[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
U.S. GOVERNMENT PRINTING OFFICE
77-984 WASHINGTON : 2002
____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; (202) 512-1800
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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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