such
techniques were when those moratoria were put in place.
For example, we could have one drilling platform located
right here at the Capitol, and it could drill all the wells
that would be needed for the entire District of Columbia, going
out into Maryland and also out into Virginia, one platform.
That's how efficient and how effective our drilling technology
is today.
So, if we really want to do something to stabilize prices,
we should revisit the issue of exploration and production in
areas that are currently off limits. I will be holding hearings
later this year on just issues of that nature.
I am not a supporter of regulating the price of energy, but
I am a supporter of developing a coherent national energy
policy that minimizes dependence and maximizes the independence
of the United States economy.
I look forward to hearing the testimony of the witnesses
before us. I would now recognize my ranking member, Mr. Boucher
of Virginia for an opening statement.
Mr. Boucher. Mr. Chairman, thank you very much for your
kind words of welcome and your kind comments. I very much look
forward to our work together, and in the pursuit of sound
energy policy.
I want to commend you, Mr. Chairman, for scheduling the
hearing this morning on a very timely subject. Our colleagues
who represent the Northeast have large numbers of constituents
who rely on oil for home heating.
They have experienced tremendous financial pressures as the
price of heating oil has increased this year by approximately
80 cents per gallon, a 66 percent increase from previous
levels.
In rural America, our concerns are also large. I represent
a rural Congressional District. It has 23 counties and cities.
It's not uncommon for many of my constituents to drive as
much as 50 miles in each direction to go to work. I have a lot
of those constituents who are saying that they can no longer
afford those long drives, given the rapid increase in gasoline
prices.
And some people in rural America are now even looking for
other work so that they can be closer to home. And while they
will earn less, at least at the end of the week, they take home
more.
We're all concerned about the effect on our national
economy of the dramatic increase in the price of crude oil from
approximately $12 per barrel this time last year, to more than
$30 per barrel at times this year.
Mr. Chairman, I am also very concerned about our Nation's
unhealthy reliance on oil imports. We currently rely on foreign
oil producers for approximately 50 percent of the oil that we
consume in this Nation.
The Department of Energy has predicted that current trends
suggest that in the absence of some rather significant policy
changes, over the course of the next two decades, our reliance
on foreign oil imports will rise, and that in the year 2020,
we'll be importing approximately 65 percent of all of the oil
that we consume, from foreign nations.
The best way to guard against the fluctuations of future
world oil prices, the best way to prevent in future years, the
kind of financial pain that many of our constituents are
feeling today, the best way to assure future oil price
stability is to enhance American energy self reliance.
We're a Nation rich in resources and rich in technical
expertise. We can become more energy self-sufficient. But to do
so is going to require a national commitment to that cause.
Given the problems that we face today, I think the time for
that commitment is at hand.
Finally this morning, I want to say a word of thanks and a
word of congratulations to the Administration for the steps
that it has taken to address the current financial pain felt by
millions of Americans.
Secretary Richardson has personally urged the leaders of
oil-producing nations to increase production levels, and a
number of nations have indicated their intention to seek higher
oil production quotas later this month. The results of his
diplomacy are self evident.
The President has released all of the funds available in
the Low-Income Home Energy Assistance Program in order to
assist in relieving the financial pressures people are feeling
for home heating.
The Federal Trade Commission is working actively with the
Attorneys General of the States to investigate whether
increases in oil prices arise, at least in part, from
anticompetitive conduct anywhere in the supply chain.
And the Administration is working with the States to obtain
waivers under the Clean Air Act, where appropriate, to ensure
adequate energy production levels.
These are commendable steps. This morning, I'm sure our
subcommittee will hear recommendations for other steps that
should be considered, and I join with you, Mr. Chairman, in
looking forward to the testimony of these witnesses.
Mr. Barton. Thank you, Congressman Boucher. We'd now like
to recognize Congressman Bryant for an opening statement.
Mr. Bryant. Thank you, Mr. Chairman. I appreciate very
much, you holding this very timely hearing, and I want to thank
our distinguished witnesses for appearing today, especially our
colleagues in Congress.
I'm eager to hear the thoughts and recommendations on this
issue that they have, and I would simply concur with what both
of you have already said today in terms of concerns that I
have.
But in addition to that, I want to say that a few weeks
ago, over 400 heavy trucks and tractor trailers came to the
Capitol to try to raise the Nation's awareness of the
escalating price of fuel.
For these drivers, many of whom are independent businessmen
and women, this was about more than simply paying a few more
dollars at the pump; their trip here was about sending a
message to Washington's policymakers that the future of their
business was at stake.
Fuel is often the second highest expense for truckers, and
that dramatic price increase has forced many to simply park
their trucks or even surrender their trucks, rather than lose
money on each haul because of the high price of fuel.
We certainly have this occurring back in Tennessee, and I
know it's occurring across the country. The average American
driver is like the rest of us, though; we're also feeling the
effects of the steep prices.
But these implications of high fuel prices for us go far
beyond the increased cost of filling our gasoline tanks. The
vast bulk of our Nation's goods are being transported by the
trucking industry, and as the transportation costs rise,
obviously, businesses are going to be forced to raise the price
of their goods and pass those on to us as consumers.
So, in practical terms, this means that not only will a
mother have to pay more to drive to the local grocery store and
to take the kids to school, but she will also have to confront
an increase in the price of milk and eggs and vegetables at the
grocery store.
Fuel prices have recently shot up, I believe, because
member countries of OPEC have agreed to artificially raise the
price of oil by limiting production. Due to OPEC's actions,
prices have gone from $11 to $12 a barrel in December 1998, to
a high of $30 a barrel in mid-February of this year, levels not
seen since the Persian Gulf conflict.
A columnist in yesterday's Washington Post argued that
Washington should not overreact to high fuel prices and should
allow the free market to set the fuel prices. I believe in a
free market, and I agree that Americans do not have a right to
cheap gasoline, but the free market is being manipulated, and
Congress should not have to apologize for considering policies
to counter the foreign collusion.
Short of legislative solutions, President Clinton can, and
I think should, use better diplomatic resources that are
available to him to put pressure on OPEC member nations to
increase their production.
In fact, many of the Americans currently suffering from
OPEC's manipulation of global supplies are veterans of the Gulf
War who risked their lives to liberate and defend the oil-
producing states, states which are now conspiring to keep
prices artificially high.
I think the President has an obligation to use the power
associated with his office to convey the U.S. disapproval of
OPEC's supply strategy.
And I think this should have been not as a reaction that
we're looking at right now where all of a sudden we're doing
it, this should have been a long time ago. This didn't happen
just simply overnight. And that's my concern, that we're going
to have to go through this crisis when we could have had better
diplomatic relations in anticipation in a preventative measure,
rather than reacting and running over there and asking them,
oh, please, lower your prices. I just disagree with this
policy.
As a footnote, I want to also, since we have some
distinguished panelists, I want to know more about how prices
are set in this country. It concerns me when I'm back home
buying gas, and I see the price go up or down, and it seems to
be tied together. I know it's against the law to conspire, and
I know people aren't conspiring, but every price goes up about
the same when they go up, and it goes down about the same.
And I understand that competition drives it down sometimes,
but I'm concerned about the prices going up together at the
same time, as well as the other one. I haven't figured out
yet--I know gasoline is delivered to the retailers' service
stations, not every day. But yet every day, the prices seem to
be going up and down.
And this argument that, well, you know, I have to raise my
price because when they bring gasoline in, it's gone up. But I
see them going up and down--mainly up now--every day, and I
know they're not getting resupplied every day.
And I just wonder how they can justify that type of price
increase on that argument, well, my prices are going up.
Maybe somebody can educate me on that today. I look forward
to that, and I thank, again, the chairman for holding this
hearing, and look forward to learning a lot about what's going
on today. Thank you.
Mr. Barton. I thank the gentleman from Tennessee. We now
recognize the distinguished gentleman from Massachusetts, Mr.
Markey, for an opening statement.
Mr. Markey. Thank you, Mr. Chairman, very much. You know, I
know that many like me are inspired by the eloquent odes to the
free market and the dire warnings about the catastrophic
consequences of any governmental intervention into the
operation of the marketplace.
And I wonder just where all of those spokespeople were last
March when the subcommittee held a hearing just upstairs to
pressure the Administration to block additional sales of Iraqi
oil under the Oil for Food Program because many members from
oil-producing regions felt that oil prices were too low, and
they wanted to drive these prices back up.
Where were all these opponents of governmental intervention
into the markets last October when this committee approved H.R.
2884, the Energy Policy and Conservation Act Reauthorization
Bill, which included a provision directing the Department of
Energy to purchase oil from marginal stripper wells in the
United States whenever the price dropped below $15 a barrel?
That's not the free market; that's the government intervening.
Now, for most of my constituents up in Massachusetts, the
stripper well sounds like something you used find down in a
section of Boston we referred to as the Combat Zone, but this
committee decided last Fall that it was so important to protect
stripper wells from threat of low oil prices that we had to set
up a special little welfare program for them.
But now that oil prices are too high, and consumers in the
Northeast and across the country are suffering from gasoline
prices, now what are we going to do? Are we going to actually
get the Administration to use its existing legal authority to
deploy the Strategic Petroleum Reserve? Are we going to get
around to creating a regional refined product reserve that
could quickly be deployed in the Northeast when we face energy
emergencies?
No. We're told that would be wrong. That would be
interfering in the operation of a free market, and we just
couldn't do that, because that would only be protecting
consumers, not the oil industry.
Well, the fundamental fact of the world oil market is that
it is not a free market. Much of the supply is controlled by
the OPEC oil cartel. OPEC governments meet to set production
quotas and establish target prices, not the hidden hand of the
free market.
Now, OPEC and the Cato Institute might believe that that's
a free market, but they're the only people who believe that
that is a free market.
So, if it is acceptable to the U.S. Government to intervene
when prices are too low for the producer states, which is what
this subcommittee apparently thinks, because that is just what
H.R. 2884 does, why is not also acceptable for the government
to intervene when oil prices are too high and consumers are
being harmed?
Ten years ago, I joined with Representatives Moorehead and
Lent, Republicans, to offer an amendment to the Energy Policy
and Conservation Act which would create, on an interim basis, a
federally sponsored regional storage facility for petroleum
products.
Our amendment, which was signed into law in September 1990
as Section 160(g) of the Act, would have mandated that DOE set
up a regional refined products reserve on a test basis. The
Bush Administration's Department of Energy then completely
disregarded the direction of Congress that the regional reserve
be located in those areas of the country such as the Northeast
that were most dependent upon imported petroleum products or
likely to experience shortages of refined petroleum products.
Instead, they proposed to set up the regional refined
reserve using existing facilities on the Gulf Coast. And then
to add insult to injury, the Bush Department of Energy then
refused to spend any money on the program.
I wish I could say that the Clinton Administration
Department of Energy had corrected the problem, but it didn't.
It failed to insist that Congress appropriate funding for the
program between 1994 and 1995 and then it walked away from the
program.
In 1996 when we were experiencing an earlier round of high
oil prices, the Department actually undertook a paper study of
the desirability, feasibility and cost of creating a regional
refined product reserve, and even this study, which I think
understates the matter, was forced to conclude that the
benefits of a 2 million barrel refined product petroleum
reserve located in leased terminals in the Northeast would
approximate or exceed its costs, provided that the costs would
be reduced by trading Strategic Petroleum Reserve crude oil for
distillate fuel.
Despite this favorable conclusion, the Department
subsequently took the official position that a government-owned
and controlled crude oil reserve located in the Gulf Coast
region is the most cost-effective way to ensure continued oil
products to the Nation during a severe oil supply interruption.
In other words, no regional refined product reserve in the
northeastern part of our country. Indeed, last September 23,
the Department's Assistant Secretary for Fossil Energy actually
testified before this subcommittee that the Administration
wished to delete unused provisions of the law that provide for
the establishment of regional and industrial petroleum
reserves.
Unused? I'll say they're unused. These provisions are
unused because neither this Administration nor the Bush
Administration ever bothered to make use of them.
Indeed, DOE has chosen to disregard and ignore the problem.
And so I look forward to hearing from the Department this
morning about the lessons of this Winter's home heating oil
crisis. Perhaps now we will take action.
And I look forward to hearing from the other witnesses, and
I thank you, Mr. Chairman, for holding this hearing.
Mr. Barton. Thank you, Mr. Markey. I'm sure that you'll
invite me up to Boston and I can ask your constituents if they
want gasoline refined from $15 a barrel Texas crude oil or $30
a barrel Saudi Arabia crude oil and most of them will vote for
$15 a barrel Texas crude oil. I just have a suspicion of that,
but I could be wrong.
Mr. Markey. I think that when people go up to their gas
station they don't ask where it is coming from, they just ask
how much does it cost, and when it's heading toward two bucks a
gallon they are not going to be too choosy and say I would
rather pay a higher price if it came from America. They just
want to make sure it is there.
Mr. Barton. Well, democracy is a wonderful thing and you
and I together will solve this problem, I'm sure.
Mr. Markey. This committee wouldn't be interesting if Texas
and Massachusetts wasn't as fully represented as they are.
Mr. Barton. That's true. Now let's hear from Congressman
Largent of the great State of Oklahoma for an opening
statement.
Mr. Largent. Mr. Chairman, I commend you for holding this
hearing this morning to examine a cause and effect of recent
price fluctuations in the world's oil markets. Unfortunately it
is not until we experience sticker shock at the gas pump where
American families have to pay significantly higher prices to
heat their homes that oil and gas enter the national
consciousness.
Now that the matter has raised national interest I hope
that the Administration and Congress will genuinely focus on
developing a long-term energy policy based on self-reliance,
one that promotes domestic oil and gas exploration and
production, rather than directing our efforts on some short-
term band-aid fix that may help in the short-term but
ultimately does little to prevent future price fluctuations.
In short, we need to stop treating the symptoms and find a
cure.
As one who represents an oil-producing State I know all too
well the economic havoc as well as the national security threat
that stems from our reliance on foreign oil imports. Since 1985
domestic crude oil production has declined while our oil
consumption has increased. Today the U.S. imports over 55
percent of our crude to meet domestic demand. Common sense
would dictate that as demand grows so should our production.
Unfortunately, this is not the case.
In fact, during the last 2 years our domestic oil industry
has lost 65,000 jobs. These jobs have been lost for a variety
of reasons--a tax policy that favors investment overseas rather
than here at home, a growing regulatory burden which has
significantly increased industry's compliance cost to the tune
of $90 billion over the past decade, offshore drilling
moratoriums that prevent environmentally safe development of
domestic resources off our coasts, and the refusal to even
consider whether to open the Arctic National Wildlife Refuge
Coastal Plane for oil and natural gas development.
Mr. Chairman, we can talk about whether or not we should
release the Strategic Petroleum Reserve, why OPEC and non-OPEC
producing companies decided to cut back on their production,
whether or not there has been anticompetitive behavior, or
whether or not we should create a strategic reserve for heating
oil, but in my opinion the focus of this hearing as well as the
focus of policymakers needs to be on what we must do to
stimulate domestic exploration and production. Otherwise I
predict we will continue to have these large price spikes which
will result with future Secretaries of Energy traveling the
globe on bended knee asking foreign countries to please meet
our energy needs.
I look forward to hearing our witnesses' comments. Thank
you, Mr. Chairman.
Mr. Barton. Thank you, Mr. Largent. We would now like to
hear from the former ranking member and a member whose district
includes the East Texas oil patch, Congressman Ralph Hall of
Texas.
Mr. Hall. Mr. Chairman, thank you very much and I join the
accolades for holding this hearing. It is very timely. A lot of
attention has been focused on the rapid rise in heating oil
prices and I am sympathetic to that, particularly for the
people in the Northeast. Higher product prices for heating oil,
diesel fuel and gasoline have been felt in other parts of the
country as well.
You know, before Mr. Boucher moved closer to the chairman's
desk up there, I always got to talk before Markey talked and
that was both good and bad but I think I just have to answer my
friend from Massachusetts in that it is not that prices are too
low for energy, because all of us want reasonable prices, but
they are too unreliable and if we could get a steady price--
something acceptable that was steady where little guys could go
borrow it to drill a hole and then sell it to the big guys, and
that's the way it works, I think we could help you solve the
problem of heating oil in the North and East.
We're not unsympathetic to that. I certainly am not, but I
don't hear my friend from Boston complaining about Amtrak--the
dang thing goes I think 38 times from here to New York, 36
times to Philadelphia, I don't know how many times to Boston
subsidized. The thing doesn't even whistle west of the
Mississippi or slow down going through my little hometown, but
still I support railroads because in a national emergency we
operate on railroads and we have to travel by rail and it is
important for those people in the Northeast Corridor with the
population, heavy population, and in New York and those areas
that they have transportation.
We are one Nation and we have different needs. We have
different needs today to where there might be an answer that
would help both of us very much. The problem of the oil market
is that OPEC can get more oil out of one hole than we can get
out of a hundred here. We have had no government protection and
yet we are too proud to ask for a lot of Government protection,
but the Government could be a little kinder to the energy
operation. We don't need any energy policy other than a simple
energy policy that says that there's some reward for getting it
and then send you to look for it. That is what we really need
and that is what we really want and that is what we have not
really had in years and years.
I think in my district farmers and truckers have been
squeezed dramatically and I realize that this gentleman from
Massachusetts does an excellent job for the people he
represents, and that we have different constituencies and we
must make different speeches up here, but really and truly I
think both of us want the same thing. That is an answer to what
Jeremy Bentham called the greatest good for the greatest
number. Energy is so important so why can't it like railroads
and be a national asset and be considered as a national asset.
In my district we have been squeezed. Independent truckers
do not operate a high profit business. Theirs is a low profit
business and for independent truckers, the effects of increases
on fuel is disastrous to them. Farmers in my area, already hit
hard by a draught, are attempting to cope with higher fuel
prices while their incomes have fallen dramatically. The Right
to Farm Act that we passed some time ago that affects my
district a little more than the Boston area. Any of you that
have agriculture, any of us here who represent people that have
agriculture the Right to Farm Act is going to wind up in about
2 years. The 7 year period is going to be over--and if the
subsidies get pulled back and they don't have that thing called
parity, which is not in that act anywhere, right, side, nor
forehand, they are going to have a Right to Starve Act if this
Government does not move in and do something to change that----
Mr. Barton. Would the gentleman from Texas yield? I hate to
interrupt his----
Mr. Hall. I am going so good----
Mr. Barton. I know you are.
Mr. Hall. You never did stop me when I was sitting that
close to you.
Mr. Barton. Well, I am sorry. I will make it up to you, I
promise.
Mr. Hall. All right.
Mr. Barton. I just want our witnesses and the members of
the panel that have not yet given their opening statements to
know. We have two votes pending on the floor. We have a vote on
a resolution. There is late-arriving news here.
We have a 15-minute vote, a 5-minute vote, and then a
general vote to follow, so unfortunately I am going to have to
suspend the hearing.
I would like to get Mr. Hall's opening statement and
perhaps Mr. Shimkus's opening statement and then we will
suspend to go vote, so I will now again recognize Mr. Hall.
Mr. Hall. Well, I just think amid all the allegations of
one thing I believe consumers and producers can agree on is a
goal that we ought to find a way to achieve some stable oil
prices. All of us crave some certainty in the price of basic
goods and services and no one is well served over the long term
by huge fluctuations in the market. That is what the major
problem is.
We are embarking on answers. I don't have one today, but I
am interested in hearing what our witnesses have to say and
maybe some ideas will come out of this and a way to work
things. I yield back my time----
Mr. Markey. Mr. Chairman----
Mr. Hall. Yes, I do yield.
Mr. Markey. I would just like to say that I agree with you.
I think the Northeast should work with the Southwest when the
prices are too low, right?--and I would hope that the Southwest
could work with the Northeast when the prices are too high, so
that we can find some equilibrium.
Mr. Barton. Isn't brotherly love great? I just love this.
We are in the opening statements and already we are bonding
here.
But unfortunately we have two pending votes. The Chair is
going to recognize Mr. Shimkus for his opening statement, then
we will suspend, but we are going to have three votes on the
floor and as soon as the last vote is, the chairman intends to
come back. We will recognize members that are present for
opening statements, but if a member is not present for an
opening statement we will then get to our first panel.
The gentleman from Illinois.
Mr. Shimkus. Thank you, Mr. Chairman. I will be brief and
cut through a lot of the gobbledegook and just talk about in
the national energy portfolio one thing that you left out and I
will list it in No. 4 on your list is a credible, reliable
biofuels program, one that the Administration talked about.
I have a bill, H.R. 2788, which would expand the CMAC. We
had a hearing last week on the auctioner program. It was stated
by the DOE, who is testifying today, that if we eliminated the
auctioner program, gas prices would increase 3 to 5 cents a
gallon. A credible biofuels program is critical to our national
security. It decreases our reliance on foreign oil. It is
cleaner burning and it is renewable. Any discussion on energy
policy without considering the biofuels program is a mistake
and obviously I will be in this process fighting for cleaner
air, renewable source of fuel, and for our farmers, and I yield
back my time.
Mr. Barton. We are going to suspend the hearing. We have
three votes on the floor. My guess is we will restart between
11:20 and 11:30, so the subcommittee is in recess until
approximately that time.
[Brief recess.]
Mr. Barton. The subcommittee will come to order. We are
still in opening statements. We have members present.
The Chair would recognize Mr. Norwood for an opening
statement and then he'll recognize Congresswoman McCarthy for
an opening statement. Mr. Norwood.
Mr. Norwood. Thank you very much, Mr. Chairman. I do
appreciate you having this hearing today. It is very timely and
I thank our colleagues for taking the time and coming to
testify.
I think it is fair to say that all areas of this country
are feeling the effects of the recent near-historically oil and
gas price increases. It is not just Boston. The unusually
harsh, cold spell in January and early February over much of
the East Coast, combined with OPEC's shenanigans, have made it
extremely hard on many citizens, especially older Americans.
Mr. Chairman, I firmly believe that this crisis could and
should have been avoided, and I lay the blame for allowing
prices to get out of control squarely at the feet of the
current Administration. This oil shortage is completely and
wholly artificial. There is plenty of oil to go around if the
oil-producing countries simply choose to pump it. If we had a
President with enough intestinal fortitude to face down that
same OPEC group that we baled out earlier last decade I do not
think we would be in this mess.
Furthermore, I am deeply disturbed by remarks made by
President Clinton on Tuesday that suggest he may be complicit
in the artificial price hike. The President said that the
prices need to be high in order to, and I quote, ladies and
gentleman, ``encourage the use of alternative fuels and to
prevent global warming.''
Now Mr. Chairman, I find that a little offensive. We do not
need to be furthering the Clinton-Gore Administration's liberal
global environmental wacko agenda on the backs of the American
working poor and elderly. Our gas and oil prices do not hurt
the new wealthy elite who have profited so well from the stock
market, international trade and the boom in technology. If you
are riding in a $60,000 Mercedes you probably do not give a rip
whether gas is 89 cents or $1.89, but Mr. Chairman, my people
are riding in used Fords and Chevrolets working two jobs to
make up for the manufacturing jobs lost by NAFTA and the Red
Chinese Army and I'll be durned if we ought to let the oil
producing countries take their lunch money to boot.
Mr. Chairman, we need to send a strong message today gas
prices last year in this country were not too cheap. We need
this Administration to use every possible economic weapon at
our disposal to bring these prices down before cumulative
inflationary effect pulls our overall economy into recession.
If this Administration wants to pass new environmental
legislation to stop people from using their cars to get to work
or take their children to school, then bring the bill forward
and let us have a debate on it today, but do not try to
circumvent the will of the people by encouraging foreign
nations to raise prices on our poor, then declare it is for
their own good.
Mr. Chairman, I am anxious about this hearing. I look
forward to it, and again I thank you for calling it.
Mr. Barton. Thank you, Congress. We will put you down as
undecided on what to do about the problem.
We would now like to hear from the gentlelady from
Missouri, Congresswoman McCarthy, for an opening statement.
Ms. McCarthy. Thank you very much, Mr. Chairman.
I was not present when Mr. Shimkus gave his remarks with
regard to biodiesel fuel, something that this committee helped
to put into law and is hopefully creating relief in our
transportation sector, but as I read the briefing that the
staff provided about today's oil prices, they note that while
crude oil prices have risen in nominal terms when adjusted for
inflation they are still lower than historical prices. In
today's dollars prices for crude oil peaked in 1981 at about
$70 per barrel or $39 per barrel in nominal terms. Heating oil
prices are also still lower than previous years, and yet we are
experiencing in our country some distress in certain sectors
and regions and certainly at certain economic levels, so I
would hope, Mr. Chairman, that we would go forward on two
fronts.
First of all, take a look at what other things we can be
doing, such as this committee has done, to encourage uses of
alternative fuels such as biodiesel and other fuel combinations
that use our natural resources. Since the transportation sector
is the largest petroleum end user, I think we might also
explore whether or not what OPEC is doing is actually legal
within the WTO and if not take steps to address that as well.
I do thank you, Mr. Chairman, for holding this hearing and
for allowing us this opportunity to hear from members and also
experts in the field and to have a full and fair discussion of
what we as a Congress might do. Thank you very much.
Mr. Barton. Thank you, Congresswoman. We appreciate that.
I would now like to hear from the distinguished chairman of
the Health and Environment Subcommittee who shares some
jurisdiction on this issue, Congressman Bilirakis of the great
State of Florida.
Mr. Bilirakis. Thank you very much, Mr. Chairman, and I,
too, commend you for holding this hearing.
Mr. Chairman, in yesterday's St. Petersburg Times there is
an article entitled ``Survey Confirms Gas Pump Shock.'' There
is a paragraph in here: ``The AAA usually conducts its price
survey on a monthly basis but prices have been rising so fast
lately that the organization will begin conducting weekly
surveys March 14. The weekly schedule will continue at least
through March 27, the next time members of the Organization of
Petroleum Exporting Countries meet to discuss whether they will
pump out more oil.''
I think that basically says it all so very well, Mr.
Chairman. We know about the gas prices having gone up and in
Florida prices have gone up 15 cents a gallon in just 3 weeks.
The average price for a self-service gallon of regular unleaded
fuel reached $1.54 on Tuesday, up from $1.39 on February 15. A
year ago a gallon of gas cost just 98.2 cents in Florida and
earlier this week the Energy Information Agency predicted that
even barring major refinery disruptions this summer average
retail gasoline prices could reach a monthly average of $1.75
to $1.80 per gallon, and in high cost areas such as California
prices could be as high as $2 per gallon.
Mr. Chairman, you and others have all said it. Finding the
cure is really what we should be doing hopefully in this
committee, and not just short-term fixes that we read about
what the Administration is doing when their Department of
Energy News announces ``Administration's Actions to Ease Home
Heating Oil Crisis.'' I would like to say that there are an
awful lot of things they could be doing on a regular basis to
keep the problem from taking place rather than after something
like this comes up. Mr. Chairman, it is critical I think to go
into the real reasons why the prices have gone up.
We can blame OPEC and OPEC to a large degree probably is
responsible. I don't know how much of the responsibility lies
really domestically, but knowing you and knowing your
persistence and perseverance I think you are going to come up
with the answers ultimately. Thank you, sir.
Mr. Barton. Thank you, Congressman Bilirakis. We appreciate
that.
The gentleman from Ohio, Mr. Strickland, is recognize for a
brief opening statement.
Mr. Strickland. Thank you, Mr. Chairman. I am pleased that
we are holding this hearing today because the high price of
gasoline and fuel oil deserves our full attention.
I represent a very rural part of Ohio, and just recently in
recent days I have met with independent truckers, I have met
with members of the Farm Bureau, and other constituents across
Southern Ohio to hear the concerns that these hard-working
individuals have.
Many of these people maintain business or farm operations
which simply cannot withstand the recent volatility in the
prices of diesel fuel, gasoline, and home heating oil. In rural
Southern Ohio the considerable increase in fuel prices has
alarmed many and they are looking to us to provide some
stability during this emergency.
I think we must take our responsibility very seriously and
explore thoughtfully and thoroughly our options for addressing
this alarming situation, including the release of oil from the
Strategic Petroleum Reserve.
I understand that the Administration has made no decision
as to whether or not to pursue this particular option, but I
emphasize that for many people in my district the high fuel
costs have already created an economic crisis for them, and
while we are sharing the blame for this current crisis, I think
we should remind our so-called international friends that
friendship is a two-way street.
We went to Mexico and helped them when they were
experiencing economic difficulty and yet they have colluded, in
my judgment, with OPEC including Venezuela and Saudi Arabia and
Kuwait, a country where we put our national resources and the
lives of our young people on the line, and now they collude to
raise prices, and I think we should take the firmest stand with
the OPEC nations.
I understand that we don't give them a lot in terms of
direct economic aid, but we give them security, and Saudi
Arabia is awfully glad that we exist, otherwise they may not
exist and I think we should remind them of these circumstances
and demand that they be sensitive to the needs of our economy
as we face this very difficult set of circumstances.
Thank you, Mr. Chairman. I yield back my time.
Mr. Barton. Thank you, Congressman, and your point about
Mexico I think is very well taken.
I am glad that you brought that up, because that is worthy
of future discussion.
The gentleman from the Tarheel State, the Honorable Mr.
Burr of North Carolina.
Mr. Burr. Thank you, Mr. Chairman, thank you for this
hearing. I welcome my colleagues. I had the opportunity to have
Secretary Richardson in International Relations last week. Wish
I could tell you that I was enlightened and knew that there was
an end to the current process from his statement and answers
but in fact I got the distinct impression that we still have no
policy. For an issue that most Americans have seen coming for
some time, the question is who was asleep at the helm.
Let me take this opportunity, Mr. Chairman, as you know I
exercise frequently when individuals don't share with us the
opportunity to read their testimony well in advance, that for
an issue of this magnitude that affects so many Americans--
seniors, truckers, the average person every time they stop at
the pump--EIA and the Department of Energy was nice enough to
share their testimony for this hearing with us at 8:30 p.m.
last night. Under the rules of this committee we could deny
them the opportunity to testify and I question today after
reading the testimony last night whether it is even worth
hearing, but this committee has never denied a branch of the
Government the opportunity to come before us and educate us,
enlighten us, and share with America what their plans were to
solve the problem.
Clearly there was an opportunity for both to share their
testimony with each other to make sure that there were no
discrepancies between how they would testify.
I just had the opportunity to refresh myself with a letter
or the response to a letter that I wrote to the EIA earlier
with a number of other members, Republican and Democrat. Let me
read one sentence in that letter: ``EIA's latest projections
show regular gas prices peaking near $1.40 per gallon this
summer.'' That was in the last several weeks. Think of the gas
pump price the last time you filled up. Clearly we have missed
it again.
We have no better determination of where gas prices are
going to go because we have no policy to stabilize it. I think
my chairman of the Health Committee was right. It is time we
find a solution. It is time that the Congress and the
Administration work together. If using SPR to stabilize the
price is an option, we have used it before. We should put it on
the table now. How difficult a decision does the Administration
have to make a determination as to what is an effective way to
stabilize price?
I am reminded of the remarks that Senator Murkowski said
this week or last week in his hearings. It is odd at a time
where we are faced with this crisis that we have an
Administration who is aggressively causes the price of
electricity to go up through the regulations on the industry,
has cutoff new exploration in the areas of the public Federal
lands for exploration, and an Administration that blocks the
Nuclear Waste Policy Act which affects the long-term cost and
unpredictability of energy as well as our inability to
relicense hydro facilities.
Mr. Chairman, this is an important hearing I thank you for
holding and I yield back.
Mr. Barton. I thank the gentleman from North Carolina. I
would agree with the gentleman on the tardiness of some of the
testimony. I was tempted to not let DOE testify today, but this
is such an important hearing that I think we have to have their
testimony in the record but it is ironic to me that they
testified at a similar hearing in the Senate 2 weeks ago, so
that I doubt that they had to reinvent every paragraph.
I just have a feeling that some of what their testimony
today is is similar to what it was 2 weeks ago, so I share your
concerns and I will be addressing them with the Secretary or
his deputy later today, I hope.
We do have several more opening statements, but Mr. Sweeney
has a pending engagement at 11:30, so we are going to attempt
to expedite these opening statements.
The distinguished gentleman from Illinois, Mr. Rush, who I
am sure his constituency has experienced more than most of our
constituencies the pain of some of these higher energy prices
recently, will be recognized for an opening statement.
Mr. Rush. Thank you, Mr. Chairman, and you are absolutely
correct. My constituency has faced many, many problems as it
relates to the escalating prices, oil prices, and I want to
thank you for calling today's hearing on the issue of oil price
fluctuations.
I especially think it is important that our subject for
hearing this morning is just not the high price of gasoline at
the pumps or the price of heating oil this winter. Really our
hearing must focus on the volatility of our markets. Just a
year ago crude oil was selling for approximately $11 a barrel.
Today it is selling for $30 a barrel. Now we certainly all
understand how the free market economy works. When supply is
high and demand is low, prices will fall. When supply is low
and demand is high, as we know, prices will rise.
That said, my issue is not with the free market economy. My
issue is with how we have allowed ourselves and our Nation to
be manipulated by it.
During the first session of this Congress, this
subcommittee held hearings on what could be done to assist
domestic oil producers to keep their wells open. Situations
like the one we face today was used as an argument for giving
assistance to domestic producers. In response to today's high
prices, the Administration appropriately took action by
releasing LIHEAP funding for the lower income. Additionally,
the Administration waived on a case by case basis certain
environmental standards and currently on the Hill there is
discussion of dropping the Federal gasoline tax.
That said, Mr. Chairman, these proposed remedies are not
remedies to solve the issue of price fluctuation and our
Nation's vulnerability to such fluctuations. Really what we
must be about today and what we must be about when prices come
back down is figuring out a way to decrease our Nation's
vulnerability to fluctuating prices. We are present here at the
dawn of the 21st Century. We are seeing technology that our
parents and grandparents never dreamed of, and, Mr. Chairman, I
find it hard to believe that in this day and age American
cannot find a workable solution to oil price fluctuation.
What is the solution? Well, we are not sure at this point,
but maybe perhaps there must be a greater focus on the use of
renewable energies. Maybe we should be looking at natural gas
more closely. Perhaps we should increase our reliance on
domestic production and maybe we need to rethink our heavy
reliance on foreign oil. Quite frankly, I am not sure of the
solution.
However, I am certain that a quick fix today does not solve
the problem tomorrow. Therefore, I am calling on the Congress
and this subcommittee to work to solve this problem
permanently--no quick fixes.
Let us set up commissions, conduct studies, do whatever
that we must do to prevent our Nation's vulnerability to
fluctuating oil prices. This must be done to protect our
Nation's economy and to protect our Nation's security.
So Mr. Chairman, I fully appreciate the subject of today's
hearing, but we must be about finding a permanent solution and
not quick fixes, and with that, Mr. Chairman, I yield back the
balance of my time.
Mr. Barton. We thank the gentleman from Illinois for his
thoughtful statement. We would like to now recognize the
gentleman from Staten Island and part of Brooklyn, the baseball
standout from the 13th District who is celebrating I am told
today his 35th birthday, which means he is now eligible to run
for President of the United States of America if he so wishes--
Mr. Vito Fossella.
Mr. Fossella. Well, thank you very much, Mr. Chairman.
Mr. Barton. Is it not true it is your birthday?
Mr. Fossella. This is true.
Mr. Barton. It is true?
Mr. Fossella. As to the second, I decline.
Thank you very much and thank you as always for holding the
hearing.
I think the last thing we need today, Mr. Chairman, the
American people need today is another analysis as to why prices
have run up. I think what the American people need are answers
as to what this Administration and Members of Congress who have
been resistent to allow greater emphasis on domestic oil
producers and create of a dependency on a foreign cartel.
I think if anything has come out of this hearing in the
opening statements so far is that both sides of the aisle agree
that the United States is too dependent on foreign cartels and
there are things that this Administration can be doing to ease
the regulatory burden on domestic oil producers to ease the tax
burden and to create incentives so that we are less reliant
upon this cartel.
We have seen in the last several months those constituents
of mine in Staten Island, Brooklyn, what the consequence of
lack of action are. Yesterday on Staten Island at the pump,
$1.99 for gasoline. We have a gentleman with us today, Mr.
Peter D'Arco, who supplies home heating oil to a lot of people
in my district, and he will tell you first-hand what happened
when we saw that spike in home heating oil just a couple of
months ago. A lot of citizens on fixed income are not going to
be able to pay their bill.
That is the consequence of lack of action, and I know a lot
of people call for long-term solutions. Some people have called
for commissions and studies. I don't think we need a
commission. I think what we need is an articulate policy that
says these tax burdens are too high, these regulatory burdens
are too great, and then ultimately the constituents on Staten
Island, my constituents in Staten Island, Brooklyn, will
benefit and we will have a rational policy for the domestic oil
producers around the country, particularly in the West and the
South.
I think if anything else, if I might add, it has been
repeated a couple of times, but let us not just take a snapshot
here and forget about it. Let us not just tell the American
people that we are doing something when in reality nothing may
come out of it. I think what you need and what this country and
what the people of this country need is less rhetoric and more
action.
I know our colleagues here have also felt the brunt. I know
Congressman Sweeney in upstate New York and Congressman
Sherwood in Pennsylvania get hit even harder, and you have been
vocal advocates in trying to bring about relief and trying to
help your constituents and I appreciate your coming here today.
You have done a great job as well.
Mr. Chairman, I think what--if I could underscore one more
time--that life is a two-way street, and this issue of OPEC's
decrease in production, I agree with my good friend from Ohio,
that several years ago we lost American lives because we were
there for Saudi Arabia and Kuwait and now, all of a sudden, it
seems that they forgot those lives that were lost.
Right now there are being in Staten Island, Brooklyn,
across the Northeast who are paying a lot for gas at the pump
and home heating oil. If anything comes out of this, and I am
as big a believer in the free market as anybody here, but
technically we do not have one because as long as we are
dependent on places like Saudi Arabia, Kuwait and Mexico and
Venezuela for our oil, we do not live in a free market. If
anything comes out of this, I would hope it is a united
Congress and an Administration that sends a signal around the
globe that when the chips are down for us we expect help, just
as we are there for them when they need help. With that, I
yield back the balance of my time, Mr. Chairman.
Mr. Barton. Thank you, Congressman, and I want to commend
you on the effort that you put in on this issue. You were one
of the first Congressmen to ask me to conduct this type of a
hearing and you have been very aggressive in seeing to the
needs of your constituents and you are to be commended on that.
Our last opening statement is going to be from the
gentlelady from New Mexico, Congresswoman Heather Wilson, who
has helped this subcommittee in obtaining a witness for later
in today's hearing. Congresswoman Wilson.
Mrs. Wilson. Thank you, Mr. Chairman, and I wanted to thank
you for holding this hearing.
I have a slightly different situation than the folks in the
Northeast in that New Mexico doesn't rely as much on home
heating oil, but on Sunday the price of a gallon of gas at the
Chevron station at I-25 in Lomas was $1.49.9 and it is probably
2 or 3 cents higher than that by today. The New Mexico Hotel
and Motel Association says that they have historic low advance
bookings for June, July and August and the No. 1 reason they
believe--that we have got a great economy otherwise--but people
are not planning to drive this summer and it is going to affect
tourism across America.
Eighteen months ago, or for the 18-month period between
1997 and mid-'99, we had historic low prices for oil that cost
$3.7 billion to the New Mexico economy, 1500 jobs and $25
billion to the Nation as a whole. Where was this Administration
on energy policy then? Frankly, it is pretty much where we are
now. I don't think they have a policy and we are all suffering
the fluctuations because of it.
The reality is that the problem is the fluctuations and it
is the dependence on foreign oil that is driving many of those
fluctuations. It is not a free market. It is a cartel. You are
exactly right--and those countries will do what it is in their
national interest to do.
In 1998 52 percent of the oil consumed in the United States
was from foreign sources. That is the highest level in history,
the highest percentage in history, and at the same time we have
a tax structure and a regulatory structure that cuts off
responsible exploration, that encourages foreign exploration,
and that limits offshore drilling. We have taxes on gasoline,
and most folks don't know that of that $1.49 they paid last
weekend at the pump per gallon 18.3 cents is in Federal taxes.
It used to be 14 cents before the tax hike of 1993. The same
with diesel--24.3 cents is taxes.
I think the question today that I am going to have for some
of the folks particularly from the Department of Energy is what
is the plan? For 12 months--it was 12 months ago that OPEC said
we are going to cut production and started to hold together. As
long as a cartel holds together America has a problem. They
were inactive for 12 months and then we see a flurry of
airplanes going around the world asking people on bended knee
with hat in hand to increase production. That is not a policy.
That is a plea, and we need to come up with a policy.
I am glad they released the LIHEAP funds for folks in the
Northeast and I hope that that helped some, and likewise
looking at weatherization assistance, but that doesn't solve
the problem. These are little band-aids and we need to get a
serious policy to reduce reliance on foreign production.
Thank you, Mr. Chairman.
Mr. Barton. Thank you to the gentlelady from New Mexico. We
are now going to welcome our first panel. All other members are
not present who have yet to make an opening statement who wish
to make an opening statement, the Chair would ask unanimous
consent that their statement be included in the record at the
appropriate point.
Is there objection? Hearing none, so ordered.
[Additional statements submitted for the record follow:]
Prepared Statement of Hon. Cliff Stearns, a Representative in Congress
from the State of Florida
Thank you Mr. Chairman for holding this hearing.
One dollar and eighty cents. That's what average Americans can
expect to pay for a gallon of gasoline this summer. Home heating oil
will cost even more. So, I need not emphasize the importance for this
Subcommittee to examine the recent spike in oil prices and how this
Administration deals with such changes in the market.
In February of last year, crude oil was $12 per barrel. 12 months
later--the cost rose to over $30 per barrel. Though these prices, when
adjusted for inflation, are below historical oil prices, there is cause
for concern.
Some have called for the President to drawdown the Strategic
Petroleum Reserve. At this time, I would caution against such action.
This reserve was created to sustain the US in the event of a major
disruption in its energy supply.
However, we must examine all aspects of this issue including
allegations of ``price gouging'' by oil companies and most importantly
our dependence on foreign oil. Our dependence on foreign oil has
increased since the oil crisis in the 70's. Over 50% of our oil is
imported leaving our economy at the whim of a handful of nations. This
is a national security concern. And one not to be taken lightly.
Regardless of where each of us stands on addressing the oil price
issue, I am most concerned with the Administration's handling of this
recent price spike.
In March of 1999, OPEC met and agreed to reduce oil production.
That was nearly a year ago. The federal government had more than enough
time to prepare for what inevitably would result from a decrease in
supply--an increase in price.
In fact, the Department of Energy did not announce any major action
until just last month per its news release dated February 10. Even more
amazing is that Secretary Richardson in a Boston meeting was quoted as
saying ``the federal government was caught napping.''
Heaven forbid if any of our military leaders were to use such an
explanation.
And speaking of unprepared, for the record Mr. Chairman, I would
like to note that DOE did not get its testimony to the subcommittee
until 8:30 last night. However, I guess we should be used to this by
now.
I do question some of the actions proposed or taken by the
Administration. For instance, the President released nearly $300
million in Low-Income Home Energy Assistance Funding in response to the
home heating oil crisis.
While, this undoubtedly provided needed relief, I wonder if the
Administration considered that much of the emergency LIHEAP funding
will also be needed for air conditioning in the summer. We can expect
another summer of extreme heat and many Americans will need such
assistance.
In addition, waiving ``hours of service'' regulations for
commercial trucking and deferring routine maintenance at refineries may
cause more additional problems.
Mr. Chairman, we have a lot to learn today, and I look forward to
the testimony of our distinguished Member panel, as well as the
Administration and Industry witnesses. Thank you.
______
Prepared Statement of Hon. Tom Bliley, Chairman, Committee on Commerce
Mr. Chairman, before I give my statement I would like to welcome
Congressman Boucher from my home State of Virginia as the new ranking
member on this Subcommittee. I think the gentleman will make an
excellent ranking member and I am happy to see we have finally broken
the lock the State of Texas has had on this Subcommittee.
Thank you, Mr. Chairman. I'd like to commend you for holding this
hearing on oil prices and I welcome the Members that have come to
testify before the Subcommittee today.
As everyone is well aware, recently there has been a dramatic
increase in the price of crude oil and oil products, including home
heating oil, gasoline, and diesel fuel. Although heating oil prices
have declined as the temperature has risen, I am told gasoline prices
for this summer will reach heights we haven't seen for years. Like many
members, I am concerned about the impact these high oil prices are
currently having on consumers and on our economy.
There are always events out of our control that impact the price we
pay for oil: the decision of OPEC to decrease production; a sudden, an
unexpected cold snap; an increase in the demand for oil in Asia; and
the unexpected shutdown of refineries. Given all that, this hearing
will look at whether government intervention is necessary or
appropriate on this matter.
This hearing will provide an opportunity to explore this country's
policy on oil markets and our energy security. We need to assure that
the U.S., not officials in countries thousands of miles away, is in
charge of its energy policy.
I welcome today's witnesses, and I am especially looking forward to
hearing the testimony of our colleagues. Thank you.
______
Prepared Statement of Hon. Ron Klink, a Representative in Congress from
the State of Pennsylvania
I want to thank Chairman Barton and Ranking Member Boucher for
holding this hearing today to talk about high fuel prices and what we
can do to bring relief. I want to welcome all of our witnesses today,
especially Mr. Sam Farruggio, who is from Bristol, Pennsylvania, and
who runs a trucking business of over 100 trucks in the northeast. Mr.
Chairman, I will also submit for the record a statement from Mr. Jim
Luchini of Kirk Trucking in Delmont, Pennsylvania, who sent me figures,
back in January, showing that prices at the diesel fuel pumps increased
in some places by 10 cents in 24 hours. Also, on January 26th, the
Pittsburgh Post Gazette reported that diesel prices shot up about 40
cents in the previous week.
We need to get the price of crude oil down to normal levels so our
folks can afford to live. The problem began in March of last year, when
OPEC decided to cut oil production by 7.5% because they wanted bigger
profits. As a result, home heating oil prices skyrocketed, and diesel
fuel prices haven't been under $1.00 a gallon since. Diesel fuel prices
in Pennsylvania were up to $1.96 a gallon at the beginning of February
and, as of March 6th, are now $1.60 a gallon.
I am here today to tell you that I understand and appreciate what a
dramatic impact these increases are having on truckers and their
families, and on people trying to pay their home heating bills.
Here is a case study. In February, when the Independent Truckers
drove their trucks in to Washington to protest skyrocketing diesel
prices, the Washington Post wrote a story about the Ericksons from
Meyerstown, PA who own their own rig. Mrs. Erickson is now helping her
husband to drive the truck, to make ends meet and to cover operating
costs, and they had to pull their 14-year-old daughter out of school
and are now home-schooling her in the cab of their truck. No family
should have to disrupt their lives so drastically, because of high
prices at the gas pumps.
Congress, and the Administration, have discussed every option
imaginable. Congress has met with President Clinton, and Energy
Secretary Richardson has been all over the Mideast urging OPEC
countries to increase production. After our citizens fought the Persian
Gulf War, risked their lives, and some lost their lives, to keep our
allies free (Kuwait) the least they can do for us is to increase oil
production. After meeting with Secretary Richardson, OPEC nations have
agreed to meet on March 27th to decide whether they will increase
production.
This week, I have introduced a resolution in the House saying that,
if OPEC leaders fail us, and don't increase production, the President
should draw down the Strategic Petroleum Reserve (SPR) to give us
relief The SPR contains 586 million barrels of oil, and if OPEC fails
us, then we must tap in to our own reserves. I would appreciate the
support of my colleagues on the Committee for this resolution.
I am also a co-sponsor of a bill, introduced by Congressman Sanders
of Vermont, to create a special 6 million barrel oil reserve for the
northeastern states. This will help diesel truck drivers, farmers, who
must operate tractors, drivers of regular cars, and persons paying home
heating oil bills. Here is how it will help: if we have an emergency or
severe winter weather, the 2 million barrels of oil will be used for
home heating oil purposes. If the severe winter continues, then we will
draw on an additional 4.7 million barrels of oil kept in reserve to
heat homes. That way, diesel fuel will not be confiscated to use as
home heating oil, because the reserves were there. This will keep
prices down for truckers, car drivers, and farmers driving tractors.
In addition, as quickly as possible, Congress needs to pass the
Supplemental Appropriations bill in which the President asked for an
additional $600 million for LIHEAP funds, $19 million for the Home
Weatherization Program run by the Department of Energy and another $1
million for the Small Business Administration to provide low-interest
loans for small businesses to get through the crisis.
If more Pennsylvanians can weatherize their homes, their heating
bills will go down. The extra funds for LIHEAP will give SBA a total of
$86 million to give loans to home heating oil dealers so they can
extend flexible payment terms to their customers. Loans will also be
available to loggers and truckers who were affected by the price
spikes.
I look forward to working with my colleagues in Congress and the
Administration to determine whether we need to re-examine our policy
regarding the Strategic Petroleum Reserve and United States energy
policy in general.
Again, I want to thank our witnesses, especially Mr. Farruggio who
came from Pennsylvania and gave us the message we all must remember--
``we have seen the fuel prices move as much as 15 cents a in one day
and changes at the pump two to three times in one day.'' We must
resolve this, so working men and women of America can afford to live
and work without passing costs on to consumers due to high oil prices.
Thank You, Mr. Chairman.
Mr. Barton. Due to a pending engagement, we are going to
recognize the gentleman from New York, the Honorable John
Sweeney. We will go with you first, then we will start with Mr.
Moran, Mr. Sherwood, and hopefully by that time Congressman
Crowley of Pennsylvania will be joining us, so Mr. Sweeney,
your statement is in the record in its entirety and we
recognize you for 5 minute to summarize and appreciate your
appearance before the committee.
STATEMENTS OF HON. JOHN E. SWEENEY, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF NEW YORK; HON. JERRY MORAN, A
REPRESENTATIVE IN CONGRESS FROM THE STATE OF KANSAS; HON. DON
SHERWOOD, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF
PENNSYLVANIA; AND HON. JOSEPH CROWLEY, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF NEW YORK
Mr. Sweeney. Thank you, Mr. Chairman. I want to thank you
and the ranking member, Mr. Boucher, for conducting this
hearing. I am extremely thankful. As you know, I have had a
number of conversations with you in the halls of Congress about
this particular issue.
And while we may not agree on all or share the same views
on all of the issues attendant here, I think we do agree on the
need to begin to develop the process for finding a long-term
solution based on self-reliance.
This hearing is an important event for those of us in the
Northeast, because, frankly, the Administration has viewed this
with benign neglect. They have ignored our pleas and they have
shown no leadership.
They have detached; they don't feel our pain. And I think
if I can do something important here, it will be to put a human
face on what's happening in my region of the United States in
upstate New York.
Many of my constituents have been shocked at what has
happened with fuel and oil prices as they have risen, but I'd
like to start by saying that as New Yorkers, we prepare and
plan for all sorts of weather conditions in the Winter, and we
have a lot of experience.
Whether it's families putting plastic over their windows
for extra insulation, or pulling sweaters out for warmth, or
adjusting the thermostat down to preserve fuel, New Yorkers, we
know how to prepare for cold winters.
But this is one that we were really caught by surprise on,
and I think it will give you a real sense of the kind of issues
that exist out there, as you begin the journey to find
solutions.
In January, one constituent called and told me that he was
using his overtime wages to pay the heating bill, rather than
saving for his children's education.
A senior citizen called and explained that she didn't act
quickly enough to stop the oil distributor from delivering the
recap on her oil tank, and filling her oil tank, as is usually
done in my neck of the woods, was faced with a $450 oil bill.
This woman is collecting a Social Security check each month
for just under $400, and this current situation is real to her.
It leaves her finances decimated.
These are just two of the many examples of this horrendous
situation, and how people are dealing with this extreme
hardship. With the high cost of home heating fuel ruining many
family budgets, people have had to cut expenses elsewhere.
Often, too many people are literally having to choose
between putting food on the table for their families and having
a warm home.
The crisis has been so severe that an oil distributor in my
District recently told me that he was hoping for warmer weather
quickly. That's like hearing that Frosty the Snowman wants to
sing about how he is looking forward to Spring.
This gentleman told me that they were only delivering in
quantities of 100 gallons, because most folks could not afford
more, and he could not get enough fuel from producers to
satisfy the demand, because there was not enough heating oil in
the region.
For further reference, he usually will not deliver less
than 150 gallons, because he can't justify the cost.
Truckers, as many of your committee have pointed out, are
feeling the pinch in high diesel prices. Mr. Bryant mentioned
the rally that was held earlier this month in Washington.
I live in an area where mass transit is not readily
available. The trucking industry is a major, major component of
our economy, and the area is very dependent on moving goods and
supplies by using truckers.
Many truckers in my District are finding it too expensive
to start their engines, and are simply quitting the business.
An industry that already has a shortage of drivers doesn't need
this additional burden.
The stories continue: Whether it's the small manufacturing
plant pouring its profits into fuel tanks, the grocers who must
pay more for food to be shipped, the local government that
finds its heating bills doubled, forcing them to cut back on
services; this crisis has affected everyone in the region.
In response to this emergency situation, I have sent, as
have other Members of Congress, sent letters to the President
and to the Secretary of Energy, asking them to release
emergency LIHEAP dollars and to consider opening the Strategic
Petroleum Reserves to get more oil into the region.
Many of our colleagues have joined us, as I said, in this
call, asking that we reduce the burden in the Northeast, in
particular, but with all due respect to those who feel
otherwise about the Administration's response to this, it has
been grossly inadequate.
They have been, as I said earlier, treating this with
benign neglect. The entire State of the New York, in the first
release of funds, received $2.6 million in emergency
assistance, while our friends in Maine and in surrounding
States received five times that emergency aid.
We quickly called for assistance to help New Yorkers, but
were rebuffed by the Administration, which still refused to
acknowledge there was an emergency situation in the first
instance.
Only after LIHEAP funds became an issue in the current New
York Senatorial race, did the White House release more funds.
Too little, too late, is what we heard from most of the
constituents and most of the people in upstate New York.
The White House had an opportunity to release from the SPR
in January, yet they have steadfastly denied there was any
problem in the first instance. Now, after belatedly
acknowledging that there is not enough oil in the market, the
Secretary of Energy has traveled the world with hat in hand,
asking OPEC to increase oil production to help get us out of
this situation.
In 1984, President Reagan announced that the SPR would be
drawn down in early in disruption such as what the Northeast is
experiencing now. If this Administration had acted when they
were first asked to, and acted in accordance with President
Reagan's policy regarding the SPR, this crisis may have been
shortened.
By strategically releasing oil from the reserves into the
Northeast in January when there was a definite disruption in
the oil supply, oil would have made it through the process to
the consumer at a much cheaper price by mid-February.
I see that my time has expired, Mr. Chairman. I want to say
that I have a couple of bills in committee that I'd like you to
consider:
One that would require the Department of Energy to study
and report back to you, the causes, and to make definitive,
tangible recommendations; and the second is to create a
Northeastern Reserve so that we in the Northeast may find an
ability to be independent in and of ourselves.
But I can't overstate how critical this issue is in my neck
of the woods, how people are really suffering from this issue.
I thank you very, very much, for conducting this hearing, and
hopefully beginning a real discussion and national debate on
how we make sure that this never happens again.
[The prepared statement of Hon. John E. Sweeney follows:]
Prepared Statement of Hon. John E. Sweeney, a Representative in
Congress from the State of New York
Good morning Chairman Barton and Ranking Member Hall. Thank you for
allowing me the opportunity to testify before the committee. I
congratulate you for holding a hearing on this important topic and am
pleased to be able to help shed some light on this terrible situation.
My comments will be directed at the recent home heating fuel price
surge in the Northeast and its effect on my constituents.
As you know, the recent heating fuel price spike sent home heating
oil, kerosene, and diesel prices through the roof. Many of my
constituents were shocked when home heating oil prices rose from just
over a dollar per gallon last fall to more than two dollars per gallon.
No one can accuse New Yorkers of not expecting temperatures to drop
during the winter months--everyone knows and prepares one way or
another. Whether families are putting plastic over their windows for
extra insulation, pulling out sweaters for warmth, or waxing their skis
in preparation for the coming snow, residents of New York know cold
weather.
However, the sudden cold snap, which kept the region in icebox
temperatures for weeks, sent heating fuel prices skyrocketing. In
January, one gentleman called and told me his story--how he is using
his overtime wages to pay the heating bill rather than saving for his
child's education. A senior citizen called and explained that she was
not quick enough to stop the oil distributor from filling her heating
oil tank like ususal, and was faced with a $450+ oil bill. Her Social
Security check for the month was for just over $400--leaving her
finances decimated. These are just two of the many people who contacted
me about this horrendous situation. With the high cost of home heating
fuel ruining many family budgets, people have to cut expense elsewhere.
Too many people are having to choose between food on the table and a
warm home.
Another perspective of the problem came from an oil distributor in
my district who told me he was hoping for warmer weather. That's like
hearing Frosty the Snowman sing about how he's looking forward to
Spring! This gentleman told me they were only delivering in quantities
of 100 gallons--because most folks could not afford more and he could
not get enough fuel from producers to satisfy demand because there was
not enough heating oil in the region. For reference, he usually will
not deliver less that 150 gallons--because he cannot justify the cost.
Truckers are feeling the pinch of high diesel prices too. To drive
their point home, they staged a mass protest of high diesel fuel prices
by driving in convoy down to the heart of Washington. Many truckers in
my district are finding it too expensive to start their engines and are
quitting the business. An industry that already has a shortage of
drivers does not need this additional burden.
The stories continue. Whether it is the small manufacturing plant
pouring its profits into fuel tanks, the grocers who must pay more for
food to be shipped, the local government that finds its heating bills
doubled forcing them to cut back on services, this crisis affects
everyone in the region.
In response to this emergency situation, I sent letters to the
President and Secretary of Energy asking them to release emergency
LIHEAP (Low Income Heating Energy Assistance Program) funds and to
consider opening the Strategic Petroleum Reserve to get more oil into
the region. While many of my colleagues joined me in saying there was
an emergency situation in the Northeast, the Administration was
hesitant to act.
The Administration's initial response, in my view, was inadequate
at best. The whole state of New York received a whopping $2.6 million
in emergency assistance, while our friends in Maine received five times
as much emergency aid. I quickly called for more assistance to help New
Yorkers but was rebuffed by the Administration, which to my dismay,
still refused to acknowledge there was an emergency situation. Only
after the LIHEAP funds became an issue in the New York Senatorial race
did the White House release more emergency LIHEAP funds.
``Too little too late'' is what I heard from many people. The White
House had the opportunity to release oil from the SPR in January, yet
they steadfastly denied there was a problem. Now, after belatedly
acknowledging there is not enough oil in the market, the Secretary of
Energy has traveled the world--hat in hand--asking OPEC to increase oil
production to help get us out of this situation.
In 1984, President Reagan revised its earlier position by
announcing that the SPR would be drawn down early in a disruption--such
as the Northeast experienced. If the Administration acted when I asked
them to, and in accordance with President Reagan's policy regarding the
SPR, this crisis may have been shortened. By strategically releasing
oil from the reserves into the Northeast in January, when there was a
definite disruption in the oil supply, oil would have made it through
the process to the consumer at a much cheaper price by mid-February.
Regardless of Administration actions, all the LIHEAP money in the
world wasn't going to help folks who didn't qualify. Even people who
did qualify for LIHEAP funds were going forced to wait for their
checks, because bureaucracy cannot work that fast.
To prevent this appalling situation from happening again I
introduced the Home Heating Fuel Price Spike Act (H.R.3641). My
legislation takes two simple steps in this effort. First, H.R. 3641
requires the Department of Energy to fully examine the oil crisis and
report back to Congress exactly what happened so we can effectively
work together to prevent future problems. The Study also requires the
Secretary of Energy to propose alternatives to alleviate future home
heating fuel shortages and make recommendations with respect to the
suitability and feasibility of each alternative.
Some factors that caused the shortage of heating oil in the
Northeast region are:
Sudden cold snap.
Poor judgements of how much supply to keep on hand--because
the last three winters were warmer than usual.
Weather related delivery problems--ice on the river, etc.
Interaction with the natural gas supply.
Volatile commodity market.
OPEC policies.
The question is--how do these factors interrelate. My legislation
will help us get the answers we need.
H.R. 3641 creates a 10 million barrel heating oil reserve in the
Northeast region that can be tapped in times of trouble. The reason for
creating a reserve in the region, rather than capitalizing on the
existing SPR, is the amount of time it takes to get oil from the SPR to
the Northeast. There is a definite possibility that in the future, a
severe cold spell will shut down river traffic for an extended period
of time, leaving thousands of residents without access to heating oil.
In an emergency like this, it will take too long to find enough trucks
to haul a million barrels of oil, then load up the trucks and drive
them halfway across the country. The only reasonable solution to this
problem is to establish a heating oil reserve in the region.
Whether we establish one, two or three different sites across the
Northeast--in times of emergency, oil distributors would not have to
wait for oil to be trucked across the country. Since the problem is
getting heating fuel into the region, having a reserve located there
solves half the problem.
H.R. 3641 will help us get the facts on what thrust us into this
situation, so that we can work together to prevent such an emergency
from happening again. Creating a heating oil reserve in the region to
guard against future shortages is a good and necessary first step.
We have lived through a terrible crisis that never had to happen.
Too many families have had their savings depleted and budgets racked.
Too many have had to choose between food on the table or a warm home. I
am grateful that nobody has died because of this needless tragedy. By
considering H.R. 3641, we will get the answers we need. I look forward
to working with you on this extremely important issue.
Thank you again for allowing me the opportunity to testify before
the committee. This concludes my testimony.
Mr. Barton. Thank you, Congressman. I can assure you that
this is not the only hearing we're going to have this Spring or
Summer on this issue. This is not an ending; this is a
beginning.
I now recognize the gentleman from the great State of
Kansas. Again, your statement is in the record in its entirety,
and we would recognize you for 5 minutes to summarize, Mr.
Moran.
STATEMENT OF HON. JERRY MORAN
Mr. Moran. Mr. Chairman and Mr. Boucher, thank you for the
opportunity to appear once again before this subcommittee.
Three years ago this month, I made my first speech on the
House floor, highlighting the importance of domestic oil
production, and our dangerous reliance upon imported oil, and
calling for the development of a national policy on our
dependence.
At that time, oil prices were sliding, were under $15 a
barrel; gasoline was around 80 cents a gallon. Within the next
12 months, the price of crude would reach $7.75 per barrel for
Western Kansas Crude, and would remain under $10 a barrel for
most of the next year.
As a result of this dramatic price decline, more than
136,000 wells were shut down, and more than 41,000 jobs were
lost in the oil and gas industry.
This amounts to 136,000 wells and 41,000 people not today
producing oil to meet the country's energy needs.
It was during that time that I introduced legislation aimed
at reducing the cost of production for independent oil and gas
producers. The bill I introduced seeks to boost domestic
production by lowering the tax burden on independent producers,
increasing the credits for advanced oil recovery, and calling
for a strategic plan, including additional research and
development to address our national security needs when oil
imports reach 60 percent.
While the focus of today's subcommittee hearing is on the
cost of energy paid by the American consumer, the solution for
today's consumer is the same as the solution for the
independent oil producer. We must encourage production in our
domestic industry, and limit our dependence upon foreign
supplies of petroleum.
High oil prices are a burden that we all bear. Kansas is a
transportation-dependent State with long distances between our
communities and many commodities to haul, and we normally have
an extremely cold Winter.
Whether it's the Kansas farmer preparing now his fields for
Spring planting, the trucker hauling wheat to the elevator, or
the Kansas City commuter on her way to work, we all pay when
our dependence on foreign oil becomes too great.
While we may be upset about the current situation, we
certainly can't say it comes as a surprise. In the last 7
years, U.S. oil production has fallen by nearly 20 percent,
while oil consumption continues to increase.
During the 25 years since the last oil crisis when we lined
up at the pumps, our reliance on foreign oil has increased from
37 percent to nearly 57 percent today. Today's higher crude
prices alone are insufficient to increase domestic production,
particularly in the short run.
Kansas producers who have lost much of their equity in the
years of 1997, 1998, and 1999, find it very difficult to
convince lenders to take a risk in exploring and developing new
leases now in the year 2000.
When prices are dependent upon the actions of OPEC rather
than on free market forces, the ability to take risks necessary
to find and produce new sources of oil and gas are limited.
Does the Kansas small, independent producer invest
necessary money today, not knowing what the world price will be
tomorrow? In Kansas, the average daily production is 2.2
barrels per day.
The cost per barrel is very high, and the price received
for that barrel determined by foreign suppliers. The stability
which comes from greater control of our own destiny through
increased domestic production is what is required.
Today's situation is a clear signal for Congressional
action. It's our obligation to develop tax policies, regulatory
policies, and research funding that will allow us to raise
domestic production to meet the demands of the U.S. economy.
Mr. Chairman, I do not come here today to indicate that the
legislation that I introduced last year is the be-all and end-
all or the solution to the current situation. There are many
other options that you will hear about, and they should be
considered.
However, I do come here today to say that our strategy for
dealing with our energy needs must be something more than
simply begging at OPEC's door. Thank you.
Mr. Barton. Thank you, Congressman. We appreciate your
leadership on that legislation, and it will be at the top of
legislation that this subcommittee will be looking at. I can't
guarantee you that we're going to come down exactly where you
are, but it's certainly a good place to start looking.
Mr. Moran. Thank you, Mr. Chairman.
Mr. Barton. We'd now want to recognize a very patient
Congressman from the great State of Pennsylvania, Mr. Sherwood,
who has been a strong advocate for action in this area. He also
has been very aggressive in working with me to try to help us
put this hearing together.
Your statement is in the record in its entirety,
Congressman, and we'll recognize you for 5 minutes to
summarize.
STATEMENT OF HON. DON SHERWOOD
Mr. Sherwood. Thank you very much, Mr. Chairman. I
appreciate your consideration, and I think this is a very
important issue today.
And if you'll look at the Northeast, it will give you a
road map of where we might be going in our current oil crisis.
This Winter in the Northeast, we had an extreme shortage and an
extreme price spike.
Diesel fuel went from $1.30 to $2.60. Home heating oil went
from 90 cents to $1.80, so we had elderly people trying to
decide whether to buy food or buy fuel. You've heard all those
stories.
The people who are making out great in the Northeast are
the people who repossess trucks. Their lots are full. All the
repossession guys are going out to pick up the trucks of the
independent truckers who have had their costs go up so
strongly, so quickly, that it has disrupted their lives and
ruined their livelihoods.
And I know that you folks from the oil patch have seen that
in the past. When the price of oil gets ridiculously low, there
is crisis in the oil patch.
When it gets short or ridiculously high, there is crisis in
the Northeast and across the rest of the country.
And, you know, we talked very strongly to Secretary
Richardson this Winter that we needed some action. We didn't
get it.
When the Northeast got short on oil, then the speculators
took over on the New York Merc, and there were fortunes made
because of the shortage of oil. That fortune didn't go to the
independent producers in the oil patch; it went to the people
who were able to speculate on the New York Merc.
So, I'd like to think of the Strategic Petroleum Reserve as
flood control dam. And I think that when your prices are low,
we ought to buy in that Reserve very heavily; when there is a
shortage or there is not enough oil and the prices are very
high in the rest of the country, that's a good time to let a
little of the flood control waters out of that dam.
We have to have an energy policy, and it doesn't seem to me
that we have an energy policy. We need to find both short-term
and long-term solutions by which the United States can reduce
its dependence on foreign oil.
As a member of the Armed Services Committee, I'm
particularly concerned about our reliance on foreign oil which
may be cutoff during times of crisis. After the fall of the
Warsaw Pact forces, we have dramatically reduced the size of
our Armed Forces.
If we're confronted with responding to a multi-front
crisis, we would have the ability to prevail only on our
national security objectives if they diverged from those of
OPEC nations. If our oil supply is at any time shut off, we're
in very grave danger.
I think that if we could develop a policy where if oil is
cheap and the oil patch is in crisis, that's a great time for
the Strategic Oil Reserve to buy. If we're short, that's a good
time to use that as a lever.
If we had released the Strategic Petroleum Reserve in
January as President Bush did 10 years ago, it would have
discouraged the speculators on the New York Merc, and it would
have saved a great deal of pain and suffering, ruination of
lives, crisis situations, and failed businesses in the
Northeast.
Mr. Chairman, thank you for giving me the opportunity to
testify on this most important matter. The time for action is
now.
We need to create an effective national policy which is
prudent, responsive to demand, and sound. Thank you for your
consideration.
Mr. Barton. We want to thank you, Congressman Sherwood, for
your attention to this matter. Your expertise is going to be of
benefit to the subcommittee as we continue on these hearings,
and then decide what legislative action, if any, to take.
We are not going to ask the Congressional panel questions.
We can meet with you individually and collectively, if
necessary. Our other panel members, we don't have that option,
so we're going to excuse you.
The Chair will announce that if Congressman Crowley does
show up, we'll put him on the panel that's currently before the
subcommittee. But this panel is excused.
We'd now like to call forward our panel from the executive
branch. We should have in the audience, Mr. Mark Mazur, who is
the Director of the Office of Policy for the United States
Department of Energy; we should also have Dr. John Cook, who is
the Director of the Petroleum Division of the Energy
Information Administration; and we should have Mr. Richard G.
Parker, Director of the Bureau of Competition for the United
States Federal Trade Commission.
Mr. Barton. Gentlemen, welcome to the subcommittee. Your
testimony is in the record in its entirety, although two of you
were somewhat tardy in getting it to the subcommittee; but,
that will be addressed at a later time. We're going to start
with you, Dr. Cook. We'll put your statement in the record.
We're going to recognize you for 7 minutes. Then, we'll go to
Mr. Mazur; then, we'll go to Mr. Parker. So, Dr. Cook, welcome
to the subcommittee and you're recognized for 7 minutes.
STATEMENTS OF JOHN COOK, DIRECTOR OF PETROLEUM DIVISION, ENERGY
INFORMATION ADMINISTRATION; MARK MAZUR, DIRECTOR, OFFICE OF
POLICY, DEPARTMENT OF ENERGY; AND RICHARD G. PARKER, DIRECTOR,
BUREAU OF COMPETITION, FEDERAL TRADE COMMISSION
Mr. Cook. Thank you, Mr. Chairman. I wish to begin by
thanking the committee for the opportunity to testify on behalf
of Jay Hakes, the administrator of the Energy Information
Administration. Regrettably, he was unable to be here today.
As has become increasingly apparent to consumers, world
crude oil and refined product prices have risen rapidly over
the last 12 months, from about $12 a barrel in February 1999
for crude oil, to as high as $34 this week. While the change is
dramatic, I would be remissed in not noting that in inflation
adjusted terms, such prices are still less than the $70 levels
seen in 1981.
The recent price rise is, of course, the result of a
notable shift in the global balance between demand and crude
production. Crude oil markets tightened in 1999, as OPEC and
several other key exporting countries significantly reduced
supply, while, at the same time, economic recovery in Asia
restimulated demand growth. In 1999, global demand out paced
production by over a million barrels a day, reducing surplus
world inventories by almost 400 million barrels. If OPEC were
to restrain production in this year to the levels seen
recently, we estimate that the shortfall in 2000 would be as
much as 2 million barrels a day.
Further complicating the supply picture, crude oil prices
have risen faster than product prices this year, reducing
refining margins. This squeeze on margins, on top of already
high crude oil prices, encouraged refiners to restrain crude
purchases, restrict product output, and draw down crude and
product inventory. By the end of last year, world stocks had
dropped to very low levels, especially in the U.S.
If I may call your attention to the first chart, on the
east coast, distillate stocks began the winter season just
past--almost past.
Mr. Barton. Dr. Cook, is distillate, would we call that
fuel oil?
Mr. Cook. Yes, sir, that's--distillate, which is comprised
of both heating oil and diesel fuel. And what we're seeing here
is that we began the winter in October with more than ample
supplies; but, by the end of December, stocks had dropped
significantly below normal levels, which, of course, set the
stage for the recent spike in heating oil prices.
Low inventories leave little cushion to meet unexpected
shifts in supply and demand and increase the risk of price
fluctuations. In the northeast, heating oil prices and diesel
prices surged in January, when a combination of cold weather
and supply problems occurred in that region in the face of low
stocks. With little cushion, local supplies were drained and
prices spiked. In the 3-week period ending February 7, retail
heating oil prices and diesel prices in New England rose 78 and
68 cents, respectively. In contrast, prices for these fuels
elsewhere in the country hardly budged.
Fortunately, a flood of distillate imports arrived
throughout the month of February, in response to these high
prices. That, in combination with warm weather, eased these
market pressures and by the end of last month, heating oil and
diesel prices had fallen about 60 cents a gallon, offsetting
much of the earlier rise.
With the apparent end of winter in sight, I'd like to
conclude my testimony by focusing some comments on the gasoline
outlook. Tight crude oil markets are now impacting gasoline in
much the same manner as earlier heating oil markets were
impacted. The same crude-oil-induced squeeze on margins that
drove down distillate stocks has now reduced gasoline
inventories. With both crude oil and gasoline stocks at levels
not seen for decades, gasoline prices are now climbing sharply,
averaging $1.50 this week.
Mr. Barton. When you say that, Dr. Cook, you're saying it
is that they're at all time lows; that the stocks, the amount
in inventories is at an all time low?
Mr. Cook. Twenty year low.
Mr. Barton. Twenty year low.
Mr. Cook. Unfortunately, as high as these prices are,
gasoline prices are likely to continue rising, given that both
the spring transition period and the peak summer demand period
are now looking increasingly vulnerable. During March and
April, U.S. refineries typically increase crude throughputs by
about a million barrels a day. This year, with low stocks and a
market short on crude oil, that situation implies a volatile
spring.
But even after this transition, we expect volatility to
continue this summer. We expect strong demand, uncertain and
possibly limited imports to push utilization rates to very high
levels. Given precariously low stocks, this combination leaves
little room for the unexpected. Unplanned refinery outages,
import delays, sudden surges in demand can push prices well
above those forecast in EIA's base case, now at $1.56.
Potential volatility could add as much as another 25 cents a
gallon to the price, pushing actual prices to be seen this
summer possibly as high as $1.80. Although such prices are far
from record highs in real terms, this rapid rise over such a
short period of time will no doubt continue to attract consumer
intention.
That concludes my testimony. I'd be happy to answer
questions.
[The prepared statement John Cook follows:]
Prepared Statement of John Cook, Director, Petroleum Division, Energy
Information Administration
summary
World crude oil and petroleum product prices have risen rapidly
over the past twelve months, from about $12 per barrel in February to
touch $34 this week. While $34 adjusted for inflation is still less
than the $70 per barrel seen in 1981, the extreme price volatility over
the last year has created market dislocations. The recent price rise is
the result of a shift in the world balance between production and
demand. Over the last year, as OPEC and several other exporting
countries cut output, world oil demand exceeded production, and
inventories were used to meet demand growth. World inventories of crude
oil and products are now at low levels, and continue to fall.
Low inventories leave little cushion to meet sudden increases in
demand or decreases in supply, increasing the possibility of price
runups. In particular, U.S. Northeast heating oil and diesel prices
surged in January 2000, when cold weather and supply problems occurred
in the region on top of low stocks. With little distillate stock
cushion, local supplies were diminished, and prices spiked. Large
volumes of distillate imports, warm weather, and increases in
production have since resolved this supply shortage in the Northeast.
We are now facing a very tight gasoline market. U.S. crude oil and
gasoline inventories are at alarmingly low levels not seen for decades.
On top of low stocks, refineries need to increase crude inputs over 1
million barrels per day during March and April, within a market short
on crude oil--creating an environment ripe for gasoline price
volatility this spring. But even after we get through the spring,
expected high refinery utilization rates on top of precariously low
gasoline stocks set the stage for volatility during the summer as well.
increases in crude oil, distillate fuels and gasoline prices
I wish to thank the Committee for the opportunity to testify on
behalf of Jay Hakes, Administrator of the Energy Information
Administration, who regrets that he was unable to be here. I will focus
on the status of the global crude oil market and its effects on the
heating oil, diesel fuel, and gasoline markets and prices. As I will
illustrate, world demand exceeded crude oil production in 1999, largely
as a result of the decline in production by the Organization of
Petroleum Exporting Countries (OPEC) and several other exporting
countries. Inventories were used to meet the excess demand, and prices
rose in response. Today, world inventory levels are very low, leaving
markets vulnerable to price spikes, such as that just experienced for
heating oil and diesel fuel in the Northeast.
U.S. Dependence on Petroleum
Today, the United States is still heavily dependent on crude oil,
in spite of the growth in use of other fuels like natural gas and coal.
In 1998, petroleum supplied 39% of our energy needs. Since 1985,
domestic crude oil production has been declining while oil product
consumption has been increasing, resulting in a growing reliance on
imports. In 1974, net imports of crude oil and products supplied about
35 percent of U.S. consumption. In 1998, net imports supplied about 52%
of U.S. petroleum consumption, the highest percentage ever. However,
this dependence is offset, to some extent, by an ongoing decline in
petroleum's role in the economy. Over the last 20 years, spending on
petroleum has dropped from about 8 percent of all spending on U.S.
goods and services to about 3 percent.
Crude Oil Market and Recent Price Increases
Crude prices have changed significantly over the past year. Prices
have risen more than $20 per barrel (48 cents per gallon) from under
$12 per barrel in mid February 1999--the lowest prices in nominal terms
since 1986--to $34 per barrel recently. To put this in perspective,
while this represents the highest price since the Persian Gulf War,
crude oil prices peaked in 1981 at $70 per barrel in today's dollars
($39 per barrel in nominal terms). Recent EIA forecasts show that these
high prices have resulted in a decline in OPEC's market share of over
1% from fourth quarter 1999. Non-OPEC production in the fourth quarter
was higher than expected, indicating higher oil prices may be
stimulating more non-OPEC production than many analysts predicted.
Nevertheless, crude oil markets tightened in 1999 as OPEC and
several other exporting countries reduced supply, and, at the same
time, recovery of Asian economies increased demand growth. In 1999,
world oil demand exceeded production by over 1 million barrels per day
for the year, reducing world inventories by nearly 400 million barrels.
If OPEC were to keep production in the year 2000 at the levels seen in
the first quarter, EIA estimates the shortfall in 2000 could be up to 2
million barrels per day. Should such production levels be sustained,
the resulting higher prices would have adverse impacts on inflation and
economic growth.
During 1999, crude oil prices rose faster than product prices,
reducing refining margins. The squeeze on margins, on top of high crude
oil prices, encouraged refiners to constrain crude oil purchases,
restrict product output, and draw down inventory. By the end of 1999,
world crude oil and product stocks sank to very low levels, and U.S.
inventories were no exception. For example, as shown in Figure 1, East
Coast distillate inventories, which were ample at the start of the
winter season, fell well below normal levels by year end, setting the
stage for the heating oil price spike experienced in recent weeks.
Heating Oil Price Spike
Retail heating oil and diesel fuel prices (distillate prices)
climbed steadily from early 1999 through the middle of January 2000,
largely as a result of increases in crude oil prices. But distillate
prices in the Northeast 1 turned sharply upward in the third
week of January. In a three-week period, New England residential
heating oil prices, as shown in Figure 2, rose 78 cents (66 percent) to
$1.96 per gallon. During the same three-week period, New England retail
diesel fuel prices (Figure 3) rose 68 cents per gallon (47 percent), to
peak at $2.12 per gallon. While Northeast prices surged further at the
end of January, heating oil and distillate product prices in other
parts of the country rose relatively little.
---------------------------------------------------------------------------
\1\ The Northeast includes New England (Connecticut, Maine,
Massachusetts, New Hampshire, Rhode Island, Vermont) and the Mid-
Atlantic region (Delaware, District of Columbia, Maryland, New Jersey,
New York, Pennsylvania).
---------------------------------------------------------------------------
Fortunately, prices peaked in early February, and are now dropping.
By February 28, New England residential heating oil prices had fallen
60 cents and retail diesel fuel 48 cents per gallon from their peaks.
Retail heating oil and diesel fuel prices follow the spot
distillate markets, which had been driven by crude oil prices until
recently. Figure 4 shows that spot crude oil prices for West Texas
Intermediate (WTI) changed relatively little, even as No. 2 heating oil
spot prices in the Northeast spiked dramatically. New York Harbor spot
heating oil prices rose from about 76 cents per gallon on January 14 to
peak at $1.77 February 4 before falling back. Gulf Coast prices did not
spike, but were probably pulled slightly higher as the New York Harbor
market began to draw on product from other areas, again indicating the
Northeast focus of this problem.
The late-January heating oil and diesel fuel price surges in the
Northeast resulted from a unique combination of low inventories,
weather, and supply problems. Low stocks leave little cushion to absorb
sudden changes in supply or demand. Distillate stocks fell rapidly in
late November through December as high crude oil prices and margin
pressure discouraged production. By the beginning of January, East
Coast inventories were running almost 4 million barrels, or 8 percent,
below the low end of the normal range.
During the last half of January, cold weather in the Northeast not
only increased demand, but also caused supply problems, with frozen
rivers and high winds hindering the arrival of new supply. It was
reported that utilities were buying distillate both for peaking power
and, along with industrial and commercial users, to substitute for
interruptible natural gas supplies, further adding to the market
pressure.
Thus, with new supply being delayed and little inventory to cover
the increased demand, prices spiked. Within weeks, a flood of imports
attracted by the higher prices, along with domestic resupply, stopped
the inventory decline, and prices dropped substantially. Although
stocks remain low, with currently mild weather and only a few weeks of
the traditional heating season remaining, a surge like that seen in
late January is unlikely.
Upcoming Gasoline Season
I would like to conclude my testimony by focusing on the outlook
for gasoline. The tight crude oil market is also affecting the gasoline
market. U.S. gasoline prices averaged $1.50 this past Monday, an
increase of 23 cents per gallon since the beginning of this year.
Today, both U.S. crude oil and gasoline stocks are at alarmingly low
levels (Figure 5)--levels not seen for decades. The same squeeze on
margins that brought distillate stocks down to low levels also reduced
gasoline stocks.
I would like you to focus on two time periods--spring and summer.
During March and April, refineries need to increase crude oil inputs by
over 1 million barrels per day (Figure 6). With low stocks and a market
short on crude oil, the situation is ripe for gasoline price
volatility. Spot gasoline prices are already reflecting the tight
gasoline supply-demand balance. Last week, spot gasoline prices on the
Gulf Coast averaged almost 20 cents per gallon higher than crude oil
prices--a spread that is about 2 times the average spread this time of
year.
But even after we get through the spring, we may see price
volatility this summer as well. EIA expects to see high refinery
utilization rates on top of precariously low gasoline stocks. This
combination leaves little room for the unexpected. Unplanned refinery
outages, import delays or demand increases can create price surges
above levels shown in the EIA forecast. EIA is currently projecting
regular gasoline prices to peak at $1.56 per gallon this summer. Price
volatility can result in a 20-25 cent per gallon price surge such as
those seen in California historically, which brings the price to $1.80
for a time. Although these prices are far from record highs in real
terms, they have risen rapidly over a short period of time, attracting
a great deal of consumer attention.
This concludes my testimony. I would be glad to answer any
questions that you might have.
[GRAPHIC] [TIFF OMITTED] T2977.001
[GRAPHIC] [TIFF OMITTED] T2977.002
Source: Reuters Daily Spot Prices.
Note: WTI--West Texas Intermediate crude oil price; GC No. 2--
Gulf Coast No. 2 heating oil; NYN No. 2--New York Harbor No. 2
heating oil prices.
[GRAPHIC] [TIFF OMITTED] T2977.003
Mr. Barton. Thank you, Dr. Cook.
We have Congressman Crowley from Pennsylvania, who has
arrived. We have two 15-minute votes pending. We're going to
recognize Congressman Crowley for 5 minutes; then, we're going
to take a recess to go do the two votes; and we'll reconvene
between 12:45 and 1 p.m., to hear our other two Executive
Branch witnesses.
Congressman, we welcome you. Your statement is in the
record in its entirety and ask you to summarize it in 5
minutes.
STATEMENT OF HON. JOSEPH CROWLEY
Mr. Crowley. Thank you. Chairman Barton, and I appreciate
your extending the courtesy to allow me to appear before the
second panel today.
Mr. Barton. You've been very patient. And this is an issue
that's very important to your constituents and you've been a
leader on it and we want to hear what you have to say about it.
Mr. Crowley. Thank you, Mr. Chairman. I, also, want to
thank Ranking Member Boucher, as well, for his patience, and
the other members of the committee.
The massive fluctuations of the price of oil is of extreme
concern to my congressional district in New York, in Queens and
the Bronx, particularly with respect to the high cost of home
heating oil. This winter, an extremely cold one in New York, my
constituents and many other citizens of the northeast--
including one of the members here on the committee, Vito
Fossella, from Staten Island--suffered not only frigid
temperatures, but, also, extreme increases in the price of oil.
While oil is used to heat approximately 12 percent of all
homes in the United States, in New York State, that number is
almost 40 percent. In my congressional district, that number if
46 percent of my constituents, who use oil to heat their home,
on over 108,000 households. Many of my constituents have told
me that they are paying double for their energy this winter, as
opposed to previous years.
I represent a working class district, where most of the
home owners are seniors or working families. These are people
that are hurting. The skyrocketing costs are hitting these
people the hardest. The average income of my district is
approximately $30,100 per year. They make too much to qualify
for LIHEAP and, at the same time, they make too little to
afford an increase of almost $1,000 a year in home heating oil
costs.
In my invitation to testify, it was requested that I
comment on the likely cause or causes of the massive price
swings in the cost of oil. The first and largest cost of the
massive price volatility in the market deals with international
supply; in this case, the reduction of output by OPEC members
and their non-member allies. Since OPEC began their reduction
in output in March 1999, the price of a barrel of crude oil
rose over $14 a barrel, to over $30 a barrel.
The second reason deals with oil speculators or domestic
price gougers, who are using higher prices caused by the
decrease in supply to their advantage in gouging the American
consumers. Let me point out that this is not a universal
stance. There are some oil distributors that I have met with,
who are concerned not only about their image, but, also, their
customers. They're not looking to have their customers convert
to gas heat.
In response to the allegations domestic price gouging have
joined, a number of my colleagues in both political parties
demand action by our attorney general to investigate the
situation. Besides launching a Federal investigation into
alleged domestic price gouging, I believe the best short term
solution would be to open the strategic petroleum reserve. I
understand that you are opposed to that action.
The law creating an authorizing SPR, the Energy Policy
Conservation Act allows draw down of the Nation's oil reserves
under several conditions, including when a sharp increase of
petroleum process would likely have a major adverse impact on
the economy of the United States. Economists at the Department
of Energy expect the average price of gasoline to hit $1.50
soon. That will be certainly much higher in New York and other
major metropolitan areas, where a gallon of gas goes for over
$1.80. In fact, other independent economists expect gas prices
to hit $2 a gallon, maybe hitting $2.50 a gallon during the
peak summer travel season. This is not good for our economy.
I believe the president has the grounds to open the SPRO
for these economic reasons, but has continually refused to do
so. Therefore, I am supportive of an amendment to the Energy
Policy and Conservation Act Reauthorization, H.R. 2884, which
recently passed both this subcommittee and the full Committee
on Commerce by voice vote--albeit with dissenting views from
the minority--to allow for the draw down of the in times of
reduction and supply caused by anticompetitive activity.
In the long term, I believe that Congress, working with the
oil producing allies, such as Mexico, Norway, Russia, and with
OPEC member states, must work together to establish and set
stable oil prices. As a member of the committee in
international relations, I was pleased that Chairman Gilman and
ranking member Gejdenson conducted a hearing on March 1,
regarding the issue of OPEC and their price fixing. At the
time, I heard the viewpoint of Wes Watkins of Oklahoma, a
representative of an oil producing state, who informed the
committee on international relations that from a producer's
standpoint, the best solution would be to have a stable price
for oil. a stable price would rid the people of Oklahoma,
Louisiana, and Texas, and other petroleum producing states of
the economic insecurities brought on when the prices are too
low, just as they would help protect my constituents in Queens
and the Bronx and all the people of cold climate States in
years like this, when prices skyrocket out of control. This
should be a long-term goal to Congress, so we can eliminate
these massive price fluctuations.
I, also, believe it's important for us to create a
strategic reserve for home heating oil in the northeast, as Mr.
Markey mentioned earlier, and I would be supportive of that
legislation, as well. And I thank the chairman for this time
and yield back the balance of my time.
[The prepared statement of Hon. Joseph Crowley follows:]
Prepared Statement of Hon. Joseph Crowley, a Representative in Congress
from the State of New York
i. introduction
I would like to thank both Chairman Barton and Ranking Member
Boucher for holding this important hearing today and for inviting me to
speak before the Committee.
ii. importance of issue
The issue of the massive fluctuations in the price of oil is of
extreme concern to my Congressional District particularly with respect
to the high costs of home heating oil.
This winter, an extremely cold one in New York, my constituents and
many other citizens of the Northeast, including the residents of Vito
Fossella's Staten Island district, suffered not only frigid
temperatures but also extreme increases in the price of oil.
While oil is used to heat approximately 12% of all American homes,
in New York State that number rises to almost 40%.
In my Congressional district, 46% of my constituents use oil to
heat their homes--over 108,000 households.
My constituents have told me that they are paying double for their
energy this winter as opposed to previous years.
I represent a working class district, where most of the homeowners
are senior citizens or working families.
These are the people who are hurting--these skyrocketing costs are
hitting these people the hardest.
iii. reasons for price volatility
In my invitation to testify, it was requested that I comment on the
likely cause or causes of the massive price swings in the cost of oil.
A. OPEC
The first and largest cause of the massive price volatility in the
market deals with international supply--in this case the reduction of
output by OPEC member states and their non-member allies.
Since OPEC began their reductions in output in March 1999, the
price of a barrel of crude oil rise over $14 a barrel to over $30.00 a
barrel.
B. Domestic Price Gougers
The second reason deals with oil speculators, who are using the
higher prices caused by the decrease in supply to their advantage and
gouging the American consumer.
Prices for both home heating oil and diesel fuel are far higher in
the Northeast then elsewhere, and in New York City they are higher then
in other neighboring Northeastern states.
iv. short term solutions:
A. Investigation by Department of Justice
In response to the allegations of domestic price gouging, I joined
with a number of my colleagues in both political parties to demand
action by the Attorney General to investigate this situation.
B. Open the Strategic Petroleum Reserve
Besides the launching of a Federal investigation into alleged price
gouging, I believe that the best short-term solution would be to open
the Strategic Petroleum Reserve.
The law creating and authorizing the SPR, the Energy Policy and
Conservation Act, allows draw down of the nation's oil reserves under
several conditions, including when a sharp increase in petroleum
process would likely have ``a major adverse impact'' on the economy of
the United States.
Economists at the Department of Energy expect the average price for
a gallon of gas to hit $1.50 soon--though it is currently much higher
in New York and other major metropolitan areas.
Other independent economists expect gas prices to hit $2 a gallon--
maybe hitting $2.50 during the peak summer travel season.
This is not good for our economy.
I believe that the President has the grounds to open the SPR for
these economic reasons. But he has continually refused.
Therefore, I am supportive of amending the Energy Policy and
Conservation Act Reauthorization (H.R. 2884) which recently passed both
this Subcommittee and the full Committee on Commerce by voice vote--
albeit with dissenting views from the Minority--to allow for the
drawdown of the SPR in times of reduction in supply caused by anti-
competitive activity.
President Bush authorized the tapping of the SPR during the Gulf
War--and world oil prices dropped by $10 a barrel overnight.
v. long-term solutions:
A. Attain A Stable Price
In the long-term, I believe that the Congress, working with our
oil-producing allies such as Mexico, Norway and Russia and with the
OPEC Member states must work together to establish a set, stable price
for oil.
As a member of the Committee on International Relations, I was
pleased that Chairman Gilman and Ranking Member Gejdenson conducted a
hearing on March 1 regarding the issue of OPEC and their price fixing.
At that time, I heard the viewpoint of Rep. Wes Watkins of Oklahoma, a
representative of an oil producing state, who informed the Committee on
International Relations that from a producers standpoint the best
solution would be to have a stable price for oil.
A stable price would rid the people of Oklahoma, Louisiana and
Texas and other petroleum producing states of the economic insecurities
brought on when prices are too low just as they would help protect my
constituents in Queens and the Bronx, and all of the people of cold
climate states in years like this when prices skyrocket out of control.
This should be a long-term goal of the Congress so that we can
eliminate these massive price fluctuations.
B. Use Diplomacy to Attain the Objective
I believe that international mutual understanding and cooperation
achieved through diplomacy will be our nation's best bet to accomplish
the goal of a stable price for oil.
On this score, I believe that Secretary of Energy Bill Richardson
deserves the praise of the Congress for his work in communicating the
American position on the oil reductions to our OPEC allies over the
past few weeks.
Although I believe the Administration could have done and still can
do more to help the American people, and diplomacy is no short term
answer for my constituents who are suffering, I applaud the Secretary's
efforts to meet the long term goals of satisfying both the supply end
and demand end of America's oil consumption needs.
I hope that the Secretary's talks will lead to an increase in oil
output sufficient to meet world demand in the short term and the
establishment of a stable price for oil for the long term.
C. Wean the U.S. off of Imported Oil
I also believe that the United States should look into alternative
energy sources to wean our nation off of imported oil.
vi. conclusion
That concludes my remarks, and I again would like to thank the
Chairman and the entire Committee for inviting me before you this
morning.
I am prepared to answer questions that the Committee my have.
Mr. Barton. Well, I thank you, Congressman, and I think I
mistakenly in my introduction said you were from the great
State of Pennsylvania. I want to correct the record and let
everybody know you're from the great State of New York----
Mr. Crowley. That's quite all right.
Mr. Barton. [continuing] the Empire State.
I don't want your constituents to think that I'm a dizzy
Texan who doesn't know the difference between Pennsylvania and
New York, because they're both great States and both well
represented in this committee and this Congress.
We're going to recess until approximately 12:45. We have
two pending votes on the floor. So, I would surely hope that
Dr. Cook and Mr. Mazur and Mr. Parker can be back by 12:45. And
that clock is going crazy. I have no idea; but time flies in
Congress, but it doesn't fly that rapidly. We're in recess
until approximately 12:45.
[Brief recess.]
Mr. Barton. The subcommittee will come to order. When we
recessed, we had heard from Congressman Crowley of New York and
we have, also, heard from Dr. Cook. We now would like to hear
from Mr. Martin Mazur, who is the director of the Office of
Policy at the U.S. Department of Energy. We'll give you 7
minutes to summarize your statement that will be in the record
in its entirely. Mr. Mazur?
STATEMENT OF MARK MAZUR
Mr. Mazur. Thank you, Mr. Chairman. First, I want to start
off by apologizing for our testimony being late yesterday. As
you know, there's a lot of interest in this hearing and it took
a long time for the people within the Department of Energy,
within the rest of the administration, to clear off on it. And
I understand----
Mr. Barton. On that--we won't take this out of your time--
--
Mr. Mazur. Okay.
Mr. Barton. [continuing] but Mr. Parker had his testimony
here on time and it had to be cleared through all kinds of
people. I'm not going to say you, personally, because you
haven't testified often, but it seems a chronic problem of DOE,
whatever the deadline is, they miss it.
Mr. Mazur. Okay.
Mr. Barton. And I am going to talk to Secretary Richardson,
the earliest possible convenience and when I do, you know,
politely, but firmly say the next time DOE doesn't get its
testimony in on time, they won't be a part of the hearing. Now,
he may say is that a promise, I don't know; but it's not fair
to our members on both sides of the aisle, even when we think
we know what you're going to tell us, to not have it so we can
verify what you're going to tell us. So, anyway, we set the
clock at 7 minutes and we do welcome you to the hearing today.
Mr. Mazur. Thank you, Mr. Chairman. I want to thank you for
inviting the Department here today to testify in recent
movements in crude oil and petroleum product prices. One point
that I do want to make clear is that the United States does
have a longstanding energy policy followed for about 20 years
by both Democrat and Republican administrations. This energy
policy is grounded in general reliance on markets and prices to
allocate energy resources. Usually, these energy markets work
well. However, when there are market imperfections or unwelcome
distributional consequences, government has a role in
addressing these concerns.
As my EIA colleague pointed out, the expanded oil producing
cartel, including Mexico, restricted production, to address
concerns of oversupply and large inventories. When combined
with increased demand from Asian economies coming out of
recession, there was a dramatic increase in oil prices and
large increases in domestic prices for a number of refined
products, notably home heating oil.
This administration has moved forcefully to deal with
current price movements. Secretary Richardson has coordinated
the administration's efforts in this regard. Actions included
the following: releasing additional LIHEAP money--$295 million
in emergency funds that will help low-income Americans pay
their heating bills this winter. The administration also
submitted to Congress a supplemental request for additional
funds--emergency funds for LIHEAP, to get through the end of
the fiscal year. The administration assured availability of SBA
loans for heating oil distributors, to help with their cash-
flow. The administration worked with States on a case-by-case
basis on possible Clear Air Act waivers, in order to ensure
that fuel oil supplies were available. The administration
obtained hours of service waivers, to enable truckers to work
extended hours to deliver products safely. The administration
urged refiners to defer routine maintenance turnarounds, so
that heating oil production will be adequate to meet demand
during the heating season; also, the administration urged
electricity generators to switch from heating oil to natural
gas where possible.
The Department began a process to reestablish an Energy
Emergency Office, to enable the Federal Government to work more
closely with States, and to anticipate, plan, and respond to
energy problems. The administration created a DOE-U.S. Coast
Guard task force for product movement, to make sure there were
no shipping delays for heating oil. And the Department directed
the strategic petroleum reserve office to renegotiate oil
delivery contracts for the reserves royalty in kind program, to
ensure that more oil stayed on domestic markets in the near
term. We also sought additional weatherization funds for fiscal
year 2001 and, also, a supplemental request for fiscal year
2000.
Secretary Richardson hosted a home heating oil summit in
Boston on February 16, to bring together congressional members,
State officials, industry leaders, to discuss methods to
address the price run up.
In addition, Secretary Richardson personally coordinated a
strong diplomatic effort, to show oil producers that supply
restrictions are harmful not only to oil consuming countries,
but, also, to the oil exporting countries, themselves.
The culmination of these discussions with energy
administers from Saudi Arabia, Kuwait, Mexico, Norway, and
Venezuela was the release of a number of communiques that
shared a common theme: volatility in oil markets is not
desirable; it is damaging to both consuming and producing
nations. Moreover, these countries agreed that upcoming
production decisions by OPEC and its oil producing colleagues
will take into account the implications of current production
levels on the world economy. We are guardedly optimistic that
when the OPEC ministers meet at the end of March, that there
would be substantial and timely increases in production.
We should not focus solely on production decisions by oil
producing nations. Also, keep in mind that the Department has a
long-term R&D effort aimed at cutting oil consumption without
cutting the services that we get from petroleum products. These
programs can help reduce dependence on foreign oil, by
encouraging energy efficiency, developing alternative fuels,
and supporting domestic oil production.
Total petroleum consumption in the United States is
approximately the same as it was 20 years earlier. But, our per
capita consumption has dropped by about a fifth and our energy
consumption per dollar GDP has dropped by about a third. This
has been achieved through a number of efficiency and
alternative fuel efforts, which we plan to continue for the
future. For example, the Department's transportation program is
working with its partners in the Partnership for a New
Generation Vehicles Program, to develop an 80-mile per gallon
prototype mid-size sedan by 2004; to improve light truck
efficiency by 35 percent, also by 2004; and to develop
technologies to increase the economy of the largest heavy
trucks from seven to 10 miles per gallon, almost a 50 percent
increase. The Department has also worked to increase domestic
ethanol production to 2.2 billion gallons per year by 2010.
On the domestic oil and gas side of things, the Department
is working with industry to make efficient use of the resources
we have in an environmentally responsible manner. The emphasis
is on recovery technology, helping the private sector extract
more usable oil and gas from existing reserves than we did in
the past, and extending the life times of those reserves.
While some have argued for release or sale of oil from the
strategic petroleum reserve as a way to bring down world oil
prices, we do not believe that a release at this time would be
desirable. The SPR's is intended for release only in the event
of a major oil supply disruption, not for trying to manage the
world market of nearly 74 million barrels per day. If you keep
in mind that the strategic petroleum reserve is 570 million
barrels, you can see it's far too small for the task of
managing world oil prices.
In summary, we think the outlook is for lower world oil
prices later this year. We're aware that high crude prices and
low inventory levels can lead to higher gasoline prices this
summer; however, we need--we think that we need to let the
energy diplomacy efforts led by Secretary Richardson to work in
the short term and then look to address our other concerns
through long-term efforts that make the best use of markets to
allocate energy resources.
Thanks for your attention. I appreciate your questions.
[The prepared statement of Mark Mazur follows:]
Prepared Statement of Mark Mazur, Director, Office of Policy, U.S.
Department of Energy
Mr. Chairman and members of the subcommittee: I would like to thank
Chairman Barton for inviting the Department of Energy here today to
testify on the recent movements in crude oil and petroleum product
prices. At the Department of Energy, the Policy Office is responsible
for providing objective analysis and policy advice to the Department's
senior management. I am happy to be here today to speak on behalf of
the Department.
One point I want to make clear is that the United States has a
long-standing energy policy, followed for about 20 years by both
Democratic and Republican Administration's. This energy policy is
grounded in a general reliance on markets and prices to allocate energy
resources. Usually, energy markets work well. However, when there are
market imperfections or unwelcome distributional consequences of market
operations, government has a role in addressing these concerns. That is
why the government policy toolbox in the energy area includes items
such as LIHEAP, weatherization, and the Strategic Petroleum Reserve.
the situation this year
Cold weather, limited heating oil availability and rapidly climbing
heating oil prices in the Northeast in late January and February
alarmed consumers, distributors, and governments at all levels. And an
expanded oil-producing cartel (OPEC plus Mexico and Norway) restricted
oil production to address concerns with oversupply and exceptionally
large inventories. As my EIA colleague has pointed out, these actions,
combined with increased demand from Asian economies coming out of
recession, led to a dramatic rise in world oil prices.
This Administration has moved forcefully at home and abroad to deal
with both short-run and long-run causes of our current environment of
``extreme'' price movements. Following this winter's runup in price for
distillate fuels in the Northeast, Secretary Richardson coordinated the
Administration's efforts. The Administration moved to implement
traditional programs and went beyond these initiatives to creatively
help those in need. The Administration:
Released additional Low Income Home Energy Assistance Program
(LIHEAP) funds. The U.S. Department of Health and Human
Services (HHS) released a total of $295 million in emergency
funds to help low-income Americans pay their energy bills this
winter. The bulk of these funds were targeted at Northeast
states that had substantial fuel price increases.
Submitted to Congress a supplemental request for $600 million
to provide additional contingent emergency funds for LIHEAP
through the end of the fiscal year.
Ensured availability of Small Business Administration loans
for heating oil distributors who needed improved cash flow in
order to meet contractual obligations and make deliveries;
Worked with states on a case-by-case basis on possible Clean
Air Act waivers to help add to the quantity of available fuels
ensuring that people had adequate fuel oil supplies;
Obtained ``Hours of Service'' waivers that enabled truckers to
work extended hours to deliver the product safely;
Urged refiners to defer routine maintenance turnarounds.
Recognizing individual refinery needs and safety requirements,
the Administration urged trade associations and companies to
delay routine maintenance so that heating oil production would
be adequate to meet demand this heating season;
Urged electricity generators to switch from heating oil to
natural gas where possible;
Began the process to reestablish an Energy Emergency Office at
the Energy Department to enable the federal government to work
more closely with the states to anticipate, plan and respond in
a more immediate and coordinated way when energy crises occur,
including heating oil/gasoline shortages, power outages, or
pipeline emergencies;
Created a DOE/U.S. Coast Guard Task Force for Product
Movement, to prioritize heating oil shipments at terminals when
necessary, clear rivers as needed, deploy Coast Guard vessels
and other resources to make certain there are no shipping or
loading delays;
Directed the Energy Department's Strategic Petroleum Reserve
Office (SPRO) to renegotiate oil delivery contracts for the
Reserve's royalty-in-kind program to ensure that more oil
remained on domestic markets;
Directed the Energy Information Administration to increase its
monitoring of home heating oil prices;
Sought $154 million for low-income weatherization assistance
in the FY 2001 budget and requested an additional $19 million
in a supplemental request for FY2000;
Announced regulatory changes to give nonprofit organizations
more flexibility in providing weatherization assistance;
Held a series of meetings with refiners, industry, consumers,
and Northeast lawmakers; and
Hosted a home heating oil summit in Boston on February 16 that
brought industry leaders, congressional members and state
officials together to address methods to address the price run-
up.
To look at long-term solutions, the President has directed the
Department to study the longer-term issue of heating oil supply
shortages and price spikes by examining possible ways to reduce
regional reliance on heating oil, mainly through the increased use of
natural gas. Moreover, the Secretary has directed the Department to
study the impacts of interruptible contracts on home heating oil
supply.
John Cook provided you with an excellent overview of current supply
restrictions by OPEC and its allies. Secretary Richardson has
personally coordinated a strong diplomatic effort to show oil producers
that supply restrictions, past some point, are harmful not only to oil
consuming countries but also to the oil exporting countries themselves.
In general, because OPEC does not control all the world's oil, the more
successful OPEC is in restricting supply, and hence the higher oil
prices, the more incentive is provided for non-cooperating producers to
increase their output. As non-cooperating oil suppliers increase
production to take advantage of higher prices, and consumers move away
from high-priced oil, OPEC must either make further supply cuts to
maintain price--thus losing market share--or maintain market share but
give on price.
The culmination of this round of discussions with energy ministers
and key leaders from Saudi Arabia, Kuwait, Mexico, Norway and Venezuela
was the release of four joint communiques that shared a common theme:
excessive volatility in oil markets is not desirable--it is damaging to
both consuming and producing nations. And, while the communiques varied
in substance from country to country, the single point on which all
producing countries--Kuwait, Saudi Arabia, Norway, and Venezuela--
agreed, was to reevaluate data on current oil market conditions to help
avoid excess market volatility and preserve world economic growth. In
other words, upcoming production decisions by OPEC and its oil
producing colleagues will not be arbitrary--they will take into account
the implications of current production levels on the world economy. We
believe the likely outcome of this analysis will be shown when the OPEC
ministers meet on March 27th--that there should be substantial and
timely increases in production.
the larger picture
I think we should not focus solely on production decisions by oil-
producing nations in the short term, but also keep in mind that the
Department has a long-term, well-crafted research and development
effort aimed at cutting our oil consumption without cutting the
services we get from petroleum products. These programs can help
mitigate energy price spikes and slow our rising dependence on foreign
oil by encouraging energy efficiency, developing alternative fuels, and
supporting domestic oil production. Although total petroleum
consumption was approximately the same, in million barrels per day, in
1999 as 1979, our per capita consumption has dropped about one fifth
and our energy consumption per dollar of gross domestic product has
dropped about a third. This has been achieved through a number of
efficiency and alternative fuel efforts which we plan to continue for
the future. For example, the Department's transportation program is
working with its partners to develop an 80 mile per gallon(mpg)
prototype sedan by 2004; to improve light truck fuel efficiency by 35
percent while meeting newly issued EPA Tier 2 emission standards by
2004; to develop technologies to increase fuel economy of the largest
heavy trucks from 7 to 10 mpg (nearly 50 percent) by 2004, and to
increase domestic ethanol production to 2.2 billion gallons per year by
2010. The Administration is also supporting market incentives like the
tax credit proposal for hybrid vehicles. These efforts will result in
vehicles with higher fuel economy and increase the production and use
of alternative fuels, both important avenues to reducing the potential
for future oil price fluctuations.
The Department also is encouraging the domestic oil and gas
industry to make efficient use of the resources we have in an
environmentally responsible manner. The emphasis is on recovery
technology--helping the private sector to extract more usable oil and
gas from existing reserves than we did in the past. The Energy
Department restarted its program to share the costs of field tests of
new or improved technologies that keep endangered resources in
production. This program has subsequently provided nearly $23 million
in cost-sharing assistance to producers. Some elements of the
Department's wide-ranging research program cover: improved drilling and
completion techniques; use of new diagnostic and imaging tools; and
improved techniques to improve the efficiency with which reserves are
recovered and to increase useful reservoir life.
Clearly, we need to recognize that petroleum product price
volatility is a periodic policy issue--particularly during times of New
England cold snaps or supply cutbacks by overseas oil producers. With
cost-driven lower inventory levels and electronic markets, petroleum
product prices are responding immediately to market developments. While
prices are excellent sources of information for all sorts of business
and personal decisions, rapidly changing prices introduce uncertainty
that has its own costs for consumers and producers.
While some have argued for release of oil from the SPR as a way to
bring down world oil prices, we do not believe that a release at this
time would be desirable. The SPR is intended for release only in the
event of a major oil supply disruption, not for trying to manage the
world market of nearly 74 million barrels per day. At 570 million
barrels, it is far too small for that task. Releasing crude oil from
the Strategic Petroleum Reserve now for future repayment in delivered
oil--including a premium--could add crude oil to the current market and
could be appealing to crude purchasers because of expectations that
future oil prices will be lower than today's. We are evaluating this
strategy as a possibly cost-effective way to increase the size of the
SPR to address potential future supply imbalances. However, no decision
on whether to undertake this policy option has been made.
summary
In summary, we think the outlook is for lower world oil prices
later this year, as forecast by participants in the futures markets. We
are aware that high crude prices and low inventory levels can lead to
higher prices for gasoline this summer. However, we think that we need
to let the energy diplomacy efforts undertaken by Secretary Richardson
work in the short term and then look to address these concerns through
long-term efforts that make best use of markets to allocate energy
resources.
Thanks for your attention. I would be happy to answer any questions
you may have.
Mr. Barton. Thank you, sir. We now like to hear from the
Federal Trade Commission. We have Mr. Richard Parker, who is
the director of the Bureau of Competition. Your statement is in
the record in its entirety. We want to thank for getting it in
on time and would ask you to summarize it in 7 minutes or less.
STATEMENT OF RICHARD G. PARKER
Mr. Parker. Thank you, very much, Mr. Chairman and members
of the committee for asking us to participate. What I'd like to
do is make basically three points that I hope will be helpful
to the committee about the FTC and what we--what our
capabilities are in this area.
The FTC enforces the antitrust laws. We share that
responsibility with the Department of Justice. The Commission
has been very active in enforcing those laws over a lot of
years, in a lot of industries, including most prominently the
petroleum industry and the energy industry, generally. We have
a long history of enforcement actions. We are ready, willing,
and capable to take on the industry, in the event they cross
the antitrust lines that I'm going to describe in a moment.
Our most recent action would have been--is a challenge to
the BP-ARCO merger, which is pending in Federal court in San
Francisco and now scheduled for trial on March 20. I would add
that in the EXXON-Mobil matter, we achieved divestitures of
over 2,000 gas stations, refineries, and EXXON's marketing
system in California, in order to ensure that that merger did
not increase concentration in any American market.
The second point I want to make is about the antitrust
laws, generally, that we're trying to enforce. The antitrust
laws are about competition. They're the laws of competition and
they're premised on the notion that's been part of American law
for 110 years now, that consumers are best protected when
companies are slugging out, to use the colloquial; fighting it
out in the marketplace. And it's that interaction of force,
that interaction of competitive forces that produce low prices,
innovation, and increasingly good service.
What the antitrust laws do is intervene and what an
enforcement agency does is intervene when companies or
individuals attempt to opt out of the competitive system, which
largely, and I'm speaking broadly, occur in three general kinds
of instances. First is when they quit competing and start
cooperating; collusion: agreeing on price, agreeing on output,
and the like. That violates the antitrust laws and where that
occurs and where we have a case to prove it, we have and will
take action.
Point two would be monopolization, where one company grows
to a level where it, alone, is so dominant, that it can raise
price or reduce output and reduce service and get away from it,
in attempts to preserve or extend that monopoly power with
anti-competitive practices. And where that happens, the
antitrust laws take hold and we have the ability and certainly
the willingness to go after that, as well.
The third area is one that's been particularly active,
because this country is in the throes of a merger wave that is
of historic proportions, and that is the antitrust laws do not
allow companies to merge their way to market dominance. And
when that occurs, as we've seen in the EXXON-Mobil matter and
in the BP-ARCO matter and a lot of other matters, the
Commission has the resources and the willingness and the
ability and the trial and other skills it takes, to take that
on.
My final point is this, and it is somewhat frustrating,
because I cannot talk, for a good reason, about ongoing
investigations and so I can't get into detail about that, but
the oil price increases are a serious matter, a very serious
matter. We recognize that. Particularly compelling is the human
side that has been presented by so many of the members this
morning. We have good people, expert people looking at, for
example, the oil price issues in California, and we're
assisting, working with the States in the northeast, and we
continue our vigil on the merger front. We have the people and
we are paying attention.
I appreciate, again, the opportunity to participate in the
hearing and I'd be please to respond to any questions you might
have.
[The prepared statement of Richard G. Parker follows:]
Prepared Statement of Richard G. Parker,1 Director, Bureau
of Competition, Federal Trade Commission
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\1\ This written statement represents the views of the Federal
Trade Commission. My oral presentation and response to questions are my
own, and do not necessarily represent the views of the Commission or
any individual Commissioner.
---------------------------------------------------------------------------
i. introduction
Mr. Chairman and members of the Committee, I am Richard G. Parker,
Director of the Federal Trade Commission's Bureau of Competition. I am
pleased to appear before you today to present the Commission's
testimony concerning the important topic of recent large increases in
the prices of oil products, and what the various agencies of the
federal and state governments can, and should, do in response. This is
a national issue that calls for a coordinated response from all
parties.
The FTC is a law enforcement agency whose statutory authority
covers a broad spectrum of the American economy, including the
companies and economic sectors that make up the energy industry and its
various components. The Commission enforces, among other statutes, the
FTC Act 2 and the Clayton Act,3 sharing with the
Department of Justice authority under section 7 of the Clayton Act to
prohibit mergers or acquisitions that may ``substantially lessen
competition or tend to create a monopoly.'' 4 In addition,
section 5 of the FTC Act prohibits ``unfair methods of competition''
and ``unfair or deceptive acts or practices,'' thus giving the
Commission responsibilities in both the antitrust and consumer
protection areas. In antitrust cases not involving mergers, the laws
enforced by the Commission generally prohibit two categories of
anticompetitive activities--conspiracies in restraint of trade and
exclusionary monopoly tactics. The Commission also provides advice and
guidance to states and other federal regulatory agencies on competition
issues.5 Moreover, the Commission has experience in applying
antitrust principles across many different industries.
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\2\ 15 U.S.C. Sec. Sec. 41-58.
\3\ 15 U.S.C. Sec. Sec. 12-27.
\4\ 15 U.S.C. Sec. 18.
\5\ In recent years, the Commission has been active in supporting
the deregulation of the electric power industry. See Commission Letter
to the Honorable Thomas E. Bliley, Chairman, Committee on Commerce,
United States House of Representatives, Concerning H.R. 2944, The
Electric Competition and Reliability Act (Jan. 14, 2000); Comment of
the Staff of the Bureau of Economics, Federal Trade Commission,
``Inquiry Concerning Commission's Merger Policy Under the Federal Power
Act,'' Dkt. Nos. RM95-8-000 and RM94-7-001 (May 7, 1996); ``Revised
Filing Requirements,'' Dkt. No. RM98-4-000 (Sept. 11, 1998); Comment of
the Staff of the Bureau of Economics of the Federal Trade Commission
Before the Alabama Public Service Commission, Dkt. No. 26427,
Restructuring in the Electricity Utility Industry (Jan. 8, 1999).
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Experience demonstrates that competition among market participants
ordinarily will provide consumers with the benefits of low prices,
desirable products, good service, and innovation. Certainly that is the
case for energy products, including oil, natural gas, and electric
power.
The Commission has had experience in enforcing the antitrust laws
in each of these industries. The Commission has expended a substantial
part of its resources in recent years on energy matters. In fiscal
years 1999 and 2000 to date, the Bureau of Competition spent 115 work
years on investigations in energy industries, almost one-third of its
total enforcement budget. So far in fiscal 2000, the Bureau has spent
over 35 work years on energy related matters.
ii. the commission's experience with antitrust enforcement in energy
industries
Much of the Commission's experience with enforcing the antitrust
laws in energy industries has been in analyzing mergers. Merger
enforcement is the first line of defense in protecting a competitive
marketplace, because it preserves rivalry that brings lower prices and
better services to consumers. The Commission blocks those mergers that
increase the likelihood that the merged firm can unilaterally, or in
concert with others, increase prices or reduce output or innovation.
The Commission has an extensive history of carefully investigating
mergers in the energy industries, particularly petroleum, and the FTC
has challenged mergers in those industries that would be likely to
reduce competition, result in higher prices, and injure the economy of
the nation or any of its regions.6
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\6\ Section 7 of the Clayton Act specifically prohibits
acquisitions where the anticompetitive acts affect ``commerce in any
section of the country.'' 15 U.S.C. Sec. 18.
---------------------------------------------------------------------------
The Commission has been particularly active in investigating
petroleum mergers due to the ongoing trend of consolidation and
concentration in this industry. On February 2, 2000 the Commission
voted to challenge the proposed merger of BP/Amoco and
ARCO.7 In recent years, the Commission has investigated the
mergers of Exxon and Mobil 8 and BP and Amoco 9--
the two largest oil mergers in history--and the combination of the
refining and marketing businesses of Shell, Texaco and Star Enterprises
to create the largest refining and marketing company in the United
States.10 Other recent mergers regarding petroleum industry
assets include Tosco's acquisition of Unocal's California refineries
and marketing business, the acquisition by Ultramar Diamond Shamrock of
Total's North American refining and marketing operations, and the
combination of the refining and marketing businesses of Marathon and
Ashland.
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\7\ Federal Trade Commission v. BP Amoco, p.l.c., Civ. No. C 000416
(SI) (N.D. Cal. Feb. 4, 2000) (complaint).
\8\ Exxon Corp., FTC File No. 991 0077 (Nov. 30, 1999) (proposed
consent order).
\9\ British Petroleum Company p.l.c., C-3868 (April 19, 1999)
(consent order).
\10\ Shell Oil Co., C-3803 (April 21, 1998) (consent order).
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Our investigations revealed that several of these transactions
threatened competition in local or regional markets. In each instance,
relief was obtained to restore the competition lost as a result of the
merger in a wide range of markets from refineries to distribution to
retailing. In retail markets in Exxon, the Commission ordered
divestiture of all Mobil stations from Virginia to New Jersey, and all
Exxon stations from New York to Maine, the largest retail divestiture
in history. In addition, the Commission ordered additional retail
divestiture in Texas and Arizona, the divestiture of Exxon's Benecia
refinery and California marketing assets, the divestiture of Mobil's
Boston and Manassas, Virginia terminals, the sale of the Exxon
Plantation or Mobil Colonial pipeline interest, and the divestiture of
Mobil's interest in the Alaska pipeline. In BP/Amoco, the Commission
ordered divestiture to preserve retail competition in 30 local gasoline
markets mostly in the Midwest, and in Shell-Texaco, the Commission
preserved competition through divestiture in local gasoline markets in
San Diego and Hawaii, and broader refining and pipeline markets in the
Pacific Northwest, California, and the Southeast.
The Commission has also challenged anticompetitive mergers in other
energy industries, including electric power, coal, and gas pipelines.
The Commission recently investigated three ``convergence mergers''--
where an electric power company proposed to merge with a fuel supplier.
The first case concerned PacifiCorp's proposed acquisition of The
Energy Group PLC and its subsidiary, Peabody Coal.11 In a
second case, the Commission filed a complaint against CMS Energy
Corporation's proposed acquisition of two natural gas pipelines from
subsidiaries of Duke Energy.12 In Dominion Resources, the
electric utility that accounted for more than 70 percent of the
electric power generation capacity in the Commonwealth of Virginia
proposed to acquire Consolidated Natural Gas (``CNG''), the primary
distributor of natural gas in southeastern Virginia. Working closely
with Commonwealth officials, the Commission required the divestiture of
Virginia Natural Gas, a subsidiary of CNG.13
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\11\ PacifiCorp, FTC File No. 971 0091 (consent order accepted for
public comment Feb. 17, 1998). This order was withdrawn when the
parties abandoned the transaction.
\12\ CMS Energy Corp., C-3877 (June 2, 1997) (consent order).
\13\ Dominion Resources, Inc., C-3901 (Dec. 9, 1999).
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In each energy investigation, the Commission has carefully reviewed
the proposed merger, and has intervened where appropriate to prevent
those mergers from significantly reducing competition in any sector of
this industry that affects the United States or its citizens. The
Commission's inquiry has been, and continues to be, to determine
whether a merger would make it substantially likely that the remaining
firms in the industry could reduce output and raise prices to the
detriment of consumers anywhere in the United States. Consumer
protection is the goal of antitrust enforcement across all industries;
its importance is particularly clear in the energy industry, where even
small price increases can have a direct and lasting impact on the
entire economy.
As an analytical matter, the Commission approaches its antitrust
mission by examining the areas in which merging companies compete,
looking at the existing state of competition in that marketplace and
the likely changes in that marketplace in the future, both from new
competition entering and from existing competition exiting. We also
look at the effect of recent mergers on competition in the particular
marketplaces at issue, and whether the merger is a part of a trend
towards concentration. The Commission has recognized the existence of
such a trend toward consolidation in the petroleum
industry.14
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\14\ British Petroleum Company p.l.c., C-3868 (April 19, 1999)
(consent order), Analysis to Aid Public Comment.
---------------------------------------------------------------------------
We also consider whether a merger will yield efficiencies that
might counteract the merger's threatened anticompetitive effects.
However, efficiencies must be proven--merely claiming cost savings is
not enough to allow an anticompetitive merger. The cost savings must be
real, they must be substantial, they cannot result from reductions in
output, they cannot be practicably achievable by the companies
independently of the merger, and they must counteract the merger's
anticompetitive effect, not merely flow to the shareholders' bottom
line.15
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\15\ See United States Department of Justice and Federal Trade
Commission, Horizontal Merger Guidelines Sec. 4 (1992), reprinted in
Trade Reg. Rep. (CCH) para. 13,104 (1992).
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The Commission has several active investigations of matters
involving energy industries, both merger and nonmerger. Commission
rules prevent comment on current investigations, but it is public
knowledge that the Commission has filed a complaint against the
proposed merger of BP/Amoco and ARCO and is also looking at the issue
of gasoline pricing in California and other Western states.
iii. the current economic environment and possible government action
The last year has been a volatile one for energy prices in the
United States, and that volatility has only increased in the first few
months of this year. Based on publicly available information, we know
that crude oil prices rose from $12 per barrel in February 1999 to over
$31.00 per barrel by March 1, 2000.16 On top of the crude
oil price increases, the prices for heating oil and diesel fuel jumped
sharply in the Northeast in January 2000. Between January 17 and
February 7, prices of New England residential heating oil prices rose
from $1.18 to $1.96 per gallon, while New England retail diesel prices
rose from $1.44 to $2.12. Just as quickly, however, prices have begun
to come down. By February 21, the price for retail diesel fuel fell to
$1.74 per gallon and the heating oil price also dropped.17
What are the causes of high prices and substantial price volatility,
and what can competition enforcement agencies do to ameliorate them?
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\16\ Energy Information Administration, Heating Fuels and Diesel
Update, March 2, 2000, at www.eia.doe.gov. See also Martha M. Hamilton,
``Three Major Oil Producers Consider Increasing Output,'' Wash
\17\ Statement of John Cook, Petroleum Division Director, Energy
Information Administration, Department of Energy, before the Committee
on Energy and Natural Resources, United States Senate (Feb. 24, 2000).
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It is no secret that the United States is dependent on foreign
sources for a major portion of our petroleum consumption. That reliance
is growing. In 1998, net imports of crude oil supplied approximately 52
percent of U. S. demand--the highest percentage ever. Despite the
rising use of alternate fuels such as coal and natural gas, petroleum
still provides 39 percent of the country's energy needs.18
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\18\ Id.
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Higher petroleum prices in 1999 can be traced to several factors.
OPEC countries and several other non-OPEC exporting countries curtailed
supply. Simultaneously, a number of Asian economies began to recover
from a regional recession, causing increased demand for petroleum
products. The result was that worldwide consumption exceeded production
and inventories were drawn down. The price increase caused by the
excess of demand over supply also reduced refinery margins, causing
refiners to cut production and use inventories to meet demand.
The short term price volatility in the Northeast was probably
caused by several different, or at least additional, factors, including
weather and supply problems. Low inventories set the stage for price
volatility as changes in demand had to be met from imports. At the
beginning of January, East Coast inventories for distillates were about
8 percent below the low end of the normal range.19
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\19\ The low inventories were likely a response to both high crude
prices and an expectation that those prices would come down. If
refineries had expected crude prices to continue to rise, it would have
made sense to continue buying instead of reducing inventories.
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The weather on the East Coast was also unusually severe in January.
During the week of January 16, a cold spell hit the Northeast, dropping
temperatures to nearly 20 percent lower than normal for that time of
the year. The weather had a two-fold effect: at the same time that it
caused the demand for heating oil to increase, the cold weather
decreased supply because frozen rivers and high winds delayed product
movement. Demand for electric power also increased, causing utilities
to turn to distillates as a substitute for interruptible natural gas
supplies. Additionally, several refinery outages in January exacerbated
the supply/demand imbalances.
While cold weather and refinery malfunctions raise no obvious
antitrust issues, continued antitrust oversight of these markets is
important to insure that market participants do not exacerbate those
conditions through anticompetitive conduct. There are a number of
potential activities that would violate the laws enforced by the
Commission. Price fixing, tying, or agreements on supply reductions
could all be antitrust violations. For example, if producers take
advantage of market-determined events to overtly or tacitly collude on
price increases or output reductions, the enforcement agencies should
aggressively intervene. The potential is always present for producers,
refiners, or distributors to take advantage of sudden market imbalances
to engage in anticompetitive conduct in the hope that their illegal
activities will be lost in all the noise.
There are certain markers or evidentiary patterns that the
Commission staff looks for when deciding whether or not to open an
investigation. Evidence of overt collusion may point to anticompetitive
activity, but it is rarely observed. Where there is evidence of overt
collusion, criminal enforcement may be appropriate.20 Where
there is evidence of tacit collusion, a closer look also is warranted.
Many factors may show tacit collusion, but generally we look for
evidence that firms are acting contrary to what would seem to be their
independent economic interests. For instance, if some or all firms in
an industry are shipping from high margin markets to low margin
markets, that may be some evidence of an agreement. If price and cost
movement are divorced from each other, that may also be evidence that
competitive forces are muted.
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\20\ The Department of Justice has brought a number of criminal
enforcement proceedings against international price fixing cartels in
industries such as food additives and vitamins.
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It is crucial to separate anticompetitive conduct from market-
driven outcomes so as not to chill competitive conduct. Large price
increases are not themselves inconsistent with competitive behavior.
They may merely be a competitive reaction to large cost increases.
Without evidence of concerted activity or exclusionary monopoly
conduct, there can be no antitrust violation.
The January price spikes were principally a Northeastern
phenomenon. Crude oil prices for Gulf Coast and West Texas Intermediate
crude did not increase materially; Midwest heating oil prices increased
only 10 cents per gallon. A number of State Attorneys General in the
Northeast have opened an investigation of the increase in prices for
heating oil and diesel fuel in their jurisdictions and have requested
that the Federal Trade Commission assist them. Beyond stating that we
are providing such assistance, I cannot comment further on this law
enforcement investigation.
iv. conclusion
The Commission thanks the Committee for holding this important
hearing. The American public needs to know what forces are at work in
this vital sector of the economy. Higher prices for products that are
critical to our citizens' quality of life and for the efficient
functioning of the national economy are a matter of serious concern.
Where conduct that violates the antitrust laws is implicated in the
higher prices, enforcement action must be taken.
The Northeastern Attorneys General's investigation, assisted by the
Federal Trade Commission, should enable us to determine if the reasons
for recent increases in the price of heating oil warrant enforcement
action.
Mr. Barton. We thank you, Mr. Parker. The Chair is going to
recognize himself for the first round of questions. They will
be 5-minute rounds, but we'll have as many 5-minute rounds as
members want. And with only three members here, I think we all
have our chance to get the questions in.
My first question is to Dr. Cook and to Mr. Mazur of the
Department of Energy and EEI. When did the Department sense
that there might be a tightening of crude oil supplies coming
into the United States? You showed us some pretty fancy charts,
where you're predicting continued tightness in supply and,
therefore, projecting increased gasoline prices at retail,
which leads me to believe you do have a model that makes
predictions or projections in advance. So, my question is: when
did the Department sense that we were going to have this
tightness in December and January, which did, in fact, result
in a run up in fuel oil prices and gasoline prices?
Mr. Cook. As you may know, the Department has a monthly
short-term forecast that comes out the first week or so of the
month. The apparent impact on crude oil inventories from the
imbalance and global supply and demand began to show up as
significant by June--June and July.
Mr. Barton. Last June and July.
Mr. Cook. Last June and July, in the data. The forecast
began to reflect that, which go out on the Web. The published
version is twice a year, April and October, I believe. I'd
actually like to read you a quote, if I might, from the
November forecast, which indicates some concern about price
volatility.
``Price volatility in the spot and futures markets for both
crude oil and natural gas has been the norm since the end of
the summer, as the market has tried to anticipate the fuel
requirements for the upcoming heating season. Changes in both
the current weather and in short-term forecasts of the weather,
particularly for the northeast and Midwest regions of the
country, have caused heavy price fluctuation in these heating
fuels markets. These weather factors are likely to continue to
cause wide price swings in the spot and near-term futures
markets for oil and gas through this end of the month, even
before the heating system begins.''
Mr. Barton. That wasn't until November.
Mr. Cook. That was in the November forecast.
Mr. Barton. Well, my point is: EIA has got some fairly
sophisticated models. It would seem to me that if back in June,
July, your models began to project the shortage in the fall and
winter, it would have been prudent to schedule meetings with
the Secretary of Energy and the President, and then, in turn,
have them get with the State Department and work with the non-
OPEC member states, like Mexico and others, that perhaps could
increase production, so that you can have an increase in crude
oil supply. Because, if you wait until November, December, even
with the best of intentions, it takes a while from the time a
decision is made to increase production, actually get the crude
oil to the refinery and get the refinery to process it and send
it through the distribution channel. So, why didn't the
administration began to act a little bit more rapidly, if, in
fact, you had indications last spring and summer, that the
problem that has occurred might occur?
Mr. Cook. If you recall that stock chart that I had up
there, you may remember that even as late as November--the end
of November, distillate inventories and inventories were still
in the normal range. So, while we put out that warning in the
forecast, we still had adequate inventories, by any measure.
The problem in the northeast happened very rapidly and you
really didn't have cause to go out and say the sky is falling,
so to speak, until, essentially, right when the impact hit,
with the cold weather in late January.
With those normal stocks in November, there were signs that
if these trends were to continue, and that's why the language
that I read to you, if, in fact, the stocks were to get low by
January, the implication here, and you combine that with cold
weather, you could have some volatility for the second half of
the winter. But no one, not us or anyone else, can forecast
cold weather and some of the other complications that occurred
there.
Mr. Barton. But, you can predict that it's probably going
to be colder in December or January----
Mr. Cook. We were trying to predict that the stage----
Mr. Barton. [continuing] than it is in June or July.
Mr. Cook. [continuing] was being set, but we couldn't take
it any farther than that.
Mr. Barton. Well, I----
Mr. Cook. Now, that said, I agree, you know, the process of
communicating these concerns certainly can be and should be
improved and we would like to work on you on that.
Mr. Barton. Okay.
Mr. Mazur. Mr. Chairman, I just want to interject one
point, is that the data that we rely on for worldwide supply
and demand measures comes with quite a lag, a several month
lag. The data that John showed you for the United States comes
very quickly. Basically, we have the best data system at the
Energy Information Administration in the world. Everybody else
is not so good. And so a lot of the work that John's folks are
doing on forecasts is based on older data from other parts
around the world and then their best judgment of what that is
likely to show. And so when we get concerns, as John read, they
tend to be tempered, because we don't have a very precise feel
for what the worldwide stocks of crude oil are.
Mr. Barton. Well, my prediction is, based on the hearing
today, since it's being televised, DOE projecting higher
gasoline prices in the summer, that impact is going to be felt
on the spot market this afternoon. It was probably felt in
minutes after that went out. So, you know, we really need to do
a better job. Because, if you try to increase supply, the only
way we have to increase supply in the short run in the United
States is greater imports. And given that OPEC has a cartel
that is trying to restrict production right now, we have to
work with our non-OPEC allies that are just observers: Mexico
and Russia, some of those nations. So, we really need to
develop a better mechanism, when your model show a projected
tightness, to do something other than economists sit around
conference tables and cluck about it. I mean, I would hope you
would agree with that.
Mr. Cook. I agree. I said that we should improve this
process and we'd like to work with you.
Mr. Barton. My last question, because my time has expired:
what are fuel oil prices today in the northeast? We've heard
the testimony from our congressional panel of $1.80 a gallon
and there's anecdotal evidence that it is $2 a gallon. I'm told
that that price has already come back down and the numbers that
we have on the staff, they were about $1.17 a gallon for fuel
oil. Does that track with what you have?
Mr. Cook. No. I think I testified that in New England,
heating oil prices rose about 75 cents a gallon and over the
balance of February, they had dropped about 60 cents, as of our
last survey at the end of February.
Mr. Barton. So, they are 15 cents a gallon higher?
Mr. Cook. So, they're still elevated, about 15 cents.
Mr. Barton. And where was your base? Was it 90 cents a
gallon?
Mr. Cook. That would put them in the $1.35 to $1.60 range,
depending on the State.
Mr. Barton. Today?
Mr. Cook. As of the end of February.
Mr. Barton. Okay. What about as of today.
Mr. Cook. Well, we did a survey on Monday and the data will
be available and published tomorrow. I just don't have it.
Mr. Barton. But, is it a fair assessment that, as of
today's hearing, the prices have declined from the highs that
caused the greatest concern to some of the congressmen from the
northeast?
Mr. Cook. Most of that increase has been offset.
Mr. Barton. My time has expired. I'll get into the
distribution channel in the next round of questioning. Mr.
Boucher of Virginia.
Mr. Boucher. Thank you, very much, Mr. Chairman. I agree
with the statements that have been made by a number of members
of this panel this afternoon, that it's important that
witnesses present their testimony in a timely fashion. However,
let me say in defense of DOE on this particular occasion, that
the Department is testifying today before four committees of
this Congress, and I would, also, point out that at least three
members of the panel to follow did not present their testimony
in a timely fashion either. I think we all can improve our
practice, in this regard, and I would hope we would do that.
Mr. Mazur, let me ask you a couple of questions about the
strategic petroleum reserve. There is a statutory mandate that
the reserve have 1 billion barrels of petroleum. The actual
capacity of the reserve today is about 700 million barrels, as
a consequence of one of the facilities some time ago having
leaked and that facility is today closed; so the real capacity
is about 700 million barrels. At the present time, the
inventory in the reserve is about 570 million barrels. Do you
believe that it's in the public interest to utilize the full
capacity of 700 million barrels that we have available and find
the means to acquire the additional 130 million barrels
necessary to fill it?
Mr. Mazur. One of the steps that Secretary Richardson
directed the Department to take last year, when prices were
low, was to find innovative ways to add to the strategic
petroleum reserve. And the one chosen was to use a royalty in-
kind program: while prices were low, to add some oil to the
strategic petroleum reserve, thinking that was a good deal for
the taxpayer; when prices are high, it's probably not such a
good time to be adding oil to the reserve. So, these are the
steps that we're taking now. The strategic petroleum reserve
competes with every other priority that Congress funds and
there have not been a lot of appropriated moneys forthcoming to
add oil to the SPR.
Mr. Boucher. Well, I'm going to get to a potential way that
we might add to the reserve without having to have appropriated
moneys; but, let me just get you to say whether you think it's
a good idea for us to add to it, at this time. Assuming that
the funding environment permitted that, do you think it's a
good idea?
Mr. Mazur. The administration is engaged in an SPRO sizing
study, at that moment. I think it would be premature to come
out one way or the other on that, until the actual analysis is
completed.
Mr. Boucher. Well, I notice from your testimony a
suggestion that DOE is presently considering, something that
you call a lending plan, under the basic structure of which
petroleum would be loaned from the reserve, at the present
time, to petroleum companies. Those companies, presumably,
then, would sell that petroleum into the market, with the
beneficial effect that that would add to the supply and,
presumably, affect price in a favorable manner. And, then, that
petroleum would be returned to the reserve with interest, if
you will, with a premium, meaning that more gallons would be
put into the reserve than were withdrawn. And the return of the
petroleum would, presumably, occur at a time when prices are
lower and when the petroleum, therefore, can be purchased by
the companies for less than they would be selling it for today.
Now, this strikes me as a very innovative proposal. Among its
benefits would be that the premium paid by the petroleum
companies would actually serve to increase the size of the
inventory.
Now, your testimony suggest that that is being considered
by the DOE. So, let me just get you to elaborate on that a bit
and why don't you start by telling us whether you think it's
legally authorized, this proposal.
Mr. Mazur. I think first, we do believe it is legally
authorized. There have been other types of arrangements where
oil has been traded, exchanged, in the past, and we think it's
well within the authorization of the SPR. I think it's included
in EPCA.
Second, whether it's a good idea or bad idea is being
discussed right now. It's, again, under active consideration.
It's an innovative program, as you say, and it's something
where the details need to be worked out. And the details are
quite important, in part, determining whether or not you're
getting a good deal, in terms of the amount that is getting put
back in the SPR, in the future. It's something that's not
obvious to a casual observer.
Mr. Boucher. Well, let me simply encourage you to continue
to refine this concept. It strikes me as creative thinking. I
think it's entitled to more careful consideration. I would like
to have the benefit of your thinking about the basis on which
it is legally authorized. And I will conclude my questions with
this, my time has expired, and that is following the OPEC
meeting to take place later this month, during which it is
hoped that the OPEC member nations will decide to increase
petroleum production levels. If they do, by the way, I think
that will be a direct consequence of the very favorable steps
taken by our Secretary of Energy, to discuss that very process
with the leadership in the petroleum exporting countries.
But following that meeting later this month, is it the
intention of DOE to reevaluate your strategy, with regard to
oil prices, and do you think you might be forthcoming with some
additional recommendations to the Congress or a decision to
take some additional steps, yourself, following that meeting,
given the virtual certainty that gasoline prices will increase
no matter what happens at OPEC at the end of this month?
Mr. Mazur. I think the President said that all options are
on the table and I think the he's encouraging a lot of creative
thinking within the administration, as to what steps can be
taken. I don't want to go too far out on this, though, when you
talk about our policy toward energy prices. Really, the policy
is to let prices and markets be set by supply and demand, and
not have the government intervene and say price should be x.
That's not part of the----
Mr. Boucher. Well, that, in and of itself, is a strategy
with regard to energy crisis.
Mr. Mazur. Probably a failed one.
Mr. Boucher. Well, that's fine. Thank you, very much, Mr.
Mazur. Thank you, Mr. Chairman.
Mr. Barton. Thank you, Congressman Boucher. We recognize
Congressmen Burr for 5 minutes.
Mr. Burr. Thank you, Mr. Chairman. I want to say--it is
Mazur?
Mr. Mazur. Mazur, yes.
Mr. Burr. Mazur. Mr. Mazur, hopefully, you can give that
same speech about our policy not being one to influence prices
the next time we talk about some of the onerous regulations
that we place on individuals in the energy field, because I
think we do have a great effect on where the pricing is.
Let me turn to Mr. Cook, first. EIA missed their
projections in a February letter on where gas prices were going
to go. Would you care to give a new estimate today on what the
peak is?
Mr. Cook. No. The one I just gave is our current
projection.
Mr. Burr. And that is what?
Mr. Cook. $1.56 peak in May, up to $1.80, with the
volatility that's out there.
Mr. Burr. And the basis for your peak number is on what
OPEC has or has not done, or what DOE is going to or is not
going to do? Is it on policy or is it on the OPEC decision?
Mr. Cook. Like all forecasts, it makes some assumptions.
Mr. Burr. What are those assumptions?
Mr. Cook. We assume that OPEC, one way or another, will
increase production beginning April 1, by a million barrels a
day. That may not be enough to fully balance crude markets and,
therefore, that's one of the reasons why the forecast calls for
continued high crude prices. That influences the gasoline
price. The tightness in the gasoline market, itself,
independent of the increase we might see in crude, is due to
low stocks, high requirements for feed stocks----
Mr. Burr. But, you're presuming in this calculation that
there's no policy or move that we make in this country that
would stabilize the price?
Mr. Cook. No, we don't do that.
Mr. Burr. So, do you consult with DOE when you do your
assumptions?
Mr. Cook. No.
Mr. Burr. Okay. Let me go back to you, if I could. We've
had this discussion about SPR. It's on the table; it's off the
table; it's on the table; it's off the table. Tell me what is
different now than in 1995 or 1996, when we sold SPRO to raise
revenues for budget purposes?
Mr. Mazur. In those years, Congress directed the Department
to sell a limited amount of oil from the strategic petroleum
reserve. I think it was on the order of----
Mr. Burr. Congress approved the ability to sell oil at the
request of the administration.
Mr. Mazur. The administration requested it one time in the
fiscal year and Congress----
Mr. Burr. And the administration requested it to raise
revenues, so the budget would balance; yet, we're hesitant to
sell any SPR to stabilize the price of oil prices.
Mr. Mazur. My recollection is that the administration
requested funds, so that the Weeks Island facility could be
decommissioned and that Congress approved those funds. And then
in subsequent years, Congress directed the Department to sell
oil----
Mr. Burr. When we sell off SPR, do we affect the price of
oil in the marketplace?
Mr. Mazur. Actually, we did a quick little analysis,
looking at the timing of the strategic petroleum reserve sales
and what the effects of prices are and except for the Gulf War
sale, it's difficult to see a dramatic drop in price coincident
with the sales from the SPR.
Mr. Burr. So, we could estimate the effect that SPR sales
were going to have on the world supply and, consequently, the
cost in the United States of oil; but, we couldn't anticipate
what would happen if OPEC cut their production, that we would
be at $1.60 a gallon on gas?
Mr. Mazur. I think part of what the forecast from the
Energy Information Administration does is assume some
production paths for various countries in the world: OPEC, non-
OPEC producers, United States, and others. Sometimes, they are
right; sometimes, they are a little short; sometimes, they are
a little over. The EIA forecasts have consistently called for
higher crude oil prices then in the month those forecasts are
made. They may have undershot the extent to which prices were
going to rise; but, they're pretty much on the mark, saying
that fuel prices were going up.
Mr. Burr. You don't anticipate DOE to make any moves prior
to the OPEC meeting the end of March?
Mr. Mazur. Moves in which direction, sir?
Mr. Burr. Any direction.
Mr. Mazur. You mean like selling SPR oil?
Mr. Burr. Making a decision to sell SPR or not sell SPR, or
anything that would affect the stabilization of the price?
Mr. Mazur. I think at this point, we think it's--the best
course of strategy, to let Secretary Richardson's energy
diplomacy work its way and see what----
Mr. Burr. Which is to wait for OPEC to have their meeting.
Mr. Mazur. At the end of the month, yes.
Mr. Burr. So, we will continue Federal subsidies to those
individuals, who are having a tough time affording fuel oil,
and we'll extend SBA loans to truckers, who can't pay for the
price of diesel. Now, how do we expect them to pay back those
loans?
Mr. Mazur. I think in the forecast that both EIA made and a
number of private sector folks have made, oil prices are
expected to come down probably by the end of the year or later.
Mr. Burr. And somehow they're going to recover enough money
in additional profits to pay off loans that they've now
incurred, because we've extended SBA loans to them?
Mr. Mazur. That would be the expectation, yes, sir.
Mr. Burr. I will conclude, Mr. Chairman, because I have to
go to another hearing. I would, also, tell you that with the
accuracy of EIA's projections, I'll let you tell that to
truckers across America, because I'm not going to be the one to
give them that assurance that it's coming down. I thank you,
Mr. Chairman.
Mr. Barton. Thank you, Congressman Burr. We'll now
recognize Mr. Wynn of Maryland for 5 minutes.
Mr. Wynn. Thank you, Mr. Chairman. I recognize that we
don't have a representative from the State Department here, but
I would like for you to share any information you may have on
the subject of Russia's role in the OPEC decisionmaking, with
regard to increase in production. The information that seems to
be floating around suggests that Russia is one of the major
obstacles to getting an OPEC agreement. Is that accurate?
Mr. Mazur. This is not an area that I'm an expert on. I do
know Russia is not a member of OPEC, so I would be surprised if
they were a major obstacle to OPEC coming with an agreement.
Mr. Wynn. What about Russia, in general, are they--what
role are they playing, in general?
Mr. Mazur. Again, that's something that is outside of my
area.
Mr. Barton. Would the gentleman yield?
Mr. Wynn. Certainly, Mr. Chairman.
Mr. Barton. I mean, it's true, they're not a member of
OPEC; but, isn't it, also, true that they are regular observers
at OPEC meetings and that there are meetings at the staff level
between the oil ministry in Russia and the oil ministries in
the OPEC countries?
Mr. Mazur. They are a major oil supplier, so, yes, you
would expect them to be sitting in----
Mr. Barton. So, the Congressman's question, you know, does
have merit, since Russia is one of the few non-OPEC members
that could increase production, if they were so inclined?
Mr. Mazur. Perhaps, yes.
Mr. Wynn. Thank you, Mr. Chairman. In your strategy
discussions, have there been any consideration of negotiating
with Russia? Are you aware of any negotiations with Russia, to
increase their production?
Mr. Mazur. I am not, no, sir.
Mr. Wynn. Early on, many of us expressed concern about the
problems in the northeast with heating oil and there's a bill
around, in which many of us believe that we ought to have a
northeast or a regional reserve for domestic consumption of
heating oil. What is your position on that?
Mr. Mazur. The Department has looked over the past decade a
number of proposals for regional refined product reserves and
generally found that the expected cost of those reserves
exceeded the benefits that would come from it. Secretary
Richardson wants us to think creatively about alternatives, and
so we are going to be spending a little bit of time to see if
we can find a better approach. But, frankly, the analysis that
has been done over the past decade has not been very supportive
of the idea of having a regional petroleum----
Mr. Barton. Would the gentleman yield on that point?
Mr. Wynn. Certainly, Mr. Chairman.
Mr. Barton. Is it not true that the Department submitted to
the chairman of this subcommittee a proposal that would
eliminate the current authority to put funds into the regional
reserve that was authorized in 1992?
Mr. Mazur. Yes, I understand that.
Mr. Barton. So, your official position is that you want to
eliminate the existing authority?
Mr. Mazur. And that would have been based on the most
recent analysis that had been done of a regional product
reserve.
Mr. Barton. Thank you.
Mr. Wynn. You said the costs outweigh the benefits. How was
that analysis done? I mean, as somewhat laypersons, we're
assuming that the benefit would be that families would get
heating oil, particularly low income persons, who would be
impacted. That's the benefit. What are the costs considerations
that were used to say that this was not a good idea?
Mr. Mazur. There are a number of costs that are involved in
creating and operating a regional product reserve. First, you
need to acquire the facilities where the product is going to be
stored.
Mr. Wynn. If you assume these are leased facilities.
Mr. Mazur. You still have to pay the lease payments for
that. Then, you need to acquire the product, and with refined
product, one of the things you need to do is be in the market
fairly regularly, to maintain a product that is of sufficient
quality to be sold in the marketplace. So, the operating costs
could be quite substantial. In addition, the analysis showed
that it's not every year in which you would choose to use this
facility. It would be on the order of one out of three winters,
perhaps, that were cold enough and where the prices had spiked
enough that you would want to make use of these reserves.
Mr. Wynn. It would appear that that would be a good thing;
that that would kind of stabilize or help maintain the reserve,
so that you wouldn't have to constantly make maximum purchases.
Mr. Mazur. Not maximum purchases, but you need to keep the
supply of the refined product relatively fresh, and so you
would have to be in the market pretty regularly. So, you would
be incurring operating costs on a regular basis.
Mr. Wynn. Let me ask two final questions: one, and this may
be the same question in another guise, if this is not a good
idea, what are your proposals to address the concerns of the
northeast; and second, what are you long-term plans to make us
more self-reliant, in view of these kind of periodic problems
that we're encountering now and that we may well encounter in
the future?
Mr. Mazur. On the first question, what are we doing about
the situation in the northeast, Secretary Richardson has
directed the Department to look at a couple of issues. One is
decreasing the reliance on fuel oil in the northeast, perhaps
by increasing the use of natural gas there and try to
understand what sort of obstacles there are to that switch in
fuels. In addition, in the longer term, as I mentioned in the
testimony, the Department has a fairly robust R&D program in
energy efficiency, alternative fuels, and so on, which are
designed to reduce our reliance on imported oil. On the
domestic supply side, we have a fairly robust R&D program to
help improve the amount of resource that can be extracted from
existing reservoirs.
Mr. Wynn. What specific alternatives are you talking about?
Mr. Mazur. On alternative fuels?
Mr. Wynn. Yes.
Mr. Mazur. It would include things like--well, in
transportation fuels, ethanol would be a top candidate.
Biodiesel, as Ms. McCarthy mentioned earlier, is another one.
And there are natural gas, methanol, and other types of fuels
that can be used for transportation vehicles.
Mr. Wynn. All right, thank you.
Mr. Barton. Thank you, Congressman, those were excellent
questions. We would now welcome 5 minutes of questions from the
gentleman from Georgia, Mr. Norwood.
Mr. Norwood. Thank you, Mr. Chairman, I appreciate that.
Mr. Mazur, I'm, basically, going to confine my first full
minute to you. Two days ago in the White House briefing room,
the President, in his remarks, said he prefers high oil prices,
because they're useful in supporting his social and
environmental agenda. And just so I can get this exactly right,
I'd like to quote the President, so we won't be off base here.
He said, ``Americans should not want oil prices to drop to $10
to $12 a barrel, the levels that they were last year, because
that would take our minds off of our business, which should be
alternative fuels, energy conservation, and reducing the impact
of all of this global warming.'' Do you support that?
Mr. Mazur. What the President, I think, was saying is
that----
Mr. Norwood. I understand what he is saying.
Mr. Mazur. Okay.
Mr. Norwood. Everybody in this room understood it. Now, do
you support that?
Mr. Mazur. I support the position that when prices last
year at historic lows, that they took away the incentive for
folks to give consideration to things, like energy efficiency
and use of alternative fuels.
Mr. Norwood. Does the Department of Energy, then, and the
Secretary support this statement that the President made, that
anybody I know can understand?
Mr. Mazur. Secretary Richardson has said, and he said many
times last year, I think even in front of this committee, that
prices--oil prices of $10 a barrel were too low. He's, also,
said prices----
Mr. Norwood. Does that mean he, then, supports that price
of gasoline at $1.80 a gallon?
Mr. Mazur. That--that--no, I don't think that's what it
means. It means that at $10 a barrel, the incentives for
domestic production were sufficiently low, that not a whole lot
of it was occurring.
Mr. Norwood. It's a little hard to have it both ways. The
administration, in particular the Vice President, called for a
50 cents a gallon Federal tax hike, as part of the Clinton-Gore
1993 tax increase. Now, the administration, at that time,
justified the request on grounds that higher prices would force
the public, especially low income families, to use less energy.
Public outcry, as you remembered, I certainly do, and I wasn't
up here, forced the administration to drop this idea.
Now, the administration publicly supports allowing at least
part of this OPEC price gouging to become permanent for the
very same reason, forcing the public to use less gas by simply
pricing low income working families out of the gas lines, which
is what it does. Has anyone in the administration discussed any
portion of this policy with you or other personnel at the
Department of Energy?
Mr. Mazur. I don't think anyone has discussed the idea of
supporting OPEC to raise prices on American consumers, as part
of a U.S. strategy, no.
Mr. Norwood. Were you in the Department of Energy in 1992-
93, when----
Mr. Mazur. In 1993, I was working for Joint Tax Committee,
and I was working on the----
Mr. Norwood. Ah-hah, then you recall them wanting to
increase prices 50 cents a gallon, so people would use less
gas; in other words, pay more.
Mr. Mazur. My recollection was that it was a broad-based
energy tax, not just a gasoline tax.
Mr. Norwood. Well, that was certainly the part out of the
broad-based tax that got dropped out, because the American
people said, in a fairly loud voice in 1993, no, you don't;
you're not going to do that.
Does the Department of Energy believe that higher oil
prices, either through direct taxes or by default through
international trade agreements, should be used as a tool to
force the public to drive less? If so, does this amount to the
same thing, enacting of 50 cents a gallon tax hike without
having to seek congressional approval? Does it mean the same
thing?
Mr. Mazur. Again, I don't----
Mr. Norwood. If you're supporting higher prices, which
means it's going to be higher at the gas tank, doesn't that, in
effect, mean the same thing as raising the Federal excise tax
by 50 cents?
Mr. Mazur. No, I don't think so. I think one thing you need
to keep in mind is that last year, when prices were $10, $11,
$12 a barrel, those were historic lows, not seen since the days
of the depression in the United States, in real terms. And I
think it was commonly agreed that prices at that level were too
low.
Mr. Norwood. So, you're, basically, saying that it's all
right for the price to go up; it just may be a little high now?
Mr. Mazur. I'm saying prices now are, I think--quite
clearly, prices now are too high, yes.
Mr. Norwood. In your statement, you said, and I quote,
``Oil prices will come down by the end of the year.''
Mr. Mazur. I think that's my expectation, yes.
Mr. Norwood. Do you mean by late October?
Mr. Mazur. I think the price forecast that I've seen have
shown them coming down throughout the course of the year; yes,
sir.
Mr. Norwood. Well, explain to the public why you think
they're going to come down?
Mr. Mazur. I think the way I looked at this is the market
participants, who purchase oil in the futures markets, for
delivery in months of July, August, September, October, are
willing to pay much less, $2, $3, $4 a barrel less for that oil
than for today's oil. That's indication to me that the market
believes prices will be coming down in the future.
Mr. Norwood. Did you predict the prices would go up as high
as they're going?
Mr. Mazur. As I said earlier, the EIA projections were
fairly consistent that prices would be going up. I don't think
they projected $32 a barrel oil.
Mr. Norwood. Dr. Cook, you said that----
Mr. Barton. This will have to be your last question----
Mr. Norwood. It's very brief.
Mr. Barton. [continuing] of this round.
Mr. Norwood. Very brief. Dr. Cook, you said that OPEC will
increase production a million gallons a day and then you went
on to say by one way or the other.
Mr. Cook. Barrels not gallons.
Mr. Norwood. I'm sorry, barrels. Explain to me what one way
or the other would mean, so we can have some confidence this
may be true. It doesn't appear there's going to be help from
the Department of Energy, so what other ways are we going to
hope to increase this production?
Mr. Cook. First of all, that was an assumption. The model
works that way. We assumed a million barrel a day increase
beginning in the second quarter. It doesn't mean that we have
inside knowledge of anything like that. When I said one way or
another, what I meant is that OPEC, after the meeting on March
27, may announce that. On the other hand, who knows what
they're going to announce. It seems to change from day to day.
The other way that it can come out is just high prices tend
to reduce their compliance with their own agreement. They tend
to cheat more. And, in fact, that's why we underestimated all
along the oil price, because we assumed that they would cheat
more than they actually did. This is maybe a historic period
for their unity, possibly dating all the way back to the early
1970's.
Mr. Barton. That's true.
Mr. Norwood. Next round we'll finish.
Mr. Barton. Thank the gentleman from Georgia. The gentleman
from Massachusetts is recognized for 5 minutes.
Mr. Markey. Thank you, Mr. Chairman, very much. Mr. Mazur,
in response to the gentleman from Maryland earlier, you said
that DOE had done a recent study of the matter and you
concluded that establishing a regional reserve was not cost
effective. Now, if you're referring to your June 1998 study,
then that just flat out contradicts what the conclusion was in
your report, where it says that the expected benefits of a
smaller 2 million barrel regional product reserve located in
lease terminals in the northeast would approximate or exceed
its costs. Is there some other study that you're referring to?
Mr. Mazur. Yes, sir. I guess what I was saying was that
there are a number of studies that have been done over the last
decade and that the general conclusion----
Mr. Markey. No, I'm talking about is there some study more
recent than your own study in June 1998?
Mr. Mazur. That is the most recent study and under one
scenario, it does conclude that the costs approximate the
benefits. Under the other scenarios, I believe it concludes
that the costs exceed the benefits.
Mr. Markey. So, when you said to Mr. Wynn that a regional
petroleum reserve was not cost effective, were you referring to
your own study, which says that it is----
Mr. Mazur. I was referring----
Mr. Markey. [continuing] cost effective or are you
referring to other people's studies that said that it may not
be, Mr. Mazur?
Mr. Mazur. Mr. Markey, I was referring to the bulk of the
studies and I was referring to the general conclusion that
comes from----
Mr. Markey. No, I'm talking about--you're not sticking by
your own conclusions and in your own report, with regard to the
economic feasibility of planting a petroleum reserve right in
the northeast.
Mr. Mazur. My understanding of that study is that you have
one scenario in there, a 2 million barrel leased facility with
oil swapped from the SPR, and that the conclusion and a
particular strategy for using oil from that reserve. Under
those sets of assumptions, their costs approximately equal the
benefits. Under every other set of assumptions--under other----
Mr. Markey. Why don't you go forward with it, then, if it
says that you can do it under this--under these conditions,
using this scenario, it would be cost effective? Why isn't the
administration moving forward on a program that you have
concluded would be cost effective for the northeast?
Mr. Mazur. I guess the point is that it would be
approximately cost effective under the circumstances that are
designed in there, including the assumed draw down plan, and
it's not obvious to me that the assumed draw down plan would be
one that the Federal Government would be utilizing.
Mr. Markey. Well, of course, they wouldn't be utilizing it,
if they never wanted to deploy it in the case of a huge spike
in the rates that the elderly and the poor in the northeast
would have to suffer, because of the rise in home heating oil.
If your whole belief is that you're never going to deploy it,
in the event that consumers are getting hurt, then, of course,
it wouldn't be effective. But, if you had it there and then
there was without question a gouging of consumers, where they
were being tipped upside down and had money being shaken out of
their pockets by OPEC, by oil companies, and you deployed it, I
don't think there's any question, based upon your own
conclusions, that it would be an effectual use of taxpayer's
money, in order to make sure that there was a rectification of
a distortion of market forces.
Mr. Mazur. I guess, sir, we disagree on the interpretation
of that study.
Mr. Markey. Okay. Now, does the Department still want to
repeal the provisions of the--of EPCA, that authorized DOE to
create a regional refined product reserve, or have you changed
your policy on that?
Mr. Mazur. I understand that Assistant Secretary for Fossil
Energy testified to that effect last year. I don't think that
issue has been revisited.
Mr. Markey. So, now you're saying that you want to--you
don't even want to build it at all, is that right? Is that the
policy now with this administration, cancel it out?
Mr. Mazur. I think that's what the Assistant Secretary
testified to, but I don't know for----
Mr. Markey. Okay. Well, that's unacceptable. I mean, right
now, I'm--what I'm--you know, the Christians had a better
chance against the lions, than the consumers in the northeast
are going to have against the OPEC and oil companies under this
administration's oil policy. Now, we need a regional petroleum
reserve to protect us against market distortions and you're
telling us right now you have no intention of even revisiting
this issue. And I think that maybe you are waiting it out,
hoping spring hits early up in the northeast. But, it wasn't--
it wasn't 85 degrees up there yesterday; it was 44 when I left.
And you might get a little bit of a break, but you're only
buying time before this issue comes back to haunt you again.
Now, instead of repealing this law, why don't we just
reauthorize the test fill; that is, just do a little experiment
up there. Norman Lent, the Republican from New York, and I
passed that amendment back in 1990. Two years of the Bush
Administration, no experiments; 2 years of the Clinton
Administration, no experiments, and that legislation just
lapsed. Why don't we reauthorize it, so you can have a chance
to test? Would you support passage of legislation that
reinstituted the Markey-Lent language, which gave you the
ability to test?
Mr. Barton. And this will have to be the last question of
this round; but, if you want a second round, we'll certainly
have a second round.
Mr. Markey. Thank you.
Mr. Mazur. At this point, that's something that we would
have to take under serious consideration. I couldn't commit one
way or the other.
Mr. Markey. It's just unacceptable. Thank you, Mr.
Chairman.
Mr. Barton. The gentleman from New York, Mr. Fossella, is
recognized for 5 minutes for questions.
Mr. Fossella. Thank you, Mr. Chairman. Mr. Mazur, there is
a direct correlation between the price of a barrel and the
price of home heating oil and/or gasoline at the pump;
correct--or Dr. Cook. In other words, the higher the price of a
barrel, the higher the home heating oil----
Mr. Cook. Sure; sure----
Mr. Fossella. It's just that----
Mr. Cook. [continuing] all other things equal.
Mr. Fossella. I beg your pardon?
Mr. Cook. All other things equal.
Mr. Fossella. Or, all other things equal. Now, this issue
of the concern for the spike in prices, not on home heating oil
in the northeast, but gasoline at the pump, has been on the
table for several months now; correct? It goes back to November
1999?
Mr. Cook. I wouldn't phrase it quite that way, no.
Mr. Fossella. December 1999? There were people raising the
issue of releasing the strategic petroleum reserve back in
November and December 1999, correct?
Mr. Mazur. I think the chart that John Cook showed a little
earlier had the distillate inventories still in the normal
range in November 1999. So, I----
Mr. Fossella. There were people advocating the release of
the strategic petroleum reserves back in November and December
1999, correct?
Mr. Mazur. I don't know.
Mr. Fossella. You don't know?
Mr. Mazur. Don't know.
Mr. Fossella. Senator Shumer and others----
Mr. Mazur. I'm sorry.
Mr. Fossella. [continuing] who indicated----
Mr. Mazur. Okay, I understand Mr. Shumer did, yes; so, at
least--at least several people, yes.
Mr. Fossella. I'm just--well, that is sort of
disconcerting, because if there were--and he was just one them.
There were others, who were raising this issue. I guess what
I'm getting at is if we knew about in November of--December and
you didn't, which is disturbing, but if you didn't and we had
done something about it at that time, this quiet diplomacy that
is now being discussed, if something was done then, wouldn't we
be experiencing some relief in prices today?
Mr. Cook. As I indicated earlier, global inventories and
U.S. inventories in November were still in the normal range. a
lot of people were saying they were high then. What I tried to
convey, maybe not as clearly as I should have earlier, is that
the cuts in OPEC were beginning to cut into those surplus
inventories and beginning to show a trend from high end to
normal. Our models, everyone else's that I'm familiar with,
assumed that OPEC would cheat more, supply more over the winter
period, and that this trend would not necessarily bring
inventories down to below normal. So, although Mr. Shumer did
advocate use of the SPR at that point, the stock globally and
in the United States were not even below normal.
And just the fact that they got below normal by mid-January
did not produce the spiked price either. It was the combination
of that, with cold weather, with some factors in the market
that were pretty unusual that did that. We couldn't predict
that in November. For all we knew, the stocks would start
rising like they normally do in November.
Mr. Fossella. But with all due respect, your analysis, it
was wrong.
Mr. Cook. Absolutely. The actual----
Mr. Fossella. And the fact of the matter, there were people
advocating that somebody should step up on OPEC's toes, to
increase production, because of a simple correlation between a
price of a gallon--a barrel of crude oil and the price of home
heating oil and the price at the gasoline pump. Nothing was
done. Now, we're here today, that we should just wait until the
Secretary's diplomacy takes hold. And isn't it a legitimate
question that this should have been done 2, 3, 4 months ago, so
that rather than wait until late October, November, December,
the guy, who is filling up now, is paying $1.99 on Staten
Island?
Mr. Cook. I can't speak to what should have been done. I
can only point out, again, there's a lot of uncertainty in
these areas and no one could know how much oil OPEC was going
to actually supply over the winter. For all anyone knew, at
higher prices, they could have supplied enough, that we would
not have seen a continuation in that decline. Mr. Shumer's
scenario, one of many out there, turned out to be the one that
actually unfolded.
Mr. Fossella. Well, I guess we're not going to make
progress on that. But, let me just step aside, because I see my
time is running now, and that is what is the position of the
Department of Energy, other than waiting for these alternative
fuel sources to come to fruition, what are your official
positions, regarding the taxation on domestic oil producers,
incentives, to encourage more production in the United States,
as opposed to being dependent upon the foreign cartel and,
also, the regulatory burdens that place disincentives on
American oil producers, to--again, to bring that product to the
table?
Mr. Mazur. As part of Secretary Richardson's response to
the low oil prices of last year--as you recall, about a year
ago, the prices were $10, $11, $12 a barrel--he worked with the
domestic producers, to try and find ways to reduce their costs
of finding and producing oil. There were a number of technology
programs to transfer technology to smaller independent
producers, so they can get more out of the reservoirs that they
have available. We've, also, worked for royalty relief on
Federal lands. We have deep water royalty relief for some
projects deep in the Gulf. And the Department is working on on-
line oil and gas projects, to help get rid of some of the red
tape, at least, in that area. So, we're doing what we think are
measured responses to help domestic producers with their
regulatory burdens.
Mr. Barton. Unfortunately, the gentleman's time has expired
and I've been reasonably strict with the other members. But, we
are going to have, after Mrs. Wilson, kind of an open question
period, so that all members, who are present, if you have one
or two wrap-up questions for this panel. Congresswoman Wilson
is recognized for 5 minutes.
Mrs. Wilson. Thank you, Mr. Chairman. I was interested in
some of your testimony about allowing Secretary Richardson's
energy diplomacy to work, and interested in it for a couple of
reasons. This is--it's interesting to me that we're now
pursuing this concept of diplomacy, which some commentaries
within the last month have acknowledge that the administration
was caught napping on energy policy. And I understand that now,
as you've just testified, that the Secretary and the President
have asked you to think creatively about alternatives and that
everything is on the table, which raises a question of was
everything on the table a year ago, when OPEC announced
publicly that it was reducing its supply?
Mr. Mazur. As you recall, OPEC announced several times they
were reducing supply. There were a series of supply cuts. And
as John pointed out a little bit earlier, that the effect of
the cuts didn't really show up until, basically, the fall, in
good measure. And so, we were monitoring the situation and
looking at oil prices; but, frankly, a year ago, this committee
was concerned about prices being too low and that was one of
the areas that the Department was being tugged in.
Mrs. Wilson. When Secretary Richardson went to the oil--to
the OPEC countries, diplomacy is usually a give and take game.
What demands were made by OPEC on the United States?
Mr. Mazur. I wasn't part of that trip, so I really can't--
and I wasn't in the room with the Secretary, I really can't
answer that.
Mrs. Wilson. So, we don't know what the price is?
Mr. Mazur. Again, I wasn't there. Secretary Richardson
would have to answer himself.
Mrs. Wilson. Who--you're the head of policy, right----
Mr. Mazur. Yes, ma'am.
Mrs. Wilson. [continuing] in Department of Energy? Who is
setting up what the policy is? Who is writing the talking
points for the Secretary of Energy?
Mr. Mazur. On international issues, we have the Office of
International Affairs, that works on those, and the Secretary's
office. There are a number of people, who have worked with him
on this OPEC issue, and others, the energy diplomacy portion of
things.
Mrs. Wilson. Mr. Chairman, I would very much like to ask
that those folks come up here to testify, if we can't get
answers about what America is giving up, in return for
increased oil production. I think that really highlights the
problem of foreign dependence pretty clearly.
Mr. Barton. We're going to send written questions to the
Secretary and this certainly will be one of the questions that
we send.
Mrs. Wilson. A year ago, a section 232 investigation was
initiated, with respect to oil imports and whether they are a
threat to national security. Is that the most recent study
done?
Mr. Mazur. My understanding is that study is at the White
House for review of the recommendations of the study.
Mrs. Wilson. What were its conclusions?
Mr. Mazur. I don't know, ma'am.
Mr. Barton. Excuse me, you don't know or you can't say,
because it's still being cleared by the political officers at
the White House?
Mr. Mazur. It's being reviewed at the White House. The
conclusions of the study, I did not work on that study, so I
really don't know what the conclusions were.
Mr. Barton. Well, I want to reenforce what the gentlelady
from New Mexico is saying. I was a White House fellow at the
Department of Energy in the early years of the Reagan
administration and I worked in the Office of Policy, Planning,
and Analysis. I mean, I was low man on the totem pole. I was
way down there. But, the head of the Office of Policy,
Planning, and Analysis knew what the policies were. How can you
be a head of the policy office and with an apparently sincere
and straight face claim you don't know? I mean, that--if you're
honest--well, you're not under oath----
Mr. Mazur. Yeah, I understand that.
Mr. Barton. [continuing] but if you're being truthful, they
must not include you in too many of the policy discussions.
Mr. Mazur. I don't know how large the Office of Policy was
when you were there. It is probably well below the size, at
that point; much smaller operation, focused mostly on domestic
issues, not international issues.
Mr. Barton. All the more reason for you to know. If there
are fewer bodies----
Mr. Mazur. The section 232----
Mr. Barton. [continuing] the body at the top would tend to
be more informed on what the other bodies are doing.
Mr. Mazur. The section 232 studies, there have been about a
dozen--about 10 of them done in the past. Every single one has
concluded that the level of oil imports has threatened national
security. That sort of a finding in this study would not be
surprising. The study then goes on to have a number of--studies
tend to go on having a number of recommendations for what the
Federal Government should be doing. That's the part that I just
don't know what those recommendations are.
Mr. Barton. We're going to give the gentlelady a little
more time, because I've taken up some of your time. Would it be
safe to say that you have been briefed, in your preparation for
testimony, to tell us as little as possible?
Mr. Mazur. No, that would be incorrect, sir.
Mr. Barton. Okay.
Mrs. Wilson. Thank you, Mr. Chairman. How many barrels of
oil per day does Iraq produce?
Mr. Cook. It's been fluctuating. Lately, we have estimated,
February anyway, that it was around 2.3 million barrels a day.
Mrs. Wilson. And you expect, you hope, you, well, pray, I
suppose, that OPEC will increase its production by a million
barrels per day at the end of this month; is that right?
Mr. Cook. No, we assume that.
Mrs. Wilson. Even worse.
Mr. Cook. Well----
Mrs. Wilson. In May, the United Nations is, again, going to
consider whether it will lift sanctions on Iraq. And every time
that we come up to that decision point in the past, Iraq has
sent a little shock into the oil market. Do you anticipate
that, again?
Mr. Cook. I think based on their track record, you'd have
to assume that there is always that potential for Iraq to
disconnect, to disrupt, or suspend its shipments, when the
various phases of the program roll over.
Mrs. Wilson. Mr. Mazur, what does this do our oil
diplomacy?
Mr. Mazur. Oh, as you can imagine, it complicates it quite
a bit. When you have countries that we don't have very good
relations with, Iran, Libya, Iraq, as part of the discussion,
it's very much a complicating factor.
Mrs. Wilson. In fact, what it really means is that Saddam
Hussein now holds the cards, doesn't it?
Mr. Mazur. I don't think I'd go that far, no, ma'am.
Mrs. Wilson. He produces 2.2 billion barrels per day and
OPEC may, if we're lucky, increase production a million barrels
a day. And you don't think he's holding the cards?
Mr. Cook. It's 2.3 million.
Mr. Mazur. Out of a world production of about 75 million,
where other countries could, if they desired to, make up some
of that excess. For instance, Saudi Arabia has excess capacity
to more or less offset, if that were desirable.
Mrs. Wilson. I think what this gets to, Mr. Chairman, is
just how vulnerably we are to dependence on foreign supply and
just how weak how diplomatic approach is. Thank you, Mr.
Chairman.
Mr. Barton. I thank the gentlelady. We're going to set the
clock at 10 minutes. This is going to be an open question
period, so any congressman can ask a question. So, we got to
this up in the next 10 minutes and then go to our second panel.
Mr. Markey. This is the fastest finger round, then, okay.
Mr. Barton. This is do you want to be a millionaire, if you
push the right button.
I'm going to start it and I want to ask our two witnesses
from DOE and EIA, this model that you put on the board showed a
projected retail gasoline price increase. My question: in the
next coming months, we can't do a lot about what wasn't done 3
or 4 months ago, but we can do something about what we do the
next month or 2. How much available refined product supply is
there in the world and how rapidly do your models project it?
If wholesale gasoline prices on U.S. markets stay where they
are or go higher, then how much of that would be redirected
from Europe or Asia, come into the United States, and how
quickly would it get here? Do you understand the question?
Mr. Cook. Sort of. If the market gets very tight in the
spring and summer and needs more imports, historically, there
has been 400,000-500,000 barrel a day excess gasoline capacity
in Europe and, typically, it would take 5 to 10 cents a gallon,
in terms of higher New York Harbor prices, to attract that
extra supply.
Mr. Barton. Today on the New York market, unleaded gasoline
wholesale dropped from 96 cents a gallon to 94.9 cents a
gallon, so it's down about 2 cents a gallon. I don't have any
clue where 94 cents a gallon relates to the European market.
Where would the price have to be, at the wholesale level,
landed in New York, for the available surplus capacity of
unleaded gasoline to be redirected to the U.S. market?
Mr. Cook. Well, first of all, we get a base--a baseline
line of imports from Latin America, the Caribbean, Canada,
anyway, again, 5 to 10 cents higher in New York--New York
Harbor, 5 to 10 cents higher than, say, Rotterdam is normally
enough to at least redirect flows from those regions,
incremental flows, and attract excess European gasoline. So,
if, you know, New York Harbor is at 95 and Rotterdam is at 85,
I would anticipate some beginnings of movement.
Mr. Barton. Okay. I've got other questions, but, Mr. Wynn?
Mr. Wynn. Thank you, Mr. Chairman. Mr. Mazur, you were
saying, when we were talking about an eastern reserve, that you
did not like that approach and the administration was pursuing
other approaches involving alternative fuels: methane, ethanol,
natural gas, in substitute. The question I have is: given that
the consumers homes are basically set up to operate on home
heating oil fuel, if you will, how are you going to substitute
these other fuels that use a different mechanism, if you will,
to operate? I mean, are you going to retrofit homes? I mean,
how are we going to actually make this substitution work?
Mr. Mazur. Let's think about natural gas in the New England
area. We're seeing a number of pipe--a couple of pipelines
being built into New England, to power electric generating
facilities. You could imagine that large industrial facilities
could make use of that natural gas and get off of fuel oil, if
that is economical for them to do so.
Mr. Wynn. What about the residential consumers?
Mr. Mazur. New residential markets are--or new residential
developments will be more likely to be gas than oil. It's much
more difficult to convert existing residential developments.
Mr. Wynn. I'm going to--okay, that's where I wanted to go,
because my time is short. Senior citizens, low income citizens
in these areas that have severe weather are not likely to have
newer homes that are suitable for these alternatives. So, what
are they going to do?
Mr. Mazur. To the extent you can take pressure off of fuel
oil use by converting other sources, there should be greater
amounts of fuel oil available for them, putting some downward
pressure on prices.
Mr. Wynn. When--and this is my last question, Mr.
Chairman--when is this conversion going to take place?
Mr. Mazur. This is a long-term process. You can ask Mr.
Markey how long it takes to put pipelines in New England. It
takes a long time. It's a period of years.
Mr. Wynn. So, we're talking about a solution that is not
going to be viable within, say, the next 5 to 7 years?
Mr. Mazur. Certainly not next winter; maybe the 5 to 7
years----
Mr. Barton. The last two pipelines built in New England for
natural gas have come on line in the last year and they took 5
to 7 years to site and build, I'm told.
Mr. Mazur. Okay.
Mr. Barton. Let's go to Mr. Fossella and then we'll come
back to Mr. Markey.
Mr. Fossella. Again, Mr. Mazur, we talked before about what
we can do to--or what the Federal Government and what this
administration can do, to establish a long-term plan to
decrease our reliance upon the cartel. Several years ago, the
House and the Senate passed legislation that would have opened
a tiny portion, \1/100\ of 1 percent, the Arctic National
Wildlife Refuge to oil exploration, and the administration
vetoed it. And some of the members here today have raised it as
a possibility, as a way to decrease our reliance. Do you
believe that we should seek that as an alternative, as an
option?
Mr. Mazur. I think the administration's position is pretty
clear on ANWR. I think that the opening of that would incur
significant environment costs and that, at this point, the
administration doesn't support that at all, no.
Mr. Fossella. And that is your position, as well?
Mr. Mazur. That's my position, as well, yes, sir.
Mr. Fossella. Dr. Cook, you mentioned the OPEC, you're
anticipating a million dollar--a million barrel increase at
March 27 meeting--assuming a million. Isn't there indications
that there's about a 3 million barrel per day demand right now?
So, in light of that, will there still be a 2 million barrel
per day demand, in addition to the 1 million barrel per day
increase in production?
Mr. Cook. I'm not sure I followed you. What I think you're
saying is that our assumed million barrel a day increase is
maybe half as much as necessary to balance markets, according
to other groups that do these forecasts. Our own estimate is
that it would take 2 to 2.5 million barrels a day, as I
testified earlier----
Mr. Fossella. Right.
Mr. Cook. [continuing] to balance the market. So, that's on
the low side. Bear in mind, that's our base case, which tends
to be conservative, and it shows high prices. If OPEC actually
does increase the 2 million, then that should go a long way to
begin restoration of low inventories. Again, it's just, you
know, a starting point.
Mr. Fossella. I'm just curious, we've been there for these
countries in the past and they risk losing their sovereignty.
Doesn't it disturb anybody that we're just sort of hoping on a
wing and a prayer that these countries may come forward and
increase production? We don't look to destabilize their economy
by any stretch, but there's a legitimate demand, whether you're
in Maryland, in Massachusetts, or anywhere across the country.
Doesn't anybody in this administration have a problem with
that?
Mr. Mazur. Part of what Secretary Richardson is doing, when
he goes to meet with these leaders, is to remind them that we
have a strong partnership with them and it covers a number of
different dimensions, one of which is oil, but there are other
dimensions, as well, and that he does make clear partnerships
go both ways.
Mr. Barton. Mr. Markey, you had another question?
Mr. Markey. Yes, I do, Mr. Chairman, thank you. I just
wanted to say to the Department of Energy, you guys aren't
giving yourself enough credit in anticipating this energy
crisis. In fact, on October 6, 1999, the Department of
Energy's, Energy Information Agency forecast for this coming
winter fuel costs increases rising as much as 44 percent for
household heating expenditures. The increases were attributed
to the likelihood of a colder winter this year and dramatic
increases in crude oil prices.
How do I know that? Because, you put out that report on
October 6 and I wrote you a letter on October 7 and I got the
entire Massachusetts delegation to sign on with me, saying, in
light of what you've just said on October 6, we would suggest
exploring the use of the strategic petroleum reserve, to
ameliorate the sharp increases in home heating oil prices,
should your forecast prove accurate. And, in addition, we
requested that you ask the Department of Energy to examine the
adequacy of current home heating oil inventories at refineries
and storage tanks in the northeast, as well as other measures
undertaken by the industry. So, I sent you this letter on
October 7, based upon your public statements about what you
were anticipating this winter.
So, you're down there saying how difficult it might have
been to predict, I guess forgetting your own report and
forgetting the letter I then sent you from the northeastern
delegation asking for anticipatory action, based upon your own
report. So, I'm just, again, continually dismayed by your
attempts to, you know, leave us with the impression that you
didn't know what was going to happen.
As I see it, we have a decision made by OPEC last year, to
reduce the production by about 6 percent. That decision comes
on the heels of a year, in which prices have been at historic
lows and demand was depressed by the recession in Asia. So, oil
companies are in a mind set all through last year, where they
aren't inclined to add to their refined product inventories.
You identify that in your report. So, I don't think it takes a
Nobel prize in economics to recognize that prices were headed
up by the fall and that these price spikes would be most
sharply felt in the northeast, where families are most
dependent on home heating oil. And now, we're facing the
prospect that the same reduced supply in crude oil is likely to
result in increased gas prices at the pump by the summer peak
driving season. And what this reminds me of is that old verse,
``for want of a nail, the shoe was lost; for want of a shoe,
the horse was lost; for want of a horse, the battle was lost;
for losing the battle, the kingdom was lost.''
We now put our economy increasingly in jeopardy. The longer
we ignore the ascertainable facts, which were there on October
6, that we had to take swifter, more forceful action with the
oil companies domestically, to buildup their inventory; but,
also, with these other countries, to let them know how
seriously we were going to react to whatever action they took;
and at the end of the day, not having taken those actions, to
then take the deployment of the strategic petroleum reserve off
the table is the ultimate cruel cut to those consumers in the
northeast, because, at the least, they were left with a
misimpression that that could be used as something that could
deal with the unjustifiable non-market-based prices that were
going to be inflicted upon them.
So, again, I think that you're sitting down here with a--
you know, with this see nothing, know nothing attitude here
today; but, it was clear to me in October, just last year, that
you knew what was coming. You predicted what was coming. And my
response to you was please do something in anticipation of
those events unfolding. Thank you, Mr. Chairman, unless Mr.
Cook wants to respond.
Mr. Barton. If you want a quick response, because we've got
our second panel and I want to get to that, but give you a
chance to respond to Congressman Markey's, I thought, very well
put comments. I have to say that the constituents of
Massachusetts ought to be well served that he could reply that
quickly on a report and be as on the mark as history has turned
out that he was. I'm very impressed with that fact.
Mr. Markey. Thank you.
Mr. Cook. Mixed feelings about it. I think what I'm hearing
is that EIA did signal enough for Mr. Markey, as early as
October. On the other hand, the signal that we sent out in
October was based on two things. When you said the weather
would be colder, that assumed normal weather. We had the
previous year in 1998 warm weather. So, that was what that
reference was, that we would just have normal weather.
Mr. Markey. Was normal weather warm weather or cold
weather, as you were predicting?
Mr. Cook. The previous year, the 1998-99 winter was much
warmer than normal, so we were assuming a return to normal
weather, which would add to heating demand. The second
assumption there--nothing like what we saw in late January,
mind you; just normal weather. The second assumption was that
crude oil prices, underestimated, would rise as high as $24 to
$25 a barrel. Based on those relatively low projections, we
said the home heating oil costs would be up 44 percent.
The issue that I think we've been talking about today goes
far beyond that. We did not project $1.96 for home heating
oil--$2.12 for home heating oil. That's the part that we could
not predict, because of the cold weather and the other factors
that were in the Harbor. But the higher crude price, the normal
weather, we did.
Mr. Markey. Mr. Cook--Dr. Cook, I don't think you
understand. What you predicted was enough for me and our
delegation to write to you, to say please now take action,
because a 44 percent spike in the price of home heating oil is
unacceptable, and you did nothing in anticipation----
Mr. Cook. No.
Mr. Markey. [continuing] of that.
Mr. Cook. What you have done is take EIA out of the debate
and you have said that from your standpoint, that's a high
enough price for the issue of the SPR to be on the table. I
have no comment on that. It's not my role.
Mr. Markey. Yeah, my--I don't have a problem with you, Dr.
Cook, by the way. My problem is with Mr. Mazur, okay. No
response.
Mr. Barton. We're going to have to----
Mr. Markey. You are Paul Revere, saying, you know, OPEC is
coming, okay. Now, over here, Mr. Mazur, then, did nothing to
ensure that the United States had some kind of response that
was put in place. That's my problem.
Mr. Barton. We need to continue this dialog at a later
point. But, I do want to reinforce one thing that Congressman
Markey said, I disagree with his solution, which is using the
SPR, but I don't disagree with the fact that given all the
indicators that were at the disposal of the policymakers at DOE
and the White House, literally nothing was done. Now, that, to
me, does merit some attention, because the Clinton
Administration does have the responsibility for implementing
policy decisions and there was adequate information to predict
that a shortage was coming, that it was going to impact the
northeast unduly. And I don't see that there was any action
taken until December or January, and I think that's
inexcusable.
I do want to thank this panel. We didn't ask Mr. Parker any
questions, because we were told at the staff level that you
couldn't answer too many questions, based on pending
investigations. So don't feel like you're unloved; we just
ceded to the staff request that you be able to talk in general
terms. We will have written questions for this panel. We do
excuse you. We thank you for your personal attendance today.
We now want to call our second panel forward and we have a
number of members here that want to introduce personally some
of the witnesses. I'll call the panel generally and then I'll
yield to each member to introduce your specific witness.
We have Mr. Red Cavaney, who is the President and CEO of
the American Petroleum Institute. We have Mr. Neal Wolkoff, who
is the Executive Vice President, New York Mercantile Exchange.
We have Mr. Samuel Farruggio, who is the President of Farruggio
Express in Bristol, Pennsylvania, and he is representing the
American Trucking Association. Mr. Mark Murphy, who is an
independent producer from Roswell, New Mexico, he is here on
behalf of the Independent Petroleum Association of America. Mr.
Bob Slaughter, former staff member for this committee, who is
here as general counsel and Director of Public Policy for the
National Petrochemical and Refiners Association. And Mr. Peter
D'Arco, who is the Vice President of S.J. Fuel Company, from
Brooklyn, New York, and he's representing the Petroleum
Marketers Association of America.
I'm going to yield to Mr. Greenwood to introduce more
formerly Mr. Farruggio; then, Mrs. Wilson to introduce more
formerly Mr. Murphy; and then Mr. Fossella to introduce more
formerly Mr. D'Arco.
Mr. Greenwood. Thank you, Mr. Chairman. I want to thank you
for holding this hearing. I want to, also, particularly thank
you for responding to my request that Mr. Farruggio be able to
come--my constituent be able to come here and testify.
Sam Farruggio is the President of Farruggio Express. His
company operates out of Bristol, Pennsylvania, in my district.
It's a family owned and operated business that was opened over
80 years ago by Mr. Farruggio's grandfather. Mr. Farruggio, who
has worked in the trucking industry for 30 years, will be able
to shed some light on how the diesel fuel price crisis has not
only affected his business, but, also, that of other
independent truckers--truck owners and small trucking companies
and large fleet owners. I called Mr. Farruggio and asked him if
he would be so kind as to come to Washington and testify. I did
not warn him that he'd have to spend 4\1/2\ hours sitting,
listening to others testify. But, I hope he found it edifying.
I'm glad you're here.
I am in the midst of another hearing, another subcommittee,
so I apologize that I can't stay. But, I did want to introduce
my constituent and thank you for that indulgence, Mr. Chairman.
Mr. Barton. Mrs. Wilson, and welcome, Mr. Farruggio, to the
committee.
Mrs. Wilson. Thank you, Mr. Chairman. I'm real pleased to
have Mark Murphy here from Roswell, New Mexico, which is
outside my district, so I have no aliens in my district.
We are very pleased that Mark is with us here today. He's
the President of Strata Production Company, an independent oil
and gas exploration and production company. And as most folks
in this room know, the independent producers in the continental
United States are the ones, who are producing most of the oil.
They are kind of the wild catters and I'm real pleased. I can't
see real clearly, but Mark is usually in cowboy boots and we
love him for it.
Mr. Murphy has served as the Chairman of the United States
Department of Interior Public Lands Advisory Council, as
President of the Independent Petroleum Association in New
Mexico, and a member of the U.S. Department of Energy,
Secretary of the Energy Advisory Board. He has served on the
task force on alternative futures for the Department of Energy,
National Laboratories, which was known more widely as the
Galvin Commission, and on the task force on Strategic Energy,
Research, and Development. He is a member of the National
Petroleum Council and currently serves as the Chairman of the
Lands and Royalty Committee of the Independent Petroleum
Association of America. And we're real glad to have him here.
Mr. Barton. Welcome. And let the record show he does not
have cowboy boots on.
Mrs. Wilson. I'm really disappointed in you, Mark.
Mr. Barton. It looked to me like they're loafers.
Mr. Murphy. My wife wouldn't let me bring them.
Mr. Barton. Mr. Fossella, would you like to introduce your
witness to the committee?
Mr. Fossella. Thank you, Mr. Chairman, and welcome the
panel. I'd like to introduce Mr. Peter D'Arco from Brooklyn,
New York. He's Vice President and Chief Operating Officer of
S.J. Fuels, a third generation company that has about 5,000
clients in the New York City area. And we met several weeks ago
on Staten Island, to discuss the impact. Again, this lack of
action, as we've highlighted here today, the impact on men and
women across Staten Island and Brooklyn, the high home heating
costs, and we prayed for warm weather and it seems we got it.
So, that solves one problem, but we have others that come down
the road. So, I want to thank you for your patience today and
thank you for coming down.
Mr. Barton. Thank you, Congressman Fossella, and welcome,
Mr. D'Arco. And for you other gentlemen, who didn't have
members to personally introduce you, we love you, too, and
suffice it to say that the minority and the majority staff work
together in a bipartisan basis, to make sure that this panel
was a very balanced panel.
We're going to start with Mr. Cavaney, who is representing
the American Petroleum Institute. We will give each of you 5
minutes to summarize your written testimony, which is in the
record in its entirety, then there will be a question period.
So, Mr. Cavaney, welcome to the committee.
STATEMENTS OF RED CAVANEY, PRESIDENT AND CEO, AMERICAN
PETROLEUM INSTITUTE; MARK B. MURPHY, STRATA PRODUCTION COMPANY;
NEAL WOLKOFF, EXECUTIVE VICE PRESIDENT, NEW YORK MERCANTILE
EXCHANGE; BOB SLAUGHTER, GENERAL COUNSEL AND DIRECTOR OF PUBLIC
POLICY, NATIONAL PETROCHEMICAL AND REFINERS ASSOCIATION; SAMUEL
FARRUGGIO, PRESIDENT, FARRUGGIO EXPRESS; AND PETER D'ARCO, VICE
PRESIDENT, S.J. FUEL COMPANY
Mr. Cavaney. Thank you, Mr. Chairman and members of the
subcommittee. My name is Red Cavaney. I am President and CEO of
the American Petroleum Institute. I appreciate the opportunity
to offer our assessment on the recent oil supply situation and
on the impact of rising petroleum product prices on consumers.
America's oil and natural gas companies have a proud
history of providing this country's consumers with a reliable
and affordable supply of energy, that gives Americans the
mobility they need and the products that make their homes
comfortable and their lives more enjoyable. It is because of
this history of service that we understand the impact of rising
prices on the Nation's consumers. We find no comfort in knowing
that a number of them might be facing hardships or
inconveniences. We share your concerns for the health and
welfare of your constituents. They are, also, our customers and
our neighbors.
Research has shown that Americans know how the markets
work. They understand that with America importing some 55
percent of its crude oil, we are significantly impacted by
outside forces, whether it is OPEC or other producing nations.
We, also, know that Americans believe our member companies are
doing a good job, given this country's heavy dependence on
foreign oil, the unwillingness of our government to allow these
companies to more fully explore for oil and natural gas on
Federal lands and the non-coordinated layers of regulation that
limit refiners ability to keep the fuel flowing into America's
cars, homes, and manufacturing plants. Over regulation reduces
the flexibility refiners need to respond to this fast pace
changed world.
America's consumers are frustrated over their sense that
control of something very crucial to their lives has moved to
forces over which they have very little influence. We
understand that frustration. A stronger, more vibrant domestic
oil and natural gas industry can provide Americans a better
sense of security about their energy needs.
Price increases arising from international market
conditions have imposed hardships on consumers, particularly
those on fixed incomes, farmers, and truckers. But the American
people understand that these increases were brought about by
short-term shocks that resulted from sudden changes in supply
and demand. Prices are up now, but they will go down when
factors change. In a free market economy, we've seen time and
again that price movements ultimately create balance between
supply and demand. If allowed to work, the marketplace delivers
lower average prices over time to consumers.
Government industry can work closer together, to ease some
of the hardships and concerns faced by American consumers. We
are urging the Energy Information Administration to convene a
summer fuels conference, to evaluate the status of gasoline,
diesel, and jet fuel production and inventories. We are, also,
asking EIA to expand the scope of their winter fuels
conference, to give the agency the opportunity to share
information on winter fuel production inventories and imports
with all of the stakeholders.
The government can, also, take steps to further inform
consumers on energy market conditions. API has participated in
the Department of Energy's meetings on heating oil conditions
and stands ready to provide information on market conditions.
We will seek to develop a joint effort with DOE, to provide
consumers the best and most updated information available and
to help them find ways to better cope with the fluctuation in
prices.
The government should, also, take steps to help further
prevent the reoccurrence of the home heating oil situation. It
can increase funding for the low income housing energy
assistance program and move quickly and equitably to release
funds, and they can consider expanding SBA emergency loans to
home heating oil dealers and to truckers. Secretary
Richardson's leadership here, as this unfolded, has been very
helpful.
Government, however, should, also, take long-term steps, to
strengthen our domestic oil and natural gas industry. We can
reduce our reliance on foreign supplies and, also, exert
downward pressure on international crude oil prices, by opening
our best oil and natural gas prospects to responsible
exploration and development, many of these areas which have
been placed off limits by the Federal Government. Since 1983,
access to Federal lands in the western United States, where
nearly 67 percent of our on-shore oil reserves and 40 percent
of our natural gas reserves are located, have declined by 60
percent.
Mr. Chairman, we know that Americans have learned to rely
on America's oil and natural gas companies. We, also, know that
they want the facts about the current situation and what it can
mean for the future, especially as they face the upcoming
vacation season. That trust calls for honest answers and the
only honest answer we can offer today is that things may get a
bit tougher before they get better, but they definitely will
get better.
Because of the international market supply and demand
situation, we cannot always guarantee gasoline, diesel, and
home heating oil at prices Americans would prefer to pay. But,
we can guarantee that our companies will do all they can to
keep fuel available and to keep this country going strong.
Thank you, Mr. Chairman.
[The prepared statement of Red Cavaney follows:]
Prepared Statement of Red Cavaney, President and CEO, American
Petroleum Institute
The American Petroleum Institute (API) is pleased to have the
opportunity to present a statement on the recent oil supply situation
in the United States, and on the impact of rising prices on consumers
of petroleum products. API represents almost 500 companies engaged in
all aspects of the U.S. oil and natural gas industry, including
exploration, production, refining, distribution and marketing.
Our industry works very hard to provide consumers with the energy
they need for their daily lives. Therefore, we can appreciate your
concern about the current oil supply situation, and your desire to
lessen its impact on your constituents. I want to assure you that we in
the industry are likewise concerned. We appreciate this forum to share
with you our views about the causes of the current situation. We are
taking what actions we can to improve conditions, and also have
suggestions to offer for actions that can be taken by government and
even by consumers, themselves, to help through these difficult times.
First, let me take a moment to frame the situation. While research
and development continue on alternative sources of energy, gasoline and
diesel fuel remain the most cost-effective and prevalent fuels for our
transportation needs. To be specific, 97 percent of all transportation
is fueled by petroleum products. These fuels, and the infrastructure
built to fuel a nation of cars and trucks, allow us to get us where we
need to go. Whether we need to go to work, take a school bus, get
produce to market, or fly for business or pleasure, oil plays a crucial
role in our daily lives.
But for decades, as a matter of government policy this nation has
reduced the industry's access to some of the most promising domestic
resource areas for oil and gas exploration and development. As a
result, despite significant energy efficiency gains since the 1970s, we
have become increasingly reliant on foreign supplies of crude oil.
As the markets rise and dip, American consumers sometimes benefit,
as was the case last year when prices were at historic lows, and
sometimes suffer when prices are high, as they are now. The industry is
keenly aware of the fact that rapidly rising prices cause consumers to
pay more for their needs than they had budgeted. This means less is
available in the family budget for other equally pressing needs. People
aren't as able to take care of their families as comfortably. This is a
concern to us, as well, and we understand that consumers expect us to
do everything in our power to help alleviate these conditions. We want
to help.
I would now like to explain our perspective on the current
situation.
Just last year at this time, we were experiencing some of the
lowest prices--adjusted for inflation--for petroleum products in this
century. Crude oil was selling for less than $13 per barrel and
gasoline prices were less than $1 a gallon. Things have certainly
changed. Today, crude oil is in the $34 range--a 160 percent increase.
What caused these changes?
The simple answer is supply and demand. Worldwide crude oil
supplies have declined, as major, foreign crude oil exporters have
reduced production. These declines, in combination with increased
worldwide demand for crude oil from growing economies, have driven
world oil prices sharply higher.
Because crude oil is the largest cost component of gasoline,
heating oil and diesel fuel, prices of these fuels have also increased.
Gasoline, heating oil and diesel prices have increased by about 60
percent.
It is during times of uncertainty, such as concerns over fuel
prices, that we hear the louder voices of those who demand that
government step in to offer immediate relief. Such actions always
involve consequences, and it is important that all concerned understand
the full range of the potential consequences from any such government
involvement. All voices should be heard, of course, but these voices
should be listened to in context. In this case, for instance, we should
not lose sight of the fact that this situation is not new: prices have
risen before. Such increases are the result of complicated market
forces that operate globally as well as locally.
In addition, we should remember that the overall economic
prosperity we are now experiencing is partly due to the efforts of
moving government out of is direct involvement in major sectors of the
economy--deregulation. The United States is the envy of the world
because of its productivity and efficiency.
This is not, however, to say that the particular confluence of
events that occurred in recent weeks was not extraordinary. What it
does mean is that the world market, as well as local supply-and-demand
conditions, will occasionally create price spikes. However, as history
has shown, these variations are soon returned to a ``norm'' by the
market, when it balances supply and demand. We cannot, however, lose
sight of the fact that these price shocks have potentially dire
consequences for low- and fixed-income consumers, and action must be
taken to help these consumers.
Supply, demand and price
The price of crude oil, obviously, is the dominant influence on the
price of all petroleum products. For example, crude oil currently
accounts for approximately 50 percent of the cost of gasoline. The
current price of crude is about $34 per barrel. A year ago, the price
was about $13. That's a jump of about 160 percent.
OPEC has been a critical factor. While many market watchers may
have believed OPEC's ability to move world markets was diminished, what
we have witnessed since March of last year would belie that notion.
OPEC and several non-OPEC producers such as Mexico and Norway have
removed significant amounts of crude oil from production. Coupled with
the new increasing world demand for petroleum, especially in the Far
East, this production rollback is having a significant impact on
supply, pushing prices higher.
In the case of heating oil, the increase in demand was local.
Extremely cold weather in the Northeast increased demand for home
heating oil and forced natural gas suppliers to curtail or eliminate
deliveries of natural gas to ``interruptible'' customers.
``Interruptible'' natural gas customers usually pay lower prices for
gas on the condition that they can be interrupted, if their suppliers
need their gas for other customers such as residential users. When the
interruptibles' natural gas was re-directed to other customers, these
interruptibles switched to other petroleum products to meet their
needs, further squeezing an already demand-heavy market.
It's important to remember, too, that extreme temperatures had a
temporary impact on supply and price by increasing transportation and
delivery disruptions. For example, because there are no pipelines for
petroleum products into New England, products must be barged from New
Jersey. However, frozen rivers slowed or stopped barge traffic in many
locations in the Northeast. As a result, supplies at some northern
terminals were severely reduced. At times, roads were not much better.
In our nation as a whole, almost 75 percent of petroleum products
travel by pipeline. Consequently, the New England region is much more
vulnerable to weather impacts and fuel disruptions than elsewhere.
U.S. refiners are now implementing their driving season plans.
Refineries are turning to increases in production for gasoline to meet
the summer driving demands, since inventory must be built in advance of
use. We have reviewed production, imports, inventory and refinery
utilization statistics and believe we will be able to meet the needs of
our customers this summer.
However, the entire petroleum-products distribution system is
stretched to its limits and its flexibility has been significantly
reduced. We are wrestling with significant hurdles in the form of
increasing non-coordinated government regulatory constraints on
refinery operations. These regulations deal with gasoline sulfur,
reformulated gasoline, new-source review, MTBE and diesel sulfur, to
list a few.
The price of gasoline is, of course, influenced by world crude oil
prices--and today this country imports about 55 percent of its crude
oil. If recent reports of increased supplies by foreign national
producers turn out to be true, the increased supply will be a welcome
addition.
Inventories
Some media reports have created the impression that U.S. suppliers
have pinched supply in order to drive up price. Statistics do not
support such claims. For example, inventories for heating oil were low
earlier as a result of two and a half years of moderate weather,
coupled with the high cost of maintaining excess stocks. In fact, in
response to the 1999-2000 cold snap in the Northeast, the industry was
able to supply 17 million barrels of distillate (home heating oil) from
inventory over a three-week period--the largest amount of distribution
for a three-week period in five years. In total, nationwide inventories
were adequate. Because of the weather-related conditions and uniqueness
of the New England fuel logistics, getting inventory into that market
took time. As mentioned earlier, the cold weather slowed or stopped the
delivery of supplies in New England. Prices then rose dramatically
because of local bidding for scarce supplies. However, to the best of
our knowledge, no one went without heating oil.
Occasionally, consumers suggest that refiners should increase
inventories to better protect them against possible price spikes. While
refiners make their own decisions about inventory levels, and other
business matters, if they had increased inventories to last year's
levels, it would likely have been at greater cost to the consumer than
any savings relief they might have realized during the cold snap.
Increased purchases of crude oil would have no doubt driven world crude
oil prices even higher. Thus, increased inventories would not have
protected consumers from higher fuel prices. Increased production,
increased inventory and additional storage are all increased cost
factors.
Inventories kept available by primary suppliers and retail
marketers are not regulated. However, suppliers who fail to estimate
correctly the inventories they will need to satisfy their customers pay
a stiff penalty in a competitive market. If inventories are too low,
the suppliers lose customers to their competitors. And some of those
customers may well never return. If inventories are too high, the
suppliers bear higher costs and necessarily charge higher prices than
their competitors, eventually losing customers and risking their entire
business.
Similarly, there have been some recent predictions about gasoline
prices based on low inventories of gasoline. Inventories for gasoline
are currently lower than normal, but they are not currently at a
problematical level, based on estimates from the National Petroleum
Council. The NPC estimated in 1998 that about 185 million barrels of
gasoline inventories were needed to keep the nationwide distribution
system running smoothly. Current inventories are about 200 million
barrels.
Production
Some have alleged that refineries have restricted output. The facts
are at odds with this contention. Production of distillate fuel oil
this heating season has been higher than average and may actually set a
seasonal record. While refinery utilization is lower than last year and
lower than normal, the most relevant and important measure is actual
production--and gasoline production has also been high. Gasoline output
for 1999 was 8 percent higher than average. Gasoline production has
averaged the highest ever over the past six months. February's gasoline
production figure of 7.76 million barrels per day was the most ever
produced in a February.
Refinery management cannot and should not automatically increase
production in response to calls for increased output. Each refiner's
situation is unique and must be looked at by those in positions of
responsibility in those organizations. Refineries are complex
structures operating under high temperatures and pressures. To push
production beyond design limits may endanger the health and safety of
our employees and the communities in which they operate. Already, there
are ample incentives to increase output within safety tolerances.
Prices
Despite some recent upswings in price, today's retail heating oil
and gasoline prices have increased by less than the jump in worldwide
crude prices. According to the U.S. Energy Information Administration,
heating oil retail prices peaked at a national average of $1.86 per
gallon. They have fallen by about 40 cents per gallon since then. At
this time last year, the average retail price was 86 cents per gallon,
with crude prices about $13 per barrel. Gasoline prices have increased
from about 92 cents per gallon a year ago to about $1.50 today. That's
an increase of 63 percent compared to crude price increases of 140
percent. It would appear that retail prices not only have a direct
relationship to the spiraling worldwide price of crude, but have been
more restrained in their upward momentum.
What government can do
We are urging the Energy Information Administration to convene a
``Summer Fuels Conference'' to evaluate the status of gasoline, diesel
and jet fuel production and inventories. We are also asking that the
EIA expand the scope of the ``Winter Fuels Conference'' next fall to
give the agency the opportunity to share information on winter fuel
production, inventories and imports with all stakeholders.
The government can also take steps to further inform consumers on
energy market conditions. API has participated in the Department of
Energy's meetings on heating oil conditions and stands ready to provide
information on market conditions. Educated consumers are our best
assets. We will seek to develop a joint effort with DOE to provide
consumers the best and most up-to-date information available, and to
help them find ways to better cope with the fluctuation in prices.
In the short term, the government can also consider a number of
actions to help prevent another recurrence of the home-heating oil
situation. It can increase funding for the Low-Income Home Energy
Assistance Program and more quickly and equitably release funds; and
consider expanding Small Business Administration emergency loans to
home heating oil dealers and truckers.
We think it's imperative that Congress quickly reauthorize the
Energy Policy and Conservation Act that provides authorization for the
Strategic Petroleum Reserve and U.S. participation in the International
Energy Agency.
In the long run, government can and should also take steps to
strengthen our domestic oil and natural gas industry. Popular belief to
the contrary, the age of the American oil and natural gas producing
industry is not over. It is very much alive, and can be an even more
important asset if government were to take immediate steps to improve
access to domestic oil and natural gas resources.
We can reduce our reliance on foreign supplies and also potentially
exert downward pressure on international crude oil prices by opening
our best oil and natural gas prospects to responsible exploration and
development. Currently, many of these areas have been placed off-limits
by the federal government. Since 1983, access to federal lands in the
western United States--where nearly 67 percent of our onshore oil
reserves and 40 percent of our natural gas reserves are located--has
declined by 60 percent. Our industry works hard to supply the energy to
keep America going strong, but to continue to produce domestic oil and
natural gas, we must have access to federal and state lands.
The federal government has imposed layer upon layer of regulations
on U.S. refineries without sufficient regard as to how these
regulations impact refiners' ability to meet the full range of needs of
the American consumers. Refineries need flexibility to respond to the
fast-paced change in today's world. Overregulation reduces flexibility.
A soon-to-be proposed regulation to drastically lower the sulfur
content of diesel fuel is an example of a government action that could
have negative consequences on our ability to supply heating oil and
diesel fuel. We share the government's interest in cleaning the air.
But reductions beyond the 90-percent level we proposed stand a good
chance of further driving up fuel manufacturing costs unnecessarily,
imposing yet additional burdens on our nation's truckers and farmers.
Even with greater access and flexibility, the United States will
continue to need to rely on foreign oil supplies. Thus, it is important
that we maximize the diversity of those supplies to help ensure the
reliability of a continuous flow of oil imports. Unfortunately, U.S.
unilateral trade sanctions narrow our sources of supply, frustrating
achievement of this important objective.
In recent years, unilateral economic sanctions have increasingly
become the policy tool of choice in the conduct of U.S. foreign policy.
One of the favorite targets of these recent sanctions has been major
oil-producing countries. The U.S. currently has sanctions in place
against countries comprising over 10 percent of world oil production
and 16 percent of estimated remaining oil resources. With little
evidence that unilateral sanctions produce desired outcomes, is there
not a better way?
In short, U.S. policymakers face a dilemma. Growing supplies of
crude oil will be required to sustain world economic prosperity, and
diverse, ample foreign supplies are needed to help ensure our own
country's economic growth. The drive to impose unilateral sanctions is
an obstacle to both of these objectives.
What Consumers Can Do
While it may be easier to see what government policymakers and the
industry can do to improve the current situation, many consumers can
help lessen the impact on their budgets by embracing ways to use less
fuel. The industry will be doing its part to share advice for
conserving fuel use in the hope that some families can benefit.
Examples of the types of changes drivers can make include:
maintaining their vehicles properly, combining trips to reduce fuel
consumption from cold starts of automobiles; accelerating slowly and
decelerating rather than multiple braking to stop; and, in a two-car
family, having the family member who does the most driving use the most
fuel-efficient car. Many families will be surprised at the fuel economy
benefits they can achieve from these simple changes. While they
certainly won't offset the higher cost of gasoline, they should help
families get where they need to go at less cost until purchasing
conditions improve.
Conclusion
In closing, we share your concerns for the health and welfare of
your constituents. They are our customers. They are our neighbors. We
are as frustrated as they are by the sense that too many outside
factors control our destiny. We believe that a stronger, more vibrant
domestic oil and natural gas industry can provide Americans a better
sense of security about their energy needs.
Price increases--brought about for whatever reason--have imposed
hardships on consumers, particularly those with lower or fixed incomes.
But these increases were brought on by short-term shocks that resulted
from sudden changes in supply and demand. Just as prices are up now,
they will turn down when factors change. In a free-market economy, we
have seen time and again that price movements ultimately create balance
between supply and demand. We are confident that if we continue to
allow the marketplace to work, this balance will be maintained. And,
history would show us that the longer-term cost of the product is less
than would otherwise be the case.
America's oil and natural gas companies have a long and proud
history of providing this country's consumers with a reliable and
affordable supply of energy to make their homes comfortable and take
them where they need to go, when they want to go. Through good and lean
years, U.S. suppliers of petroleum products have kept America's
factories running and provided the fuel to move goods from
manufacturers to retailer and, ultimately, into America's homes and
offices.
It is because of this history of service that we understand the
impact of rising prices on this nation's consumers--our customers. We
find no comfort in knowing that a number of them might be facing
hardships or inconveniences. We are cognizant, too, of the concerns of
our nation's truckers and farmers, who also have been adversely
affected by these increases in fuel prices.
Finally, we recognize that you are faced with increasing demands to
address this situation. To the extent to which we can help in your
efforts to better understand the possible effects of the many various
proposed actions under consideration, we are here to assist you.
Mr. Barton. Thank you, Mr. Cavaney. We now would like to
hear from Mr. Murphy for 5 minutes, please.
STATEMENT OF MARK B. MURPHY
Mr. Murphy. Thank you, Mr. Chairman. My name is Mark
Murphy. I'm President of Strata Production Company, an
independent oil and gas exploration and production company,
based in Roswell, New Mexico. Today, I'm representing the
Independent Petroleum Association of America and the National
Stripper Well Association. These organizations represent the
backbone of the United States domestic oil and gas industry.
Mr. Barton. Would you put on the record the definition of a
stripper well, so that people don't think this is some sort of
adult-oriented hearing.
Mr. Murphy. Yes, sir. I believe that the current definition
is 15 barrels per day or less. The independent producer is the
true strategic petroleum reserve, in my opinion. We've got a
350 billion barrel reserve base in this country. And if you
look to the independents to develop it, we need four things,
and they all come under the heading of access, and its access
to land, access to capital, access to technology, and access to
skilled workers.
Now, thinking about that as a chair, a platform, you've got
four important legs to it and there's probably a couple of
cross beams there, one is regulatory reform and incentive
programs. It's always difficult to follow someone as well
prepared as Red; so, I'm not going to repeat all that he has
said, but I'm going to try and hit a few highlights.
We understand and sympathize with the pain that people are
going through due to high energy prices. Within the last 2
years, I've laid off half of my workforce and so I understand
what that means, putting people out of work. It's difficult
when you see companies and people that you've known for
decades, companies that have gone from grandparents, to
parents, to sons and daughters, close their doors.
There was an interesting question earlier in the hearing
and it had to do with why prices are so high. And one thing
that has struck me is, is that crude oil is 50 cents per gallon
when oil is $21 a barrel. At $30 a barrel, it is 71 cents, so
there's about 21 cents there. And, yet, we have seen prices
rise by as much as 80 cents to $1.
If I recall the gentleman's testimony from the Department
of Energy, he said that those things were related, as long as
all things are equal. I think that was the testimony. So, there
must be other factors, factors such as storage and
transportation and those sorts of things. And I think it's
important for people to keep that in mind, that it's not just
the price, it's getting the product to where it needs to be.
Mr. Barton. It's not the raw material price, that's what
you mean?
Mr. Murphy. Yes, sir, that's correct.
Mr. Barton. It's not the crude oil price?
Mr. Murphy. That's right. There were some other discussion,
and this is something that has troubled many of us, and this is
regards to section 232 analysis. Many in our industry called
for that about a year ago; many in this Congress supported it.
The administration has started it. We don't have an answer.
There was a similar analysis in 1993 and it concluded that
imports at this level, 55 percent or so, are a threat to
national security; yet, nothing has happened. There has been no
major policy changes by this administration in that period of
time, almost 7 years. We have heard about the 10,000
steelworkers that were put out of work. We haven't heard about
the 65,000 oil and gas producers put out of work in the last 18
months. Since the 1980's, that number is about 500,000. That's
a lot of jobs to lose and not have apparently anyone too
concerned about it, certainly anyone in the administration.
Prior to the 1986 crash, there were over 10,000 companies just
like mine. There's about 6,000 now.
This consistent lack of interest hurts our industry and our
Nation and it's got to be reversed. Now, this year, prices have
returned to about the 1997 level. Had they stayed at the 1998-
99 level for another year or 2, I would submit to you that we
would have no industry left. So when people look at prices now
and say, well, gee, they're a whole lot higher than they were
last year and the year before, they're right; but if they had
stayed at the 1998 and 1999 levels in a year or 2, there
wouldn't be companies like mine.
We import over 55 percent of our crude oil.
Mr. Barton. I hate to hurry you along, but we've got four
more witnesses. So--and if you could kind----
Mr. Murphy. Let me----
Mr. Barton. [continuing] of summarize the next minute or
so.
Mr. Murphy. You bet, I sure can.
Mr. Barton. And God knows, I would love to let you talk all
afternoon, but we need to get the other testimony on the
record. I think New Mexico is a lot like Texas, it's hard to
say hello and my name in 5 minutes.
Mr. Murphy. The National Petroleum Council has put out a
report called the National Gas Report and it goes into many of
the issues that I've talked about and I would encourage you to
become familiar with that report. It talks about the access
issues that I mentioned in the very beginning of my testimony,
and access to land is absolutely critical; access to capital is
absolutely critical; and much of that can be achieved through
simple tax reform.
We would encourage this committee and those that are
interested to spur the administration along, in concluding the
section 232 analysis. And I guess the real disconnect that I
see in the policy and one of the things that troubles me the
most is, is that we have continued to hear about how the
country must rely in the future on natural gas, and we agree
with that and I think we can get out there and find it and
develop it for this Nation. But the problem is, is we continue
to see policies that discourage that very thing, access to less
land and access to the other things that I mentioned. Thank
you, very much.
[The prepared statement of Mark Murphy follows:]
Prepared Statement of Mark Murphy on Behalf of The Independent
Petroleum Association of America
Mr. Chairman, members of the committee, I am Mark Murphy, President
of Strata Production Company, representing the Independent Petroleum
Association of America and the National Stripper Well Association. IPAA
represents the 7,000 independent oil and natural gas producers that
drill 85 percent of domestic oil and natural gas wells and produce
approximately 40 percent of domestic oil and 66 percent of domestic
natural gas. We are the segment of the industry that is damaged the
most by the lack of a domestic energy policy that recognizes the
importance of our own national resources.
Let me say at the outset that we understand the pain that high
energy prices can cause, and we sympathize with those who have been
shocked by sudden price increases in heating oil and diesel fuel. But
it is equally important to understand that a year ago we were watching
friends in the oil patch we had known for decades being driven out of
business, companies that had been handed down from grandfather to
father to son closing their doors forever. Neither situation is
acceptable. Dramatic price shifts harm everyone. We need to look for
routes to stability for both producers and consumers.
There is another fact that is frequently lost in the debate over
high heating oil or diesel prices. Crude oil costs 50 cents per gallon
when it is $21 per barrel. At $30 per barrel, it costs about 71 cents
per gallon. So, when heating oil or diesel prices soar by $1.00 per
gallon in a week, the source of the problem is not the crude oil.
Last month, it was reported that Energy Secretary Bill Richardson
said that the Administration was caught napping at the start of the
current heating oil crunch in the Northeast. Well if that's true, the
Administration must have been hibernating during the 18 months that oil
prices dropped to historic lows in 1998 and 1999.
Almost a year ago, the Administration started an analysis under
Section 232 of the U.S. Trade Expansion Act to determine whether oil
imports pose a national security threat. It has yet to be completed.
For the past two years we have heard President Clinton speak
repeatedly about his concern for the jobs of 10,000 American
steelworkers that were lost due to foreign competition. We have heard
nothing about the 65,000 American jobs lost due to low oil prices.
We met with representatives of the president when oil prices were
at their depth. We asked that the president state clearly that he
understands the value of domestic oil and natural gas production and
the importance of maintaining and enhancing it. They are words he has
never spoken. This year, as 1997 prices have returned, we now hear
voices of complaint. Recently, President Clinton was quoted as saying
that he believed oil prices were too high and that it would be in the
best interests of OPEC countries to lower prices. It is position echoed
by many in Congress.
It is this consistent lack of interest in domestic oil and natural
gas production that hurts the nation the most. Few in Washington seem
to understand that today's problems result from prior decisions by our
Government.
Let's review the critical facts facing us today.
One. it is wrong to compare today's crude prices to 1998 and 1999.
Those prices were at historic low levels. 1997 is a more appropriate
comparison.
Over the past two years the United States lived with unusually low
crude oil prices. At the depth of the crude oil price crisis, crude oil
was selling at prices--on an adjusted basis--not seen since the Great
Depression. These prices were crippling the domestic oil and natural
gas exploration and production industry. Over the eighteen-month time
frame of low prices, the industry lost 65,000 American jobs. Even after
months of higher prices, only about 7,000 of these have been recovered.
Eighteen months of low oil prices resulted in devastating reductions in
capital investment in the industry both domestically and worldwide. The
consequences of this lost investment will take years to measure as
existing wells were shut down prematurely and delays in bringing new
wells into operation will no doubt limit the potential ability to meet
expanding demand. The implications of those Depression-era prices are
not just domestic. The lost investment extended to all producer
countries.
Thus, if we are to realistically compare today's prices against a
past price, we should look to 1997 before the oil price crisis began.
Then, the economy was booming as it is now--oil prices were not a
constraint.
Two, we now import over 55 percent of our crude oil demand. Like it
or not, this is a national security issue. Our economy could well be
defined by the decisions of Saddam Hussein in the near future.
There is pending an analysis under Section 232 of the U.S. Trade
Expansion Act to determine whether the current level of oil imports
presents a threat to national security. This assessment has been made
five times before. In each instance the analysis concluded that a
threat exists. However, perhaps now more than ever, the threat is as
imposing as it was in 1973 when the Arab Oil Embargo crippled the
American and European economies. While that crippling effect required
the concerted effort of many Arab countries, today, it could
accomplished by just one country--Iraq. Why?
Clearly, Iraq's actions are driven by its own political agenda. As
it was prior to the Persian Gulf War, Saddam Hussein's objective is to
dominate the Middle East. What he could not achieve militarily in 1990,
he now seeks to achieve through the manipulation of other countries.
Today, he seeks to rid himself of the UN sanctions, to gain the ability
to control his nation's oil resources and spend that wealth how he
chooses. He uses the failed UN humanitarian aid process to gain
worldwide sympathy for the Iraqi children he prevents from receiving
food and medicine that has been purchased for them. He uses the greed
of France and Russia and China to restore and improve Iraq's oil fields
to weaken UN Security Council resolve. He uses radical Moslems to try
to destabilize his Arab neighbors' governments. He will use an oil
weapon as soon as it becomes available.
When will that be? How about two months from now.
Today, the world uses about 77 million barrels per day of oil. The
oil price crisis of 1998-99 essentially resulted in a lost year of
capital investment in maintaining existing oil production and
developing new production. As a result the world's excess oil
production capacity has diminished. Most of it is controlled by Saudi
Arabia, which has long been considered the world's swing producer of
crude oil. Estimates of this capacity vary.
Now, OPEC is grappling with increasing its production to
accommodate world demand and reaction to higher prices. But, it is
walking a dangerous path. OPEC speaks of raising production by 1
million barrels per day beginning in April. Most oil industry analysts
argue that the increase needs to be about 2.5 million barrels per day.
Some OPEC members argue that no Increase is needed now because of
traditional demand drops in the second quarter of the year. In reality,
many experts question whether all OPEC countries could increase their
production consistent with their current quotas. On March 6, both the
Financial Times and the Wall Street Journal ran articles about OPEC
capacity. The Financial Times questioned Venezuela's production
capacity. The Wall Street Journal analyzed both Iran and Iraq. The
conclusions were similar--the capacity is not there.
So, while it may be possible to increase production by 1 million
barrels per day, a 2.5 million barrels per day increase may exceed
current capacity--or can only be provided by Saudi Arabia. No one knows
for certain. Either case plays into the hands of Saddam Hussein. Iraq
currently exports about 2 million barrels per day, sometimes more. In
May, the UN again reviews its sanctions policy on Iraq. In the past,
Saddam has temporarily withdrawn production to tweak the world markets.
But this time he will be in a unique position. This time, if he pulls
his oil off the market, the market will be short. This time, it will
cause substantial price spikes, perhaps to $50 per barrel. This time,
other production cannot be instantly increased and the world will have
to grapple with Saddam's demands to remove UN sanctions and then--
maybe--he will return to the oil market.
We hear many argue that we should release oil now from our
Strategic Petroleum Reserve. We should not. It is there to respond to
supply shortages, particularly politically created supply shortages. If
we act now to use the SPR when the issue is price, it won't be
available when the true crisis comes.
Three, in 1986 we produced 8.5 million barrels/day of domestic oil;
now, production has dropped to below 6 million barrels/day.
Prior to the last oil price crisis in 1986, domestic oil production
was about 8.5 million barrels per day. By 1997, domestic production had
dropped to about 6.5 million barrels per day--a 2 million barrel per
day loss. In 1998, the Clinton Administration's energy strategy called
for a 500,000 barrel per day increase in domestic oil production by
2005--moving to a 7 million barrel per day target. Now, as a result of
the 1998-99 price crisis, domestic production has dropped below 6
million barrels per day.
Four, this drop in oil production reflects changes in investment in
the United States--a change largely due to the 1986 price crisis as
major oil companies shifted their investments out of the U.S. lower 48
states onshore.
The 1986 oil price crisis demonstrated that the United States was
the world's highest cost production area. In particular, the lower 48
states onshore is the highest cost area because it is such a mature
area compared to the rest of the world. Combined with domestic policy
changes, like the 1986 tax reform law that created the Alternative
Minimum Tax, the desirability of domestic oil development in the lower
48 states onshore dropped dramatically. As a result, the major
integrated oil companies revised their investment strategies. They
shifted their investment plans to develop large ``elephant'' prospects.
In the United States these are located offshore or in Alaska--
frequently in areas where development has been prohibited. Thus, our
own policies led to a shift in capital deployment that encouraged
foreign oil development over domestic.
Five, the role of independent producers has steadily increased
since the mid-1980s. In the lower 48 states onshore which accounts for
60 percent of domestic oil production, the independent share has
increased from about 45 percent to over 6O percent. This shift is
irreversible and represents a profound change in the character of the
domestic industry. Independent producers are primarily involved only in
the upstream part of the industry and do not have the diverse resources
of major integrated oil companies. They need different governmental
policies.
For independent producers this shift in strategy by major oil
companies has opened opportunities throughout the United States. While
most of this effort has been in the lower 48 states onshore,
independents are also moving aggressively into the offshore. At the
same time, for independents to meet the challenge, they must have
capital. Independents do not have the diverse resources of majors; they
draw their income from the upstream part of the industry: producing oil
and natural gas. Many are small business entities that draw their
capital from their current production.
For these companies domestic tax policies--the AMT, limitations on
the use of percentage depletion, constraints on intangible drilling
costs, and efforts to limit the expensing of delay rental payments and
geological and geophysical costs--constrain their capital retention and
their ability to increase production. Price stability becomes a more
critical concern to generate the ability to attract capital compared to
other investments. They differ from major integrated companies and need
policy structures that reflect these differences.
Six, independent producers account for 85 percent of wells drilled
in the United States and produce 66 percent of the nation's natural
gas.
In the United States, independent producers--with the capital to do
it and access to the resources--are the aggressive explorationists.
Their ``wildcatter'' image is not without merit. While they use far
more sophisticated tools today, independents are still willing to
develop new frontiers and rework old ones. They drill the most wells.
And, they produce most of the nation's natural gas. So, as natural gas'
role increases in the domestic energy supply mix, it is independents
who will be the mainstay.
Seven, natural gas cannot economically be supplied to the U.S.
market from outside the continental area. If it doesn't come from the
U.S., it must come from either Canada or Mexico. Currently, Mexico does
not export natural gas.
Natural gas differs from oil in one key respect--transportability.
As a liquid, oil can be loaded on ships and sent around the world. Gas
isn't as easy to move across oceans. Economically, natural gas must be
supplied in large volume in the continental area where it is found. In
North America, that means that the supply sources for the United States
are domestic production, Canada, and Mexico. Today, U.S. supplies come
from domestic production and Canada.
Eight, the National Petroleum Council's Natural Gas study estimates
that domestic natural gas supply must reach 29 trillion cubic feet per
year by 2010. Natural gas and crude oil are intrinsically related--they
are found together, they are produced together, and they require the
same industry. Without a healthy domestic oil industry, we cannot have
a healthy domestic natural gas industry, and we cannot meet future
needs.
Natural gas is a key fuel to America's future. All credible energy
studies predict the need for increased domestic natural gas use. It is
a significant task. Building to a supply level of 29 or 30 trillion
cubic feet per year by 2010 requires not just the development of new
reserves but the replacement of existing ones. It will require capital,
access to resources, technology, and a trained workforce. It will also
require a clear understanding that crude oil production and natural gas
production are intrinsically related. Physically, they exist together.
Physically, they are produced together. Economically, they require the
same industry skills, the same capital, the same workforce. We cannot
achieve the national goals for natural gas use without a healthy
domestic oil industry.
For all these reasons we should be developing national policies to
maintain and enhance domestic oil and natural gas production--but we
have not. Over the past 15 years this nation has made policy choices
that strip capital from domestic oil and natural gas production, limit
access to essential resources, aid foreign producers, and under the
guise of environmental righteousness limit logical options.
Let me address some of these.
The 1986 tax reform act stripped away critical capital
after the 1986 oil price crisis through elements like the creation of
the Alternative Minimum Tax. Some of this effect was corrected in 1992
amendments. Now Congress has embraced a series of sound modifications
to the tax code affecting independent producers. These were included in
tax bill passed by Congress last year, but President Clinton vetoed the
bill Congress and the Administration need to act jointly on these
issues.
Domestic tax policy remains an important component to the
maintenance and enhancement of domestic oil and natural gas production.
Because domestic production must compete in a world market where
foreign producer nations determine the price of oil, domestic producers
cannot define the price framework and must operate within the price
that exists. At the same time, domestic oil projects must compete for
investors against foreign projects and against other investment
opportunities. In the 1990's, their rate of return was 6 to 8 percent--
paltry given the risk and capital intensive nature of the industry and
certainly compared to the returns from many new high technology and
Internet companies. Even government-regulated sectors, like pipelines
and utilities, have typical returns between 12 and 14 percent.
It is in this context that one must look at the role of the federal
tax code. The tax code determines how much income oil and gas producers
will retain and how much capital will be available for reinvestment in
maintaining production or developing new production. It influences the
rate of return on projects and therefore the appeal of a project to
investors. Independent producers typically drill off their cash flow.
That is, they must have producing operations generating revenue to
maintain and develop properties. Historically, independents have
``plowed back'' 100% of their after tax revenues into their operations.
Thus, when their tax burden is reduced, it means more funding for
domestic production of vitally needed oil and natural gas.
Clearly, at a time when we are trying to improve national security
and when our imports of foreign oil already exceed our domestic
production, it is counterproductive to tilt the incentives for
investment to ``push'' more investment overseas, or limit its
availability in the U.S. Many other countries allow full cost recovery
before applying any income tax. The U.S. rules are already more complex
and produce an overall higher tax rate on oil and gas development than
many if not most foreign countries. Several industry analytic companies
have evaluated the investment climate in the U.S. versus foreign
countries. On the basis of business and political risk for oil and gas
production investment, the U.S. ranked 31st out of 111 countries. On
the basis of leasing and fiscal tax policies, in a ranking system where
individual states were compared to countries, the state of Texas ranked
180th. These analyses point to the problems facing investment in
domestic oil and natural gas production.
Domestic tax policy needs to be crafted to encourage the
maintenance and enhancement of domestic oil and natural gas production.
The tax bill passed by Congress last year included five key provisions
that would help retain capital for domestic production. These need to
be included in the tax code.
Similarly, the National Petroleum Council's Marginal Wells study
concluded that a marginal wells tax credit would provide
countercyclical protection to the vulnerable marginal wells that
produce about 20 percent of domestic crude oil and represent this
nation's true strategic petroleum reserve. Last year, Congress at least
appeared to be moving toward tax policies that would help the
investment climate for domestic oil and natural gas production.
But, we must be watchful. Two of the current presidential
candidates have proposed tax plans that would attack key elements of
the current tax code that provide capital to the independent producer.
A linchpin to develop gas supplies consistent with the
determinations of the NPC Natural Gas study is access to resources.
Yet, successive administrations have created offshore moratoriums to
prevent environmentally safe development of domestic resources off
California, in the Gulf of Mexico and in the Atlantic. The most
egregious of these actions was in 1998. After going through the charade
of commissioning a study of the risk to the oceans from offshore
development--a study that stated unequivocally that offshore
development was environmentally sound--President Clinton extended the
California offshore moratorium another decade.
For decades the nation has deliberated the use of its offshore
resources with mixed results. In the Gulf of Mexico where drilling and
production has been allowed, offshore development has provided
substantial oil and natural gas resources to the nation. Offshore
production now accounts for roughly 20 percent of domestic oil
production and over 25 percent of natural gas production. This
production has been both a technological and environmental success
story. On the other side of the coin, unreasonable opposition to the
offshore development of California and other areas has limited use of
these potential resources. Under the guise of environmental
righteousness, the nation is denied resources that can be produced in a
clearly environmentally sound manner.
During the 1998 Year of the Ocean activities, the Heinz Center for
Science, Economics and the Environment analyzed the history and
potential of offshore production for the National Oceanic and
Atmospheric Administration. It was unequivocal in its conclusions that
offshore production can be done and done well. Yet, the Clinton
Administration ignored this assessment as it imposed another ten year
extension to the California offshore moratorium.
For well over two decades we have debated whether to open
the Arctic National Wildlife Refuge (ANWR) Coastal Plain to oil and
natural gas development. It could yield a field on a par with Prudhoe
Bay. Development has never occurred under the guise of environmental
righteousness. Now, the latest question is whether the Clinton
Administration will use the Antiquities Act again to wall off any
development.
Debate over the use of ANWR parallels the offshore debate. The
nation is losing access to valuable potential resources that can be
produced in an environmentally sound manner. The latest question will
be whether the Clinton Administration will use the Antiquities Act to
designate the area as a National Monument to prevent its development.
On a broader scale the Clinton Administration has
consistently closed off access to national resources. In addition to
offshore moratoriums and opposition to ANWR development, it has
initiated policies to prevent access to forestland by preventing road
construction. It has denied permits on federal land. It is an attitude
that also pervades Congress. For example, the House has passed
legislation to prohibit the development of natural gas resources under
Mosquito Creek Lake in my home state of Ohio.
IPAA initiated a Section 232 request regarding the level
of crude oil imports in 1993. Despite a clear determination that the
level posed a threat to national security, the Clinton Administration
proposed no concrete policies to enhance or maintain domestic oil
production. As mentioned earlier, another Section 232 assessment is
pending. It needs to include provisions that are designed to maintain
and enhance domestic oil and natural gas production.
No Section 232 analysis has concluded that oil import levels do not
pose a threat to national security. Now is the time to recognize that
while the steps to improve energy efficiency, develop alternate fuels,
diversify import sources, and other steps are useful, they are
worthless without a strong domestic oil and natural gas production
industry. Without sound policies that support domestic marginal well
production, the nation loses its true strategic petroleum reserve.
Without sound policies that support domestic natural gas production,
the nation's most plentiful ``alternate'' fuel will never meet its
potential.
The Environmental Protection Agency develops policies that
undermine the domestic resources. For example, after initially opposing
an erroneous court interpretation of the scope of underground injection
control under the Safe Drinking Water Act, the EPA now opposes
legislation to structure the law as it was originally intended, EPA's
original position before the court.
The 11th Circuit Court of Appeals in the LEAF v EPA case
erroneously interpreted the scope of the Safe Drinking Water Act's
Underground Injection Control (UIC) program. It ruled that the UIC
program applied to the injection of fluids for the purpose of
hydraulically fracturing geological formations to stimulate reservoirs
for oil and natural gas production. EPA argued against this
interpretation of the law in the case, a case where no environmental
damage was shown. It lost. Subsequently, the State of Alabama was
threatened with the loss of its primacy to run the UIC program for coal
bed methane operations. EPA compelled Alabama to require the use of
federally certified drinking water in hydraulic fracturing operations
at substantial cost with no environmental benefit. However, EPA now
opposes legislation that would correct the erroneous court decision.
If this Court interpretation is allowed to stand, it could threaten
normal safe hydraulic fracturing operations at all oil and gas
operations in all states. Congress must act. LEAF has filed another
action in the Circuit Court seeking a review of the EPA action in
Alabama.
Implementation of the limited emergency oil and gas loan
guarantee program has been so constrained that no loan guarantees have
yet to be provided. Yet, in 1998 when oil prices were at their lows,
the United States was sending funding to Russia and Mexico to develop
their oil industries. We have shown more interest in a pipeline across
Turkey than preserving domestic resources.
Last year after considerable delay, Congress passed the Emergency
Oil and Gas Loan Guarantee Program. While the congressionally imposed
restraints on the program make it complicated to implement, the
interpretation of the law by the Loan Guarantee Board has so limited
the program that it has scared off many potential banks and producers
from seeking the financial assistance. To date the first guarantee has
yet to be granted and less than 25 applications have been received.
At the same time many independent producers are frustrated that
while Congress was delaying action on this program and making it too
constrained, while the Administration was further limiting its
application, the United States was sending funding to Mexico and Russia
to enhance their oil production operations during the depths of the oil
price crisis.
The Strategic Petroleum Reserve has been manipulated for
budget tricks. Now, there are persistent efforts to use it to influence
prices rather than when supplies are in jeopardy.
IPAA has consistently sought two objectives with regard to
strategic reserves of petroleum. First, the nation needs to recognize
the role of its marginal wells as a true strategic petroleum reserve
that produces crude volumes approximately equal to imports from Saudi
Arabia.
Second, the Strategic Petroleum Reserve was created to deal with
supply disruptions of crude oil; it should not be used to influence the
market. IPAA objects to selling oil for budget purposes or releasing
oil to affect prices.
As a nation we must define policies that recognize the ongoing
importance of domestic oil and natural gas supplies. We cannot continue
the current path of trashing crude oil as environmentally evil and
banking on natural gas to meet future fuel needs.
We cannot continue a policy of reliance on foreign oil at prices
that destroy the domestic producer. It will place our energy and
economic future in the hands of foreign governments--first because we
will lose our domestic oil resources, second because we will not be
able to develop our domestic natural gas.
Instead, we must work together--both here in the United States and
with foreign producer nations--to develop a stable oil and natural gas
development framework. The next several months will test our resolve.
Price pressures will continue. The Section 232 action will be
completed. Policymakers can establish a sound framework for the future
of domestic energy, or they can continue the failed policies of the
past. Let's hope for the right choice.
Mr. Barton. Thank you, sir. We now want to hear from Mr.
Neal Wolkoff, who is the Executive Vice President for the New
York Mercantile Exchange, for 5 minutes, please, sir.
STATEMENT OF NEAL WOLKOFF
Mr. Wolkoff. Thank you, Mr. Chairman, for the invitation to
appear. I'd like to take a moment of my time to describe NYMEX,
the New York Mercantile Exchange. It was described in a rather
colorful way a bit earlier, but I'd like to expand on some of
the things said about us today.
We occupy a fairly unique position, vis-a-vis the witnesses
that have testified today before this committee. We are a
federally chartered and regulated commodity future exchange. We
are a market place. We are completely price neutral and have no
vested interest either in higher or lower energy prices. Our
markets in energy include crude oil, heating oil, unleaded
gasoline, and natural gas, and the prices determined at NYMEX
are arrived at in a completely open and competitive auction
market. Important to note, it's a zero sum market. So for every
dollar that someone earns at NYMEX, another participant loses
that dollar, as well.
Our prices are accepted worldwide as benchmarks for the
various commodities that are represented. As part of our
responsibilities in operating a public marketplace for
strategically important commodities, we are required by the
Federal Government to be self regulating. NYMEX oversees its
markets, to ensure that NYMEX's prices represent supply and
demand fundamentals; in other words, we monitor our markets, to
assure price integrity and to protect against manipulation, and
the exchange provides a structure of rules and policies that
put teeth into the surveillance efforts.
What we have seen in energy prices since the beginning of
last year is a tripling of crude oil prices. As the feed stock
for refined products, including gasoline, heating oil, and
diesel fuel, sharp increases in crude have resulted in similar
and very noticeable price increases in those fundamentally
important products.
I'd like to summarize, very briefly, what our findings are
about the fundamental of these and to conclude in sum that the
increases in price that we have seen are due to fundamentals of
supply and demand and not due to price manipulation or any
other artificial pricing. As has been said before, there has
been a reduction in OPEC production. It's a 12 percent cut in
production. But what hasn't been said, and I think it's
important to offer some perspective just on how sensitive the
oil pricing mechanism is and what an inexact science it is to
predict oil pricing. We've seen as a result, a 4 million barrel
a day reduction in crude production by OPEC, out of total world
production of nearly 80 million barrels, a tripling of energy
prices over the last year. It is a very price sensitive market,
extremely sensitive to the slightest provocations of changes in
supply or sudden changes of demand.
Earlier this year, we had a 13 percent increase in heating
oil demand, in the first 6 weeks of January and February,
mainly due to cold weather. That, on top of a 12 percent cut in
production, was, in many respects, behind the spike that we saw
in the northeast. Gasoline demand nationwide is matching last
year's demand, which was at a record, and last year's supply
was plentiful and prices were low. We've seen that price has
not yet been a catalyst for any meaningful conservation, a
word, by the way, that I think I've just mentioned for the
first time today.
Inventories of crude and products reached at least 10 year
lows a few weeks ago. Refinery utilization, which means how
much available refinery capacity is being used, is well below
the average over the last 5 years. A significant cause in
something that hasn't been mentioned today has been unexpected
maintenance in many important refineries during the month of
January. But, certainly, the suddenness in the rise of crude
and the expectation that those high prices are temporary have
not encouraged high inventories or maximum refinery
utilization.
What is not a factor, I would like to add, is market
speculation. There is overwhelming commercial use of the
marketplace. I would like to ask what the market would be like
without price transparency in times of shortage of supply. As
I've said, it's a very fragile market and without transparency,
prices would be determined in a non-public way. I think we
would have seen even higher prices than we did.
In addition to high prices, we have, also, been dealing
with price spikes, that is one actual and one, I think, to
which a great deal of fear has been instilled in the public
mind about coming times. I think it's important just to
understand what a price spike is and why it happens, and I
would briefly like to touch on that. It starts with low
inventories and added to that, a sudden change in demand.
Inventories normally cushion price impacts from demand and when
the inventories are low, we can sometimes see price spikes, an
inventory shortage causing State price volatility.
Typically, these spikes are painful, but short lived, and
the marketplaces tended to quickly normalize the situation, as
the earlier chart shown by the EIA demonstrated. In answer to
the chairman's question, typical fuel oil prices today are
between $1.10 and $1.20, at the retail level.
And my final comment, on the SPR, the issue of release and
the issue of SPR swaps--I almost said swipes and perhaps that
would have been more appropriate. We are fundamentally opposed
to that and see it as an opening of a door to market
intervention that, in the past, is shown to be completely
unsuccessful. Thank you.
[The prepared statement of Neal Wolkoff follows:]
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Mr. Barton. Thank you, Mr. Wolkoff and we'll have questions
for you in the question period. Now, I would like to hear from
Mr. Bob Slaughter, who is representing the National
Petrochemical and Refiners Association. Mr. Slaughter?
STATEMENT OF BOB SLAUGHTER
Mr. Slaughter. Thank you, Mr. Chairman. I'm Bob Slaughter,
General Counsel for NPRA. We represent refiners, who own about
98 percent of the U.S. refining capacity.
NPRA shares your concern about the supply and price of
petroleum products. We and our members have been working with
the Secretary of Energy and other officials to mitigate the
adverse effects of recent supply problems in the northeast. The
Secretary has asked for our members' help in maximizing the
output of home heating oil and diesel and in rescheduling
discretionary maintenance and repair, which could interfere
with refinery output. Of course, that can be delayed only when
safety considerations are not compromised. Refiners are
responding to this and other requests and our cooperation has
been acknowledge. We will continue to do so.
We agree with the general consensus that the northeast
supply problems resulted from a sudden cold snap, the weather,
and, also, from OPEC's reduction of supply. Another factor was
the triggering of natural gas interruptible contracts. Frankly,
the OPEC problem is beyond NPRA's control, but we support
efforts to convince OPEC and non-OPEC participants that an
increase in crude supply is necessary and warranted. Refiners
and consumers will benefit from additional crude supplies.
Crude and product inventories seem to be on the increase
and that's a good sign. Stable supplies of crude and
predictable prices are important to us, too. Refiners are,
also, aware of concerns that gasoline supplies for this year
may be under pressure, as a result of the reduction in crude.
We would have to say that these concerns are speculative at
this point. Refiners excel at meeting consumers demand for
petroleum products and are focused on the need to provide
gasoline to consumers. We are confident that continued reliance
on market forces will best help them to accomplish this task.
We are looking at all the policy options that have been
discussed here and elsewhere, but we want to mention that the
U.S., not long ago, experimented with an energy policy
characterized by widespread government intervention in energy
markets. This was found to be inefficient and costly. After
several years of experience with that model, it was traded for
a policy that relies on market forces to balance supply and
demand. Reliance on the market has its rough spots and we are
experiencing one at present, but history suggest the
alternatives are worst. Also, Mr. Chairman, we support your
reluctance and DOE's reluctance to tap the SPR for a temporary
supply problem. The SPR is a strategic asset and is meant to
address more critical situations than this.
It does seem the post examination of some policy options
may help to avoid future supply problems. During the decade
just past, refiners faced an unprecedented level of
environmentally related investments in their facilities. The
industry spent $50 billion to comply with stationary source
controls alone in this timeframe. Perhaps, as a result, the
average return on capital for the industry, for 1990 to 1997,
was 3 percent. This does not compare favorably with the
passbook savings rate at the local bank.
We now face another round of large environmentally related
spending in this decade. The chart before us shows the
environmental programs for which investment will soon be
required. Those that can be estimated, at this point, add up to
more than $15 billion in new investment, and this does not
include needed investment to maintain and expand current
operating capacity to meet demand.
We're not here to seek any moratorium or a roll back of
environmental progress. On the contrary, our industry has an
excellent record of environmental achievement. Between 1980 and
1996, air emissions from refineries declined by 73 percent and
there is more to be done. But, these programs do come at a cost
and we urge the subcommittee to review the impact of
perspective environmental proposals on a supply of petroleum
products. We can go too far, too fast. This is especially true,
if we lose refineries and capacity.
And we especially want to urge the subcommittee to examine
the upcoming diesel sulpher rulemaking, which will impact both
diesel and home heating oil supply. EPA seems ready to support
an unreasonable level of sulfur reduction, which could endanger
future diesel and home heating oil supplies, as well as
refinery viability. We believe that the industry has proposed a
more reasonable and equally effective approach.
I want to thank you for the interest of the subcommittee
and I look forward to responding to your questions.
[The prepared statement of Bob Slaughter follows:]
Prepared Statement of Bob Slaughter, General Counsel and Director of
Public Policy, on behalf of the National Petrochemical & Refiners
Association
Good morning. My name is Bob Slaughter. I am General Counsel and
Director of Public Policy for the National Petrochemical & Refiners
Association (NPRA). I am very pleased to be here this morning to
address the refining industry's perspective on the fluctuations in
crude oil prices and supplies over the past 12 months.
NPRA's membership includes virtually all U.S. refiners, as well as
petrochemical manufacturers using processes similar to refineries. Our
members own and/or operate almost 98 percent of U.S. refining capacity.
NPRA includes not only the larger companies, but also many small and
independent companies.
overview
Today Americans have the benefit of a highly competitive refining
industry that welcomes challenges and which produces quality supplies
at market prices. Price fluctuations are driven by many factors that
influence supply and demand in a competitive oil marketplace. The
fluctuations which we have seen lately are the result of many events,
some of which have occurred far from our shores.
In addition, our industry is currently confronted by many
environmental challenges from state and federal regulators, which we
plan to meet. However, contrary to popular belief, the refining
industry's resources are limited and the costs of these upcoming
regulatory initiatives are high.
I would like to review for you (1) what we see as some of the
causes of these recent fluctuations, (2) NPRA activities with Secretary
Richardson and the Department of Energy, (3) supply and distribution
challenges which we see ahead for the refining industry, and (4) some
future steps which we believe may be appropriate.
causes of price fluctuations and status of current crude oil markets
Early in 1999, a ``glut'' of oil on the world oil market drove the
price of a barrel of oil down sharply. In February 1999, a barrel of
crude oil was being sold for an astonishing $11. This was the result of
two major factors, 1) reduced demand in Asia and to a lesser extent
Europe, and 2) increased production in the Western Hemisphere. However,
beginning in April, 1999 the price for crude oil began a consistent and
steady increase, with a barrel of oil today (March, 2000) selling for
around $30. A few events can be identified as contributing factors to
the current price scenario. First, OPEC and several other exporting
nations, in response to the devastatingly low price of crude oil during
the 1998-1999 time frame, began to reduce the supply of oil to the
world market by cutting production. This decrease in production
coincided with a rejuvenation of the sagging Asian and European
economies which increased the demand for crude oil on the world
markets. In addition, the U.S. experienced a colder than normal late
winter in 2000, especially in the Northeast, adding a greater than
expected demand for heating oil. The reality of all of these factors is
that the world is now consuming around 2 million barrels more than it
is currently producing.
refineries are working with the department of energy
February 9, 2000 Meeting with Secretary Richardson
On February 9, 2000, NPRA member company representatives and staff
met with Secretary Richardson regarding the current problems with
heating oil supplies in New England. Refiners were encouraged to take
all steps possible to increase the supply of heating oil and diesel
fuel to the affected region. It was also suggested that routine
maintenance and turnarounds at refineries be delayed where feasible and
safe, in order to maintain distillate output. Insofar as these
activities are consistent with safety and sound operating practices,
some refiners have agreed to consider rescheduling minor repairs in
order to maximize distillate supplies to this region. However, it must
be stressed that these activities will only take place provided all
necessary safety concerns are met.
February 16, 2000 Department of Energy Home Heating Oil Summit
On February 16, 2000, NPRA attended the Department of Energy's Home
Heating Oil Summit in Boston, Massachusetts. Both Secretary Richardson
and NPRA told the Boston meeting that the refining industry is working
with DOE and others to respond to the current situation. In addition to
the meeting with the Secretary, several NPRA member company
representatives have provided the DOE with private information in an
effort to help the Secretary and the Department of Energy assess the
current situation and the near-term supply situation as he evaluates
various possible responses. Refiners have also confirmed to the
Secretary that efforts to ensure adequate production of heating oil and
diesel fuel have been underway for weeks and are continuing. Because of
competitive considerations we asked our members to deal privately and
directly with the Secretary's office and his distillate supply task
force, and we know that many of our members have done so. We anticipate
continued contact between our members and the Secretary's office on
this subject.
supply and distribution challenges ahead for the refining industry
The current predicament again reminds us that the U.S. either
deliberately or inadvertently has followed a national policy which, at
times, doesn't pay sufficient attention to the question of supply. This
is most often true in the area of environmental policy. The U.S.
frequently pursues overly expensive environmental restrictions without
looking for equally effective but less costly alternatives. The
inevitable result is situations such as that which we are confronted
with in the Northeast. The refining industry now faces extensive new
Clean Air Act regulations that will take effect in the near future.
These include requirements both for control of refinery emissions, New
Source Review (NSR), and for the reformulation of gasoline to remove
sulfur and selected "air toxics". Refiners are also currently making
the transition into RFG II as required by the 1990 Clean Air Act
Amendments. It seems certain that in addition that EPA will require the
reformulation of diesel fuel, and it is likely that Congress or EPA
will consider proposals which require the phase-down or even
elimination of MTBE from gasoline. Attached is a chart titled,
``Cumulative Regulatory Impacts on Refineries: 2000-2010,'' reflecting
these requirements in more detail. This chart reflects the importance
of the need for policymakers to begin working together with industry to
balance the environmental concerns of the country with consumers' need
for an adequate supply of petroleum products. I would like to briefly
cite some of the environmental rulemakings the refining industry faces.
New Source Review (NSR)
Under the Clean Air Act Section 111(a)(4) and EPA's regulations,
NSR is triggered by any ``physical change or change in the method of
operation'' of a source that increases its emissions by a significant
amount. If a physical/operational change does not itself significantly
increase source emissions, or if the source ``nets out'' the change by
offsetting emissions reductions in other places, then, under the law,
NSR does not apply.
NSR is one of the most complicated regulatory programs ever
created. EPA has recognized this and initiated the reform process to
simplify and rectify the program. EPA's current approach to NSR
applicability makes it extremely difficult for refiners to determine
when NSR permitting and controls are required and leaves refineries in
enforcement jeopardy unless they consider NSR for any and all
operational changes. As a result, the program is an untenable burden on
state permitting authorities and refineries and threatens their ability
to implement Congress' future environmental goals in a timely manner.
The end point of EPA's current position is universal NSR. However,
no industrial economy could function if every change to a factory
required a permit before construction could begin. This will be
particularly burdensome for refineries given the operational changes
necessary to comply with the blizzard of new fuel reformulation and
stationary source regulations. EPA recognized that Congress did not
intend universal NSR in its 1996 proposal for NSR reform, however EPA's
new approach is achieving just that.
Tier II Regulations
EPA's recently concluded rulemaking on the Tier II gasoline program
is an extremely ambitious, high-stakes approach to reducing sulfur in
gasoline. It requires that refining industry to make unprecedented
investments in improving technology to meet the rule's timing
requirements. The final Tier II rule will require the refining industry
to invest as much as $8 billion in order to comply with a new 30 ppm
gasoline sulfur standard effective 2004-6. Conservative estimates have
stated that the cost of gasoline will rise 5 cents per gallon in
response to these costs. This doubles the refining industry's recent
annual environmental expenditures. Expected requirements to reformulate
diesel fuel could increase these costs by as much as $4 billion, or
more, depending on the extent and timing of sulfur reduction.
Diesel Fuel
Another prime example is an upcoming EPA regulation affecting
diesel fuel. Truckers and others who are reliant on diesel supplies
have recently protested about disruptions in the supply and price of
the product. At the same time, EPA is preparing to propose a regulation
drastically reducing sulfur levels in diesel fuel. NPRA is committed to
improving the environmental performance of fuels, and we have endorsed
a reasonable reduction in diesel sulfur. However, all indications are
that the EPA proposal goes far beyond anything that could be called
``reasonable.''
EPA is set to propose a severe reduction in the on-highway diesel
fuel sulfur standard from a cap of 500 parts per million to 15 parts
per million. The agency has conducted no analysis of the impact of this
reduction on diesel supply or price or on the viability of the U.S.
refining industry. NPRA has told the agency that a sulfur cap of 15 ppm
will severely impact refiners, resulting in the reduction of U.S.
refining capacity. We think that it will severely reduce the available
supply of diesel, and that heating oil and gasoline supply will also be
affected if marginal refineries close, or elect not to produce on road
disels. Please note that the diesel requirement would take effect at
the same time as a 90% reduction in gasoline sulfur. Together these
initiatives could cost the refining industry roughly $12 billion. And,
the process and operating changes are not the same for gasoline and
diesel--synergies do not exist between the two.
Reducing diesel fuel sulfur content to the level under
consideration by EPA poses difficult technical and engineering
challenges for the refining industry and imposes significant capital
requirements and operating costs. There are no obvious solutions or
inexpensive means to accomplish this level of reduction, and the
technical capability to achieve very low sulfur levels is in question
for many refineries. Very low diesel sulfur levels may also lead to
other unexpected problems or unintended consequences, such as
reductions in energy content, lubricity degradation, and susceptibility
to contamination problems at the refinery and terminals.
As this rulemaking goes forward, policymakers must be sensitive to
diesel supply implications, and the availability of technologies
capable of meeting regulators' objectives. We must guard against
unreasonable requirements which would threaten the viability of
refineries, and cause market disruptions in the flow of critical energy
products to consumers.
Urban Air Toxics
Yet another example of challenges facing the refining industry can
be found in EPA's plans to regulate air toxics. Section 202 (1) of the
Clean Air Act directed EPA to complete a study of toxic air pollution
from mobile sources, including both vehicles and fuels by May 15, 1992
and issue final air toxics regulations by May 1995. The study was to
focus on air toxic emissions that posed the most significant risk to
human health. EPA was delayed in completing the study and issuing air
toxics standards. It is now under court order to propose regulations by
April 2000, with a final rule by December 2000. It is likely EPA will
propose stringent new air toxic standards for both conventional
gasoline and reformulated gasoline (RFG) and EPA will issue these new
toxics standards as part of its Integrated Urban Air Toxics Strategy.
It is expected that EPA will focus on benzene in gasoline and is
currently seeking information and data from industry in order to make a
cost effectiveness determination of possible benzene control options.
secretary richardson is correct not to tap the strategic petroleum
reserve
NPRA commends the Secretary of Energy and the Administration for
their continued disinclination to tap the Strategic Petroleum Reserve
(SPR). The SPR is a designed to be available in major supply
emergencies when our national security and economic prosperity are at
stake. It is a strategic asset intended to counteract severe crude oil
supply disruptions such as occurred during the 1970s.
Use of the reserve should be based only on a Presidential finding
that implementation of a drawdown plan is required by a disruption,
originally stipulated by the Energy Policy and Conservation Act of
1975. The concept of using the reserve to influence prices should be
rejected as impractical. Using the SPR to manipulate prices would both
politicize this asset and render it less useful for the purpose for
which it was originally designed. In addition, logistically, by the
time the SPR crude oil was released, transported, refined and delivered
to customers, the current situation and certainly the winter season
would be over.
future steps
NPRA and its members urge federal and state policymakers to review
the current situation and events leading up to it for ways to avoid or
at least minimize the possibility of future price and supply upsets.
Unless there is rational, coordination of pending and future
regulations there is a serious threat of supply disruption and price
swings. As was mentioned earlier, this can in part be accomplished by
rethinking the current U.S. policy regarding production of crucial
energy products such as heating oil, diesel and gasoline. We also
support the Administration's attempts to urge OPEC and other suppliers
of crude oil to consider providing additional allocations of oil to
U.S. markets. Renewed international economic growth coupled with
continuing strength of the U.S. economy may warrant increased crude oil
supplies. Consequently, refiners may need access to more crude oil in
order to meet projected strong demand for gasoline during the upcoming
driving season. We also need to guard against a repeat problem with
heating oil supplies if untimely ``cold snaps'' occur during the next
and subsequent winters. Finally, as a nation, we must work to promote
and develop policies that focus on continued environmental progress
without reducing the supply of petroleum products needed for a healthy
economy.
conclusion
In the past decade the refining industry invested more money in
environmental improvements than the total book value of refining
assets. We have been asked to continue significant environmental
investments, and we will do so. We ask, however, that policymakers pay
close attention to the scope and pace of environmental regulations.
Trying to go too far too fast will result in market disruptions which
are not in the best interests of consumers or refiners. We hope that
the Congress will assist us in addressing these concerns. NPRA believes
that even with its occasional (but temporary) shortcomings, market
forces remain the best foundation for U.S. energy policy.
[GRAPHIC] [TIFF OMITTED] T2977.023
[GRAPHIC] [TIFF OMITTED] T2977.024
Mr. Barton. Thank you, Mr. Slaughter. We have a pending
series of votes on the floor, we have two votes. So, what I am
going to try to do is let Mr. Farruggio and Mr. D'Arco give
your testimony. Unfortunately, I don't think we're going to be
able to give you oral questions, unless you want to wait around
until 4 or something, and I doubt that you're going to want to
do that. So, we'll hear from Mr. Farruggio, Mr. D'Arco, and
then we'll release the panel and send you written questions.
We'll, also, try to do an informal brown bag seminar, like
we've done in the past. So maybe if you, personally, can't
come, somebody from your associations can come and members can
come in and we can have an off-the-record discussion, because I
would really like to spend some time. Unfortunately, these
votes are going to make that impossible. So, Mr. Farruggio, and
then we'll hear from Mr. D'Arco.
STATEMENT OF SAMUEL FARRUGGIO
Mr. Farruggio. Thank you, Mr. Chairman. I am Sam Farruggio,
President of Farruggio Express. I want to thank you for
allowing me to testify before this subcommittee on diesel fuel
crisis that is devastating my industry. I would, also, like to
express a special thanks to Representative Greenwood for
allowing me to share my thoughts.
Farruggio Express runs over 100 trucks in the northeast,
operating out of five terminals located in Baltimore;
Harrisburg; Allentown; Bristol, Pennsylvania; and Cliftwood,
New Jersey. We, together with our independent contracts, total
over 175 people counting on Farruggio to provide a living for
our families.
My purpose today is to express my concerns for the industry
I've worked in for 30 years. I am here to represent everyone
from the independent truck owner, to the largest fleet owner,
in what has become a battle to survive. Before I go into
specifics on how the diesel fuel crisis has severely impacted
by company, let me give you a little background on the trucking
industry.
Trucks haul nearly every commodity in the United States.
Essentially, if you bought it, a truck delivered it. There are
over 9.6 million people employed in the industry today. Trucks
haul 60 percent of the annual freights or tonnage. Eight-one
cents out of every dollar spent on transportation goes to
trucking. An astonishing 70 percent of the communities in the
United States get their goods solely from trucks. The truck
industry--the trucking industry is primarily composed of small
businesses. Out of the hundreds of thousands of trucking
companies running in the country today, 80 percent of them
operate 20 or fewer trucks. These are companies that can be
wiped out from this unbelievable surge in fuel costs.
According to the American Trucking Association, on average,
trucking companies have profit margins of only two to 4
percent. So as diesel fuel prices jumped over 50 cents a gallon
in the last year, most small trucking companies have seen their
profit margins go from the average of two to four, to nothing.
In fact, many small carriers are losing money on each and every
load they deliver.
Behind labor, fuel is typically the second most important
input for the trucking operation. As diesel fuel prices rose
from an average of 96 cents a gallon a year ago, an average of
$1.49 today, many of my colleagues and competitors have had
to--had difficult times in keeping their trucks on the road. I
know many are now at the breaking point. If the industry does
not see some relief now, there will be significant numbers of
carriers going out of business. This will be detrimental to our
economy.
To put some perspective on just how serious the situation
is, let me tell you what my company has gone through recently,
by comparing February 1999 fuel costs, to those of February
2000. In February 1999, we consumed 50,000 gallons of diesel
fuel, with an average cost of $1.04 a gallon, totaling for
$52,000. In February of 2000, we purchased the same number of
gallons, 50,000 gallons, but with an average price of $1.82 per
gallon. It's a monthly cost of $91,000. The increase was
$39,000 in 1 month. We traveled the same mileage, delivered the
same product, costs us $39,000 more to do it.
Farruggio is a family owned and operated business that was
opened over 80 years ago by my grandfather. We have survived
many a crisis in the past and I feel confident we will see our
way through this current situation. But, as in the past, I can
guarantee that many other companies, some small and some
larger, will not make it. Over the past 2 months, we have seen
many independent contractors go out of the business. We're
already in a period of a driver shortage, but after years
within the industry, these drivers are forced to look for other
types of work.
A good friend of mine in Allentown operates nine trucks. He
is $15,000 behind in his payment to his fuel supplier. He will
be forced out of business, unless we can make something happen
to correct this injustice.
The independent contractors have shown their frustration.
Recently, they have shut down the ports of New York, New
Jersey, Philadelphia, Baltimore, and Miami, at various times.
We have seen the fuel price increase as much as 15 cents in 1
day. Some days, the pump prices change three times. What will
you do to correct this? You cannot act fast enough.
The current Department of Energy's statistics for the
central Atlantic region shows the average fuel price at $1.60.
Yet, in Philadelphia, the pump price is $1.79 to $1.89. Why is
there such a large difference?
The diesel fuel crisis is a disaster to the trucking
industry. The government reacts over night to most natural
disasters; yes, we are in the third month of this crisis. The
news media says the U.S. economy is controlled by the Federal
Reserve. I beg to differ, at this point. I fear that it will
take the country coming to a complete stop before we see some
relief.
Most food stores hold three to 4 days supply. When there is
not a loaf of bread in the store, not a gallon of milk for
miles, and not nearly enough truck drivers to----
Mr. Barton. I hate to interrupt you, Mr. Farruggio, but
I've got 6 minutes to vote----
Mr. Farruggio. Okay.
Mr. Barton. [continuing] and I still need to let Mr.
D'Arco----
Mr. Farruggio. We thank you for this opportunity.
[The prepared statement of Samuel Farruggio follows:]
Prepared Statement of Sam Farruggio, President, Farruggio's Express
Mr. Chairman and Members of the Subcommittee, I am Sam Farruggio,
President of Farruggio's Express in Bristol, PA. I sincerely appreciate
the opportunity to testify before this subcommittee on the diesel fuel
crisis that is devastating my industry. I would also like to to express
a special thank you to Representative Greenwood for allowing me to
share my thoughts. Farruggio's Express runs over 100 trucks in the
Northeast operating out of 5 terminals located in Baltimore, MD,
Harrisburg, PA, Allentown, PA, Bristol, PA and Cliffwood, NJ. We,
together with our independent contractors, total over 175 people
counting on Farruggio's to provide a living for our families. My
purpose today is to express my concerns for the industry I have worked
in for 30 years. I am here to represent everyone from the independent
truck owner to the largest fleet owner in what has become a battle to
survive.
Before I go into the specifics of how this diesel fuel crisis has
severely impacted my own company, let me give you a little background
on the trucking industry. Trucks haul nearly every commodity in the US.
Essentially, if you bought it, a truck delivered it. There are over 9.6
million people employed in trucking related jobs in every sector of the
economy. Trucks haul 60% of the freight tonnage annually. Eighty-one
cents out every dollar spent on freight transportation goes to
trucking. An astounding 70% of the communities in the US get the goods
they consume solely from trucks.
The trucking industry is primarily composed of small businesses.
Out of the hundreds of thousands of trucking companies running in this
country, 80% of them operate only 20 or fewer trucks. These are the
companies that can be wiped out from this unbelievable surge in fuel
costs. According to the American Trucking Associations, on average,
trucking companies have profit margins of only 2% to 4%. So, as diesel
fuel prices jumped over 50 cents per gallon in the last year, most
small trucking companies have seen their profit margins go from the
average 2% to 4% to nothing. In fact, many small carriers are losing
money on each and every load they deliver.
Behind labor, fuel is typically the second most important input for
a trucking operation. As diesel fuel prices rose from an average of 96
cents per gallon a year ago to an average of $1.49 per gallon today,
many of my colleagues and competitors have had a difficult time keeping
their trucks on the road. I know many are now at the breaking point. If
this industry does not see some relief now, there will be a significant
number of carriers going out of business. This would be detrimental to
our economy.
To put some perspective on just how serious this situation is, let
me tell you what my company has gone through recently by comparing our
February 1999 fuel costs to that of February 2000. In February of 1999,
we consumed 50,000 gallons of diesel fuel with an average cost of $1.04
per gallon totaling $52,000.00. In February 2000, we purchased the same
number of gallons, 50,000, but the average price was $1.82 per gallon
for a monthly total cost of $91,000.00. This means that there was a
$39,000.00 increase or 57%.
Farruggio's Express is family owned and operated business that was
opened over 80 years ago by my grandfather. We have survived many a
crisis in the past and I feel confident that we will see our way
through this current situation. But, as in the past, I can guarantee
that many other companies, some smaller and some larger, will not make
it. Over the past two months, we have seen many independent contractors
go out of business. We are already in a period of driver shortage, but
after years within the industry, these drivers are forced to look for
other types of work. A friend of mine in Allentown operates 9 trucks.
He is $15,000.00 behind in payments to his fuel suppliers. He will be
forced out of business, unless we can make something happen to correct
this injustice. The independent contractors have shown their
frustration by refusing to handle cargo, literally shutting down the
ports of NY, NJ, Philadelphia, Baltimore and Miami at various times
over the past few weeks
We have seen the fuel prices move as much as 15 cents in one day.
We have seen changes at the pump two to three times in one day. What
will you do to correct this? You can not act fast enough. The Current
Department of Energy weekly statistics for the Central Atlantic region
showed an average fuel price $1.601, Yet, in Philadelphia, PA, the
price at the pump was from $1.799 to $1.899. Why is there such a large
difference?
This diesel fuel crisis is a disaster to the trucking industry. The
government reacts overnight to most natural disasters, yet we are in
the third month of this crisis. The news media says that the US economy
is controlled by the Federal Reserve. I beg to differ at this point. I
fear that it will take the country coming to a complete stop before we
see some relief. Most food stores hold a three to four day supply. When
there is not a loaf of bread in the store, not a gallon of milk for
miles and not nearly enough trucks nor drivers to catch up, then will
we receive some assistance? When the movement of goods has ceased, our
economy will come to a halt. We need your help now. What can you do to
help these people who have or may lose everything? What can you do to
save 9.6 million jobs?
There is no guarantee that my industry will see relief anytime
soon. Diesel stocks are extremely low. In fact, they are 30% lower than
one year ago. Even the Department of Energy has stated that we are not
out of the woods. I am not an expert on how to achieve the relief that
this industry needs, whether it be by releasing oil from the Strategic
Petroleum Reserve or by some other means. All I know is that we
desperately need your help. I am saying this not only as a very
concerned trucking company, but as a consumer of the thousands of goods
that these trucks deliver every second of the day across this entire
nation. Again, we need your help and we need it now. I thank you Mr.
Chairman and would be happy to entertain any questions.
Mr. Barton. Thank you, sir. Mr. D'Arco, on behalf of the
distributors.
STATEMENT OF PETER D'ARCO
Mr. D'Arco. Thank you, Mr. Chairman and committee members.
I am Peter D'Arco. I am the Vice President and Chief Operating
Officer of S.J. Fuel Company. We're a third generation company,
located in Brooklyn, New York, and deliver fuel to nearly 5,000
locations. Earlier this year, dealers from Staten Island and
Brooklyn visited Congressman Fossella, to discuss the heating
oil situation. Today, I'll try to describe the retailer
perspective on the price increases and offer some suggestions.
I would like to join the chairman and other members in
expressing concern for consumers. The high prices and cold
weather that occurred earlier this year are troubling.
Fortunately, prices are returning to more normal levels
throughout the northeast and these price increases should have
a limited impact on my customers.
Late January and early February were very trying times for
my company and myself. As the temperature dropped, we had to
pick up the pace of the company and nearly all of my employees
began working extended hours, many had to work 7 days a week to
keep up with increased demand. a price run up like this is a
disaster for my company. Over time, expenses skyrocketed,
credit lines have been stretched, and many consumers have
delayed payments. Consumers of heating oil are upset by the
increased prices, but the committee should know that throughout
the 1990's, we have provided superior services and low prices.
I hope that my customers will bear with me, as we move forward,
and not forget the very low competitive prices that they have
been getting for years.
In my discussions with other dealers and suppliers, it
became apparent that there are two main reasons for this
problem: low inventories and a backwardized market.
Backwardization is illustrated by this example. If you buy a
gallon of oil for a dollar today, the market is saying that if
you sell it in the future, you will receive less than a dollar.
Taking on inventory in a backwardized market means that you
have high priced inventory and most certainly will sell it at a
loss. The market did not provide incentives to keep inventory.
Several other important events happened. The weather became
extremely cold and stayed extremely cold for several weeks.
This led to a rapid increase in demand. Further, in the
northeast, there are many interruptible consumers of natural
gas. When the weather gets cold, many of these large gas
consumers are switched to oil, thus the demand not only
increased among our normal customer group, we added many new,
but temporary customers. For my company, our volume in the
Bronx increased over 400,000 gallons, as we began supplies city
schools, hospitals, and colleges. This is an increase of 30
percent.
I would like to describe some of the bright spots. First,
we took care of our customers and made sure they stayed warm,
despite tight conditions. Second, our government agencies
responded effectively. LIHEAP funding was released, so that low
income families would not go without heat. The Department of
Transportation issued emergency waivers to the hours of service
regulations. The Coast Guard acted quickly to keep the water
ways free of ice. The Department of Energy worked with the
Small Business Administration, to develop and publicize bridge
loans for heating oil retailers.
As we move away from the crisis, we would encourage this
committee to carefully consider ways of minimizing this type of
problem. I would like to offer a number of suggestions. The
Petroleum Marketer's Association of America would recommend
that legislation be enacted, ensuring that the depreciation
period for tanks is 5 years. Representative Crane has
introduced a bipartisan bill to accomplish this, H.R. 2429, and
we would encourage the House to enact this measure.
The best way to have markets work is to have informed
consumers, making intelligence choices on how to heat their
water and their homes. Consumers, who use energy efficient
equipment, will help reduce the cost of their energy bills
every year. The Senate has enacted legislation----
Mr. Barton. If you could summarize in the next 1 minute,
I'd really appreciate it. I know you've got a lot and you
waited a long time.
Mr. D'Arco. That's quite all right. I just thank you for
the opportunity----
Mr. Barton. You've still got a minute, so----
Mr. D'Arco. Well, okay. The Senate has enacted legislation,
S. 348, which would provide consumers with this information and
would, also, authorize funding to develop new technologies. The
heating oil industry has vigorously supported S. 348 and H.R.
380 for several years, and would encourage all members of the
subcommittee to support this bill. PMAA, also, believes that
more and better information regarding oil markets can be
provided by the Department of Energy. We believe that H.R. 3662
may be meritorious and should be considered by the committee.
PMAA would, also, encourage the Congress to provide funding for
oil heat research and development. The PMAA would recommend
that funding of $1.2 million be provided for this program in
fiscal year 2001.
PMAA, also, believes that the markets and the control that
OPEC has over consumers in America results from a lack of
domestic production and increase refining course in the United
States. Congress should encourage domestic production of new
crude oil reserves. Additionally, Congress should closely
examine the efforts of the Environmental Protection Agency, to
alter the sulphur levels in diesel fuel. These changes may
result in additional supply and price problems.
Thank you for the opportunity to testify.
[The prepared statement of Peter D'Arco follows:]
Prepared Statement of Peter D'Arco, Vice President, S.J. Fuel Company,
on Behalf of The Petroleum Marketers Association of America
Thank you Mr. Chairman and committee members. I am Peter D'Arco and
I am the Vice President and Chief Operating Officer of SJ Fuels. We are
a third generation company located in Brooklyn New York and deliver
fuel to nearly 5000 locations. Earlier this year, dealers from Staten
Island and Brooklyn visited Mr. Fossella to discuss with him what was
going on in the industry. I am pleased that the Chairman felt that the
entire subcommittee should be similarly briefed. PMAA represents
heating oil retailers throughout the country, as well as distributors
of gasoline and heating oil. Today, I will describe the retailer
perspective on the price increases and offer some suggestions on what
can be done to avoid a repetition of the extreme price increase of
January and February.
Before beginning I would like to join the Chairman and other
members in expressing concern for consumers. The high prices and cold
weather that occurred earlier this year will affect many of the working
poor and middle class who lack excess disposable income. Fortunately,
prices have returned to more normal levels throughout the northeast and
the last couple of warm weeks have allowed the industry to recover.
Thus, the price increases should have a limited long term impact on
heating oil consumers.
As you can imagine, late January and early February were very
trying times for my company and me. I know my experience was not
unique. First, as the temperature dropped, we had to pick up the pace
at the company, and nearly all of my employees began working round the
clock, and many had to work seven days a week to keep up with the
increased demand. This was coupled with rapidly increasing costs which
significantly stretched the credit lines of my business and many
similarly situated businesses. Finally, there were many unhappy
customers, and we had to spend a lot of time explaining the situation
to them.
As you can imagine, a price run up like this is a disaster for my
company. Expenses associated with overtime skyrocketed, my lines of
credit have been stretched, and many consumers have delayed payments.
Additionally, because of lack of product in the market, we occasionally
had to deliver fewer gallons to individual homes so that we could
provide product to all our customers. These "short deliveries"
significantly reduced delivery efficiencies.
Consumers of heating oil are upset by the increased prices.
However, throughout the 90's we have provided superior services and
prices. The lower cost of heating oil in New York has been shown by the
statistics developed by Energy Information Administration and the New
York State Energy Research and Development Administration. I hope that
consumers do not change supplier or to another fuel based on a
temporary price increase last month, but rather look at the last
decade.
In my discussions with other dealers and suppliers, it became
apparent that there are two main reasons that this crisis occurred. Low
inventories and a backwardated market. Backwardization is a term used
to describe what happens when the market perceives product prices will
be lower in the future. For example, if you buy a gallon of oil for a
dollar today, the market is saying that if you sell it in the future
you will receive less than a dollar. In December and January the market
was backwardated at the crude level as well as the product level.
Taking on inventory in a backwardated market means that you have high
price inventory, and will almost inevitably lead to losses.
The result of this behavior is lean inventories. And unfortunately,
as inventories become lean, there is a greater chance of price
volatility as there is a limited amount of supply in storage to meet
demand.
As the inventories became lean, a confluence of events occurred.
First, the weather became extremely cold and stayed extremely cold for
several weeks. While this winter has not even been as cold as normal,
the latter half of January and the first weeks of February were far
colder than normal. This led to a rapid increase in demand. Further, in
the northeast, there are many interruptible consumers of natural gas.
When the weather gets cold, many of these large commercial and
industrial gas consumers were switched to oil. Thus, the demand not
only increased among our normal customer group, we added many new, but
temporary, customers. The Department of Energy is now studying this
issue, and we are looking forward to their analysis as to how we can
work with these industrial users to minimize their impact on our
traditional customers.
What happened on the supply side has also now been described to the
industry by the press and our suppliers. Apparently, there were a
number of refinery problems that prevented normal production in the
critical winter months reduced supply.
There are a few bright spots that did come out of this crisis.
First, we took care of our customers and ensured that they received
product, despite tight conditions. Second, it is our opinion that our
government agencies responded effectively. LIHEAP funding was released
so that low-income families would not go without heat. The Department
of Transportation issued emergency waivers to the hours of service
regulations. The Coast Guard acted quickly to keep the waterways free
of ice for the heating oil barges on the Hudson River and other
waterways in the northeast. The Department of Energy worked with the
Small Business Administration to develop and publicize bridge loans for
heating oil retailers.
As we move away from the crisis, we would encourage this committee
to carefully consider legislation which might lessen the impact of the
volatile oil markets on consumers in the northeast. I would like to
offer a number of suggestions that have been discussed in our industry.
We believe that we should take steps to improve the tax structure for
those of us in the industry that store product. As you know, the
regulations issued by the Environmental Protection Agency and state and
local agencies discourage storing product. As a result, there have been
sharp reductions in storage capacity in the northeast and throughout
the country. Thus, when the weather turns colder there is less
available oil in the market for distribution. As a result, spot prices
drive the market, rather than the prices of stored product. To
encourage the construction of storage, PMAA would recommend that the
tax code be amended to provide economic incentives for storing
petroleum products.
Currently there is discussion regarding the appropriate
depreciation schedule for aboveground storage tanks. If they are
classified as personal property, the depreciation period is five years,
if real property, the depreciation schedule is 15 years. PMAA would
recommend that legislation be enacted ensuring that the depreciation
period is five years. Representative Crane has introduced a bipartisan
bill to accomplish this, H.R. 2429, and we would encourage the House to
enact this measure.
PMAA would also recommend considering the use of the investment tax
credit as a method to encourage construction of new tanks.
PMAA also believes that the best way to have markets work is to
have informed consumers that make informed and intelligent choices on
how to heat their water and their homes. Consumers by making wise
purchasing decisions and utilizing energy efficient equipment will help
reduce the cost of their energy bills and reduce our reliance on
imported energy. The Senate has enacted legislation, S. 348, which
would provide consumers with this information and would also authorize
funding to develop new technologies. A similar bill passed the House in
1998, and we would encourage this committee to consider S. 348
expeditiously. We believe this bill will provide the industry with
tools to ensure consumers are using modern and efficient equipment and
taking steps to maintain their equipment at the highest efficiency
levels. Further, this bill provides the funds necessary to validate the
energy efficiency of products and maintenance techniques, which should
aid consumers. I have vigorously supported both S. 348 and its
companion bill, H.R. 380, for several years and would encourage all
members of the subcommittee to support this bill.
PMAA also believes that more and better information regarding oil
markets can be provided by the Department of Energy. Each year PMAA
hosts a conference where international oil markets are discussed,
additionally PMAA participates in the Department of Energy's Winter
Fuels Conference. However, we believe that improved information
dissemination would have lessened the impact of the crisis. We believe
that H.R. 3662 may be meritorious and should be considered by the
Committee.
Maintaining waterways has been a traditional function of the Coast
Guard. Prior to the crisis, there was concern that the Coast Guard
would not have adequate resources to ensure waterways in the northeast
were open. The Coast Guard responded admirably as the weather became
severe and they should be commended. We would encourage the Congress to
review the Coast Guard's equipment and operating abilities for future
crisis.
PMAA would also encourage the Congress to provide funding for
oilheat research and development. For many years, the Department of
Energy has provided $1 million for energy research and development for
oilheat consumers. This research has been the foundation for the
development of new equipment and better service. Over time, this
research has improved the efficiency of oilheat equipment.
Additionally, a curriculum has been developed to educate service
personnel on how to reduce oil consumption. In recent years, the
funding has been reduced, and in the 2001 budget request no funding has
been requested for this program. Thus, the 14 million households that
use oilheat in the northeast do not benefit from the nearly $100
million that the Department of Energy invests in research. PMAA would
recommend that funding of $1.2 million be provided for this program in
FY 2001.
In addition to these ideas, there are several initiatives being
considered to increase the amount of stored oil in the northeast. PMAA
believes that objective is worthwhile, but is concerned that these
measures may not achieve their objectives of increasing supply and
minimizing price volatility. Therefore, we encourage the Congress to
defer a decision on those matters until the Department of Energy
completes a full analysis of this winter's problems and the possible
impacts of the proposed initiatives on improving the supply situation.
We must ensure that the remedy we select directly benefits the oilheat
consumer.
PMAA also believes that the tight oil markets and the control that
OPEC has over consumers in America results from a lack of domestic
production and increased refining costs in the United States. We
believe that the Congress should carefully consider legislation that
would encourage domestic production of new crude oil reserves.
Additionally, we would encourage the Congress to more closely examine
the efforts of the Environmental Protection Agency to alter the sulfur
levels in diesel fuel. PMAA is very supportive of the Agency's efforts
to improve the fuel by reducing sulfur. However, the contemplated
levels are likely to reduce refinery capacity below acceptable levels.
Additionally, there is now consideration of adding a third diesel fuel
which would reduce transportation efficiencies and likely reduce the
amount of diesel and heating oil in the market.
I thank you for this opportunity to testify.
Mr. Barton. Thank you, Mr. D'Arco. I really do apologize to
this panel, that we can't really ask you a lot of questions,
because I think you would be very illuminating. We will provide
those questions for the record. This is not the only thing this
subcommittee is going to do. We're going to be working with the
Senate. We work with the administration. And we may do another
hearing on this. We may move to do some sort of a working group
that we put together on a bipartisan basis.
I do want to thank you for your testimony. Before I close
the hearing, I want to, also, put on the record that the Air
Transport Association, the Interstate Natural Gas Association,
the Natural Gas Supply Association, and the Owner/Operator
Independent Service Associations asked to testify. As you can
tell, we ran out of room at the table, but their statements, if
they give them to the committee in the requisite amount of
time, will be included in the formal hearing record.
Thank you. You are released and the hearing is adjourned.
[Whereupon, at 3:10 p.m., the subcommittee was adjourned.]
[Additional material submitted for the record follows:]
Prepared Statement of the Air Transport Association of America
Mr. Chairman, the Air Transport Association of America appreciates
the opportunity to submit this statement on the price fluctuations in
oil markets.
ATA's member airlines collectively account for approximately 95
percent of the revenue passenger miles and freight ton-miles flown in
the United States. With fuel representing our second largest item of
operating expense, the recent fuel price run up is particular cause for
concern in the airline industry.
Scope of the problem
Like home heating oil customers, motorists, and truckers, the
airline industry is suffering from spiraling fuel price increases. The
March 1, 2000 vs. March 1, 1999 spot market jet fuel price increase is
169%, from 31 to 83.25 cents per gallon. On an annualized basis this
amounts to a $10 billion fuel cost increase, more than doubling the
cost of fuel purchased by the airlines in 1999.
But far greater impact from the fuel cost increase falls on our
customers and employees. For example, even if the average fuel price
for all of 2000 were 75 cents per gallon, air carriers would need to
increase fares by $32.50 just to cover these fuel cost increases. For
many passengers, particularly leisure travelers, a $32.50 fare increase
for each ticket is the difference between making a trip and staying
home. Based on traditional elasticity measures in the industry, a
$32.50 fare increase, would result in about 50,000,000 fewer
enplanements, or 18,000,000 passengers foregoing trips. With 18,000,000
fewer passengers, airlines would be significantly overstaffed, and
roughly 30,000 jobs would be expendable. Such a scenario also would
result in service on marginally profitable routes--often to smaller
communities--being dropped, further exacerbating adverse economic
conditions in these communities.
The airlines, their customers, and their employees cannot afford
the effects of these fuel price increases. The US economy cannot afford
these types of increases either. The last time we faced this kind of
devastating energy price increase, in 1990 and 1991, almost half the
airline industry filed for protection under chapter 11 of the
bankruptcy code, long standing airlines went out of business, more than
100,000 employees lost their jobs, and the industry went into a
financial tailspin from which it took years to recover.
Congress needs to take action now to alleviate the crushing burden.
Energy Policy
The source of our problem is a national energy policy rooted in
reliance on OPEC controlled crude oil. As long as oil supply, and
therefore oil pricing, is dictated by OPEC, we remain at its mercy.
International jawboning is not a substitute for energy policy.
Cajoling, begging, and threatening foreign governments to produce more
oil is not an energy policy worthy of the United States. And while
targeted assistance to low income individuals who cannot cope with the
price shocks is clearly understandable, it represents a failure to
establish an enduring energy policy framework. Moreover, tax policies
that burden oil consumers and disincentives to domestic oil production,
are not the hallmarks of a sound energy policy.
ATA recommends both a short term and lone term course to alleviate
the cost burden that falls so heavily on the US airline industry, and
other oil dependent consumers.
Short term--As a modest demonstration of a national commitment to
bringing oil prices down, the 4.3 cents per gallon ``deficit
reduction'' tax adopted in 1993 must be repealed. This tax, which
currently adds $620 million annually to the airlines' fuel cost burden
made little sense when it was adopted and makes even less today in an
era where there is no ``deficit''. Its immediate repeal will have both
substantive and symbolic value. Averaged over the number of customers
who fly, it amounts to an about $1 per passenger. But more importantly,
it sends an important signal that discriminatory taxation is not the
United States' tool of choice in dealing with energy.
Long term--The US must foster environmental and financial
incentives for domestic oil exploration, production and refining. If
even a small portion of our untapped reserves were made available for
consumption, OPEC's stranglehold on the US economy would be lessened.
Additionally, it makes little sense to beseech foreign governments to
produce more oil while domestic reserves are so substantial.
Conservation Measures
Throughout the course of civil aviation, airlines have introduced
fuel saving measures. We have done so well; in fact, there isn't much
room for improvement in the current crisis. Changes in cruise speed,
use of flight simulators, sophisticated flight planning systems,
increasing load factors and the introduction of newer, more fuel
efficient aircraft has resulted in improved fuel efficiency in excess
of 130% since the first OPEC instigated fuel crises some 26 years ago.
We currently obtain the equivalent of 38 miles per passenger gallon, a
figure that compares favorably with even the most fuel-efficient
automobile.
But there are only so many efficiencies that can be squeezed out.
It's time for the Government to develop a sound energy policy that
serves the American people. It's time for the Government to develop an
energy policy that shields the US from the overwhelming economic power
of OPEC. And it's time that the government to develop an energy policy
that looks to domestic solutions to our reliance on foreign sources of
oil. Regrettably, we may be a generation late in doing so.
In the meantime, the Air Transport Association urges the Congress
to repeal the 4.3 cents per gallon ``deficit reduction'' fuel tax now!
Punishing consumption of energy has no role in the a national energy
policy.
______
Prepared Statement of Hon. George W. Gekas, a Representative in
Congress from the State of Pennsylvania
Mr. Chairman, thank you very much for permitting me to submit this
statement for this important hearing. I regret that I am unable to
appear in person. I want to express my sincere thanks for holding this
hearing on price fluctuations in oil markets.
As you know, the price of oil in the United States, particularly
the Northeast, has increased at an astounding rate over the last few
months. Unfortunately, numerous predictions indicate that gasoline
prices could climb to over $2.00 a gallon. This steep rise in oil
prices may lead to inflation, and the accompanying severe consequences
for our current robust economic growth.
The people of Pennsylvania have suffered because of the recent
increase in heating oil and diesel fuel prices. As a member of Congress
representing Central Pennsylvania, I am particularly concerned about
this issue. Specifically, my district sits at a unique ``crossroads''
position in the eastern seaboard and is home to a significant
warehousing/distribution and transportation companies.
Pennsylvania, like so many other states in the Northeast, also has
a large population that is dependent on heating oil, this price
increase has hit pensioned seniors on fixed incomes and families on
tight budgets particularly hard.
As everyone on the committee knows, the reason for the recent
increase in the price of heating oil and diesel fuel is that demand is
high and supply is low. Unusually cold January weather increased demand
significantly above that experienced in recent years.
On the supply side, a significant portion of the increase in the
price of oil is the result of international events that are beyond the
control of the Congress or the people of the United States. For
example, OPEC has pursued a production quota among its member states
that has had a dramatic effect on the price of oil. In order to raise
global oil prices, OPEC has advised its member countries to cut
production to a level that would sufficiently limit supplies in order
to raise petroleum profits for member countries. Simply put, the OPEC
cartel dictates world oil prices. Since January, OPEC has decreased its
oil production by 4.2 million barrels a day from this time last year--
about 13% lower than January 1998. As a result, a barrel of oil
increased in price from $12.33 a barrel last year to nearly $31.00 a
barrel at the close of trading yesterday. This price increase at the
industry level has been passed directly on to consumers at gas
stations, trucking companies, utilities and other fuel consumers, and
has been felt throughout the economy.
OPEC's behavior illustrated by the recent rise in oil prices
demonstrates the dangers of shutting down America's domestic oil
production. However, this Administration has pursued policies that have
increased our country's dependency on foreign oil, especially OPEC. For
example, this Administration has continued to put unnecessary
restrictions on oil exploration and extraction. While there are many
untapped reserves in the U.S., restrictions that prevent companies from
extracting this oil.
Mr. Chairman, today I would like to thank you for having the
courage to investigate the dramatic increase in oil prices. I would
also like to welcome to this hearing Samuel Farruggio, President of
Farruggio Express Trucking, Inc., of Bristol, Pennsylvania. Although he
is not a constituent of mine, his concerns about the effects of high
oil prices are shared by people throughout Pennsylvania. Hard working
entrepreneurs like Mr. Farruggio are among the hardest hit by these
drastic price increases.
Thank you again Mr. Chairman for allowing me to submit this
statement.
______
Prepared Statement of Hon. Lamar S. Smith, a Representative in Congress
from the State of Texas
Mr. Chairman, thank you for holding this important hearing on Price
Fluctuations in Oil Markets. I appreciate the opportunity to submit
testimony and regret that I cannot be present because of a Judiciary
Committee meeting.
Our best defense against instability and volatility in the world
oil market is an energy policy that produces a healthy domestic oil and
gas industry. For too long, the Administration has pursued a policy of
cheap foreign oil.
Domestic producers continue to recover from one of the worst price
crashes in history. This has been followed by some of the highest oil
prices in recent years. These wild fluctuations are not good for
anyone.
The United States now imports 55 percent of our petroleum products,
up from 45 percent in 1991, and just 35 percent in 1973. We are
becoming increasingly dependent on foreign oil even though the
Administration found, in 1995 and in a number of other years, that
increasing oil imports is a threat to national security.
Rather than develop and implement a national energy policy, the
Administration continues to rely on foreign oil. Most recently it sent
Secretary of Energy Richardson to other oil producing nations to ask
them to increase their output.
In particular, Iraq has benefited from the United States'
dependence on foreign oil. The United Nations ``Oil for Food Program''
has enabled Iraq to rebuild its facilities and become the swing
producer on the world market. Iraq's new market power leaves the United
States even more vulnerable to the whims of Saddam Hussein.
Just over 1 year ago, when producers in the United States faced
some of the lowest prices in history, the Administration did nothing.
This industry lost over 65,000 jobs during the most recent downturn.
The steel industry, which also faced tough times, lost about 10,000
jobs. In order to help the steel industry, the Administration proposed
$300 million in tax incentives. Unfortunately the President vetoed the
tax reform bill that included similar tax relief for the domestic
petroleum industry.
Independent producers are the backbone of the industry. These
wildcatters drill 85 percent of the wells and produce about 40 percent
of the domestic oil. These risk takers typically plow most of their
income back into the business, always looking for the next producing
well. They are hardest hit by the boom and bust cycle since typically
they do not have other operations on which to rely for cash flow.
The industry's infrastructure must be protected. When wells are
shut in, that production is lost forever. Marginal wells, wells that
produce less than 15 barrels a day, are particularly vulnerable to low
oil prices. Individually these wells produce very little, however their
aggregate oil production is 20 percent of our nation's total.
Oil production today is less than it was in 1986. In 1986 the
United States produced about 8.5 million barrels a day and in 1997 that
number dropped to below 6 million barrels a day. We need to enact
policies that will increase our domestic production.
Many in Congress and the Administration continue to oppose opening
some of our resources to oil and gas drilling. The Arctic National
Wildlife Reserve (ANWR) holds the potential to lessen our reliance on
imported oil. It is estimated that a small portion of the reserve could
hold 16 billion barrels of oil.
Drilling is also banned off much of America's coasts, further
limiting access to potentially large reserves. Without allowing, much
less encouraging, domestic exploration and production we cannot hope to
lessen our dependence on foreign oil.
Some in Congress want to tap into the Strategic Petroleum Reserve
(SPR) to combat higher home heating oil and gasoline prices. I strongly
oppose this action. The SPR has statutorily defined uses and
manipulating markets is not one of them. The SPR was created for use
during crude oil supply emergencies.
Congress should pass and the President should sign a number of oil
and gas incentives to support the domestic industry. I support enacting
a marginal well tax credit that will help keep these wells on line when
prices drop. I support other tax relief provisions such as a percentage
depletion expansion; clarification that delay rental payments are
deductible as ordinary and necessary business expenses; and the
expensing of geological and geophysical expenses among other things.
Many of these provisions were included in last year's tax reform
legislation that was vetoed by the President.
As we enter the next century we must develop a national energy
policy that will reduce dependence on foreign oil and stabilize prices.