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



 
                GASOLINE SUPPLY--ANOTHER ENERGY CRISIS?

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


                                HEARING

                               before the

                 SUBCOMMITTEE ON ENERGY POLICY, NATURAL
                    RESOURCES AND REGULATORY AFFAIRS

                                 of the

                              COMMITTEE ON
                           GOVERNMENT REFORM

                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION
                               __________

                             JUNE 14, 2001
                               __________

                           Serial No. 107-55
                               __________

       Printed for the use of the Committee on Government Reform










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


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77-984                          WASHINGTON : 2002
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                     COMMITTEE ON GOVERNMENT REFORM

                     DAN BURTON, Indiana, Chairman
BENJAMIN A. GILMAN, New York         HENRY A. WAXMAN, California
CONSTANCE A. MORELLA, Maryland       TOM LANTOS, California
CHRISTOPHER SHAYS, Connecticut       MAJOR R. OWENS, New York
ILEANA ROS-LEHTINEN, Florida         EDOLPHUS TOWNS, New York
JOHN M. McHUGH, New York             PAUL E. KANJORSKI, Pennsylvania
STEPHEN HORN, California             PATSY T. MINK, Hawaii
JOHN L. MICA, Florida                CAROLYN B. MALONEY, New York
THOMAS M. DAVIS, Virginia            ELEANOR HOLMES NORTON, Washington, 
MARK E. SOUDER, Indiana                  DC
JOE SCARBOROUGH, Florida             ELIJAH E. CUMMINGS, Maryland
STEVEN C. LaTOURETTE, Ohio           DENNIS J. KUCINICH, Ohio
BOB BARR, Georgia                    ROD R. BLAGOJEVICH, Illinois
DAN MILLER, Florida                  DANNY K. DAVIS, Illinois
DOUG OSE, California                 JOHN F. TIERNEY, Massachusetts
RON LEWIS, Kentucky                  JIM TURNER, Texas
JO ANN DAVIS, Virginia               THOMAS H. ALLEN, Maine
TODD RUSSELL PLATTS, Pennsylvania    JANICE D. SCHAKOWSKY, Illinois
DAVE WELDON, Florida                 WM. LACY CLAY, Missouri
CHRIS CANNON, Utah                   ------ ------
ADAM H. PUTNAM, Florida              ------ ------
C.L. ``BUTCH'' OTTER, Idaho                      ------
EDWARD L. SCHROCK, Virginia          BERNARD SANDERS, Vermont 
JOHN J. DUNCAN, Tennessee                (Independent)


                      Kevin Binger, Staff Director
                 Daniel R. Moll, Deputy Staff Director
                     James C. Wilson, Chief Counsel
                     Robert A. Briggs, Chief Clerk
                 Phil Schiliro, Minority Staff Director

Subcommittee on Energy Policy, Natural Resources and Regulatory Affairs

                     DOUG OSE, California, Chairman
C.L. ``BUTCH'' OTTER, Idaho          JOHN F. TIERNEY, Massachusetts
CHRISTOPHER SHAYS, Connecticut       TOM LANTOS, California
JOHN M. McHUGH, New York             EDOLPHUS TOWNS, New York
STEVEN C. LaTOURETTE, Ohio           PATSY T. MINK, Hawaii
CHRIS CANNON, Utah                   DENNIS J. KUCINICH, Ohio
------ ------                        ROD R. BLAGOJEVICH, Illinois
------ ------

                               Ex Officio

DAN BURTON, Indiana                  HENRY A. WAXMAN, California
                       Dan Skopec, Staff Director
               Jonathan Tolman, Professional Staff Member
                        Regina McAllister, Clerk
                     Michelle Ash, Minority Counsel













                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on June 14, 2001....................................     1
Statement of:
    Cook, John, Director, Petroleum Division, Energy Information 
      Administration, U.S. Department of Energy; and Rob Brenner, 
      Acting Assistant Administrator, Office of Air and 
      Radiation, U.S. Environmental Protection Agency............    15
    Coursey, Don L., Ameritech professor of public policy, 
      University of Chicago, and Policy Solutions, LTD.; Robert 
      Slaughter, general counsel, National Petrochemical and 
      Refiners Association; Ben Lieberman, senior policy analyst, 
      the Competitive Enterprise Institute; and A. Blakeman 
      Early, environmental consultant, American Lung Association.   110
Letters, statements, etc., submitted for the record by:
    Brenner, Rob, Acting Assistant Administrator, Office of Air 
      and Radiation, U.S. Environmental Protection Agency,
        Letter dated June 27, 2001...............................   108
        Prepared statement of....................................    34
    Cook, John, Director, Petroleum Division, Energy Information 
      Administration, U.S. Department of Energy:
        E-mail dated June 28, 2001...............................   101
        Prepared statement of....................................    19
    Coursey, Don L., Ameritech professor of public policy, 
      University of Chicago, and Policy Solutions, LTD., prepared 
      statement of...............................................   113
    Early, A. Blakeman, environmental consultant, American Lung 
      Association, prepared statement of.........................   156
    Lieberman, Ben, senior policy analyst, the Competitive 
      Enterprise Institute:
        Names of energy companies that fund the organization.....   184
        Prepared statement of....................................   141
    Mink, Hon. Patsy T., a Representative in Congress from the 
      State of Hawaii, information concerning Alcohol fuels tax 
      incentives.................................................    89
    Ose, Hon. Doug, a Representative in Congress from the State 
      of California:
        Letters dated May 3 and June 11, 2001....................   186
        Prepared statement of....................................     4
    Slaughter, Robert, general counsel, National Petrochemical 
      and Refiners Association:
        Letter dated February 14, 2000...........................   179
        Prepared statement of....................................   121
    Tierney, Hon. John F., a Representative in Congress from the 
      State of Massachusetts, prepared statement of..............    11
    Towns, Hon. Edolphus, a Representative in Congress from the 
      State of New York, prepared statement of...................   192
    Waxman, Hon. Henry A., a Representative in Congress from the 
      State of California, letter dated June 14, 2001............    46















                GASOLINE SUPPLY--ANOTHER ENERGY CRISIS?

                              ----------                              


                        THURSDAY, JUNE 14, 2001

                  House of Representatives,
  Subcommittee on Energy Policy, Natural Resources 
                            and Regulatory Affairs,
                            Committee on Government Reform,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 10 a.m., in 
room 2154, Rayburn House Office Building, Hon. Doug Ose 
(chairman of the subcommittee) presiding.
    Members present: Representatives Ose, Waxman, Otter, 
LaTourette, Cannon, Tierney, Mink, and Kucinich.
    Staff present: Dan Skopec, staff director; Barbara Kahlow, 
deputy staff director; Jonathan Tolman, professional staff 
member; Regina McAllister, clerk; Michelle Ash, Greg Dotson, 
Elizabeth Mundinger, and Alexandra Teitz, minority counsels; 
Andrei Greenawalt, minority special assistant; and Kate 
Harrington, minority staff assistant.
    Mr. Ose. Good morning. We welcome everybody to the 
committee hearing. Today we are going to take a look at 
gasoline prices. Joining us is Mr. Cannon of Utah. I presume 
Mr. Tierney will be here soon.
    We will start with opening statements, then proceed to the 
witnesses for theirs.
    But, first of all, let me welcome everyone. We appreciate 
your taking the time to come and visit, particularly our 
witnesses. I'm sure the information you provide will be very 
helpful.
    The best known price in America is of gasoline, there isn't 
any doubt. Americans see it posted along the road dozens of 
times every day, they pull in to fill up at least once a week, 
if not two or three times. Filling up with gas today is an 
expensive proposition.
    Last Monday, the average price for regular gasoline 
nationwide was $1.65 a gallon. In California, it was even 
higher, $1.95, with some cities seeing prices over $2. For 
working Americans filling up their gas tank is not a luxury, it 
is a necessity. They have to go to work, they have to take the 
kids to school, they have to go to the grocery store, they have 
to go to the doctor or they have to go to the emergency room. 
Like it or not, gasoline is the energy that literally fuels our 
everyday life.
    When prices skyrocket, as they have in the past few weeks, 
it has a dramatic effect not only on the economy but also on 
the pocketbooks of everyday families, particularly those on low 
or fixed incomes. Unfortunately, this is not the first year 
that gasoline prices have suddenly escalated in the spring. Two 
years ago, the price of gas jumped dramatically on the West 
Coast. Last spring, the price of gasoline skyrocketed in the 
Midwest, and this year, prices have done the same.
    This sequence of events, the repetitive pattern, begs the 
question, if nothing changes, what is going to happen next 
year? It seems that the events of the last 2 years have been a 
series of warnings that there is something wrong with the 
gasoline market. But it is not just the recent price increases 
that suggest there is a problem. Even though demand for 
gasoline has risen nearly every year since 1982, refining 
capacity has actually declined more than 10 percent since that 
time. Today, refineries nationwide are operating at over 97 
percent of capacity, essentially full tilt.
    Even when operating at such a high rate, refineries are 
barely keeping up with demand. At such a high utilization rate, 
there is virtually no room for error. Any accident or error can 
cause a supply disruption, with dramatic consequences for the 
price of gasoline. This is a problem of particular concern for 
California. The prospect of rolling blackouts across the State 
creates the specter of another energy crisis, this time in 
gasoline.
    If the lack of power to refineries significantly disrupts 
supply, some analysts have predicted the price of gasoline 
could go to $3 a gallon. That benefits no one.
    With eminent blackouts and high natural gas prices, the 
California economy can ill afford a third crisis in gasoline 
prices. The effect would be devastating, not only in generic 
economic terms of a recession, but also in personal terms, 
affecting Mr. Waxman's district, my district, every single 
district of every single member from California, with job loss 
and financial hardship.
    A gasoline crisis due to refinery blackouts is avoidable. 
On May 3rd of this year, Chairman Dan Burton, Mr. Steve Horn 
and I sent a letter to California Governor Gray Davis, urging 
him to place refineries on the list of facilities exempt from 
having their power cutoff. Blackouts at refineries can and 
should be avoided. There is no reason to substitute a shortage 
of gasoline for a shortage of electricity.
    One reason that California is so sensitive to supply 
disruptions is a function of its special requirements for clean 
burning gasoline. California's own special blend of gasoline, 
although good for the environment, means that California must 
produce virtually all of its gasoline inside the State. When 
there's a supply shortage, refiners in the rest of the country 
can't simply ship more gasoline to California.
    And although California may be the largest example of this 
problem, it is by no means alone. Twenty years ago, the Nation 
was essentially one single market for gasoline. It was a 
commodity, if you will. Today, the Nation has been balkanized 
into dozens of tiny boutique markets with their own specialized 
blends of gasoline. In Chicago, there's a unique blend of 
gasoline. In Mr. Cannon's home State of Utah, there are two 
special blends in addition to the conventional blend of 
gasoline.
    The principal question that concerns me about these 
boutique islands is not whether these special blends are more 
or less expensive to produce than conventional gasoline, but do 
they make the entire market less stable. Does this overlay of 
regulatory barriers on top of the current supply problems make 
the market susceptible to recurrent spikes?
    Beyond this balkanization of the gasoline market is the 
overarching regulation of gasoline under the Clean Air Act, 
particularly the oxygenate mandate added by Congress in 1990. 
On Tuesday, the EPA declined to grant California a waiver from 
the oxygenate requirement. This waiver is critical to 
California's continued commitment to protect water quality and 
reduce skyrocketing gasoline prices. This ruling is a setback 
to our continued efforts to help Californians acquire clean, 
affordable gasoline. I will continue to work with the 
administration and our State government to seek alternative 
ways to implement this waiver.
    I think the fact that California cannot get a waiver from 
the EPA administrator to protect its water shows a fundamental 
problem with the way our Nation's environmental laws are 
structured. Fundamentally, I'm disturbed that the Federal 
Government seems to be in the business of micromanaging what 
goes into California's gasoline and everyone else's, for that 
matter, too.
    Hopefully the witnesses today can enlighten us on these 
issues facing the gasoline market and possibly point toward 
some productive solutions. I do look forward to your testimony.
    Now I want to recognize Mr. Tierney for 5 minutes for an 
opening statement.
    [The prepared statement of Hon. Doug Ose follows:]
    [GRAPHIC] [TIFF OMITTED] T7984.001
    
    [GRAPHIC] [TIFF OMITTED] T7984.002
    
    Mr. Tierney. Thank you, Mr. Chairman.
    I'm going to yield to Mr. Waxman, who has another committee 
meeting to go to, if that's all right.
    Mr. Waxman. Thank you very much, Mr. Chairman, for holding 
this hearing, Mr. Tierney for yielding to me. I'll try to be at 
this hearing as much as possible, because I think it's a very 
important one.
    Just since March, gasoline prices rose an average 31 cents 
per gallon nationwide. The national average for self-service 
regular is $1.65, which is 30 cents lower than the price of 
regular in California. Gasoline prices often rise for reasons 
outside of the control of U.S. policymakers. In the 1970's, the 
cost of gasoline soared when OPEC cut oil production and there 
was little we could do about this. Similarly, a series of OPEC 
production cuts that began in December 1998 caused gasoline 
prices to rise again.
    In these circumstances, U.S. policymakers have limited 
options. When President Clinton faced this challenge in 2000, 
he successfully urged OPEC and non-OPEC countries to increase 
oil production, and I hope that President Bush will make 
similar efforts.
    What is unforgivable, however, is for U.S. policymakers to 
create a gas crisis through their own blunders. But 
unfortunately, this is exactly what the Bush administration is 
doing. Mr. Chairman, you and I join the entire California 
delegation, both Republicans and Democrats, in supporting 
California's request for a waiver of the Federal oxygenate 
requirements in gasoline. The science justified this waiver, 
and EPA wanted to grant it.
    But just 2 days ago, President Bush denied it. This 
decision, which makes absolutely no sense, has the potential to 
cause a gasoline crisis in California. The decision benefits 
political supporters of President Bush like Archer Daniels 
Midland, the largest manufacturer of ethanol. But for 
California, it means more air pollution and higher fuel costs.
    Starting in 2003, California has banned the use of methyl 
tertiary butyl ether [MTBE], in gasoline, because MTBE 
contaminates drinking water wells. Because California's waiver 
request was denied, California will be forced to use the only 
practical alternative, ethanol. In California, ethanol will not 
reduce air pollution, yet it is more expensive than MTBE, and 
it's in short supply. In fact, industry officials estimate that 
it will take about one third of current U.S. production of 
ethanol for California to meet the Federal oxygenate 
requirements.
    Shortage of ethanol could cause gas prices to rise by 50 
cents a gallon, according to California Governor Gray Davis. 
What's more, President Bush's decision will cause balkanization 
of the fuel supply in California. This is completely 
contradictory to ``reducing the number of boutique fuels,'' a 
goal of his National energy policy.
    Because California will not receive a wavier, oil refiners 
will have to supply California with at least two different 
fuels in areas that are classified as severe or extreme, non-
attainment areas under the Clean Air Act, like Los Angeles, oil 
refineries will have to add ethanol to meet the oxygenate 
requirements of the Clean Air Act. But in other parts of the 
State, oil refineries only have to meet California's clean fuel 
standards, which do not require the addition of ethanol.
    Moreover, gasoline with ethanol must be segregated from 
non-oxygenated throughout the distribution process and large 
quantities of ethanol will have to be imported from halfway 
across the country. President Bush's decision is so mind-
boggling that I awarded him a golden jackpot for failing to 
grant the California waiver. The golden jackpot is an award 
that recognizes indefensible government decisions that benefit 
special interests at the expense of the public interest.
    Besides avoiding blunders like the California decision, 
there are essential affirmative steps that we should implement 
to reduce gasoline prices. President Bush should put pressure 
on OPEC to increase supply. We should also increase the fuel 
economy standards required in motor vehicles, which would 
significantly reduce our demand for gasoline.
    Mr. Chairman, we worked together on a bipartisan basis to 
urge President Bush to grant California's waiver. We were 
unsuccessful in that effort, but I hope we can work together on 
other policies to alleviate gasoline price hikes and any other 
potential fuel shortages.
    I thank you very much for allowing me to make this opening 
statement.
    Mr. Ose. Thank you, Mr. Waxman.
    Mr. Cannon.
    Mr. Cannon. Thank you, Mr. Chairman.
    I have an opening statement that I'd just like to submit 
for the record.
    Mr. Ose. Without objection.
    Mr. Tierney.
    Mr. Tierney. Thank you, Mr. Chairman.
    I want to thank you for holding this hearing. As Mr. Waxman 
already stated, the price of gasoline has increased 
significantly between May and March of this year, and the 
American public does deserve to know what's happening and what 
we're going to do about it.
    Clearly, one factor that is contributing to the rise in 
high prices is the high cost of crude oil. In December 1998, 
the cost of crude oil was 23.4 cents a gallon. Today that cost 
is two to three times more expensive at around 66 cents a 
gallon, and it reflects the fact that OPEC countries have 
significantly limited supplies.
    Other foreign oil producers, including Mexico, are joining 
in and significantly reducing their production. If we're going 
to see relief at the pump any time soon, we're going to have to 
address that problem. Mr. Waxman alluded to the fact that in 
the previous administration, President Clinton lobbied foreign 
producers, and as a result they increased their production 
quotas by more than 3\1/2\ million barrels per day. It's 
interesting to note that during that period of time, as a 
candidate, the current President was pretty harsh in his 
criticism of President Clinton, pretty insistent, in fact, that 
President Clinton do that lobbying, which he then in turn did 
and met with some success.
    I urge the Bush administration now to heed its own words 
and do the same. We've had a decrease in the months that this 
administration has been in office. Mexico alone, with which 
this particular administration is supposed to have a special 
relationship, could increase its production capacity by 500,000 
barrels per day over the next 2 years, even more than that, 
going further out. They have in fact reduced their production 
by some 40,000 per day.
    So, we also have to look at the issue of market 
manipulation. We should be looking at it seriously as it 
pertains to the oil industry. I notice that in some of the 
written testimony, and I suspect that we'll hear in some of the 
testimony today, claims that the Federal Trade Commission found 
no illegality with respect to what went on in the Midwest last 
year. But that begs the question, in fact, that what they found 
was that gasoline price spikes last spring in the Midwest were 
caused in part by refineries curtailing production and 
withholding supply. That may not be illegal, but it certainly 
was a cause, part of the cause of the rise in prices.
    Three companies produced 23 percent less reformulated 
gasoline in 2000 than they did in 1999, thus substantially 
limiting supply. One company that was later identified by the 
Wall Street Journal as Marathon Ashland substantially increased 
its production of reformulated gasoline, and then, despite its 
increased production that increased excess supplies, it 
withheld supplies in order to sustain high retail prices. So, 
maybe there was nothing illegal about it, and maybe the 
industry wants to keep going around banging on that drum. But, 
the fact of the matter is, they took actions, and by those 
actions, we had a price hike.
    The Wall Street Journal reported that ``the steep prices 
substantially boosted prices for Marathon Ashland,'' and 
refining and marketing profits were more than double from the 
year before. Marathon Ashland represents more than 5 percent of 
the total refining capacity in the United States. Clearly, if 
this type of behavior is continuing at Marathon Ashland or 
other refineries, and this should be explained, it could 
explain part of the steep rise in prices.
    The refining industry is making huge profits and consumers 
are paying for it at the pump. Oil Daily, which is an industry 
newsletter, reported, ``U.S. independent refiners say that they 
are on pace to exceed last year's record profits, due to robust 
refining margins--Valero and Sunoco both announced that second-
quarter profits would exceed Wall Street forecasts by a hefty 
margin, owing largely to the strength of the U.S. gasoline 
market, where profit margins soared in April and May--a 
combination of low product inventories, tightening 
environmental specifications on fuels, and strong demand has 
led to higher-than-normal refining margins in the United States 
over the past year, lining the pockets of refiners.''
    Between 1999 and 2000, profits for the top 10 petroleum 
refining companies on average have doubled. The profits of 
Valero Energy Services increased by 437 percent in this same 
time period: profits for Phillips Petroleum increased by 127 
percent; and profits for Chevron increased by a mere 110 
percent. In addition, profits in the first quarter of 2001 are 
on average 81 percent higher than they were in the first 
quarter of 2000. This is the same industry that received tens 
of billions of tax credits, and is expected to benefit from 
another $15 billion in tax breaks and incentives over the next 
5 years.
    I hope, Mr. Chairman, that this hearing will help us 
determine whether a portion of these enormous profits came from 
price gouging or from market manipulation.
    At this hearing, we can also anticipate hearing a great 
deal of discussion regarding environmental protections. I would 
like to take a moment to urge the President to improve the 
corporate average fuel economy standards. We have the 
technology to implement increases, we can conserve 3 million 
barrels per day and we can pay less at the pump. Regardless of 
the Vice President's claim that real men don't conserve, in 
fact, conservation can have a serious, positive impact, and we 
would reduce our contribution to global warming at the same 
time.
    I expect that some may claim that other environmental 
protections contribute to higher gasoline prices, so I want to 
take a moment and review some of these claims. Last spring, 
when there were gasoline price hikes in the Midwest, especially 
in the price for reformulated gasoline [RFG], many claimed that 
the price increase was due to the RFG program. However, we 
investigated this issue extensively and learned that 
environmental regulations were not to blame. In fact, the 
average retail price for RFG everywhere except in Chicago and 
Milwaukee was 1 percent lower than the average retail cost of 
conventional gasoline, indicating that RFG can be produced 
inexpensively.
    Furthermore, the Federal Trade Commission, as I mentioned 
earlier, found that the refineries in the Chicago and Milwaukee 
area were curtailing production and withholding supplies of RFG 
to the region, and these activities contributed to the price 
hikes.
    Others may charge that environmental protection has 
discouraged expansion of our domestic refining capacity. 
President Bush, in fact, recommends one, that the EPA provide 
more regulatory certainty to refinery owners and streamline the 
permitting process, two, that the EPA review new source review, 
including administrative interpretation and implementation and 
its impact on investment in new utility and refinery generation 
capacity, and three, the Attorney General review existing 
enforcement actions regarding new source review to assure that 
the enforcement actions are consistent with the Clean Air Act 
and its regulations.
    Now, anybody reading the testimony of some of our witnesses 
today would wonder whether the administration was looking over 
the shoulder of the people writing that testimony or vice 
versa, but it's remarkably close.
    New source review requires new refineries, and existing 
refineries that undergo a significant expansion that 
substatially increases emissions of pollution to install up-to-
date pollution controls. There is little, if any, evidence that 
they have discouraged the building of new refineries or the 
expansion of existing refineries. Industry has not applied for 
a permit to build a new refinery for over 25 years. In fact, 
industry closed down 50 refineries over the last 10 years, 
presumably 50 of the dirtiest refineries, thus giving us 
cleaner air. During the same period, refinery capacity at 
existing facilities has expanded and the EPA has not denied a 
single permit to expand.
    The evidence indicates that the choice not to build new 
refineries was primarily the result of business decisions, 
market forces, not environmental regulations. For example, the 
New York Times reported on May 13, 2001, ``such regulations are 
viewed by many executives as nuisances rather than as barriers 
to meeting demand--but, the bigger headache for industry is the 
fierce competition that keeps profit margins thin. Our margins 
are not wide enough to justify building new refineries. Where 
we need to expand, we do it at the existing sites''--from Gene 
Edwards, senior vice president of Valero Energy of San Antonio, 
one of the Nation's largest independent refiners.
    Moreover, given the industry's record profits, it appears 
that refineries can afford the cost of installing modern 
pollution controls.
    And last, let me indicate that with respect to boutique 
fuels, the President also recommended review of the use of 
boutique fuels. It's important to note that boutique fuels have 
arisen primarily as a function of States' rights, with the 
encouragement and support of oil companies. In the words of the 
National Petrochemicals and Refiners Association, ``because 
local air quality conditions vary, NPRA does not support the 
establishment of a single performance standard for gasoline or 
diesel throughout the U.S.''
    However, there is a concern that the number of fuels may be 
increasing gasoline prices, and if that's the case, why not 
require cleaner burning fuel nationwide? I understand that 
there are concerns about the oxygenate requirement in RFG. 
However, we could require a fuel that is at least as clean as 
RFG. We learned that RFG could be produced inexpensively, and 
in fact, during the price spikes of the spring of 2000 the cost 
of RFG was generally 1 cent lower than conventional gasoline.
    Mr. Chairman, I know my time has run and you've been kind 
to listen to that. I just want to say that I will ask for 
unanimous consent to include copies of articles and testimony 
that I referred to, as well as miscellaneous materials in the 
record.
    Mr. Ose. Without objection.
    [The prepared statement of Hon. John F. Tierney follows:]
    [GRAPHIC] [TIFF OMITTED] T7984.003
    
    [GRAPHIC] [TIFF OMITTED] T7984.004
    
    [GRAPHIC] [TIFF OMITTED] T7984.005
    
    Mr. Tierney. The balance of my remarks I'll put on the 
record, and I look forward to hearing from these witnesses and 
getting more evidence. Thank you.
    Mr. Ose. Thank you, Mr. Tierney.
    Mr. Otter for 5 minutes. Will the counsel please start the 
clock?
    Mr. Otter. I have no opening statement, thank you, Mr. 
Chairman.
    Mr. Ose. Do you have anything you wish to submit for the 
record?
    Mr. Otter. No, I do not.
    Mr. Ose. All right. Mr. Kucinich for 5 minutes.
    Mr. Kucinich. I thank the gentleman.
    Oil companies posting record profits are blaming everyone 
but themselves for the excessive gas price increases. The 
consumer is being gouged and the oil companies continue to 
avoid their responsibilities. Their record profits are massive. 
Consider the 251 percent increase in profits Occidental reaped 
last year, or the $17.7 billion profit posted by Exxon-Mobil 
last year.
    If environmental regulations are to blame for excessive 
gasoline prices, oil companies should be supporting them, 
because they're making a killing. But they don't. Because they 
know that environmental regulations have little to no impact on 
gasoline prices. If you want to know why gasoline prices are 
high, all you have to do is follow the money. Oil companies 
have it, and I don't think it got there accidentally.
    I've introduced H.R. 1967, the Gas Price Spike Act of 2001, 
which will authorize a windfall profits tax on gasoline and 
other related fuels, create tax credits for ultra-efficient 
vehicles, lower fares for mass transit and grant the Attorney 
General the authority to order the licensing of reformulated 
gasoline patents at a fair and competitive price. This 
legislation will institute a windfall profit tax on gasoline, 
diesel and crude oil. Such as tax is to be imposed on all 
industry profits that are above a reasonable profit level, 
which should be based on the history of oil company profits.
    This proposal would not increase the cost of gasoline or 
any other fuel, because this proposal does not tax the price of 
any of these fuels. It only taxes excessive profits at each 
transaction in the production of these fuels. Some of the 
revenue from the windfall profits tax will be used to offer tax 
credits of up to $6,000 to Americans who buy ultra-efficient 
cars that are union made in America. These will be directly 
available to the purchaser of a car that traveled at least 45 
miles on a single gallon of gas or driven with an electric 
motor. In an effort to provide relief, the bill makes funding 
available to regional transit authorities to offset 
significantly reduced mass transit fares during times of gas 
price spikes.
    The gas industry has also blamed high prices of 
reformulated gasoline on a patent dispute with Unocal that is 
deterring the industry from making cleaner burning reformulated 
gasoline [RFG], and making RFG more expensive for consumers. By 
amending the Clean Air Act, the monopoly control of RFG is 
eliminated. This will lead to lower gasoline prices because it 
will make the process for manufacturing RFG available to all 
oil companies. The owners of the patents will be fairly 
compensated, more RFG will be produced, lowering the price of 
RFG.
    I think it's particularly vexing to have a condition where 
consumers are being socked with these high prices, being gouged 
at the pump and simultaneously told that they should expect to 
have the quality of their air diminished. There's one transfer 
of wealth going on, from the consumer to the oil companies, 
because of the way the market is rigged. And there's another 
transfer of wealth going on, the wealth of the natural treasure 
of our resource of clean air transferred to these companies 
that do not want to abide by environmental regulations that are 
ensuring the quality of life for all Americans.
    So I think this is a particularly interesting hearing to 
have, and I appreciate a chance to be present at it. Thank you, 
Mr. Chairman.
    Mr. Ose. The gentleman's time has expired. The Chair 
recognizes the gentlelady from Hawaii, Mrs. Mink, for 5 
minutes.
    Mrs. Mink. Thank you, Mr. Chairman. I reserve my right to 
include my remarks at the end of the hearing. Thank you.
    Mr. Ose. Just a moment.
    Mrs. Mink, would you clarify? You're going to make your 
remarks during the course of the hearing?
    Mrs. Mink. I reserve my time for the end, where I could 
make my remarks at that time.
    Mr. Ose. We'll be happy to give you time at the end, 
regardless.
    Mrs. Mink. Thank you.
    Mr. Ose. OK. At this committee, we swear in our witnesses, 
so if you would please rise.
    [Witnesses sworn.]
    Mr. Ose. Let the record show that the witnesses answered in 
the affirmative.
    Joining us on the first panel today is Mr. John Cook, who 
is the Director of the Petroleum Division for the Energy 
Information Administration at the Department of Energy, and 
also Mr. Robert D. Brenner, who is the Acting Assistant 
Administrator for the Office of Air and Radiation at the U.S. 
Environmental Protection Agency.
    Gentlemen, thank you for coming. Mr. Cook, you're 
recognized for 5 minutes.

 STATEMENTS OF JOHN COOK, DIRECTOR, PETROLEUM DIVISION, ENERGY 
INFORMATION ADMINISTRATION, U.S. DEPARTMENT OF ENERGY; AND ROB 
  BRENNER, ACTING ASSISTANT ADMINISTRATOR, OFFICE OF AIR AND 
        RADIATION, U.S. ENVIRONMENTAL PROTECTION AGENCY

    Mr. Cook. Thank you, Mr. Chairman and members of the 
committee, for the opportunity to testify today.
    Gasoline prices have begun declining, as we expected, from 
this spring's apparent peak of $1.71 on May 14, with the 
national average now standing at $1.65. Between late March and 
mid-May, retail prices rose 31 cents a gallon, some regions 
experiencing even greater increases. Like last year, Midwest 
consumers saw some of the largest increases and along with 
California, some of the highest prices.
    Prices in the Midwest increased 43 cents a gallon over this 
7 week period, peaking at $1.81 on May 14. However, since then, 
Midwest gasoline prices have fallen faster than the national 
average, now down 16 cents from the peak, according to EIA's 
latest survey.
    Most of the factors that affected prices last year were 
again at work this year. The relatively tight crude oil market, 
resulting in low petroleum inventories, relatively tight spring 
gasoline supply demand balance, compounded by extensive 
refinery maintenance, unique regional and seasonal products, 
high refinery capacity utilization and dependence on distant 
supplies. When these factors come together, just as they did 
last year, rapid price run-ups can occur.
    The principal difference from last year's pattern has been 
timing. This year's increases occurred a month earlier. Barring 
any major infrastructure problems over the remainder of the 
summer, we expect the current decline to continue just as we 
saw last summer.
    I'd like to turn next to a brief summary of these factors, 
beginning with inventories. Low stocks set the stage for 
gasoline price increases this spring, just as they did last 
year for heating oil and gasoline. Low inventories originate in 
the tight global crude oil supply demand balance that evolved 
in early 1999. This ongoing tightness has been a key factor in 
maintaining both low crude and product inventory since then.
    Actions taken by OPEC are largely responsible for the sharp 
increase in oil prices from the $10 levels seen in December 
1998. OPEC dramatically reduced crude oil production in 1998 
and again in 1999, so much so that even after four increases 
last year, inventories remained at relatively low levels this 
spring, especially for the developed countries of the OECD.
    Furthermore, scarce crude supplies encourage high near term 
prices relative to those for future delivery. This situation, 
referred to as backwardation, discourages discretionary 
inventory growth and maximum refinery production. Thus with 
crude oil and product inventories relatively low, again 
entering this spring, little cushion existed to absorb 
unexpected imbalances in supply and demand, thereby setting the 
stage for volatility.
    Although world demand is again projected to grow this year, 
OPEC's current plans imply even less production than last year. 
This is expected to limit global inventory growth and maintain 
crude prices close to $30 for the balance of the year.
    The recent OPEC meeting and Iraqi exports cutoff could 
result in oil production levels low enough to again cause us to 
enter the fourth quarter with both low crude and product 
inventories, especially heating oil. Last year, in a similar 
situation, OPEC did not increase its quotas significantly until 
fall. Thus, there was insufficient time to buildup heating oil 
inventories by the time winter started. Even if Iraqi imports 
are suspended for just a brief time, petroleum markets are 
likely to be tight. But if Iraqi imports are cutoff for a month 
or more and not fully offset by other producers, market 
conditions will definitely be tighter.
    Returning to U.S. markets, and gasoline in particular, 
stocks were even lower this spring than last year. In recent 
weeks, there's been significant improvement, though, and as of 
Friday June 8th, stocks were about 2 percent above their 
seasonal 5 year average. Nevertheless, both conventional and 
RFG gasoline markets exhibited low stocks and tight conditions 
over this mid-March to mid-May period.
    Low inventories were partially a consequence of refineries 
focusing strongly on distillate production last winter, given 
that the United States entered the season with low stocks. 
They're also a consequence of high natural gas prices which 
encouraged fuel switching to distillate, heightening the focus 
on distillate production at the expense of gasoline.
    Furthermore, high natural gas prices undercut the 
production of clean gasoline components, including MTBE. In 
addition, relatively strong late winter gasoline demand 
combined with extensive refinery maintenance to sustain 
downward pressure on inventories. Gasoline prices were in steep 
backwardation until recently, thereby discouraging inventory 
growth at the margin.
    Several other factors are also at work that add to the 
potential for volatility when stocks are low. Today's market is 
comprised of many different types of gasoline serving different 
regional markets to meet varying environmental requirements. 
While producing these specialized products can be an efficient 
approach for individual refineries to meet regional air quality 
needs, it's not necessarily efficient for the overall 
marketplace.
    Mr. Ose. Mr. Cook, you need to wrap up here.
    Mr. Cook. OK, sorry. This large number of product types 
adds a level of complexity to the distribution system. This 
targeted approach has been, in particular, one to create 
gasoline islands. The primary examples are well known, 
California and the Chicago area, which require unique blends. 
Only a limited number of refineries make these products, thus 
when stocks are drawn down, prices surge, given that these 
specialized fuels cannot be quickly resupplied.
    Another factor is limitations on refinery capacity. The 
summer of 1997 was the first time the system was pushed to its 
limits and unable to respond adequately when gasoline demand 
surged. As a result, seasonally low stocks were drawn further, 
and prices surged.
    This summer, we again saw what can happen when low 
inventories combine with regional capacity limitations and 
unique gasoline requirements. For example, in the Midwest, the 
closure of the Blue Island refinery created a concern about the 
level of RFG supplies in the Chicago area. The closure also 
created the need for greater volumes to move from the Gulf 
Coast. Economic incentives to build inventories were further 
eroded as Gulf Coast prices surged in response to the strong 
demand not only from the Midwest, but also from the West Coast, 
the East Coast where refineries were undergoing extensive 
maintenance.
    Thus, in April, with little inventory cushion in place, and 
a transition from winter to summer grade gasolines requiring 
the running down of tanks, further undercutting stocks and 
Tosco's Wood River refinery having a fire, reducing its ability 
to produce conventional and reformulated gasoline, we saw this 
surge.
    In closing, I would like to note that almost exactly 1 
month ago, EIA in testimony before another House committee 
stated that we thought gasoline prices were nearing the peak 
for the summer. At that time, we noted the United States was 
nearing the end of what is usually one of its tightest times in 
the market, when gasoline demand begins to rise seasonally and 
refineries are winding up maintenance.
    Since the end of March, production has jumped 
significantly. Refineries have ramped to full capacity, Wood 
River is now fully operational, boosting Midwest supplies, and 
imports are streaming into the East Coast. As a result, stocks 
have returned to the normal range. Barring further refinery or 
other major problems, we do expect prices to drop significantly 
over the balance of the summer.
    Finally, I should caution, that gasoline markets remain 
exposed to volatility, particularly toward the end of the 
summer when demand peaks. Some factors suggesting the potential 
return of late summer volatility include likely low global 
inventories, as I noted earlier, even with the early return of 
Iraqi exports and gasoline markets here and in Europe already 
signaling a potential reduction in crude runs and gasoline 
production.
    That concludes my testimony.
    [The prepared statement of Mr. Cook follows:]
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    Mr. Ose. Thank you, Mr. Cook.
    Mr. Brenner, we're going to go ahead and take your 
testimony. I want to remind you, we have received your written 
testimony. I know I've read it, I know staff's read it, I'm 
sure my colleagues on both sides of me have read it. If you 
could be brief, I would appreciate it.
    Mr. Otter went to vote, he's going to come back so we can 
keep the hearing going, then I'm going to go vote, as well as 
my colleagues. We're going to try to keep this thing rolling. 
Mr. Brenner, for 5 minutes.
    Mr. Brenner. Thank you, Mr. Chairman and members of the 
subcommittee.
    Thanks for inviting me here today to outline EPA's gasoline 
initiatives related to President Bush's National Energy Policy, 
and to discuss the vital role that cleaner burning gasoline 
plays in improving America's air quality. I will offer a brief 
opening statement and submit my longer statement for the 
record, as you requested.
    Mr. Chairman, let me assure you first and foremost that 
this administration is determined to see that consumers 
continue to receive the benefits of cleaner burning gasoline at 
a reasonable price. When Congress passed the Clean Air Act 
amendments of 1990, it established a number of programs to 
achieve cleaner motor vehicles and cleaner fuels. These 
programs have been highly successful in protecting public 
health by reducing harmful vehicle exhausts.
    One of these programs, the Reformulated Gasoline Program, 
was designed to serve multiple national goals, one of which was 
improving air quality. Today, roughly 35 percent of the 
gasoline used in this country is reformulated gasoline. RFG is 
used in 10 metropolitan areas required by Congress, and in 
areas that have chosen to opt-in to this cost effective 
pollution reduction program. Those include areas in Kentucky, 
Texas, Missouri, and the Northeast.
    The program is working. RFG has significantly reduced 
vehicle tailpipe emissions, including emissions of smog forming 
pollution and air toxics, such as benzene, which is known to 
cause cancer in humans. Benzene emissions have dropped a 
dramatic 38 percent in RFG areas, and smog forming emissions 
have dropped by more than 27 percent. Results like these mean 
cleaner air for early 75 million Americans at a cost of just 4 
to 8 cents per gallon. The cost is small compared to what we 
saw this spring. Across the country, gas prices climbed in 
areas that use cleaner burning gasoline and in those that do 
not.
    Similarly, the price drops we have seen since mid-May have 
occurred across the board. Those spring price increases were 
influenced by a number of major factors, including the 
continued high cost of crude oil, a decrease in the amount of 
oil available on world markets, record low gasoline 
inventories, following a longer than normal winter heating 
season, continued increases in vehicle miles traveled and in 
fuel demand, and decreases in vehicle fuel efficiency.
    Finally, American refiners are producing gasoline at nearly 
full capacity. Any disruption, no matter what the cause, 
affects the entire U.S. gasoline market. To help reduce 
disruptions like these in the future, this administration is 
committed to exploring whether there are ways to increase 
flexibility for refiners. Already, the administration has 
provided a VOC adjustment for ethanol blended RFG in the upper 
Midwest. We are looking for ways to minimize disruption when 
the gasoline distribution system switches from winter to summer 
fuel.
    And as part of our efforts to carry out the President's 
National Energy Policy, we have begun meeting with the oil 
industry, States and other stakeholders to examine 
opportunities to reduce the number of State and local boutique 
fuels while maintaining or even improving the environmental 
benefits these fuels produce. We see this study as an 
opportunity to provide greater flexibility for the fuel 
production and distribution system.
    This concludes my statement, and I'd be happy to answer any 
questions.
    [The prepared statement of Mr. Brenner follows:]
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    Mr. Ose. Thank you, Mr. Brenner.
    I think we have somewhere around 8 minutes before the vote 
comes. Mr. Otter should be back within 5. We will proceed to 
questions.
    Mr. Cook, does the Energy Information Agency anticipate 
that refinery capacity in the United States will increase in 
the next few years? I think the question we are all interested 
in knowing is whether we're going to be back here next year, 
hearing different testimony.
    Mr. Cook. Well, the latter part is difficult to say. If 
Iraq stays out of the market for a significant period of time, 
we'll probably be back before then.
    As far as capacity is concerned, actually over most of the 
1990's it's been growing at something like an average rate of 
about 1.4 percent per year, roughly keeping pace with gasoline, 
total product demand. We expect that to continue. But we don't 
expect to see any growth in excess capacity. We expect it to 
stay tight.
    Mr. Ose. So, the 97 odd percent utilization, you don't 
expect that to change very much?
    Mr. Cook. Not very much. Now, that's a summertime peak 
number. There are lots of times during the year, during the 
winter in particular, the fall, the spring periods, where that 
utilization rate is much lower.
    Mr. Ose. Does the EIA foresee the construction of new 
refineries or an increase in the capacity of existing 
refineries, beyond the 1.4 percent?
    Mr. Cook. No, we're anticipating no new refineries, but 
continuing creep at existing refineries, roughly at that pace.
    Mr. Ose. So, we're destined to have a very tight alignment 
between supply and demand?
    Mr. Cook. It would appear, yes.
    Mr. Ose. If refinery capacity does not keep pace with 
demand or it aligns very closely with the growth, to the extent 
that we have excess demand, where does that product have to 
come from?
    Mr. Cook. Well, the seasonal surge typically comes from 
Europe. Europe has excess capacity for gasoline for a variety 
of reasons. We tap into that, and have been at near record 
levels ever since January of this year.
    Mr. Ose. So, we end up importing refined or finished 
product from Europe on a seasonal basis?
    Mr. Cook. Well, we do it year-round. Our average imports 
for last year and recent years has been about 500,000 barrels a 
day. Canada, the Caribbean, Venezuela, Europe, are baseline 
exporters. Then the seasonal surge typically comes from Europe.
    Mr. Ose. I want to digress for a minute. One of the things 
I was curious about, reading everybody's testimony last night 
was, who is a chemist and who is a petroleum engineer and who 
is not. Are you a chemist?
    Mr. Cook. No, I'm an economist.
    Mr. Ose. You're an economist. Mr. Brenner, are you a 
chemist?
    Mr. Brenner. I am also an economist.
    Mr. Ose. OK. I like economists. [Laughter.]
    Mr. Cook, do you have any thoughts as to why our refinery 
capacity has essentially, I mean, you've got a report here from 
1999 showing capacity has declined from the early 1980's. In 
other words, in 1981, there were 324 refineries operating, in 
1999, there were 159. In 1981, capacity was 18.62 million 
barrels per day, 1999 capacity is 16.26 barrels per day. 
Interestingly, the utilization in 1981 was a little bit over 68 
percent versus in 1999, 92.7 percent.
    Do you have any thoughts as to why the capacity has 
declined in the last couple of decades?
    Mr. Cook. There are a couple of factors. The big drop in 
the early 1980's was a shakeout of the movement to 
deregulation. A number of smaller, less efficient plants 
dropped by the wayside rapidly. Over the rest of the 1980's, I 
would argue that competition and relatively low margins or 
spreads seen in the industry over that decade, and since then 
as well, have discouraged all but the most efficient refineries 
from remaining in operation.
    So you basically have the shakeout of the deregulation 
period and then a period of low margin increasingly forcing 
consolidation in the industry.
    Mr. Otter [assuming Chair]. Thank you, Mr. Cook. The 
chairman's time is up, so I'm going to take over now.
    Mr. Cook, your organization has stated in the past that 
California is different than the rest of the country, and that 
the prices need to spike fairly high before refineries are 
actually induced to bring in more supply. Would you explain 
that?
    Mr. Cook. Well, that's not exactly the way we put it. But 
first of all, California's gasoline is unique, as you know.
    Mr. Otter. Well, I don't want to put words in your mouth, 
nor in the record. How did you put it?
    Mr. Cook. Where did you get that statement?
    Mr. Otter. Gasoline primer.
    Mr. Cook. I don't recall the need to spike before product 
will come in or refiners will crank up. But in many cases that 
is in fact what happens.
    Mr. Otter. Why does that happen?
    Mr. Cook. First of all, you have a unique fuel that's 
produced only by a handful of refiners on the West Coast. You 
have a typically tight balance out there, very little 
difference between capacity at the dozen or so large plants 
that are out there on the West Coast and summer demand. So 
again, if anything goes wrong there, given the geographic 
isolation that California has, and given the unique nature of 
that fuel, it takes a significant amount of time to provide the 
market signals and incentives to Gulf Coast producers who don't 
normally produce that type of gasoline to make a batch, ship it 
around to the West Coast.
    And in the meantime, the price spikes, as folks bid up what 
is available on the West Coast to meet the near term needs they 
absolutely have to meet.
    Mr. Otter. It was a gasoline primer update, June 13, 2001, 
I've got it right here. That was yesterday.
    Your statement in that then said, the farther away the 
necessary relief supplies are, the higher and longer the price 
spike will be. I think you've answered that.
    Can we conclude, then, that the same thing is going to 
happen for offshore refineries? How high is the spike going to 
have to go before we induce foreigners to then start making 
these same blends for California, for Minnesota, other areas 
that have a unique blend of gasoline?
    Can we conclude, then, I guess my question goes back to Mr. 
Cook, can we conclude then that foreign refineries are going to 
have to see a higher spike before they will be induced to make 
these specialized kinds of fuels?
    Mr. Cook. Well, it's relative. Certainly we've seen the 
same kind of a spike in the Chicago, Milwaukee area, where the 
singular conditions, extreme conditions, if you will, exist 
when stocks get low. Now, of course in California and in the 
Chicago market, stocks are not always low, in which case, when 
you have a refinery problem you don't get the big spike and you 
don't have these pressures at work.
    Outside of those two areas, the East Coast, for example, 
has more sources of supply and those relief valves, if you 
will, Europe, the Caribbean, Venezuela, are closer. Therefore, 
you won't have to see the same kind of a price signal to get 
extra supply.
    Mr. Otter. Mr. Cook, you were heard during some of the 
opening statements by several of the folks that said that 
perhaps the confusion on the boutique fuels and the whole 
reason for the boutique fuels was that there was too much 
freedom for the States to kind of do their own thing. I think 
the word used was States rights. I suspect that was a referral 
to the 10th amendment.
    Do you agree with that? Does your agency agree with that? 
Is there too much freedom for the States to pick and choose 
themselves? Should we have a national gasoline policy?
    Mr. Cook. As you may be aware, we're a statistical 
organization, and I am not authorized to make policy 
statements. So, I respectfully decline on that one.
    Mr. Otter. Do you analyze your statistics?
    Mr. Cook. Sure.
    Mr. Otter. Would an analysis of your statistics, if we have 
uniform fuel across the United States, in your analysis of your 
own statistics, would then the price be moderately low, medium, 
moderately high? And if we then superseded the States' choices 
and made a national gasoline, would then that stabilize not 
only supply but also price?
    Mr. Cook. Well, let me put it this way, and you might not 
like the answer, but the way I see it personally is that this 
market fragmentation, even the capacity issue, become important 
in the recovery period of gasoline. If you have a capacity 
limitation and you have a spike, that clearly limits the 
ability to quickly produce a lot more gasoline and get it into 
the area. So you could argue that the duration of the spike is 
affected by the fragmentation and by the capacity.
    But the primal causal factors may still be there, and 
that's low stocks and tight balances at certain points in the 
year, especially in the spring when you have refinery 
maintenance. So you're still going to be subject to volatility 
if, for whatever reason, stocks are low and you go into this 
period, whether it's one fuel or a bunch of fuels.
    Mr. Otter. I don't necessarily dislike that answer, but, I 
was hoping for something better.
    Mr. Brenner, a new refinery hasn't been built in the United 
States since 1976, I think that's right, and in fact, since 
1981, the number of refineries has been substantially reduced 
in number, not necessarily in ability to produce. Last January, 
the Blue Island refinery in Illinois shut down, citing 
insufficient returns to justify the cost of upgrading to meet 
new EPA standards. Do you think that the constant cycle of 
product upgrades has had an effect on the ability of the 
refining industry and its ability to increase capacity by 
attracting capitalization funds?
    Mr. Brenner. What we've seen, Representative Otter, is that 
they have in fact been increasing capacity in the industry, as 
you heard from the earlier testimony. It's gone up by 1 to 2 
percent a year. In addition, they've further increased their 
ability to produce fuel by adding oxygenates to the fuel, which 
has also enabled them to produce additional gasoline without 
having to add a lot of additional capacity at the refinery. 
Those two factors have enabled them to keep up, although barely 
keep up, with the increasing demand for gasoline.
    So our experience has been that refineries are expanding 
and in terms of profitability, of course what we've seen over 
the last few years is that profitability has increased 
markedly. At this point, the situation that existed in the, 
say, mid-1990's, where there were concerns about profitability, 
has changed very dramatically and profit margins are 
considerably better than they were.
    Mr. Otter. We heard comments during the opening statements, 
Mr. Brenner, about the unfortunate resolve of the Bush 
administration to refuse to waive the standard for California. 
In your estimation, over the last 8 years, is that a unique 
situation where the administration vis-a-vis the EPA, Army 
Corps of Engineers, let's name all of the regulators, refuses 
to grant a waiver to a State or municipality or to a locale?
    Mr. Brenner. No, that's not a unique situation. When we get 
a request for a waiver such as that, we need to apply the 
statutory requirement to that request and make a determination. 
In this case, the Clean Air Act has a fairly narrow framework 
that we are supposed to use for examining the request, it's to 
look at whether, by granting the waiver, if we did not grant 
the waiver, would it interfere with or prevent attainment of 
the ambient air quality standards.
    So we had to look at the proposal from California, look at 
whether by, whether the oxygenate requirement that they asked a 
waiver from was interfering with their ability to meet the air 
quality standard. When we looked at their analysis, what we 
found was that we could not make that showing that the Clean 
Air Act requires us to make. Because we could not make that 
showing, we ended up having to deny the waiver request.
    Mr. Otter. Could you take a guess or be willing to take a 
guess on how many waivers were denied in the last 8 years?
    Mr. Brenner. We've had very few waiver requests from the 
oxygenate requirement.
    Mr. Otter. What happened to the one from Boise, ID?
    Mr. Brenner. The Boise, ID one?
    Mr. Otter. I'm being facetious. There was a request, it was 
denied and then we were threatened with the loss of about $30 
million if we continued the course that we were going to go on 
in Idaho.
    I just wanted to make the point that it has not been a 
unique thing, even in emergency situations, for the 
administration to adhere itself strongly, root itself in the 
law of the land, and then use that as guidelines, rather than 
personalities and whims, isn't that right?
    Mr. Brenner. That's true, Congressman Otter.
    Mr. Otter. OK, thank you very much. Lacking anybody else 
being here, I guess I will then excuse this panel and thank you 
very much for being here.
    Perhaps the vice chair, in his position, was a little 
hasty. I have been called by those who have been here longer 
than 155 days and we would like to retain this panel. So 
without objection, there being nobody here to object, I'm in 
charge here. [Laughter.]
    Somebody else said that once.
    Mr. Cook, on behalf of Chairman Ose, I would like to ask 
you this question, as a matter for the record. Your 
organization has released a report today on the possible 
impacts of blackouts on California refineries. Does the EIA 
have an estimate of the kind of price hike that could occur in 
California if there is a major refinery outage?
    Mr. Cook. Strictly speaking, we do not have a precise or 
reliable estimate of that. Not for lack of modeling tools, but 
for lack of a data base. We don't specifically have a time 
series relating electrical outages to volume losses and price 
responses. That said, we do have a lot of data for California 
and elsewhere on production, stocks, prices, and what have you. 
We've identified maybe 20 spikes or fluctuations in the last 
umpty-up years where the trade press reported them due at least 
in part to outages of whatever type.
    When we look at that, we see a spread of from 7 to 52 cents 
a gallon as the historical response, depending on the condition 
of the market at the time. By that I mean whether stocks are 
low, whether it's early in the gasoline season, whether it's an 
isolated outage or a series of outages with some catalytic 
event at the end, when stocks have been eroded.
    That's basically all we can really say and said in the 
report at this point. We've done some preliminary regression 
analysis to try to support that's not in the report. The early 
results are very consistent with that. We have basically shown 
that if stocks are low and you have, let's say, a 10 percent 
gasoline volume loss as a result of maybe a couple hours of 
outages that brings refineries down and the accumulated 
gasoline volume loss to that level would be within that range. 
The results show anywhere from 30 to 60 cents a gallon, 
depending on whether it's a 10 or 20 percent volume loss.
    Mr. Otter. What would the volume loss be if you had a major 
blackout, let's say, every 24 hours?
    Mr. Cook. That we can't estimate. We really haven't been 
able to do that.
    Mr. Otter. The committee will go at ease subject to the 
call of the Chair.
    [Recess.]
    Mr. Ose [resuming Chair]. Excuse me for a minute.
    Mr. Cook, in your written testimony you stated that today's 
gasoline market comprises many types of gasoline, and that the 
result has been the creation of gasoline islands. Given not 
only the production and distribution constraints, but 
regulatory barriers that you've mentioned, how many of these 
islands are there?
    Mr. Cook. That might have been poor wording. What we 
intended to imply in term of islands is the California, Chicago 
and Milwaukee area, that those are the true islands where these 
markets are tight in the summer time and sit at the end of the 
pipeline, so to speak, and use a unique product. Which means 
that if they get tight, they see a price response, then it's 
going to take a significant period of time and a significant 
increase to induce additional resupply into that area.
    There are something like 14 different types of summer 
gasolines and what-not. I wouldn't call them all islands. It's 
a matter of degree. But you don't see the barrier to the flow 
of products in these other market areas that you see for 
Chicago and California.
    Mr. Ose. When did these unique, since we're not going to 
call them boutique or islands, when did these unique fuel 
requirements--how do I phrase this? I'm going to use my 
language. When did these boutique islands emerge?
    Mr. Cook. Well, we would loosely trace that to the Clean 
Air Act, even more loosely to first, the oxygenated program 
that began in 1992, and then the reformulated gasoline program 
in 1995. These were the major drivers of the 14.
    Mr. Ose. You say 14, and that's just in those two markets?
    Mr. Cook. No, that's nationwide.
    Mr. Ose. OK, because we've had different numbers put forth 
in the different testimony, some as high as 38. But you're 
referencing 14?
    Mr. Cook. Yes, I don't know how they get those. We're not 
counting grades and this, that and the other.
    Mr. Ose. Mr. Brenner, in your testimony you state that 
actions taken by a growing number of States to ban the use of 
MTBE as a gasoline additive is the single biggest factor that 
threatens to proliferate boutique fuel requirements around the 
country. Why is that?
    Mr. Brenner. Mr. Chairman, the reason is that as the 
individual States, because of their concerns over water 
pollution from MTBE, make that decision to move away from 
continuing to use MTBE in their gasoline, that means they need 
to work with their fuel suppliers to provide gasoline that does 
not have MTBE in it. So that gasoline is somewhat different 
from what may be provided to neighboring States where MTBE may 
still be a component.
    So that's really the classic definition of boutique fuels, 
where it's for a limited area and it's not a fuel that's 
necessarily widely used around the country.
    Mr. Ose. In the Clean Air Act, or the amendments, more 
accurately, of 1990, or 1992, I think you just referenced, is 
MTBE called out specifically, or is a 2 percent oxygenate 
requirement called out specifically?
    Mr. Brenner. The Clean Air Act amendments of 1990, they do 
not call out for a specific oxygenate. What they call for is a 
2 percent oxygenate requirement, and the suppliers of gasoline 
have several options in terms of what oxygenate they would 
choose to use.
    Mr. Ose. So, there is some flexibility in the law in terms 
of unique markets, how they meet their air quality 
requirements. As long as they meet that 2 percent oxygenate 
requirement.
    Mr. Brenner. That's right, the 2 percent requirement is in 
essence a performance standard for the amount of oxygenate to 
be included. Then, they have a choice of those two how to meet 
it.
    Mr. Ose. Given that, is it more accurate to say that the 
oxygenate mandate is the biggest factor in creating or 
proliferating boutique fuels, as opposed to saying it's MTBE?
    Mr. Brenner. No, I would not say that, because the 
oxygenate requirement, for example, has resulted in 
reformulated gasoline being used around the country in many 
different areas, as I mentioned. Thirty-five percent of the 
fuel supply now is reformulated gasoline. I would not think of 
something that's 35 percent of the gasoline supply as being a 
boutique fuel.
    But what I was referring to in my testimony is the fact 
that in a number of areas, States are removing one of the 
oxygenate choices and removing MTBE as one of the oxygenate's 
choices. That is what is beginning to create a proliferation of 
gasoline. But it's for understandable reasons, they're 
concerned about their water supplies.
    Mr. Ose. I'd like to followup, but my time has expired. Mr. 
Waxman for 5 minutes.
    Mr. Waxman. Thank you very much, Mr. Chairman.
    Mr. Brenner, yesterday the administration rejected 
California's request to waive the Federal oxygenate requirement 
for gasoline. This decision was so incomprehensible on the 
merits that I awarded President Bush a golden jackpot for that 
decision, as I mentioned in my opening statement.
    In effect, the President had a simple choice. He could 
grant California's request, which was what every member of the 
delegation urged. This would result in cleaner gasoline and 
lower prices for California consumers, or he could deny the 
waiver, which would mean more pollution and higher cost for 
California consumers but would provide an enormous windfall for 
ethanol companies like Archer Daniels Midland that gave 
hundreds of thousands of dollars in campaign contributions.
    The President chose more pollution at higher cost for 
California. Earlier this year, EPA was prepared to grant the 
California waiver. EPA even prepared a proposal to do so. And 
I've obtained a copy of this proposal, and I'm sending 
Administrator Whitman a letter today asking her to explain this 
last minute reversal in their decision. I'm releasing both the 
letter and the proposal to the press. I'd also like to submit 
them, Mr. Chairman, for the record.
    Mr. Ose. Without objection.
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    Mr. Waxman. In denying the request, Administrator Whitman 
said, ``We cannot grant a waiver for California, since there's 
no clear evidence that a waiver will help California reduce 
harmful levels of air pollutants.'' This is a remarkable 
statement, given that EPA's technical staff found just the 
opposite. Let me read from EPA's proposal to grant a waiver. 
EPA concludes, I'm reading from the EPA technical document, 
``that compliance with the oxygen content requirement for 
reformulated gasoline would interfere with attainment of the 
national ambient air quality standards for ozone and 
particulate matter in the reformulated gasoline areas in 
California.''
    The oxygenate decision seems directly contrary to the goals 
of the administration's National Energy Policy. One of the 
goals of the National Energy Policy is to reduce the number of 
boutique fuels. Yet I understand that as a result of the 
administration's decision, oil refiners will have to supply 
California with at least two different fuels in areas that are 
classified as severe or extreme non-attainment areas under the 
Clean Air Act like Los Angeles. Oil refiners will have to add 
ethanol to meet the oxygenate requirement of the Clean Air Act. 
But in other parts of the State, oil refiners only have to meet 
California's clean fuel requirements, which do not require the 
addition of ethanol.
    Mr. Brenner, do you agree that the decision to deny 
California's waiver will increase the balkanization of the fuel 
supply?
    Mr. Brenner. Congressman Waxman, based on the evidence we 
have right now, it's difficult to say whether it would or would 
not increase the balkanization of the fuel supply. It will 
depend, of course, on how the fuel suppliers respond to the 
requirement. But I would like to take a minute to explain why 
Governor Whitman made the decision that she made, and why there 
seem to be differences of views as to whether it would be 
adverse or not to air quality in California.
    The requirement in the 1990 amendments is that we examine 
whether the oxygenate requirement would have, would prevent or 
interfere with the ability of the State to meet the air quality 
standards, in this case, ozone. That is a fairly narrow task 
that was put into the Clean Air Act amendments. It does not 
enable us to consider the factors, many of the factors that you 
raised.
    California sent us a proposal indicating that they felt 
they met that test, because with a wavier they could reduce the 
nitrogen oxide emissions from gasoline. When we examined the 
proposal, we found that although that was the case, we agreed. 
We found that carbon monoxide emissions would go up and they 
contribute somewhat to ozone formation. And hydrocarbons could 
go in either direction, depending on the----
    Mr. Waxman. And that means if California didn't have an 
oxygenate requirement that they couldn't develop reformulated 
gasoline that would meet the Clean Air standards both in all 
the criteria? Is that your testimony?
    Mr. Brenner. The test is not in whether it would meet Clean 
Air Act standards or not. We need to do a comparison of what 
the fuel would achieve with or without the oxygenate 
requirement. So we need to compare it to the fuel they would be 
producing with the oxygenate requirement continuing, compared 
to the fuel they would be producing without the oxygenate 
requirement.
    Mr. Waxman. I ask unanimous consent for an additional 
minute.
    Mr. Ose. We'll have another round.
    Mr. Waxman. Well, Mr. Chairman, on this point, you took a 
little bit more than 5 minutes, I wonder if I could ask some 
further questions.
    Mr. Ose. I thought I was right on 5 minutes. I tell you 
what, we'll give you a minute, Henry. Go ahead.
    Mr. Waxman. Thank you very much. Now, wouldn't that depend 
on the reformulated gasoline requirements? Do you agree that if 
they didn't have an oxygenate requirement to do reformulated 
gasoline in a specified formula, a certain recipe, that they 
could develop a reformulated gasoline that would meet all the 
requirements of the Clean Air Act?
    Mr. Brenner. The reformulated gasoline could meet the basic 
requirements of the Clean Air Act. But the test in the statute 
is not whether it meets the basic performance standards of the 
Clean Air Act that we do a comparison of, it's the gasoline 
that they would be likely to produce with oxygenates compared 
to the gasoline they would produce if they received a waiver. 
We found that differential in terms of carbon monoxide----
    Mr. Waxman. EPA wrote in its document, ``We conclude that 
compliance with the 2.0 weight percent oxygen content 
requirement for RFG would interfere with the attainment of the 
NAAQS for ozone and PM in the RFG areas in the State. EPA has 
considered the data and other analyses submitted by CARB in 
support of its request for a waiver. We have also considered 
information submitted by other interested parties.'' And so EPA 
said that it thought that if California had the oxygenate 
requirements, California could achieve what it is required to 
do under the law.
    Mr. Ose. Mr. Brenner, we're going to come back----
    Mr. Waxman. Yes or no, do you agree with that statement?
    Mr. Brenner. I need to explain that that was in a draft.
    Mr. Ose. We'll come back to Mr. Waxman on a second round.
    Mr. Waxman. Thank you, Mr. Chairman, for that additional 
minute.
    Mr. Ose. Mr. LaTourette, for 5 minutes.
    Mr. LaTourette. Thank you, Mr. Chairman.
    Mr. Cook, last week I had all of the mayors, city managers, 
township trustees from my district in town. We met with the 
American Petroleum Institute, which has some opinions about 
this as well. One of the mayors raised his hand and raised the 
question, at least in northeastern Ohio, I don't know if it's 
this way in California or other parts of the country, but when 
you drive by a gasoline station on Thursday morning, gas is 
like $1.50, when you come back home and if you'd made the 
mistake of not filling up on your way to work, it's $1.70 or 
$1.75. The mayor's question and I guess my question to you is 
from the hearings that this committee had last summer, I 
understand what happened with pipelines and I understand what 
happens with boutique fuels, and I understand RFG II dilemmas 
in Chicago or Wisconsin.
    But folks in my part of the country don't understand why 
the same gas in the same ground in the same station goes up 20, 
30 cents on a Thursday afternoon. Do you have any insight on 
that, based on your research?
    Mr. Cook. We've looked into that claim some, given the 
limited amount of retail data that we have. And we've generally 
found it to be not a true statement as far as statewide 
averages are concerned, as far as Ohio or Michigan or what have 
you are concerned.
    There does appear to be some isolated stations that did 
raise prices significantly, although we didn't find any at 25 
cents. But I'm not saying, since we don't survey every single, 
etc. On the other hand, those that did raise prices 
significantly seemed to be those who had suppressed prior 
wholesale cost increases to them substantially up to that 
point, and facing the likely prospect of a sharp jump in their 
resupply costs, they chose to pass those prior cost increases 
through plus stay up with the market.
    So you do get a pretty good jump when someone's been below 
market and all of a sudden they correct to market.
    Mr. LaTourette. The biggest one we had last summer was 42 
cents. That's what the fellow from API said, that basically 
statewide averages don't jump. But I can tell you, it's not 
only that mayor's observation, everybody in the room started 
shaking their heads. In the summer time, maybe it's not always 
25 cents, but it's 10 cents and people don't understand that.
    Mr. Cook. Right.
    Mr. LaTourette. Because if it is truly a supply and demand 
difficulty, people don't understand what's happened, other than 
we know that people are going to hop into their car and take 
their kids to the beach on Saturday, and so let's get 10 cents 
a gallon extra from them. I think that leads to some of the 
conspiracy theories that we hear around here.
    Mr. Brenner, let me ask you, following up on where Mr. 
Waxman was, the President's National Energy Policy does call 
for a reduction of boutique fuels, and I think when I started 
driving, there were maybe three blends of gasoline. Now if I 
read the literature correctly, there are 27 or 28. You have 
these islands that the chairman talked about in his 
questioning.
    Don't you think that we have the ability to put our heads 
together and come up with two, three or four that will satisfy 
the requirements of the Clean Air Act and their amendments and 
also be specific to certain areas of the country? Isn't it time 
to do that? In helping, I mean, we're going to have to build 
more pipelines and more refineries and so on. But it seems to 
me that some of these spikes, like the ones you got in Chicago 
and Wisconsin last summer, are caused by inventory shortfalls, 
together with other problems. But, it's a fact that we have all 
these blends of gasoline all over the country.
    Can't we do that? Don't we have the science to do that?
    Mr. Brenner. We believe there probably are opportunities to 
reduce the number of fuels out there. Whether there are 27 or 
how many there are depends on how you count them. But as I 
noted in my testimony, there is a potential for more. We have 
already begun a process of sitting down with the oil companies 
and with the States and with other stockholders to talk about 
the reasons for the proliferation of number of fuels, and 
opportunities to reduce that number and perhaps do something. 
As you suggested, creating a smaller number of different 
formulations that States might choose from. That's one of the 
options that one of the stakeholders has put on the table.
    So, the energy policy report asks that we do that in 
working with the Department of Agriculture and Department of 
Energy. We've already begun that process and hope to find some 
opportunities to do exactly what you're suggesting.
    Mr. LaTourette. Is there a bad guy in the scenario? For 
instance, a big deal in last year's hearing was the patent that 
Unocal had, and basically some refiners are saying that Unocal 
has patented the Clean Air Act. Are the refiners objecting? Are 
they saying, no, we want to make our stuff and because we have 
a patent on the blending or the formula, and so are they being 
the bad guys?
    Mr. Brenner. What we find is differing views within the 
industry. Some of the companies have found it advantageous to 
produce fuels for smaller markets. Some of them have found that 
they would prefer to have the flexibility of being able to 
provide fuel to many different areas, to have broader markets 
for their fuels. So as you would expect to see in a big country 
with lots of different companies, there are different views. 
But, we think that we can sit down with the companies and with 
the States and develop options which would reduce the number of 
fuels, while maintaining the environmental benefits. The States 
are of course very anxious, and we're anxious to see them 
preserve the environmental benefits of cleaner fuels. So that 
would be an important part of that discussion.
    Mr. LaTourette. Thank you. Thank you, Mr. Chairman.
    Mr. Ose. The gentleman yields back.
    The gentlelady from Hawaii for 5 minutes.
    Mrs. Mink. Thank you very much, Mr. Chairman.
    Mr. Brenner, in your testimony, with reference to the 
reformulated gasoline, you indicated that the Federal program 
requires 10 metropolitan areas to participate in this program, 
but that others have joined voluntarily. Is there any impetus 
for the Congress at this point to increase the numbers of areas 
that are required to participate?
    Mr. Brenner. The reason some additional areas have chosen 
to participate is because it provides them with, of course, 
additional air quality benefits. It reduces pollution in their 
area. Then some other areas have chosen to, instead of 
participating in the full reformulated gasoline, to select 
somewhat cleaner gasoline than conventional fuels, but not go 
all the way to the reformulated gasoline.
    Mrs. Mink. Well, my question is, we limited it to 10 
metropolitan ares in the legislation. Isn't there some 
justification for now considering extending that requirement to 
other areas?
    Mr. Brenner. I'd say what the Congress would want to 
consider is, what would the additional cost be. As I said, it 
is 4 to 8 cents a gallon. But also how many additional areas 
could take advantage of the additional environmental benefits, 
how many of them have continuing air quality problems, and this 
could contribute to reducing those problems.
    Mrs. Mink. Your testimony said that ethanol is used in 100 
percent of the reformulated gasoline in Chicago and Milwaukee. 
What has been the experience of these two cities with the use 
of ethanol and the price for gasoline in these areas, and the 
premier consequences?
    Mr. Brenner. What they found is, of course, the 
reformulated gasoline does meet Clean Air Act requirements, 
which means it provides them with significant environmental 
benefits. In the case of Chicago, their emissions of pollution 
are down something like 8,000 tons a year as a result of using 
reformulated gasoline with ethanol in it.
    Mrs. Mink. Has the price of gasoline increased as a 
consequence of the use of ethanol?
    Mr. Brenner. The price of gasoline has increased, as it 
does with all reformulated gasoline. As I said, it is about 4 
to 8 cents per gallon.
    Mrs. Mink. But how about Chicago?
    Mr. Brenner. I don't have numbers that show the price 
differential in Chicago compared to conventional gasoline that 
is nearby, the exact numbers. However, if you do the comparison 
of gasoline in nearby areas to reformulated gasoline in Chicago 
with ethanol in it, it's a relatively small differential. We're 
still talking on the order of 10 cents or less, I believe.
    Mrs. Mink. Given a situation where regular gasoline prices 
are skyrocketing in so many areas, it would seem to me that the 
price increase for reformulated gasoline would be minimal by 
comparison.
    Mr. Brenner. That's right. As I said, the price increase 
for reformulated gasoline has only been 4 to 8 cents a gallon, 
and you can do those comparisons of conventional gasoline 
nearby to these areas.
    Mrs. Mink. So wouldn't you be prepared to recommend that 
the Congress consider moving in the direction of extending the 
requirement to other areas for reformulation, because it does 
increase the supply, does it not? If the rationale for the 
crisis is the lack of supply, doesn't the extension into 
ethanol increase the supply as well, as well as take care of 
the pollution problem?
    Mr. Brenner. The supply problem is for gasoline overall, 
not reformulated gasoline alone. So you'd be shifting from 
conventional to reformulated----
    Mrs. Mink. Doesn't the use of ethanol increase the supply?
    Mr. Brenner. The use of ethanol or other oxygenates does 
increase the supply by about, I believe it's about 5 or, well, 
actually, the way it's blended, it can increase the supply as 
much as 9 or 10 percent of gasoline. That's part of why this 
requirement for reformulated gasoline is in the Clean Air Act, 
and it's one of the benefits of reformulated gasoline, it helps 
increase supply.
    Mrs. Mink. What incentives are there now for the production 
of ethanol and its use as a gasoline additive?
    Mr. Brenner. There are a set of tax incentives to encourage 
the use of ethanol.
    Mrs. Mink. What are the incentives?
    Mr. Brenner. I'd have to provide you the specific 
incentives. I could followup and provide you with a list of 
those incentives.
    Mrs. Mink. Mr. Chairman, I would ask that be inserted in 
the record.
    Mr. Ose. Without objection.
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    Mr. Ose. I'd also remind the gentlelady that--she yields 
back.
    Mr. Otter from Idaho for 5 minutes.
    Mr. Otter. Mr. Brenner, so that I don't misunderstand, and 
I don't want to rush to an idea here where we end up dividing 
up the scarcity, which it sounds like where we're going. We 
have a law in Idaho, it's called Finagle's law. It says, once 
something is sufficiently screwed up, almost anything the 
Government does to improve it will make it worse.
    Having said that, in these new bunch of fuels, these exotic 
efforts that we've got that we now want to apply uniformly, it 
appears, across the United States, tell me, in the refining 
process, with the new standards, how many gallons of gasoline 
do you get out of a barrel of oil?
    Mr. Brenner. How many gallons?
    Mr. Otter. How many gallons. It used to be, if we had a 
viscosity of 19 from, say, Saudi light crude, we'd get 19 
gallons of gasoline. How much do you get today?
    Mr. Brenner. It really varies depending on what mix of 
products the refinery is choosing to produce from each barrel. 
But the point is correct that with reformulated gasoline, it 
extends the amount of gasoline supplied, because the oxygenates 
that you add to it displace the need for additional petroleum 
from that barrel of oil.
    Mr. Otter. But isn't it true that there's a reduction in 
the raw base material, the crude oil, in the amount of gasoline 
that you get out of a barrel of crude? Is there a reduction or 
not? Do you still get the same amount of gasoline as you did 20 
years ago?
    Mr. Brenner. Actually, with reformulated gasoline, you end 
up getting somewhat more, because of the addition of the 
oxygen.
    Mr. Otter. No, forget the oxygen. Forget adding ethanol. 
Before you blend, how much gasoline did you get out of a barrel 
of oil?
    Mr. Brenner. I can't tell you what the numbers were from 
previously to now, but we could certainly provide you that.
    Mr. Otter. What does a gallon of ethanol cost?
    Mr. Brenner. About--I understand that it's pretty close to 
the price of gasoline, it's about $1.40, $1.50 a gallon, is our 
understanding.
    Mr. Otter. My company made 6 million gallons on an average, 
ethanol out of potato waste in Idaho. Our average price was 
$2.30 a gallon. That's what we had to get out of it, after we 
poisoned it with gasoline to make sure that we didn't drink it. 
So I don't know where you're getting this extra ethanol much 
cheaper than the price of gasoline. But it seems to me, we're 
going to go out of business out there if you can buy it 
cheaper, made out of corn, I guess, so long as the price of 
corn is reduced.
    Mrs. Mink. If the gentleman would yield----
    Mr. Otter. My point is this, Mr. Brenner. Isn't it a fact 
that not only just in the production of the product itself, but 
in the handling of the product, the storage of the product, the 
transportation of the product, the delivery of the product, the 
execution of delivery from the pump itself into the gas tank, 
all have changed substantially? You cannot put the same gas in 
the pipeline if you've got one fuel going into another. So 
you've got to purge the pipeline, you can't put the same one in 
the pipeline. So you've got to purge the transport. You can't 
put the same in the tank, so if you're going to have two or 
three of these fuels, you've got to have two or three tanks.
    All of this adds to the overall capitalization cost of the 
whole idea of 27 different kinds of fuels, isn't this right?
    Mr. Brenner. It's true that when you use ethanol as part of 
the fuel supply then you have a set of additional requirements, 
as you mentioned, with respect to storage and distribution to 
minimize the amount of what we call commingling of the ethanol 
based fuel with other fuels. In part, those additional costs 
have been offset by a tax benefit that ethanol receives and 
that helps. I think that's part of why you're seeing a 
difference in price that you've described compared to what I 
described. There is a tax benefit that is somewhat over 50 
cents a gallon for the use of ethanol.
    Mr. Otter. Thank you.
    Mr. Ose. The gentleman yields back?
    Mr. Otter. I yield back.
    Mr. Ose. The gentleman from Massachusetts.
    Mr. Tierney. Mr. Brenner, just following up on that a bit, 
in your testimony I believe you said that some in the industry 
thought it was advantageous to produce fuels for smaller 
markets. So, I'm assuming that the EPA is going to explore the 
fact that industry has been very complicit in fostering this 
boutique sort of situation that we have. And you're going to 
deal with them and talk to them about that?
    Mr. Brenner. Well, Congressman Tierney, our focus is going 
to be on trying to look for solutions to----
    Mr. Tierney. Well, one solution I would hope would be to 
get them to cooperate as opposed to trying to drive the market 
into boutique so they can make more money.
    Mr. Brenner. Sure, we would certainly want to work with 
companies----
    Mr. Tierney. Let me ask you, do some refineries encourage 
States to adopt boutique fuel requirements instead of opting 
into the RFG program?
    Mr. Brenner. My understanding is that in some instances, 
companies did suggest that.
    Mr. Tierney. And when the Federal Government permitted a 
State to require the use of a boutique fuel, EPA publishes that 
notice in the Federal Register, right?
    Mr. Brenner. That's correct.
    Mr. Tierney. Has the refining industry ever submitted 
comments opposing any State boutique fuel requirement, to your 
knowledge?
    Mr. Brenner. I don't know if I can say that's true for any 
instance----
    Mr. Tierney. To your knowledge.
    Mr. Brenner [continuing]. But typically, we have, I know 
there are very few instances, if any, where we have received 
comments from refiners.
    Mr. Tierney. You're not aware of any, are you?
    Mr. Brenner. I'm not personally aware of any, that's right.
    Mr. Tierney. Thank you.
    Mr. Cook, let me just ask you a question. You mentioned the 
concept of backwardation in your testimony. Would you explain 
to us again what that is?
    Mr. Cook. For crude oil, it would simply mean that future 
deliveries, say deliveries in August, of crude oil, would be 
somewhat lower priced than deliveries in July.
    Mr. Tierney. And as a result of that, people in the 
refinery industry are less inclined----
    Mr. Cook. Right.
    Mr. Tierney [continuing]. To put on production capacity now 
at a higher price than they would at an anticipated lower 
price?
    Mr. Cook. Sure.
    Mr. Tierney. Now, we're all enthralled with the free 
market, which I used to assume meant that this industry and 
others would not want the Government to get involved in their 
business, but I notice that we already have an estimated $15.6 
billion over the next 5 years of incentives for oil and gas 
production that are in existing law. So, assuming for a second 
that we don't do any more of that, and we grant them their wish 
to be a free market, what policies are out there for us that 
encourage something against that trend, that encourage people 
to actually produce more now than be afraid that the price is 
going to drop later and quit that production?
    Mr. Cook. Well, again, I don't think that EIA as a 
statistical organization can comment on policy, other than to 
make the comment consistent with my testimony that more crude 
supply certainly improves refining economics and tends to 
encourage, rather than discourage, extra production and extra 
storage.
    Mr. Tierney. So, if we convince OPEC to produce more and if 
we convince some of the non-OPEC countries to produce more, 
that would be an assistance on that?
    Mr. Cook. Certainly more supply is going to reduce crude 
costs and encourage refiners to buy and store and refine more 
products.
    Mr. Tierney. Mr. Brenner, what are the air pollution 
concerns that are associated with refineries?
    Mr. Brenner. Well, refineries, as major industrial sources, 
do produce significant amounts of pollution. They have reduced 
their emissions over the years, but nonetheless, they in recent 
years have produced over 30,000 tons per year of toxic 
emissions and over 800,000 tons per year of what we call 
criteria pollutant emissions--nitrogen oxides, hydrocarbons, 
carbon monoxide and sulfur dioxide. So they are significant 
sources of air pollution.
    Mr. Tierney. Under the new source review requirements, what 
are the refineries required to do when they increase 
production?
    Mr. Brenner. A refinery can increase its utilization, in 
other words, its production, without any additional controls if 
it does not require making a change to the refinery. But if 
they need to make a change to the refinery in order to increase 
production, then they can still do that without any new 
requirements, as long as the pollution does not go up by more 
than 10 tons a year in California or 40 tons a year in many 
other parts of the country.
    So the first 10 to 40 tons of emission increases do not 
carry with them additional control requirements. But if they do 
make a change and the pollution goes up by more than that 10 to 
40 tons, then they need to either find offsetting reductions 
within their facility or they need to put on modern pollution 
control equipment. The goal, of course, is to minimize the 
increase in pollution that occurs as a result of the increased 
production. And it's important to the communities near the 
refinery that those pollution increases, of course, be 
minimized.
    Mr. Tierney. Thank you.
    Mr. Ose. Thank you, Mr. Tierney. Mr. LaTourette, for 5 
minutes.
    Mr. LaTourette. Thank you, Mr. Chairman.
    Mr. Brenner, I apologize for not being here at the 
beginning of the hearing. Do you have the job Mr. Perciasepe 
used to have in the old administration?
    Mr. Brenner. I'm the Acting Assistant Administrator until 
the political appointee can be confirmed, that's correct.
    Mr. LaTourette. I wanted to followup on where Mrs. Mink was 
a little earlier, and also Mr. Otter's observation about how 
when the Government gets involved, things can get screwed up. 
It seems, as my grandfather used to say, we have things 
``bassackwards'' with our tax code on some of these. Let me 
just tell you, on ethanol, in the State of Ohio, about 4 out of 
every 10 gallons of fuel that's sold in Ohio is ethanol based, 
which is good for the air, it's helped us get our non-
attainment areas into attainment.
    But, I think as you know, when it comes to the Highway 
Trust Fund, it's taxed at about 10 cents a gallon as opposed to 
18 cents a gallon for regular gasoline. So while Ohioans are 
driving around doing nice things for the environment, they're 
getting whacked, and when it comes to distributing shares, to 
fix the roads, bridges and highways, which also increase fuel 
efficiency, make the air cleaner and everything else. It seems 
to me, on the Transportation Committee, on which I also have 
the pleasure of serving, we will be attempting shortly to 
legislatively fix that inequity. It seems to me that a State 
that wants to do good by its air and use reformulated gasoline 
should be rewarded, not penalized.
    I know that there's a big ethanol lobby that plays into 
that, and it's a big issue that's not as simple as I just made 
it. But I would hope that the EPA will take a look at it, as 
you move forward in seeking cooperation with all the various 
stakeholders, that perhaps States that want to do well by the 
environment should also have the opportunity to participate 
fully in the Highway Federal Trust Fund to make their roads 
better. If you have any comment about that, I'd be glad to hear 
it.
    Mr. Brenner. That's a good example of why the decisions on 
fuels, and why, in the President's energy report, a directive 
is that work be done not just by EPA, but working with the 
Department of Energy, the Department of Agriculture, we'll 
certainly be talking to the Department of Treasury regarding 
some of the issues you raised. We will then need to consult 
closely with Members of Congress. Because as you're noting, all 
of these decisions have ramifications that go well beyond 
environmental protection.
    Mr. LaTourette. Let me just ask you now, in response to 
that question, I understand the meetings with the stakeholders. 
But, I also think Mr. Tierney hit the nail on the head, too, if 
I'm the CEO of a corporation that has a patent on a certain 
blend of fuel that I want you to buy, I think it would be a 
good idea for the State or locality to say that you've got to 
have my fuel running in the cars to meet the Clean Air Act 
requirements.
    And this may be a non-Republican position, but I'll tell 
you, if you came to the conclusion that there was a blend of 
gasoline that would take care of our air and it would help ease 
some of the things Mr. Otter was talking about, that's OK with 
me. I think that's something that would generate a lot of 
support in the Congress.
    Did you have at EPA a timeframe when you think you're going 
to get this thing squared away, these meetings that you're 
having?
    Mr. Brenner. The meetings have already begun, and our 
schedule for producing a report on boutique fuels is to issue a 
draft of it in the fall for comment, and then toward the end of 
the fall or beginning of the coming winter have a final report 
which hopefully will include some suggestions or options for 
all of us, the administration and the Congress, to pursue in 
addressing these concerns.
    Mr. LaTourette. Thank you very much. I don't have any more 
questions. I yield back.
    Mr. Ose. The gentleman yields back. Mrs. Mink for 5 
minutes.
    Mrs. Mink. I have one question of Mr. Cook. As I read your 
testimony, the major emphasis that you made was that the 
primary reason our gasoline prices have escalated and 
fluctuated is because of the oil supply. And where the supply 
has been inadequate, it has increased the prices for gasoline.
    My question is, with the new administration taking office 
in January, what efforts have you and the administration made 
to try to work with OPEC to increase the supply so that this 
basic problem could be solved at least on one end without all 
the other discussions that we've had?
    Mr. Cook. Well, first of all, I'm in EIA, and I don't have 
a lot of contact with the Secretary of Energy. So I can't tell 
you what he's been doing with OPEC. Also, that might be a 
slight misunderstanding of my testimony. We didn't try to pick 
one factor out and emphasize it any more than another. We did 
talk a little more about crude oil in the testimony because 
it's very topical right now, with the Iraqi outage. But now, we 
list that factor, and then the other four or five factors, not 
the least of which was the weather back in December. Those high 
natural gas prices deeply cut into the methane and the butane 
streams that are key compounds to making MTBE, which helped to 
keep stocks low going into the spring.
    The focus on distillate production, which was extra strong 
because of fuel switching from natural gas to heating oil, 
diesel fuel, can take some of the responsibility for less 
gasoline this spring. A number of factors there that gave us 
low stocks that combined with the tight balance to give us the 
spike.
    Mrs. Mink. Well, with respect to most complicated issues, 
there are always many avenues that you approach in order to 
solve it. One would think that the administration would put 
high on its agenda efforts that need to be made to increase the 
supply and the one source is OPEC. So, I'm surprised not to see 
anywhere in the policy statements that are being made that 
effort is underway.
    Thank you, Mr. Chairman.
    Mr. Cook. Well, can I comment on that? I can't speak for 
the Secretary, but I've seen in the press that he is in a 
continuous dialog with OPEC, it's just one that is not public.
    Mr. Ose. Mr. Tierney for 5 minutes.
    Mr. Tierney. Thank you.
    Mr. Cook, can you share with us what the profits of the 
refining industry were in 1999 and 2000?
    Mr. Cook. No, I don't have those figures handy. I could get 
them for you. But generally speaking, they were relatively low 
in 1999 and relatively high in 2000.
    Mr. Tierney. Well, if you could get those, I would 
appreciate it, and if they could be made part of the record.
    Mr. Ose. Without objection.
    [The information referred to follows:]
    [GRAPHIC] [TIFF OMITTED] T7984.067
    
    Mr. Tierney. Mr. Brenner, would you comment on the reaction 
that we've been seeing from different types, particularly the 
industry, with regard to the diesel sulfur rule?
    Mr. Brenner. Sure. The diesel sulfur rule is part of a 
regulation that is intended to clean up diesel emissions and it 
is an effort to combine both new technologies on vehicles with 
cleaner diesel fuel so that the emissions can be significantly 
reduced, because the new technologies on vehicles require 
cleaner diesel fuel in order to work effectively.
    This is a rule that is phased in beginning in the year 
2006. The administration decided recently, as you are probably 
aware, to go ahead with this rule. One of the things, though, 
that we will be doing is trying to ensure that it's implemented 
in a way to minimize any possible fuel impacts, the adverse 
impacts on fuel supply. That's part of the reason why it's 
designed with a phase-in and why there's a several year lead 
time for producing the new gasoline.
    We are hopeful that we will be able to work closely with 
the petroleum industry to ensure that there is a smooth phase-
in of the lower sulfur diesel fuel, just as there is currently 
a smooth phase-in of the lower sulfur gasoline for cars that's 
going on now.
    Mr. Tierney. In Europe, are they using cleaner diesel fuels 
now?
    Mr. Brenner. In Europe, they have also made a decision to 
move toward cleaner diesel. They are in the process of cleaning 
up diesel fuel and they have a proposal before them that would 
result in even slightly cleaner standards than what we have 
proposed for 2006.
    Mr. Tierney. So that will increase the market and 
presumably help on the price issue.
    Mr. Brenner. What we seem to be moving toward is decisions, 
both in Europe and Canada, to move toward a lower sulfur diesel 
fuel for use, that's right.
    Mr. Tierney. I think, Mr. Cook, in fact, I'm sure that Mr. 
Cook's figures are going to show us that the refineries are 
earning record profits. How would you compare the recent 
profits of the refining industry to the cost that might be 
incurred in complying with the diesel sulfur rule?
    Mr. Brenner. The diesel sulfur rule, our estimate was that 
for the refiners, not for the auto and truck manufacturers, but 
for the refiners, the cost is on the order of somewhat less 
than $2 billion a year. When you take the capital costs and 
annualized them, and you take the operating costs, it's a 
little bit less than $2 billion a year. Because we need to do 
an economic impact analysis whenever we do a new regulation, we 
did look at how did, one of the factors we looked at is how 
does that compare to profits.
    What we found was that profitability over the last few 
years has been, or we had numbers that were close to $20 
billion in 1998 and over $70 billion in 2000. And so you could 
compare, one measure would be to compare that profitability 
with the annualized cost, which as I said is a little bit less 
than $2 billion a year.
    Mr. Tierney. Now, refineries, they say they're going to 
need enough lead time to prepare for the new fuel requirements, 
and they're going to be required to produce tier two low sulfur 
gasoline starting in 2004. Do you think that's enough time for 
them to comply?
    Mr. Brenner. That program seems to be working very well. 
They have been making investments to enable them to produce the 
lower sulfur fuel in some areas, it's already being produced. 
And so we've been very pleased with the progress.
    Mr. Tierney. Is BP-Amoco producing?
    Mr. Brenner. Yes, in many areas, BP-Amoco is already 
producing lower sulfur gasoline. And in some instances, we're 
seeing commitments already to produce lower sulfur diesel fuel. 
That's only a year after the regulation was issued.
    Mr. Tierney. And finally, you testified that prices this 
spring rose both for conventional and RFG fuels. What does that 
tell us about the effect of the RFG program is having on the 
rise in gasoline prices?
    Mr. Brenner. We believe that the primary factors causing 
increases in gasoline prices are some of the other ones that 
were mentioned here, the tight situation in terms of refinery 
capacity, the increased costs of crude, some of those other 
factors, and that they seem to be affecting both conventional 
and reformulated gasoline. So, we continue to believe that the 
effect of reformulated gasoline is the 4 to 8 cents a gallon I 
mentioned, but that's only a small part of the overall 
increase, of course, that we're seeing in gasoline.
    Mr. Tierney. Thank you very much. Thank you, Mr. Cook.
    Mr. Ose. The gentleman from California for 5 minutes.
    Mr. Waxman. Mr. Brenner, I want to go back to this issue, 
and ask you to take a step back to look at it. Under the Clean 
Air law, California has a requirement that 2 percent of its 
reformulated gasoline has to have an oxygenate in it. If 
California is kept to that requirement, it could well mean that 
there will be a supply disruption, there will definitely be a 
price increase, and EPA at one point thought it could lead to 
less cleanup of the air quality. So, let's just say a possible 
environmental consequence, adverse environmental consequence.
    So, it seems to me that California wanted a waiver of this 
oxygenate requirement so they'd only have one fuel instead of 
two fuels. It's cheaper to have one fuel. The administration 
says we ought to have one and not a bunch of different fuels. 
It would be more available, and with the California standard, 
they'll get all the environmental benefits.
    Am I right in what I'm saying so far? You don't have to 
agree with every analysis, but generally, isn't that really 
what we're facing?
    Mr. Brenner. Well, of course, it would depend on what fuel 
is produced. But, what our analysis showed was that you may or 
may not have an increase in pollution. The problem was that the 
statutory requirement we were working under required us to be 
able to clearly state that you would have an air quality 
benefit by dropping the oxygenate waiver.
    Mr. Waxman. Now, I have it clear in my mind. What you're 
saying, in effect, is that it is a legalistical argument, not 
whether it makes sense to have one fuel as opposed to two. 
Whether we're going to get the environmental benefit by the 
California gasoline standard, and whether we're going to have 
less of a threat of supply and price increases because of the 
two fuel standard, you're saying that the law says that for 
California to get a waiver that we've got to show that the 2 
percent oxygenate requirement is going to lead to an adverse 
environmental impact.
    Now, EPA at one time said it would lead to an adverse 
environmental impact. On that basis, EPA recommended to the 
administration that they grant the waiver. Well, this went to 
the White House and the President turned it down. The only one 
who wants this oxygenate requirement is Archer Daniels Midland. 
And now EPA's coming back and saying, well, wait a minute, we 
don't know for sure that there's going to be an adverse 
environmental consequence, and on that basis, that waiver 
should be denied.
    Well, that doesn't make any sense to me. EPA is changing 
its position from that which it had before. The Bush 
administration is saying it makes more sense to have gasoline 
in California that is specialized for one part of the State as 
opposed to another, that could lead to less of an environmental 
benefit, and is going to cost more because they'd have to meet 
this oxygenate requirement. It's going to cost more. And 
because it's going to cost more to get this replacement for 
MTBE, it could be that there's going to be a supply disruption.
    That to me doesn't make any sense. That's why I find it so 
incomprehensible that the Bush administration made the decision 
it did.
    Mr. Brenner. Let me try to help explain that, which is that 
there's a technical basis, there's an analytic basis for that 
decision. You quoted from an earlier draft that we had done 
last year. Since then, we have done additional analyses of the 
hydrocarbon related issues, and as we did the additional 
analysis of the hydrocarbon related issues, what we found is 
that we could not clearly say that hydrocarbon emissions would 
remain the same. In fact, they could go up if the oxygenate 
waiver was granted.
    Mr. Waxman. It seems to me you're arguing a technical 
point. We can sit here all day and argue that technical point. 
But if in another month from now people are looking at higher 
prices of maybe 20, 30 or 60 cents a gallon for gasoline, and 
they're buying a gasoline that may even pollute more than what 
they could do otherwise. No one's going to accept this very 
technical, legalistic analysis to deny us what makes just good 
common sense.
    And States' rights seems to be a proposal, not a proposal, 
but a philosophy of Republicans, here the States want to do 
what's right and they're being denied the opportunity to do it 
for its own citizens.
    Mr. Brenner. The waiver, Congressman Waxman, was to take 
effect at the end of next year, at the end of 2002. So, we're 
not looking at an immediate impact on the fuel supply. That 
does provide an opportunity to work through ways to best 
provide gasoline for California without disruption.
    Mr. Waxman. Refineries have to make investments today to 
meet any changes a year or two from now. If we don't make the 
issue clear, they're not going to know how to make their 
investment, and we're not going to have the gasoline that we 
need for our citizens at the prices they ought to be paying 
down a year or two from now.
    Thank you, Mr. Chairman.
    Mr. Ose. Thank you. We're going to wrap this panel, I have 
a couple of followup questions. I want to followup on Mr. 
Waxman's comment, or observation, about the technical issues. 
Are we talking about technical in the sense that it's chemistry 
or are we talking about technical in the sense that it's 
statutory? Obviously, there's something there that exists in 
statute or in physics or something. Is it statutory or is it 
chemistry?
    Mr. Brenner. There is a statutory requirement that we 
examine the air quality impact of the waiver. Then when we did 
that examination, we used air quality models and engineering 
and gasoline supply models to make that defemination.
    Mr. Ose. Congressman Waxman refers to a report, and I'm 
sorry I don't have it, and you had indicated there was a 
subsequent report. Can we enter the report in the record? 
Without objection.
    [Note.--The report may be found at http://www.epa.gov/oms/
regs/fuels/rfg/ro1016.pdf.]
    Mr. Brenner. I can help you with that----
    Mr. Ose. I just want to get the chronology here, to make 
sure we have the most current data we're receiving testimony 
on.
    Mr. Brenner. I believe what Congressman Waxman has is a 
draft that we had produced earlier as we went through this 
process of evaluating California's waiver. We have since 
developed additional analyses and the final decision was issued 
earlier this week and was sent to the State of California. The 
State of California received our decision and a copy of the 
analysis that backed up the decision.
    Mr. Ose. So, we had an early report or a draft or whatever, 
and then we had a final, is what you're telling me. I'm trying 
to figure out which is it that we're basing policy on. Are we 
basing it on the draft or the final report?
    Mr. Brenner. We based our decision on the final version, of 
course.
    Mr. Ose. Was it, the final said that the statutory 
requirements were X, whereas the draft said there were things 
that could be done to address X?
    Mr. Brenner. They both of course had the same statutory 
requirement in them, but in the first version, we had thought 
based on the information we had at the time that the statutory 
requirement could perhaps be met. Then based on additional 
information, we found that we were not able to say it could be 
met.
    Mr. Ose. All right, I want to make sure that we get both 
the draft and the final in the record. I'm going to yield to my 
friend, but I'm going to maintain my time as chairman.
    Mr. Waxman. I thank you for yielding. I was one of the 
authors of the Clean Air Act in 1990. We provided a 
reformulated gasoline requirement, with an oxygenate formula 
minimum. And we said, you can get a waiver. But we didn't want 
States to get waivers where they're going to do environmental 
damage. So we said, in order to get a waiver, you've got to 
show that keeping to the requirement of the law is going to 
hurt the environment.
    EPA did an analysis. And they said they thought it could 
hurt the environment, and therefore, they were recommending the 
waiver. The administration denied the waiver, and then EPA sent 
us a subsequent report saying, well, they're not sure that it 
would be harmful to the environment if California keeps to its 
requirement in the law.
    But if you step back from that, for California to meet the 
requirement of the law, parts of the State have to use a fuel 
that's different than what the rest of the State uses. 
California could use the same fuel for everyone in the State at 
a lower price, because in order to meet the oxygenate 
requirement, it costs more money. In order to meet this 
oxygenate requirement, because we're no longer using MTBE, we 
have to get the ethanol and there could be a disruption of that 
supply.
    So, we're looking at a ridiculous situation in California 
by not having this waiver. That's why you and I and all the 
members of our delegation wanted this waiver. The only 
explanation that anyone could come up with why the 
administration would turn this request down, which EPA 
supported originally, is Archer Daniels Midland. They're the 
ones who make the ethanol requirement for reformulated 
gasoline. There's no environmental reason to do it. It's a 
higher price that we're asking people to pay, with a possible 
disruption in supplies. And if we're looking at the next crisis 
in gasoline, well, we're going to have a crisis in California, 
because this waiver has been denied. To me it doesn't make 
sense.
    Mr. Ose. I appreciate my friend offering those remarks, and 
I want to--this is the part that I'm trying to get clear, and 
you might know the answer to this. As I understand it, the 
waiver denial was issued on Tuesday of this week, and the draft 
report, I don't recall the date on that, but the draft report 
was issued some months ago or some weeks ago?
    Mr. Brenner. It was not issued. But somehow it was obtained 
by both the State of California and by the Energy and Commerce 
Committe. This was last year that they asked for it. And, I can 
explain the difference.
    Mr. Ose. I'm just trying to get the chronology right. If I 
remember correctly, I heard that there was the draft, then the 
waiver, denial, and then the final report was issued. Was the 
draft prepared and then the final was prepared and the waiver 
was denied, or was the draft prepared, the waiver was denied 
and the final report was written?
    Mr. Brenner. No, there was a draft prepared, it was not 
publicly released. However, copies of it were obtained by 
outside sources. Since then, we did additional analyses, found 
additional environmental concerns, prepared our final report 
and based on that final report, made the decision to deny the 
waiver request.
    Mr. Ose. OK. I'd be happy to yield.
    Mr. Waxman. I would submit the following chronology. EPA 
was working over a 9-month period on this staff report. Their 
staff report recommended that the waiver should be granted. I 
believe that the head of EPA concurred in that decision. Then 
it went to the administration and the administration decided 
not to grant the waiver, and therefore, another further report 
was prepared to show on a technical basis that EPA was not sure 
that there would be an adverse environmental result if the 
waiver were granted. First they were, and now they're saying 
they're not sure. That's why they're turning us down on the 
waiver.
    But the fact of the matter is, the waiver should be granted 
for all these other reasons, and it was denied for no reason 
except, seems to me, the obvious special interest conclusion of 
the people who wanted to make gasoline with this ethanol in it.
    Mr. LaTourette. Mr. Chairman, may I make some observations 
about that, if we're going to make observations?
    Mr. Ose. Yes, you may.
    Mr. LaTourette. That's a pretty serious allegation I think 
you're making, Mr. Waxman. Mr. Brenner, you're not a political 
appointee, as I understand, you're the acting Mr. Perciasepe, I 
think we talked about before, right?
    Mr. Brenner. That's right.
    Mr. LaTourette. Is there anything--and how long have you 
been with the EPA?
    Mr. Brenner. I've been with the EPA for over 20 years now.
    Mr. LaTourette. And the Republican and Democratic 
administrations have put you at the EPA, if I have my history 
correct?
    Mr. Brenner. That's correct.
    Mr. LaTourette. Are you aware of anything to validate or 
buttress what Mr. Waxman has just said? Do you concur with the 
final report?
    Mr. Brenner. Yes, I did sign off on the final report. As I 
indicated, there is a technical report that buttresses the 
decision that was made, that explains the decision that was 
made. We've provided that report to California and we'll 
provide it to the committee.
    Mr. LaTourette. Were you directed by Governor Whitman or 
the President or Vice President or anyone in the administration 
to reach that conclusion, that even though it conflicted with 
what you knew as a career member of the U.S. EPA?
    Mr. Brenner. No, we were not directed to reach that 
decision.
    [The information referred to follows:]
    [GRAPHIC] [TIFF OMITTED] T7984.068
    
    Mr. LaTourette. Do you own any Archer Daniels Midland stock 
that would put you in conflict?
    Mr. Brenner. No, sir.
    Mr. LaTourette. Thank you very much, Mr. Chairman.
    Mr. Ose. Thank you, Mr. LaTourette.
    We're going to wrap this up. I do want to ask a couple of 
questions. You've indicated there's a statutory constraint to 
granting the waiver that California has requested. What I'm 
trying to find out is, can Congress provide statutory 
flexibility whereby California can be granted the waiver that 
it requested, and how would we go about doing that?
    Mr. Brenner. Currently in the act, and I want to just say, 
as an aside, probably a highlight of my career definitely has 
been working with Members of Congress on the Clean Air Act 
amendments of 1990, however, that provision in there that deals 
with waivers from the oxygenate requirement is a fairly narrow 
one that deals just with the air quality effects.
    So, we would need to take into account more than just the 
air quality effects in order to be able to grant that sort of 
waiver. And as I've indicated, that's something that, whenever 
you change the fuel supply, it has a fairly broad set of 
implications across the economy. Undoubtedly, there would be a 
number of other stakeholders that would want to comment on any 
change such as that.
    Mr. Ose. Are you familiar with former Congressman Bilbray's 
legislation in 1999 to provide California the flexibility for 
such reformulated gasoline?
    Mr. Brenner. I'm sorry, I'm not.
    Mr. Ose. OK. I'm referring to H.R. 11 from the last 
Congress, that had significant support, 51 of 52 Members of 
Congress from California supported it. I'm curious whether this 
might offer, this particular legislation, if updated, might 
offer a vehicle whereby we could provide some resolution in a 
timely manner, so that statutorily, EPA could come forward to 
grant the wavier.
    Mr. Brenner. We could certainly look at it and report back 
to you on what we think the implications of legislation like 
that might be.
    Mr. Ose. I just want to emphasize, we're all up here trying 
to find solutions to this. Because all of our people are 
paying, whether it be in Mr. Tierney's district in 
Massachusetts or Mr. LaTourette's or mine or Mr. Otter's, Mr. 
Waxman's, all our people are paying extra and we don't like it. 
If there's something we can do to alleviate that, we want to do 
it. So, you may well get a written question.
    We're going to leave the record open. I want to make sure 
everybody's aware of that. We're going to leave the record open 
for some written questions. I want to thank both of you for 
coming. It's been a long hour and a half, you've been very 
gracious.
    We'll take a 5-minute break.
    [Recess.]
    Mr. Ose. The subcommittee will come to order.
    We'll swear in our witnesses, so if you'd all rise and 
raise your right hands.
    [Witnesses sworn.]
    Mr. Ose. Let the record show that the witnesses all 
answered in the affirmative.
    Joining us on our second panel is Dr. Don Coursey, who is 
professor at the Harris School of Public Policy, University of 
Chicago; Mr. Robert Slaughter, the general counsel for the 
National Petrochemical and Refiners Association; Mr. Ben 
Lieberman, who's a senior policy analyst for Competitive 
Enterprise Institute; and Mr. A. Blakeman Early, who's an 
environmental consultant for the American Lung Association.
    Gentleman, I welcome you. We appreciate your taking the 
time from your day to come.
    Dr. Coursey, you're recognized for 5 minutes. We all have 
your written testimony. I know we've all read it. So if you 
could summarize, that would be great.

  STATEMENTS OF DON L. COURSEY, AMERITECH PROFESSOR OF PUBLIC 
  POLICY, UNIVERSITY OF CHICAGO, AND POLICY SOLUTIONS, LTD.; 
 ROBERT SLAUGHTER, GENERAL COUNSEL, NATIONAL PETROCHEMICAL AND 
REFINERS ASSOCIATION; BEN LIEBERMAN, SENIOR POLICY ANALYST, THE 
   COMPETITIVE ENTERPRISE INSTITUTE; AND A. BLAKEMAN EARLY, 
      ENVIRONMENTAL CONSULTANT, AMERICAN LUNG ASSOCIATION

    Dr. Coursey. Thank you for inviting me today. I am an 
economist from the University of Chicago, and my interest in 
looking at this is from a market viewpoint. That's what I do 
for a living, study markets.
    People like to look at Chicago historically and think that 
we invented markets and invented transactions. Markets have 
been around for a long time. People traded corn, wood, and 
wheat. What the great invention of the Chicago markets were 
over 100 years ago was the commodification of these things, the 
corn, the wheat and the wood. And the definition of a 
commodity, instead of bringing corn or wheat to the docks and 
have people individually go through it, the commodification of 
these things allowed people to just trade them freely.
    There were difficulties at that time as well in defining 
different types of corn, but we managed to work our way through 
that. Now we can trade corn fit for human consumption, corn fit 
for animal consumption. That was the invention of Chicago, the 
commodity. And that's what led to the emergence of modern 
markets.
    It may come as a shock to you today, but I strongly feel 
that there is no such thing as a gasoline market in the United 
States today. Rather, I think the situation is much better 
described as a set of regional oligopolies.
    Why? The invention of commodities in Chicago meant that 
everything was a perfect substitute for everything else. If 
corn was needed in Iowa, it would move there. And what would 
attract it would be prices. The corn could come from Wisconsin, 
it could come from North Dakota, whatever. So, one of the 
conditions for forming a market is the commodification of 
whatever you're trying to trade.
    The second reason why I think we have regional oligopolies 
as opposed to a marketplace is because there are few sellers. 
There are great returns of scale in the refining and 
distribution business. You're going to end up, given current 
technologies, with at most a handful of people serving in an 
individual region in a country.
    The third reason has to do with entry restraints and the 
difficulty of setting the refining capacity. I'll return to 
that.
    All these have led to higher prices for gasoline, and 
everybody here has commented on that, I don't need to repeat 
that. But, I want to emphasize something about volatility of 
prices in a moment.
    Oil bashing seems to be quite a great spectator sport right 
now. Someone earlier in the morning commented on the Wall 
Street Journal article regarding my area of the country, 
Chicago, and the problems having to do with Marathon and BP-
Amoco, or now just BP, serving the Chicagoland area. But, I 
would urge the committee to consider the challenges of being a 
refiner these days. I think a lot of people have the opinion 
that refiners take crude oil, smash it up, turn it into other 
products, and distribute it around the country.
    That is, as I argue in my testimony, the easy part. 
Marathon and BP in my area will have raw product. The price of 
that raw product is often dictated many thousands of miles 
away. And they've got it, what are they going to do with it? 
They have to decide, what flavor do they want to produce? Do 
they want to produce for the Milwaukee-Chicagoland region? Do 
they want to produce for Ohio? Do they want to produce for 
somewhere else, do they want to produce for North Dakota?
    When are they going to produce it? You can only make one of 
these at a given period of time, you can't stop and 5 minutes 
later start making another one. There are turnaround times.
    Where are you going to send it? Additionally, the product 
doesn't go directly out the front door into people's cars. It 
has to go through pipelines. Indeed, many of the in the 
additives in the Chicagoland area have to come through their 
own pipeline, of which BP or Amoco have no control over. There 
are refining constraints in place. These refineries require 
maintenance periods, shutdown periods, and how do you plan them 
into the schedule?
    And last and not least important, it's all subject to fixed 
general stocks, such as changes in the weather patterns, 
changes in consumer behavior, and changes in the behavior of 
OPEC, of which the Chicagoland area has very little control 
over, of course.
    So, I would argue that running a modern refinery, given the 
current regulations, is very similar to running an airline, 
which as we know has not been an easy thing to do over the last 
4 or 5 years as well. Both airlines and refiners are subject to 
heavy capacity constraints, the airlines, in terms of airplanes 
and increasingly runway space. The changes in consumer demand 
patterns that can occur, and again shocks such as weather or 
other external factors. It's very, very difficult to begin 
with, to run a refinery, and you're adding a degree of 
complexity that's mind boggling on top of that.
    A lot of people here have focused on the higher average 
prices. And when OPEC moves the prices up and down, it's 
inevitable that regular gasoline, reformulated gasoline, 
everything's going to move up and down with them. That's just 
the law of supply and demand. What I think has not been focused 
on as much is the volatility produced when all these additional 
regulatory constraints are imposed upon refiners. It's the 
volatility in places such as Chicago that really attracts 
people's attention.
    Earlier you asked about the Ohio consumers, driving to work 
1 day at $1.50, coming home in the evening at $1.75. That's not 
at all unusual in my part of the country as well. I think one 
of the things that's left unnoticed is that oftentimes prices 
will fall equally as much. I don't think we see 25 cents over 
the course of an 8 hour working day, but they can come down as 
much as they can go up. It's the volatility that drives people 
quite crazy in my region, as well as the average prices.
    I argue strongly in my----
    Mr. Ose. Dr. Coursey, you need to wrap up here.
    Dr. Coursey. OK. So, to put this all together, perhaps what 
the perspective of the committee might be is to consider a 
return back to the future. Figure out ways to get the 
interested parties together and recreate a commodity of 
gasoline. We had gasoline as a commodity for a long time in 
this country. The United States doesn't need 50 blends of 
gasoline, it doesn't need 30, 20, 18, 20, there's all kinds of 
numbers floating around. Perhaps we need as few as four.
    But once that is accomplished, then the problems that you 
see out in places like California or in my area will tend to 
take care of themselves naturally. The easiest way to attract 
resources to your area is to provide people incentives to send 
them there.
    [The prepared statement of Dr. Coursey follows:]
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    Mr. Ose. Thank you, Dr. Coursey.
    Mr. Slaughter, for 5 minutes.
    Mr. Slaughter. Thank you, Mr. Chairman.
    I'm here today on behalf of NPRA. The Association's members 
and owners operate 98 percent of U.S. refining capacity. We 
also have as our members most petrochemical manufacturers.
    A lot of the current information about the market has been 
given out today by EIA. Obviously we're in a situation in which 
we've had record production of gasoline by refiners over the 
last 2 months, some addition even to inventories. Prices over 
the last couple of weeks have generally been declining. There 
is reason to believe that we may get through this summer all 
right, the heavy driving season, provided there are no 
unforeseeable problems, such as there were and which triggered 
events in the Midwest last summer.
    And frankly, I think that some considerable credit should 
go to the men and women in the refining industry for all 
they've done over the last few months to turn this product out 
in very severe situations.
    But of course, we have underlying problems, which we've 
talked about today. My first chart over here shows that we have 
no longer really any excess capacity in the United States, 
excess refining capacity. The top line, the light green line, 
represents demand, the dark green line, capacity. We obviously 
over the last several years no longer have that cushion. That 
means a tight supply demand balance.
    We're dependent on imports. Projections are that gasoline 
demand will grow by 1 to 2 percent over the next several years. 
There really are no projections that refining capacity will 
grow to meet that. With no new refineries since 1976, and it's 
becoming increasingly difficult to add capacity at existing 
sites, which is the major way that we add capacity in this 
country, because of reinterpreted rules and restrictions that 
EPA is in charge of.
    So, you can't count on the refining industry being able to 
add the capacity we need unless we make some policy changes.
    We currently important 700,000 barrels of refined product 
to help us meet demand, and we're not always going to be able 
to depend on that increment of supply. Other societies are 
growing, economies are growing and they want some of that 
gasoline as well.
    Now, basically, I think we ought to move to a few of the 
issues just very quickly that have come up several times, so we 
can talk about these issues. We are concerned about the Unocal 
patent. We do think that's having an impact on gasoline 
supplies. We have asked the FTC to look at Unocal's conduct in 
participating in Federal and State regulatory activity, and 
then patenting these particular blends. We hope that the FTC 
will look at it. We think it does have an impact on gasoline 
supply.
    The next chart is a bar chart that shows you all the 
different regulations that face the refining industry over the 
next 10 years. There's roughly $20 billion of investment 
required. It's going to be very difficult to do it all, 
particularly the diesel sulfur rule.
    Some people want to take great umbrage that we suggest that 
this is not a perfect rule. It's not a perfect rule. It 
requires that 80 percent of diesel be reduced from essentially 
500 parts per million now to 15 parts per million in 2006, that 
80 percent of diesel be reduced, at a cost of $8 billion, to 
that level, to meet only 5 percent of demand in 2006 and 2007. 
That overlaps almost exactly the period for the reduction of 
gasoline sulfur from the current 500 parts per million to 30 
parts per million average. Double programs, EPA refused to 
sequence them. There's not really any demand for 15 parts per 
million diesel in 2006, but the industry is under the gun to 
have to make it.
    We want to thank Chairman Ose, Mr. Burton and Mr. Horn for 
their efforts to encourage California officials to exempt 
refineries from rolling electricity blackouts. We need that 
exemption in order to keep products flowing in California, and 
we thank you for that.
    On the California oxygenate waiver, I would just like to 
point out one----
    Mr. Ose. Mr. Slaughter, I appreciate your thanks, as does 
Mr. Burton and Mr. Horn, our concern was the consumers and the 
impact of shutting you guys down.
    Mr. Slaughter. We understand. On the California waiver, I 
would like to point out one fact that was not mentioned 
earlier, which is that the waiver was pending at EPA for 23 
months, and the previous administration didn't grant it either. 
They didn't explicitly turn it down, but they didn't grant it, 
either. Our members are of two minds on the waiver. Our refiner 
members would support the waiver, and want relief from the 27% 
requirement. We also do have some MTBE manufacturers who 
wouldn't agree with that position. But again, I wanted to clear 
the record and say that it had been pending there under two 
administrations.
    The new source review program we think needs a second look. 
It's going to get one under the President's recommendations. It 
is a road block to improving and expanding capacity, installing 
new technologies, even undertaking basic maintenance procedures 
now at refineries. We think it deserves a look. There's room 
for improvement. People who say that it's the best that can be 
invented have got a hard case to make, if you look at its 
history.
    The boutique fuel chart; it's up on the other screen as 
well. People want to argue about how many fuels there are. 
There are 14 to 16 on this map. There are different grades of 
those: there are geographic grades, there are seasonal grades, 
there are a lot of gasolines out there.
    These maps were generated last summer when people in the 
Midwest wanted to understand what the gasoline distribution 
system really looks like. The 1990 Clean Air Act set out 
essentially a three gasoline system but local choice, economics 
and politics have made it look like it does. The energy 
industry has to optimize this map to deliver gasolines, and 
this situation as well looks like something that could deserve 
a second look. The administration is going to take another look 
at it and everyone can participate in that review.
    Mr. Ose, and members of the committee, I think I'll leave 
it there, and look forward to your questions.
    [The prepared statement of Mr. Slaughter follows:]
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    Mr. Ose. Thank you, Mr. Slaughter.
    Mr. Lieberman, for 5 minutes.
    Mr. Lieberman. Good morning. My name is Ben Lieberman, and 
I'm a senior policy analyst with the Competitive Enterprise 
Institute, a public policy organization committed to advancing 
the principles of free enterprise and limited government.
    Gasoline prices have risen more than 20 cents per gallon on 
average over the past 10 weeks, with consumers in some parts of 
California and the upper Midwest recently paying more than $2 
per gallon. As with previous price spikes, Congress has sought 
to learn why these increases occurred and what can be done 
about it.
    Thus far, most of the attention has focused on allegations 
of illegal conduct on the part of the oil industry. 
Consequently, there have been many Federal investigations of 
alleged collusion of price gouging, and in fact, two Federal 
Trade Commission reports on previous price spikes have recently 
been released. However, these investigations have pointed away 
from industry conduct as the cause of the gasoline price 
increase.
    At the same time, evidence is emerging that the growing 
Federal regulatory burden is having an effect on gasoline 
prices, and is a factor in the volatility seen in recent years. 
In particular, the regulations promulgated under the Clean Air 
Act, which both dictate the composition of gasoline and place 
limits on refining infrastructure, are a major contributor to 
the price of gasoline today.
    The 1990 amendments to the Clean Air Act contained a number 
of motor fuel regulations. For example, we now have specialized 
blends such as reformulated gasoline and oxygenated gasoline 
mandated for particular areas. There are also varying 
requirements applicable to conventional gasoline. The 
amendments also gave broad discretion to EPA to set additional 
fuel requirements. As a result, we now have a number of 
distinct fuel types in use.
    Perhaps the most problematic of these provisions is the 
requirement for reformulated gasoline in the smoggiest parts of 
the country. Reformulated gasoline must meet several 
compositional requirements and emissions performance standards. 
Today, nearly one-third of the Nation's fuel supply is 
reformulated gasoline, and it currently averages 21 cents per 
gallon more than conventional gasoline. There are distinct 
requirements for reformulated gasoline in northern States and 
southern States and specific summer requirements applicable 
from June to September.
    Despite the higher costs, the National Research Council and 
others have raised some questions about the extent of the 
environmental benefits of reformulated gasoline. Some benefits, 
but not as great as originally anticipated. And in fact, 
California, as we've discussed, and other States, are trying to 
get out of certain specific requirements under the reformulated 
gasoline program.
    As I mentioned, reformulated gasoline costs more than 
conventional gasoline, but the emerging problem is not so much 
the higher price of individual blends, but the balkanizing 
effect of so many distinct gasoline types simultaneously in 
use. In 1999, the Department of Energy's Energy Information 
Administration stated that ``The proliferation of clean fuel 
requirements over the last decade has complicated petroleum 
logistics,'' and predicted that ``Additional clean fuels 
programs could make the system more vulnerable to local outages 
and price spikes.''
    In fact, one pipeline operator reports having to handle 38 
different grades of gasoline, several due to environmental 
requirements and some due to other requirements. But many of 
these blends have to be separately refined, shipped and stored.
    For those who question whether Federal regulations really 
are major contributors to the high price of gas, I would 
suggest taking a close look at the where and when of the 
highest gas prices, because it matches reasonably well with the 
where and when of the most burdensome regulations. For example, 
the prices tend to be highest in the late spring, early summer 
timeframe. This is the second year in a row that Chicago has 
been hit with $2 gas at this time of the year.
    This is due in part to the additional complication of 
transitioning away from winter fuel specifications to the 
summer specifications. The location of the highest prices, 
California and the upper Midwest, is not coincidentally the 
location of the most unique and challenging fuel standards, as 
well as the most vulnerable refining infrastructures.
    In contrast, I've heard a lot of people claim that high gas 
prices are due to industry manipulation. But I've never heard a 
logical explanation why big oil gets so greedy in April and May 
and not the rest of the year, or why they keep picking on 
Chicago and California and leave other parts of the country 
alone, or for that matter why they endured long stretches in 
the 1990's when gasoline prices were at record lows.
    Unfortunately, there are a number of new fuel regulations 
scheduled to take effect in the years ahead, such as the new 
ultra low sulfur standards for gasoline and diesel fuel. These 
rules could increase costs further in the years ahead.
    Now, the FTC report as to last summer's Midwest gas price 
spikes further confirms the role of regulation. While the 
report found no evidence of illegal conduct by industry 
participants, it went on to list the primary and secondary 
factors behind the price increases. Many of these factors are 
related to the regulatory burden, particularly the stringent 
new requirements for reformulated gasoline that took effect in 
2000. In fact, the FTC report could be used as a good starting 
point for regulatory reform.
    In closing, I'd like to offer a few general thoughts on 
what needs to be done to ensure that gasoline is as affordable 
as the market will allow. I think there are some good elements 
in the administration's recently released energy plan, 
particularly the plan to direct EPA to study ways to reduce the 
proliferation of different fuel requirements and to streamline 
the regulations that are stopping refiners from expanding to 
meet demand. This can be done without sacrificing environmental 
quality.
    One specific recommendation is that Congress amend the 
Clean Air Act to eliminate the 2 percent oxygenate requirement 
from the reformulated gasoline program, or at least allow 
States to opt out of this requirement, as California has 
attempted to do. The role of Government should be to set 
environmental end goals for gasoline, not to dictate the 
specific ingredients and recipes by which those goals are met.
    And given the magnitude of recent gasoline price increases, 
I would urge EPA and Congress to take a look at some of the new 
fuel regulations scheduled to take effect in the years ahead, 
and amend them if they threaten future price increases 
disproportionate to the expected environmental benefit.
    Thank you.
    [The prepared statement of Mr. Lieberman follows:]
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    Mr. Ose. Thank you, Mr. Lieberman.
    Mr. Early, for 5 minutes.
    Mr. Early. Good afternoon. I'm very happy to be here on 
behalf of the American Lung Association, and I'm going to 
basically chuck my testimony and try to hit on some key issues 
that I urge the committee to consider.
    Talking about this in the same way that Dr. Coursey does, I 
think it's important to recognize that the American public 
wants the refining industry to deliver both affordable gasoline 
and clean air. The American public expects and the Congress has 
dictated through the Clean Air Act that they deliver on clean 
air as well as gasoline.
    Weakening either the clean fuel requirements or the new 
source review requirements that will apply to expansions of 
refineries is going to ensure that the refining industry does 
not deliver on clean air as much as they are right now. So the 
American Lung Association very much opposes proposals in that 
regard.
    We also have sponsored public opinion surveys which show 
the American public is willing to pay more for their gasoline 
for the delivery of clean air. All the price spikes we've seen 
have exceeded by a considerable margin the amount of the 
incremental costs of delivering clean air. It's obviously these 
other factors, as the previous witness, Mr. Cook, pointed out, 
such as consolidation of the oil refining industry. 
Essentially, when you put more of the power of gasoline 
production and supply in fewer hands, you can't guarantee that 
weakening clean air requirements is going to result in lower 
fuel prices, because they just have too much power to 
manipulate the market.
    Briefly, my testimony shows that we believe the refining 
industry is exaggerating the problems of boutique fuels. I have 
in my testimony a map, this one, and I apologize that it's 
difficult to understand. But basically, a lot of the fuel 
requirements, particularly in the Southeast, the RVP 
requirements, are essentially the same requirements and don't 
represent a major impediment to the industry. The RVP 
requirements for Texas, Louisiana, North Carolina, Tennessee 
and Florida are essentially identical on that map.
    If you take California out of the equation, you take 
Chicago out of the equation, the number of separate gasolines 
on that map really goes down to seven gasolines. You multiply 
that by low test or regular and premium, and there's a total of 
14 summertime fuels, not 48 fuels.
    Let me also just briefly touch on the Bush administration's 
oxygenate waiver denial. The American Lung Association is very 
disappointed in this decision. But, I urge you to consider 
another factor which hasn't gotten any discussion. There's 
another special interest that doesn't want this waiver. It's 
the MTBE industry. And one of the things that we're very 
concerned about is, the previous administration basically was 
in favor of a policy that would promote removing MTBE from the 
entire national fuel supply. The denial of this waiver, from 
our perspective, would indicate that this administration has 
abandoned that policy. We think this is very unfortunate, 
because there's a very strong consensus that removing MTBE from 
the fuel supply is a good idea for the protection of our water 
resources, and that we can achieve air quality goals without 
MTBE in the fuel supply.
    The administration had the opportunity, because of the 
nature of the evidence, to hang their hook on evidence that 
would support the waiver or hang their hook on evidence to deny 
the waiver. Unfortunately, they took the latter course. We're 
very concerned and disappointed. There's a real opportunity to 
help California deal with its water quality problems and ensure 
air quality, and the administration basically did not do 
anything to help them do that.
    Finally, what I'd like to do with respect to new source 
review is, which has not been discussed too much by the 
committee today, but we think it's a very important issue, is 
to submit a letter to the record from the Natural Resources 
Defense Council to President Bush which discusses the fact that 
the Environmental Protection Agency has not changed the rules 
with respect to new source review applications for expansions 
at refineries or any other industrial expansions.
    They're the same rules and the same interpretation of the 
rules that we've seen for many, many years, going back to the 
first Bush administration. They ensure that as modernization 
occurs at industrial facilities, we get a delivery on clean air 
benefits as well. And we urge you not to consider making 
changes to the new source review program.
    With that, I will conclude, Mr. Chairman. Again, I hope you 
will be able to include that letter for the record.
    [The prepared statement of Mr. Early follows:]
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    Mr. Ose. Without objection, it will be included.
    Thank you, Mr. Early.
    Mr. Otter, for 5 minutes.
    Mr. Otter. Thank you very much, Mr. Chairman. Members of 
the panel, welcome, and I apologize for having to run in and 
out. But in the normal course of business, I find that's the 
way it is. You sort of do these things on the installment plan, 
and today is no exception.
    Interesting, your comments, Mr. Early, that the EPA hasn't 
changed the rules. I would take exception to the idea that not 
having changed the rules doesn't change the environment for 
competition. Because as we know the rules that were established 
had a progressive effort to clean things up, had a progressive 
effort to make things better.
    As we reached some of those plateaus of making things 
better, even though we didn't change the rules, substantial 
costs and investment in meeting some of the new standards that 
were established, that we didn't change the rules since 1990 
have taken effect. And, the result of that obviously is that 
we've got less production. Less production means there is an 
increasing demand and it's going to create scarcity.
    So, hasn't in fact the increasing standard that we put in 
place, starting in 1990, and we didn't want to create too much 
hardship, so we didn't want to do it overnight, and so it's 
actually taken about 11 years for our chickens to come home to 
roost here. Even though your statement, we didn't change the 
rules, in fact may be correct, but from where we started in 
1990 to where we are in the year 2001, haven't the standard 
considerably changed?
    Mr. Early. Well, let me respond in this way. First of all, 
the new source review program, if you're talking about the 
standards that apply to refinery expansions, for instance, 
first took place in 1977, and it was a pretty long time ago. 
All the changes that have been discussed in the industry, as 
was testified to by Mr. Cook, appear to be as a result of 
larger forces within the industry, and not environmental 
requirements that will apply.
    Obviously, some refineries have a harder time meeting 
environmental requirements than others. But in terms of the 
consolidation of the industry, that has been a process that's 
affected by far larger forces. I think I'm getting at what 
you're asking, but I'm not certain.
    Mr. Otter. That sort of is where I'm going to. But I was 
involved in an industry, and I saw a lot of industry change 
between 1964 and 1993, or 1994, when I retired from the 
company. Quite frankly, the thing that would happen in the 
french fry business was for the EPA or OSHA or some other 
Government regulatory agency to come into our industry and say, 
you can't do this any more and you can't do that any more and 
you must change this and you must change that. Because we were 
large enough, and we had a large enough critical mass at the 
time that we could go ahead and make the changes. We could 
retrofit our plants. The little guy couldn't.
    So, when we retrofitted, we were then obeying the law and 
they weren't obeying the law so, they had to go out of 
business. Somebody got their customers, and it was generally 
one of us.
    When I started in that business, there was, I'm guessing 
now, but well over 20. I know it was over 20, could have been 
40. Today there's about six. And most of the reason for that, 
make no mistake, it has nothing to do with the marketplace, 
other than the marketplace continued to grow. But what 
continued to grow even more dramatically was the Government 
constantly mucking about in that industry.
    Rather than just setting the standard and holding people 
responsible, they continued to try to control the industry to 
their own peril. French fries then were selling for 8 cents a 
pound, today they're about 58 cents a pound, a la gasoline. So, 
I guess maybe they're catching up, but I don't see the pickets 
outside McDonald's and Jack in the Box yet. But maybe we will, 
I'm not exactly sure.
    I think it's terribly naive to suggest that the constant 
drum beat of Government regulation and whether it started in 
1990, certainly this drum beat started maybe even before that, 
but I think it's terribly naive to suggest that the constant 
infusion of Government regulation in the marketplace hasn't 
caused a constant increase. And I'd be willing to listen to 
your response to that.
    Mr. Early. Well, I'm not really qualified to talk about all 
Government regulation. But again, going back to my initial 
remarks, Congress, at the urging of the American public, has 
been basically sending a message to the oil refining industry, 
we want you to deliver not only on gasoline and other fuels, 
but clean air as well. And there isn't any question that 
refiners who refuse to deliver on the clean air part of the 
requirement are going to be at a disadvantage and might have to 
go out of business.
    But as a general matter, all the data would indicate that 
the forces that have really caused this consolidation of the 
industry don't have to do with the air quality regulations and 
have everything to do with natural economic forces that benefit 
large gasoline producers over small gasoline producers, as a 
result of a wide variety of factors. Dr. Coursey talked about 
that.
    Mr. Otter. But you don't think that it is a factor that one 
person can afford to comply relatively easily and the other 
can't?
    Mr. Ose. If I may interject here, we're going to have a 
second round. Can you hold this line of thought?
    Mr. Otter. Yes, I will. But I would just conclude, Mr. 
Chairman, and say that whenever you're going to steal from 
Peter to pay Paul, you're always going to have Peter to 
support.
    Mr. Ose. Mr. Tierney, for 5 minutes.
    Mr. Tierney. Thank you.
    I think we can show a pretty good record for the drum beat 
of Federal regulation for clean air standards, and that's a 
drum beat that most people like to hear. Contrast that with the 
constant whining of the industry for wanting Government to get 
out of their affairs, yet they've got their hand out for some 
$15.6 billion of subsidies and tax credits and other things, 
and I think we'd take the drum beat any day over the whining.
    With respect to the settlements on those cases, you've got 
9 to 10 settlements, and you may want to comment on this, Mr. 
Early, but I think that from 22 years in litigation, if you're 
settling cases of that magnitude, you're pretty much admitting 
that you should have complied, and now you're bellying up to 
the table and paying with respect to the new source.
    Mr. Early. That's correct, and in the letter that I 
submitted for the record, it quotes from a portion of the brief 
submitted by the Bush administration Justice Department in 
litigation over the Tennessee Valley Authority, which 
acknowledges that the rules and the interpretation of the rules 
are the same today as they've been over more than 15 years. And 
these cases are meritorious cases, basically they're requiring 
those members of the industry to play by the rules and help 
deliver on clean air as well as product. And we think that we 
shouldn't be messing around with a program which actually has a 
record of success.
    Mr. Tierney. My latest recollection of that is there have 
been 10 settlements. Is that accurate in terms of your 
recollection?
    Mr. Early. I think that's my understanding, yes.
    Mr. Tierney. I don't have a question for you, Mr. 
Slaughter, but I do have some information for you, just to 
correct. I know you don't want to leave the misimpression that 
the last administration had a fully completed application for 
waiver in 1999. In fact, that California application for waiver 
was finalized in February 2000. So after about 9 months of 
review, it then was recommended for approval, and now this 
administration has turned that around. Apparently there's going 
to be an effort to try and win it through some sort of 
political manipulation.
    But I did, again, ask you, Mr. Early, this oil industry has 
experienced record profits and consumers are paying high 
prices. Between 1999 and 2000, profits from the top 10 
petroleum refining companies on average doubled. Profits from 
Valero Energy Services increased by 437 percent in the same 
period, profits from Phillips Petroleum increased by 127 
percent, and profits from Chevron increased by 110 percent. In 
addition, profits in the first quarter of 2001 averaged 81 
percent higher than they were in the first quarter of 2000.
    This is the same industry, as I mentioned earlier, that's 
going to get $15.6 billion in corporate welfare in the form of 
special tax breaks over the next 5 years. You think that 
perhaps we ought to watch this industry, make sure they're 
doing their fair amount of protecting the public health? And I 
would suspect to make sure that they understand that if they 
had to incur some cost of the new source review or whatever, it 
is a fair price for doing business, and for making the enormous 
profits that they're making and for the subsidies that they're 
getting?
    Mr. Early. The evidence would indicate that the new 
requirements that the industry is going to have to meet, and 
you saw Mr. Slaughter's chart, are affordable to the industry. 
They do make life a little more complicated for them, but you 
know, Exxon-Mobil made $5 billion in the first quarter of 2001, 
I think they can get over it. They clearly can afford it. The 
important thing is that we need the oil industry, as we need 
other stationary sources, to contribute to the effort to get us 
to healthy air, just as they contribute to the economy through 
providing the American public valuable products.
    And we think that the mix is not out of balance at this 
point, and would argue that weakening requirements for the 
industry are by no means in order.
    Mr. Tierney. Mr. Chairman, I would just end my comments 
here by saying, these are business decisions on the part of 
these refineries, and not any sort of problems with 
regulations. In fact, I quoted in my opening remarks one of the 
vice president of Valero Energy in San Antonio making that 
point. Regulations are merely a nuisance rather than a barrier 
to meeting the demand. A bigger headache for the industry is 
the fierce competition that keeps the profit margins thin.
    So I think the real issue here is, some of them decided to 
do boutiques because that narrows down their market, gives them 
a sort of a small monopoly and they can certainly capitalize on 
that, others, as we've seen in the Midwest, have curtailed 
production and withheld supply. The real issue here is, what do 
we do, other than give out more corporate welfare, what do we 
do with the policy issue to try to ensure that there's more 
refining capacity? That industry has made a decision on 
business premises that they don't want to increase refining 
capacity because they wouldn't make enough money for them. Not 
that they wouldn't make a profit, but they apparently wouldn't 
make enough of a profit.
    So I would hope that the real question in this hearing is, 
what do we do to get industry, not only to comply with the 
reasonable environmental standards, that certainly wouldn't cut 
into their profits in any appreciable sense, but how do we get 
them to build more refining capacity when they tell us, we're 
making a profit, but it just isn't enough, so we're not going 
to.
    Thank you.
    Mr. Ose. As always, the gentleman is right on the button 
with his time, and I appreciate it.
    Dr. Coursey, if I read your written testimony correctly, 
your essential point is that we need to move from a situation 
where we are today with a variety of different fuels to 
something more similar to a commodity market. I'm synthesizing 
or basically summarizing your point, but I believe it was that 
the simpler we make our fuel mix requirements, the more likely 
we are to have acceptable supply levels and price levels. Is 
that accurate?
    Dr. Coursey. Yes. I would agree with the remark earlier 
that consumers, based upon my 20 years of looking at them, are 
willing to pay 5 to 10 cents more per gallon, on average, to 
have these environmental benefits. There's a lot of evidence 
that I can prepare and submit if you'd like to see that.
    But what that ignores is what I was referring to in my 
opening remarks. The other part that consumers are playing is 
less well noted, and that is that the spikes are part of the 
regulatory type of problem. When you put this very, very 
confused situation up here, that's going to cause small shocks 
to the system to be amplified, particularly in places like 
we've talked about, the upper Midwest and California.
    Mr. Ose. I meant your points about the fungibility of 
production, that is, when a refinery goes off line in 
California, the consequence in, say, southeast Louisiana or 
whatever, for demand for substitute fuel and how it ripples 
through the entire economy were very well made. I was most 
appreciative of that.
    Dr. Coursey. I think what's interesting about this map, and 
we've all seen these maps that exaggerate the size of States 
depending upon a particular variable----
    Mr. Ose. But California remains the biggest and only State 
we're concerned about here, of course. [Laughter.]
    Dr. Coursey. I think another way of looking at this map up 
here would be to look at how far away from other competitive 
sources are these regions. If you do that, you're going to pull 
California way up the coast and make it an island with some 
home production capacity. We're going to pull Milwaukee, 
Chicago, northeast Indiana area off, put it up in Canada 
somewhere, and then ask, how can new sources get there under 
the current constraints of the system.
    Mr. Ose. Mr. Slaughter, in your testimony, you talk about 
the denial of California's oxygenate waiver. We've heard a lot 
of discussion up here today about how legally narrow the waiver 
ability is, and whether or not California qualifies. I find it 
interesting sitting here thinking about it, you've probably got 
members in your association on both sides of that issue, so I 
think you're probably pretty well suited to answer this 
question.
    Is the waiver narrow or does California qualify for a 
wavier?
    Mr. Slaughter. Well, let me answer the first question 
first. The waiver is narrow. It was designed to be narrow. When 
the Clean Air Act amendments of 1990 was passed, there was 
great concern about that 2 percent oxygenate requirement, 
because it was an intense political issue.
    There was great interest in designing that portion of the 
act very narrowly. But as Mr. Waxman has stated, there are 
grounds for waiving it.
    I don't know what more I can say about that. The grounds 
are narrow. It looked to me, I looked at EPA's decision, it 
looked to me to be a close decision. They said that some 
pollutants went up, some pollutants went down, they couldn't be 
quite sure about the overall effect, and so they decided not to 
grant the waiver.
    One of the difficulties, I will say, that they raised, one 
of the reasons they gave for not waiving was, that there's a 
question of what the VOC impact of ethanol will be. If the 
waiver isn't granted and the MTBE phase-out stands, there will 
be considerable use of ethanol in California, with a lot of 
potential for increased VOCs.
    It seems to me that this is kind of a circular matter, 
because there is evidence that if the current state of affairs 
in California stands, and ethanol is used, it basically will 
take a quarter of all the ethanol produced in the country to 
satisfy California's demand. I don't know how it's all going to 
get there. But there will be VOC impact from it. But that fact 
was not discussed.
    But again, this is a matter that's been pending before EPA 
for a long time. The Administrator had authority to grant it 
now, or before the beginning of this year, and it was not done.
    Mr. Ose. Let me just follow up on that. I'm a little bit 
confused on that. Apparently the application from California 
was received in the spring of 2000 for a wavier. I don't know 
how you act on something that is not complete. Was it complete? 
Was it incomplete? I don't quite understand.
    Mr. Slaughter, we're going to come back to my question, but 
my time's expired. Mr. Otter, for 5 minutes.
    Mr. Otter. Thank you very much, Mr. Chairman. I have just a 
couple that I'd like to follow up on. One of them is the 
waiver, because much has been made about it, because some 
people feel like we're just picking on them, we're just picking 
on California. And I say that with all due respect to my good 
friend, the chairman.
    Has anybody else, in your recollection, I couldn't get it 
out of the last panel, did Chicago ever ask for a waiver and 
they not get it?
    Mr. Slaughter. Well, there are different kinds of waivers, 
Mr. Otter. In the Midwestern situation last year, for instance, 
several people asked for waivers of the RFG program, because of 
the supply problems in the Midwest. They were not granted in 
the case, for instance, of Chicago and Milwaukee, but they were 
granted in the case of St. Louis.
    Mr. Otter. Mr. Gephardt's territory. I'm not suggesting 
anything.
    Mr. Slaughter. It was granted in the case of St. Louis. It 
was not exactly the same type of waiver, but it was a waiver 
that required serious consideration. Some were granted, some 
were not.
    Mr. Ose. Would the gentleman yield?
    Mr. Otter. Yes, I'll yield.
    Mr. Ose. You're saying there was a waiver granted in St. 
Louis on reformulated gasoline type II by the Clinton 
administration?
    Mr. Slaughter. That's correct.
    Mr. Early. If I might shed some light on that----
    Mr. Ose. Mr. Slaughter is speaking, Mr. Early. I appreciate 
the variance in the waivers. I'm just kind of curious, we had 
some rather serious allegations earlier for which there was no 
evidence, I don't think you're making any----
    Mr. Otter. No.
    Mr. Lieberman. It might be worth adding that on a related 
matter, some of the States and counties that have opted into 
the RFG program are now attempting to opt out. So they would 
like to accomplish what California is also trying to 
accomplish, and perhaps that's the reason to maybe amend the 
Clean Air Act, to allow that opt-out of the 2 percent oxygenate 
requirement for any State or locality that wants to continue 
with the RFG program, but not with that RFG 2 percent 
requirement.
    Mr. Early. Amazingly enough, the American Lung Association 
agrees with Mr. Lieberman on this question.
    But just to correct the record, or to clarify the record, 
St. Louis is a non-mandatory RFG area. They opted into the 
program. There is a provision in the Clean Air Act which 
specifically allows opt-in areas as opposed to mandatory areas, 
to ask for a waiver. It was on that basis that St. Louis 
obtained a waiver last summer. California is a mandatory area, 
and the statutory provisions are different for mandatory areas.
    Mr. Otter. Mr. Slaughter.
    Mr. Slaughter. Mr. Otter, I understand that EPA wrote the 
California Environmental Protection Agency in February 2000, 
that its application was complete. And that letter said that 
EPA would issue a decision on the waiver request in summer 
2000.
    Mr. Otter. Could I get a copy of that letter? Do you have a 
copy of that letter?
    Mr. Slaughter. I will see if we can supply one to you, sir.
    Mr. Otter. Mr. Chairman, I would like to make sure that the 
committee gets a copy of that letter forwarded to it, and also 
that it become part of this committee process.
    Mr. Ose. Without objection.
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    Mr. Otter. Mr. Slaughter, I would be interested in the 
industry's response to the earlier testimony, and I think you 
were here during the earlier testimony, about the EPA's 
estimate of what it would cost in order to retrofit the 
petroleum, or the refining industry, it was like $2 billion is 
what it would cost. I'm always a little nervous when I have a 
Government agency that estimates the cost for an industry. 
Would you agree to that $2 billion?
    Mr. Slaughter. Mr. Otter, I believe the figure was $2 
billion per year. We believe the cost of the diesel fuel 
regulation to be $8 billion over a 4-year period, so it seems 
relatively close. That's on top of the $8 billion that the 
gasoline sulfur reduction will cost the industry in the same 
period of time.
    I think one of the factors is that the refinery industry 
earnings are cyclical. Over the long period of time, the 
earnings on investment and refining, as opposed to the rest of 
the business, have averaged 4 to 5 percent. You can make 4 to 5 
percent by putting your money in a Treasury note with no risk. 
Obviously, refining is a difficult investment.
    Right now, refining is doing better than that. We may well 
be at the top of the cycle. There has been reference today to a 
number of incentives and tax breaks that the industry receives. 
I'm not aware of any of them that the refining industry 
receives. There may be other portions of the energy industry 
that do receive them.
    But essentially, refiners operate in a free market 
environment. One of the problems, sir, is that people want to 
basically maintain that these environmental initiatives have no 
cost, that they're free. When regulations are finalized, EPA 
press releases are coming out basically saying that it's the 
most significant event since the stone tablets came down from 
Sinai. But if you suggest that they have any impact on 
operating costs, or on the concentration within the industry, 
it's as if that's something that can't even be considered.
    I don't know what their impact is. But obviously something 
that significant that reduces pollution as much as they say is 
going to have an impact on cost. For some reason, people want 
to ignore that fact. And I really don't understand why.
    Mr. Otter. Thank you. Thank you, Mr. Chairman.
    Mr. Ose. Mr. Tierney, for 5 minutes.
    Mr. Tierney. Mr. Slaughter, some of those companies that 
are into refining, are they also into other products or aspects 
of the energy business?
    Mr. Slaughter. There are integrated companies, Mr. Tierney, 
then there are independent ones, smaller regional ones. It's a 
diverse industry, but there are fewer participants than there 
used to be.
    Mr. Tierney. How about Valero? Is that somebody that has 
refining as well as other aspects?
    Mr. Slaughter. No, Valero is an independent refiner with no 
production.
    Mr. Tierney. Sunoco?
    Mr. Slaughter. Sunoco has no production.
    Mr. Tierney. Can you give me the names of some, Chevron?
    Mr. Slaughter. Chevron has production, Exxon-Mobil has 
production, BP, Citgo.
    Mr. Tierney. Phillips Petroleum?
    Mr. Slaughter. Phillips, yes, has production. It's 
integrated.
    Mr. Tierney. So they're making 120 percent profits, and 5 
percent profits at the refining end, probably appreciably more 
profits in other aspects of their business.
    Mr. Slaughter. But they may not channel those profits back 
into the refining business, Mr. Tierney. They may put it in 
other pursuits, and----
    Mr. Tierney. No. But that's their decision, right?
    Mr. Slaughter. That's their decision. But we ought to try 
to make the refining industry attractive to investment, because 
it's important to the country.
    Mr. Tierney. Who's we on that?
    Mr. Slaughter. All of us. I think that should be public 
policy, to encourage investment in a key industry.
    Mr. Tierney. Why won't the market do that? You guys are big 
market fans. Why won't the market take care of that?
    Mr. Slaughter. Well, part of ``the market'' is basically 
the investment requirement on the industry, which is a function 
of what you're asking it to do environmentally. And the 
industry is never saying that we shouldn't make environmental 
improvements, we're saying that some of them can be done more 
efficiently. We're suggesting that people look at that. Do you 
think the current situation can't be improved?
    Mr. Tierney. Well, Mr. Early, let me get back to you, 
because I want to knock this out once and for all. Let's make 
it clear here, have you ever seen any evidence at all, any 
evidence at all, that the decisions of whether or not to 
increase refining capacity were based on environmental 
regulations as opposed to business decisions?
    Mr. Early. To my knowledge, I've seen no evidence of that 
nature.
    Mr. Tierney. Have you got any, Mr. Slaughter, that you want 
to put on the record here? Hard evidence, not conjecture or 
broad conclusionary statements, but just hard evidence to that 
effect?
    Mr. Slaughter. Well, there's plenty of evidence, I'd be 
glad to supply it for the record. Refining investment has not 
gone forward in many instances because of the return on the 
investment.
    Mr. Tierney. What's the nature of the evidence that you--
return on the investment or the regulations?
    Mr. Slaughter. What was the nature of Mr. Early's evidence 
that there wasn't any impact?
    Mr. Tierney. He either has some or he doesn't. I'm asking 
you, do you have some hard evidence? Are you going to produce 
for us hard evidence of the places that decided they weren't 
going to build refining capacity because of environmental 
regulations, as opposed to because they just didn't think they 
were getting enough of a profit margin generally?
    Mr. Slaughter. First of all, the investment requirement for 
environmental expenditures is part of the investment climate, 
and the return on investment, refiners will tell you that has 
been a factor in their decision to build or not build refining 
capacity, particularly in the United States. I'd be glad to 
supply some of that information for you.
    Mr. Tierney. Let me just say what was mentioned again in 
one of the earlier statements, there was a person who said it 
wasn't a factor. They said it was a minor nuisance, and that's 
what they say.
    Mr. Slaughter. He was speaking for one----
    Mr. Tierney. U.S. independent refiners say they are on pace 
to exceed last year's record profits, robust margins, and they 
go on to say that basically it's a nuisance, not a reason for 
why they're going to build or not build. The fact of the matter 
is, you've got part of the industry, it's not the refining part 
of the industry, it's other parts of it, that get $15.6 
billion. I guess you're saying that you hand it out again, and 
you're saying, well, in order to get more refineries, you've 
got to ante up on that, too. Is that how we make it attractive?
    Mr. Slaughter. We're simply suggesting that environmental 
requirements can be done more cost effectively than they have 
been, and that some of them are impediments going back over 
more than a decade and ought to be reconsidered.
    Mr. Lieberman. One thing that I might add to the record, 
the National Petroleum Council and Advisory Committee----
    Mr. Ose. Mr. Lieberman, I'm sorry, it's Mr. Tierney's time.
    Mr. Tierney. I wasn't asking you a question, sir, but I do 
have a question for you. Can you tell me which energy companies 
contribute to your organization?
    Mr. Lieberman. We get funding from, I believe, the American 
Petroleum Institute and some----
    Mr. Tierney. Mr. Slaughter's group?
    Mr. Lieberman. No.
    Mr. Tierney. Oh, he doesn't give you any. American 
Petroleum Institute and what?
    Mr. Lieberman. And some large companies. I don't know the 
exact ones. I believe we get money from Texaco.
    Mr. Tierney. Will you submit that for the record, the names 
of the energy companies that fund your organization and the 
extent to which they do that?
    Mr. Lieberman. OK.
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    Mr. Tierney. I yield back.
    Mr. Ose. Thank you, Mr. Tierney.
    We've just been called for votes, we've got a 15 minute 
vote and a 5 minute vote. We're going to go ahead and wrap.
    I have a couple of questions, if I might, I'll use my time 
accordingly. First of all, I want to thank Mr. Tierney for 
being here, Mr. Waxman and the others, as well as the members 
on my side. I want to go to the electricity issue in 
California. Mr. Slaughter, this is probably going to be a 
discussion you and I are going to have.
    It seems to me that if we, or if the State sets up a 
regulatory scheme for allocation of electricity that puts 
refineries at the back of the line, we're in effect 
substituting or actually manufacturing a gasoline shortage. 
Because, if I understand the industry practices, it takes from 
a week to 2 weeks once a line loses power to bring it back up. 
The consequence of that would be lost supply, resulting in 
significantly higher prices. Is that an accurate analysis?
    Mr. Slaughter. Yes, it is, Mr. Chairman. It's just not as 
simple as turning a switch on or off to start a refinery back. 
For instance, Mr. Cook mentioned the maintenance and repair 
cycle, and the problem that some refineries have in coming back 
from that in the spring season. You basically have to shut 
parts of your units or all of your units and then restart them 
again. It's not as easy as flicking a switch.
    So, there would be lost production and increased costs to 
your constituents.
    Mr. Ose. I continue to be focused on that, I have since 
early spring. You referenced this letter we sent, that Mr. 
Burton and Mr. Horn and I sent to the PUC, which by the way, we 
followed up with a letter on June 11th, excuse me, we sent a 
May 3rd letter to Governor Davis regarding this particular 
concern of ours, and we followed up with a June 11th letter to 
the person who runs the PUC in California. We're going to enter 
these into the record.
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    Mr. Ose. The consequence of shutting electricity off at the 
refineries in effect means that people aren't going to be able 
to fill their tanks in their cars. Since they can't put fuel in 
their cars, they won't be able to get to work or to school or 
the grocery store. The price of fuel is likely to rise, did Mr. 
Cook estimate 30 to 60 cents per gallon. And the net result of 
which is a terrible disruption to the sixth largest economy in 
the world.
    This isn't about Mr. Slaughter and his clients. This isn't 
about air quality. This is about making California work and 
giving us the tools to do so. I would just hate to see the 
California PUC compound its problems by frankly, making a 
foolish decision that takes away the ability of our people to 
utilize natural resources to facilitate their work.
    That doesn't call for a comment from you. Refineries may 
benefit, the fact of the matter is, I'm trying to get consumers 
gasoline at the lowest possible price and an adequate supply.
    I want to summarize a couple of thoughts here, then I want 
to ask each of you to be brief, give you each a minute. One of 
the things I always try and focus on is, what have we learned 
today. What we have leaned today is that the in next few years, 
we're going to spend $10 billion a year to keep refineries in 
compliance or in anticipation of new air quality requirements.
    We've learned that rolling blackouts in California, if 
refineries are not protected from denial of power, may cause an 
increase in the cost per gallon of fuel of 30 to 60 cents. 
We've learned that the Bush administration has followed the law 
written by Mr. Waxman in making the unfortunate decision to 
deny California's longstanding request for a waiver from the 
oxygenate requirement.
    We've learned that for the Bush administration to grant the 
waiver will require statutory changes that can only be put 
forward by Congress. And we've learned that--this is Dr. 
Coursey's comment--we've learned that to the extent we can 
narrow the numbers or types of fuels that we have in the 
marketplace, we can give refiners the opportunity to better 
align production with demand, and likely to end up with lower 
prices to the consumers.
    The essential question I have is, is there a process 
impediment that prevents us from saying, you have a safe harbor 
here on all of your air quality requirements, as long as you 
use one of these two or three fuels across the country? Is 
there a process impediment to us saying that from an outcome 
based procedure, not a process procedure, but from an outcome 
based procedure? If you produce fuel that meets this 
requirement, you are in compliance with the Clean Air Act? 
That's my basic question.
    Frankly, we've focused on the process in writing the law. I 
want to focus on the outcome. Can we give industry the freedom 
to help us get adequate supplies of fuel at affordable prices 
for our consumers?
    Dr. Coursey.
    Dr. Coursey. I'd like to make my summary remarks around the 
notion of profit, which has also taken a beating a lot today. 
Clearly, you want to identify the choke points, and clearly one 
of them, I elaborated on others in my written testimony, but 
one of them is the refining process.
    As an economist, I know that if this situation keeps up in 
the long run, somewhere or another, the forces of competition 
are going to move in to solve it. I think two basic scenarios 
you have right now to choose over are A, let's revisit the way 
we're regulating American refineries, see if there's a 
compromise that can be made, and see if the things that were 
done 10 years ago still hold water today. Let them expand, 
especially as everybody's talked about, when they're in a rare 
period where profits are high. And, I emphasize the fact that 
this is a rare event.
    The other option, I think, is that other people will take 
care of it for us, Europeans, South Americans, particularly the 
Venezuelans and Mexicans. And that's, I think, one of the broad 
brush things that you're going to have to confront. Which of 
those two scenarios do you want to see occur in the long run?
    Mr. Ose. Thank you, Dr. Coursey.
    Mr. Slaughter, briefly.
    Mr. Slaughter. Conceivably no, there's no impediment. But, 
probably you would have difficulties with the NSR, new source 
review, program. People who have come up with suggestions for 
streamlining, bubble concepts, things that you're suggesting, 
we think that people who are making cleaner fuel ought to at 
least be given expedited permitting, and shouldn't be subject 
to the labyrinth of the new source review system in every 
instance.
    But that's not today's case. So changes would have to be 
made, at least in the new source review program. One of the 
things I have to tell you is that the refining industry is 
concerned about convergence on one or two very expensive, 
difficult to make fuels. For instance, we can't afford to make 
CARB 3 throughout the country as the national fuel, you will 
decimate the American refining industry if you do it. It's 
expensive to make. So please keep that in mind.
    Mr. Ose. Thank you. Mr. Lieberman, we're going to save you 
for last.
    Mr. Early.
    Mr. Early. It's certainly possible to come up with a 
consensus on reducing the number of fuels. But the main message 
that the American Lung Association is trying to send today is 
that those fuels have to contribute to clean air rather than 
being neutral or detracting from clean air. In my testimony, I 
have a map showing all the areas that have high levels of air 
pollution that could benefit from a uniform clean fuel, and 
would obviously be adversely impacted from a uniform, dirty 
fuel. Our concern is that as we have these discussions, we end 
up with the wrong fuel.
    Mr. Ose. Mr. Lieberman.
    Mr. Lieberman. Just one obvious thing, just because 
gasoline gets more expensive, because of regulations, that 
doesn't automatically make it better for the environment. We 
see a number of these fuel specifications, and a large number 
of fuel specifications adding to the cost burden in a way that 
really doesn't provide additional environmental improvements.
    There are some things that can be done at the Federal 
level, just within the reformulated gasoline program alone. 
Right now RFG costs 21 cents a gallon more than conventional, 
the 4 to 8 cents that the EPA representative mentioned, that's 
just the estimated cost. But people pay at the pumps right now 
21 cents a gallon more.
    A lot of the problems that have been associated with 
reformulated gasoline, especially the new tougher reformulated 
gasoline standards that took effect starting last year, things 
like maybe easing the transition from the winter to the summer 
blend, which is I think a factor in why we see price spikes 
this time of year. There is some tinkering at the 
administrative level that can be done, and I would also urge 
the Congress to take a look at the Clean Air Act.
    If even Henry Waxman can say that there are problems with 
the 1990 amendments, the Clean Air Act, then there may be some 
problems worth looking at and some revisions to be made.
    Mr. Ose. I want to thank the witnesses for their 
participation today. I do want to just reiterate that I am 
terribly concerned about the denial of electricity to 
refineries in California and the consequences that clearly 
leads to in terms of consumers paying exorbitantly high prices. 
I think the State government needs to move expeditiously to 
grant their request that puts these refineries in a position 
where they can produce.
    Gentlemen, I do appreciate your joining us today, as well 
as the previous panel. We will take your comments and advice 
into consideration.
    We're going to leave the record open for 10 days for 
additional questions. If we send them to you, we hope you will 
be able to respond. Again, thank you.
    We're adjourned.
    [Whereupon, at 1:22 p.m., the subcommittee was adjourned, 
to reconvene at the call of the Chair.]
    [The prepared statement of Hon. Edolphus Towns and 
additional information submitted for the hearing record 
follow:]
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