[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]



    NATIONAL ENERGY POLICY: CRUDE OIL AND REFINED PETROLEUM PRODUCTS

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

                                HEARING

                               before the

                 SUBCOMMITTEE ON ENERGY AND AIR QUALITY

                                 of the

                    COMMITTEE ON ENERGY AND COMMERCE
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION

                               __________

                             MARCH 30, 2001

                               __________

                           Serial No. 107-12

                               __________

       Printed for the use of the Committee on Energy and Commerce


 Available via the World Wide Web: http://www.access.gpo.gov/congress/
                                 house

                               __________

                   U.S. GOVERNMENT PRINTING OFFICE
71-483                     WASHINGTON : 2001

----------------------------------------------------------------------------    
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpr.gov  Phone: toll free (866) 512-1800; (202) 512ï¿½091800  
Fax: (202) 512ï¿½092250 Mail: Stop SSOP, Washington, DC 20402ï¿½090001

                    COMMITTEE ON ENERGY AND COMMERCE

               W.J. ``BILLY'' TAUZIN, Louisiana, Chairman

MICHAEL BILIRAKIS, Florida           JOHN D. DINGELL, Michigan
JOE BARTON, Texas                    HENRY A. WAXMAN, California
FRED UPTON, Michigan                 EDWARD J. MARKEY, Massachusetts
CLIFF STEARNS, Florida               RALPH M. HALL, Texas
PAUL E. GILLMOR, Ohio                RICK BOUCHER, Virginia
JAMES C. GREENWOOD, Pennsylvania     EDOLPHUS TOWNS, New York
CHRISTOPHER COX, California          FRANK PALLONE, Jr., New Jersey
NATHAN DEAL, Georgia                 SHERROD BROWN, Ohio
STEVE LARGENT, Oklahoma              BART GORDON, Tennessee
RICHARD BURR, North Carolina         PETER DEUTSCH, Florida
ED WHITFIELD, Kentucky               BOBBY L. RUSH, Illinois
GREG GANSKE, Iowa                    ANNA G. ESHOO, California
CHARLIE NORWOOD, Georgia             BART STUPAK, Michigan
BARBARA CUBIN, Wyoming               ELIOT L. ENGEL, New York
JOHN SHIMKUS, Illinois               TOM SAWYER, Ohio
HEATHER WILSON, New Mexico           ALBERT R. WYNN, Maryland
JOHN B. SHADEGG, Arizona             GENE GREEN, Texas
CHARLES ``CHIP'' PICKERING,          KAREN McCARTHY, Missouri
Mississippi                          TED STRICKLAND, Ohio
VITO FOSSELLA, New York              DIANA DeGETTE, Colorado
ROY BLUNT, Missouri                  THOMAS M. BARRETT, Wisconsin
TOM DAVIS, Virginia                  BILL LUTHER, Minnesota
ED BRYANT, Tennessee                 LOIS CAPPS, California
ROBERT L. EHRLICH, Jr., Maryland     MICHAEL F. DOYLE, Pennsylvania
STEVE BUYER, Indiana                 CHRISTOPHER JOHN, Louisiana
GEORGE RADANOVICH, California        JANE HARMAN, California
CHARLES F. BASS, New Hampshire
JOSEPH R. PITTS, Pennsylvania
MARY BONO, California
GREG WALDEN, Oregon
LEE TERRY, Nebraska

                  David V. Marventano, Staff Director

                   James D. Barnette, General Counsel

      Reid P.F. Stuntz, Minority Staff Director and Chief Counsel

                                 ______

                 Subcommittee on Energy and Air Quality

                      JOE BARTON, Texas, Chairman

CHRISTOPHER COX, California          RICK BOUCHER, Virginia
STEVE LARGENT, Oklahoma              RALPH M. HALL, Texas
  Vice Chairman                      TOM SAWYER, Ohio
RICHARD BURR, North Carolina         ALBERT R. WYNN, Maryland
ED WHITFIELD, Kentucky               MICHAEL F. DOYLE, Pennsylvania
GREG GANSKE, Iowa                    CHRISTOPHER JOHN, Louisiana
CHARLIE NORWOOD, Georgia             HENRY A. WAXMAN, California
JOHN SHIMKUS, Illinois               EDWARD J. MARKEY, Massachusetts
HEATHER WILSON, New Mexico           BART GORDON, Tennessee
JOHN SHADEGG, Arizona                BOBBY L. RUSH, Illinois
CHARLES ``CHIP'' PICKERING,          KAREN McCARTHY, Missouri
Mississippi                          TED STRICKLAND, Ohio
VITO FOSSELLA, New York              THOMAS M. BARRETT, Wisconsin
ROY BLUNT, Missouri                  BILL LUTHER, Minnesota
ED BRYANT, Tennessee                 JOHN D. DINGELL, Michigan
GEORGE RADANOVICH, California          (Ex Officio)
MARY BONO, California
GREG WALDEN, Oregon
W.J. ``BILLY'' TAUZIN, Louisiana
  (Ex Officio)

                                  (ii)


                            C O N T E N T S

                               __________
                                                                   Page

Testimony of:
    Cook, John, Director, Petroleum Division, Energy Information 
      Administration.............................................     3
    D'Arco, Peter, President, SJ Fuels...........................    25
    Kassel, Richard, Senior Attorney, Natural Resources Defense 
      Council....................................................    33
    King, Gregory C., Vice President and General Counsel, Valero 
      Energy Corporation.........................................    18
    Layton, Stephen D., President and CEO, Equinox Oil Company...     9
    Pitts, John Paul, Oil Editor, Midland Reporter Telegram......    57
    Robinson, Thomas L., Chief Executive Officer, Robinson Oil 
      Corporation................................................    29

                                 (iii)

  

 
    NATIONAL ENERGY POLICY: CRUDE OIL AND REFINED PETROLEUM PRODUCTS

                              ----------                              


                         FRIDAY, MARCH 30, 2001

                  House of Representatives,
                  Committee on Energy and Commerce,
                    Subcommittee on Energy and Air Quality,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 10 a.m., in 
room 2123, Rayburn House Office Building, Hon. Joe Barton 
(chairman) presiding.
    Members present: Representatives Barton, Bono, Walden, 
Boucher, and Markey.
    Staff present: Jason Bentley, majority cunsel; Karine 
Alemian, majority professional staff; Andy Black, policy 
coordinator; Anthony Habib, legislative clerk; Rick Kessler, 
minority professional staff; Sue Sheridan, minority counsel; 
and Alison Taylor, minority counsel.
    Mr. Barton. The subcommittee will come to order.
    The Subcommittee of Energy and Air Quality of the Energy 
and Commerce Committee is today continuing a series of hearings 
on national energy policy. Today's hearing is on crude oil and 
refined products. I want to thank our witnesses that are here 
this morning, and I want to thank our members that are here on 
a Friday when there are no votes scheduled.
    I drove here today in a car that uses gasoline. I think 
most of us probably arrived here by transportation that uses 
gasoline, also. The demand for petroleum is not going down. 
Even though our motor engines continue to become more energy 
efficient and even though alternative fuel vehicles and public 
transit are making great technological advances, we have not 
yet left the age of the gasoline internal combustion engine.
    Last night spot crude oil prices closed at $26.32 a barrel. 
Had that figure been over $30 per barrel, as was the average 
for November of 2000, more members would have been here today. 
Had that figure been $10.76, as it was 2 years ago this month, 
national attention would have been less than it is today.
    We suffer the problems of an up-and-down market. Between 
600,000 and 1 million barrels per day of domestic crude oil 
production was lost in the late 1990's, when oil prices were at 
all time lows adjusted for inflation. Many marginal wells were 
shut in and those wells, once shut in, are very difficult, if 
not impossible, to reopen. That supply has been recovered 
obviously with foreign imports, including more than half a 
million barrels per day from Iraq, of which we have economic 
sanctions in force.
    Our dependence upon foreign crude oil imports for more than 
half of our needs, perhaps 56 or 57 percent, means that 
consumers must bear the brunt of mood swings in world markets. 
A small amount of crude oil being produced or withheld by the 
OPEC trading cartel can change the spot price dramatically, 
which brings us to prices for petroleum products like gasoline, 
heating oil, fuel oil, propane and others, which have all seen 
price spikes in the last year.
    The Energy Information Administration warns that gasoline 
inventories are even lower this year than they were last year 
and that this summer's prices are expected to be relatively 
high. Of course, part of the reason for high petroleum product 
prices is the base price of crude oil. But many other factors 
affect these prices, refinery capacity, refiner cost, business 
decisions based upon economic forecasts, inventory stocks and 
distribution constraints.
    We are here today to talk about the upstream issues, such 
as increasing supply of crude oil generally, and the downstream 
issues dealing with refining, distribution and sales to 
consumers. We hope to hear from the witnesses what impacts the 
ability to improve supply, if any, would be on the cost of the 
product. If there are laws and regulations that Congress should 
review, we would like to know which ones those are. We need to 
learn more about the refinery business and the downstream 
markets for petroleum and products like heating oil. Do we have 
markets that encourage investment in refinery capacity? If not, 
why not?
    The lessons of California's electricity problem should not 
be forgotten here. American consumers need sufficient supply to 
meet demand at an acceptable price. When energy supply is not 
adequate, we as a Congress and as a Nation have a duty to help 
the supply demand imbalance.
    This subcommittee hopes to soon begin crafting 
comprehensive energy legislation dealing with all fuel sources 
as well as conservation and environmental issues. I look 
forward to working with members on both sides of the aisle, 
especially my distinguished ranking member, the gentleman from 
Virginia, Mr. Boucher, and I know that we are all concerned 
about our Nation's energy future. Your testimony today will 
help us in these efforts.
    With that, I would like to recognize the distinguished 
gentleman from Virginia, Mr. Boucher, for an opening statement.
    Mr. Boucher. Thank you very much, Mr. Chairman. Oil is the 
fuel for 40 percent of our Nation's energy consumption, and 
assuring an adequate supply of petroleum and refined petroleum 
products is essential to our Nation's energy security and to 
the affordability of gasoline and home heating oil for American 
consumers. I look forward to advice from today's witnesses 
about measures that we can take at the Federal level to reduce 
our dependence on foreign sources of crude oil, to reduce the 
volatility of prices for oil-derived products and to ensure 
that we can satisfy our Nation's oil needs in an 
environmentally acceptable manner.
    A key question for our consideration this morning is why 
United States refinery capacity has not expanded to meet the 
demand for refined products. Ten years ago, domestic refineries 
were able to meet 94 percent of our domestic consumption needs. 
Today, that figure stands at 85 percent. What are the 
constraints inhibiting the needed investment in new refinery 
capacity? And what can we do about those constraints?
    I would also welcome the views of our witnesses concerning 
the recent reports that gasoline inventories are below the 
level of 1 year ago. Last year's inadequate inventories 
contributed to price spikes that occurred as the spring-summer 
driving season matured, and we were certainly hoping for a 
better report and projection for the year 2001. What are the 
problems that have caused these reduced inventories of 
gasoline? And what actions do our witnesses suggest that we as 
a committee take in order to address those problems?
    I want to thank our witnesses for being here today. With 
those brief thoughts, Mr. Chairman, I look forward to their 
testimony.
    Mr. Barton. I thank the gentleman. We would welcome the 
gentlewoman from California for an opening statement.
    Mrs. Bono. Thank you, Mr. Chairman. I have a written 
statement I will just submit for the record.
    Mr. Barton. Without objection, so ordered.
    I would also encourage you to move closer to the center. I 
don't think we are going to be overwhelmed with members today.
    We want to welcome our panel. Your statements are in the 
record in their entirety. We are going to start with Mr. Cook, 
who is the Director of the Petroleum Division of the Energy 
Information Administration, and we will go right down the line. 
I can't say we will save the best for last, but certainly for 
the last testifier we have one of the most noted experts in the 
State of Texas here from the Permian Basin, Mr. Pitts, who is 
going to give us kind of a cleanup testimony today.
    Mr. Cook, we welcome you to the subcommittee. We recognize 
you for 6 minutes to elaborate on your testimony.

 STATEMENTS OF JOHN COOK, DIRECTOR, PETROLEUM DIVISION, ENERGY 
 INFORMATION ADMINISTRATION; STEPHEN D. LAYTON, PRESIDENT AND 
 CEO, EQUINOX OIL COMPANY; GREGORY C. KING, VICE PRESIDENT AND 
   GENERAL COUNSEL, VALERO ENERGY CORPORATION; PETER D'ARCO, 
   PRESIDENT, SJ FUELS; THOMAS L. ROBINSON, CHIEF EXECUTIVE 
   OFFICER, ROBINSON OIL CORPORATION; RICHARD KASSEL, SENIOR 
  ATTORNEY, NATURAL RESOURCES DEFENSE COUNCIL; AND JOHN PAUL 
          PITTS, OIL EDITOR, MIDLAND REPORTER TELEGRAM

    Mr. Cook. Thank you, Mr. Chairman and members of the 
committee, for the opportunity to testify today on behalf of 
the Energy Information Administration. I will begin with an 
overview of recent oil market trends and the key underlying 
factors. I will then talk a little about our near-term 
forecasts.
    A combination of factors contributed to the sharp increases 
in both crude oil and refined product prices experienced over 
the last year or so. On the demand side, strong economic growth 
through the first half of last year stimulated increased oil 
consumption. Additionally, this winter started out very cold, 
unlike the previous four winters. November and December were 
very cold in certain parts of the country, requiring 
significantly more energy for home heating. On the other hand, 
while oil supplies outpaced demand growth last year, resulting 
in a slight gain in inventory levels, that excess supply proved 
to be too little to significantly boost global stocks from 
already low levels.
    Arguably, tightness in crude markets has been the key 
factor driving high oil prices recently. Although the cold 
winter, robust economy and some fuel switching from natural gas 
has had an impact on product demand, it has been recent actions 
taken by OPEC that are largely responsible for the sharp 
increases in oil prices from the $10 lows we saw in December 
1998. OPEC dramatically reduced crude production in 1998 and 
early 1999, so much so that even after four increases last 
year, inventories remained at extremely low levels.
    Furthermore, scarce crude supplies encourages high near-
term prices relative to those for future delivery. This 
situation, known as backwardation, discourages inventory growth 
and maximum refinery production. Thus, with low crude stocks 
and low product stocks, there is little flexibility to adjust 
to changing conditions setting the stage for volatility.
    I will turn next to our short-term forecasts, beginning 
with crude oil. At their March 17 meeting, OPEC members agreed 
to reduce production quotas by a million barrels a day 
effective next month. This is in addition to the 1.5 million 
barrel a day reduction taken in January. The combined 2.5 
million barrel a day quota reduction puts actual likely OPEC 
production significantly below last summer's levels. This is 
expected to continue the tight balance between global supply 
and demand, resulting in continued low inventories worldwide, 
especially in the developed countries of the OECD. Given these 
low stocks, we expect prices for OPEC's basket of crude oils to 
remain toward the high end of its $22 to $28 range.
    Since WTI, West Texas Intermediate, the key U.S. bench mark 
crude oil, tends to run about $3 or $4 higher than the OPEC 
basket, this puts our forecast at $29 to $30 later this year.
    Turning to distillate markets, in spite of strong demand 
this winter, heating oil stocks have not dropped the way they 
normally do the first quarter of the year. Warm weather in 
Europe, high margins for heating oil encouraging record levels 
of imports and refinery production have offset strong demand. 
Thus, at this point distillate stocks are now back in the 
normal range, which bodes somewhat better for next year.
    I say this because refiners may not have to produce or 
import as much distillate product this summer in order to 
rebuild inventories ahead of next winter. Nevertheless, I 
should caution that the improved outlook does not take into 
account the potential for continued unusually high demand from 
large end-users. Should we have hot weather this summer, this 
could result in higher diesel demand as more peaking units and 
backup generators are used. Regardless, with the heating season 
ending and more comfortable inventory levels, we should see 
retail prices begin to decline from current levels as seasonal 
demand diminishes.
    Unfortunately, even with this decline, on average retail 
prices have been relatively high, resulting in higher bills for 
consumers. For example, due to higher prices and colder 
weather, the average bill for oil heat in the Northeast was 
nearly $1,000 this year compared to under $600 two winters ago.
    Turning to gasoline, with crude prices expected to rebound 
from the recent lows and continued low stocks, EIA projects 
that prices at the pump will rise modestly as the year's 
driving season begins. While EIA expects little difference from 
last summer's average price of $1.50 a gallon, stocks are 
projected to be about the same or less. This could set the 
stage for regional supply problems and significant price 
volatility. With little stock cushion to absorb unexpected 
changes in supply and demand, regional problems can arise even 
from temporary losses in refining capacity or pipeline 
disruptions, particularly since there is little excess refining 
capacity available during the summer.
    This lack of excess capacity leaves the domestic system 
dependent on high imports and smooth operations from the 
infrastructure, both pipelines and refineries, if we are to 
avoid significant price fluctuations. However, imports cannot 
function as a relief valve to the same degree as we see in 
distillate markets, since few overseas refiners make the summer 
grades of gasoline used in many parts of this country.
    The prospect of regional supply problems is also increased 
by the differing regional gasoline product requirements arising 
from Federal and State air quality programs, which limit the 
distribution system's flexibility to respond.
    I will close with a positive note. It is expected that a 
year's experience behind them should make the refining industry 
more able to produce the summer grades of gasoline first 
introduced last year. This concludes my testimony. I would be 
happy to answer any questions.
    [The prepared statement of John Cook follows:]

 Prepared Statement of John Cook, Director, Petroleum Division, Energy 
            Information Administration, Department of Energy

    Thank you, Mr. Chairman. I would like to thank the Committee for 
the opportunity to testify on behalf of the Energy Information 
Administration (EIA).
    I will begin with an overview of recent crude oil and petroleum 
product trends and the underlying factors behind them. I will then 
address our near-term forecast.
    A combination of factors contributed to the sharp increases in both 
oil and refined petroleum product prices experienced over the past year 
or so. On the demand side, strong economic growth through the first 
half of 2000 led to increased oil consumption. Additionally, this 
winter started out very cold, unlike the previous 4 winters, which were 
much warmer than normal. November and December were very cold in 
certain parts of the country, requiring significantly more energy for 
home heating than in recent winters.
    On the other hand, supplies of crude oil and petroleum products in 
2000 just kept pace with demand growth, resulting in continued low 
inventory levels, and leaving high prices.
    Crude oil prices have been a key factor driving refined product 
prices in recent years. Although the cold winter, robust economy, and 
some fuel switching from natural gas to oil had an impact on petroleum 
product demand, it was action taken by OPEC and a rebounding Asian 
economy that sharply increased oil prices from the $10 per barrel low 
levels seen in December 1998. OPEC dramatically reduced its crude oil 
production in 1998 and early 1999, so that even after four separate 
production increase agreements in 2000, inventories remained at 
extremely low levels. Scarce crude supplies encourage high near-term 
prices relative to those several months out. This situation, referred 
to as backwardation, discourages robust growth in inventories, and 
discourages maximum refinery production. With low crude oil and product 
inventories, there is little flexibility to adjust to changing 
conditions, and the stage is set for volatility.
    I would now like to focus next on our short-term forecast, 
beginning with Crude Oil. At their March meeting, OPEC members agreed 
to reduce production quotas by 1 million barrels per day effective 
April 1. This production quota reduction is in addition to a 1.5-
million-barrel-per-day cut agreed upon in January. Combined, the 2.5-
million-barrel-per-day quota reduction is expected to continue the very 
tight balance between global crude oil supply and demand, resulting in 
continued low inventories worldwide, and especially in the developed 
countries of the OECD (Figure 1). Given low stocks, EIA expects prices 
for OPEC's basket of crude oils to remain toward the high end of its 
target range of $22 to $28 per barrel, at least for the balance of 
2001. However, West Texas Intermediate (WTI), the U.S. benchmark crude 
oil, tends to run about $3-$4 per barrel higher than the OPEC basket 
price, given its higher quality. Our forecast then, projects WTI to 
average about $29 to $30 per barrel (Figure 2) again this year and 
next. This forecast assumes that Iraqi oil exports bounce back to 
levels easily achieved beginning in the second quarter of 2001. But 
Iraq is probably the biggest wild card that could generate higher 
prices in the short term.
    Now, Distillate Fuel. In spite of strong demand this past winter, 
heating oil stock levels have not weakened over the past month or two 
as would normally occur. Warm weather in Europe, in combination with 
high heating oil margins, encouraged record levels of imports and 
refinery production of heating oil, countering strong demand. Thus, for 
the country as a whole, distillate stocks are now back within the 
normal range after being well below normal for most of the winter. This 
indicates refiners may not have to produce and import as much product 
to build inventories prior to next winter to maintain them in the 
normal range. However, this does not take into account the potential 
for continued unusually high demand from the industrial and electricity 
sectors. Hot weather this summer could result in higher diesel demand 
as more peaking units and backup generators are used.
    With the heating season ending, retail heating oil prices are 
expected to remain at or possibly decline some from current levels as 
seasonal demand diminishes. Nevertheless, retail prices remain 
relatively high on an historical basis, resulting in higher bills for 
consumers.
    This past winter, the average bill for heating with oil in the 
Northeast was nearly $1,000, compared to $760 last winter and under 
$600 the previous two winters. Although consumers did not face the 
price spike they saw last winter, preliminary data indicate consumption 
was about 11 percent higher than last year, because of colder weather 
and high natural gas prices encouraging some fuel switching. Higher 
consumption levels, lower initial stock levels, and higher crude oil 
prices relative to last winter have combined to push up the average 
cost of a gallon of heating oil by 18 percent this winter. Together, 
the increases in consumption and price raised winter oil heating bills 
by about 31 percent.
    Turning to Gasoline. With crude oil prices rebounding from their 
recent lows, and continued lower-than-normal gasoline stock levels, EIA 
projects that prices at the pump will rise modestly as this year's 
driving season begins. While EIA expects little difference from last 
summer's average price of $1.50 per gallon, gasoline inventories going 
into the driving season are projected to be about the same or even less 
than last year (Figure 3), which could set the stage for regional 
supply problems that once again could bring about significant price 
volatility, especially in the Midwest and on both coasts.
    With little stock cushion to absorb unexpected changes in supply or 
demand, regional problems can arise from temporary or permanent losses 
of refining capacity, or pipeline disruptions, particularly since there 
is little or no excess U.S. refining capacity available in the summer. 
This lack of excess capacity leaves the domestic gasoline system 
dependent on high imports and smooth operations from the 
infrastructure, both pipelines and refineries, if it is to avoid a 
substantial near-term price run-up. However, imports cannot function as 
a relief valve for tight gasoline markets as effectively as in the case 
of distillate, since few overseas refiners make the summer grade Phase 
II gasoline that is required in many parts of the United States. The 
prospect of regional supply problems is also increased by the differing 
regional gasoline product requirements, arising from Federal and State 
air quality programs, which limit the distribution system's flexibility 
to respond. On the positive side, though, it is expected that with a 
year's experience behind them, the refining industry's ability to make 
the Phase II reformulated gasoline first required last year should be 
improved.
    Finally, I would like to expand briefly on U.S. refining capacity. 
Capacity constraints are more of an issue with gasoline during the 
summer than with heating oil during the winter (Figure 4). Refineries 
usually run at their peak capacities when gasoline demand is highest 
during the summer. In 1997 we saw for the first time, a situation where 
a temporary shortage at the end of the summer could not be resolved 
with an increase in domestic production because operating refineries 
were running at very near full capacity. Last summer, while individual 
refiners ran at full capacity, the industry as a whole did not run as 
high as we have seen historically. This was generally due to a 550,000 
barrel per day increase in operating capacity since 1998. While this 
suggests some potential for higher domestic gasoline production this 
summer, any incremental production will necessarily be quite small, 
given that further capacity growth in 2001 and 2002 is not expected to 
be significant. For almost 20 years, we have had an excess of refining 
capacity in this country, but that is no longer the case.
    This concludes my testimony, and I would be pleased to answer any 
questions the Committee may have.

[GRAPHIC] [TIFF OMITTED] T1483.001

[GRAPHIC] [TIFF OMITTED] T1483.002

[GRAPHIC] [TIFF OMITTED] T1483.003


    Mr. Barton. Thank you, Mr. Cook. We do appreciate you being 
here.
    We now want to hear from Mr. Stephen Layton, who is the 
President and Chief Executive Office of Equinox Oil Company in 
The Woodlands, Texas. He is representing the Independent 
Producers Association of America, IPAA. Welcome. Your testimony 
is in the record. We would let you summarize it for 6 minutes.

                 STATEMENT OF STEPHEN D. LAYTON

    Mr. Layton. Thank you, Mr. Chairman, members of the 
committee. I am Steve Layton, Chairman of the Crude Oil 
Committee of the Independent Petroleum Association of America. 
Today I am testifying on behalf of the IPAA, the National 
Stripper Well Association, and 32 cooperating State and 
regional oil and gas associations. These organizations 
represent the thousands of independent petroleum and natural 
gas producers that drill 85 percent of the wells in the United 
States. This segment of the industry has been damaged most by 
the lack of an energy policy that recognizes the importance of 
our domestic natural resources. Independent producers are 
indeed the linchpins to the continued development of the 
country's petroleum and natural gas resources.
    Today's hearing addresses issues associated with crude oil 
and its domestic use. Mr. Chairman, my written testimony 
details the events that have placed us in the current situation 
and presents our recommendations. I will highlight several of 
the key points in my oral testimony.
    First, our national policies must be based on a realistic 
view of the marketplace. While the natural gas market is 
largely North American and is basically free, the supply of 
crude oil and its price are largely determined by geopolitical 
considerations, by actions of producer nations, actions taken 
both for economic and for political reasons. Domestic producers 
must live with the consequences of these decisions. When oil 
prices collapsed in 1998 and 1999, domestic producers lost $19 
billion of revenue. Crude oil prices are also affected by 
actions or, more accurately, the reactions of the commodity 
markets. These markets can particularly influence prices at the 
extremes with overreactions to what is in many cases imprecise 
supply and demand data.
    Second, national policies need to recognize the nature of 
domestic production. Approximately 20 percent of domestic crude 
oil comes from Alaska. But this is a resource that due to 
depletion is providing almost 1 million barrels a day less of 
oil production than in 1990. The Alaskan National Wildlife 
Refuge presents the opportunity to sustain and grow this 
Alaskan supply level for years to come. Another 20 percent of 
the domestic production comes from the offshore, but only the 
western and the central Gulf of Mexico are being aggressively 
developed. In the offshore, future development of the resource 
base will be defined first by what areas are accessible and 
second by the Federal royalty policies that apply. The majority 
of domestic production, about 60 percent, comes from the lower 
48 States onshore. Of this, roughly one-third comes from 
marginal wells, wells that average about 2.2 barrels of oil per 
day but still are competitive in the global marketplace, and 
collectively these marginal wells equal the amount of oil 
imported from Saudi Arabia. A great deal of effort will be 
required to maintain or hopefully to expand this onshore 
production. This is a challenge that must be met.
    Third, domestic policy needs to recognize that independent 
producers are rapidly becoming the backbone of the industry. 
They are responsible for the majority of the production, 
operations and drilling activity in the lower 48 States. 
Independents require different policies than large integrated 
companies. Their revenues come solely from the sale of their 
oil and their natural gas production. They are therefore much 
more susceptible to price swings and market instability.
    Fourth, domestic production needs a stable climate to 
maintain the production levels essential to meet future demand. 
National crude oil policy must be committed to stability. The 
1998 and 1999 price crisis has demonstrated that consequences 
adverse to domestic production affect both oil and natural gas. 
The two are inherently intertwined. Moreover, a significant 
factor in today's high oil and natural gas prices is the 
reduced capital reinvestment which resulted from that same 
price crisis, so the consequences apply not only to oil and gas 
producers but to consumers as well.
    Crafting Federal policy is difficult, but some elements 
should be obvious to everyone. First, there is a compelling 
need to understand the supply and demand of crude oil on a 
worldwide scale. The Department of Energy Oil Data Transparency 
Project should be supported. This effort would improve the 
quality of information available to understand what is 
happening in the worldwide petroleum market. This could reduce 
the volatility of the market and provide an early warning 
mechanism for potential supply and demand imbalances. This 
information should be used to develop policies that focus on 
improving domestic production rather than relying on 
criticizing OPEC and expecting foreign nations to bail the 
United States out during periods of tight supply. We must 
always strive to control our own destiny.
    Second, policies need to recognize how vulnerable the 
domestic industry is to instability. The National Petroleum 
Council estimates that we need to increase investment in 
domestic exploration and production by $10 billion annually 
over the next 15 years to meet future demand. For producers, 
most of this will have to come from retained revenues and this 
is largely an issue of tax reform. Congress should enact 
legislation to maintain and enhance investments, such as a 
marginal well tax credit and other tax provisions designed to 
encourage exploration and production, including incentives to 
plow back or reinvest revenues during periods of higher prices.
    We need to avoid policies that result in closures of small 
refineries that purchase and process domestic crude oil. This 
limits the markets available to independent producers for the 
sale of their production. We must acknowledge the importance of 
a strong and stable labor pool for the industry through 
assistance to educational institutions that are developing and 
rebuilding training programs. This industry lost 65,000 jobs 
during the most recent price crisis. About 40 percent have been 
recovered, but they are not the same highly skilled employees 
that left. Training new workers is critical to the long-term 
health of the industry. We also should recognize the importance 
of the Department of Energy's fossil energy programs designed 
to improve drilling, production and environmental technologies 
available to independent producers.
    Finally, policies must address the importance of access, 
particularly with regard to regulatory constraints. The impact 
on our energy supply should be considered when new regulations, 
resource management plans and interagency agreements are 
created. Domestic oil production can be an integral part of the 
Nation's future energy supply. The 1998 and 1999 price crisis 
proved that a healthy oil industry is essential to the 
development of the country's natural gas resources, but because 
the industry competes in a world marketplace that is defined 
largely by the political decisions of producer nations, it is 
critical that our national energy policy recognizes the 
vulnerability of the industry and of the Nation.
    With that, I will conclude my testimony, Mr. Chairman.
    [The prepared statement of Stephen D. Layton follows:]

    Prepared Statement of Steve Layton on Behalf of The Independent 
    Petroleum Association of America and The National Stripper Well 
                              Association

    Mr. Chairman, members of the committee, I am Steve Layton, 
Executive Vice President of Elysium Energy, LLC. of Houston, Texas, and 
Chairman of the Crude Oil Committee of the Independent Petroleum 
Association of America (IPAA). Today, I am testifying on behalf of the 
IPAA, the National Stripper Well Association (NSWA), and 32 cooperating 
state and regional oil and gas associations. These organizations 
represent the thousands of independent petroleum and natural gas 
producers that drill 85 percent of the wells drilled in the United 
States. This is the segment of the industry that is damaged the most by 
the lack of a domestic energy policy that recognizes the importance of 
our own national resources. NSWA represents the small business 
operators in the petroleum and natural gas industry, producers with 
``stripper'' or marginal wells. These producers are the linchpins to 
continued development of domestic petroleum and natural gas resources.
    Today's hearing addresses issues associated with crude oil and its 
domestic use. To fully address the role and policy issues associated 
with petroleum, it is important to understand how the nation's current 
petroleum situation occurred.

                         THE PETROLEUM CENTURY

    Petroleum--the energy source that dominated the 20th Century--will 
continue to be pivotal for the foreseeable part of the 21st Century. It 
is the most versatile energy source available today. It is the most 
political of energy sources--the substance that makes countries go to 
war, the substance that countries must have to wage war. And yet, it is 
also a commodity--like sugar or pork bellies. As a commodity, it has 
been one of the most volatile the world has seen.
    As the 20th Century began, petroleum was being found, produced, and 
wasted. In the US, states had to step into the production of petroleum 
to protect their resources. They created commissions to determine where 
wells could be developed and how much they could produce--forcing 
conservation and stabilizing the supply and price. After World War II 
petroleum's global nature changed the supply structure. As US demand 
increased and foreign supplies of petroleum became available, prices 
were largely defined by what refineries were willing to pay. This 
system worked fine for refineries but not for producers, particularly 
foreign producer nations that relied on petroleum sales to fund their 
national budgets. It led in part to the creation of the Organization of 
Petroleum Exporting Countries (OPEC).
    By 1973 OPEC controlled enough petroleum production that if it 
acted collectively, it could determine whether the world had enough 
supply or too little; it could determine the market price. Driven by 
political events of the time, a band of OPEC countries found the will 
to restrain exports and OPEC control of prices began. Like all cartels, 
OPEC's strength is in solidarity and trust. By 1986 this trust was lost 
and OPEC members began competing for market share, driving prices to 
their lowest levels since the early 1970's.
    Ultimately, the OPEC infighting ended and new production quotas 
were devised. But, at the same time, a profound change in petroleum 
pricing was beginning. In 1983, the New York Mercantile Exchange began 
to trade oil futures on its commodity market. Over time, commodity 
market trading would become the price maker. Petroleum prices would not 
be set by regulators controlling supply, by refiners stating what they 
would pay, or by OPEC oil ministers setting production quotas. It would 
be defined on the tumultuous and volatile trading floors of the NYMEX. 
We are seeing the consequences of this change.

          1998-99: LOW OIL PRICES AND THE CRISIS THEY CREATED

    In late 1997 several events combined to initiate a precipitous drop 
in world oil prices--events that are now defining current energy 
issues. First, Asian economies, which had been generating the greatest 
increases in petroleum demand, suffered substantial contractions--
lowering their growth in petroleum use. Second, OPEC--not perceiving 
this situation--agreed to increase production quotas. Third, the 
Northern Hemisphere benefited from a mild winter--reducing its 
petroleum demand. Fourth, weakness in the Russian economy resulted in 
higher exports of Russian petroleum. Fifth, Venezuela and Saudi Arabia 
engaged in a market share battle that led to higher volumes of 
petroleum exports.
    Taken together, these events triggered price drops on the commodity 
markets. OPEC then recognized the nature of the events and initiated 
production reductions, but a new factor was surreptitiously entering 
the arena. Iraq's petroleum production is defined by the UN sanctions 
program. With little notice, the UN allowed Iraq to increase the amount 
of production it could sell. At the beginning of 1998, Iraq exported 
roughly 500,000 barrels/day. By the beginning of 1999, Iraq was 
exporting 2.5 million barrels/day. This dramatic increase occurred 
while other OPEC countries were reducing production. Virtually every 
action to bring supply and demand back into balance was offset by Iraq 
increases. The commodity markets continued to drive prices down.
    The consequences to petroleum production were devastating. Capital 
investment to develop new production and to maintain existing 
production was slashed throughout the world. Even the OPEC countries 
curtailed development projects to divert diminishing petroleum revenues 
to maintain their national budgetary commitments to their citizens. The 
effects of lost capital are twofold. First, all oil wells deplete over 
time. While new technology has made the discovery of oil more 
effective, it has also allowed oil reserves to be depleted more 
quickly. Some recent studies suggest that the current oil depletion 
rate in the Gulf of Mexico is now averaging 26 percent per year. This 
is dramatically higher than historic rates of 3 or 4 or 5 percent per 
year. Without adequate investment to maintain existing production, 
critical resources were lost--many of which will never be recovered. 
Second, the loss of an investment year in the petroleum production 
business creates a critical time lag. The new production that was 
needed first to replace depleted resources and second to meet expanding 
demand was not there. IPAA warned in early 1999 that this loss of 
capital could produce serious production capacity limitations as early 
as 2000.

            1999-2000: OPEC REBOUNDS, BUT THE DAMAGE IS DONE

    In March 1999, OPEC countries agreed to substantial reductions in 
exports; Mexico, Norway and other producer countries joined in. Prices 
began to rebound, but so did demand. The US economy remained robust and 
Asian economies recovered. By year's end, prices had returned to 1997 
levels, but by then the consequences of a year's lost investment began 
to tell. In the US, where 65,000 jobs had been lost, only 7,000 had 
been recovered; where the oil rig count had fallen by 331, it had 
increased by only 67. Internationally, the results were similar. 
Strapped for revenues to meet national budgets, new production was not 
being developed and existing production was not maintained.
    Continued demand growth and reducing inventories of petroleum were 
leading NYMEX commodity prices still higher. In March 2000, OPEC acted 
again--this time to increase production. It was not an easy task. When 
OPEC agreed to cut production, Saudi Arabia agreed to the biggest 
reduction--in part to offset the increased share that Iraq had 
acquired. Yet, when increases were at issue, no other OPEC country 
wanted to give market share to the Saudis, but many countries had now 
lost their previous production capacity--the consequence of lost 
investment.
    While Americans demanded that OPEC ``open the spigots'' and let the 
oil flow, the reality was that the capacity was not there except for 
Saudi Arabia, Kuwait, and the United Arab Emirates. In its effort to 
raise production in September 2000, the fundamental issue had not 
changed. Even after a year of high petroleum prices, new capacity is 
lagging because of the low prices in 1998-99. While OPEC countries, 
particularly Saudi Arabia talked about increasing production again if 
petroleum prices did not fall, Kuwait announced that it could not meet 
its current quota. In reality the world's excess oil production 
capacity was whatever production the Saudis could muster. Even then, 
questions remained regarding worldwide tanker capacity, the quality of 
the remaining oil that can be produced, and the accuracy of estimates 
of remaining spare capacity such as those of the International Energy 
Agency.
    Since the end of 2000, OPEC has chosen to reduce its production 
targets. Publicly, these actions are based on its assessment of whether 
world oil demand will diminish either because of slower economic 
activity or because of historic seasonal demand fluctuations as spring 
approaches. However, it is also possible that the intense production 
efforts of 2000 may have stressed the facilities in these countries as 
it has in the United States and they require the flexibility to 
rehabilitate their operations. While the United States has criticized 
OPEC's actions, the situation reflects the tenuous nature of world oil 
supply following the 1998-99 oil price crisis.
    And then there's Iraq. Since early 1999, IPAA has warned that UN 
policies were placing Iraq in a position where it could ultimately 
control the world price of oil and demand the end to UN sanctions. On 
September 19, 2000, the Wall Street Journal article, ``Iraq Pumps 
Critical Oil, and Knows It'' crystalized this risk.
    Every six months, the UN revisits Iraqi sanctions and each time 
there is a tension over what Iraq will do. For all the talk of using 
the Strategic Petroleum Reserve to mitigate price concerns about 
heating oil or gasoline, perhaps the real issue will be whether the 
world can physically meet its petroleum needs if Saddam ``closes the 
spigot.'' Then, the SPR will be needed for its true purpose--meeting a 
supply crisis. Clearly, the decision on releasing SPR oil in late 2000 
was based on the politics of the Northeastern and Midwestern states. 
Its purpose was to manipulate the commodity markets that had little 
response to the OPEC increases. It would be far more beneficial to 
assure that adequate low income assistance is provided to purchase 
heating oil or to address better ways to shift supplies of gasoline 
than to risk placing our economic future in Saddam's hands in an 
attempt to change the commodity price of oil on the NYMEX.

                   A NATION DEPENDENT ON FOSSIL FUELS

    National energy policy must reflect an accurate understanding of 
the nature and politics of world oil supply and demand. The US is the 
second largest petroleum producer in the world; yet, domestic 
production has dropped by over 10 percent--to 5.8 million barrels/day--
since the 1998-99 low price crisis. To meet future natural gas demand 
and provide the nation with its true strategic petroleum reserve of 
oil--domestic production--national policies must recognize the 
importance of a healthy domestic exploration and production industry.
    During the past three decades the United States has become more 
dependent on energy and more dependent on foreign energy. While there 
have been numerous efforts to define a national energy policy, none 
have been successful. Today, the world is operating with its tightest 
supply of petroleum and the United States is facing tight natural gas 
supplies. Now is the time to clearly address national energy policy and 
build the program that is needed to meet future demand.
    Like it or not, the nation will be dependent on fossil fuels for 
the foreseeable future. In particular, petroleum and natural gas 
currently account for approximately 65 percent of the nation's energy 
supply--and will continue to be the significant energy source. Natural 
gas demand, for example, is expected to increase by more than 30 
percent over the next decade.

 INDEPENDENT PRODUCERS--THE LINCHPIN TO FUTURE DOMESTIC PETROLEUM AND 
                              NATURAL GAS

    It is important to recognize that the domestic oil and natural gas 
industry has changed significantly over the last fifteen years. The oil 
price crisis of the mid-1980's and policy choices made then triggered 
an irreversible shift in the nature of the domestic industry. 
Independent producers of both oil and natural gas have grown in their 
importance, and that trend will continue. Independent producers produce 
40 percent of the oil--60 percent in the lower 48 states onshore--and 
produce 65 percent of the natural gas. They are becoming more active in 
the offshore, including the deep water areas that have previously been 
the province of the large integrated companies. At the same time those 
large companies are now mainly focusing their efforts overseas, in 
addition to Alaska and the offshore, because they are aiming their 
investments to seek new and very large fields. Domestic energy policy 
must recognize this reality.

                   RECOGNIZING THE ROLE OF THE MARKET

    Future energy policy should rely on market forces to the greatest 
degree possible. For natural gas the market is strong and active. 
Natural gas supply is essentially North American and overwhelmingly 
from two countries that rely on private ownership and the free market--
the United States and Canada. Currently, exploration and development of 
natural gas in both countries is being aggressively pursued when the 
opportunities are there, and can be accessed. In the United States 
drilling rig counts for natural gas are running at rates that are as 
high as they have ever been since natural gas drilling was 
distinguished from petroleum. The principal constraints are finding the 
capital to invest, getting access to the resource base, finding 
competent personnel, and obtaining rigs. If the market is allowed to 
work, it will continue to draw effort to produce this critical resource 
for domestic consumption.
    Oil, however, is a different situation. In making decisions 
regarding developing domestic petroleum resources, the nature of the 
world petroleum market must be recognized. Although the United States 
remains the second or third largest producer of petroleum, it is 
operating from a mature resource base that makes the cost of production 
higher than in competitor nations. More importantly, most other 
significant petroleum producing countries rely on their petroleum sales 
for their national incomes. For them, petroleum production is not 
driven by market decisions. Instead, their policies and their 
production is determined by government decisions. Most are members of 
OPEC, the Organization of Petroleum Exporting Countries. Several are 
countries hostile to the United States like Iraq, Libya, and Iran. Even 
those that are generally supportive of the United States, like Saudi 
Arabia and Kuwait, are susceptible to unrest from both internal and 
external forces.
    Thus, the market price for petroleum will be largely framed by 
production decisions driven not by the market, but by the politics of 
these countries--both by internal issues and global objectives. United 
States domestic policy decisions must reflect this reality--looking to 
this factor in taking actions that can affect domestic production and 
producers. But, more importantly, it must recognize that a healthy 
domestic oil production industry is also essential for a healthy 
domestic natural gas industry, because they are inherently intertwined.
    For example, the failure of the United States to recognize the need 
to respond to the low oil prices of 1998-99 resulted in adverse 
consequences for both oil and natural gas production. The nation has 
lost about 10 percent of its domestic oil production--most of which has 
been made up by imports from Iraq. And, in addition, the tight natural 
gas supplies this year are partially attributable to the drop in 
natural gas drilling in 1998-99 when oil prices were low and capital 
budgets for exploration and production of both oil and natural gas were 
slashed by producers because drilling under those conditions made no 
economic sense.
    It is equally important to recognize that while all of these 
factors influence the ultimate prices of oil and natural gas, it is the 
commodity markets that have the final say. The role of these markets 
has emerged from a minor factor in the mid-1980s, when oil and natural 
gas trading began, to the dominant force today. While many people want 
to point toward OPEC or big oil, the ultimate price maker is the 
trading floor of the commodity markets. This has added a new volatility 
to oil and natural gas prices. Its impact is still poorly understood 
but must be considered.
    However, it is clear that the market reacts to whatever information 
it can obtain. During the low oil prices of 1998-99 and even during the 
high prices of 2000, the impreciseness of this information likely 
created incorrect perceptions of the fundamental situation in the 
market. The widely held belief that there were large volumes of crude 
oil available that helped suppress prices in the 1998-99 time period 
proved incorrect. But, it also worsened the state of the industry such 
that productive capacity was lost. One action that has been developed 
to respond to this problem is the creation of an Oil Data Transparency 
initiative by the Department of Energy to create better information 
worldwide on supply and demand.

                 PROVIDING ACCESS TO ESSENTIAL CAPITAL

    The nation must avoid making bad policy choices like it has in the 
past. For example, because oil and natural gas exploration and 
production are capital intensive and high-risk operations that must 
compete for capital against more lucrative investment choices, much of 
its capital comes from its cash flow. The federal tax code is a key 
factor in defining how much capital will be retained. In the late 
1970's and early 1980's when oil prices were high and drilling activity 
was soaring, the industry was hit by the Windfall Profits Tax that 
pulled a net $44 billion from the industry at a time when it could have 
been invested in new exploration and production. In addition, in 1986, 
when the industry was recovering from the low oil prices of that year, 
the Alternative Minimum Tax (AMT) was created. The AMT sapped capital 
from the industry when it was desperately needed. From 1986 to 1997 
(before the latest price crisis) domestic oil production dropped by 2 
million barrels per day--roughly 25 percent of 1986 capacity. Thus, 
those tax policies stifled the industry at a time when U.S. energy 
demand was increasing significantly.
    Instead of such counterproductive tax actions, the Administration 
and Congress need to enact provisions designed to (1) encourage new 
production, (2) maintain existing production, and (3) put a ``safety 
net'' under the most vulnerable domestic production--marginal wells. 
Congress has considered a mix of tax reforms that have widespread 
support. They include provisions to allow expensing of geological and 
geophysical costs and of delay rental payments that encourage new 
production, extending the net operating loss timeframe and revising 
percentage depletion that assist both new and existing production, and 
a countercyclical marginal well tax credit when prices fall to low 
levels. All of these are programs that independent producers need 
because their revenues are limited to their production.
    Beyond these immediately needed policy changes, new tax policies 
must be developed to meet future demand. In 1999 the National Petroleum 
Council released its Natural Gas study projecting future demand growth 
for natural gas and identifying the challenges facing the development 
of adequate supply. For example, the study concludes that the wells 
drilled in the United States must effectively double in the next 
fifteen years to meet the demand increase. Capital expenditures for 
domestic exploration and production must increase by approximately $10 
billion/year--roughly a third more than today. While these estimates 
are cast in the context of natural gas, the task to maintain or even 
enhance domestic crude oil production could be similarly stated. 
Generating this additional capital will be a compelling task for the 
industry. As the National Petroleum Council study states:
          While much of the required capital will come from reinvested 
        cash flow, capital from outside the industry is essential to 
        continued growth. To achieve this level of capital investment, 
        industry must be able to compete with other investment 
        opportunities. This poses a challenge to all sectors of the 
        industry, many of which have historically delivered returns 
        lower than the average reported for Standard and Poors 500 
        companies.
For the industry to meet future capital demands--and meet the 
challenges of supplying the nation's energy--it will need to increase 
both its reinvestment of cash flow and the use of outside capital. The 
role of the tax code will be significant in determining whether 
additional capital will be available to invest in new exploration and 
production in order to meet the $10 billion annual target.
    There are a number of different approaches that should be 
considered. The AMT remains a constriction. While the AMT was modified 
to exclude percentage depletion from the calculation of the alternative 
minimum taxable income (AMTI), independent producers remain subject to 
the AMT with regard to intangible drilling costs (IDCs). Specifically, 
if ``excess intangible drilling costs'' exceed 65 percent of net income 
from all oil and gas production, these costs are ``potential preference 
items''. AMTI cannot be reduced by more than 40 percent of the AMTI 
that would otherwise be determined if the producer was subject to the 
IDC preference. This 40 percent rule forces many independent 
producers--particularly smaller ones--to curtail drilling once the 
expenditures become subject to the AMT. Now is a time when drilling 
needs to increase significantly. It makes no sense for the federal tax 
code to be a barrier to this effort.
    Some of the future focus also needs to be directed to getting more 
out of existing resources. For example, while the Enhanced Oil Recovery 
tax credit exists, it is based on technologies that are twenty or more 
years old. This provision should be restructured and updated.
    Equally significant, policies need to address encouraging more new 
development. Proposals to encourage domestic exploration and production 
should be created. A number of concepts are already in play and need to 
be more fully evaluated.
    For example, the Section 29 tax credit for unconventional fuels 
proved to be a strong inducement to developing those resources. It 
applies to wells drilled prior to 1993 and uphole completions 
thereafter. Just last July, the Federal Energy Regulatory Commission 
acted to reinstate its certification process to address many wells that 
would otherwise qualify for the Section 29 tax credit. But, the 
existing credit expires in 2003 and provides no incentive for current 
development since the qualifying wells had to have been drilled before 
1993. S. 389 extends the existing credit and creates a second drilling 
window that also applies to heavy oil.
    Fundamentally, the question facing the nation is how to marshal the 
capital to develop its domestic resources. To date the $10 billion 
annual spending increase target has not been met. At issue is how to 
obtain capital for domestic development. One source is the capital 
markets and some of this amount will come from there, but it has 
significant drawbacks. First, the capital markets have yet to show a 
strong interest in the oil and gas exploration and production industry 
despite the recent high prices of both commodities. Second, where the 
capital markets are likely to focus their attention will be on large 
companies. So, while some large independents may derive some of their 
capital from these markets, it will only be a portion and smaller 
independents will need to look elsewhere. Third, there is no guarantee 
that such capital will go into domestic production because even with 
regard to investment in exploration and production activities, capital 
must compete against other projects including international ones.
    The next source of capital will be from the revenues generated by 
higher production and higher prices. First, the magnitude of this 
capital may be overstated because just as prices for oil and natural 
gas have increased, prices for drilling rigs and other costs are also 
increasing which will squeeze the capital that is available. Second, 
this capital will also be directed to the most promising projects, so 
there is no guarantee that it will be invested domestically. Third, 
this revenue will be significantly reduced by taxes.
    The challenge, then, is to create a mechanism to direct the capital 
to domestic production. One such approach would be to create a 
``plowback'' incentive that would apply to expenditures for domestic 
oil and natural gas exploration and production. This type of proposal 
would encourage capital formation and development of domestic wells 
provided it was immediately beneficial. Therefore, it would have to be 
creditable against both regular and AMT taxes and any excess available 
for carryback and carryforward. It would address the compelling need to 
improve natural gas supply as well as reduce the growing dependency on 
foreign oil. It must, in fact, apply to both oil and natural gas 
because they are inherently intertwined--often found together. 
Moreover, because of their inherent link, a healthy domestic natural 
gas exploration and production industry cannot exist without a healthy 
comparable oil industry.

             PROVIDING ACCESS TO THE NATURAL RESOURCE BASE

    National energy policy must also recognize the importance accessing 
the natural resource base. While this issue has been addressed 
extensively for natural gas in other hearings, its importance should 
not be underestimated. Crude oil production is also significant on 
government controlled lands and has to confront the same permitting 
problems and access constraints. The Arctic National Wildlife Refuge 
(ANWR) has been the focal of access discussions and its reserves are 
largely oil. The Department of Energy recently released a comprehensive 
report, Environmental Benefits of Advanced Oil and Gas Exploration and 
Production Technology, demonstrating that the technology for 
development of resources in sensitive environments is available. And, 
it is being employed, when exploration is allowed.
    Without policy changes, the nation may not be able to meet its 
needs. Currently, much of the offshore is off limits to development 
because of moratoria that are based on technologies that have been 
replaced decades ago. The rationale for these moratoria is outdated and 
inaccurate; there must be a reassessment of these decisions in the 
context of today's technology and tomorrow's needs.
    Even in those offshore areas of the Gulf of Mexico that are open 
for development, the federal policies that determine royalties will 
also significantly define the extent to which development will occur. 
For example, over the past half-decade, Gulf of Mexico development has 
soared, partly because of the Deep Water Royalty Relief Act that 
specified how royalties would be determined for a set time period. This 
allowed producers to plan their investments better. However, the Deep 
Water Royalty Relief Act was largely used by large integrated companies 
and its specific provisions expired in 2000. Now, as independent 
producers are also seeking deep water opportunities, the planning 
window is narrow and the policies are less certain. On the Outer 
Continental Shelf, marginal properties remain that could be developed 
if the royalty policies were right. All of these issues need to be 
addressed with the full understanding that independent producers will 
be increasingly willing to develop these areas as large integrated 
companies look toward the Ultra-deep Water and overseas for the large 
fields that they need to find.
    Onshore, an inventory of resources is underway. It is an important 
first step. But, it is equally important to understand that access to 
these resources is limited by more than just moratoria. The constraints 
differ. Monument and wilderness designations prohibit access to some 
areas. Regulations like the Forest Service roadless policy and 
prohibitions in the Lewis and Clark National Forest are equally 
absolute.
    At the same time the permitting process to explore and develop 
resources often works to effectively prohibit access. These constraints 
range from federal agencies delaying permits while revising 
environmental impact statements to habitat management plans overlaying 
one another thereby prohibiting activity to unreasonable permit 
requirements that prevent production. There is no single solution to 
these constraints. What is required is a commitment to assure that 
government actions are developed with a full recognition of the 
consequences to natural gas and other energy supplies. IPAA believes 
that all federal decisions--new regulations, regulatory guidance, 
Environmental Impact Statements, federal land management plans--should 
identify, at the outset, the implications of the action on energy 
supply and these implications should be clear to the decision maker. 
Such an approach does not alter the mandates of the underlying law that 
is compelling the federal action, but it would likely result in 
developing options that would minimize the adverse energy consequences.

         THE OTHER CHALLENGES TO DOMESTIC CRUDE OIL PRODUCTION

    Any realistic future energy policy will take time. There is no 
simple solution. The popular call for OPEC to ``open the spigots'' 
failed to recognize how serious crude oil production has been 
constrained by the low oil prices of 1998-99. While the producing 
industry lost 65,000 jobs in 1998-99, only about 40 percent of those 
losses have been recovered and they are not the same skilled workers. 
If measured by experience level, the employment recovery is far below 
the numbers. Less obvious, but equally significant, during the low 
price crisis equipment was cannibalized to keep operating and support 
industries were devastated. Even now, while natural gas drilling rig 
use has reached record levels, oil rig counts are only about 60 percent 
of their 1997 level. It will take time to develop the infrastructure 
again to build new drilling rigs and provide the skilled services that 
are necessary to rejuvenate the industry. For example, a number of 
Texas and New Mexico community/junior colleges are recreating programs 
to train rig workers--programs that were shut down during the price 
crisis. This is an area where federal assistance could improve the 
success of the programs and speed their efforts.
    There are longer term issues that must be fully understood as they 
affect domestic crude oil production. Some of these have been 
suppressed as the industry has had to respond first to the low oil 
prices and then to rebuild itself as prices increased and supply 
tightened. For example, domestic refining capacity has shifted during 
the past decade or so. Many of the smaller refineries scattered 
throughout the middle part of the country have shut down due to 
increased capital requirements--in part compelled by the requirements 
of the Clean Air Act. These refineries were purchasers of domestic 
crude and as they close down, this affects where domestic crude can be 
sent and its economics. Similarly, pipelines that once took crude oil 
to refineries are being reconfigured to take product from these 
refineries. This both eliminates a domestic crude oil market and may 
affect the regional market of another refinery that is purchasing local 
crude. The consequence may be to create a preference for foreign crude 
over domestic. Similarly, crude oil pipelines connecting to Canada can 
adversely affect domestic production in northern states and those 
supplying midwest refineries.
    The interrelationships between energy sources can also have adverse 
effects. For example, California heavy crude oil production is 
confronted with its own problems resulting from high natural gas 
prices. Because this production requires special treatment to heat it, 
natural gas is used to generate steam for injection. However, with 
natural gas prices at current high levels operating costs are so high 
that production is being shut in and may be lost. High electricity 
costs can have the same effect. Electricity is one of key operating 
costs for crude oil production. Particularly for marginal wells, high 
electricity costs can take away the profitability of a well and force 
it to shut down.

                               CONCLUSION

    The challenges facing domestic crude oil are diverse and 
complicated. Because crude oil is a world market, supply is not 
determined by pure market forces--it can be defined by political 
decisions. Moreover, the commodity markets then add greater 
uncertainty. These dynamics taken together with the high marginal costs 
associated with domestic crude oil production create an uncertain 
investment atmosphere.
    Overall, attracting capital to fund domestic production under these 
circumstances will be a continuing challenge. This industry will be 
competing against other industries offering higher returns for lower 
risks or even against lower cost foreign energy investment options. The 
slower the flow of capital, the longer it will take to rebuild and 
expand the domestic industry. Providing access to the resource base 
will be critical and requires making some new policy choices with 
regard to federal land use. Rebuilding the domestic infrastructure is 
essential but difficult in the near term. Longer term a stable policy 
structure is critical.
    Domestic crude oil production remains an important national 
security issue. Maintaining or enhancing domestic production is an 
important national objective. The failure to have clear policies has 
resulted in two significant adverse events--the 1986 low price crisis 
that ultimately led to the loss of 2 million barrels per day of 
domestic production and the 1998-99 low price crisis where the 
consequences are still being determined.
    It is time for this country to take its energy supply issues 
seriously and develop a sound future policy. Certainly, there is room 
in such a policy for sound energy conservation measures and protection 
of the environment. But, energy production--particularly petroleum and 
natural gas--is an essential component that must be included and 
addressed at once. Independent producers will be a key factor, and the 
industry stands ready to accomplish this component, if policy reflects 
that reality.

    Mr. Barton. Thank you, Mr. Layton, we appreciate your 
testimony.
    We now want to hear from Mr. Gregory King, who is Vice 
President and Chief Operating Officer of Valero Energy 
Corporation in San Antonio, Texas. We welcome you, sir. Your 
statement is in the record in its entirety. We would ask you to 
summarize it in 6 minutes.

                  STATEMENT OF GREGORY C. KING

    Mr. King. Chairman Barton, Congressman Boucher and members 
of the subcommittee, thank you for this opportunity to testify 
regarding the national energy policy and its relationship to 
the U.S. refining industry.
    My name is Greg King, and I am Executive Vice President and 
Chief Operating Officer of Valero Energy Corporation. Valero is 
now the largest independent refiner in the United States, with 
refineries on the East Coast, West Coast and the Gulf Coast. We 
now have a combined throughput capacity of 1 million barrels a 
day.
    I am also here on behalf of the Natural Petrochemical and 
Refiners Association, which represents 98 percent of the 
refining capacity in the United States. President Bush recently 
remarked that tightness in gasoline supplies and volatility in 
price are directly related to the fact that we don't have 
enough refining capacity. He further observed that we haven't 
built a refinery in America in 25 years. We couldn't agree 
more. Over the past two decades, domestic refining capacity has 
fallen from 17.9 to 16.5 million barrels a day, or a 9 percent 
decline, while gasoline demand has increased 20 percent since 
1984. We have gone from 315 refineries to 152 refineries in the 
last 20 years. The U.S. is more dependent on imported products 
than any time in our history.
    Now, it is not easy to isolate a single cause for the 
shortage we face in domestic refining capacity. We do know that 
the regulatory burdens faced by the industry certainly don't 
help. Refiners face near simultaneous implementation of 
significant reductions in sulfur for both gasoline and diesel 
fuel and perhaps limitations on the use of clean fuel additives 
such as MTBE. At the same time, the U.S. EPA has made it 
increasingly difficult for refiners to expand capacity based 
upon novel and restrictive interpretations of the New Source 
Review Program. The first challenge for policymakers is to 
avoid making the situation worse. Precipitous action to ban 
MTBE would be problematic from an environmental and a supply 
perspective.
    This January, DOE's Office of Policy noted that eliminating 
MTBE would effectively reduce the domestic supply of gasoline 
by 550,000 barrels a day, or about 6.8 percent of our current 
capacity. Now, in our view MTBE concerns should be directly 
addressed through programs to detect and fix leaking 
underground storage tanks and through effective remediation 
programs. As I know the chairman would not follow California's 
path on electricity deregulation, I urge the committee and 
Congress not to follow California's lead to ban MTBE.
    Some have further suggested that mandating a certain amount 
of ethanol could boost supply. Actions like this tend only to 
compound problems, not alleviate them. Based on our review at 
our refinery out in Benicia, California, an MTBE ban coupled 
with an ethanol blending would reduce the production volume of 
gasoline at our facility alone by 8 percent. We think that is 
indicative of what would happen in the rest of the State. Even 
some proponents of the MTBE ban in California now admit that 
California cannot turn to ethanol without substantial price 
increases and supply disruptions.
    Another challenge that we face as an industry is the 
continuing difficulties with the so-called Unocal patent. As 
many of you know, Unocal participated in regulatory 
deregulation proceedings in California and then successfully 
patented the results of this joint exercise. Unless some 
legislative relief is found from this situation, supplies of 
clean gasoline will be made more costly. Suffice it to say, the 
imbalance between refining capacity, supply and demand did not 
emerge overnight and it won't be solved overnight, either.
    However, concrete steps to address refining issues should 
include the following: First, address the cumulative effects of 
regulations. When the EPA, DOE and the Office of Management and 
Budget conduct their reviews of each regulation, the cumulative 
impact of regulations on supply, distribution and costs should 
be fully considered before taking action.
    Second, do not change the rules of the game in the middle 
of the game. Retroactive reinterpretation of regulatory 
programs wastes scarce capital resources. Congress should 
consider enacting measures that compensate impacted parties 
when the reversal of Federal regulations strand business with 
useless equipment that was built specifically to comply with 
Federal law.
    Third, reform the permitting process in order to facilitate 
capacity expansion and maintenance. By questioning State 
permitting decisions and policy over the past 20 years, EPA 
will only further slow down the permitting process and divert 
State resources toward reviewing past decisions. This is 
inappropriate at a time when it is critical that State 
permitting authorities and refiners work together.
    Finally, consider tax incentives to encourage environmental 
improvements. Valero alone spends over $100 million a year in 
environmental compliance expenditures. But the real cost of 
environmental standards is lost international competitiveness 
for U.S. refiners. Although by no means a complete solution, 
the Congress should consider some combination of tax credits 
for environmental compliance or at least enhanced depreciation 
for such investments.
    President Bush recently remarked that the solution for our 
energy shortage requires long-term thinking and a plan that 
will take time to bring to fruition. We agree. Any successful 
plan must take into account the current state of the U.S. 
refining industry.
    Thank you very much for this opportunity to testify.
    [The prepared statement of Gregory C. King follows:]

  Prepared Statement of Gregory C. King, Executive Vice President and 
           Chief Operating Officer, Valero Energy Corporation

    Chairman Barton, Congressman Boucher, and Members of the 
Subcommittee, thank you for this opportunity to testify regarding the 
implications of a National Energy Policy on Crude Oil and Refined 
Petroleum Products. My name is Greg King, and I am Executive Vice 
President and Chief Operating Officer of Valero Energy Corporation.
    Valero is a Fortune 500 company based in San Antonio, with over 
3,000 employees. The company currently owns and operates six refineries 
in Texas, California, Louisiana and New Jersey with a combined 
throughput capacity of approximately one million barrels per day, 
making it the nation's largest independent refining company. Valero is 
recognized throughout the industry as a leader in the production of 
premium, environmentally clean products such as reformulated gasoline, 
CARB Phase II gasoline, low-sulfur diesel and oxygenates. The company 
markets its products in 34 states through an extensive wholesale bulk 
and rack marketing network, and in California through approximately 85 
Valero branded retail and 270 other retail distributor locations.
    Valero is a member of the National Petrochemical and Refiners 
Association, and is pleased to appear on NPRA's behalf today. NPRA's 
membership includes virtually all U.S. refiners, as well as 
petrochemical manufacturers using processes similar to refineries. Its 
members own and/or operate almost 98 percent of U.S. refining capacity. 
NPRA includes not only the larger companies, but also many small and 
independent companies.
    Valero is proud of its record of environmental achievement, which 
goes beyond its commitment to produce cleaner-burning fuels and 
additives. Investing millions of dollars in pollution prevention and 
waste minimization, Valero was the first petroleum refiner ever to 
receive the prestigious Texas Governor's Award for Environmental 
Excellence and was recognized during the Clean Air Celebration for its 
``outstanding environmental stewardship and leadership.''

                 CURRENT STATE OF THE REFINING INDUSTRY

    The United States has long recognized the importance of domestic 
refining to its economy. Many people in various states across the 
country have found high-paying jobs in the refining sector, and the 
energy sector plays a vital role in the gross domestic product of the 
U.S.
    Unfortunately, the refining capacity of the United States has been 
in a continual decline for a number of years. In the past twenty years, 
the number of domestic refineries dropped from a high of 315 to only 
152, a 48% decrease. During the same period, domestic refining capacity 
fell from 17.9 to 16.5 million barrels per day, a 9% decline, while 
gasoline demand increased 20% since 1984.
    While refiners have historically been able to meet consumer demand 
by simply expanding capacity, U.S. utilization is currently at virtual 
capacity so there's not much room to increase production. Utilization 
rates hit a high of 97% last summer and were as high as 94% in 
December. Expansion of existing capacity has been constrained by 
permitting challenges, raising questions about our industry's ability 
to meet future demand domestically.
    To compound the problem, the one thing that all of the new 
environmental regulations have in common is that they reduce supply. 
And, to make matters worse, refiners must direct much of their capital 
investments to meet environmental regulations so there is less capital 
available for much-needed expansion projects. In fact, increasingly 
stringent environmental regulations, often adopted in piecemeal 
fashion, have created operational constraints and have sharply 
curtailed the flexibility of refiners to expand. Over the course of the 
last decade, the National Petroleum Council estimated that total 
investments to comply with the Clean Air Act Amendments in the refining 
sector exceeded the total book value of the refineries brought into 
compliance by $6 billion dollars. Things are even worse today. Refiners 
face near simultaneous implementation of reductions in gasoline sulfur 
and air toxic constituents, changes to diesel fuel to reduce sulfur to 
ultra-low levels, and, perhaps, limitations on the use of clean-fuel 
additives like MTBE. At the same time, the U.S. Environmental 
Protection Agency has made it increasingly difficult for refiners to 
expand capacity based upon novel and restrictive interpretations of the 
New Source Review (NSR) program.
    Of course, the Clean Air Act is just one piece of the puzzle. A 
regulatory blizzard swirls around the U.S. refining industry. We have 
included a more comprehensive list of the real and potential federal 
regulatory burdens that can interfere with an adequate supply of 
refined product. See Appendix I. In addition, individual state actions 
(e.g., NAAQS implementation, California, New York and Connecticut bans 
on MTBE) will further jeopardize fuel supplies.
    Unfortunately, the conditions that have caused our current 
stretched capacity in refining are not likely to resolve themselves in 
the near future without careful planning and a balanced energy policy 
that takes refining issues into account. Indeed, as we enter the summer 
driving season, refiners will struggle to make up inventory deficits 
created by the need to produce more home heating oil this past winter. 
Also, unusually high natural gas prices last winter directed natural 
gas into direct usage and away from feedstock usage. As a result, less 
MTBE and alkylate were made, thus further depriving the summer driving 
season of some of its usual cushion in gasoline inventories. The tight 
market for MTBE is already fueling predictions of another summer of 
high gasoline prices. According to the Energy Information 
Administration, MTBE inventories in February were down 22.4% from a 
year ago and MTBE production declined by 9.2% from the year-ago level. 
This decline has contributed to lower production of RFG at a time when 
demand for RFG continues to grow. This problem could be exacerbated by 
the unreliability of electricity supply in California, which could 
result in power outages that force refiners and pipelines to shut down.
    Therefore, American consumers may see an increase in prices at the 
pump this summer. As USA Today reported earlier this month, gasoline 
prices might exceed $2.50 per gallon in some areas. Tightness in 
capacity is much of the problem: even as EPA eased the clean air 
restrictions on ethanol use for Milwaukee and Chicago, one Midwest 
refinery announced that it would be unable to meet regulatory 
constraints and therefore will close down. Loss of one refinery may 
reduce Midwest supply by as much as 9%--eliminating the potential gains 
that might have resulted from EPA's actions. See USA Today, March 9, 
2001, at 3B.
    After his first briefing with the National Energy Policy Task 
Force, President Bush recognized the dire situation with refining 
capacity and its direct relationship to high prices at the pump. The 
President stated on March 19 that: ``it's important for American 
consumers to understand that if we have a price spike in refined 
product, it's not going to be because of the price of crude oil being 
$25 or $26 a barrel; it's going to be because we don't have enough 
refining capacity.'' He concluded: ``We think that the major impact on 
gasoline prices, if they go up, is a result of not generating . . . 
enough refined product to meet the demand of U.S. drivers. And we 
haven't built a refinery in 25 years in America.'' We concur with the 
President's assessment and believe that a key component of any National 
Energy Policy must create an environment that enables domestic refiners 
to invest in and increase our nation's refining capacity. Such an 
environment can only be created if an appropriate amount of 
consideration is given to the supply/demand impact of future 
regulations.
MTBE
    One challenge for policy makers is to avoid making the situation 
worse. Precipitous action to eliminate the fuel additive MTBE that has 
been detected in ground and surface water would be problematic from an 
environmental, energy price and supply perspective.
    In a January 2001 presentation, authors from DOE's Office of Policy 
and the Oak Ridge National Laboratory reminded us that an MTBE ban is 
equivalent to a loss of 300,000 barrels per day of premium blendstock. 
Since MTBE is an exceptionally clean burning, high-octane gasoline 
additive, it allows refiners to extend the gasoline pool by bringing in 
lower octane components. Eliminating MTBE would effectively reduce the 
domestic gasoline supply by 550,000 barrels a day or roughly 6.8% of 
the total daily consumption of gasoline. The severe energy and 
environmental consequences of proceeding in this fashion will further 
increase our dependency on imports.
    Banning MTBE does not address the potential problem of MTBE in 
groundwater. The fact remains that MTBE is most often detected in 
groundwater as a result of gasoline leaking from underground storage 
tanks. Assessments of MTBE were made prior to implementation of the 
current Underground Storage Tank regulations. As more data is 
developed--including data from California--the percentage rate of MTBE 
detections seems to be declining. With regard to surface water 
concerns, a recent report confirmed that a water-quality sampling 
project completed in 46 Texas Lakes on behalf of the U.S. Geological 
Survey concluded that, ``health concerns about MTBE in water is not a 
factor.''
    MTBE concerns can be directly addressed through programs to detect 
and fix leaking underground storage tanks and through effective 
remediation programs. As I know the Chairman would not follow 
California's path on electricity deregulation, I urge the Committee and 
Congress not to follow California's lead with a ban on MTBE.
Ethanol Mandate
    Some in Congress and elsewhere have further suggested that 
mandating a certain amount of ethanol usage could boost supply. Actions 
like this tend only to compound problems, not alleviate them. While the 
current fuel market includes a healthy share for ethanol, further 
mandates are likely to be counterproductive. An ethanol mandate will 
make it harder for refiners to provide cleaner fuels to consumers at 
acceptable prices. Due to ethanol's high blending vapor pressure, 
pentanes are backed out of the gasoline pool, further decreasing 
supply. An ethanol mandate will hinder refiners' ability to optimize 
the quality and volume of cleaner-burning gasoline. This will increase 
refining costs, and negatively impact both gasoline supplies and price. 
According to the California Energy Commission, the costs of 
substituting ethanol-blended gasoline in that state could increase 
refining costs by up to 7 cents per gallon. Based on our review at the 
Valero Benicia Refinery, an MTBE ban, coupled with ethanol blending 
reduces production volume by 8%.
UNOCAL
    Another challenge that could complicate the picture is the 
continuing difficulties with the so-called Unocal patent. As many of 
you know, Unocal participated in regulatory negotiation proceedings in 
California and then successfully patented the results of this joint 
exercise. Recently, the U.S. Supreme Court decided not to hear an 
appeal of the patent, thus leaving refiners the choice of paying a 
large licensing fee to Unocal (on the order of 5.75 cents per gallon), 
or ``blending around'' the patent (also a very costly alternative). In 
addition, refiners face four more patents that further severely limit 
our flexibility. Unless some relief is found from this situation, 
supplies of clean, reformulated gasoline will be made more costly in 
the near term. And, we should recall that last summer the Congressional 
Research Service listed the on-going controversy regarding the Unocal 
patent as a contributing factor in last summer's high fuel prices.
                how do we fix the problem with refining?
    Suffice it to say, the imbalance between refining capacity, supply 
and demand did not emerge overnight, and it won't be solved overnight. 
The domestic refining industry finds itself in the same position as the 
domestic oil and gas producers of twenty years ago. Without proper 
attention to the role of the domestic refiner in shaping energy policy, 
you will see the nation's dependence on imported petroleum products 
increase. The current Administration and the Congress are off on the 
right foot: they are cooperatively working toward a national energy 
policy that will include some consideration of refining issues and 
appropriate legislative and executive action.
    We strongly recommend you keep refining issues in mind as you 
fashion legislative responses to our current energy situation. In 
particular, remember that a diversity of refining capacity that 
includes robust participation by domestic independent refiners is 
critical to produce a system capable of meeting the economic, 
environmental and security demands of the United States.
    Additional concrete steps to address refining issues should include 
the following:

 Address the cumulative impact of regulations. There is a 
        tendency to view each regulation imposed upon refining in a 
        vacuum, particularly when measuring primary and secondary 
        economic impacts. However, as we observed above, the plain fact 
        is that the refining sector has numerous, overlapping 
        regulations. Most recently, compliance deadlines have come one 
        on top of another. When EPA, DOE and the Office of Management 
        and Budget conducts their reviews of each regulation, the 
        cumulative impact of regulations on the supply, distribution, 
        and cost on transportation fuels should be fully considered 
        before taking action.
 Ensure thorough review of regulations. Preparation of an 
        Energy Impact Statement for major rules could help ensure that 
        energy supply impacts are fully understood and balanced with 
        environmental goals. Proper use of cost-benefit analysis to 
        ensure cost-effectiveness of regulations is another essential 
        tool.
 Do not change the rules in the middle of the game. Retroactive 
        reinterpretation of regulatory programs such as EPA's NSR 
        enforcement activities constitute rulemaking without due 
        process and opportunity for comment. Also, changes in 
        requirements that negate good faith compliance investments 
        waste scarce capital resources that are much needed for other 
        projects such as refining capacity expansions. To deter unwise 
        government intervention, Congress should also consider enacting 
        measures which compensate impacted parties when the reversal of 
        federal rule or regulations strand business with useless 
        equipment which was built specifically to comply with federal 
        law.
 Reform the permitting and New Source Review processes in order 
        to facilitate capacity expansion and maintenance. By 
        questioning state permitting decisions and policy over the past 
        20 years, EPA will only further slow down the permitting 
        process and divert state resources towards reviewing past 
        decisions. This is inappropriate at a time when it is critical 
        that state permitting authorities and refiners work together to 
        expedite the permitting processes for important upcoming 
        environmental regulations, such as the Tier II gasoline sulfur 
        reduction requirements. We believe that any real reform must 
        address both substantive and procedural issues. Real reform 
        should ensure that NSR applies only if emissions actually 
        increase significantly. The current system of perpetual 
        exposure to NSR cannot be defended; and
 Consider tax incentives to encourage environmental 
        improvements. The costs associated with environmental 
        compliance often make the difference between a competitive 
        refinery operating in the U.S., and one that closes. Valero 
        alone spends on the order of $100 million per year in 
        environmental compliance expenditures. The real cost of these 
        environmental standards is lost international competitiveness 
        for U.S. refiners. The Office of Technology Assessment has 
        found that the cost to the domestic refining industry for 
        pollution abatement is substantial and is higher than for most 
        other industries. API has calculated that petroleum refining 
        could account for a disproportionate 17% of the national 
        environmental expenditure in the year 2000. Although by no 
        means a complete solution, the Congress could consider some 
        combination of tax credits for environmental compliance or 
        enhanced depreciation for such investments.

                               CONCLUSION

    While these responses to current refining difficulties are by no 
means comprehensive, they represent a start. President Bush recently 
remarked that, ``the solution for our energy shortage requires long-
term thinking and a plan that we'll implement that will take time to 
bring to fruition.'' At Valero, we couldn't agree more. However, any 
plan, in order to succeed in providing the American consumer with 
reliable and affordable motor fuel supplies, must take into account the 
current state of the US refining industry and of our product 
distribution infrastructure.
    Thank you very much for this opportunity to testify.

       Appendix One: Overlapping Federal Regulatory Requirements

    Tier II Gasoline Sulfur--In December 1999, EPA announced a final 
rule to provide new Tier II motor vehicle emission and gasoline sulfur 
standards. The Tier II standards adopt stricter tailpipe emission 
standards for motor vehicles beginning in model year 2004 and phase in 
over a ten-year period for larger models, such as sports utility 
vehicles. The gasoline sulfur standard is a national annual average 
standard set at 30 parts per million, a 90 percent reduction over 
current national levels. The new sulfur standard would be phased in 
beginning in 2004 and must be met by 2006.
    California MTBE Phase-out--In March 1999, Governor Davis of 
California issued an Executive Order to phase out the use of MTBE in 
California no later than December 31, 2002. In December 1999, CARB 
adopted gasoline standards without using MTBE. The Governor also 
petitioned EPA to waive the 2% oxygen content mandate for federal RFG 
in the state.
    Regional Haze--In July 1999, EPA promulgated a final rule requiring 
states to establish goals for improving visibility in 156 national 
parks and wilderness areas. States will develop strategies and plans 
for reducing emissions of air pollutants that contribute to poor 
visibility in these areas. These plans will likely include controls to 
reduce emissions of fine particulates, PM2.5. Fine 
particulates are emitted by mobile and stationary sources. The schedule 
for states submitting SIPs is uncertain because the regional haze 
program is linked with the new NAAQS PM2.5 SIP process, 
which was invalidated by the courts.
    Off-Road and On-Road Diesel Fuel--In December 2000, EPA released a 
final rule for highway diesel fuel that includes a 15 ppm sulfur cap 
effective in 2006. EPA is expected to issue a proposal controlling the 
sulfur content of off-road diesel fuel.
    Gasoline Air Toxics--In December 2000, the Agency promulgated a 
restrictive mobile source air toxics standard for gasoline effective in 
2002.
    Refinery MACT II--In September 1998, EPA proposed National Emission 
Standards for Hazardous Air Pollutants from Petroleum Refinery Vents. 
This rulemaking, refinery MACT II, covers emissions from the catalytic 
cracker, catalytic reformer, and sulfur plants.
    Section 126 Petitions--In August 1997, eight northeastern states 
filed Section 126 petitions. The Clean Air Act gives a state the 
authority to petition EPA to set emission limits for specific sources 
of pollution in other states that contribute to its ozone nonattainment 
problems. In December 1999, EPA granted four of the petitions filed by 
the states of Connecticut, Massachusetts, New York, and Pennsylvania. 
The granting of these petitions would require 392 facilities to reduce 
NOX emissions. Refineries and petrochemical plants are on 
the list of affected facilities. There is litigation challenging these 
petitions pending action in the US Court of Appeals for the D.C. 
Circuit. These petitions were originally conceived as a ``backstop'' 
for EPA's NOX SIP call which also was the subject of legal 
challenge. The US Supreme Court recently upheld EPA's authority 
regarding the NOX SIP call which will likely make that the 
main approach for further controls in this area.
    New Source Review Enforcement Initiative--EPA's Office of 
Enforcement has said it will target enforcement actions against 
refineries for alleged noncompliance with the New Source Review 
program, based for the most part on a new interpretation of what 
constitutes a modification triggering NSR permitting requirements. EPA 
has filed actions against the paper and utility industries seeking the 
highest penalties under the Clean Air Act. The NSR regulations were 
issued in 1980 and supplemented by seven volumes of guidance documents 
and altered over the years by informal policy in letters, memoranda, 
and other documents outside of the public notice and comment process.
    Climate Change--The U.S. signed the Kyoto Protocol on November 12, 
1998. in this as yet unratified treaty, the U.S. agreed to a 7 percent 
reduction in greenhouse gas emissions from 1990 levels between 2008--
2012. According to some analysts, this 7 percent reduction could 
translate into a 40 percent reduction in fossil fuel use. Fossil fuel 
production, including gasoline manufacture would be affected.
    Residual Risk--Under Section 112 of the Clean Air Act, EPA is 
required to assess the residual risk posed to public health and 
environment after implementing technology-based MACT (maximum 
achievable control technology) standards for major industrial sources 
emitting toxic air pollutants. Refineries and petrochemical plants are 
currently subject to several MACT standards. After this assessment, EPA 
may promulgate additional regulations and require additional emission 
reductions for these sources.
    Urban Air Toxics Strategy--In July 1999, EPA released its 
Integrated Urban Air Toxics Strategy to provide a framework for 
reducing air emissions and health risks from toxic air pollution in 
urban areas. EPA identified 33 toxic air pollutants as posing the 
highest risks and targeted 13 new area sources (smaller industrial and 
commercial facilities) for new national standards. Gasoline 
distribution and oil and natural gas production facilities are on the 
list. The Agency released a Report to Congress, dated July 2000, that 
summarized actions to reduce public health risks and listed research 
needs.

    Mr. Barton. Thank you, sir. We do appreciate you flying up 
from San Antonio.
    We now want to hear from Mr. Peter D'Arco, the President of 
SJ fuel in Brooklyn, New York. You have testified before this 
subcommittee before and done an excellent job. I am sure you 
are going to do the same today. Your testimony is in the 
record. We would ask you to summarize it in 6 minutes.
    Welcome back to the subcommittee.

                    STATEMENT OF PETER D'ARCO

    Mr. D'Arco. Good morning, Mr. Chairman and committee 
members. I am Pete D'Arco, Vice President of SJ fuel. I 
appreciate the opportunity to discuss the petroleum industry 
today. I would like to review the state of the oil heat 
industry and the progress that has been made since last year. I 
would also like to discuss the motor fuels industry and the 
recently finalized rules affecting diesel. In particular, I 
would like to encourage you and the committee to closely 
examine the rule recently issued by the Environmental 
Protection Agency to lower the sulfur in diesel fuel.
    Prior to the start of the winter, many said that distillate 
prices would spike or we would run out of product because 
inventories of distillate were below normal. However, the free 
market that I represent did many things to avoid a problem. 
First, many interruptible consumers of natural gas entered into 
supply contracts. Additionally, many residential consumers 
entered into contracts for supply while others merely 
transferred their business to dependable vendors. What we have 
seen is an industry that has responded to a winter that is 
colder than normal since the winter of 1993-1994. Last year the 
winter was 10 percent warmer than normal and this year the 
winter in many areas is 5 percent colder than normal for a 
swing of 15 percent.
    Additionally, record prices for gas led many interruptible 
consumers to switch to heating oil for generating electricity 
and heat. Thus, the demand for heating oil is much higher this 
winter than last but the market has worked to avert problems. 
In fact, the Department of Energy has seen prices in New York 
fall nearly 15 cents a gallon since the beginning of this year. 
There has been no concern about supply, and our customers are 
pleased that they are not tied to utility pricing and product 
is being delivered consistently.
    This success story is in sharp contrast to the continuing 
and persistent problems now confronting the natural gas and 
electricity industries. While I am not an expert in either 
area, it is apparent that at the residential level in 
California, there are only one or two suppliers and that the 
grid is controlled by a single entity. This limited and 
controlled competition has been proven to be incapable of 
matching a competitive field.
    In focusing on our success compared to the utility problems 
in California, we believe the Congress must recognize some of 
the unique attributes of oil markets that can give it a 
competitive edge. Since oil is easy to transport, it is an 
international product. Instead of perceiving this to be a 
problem, we should recognize it as a competitive advantage. Can 
you imagine where natural gas prices would be today if everyone 
in the Northeast relied on natural gas for heating?
    With respect to the motor fuel industries, for nearly a 
year the United States had significant problems with 
distribution and supply of refined products. Unfortunately, the 
Environmental Protection Agency has issued a rule that will 
impact distribution at every level. In 1990, the country used 
essentially two distillates. No. 2 distillate was used for home 
heating oil, truck diesel and off-road equipment diesel. 
Kerosene, our No. 1 distillate, was used as a jet fuel, for 
inner city buses and a blend stock for diesel and heating oil 
in the winter months. Today, due to congressional and 
environmental initiatives, there are six fuels. The 
Environmental Protection Agency rule further divides the on-
the-road fuel into a 500 parts per million fuel and a 15 parts 
per million fuel. However, we are not merely adding one fuel. 
It is conceivable that we are adding two new products for a 
grand total of eight when the tax status is considered.
    PMAA is concerned with adding new fuels and thus supports a 
more rational approach to the rulemaking now being considered. 
The new rule will require the new 15 parts per million fuel for 
new trucks and older trucks can continue to use the older 
diesel at 500 parts per million. There is no harm in an old 
truck using a new fuel and there are some environmental 
advantages. However, the rule that EPA has issued will create 
confusion in the marketplace, lead to difficult enforcement 
issues and stress our distribution system.
    We would note that the transitional program proposed by EPA 
is similar to that of the leaded-unleaded transition that 
occurred in the seventies. EPA found a 17 to 20 percent 
noncompliance with the rule. The leaded-unleaded program was 
the last transitional program. Apparently for 20 years we 
remembered this problem and avoided it. Unfortunately, diesel 
phase-in is likely to repeat that same problem, disrupting the 
distribution system and at the same time hampering the smooth 
implementation of this important environmental program. PMAA is 
thus encouraging Congress to override EPA and transition the 
fuel at a single point in time.
    Thank you, Mr. Chairman, for the opportunity to testify.
    [The prepared statement of Peter D'Arco follows:]

Prepared Statement of Peter D'Arco, SJ Fuel, on Behalf of The Petroleum 
                    Marketers Association of America

    Good Morning Mr. Chairman, and committee members. I am Peter D'Arco 
and I am the President of SJ Fuels. We are a third generation company 
located in Brooklyn, New York and deliver fuel to nearly 5000 
locations. I am here on behalf of the Petroleum Marketers Association 
of America. PMAA represents 7,800 petroleum marketers. These marketers 
ell 40 percent of the gasoline, 50 percent of the diesel and nearly 75 
percent of the heating oil distributed in the United States.
    As the country reflects on the last year's energy issues, I welcome 
the opportunity to discuss the status of the refined petroleum products 
industry with you. It has been six months since I testified before this 
Committee and I applaud you for holding another hearing. As you know, 
Mr. Chairman developing natural resources is a long term proposition 
and what we do today will have an impact on America's energy future ten 
and twenty years from now. However, the core of any energy strategy 
must continue to be the free market`
    Today, I would like to review the state of the oilheat industry, 
and the progress that has been made since last year. I would also like 
to discuss the future of the motor fuels industry, and the recently 
finalized rules affecting both gasoline and diesel. In particular, I 
would like to encourage you and the committee to closely examine the 
rule recently issued by the Environmental Protection Agency (EPA) to 
lower the sulfur in diesel fuel.
    First, I would like to update the committee on the heating oil 
industry. Last year, its ability to respond and its resilience was 
questioned as prices rose sharply when the weather became extremely 
cold in the winter. The problems related to unusual weather patterns 
that caused transportation problems, and refinery problems. However, as 
you know our company as well as thousands of other businesses both 
large and small responded. Refineries increased production, wholesalers 
searched the globe for product, and marketers like myself staggered 
deliveries to ensure all customers had product at all times. I would 
like to contrast that behavior with what has occurred in California 
where monopolies or semi-monopolistic utilities unilaterally decided to 
cease distribution of electricity to selected communities. Now, the 
state of California is subsidizing electricity purchases on a daily 
basis, and has just imposed a massive rate increase
    That stands in sharp contrast to the industry I represent. Last 
winter forced many firms from the business, others sold out at the end 
of the year. However, at no time did the federal or state government 
begin to pay their bills. In fact many of the energy experts predicted 
a similar debacle this year. There was an obsessive focus on 
inventories, and the fact that they were below normal.
    Many said that prices would spike or we would run out of product 
because these inventories of distillate were below normal. However, the 
free market that I represent did many things to avoid a problem. First, 
many interruptible consumers of natural gas entered into contracts for 
supply. Additionally, many residential consumers entered into contracts 
for supply, while others merely transferred their business to 
dependable vendors. And what we have seen is an industry that has 
responded to a winter that is colder than normal for the first time 
since 1993 and 1994. Last year, the winter was 10 percent warmer than 
normal, and this year the winter in many areas is 5 percent colder than 
normal, for a total swing of 15 percent. Additionally, record prices 
for gas led many interruptible consumers to switch to heating oil for 
generating electricity and heat. The market responded by searching 
internationally for product, and in January, imports of distillate into 
the northeast were 2.5 times higher than normal.
    As a result we have seen level and declining prices in many 
markets. According to the Department of Energy prices in New York have 
fallen nearly 15 cents since the beginning of the year. There has been 
no concern about supply and our customers are pleased that they are not 
tied to utility pricing, and product is being delivered consistently. 
For my industry, failing to deliver product to a customer is the same 
as losing the customer. As I said last spring we will do anything 
necessary to get supply to customers, and since I am a customer to my 
supplier, he will do the same.
    The one lesson that we must take from this is that the free market 
works. Particularly when there are competitors to force competition.
    PMAA believes that as the Congress considers establishing a new 
energy strategy, how to ensure that markets have multiple competitors 
must be the guiding principle. Congress must work to have competitors 
in the various energy fields, in oil at every level, in natural gas at 
every level, and in electricity at every level. Further, attempting to 
encourage one of these sectors to be dominant will necessarily be 
harmful. We are dismayed by many proposals now circulating which could 
encourage consumption of natural gas or electricity. We believe 
consumer choice will lead to people selecting the best fuel for their 
use, and the best fuel for the future, tilting the playing field will 
always decrease competition, and thus should be avoided.
    Flexibility comes from competition, as competitors adapt to changed 
circumstance. And as you know each winter is different, each year 
competition is more intense. As the heating oil industry demonstrated 
this year, many wholesalers searched worldwide for product. Brokers 
distributed the product between markets. Refiners worked round the 
clock to increase production. Finally the ability of oil to be stored 
at every level, from homeowner to refiner allowed the industry to 
distribute the product efficiently. Similarly, the final customer was 
able to time his or her purchases, how much they should store who 
should they buy from and what type of contract they should enter into 
with their supplier. And as every business knows, the best discipline 
for a market is a customer, and the competitors I described are each 
customers of each other, and they are always trying to get the best 
value and deliver the best product to the ultimate consumer.
    This is in sharp contrast to the continuing and persistent problems 
now confronting the natural gas and electricity industry. While I am 
not an expert in either area, it is apparent that at the residential 
level in California there are only one or two suppliers, and that the 
grid is controlled by a single entity. This limited and controlled 
competition has been proven to be incapable of matching a competitive 
field.
    As we debate energy policy, many raise the issue of imports of 
crude oil into the country. As you know, the heating oil industry 
relies on domestic crude for approximately 50 percent of the fuel oil 
produced, and uses domestic refineries plus Canadian refineries for 
nearly all the refined product consumed. Similarly, the vast majority 
of gasoline and diesel consumed in the United States is refined in the 
United States. However, as we have seen in California, their isolation 
from the country for fuel and electricity makes their problems worse, 
perhaps we should recognize that an international market is preferred 
to a domestic market.
    We would again contrast the oil industry with the natural gas 
industry. While gas is generally domestic sourced and distributed, it 
cannot utilize worldwide energy resources in a problem time. As we 
know, natural gas prices have risen sharply and likely will not drop 
substantially until more production goes on line in the United States. 
Again, the oil industry because of the easy transportability of oil can 
search internationally for product. We must acknowledge that oil will 
always be an international product, as transportation is a small 
fraction of the cost, and thus, the domestic oil industry will always 
be tied to the international economy. Dissimilarly, both coal and gas 
are more difficult to transport and thus will tend to be domestic 
industries.
    We do not believe that our energy policy should in any way be 
altered to give these two domestic products advantages in our market. 
Consider the situation we would be in today, if somehow the United 
States was independent of international energy markets. Oil would not 
be available to take some of the pressure off of natural gas demand, 
and the utility industry would not only be coping with making more 
electricity for California, they would have had to supply the 5 percent 
increase in demand for oil in the northeast. Where would prices be 
today if that were our energy policy of five years ago?
    PMAA does of course agree that steps must be taken to increase 
domestic production. Having crude developed both domestically and 
internationally increases competition, and thus benefits consumers.
    PMAA would also urge the Congress to liberalize the waiver 
provisions within the Jones Act. During heavy weather, barges cannot 
transit from New York to Boston, or from the gulf coast to New York. 
However, many foreign flag tankers could be diverted into this trade if 
the government would allow waivers of the Jones act. Such a course 
would allow wholesalers to buy product in the gulf coast and bring it 
up to the northeast if the pipeline systems are at capacity. 
Additionally many of these tankers can be used in heavier weather that 
would allow product to move between Boston and New York.
    PMAA would now like to turn its attention to the motor fuels 
industry. As you know, PMAA represents the marketers who sell over 40 
percent of the gasoline and 50 percent of the diesel sold in the United 
States.
    For nearly a year, the United States had significant problems with 
distribution and supply of refined products. The Environmental 
Protection Agency had to delay implementation of reformulated gasoline 
in St. Louis because of supply and pipeline problems, and prices for 
reformulated gasoline spiked in Milwaukee and Chicago, and then 
gasoline prices spiked throughout the Midwest. While some of the 
problems related to lack of refined product, much of the problem 
related to distribution problems. Pipeline problems outside St. Louis 
initiated the Midwest problem. This proceeded to Chicago where the new 
reformulated gasoline was more difficult to manufacture than was 
anticipated. A pipeline problem in Michigan exacerbated the problem. 
Thus, much of the problems were sourced to a distribution system that 
is at capacity, and thus has limited ability to recover from problems.
    Unfortunately, the Environmental Protection Agency has issued a 
rule that will impact distribution at every level. In 1990, the country 
used essentially two distillates for all uses. Number 2 distillate was 
used for home heating oil, trucks, and off-road equipment. Kerosene or 
Number 1 distillate was used as a jet fuel, for inner-city buses, and a 
blendstock for diesel and heating oil in the winter months. In the last 
ten years we have subdivided each of these fuels by four. We have a 
high and low sulfur fuel for both diesel and kerosene, and we have a 
dye system, which is used for the tax status of the product. Thus, each 
of two products described above has been divided and are now six 
distinct products.
    The Environmental Protection Agency will further divide those pools 
into a 500-ppm fuel and a 15-ppm fuel. However, we are not merely 
adding one new fuel we are adding two new fuels, one taxed, and one not 
taxed. Thus, there will be eight distinct distillates.
    How does this affect distribution? The petroleum industry has 
always been a high volume industry relying on fungible products. A 
barge would carry a large load of a single product, a pipeline would 
carry millions of gallons of a single product that would supply every 
terminal in its area before transitioning to a new product, and a truck 
would distribute the multiple grades of gasoline and diesel. Now each 
of these transportation systems must lose its economies of scale as 
smaller and smaller volumes of product are transported. Staging in the 
pipeline becomes more difficult. Terminals may choose to handle only a 
selection of the products, or put one of these products into smaller 
tanks, or perhaps not sell a particular product. Marketers may have to 
drive farther to find the product they are searching for, and make more 
stops to distribute the same volume of product. Thus, each change 
increases distribution costs.
    PMAA has thus supported a more rational approach to the rulemaking 
now being considered. As the Committee understands, the new rule will 
require the new 15 PPM fuel for new trucks, and older trucks an 
continue to use the older diesel at 500 PPM. There is no harm in an old 
truck using the new fuel, and there are some environmental advantages. 
However, the rule that EPA has issued will create confusion in the 
marketplace, lead to difficult enforcement issues and stress our 
distribution system.
    PMAA would note that the transitional program proposed by EPA is 
similar to that of the leaded unleaded transition that occurred in the 
70's. EPA stated at that time there was 17-20 percent non-compliance 
with the rule as consumers used funnels to overcome the nozzle 
restrictors or simply removed the restrictor in their tanks. This 
behavior destroyed the emissions devices, and thus much of the 
environmental gains were lost. To counter this, EPA began an 
enforcement program targeted at marketers. Unbelievable as this may 
seem, marketers were directed to memorize vehicle designs and 
descriptions to prevent misfueling. PMAA distributed vehicle profiles 
to marketers to assist in this process. EPA also considered price 
controls to ensure that the leaded gasoline was sold at the same or 
higher prices than the unleaded program to counter this problem.
    The leaded unleaded program was the last transitional program with 
both gasoline and diesel being implemented at once. Apparently for 
twenty years we remembered this problem, and avoided it. Unfortunately, 
the diesel phase in is likely to repeat that problem, disrupting the 
distribution system and at the same time hampering the smooth 
implementation of this important environmental program.
    PMAA is thus encouraging Congress to override EPA and transition 
the fuel at a single point. We are of course concerned with supply, and 
whether the refiners will be able to make the fuel. While their 
concerns are real, we recognize that nearly all of the problems of the 
last year are distributional and we do not want them to occur for four 
straight years
    Additionally, I would like to offer one final comment on the number 
of rules that have come out affecting the domestic refining and 
distribution industry. Each new rule affecting refining requires 
substantial capital investment. Similarly, the splitting of the fuels 
pools also requires substantial investment. Each time that happens, 
there is a bias in favor of large plants that can more readily absorb 
the investment and spread it over more gallons. This bias leads to an 
industry of fewer competitors. Additionally, each of the competitors 
must try to always be at 100 percent capacity. However, when demand 
increases or there are problems with supply, big problems await 
everyone.
    We believe that the Congress must recognize this and try to ensure 
that our country's energy policy is as flexible and multi-source 
reliant. Competition will benefit the American consumer, the economy 
and the environment.

    Mr. Barton. Thank you, sir.
    We would now like to hear from Mr. Thomas Robinson, who is 
the Chief Executive Officer of the Robinson Oil Corporation in 
San Jose, California. We have heard a lot about California over 
the last month or so in this subcommittee. Welcome. Your 
testimony is in the record. We would ask you to summarize it in 
6 minutes.

                 STATEMENT OF THOMAS L. ROBINSON

    Mr. Robinson. Good morning. Yes, California is an 
interesting place. Good morning, Mr. Chairman and members of 
the subcommittee. My name is Tom Robinson. I am CEO of Robinson 
Oil, San Jose, California. Our company owns and operates 28 
Rotten Robbie retail gasoline outlets located in the San 
Francisco Bay Area of California.
    I appear before this subcommittee today as a representative 
of the National Association of Convenience Stores, NACS, and 
the Society of Independent Gasoline Marketers of America, 
SIGMA. Collectively, NACS and SIGMA members sell more than 75 
percent of the gasoline and diesel fuel purchased by American 
consumers each year. I appreciate this invitation to appear at 
this hearing to present testimony on the Nation's energy policy 
as it relates to crude oil and refined petroleum products.
    The companies I represent today are different from the 
other witnesses at today's hearing. For all practical purposes, 
we are a surrogate for the Nation's gasoline and diesel fuel 
consumers. Our primary mission is to secure adequate supplies 
of gasoline to sell consumers at a competitive price. My 
company is not involved in the exploration or production of 
crude oil, nor is it a refiner. If companies like mine, 
independent marketers of motor fuels, are unable to secure this 
adequate supply, then we cease to be a competitive force in the 
marketplace, and if independent marketers cease to be an 
effective competitive force in the marketplace, then consumers 
lose as retail gasoline and diesel fuel prices rise in response 
to the supply shortage.
    NACS and SIGMA have two primary messages for the 
subcommittee today. First, we must collectively and 
aggressively address the motor fuel supply problems that are 
facing this Nation. Otherwise, the fuel price spikes we have 
witnessed for the past decade in California and for the past 2 
years in other parts of the Nation will become worse and more 
frequent. Our failure to act has, is and increasingly will cost 
consumers more at the pump.
    Second, the debate over the future of our Nation's energy 
policy need not be confrontational. Our Nation can have both a 
clean environment and affordable, plentiful supplies of 
gasoline and diesel fuel. However, in order to achieve these 
twin goals, all sides of the current debate, industry, 
government, consumers and environmentalists, must approach this 
debate in the spirit of cooperation, not confrontation. This 
includes a reasonable attitude and an understanding of the 
tradeoffs.
    The challenge facing the Congress today is straightforward. 
We must preserve current and future improvements in air quality 
while at the same time maintaining and expanding supplies of 
motor fuels. Otherwise, our Nation's consumers will continue to 
pay the price when supply shortages occur and retail prices at 
the pump spike as they have done repeatedly over the past few 
years.
    As a Californian, I have become only too familiar with this 
routine. NACS and SIGMA do not have a specific legislative 
proposal to put forward at this time. Instead, we offer the 
following principles which we are convinced must be part of any 
legislative initiative: One, greater fungibility in motor fuels 
and a stop to the balkanization of our Nation's gasoline and 
diesel fuel markets. I cannot overemphasize the importance of 
this particular point. The second point is fuel requirements 
that recognize the limitations and strengths in the motor fuel 
distribution system in the United States. Three, reasonable 
implementation plans for new environmental initiatives. Four, 
fuels programs that set performance goals rather than specific 
formulas or mandates. And, five, it must be economically 
feasible to upgrade the Nation's refining capacity to make 
these clean fuels.
    We look forward to working with this subcommittee and 
others in Congress to explore legislative options in the months 
ahead. We certainly offer our assistance to the subcommittee in 
this exploration. The debate over our Nation's energy policy is 
just starting, but the crisis has been occurring for some time. 
We can either discuss potential solutions collectively now or 
we can point fingers, cast blame and collectively suffer the 
consequences as we have seen occur in the California 
electricity crisis.
    We encourage all parties to this debate to adopt fresh and 
reasonable approaches. Both the environment and our Nation's 
motor fuel consumers can be winners in this debate, but only if 
all sides agree with the premise that environmental protection 
and affordable energy are not inherently contradictory goals. 
NACS and SIGMA assert that these goals need not be 
irreconcilable.
    Thank you for the opportunity to testify today.
    [The prepared statement of Thomas L. Robinson follows:]

  Prepared Statement of Thomas L. Robinson, Chief Executive Officer, 
   Robinson Oil Corporation Representing the National Association of 
Convenience Stores and the Society of Independent Gasoline Marketers of 
                                America

    Good morning, Mr. Chairman and Members of the Subcommittee. My name 
is Tom Robinson. I am Chief Executive Officer of Robinson Oil 
Corporation of San Jose, California. Our company owns and operates 28 
``Rotten Robbie'' retail gasoline outlets located in the San Francisco 
Bay Area of California.
    I appear before this Committee today as a representative of the 
National Association of Convenience Stores (``NACS'') and the Society 
of Independent Gasoline Marketers of America (``SIGMA''). NACS 
represents an industry of more than 120,000 retail outlets, 75 percent 
of which sell motor fuels. In 1999, convenience stores sold more than 
117 billion gallons of motor fuels which accounts for more than 60 
percent of American consumption.
    SIGMA is an association of approximately 260 motor fuels marketers 
operating in all 50 states. Together, SIGMA members supply over 28,000 
motor fuel outlets and sell over 48 billion gallons of gasoline and 
diesel fuel annuallyor approximately 30 percent of all motor fuels sold 
in the nation last year.
    Collectively, NACS and SIGMA members sell more than 75 percent of 
the gasoline and diesel fuel purchased by American consumers each year.
    I appreciate the invitation to appear at this hearing to present 
testimony on our nation's energy policy as it relates to crude oil and 
refined petroleum products. The companies I represent today are 
different from all of the other witnesses at today's hearing. For all 
practical purposes, we are a surrogate for the nation's gasoline and 
diesel fuel consumers. Our primary mission is to secure adequate 
supplies of gasoline to sell to consumers at a competitive price. My 
company is not involved in the exploration or production of oil, nor 
does it refine oil. If companies like mine, independent marketers of 
motor fuels, are unable to secure this adequate supply, then we cease 
to be a competitive force in the marketplace. And if independent 
marketers cease to be an effective competitive force in the 
marketplace, then consumers lose as retail gasoline and diesel fuel 
prices rise in response to the supply shortage.
    NACS and SIGMA have two primary messages for this Subcommittee 
today. First, if we, collectively, do not address aggressively the 
motor fuels supply crisis that is facing this nation in the near 
future, then the price spikes we have witnessed, for the past decade in 
California and for the past two years in other portions of the nation, 
in gasoline, diesel fuel, and other petroleum products will become the 
norm rather than the exception. Ultimately, if we fail to act, it will 
be consumers who will pay for this inaction--through higher retail 
motor fuels prices at the pump.
    Second, the debate over the future of our nation's energy policy 
need not be confrontational. Our nation can have both a clean 
environment and affordable, plentiful supplies of gasoline and diesel 
fuel. However, in order to achieve these twin goals, all sides to the 
current debate--industry, government, consumers, and 
environmentalists--must approach this debate in a spirit of 
cooperation, not confrontation.
    These are not new points for either the associations I represent or 
for me. As a California marketer I have personally witnessed these 
events happening over and over again. I personally have had the 
opportunity to present these points to Congress in the past. 
Unfortunately, our warnings have been ignored. However, it is my 
personal hope that the renewed attention to the need for a national 
energy policy will produce the results NACS and SIGMA have been calling 
for over the years.
    The challenge facing this Subcommittee and your colleagues in 
Congress today is straightforward. We must preserve current and future 
improvements in air quality while at the same time maintaining and 
expanding supplies of motor fuels. Otherwise, our nation's consumers 
will pay the price when supply shortages occur and retail prices at the 
pump spike, as they have done repeatedly over the past three years in 
several areas of the nation and over the past decade in California. And 
these price spikes will not be limited to the additional expense of 
producing the new cleaner fuels. Rather, they will be multiples of this 
amount as the market drives prices far above the additional cost of 
manufacture in times of short supply.
    I firmly believe that our nation is facing a serious energy crisis 
in the motor fuels refining and marketing industry. Dozens of petroleum 
refineries have closed over the past two decades and new environmental 
protection mandates, such as low sulfur gasoline and diesel fuel, are 
likely to exacerbate this trend. Operating inventories of diesel fuel 
and gasoline are at historically low levels and the nation's refineries 
are operating at or near maximum capacity. Gasoline and diesel fuel 
demand is increasing by between one and two percent each year, and yet 
the number of refineries operating to meet this ever increasing demand 
is decreasing. In 1990, there were essentially six different types of 
gasoline being sold nationwide. Now, there are over 25 different 
gasoline formulations, all being transported and distributed through 
the nation's motor fuel infrastructure. The pressure of overlapping 
federal, state and local regulations has crippled what was previously 
one of the most efficient commodity distribution systems in the world--
the United States' fungible grade motor fuels distribution system.
    As the saying goes, there is no free lunch. It should not surprise 
policy makers that after tens of billions of dollars in environmental 
compliance costs borne by refiners and marketers, the complete 
fragmentation of the motor fuels distribution system, and the 
politically-motivated diverse gasoline formulations adopted by various 
states, there is a price to pay--a price that ultimately must be paid 
by consumers of gasoline and diesel fuel. As long as the motor fuels 
refining and distribution system works perfectly, supply and demand 
stay roughly in balance and retail prices remain relatively stable. 
However, if a pipeline or refinery goes down, overseas crude oil 
production is reduced, the weather disrupts smooth product deliveries, 
or a new regulatory curve ball is thrown at the motor fuels refining 
and marketing industries, we do not have the flexibility to react and 
counterbalance these forces.
    If there is one point that I really want to emphasize it is the 
point of ``no free lunch''. Our country can have clean and 
environmentally friendly fuels and it can have plentiful supplies--
there will be a cost and it will be borne by the consumer (that is a 
given)--our job is to make the lunch, if not free, at least a fair 
bargain.
    Californians have become somewhat accustomed to motor fuels price 
volatility over the past five years because California is in fact the 
laboratory for the fuels programs that EPA currently is forcing on the 
rest of the country. When a refinery in California goes down, or a 
pipeline breaks, the impact on prices is almost immediate. In 
California, gasoline prices can increase by 40 cents per gallon within 
two or three days. When prices get high enough to attract supply from 
other markets, then eventually the supply shortage is alleviated and 
prices start to fall.
    This is the reason I am appearing before you today. The motor fuels 
supply problems we have witnessed in California over the past decade 
are now being visited on the rest of the nation. If we do not act, 
independent motor fuels marketers (who I am very concerned about), and 
gasoline consumers (who we all should be very concerned about), will 
suffer in the near future.
    The public policy solution to the current motor fuels supply crisis 
will not be simple, but it must be addressed. NACS and SIGMA posit that 
the solution is not the rollback of environmental protections. This 
solution is a non-starter and should be discarded. Alternatively, NACS 
and SIGMA encourage Congress to consider an effective plan to assist 
our nation's domestic refining industry to meet the challenges posed by 
ever more stringent environmental mandates and restore fungibility to 
the nation's distribution system. This will increase gasoline and 
diesel fuel supplies and keep retail prices down.
    We must collectively arrive at a public policy that assures that 
our nation's refineries, both large and small, stay in business, expand 
to meet increases in demand, and produce clean, affordable motor fuels. 
But this policy cannot be achieved without enlightened government 
policies and programs. The capital expenditures that refineries must 
make over the next six years in order to meet new environmental 
mandates are huge. And many refineries, particularly small, regional 
refineries, will be unable to justify those expenditures and will cease 
operation--further straining motor fuels supplies. Already, this year, 
Premcor announced that it would close its Blue Island refinery rather 
than undertake the upgrades necessary to make low sulfur gasoline and 
diesel fuel. Other refineries, owned by both large and small companies, 
will follow suit in the next few years.
    NACS and SIGMA urge Congress to assist these refineries in making 
these upgrades. This assistance will be particularly important to 
small- and medium-size ``regional'' refineries because the 
environmental upgrade costs fall more heavily on these smaller 
refineries because they do not enjoy the economies of scale that some 
larger refineries possess to make these upgrades. And, in many cases, 
these smaller refineries represent the ``marginal'' gallon of gasoline 
and diesel fuel in many marketplaces--the gallon that is the difference 
between adequate supplies and supply shortages.
    Motor fuels marketers and refiners are not always on good terms. We 
compete daily in the marketplace for customers and market share. So it 
may seem odd to have motor fuels marketers recommend to Congress that 
assistance must be given to our nation's domestic refining industry. 
However, without adequate and diverse sources of gasoline and diesel 
fuel supply, independent marketers cannot exist. Thus, the solution we 
are proposing to Congress is the only way our segment of the marketing 
industry can survive and can continue to provide consumers--your 
constituents--with the most affordable, clean gasoline and diesel fuel 
in the world.
    NACS and SIGMA do not have a specific legislative proposal to put 
forward at this time to put our joint recommendation into operation. 
Instead, we offer the following principles which we are convinced must 
be a part of any legislative initiative: (1) greater fungibility in 
motor fuels and a stop to the balkanization of our nation's gasoline 
and diesel fuel markets; (2) fuel requirements that recognize the 
limitations and strengths of the motor fuel distribution system in the 
United States; (3) reasonable implementation plans for new 
environmental initiatives; (4) fuels programs that set performance 
goals, rather than specific formulas or mandates; and (5) it must be 
economically feasible to upgrade the nation's refining capacity to make 
these clean fuels.
    We look forward to working with this Subcommittee and others in 
Congress to explore legislative options in the months ahead. We offer 
our assistance to this Subcommittee in this exploration.
    The debate over our nation's energy policy is just starting. But 
the crisis has been occurring for some time. We can either discuss 
potential solutions collectively now, or we can point fingers, cast 
blame, and collectively suffer the consequences--as we have seen in the 
California electricity crisis.
    We encourage all parties to this debate to adopt fresh approaches 
to the problems our nation is facing. Both the environment and our 
nation's motor fuel consumers can be the winners in this debate, but 
only if all sides agree with the premise that environmental protection 
and affordable energy are not inherently contradictory goals. NACS and 
SIGMA assert that these goals need not be irreconcilable.
    Thank you for inviting me to present this testimony. I would be 
pleased to answer any questions my testimony may have raised.

    Mr. Barton. Thank you, Mr. Robinson. We do appreciate you 
coming all the way from California to testify.
    We would now like to hear from Mr. Richard Kassel, who is 
the Senior Attorney for the Natural Resources Defense Council. 
He comes from the East Coast in New York City. We welcome you, 
sir. Your testimony is in the record and we ask that you 
summarize it in 6 minutes.

                   STATEMENT OF RICHARD KASSEL

    Mr. Kassel. Thank you, Mr. Chairman, members of the 
committee. Thank you for the opportunity to testify today. At 
NRDC we believe strongly that the Nation needs a balanced 
energy policy that meets a series of equally important energy, 
public health and environmental goals. At NRDC I run our Dump 
Dirty Diesels campaign, so I will spend some time on EPA's 
recent diesel rule. Other specific energy issues are addressed 
by my colleagues in attachments 1 and 2. But as background, 
here is where we are.
    Once again America faces a national debate about its energy 
future. Two distinct visions of this energy policy and energy 
future are emerging. One vision focuses chiefly on extracting 
as much energy as possible, mostly in fossil fuel form, in 
hopes that supply can somehow catch up with demand. That vision 
in the past has delayed capital investments in more efficient 
power generation, hoping to maximize short-term profits by 
squeezing extra years out of old, dirty plants. That vision 
also minimizes the environmental impacts of a supply side 
approach, including global climate change.
    Users often count environmental regulation as an issue to 
obscure its call for more drilling and more production. The 
California situation and some of the responses are instructive 
here. Contrary to suggestions from the White House and some 
today, the California crisis and our national energy problems 
are not caused primarily by pollution regulation and will not 
be solved by drilling in the Arctic National Wildlife Refuge or 
other sensitive areas. The real reasons for the California 
crisis include a market structure that failed to ensure long-
term supplies as a hedge against volatile spot market prices, 
rapid consumption growth in neighboring States that is 
overloading the interstate power grid, cutbacks in electricity 
infrastructure investments throughout the West due to 
unfavorable expectations of return on those investments, and 
reduced hydropower generation due to low rainfall.
    As if that was not enough, investigations continue of 
alleged anticompetitive practices by power generators. Rigorous 
permit procedures have not been the reason for the lack of 
growth in the California energy supply side.
    There is an alternative vision that is also emerging. That 
vision calls for encouraging innovation, investment and new 
technology to meet our energy needs in an environmentally 
responsible manner. This vision invests in the efficient use of 
energy, renewable energy sources, places priority on using 
energy resources in a way that is least damaging to our 
environment and strives to minimize the public health harms of 
the extracted resources that we continue to consume. It 
promotes economic growth, industrial competitiveness and does 
not force consumers to make sacrifices. It accepts the reality 
of global climate change and invests accordingly.
    NRDC believes that U.S. energy policy should follow this 
alternative path which is described more fully in attachment 3. 
We believe we can meet our energy needs through innovative 
investments and policies, like investing in efficiency and 
renewables, like providing tax credits for hybrid vehicles, 
home insulation and smart growth, like improving the fuel 
efficiency of tires and vehicles, and like strengthening 
efficiency standards for appliances, buildings and so on.
    I will spend my remaining time talking a bit about the 
diesel rule and its role in ensuring clean, reliable goods 
movement in America in the 21st century. Of course diesel 
trucks provide the backbone of America's goods movement, yet 
diesel pollution is one of our most enduring pollution 
problems. Diesel trucks comprise roughly 7 percent of the 
Nation's vehicles, but they consume more than 40 percent of the 
Nation's transportation energy use and they emit more than half 
of the asthma attack inducing and cancer causing particulates 
in many urban areas and roughly one-third of the 
transportation-related smog and acid-rain-causing nitrogen 
oxides.
    Recently EPA Administrator Whitman reaffirmed the agency's 
commitment to cleaning up this pollution source, thereby 
helping to assure them a responsible place in America's energy 
future. Nearly eliminating the sulfur in diesel fuel will be 
the key to this step just as removing lead from gasoline was 
the key to cleaning up cars 20 years ago.
    The diesel rule's substantial flexibility and lead time 
will be critical to ensuring the widespread national 
availability of the new low sulfur diesel as it comes to market 
in the coming decade. This flexibility includes allowing a 
percentage of the higher sulfur fuel to be sold in each 
regional petroleum district from 2006 to 2009, allowing intra-
district trading among refiners to assure an efficient and 
smooth transition, and providing extra provisions to help small 
refiners, extra time and extra flexibility. It includes interim 
dates for diesel at the refinery, at the terminal and at the 
retail levels to keep the fuel flowing smoothly in a way that 
providing a retail compliance date only has not done in the 
past.
    In sum, these options reflect past experiences with other 
fuel shifts, and it is the right way to do it.
    As we have heard, some individual firms will bear 
significant costs to upgrade old refinery infrastructure but to 
society the costs are reasonable. EPA estimates that diesel 
fuel costs might increase by about 5 cents a gallon over the 
course of the decade. Indeed, two of the largest diesel 
sellers, BP and Tosco, have each announced that they will be 
selling the 15 part per million diesel fuel in the West in the 
next year at a comparable incremental cost without the benefits 
of a national program's economy of scale.
    We believe that this undercuts the statements of the 
American Petroleum Institute and others in the oil industry who 
have suggested that the costs will be much, much higher. We 
also believe that it is worth noting that in the past, 
environmental regulation history has been filled with examples 
of regulations that did not cost nearly as much to implement as 
industry advocates had previously estimated before they became 
law.
    In conclusion, our Nation stands at a historic moment and 
we face a historic opportunity to develop an energy policy that 
can meet many critical energy, economic and environmental 
needs. Also, we finally have the technology to clean up many of 
our most enduring and polluting energy sources. The diesel rule 
is just one example of such a case. At NRDC we look forward to 
working with the subcommittee and all interested parties toward 
such a successful energy policy for the Nation. Thank you again 
for the opportunity to testify.
    [The prepared statement of Richard Kassel follows:]

    Prepared Statement of Richard Kassel, Senior Attorney, Natural 
                       Resources Defense Council

                            I. INTRODUCTION

    Mr. Chairman and members of the Committee, thank you for the 
opportunity to testify today. At NRDC,1 we believe strongly 
that the nation needs a balanced energy policy that meets a series of 
equally important energy, public health protection and environmental 
quality goals.
---------------------------------------------------------------------------
    \1\ The Natural Resources Defense Council (NRDC) is a national, 
non-profit environmental advocacy organization. Founded in 1970, NRDC 
has over 400,000 members nationwide, and offices in Washington, DC, New 
York City, Los Angeles and San Francisco.
---------------------------------------------------------------------------
    Towards that end, I will limit my oral comments to a discussion of 
the Environmental Protection Agency's recent step to insure that 
America's future freight needs are met in a way that minimizes 
environmental and public health impacts, and that ensures that diesel 
fuel supplies remain adequate and protected from price and/or supply 
spikes.2 Other issues--including power plant emissions, new 
source review, and our response to President Bush's reversal on carbon 
dioxide--are summarized in NRDC's March 21, 2001 testimony before the 
Senate Subcommittee on Clean Air, Wetlands, Private Property and 
Nuclear Safety, attached hereto and incorporated herein as Attachment 
1; environmental issues related to natural gas exploration, development 
and production from submerged federal lands on the Outer Continental 
Shelf (OCS) are summarized in NRDC's March 15, 2001 testimony before 
the House Subcommittee on Energy and Mineral Resources, attached hereto 
and incorporated herein as Attachment 2.
---------------------------------------------------------------------------
    \2\ Control of Air Pollution from New Motor Vehicles: Heavy-Duty 
Engine and Vehicle Standards and Highway Diesel Fuel Sulfur 
Requirements, 66 Federal Register 5002 et seq. (January 18, 2001) 
(hereafter, the ``Diesel Rule'').
---------------------------------------------------------------------------

           II. BACKGROUND: ENERGY POLICY IN THE 21ST CENTURY

    At the dawn of a new century, America finds itself once again 
grappling with a chronic problem--how to provide enough energy for its 
growing population and its growing economy. The United States has 5 
percent of the world's population, but consumes nearly a quarter of the 
world's energy supply. We use energy to heat our homes and our 
businesses, power our computers and telephone systems, run our 
automobiles and aircraft, drive our manufacturing plants and hospitals, 
and deliver every good we use. In short, we have constructed an economy 
and a way of life that depends on the ready availability of energy.
    Two distinct visions of an energy policy for the United States have 
emerged to meet these demands. One vision focuses chiefly on extracting 
as much energy as possible, mostly in fossil fuel form (oil, coal and 
natural gas), in hopes that supply can catch up with demand. The 
alternative vision, however, calls for encouraging innovation and new 
technology to meet our energy needs in an environmentally responsible 
manner. This vision emphasizes efficient use of energy, places priority 
on using energy resources that are least damaging to our environment, 
and strives to minimize the environmental and public health harms of 
the extractive resources we consume. It promotes economic growth and 
American industrial competitiveness. This energy path would not force 
consumers to make sacrifices. Instead it relies on improved 
technologies that will eliminate waste while increasing productivity 
and comfort.
    NRDC believes that U.S. energy policy must follow this alternative 
path. America can and must rely on the application of technological 
advances already in place and readily available as a way to reduce 
consumption and/or minimize environmental and public health impacts. 
Such an approach will decrease America's reliance on foreign sources of 
energy in the near- and long-term, protect the environment and the 
public's health, provide for America's energy needs, and buffer the 
economy against short-term swings in the market. NRDC's recently 
published report, A Responsible Energy Policy for the 21st Century 
examines these issues in detail. The executive summary is attached 
hereto and incorporated herein as Attachment 3.

  III. CLEANER TRUCKS ARE CRITICAL TO ENSURING CLEAN, RELIABLE GOODS 
                      MOVEMENT IN THE 21ST CENTURY

    Diesel trucks provide the backbone of America's freight movement, 
yet diesel pollution has been one of America's enduring pollution 
problems--with impacts that are far greater than the size of the 
vehicle population would suggest. Diesel trucks comprise roughly 7 
percent of the nation's vehicles, but their impact is far greater. More 
than 40 percent of the nation's transportation energy use comes from 
the nation's diesel trucks and buses, equivalent to more than 5,000,000 
barrels of crude oil per day.3 More than half of the 
particulate matter found in some urban areas come from diesel 
tailpipes--soot particles that have been linked to increased asthma 
attacks, cancer and even premature death. Roughly one-third of the 
transportation-related smog- and acid rain-causing nitrogen oxides come 
from diesel tailpipes.
---------------------------------------------------------------------------
    \3\ Oak Ridge National Laboratory, U.S. Department of Energy, 
Transportation Energy Data Book, October 2000, p. 2-7.
---------------------------------------------------------------------------
    Recently, EPA Administrator Christine T. Whitman reaffirmed the 
agency's commitment to cleaning up these trucks--thereby helping to 
assure them a responsible place in America's energy future. This 
commitment came in the form of a complex, thorough rule making that 
will bring about the most significant improvement in the environmental 
performance of the nation's vehicles since the removal of lead from 
gasoline two decades ago.
    EPA's Diesel Rule was supported by more than 75,000 Americans who 
provided written comments to EPA, and by an extremely diverse coalition 
of supporters that included the Alliance of Automobile Manufacturers, 
the California Trucking Association, International (formerly Navistar), 
Tosco, BP, the Manufacturers of Emission Controls Association, the 
American Lung Association, the U.S. Public Interest Research Group 
(USPIRG), the Union of Concerned Scientists, the Clean Air Network, the 
Clean Air Trust and others.
    Briefly, EPA's Diesel Rule will do the following: Starting in mid-
2006, 97 percent of the sulfur in diesel fuel would be eliminated, in a 
four-year phase-in that provides substantial flexibility for refiners, 
special allowances to help small refiners, and significant flexibility 
for vehicle and engine manufacturers. With sulfur largely eliminated, 
drastic emissions reductions will be possible, using advanced emission 
controls that cannot be used with today's high-sulfur diesel fuel. 
Starting with the 2007 model year, soot particles from new diesel 
engines will be slashed by 90 percent. By the end of the decade, 
tailpipe emissions of smog-forming nitrogen oxides (NOX) 
would be cut by 95 percent. As a result, diesel vehicles will achieve 
gasoline-like emissions levels.
    These emission reductions will be huge--equivalent to removing the 
pollution from 13 million of today's 14 million trucks from the roads. 
When fully implemented, the Diesel Rule will result in the elimination 
of 2.6 million tons/year of NOX, 115,000 tons/year of non-
methane hydrocarbons, and 109,000 tons/year of particulates. This will 
avoid 8,300 premature deaths, more than 23,000 cases of acute or 
chronic bronchitis, 360,000 asthma attacks and other avoidable health 
impacts annually.4
---------------------------------------------------------------------------
    \4\ Statement of EPA Administrator Christine T. Whitman, February 
28, 2001. See also 66 Federal Register 5002 (January 18, 2001).
---------------------------------------------------------------------------
    There are three keys to the successful implementation of EPA's 
Diesel Rule. First, the desulfurization of today's high-sulfur diesel 
fuel is necessary to achieve the predicted health and emissions 
benefits. Just as a small amount of lead in gasoline disables 
automobile catalytic converters, even a small amount of diesel sulfur 
will disable the most promising emission controls for nitrogen oxides 
and will make the soot controls less effective. In other words, a 
smaller, compromised sulfur cut (as has been suggested by the oil 
industry) would render the EPA's proposed PM and NOX targets 
unachievable.
    Second, the Diesel Rule's substantial flexibility and lead-time 
will be critical to the success of the Diesel Rule. Various 
implementation options are available on a region-by-region basis to 
ensure that there is widespread, national availability and supply of 
the low-sulfur diesel fuel from the beginning of the program. However, 
these options are designed (e.g., a percentage of higher-sulfur fuel 
will be allowed from 2006-2009 in each regional petroleum district, 
intra-district trading will be allowed, etc.) to provide important 
implementation flexibility to small and other refiners who need it 
during the first four years of the program. This will provide the 
widespread fuel availability that is critical to every truck operator. 
Also, this approach (including a four-year phase-in of the 
NOX standard) will provide engine and vehicle manufacturers 
with adequate lead time to efficiently phase-in the exhaust emission 
control technology that will be used to achieve the health benefits of 
the new standards.5
---------------------------------------------------------------------------
    \5\ One other point is worth noting. By requiring that all highway 
diesel fuel produced by refiners or imported to begin meeting the new 
sulfur standard by April 1, 2006, and all highway diesel fuel at the 
terminal level begin meeting the new sulfur standard by May 1, 2006, 
EPA is providing adequate lead time to ensure that all highway diesel 
fuel users can buy the low-sulfur diesel fuel by June 1, 2006 and is 
providing a clear and useful road map to implementing the sulfur limits 
in a manner that avoids market disruptions that could occur if only a 
retail compliance date were provided.
---------------------------------------------------------------------------
    Third, although some individual firms will bear significant costs 
to upgrade old refining infrastructure, the costs are extremely 
reasonable to society as a whole. EPA estimates that the Diesel Rule 
will increase the cost of a new truck or bus by about one percent or 
less, and that diesel fuel costs might increase by five cents per 
gallon. Indeed, BP and Tosco have each announced that they will be 
selling 15 ppm diesel fuel next year at comparable cost, completely 
undercutting the excessive claims of other oil industry commenters. In 
sum, EPA estimates that the benefits outweigh the costs by sixteen to 
one.6 It is worth noting that even these cost estimates are 
likely to be high--the past three decades of environmental regulations 
are filled with examples of air pollution regulations that did not cost 
nearly as much as industry advocates had previously estimated.
---------------------------------------------------------------------------
    \6\ See footnote 4.
---------------------------------------------------------------------------
      IV. FURTHER DETAILS ON THE HEALTH THREAT OF DIESEL EMISSIONS

    More than fifty studies show links between particulate matter 
generally and a wide range of health impacts, including increased 
asthma attacks and emergencies, endocrine disruption,7 
numerous cardiopulmonary ailments, cancer and premature 
death.8 Nitrogen oxides contribute to ground-level ozone 
formation, acid deposition, nutrient pollution of waterways, and 
secondary (i.e., atmospheric) formation of particulate matter.
---------------------------------------------------------------------------
    \7\ Endocrine/Estrogen Letter, June 2, 2000, p. 6. Researchers at 
the Science University of Tokyo found testicular abnormalities in male 
mice that inhaled diesel exhaust.
    \8\ NRDC, Exhausted by Diesel, Third edition, May 1999, pp. 5, 8.
---------------------------------------------------------------------------
    While numerous studies have concluded that the particulate matter 
and nitrogen oxide emissions in diesel exhaust are harmful to human 
health, NRDC is increasingly concerned about the growing evidence that 
diesel particulates are associated with increased cancer risk. Diesel 
exhaust has long been considered to be at least a probable human 
carcinogen by the National Institute of Occupational Safety and Health 
(NIOSH) and the World Health Organization's International Agency for 
Research on Cancer (IARC).
    In the past two years, three actions by various government bodies 
moved the nation further along this path: In July, EPA staff reiterated 
its prior conclusion that diesel exhaust is a likely human carcinogen, 
based on compelling epidemiological studies.9 We expect the 
Clean Air Scientific Advisory Committee to finalize its work on this 
document at its October meeting. In August 1998, the California Air 
Resources Board (CARB) formally declared diesel particulate exhaust to 
be a toxic air contaminant.10 And in December 1998, the 
National Toxicology Program advisory board recommended that diesel 
exhaust particulates be listed as ``reasonably anticipated to be a 
human carcinogen'' in the ninth edition of the Congressionally-mandated 
Report on Carcinogens.11
---------------------------------------------------------------------------
    \9\ U.S. EPA, Office of Research and Development, Health Assessment 
Document for Diesel Emissions, EPA/600/8-90/057E, July 2000, SAB Review 
Draft.
    \10\ California Air Resources Board, Resolution 98-35 (listing of 
diesel particulate as a toxic air contaminant), adopted August 27, 
1998.
    \11\ See 
---------------------------------------------------------------------------
    Diesel's link to cancer results in thousands of avoidable cancers 
nationwide. The association of the nation's state, territorial and 
local air pollution officials estimates that current levels of diesel 
pollution result in over 125,000 potential lifetime cancers nationwide, 
based on their extrapolation of the MATES-II study.12
---------------------------------------------------------------------------
    \12\ State and Territorial Air Pollution Program Administrators/
Association of Local Air Pollution Control Officials (STAPPA/ALAPCO), 
Cancer Risk from Diesel Particulate: National and Metropolitan Area 
Estimates for the United States, March 2000. This report was based on 
calculations of cancer risk first published in South Coast Air Quality 
Management District, Multiple Air Toxics Exposure Study (MATES-II), 
Draft Final Report, November 1999.
---------------------------------------------------------------------------
    NRDC is also especially concerned about the growing incidence of 
asthma in our nation, as well as the association between diesel 
particulate matter and asthma attacks. A recent study estimated that 
asthma cases would double by 2020, hitting one out of every five 
American families. 13 Nobody knows what causes asthma, but 
numerous studies have found associations between pollution (i.e., both 
ozone and particulate levels) and acute respiratory symptoms, including 
asthma attacks and hospitalizations.14
---------------------------------------------------------------------------
    \13\ Pew Environmental Health Commission, Attack Asthma: Why 
America Needs a Public Health Defense System to Battle Environmental 
Threats, May 2000.
    \14\ Regarding ozone associations, see, e.g., Gilmour MI, 
``Interaction of air pollutants and pulmonary allergic responses in 
experimental animals,'' Toxicology 1995 Dec 28; 105(2-3): 335-42; 
regarding PM associations, see, e.g., Nel AE, Diaz-Sanchez D, Ng D, 
Hiura T, Saxon A, ``Enhancement of allergic inflammation by the 
interaction of diesel exhaust particles and the immune system,'' J 
Allergy Clin Immunol 1998 Oct; 102 (4 Pt 1): 539-54.
---------------------------------------------------------------------------

          V. WHY THE OIL INDUSTRY COUNTER-PROPOSAL DIDN'T WORK

    Throughout the comment period, various oil industry representatives 
suggested a counter-proposal of 50 ppm. NRDC continues to view this 
approach as completely unworkable.
    At a sulfur level of 50 ppm, PM traps are likely to suffer high 
failure rates, leaving oxidation catalysts that yield only a 20 percent 
PM reduction 15 as the most likely PM after-treatment 
technology. While some PM traps (including the most promising 
continuously regenerating traps) can operate at 50 ppm, trap clogging 
and failure is a serious problem at this level, due to the formation of 
sulfate PM. Fuel economy also suffers, as a result of increased 
regeneration needs. As a result, it would be difficult--if not 
impossible--for engine, aftertreatment and/or vehicle manufacturers 
and/or sellers to warrant such a trap for the full useful life of the 
vehicle, and fuel economy-sensitive vehicle users might not welcome the 
technology. Consequently, if EPA had adopted a 50 ppm sulfur cap, 
manufacturers and sellers would be likely to opt for the less effective 
oxidation catalyst, rendering the proposed 0.01 g/bhp-hr PM standard 
unachievable.
---------------------------------------------------------------------------
    \15\ Statement by EPA Office of Transportation and Air Quality 
(OTAQ) Director Margo T. Oge, June 19, 2000, at EPA's hearing on the 
Diesel Rule, pp. 53, 55.
---------------------------------------------------------------------------
    Likewise, under a higher-sulfur approach, engine manufacturers and 
vehicle sellers would likely opt for selective catalytic reduction 
(SCR) as their preferred NOX after-treatment because it is 
less sulfur-sensitive than NOX adsorbers and other 
NOX after-treatment technologies that are in development. 
NOX adsorber efficiencies are dramatically reduced when 
sulfur contacts the NOX storage bed. Perhaps for this 
reason, the Manufacturers of Emission Controls Association has 
testified that industry efforts to develop an effective NOX 
adsorber would cease if EPA had chosen a 50 ppm cap.16 While 
SCR seems capable of significant emission reductions, it also requires 
the development of a nationwide urea infrastructure that would cost 
billions of dollars to install, operate and maintain. As with oxidation 
catalysts, it seems unlikely that the NOX standard would be 
achievable with an SCR-only strategy.17
---------------------------------------------------------------------------
    \16\ Testimony of Bruce Bertelson, Manufacturers of Emissions 
Control Association, June 19, 2000, as reported in the transcript of 
EPA's New York hearing on the Diesel Rule, June 2000, p. 56.
    \17\ EPA OTAQ Director Oge noted that EPA estimated that a 50 ppm 
sulfur limit would yield NOX reductions of 20 percent, 
presumably because of the perceived limits of SCR technology. See 
footnote 15 above.
---------------------------------------------------------------------------
    It is worth reiterating that the oil industry's preferred 50 ppm 
sulfur limit would have had a negative effect on the fuel economy of 
the nation's trucks and buses--hardly an issue for the industry that 
sells the fuel. For example, NOX adsorbers are expected to 
consume diesel fuel as they cleanse themselves of stored sulfates. As 
noted above, PM trap regeneration is inhibited by diesel fuel's 
sulfur--leading to increased PM loading, increased exhaust 
backpressure, and decreased fuel economy.18 In other words, 
the higher the sulfur cap, the lower the fuel economy.
---------------------------------------------------------------------------
    \18\ Memorandum from former EPA Official Michael P. Walsh to 
Interested Parties, May 17, 2000, p. 10.
---------------------------------------------------------------------------
                               CONCLUSION

    With a new century, a new President and a new Congress, our nation 
stands at a historic moment, and we face a historic opportunity to 
develop an energy policy that can meet many critical needs. Innovative 
technologies and policies allow us to finally move away from an energy 
policy that is focused primarily on increasing supply, and towards an 
energy policy that meets our energy needs while simultaneously meeting 
our environmental and public health needs. Further, we finally have the 
technology to clean up many of our most polluting energy sources. The 
Diesel Rule is just one example of such a case.
    At NRDC, we are excited about the possibilities for the alternative 
path discussed at the outset of this testimony. We look forward to 
working with the Committee and all interested parties towards such a 
successful energy policy for the nation.
    Thank you again for the opportunity to testify today. For further 
information, please do not hesitate to contact Richard Kassel at (212) 
727-4454 or at .

                              Attachment 1
    Prepared Statement of David G. Hawkins, Director, Air & Energy 
Programs, Natural Resources Defense Council Before the Subcommittee on 
Clean Air, Wetlands, Private Property, and Nuclear Safety, Committee on 
       Environment and Public Works, U.S. Senate, March 21, 2001

    Mr. Chairman, members of the Subcommittee, thank you for your 
invitation to testify on behalf of NRDC, the Natural Resources Defense 
Council, regarding the Clean Air Act and national energy policy. NRDC 
is a nonprofit citizen organization dedicated to environmental 
protection, with more than 400,000 members nationwide. Since 1970, NRDC 
has followed closely the implementation of the Clean Air Act and has 
sought to promote actions under the law that carry out Congress' policy 
decisions to protect public health and the environment from harm caused 
by air pollution.
    With all respect to the Subcommittee, my first point today is to 
suggest that the title of this hearing does not capture the issue 
before us. Rather than discussing ways to change the Clean Air Act to 
harmonize with an independently determined national energy policy, we 
need to define our tasks as identifying the goals that are important to 
Americans in the areas of energy, public health protection, and 
environmental quality and then designing energy and clean air policies 
that support these goals. I think any objective view of the historical 
record would demonstrate that the way we have pursued our energy goals 
in the past has interfered with Americans' desire for clean air, rather 
than the other way around. Today's hearing appears to be prompted by 
concerns that the Clean Air Act is interfering with meeting the 
nation's energy needs. While I welcome the opportunity to speak to 
these claims, I think it would be healthy for your sister committee, 
the Senate Committee on Energy and Natural Resources, to hold a hearing 
to review widespread concerns regarding the impact of our energy 
policies on public health and the environment. NRDC certainly would 
appreciate any encouragement you can give your colleagues on that 
Committee. Perhaps Senators Campbell, Graham, and Wyden, who serve on 
both Committees, could form an Health, Energy, Environment Harmony 
Caucus!
    In this testimony I would like to touch on three topics: the need 
to clean up electric power plants, the flaws in President Bush's change 
of position on including carbon dioxide in that program, and the role 
of new source pollution control requirements in the nation's air 
quality management program and useful improvements to that program.

  I. THE NEED FOR A COMPREHENSIVE PROGRAM TO CLEAN UP POLLUTING POWER 
                                PLANTS.

    Today, electricity generation imposes an enormous burden of air 
pollution on the American public and the great bulk of that pollution 
comes from plants that are not meeting technically feasible, affordable 
modern environmental performance standards. This fact is the product of 
actions, both lawful and unlawful, that have resulted in an electric 
generating fleet that is older, dirtier, and less efficient than is 
needed to protect health and the environment.
    As I explain in greater detail in Part III of my testimony, 
Congress in 1970 drew a distinction between existing pollution sources 
and sources that are new or modified: new and modified power plants 
were required to minimize air pollution through performance standards 
based on state-of-the-art clean power techniques, while existing, 
unmodified plants were required to clean up only to the degree needed 
to address local air quality problems.
    There were several reasons for this approach. First, most air 
quality problems were perceived as local. Second, at the time, the 
electric power industry was mostly a local one. Third, the exemption 
was assumed to be temporary--Congress believed existing plants would 
retire and be replaced by new ones meeting modern performance 
standards.
    Now, nearly 30 years later, the facts on the ground have changed. 
We know now that many of our most threatening air pollution problems 
are not local--they are regional, national, and even global. Our 
electric generating industry is rapidly becoming a national industry 
with all parts of the country connected by wires over which the product 
can move anywhere in three large regions of the lower 48 states. And 
those powerplants that were supposed to retire have, by lawful and 
unlawful means, kept on running like the Energizer Bunny. As a result, 
pollution from electric power generation is a dominant cause of nearly 
all our most pressing air quality related problems.
    Four pollutants cause a host of public health and environmental 
damage: sulfur dioxide, nitrogen oxides, mercury, and the pollutant no 
one can get away from, carbon dioxide, the dominant greenhouse gas. 
Electric generation in the U.S. is the largest single source of these 
four horsemen of air pollution. Electric powerplants release over two-
thirds of total U.S. emissions of sulfur dioxide; they release forty 
per cent of U.S. carbon dioxide; and they release about one-third of 
the nation's nitrogen oxide and mercury pollution.
    These pollutants are responsible for a Pandora's box of health and 
environmental harm:

 fine particles, formed from sulfur and nitrogen emissions, 
        that contribute to tens of thousands of premature deaths in the 
        U.S. each year;
 smog, that plagues our major cities, and causes respiratory 
        attacks in kids and seniors;
 acid rain, that still damages lakes, streams, forests, and 
        monuments;
 regional haze, that spoils trips to national parks for 
        millions of visitors annually;
 nitrogen emissions, that help over-fertilize estuaries, 
        including the Chesapeake Bay, Long Island Sound, Pamlico Sound, 
        and the Gulf of Mexico, leading to dead zones where aquatic 
        life perishes;
 mercury contamination of lakes and streams, that has lead 40 
        states to issue continuing advisories of the fish that store 
        this toxin; and,
 carbon dioxide driven climate change, that threatens ``
 to kill millions of people through more destructive floods, 
        droughts, heat waves, intense storms, and climate-related 
        infectious disease;
 to produce sea-level rise that would inundate the homes of 
        tens of millions of people and cost hundreds of billions of 
        dollars in damages and for countermeasures in those countries 
        with the resources to respond; and
 to destroy complex ecosystems that have evolved over thousands 
        of years under the influence of climate cycles that were not 
        destabilized by fossil fuel combustion.
    Consider also the energy we waste with current generating 
technology. Today's fossil generating plants are about 34% efficient in 
converting the chemical energy found in fossil fuels into electricity. 
What that means in real terms is that we must mine three tons of coal 
and pollute the air with the emissions caused by burning three tons of 
coal just to get electricity with the energy equivalent of one ton of 
coal. In fact, the energy we waste each year in making electricity is 
greater than the total energy in all the coal we burn each year in the 
United States. Stated another way, if we could increase the efficiency 
of our power plant fleet from about 34% to around 68%, we would cut 
sulfur, nitrogen, mercury, and carbon pollution from electricity 
generation in half, even with no change in the fuel mix.
    Our plague of pollution problems and wasted energy is the result of 
policies and practices that still allow 30, 40 and 50-year old plants 
to keep operating without meeting modern performance standards for 
pollution or efficiency. In addition to harming health and the 
environment, the de facto grandfather status of most of today's power 
plants creates unfair competition in the electricity market. In effect, 
the patchwork of lenient or nonexistent rules at the state and local 
level, combined with evasion of federal requirements, has created 
pollution havens where grandfathered plants can engage in domestic 
environmental dumping, distorting fair energy markets.
    As we move to modernize the electricity market economically, we 
must accompany it with modern environmental performance measures. A 
central purpose of electric industry restructuring legislation is to 
create a free and fair, competitive market for energy services. But 
fair competition is impossible in an environment where air pollution 
performance requirements are balkanized. Because electricity markets 
are connected by wires, different pollution standards promote a 
``survival of the filthiest'' market, where the power plants that are 
the dirtiest, run harder because they can slightly underbid cleaner 
generators.
    These market distortions do not deliver consumer benefits. The 
price differences caused by different pollution requirements are quite 
small--usually 2-3 mills per kilowatt-hour or less--but these small 
differences are enough to give dirtier producers a decisive market 
advantage in many areas. The market distortions also discourage 
investment in new, cleaner, more efficient generation and in renewable 
resources.
    Under the current rules, an entrepreneur who seeks financing for, 
say, a clean, high-efficiency natural gas plant can point out that it 
emits no sulfur, no mercury, and much less nitrogen oxides 
(NOX ) and carbon dioxide (CO2) than the 
competition. But, with the partial exception of sulfur (for which 
allowance programs exist under the acid rain law), this superior 
environmental performance has no economic value in the market place. 
The financier wants to know whether the plant will be able to run more 
cheaply than the competition. If the competition is a group of 
grandfathered coal-fired power plants, the answer often will be no, and 
financing may go to a higher-polluting new plant rather than a clean 
one.
    To address the egregious health, environmental, and economic flaws 
in the current air pollution control programs, a number of bills were 
introduced in the last Congress and last week the bipartisan ``Clean 
Power Act of 2001,'' S. 556, was introduced in the Senate. Among its 
lead sponsors are three members of this Committee, Senators Lieberman, 
Clinton, and Corzine. The Clean Power Act establishes industry-wide 
caps on tons of each of the ``four-horsemen'' pollutants: sulfur 
dioxide (SOX), NOX, CO2, and mercury. 
The caps on SOX and NOX would provide building 
blocks for meeting health-based smog and fine particle standards 
(challenged unsuccessfully by industry in the Supreme Court) and would 
reduce acid rain further. The mercury cap would attack the largest 
single remaining U.S. source of this pollutant. And the CO2 
cap would return the industry's emissions to 1990 levels--the target 
set in the 1992 Rio Climate Treaty that the first President Bush signed 
and that the Senate has ratified.
    With the exception of mercury, for which there are both local and 
regional concerns, the bill would implement the cap through market-
based approaches where power generators could trade their clean-up 
obligations to meet the caps in the most efficient manner. One possible 
market mechanism, a ``generation performance standard,'' would define 
the amount of pollution that could be legally emitted for a kilowatt-
hour of electricity from fossil generation, thus creating a level 
playing field for those generators. This system will directly reward 
cleaner, more efficient generators.
    In contrast to the current situation, if the Clean Power Act were 
now law, a developer of a new clean power plant would be able to show 
direct tangible economic benefits from its reduced environmental 
impact. Because the new plant would be able to generate electricity 
below the average pollution performance required under the law, every 
kilowatt-hour generated would also generate another source of revenue: 
emission allowances that can be banked or sold on the market. This 
additional revenue stream would make financing such projects that much 
more attractive.
    A final benefit of these integrated pollution cleanup bills is that 
they provide a clear roadmap for business in planning long-term 
investments. The history of clean air progress has developed as a 
series of unconnected initiatives, typically focused on a single 
pollutant. Today, we can survey the next 10-15 years and be confident 
that additional measures will be pursued to reduce the four horsemen 
pollutants. But if we pursue the traditional approach, no one can say 
now with confidence, when, how deep, and in what order these important 
steps will occur.
    As a result, business planners must approach today's investments by 
making educated guesses about environmental requirements. Billions of 
dollars are changing hands as generation plants are sold under state 
restructuring programs. One thing we can say for sure is that someone 
is guessing wrong. By enacting integrated cleanup programs, Congress 
could both provide certainty and reduce the tendency to prolong 
dependence on existing outmoded plants through the traditional process 
of applying end-of-pipe cleanup devices normally aimed at controlling 
only one pollutant.
    In short, we know we need to reduce a range of damaging pollutants 
from the electric generating sector; we know how to do it; and we know 
that failure to take these steps now will increase damage, prolong 
uncertainty, and encourage unfair competition. Mr. Chairman and members 
of the Subcommittee, we hope you will seize the opportunity presented 
by the Clean Power Act to harmonize clean air and energy goals. By 
doing so you can address the key issues that face the industry and the 
public in a manner that produces a cleaner, more efficient, more 
sustainable, and more competitive electricity market that delivers 
energy services for lower costs.

            II. PRESIDENT BUSH'S POSITION ON CARBON DIOXIDE

    As you know, on March 13, 2001, President Bush announced that, 
despite his campaign promise to support emission reductions for all 
four major pollutants from power plants, including carbon dioxide, he 
now opposes inclusion of CO2 in a power plant control bill. 
You may also know that NRDC and virtually every other environmental 
organization strongly objected to the President's change of position, 
the reasons he gave for his decision, and the way in which he made his 
decision.
    From what I have said in Part I of my testimony you can understand 
that NRDC believes that control of carbon dioxide from power plants is 
as critical to health and the environment as control of the other three 
pollutants. Requiring the electricity industry to return its carbon 
emissions to 1990 levels is a practical and necessary first step in 
demonstrating that the U.S. intends to honor its commitment under the 
1992 Rio Climate Treaty, which, as I said, has been ratified by the 
Senate. Failure to include carbon dioxide in a clean-up bill would mean 
the legislation would not be comprehensive. By decoupling carbon 
emissions from control strategies on the other three pollutants, a 
limited bill would increase the tendency for plant owners to make 
short-sighted investments in control methods that might reduce sulfur, 
nitrogen, and mercury but would perpetuate high levels of carbon 
emissions. Indeed, a narrow-focus strategy that slaps controls on 
inefficient, outmoded generators could well extend the life of such 
facilities further, wasting energy and making it more difficult and 
costly to reduce carbon when Congress decides (as I believe will 
happen) to take on that threat to planet. A narrow bill would send a 
confusing signal to investors: is carbon really off the table or will 
it be put back on in a couple of years just after we have selected a 
strategy that ignores that pollutant? A two-step program to control the 
four major pollutants from electric generators will cost consumers more 
in the end than enacting a comprehensive bill now.
    Let me turn to the reasons President Bush gave in his March letter 
for his about-face. The first reason cited by the President is his 
claim that carbon dioxide is ``not a ``pollutant' under the Clean Air 
Act.'' To start, the claim that carbon dioxide is not a Clean Air Act 
pollutant is irrelevant as a justification for abandoning his pledge to 
support a new law (imagine President Lincoln announcing he would oppose 
adoption of the 14th Amendment because he had learned that the original 
Constitution did not prohibit discrimination). However, President Bush 
is wrong on the law as well as on his logic.
    To my knowledge, the only official interpretation of the status of 
carbon dioxide under the Act was issued in a legal memorandum prepared 
in April 1998, by the chief agency officer authorized to interpret the 
Act, EPA General Counsel Jonathan Z. Cannon (copy attached). In his 
memorandum, Mr. Cannon concluded that while not yet covered by 
regulations issued under the Act, carbon dioxide met the statutory 
criteria for a ``pollutant'' as the term is defined in the law. Indeed, 
as pointed out by Mr. Cannon, carbon dioxide is mentioned by name in a 
list of multiple pollutants from fossil fuel power plants for which 
Congress directed EPA to develop pollution prevention programs. Sec. 
103(g). To be sure, this section of the law does not by itself confer 
authority on EPA to regulate carbon dioxide, just as it does not 
provide regulatory authority for any of the other pollutants listed in 
section 103(g) that EPA has regulated under other provisions of the 
Act. While lawyers will argue about the scope of EPA's current 
authority to regulate carbon dioxide, the Act is clear that carbon 
dioxide is a pollutant. (See attached NRDC Fact Sheet.)
    Perhaps some will argue, Mr. Cannon was general counsel in the last 
administration and we now have a new president. It is true that 
President Bush is the Chief Executive of the United States but his oath 
under the Constitution is to faithfully execute its laws, not to make 
them up. If President Bush did not rely on Mr. Cannon's existing 
interpretation of the Act, on what official's legal interpretation did 
he rely? Was a memorandum of law prepared for the president's 
consideration? If so, by whom? We don't know the answers to these 
questions and we should know, to promote confidence in the way the 
president reaches his decisions.
    President Bush's second reason for changing his position was an 
assertion that including carbon dioxide in new legislation would lead 
to significantly higher electricity prices. Was this conclusion based 
on any analysis performed by his administration? Apparently not. His 
letter cites one report for the high cost conclusion: ``Analysis of 
Strategies for Reducing Multiple Emissions from Power Plants.'' I will 
say more about this report in a moment. First, let me point out that 
while the president apparently did not ask his own appointees to 
prepare an analysis for him, there were four other reports done in the 
last six months regarding the costs of programs to reduce power plant 
emissions of carbon dioxide. The other four studies, including a 
November, 2000, Department of Energy report, Scenarios for a Clean 
Energy Future, concluded that substantial carbon dioxide reductions 
from the electric sector could be achieved at very low costs. For 
example, the DOE ``Clean Energy Future'' study found that electric 
sector carbon dioxide emissions could be reduced to 1990 levels with a 
net increase in Americans' energy bills of less than 1% in the year 
2010 and with large energy bill savings in later years due to more 
efficient use of energy. Citations to this and the other studies are 
attached.
    Thus, there were five studies the president could have consulted 
regarding the costs of carbon controls--four that found low to modest 
costs and one outlier that forecast high costs. Unfortunately, his 
letter leaves the impression that his staff seized on the EIA analysis, 
not based on any broad review of the issue but because it contained the 
conclusion that could be used to rationalize the president's change of 
position. If this is correct, it is quite striking. The president made 
an explicit and clear policy commitment during the campaign. His 
surrogates repeated his pledge in additional public appearances during 
the campaign. One would think that before abandoning such an explicit 
promise, the president would have directed a thorough review by his own 
administration team of policy options and the costs of those options to 
determine whether there was a real conflict between his promise and 
Americans' energy goals. At the very least, one would have hoped that 
the president's staff would have recommended a process that included an 
examination of all relevant recent analyses and, when presented with a 
conflict in those analyses, that more time would have been taken to 
determine which cost analyses were more reliable. While the president's 
letter states the information he received ``warrants a reevaluation,'' 
he didn't announce he was undertaking a reevaluation. He just made a 
decision that flatly contradicted his campaign pledge. All of these 
facts suggest that careful policy analysis had very little to do with 
the president's decision.
    What should we make of the report cited by the president? While he 
called it a ``Department of Energy Report,'' the analysis is, in fact, 
a ``Service Report'' prepared by the Energy Information Administration 
(EIA) for submission to former Congressman David McIntosh in response 
to his request for an analysis of emission reduction scenarios 
specified by the congressman. Now EIA is respected for its analytical 
capabilities but it is also clear that when Congressmen McIntosh 
requested the analysis, his staff knew before the EIA computers were 
turned on that the result would forecast high costs for carbon 
controls. Given Mr. McIntosh'' vehement opposition to any form of 
carbon emission reductions, this prospect probably did not make him 
unhappy.
    Is EIA's predictable result due to deliberate deception by EIA? 
Certainly not. It is an artifact of the approach EIA used to evaluate 
the policies specified by Mr. McIntosh. The analytic approach and 
assumptions that EIA adopts in modeling electric services options 
guarantee that any policy aimed at significantly reducing carbon from 
electricity generators will be calculated as having a high cost. One 
would have more confidence in the reality of this prediction if there 
were no credible conflicting conclusions. But, in fact, the Department 
of Energy Clean Energy Future study I mentioned above, uses the same 
model run by EIA and reaches dramatically different conclusions. A 
principle reason for this is that in DOE's runs, analysts incorporate a 
number of sensible policies designed to help Americans use electricity 
and natural gas more efficiently. These policies lower consumer energy 
bills and make it possible to clean up power plants at much lower 
costs. For example, the DOE analysis ignored by the president includes 
policies found in Chairman Smith's recently reintroduced Energy 
Efficient Buildings Incentives Act, S. 207, also sponsored by Senators 
Reid, Lieberman, and Chafee of this Committee. By examining a 
harmonized set of energy and clean air policies such as those 
championed by Chairman Smith, the DOE Clean Energy Future report comes 
much closer to the truth about the costs of smart carbon reduction 
programs than the EIA service report done at Mr. McIntosh'' request.
    President Bush also refers to concerns about current high energy 
prices in California and other states as supporting his new position on 
carbon dioxide. This point really does not withstand analysis. Prices 
are high today and generation capacity in California and the West is 
constrained. But any legislation enacted by Congress for power plants 
will not affect energy supplies today. Instead, a reduction timetable 
will be some years in the future, allowing time to install pollution 
controls and for repowering or replacement of the very plants whose 
breakdowns contributed to California's problems in the last year. As 
explained in attached NRDC fact sheets, environmental requirements have 
not caused today's electricity price and supply problems and no amount 
of scapegoating will change the facts or improve our chance of 
designing effective remedies.
    Finally, I must comment on the president's statements regarding the 
Kyoto Protocol in his letter. Just last month the president's foreign 
policy officials requested and received a delay in the resumed meeting 
of the parties to the Rio Climate Treaty, previously scheduled for May 
2001. The State Department requested this delay because, it told other 
countries, the administration was conducting a comprehensive review of 
climate change policy that could not be completed by the May meeting.
    How is that need for a thorough review to be squared with the 
president's apparently definitive denunciation of the Kyoto agreement 
in his letter? Granted, in this case, his statements are consistent 
with views he expressed on the campaign trail. But why not await the 
review he has promised before reaffirming views he formed without 
benefit of such an analysis? The president says the Kyoto agreement 
would ``cause serious harm to the U.S. economy.'' What analyses did he 
review in reaching this conclusion? The previous administration 
published analyses concluding that compliance with the agreement would 
have less than a 1% impact on forecasted GDP, equivalent to adding no 
more than a month or two to a ten-year forecast for achieving a vastly 
increased level of wealth in this country. The president may well 
disagree with the previous administration's analysis but on what basis? 
Wouldn't he and the American public be benefited by preparation of the 
best objective analysis that the new administration is capable of 
producing? Why the hurry to issue the verdict before hearing the 
evidence?
    The other thing the president had to say about the Kyoto agreement 
was that it was unfair because it does not establish the same reduction 
targets for China and India as for the United States. In my opinion, 
this is a shameful statement. Consider that the U.S. and other 
developed countries are among the wealthiest nations on earth and that 
they have put into the atmosphere about 75% of the carbon dioxide that 
has accumulated since the start of the industrial revolution 150 years 
ago. Consider also the relative economic ability of the U.S., India, 
and China to take the first steps in demonstrating that we can fight 
global warming. The mortality rate for children under 5 years old in 
India is thirteen times higher than in the U.S.; China's mortality rate 
for these children is 6 times higher than ours. In India, close to half 
the population attempts to survive on less than $1 per day; in China, 
one in five people lives on this level. Consider electricity 
consumption: the average American uses more electricity in a day than 
the average person in India uses in a month; compared to China the 
average American uses more electricity in a month than a Chinese person 
uses in fifteen months.
    For the president to demand that India and China make equal 
commitments to control carbon dioxide as a condition for the U.S. to 
take a first step along with other wealthy nations, flies in the face 
of Americans' vision of our country as a compassionate and responsible 
world citizen. America's heart is bigger than this. The president spoke 
of compassion during the campaign and I have to believe his heart is 
bigger than this too.
    There is a practical point to be made here as well. China and India 
are important nations to engage in global strategies to fight climate 
change. The U.S. certainly needs a strategy to break down barriers with 
these countries and produce a more cooperative basis for discussion of 
all countries' global warming responsibilities over time. But what 
possible strategy could underlie the President's decision to single out 
China and India for criticism in his letter? Did Secretary of State 
Powell advise that this would be helpful in moving those two countries 
to a position that is less contentious on this issue? That seems 
unlikely.
    NRDC hopes the president actually will evaluate and reevaluate his 
positions on carbon dioxide from power plants and the Kyoto agreement, 
rather than flatly reversing one position and restating the other with 
no current analysis to inform his decisions. If he does so, he could 
rebuild some badly needed bridges that are now in flames.

        III. THE CLEAN AIR ACT'S DUAL-TRACK AIR QUALITY STRATEGY

    Now I want to turn to the role of new source review under the Clean 
Air Act. Members who read my testimony before this Subcommittee in 
February, 2000, will find this material familiar, since I repeat in 
this section, what I said at that time.
    In 1970 Congress adopted a dual-track program to protect and 
enhance our nation's air quality. The first program calls on states to 
adopt comprehensive pollution control programs under state law to 
achieve air quality objectives set forth in National Ambient Air 
Quality Standards (NAAQS) adopted by EPA. This ambient program is an 
example of the ``assimilative capacity'' approach to environmental 
management--based on the belief that the environment can assimilate a 
certain amount of dirt or toxins released from human activities without 
causing identifiable harm. This approach starts by identifying exposure 
levels of pollution that current research indicates may be tolerable 
for humans and ecosystems and then seeks to reduce emissions from 
pollution sources enough to meet the maximum tolerable exposure 
targets.
    The 1970 Act's ambient management program strengthened previous 
efforts enacted by Congress in the 1960s and relied on states to set 
control rules for pollution sources at levels just tough enough to 
bring total pollution down to the level of the national ambient 
standards. Implicit in this approach is that an area's air quality 
determines the amount of clean-up required of sources. Even if there 
are readily available means of reducing a source's pollution, a state 
is not required to adopt such measures if not needed to meet the NAAQS.
    But Congress did not rely exclusively on the assimilative approach 
to air quality protection in the 1970 Act. Congress adopted another 
strategy designed to minimize air pollution by requiring sources to 
meet emission performance standards based on modern ``best practices'' 
in pollution abatement. The performance standard approach does not set 
required levels of control based on the air quality conditions of 
particular areas. Rather, the required emission reductions are 
determined by assessing how much polluting processes can be cleaned up, 
taking account of technical and economic constraints.
    Congress expected that future ambient goals would likely be more 
ambitious than 1970's defined goals and wanted an independent program 
that would be effective in reducing total emissions over time. 
Congress' intent in the performance standard program was to use the 
force of new purchases and investments to incorporate advances in 
pollution prevention and control as a complementary strategy to the 
ambient management program.
    Congress applied the performance standard approach to both 
stationary and mobile sources but with some important distinctions. In 
the mobile source area (cars, trucks, buses), only entirely new 
vehicles were subject to federally-established modern performance 
standards. Congress was presented with analyses demonstrating that with 
traditional rates of ``fleet turnover,'' most of the benefits of 
tighter new car standards would be experienced in less than 10 years.
    In requiring performance standards for stationary sources, Congress 
adopted more sweeping provisions. The Act requires that both new and 
modified stationary sources must meet modern performance standards. 
Congress in 1970 also adopted a very expansive definition of 
``modification,'' to assure that environmental performance would 
improve as investments were made.
    The 1970 Act's principal tool for improved pollution control for 
new and modified sources was the New Source Performance Standard 
(NSPS), a national, categorical requirement based on very good, but not 
the best, pollution minimizing practices. In 1977, when the Act was 
amended, Congress adopted the new source review (NSR) and prevention of 
significant deterioration (PSD) programs to strengthen efforts to 
minimize emissions and air quality impacts from new and modified 
sources.1 In the 1977 Amendments Congress expanded both the 
scope of the rigor of the requirements for improved performance from 
new and modified sources. Coverage would no longer be limited to the 
categories for which EPA had adopted NSPS requirements; rather all new 
and modified sources above certain pollution tonnage thresholds would 
be required to minimize their emissions. Second, the level of the 
performance requirement would not be tied to often out-of-date NSPS; 
rather case-by-case determinations of current best performance would be 
required. Third, covered sources locating in clean areas as well as 
dirty areas would have to pass ambient impact tests to prevent a 
worsening of air quality. In 1990, Congress again increased its 
emphasis on pollution prevention from new and modified sources, 
reducing the size thresholds for coverage in badly polluted areas.
---------------------------------------------------------------------------
    \1\ For simplicity, for this testimony I will refer to these 
programs generally as NSR.
---------------------------------------------------------------------------
    In sum, Congress has repeatedly endorsed the concept of modern 
performance standards for new and modified pollution sources, adopting, 
in successive amendments, strengthened requirements intended to make 
the NSR programs more effective in reducing pollution.
    However, these programs have for twenty years been the subject of 
criticism from industry representatives and from many academic 
economists. The economists' argument runs, ``why should new sources be 
regulated more strictly than existing sources? After all, air quality 
is determined by how much pollution is released and where it is 
released. The air certainly cannot tell the difference between a pound 
of pollution from a plant built in 1965 and that from a plant built in 
1995.''
    Critics of the Act's new source requirements argue that instead of 
regulating new and old sources differently, we should simply establish 
our desired air quality objectives and allow them to be met by the most 
efficient means. Under this approach, agencies first would do research 
to identify the adverse effects of air pollution on health and welfare; 
next, agencies would convert this research into environmental 
standards; then, the agencies would design pollution control programs 
to achieve the environmental standards; finally, agencies and pollution 
sources would implement the pollution control programs and the air 
would become cleaner.
    This critique and prescription has a certain superficial appeal. As 
I have mentioned, the ambient management program has been a central 
program of the Clean Air Act since 1970 and it should continue. The 
question is whether it is prudent to rely on the ambient standards 
approach as the only strategy for improving and protecting air quality. 
In my view that would be a mistake.
    The 1970 and later Clean Air Acts reflect a judgment by Congress 
that the ambient standards approach should be the major pollution 
control strategy but that it should be complemented by other 
independently functioning programs such as the NSR and Mobile Source 
Emission Standards programs. I think that this judgment was a wise one. 
The history of air pollution control efforts both before and after the 
1970 Act reveals that the ambient standards approach, while 
conceptually sound, has its weak spots, which when exploited by well-
organized opposition, can prevent the program from solving air quality 
problems in a timely fashion.
    First, the Government's capacity to acquire unambiguous information 
about natural processes is very limited. The research is complex, 
expensive, and time consuming. Due to perennial shortages of money, 
talent, and time, most of the studies undertaken in the past and those 
being conducted now are less than perfect. As a result, their 
conclusions are easy to pick apart and dismiss as not dispositive. 
Moreover, the health effects we are concerned about are increasingly 
related to chronic exposures to low levels of combinations of 
pollutants. We have never conducted an adequate study to characterize 
the effects from these kinds of exposures and none is even planned.
    The uncertainties in what we know about air pollution effects in 
turn lead to controversy and delay in establishing environmental 
standards. All of us, including this Committee, have experienced this 
controversy in the continuing disputes about EPA's revised ozone and 
particulate standards.
    The next step in the process--control program design--can also be 
affected. Different interests argue at length about how emissions in a 
particular location relate to air quality in that location or 
elsewhere. This can and has led to uncertainty, controversy and delay 
in designing pollution reduction programs to meet environmental 
standards. The continuing fights over efforts to address transported 
air pollution are an example of this problem.
    Another weak spot in the ambient standards abatement program is 
that it often requires large changes in established patterns of 
behavior. When an air pollution control agency adopts a regulation that 
applies to an existing source it is trying to get firms to spend their 
money, time, and thought in ways they have not planned. Not 
surprisingly, these firms often resist, which leads to uncertainty, 
controversy and delay in the final step of the ambient standards 
approach, the actual implementation of pollution reduction measures in 
the real world.
    This resistance to change often feeds back to the first step in the 
ambient standards process, setting the standards themselves. Pressure 
is mounted to weaken existing standards and to oppose the setting of 
new ones. Again, the unified fight of industrial polluters against the 
revision of the ozone and particulate standards highlights this 
problem.
    These weaknesses do not call for abandoning the ambient standards 
approach. But they do suggest the wisdom of complementing that approach 
with programs that are strong where the ambient approach is weak. The 
Act's NSR programs meet that need. Implemented properly, these programs 
can assure that as new well-controlled sources replace old ones, we 
will make progress in reducing emissions as our economy grows. By 
controlling the major pollutants, the new source programs also serve as 
a hedge against unidentified risks associated with those pollutants. By 
dealing with engineering facts rather than biological facts, the new 
source programs usually involve more manageable factual controversies. 
We are relatively good at measuring the dollar costs of meeting 
performance standards and calculating the emission reductions such 
standards can provide. Finally, by focusing on new and modified 
sources, the new source programs can lessen the social and political 
costs of reducing pollution. Because they operate at the time firms are 
making new investments, these programs allow firms to plan pollution 
prevention and control into their plant operations.
    All of this does not argue that the new source programs should 
replace the ambient program, only that they should complement that 
program. For the new source programs have weaknesses in areas where the 
ambient program performs better. The new source programs focus on the 
highly technical details of engineering and thus are too insulated from 
effective public participation. Controlling pollution only from new 
sources often is not the cheapest way to achieve a unit of emissions 
reduction. In my view, the premium we pay to accomplish reductions 
where the ambient program has failed to deliver them is a prudent 
investment, but controls on new and modified sources should not be our 
only program. Finally, new source programs, because they are technology 
based, do not guarantee a desirable level of environmental quality. We 
will degrade our air quality unless we improve pollution reducing 
methods and processes at least as fast as we grow. The new source 
programs do not create adequate incentives for such improvements and 
thus must be complemented by the ambient standards and PSD programs 
which do recognize that clean air is a scarce resource.
    In sum, the Clean Air Act's dual track approach to air quality 
management employs the principle of diversification to reduce risks. In 
an uncertain world, a prudent investor will forego putting all her 
money into the one stock with the apparent highest yield. Instead she 
will spread her risk by selecting a range of investments--some which 
offer high risk and high yield and others which offer less risk and 
less yield. Similarly, the Act resembles a stable ecosystem which has a 
diversity of species. Such systems are much less likely to fail in the 
face of adversity than systems that have no diversity.

           IV. HOW SHOULD EPA'S NSR PROGRAMS BE ``REFORMED''?

    NRDC has participated over the last decade in stakeholder 
discussions convened by EPA to consider ways to improve the Act's NSR 
programs. A major reason these talks have made little progress is the 
lack of agreement on the purposes of these programs. There are two 
major purposes: to assure that new investments do not degrade air 
quality and to assure that when new investments are made, emissions are 
minimized by requiring sources to meet performance standards that 
reflect modern emission prevention capabilities.
    While a great deal of attention has been paid to the complexity of 
the NSR permitting process, the larger environmental failure of the NSR 
program is that the program has not brought down emissions as Congress 
intended. Citizens, pollution control agencies, and members of Congress 
are increasingly aware of the fact that grandfathered air pollution 
sources are more and more the central impediment to clean air progress. 
Contrary to the intent of Congress, investments in new production have 
not resulted in existing grandfathered sources being replaced by 
facilities that must meet modern performance standards. As a result, 
grandfathered sources dominate the pollution inventory throughout the 
United States.
    The degree to which old stationary sources determine our nation's 
burden of air pollution is striking, especially when compared to the 
impact of old cars on pollution loads. For example, fossil electric 
powerplants built more than 20 years ago are responsible for 84% of 
total US nitrogen oxides (NOX) pollution from that sector 
and 88% of sulfur dioxide ( SOX). In contrast, 20-year-old 
cars contribute less than 7% of US car NOX pollution and 3% 
of that sector's VOC (volatile organic compounds) pollution.
    It is obvious that the Title II new mobile source program has done 
quite a good job of preventing old cars from dominating today's 
pollution problems but the Title I new stationary source program has 
performed miserably on this score.
    There are some obvious reasons for the NSR program's poor pollution 
reduction performance. First, the rules themselves contain too many 
loopholes that allow sources to avoid NSR even though they continue to 
make significant investments year after year. Second, as recent 
enforcement actions have alleged, there are many instances of firms 
escaping the requirements of the rules by misclassifying projects in an 
unlawful manner.
    Reform of the NSR program should address its failure to produce 
pollution reduction from old grandfathered sources as a priority issue 
as well as explore ways to simplify the NSR process. A genuine reform 
of the program should aim to make two basic changes: the program should 
apply to more industrial projects than it now does and the review 
process should be streamlined to enable decisions to be made quickly 
while protecting the public's right to participate. Instead, the 
``reform'' proposals EPA has published over the last decade have 
concentrated almost entirely on changes that would expand the loopholes 
of the current rules so that even fewer grandfathered sources would be 
required to clean up as they upgraded their capital equipment.
    The combination of categorical exemptions and exclusions, weak 
rules for calculating emission increases, and broad provisions for 
``netting out'' of review allow far too many sources to avoid the NSR 
program indefinitely. When illegal evasions of the rules are added to 
the many exemption opportunities in the rules, we get the results we 
see--most sources never encounter the federal NSR program and their 
pollution remains with us.
    NRDC has filed lengthy comments with EPA on these issues over the 
years and I will not burden the Subcommittee with a recitation of the 
details here. I would like to mention one area--that of ``netting.'' 
Netting is the jargon for a transaction that allows new projects at 
existing sources to escape NSR. In essence it allows the source 
operator to count ``reductions'' from grandfathered pieces of polluting 
equipment at the site in calculating whether a new project will result 
in an emission increase that would require new source review. By 
allowing sources to avoid the modern performance requirements of NSR, 
netting preserves the status quo, perpetuating excessively high levels 
of pollution originally emitted by poorly-controlled, grandfathered 
pollution sources.
    Netting rewards sources that have managed to manipulate the current 
system to preserve high levels of emissions. Current netting policy 
allows those high emission levels to function as an asset that can be 
deployed to avoid NSR/PSD review. Thus, netting operates at cross 
purposes with sound air quality objectives. It creates incentives to 
keep emissions at unnecessarily high levels and perpetuates an 
inefficient allocation of emission ``shares'' by providing the greatest 
rewards to the most polluting sources. Netting frustrates one of the 
primary objectives of the NSR/PSD program, which is to link 
requirements for modern emission performance standards to investments, 
so that emissions are reduced as the economy expands. Instead, netting 
allows existing emission levels to be perpetuated indefinitely.
    While the netting rules are complex, the fundamental problem with 
the approach is easy to understand. Netting allows a grandfathered 
pollution source to ``bequeath'' its excessive pollution privileges to 
its descendant, the new piece of equipment. Under netting, the new 
piece of equipment is not required to meet modern performance 
standards; it can emit at much higher levels by relying on the 
pollution entitlements transferred from old, grandfathered pieces of 
equipment. In this way, excessive amounts of pollution can live on long 
after the original sources have disappeared. Netting resembles the 
former hereditary peerage system in England, where membership in the 
House of Lords and other privileges were handed down from generation to 
generation. England recently acknowledged this system has no proper 
place in a modern democracy. We too need to eliminate the pollution 
peerage that is imbedded in EPA's netting rules.
    For nonattainment NSR, the Supreme Court in Chevron made it clear 
that EPA has the authority to eliminate the availability of netting 
altogether.2 One perverse effect of netting in nonattainment 
NSR is that new equipment is installed without meeting ``lowest 
achievable emission rate'' (LAER) performance standards. This in turn 
means that a greater level of emission reduction is required to offset 
the new equipment's emissions than if the new equipment had met LAER 
standards. These additional emission reductions must come from a finite 
pool of existing emission sources whose total pollution load must be 
further reduced for the area to attain the ambient standards. Thus, the 
effect of NSR netting is to allow existing source owners to 
unilaterally dedicate the cheapest and easiest emission reductions in a 
nonattainment area to compensate for poorly-controlled new units, 
leaving state and local control agencies with the more difficult task 
of developing an attainment plan from the more expensive, politically 
controversial remaining emission reduction opportunities.
---------------------------------------------------------------------------
    \2\ Chevron, U.S.A., Inc. v. NRDC, 467 U.S. 837 (1984).
---------------------------------------------------------------------------
    EPA's original defense of its 1981 change to allow netting under 
the nonattainment NSR program was that areas choosing such an approach 
would be required to develop timely attainment plans in any event so 
that there would be no environmental harm. It is now the year 2000 and 
EPA can no longer deny that the theory it presented to the Supreme 
Court in the early 1980s has no basis in reality. In fact, areas have 
not succeeded in developing timely and adequate attainment plans. State 
and local agencies have protested repeatedly to EPA that they cannot 
identify sufficient, politically feasible emission reductions to 
demonstrate timely attainment. EPA has responded with policies that 
have permitted lengthy delays in the submission of adequate plans. 
Given that the premise for EPA's initial adoption of NSR netting in 
1981 has not been achieved, it is time for nonattainment netting to be 
abolished.
    To restrict netting in the PSD NSR program, EPA should reform its 
definition of contemporaneous so that only activities which are part of 
the project for which the netting claim is made can qualify. Second, 
EPA should reduce the netting credits available for shutting down or 
limiting operations at existing units to reflect the obvious fact that 
the new emission-increasing projects will have greater longevity than 
the older existing units that are generating the netting credits. For 
example, consider a source that proposes to build a 100-ton-per-year 
new unit with a 35-year useful life and to net out the increase with 
the shutdown of a 100-ton source that has only 5 years of life 
remaining. The stream of emission reductions from the shutdown source 
ends after 5 years but the emission increases from the new source 
continue for an additional 30 years. There clearly is an enormous 
increase in the cumulative emissions from the facility over the life of 
the new project that is not captured if netting credits are given for 
the shutdown unit based only on a comparison one year's emissions.

               V. NEW SOURCE REVIEW AND ENERGY FACILITIES

    Over the last year, as we have experienced high prices and 
shortages in some energy markets, the cry has been raised that 
permitting requirements, including the Act's NSR requirements, are 
preventing construction of needed facilities. These are not new claims. 
They are raised whenever the basic fact that energy is a scarce 
resource makes its way on to the evening news. So we see repeated 
references to the fact that California ``has not built a major power 
plant in a decade'' and the claim that permitting requirements are the 
reason. As NRDC's attached fact sheet points out, the claim is wrong. 
Power plant construction slowed to a trickle in California in the 1990s 
not because of permitting requirements but because private investors 
first did not forecast enough demand to be assured of returns that 
would beat other uses for their money; then uncertainties created by 
the development of a deregulated electricity market caused further 
hesitation. A review of California's permitting files demonstrates that 
nearly all power plant projects were approved and without significant 
delays. The fact is, had there been no permitting requirements at all 
in California during the 1990s, private investors still did not have 
adequate market incentives to spend money building new plants.
    However, in this Congress bills have been introduced that would 
carve gaping exemptions for from NSR requirements for new and modified 
power plants. For example, S. 60 and similar provisions in S.389, 
Senator Murkowski's energy bill, would exempt from NSR and from any 
additional emission regulation, projects at new or existing coal-fired 
power plants. While these exemptions are labeled ``credit for emission 
reduction'' or ``clean-coal'' projects, in fact the legislation does 
not require emissions to be reduced as a condition for eligibility. The 
eligibility criteria are so broadly drafted that virtually any 
expansion project at an existing plant or any new coal plant could be 
built with an exemption from NSR and a prohibition of coverage by new 
pollution control requirements, such as future rules for mercury 
controls or rules to reduce nitrogen oxides to address regional smog 
problems. A detailed analysis of S. 60's exemptions, which applies as 
well to similar provisions in S. 389, is attached.
    In truth, these efforts to repeal Clean Air Act safeguards are 
short-sighted and counterproductive to the goal of increasing public 
acceptance of new energy projects.
    While the nation's energy concerns continue to be a convenient 
excuse for attacking environmental permitting requirements, with the 
``NIMBY syndrome'' derided as a telltale symptom of our ills, the fact 
is, people want nearby plants to be as clean as possible and want the 
chance to participate in location decisions. Weakening the Clean Air 
Act would increase anxiety and opposition to new projects, not lessen 
it.
    As you consider this issue I would encourage each member of the 
Subcommittee to ask, ``how close is the nearest large fossil fuel 
generating station to my home--1 mile away, 2, 5, 10?'' Suppose a new 
station was proposed less than a mile from your home; how would you 
talk about it in your own kitchen or living room? Would you like the 
opportunity to ask questions about the design, performance, scale, and 
perhaps even the location of the project? Would you like a public 
process that your neighbors could join in? Would you like the right to 
get answers from the approval authorities? Would you like some recourse 
if officials ignored your questions and suggestions for improvement of 
the project? Other Americans want these same safeguards and they 
deserve better than to be labeled ``NIMBY.''
    The path to harmonizing clean air and energy goals is not down the 
road of exemptions from safeguards. The right path involves adopting 
comprehensive integrated programs to clean up existing polluting power 
plants and improving current new source programs so that they more 
reliably and efficiently assure citizens that expanded energy supplies 
can be achieved without degrading environmental quality. Mr. Chairman 
and members of the Subcommittee, NRDC would be happy to work with you 
to move down this path. Thank you for the opportunity to present these 
views and I am happy to answer any questions you may have.

                              Attachment 2
   Prepared Statement of Lisa Speer, Senior Policy Analyst, Natural 
   Resources Defense Council, Before the Subcommittee on Energy and 
    Mineral Resources, House Committee on Resources, March 15, 2001

    My name is Lisa Speer. I am Senior Policy Analyst with the Natural 
Resources Defense Council (NRDC) in New York. NRDC is a national 
nonprofit organization of scientists, lawyers, and environmental 
specialists, dedicated to protecting public health and the environment. 
Founded in 1970, NRDC serves more than 400,000 members from offices in 
New York, Washington, Los Angeles, and San Francisco. My testimony 
today addresses environmental issues surrounding natural gas 
exploration, development and production from submerged federal lands on 
the Outer Continental Shelf (OCS).

            1. BACKGROUND: ENERGY POLICY IN THE 21ST CENTURY

    At the dawn of a new century, America finds itself once again 
wrestling with a problem that has, off and on, been at the forefront of 
U.S. politics for several decades: energy. The United States has 5 
percent of the world's population, but consumes nearly a quarter of the 
world's energy supply. We use energy to heat our homes and our 
businesses, power our computers and telephone systems, run our 
automobiles and aircraft, and drive our manufacturing plants and 
hospitals. In short, we have constructed an economy and a way of life 
that depends on the ready availability of energy.
    Two distinct visions of an energy policy for the United States have 
emerged to meet these demands. One vision focuses chiefly on extracting 
as much energy as possible, mostly in fossil fuel form (oil, coal and 
natural gas), in hopes that supply can catch up with demand. The 
alternative vision, however, calls for encouraging innovation and new 
technology to meet our energy needs in an environmentally responsible 
manner. This vision emphasizes efficient use of energy, and places 
priority on using energy resources that are least damaging to our 
environment. It promotes economic growth and American industrial 
competitiveness. This energy path would not force consumers to make 
sacrifices. Instead it relies on improved technologies that will 
eliminate waste while increasing productivity and comfort.
    Therefore, NRDC believes that U.S. energy policy must rely on the 
application of technological advances already in place and readily 
available as a way to reduce consumption. Such an approach will 
decrease America's reliance on foreign sources of energy in the near- 
and long-term, protect the environment, provide for America's energy 
needs, and buffer the economy against short-term swings in the market. 
NRDC's recently published report, A Responsible Energy Policy for the 
21st Century examines these issues in detail. I ask that the report be 
included in the record.

        2. NATURAL GAS RESOURCES OF THE OUTER CONTINENTAL SHELF

    As the cleanest burning fuel, natural gas makes an important 
contribution to the nation's energy supply. Some argue that natural gas 
development on the Outer Continental Shelf should be promoted. They 
argue that the risk of oil spills is negligible, and that 
environmentally sound development can take place. This argument ignores 
the reality that oil spills are not the only environmental concern 
related to OCS development. Offshore gas development, like oil 
development, causes substantial environmental impacts, including the 
following.
    Onshore damage: The onshore infrastructure associated with offshore 
oil or gas cause significant harm to the coastal zone. For example, OCS 
pipelines crossing coastal wetlands in the Gulf of Mexico are estimated 
to have destroyed more coastal salt marsh than can be found in the 
stretch of land running from New Jersey through Maine.1 
Moreover, the industrial character of offshore oil and gas development 
is often at odds with the existing economic base of the affected 
coastal communities, many of which rely on tourism, coastal recreation 
and fishing.
---------------------------------------------------------------------------
    \1\ Boesch and Rabalais, eds., ``The Long-term Effects of Offshore 
Oil and Gas Development: An Assessment and a Research Strategy.'' A 
Report to NOAA, National Marine Pollution Program Office at 13-11.
---------------------------------------------------------------------------
    Water pollution: Drilling muds are used to lubricate drill bits, 
maintain downhole pressure, and serve other functions. Drill cuttings 
are pieces of rock ground by the bit and brought up from the well along 
with used mud. Massive amounts of waste muds and cuttings are generated 
by drilling operations--an average of 180,000 gallons per 
well.2 Most of this waste is dumped untreated into 
surrounding waters. Drilling muds contain toxic metals, including 
mercury, lead and cadmium. Significant concentrations of these metals 
have been observed around drilling sites.3
---------------------------------------------------------------------------
    \2\ MMS, 2000. Gulf of Mexico OCS Oil and Gas Lease Sale 181, Draft 
Environmental Impact Statement (DEIS), p. IV-50.
    \3\ Id.
---------------------------------------------------------------------------
    A second major polluting discharge is ``produced water,'' the water 
brought up from a well along with oil and gas. Offshore operations 
generate large amounts of produced water. The Minerals Management 
Service estimates that each platform discharges hundreds of thousands 
of gallons of produced water every day.4 Produced water 
typically contains a variety of toxic pollutants, including benzene, 
arsenic, lead, naphthalene, zinc and toluene, and can contain varying 
amounts of radioactive pollutants. All major field research programs 
investigating the fate and effects of produced water discharges have 
detected petroleum hydrocarbons, toxic metals and radium in the water 
column down-current from the discharge.5
---------------------------------------------------------------------------
    \4\ Id., p. IV-32.
    \5\ Id., p. IV-32-33.
---------------------------------------------------------------------------
    Air pollution: Drilling an average exploration well generates some 
50 tons of nitrogen oxides (NOX), 13 tons of carbon 
monoxide, 6 tons of sulfur dioxide, and 5 tons of volatile organic 
hydrocarbons. Each OCS platform generates more than 50 tons per year of 
NOX, 11 tons of carbon monoxide, 8 tons of sulfur dioxide 
and 38 tons of volatile organic hydrocarbons every year.6
---------------------------------------------------------------------------
    \6\ Id., p. IV-40.
---------------------------------------------------------------------------
    Oil spills: If offshore areas are leased for gas exploration there 
is always the possibility that oil also will be found. We no of no 
instance where a lease prohibits an oil company from developing oil if 
oil is found in a ``gas prone'' region. We are not aware of any company 
ever agreeing to such a condition in the history of the OCS program. 
Without such a restriction included in a lease there would be no 
assurances that oil in fact would not be developed, raising the 
possibility of an oil spill. According to statistics compiled by the 
Department of the Interior, some 3 million gallons of oil spilled from 
OCS oil and gas operations in 73 incidents between 1980 and 
1999.7 Oil is extremely toxic to a wide variety of marine 
species, including marine birds, mammals and commercially important 
species of fish.
---------------------------------------------------------------------------
    \7\ MMS, 2000. Gulf of Mexico OCS Oil and Gas Lease Sale 181, Draft 
Environmental Impact Statement (DEIS), pp. IV-50.
---------------------------------------------------------------------------

                          3. THE OCS MORATORIA

    Beginning in 1981 and every year since then, Congress has imposed 
restrictions on OCS leasing in sensitive areas off the nation's coasts. 
These moratoria now protect the east and west coasts of the U.S. and 
most of the Eastern Gulf of Mexico. The moratoria reflect a clearly 
established consensus on the appropriateness of OCS activities in most 
areas of the country, and have been endorsed by an array of elected 
officials from all levels of government and diverse political 
persuasions, from former President George H.W. Bush to Governor Jeb 
Bush of Florida, and from Governor Tony Knowles of Alaska to Governor 
Gray Davis of California.
    We strongly oppose any attempt to lift the moratorium, or to 
promote gas development in other sensitive OCS areas, including the 
Sale 181 area off the west coast of Florida and areas off Alaska. We 
have called on the Interior Department to remove these areas from the 
new Five Year OCS Program currently under development.

 4. DRILLING IN THE MORATORIA AREAS, THE SALE 181 AREA AND THE ALASKAN 
                         OCS IS NOT NECESSARY.

    Despite assertions from industry and their supporters on Capitol 
Hill, it is not necessary to drill in sensitive areas to meet America's 
energy needs. For example, industry is pressing to drill in the 
moratorium areas, the Eastern Gulf of Mexico, and off Alaska. But such 
drilling is unnecessary because seventy per cent of the nation's 
undiscovered, economically recoverable OCS oil and gas, and 80% of the 
nation's undiscovered, economically recoverable OCS gas, is located in 
the Central and Western Gulf of Mexico. 8 Thus, removing the 
moratorium areas, the OCS off Alaska, and the Eastern Gulf of Mexico 
from the 5 Year Program will leave the vast majority of the nation's 
OCS oil and gas available to the industry.
---------------------------------------------------------------------------
    \8\ U.S. Department of the Interior, Minerals Management Service 
(MMS), 2000. Outer Continental Shelf Petroleum Assessment, 2000, page 5 
and Gulf of Mexico Assessment Update.
---------------------------------------------------------------------------
    Large untapped energy efficiency resources provide a much better 
choice. Congress can help by providing tax incentives for the 
construction of energy efficient buildings, manufacturing energy-
efficient heating and water heating equipment. These measures could 
save 300 Tcf of natural gas over 50 years.9 This is more 
than twelve times the Interior Department's mean estimates of 
economically recoverable gas located outside the Central and Western 
Gulf of Mexico.10 These strategies will do far more to 
increase our nation's energy security than a ``drain America first'' 
policy of exploiting sensitive offshore and onshore federal lands.
---------------------------------------------------------------------------
    \9\ NRDC, 2001. A Responsible Energy Policy for the 21st Century, 
p. 32.
    \10\ U.S. Department of the Interior, Minerals Management Service 
(MMS), 2000. OCS Petroleum Assessment, 2000, p. 5 and Gulf of Mexico 
Assessment Update.
---------------------------------------------------------------------------
    Thank you for the opportunity to testify.
                              Attachment 3
            A Responsible Energy Policy for the 21st Century
    Principal Authors: Daniel Lashof and Patricio Silva. Contributing 
Authors: Alyssondra Campaigne; Sheryl Carter; Ralph Cavanagh; Sarah 
Chasis; Charles Clusen; Karen Garrison; David Goldstein; Nathanael 
Greene; David Hawkins; Roland Hwang; Kit Kennedy; Lisa Speer; Johanna 
Wald; Faith Weiss; and Gregory Wetstone, Natural Resources Defense 
Council, March 2001.

                           Executive Summary
    This report offers a responsible approach to meeting America's 
energy requirements. And it is balanced, recognizing the need to 
extract resources, while proposing a range of environmentally preferred 
ways to increase supply and energy efficiency improvements that could 
substantially reduce the demand for energy without forcing Americans or 
American industry to make sacrifices.
    The cornerstone of NRDC's (Natural Resources Defense Council) plan 
is increased energy efficiency, relying not on pie-in-the-sky, 
undeveloped technologies, but on readily available and cost-effective 
processes and technologies. In the short-term, the plan calls for 
increased reliance on natural gas as a bridge to renewable and 
environmentally sound energy sources in the future. Correspondingly, 
the plan calls for reducing U.S. reliance on dirtier fossil fuels--oil 
and coal. And the plan addresses the urgent needs of low-income 
households for affordable energy services.
    In sharp contrast to NRDC's common sense approach is the Bush 
administration's controversial energy initiative. Among other things, 
it calls for opening the Arctic National Wildlife Refuge coastal plain 
to oil drilling and development, and for rolling back environmental 
safeguards to pave the way for more fossil fuel development. Already 
the plan has come under severe criticism for the irreparable harm it 
would cause pristine areas of the wildlife refuge. That criticism is 
entirely accurate. But there is another fundamental reason to reject 
the proposal: it is completely unresponsive to the problems it purports 
to address. It would make virtually no difference to America's energy 
supply in the short- or long-term, it would have no impact on energy 
prices, and it would have no practical effect on America's dependence 
on foreign sources of oil.

RESPONSIBLE OIL POLICY: FUEL EFFICIENCY, NOT FOOLISH DEVELOPMENT OF THE 
                    ARCTIC NATIONAL WILDLIFE REFUGE

Key Recommendations:
 Provide tax credits to individuals who buy clean and efficient 
        advanced-technology vehicles employing hybrid gasoline-electric 
        drive.
 Raise fuel economy standards for new cars, sport utility 
        vehicles (SUVs), and other light trucks to an average of 39 
        miles per gallon over the next decade.
 Require replacement tires to be as fuel efficient as the 
        original tires on new vehicles.
 Expand programs to weatherize low-income Americans' housing 
        and help pay their energy bills.
 Provide incentives for smart growth development patterns that 
        reduce sprawl.
 Do not drill in the Arctic National Wildlife Refuge.
 Do not drill in sensitive offshore areas, including moratorium 
        areas, Alaska, and the eastern Gulf of Mexico.
 Maintain existing protections for sensitive onshore public 
        lands and extend protection to other special places.
    The reality that proponents of drilling in the Arctic National 
Wildlife Refuge refuse to acknowledge is that the United States cannot 
drill its way out of its energy problem. America has 5 percent of the 
world's population, but consumes nearly a quarter of the world's oil 
supply. It already has extracted the majority of its available oil. The 
obvious conclusion is that the United States can have a much greater 
impact on oil prices worldwide and can do more to help ensure its own 
economic security by cutting its demand.
    For example, simply upgrading the quality of replacement tires to 
match that of tires that come as standard equipment on new cars would 
save 5.4 billion barrels of oil over the next 50 years--70 percent more 
than the total amount of oil that would likely be pumped from the 
Arctic Refuge over the same time period. Updating fuel efficiency 
standards to reflect the capabilities of modern technology would 
produce even greater savings. Increasing fuel efficiency standards for 
new vehicles to an average of 39 miles per gallon over the next decade 
would save 51 billion barrels of oil over the next 50 years--more than 
15 times the likely yield from the Arctic Refuge.

  DRILLING THE ARCTIC REFUGE IS UNRESPONSIVE TO AMERICA'S ENERGY NEEDS

    The case for drilling the Arctic National Wildlife Refuge made by 
the Bush administration and its supporters on Capitol Hill makes no 
sense. Proponents wrongly present drilling as a solution to the current 
California energy crisis. They overstate how much oil could be pumped. 
They understate the environmental consequences. In fact, drilling in 
the Arctic Refuge coastal plain would have no bearing on California's 
current crisis, would cause huge and unnecessary environmental damage, 
would do nothing to address America's long-term need for greater energy 
efficiency, would not affect the price of gasoline at the pump, and 
would not significantly reduce U.S. dependence on foreign oil.
    The available oil from the Arctic National Wildlife Refuge is a 
drop in the bucket of America's energy needs. The best U.S. Geological 
Survey estimate is that less than a six-month supply of oil could be 
economically recovered from the Arctic Refuge (about 3.2 billion 
barrels, spread out over a 50-year period), and that it would take at 
least 10 years of exploration, drilling, and pipeline construction 
before the oil would reach refineries. In its peak year of production--
2027--the Arctic Refuge would yield less than 2 percent of projected 
U.S. consumption in that year.
    Proponents overstate how much oil would be extracted from the 
refuge. Proponents of drilling maintain that as much as 16 billion 
barrels of oil would be pumped from the Arctic Refuge. The claim is a 
gross exaggeration that ignores the U.S. Geological Survey's conclusion 
that about 60 percent of the oil in the Arctic Refuge would not be 
economically feasible to produce. Even if there were 16 billion barrels 
of oil available in the refuge, more than three times as much could be 
saved by raising vehicle fuel economy standards to an average of 39 
miles per gallon.
    Drilling in the coastal plain would have no impact on California's 
electricity problems or any other state's electricity problems. Most 
U.S. electric power plants do not use oil. Less than 1 percent of 
California's electricity is generated by burning oil. The average for 
the United States as a whole is only 3 percent. And as noted above, oil 
from the refuge would not flow to refineries for at least a decade.
    Drilling in the Arctic National Wildlife Refuge would have no 
impact on the price of energy. The oil market is global, and refuge oil 
would expand global oil reserves by just 0.3 percent--a quantity far 
too inconsequential to affect prices at the pump or elsewhere.
    Drilling in the coastal plain would spoil an irreplaceable natural 
treasure. The Arctic National Wildlife Refuge is a fragile wilderness 
that would be ruined by oil drilling.

     RESPONSIBLE ELECTRICITY POLICY: CLEAN AIR, ENERGY EFFICIENCY, 
                        CONVERSION TO RENEWABLES

Key Recommendations:
 Establish a national ``system benefits'' fund to promote 
        energy efficiency, support research and development, and 
        maintain universal service.
 Establish a federal ``portfolio standard'' to ensure that 
        renewable energy steadily increases its market share at minimum 
        cost.
 Extend the renewable energy production tax credit, which 
        encourages greater reliance on emerging renewable energy 
        sources.
 Provide tax incentives for advanced energy-efficient buildings 
        and appliances.
 Strengthen energy-efficiency standards for appliances and 
        buildings.
 Establish comprehensive limits on air pollution from power 
        plants covering emissions of carbon, nitrogen, sulfur, and 
        mercury.
 Require full disclosure to customers about the sources and 
        environmental impact of their electricity.
 Reject new subsidies for so-called ``clean coal'' technology 
        and nuclear power, and eliminate existing subsidies.
    Another form of energy in the news today is electricity. As 
Californians suffer through an unprecedented electricity crunch, 
politicians a continent away are beginning to debate the causes of--and 
solutions to--the shortfall.
    Contrary to suggestions from the White House, the California crisis 
is not a function of pollution regulation, and it will not be solved by 
drilling in the Arctic National Wildlife Refuge. The real reasons for 
the crisis include a market structure that failed to ensure long-term 
supplies as a hedge against volatile spot market prices, rapid 
consumption growth in neighboring states that is overloading the 
interstate power grid, cutbacks in electricity infrastructure 
investment throughout the West, and reduced hydropower generation due 
to low rainfall. As if all of that were not enough, investigations 
continue of alleged anti-competitive practices by power generators.
    Also contributing to the crisis is a contraction in available 
natural gas supplies, leading to higher costs (almost one-third of 
California's electricity is generated with natural gas). Again, the 
upswing in natural gas prices is partly the result of industry 
decisions to forego exploration and cut storage levels after years of 
low commodity prices. Another contributor to natural gas price 
increases is a short-term reduction in pipeline capacity in the 
Southwest due to an explosion last summer.
    California already has acted to reduce its exposure to volatile 
short-term electricity markets by providing for a more balanced 
portfolio of longer-term purchase contracts. Looking ahead, the 
fastest, cheapest, and cleanest response to the electricity crisis is 
to take advantage of the state's many immediate opportunities to ramp 
up its investments in energy efficiency and renewable energy. These 
measures already contribute more than 15,000 megawatts to the Western 
power grid, which never needed them more. And the California Energy 
Commission recently issued emergency upgrades for efficiency standards 
governing all new buildings, which will yield the equivalent of two 
giant coal-fired power plants (1,000 megawatts) in the next five years. 
Also, last September, the Legislature and Gov. Gray Davis created a 10-
year, $5.5 billion investment fund for energy efficiency and other 
sustainable energy technologies. California legislators could do more, 
starting with making a large additional investment from California's 
budget surplus in energy efficiency and renewable energy.
    California also needs more highly efficient natural-gas-fired power 
plants. NRDC and other environmental groups support the ongoing 
additions of such plants, which have had no difficulty meeting 
California's siting requirements. Since April 1999, nine plants 
totaling nearly 6,300 megawatts have received siting approval. Six are 
under construction, and at least three are expected to be on-line by 
the end of this year (2,368 megawatts). At least 14 more plants capable 
of generating about 7,000 megawatts are poised to follow, rebutting 
claims that environmental safeguards somehow prevent additions of 
generation capacity. The new plants (both renewable and fossil) are 
dramatically cleaner than their aging gas- and coal-fired competitors 
across the Western power grid. Indeed, the capacity additions 
anticipated over the next several years are both clean and large enough 
to begin improving air quality by displacing those dirtier competitors 
during at least some hours of the year.
    Nonetheless, President Bush said recently, ``If there's any 
environmental regulations . . . preventing California from having a 100 
percent max output at their plants--as I understand there may be--then 
we need to relax those standards.'' But as reported by the Los Angeles 
Times on January 25, Richard Wheatley, spokesman for Houston-based 
Reliant Energy Co., which operates four Southern California power 
plants, said that the assertion that environmental regulations are 
holding back output ``is absolutely false. We're making every megawatt 
available on request. We factor the air quality regulations into our 
daily operating basis, and they are not causing us to withhold power.'' 
The Times could find only one small, obsolete plant that had to suspend 
operations temporarily to comply with air quality standards, and it 
accounted for less than 0.2 percent of California's peak power needs.
    In the long-term, the best path for California is the best path for 
America: strong clean air standards; increased reliance on energy-
efficiency measures; a shift away from obsolete, inefficient fossil-
fueled plants as a source for electricity; and, eventually, full 
conversion to renewable and environmentally sound forms of energy.
    Taken together, these measures will reduce power plant pollution. 
The electricity-generating sector today is the single largest source of 
the four pollutants responsible for the most serious local, regional, 
national, and global air pollution problems we face. These four 
horsemen of power plant pollution are: sulfur dioxide (causing acid 
rain and producing fine particles), nitrogen oxides (causing ozone 
smog), mercury (causing neurological damage), and carbon dioxide 
(causing global warming).
    Policies to limit air pollution are fragmented and based on 
outdated assumptions, resulting in excessive emissions and distorted 
electricity markets. As a result, support continues to grow for 
integrated requirements to reduce the four horsemen. A major benefit of 
an integrated pollution cleanup approach is that it would provide a 
clear road map for business in planning long-term investments.
    Large pollution reductions can be achieved at reasonable cost while 
meeting America's electricity needs by maximizing energy efficiency and 
reliance on renewable energy technologies. Market barriers, however, 
have inhibited the widespread deployment of environmentally preferred 
electricity demand and supply options. Two of the most effective and 
market-compatible public policies to address this problem are public 
goods or system benefits funds, and renewables portfolio standards.
    A public goods or system benefits charge--a small surcharge on 
customers' electricity bills--can help fund cost-effective, long-term 
investments in energy efficiency, low-income services, and renewable 
energy resources. At least 20 states have some form of system benefits 
charge.
    Renewables portfolio standards, meanwhile, encourage greater 
diversity of energy resources, which enhances reliability by requiring 
electricity providers to include a minimum percentage of renewable 
energy resources in the electricity mix they deliver to their 
customers.

RESPONSIBLE NATURAL GAS POLICY: SENSIBLE EXTRACTION, SENSIBLE PIPELINE 
                                 SITING

Key Recommendations:
 Provide tax incentives for the construction of energy-
        efficient buildings and for manufacturing energy-efficient 
        heating and water-heating equipment.
 Adopt a comprehensive pipeline approach ensuring that 
        pipelines are constructed and operated in an environmentally 
        sensitive manner, with strong safety oversight, and, whenever 
        possible, along existing routes.
 Reject plans to construct an offshore pipeline off the Arctic 
        National Wildlife Refuge coastal plain.
 Plan an Alaska gas pipeline if needed to deliver Prudhoe Bay 
        gas to the lower 48 states that follows the Trans-Alaska 
        Pipeline System and the Alaska-Canadian Highway right-of-ways; 
        complies with all U.S. and Canadian environmental laws; has a 
        thorough, new environmental impact statement; and incorporates 
        the best pipeline safety and environmental measures.
 Do not drill in sensitive offshore areas, including the 
        moratorium areas, Alaska, and the eastern Gulf of Mexico. 
        Maintain existing protections for sensitive onshore public 
        lands and extend protection to other special places.
    Of the three fossil fuels that dominate the U.S. energy market, 
natural gas is by far the cleanest burning fuel. It is, therefore, a 
key part of NRDC's energy policy--the bridge to greater reliance on 
cleaner and renewable forms of energy. Increased energy efficiency in 
homes and factories not only would lower consumers' energy bills; it 
would also free up large amounts of natural gas to help meet the needs 
of new, highly efficient, combined-cycle (combustion and steam turbine) 
power plants. Stronger and better-enforced building codes augmented by 
tax incentives for constructing buildings that exceed code requirements 
would pay a double dividend: lower heating and electric bills, and less 
pollution.
    But natural gas is not sufficiently clean to be considered the 
long-term answer to America's energy needs. Extracting gas, 
transporting it to market, and burning it all cause pollution in 
various forms.
    NRDC recognizes the need for continued exploitation of America's 
natural gas resources, but believes that certain federal lands should 
be afforded special protection. This applies to existing protected 
areas, including roadless national forest areas and the Rocky Mountain 
Front. Additional areas that should be protected include Wyoming's Red 
Desert, Utah's fabled red rock country, and the area in and around 
Vermillion Basin in northwest Colorado.
    The energy production industry and its champions in Washington 
sometimes assert that America's public lands natural gas resources have 
been put off limits, but in fact, 95 percent of onshore federal public 
lands in the Rocky Mountain region managed by the Bureau of Land 
Management (including split estate lands) remain open to exploration 
and production leasing. Similarly, nearly 70 percent of the nation's 
untapped economically recoverable offshore oil and gas resources are 
open for these purposes. Oil and gas development should be excluded 
from sensitive offshore areas, including existing moratorium areas, 
Alaska, and the eastern Gulf of Mexico.
    Another important natural gas issue involves siting pipelines to 
carry gas from drilling sites to market. NRDC believes that pipelines 
should be constructed and operated in an environmentally sensitive 
manner, with strong safety measures and oversight, and, whenever 
possible, along existing routes. For example, plans to construct an 
offshore pipeline off the Arctic National Wildlife Refuge coastal plain 
should be rejected. Instead, if Prudhoe Bay gas supplies are needed to 
serve markets in the lower 48 states, any Prudhoe Bay natural gas 
pipeline should follow the Trans-Alaska Pipeline System and the Alaska-
Canadian Highway right-of-ways; undergo a thorough, new environmental 
impact statement; comply with all U.S. and Canadian environmental laws; 
and incorporate the best pipeline safety and environmental measures.

                               CONCLUSION

    Eventually the United States will have no choice but to turn to 
greater energy efficiency and renewable sources of power. Demand for 
fossil fuels surely will overrun supply sooner or later, as indeed it 
already has in the case of U.S. domestic oil drilling. The capacity of 
our air and land to absorb unlimited quantities of waste from fossil 
fuel extraction and combustion is also limited. As that day draws 
nearer, policymakers will have no realistic alternative but to turn to 
power sources that today make up a viable but small part of America's 
energy picture. They also will be forced to embrace energy 
efficiencies--those that are within our reach today, and those that 
will be developed tomorrow. Precisely when they come to grips with that 
reality--this year, 10 years from now, or 20 years from now--will 
determine how smoothly the transition will go for consumers and 
industry alike.

    Mr. Barton. Thank you, Mr. Kassel. We appreciate that.
    Last but not least, we want to hear from John Paul Pitts, 
who is the Oil Editor for the Midland Reporter Telegram in the 
Permian Basin in west Texas. As a personal note, I have been 
involved in energy issues in some shape, form or fashion for 
almost 20 years, and of all the people I have met with, talked 
to, listened to, read, researched, and I think I am pretty 
comprehensive in at least having contact with most people that 
are supposed to know something about oil and gas issues, I 
would put Mr. Pitts at the very top of the list in terms of 
personal knowledge and integrity on these issues. So it is 
truly an honor to have you before the subcommittee that I 
chair.
    We have got your testimony in the record and look forward 
to having you summarize it in 6 minutes.

                  STATEMENT OF JOHN PAUL PITTS

    Mr. Pitts. Thank you for those kind comments, Chairman 
Barton. Distinguished members of the committee, my name is John 
Paul Pitts. I am the Oil Editor of the Midland Reporter 
Telegram, a Hearst newspaper serving the Permian Basin of west 
Texas and southeast New Mexico. I am honored to be here today 
to provide this committee what insight or information I can as 
you take on the urgent task of developing a comprehensive 
national energy policy that will provide America with abundant, 
sustainable, secure, and affordable energy for the short term 
and the long term.
    The Permian Basin, comprised of 52 counties in west Texas 
and New Mexico, is larger than Norway, Italy or Ireland. It is 
a prolific oil and gas producing area, accounting for 75 
percent of all the oil in Texas and 18 percent of the Nation's 
5.8 million barrels of daily oil production. The oil and gas 
capital of the Permian Basin is Midland, Texas, a world class 
oil town that is both highly dependent and highly focused on 
oil and gas.
    This oil centered intensity has given us a community of oil 
and gas producers highly attuned to energy issues with views 
tending to be reflective of the entire industry.
    Mr. Barton. Mr. Pitts, would you suspend a minute. Do you 
know of anybody who just recently moved to Washington that was 
from Midland, Texas?
    Mr. Pitts. My friend George Bush.
    Mr. Barton. That is right. I think you should put that in 
your testimony if you are talking about Midland, Texas.
    Mr. Pitts. I didn't want to drop names.
    Mr. Barton. Continue.
    Mr. Pitts. I will have to find my place here.
    This oil centered intensity has given us a community of oil 
and gas producers highly attuned to energy issues and with 
views tending to be reflective of the entire industry. In other 
words, if you could take the entire domestic oil industry and 
somehow distill it and condense it into one city of 106,000 
people, you would have essence of oil, or Midland, Texas.
    In February, the Reporter Telegram interviewed a large 
cross-section of these producers and asked key energy policy 
questions on energy policy issues. I would like to share some 
of those findings with you. First, most producers in the 
Permian Basin think it is a now or never situation for our oil 
and gas policy. Ninety-seven percent feel that this is the 
President and this is the administration and this is the 
Congress and this is the year. If it doesn't happen this year, 
it will never happen.
    By the same token, less than half think it can happen. They 
don't think it is politically possible. They just don't think 
the Nation is ready yet to make the hard choices for a viable 
energy policy.
    Second, there is great concern among Permian Basin 
producers about national security. Eighty percent are very 
concerned about it. They feel that we must begin now to back 
away from the treachery in the Middle East before it is too 
late. Yet three quarters do not believe that we can become 
energy independent if you were to conceive the best energy 
policy you could.
    Third, while producers feel a national energy policy should 
deal with oil price volatility, 68 percent would not support a 
floor price on crude oil. They say floor prices don't work, you 
have a ceiling that will be artificial, a floor that will be 
artificial and it will be subject to government manipulation.
    A resounding 86 percent do favor the OPEC trading band of 
22 to $27 as the best means of controlling price volatility for 
U.S. producers and consumers. The main fear there is that OPEC 
cannot maintain the discipline to hold that together. I 
interviewed at one time the Oil Minister of Saudi Arabia. He 
told me that trying to keep OPEC together was like trying to 
herd chickens. Over half of the Permian Basin does believe that 
NYMEX, and not OPEC, is the real villain behind oil price 
volatility and some would welcome a legislative remedy for 
that.
    Fourth, while basin producers feel that America has gone 
too far down the road of dependence to achieve total energy 
independence, we do feel that the U.S. oil decline curve of 2 
percent to 3 percent per year can be flattened, not turned up 
but flattened. That will be with a pricing scenario of $20 for 
a sustained period and an energy policy that encouraged 
domestic production, access to domestic reserves, new 
technology and intense drilling. By the same token, applying 
those same policy factors to natural gas, producers feel that 
30 Tcf annual gas production can be achieved and sustained 
within 10 years, but only in the context of a North American 
gas market and only at a price of $5 per Mcf. That means no 
more cheap gas.
    Last, Permian Basin oil producers also noted that in 
addition to price instability, excessive environmental 
regulation is a concern, regulations like the one that recently 
shut down rigs in New Mexico and sent fathers home without a 
paycheck because the noisy rigs were interfering with the 
mating habits of the prairie chickens.
    In conclusion, as an oil and gas journalist, I feel that it 
is absolutely critical that our Nation develop an energy policy 
that relies on homegrown energy and decreases our dependency on 
foreign sources. We have managed without an energy policy for 
two decades, but it would really, really be pressing the odds 
to think that we could go one more decade without a major 
crisis. I am talking about a major confrontation in the Middle 
East. The blackouts in California have been a wake-up call for 
America. If we don't heed them, the next wake-up call may be 
body bags stacked on the deck of an aircraft carrier in the 
Persian Gulf.
    I thank you for your attention. I will answer any questions 
I can.
    [The prepared statement of John Paul Pitts follows:]

  Prepared Statement of John Paul Pitts, Oil Editor, Midland Reporter 
                                Telegram

    Good Morning, Chairman Barton, distinguished members of the 
committee. As this committee goes forward in its quest for a national 
energy policy, I am honored to be allowed to provide what insight I 
can, as an oil and gas journalist for the past 25 years, and the oil 
and gas editor of the Midland Reporter Telegram for the past 18.
    I am not here today with another bag of statistics, a legislative 
wish list or well-worn argument, but simply the results of a survey of 
a small segment of America's oil and gas producers. Hopefully, as you 
go forward with the urgent task of creating policy to fix America's 
energy problems for the short term and the long term, this survey 
information will provide you more insight into the challenge.
    This survey of Permian Basin oil and gas producers addresses many 
of those challenges.

                       THE PROLIFIC PERMIAN BASIN

    Larger than Norway, Italy or Ireland, the Permian Basin is a 
prolific, geological province, comprised of 52 counties in West Texas 
and Southeast New Mexico, accounting for 75 percent of all the oil in 
Texas, and 18 percent of the nation's 5.8 million barrels of daily oil 
production. The capitol of the Permian Basin is Midland Texas--a world 
class oil town, and a microcosm of the domestic oil industry. If 
somehow, you could take the entire domestic oil industry--from 
Louisiana to California and Texas to Canada and distill it down into a 
single city of 106,000 you would have essence of oil or Midland, Texas.
    Because Midland lives and dies by the price of oil and gas, and the 
issues that impact those prices, producers, there, are perhaps more 
keenly attuned to oil and gas issues than any other oil town in 
America--including Houston.
    Chairman Barton was in Midland recently on a fact-finding mission 
for this committee, and I am sure he will agree with me that when it 
comes to getting a feel for America's energy destiny, Midland is a go-
to-place.

                          THE PRODUCER SURVEY

    Each year the Reporter-Telegram interviews a cross-section of 
Permian Basin oil and gas producers--majors and independents--from 
Midland to Hobbs, New Mexico, conducts a survey, in which it attempts 
to interview each oil and gas producer--major and independent--in order 
not only to determine spending and activity levels for the year, but 
producer opinions on key issues. We do not ask for a simple yes or no, 
but sought to engage them in discussion to validate a bigger picture.
    While it is neither highly scientific, or large in sample, over the 
years the Reporter-Telegram Producer Survey has proven nevertheless to 
be a highly accurate barometer of mood and money in the oilpatch. 
That's because there are a large number of producers, intensely focused 
on oil and gas, in a region with one of the oldest and largest 
concentrations of oil and gas in the world.
    Today, we offer the results of our survey questions on energy 
policy, in hopes that it will , perhaps, give the committee a broader 
understanding of America's oil and gas producers, a better feel for 
what needs to be done and what is politically possible, and physically 
``doable.'' Over decades of trying to make a living in the risky and 
politically charged oil business, Midland oil and gas producers have 
developed a strong sense for the possible and impossible. Here are some 
of the responses.

                             ENERGY POLICY

    On the issue of energy policy we asked: Is the time right for an 
energy policy?--And how high should it rank on President Bush's policy 
agenda.
    To no one's surprise 97 percent, said ``yes'' this is the time. 
Only three percent said no.
    On its ranking as a priority, 91 percent said it should be ``high 
or very high'' on President Bush's agenda. But 9 percent said it should 
rank less than that.
    From the responses we detected not only a great deal of enthusiasm, 
that a national energy policy is finally on the table, but a strong 
sense of finality--we heard many times that it was now or never if 
America is to finally have an energy policy.
    Next we asked: Do you think it is politically possible to achieve a 
national energy policy?
    Only 44 percent said ``yes,'' 25 percent said ``no,'' and 30 
percent said ``maybe.'' If producers were all over the board on this 
response, one must remember that the oil industry has had along history 
of disappointment in matters energy policy issues. While they want it 
to be true, it is very apparent that they are not long history of 
disappointment in matters of energy policy. While they want it to be 
true, (that an energy policy is coming) it is very apparent that they 
are not confident that Congress can bridge the political differences or 
that the public will be able to overcome their NIMBY ways or their bias 
against the oil and gas industry. Also for decades, producers have been 
told repeatedly, that it is politically impossible to achieve an energy 
policy.
    The traditional argument is that there are more energy consumers 
than producers and the only thing consumers care about is cheap 
energy--and the cheaper the better. One producer noted: ``We will never 
get the consuming public's attention on energy until they begin to 
stack American body bags on the deck of air craft carriers in the 
Middle East.''

                            ENERGY SECURITY

    Next we asked: How concerned are you or your company about energy 
security?
    Over 80 percent said they were very concerned, while 19 percent 
said they were not. Why only 80 percent and not 100 percent?
    I sensed that some thought oil and gas had become too global for 
anything drastic to happen. Also there is the lull factor created by 
the fact that we have gone decades without an energy policy and have 
had to fight only one war--which we easily won. Most, however, 
acknowledged that it was sheer folly and highly dangerous to be 57 
percent dependent on foreign oil producers. Especially when America has 
so many energy resources and some of our foreign oil suppliers are 
openly hostile to America--its culture and religious heritage. And then 
there is Iraq. We are their biggest oil customer, but they are so bad 
we have to bomb them from time to time--taking care not to hit any oil 
facilities.

                          ENERGY INDEPENDENCE

    Energy independence will become one of the most critical aspects of 
a national energy policy. Is it a realistic goal--or not? If it is not, 
should we just forget about an energy policy, and focus on our 
military? We phrased this question very carefully.
    We asked--is energy independence a realistic goal to pursue, in the 
context of a comprehensive energy policy that includes conservation, 
access to reserves, coupled with the use of broad-based energy 
resources including: coal, nuclear, oil, natural gas and alternatives?
    The majority, 68 percent, said that even with the best energy 
policy, energy independence is impossible, that we have gone too far 
down the road of dependence to become totally free of foreign oil 
producers. Only 31 percent thought it was possible.
    Many of those negative responses, however, were qualified by noting 
that energy independence should be pursued, even it may not be 
achieved. ``You can't hit the bulls eye unless you aim for it,'' said 
one operator.
    There was also the sense, that even though total energy 
independence is unattainable, we must begin to back away from the 
Middle East--even if it is only a little space, we must begin to put 
space between America and the treachery of the Middle East.

                          OIL PRICE STABILITY

    Oil price volatility has proven to be highly corrosive to the 
welfare and security of America. During the downturn of 1997-1999, $11 
oil nearly destroyed the oil and gas infrastructure. Then, in 2000-2001 
high oil prices, above $35, produced a near train wreck in the economy.
    We asked Basin producers if they would support a floor price on 
crude oil as a means of controlling oil price volatility.
    Over 60 percent, said they would not support a floor price. The 
reasons: Price controls don't work. Every floor has a ceiling. Both 
floor and ceiling would be artificial and mismanaged by government. But 
37 percent said they would support a floor price.
    Next we asked: Do you approve of NYMEX as a pricing mechanism for 
crude oil?
    Of those responding, 54 percent said they did not approve of NYMEX 
as a pricing mechanism for world crude oil. Another 11 percent said 
they did not think it was the right pricing mechanism, but accepted it 
because, ``it was the only thing we have.'' Another 11 percent had no 
opinion, and only 23 percent thought NYMEX was a legitimate and useful 
pricing mechanism for world crude oil.
    Most of the comments reflect the opinion that: NYMEX does not truly 
reflect free market principles; that it is a price-maker and not a 
price-taker; that there are too many more paper barrels trading; that 
it was volatility by design for the benefit of commodity traders. There 
is a strong feeling, even among those who favor NYMEX, that it must be 
changed to prevent extreme price volatility.
    Then we asked about the OPEC trading band of $22-$27. Is it a good 
pricing mechanism for world crude? Is it working?
    About 86 percent said ``yes'' it was a good pricing mechanism. It 
is working and it is good for OPEC, U.S. consumers and domestic 
producers. Most of the 14 percent who responded negatively to the idea 
of the trading band qualified their answers by noting that they feared 
OPEC did not have the discipline to make it work.

                         OIL AND GAS PRODUCTION

    As the number one energy consumer in the world, America is faced 
with two major challenges:

1. flattening an oil production decline curve of 2-3 percent per year,
2. trying to discover, develop and sustain 30 Tcf per year of gas 
        production within the next 10 years.
    We asked: With the right oil price scenario, intense drilling, and 
access to domestic reserves, do you think the domestic oil industry can 
flatten the oil decline curve?
    Approximately three-quarters said they were confident the steep oil 
decline curve could be flattened--26 percent did not. While most said 
the maturity of U.S. reservoirs, would be the biggest hurdle to 
flattening the decline curve, they also thought new technology could 
help compensate for maturity, and thought that opening access to 
domestic reserves would be a bigger factor in flattening the decline 
than increased drilling.
    We also asked about natural gas: With the right gas price scenario, 
intense drilling and an energy policy that encourages exploration and 
production, do you think a North American gas market can reach and 
sustain the target of 30 Tcf natural gas production per year? There is 
more optimism here.
    A solid 89 percent thought a North American gas market could 
sustain that level, only 11 percent did not. Again access to reserves, 
was given as the key to achieving the 30 Tcf goal. Also, that it is 
developed within the context of a North American natural Gas Market 
that includes Alaska, the Lower 48, Canada, and Mexico. Few feel the 
U.S. can do it alone.

                         ENVIRONMENTAL CONCERNS

    Asked to rank their top concern as producers--lack of rigs and 
crews, oil price volatility or unreasonable environmental regulation, 
we found few who would rank them and choose all three as top concerns.
    Environmental Extremism is 11the bee in the bonnet'' for basin 
producers. For example, during the California crisis, when natural gas 
was in short supply and gas prices soared above $10, rigs in New 
Mexico, drilling for natural gas were shut down, and men with families 
to feed were put out of work--so as not to disturb the prairie chicken 
during its mating season.

                            THE BOTTOM LINE

    I think the bottom line of our survey is this: There are many 
things to be addressed and fixed to have a viable national energy 
policy. Permian basin producers strongly support a national policy, and 
when called upon to step forward help solve America's energy dilemma 
will do so, even though they have doubts that conditions in America 
have changed enough for an energy policy to happen.
    As unfortunate as it is, we can only hope that the California 
situation will suffice as America's wake up call on energy--that it is 
only black outs that are needed to get America's attention and not body 
bags.
    I applaud the Committee for the very serious work it is doing in 
moving forward to formulate a long term energy policy, that will 
provide the nation with secure, abundant, sustainable and affordable 
energy sources for decades to come--an energy policy that will 
hopefully decrease the danger we face from over dependence on Middle 
East oil.
    As you seek to build consensus around energy policy issues, I hope 
this information can be of some use. Thank you very much.

    Mr. Barton. We thank you, Mr. Pitts. We do appreciate you 
flying up from Texas.
    We are going to have 10-minute question rounds and if we 
need more than one round, we will certainly do that. The Chair 
would recognize himself for the first 10-minute round.
    Mr. Cook, in your testimony, you didn't really give us an 
overview of the world situation in terms of production and 
consumption, or the U.S. production and consumption. Do you 
know approximately how many barrels per day is produced of oil 
in the world market?
    Mr. Cook. We expect global oil supply, global oil 
production to run 76 million barrels a day or so.
    Mr. Barton. Is that about where it has been the last 3 or 4 
years, or is that up a little bit?
    Mr. Cook. It has grown significantly since the early 
1990's.
    Mr. Barton. What was it--could you get that information, 
the trend line where the world production curve is going?
    Mr. Cook. Sure.
    [The following was received for the record:]

    From 1990 to 2000, world oil production has risen by approximately 
10 million barrels per day (mmbd) from 66.7 mmbd to 76.6 mmbd. This was 
an average 1.4 percent annual increase, although the increase was not 
steady. World oil production remained relatively flat through the early 
1990s. The year 1994 marked the beginning of larger annual increases in 
production. From 1994 to 1998, world oil production rose 11.9 mmbd, 
increasing from 63.2 mmbd in 1994 to 75.1 mmbd in 1998. This created an 
average surplus of about 1.5 mmbd for 1998.
    OPEC drastically cut production in 1998 and early 1999, resulting 
in reduced world crude oil production of 74.2 mmbd for 1999. Crude 
inventories have remained extremely low despite four production 
increases in 2000 to attain a production level of 76.6 mmbd.
    In 2001, OPEC reduced its quota 1.0 mmbd in January and then 
another 1.5 mmbd when they met on March 17. While OPEC members have 
tended to produce more than their quotas, EIA estimates that this 
combined cut of 2.5 mmbd per day would put OPEC production below last 
summer's levels.

    Mr. Barton. Is world consumption in that same range, about 
76 million barrels a day right now?
    Mr. Cook. It averaged about 76 last year.
    Mr. Barton. Now, in the United States do you know what our 
domestic production is averaging per day?
    Mr. Cook. Crude oil is about 5.8 million barrels a day.
    Mr. Barton. 5.8. About how many million barrels of 
equivalent do we get in terms of natural gas liquids per day in 
the United States?
    Mr. Cook. That one I would have to get back to you on.
    [The following was received for the record:]

    Natural Gas Liquid (NGL) production comes from both natural 
gas processing plants and refineries. Natural gas processing 
plants account for about 73 percent of total production. There 
is some seasonality to natural gas liquids (NGL) production 
levels, with production being higher in the summer months as 
refiners produce butane that cannot be used in gasoline during 
the summer (the butane is used in the winter).
    NGL production levels tend to fluctuate anywhere from 2.0 
to 2.6 million barrels per day (mmbd), depending on the time of 
year. However, January 2001 production was only 1.8 mmbd, the 
lowest level for any month in at least ten years. This is due 
in part to the high price of natural gas, which encourages 
refiners to simply sell the gas for a higher profit than they 
could make by removing the wet NGL streams.

    Mr. Barton. The number I have is about 2 million barrels.
    Mr. Cook. 2 million, right. Correct.
    Mr. Barton. What is the United States consumption per day 
in millions of barrels?
    Mr. Cook. We are running between 19 and 20 million barrels 
a day, depending on the season.
    Mr. Barton. So that is up then significantly from where it 
has been?
    Mr. Cook. Absolutely. Demand growth has been very strong. 
That is one of the main reasons why excess refining capacity 
has dropped.
    Mr. Barton. If you could provide the committee with the 
historical data say for the last 10 to 15 years in world 
production, world consumption, United States production, United 
States consumption, but in general the consumption of petroleum 
in the United States for the last 5 or 6 years is on an upwards 
curve.
    Mr. Cook. Absolutely. A strong economy.
    [The following was received for the record:]

    From 1990 to 2000, world oil production and consumption 
have risen steadily, increasing by approximately 10 million 
barrels per day (mmbd) or an average 1.4 percent annual 
increase. However, production and consumption did not always 
change together, and price variations reflect these imbalances 
in cycles of demand and production.
    World oil production reached 75.1 mmbd in 1998, creating an 
average surplus of about 1.5 mmbd. Resulting low prices in 1997 
and 1998 led OPEC member countries to drastically cut 
production in 1998 and early 1999. World oil production for 
1999 was about 74.2 mmbd, which was about 0.72 mmbd below 
consumption.
    Despite four increases in 2000, crude inventories remain 
extremely low. World oil production for 2000 was about 76.6 
mmbd, which was approximately 0.8 mmbd in excess of 
consumption.
    OPEC cut 1.5 mmbd in January 2001 and then cut another 1.0 
mmbd when they met on March 17. This combined cut of 2.5 mmbd 
per day would put OPEC production below last summer's levels.
    U.S. oil consumption has increased steadily since 1990. 
Consumption has risen from 17.0 mmbd in 1990 to 19.5 mmbd in 
2000. However, U.S. oil production has actually declined during 
this period, falling from 9.7 mmbd in 1990 to 9.1 mmbd in 2000, 
including crude oil and natural gas liquids production.

    Mr. Barton. Has that continued in spite of the price spike 
that we saw about 1\1/2\ years? Did that have any impact on 
consumption?
    Mr. Cook. Well, last year the consensus is that U.S. oil 
demand did flatten out. In fact, gasoline dropped some because 
of the significant price jump from 1999 to 2000.
    Mr. Barton. Okay.
    Mr. Cook. It is still relatively high.
    Mr. Barton. Mr. Layton, you are the closest thing we have 
here to a spokesman for the producing sector, because you were 
representing the independent producers.
    The American Petroleum Institute, which would represent the 
major oil producers, chose not to participate. They were 
willing to send their executive director who is headquartered 
here in Washington. And he is a very able gentleman. But we 
wanted what I call a real-world witness, somebody who is 
actually out in the market; and for whatever reason, that was 
not possible.
    So if people in the audience are scratching your heads 
about how we managed to have an oil hearing without Exxon, 
Mobile, Texaco, Chevron, some of those folks participating, 
they chose not to be here, except for the executive director, 
who again is a very abled person, if he had been here.
    So I am going to ask you some questions, knowing that you 
don't represent the major producers.
    What is your best guess about how much oil production we 
can get in the United States if we really made a major emphasis 
on supply, as if we were willing to look at the OCS, willing to 
look at ANWR, willing to look at Federal lands in the United 
States that are currently off limits, put some production 
incentives back into the Tax Code? If we did all of the things 
that people talk about doing, do you know how much we could 
increase the approximately 8 million barrels a day that we have 
right now, if you include natural gas liquids?
    Mr. Layton. I think that is a two-step process. The first 
step is to flatten the decline curve, and that is a challenge 
that I think can be met with--I do not want to make it sound 
like it is easy, but it certainly is well within reach, if we 
can bring stability and, more importantly, the perception of 
stability to the marketplace.
    That can be done with providing tax incentives, with 
removing some of the perception that you have inability to 
access lands to drill. And with those steps in place, I think 
we can flatten production. We are not going to increase 
production until we come to the point where we can stop the 
decline.
    The next step--I think probably that the best thing for me 
to point to is what happened roughly 20 years ago when the 
Alaskan Pipeline came online, and all of a sudden we saw an 
extra 2 million barrels a day of oil production coming down 
from Alaska. I do not know that there is a better example for 
me to point at, other than that. And that was not that long 
ago. Maybe there is not another 2 million barrels a day of 
production that could come out of ANWR or come from more 
drilling in the deep-water Gulf of Mexico, but we do not have 
to look back too far to see a huge jump in the domestic crude 
oil supply.
    Mr. Barton. Prudoe Bay is currently producing at 
approximately 1 billion barrels a day. Is that not correct? Mr. 
Cook may know the answer to that, but it is on the decline.
    Mr. Layton. Yes, it is. I think last year is the first year 
that Alaskan production had dropped blow a million barrels a 
day. It is just barely below a million.
    Mr. Barton. If we do not do something somewhere in the 
North Slope, that production decline is going to accelerate.
    Mr. Layton. It certainly will; and more importantly--and 
maybe your witnesses from the API could address this more 
accurately than I can--but the production in Alaska, as you 
know, comes to the pipeline, and there is a critical mass that 
is required to keep that pipeline going. And I have heard that 
that number is several hundred thousand barrels a day of 
production.
    So you are not going to ride that million barrels a day of 
production down to zero before there is not any Alaskan crude 
coming. It will shut off long before it hits zero.
    Mr. Barton. Mr. Robinson, you represent the marketers. Of 
course, your actual chain of convenience stores and gasoline 
service stations is in California; is that not correct?
    Mr. Robinson. Correct.
    Mr. Barton. Are California gasoline prices lower or higher 
than the national average?
    Mr. Robinson. Higher.
    Mr. Barton. Quite a bit higher, aren't they?
    Mr. Robinson. Typically.
    Mr. Barton. And where does most of the crude oil come from 
that is refined in the products? Doesn't most of it come from 
Alaska?
    Mr. Robinson. California has a fair amount of crude, but an 
awful lot of it comes from North Slope.
    Mr. Barton. All right. So if we were not to drill in ANWR 
and the production decline continues on the North Slope, would 
you think gasoline prices on the West Coast would go up or go 
down?
    Mr. Robinson. They would likely go up.
    Mr. Barton. Would likely go up. That is what I think, too.
    Mr. Pitts, can you tell me how many wells have been drilled 
approximately in the Permian Basin?
    Mr.  Pitts. I would estimate 6 to 700,000.
    Mr. Barton. 6 to 700,000. Where does West Texas get its 
water supply?
    Mr. Pitts. Groundwater.
    Mr. Barton. You need to turn your microphone on.
    Mr. Pitts. I am sorry.
    Mr. Barton. You said groundwater.
    Mr. Pitts. Yes, groundwater.
    Mr. Barton. How many of those 6 or 7,000 wells have 
contaminated water supply in West Texas.
    Mr. Pitts. In all of Texas last year, there were 52.
    Mr. Barton. Fifty-two.
    Mr. Pitts. Of 600--that is just wells in the Permian Basin. 
There are probably several million wells in all of Texas.
    Mr. Barton. Has there been any permanent contamination from 
all of those wells drilled in West Texas?
    Mr. Pitts. No, sir, it has all been taken care of.
    Mr. Barton. All of you rowdy wild rambunctious wild catters 
out West for all of the wild talk about raping and pillaging 
the environment, they have drilled almost three quarters of a 
million oil wells and gas wells, and they managed to do that 
without damaging the environment in any kind of a permanent 
situation?
    Mr. Pitts. Would you believe that?
    Mr. Barton. I believe it. I am asking you. You are the 
expert.
    Mr. Pitts. Yes, sir, it happened.
    Mr. Barton. Okay. Mr. Kassel, you are obviously a little 
outmanned here, but certainly if we had a little broader 
perspective, it would be a pretty equal fight.
    I am almost tempted to say--we used to say one ranger, one 
riot. We can say in your case, you know: one energy hearing, 
one environmentalist is all we need. You know, it is a pretty 
fair fight. I thought your testimony was well spoken.
    Mr. Kassel. Thank you.
    Mr. Barton. But I do not think this subcommittee has any 
serious objection to focusing on conservation and trying to 
improve the environmental protection in existing laws. We are 
certainly in favor of that.
    But would you agree from your side of the equation it is 
also appropriate that we do what we can to increase the 
domestic supply, if that is possible?
    Mr. Kassel. I think the real issue isn't one of supply or 
demand. It is meeting our energy needs. Most of the folks on 
the panel today are talking about meeting our energy needs with 
a basket of new sources of supply. We have a different view. 
Our view is that the combination of supply side and demand-side 
management, with more focus on demand-side than we have seen in 
the past, can really bring us much closer toward meeting our 
environmental need--our energy needs over the long haul.
    There are some--again, the California situation provides 
some instruction. You know, drilling in the Arctic Refuge or 
offshore is not going to solve or even help at all the short-
term electricity crisis in California.
    Mr. Barton. I agree with that.
    Mr. Kassel. And we all agree--I think everybody agrees with 
that. And yet that is a piece, a large piece of the debate.
    But if you look at what they are doing in California, they 
have taken some very important steps that will increase 
efficiency of energy use over the next few years in a very 
clean way to offset the need for more production.
    It does not mean there will not be more production, and I 
think we all know that there will be some more production as 
well.
    But take one example, the California Energy Commission 
issued an, under an emergency basis, efficiency standards for 
new buildings. Those standards will roll out over 5 years. It 
will take the place of 2,000 megawatt coal-fired power plants. 
That is a way to meet the energy need in California without 
adding to the pollution.
    Mr. Barton. Of course, there is a cost to that. I am not 
opposed to what they did, but you do not increase efficiency 
and installation capability at zero costs. I mean, it costs 
money to do that. You recognize that.
    My last question--then I want to go to Mr. Boucher--you do 
live in New York City, so I do not know the answer to this 
question. Do you own an automobile?
    Mr. Kassel. I have owned an automobile----
    Mr. Barton. You have owned an automobile.
    Mr. Kassel. [continuing] in my life. My first car was a 
1972 Thunderbird, which probably----
    Mr. Barton. So you at least----
    Mr. Kassel. [continuing] was 8 miles a gallon.
    Mr. Barton. You at least have been in an automobile?
    Mr. Kassel. I was in an automobile. I was in a taxi today. 
I live in Manhattan, so I do not need one.
    Mr. Barton. I think that is a wise decision.
    I recognize the gentleman from Virginia for 10 minutes for 
questions.
    Mr. Boucher. Thank you very much, Mr. Chairman.
    For a couple of years, I also lived in Manhattan; and I 
found out having a car was more of a burden than an 
opportunity, so I gave it up very quickly.
    I want to say thank you to our witnesses for their 
outstanding testimony this morning.
    Just a brief follow-up with regard to the Alaskan 
production of oil, a concern has been expressed about the fact 
that production from the Prudoe Bay is beginning to decline 
below 1 million barrels per day; and the suggestion that some 
have made is that the next obvious step might be to explore and 
develop in the Arctic National Wildlife Refuge.
    What has not been mentioned is that there is another 
possible source of production in Alaska, and that is the 
National Petroleum Reserve, which is 23 million acres 
altogether, lying just to the west of Prudoe Bay.
    And I am wondering if any of our witnesses this morning, 
perhaps Mr. Kassel, Mr. Layton or Mr. Robinson, all of whom 
have made comments with respect to the potential for developing 
the ANWR, can give us any information about what might be 
expected were development to proceed with regard to the 
National Petroleum Reserve.
    During the course of the last year, Secretary Babbitt made 
exploration in that area possible leading toward the potential 
for development, and I wondered if perhaps that is a way that 
we might continue to provide supply for the Alaska oil pipeline 
and to keep production in Alaska going so as to benefit the 
United States economy, while at the same time maintaining the 
Arctic Natural Wildlife Refuge in its current condition.
    Mr. Kassel, do you have any information?
    Mr. Kassel. I think I would like to defer to some of my 
colleagues who focus on that part of our energy policy. As I 
said at the outset, my focus has been on the diesel rule, and 
my real focus is on air pollution and vehicle policy.
    But I will provide you a written answer if you would like.
    Mr. Boucher. That would be helpful. Do other witnesses care 
to comment on the question? Mr. Layton?
    Mr. Layton. Well, I confessed not having a great deal of 
knowledge about the potential of the reserve. My comment would 
be that exploration anywhere in an environmentally sound 
fashion is a good thing, but if you are trading off exploring 
in an area that may have less promise than the one that perhaps 
you want to, if that is the tradeoff that you make, then you 
are certainly not gaining as much ground as you could.
    And if this industry, and I firmly believe it can, can 
effectively explore in either of those areas in an 
environmentally sound manner, I do not know that the two really 
should be mutually exclusive.
    Mr. Boucher. But you have not actually focused on the 
potential of the National Petroleum Reserve to provide a 
substantial supply of oil to the United States.
    Mr. Robinson, do you have any comments you would like to 
make?
    Mr. Robinson. Yes, I am certainly not an expert on the 
reserve; but as I mentioned--and I talked about performance 
standards for fuels--I think that you look at that exploration, 
if you set your performance standards which you expect those 
folks that are attempting to drill oil to meet whatever 
environmental standards that are necessary, I believe, No. 1, 
they can. And you should--at that point you should attempt to 
take advantage of those resources in a responsible manner. I 
mean, to me----
    Mr. Boucher. Thank you. It is an interesting response, but 
hardly directed to the question. It would appear to me that 
before we plunge headlong into developing a pristine wilderness 
area that the better course might be to examine in detail what 
potential there might be for the Arctic National Petroleum 
Reserve to provide substantial supply to the United States. 
That is a comment.
    I do have some other questions.
    Mr. Cook, I would like to ask you a little bit about 
refinery capacity in the United States. About a decade ago, we 
had sufficient refinery capacity to meet approximately 94 
percent of the needs that we had for refined product in this 
Nation. Ten years later, that number has declined to 85 
percent, and it is generally thought that the absence of 
sufficient domestic refinery capacity is a contributing factor 
to the high price of gasoline and to the gasoline price spikes 
that we experienced last year and some anticipate that we may 
experience again as the spring and the summer driving season 
comes upon us.
    Some of the witnesses this morning have suggested that one 
of the reasons that we do not have adequate refinery capacity 
is because of the operation of various environmental 
requirements, the clean air laws, perhaps the sulfur rule, and 
other Clean Air Act requirements.
    I would like to just review with you a little bit of the 
history of refinery capacity in the United States and get your 
comments on that assertion as to whether or not it is accurate.
    Let me just cite a few numbers. It appears that in the 
United States, refinery capacity grew steadily in the 1970's 
and reached a peak in 1980. By 1985, 5 years later, the number 
of operating refineries had dropped dramatically to 223, and 
that was substantially below even the 1970 level of 276.
    So in 1970, we had 276 refineries; and by 1985, that number 
had dropped to 223. By the time that President Bush signed the 
Clean Air Act in 1990, the number of operating refineries had 
already dropped to 205. And so it would appear that there was a 
very substantial decline in the number of refineries in the 
United States by the time those major amendments to the Clean 
Air Act of 1990 were adopted.So the trend had already begun and 
was quite dramatic.
    Now, in view of that history, would it be reasonable for us 
to conclude that the problem with regard to inadequate refinery 
capacity in the Nation really is not the Clean Air Act, but was 
other factors, and that those other factors might be things 
like the end of price controls in 1981 and the determination 
that approximately that time of the small refinery crude oil 
entitlement program?
    Your views with regard to those matters would be very 
welcome, Mr. Cook.
    Mr. Cook. Well, first of all, there at the very end, I 
think you touched on why we saw the big drop in the number of 
refineries. In the early and middle 1980's, we had that shake-
out period where the small, inefficient refineries would never 
have existed in the first place were it not for the regulatory 
program. So in some sense, taking those out is probably 
analytically the right thing to do.
    Now, there was--even after the shake-out--I would term 
adequate refining capacity in the late 1980's, even up until 
the early 1990's, recognizing that it is a global market now 
and that at the same time Europe enjoyed, or the opposite, if 
you are a refiner, a significant amount of excess capacity as 
well.
    So any temporary tightness through this period was quickly 
responded to by both domestic and foreign refineries with a 
large influx of product, gasoline in particular.
    So this tended to keep margins relatively low throughout 
this period along with some warm weather. You move into the 
middle 1990's and that is when this excess capacity begins to 
get fairly small.
    We had a very strong U.S. economy, very strong demand for 
petroleum that outstripped a significant uptick in refinery 
capacity from the mid-1990's up through this point up 1.5 
million to 2 million barrels a day. So while the number of 
refineries had dropped over this period, there was still 
ongoing upgrading going on; but it just occurred at a somewhat 
slower pace than the strong demand growth over the second half 
of the 1990's.
    The real question here was why wasn't it stronger, and I 
would say that the margins are key here. With that excess 
gasoline capacity in Europe, which still exists, this, along 
with again some high stocks and cheap crude oil and some warm 
weather in the middle to late 1990's, kept those margins less 
than what would be necessary to stimulate significant increases 
in refining capacity.
    This is not to say that the environmental regulations do 
not contribute to it; of course they do, because they add to 
costs of compliance. You have to invest for that, plus you have 
to invest for the economic factors.
    Mr. Boucher. Would your conclusion be that the primary 
motivation for the existing level of capacity, the primary 
problem that there not being enough capacity to meet a larger 
amount of our domestic needs is economic as compared to 
problems that arise from environmental requirements?
    Mr. Cook. I would say both, but the bottom line is the 
margins have not been sufficient to stimulate capacity growth.
    Mr. Boucher. Why aren't the margins sufficient enough? What 
is the major problem there?
    Mr. Cook. Again, there is a lot of capacity in Europe. So 
we get a little temporary tightness in gasoline like we had 
last year, you know, off and on, 1996, late 1997; and within 3 
to 4 weeks a flood of gasoline will arrive on the East Coast 
undercutting prices and margins and quickly restoring the 
market balance.
    So while there may be a month period where refiners enjoy 
relatively healthy margins--you average it out for the year--
when you look at the history over the last 15 years and compare 
it with other industries where the capital could go, it is just 
not an attractive environment.
    Mr. Boucher. Mr. Chairman, with your indulgence, I would 
like to pose one other question to one of the witnesses.
    Mr. Barton. Sure.
    Mr. Boucher. This will be fairly brief.
    Mr. D'Arco, I would like to ask you about the operation of 
the Jones Act and the potential that we could either make more 
readily available Jones Act waivers or perhaps consider repeal 
of the Jones Act altogether.
    The Jones Act requires that for domestic shipments within 
the territorial waters of the United States that we use 
American-flag carriers; and foreign-flag carriers oftentimes 
could provide that service at a much lower price, which in turn 
might make the availability of fuels cheaper to the end user.
    I can say that I personally have long felt that major 
modifications or repeal of the Jones Act altogether would be 
appropriate. I think you have some information about the recent 
operation of that act.
    What I would like for you to do, if you can, is give us a 
sense of how many waivers under the Jones Act have been applied 
for within the last year or, perhaps, 2 years; how many have 
been granted; and if none have been applied for, why not.
    Is it the waiver provision that is not sufficiently 
generous to make the waiver process worthwhile and what change, 
if any, do you think would be necessary in order to assure that 
we can use more cheaper foreign-flag carriers for this 
transport than can occur today?
    Mr. D'Arco. Sir, I do not know actually--I do not know how 
many waivers have been applied for and issued over the last few 
years. I can certainly get that information for you from my 
trade association, but it is an important issue.
    And I know a lot of the product that is needed in winter 
season that cannot be provided by local refineries must come 
from the Gulf Coast, and the pipelines do not have the 
capability at all times to deliver that fuel. So it would be a 
wonderful thing if we can use foreign-flag ships to bring it 
into New York Harbor and ameliorate the price situation.
    Mr. Boucher. Okay. Thank you, Mr. D'Arco. Thank you, Mr. 
Chairman.
    Mr. Barton. Thank you for that last question. Let the 
record reflect that was on my list of questions for the next 
round.
    The gentlewoman from California, Congresswoman Bono, is 
recognized for 10 minutes.
    Mrs. Bono. Thank you, Mr. Chairman. I would like to thank 
the panelists for your time today. I am very new on this 
committee; I think I have been here for 3 weeks. I just want to 
say that I am enjoying learning about these issues a great 
deal. I have a brother who is in this business as an 
independent producer, and I should have listened to him as I 
was growing up. And he reminds me of that daily now.
    My first question is to Mr. Layton. In your testimony, you 
referred to the critical time lag for production capacity to 
meet demand because of the lack of investment in new 
development. How long is this time lag?
    Mr. Layton. It certainly is something that could easily 
exceed a year, and the reason I say that is because if we go 
back to 1998 and 1999 and see what happened primarily to 
independent producers, capital sources dried up, debt problems 
were there; and so once the prices recovered, you are not 
immediately in a position to go out and spend money on drilling 
new wells.
    You have got to heal the company, if you will; and that 
takes time. I mean, that process to a certain extent is still 
going on. The rig count has grown substantially, particularly 
if you look at natural gas. But if you look at the number of 
rigs that are out drilling for oil right now, we have not 
approached the level that we were in 1997. So, you know, we are 
a couple years beyond that price crisis of 1998 and 1999. And I 
would still say we are not in the period of time in terms of 
drilling where we have fully recovered.
    Mrs. Bono. Is the California crisis helping with that 
recovery?
    Mr. Layton. The California crisis is, I think, very ironic 
to me. You have a situation in California now where oil 
producers are seeing higher prices than have been seen in many, 
many years. Yet, because so much of the production in 
California is incorporated in enhanced-recovery operations that 
use steam, and to generate steam, you have to buy natural gas. 
And so many producers have had to shut in their steam 
generation operations and, therefore, are actually going to 
experience a decline in production unless they are able to 
start steaming their properties again.
    And so even though the price of oil is high, margins out 
there are really tough because of the costs to generate steam, 
which is tied directly to the price of natural gas.
    Mrs. Bono. Thank you. To just change subjects, but still 
with you, Mr. Layton. I am hoping to take a trip myself 
actually up to Alaska this summer to see ANWR before I have to 
take a position on it either way. I think it is a novel 
approach sometimes for a politician to actually to see what you 
are voting on, and I hope to do it.
    But in your testimony, you mentioned the technology 
currently available for the development of resources in areas 
like ANWR. Can you describe some of these technologies and 
explain how they are environmentally friendly?
    Mr. Layton. Probably the--I think the technology that 
reduces the footprint required to develop is the one specific 
one I would point to, and that is where you have wells that can 
be drilled directionally from a very compact location, so 
rather than scattering wells all over a large area, you are 
able to drill many, many wells from a very small area that 
extend out and are able to tap reserves that are a long, long 
ways away from where the actual drilling operations are. So 
that is the one technology that I would certainly say would 
minimize the environmental impact.
    Mrs. Bono. Thank you. Mr. King, some in Congress want to 
eliminate the additive MTBE from the national fuel supply. They 
say that MTBE has been detected in water. Can you update us on 
the science?
    Mr. King. As you know, MTBE has been detected--as you know 
it began in Santa Monica and that was a very sensationalized 
case, and what we have found is that the number of detections 
has actually flattened out and actually been in decline.
    We have to remember that in California, it is only like 1 
percent, I believe, of the total water systems that have been 
tested have we found any traces of MTBE. And then only .2 of 1 
percent of those wells have we found levels of MTBE in excess 
of the maximum containment level.
    So we think it is an issue that is overblown, and it has 
unfortunately tarnished the reputation for this product that is 
extremely effective at reducing air pollution. And it is 
something that I think we need to deal with through the--as I 
mentioned in my comments--through the leaking underground 
storage tanks and fixing those tanks, which is the source of 
not only MTBE leaks but also other components of gasoline like 
benzene and things that are known carcinogens. We have to 
remember also MTBE is not a known carcinogen, and I think it is 
very important to recognize that issue.
    Mrs. Bono. Thank you. You answered my next question, too.
    Some of my colleagues also labor under the impression that 
any volume lost in banning MTBE would quickly be made up by 
using ethanol. What are your views on that?
    Mr. King. Ethanol is a product that simply will--if you 
replace ethanol with MTBE, it would not keep the same level of 
gasoline. You cannot blend as much ethanol as you can MTBE. 
There are limits with the amount that you can blend--it is 10 
percent--for two reasons:
    First of all, any level above 10 percent affects the 
engine's performance, and the car will not work as well; and 
then second, the subsidy, the Federal subsidy for ethanol stops 
at 10 percent.
    And the only reason why you would ever blend ethanol is if 
you were able to take advantage of the Federal subsidy; and so, 
therefore, we actually, as I said in my comments, at our 
refinery in California alone, if we switch MTBE with ethanol, 
we lose 8 percent of our gasoline production.
    And I think that number that we have studied in California 
is just replacing ethanol with MTBE, we would see a reduction 
of supply of around 100,000 barrels a day; and that is already 
in a very, very tightly balanced supply and-demand situation in 
California.
    So we do not believe that ethanol is the answer, not only 
from a supply perspective, but it is simply not available in 
the quantities that are needed. It is hard to transport. It is 
very difficult to transport. It is more water soluble than 
MTBE.
    There is just simply not the capacity of ethanol to do the 
replacement with MTBE. So there are several issues with ethanol 
that we find problematic as a potential solution to our 
gasoline shortage issue.
    Mrs. Bono. Thank you. My next question is for Mr. Robinson. 
One of the biggest questions facing consumers and many 
legislators is our price is going to spike again this year.
    Mr. Robinson, you have daily, direct contact with 
consumers; you hear from them more than we do, and prices are 
going up. So do you believe we are going to have price spikes 
this summer, and why is that?
    Mr. Robinson. We have had numerous price spikes. Nothing is 
changed to stop that. At this point, there is no good reason to 
expect that the past will not occur in the future. Our 
situation is that we have basically sort of a stressed system, 
refining and distribution system. It is a very tight system, 
caused partly because we have a number of different 
specifications for fuels.
    It takes a very small problem to make a very large price 
increase. We have got the oxygenate mandate which makes the 
problem even more difficult; and then if you add in a few other 
problems, for example, you know, natural gas is going up. 
Natural gas impacts MTBE; that impacts the overall supply. It 
also in particular impacts the higher octane products; and so, 
you know, you couple all of these things, there is no good 
reason not to expect that we will continue to have any price 
spikes.
    Mrs. Bono. Do you have any idea what Congress can do to 
provide relief for our constituents this summer?
    Mr. Robinson. I think a really good place to look at is the 
oxygenate mandate. You know, I think Mr. King mentioned about 
four things, and I would like to add a couple of things to 
those. He mentioned that you really need to look at the 
cumulative regulatory effects. You just need to consider it as 
you are going forward. That is not necessarily a quick fix, but 
you need to look at that as you go forward. I think that is an 
important thing.
    You need to have clear rules. They need to be reasonable, 
and you need to have an implementation time that the job can 
get done. You need to look at the permit process. I think the 
permit process, a lot of times that stresses the system too, 
and that is somewhat of an artificial requirement.
    He mentioned tax incentives for environmental costs. That 
is something that you can look at that will help on the supply 
side.
    I think, in particular, you need to look at the number of 
fuel specifications. We have continued to add more and more 
fuel specifications. What you end up with--I mean, we have 
RVPs. We have reformulated gasoline, nonreformulated gasoline, 
reformulate gasoline with ethanol, reformulated gasoline 
without ethanol. You have different kinds of diesels. You 
really have stressed the system.
    What happens is a lot of times you have products, but you 
have artificial shortages because you have the wrong product in 
the wrong place or the right product in the wrong place, 
however you want to say it. So I think you need to look at the 
performance standards instead of mandates and then in 
particular--and this is, you know, something that I think is 
very, very important for California--is you need to look at 
that oxygenate mandate, and you need to get rid of it.
    Mrs. Bono. Thank you. My time has expired. Thank you, Mr. 
Chairman.
    Mr. Barton. Thank you, Congresswoman.
    The gentleman from Massachusetts, Mr. Markey, is recognized 
for 10 minutes for questioning.
    Mr. Markey. Thank you, Mr. Chairman, very much.
    Mr. Cook, let me ask you, based upon EIA's present-day 
analysis of the current market conditions, do you believe that 
America is in an energy crisis?
    Mr. Cook. That terminology would be something that a 
statistical organization would probably choose to avoid. There 
is no question that supplies are extremely tight right now, and 
the risk of price spikes for summer gasoline is high.
    Mr. Markey. Would you agree with the statement in the 
Republican staff memo that they gave us today that ``while 
crude oil prices have gone up in nominal terms, when adjusted 
for inflation, they are still lower than historical prices''? 
And the statement again in their memo to us and to the world 
``in today's dollar prices for crude oil peaked in 1981 at 
about $70 per barrel using 2001 dollars, and today it's about 
$26 to $27 a barrel''?
    Would you agree with that analysis?
    Mr. Cook. It sounds like my testimony last summer.
    Mr. Markey. As we know, imitation is the sincerest form of 
flattery; and if it could get the staffers on the Republican 
side home earlier at night, they probably did so in complete 
concurrence with your findings. Would you agree with that, Mr. 
Cook?
    Mr. Barton. Will the gentleman yield?
    Mr. Markey. I would be glad to.
    Mr. Barton. I come from an oil-producing State; I will put 
on the record I think oil prices are too high.
    Mr. Markey. Too high?
    Mr. Barton. Too high, if that helps the gentleman's point.
    Mr. Markey. It is just the opposite.
    Mr. Barton. It is just the opposite.
    Mr. Markey. I am making the opposite.
    Mr. Barton. You want to say they are too low?
    Mr. Markey. No, I am saying it is just like Goldie Locks, 
they are just right. I mean, they could be a little lower, 
okay? A little lower. But, you know, $22 to $28 a barrel at 
least is the stated goal of OPEC; and they are at the upper end 
of that range right now, but it is also within a range that is 
not overly detrimental to the American economy, compared to 
$70-a-barrel prices in 1981, which were having a devastating 
impact on our economy.
    Is that a correct summary of your point, Mr. Cook?
    Mr. Cook. There are a couple of things here. First of all 
the $70 high is correct; $30 today puts you in the--at the 
upper end of the lower third on the historical real-price 
range.
    Mr. Markey. The upper end of the lower third?
    Mr. Cook. The lower third.
    Mr. Markey. Your mother would not be proud if you came home 
with that as your report card; but for oil prices, that is a 
good grade, isn't it?
    Mr. Cook. Let us just say it is in the lower--it is below 
the median price since----
    Mr. Markey. Below the median price.
    Mr. Cook. [continuing] since 1981. However, that is not the 
end of the story. That suggests that from an economic impact 
point of view, whether it is the household or whatever, it is 
not an extremely high price. However, it is the volatility that 
I think concerns all decisionmakers and households. When 
nominal prices swing out of the historical range--nominal 
prices now have historically ranged between $17 and $21--and 
when they swing out of this range, even with a dip to $10 in 
less than a year to $30, that causes a lot of investment 
confusion and causes a lot of consumption confusion.
    So I do think--we have to take that volatility very 
seriously.
    Mr. Markey. Well, let me say this: the President is dead 
wrong. We are not in an energy crisis. I think all the evidence 
makes it clear that in the same way that he is talking down the 
economy so that he can justify his huge tax cuts, he is talking 
up an energy crisis that does not exist so that he can drill in 
the Arctic Wilderness and other environmentally sensitive parts 
of the United States. In both instances, he is dead wrong.
    His analysis of the energy situation is completely 
inaccurate, looking at all of the historical numbers of where 
we are. And if we are in a crisis, he has the wrong solution, 
because we cannot extract oil from the Arctic Wilderness for at 
least 8 to 10 years. Meanwhile, he has yet to mention the words 
suburban utility vehicle, air conditioners, and every other 
appliance or device which has been manufactured by man that is 
now consuming all of this energy, which gives us a much higher 
probability of getting a near-term solution.
    One word, yes or no, we will go down the line. Are we in an 
energy crisis, Mr. Layton? Crisis, yes or no?
    Mr. Layton. Yes.
    Mr. Markey. Mr. King.
    Mr. King. California certainly is.
    Mr. Markey. I am not talking about an electricity crisis in 
California. I am talking about a national energy crisis. Yes or 
no?
    Mr. King. I think we are, yes.
    Mr. Markey. Yes, fine. Mr. D'Arco.
    Mr.  D'Arco. No.
    Mr. Markey. No. Mr. Robinson.
    Mr. Robinson. I am a Californian, realize.
    Mr. Markey. I am not talking about an electricity crisis, 
Mr. Robinson. I am talking about a national energy crisis.
    Mr.  Robinson. You can't ignore----
    Mr. Markey. Yes or no, are we in a national energy crisis, 
Mr. Robinson?
    Mr. Robinson. Yes.
    Mr. Markey. Yes, thank you. Mr. Kassel.
    Mr. Kassel. No.
    Mr. Markey. No. Mr. Pitts.
    Mr. Pitts. Yes.
    Mr. Markey. Yes. Thank you.
    Now, I would like to ask each of you, do you support in a 
crisis, as we did in 1975 in this country when we increased the 
efficiency standards for automobiles from 13 miles a gallon to 
27 miles a gallon, moving to increase, mandate the fuel economy 
standards once again for automobiles and especially for SUVs, 
which have never had any standards imposed?
    Under your own definitions that that we are in a crisis, 
should we impose standards on those vehicles that consume \2/3\ 
of all of the oil that we consume in our country?
    Mr. Layton?
    Mr. Layton.  No.
    Mr. Markey. No, thank you. Mr. King.
    Mr. King. No.
    Mr. Markey. No. Fine. Mr. D'Arco.
    Mr.  D'Arco. No.
    Mr. Markey. No, fine. Mr. Robinson.
    Mr. Robinson. It is going to take more than one word. But I 
think I will agree with you.
    Mr. Markey. I will take that. Mr. Kassel.
    Mr. Robinson. My point is that SUVs will----
    Mr. Markey. We will come back to you. I will come back to 
you, Mr. Robinson. Mr. Kassel.
    Mr. Kassel. I said we were not in a energy crisis, but we 
should close the SUV loophole and fuel economy and bring us up 
to 39 to 40 miles a gallon by the end of the decade.
    Mr. Barton. Mr. Pitts.
    Mr. Pitts. I agree with you.
    Mr. Markey. You agree with me.
    Mr. Barton. If the gentleman will suspend.
    Mr. Markey. I would be glad to.
    Mr.  Barton. We encourage the gentleman to show the 
enthusiasm he normally does, but this is not an oversight 
hearing. We do not need to be on the verge of brow beating the 
witnesses.
    Mr. Markey. I am not brow beating the witnesses. I am 
trying to extract answers in the very wise time constraints 
that the chairman is imposing upon the members of the 
committee.
    Mr. Barton. You are one of the wisest, most valuable 
members of the subcommittee.
    Mr. Markey. I think you. That is a tribute from Caesar.
    Mr. Barton. That is actually seriously meant. But you know, 
there will be times that we need to be in the witness' face, 
but I do not believe this is one of those times.
    Mr. Markey. I am not in the witness' face. I'm trying to 
actually get helpful information from them. See, sometimes what 
you have to do in order to get answers from people is to 
paradox them so that they can understand the inherent 
contradictions in their testimony, only by making them really 
simplify down the essential contradictions in their positions 
can you get them to confront that and ultimately to reconcile 
so that we can get a real answer that is helpful to the 
American people; otherwise their testimony appears to be self-
serving from an industry perspective, but is it really helpful 
from a national perspective.
    Mr. Barton. I understand. This is just not a grand jury.
    Mr. Markey. We obviously do not have them under oath.
    Mr. Barton. We will give the gentleman more time, because I 
took--that took 2 or 3 minutes, so please continue.
    Mr. Markey. So that is my--that is the essential points 
that I am trying to make, Mr. Chairman, that the President--
once again I am saying this clearly--is trying to create an 
atmosphere of artificial energy crisis in order to drill in 
environmentally sensitive areas in our country while ignoring 
the fact that we put 2/3 of all the oil that we consume in the 
United States in gasoline tanks.
    Yet we have now rolled back the efficiency of automobiles 
and SUVs and light trucks back to the same standards that they 
were in the early 1980's. If there is a crisis, we must deal 
with it as a crisis. If it is not, we should not take the most 
environmentally sensitive parts of our country.
    I think, Mr. Chairman, that we should drill in all parts of 
the United States that are not environmentally sensitive. But 
second, we have to realize that we only have in the United 
States 3 percent of all of the oil reserves in the world. That 
is our disadvantage when we compete against OPEC.
    Our advantage is that we are the most technologically 
sophisticated Nation in the world. That is how we are going to 
bring OPEC to its knees, only by looking at automobiles and 
SUVs and light trucks and air conditioners and all the other 
devices that consume energy and making them much more efficient 
can we ultimately take OPEC and regain the national and global 
agenda.
    We are playing into their hands, and so here we are on the 
committee that prides itself as being the technological 
committee of Congress, and instead of talking about the devices 
which we have control over, all of those automobiles, all of 
those SUVs, all of those air conditioners and saying how do we 
make them more efficient, the President says to us, that we are 
in a crisis, let us go to the Arctic, the most environmentally 
sensitive part of the United States, and drill to produce oil 
that will not come down to the United States for another 10 
years; and when it finally arrives in California, since they do 
not burn oil in order to generate electricity, that oil will go 
into the gasoline tanks of SUVs.
    Now what kind of crisis is that that we will drill in the 
most environmentally sensitive part of the United States to 
build a pipeline to put into tankers to bring it to California 
to put it in SUVs?
    Can we be smarter than that? Can we not find some better 
and more decent way of dealing with the legacy that we should 
be leaving to every subsequent generation of Americans?
    I would ask, Mr. Chairman, that the next hearing be on 
energy efficiency. I think that that would be--having a hearing 
on all of the issues that deal with how much we consume in this 
country, how much higher percentage of all the energy per 
capita that we consume, and I think that that would help to 
flesh out this whole debate. But right now, we have not talked 
about alternative energy resources. We have not talked about 
energy efficiency.
    We have witnesses down here that think we are in an energy 
crisis, but we should not look at where we put all of our 
energy. As far as oil is concerned, we put it in gasoline 
tanks.
    So I do not think we are really hearing, in other words, 
the kind of balanced presentation of the problems and the 
solutions. I agree with Mr. Cook, and he did a very good job 
with the certain amount of terminological inexactitude to deal 
with his governmental job to tell us where we were in the 
upper--the upper part of the lower third of energy prices 
historically.
    That is not a crisis. What we have is, in fact, an 
unwillingness on the part of our country to deal with the fact 
that we are consuming all of this energy.
    I am just going to yield a final second here to Mr. 
Robinson so he can elaborate, if you would like to, on your 
answer on SUVs.
    Mr. Robinson. I can tell you a few more things, but my 
point is, I just do not think SUVs should necessarily be 
treated any differently than anything else. That is my point.
    Mr. Markey. You mean separate from automobiles?
    Mr. Robinson. Yes.
    Mr. Markey. I agree with you 100 percent.
    Mr. Kassel, we have basically 20 percent of the vehicles 
out there on the street now are SUVs and people--Chrysler has 
announced a Unimark, it is 10 feet high and 7\1/2\ feet wide 
and it gets 10 miles to the gallon. There is the kind of 
announcement that the United States is looking for in terms of 
energy efficiency, huh? And that is heading in the wrong 
direction; we are going backwards. The big announcement should 
be that SUVs are going to get 25 miles a gallon, not 10 miles a 
gallon.
    Mr. Kassel.
    Mr. Kassel. I just wanted to agree with what you have been 
saying----
    Mr. Barton. Agree with him quickly, because the Chair gave 
him an extra 5 minutes which he already exceeded.
    Mr. Kassel. One quick sentence, increasing fuel economy 
across the board to 39 miles per gallon would yield the 
equivalent energy consumption to 15 Arctic Refuges.
    Mr. Markey. Thank you, Mr. Chairman. Thank you for your 
generosity.
    Mr. Barton. Let is put a few things on the record here. The 
gentleman from Massachusetts has asked that we do a hearing on, 
I think, liquefied natural gas. That we are trying to work in 
the schedule.
    Great minds do think alike sometimes, even from opposite 
political spectrums, because one of the next hearings we are 
going to do is on conservation efficiency renewables, and I 
know that has been briefed at the staff level. It may not have 
yet reached the exulted levels of senior members like yourself, 
but it is in the works.
    Mr. Markey. I am in the top part of the lower third of the 
information chain.
    Mr. Barton. And we are working together toward a 
comprehensive strategy in which all things are on the table, 
including some of the things that are nearest and dearest to 
your heart. Democracy is a wonderful thing.
    Mr. Markey. Thank you.
    Mr. Barton. The gentleman from Oregon, Mr. Walden, is 
recognized for 10 minutes.
    Mr. Walden. Thank you, Mr. Chairman.
    I appreciate the opportunity to follow my distinguished 
colleague from Massachussetts. It is a long way from 
Massachusetts to Oregon, but we may actually share some common 
goals, including energy efficiency and conservation; and I look 
forward to that hearing.
    I happen to be among those, even though I was not polled, 
who agree there is an energy crisis. I also do not believe that 
the only part of the energy crisis or the way you solve it is 
ANWR. I think that is a very small issue in terms of the 
overall problem that we face in terms of energy.
    I think it is wrong to suggest that it is the answer or the 
only reason the President says we have a problem. I have an 
energy crisis in my district and in my region.
    When 1,285 steel workers are laid off and may never get 
their jobs back because the electrical power is too expensive 
and their power is being bought out and sold on the market, and 
the plants shut down, that is a crisis.
    When we are paying $2 a gallon for gas as we did last year 
in Oregon--and I some day would love to get to the bottom of 
why that is--that is a crisis. That is a crisis for the men and 
women who are trying to figure out how to pay for the gas to go 
in their tank--and it is more than just SUVs in my district--
because I got tractors and other farm machinery they are trying 
to put gas into and diesel into--it's very expensive. So mark 
me down as a person who believes there is a crisis.
    I was kind of taken by your comment about how you would 
support drilling in parts of the United States that are not 
environmentally sensitive, because I would love to have a 
definition or have you point out on a map where those places 
are. Because I tend to think every place has a little 
environmental sensitivity to it.
    Mr. Markey. Prudoe Bay, the National Petroleum Reserve, all 
of that is still is yet to be developed.
    Mr. Walden. And should be developed. I think there is an 
issue too that should be looked at: If we add to the supply out 
of our own reserves, does that just get exported and is there 
market manipulation going on? I know the FTC has looked at that 
a bit on the West Coast. Whether there is or not, I do not 
know. I would love to hear from our witnesses about that. 
Because what good does it do to go through the fight opening up 
new areas to drill if what happens to the amount that we drill 
gets shipped overseas in part of a global trading environment?
    Do you all have a comment on that particular side of 
things, the export of domestic oil as it relates to trying to 
move the market one way or another? All right.
    Mr. King. I will comment.
    Mr. Walden. Talk to me about it.
    Mr. King. I will comment on it from the refiners 
perspective. Last year about this time, we bought a refinery 
from Exxon in California, and that refinery ran primarily crude 
oil from the Alaskan North Slope, and also some California 
crude called SJC, San Joaquin Valley, exclusively from those 
two places.
    It is difficult to get incremental supplies of ANS. First 
of all it is declining in production. Second, it has a very 
tight market out there in terms of who is buying and who is 
offering for sale that crude. One of the things that we are 
doing is actually trying to bring crude in from the AG and from 
other sources to compete with that crude and to bring more 
supply in so that we can ultimately drop the costs of gasoline 
for the consumer.
    So I do not know if I specifically answered your question, 
but we are doing what we can as a refiner to force competition 
in that market; and, you know, we do not support exporting that 
crude away from our American needs.
    Mr. Walden. How much impact do all of these different 
boutique fuels, as they are labeled, have in terms of the costs 
of gasoline in the market? And I apologize for being here late, 
maybe you covered this.
    Mr. King. I did not cover that, but that is a good 
question. I think it does have an impact on the price of 
gasoline. Because, for example, in California, California has 
the strictest standards for gasoline in the country. It is very 
difficult to make that gasoline, and you do not make it outside 
of California other than a few selected areas maybe in Asia, 
but it takes a lot of money to get that over here.
    We do make it in one refinery in Corpus Christi, but that 
is very unusual; and it takes certain market dynamics and 
transportation costs to get it there.
    So the same thing in the Midwest, they use ethanol. It is 
difficult to blend ethanol and to provide components to make 
ethanol; and, therefore, they hit a very tight supply demand 
situation, and we saw what happened there last summer.
    Different standards in the South, different standards in 
the Northeast, and different times that certain things happen 
with respect to vapor pressure and things that affect gasoline 
production. So it does have impact on prices.
    Mr. Walden. Because that is where we get a lot of our gas 
in Oregon is imported in from California.
    Mr. King. Either that or you get a lot from Washington 
State.
    Mr. Walden. I think it is both 70 and 30 percent, one from 
the other. And it strikes me that we end up in the price vise 
pretty quickly out there; we certainly have over the last 
couple of years. And then you get into all of these zoning 
issues, the zones that get set by the oil companies as well. I 
think it is something that this committee frankly ought to be 
looking at as well.
    Mr. King. Mr. Robinson might be able to talk about the 
zoning situation in terms of pricing. I am more focused for 
your attention on the refining capacity. I do not think you 
have a refiner in Oregon.
    Mr. Walden. We do not.
    Mr. King. So you are dependent upon the sources, as we 
said, from Washington and California.
    Mr. Walden. Before we go to Mr. Robinson, can you tell me 
from your perspective what are the impediments to a new 
refinery in, say, a State like Oregon? Is there just not enough 
volume there? Is it a permitting process? Is it we are not the 
right end into some pipeline? What is it?
    Mr. King. Primarily, I think--and this speaks of the whole 
country--I mean, the question should be why do we not build 
refineries in our country including Oregon, and it is 
permitting. Permitting has a lot to do with it.
    It is difficult to get permits. Most people do not want a 
refinery in their backyard.
    The other thing is you've got overlapping regulations. We 
talked about this. You have got regulations on the fuels that 
we produce, and then there are also significant regulations on 
the refining--it is the refinery itself. Then you compound that 
with the rules changing in the middle of the game.
    You get halfway through a particular mandate or a situation 
that is dictated by the government, and then the rules change 
and you have a stranded investment. That is not necessarily an 
environment that attracts capital.
    As Mr. Cook accurately pointed out, our business has 
basically historically been about the same rate of return as a 
mutual fund, with a whole lot more risk.
    Mr. Walden. See, my concern is that we are sitting here 
today with gas prices at $1.49 to $1.69 or higher in my 
hometown--frankly, it is always higher--and I am afraid we are 
going to wake up this summer and the same situation we found 
ourselves when it comes to electricity this winter when it 
comes to gas prices. I will have to go home and explain why gas 
prices are back up over $2 a gallon in northeast Oregon.
    Mr. King. I think it is two things. First of all, it is 
crude oil prices. They are higher than they were last year, but 
if you really look at the issue; there is plenty of crude oil 
on the market. In fact, OPEC is cutting crude because there is 
too much. So what does that tell you?
    It tells you that there is a problem with converting that 
crude oil into product, which is the lack of refining capacity 
in our country. That is the issue. That is why we are where we 
are on gasoline prices.
    Mr. Walden. So to take this back to the electricity 
example, the problem we have is a lack of supply. And there are 
a lot of people in my region where we are now having blackouts 
in California, we are not going to spill water for fish. We are 
having all of these problems. They are saying, How did we get 
here? Why did someone not see this coming? What are we going to 
do about this supply? And everybody is rushing in to fill in 
the gap. How do we have a more reasonable approach when it 
comes to adding a refinery?
    Mr. King. I think we need to have a more receptive process 
by which a refinery is permitted and allowed to be in someone's 
backyard. On the electricity situation in California, I don't 
think a new power plant has been built in California in 10 
years. Whereas demand has grown significantly, there are 4 
million extra people in California. So it is the same concept. 
How do we make it easier? You make the permitting process 
easier. We don't change the rules in the middle of the game. We 
do the things that I have talked about.
    Mr. Walden. Are the environmental laws that are in place, 
are you talking about relaxing those or just making the process 
itself easier?
    Mr. King. We are not--and this is something that I think is 
important for everyone to know--we are not in favor of relaxing 
the laws. I think that should come as a nice surprise to Mr. 
Kassel. But we are not in favor. We just want----
    Mr. Walden. Tell us what they are and stick to them.
    Mr. King. Here is a good example. We are talking about 
lowering the sulfur in diesel fuel. We make several different 
types of diesel fuel. There are many categories: on-road 
diesel, off-road diesel, heating oil, jet fuel. But we are only 
talking about right now changing the specifications for on-road 
diesel. Then the next thing you know, in a year there will be a 
change in spec for off-road; then in a couple of years it will 
be jet fuel, then heating oil. So we are constantly compounding 
this issue, and we have got to spend capital retrofitting 
refineries over and over again; and we would just like one 
comprehensive plan to say, this is what we are going to do from 
a regulatory standpoint.
    Mr. Walden. Those regulations, are they coming from the 
Congress, the EPA?
    Mr. King. They are coming from Congress, they are coming 
from the EPA, they are coming from the States, at the State 
level. We have incremental pressures. We have two refineries in 
the Houston area. They are being asked to reduce air emissions 
in Houston more so than other parts of the country. So we have 
got to even do more work there, and that capital has no return 
whatsoever. So your return on capital on that is zero. Whatever 
you couple that with, it is difficult.
    Mr. Walden. That is my concern, we are going to wake up, no 
new refineries, heck of a gas price spike this summer, not that 
you would have a refinery in place by then, anyway; and it 
strikes me that you could live with these environmental laws if 
you had certainty long term so that you could plan for it and 
invest your capital wisely.
    Mr. King. That is right. The other thing that would help, 
sir, I think is at least an investigation into possible tax 
incentives for environmental equipment and maybe accelerated 
depreciation or giving us some advantage, some incentive to 
make those investments. Because the major, major oil companies, 
are diverting their capital away from the refining sector and 
going through the E and P sector, toward the exploration and 
production section of their company versus their refining 
system.
    Mr. Walden. I have overrun my time. Thank you, Mr. 
Chairman.
    Mr. Barton. The gentleman's time has expired. The second 
round of questions is going to be for 5 minutes so we are going 
to try to wrap this up in the next 30 minutes or so. Before I 
start asking questions, just a kind of general overview. Mr. 
Cook pointed out in response to my questions in the first round 
that world production and consumption is somewhere in the 75- 
to 76 million-barrel-per-day range. OPEC is producing between 
25 and 30 million barrels per day depending on their quotas 
that they set and how much cheating there is--OPEC is a swing 
producer. They can raise production, lower production.
    Saudi Arabia is about 7 to 8 million barrels a day, so 
Saudi Arabia by itself with a list cost of $1 to $2 a barrel 
can kind of target the range; and if they get the price 
elasticity demand correct--they have this target price that Mr. 
Cook put on the table--they try to manage the world oil market. 
I happen to think that their target price is too high. I 
disagree some with Mr. Markey when he says the prices are 
acceptable. I think they need to be lower. We need lower oil 
prices; we need lower natural gas prices. That would help 
tremendously in our electricity markets if natural gas prices 
were lower than they are.
    I would agree with Mr. Markey on the definition of a crisis 
versus a problem. We do have an energy problem in this country, 
and it is both a consumption problem and a supply problem. We 
need to address it. Conservation is part of it that Mr. Kassel 
is supportive of as, I think, are most of the other panel 
members; but I think supply increases are also a part of it. 
Now, I want to ask Mr. King, who is representing the refiners, 
my understanding is that your specific company does use MTBE in 
its reformulated gasoline; is that correct?
    Mr. King. That is correct.
    Mr. Barton. In response to questions from Congresswoman 
Bono, I think you indicated that MTBE is not a carcinogen; is 
that correct?
    Mr. King. That is correct.
    Mr. Barton. Isn't the worst thing you can really say about 
MTBE is that if it gets into the water table, it stinks?
    Mr. King. It smells bad.
    Mr. Barton. It is not a nice smell. It smells like rotten 
eggs.
    Mr. King. Right. At large levels. But the levels we are 
talking about, I don't think that is the issue. But you are 
right, that is the concern, is the smell.
    Mr. Barton. If we were to ban MTBE as the Governor of the 
State of California has done by executive order, what would 
that do to the ability to actually meet the clean air standards 
that are in place? There are two ways to do it. One is--I guess 
three. MTBE is an additive at the refinery; ethanol is an 
additive at the terminal; and Chevron, I think Chevron, has a 
patented reformulated gasoline that can meet the standards in 
some areas of the country. Which of those is the least cost 
option?
    Mr. King. Keeping MTBE in the gasoline pool is the least 
cost option.
    Mr. Barton. If we were to take the MTBE out of the 
equation, do you have any data on what the overall cost 
increase would be in areas that are currently using MTBE?
    Mr. King. I don't know if I have--I think I have heard 
numbers. It is a range, as usual. Anywhere from 7 to 14 cents 
are numbers that I have heard. So I think it would have a 
definite impact on the price.
    Mr. Barton. It would add 7 to 14 cents a gallon?
    Mr. King. Those are the numbers that we have heard, the 
ranges, yes. It will certainly be more costly to produce the 
gasoline. Now, whether you can pass every penny of that on, I 
don't know.
    Mr. Barton. Are refineries in the United States set up that 
they can blend MTBE or not blend MTBE and there is no 
difference to them, there is no cost difference, there is no 
output difference; or are refineries actually set up more 
specifically for particular feed stock and a specific type of 
crude oil with the addition of MTBE?
    Mr. King. Most refiners are set up to allow them the 
flexibility. But of the oxygenates that have been utilized, 
MTBE and ethanol, 85 percent of refiners that blend an 
oxygenate choose MTBE. So most of them are set up to handle 
MTBE.
    Mr. Barton. Under the current Tax Code, does MTBE get any 
special tax considerations?
    Mr. King. No.
    Mr. Barton. Do any of the other oxygenate substitutes, 
additives, get tax considerations?
    Mr. King. Yes, they do. Ethanol does.
    Mr. Barton. Ethanol does. Do you know approximately what 
the tax consideration is in cents per gallon or dollars per 
gallon or dollars per barrel or whatever the standard of 
measure is?
    Mr. King. It is 54.5 cents a gallon of ethanol.
    Mr. Barton. 54.5 cents per gallon.
    Mr. King. Of ethanol.
    Mr. Barton. Of ethanol. Per gallon. Not per barrel. Per 
gallon. That is a pretty good deal.
    Mr. King. It isn't, if you are the American consumer.
    Mr. Barton. But it is if you are getting it.
    Mr. King. It is if you are getting it, no doubt about it. 
But if you are a taxpayer in this country, I think people would 
like to know that. And to the extent that we would consider 
expanding the pool for ethanol, that is a real problem.
    Mr. Barton. What would happen if that tax benefit were 
taken away?
    Mr. King. No one would blend ethanol.
    Mr. Barton. Ethanol would not be cost competitive without 
that. In any region of the country, even in the Midwest?
    Mr. King. I don't believe that it would be competitive.
    Mr. Barton. My time is about to expire, so I would 
recognize the gentleman from Virginia for 5 minutes, Mr. 
Boucher.
    Mr. Boucher. Thank you very much, Mr. Chairman. Mr. D'Arco, 
I would like to propound a couple of additional questions to 
you.
    In your testimony, you have talked at some length about the 
new rule with regard to sulfur content in the diesel stream. 
Under that rule, older trucks can continue to use diesel fuel 
at the level of 500 parts per million of sulfur in the diesel 
stream, while for newer trucks a different standard is imposed; 
and that standard is 15 parts per million in the stream.
    You suggest that this new rule, because it has two 
differentiations, of the amount of sulfur in the stream that is 
allowable is causing some dislocation and confusion in the 
market, because producers will presumably in some cases at 
least continue to produce diesel fuel at both levels of sulfur 
content. Why would that problem not be effectively addressed if 
all of the producers do what some of them have done and simply 
decide to move immediately to the lower content and only 
produce one fuel and that fuel would have 15 parts per million? 
Why not do it that way?
    Mr. D'Arco. That is actually our position. We are looking 
for that to happen.
    Mr. Boucher. So you think that will happen?
    Mr. D'Arco. I honestly don't know. I do know that if we 
have these two separate fuels, certainly it is going to create 
supply problems because terminal facilities as they exist in 
the Northeast cannot handle the abundance of products.
    Mr. Boucher. Your suggestion is that in fact the best way 
to address that particular problem is for the producers to make 
one fuel, and that would be at the lower level of 15 parts per 
million?
    Mr. D'Arco. That is correct.
    Mr. Boucher. I have a question that is primarily for the 
purposes of clarification. You have a reference in your 
testimony to a dye system that is used for tax purposes. Is 
that a dye system that is required in the diesel sulfur rule, 
or is it required in some other EPA rule? Why is this dye 
system used and what is it?
    Mr. D'Arco. That system exists to identify which fuels are 
subject to motor fuel taxes and which are not.
    Mr. Boucher. And what is the source of that requirement?
    Mr. D'Arco. I am sorry, I don't understand.
    Mr. Boucher. Where does that requirement derive?
    Mr. D'Arco. Congressional mandate.
    Mr. Boucher. It is a congressional mandate. It is contained 
in the statute?
    Mr. D'Arco. Yes.
    Mr. Boucher. The chairman was saying that we prefer the 
nicer term, Federal law, to congressional mandate.
    Mr. Layton, let me turn to you, if I may. In your 
testimony, you have raised some concerns about the impediments 
to drilling on the outer coastal shelf. I want to ask you a 
little bit about your expression of those concerns. There was 
recently a disaster off the coast of Brazil in which a large 
drilling rig sank. In view of that experience, I wonder what 
kind of assurance you could offer to someone like the current 
head of the EPA, the former Governor of New Jersey, Ms. 
Whitman, who opposed drilling offshore or perhaps to Florida 
Governor Jeb Bush, who has also opposed drilling offshore, that 
a similar kind of disaster would not happen in the United 
States if we were to make it easier for production to take 
place on rigs that are located on the outer continental shelf. 
What assurance could you offer?
    Mr. Layton. An honest assurance that there are no hundred 
percent guarantees that something bad would not happen. But I 
would ask that they go back and look at the record of the 
industry, particularly over the last 20 years. Not only in the 
incidents that did happen but how the industry and the 
technology that is available allowed the industry to cope and 
to take care of problems if they did come up. I think they will 
find that there are very, very few problems that have arisen 
and certainly not of the magnitude of the one you just 
mentioned. But those that have, I think the industry is in a 
position that it can be very responsive and has been very 
responsive to take care of the obligation to clean up if there 
is an incident that has happened.
    Mr. Boucher. Was there any particular lack of safeguard in 
the case of the Brazilian incident that we could reliably 
assume would not be repeated with regard to offshore drilling 
in the United States? Was there any particular facet of that 
Brazilian experience that was unique, and do we have any 
confidence that whatever affected that drilling rig would not 
affect a rig in the United States?
    Mr. Layton. I apologize to the Congressman. I really am not 
in a position to address that.
    Mr. Boucher. Thank you very much, Mr. Layton. Thank you, 
Mr. Chairman.
    Mr. Barton. Before we get off the subject, could we--would 
EIA have data on the amount of oil spilled from drilling 
platforms versus oil spilled from tankers bringing imported 
oil? Is such data available? Or is that such an esoteric 
statistic that it is not obtainable?
    Mr. Cook. Given our budget, I am not aware of any such data 
collection.
    Mr. Barton. Mr. Layton?
    Mr. Layton. Congressman, I believe there is some data 
available. I will take it upon myself to find that.
    Mr. Barton. I wouldn't put my hand on a Bible, but my 
recollection is that we have had more spills from tankers in 
the last 20 years than we have from drilling rigs. I know that 
is the case in the Gulf of Mexico off the coast of Texas.
    Mr. Layton. My recollection is the same as yours. But I 
will collect that and submit it to the Congress.
    Mr. Barton. The gentleman from Oregon is recognized for 5 
minutes.
    Mr. Walden. Thank you, Mr. Chairman.
    Mr. Pitts, you noted that the results of your survey 
indicated a majority of those interviewed did not approve of 
NYMEX as a pricing mechanism for crude oil and believe it 
causes unnecessary price volatility. Do you or any of the 
producers have suggestions on how to create more price 
stability?
    Mr. Pitts. The OPEC pricing ban is working very well. 
Everybody I have talked to agrees with it and thinks it is 
working and it should stay in place.
    Mr. Walden. Do others want to comment on that?
    Mr. Layton. I would add a comment and, that is, one 
mechanism that I believe would help would be the Department of 
Energy's oil data transparency project. That project has the 
goal of making sure that the information that is out there that 
drives the markets is in fact as accurate, as accessible as 
possible. If the markets do overreact--and I think there is 
some evidence that momentum carries them too far one way or 
another--it certainly adds insult to injury if they are 
overreacting to the wrong data, and that is what I believe the 
Department of Energy effort is designed to try and combat. And 
so I certainly think that is one thing that should be supported 
and worked on very much.
    Mr. Walden. Let me follow up on some of the information 
issues and the way prices are set and all. It used to be that 
there were 10 to 13 players in the market; no one company could 
set the market price. But now with all the information 
available on the Internet, quick access to information, what 
effect does that quick access to information have on the 
consumer?
    Mr. Layton. Is your question addressed to me?
    Mr. Walden. Whoever wants to take it. You seem brave enough 
to answer.
    Mr. Layton. Brave or foolish, I am not sure which.
    It certainly, over the years as information has become more 
available, has changed the price of our commodities, crude oil 
and natural gas. You can look back historically--and you have 
to go back a number of years to see that--but the price of oil 
might change a few times during the year. Now we have it 
changing daily and not by 25 cents a barrel, but maybe a dollar 
a barrel and maybe $5 a barrel over a week's period of time. I 
think the additional volatility probably is the biggest impact 
on the consumers, and I guess that can be good for them in the 
short term. I don't agree it is good for them in the long term 
if volatility is downward because it is downward as it was in 
1998 and 1999; it is going to bounce back like it has.
    Mr. Walden. I guess it is somewhat like their siting of 
refineries. I think what people want most is some level of 
predictability as they do their own budgeting, whether you are 
in a small business or just a household budget. If you are 
commuting and gas is 98 cents 1 year as it was and close to $2 
the next, how do you budget for that? I just wondered how 
that--everybody gets information right away. Does that really 
end up having a positive effect on the pricing structure? Does 
it create more volatility? Does it do damage to the marketplace 
in terms of competitiveness? Mr. Robinson? Or is it not an 
effect at all?
    Mr. Robinson. I think it has a degree of an effect. When 
things are tight and information is flowing, you are going to 
see rapid run-ups. You will also see--when it gets loose, you 
will also see the prices going down. The villain really isn't, 
though, the information. It might make it a little bit quicker, 
but it doesn't materially impact it overall. Just like all the 
technology, it makes things a little quicker, but you would 
have gotten there anyway.
    Mr. Walden. Anybody else? Mr. Kassel?
    Mr. Kassel. I think one impact that we might see with the 
incredibly fast flow of information is a quickening of when 
problems become crises. We have been talking--before we were 
talking about is it a crisis or is it a problem, and we had a 
variety of different answers to the question. The reality is 
that the country needs a balanced energy policy that meets a 
whole array of energy, economic, and environmental and health 
goals. We don't have that now.
    But what we do have is a near-hysteria pitch growing over 
what are we going to do, what are we going to do, which is in 
part increased by the incredible flow of information that we 
all have. But our response should be to the problem that we 
have, to the lack of the policy. So yes, we have to be talking 
about the supply side as we have done in many cases, for most 
of today, but we also have to talk about how do we free our 
fuel economy so that we can meet the energy needs, the 
consumption needs of America's driving without having to go 
offshore, without having to go into sensitive areas like the 
Arctic Refuge. I think that is a debate that will take time to 
unroll. And it flows at a different pace than the kind of 
information flow you are talking about.
    Mr. Walden. I am out of time. Thank you, Mr. Chairman.
    Mr. Barton. The gentleman's time has expired. For the last 
5 minutes of questioning, the mild-mannered man from 
Massachusetts, the mellifluous Mr. Markey.
    Mr. Markey. Thank you, Mr. Chairman, very much. I will try 
to merit the confidence that you have in me to maintain that 
demeanor.
    First of all, let me say that we don't have as many oil 
wells in Massachusetts as we would like to; and so even when 
prices are in the upper part of the lower third, prices, we 
still believe that prices are too high, so I just want to make 
that clear. The point I was trying to make is we don't have an 
energy crisis, we have an energy problem; and a problem as a 
result lends itself to more judicious consideration. We can 
exclude the more extreme resolutions of that crisis, if we want 
to work together. On the other hand, if we want to take the 
most extreme solutions, then it can only be justified by 
calling something a crisis. So let me ask this, Mr. King. I 
thought I heard you say--maybe I was wrong--but I thought I 
heard you say that there is plenty of crude oil in the world. 
Did I misunderstand that?
    Mr. King. I think at this--it is all seasonal. It is all 
dependent upon supply and-demand fundamentals, but I think--at 
this time, I think there is a general feeling at least among 
OPEC that there is too much oil.
    Mr. Markey. But I thought you said there is plenty of crude 
oil, but because there is plenty of crude oil that OPEC has 
decided to cut back because it affects their ability to have 
the price that they want; is that correct? Would that be an 
accurate summary?
    Mr. King. I think that is accurate for today. It wasn't 
true last year when they were increasing production. But their 
feeling is that with the slowdown in the economy, they are 
trying to figure out how do we regulate the oil. So therefore 
they are having to cut back their production.
    Mr. Markey. Exactly. So the point again, to put a point on 
it, is that there is plenty of crude.
    Mr. King. That is right. But I think what we are talking 
about here is a domestic energy policy. There is not plenty of 
crude oil in the United States. That is the real issue. It is 
the same thing with refining capacity.
    Mr. Markey. We only have 3 percent of the oil reserves in 
the world, so we are never going to be able to drill our way 
out of the crisis. There is no way--you do agree that there is 
no way that we could ever reach a point where we have 100 
percent of our oil production in the United States produced 
domestically?
    Mr. King. I do agree with that, but I also believe that we 
have become over time now, the last 10 years, 20 years, we are 
more and more dependent on OPEC than we ever have been. So, 
therefore, I think we have lost some of that power that we want 
to have back, as you have mentioned.
    Mr. Markey. Let me show you a chart here that BP Amoco has 
provided to the committee in terms of the share of global oil 
production from 1965 to the year 2005. According to this chart, 
this is BM Amoco, that OPEC today is producing just about the 
same level of total production in a global marketplace as it 
was 15 years ago. In fact, it is lower today than it was back 
in the late sixties and early seventies. Meanwhile, the non-
OPEC production has remained stable over the last generation. 
In fact, it is higher than it was back in the 1960's and right 
up to the mid-1970's.
    Mr. Barton. We will need that chart, to put it in the 
record. I have seen the same chart, but we need to make sure we 
get it into the record.
    Mr. Markey. I place a great deal of weight on BP Amoco's 
analysis. I don't know about you, Mr. Chairman.
    Mr. Layton. I would be happy to comment on that chart.
    Mr. Markey. Please do so, Mr. Layton.
    Mr. Layton. There is one difference that doesn't show up on 
the chart and, that is, excess production capacity with the 
OPEC countries. In the earlier years where that production hit 
that level you pointed to, there was an enormous amount of 
capacity beyond what OPEC was actually producing. The issue 
that we are dealing now with in the global marketplace is that 
the only excess production capacity prior to the recent cuts 
that were made really resided with Saudi Arabia, and it was 
maybe 2 million barrels a day. So if there was a cushion, not 
if, there was a cushion there in years past, that cushion has 
almost disappeared. And I think that is something that 
certainly--I don't disagree with what the chart shows, but it 
is information that is not available on that chart.
    Mr. Markey. Again, I am just trying to make the point 
that--I guess you are trying to make the point that we are too 
dependent on OPEC on the one hand, but that they should produce 
more on the other. I understand that. That is again another one 
of these contradictions that we have. But ultimately, no matter 
what we do in our own country in terms of additional 
production, our better way of putting pressure on OPEC so that 
they are at the lower end of what their production needs are to 
satisfy all their members in terms of the revenues they need to 
satisfy the citizens of their countries in terms of their needs 
is to continue to lower the amount of oil that we consume, in 
automobiles and SUVs.
    Then there is pressure on their membership to raise the oil 
production because you kind of hit a bottom level, below which 
they can't go back to their own citizens and say that we are 
going to lower the production of oil again. Because, obviously, 
Saddam Hussein is going to be arguing that he has a right to 
produce more oil because he has been off the market for so 
long, and Mexico and others are also going to be saying we need 
to produce more.
    I just think that we are not using our primary tool, which 
is our technological superiority, in order to leverage this 
relationship with OPEC. That is our single most underutilized 
tool. It just seems to me that if we can boast about putting a 
man on the Moon or having invented the Internet and made all 
the information in the world available at the fingertips of 
every citizen of our country and every citizen of the world, it 
seems to me that it is kind of a sad commentary on us as a 
Nation that we are now using 1982-level automotive efficiency 
tools.
    It seems to me that on the central relationship to our 
economy, our dependence upon imported oil, that we are looking 
at this technology and basically ignoring the potential 
benefits that we could extract from it in terms of our 
relationship with this unstable source of energy for our 
economy.
    I would just make one final point, Mr. Chairman. The BP 
Amoco charts also include a very interesting point, which is 
that U.S. oil products, imports into the United States, have 
stayed within the same band, that is, 1.5 to 2.5 million 
barrels of oil a day of refined product for the last 10 years. 
It stays right inside of that band. There is no real spike that 
is evident right now or last year or the year before, and that 
in terms of again these historical trends, that there is no 
justification for drilling in the Arctic Wildlife Reserve or 
moving to those more vulnerable areas before we have looked at 
the National Petroleum Reserve, Prudhoe Bay, looked at other 
potential--I will tell you the truth.
    I look at natural gas in Prudhoe Bay, and I am astounded 
that we haven't brought that down yet. There is only about 7 
trillion cubic feet of natural gas that people estimate is over 
in the Arctic Wildlife Reserve, but there is 25 to 30 trillion 
cubic feet in the Prudhoe Bay area. Yet the pipeline hasn't 
been built; it hasn't been brought down. So I think if we are 
going to be looking, in other words, at where the energy is 
that we can all agree, Democrat, Republican, liberal, 
conservative, environmentalist, producer, that we really 
haven't even begun to tap those resources yet before we have to 
reach the more vulnerable parts of our country. I thank you, 
Mr. Chairman.
    Mr. Barton. Thank you. We will try to get those charts you 
referred to into the record. The Chair would also ask unanimous 
consent that the February DOE monthly highlight fact sheet be 
put into the record from the energy information agency unless 
you have got a later one out. The latest we have is February. 
When would the March highlight data sheet be out, Mr. Cook?
    Mr. Cook. Could you clarify which data sheet you are 
talking about?
    Mr. Barton. EIA DOE Government February 2001 Energy 
Highlight. It is petroleum supply summary table H1. I know you 
know every one of the things you do. Generally when do they 
come out? I want to put this one in because I am told at the 
staff level it is the latest one we have, but if there is a 
March one we will certainly put--we will show you----
    Mr. Cook. We don't have final March monthly data yet. 
Without taking a look at what you are looking at there, I 
suspect maybe that is using December data.
    Mr. Barton. Actually, it has estimates for February and 
January. I guess the actual would be December. It does say--it 
says total petroleum demand averaged 20 million barrels per 
day. This was the highest daily average for February since 
1979. Crude oil production was 5.9 million barrels per day, the 
lowest since February 1950. We have got the highest demand we 
have had in 21 years and the lowest production we have had in 
51 years according to the--that would tend to be a problem.
    Mr. Cook. Do you have an estimate for February on that 
table?
    Mr. Barton. Yes, sir.
    Mr. Cook. Okay. Approximately the end of the first week of 
April.
    Mr. Barton. That is next week.
    Mr. Cook. Yes. We will have all of the data from March in a 
preliminary form, and we can give you an estimate then for the 
March figure.
    Mr. Barton. Thank you. I wasn't trying to create an 
argument right at the end. I was just asking unanimous consent 
to put the latest data into the record. Hearing no objection, 
so ordered. If we can update the data, we will put that into 
the record, too.
    [The following was received for the record:]

    Data will be available on the EIA website (www.eia.doe.gov) 
on Wednesday, April 18 in the Weekly Petroleum Status Report.

    Mr. Barton. I want to thank our panels. I want to thank the 
Members for being here on a day that we don't have votes. There 
may be written questions from the staff for the record. If so, 
we would ask that you reply expeditiously. We have probably 
three to a half a dozen more hearings before we begin to try to 
put together a package, a legislative package. We appreciate 
your attendance. Again, I want to give special thanks to Mr. 
Pitts for coming. We do appreciate your attendance. This 
hearing is adjourned.
    [Whereupon, at 12:30 p.m., the subcommittee was adjourned.]
