[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]



       STRATEGIC PETROLEUM RESERVE: A CLOSER LOOK AT THE DRAWDOWN

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

                                HEARING

                               before the

                    SUBCOMMITTEE ON ENERGY AND POWER

                                 of the

                         COMMITTEE ON COMMERCE
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED SIXTH CONGRESS

                             SECOND SESSION

                               __________

                            OCTOBER 19, 2000

                               __________

                           Serial No. 106-169

                               __________

            Printed for the use of the Committee on Commerce


                   U.S. GOVERNMENT PRINTING OFFICE
67-637                     WASHINGTON : 2001


                         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:
    Boles, John, President of Equiva Trading, Equiva Services....   101
    Cubin, Hon. Barbara, a Representative in Congress from the 
      State of Wyoming...........................................    22
    DeLauro, Hon. Rosa L., a Representative in Congress from the 
      State of Connecticut.......................................    19
    Hinojosa, Hon. Ruben, a Representative in Congress from the 
      State of Texas.............................................    15
    Knollenberg, Hon. Joe, a Representative in Congress from the 
      State of Michigan..........................................    24
    Kripowicz, Robert S., Acting Assistant Secretary for Fossil 
      Energy, Department of Energy...............................    29
    Majak, Hon. R. Roger, Assistant Secretary for Export 
      Administration, U.S. Department of Commerce................    36
    Manzoni, John, President, Eastern United States BP...........    99
    Martin, William F., Chairman, Washington Policy and Analysis.    85
    Surma, John P., Senior Vice President, Supply & 
      Transportation, Marathon Ashland Petroleum, LLC............    95
    Watkins, James D., President, C.O.R.E........................    72
    Wolkoff, Neil L., Executive Vice President, New York 
      Mercantile Exchange........................................    89
Material submitted for the record by:
    Wilcox, David W., Assistant Secretary for Economic Policy, 
      Department of the Treasury, prepared statement of..........   113

                                 (iii)

  

 
       STRATEGIC PETROLEUM RESERVE: A CLOSER LOOK AT THE DRAWDOWN

                              ----------                              


                       THURSDAY, OCTOBER 19, 2000

                  House of Representatives,
                             Committee on Commerce,
                          Subcommittee on Energy and Power,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 9:10 a.m., in 
room 2123, Rayburn House Office Building, Hon. Joe Barton 
(chairman) presiding.
    Members present: Representatives Barton, Stearns, Largent, 
Burr, Shimkus, Pickering, Boucher, Markey, and Wynn.
    Also present: Representatives Tauzin and Green.
    Staff present: Cathy Van Way, majority counsel; Miriam 
Erickson, majority counsel; Robert Simison, legislative clerk; 
Peter Kielty, legislative clerk; and Rick Kessler, minority 
counsel.
    Mr. Barton. The subcommittee will come to order. If our 
witnesses and our participants would find their seats.
    I want to welcome everyone to today's hearing on the 
drawdown of the Strategic Petroleum Reserve.
    The last hearing on September 28 dealt with natural gas and 
heating oil. We spent some time discussing the just-announced 
administration decision to release oil from the Strategic 
Petroleum Reserve. At that hearing, I questioned the authority 
for this action, the timing so close to the election, the cost 
of establishing such a dangerous precedent and whether it would 
actually accomplish the goal of increasing heating oil supplies 
to the Northeast.
    Shortly after the hearing, I and Chairman Bliley wrote 
Energy Secretary Richardson and the President a letter 
expressing our concerns and asking for their responses to a 
list of questions. I am pleased to announce that the Department 
did partially respond and only 1 day late, which for them is 
pretty good work.
    I am not satisfied with those responses. I don't think they 
were totally sufficient to the questions that were asked, but 
they said they would get us additional information. We will 
review their responses and probably ask for additional 
material.
    The administration has begun to implement its program to 
release 30 million barrels of oil in what it calls a swap or an 
exchange. At the time the DOE announced this decision, they 
made public statements, sent out press releases that the 
purpose of the program was to avert a shortage of home heating 
oil. We now find out that, while heating oil supplies are lower 
than they normally should be expected, that no one is claiming 
there is a shortage.
    Today we will examine the program as it is being 
implemented and see if it has any ability to implement the goal 
that it has announced. We will deal specifically with the 
mechanics of the program, policy issues involved in the 
decision and the impact of the action.
    It appears that the administration has decided to make the 
Strategic Petroleum Reserve a focus of their energy policy, so 
we should discuss many of the issues that have been raised by 
the drawdown. It is questionable in my mind whether the 
President or the Department has the statutory authority to 
release the oil in this manner for this purpose. The Energy 
Policy and Conservation Act requires a severe supply disruption 
before drawing down the Reserve. Not only has the 
administration not informed the Congress of such a disruption, 
Secretary Richardson recently announced there was no energy 
crisis.
    I also question the Department's characterization of this 
program as an exchange or swap, when its real purpose, and 
admittedly so, has been to increase the available amount of 
home heating oil in the marketplace. A variety of expert 
opinions question the release of 30 million barrels of oil will 
have any significant impact on home heating oil supplies. DOE 
itself estimates that it will increase home heating oil 
supplies by about 3 to 5 million barrels, and that is a very 
questionable assumption which we will get into in the hearing.
    Third, some Members of the Congress have raised questions 
about the fact that heating oil made from the crude oil 
released from the Reserve could actually be exported outside of 
the United States.
    Finally, many news reports have raised questions about 
DOE's governance of the bidding in the solicitation process. 
Simply put, in my mind the mechanics of this program are very 
flawed. The administration originally opened bidding to almost 
anyone without requirement that the bidders prequalify and 
demonstrate expertise in refining or trading or even promise to 
refine the oil here in the United States.
    As it happened, 7 million barrels were awarded to bidders 
who could not live up to their end of the deal. Seven million 
other barrels have apparently been ``flipped'', meaning that 
the winning bidder simply sold to someone else and made a quick 
profit. Meanwhile, market analysts keep decreasing the amount 
of heating this release of unrefined crude oil will generate 
for the United States.
    It is worth noting that the administration has changed its 
policies for the rebidding of the oil turned back in.
    I will also point out that we have 2 million barrels of 
home heating oil in a Northeast Home Heating Oil Reserve. 
Unless the administration announces today they intend to 
release some of this home heating oil, the Reserve that was 
created specifically for the purpose that allegedly this 
program has been initiated is not going to be used this winter.
    Nobody wants consumers in the Northeast or anywhere else to 
go without heating oil or to pay a higher than necessary price. 
We should be focusing on ways to help that situation.
    As I just pointed out, millions of gallons of home heating 
oil are ready to be transported, are already in the Northeast 
but are not being released. We also have millions of gallons of 
heating oil ready to be transported to the Northeast from the 
Gulf Coast, but they cannot find an American flag carrier to 
carry them.
    The Federal Jones Act requirements prevent foreign flag 
ships from getting American heating oil where it needs to go, 
to the Northeast. The administration has some authority to 
waive the Jones act, and I have not heard that that is being 
considered.
    To remedy this purpose, I have introduced legislation to 
grant a temporary waiver so any ship could carry heating oil to 
the Northeast. H.R. 5485 would provide a 90-day waiver of the 
Jones act, just this winter, for the transport of crude oil or 
refined products like home heating oil to any two ports 
selected by the President of the United States.
    This bill is not in our subcommittee's jurisdiction, 
unfortunately, but it is the kind of more targeted action we 
must consider as a Congress and as a Nation. I am going to ask 
the leadership in the House to consider putting this bill on 
the suspension calendar next week so that we can move it to the 
Senate before we adjourn.
    As I said in our last hearing, American consumers deserve a 
national energy policy that is comprehensive, long-term and 
well-integrated. The Strategic Petroleum Reserve is but a small 
part of a comprehensive U.S. energy supply equation. True 
leadership would see this recent increase in energy prices as a 
wake-up call and seize the opportunity to develop an overall 
long-term energy policy to serve the needs of the entire United 
States. Instead, the Clinton-Gore Administration apparently 
intends to rely on the Reserve as a tool to manipulate for 
their own political purposes.
    At best, it is a short-term fix to a long-term problem. At 
worst, it could actually be counterproductive and give the 
American public the impression that the Federal Government 
should become a heavy-handed regulator and fix prices whenever 
it is politically expedient.
    This hearing is an opportunity to explore all these issues 
in more specific detail, including the effectiveness of the 
administration's so called exchange program, and whether the 
program will have any significant economic impact on crude oil 
supplies in home heating oil prices. I look forward to hearing 
the testimony of the witnesses.
    I will be happy to recognize the distinguished ranking 
member, the gentleman from Virginia, Mr. Boucher, for an 
opening statement.
    Mr. Boucher. Thank you very much, Mr. Chairman.
    I will take the opportunity of these remarks this morning 
to express my disappointment at the tone and tenor that 
surrounds this proceeding. As the members know, I hold strong 
belief in the benefits of bi-partisanship and I rarely 
criticize the processes of this committee. But I see this 
hearing as nothing more than a blatantly partisan attempt to 
deride the administration for its recent efforts to help the 
American people through what is expected to be a long and cold 
winter.
    Further, Mr. Chairman, I am disappointed that after the 
last hearing on this precise subject matter the chairman of the 
full committee and the chairman of the subcommittee sent 
letters to the Department of Energy posing questions regarding 
both the exchange of oil from the SPR and the bidding process 
that DOE utilized to facilitate that exchange. Mr. Dingell and 
I were technically copied on these letters but, nonetheless, 
did not receive those copies until the minority staff learned 
of the existence of those letters and requested that the copies 
be sent. Those letters clearly signaled the intent of the 
majority to pursue this matter further, and some advance notice 
of that intention would have been much appreciated.
    Mr. Chairman, I understand that today we will once again be 
discussing the legal authority of the DOE to conduct the SPR 
exchange. We will be addressing the bidding process and the 
exchange's potential effect on heating oil supplies and prices. 
While I understand your frustration and your disagreement with 
the administration regarding the use of the SPR in this matter, 
I would point out this is the third time the members of this 
subcommittee have been asked to delve into the authority of the 
DOE to conduct this exchange. This is a matter about which 
lawyers differ and this subcommittee, no matter how many 
hearings on the subject we hold, is unlikely to resolve.
    If the majority believes that the DOE bidding process 
deserves further scrutiny, that task could be pursued more 
effectively if there had been time for members to digest the 
information DOE provided in response to the chairman's letters. 
In fact, this inquiry could be best pursued after the 
completion of the bidding process when the results of the 
process were more in evidence.
    Despite my disappointment with today's hearing, I am much 
more greatly concerned that this Congress has not taken 
sufficient action to address the potential energy problems for 
consumers this winter. While here in the House we did work 
together on a bipartisan basis to reauthorize the Energy Policy 
and Conservation Act, and I want to thank the chairman for his 
leadership and excellent work with our side in advancing that 
measure in the House, the passage of the bill is now stalled in 
the Senate; and congressional leadership has, in my view, 
failed in its responsibility to reauthorize this expired 
legislation which is the foundation of our energy emergency 
preparedness.
    Further, Congress has underfunded the very successful Low 
Income Home Energy Assistance Program and the weatherization 
assistance programs which are vital to assisting low income 
families and senior citizens across the country in paying for 
high heating and cooling bills. Congress has also reduced 
funding for Federal energy conservation programs and energy 
conservation R&D programs by significant amounts.
    American consumers this year are faced with paying an extra 
$50 billion in the form of higher gasoline and home heating oil 
prices. Serious questions remain about the adequacy of home 
heating oil supplies for this coming winter in some regions of 
the Nation.
    Regardless of whether we fully agree with the actions that 
the administration has taken, the administration has at least 
taken steps to ward off potential energy supply and pricing 
problems, from releasing energy funds for LIHEAP, to 
establishing the Northeast Petroleum Reserve and finally 
conducting the exchange from the SPR. This Congress, on the 
other hand, has in my view failed in its responsibilities to 
America's energy consumers.
    Mr. Chairman, we have enjoyed and continue to enjoy a good 
relationship; and I value the bi-partisan approach which has 
been your hallmark in your leadership of this committee. I 
congratulate you for that and for what I think has been some 
really excellent work that you have undertaken during the past 
2 years. I am certain that, this unfortunate episode 
notwithstanding, our productive work together to advance sound 
energy policies will continue.
    I thank you, and I yield back.
    Mr. Barton. I want to thank the distinguished ranking 
member, and I want to apologize for myself. It was not my 
intent to mislead or to keep in the dark the minority on that 
letter. We announced it at the hearing. If for some reason the 
staffs did not get a copy, that is my responsibility, and I 
take full responsibility, and I am willing to apologize in 
writing if that helps the effort. Sometimes we do have to 
disagree, but we can always disagree agreeably, and it has been 
a pleasure to work with you and the other members on the 
minority on this subcommittee this year. And sometimes we 
understand that there are going to be differences that have to 
be aired, but I do apologize for any non-inclusion of the 
effort to gather the material for this hearing and this issue.
    I would recognize the gentleman from Illinois, Mr. Shimkus, 
for an opening statement.
    Mr. Shimkus.  Thank you, Mr. Chairman, and for everyone who 
showed up today and also our colleagues who will testify in 
hopefully not too long of a time.
    No one should be surprised at Chairman Barton's dogged 
oversight over the SPR. As a member of 4 years, I don't know of 
one issue that Chairman Barton has not taken--even when we had 
low energy the SPR has been something that Chairman Barton has 
been doggedly in pursuit of the truth. So I want to applaud the 
chairman for his consistency.
    For the past several months I would say that our country 
has been on the verge of an energy crisis. Oil and natural gas 
prices have skyrocketed to almost record highs. The price 
increase now poses a threat to our country's continued economic 
growth, and we continue to ask the question what can be done.
    We have heard from this administration the constant course 
of the blame game. They blame it on big oil. They blame it on 
corporate America for gouging American consumers. They blame it 
on the Republican-controlled Congress for not passing their 
energy agenda. They will blame anybody and everybody, as long 
as it isn't them.
    Their solution is to release 30 million barrels from our 
oil strategic oil reserves. As a former Army officer and 
current Army reservist concerned with the national defense, I 
think about the Strategic Petroleum Reserve, and I highlight 
the word strategic. It is a strategic reserve to be used in 
times of a national emergency. It isn't our strategic political 
reserve to be used in times of political pressure.
    What happens now if the problems in the Middle East 
continue to grow? What are we going to use to fuel our tanks, 
to fuel our jets? That oil is there for our national security. 
We now have 30 million barrels less oil to meet a possible 
national emergency.
    So when I see what I think is a use of the SPR to fix 
prices, I see it as an assault on our men and women in uniform 
whose lives may be dependent on our Strategic Petroleum Reserve 
being used to fuel our weapons of war should we need it, and 
that is my focus as still being involved with the defense 
forces of our Nation. The SPR was established to protect 
Americans from a cutoff of oil imports, not to manipulate 
prices and not for political gain.
    While it may be well-intentioned to move to swap some 
reserves, this will do little to address our Nation's heavy 
dependence on foreign oil and most likely will not impact 
price. And the way was swap was handled was laughable. Seven 
million barrels of oil had to be reauctioned because the 
companies DOE gave the oil to did not even have the money to 
purchase the oil.
    When I used to be a county treasurer and I had tax 
auctions, we would at least ask for a letter of credit. This 
was not done, and no research on the bidders occurred. Instead 
of giving this oil to actual oil companies or refiners, DOE 
gave it to groups like Dean Witter, whose sole intention was to 
make money. To top it off, there was no guarantee that the oil 
was even going to go to the Northeast where it was needed most. 
Reports in the press said companies were using the oil from the 
SPR to replenish oil that they were sending to Europe where 
heating oil is even more expensive.
    With regard to home heating oil, I would like to mention 
one thing that may help the supply problem, and it wouldn't 
come to anyone on this committee's surprise, and that is 
biodiesel. Since biodiesel is made domestically with renewable 
resources, using it at blended levels with home heating oil 
would still produce dependence on foreign oil and increase our 
supply.
    My colleague to the left asked if that was made from corn. 
It is really a product of soybeans and beef tallow and some 
other products we have in plentiful supply in this country and 
especially in Illinois and especially in the 20th district of 
Illinois. Wile there may be some concerns with using biodiesel 
as home heating oil, there should be no problems when blended 
at low levels between 5 and 20 percent. Even at those small 
levels it should stretch supplies enough to last the winter and 
keep the prices at reasonable levels.
    Although we are currently talking about biodiesel use in 
the home heating oil market this year because of the high price 
of heating oil, to help avoid the situation in the future we 
should be developing a long-term strategy for integrating 
biodiesel and other alternatives into home heating oil every 
year. Biodiesel can help displace imported petroleum, improve 
air quality and support domestic industries like agriculture; 
and I have a lot of agriculture in my district. I happen to 
think that our Nation should not rely only on just one energy 
source such as natural gas, coal, oil, nuclear, hydro, solar 
and wind to generate power, but all these sources. It is the 
smart thing to do over the long haul. Just like any good 
retirement portfolio, our energy industry should be 
diversified.
    Again, Mr. Chairman, thank you for having this hearing. I 
do think it is going to be beneficial.
    I yield back the balance of my time.
    Mr. Barton. We thank the gentleman from Illinois.
    I recognize the gentleman from Maryland, Mr. Wynn, for an 
opening statement.
    Mr. Wynn. Thank you very much, Mr. Chairman.
    First, I would like to commend the leadership and efforts 
of the Secretary, Bill Richardson, and the staff of the United 
States Department of Energy, particularly the Strategic 
Petroleum Reserve Office, in their effort to make sure that the 
oil from the SPR reaches the marketplace in an efficient 
manner. I think this addresses very legitimate and real 
concerns about high home heating oil prices during a 
potentially long and cold winter, and it is a more than 
adequate substitute for extensive rhetoric that seems to occur 
around this place.
    I understand that the SPR offered 11 contract awards, and 
only two companies were unable to meet the letter of credit 
requirement imposed by the SPR oil exchange process. This 
represents in my view an over 80 percent rate of success on the 
first solicitation. According to the SPR office in Louisiana, 
it is not unusual to solicit more than one round of bids or to 
receive bids for less than the amount of oil that is offered 
for solicitation.
    As a member of the committee, I was pleased to note that 
three of the initial contract recipients were small minority 
businesses. This is a testament to the continued sophistication 
of small businesses and the changing environment of the energy 
industry.
    The fact is that trains of all sizes can get oil to the 
marketplace in a very efficient manner. Increased access to the 
energy industry for small businesses is a natural development 
given the increased sophistication of America's small business 
community, which incidentally provides more than 50 percent of 
the private work force and is a principal source of new jobs in 
this country.
    At this point, I would like to raise my concern about the 
highly unusual and I would consider highly unfair scrutiny that 
the U.S. Department of Energy and several small minority-owned 
businesses have received during the solicitation and contract 
award process and also by this committee, quite frankly. The 
assumption made by members of the press and perpetuated by 
officials of big oil do not serve the best interest of our 
country.
    Let me begin right up front. An editorial ran in the Wall 
Street Journal October 11. The editorial began by making light 
of the fact that 3 of the 11 companies the Department of Energy 
entered into the swap agreements with were small businesses 
that have little experience in the oil business, according to 
the Journal, but among the winners were three tiny oil 
companies nobody in the oil industry had ever heard of. The 
fact of the matter is, the Wall Street Journal doesn't stop 
there, claiming that the only reason such small businesses 
could qualify would be because of special treatment or that 
they put forward a shady front.
    The Journal continues, perhaps these three have very good 
friends in the Energy Department. Perhaps big oil has good 
friends in the Energy Department as well. Perhaps they are just 
a front for low-down types. Perhaps big oil has been gouging 
the American consumer. Perhaps they are just shells to prop up 
prices when it looked as though the auction might not command a 
lot of interest.
    My point is this is unfair speculation, ungrounded 
speculation; and no evidence was ever presented to support 
these contentions. This country's economy was founded upon 
entrepreneurs who recognized opportunity and competed against 
tough odds. That is what happened in this case. The sarcastic 
and disrespectful tone taken by the Wall Street Journal 
officials for big oil concerning the legitimacy and 
qualifications of these small businesses is a great disservice 
to this country, and I am sad to say they may have jeopardized 
the chance of these small business from securing their letter 
of credit. In fact, only one of these companies actually was 
awarded a contract, despite all three making qualified bids.
    The truth is that these three small businesses had every 
right to compete for this oil and to compete for these 
contracts, regardless of their size. They had every right to 
win the contract if they provided proof of financial credit.
    The Department's solicitation developed by career staff was 
designed to meet two goals. One to get oil from the SPR into 
the marketplace as quickly as possible and, two, to ensure that 
the government and the taxpayer receive adequate protection.
    Let me emphasize that there was no size restrictions in the 
solicitation, and there should not have been. The truth is that 
the solicitation did not require bidders to offer bundled 
services of transportation, refining or trading. That is not 
necessary, and it is not required, and it should not be 
required. Today the energy marketplace is largely unbundled. A 
trader can often get oil to the marketplace in the quickest and 
most efficient manner.
    The goal of the solicitation was to encourage as many 
bidders as possible, both small and large companies, so the oil 
could be moved to the market quickly. In fact, the oil that was 
exchanged in the first round has already started reaching the 
marketplace, including the oil of the participating small 
businesses. The truth is that the government and taxpayer were 
fully protected against the loss of value of any oil in the 
Reserve, no matter how large or small the bidding company.
    The solicitation required all bidders to provide a letter 
of credit from a certified financial institution for the full 
value of the crude oil. If proof of credit was not received, no 
oil would be delivered. That is exactly what happened. The 
Department recently announced that 23 million barrels of oil is 
on its way to the market, the largest sale of swap conducted in 
the SPR's 25 year history. The same amount or more oil would be 
returned to the SPR by the winning contractors next year.
    Mr. Barton. Would the gentleman from Maryland yield 
briefly?
    Mr. Wynn. I would be happy to.
    Mr. Barton. I will let the gentleman continue because I 
think what you say is relevant to the hearing, but, 
theoretically, opening statements except for the Chair and the 
ranking member are 3 minutes. And you are in the tradition of 
Ed Markey, going on with about a 10-minute opening statement. 
Since we don't have that many attendees and you are so 
eloquent, I am very willing to listen to it, but just to remind 
that you might begin to wrap up here in the next minute or so.
    Mr. Wynn. Thank you, Mr. Chairman; and I will be wrapped up 
very shortly.
    Let me say, in terms of our bottom line, a grave injustice 
has been done to these small businesses; and I feel very bad 
about this. I believe attention should be given to the role the 
large producers played in adversely affecting the commitments 
made to these small businesses by their initial partners.
    In light of the chairman's comments--and he has been very 
generous--I would conclude my statements by indicating a 
willingness to continue to work on this issue and look at ways 
in which we can effectively include the small business 
community in contracts such as these.
    Mr. Chairman, I thank you for your generosity.
    Mr. Barton. I thank the gentleman from Maryland.
    The gentleman from North Carolina, Mr. Burr, is recognized 
for an opening statement.
    Mr. Burr. I thank the chairman.
    The gentleman from--Mr. Wynn is 100 percent correct. We 
have had unfair criticism, unfair criticism of the companies 
that bid, unfair criticism from the Department of Energy. 
Because every member of this subcommittee should know that, 
from our past experience on contracts, that the Department of 
Energy is incapable of carrying them out. They are incapable of 
designing them correctly. They are incapable of executing them. 
And for us to look at just another blunder in the contract 
process that they were warned of in a meeting open to all 
members of this committee--and I believe that the chairman and 
myself were the only ones there when we sat down with them and 
said, how can we be assured that this product ends up in the 
United States? And they said, we can't. A flawed process.
    But I also want to address some of the statements my good 
friend Mr. Boucher said. This is not something new that this 
committee has just taken on. We signed a letter earlier this 
year in the year 2000 raising questions with the Department of 
Energy about the spike last year in fuel oil prices.
    I will read you comments of Mr. Mazur, Office of Policy. He 
is the director. I take for granted from that title he is 
important.
    But in his response he said this to Chairman Bliley: While 
some have argued for release of oil from the SPR there 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 a day of oil.
    I think they made it very clear then they were against it. 
This was not even a consideration. This was on the heels of 
high prices and shortages in New England, much like we face 
today.
    I go on and speed up the clock to later this year, the 
decision by the President, the announcement to sell SPR; and I 
go immediately to a memorandum to the President from Larry 
Summers, Secretary of the Treasury. He starts off: Chairman 
Greenspan and I believe that using the Strategic Petroleum 
Reserve at this time, as proposed by the Department of Energy, 
would be a major and substantial policy mistake. Even DOE 
suggests its impact on heating oil prices would be quite small. 
Moreover, it would set a new and ill-advised precedent, and the 
claim, the exchange is nothing more than a policy of technical 
SPR management, would simply not be credible in the current 
environment.
    They went on to describe several points that they wanted to 
make to the President. Let me share one of them with you.
    Using the SPR at this time would be seen as a radical 
departure from past practice and an attempt to manipulate 
prices, the one thing DOE said they would not do.
    It goes on to say, given the substantial size of the 
proposed sale and its proximity to both the OPEC meeting and 
the November election, it will be impossible to argue credibly 
that the proposed exchange is simply a technical SPR management 
policy.
    The only reason that this question arises is because 4 
years ago in 1996 we had an SPR sale. We sold 12 million 
barrels. The statement by the President at the time said: Over 
the last several weeks I have been concerned about the rise in 
gasoline prices at the pump. Today I am directing the 
administration to take the following steps: First, I am asking 
the Secretary of Energy to immediately begin the process of 
orderly sales of approximately 12 million barrels.
    In 1996, it was because of high gasoline prices. Earlier 
this year, they wouldn't consider it because prices aren't a 
part of the decision to sell SPR.
    Mr. Chairman, the Secretary of the Treasury said, Mr. 
President, this is the wrong thing to do. Mr. Wynn is right. We 
are unfairly criticizing this process because we know they are 
incapable of carrying it out.
    Mr. Chairman, I appreciate you holding this hearing. I wish 
that it would do some good. But the reality is that the flawed 
process of the companies that could participate in putting more 
oil into the system may or may not be part of this bidding 
process. But there is one thing that I hope we can agree on, 
both sides of the aisle on, and that is that we have to have a 
design process with a very specific set of goals as it relates 
to the use of SPR, the size of SPR and the process that we go 
through when there is any type of sale like we have currently 
going on, not one where we argue and debate the code of law 
that they have chosen to use and certainly so there is not a 
misunderstanding from administration to administration about 
what its use is for.
    I kindly yield back to the chairman.
    Mr. Barton. I thank the gentleman from North Carolina.
    I would recognize the gentleman from Florida, the vice 
chairman of the subcommittee, for an opening statement.
    Mr. Stearns. Thank you, Mr. Chairman; and thank you for 
holding this hearing.
    I want to be the one to be in the same camp as others who 
say it is very important that you hold this hearing, 
particularly in light of the fact that DOE claimed that in the 
interest of time it decided not to prequalify bids for the oil; 
and of course, as a result, two of the awarded bids were 
retracted because the companies could not obtain the necessary 
letter of credit. And now DOE has had to initiate another 
solicitation for the remaining oil.
    Mr. Chairman, I remain unconvinced that the release of the 
Reserve is imperative. First of all, the Department of Energy 
has indicated that only one-third of the 30 million barrels 
would even reach U.S. Refineries.
    I am also concerned that much of the remaining 20 million 
may not even remain in the United States' market. Questions 
have been raised as to the refineries' ability to handle the 
additional oil, as most are operating near capacity; and, 
furthermore, one of the witnesses before us today indicated in 
his testimony that the primary terminal in Netherland, Texas, 
will be unable to handle the release of SPR oil for November, 
thereby delaying delivery well into December. It seems that the 
administration decided to go ahead and release the oil and then 
figure out the details as it went along.
    I think this is part of the whole program that has come out 
of the Department of Energy. I think this speaks to the general 
lack of leadership which many of us talked about earlier. 
Instead of tackling our energy problems head on with a coherent 
policy, the administration chooses to run in a circle, throwing 
money at the problem or proposing politically expedient 
policies which fail to address a long-term solution.
    Mr. Chairman, I think one of things which certainly could 
be helped is to take under the Jones Act and use a waiver so 
that we could move heating oil or crude oil from the Gulf Coast 
to the Northeast; and I want to hear from the panel about 
perhaps a Jones Act waiver that could make it, could help, sort 
of the oil needed in New England.
    And last, Mr. Chairman, if the administration is indeed 
looking to provide heating assistance to America, where is the 
help for those homes that use natural gas? I doubt that the 
release of $400 million in LIHEAP funds will provide enough 
help with natural gas prices for all Americans.
    Thank you, Mr. Chairman.
    Mr. Barton. Thank the gentleman from Florida.
    The gentleman from Oklahoma would be recognized for an 
opening statement.
    Mr. Largent. Thank you, Mr. Chairman, for holding this 
hearing. It is a very timely one. As the 106th Congress draws 
to a close, I believe this subcommittee should exert its 
jurisdictional responsibility to closely examine the 
administration's decision to draw down the Strategic Petroleum 
Reserve.
    When this subcommittee held a hearing a few weeks ago on 
the President's decision to release 30 million barrels in the 
form of a swap from the SPR, I was extremely skeptical about 
the timing of the release. At that time I stated that I thought 
the release of the SPR made for a good election year campaign 
tactic, but as a public policy matter it was a bad idea.
    After reading some of the news reports of virtual novices 
in the oil business viewing the release of SPR as a quick get-
rich scheme, as well as oil industry analysts who had pubically 
stated that the reason the government failed to receive more 
generous bids suggests that refiners are not having trouble 
finding crude oil in the market, that makes me even more 
skeptical about the validity of releasing 30 million barrels 
from the Strategic Petroleum Reserve.
    I think our colleague, Mr. Shimkus, was right on target at 
the previous hearing when he stated that the operative word in 
Strategic Petroleum Reserve is ``strategic''. I am concerned 
that this administration, based upon what happened with the 
bidding process, confused the word ``strategic'' with 
``speculative''. If DOE has a reasonable explanation why it 
suspended its usual requirement that each bidder supply 
financial guarantees, I would like to hear it.
    Mr. Chairman, the United States' ability to maintain some 
form of energy independence is one of our highest national 
security priorities. Recently, we have seen tensions rise in 
the Middle East. Tragically, 17 brave Americans lost their 
lives aboard the USS Cole last week in Yemen. Let me be clear, 
I don't believe there is any correlation whatsoever between the 
release of SPR and the bombing of the USS Cole. However, I do 
believe there is a very real correlation between our national 
security and our reliance on foreign sources for crude oil.
    I recommend every member of this subcommittee as well as 
every Member of Congress take a look at a chart compiled by the 
Congressional Research Service that shows that 7.8 percent of 
the crude oil received by the SPR since 1995 is supplied by 
Libya, Iran and Iraq. How much has the U.S. Domestic production 
supplied over that same period? Exactly that same amount, 7.8 
percent to the Strategic Petroleum Reserve produced by the 
United States. That should serve as a wake-up call to all of 
us, regardless of whether we represent an oil-producing State 
or not.
    Mr. Chairman, I look forward to hearing from our witnesses, 
particularly Admiral Watkins. I believe Admiral Watkins, as a 
former Secretary of Energy and highly accomplished naval 
officer, can offer an insightful perspective on the national 
security implications of drawing down the Strategic Petroleum 
Reserve when there has been no discernible disruption in our 
energy supply.
    I yield back my time.
    Mr. Barton. I thank the gentleman from Oklahoma.
    I would recognize the distinguished gentleman from 
Louisiana, Mr. Tauzin, for an opening statement.
    Mr. Tauzin. I thank you, Mr. Chairman, and thank you for 
allowing me to join the hearing today.
    Let me first address the concerns raised by our friend from 
Virginia about this hearing. I am, frankly, sorry that he has 
some suspicions that this is political in nature. It certainly 
should not be. This committee of Congress has primary 
jurisdiction over the SPR. The SPR is not an administration 
reserve. It is a national reserve. And this committee's 
obligation is to see whether or not it is being operated for 
the good of the Nation or whether it is being used as some sort 
of political tool.
    There are suspicions about that, I would add. There are 
serious suspicions about the decision to release 30 million 
barrels right before this election, particularly when the last 
release was in 1996, another election year.
    The seriousness of the concern is summarized by Larry 
Summers himself and Greenspan to the President saying, don't 
politicize this reserve. It is not in the Nation's interest. It 
is not in the Nation's interest because, No. 1, releasing as 
much as 60 million barrels would do no more good than perhaps 
the 2.3 cent change in the price of fuel oil, a minimal impact. 
Thirty million barrels would obviously have a smaller, perhaps 
as little as one cent, impact. In fact, experts say that only 
10 million of these barrels will actually be used in the 
process of making fuel oil. The other 20 will replace oil that 
would have been imported into the U.S., and of that 10 million 
it might produce as little as 250,000 barrels of fuel oil.
    One of the reasons we have a problem is that our refineries 
are at 94 percent capacity. We have not built a new refinery in 
America in 20 years, and in the last dozen or so years over 30 
refineries have shut down in this country. So we have a problem 
with refining the crude oil that is brought into this country 
from places like Iran and Iraq, much less turning it into fuel 
oil for folks who will need it.
    We also have a memorandum from John Shans, sent to Melanie 
Kenderdine, the Director of Office of Policy, noting that all 
that was sold to Morgan Stanley is probably going to get 
exported. Because Morgan Stanley in their memo says that the 
Colonial pipeline is so full they can't move it up north. They 
have got fuel all in abundance in the Gulf Coast. They can't 
move it up north because the pipelines are full. In fact, they 
will probably export that fuel oil to Europe.
    What is amazing is that the DOE, in preparing the contracts 
to handle this 30 million barrel release that Larry Summers and 
Greenspan indicates looks too political and it is a bad policy 
decision, it is a decision to take the national strategic 
reserve and turn it into something used in political campaign 
years. That, they think, is wrong. In fact, they say at the end 
of their summary, Mr. President, you are taking responsibility 
for the prices of energy when you start doing this. Do you 
really want to do that? Do you want to be responsible for high 
prices of energy? Because once you take control of the SPR and 
release it to control prices in the marketplace, then you 
assume responsibility for those prices. Do you really want to 
do that?
    That is what Larry Summers wrote. But even considering all 
of those political questions about the use of the SPR, to 
administer these contracts as horribly ineptly as DOE and the 
Department has apparently done now just adds insult to injury. 
These contracts--I don't know if you read the stories on them--
even permit the sale of this oil overseas. It allows these 
bidders to take this oil in with no cash, by the way. And the 
Wall Street Journal is interesting, Mr. Wynn. It says, who 
would not want to own 10 million barrels of oil with no money 
down and 12 months to pay? What a neat deal.
    Mr. Wynn. Will the gentleman yield?
    Mr. Tauzin. I will yield in a second.
    Not only did it allow these contracts to go to people with 
no experience in this business, with no money down, 12 months 
to pay, but it even included language that allowed them to 
export it overseas. Why would the DOE construct a contract that 
is specifically designed to take oil out of our strategic 
reserve for the stated reason of getting fuel oil to the 
Northeast and leave in the contract a provision that says it is 
okay to sell this oil to Europe once you have produced it into 
refined fuel oil for homes? What a stupid provision. This is 
ineptness. This is ineptitude at its worse. So, yes, there is a 
lot of suspicion about what is going on with the SPR.
    Mr. Wynn. Will the gentleman yield?
    Mr. Tauzin. If I have time I will yield to my friend.
    Mr. Wynn. I thank the gentleman for yielding. I just wanted 
to clarify one point, because I think these companies are being 
unfairly indicted. I indicated at the end of my statement I am 
willing look at ways we can improve this process, but the fact 
of the matter is that every company that received oil would 
have to have proof of credit. If no proof of credit is 
received, no oil would be delivered; and that is exactly what 
happened. So any suggestion that anybody got oil without paying 
for it or had a year to go until they paid is not accurate. The 
truth of the matter is, proof of financial ability. It had to 
be provided. Credit had to be in hand before the oil was 
received----
    Mr. Tauzin. My point is----
    Mr. Barton. The opening statements are for opening 
statements. Opening statements are not to have a debate about 
the hearing.
    Mr. Tauzin. Well, let me conclude, Mr. Chairman, if I can. 
I simply want to point out that the DOE has not only used the 
SPR release for political purposes in my opinion, in many 
people's opinion, but it has used it now for social policy to 
award contracts to people with no experience in this business 
before----
    Mr. Wynn. Will the gentleman yield?
    Mr. Tauzin. No, I will not. That is social policy. That is 
what it is. Instead of making sure that people are capable and 
they have done this before so oil can get to where it belongs, 
they have awarded it to people with no experience. That is 
social policy.
    Mr. Barton. Will the gentleman conclude his opening 
statement?
    Mr. Tauzin. I will conclude.
    Finally, it will have such a small impact on the 
availability and the prices of fuel oil in the Northeast that 
it is a shame we are going through this exercise.
    I yield back.
    [Additional statements submitted for the record follow:]

 PREPARED STATEMENT OF HON. JOHN SHADEGG, A REPRESENTATIVE IN CONGRESS 
                       FROM THE STATE OF ARIZONA

    Three weeks ago, at our September 28 hearing, we examined the high 
price of heating oil and the Administration's decision to release oil 
from the Strategic Petroleum Reserve (SPR). Today, we have the 
opportunity to conduct further oversight into the utter failure of the 
Administration's decision. This decision is a perfect example of a fact 
which we all should have learned when the Soviet Union fell a decade 
ago: interference by the federal government in the economy does not 
work.
    The record speaks for itself. On September 20, 2000, crude oil sold 
at $37.21 per barrel. On September 22, the Administration announced the 
release of 30 million barrels of oil from the SPR for the stated 
purpose of lowering the price of heating oil this winter. The market 
reacted to the news by dipping to $31.57 per barrel on September 25. 
Yesterday, less than three weeks after the announcement, the price of 
crude oil was back up to $33.48 per barrel. So much for the 
Administration's plan to lower heating oil prices this winter.
    Could the federal government have a positive impact on the price of 
heating oil? The answer is yes: by minimizing the burdens it places on 
the economy. For example, approximately 28 percent of the price of 
refined petroleum products is attributable to taxes. It does not take a 
Nobel Prize in economics to understand that if you reduce or eliminate 
28 percent of the cost of a product, you will get a significantly lower 
end price.
    The Administration could even take a step which would have a very 
positive long-term effect on oil prices: it could end its prohibition 
on oil exploration and production in the Arctic National Wildlife 
Refuge (ANWR) on the North Slope of Alaska. There is an estimated 
supply of at least 3.57 billion barrels of oil underlying a portion of 
ANWR. Private industry has the technology to extract the oil with very 
little degradation of the environment.
    Much of the recent price rise is directly attributable to the 
violence in the Middle East and the fact that the United States depends 
on imports for 62 percent of its oil supply. Again, it does not take a 
Nobel Prize winner to realize that Minimizing our exposure in a 
volatile area of the world through development of greater domestic oil 
production will bring a measure of stability to prices.
    The federal government is not a business. Moreover, when it 
attempts to act like a business, any positive result is liable to be as 
short-lived as those following the Administration's announcement of the 
SPR release. When the government steps aside, minimizes its burdens on 
the private sector, and allows the economy to take care of itself, the 
results are the long-term growth and economic efficiency that only 
private enterprise can deliver. I hope that this and future 
administrations can learn from this important lesson.
                                 ______
                                 
 PREPARED STATEMENT OF HON. TOM BLILEY, CHAIRMAN, COMMITTEE ON COMMERCE

    Mr. Chairman: I'd like to commend you for holding this hearing on 
the Department of Energy's Drawdown of the Strategic Petroleum Reserve. 
Over the past year, energy issues have been very much in the news. The 
Committee on Commerce takes very seriously rising prices for crude oil, 
heating oil, gasoline, and natural gas. Members of this Committee wish 
to prevent a home heating oil crisis this winter. When DOE announced 
the release of 30 million barrels of oil from the Reserve, this 
Committee was especially interested in the impact this would have for 
consumers.
    One thing is for sure. This unprecedented action so close in time 
to the Presidential election is troubling.
    I have always been of the view that Congress and the Administration 
need to be working together on energy policies. Our objective is to 
look out for consumers, to reduce the nation's dependence on foreign 
oil, and to increase our energy independence. We need to craft 
environmentally sound policies that will stimulate, not hinder our 
energy security.
    The petroleum reserve is a valuable strategic asset that belongs to 
the American people. The Reserve was built and filled to protect 
against severe energy supply disruption. Most importantly, we should 
not engage in short-term election year gimmickery with the Reserve. If 
this is the case, it is wrong to trifle with the Reserve in this 
manner.
    I believe it is important to look at the Release or Exchange of 30 
million barrels of oil. This Administration claims that they released 
the oil to help consumers make it through the winter. Will this program 
actually help consumers who use home heating oil? Or will home heating 
oil made from oil released from the Reserve be exported outside of the 
United States?
    I am also concerned about how DOE is administering the contracts 
for oil and whether the American public is getting value for this use 
of the Reserve.
    Today I hope to learn the answers to these and many other 
questions. I look forward to hearing from today's distinguished panel 
of witnesses. Thank you.

    Mr. Barton. All right. With those mild-mannered, non-
controversial opening statements, we are now ready to hear from 
our panel of distinguished Congressmen and Congresswomen, if 
Congresswoman Cubin would take her place at the witness table. 
We will start with Congressman Hinojosa, who is the first 
member present; and we will go to Congresswoman DeLauro, who is 
the second member present; and then to Congressman Knollenberg 
and then Congresswoman Cubin.
    Congressman Hinojosa, welcome to the subcommittee. It is 
good to have another Texan here. Sometimes I feel outnumbered, 
so I am glad that you are here. Your statement is in the record 
in its entirety. We will recognize you for 5 minutes to 
summarize it.

 STATEMENT OF HON. RUBEN HINOJOSA, A REPRESENTATIVE IN CONGRESS 
                    FROM THE STATE OF TEXAS

    Mr. Hinojosa. Thank you Mr. Chairman. I appreciate that you 
would allow me to submit all my testimony in writing and that I 
can just summarize it and possibly do a correlation to this and 
the experience that I bring before coming to Congress----
    Mr. Barton. Without objection.
    Mr. Hinojosa. [continuing] and where I make my living.
    Mr. Chairman, I appreciate the opportunity to testify 
today. I will make brief remarks, and I will also submit my 
testimony for the record as you approved earlier.
    I would like to commend the leadership and the efforts of 
Energy Secretary Bill Richardson as well as the entire staff of 
the U.S. Department of Energy, particularly the Strategic 
Petroleum Reserve, that I will refer to as SPR, in their effort 
to ensure that oil from the SPR petroleum reserve reaches the 
marketplaces in an efficient manner.
    I know that this subcommittee will be monitoring the larger 
issues regarding the oil exchange. However, I choose to focus 
my remarks on the participation of the small and medium 
minority businesses in this solicitation. As part of what I am 
submitting to the record, I have a letter dated September 28, 
2000, addressed to the Honorable Bill Richardson, Secretary of 
Energy, and in that letter which I signed, and I will only read 
a part of it, I said, ``I participated in last night's Minority 
Enterprise Development Week Conference gala dinner, and I was 
happy to hear that you entered into a memorandum of 
understanding with the United States Department of Commerce's 
Minority Business Development Agency and the National Minority 
Business Summit to increase business activity between the 
Department of Energy and minority-owned firms. As a member of 
the House Small Business Committee, I am a strong supporter of 
programs that increase the participation of minority-owned 
companies in Federal procurement and activity, and I believe 
that the inclusion of minority businesses is important to the 
economic vitality of the Nation.''
    It is this letter that makes me a participant of this 
hearing today.
    I know that this committee will be monitoring the large 
issues, as I said earlier, but I want to say that as a member 
of the House Small Business Committee, I was happy to hear that 
three of the initial contract recipients were small minority 
businesses.
    Increased access to the energy industry for small and 
medium businesses is a natural development, given the increased 
sophistication of America's small business community. Today 
America's 25 million small businesses employ more than 50 
percent of the private work force and are the principal source 
of new jobs in America.
    Without going into all of my prepared text, Mr. Chairman, I 
want to say that yesterday I attended the ceremony to honor the 
17 dead and missing sailors on the USS Cole in Norfolk, 
Virginia, a very, very sad occasion for our country, especially 
for the families of those sailors we lost in the Middle East. 
As I was driving, as I was actually riding in a bus with about 
25 Senators and 25 Congressmen to this place in Norfolk, it 
reminded me of something that happened that I want to relate to 
the members of this committee.
    Before coming to Congress, I served as president of a food 
processing company for 20 years, a company that was very small, 
had less than half a million dollars in annual sales, and I, as 
president, applied for the 8-A designation, and with lots and 
lots of difficulties, I finally got that designation and found 
it very difficult to get into the Federal procurement industry, 
into the Federal procurement program here in Washington. 
However, with my persistence and lots of hard work, I got 
there.
    So listening to what I heard in the opening remarks and how 
you have to have all of this experience in order to get into 
the oil business reminds me of what I heard as to not having 
the experience to be able to supply meat to the Department of 
Defense back in the 1980's. But in 1990, as president of the 
company, I received a request from DPSC, Department of 
Personnel Support Centers, in Philadelphia, saying that they 
needed 1 million pounds of ground meat to be loaded onto one of 
our warships headed to the Middle East and had to be delivered 
within 72 hours to the lowest bidders. So I responded by saying 
that I needed just a few hours to give them a response in 
writing.
    I closed down the plant, and I called all of the employees, 
all of the supervisors, and I told them the situation that we 
were finding ourselves in as we went into war. Our men had to 
eat, they needed food on that warship. I asked if they were 
willing to work around the clock and in 72 hours be able to 
meet that deadline. Yes, they did. They stood up to the 
challenge and 2 hours to spare. In 70 hours, we were able to 
deliver--not 1 million pounds, but a half a million pounds in a 
convoy of 14 trailerloads of ground meat.
    I say this, Mr. Chairman, because we were told that only 
ConAgra and Excel and those large companies could do this, but 
I am saying to you that small businesses are asking for an 
opportunity to be able to get into this Federal procurement 
program, and, when put to the test, we can do lots of things 
that big boys think we can't do.
    Do we still have time to continue?
    Mr. Barton. You have gone about a minute and a half over. 
If you would wrap up in the next 30 seconds.
    Mr. Hinojosa. Fine. I want to simply summarize and say that 
I have included that editorial that Congressman Wynn talked 
about in the Wall Street Journal, which is probably one that I 
think should not have been written in the way that it was, 
because it is detrimental to small businesses like ourselves, 
and that there are many in my committee, including our Chairman 
Jim Talent and our Ranking Member Nydia Velazquez, who are 
fighting, who are fighting for these kinds of opportunities as 
these three would have been given had we not had this article 
in the Wall Street Journal, which, in my opinion, probably 
caused two of them to not be able to get their letter of credit 
and be able to get into this Federal procurement. Be a little 
bit more mindful of those small and medium businesses who are 
creating the jobs that are making our economy so strong and an 
unemployment rate of 3.9 percent. Thank you, Mr. Chairman.
    [The prepared statement of Hon. Ruben Hinojosa follows:]

PREPARED STATEMENT OF RUBEN HINOJOSA, A REPRESENTATIVE IN CONGRESS FROM 
                           THE STATE OF TEXAS

    Mr. Chairman, I appreciate the opportunity to testify today. I will 
make brief remarks and I will also submit my testimony for the record. 
I also would like permission to extend and revise my remarks.
    I would like to commend the leadership and the efforts of Energy 
Secretary Bill Richardson as well as the entire staff of the U.S. 
Department of Energy, particularly the Strategic Petroleum Reserve 
(SPR) Office, in their effort to ensure that oil from the SPR Petroleum 
Reserve reaches the marketplace in an efficient manner.
    I know that this subcommittee will be monitoring the larger issues 
regarding this oil exchange; However, I choose to focus my remarks on 
the participation of small and medium minority business in this 
solicitation.
    As a member of the House Small Business Committee, I was happy to 
hear that three (3) of the initial contract recipients were small 
minority businesses. Increased access to the energy industry for small 
and medium businesses is a natural development given the increased 
sophistication of America's small business community. Today, America's 
25 million small businesses employ more than 50 percent of the private 
workforce, and are the principal source of new jobs in America.
    However, I want to take this opportunity to raise serious concerns 
I have about the highly unusual, and I would argue highly unfair, 
scrutiny the U.S. Department of Energy and several small or minority 
owned businesses have come under during the solicitation and contract 
award process for the exchange of oil from the SPR. The assumptions 
made by many of the members of the press and perpetuated by officials 
from large oil interests are alarming.
    Let me start up-front with an editorial entitled ``Bidding on the 
Reserve'' that ran in The Wall Street Journal October 11th, and which, 
with your permission, I will insert into the hearing record. This 
editorial begins by making light of the fact that three of the eleven 
companies the Department of Energy (Department) entered into swap 
agreements with are small businesses and have little experience in the 
oil business. Quoting the Journal: ``But among the winners were three 
tiny oil companies . . . nobody in the oil industry has ever heard of 
them, none of them seem to have refining capacity . . .'' The Wall 
Street Journal does not stop there, claiming the only way such a small 
business could qualify would be because of special treatment or that 
they put forward a shady front. Quoting the Journal: ``Perhaps these 
three have a Very Good Friend in the Energy Department? Perhaps they 
are fronts for some low-down types? Perhaps they are just shells to 
prop up the prices when it looked as though the auction might not 
command a lot of interest from the standard suspects?''
    Mr. Chairman, this country's economy was founded by entrepreneurs 
who recognized opportunity and competed against tough odds. These three 
companies recognized an opportunity and competed fairly according to 
the rules set out by the Department. The sarcastic and disrespectful 
tone taken by the Wall Street Journal and officials from large oil 
interests concerning the legitimacy and qualifications of these three 
small businesses is a great disservice to the country. And, I am sad to 
say, that may have jeopardized their chances for securing their letters 
of credit. In fact, only one of these three companies was actually 
awarded a contract despite the fact that all three submitted qualified 
bids.
    Today's energy marketplace is largely unbundled. A trader can often 
get oil to the marketplace in the quickest and most efficient manner. 
The goal of the solicitation was to encourage as many bidders as 
possible, both small and large companies, so that oil could be moved 
into the market quickly. In fact, the oil that was exchanged in the 
first round has already started reaching the marketplace, including the 
oil of the participating small business.
    The truth is that these three small businesses had every right to 
bid for the oil contracts regardless of their size and experience 
because they met all standards as set by the Department. There was no 
processing or refining standard because it is not necessary in this 
instance. The oil is only being traded. They had every right to win a 
contract if they offered competitive bids and provided proof of 
financial credit. The Department's solicitation, developed by career 
staff, was designed to meet two goals: 1) to get oil from the SPR into 
the market as quickly as possible, and 2) to insure that the government 
and the taxpayer received adequate protection against the value of the 
SPR oil. There were no business size restrictions in the solicitation.
    The fact is that the government and the taxpayer were fully 
protected against the loss of value of any oil in the reserve, no 
matter how small or large the bidding company. If proof of credit was 
not received, no oil would be delivered. In fact, the government and 
the taxpayer will benefit from the exchange. The Department recently 
announced that 23 million barrels of oil are on their way to the 
market, the largest sale or swap conducted in the SPR's 25 year 
history. The same amount of, or more, oil will be returned to the SPR 
by the winning contractors next year.
    In summary, the three small businesses who bid for the oil exchange 
contracts met all qualifications and thus had every right to bid for 
the oil contracts AND made the market more competitive to the benefit 
of our nation.
    America is a capitalist nation. Competition is a part of our 
business and social fabric. The House Small Business Committee along 
with the Small Business Administration work to ensure that small 
businesses have access to a competitive market. We must ensure that 
full competition be encouraged in the energy industry. But most 
importantly, we must ensure that participation by capable small 
businesses be promoted through all the sales, exchanges, and purchases 
of Energy resources by the federal government.
    The federal government is in a unique position to help small 
business & MBEs grow in this critical field. I am prepared to work with 
my colleagues on the Committee to develop legislation promoting 
innovative programs that assist small businesses to effectively compete 
in scientific, technical, environmental, and other energy related 
fields. Without these types of initiatives we are preventing small 
businesses and MBEs from competing in, and benefitting from federal 
procurement and the marketplace.
    These actions make economic sense and are good for a continued 
healthy America. Thank you for this opportunity.

    Mr. Barton. Thank you, Congressman Hinojosa. We appreciate 
your testimony.
    We now want to hear from the gentlewoman from Connecticut, 
Congresswoman DeLauro, for 5 minutes. Your statement is in the 
record in its entirety, and we ask that you summarize it.

     STATEMENT OF HON. ROSA L. DeLAURO, A REPRESENTATIVE IN 
             CONGRESS FROM THE STATE OF CONNECTICUT

    Ms. DeLauro. I thank the chairman and the ranking member 
and the rest of the committee for permitting me to testify this 
morning on this important issue. Just before my remarks, I just 
might want to make a comment because there has been a lot of 
discussion here this morning about the strategic quality of, if 
you will--or the national security issues mentioned with the 
Strategic Petroleum Reserve. I might call attention to folks 
that in 1999, there were several Republican leaders, including 
Mr. Armey, Mr. DeLay, and Mr. Blunt, who joined 35 other 
Republicans to introduce a bill that would have abolished the 
Reserve; in fact, the standard fare in the Vice Presidential 
race and the Presidential race, and Mr. Cheney has indicated, 
in fact, that he would have abolished the Strategic Petroleum 
Reserve. There seems to me to be a disjointed effort now to 
think about the Reserve in terms of its strategic nature when 
there were those who were just not a short time ago wanting to 
sell it off.
    I come before you today, quite frankly, because of the 
Northeast, my part of the country. We have suffered in the last 
year as a result of the skyrocketing home heating oil prices 
and the plummeting supplies. I come before you on behalf of 
678,000 Connecticut homes that are heated by oil.
    This past winter families, seniors across the Northeast saw 
budgets stretched to the limit to accommodate outrageous home 
heating oil prices, forcing many to choose between basic needs 
like food and heat. In the cold of a New England winter, no one 
should ever have to make that kind of a cruel choice. I note 
that in the composition of the committee, there are people from 
the Northeast, people from the Midwest who experience that, but 
there are a lot of folks who come from some very warm climates 
who maybe don't understand the difficulty that people on the 
east coast are having.
    With winter just around the corner, these families are 
confronted again with high home heating oil prices and limited 
supply. Government forecasters in the United States, the 
world's biggest energy user, are projecting a 12 percent 
increase in demand, a 25 percent rise in home heating oil bills 
nationwide from last winter, which was the warmest on record. 
In the Northeast home heating oil prices are approximately 
double the price last year, and supplies in the Northeast are 
70 percent below where they were a year ago.
    While this Congress continues to do little to address the 
concerns of families and seniors trying to heat their homes, in 
fact, the administration has acted quickly and efficiently in 
addressing the crisis. In July, the President showed leadership 
by creating the Northeast Home Heating Oil Reserve to reduce 
the risks presented by the shortages such as the one that I 
just spoke about. A 2-million-barrel reserve, half of which is 
stored in my district, will provide a safety net to many New 
Englanders.
    Mr. Chairman, I visited the storage facility this past 
week, and I might add there were some good folks from Oklahoma 
who were there in charge of the process, Williams Energy, 
because it is a storage facility doing a darn good job there. 
The Reserve in the Northeast is now full, and a full 3 weeks 
ahead of schedule.
    Mr. Barton. Madam, there are not any bad folks from 
Oklahoma, they are all good folks.
    Ms. DeLauro. Well, I would concur, and they are there doing 
a good job for those who live in the Northeast.
    In September, the President, concerned with low crude and 
home heating oil stocks, directed the exchange of 30 million 
barrels of oil from the Reserve. The move is expected to add an 
additional 3 to 5 million barrels to home heating oil to that 
market.
    Following that decision, a move that was praised by 
industry analysts, world leaders and residents of the 
Northeast, the price of crude oil dropped by almost 20 percent. 
It has meant relief for residents relying on home heating oil 
this winter and the confidence that, in fact, if we get into 
difficulty in the Northeast, we will have the Reserve close by.
    The President also released $400 million from the Low 
Income Home Energy Assistance Program, which provides emergency 
funds to all States, encouraging States to take steps now to 
help the crisis that can occur this coming winter. This is the 
largest release of LIHEAP emergency funds ever.
    When you have a chance to do something, to lift the burden 
of families in this country, you do it. Releasing the Strategic 
Petroleum Reserve, creating the Northeast Home Heating Oil 
Reserve, releasing LIHEAP funds will, in fact, bring relief to 
families. It was the right thing to do.
    We are facing lower prices of oil than we were a month ago. 
The President's actions are going to increase supply and 
decrease prices for American families.
    The purpose of the hearing is supposed to question the 
administration's authority and efforts to reduce home heating 
oil costs and to bring heat to families. The argument would be 
moot if the Congress had acted promptly on the administration's 
suggestion for a comprehensive energy policy. Instead, most of 
the goals laid out by the administration have been untouched or 
unmet. Tax credits for domestic oil and gas production, energy 
efficiency, renewable energy, Congress has done nothing. The 
proposals on research in energy research, development in oil, 
gas, coal efficiency, renewables, Congress has shortchanged the 
request by $1.5 billion. This Congress has not even been able 
to pass legislation to authorize the use of their Reserve, 
create the Home Heating Oil Reserve, or trigger language that 
will allow us to use the Reserve.
    The Energy Policy Conservation Act expired at the end of 
March. It awaits action in the Senate. We need to be serious 
about making a commitment to comprehensive energy policy on 
both sides of the aisle. I appreciate the bipartisan nature of 
this committee and its willingness to be able to do that. That 
is what our job is and not to politicize the issue.
    I would add one more point, because the Jones Act has been 
mentioned here today. We need to take a very close, hard look 
at that effort as well and look at whether or not--because 
industry would have to pay insurance prices and doesn't want to 
have to do that; or maybe, in fact, because the oil abroad will 
get a higher dollar amount for that than it is going there 
rather than here; or maybe, in fact, we do need to do something 
in a bipartisan way to look at how we can get that oil from the 
Gulf and get it to the Northeast, but it can't be on the basis 
of politics and fighting against one another, but what is in 
the best interests of the people who live not only in the 
northeastern part of this country, but all over this country. 
Thank you.
    [The prepared statement of Hon. Rosa L. DeLauro follows:]

    PREPARED STATEMENT OF HON. ROSA L. DELAURO, A REPRESENTATIVE IN 
                 CONGRESS FROM THE STATE OF CONNECTICUT
 
   I would like to thank Chairman Barton and the rest of the Committee 
for permitting me to testify on this very important issue. Too many 
people suffered in the Northeast last year as the result of 
skyrocketing home heating oil prices and plummeting supplies
    I come before you today on behalf of the estimated 678,000 
Connecticut homes heated by oil, This past winter, families and seniors 
across the Northeast saw their budgets stretched to the limit to 
accommodate outrageous home heating oil prices, forcing many to choose 
between basic needs like food and heat. In the cold of a New England 
winter, no one should ever have to make that kind of cruel choice.
    With this winter just around the corner, these families are 
confronted again with high home heating oil prices and limited supply. 
Government forecasters in the U.S. are projecting a 12 percent increase 
in demand--and a 25 percent rise in home heating oil bills nationwide--
from last winter, the warmest on record.
    In the Northeast, home heating oil prices are approximately double 
that of last year and supplies are 70 percent below where they were a 
year ago. Constituents in my district are now paying $1.33 per gallon 
for home heating oil.
    While this Congress continues to do little to address the concerns 
of families and seniors trying to heat their homes, the Administration 
has acted quickly and efficiently in addressing this crisis.
    Back in July, the President showed great leadership in creating a 
Northeast home heating oil reserve to reduce the risks presented by 
home heating oil shortages, such as the one that occurred last winter. 
The two million barrel reserve, half of which is stored in my district, 
will provide a safety-net to many New Englanders. The Northeast Reserve 
is now full--a full 3 weeks ahead of schedule.
    In September, the President, concerned with low crude and home 
heating oil stocks, directed the exchange of 30 million barrels of oil 
from the Strategic Petroleum Oil Reserve. The move is expected to add 
an additional 3-to-5 million barrels to the home heating oil market.
    Following that decision--a move praised by industry analysts, world 
leaders and residents of the Northeast alike--the price of crude oil 
dropped almost 20 percent. This has meant relief for residents relying 
on home heating oil this winter--and those who are still facing high 
prices at the pump.
    The President also released $400 million dollars from the Low 
Income Home Energy Assistance Program (LIHEAP), which provides 
emergency funds to all States, encouraging States to take steps now to 
help low-income households cope with high fuel prices this coming 
winter. This is the largest release of LIHEAP emergency funds ever.
    When you have a chance to do something to lift the burden of 
families, you do it. Releasing the Strategic Petroleum Reserve, 
creating the Northeast Home Heating Oil reserve, and releasing LIHEAP 
funds will bring relief to relies and it was the right thing to do.
    As a result of the President's actions we are facing lower prices 
of oil than we were a month ago. His actions are going to increase 
supply and decrease prices for American families.
    The purpose of this hearing is supposed to question the 
Administration's authority and efforts to reduce home heating oil costs 
and bring heat to families. This argument would be a mute point if this 
Congress had acted promptly on the Administration's comprehensive 
energy policy.
    Instead, most of the energy goals laid out by the Clinton/Gore 
Administration have either been untouched or unmet.
    The Administration has proposed tax credits for domestic oil and 
gas production, energy efficiency, and renewable energy--yet Congress 
has done nothing.
    The Administration has proposed investments in energy research and 
development in oil, gas, coal, efficiency, renewables, and nuclear 
energy--Congress has shortchanged their request by $1.5 billion.
    This Congress has not even been able to pass legislation to fully 
authorize the use of the Strategic Petroleum Reserve, create a 
Northeast home heating oil reserve, or the trigger language that would 
allow us to use this Reserve. The Energy Policy Conservation Act, which 
expired at the end of March, still awaits action in the Senate.
    If this Congress, was serious about making a commitment to a 
comprehensive energy policy that reduces prices in home heating oil and 
at the pump, it would have passed these proposals a long time ago.
    In fact, rather than politicizing the Administration's efforts to 
bring beat to Americans trying to heat their homes this winter, we 
should be holding a real hearing that looks into the failure of this 
Congress to meet the basic energy needs of American families.
    My only hope is that this Congress relies less on their hopes for a 
warm winter, and more on a comprehensive energy policy. The families 
and seniors anticipating another long, cold winter demand it.
    Thank you.

    Mr. Barton. I would like to point out to the gentlewoman, 
we passed the EPCA reauthorization on April the 12th in the 
House on a bipartisan basis with the Northeast Fuel Oil Reserve 
that was put in at the direct request of Congressmen Markey, 
Fossella and Barton.
    Ms. DeLauro. It was stripped out of the energy bill and the 
appropriations bill when it did come to the House, but it is 
now--you are right, it is in the Senate where it is being held 
up. I thank the chairman.
    Mr. Barton. I think Mrs. Cubin was next.
    Mrs. Cubin. Thank you, Mr. Chairman.
    Mr. Knollenberg. I yield to Mrs. Cubin.
    Mr. Barton. Congresswoman Cubin for 5 minutes.

 STATEMENT OF HON. BARBARA CUBIN, A REPRESENTATIVE IN CONGRESS 
                   FROM THE STATE OF WYOMING

    Mrs. Cubin. Thank you, Mr. Chairman and committee, for 
inviting me to testify today on the administration's planned 
swap of 30 million barrels of crude oil from the Nation's 
Strategic Petroleum Reserve. I am sorry that Representative 
DeLauro has to leave, because I think that one thing that has 
been left out of her analysis of the problem is that part of 
the reason we have a lack of supply is a direct result, at 
least in part, of environmental extremism that doesn't allow us 
to go on to public lands to explore and produce oil. We have 
vast volumes of reserves on high desert plains that, in my eye, 
are very beautiful, but in somebody else's eye might not be 
beautiful, that are not allowed to be explored or drilled 
because of extreme Endangered Species Act interpretation and 
other environmental laws. So I would ask that people sit down 
at the table, people in the Northeast would sit down at the 
table with us and talk about some of the problems we have in 
getting access to public lands.
    On the Resources Committee, I chair a subcommittee with 
jurisdiction over minerals, energy, and included Federal 
mineral leasing laws. I held a hearing 18 months ago to review 
the administration's proposal at that time to use royalty oil 
taken in kind from the outer continental shelf leases in the 
Gulf of Mexico to partially fill the Strategic Petroleum 
Reserve, which I will call SPR. The time was ripe then, as the 
price was quite low. It was about $13 per barrel for west Texas 
intermediate benchmark crude. The DOE proposed to take some 28 
million barrels in kind, albeit the program was suspended after 
only 11 million barrels, because global demand had recovered, 
and supplies were tight. Thus began the sharply higher priced 
trend that we are seeing today, which the recent SPR swap 
program was intended to blunt.
    Mr. Chairman, it is clear to me that SPR swaps can have a 
very, very short-term effect on crude prices, as little as a 
few days, at most a week or 2, but that is the extent of it. 
Why such a short response? Because demand-side pressures swamp 
such piddly increments of supply, obviously.
    Now, I am not an economist, but even I can do the simple 
math. I used to teach math, and I hope everybody will look at 
this; I have included it in my statement, the facts about 
import and export oil in the United States. The Energy 
Information Administration reports that the United States 
imported 9,455,000 barrels of crude oil per day in the year 
2000, which is the last month of actual data, while 
simultaneously we exported 9,000 barrels per day, for a net 
import of crude oil of 9.446 million barrels per day. Then, 
when you take into consideration the million barrels of refined 
product, including heating oil that we import, the total of 
imports is 10,446,000 barrels per day, which means that the 30 
million barrels of crude that the administration wants to swap 
represents only 3 days of imports, 3 days.
    While I was not in Congress when the SPR was created, 
although I invented oil--forgive me, forgive me for that--I am 
well aware of the purpose for which this reserve is to be set 
aside, and serving as a buffer to oil market conditions is not 
it. It is for strategic protection. The only thing strategic 
about this swap is with respect to the Vice President's 
election campaign. Incredibly, as the Wall Street Journal story 
attests, though, the administration has had problems getting 
even this oil to refiners to distill into heating oil and 
diesel fuel, because our refinery capacity in the United States 
is at its capacity. Furthermore, a dear colleague letter that 
was passed around last week that went over my desk asking me to 
sign a letter to the President urging him to disallow export of 
U.S. heating oil supplies to foreign markets impressed me with 
the lack of wisdom in it. But if other nations were to 
reciprocate in kind in this policy, it would exacerbate the 
severe supply problem that we have now, and particularly for 
the Northeast.
    So think about it. If we are net energy, or net heating 
oil, net oil importers of distilled and residual fuel oil as 
well as crude, we have to be very careful about barriers that 
we set up to free trade so that our trading partners don't do 
the same thing to us. We could end up in a much worse position 
if they decided to quit exporting to us because we quit 
exporting and interfered with free trade.
    I mentioned earlier royalty in kind, Mr. Chairman. As you 
know, a dispute in the other body, largely over the RIK 
provision, is keeping EPCA reauthorization from being 
considered on the Senate floor.
    Mr. Chairman, I can't see my lights. I don't know how much 
time I have. Oh. So I think I have exactly the right amount of 
time to finish.
    I support Senator Mikulski's position, which would give the 
Secretary of the Interior more authority to expand the program 
whereby oil and gas royalties on Federal leases are paid in 
volumes of oil and natural gas, rather than in cash, 
particularly on the OCS. If the Feds were to aggregate their 
royalty volumes from many leases, we would have a market power 
which translates into increased value for the oil and gas.
    In a recent pilot program, the Minerals Management Service 
has taken natural gas in kind from offshore Texas leases and 
sold it to GSA for use by Federal facilities. In fact, the 
heating oil that heated--our office buildings were heated by 
some of this oil.
    The Interior Appropriations Act signed into law last week 
has a short-term provision for RIK enhancement, but the EPCA 
language is better and worthy of House approval if the Senate 
can break the logjam.
    In the 107th Congress, we have to dedicate ourselves to 
creating a national energy policy that takes on the issue of 
domestic supply head on. My State of Wyoming is ready and 
willing and able to provide copious amounts of natural gas, 
including coalbed methane, coal and oil, to help balance that 
supply and demand equation.
    Thank you, Mr. Chairman. I will be happy to answer any 
questions.
    Mr. Barton. Thank you.
    The gentleman from Michigan, Mr. Knollenberg is recognized 
for 5 minutes.

     STATEMENT OF HON. JOE KNOLLENBERG, A REPRESENTATIVE IN 
              CONGRESS FROM THE STATE OF MICHIGAN

    Mr. Knollenberg. Mr. Chairman, thank you very much for 
holding this hearing. I thank you, and I thank Ranking Member 
Boucher as well. It is timely, and it is necessary.
    As a member of the House Energy and Water Appropriations 
Subcommittee, and as a representative from the auto-producing 
State of Michigan, I have a very keen interest in today's 
hearing. I would like to have heard, obviously, from Secretary 
Richardson, who I understand was invited here but could not 
come. After leading the charge to release oil from the SPR, it 
is unfortunate that he does not consider this hearing to rise 
to the appropriate level of importance.
    The SPR and the Nation's overreliance on foreign oil 
supplies impacts each and every American. This subject deserves 
all of the attention that this subcommittee is affording it 
today, and more. Releasing oil from the SPR puts both energy 
and national security at risk. It does not solve our national 
overreliance upon foreign oil supplies. It is a dangerous move 
by the administration in an attempt to temporarily reduce oil/
gas prices for what can only be deemed political gain in the 
November election.
    Chairman Barton and others are right to raise the question 
of whether this release of oil from the SPR rises to the level 
intended in the authorizing legislation. The President has not 
declared a national emergency, nor has he told the American 
people that the current situation is a severe supply or price 
disruption. World markets have plenty of oil, as evidenced by 
OPEC's production increases over the last weeks. Instead, the 
administration claims that this is only a swap, with no real 
loss of oil from the reserves. A year from now, we will know 
whether the SPR has been replenished to its intended level.
    Although I hope that the price of oil 12 months from now is 
less than $35 a barrel, that is by no means guaranteed. As 
anyone who follows closely, as I do, the changes which 
transpire rapidly and dangerously on the international level, 
this release is a gamble with American security. Recent events 
in the Middle East exemplify just how delicate the situation 
can be.
    According to the most recent data from the Energy 
Information Agency, domestic production has dropped 17 percent 
since 1992, while overall oil consumption is up 14 percent. 
Those are troubling numbers. The U.S. is now more than 55 
percent reliant upon foreign oil supplies. But that need not be 
the situation. America has substantial reserves of oil and 
natural gas, both in the outer continental shelf and in Alaska. 
Careful and environmentally responsible exploration and 
drilling in these areas can and should be allowed. The amount 
of land in question is minimal, and we have the technology to 
recover the oil with essentially zero environmental impact. And 
U.S. refineries are operating at near capacity, as high as 96 
percent or more. Any increase in the upstream supply of crude 
oil will have little, if any, impact on the roughly 16 million 
barrels per day that the 155 U.S. refineries can churn out.
    I might reference another point when it comes to 
refineries, and this applies to Mr. Shimkus' State of Illinois. 
This Nation's sole remaining uranium refinery is on the 
immediate verge of closing within the next month, yet, despite 
repeated requests to the administration, they have failed to 
answer, and that is emblematic, I think, of this 
administration's failed energy policies when nuclear produces 
over 20 percent of our energy needs.
    Such high capacity is, in part, due to the need to increase 
inventories of home heating oil for the upcoming winter season, 
a season that, by the way, NOAA has just recently warned will 
mark a return to colder temperatures in both the Northeast and 
Midwest, yet the record high capacities are also due to the 
fact that no new refineries have been built in the U.S. for 
several years now. Burdensome mandates and all too often 
scientifically flawed regulations put forth by the 
administration, in particular by the Environmental Protection 
Agency, have stymied any new investments in infrastructure. 
Many have claimed that the energy problems the Nation is 
experiencing are the result of the Clinton-Gore 
Administration's failure to develop and pursue a sound national 
energy policy. The last time I looked, the administration is in 
charge of the Department of Energy.
    Actually, it appears instead that they have what can only 
be termed as an anti-energy policy. Their actions have served 
to thwart and cut our energy supply and drive up costs. They 
pit one energy source against another and create constant 
obstructions of roadblocks with volume after volume of 
regulation.
    Petroleum production plays a much greater role in the 
economy than just gasoline and home heating oil. Increases in 
the price of oil can therefore have a ripple effect on the 
prices of other goods. That is why it is important to reduce 
our reliance on imported oil and to fully support clean coal, 
hydro and nuclear power as a means of meeting the Nation's 
energy demands. It is also why we need to invest in reasonable 
research and development in the development of new energy 
technologies, not only the solar and the wind power projects 
that this administration lavishes millions and billions of 
dollars on, investments yet to show very much promise when it 
comes to contributing to increasing our overall energy demands. 
It is precisely the antienergy policy of the Clinton-Gore 
Administration which has led to the current situation of high 
oil and natural gas prices. Unfortunately, it is the American 
people who are now being forced to bear the cost of this 
administration's antienergy policy.
    Again, I want to thank the subcommittee for affording me 
the time here today. I do think this is very important, and I 
appreciate very much you taking the time to make a case for our 
investigating what I believe is a problem; not just a long-term 
problem, it is a short term problem, and we have to do 
something about it. I thank the chairman.
    [The prepared statement of Hon. Joe Knollenberg follows:]

    PREPARED STATEMENT OF HON. JOE KNOLLENBERG, A REPRESENTATIVE IN 
                  CONGRESS FROM THE STATE OF MICHIGAN

                              INTRODUCTION

    Thank you Chairman Barton, Ranking Member Boucher and other Members 
of the Commerce Energy and Power Subcommittee for affording me the 
opportunity to speak today. Thanks are also due to the panelists for 
taking time out of their busy schedules. I look forward to your 
testimony.
    As a Member of the House Energy & Water Appropriations 
Subcommittee, and as a Representative from the auto-producing state of 
Michigan, I have a keen interest in today's hearing. I would have liked 
to have heard from Secretary Richardson who declined to be here today. 
It is my hope that his absence doe not indicate that matters involving 
the SPR do not rise to the appropriate level of importance for the 
Administration. I for one consider the topic extremely important. The 
Strategic Petroleum Reserve and the nation's over-reliance on foreign 
oil supplies impacts each and every American. The subject deserves all 
the attention that this subcommittee is affording it today.
    Releasing oil from the SPR puts both energy and national security 
at risk. It does not solve our national over-reliance upon foreign oil 
supplies. It is a dangerous move by the Administration in an attempt to 
temporarily reduce oil/gas prices for what can only be political gain 
in the November election.

                     AUTHORITY FOR THE SPR RELEASE

    Chairman Barton and other Members are right to raise the question 
of whether this swap of oil from the SPR rises to the level intended in 
the Energy Policy Conservation Act authorizing the Reserve. The 
President has not declared a national emergency, nor has he told the 
American people that the current situation is a severe supply or price 
disruption. World markets have plenty of oil, as evidenced by OPEC's 
production increases over the past few weeks.
    Instead, the Administration claims that this is only a ``swap'', 
with no real loss of oil from the reserves. A year from now, we will 
know whether the SPR is replenished to its intended level. And although 
it is to be hoped that the price of oil twelve months from now is less 
than $35 a barrel, that is by no means guaranteed. As anyone who 
follows closely, as I do, the changes which can transpire rapidly and 
dangerously on the international level, it is only prudent to restore 
the SPR to its pre-release levels in as short a period as possible.
    Recent events in the Middle East show clearly just how delicate the 
situation there can be. Oil prices leapt after the tragic bombing of 
the U.S.S. Cole in Yemen. Indeed, it is for emergencies such as drastic 
supply interruptions or military engagements that the Strategic Reserve 
was created. Its 571 million barrels in the salt domes of Louisiana and 
Texas represents only five weeks of total demand and only two months of 
foreign imports in the event of a disruption. It was for times of 
national crisis that the SPR was established, not to control market 
fluctuations.
    Prices are without a doubt high, especially in relation to just a 
short year ago when crude was nearer $10 a barrel. And there is no 
question that heating oil reserves for the coming winter months are a 
concern. But market price fluctuations are different from supply 
interruptions and national emergencies. The President and the 
Administration know the difference, yet they choose to ignore it. They 
seem to place more weight on maintaining control of the White House, 
than on protecting America's energy and national security.

                        SUMMERS/GREENSPAN VIEWS

    Even the Administration's top financial and economic advisors 
recognize the flaws in opening up the SPR. We've all seen the Wall 
Street Journal article covering the memo from Treasury Secretary 
Lawrence Summers to President Clinton advising against any release of 
oil. Secretary Summers was right when he said opening the SPR, ``would 
be a major and substantial policy mistake.''
    Even the man most-often credited with orchestrating the nation's 
economic prosperity over the past several years, Alan Greenspan, 
agrees. The nation entrusts these men to make decisions on the money 
supply, interest rates and national debt, only somehow not when it 
comes to this matter.

                         DOMESTIC OIL SUPPLIES

    According to the most recent data from the Energy Information 
Agency, domestic oil production was 5.9 million barrels a day while 
imports were 9.1 million barrels a day. Compare that to 1992 when we 
had domestic production of 7.2 million barrels a day and imports of 6.1 
million barrels. Our domestic production has dropped 17% since 1992 
while overall oil consumption is up 14%. Those are truly troubling 
numbers. The U.S. is now over 60% reliant on foreign oil supplies.
    But that need not be the situation. America has substantial 
reserves of oil and natural gas, both in the outer continental shelf 
and in Alaska. Potentially as many as 7.7 billion barrels in Alaska 
alone.
    Careful and environmentally-responsible exploration and drilling 
can and should be allowed in limited areas of the Arctic National 
Wildlife Reserve in proximity to the existing oil-production areas. The 
amount of land in question is minimal and we have the technology to 
recover the oil with essentially zero environmental impact.

                    REFINERY CAPACITY & REGULATIONS

    Another point that requires mentioning is that U.S. refineries are 
operating at near capacity--as high as ninety-six percent or more. Any 
increase in the upstream supply of crude oil, such as a release from 
the SPR, will have little if any impact on the roughly 16 million 
barrels per day that the 155 U.S. refineries can churn out.
    Such high capacity factors are in part due to the need to increase 
inventories of home heating oil for the upcoming winter season. A 
season that by the way the National Oceanographic Atmospheric 
Administration has just recently warned will mark a return to colder 
temperatures in both the Northeast and Midwest. Yet the record high 
capacities are also due to the fact that no new refineries have been 
built in the U.S. for several years now. Burdensome mandates, and all-
too-often scientifically-flawed regulations put forth by the Clinton-
Gore Administration, in particular by the Environmental Protection 
Agency, have prevented the industry from investing in any new refining 
capacity.
    While refining capacities in the petroleum industry are near 
maximum, the Administration has ignored similar difficulties in the 
front end of the uranium fuel cycle. This issue has not received the 
attention it deserves. Past actions on the part of the federal 
government have profoundly impacted U.S. uranium mining and 
conversion--the equivalent of refining for commercial nuclear power. 
The unintended consequence of these actions has been a drastic 
reduction in prices, threatening the survivability of the U.S. firms 
involved. Loss of our domestic mining and conversion capabilities could 
seriously impact our national energy security.
    Earlier this year, gasoline prices in my home state of Michigan and 
indeed much of the Midwest, hit more than $2.00 a gallon for several 
weeks. Part of the price escalation can be attributed to pipeline and 
refinery interruptions. Somewhat surprisingly, those supply 
interruptions did not merit consideration of an SPR release by the 
Administration.
    Yet that isn't the only reason. EPA mandates on gasoline resulted 
in the astounding situation where a driver traveling from St. Louis to 
Chicago would have passed through four different ``gasoline control 
zones''. With three grades required for each zone, that means refiners 
must produce twelve different blends for just a 300 mile stretch of 
highway. Just one example of how the Clinton-Gore Administration has 
over-regulated the nation into crisis.

                        RE-BIDDING OF CONTRACTS

    Next we learn that the bidding process used by DoE to select 
companies to take the oil from the SPR was flawed. It seems that as 
many as 7 of the 30 million barrels to be released was awarded to 
companies without the requisite financial capabilities and without any 
capabilities to actually transport or refine the oil. It is unfortunate 
when the Department of Energy puts such a high priority on releasing 
oil from our national reserves but then fails to execute the required 
diligence in selecting bidders. The decision to swap oil from the 
reserves was a bad one, but to learn that it was done improperly only 
adds insult to injury.

                  ADMINISTRATION'S ANTI-ENERGY POLICY

    With petroleum and natural gas demand outstripping production and 
inventories, the increase in prices is only to be expected. Many have 
claimed that the energy problems the nation is experiencing, and is 
likely to feel even more acutely in the coming winter months, are the 
result of the Clinton-Gore Administration's failure to develop and 
pursue a sound national energy policy.
    Actually, it appears instead that they have what can only be termed 
an anti-energy policy. Their every action has served to thwart and cut 
our energy supply and drive up costs. They pit one energy source 
against another and create constant obstructions and road blocks with 
the volumes and volumes of regulations, rules, guidances, and executive 
orders that they issue.
    The Vice President has stood resolutely behind his 1993 book Earth 
in the Balance. The very same book where he stated, ``We know that the 
automobile's cumulative impact on the global environment is posing a 
mortal threat to the society of every nation that is more deadly than 
that of any military enemy we are ever again likely to confront.'' It 
would appear that Mr. Gore equates the nation's primary mode of 
transportation, a cornerstone of the American economy, with the likes 
of Osama bin-Laden and Saddam Hussein. Such statements make the Vice 
President's about face on oil prices and his resulting call to release 
the reserves ever the more surprising.
    And petroleum products play a much greater role in the economy than 
just gasoline and home heating oil. Increases in the price of oil can 
therefore have a ripple effect on the prices of other goods. That is 
why it is important to reduce our reliance on imported oil and to fully 
support clean-coal, hydro and nuclear power as means of meeting the 
nation's energy demands.
    It is also why we need to make reasonable investments in research 
and development of new energy technologies, not only the solar and wind 
power that the Administration lavishes taxpayer dollars upon, year 
after year. Investments that have yet to show very much promise when it 
comes to contributing to our overall energy demands.
    It is precisely the ``anti-energy'' policy of the Clinton-Gore 
Administration which has led us to the current situation of high oil 
and natural gas prices. Unfortunately, it is the American people who 
are now being forced to bear the cost of this Administration's anti-
energy policy.

                                CLOSING

    Again, I thank the Subcommittee for affording me time to speak here 
today. It is my hope that the Administration will see the error in 
their decision to release oil from the Reserve for the purposes of 
manipulating short term market fluctuations. What is needed is a real 
domestic energy policy, one that reduces our dependence on foreign oil 
through environmentally sound exploration and development of our 
petroleum resources, one that does not stifle our proven methods of 
energy production, and one that promotes investment in technologies 
that will provide for the nation's future energy needs.
    Thank you.

    Mr. Barton. I thank the gentleman from Michigan.
    The Chair has no questions for this panel.
    The Chair recognizes Mr. Boucher.
    Mr. Boucher. Thank you, Mr. Chairman. In the interest of 
time, I am not going to ask questions of this panel either, but 
I would like to thank them for joining us here.
    Mr. Barton. Does the gentleman from Oklahoma wish to ask 
questions?
    Mr. Largent. No questions.
    Mr. Barton. Does the gentleman from Illinois wish to ask 
questions?
    Mr. Shimkus. No, Mr. Chairman.
    Mr. Barton. Does the gentleman from Louisiana wish to ask 
questions?
    Mr. Tauzin. No questions.
    Mr. Barton. Well, I don't believe it. The first panel we 
have ever had that didn't get one question asked. Because you 
all told the truth, and were eloquent in telling it. We 
appreciate you appearing before the subcommittee, and you are 
excused at this point in time.
    We want to hear from our second panel now.
    Our next panel consists of Robert S. Kripowicz, Acting 
Assistant Secretary for Fossil Energy, Department of Energy; 
Roger Majak, Assistant Secretary for Export Administration, 
U.S. Department of Commerce; and a representative from the 
Department of the Treasury.
    Gentlemen, welcome.
    Assistant Secretary Kripowicz, we are going to start with 
you. We are going to recognize you for such time as you may 
consume. We will put your statement in the record in its 
entirety and ask you to try to summarize, but, obviously, the 
purpose of this hearing is to really get into the details of 
this swap of SPR, so we want to give you sufficient time to 
explain the principles involved, and then we will go to Mr. 
Majak. Welcome to the subcommittee.

    STATEMENTS OF HON. ROBERT S. KRIPOWICZ, ACTING ASSISTANT 
SECRETARY FOR FOSSIL ENERGY, DEPARTMENT OF ENERGY; AND HON. R. 
  ROGER MAJAK, ASSISTANT SECRETARY FOR EXPORT ADMINISTRATION, 
                  U.S. DEPARTMENT OF COMMERCE

    Mr. Kripowicz. Thank you, Mr. Chairman. I will summarize.
    Mr. Barton. You really need to put the microphone close to 
you, sir.
    Mr. Kripowicz. Mr. Chairman and members of the 
subcommittee, the administration has been concerned about stock 
levels of critically needed fuels, such as heating oil and 
diesel fuel, since last winter. Many of you may recall that 
this past January temperatures in New England plunged, and 
prices for heating oil increased dramatically. Many consumers 
not only faced unexpectedly high heating oil bills, but, for a 
few very tense weeks, they faced the very real possibility of 
not having enough fuel to heat their homes.
    The President and this administration are determined to do 
everything they can to protect Americans from a repeat of last 
winter.
    On July 10 of this year, President Clinton directed 
Secretary Richardson to establish an interim heating oil 
reserve, 2 million barrels, that would provide an emergency 
cushion for this winter. He called on Congress to enact 
legislation that would make the Reserve permanent and provide 
an appropriate trigger for releasing the heating oil if 
Americans were threatened. I am pleased to report today that we 
have completed our part. As of last Friday, the heating oil 
reserve is fully stocked for this winter, 3 weeks ahead of 
schedule.
    Today, we are releasing for public comment a draft of the 
process we would follow if a crisis this winter requires the 
Reserve to be used. The only thing missing is a regionally 
specific trigger, and we remain hopeful that Congress will take 
action on this before leaving town.
    Stock levels, however, have continued to lag well behind 
last year. Throughout the summer, the President looked for 
other actions he could take to protect American families this 
winter.
    He directed the Department of Health and Human Services to 
release $400 million in low-income home energy assistance 
program funds, the largest ever emergency funding release of 
its kind.
    He asked the Environmental Protection Agency to help States 
identify ways to use more and different kinds of home heating 
oil while minimizing environmental consequences. This could 
help to further build home heating oil inventories.
    He directed Federal agencies to make early contractual 
commitments to purchase heating oil throughout the winter so 
wholesalers will have the confidence to build inventories in 
advance.
    He asked State public utility commissions to ensure that 
factories and businesses that use distillate heating oil as 
backup fuel keep adequate reserves. At least New York and New 
Jersey have done that.
    These were virtually all of the options available to the 
President for this winter, with one exception, and that was the 
use of the Strategic Petroleum Reserve. The President held open 
that option while we continued to monitor the supply situation. 
On September 22, he felt he could wait no longer. Winter was 
approaching and stocks of heating oil and other fuels were 
still at abnormally low levels. In the Northeast, where one out 
of three families rely on heating oil to stay warm, distillate 
inventories were 49 percent lower than last year. In New 
England, heating oil stocks were 65 to 70 percent lower than 
last year.
    With the stock situation still at critically low levels, 
the President directed Secretary Richardson to release oil from 
the Reserve under authorities contained in section 160(a) of 
the Energy Policy and Conservation Act. These authorities 
authorize an exchange of crude oil, not a sale.
    In essence, the provision permits the Secretary of Energy 
to exchange oil from the Reserve for the purpose of acquiring 
additional oil. That is the way we structured our solicitation. 
Companies acquiring oil from the Reserve this fall must commit 
to return it, plus a bonus, next fall. This action will help 
protect Americans this winter, and it will add to our energy 
security next winter and beyond.
    Will we succeed in adding 3 to 5 million barrels of 
distillate fuel to stock levels this winter? We believe so. Our 
analysts tell us that the models--and past experience--are good 
indicators that this will happen. They tell us that it is our 
best chance to make it happen. But obviously, the market is 
complex, and no one can say with absolute certainty. But 
consider this: What if Americans are confronted this winter 
with a life-or-death situation and the President had not used 
all the means available to him?
    Mr. Chairman, the oil market remains fragile today, and the 
scenario has played out much as we expected. Refineries are 
entering into their turnaround periods, dropping their output 
slightly. Stock levels remain low, with heating oil inventories 
down by another 800,000 barrels from last week, a 1.7 percent 
drop.
    But today the market, and perhaps most importantly the 
market psychology, is a lot different than a month ago. We are 
beginning to move 23 million barrels of crude oil from the 
Reserve into it. The first deliveries began last Friday, and 
more oil is being delivered today, and a total of 4 million 
barrels will be delivered in October, before the original 
contract delivery dates.
    The difference between current distillate prices and those 
on the futures market is much less today, the market is much 
less what they call ``backwardated'', and that creates some 
incentive to build inventories.
    Although refinery utilization has dropped to about 91 
percent, distillate fuel production last week was actually up 
by about 140,000 barrels per day, as refiners increased the 
portion of the barrel being refined into distillate fuel oil. 
We are not out of the woods yet, but Americans should recognize 
that we are exhausting every option to encourage higher 
inventories and ensure their well-being for the winter.
    I do recognize that there have been some questions about 
the way we have conducted the exchange competition, and my 
formal statement outlines the details of the process, but I 
would like to make three key points:
    First, at no time during the solicitation was the taxpayer 
at risk of losing oil from the Reserve. While initially we 
waived the front-end bid bond requirement, to give the largest 
number of bidders the best opportunity to move oil quickly into 
the market, no oil would leave the Reserve until we had an 
irrevocable letter of credit for its full value. The government 
and the taxpayer were protected throughout the process.
    This type of arrangement has worked successfully in the 
government's interest during past exchanges, for example, in 
the royalty-in-kind initiative.
    The second point is that we did not award contracts until 
we had evidence that the successful offerors had a reasonable 
opportunity to move the oil into the market, either themselves 
or in arrangements with other parties. Even though three of the 
bidders were unknown to us at the time the bids arrived, we 
determined that one had experience in past energy trading and 
the other two had serious discussions under way with companies 
that could move the oil. Only then did our contracting officer 
deem these to be responsible bids.
    It is important to recognize that energy traders can play 
just as key a role in moving oil into the market as companies 
that own refineries, and, in fact, other successful offerors, 
in this exchange and in other SPR oil releases, have been 
traders.
    The last point is that we are moving more oil into the 
marketplace in a shorter period of time than ever in the 
history of the SPR. More oil will be delivered by the end of 
November than was delivered during the Desert Storm drawdown in 
1991. The oil we currently have under contract, 23 million 
barrels, is a third more than the 17 million barrels released 
then. Three million of those barrels would not have been 
included had we arbitrarily ruled out the three offerors that 
some have questioned.
    In short, we believe the exchange process is proceeding 
well.
    Let me make one final point. I would like to compliment our 
career professionals at the SPR office, both here in Washington 
and in the field. They have done an excellent job in responding 
to the President's direction. Oil is moving into the market 
sooner than we planned. We have solid guarantees in place to 
replenish the oil and to add to the Reserve next year. Because 
of them, Americans will be better protected this winter.
    That completes my opening statement.
    [The prepared statement of Hon. Robert S. Kripowicz 
follows:]

   PREPARED STATEMENT OF HON. ROBERT S. KRIPOWICZ, ACTING ASSISTANT 
         SECRETARY FOR FOSSIL ENERGY, U.S. DEPARTMENT OF ENERGY

    Mr. Chairman and Members of the Subcommittee: When Secretary of 
Energy Bill Richardson directed the exchange of crude oil from the 
Strategic Petroleum Reserve (SPR), he did it to increase critically 
needed fuel supplies, especially heating oil in the Northeast, and to 
help consumers make it through a cold winter. In addition, this action 
will ultimately add oil to the SPR, increasing our overall energy 
security.
    We are already moving 23 million barrels of crude oil into an 
extremely tight market. The first crude oil from the Reserve started 
moving last Friday, and more is scheduled for delivery today. 
Refineries are maintaining high levels of product output, and in a 
separate action, we now have in place a fully stocked and ready-to-use 
emergency reserve of heating oil in the Northeast.
    In short, Mr. Chairman, while we are not yet out of the woods, 
Americans are significantly more protected today from a possible energy 
shortfall this winter than they were a month ago.

                       RATIONALE FOR THE EXCHANGE

    The President made the decision to carry out the oil exchange 
because of concerns that lagging petroleum product inventories could 
create potentially severe hardships for many American families this 
winter. Across the country today, distillate inventories, which include 
heating oil, are 21 percent lower than they were a year ago. In the 
Northeast, where 37 percent of families use heating oil to stay warm, 
distillate inventories are lower still: 49 percent less than last 
year's levels. In New England, heating oil inventories are closer to 70 
percent lower than last year.
    While global oil production increases have added three-and-a-half 
million barrels of oil per day to the world market, due in part to the 
Administration's diplomatic efforts, demand continues to siphon off 
most of the extra barrels before they move into inventories. Thus, 
world and U.S. crude stocks remain very low, and stocks of heating oil 
and other distillate fuels are at critically low levels.
    Stock builds are critical to the Northeast; during the course of 
winter up to 17 percent of the region's heating oil will come from 
inventories. During cold snaps, drawdowns of inventories can constitute 
an even greater percentage of local supplies.Why do we believe that a 
temporary infusion of crude oil into the market will lead to additional 
heating oil supplies this winter? There are complicated and detailed 
answers involving world energy market interactions, refining yields, 
and seasonal market shifts that could be provided, but let me focus on 
the basic issues:

 The crude oil was needed in the market: Crude oil inventories 
        worldwide have been low and did not appear likely to increase 
        in the near future unless action was taken;
 Refineries could increase heating oil output at this time: 
        U.S. refineries were about to enter the fall season when their 
        configurations change to increase distillate yield relative to 
        gasoline yield, and gasoline output can be maintained by use of 
        more volatile blendstocks than in the summer. This is also a 
        time when refineries do maintenance, both discretionary and 
        non-discretionary. Discretionary maintenance can be delayed 
        when market conditions offer appropriate incentives.
 Middle distillates (diesel fuel, heating oil, jet fuel, and 
        other transportation fuels) account for about 25 percent of the 
        total refined output: Heating oil is usually about 10 percent 
        of the total output (40 percent of the distillate yield) but 
        the other distillate products can be used for heating fuel when 
        demand requires. Having an increased output of all middle 
        distillates would increase the cushion for cold spells.
 Most of the crude oil we are exchanging from the SPR is light, 
        sweet crude oil (25 million of the 30 million barrels initially 
        awarded; 18 million of the 23 million barrels currently under 
        contract). In the refining process, this type of crude oil 
        offers the highest yields of critically needed distillate 
        products.
    Considering all these factors, the Energy Information 
Administration estimated that an additional 3-5 million barrels could 
be added to distillate fuel inventories as a result of the SPR 
exchange.

            STATUTORY AUTHORITIES FOR EXCHANGING RESERVE OIL

    There is clear legislative authority in the Energy Policy and 
Conservation Act (EPCA) 42 U.S.C. 6201 et seq., that authorizes the 
Secretary of Energy to exchange oil from the Strategic Petroleum 
Reserve.
    Section 160(a) states that:
        The Secretary is authorized, for purposes of implementing the 
        Strategic Petroleum Reserve Plan--to place in storage, 
        transport, or exchange:
          (1) crude oil produced from Federal lands, including crude 
        oil produced from the Naval Petroleum Reserve to the extent 
        that such production is authorized by law;
          (2) crude oil which the United States is entitled to receive 
        in kind as royalities from production on Federal lands, and
          (3) petroleum products acquired by purchase, exchange, or 
        otherwise. [emphasis added]
    One of the primary ``purposes of implementing the Strategic 
Petroleum Reserve Plan'' is to acquire additional crude oil for the 
Reserve. The exchange solicitations issued by the Department on 
September 25, and in modified form on October 16, explicitly state that 
the companies awarded contracts must return more crude oil of 
comparable or higher quality than they received. Contracts were awarded 
on the basis of offers that would return the highest value of 
additional specification-grade crude oil to the Reserve. Therefore, the 
requirement of Section 160(a) will be met, and the exchange is being 
carried out within the Department's existing legal authorities.
    Crude oil exchanges from the Reserve have been used before. On two 
occasions, including one instance this summer, Reserve crude oil has 
been exchanged with companies facing disruptions in crude oil 
deliveries because of transportation problems (a pipeline blockage in 
1996; a shipping channel blockage this past June).
    In 1998, the Department exchanged a lower-quality crude oil for a 
higher quality crude that better matched the Reserve's specifications.
    Currently, exchanges are being used to supply the Reserve with 
specification-quality crude oil in the Royalty-in-Kind initiative 
(where a portion of federal royalty oil from production in the Central 
Gulf of Mexico is being used to re-fill the SPR). Because of market 
conditions, it was advantageous for both the government and the 
companies to renegotiate delivery dates for several of these contracts, 
allowing the contractors to have more time in exchange for more oil 
later. The department effectively exchanged 16 million barrels of oil 
due in 1999 and 2000 for 18 million barrels of oil due in 2000 and 
2001.

              THE ONGOING PROCESS FOR EXCHANGING CRUDE OIL

    The solicitation, bidding, and contract award process was developed 
by staff in the Department's Strategic Petroleum Reserve Office. It was 
designed to meet two overarching goals: (1) to move Strategic Reserve 
crude oil into the market as quickly as possible, and (2) to acquire 
the most crude oil for the Reserve while assuring adequate protection 
to the government and the taxpayer for the value of the SPR oil.
    To encourage as many bidders as possible--including both large and 
small companies that might be able to take delivery of the oil or 
arrange trades that could move the oil quickly into the market--the SPR 
office elected to forego an upfront bid bond requirement and instead 
required necessary financial protections to be in place prior to 
delivering the SPR crude oil. Past experience had indicated that a 
requirement to provide a bid bond or earnest money could add to the 
time and expense and make it difficult for many companies, especially 
small businesses, to prepare responsive bids.
    As protection for the taxpayer, a letter-of-credit from a certified 
financial institution for the full value of the crude oil was required 
within 5 working days after a contract was awarded.
    This is an important point, Mr. Chairman. At no time in the process 
was the government at risk of losing the value of any oil in the 
Reserve. No oil would be delivered without the protection of an 
irrevocable letter-of-credit.
    On September 25, 2000, the Department released its exchange 
solicitation. In addition to the letter-of-credit requirement, the SPR 
contracting office also required other certifications from each 
offeror. These certifications attested to the independent nature of the 
exchange offer along with the disclosure of certain possible prior 
criminal or civil judgements. While the exchange process is not a 
procurement action under Federal acquisition guidelines, the SPR office 
also consulted the listing of companies debarred or suspended from 
Federal procurements prior to making contract awards.
    The SPR office also reviewed all publicly available information on 
those bidders who were unfamiliar to the contracting office. In the 
case of two offerors who did not appear to have prior experience in 
energy trading, the SPR office, prior to awarding contracts, had 
discussions with third-party companies involved with each offeror to 
ascertain whether the offerors had legitimate opportunities to move the 
SPR crude oil into the market. Only after the SPR contracting office 
was convinced that each offer represented a reasonable opportunity to 
meet the exchange objectives were contracts awarded.
    On October 4, the Department announced that 11 companies had 
submitted the highest value exchange offers. By the end of five working 
days, eight of the 11 companies, representing 20 million of the 30 
million barrels of crude oil offered, had submitted the necessary 
letters-of-credit.
    Three companies requested a time extension to secure their letters-
of-credit. The SPR contracting officer has the discretion to grant a 
time extension if it is determined to be in the best interest of the 
government. In all three cases, evidence was presented that serious 
negotiations were underway with reputable energy companies, and the 
contracting officer granted each of the three offerors a one-day 
extension.
    Two of the offerors did not secure the necessary financial 
guarantees by the time the extension had expired, and the SPR office 
terminated both contracts. Both offerors agreed to a no-cost 
termination. The third company was able to arrange a transfer of title 
to the oil it had been awarded to another energy company which, in 
turn, supplied the necessary letter-of-credit. The successful 
completion of this transaction enabled the government to secure a 
favorable deal for the taxpayer and to move an additional 3 million 
barrels of SPR oil into the market with the necessary financial 
guarantees. It also enabled a small minority-owned business to be 
included in the pool of successful bidders.
    Consequently, of the original 30 million barrels of Strategic 
Reserve offered for exchange, 23 million barrels are now under firm 
contract with financial assurances. In return, the Department will 
receive 23.8 million barrels for the Reserve during August-November of 
next year.
    To put this exchange in perspective, it is important to note that 
the 23 million barrels of oil exceeds the 17 million barrels sold (from 
34 million barrels offered) during the 1991 Desert Storm drawdown. 
Proceeds from that sale were deposited in a special Treasury account 
established for replenishing the Reserve, however because of budget 
constraints, it took until1994 for the Reserve to be restocked. Under 
the current SPR exchange, all of the crude oil plus a premium will be 
returned to the Reserve within a year after deliveries.
    Deliveries of the crude oil have begun. Although the Department 
specified that crude oil was being offered for delivery during the 
month of November, we also indicated that earlier deliveries could be 
made if companies could make the necessary transportation arrangements.
    Last Thursday, October 12, Morgan Stanley Dean Witter--one of the 
companies receiving an exchange contract--requested an early delivery 
of crude oil from the Reserve's Bryan Mound site near Freeport, Texas. 
Site operators were able to complete the necessary preparations, and 
500,000 barrels of oil began moving into the Seaway interstate pipeline 
on October 13.
    A second delivery of 250,000 barrels of oil is scheduled to begin 
moving today from the West Hackberry site in Louisiana at the request 
of Marathon Ashland Petroleum LLC, another of the successful offerors.
    This shows, Mr. Chairman, that the Strategic Petroleum Reserve is 
capable of responding literally overnight to the need to move crude oil 
quickly into the nation's distribution system. We are especially proud 
of the operational personnel at our Reserve for their ability to 
respond quickly and efficiently in delivering crude oil to the market.

                      THE OCTOBER 16 SOLICITATION

    Because two of the initial winning bidders could not secure the 
necessary letters-of-credit, seven million barrels of crude oil were 
offered for exchange on October 16 when the Department reissued its 
solicitation. Offers will be due on Monday, October 23, and deliveries 
will be scheduled for December with earlier deliveries again possible.
    In addition to the amount of crude oil, the Department made the 
following changes to the solicitation:

 Companies must take delivery of crude oil from the Reserve 
        before the end of December although earlier deliveries could be 
        arranged. The original solicitation specified the month of 
        November for oil deliveries from the Reserve.
 Given the concerns expressed by Members of Congress and others 
        regarding the qualifications of the initial bidders, the 
        Department decided to reinstitute a financial guaranty 
        requirement for the bid. A bid bond must accompany all offers 
        due on Monday. The bond must guarantee that, in the event the 
        Department selects an offer but the offeror cannot produce the 
        required letter-of-credit, the offeror must pay either 5 
        percent of the value of the offer or $3 million whichever is 
        less. This upfront requirement had been waived in the initial 
        solicitation. To ensure that small businesses continue to have 
        the opportunity to participate, the Department reduced the 
        dollar threshold from $10 million, the amount it would require 
        in an actual emergency drawdown and sale of Reserve crude oil.
 The irrevocable letter of credit which the offeror must 
        provide prior to actually acquiring crude oil from the Reserve 
        is now set at 110% of the value of the Reserve crude oil on the 
        day of the contract award (rather than the previous 100%). This 
        will provide protection to the Government for the crude oil 
        delivered from the Reserve plus the bonus percentage the 
        offeror commits to return next year.
    We continue to believe that the objective of moving oil quickly 
into the marketplace can be met by encouraging the widest range of 
possible qualified participants in the bidding process. We do not want 
to unfairly bias the bidding process against small or minority 
businesses.

                        THE HEATING OIL RESERVE

    Although the Chairman's letter did not ask about the status of the 
Northeast Heating Oil Reserve, it is also a very important component of 
the Administration's energy preparedness efforts for this winter and 
has been established through the use of crude oil exchanges from the 
Strategic Petroleum Reserve.
    On October 13, 2000, almost simultaneously with the first crude oil 
delivery out of the Strategic Reserve in Texas, the final shipment of 
heating oil was received for the government's reserve in the Northeast. 
The federal government now has a fully stocked, 2 million barrel 
inventory of emergency heating oil ready at three commercial terminals 
in the New Jersey and Connecticut as a supply cushion for consumers 
this winter.
    To acquire the storage capacity for the heating oil for this 
winter, the Department is exchanging just over 117,000 barrels of 
Strategic Reserve crude oil. Another 2.7 million barrels of Strategic 
Reserve crude oil is being exchanged in return for the heating oil.The 
Importance of Reauthorizing EPCA
    With the heating oil reserve now fully stocked, we urge Congress to 
complete legislation that would set an appropriate trigger for 
releasing the emergency supplies if necessary. The President can order 
the heating oil to be released under broad national authorities, but 
more regionally-specific authorities would be appropriate to address 
possibly supply problems in the Northeast this winter.
    We continue to call on Congress to pass a renewal of the Energy 
Policy and Conservation Act with the inclusion of an appropriate 
regionally-specific trigger for the heating oil reserve. The Act 
provides direct authority that underpins the Department's full 
emergency oil response capability. There should be no ambiguity about 
the President's ability to use this important energy response tool.
    EPCA reauthorization is also important because the Act provides 
limited antitrust protection for U.S. oil companies assisting us and 
the International Energy Agency plan for and respond to an oil 
emergency in a coordinated manner.
    The House of Representatives has acted twice in the past several 
months to reauthorize the legislation, and hopefully, the Senate will 
take action before Congress adjourns.
    This completes my prepared statement. I will be pleased to answer 
any questions Members may have.

    Mr. Barton. Thank you, Mr. Kripowicz.
    We would now like to hear from Mr. Majak.
    Your statement is in the record in its entirety, and we 
will give you such time as you may consume to elaborate on it.

                STATEMENT OF HON. R. ROGER MAJAK

    Mr. Majak. Thank you very much, Mr. Chairman, Mr. Boucher, 
members of the subcommittee. I am very glad to be here to 
discuss this morning the Commerce Department's authorities to 
regulate the export of crude oil and refined petroleum 
products.
    At present, the Department imposes export controls on 
domestically produced crude oil on the basis of various 
statutory requirements that relate to its particular origin and 
mode of transportation. These requirements are set forth in 
statutes with which this committee is very familiar, including, 
of course, the Energy Policy and Conservation Act. With a few 
exceptions, most notably the Alaskan North Slope crude oil, 
which was freed for export in 1995, these statutes require an 
export license for domestic crude oil exports to all 
destinations, including Canada. The Commerce Department 
administers these export control provisions.
    As I will discuss in more detail later, the administration 
also has discretionary authority under the Export 
Administration Act of 1979 to restrict exports of refined 
products. Those discretionary authorities have not been used 
since Malcolm Baldrige ended restrictions on refined petroleum 
product exports back in 1981, despite the fact that there have 
been some uncertainties in the oil market since that time.
    There are only a few limited circumstances in which the 
Department will approve applications to export crude oil. These 
include exports from Alaska's Cook Inlet, exports to Canada for 
consumption or use therein, exports in connection with refining 
or exchange of Strategic Petroleum Reserve oil, and exports of 
California heavy crude oil, up to an average volume of 25,000 
barrels per day.
    During fiscal year 2000, the Department processed only 15 
applications for the export of crude oil valued at $858 
million. Three of these licenses were for exports to Canada and 
the rest were for exports of California heavy crude oil, mostly 
for use as bunker fuel or to the Far East markets where 
environmental restrictions are more liberal than they are here 
in the United States. Those licenses, by the way, are valid for 
a period of 90 days.
    There is, of course, considerable interest regarding the 
scope of export controls that apply specifically to the 
Strategic Petroleum Reserve, the SPR. Therefore, let me address 
those controls in greater detail.
    Applications for the export of crude oil from the SPR may 
be approved only if there will be a corresponding import of 
refined petroleum products that the Departments of Commerce and 
Energy determine are needed in the United States and we would 
not have been able to obtain those refined products without the 
export of crude from the SPR. This provision effectively blocks 
the export--or, so far, it has blocked the export of crude 
released from the SPR, unless there is a compelling national 
interest to permit it.
    For example, if U.S. refineries are operating at full 
capacity and there is a need for additional refined product 
within the United States, it could serve our national interests 
to export SPR crude for refining and return to this country, or 
as a swap for already refined products. Although this is a 
useful option to have, to date we have not received any 
applications for the export of SPR crude.
    Regarding the discretionary authorities I mentioned a 
moment ago to control refined petroleum product exports, the 
Export Administration Act of 1979 has a declaration of policy 
which states that controls may be imposed, quote, to restrict 
the export of goods where necessary to protect the domestic 
economy from the excessive drain of scarce materials and to 
reduce the serious inflationary impact of foreign demand, 
unquote.
    To implement that policy, Section 7 of the Export 
Administration Act reads, in part, ``the President may prohibit 
or curtail the export of any goods subject to the jurisdiction 
of the United States or exported by any person subject to the 
jurisdiction of the United States.'' Those authorities, which 
would apply to refined petroleum products, have been delegated 
to the Secretary of Commerce.
    Refined products, I should note, Mr. Chairman, derived from 
SPR crude oil, therefore, can be exported with no license 
required, except to a small group of embargoed countries, such 
as Cuba and Libya, unless we were to exercise the discretionary 
authority that I just described.
    Mr. Chairman, some have suggested that the administration 
should consider imposing short supply export controls on home 
heating oil in order to ensure that adequate quantities will be 
available this winter. At this juncture, we believe that that 
would be a mistake for the following reasons:
    First, over the past 2 months, U.S. refinery utilization 
rates have remained high, over 90 percent, essentially full 
capacity. They have declined slightly from about 96 percent to 
about 91 percent over the last couple of months, as demand 
decreased with the end of the summer driving season. Some of 
that capacity is off-line for maintenance, but we expect that 
high production margins will encourage refiners to defer 
maintenance where possible to keep maximum capacity on line. It 
would be unwise, in our view, at this point to impose 
regulations that discourage this so far orderly transition to 
maximum heating oil output. Oil and oil products are, of 
course, fungible. An export ban on heating oil could encourage 
refiners to produce other products instead.
    While we could impose a ban, a complete ban on the export 
of all refined petroleum products, we believe that would reduce 
the incentive for refiners to stay on line. A total ban would 
be a draconian measure that would likely cause greater market 
disruptions. For example, since the United States is, of 
course, a net oil importer, we are at risk of foreign 
retaliation if we were to impose a total ban on refined product 
exports.
    Second, we do not project at this time that there will be a 
short supply of home heating oil this winter that the market 
cannot accommodate. As Energy's testimony indicates, the home 
heating oil reserve is already fully stocked, the conversion of 
refineries to heating oil production is proceeding smoothly, 
there is no shortage of feedstock. Although it is possible that 
some exporters will want to take advantage of higher prices 
that European consumers may be willing to pay, we cannot 
predict with any assurance the scope and impact of such export 
activity. Accordingly, we believe it would be unwise to impose 
burdensome and perhaps counterproductive new regulatory 
requirements based merely on the possibility of a shortage.
    Under current law, Mr. Chairman, applications for the 
export of 250,000 barrels or more of any refined product in any 
physical year would require congressional review for a period 
of 30 days. Of course, if there were a total ban on exports, 
nobody would file for export applications, knowing that they 
would be denied. If, on the other hand, there were exceptions, 
the entire process would quickly become much more complicated 
and again, we believe, have unpredictable effects on oil 
markets.
    In summary, Mr. Chairman, the Department is implementing 
crude oil short supply export controls that are required by 
statute. Discretionary quantitative restrictions on the export 
of refined products have not been imposed for almost 2 decades. 
While we will continue to monitor the situation closely in 
conjunction with the Energy Department, there appears to be no 
sound basis today to change course. Thank you.
    [The prepared statement of Hon. R. Roger Majak follows:]

   PREPARED STATEMENT OF HON. R. ROGER MAJAK, ASSISTANT SECRETARY OF 
                   COMMERCE FOR EXPORT ADMINISTRATION

    Good morning Mr. Chairman and Members of the Committee. I am 
pleased to be here today to discuss the Commerce Department's 
authorities to regulate the export of crude oil and refined petroleum 
products.
    At present, the Department imposes export controls on domestically 
produced crude oil based on statutory requirements related to its 
origin and mode of transport. These requirements are set forth in 
statutes including the Mineral Leasing Act of 1920, the Outer 
Continental Shelf Lands Act, the Naval Petroleum Reserves Production 
Act, the Energy Policy and Conservation Act, the Trans Alaska Pipeline 
Authorization Act, and PL 104-58 ``Exports of Alaskan North Slope 
Oil.'' With a few exceptions--most notably Alaskan North Slope (ANS) 
crude oil, which Congress freed for export in 1995--these statutes 
require an export license for domestic crude oil exports to all 
destinations including Canada. The Commerce Department administers 
these export control provisions.
    As I will discuss in more detail later, the Administration also has 
discretionary authority under the Export Administration Act of 1979 to 
restrict exports of refined products (distillates). Those discretionary 
authorities have not been used since Malcolm Baldrige ended 
restrictions on refined petroleum product exports in 1981, despite 
periodic oil market uncertainties since then.
    There are only a limited number of circumstances in which the 
Department will approve applications to export crude oil. These include 
exports from Alaska's Cook Inlet, exports to Canada for consumption or 
use therein, exports in connection with refining or exchange of 
strategic petroleum reserve oil, and exports of California heavy crude 
oil up to an average volume not to exceed 25 thousand barrels per day 
(MB/D).
    At present, petroleum products (e.g., gasoline, kerosene, 
distillates, propane or butane gas, diesel fuel and residual fuel oil) 
refined within the United States are not subject to short supply export 
controls, with one exception. If the refined products were produced or 
derived from crude oil obtained from the Naval Petroleum Reserve (NPR) 
or became available as a result of an exchange of any NPR produced or 
derived commodities, a license is required to all destinations 
including Canada.
    During FY 2000, the Department processed 15 applications for the 
export of crude oil valued at $858,025,000. Three licenses were for 
exports to Canada and the rest were for exports of California heavy 
crude oil, mostly for use as bunker fuel or to Far East markets where 
environmental restrictions are more liberal than they are in the United 
States. Heavy California crude is of such poor quality that it is 
mainly used for asphalt production or mixed with residual fuel oil for 
bunker fuel for ships. Those licenses are valid for 90 days.
    Applications for the export of domestically produced crude oil for 
consumption or use in Canada may be approved provided that none comes 
from a Naval Petroleum Reserve. Licenses are valid for one year.
    There is, of course, considerable interest regarding the scope of 
export controls that apply to the Strategic Petroleum Reserve (SPR). 
Therefore, I will address these controls in greater detail.
    Applications for the export of crude oil from the SPR may be 
approved only if there will be a corresponding import of refined 
petroleum products that the Departments of Commerce and Energy 
determine are needed in the United States and that we would not have 
been able to obtain these refined products without the export of crude 
from the SPR. This provision effectively blocks the export of crude 
released from the SPR unless there is a compelling national interest to 
permit it. For example, if U.S. refineries are operating at full 
capacity and there is a need for additional product within the United 
States (e.g., home heating oil), it could serve our national interest 
to export SPR crude for refining and return to this country, or as a 
swap for already refined product. Although this is a useful option to 
have, to date we have not received any applications for the export of 
SPR crude.
    Our regulations also contain a License Exception that permits the 
export of foreign origin crude oil that is owned by a foreign 
government or its representative which is imported into the SPR for 
storage under an agreement with the United States Government. If the 
foreign oil has been commingled with domestic crude oil in the SPR, the 
export may only be permitted if the Energy Department certifies that 
the oil to be exported is the same quality and quantity that was 
imported into the United States. It is my understanding that at 
present, this is a moot issue since there is no foreign oil in the SPR.
    As I have already noted, there are no short supply licensing 
requirements for refined petroleum products unless they are derived 
from Naval Petroleum Reserve crude oil feedstock. Refined products 
derived from SPR crude oil therefore could be exported with no license 
required, except to a small group of embargoed countries such as Cuba 
and Libya.
    Regarding the discretionary authorities I mentioned earlier to 
control refined petroleum product exports, the Export Administration 
Act of 1979's ``Declaration of Policy'' states that controls may be 
imposed ``to restrict the export of goods where necessary to protect 
the domestic economy from the excessive drain of scarce materials and 
to reduce the serious inflationary impact of foreign demand.''
    In order to implement this policy, the specific authority to 
prohibit or curtail the export of commodities determined to be in short 
supply (SS) is contained in Section 7 of the Export Administration Act 
of 1979 (EAA), which reads in part ``the President may prohibit or 
curtail the export of any goods subject to the jurisdiction of the 
United States or exported by any person subject to the jurisdiction of 
the United States''. These authorities have been delegated to the 
Secretary of Commerce.
    Mr. Chairman, some have suggested that the Administration consider 
imposing short supply export controls on home heating oil in order to 
ensure that adequate quantities will be available this winter. At this 
juncture, I think that would be a mistake for the following reasons.
    First, over the past two months, U.S. refiners utilization rates 
have declined from about 96% to about 91% of capacity, as demand has 
decreased as we moved away from the summer driving season. While some 
of that capacity is off-line for maintenance, we expect that high 
margins will encourage refiners to defer maintenance where possible to 
keep capacity on-line. It would be unwise to impose regulations that 
discourage the orderly transition to maximum heating oil output. Oil 
and products are fungible. An export ban on heating oil would encourage 
refiners to produce other products.
    While we could impose a ban on the export of all refined petroleum 
products, this reduces the incentive for refiners to stay on-line. This 
is surely a draconian measure that would likely cause even greater 
market disruptions. The United States is a major net oil importer. 
Discretionary actions taken by the Administration to restrict exports 
of U.S. petroleum products could result in retaliation, thus 
undermining the availability of crude oil supplies.
    Second, we do not project at this time that there will be a short 
supply of home heating oil this winter. As Energy's testimony 
indicates, the home heating oil reserve is already fully stocked and 
production of distillates this year has been high. The conversion of 
refineries to heating oil production is proceeding smoothly. There is 
no shortage of feedstock. Although it is possible that some exporters 
will want to take advantage of higher prices that European consumers 
may be willing to pay, we cannot yet predict with assurance the scope 
and impact of such export activity. Accordingly, I think it is unwise 
to impose a new regulatory regime based merely on this possibility.
    Applications for the export of 250 thousand barrels or more of any 
refined product in any fiscal year would require Congressional review--
delaying action up to 30 days. Of course, if there were a total ban on 
exports, nobody would file for export applications knowing that they 
would be denied. If, on the other hand, there were exceptions, 
exemptions or other limitations, the entire process could quickly 
become very complicated and have unpredictable impacts on oil markets.
    In summary, the Department is implementing crude oil short supply 
export controls that are required by statute. Discretionary 
quantitative restrictions on the export of refined products have not 
been imposed for almost two decades. While we will continue to monitor 
the situation closely in conjunction with the Energy Department, there 
appears to be no sound basis to change course now.

    Mr. Barton. Thank you.
    The Chair would recognize himself for 10 minutes for 
questions, and then we will go to each member in turn for the 
10-minute question period.
    Mr. Kripowicz, how long have you been acting Assistant 
Secretary for Fossil Energy?
    Mr. Kripowicz. Since the beginning of September.
    Mr. Barton. Just this September, so less than a month and a 
half?
    Mr. Kripowicz. Yes, but I have been the principal deputy to 
the Assistant Secretary since 1995.
    Mr. Barton. Okay. Are you a political appointee or a career 
civil servant?
    Mr. Kripowicz. I am a career civil servant.
    Mr. Barton. A career civil servant. Is there a reason that 
we couldn't get a political appointee to come to this hearing 
today, that you are kind of the low man on the totem pole and 
you had to show up because you couldn't be at a meeting in 
Canada or taking your dog to see the veterinarian or something?
    Mr. Kripowicz. Sir, the Secretary is in Canada on 
diplomatic business, as you know, and the Under Secretary is 
appearing as we speak in the Senate, so we had a question of 
the two of us, which one would be able to do it, and so we----
    Mr. Barton. We are honored to have you. You probably know 
more than the other people that would have attended.
    Mr. Kripowicz. I would hesitate to say that.
    Mr. Barton. Some of our questions do deal with the politics 
of the issue, so it would have been nice to have a political 
appointee here.
    When Chairman Bliley and I sent a letter to the Secretary 
and the President several weeks ago, we asked for any and all 
documents that relate to this policy decision that has been 
made. We received, exclusive of public reports, this pile of 
documents, which for a decision that is $1 billion in magnitude 
is hardly a large number. We saw none from your office.
    Mr. Kripowicz. There are some documents in there 
generically from the Strategic Petroleum Reserve Office.
    Mr. Barton. Okay. Well, the transmittal letter says that 
other documents are forthcoming. I would assume, since you are 
the Acting Assistant Secretary for Fossil Energy, that this was 
a decision that the fossil energy group had something to say 
about. So would you do me a favor and when you go back check 
your files. Most of the documents that we have received so far 
are from the policy office. There appear to be no documents 
from your office. As a career civil servant, you probably keep 
pretty good files; and it would be very, very helpful to have 
documents that the people that actually know about the issue 
have helped prepare.
    Mr. Kripowicz. We will review our files again, sir. Most of 
the documents that come from fossil energy in this case would 
originate in the Strategic Petroleum Reserve Office, because 
they are the office that is responsible for it. So most of what 
I would have would be duplicates of whatever they have 
provided. But we are in the process of doing a check.
    Mr. Barton. Well, if you will just go back and look. You 
know, sometimes funny things happen.
    Mr. Kripowicz. Absolutely.
    Mr. Barton. Even the First Lady found documents up in a 
White House closet that she had not known about, so there is a 
possibility, if not a probability, that you might find some 
documents, too.
    Mr. Kripowicz. I have no closets.
    Mr. Barton. Okay.
    Now, I want to talk a little bit about this issue of 
getting home heating oil. We have a document which we did get, 
if I can put this into the record, it is a memorandum dated 
September 6, it is from Melanie Kenderdine, who is the Director 
of Policy, on the issue of the SPR exchange, and I think we 
have copies to give. It is a September 6 document. We will get 
copies to the members and to you, sir.
    [The information referred to follows:]

    [GRAPHIC] [TIFF OMITTED] T7637.001
    
    [GRAPHIC] [TIFF OMITTED] T7637.002
    
    Mr. Barton. It talks about the possible ways, and I won't 
put this in the record until everybody has had a chance to look 
at it, but it talks about possible ways to get additional home 
heating oil, and the subject is an SPR oil exchange. It talks 
about an exchange of crude oil for heating oil; it talks about 
an exchange of crude oil for immediate delivery of heating oil 
at a later date; and then it talks about an exchange of crude 
oil for crude oil, which is what ultimately happened. And the 
limitation on the crude oil exchange is, ``an SPR exchange of 
crude oil is a less-than-perfect way to increase heating oil 
inventories, but our options are limited. An exchange of SPR 
oil would have the same effect as an OPEC increase in 
production. It simply puts more oil on the market. 
Recommendation.'' It says, ``the most reasonable alternative at 
this time is an exchange of crude oil for crude oil.''
    Have you seen this document?
    Mr. Kripowicz. Yes, sir, I am familiar with it.
    Mr. Barton. Okay. Do you agree with the limitation that 
exchanging crude oil for crude oil simply puts more oil on the 
market?
    Mr. Kripowicz. It does not guarantee that you get heating 
oil into the Northeast, that is correct, sir, but our analysis 
is that from 3 to 5 million barrels out of this----
    Mr. Barton. I am glad you mentioned that number. Let's talk 
about that a little bit. Let's put this chart up.
    The gentleman who heads the EIA office, Mr. Mazur, who has 
been before our subcommittee, and I am sure you know him, he is 
a reputable man.
    Mr. Kripowicz. Yes, I do.
    Mr. Barton. He issued, or his office issued a statement 
last week that says, of this 30 million barrel release, only 
about 10 million barrels is actually going to be added to the 
U.S. supply. That 20 million barrels is going to displace oil 
that would have been imported.
    Do you agree or disagree with that?
    Mr. Kripowicz. That is what the analysis was based on.
    Mr. Barton. Okay. So if we look at this little chart over 
here, it says, how much heating oil will we get? Although there 
is 30 million being released, 20 of that 30 million, according 
to EIA, just displaces imports, so in that blank would you say 
we could agree to put in 10 million barrels?
    Mr. Kripowicz. Well, the refineries will actually receive 
30 million barrels of crude oil from the Reserve.
    Mr. Barton. No, no. Now we are talking about additional 
oil. Had there not been an SPR release, you know, according to 
EIA, there would have been 20 million barrels of oil imported. 
EIA says this release actually results in 10 million additional 
barrels.
    Mr. Kripowicz. That is correct.
    Mr. Barton. So could we put a 10 there? U.S. refineries 
will receive 10 million additional barrels of crude oil? Do you 
agree with that?
    Mr. Kripowicz. Yes, sir.
    Mr. Barton. Okay. Now, let's see, how much of that will be 
processed into middle distillate? Now, according to the 
averages that we have seen and that you yourself alluded to in 
our briefing a month ago, you said that between 22 to 25 
percent of a barrel of oil normally goes into middle 
distillate. Do you agree? What is your number today?
    Mr. Kripowicz. It is approximately 25 percent, sir.
    Mr. Barton. All right. So let's put 25 percent. Give you 
the high range of that.
    Now, according again to the public documents that we have 
received, in middle distillate, about 70 percent goes into 
highway diesel, about 20 percent goes to industrial uses, and 
the number that we show is 10 percent goes to home heating oil.
    Now, what are your numbers? Those are industry averages 
from EIA public documents that, of the 25 percent that goes to 
middle distillate, you get about 70 percent into highway or 
diesel fuel, about 20 percent into industrial use, and about 10 
percent into home heating oil. Do you want to give us different 
numbers, or can we use those numbers?
    Mr. Kripowicz. You can use those numbers, if I can qualify 
that in some fashion.
    Mr. Barton. You can qualify all you want.
    Mr. Kripowicz. It would result in that amount of oil that 
could only be used for home heating oil purposes. The amount of 
barrels that go to highway diesel are interchangeable with the 
barrels that would go to heating oil, so if the demand is for 
heating oil, then you would be able to use some of the highway 
diesel fuels for home heating oil. So although on a nominal 
basis those numbers are correct, those two fuels are fungible 
going in the heating oil direction but not coming back the 
other way.
    Mr. Barton. I actually understand what you said. I won't 
disagree on technical merit with what you said.
    Well, but for purposes of the hearing today, let's put 10 
percent in home heating oil and 70 percent into highway diesel, 
and 20 percent into industrial. Now, if you do the math on 
that, 10 percent of 25 percent of 10 million is 250,000 
barrels.
    Mr. Kripowicz. That is the minimum. That is correct.
    Mr. Barton. Now, how does that square with the continued 
trumpeting of 3 to 5 million barrels of additional home heating 
oil? Those are EIA numbers, and those are administration 
projections and industry averages, and according to our basic 
Aggie math here, we get 250,000 additional barrels of home 
heating oil. We have a discrepancy of about 3,000 percent--
250,000 goes into 3 million about 12 times, I think.
    Do you want to educate the subcommittee on Clinton-Gore 
math that goes from 250,000 to 3 million?
    Mr. Kripowicz. My reaction is that the 25 percent gives you 
approximately 2.5 million barrels which can be used for heating 
oil. And it is new barrels that would displace other barrels 
that might have gone for other purposes.
    Mr. Barton. But you and I both know--I agree with what you 
said in your qualification that the diesel highway fuel is 
fungible. It is not quite interchangeable, but you can 
certainly burn it in a boiler or a burner for home heating if 
you needed to. But if you take that away from the diesel fuel 
market, you and I both know there is going to be heck to pay in 
that market.
    Mr. Kripowicz. That assumes that the market was expecting 
this additional 70 percent. If the heating oil market is the 
market that requires the oil or the product----
    Mr. Barton. This subcommittee would really like a 
justification of how you get the 3 to 5 million barrel number 
based on your own numbers that say you are only going to have 
an additional 10 million barrels come on to the market, and if 
you go through the normal refinery process, giving you the 
benefit of the doubt on what will be processed into a middle 
distillate. But 25 percent is the high end, not the average. 
The numbers don't square. They don't square in terms of what is 
really happening in the market. They may square in terms of 
what gives you the greatest political impact.
    Again, that's why you are not the best witness to be here 
because to your credit, sir, in all my dealings with you, you 
have never been political. You've been a straight shooter. 
These are the facts. So don't take it personally, but send back 
up the food chain at DOE that the people that made the decision 
in my opinion made it for political purposes and the numbers 
just do not back it up.
    Now let me ask a question about refinery capacity. In our 
briefing before the hearing that we had about a month ago 
refineries were running about 95 percent, and we were told that 
the Department of Energy was going to be engaged in discussions 
with them, and because the refinery margins were high that you 
could either get them to maintain their capacity at 95 percent 
or maybe even increase it a little bit. Now, it appears that 
they have gone down to about 91 percent.
    What has happened to cause them to go down rather than to 
stay at the higher level they were at at that time? Was it the 
routine maintenance that they have to do?
    Mr. Kripowicz. Yes, sir.
    Mr. Barton. Okay. Now, if, in fact, refinery operations 
have declined by 5 percent, how do you get more fuel oil 
refined when their capacity is going down?
    Mr. Kripowicz. Well, sir, they are maximizing distillate 
right now and actually this past week the production of 
distillate went up even though the refinery utilization went 
down. It went up by 140,000 barrels.
    Mr. Barton. So what have they changed if their capacity of 
production has gone down? Are they somehow magically being able 
to get 30 percent of the barrel into the middle distillate.
    Mr. Kripowicz. They are maximizing that fraction. I don't 
know how high an individual refinery can go.
    But the second point I would like to make is that it is 
projected that beginning in November that these outages will 
drop considerably and there should be more than enough refinery 
capacity available to produce the extra oil.
    Mr. Barton. Well, I have gone way over my time. I got 
carried away. I apologize. I recognize the gentleman from 
Virginia for 10 minutes.
    Mr. Boucher. Thank you very much, Mr. Chairman. I want to 
join with you in welcoming these two distinguished witnesses to 
the subcommittee this morning. Mr. Kripowicz, in particular I 
want to thank you for your presence here and in participating 
in this conversation. I noted with interest in Mr. Majak's 
statement that there have been no restrictions placed on crude 
oil exports since the time of the Reagan Administration. And if 
that was an accurate statement, it would appear that in 1991 
when the SPR was drawn down during a time when the Nation was 
at war, there were no restrictions placed on exports at that 
time.
    Is that correct, Mr. Majak?
    Mr. Majak. I made that statement with respect to controls 
on refined products only, not with respect to crude.
    Mr. Boucher. So on refined products there have been no 
restrictions on exports since the years of the Reagan 
Administration.
    Mr. Majak. That's correct.
    Mr. Boucher. So there were no restrictions imposed in 1991 
when the SPR was drawn down at a time when the Nation was at 
war?
    Mr. Majak. Not with respect to refined products.
    Mr. Boucher. Not with respect to refined products. It seems 
to me there is little difference between that circumstance and 
what we confront today, and I would simply note that it seems 
somewhat inappropriate that those who are arguing that somehow 
your policy is shortsighted for not having imposed restrictions 
on the export of refined products now take no note of the fact 
that during 1991 the exact same circumstance existed and, once 
again, no restrictions on exports were imposed. I won't even 
ask you to comment on that. I will simply note it in passing.
    Mr. Kripowicz, Congress has failed to reauthorize the 
Energy Policy and Conservation Act, and that is a condition 
that concerns me greatly because your existing authority to 
manage the SPR is based on language that is contained in an 
appropriations bill and it is somewhat limited. And I am 
troubled that going into this winter at a time when there is 
instability in the Middle East and when there may be a real 
need to draw down the SPR in order to deal with supply 
disruptions we don't have the authority to do that.
    I would simply ask you if you share that concern and if you 
have any comment about that condition.
    Mr. Kripowicz. Sir, it is mentioned in my statement that we 
feel that the passage of the Energy Policy and Conservation Act 
is essential. There are a couple of authorities that are 
important, one regarding the Northeast heating oil reserve in 
particular that we do not have in place; a regional trigger for 
the use of that reserve should it become necessary. Second we 
must restore the ability of our oil companies to participate 
with the International Energy Agency--if a consultation was 
necessary because of an emergency supply situation in oil. So 
those two things are particularly important to the passage of 
the act.
    Mr. Boucher. And you would agree that it is in the national 
interest to have EPCA reauthorized and signed into law as soon 
as possible?
    Mr. Kripowicz. Yes, sir, and we have said that many times. 
And I would note the House has passed it twice.
    Mr. Boucher. Certainly with the bipartisan support of 
members of this committee.
    Mr. Kripowicz, I think it is fair to say that one of the 
most popular and broadly supported steps that your office has 
taken on a bipartisan basis has been the establishment of the 
Northeastern reserve.
    Mr. Boucher. I want to commend our colleague, Mr. Markey, 
who is with us today, for the leadership that he exercised in 
raising the concept of creating this Northeastern reserve, 
which is so necessary to assure stability in the market there 
for home heating oil.
    I would simply ask you a couple of questions about the 
current status of the reserve. First of all, is it ready to be 
deployed? Where does it stand today? Second, how do you 
envision this particular reserve helping consumers of home 
heating oil in the Northeast during the course of this winter? 
And third, what actions, if any, should we take here in the 
Congress in order perhaps to give even greater legal foundation 
to the Northeast heating oil reserve.
    Mr. Kripowicz. First, Mr. Boucher, the reserve is full as 
of last Friday. So we have the full 2 million barrels, a 
million barrels in New York Harbor and a million barrels in 
Connecticut. Also, we have issued today draft procedures for 
the sale of the oil should it become necessary to release oil 
from the reserve. We think it is very important that one thing 
that Congress could do for us is give us a regional trigger, 
which would make it not necessary for the President, who under 
current circumstances would have to declare a national 
emergency under the Strategic Petroleum Reserve authorities, 
and right now that would be very much more difficult than it 
would be if we had a trigger, which is included in the pending 
legislation.
    Mr. Boucher. All right. Thank you. I will ask one 
additional question and that relates to the newspaper articles 
that have been published that suggest that the Department of 
Energy did not know very much about the bidders in this most 
recent drawdown of the SPR, and my question to you is why you 
chose to proceed as you did. It appears to me that you had two 
choices in terms of making sure that the people who were 
successful in bidding and who eventually would have contracts 
for the distribution of this oil had the financial ability to 
perform their obligations. You could have had a 
prequalification process as a consequence of which a bond would 
have been posted in advance, and that would have been before 
the bids took place, or you could have chosen to do as you did 
and simply allow the bids to occur but then require that 
letters of credit be produced by the successful bidders before 
they were permitted to come into the possession of the oil.
    Tell us why you chose to proceed as you did. I am sure 
there was a reason for that, perhaps based on the need to get 
the oil into the market quickly, and perhaps a delay would have 
been created had you undertaken the prequalification process. 
But I would like to hear your statement as to why you proceeded 
that particular way.
    Mr. Kripowicz. We believed that speed was of the essence, 
so that was one of the factors. The second thing was to get the 
widest number of bidders and have the greatest chance of being 
able to release the 30 million barrels in the timeframe 
allotted. We have used exchanges before, and in those exchanges 
we have not had bid bonds included. So we felt that standard 
procedure would probably work. Bid bonds are expensive also, 
and we would have gotten less of an exchange ratio because 
people would have to take into account the expense of the bond. 
And I would want to emphasize here that there was also no up 
front risk to the government because nobody gets any oil unless 
they come up with the letter of credit after 5 days.
    I would also point out that in the process, we obviously 
looked at the three people that we did not know anything about 
and we talked to them, we got whatever public information was 
available. We got certifications of their financial 
responsibility and other fiduciary certifications, and we had 
evidence from major people in the oil industry that they were 
seriously discussing trading this oil with them, and that is 
why we went ahead with those three.
    Mr. Boucher. And at the end of the day employing the 
process that you chose to employ, there was no risk to the 
government that any of this oil would be lost or that the 
government would not receive full payment for it; am I correct 
in saying that?
    Mr. Kripowicz. Absolutely. We did not get the letters of 
credit, so we did not release the additional 7 million barrels.
    Mr. Boucher. Thank you, Mr. Kripowicz. Thank you, Mr. 
Chairman.
    Mr. Burr [presiding]. The gentleman's time has expired. The 
Chair at this time will recognize the gentleman from Illinois, 
Mr. Shimkus, for questioning.
    Mr. Shimkus. Thank you, Mr. Chairman. I will probably 
follow the line of questions of the gentleman from Virginia. 
But first, I don't want to continue to sound like a broken 
record. Congressman Knollenberg talked uranium reprocessing, a 
national energy strategy using all our energy resources. And if 
the chairman would allow me to deface his poster a little bit, 
if my staffer, Mr. Fitzgerald, would place a little--put it on 
the arrow, B-20, which is biodiesel, which has been allowed in 
the Energy Policy Act we had inserted, myself and Karen 
McCarthy, through this committee using a renewable fuel 
standard, 20 would represent--yes, put it on the other one, 
too--would be 20 percent soy or beef tallow or whatever, 20 
percent of the gallon could be replaced with diesel which would 
affect again--this is all part of the energy portfolio, having 
a renewable portion, having uranium. We will take that off in a 
minute, Mr. Chairman. I know you may not appreciate that. So I 
make the case again for the renewable fuels, and I just wanted 
to use that chart.
    Mr. Kripowicz, I wanted to talk about this no possibility 
of loss for a second. We have these bidders. They establish a 
line of credit. They get delivery. They default. They go 
bankrupt. We get the letter of credit. The barrel price 
doubles. The amount of the barrels of oil that we can buy per 
the letter of credit has now been reduced by one-half, wouldn't 
you agree?
    Mr. Kripowicz. In that circumstance we probably wouldn't 
buy the oil at that point. We can hold on to the funds from the 
letter of credit until such time as we get a reasonable amount 
of oil in return. If the price was double what it is now, we 
certainly probably would be doing several other things with the 
Strategic Petroleum Reserve anyway.
    Mr. Shimkus. But the argument is sound that if the price 
goes up and we have to call in the letter of credit, we may--we 
may not--and if we did go buy, we may not get even the 
additional amount that was projected by the DOE in this legal 
swap scheme that we have actually developed to put oil into the 
market.
    Mr. Kripowicz. If the contractor defaulted. If the 
contractor does not default, the contract calls for the amount 
of oil and not based on current price.
    Mr. Shimkus. Correct. We have a letter of credit.
    Mr. Barton. Will the gentleman yield?
    Mr. Shimkus. I will.
    Mr. Barton. I think this is an important point. This so-
called swap works if the futures market at the time of the swap 
is right and oil prices are lower next summer. Then there is 
more oil available and the people that got the oil will replace 
it. They can make a little money and then give the Strategic 
Petroleum Reserve more oil than was in the reserve when they 
took it out. But if the futures market is wrong and prices go 
up like the gentleman from Illinois is saying, then it doesn't 
work.
    So if I understood what you just told him and what you told 
us at the briefing a month ago, you just extend the contract. 
You do not actually call it in. You just give them more time 
and you hope eventually that the market goes back down.
    Mr. Kripowicz. It would not be in the best interest of 
these contractors, other government contractors, to be part of 
the oil business and to default on a large contract to the 
government because the price isn't correct.
    Mr. Barton. I don't want to take too much of your time. We 
will come back to that.
    Mr. Shimkus. That is fine. But it is interesting when we 
bidders who--you know, I really have great respect for 
Congressman Hinojosa and his story about small business. I 
support small business totally. But his statement mentioned he 
had a factory, he had employees. He had means to try to comply 
with government contracts. Here we have a son and a mother in 
an apartment in Harlem with no means of production, 
transportation, distribution. So I, again, with all due respect 
to my colleague from Texas who testified earlier, this is 
apples and oranges. It is two difference processes.
    Let me ask a question on one thing that hasn't arisen in 
this debate. Although we have heard the terms now in a couple 
hearings, we are at refinery capacity between 90 and 96 
percent. And in the briefings we had, both in the hearing 
publically and some of the private briefings, we talked about 
how they need the time for the refineries to retool, change, 
and of course that usually happens at certain times of the 
year. And based upon that, there is a debate out in the country 
that because we have not increased refinery capacity there may 
be an attempt to even more isolate the United States as 
refineries are moved offshore and as we start importing the 
finished product instead of refining it here in the United 
States. Can you speak to that concern?
    Mr. Kripowicz. I know that the number of refineries has 
decreased considerably over the past 10 to 15 years, but the 
refining capacity has actually stayed steady or slightly 
increased, and we expect that capacity to increase further.
    Mr. Shimkus. But demand has also increased across the 
board?
    Mr. Kripowicz. When demand increases, then there will end 
up being more imports if we don't increase----
    Mr. Shimkus. And you are saying imports are refined 
products.
    Mr. Kripowicz. If we end up using refined products, so that 
is correct.
    Mr. Shimkus. So if the administration has a concern about 
obviously a refined product, as home heating oil is, and we 
have not moved in the direction of increasing refinery capacity 
by known plants in the Nation, do you not think that it would 
probably be in the Nation's best interest across the board in 
energy needs to have a policy that would help our country 
continue a refinery base in this Nation?
    Mr. Kripowicz. Absolutely.
    Mr. Shimkus. Thank you very much. The last thing that I 
want to ask, and I think this goes to Mr. Majak. I can find my 
scribbled notes. We belong to the International Energy Agency. 
Would you be the one who addresses that?
    Mr. Majak. I believe we are a member, but I am not----
    Mr. Shimkus. Mr. Kripowicz?
    Mr. Kripowicz. We are a member, yes.
    Mr. Shimkus. Because we are a member of the International 
Energy Agency we have some requirements to meet as far as the 
availability of natural--or actually reserve of fuel based upon 
being a member of that; is that correct?
    Mr. Kripowicz. That is correct.
    Mr. Shimkus. Do you know how many days on hand we are 
required to meet the requirements of being part of that group?
    Mr. Kripowicz. 90-day supply of crude oil.
    Mr. Shimkus. How many barrels do we have--actually even 
before we did the SPR release, how many barrels did we have on 
hand?
    Mr. Kripowicz. I will give you an approximation. It is 
roughly 57 days worth.
    Mr. Shimkus. 570 million?
    Mr. Kripowicz. That is in the Strategic Reserve. The 90-day 
supply requirement also includes private stocks, and we are in 
the neighborhood of 120 days, as I recall.
    Mr. Shimkus. So your position is that we meet that 
standard?
    Mr. Kripowicz. Yes, we do.
    Mr. Shimkus. And that is good for clarification because 
obviously if it was just dependent upon the SPR, which would be 
about 57 days, we would not.
    Mr. Kripowicz. That is correct.
    Mr. Shimkus. And as we would deplete oil from the SPR, we 
would be even more out of whack. But I will thank you for your 
comments. That is why we have hearings, so we can clarify some 
of these issues. I didn't know that we should include corporate 
holdings of oil reserves. And with that, Mr. Chairman, I will 
yield back my time.
    Thank you for answering the questions.
    Mr. Barton. The gentleman from Massachusetts is recognized 
for 10 minutes.
    Mr. Markey. I thank the chairman very much.
    So let's talk about the emergency situation that we have 
here today and this emergency hearing that we have had to call 
on short notice. What is the emergency exactly? The emergency 
is that oil prices have climbed to nearly $40 a barrel about a 
month ago. The President ordered the Strategic Petroleum 
Reserve to be deployed. Oil prices dropped substantially, down 
to $32 or $33 a barrel. It affected the refined product price 
for home heating oil, gasoline. They both dropped.
    What is the problem? What are we investigating here today? 
The problem from the Republican side is that the price has 
dropped. This is an emergency on their side. This is terrible. 
What's going on? People are paying lower for home heating oil, 
lower for gasoline all across the country even though they 
predicted there would be an emergency. So we must investigate 
and find out what went wrong with the free market control by 
oil company executives in Texas, Louisiana, Oklahoma, and over 
at OPEC. This is screwing up their profit taking for the rest 
of the winter all across the country. We had planned on having 
all these revenues from the rest of country pouring into their 
States, and we need a hearing on it and we are having it right 
now.
    Now because they just can't have a hearing on that, they 
have to investigate whether or not a young black guy living in 
a home with his mother up in Harlem has applied for the ability 
to be able to contract on this fuel. Now, ladies and gentlemen, 
he applied, he was denied. He couldn't find financing. However, 
let me ask this. If BP Amoco had applied and couldn't find the 
financing, would we be having a hearing right now? No. But if 
BP, black person, applies and can't find the financing, now we 
have a hearing. A black person can't find financing or if a 
young man in Texas who had a mother and father living in a 
hotel room in Houston wanted to startup an oil company, George 
W. Bush, and had no other previous business experience and was 
able to find financing and was able to find it, would we have a 
hearing just because he had a mother and father living in a 
hotel in Houston? No. We would say, look, he has a fine 
background. Look at his mother and father. Look at the fine 
record they have. They went to fine schools. But if we find a 
young man whose mother never went to college living in Harlem 
who wants to get into the same oil market, well, that is a 
scandal.
    What went wrong? Even though the Department of Energy 
rejected the contract because he couldn't find the financing, 
there should be a hearing. Why couldn't he find the financing, 
not that he couldn't and it was rejected by the Department of 
Energy, and that they acted upon sound principles of not having 
the U.S. Government be the bank. But this certainly doesn't 
merit a hearing.
    Now we call it social engineering. And the gentleman from 
Illinois puts up his B-20 over here. Soy.
    Mr. Shimkus. Soy.
    Mr. Markey. Soy and beef tallow I think it is. I don't know 
what that is exactly up in Boston.
    Mr. Shimkus. Fat.
    Mr. Markey. But we are to be making oil out of it. Now I 
know we are going to do that because we want farmers to stay on 
the farms because that is good social policy and we do not want 
these hard working farmers to have to leave after hundreds of 
years of farming that same land because that would be bad for 
the country if these farmers actually had to go into the city 
and take jobs. So we create a social policy that we are going 
to make oil out of beef tallow.
    Now, I will go along with it. I don't know what it is 
exactly. And the gentleman has convinced me it is good social 
policy to keep these farmers there. We do not want the sons and 
daughters leaving the farm and going to the city, even though 
we don't need them on the farm anymore, because it is good 
social policy. It keeps some stability out there in rural 
America. That is okay. And God knows we wouldn't want to take 
away the oil depletion allowances or stripper well benefits 
because that would be--I guess that is social policy, isn't it, 
because we want those stripper well wildcatters to have those 
extra benefits. We wouldn't have to actually have to compete 
against big companies. But if a black person wants to do it, 
that is wrong. We got to have an emergency hearing. That is a 
scandal, even though the Department of Energy said he could not 
come up with the financing.
    Now, I appreciate the fact that you are having this 
hearing, concerned now after the oil has been released that 
there may not be as much home heating oil to help us in the 
Northeast as you would like now that it has been released. I 
appreciate that. Now, you would think that we would be the ones 
that would be more concerned about that than you, Mr. Chairman. 
But to tell you the truth, we have got a pretty high confidence 
level that this is all working right now. Mr. Kripowicz made it 
quite clear that a lot of these fuels are now interchangeable 
and that, if not the market, then I think some bully pulpit 
lecturing from whoever might be President later on this winter 
might be able to ensure that with that additional supply of 
oil, that the home heating oil needs of the entire Northeast, 
parts of the Midwest could be met.
    So I don't know why we are having this hearing. Well, let 
me put it like this. I know why we are having this hearing, but 
we should not be having this hearing. The deployment of 
Strategic Petroleum Reserve worked, prices have dropped. There 
is no scandal when a young black man seeks to go into the oil 
industry almost dominated exclusively by white men.
    Mr. Barton. Would the gentleman yield?
    Mr. Markey. It is not a scandal that the marketplace is 
beginning to deal with this new in-flow of oil in a way which 
is going to provide----
    Mr. Barton. Will the gentleman yield?
    Mr. Markey. I will be glad to.
    Mr. Barton. I will be glad to give you additional time.
    Until we had the hearing I wasn't aware of the race of any 
of the potential bidders. You have repeatedly, and Mr. Wynn 
before you, have repeatedly attempted to racially polarize a 
policy hearing on the use of the Strategic Petroleum Reserve. 
But I am not aware of anybody on this side of the aisle that 
has raised any objection about potential bidders based on their 
race. Now if you've got anything that I as subcommittee 
chairman have put out based on that, because I wasn't aware of 
that.
    Mr. Markey. Mr. Chairman, if I may reclaim my time, on 
October 17, which I think was yesterday, I may be wrong, you 
sent to my office and every one of our offices your 
subcommittee briefing memo, which includes an attached story 
from the Wall Street Journal talking about black entrepreneurs 
who are unknowns.
    Mr. Barton. It is the Wall Street Journal you have got the 
problem with.
    Mr. Markey. No. You attached a three-page, four-page Wall 
Street Journal story to your memo to us. You gave it to us as 
the basis for the material that was going to be covered in this 
hearing. You did that.
    Mr. Barton. If the Wall Street Journal is raising concerns 
about race, that is their problem. That is not my problem.
    Mr. Markey. That is what the story in the Wall Street 
Journal is about. It is about the black entrepreneur. You sent 
it to us.
    Mr. Barton. Take your concerns up with the Wall Street 
Journal.
    Mr. Markey. I am taking my concerns up with whoever 
attached it to the memo from your staff to every other staff on 
the Hill and to all of the people who are sitting out here. 
This is a hearing, as far as the people who have this memo are 
concerned, about that black entrepreneur.
    Mr. Barton. Well, I am not asking any questions--I wish we 
had more entrepreneurs of all colors. I do find it somewhat 
ironic that DOE opened the bidding to anybody in the world who 
had the sense enough to read about it. I quite frankly wish 
that some of us had gone together. I wouldn't mind making an 
extra million dollars just by bidding and getting a letter of 
credit and flipping it. It is probably illegal for us to do 
that because of the positions we hold.
    I will yield back, and we will give you additional time.
    Mr. Markey. Again, I thank the gentleman. And I don't mean 
to say anything other than the fact than it is obviously meant 
to be one of the subjects for today's hearing. But you now, at 
the end of the day for better or worse, this is a political 
hearing. Okay. Now, obviously that is why you are requesting 
that the political appointees from the Clinton Administration 
be here today. It is not quite as edifying a hearing to have 
the technical people from the Department explain to you exactly 
why all of this is working. But at the end of the day we should 
not be, in my opinion, doing anything other than praising what 
has happened over the last month. It is great for consumers. It 
is great for drivers all across the country. And the prospects 
are that it is going to get better as the winter goes on and if 
we allow them to implement it. And we shouldn't try to 
stigmatize one young black man, who is trying his best to crack 
into what has been an exclusive club historically. Even though 
he was unsuccessful I think, it is a worthy attempt and maybe 
in years ahead somebody will be successful and they can crack 
through.
    There were a lot of people before Jackie Robinson, there 
were a lot of people before Colin Powell who tried to reach the 
upper levels of other industries, other professions. And who 
knows, maybe we will some day come back and we will have him 
here as an expert witness talking about how he has overhauled 
some part of the energy industry.
    I don't think we should have an extended discussion. You 
didn't do it, Mr. Chairman, but other members of the committee 
did have an extended discussion about the worthiness of people 
from minority groups being in this business. I thank you.
    Mr. Barton. I took some of your time, so if you----
    Mr. Markey. No.
    Mr. Barton. The gentleman from Oklahoma, Mr. Largent, is 
recognized for 10 minutes.
    Mr. Largent. Thank you. For those of you that got the 
opportunity to hear that diatribe from my friend from 
Massachusetts you heard an angry, frustrated, bitter Red Sox 
fan.
    Mr. Barton. Excuse me.
    Mr. Largent. He hates to see the Yankees in the World 
Series again. He is taking it out on all of us.
    Mr. Markey. Will the gentleman yield? This is without 
question 1 week where it is an insult to call me a Yankee.
    Mr. Largent. Did the chairman have something?
    Mr. Barton. I was really supposed to recognize Mr. Burr in 
order and I skipped over him, but we recognize you, Mr. 
Largent. So I will give you your 10 minutes, and then we will 
go to Mr. Burr.
    Mr. Largent. I won't take 10 minutes. Mr. Majak, in your 
opening testimony you talked about export controls for limiting 
the ability of people to export any of the petroleum that is 
released from the Strategic Petroleum Reserve; is that correct?
    Mr. Majak. That is correct.
    Mr. Largent. Was that to make us feel good that this would 
not be exported?
    Mr. Majak. An export license is required for such exports 
and we have not received any applications; therefore, we would 
believe that none has been exported.
    Mr. Largent. Okay, but I guess the question I have for you, 
because we have some international oil companies in Tulsa, 
Oklahoma and I have friends that work there, and I know for a 
fact--I mean, that we get into this word that I didn't know 
until I got into Congress. We talk about fungibility. What 
prevents a company that is doing business both in the United 
States and Europe, for example, where prices of home heating 
oil and fuel is astronomically higher than it is here, what 
prevents a company that is doing business all over the world 
from simply purchasing some of the SPR release for its domestic 
purposes and basically shifting that in a paper shift to 
selling additional barrels of oil overseas?
    Mr. Majak. Well, in the export control area, substitution 
is admittedly a problem. We depend upon the voluntary 
compliance of companies not to engage in substitution, which 
would evade the restrictions on the direct export of oil and 
other products that we control. But as a practical matter your 
point is a good one. It is difficult to assure that no 
substitution takes place.
    Mr. Largent. In reality it is not even illegal?
    Mr. Majak. It is addressed in some of the legislation, 
particularly with respect to the Naval Petroleum Reserve. It is 
not addressed in other of the legislation that applies here.
    Mr. Largent. The truth is it is good practice. I mean, if 
you are out to make the greatest return for your investors and 
you can get more for your oil in Europe today than you can in 
the United States and you have the opportunity of having 
additional petroleum products put on the market in the United 
States and you just substitute and shift your emphasis to 
Europe, you are going to get a higher return on your dollar, 
and the truth is that in fact has been the net result of the 
release of 30 million barrels of oil from the Strategic 
Petroleum Preserve. That is going on. Is that not so?
    Mr. Majak. I----
    Mr. Largent. You don't have to answer. I know it is so. Do 
you know it is so?
    Mr. Majak. I don't know it is so. As far as whether it is 
good business or not, it may be, provided it is not an 
intentional effort to evade the national security export 
controls legislated by Congress.
    Mr. Largent. Mr. Kripowicz, I have a question for you. I 
was listening to Mr. Markey talk about these entrepreneurs and 
so forth, and I guess the question I have is if the goal is to 
lower the price of fuel oil for his constituents in Boston, how 
in effect are we doing that if we are allowing middle men, call 
them entrepreneurs, middle men to profiteer as a result of 
going through this bidding process? And I don't know if the 
numbers were correct or not but some were talking about 
profiting like $6 million simply by taking the oil from DOE and 
turning it over to Amerada Hess, somebody like that. Somebody 
pays that $6 million, and it is the consumer. So how do we in 
effect lower the price if we are allowing these middle men who 
have no previous experience in the oil and gas industry to take 
that $6 million bite out of the price of fuel oil? How does 
that work? Is that good public policy?
    Mr. Kripowicz. First of all, I wouldn't imagine that there 
was $6 million of profit involved in this. But second, that is 
the role of traders. These people were acting as traders. There 
are large traders as well as small traders in the oil business 
all the time. They do a lot of the buying and selling and 
trading of oil and product. And that is the way the market 
works and you can't take these people out of the market.
    Mr. Largent. You were not going to approve them until they 
got a line of credit from a credible oil and gas company.
    Mr. Kripowicz. The line of credit is from a financial 
institution, even the oil and gas companies have to get a line 
of credit from an independent financial institution.
    Mr. Largent. Well, all of the financial institutions that 
were seeking relationships with these men were oil and gas 
companies, according to the story. Again I am going by what is 
on here.
    Mr. Kripowicz. The relationship they were seeking was to 
take over the contracts, I would expect, or else to process the 
fuel----
    Mr. Barton. Would the gentleman yield?
    Mr. Largent. I will yield in just a second, Mr. Chairman.
    I will say just again, I don't believe, after working here 
for 6 years, I don't believe everything I read in the paper, 
that is for sure, any paper. But here it says, Mr. Stroud won't 
discuss which companies were vying for his oil but at one point 
he thought he had an offer to buy him out for $1.50 a barrel, 
or $6 million. That is just one of the three individuals that 
this story highlights. So that is where I got my figures. I 
just wanted you to know that.
    I yield to the chairman.
    Mr. Barton. If the bidder for the oil had offered to pay 
cash for it, would that have been accepted? Is that allowed or 
did they have to agree to this?
    Mr. Kripowicz. This was not a sale.
    Mr. Barton. You couldn't let them pay cash?
    Mr. Kripowicz. That is correct.
    Mr. Barton. That is why the letter of credit was necessary. 
There had to be some security on the off chance that they were 
not on the up and up or the market changed, that there would be 
some guarantee to the government they would get something back.
    Mr. Kripowicz. And because it was not a sale but an 
exchange, what we were asking in payment in essence is more 
oil, not cash.
    Mr. Barton. What if they had put more oil up right then? 
That doesn't make sense, but what if they said you give us 7 
million, we will give you 8 million barrels right now? Would 
that have been allowed? There is no reason for them to do it 
but would it have been allowed?
    Mr. Kripowicz. I don't believe under the procurement that 
would be allowed.
    Mr. Barton. You would force them to take the oil?
    Mr. Kripowicz. And not give it back to us----
    Mr. Barton. Until next year. Okay.
    Mr. Largent. Mr. Chairman, I want to conclude by saying 
that I know that many members of committee feel like that this 
is a politically motivated hearing, and perhaps it is. But I 
would say that I do think this is an important issue and I 
think it is something that we need to deal with when we come 
back in the 107th Congress. And that is to define and be able 
to put some parameters about why we need a Strategic Petroleum 
Reserve, and I think we do, and what those instances are that 
would precipitate release from the Strategic Petroleum Reserve.
    I think we talked about having a national energy policy. I 
think part of that national energy policy has to include a 
sound and reasonable policy on the use of the Strategic 
Petroleum Reserve. It shouldn't be used to balance the budget, 
and Republicans tried to do that. It shouldn't be used for 
political purposes.
    And I would say finally that the government should not be 
in the position of manipulating prices of anything, oil, corn, 
wheat, any of that. That is not the responsibility of the 
Federal Government to ensure that we have lower prices or 
higher prices for any commodity.
    And with that, Mr. Chairman, I yield back my time.
    Mr. Barton. I thank the gentleman from Oklahoma.
    The gentleman from North Carolina, who has been very 
patient, is recognized for 10 minutes.
    Mr. Burr. Thank you. I regret that Mr. Markey chose to 
leave. It was apparent that he did visit the Boston debate. It 
was not apparent to me until the sigh came into the microphone, 
but clearly he learned something at that. It is indeed 
troubling that we cannot stay focused on the issue. And I think 
that every member who wanted to participate has had the 
opportunity in public hearings, also in private meetings with 
DOE, to ask questions specifically about the decision to 
release SPR. Mine are more with the comments of Mr. Largent, 
and that is how do we fix it so we get it right.
    Let me move to a comment that Mr. Summers said in his 
memorandum to the President. It was his last point where it 
talked about the benefits and the down side. His last point was 
engaging in a large SPR exchange would increase the sense of 
administration ownership of oil prices. It would set a 
dangerous precedent that would put pressure on all future 
Presidents and call into question our commitment to the free 
operation of this market. I think that is why a majority of the 
members are involved in this hearing. Whether it is a 
Republican or Democrat that occupies the White House, we want 
to make sure that the guidelines on the use of SPR are clear, 
that they can't be used to manipulate price or to get an 
advantage politically. That is not what it is there for. It is 
there to address whatever the criteria is that is set up in 
legislation.
    And we can argue back and forth as to whether the right 
section of the statute was used by the Secretary to release the 
barrels, but in the absence of it being clear today, then there 
is a compelling reason for this committee to ask you questions, 
to hold this hearing and additional questions, and to make sure 
that no other administration is unclear about the use of SPR 
and how we go about that.
    Let me ask you several questions. Why did the 
administration agree to release SPR barrels?
    Mr. Kripowicz. The basis we have been following since last 
winter, the heating oil supplies, particularly in the 
Northeast, and people have been urging us for other reasons, 
for gasoline supply shortages and for higher prices, to release 
oil from the Strategic Petroleum Reserve since last January.
    Mr. Burr. To my understanding we have not had a gasoline 
shortage. I don't know of any areas that ran out of gasoline. 
We have had high prices.
    Mr. Kripowicz. And very short stocks, but there were no 
shortages, that is correct, low stocks.
    Mr. Burr. So was the reason gasoline pricing or gasoline 
shortages?
    Mr. Kripowicz. I think the specter of shortages and the 
high prices were why people were asking the administration to 
take a look at releasing the Strategic Petroleum Reserve. But 
what we have been doing is following the heating oil process 
since last January. In July, because inventories were still 
low, we established a heating oil reserve in case there is an 
actual emergency shortage this coming winter, and that reserve 
is full. As the administration continued to watch the stocks of 
heating oil, we found that they continued not to grow. And as a 
matter of fact, they are still, the primary stocks are still 
decreasing at this point.
    Mr. Burr. Do we have U.S. Oil companies that currently 
export heating oil?
    Mr. Kripowicz. Yes, there is some export of heating oil in 
the neighborhood of somewhere----
    Mr. Burr. So at a time when we release 30 million barrels 
of the SPR to address a heating oil shortage in New England, 
U.S companies are refining heating oil and exporting it around 
the world?
    Mr. Kripowicz. And we have heating oil imports also.
    Mr. Burr. Which leads me to where Mr. Largent was with you, 
sir, as it relates to our inability to determine where oil 
goes. Though we might be able to track through export requests 
these 30 million barrels of refined product, we actually have 
no way of knowing what might have been diverted from a 
company's import into the United States to another area of the 
world where they decided to send them refined product or crude 
oil; is that correct?
    Mr. Majak. I think that is correct. With our present level 
of data collection and monitoring, that is correct.
    Mr. Burr. Let me ask you, who was openly opposed in the 
administration to the opening of SPR?
    Mr. Kripowicz. My recollection is that you have a 
memorandum from the Secretary of the Treasury that predated the 
release, but I am not aware of anybody once the release was 
made.
    Mr. Burr. Were you aware of that memorandum to the 
President prior to me mentioning it?
    Mr. Kripowicz. It was brought up in the previous hearing.
    Mr. Burr. Were you aware of the memorandum to the President 
by the Secretary of Treasury prior to any Congressional 
hearings?
    Mr. Kripowicz. I was personally not, but I cannot tell you 
who in the administration was aware of that.
    Mr. Burr. What degree were you involved in the decision to 
release SPR?
    Mr. Kripowicz. My office was involved in that decision, but 
I was not personally involved in many of the aspects of it.
    Mr. Burr. Were you in favor or it or were you against it?
    Mr. Barton. Or were you even asked your position?
    Mr. Kripowicz. From the Strategic Petroleum Reserve office, 
which is part of my organization, we have provided information 
that would indicate that the exchange of crude would get us 
increased supplies for this Strategic Petroleum Reserve and we 
would be in favor of doing that.
    Mr.  Barton. I do not think that is a direct answer.
    Mr. Burr. Yes or no, were you in favor of it or not?
    Mr. Kripowicz. Yes.
    Mr. Barton. And you were asked as Acting Assistant 
Secretary?
    Mr. Kripowicz. I was not involved in the final decision but 
I was aware----
    Mr. Barton. So you supported the decision, but you were not 
asked about it?
    Mr. Kripowicz. I wasn't asked specifically----
    Mr. Barton. And that is a straight answer. You are becoming 
political. Your learning curve is much too rapid.
    Mr. Burr. I don't want to put you on the spot, but I would 
be remiss if I did not ask you this. But you were in favor of 
this before or after the decision was made?
    Mr. Kripowicz. Before.
    Mr. Burr. Let me go back to the history of SPR releases and 
just ask you for your comments. In the 1991 release during the 
Persian Gulf War we required earnest money. We moved to the 
1996-1997 sale, where no earnest money was required in the bid 
process. In September we required no earnest money. Now we have 
flipped back in our October bid process to requiring earnest 
money up front.
    Why did we go through a 9-year span where earnest money was 
not important and now return to a period where earnest money is 
important?
    Mr. Kripowicz. There are two reasons why. One is that 
because of the publicity that this part of the process has 
received to date, the original solicitation, we believe that 
because of the access to Internet and the wide publicity that 
has been gotten here that many inexperienced or unqualified 
bidders would probably apply in a second round if we did not 
put some sort of minimum bid requirements. So we fashioned a 
requirement that we believe will still allow legitimate small 
businesses, whether they have experience in the oil industry or 
not, to apply.
    Mr. Burr. You also changed another very important part of 
that bid if my numbers are correct. In the September 2000 bid 
the irrevocable letter of credit was for 100 percent of the 
value of the contract. In the October 2000 bid you are now 
requiring that the irrevocable letter of credit be for 110 
percent of the value. What precipitated that change?
    Mr. Kripowicz. It was our feeling that we wanted to protect 
whatever premium might be offered as well as the original 
amount of the Strategic Petroleum Reserve, which was the basis 
of the 100 percent letter of credit.
    Mr. Burr. So in other words, a determination was made based 
upon who you saw bidding on the process, that if somebody 
defaulted, even though you had a letter of credit for 100 
percent, you did not have the extra 3 or 4 or 5 percent under 
the swap; is that correct?
    Mr. Kripowicz. That is correct.
    Mr. Burr. So was there a belief within the Department of 
Energy based upon the bidders that you saw that you were 
concerned whether individuals would default?
    Mr. Kripowicz. I think it was just out of an abundance of 
caution.
    Mr. Burr. Why did that caution not exist under the 
structure of the September of 2000 bid? Because clearly the 
last sizable sale in fiscal year 1996 required 110 percent of 
the contract in the letter of credit.
    Mr. Kripowicz. Actually on an exchange we had never 
required the bid bonds until now.
    Mr. Burr. Bid bonds and the letter of credit are two 
different things.
    Mr. Kripowicz. Right.
    Mr. Burr. The bid bond is up front prior to the bid being 
submitted. The letter of credit is the guarantee. As it related 
to the September 2000 process, you gave them a period of time 
after the bid was accepted to produce a letter of credit.
    Mr. Kripowicz. That is correct.
    Mr. Burr. That letter of credit was for 100 percent of the 
value of the SPR that was released to them. Now that letter of 
credit must be for 110 percent of the value of what they got. 
That is a substantial difference.
    Mr. Kripowicz. Yes, it is.
    Mr. Burr. What motivated that change?
    Mr. Kripowicz. To err on the side of caution with regard to 
the value of the ability to replace the premium oil----
    Mr. Burr. So of the 23 million barrels that we released 
under the original contract, if they were to default we would 
only get the value of the barrels that they took; we would not 
get the profit of what they bid, which was the increased 
barrels that comes out of the swap?
    Mr. Kripowicz. That depends on price. We might and we might 
not. And that is the reason for putting the 110 percent 
requirement on that.
    Mr. Burr. I think that is one of the reasons that the 
Chairman of the Federal Reserve and the Secretary of the 
Treasury wrote their letter, was that they were concerned with 
the Federal Government and the role that the release of SPR 
might have in artificially affecting the marketplace on 
petroleum. Not short term, which was what you expressed that 
you were after, and that was some price relief. Their concern 
was long term and the President of the United States government 
influencing the futures of petroleum or any other commodity in 
the marketplace.
    Mr. Barton. The gentleman's time has expired.
    Mr. Burr. Since we are the only ones here, could I take 1 
additional minute and you and I run for the vote?
    Mr. Barton. I will stay until Mr. Pickering comes back.
    Mr. Burr. Then I would be happy to stay here with you if I 
can have an additional minute.
    Mr. Barton. You may have an additional minute, but I have a 
few questions, too.
    Mr. Burr. Mr. Secretary, the letter from Secretary Summers 
said that the proposed sale of 60 million barrels--was 
originally the proposed release from SPR 60 million and not 30 
million?
    Mr. Kripowicz. There was discussion of other quantities, 
yes.
    Mr. Burr. Were you in favor of 60 million?
    Mr. Kripowicz. I was in favor of a substantial release of 
oil, and it was determined to release 30 million barrels and to 
wait and see what the effect was.
    Mr. Burr. Was there a request by the administration for a 
release of 60 million barrels?
    Mr. Kripowicz. I don't know the exact answer to that.
    Mr. Burr. Did Mr. Summers just come up with 60 million at 
random?
    Mr. Kripowicz. My assumption is that those quantities were 
discussed within the administration.
    Mr. Burr. Was your office involved in the decision as it 
related to the amount of barrels that were released from SPR?
    Mr. Kripowicz. We provided information that--what we could 
do with regard to what kind of oil we could get on to the 
market and those----
    Mr. Barton. Would the gentleman yield?
    Mr. Burr. I would be happy to.
    Mr. Barton. We have documents that have been provided by 
the policy office that indicate there was a substantial 
discussion for releasing a million barrels a day for 60 days, 
and there were computer models run about the price impact, and 
there was significant discussion about the price impact on the 
market and very little discussion about the amount of fuel oil 
that would be ultimately made available.
    Mr. Burr. In fact, the Secretary of the Treasury made in 
his memorandum to the President that under 60 million barrels 
released from SPR, as it related to fuel oil, he projected it 
would have a 2.6-cent per barrel--per gallon drop. Now that we 
have released 30 million barrels, which is half, I would assume 
we could extrapolate that the savings would be half of the 2.6. 
So is the attempt by the Department of Energy through the SPR 
release to bring 1.3 cent per gallon relief to those users of 
fuel oil?
    Mr. Kripowicz. It was an attempt to get more oil into the 
market.
    Mr. Burr. Is Secretary Summers' projections on the savings 
to the system of 1.3 cents per gallon, is that an accurate 
number?
    Mr. Kripowicz. I don't know whether that is accurate or 
not. Those are not my calculations.
    Mr. Burr. What would your calculations be?
    Mr. Kripowicz. I didn't do those calculations.
    Mr. Burr. Did the calculations of price savings play any 
part in you particular department's decision as to whether you 
were for or against SPR release?
    Mr. Kripowicz. There is obviously some effect on price but 
that was not the main thing that was looked at. It was whether 
we could actually get, as we have discussed here, heating oil 
into the market and that is what the analysis----
    Mr. Burr. Clearly as it relates to the Secretary's usage of 
the release of SPR, he couldn't do it for the price reasons and 
use the argument he has from the standpoint of why it was 
released. And I would remind all of my colleagues that we have 
never declared an emergency, and that is why we have used a 
swap. I thank you for your patience. I thank the chairman for 
his.
    Mr. Barton. I intend to keep the hearing going. Mr. 
Pickering is supposed to come back. So I will ask some 
questions until he gets back, and then he will ask questions. 
Then we will go to the next panel because I know that Admiral 
Watkins has an airplane that he needs to take.
    I want to ask both of you gentlemen about the Jones Act. I 
have introduced legislation that Congressman Boucher has 
cosponsored to provide a 90-day waiver upon date of enactment 
to give the President the discretion to allow the transport of 
fuel oil from one port to another port in the United States if 
he feels it is necessary to get supplies into the Northeast, 
although it says port to port. It is a 90-day waiver. It is 
temporary. What would the administration's position be on that 
act? Either one of you gentlemen.
    Mr. Kripowicz. We would have to get back to you on what the 
administration's official position is, but at this point we 
know of no request for Jones Act waivers, and if we get them 
the Department of Energy has worked very hard to try to 
expedite those. If this would expedite the procedures, I would 
expect, all other things being equal, it would be a good thing.
    Mr. Barton. The committee staff has been told and there 
have been press reports that there is a non-availability of 
U.S. Flag carriers to move the oil. So this would be another 
discretionary tool to give the President the ability to allow 
for a waiver if that would in fact help to expedite deliveries. 
Does the Commerce Department have any reaction?
    Mr. Majak. Mr. Chairman, I have not personally been 
involved in any of those discussions, so I really can't shed 
much light on this question.
    Mr. Barton. We just put the bill in yesterday. We haven't 
publicized it, but it is something I would like to have you all 
check with your appropriate officials and get back to us 
because if we are going to do this, we will have to put it on 
the suspension calendar next week, and eventually I hope 
Congress adjourns for this year.
    I do want to ask the question of Mr. Kripowicz more than 
Mr. Majak. On this Northeast fuel oil reserve we have 2 million 
barrels in it, I think, or 2.2 million barrels. The legislation 
in the House to authorize it gives the President quite a bit of 
flexibility on using it on a regional basis, does not require a 
national emergency, quite a bit of discretionary authority.
    Why wouldn't the President right now want to authorize the 
release of some of the fuel oil reserve, if you are really 
concerned about fuel oil in the Northeast? You have 2 million 
barrels in the reserve that is put there explicitly for supply 
problems in the Northeast. Why not, instead of going through 
this, you know, indirect route, why not be direct?
    Mr. Kripowicz. Because at this point, even with the 
authorities that are in the proposed EPCA, there is no actual 
supply interruption right now, nor are there the price spikes 
that are included in the trigger mechanism.
    Mr. Barton. Well, if that is the case, then it begs the 
question, why go through what you have already gone through in 
releasing the SPR, if, in fact, you released the SPR to get 
more home heating oil, then you have a direct resource that is 
right there. If, on the other hand, you didn't release the SPR 
for home heating oil, you used it to influence the market for 
price, then that is a wholly different issue, and releasing 
home heating oil from the reserve has no impact on world oil 
markets. Would you agree with that?
    Mr. Kripowicz. I would guess that because it is 2 million 
barrels of heating oil, it would have little impact on world--
--
    Mr. Barton. But you agree that 2 million barrels is a 
bigger number than 250,000 barrels.
    Mr. Kripowicz. I do, but it is held for emergency purposes. 
The thing about the heating oil reserve, or the release of the 
SPR oil is that it is meant to build heating oil inventory so 
that we don't have to get into emergency situations where we 
would have to release the Reserve.
    Mr. Barton. Well, there has been no testimony----
    Mr. Kripowicz. The government gets its oil back, and then 
some.
    Mr. Barton. There has been no testimony at this hearing or 
the hearing 3 weeks ago that have indicated we have any major 
emergency situation, even in the Northeast, for home heating 
oil. There has been testimony that indicates that the supply 
levels, the stocks, the inventory levels are below where they 
normally would be.
    Mr. Kripowicz. Yes, sir.
    Mr. Barton. And there were some questions about maybe this 
is just the market changing and they are going to maintain 
lower heating stocks. Maybe that is just a natural result of 
higher prices that extend into the future. Everything that has 
been put out publicly talks about the impact in lowering 
prices, but since that is not allowed by law, all the official 
testimony is, oh, we are doing this as a swap for in the 
future, to get more oil in, although there has been no debate 
about that last summer, there has been no message to the 
Congress about that, about we want to put more oil in the 
Strategic Petroleum Reserve.
    So I am very skeptical, if you have a home heating oil 
reserve that could be used this winter in which the President 
sends a message to the Congress saying I would like to use it, 
I think it passed in the House and in the Senate without 
opposition. I would support that. Nobody wants home heating oil 
to be not in supply or to be at a supply that is so high that 
people can't afford to pay it. That is why we have not objected 
to the LIHEAP program. There has been no policy objection to 
any of the real efforts to help low-income folks in the 
Northeast with home heating oil, or natural gas for that 
matter.
    You could use LIHEAP to pay for natural gas as well as home 
heating oil. But there has been a lot of objection from myself 
and others about politicizing the SPR a month and a half out 
before the election and using it for a purpose which it was not 
intended, which is to affect the price in the world market. It 
was never intended for that. Do you agree with that?
    Mr. Kripowicz. It wasn't released to affect the price.
    Mr. Barton. Well, now, we have all kinds of documents that 
were put in the record that talk about that.
    Mr. Kripowicz. It is not the primary effect. Everybody 
knows that it would have some effect on the market, at least on 
a short term basis, but the fact that heating oil reserve 
stocks in the Northeast are 70 percent below last year's 
levels, something was said that in addition to the heating oil 
reserve, we needed to do something else to get heating oil into 
the Northeast and into stocks in the Northeast, and this was 
the only other choice that the President had.
    Mr. Barton. Well, I will say again, that the minority is 
not here, so we will not put this document into the record 
until they have reviewed it and allowed it to be put into the 
record. But on August 24 there is a memorandum to Secretary 
Richardson from Melanie Kenderdine, who is the Director of the 
Office of Energy Policy at the Department of Energy. On page 2, 
it talks about an exchange of 1 million barrels per day for 2 
months would decrease per dollar oil prices by 1.70 and by 
March of next year would decrease the price per barrel to 
around $24.
    Now, what little documentation that has been presented by 
the Department of Energy, there is all kind of this type of 
information where before the decision was being made, you are 
talking about the price volatility of the market and how it 
impacts the market in terms of prices, and there is some 
discussion about home heating oil, but that discussion 
basically, as I have pointed out earlier, says, it is really 
not going to do much. It is an indirect way to get home heating 
oil. But again, that is the political cover to allow you to go 
in and--not you personally, but to allow the administration to 
go in and manipulate the market. How can you sit there with a 
straight face and not admit that? You are an honest man.
    Mr. Kripowicz. And I honestly know that we will get more 
heating oil out of this for the Northeast.
    Mr. Barton. You are going to get 250,000 barrels, using 
your numbers, additional home heating oil. That is about----
    Mr. Kripowicz. For oil that can only be used in the heating 
oil market.
    Mr. Barton. One barrel a person. I don't know how many 
homeowners use home heating oil, but it is probably more than 
250,000 of them, so they will get one additional barrel of home 
heating oil or maybe a half a barrel, who knows.
    Mr. Kripowicz. I will submit that they will also get a 
significant portion of that 70 percent of the barrels that go 
for highway diesel also; if there is a demand for the oil, that 
they will get it.
    Mr. Barton. Well, if they do, then your diesel owners are 
going to be petitioning the Department of Energy and the 
President that these prices are going to go up and you are 
going to be right back in the same box. You know that and I 
know that.
    Mr. Kripowicz. But this is additional supply, this isn't 
supply that was already expected to be on the market.
    Mr. Barton. I am going to yield to the gentleman from 
Mississippi and after his questions release this panel and 
start the second panel.
    Mr. Pickering. Thank you, Mr. Chairman. Mr. Kripowicz, let 
me just walk through a series of questions. As you were talking 
to the gentleman from Virginia, Mr. Boucher, you talked about, 
as you accepted the bids that you all did, your due diligence 
of investigation of the bidders, of looking at their financial 
capability, their business background, and their potential 
partners; is that correct?
    Mr. Kripowicz. Yes, that is correct.
    Mr. Pickering. What was your sequence of doing such an 
investigation? Before you accepted the bids, did you do your 
due diligence?
    Mr. Kripowicz. Yes, we did.
    Mr. Pickering. And so your answer today is that the 
gentlemen that have been highlighted in various articles, you 
did a due diligence background investigation on them before you 
accepted their bids? Is that your testimony?
    Mr. Kripowicz. We did do due diligence and we got whatever 
information we possibly could, including evidence that they 
were in serious negotiations with people in the oil industry.
    Mr. Pickering. Was that before you accepted their bids?
    Mr. Kripowicz. Yes.
    Mr. Pickering. Before? That is your testimony, before you 
accepted their bids?
    Mr. Kripowicz. Yes, it is.
    Mr. Pickering. Now, it seems to me logically, if you are 
going to have a well-run program, that maybe you would accept 
bids, you would have this line of credit criteria, and if they 
couldn't meet that criteria, then you would do something 
differently like you did, you eventually went other places for 
those millions of barrels where you accepted these other bids. 
But it is hard for me to comprehend a program where you would 
take the three, with their backgrounds, with their financial 
capabilities, with their financial resources and accept their 
bids, that you did due diligence before you accepted their 
bids.
    Mr. Kripowicz. Well, one of those three has a contract, and 
novated the contract to another company in the oil industry and 
we are delivering the 3 million barrels. The other two, we were 
in serious negotiations right up to the last minute, because we 
were in contact with the people that they were dealing with on 
an almost daily basis.
    Mr. Pickering. Based on the articles again that have 
appeared in the print media, those negotiations only began 
after they were awarded the bids; is that not correct?
    Mr. Kripowicz. The serious negotiations----
    Mr. Pickering. Before, before, before you accepted their 
bids?
    Mr. Kripowicz. That is my understanding, yes.
    Mr. Pickering. That is your testimony?
    Mr. Kripowicz. That is my testimony.
    Mr. Pickering. You are sticking to it?
    Mr. Kripowicz. Yes, I am.
    Mr. Pickering. They were in negotiations before they did.
    Mr. Kripowicz. Yes.
    Mr. Pickering. So if we contacted those three and asked 
them when negotiations started, they would testify as you do, 
consistently with what you testify, that they were in 
negotiations before they bid?
    Mr. Kripowicz. I don't know whether they were in 
negotiations before they bid----
    Mr. Pickering. You just testified to me that they were in 
negotiations prior to their bid, that you did due diligence, 
and you----
    Mr. Kripowicz. Prior to our acceptance of their bids. I 
didn't say before they bid. I have no knowledge of what they 
did before they bid.
    Mr. Pickering. Okay. But you did due diligence, they 
provided you with--and you received information that you can 
verify that serious negotiations were ongoing as you accepted 
their bids?
    Mr. Kripowicz. Yes. We had indications and evidence of 
serious interest from people in the oil industry, that is 
correct.
    Mr. Pickering. It appears to this committee, though, and it 
appears to the public that this was a politicized decision, 
that it was a politicized decision in the heat of a campaign on 
the spur of the moment, after previous decision points had been 
reached where this option had been rejected; but as the 
campaign heated up, the Vice President makes a decision to 
recommend, or come out in support at least of SPR, and the next 
day the President adopts his position, and then you were tasked 
with implementing that political decision and to do it in such 
a way that really doesn't make much sense. It doesn't seem to 
be well-executed or well-implemented, and raises the examples 
that we have been talking about today where it really doesn't 
make sense from the common public, to other media who have 
covered this, that this is the way the government should run.
    So I understand why we are concerned today and why I am 
asking, did you do your due diligence before or after receiving 
these bids?
    Let me go in another line of thought as well. You testified 
earlier that we now have 57 days of supply in our Strategic 
Petroleum Reserve; is that correct?
    Mr. Kripowicz. Yes.
    Mr. Pickering. Combined with private stock, you say over 
120 days of supply?
    Mr. Kripowicz. Approximately, yes.
    Mr. Pickering. Now, our European and Japanese allies have 
the right to go into those private stocks and use them in cases 
of national emergency, or national security; is that correct?
    Mr. Kripowicz. What was the question again?
    Mr. Pickering. The other members of the IEA are different 
than we are. They have either government stocks similar to our 
Strategic Petroleum Reserve, or they have the right to call or 
to draw down from private stocks; is that not correct?
    Mr. Kripowicz. I don't know the answer to that question.
    Mr. Pickering. You are the Assistant--just a second. Let me 
make sure I understand here. You are the Assistant Secretary of 
Fossil Fuel, is that correct?
    Mr. Kripowicz. That is correct.
    Mr. Pickering. And you do not know what the policies are of 
our international partners where we coordinate with IEA, when 
we face possible strategic shortages, our national security 
disruption of our oil and energy supplies, you do not know what 
the policies of our foreign policies are, our international 
partners are?
    Mr. Kripowicz. Some of our international partners don't 
even have strategic stocks.
    Mr. Pickering. Yes, but they do have the right to call 
private stock, is that not correct?
    Mr. Kripowicz. The ones that do have government stocks that 
are held in private storage. That is my understanding.
    Mr. Pickering. So they combine both private and public?
    Mr. Kripowicz. We choose not to do that.
    Mr. Pickering. That is correct. Which means, obviously, 
that the logic and the intent of the Strategic Petroleum 
Reserve authorization was that we were a government stock only.
    Mr. Kripowicz. No, sir.
    Mr. Pickering. Because we do not have the right to call the 
stocks from private supply, is that correct, in this country?
    Mr. Kripowicz. We do. EPCA has the authority to have 
industrially held stocks.
    Mr. Pickering. Have we ever used that authority?
    Mr. Kripowicz. We have not.
    Mr. Pickering. What was--the authorization and the original 
intent of the Strategic Petroleum Reserve was to have a 
government-only, 90-day supply, not a combination of private 
and public stock?
    Mr. Kripowicz. That was the goal, from my understanding.
    Mr. Pickering. And that was the intent. But you have used a 
fairly broad and liberal interpretation of combining private 
and public when we have no authority, no ability to call 
private stock.
    Mr. Kripowicz. The Strategic Petroleum Reserve is only----
    Mr. Pickering. Has never been used.
    Mr. Kripowicz. The Strategic Petroleum Reserve is only 
authorized for 1 billion barrels if our demand goes up, and 
that will be less than 90 days worth of protection anyway.
    Mr. Pickering. A last series of questions.
    You had testified, as I believe Mr. Barton and Mr. Burr 
asked you about, what your personal position was, of whether 
this was a good policy decision or just a political response. I 
worked in the Bush Administration for 2 years and I understand 
that usually the technical office and the staff that manages 
and administers particular programs are asked as decisions are 
pending what their recommendations are, what the outcomes or 
options of each option would be, and they then send that to the 
Secretary, to the White House, and they coordinate with an 
interagency process; for example, the Treasury Department.
    Did you produce any memos to the Secretary during this 
decision process or prior to the decision that was made that 
came through the Strategic Petroleum Reserve office and through 
you as the Assistant Secretary, did you produce any memos to 
Secretary Richardson?
    Mr. Kripowicz. I don't know the direct answer to that 
question. There was documentation that was provided from our 
Strategic Petroleum Reserve office to the committee, and we are 
researching our records to find out whether any additional 
information is available. If it is, the committee will receive 
it.
    [The information had not been received at time of 
printing.]
    Mr. Pickering. Will this be the same old story, the same 
old dance, the same old tune of we are trying to find our 
files, we just misplaced them somewhere?
    Mr. Kripowicz. The Department has provided--over the years, 
the Department has provided reams and reams of information to 
the committee and I don't believe has ever said that we haven't 
been able to find any.
    Mr. Pickering. It seems to me that when a decision of this 
importance is made, that there would be--the memos would be 
readily accessible and available, any memo or correspondence 
that went to Secretary Richardson, I am sure, would be 
something that the Strategic Petroleum Reserve office would 
have on file and readily accessible.
    Mr. Kripowicz. And we have provided the memos more normally 
to the policy office, and those memoranda and e-mails have been 
provided to the committee, the ones that we have at this point.
    Mr. Pickering. And on any of those memos, did you all make 
a recommendation for or against release from the Strategic 
Petroleum Reserve?
    Mr. Kripowicz. My recollection, and it is only my 
recollection, because I don't have the documentation in front 
of me, is that we were the--the responses that we were 
providing were technical questions on our capabilities.
    Mr. Pickering. But no recommendations?
    Mr. Kripowicz. We were not--we did not submit any 
recommendations in writing, that is correct.
    Mr. Pickering. In favor or in opposition?
    Mr. Burr, do you have any additional questions? I yield 
back to you, but I would like to follow up briefly.
    Mr. Burr [presiding]. You can go ahead with additional 
questions now, or I will take the opportunity now and come back 
to you.
    Mr. Pickering. Just one final question.
    Since the release of the SPR, the price of home heating oil 
has gone back up. It came down for a period of time and now is 
going back up, is that correct?
    Mr. Kripowicz. Yes, that is correct.
    Mr. Pickering. So basically we have a political decision, 
poorly executed, poorly implemented, poorly administrated, and 
the objective effect of this was either substitution or other 
outside events. Was there any coordination--let me ask this 
question. Was there any coordination with our Japanese and 
European allies for them to release from their stocks to 
address this international crisis?
    Mr. Kripowicz. This was not an emergency release, so that 
coordination wasn't necessary.
    Mr. Pickering. I thought your authority was only for an 
emergency release.
    Mr. Kripowicz. This is an exchange, this is not a sale, so 
the President did not have to declare an emergency.
    Mr. Pickering. Why is--if this is so important for us 
domestically then, even if it is not an emergency, why would 
you not coordinate with your European and Japanese allies?
    Mr. Kripowicz. There were discussions with international, 
and particularly European countries that I am not party to, but 
I know there were discussions with them.
    Mr. Pickering. And the outcome of those discussions were?
    Mr. Kripowicz. I don't know the answer to that, except 
there were press reports that some European countries were also 
considering releases.
    Mr. Pickering. But they have not done that?
    Mr. Kripowicz. They have not done that.
    Mr. Pickering. So we were not effective or persuasive with 
our allies to follow this wise policy that the U.S. took, is 
that correct?
    Mr. Kripowicz. That was not the intent of our discussions 
with them.
    Mr. Pickering. So it was not your intent, if this is an 
important issue, domestic issue and international issue, for 
the health of our economy and our consumers in the Northeast, 
if it is this important--or is it just for political campaign 
purposes, not really that important? Is that why we don't do 
something with our international allies, if it is not a real 
effect, economically or otherwise, or strategically? Is that 
why we didn't coordinate better with our allies?
    Mr. Kripowicz. The reason for the release was to build 
heating oil stocks in our country, not to build heating oil 
stocks anywhere else, and we had discussions with our allies 
and made the decision to go ahead with our release, our swap of 
oil in order to try to build heating oil stocks in the 
Northeast.
    Mr. Pickering. Isn't this an unprecedented use then of our 
Strategic Petroleum Reserve and what it was intended to do, and 
now it has become the home heating oil reserve of the 
Northeast? Isn't this unprecedented?
    Mr. Kripowicz. No, it isn't unprecedented. We have had 
exchanges before to take care of supply problems or potential 
supply problems.
    Mr. Pickering. And that was in the Persian Gulf, is that 
correct?
    Mr. Kripowicz. No. This was on the Gulf Coast, in 
particular. Three different times we exchanged oil.
    Mr. Pickering. For what purpose?
    Mr. Kripowicz. Because----
    Mr. Pickering. That was more of an operational----
    Mr. Kripowicz. There were potential supply shortages for 
two refineries, in one case when were producing into a tight 
gasoline market this summer, and there was a potential oil 
pipeline shutdown that was averted by providing oil in exchange 
several years ago, and we also have exchanged oil when 
receiving oil, royalty in kind, from the Gulf Coast last year.
    Mr. Pickering. And what was the scope? How many--on those 
swaps, how many barrels would you do?
    Mr. Barton. The gentleman will have to make this his last 
question.
    Mr. Pickering. I am just wanting to understand the 
precedent we are setting here.
    Mr. Kripowicz. Overall, it is about the same magnitude of 
this particular swap. The royalty in kind exchanges were in the 
neighborhood of 28 million barrels. The other ones were in the 
neighborhood of 1 million barrels each.
    Mr. Pickering. Was that part of the decommissioning of the 
Weeks Island site?
    Mr. Kripowicz. No.
    Mr. Pickering. No, that was different.
    Mr. Burr, thank you.
    Mr. Burr. Mr. Secretary, let me ask you one last question 
and then we do need to move on to the next panel.
    What was the reasoning at the Department of Energy for 
using section 6240(a) for the release of the oil?
    Mr. Kripowicz. Is that section 160?
    Mr. Burr. Yes, I think it is 160.
    Mr. Kripowicz. 160(a), because that gives the Secretary the 
authority to acquire oil by exchange.
    Mr. Burr. And if you had chosen another section, would that 
not have triggered some findings by the President or a report 
to Congress by the Secretary?
    Mr. Kripowicz. Yes, that is correct. If we were to have 
declared an emergency, it would have required the findings to 
be presented to the President for him to make.
    Mr. Burr. Was there an internal discussion within your 
Department or within the Department of Energy relative to why 
they chose to exercise a swap versus to declare the emergency 
and to make a report to Congress?
    Mr. Kripowicz. At this point, we felt that it was not an 
emergency situation, we couldn't point to an actual shortage. 
There have been various looks over the past year because of the 
fluctuations in the supply in the market as to whether any of 
those conditions meet emergency requirements, and the 
assumption has been to this point that they do not.
    Mr. Burr. The Chair would only make this comment and then 
let you go. Many times your answers today have suggested a 
significant sense of urgency in the need for us to do this. 
Certainly the paper trail that follows this year-long attempt 
by this committee to understand what the administration's 
intent and the Department of Energy's intent as it related to 
SPR sales in a period where we have gone through that we have 
known were shortages as we came off of last year, shortages 
that we predicted for this year, price spikes that were 
predictable, yet some suggest that it was not. We have tried to 
monitor the process along with the Department of Energy. We 
have asked questions along the way.
    Something changed. Something changed in a very short period 
of time. In your answers, if you haven't used emergency, you 
have used words that could interchange with it, but certainly 
there was a new increased sense of urgency. You have been very 
eloquent in the fact that you said this was not for price 
stability, because we know that would trigger some other 
things. But the reality is that this is about as close to a 
declaration of emergency, and I think every Member of this 
committee has a right to question whether the choice of the 
section that was used was because the administration did not 
want to send a report on findings and the Secretary did not 
want to send a report to Congress. That is something that will 
remain unknown.
    The reality is that we are--this Member is glad to see that 
you have adopted in this new bid process a structure that we 
suggested privately to the Department of Energy before they had 
received bids, before after they had set up a structure as it 
deals with the amount required in guarantee, and the 
requirement that people be preapproved. And I think your 
statement earlier, though I am not an expert as it relates to 
the bonding process; I actually wouldn't think that there is a 
cost involved in that letter of credit until the letter of 
credit is exercised. If, in fact, there is, it is because there 
is not a relationship with that individual and lending 
institutions. So the requirement to have preapproval or some 
bonding that allows them to bid that says they do have access 
to the letter of credit I don't think is a financial 
disadvantage to any person, whether it is a company or an 
individual in the marketplace to have bid on this product.
    Once again, I want to thank you on behalf of all members of 
this committee, to both of you, for your testimony today. At 
this time we release the second panel.
    Mr. Majak. Thank you, Mr. Chairman.
    Mr. Burr. At this time I would like to call up the third 
panel and final panel.
    This panel is made up of Admiral James Watkins, U.S. Navy 
Retired, President of C.O.R.E.; Mr. Neil Wolkoff, Executive 
Vice President, New York Mercantile Exchange; John Manzoni, 
President, Eastern United States BP; William Martin, Chairman 
of Washington Policy and Analysis; John Surma, Senior VP, 
Supply and Transportation, Marathon Ashland Petroleum; and Mr. 
John Boles, President of Equiva Trading, part of Equiva 
Services.
    Let me welcome our entire panel and ask everybody just to 
take a seat as soon as its possible.
    The Chair at this time welcomes Admiral Watkins. We realize 
that you do have a time constraint. We apologize for the length 
of the first panel.
    If there is no objection, the Chair would like to recognize 
Admiral Watkins for 5 minutes for his opening statement and 
allow any members who wish to question him to do so, and then 
we would return to the regular order of opening statements of 
the rest of our witnesses.
    Admiral Watkins.

STATEMENTS OF JAMES D. WATKINS, PRESIDENT, C.O.R.E.; WILLIAM F. 
   MARTIN, CHAIRMAN, WASHINGTON POLICY AND ANALYSIS; NEIL L. 
    WOLKOFF, EXECUTIVE VICE PRESIDENT, NEW YORK MERCANTILE 
   EXCHANGE; JOHN P. SURMA, SENIOR VICE PRESIDENT, SUPPLY & 
TRANSPORTATION, MARATHON ASHLAND PETROLEUM, LLC; JOHN MANZONI, 
PRESIDENT, EASTERN UNITED STATES BP; AND JOHN BOLES, PRESIDENT 
               OF EQUIVA TRADING, EQUIVA SERVICES

    Mr. Watkins. Thank you very much, Mr. Chairman, members of 
the subcommittee. In your invitation for me to testify before 
you today, you requested that I address a number of concerns 
that have recently emerged in regard to the administration's 
oil policy and its decision to tap the Strategic Petroleum 
Reserve. I will refer to that as the SPR. I believe, as does 
Treasury Secretary Summers, that the administration's SPR 
decision was ill-advised as a matter of policy, poorly 
implemented, and likely futile as a means of mitigating prices 
in the heating oil market.
    The SPR is not a tactical weapon, but a strategic one, 
designed and built with a clear intent of responding to major 
supply disruptions that, in the intent of the enabling 
legislation, would likely cause irreparable harm to the Nation 
and its economy. It was properly used during the Iraqi war, 
precisely for the purpose of responding to a supply disruption 
of over 3.5 million barrels of oil a day, while the threat 
existed to more than half of the additional Saudi production 
capacity. That particular decision, consistent with the intent 
of SPR's enabling legislation, was taken in the wake of 
extensive consultation with allies and subsequent to the 
completion of other critical steps designed to maximize the 
effect of the SPR release, once it came.
    It is useful to reference the decisionmaking process that 
led to the 1991 SPR use because it illustrates the differences 
with the present administration's approach to oil policy. We 
managed the Iraqi crisis by first focusing on conservation and 
demand reduction and launching a national campaign to reduce 
consumption by about one-half million barrels a day.
    Second, we met with each of the U.S. oil producers and 
their trade associations to request a surge in production from 
all available domestic supplies.
    Third, we met with allies among Persian Gulf producers to 
fully account for their production capacity and plans, and to 
establish private communication channels allowing for 
instantaneous exchange of vital production information.
    Fourth, we secured a blanket waiver of Jones Act 
requirements in order to ensure that transportation bottlenecks 
would not hamper the seamless flow of oil, especially from the 
U.S. Gulf Coast to the vulnerable northeast.
    Finally, we ran live and desktop tests of the SPR response 
mechanisms, including prequalification of all potential 
bidders, in order to eliminate glitches in the system before 
the actual drawdown.
    Mr. Chairman, the SPR drawdown of 1991 stands in obvious 
contrast to the administration's decision of 2 weeks ago to use 
the SPR as a knee-jerk response to market fundamentals that 
have been created by the administration's own 8 years of oil 
sector benign neglect. We, as a Nation, are worse off than we 
were in 1991 because demand for oil is substantially higher, as 
is reliance on insecure supplies of oil. There would appear to 
be no apparent diplomatic strategy to address newly aggressive 
OPEC behavior. Administration policy has made no difference to 
domestic oil production, or to domestic oil consumption; 
neither to fuel switching in the vulnerable New England, nor to 
enhanced refining capacity nationwide. We have, in sum, 
squandered the 4 years of strong, bilateral policy conduct that 
led to the enactment of the Energy Policy Act of 1992 and can 
now respond to oil sector issues only with Band-Aids and 
palliatives.
    Mr. Chairman, only a few months ago, you asked me to 
testify before this subcommittee as to the adequacy of the 
Nation's energy policy. I gave you my views on 24 May as to why 
I felt that we had allowed all of our good bipartisan work of 
the early 1990's to lapse. We do not have what can reasonably 
be called a meaningful energy policy in this country. I will 
not repeat the specifics of my position, because they are a 
matter of Congressional Record. I will say that I have detected 
no sense of purpose or urgency in the crafting of national 
energy policy for the last 8 years. The administration's benign 
neglect of the oil sector remained undisturbed until the crude 
prices increased in this very critical political year.
    The fact of the matter is that the northeast fuel market 
cannot be changed either by the chronic releases of the SPR, 
nor by the creation of the fuel oil reserve that has been 
established by the administration. To change the northeast's 
exceptional over-reliance on fuel oil for heating, action will 
be needed at a structural level and through determined Federal 
and State policy to change the fundamentals of that dependence.
    For the immediate term, the more effective means of getting 
more supplies to the northeast for the winter, if that is 
really necessary, is another blanket Jones Act waiver, so that 
the ample supplies now in the U.S. Gulf Coast can be moved 
economically to the northeast.
    For the longer term, the region's political leaders should 
look for solutions that do not shift the cost of their problems 
to the U.S. taxpayer. These include the construction of a 
state-of-the-art refinery in New England, expansion of the 
natural gas distribution system to accommodate more gas imports 
from the newly developed field of maritime Canada, and to 
provide economic incentives to encourage dual fuel capacity.
    I will have to say, in listening to Mr. Markey this 
morning, I was extremely disturbed at the arrogance again of 
the northeast, which has been there now for 20 years on any new 
refining capacity going into that region. They don't mind using 
the refining outputs from other States of our country; they 
don't mind them facing the environmental burdens, but not the 
northeast, how dare you put it in this pristine area of our 
country. Somebody ought to get the Governors together, get the 
Canadian representatives together, get DOE in the middle of it, 
get the futures market and the commodity market people together 
and sit down and solve this problem and start converting the 
northeast to natural gas. Over time it can be done. Let the 
existing reserve that is up there solve the problem in the 
interim, but get on with it like we have in the rest of the 
country.
    We are not a Nation devoid of energy policy choices, but we 
do tend to avoid hard decisions on matters of crude oil supply 
and demand. The national energy strategy that I had the 
privilege of issuing in 1990 forecasts, as closely as it is 
feasible to do, the supply and demand equation that we have 
reached today.
    I warned then and I warn now that without effective policy 
measures to reverse the trend we are on, we will revisit the 
issue of high and volatile energy prices henceforth and forever 
more. We can't change the fundamentals of the oil market by the 
expediency of the SPR or by building regional product 
stockpiles any more than we can change the fundamentals of the 
gas market by getting into the business of a Federal gas 
storage, nor can we do so by building Federal power plants to 
mitigate some seasonally high prices of electricity. On the 
other hand, we will change the fundamentals of the energy 
market by fostering increases in domestic production, deploying 
technology that reduces demand for fossil fuels, and by getting 
the Federal Government out of the price-fixing business.
    Let me state unequivocally how inappropriate I believe the 
role of government is in what is generally considered a highly 
competitive oil market. That is that the SPR, which not 
incidentally was built and filled entirely during the Reagan 
and Bush Administrations, was created ``to diminish 
vulnerability of the United States to the effects of a severe 
energy supply interruption.'' The Act also provides authority 
under which the United States may carry out its obligations 
under the International Energy Program. All of us in this room, 
and previous and current members of this committee, have 
repeatedly debated the criteria for use of the reserve, even as 
we have agreed on avoiding its use principally for the purpose 
of affecting prices in the marketplace, as was done in this 
case.
    I am persuaded that the administration's release of SPR oil 
in this instance was used, as feared by Treasury Secretary 
Summers in his September 13 memorandum to the President, 
principally for the purpose of affecting prices in the 
marketplace. I consider not credible the administration's 
recourse to the fig leaf of low fuel oil inventories as 
rationale for the action.
    In any case, even if worries about low fuel oil inventories 
were true, there is little the administration could do to 
precisely direct SPR oil toward fuel oil production. Indeed, 
the award of SPR oil contracts to traders devoid of experience 
in handling physical supplies of oil has severed whatever link 
there might have been between SPR oil availability and fuel oil 
production for the coming winter. As a matter of fact, the 
administration's election year intervention in the oil market 
is likely to produce no benefits at all beyond a transitory, 
entirely superficial shadow on prices. But it will set a 
terrible precedent for future SPR policy.
    Mr. Chairman, the energy sector is unforgiving because it 
adheres to fundamentals of supply and demand and price and is 
immune to political expediency. Only in rare times since the 
first energy crisis of 1973 has this Nation taken the hard 
decisions that are the emblem of good policy. The last such 
time was in 1992 when very strong bipartisan leadership 
produced the Energy Policy Act. Even then, some decisions 
proved too difficult to make, even as the consequences of 
inaction intensified.
    We have, Mr. Chairman, a second, untapped and unused SPR in 
the form of oil that lies buried within the Arctic National 
Wildlife Refuge. That oil can be produced with minimal impact 
on very small acreage. An increase in U.S. oil supplies is, in 
my view, essential to the achievement of a new equilibrium in 
U.S. energy policy, but not solely. We need robust diplomacy to 
deal with OPEC. We need effective investments in new 
technology. Most of all, we need leadership to avoid exposing 
ourselves repetitively to circumstances exemplified by this 
needless biannual regional dilemma.
    Thank you, Mr. Chairman.
    [The prepared statement of James D. Watkins follows:]
   Prepared Statement of James D. Watkins, Former Secretary of Energy
    Mr. Chairman and members of the subcommittee, in your invitation 
for me to testify before you today, you requested that I address a 
number of concerns that have recently emerged in regard to the 
Administration's oil policy, and its decision to tap the Strategic 
Petroleum Reserve (SPR). I believe, as does Secretary Summers, that the 
Administration's SPR decision was ill advised as a matter of policy, 
poorly implemented and likely futile as a means of mitigating prices in 
the heating oil market.
    The SPR is not a tactical weapon but a strategic one, designed and 
built with the clear intent of responding to major supply disruptions 
that, in the intent of the enabling legislation, would likely cause 
irreparable harm to the Nation and its economy. It was properly used 
during the Iraqi War, precisely for the purpose of responding to a 
threatened supply disruption of over 3.5 million barrels of oil per 
day, while the threat existed to more than half of additional Saudi 
production capacity. That particular decision, consistent with the 
intent of the SPR's enabling legislation, was taken in the wake of 
extensive consultations with allies, and subsequent to the completion 
of other critical steps designed to maximize the effect of the SPR 
release, once it came.
    It is useful to reference the decision-making process that led to 
the 1991 SPR use because it illustrates the differences with the 
present Administration's approach to oil policy. We managed the Iraqi 
crisis by first focusing on conservation and demand reduction, and 
launching a national campaign to reduce consumption by about one half 
million barrels per day. Secondly, we met with each of the U.S. oil 
producers and their trade associations to request a surge in production 
from all available domestic supplies. Thirdly, we met with allies among 
Persian Gulf producers to fully account for their production capacity 
and plans, and to establish private communication channels allowing for 
instantaneous exchange of vital production information. Fourth, we 
secured a blanket waiver of Jones Act requirements, in order to ensure 
that transportation bottlenecks would not hamper the seamless flow of 
oil, especially from the U.S. Gulf Coast to the vulnerable Northeast. 
Finally, we ran live and desktop tests of the SPR response mechanisms, 
including pre-qualification of all potential bidders, in order to 
eliminate glitches in the system before the actual draw-down.
    Mr. Chairman, the SPR draw-down of 1991 stands in obvious contrast 
to the Administration's decision of two weeks ago to use the SPR as a 
response to market fundamentals that have been created by the 
Administration's eight years of oil sector benign neglect. We, as a 
Nation, are worse off than we were in 1991 because demand for oil is 
substantially higher, as is reliance on insecure supplies of oil. There 
would appear to be no apparent diplomatic strategy to address newly-
aggressive OPEC behavior. Administration policy has made no difference 
to domestic oil production, or to domestic oil consumption; neither to 
fuel switching in the vulnerable New England, nor to enhanced refining 
capacity nationwide. We have, in sum, squandered the four years of 
strong, bilateral policy conduct that led to enactment of the Energy 
Policy Act of 1992, and can now respond to oil sector issues only with 
band aids and palliatives.
    Mr. Chairman, only a few months ago, you asked me to testify before 
this Subcommittee as to the adequacy of our Nation's energy policy. I 
gave you my views on 24 May 2000 as to why I felt that we had allowed 
all of our good bipartisan work of the early '90s to lapse. We do not 
have what can reasonably be called a meaningful energy policy. I will 
not repeat the specifics of my position because they are a matter of 
Congressional record. I will say that I have detected no sense of 
purpose or urgency in the crafting of national policy for energy in the 
last eight years. The Administration's benign neglect of the oil sector 
remained undisturbed until the crude price increases of this very 
political election year.
    The fact of the matter is that the Northeast fuel oil market cannot 
be changed either by chronic releases of the SPR, nor by the creation 
of additional reserves, as is now being proposed by the Administration. 
To change the Northeast's exceptional over-reliance on fuel oil for 
heating, action will be needed, at a structural level, and through 
determined Federal and State policy to change the fundamentals of that 
dependence. For the immediate term, the more effective means of getting 
more supplies to the Northeast for the winter is another blanket Jones 
act waiver, so that the ample supplies now in the U.S. Gulf Coast, can 
be moved economically to the Northeast. For the longer term, the 
region's political leaders should look for solutions that do not shift 
the cost of their problems to the U.S. taxpayer. These include the 
construction of a state-of-the-art refinery in New England, expansion 
of the natural gas distribution system to accommodate more gas imports 
from the newly-developed field of maritime Canada, and proper economic 
incentives to encourage dual fuel capacity.
    We are not a nation devoid of energy policy choices. But we do tend 
to avoid hard decisions on matters of crude oil supply and demand. The 
National Energy Strategy, that I had the privilege of issuing in 1990, 
forecasts, as closely as it is feasible to do, the supply and demand 
equation that we have reached today. I warned then and I warn now that 
without effective policy measures to reverse the trend we are on, we 
will revisit the issue of high and volatile energy prices henceforth 
and forevermore. We cannot change the fundamentals of the oil market by 
the expediency of the SPR or by building regional product stockpiles, 
anymore than we can change the fundamentals of the gas market by 
getting into the business of a Federal gas storage; nor can we do so by 
building Federal powerplants to mitigate some seasonally high prices of 
electricity. On the other hand, we will change the fundamentals of the 
energy market by fostering increases in domestic production, deploying 
technology that reduces demand for fossil fuels, and by getting the 
Federal Government out of the price fixing business.
    Let me state unequivocally, how inappropriate I believe the role of 
government is in what is generally considered a highly competitive oil 
market. I read the Energy Policy and Conservation Act of 1975 at its 
wise face value. And that is that the SPR, which not incidentally was 
built and filled entirely during the Reagan and Bush Administrations, 
was created ``to diminish vulnerability of the United States to the 
effects of a severe energy supply interruption.'' The Act also provides 
authority under which the United States may carry out its obligations 
under the International Energy Program. All of us in this room, and 
previous and current members of this Committee have repeatedly debated 
the criteria for use of the Reserve, even as we have agreed on avoiding 
its use principally for the purpose of affecting prices in the 
marketplace.
    I am persuaded that the Administration's release of SPR oil in this 
instance was used, as feared by Treasury Secretary Summers in his 
September 13th memorandum to the President, principally for the purpose 
of affecting prices in the marketplace. I consider not credible the 
Administration's recourse to the fig leaf of low fuel oil inventories 
as rationale for the action. In any case, even if worries about low 
fuel oil inventories were true, there is little the Administration 
could do to precisely direct SPR oil towards fuel oil production. 
Indeed, the award of SPR oil contracts to traders devoid of experience 
in handling physical supplies of oil has severed whatever link there 
might have been between SPR oil availability and fuel oil production 
for this coming winter. As a matter of fact, the Administration's 
election year intervention in the oil market is likely to produce no 
benefits at all beyond a transitory, entirely superficial shadow on 
prices. But it will set a terrible precedent for future SPR policy.
    Mr. Chairman, the energy sector is unforgiving because it adheres 
to fundamentals of supply and demand and price, and is immune to 
political expediency. Only in rare times since the first energy crisis 
of 1973, has this Nation taken the hard decisions that are the emblem 
of good policy. The last such time was in 1992 when very strong 
bipartisan leadership produced the Energy Policy Act. Even then, some 
decisions proved too difficult to make, even as the consequences of 
inaction intensify. We have, Mr. Chairman, a second, untapped and 
unused SPR in the form of oil that lies buried within the Arctic 
National Wildlife Reserve (ANWR) That oil can be produced with minimal 
impact on very small acreage. An increase in U.S supplies of oil, is in 
my view essential to the achievement of a new equilibrium in U.S. 
energy policy . . . but not solely. We need robust diplomacy to deal 
with OPEC. We need effective investments in new technology. And most of 
all, we need leadership to avoid exposing ourselves repetitively to 
circumstances exemplified by this needless regional dilemma.

    Mr. Burr. Thank you, Admiral.
    The Chair would ask a couple of questions at this time of 
Admiral Watkins.
    What did you think of the testimony from the Department of 
Energy earlier? Did you hear it?
    Mr. Watkins. I thought it was in line with the normal rules 
of engagement for a rather low level official to be placed in 
the position he was placed in. We should have had Secretary 
Richardson here to answer the questions. These are all 
political issues, and very important ones. I am sad to see them 
send up a perfectly good man. I understand he was a former 
staff person for Senator Byrd. He was a political appointee 
converted over into the SES force. It is unfair to send him up 
here, and I don't think you got all the answers you need to 
have.
    I don't agree with someone on this side of the aisle that 
said this was not an important hearing. This is an extremely 
important hearing. It is another touchstone in the inadequacy 
of our attention to energy policy in this country, and it is 
going to get worse. If we think it is a problem now in the 
northeast, wait until the price of natural gas begins to go up, 
with our inadequate supplies. Do we want to have a strategic 
gas reserve? Why don't we start getting the billions of cubic 
feet we need now and put it somewhere in the Midwest where the 
poor Midwest people are going to pay high prices, even in the 
low economic region in the Midwest. Why should we go to the 
northeast only?
    So what are we talking about here? This is, I think, an 
extremely important hearing, and it tells us how inadequate we 
are in our address of oil and gas issues which are the reality 
of today's transportation sector.
    Mr. Burr. I think that most of the members of the committee 
would agree with you, and I think this is one time where the 
members of this committee have, in fact, asked the right 
questions very early in the process, and in some cases, didn't 
get answers, and in some cases, got answers that were 
inaccurate and in other cases, quite honestly, got answers that 
were truthful but at odds with the administration's decision 
ultimately.
    Mr. Barton. Will the gentleman yield briefly?
    Mr. Burr. I will yield to the chairman.
    Mr. Barton. We would have held hearings on the release of 
the SPR much earlier if not for the fact that the Secretary of 
Energy told me twice that he had no intention of doing it. We 
were told that it was not going to happen, so I didn't see a 
reason to hold a hearing on something that wasn't going to 
happen. So we have had to play catch-up because they made an 
internal decision that they didn't vet with the Congress that 
they weren't going to da that.
    Mr. Watkins. You weren't able to transmit that thought, 
though, to Mr. Markey, obviously.
    Mr. Barton. Well, I will keep working on Mr. Markey.
    Mr. Burr. I feel confident as time goes on and we get into 
the annual discussion of the Tennessee Valley Authority and the 
marketing agencies that Mr. Markey will show his objection to 
the Federal presence, and clearly that is at odds with his 
belief that we have to come to the rescue of the fuel oil users 
in New England.
    And let me say, I think we are doing the right thing, based 
upon the circumstances that exist right now, not necessarily 
with the sale of SPR, but with the attempt to make sure that 
adequate inventories are there. The question is, why were we 
asleep as this process happened, because most members of the 
committee have seen the deterioration over the years?
    Mr. Watkins. Well, Mr. Kripowicz testified that he has 
known this for a year. Well, we didn't know it for a year in 
1990 when we came to the table, because we weren't attentive to 
this, and it was John Dingell, who was then chairman of the 
full committee, who sent Dingell-grams to me daily on this 
issue, and accused us of not doing our job on heating oil in 
the northeast.
    Well, by God, we went to battle stations on it and we did 
some hard work, and we brought all of these energy reps and the 
northeastern Governors into town, and we brought the futures 
market people down and we said look, this is the situation, 
this is what we can do with the Jones Act, this is what can 
work together on and solve the problem, and we solved the 
problem. We didn't go to the SPR as an alternative.
    My problem here with this is not so much misuse of the SPR, 
but what did you do ahead of time, Mr. President, to address 
the issues that you could have addressed and maybe solved this 
problem without making it a big political issue? He didn't do 
anything that I could see. I didn't hear one thing today that 
said that they went for a waiver to the Jones Act, which we 
did, and we got right away and we began to divert tankers 
headed for Western Europe with heating oil on board to the 
northeast ports.
    Now, I understand that there are maybe tens of millions of 
barrels of heating oil that can't be moved in non-U.S. flag 
areas sitting there in the Gulf Coast today, or in the 
refineries ready to roll. Why don't we move them out? I think 
your initiation of this bill is very important, but why does 
Congress have to do that? Why didn't the administration do that 
as a first choice? Why did they go to the SPR, which is a very 
complex issue, and it certainly doesn't meet the intent of the 
law.
    Mr. Burr. I yield to the chairman.
    Mr. Barton. Admiral Watkins, as the former Secretary of 
Energy, do you share the position that the current 
administration does about the swap provision in the SPR? They 
have hung their entire legal argument on doing this, on the 
fact that they have the ability under, really, what I view as 
an operational title of the Act, to swap for short-term 
operational ability, that they can now swap long-term to get 
more oil in the reserve.
    Do you share their view?
    Mr. Watkins. Absolutely not. I think it is the most thinly 
veiled argument I have heard.
    If you use the Reserve for immediate disruptions in the 
United States where you share with the oil industry, hey, I 
have a problem in my refineries, I have a problem in my 
industry, I need help right now, you will get it back next 
month. That is a different story to me than what we have done 
in this case. I do not share it. I think it is one of the most 
convoluted legal, technical, legal go-arounds of the intent of 
the law that I have ever seen.
    I have to give them great credit. I have never seen such a 
carefully orchestrated end-around to the intent of the law. I 
think they should get an A for that. Absolutely brilliant, the 
way they did it.
    An exchange? What are we talking about here? My feeling is 
that this is not the time you make the exchange. There may be 
some reasons for doing it, but this wasn't one of them.
    Mr. Barton. Thank you.
    Mr. Burr. The Chair recognizes the gentleman from Texas, 
Mr. Green.
    Mr. Green. Thank you, Mr. Chairman. I appreciate the 
courtesies of our--of the Chair and the ranking member. I am 
not on the Energy and Power Subcommittee, but coming from 
Houston, obviously I have a great interest in this committee, 
and maybe sometime I will have enough seniority to use to get 
on the subcommittee.
    Admiral, let me ask, because I have been concerned not just 
in the last 8 years, but for a number of years, about the lack 
of an energy policy in our country, that really the last energy 
policy we had was President Carter, and I disagreed with that 
when I was in the legislature in Texas.
    What should Congress have been doing the last 7 or 8 years, 
to promote an energy policy? Because we haven't been that 
active either on the House side, or the Senate side.
    Mr. Watkins. No, I think it hasn't done anything. If you 
decide that advocacy is the way to run an energy policy in the 
country, you wait for crises and you make decisions, which are 
probably totally unintegrated overall. When we built the energy 
strategy, we did it in concert with members of both the House 
and the Senate, as well as the industry, that we could really 
carry it out. We went to outside analysts to look at our models 
to make sure that we were reasonable. The Office of Technology 
Assessment here in the Congress agreed that they were 
reasonable assessments of the projected inventories and things. 
We did all of that. We set up a mechanism within the 
Information Energy Agency of the Department of Energy to 
continue this modeling effort with the models then approved 
over time and about biennially, adjust the strategies and, if 
necessary, adjust the law to meet the changing times, both in 
technology and other things. That has not been done at all, and 
nobody has raised any question about it. I don't know why.
    I blame maybe this committee as well as the committee in 
the Senate to disallow the Department of Energy not to follow 
it, and if they are not going to follow it, they better come up 
with good reason not to follow the Energy Act of 1992 and carry 
out its provisions and upgrade it and demand a real energy 
strategy, not one that is advocacy-only on one side of the 
equation. You can't do it that way.
    We don't like nuclear anymore because of waste, we don't 
like hydro because of fish ladders, we don't like fossil energy 
because of global warming. What do we like? We love jobs and we 
love GNP directly connected with electrical output. What is 
going on? In our strategy, we were actually getting less and 
less dependent on foreign imports, if we did what we said we 
would do, but we didn't do that.
    Mr. Green. Admiral, I agree, because this Congress hasn't 
done anything really since the Energy Policy Act of 1992, is 
that correct?
    Mr. Watkins. That is correct, in my opinion.
    Mr. Green. Let me ask you a question about--I would like to 
get your thoughts on this, because SPR, granted it was for 
strategic issues and really for embargoes, but it is being used 
now to try and have some flexibility in the market, but in 
1996, Congress actually suggested we sell 20 million barrels of 
oil for deficit reduction purposes. Could you comment on that?
    Mr. Watkins. Yes. I think it was a bad idea. I think the 
Congress shouldn't have done that. Here we are today accusing 
the administration of misusing the Strategic Petroleum Reserve 
and we did it then. We can't be for free markets and then for 
market interference. It is incredible to me how we can speak 
out of both sides of our mouths.
    Mr. Green. Well, let me follow up on that. I agree. In 
fact, again, it seems strange that we would try and sell oil 
when it is $12 a barrel that we probably bought for $27 a 
barrel. The whole point should be that when the oil is cheap, 
we should use the--we should stock up to prepare for the times 
when we need it. I also don't know if we have a free market, 
again, simply because our markets are not controlled by our 
government, we hope, but it is controlled by other governments, 
whether it is Venezuela, whether it is Saudi Arabia, whether it 
is OPEC, a coalition of governments; so to say we actually have 
a free market, it is really controlled by other governments 
other than our own.
    Could you comment on that?
    Mr. Watkins. That is true, I agree with that. But on the 
other hand, we are going to the bargaining table with a tin cup 
running around to the OPEC cartel saying please increase your 
production, and the next move we make is a $30 million drawdown 
on the Strategic Petroleum Reserve. If I were them, I would 
just cut back 1 million barrels a day for 30 days. I don't 
understand what we are doing is all I am saying, and it is not 
integrated with any other element of what we thought was a good 
national energy policy in 1992 and that should have been 
continued, and maybe, maybe, we would have gone on today to 
find out that what we were doing here in setting policy on one 
side of the equation only was in the long-range bad interest of 
the United States.
    Mr. Green. Well, I agree, we should do more. In fact, that 
is why hopefully this committee in the next session of 
Congress, and we should have done it for the last 8 years, to 
really develop a national energy policy.
    But the other interest I have is that I have seen the price 
of oil in Houston, Texas, the price of gas at the pump actually 
go from, at one time it was inching from $1.45 to $1.50 and now 
you can buy it this weekend in Houston for $1.32. So granted, 
it is short-term relief and we need to look for long-term 
relief.
    Mr. Watkins. We need to get on with long-term relief. In my 
opinion, there isn't any short-term relief except to do the 
kinds of things I laid out in my testimony here today, and my 
feeling is to use something to interfere with the market prices 
when we are down to 175th of the input internationally is a 
mistake. We don't have the leverage, and we need to get the 
leverage back, and we need to go into alternatives that we have 
not, in my opinion, aggressively pursued.
    We don't mind having the Gulf Coast do the drilling off 
their shores, but we disallow the incredible gas reserve that 
is sitting off the East Coast, the West Coast, and the crude 
oil that is sitting up in Alaska.
    Mr. Green. Well, Admiral Watkins, you are preaching to the 
choir.
    Mr. Watkins. I don't get that. I don't understand that. We 
are willing to use the refineries in the south to send fuel oil 
to the northeast, but the northeast is so pristine and so 
arrogant that they will not build a state-of-the-art, 
prestigious refinery today to do their job.
    So some of those things have to be ironed out. Those are 
political issues, those are not technical issues.
    So I don't know how you come to grips with it up here. When 
we went through that act in 1992, it was one of the most 
contentious acts. The reason we got it passed, frankly, is we 
left CAFE standards alone for John Dingell, and that is how we 
got it passed. Sometimes you have to compromise on those things 
and do it. And we did it and it didn't defy the principles we 
set up in the energy policy. But it was never continued and we 
just dropped it, and here we are in the same mess we were in 8 
years ago.
    Mr. Green. Mr. Chairman, just in response, I go offshore in 
my district and I see the success we are having in offshore 
deep water, Gulf of Mexico. We are drilling and we are being 
successful and environmentally correct. In fact, our fishermen 
will tell you they would rather fish around a platform than 
anywhere else.
    Mr. Watkins. I have checked out of those platforms and you 
can't do it because of environmental considerations because 
they are one of the greatest fish habitats in the world.
    Mr. Green. In fact, in the early part of this decade, we 
were actually destroying some of those platforms so they could 
be reached off the coast for that habitat, but there is a way 
you can drill offshore successfully and environmentally safe. 
Again, sometimes up here the only States that do it are Alaska, 
Texas, Louisiana and Mississippi, but no one else is willing to 
tap their reserves.
    Thank you, Mr. Chairman.
    Mr. Shimkus [presiding]. Thank you.
    To the panel I understand we are going to finish with you, 
Admiral Watkins, and then we will go to opening statements. So 
just a few comments, if I may, and I will take my 5 minutes and 
then we will dismiss you, Admiral.
    You said during the first--actually, the second panel, and 
under--was it your impression that the International Energy 
Association's guidelines for on-hand storage in case of 
emergency was solely based upon a SPR, or should that, as was 
testified, taken----
    Mr. Watkins. That is some legal interpretation that has 
come out. We never discussed anything like that when I was 
Secretary of Energy. It just never came up as an issue to 
misuse it in that form. I don't say that, you know, you can't 
go into the technical aspects of the law and jesuitically move 
this thing around so that you can come out with something that 
just makes sense. I think that is what was done here. I don't 
think it was ever the intent, particularly for this large a 
drawdown. For some of the lesser ones that we heard about for 
production problems here of an immediate nature, I think 
something like that could be justified, providing you notify 
the Congress, providing you notify your international partners 
of what you are doing so that they are not misled as to whether 
or not you are trying to interfere with market prices.
    Mr. Shimkus. Under the International Agency's guidelines, 
there is supposed to be coordination between the signatures on 
a release. Did that happen in 1991? Do you think that happened 
during this most recent release?
    Mr. Watkins. I know it happened in 1991. I was involved 
directly in it. I was in direct communications with the Saudi 
Minister of Energy on private circuits, monitoring every single 
event in the Gulf at the time through his contact with the 
other Arab nations; I was in communication with the Paris 
group, the IEA in Paris, telling them exactly what we were 
doing, encouraging them to make sure that those that did have 
reserves were ready to draw down, as we would. That means you 
have to go out and run a drill, and we ran a drill in October 
1990, before the war, with great discussion in the Cabinet as 
to whether or not we were going to interfere with prices, even 
at 4 million barrels coming out for testing purposes, testing 
the bidding process, prequalifying bidders, getting all ready 
to go.
    But the signal we sent, and the NEA agreed with us, that we 
were sending a signal to Saddam Hussein that we were serious 
internationally, and when necessary, the international 
inventories, which were significant when you add them all up, 
would be a strong deterrent for him to think that he could 
control the economies of the world by attacking Kuwait and 
Saudi Arabia without us getting involved.
    So my feeling is that those were all legitimate uses, and I 
think this is an illegitimate use of the reserve, and when 
there are alternatives available.
    So we did it for other purposes. We did it for price 
control, and it wasn't that long lasting, as you saw, because 
the spooking of the commodities market by the Middle East 
crisis is far greater than anything we can pump out of the 
little reserve we have. So it is nonsense to use the rationale 
that I have heard here this morning to try to justify what we 
are doing. I don't get it. It is certainly not to fill the 
reserve at this price for oil. Why didn't we buy it when we 
were at $10 a barrel and put in the 750 million barrels to fill 
the capacity?
    Those are the kinds of questions that I think don't get 
aired very well. The press doesn't pick them up, nobody takes 
it on, and so we see drifting into this inadequate future that 
we now have proven to be faulty, again, because we haven't kept 
up pace.
    Mr. Shimkus. As you have observed through your time 
testifying before us and my background, an overall national 
energy policy is a critical component from our marginal wells, 
which I have an abundance of in my district, to nuclear, coal 
and all of those aspects.
    I am just going to briefly get off on the petroleum reserve 
for 1 second and ask you if you are familiar with the uranium 
processing plant in Metropolis, Illinois, and the fact that it 
is 90 days short of closure because of the U.S. purchasing of 
reprocessed uranium from the Soviet Union, which is now, in 
essence, a subsidized competitor to a government-sponsored 
corporation, thus endangering I think another aspect of our 
national energy policy and our national security, because as 
with petroleum, now we are losing a refinery, in essence, on 
uranium. Can you comment on that?
    Mr. Watkins. Well, I can't comment specifically about the 
installation in Illinois. Obviously, I am very upset that the 
Nation, which has technical solutions to the various waste and 
other problems associated with nuclear power operations, is 
basically throwing this option out the window. We haven't built 
a new nuclear power plant, as you know, in 20 years, and yet on 
the table we have completely researched and prelicensed 
inherently safe reactors. We know how to bury the waste, but 
nobody wants it in their backyard. We are quite willing to 
supply a reactor to North Korea, but we won't supply one to 
ourselves. I mean, you tell me the logic and the rationale for 
all that. I can't find it. I think 10 years from now we will 
wake up and say we can't meet air quality standards and why 
don't we reopen the issue of nuclear. We will surely do that.
    As a matter of fact, the way the utility commissions are 
going in the various States right now under the deregulation, 
the rate base is picking up the stranded cost investments of 
those nuclear plants and you are going to see far fewer go down 
of the existing plants, but we are going to end up 20 years 
from now with very old plants.
    So we need to get on with a new nuclear power option and 
get on with it and demonstrate to the world that we know how to 
bury this stuff, and we need to reopen the various issues of 
where we can bury this waste in the stable clays of the earth 
which are existent all over the earth. It doesn't have to be in 
Nevada, it can be in other places, and we ought to get on with 
it and do the research work and really boost up the 
contribution we make so that we can cut back on coal, we can 
cut back on the fossil fuels.
    But absent that, we are going to continue to have these 
kinds of hearings about every other year, and it is not going 
to be any better in the northeast, I can tell you that right 
now, unless they start converting over to gas and begin to make 
contracts with their Canadian partners in their northeast 
Governor's councils. They ought to get on with it.
    Mr. Shimkus. We are still going to be on schedule to get 
you released by 1 but the ranking member would like to ask a 
follow-up question.
    Mr. Boucher. Admiral Watkins, thank you for joining us here 
today. I can't resist, hearing you mention coal, asking you 
this question. In my congressional district, we mine all of 
Virginia's coal and we are very interested in seeing coal take 
a higher posture in the fuel that is used for electricity 
generation.
    Do you have any advice for us on what we can do to achieve 
that goal?
    Mr. Watkins. I think we are moving in the right direction 
with clean coal technology. I was on the board of directors of 
a major utility in the country. Under the deregulation process, 
we bought up some very poorly run coal-fired plants. We are 
putting in the scrubbers in those plants. That was part of the 
deal in the merger I think we are doing a wonderful job there 
in the coal industry, and I would never want to throw that out. 
After all, we are small potatoes in the world of indigenous 
supplies of coal. I mean what about India and China? They are 
emerging. They are excluded from some of these Kyoto agreements 
and other things because of coal, and we are going to penalize 
ourselves? That is nuts.
    My feeling is that coal today is about 57 percent of the 
power generation in the country; it was only about 53 when I 
was Secretary of Energy. So by environmental standards, we have 
gone in the wrong direction, and I haven't heard a peep out of 
them. What is going on?
    My feeling is that coal will continue to play the major 
role in power production in this country, the major role in GNP 
growth, because you need that energy, and the only thing we 
have to do is make sure the technologies are maintained and 
continue to put the money in to clean coal technology as time 
goes on, that is better than what we have today.
    Mr. Boucher. I have heard it said by some utilities that 
one of the reasons they don't rely on coal for their due 
generating capacity is because it is so difficult to get 
permits. Is there something that we can do to facilitate the 
permit-granting process that would perhaps stimulate electric 
utilities to use coal?
    Mr. Watkins. I think this committee would do one of the 
great services and reenergize interest in the energy strategy 
by seeing the degree to which regulatory authority has been 
imposed on a whole host of energy sources, including hydro. 
Nobody wants to renew a hydro plant today because the agony and 
pain to go through FERC is 7 years at great expense.
    I don't agree with that labyrinth that people have to go 
through. There should be a complete review of the degree to 
which we impose these problems on ourselves for political 
reasons at the time they are passed, and then we leave them 
there forever. That is what we have done in most of these 
cases, and I would hope that would be a part of the attack of 
this committee on an energy policy for the future, to get on 
what have we done to impede our own energy policy. We have done 
a lot, and we should not let those things stand forever. We 
should be reviewing those things at least every 5 years. We 
ought to be legislating again and keeping these things dynamic.
    Coal was getting a bad name. It doesn't get a bad name 
anymore because it should not have a bad name. There is no 
reason not to have clean coal technologies applied. And given 
the standards and all of the brouhaha on acid rain, that went 
down the tubes on the analysis. It wasn't really there except 
in selected cases. We have overemphasized one side of the 
advocacy equation called environmentalists, and we need to get 
in balance with GNP, economy and so forth because they are the 
ones that want jobs, too. They want GNP growth so we can't have 
it both ways. We need to come together as we did in 1992 and 
put this thing in a package that makes some sense, and that 
would include the northeast and what they ought to be doing. 
Use the bully pulpit. You can't interfere with the market, but 
you can influence that market by encouraging those northeast 
Governors to come to the table and be reasonable as other 
states have been on who generates the energy and refines oil, 
and come on board with the rest of us, don't stand out there as 
if you are something unique and special in this country. Maybe 
you are, but let's be equitable across the board.
    Mr. Boucher. Thank you very much for your views. Thank you, 
Mr. Chairman.
    Mr. Barton. Admiral, we are going to let you go.
    Mr. Watkins. I have some strong views on this that I will 
talk to you later on.
    Mr. Barton. We want to hear the strong views now that we 
have heard the mild views. We are now going to continue with 
this panel. Hopefully we will get all of your testimony in. We 
have at least an hour before the next vote. We will start with 
Mr. Martin and go to Mr. Wolkoff, Mr. Surma, Mr. Manzoni and 
then Mr. Boles.

                 STATEMENT OF WILLIAM F. MARTIN

    Mr. Martin. Thank you, Mr. Chairman. Much of what I was 
going to say has been said by Admiral Watkins. He is a hard act 
to follow.
    Let me say, I had an interesting experience from 1977 to 
1981 to be the assistant to the director of the International 
Energy Agency, and I would like my remarks to look at the 
international setting. I believe it is folly to think that 30 
million barrels of oil is going to affect a world oil market of 
75 million barrels a day. If people are concerned about price, 
they would have coordinated actions within the IEA. I think we 
are headed toward a time when the IEA and stock policy is going 
to become much more important, especially as Asian demand 
increases on the Persian Gulf. It is likely we will have a 
crisis within the next 5 years. That is why having this hearing 
is important to review why we have the SPR and why it needs to 
be coordinated with our European and Japanese markets.
    In 1974 in the first oil embargo, the IEA was formed. The 
mechanism was a sharing system. If oil markets hit a 7 percent 
shortfall, we would share oil. But when we came up to the 
Iranian revolution in 1979, there was only a 2 percentage 
dropoff but the oil price almost tripled. Why? Because 
companies were like auto users: They topped off their tank. If 
you fear a crisis, you add to your stocks. So we exaggerated 
the oil crisis, and we all paid for it. When the Iran-Iraq War 
started in 1981-1982, and this was at the beginning of the 
Reagan Administration, it was decided that rather than shoot 
ourselves in the foot collectively again, all of our countries, 
we would actually draw down stocks, and we did and countries 
were penalized if they were going to build stocks.
    Following that, in the Reagan Administration we made an 
effort to build the Strategic Petroleum Reserve, but the key 
was coordination with our allies because when we put a barrel 
in Louisiana, that is for the everybody-in-the-world oil 
market. We also figured out if we were the only ones building, 
we were going to be subsidizing everybody else. I met with the 
Vice Minister of Amiti, Mr. Merota, and said Japan should build 
stocks and they did. The Germans built stocks. Some have as was 
raised today, the right to urge private stock use and that 
counts within the IEA definition. But the reality is we built 
up stocks, so when Secretary Watkins was able to confront the 
Gulf War, we had an effective deterrent collectively.
    Let me also say that Ronald Reagan also built up the 
defensive capabilities in the friendly Arab states, so when 
Secretary Watkins came in, he had a strong defense and not only 
a coalition, we always think of the coalition of people 
fighting the war, Secretary Watkins also had a coalition of 
consuming countries behind him with a large SPR.
    So when I saw that the administration was using 30 million 
barrels for what, my first question was, well, have you talked 
to the allies? What are they saying about this? Of course, they 
are delighted because we are putting 30 million more barrels of 
oil on the market. They are not going to complain. They must be 
thinking in London and Paris what are these people doing. They 
understand what the present administration is doing, and that 
is why I have relabeled in the title of my testimony, ``SPR or 
PR?'' I really do think that it is PR. I don't doubt that the 
administration is motivated, as Secretary Richardson was last 
year, to go around the world and try to get production up 
because we don't want to have wild swings in stocks, but where 
was Secretary Richardson when the price was $10 per barrel in 
Oklahoma and Texas?
    I would urge, Mr. Chairman, and I would suggest that next 
year's G 7 summit in June is going to be the energy summit. I 
predict that right now. There will be a lot of measures out on 
the table, what should we do because the Italians are chairing 
it, and they are 80 percent dependent on oil for their total 
energy. It is like the Venice Summit of 1980.
    So I would like to see the next President look not only at 
a national energy policy, but I would like to see him go 
prepared to Italy, and part of that may be what this committee 
has been talking about for several months now, a credible 
national energy policy. That would be nice thing for the next 
President to take to the table.
    I also suggest that the committee delve into what are the 
criteria for using the SPR and indeed, how should we coordinate 
it with our IEA partners? Thank you very much.
    [The prepared statement of William F. Martin follows:]
Prepared Statement of William F. Martin,\1\ Former Deputy Secretary of 
                                 Energy
---------------------------------------------------------------------------
    \1\ William F. Martin is Chairman of the Energy Security Group of 
the Council on Foreign Relations. He is a former Deputy Secretary of 
Energy and Executive Secretary of the National Security Council. During 
the second oil crisis, Mr. Martin was Special Assistant to the 
Executive Director of the International Energy Agency in Paris.
---------------------------------------------------------------------------
    Good morning, Mr. Chairman. I recently spent a year co-authoring a 
report entitled Maintaining Energy Security in a Global Context for the 
Trilateral Commission. My co-authors, former IEA Director Helga Steeg 
and Ambassador Ryukichi Imai of Japan, interviewed over 100 senior 
government officials and researchers on energy security and our report 
in l977 has been published in five languages. We specifically addressed 
the important issue of strategic stocks and their coordination during a 
crisis.
    The Strategic Petroleum Reserve (SPR) of the United States 
represents the largest and most important reserve among industrialized 
countries. As such, the United States has the key leadership role in 
deciding when to use stocks and coordinating international responses to 
energy emergencies. It is for this reason that the Administration's 
recent decision to release 30 million barrels from the reserve should 
be considered as more than just a domestic policy option to offset 
price increases. In fact, the SPR must be viewed as a mechanism that is 
at the heart of US national security policy.
    I would like to make six observations.

1. The SPR was designed to be the main element of U.S. response to a 
        serious oil disruption threatening U.S. national security.
    The SPR is not a TPR (tactical strategic reserve); nor is it a PPR 
(political petroleum reserve); nor is it a PR reserve. It is a 
strategic petroleum reserve designed to be used in serious national 
emergencies. It was also built with an eye towards coordination with 
other member countries of the International Energy Agency (IEA). My 
impression is that the Administration was genuinely concerned about 
higher oil prices, but their effort to tap the SPR--even through a swap 
deal--appears a bit more than opportunistic, in part because it has not 
been accompanied by a cooperative effort to coordinate an international 
stock draw. If they intended to have an impact on price, then an 
international stock draw--through the IEA--would have been a far more 
effective strategy. As it stands now, the U.S. has drawn the SPR 
unilaterally for the benefit of all nations who use oil.

2. Release of SPR will have little or no impact on oil prices.
    The price of crude oil continues to fluctuate in the $30-37/barrel 
range following the Administration's announcement that it would tap the 
SPR. The reason is simple. The impact of adding 30 million barrels to 
oil markets is negligible, representing less than half a day of global 
oil consumption (total daily global demand is approximately 75 million 
barrels). The measuring stick for potential impact of such a release 
should not be just U.S. oil consumption, but rather international oil 
consumption because we are part of in an integrated, global market. 
While the Administration's release of stocks will reduce oil imports a 
bit, the reality is that a European or East Asian country could easily 
import that amount of oil and put it into their stocks--negating the 
impact of the SPR release. Other experts have cautioned that it will 
also have little impact on relieving the heating oil crisis in the 
Northeast. A 30 million-barrel release does not directly translate into 
heating oil stocks for these states. In fact, the refined products 
resulting from the release will be sold where they fetch the highest 
price. There have been recent reports of some U.S. refiners shipping 
heating oil to Europe where prices are even higher than in the domestic 
market.

3. The ``founders'' of the SPR viewed the SPR as a national security 
        asset to be enhanced and coordinated with stocks in other 
        nations.
    Following the Arab embargo of the U.S. in 1973, Henry Kissinger 
urged the creation of the International Energy Agency. The IEA was 
founded upon the principle that countries must build 90 days of stocks. 
In the event of a 7 percent shortfall, member governments were 
obligated to share oil with other countries.
    However, in l979 the Iranian revolution resulted in only a 2 
percent shortfall, far below the IEA trigger of 7 percent and caused 
prices to more than double to over $40 a barrel. This contributed to 
one of the most significant economic recessions of the last three 
decades. What happened? Instead of lowering stocks, countries built 
stocks--putting added pressure on markets. There was a key lesson 
here--countries, like auto owners, ``topped off their tanks'' creating 
added pressure on prices.
    In l981 when the Iran-Iraq War caused more market insecurity, the 
IEA members learned a lesson from history and agreed to collectively 
lower stocks. Rather than build stocks rapidly, there was sufficient 
international will power to lower stocks together. This effort dampened 
upward price pressure and in fact pushed prices down. I would like to 
point out that a bipartisan effort helped this process. Outgoing 
officials of the Carter Administration and the incoming officials of 
the Reagan team both saw the value of building and coordinating stocks.
    Mr. Chairman, you will recall that the Iran-Iraq War intensified 
during the period l984-85 and President Reagan took active measures to 
urge all countries to build their stocks and to clarify rules for their 
use--the key of which was coordinated stock draw. Many countries, 
including Japan and Germany, built stocks at our urging. The United 
States actively sought a 600 million-barrel SPR and we agreed in l985 
on a plan to coordinate stocks internationally in the event of a 
disruption. In tandem with this effort we helped expand the defense 
capabilities of the friendly Arab countries in the event that war might 
spread into Kuwait and Saudi Arabia.
    The next crisis was triggered by the Gulf War. President Bush and 
Energy Secretary Admiral Watkins had the advantage of a well-stocked 
SPR, available for use to impact and stabilize the world oil situation. 
They also benefited from Reagan Administration efforts to increase the 
defensive capabilities of friendly Arab states. Secretary Watkins and 
National Security Advisor Scowcroft and their staffs worked very hard 
within the IEA framework to develop a common policy among the IEA 
countries. The results were commendable. Even though the SPR was only 
tested--it did serve as an effective deterrent. Our allies appreciated 
that not only did the U.S. build a coalition force to protect Kuwait--
we also build a coalition of countries within the IEA to coordinate 
emergency release of oil stocks.
    The point of my historical observations is that both Democratic and 
Republican Administrations have been hesitant to use the SPR. Like a 
strong military, the SPR was seen primarily as a deterrent, a mechanism 
to be used only as a last resort and when national economic security is 
severely threatened.

4. The Strategic Petroleum Reserve can help relieve physical shortage 
        and moderate prices--but it should be used in coordination with 
        the stocks of other nations.
    Let me give a definition of when and how the SPR should be used. 
The SPR is America's first line of defense against oil disruptions. It 
is a national treasure which when coupled with the effective use of 
stocks in other countries can calm and bring reassurance to troubled 
oil markets. The SPR can be used to moderate prices when it threatens 
our economies and it can be used to help relieve a physical shortage. 
But it should not be triggered in isolation of international 
cooperation with the IEA countries.
    If the Middle East were to go up in flames next week and oil 
markets were disrupted then I would be quick to call for a stock draw 
both in the U.S. and within the IEA. But I do not think the present SPR 
swap was necessary and I do not believe it will be effective. Nor do I 
think that Secretary Richardson's efforts to pressure producer 
countries earlier this year was particularly effective in gaining their 
cooperation. Again, let me stress that the motivation may have been 
commendable, but the signal this Administration has been sending to 
both consuming countries and producing countries is that the U.S. will 
act unilaterally in matters of energy security. The SPR release 
undermines our international leadership and credibility.

5. The next President should focus on national energy policy as a high 
        priority
    The reality today is that oil markets are on the razor's edge--
inventories are low; demand is increasing--and it may take years for 
new supplies to be on the market. Many experts agree, however, that 
current oil prices are sufficient to encourage a new wave of resource 
development, especially given the pace of technological developments. 
But much of that supply will not be on the market for at least three to 
five years and we can expect some bumps in the road until then.
    As the members of this committee know full well, the current 
situation is a reminder that we must accelerate our efforts to put in 
place a national energy security policy that emphasizes the development 
of our domestic resources. We should (l) allow greater access for oil 
and gas exploration on Federal lands; (2) fully tap the potential for 
greater use of natural gas, by supporting R&D for new gas using 
technologies and enabling an expansion of natural gas infrastructure; 
(3) encourage the deployment of clean coal technologies; (4) relicense 
hydro plants (5) encourage continued R&D for renewable sources and 
energy efficiency, and; (6) maintain our nuclear power capability 
through life extension of our nuclear plants.

6. Any solution to the present energy situation must be an 
        international one.
    I would like to recommend that we also pursue an international 
strategy to calm markets in the next few months within the framework of 
the Head-of-State G-7 summit in Italy next June and the IEA and OECD 
Ministerial meetings in May.
    I expect that the next G-7 summit will focus on energy and the next 
President should be in a position to show leadership, listen to the 
energy challenges confronting other nations, and work to collectively 
forge an international energy policy. In addition to taking a strong 
U.S. domestic energy policy to the table, the President should use the 
present situation to (1) urge all countries, including the U.S., to 
evaluate their stock positions and possibly increase the size of those 
reserves given the likelihood of growing oil import dependence in the 
future; (2) closely monitor current oil market developments--supply and 
demand--throughout the coming critical winter months; (3) evaluate 
alternative international strategies for releasing some oil from stocks 
should the situation warrant market intervention; (4) continue 
bilateral discussions with producer countries to consider their short 
and long-term interests, and; (5) be prepared to respond to any real 
oil supply emergencies arising out of the current troubled Middle East 
situation.
    Mr. Chairman, we are fortunate that this Committee has been holding 
hearings throughout the last few months to address U.S. energy policy. 
This gives the next Administration an opportunity to move quickly on 
energy policy. A credible national energy policy will allow the 
President to demonstrate real leadership at the G-7 summit in Italy 
next June. U.S. leadership to forge a sound international energy policy 
with our Japanese and European colleagues will ultimately benefit U.S. 
consumers and help relieve our growing dependence on oil imports from 
the volatile Persian Gulf. Thank you.

    Mr. Barton. I agree with you. We need to do that. We 
appreciate your waiting, all of the panel. This is no fun to 
sit for 4 hours, and I apologize for that.
    We are now going to hear from Mr. Wolkoff who is with the 
New York Mercantile Exchange. We would like to hear your 
comments. We put your statement in the record and we give you 
at least 5 minutes to summarize.

                  STATEMENT OF NEAL L. WOLKOFF

    Mr. Wolkoff. Thank you for the invitation to be here today. 
Just a couple of comments, a few words describing NYMEX. I 
would like to lead off by saying that NYMEX is a regulated 
entity. It is a nonpartisan organization. We are price neutral. 
That means that our policies do not favor either low or high 
prices. Our goal is to represent further competitive markets 
with fair and rational pricing.
    Mr. Barton. We will stipulate that you are neutral.
    Mr. Wolkoff. The relevance to this hearing is that NYMEX is 
the price determination forum for benchmark contracts, crude 
oil, heating oil and natural gas. Being a benchmark means that 
the prices established on NYMEX are accepted as the leading 
price reference by far for the purchase and sale of oil and gas 
on the commercial wholesale market.
    Quickly, getting into the couple of SPR issues, NYMEX's 
views on the release of oil from the SPR is consistent with 
NYMEX's view, which has been stated many times over the years, 
that governmental intrusion into the energy markets must be 
predictable and subject to specific, clearly identified 
objective standards. NYMEX is not opposed to a strategic 
petroleum reserve, although its use would always be a 
governmental intrusion into the marketplace. Instead, we are 
opposed to a sudden, unpredictable use of a SPR because such a 
use cannot be planned for in advance, it creates market 
volatility and incentive for future conduct, which is not 
desired.
    There are two specific items I would like to amplify. The 
first is the impact of an SPR release on supplies and prices 
later next year is a concern. The SPR swap release appears to 
have lowered prices temporarily. The government's action 
coincided with a price drop of approximately $1 per barrel in 
the front month, that being November crude oil. I provided some 
charts which show the apparent effect of the SPR announcement 
and subsequent bidding process on short-term prices. They show 
that the action did little to change the market's fundamental 
sentiment on oil prices going forward, that is, prices are 
expected to decline according to the forward price curve.
    As a price lowering action, the SPR release appears to have 
worked in the short term. Albeit its effect may be overwhelmed 
by other market factors such as Mideast hostilities. Whatever 
the effects such a release has on prices this year, the 
question remains, what impact the government's action will have 
once the oil is required to be paid back? Will the repayment 
come at another period of supply tightness and thus exacerbate 
market conditions later next year? The SPR swap deal provides a 
temporary inflow of crude oil into the marketplace, but in the 
longer run it will reduce the supply of oil later on as the 
obligations of repayment to the SPR come due.
    The second point on the SPR issue is the impact on future 
supply decisions by the companies that supply oil and gas to 
the public is a concern. The government's release of SPR oil 
could encourage refiners and suppliers to hold lower 
inventories, which is clearly an unwanted and unwelcomed 
outcome. The decision to release can create a concern among the 
supply and distribution companies of future governmental 
interference in the marketplace, which might cause financial 
losses for any inventories being held at the time.
    I used my 4 hours in the waiting area somewhat 
productively. I can illustrate at the time of the SPR release, 
there were 290 million barrels of crude oil in storage. There 
are about 110 million barrels of heating oil in storage, and 
another 200 million barrels of unleaded gasoline. If the SPR 
release lowered prices by $1 a barrel, it would have affected a 
transfer of wealth of $600 million, simply based on those 
barrels that we knew of in storage. Many other barrels are 
contractually owned but not stored, and they would have had 
their prices affected as well.
    It is the concern that this action by the government in 
transferring wealth from those in the business of supplying the 
marketplace with oil will, in the future, create a concern that 
high inventories can have their value again reduced by similar 
unplanned and unpredictable government action. That is a 
legitimate concern and one that I am afraid will be with us for 
the next several years.
    Commercial participants in the oil market make supply 
decisions based on their interpretations of market conditions. 
There is a market incentive for refiners to make appropriate 
business decisions. After all, the customer can always do 
business with another supplier.
    To finish, I would say inventory decisions should be left 
to the marketplaces. Free markets have been a very effective 
oil policy for the last 20 years. The marketplace has shown 
itself to be self-correcting and efficient. The SPR decisions 
to influence price, ironically, create incentives for refiners 
and suppliers to hold lower inventories, which ultimately is 
bad for the consumer. Lower inventories do not provide a buffer 
against price shocks caused by sudden increases in demand. To 
the contrary, lower inventories contribute to prices spikes.
    Thank you.
    [The prepared statement of Neal L. Wolkoff follows:]
 Prepared Statement of Neal L. Wolkoff, Executive Vice President, New 
                        York Mercantile Exchange
    My name is Neal Wolkoff. I am the Executive Vice President of the 
New York Mercantile Exchange (``NYMEX'' or the ``Exchange''). On behalf 
of the Exchange, I wish to thank you for the opportunity to participate 
in today's hearing on the Strategic Petroleum Reserve (SPR).

                        I. DESCRIPTION OF NYMEX

    NYMEX was established in 1872. NYMEX is federally chartered and 
regulated by the Commodity Futures Trading Commission (``CFTC''), an 
independent regulatory agency similar in purpose to the Securities and 
Exchange Commission. NYMEX is the largest physical commodity futures 
exchange in the world, offering contracts for energy, and base and 
precious metals. NYMEX is also the largest energy exchange in the 
world.
    Of most relevance to this hearing, NYMEX is the price determination 
forum for benchmark contracts in crude oil, heating oil, gasoline, and 
natural gas. Being a ``benchmark'' means that the prices established on 
NYMEX are accepted domestically (and in the case of crude oil, 
internationally, as well) as the leading price reference, by far, for 
the purchase and sale of oil and gas on the wholesale market.
    For essentially two decades, the marketplace has been fortunate to 
have highly liquid, transparent futures markets for heating oil, 
gasoline, crude oil, and natural gas to provide a window on the 
market's actions. Physical supplies of crude oil and refined products 
are traded on NYMEX in an open, competitive, and regulated marketplace. 
Each transaction is consummated in a completely visible open outcry 
auction with an extensive audit trail. Buyers and sellers vying for the 
best price in a transparent marketplace cannot make a market with tight 
supply cheap, or a market with abundant supply expensive. However, they 
can make the pricing fair and rational.
    The Exchange pioneered the development of energy futures and 
options. From a modest 34,000 heating oil contracts traded in 1978, 
NYMEX energy futures and options volume grew to more than 89 million 
contracts in 1999 and now includes crude oil, gasoline, natural gas, 
electricity and propane in addition to heating oil.

                    II. THE ROLE OF FUTURES MARKETS

    Futures markets provide two important economic functions: price 
transparency (price discovery) and risk shifting (risk management). 
Both of these functions are mandated by the Commodity Exchange Act, 
which is the federal statute governing NYMEX and other U.S. commodities 
exchanges. In addition, NYMEX is under the requirement by statute to 
further the public interest.
    Price transparency is the constant reporting to the world of the 
prices of actual trades being made at NYMEX. With tens of thousands of 
energy contracts 1 traded daily, each reflecting a binding 
commitment to make or take delivery of a specific commodity, price 
information is made available real-time, on a virtually continuous 
basis over a ticker network.
---------------------------------------------------------------------------
    \1\ Futures and Options Contracts
    A futures contract is an agreement between two parties for delivery 
of a particular commodity at a specific time, place and price. Once 
initiated, a futures contract obligation can be satisfied by either 
taking an equal and offsetting futures position or by going through the 
delivery process and taking possession or making delivery of the 
commodity. The vast majority of market participants opt for the former, 
and as a result, futures contracts are primarily used as financial 
rather than physical management tools.
    An options contract bestows upon its owner the right, but not the 
obligation, to buy or sell the underlying futures contract at a 
specified time and ``strike'' price. The option to buy is called a 
``call'', and the option to sell is a ``put''. A major appeal of 
options is their similarity to term insurance. The option is purchased 
for a one-time fee called an option premium. Depending on how the 
market moves, the option may be sold for a profit, exercised, or 
allowed to expire worthless, with the holder's loss limited to the 
premium paid.
    NYMEX guarantees the financial obligation associated with all 
contracts open on NYMEX. The strength and liquidity of NYMEX is found 
in the financial integrity of its clearing system, and its commitment 
to the provisions of fair and orderly markets. NYMEX has taken strong 
steps to ensure integrity, including daily price limits, customer 
margin requirements, speculative position limits, market surveillance 
and strict financial requirements for all NYMEX members. As the world's 
largest and most innovative energy futures trading forum, NYMEX offers 
the experience and the security to help industry manage the global 
challenges of today's dynamic price realities.
---------------------------------------------------------------------------
    Risk shifting, in the secure liquid markets that NYMEX provides, 
allows commercial interests to ``hedge'' the risk of price fluctuations 
that could affect profitability and planning of their business 
operations. For the commercial participant, the result is a form of 
insurance against the financial adversity that can result from volatile 
energy prices.

                 III. NYMEX SERVES A BROAD MARKETPLACE

    While the principal market served by NYMEX is composed of those 
involved in financial risk management, the utility and necessity of its 
price reference functions are substantially broader, and serve a 
valuable public purpose by enhancing competition in the marketplace.
    NYMEX's markets are widely utilized by all segments of the domestic 
and international oil and gas industries, and by major banking 
institutions, among other participants. NYMEX's prices are disseminated 
to the public in every major industrialized nation on a real time 
basis. The transparency of NYMEX's prices, and the integrity of its 
markets, makes NYMEX a benchmark for energy pricing around the country 
and the world.
    On any given day, the NYMEX energy complex averages the trading of 
approximately 225 million crude oil equivalent barrels per day. That 
represents nearly 3 times daily world oil production--and 9 times daily 
OPEC production, with an annual notional value of nearly $2 trillion.

                             IV. SPR ISSUES

    NYMEX views the release of oil from the SPR consistent with its 
view stated many times over the years that governmental intrusion into 
the energy markets must be predictable, and subject to specific, 
clearly identified objective standards. We are not opposed to a 
Strategic Petroleum Reserve, although its use would always be a 
governmental intrusion into the marketplace; instead, we are opposed to 
sudden, unpredictable use of a Strategic Petroleum Reserve, because 
such a use cannot be planned for in advance, and creates market 
volatility and, as described below, incentives for future conduct that 
is not desired.

A. The Impact of an SPR Release on Future Supplies and Prices Is a 
        Concern
    The SPR swap release appears to have temporarily lowered oil 
prices. The government's action coincided with a price drop of 
approximately $1 per barrel in the front month of November crude oil. 
The accompanying charts graph the apparent effect of the SPR 
announcement and subsequent bidding process on short term 
prices.2 They also show that the action did little to change 
the market's fundamental sentiment on oil prices going forward (prices 
are expected to decline, according to the forward price curve).
---------------------------------------------------------------------------
    \2\ The price impact of the SPR swap release will be temporary, and 
will not have much impact in the longer term. Although the immediate 
impact of the SPR release has been lower prices in the near term by 
about $1.00 per barrel, the SPR release has not altered the price curve 
for oil. The price of oil continues to be in backwardation, a term that 
means that prompt delivery of oil is priced higher than future 
delivery. On September 21, one day before the announcement of the SPR 
swap plan, the backwardation in the crude oil market was $.59 cents per 
barrel for November delivery as compared to December. As of October 17, 
the backwardation continued to be $.57 for November vs. December 
delivery.
---------------------------------------------------------------------------
    As a price lowering action, the SPR release worked in the short 
term, albeit its effect may become overwhelmed by other market factors, 
such as Mid-East hostilities. Whatever the effect such a release has on 
prices this year, the question remains what impact the government's 
action will have once the oil is required to be paid back. Will the 
repayment come at another period of supply tightness, and thus 
exacerbate market conditions later next year? The SPR swap deal 
provides a temporary inflow of crude oil to the marketplace, but in the 
longer run will, in fact, result in a net reduction in the supply of 
oil as the obligations for repayment to the SPR come due.

B. The Impact on Future Supply Decisions Is a Concern
    The government's release of SPR oil could encourage refiners and 
suppliers to hold lower inventories, which is clearly an unwanted 
outcome. The decision to release can create a concern among the supply 
and distribution companies of future governmental interference in the 
marketplace which might cause financial losses for any inventories 
being held at that time. Arbitrary, i.e., non-emergency, use of the SPR 
oil by the government to influence price interferes with the decision-
making process, and therefore interferes with the normal marketplace 
incentives to be reliable and customer-friendly.
    Commercial participants in the oil market make supply decisions 
based upon their interpretations of market conditions. There is a 
market incentive for refiners and suppliers to make appropriate 
business decisions that are intended to satisfy customer and consumer 
needs. After all, like any business, if a refiner or supplier fails to 
meet its customer's needs, the customer can do business with another 
supplier.
    The various suppliers and refiners of crude oil need to factor in 
the potential release by government of SPR oil in making an inventory 
decision, with the end result that the consumer is likely to be the one 
to suffer. In essence, in a world governed by marketplace consequences, 
without government intervention using the SPR, a supply decision to 
carry low inventories can have significant commercial consequences to a 
refiner's business if his judgment is wrong.
    However well meaning, government interference can provide perverse 
incentives. For example, with a government inventory to fall back on, 
the SPR actually provides a buffer for the supplier or refiner, 
allowing him to err on the low side for inventory. If wrong, the SPR 
will be there to bail him out. In addition, if he chooses to maintain a 
normal or higher-than-normal inventory to assure reliability, he runs 
the risk of being punished commercially through an unplanned SPR 
release that will lower the value of his inventory in the short term. 
Again, the SPR incentivizes low inventories out of price concern.
    Inventory decisions should be left to the marketplace. The 
marketplace has shown itself to be self-correcting and efficient. SPR 
decisions to influence price ironically create incentives for refiners 
and suppliers to hold lower oil inventories, which is bad for the 
consumer. Lower inventories do not provide a buffer against prices 
shocks caused by sudden increases in demand. To the contrary, low 
inventories contribute to price spikes.

C. Administrative Concerns
    The non-emergency use of the SPR is difficult to administer to 
assure fairness and adequacy in the distribution scheme. The experience 
of the 1970's with a government body in charge of gasoline allocation, 
which resulted in shortages, lines, and allegations of fraud and 
corruption, shows the dangers inherent in centralized administration of 
supply and demand.
    Finally, once SPR oil is released to the marketplace, it becomes 
difficult to monitor that the oil is used as intended by the 
government. It can be traded or sold at a profit, or even exported on 
the world market, and perhaps the consumer will not benefit.

 V. THE OIL MARKET IS NOT SPECULATIVELY DRIVEN, AND A SPR DECISION ON 
                      THAT BASIS IS NOT JUSTIFIED

    One prevalent theory seeking to justify the release of SPR oil is 
that the market is driven by speculative forces, instead of commercial 
ones. The accompanying price charts clearly show a rational market 
making decisions on the basis of supply and demand information, as 
known. The SPR release became factored into the price for the short 
term period it would have a supply impact, and thereafter, the market 
readjusted to its former price sentiment.
    Contributing to the ever-present theories, rumors, and ghost 
stories of how speculators can drive prices up, are the press releases 
by OPEC, which minimize the impact of its members' conduct and 
routinely list ``speculation'' as the number one cause of high prices. 
These excuses for a painful consumer environment may make for colorful 
tales in the news media, but they do not reflect how public markets 
work today, with hundreds of commercial participants and instantaneous 
price dissemination. Any ``speculative'' price would be met with an 
equally strong ``commercial'' reaction. An oil company would gladly 
sell its oil at a speculatively driven ``inflated'' price. And those 
sales, in turn, would act to bring the market right into line again.
    The reason every major oil company around the world uses our 
markets not only to manage their risk, but also as a benchmark for 
transactions in related markets, is that the price activity is 
consistent with their in-depth understanding of market conditions based 
on exploration and development projections--industry executives would 
be more likely than laymen to know whose wells are suffering operating 
problems or who has a cargo of oil at sea. To the extent that the 
market begins moving in a direction that is inconsistent with their 
market intelligence, they will seek to take advantage of it, selling 
into a market that is reaching too high, thus dampening the price 
increase and buying into a market that is too low--mitigating the 
decline. The participation of hundreds of other similar commercial 
entities--energy producers, wholesalers, retailers--and government 
agencies with comparable access to information is what ensure the 
prices will rapidly return to where the industry consensus believes it 
should be. If the system didn't work, these savvy market players would 
have found or developed a better one, particularly in this age of 
instantaneous access to global information.
    Speculators do exist and they actually play a valuable, even 
necessary role--adding liquidity to the market and enabling the 
commercial traders to get in and out of the market when they need to. 
By the nature of their role, speculative traders seek to take advantage 
of price trends, but because they lack the real oil to back up their 
investment, they cannot control the price, only hitch on for the ride. 
They create virtually no impact on daily settlement prices, which are 
the primary benchmark used by the marketplace.
    NYMEX has a regulatory responsibility, which is supervised by the 
Commodity Futures Trading Commission, an independent federal regulatory 
agency, to monitor market participation and take all necessary steps to 
protect against price manipulation. The CFTC has consistently found 
that NYMEX performs its regulatory functions, as required.
    Because of the broad national importance of energy prices to the 
public, the U.S Department of Energy (``DOE'') has also studied the 
role NYMEX plays in the pricing of energy. Four years ago, as a result 
of sharp winter price increases in heating oil in late 1996, the DOE's 
Office of Policy began a study on the heating oil futures market. The 
final report, ``Heating Oil Futures Markets and Price Volatility `` 
issued last June, concluded that futures markets play a stabilizing 
role in the determination of heating oil prices, even during a period 
of sharp price increases. The report also confirmed the extremely broad 
use of the marketplace by oil refiners (who produce the heating oil, 
and have a great interest in a ``real'' unmanipulated price) for 
hedging their risk. By using the NYMEX market for hedging, the refining 
community inherently endorses the validity or integrity of NYMEX's 
pricing mechanism.

Market Oversight
    The federal government has long recognized the unique economic 
benefit futures trading provides for price discovery and managing price 
risk. In 1974, Congress created the Commodity Futures Trading 
Commission, giving it authority to regulate commodity futures and 
related trading in the U.S. A primary function of the CFTC is to ensure 
the economic utility of futures markets as hedging and price discovery 
vehicles--encouraging competitiveness, efficiency, and market and trade 
practice integrity and fairness. The CFTC reviews the terms and 
conditions of proposed contracts, and oversees registration of firms 
and individuals who either handle customer funds or give trading 
advice. It conducts and monitors rule enforcement at U.S. futures 
exchanges. The CFTC also reports publicly the speculative/commercial 
ratio of participants in the market.
    Under the regulatory framework, NYMEX is both regulated and self-
regulating. To fulfill its self-regulatory duties, NYMEX has people and 
systems in place to ensure that, despite the fundamental forces in 
operation at a given time, artificial factors or manipulation cannot 
drive the prices of futures contracts. Our market surveillance and 
financial surveillance systems ensure orderly markets, including the 
recent period of price changes in the heating oil market. Specific 
self-regulatory functions relevant to this hearing include:

1. Speculative position limits
    Speculative position limits, or a limit on the number of contracts 
any one participant can hold in a single month or aggregated over all 
months, are an important facet of market oversight. The limits protect 
the market from the potential influence of large participants or 
concentration of positions. Speculative position limits for the crude 
oil contract are 1000 contracts (1 contract is 1,000 barrels of crude 
oil) in the spot, or nearby contract month, and an overall limit of 
20,000 contracts in all months. NYMEX does permit hedge exemptions to 
the total number of positions an individual firm or group acting 
collectively can assume in any one month or all months combined to 
accommodate legitimate risk management needs of large commercial firms. 
There are four strict rules governing the exemptions: first, there must 
be sufficient liquidity in the market; second, the firm must document 
its cash market hedging needs; third, the firm must be appropriately 
capitalized and financially solvent; and fourth, the firm must have the 
experience to handle the size of the position. These measures serve to 
avoid domination by any one hedging entity, and assure that each 
commercial firm has the financial status to perform on its contract 
obligations. Large positions, defined as those entities holding 300 or 
more crude oil contracts, are reported to the CFTC and NYMEX daily.

2. Surveillance of Market Fundamentals
    Market surveillance also monitors the supply and demand 
fundamentals in the underlying cash market. This is to ensure that 
NYMEX reflects cash market price movements, that the futures market 
converges with the cash market at contract expiration, that there are 
no price distortions and no market manipulation. Market surveillance 
staff meets weekly to assess market conditions. The surveillance staff 
includes members of the compliance, operations, and research 
departments, and--when necessary--senior administrators.
    After analyzing events and developments over the past several 
months, including the most recent price moves, NYMEX surveillance staff 
have concluded that the crude oil market price movements were based on 
a number of fundamental market factors. It is NYMEX's belief that the 
crude oil futures market performed in a rational manner, that price 
increases experienced were due to a number of widely identified 
fundamental market factors including tightened supply and increased 
demand. Markets were closely monitored and contract liquidation has 
proceeded smoothly. The NYMEX system worked according to design, 
providing a viable price discovery and risk management forum--the 
functions which it is required under federal law to perform.
    Once again, on behalf of NYMEX, I wish to thank you for the 
opportunity to discuss the SPR, and will be happy to answer any 
questions you may have.

    Mr. Barton. Thank you, Mr. Wolkoff.We will now will hear 
from Mr. John Surma, who is with the Marathon Ashland Petroleum 
Company, and they are one of the winning bidders of SPR oil. We 
recognize you for 5 minutes.

                   STATEMENT OF JOHN P. SURMA

    Mr. Surma. Thank you very much. As you indicated, I am with 
Marathon Ashland Petroleum, which I will refer to as MAP. We 
are the Nation's fifth largest refiner and marketer. We operate 
seven refineries with a combined crude oil capacity of 935,000 
barrels per day. Most of our territory is in the midwest and 
southeast. We appreciate the chance to present our company's 
perspective. We were a winning bidder of 3.9 million barrels on 
the first round of release.
    First, let me speak to the supply and demand picture. With 
respect to the manufacture of heating oil, we believe the 
efficiency of the free market system is best capable of 
shifting resources to meet apparent demands. On or about Labor 
Day, our company began to manufacture maximum distillates in 
our refining system. In September, MAP set a company record for 
distillate production of 300,000 barrels per day. Additionally, 
we are operating at or near maximum levels. All of this is 
occurring without any influence of the release of crude from 
the SPR or any other force other than normal market forces.
    Our company supports the creation and maintenance of a 
strategic reserve of crude oil to ensure adequate energy supply 
in times of emergency. In fact, as a significant purchaser and 
refiner of crude oil, MAP would look to the SPR in times of 
emergency to supply refineries and meet the energy and 
transportation fuel demands of our customers.
    The SPR, in our view, represents a critical controllable 
source of oil in the event of a significant sustained world oil 
supply disruption. MAP supports the drawdown of SPR crude in 
the event of a national emergency. We do not believe the 
current case fits that definition. Based on our experience with 
the current release, we are concerned about the process by 
which the government has offered SPR volumes for sale or 
exchange as well as the ability of the SPR to execute 
deliveries upon completion of the contracts. We believe these 
concerns should be addressed and specific procedures defined so 
that both the DOE and the Nation's refiners are prepared in the 
event of a true supply emergency.
    Let me comment on several specifics. With respect to 
prequalifications or offer guarantees, we find that purchasing 
crude oil from the SPR is a serious and complex business 
transaction, and we strongly support a prequalification 
procedure for the inclusion of an offer guarantee in all future 
SPR solicitations similar to that which was included in the 
most recent October 16 solicitation package.
    The package receipt from the DOE for the initial 
solicitation, dated September 25, 2000, required that an 
irrevocable standby letter of credit be established in favor of 
DOE and then be provided to the contracting officer within 5 
business days of receipt of award. We complied with that 
requirement. Three of the successful bidders were granted 
additional time to comply, even though there was no such 
provision for extension in the solicitation package. We believe 
that the solicitation rule should be applied consistently for 
all bidders, and special rights and exceptions should be 
avoided. Only then will participants in the auction process be 
comfortable that they understand the rules and ensure a more 
efficient bid process in an orderly clearing of the market.
    Of the 30 million barrels of SPR crude that was initially 
awarded, 24.9 million barrels was West Hackberry crude oil. 
Most of that crude must be shipped to Sun's Midland, Texas 
terminal for movement to the refiners by pipeline, vessel or 
barge. We understand that Sun may not be able to handle all of 
the SPR crude nominated to it in the month of November. As a 
result, some of the SPR crude oil will likely not be delivered 
until December.
    The uncertainty of SPR deliveries makes it difficult for 
our country to complete our November crude purchase program, 
which must be finalized no later than October 25. We suggest 
that for any future release, that DOE work closely with the 
connecting terminals to determine what the capacity limitations 
are and tailor the solicitation volumes appropriately. As the 
solicitations currently stand, custody transfer for West 
Hackberry crude takes place at the Sun terminal receiving 
tanks. In order to maximize volumes through Sun's terminals, 
MAP suggests that this measurement procedure be modified.
    We believe DOE should work with Sun to designate a given 
number of tanks strictly for DOE deliveries such that custody 
transfer occurs as Sun delivers out of their tanks to the 
connecting pipeline, vessel or barge. By making this simple 
change which is common practice in the industry, shipments from 
DOE's facilities can be maximized and crude oil can reach its 
ultimate destination in a more rateable and predictable manner. 
We believe these recent events provide further evidence of the 
need for a comprehensive national energy policy, which 
recognizes the need for strengthening the downstream 
infrastructure of the domestic petroleum industry.
    That policy should consider the threat to supply that the 
recently proposed low sulfur diesel rule represents and should 
also recognize the need to improve the flexibility of the 
Nation's petroleum refining pipeline and logistics 
infrastructure.
    In closing, we recommend that changes be made to the 
commercial and logistical program elements which have been 
problematic in the process such that all market participants, 
and the general public, will have a greater assurance that the 
SPR will be able to fulfill its mission in times of a true 
national emergency. We appreciate the opportunity to be here.
    [The prepared statement of John P. Surma follows:]

 PREPARED STATEMENT OF JOHN P. SURMA, SENIOR VICE PRESIDENT SUPPLY AND 
             TRANSPORTATION, MARATHON ASHLAND PETROLEUM LLC

    Good morning. I'm John Surma, Senior Vice President, Supply and 
Transportation, of Marathon Ashland Petroleum (MAP). We are the 
nation's fifth largest refiner, operating seven refineries with a 
combined crude oil capacity of 935,000 barrels per day. We operate 85 
terminals in the Midwest and Southeast United States which distribute 
gasoline, diesel and asphalt, and we market through more than 5,200 
retail outlets in 21 states under the Marathon and Speedway brands. We 
are headquartered in Findlay, Ohio.
    Chairman Barton, Members of the Sub Committee, I welcome the 
opportunity to present my company's experience and perspective on the 
recent release of crude oil from the Strategic Petroleum Reserve. Our 
company was the successful bidder on 3.9 million barrels.
    I would like to focus my remarks on a number of issues related to 
the recent SPR bidding process and the planning for and delivery of the 
crude oil, but first let me speak to the supply/demand picture. With 
respect to manufacture of heating oil, we believe the efficiency of the 
free market system is best capable of shifting resources appropriately. 
On or about Labor Day, MAP began to manufacture maximum distillate in 
our refineries. In fact, during the month of September, MAP set a 
company record for distillate production, over 300,000 barrels per day. 
Additionally, MAP is operating available refining capacity at near 
maximum levels. All of this is occurring without any influence of the 
release of crude from the SPR.
    Our company supports the creation and maintenance of a strategic 
reserve of crude oil to ensure adequate energy supply in times of 
emergency. In fact, as a significant purchaser and refiner of crude 
oil, MAP would look to the SPR in times of national emergency to supply 
our refineries and thus meet the energy and transportation fuel demands 
of our customers. With the majority of our nation's supply of crude oil 
coming from outside the United States, the SPR represents a critical, 
controllable source of oil in the event of a significant, sustained 
world oil supply disruption. MAP supports the drawdown of SPR crude oil 
in the event of a national emergency. We do not believe that the latest 
situation fits that definition.
    Every day, our company surveys the oil markets seeking to purchase 
the crude oil supplies necessary to meet the requirements of our 
refineries. Once the decision was made to offer oil from the SPR, we 
were compelled, for competitive reasons, to bid for this crude as we do 
for other crudes marketed for sale. As the successful bidder for 3.9 
million barrels, we in turn will not purchase that amount from other 
sources. A similar scenario would likely apply to the entire 30 million 
barrel SPR drawdown. One could infer that an incremental 30 million 
barrels of crude oil will simply be diverted to the world market. In 
turn, the 570 million barrels currently in the SPR will be diminished 
by 30 million barrels until it is replaced sometime next year. The 
ability of the SPR to mitigate a world supply disruption will therefore 
be diminished by this amount during the coming year. I would liken this 
situation to a family spending a part of its nest egg for a luxury 
item, and not having those resources available should a necessity arise 
in the future.
    Based on our experience with the current SPR release, we are 
concerned about the process by which the government offers SPR volumes 
for sale or exchange, as well as the ability of the SPR to execute 
deliveries upon the completion of contracts. We believe these concerns 
should be addressed and specific procedures defined so that both the 
DOE and the nation's refiners are prepared in the event of a true 
supply emergency.
    Let me comment on several of these issues:

Pre-qualification of Bidders or ``offer guarantees''
    Purchasing crude oil from the SPR is a complex business transaction 
involving assessing the current value of the crude oil to the refinery 
relative to alternatives, handling the logistics to move the crude oil, 
procuring the replacement crude oil nine to twelve months in the 
future, hedging the risk in the futures market and posting an 
irrevocable standby letter of credit. The inclusion of unqualified 
bidders in this process has been disruptive to the successful, 
legitimate bidders like MAP. MAP is concerned that these and, perhaps, 
other bids submitted by companies or individuals who were not bonafide 
bidders and who submitted unrealistic bids, might have influenced DOE's 
decision with regard to our original bids which were not accepted in 
full.
    Simply put, the inclusion of unqualified bidders in such an auction 
process results in a disorderly market and a potentially inefficient 
result. In the event of a true supply emergency, it would be in the 
best interests of the DOE, consumers and refiners to avoid market 
inefficiencies and unnecessary and time-consuming delays resulting from 
unqualified bidders being involved in the process. MAP strongly 
supports a pre-qualification procedure or the inclusion of an ``offer 
guarantee'' in all future SPR solicitations, similar to that included 
in the October 17, 2000 solicitation package.

Strict adherence to procedures
    The solicitation package received from the DOE dated September 25, 
2000, required that an irrevocable standby letter of credit be 
established in favor of the U.S. Department of Energy and be provided 
to the contracting officer within five business days of receipt of 
awards. MAP complied with this requirement. Three of the successful 
bidders were unable to provide the letter of credit on the due date and 
DOE granted additional time for these bidders to comply, even though 
there is no provision for such an extension in the solicitation 
package. MAP believes that the solicitation rules should be applied 
consistently for all bidders, and special rights and exceptions should 
be avoided. Only then will participants be comfortable that they 
understand the rules, which helps ensure a more efficient bid process.

Terminal logistics limitations
    Of the 30 million barrels of SPR crude that was awarded, 24.9 
million barrels is West Hackberry crude oil. Most of this crude oil 
must be shipped to Sun's Nederland, Texas terminal for movement to 
refiners by pipeline, vessel or barge. We understand that Sun will not 
be able to handle all of the SPR crude nominated to it in the month of 
November. As a result, some of the SPR crude oil will likely not be 
delivered until December. The uncertainty of SPR deliveries makes it 
difficult for MAP to complete our November crude purchases program with 
other suppliers that must be finalized no later than October 25. We 
would suggest for any future release that DOE work closely with 
connecting terminals to determine what capacity limitations are, and 
tailor the solicitation volumes accordingly.

DOE measurement requirements
    As the Solicitations currently read, custody transfer for West 
Hackberry crude oil takes place at the Sun terminal receiving tanks. 
Quantity measurements are based upon Sun's opening and closing tank 
gauges. No commingling of batches is allowed by DOE. Crude is pumped 
from Sun's tank to the delivery pipeline, vessel or barge. The next DOE 
delivery to Sun's tank can take place only after a particular batch has 
cleared the tank.
    In order to maximize volumes through Sun's terminal, MAP suggests 
this measurement procedure be modified. DOE should work with Sun to 
designate a given number of tanks strictly for DOE deliveries. Rather 
than custody transfer occurring as the crude is delivered into Sun's 
tanks, it should occur as Sun delivers out of their tanks to the 
connecting pipeline, vessel or barge. By making this change, which is 
common practice throughout the industry, and allowing for commingling 
of any West Hackberry batches, shipments from DOE's facility can be 
maximized and crude oil can reach its ultimate destination in a more 
ratable and predictable manner. This same concept should be adopted at 
other DOE facilities if applicable.
    We believe these recent events provide further evidence of the need 
for a comprehensive national energy policy which recognizes, among 
other matters, the need for strengthening the downstream infrastructure 
of the domestic petroleum industry. That policy should consider the 
threat to supply that the recently proposed ``low-sulfur diesel rule'' 
represents and should also recognize the need to improve the 
flexibility of the nation's petroleum pipeline and logistics 
infrastructure.
    In closing, we urge the DOE to make every effort to comply with the 
delivery terms and conditions in the solicitation. Further, we 
recommend that changes be made to the commercial and logistical program 
elements that have been problematic in the current process, such that 
all market participants, and the general public, will have a greater 
assurance that the SPR will indeed be able to fulfill its mission in 
times of true national emergency.
    Again, I appreciate this opportunity to appear before this Sub 
Committee, and I look forward to answering any questions you or other 
members of the Sub Committee may have.

    Mr. Barton. We appreciate you being here. Now we go to Mr. 
John Manzoni, president of the Eastern United States for 
British Petroleum.

                    STATEMENT OF JOHN MANZONI

    Mr. Manzoni. Thank you. My name is John Manzoni. I am the 
Regional President for the Eastern States for BP. I am pleased 
to be here this morning at the request of the subcommittee to 
review with you BP's participation in the recent SPR bidding 
process. BP is one of the largest energy companies in the 
world. We explore for, produce, refine, and we market petroleum 
and other energy products, including solar applications, all 
around the world.
    First of all, I would like to take a few moments to explain 
how and why we made the decision to bid on the SPR crude oil. 
Let me be clear that the basis for our decision was purely a 
commercial opportunity. It is useful to explain how we supply 
our refineries in order to understand how we approach 
opportunities in the market and how we approached the SPR.
    The first point is that the refiners are supplied by a 
series of contracts, and those contracts are for various terms 
or lengths. It is the traders' job to make sure that the 
refiners are well supplied with crude oil, and the traders take 
into consideration several factors. For example, the logistics 
of getting the oil into the refining, the assay or genetic 
makeup of the crude oil, whether sweet or sour. And depending 
on these physical factors, as well as other market factors, the 
traders will bid a particular price for crude oil where they 
believe that they can be profitable. This is a complex process, 
and all of the factors that I have mentioned, the logistics, 
the assay and the price are interrelated. As a company, we are 
continuously in the market looking to service our refinery 
assets to keep them supplied with crude oil into the future, 
and of course to make a trading profit. In other words, the 
market is dynamic and it is continuous.
    So let us talk about the specific crude oil BP bid on for 
the SPR. First of all, it was a sweet crude oil and that crude 
happens to be the best economically available crude to service 
our refineries. Second, it had easy access to our logistic 
system. Given these factors, our traders, like others in the 
market, put a value on the crude and created an exchange ratio 
because the SPR transaction was an exchange and not an outright 
purchase. Because of the structure of the market, we were able 
to offer a commercially attractive ratio, which will deliver 
more oil into the SPR at the end of the period and at the same 
time, we were trying to determine how we could derive value on 
a trading basis, given our view of the forward structure of the 
price curve.
    With these considerations, our traders chose to make a bid 
on the SPR crude. This transaction worked for us because, as I 
said, the crude matched with our refinery requirements, and it 
was close to our logistical system. It was, therefore, the most 
economically attractive crude to run in our refineries. The 
terms of the contract were exactly as per the solicitation 
process. And in the first round of bidding, BP was awarded 2 
million barrels of oil.
    Then the SPR retendered the second round. Between the first 
and second rounds, we were able to establish alternative 
logistics to allow us to move the crude in a different way 
between the refineries, which allowed us to bid for the 4 
million barrels the second time and that amount we were 
subsequently awarded. This brought our total SPR award to 6 
million barrels. We expect to lift all of that oil in November, 
and furthermore, we expect to process it through our refinery 
network starting about that time.
    As I explained, we carefully consider the supply, the 
logistic, and the production capabilities of our network when 
we make crude selection decisions. The entire process is 
managed using economic and investment decision criteria which 
are based on sound business practice.
    In closing, let me also address the status of BP's 
operations in the United States. All of our refiners are 
currently running at maximum available capacity. We are 
maximizing distillate production and our inventories are at or 
above normal levels. We have no planned shutdowns for our 
refinery system for the remainder of this year although, of 
course, unplanned shutdowns and outages can always occur. 
Finally we continue to believe that the market mechanism 
provides the most efficient distribution and allocation of 
resources in the best interests of our consumers. Thank you for 
your time. I will be happy to take questions.
    [The prepared statement of John Manzoni follows:]

  PREPARED STATEMENT OF JOHN MANZONI, BP REGIONAL PRESIDENT, EASTERN 
                             UNITED STATES

    Good morning Mr. Chairman and Members of the Subcommittee, I am 
John Manzoni, Regional President of BP for the Eastern United States. I 
am pleased to be here at the request of the Subcommittee to review with 
you BP's participation in the recent SPR bidding process.
    BP is one of the largest energy companies in the world. We explore 
for, produce, refine and market petroleum and other energy products, 
including solar applications, around the world. We are in the markets 
everyday, constantly seeking to balance our supply and demand 
obligations, while earning a reasonable return for our shareholders.
    First, I would like to take a few moments to explain how and why we 
made the decision to bid on SPR crude oil. Let me be clear, the basis 
for this decision was a commercial opportunity for BP.
    It is useful to explain how we supply our refineries in order to 
understand how we approach opportunities in the market, and thus how we 
approached the SPR. The first point is that our refineries are supplied 
via a series of contracts for oil of various lengths. It is the 
traders' job to make sure that the refineries are well supplied with 
crude oil. As they do their business, there are several considerations 
they must take into account. For example, the logistics of getting the 
oil in to the refinery--the transportation cost; the assay, or 
``genetic'' make-up of the crude--whether it is sweet or sour. 
Depending on these physical factors and other market factors, the 
traders will bid a particular price for crude oil where they believe 
they can be profitable. This is a complex process and all the factors 
are inter-related. We are continuously in the market looking to service 
our refinery assets, keep them well supplied and to make a profit. In 
other words, the market is dynamic and continuous.
    So, let's talk about the specific crude oil BP bid on from the SPR. 
First of all, it was sweet crude, and happened to be the best 
economically available crude to meet our refinery needs; second, it had 
easy access to our logistical system. Given these factors, our traders, 
like others in the market, put a value on the oil and created an 
exchange ratio, because the SPR transaction was not an outright 
purchase, it was a swap. Because of the current structure of the 
market, we were able to offer a commercially attractive ratio which 
will deliver more oil into the SPR at the end of the period. We were 
trying to determine how we could derive value on a trading basis given 
our view of the forward price of crude oil. With these considerations 
our traders chose to make a bid on the SPR oil. This transaction worked 
for us because the supply was close to our logistical system and it was 
the most economically attractive crude oil to run in our refineries.
    Now allow me to address the terms and structure of BP's bid. The 
terms of our contract were exactly as per the SPR solicitation. In the 
first round of bidding BP was awarded 2.0 million barrels of oil.
    Then the SPR re-tendered a second round. Between the first and 
second rounds, we established a logistical alternative to move crude 
which allowed us to bid for a further 4.0 million barrels, an amount 
which we were subsequently awarded. This brought our total SPR award to 
6.0 million barrels of crude oil. We expect to lift all of the oil in 
November and process it through our refinery network around that time.
    As I have explained, we carefully consider the supply, logistic and 
production capabilities of our network when making crude selection 
decisions. The entire process is managed using economic and investment 
decision criteria that are consistent with sound business practices.
    Let me also briefly address the status of BP's refinery operations 
in the US. All of our refineries are currently running at maximum 
available capacity. As is usual for this time of year, we are 
maximizing distillate production and our inventories are at normal 
levels. We have no planned shutdowns in our refinery system this yea; 
however, unplanned outages can always happen. We continue to believe 
the market provides the most efficient distribution and allocation of 
supply in the best interest of consumers.
    Thank you very much for your time. I would be pleased to take 
questions.

    Mr. Barton. Thank you. We will now hear from John Boles, 
president of Equiva Trading in Houston, Texas. We recognize you 
for 5 minutes.

                     STATEMENT OF JOHN BOLES

    Mr. Boles. Thank you, Mr. Chairman. By way of background, 
Equiva Trading Company is owned by Equilon Enterprises and 
Motiva Enterprises. Each has a 50 percent interest. Equilon, in 
turn, is a joint venture owned 56 percent by Shell and 44 
percent by Texaco. Motiva's ownership is 35 percent Shell and 
32.5 percent each by Texaco and Saudi Refining Company. We are 
in the business of product supply and trading, crude oil supply 
and trading, marine charting and support and other related 
activities.
    As you indicated, we are headquartered in Houston with 
smaller trading offices in Burbank, California and Calgary, 
Canada. We were not consulted on the September 22 decision to 
release oil from the Strategic Petroleum Reserve. However, once 
that decision was made and the oil was released, this created 
an opportunity for us to participate in the process.
    Equiva Trading was the successful bidder on 2.5 million 
barrels of the release. We learned of the opportunity through 
the SPR press release on their Web site, and through direct DOE 
contacts, and submitted a bid in the required format. The 
process was consistent with other commercial bidding 
transactions, and was open and fair. We have read in the Wall 
Street Journal and seen television reports about bidders who 
were awarded significant volumes of oil without evidence of 
their financial ability to perform. It is our opinion that the 
integrity of the bidding process is enhanced when regular DOE 
procedures are followed and letters of credit are part of the 
process. Nevertheless, we were pleased that Equiva was 
successful in its bid, and I can assure the committee that we 
will fully comply with all provisions of our contract each and 
all of which are reasonable and commercial.
    We do not have an opinion on the extent to which the SPR 
release had an impact on supplies of crude and home heating 
oil. Our parent companies, however, are making efforts to 
ensure that adequate supplies of home heating oil reach the 
northeast in a timely fashion, and we have participated in the 
establishment of the government's home heating oil reserve in 
New England. Representatives of Motiva and Equiva Trading 
notified Secretary Richardson that we will not, in the near 
term, export home heating oil given current market conditions.
    Thank you.
    [The prepared statement of John Boles follows:]

  PREPARED STATEMENT OF JOHN BOLES, PRESIDENT, EQUIVA TRADING COMPANY

    Mr. Chairman, my name is John Boles and I am President of Equiva 
Trading Company, which is owned by Equilon Enterprises and Motiva 
Enterprises each of which have a 50% interest. Equilon, in turn, is a 
joint venture owned 56% by Shell and 44% by Texaco. Motiva's ownership 
is 35% Shell, and 32.5% each by Texaco and Saudi Refining Company. On 
behalf of Equilon and Motiva, we are in the business of products supply 
and trading, crude oil supply and trading, marine chartering and 
support, and other related activities. We are headquartered in Houston, 
with smaller trading offices in Burbank, California, and Calgary, 
Canada.
    Mr. Chairman, Equiva Trading was not consulted on the September 22 
decision to release 30 million barrels of oil from the Strategic 
Petroleum Reserve. However, once the decision was made and the release 
was announced, this created an opportunity for us to participate in the 
process.
    The public record will demonstrate that Equiva Trading was the 
successful bidder on 2.5 million barrels of the release. Like other 
potential bidders, we learned of the opportunity through the SPR press 
release on their website and through direct DOE contacts and submitted 
a bid in the required format. In our view, the process was consistent 
with other commercial bidding transactions, was open, and was fair.
    We have read in the Wall Street Journal and seen television reports 
about bidders who were awarded significant volumes of oil without 
evidence of their financial ability to perform. It is our opinion that 
the integrity of the bidding process is enhanced when regular DOE 
procedures are followed and letters of credit are part of the process. 
Nevertheless, we are pleased that Equiva was successful in its bid, and 
I can assure the Committee that we will comply fully with all 
provisions of our contract, each and all of which are reasonable and 
commercial.
    We do not have an opinion on the extent to which the SPR release 
had an impact on supplies of crude and home heating oil. I can, 
however, state that our parent companies, Equilon and Motiva, are 
making efforts to assure that adequate supplies of home heating oil 
reach the Northeast in a timely fashion and have participated in the 
establishment of the government's home heating oil reserve in New 
England. Representatives of Motiva and Equiva Trading notified 
Secretary Richardson that we will not, in the near term, export home 
heating oil given current market conditions.

    Mr. Barton. Thank you.
    The Chair is going to recognize himself for the first 5 
minute round.
    First, we invited all of the successful bidders to testify, 
even those that ultimately dropped out. We made a decision not 
to try to go through the subpoena process to get witnesses from 
the Secretary on down, simply because we believe in the 
tradition of the committee, that we do not use subpoenas except 
in the most extreme case, and we didn't consider this hearing 
to necessitate subpoenas.
    My first question to the bidders: Was there a minimum price 
calculation that DOE put on the oil? I have heard that there 
was a $30 base case valuation on the oil; is that true or not 
true? For the letter of credit, they had to put some value on 
the letter of credit. If you have 2 million barrels, that 
letter of credit had to be valued at some price. Was that the 
same price in each case; and if so, did DOE stipulate the price 
for the letter of credit?
    Mr. Surma. I believe in the most recent solicitation 
document, there was a price specified. It was $34 and 
something.
    Mr. Barton. But I am really more interested in the first 
go-around than the second.
    Mr. Surma. I am afraid I am not as familiar with the first 
solicitation.
    Mr. Barton. So when you had to put the letter of credit up, 
what was that based on, Mr. Manzoni?
    Mr. Manzoni. I am afraid that I am not familiar with the 
specifics of the particular trades. We do hundreds of trades.
    Mr. Barton. I understand that.
    Mr. Manzoni. Nothing has been indicated to me that there is 
anything unusual with the letters of credit that are required.
    Mr. Barton. What is unusual is in the first round, 
apparently anybody, and I mean anybody, could tender an offer, 
could tender a bid. If you were successful, then you had so 
many days to put this letter of credit up. This letter of 
credit had to be based on some valuation of the oil that you 
were getting because the government owns it and the government 
and the DOE witness testified that they were guaranteeing that 
the taxpayers were not at risk. So somebody in your operations 
put a valuation on the oil that you were successful in getting 
without any preconditions, and my question is: Who did that? 
Did your traders do it? Did DOE say here is what the price is?
    Mr. Manzoni. In our case, it would have been somebody in 
our trading organization. I will be happy to submit that for 
the record.
    Mr. Barton. If each of you could do that, I would 
appreciate it.
    In terms of repayment, there is a timeframe in which you 
have to repay in kind. In other words, you don't pay money, you 
pay back in more barrels of oil. What are your timeframes in 
the contracts, Mr. Surma?
    Mr. Surma. I believe the contract specifies rateable 
repayment of a certain slate of crude that we specified in our 
bids from August through November.
    Mr. Barton. So you have from August to November.
    Mr. Manzoni?
    Mr. Manzoni. I know that the November timeframe is correct, 
but I am not sure what time we start; but soon.
    Mr. Boles. The same timeframe.
    Mr. Barton. What happens under the terms of the contract if 
the market goes up, not down? What is your contract extender 
clause? Is it good faith or is there actually in the contract 
an eventuality provision if the market is higher than the 
futures market indicated it will be next year?
    Mr. Surma. My understanding, Mr. Chairman, is that the 
effects of what the market changes may be is our 
responsibility, that our contract with the government is to 
return the specified amount of crude oil.
    Mr. Barton. So if oil is $50 a barrel next November, you 
expect to put in the number of barrels that you got out plus 
some, even if you have to buy it on the open market?
    Mr. Surma. Yes, sir.
    Mr. Barton. And in order to preclude that, my guess is that 
you have hedged your position right now so that if the market 
is different, you are hedged against that?
    Mr. Surma. We manage our market risks extensively and 
carefully, and we are not unaware of that risk.
    Mr. Barton. But you don't expect to go to DOE and say we 
guessed wrong, we thought prices were going to be $24 a barrel 
but they are $35 a barrel, give us more time?
    Mr. Surma. Our analysis did not include that as an option.
    Mr. Manzoni. I think my answer would be exactly the same. 
We have a commitment to replace a number of barrels, and of 
course our trading risks, in the same way as stated by Mr. 
Surma, are carefully managed on a global basis.
    Mr. Boles. We are managing the same way.
    Mr. Barton. Of course, if the price is higher, you wouldn't 
be opposed if DOE came and said do you want more time?
    Mr. Surma. That would be a separate new decision to make, 
based on the conditions of the market at that point. I am 
reluctant to say we would be in favor.
    Mr. Burr. Would the chairman yield?
    Mr. Barton. Sure.
    Mr. Burr. Do you hedge your exposure with any contracts 
that might be futures contracts which buy to eliminate that 
downside risk?
    Mr. Surma. We are actively involved in a variety of energy 
trading activities that are related to our risk management, 
both NYMEX and over-the-counter.
    Mr. Burr. That is a common practice within the industry?
    Mr. Surma. It would be common in the industry, yes.
    Mr. Barton. Mr. Wolkoff, you talked about certainty in the 
market and efficiency of operation and stability. In your 
opinion, as the representative of the New York Mercantile 
Exchange, is what DOE has done with the SPR, is that promoting 
certainty and predictability or is that putting volatility and 
unpredictability into the market?
    Mr. Wolkoff. It is not promoting stability and 
predictability unless they were to say that it would not be 
done in this way again. That would promote stability.
    Mr. Barton. So it has put an element of uncertainty in the 
trader's mind, and in the oil market, there probably is a 
decline curve over time. If it doesn't happen again, people 
will say it probably won't happen again. But when we prebriefed 
the previous hearing a month ago, the DOE representative said 
that they reserve the right to do this as often as they wanted 
to. And this time they did it with no prenotification to the 
Congress. They may have prenotified IEA representatives, but we 
don't see that on the record. So you agree with the chairman 
that this has just created more uncertainty and 
unpredictability, which long term is a bad thing for the oil 
market, not a good thing?
    Mr. Wolkoff. Yes, I agree with you.
    Mr. Barton. Mr. Boucher.
    Mr. Boucher. I want to thank the witnesses for being here 
and apologize for the length of time you have had to wait 
today.
    A number of the witnesses have mentioned, and some members 
of this panel have mentioned, the potential problem of 
disruption in transportation of petroleum products to the 
northeast and have suggested that perhaps a waiver of the Jones 
Act to enable foreign flag carriers to participate in that 
transport might be helpful. I would like the opinion of the 
witnesses who are involved in the energy market directly, the 
three gentlemen on this side of the panel, with regard to 
whether you are witnessing any current disruptions in 
transportation to the northeast from other parts of the U.S., 
that the ability of foreign flag carriers to take part in the 
market might resolve, and if there are no current disruptions 
of that nature, are there any potential disruptions of that 
nature lying ahead?
    We are trying to decide whether we should enact legislation 
that would authorize a Jones Act waiver, perhaps, for a 
temporary period of time directed toward this purpose, and your 
advice concerning the need for that would be helpful.
    Mr. Boles.
    Mr. Boles. Yes. The pipelines moving out of the Gulf Coast 
and northeast are essentially full, which means marine 
transport is the primary outlet, and the market for Jones Act 
vessels is becoming very tight and difficult to arrange. So in 
the event in a sudden surge in demand, there could be 
disruptions in terms of our ability to mobilize the necessary 
resources to move. So the availability of a waiver would 
provide flexibility to respond to those kinds of events.
    Mr. Boucher. Mr. Manzoni, would you comment.
    Mr. Manzoni. From BP's perspective, we are not constrained 
currently in the movement of our oil in this particular 
instance, and so from our perspective we do have sufficient 
anchorage to move the required oil into the future.
    As to the longer term and as to the generic point, one has 
to agree that any restrictions on mobility are bound to be more 
problematic than no restrictions, but I think that in this 
instance, there are multiple constituencies, and it would need 
consideration. I am not qualified to comment on the Jones Act 
at this time.
    Mr. Boucher. Mr. Surma?
    Mr. Surma. We operate largely in the midwest and southeast 
and don't typically transport a great amount of product into 
the northeast. Having said that, we do ship on the same 
pipelines that Mr. Boles mentioned, and they are limited in 
times of need to move significant amounts of product. 
Infrastructure limitations are most often what the problem is. 
To the extent that Jones Act relief would allow additional 
marine assets to come into play, that would be the most 
expedient manner to get additional product into the northeast.
    Mr. Boucher. So having waiver authority in place, that 
would be preferable?
    Mr. Surma. Yes, sir.
    Mr Boucher. Mr. Wolkoff, my question is a response, if you 
care to make one, to the claims that some members of the 
subcommittee made earlier today that perhaps, coincident with 
this drawdown of oil from the SPR, there should be some 
restriction placed on the ability of that--of U.S. companies 
taking that oil, to export that oil to other countries. You, I 
know, are quite an advocate of unrestricted markets and 
predictability, and I wonder if you have any comment on what 
those kinds of export restrictions might do to the unrestricted 
market, which I know that you value?
    Mr. Wolkoff. NYMEX and I, as its representative would 
certainly be in favor of unrestricted exporting ability as well 
as importing ability. It is a world market, and I think to 
disrupt that would be to disrupt the entire supply and 
distribution network. As I understand the Strategic Petroleum 
Reserve, however, its use is intended to be applied during a 
period of defined and declared national emergency, so there is 
a disruption in supply.
    Given such a disruption, it would seem to me to be a fair-
minded exception to my general philosophy of free and open 
markets, that because there is a supply disruption and because 
there is a national emergency, the lack of an export 
restriction would be, in my view, somewhat inconsistent. I 
think it is a matter open to many opinions, but that is in the 
context of a national emergency.
    I think it is fairly clear from events in this particular 
release that the kind of emergency, actual physical shortages, 
shutdowns in supply and the like, was not the case. So in this 
particular release of SPR, I think entering into an export 
restriction would have probably just made a bad decision worse.
    Mr. Boucher. Thank you.
    Mr. Barton. Mr. Burr is recognized for 5 minutes.
    Mr. Burr. Thank you, Mr. Chairman.
    I think my good friend, Mr. Boucher, misunderstood where 
some of us were going with our questions of DOE as it related 
to an export restriction. There were two points that were 
trying to be made, at least by this member. One, that the 
possibility exists for companies to reallocate those planned 
imports or to choose to move the reserves that they brought out 
of SPR. They have the free flow to respond to the marketplace, 
in essence. Given that they made a decision not to put market 
restrictions on, I think you are right, Mr. Wolkoff, that there 
was not an emergency, yet every statement from the Department 
of Energy publicly and from the administration was that this 
was not an action from the release of SPR to address the price 
spike.
    There is an inconsistency here. If there is a shortage and 
that shortage is to the degree that there is an emergency, then 
it would have made perfect sense for the administration and for 
the Department of Energy to put restrictions on the 
distribution of this SPR product, and I do believe the 
financial markets would have gone along with that.
    Let me go to the futures market.
    What we do today or say today does not have an effect on 
the price tomorrow. If it does, it is not the same magnitude as 
it does 6 months from now; is that an accurate statement?
    Mr. Wolkoff. If it does, I have clearly said the wrong 
thing.
    Mr. Burr. Noted.
    Secretary Summers and Chairman Greenspan were accurate in 
their memorandum to the President, weren't they?
    Mr. Wolkoff. I have never read the memorandum to the 
President. I have read excerpts to the memorandum to the 
President. And in all honesty, I am not familiar with the 
circumstances of that memo having been written, whether it was 
intended as a preliminary memo or a final judgment. So I can 
comment on it, but really only from a secondhand knowledge of 
what they said in it.
    Mr. Burr. Given the lack of a thorough debate within the 
Department of Energy as it related to the Secretary's 
memorandum to the President, the fact that it was a memorandum 
to the President, it wasn't a memorandum to the Secretary of 
Energy, it wasn't a memorandum to the area of DOE that deals 
with SPR release, it gives one the impression that this was an 
imminent decision to be made by the White House and the 
Secretary of the Treasury thought it important enough to send 
the memo directly to the President, President of the United 
States.
    Chairman Greenspan felt it important enough for it to be 
part of the memorandum to the President, and I think, although 
we could dissect, and I think did with the Department of 
Energy, each piece that Secretary Summers addressed, the 
overall theme was the concern that they had on the precedent 
that would be set in the marketplace. The government at will, 
without clear explanation releasing part of the reserve into 
the marketplace of petroleum products, and their expression was 
long term, this is a very, very bad precedent to set. Do you 
agree?
    Mr. Wolkoff. Yes, I heard that recited by one of the 
witnesses today. I actually thought it was a very well 
articulated point, and I do agree with it.
    Mr. Barton. Would the gentleman yield?
    Mr. Burr. I would be happy to yield.
    Mr. Barton. We asked the Treasury Department to testify at 
this hearing, and after various negotiations, they ended up not 
testifying, although as late as yesterday afternoon they were 
testifying. But the three officials that helped prepare that 
memo, 2 of the 3 are no longer at the Treasury Department, and 
the third has apparently become seriously ill very quickly, and 
we don't know whether that is a legitimate illness or a 
political illness, but we were not able to get the Treasury 
officials here or you could go into more detail.
    Mr. Burr. I think that the Secretary's position and the 
chairman's position were both stated very clearly, unlike the 
reason why we are releasing SPR.
    Let me turn to the three gentlemen that were successful in 
their bids. If in September, I think that was the timeframe on 
the first contract, September----
    Mr. Barton. This is your last question this round.
    Mr. Burr. If the bid requirements stated not 100 percent 
but 110 percent of the value in the letter of credit, would 
that have changed your bid price or your willingness to bid?
    Mr. Surma. I don't know that it would have affected our 
willingness to bid. We viewed this as a commercial source of 
supply. The letter of credit cost, there is a cost element to 
it, it was an economic element in the valuation. To the extent 
that would have been a greater amount, that would have had an 
effect. I can't say how much, but some element.
    To the best of my knowledge, I think we, for at least 
economic valuation purposes, used relatively current market 
prices to decide how much that would be.
    Mr. Manzoni. We have no difference with that answer.
    Mr. Burr. So the 10 percent would have affected potentially 
the replacement bid?
    Mr. Surma. Yes, sir.
    Mr. Burr. Okay.
    Mr. Barton. We will now go to Mr. Shimkus.
    Mr. Shimkus. Thank you, Mr. Chairman.
    Of the three industry individuals, Marathon, BP and Equiva, 
how long would you stay in business if you were purchasing 
crude oil high and selling it low? Could you sustain your 
market and capital and stay in business?
    Mr. Surma. That is not an element of our strategic plan.
    Mr. Shimkus. And I am having nods across, that is not 
really a way to stay in business.
    Since the Federal Government's role in the strategic 
petroleum reserve, taxpayers have foot the bill for over $420 
million because of purchasing high and selling low. In my 
opening comments, when I was defending the honor and integrity 
of the chairman, which I like to do, I think that is one of the 
things that he has always been harping on, we don't know when 
to buy and we don't know when to sell. We are a government, we 
are not involved in really the business industry as we like to 
think that we are sometimes. That is why a lot of us are queasy 
about our being involved in the market. Because we are very 
inefficient. We are inefficient in our ability to do our job 
here as designed by the founding fathers; and especially 
involving ourselves in the market, we don't add any value when 
we get involved in the market.
    In the first contract offer, was there not a stipulation to 
keep the crude oil in country?
    Mr. Surma. I am not aware if there was. We are not involved 
in any kind of exportation. It wouldn't have been a relevant 
issue for us to focus on.
    Mr. Manzoni. I am not actually aware of any specific terms 
in that particular contract.
    Mr. Boles. The same answer.
    Mr. Shimkus. If you could just recheck, because I think in 
our initial hearings, we asked that of the DOE and I was under 
the impression that there was.
    Mr. Barton. They told me that there was no restriction on 
the oil used. The only restriction was that you actually had to 
take the oil from the reserve. You couldn't leave it in the 
reserve and buy or sell it. You had to take it out of the 
reserve. That is what I was told before the bid.
    Mr. Shimkus. Mr. Surma, your market area is--could you 
explain it again?
    Mr. Surma. Midwest and into the southeast to some degree. 
Mostly in the midwest.
    Mr. Shimkus. So as far as your purchase of the SPR, do you 
have marketing capabilities for home heating oil in the 
northeast?
    Mr. Surma. No, sir.
    Mr. Shimkus. So your purchase would not have affected any 
of the home heating oil debate in New England?
    Mr. Surma. We do make some fuel that would be in the home 
heating category, but it would be on the periphery of the 
northeast market.
    Mr. Shimkus. How many barrels did you purchase?
    Mr. Surma. 3.9 million.
    Mr. Shimkus. Mr. Boles, I want to ask, I have been very 
interested in the northeast heating oil reserve and you say 
that you are involved with that. Explain that to us. The 
question that I asked in the last hearing, how come the 
administration before we went to the SPR, why didn't they 
release--they had at least 1.5 million barrels of heating oil 
of reserves on hand, and why didn't they release those instead 
of going through the auction of the SPR?
    Mr. Boles. Our only involvement is as a supplier. We 
provided a million barrels of supply into the reserve, and are 
also providing 500,000 barrels of storage. It is a commercial 
relationship.
    Mr. Shimkus. Where is that storage at?
    Mr. Boles. I believe it is in New Haven.
    Mr. Shimkus. Mr. Chairman, thank you.
    Mr. Barton. Mr. Burr is recognized for 5 minutes.
    Mr. Burr. I won't take that long, Mr. Chairman.
    Mr. Wolkoff, did the Department of Energy consult with the 
marketplace in any way that you are aware of that the impact a 
sale of SPR might have?
    Mr. Wolkoff. NYMEX was not part of a consultative effort. I 
cannot speak for any efforts that took place with any other 
companies.
    Mr. Burr. But you are not aware of any?
    Mr. Wolkoff. I have not heard of any other discussions, but 
that is not to say that they didn't happen.
    Mr. Burr. The price of a barrel of crude was what on the 
day that DOE announced a plan to sell SPR, do you know?
    Mr. Wolkoff. It was around 34 and went down to 33. It had 
been as high as 37 several days prior to that, but because of 
stories of impending releases and the like, the market--and 
perhaps for many other reasons, one is hard-pressed to ever 
know why the market does what the market does.
    Mr. Burr. The price is what today?
    Mr. Wolkoff. The price of a barrel of NYMEX light sweet 
crude was as high as $37 several days before the SPR release. 
The previous day before the announcement it was $34 and went 
down to $33, $32.50. In that area.
    Mr. Burr. Where is it today?
    Mr. Wolkoff. Today it is about $33. It peaked again last 
week with the Mideast hostilities, but it has gradually come 
back. As of yesterday it was about $33.
    Mr. Barton. If the gentleman would yield, this was as of 11 
this morning. It opened at $32.80 for light crude deliverable 
in December, and it was at $32.70 per barrel. Heating oil 
opened at 96 cents for December delivery and had gone up to 
96.7 cents a gallon .
    Mr. Burr. I thank the chairman for that accurate 
information.
    My point, and I think you have answered it, is that since 
this announcement, the price has fluctuated significantly, over 
$4 a barrel, based upon nothing that the Federal Government 
did, but on the perceptions of the world marketplace?
    Mr. Wolkoff. I am not sure that I understood that 
characterization. I think that the price went lower prior to 
the actual announcement of SPR; and since the announcement, the 
price in the short term went down $1 to $2. It went back up 
apparently in response to the Mideast events, and has proceeded 
to come back down again.
    Mr. Burr. I define that as fluctuation. It went down, it 
went back up and back down.
    Mr. Wolkoff. Price movement without knowing the cause.
    Mr. Burr. Next week it could go back up. Clearly the 
release of SPR has had no effect on the stabilization of the 
pricing. The marketplace has a greater effect on the stability 
of the price?
    Mr. Wolkoff. I can't totally agree with that. I think it 
has had some near term effect on the price. There are other 
elements out there that on any given day can make price 
fluctuations happen. But when you look over the course of 
several weeks and you compare the price at the time of the SPR 
release, or just prior to the SPR release with the price, and 
the price I have most recently is October 17----
    Mr. Burr. If Venezuela took their 2.3 million barrels, 
which is their current output off the marketplace, would the 
price go up or down?
    Mr. Wolkoff. It would depend on what anybody else in the 
market did. If that were the only action that day and there is 
generally not one taking that kind of supply off the market, it 
would raise the price.
    Mr. Burr. If they were doing that for good, what effect 
would it have on the price?
    Mr. Wolkoff. Without any other substantive events, it would 
increase the price.
    Mr. Burr. I don't want to hold you over after this vote, so 
I yield back the balance of my time.
    Mr. Barton. The Chair recognizes himself for a few 
questions. Before the gentleman leaves, the Chair would ask 
unanimous consent that all members not present have the 
requisite number of days to put their statements in the record. 
The staffs have the ability to prepare materials to be put in 
the official record. Is there an objection? Hearing no 
objection, so ordered.
    To my three bidders, the first question I have, what would 
have happened had the SPR release not have occurred? Was there 
a shortage of oil that you would have to curtail refinery 
operations, or in Mr. Boles case, bidding for crude had they 
not released the oil?
    Mr. Surma. In our case, we were operating at or near 
capacity, and the incidence of the release or not really would 
not have affected our refining operations at all.
    Mr. Barton. Mr. Manzoni.
    Mr. Manzoni. I have exactly the same answer.
    Mr. Barton. Mr. Boles.
    Mr. Boles. We were not short on supply, no.
    Mr. Barton. So what you basically did was just substitute 
this oil for other oil that was on the market because it was a 
better deal economically; is that correct?
    Mr. Boles. Yes.
    Mr. Barton. Mr. Martin, we have not asked you a question 
yet. You talked in more global terms in your opening statement, 
so I am assuming that you are following the world oil market. 
Have you been made aware of some of the discussions more of a 
political nature than an economic nature, that there has begun 
to surface some talk of another oil embargo against the United 
States because of what has happened in the Middle East in the 
last month?
    Mr. Martin. I am not aware of that.
    Mr. Barton. You are not aware of that? Do you think the 
release of this oil in the SPR would give more credibility or 
less credibility to those in the OPEC cartel that, for 
political purposes, would want to politicize the use of their 
production capacity again like they did in the 1970's and 
1980's?
    Mr. Martin. It gives us less credibility.
    Mr. Barton. My last question, and then I will go do Mr. 
Markey who got here literally in the nick of time. The 
underlying trend in this whole debate is that we do not have 
enough refinery capacity in the United States because our 
refineries are operating at capacity and we haven't built a new 
refinery in the last 10 to 15 years. Do you gentlemen that did 
the bidding on the oil believe that we should add additional 
refinery capacity in the United States.
    Mr. Manzoni, you are smiling.
    Mr. Manzoni. I shouldn't have been.
    Mr. Barton. You are allowed to smile. It is not against the 
rules of the subcommittee to smile.
    Mr. Manzoni. I feel only qualified frankly to answer from 
our own perspective, and our own perspective with regard to 
refinery investments is that this is a part of our business 
which is central, which is strategic, which has to be invested 
in. These investments are very big. They are very long term. 
The fact is that the returns on those investments have not been 
stellar over the history, and that, obviously, impacts economic 
and commercial decisions about the level of investment in them. 
So those are the considerations that we take into account as a 
company when we consider refining stock and refining 
investments.
    Mr. Barton. I am not asking from an economic standpoint 
whether it makes sense from your company's perspective to add 
additional refinery capacity. I am asking from an economic 
standpoint in the United States to assure supply of refined 
products, do we need to add to the refinery base in the United 
States kind of generically or as opposed to whether it makes 
sense for your company to put money up? That is my question.
    Mr. Manzoni. I mean, if I may, without trying to be 
evasive, if I may go to a comment that has been made several 
times here, I think the supply and demand of both product, 
crude and everything else in the United States is quite a 
holistic problem. The holistic energy policy, which deals with 
the investment patents to the logistics and the refining and 
the marketing aspects, that is absolutely required, in our 
view, and we certainly would be interested in participating in 
a constructive and bipartisan conversation.
    Mr. Barton. Mr. Surma.
    Mr. Surma. I would generally support that. Most public 
demand forecasts suggests that any reasonable growth in 
transportation fuel and heating fueling, those kinds of 
products is likely to outstrip refining capacity at some point, 
which leads then to greater product imports, which leads to 
more dependence on international trade, that to some degree, 
energy sufficiency and independence on the refining side is 
something we, the country, has had for a long time and we think 
is worth defending, and that means additional capacity.
    Mr. Barton. Mr. Boles, do you have a comment on that?
    Mr. Boles. I would agree with those comments.
    Mr. Barton. Mr. Martin, again, strategically do you think 
it is important that we add additional refinery capacity in the 
United States as opposed to importing more refined product?
    Mr. Martin. I think it basically should be an economic 
question, but strategically yes, I think so. I think we face a 
challenge in energy infrastructure generally in the United 
States. That is why I was happy that you are having these 
hearings on gas infrastructure, refinery infrastructure and so 
forth. We can't depend on overseas forever, because they have 
demands themselves, and that demand is growing very, very 
rapidly. That is again why I want to say about the SPR, this 
was really a silly reason to use a very valuable national 
security asset. We are going to need to use that SPR I think 
within 5 years for a serious concern, whether it is an embargo, 
whether it is a disruption, whether it is a war. And what we 
are finding all the time our reliance is going up, but so is 
everybody else's in the oil market.
    Mr. Barton. Have you voted?
    Mr. Markey. No.
    Mr. Barton. We will recognize you for as long as possible 
until we both have to go vote. The gentleman from 
Massachusetts.
    Mr. Markey. I thank the gentleman very much.
    I know that I was gratuitously insulted in absentia by 
Admiral Watkins. And I thought I would return the compliment. 
And it is only to say this, I know that Admiral Watkins has a 
very strong, ideologically based position in terms of whether 
we should deploy the strategic petroleum reserve. In fact, on 
August 2, 1990 when Saddam Hussein invaded Kuwait, the oil 
prices in the world skyrocketed from $16 a barrel to $36 a 
barrel. We had an emergency hearing in this committee a couple 
of weeks later, and we asked Admiral Watkins, who was Secretary 
of Energy to come and testify. He said he was on vacation and 
he couldn't make it. He really didn't think it was important 
for him to come back to testify because he did not believe that 
the strategic petroleum reserves should be deployed in that 
circumstance, which, of course, was war.
    Now, they never did deploy it until actually a couple days 
before we began bombing January 15, 1991. But for August, 
September, October, November, December, January, the price of 
oil stayed up there. Now, the end of 1991 a little mini 
recession started to hit America, the beginning of 1992. That 
was the oil recession, $36 barrel oil ripping its way through 
our economy. Now ironically, George Bush Sr. won the war but 
lost the election because he didn't deal with the oil component 
of it. He started to get blamed for the economy, which a lot of 
people say he just did not get.
    What we are trying to say here, notwithstanding Admiral 
Watkins' lack of ability to understand his own personal history 
in creating the recession of 1991 and early 1992, is that we 
were going to try to avoid it this time by using the very same 
weapon that he was not willing to use then. We used it because 
OPEC ministers meeting together would be a per se violation of 
antitrust law in the United States.
    Mr. Barton. There are less than 2 minutes in the vote on 
the floor.
    Mr. Markey. Thank you, Mr. Chairman.
    We have no power to deal with that per se violation. The 
only real weapon we have is to flood the market with as much 
oil as we can to limit their ability to artificially inflate 
prices that ultimately would rip through the western economy. I 
still think that Admiral Watkins doesn't get it. He didn't get 
it once. I think it would be a mistake for us to allow him to 
dictate policies that would have the American----
    Mr. Barton. It would be helpful if you could encourage your 
Secretary of Energy--the current Secretary of Energy to come to 
these hearings so we can hear from the current Secretary of 
Energy. Then we could hear the official position from the 
people that made the decisions. He was invited and said he had 
to be in Canada today. The current Secretary is apparently in 
Canada today and the Under Secretary is in the Senate today. I 
am not sure where the Deputy Secretary is, but he is not here, 
so that the Acting Assistant Secretary, who is a civil servant, 
a true soldier, that is, who the Clinton/Gore Administration 
put forward for this hearing.
    Mr. Markey. If I may, again, return to the subject so 
history records this correctly. The military Secretary of 
Energy in 1990 did not want to come to our hearing, when we did 
have a crisis and they never did do anything. This civilian 
Secretary of Energy, Hispanic Secretary I might add, did do 
something about it and we are already seeing the benefits in 
our economy with the lowering of the prices by $6 to $8 a 
barrel. That is the difference. Our secretary really doesn't 
have to show up because he already did the job. And thank God 
Secretary Watkins showed up 10 years late, still not 
understanding the mess that he helped to create.
    Mr. Barton. We want to thank the gentleman from 
Massachusetts for his editorial comments. We want to thank this 
panel for your attendance. There may be other questions in 
writing for the record. We would hope that you would provide 
them expeditiously. This hearing is adjourned.
    [Whereupon, at 2:08 p.m., the subcommittee was adjourned.]
    [Additional material submitted for the record follows:]

PREPARED STATEMENT OF DAVID W. WILCOX, ASSISTANT SECRETARY FOR ECONOMIC 
                     POLICY, DEPARTMENT OF TREASURY

    Mr. Chairman, Mr. Boucher, Members of the Committee, this testimony 
addresses the President's decision to swap 30 million barrels of oil 
out of the Strategic Petroleum Reserve for replacement next fall.
    Let me begin by noting that the overall prospects for the U.S. 
economy are very good today, despite the current conditions in world 
petroleum markets. One clear confirmation of this fact comes from the 
latest consensus economic forecast released last week by the Blue Chip 
panel of some 50 economists at major businesses, financial 
institutions, and economic research organizations. The consensus view 
is that U.S. economic growth will remain strong in the near term, and 
inflation will remain moderate. The Blue Chip forecasters expect real 
GDP growth to average 3.3 percent during the second half of this year, 
and 3.4 percent (fourth quarter to fourth quarter) during 2001. They 
forecast CPI inflation at 2.9 percent for the second half of 2000, 
slowing to 2.6 percent next year.
    In addition, the Blue Chip panel released last week their semi-
annual update of the outlook for the next 10 years. Once again, the 
picture looks strong. The consensus forecast of the Blue Chip 
economists is that real GDP will grow by at an average annual rate of 
3.3 percent from 2002 through 2011. This is up from 3.1 percent in the 
ten-year forecast compiled last March and 2.7 percent in the October 
1999 forecast. Inflation is expected to remain tame, with the CPI 
rising at an average annual rate of only 2.6 percent over the ten-year 
horizon.
    Turning specifically to the issue of the swap from the Strategic 
Petroleum Reserve, the Administration believes that this policy has a 
sound economic rationale.
    Use of the SPR in response to low inventories of crude oil was a 
policy option that had been on the table most of the year. But in the 
several weeks before the swap announcement, the world oil market became 
considerably more unsettled. The price of oil surged by more than $3 a 
barrel to its highest level since the Gulf War. We saw anecdotal 
reports of anticipatory purchasing that seemed to be generated by the 
expectation of a further price rise.
    Most important, domestic stocks of both crude oil and refined 
products were at an unusually low level. There was growing concern that 
we might not have sufficient inventories of home heating oil to ensure 
a smooth supply through the winter. In the Northeast, in particular, 
stocks of distillates are down by about half from last year's levels. 
All told, the tightness of the petroleum markets left very little room 
to absorb any further shocks, raising the risk of very unfavorable 
developments in the months ahead.
    The deterioration of market conditions led the President to take a 
prudent, precautionary step to reduce the risk of shortages of home 
heating oil this winter. The President ordered that about 5--percent of 
the SPR be made available for the swap, leaving the other 95--percent 
in reserve for possible future use. We anticipated that this measured 
action would have several favorable effects:

 First, and most directly, the swap would increase the supply 
        of crude oil and boost oil inventories.
 Second, the swap would increase the supply of home heating oil 
        this winter. Although domestic refineries were operating around 
        96 percent of capacity in July and August, we expected that 
        capacity utilization would decline in the early fall, as it 
        usually does, at the conclusion of the period of peak demand 
        for gasoline. In fact, that decline in utilization has now 
        occurred--and with utilization around 91 percent, refineries 
        have the capacity to refine oil from the SPR.
 Third, the swap could reassure markets that there would be no 
        disruption in the supply of oil, thereby adding confidence to 
        what could potentially have been a difficult situation. By 
        rebuilding inventories, we can reduce the likelihood of 
        shortages and spikes in the price of heating oil and other 
        refined products this winter.
 Fourth, by using SPR reserves for an exchange rather than an 
        outright sale, we will have a larger Strategic Petroleum 
        Reserve next fall than we have today, leaving us with an 
        enhanced energy security in the long run.
    While it is too early to observe any increments to inventory 
levels, the behavior of the oil market since the swap announcement 
suggests that we are on the right course:

 The markets reacted to reports that an exchange was imminent. 
        The 1-month futures price of West Texas Intermediate dropped 
        more than $3 per barrel on rumors of the pending announcement, 
        and then by more than $1 per barrel on the announcement of the 
        President's decision. Moreover, the price continued to head 
        downward over the following six calendar days, for a cumulative 
        decline over that period of more than $2 per barrel. Overall, 
        from the day before to six days after the President's action, 
        the one-month futures price of WTI dropped by about $7 per 
        barrel.
 Importantly, the one-month futures price of heating oil also 
        declined during this same period, taking very much the same 
        profile from day to day as crude oil prices. While the 
        objective of the policy was to address potential issues of 
        supply disruptions and shortages, we cannot lose sight of the 
        fact that in markets, shortages--and potential shortages--are 
        reflected as higher prices. Likewise, alleviation of 
        shortages--and reductions in the risk of shortages--are 
        reflected as reductions in prices.
 Since that time, a portion of the oil price decline has been 
        reversed. This partial unwinding appears to be due primarily to 
        additional concerns about instability raised by recent world 
        events such as the turmoil in the Middle East, a hurricane 
        threatening production in the Gulf of Mexico, an early cold 
        snap in the Northeast, and Venezuelan oil workers going on 
        strike.
 It is noteworthy that, notwithstanding those world events, 
        crude oil prices remain several dollars a barrel below where 
        they were before the SPR swap announcements. In addition, the 
        1-month futures price of home heating oil is also well below 
        its level a month ago, despite substantial volatility arising 
        from these market forces. These readings suggest that the SPR 
        swap is viewed by market participants as having reduced the 
        pressure in petroleum markets and the risk of shortages this 
        winter.
    In summary, we believe that the swap has given market participants, 
and U.S. citizens generally, a measure of confidence they would not 
otherwise have had that the Federal government is ready and willing to 
move aggressively to address issues of supply disruptions. In a market 
as tight and unsettled as the world oil market is today, every 
additional measure of confidence is extremely valuable. Mr. Chairman, 
we believe that the U.S. economy is in better shape today because the 
President undertook a SPR swap.
    Thank you.
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