[Senate Hearing 106-650]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 106-650
 
OVERSIGHT OF RISING OIL PRICES AND THE EFFICIENCY AND EFFECTIVENESS OF 
                   EXECUTIVE BRANCH RESPONSE--PART II

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


                                HEARING

                               BEFORE THE

                              COMMITTEE ON
                          GOVERNMENTAL AFFAIRS
                          UNITED STATES SENATE

                       ONE HUNDRED SIXTH CONGRESS

                             SECOND SESSION

                               __________

                             JUNE 29, 2000

                               __________

      Printed for the use of the Committee on Governmental Affairs




_______________________________________________________________________
For sale by the Superintendent of Documents, Congressional Sales Office
         U.S. Government Printing Office, Washington, DC 20402

                     U.S. GOVERNMENT PRINTING OFFICE
65-746 cc                    WASHINGTON : 2000




                   COMMITTEE ON GOVERNMENTAL AFFAIRS

                   FRED THOMPSON, Tennessee, Chairman
WILLIAM V. ROTH, Jr., Delaware       JOSEPH I. LIEBERMAN, Connecticut
TED STEVENS, Alaska                  CARL LEVIN, Michigan
SUSAN M. COLLINS, Maine              DANIEL K. AKAKA, Hawaii
GEORGE V. VOINOVICH, Ohio            RICHARD J. DURBIN, Illinois
PETE V. DOMENICI, New Mexico         ROBERT G. TORRICELLI, New Jersey
THAD COCHRAN, Mississippi            MAX CLELAND, Georgia
ARLEN SPECTER, Pennsylvania          JOHN EDWARDS, North Carolina
JUDD GREGG, New Hampshire
             Hannah S. Sistare, Staff Director and Counsel
                      Paul R. Noe, Senior Counsel
   Catherine C. Walters, Legislative Assistant for Senator Voinovich
     Kristine I. Simmons, Staff Director, Oversight on Government 
                              Management,
        Restructuring and the District of Columbia Subcommittee
      Joyce A. Rechtschaffen, Minority Staff Director and Counsel
                   Kenneth R. Boley, Minority Counsel
                 Darla D. Cassell, Administrative Clerk
                            C O N T E N T S

                                 ------                                
Opening statements:
                                                                   Page
    Senator Voinovich............................................     1
    Senator Lieberman............................................     3
    Senator Levin................................................     6
    Senator Akaka................................................    15
    Senator Durbin...............................................    36
    Senator Domenici.............................................    42
Prepared statements:
    Senator Cleland..............................................    59

                               WITNESSES
                        Thursday, June 29, 2000

Hon. Robert Taft, Governor, State of Ohio........................     8
Hon. Ernest J. Moniz, Under Secretary for Energy, Science and 
  Environment, U.S. Department of Energy.........................    12
John Cook, Ph.D., Director, Petroleum Division, Energy 
  Information Administration, U.S. Department of Energy..........    16
Denise A. Bode, Vice Chairman, Oklahoma Corporation Commission...    18
Robert Perciasepe, Assistant Administrator, Office of Air and 
  Radiation, U.S. Environmental Protection Agency................    27
Phyllis Apelbaum, Owner, Arrow Messenger Service.................    34
Hon. Richard Blumenthal, Attorney General, State of Connecticut..    37
J. Louis Frank, President, Marathon Ashland Petroleum, LLC.......    39
Red Cavaney, President and Chief Executive Officer, American 
  Petroleum Institute............................................    45

                     Alphabetical List of Witnesses

Apelbaum, Phyllis:
    Testimony....................................................    34
    Prepared statement...........................................   110
Blumenthal, Hon. Richard:
    Testimony....................................................    37
    Prepared statement...........................................   113
Bode, Denise A.:
    Testimony....................................................    18
    Prepared statement...........................................    96
Cavaney, Red:
    Testimony....................................................    45
    Prepared statement...........................................   270
Cook, John:
    Testimony....................................................    16
    Prepared statement with attachments..........................    89
Frank, J. Louis:
    Testimony....................................................    39
    Prepared statement with attachments..........................   120
Moniz, Hon. Ernest J.:
    Testimony....................................................    12
    Prepared statement...........................................    67
Perciasepe, Robert:
    Testimony....................................................    27
    Prepared statement...........................................   101
Taft, Hon. Robert:
    Testimony....................................................     8
    Prepared statement...........................................    60

                                Appendix

Prepared statements from:
    Hon. Evan Bayh, a U.S. Senator from the State of Indiana.....   283
    Steven R. Smith, President, National Rural Letter Carriers' 
      Association................................................   286
Chart referred to by Senator Levin...............................   289
Copy of Corporate Scoreboard.....................................   290


OVERSIGHT OF RISING OIL PRICES AND THE EFFICIENCY AND EFFECTIVENESS OF 
                   EXECUTIVE BRANCH RESPONSE--PART II

                              ----------                              


                        THURSDAY, JUNE 29, 2000

                                       U.S. Senate,
                         Committee on Governmental Affairs,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 1 p.m., in room 
SD-342, Dirksen Senate Office Building, Hon. George Voinovich 
presiding.
    Present: Senators Voinovich, Domenici, Lieberman, Levin, 
Akaka, Durbin, and Cleland.

             OPENING STATEMENT OF SENATOR VOINOVICH

    Senator Voinovich. The Committee will please come to order. 
I want to welcome all of you this afternoon.
    Two weeks ago, I asked the Committee Chairman, Senator 
Thompson and Ranking Member Senator Lieberman, to conduct a 
hearing on the subject of the high price of gasoline. I am 
pleased that they responded positively, and I appreciate 
Senator Thompson's willingness to allow me to Chair this 
hearing of the Committee on Governmental Affairs.
    Today's hearing is the second that this Committee has held 
to look into the high cost of gasoline in our Nation. This 
Committee held its first gas price hearing on March 24, and we 
were assured that things would get better. Unfortunately, they 
have not.
    Ladies and gentlemen, today you cannot pick up a newspaper 
or turn on a television without reading or hearing about the 
high price of gasoline. People are mad, and I don't blame them. 
They are angry because the increase is affecting them where it 
hurts: Right in their pocketbook.
    Last year at this time, the prices we are experiencing 
today would have been considered inconceivable by most 
Americans. One year ago, the national average for a gallon of 
regular unleaded gas was about $1.15, according to the American 
Automobile Association. The last time I filled up in Ohio it 
was $1.94. Today the national average for gasoline in the 
country is $1.65, which is 50 cents more than a year ago.
    But nowhere has the price increase been so dramatic than in 
the Midwest where gas prices have skyrocketed in the last 4 
weeks. Earlier this month, prices in Ohio and other parts of 
the Midwest increased by as much as 30 or 40 cents in a matter 
of hours. Prices in many cities and States went over the $2 
mark for a gallon of gas, setting all-time high price records. 
In my county, Cuyahoga, just 10 days ago we were hovering at 
the $2 a gallon mark with prices averaging $1.98 a gallon.
    Although there are signs that prices are dropping, this is 
of little consolation to families, particularly in the Midwest, 
where the prices are so high. Prices in most major cities in 
the Midwest are well above the national average of $1.65, and 
$2 a gallon and higher are still prevalent in many areas.
    The kind of gas price increase we have seen lately does 
more than just raise eyebrows. Do you know what it does? It 
raises questions, significant questions. Politicians, analysts, 
business owners are busy pointing to a whole host of reasons 
for the recent hikes: Alleged collusion among oil companies who 
have sent crude oil prices through the roof, lack of domestic 
production, reformulated gasoline, alleged price gouging and 
collusion by the oil companies, economics and the law of supply 
and demand, pipeline and other transportation problems. You 
name it.
    Frankly, most people I talk to don't care what the reason 
is, and they are getting tired of the finger-pointing. What 
most people want to know, including this Senator, is: When are 
we going to see the prices go down? And what are we going to do 
as a Nation to make sure that we don't end up in the same 
predicament we find ourselves 5 years from now?
    Most people that have been around as long as I have 
remember the Arab oil embargo in 1973, and when costs went up, 
gas shortages were everywhere, and people sat in long lines. At 
that time the United States only relied on 35 percent foreign 
oil to meet our domestic needs. Today our reliance on foreign 
oil averages 56 percent, and in some months out of the year, it 
reaches 62 percent reliance.
    The American people want to know why hasn't something been 
done in the last 27 years to reduce our dependence on foreign 
oil.
    All too often in government when a problem comes up, we 
have a tendency to treat it like a barking dog. You know, give 
it a bone, a little attention to make it stop barking, and when 
it stops barking, ignore it until it starts barking again. And 
that is what we have done in terms of the price of gasoline in 
our energy policy in this Nation.
    Such neglectful treatment of such a vital component of our 
Nation's economy is unconscionable, and the major part of the 
problem that I see in this regard is the lack of an energy 
policy by this administration. And I am not even going to point 
the finger at this administration because that has been 
happening. It can be pointed at administrations since 1973 who 
have not developed an energy policy. And, quite frankly, and I 
don't want to make my colleagues feel uncomfortable, but I 
think the Congress has also not done the job that we are 
supposed to be doing in terms of developing an energy policy.
    One of the things that I am hopeful for is that on a 
bipartisan basis, we can develop some kind of an energy policy 
between now and the end of the year. There are a lot of good 
ideas. I have been on the Leader of the Senate, Senator Trent 
Lott, and Senator Frank Murkowski, to get a bill that they put 
together on the floor to be debated and discussed. And if we 
lose this opportunity and let it go and wait until next year, I 
think that we may find ourselves back in the same position we 
are in today, and that is, no energy policy.
    I recall at our hearing in March, we had David Goldwyn, who 
is the Assistant Secretary of Energy, and I asked him what this 
Nation's dependence on foreign oil should be. I asked him: 
Should it be 45 percent? Should it be 50 percent? He couldn't 
give me an answer.
    We need answers. I am an old governor, and I am glad that 
my successor, Governor Taft, is here today. But if we had a 
problem like this in Ohio, what we would do is sit down and say 
we have got to figure out how much we should be dependent on 
foreign oil, set a number. We would then develop a strategy 
identifying all the things that we would want to do in order to 
make sure that we reached the number, and then we would start 
the plan and monitor it and, of course, set a date when we 
expected to reach the goal. I mean, that is the logical thing 
to do, and I think that is what we need to do here in the 
Congress, and I think that we need to do that with the 
administration.
    I have a lot of other comments I would like to make, but we 
have a wonderful group of witnesses here today. I guess the 
last thing I will say is that I bet you that the witnesses here 
today that we have--if they got in a room and we locked them up 
for a couple of weeks, they could come back with a darn good 
energy policy for the United States of America. And so often we 
have witnesses that come before us, and they depend on us to do 
the job. And I have found that if you get the people who really 
know what it is about in a room and get them in the mood where 
they are willing to compromise with each other, they can do a 
whole lot better job of coming up with a solution than those of 
us sitting behind this table.
    So, without further words, I would like to hear from 
Senator Lieberman.

             OPENING STATEMENT OF SENATOR LIEBERMAN

    Senator Lieberman. Thanks, Mr. Chairman, and I would like 
to second your motion that we lock the witnesses up in a room. 
[Laughter.]
    I think that probably would have a good result on the 
problem.
    Senator Levin. Both parts of the motion or just the first 
part?
    Senator Lieberman. Both parts.
    Senator Levin. We can let them out afterwards.
    Senator Lieberman. We will let them out.
    Mr. Chairman, thanks so much for your initiative which has 
resulted in the convening of this very timely hearing. I am 
glad to join you today in trying to get to the bottom of this 
problem of skyrocketing oil prices that is so palpably 
frustrating and angering consumers in our country today as it 
has every now and then for years. As you said, every now and 
then the dog barks.
    I remember that oversight hearing in March that you talked 
about. At that time one of the witnesses told us that low 
inventories being kept by the oil companies might drive the 
cost of gasoline over $2 a gallon at the pump this summer, and 
I think we were incredulous about that prediction. But here we 
are 3 months later, and as you indicated, people in Chicago 
have been paying a whopping $2.13 a gallon to fill their tanks. 
In Milwaukee, the price has reached $2.02 a gallon. And even 
outside the particularly hard-hit areas, the price has reached 
$1.87 a gallon in my own State of Connecticut, and all these 
prices are for regular self-service unleaded.
    The American people clearly want to know why is this 
happening, who is to blame, and what can we do to make it 
better and have it not happen again? And we are holding this 
hearing because we on this Committee have exactly those same 
questions.
    I would like to just offer a few comments of my reaction to 
the problem, and then I look forward to hearing the witnesses. 
It seems to me to begin with that OPEC manipulates the price 
and production of oil with no consideration for the consumer. 
And then American oil companies and international oil companies 
keep their inventories low, apparently hoping that the price of 
crude oil will drop before they have to buy more to refine. As 
you know, there have been questions raised, Mr. Chairman, about 
price gouging along this line.
    And then, finally, as you said in your very strong and 
independent statement, as a Nation we are still too dependent 
on a source of energy--oil, fossil fuel--that we don't control. 
For me, the most infuriating factor is the behavior of OPEC. 
The member countries proudly call themselves a cartel. They 
collude and act anti-competitively. Their action in holding 
supply down has brought the price of crude oil per barrel up 
over $30 and kept it there, even though the consensus that I 
hear and read from experts is that that price should be fairly 
set, not only in the interest of the consumer but of the 
producer nations, in the vicinity of $20, perhaps $22 a barrel.
    The practices of OPEC should be illegal under the Sherman 
Antitrust Act. The fact is that if businesses in the United 
States acted in this way, it would be illegal. But because OPEC 
members have the protection of the Foreign Sovereign Immunity 
Act, they do not face a price-fixing case in the United States, 
although they are obviously very active here and are deriving 
billions of dollars of income from American consumers and 
businesses.
    I think it is worth reaching a bit here to try to test this 
proposition, and maybe this is one of the expressions of 
globalization. We are a global economy, and what happens 
elsewhere in the world affects us just as what we do here 
affects people elsewhere in the world. And I have been taken by 
the arguments of our colleagues Senators DeWine and Kohl who 
are sponsoring a bill that would subject OPEC to American 
antitrust laws and remove from them this shield of sovereign 
immunity when they are acting as they are with extraordinary 
impact on our economy as a business selling a precious 
commodity to the United States. It is called the ``No Oil-
Producing and Exporting Cartels Act,''--NOPEC--and I have 
joined as a cosponsor on that bill.
    I also want to express my concern that there are some in 
the oil business who are taking advantage of the current 
situation to exact an even higher price at the pump than the 
increasing crude oil price that OPEC is charging and market 
forces support. Obviously we all want to know whether part of 
the reason the gas price increased results from the oil 
companies' padding their profits while hoping that inflated 
pump price will be blamed either on OPEC or on market 
conditions generally.
    As you know, Mr. Chairman, the Federal Trade Commission is 
investigating whether the oil companies have colluded to keep 
prices high in the Midwest. A group of us Senators from the 
Northeast have asked the commission now to extend its 
investigation to cover the rest of the country and to look at 
the reasons for the price increases, which might include price 
gouging.
    We have also called on the administration to better utilize 
the Strategic Petroleum Reserve in cases of what we consider to 
be unnatural, artificial reductions of supply and to put some 
of that almost 600 million barrels of crude that we own, that 
we have in our possession in the Strategic Petroleum Reserve, 
out into the market to begin to increase supply, reduce prices, 
and at least show OPEC that we are not helpless.
    Finally--and this goes to what you said, Mr. Chairman--I 
think we come back to part of this problem being us and our 
ever-increasing demand for energy without regard to the 
concerns that we have had at different times of our history 
since the early 1970's and the oil boycott for, one, more 
efficient use of fuel and energy and, two, a very aggressive 
partnership between the Federal Government, State governments, 
and the private sector to develop alternative sources of energy 
that are more within our control and that are renewable.
    At that hearing that I referred too, and that you did, too, 
in March, the Chairman of the President's Committee of Advisers 
on Science and Technology, Dr. John Holdren, gave what to me 
was some very impressive testimony about the promise of simple 
energy conservation, about doing what we used to do in this 
country, which is to conserve, to be a bit thrifty in the use 
of our resources. And he noted that if we in the United States 
increased our energy consumption efficiency by just 2.2 percent 
per year, it would reduce our dependence on oil by more than 50 
percent, which is worth about 5.5 million barrels of oil a day.
    It seems to me that this is a goal that is within our 
reach. It is not unrealistic. The United States actually 
decreased our energy consumption by 1.7 percent between 1972 
and 1979, which were the years surrounding the Arab oil 
boycott, and by 3.2 percent, believe it or not, between 1979 
and 1982. So we can do it.
    I join you, Mr. Chairman, in seeing this moment of 
artificially reduced oil supply and outrageously but real 
rising prices as the time at which we should hear the bell 
tolling or, to use your reference, the dog barking, to think 
aggressively about the future health and security of our Nation 
and, as a result, to enact a progressive, new, comprehensive 
energy policy for our country.
    I think you have assembled a wonderful group of witnesses. 
I thank you for, on the second panel, calling the attorney 
general of my home State, Dick Blumenthal, who has been active 
in this area, and I look forward to the witnesses' testimony.
    Thank you very much.
    Senator Voinovich. Thank you. Senator Levin.

               OPENING STATEMENT OF SENATOR LEVIN

    Senator Levin. Mr. Chairman, thank you, and thank you for 
your initiative and your commitment to this issue. I have been 
trying to get answers to the cause or causes of skyrocketing 
prices in my home State of Michigan for many, many weeks.
    Many explanations have been offered for the incredible 
spike in gasoline prices, everything from the effect of 
reformulated gas to rising demand, to short supply, to the fact 
that the hurricane season makes the petroleum companies nervous 
because many of the refineries are located on the coast.
    But none of those explanations explain the 70- to 80-cents-
per-gallon increase that we have experienced in Michigan over a 
7-week period. Gas prices went to $2.07 statewide. On June 19, 
that was a statewide average increase of 70 cents per gallon. 
In Detroit, prices went up to $2.14 cents in the same 7-week 
period. That is an 80-cents-per-gallon increase in price. Those 
increases in prices are double the price hike experienced in 
other parts of the country, as can be seen on that chart.\1\
---------------------------------------------------------------------------
    \1\ The chart referred to appears in the Appendix on page 289.
---------------------------------------------------------------------------
    The United States and Michigan prices generally stayed 
together until that point in May, and all of a sudden, 
Michigan, like other Midwestern States, was given that dose of 
price increase that is reflected on that chart. So we have got 
to fight back on behalf of our constituents to roll back these 
extreme gas price increases, and the fight has got to be waged 
both short term and long term.
    The Chairman has gone through some of the justifications 
which have been given which just don't hold water or don't hold 
gas. One excuse given for the gas price increase was 
reformulated gas, but Michigan doesn't have the reformulated 
gas requirement. We have heard about low inventories, but the 
Midwest's low inventories are not much different from low 
inventories elsewhere.
    High crude oil prices have been cited, but those increases 
have been nowhere near as steep as retail price increases in 
the Midwest.
    Two pipelines and their operational difficulties have been 
cited, but that doesn't wash either. The rupture of one had 
minimal effect on supply. The rupture of the other came after 
the big increase began, and in any event, the increase after 
the pipeline break in the second case remained about the same 
as in those Midwest States that were not dependent on that 
pipeline.
    So you have got to look at other factors, including price 
gouging and the possibility that oil companies are engaging in 
anticompetitive conduct, for instance, by refusing to deliver 
supply to certain independent gas dealers.
    The issue is the issue that our Chairman has indicated. 
What will it take to get these prices down? I think it would 
help to release more oil from the Strategic Petroleum Reserve, 
which the President has authority to use, to assist in 
relieving economic problems, and here I am quoting from the 
legislative history of the most recent reauthorization, where 
economic problems ``are directly related to a significant 
increase in the price of petroleum products.'' Well, we are 
seeing major economic impacts from these price hikes.
    The investigation of the Federal Trade Commission that is 
now underway has been helpful already. Just the announcement of 
the investigation was followed by a significant wholesale price 
drop. I don't think that is a coincidence.
    In the long term, we need to reduce our dependence on oil. 
We should enact greater tax incentives to encourage consumers 
to purchase cars, homes, and consumer products which run on 
alternative energies. We should increase Federal investments in 
renewable energy and natural gas programs. And, by the way, our 
Chairman is absolutely right. Congress here is also carrying 
some responsibility. This is not just something where we can 
point fingers to others. We have responsibility in this area.
    Over the past 7 years, Congress has supported only 12 
percent of the administration's proposed increases for energy 
programs, such as Federal investment in efficient technologies 
for our factories and homes, weatherization of low-income 
households, technologies to produce biofuels and power from 
biomass, and in the case of the Partnership for a New 
Generation of Vehicles, which is a partnership between 
government and the automobile manufacturers, in order to 
produce energy-efficient automobiles, a new class of vehicles 
with up to 80 miles per gallon without sacrificing 
affordability or utility or safety or comfort.
    Just 2 weeks ago, the House cut the Department of Energy's 
budget for the PNGV so drastically that it would gut that 
partnership. So we do have responsibilities as a Congress, and 
we can't just point our fingers at others, although it is 
important that we hold others accountable as well.
    But the constituents are really being hit hard. Our 
citizens, our consumers, are going to have to pay $160 to $170 
more for gas this season--the small gas station owner has to 
get family members to work because he can't afford to pay 
employees, the motel owner who has got to put the vacancy sign 
out because people don't want to travel and pay high gas 
prices, the trucking companies struggling to cover fuel costs, 
recreational vehicle dealers and users who are losing sales and 
unable to use their vehicles, farmers whose income may be 
reduced by a third because of high gas prices.
    So I want to commend our Chairman for his leadership in 
this area. It is a critically important area to find out not 
only why, but to force action to reduce these prices.
    Senator Voinovich. Thank you, Senator Levin.
    I also remind the Senator that one thing Congress did do is 
give the opportunity for more oil exploration to this 
administration, and that legislation was vetoed. And I think 
that is one of the things that needs to be talked about in 
terms of our overall energy policy. We are concentrating on 
some of these other things, but I think that to ignore that 
aspect of it that we should be more reliant on our own domestic 
supply is something that needs to be dealt with straightforward 
during this discussion of an energy policy.
    I am pleased to welcome my good friend, the distinguished 
Governor of Ohio Bob Taft, here today with us, who is going to 
give us the Midwest perspective on the very serious effects of 
rising gasoline prices. Governor Taft is a man of great 
courage. He was pushed by his legislature to eliminate the gas 
tax in the State of Ohio, and he did not do so, understanding 
that that money is necessary to maintain our roads in the State 
of Ohio and to do the new construction work that is necessary. 
I think that was a courageous action on your part, Governor.
    We also have with us the Hon. Ernest J. Moniz, Under 
Secretary of Energy, Science, and Environment in the U.S. 
Department of Energy; Dr. John Cook, Director of the Petroleum 
Division of the Energy Information Administration; and Denise 
A. Bode, Oklahoma Corporation Commissioner.
    We would like to welcome all of you here today, and, 
Governor Taft, we are going to call on you first. I understand 
that you have got to make a plane, and so we are going to let 
you go forward. And, Senator Levin, if you would like to ask 
Governor Taft a question or two after his testimony, you will 
be welcome to do that.
    Governor Taft.

   TESTIMONY OF HON. ROBERT TAFT,\1\ GOVERNOR, STATE OF OHIO

    Governor Taft. Thank you, Mr. Chairman, and good afternoon. 
I am very grateful for this chance to testify today on a 
subject that has the attention of motorists and consumers in 
Ohio and throughout the Nation. We are here today because 
gasoline prices affect everybody, not just the motorists at the 
pump, and I commend you for holding today's hearing.
---------------------------------------------------------------------------
    \1\ The prepared statement of Governor Taft appears in the Appendix 
on page 60.
---------------------------------------------------------------------------
    Recent severe increases in gasoline prices in my State are, 
to say the least, baffling. In Ohio, the price of regular 
gasoline is up approximately 16 percent, from $1.55 last month 
to $1.80 today, and, more troubling, up over 50 percent from a 
year ago, when a gallon of regular gasoline was selling at 
$1.15.
    The price of gasoline in Ohio is currently 5 percent above 
the national average. Our citizens are demanding, if not 
complete answers, at least some rational justification for this 
dramatic price increase. Every day I hear from people 
throughout Ohio about the burdens of this price increase. I 
hear from senior citizens on fixed incomes, like Robert York of 
Centerville, Ohio, who wrote to me that because gas is so 
expensive, he is forced to choose between going to the doctor, 
traveling to the grocery store, or attending church on Sunday. 
I have also heard from Cheryl Dolin in Carroll County, a single 
mom making $6.50 per hour. For Cheryl, a 50 percent increase in 
gasoline prices has placed a tremendous burden on an already 
stretched household budget.
    The impact of increased fuel prices on our transportation 
and business sector is equally dramatic. Just last week, I 
heard from Kevin Burch, the president of Jet Express Trucking 
in Dayton. His company uses about 4 million gallons of diesel 
fuel a year. If diesel prices stay at current levels, Jet 
Express Trucking will pay about $1.8 million in higher fuel 
costs this year. These are real dollars to a small business 
that already operates at close margins.
    Ohio roadways carry the fourth largest volume of freight 
traffic of any State in the Nation. We provide critical 
transportation links east to west, north to south. Interstate 
75, which runs from Toledo to Cincinnati, carries $25 billion 
worth of goods each year by itself. So these unexplained price 
increases are not only penalizing Ohioans, they are also 
negatively affecting the Nation's ability to move goods from 
one destination to another.
    I recognize that motor fuel production and distribution are 
very complex processes influenced by a host of factors, and the 
most fundamental fact is that ours is a Nation increasingly 
dependent on petroleum-based energy. Crude oil prices have 
almost tripled since January 1999, and for a Nation that 
imports 55 to 60 percent of its crude oil and even imports some 
refined products, the impact of foreign price hikes has been 
significant.
    The Congressional Research Service reports a number of 
other factors affecting price increases to some extent, and I 
salute your efforts to examine the factors that have 
contributed to higher gasoline prices at the pump. I think it 
is equally important, however, to recognize that the underlying 
realities that affect our gas prices also pose a threat to our 
Nation's future prosperity. The most fundamental reality is 
this: For a Nation with an economy that is so heavily dependent 
on oil, we have no coherent energy policy to reduce our 
dependence on foreign oil or to lessen our vulnerability to 
rapidly escalating price spikes like this one.
    This fundamental failing exposes the fragility of our 
Nation's economic and national security, and it is compounded 
by the lack of a sensible, coordinated approach to 
environmental policy at the Federal level.
    I commend the Congress for rededicating itself to the task 
of devising a comprehensive energy policy for the United 
States, and I hope that the President and the administration 
will join you in that effort. I commend Majority Leader Lott, 
Chairman Murkowski, and others for introducing S. 2557, which 
provides a useful framework to begin work on a truly 
comprehensive national energy policy.
    We must also develop a sensible national environmental 
policy in a manner that complements our energy policy. You, Mr. 
Chairman, and also Senator Breaux and others deserve enormous 
credit for introducing the Air Quality Standard Improvement 
Act, which will provide a common-sense approach to new 
regulations under the Clean Air Act, while at the same time 
increasing public health, safety, and environmental protection.
    This bill comes in response to the current administration's 
disturbing history of issuing environmental regulations without 
adequately identifying risks to health and with no 
consideration of costs and benefits.
    Mr. Chairman, as I said earlier, governors across the 
Midwest are concerned about high gasoline prices. A number of 
citizens have suggested adjusting Federal and State fuel taxes 
to ease the pinch of rising pump prices.
    As you point out, I have opposed the suspension or 
elimination of the Federal gas tax because it is a dedicated 
user fee that generates needed revenues for highway safety, 
construction, and maintenance. Ohio maintains the fifth largest 
system of roadways, the fourth largest in freight volume, the 
fourth largest in traffic volume, and the second largest 
inventory of bridges in the Nation, and we need to maintain 
that system.
    Our strategy also relies on revenues from the dedicated 
fuel tax which Congress devoted solely to transportation 
purposes under TEA-21.
    I want to briefly, in conclusion, advise the Committee of 
our very serious concerns related to ethanol consumption that I 
have discussed on several occasions with the Chairman. We 
support the environmental contributions made by ethanol, and we 
support the continued use of this fuel. But we have become 
aware, as you have as well, that the funding formula adopted 
under TEA-21 is determined in large part by our contributions 
to the Highway Trust Fund. And because we utilize ethanol-
blended gasoline, we suffer significantly because of the 5.4-
cent-per-gallon Federal tax break on each gallon of ethanol-
blended gasoline sold and the fact that 3.1 cents of the tax is 
credited to the general revenue funds and not the Highway Trust 
Fund. That means that we are losing 8.5 cents for each gallon 
of ethanol-blended fuel sold in Ohio, a total decrease to our 
State's trust fund contributions of $185 million annually. So 
this is a problem which we are very pleased that the Chairman 
is addressing, and we hope your colleagues will join you in 
that effort.
    Mr. Chairman, thank you for the opportunity to appear 
today, and I would be glad to answer any questions you or the 
Committee may have.
    Senator Voinovich. Thank you, Governor Taft. I am glad that 
you raised the issue of the loss of revenue to States like Ohio 
because of our significant consumption of ethanol. And one of 
the things that I think needs to be looked at when we are 
putting an energy policy together is a method to take care of 
that situation, perhaps taking the taxes that are generated, 
instead of them going into the general fund, have them go into 
the Highway Trust Fund.
    Governor Taft. That would be excellent.
    Senator Voinovich. I think the other thing that is 
important that you mentioned today, and so often people forget 
about it, is that Governor Taft just recently announced that 
our last area of the State of Ohio achieved the ambient air 
standards. Frankly, governor, they had achieved that status 
before I left the governor's office, but it has taken the EPA 
that long to give them the status.
    Governor Taft. Right.
    Senator Voinovich. And so the entire State today is 
reaching ambient air standards, and one of the reasons why is 
because we have emission testing in Ohio. We didn't go for 
reformulated gasoline. And most Ohioans are not aware that if 
the Supreme Court does not agree with the lower court's 
decision in the issue of new ambient air standards for ozone 
and particulate matter, then all of the major 26 areas in Ohio 
are going to go into nonattainment, which means that we may 
have to go to reformulated gasoline and many other things in 
terms of businesses adding great expense in order to meet those 
new standards.
    Again, it was recently announced that the oil companies are 
going to have to remove sulfur from gasoline, and everyone 
applauded that as a great environmental effort. But no one has 
paid attention to the fact--and we will have some witnesses 
later--that I think it is going to add 6 or 7 cents to the cost 
of gasoline. So, too often, what we do is we pass these things 
and don't really pay attention to the fact that ultimately 
somebody has to pay for it, and there is a balance between our 
environmental concerns and our costs and our economy. So I 
think those are things that too often get lost here in 
Washington.
    I would just be interested--I know you are concerned about 
the State, and you have heard it all, the pipelines and so 
forth. Governor, do you have any ideas on what you would do to 
take care of this problem immediately, to get the cost down?
    Governor Taft. I appreciate that question, Mr. Chairman. As 
you pointed out, we do not use reformulated gasoline in Ohio, 
which makes it even more difficult to understand the causes and 
the reasons. But certainly I would say we need to develop a 
policy that reduces our dependence on imported oil from the 
OPEC countries. We are concerned for our economy in the State 
of Ohio. We are very dependent on oil, obviously, our consumers 
as well as our business economy, and we believe that the 
Congress needs to take the lead with the administration in 
developing a comprehensive energy policy that is also 
consistent with the environmental policy that focuses on 
increasing our domestic energy supplies. And there are a number 
of opportunities to do so, and some of those are contained in 
S. 2557, which Senator Lott has introduced.
    But in addition to that, obviously greater energy 
efficiency--and we are working on that in Ohio. In fact, we are 
experimenting with soy diesel in our Ohio Department of 
Transportation vehicles to see if that is a good alternative to 
reducing our dependence on imported oil in the State of Ohio.
    We also need to seek, obviously, alternatives to petroleum 
as well. And I would support any efforts on the part of the 
administration to press the OPEC countries to put more oil on 
the market. That is certainly the most immediate solution that 
would help us in Ohio. But I believe we also need to address 
the long-term viewpoint as well. That is just as important.
    Senator Voinovich. I would like to make a suggestion to 
you. Governors of this country are very, very concerned about 
this issue. People forget about that the economic engines of 
America are in our States, and your policies have a lot to do 
with how competitive your State will be.
    It would be interesting if you might ask the National 
Governors' Association to put a little group together to look 
at this issue and come back to us with some of their 
recommendations on how they think that we can do a better job.
    Governor Taft. That is an excellent idea, and we will be 
meeting in a couple weeks at the National Governors' 
Association, and I will take that idea forward.
    Senator Voinovich. Perhaps maybe a special task force that 
might work with Congress on this issue, because we are going to 
need support for this. Too often, these things come to the 
floor of Congress, and we don't get the kind of support that we 
need from our brothers and sisters out in the State and local 
government. That might be a real positive thing that you can do 
for us.
    Governor Taft. That is an excellent idea, Mr. Chairman.
    Senator Voinovich. Thanks very much. I know you have to 
leave, and we really appreciate your coming from Ohio to be 
with us today.
    Governor Taft. Thank you very much. Thank you.
    Senator Voinovich. I would now like to call on the Hon. 
Ernest Moniz, Under Secretary, U.S. Department of Energy. Mr. 
Moniz, we are very happy for you to be here. I am sure that all 
of you at the Department of Energy are getting tired of going 
to all these hearings, and we are grateful for your input, and 
hopefully after this is all over with we will have enough 
information where we can start to do some things that are going 
to make a difference.

   TESTIMONY OF HON. ERNEST J. MONIZ,\1\ UNDER SECRETARY FOR 
   ENERGY, SCIENCE AND ENVIRONMENT, U.S. DEPARTMENT OF ENERGY

    Mr. Moniz. Mr. Chairman, we certainly have had a number of 
hearings, but this is a very important issue and we certainly 
are willing and happy to support you and other Members as often 
as you need to help us solve this problem together.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Moniz appears in the Appendix on 
page 67.
---------------------------------------------------------------------------
    We do appreciate the opportunity, in fact, to come and 
discuss once again our energy policy and, of course, also to 
hear your suggestion for incarceration. I hope you have a nice 
location in mind for our being locked into a room for the 
policy development.
    The fundamental importance of energy to the Nation's 
economic and environmental health has warranted investments by 
the administration in a set of policies and a portfolio of 
technologies to produce more energy, to use energy more 
efficiently, to reduce impacts on the environment, to develop 
alternative sources of supplies, and to provide incentives for 
private sector advancement towards these goals.
    The administration's core principles in energy policy 
really are two: First, market forces are the best means of 
informing supply and demand and getting the most for the 
American consumer; and, second, environmental stewardship and 
abundant, affordable energy are quite compatible.
    Our commitment to these principles has contributed, in 
fact, to the longest period of sustained economic growth in 
modern times, while leading to significant progress in a number 
of environmental indicators. The reliance on free markets as 
the cornerstone of our energy and oil policy is a bipartisan 
view. It has been expressed over and over again in the last 20 
years as the Congress and the Executive Branch have 
systematically removed the Federal Government's authorities to 
control oil prices or allocate supply.
    Generally with the exception of emergency authorities, the 
Congress has taken the government out of the equation and 
committed us to the free market principles of supply and 
demand. It is in this context that I would like to discuss 
briefly the current problems in the gasoline market and the 
major features of the Clinton-Gore energy policy.
    For the third quarter of this year, there will be 3.5 
million more barrels of oil per day on the market than in 
March. Production, however, is still being outpaced by near 
historic demand levels and the need to rebuild stocks for the 
winter heating season. Oil prices remain high and refinery 
inventories are low. These are the fundamental reasons for high 
gasoline prices.
    It is in this context that we have been reviewing the 
gasoline supply situation, particularly in the Midwest, where 
you and other Members have clearly stated what is obviously a 
major problem. I would note that DOE performs gasoline supply 
assessments to inform the EPA's waiver process for cleaner 
gasoline as opposed to performing any specific price analysis.
    The situation, particularly in the Milwaukee-Chicago area, 
where gasoline prices are the highest in the Nation, is 
affected by the overall high price of crude, but also by other 
factors: Higher regional demand than the national average, low 
inventories in the region, distribution problems with pipelines 
and refineries, high regional refinery utilization rates, and 
an RFG formulation specific to the area that is more difficult 
to produce.
    These supply issues will affect the price of RFG Phase II 
and conventional gasoline, but the degree to which they 
contribute to price spikes is not yet known.
    Because the supplies in the area are tight but adequate, 
because the differential between RFG Phase II and conventional 
gasoline was so large--up to 48 cents at one point--and because 
DOE was not convinced that the factors I just listed were 
sufficient to explain this differential, DOE and EPA referred 
this matter to the FTC, the appropriate agency to review 
specific pricing issues. And it is my understanding that the 
FTC will issue an interim report on this matter in July.
    Let me now summarize some elements of the administration's 
energy policy. Through policy choices and investments, the 
administration seeks to address in particular four major 
challenges: Maintaining America's energy security in global 
markets, harnessing the forces of competition in restructured 
energy markets, mitigating the environmental impacts of energy 
use, and ensuring a diverse, reliable, and affordable set of 
energy sources for the future.
    While I discuss each of these challenges in detail in my 
written testimony, I will focus here only on the first: 
Maintaining our energy security. To address this challenge and 
reduce net imports, the administration has supported or 
proposed measures to spur domestic oil and gas production, 
address the generally high U.S. oil production costs relative 
to other regions of the world through advanced technologies, 
ensure that we are not overly reliant on imports from a single 
region of the world, encourage the world to develop its oil 
resources and increase world productive capacity, increase the 
size of the SPRO, provide tax incentives for the expensing of 
geological and geophysical costs and delay rental payments, 
provide deep-water royalty relief, simplify royalty collection 
on public lands, and promote the creation of a guaranteed loan 
program for small domestic oil and gas producers.
    Very importantly, we can also reduce net imports by 
focusing on the demand side of the oil equation. Two-thirds of 
our oil is used in transportation, so in the spirit of Willie 
Sutton's dictum, that is where we should look for demand-side 
relief.
    Increasing the average fuel efficiency of America's 
automobiles by just 3 miles per gallon would save us over 1 
million barrels a day. This is why we have invested, for 
example, heavily in R&D on more fuel-efficient cars. Our PNGV 
program, Partnership for a New Generation of Vehicles, has a 
goal of developing an 80-mile-per-gallon prototype automobile 
by 2004. This focus is even sharper when we look ahead to world 
oil demand in this sector.
    For example, take China alone. Projected economic growth in 
China has led to the prediction that they will add about 150 to 
180 million vehicles on the road in the next 20 years, an 
enormous, again, additional demand-side draw.
    In addition to technology development, therefore, the 
administration is also proposing tax credits to spur 
introduction of such advanced clean and efficient vehicles. 
These actions are good for the environment, good for energy 
security, and good for helping position American industry for a 
major export market.
    The administration is proud of its record on energy policy 
and the demonstrable results in contributing to economic growth 
and environmental stewardship. Nevertheless, the volatility in 
prices is clearly leading to significant problems for 
Americans, certainly in the Midwest, and we remain very 
concerned about high gas prices and are doing all that we can 
to address this issue within the authorities given to us by 
Congress.
    The Secretary has called on the Congress to work with us in 
a bipartisan fashion to pass legislation to enhance our 
national energy security, including extension of EPCA, which 
expired on March 31, establishment of a regional home heating 
oil reserve, additional tax incentives for domestic oil and gas 
production, renewable energy and increased efficiency, 
comprehensive electricity restructuring, replenishment of 
emergency LIHEAP funds, and funding of energy R&D to reduce 
demand, increase domestic supply, produce cleaner energy, and 
develop alternative sources.
    In fact, I would note, as Senator Levin did, that the House 
voted to cut $126 million from the PNGV and $45 million from 
the Department's Fossil Energy Program. As noted in my 
testimony, these programs support essential energy security 
goals on both the demand and supply sides. We appreciate the 
Senate's support of these R&D programs. They, together with our 
efficiency and renewable programs, have never been more 
important than they are today for meeting energy and 
environmental goals simultaneously.
    We urge the Congress to pass these proposals, and if we are 
going to meet the Nation's energy needs in the 21st Century, as 
you well know, we have neither the time nor the energy to 
waste.
    Thank you, Mr. Chairman.
    Senator Voinovich. Thank you.
    I am really glad to hear what you had to say today, but I 
can't help but thinking back to February 16, when gas prices 
were in the midst of their march upward, that the secretary of 
your agency said, ``The Federal Government was not prepared; we 
were caught napping; we got complacent.'' And in all due 
respect, I think some of the things you have talked about today 
are very, very worthwhile and we should study them and 
incorporate them into an energy policy for our Nation.
    The question you have to ask is: Why didn't we do this 6 or 
7 years ago? And I think it just underscores the 
administration's responsibility to try and work with Congress 
between now and the end of the year to participate in a 
bipartisan way of putting some policy together that we can be 
supportive of.
    You mentioned the issue of exploration--there has been one 
initiative after another that has been shot down because of 
pressure on the administration not to do these things. And, 
again, ANWR, for example, we have been up in Prudhoe Bay, the 
technology has increased, but these become symbols of, well, we 
are not going to do that, this is going to hurt the 
environment. But we never talk about the other side of it, that 
right now it is hurting the people at the gas pump. It could 
have been done 5 years ago, 6 years ago, and that oil could be 
flowing today in this country.
    We never talk about the fact that when we talk about some 
of these environmental things about the defense of our Nation 
and the vulnerability that we are. The man that was here before 
you mentioned 65 percent reliance on foreign oil by the year 
2020.
    We have a serious problem here, and I think we need to talk 
about it, and we need to balance out the environmental concerns 
that we have in this country with the economic and with the 
national security interests.
    Mr. Moniz. Shall I respond later on?
    Senator Voinovich. Pardon me. Senator Akaka is here. 
Senator, would you like to make a statement or would you rather 
hear the witnesses and then ask questions?
    Senator Akaka. Well, I would like to make a statement.

               OPENING STATEMENT OF SENATOR AKAKA

    Senator Akaka. Mr. Chairman, I want to thank you very much 
for holding this hearing. It is not only important to us but 
important to the Nation, and what we have been experiencing has 
been something that is extraordinary, I would say.
    I want you to know about how we feel in Hawaii. Let me tell 
you that for most of the 1990's, the average Honolulu price 
based on a weekly survey hovered roughly 25 cents to 50 cents 
above the national average. And in June 1999, only 1 year ago, 
Hawaii's $1.51 per gallon was ranked above Oregon's $1.44 and 
the national average of $1.14.
    As late as last month, according to Automobile Association 
of America, Hawaii topped the Nation with an average per gallon 
of $1.85 compared to the next highest State, Nevada, at $1.67 
and the U.S. average of $1.51.
    Now, this month, according to AAA, Hawaii ranked fourth 
highest, with an average price for regular unleaded of $1.86. 
That fell below Illinois with an average of $1.98, Michigan at 
$1.96, and Wisconsin at $1.91.
    Still, Hawaii's average price is well above the U.S. 
average of $1.63, and it is no pleasure for me to say that 
Hawaii has lost its dubious distinction as the State with the 
Nation's highest gasoline prices. The pocketbooks of Americans 
are hurting all over the country, and that is what we are 
addressing at this time.
    Mr. Chairman, I am pleased that you called this hearing, as 
I said, and we must know why a region of the country was hit 
with such high price spikes in such a dramatic manner. We must 
not let this happen again to the Midwest or any other region of 
the country. The rise in gasoline prices hits Americans in an 
extremely uneven manner. Those who can afford it the least are 
affected the most. Our import dependence has been rising for 
the past two decades. The combination of lower domestic 
production and increased demand has led to imports making up a 
larger share of total oil consumed in the United States.
    We all understand that there is no overnight solution to 
America's energy problems. We can't turn this trend around 
overnight. Tax repeals and other such short-term actions may 
appear appealing given the political climate and may even help 
American pocketbooks in the short run. But they do not provide 
a solution for our energy problem.
    For me, the only way to reverse our energy problem is to 
have a multifaceted energy strategy and remain committed to 
that strategy. In my judgment, Mr. Chairman, you need both of 
these in equal portions, and this, I think, would send a clear 
message to OPEC and their partners about America's resolve.
    I am so happy you are having this hearing, Mr. Chairman, 
and I thank you for it, and I want to hear the witnesses. Thank 
you.
    Senator Voinovich. Thank you, Senator Akaka.
    Our next witness is Dr. John Cook, Director of the 
Petroleum Division of the Energy Information Administration. 
Dr. Cook, I want to say that the work that your organization 
has done has just been terrific, and it has been very helpful 
to me and, I know, other Members of the Congress. We thank you 
very much and thank you for being here today.

TESTIMONY OF JOHN COOK,\1\ PH.D., DIRECTOR, PETROLEUM DIVISION, 
  ENERGY INFORMATION ADMINISTRATION, U.S. DEPARTMENT OF ENERGY

    Dr. Cook. Thank you, Mr. Chairman. I have a lot of good 
staff to thank for that.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Cook with attachments appears in 
the Appendix on page 89.
---------------------------------------------------------------------------
    I would like to begin today by thanking the Committee for 
the opportunity to testify on behalf of Mark Mazur of the 
Energy Information Administration.
    With gasoline prices currently averaging about $1.66 
nationwide, compared to just $1.11 last June, indeed, consumers 
do want an explanation. It is our view that this summer's run-
up, like other recent oil price spikes, stems from a number of 
factors, including tight crude markets, resulting in low crude 
and product stocks and high crude prices, from pipeline and 
refinery problems, relatively strong demand, and a difficult 
transition to summer-grade Phase II reformulated gasoline, or 
RFG.
    Crude oil continues to be a significant factor in 
explaining these increases. As you know, crude oil prices have 
risen from about $10 a barrel in December 1998 to about $34 
recently. While $34 is far from the inflation-adjusted $70 
historical high seen in the early 1980's, for many the pace of 
these increases may be as disruptive as the higher absolute 
levels. Regardless, crude increases have contributed about 33 
cents to the increase in gasoline.
    In turn, these crude oil prices are up as a result of the 
shift in the global balance between supply and demand. Crude 
markets tightened in 1999 as OPEC and several other exporting 
countries reduced supply, while at the same time economic 
recovery in Asia stimulated demand growth. As a result, crude 
oil and product inventories fell, and by the end of 1999, 
global inventories were at very low levels, especially here in 
the United States, as shown in Figure 1 on the right-hand 
side.\1\
---------------------------------------------------------------------------
    \1\ Figures 1 and 2 appears in the Appendix on page 94.
---------------------------------------------------------------------------
    Last year, as markets tightened, crude oil prices rose 
faster than product prices, squeezing refinery margins, 
discouraging refinery production, and thereby adding to 
downward pressure on inventories. Figure 2 shows that in June 
of last year,\1\ the difference between wholesale gasoline 
prices and crude prices averaged less than 6 cents a gallon. 
This is compared to the more typical 10 to 12 cents a gallon 
seen typically in June. This year, however, by the spring, low 
crude and product stocks generated much higher product prices 
relative to crude oil. Where these margins were low last year, 
they are now high at about 20 cents a gallon, or 14 cents more 
than last year. To put it another way, low gasoline inventories 
are probably adding about 10 cents a gallon to the price of 
gasoline over what we would normally expect for this time of 
year. Yet some regions have experienced much higher prices than 
the 47-cent calculation I just implied.
    EIA has pointed out on numerous occasions that very low 
gasoline stocks combined with a market short on crude oil 
generates an environment ripe for price volatility, both during 
the spring and the peak summer periods. The West Coast 
experienced such volatility in February, and the Midwest 
erupted in May. Several pipeline and refinery problems caused 
already low stocks in the Midwest to fall 13 percent below 
their 5-year average, while at the same time U.S. gasoline 
inventories were only 5 percent below average in May.
    With inventories in the Midwest at extremely low levels, 
prices were bid up rapidly, as marketers scrambled for limited 
supplies of both conventional and reformulated gasoline. As we 
know, reformulated gasoline in the Chicago and Milwaukee areas 
drew most of the attention initially, as these prices increased 
more than 30 cents over conventional.
    As shown in our last figure, the jump in Midwest 
reformulated prices appeared similar to surges we saw earlier 
this year in California and have seen frequently since the 
start of that State's reformulated program.
    There are several reasons for this strong price response.
    First, the Midwest reformulated market is very small, only 
about 13 percent of all Midwest sales. This very limited size 
limits nearby supply options.
    Second, this was the first year of the Phase II of the 
reformulated program, and it is very clear from our research, 
our field work, that some refiners had added difficulty in 
making this transition to the summer grade. It is a more 
difficult product to make, and it does cost more to do that.
    In the Midwest, as you know, ethanol is used to make 
reformulated gasoline, which requires a unique blend of 
gasoline components with very low vapor pressure.
    Finally, as I said, with few alternative sources of readily 
available supply, it simply takes time for any added supply-
demand imbalances to be resolved. The reformulated markets in 
the Midwest and California are alike in that they are isolated 
and use unique gasoline blends. As such, supply problems cannot 
be resolved quickly.
    Today the U.S. refinery system has little excess capacity, 
and the growth in the number of distinct gasoline types 
increases the potential for extended supply disruptions.
    Fortunately, wholesale prices in the Midwest began 
declining more than a week ago, reflecting increasing supplies. 
Midwest stocks have increased 13 percent over the last 4 weeks, 
and in response, reformulated retail prices have fallen over 12 
cents a gallon while conventional is now down about 7 cents. 
Much lower wholesale prices indicate we could see further 
declines barring any more pipeline or refinery problems, and 
since retail prices normally lag wholesale prices, both when 
prices are rising and when they are declining, we can expect 
Midwest retail prices to fall further, barring any more supply 
problems.
    In closing, while the first hurdle of the transition to 
summer-grade gasoline is behind us, we may experience more 
volatility before the summer is over. As we enter the peak 
season, refiners will be pushing production to the limit to 
meet demand. With low stocks and refineries operating at high 
utilization rates, any more supply disruptions can trigger yet 
another price run-up.
    That concludes my testimony. I would be happy to answer any 
questions.
    Senator Voinovich. Thank you, Dr. Cook.
    Ms. Denise Bode, thank you for being here today.

    TESTIMONY OF DENISE A. BODE,\1\ VICE CHAIRMAN, OKLAHOMA 
                     CORPORATION COMMISSION

    Ms. Bode. Thank you. I appreciate the opportunity, Mr. 
Chairman. I am Denise Bode, and I am Vice Chairman of the 
Oklahoma Corporation Commission.
---------------------------------------------------------------------------
    \1\ The prepared statement of Ms. Bode appears in the Appendix on 
page 96.
---------------------------------------------------------------------------
    Mr. Chairman, having worked in energy policy my whole 
career, I am here to try to tell you as much of the facts as I 
know it, having worked through these processes and with these 
policymakers, many of whom I know back here in the audience, on 
energy policy to try to prevent us from being in the situation 
that we are right now. And so I am going to try to give you as 
clear a picture as I can as to how we got to where we got. And 
since you are focused on this administration, I will focus on 
this administration. But let me tell you, as you stated, the 
blame can go beyond this administration and the blame also lies 
with this Congress. And I think we have got to go through the 
historical perspective, and then I will give you some ideas as 
to what I think we can do short term and long term to try to 
solve the problems.
    Senator Voinovich. Great.
    Ms. Bode. OK. To understand how and why America is at risk, 
first understand that there is not a free market in the 
traditional sense when it comes to oil. There never has been. 
My friend Dan Yergin's book on oil, ``The Prize,'' articulates 
convincing rationale that all markets have always been 
manipulated, first by the Standard Oil Trust, then through our 
government through pro-rationing and price controls, and 
finally by OPEC through the producing-nation quotas. Oil-
producing countries manipulate oil inventories for politics as 
well as for their own economic gain. Our reliance on foreign 
oil has gone from 34 percent during the 1974 Arab oil embargo 
to 44 percent at the beginning of this administration, to close 
to 60 percent today. In fact, the dependence on oil imports has 
grown twice as much in this administration than during the 
previous 20 years.
    The problem is that each time the OPEC cartel manipulates 
oil supply to create shortages or to flood the market, it 
causes price shocks, making the domestic oil industry a less 
stable business, driving away investment, terminating qualified 
employees, destroying valuable infrastructure, both exploration 
and refining. And it forces more of U.S. production, 40 percent 
of which is marginally economic to be plugged, to be lost 
forever. It is so serious now that even with the latest OPEC 
price increases, domestic producers are not drilling new wells. 
Of approximately 800 rigs drilling, less than a third of them 
are drilling for oil, and these price shocks, as you all well 
know, impact consumers as well, making it impossible for a 
family or a business to budget without knowing whether their 
gasoline is going to be 70 cents a gallon or $2 a gallon.
    Let me run through a chronology of events and responses by 
this Executive Branch since 1992 that have brought us to the 
dire straits we find ourselves in today.
    In 1993, at the beginning of this administration, the OPEC 
cartel had increased production. Oil prices in the United 
States fell below $13 a barrel and imports had risen to 44 
percent. The IPAA, which I was president of at that time, 
petitioned in March 1994, under Section 232 of the Trade 
Expansion Act, for an investigation into increasing oil imports 
and asked for action by the President. Since the Eisenhower 
Administration, this Trade Expansion Act has been used to 
affect American energy policy relations with the world. A 
bipartisan group of members of Congress, Democrats and 
Republicans alike, met with the President personally in the 
White House and asked him to enact, to propose, to support an 
energy plan that would maintain a strong domestic production 
and refining option.
    In fact, that bill that they proposed looks very much like 
S. 2557. It said to the American industry, yes, we need your 
investment here in the United States so that we can have a 
domestic oil option.
    But no action was taken on their plan. A year later a 
Presidential finding of a national security threat was finally 
issued. No new action there. But the Presidential finding did 
warn us of what we would be facing without action. 
Specifically, it said, ``The United States and its allies may 
find themselves constrained from pursuing . . . foreign policy 
actions for fear of provoking producer countries into actions 
that could result in the manipulation of oil prices and 
increased prices for consumer countries.''
    Even after that Presidential finding, no action was taken.
    During that time, domestic oil production dropped by over 
500,000 barrels a day, imports accelerated, and 75,000 
Americans lost their jobs.
    Congress did take the initiative to enact one item in their 
plan, a royalty holiday on Gulf of Mexico deep-water drilling. 
This new production, let me tell you, stopped the decline in 
domestic production by 1997, clearly demonstrating that we do 
have the ability to spur domestic production.
    But the most significant energy policy initiated by the 
administration during that time was initially a Btu tax, which 
ended up being a 4.3-cent increase in the gasoline tax.
    The OPEC cartel clearly understood that American energy 
policy in this administration was based on instant 
gratification, seeking low gasoline prices from foreign sources 
and ignoring future consequences with a foreign cartel in 
charge of our transportation fuel and our prices. In 1997, 
members of OPEC acted to consolidate their control of the 
American market by increasing production and reducing world oil 
prices to historic low prices. Of course, everybody liked the 
low prices. Of course, there are other economic factors they 
hadn't adequately predicted that drove the price down even 
beyond their control. But the United States took no action. 
Thirty thousand Americans lost their jobs. Domestic oil 
production went from holding steady to a 5 percent decline, an 
incredible drop of another 600,000 barrels today. Today we only 
have 153 refineries, down from 198 in 1990. Members of Congress 
clamored for another investigation of the threat to our 
national security of oil imports. The second Presidential 
finding in this administration was released at the end of 
March, again finding an increased national security threat. No 
action has been taken.
    There has been a recommendation now to take some action, 
but, again, no action has been taken. But 28 States have taken 
the initiative, including my State, with incentive programs for 
production. Ohio has taken action with encouragement for 
domestic producers.
    The Clinton Administration says they were ``caught 
napping'' when fuel prices jumped. I would suggest otherwise. 
With two Presidential findings of national security risk in 
hand--and let me tell you, DOE has been clamoring trying to get 
the attention of the administration. But they are not 
listening. They knowingly put American consumers at risk for 
these high prices with the foreign policy of looking to OPEC 
for more oil imports and gasoline instead of acting to 
stabilize domestic production and refining capacity.
    Senator Voinovich. Ms. Bode, would you please summerize----
    Ms. Bode. Yes, absolutely. And I have a much longer 
statement that I would like to be included in the record.
    A lot of folks have talked here about what has been 
happening in the Midwest. Oklahoma is part of that PADD2 
distribution region, so our prices were spiking, too. We looked 
into it. There is a tremendous amount of complicated 
infrastructure issues that are being resolved right now. 
Gasoline prices are continuing to fall. Hopefully we have 
learned lessons in regulatory policy from this government-
caused disruption.
    But that is a smaller, more temporary matter. The much more 
important fundamental issue is whether we as a Nation have 
learned the importance to our national security and economy of 
maximizing domestic refining and production options. If we have 
not learned the fundamental lesson, this episode will be 
replayed in the future with even more costly effect.
    Senator Voinovich. Thank you very much.
    I think, Ms. Bode, one of the things that you mentioned 
that is interesting that is hard for Americans to understand 
because we are used to thinking of things one way, and when we 
are asked to think of them another way, it is sometimes hard 
for us to understand, particularly when it may cost us more 
money. When the oil prices went way down, they dramatically 
impacted upon many of the U.S. domestic producers of oil, and 
that if we are going to maintain our domestic producers, the 
marginal producers, ``the strippers'' that some people refer to 
out there, you need to maintain a certain level per barrel in 
order for them to stay in business.
    One of the things that we perhaps ought to look at is 
working it out so that when that price does fall way down 
there, that there is some kind of incentive for them to stay in 
the business and not just disappear.
    I would like you to comment on that so that people can 
maybe understand that concept, because I think what you said 
was that when the price goes so far down, hooray, but what you 
are doing is you are making yourself a lot more vulnerable so 
that later on somebody could take advantage of you because you, 
in effect, have eliminated part of the supply.
    Ms. Bode. Absolutely. And I think most Americans understand 
that, the concept. They are not saying that they have to have 
absolutely 25-cent gasoline. They are just saying don't whipsaw 
us like this so that we can't even plan--from 70 cents to $1.80 
all in the period of a year. I think people understand you have 
to be able to at least break even or make a little profit on 
producing oil and gas, and that is all I think folks have been 
talking about.
    But one of the things that I think is fundamentally 
important that you mentioned is that there be some stability. 
And, in fact, one of the things we did and many other States 
did in putting incentive packages together was to drop the 
gross production tax, which is the State tax on oil and gas 
production, dropped it almost to zero whenever oil prices fall 
below $14 a barrel. And that provides a stabilizing effect so 
people know that there is going to be encouragement to continue 
to invest and stay in business. It is not the government 
saying, well, our policy is basically we are going to get all 
our oil from overseas, because that is a strong message to stop 
doing business here in this country, and, in fact, that has 
been the result.
    Senator Voinovich. Well, if you noticed, I suggested to 
Governor Taft that he might go back to the National Governors' 
Association. As a former Governor of Ohio, I don't know whether 
it happened during my administration. If it did, wonderful. If 
it happened under another, God bless. But the fact is that you 
are pointing out that even States can get into the act in terms 
of making more production available.
    Ms. Bode. And they have.
    Senator Voinovich. There is the issue of refineries, and I 
think you said that at one time we had 198 refineries, and now 
we have 153, and I understand there hasn't been a refinery 
built in this country in the last 25 years.
    I would like some comment from the witnesses on why that 
is, and do you believe that if we are going to have an energy 
policy that issue should be addressed? And should we build more 
refineries in the United States? You might even comment, if we 
haven't, why have they closed and why aren't people building 
more of them if they are needed?
    Ms. Bode. I would be glad to respond. I think obviously we 
have much stricter government regulation of refineries, 
environmental regulations and other things that--we have the 
most strict environmental regulations in the world on our 
domestic industry. And that is because we care about the 
environment, we care about health and safety, and that is good. 
But the problem is we need to evaluate how to balance that and 
the cost of those regulations with the needs of the country in 
building infrastructure, because, let me tell you, it is 
pseudo-environmentalism to say that it is better not to have 
domestic production and refining in this country than to ship 
it in on tankers. At 60 percent oil dependence, we are talking 
about 10,000 tankers coming into American ports, and anybody 
will tell you, particularly the Coast Guard, that that is a 
much greater threat to the environmental health of this country 
than drilling for oil and gas under our very strict 
environmental standards and refining oil under our standards. 
So those are some of the--and the loss of domestic production 
of oil, I think, has caused refineries to say, well, heck, we 
are not really needed to do business in here, and refined 
products coming in is another reason, I think, that 
fundamentally people have said, well, we will refine offshore 
because it is cheaper to refine offshore. Imported products 
coming in is another factor.
    But I think we should have an area at the Department of 
Energy, frankly, that focuses on refineries and that looks at 
our infrastructure on a regular basis and that we should focus 
on these issues and come up with a list of what we can do to 
encourage refinery upgrading and standards as opposed to 
putting new rules in place that basically run them offshore. 
Because if you have refineries close to your markets, you are 
going to be able to provide the product whenever you have these 
short-term problems. Otherwise, the problem in the upper 
Midwest and Chicago is that because they only can provide about 
75 percent of the capacity for gasoline they need, it has to be 
piped up from the gulf. That product has to be piped up. If 
there is any disruption along the way and if anybody else needs 
all these different flavors of gasoline, then you are not going 
to be able to get it to the marketplace. So localized 
refineries are fundamentally important to the distribution 
system.
    Senator Voinovich. What is interesting is that I think, 
again, when we think about the environment and we are saying, 
gee, we don't want to have the oil exported--or we don't want 
to have the refineries here because we are concerned about the 
environment, I doubt seriously that anyone gives any 
consideration that it has got to be refined someplace, and if 
it is coming over here in large boats--there is a jeopardy to 
the environment in terms of spillage, what we have seen over 
the years.
    Ms. Bode. The greatest threat.
    Mr. Moniz. May I just add to the refinery question?
    Senator Voinovich. Yes.
    Mr. Moniz. Thank you, Mr. Chairman.
    First, of course, we certainly agree that we would like to 
see additional refining capacity in the United States, but I do 
want to note that although it is certainly true that the number 
of refineries has reduced, we should emphasize as well that 
there has been a significant increase in capacity of the 
remaining refineries, largely driven by new technology 
developments. There has been a consolidation in the industry.
    Clearly, there has been a problem in terms of the profit 
margin, which is one of the reasons we don't see more refinery 
development, and that, again, adds to something that Ms. Bode--
and I think you have also said--that one of the real problems 
right now, in addition to the too high level of cost in terms 
of oil, gasoline, etc., is the volatility. The volatility--the 
ups and downs, the rapid changes--makes life difficult for 
everyone from consumers to people in the refining business, 
etc.
    Finally, Ms. Bode suggested that the Department of Energy 
deal more with the refining industry, and I just would note 
that we do. We have several programs, for example, a couple of 
new programs.
    First, we have before the Congress this year a proposal 
called ultraclean fuels. It is precisely to work with the 
refining industry in developing the technologies to meet the 
increasing environmental needs and developing new petroleum-
based fuels. The Congress I think is looking well on that 
proposal, and we appreciate it.
    Second, we have an important program in the Industries of 
the Future Program, working with refineries to reduce their 
internal energy costs, therefore improve their posture.
    Senator Voinovich. Can I ask, do we need more refineries?
    Mr. Moniz. Yes. Right now our refining capacity is really 
being pushed to the limit. We are about 96 percent utilization 
today across the country.
    Senator Voinovich. If you are not able to answer this, I 
would be interested in finding out the answer. If you looked at 
where we are today and you had to calculate based on the 
refinery technology that is available today and the average 
refinery, whatever it would be, is one, two, five, or ten 
refineries?
    Mr. Moniz. I am sorry?
    Senator Voinovich. In terms of the additional refineries, 
if we need more, approximately how many more would we need in 
order to be competitive?
    Mr. Moniz. Well, the issue is that--and maybe John Cook 
could actually expand on this--clearly we anticipate demand 
growing at somewhere between 1 and 2 percent per year in terms 
of domestic use.
    Senator Voinovich. It is interesting, I read that several 
years ago China was exporting oil. Today they have become a 
major importer of oil.
    Mr. Moniz. Yes.
    Senator Voinovich. In other words, we in the United States 
are kind of provincial in our thinking, and what is happening 
is that the market is growing by leaps and bounds around the 
world, and as a result of that, we may have to reevaluate the 
traditional way we have approached some of these things, for 
example, saying, we are going to have to do more of our 
refining here because of what is happening.
    Dr. Cook, would you like to comment on that? I am about out 
of time.
    Dr. Cook. Sure. I think they have covered it pretty well. 
When we hit peak demand in July or August, utilization rates 
may hit 98 percent. Some areas, the Chicago area is already at 
99 percent, pretty close to flat out. The Gulf Coast and West 
Coast refineries often run at peak, at pretty much flat out. 
So, as was stated, if demand is going to rise 1 or 2 percent a 
year, just to maintain this volatile, very little excess 
capacity situation, it has to grow by that amount. And we need 
a cushion, another 4 or 5 percent or so.
    Senator Voinovich. What I would be interested in is if the 
experts looking at it say, objectively, this is what we ought 
to have in order to deal with it, because what I understand, in 
the Midwest we had this lack of refining capacity, then we had 
the reformulated gasoline, which, Mr. Perciasepe, I think it 
was mandated in those towns by the EPA. They had to have 
reformulated gasoline. Was it mandated----
    Mr. Perciasepe. It was mandated by Congress in 1990 that 
the cities with those specific classifications are required----
    Senator Voinovich. Had to have--OK. So, right, Congress, 
you are implementing it.
    Mr. Perciasepe. You had the option in Ohio when you were 
there to----
    Senator Voinovich. We took the option. We did emission 
testing and didn't go for reformulated gasoline. But a lot of 
them were mandated.
    Ms. Bode. The date of implementation was set by EPA.
    Senator Voinovich. But the fact is that also was a problem, 
that this was coming on. You had the refinery capacity, and as 
a result of that, that interfered with the flow of oil coming 
into the area. Is that right?
    Dr. Cook. In my view, that is exactly right.
    Senator Voinovich. I have had a chance. Senator Lieberman.
    Senator Lieberman. Thanks, Mr. Chairman. I thank the 
witnesses. I apologize that I had to be out for a while to go 
back for a meeting in my office, but I followed your prepared 
testimony. I do have some questions.
    Dr. Cook, you put up a chart, which I have as Figure 2,\1\ 
components of gasoline prices. And I was interested in looking 
at it, and this is a comparison of June 1999 to June 2000--
$1.11 in June 1999, and $1.63 in June 2000. But what interested 
me is that the biggest percentage increase, almost quadrupling, 
was in the refiners' contribution to the cost per gallon of 
gasoline, the refiners' share of that, because most of the rest 
resulted from the jump in the price of crude oil. Distribution 
and marketing is a little bit larger but not that much; tax is 
about the same.
---------------------------------------------------------------------------
    \1\ Figure 2 appears in the Appendix on page 94.
---------------------------------------------------------------------------
    So why did the refiners' share of the cost of a gallon of 
gasoline quadruple in a year?
    Dr. Cook. Well, again, to keep it short, the very low 
gasoline stocks, strong gasoline demand, it is not unusual when 
these rare circumstances occur that this will put extra 
pressure at that refining level on wholesale prices. Typically 
in the spring, refiners are doing maintenance. Their gasoline 
production is not at maximum levels. Gasoline demand will start 
to rise as we move into the driving season. And that tighter 
balance will reduce stocks a little bit and raise gasoline 
prices relative to crude maybe a nickel or so. But with these 
extremely low stocks, especially in the Midwest, and with very 
strong demand, that tightening process was just much more 
severe and raised the margins more than they normally would go 
up.
    Senator Lieberman. Do you have a basis for making a 
judgment yourself--or I don't know whether you, Secretary 
Moniz, wanted to say anything--for whether this is fair? This 
looks like an awful large percentage increase for refiners 
compared to other contributions to the cost of a gallon of 
gasoline. Does it look fair to you?
    Dr. Cook. Well, it is extremely high, but it is important 
to remember that throughout the 1990's these refining margins 
were very poor, and especially in 1999. In 1999, with crude oil 
prices rising much faster than product prices, you had those 
almost nonexistent margins, and that is largely the reason that 
production failed to keep up with demand and we got these low 
stocks. They do have to make a healthy margin to encourage the 
extra production.
    I will let someone else comment on what is fair. They are 
very high.
    Senator Lieberman. They are high. I suppose it would be 
fair to say that the Federal Trade Commission may be commenting 
on whether these increases at the refiner level are fair or 
whether they do amount to price gouging or something else.
    I have been hearing about what was described as just-in-
time inventory practices of the oil companies and the 
refineries, and I guess it is taking the concept that is quite 
fashionable and productive in industry where you have just-in-
time inventory so that you are not carrying large inventories 
unnecessarily for long periods of time, but you use computers 
and sensible management to bring in the parts that you need as 
you need them.
    But when you apply this--and this has been a change, I 
gather--in the oil industry, it becomes a ``heads I win, tails 
you lose'' deal because if they are right in their projection 
of the inventory they are keeping, which presumably will be 
modest or more modest than it would otherwise be, then it is 
OK, they make what they would make. If for some reason there is 
an increase in demand, then, of course, they benefit again 
because supply is low as a result of that practice.
    That is my personal layperson's reaction to this. There is 
nothing illegal, as far as I can tell, about just-in-time 
inventory, but they are stacking the deck, to mix my metaphors 
here, against the consumer by this policy. And I just wonder 
from your review of the data whether there is any causal link 
between just-in-time inventory practices and increased price 
volatility of gasoline and, during the winter season, home 
heating oil.
    Dr. Cook. This concept was very popular in 1996. People 
attributed the low stocks, even within the industry, to this 
practice. I think we saw that debunked in 1997 and 1998 when we 
had very low crude stimulating a very favorable economic 
environment for refining, and cheap crude turned into cheap 
product. We had tons of stocks.
    Senator Lieberman. In other words, the refiners did buy 
more based on the lower world price.
    Dr. Cook. Yes.
    Senator Lieberman. And, therefore, the inventories were up.
    Dr. Cook. Yes.
    Senator Lieberman. OK.
    Dr. Cook. Cheap crude eventually filters down into cheap 
products. It is complicated, but, that is a fair statement.
    So now we have high crude and the reverse situation. It 
just basically discourages, with weak margins and what is 
called backwardation, excessive product production.
    The just-in-time inventory concept you might think of as 
just the normal business practice that anyone has of wanting to 
hold down their inventory costs or any other business costs as 
much as they can.
    Senator Lieberman. Yes.
    Dr. Cook. But I view it as an exacerbating factor. It is 
mainly the refinery economics.
    Senator Lieberman. Yes, I hear you. What I am concerned 
about is--and I understand that there would be a natural 
economic incentive as the world price of oil goes higher to buy 
less, hoping it will go down. But my question is--we have been 
following your numbers on home heating oil stocks now because 
we have an obvious concern that the crisis in the Northeast is 
going to be repeated again next winter. And your numbers show 
that the home heating oil stocks now are lower than they have 
been in the past than I would say they should be, so we are 
rapidly heading toward, are methodically, unfortunately, 
heading toward another winter in which if the weather is colder 
than we expect, the prices are going to shoot sky high.
    Of course, I wonder about the same thing as we approach the 
gasoline driving season. I understand that the price of world 
crude is up, but can't you really predict or can't they predict 
driving--gasoline demand is going to go up as we get to June, 
and that their stocks have been lower than predictable demand 
would be. This is probably even more predictable--it is more 
predictable than whether the winter is going to be cold or not.
    So my concern is here--and from your data, I wonder if you 
can either shed some light or tell me I am wrong or right--that 
they are keeping the inventory lower than in the best of 
circumstances we would want it to be. And I understand they are 
in a business, but you would hope for a certain amount of 
sensitivity to consumer cost along the way.
    Dr. Cook. Again, I think that limited excess refining 
capacity is part of the problem. When stocks fell over the 
winter for gasoline now to extremely low levels, even when the 
conditions improved, personally I believe refiners made every 
effort they could to crank up as high as they could and as 
quickly as they could, but they ran into a lot of refining 
problems, which occurs when you try to run at high rates.
    I don't think there is enough capacity to catch up. That is 
the problem here. When you get behind and you have to meet 
gasoline demand and you have to meet diesel and heating oil 
demand and restock from low levels, there is just not enough 
capacity to do that. I don't think they are holding back. I 
think the economics now are wildly favorable to maximum 
production, and anybody that can produce the product will do 
it.
    Senator Lieberman. Will do it; they are catching up. Thank 
you, Dr. Cook.
    I wonder, Mr. Chairman, if I could ask Mr. Perciasepe to 
come to the microphone. I just want to ask him in the time I 
have this one question, if he would come to the table.
    Senator Voinovich. I have no objection; it is on his time.
    Senator Lieberman. Yes, sir. Thank you. The question is the 
broad one, which is, there are clearly those who would place 
much of the blame for high gas prices on environmental 
regulation, specifically the reformulated gasoline requirement. 
In fact, I think the representative from the American Petroleum 
Institute, who is testifying on the next panel, is going to 
call--at least he called in his written testimony for the 
repeal of the RFG oxygenate requirement.
    I wonder, Mr. Perciasepe, if you think the reformulated gas 
requirement is responsible for some or most of the price 
increase. And given your review of the situation, has EPA been 
able to account for the entire increase in the Midwest, or is 
there some portion of it still that you can't attribute to the 
factors suggested by others, including the oil companies?
    Senator Voinovich. Would the witness state his name and the 
organization that he represents for the record?

TESTIMONY OF ROBERT PERCIASEPE,\1\ ASSISTANT ADMINISTRATOR FOR 
       AIR AND RADIATION, ENVIRONMENTAL PROTECTION AGENCY

    Mr. Perciasepe. Yes, sir, and I am sorry I didn't do that 
when you asked me when I was in the seat before. My name is Bob 
Perciasepe. I am the Assistant Administrator for Air and 
Radiation at the Environmental Protection Agency. Again, I 
appreciate the question. I will try to give a general answer. I 
am sure it will generate more questions.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Perciasepe appears in the 
Appendix on page 101.
---------------------------------------------------------------------------
    Our analysis continues to be that when you add up the 
additional cost of Phase II RFG on top of Phase I, which took 
effect in 1995--and which had a mere cost of around 3 to 4 
cents per gallon. When you add both of them up together, it is 
about 4 to 8 cents impact on the cost of producing gasoline. 
And we have not seen any evidence that that cost should be any 
different. That cost range includes the cost of making the 
reformulated gasoline with ethanol, and so there has never 
been, back to 1993 when these regulations were enacted, a sense 
that it would be a free program. And I want to be clear about 
that, and I think everybody recognizes the balancing act that 
everyone has talked about here.
    Senator Voinovich. Mr. Perciasepe, I can tell you that we 
did in Ohio. It was a question of whether we were going one 
direction, emission testing, or in another direction, 
reformulated gas. I figured it was going to cost my people in 
Ohio more money and that the estimate of what it would be would 
be probably more.
    Mr. Perciasepe. Right. The actual cost of producing Phase I 
RFG turned out to be less than the estimates in the 5 years 
that it was implemented, and that is a tribute to the American 
refining industry who was able to do that.
    The current situation in the United States, looking at 
today's retail prices, if you take out Chicago and Milwaukee, 
the average cost of RFG in the United States is roughly 
equivalent to, on average, the cost of conventional gas in the 
United States. Remember, conventional gas is about 70 percent 
of the gas in the United States; RFG is about 30 percent. The 
Chicago and Milwaukee market is about 3.4 percent.
    Now, if you look at Chicago and Milwaukee, what has 
happened over the last 14 days is the wholesale price for RFG 
with ethanol in it has dropped 47 cents. That has not been 
reflected at the retail level. If half of that or a third of it 
or some of it is reflected at the retail level, the prices in 
these cities would be very similar to what it is in the rest of 
the country. And the differential between conventional gasoline 
and RFG at the wholesale level, off the rack where the trucks 
fill up, is less than a penny in Chicago and 7 cents in 
Milwaukee. And those are pretty much what we would expect--
those are within the range that I mentioned earlier. Obviously 
one is lower.
    Now, cost to produce is not price, and I want to be clear 
about that. My point is that there are other things going on 
that are affecting the price, not the cost of producing. And we 
see that stabilization in the entire country now that these 
wholesale prices are stabilized. We now need that pricing 
reality to move onto the retail level so the consumers can be 
relieved of whatever happened in early June to cause prices to 
reverse.
    Senator Voinovich. I think the time is up.
    Senator Lieberman. My time is up. I thank you, Mr. 
Chairman. Thanks, Mr. Perciasepe.
    Senator Voinovich. Thank you.
    We have some other Senators here. I am going to follow the 
early-bird rule, and I think, Senator Levin, you were here.
    Senator Levin. Mr. Chairman, thank you.
    While Mr. Perciasepe is there, if you could just stay there 
for a minute, you have analyzed some of the reasons--EPA has 
analyzed some of the reasons which have been given for the huge 
increases in prices in Michigan, Illinois, and Wisconsin, five 
factors: Higher crude oil prices, use of ethanol in 
reformulated gasoline, pipeline problems, low inventories, and 
the patented RFG process.
    Have you found that any of those factors or all of them put 
together can explain the 80-cent increase over 7 weeks in the 
price of gasoline in Michigan, Illinois, and Wisconsin?
    Mr. Perciasepe. We have been asked by many to grant a 
waiver for the reformulated gasoline program, particularly in 
the Chicago and Milwaukee area. So pursuant to our analysis to 
see whether there indeed is a supply problem, that there was 
not the clean-burning gasoline available to be sold, whether it 
be at the retail or at the wholesale level, we worked together 
with DOE to look to see what the supply situation was. And I 
think you have already heard reported here by Dr. Cook that the 
supply in the entire Midwest PADD was tight, and in particular, 
when we looked at the Milwaukee and Chicago area with field 
teams, we found that it was tight but adequate to meet the 
demand that was available. Nobody ran out of gasoline.
    And so when we looked back to see what the issues were, and 
we met with the oil industry, they brought up some of these 
issues. We have pursued every one of them vigorously. And, 
again, there are inadequate explanations in terms of equating 
that large of a price increase with whatever effect might 
result from savings, a 5-day outage of a pipeline or the cost 
of producing RFG.
    Senator Levin. Or all of them put together.
    Mr. Perciasepe. Or all of them put together.
    Senator Levin. Now, you have given us an analysis of----
    Senator Voinovich. I think in fairness to the other 
witnesses that are here, Mr. Perciasepe was not on the witness 
list. He is now here and answering the questions. We have three 
people that have waited, and I think they ought to have an 
opportunity also to respond to the question.
    Senator Levin. Sure, I would be happy to.
    Mr. Moniz. I was going to add, Mr. Chairman, a footnote, a 
piece of good news. Today AAA announced that in Michigan there 
was almost a 10-cent price drop in the last week. It is only a 
datum. It isn't a trend yet, but hopefully it will become one.
    Senator Levin. That was announced some days ago, as a 
matter of fact.
    Mr. Moniz. I see. OK.
    Senator Levin. The EPA analysis is, relating to the 
wholesale price drop, a very significant price drop since June 
15 when there was a Federal Trade Commission investigation that 
was announced. And as I understand it--either one of you from 
EPA can perhaps comment on this--while wholesale prices of 
gasoline have dropped significantly since June 15, none of the 
factors that I have just rattled off that have been given for 
the rise in prices have changed. Is that correct? I am reading 
an EPA memo here. I don't know which one of you gentlemen----
    Mr. Perciasepe. Yes----
    Senator Levin. So, in other words, of those five factors--
higher crude, use of ethanol in reformulated gas, pipeline 
problems, low inventories, and the RFG process--we have had a 
significant drop----
    Mr. Perciasepe. None of those has changed in the last 2 
weeks.
    Senator Levin. All right. So they don't explain the 
increase, and they haven't changed, as far as you know, to 
explain the drop. What, in your judgment--well, I will let it 
go at that.
    Now, on reformulated gasoline, Michigan does not use 
reformulated gasoline. Is that correct? I am just asking either 
of the EPA folks here. Is that correct?
    Mr. Perciasepe. Correct.
    Mr. Moniz. Correct, yes.
    Senator Levin. And yet the price in Michigan, is this not 
also correct, the retail price has been about equivalent, if 
not more, than the price in Chicago and Milwaukee? Do you know 
whether that is true or not?
    Mr. Moniz. That is approximately correct, yes.
    Senator Levin. As far as you know.
    Mr. Moniz. Yes.
    Senator Levin. There has been----
    Senator Voinovich. I would just like to mention that we 
have got two back-to-back votes coming up. We have 10 minutes, 
and I think that what we probably should do is go for another 5 
minutes and then go over and do our votes and recess this until 
we come back.
    Senator Levin. Do you want to recess now?
    Senator Voinovich. Well, we have 4 or 5 minutes. But the 
other thing I have to say is that these witnesses, are you able 
to stay until we come back? We are imposing on you and we have 
a bunch of other folks here that have been sitting around 
waiting to testify.
    So why don't we go on for another 5 minutes, and then we 
will recess and go down and vote and come back.
    Senator Levin. Let me ask the EPA folks this question. I 
believe that, according to one press report, New York Times, 
June 26, the American Petroleum Institute, ``pleaded with the 
EPA not to lift the rule'' relating to, I think, reformulated 
gas, if I am correct. Have they made that plea to the EPA?
    Mr. Perciasepe. Yes, they have. When we were asked to 
review a waiver request--we obviously take those very 
seriously--we instituted all the examinations that I just 
mentioned. We also asked the refiners who are supplying the 
area what their views were and how that would affect them, and 
all of them, I think, without exception, including their 
association, recommended no granting of a waiver.
    Senator Levin. Well, if I read the testimony today of the 
Petroleum Institute, however, they are urging that that 
requirement be lifted. Am I reading that correctly?
    Mr. Perciasepe. They haven't communicated to us.
    Senator Levin. One of you testified, I believe Dr. Cook, 
that the refining capacity is at 98 or 99 percent right now. Is 
that correct?
    Dr. Cook. In the Chicago area.
    Senator Levin. In the Chicago area. If this is generally 
true that we are refining at almost full capacity, what would 
be the benefit of greater oil supplies coming in from either 
OPEC or from the Strategic Petroleum Reserve? Could it be 
refined if we were able to get that release from the Strategic 
Petroleum Reserve or get OPEC to give us 2 million more barrels 
a day instead of 750,000 barrels?
    Dr. Cook. Well, that is a good point. It would have a 
limited effect. For one thing, a large release would reduce the 
crude price. It is a global market. That would undercut the 
crude component of the gasoline price.
    The expectation of that to happen, these markets are very 
important in pricing run forward, on expectations, so there 
could be some decrease from that.
    Not all regions are at 99 percent capacity. The Gulf Coast 
is not at capacity yet, and likewise, the East Coast. There 
could be some additional production there.
    More importantly, Europe and Asia are nowhere near 
capacity, so that to the extent that cheaper crude stimulates 
them to produce more, we could certainly see more conventional 
gasoline imported. And in your area, in your State, 
conventional is the problem.
    Senator Levin. Thank you. Thank you, Mr. Chairman.
    Senator Voinovich. I think we are going to recess the 
hearing, and we will try to be back as soon as possible. Thank 
you.
    [Recess.]
    Senator Voinovich. We will reconvene the meeting, while I 
wait until for my colleagues to return, I will ask a few 
questions before they get here.
    The issue of the refineries, I would like to go back to 
that again. There was a question asked about if we could get 
more supply in, could we handle it in terms of the refineries? 
And I think I heard you say, Dr. Cook, that we do have refinery 
capacity out in the West Coast. It is not at its capacity. 
Could you explain that? What I am trying to get at is do we 
need more refineries. And if we do, what have we got to do in 
order to get them?
    Dr. Cook. Well, we either need more refineries, or we need 
more refining capacity at the existing ones. They can upgrade, 
they can add units, and they have been doing that. So I think I 
would phrase it the latter.
    I would also like to say there isn't very much excess 
capacity left anywhere in this country. It is a very small 
amount, on the West Coast, Gulf Coast, East Coast, and 
virtually flat out in the Chicago area.
    Now, I think the potential for more product production of 
conventional and distillates, anyway, if not RFG, is globally, 
in Europe and Asia. To the extent that could be imported and 
help the distillate stocking for next winter, which is a 
concern of ours, that would be a plus.
    Senator Voinovich. So what you are saying is you either 
need more refineries or you need to have the ones that are 
there expand their capacity. And the reason why we have lost 
the refineries that we have is what? Why are they out of 
business? It is not economical or what is the reason?
    Dr. Cook. Well, most of the losses were very small 
refineries spawned from the regulation period that, once 
competition occurred, were inefficient and noneconomic to 
operate, so they dropped by the wayside. And some of that 
capacity was picked up by the remaining refineries.
    Senator Voinovich. Again, how do we get more refineries?
    Dr. Cook. Well, profit margins have to improve. No one is 
going to invest in it, especially with stringent environmental 
regulations, unless one can at least make the average of other 
large industrial rates of return.
    Senator Voinovich. Mr. Moniz.
    Mr. Moniz. The rates of return, as John just alluded to, in 
that business have been rather low compared to alternative ways 
of investing capital.
    I would just add one other thing, however, in terms of the 
refining equation, and that is also, again, the demand side. I 
think we need to keep working on the demand side, finding 
environmentally and economically attractive ways of reducing 
demand, like with the advanced automobiles.
    Senator Voinovich. It has to be more economical. How do you 
do that? Does that have to do with the price of oil has to stay 
up? What is it that is going to make it--what profit--is it 
more incentives from the Federal Government? What is it that is 
going to get them to get in there and build more refineries?
    Ms. Bode. Well, I will tell you what I think.
    Senator Voinovich. Fine.
    Ms. Bode. I think we need to have a comprehensive look at 
U.S. refinery policy in this country. As you suggested, what we 
need to make ourselves independent in terms of at least these 
short-term problems, which is probably close to 50 percent, we 
have, I think, an opportunity to get back to 50 percent 
domestic production, and refining capacity is very much a part 
of that. We need to have a look at comprehensive refinery 
policy.
    I would suggest incentives may be something to look at, but 
also we need to look at regulatory policy regarding refineries 
to make sure, to ensure that refinery policy and regulation is 
cost-effective. One of the newest things that is going to 
affect it coming up very shortly is new environmental standards 
for diesel fuel, and that is going to, again, cause some 
refineries that now may be in business to look seriously at 
whether the margins are sufficient for them to stay in 
business. So you may see a fall-off in new refineries or 
existing refineries as a result of new rules going into effect.
    So I just think we need to take a comprehensive look at our 
infrastructure, both refining, exploration, and production, and 
really see what we are doing right now to encourage having a 
strong domestic option so that consumers aren't hurt in these 
times of short supply, and particularly refining options, not 
just on the Gulf Coast, because refining capacity has 
increased, but it has all increased away from where we need the 
product. We need to be thoughtful about making sure the 
capacity is there close enough and supplied by pipelines, 
sufficient pipelines so that it can get the product to market 
in a timely fashion.
    Senator Voinovich. So what about if we opened up 
exploration and we had more oil produced here? Would that 
generate more refineries?
    Ms. Bode. Well, it is a two-part equation. Exploration, 
production, more domestic production obviously is something 
that you need in order to have domestic refineries. But you are 
not going to impact margin of domestic refineries by having 
more produced here at home. You are going to have to have 
policy that focuses on refineries and their margins as well in 
order to encourage more refining capacity and more refineries 
to be built in areas where you really need that capacity.
    Senator Voinovich. Well, I would be very interested in any 
suggestions from you or anybody in the audience about what is 
it that we would have to do in order to get our refining 
capacity increased.
    Mr. Moniz. Mr. Chairman, thank you. Ms. Bode addressed the 
issue of looking at the infrastructure requirements in the 
refining business and other parts of the business. I would just 
note that, in fact, we did ask the National Petroleum Council, 
and they just, in fact, produced a report looking forward on 
the refinery business, particularly as one looks at what she 
referred to as some of the coming requirements in terms of low-
sulfur gasoline, diesel fuel issues, MTBE. We have a report. 
They basically emphasized very strongly the importance of sort 
of sequencing and phasing of these programs, and this is 
something that we intend to work closely with EPA and others in 
the administration to address. So that is very directly 
addressing this question of the refinery business in the next 
years.
    Senator Voinovich. Senator Lieberman, I just wonder, this 
panel has been here now for quite some time. I think that we 
ought to excuse them and let the other witnesses that have been 
waiting come forward.
    Senator Lieberman. Absolutely, Mr. Chairman. I agree. I 
thank the panel.
    Mr. Moniz. May I add one more comment, please, Mr. 
Chairman? I would appreciate it. I will be very brief, and I 
apologize. But I did want to go back to Mr. Lieberman's earlier 
question on heating oil and just add one fact.
    Dr. Cook emphasized how tight we are right now in the 
refining business and we are at capacity, and with regard to 
moving forward on a home heating oil reserve that we share with 
the Congress a desire to do so, we want to emphasize because of 
that fact, the urgency that we need to be moving forward very 
soon, because, frankly, in the situation he has described, the 
last thing we want to do is late in the fall begin to stock up 
a home heating oil----
    Senator Lieberman. Start acquiring oil for the reserve, you 
mean.
    Mr. Moniz. Exactly. So we need to really be moving quickly 
and hope to work with the Congress in accomplishing that.
    Senator Lieberman. Thanks very much. We appreciate the 
department's support of the idea of a regional home heating oil 
reserve and look forward to working with you in the very near 
future to get this implemented. Thank you.
    Dr. Cook. Could I add one last comment also? As I 
testified, I would like to clarify that we do see the situation 
in the Midwest improving some. Inventories have been building, 
refinery production has been growing for the last 4 weeks out 
there, and that is behind the big wholesale price decrease.
    Senator Voinovich. OK. One other thing. I went to a meeting 
that Speaker Hastert had for the Midwest region. The EPA 
director had a chart that showed the prices going up, and then 
when it announced that we were going to have the FTC 
investigate, it looked like the prices went down. And the 
allegation is because of the threat of the FTC hearings, which 
everybody supports, including me, that all of a sudden the 
prices went down.
    Would either one of you want to comment on that?
    Dr. Cook. Well, I don't want to comment on that 
specifically. I just want to emphasize that supplies were 
increasing over this period of time.
    Ms. Bode. And I have talked to the refineries as well in 
our areas, because, obviously, that is something that we 
regulate, and we were also part of that PADD2 distribution 
reach, Oklahoma was, along with Ohio and Illinois and the upper 
Midwest. And what we found basically was that we had a tight, 
very tight situation coming in. We are part of the region, 
again, that only has 75 percent capacity in our region, and as 
they determined up the pipeline in Chicago that they were 
having difficulties blending the ethanol into the gasoline, and 
supplies became really tight and prices went up, the gasoline 
for Oklahoma--and we don't use reformulated gasoline--the 
gasoline in Oklahoma went up the pipeline to where the supplies 
were short. And so as soon as the batches of gasoline started 
getting to the marketplace up there and we started resupplying 
the marketplace, in Oklahoma our prices started coming down. 
And it was, steadying--long before any of the hearings or the 
investigation was announced--because I was talking to the 
marketers every single day. So I knew when the price fell and 
it was really before any investigations were announced.
    Senator Voinovich. So your feeling is that was more 
coincidence than it was any kind of----
    Ms. Bode. That is my understanding as a regulator as to 
what----
    Mr. Moniz. I personally believe we need to wait to see what 
the FTC says. Certainly the numbers don't all add up at the 
moment, but I would just add as well that the most recent data 
indicates a drop in demand, presumably as part of a price 
signal in the region.
    Senator Voinovich. It is so complicated. Thank you so much.
    Our next panel of witnesses, and, again, I apologize to you 
for the long delay: Hon. Richard Blumenthal, the Attorney 
General of the State of Connecticut; Phyllis Apelbaum, owner of 
Arrow Messenger Service; J.L. Frank, President of Marathon 
Ashland Petroleum Company; and Red Cavaney, President and Chief 
Executive Officer, American Petroleum Institute.
    I understand, Ms. Apelbaum, from your Senator that you have 
a plane to catch? Or have you missed it?
    Ms. Apelbaum. I have missed that one, but I am going to get 
the next one no matter what.
    Senator Voinovich. OK. Well, how would it be, then, if we 
would start with you, Ms. Apelbaum, and your Senator thinks the 
world of you, and he will be here to introduce you or say some 
nice things about you, as you have come all the way here. And 
we would start with you, and we will move then to Mr. 
Blumenthal, Mr. Frank, and then clean-up will be Mr. Cavaney.

   TESTIMONY OF PHYLLIS APELBAUM,\1\ OWNER, ARROW MESSENGER 
                            SERVICE

    Ms. Apelbaum. Thank you very much. Mr. Chairman, Members of 
the Committee, my home State of Illinois Senator, Senator 
Durbin, thank you for allowing me to testify here today. My 
name is Phyllis Apelbaum, and I am the owner of Arrow Messenger 
Service in Chicago, Illinois. I am a member of the Chicagoland 
Chamber of Commerce, and I am also the president of the 
Messenger Courier Association of the Americas. The MCAA 
represents approximately 500 courier companies in the United 
States and abroad. Most of these companies are small businesses 
and many are multigenerational family owned. In my brief 
remarks today, I hope to tell you a little about the effects of 
high gas prices on small business owners in the Chicago area 
and throughout the courier industry.
---------------------------------------------------------------------------
    \1\ The prepared statement of Ms. Apelbaum appears in the Appendix 
on page 110.
---------------------------------------------------------------------------
    Courier companies are not glamorous businesses, but we 
perform a vital role. As the agents for the same-day delivery 
business, we deliver the Nation's time critical shipments. We 
know full well that someone can pay 33 cents to mail a letter 
across town or pay FedEx or UPS to deliver it in 3 days or 
overnight. We deliver critical documents, medical supplies, 
blood, machine parts, and even organs for transplant. We even 
facilitate same-day cross-country shipping.
    The courier industry in Chicago and most major cities 
utilizes, contrary to the view you might get walking the 
streets of Washington, DC, mostly cars, vans, and light trucks 
to undertake deliveries. One of our major costs has always been 
fuel to keep our fleets in operation. We have always been 
conscious of gasoline prices and fuel efficiency.
    As the Committee knows, the rise in gas prices has been the 
highest and most destructive in the Chicago area. This rise in 
prices is not an abstract concern or a minor annoyance. We feel 
it every day as we refuel these fleets. This is a problem that 
not only inconveniences vacationers who have many travel 
options; it is affecting our businesses in a very real and 
negative manner.
    In mid-May, my drivers fueled the Arrow Messenger fleet of 
110 vehicles for an average of $1.77 a gallon, up from $1.47 in 
January. Now we are paying $2.24 or more a gallon in the 
Chicago area for regular grade gasoline. This increase is 
costing my business thousands of dollars a month and over 
$35,000 since January. These figures are duplicated with other 
businesses throughout the greater Chicago area. We already 
employ complex dispatching software that allows us to do 
multiple pick-up and deliveries on all single runs. If there is 
a way to cut down on fuel costs and miles traveled, we are 
already using it. Short of refusing to make deliveries, there 
is little that we can do to mitigate the fuel usage.
    But it is not just couriers; the whole transportation 
sector in my area of the country has been especially hard hit, 
as we have heard today over and over. For example, in Chicago, 
we have 6,300 taxicabs and 15,000 drivers who are paying 30 
percent more for fuel and working an additional 2 to 4 hours 
per day to cover these increases. Multiply what the courier 
industry is going through by the entire transportation 
industry, and you can see that millions, if not billions, of 
dollars is being drained out of the economy of the Midwest. 
Crain's Chicago Business estimates that the gasoline price 
shock will cost the local economy 36,000 jobs over this coming 
year.
    Gasoline is one of the largest costs for any courier 
business. As president of the Messenger Courier Association, I 
have spoken with members from throughout the greater Chicago 
area. They echo what I know to be a fact: That the increase in 
gasoline prices is hurting and even disrupting their 
businesses. Until the gas price shock, one of our toughest 
challenges was finding enough qualified drivers to make the 
deliveries that our fast-paced economy requires. After 40 years 
of working in this industry, I can tell you that there has 
never been a more difficult time to hire and retain drivers, 
and we are struggling to keep these vehicles on the road. On 
top of that, companies are having drivers quit on a daily basis 
rather than pay the exorbitant fuel costs.
    There has been a variety of responses to this crisis. Many 
of our companies have added fuel surcharges. This is done on 
either a percentage basis or a flat fee. Others are simply 
having to raise their basic rates. Most of the members report 
that the surcharges don't even begin to cover the lost revenue 
due to the gas price increases. So we have the dilemma of 
losing money to keep a client in the hopes that the gas prices 
will fall or letting the client go and jeopardizing future 
business.
    I have heard the theories put forth to us as to why this 
has happened: OPEN, environmental regulations, price gouging, 
SUVs. I will leave that up to the economists among us to 
decide. But I can tell you that the increases have hurt my 
family-owned business and many small and emerging companies in 
the Chicago area and throughout the country. I urge the 
Committee to continue its investigation into this matter, and I 
strongly support the FTC investigation into price gouging.
    The courier industry has faced many challenges over the 
past 20 years. First, the fax machine was going to wipe us out, 
but we survived in spite of it. Then came E-mail, and we just 
grew. Now, with the passage of the Electronic Signatures Act, 
once again we will have to adapt. The industry as a whole will 
survive this challenge over higher gas prices as well. What I 
fear is that many individual, good, hard-working family-run 
courier companies will be put out of business or greatly 
disrupted by the gasoline price shocks. And eventually higher 
costs get passed along to the customers. This is the strongest 
economy that I have witnessed in my lifetime. Anything that 
jeopardizes this should be of the very highest concern to the 
Members of Congress and this administration.
    I thank the Committee for the opportunity to testify before 
you today. I would be happy to answer your questions.
    Senator Voinovich. Thank you, Ms. Apelbaum. It is nice to 
have a witness like you to remind us again of what impact this 
is having on small business in our country.
    Senator Durbin is here. Would you like to say a few words?

              OPENING STATEMENT OF SENATOR DURBIN

    Senator Durbin. I will say very briefly, because I know Ms. 
Apelbaum has some time problems running out to the airport 
soon, but thank you for being here and thanks for making the 
sacrifice to come out and tell us your story. It makes a real 
difference. And to the Committee, let me tell you, Ms. Apelbaum 
is known as not only a great business leader but a great civic 
leader. Chicago and Illinois are very proud of her.
    I think you have made a very good statement to put in 
perspective the concern we have that this gas price problem is 
going to create a ripple effect across the economy--an economy 
that we are proud of, but one that is fragile when it faces 
this type of energy cost increase.
    I also want to add there is some frustration, I am sure, on 
your part and everyone who testifies that we have not been able 
to get our hands on this and turn it around more quickly. I am 
glad prices are coming down, and I hope they keep coming down 
more.
    Ms. Apelbaum, thank you for being here.
    Ms. Apelbaum. I hope so, too, Senator. One of the issues 
that people do ask me about all the time, in reference to the 
deliveries, is: When you are short of drivers and fuel is an 
issue and you have to choose between delivering blood or live 
organs and doing corporate work for people that really need to 
get that moving for the economy, there is no call. You have to 
make the call for life-saving measures. And so you turn 
business down every day in order to do that, and that has 
really become a major problem for all of us.
    Senator Durbin. Thank you.
    Senator Voinovich. Thank you very much.
    Senator Lieberman, would you like to introduce Attorney 
General Blumenthal?
    Senator Lieberman. Thanks, Mr. Chairman. It would be an 
honor to introduce the attorney general, who has a 
distinguished record in public service, served as a clerk to a 
Supreme Court Justice, as U.S. Attorney for Connecticut, a 
member of the State legislature, and now since 1990 is the 
attorney general. Am I right about that? Right, 1990, attorney 
general of the State of Connecticut.
    If I may impose on Richard for probably the 30th time in 
forcing him to hear this small story, when I was elected to the 
Senate, he succeeded me as State attorney general, and we have 
a mutual friend--or he is supposed to be a friend of mine in 
New Haven. I will now immortalize him by mentioning his name in 
the record here. He is our probate judge, Jack Keasan.
    In what I thought was a tribute to me after my election, 
commenting on the new offices, he said that now Connecticut not 
only has a better U.S. Senator, we have a better attorney 
general. [Laughter.]
    This is the tribute I pay.
    Attorney General Blumenthal has been a great attorney 
general, a great leader in a lot of the multistate attorney 
general actions, and very strong locally as a legal advisor to 
the governor in the State agencies, but also has an enforcer 
particularly of our environmental and consumer protection laws. 
So I am honored to welcome him, and thank you for calling him 
as a witness.
    Senator Voinovich. Mr. Blumenthal.

  TESTIMONY OF HON. RICHARD BLUMENTHAL,\1\ ATTORNEY GENERAL, 
                      STATE OF CONNECTICUT

    Mr. Blumenthal. Thank you. Senator Lieberman, I never tire 
of that story for some reason that probably most people can 
understand, and I want to thank the Chairman for having me 
today and the Members of the Committee for being here.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Blumenthal appears in the 
Appendix on page 113.
---------------------------------------------------------------------------
    I was listening earlier to the invitation--I think it was 
an invitation--to be locked in a room together, and I can 
safely say, one, I wouldn't volunteer; but, two, I probably 
would be the least expert and qualified of all the people 
locked in that room. But I would volunteer to help enforce the 
NOPEC prohibitions that Senator Lieberman and others have 
sponsored because I do think and agree wholeheartedly, Mr. 
Chairman, that a great share of the blame and responsibility 
for the skyrocketing prices that we have seen at the pump 
belongs to OPEC, and we need to take more effective action to 
assure that we are not at the mercy of that cartel or of 
foreign oil.
    I am going to briefly, very briefly, summarize my testimony 
in the interest of time rather than reading it and come first 
and most directly to the question that Senator Lieberman asked 
earlier, because I do think it is probably the central question 
that we confront today, looking at the margins at the refining 
level and seeing the increase from 6 cents to 20 cents in the 
contribution, if I may use that word, toward the increasing 
prices that we have seen made at the refining level.
    Is that increase fair? And my answer is unequivocally no, 
it is not fair. It is too high. It is excessive. And we have 
seen low inventories on the part of oil companies, and we have 
seen low inventories on the part of all of them together. We 
have seen increasing prices, again, together. We have seen 
profit margins increasing together. So it is not only 
skyrocketing prices that have precipitated an investigation 
focusing on potential collusion, price gouging, and antitrust 
violations; it is the fact of those trends happening together.
    And we have urged for some time that the FTC take the 
action that it has with respect to the Midwest price 
phenomenon, and I am delighted that Senator Lieberman and 
others have urged that the FTC investigation be extended to the 
Nation as a whole, which we hope it will be. A number of us as 
attorneys general have begun our own investigations, and we 
hope that the expertise and resources of the FTC and other 
Federal agencies will be focused on this trend because none of 
the excuses, none of the reasons given by the oil industry, 
even taken together, can explain the trends that we have seen. 
And that fact, I think, came across very clearly in the 
testimony yesterday before the House Judiciary Committee from 
the head of the Bureau of Competition for the FTC, Richard 
Parker, who cited, for example, the reformulated gasoline cost, 
the pipeline disruptions, the other kinds of temporary 
phenomena that the industry has blamed for these trends, and, 
again, they cannot account for the astonishing price spikes 
that we have seen.
    In any other industry, if there were product shortages, 
whether as a result of tremendous mistakes, unanticipated 
shortages of supply, or concerted activity, we would not see 
what we have witnessed in this industry, which are also record-
high profits. And so what I have proposed in my testimony is 
that we take measures to increase the stocks and inventories by 
releasing product from our Strategic Reserve and creating 
regional reserves, such as Senator Lieberman and others have 
advocated, regional reserves for home heating oil and for 
gasoline, that we require perhaps minimum inventory levels, 
much as we do for banks and insurance companies with the same 
idea that we need to protect consumers against unanticipated 
shortages that threaten literally their lives if we lack the 
product that we need, that we adopt new merger standards to 
prevent the kind of consolidation that we have seen in the oil 
industry, a presumption against approval unless there are clear 
benefits for consumers, eliminating zone pricing and other 
abuses, and taking action now to deal with the crisis that we 
see on the horizon with home heating oil, because just as 
surely as we have a crisis now in gasoline, we face another 
crisis in home heating oil if we don't take action now to 
increase those stocks and inventories.
    Thank you very much, Mr. Chairman.
    Senator Voinovich. Thank you.
    Our next witness will be J.L. Frank, who is President of 
Marathon Ashland Petroleum. Mr. Frank, we are very happy to 
hear you have spent a lot of time here in Washington the last 
couple of weeks. I imagine you are getting a little tired of 
it, but we really appreciate the fact that you are here, and 
not only a spokesman for your company but for the industry.

  TESTIMONY OF J. LOUIS FRANK,\1\ PRESIDENT, MARATHON ASHLAND 
                         PETROLEUM, LLC

     Mr. Frank. Thank you. I should be wearing one of these 
buttons, but I am probably the least popular guy in town. I am 
J. Louis Frank, of Marathon Ashland Petroleum, and my company 
makes and markets most of our products in the Midwest. We are a 
buyer of crude oil and a seller of products.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Frank with attachments appears in 
the Appendix on page 120.
---------------------------------------------------------------------------
    I welcome this opportunity to discuss the gasoline market 
conditions we have experienced recently in our part of the 
country, and I look forward to answering your questions or 
those of other Members of the Committee.
    Let me start by saying that a very competitive gasoline 
market ultimately determines the price of gasoline.
    When there is a supply shortage in a competitive market, 
prices tend to rise to whatever level is necessary to balance 
demand with supply. And when supplies return to more normal 
levels, prices tend to return to lower levels. Adam Smith, in 
his writings, had portrayed these as the customary market. Just 
such an imbalance of supply and demand occurred in the Midwest 
over the past few weeks, and that is the reason that prices in 
the area surged. And I would like to explain that.\2\
---------------------------------------------------------------------------
    \2\ The chart entitled ``Chicago Market Wholesale Gasoline Prices'' 
appears in the Appendix on page 129.
---------------------------------------------------------------------------
    First, worldwide crude oil prices have risen rapidly, as 
you heard, substantially going from $10 a barrel at a low to 
$35 a barrel at a high. Second, Midwest refineries can supply 
only about 75 percent of the region's demand. The balance is 
about 42 million gallons a day that must be transported to this 
region. That is a million barrels a day.
    The vast majority of this product comes in from the Gulf 
Coast by barge or two major pipeline systems. Recent events 
illustrate how fragile the Midwest refining and distribution 
system is and how any disruption can create a supply shortfall 
that will ripple through the system for weeks or maybe even 
months as refiners and pipeliners struggle to catch up.
    In March, one of these critical pipeline systems, the 
Explorer pipeline system--we have an exhibit that shows where 
the Explorer pipeline is \3\--experienced a line failure north 
of Dallas, followed by a 6-day outage, which resulted in a 
shortfall of about 336 million gallons of product deliveries to 
the Midwest--that is about 8 million barrels--markets from 
Tulsa to St. Louis and on to Chicago and Milwaukee. It quickly 
became apparent that there was no short-term make-up capacity 
to replace the 23 million gallons per day that Explorer was not 
moving out of the Gulf Coast market to PADD2.
---------------------------------------------------------------------------
    \3\ The chart entitled ``Regional Fuels Programs'' appears in the 
Appendix on page 130.
---------------------------------------------------------------------------
    More recently, the Wolverine pipeline, which carries almost 
40 percent of Michigan's petroleum needs from Chicago, also 
experienced a release that resulted in a 9-day interruption of 
supply to that area. With only limited alternatives available, 
gasoline supplies in Michigan reached dangerously low levels, 
which are only beginning to recover now.
    Another factor that contributed to this supply and demand 
imbalance in the Midwest was the new Phase II reformulated 
gasoline requirements which became effective on June 1, and you 
can see on this map by the colored areas where different types 
of special gasolines, boutique gasolines, are required in the 
Midwest market. This gasoline is more difficult to blend to 
meet U.S. EPA regulations. We had to virtually drain our tanks 
of winter-grade gasoline at the same time as the supply 
disruptions with Explorer were unfolding.
    If these supply issues were not enough, EPA's decision to 
grant three waivers from the RFG requirements for the St. Louis 
area without any sort of penalty became the straw that broke 
the camel's back.
    Conventional gasoline that was originally destined for the 
upper Midwest conventional markets was immediately diverted to 
St. Louis. This contributed to the conventional gasoline 
shortages that in turn led to severe price increases for those 
products in the upper Midwest. And the price response that 
should have been seen in St. Louis was transferred up to 
Chicago because St. Louis went to consuming conventional 
gasoline while building their supplies of reformulated 
gasoline, so essentially in a supply-short market, they were 
taking two volumes of gasoline to St. Louis. The conventional 
they were burning and the replenishing of the reformulated 
stock.
    My company responded aggressively to the gasoline supply 
and demand imbalances in the Midwest. We took immediate and 
extraordinary steps to try to bring additional supplies into 
the Midwest. We have been running our refineries at capacity 
and pipelines are at full capacity, and we utilize trucks and 
barges to bring products in from nontraditional sources, as far 
away as Newfoundland, Canada, into the Michigan market. We 
brought truck drivers in from Texas, Florida, and Louisiana. 
Our comments to the EPA and DOE on what could be done to 
improve the Midwest supply situation in the short run were 
submitted in a letter dated June 13, 2000, and were discussed 
prior to that, and they have been attached to my testimony.\1\
---------------------------------------------------------------------------
    \1\ The letter referred to appears in the Appendix on page 131.
---------------------------------------------------------------------------
    Our nine recommendations focused on relief from numerous 
regulatory restrictions that hampered our ability to move 
products into the areas that needed it most. My company is 
working on several long-term infrastructure problems that would 
help eliminate supply shortages like the one we just 
experienced. These include a new pipeline to serve the growing 
central Ohio market and a joint venture pipeline to convert an 
abandoned or low utilization natural gas pipeline into 
products, and that line is going through the approval process 
with FERC. And we are trying to expedite that to get it pulled 
forward. It won't be in operation even on the regular track 
until January 2002.
    In our view, these recent difficulties in the gasoline 
market are mere symptoms of the much deeper problem that the 
United States does not have a cohesive energy policy, a policy 
that would recognize the importance of ample, affordable, and 
clean energy for the Nation, a policy that would encourage a 
viable and vital domestic petroleum industry.
    Any national energy policy must recognize the need for 
strengthening the downstream infrastructure of the domestic 
petroleum industry, the sector that includes refining, 
pipelining, and terminaling. Investor confidence in this 
critical sector must be restored if we are to stem the decade-
long retreat in refining capacity and maintain our self-
sufficiency in motor fuels.
    In closing, I am very proud of the way that my company has 
responded to the petroleum shortfall situation. And as I said 
in my opening remarks, the gasoline market is highly 
competitive, and market forces ultimately determine the price 
of gasoline. However, the supply system remains fragile, and 
any disruption in a refinery or a pipeline distribution system 
could result in another supply-demand imbalance in the Midwest. 
And I have to say, Senator, that when I first heard of the 
calls of investigation on collusion and price fixing, I was 
sort of outraged and indignant about it. I was embarrassed for 
the 28,000 people that work at my company and come to work 
every day and wonder, ``is my company guilty of price gouging 
and collusion,'' and I say unequivocally ``no.'' And I now 
welcome this investigation to help clear the air for the 
accusations that have been validated by the President, the Vice 
President, and that inflames the consumer base, and everybody 
is concerned about price gouging and price fixing that the 
industry is being charged of.
    That concludes my remarks, and I will respond to any 
questions that anybody might have.
    Senator Voinovich. I appreciate that last comment because I 
know that there were those that said you were reluctant to 
answer questions, and I can understand your initial feelings 
about it. I am very pleased that you are here to say that you 
welcome questions, because I do think that in the next couple 
of months we should clear the air just about exactly what 
happened and we are starting to piece this together.
    But I will say this to you, that I think too much 
importance is placed on the cause of prices are high, and I 
would hope that in this further testimony through the questions 
that we get at the issue of what do we do now in order to 
systematically bring the price down and keep it down, and it is 
starting to fall. We know that. And, second, and more 
important, as I mentioned in my earlier remarks, we talk about 
what is it that we need to do to have a comprehensive energy 
policy to make sure that 5 years from now we are not in the 
same position that we are today.
    Mr. Frank. Senator, can I have one more minute to show you 
what I think is an explanation of the statement that is 
floating around that prices came down when the FTC said we are 
going to have an investigation? If you look at this chart, that 
shows what the inventory level in PADD2 did, where that 
inventory level actually fell to a minimum on June 2. And 
following June 2, the inventory started to build----
    Senator Voinovich. I am sorry. Could somebody point that 
out? I am not following the chart.
    Mr. Frank. The minimum inventory level was on June 2. Since 
that date, inventories have risen in response to a decreased 
driving habit of the consumer, and the inventory levels have 
risen to a new level. And then on the next chart, John, if you 
would put that up, it shows that the prices were at their 
height on June 7 and were falling from that date. And then 
there was an announced fire at the Blue Island refinery in the 
Chicago area. The prices spiked overnight, 10 cents up on the 
spot market. The next day they were down 10 cents as the 
company said they were back in operation. And since that time, 
the prices have fallen.
    Now, we were facing charges or allegations of price fixing 
and colluding back in mid-May, but the market continued to work 
after that and the prices rose. And, finally, price stifled 
demand and the inventory started to build, and the price fell. 
And that is the normal response you would see in a supply-
constrained market.
    Senator Voinovich. Thank you.
    Senator Domenici. Mr. Chairman.
    Senator Voinovich. Yes, Senator Domenici.
    Senator Domenici. I wonder if you would yield me 5 minutes. 
Or do you want a witness to go first? I have to go to the 
floor.
    Senator Voinovich. Senator Domenici, you were here before, 
and you mentioned that you did, and I apologize. I think that 
Senator Lieberman and I would more than honor your request to 
make a statement here today.
    Senator Lieberman. Absolutely. Besides, we note that you 
are still the Chairman of the Budget Committee. [Laughter.]

             OPENING STATEMENT OF SENATOR DOMENICI

    Senator Domenici. I might say to both of my friends, I am 
not at all proud of what we have done today with reference to 
the budget.
    Senator Lieberman. Understood.
    Senator Domenici. And I am about to form a pact with my own 
heart that I will never let anybody by unanimous consent waive 
the Budget Act. We, today, made some horrible mistakes in terms 
of taking things off budget that we just don't understand, and 
there was no way to get in front of the steamroller. But it 
will not happen without getting slowed down in the future.
    And I might find five other Senators to agree with me, and 
we will understand what we are doing rather than vote because 
we think people want us to vote in a certain way.
    Now, having said that, I want to thank you, Mr. Chairman, 
and this Committee. I have heard enough today to know that you 
are on track to getting the facts. And, frankly, I want to 
thank you, Mr. Frank, and I haven't read your testimony, Mr. 
Cavaney, but let me say we need to know what really happened. 
And my friend, Senator Lieberman, will not like me to focus 
this on the last 7\1/2\ years, but I will for a couple of 
minutes.
    Let me just ask a question that needs no answer. How could 
crude oil prices, since January 1999, go up 300 percent and 
there not be a dramatic increase in a derivative of crude oil 
called automobile gasoline? It is impossible to go from $11 a 
barrel to $33 a barrel and to blame you for the increase in 
gasoline prices when something is amiss in American policy, 
unless that is the way we want to do business. To have crude 
oil go to $10 and then go up to $30 and then come down to $20 
and then go up to $40, I am just projecting, but that is the 
roller coaster we have been on.
    Now, I think the policies of our National Government are 
somewhat responsible, and I predict for you today the next 
crisis will be brownouts. And I am crossing my fingers while I 
predict there will be brownouts. And then there will be another 
series, Senator Lieberman, of ``we blame you.'' And the truth 
of the matter is we are not building enough power plant 
capacity to meet electrical generating needs, and we are going 
to get stuck with that just like we did by OPEC when they found 
we needed more crude oil and they weren't giving it to us. 
Instead, they decided we will not give it to you until the 
price gets up where we want it.
    And nobody really is going to be to blame for the 
brownouts, because it is the fault of an American policy of 
trying to get every ounce of energy out of the utility 
companies without producing any new sources. Because new 
sources create environmental hazards, we better squeeze every 
ounce out of the existing electric generating system and 
swapping around rather than just build new ones. And the only 
thing we are using to build new ones is very risky. The last 
five, Mr. Chairman, are all natural gas--natural gas which 
comes into your citizens' households, and they are delighted to 
be able to afford it.
    Build the next generation of plants that furnish us with 
electricity on natural gas, Senators, and the price in your 
households will begin to rise. Folks will begin to say, ``Who 
is responsible for that?''--for the enormous increase that is 
going to occur. And it is a lack of a policy, that forces us to 
recognize that we need power plant capacity. I am going to say 
from the standpoint of one Senator, and maybe Senator Lieberman 
has said a little bit that might permit me to say he concurs, 
but another problem is an American policy that says no activity 
in the nuclear power area, no nuclear waste disposal even on a 
temporary basis. Even though this is done by every European 
country like you get up in the morning. Eighty percent of 
France's electricity comes from nuclear power. They put it away 
temporarily, and they don't lose a wink of sleep. And we are 
fussing around trying to find a place to put the temporary 
storage of that which comes from nuclear power plants.
    Frankly, the President made a horrible mistake when he 
refused to let a facility be built. And if you had nothing else 
to blame on him, you can blame him for stifling the future 
because we are frightened to death of the cycle on nuclear 
power.
    Now, I want to talk one final moment on how you can send a 
message to the OPEC countries. How could we have less oil 
production in America and take more American land out of 
production, and send any signal to them other than we are more 
at your mercy every single day? And that is what happened.
    Sixty percent of the land that in 1983 was available for 
independents to try to produce oil is off limits now. The idea 
of a multiple use of the public domain is a concept that is 
fleeting away because it really isn't of concern to certain 
people who advise this administration that national lands be 
used for energy production. It is that they should be 
preserved, and the principal function of government is 
conservation and preservation, not utilization of what God put 
under the ground, which is energy sources.
    ANWR is off limits. Offshore drilling, which is an abundant 
source of natural gas, that moratorium is preserved as if we 
relaxed it a little, we would imbalance the environment of 
America. None of that is true.
    So I have been heard to say that the chickens are coming 
home to roost, and, frankly, they are going to come back in 
more numbers. The roost is going to get heavier, and there is 
going to be another roost for another source of energy, and 
that is going to be the one I just told you about. And then we 
are going to say, as we frequently do, it is your fault, Mr. 
Frank, it is your fault, and it is your fault, Exxon.
    In wrapping it up, let me say we now have--did anybody 
quote how few refineries we have now?
    Senator Voinovich. Yes.
    Senator Domenici. You already did that?
    Senator Voinovich. We have gone into that.
    Senator Domenici. Thank goodness that these refinery owners 
have put in new equipment and new technology, because fewer are 
producing more per unit, but you haven't built one since, what 
1976, Mr. Chairman?
    Mr. Frank. Nineteen seventy-six.
    Senator Voinovich. Haven't built one for 25 years.
    Senator Domenici. Now, what does that say for a country? 
That means we must have some policy that says it is far more 
important not to build them, for some reason, than it is to 
build them and have capacity of our own. And I assume it is in 
some part because of the 23 environmental protection rules and 
regulations that apply to the oil and gas industry, or maybe it 
is even beyond those 23.
    But, essentially you just can't do all of these other 
things and expect to do anything but grow more dependent and 
grow more vulnerable. And I think you are proving that today, 
and thank you for the time.
    Senator Voinovich. Thank you, Senator Domenici.
    I will say this, that from everything I have heard, natural 
gas and home heating oil are going to skyrocket before this 
winter comes up, and I don't know what we can do about it, but 
that is what everyone is saying. And not only, Senator, I want 
to say, is it in terms of nuclear power and not having a policy 
in regard to that and the biggest stumbling block is not having 
a place to deal with nuclear waste, but this administration 
also wants to eliminate fossil fuel in this country, which is a 
very, very important source of fuel in my State. That is the 
way it is.
    Mr. Frank. That is one answer to Senator Domenici's 
question. Why hasn't there been a refinery built? It is because 
the administration and Vice President Gore in his book ``Earth 
in the Balance'' has said he wants to eliminate fossil fuels 
and doesn't want any more refineries. Who is going to build one 
under those circumstances?
    Senator Voinovich. We are getting into the finger pointing, 
which I didn't want--but it does get frustrating. I lived 8 
years as Governor of Ohio, and we have 15,000 less miners in 
our State and costs are up.
    We will hear from you now, Mr. Cavaney.

  TESTIMONY OF RED CAVANEY,\1\ PRESIDENT AND CHIEF EXECUTIVE 
             OFFICER, AMERICAN PETROLEUM INSTITUTE

    Mr. Cavaney. Thank you, Mr. Chairman and Members of the 
Committee. I appreciate the opportunity to present the views of 
API's members on rising oil prices and the efficiency and 
effectiveness of the Executive Branch's response. Our members 
understand their customers concerns over the recent higher 
gasoline prices. They work hard to ensure consumers have a 
readily available and affordable fuel supply, and the 
historical record attests to their success in that regard.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Cavaney appears in the Appendix 
on page 270.
---------------------------------------------------------------------------
    Over the past decade, gasoline has been more affordable 
than ever. Adjusted for inflation, 1998 prices were the lowest 
in history; in 1999, they were the second lowest. Prices have 
been low because companies have competed hard to reduce their 
costs and because supplies have been plentiful.
    Gasoline prices in 2000, however, have increased--not to 
record levels but far above where they were 12 to 18 months 
ago. And in the Midwest, they are above even the higher 
national average. There are four main reasons why.
    First, world crude oil prices have risen sharply, the 
result of decisions by OPEC and several other foreign 
producers. Since crude oil accounts for 60 percent of the cost 
of gasoline, excluding taxes, an increase in crude prices 
directly impacts the price at the pump. Over the past 2 months, 
the cost of crude oil has risen 35 percent.
    Second, inventories have been lower than usual, and prior 
to June 1, as Corky Frank testified, companies were clearing 
their storage tanks of the wintertime fuel in order to 
accommodate the new cleaner-burning gasoline when we 
experienced some shortfalls in the Midwest due to the pipeline 
and to several other problems that I will cite. Imports into 
the region are absolutely critical because the Midwest 
refineries only make a little less than 80 percent of the 
gasoline that is consumed in that region.
    Third, demand for gasoline has been increasing, as it 
usually does during the beginning of the driving season. 
According to the Department of Energy's Energy Information 
Administration, ``gasoline demand in the Midwest seems to be 
growing more strongly in 2000 than it has for the past couple 
of years in the region.''
    Fourth, the new cleaner-burning gasoline which was 
introduced at retail on June 1 causes special problems in the 
Midwest, a fact EPA was aware of for over a year. Refiners 
weren't able to make quite as much of the special base fuel as 
quickly as needed, tightening supplies and ultimately pushing 
up prices.
    Other factors have also played a role, including the Unocal 
patent infringement case that has created uncertainty and risk 
for many companies making or importing cleaner-burning 
reformulated gasoline.
    As DOE Energy Information Administration says in its 
brochure entitled ``A Primer on Gasoline Prices,'' and I quote, 
``Any event which slows or stops production of gasoline for a 
short time can prompt bidding for available supplies. If the 
transportation system cannot support the flow of surplus 
supplies from one region to another, prices will remain 
comparatively high.'' That is what happened in the Midwest. 
But, frankly, we are very pleased to see that the actions of 
the industry in bringing more supply to bear has made 
significant reductions in wholesale prices, and retail prices 
are moving accordingly.
    For all these reasons, today's gasoline supplies haven't 
been enough to meet the demand at the record low prices that 
consumers enjoyed not too long ago during this transition 
period involving RFG Phase II. This same conclusion was reached 
by two government reports issued just last week: The 
Congressional Research Service report and the DOE's EIA latest 
report of June 20.
    Price increases have surely been painful, and companies are 
rushing to get every gallon into the marketplace that they can. 
Refineries supplying the Midwest are running all out, and added 
supplies are exerting downward pressure on prices as we speak.
    In fact, spot prices for the Chicago market started 
falling, as Mr. Frank cited, back on June 7, less than a week 
after the new gasoline was introduced at the retail level, and 
they have fallen well over 30 percent since that time. Prices 
at the consumer level typically follow such reductions at 
varying intervals, depending on how much higher-priced products 
is still in the system and other factors. Already, as we have 
talked about, pump prices are falling.
    Gasoline is much like many other commodity products, 
although it differs in one important aspect. When a drought 
reduces the corn harvest or a freeze cuts citrus production, 
prices go up. When corn gets expensive, people can switch to 
potatoes or some other product where supplies are more 
plentiful and prices are lower. For gasoline, substitutes are 
not readily available, so consumers feel stressed.
    Yet the system ultimately works to their advantage because 
over the longer term gasoline prices for decades have been 
trending downward.
    The current situation underscores the need to revisit our 
national energy policy, and we would like to suggest at least 
four areas be considered in that regard. Greater access to 
government lands is needed to find and develop more domestic 
oil and natural gas resources and to cut our reliance on 
foreign oil, which now fulfills 55 percent of U.S. needs. We 
also need more access to foreign oil supplies, but government 
policies--specifically, unilateral sanctions--have placed some 
of these sources off limits. Coordinated implementation of the 
environmental rules impacting consumers and the industry are 
also needed. And, finally, expedited permitting for the 
building or modernization of facilities for the manufacture and 
delivery of gasoline, diesel oil, natural gas, and heating oil 
is also vital.
    U.S. oil and natural gas companies know how to make and 
deliver gasoline, and all strive to be an efficient provider. 
With a more effective national energy policy, still fully 
protective of the environment, our members could even better 
serve the consumer, and the risk of market volatility would be 
reduced as well.
    Thank you.
    Senator Voinovich. Thank you, Mr. Cavaney. What was the 
third reason that you had? You had access to government land--
--
    Mr. Cavaney. Coordinated implementation of the 
environmental rules impacting both the consumer and the 
industry. Oftentimes, we and the Environmental Protection 
Agency get in disagreements over impacts, and there isn't 
enough time spent on looking at those things beyond just the 
environmental impacts, looking at the cost impacts, and, more 
importantly, in our case, the supply impacts. Is there going to 
be enough supply to go around? Because that is really what is 
at the heart of much of what has gone on these last 4 or 5 
weeks.
    Senator Voinovich. As I said earlier in my opening 
statement, we have heard a lot about the high cost and everyone 
has got a different reason for it, and I am pleased to have 
heard the explanation here. Mr. Blumenthal, you have a theory, 
and we have heard these gentlemen. But the guy at the pump that 
I am going to run into this weekend--I am going to get over 
there--wants to know--prices are coming down: Senator, are they 
going to stay down? And, Senator, 5 years from now if I bump 
into you here at this Marathon station, are we going to have 
the same situation that we have today?
    I would like to know what things could we do--now, I heard 
from Mr. Frank, you testified before Speaker Hastert at a 
meeting we had last week or the week before, and you were 
talking about some things that you thought could help the 
situation. And I would like to hear about them, and I am sure 
my colleagues would today. What things do you think right now 
could help the situation so that we stabilize this price? And 
then what are your thoughts about the long run?
    Mr. Frank. Senator, our country has come to expect low 
energy prices, and yet we are becoming more and more dependent 
on imported crude oil, and that is because of the fact that we 
are locked out. The oil companies are locked out from exploring 
on whatever lands are available and what kind of crude oil 
reserves might be found there. Our infrastructure in this 
country, for all energy sources, is tired and worn-out, and it 
has low profitability.
    In the segment that I know about, for the last 20 years in 
the refining business, the rate of return on capital employed 
has been 5 percent.
    Senator Voinovich. Mr. Frank, we always use this word 
``infrastructure.'' What do you mean by infrastructure?
    Mr. Frank. Pipelines, terminals, service stations, 
refineries and the pipelines that serve them. I am talking 
about the refining industry and transportation industry now. 
But the electrical industry--on the panel I was with yesterday 
were four people testifying on the electrical industry, and it 
amazed me that our problems are very similar, that low 
profitability is not encouraging investments. You are seeing 
major large, integrated oil companies walk away from the 
refining business because they are saying the returns aren't 
adequate for us to have an interest in that anymore.
    The refinery closures in the Midwest, 12 since 1990, they 
are just closing down. And there are several marginal 
refineries that remain through the rest of the United States, 
including the Midwest. And if they are uneconomic, something 
has got to happen to let that capacity be picked up because the 
refining system is running at 100 percent of capacity, the 
pipelines to the Midwest are at 100 percent of capacity.
    What do you do when you are up against those kind of 
constraints? You have got to have more capacity. Who is going 
to build it? How do you attract the capital to invest in 
building a refinery if you are uncertain what the economic 
return is going to be? That is what faces our country today.
    And then there is a concept that nobody believes that you 
could even build a refinery in the United States anymore, that 
the permitting process is so difficult, nobody wants a refinery 
in their area of the country. And the time to get a permit is 
exceptionally long, even for doing new capital projects. It is 
a very involved process.
    So I think that, in short, the situation has got to find 
some way to allow a return that attracts investment so that 
people find that an attractive place to be in business.
    Mr. Blumenthal. Mr. Chairman, if I may add a word, I 
certainly support the idea that infrastructure needs to be 
improved, that we should offer incentives for that kind of 
enhancement. At the same time, fundamentally, when you deal 
with customers at the pump or the man who is charging you who 
owns that gas station, what we are dealing with short term is a 
lack of inventory, a shortage in supply, insufficient stocks. 
And, in fact, in terms of infrastructure, I am told--and I 
believe reliably--that the industry has excess storage 
capacity. I believe it may be on the order of one-fifth overall 
nationally. We have storage capacity that is not being used now 
because inventories have been so low and that the shortage of 
stocks has made the system susceptible to the kind of short-
run, short-term disruptions that you have heard mentioned today 
and have increased the margins that Senator Lieberman cited 
earlier and have been responsible for those historic price 
hikes that we have seen.
    And so I think the immediate question is: What do we do 
about inventory so as to avoid the looming crisis that you, I 
think, cite, quite rightly, that we face on heating oil this 
very winter?
    This week, in New York, the spot price for heating oil was 
79 cents as compared to 46 cents per gallon last year. That 
gives you some idea of where we are heading on heating oil. And 
I think, quite rightly, you are focusing on long-term energy 
policy and so forth, but right away, for the sake of those 
people who are going to be without heating oil this winter or 
having to pay $2.25 per gallon, as we did in Connecticut last 
year, we need to increase the supply, and I think looking to 
the strategic reserves that this country has.
    Senator Voinovich. Well, I am very interested in the 
shorter term, and I may be from the Midwest, but I am concerned 
about the rest of the country also, and everything I have read 
says it is going to skyrocket and that we are going to be 
hearing people scream about this, as they are in the Midwest. 
In terms of heating oil, it is even more severe because this is 
how you heat your home. I am concerned about it, and I am 
interested. Are there short-term things that we can do to avoid 
the crisis?
    Mr. Blumenthal. And I might add, Senator, that in terms of 
short-term measures, the focus of this Committee--and I really 
commend and salute this Committee for focusing as it is in a 
very thoughtful and insightful way on this problem--does have a 
beneficial effect. Investigations do work. And whether it is 
the FTC or the antitrust department or this Committee--as 
Senator Levin remarked earlier--the light and heat of public 
scrutiny have a beneficial effect for consumers. And so I think 
the attention this Committee is giving to this problem so 
thoughtfully will have an effect in and of itself.
    Senator Voinovich. Mr. Caveney.
    Mr. Cavaney. Yes, Senator, I would like to comment on what 
we can do. I think the most important thing we can do right 
today is let the market work and not interfere. As the chart 
shows here, the industry's traditional response over decades is 
to rush supplies from wherever you can find them into areas 
that are getting tight. That is what you have seen in the 
Midwest.
    Our longer-term problem, though, which is part of this, is 
that when you have the capacity pretty well matched up with 
demand, when we are in the middle of a major effort to supply 
the needs of the consumer--think of earlier in the year when we 
were asked to go in to speak with Secretary Richardson, when we 
were talking to a lot of other people, they said maximize your 
production of distillates so we can get home heating oil and 
diesel fuel. We were told to go full up. Well, when you are 
going full up on that, you don't have the extra capacity to 
start to make a product to begin to full up inventory for the 
next change, which was the summertime fuel. And that is going 
to be the challenge we are going to face ahead of us: How do we 
keep producing at record levels the kind of production we need 
for summertime gasoline and at the same time make sure that 
there is enough extra capacity that can be worked into the 
system that you can get the build on home heating oil and the 
distillate fuel that we know we need for the other? So it goes 
to both the short term--don't confuse or discourage the kind of 
behavior that is producing good results, but long term focus on 
this idea that we are expected to change fuels by season and by 
regs. But when these two match up very, very closely, there is 
little give in the system.
    Senator Voinovich. Mr. Frank, when you testified before 
Speaker Hastert, you mentioned there were four or five things 
that you had given the administration, and one of them, I 
think, dealt with this Explorer pipeline and Wolverine that is 
going to take 8 months for you to test it so that it can be at 
full capacity. Right now it is at 80 percent of capacity, which 
means that you are only getting 90 percent of the gasoline 
throughput.
    Mr. Frank. Yes. Both Explorer and Wolverine are restricted 
to operating at 80 percent of the pressure at the point of the 
break, which translates to about 10 percent reduction in 
volume. And the Explorer pipeline has been down since early 
March, either completely out of production or at this 
restricted rate. The ongoing shortage in the PADD2 is 50,000 
barrels a day of gasoline. That is significant. I have heard it 
described yesterday in the House hearing that the normal amount 
of gasoline was going to Chicago that normally goes there, but 
Chicago was almost in a critical state of supply, depleted 
inventories back in about the third week of May, and there is 
no make-up capacity. It is sending the normal volume in there, 
but that is all that can be sent by this pipeline with the 
restriction it is on.
    Wolverine is--and the company is trying to expedite, the 
Explorer pipeline company, the process of having run a smart 
pig, which is a flaw detector device, electronic flaw detector, 
and get the results analyzed. But they think that from the 
information I have heard that that takes about 3 or 4 more 
months. There have been some companies that have given up their 
space, other pipeline companies, to let Explorer company move 
to the front.
    The Wolverine situation is a little bit different in that 
the failure was related with a fitting, and from what I 
understand, they should be back to capacity in 3 or 4 more 
weeks.
    Senator Voinovich. I am very interested in any short-term 
things, an administrative agency or whatever it is, to try and 
jack them up and get them to do it, any way that we can tighten 
up a screw here and push this here to make it----
    Mr. Frank. In the items that I listed to the Department of 
Energy and to the EPA, including expedite an increase in 
Explorer pipeline operating pressure, restoring it, grant a 
relief on DOT driver restrictions for transport, for drivers to 
be able to drive their transports longer hours. We got all the 
trucks we could, and we were moving gasoline from Illinois, 
Indiana, and Ohio into Michigan. First, it started off we were 
moving it into Chicago to help satisfy that problem, and then 
we moved it into Michigan, and longer hours would have helped. 
Approve the larger tank truck for use in other States, like is 
used in Michigan. It is about a 70 percent larger tank truck 
for transporting gasoline.
    Senator Voinovich. Mr. Frank, I am out of my time, and I am 
on my colleagues' time, but I would like to have you submit 
those letters for the record.\1\ I would certainly like to see 
them. And if there is something that I can do to help expedite 
it, I am sure some of my colleagues might be willing to do the 
same thing. We would be more than happy to do it.
---------------------------------------------------------------------------
    \1\ The information referred to in a letter dated June 13, 2000, 
sent to the EPA and the Department of Energy from Mr. Frank appears in 
the Appendix on page 131.
---------------------------------------------------------------------------
    Senator Voinovich. Senator Lieberman.
    Senator Lieberman. Thanks, Mr. Chairman.
    Attorney General Blumenthal, I know you have a plane to 
catch. Do you have a moment for some questions?
    Mr. Blumenthal. Sure.
    Senator Lieberman. Incidentally, Mr. Chairman, in my 
recitation of Mr. Blumenthal's background, I failed to mention 
one high point in his career. He was the administrative 
assistant to former Senator Abraham Ribicoff of Connecticut, 
who, in fact, was the Chairman of the Governmental Affairs 
Committee. So there is a nice piece of history.
    Mr. Blumenthal. The staff has improved considerably since 
then. [Laughter.]
    Senator Lieberman. We have been talking about the reserves 
here, and some of us have tried to convince the administration 
to open up the Strategic Petroleum Reserve, and we are talking 
about a regional home heating oil reserve. I was very 
interested that you have raised the question of the possibility 
of requiring the oil companies to maintain some minimum reserve 
of their own, and I wanted to know first--I don't know whether 
you have had a chance to go into that very much, but whether 
you feel we would be or the States would be on a strong legal 
foundation in considering such a requirement, and, second, 
whether you have thought at all about how we would try to 
determine what the minimum level of reserve required would be?
    Mr. Blumenthal. First, Senator, let me say that my 
preference would be to use the strategic reserve concept as you 
and others have suggested we do, and many of us as attorneys 
general have advocated as well, not to manipulate prices or 
have the government intervene in a heavy-handed way in the free 
market, but try to deal with extraordinary situations such as 
we now have confronting us in all parts of the country, and I 
agree with the Chairman that it is really all parts of the 
country that share in this problem.
    As an alternative, the idea that some kind of reserve or 
minimum balance be maintained I think in principle would 
operate much the same way as we now do with banks or insurance 
companies and other kinds of industries where the product is 
not a luxury or a common, everyday consumer product where there 
is competition and where there is an absence of government 
regulation, but in this industry where we are dealing with an 
essential commodity that people need at affordable prices and, 
at the very least, need to have at certain points of the year, 
for example, in the winter where consumers throughout the 
Northeast last year went without the product and suffered as a 
result.
    And so how to set what that reserve would be I can't state 
with precision at this point, but it would be based presumably 
on historical levels of supply and demand, and could well be 
enabled through tax credits and other kinds of incentives 
offered, as well as conceivably some kind of minimum 
requirements.
    Senator Lieberman. Well, I appreciate your venturing forth 
into this area, and I look forward to hearing, as you and your 
staff develop this thought, more about it. I don't know how--
maybe I should ask Mr. Cavaney or Mr. Frank how you respond to 
that proposal.
    Mr. Cavaney. Well, one of the things, when you look 
particularly at the Northeast where we had the heating oil 
experience, the problem in the Northeast was not one of 
inventories. The problem was one of transportation. There were 
inventories in PADD1, but if you will recall, the problem was 
that most of the harbors that we typically moved the product up 
the coast and into were iced over and we had trouble getting 
barges in to make deliveries. The roads, for a long period of 
time we couldn't move the trucks on them, and, finally, thanks 
to Secretary Richardson, he and the States up there mobilized 
and cleared the ice away, and we were able to move the 
inventory in.
    So just looking at inventories is not going to solve all of 
the problems that we happen to see. And then you also have to 
consider that the hand of government into the business of 
selecting inventories, because what you wouldn't want to do is 
create a law of unintended consequences that we haven't been 
able to think through. So a lot of consideration has to be 
given to the issue before people go jumping off in that 
direction given our experience.
    Senator Lieberman. OK. Did you want to add anything, Mr. 
Frank?
    Mr. Frank. I would say my company doesn't market heating 
oil, we are not a Northeast supplier. The things about 
strategic inventories, are they in the right place? How do you 
distribute them if they are needed? And then what is market 
interference or unreasonably prices, and when does it come in? 
How do you set those rules?
    One of the things that intrigues me--and this is sort of 
going to the SPR concept that we talked about, the last panel 
talked about--as a policy, why did the SPR not fill at a more 
rapid rate with these low prices last year, $10 a barrel, fill 
the Strategic Petroleum Reserve? It looked like an opportune 
time, and it could help stabilize the crude oil price from this 
volatility. But it wasn't done. In fact, I think we decreased 
what the fill rate was.
    Senator Lieberman. So you think that we made a mistake 
there in not purchasing while prices were low?
    Mr. Frank. Well, as a businessman, sir, I always like to 
buy low and sell high.
    Senator Lieberman. Sell high, exactly. I have heard that 
before. [Laughter.]
    I don't know what the explanation of that is. It is too bad 
the folks from the Energy Department left. Maybe we will have 
another chance to come back and ask them.
    General Blumenthal, I thought another--this is an area in 
which we tend to hear the same ideas and remedies mentions. I 
thought you had a couple of really fresh thoughts in your 
testimony, and another one was the question you raised, as I 
heard it, of the impact that mergers in the energy industry may 
be having on this problem that we are dealing with today. So I 
wanted to ask you to speak at a little more length about what 
your thoughts are on that one and about the extent--I think you 
suggested that we may want to have new standards for mergers to 
consider this impact.
    Mr. Blumenthal. Well, thank you, Senator. Again, I can't 
claim any overwhelming expertise or wisdom, but we have among 
us as attorneys general a lot of experience with antitrust law 
and its enforcement, and I opposed the most recent major merger 
in the country, Exxon-Mobil, and was disappointed to see it 
approved, even with some of the divestiture that was ordered by 
the FTC as a condition.
    I think that part of the reason for the diminished 
competition--indeed, for the absence of real competition in 
many parts of the country at the retail level and other levels 
in the industry is that we have seen a wave of mergers and 
consolidations. And I very simply propose that the presumption 
be against approval unless there is clear and convincing 
evidence that there will be a tangible benefit for consumers.
    A lot of times we hear the companies in this industry and 
in a great many others say rhetorically, somewhat vaguely, with 
uncertain data and predictions, that there will be benefits for 
consumers. But what I am suggesting is that we should put the 
burden of proof on the companies that are merging, that the 
presumption be against approval, and that there be clear and 
convincing evidence of real benefits, tangible ones, for 
consumers.
    Senator Lieberman. Let me ask one more question as my time 
is running out. You made mention of several State attorneys 
general being involved in review of this matter. Is that 
focused on the question of whether there is price gouging going 
on? And how broad is the multistate investigation in this case? 
Or is it individual States that are doing it individually?
    Mr. Blumenthal. There are individual States coordinating 
our efforts, some of them in the Midwest, obviously, that are 
working with the FTC, but others of us from other parts of the 
country, some of the major States that have a stake in this 
problem. And we have a real tradition, as you well know, of 
working together in these multistate task forces involving 
antitrust matters, and there is no economic problem that is of 
higher priority to us than this one.
    Senator Lieberman. Thank you very much for taking the time 
to come down and contributing to the discussion. I am proud to 
have you as my attorney general.
    Thanks, Mr. Chairman.
    Senator Voinovich. Thank you. Senator Durbin.
    Senator Durbin. Thank you very much, Mr. Chairman. Are we 
on a roll call vote? I don't know how much time is remaining. 
Well, if they could check, I may not be able to come back after 
the vote.
    I would like to make one comment for the record. If I am 
not mistaken, during Senator Domenici's testimony it was noted 
that it has been 25 years since we have built a refinery in 
this country, and someone--it may have been Senator Domenici, 
but someone said it is because of this war on fossil fuel, and 
someone said, yes--Vice President Gore.
    I had my staff check. He has only been Vice President for 
7\1/2\ years, and if there hasn't been a refinery built in 25 
years, I think perhaps that is overstating the politics of this 
issue.
    Now, there was, if I am not mistaken, a Republican 
President for 12 years in that period of time, and if there was 
a war on fossil fuels under Ronald Reagan and George Bush, I 
can't speak to it. But to assign political blame to Al Gore, 
the Democratic candidate for President, for the failure to 
build a refinery for 25 years is a leap that I hope we won't 
take in this Committee.
    Mr. Frank. Let me elaborate on that a little bit, Senator. 
For the period from 1976, which was when the last refinery was 
built in the United States--and my company built it--there 
hasn't been another one built. At that time there was an 
oversupply of refining capacity by about 25 percent, so there 
wasn't a need for a refinery to be built.
    In Al Gore's book, Vice President Gore's book, he says that 
he is opposed to this.
    Senator Durbin. Opposed to?
    Mr. Frank. Fossil fuel; the internal combustion engine he 
wants to obsolete.
    Senator Durbin. Well, we have had this debate on the Senate 
floor, and I think if you read the book more closely, you will 
see that he is suggesting--and a lot of people are joining 
him--that we should be looking at energy alternatives. I 
support that, and I don't believe it is going to happen 
overnight.
    Mr. Frank. I am not opposed to that, either.
    Senator Durbin. I hope your industry supports it.
    Mr. Frank. I am not----
    Senator Durbin. Let me raise three questions because we 
have very limited time here. One is, if the price of wholesale 
gasoline has gone down 47 cents in 14 days, when will the price 
at the pump go down 47 cents?
    Mr. Frank. I think my partner, who has just left here from 
the table, would tell me that I can't predict that for you. But 
if you look historically, prices at the street lag going up----
    Senator Durbin. Lag by how much?
    Mr. Cavaney. I can make a comment on the last increase that 
you see over there, we tracked it and it lagged by 2 weeks.
    Senator Durbin. So you would say in 2 weeks the full 47 
cents ought to be felt in the upper Midwest?
    Mr. Frank. No, sir. It did not occur all in 1 day.
    Senator Durbin. Well, why not?
    Mr. Cavaney. Let me explain why. First of all, broadly, 
there are 180,000 retail outlets in the United States that sell 
gasoline. Ten percent of them are owned and operated by the oil 
companies; the other 90 percent are owned by independent 
businessmen and independent businesswomen who have their own 
marketing and sales strategies and determine the price of the 
product, how much inventory to hold, and the like. They all 
make these. Legally, we can't be privy to any information 
there, and even if you had the capability to do so, I don't 
think it would be easy to get your hands on it.
    But if you look at it historically, you can talk about 
trends, and the lag can't be as precise as by 1 day, but it is 
going to happen.
    Senator Durbin. I don't expect it to be precise, but you 
can understand the cynicism of the consumer when you see a 47-
cent decrease in wholesale prices and you can't tell me when 
they are going to benefit from it. Let us hope that they do.
    Mr. Cavaney. They will.
    Senator Durbin. Let me ask you the second question. Some 
States like Indiana and Illinois are talking about reducing 
their gasoline taxes. What assurance can you give consumers, 
families, and businesses across America if we reduce any tax on 
a gallon of gasoline that they will be able to measure that 
impact in reduced cost at the pump?
    Mr. Frank. Let me respond to that, Mr. Cavaney.
    Governor O'Bannon in Indiana reduced the gasoline tax 
effective July 1, and there is a roll-in period because it is 
taxed as what goes into inventory. I can tell you what my 
company did. We made a press announcement on Tuesday of this 
week that we reduced the price of gasoline in the whole State 
of Indiana by the amount of the sales tax decrease before July 
1.
    Senator Durbin. I am glad you did that. I wish we could 
have a similar impact in Illinois. It is going to be tough to 
measure how much of that is an impact of the wholesale price 
going down, which you are not sure when we are going to see the 
impact on.
    Mr. Frank. They are different situations, sir.
    Senator Durbin. I understand. For the consumer, it is the 
same situation.
    Mr. Cavaney, one of the things that you said here, I wrote 
down several of your comments, and sometimes it is hard for me 
as a liberal arts major to follow some of this deep, dark 
economics. But you said at one point, how can you invest if you 
are uncertain about economic return? I thought that was kind of 
what capitalism is all about. You deal with the market.
    Then you went on to say, let the market work. We have some 
numbers here that suggest that the members of the American 
Petroleum Institute have done very, very well in terms of the 
profitability of their operations. Let me give you a couple 
examples: First-quarter profits for the major private oil 
companies in the United States over the year 2000, up 500 
percent; BP-Amoco, profits up 296 percent; Exxon-Mobil, 108 
percent; Phillips, 257 percent; Texaco, 473 percent. That is 
the year 2000 first-quarter profits compared to the year 1999.
    Now, it is interesting to me that those first-quarter 
profits would be there, you would have such a good turnout for 
your members, and then the consumers get nailed in the upper 
Midwest with 40-, 50-, and 60-cent-a-gallon increases.
    Mr. Cavaney. Senator, that is very explainable. In 1999, 
the industry was in a depression. It was operating and selling 
gasoline as historically low prices, lower than they sold 
during the depression.
    What I have here that I would like to submit for the 
record, Business Week, May 15 edition, this is the Corporate 
Scoreboard \1\ that lists all corporations and their earnings 
over the first quarter, the exact period you cite.
---------------------------------------------------------------------------
    \1\ The Corporate Scoreboard appears in the Appendix on page 290.
---------------------------------------------------------------------------
    Let me just give you some examples of what we think is not 
any evidence at all of getting excessive profits. These are the 
returns, which is the net income as a function of sales on 
ongoing operations: The telecommunications industry, 10.3 
percent; non-bank financial, 10.8; banks, 14.6; computer 
software, 17.4; electronics, 11.7; media, 11.9; all-industry, 
7.3; and oil and gas industry, 5.9 percent.
    So the amounts that you cite are from a low historical 
base. If you compare them against all other corporations, you 
can certainly not argue that there had been any excessive 
profits in the industry.
    Senator Durbin. I will make a matter of record here of the 
increases between 1998 and 1999: ARCO, up 165 percent; BP-
Amoco, 35 percent. The list goes on and on. It is certainly a 
lot more than 5 percent.
    Mr. Cavaney. It is not.
    Senator Durbin. The bottom line I want to get to is this: 
When it comes to the government's involvement here, there are 
environmental concerns which many of us in this country share. 
No, we don't want you to drill everywhere. We don't want you 
drilling offshore in vulnerable areas. Some of us were up in 
Prince William Sound and saw what happened with the Exxon 
Valdez. We don't want you--some of us don't want you to go in 
the Arctic National Wildlife Refuge when you are diverting oil 
that is being drilled out of Alaska to Japan instead of the 
United States. And some of us believe that, yes, we can produce 
energy and clean air for America. We don't think they are 
inconsistent.
    Mr. Cavaney. We believe the same thing, Senator, and we 
would look forward to sitting down and having a dialogue and 
trying to be constructive in that regard. We are not asking to 
be able to drill everywhere, but we certainly need more 
domestic energy sources if we are going to have any hope of----
    Senator Voinovich. And the public ought to understand that 
because we haven't done the exploration and we haven't gone 
into the areas that that is part of the reason why they are 
paying increased taxes----
    Senator Durbin. Well, let me say, Mr. Chairman----
    Senator Voinovich [continuing]. Or increased costs for 
gasoline in this country, and the fact of the matter is it is 
time that the environmentalists and the oil industry sat down 
and started to look at balancing up the options, that there is 
a possibility that you can have more domestic supply and at the 
same time protect the environment, and they are not separated. 
But for the last several years, the attitude is that if you do 
any exploration, you are polluting the environment----
    Senator Durbin. No, Mr. Chairman, on my time here--and I 
have a minute and 25 seconds, and I have waited patiently all 
afternoon for a chance to ask any questions. And let me just 
say on my time, I don't disagree with your premise here. There 
should be this conversation. But many of us are concerned when 
the major oil companies want to go on public lands and drill 
and not pay the taxpayers fair compensation for the oil that 
they are deriving from our land, America's land.
    And, second, it troubles me that during the course of this 
conversation this afternoon, there have been, I think, precious 
few opportunities for us to mention words like conservation and 
fuel efficiency. It is as if this isn't part of the equation. I 
think it is a big part. And when we talk about CAFE standards 
and talk about SUVs being held to standards so that they have 
some fuel economy--accountability, I don't think that is 
unreasonable. I would like to make that part of the same 
conversation.
    Mr. Cavaney. Senator, we support conservation efforts. We 
support efficiency efforts. And we also would like to, 
hopefully, through your good offices and some of the others, to 
begin the dialogue to talk about how can we have both, because 
most of the clean air gains have come from the mobile sources, 
which is the autos and ourselves. So we have the capacity to do 
it. We would like to.
    Senator Durbin. I yield back my time.
    Senator Voinovich. Thank you, Senator Durbin.
    I would like to just finish and adjourn this hearing with 
one last word, and that is, shame on all of us if we don't get 
together between now and the end of this year to come up with 
some kind of an energy policy, and I would be very interested 
in hearing the industry's point of view or anybody else that is 
viewing this hearing on S. 2557, that is, the Lott-Murkowski 
bill--I happen to be a cosponsor of that bill, but it would be 
wonderful if we would be able to perhaps refer that to a 
committee, get people, had testimony on it, and did it on a 
kind of bipartisan basis and work on that between now and the 
end of the year. There are some that want to bring it to the 
floor for a vote. I am not sure that would work out because I 
think it would get very partisan. But perhaps it should be 
referred to a committee and let's start the dialogue. I will 
talk to the Leader about it today, get it to a committee and 
start, get the administration in, get the EPA in, get the 
environmentalists in, get the oil companies in, and start to 
see if we can't hammer out something so that maybe before the 
end of the year we can pass a piece of legislation, or maybe at 
least do enough work to get it up the flagpole high enough that 
in the next administration we can tackle it immediately so 
that, again, we don't find ourselves where we are today with 
all of this going on and nothing to show for us.
    Thank you very much.
    Mr. Frank. Congratulations on taking the initiative to get 
that ball rolling, Senator, because it is something that the 
United States, our country, has been sorely lacking, and there 
needs to be a balancing of interests, and issues, to arrive at 
a workable plan that describes what our energy policy is.
    Senator Voinovich. Thanks very much for your patience.
    The record will remain open for 1 week for additional 
submissions.\1\
---------------------------------------------------------------------------
    \1\ The prepared statement of Senator Bayh appears in the Appendix 
on page 283.
---------------------------------------------------------------------------
    [Whereupon, at 4:50 p.m., the Committee was adjourned.]
                            A P P E N D I X

                              ----------                              

                 PREPARED STATEMENT OF SENATOR CLELAND
    Mr. Chairman, thank you for the opportunity to come here again 
today to speak on the very important topic of rising oil prices. Since 
this Committee's last hearing on this issue on March 24, oil prices 
have steadily increased across the country resulting in sharply higher 
gasoline prices, including in my own State. Only in the last week or 
two have I heard reports that oil prices may have declined in certain 
parts of the country. However, prices have not declined enough to offer 
substantial relief to a vast majority of Americans.
    I am especially concerned about the devastating effect that the 
high gasoline prices may have on people with fixed incomes who lack the 
means to absorb the increase in the face of other essential household 
and personal expenses. Additionally, our farmers in the Southeast are 
currently facing one of the worst droughts in recent memory. The 
projections for this year's crops do not look good. We must realize 
that high fuel prices have a tremendous effect on the agriculture 
community. Those who are just getting by now have to contend with the 
exorbitant cost of diesel and gas.
    Though oil prices in Georgia are higher than they were last summer, 
gasoline prices have not yet reached the levels currently experienced 
in the Midwest. Since future increases remain a distinct possibility, I 
am closely following the situation in the Midwest. This hearing 
provides us with the opportunity to learn more about the impact that 
rising oil prices have had across the country and the various reasons 
for the higher fuel costs associated with the increase in oil prices. 
The exorbitant price of gasoline in the Midwest has reached 
approximately $2.30 per gallon in some cities and hopefully, today's 
experts and officials will provide solutions that will significantly 
reduce the cost of oil across the country.
    Over the last several weeks, I have been contacted by many of my 
constituents who have expressed their serious concerns about the impact 
of the recent dramatic increase in petroleum prices. I must note that I 
have heard a great deal of concern regarding the use of reformulated 
gasoline or RFGs. In the Commerce Committee, we recently reported a 
pipeline authorization and reform bill. It is the first time in many 
years that pipelines have been the focus of discussion. It is seldom 
noted that pipelines are an important form of transportation. In 
Georgia, we have an excellent network of pipelines which distributes 
fuel oil throughout the State. I recognize the importance of this 
system to supply our pumps, and I realize that our pipelines are one 
reason Georgians enjoy lower gas prices at the pump. Pipelines are an 
interstate mode of transportation. As such, it is a national concern 
that the challenges of transporting RFGs might increase the costs of 
fuel to consumers.
    Another aspect of this hearing is to examine the response from the 
Executive Branch to rising gasoline prices. Last January, I wrote to 
the President in order to express my concern over rising prices and to 
ask that the Administration consider any and all policy options in 
order to counteract this situation. The Administration has had some 
success in encouraging OPEC ministers to increase oil output. However, 
I feel that there is more that could be done. I look forward to hearing 
the Administration's summary of actions to date, and I would be pleased 
to know what we can expect in the near future. This is a desperate 
situation, and we must act immediately.
    And, of course, I hope we can get into the issue of the role of the 
pricing policies of the oil companies in contributing to the current 
program. As we all know, the Federal Trade Commission launched its 
investigation along these lines yesterday, but I think some of today's 
witnesses could shed light on this matter as well. Our constituents 
want to know what we're doing in Washington to address the high price 
of oil. As in most things, there is likely to be no single, simple 
explanation but we need to do what we can to get to the bottom of this 
serious situation. In an election year, there will be a great 
temptation for demagoguery and partisanship. I hope we can resist that 
temptation and develop a bipartisan consensus and course of action. I 
look forward to hearing from our distinguished witnesses.
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