[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
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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.
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\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.
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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.
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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.