[Senate Hearing 107-509]
[From the U.S. Government Publishing Office]
S. Hrg. 107-509
GAS PRICES: HOW ARE THEY REALLY SET?
=======================================================================
HEARINGS
before the
PERMANENT SUBCOMMITTEE OF INVESTIGATIONS
of the
COMMITTEE ON
GOVERNMENTAL AFFAIRS
UNITED STATES SENATE
ONE HUNDRED SEVENTH CONGRESS
SECOND SESSION
__________
APRIL 30 AND MAY 2, 2002
__________
Printed for the use of the Committee on Governmental Affairs
U.S. GOVERNMENT PRINTING OFFICE
80-298 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
Fax: (202) 512-2250 Mail: Stop SSOP, Washington, DC 20402-0001
COMMITTEE ON GOVERNMENTAL AFFAIRS
JOSEPH I. LIEBERMAN, Connecticut, Chairman
CARL LEVIN, Michigan FRED THOMPSON, Tennessee
DANIEL K. AKAKA, Hawaii TED STEVENS, Alaska
RICHARD J. DURBIN, Illinois SUSAN M. COLLINS, Maine
ROBERT G. TORRICELLI, New Jersey GEORGE V. VOINOVICH, Ohio
MAX CLELAND, Georgia THAD COCHRAN, Mississippi
THOMAS R. CARPER, Delaware ROBERT F. BENNETT, Utah
JEAN CARNAHAN, Missouri JIM BUNNING, Kentucky
MARK DAYTON, Minnesota PETER G. FITZGERALD, Illinois
Joyce A. Rechtschaffen, Staff Director and Counsel
Richard A. Hertling, Minority Staff Director
Darla D. Cassell, Chief Clerk
------
PERMANENT SUBCOMMITTEE ON INVESTIGATIONS
CARL LEVIN, Michigan, Chairman
DANIEL K. AKAKA, Hawaii, SUSAN M. COLLINS, Maine
RICHARD J. DURBIN, Illinois TED STEVENS, Alaska
ROBERT G. TORRICELLI, New Jersey GEORGE V. VOINOVICH, Ohio
MAX CLELAND, Georgia THAD COCHRAN, Mississippi
THOMAS R. CARPER, Delaware ROBERT F. BENNETT, Utah
JEAN CARNAHAN, Missouri JIM BUNNING, Kentucky
MARK DAYTON, Minnesota PETER G. FITZGERALD, Illinois
Elise J. Bean, Acting Staff Director and Chief Counsel
Dan M. Berkovitz, Counsel
Laura E. Stuber, Counsel
Kim Corthell, Minority Staff Director
Mary D. Robertson, Chief Clerk
C O N T E N T S
------
Opening statements:
Page
Senator Levin................................................ 1, 79
Senator Collins..............................................10, 81
Senator Akaka................................................ 12
Senator Lieberman............................................13, 82
Senator Carnahan............................................. 15
Senator Voinovich............................................ 16
Senator Bunning.............................................. 18
Prepared statement for May 2, 2002:
Senator Bunning.............................................. 129
WITNESSES
Tuesday, April 30, 2002
James S. Carter, Regional Director, U.S., ExxonMobil Fuels
Marketing Company, Fairfax, Virginia........................... 20
Gary Heminger, President, Marathon Ashland Petroleum, Findlay,
Ohio........................................................... 21
Ross J. Pillari, Group Vice President, U.S. Marketing, BP,
Warrenville, Illinois.......................................... 24
David C. Reeves, President, North America Products, ChevronTexaco
Corporation, San Ramon, California............................. 26
Rob Routs, President and Chief Executive Officer, Shell Oil
Products U.S., Houston, Texas.................................. 29
Thursday, May 2, 2002
Hon. Ron Wyden, a U.S. Senator from the State of Oregon.......... 85
Richard Blumenthal, Attorney General, State of Connecticut,
Hartford, Connecticut.......................................... 89
Jennifer M. Granholm, Attorney General, State of Michigan,
Lansing, Michigan.............................................. 91
Tom Greene, Senior Assistant Attorney General for Antitrust,
California Department of Justice, Sacramento, California....... 95
Peter Ashton, President, Innovation and Information Consultants,
Inc., Concord, Massachusetts................................... 108
Justine S. Hastings, Assistant Professor of Economics, Dartmouth
College, Hanover, New Hampshire................................ 112
R. Preston McAfee, Murray S. Johnson Professor of Economics,
University of Texas, Austin, Texas............................. 115
Philip K. Verleger, Jr., President, PK Verleger, LLC, Newport
Beach, California.............................................. 118
Alphabetical List of Witnesses
Ashton, Peter K.:
Testimony.................................................... 108
Prepared statement with attachments.......................... 204
Blumenthal, Richard:
Testimony.................................................... 89
Prepared statement........................................... 179
Carter, James S.:
Testimony.................................................... 20
Prepared statement with an attachment........................ 130
Granholm, Jennifer M.:
Testimony.................................................... 91
Prepared statement........................................... 187
Greene, Tom:
Testimony.................................................... 95
Prepared statement........................................... 198
Hastings, Justine S.:
Testimony.................................................... 112
Prepared statement with attachments.......................... 215
Heminger, Gary:
Testimony.................................................... 21
Prepared statement........................................... 146
McAfee, R. Preston:
Testimony.................................................... 115
Prepared statement........................................... 227
Pillari, Ross J.:
Testimony.................................................... 24
Prepared statement........................................... 157
Reeves, David C.:
Testimony.................................................... 26
Prepared statement........................................... 161
Routs, Rob:
Testimony.................................................... 29
Prepared statement........................................... 170
Verleger, Philip K., Jr.:
Testimony.................................................... 118
Prepared statement........................................... 239
Wyden, Hon. Ron:
Testimony.................................................... 85
Prepared statement, May 2, 2002.............................. 175
Exhibits
1. GChart: Average Midwestern Retail Gasoline Prices, January
1999-April 2002................................................ 250
2. GChart: Michigan Retail and Rack Prices, January-August 2001. 251
3. GChart: Average United States Retail Gasoline Prices, January
1995-April 2002................................................ 252
4. GRecent Mergers.............................................. 253
5. GChart: HHI Index for United States Gasoline Wholesale Market
in 1994........................................................ 254
6. GChart: HHI Index for United States Gasoline Wholesale Market
in 2000........................................................ 255
7. GChart: Market Share of Top 4 Firms in the Gasoline Wholesale
Market in 1994................................................. 256
8. GChart: Market Share of Top 4 Firms in the Gasoline Wholesale
Market in 2000................................................. 257
9. GChart: Illinois Retail Prices (Net Taxes), June 2001........ 258
10. GChart: Maine Retail Prices (Net Taxes) by Brand, January-
August 2001.................................................... 259
11. GChart: Michigan Retail, Rack, and Spot Market Prices,
January-August 2001............................................ 260
12. GChart: Michigan Retail Prices (Net Taxes) by Brand, April
2001........................................................... 261
13. GBP Amoco Midwest/Mid Continent Strategy..................... 262
14. GBP Amoco CEO Statements..................................... 266
15. GPowerine Memo............................................... 267
16. GARCO West Coast Market Fundamentals......................... 268
17. GARCO Memo on Role In Market................................. 269
18. G1992 Texaco Memo............................................ 271
19. G1993 Chevron Memo........................................... 272
20. G1996 Texaco Memo............................................ 273
21. G1997 Pricing Strategy Emails................................ 274
22. GChart: Wolverine Pipeline System Overview................... 276
23. GChart: Pipeline Transportation Charges in 1999.............. 277
24. GChart: Michigan Daily Retail Price Changes (Net Taxes) by
Brand, April 9-14, 2001........................................ 278
25. GChart: Petroleum Administration for Defense Districts (PADD) 279
26. GMarathon Oil Company, Summary: Short-Term Price Outlook..... 280
27. GLetter from Gary R. Heminger, President, Marathon Ashland
Petroleum, dated May 13, 2002, to the Permanent Subcommittee on
Investigations, clarifying April 30th testimony................ 281
28. GLetter from James S. Carter, Regional Director, U.S.,
ExxonMobil Fuels Marketing Company, dated May 17, 2002, to the
Permanent Subcommittee on Investigations, clarifying April 30th
testimony...................................................... 282
29. GLetter from Ross J. Pillari, President, BP America Inc.,
dated May 16, 2002, to the Permanent Subcommittee on
Investigations, clarifying April 30th testimony................ 285
30. GLetter from ChevronTexaco, dated May 14, 2002, to the
Permanent Subcommittee on Investigations, clarifying April 30th
testimony of David C. Reeves................................... 287
31. GMemorandum from James S. Carter, Regional Director U.S.,
ExxonMobil Fuels Marketing Company, dated May 2, 2002, to the
Permanent Subcommittee on Investigations, clarifying the record
on zone pricing................................................ 288
32. GSupplemental questions and answers for the record of Ross J.
Pillari, BP America, Inc....................................... 289
33. GSupplemental questions and answers for the record of Gary R.
Heminger, Marathon Ashland Petroleum........................... 294
34. GSupplemental questions and answers for the record of Rob J.
Routs, Shell Oil Products...................................... 299
35. GSupplemental questions and answers for the record of David
C. Reeves, ChevronTexaco Corporation........................... 302
36. GSupplemental questions and answers for the record of James
S. Carter, ExxonMobil Fuels Marketing Company.................. 311
37. GChevronTexaco's comments on the Permanent Subcommittee on
Investigations' Majority Staff Report entitled Gas Prices: How
Are They Really Set?........................................... 314
38. GAttachments to prepared statement of David C. Reeves,
President, North American Products, ChevronTexaco Corporation.. *
39. GReport of the Permanent Subcommittee on Investigations'
Majority Staff entitled, Gas Prices: How Are They Really Set?.. 322
* May be found in the files of the Subcommittee
GAS PRICES: HOW ARE THEY REALLY SET?
----------
TUESDAY, APRIL 30, 2002
U.S. Senate,
Permanent Subcommittee on Investigations,
of the Committee on Governmental Affairs,
Washington, DC.
The Committee met, pursuant to notice, at 9:34 a.m., in
room SH-216, Hart Senate Office Building, Hon. Carl Levin,
Chairman of the Subcommittee, presiding.
Present: Senators Levin, Lieberman, Akaka, Durbin,
Carnahan, Dayton, Collins, Stevens, Voinovich, and Bunning.
Staff Present: Linda J. Gustitus, Chief of Staff for
Senator Levin; Mary D. Robertson, Chief Clerk; Laura Stuber,
Counsel; Dan Berkovitz, Counsel; Edna Falk Curtin, Detailee/
General Accounting Office; Cliff Tomaszewski, Detailee/
Department of Energy; Kim Corthell, Minority Staff Director;
Eileen Fisher, Investigator to the Minority; David Mount,
Detailee/Secret Service; Joyce Rechtschaffen, Staff Director
and Counsel, Governmental Affairs Committee; and Laurie
Rubenstein (Senator Lieberman).
OPENING STATEMENT OF SENATOR LEVIN
Senator Levin. Good morning, everybody. Today the Permanent
Subcommittee on Investigations opens 2 days of hearings on how
gas prices are set in the United States. Gas is the lifeblood
of our economy, and through luck, pluck, hard work, and
ingenuity, we have been able to have the gasoline that we need
in this country.
Most of us take for granted the fact that in most urban
areas we can go a few blocks and find a gas station that has
gas, and with the 5 minutes it now takes to fill up our tanks,
we can be off and about our business in no time. It is easy to
lose sight of the fact that the gas that we put in our tanks is
the product of an incredibly complicated, worldwide network of
countries, companies, and individuals who, using advanced
technology and science, take crude oil from under the ground or
under the seas, then put it in tankers the size of two football
fields, ship it across oceans or through long pipelines to
ports in the United States, pipe it into refineries, heat it
under the most dangerous circumstances, and produce gasoline in
that process. That gas is then piped or barged across the
country to terminals where trucks unload and deliver it to
individual gas stations. It is an amazing process that goes on
day after day, hour after hour--24/7, as they say--to enable
America's ready access to the liquid that makes our lives run.
With the central role that gas plays in all of our lives,
it is no wonder that the public is highly attuned and sensitive
to its price. And when the price of gas jumps dramatically at
the pump without any apparent reason, and when all stations
regardless of brand appear to raise and lower their prices at
the same time and by the same amount, the public understandably
gets suspicious. That is what happened over 11 months ago when
we started this investigation. The Midwest had just experienced
for the second year in a row a price spike leading into the
Memorial Day holiday. Exhibit 1 \1\ over to my left shows those
gas spikes. Exhibit 11 \2\ shows the 2001 spike and shows that
it was not due to increases in the price of crude oil. Exhibit
11 over there is the one that is on the left, and Exhibit 1 is
the one that is on the right. Consumers were upset. They didn't
trust the answers from the oil companies that the price spikes
were just supply and demand at work.
---------------------------------------------------------------------------
\1\ See Exhibit No. 1 which appears in the Appendix on page 250.
\2\ See Exhibit No. 11 which appears in the Appendix on page 260.
---------------------------------------------------------------------------
Since the spikes in spring of 2000 and 2001, the Midwest
also witnessed a Labor Day price spike last year, and
nationwide, gas prices have increased in the last few months
faster than at any time in the past 50 years. Price spikes are
becoming a way of life in the United States and not without
serious consequences.
As we can see from the next exhibit, Exhibit 3,\3\ at the
same time approximately each year not only does the groundhog
look for his shadow but for rising gas prices as well. But
there are serious consequences to this new pattern. Sudden
increases in gasoline prices are costly to the consumer and
disrupt our economy, because the cost of transportation, which
is based on the cost of fuel, affects the cost of all of our
goods and services. Last year's increases in the price of
gasoline helped push the American economy into a recession, and
this year's increases are threatening the current recovery.
---------------------------------------------------------------------------
\3\ See Exhibit No. 3 which appears in the Appendix on page 252.
---------------------------------------------------------------------------
For every 1 cent per gallon increase in the price of gas,
the income to oil companies goes up $1 billion a year.
To try to get to the bottom of questions about gas prices,
I asked the staff of our Permanent Subcommittee to investigate
just how gas prices are set. After an extensive investigation,
the Majority staff of the Subcommittee issued a 400-page report
laying out their findings. The report looks in detail at three
regions of the country: The West Coast (California in
particular); the Midwest (Michigan, Ohio, and Illinois in
particular); and the East Coast (Maine and the Washington, DC,
area in particular).
The Majority staff found that the mergers in the oil
industry over the last few years and the closing of many
refineries over the past 20 years have increased the
concentration in the refining industry, that is, there are far
fewer refining companies. And as we can see from Exhibit 4,\4\
there have been many, many mergers that have been approved in
recent years. And just to list a few of them, in 1998 Marathon
and Ashland Oil merged their downstream assets; in 1998,
British Petroleum (BP), merged with Amoco; in 1999, Exxon
Corporation merged with Mobil Corporation; in 2000, BP Amoco
acquired ARCO. Many of these are mega-mergers.
---------------------------------------------------------------------------
\4\ See Exhibit No. 4 which appears in the Appendix on page 253.
---------------------------------------------------------------------------
Under one accepted test for concentration, 28 States would
now be considered tight oligopolies. Now, Exhibits 7 and 8 \5\
will demonstrate this. As you can see from these two exhibits,
which use the 4-firm concentration ratios--and that is an
accepted measurement of concentration of oil companies and
their control of the market in a particular area--there has
been a dramatic increase in the number of States with high
levels of concentration between 1994 and 2000. In fact, the
number of States which have a high level of concentration have
doubled from 14 to 28 during those 6 years.
---------------------------------------------------------------------------
\5\ See Exhibits No. 7 and 8 appear in the Appendix on pages 256
and 257.
---------------------------------------------------------------------------
The red areas show the levels at which the numbers reflect
a tight oligopoly, which is a 4-firm concentration ratio of
more than 60 percent of the market. And as you can see from
these charts, the District of Columbia is the most concentrated
market, followed by Hawaii, Alaska, and a number of States in
the Midwest, including my home State of Michigan.
As is true in this industry, as in any other industry, the
more competition, the better for the consumer; the less
competition, the worse for the consumer. But when an industry
is concentrated, individual companies can have a significant
effect on the price of a product, like gasoline, by the
decisions that they make on supply. And that is what is
happening today, in a number of markets, at least, in the
United States. The reality is that a tight balance between
demand and supply and low inventories are major contributors to
price spikes, because in that tenuous condition, with the
demand for gas being inelastic, that is, staying pretty
constant despite the price, two things happen: In normal times
when the market is concentrated, prices can be spiked before
holidays, for instance, with less fear of competition driving
it back down; and in times when there is a market disruption,
the market responds wildly to the slightest problem or
potential problem. We experienced major price spikes in the
Midwest in just 2 years for these reasons.
Internal documents from several oil companies confirm that
oil companies view it to be in their economic interest to keep
gas inventories low and supply tight. Several documents from
California show that refiners in California sought in the mid-
1990's to prevent imports into California in order to make the
market tight. One external Exxon memo advises the company to
``not do deals that supports other's importing barrels to the
West Coast.''
Similarly, an internal Mobil memo counsels against
importing gasoline, saying that it would depress profit
margins.
California refiners also sought to limit the overall
refinery capacity in that State.
One Mobil document talks about how to block the proposed
startup of the Powerine refinery. ``Needless to say, we would
all like to see Powerine stay down.'' It then proposes
accomplishing this by buying all its product and marketing it
themselves. ``Especially,'' this memo says, ``if they start to
market below our incremental cost of production.'' And then the
memo notes that buying Powerine's product the previous year had
worked and it was ``a major reason that the RGF premium''--the
reformulated gas premium--``. . . went from 1 cent per gallon
to 3 to 5 cents per gallon.''
A Texaco memo discusses how to use changes in fuel
specifications to reduce supplies. The memo says, ``Significant
events need to occur to assist in reducing supplies and/or
increasing the demand for gasoline.'' One example of a
significant event, the memo says, would be to seek the
elimination of the requirement for an oxygenate which, the memo
says, would make oxygenate usage go down, which would then have
to be replaced by gasoline and, therefore, reduce the supply of
gasoline. The memo says, ``Much effort is being exerted to see
that this happens in the Pacific Northwest.''
California refiners also exported gas, that is, shipped gas
out of California--to keep the market in that State tight.
An ARCO internal document discusses the need to export to
prevent supply from building up in the State. The memo
indicates that ARCO should export in order to intentionally
alter the supply/demand balance within California and not just
as a passive response to prevailing economic conditions. In
that same presentation, one strategy discussed is to ``exchange
and trade selectively to preserve market discipline.''
Another document in the Subcommittee files indicates that
one company would export gasoline out of California to the Gulf
Coast, even at a loss, with the rationale that such losses
``would be more than offset by an incremental improvement in
the market price of the much larger volumes of [gas] left
behind.''
Another company's plan indicates that exporting gasoline
can ``improve market conditions,'' and that the company was
willing to ``take [a] hit on price to firm up the market.''
An internal BP document from 1999 reflects similar thinking
with respect to the Midwest. The document reflects a discussion
among senior BP executives of possible strategies to increase
refining margins by reducing the supply of gasoline in the
Midwest. It discusses ``opportunities'' to increase Midwestern
gas prices by 1 to 3 cents per gallon by reducing the supply of
gasoline. Options included: Shutting down refining capacity;
convincing cities outside of the Midwest to require
reformulated gas that was not readily available in their areas,
thereby pulling supplies from the Midwest; exporting product to
Canada; lobbying for environmental regulations that would slow
down the movement of gasoline in pipelines; shipping products
other than gasoline in pipelines; and providing incentives to
others not to provide gasoline in Chicago.
BP officials told the Subcommittee staff that these ideas
were only part of a ``brainstorming'' session. Well, what they
were brainstorming about at a high level was manipulating
supply in ways that are deeply troubling, and we will go
through that document in some detail later this morning.
In another document from the Midwest, an internal Marathon
document, Marathon even called Hurricane Georges a ``helping
hand'' to oil producers because it ``caused some major refinery
closures, threatened offshore oil production and imports, and
generally lent some bullishness to the oil futures market.''
And that is the heart of the problem with respect to gas
prices in the United States, at least in certain regions of the
country. The refining market is so concentrated that oil
companies can act to limit supply and from time to time spike
prices to maximize profits, and because there is insufficient
competition, and other companies' supplies are also kept tight,
there is little to no challenge to that action. That is the
major problem, or at least one major problem, as I see it. The
ability to control supply allows oil companies to spike prices
in a concentrated market without adequate competition to
challenge them. And, also, the few companies that control the
market often keep their prices in sync with each other, going
up and down together in a fixed relationship to each other.
That is another part of the staff analysis. Most oil
companies and gas stations, at least in these concentrated
markets, try to keep their prices at a constant price
differential with respect to one or more competitors. For
example, one company decided that its station in Los Angeles
should price the lower of ARCO stations plus 6 cents per
gallon, or the average price of major branded stations in the
area. Another oil company followed a pricing policy in
Baltimore as follows, ``We will initiate upward, we will follow
Amoco, and Shell quickly.''
Different companies' prices in specific markets tend to go
up and down together, with companies tending to stake out a
position in each market vis-a-vis the competitors and holding
that position. Hence, it will often appear that, over time,
gasoline prices in that market move together in a ribbon-like
manner, so that as a brand moves up and down, it nevertheless
remains at a constant differential with respect to other
brands. Look at the retail pricing chart for Illinois for June
2001, and one from Maine for January to August 2002. Those are
Exhibits 9 and 10,\1\ and you see that ribbon-like move with
brands of gasoline staying in the same relationship to each
other price-wise as prices go up and down.
---------------------------------------------------------------------------
\1\ See Exhibits No. 9 and 10 appear in the Appendix on pages 258
and 259.
---------------------------------------------------------------------------
In Michigan and Ohio we found a clear leader-follower
pricing practice. Speedway, owned by Marathon, has a pricing
practice that bumps up the retail price of gasoline on
Wednesdays and Thursdays, and that is Exhibit 2.\2\ As the
price leader in Michigan, once Speedway goes up, the other
brands follow. And you can see those bumps on that chart on the
right. The typical pattern after that is for Speedway to come
down pretty quickly in price, while the other brands follow
them down more slowly. Other companies follow similar practices
in other areas.
---------------------------------------------------------------------------
\2\ See Exhibit No. 2 which appears in the Appendix on page 251.
---------------------------------------------------------------------------
The Majority staff report also addresses several other
important issues with respect to gasoline pricing, including
zone pricing, recommended retail prices, the advent of hyper-
markets, which are the discount superstores like Wal-Mart and
Cosco that now sell the lowest priced gasoline in the market,
and the impact of boutique fuels, which are fuels required for
specific locations to address particular environmental
situations.
This morning we are going to hear from top marketing
executives of five major oil companies: Marathon Ashland,
British Petroleum or BP, ExxonMobil, ChevronTexaco, and Shell
Oil.
And then on Thursday, we will hear from Senator Wyden, who
has been looking into the subject of gas prices for a long
time; from three Attorneys General (the Attorneys General from
California, Connecticut, and Michigan), all of whom have been
active in challenging gasoline price increases in their States;
and we will hear from a panel of economists and industry
experts on the issues that are raised in the report.
I want to just take a moment to say a special thanks to the
Majority staff who worked so hard on this report and put
together such a thorough product. I also want to express my
appreciation to Senator Collins and her staff for their support
and to Senator Durbin and his staff, who assisted in the
interviews.
When you think about the complexity of the issues and the
size of this industry and the task of reading through tens of
thousands of pages of material, a small team produced a well-
written report in less than a year, and we are grateful to them
for that effort.
[The prepared statement of Senator Levin follows:]
STATEMENT OF SENATOR CARL LEVIN
Good morning ladies and gentlemen. Today the Permanent Subcommittee
on Investigations opens two days of hearings on how gas prices are set
in the United States. Gas is the lifeblood of our economy, and through
luck, pluck, hard work and ingenuity we've been able to have the
gasoline we need in this country.
Most of us take for granted the fact that in most urban areas, we
can go a few blocks and find a gas station that has gas and with the
five minutes it now takes to fill up our tanks, we can be off and about
our business in no time. It's easy to lose sight of the fact that the
gas we put in our tanks is the product of an incredibly complicated,
worldwide network of countries, companies, and individuals who, using
advanced technology and science, take crude oil from under the ground
or under the seas, put it in tankers the size of two football fields,
ship it across the ocean to ports in New York, California, and the Gulf
Coast, pipe it into refineries, heat it under the most dangerous
circumstances and produce gas in that process. That gas is then piped
or barged across the country to terminals where trucks unload it and
deliver it to individual gas stations. It's an amazing process that
goes on day after day, hour after hour, 24-7 as they say, to enable
America's ready access to the liquid that makes our lives run.
With the central role that gas plays in all of our lives, it is no
wonder that the public is highly attuned and sensitive to its price.
And when the price of gas jumps dramatically at the pump without any
apparent reason, and when all stations regardless of brand appear to
raise and lower their prices at the same time and by the same amount,
the public gets suspicious. That's what happened over 11 months ago
when we started this investigation. The Midwest had just experienced
for the second year in a row a price spike leading into the Memorial
Day holiday. (Exhibits 1 and 2) Consumers were upset; they didn't trust
the answers from the oil companies that the price spikes were just
supply and demand at work.
In Michigan, the price of gas seemed to leap up overnight by the
same amount across all brands of gas at all stations. If there were
real competition in the industry, people asked, why would the prices of
different brands go up and down together and just before the holidays?
Since the spikes in spring of 2000 and 2001, the Midwest has also
witnessed a Labor Day price spike last year and nationwide, gas prices
have increased in the last few months faster than at any time in the
past 50 years. Price spikes are becoming a way of life in the United
States and not without serious consequences. (Exhibit 3.) At the same
time each year not only does the groundhog look for his shadow but for
rising gas prices as well. But there are serious consequences to this
new pattern. Sudden increases in gasoline prices are costly to the
consumer and disrupt our economy, because the cost of transportation,
which is based on the cost of fuel, affects the cost of all our goods
and services. Last year's increases in the price of gasoline helped
push the American economy into a recession, and this year's increases
are threatening the current recovery.
Increased gas prices also represent a significant shift in wealth.
For every 1 cent/gallon increase in the price of gas, the income to the
oil companies goes up $1 billion a year.
To try to get to the bottom of questions about gas prices, I asked
the staff of our Permanent Subcommittee to investigate just how gas
prices are set. After interviewing representatives from the oil
companies, distributors, service station owners and dealers, trade
association representatives, lawyers and economists; after analyzing
data from the Energy Information Administration and wholesale and
retail price data purchased from the Oil Price Information Service;
after reviewing over 250,000 documents subpoenaed from a number of
major oil companies and one pipeline company, the Majority Staff of the
Subcommittee issued a 400 page report yesterday laying out their
findings.
The report includes an analysis of the operations and structure of
the oil industry with particular focus on the downstream portion--that
is, from the refinery to the pump. Due to staff and time constraints,
the staff looked in detail at just three regions of the country: the
West Coast (California in particular); the Midwest (Michigan, Ohio and
Illinois, in particular); and the East Coast (Maine and the Washington,
D.C. area, in particular).
The Majority Staff's findings are contained in the Executive
Summary at the front of the report and provide the basis for these two
days of hearings. (For those unable to obtain a hard copy, the report
is available on the PSI website.) The Majority Staff found that the
mergers in the oil industry over the last few years and the closing of
many refineries over the past 20 years have increased the concentration
in the refining industry, that is there are fewer refining companies.
(Exhibit 4.) Under one test for concentration in at least 9 states the
refining and marketing industry is highly concentrated and in at least
28 states it is at least moderately concentrated. Under another test
for concentration, 28 states would be considered tight oligopolies. Let
me explain.
The Department of Justice and the Federal Trade Commission measure
market concentration in two ways. One is the Herfindahl-Hirshman Index
or HHI; the other is the 4-firm concentration ratio. The report
describes how each of these measures of concentration works. This
morning, we have charts showing these measures for all 50 states and
the District of Columbia. (Exhibits 5-8.) As you can see from these
charts, there's been a dramatic increase in the number of states with
moderate to high levels of concentration between 1994 and 2000. The red
areas show the levels at which the numbers reflect high concentration.
Under Department of Justice Guidelines, an HHI of between 1000 and 1800
is ``moderately concentrated,'' and an HHI over 1800 is considered to
be ``highly concentrated.'' A 4-firm concentration ratio of more than
60 percent shows a ``tight oligopoly.'' As you can see from these
charts, D.C. is the most concentrated market, followed by Hawaii,
Alaska, and a number of states in the Midwest; my home state of
Michigan is considered a ``tight oligopoly'' under the 4-firm ratio and
just below ``highly concentrated'' using the HHI index.
As is true in this industry as in any other, the more competition,
the better for the consumer; the less competition, the worse of the
consumer. But when an industry is concentrated, individual companies
can have a significant effect on the price of a product, like gasoline,
by the decisions they make on supply. That's what's happening today, in
a number of markets in the United States. The reality is, that a tight
balance between demand and supply and low inventories are major
contributors to price spikes, because in that tenuous condition, with
the demand for gas being inelastic, that is, staying pretty constant
despite the price, two things happen: 1) in normal times when the
market is concentrated, prices can be spiked before holidays, for
instance with less fear of competition driving it back down; 2) in
times when there is a market disruption, the market responds wildly to
the slightest problem or potential problem. We experienced major price
spikes in the Midwest in just two years for those reasons. Let's walk
through each of those prices spikes.
Low inventories have helped to create the conditions for price
spikes in the Midwest, which have occurred when demand has increased
(near driving holidays) and/or the supply of gasoline was disrupted.
Not unlike oil companies nationwide, oil companies in the Midwest have
adopted just-in-time inventory practices, resulting in crude oil and
product stocks that frequently are just above minimum operating levels.
And, in the spring of 2000 and 2001, the conversion from the production
and supply of winter-grade gasoline to summer-grade gasoline further
contributed to low inventories just prior to a seasonal increase in
demand. With the stage set by those two factors, the oil companies took
actions over these past two years in accordance with their profit
maximizing strategies that significantly contributed to the price
spikes when disruptions in supply occurred:
--During the spring of 2000, three major refiners determined it
wasn't in their economic self interest to produce any more RFG
[reformulated gas] than that required to meet the demands of their own
customers, and so in that year they produced 23% less RFG than in the
prior year, not enough to supply everyone who wanted to purchase it.
That contributed to the short supply in the spot market for RFG,
contributing to the price spike of spring 2000. While Marathon did have
surplus RFG, it withheld some of it from the market so as to not lower
prices.
--In the summer of 2001, major refiners deliberately reduced
gasoline production, even in the face of unusually high demand at the
end of the summer driving season, contributing significantly to the
price spike of 2001.
Nationwide, in the winter of 2001-2002, demand fell and inventories
rose following the tragic events of September 11, 2001. With reduced
demand and higher inventories, prices fell. As a result, refining
profits fell and refiners cut back on production in order to obtain
higher profits. Along with the increase in the price of crude oil and
market speculation, these reductions in production and the increase in
industry concentration significantly contributed to the run-up in price
in the late winter and continuing into the early spring of this year.
Internal documents from several oil companies confirm that the oil
companies view it to be in their economic interest to keep gas
inventories low and the supply and demand balance tight.
Several documents from California show that refiners in California
sought in the mid-90's to prevent imports into California in order to
make the market ``tight.''
One internal Exxon memo advises the company to ``not do
deals that supports other's importing barrels to the West Coast.''
Similarly, an internal Mobil memo counsels against
importing gasoline, saying it would depress margins.
California refiners also sought to limit the overall refinery
capacity in the state.
One Mobil document talks about how to block the proposed
startup of the Powerine refinery. ``Needless to say,'' the memo says,
``we would all like to see Powerine stay down.'' It then proposes
accomplishing this by buying all its product and marketing it
themselves. ``Especially,'' the memo says, ``if they start to market
below our incremental cost of production.'' The memo then notes that
buying Powerine's product the previous year, when it was below Mobil's
``incremental cost of production'' had worked and it was ``a major
reason that the RFG premium . . . went from 1 cent per gallon to 3-5
cents per gallon.''
A Texaco memo discusses how to use changes in fuel
specifications to reduce supplies. The memo says, ``Significant events
need to occur to assist in reducing supplies and/or increasing the
demand for gasoline.'' One example of a significant event, the memo
says would be to eliminate the requirement for an oxygenate which, the
memo says, would make oxygenate usage go down which reduces total
volume of gasoline supplies. The memo says, ``Much effort is being
exerted to see that this happens in the Pacific Northwest.''
California refiners also exported gas--that is, shipped gas out of
California--to keep the market in that state tight.
An ARCO internal document discusses the need to export to
prevent supply from building up in the state. The memo indicates that
ARCO should export in order to intentionally alter the supply/demand
balance within California and not just as a passive response to the
prevailing economic conditions. In that same presentation, one strategy
discussed is to ``exchange and trade selectively to preserve market
discipline.''
Another document in the Subcommittee files indicates that
one company would export gasoline out of California to the Gulf Coast,
even at a loss, with the rationale that such losses ``would be more
than offset by an incremental improvement in the market price of the
much larger volumes of [gas] left behind.''
Another company's plan indicates that exporting gasoline
can ``improve market conditions,'' and that the company was willing to
``take [a] hit on price to firm up market.''
An internal BP document from 1999 reflects similar thinking with
respect to the Midwest. The document reflects a discussion amongst
senior BP executives of possible strategies to increase refining
margins, and it mentions ``significant opportunities to influence the
crude supply/demand balance.'' It notes that these ``opportunities''
can increase Midwestern prices by 1 to 3 cents per gallon.'' The memo
discusses strategies to reduce the supply of gasoline in the Midwest.
It lists some possible options, including: shutting down refining
capacity, convincing cities to require reformulated gas that is not
readily available, exporting product to Canada, lobbying for
environmental regulations that would slow down the movement of gasoline
in pipelines, shipping products other than gasoline on pipelines that
can carry gasoline, and providing incentives to others not to provide
gasoline in Chicago. BP officials told the Subcommittee staff that
these ideas were only part of a ``brainstorming'' session and that none
of the options for reducing supply were adopted. We'll go through this
document in some detail later this morning. In another document from
the Midwest, an internal Marathon document, Marathon even called
Hurricane George a ``helping hand'' to oil producers because it
``caused some major refinery closures, threatened off-shore oil
production and imports, and generally lent some bullishness to the oil
futures market.''
And that is the heart of the problem with respect to gas prices in
the United States today--in certain regions of the country--the
refining market is so concentrated, that oil companies can act to limit
supply and from time to time spike prices to maximize profits, and
because there is insufficient competition, there is little-to-no
challenge to that action. That's the major problem as I see it. The
ability to control supply allows oil companies to spike prices in a
concentrated market without adequate competition to challenge them.
The Majority Staff made some other significant findings. Oil
companies do not set wholesale (rack) or retail prices based solely
upon the cost to manufacture and sell gasoline; rather wholesale (rack)
and retail prices are set on the basis of market conditions, including
the prices of competitors. Most oil companies and gasoline stations try
to keep their prices at a constant price differential with respect to
one or more competitors. For example one company decided that its
station in Los Angeles should price the lower of ARCO stations plus 6
cents per gallon, or the average price of major branded stations in the
area. Another oil company followed a pricing policy in Baltimore as
follows:
``We will initiate upward, we will follow Amoco, Shell quickly . .
. we will be slow to come down in a dropping market.''
Because many oil companies and gasoline retailers set their retail
price on the basis of the prices of their retail competitors, prices in
each specific market tend to go up and down together. And oil companies
tend to stake out a position in each market vis-a-vis the competitors
and hold that position. Hence, it will often appear that, over time,
gasoline prices in that market move together in a ``ribbon-like''
manner--so that as a brand moves up and down it nonetheless remains at
a constant differential with respect to the other brands. Look at this
retail pricing chart for Illinois for June 2001, and this one from
Maine for January-August 2001. (Exhibits 9 and 10.)
In Michigan and Ohio we found a clear leader-follower pricing
practice. Speedway, owned by Marathon, has a pricing practice that
bumps up the price of gasoline on Wednesdays or Thursdays. As the price
leader in Michigan, once Speedway goes up, the other brand follows. The
typical pattern after that is for Speedway to come down in price pretty
quickly, while the other brands follow them down more slowly. You can
see this very clearly in these charts from January to August 2001 and
April 2001. (Exhibits 11 and 12.)
Oil companies also use a system of what they call ``zone pricing''
in order to maximize the prices and revenues at each gas station. Since
under the antitrust law, they are prohibited from selling wholesale
product at a different price to similarly situated retailers, the oil
companies have developed a system for differentiating among retailers
in the same immediate area. In doing so, they can charge the retailers
different wholesale prices for their gasoline. The way they accomplish
this is by dividing a state or region into zones. A zone is supposed to
represent a particular market, and the stations in that zone are
supposed to be in competition with each other. The oil companies use a
highly sophisticated combination of factors to identify particular
zones. For example, if most people buy their gas on their way home from
work instead of on their way to work, a station on one side of a rush
hour street may be treated as in one zone and the same brand station on
the other side of the street in another zone. The oil company will then
charge those two gas stations different prices for their gasoline,
because the station on the side of the street with easy access for
evening rush hour traffic may be able to get a higher price for its gas
than the station on the other side of the street. That's the kind of
thinking that goes into the zone pricing system, and it allows the oil
companies to charge the highest possible amount for their gas in a
given area.
Another pricing practice the Majority Staff uncovered has to do
with how gas station owners set their retail prices. The Majority Staff
learned that for those stations that lease from a major oil company
(about one-fourth of the 117,000 branded stations) the oil company
actually recommends to the station dealer a retail price. Now by law,
the oil company is prohibited from telling a lessee dealer what it can
charge for gasoline, but that doesn't keep oil companies from
``recommending'' a price. And the Majority Staff was told by several
dealers that if they don't charge their retail customers the
recommended price, the next delivery of gas from the oil company will
reflect any increase instituted by the dealer. These dealers are saying
that if they decide to price their gas at $1.40/gallon when the oil
company recommends $1.35, the next delivery of gasoline to the station
(and deliveries are sometimes daily for busy stations) will have a 5
cent/gallon increase in the price to the retailer. If these allegations
are true, then the practical effect would be that the recommended price
is subtly or not so subtly being enforced.
The Majority Staff report also address several other important
issues with respect to gasoline pricing--including the advent of
hypermarkets, those are the discount super-stores like Wal-Mart and
Cosco that now sell the lowest priced gasoline in the market; and the
impact of boutique fuels, fuels required for specific locations to
address particular environmental situations. This morning we will hear
from the top marketing executives of five major oil companies: Marathon
Ashland, BP, ExxonMobil, ChevronTexaco, and Shell Oil.
On Thursday we will hear from Senator Wyden, who has also been
looking into the subject of gas prices; three Attorneys General, from
California, Connecticut and Michigan, all of whom have been active in
challenging gasolines price increases in their states; and we will hear
from a panel of economists and industry experts on the issues raised in
the report.
I want to take this opportunity to say a special thanks to the
Majority Staff who worked so hard on this report and put together such
a thorough product. The Subcommittee's thanks go to Dan Berkovitz, the
lead writer of the report; Laura Stuber, counsel to the Subcommittee
who oversaw the dozens of interviews with individual gas station owners
and operators and ably drafted portions of the report and oversaw its
development; Edna Curtin, a detailee from the General Accounting Office
who did a substantial portion of the price analysis and chart
development; Cliff Tomaszewski, a detailee from the Department of
Energy who provided background research on the oil industry and the
production and marketing of gasoline; Bob Roach, chief investigator who
was responsible for the discussion of the Wolverine Pipeline case; and
Mary Robertson, the Subcommittee's Chief Clerk who again, amazed us all
with her ability to pull together a complex report for production.
I also want to express my appreciation to Senator Collins and her
staff for their support and to Senator Durbin and his staff who
assisted in the interviews.
It has been a team effort, and when you think about the complexity
of the issues, the size of the industry, and the task of reading
through tens of thousands of pages of materials, it is highly
impressive that such a small team produced such a well-written report
in less than a year.
Senator Levin. Senator Collins.
OPENING STATEMENT OF SENATOR COLLINS
Senator Collins. Thank you, Mr. Chairman.
First, let me thank the Subcommittee Chairman, Senator
Levin, for convening these hearings to examine the pricing of
gasoline and the causes of price spikes. Oil and gasoline are
vital to virtually every aspect of our economy, which depends
on stable and reasonable energy prices to prosper.
Consumers are justifiably concerned and confused about the
high price of gasoline. From the first week to the last week of
March, for example, gasoline prices rose about 23 cents per
gallon nationwide. This increase is a record for a 4-week
period. This price jump is particularly noteworthy as it pre-
dates both the seasonal transition from winter to summer
gasoline that takes place beginning May 1, as well as the
beginning of the driving season that typically starts around
Memorial Day.
While price spikes have been most dramatic in the Midwest,
Maine and other regions of the country have not been immune to
price spikes and price volatility. In recent weeks, gas prices
in Maine have edged up sharply, with recent price increases
ranging from 8 to 20 cents in just 1 week's time.
Just as inexplicable are gasoline prices that are
significantly higher in one Maine town than in other towns
further from supply points.
High gasoline prices have a negative effect on the U.S.
economy overall, but particularly on low-income families and
small businesses.
Geographically, Maine is a large State, and many Mainers
have to commute long distances to get to work, to go to school,
and to go shopping. Gasoline prices affect all sectors of the
economy by raising the cost of transportation. I have met
frequently with truckers, for example, in my State who talk
about the impact of rising diesel prices on their ability to
earn a living. As our country struggles to strengthen the
economy, it is vital that high gasoline prices or price spikes
not derail these efforts.
The gasoline industry has changed dramatically over the
past 20 years. Perhaps the most significant change that has
occurred is the increased concentration in the industry that
the Chairman has mentioned, including such mergers as Marathon
and Ashland Oil; Exxon and Mobil; BP and Amoco, and then ARCO;
and Chevron and Texaco, to name just a few. The two largest
mergers, I would note, between Exxon and Mobil, and BP and
Amoco, were approved during the Clinton Administration, as was
the Marathon and Ashland Oil merger. Clearly these mergers have
had an impact on competition within the marketplace. This trend
has resulted in increasingly concentrated refining and
marketing industries, which can then result in higher prices
for consumers.
According to the 2002 annual report on competition in the
retail petroleum markets prepared by Maine's Attorney General,
Maine's gasoline markets are relatively concentrated, which
means that the level of competition within these markets is
generally low. Maine's more rural counties tend to be extremely
concentrated, meaning that there is even less competition.
Competition is more healthy in the more populous areas of my
State. Overall, however, the Attorney General's report
indicates that concentration has been inching up gradually over
the past few years, a troubling development.
Another change is the closure of more than half of the
refineries in the United States. Yet refining capacity has
remained nearly what it was before the refinery closures. This
is due to increased efficiencies and a very high rate of
capacity operation, about 96 percent. By contrast, the average
capacity utilization rate in other U.S. industries is 82
percent. This means that the 150 refineries still operating in
the United States are responsible for producing ever more
product as demand continues to grow. It also means that there
is no room for error, either through a refinery breakdown or a
demand miscalculation on the part of refiners.
Yet another significant development has been the
proliferation of gasoline blends. Prior to 1995, only
conventional gasoline was sold in the United States. Now there
are more than 16 different blends of gasoline due to various
Federal, State, and local fuel requirements. As a result, when
an area has a supply disruption due, for example, to a refinery
fire or a pipeline rupture, it is more difficult to meet the
demand with gasoline from another area, particularly if one of
those areas also requires a unique blend.
Many of Maine's gasoline distributors have told me that
they are very concerned about the impact of the proliferation
of gasoline blends and the difficulties this creates in getting
enough of the appropriate type for each market. Not only do the
number of blends make it harder to get each type of gasoline
for each market, but it also creates the need for additional
infrastructure. In particular, terminals need more tanks to
store each type of gasoline. These are other costs that are
undoubtedly passed on to the consumer in the form of higher
prices, and I want to explore with our witnesses the impact of
boutique fuels on prices.
In Maine, we have two types of gasoline. Conventional
gasoline is sold year round in much of the State. But during
the summer, in the southern counties, because of concerns over
water quality, we use a State-required blend that helps to
improve water quality, yet doesn't appear to result in as
severe groundwater pollution as the Federal reformulated fuel.
In Massachusetts, eastern New Hampshire, and Connecticut,
however, Federal RFG is sold, which makes a total of three
types of gasoline required in just one small corner of New
England.
Today we will hear testimony from representatives of
several of the largest oil companies. I look forward to
discussing with them the increased concentration in the
industry, which I view as a negative development, as well as to
hear their explanation of gasoline price spikes and the recent
price hikes that people in Maine have been experiencing, as
well as citizens elsewhere. I look forward to hearing what can
be done to avert price spikes that cost consumers millions of
dollars and threaten our economic recovery.
Senator Levin. Thank you, Senator Collins. We will use the
early-bird rule here. Senator Akaka.
OPENING STATEMENT OF SENATOR AKAKA
Senator Akaka. Thank you very much, Mr. Chairman. I want to
thank you for holding the first of 2 days of hearings on this
very important and timely matter.
The rising cost of gasoline across the United States is
alarming, and I applaud your efforts to uncover the reasons for
this trend so that we may devise a plan to protect American
consumers. I would like to take this opportunity to thank you
for this report and the good work by your staff.
High gasoline prices are not new to Hawaii. According to
the Subcommittee report, Midwestern gasoline prices spiked to
the highest in the Nation during the spring of 2000 and 2001.
During this time, prices in the Midwest eclipsed those in the
State of Hawaii to earn the dubious distinction of highest in
the Nation.
For more than 20 years, Hawaii has consistently had the
highest gasoline prices in the Nation. From 1995 through the
first half of 1998, gasoline prices in Hawaii averaged more
than 30 cents per gallon higher than the U.S. mainland prices.
We don't have price spikes in Hawaii. We have had one long
continuous spike.
On any day that you check www.gaspricewatch.com, you will
find a gas station in Hawaii at the top of the list. On Monday,
for example, the record for the highest price for regular
unleaded gas in the Nation was held by a station in Pukalani,
Hawaii, at $1.89 per gallon.
According to the Attorney General of Hawaii, higher prices
cannot be attributed to higher refining costs within the State
of Hawaii or higher transportation costs to the State. For
example, the price of gasoline in Hawaii has exceeded the cost
of buying refined gasoline in California and transporting it to
Hawaii by more than 20 cents per gallon. Moreover, the cost of
transporting crude oil to Hawaii or refining gasoline in Hawaii
is not higher than similar costs on the mainland. As such, the
State's higher retail prices may be the result of having a
highly concentrated market. Hawaii has only two refineries and
four firms selling wholesale gasoline. This leaves the State
with one of the highest concentration levels of refining and
gasoline supply in the Nation--a significant problem according
to your report, Mr. Chairman.
Once again, Hawaii has the highest gasoline prices in the
Nation. Just last week the American Automobile Association
reported that the national average price of regular unleaded
gasoline was $1.41 per gallon. At the same time the average
regular unleaded gas price in Hawaii was approximately $1.69
per gallon. California was second with an average of $1.66 per
gallon. Such high prices hurt the hard-working men and women in
Hawaii and in the rest of the country. As your report states,
this could push the American economy back into a recession.
Currently Hawaii State lawmakers are seeking information on
how gas prices are set as they look at ways to bring the
State's gas prices more in line with the national average. Over
the weekend a conference committee of the Hawaii State
legislature reached an agreement on a bill to regulate gas
prices in Hawaii. I understand that many other States are
concerned with this issue and may be looking at similar
proposals. I am hopeful that Chairman Levin's interest in
gasoline prices will spur continued attention to this issue,
specifically for States with higher prices such as Hawaii.
Because Hawaii has such consistently high gasoline prices, it
generally does not draw the attention that unusual price spikes
command.
I would like to know, and my constituents would like to
know, what happens at the pump. Why are some States always
faced with higher gasoline prices than others? I anticipate the
testimony we receive today and the information in your report,
Mr. Chairman, will aid in answering this critical question and
lead to lower prices for States like Hawaii.
Thank you very much, Mr. Chairman.
Senator Levin. Thank you, Senator Akaka. Senator Lieberman.
OPENING STATEMENT OF SENATOR LIEBERMAN
Senator Lieberman. Thanks very much, Senator Levin. I want
to commend you and your staff and Senator Collins and her staff
for working so hard on a matter of such critical importance to
the American economy and to millions of American consumers. You
have produced a very substantive, thoughtful and important
report, and as Chairman of the full Senate Governmental Affairs
Committee, may I say I am very proud of the quality and
constructiveness of this report.
When gasoline gets dramatically more expensive, as it seems
to do every spring, summer and other times of the year, all
Americans pay the price. The entire economy feels the pinch.
Just this spring, as the Permanent Subcommittee on
Investigation's Report points out, retail prices have increased
faster than at any time in the past 50 years. American
consumers obviously remain wary of future price hikes, puzzled
and angered by the forces that seem to make the price of gas as
volatile as gasoline is combustible. They are not alone. Even
those in government with a statutory responsibility to
understand the energy industry have been working hard to learn
precisely how gas prices are set. This Permanent Subcommittee
on Investigation's Report is a major contribution to that
effort, and it appropriately focuses our concentration on the
oil industry's growing concentration.
Over the past 20 years and particularly over the past 5
years, big oil companies have been merging, and these larger
and larger corporations have been squeezing small refineries
out of the market. They are also controlling more and more gas
stations, setting prices and carving out market share through
sole supplier agreements and zone pricing plans.
But the American consumer is often left at the short end of
the pump, at the mercy of wild price fluctuations and big price
spikes. That is made worse by the fact that while their own
pocketbooks are being pinched, consumers see the oil companies
making huge profits. As PSI's report points out, the increase
in gas prices from 1999 to 2000 had been matched only once in
history, and the year 2000 income for major energy companies
from refining and marketing was up 57 percent from 1999. In
other words, the hundreds of additional dollars paid by the
average consumer for gasoline resulted in unusually large
profits for the oil industry. Over the course of a year every
10-cent increase in the price of gasoline results in
approximately $10 billion in additional oil company revenues.
Now, a free market economy like ours is a wonderful thing,
but the price of that freedom, as we have learned from the
Enron debacle, is constant vigilance against market abuses. And
the question before us today is: Are the interests of consumers
being served by the increasing domination of the gasoline and
oil markets by fewer and fewer large companies? Each of the
mergers that has changed the landscape of the oil industry has
been approved by the Federal Trade Commission, but given the
effects of these mergers on the marketplace, it does seem to me
to be worth asking whether the Federal Trade Commission is
using all the right criteria for evaluating these mergers, and
whether its policy of ordering newly-merged companies to divest
their refineries is in fact good for the American consumer. The
net effect of those divestitures, as has been pointed out, has
been to reduce the responsiveness of the marketplace when
demand goes up and therefore increase the likelihood of price
spikes.
As William Baer, then Director of the FTC's Bureau of
Competition, said in 1999, ``Competition is critical to this
industry, and that concentration, as well as increases in
concentration, even to the levels that the antitrust agencies
call moderately concentrated, can have substantial adverse
effects on competition.'' The main point being that
concentration can have adverse effects, and from this report
certainly appears to have had such effects on competition.
Mr. Chairman, I want to conclude by pointing out how
critical an energy policy priority today's hearing should
underline, and that of course is energy diversification. The
tremendous volatility of gas prices is in part the result of
volatility of global politics and economics. We have had
turmoil in Venezuela, fourth largest provider of imported
American oil. We have had, obviously, a serious and ongoing
crisis in the Middle East. So that even in a maximally
competitive and healthy marketplace, these global changes would
make oil prices volatile, and therefore would put periodic
price pinches on American gasoline consumers. That calls on us
to have the foresight to diversify our energy supply to plan
new sources of energy, rather than continuing our long-term
reliance on oil so that the U.S. economy and policy is not at
the mercy of such fluctuations. The energy bill passed by the
Senate last week, in my opinion, offers us an opportunity to
start doing that.
But let me come back to the beginning, Mr. Chairman. I
thank you and your staff for an extraordinary piece of work
that is clearly in the public interest. Thank you very much.
Senator Levin. Thank you very much, Senator Lieberman.
Senator Carnahan.
OPENING STATEMENT BY SENATOR CARNAHAN
Senator Carnahan. Thank you, Mr. Chairman.
If you were to ask most Americans what the current price of
gasoline is, I am certain that they would be able to tell you.
They can probably even tell you what the price is at two
different stations in comparison. Americans pay attention to
gas prices. Why? Because travel, and thus fuel, impact
virtually every part of their lives, from driving to work, to
taking the kids to after-school activities, to whether or not
they can afford a family vacation. And the ripple effects of
gas price spikes extend to businesses as well. As gas prices
rise, costs to businesses also increase. And when the cost of
doing business is greater, someone has to pay.
Whether directly or indirectly, gas prices have a
tremendous impact on the American family's bottom line.
Consumers are the ones that bear the burden of spikes and
increases in gas prices. For those living on a fixed income,
like most seniors in Missouri, the price spikes have an even
greater negative effect. Last summer, for the second year in a
row, the Midwest experienced significant increases and
fluctuations in gas prices, and we want to know why.
So I applaud Senator Levin for initiating and overseeing
this investigation. When constituents ask why our gas prices
are increasing, they deserve an answer, and this report
provides that answer.
However, that answer is complex, and we find it is not just
one factor that is the cause, but rather, a set of market
trends that have combined to cause price spikes. Several of
these trends are troubling. First is the more frequent
fluctuation in gas prices. Oftentimes prices fluctuate more in
a month than they previously did in years. Second, there is the
refiners' ability and willingness to influence prices by
controlling supply. And third, the decrease in competition
brought on by mergers in oil companies and with it an increase
in prices.
The message of this report is unsettling. The situation is
worse than it has been in a long time, and there are no signs
that these trends that have caused volatility will end any time
soon. These are significant findings that we need to keep in
mind as we develop policies that impact the gasoline market. In
such a volatile and concentrated market, we must be vigilant on
behalf of consumers. And I hope that this Subcommittee will
continue monitoring this issue and help us to develop policies
that protect our economy, our businesses, and our consumers.
Thank you, Mr. Chairman.
Senator Levin. Thank you very much, Senator Carnahan.
Senator Voinovich.
OPENING STATEMENT OF SENATOR VOINOVICH
Senator Voinovich. Thank you, Mr. Chairman, for holding
this hearing.
The impact of high and unpredictable gasoline prices is a
problem that has plagued consumers in my home State of Ohio for
the past few years, and I would like to commend the Chairman
for the time that you and your staff have put in on this
important issue.
I would also like to welcome our witnesses, particularly
Gary Heminger, who is the President of Marathon Ashland Oil and
who has a large installation in the State of Ohio, and one of
our great corporate citizens; and Mr. Pillari, even though I am
very unhappy with BP moving their North American Headquarters
out of Cleveland, Ohio, to Chicago, you still have a large
presence in our State. I will never forget that while I was
Governor of Ohio, because of an enormous investment of money
made by BP, we brought down the emissions in the Toledo area
and helped us obtain our ambient air standards there which was
very, very helpful.
Two years ago the full Committee, at my request and several
other Senators, held a series of hearings looking into this
same issue: Gasoline price spikes. It is very interesting that
the players have changed but the companies are the same here
before us.
At that time, politicians, analysts, and business owners
were busy pointing to a whole host of reasons for the 2000
price hikes. Alleged price gouging and collusion among oil
companies was one thing. Lack of domestic production,
reformulated gasoline, economics and the law of supply and
demand; pipeline and other transportation problems; you name
it.
At the time the Federal Trade Commission also was asked to
investigate the Midwest gasoline price situation. I would like
to point out that that was the Federal Trade Commission that
was under the jurisdiction of President Clinton. I supported
the investigation, because I believed that my constituents had
the right to know why their gasoline prices were high and if
the actions by the oil companies were behind the high prices.
In March 2001 the FTC issued their report and found that there
was no evidence of collusion. The report did find that the high
gas prices were caused by a mixture of structural and operating
decisions with primary factors including refinery production
problems, low inventory levels, and pipeline breaks.
And, Senator Levin, you and I experienced them. We had a
break in the Wolverine pipeline coming down from Michigan and
then there was another one, the Explorer coming up from Texas,
that were both ruptured.
The FTC report also found that the damage was minimized
because the industry responded quickly with an increased supply
of gasoline to the Midwest. Unfortunately, similar price
increases were seen last year and we have seen similar gas
prices this year and will, I am sure, see even more of them
with what is going on in the Middle East and Persian Gulf.
Well, there have been signs that gasoline prices are
dropping. That is of little consolation to families in the
Midwest where prices are still high. I am concerned about that,
just like everyone else. I watch those gas station prices.
Most people who have been around, as long as I have been,
remember the Arab oil embargo of 1973, when costs went up, gas
shortages were everywhere, and people sat in long lines to get
gas. Some of the younger people in this country do not remember
it. I remember it. At that time the United States only relied
on 35 percent foreign oil to meet our domestic needs. Today our
reliance on foreign oil averages 58 percent. And when we had
the crisis a couple of years ago, it got up to over 60 percent.
The American people want to know why nothing has been done
in the last 29 years to reduce our dependence on foreign oil.
In my opinion, we botched one opportunity when we in the Senate
did not provide for exploratory drilling in ANWR. I have been
around this business over 35 years. All too often in
government, when a problem comes up, we have a tendency to
treat it as if it were a barking dog. Give it a bone, a little
attention and it stops barking, and when it stops barking,
ignore it until it starts barking again. That is what we have
done in this country in terms of the supply of gasoline.
Such neglectful treatment of such a vital component of our
Nation's economy is unconscionable. We lack an energy policy by
this country, and hopefully we are going to have one by the end
of this session.
With the Senate's passage last week of the energy bill, I
think we are one step closer to preventing these unpredictable
gas price spikes. However, in my opinion, there are still many
issues that must be addressed before we are going to be able to
have a reliable and predictable gasoline supply.
The report prepared by the Democratic staff of the
Subcommittee recognizes that the number of refineries in this
country went from a high of 324 in 1981 to 155 in 2001.
Additionally, I think it is important to remind my colleagues
that there have been no refineries constructed since 1976.
Additionally, it is extremely unlikely that a new refinery will
be built because of the difficulties with siting new
refineries, many of them environmental, and many of them have
to do with the rate of return on building a new refinery. I
would like to hear from the witnesses why we cannot get more
refineries built in the United States of America. In 1982 there
were over 300 refineries in this country; just over 68 percent
of their capacity was being utilized. Today our Nation's
refineries operate at near peak capacity. If a refinery has a
problem, you can almost see it immediately reflected in the
price of gasoline. While increased refining capacity has
increased by nearly 1 million barrels per day since 1986, that
still does not replace the 3 million barrels per day that was
lost in the closure of 120 refineries during the 1980's.
At the same time I am concerned about our Nation's
infrastructure for distributing gasoline. In 2000, distribution
problems were one of the major contributing factors to the
extreme price hikes experienced by my constituents. I already
mentioned the two pipelines. Until they were back operating at
full capacity, they significantly limited the amount of
gasoline that was being brought into Ohio, resulting in higher
prices. This situation is not unique. Nationwide our pipelines
are operating at capacity, and if a break or other problem is
experienced, then the gasoline being distributed to gas
stations will be limited. The best way to eliminate this
problem with our distribution system is to improve our
infrastructure. Only by expanding pipeline capacity can we
improve reliability and competition and lessen the risk of
unexpected price hikes.
Finally, I would like to point out that the report prepared
by the Subcommittee focuses only on the downstream industry,
leaving out one of the most variable factors in gasoline
pricing, the price of crude oil. According to the Energy
Information Administration, in March this year crude oil
accounted for 41 percent of the cost of gasoline. Over the last
4 years crude oil prices have varied dramatically--listen to
this--from $11 a barrel to $33 a barrel. It only makes sense
that if you have significant differences in crude oil prices,
then you will see price spike in gasoline.
I would like to thank the witnesses for being with us today
and I look forward to your testimony.
Senator Levin. Thank you very much, Senator Voinovich.
Senator Bunning.
OPENING STATEMENT OF SENATOR BUNNING
Senator Bunning. Thank you, Mr. Chairman.
Gasoline is what makes this country move. We rely on it to
get to work, pick up our kids from school, travel on business,
and deliver goods and services to companies and homes across
this country. Americans use 123 billion gallons of gasoline
each year. Did you hear me? 123 billion gallons. In the
Commonwealth of Kentucky we used about 2.1 billion gallons in
the year 2000. We are all concerned about fluctuations in
gasoline prices. It affects how much disposable income
Americans have left over at the end of the week. It determines
the health of our economy and the ability of businesses to
operate. I routinely hear from Kentuckians who are concerned
about gasoline prices, particularly after prices spiked last
year post September 11. Gas companies and gasoline stations
should be fair with their customers, and any activity like
price gouging or collusion should not be allowed.
There is probably no other commodity Americans regularly
purchase that fluctuates as much as gasoline. Refiners and
retail stores should be held to the highest standards. Recently
price fluctuations seem to have become wilder and lots of
people want to know what has been going on. If they are like me
the average consumer does not know why prices have been going
up and down, but they would like to know more. So this hearing
gives everyone a chance to explain things and gives us a chance
to look at the regulatory and delivery systems we have now. I
have heard reports that margins between supply and demand in
the gas market have become smaller in recent years, and so
mistakes in matching up the two can lead to price swings.
Some also complained about market concentration among
retail brands and how that affects price and availability. I do
not know if either of those claims are true, but I am
interested in hearing from those in the industry who have come
here today. Also as a part of any discussion, we also have to
make sure that the government role as regulators does not
contribute to the problem. In fact we need to know what we can
do in the opposite direction to encourage companies to make
investments in our Nation's infrastructure, including what
Senator Voinovich said, in new refineries that will help ease
this problem in the future. For example, I understand some
producers are having problems building a pipeline that could
move gas and help alleviate some of the gas price problems that
occurred last summer in the Midwest. The industry is trying to
build a new pipeline called the Cardinal that would run 150
miles through Ohio and West Virginia and would end up in
Kentucky. The Corps of Engineers is hassling this project, not
allowing it to be completed and making it very difficult to
complete. Red tape has slowed this process. We need to work
harder to construct a smarter more efficient regulatory
framework.
I appreciate the time our witnesses have taken to come and
testify. I look forward to hearing from them.
Thank you, Mr. Chairman.
Senator Levin. Thank you very much, Senator Bunning.
Let me also note the presence of Senator Wyden, who I
indicated will be testifying before us on Thursday. He has
joined our panel and he has been long involved in investigating
gas prices and trying to understand and transmit to the public
the reasons for the gas price spikes that we face.
Senator Levin. Let me now introduce our panel of witnesses
who are with us this morning. We are grateful for their
presence and appreciate their presence. They are all executives
from five of the top oil companies in the world. And we invited
these witnesses because they are in charge of U.S. operations
for each company, so that they have the expertise to answer
some of the questions that we will be asking. We have at the
witness table James Carter, who is the U.S. Regional Director
of ExxonMobil; Gary Heminger, President of Marathon Ashland
Petroleum; Ross Pillari, Group Vice President for U.S.
Marketing of BP; David Reeves, President of North American
Products for ChevronTexaco; and finally, Rob Routs, President
and CEO of Shell Oil.
And we look forward to hearing your views, and pursuant to
Rule VI, all witnesses who testify before this Subcommittee are
required to be sworn, and I would ask you to please stand and
to raise your right hand.
Do you swear that the testimony that you will give before
this Subcommittee this morning will be the truth, the whole
truth, and nothing but the truth, so help you, God?
WITNESSES: I do.
Senator Levin. Thank you. We will be using a timing system
today, and approximately 1 minute before the red light comes
on, you will see lights change from green to yellow, giving you
an opportunity to conclude your remarks. All your testimony
will be printed in the record as written. We ask that you limit
your oral testimony to no more than 10 minutes. We will have a
lunch break approximately at 12:30.
Mr. Carter, please proceed.
TESTIMONY OF JAMES S. CARTER,\1\ REGIONAL DIRECTOR, U.S.,
EXXONMOBIL FUELS MARKETING COMPANY, FAIRFAX, VIRGINIA
Mr. Carter. Thank you, Mr. Chairman. I am Jim Carter,
Regional Director, U.S., ExxonMobil Fuels Marketing Company. I
appreciate this opportunity to discuss the causes for price
volatility in the gasoline marketplace and our recommendations
to help deal with these fluctuations.
---------------------------------------------------------------------------
\1\ The prepared statement of Mr. Carter with an attachment appear
in the Appendix on page 130.
---------------------------------------------------------------------------
ExxonMobil markets fuel products in 47 States and the
District of Columbia. Our goal is to provide reliable supplies
to our customers at competitive prices while respecting the
environment and protecting the safety of the communities we
serve. In the interest of time, I will summarize my remarks and
ask that my written testimony be entered in the record.
Senator Levin. It will be. Thank you.
Mr. Carter. Our company understands the public sensitivity
to price swings and the impact of fluctuating prices on
consumers' budgets. The market for gasoline is one of the most
visible of all consumer goods. Customers see our prices every
day, as some of you have mentioned, and readily know when they
are rising and falling. In fact, customers often contact us
when they are rising.
I aim to leave you today with the following messages:
Gasoline prices reflect a fiercely competitive market operating
with high transparency and a tight supply/demand balance. The
market efficiently sets gasoline prices that reflect supply and
demand balances, and consumers benefit in the long term when
the free market is allowed to work. U.S. refiners and gasoline
marketers compete vigorously, as evidenced by low margins and
returns. Over the last 20 years, combined refining and
marketing returns on capital have averaged 5 percent. New
players have recently entered both of these businesses.
Marketing has evolved over the past several decades from a
focus on automotive needs such as service and gasoline to now
service and convenience. The market today includes not only so-
called major brands such as Exxon and Mobil but also
convenience store chains, supermarkets and discount retailers
or hyper-markets. The traditional major suppliers combined have
45 percent of the gasoline retail market today. Over the next 3
to 5 years the hypermarket share is projected to grow from 3 to
4 percent today to almost 16 percent, which is higher than
ExxonMobil's current market share.
With more choices than ever before, gasoline consumers are
clearly benefited by this increased competition. Both gasoline
margins and retail prices have declined over time. After
adjusting for inflation, average retail gasoline prices have
exhibited a general downward trend during the past 80 years. Of
course, there has been some interim fluctuation based on true
oil prices.
Measured in 1999 dollars, gasoline prices have declined
from around $2.50 in 1920 to about $1.50 in 2000, even as taxes
have increased. Today taxes make up 30 percent of the retail
price.
There are three main causes for gasoline price volatility:
Changes in crude oil prices, market transparency, and the
proliferation of fuel specifications. Crude oil prices
currently comprise about 40 percent of the retail gasoline
price. Since late January crude oil prices have increased by
over $7 a barrel, accounting for 15 to 20 cents of the total
gasoline price increase of roughly 30 cents per gallon.
Instant availability of global news has made markets highly
transparent. Prices in commodity futures markets respond
quickly to world events. High transparency makes markets more
efficient, but it can also increase volatility.
Today's many boutique gasoline specifications place
significant demands on the refining industry. Summer grades are
more difficult and expensive to make because they require
additional processing to meet environmental standards. This
reduces refining capacity in the summer when demand is the
highest. A disruption at a single refinery can quickly upset
the balance. Boutique gasolines also present logistics
challenges. They limit distribution system flexibility and
reduce interchangeability of supply among terminals.
Industry consolidation, which the Subcommittee has raised
as an issue, based on refining concentration analysis by State,
has not contributed to increased price volatility. Refining
concentration should be analyzed regionally, as most States are
not self-contained refining markets. Even with recent mergers,
there are still a large number of independent refiners and
marketers.
To minimize the effects of market disruptions and increase
industry capacity we recommend three changes. First, reduce the
number of boutique gasolines. That will increase our
flexibility in refining and distribution. Second, appropriately
sequence future changes in product specifications to eliminate
overlap and bunching of requirements, which will help ensure
that necessary investments can be completed without affecting
supply stability. Finally, ensure appropriate interpretation
and enforcement of regulations that affect capacity and supply.
I would be happy to address your questions that you might
have. However, I hope that you will understand that due to the
competitive concerns, it would not be appropriate for us to
discuss company sensitive data. I'd prefer to address that in
another setting.
Thank you for the opportunity to comment.
Senator Levin. Thank you very much, Mr. Carter, and we in
our exhibits have also tried to protect those proprietary
matters that would cause disclosure of information which would
not be appropriate to competitors, and we have made that effort
as well.
Mr. Heminger.
TESTIMONY OF GARY HEMINGER,\1\ PRESIDENT, MARATHON ASHLAND
PETROLEUM, FINDLAY, OHIO
Mr. Heminger. Thank you, Mr. Chairman, and Members of the
Subcommittee. I thank you for allowing me the opportunity to
meet with you today.
---------------------------------------------------------------------------
\1\ The prepared statement of Mr. Heminger with attachments appear
in the Appendix on page 146.
---------------------------------------------------------------------------
I am Gary Heminger, President of Marathon Ashland
Petroleum. Mr. Chairman, I, too, have a written report for the
record.
Senator Levin. Thank you.
Mr. Heminger. We are a Midwest company headquartered in
Findlay, Ohio. We have major facilities and a number of
employees in several of the States of the Members, including
2,000 employees in Illinois, 2,500 in Indiana, 3,200 in
Kentucky, 3,200 in Michigan, and 8,000 in Ohio.
Unlike many refiners we consistently supply all segments of
the gasoline market including independent distributors and
retailers. In fact, these customers represent our largest
single customer market.
We appreciate the Subcommittee's interest in this very
important topic and agree with a number of findings in the
just-released report of the Subcommittee staff, including No.
1, the finding that our new Cardinal and Centennial Pipeline
projects should make a positive difference to the Midwest
consumer. We obviously agree. No. 2, the finding that the
mandated winter to summer fuel changeover reduces inventories
just before the warm weather driving season, that has a price
effect. And No. 3, the finding that our company made and sold
33 percent more reformulated gasoline in 2000, a period when
many other refiners had cut back their production.
A central question in this hearing is whether my company
deliberately withheld reformulated gasoline from the market in
the spring of 2000 to boost prices. The answer is an emphatic
no. The fact is that Marathon Ashland Petroleum produced 33
percent more reformulated gasoline than the year before and we
sold every drop. Let me repeat that. We produced 33 percent
more and sold every drop. Any assertion to the contrary is just
plain wrong.
Our pricing procedures also follow sound business models.
We consider our cost of supply, the amount of supply, the
anticipated demand and a range of market indicators. Fuel
markets everywhere follow the price of crude oil. However,
individual markets have their own unique sensitivities. In the
Midwest, for example, consumers use 25 percent more fuel than
the Midwest refineries produce. The balance is shipped to the
region by pipeline or barge usually from the Gulf Coast. Any
disruption in transportation service has the potential to
produce price volatility. We understand that the ups and downs
of gasoline price upset consumers. Despite volatility, the
Lundberg survey found that motorists in the Midwest actually
paid 1.6 cents per gallon less than the U.S. average from 1998
to 2001. In fact, adjusted for inflation gasoline now sells at
close to an all-time low. This is true for very few other
products. But then few markets are as uniquely competitive as
the one that brings America's motorists to approximately
180,000 retail gasoline outlets, a market that is growing even
more competitive with the emergence of hypermarket gasoline
retailers.
I believe that few companies have been as responsive and
customer focused as Marathon Ashland. I am extremely proud of
the people and how they responded during the periods of supply
imbalance in 2000 and 2001. During those years we increased our
refining throughput, testing to the design limits, our plants
already running at the high end of historic norms. When a major
pipeline failure took about 400 million gallons out of the
market, we ran additional transport trucks 24 hours a day, 7
days a week to supply our customers as best we could. We flew
in additional drivers to fill the greatly expanded route
schedules and driving times. We also took the highly unusual
step of shipping gasoline from far away as Newfoundland. We
increased our sales. In fact we sold more product than we
produced. In 2000, for example, we sold approximately 2 billion
gallons more gasoline than our plants refined, an outcome
possible only because we dedicated our logistics resources to
bringing fuel from where it was made to where it was needed. We
took extraordinary steps to keep our customers supplied.
One reason the supply disruption of 2000 and 2001 produced
such dramatic price effects is that the Nation's refining and
delivery systems are severely constrained, particularly during
periods of peak demand. Understanding this context is important
to appreciating why prices may spike when a refinery goes down
or a pipeline connection to the Gulf Coast is interrupted. It
is estimated that the Midwest has a refined product shortage of
about 42 million gallons a day, and this puts a great burden on
our ability to move fuel from where it is made to where it is
needed. Yet our distribution is highly constrained.
During periods of peak demand pipelines can't grant
suppliers all the shipping capacity they need. If there is an
outage for a reason, there is very little if any makeup
capacity. At Marathon Ashland we're trying to address these
issues. On the production side we have a new coker at our
Garyville, Louisiana, refinery that produces enough gasoline
for about 60,000 cars a day with no additional crude oil
throughput. A major capital investment project is now under way
at our Catlettsburg, Kentucky, refinery in addition to numerous
smaller projects completed or under way. We are constantly
looking at cost effective ways to improve our refineries to
increase production, reduce emissions, and improve efficiency.
We're also working to address the delivery issue. Earlier
this month the Marathon Ashland joint venture began operation
on Centennial Pipeline, a new refined products pipeline that
connects the Midwest with the Gulf Coast. We also plan to build
the Cardinal Products Pipeline to link one of the Midwest
fastest-growing markets, Columbus, Ohio, with the Ohio River
and our Catlettsburg, Kentucky, refinery. These projects are
expensive. In fact, just since its inception in 1998 Marathon
Ashland has invested a total of more than $2.5 billion in
refining, marketing and transportation. We plan to continue to
invest heavily to meet clean fuel regulations and the growing
needs of our customers.
Three of our Midwest refineries, St. Paul Park, Minnesota;
Canton, Ohio; and Detroit, Michigan, are very small. They lack
either the inherent efficiencies of larger facilities or the
location advantage of Gulf Coast refineries. Every refinery in
this size or class is vulnerable. Were it not for the
efficiencies realized from the combination of the downstream
assets of Marathon Oil and Ashland, Incorporated, it is
questionable whether either company would have been able to
survive as an independent refining and marketing company.
Marathon Ashland and its employees are committed to help
the Midwest growing energy needs. These government measures
would help: Regulatory certainty, appropriate rule phase-in,
policies that encourage investment in the industry, and
expedited permitting. The Department of Energy indicates
petroleum hydrocarbons are likely to be the predominant source
of transportation fuel in America for at least the next 20
years. Government and industry need to work together to help
assure supply reliability and affordability for America's fuel
customers.
I look forward to making the effort a productive and long-
lasting one. And I appreciate the opportunity to appear before
this Subcommittee. Thank you, Mr. Chairman.
Senator Levin. Mr. Heminger, thank you very much. Mr.
Pillari.
TESTIMONY OF ROSS J. PILLARI,\1\ GROUP VICE PRESIDENT, U.S.
MARKETING FOR BP, WARRENVILLE, ILLINOIS
Mr. Pillari. Thank you, Mr. Chairman. Good morning. My name
is Ross Pillari and I am a Group Vice President of Marketing
for BP. BP is a supplier of fuels for transport and power in
the United States under the BP, Amoco, and Arco brands. I, too,
have submitted a written report for the record, Mr. Chairman.
---------------------------------------------------------------------------
\1\ The prepared statement of Mr. Pillari appears in the Appendix
on page 157.
---------------------------------------------------------------------------
Senator Levin. Thank you.
Mr. Pillari. I am pleased to appear here this morning to
speak on behalf of my company and address the issues of
gasoline price volatility. It is a subject that attracts the
attention of many interested parties, but most importantly is
on the minds of our customers as they make their buying
decisions.
The price of gasoline is also a business issue for the
thousands of gasoline dealers, distributors, refiners, and
energy companies who invest their personal and corporate funds
in this volatile and intensely competitive business. As each of
these businesses works to manage within this complex market
volatility, they are faced with trying to explain increasing
gasoline prices such as we have seen in the last 60 days.
However, when gasoline prices are low, as they were in January,
in some markets reaching as low as $1.05 a gallon, there are
generally few questions, and little understanding that this
effect is also a function of volatility. Yet it is important to
note that in this period and in similar periods of volatility,
this country has, on average, maintained the most reliable
supply and the most efficient distribution system at the lowest
prices in the world. This is an important fact because it
demonstrates our ability to dampen at least some of the effects
of volatility.
In the long run gasoline prices are directly related to
crude oil prices. Over 90 percent of the change in gasoline
prices is directly related to changes in the price of crude. In
just the past 24 months crude prices have bounced from lows of
around $10 per barrel to highs of over $28 per barrel, as have
already been mentioned. And gasoline prices have moved in
tandem. The increased gasoline price volatility over the last
18 months is consistent with the volatility in the price of
crude oil. Crude oil prices react to world events. Crude oil
prices react to world economic demand. The market will
naturally adapt to the ebbs and flows of this demand, resulting
in normal market-based volatility. As crude demand increase,
crude supply has historically increased to meet it. We have
seen additional resources brought online in the Gulf of Mexico
and other locations around the world. In just one of these
areas, the Gulf of Mexico, my company is spending billions of
dollars to find these new resources. These investments for
additional supplies are based on an assumed long-term price for
crude oil. But this is not likely to be a static price. It is
more likely to be a volatile price based on the many factors I
have already mentioned. This same volatility will naturally
flow through and have an effect on the gasoline product
markets.
However, the cost of crude oil is just one of the factors
that influences gasoline price volatility. As we have seen in
the past, supply disruptions from unexpected and in some cases
catastrophic refinery problems, pipeline outages, and import
patterns will also cause volatility in our gasoline markets.
Volatility tends to rectify itself with the natural actions
of the marketplace. Changes in gasoline price affects supply so
that the market reaches the equilibrium price where supply and
demand is in balance. During this balancing process, the market
experiences price volatility and initiates the market-based
actions that will attract the very supply that will dampen this
affect.
Nowhere was this more in evidence than in the actions taken
by our company to supply gasoline to the Midwest and the West
Coast during supply disruptions of the past two summers. BP
reacted to these market conditions by taking a number of
actions including blending chemical feedstocks into the
gasoline pool to maximize volumes, moving barrels from our
Toledo refinery into Detroit to free up Chicago-based refinery
barrels for sale or supply in that market, transporting
gasoline from European refineries to the Midwest, moving
gasoline components from our Kwinana, Australia, refinery to
the West Coast, and delivering additional volumes into Chicago
via Explorer Pipeline when space was available.
As a result of these efforts, BP was able to make more of
its gasoline available to the Midwest and West Coast, and also
to dampen the price effect of the disruptions, but not without
temporary price volatility as the market corrected itself. At
the street level the U.S. gasoline market has gone through a
dramatic change over the last 10 years, primarily driven by
consumer demands for quick service, convenience products, and
low prices. These changes continue. And the driver of these
changes is the consumer. The consumer is demanding better and
more progressive retail options for purchasing gasoline. These
new outlets, whether investments by a jobber, an integrated oil
company, or a grocery store chain, are complex and multi-
faceted businesses. They require multimillion dollars
investments. There is no slack in the economic drivers of this
system that would allow for increasing costs or inventory to
dampen or absorb price volatility. But we must look at the
facts and analyze the impact of these market factors over the
last few months.
While we have seen volatility in gasoline prices due to
world crude oil market volatility, we have actually experienced
lower retail prices over the first part of this year. According
to DOE statistics, the price of gasoline during the first
quarter of this year has averaged about $1.20 per gallon
compared with $1.48 during the same period last year. We have
seen the price move from a low in January of nearly a dollar,
as I mentioned before, in some markets to their recent highs,
in some cases as high as $1.60 in the Illinois market, which
are still nearly 15 to 20 cents below the highs of last year.
But as the price of crude oil has begun to stabilize, so have
retail gasoline prices. They are beginning to come down
already.
At the same time gasoline production in the United States
has increased by 3.6 percent over last year, and nationwide
inventories of both RFG and regular gasoline are at or above
their prior year levels. No single factor is the cause of
volatility. It is the totality of these factors that makes the
market work so effectively in achieving each period of
equilibrium. Consumers in the United States continue to benefit
from the intensely competitive U.S. refining and marketing
industry. More sophisticated and cost efficient business models
are constantly evolving in the marketplace at an ever-
quickening pace. In the last few years the market has seen the
entry and growth of large format independents, convenience
store chains, the addition of gasoline at hypermarkets and
grocery store chains, and the accompanying growth in their
market share. The consumer has more offers and better offers to
choose from.
At the same time the need to realize economies of scale,
reduce costs, access new markets and better manage risks, while
continuing to deliver value to shareholders has resulted in a
number of mergers, acquisitions, and consolidations. The net
result is that cost reductions and efficiencies from mergers
have resulted in greater value for the consumer as evidenced by
prices the same or lower than in previous years. To this end we
continue to operate our refineries at high levels of
production, maintain our inventories at levels required to meet
our customers' needs, and establish our role as a preferred
supplier.
The marketplace works. And while it is working, it will
reflect the realities of the actions required to balance supply
and demand. Artificial interventions are likely to result in
consequences and unpredictable results.
As we have throughout this discussion, BP is prepared to
continue to work with this Subcommittee and to be as helpful to
you as possible. I will be pleased to take questions.
Senator Levin. Thank you very much, Mr. Pillari, and we
thank you all, by the way, and your companies, for your
cooperation with this Subcommittee. We have sought out a
significant amount of information. We have obtained that
information, and we are appreciative of it, and we appreciate
your willingness to continue to work with the Subcommittee on
that basis.
Mr. Reeves.
TESTIMONY OF DAVID C. REEVES,\1\ PRESIDENT, NORTH AMERICA
PRODUCTS, CHEVRONTEXACO CORPORATION, SAN RAMON, CALIFORNIA
Mr. Reeves. Thank you, Mr. Chairman and Senators. It's my
pleasure to be here today to testify before the Subcommittee.
My name is Dave Reeves and I'm the President of North America
Products, which is the ChevronTexaco entity responsible for
refining, marketing, and distribution in the United States.
---------------------------------------------------------------------------
\1\ The prepared statement of Mr. Reeves appears in the Appendix on
page 161.
---------------------------------------------------------------------------
In the United States we refine and market gasoline under
the Chevron brand, and I'll be referring throughout my
testimony to our United States' operations as Chevron. Although
our corporate name is ChevronTexaco, we do not own, operate, or
supply any of the former Texaco refineries or retail outlets in
the United States. The FTC required that those facilities be
sold as a condition of our merger last year.
To cover the issues the Subcommittee asked us to address,
let me talk briefly about gasoline production and delivery.
Chevron operates six fuel refineries in the United States with
a total refining capacity of roughly 900,000 barrels a day. Our
largest refineries are located in Pascagoula, Mississippi, and
El Segundo and Richmond, California. We have one medium-sized
refinery in El Paso, Texas, and two smaller refineries, one in
Hawaii and one in Salt Lake City.
Chevron's share of the gasoline market in the United States
is roughly 6 to 7 percent. We sell gasoline in 28 States and
the District of Columbia through about 8,000 Chevron branded
retail service stations. Over 90 percent of our stations are
operated by independent jobbers or dealers who choose to brand
with Chevron. Less than 10 percent of our stations are owned
and operated directly by Chevron. We market on the West Coast,
throughout the South, Hawaii, Alaska, and in portions of the
Rocky Mountains. We are a smaller marketer in the Mid-Atlantic
region through jobber-served stations. We do not refine or
market in the Midwest or the Northeast.
With respect to the Subcommittee's question about the
adequacy of the industry infrastructure, I can best comment on
my company. We continue to invest substantial sums to ensure
that our infrastructure is adequate to meet our customers'
needs. For example, our Pascagoula, Mississippi, refinery has
begun work on its clean fuels project. When completed next year
it will be one of the first refineries in the Nation capable of
producing both low-sulfur gasoline and on-highway diesel fuel
outside California. The project will be completed in advance of
the national deadlines, primarily to meet local fuel
requirements in Birmingham, Alabama, and Atlanta, Georgia,
which are key marketing locations for the Pascagoula refinery.
In general, while I think it has been noted that the capacity
of the industry is strained in some parts, I do believe it will
continue to grow to meet demand as long as the conditions to do
so are economic.
One concern of the Subcommittee is the series of mergers
over the last 6 or 7 years, and like mergers in other business
sectors, the mergers have been driven, I believe, by both a
need to improve efficiency by reducing costs, and a need to
compete in a world that requires strong companies capable of
finding, developing, and delivering energy for the future
generations. Those were major factors in the merger with
Chevron and Texaco.
Turning to gasoline pricing, I believe the Subcommittee's
report accurately reflects that gasoline prices are set based
on competition. They are the result of the combination of
complex factors of supply, demand, and competitive forces. At
Chevron our primary aim is to keep our independent dealers and
jobbers competitive with the station down the street. As a
result of competition, gasoline prices in constant dollars have
been generally declining over a 20-year period and are a good
value compared to many other goods and services, and to
gasoline prices in many other countries.
I recognize that those facts alone may be little comfort to
families whose budgets are strained when gasoline prices
increase rapidly, and I recognize that gasoline prices do tend
to fluctuate, both up and down, more than many or most other
products. It's important to recognize in addition that there
are many factors that cause price fluctuations, including
rapidly-changing crude oil prices, the ever-growing demand for
gasoline, temporary refinery outages, and in some cases the
annual changeover from winter grade to summer grade gasoline
specifications. That changeover reduces inventories at the same
time seasonal demand begins to increase for the summer driving
season.
Gasoline prices have also been a concern of many government
agencies, and there have been obviously many investigations of
gasoline pricing and fluctuations in the last several years.
Those investigations have consistently shown that there have
not been any conspiracies or antitrust violations, but rather
that the fluctuations simply reflect that the market is working
as it should. For example, the California Energy Commission
concluded that the price spike in California in 1996 was caused
primarily by a fire at a competitor's refinery, which removed
some 10 percent of the supply for several months. Gasoline
prices did in fact increase rapidly, which dampened demand and
created the incentive to import gasoline from as far away as
Finland. Prices then returned to lower levels. And as the
Energy Commission put it, ``The market worked.''
I've reviewed the Subcommittee's report, and while I can't
say that I have fully digested all 396 pages, I'd like to offer
a few additional comments on it. First of all the report
appears to miss the most basic reason for fluctuations in
gasoline prices, and that is the changes in crude oil. The
report notes that the average gasoline price across the United
States went up by 35 cents from early 1999 to 2000. Two things
are important about that observation. First, the report uses
early 1999 as the starting point even though gasoline prices
were at historic lows at that point so that the increase
appears larger than if the report focused on a different time
period. And more importantly, as Senator Voinovich noted
earlier, it fails to take into account that the cost of raw
materials, crude oil, increased by an even greater amount
during that period of time.
In addition the report refers to the various mergers and
acquisitions that have taken place, most of them in the last
decade, and suggests that they have reduced competition. I
believe that they have increased competition. The mergers
created stronger companies which were more efficient and thus
better able to compete. The FTC also typically required the
merging companies to divest refining and marketing assets,
where retaining the assets could have been a competitive
problem. The end result, as shown by the Subcommittee's
charts--I think it's on page 84 in your report \1\--is that
industry gross margins and operating costs have been declining,
while net margins and rates of returns have remained fairly
constant and low. Industry rates of returns have averaged about
5 to 6 percent, reflecting the fierce competition that we face.
Consumers have been the beneficiary of the competition.
---------------------------------------------------------------------------
\1\ See Permanent Subcommittee on Investigations' Majority Staff
Report, Gas Prices: How Are They Really Set, which is reprinted in the
Appendix on page 322.
---------------------------------------------------------------------------
One more observation on the report. It refers to documents
used in a California case entitled Aguilar dealing with
California gasoline prices. What is not particularly clear in
the report, however, is that all three levels of courts in
California considered those very same documents and determined
that they did not establish any wrongdoing. The trial court and
the California Court of Appeals threw out the case as
unfounded, and the California Supreme Court unanimously
affirmed that decision.
Finally, the Subcommittee has asked what can be done
regarding gasoline price fluctuations. Speaking for Chevron,
our people are doing our very best to operate our refineries
and distribution system safely and reliably. It is our No. 1
priority. We devote a lot of resources to making sure that we
continue progress to being world class in reliability. We're
also doing our best to be fully ready to meet new government
requirements for fuels. The government can also take steps to
ensure that reliable supplies of gasoline and other fuels are
available for the American consumer. For example, the
government can set performance-based standards for fuels, so
that refiners have the freedom to use the most efficient
methods to meet those standards. The government can also take
steps to minimize and eliminate things that interfere with
markets such as mandates and subsidies, and the government can
streamline permitting wherever possible, which we believe can
be done without compromising environmental protections.
Thank you again, Mr. Chairman and Senators for the
opportunity to testify before your Subcommittee today, and I
would be happy to answer any questions as the hearing goes on.
Senator Levin. Thank you very much, Mr. Reeves. Mr. Routs.
TESTIMONY OF ROB ROUTS,\1\ PRESIDENT AND CHIEF EXECUTIVE
OFFICER, SHELL OIL PRODUCTS US, HOUSTON, TEXAS
Mr. Routs. Thank you, Mr. Chairman. Whatever I am going to
say is going to be a repeat by now, but I would like to go
through my remarks, anyway.
---------------------------------------------------------------------------
\1\ The prepared statement of Mr. Routs appears in the Appendix on
page 170.
---------------------------------------------------------------------------
Mr. Chairman, Members of the Subcommittee, for the record,
my name is Rob Routs, and I am the president and CEO of Shell
Oil Products US
Shell Oil Products US is a marketer of fuels, lubricants,
services, and solutions to consumer and business-to-business
customers in the automotive, commercial, and industrial
sectors. Shell Oil Products US operates refineries, a
lubricants business, and a pipeline and terminal system.
Together with its affiliate Motiva Enterprises LLC, Shell Oil
Products US supplies nearly 22,000 branded service stations.
I have been asked to share with the Subcommittee our
thoughts on the United States' motor fuels market and the
factors that contribute to the volatility of the price our
customers pay at the pump.
America's growth has been fueled in large part by the
stable supply of reasonably priced energy. In fact, the price
of gasoline has remained fairly constant when adjusted for
inflation.
A recent analysis by the American Petroleum Institute
stated: ``In inflation-adjusted 2002-dollar terms, today's
price is low compared to the historical 84-year record of
recorded pump prices. In fact, motor gasoline prices are 45
percent lower than the 1981 record high of $2.64 per gallon.
Between then and now, the real cost of motor gasoline to
consumers fell by $1.19 per gallon. This decline can be
attributed largely to lower crude costs, but manufacturing,
distribution, and marketing costs are lower as well.''
Shell remains committed to ensuring that we meet the needs
of our customers by providing them with a reliable supply of
quality products at competitive prices.
Still, there are a number of factors that have contributed
to the volatility of the recent past. These factors still exist
today and will continue to influence the price of gasoline in
the future.
One of the greatest challenges we face as an industry is
supplying an ever increasing number of boutique fuels to an
ever expanding number of niche markets. Prior to 1990, there
were six kinds of gasoline sold in the United States. Today,
requirements imposed by Federal, State, and local governments
have contributed to the creation of an ever expanding number of
motor fuels and other petroleum products. Again, according to
the American Petroleum Institute, ``One pipeline company,
Atlanta-based Colonial, delivers 90 different products for 85
shippers to 270 terminals and more than 1,000 storage tanks. In
any given month, Colonial may ship 30 different grades of
gasoline.''
When a region, State, or city requires a unique fuel, it
becomes a fuel island, unable to use nearby supply should the
delivery of their special blend be interrupted. The smaller the
market, the more isolated they become, and the more difficult
it is for us to move products into that area on short notice.
Not only are we being asked to supply a greater number of
fuels, but the specifications of these fuels often change with
the seasons. These seasonal fuel variations require us to draw
down inventories as we switch from one fuel to another. We
conduct this fuel switch in April and May and September and
October. When we switch fuels in the spring, we must draw down
inventories to ensure that our fuel remains compliant. During
this time markets are particularly exposed to volatility should
a supply disruption occur.
In an effort to address the proliferation of the fuels in
America, we have been working with Congress on the
establishment of a study to look at the issue. This study is
included in the Senate's energy bill. We look forward to
participating in the development of policies and programs
intended to reduce the number of fuels used in this country
without compromising environmental quality.
At the same time, the infrastructure for producing and
distributing fuels has been running at a very high utilization
rate. America's refineries, for example, were running at 94
percent utilization last summer. At these high rates, there is
little reserve capacity that can be turned on when demand peaks
or another source of supply shuts down. Likewise, pipelines,
particularly those that bring product to inland markets, are
also operating at or near capacity.
In recent years, oil has been as low as $10 a barrel and as
high as $30 a barrel. Today that same barrel costs $25.
The factors influencing the cost of crude are global in
nature. Crude oil is a commodity that is traded on various
exchanges around the world. As with most commodities, supply
and demand--real and perceived--determine what participants in
the market are willing to pay for a barrel of oil. As a result,
factors that range from regional conflict to the shut-in of
platforms in the Gulf of Mexico can all influence the price of
crude oil. These types of events can often contribute to short-
term price volatility.
Finally, the business of refining and marketing fuel is
itself changing as merchant refiners and non-integrated
marketers have grown. They rely on the spot market for selling
and acquiring product, and it is often the gasoline spot market
that leads prices higher during disruptions in the supply and
distribution system.
Together, boutique fuels, high utilization rates, seasonal
fuel requirements, fluctuating crude prices, and the growth of
merchant refiners have all contributed to the volatility in the
price of gasoline that has become common over the last couple
of years.
Given that the price of a gallon of gasoline is determined
by a marketplace that is influenced by a variety of factors,
many of which are not within the control of those who refine,
market, and distribute fuel, is there anything that can be done
to ease this volatility?
First, we must stem the proliferation of boutique fuels so
that product can be shifted from one market to another when
supply disruptions occur or demand peaks. As I said earlier, we
support the establishment of a study to look at this issue and
provide recommendations.
Second, we must look for ways to streamline the permitting
and construction of new and expanded facilities used in the
production, transportation, and distribution of fuels.
More importantly, we must let the free market work and
avoid the development of schemes intended to control or
influence the price of gasoline.
In the years ahead, I expect that we will continue to see
mergers, acquisitions, and divestments in the oil industry.
Like any business, we continually search for opportunities that
will make us more competitive relative to our peers. The
efficiencies and synergies we often recognize through these
types of transactions allow us to continue to provide our
customers with a competitively priced product.
In some instances, the consolidation in the industry,
particularly in refining, is being driven by the huge capital
investments needed to meet ever more demanding regulatory
requirements. Many smaller companies simply cannot justify the
investment in plants and facilities needed to produce today's
cleaner burning fuels.
Finally, the Subcommittee has expressed an interest in how
we price our product. Let me first say that the members of our
industry never discuss amongst themselves how we price our
product. Not only would that be illegal under Federal antitrust
statutes, but it would also disadvantage our ability to stay
competitive in the marketplace. I can tell you that we price
our product relative to the market and that we are constantly
striving to provide our customers quality motor fuels at a
price that is competitive. Of course, the cost of crude is the
single greatest cost in a gallon of gasoline. Many other
elements contribute to the price of a gallon of gasoline.
According to the Energy Information Agency, ``Federal, State,
and local taxes are a large component of the retail price of
gasoline. Taxes, not including county and local taxes, account
for about 28 percent of the cost of a gallon. Within this
national average, Federal excise taxes are 18.4 cents per
gallon, and State excise taxes about 20 cents a gallon. Also,
some States levy additional sales taxes, some applied to the
Federal and State excise taxes. Additional local county and
city taxes can have a significant impact on the price of
gasoline.
``Refining costs and profits comprise about 14 percent of
the retail price of gasoline. This component varies from region
to region due to the different formulations required in the
different parts of the country.
``Distribution, marketing, and retail station costs and
profits combined make up about 12 percent of the cost of a
gallon of gasoline. From the refiner, most gasoline is shipped
first by pipeline to terminals near consuming areas, then
loaded into trucks for delivery to individual stations. Some
retail outlets are owned and operated by refiners, while others
are independent businesses which purchase gasoline for resale
to the public. The price on the pump reflects both the
retailer's purchase price cost and the other costs of operating
the service station. It also reflects local market conditions
and factors, such as the desirability of the location and the
marketing strategy of the owner.''
Remember, the final price for a gallon of gasoline is
determined by the retailer. And that price, which is included
in the last 12 percent from the above, is set after he or she
adds their costs or profits to the price they pay for the
product.
I hope that I have helped you understand the many factors
that influence the price of a gallon of gasoline and why that
price sometimes can be volatile. I hope you can also appreciate
the substantial capital investments and long-range planning
that is required for the oil industry to quench the thirst our
country has for the fuels that keep us mobile.
Yet despite all of the challenges I have outlined, and many
more I have not, I believe a gallon of gasoline remains a great
bargain in constant dollars. I look forward to answering any
questions you might have. Thank you.
Senator Levin. Thank you very much, Mr. Routs. Thank you
all for your statements.
Let me just say at the outset that I think we all recognize
that the price of gas is directly affected by the factors that
you have all identified. That is not in dispute. We chose to
look at the downstream market. We did not look at, for
instance, the price of crude oil as a factor, even though it is
obviously a major factor.
By the way, the price of crude oil was not a factor in the
price spikes of 2000 and 2001. It was those price spikes which
really caused me to begin this investigation. And as we saw
from the earlier charts, those spikes had nothing to do with
the price of crude oil.
There are other factors which you have mentioned: The
growing number of boutique fuels, increasing and inelastic
demand for gasoline in the United States, supply disruptions,
reduction in the number of refineries, and a number of other
factors which you mentioned. Those are factors. But what we
want to focus on is what our staff investigation disclosed,
which is strong evidence that you don't simply respond to
market factors, but that you actively help to create and
maintain a tight market.
Now, where there is little competition--in other words, in
areas of high concentration--the creation and maintenance of
tight supply gives undue power over price to those companies
that are engaged in that market. I want to go through some of
the documents that the staff identified and go through the
words of the company--not mine, not consultants, not my staff,
but the words of the companies themselves in these documents.
I want to start with a document that is found in the BP
files from 1999. This is found on pages 274 and 282 of the
staff report.\1\ I have enlarged portions of it so we can all
look at it. It is from a meeting of the Business Unit Leaders,
or BULs, at BP on June 1, 1999, and it discusses BP's Midwest/
Mid-Continent strategy, in the words of the document.
---------------------------------------------------------------------------
\1\ See Permanent Subcommittee on Investigations' Majority Staff
Report, Gas Prices: How Are They Really Set, which is reprinted in the
Appendix on page 322.
---------------------------------------------------------------------------
Now, we were told that the BULs, as they are called, are
companies' executives at the senior vice president level, so
these are top people in the BP organization.
First of all, Mr. Pillari, how many are of these senior
executives who attended this meeting? About how many?
Mr. Pillari. Probably about six or seven.
Senator Levin. Thank you. Now, this meeting is not just a
casual meeting. It is taking up the time of top executives at
BP. It is a continuation of a discussion that started in April
because the first part of the agenda for the meeting is a recap
of the presentation from that April meeting.
The presentation makes it clear that the purpose of the
meeting was to come up with a strategy for the company, and
this was not just presented by a low-ranking employee to the
top executives, some employee who was dreaming up options on
his own or her own. To be presented at this level, it had to
have had some direction or support from a high level,
presumably under the supervision of a senior officials. And,
obviously, it is the product of a lot of work and a lot of
thought.
One part of this document refers to the Midwest/Mid
Continent as a niche, I assume a market niche. I am just
wondering first, Mr. Pillari, what is----
Mr. Pillari. Those are actually designations of two of the
business units. There was a Midwest Business Unit and a Mid
Continent Business Unit. So it would be describing those two
organizational functions.
Senator Levin. What is meant by niche?
Mr. Pillari. Well, since I wasn't there, I don't actually
know. I'm assuming if you look at it, that given we were
organized around the Midwest and the mid-continent, they would
look at that geographic market and refer to it as the geography
of the mid-continent and the Midwest.
Senator Levin. Now, at the top box on page 277,\1\ the
presentation says that, ``We can influence niche value [1 to 3
cents per gallon] but our actions need to be significant
[greater than 50,000 barrels per day] to be sustainable [more
than 3 years].'' I take that to mean that you can affect the
price of gasoline in the Midwest by 1 to 3 cents a gallon if
you take certain actions, and just stop me if that is an
inaccurate presentation of what it is because I want to get to
the point.
Then the memo goes on to present ways that you can achieve
that increase in the price of gasoline. And so to achieve that
goal, there are a number of options that are discussed at that
meeting and presented, I gather many of which or most of which
were not adopted but nonetheless considered as options to
achieve that goal. And the rest of the page goes on to make
some general observations about the Midwest market.
The second dot from the bottom says that, ``There are
significant opportunities to influence the crude supply/demand
balance.''
And then it goes on to say--or to discuss the market levers
that are available to BP to influence the supply/demand balance
in the Midwest, and I want to look at market lever No. 1, and
this is on page 281.\1\ This is the product short market lever.
There are two pages in the presentation on product short market
levers. One is product short (1), which is page 281, and then
there is product short (2), and I want to go over these
thoughts that were presented to these executives, these options
that were presented.
---------------------------------------------------------------------------
\1\ See Permanent Subcommittee on Investigations' Majority Staff
Report, Gas Prices: How Are They Really Set, which is reprinted in the
Appendix on page 322.
---------------------------------------------------------------------------
On product short (1)--Exhibits 13,\2\ I am informed. On
product short (1), the first bullet is ``shut down niche
internal supply.'' That would mean reducing supply inside of
the Midwest. Then it goes through a number of ways to achieve
that. The first way to achieve that reduction of supply is ``to
offer supply agreements in exchange for capacity shutdown,''
which means that BP would promise to supply gasoline if other
refiners would agree to shut down their refineries or their
capacity at their refineries, which would give BP greater
control over supply.
---------------------------------------------------------------------------
\2\ See Exhibit No. 13 which appears in the Appendix on page 262.
---------------------------------------------------------------------------
I understand you did not adopt that recommendation. First,
I am wondering why you did not adopt that recommendation.
Mr. Pillari. Well, sir, first of all, I would say you are
correct when you say these were presented to the business unit
leaders. They were rejected by the business unit leaders. They
were rejected because it is inappropriate to have this kind of
activity in the marketplace, and it's naive to think that
activities like this could influence the marketplace.
Senator Levin. So the people who were presenting these
options to the senior executives were presenting a bunch of
inappropriate options. They had been first presented in April
and then presumably not rejected in April but then recapped in
June. Is that correct?
Mr. Pillari. The issues presented in April--and if I could,
the context for this group, it was a study group that was
involved in the integration of the company back then. So we
were looking at the Midwest and the mid-continent where we had
two refineries, two logistics systems, and two of everything.
And the study group was asked to go away and think through
scenarios or possibilities or options as a result of this
integration.
In April, they returned to the business unit leaders and to
the group and said there were some obvious things. We could
rationalize the number of trucks that we had because we were
now going past similar retail outlets. So we had synergies that
we could make that were very obvious. In April, none of these
issues was discussed.
In June, it's my understanding--because I wasn't there, but
it's my understanding that these options were presented to the
BULs, who rejected them and they never went past that group.
Senator Levin. All right. Did the people who presented
these inappropriate options, were they fired or disciplined in
some way?
Mr. Pillari. They have certainly been counseled and trained
on understanding the appropriate way to behave and the
regulations in the marketplace. These were not senior people
who did the studies.
Senator Levin. To the other oil companies here, have you
ever entered into a supply agreement or offered to enter into a
supply agreement in exchange for the shutdown of refinery--
excuse me, in exchange for the shutdown or reduction of
refinery capacity? Mr. Carter.
Mr. Carter. Absolutely not.
Senator Levin. Mr. Heminger.
Mr. Heminger. No, Mr. Chairman.
Senator Levin. Mr. Reeves.
Mr. Reeves. No, Mr. Chairman.
Senator Levin. Mr. Routs.
Mr. Routs. No, Mr. Chairman.
Senator Levin. Thank you.
The second option presented to the BULs was to purchase
capacity and to shut it down. I assume that that means to buy a
refinery and shut it down. Have any of you ever engaged in that
activity? Mr. Carter.
Mr. Carter. No, Mr. Chairman.
Senator Levin. Mr. Heminger.
Mr. Heminger. No, Mr. Chairman.
Senator Levin. Mr. Pillari.
Mr. Pillari. No, Mr. Chairman.
Senator Levin. Mr. Reeves.
Mr. Reeves. I'm sorry. I missed the question, Senator.
Senator Levin. Have any of your companies ever purchased
capacity and then shut it down?
Mr. Reeves. No, sir.
Senator Levin. Mr. Routs.
Mr. Routs. To my knowledge, no, sir.
Senator Levin. OK. We are going to talk a little bit later
about a Mobil memo from California when Mobil was considering
what to do with the Powerine refinery. Is that the right
pronunciation of ``Powerine''?
Mr. Carter. Mr. Chairman, I believe it's ``Powerine.''
Senator Levin. What to do with the Powerine refinery that
was undercutting the price of gasoline by providing
reformulated gas, or RFG, at a low price. The memo discussed
buying all of Powerine's output as well as just shutting it
down. We will come back to that memo.
The third option, back to BP's memo, lobby for the
elimination of oxygenates/tax breaks for same, and the two
oxygenates are MTBE and ethanol.
Now, the thinking here in presenting this option is that
oxygenates as an additive reduces the amount of gasoline
otherwise needed, so that by eliminating oxygenates, you
replace the oxygenates with gasoline and thereby increase the
demand for gasoline.
Now, as a matter of fact, is it not true, Mr. Pillari, that
BP has lobbied for the elimination of MTBE?
Mr. Pillari. Sir, we've done a number of things. First of
all, we're the largest buyer of ethanol in the United States.
We are concerned about some of the health issues around MTBE,
and we have discussed openly with many constituencies our
concern about that and how it could be alleviated.
Senator Levin. My question was a little different from
that, not whether you have discussed with other entities or
other people, but whether or not BP has lobbied for the
elimination of MTBE and the oxygenate requirement.
Mr. Pillari. I'm not aware of lobbying to eliminate MTBE.
We still use MTBE. I am aware of the discussions around----
Senator Levin. If it were eliminated, you wouldn't be using
it, though. My question is: Have you lobbied for the
elimination of the requirement? Has your company lobbied? It is
a very direct question.
Mr. Pillari. I'm not aware of it, sir.
Senator Levin. OK. Let me ask the other companies: Do you
agree with the assessment that the elimination of the oxygenate
requirement will increase the demand for gasoline in the
Midwest, thus tightening the available supply? First of all, do
you agree with that? I am not asking you yet whether you
lobbied for it, just whether you agree with the--that the
elimination of that requirement would have that effect. Mr.
Carter.
Mr. Carter. I haven't looked at that specifically, but I'd
be happy to answer the question about the lobbying.
Senator Levin. OK. Mr. Heminger.
Mr. Heminger. Mr. Chairman, taking MTBE out will reduce
available supply; however, it would be replaced by ethanol.
Senator Levin. OK. Thank you. Would you agree with that?
Mr. Pillari. Yes, I agree with that statement.
Senator Levin. Mr. Reeves.
Mr. Reeves. We don't market in the Midwest, so I'd rather
not answer conditions there, but directionally, I agree with
these gentlemen on that.
Senator Levin. OK. Mr. Routs.
Mr. Routs. Directionally, I agree. I believe, though, that
there will be enough ethanol around to replace MTBE.
Senator Levin. I am talking about elimination of the
oxygenate requirement period. Now the question is: Have you
lobbied for the elimination of that requirement? Mr. Carter.
Mr. Carter. We have been opposed to the oxygenate mandate
because it, in fact, requires us to use MTBE, and we have been
in favor of phasing down the use of MTBE in gasoline.
Senator Levin. OK. So is it fair to say you have lobbied
for the elimination of that requirement?
Mr. Carter. Yes.
Senator Levin. Thank you. Mr. Heminger.
Mr. Heminger. Yes, Mr. Chairman, we have lobbied to reduce
MTBE.
Senator Levin. And to eliminate oxygenate requirement
generally?
Mr. Heminger. I would say not to eliminate oxygenate
requirements generally. We believe there should be no
backsliding whatsoever in the Clean Air Act.
Senator Levin. In the what?
Mr. Heminger. In the Clean Air Act.
Senator Levin. So you have not lobbied for the elimination
of the oxygenate requirement.
Mr. Heminger. Not to the best of my knowledge.\1\
---------------------------------------------------------------------------
\1\ See Exhibit No. 27, May 13, 2001 clarification letter from
Marathon-Ashland which appears in the Appendix on page 281.
---------------------------------------------------------------------------
Senator Levin. Thank you. And you don't know?
Mr. Pillari. Well, your question was on MTBE. On oxygenates
in general, we have said we prefer a results-based regulation
such that we would have the option to use oxygenates,
particularly ethanol, where it makes the most sense.
Senator Levin. Which, I think, in plain English means that
you would therefore prefer the elimination of the requirement,
leaving it optional.
Mr. Pillari. Correct.
Senator Levin. Now, when I asked you before, did you lobby
for the elimination of the oxygenates/tax breaks for same, you
said not to the best of your knowledge.
Mr. Pillari. I'm sorry, sir. I misunderstood the question.
I thought you were asking me specifically about MTBE.
Senator Levin. No. I was very precise. It was oxygenates.
Mr. Pillari. Well, then I misspoke. I heard the question
incorrectly. We would prefer to have the option to use
oxygenates rather than have it mandated.
Senator Levin. OK. Then is it fair to say that you have
lobbied for the elimination of that requirement?
Mr. Pillari. Yes.
Senator Levin. Therefore, you have, in fact, done one of
the things, at least, that is in that document, because that
document says that in order to reduce supply, No. 3, that you
will lobby for the elimination of oxygenates/tax breaks for
same, and you now acknowledge that you have done that.
Previously you said you didn't do any of these things, you
didn't adopt any of these recommendations. Now you acknowledge
you have, in fact, done one of the three things that were
recommended.
Mr. Pillari. What I would say, sir, is that the desire to
have an option to use oxygenates so that we can use ethanol
where it makes the most sense actually increases the gasoline
pool, and that decision is about increasing the production of
gasoline and the clean aspects of gasoline. It has nothing to
do with this report.
Senator Levin. Let me just go back to this. I want to get
this really clearly for the record. Have you lobbied for the
elimination of oxygenates?
Mr. Pillari. We have lobbied to make oxygenates optional
for a results-based formula.
Senator Levin. So it is fair to say that you have lobbied
to eliminate oxygenates as a mandate?
Mr. Pillari. Correct.
Senator Levin. And you are saying that is different from
what that recommends?
Mr. Pillari. Yes, it is.
Senator Levin. OK. We also have a memo from Texaco--that is
now part of Shell that we will discuss a little bit later--
stating that the elimination of the oxygen mandate would be a
good way to tighten supply in California. Is that accurate? Let
me ask you that right now since we are on this subject.
Mr. Routs. Is that the memo that was produced in the
Aguilar case, sir?
Senator Levin. Yes.
Mr. Routs. First of all, Shell was not involved in the
situation 10 years ago.
Senator Levin. Let me ask Texaco then, if you don't know
the answer to that. Did Texaco state that the elimination of
the oxygen mandate would be a good way to tighten supply in
California?
Mr. Routs. This is the first time I have seen this internal
memo in Texaco the way you produced it. The reference to Shell
in the memo is--I mean, I'm not aware of anything, and we
haven't been able to trace anything in this short time period,
sir.
Senator Levin. Let me then ask----
Mr. Routs. Let me put it this way: It's my belief in the
situation that we're seeing today that importing into
California--importing CARB gasoline into California wouldn't
have been the cheaper option. I think they were dreaming in
what they were doing at the time.
Senator Levin. OK. Well, we are going to come back to that
document.
Now, the fourth option that was presented to the executives
at BP was to eliminate exemptions for small refiners. Was
that----
Mr. Pillari. Well, that was rejected.
Senator Levin. Right. So you didn't take any steps in that.
Now, increase product demand, this is product short (1) on page
281.\1\ The first option, lower prices. I know you didn't
implement that. The next way to increase product demand is to
convince swing cities on Gulf Coast supply to require
reformulation that is not readily available from the Gulf
Coast, in other words, to pull RFG from the Midwest to those
other cities, even though they may not need it. So here you
have the consideration by BP of promoting government
regulation, promoting the use of RFG, which is a boutique fuel,
to reduce supply in the Midwest.
---------------------------------------------------------------------------
\1\ See Permanent Subcommittee on Investigations' Majority Staff
Report, Gas Prices: How Are They Really Set, which is reprinted in the
Appendix on page 322.
---------------------------------------------------------------------------
Now, here is what EPA says about this. This is not just me.
It is the EPA. In its report on boutique fuels, it says that,
``Some refiners have promoted boutique fuels in order to create
tight markets for those fuels.'' That is an EPA finding. Yet we
have Lord Browne, who is the head of BP, saying that boutique
fuels cause price spikes. So EPA has found that some refiners
have actually promoted boutique fuels to create the tight
markets for those fuels, and I think the head of your company--
is he still the head of it--Lord Browne?
Mr. Pillari. Yes, he is.
Senator Levin. Says that boutique fuels cause price spikes,
or help cause price spikes. Now, I want to jump to product
short (2), which is page 282,\1\ and this is, again, options
presented to your executives to reduce supply.
---------------------------------------------------------------------------
\1\ See Permanent Subcommittee on Investigations' Majority Staff
Report, Gas Prices: How Are They Really Set, which is reprinted in the
Appendix on page 322.
---------------------------------------------------------------------------
The first category on this page for reducing supply is to
``export products from the Midwest.''
Second, to ``move product into southern Ontario.'' I
presume by that you mean to just take product from the Midwest
and export it to Canada to make supplies tight in the Midwest.
Third item, ``use Xylene line or others to move product
south or out of the area.''
Next category is options called ``fill import logistics''
which would make it difficult to import products into the
Midwest, and the first option in this category is to ``ship
crude substitutes and/or intermediates/blendstocks on product
lines.'' That sounds like a plan to use products--to use the
pipelines for products other than gasoline so that the
pipelines won't be available to carry gasoline to the Midwest.
Have you ever followed that strategy at BP?
Mr. Pillari. All of these that you have just mentioned have
been rejected and never implemented.
Senator Levin. The next option is ``don't incent pipeline
conversions to products,'' threat of swing or seasonal
production to deter. That sounds complicated, but I think the
option that was presented there to the BP executives is that BP
would threaten to increase its own production and thereby
depress prices if other companies seek to create more pipeline
capacity into the Midwest. That threat you say was presented
and then it was rejected.
The next strategy, to incent--``incentivize,'' I presume
that means--``Koch not to ship into Chicago.'' Koch is a major
supplier of reformulated gasoline in Chicago, and this strategy
is to get Koch not to ship into Chicago.
You weren't at the meeting, but perhaps you can help us out
with this. What kind of incentives could BP use had they
adopted that strategy to get Koch not to ship into Chicago? Do
you know?
Mr. Pillari. I have no idea, sir.
Senator Levin. OK. The next option is to lobby for
elimination of drag-reducing agents for environmental reasons,
and this is No. 8 on page 282.\1\ Now, those are chemicals that
are put into pipelines to make the product in the pipeline move
more easily and more quickly, and by using DRAs, pipelines can
ship gasoline faster and at less cost than if DRAs are not
used.
This suggestion is that you should lobby to eliminate the
use of DRAs, slowing the delivery of gasoline into the Midwest,
and to use the argument that DRAs are not good environmentally.
Did you, in fact, lobby for the elimination of DRAs?
Mr. Pillari. No, sir. To my knowledge, we did not since all
of these options were rejected.
Senator Levin. Thank you. Did any of the companies here
lobby for the elimination of DRAs, do you know? Mr. Carter.
Mr. Carter. No, Mr. Chairman.
Senator Levin. Mr. Heminger.
Mr. Heminger. No, Mr. Chairman.
Mr. Routs. No, Mr. Chairman.
Mr. Reeves. No. We have increased the use.
Senator Levin. The next category on this chart is ``change
behavior of shippers to support niche uplift,'' which we assume
means to raise prices in this area. These proposals were to
increase the cost of transporting product to the Midwest, and
one way would be to support market-based tariffs which would
presumably lead to increased costs for transporting product to
the Midwest, and the other way would be to simply raise
tariffs.
Has BP supported higher tariffs on products going to the
Midwest?
Mr. Pillari. No, sir.
Senator Levin. Thank you.
And the last option is ``reduce product inventory in the
niche'' or in the area. And you say that you did not act to do
that?
Mr. Pillari. No, all of this was rejected, sir.
Senator Levin. Thank you.
Now, on June 28, 2001, in a Chicago Tribune article, Sir
John Browne, who is your CEO, talks about price volatility in
the United States. This is Exhibit 14.\1\ Mr. Browne is quoted
as saying that the shortage of refining capacity is not causing
the price spikes. Do you agree with that?
---------------------------------------------------------------------------
\1\ See Exhibit No. 14 which appears in the Appendix on page 266.
---------------------------------------------------------------------------
Mr. Pillari. Sir, what he was referring to was a briefing
that I had given him about the problems with the Explorer
pipelines, the CITGO fire problems. So the context of this
discussion would have been is it a basic refining problem or
are there logistics interruptions.
Senator Levin. And, in his judgment, is there a shortage of
refining capacity?
Mr. Pillari. Well, I think what he was saying is we--and he
means BP--does not need any more refineries in the United
States.
Senator Levin. All right. He says that the problem is
``that products can't flow easily to where shortages develop.''
It seems pretty clear that shortages--that short supplies are
intended by companies--that you intend to have a tight supply.
And we just went through a lengthy presentation of top
officials about how to achieve that goal. We were told that
those particular methods were not used. But the presumption
here is that the people who made that presentation were aiming
to achieve that goal of tightening supply for BP. I mean that,
it seems to me, has got to be indisputable. They may at this
meeting have rejected or not used those methods, although we
have a difference over the one issue involving lobbying to
eliminate the oxygenate requirement. Nonetheless, the goal of a
tight supply in a market was the purpose of looking at all of
those options. Is that correct, Mr. Pillari, that that was the
purpose of considering those options?
Mr. Pillari. Sir, I would be speculating on what they did
since I wasn't there----
Senator Levin. Not what they did. What the purpose of the
presentation was.
Mr. Pillari. I would be speculating on the purpose of the
presentation. The request that they were given was to take a
look at the integration of all the facilities in this area and
develop some scenarios so that management could then decide the
way forward.
Senator Levin. All right. Would you agree with me that
those suggestions are outrageous?
Mr. Pillari. Yes, I would.
Senator Levin. If these are outrageous recommendations,
didn't anyone call these folks on the carpet?
Mr. Pillari. Yes. It's my understanding that the BULs did,
which is why the business unit leaders would never have taken
it forward. I mean, these were rejected immediately. The people
were counseled on the inappropriateness of it, and it never
went any farther than that.
Senator Levin. And did the senior person who was overseeing
that presentation ever say to the people making the
presentation this is wrong, it should not be presented to our
executives?
Mr. Pillari. I don't know exactly what they had said, but
since it never came forward and since I know that they were
counseled, I would assume that something like those words were
said.
Senator Levin. OK. Let us know for the record, would you?
Mr. Pillari. I will.\1\
---------------------------------------------------------------------------
\1\ See Exhibit No. 29, letter from Ross J. Pillari, dated May 16,
2002, which appears in the Appendix on page 285.
---------------------------------------------------------------------------
Senator Levin. Find out.
Mr. Carter, the Majority staff report contains a document
from February 1996, and that is on page 225.\2\ It is a series
of E-mails between Mobil officials discussing how to block the
proposed startup of the Powerine refinery or to at least
prevent its output from reaching the market. Apparently,
according to the E-mail, Mobil had successfully kept the
Powerine product from reaching the market the previous year,
and the way they did that was they bought all the Powerine
product and then Mobil marketed it.
---------------------------------------------------------------------------
\2\ See Permanent Subcommittee on Investigations' Majority Staff
Report, Gas Prices: How Are They Really Set, which is reprinted in the
Appendix on page 322.
---------------------------------------------------------------------------
In one of these E-mails, one Mobil official said the
following: ``Needless to say''--and this is Exhibit 15,\3\ by
the way, now on page 228. ``Needless to say, we would all like
to see Powerine stay down. Full court press is warranted in
this case and I know Brian and Chuck are working this hard.''
---------------------------------------------------------------------------
\3\ See Exhibit No. 15 which appears in the Appendix on page 26700.
---------------------------------------------------------------------------
What do you think is meant by ``full court press'' to keep
Powerine down, to keep their production down?
Mr. Carter. Mr. Chairman, Powerine was a refinery in
California that had chosen not to make the investment required
by California regulators to produce and sell gasoline that was
in compliance with the regulations there, to clean up the air
in California. And they had petitioned the California Air
Resources Board, the regulatory authority, to be allowed to
sell gasoline that was not in compliance with the regulations
of California. And we opposed that.
We had made a unilateral decision to upgrade our own
refinery. We had spent millions and millions of dollars to
produce gasoline that was in compliance with the air
regulations of California. Having another refinery be able to
sell environmentally unfriendly gasoline and not make the
investments to upgrade their refinery seemed to us to present a
playing field that wasn't level, and we did, as we have a right
to do, oppose their selling of this gasoline. And that's what I
understand to be meant there.
Senator Levin. So you didn't buy their product. You bought
the product before they in any way changed it or affected it?
Mr. Carter. That's correct, sir.
Senator Levin. Powerine was selling RFG below the cost of
MTBE, and you bought it and marketed it at a higher price. Is
that what you understand that E-mail to be saying?
Mr. Carter. I don't understand exactly what they did the
year before. They did say they bought Powerine's output and
marketed it through Mobil. I'm not sure what price they charged
for it.
Senator Levin. You are not aware of the fact that they had
bought that at a higher price, your company bought it at a
higher price and then marketed it?
Mr. Carter. I'm not sure I understand you, sir. We bought
it at a higher price and then marketed it?
Senator Levin. That is correct, and you marketed it instead
of allowing them to market it.
Mr. Carter. I'm aware that we marketed it, yes. I'm not
aware of what price we paid.
Senator Levin. So what you are saying is that you were
trying to protect the environment? You weren't trying to
protect your own company?
Mr. Carter. In the case of Powerine producing gasoline that
wasn't in compliance with the regulations of the California Air
Resources Board, we thought it was unfair, that it was an
unlevel playing field, and they should have to make the same
investments that we made and comply with the regulations.
Senator Levin. And how would buying all their production
achieve that?
Mr. Carter. I believe that was in the prior year, sir,
before----
Senator Levin. But you were proposing to do the same thing.
It says, ``might be worth buying out their production and
marketing. . . . Last year when they were dumping RFG at below
cost of MTBE, we purchased all their avails and marketed
ourselves which I believe was a major reason that the RFG
premium last year went from [1 cent per gallon] in January to
[3 to 5 cents per gallon] thru to their shutdown.'' In other
words, the price of RFG went up 3 to 5 cents because you shut
them down the year before. Isn't that what that E-mail says?
Mr. Carter. I believe, if I can get the question right----
Senator Levin. Page 228.\1\
---------------------------------------------------------------------------
\1\ See Exhibit No. 15 which appears in the Appendix on page 267.
---------------------------------------------------------------------------
Mr. Carter. If in the case they started the refinery up and
produced non-compliant gasoline, was it an option for us to buy
it and resell it, and that was the second option. The first
option was to oppose that they produce non-compliant gasoline
to protect our investment and to make the playing field as
level as we thought we could. A second option was to buy the
gasoline in that case. Again, I believe this was in the Aguilar
case. This has been thoroughly investigated. It went to the
California Supreme Court, and our company was not found to be
in violation of any regulations or laws.
Senator Levin. That is not the question here whether or not
you violated a law by doing this. The question is whether or
not that was a way of maintaining the control over the supply
of a product. That is what we are talking about here today. And
the way you did that was that, according to this E-mail that is
on page 228, it ``might be worth buying out their production
and marketing ourselves, especially if they start to market
below our incremental cost of production.''
It doesn't say anything here, by the way, about environment
but, nonetheless, this is what the E-mail says. ``Last year
when they were dumping RFG at below cost of MTBE, we purchased
all their avails and marketed ourselves which I believe was a
major reason that the RFG premium last year went from [1 cent
per gallon] to [3 to 5 cents per gallon] thru to their
shutdown.'' So you benefited economically when there was 3- to
5-cent premium for RFG gas in California, and after you
purchased all of their production so that they couldn't
undercut your price, you benefited by having a higher price for
all of your output. Isn't that what happened? Isn't that what
that says, that E-mail?
Mr. Carter. We were protecting our investment. We thought
that was the best way to level the playing field.
Senator Levin. And then it says, ``. . . if they do start
up, I'd seriously consider this tactic.'' Did you?
Mr. Carter. I don't believe they started up, sir.
Senator Levin. OK. Senator Collins.
Senator Collins. Thank you.
I want to follow up on an issue that the Chairman has
raised about the industry's lobbying efforts on MTBE and the
oxygenate requirement in general, because I think the record is
confused right now as to motivation of the various industry
representatives here today in lobbying on these issues.
In Maine, the MTBE additive has caused some serious
groundwater contamination, and, thus, in our State the
legislature, and the governor, supported by the entire
congressional delegation, have called for a phase-out of MTBE.
The implication, however, in the BP-Amoco exhibit that Senator
Levin used is that the oil companies lobbied to remove the
oxygenate requirement because it would reduce the supply of
gasoline and presumably drive up prices.
All of you in response to Senator Levin's question have
commented on your various lobbying efforts regarding the
oxygenate requirement. So I want to ask you directly for the
record: What was your motivation in lobbying for the removal of
the requirement for MTBE in particular or the oxygenate
requirement in general? And I realize, Mr. Heminger, that you
gave a slightly different answer than your colleagues in this
area.
Mr. Carter.
Mr. Carter. Thank you, Senator. As I previously said, we
thought that phasing out of MTBE or phasing down of MTBE was a
good idea. We had used some MTBE prior to the Clean Air Act
Amendments, but it was a very small amount. The Clean Air
Amendments that require the oxygenate, in effect, because of
the supply of oxygenates, basically dictated that we use MTBE
and we thought it should be phased out. So for that reason, we
thought that elimination of the oxygenate mandate was a good
idea.
Senator Collins. But was your motivation to also try to
tighten to supply and drive up prices?
Mr. Carter. No, Senator.
Senator Collins. OK. Thank you. Mr. Heminger.
Mr. Heminger. Yes, Senator. When we looked at MTBE, we,
too, understand the problems it has with groundwater, and we
did not lobby to tighten the supply. In fact, we supported
ethanol as a replacement for the MTBE. We have a very small
manufacturing capacity of MTBE, but we did support the new
proposal to increase the amount of ethanol.
Senator Collins. Mr. Pillari.
Mr. Pillari. Yes, our position on oxygenates is not related
to a supply decision. Our position on oxygenates is related to
our desire to have clean fuels and to have them be results-
based and to have the option to use oxygenates when it's the
most efficient, economic way to make clean fuels.
Senator Collins. Mr. Reeves.
Mr. Reeves. Yes, Senator, we have actively proposed and
supported the phase-out of MTBE, primarily because our
customers and regulators around us prefer not to have it in the
fuel. In 1990, when the oxygenate mandate became a part of the
Clean Air Act, we actually did design in the use of MTBE as we
expanded our refining capacity in California to meet the new
requirements of California fuel.
We continue to support the Governor in California to remove
MTBE, are somewhat disappointed that he extended that ban
delay, delayed it an additional year, and we would continue to
support it. It really is not targeted at a volumetric issue.
It's because the customers and regulators prefer to have it
out.
Senator Collins. Mr. Routs.
Mr. Routs. We have supported it because customers and
regulators have asked us to remove MTBE. We have also very
actively, through API, supported the growth of ethanol in the
country to address just the issue that you're talking about, to
make sure that the total volume sold is stable.
Senator Collins. Mr. Reeves, in your testimony you talked
about the seasonal transition between summer and winter
gasoline, and most of you identify the changeover to summer
fuels as one of the reasons for causing an increase in prices.
You also blame the start of the summer driving season.
I guess my reaction to that is you know that is going to
happen each year. You know that consumers are going to drive
more during summer months. You know that you are going to have
to make this seasonal transition between winter fuels and
summer fuels. So you also know from experience that there can
be glitches such as refinery fires or a pipeline breakdown. So
why don't you plan better? I mean, it seems to me that you
could take steps to deal with this issue and, thus, remove one
of the price spikes that are so harmful to our economy and so
burdensome to consumers. Mr. Reeves.
Mr. Reeves. Thank you, Senator. Perhaps it is a good idea
to get a mental picture of what's actually happening as
inventories are drawn down and the transition between one grade
to another occurs. I think as other people have mentioned,
something like 97 or 98 percent of the fuel that is delivered
out to the retail stations actually goes through terminals, not
delivered directly from the refinery. And when you go to a
terminal, there is a diesel tank and a jet fuel tank and
probably three tanks for various grades of gasoline. And what
happens is you have to draw those gasoline tanks down out at
the terminal level and then replenish it with the new
specification fuel for whatever seasons you're moving into. So
there really is no capacity in the pipeline terminals out.
Now, you could argue that we could choose to invest, to
expand put in more tanks and carry more inventory. I think
generally in the concept of inventory, while I think it's true
inventory can help dampen volatility, I happen to believe that
if you have to invest and carry a lot of inventory, the average
price would actually increase, and our incentives are to keep
as low working capital as we possibly can. So I guess that
would explain our motivation, Senator.
Senator Collins. Well, that does bring me to my next
question. Every 10-cent increase in gasoline prices results in
approximately $10 billion in revenues to oil companies over the
course of a year. So if you have a spike of even short
duration, it results in considerable profits to the oil
companies. And yet I am hearing today that one of the reasons
for price hikes and for price volatility is a lack of capacity,
a lack of refining capacity, not enough pipelines.
Given those kinds of profits, why aren't investments being
made? If I look, three of the companies that are here today
were in the top 50 on the Fortune 500 list released in April.
Clearly there are profits available that could solve some of
these infrastructure problems that have been cited repeatedly
as the causes of these glitches that produce these very onerous
price spikes.
So why aren't additional investments being made to keep
your refineries in better condition and to build additional
storage tanks? Mr. Carter, we will start with you and go down
the line.
Mr. Carter. That's an excellent question, Senator, and, in
fact, we have made considerable investments to upgrade our
capacity and to be able to produce more of these boutique
gasolines.
If we take the Midwest, for example, in the year 2000 we
started up our investment to make RFG with ethanol at our
Joliet refinery, and we never operated that unit before. It was
brand new. And we had some difficulty when we first came out of
turnaround. We learned to use it better, and the next year we
made even more gasoline there that met the requirements there.
In addition to that, we learned to make components that can
be blended to make RFG with ethanol at our Baton Rouge
refinery, and we found new barges to ship that material up the
Mississippi River to the Midwest. I think this was one of the
advantages of the merger between Exxon and Mobil. That probably
wouldn't have happened short of the merger.
So we've taken a lot of steps. That's just one example.
Senator Collins. Mr. Heminger.
Mr. Heminger. Thank you, Senator, and as Senator Bunning
stated, for 4\1/2\ years now, we have attempted to build a new
pipeline and invest in a pipeline that would take product from
the Catlettsburg refinery in Kentucky up to Columbus.
In addition to that, I'll show a picture here of Creal
Springs. This is the endpoint of the new Centennial pipeline
which has the capacity to move 200,000 barrels a day into
southern Illinois. This is just a picture which illustrates the
2.2-million-barrel tank farm that we have built, and that
system is now operating and has the ability to bring that to
the Midwest.
And, last, I stated our refinery in Garyville, Louisiana,
invested $300 million to build a new coker which provides
enough fuel for another 60,000 cars per day. So we have
invested heavily.
Senator Collins. Mr. Pillari.
Mr. Pillari. Yes, Senator. We've invested in our Toledo and
Whiting refineries to be able to make more RFG product in the
last 2 years, and we have maintained our terminaling system as
it has been.
I would say in coming back to the fundamentals of this that
one of the things that has to happen with investing in
terminals or inventory is it has to be a good economic decision
for the long run, not just for 3 or 4 days. And I think in our
company's case, we are more of a buyer on the marketplace than
maybe some others. We buy almost 40 percent of our product from
other suppliers.
Senator Collins. Mr. Reeves.
Mr. Reeves. Thank you. I think it's fair to say that over
the last decade or so, the vast majority of our investments in
the refining and marketing business have been to do two things:
Improve the reliability and meet the environmental standards on
refining, and to grow our retail business. That's it
essentially--and they're roughly equal.
I think you've heard a lot of testimony in the opening
comments about the returns on the refining investment--the
refining and marketing business in the United States which have
historically been very low. The industry does not attract a lot
of discretionary capital, and, therefore, we just have chosen
to invest in the things that we need to do to run reliably and
make sure that we get the value out of the assets that we
already own.
And if I could just correct the record, Senator Levin asked
me earlier on a question which we passed by quickly, did we
ever buy or sell--buy capacity and then shut it down. And I
said no. During the Gulf merger in 1985, there were some
refineries that came with that merger. One was in Philadelphia
that ultimately did shut down. It was one of those that you
heard of. So we didn't buy it to shut it down, but it was shut
down. And then we have sold--we did sell our Port Arthur,
Texas, refinery to Clark back in the early 1990's, just to
correct the record.
Senator Collins. Mr. Reeves, I want to follow up on that
point then. Why would you shut down a refinery when there is a
shortage of refining capacity?
Mr. Reeves. Well, certainly at the time Philadelphia was
shut down, that wasn't the case.\1\ It was in the middle of the
1980's. There was plenty of surplus refining capacity, and it
was uneconomic to run.
---------------------------------------------------------------------------
\1\ See Exhibit No. 30, May 14, 2002 clarification letter from
ChevronTexaco which appears in the Appendix on page 287.
---------------------------------------------------------------------------
Senator Collins. Mr. Routs, my original question.
Mr. Routs. Senator, in the 1990's, we invested about a
billion and a half in our refineries for clean fuels and CARB
fuels. We are looking forward to investing over the next 5 to 7
years another billion dollars in low-sulfur gasoline, low-
sulfur diesel, the consent decree that we have done with the
EPA on the emission side of the business. We started up last
year a $300 million coker in Deer Park in Houston that is
delivering more product to the market. And we're investing a
lot of money and human capital in getting the reliability of
our refineries and systems up, because in the end, getting our
refineries to run properly is going to create more volume for
the market. We've had in the past some trouble doing that, and
right now we're investing 200 man-years in order to train
people properly to get the most out of those places, and that
will help the consumer.
On the pipeline side, we've heavily supported the expansion
of the Explorer pipeline that is now in the process of getting
expanded by about 100,000 barrels. That will bring more volume
into Chicago. And we're actually in construction of the Two
Rivers pipeline which will bring more volume from the mid-
continent into the Ohio region. So there is a fair bit of
investment going on as we speak, and that should help the end
consumer in the years to come.
Senator Collins. Mr. Chairman, since two--well, now one of
our colleagues has not had a chance to question yet and the
hour is late, I am just going to make one final comment in the
hopes of letting Senator Bunning question before we break for
lunch, and that is that consumers are not the cause of refinery
glitches, whether it is a fire or--nor are they to blame for
industry supply miscalculations, nor are they to blame for
infrastructure shortcomings.
It concerns me that every year, as predictable as Memorial
Day, are price spikes; we just know that is going to happen.
And it seems to me that the industry could do more to try to
even out the pricing and prevent those spikes. And I still
don't feel like I have gotten a good answer to why these
investments have not been made before now, why they are not
being made more aggressively, and that is what leads people to
conclude, perhaps completely unfairly, that the industry is
manipulating supplies or wants tight suppliers or wants
shortages in order to drive up prices and, thus, profits.
So I think at the least that you need to give us a better
understanding of what you are doing to learn from past
experience and prevent these disruptions that are so burdensome
to our economy and to the average consumer.
Thank you, Mr. Chairman.
Senator Levin. Thank you very much, Senator Collins.
Senator Bunning.
Senator Bunning. Let me start off by saying nothing lights
up my phone more in my local office, in my Washington office,
when we see a 10- or a 15- or, for that matter, a 20-cent-per-
gallon increase today or tomorrow, and then over a period of
time it gradually reduces down maybe about to where it was, and
then all of a sudden we have another increase of 15 cents a
gallon, like we did 2 weeks ago. Nothing more infuriates the
consumer because they do not understand the complications that
go into it.
The question I want to ask, can you explain how zone
pricing works for each of your companies? The Subcommittee
report points out that some retailers here in Washington, DC,
felt that they were not able to compete with other stations
just across the river in Virginia, for instance, because of the
zone they were in. How do you respond to this? Is it the zoning
price that causes the great big fluctuations or is it something
else?
We will start with the ExxonMobil people.
Mr. Carter. Thank you, Senator.
The way we establish zones is we go into the marketplace,
and we look at competition. And where we have a group of
dealers that face similar competition, we set up a price zone
for them so we can price to them, at a level which allows them
to compete with their local competition, and we do that all
over the country. We have been doing it for at least 30 years,
my entire career.
Senator Bunning. Let me explain. I can go over in Virginia
and buy gas 25 cents less for unleaded regular than if I buy it
in Washington, DC. Is that taxes or what is it? What causes
that?
Mr. Carter. I'm not familiar with the taxes in Washington,
DC. I would be happy to get back to you with that. I can tell
you that it is extraordinarily difficult to build a service
station in Washington, DC. We would love to build more stations
here. The last time we tried to build a new-to-industry station
here, we spent over a million dollars to buy a piece of
property on the expectation we would be able to get a permit,
that the community would welcome another service station. In
fact, after a number of years, we could not get a permit, and
we had to sell that piece of property at a significant loss.
So there are fewer stations in Washington, DC, because of
permitting----
Senator Bunning. I know that land costs are high, but----
Mr. Carter [continuing]. And the land costs.
Senator Bunning. Are they trying to recoup the land costs
from the price of the gasoline, do you think?
Mr. Carter. We, and our dealers, try to recoup our cost,
and the dealer is ultimately--there are no company-operated
stations in Washington----
Senator Bunning. So it is dealer operated.
Mr. Carter. Right, it's the dealer that does the pricing.
Mr. Heminger. Senator, Marathon Ashland Petroleum does not
market here in Virginia or Washington, DC.
Senator Bunning. OK, but you have a zone pricing.
Mr. Heminger. But for zone pricing, within our Marathon-
brand stations, we have zone pricing, and each station is set
up on its own price grid, and therefore a zone. And they are
priced individually against the grid or against the competition
on that zone. So I would say each one of those grids is
competitive against its own other market competitors.
Senator Bunning. No matter how much the cost of the product
that you are sending into that zone?
Mr. Heminger. The cost of the product is a big part of how
we decide to set the price on a daily basis.
Senator Bunning. What we are getting at is the Midwest,
obviously, because of the huge spikes in the prices that
occurred in the Midwest in the past couple of years. That is
what I want to know. I know you are located right in the middle
of the Midwest, did the Midwest structure differ from where you
sell out of the Midwest?
Mr. Heminger. Within the Midwest, I see the Midwest, as
other parts of the country, but specifically the Midwest, as
being one of the most fiercest, competitive areas in the
marketplace. Every day we look at our prices. And we have a
very small number of customers that are on zone pricing, the
balance are through our Speedway stores, which are direct-
operated stations. Every day we look at those, and our strategy
has always been, as we shared with the staff, is to be the
lowest price on the street. And every day as you----
Senator Bunning. That is hard to do because there's
independents who probably buy a product from you and someone
else who will take a lesser of a margin on that same gallon of
gasoline that drives the price down. I use convenience stores
and other independents. I do not know where they are getting
their product, but obviously the wholesale price of that
gasoline that they are buying, they are getting a less markup
on because they are underselling your Speedway stations in my
area.
Mr. Heminger. Well, Senator, we attempt to match the lowest
price on the street, and therein goes the volume that we sell
on a daily basis. If we do not match the lowest price on the
street, and we are a very big supplier to the balance of the
independents in the marketplace, you are absolutely correct,
but if we don't match the lowest price on the street, just a
penny, therein goes our sales. So we watch that every day to
ensure that we are competitive on the street.
Senator Bunning. Let me ask you something different because
it is really--BP has a station in Highland Heights, Kentucky.
It is the lowest priced gasoline in my whole area, but BP also
has a station right across from my office in Northern Kentucky
that is one of the highest priced gasoline in my area--as much
as 20 cents more a gallon. Now how do I explain that to
somebody who calls me and says, ``What are you doing about the
price of BP's gasoline over here in Fort Wright, Kentucky, when
I can go over in Highland Heights, Kentucky, and buy it for 20
cents a gallon cheaper?''
Mr. Pillari. Well, first of all, I'm pleased that you have
noticed us. I hope you are a customer.
Senator Bunning. I wouldn't know your two stations.
Mr. Pillari. I have never been to those stations, but in
that area we are basically jobber and dealer. So those
locations in that area would buy product from us and then set
their own retail price, and each dealer or jobber would
determine how they want to set that price. Some of them prefer
a low-volume, high-price strategy to get the cash they need to
run their business. Others will prefer a lower price and try to
get a higher volume to get the cash to meet their economic
needs. And so you can see big swings within the market based on
how each individual----
Senator Bunning. Even in your own stations.
Mr. Pillari. Yes.
Senator Bunning. Even with your BP markets.
Mr. Pillari. Yes, absolutely.
Senator Bunning. Mr. Reeves.
Mr. Reeves. Thank you.
Of course, we don't operate in the Midwest, so I will give
you a broader answer than just the Midwest.
Senator Bunning. All right, zone pricing.
Mr. Reeves. Zone pricing. I'll go back to the original
question, thanks.
I always think of zone pricing, and I was reminded actually
this morning, when I paid my hotel bill, zone pricing sounds
mysterious, but it's really meeting local, relevant
competition, and that's why hotel bills are different in
Washington, DC, or across the river in Virginia or in Kansas
City or elsewhere. It's the dynamic of meeting competition, and
that's our basic philosophy.
Zone pricing is just that. It is figuring out what's a
relevant area of competition, and who do you want to compete
against and why, and figuring out where to set your price
relative to those, so that you can get the volume that you need
and the balance between volume, and price, and margin is what
generates the cash to run the business. And it sounds
mysterious, and it sounds complicated, but it is actually as
simple as meeting local competition.
Senator Bunning. It is hard to explain to the average
consumer----
Mr. Reeves. Very hard. I've been trying to do it for a lot
of years.
Senator Bunning. And that is who we are trying to explain
it to every day, why there is a 15--today, we were buying
gasoline at 94 cents for regular unleaded at one time just like
4 months ago, and now it is at $1.44 for regular unleaded in
the same area. So that's a 50-cent-per-gallon increase, and boy
that will bring the consumer right to your door.
Mr. Routs. Basically, the same story. It's all determined
and set by the competition in the neighborhood. I must say
cases like you mentioned of across the river and across the
street we will look at because it is not a very healthy
circumstance when one side of the road has one price and the
other side of the road has another price. Then you start
looking at things like is there a median in the street, and are
people going to take that detour to actually go to the lower
price range? So all of that is being balanced in order to
arrive at the right situation in the end.
Senator Bunning. I know how the price of gasolines compare
over the last 30 years, and even longer. We are getting a
bargain, actually, here in the United States. If you travel
anywhere, our prices per gallon are much cheaper than they are,
for instance, in Europe and other places. But the Midwest seems
to chronically be short of product. Please explain why that is.
Mr. Heminger. Senator Bunning, as I testified, the Midwest
imports approximately a million barrels per day of gasoline and
diesel fuel above and beyond what is manufactured in the
Midwest, and when you go back and look at the amount of product
that is coming in from the Gulf Coast, there were two major
pipelines, an Explorer pipeline and TEPPCO pipeline, which had
the ability to ship about 750,000 barrels a day into the
Midwest at peak. We just started up, as I stated, the
Centennial pipeline, which will have the ability to bring
another 200,000 barrels a day.
Since the Midwest only refines approximately 75 percent of
its demand, it's important, and the only way to really bring
it, we bring a little bit from the East Coast, from the harbor
market, but the majority of it comes from the Gulf Coast. The
Gulf Coast is the flywheel supply to the United States. And we
have attempted here to lay this new pipeline that is going to
go from Catlettsburg, a 240,000-barrel-a-day refinery, into
Ohio to take some of the pressure off of the Midwest. And as I
stated earlier, we're still 4\1/2\ years into the project to
try to get a permit.
Senator Bunning. A regulatory quagmire, I understand that.
Mr. Heminger. Yes.
Senator Bunning. We will try to get you out of that, but
the point being that there is 75 percent only being produced in
the Midwest that is being used. That is correct.
You talk about capacity and refineries. Are any of your
companies thinking about building new refineries, since it has
been well over 20-plus years that we have built new refineries
in the United States, any of you?
Mr. Reeves. No.
Mr. Routs. We are not.
Mr. Pillari. No, sir.
Mr. Heminger. No, sir.
Senator Bunning. And the reason is that it is not
environmentally possible, it is not economical? What is the
reason?
Mr. Routs. I think it's been said before the refining
business over the last 10 years has had returns of an average
of about 5 percent.
Senator Bunning. So it is cheaper to bring it in.
Mr. Routs. That's right.
Senator Bunning. Just buy it and put our dependency on
foreign crude and foreign gasoline at a higher--we are going to
be over 60 percent very shortly.
Mr. Routs. If you will allow me, Senator, we had a refinery
in Wood River in the mid-continent, and we decided to sell that
to Tosco at the time because of the very low returns that
refinery had. So that's the kind of a view we had on the
refining industry at the time.
Senator Bunning. Thank you very much, Mr. Chairman.
Senator Levin. Thank you, Senator Bunning.
I think we are going to, if it is all right with our
witnesses, I think what we will do is work right through the
lunch hour. We may be able to finish by 1:30, depending on
whether colleagues come back or not. Is that agreeable with all
of you?
Mr. Pillari. That is fine.
Senator Levin. I want to go back to the ExxonMobil E-mail
that is on Page 228. It is Exhibit 15.\1\ Mr. Carter, this is
where--back to Powerine, where it says, ``Needless to say, we
would all like to see Powerine stay down. Full court press is
warranted in this case and I know Brian and Chuck are working
this hard.''
---------------------------------------------------------------------------
\1\ See Exhibit No. 15 which appears in the Appendix on page 267.
---------------------------------------------------------------------------
Can you tell us what that ``full court press'' entailed?
Mr. Carter. Yes, Senator. My understanding is that that
meant that we were going to oppose their petition before the
regulatory body in California to allow them to manufacture and
sell in California gasoline that didn't meet the air
requirements.
Senator Levin. Is that all that was done?
Mr. Carter. To my knowledge, that's correct, sir.
Senator Levin. Mr. Pillari, on Page 219,\2\ I want to refer
you to a document from 1996. This document came from ARCO,
which BP Amoco acquired in 2000. It is a presentation to senior
ARCO managers, and it says the following:
---------------------------------------------------------------------------
\2\ See Permanent Subcommittee on Investigations' Majority Staff
Report, Gas Prices: How Are They Really Set, which is reprinted in the
Appendix on page 322.
---------------------------------------------------------------------------
``From time to time, APC,'' which is ARCO, ``may need to
endure brush fires to discipline the market, exchange and trade
selectively to preserve market discipline.''
Can you explain to us what you think ARCO meant by
``disciplining the market'' or ``preserving market
discipline.''
Mr. Pillari. Sir, I don't know what they meant. This was
quite a long time ago before we were involved.
Senator Levin. Have you ever heard the term ``preserve
market discipline''? Have you ever used the term or heard it?
Mr. Pillari. No, sir.
Senator Levin. This is another example where it is not just
sort of market factors which are controlling, this is another
example of companies taking very specific actions to impact
that market--in this case, exchange and trade.
Now I want to talk to you about this memo on Page 273.\2\
This is a document from the Marathon files, dated October 1,
1998, and it appears that Marathon was pleased that Hurricane
George came through and knocked out a refinery. Here is what
the document says:
``As OPEC and other exporters' efforts to rein in output
began bearing fruit, nature stepped in to lend the oil
producers a helping hand in the form of Hurricane George, which
caused some major refinery closures, threatened off-shore oil
production and imports, and generally leant some bullishness to
the oil futures markets. However, this storm-induced optimism
is likely to prove temporary, leading to some pullback in
prices prior to the heavier worldwide demands for crude in late
fall and early winter.''
Mr. Heminger, it is quite an amazing document, actually,
that you would view the hurricane as nature providing oil
producers a helping hand. What do you have to say about that
memo?
Mr. Heminger. Mr. Chairman, first of all, I apologize for
any inference whatsoever that is taken from this document or
anything taken out of context in this document that states that
my company would find pleasure in any natural disaster. That is
totally an incorrect interpretation.
What that document is, is on a monthly basis we basically
recite the EIA, OPIS, other industry magazines, other industry
reports about what is going on in the crude oil market and what
we expect the future price is going to be. This merely recites
what was stated at that point in time for the cause of the
increase in crude oil prices. But we have employees in the Gulf
of Mexico working on a LOOP platform, we have employees at our
parent company working on production platforms and a number of
employees working in the marine business that would be off of
the Gulf of Mexico. We certainly would never want anything to
happen to anyone.
Senator Levin. Well, first of all, I think you will agree I
read the whole paragraph. I did not take words out of context;
is that not correct?
Mr. Heminger. That's correct, Mr. Chairman.
Senator Levin. And, second, I want to get to the heart of
the matter, which is that reining in output, reducing supply
helped oil producers; is that correct?
Mr. Heminger. What that document is discussing is crude oil
prices only. And when it talks about they had to shut down
platforms, in a hurricane disaster and safety procedures, you
have to shut in the platforms, and many times we shut in
pipelines that are bringing off-shore crude oil into the
marketplace.
Senator Levin. How does that help producers? How does
closing, major refinery closures, it says here, help oil
producers?
Mr. Heminger. Closing a major refinery, Senator, never
helps a producer.
Senator Levin. Let me read it to you again, putting aside
the reference to Hurricane George for a minute.
``As OPEC and other exporters' efforts to rein in output,''
reduce output, ``began bearing fruit, nature stepped in to lend
the oil producers a helping hand, in the form of Hurricane
George, which caused some major refinery closures.''
Now, putting aside the fact that it was Hurricane George
which did that, the closing of major refinery closures is
referred to in that document as lending oil producers a helping
hand.
Mr. Heminger. I cannot--I did not write the document, first
of all, but closing a major refiner or refinery would never
help a producer because that would take additional demand off
of the marketplace.
And what that report back at that time was discussing was
the global crude oil market. And as you are aware, OPEC's back-
and-forth stance on whether they're going to produce more or
produce less, that was specifically speaking to reports from
the EIA and from other industry reports talking about the
global crude oil market.
Senator Levin. Do you know who wrote this document?
Mr. Heminger. I'm aware, yes, sir.
Senator Levin. Who is it?
Mr. Heminger. A gentleman in our Economics Department.
Senator Levin. Have you talked to the person and said, ``My
God, what are you saying here? You are saying exactly what
Senator Levin is saying, which is that reducing supply can help
us here. Controlling supply, having a tight supply is good for
oil producers. That is what Senator Levin is saying, and my
gosh you put it all there right in the first paragraph''?
Did you talk to this man about this?
Mr. Heminger. I have not spoken to this man yet, no.
Senator Levin. I am sure you will after this hearing.
Mr. Heminger. Yes, sir.
Senator Levin. Now let's go to the first few words. ``As
OPEC and other exporters' efforts to rein in output began
bearing fruit.'' That is bitter fruit for most consumers. When
OPEC reins in output, it is bitter fruit for the consumers of
America. We fight that, and yet here is your economist saying
that when OPEC and other exporters rein in output, it bears
fruit.
How does he--explain those words.
Mr. Heminger. First of all, reining in production, from a
producer's standpoint, has no benefit whatsoever to the
downstream part of our business. So I never like to see
increased crude oil prices.
Senator Levin. It says here it ``lends oil producers a
helping hand.'' ``Nature stepped in.''
Putting aside the reference, the crude reference out of
Hurricane George, OK, put that aside, just the fact that OPEC
is reining in output is bearing fruit, that is a positive
reference. Bearing fruit means it is good. Your economist says
that is good. You are saying it is not. Your document says it
is. Why? It lends oil producers a helping hand, and it talks
about closing major refineries. That is a plus.
It is evidence of exactly what the report's conclusion here
is, it seems to me, but I want to just again give you a chance,
just on the OPEC issue, reining in output is referred to as
bearing fruit, and I just want to be sure you are saying, from
your perspective, that is wrong.
Mr. Heminger. From my perspective, that is discussing about
a crude oil producer, not a refiner and a marketer.
Senator Levin. Your company is a refiner and marketer, is
it not?
Mr. Heminger. Yes, Mr. Chairman.
Senator Levin. ``And this storm-induced optimism is likely
to be temporary.'' The good news is like to be temporary; isn't
that what this is saying?
Mr. Heminger. Any time there is a natural disaster and we
have to take our employees out of the Gulf of Mexico or close
down a refinery is generally very temporary, and it's never
good.
Senator Levin. The staff report, now turning to California,
found that ``a number of refiners sought to limit the amount of
supply in order to get higher margins. And to reduce supply,
the refiners sought to increase exports, limit imports,
eliminate the oxygenate mandate and prevent additional refinery
capacity from operating.''
I just want to repeat it. This is what the staff report
finds, and it has got the evidence set forth right there,
bountifully.
``A number of refiners sought to limit the amount of supply
in order to get higher margins.'' How do you reduce supplies?
Refiners sought to increase exports from California, limit
imports to California, eliminate the oxygenate mandate and
prevent additional refinery capacity from operating.
I want to just look at a couple of memos here now on
limiting imports into California. First, on Page 218, and it is
Exhibit 18.\1\ This is a Texaco memo, and the Texaco
representative is reporting a conversation that he had with a
representative from Shell regarding Texaco's plan for
manufacturing gasoline under new standards that were brought
about to take effect in the fear that Texaco would import
gasoline. So that is the fear. This is 1992. Now the Texaco
official reports that the Shell representative said the
following:
---------------------------------------------------------------------------
\1\ See Exhibit No. 18 which appears in the Appendix on page 271.
---------------------------------------------------------------------------
``Shell and the other oil companies are extremely concerned
about Texaco's silence--'' Let me read that again.
``Shell and the other oil companies are extremely concerned
about Texaco's silence and the lack of activity concerning our
plans toward CARB Phase 2 compliance.'' The Shell
representative called Texaco a ``wild card'' and said, ``We are
nervous about it.'' The Texaco official said that an ARCO plant
manager expressed the same concerns at a refinery managers
meeting in April.
I am going to address this to you, Mr. Routs, because you
now speak for not just Shell, as I understand it, but for part
of the old Texaco; is that correct?
Mr. Routs. Indeed. We went into a joint venture with Texaco
in 1998 and bought them out in 2002.
Senator Levin. The document here, the memo, talks about
Texaco's silence. What silence would that be referring to?
Mr. Routs. Not having been involved in these discussions,
Senator Levin, I have no idea. I have to assume that the
industry was announcing what they were going to do about this
whole thing, in terms of capital investment, and that Texaco
hadn't announced, but again that is a speculation, but that's
what happens in other parts of the world.
Senator Levin. The memo refers to Texaco as a ``wild
card.'' Do you know what that means? Are the other companies
known or----
Mr. Routs. It's not the kind of language that I would allow
in my company today, Senator.
Senator Levin. OK. Is it standard practice within your
company to ask other refiners about their plans for refining
gasoline?
Mr. Routs. It is not.
Senator Levin. That would be borderline collusion, wouldn't
it?
Mr. Routs. That would be absolutely forbidden, and our
lawyers----
Senator Levin. Because it might be collusion.
Mr. Routs. Our lawyers would take action. We think it's
anticompetitive, yes.
Senator Levin. OK. Now the Shell representative here
apparently said of Texaco imports, ``Shell will seek a tax on
the importation of RFG.''
Do you know anything about that effort, Mr. Routs?
Mr. Routs. I don't know anything about the effort, Senator.
Senator Levin. It looks like a direct threat to Texaco.
That would surely be an anticompetitive action, would it not?
Mr. Routs. Believe me that I find it incredible that if a
conversation like this has taken place in the past, that it is
absolutely not acceptable in our norms and ethics of today and
at the time, for that matter.
Senator Levin. Let me just interrupt for one second. We
decided, I hope, with everybody's consent, although you weren't
here to give it to me, that we would work right through the
lunch hour. And so you can, any time you are ready, if you have
additional questions, I can just stop and pick up----
Senator Voinovich. You are going to continue?
Senator Levin. I am going to continue for some time.
Senator Voinovich. This is Governmental Affairs, and we are
involved in looking at the entire operation of the government
and how it operates. If I recall correctly, when I met with a
representative from BP in my office, he indicated to me that
they didn't need more refineries here in the United States, and
also there was an indication that the boutique gasoline
problem, our various RFG formulas, were not that big a problem.
I heard this morning that these various numbers of
gasoline, over 91--you used to have 6 and now you have 90--is a
problem, that looking at that situation and changing it would
help ease the spikes that we are seeing.
The other thing that I am concerned about is that if we
only have limited refinery capacity and if one of them goes
down, again, we see prices spike. I would like to eliminate all
of the causes that you have put on the table that cause spikes.
Now we can't do much about the issue of crude oil, and that is
a problem that we have had, and we are going to continue to
have for a long time. I think it is going to get a whole lot
worse before it gets better, but that is something that we are
going to have to spend some time with.
But the issue of refineries, I would like to hear from all
of you how do we get another refinery built here? I think we
need more refineries. The first question is do we need more
refineries? I want to hear from each one of you, do we need
more refineries?
Mr. Carter. Senator, my company doesn't need any more
refineries. We have done a really excellent job of expanding
the ones we have. They are large refineries. They are highly
efficient. Under previous regulations, we have been able to
expand those and have added considerably to our capacity over
the years.
This incremental growth of refining capacity, however, is
threatened by current New Source Review regulations. They are
difficult to interpret. They are being interpreted
retroactively. The DOE and EPA are studying those. We have
submitted a report to them with our recommendations. I would be
happy to get you a copy of that report, but in our view, that
is the largest threat out there to increasing refinery
capacity.
Senator Voinovich. So, as far as your company is concerned,
you have the facilities and, with clarification of New Source
Review, you think you'd be OK in terms of your refinery; is
that right?
Mr. Carter. With that exception, and also in my testimony,
I mentioned the new sulfur regulations, potential phase-out of
MTBE, the need to coordinate these changes in gasoline
regulations so that we have the time to make the investments,
and they don't gang up on us. The NPC has done a study of that.
They have raised some doubts whether the industry will be in
position to meet all of the new software requirements, as well
as MTBE phase-out. So I think those should be coordinated as
well, sir.
Senator Voinovich. So we have to coordinate the MBTE phase-
out, and you are going forward with the sulfur regulation, but
you think you are going to have a problem in complying with it,
as Congress has mandated; is that correct?
Mr. Carter. The NPC found that. I, personally, have a lot
of confidence in my company, but when the NPC looked at the
entire industry, they raised some doubts about the industry's
ability.
Senator Voinovich. How about the sulfur implementation?
Mr. Carter. All of these together.
Senator Voinovich. Mr. Heminger.
Mr. Heminger. Yes, Senator, we have invested heavily in our
refineries. In fact, I stated we just invested $300 million to
upgrade our plant in Garyville, and we are going to have to
invest between $600 and $700 million just to meet the low-
sulfur regs for gasoline and diesel by 2006 to 2008 time frame.
So we are going to continue to invest, but that is investment
just to keep today's capacity where it is. If you take between
$600 and $700 million of investment, with basically no return
off of that investment because I look at that as ``stay in
business'' capital, I would say it is going to hurt us to
continue to invest in new refineries.
To go back to your other question, would we invest in a new
refinery? We certainly would give strong consideration to that.
I believe, though, it needs to be on the same pipeline or the
same corridor of the pipeline and the infrastructures that we
have available in the country today. But as I have also stated
how difficult it has been to get a permit to do a very small
pipeline, we find it many multiples more difficult to be able
to try to increase refining output.
Senator Voinovich. Mr. Pillari.
Mr. Pillari. Thank you, Senator.
We are investing heavily in our core refineries, those that
we believe have the best long-term future. As you know, we have
been selling refineries. All of them are still operating in the
marketplace, but we have been selling them because we believe
that the economics of the business support an alternate
purchase rather than an investment in a new refinery.
Senator Voinovich. Is all of the crude oil that comes into
this country refined here or is some of it refined when we
bring it in? Is all of it refined in the United States? How
much?
Mr. Pillari. All of the crude oil that we bring into the
country?
Senator Voinovich. Yes.
Mr. Pillari. Everything we bring into the country is
refined here.
Senator Voinovich. It is refined in the United States?
Mr. Pillari. Yes.
Senator Voinovich. Why don't you bring in refined oil?
Mr. Pillari. We also bring in refined oil products.
Senator Voinovich. So you have options. BP has options. You
can either have somebody refine it here or you bring in oil
that is refined.
Mr. Pillari. Correct.
Senator Voinovich. Why doesn't that take care of the
problem when a refinery breaks down, if you can just bring it
in from someplace else?
Mr. Pillari. Well, it takes a little while to get it here,
and I think there are two things about it. First off, when
something unusual happens, if it is significant, like the fire
at the Citgo refinery last year, something that major that
takes a lot of product out of the marketplace, it takes a
little while, particularly in the Midwest, for the product to
come in through the Gulf Coast or through New York or somewhere
to get up there. So there are logistics issues for getting up
there, and at the same time, you are also then dealing in the
spot market, which is reacting to the marketplace.
Senator Voinovich. Does BP think we need more refineries in
the United States?
Mr. Pillari. We think we don't need more refineries.
Senator Voinovich. I know that because you got rid of one
in Lima, and thank God a company picked it up and it is
refining. I don't know what we would have done if they had shut
that place down.
Mr. Reeves.
Mr. Reeves. Similar to earlier answers, Senator, the vast
majority of our capital over the last certainly 6 or 8 years
has gone into meeting environmental performance requirements,
and very much of that driven in California. That is where the
majority of our refining capacity lies.
Also, looking at California, I find it inconceivable that
in California's climate today a new refinery could be built. We
also have a large refinery in Mississippi, which is under
construction right now to meet the new clean fuel standards.
There will be some minor expansion of capacity there, but
certainly nothing major.
The answer to the second question, which is do we need more
refining capacity, ultimately, demand is going to outstrip the
capacity of the refining industry in the United States over the
next 20 years. The question is how do you meet that? Is it
going to be imports? Is it going to be constructed? Generally,
today there is adequate refining capacity in the world to
import products to meet U.S. demand, and barring any unforeseen
circumstances, I would guess that is how it is going to evolve.
Senator Voinovich. No new refineries. Mr. Routs.
Mr. Routs. No new refineries. Actually, we are going the
other way. The refinery coverage is about 70 percent of our
branded sales. We have sold over the last couple of years two
refineries. They are still operating. But this is a business,
as I said earlier, that has very low returns, and where we have
to spend billions of dollars in order to meet the requirements
of clean fuels and the requirements of emissions. And don't
take me wrong, I think those things are necessary to protect
the environment, but in the end, it's not a business that makes
a lot of money. So what we are looking at actually is to,
through a global trading system, to bring more gasoline into
the country.
Now you asked a question why doesn't it happen all of the
time? Time requirements are one, but the other one also is
arbitrage. Gasoline might just be more expensive in Europe, and
prices have to come in this country, in terms--for gasoline to
move from Europe to the United States.
So all of those things have to adjust and get balanced
before a cargo gets sent this way.
Senator Voinovich. So, basically, all of you are saying
that none of you are going to build any new refineries. In
fact, many of you are selling them because the rate of return
on them is not that good, those are environmental problems of
going forward with them, and you've got a problem with the ones
you have right now because you don't know where you stand on
New Source Review; is that about it?
But what it basically says is, if a major refinery goes
down in the United States, the people in the United States,
depending on where it is, can experience what we did 2 years
ago in the Midwest; is that right? And if we import it here, we
are going to pay more for it because of where it is coming
from. So that is a question that we ought to discuss, Mr.
Chairman, as to what can we do to create an environment where
companies are willing to build more refineries here in this
country.
My last question adresses the problem of reformulated gas,
the various degrees of reformulated gas that we have.
What is the answer? Is it a problem or isn't it a problem?
Mr. Reeves. Well, I'll take a shot at it, Senator.
It is a problem for the distribution system. To date, it
has been a problem that can be overcome, but generally creates
or at least is a contributing factor to some of the price
volatility. I think it's important to remember that those
boutique fuels were created as our legislative, and
environmental, and regulatory communities, and the business
communities tried to seek a balance. They weren't created with
ill will, they were created to match local environmental
conditions and then place requirements on the people that
manufacture fuels that are sold there.
So I think the boutique fuel issue, looking ahead of us, is
going to be very difficult to overcome because it almost either
requires everybody to come up to the highest possible standard,
which can place some costs on people that don't currently
reflect those costs in their prices, or it asks people to lower
their environmental performance expectations in certain
markets, to lower them to the average, and I don't see that as
a very easy thing to change.
Senator Voinovich. Is there anybody from the industry that
is looking at these 90 different RFGs to find out if there is
an easier way of skinning the cat, and getting the job done and
respecting the environment? Are they?
Mr. Heminger. Senator, I know the National Petroleum
Refining Association and the American Petroleum Institute have
been working on that question.
Mr. Routs. As the chair of the Downstream Committee of the
API, we have been pushing very strongly to get the number of
gasolines reduced, and we have had a proposal in, and actually
in the new energy bill some of those proposals are going to be
worked. So we think there is a solution in sight. It is just a
matter of arriving at the right balance between what we can put
in our distribution system and what is acceptable to the
environment.
Senator Voinovich. So your suggestion is that we ought to
see if there is a way that we can smooth it out a bit and get
rid of some of the jagged edges. But the public has to
understand that if you are doing this kind of gasoline, that
they are going to have to pay more for it at the pump.
I remember well, as governor of Ohio, we had the issue of
our reformulated gas in Cincinnati, and the choice was we go
RFG or we go to emissions testing. I opted for emissions
testing because I knew that if we went to the reformulated
gasoline, it would cost more money for our people, and we could
comply with the law in a cheaper way by doing the emissions
testing.
I think that one of the things that the public has to
understand is that the environmental considerations have had a
dramatic impact on your businesses and that, as you point out
Mr. Reeves, in many instances they are proper requirements, but
the fact of the matter is that you are going to have to pay for
it.
There is a public perception that the oil companies are
making money hand over fist. I would like to know from you, Mr.
Heminger, what has happened to your stock price in the last
several years. Are you making out like a bandit because of
these spikes at the pump?
Mr. Heminger. Well, our stock price is really reflected in
both parents, Marathon and Ashland, and I would say that, no,
our stock price has been relatively flat over the last number
of years.
Senator Voinovich. What do you mean by flat?
Mr. Heminger. We have not seen any sustainable increase in
rates of return. Therefore, we have not seen any growth or any
increased value in the market capitalization of our stocks.
Senator Voinovich. There was a brief period there where the
stock prices went up, and then they came down again, correct?
Mr. Pillari, you are worldwide, BP?
Mr. Pillari. Correct. Our share price has been almost as
volatile as gasoline prices in the last 5 or 6 years. I think
today we are probably sitting somewhere in the low fifties. We
have dropped $3 or $4 just in the last month or so, and we have
been as low as the forties. So we've seen quite a bit of
volatility.
Senator Voinovich. Mr. Reeves.
Mr. Reeves. That would be the same for us. We're right now
in the mid eighties, up as high as the mid to high nineties and
to the low seventies over the course of the last 2\1/2\ years.
Mr. Routs. Royal Dutch shares, same thing happened in the
mid sixties. We are right now trading around fifty.
Senator Voinovich. Mr. Carter.
Mr. Carter. Same answer. Our stock today, I mean, it
fluctuates as well, but if you look at it today versus 2 or 3
years ago, it is lower.
Senator Voinovich. Mr. Chairman, I have no other questions
at this time.
Senator Levin. Thank you, Senator Voinovich.
Let me ask, first, Mr. Carter a question about a document
on Page 214.\1\ It is a document that discusses limiting
imports into California, and it is a strategy discussion by
officials from Exxon who were looking at the West Coast supply
picture.
---------------------------------------------------------------------------
\1\ See Permanent Subcommittee on Investigations' Majority Staff
Report, Gas Prices: How Are They Really Set, which is reprinted in the
Appendix on page 322.
---------------------------------------------------------------------------
And then on the last page of that memo, which is Page 214,
there are several general strategy considerations, and I want
to just make reference to one of them. In the first bullet,
there is a proposal that Exxon, ``Should not do deals that
support others importing barrels to the West Coast.'' What kind
of deals would that bullet be referring to?
Mr. Carter. Mr. Chairman, I am not absolutely familiar with
the memo. I can tell you about our practices on the West Coast.
Many times we have manufactured California-grade gasoline in
our refinery at Baytown, Texas, and we have shipped it all the
way around, up the West Coast, into California at considerable
expense, and in many cases we have lost money on that gasoline.
As the report indicates, the California and West Coast
marketplace is isolated. It's sometimes long of product, it's
sometimes short of product. In short periods, we have often
manufactured the gasoline on the West Coast, the East Coast or
Gulf Coast and moved it all the way around.
I take this memo to refer to those times when the supply is
long. That is the only thing I can assume that it's referring
to.
Senator Levin. Now, there is also a ChevronTexaco memo,
which is Exhibit 19,\2\ and this----
---------------------------------------------------------------------------
\2\ See Exhibit No. 19 which appears in the Appendix on page 272.
---------------------------------------------------------------------------
Mr. Reeves. I'm sorry, Senator, what page would that be?
Senator Levin. This is Exhibit 19. That is on Page 202.
Mr. Reeves. Thank you.
Senator Levin. This is a study which says the following:
``Exports becoming a more important factor in balancing
light product supply and demand.''
So this memo starts or that reference highlights the use of
exports of gasoline to keep supplies tight. And then it goes on
to make another important statement. It says the following:
``Market is dominated by limited number of large, committed
refiner/marketers whose individual actions can have significant
market impact.''
Now that is pretty much what our conclusion is in the
report, so I am going to read it again.
``Market is dominated by limited number of large, committed
refiner/marketers whose individual actions can have significant
market impact.''
That's what a highly concentrated market is all about. I'm
just wondering whether or not, let's see, this would be you,
Mr. Reeves, do you agree with that statement from your
document?
Mr. Reeves. Well, actually I've been with the Chevron
organization long enough that I was actually part of the study
team that put this together.
Senator Levin. Better yet.
Mr. Reeves. So I can reply to it.
Senator Levin. Do you agree with what you wrote?
Mr. Reeves. I do, yes. I guess I'd parse it into two
pieces; one is the large committed refiner/marketer, and it is
true that is a reflection of the West Coast competitive
structure, and probably the most important word there is
``committed.'' Given the volatility of the West Coast refining
and marketing business, it's my belief, when you look back over
at history, that small companies who don't have the financial
wherewithal to see it through the ups and the downs, have
elected not to remain in that business, and so that is the
reflection of the large and committed and why it is
significant.
Individual actions, I think you've seen that actually play
out. This is a document I think from 1993 or somewhere back
then when we were actually long on product, but even then you
could see that if there were significant incidents and
disruptions in the marketplace, that there was a lot of
volatility in the price. So, yes, I would certainly stand by
what we wrote then.
Senator Levin. Is the market in California dominated by a
few large refiners that can have a significant market impact?
Mr. Reeves. Well, the refining capacity has not really
materially changed over the last, oh, 9 to 10 years. The
ownership has been moving around quite a bit, mostly as a
result of the mergers and the required FTC divestments. It is
characterized by larger refiner marketers, large integrated oil
companies, and now an emerging group, companies like Valero-
UDS, who are now actually the largest refiners in the United
States or close to it.
Senator Levin. Going back to the statement, is it true that
the market is dominated still by a limited number of large,
committed refiner/marketers, and these now are the key words
``whose individual actions can have significant market
impact''? Is that true?
Mr. Reeves. I think I've already agreed with that
statement, Senator.
Senator Levin. You have? I didn't hear a clear agreement
with it.
Mr. Reeves. It was, yes.
Senator Levin. Thank you. Now, relative to an ARCO
presentation, this is Exhibit 17,\1\ Page 223, and this
advocates exporting gasoline in a number of places.
---------------------------------------------------------------------------
\1\ See Exhibit No. 17 which appears in the Appendix on page 269.
---------------------------------------------------------------------------
On Page 223, Exhibit 17b, if you look up at the upper right
hand, under ``Take Action,'' it says, ``Export to keep the
market tight.''
So let me ask, is that still the policy of ARCO?
Mr. Pillari. Well, since we have owned ARCO, we have not
been exporting product. We are a net buyer of product in the
market, and so we are quite short.
Senator Levin. And so ARCO did not follow that?
Mr. Pillari. I don't know what ARCO did back then. I think
this was, what, the mid-nineties or something?
Senator Levin. This document, I believe, is 1996.
Anyway, you don't know whether that action was taken,
whenever the date of the document is?
Mr. Pillari. No, I don't, but today we are a net buyer.
Senator Levin. Now let me ask ExxonMobil, has ExxonMobil
exported gasoline from California to maintain high refining
markets?
Mr. Carter. No, Mr. Chairman.
Senator Levin. I mean, high refining margins.
Mr. Carter. The California-grade gasoline we manufacture is
sold in California.
Senator Levin. All right. Let me ask Shell, has Shell
exported gasoline from California to maintain high refining
margins?
Mr. Routs. No, we have not, Senator.
Senator Levin. Thank you.
If you take a look at Exhibit 20,\1\ this is a Texaco
document from the Aguilar case. This is a 1996 memo, and it is
on Page 238.
---------------------------------------------------------------------------
\1\ See Exhibit No. 20 which appears in the Appendix on page 273.
---------------------------------------------------------------------------
Texaco's ``position is to fight the proposed specification
changes because it will increase fuel costs and not deliver
commensurate benefits to consumers.'' That sounds good.
Then the next paragraph says the following:
``Incremental improvements to refinery margins from
reducing supplies can be achieved in a number of ways. One
way--'' I want to point out here this is what this report is
all about is increasing refinery margins from reducing
supplies. This memo says it can be achieved in a number of
ways. ``One way would be to promote the more restrictive
mandated specification changes to reduce supply of product;
another would be for refiners to voluntarily reduce refinery
production, without incurring added costs or suffering
attrition [admittedly unreasonably idealistic, but the best
option.]''
Now the goal then, as stated in this memo, is to reduce the
supply of gas in order to increase refining margins; is that
correct?
Mr. Routs. I can't comment on it, Senator. I don't know
what the goal was at the time that this memo was being put
together.
Senator Levin. OK. Texaco has taken a position of opposing
one particular plan for new specifications for fuel. This memo
is contemplating changing that position in order to tighten
supply; is that correct? That is what the memo was doing,
saying maybe we ought to change our position about whether we
support or oppose a particular plan for new specifications in
order to tighten supply.
Am I reading it correctly, to begin with?
Mr. Routs. I agree with you that you can read that memo
that way, Senator.
Senator Levin. Now, in the BP memo that we discussed
earlier, BP seemed to be opposing oxygenate requirements or at
least was considering it, in order to tighten supply, because
without the oxygenate more gasoline is needed. So it appears as
though, whether or not companies support or oppose fuel
specifications could depend on whether or not those fuel
specifications increase or decrease the supply of gasoline.
That is what it appears from these memos.
Now another proposal in this memo, which is on Page 238, is
to ``voluntarily reduce refinery production.'' That just means
shutting down a refinery in order to reduce supply; is that
right? Did Texaco do that?
Mr. Routs. I can't answer that question on behalf of
Texaco, sir.
Senator Levin. Let me just ask Shell. Has Shell ever done
that?
Mr. Routs. Could you repeat the question?
Senator Levin. Yes. I think you may have answered this
before, this issue that is coming up now. Has Shell ever
reduced refinery production or shut a refinery just to reduce
supply?
Mr. Routs. As I said earlier, the main reason why we have
sold or shut capacity is because it was no longer economic to
run.
Senator Levin. All right. I want to go back to what Senator
Voinovich was asking about also, which is whether or not the
United States needs more refineries. And the answer, I believe,
from each of our witnesses was that your company doesn't need
more refineries. Is that correct?
Mr. Routs. That's right.
Senator Levin. With the one exception, I think, of
someone----
Mr. Heminger. I said we would consider an investment in
refining.
Senator Levin. You would consider. The other companies, I
believe, said that you have adequate refinery capacity. Is that
correct?
Mr. Reeves. That's right.
Mr. Carter. We don't need another refinery. I did not say
we would not add refining capacity, and I talked about the New
Source Review requirements and things like that.
Senator Levin. OK. That is correct. You don't need another
refinery. So the only company that is considering an additional
refinery then would be Marathon. Is that correct?
Mr. Heminger. We would consider that, yes, sir.
Senator Levin. All right. Now let me ask you this question:
Putting aside your own company's situation relative to the need
for additional refineries, is the United States now short of
refineries? Mr. Carter.
Mr. Carter. Well, my company is not short. We run our
refineries----
Senator Levin. In your judgment, is our country short?
Mr. Carter. No, sir.
Senator Levin. In your judgment, is the United States short
of refineries, Mr. Heminger?
Mr. Heminger. I would say we are short of refining capacity
because we're importing refined products today.
Senator Levin. All right. So you believe our capacity right
now is too low?
Mr. Heminger. Mr. Chairman, when you look at the rates that
we're running all the refineries today, we are running them
full out for the majority of the year. And if we're importing--
in fact, the question came up a while back on Venezuela. We're
importing a significant amount of refined product from South
America and from Europe, so it's clear to our company that more
capacity could be used in this country.
Senator Levin. OK. Mr. Pillari.
Mr. Pillari. Given the imports coming in, I would say we
are finely balanced, just a tad bit short.
Senator Levin. OK. Mr. Reeves.
Mr. Reeves. A similar answer. I think we clearly are
importing products, and it is--at least, I think returns are
telling us that is the most economic solution right now. If
demand continues to grow--and that is an unknown--out over
another couple of decades, I think the situation would have to
be looked at differently.
Senator Levin. OK.
Mr. Routs. Imports will cover our needs. It's more economic
for us at this point.
Senator Levin. I think from at least most of your answers,
it is clear at least that there is not--in terms of trying to
look at the cause for price spikes, you can't point to the
shortage of refineries since most of you say there is no
shortage of refineries. Most of you say there is no shortage of
refining capacity. Sometimes that is given as the reason for
price spikes. But I don't think we can use that excuse. I don't
think that particular justification or rationale washes, given
at least the bulk of your answers here.
I want to talk just a minute about concentration in
Michigan. The Department of Energy's Energy Information----
Senator Voinovich. Mr. Chairman, excuse me just a minute.
Senator Levin. Please.
Senator Voinovich. It is my understanding that when we have
had refinery fires and shutdowns, prices have been impacted.
Senator Levin. That is correct. There is a disruption in
supply.
Senator Voinovich. There is a disruption in supply, and
that refineries do have an impact on these spikes.
Senator Levin. On spikes where there has been a disruption
in supply, but our recent spikes are not. The issue also is
inventory, not just refining capacity. They maintain 3 days of
excess inventory, which means they keep the supply very tight.
The report says that gives, in a highly concentrated area, the
ability of a few companies then to have an impact on price
without fear of significant competition. That is the result of
maintaining a very tight supply. That is the finding of the
report.
Senator Voinovich. The issue is the competition.
Senator Levin. That is correct.
Senator Voinovich. And whether or not the competition is
there in terms of the refineries, and is it cheaper to raise
the price than to import refined oil in from some other place.
Senator Levin. The issue is lack of competition. That is
what our focus has been in the highly concentrated areas, and
the fact that there is inadequate competition and what effect
that has on price.
Senator Voinovich. But the bottom line is that we have been
told that the return on investment in building refineries is
not that good, and that is why they are getting rid of them and
they are selling them off. Also, they have a problem with
regulations in terms of building them.
Senator Levin. They can argue the return on capital, that
is something they may wish to argue, although if you look at
all the other industries and businesses, it is somewhere in the
middle. But, nonetheless, they can make the argument, but it
can't be, under their testimony, that the lack of refineries
causes price spikes, because they just said we do have enough
refineries. And presumably they don't support price spikes. At
least that is what we have been told this morning.
Senator Voinovich. Well, I would like them to respond to
that.
Senator Levin. That would be fine. Are refineries--the
shortage of refineries the cause of price spikes? Mr. Carter.
Mr. Carter. That was not my testimony, Mr. Chairman.
Senator Levin. Thank you. Mr. Heminger.
Mr. Heminger. That was not my testimony.
Senator Levin. Mr. Pillari.
Mr. Pillari. No, sir.
Senator Levin. Mr. Reeves.
Mr. Reeves. No, I believe it is the regional imbalance that
causes the spikes, and then markets require some time to
equilibrate. Ultimately they go down. So it is the time lag to
resupply.
Senator Levin. OK. Mr. Routs.
Mr. Routs. I agree with Mr. Reeves. I think we have an
ample refining capacity, though not necessarily in the right
place.
Senator Levin. OK. And, of course, a separate issue here is
inventory and the way that is kept very low with a 3-day
supply, and when inventory goes down because of the disruption
or whatever, at that point you have got a problem. But that is
a decision to maintain a low inventory level, which the oil
companies have maintained.
The EIA, the Energy Information Administration, says that
in my State of Michigan four firms--Marathon, BP, ExxonMobil,
and Shell--provide about two-thirds of the gasoline sold within
Michigan. And it is my understanding that the EIA is measuring
which companies are either manufacturing gasoline within the
State or bringing it into the State from elsewhere. So we are
not talking here retail sales. We are talking about those
companies which are manufacturing in the State or bringing it
into the State.
So the EIA says that this reflects a tight oligopoly in
this market. That is not me. That is the Department of Energy
which says there is a tight oligopoly in the Michigan market
and in other States in the Midwest and California and other
States.
Do you disagree with this characterization? First let me
ask Exxon.
Mr. Carter. Well, sir, as I testified, we looked at the
Midwest, not at individual States. Individual States are not
generally refining markets.
If you go back to January 1, 1997, prior to all the mergers
that have been discussed here, there were 27 gasoline-producing
refineries in the Midwest owned by 19 companies. If you come
forward to today, there are still 25 refineries owned by 18
companies, so only one less company.
If you use the Herfindahl Index or whatever people use--my
economists do that--the Midwest is by that classification ``not
concentrated'' in 1997 and it retains that classification
today.
Senator Levin. Not heavily concentrated?
Mr. Carter. ``Not concentrated,'' is the FTC wording.
Senator Levin. OK.
Mr. Carter. That's in my written report, Mr. Chairman.
Senator Levin. OK. Thank you. Mr. Heminger.
Mr. Heminger. Mr. Chairman, we believe that the Midwest is
one of the most fiercest competitive marketplaces, and I stated
that in my testimony. And, in fact, when we look at the Midwest
and the State of Michigan, we supply 2 billion gallons more
product, so we believe we have acted very responsibly in being
able to supply the market.
Senator Levin. OK. Thank you. Mr. Pillari.
Mr. Pillari. We only make about 60 percent of what we sell
in the Midwest. We have refineries in Toledo and Chicago, and
the rest we buy on the open market.
Mr. Reeves. I'm not qualified to comment on the Midwest.
Senator Levin. Thank you. Mr. Routs.
Mr. Routs. We have no refineries in the Midwest.
Senator Levin. Do you generally agree that high
concentration leads to higher prices? Mr. Carter.
Mr. Carter. I couldn't disagree with that, sir.
Senator Levin. Mr. Heminger.
Mr. Heminger. I disagree with that.
Senator Levin. OK. Mr. Pillari.
Mr. Pillari. I don't think it's automatic.
Senator Levin. Mr. Reeves.
Mr. Reeves. I would disagree with that as per my testimony.
Senator Levin. Mr. Routs.
Mr. Routs. I don't think it's automatic either.
Senator Levin. Would you generally agree the more
competition, the better, in terms of consumers?
Mr. Carter. I think competition is good for consumers, yes.
Mr. Heminger. I agree.
Mr. Pillari. Yes, sir.
Mr. Reeves. I would.
Mr. Routs. As a consumer, yes, sir.
Senator Levin. Let me give you the concentration numbers,
that same HHI Index which was referred to, for the United
States gasoline wholesale market in 1994. There was moderate
concentration in 22 States. That went up to 28 in the year
2000, and there was high concentration in 1994 in 5 States, and
that went up to 9 States.
So 37 States, according to that same index which you quote,
the HHI Index, 37 of those States are either highly or
moderately concentrated, and that is an increase from 27 States
just 6 years before.
Now, those are the HHI numbers that we have in terms of
concentration. The other index which is used shows a doubling
of the States that are in high concentration areas. So by
either index, there has been a significant increase in
concentration between 1994 and the year 2000.
Let me just ask Marathon a question here. I want to talk to
you about a practice that we witnessed in Michigan and Ohio,
something that I call Speedway bumps--not speed bumps but
Speedway bumps. And I call them that because it is quite
apparent in Michigan and Ohio that Speedway takes the lead in
bumping up the price of gasoline dramatically on Wednesdays or
Thursdays by a dime or more, and then letting it slowly fall
over the weekend. And then once Speedway does that, it is
apparent that the other brands follow, some to a greater
degree--Shell, for example--some to a lesser degree--Mobil, for
example. And you can see that in those two figures.
This is the last price spike, by the way, that we are
looking at. There, again, no relationship to the price of
crude, but you can see the difference in rack and retail
prices, wholesale and retail prices in Michigan from January to
August 2001.\1\ The other one shows Michigan retail prices by
brand for the month of April 2001.\2\ You can actually see
those Speedway bumps on that right-hand chart and on the left-
hand chart. We have enlarged it on the right-hand chart. Up for
the weekend, then down; up for the weekend, then down; up for
the weekend, then down, and so forth.
---------------------------------------------------------------------------
\1\ See Exhibit No. 11 which appears in the Appendix on page 260.
\2\ See Exhibit No. 12 which appears in the Appendix on page 261.
---------------------------------------------------------------------------
Mr. Heminger, let me ask you about that pricing policy.
First of all, do you agree that you appear to be the price
leader in Michigan, that other companies, other retailers
follow your lead?
Mr. Heminger. Mr. Chairman, our pricing policy is every
day, as I had in my testimony. We look at our cost, we look at
our sales, and we look at how the competitors are pricing, and
we elect, as I stated, to always match the lowest price on the
street.
And then there comes a time when our costs have increased
that we elect to raise our retail price to try to recover some
of our costs.
Senator Levin. Would you agree with me, though, that when
you look at the history of pricing and who is a price leader,
who follows whom, that in Michigan you appear to be the price
leader, that others follow your price? Would you agree with
that?
Mr. Heminger. Mr. Chairman, every day we attempt to be--to
match the lowest price on the street, and there are times--you
stated it in your question Wednesday or Thursday. I hope that
we are not that predictable. In fact, we look at our prices
every day, and we make decisions based on the cost of that
given day and time.
Senator Levin. Well, you can see Wednesdays or Thursdays on
that chart. Those are peaks, little mountains. It doesn't get
to Everest until a little later, but there are some peaks,
valley, peak, valley, peak, valley, peak, valley, on Wednesday
and Thursday. You are just saying that is a coincidence?
Mr. Heminger. No, sir. I said that every day we look at our
price. There are times--in fact, many times, Wednesday or
Thursday is when we will elect or we historically have elected,
better said, to increase our price. It is not every week. And
when you look at the charts and you really look over the period
of time of the spring and summer of 2001, in comparing that
back to the crude oil price, and as Senator Voinovich just
stated, it wasn't a cause of refineries or it wasn't a cause of
crude oil prices in that time frame. It was because of two big
fires, one with the Tosco refinery, another one in Lamont,
which is southern Chicago, and the prior year it was because of
two pipeline failures, is what caused those spikes in the
summer months.
Senator Levin. I want to talk to you about parallel pricing
just for a minute. I want to put the Illinois chart up, if we
can get it, for June 2001.\3\ Now, this shows how companies
maintain a price relationship to each other, and this is true
in many areas. The same company typically will be at this
level; the next company, a penny or a fraction of a penny above
it; another company, a penny or a fraction above that, and so
forth. So you've got like four or five fingers moving down, up
or down together, rarely crossing each other. It is called
parallel pricing. It is not illegal under current antitrust
law. But it sure is no coincidence, either. It may not be
illegal, but it is not a coincidence.
---------------------------------------------------------------------------
\3\ See Exhibit No. 9 which appears in the Appendix on page 258.
---------------------------------------------------------------------------
In a foot race, if all the competitors of equal speed came
across the finish line in the same order race after race after
race, some would think that something was fishy.
Now, when major brands in a market region change their
prices at the same time, stay in the same relationship, moving
in the same direction and by the same amount, do you not agree
that the consumer out there is going to believe and, I will
add, reasonably believe that there is a conscious decision to
maintain a relationship price-wise between those brands? Would
you not agree with that, Mr. Carter? What is a consumer to
think when he sees that parallel pricing, that ribbon with the
four companies in the same relationship to each other?
Mr. Carter. Mr. Chairman, I notice my company is missing
from the chart so I don't know from that what my relationship
was. We look at our prices every day. We look at the individual
zones where our dealers operate. And we try to provide them
with a price that allows them to compete in their zone.
If you take Washington, DC, the gasoline we are supplying
here today was put in a pipeline in the Gulf Coast 30 days ago.
If our price is extraordinarily low, we are going to run out
before the next amount of gasoline gets here. If our price is
extraordinarily high, then we are not going to sell anything.
And since this is the end of the Plantation pipeline, we won't
know what to do with the gasoline when it gets here.
So it's a very careful balancing act to keep our supply in
balance and to compete with our competitors. As several of the
Senators said, it's a very visible marketplace; everybody can
see our prices every day right out on the street without even
getting out of their cars.
Senator Levin. OK. Do you want to comment on that, Mr.
Heminger?
Mr. Heminger. Mr. Chairman, as this chart illustrates,
Speedway is always the lowest price on the street on this
chart, and that has been our strategy, and we hope that our
customers look at us as being a value pricer at the street.
Senator Levin. OK.
Mr. Pillari. Sir, if you take a look at this data, it shows
that our company was trying to determine where the consumer
would put us in their buying decision, and in some cases our
price was up quite a bit higher. And if you look at the end of
the period, you would see we were quite down in the middle of
the pack. So it doesn't seem to be as consistent as a set
approach.
Senator Levin. Is parallel pricing illegal?
Mr. Pillari. Not to my knowledge, no, sir.
Senator Levin. Do you have any problem with making it a
presumption that when companies go down or up together and stay
in the same price relationship with each other, that that
should be evidence that there is something at work which should
not be at work? In other words, is there any problem with
making that a presumption of illegality that is rebuttable by
the industry that you can see?
Mr. Pillari. I'm not sure I understand the presumption
you're asking me to----
Senator Levin. Parallel pricing, under the current law,
which is what that is--where companies stay basically in the
same relationship, going up and down together--is not illegal
under current law. Would you have a problem with making it
presumptively illegal subject to rebuttal?
Mr. Pillari. I'll be honest, sir. I don't know what
``presumptively illegal'' means.
Senator Levin. OK. Thank you. Mr. Reeves.
Mr. Reeves. To answer your question, I would object, and I
happen to think that the reflection of a reasonably stable
relationship of prices is actually an indication that the
market is working exactly as it should.
Senator Levin. Even when the companies stay in the same----
Mr. Reeves. Yes, sir.
Senator Levin [continuing]. Relationship to each other?
Mr. Reeves. And the reason I say that is our pricing is the
cumulative effect and response of millions of consumers'
decisions, and they choose which brand they care to shop at.
They choose for what reasons they choose to shop at a
particular company. And the fact that market prices are going
up and going down and that individual companies are in relative
position, not changing quite often, is, in fact, an indication
to me that the market is working. So a presumption of guilt
would be completely inappropriate in my view.
Senator Levin. Is there any reluctance on your part to say
that your company engages in parallel pricing?
Mr. Reeves. I don't know the correct definition of parallel
pricing. I only know as it's been described here, and I've just
said that I think that's a perfectly good reflection of an
active and healthy and competitive market.
Senator Levin. So you don't know what parallel pricing
means?
Mr. Reeves. I don't know.
Senator Levin. Thank you. Mr. Routs.
Mr. Routs. This to me is an example of a highly competitive
market where people react to each other or react to each of the
pricings. We measure on a daily basis the volumes that go
through our stations. If the price is high, we see that the
volumes come down immediately. It's very competitive.
Senator Levin. And if companies stay in the same
relationship to each other price-wise, up and down, does that
trouble you?
Mr. Routs. No, it doesn't trouble me, sir.
Senator Levin. OK. Does it trouble you, Mr. Carter?
Mr. Carter. Mr. Chairman, as I stated, I think this
marketplace is highly competitive. I went through how we price
and so forth. In my testimony I indicated that gasoline prices
last year were about $1.50 a gallon, down significantly across
time. I understand CNN reported this morning that gasoline
prices today are $1.39. In 1999 dollars, I guess that's around
$1.30, the lowest prices it's been in a month.
I checked into my hotel room last night, and I found this
there. I had a bottle of water. A liter of water, about a
quart, is $6. If I convert that to per gallon, that's $24 a
gallon for water, which comes out of the ground. They don't
have to refine it. They don't have to meet all these
regulations. And while the marketplace is volatile and I'm
concerned about the volatility, I think the absolute price out
there is pretty good for consumers.
Senator Levin. Well, first of all, I think I'd change
hotels. But putting that aside---- [Laughter.]
I think if you saw the price of bottled water go up and
down together every day, every week, with the same brands
staying in the same relationship to each other, I think you
would think that something is fishy, too. But my question is:
Would it trouble you if brands stay in the same price
relationship to each other up and down and up and down? Mr.
Heminger.
Mr. Heminger. Mr. Chairman, as I say, our strategy is every
day to give that value price. We're talking about a global
commodity, and if we didn't have NYMEX and if we didn't have
the Chicago Exchange, maybe all of those prices wouldn't be
transparent. But they are, and all that is traded, and all that
reflects costs every day. And we have to take into account how
we price our gasoline, and if we want to be the value leader on
the street, as this chart illustrates, we really have to pay
attention to where our consumers are buying.
Senator Levin. OK. Thank you. Would it trouble you if four
or five brands stayed in the same price relationship with each
other up and down, Mr. Pillari?
Mr. Pillari. Sir, I believe the consumers set the price
relationship based on their view of the value of each brand,
and so it will be where the consumers allow it to be. So, no,
it doesn't trouble me.
Senator Levin. It doesn't trouble you at all. OK.
Mr. Reeves, I think you have answered the question already.
Mr. Routs.
Mr. Routs. It doesn't trouble me in the sense that I think
that is indeed what the market drives us to do.
Senator Levin. It drives you to engage in parallel pricing?
Mr. Routs. That's not what I said.
Senator Levin. What does the market drive you to do?
Mr. Routs. The market drives us to be very competitive and
to stay close to our competitors in terms of pricing.
Senator Levin. OK. Let me ask about zone pricing. It is a
very specific question. Are a large number of your zones
single-dealer zones? Mr. Carter.
Mr. Carter. No, Mr. Chairman.
Senator Levin. Do you know about what percentage of the
zones are single-dealer? Would it be less than 10 percent?
Mr. Carter. I don't know the exact number. I expect that
it's less than 10 percent.
Senator Levin. OK. Mr. Heminger.
Mr. Heminger. Mr. Chairman, they are all single-dealer
zones.
Senator Levin. Every zone has just one gas station?
Mr. Heminger. Yes, sir.\1\
---------------------------------------------------------------------------
\1\ See Exhibit No. 27, May 13, 2001 clarification letter from
Marathon-Ashland, which appears in the Appendix on page 281.
---------------------------------------------------------------------------
Senator Levin. OK. Mr. Pillari.
Mr. Pillari. As far as I know, the only single-station
zones we would have would be out in the rural areas, and that
would be relatively small.
Senator Levin. OK. Mr. Reeves.
Mr. Reeves. It would be a very small percentage of ours.
Senator Levin. Mr. Routs.
Mr. Routs. Fifty-three percent, I am just informed, of our
areas are single-dealer.
Senator Levin. OK. On the lessee dealers, is it generally
correct that lessee dealers do not negotiate the price of the
product that you provide to them, that it is set by the company
and that they are obligated under the lease to pay whatever
they are charged by the company? Is that generally true?
Mr. Carter. Well, Mr. Chairman, there are two caveats to
that. There are laws that prescribe how we price to our
dealers, UCC, I believe. I'm not an attorney, but I get a lot
of advice from them. And, second, our dealers feel very free to
let us know when they think their price is not a price that
allows them to compete. I don't agree that that's negotiation,
but certainly they feel free to express their views and we take
it into account.
Senator Levin. But by the lease, are they obligated to pay
the price that you charge?
Mr. Carter. That's correct, Mr. Chairman.
Senator Levin. Mr. Heminger.
Mr. Heminger. Yes, Mr. Chairman, by the lease they're
obligated to pay the price, and we have very few lessee
dealers.
Senator Levin. OK. Mr. Pillari.
Mr. Pillari. We have very few also, but, yes, they're
obligated to comply with the brand. They can only sell our
brand through branded dispensers.
Senator Levin. Well, that wasn't my question, though. Are
they obligated to pay the price that you charge?
Mr. Pillari. Yes.
Senator Levin. Mr. Reeves.
Mr. Reeves. That would be the case for us as well.
Senator Levin. Mr. Routs.
Mr. Routs. As far as I'm aware, that's the case, sir.
Senator Levin. And do you recommend retail prices to your
branded stations?
Mr. Carter. We do not today, Mr. Chairman. There was a time
when one of our predecessor companies would tell the dealers
what the recommended price was. They would also in the same
communication tell them that they were free to set it as they
chose.\2\
---------------------------------------------------------------------------
\2\ See Exhibit No. 28, May 17, 2002, clarification letter from
ExxonMobil, which appears in the Appendix on page 282.
---------------------------------------------------------------------------
Senator Levin. OK.
Mr. Heminger. Not to our branded stations, Mr. Chairman.
Senator Levin. Not to your lessees?
Mr. Heminger. We do not recommend the retail price to our
lessees or lessee dealers.
Senator Levin. OK. Mr. Pillari.
Mr. Pillari. It's against policy.
Senator Levin. It is? Thank you. Mr. Reeves.
Mr. Reeves. We do not encourage that, no. We don't give
them a recommended price.
Senator Levin. OK. Mr. Routs.
Mr. Routs. We don't tell our dealers what to charge.
Senator Levin. No, that is not my question, though. Do you
give them a recommended price for their retail?
Mr. Routs. We have discussions with them about the pricing
in the zone, but they can still make their own decisions after
that.
Senator Levin. You discuss with them, but do you publish a
recommended price to your dealers----
Mr. Routs. We don't.
Senator Levin [continuing]. Or do you give them in writing
a recommended price?
Mr. Routs. We don't, sir.
Senator Levin. OK. So, orally, what you discuss with them
you don't consider to be a recommendation?
Mr. Routs. No, we don't consider it a recommendation, and,
again, they don't have to act upon the discussion.
Senator Levin. Senator Wyden.
Senator Wyden. Thank you, Mr. Chairman.
First, Mr. Chairman, let me thank you for allowing me to
participate. I think this is a superb report, and I would only
say that I think you and I both know that this litany of anti-
competitive practices that you found and that I found in my
inquiry in Oregon--it really extended to the West Coast--these
anti-competitive practices have been documented again and
again. But the fact is that these problems are growing, and the
reason that they are growing is that the law under which they
could be stopped is full of loopholes. And what we have found
is that unless people are engaged in some textbook case of
collusion, which these companies are far too intelligent to do,
it is very hard to bring a successful action to protect the
consumer. And that is why I am especially interested, Mr.
Chairman, in exploring this idea that you and I have talked
about in the past, and that is, when there are anti-competitive
practices that as of today are not per se illegal and you have
a concentrated market, that you create a presumption that this
is raising an anti-competitive issue unless information is
proven to the contrary. And I am going to address that more
fully on Thursday when I testify, but I appreciate the chance
to work with you on it.
I think for purposes of this afternoon I want to start with
you, Mr. Pillari. At an April 25, 2001, hearing before the
Commerce Committee, Mr. Malone, who is your Western regional
president, refused to make any commitment to stop exporting
Alaskan oil to Asia. And as you know, we have seen E-mail that
essentially says, hey, this is a no-brainer to export oil from
Alaska to Asia at a discount because you can stick it to people
on the West Coast of the United States, in Oregon, Washington,
and California, in order to make up the difference.
Now, the company, of course, has said that this person
didn't speak for the company, and I understand all of that.
What I would like to do this afternoon is get a sense about
your current policy and commitments that you are willing to
make to the public. My understanding is you are not exporting
Alaskan oil outside the United States today, but I would like
to ask you to commit today that BP is not going to export
Alaskan oil overseas, period. Can you make that commitment this
afternoon?
Mr. Pillari. Sir, let me respond by saying we're a net
buyer of Alaskan crude oil. We have to buy a significant amount
of our needs. So as a net buyer, exporting has not been an
issue for us.
Senator Wyden. But that is not my question. My question is,
because we have obtained E-mail from your company, sir, saying
it is a no-brainer. Now, again, these are not my words or the
words of some consumer advocate. These are the words of people
in your company, calling it a no-brainer to export oil from
Alaska to Asia. So what I would like to know is whether you all
are willing to make a commitment. Mr. Malone was not. Mr.
Malone basically said, ``We're going to export oil any time
it's in our economic interest. We're not doing it today, but
whenever it's in our economic interest, we are going to export
oil overseas.''
So what I would like to hear from you is not about your
situation today with you as a buyer or this or that. I would
like to hear categorically whether you will commit not to
export oil from Alaska overseas.
Mr. Pillari. As I said, we're a net buyer. What I would say
about the future is it can't be predicted. I don't know what
will happen in the future and I would not commit to limit my
commercial flexibility.
Senator Wyden. Well, that was my understanding. I
appreciate your candor, and of course, that is, in my view, why
this whole notion of making this country energy independent,
something I strongly support, is directly undercut when an oil
company executive says, ``Look, I'm not going to commit to
anything. If it's in our economic interest, of course we're
going to export.'' And that is why so many people on the West
Coast of the United States are unhappy about that particular
policy. Frankly, I mean, we have a whole host of anti-
competitive practices that we are facing. We have had juries
handing out awards for redlining for millions of dollars,
redlining our markets. I am going to talk about that on
Thursday, but I will tell you it is very disappointing to my
constituents and people all up and down the West Coast, that
you will not commit, at a time when the oil companies are
saying, ``We've got to be energy independent, got to make this
country strong and energy secure.'' You again have restated
what I thought was the position, and that is that you will not
commit to banning the exports of Alaskan oil.
Let me ask then the panel, if I might, about their views,
and put it in the context of the situation with respect to the
Arctic National Wildlife Refuge, ANWR. My sense is with the way
your companies have been merging, ExxonMobil, BP Arco,
ChevronTexaco, spinning off assets right and left in the past
few years, any of your companies could end up with leases and
drilling rights in the Arctic Refuge. So what I would like to
do is just go down the row and see if each one of you would
pledge this afternoon not to export any oil you get from the
Arctic Refuge if it ends up being opened up to drilling?
Why don't we just go right down the row.
Mr. Carter. Well, we are a major exploration company. We
explore all over the world. We produce a lot of oil and gas. To
my knowledge, we haven't been spinning off assets since we
merged except as required by the FTC. We do favor additional
exploration. If I recall--I'm not an upstreamer, but if I
recall correctly, we opposed the export of Alaskan crude, and
as you know, the law required it to stay in the United States
at one time. To the best of my knowledge, it does stay here. I
have no authority to commit us on what would happen if ANWR--
but I can tell you what our practices have been.\1\
---------------------------------------------------------------------------
\1\ See Exhibit No. 28, May 17, 2002, clarification letter from
ExxonMobil, which appears in the Appendix on page 282.
---------------------------------------------------------------------------
Senator Wyden. I would just like to get an answer because
you all are the leaders in the field, to hear a pledge not to
export any oil you get from the Arctic Refuge if it is opened
to drilling. It is a simple question. I mean it is a chance for
you to make a strong statement about energy independence, and
if anything, the arctic issue makes it even more stark. I mean
everything about this arctic debate has been about let's get
that oil and make us energy independent. Now, if you all will
not pledge to keep this oil here, if anything, it is going to
make us more energy dependent because we will be drilling in
Alaska, selling it to Asia at a discount, and sticking it to
people on the West Coast of the United States.
So I am just going to go right down the row and the
question is just that simple.
Mr. Heminger. Yes. Senator, my company, we're just
refining, marketing and transportation. We have no equity
production, so I can't comment.
Senator Wyden. OK.
Mr. Pillari. Sir, I would not change my earlier view.
Mr. Reeves. Senator, to my knowledge, we don't produce much
if any crude oil out of Alaska. I would say the answer to your
question was, I don't have the authority to make the decision,
but if I did, I would say that it would be irresponsible for
any company, certainly our company, to try to accurately
predict what we would do in commercial circumstances, 5, 10, or
20 years out.
Mr. Routs. I cannot comment. I represent Shell's
downstream, and have very little to do with the upstream at
this point.
Senator Levin. Senator Wyden, we suggested that we would
try to stop at 1:30, and they have been here a long time.
Senator Wyden. Mr. Chairman, you have been kind to me, and
I will look forward to Thursday.
Senator Levin. Thank you.
Let me close first of all by thanking our witnesses. It has
been a long hearing, and you have been cooperative in your
production of testimony and materials. We again appreciate that
as a Subcommittee.
Just one word about our responsibility and yours. You
represent large and successful corporations, and it is to be
expected that you are going to act in ways to maximize your
profits. That is what you are in business to do. The government
has a responsibility, on the other hand, to the public as a
whole. And government's job is to make sure that the markets
stay competitive and that anti-competitive practices be
prevented, and that the consumers of this country get a fair
shake.
Our analysis of the oil industry is that it is highly
concentrated in a number of markets in the United States, and
that in these highly-concentrated markets, major oil companies
take actions that limit supply in order to keep prices higher,
and because of insufficient competition in those highly-
concentrated markets, they can succeed more readily in keeping
prices up.
The number of mergers in the last few years is dramatic.
When you have Chevron merging with Texaco and BP with Amoco,
and whoever would have thought that Exxon would merge with
Mobil, but it happened. And as the industry has gotten more
concentrated, the lifeblood of this country, gasoline, is in
the hands of fewer and fewer players, and that means that if
those players can effectively control supply in order to have a
significant impact on price, a healthy economy is in jeopardy,
and that is not what the American public wants.
The question is what can we do about this, and I think
there are at least a number of steps that we ought to take or
consider taking. First, the Federal Trade Commission should be
more cautious about approving mergers. The current situation is
bad enough in terms of concentration in the oil industry. Any
additional mergers should be subject to strict scrutiny, and
the presumption should be that any merger that the oil industry
is proposing should be not only scrutinized carefully, but the
burden of proof, it seems to me, should clearly be on the
people who are proposing those mergers and should be against
the merger occurring. The presumption should be against any
further mergers.
Moreover the Federal Trade Commission needs to make sure
that when it requires assets to be divested as part of a merger
approval, the divested assets are viable as a competitive
factor. There is concern that while the FTC has ordered certain
divestitures in approving mergers, those divestitures haven't
been to a sufficiently viable entity, so that they end up being
a competitive force over time. I would recommend that the FTC
study the mergers in the oil industry over the last 5 years to
determine what the results of the ordered divestitures have
been, to find out, in other words, whether the FTC was
successful in achieving the desired level of competition that
they thought that they were going to achieve. Those are
responsibilities of the FTC.
Second. I think we ought to at least consider changing the
law with respect to the issue of parallel pricing. Right now
parallel pricing is legal. To bring an antitrust case with
respect to parallel pricing requires additional proof, proof
that there was some agreement or collusion or conspiracy. But
parallel pricing can be an anti-competitive act, and the courts
have said that any plaintiff bringing an antitrust suit with
respect to parallel pricing, cannot under current law get to a
jury without some showing of agreement or collusion. It seems
to me with respect to this issue that we should consider
allowing parallel pricing cases to go to a jury if there is
sufficient evidence of parallel pricing alone to make that
rebuttable presumption, but nonetheless sufficient evidence to
get to the jury.
Oil companies, through their legal counsel try to avert or
try to avoid overt collusion. But the reality is that with
exchange agreements, the use of common consultants, public
postings of prices, and common statistical resources and
analysts, the market can, in the words of one oil company, ``be
disciplined.'' And it can be disciplined in areas of
significant or heavy concentration without overt collusion.
Now, with all the evidence that the plaintiffs in the
Aguilar case had assembled to demonstrate anti-competitive
behavior in California, the courts threw out a case and granted
a motion for summary judgment because of the absence of overt
conspiracy. But I think that new circumstances ought to at
least have us look at possible changes in current law so that
again we would allow proof of the fact of parallel pricing to
be enough to withstand a motion for summary judgment and to get
a case to the jury.
Finally, I think Congress should consider the possibility
of requiring the oil companies to maintain a certain level of
inventory of gasoline in order to avoid price spikes and price
fluctuations. Four countries in Europe have such a requirement:
France, Switzerland, Germany, and the United Kingdom. And we
ought to at least look at that possibility as an appropriate
approach for the United States so that supply is not so tight
as it is in these highly concentrated areas. The oil companies
have reduced their inventory levels dramatically over the past
few years, so that now we have only 3 days worth of emergency
supply at the Nation's current consumption rate. The tight
balance between supply and demand and the low inventories, when
combined with market concentration, have contributed to the
recent price spikes and gas price volatility. It may be time to
require a cushion of gasoline supply.
On Thursday we will hear, in addition to Senator Wyden,
from three State Attorneys General, who have been investigating
the practices of oil companies for the last few years, as well
as from a number of oil experts who can respond to the issues
that were raised here today and in the Majority Staff's report.
The hearing will begin at 9:30 on Thursday. It will not be
held in this room. It will be held in room 342 of the Dirksen
Building, which is the Governmental Affairs Committee hearing
room.
Again, I want to thank our witnesses for volunteering to
come forward, for the cooperation of their companies, and for
their testimony here today. It will be made part of the record
in its entirety as drafted and presented to the Committee, and
of course your oral comments here will be helpful to the
Subcommittee.
We will stand adjourned.
[Whereupon, at 1:42 p.m., the Subcommittee was adjourned.]
GAS PRICES: HOW ARE THEY REALLY SET?
----------
THURSDAY, MAY 2, 2002
U.S. Senate,
Permanent Subcommittee on Investigations,
of the Committee on Governmental Affairs,
Washington, DC.
The Subcommittee met, pursuant to notice, at 9:36 a.m., in
room SD-342, Dirksen Senate Office Building, Hon. Carl Levin,
Chairman of the Subcommittee, presiding.
Present: Senators Levin, Lieberman, and Collins.
Staff Present: Linda J. Gustitus, Chief of Staff for
Senator Levin, Senator Levin; Mary D. Robertson, Chief Clerk;
Laura Stuber, Counsel; Dan Berkovitz, Counsel; Edna Falk
Curtin, Detailee/General Accounting Office; Cliff Tomaszewski,
Detailee/Department of Energy; Kathleen Long (Senator Levin);
Kim Corthell, Minority Staff Director; Eileen Fisher,
Investigator to the Minority; David Mount, Detailee/Secret
Service; Hilary Keilp (Intern); Joyce Rechtschaffen, Staff
Director, Government Affairs Committee; Laurie Rubenstein and
David Berick (Senator Lieberman).
OPENING STATEMENT OF SENATOR LEVIN
Senator Levin. Good morning, everybody. Today the Permanent
Subcommittee on Investigations will hold its second of two
hearings on the reasons for dramatic fluctuations and recent
increases in the price of gasoline. On Monday of this week, the
Subcommittee released the report of the Majority staff
following a 10-month investigation. One of the basic
conclusions of the report deals with the effects of increased
concentration in the oil industry on the wholesale supply
market.
Due to a series of refinery closures and mergers within the
oil industry, the wholesale supply market is now more
concentrated than ever. According to information provided by
the Department of Energy's Energy Information Administration,
the wholesale supply market is moderately to highly
concentrated in a total of 37 States. By another accepted
measure of concentration, 28 States are considered tight
oligopolies.
In general, more competition means lower prices for
consumers, and lack of competition leads to higher prices. The
oil industry is no exception to these general rules.
In areas of high concentration, where a few refiners
control most of the retail sales, by keeping supplies tight
refiners can raise the price of gasoline without great fear of
competition. One way to maintain a tight supply is by keeping
only a minimal amount of gasoline in inventory. One effect of
doing that is that any supply disruption will cause a shortage
of gasoline because there is no reserve capacity to bring to
market.
This invariably leads to price increases, and because
gasoline is such an essential commodity in our lives today,
most Americans have no choice but to pay more and more when
prices rise.
Keeping supplies tight and inventories low in highly
concentrated areas makes it possible for companies to spike
prices without great fear of competition. Since all the
companies maintain minimal inventories, no company need fear a
competitor will gain market share by keeping their prices low
because they would quickly run out of gas.
James Carter, Regional Director, U.S., for ExxonMobil,
testified to that on Tuesday. He said, ``If our price is
extraordinarily low, we are going to run out before the next
amount of gasoline gets here.'' So the few companies in these
areas raise and lower prices together and in the same price
relationship to each other, a practice called ``parallel
pricing.''
One of the key findings in the staff report is that in a
number of highly concentrated markets, oil companies are not
just passive actors who respond to whatever the supply and
demand situation is at a given moment; but, rather, they are
active players, seeking to shape and structure the market in
such a way so as to make the refining business more profitable.
The investigation found a number of documents, which we
discussed Tuesday, indicating that oil companies seek to
tighten supply in highly concentrated markets to increase
prices. While the oil company executives who testified on
Tuesday said either that their companies didn't adopt the
options set forth in their memo to limit supply, or that they
didn't have any knowledge of the activities discussed in
another memo, or that actions described in a third memo were
against corporate policy, the evidence presented in the
Majority staff report demonstrated many instances when refiners
acted to limit supply to raise prices.
Most of the oil companies that testified on Tuesday do not
believe we need additional refineries in the United States.
These companies believe that a shortage of refineries has not
been a cause of any of the recent price spikes.
Now, although the price of crude and government regulatory
actions obviously have a large effect on wholesale and retail
prices in this country, or in the case of regulatory actions,
surely contribute to the cost of gasoline, the staff
investigation looked at actions taken by the oil companies,
within their control, downstream from the crude oil production
process.
Today we will hear from a number of distinguished public
officials and economists about this subject. First we will hear
testimony from Senator Ron Wyden. Senator Wyden has been
working on the issue of gasoline prices and industry
concentration for many years.
Following Senator Wyden, we will hear from a panel of
Attorneys General. Attorney General Jennifer Granholm is here
today from my home State of Michigan. Attorney General Granholm
has been very active on a number of consumer issues, including
gasoline pricing in Michigan. She successfully forced gasoline
stations that gouged the public after the tragic events of
September 11 of last year to return some of their ill-gotten
gains.
Attorney General Richard Blumenthal from Connecticut is
also on our panel today. Attorney General Blumenthal has been
very active in gasoline pricing issues. Over a number of years,
he has aggressively advocated for a competitive gasoline
marketplace on behalf of Connecticut motorists.
I am also pleased that Thomas Greene, Assistant Attorney
General from California, will be here to represent the
California Attorney General's views. As our Majority staff
report shows, the effects of high concentration and vertical
integration in the refining and marketing industries are
acutely seen and felt by consumers in the State of California.
A few years ago, the California Attorney General issued a
report on gasoline pricing in that State. That report addressed
many of the issues that we have been looking at. We are looking
forward to Mr. Greene's testimony.
On the third panel today, we will hear from four
economists. All four of these panelists have studied one aspect
or another of the petroleum industry. We are grateful for their
presence, and we look forward to hearing from them as well.
Senator Collins.
OPENING STATEMENT OF SENATOR COLLINS
Senator Collins. Thank you, Mr. Chairman.
First, let me commend you and your staff for your in-depth
investigation into this very important issue of how gasoline
prices are set and the causes of high gasoline prices and price
spikes. Volatile prices are a major source of concern to
Americans, particularly lower-income families and small
businesses. Given how vital oil and gasoline are to every
aspect of our economy, gasoline prices play an important role
in our country's ability to recover from the recession.
On Tuesday, we heard testimony from executives of several
of the Nation's largest oil companies who explained the
industry's practices in distributing and establishing prices
for gasoline. I was particularly interested to hear what the
witnesses had to say about the impact on supply of the seasonal
transition between winter and summer gasoline, a time of year
when price spikes are common.
The perennial glitches that occur during this seasonal
transition are contributing factors to price spikes in some
areas of the country. The oil industry argues that the
stringent transition calendar that the EPA has put in place is
at fault. I must say, based on my review, I do not understand
why, after years of experience in the oil business and several
years of dealing with the various Federal and State
environmental regulations on gasoline, the industry has not
been able to plan more effectively for these transitions to
avoid price spikes. After all, summer always is going to follow
spring, and the summer driving season is going to begin every
year around Memorial Day.
In addition, I remain concerned that the oil companies have
not made the necessary investments in infrastructure and to
maintain U.S. refineries. Refinery breakdowns were a major
cause of gasoline price spikes in the Midwest, especially in
the spring of 2000. While the oil companies clearly are
profitable, they testified that they had made investments in
refineries of only a few million dollars, mainly so that they
could stay in compliance with environmental regulations. With
refineries operating at near 100 percent capacity, any glitches
usually lead to limited supplies and higher costs to
consumers--costs to the tune of $1 billion in revenue annually
for the industry for every penny increase at the pump.
I also share Senator Levin's concern about the impact that
industry mergers in recent years have had on competition. That
has led to greatly increased concentration in the industry, and
a basic rule of economics is more competition produces more
choice for consumers and lower prices. We seem to be going in
the opposite direction in the oil industry.
For that reason, I am particularly interested in hearing
the testimonies from the three States' Attorneys General. They
will discuss their investigations into competition within the
gasoline industry in their home States.
I also look forward to hearing the statements from several
economists and oil industry analysts who have studied the
effects of mergers and the resulting increased concentration
levels in the industry. This raises questions about the
effectiveness of the FTC's review of mergers during the Clinton
Administration.
I also look forward to hearing their opinion on the
industry's contention that U.S. refinery capacity is sufficient
for our needs. I just don't see how that can be with the
refineries operating at nearly 100 percent capacity. It seems
to me that leaves no room for error.
Consumers in Maine and across the Nation are justifiably
confused and frustrated by the recent high gas prices and price
fluctuations. I again want to thank Senator Levin for shining a
spotlight on this important issue and for exploring what can be
done to protect American consumers.
Senator Levin. Thank you again, Senator Collins, and thank
you again for your support and the support and assistance of
your staff in this matter.
Now the Chairman of our full Committee, Senator Lieberman.
OPENING STATEMENT OF SENATOR LIEBERMAN
Senator Lieberman. Thank you, Senator Levin. I am glad to
be here for this second hearing on gas prices, and once again I
would like to, in my capacity as Chairman of the Senate
Governmental Affairs Committee, thank you and Senator Collins
and your staffs for the extraordinary work that you have all
done that led to a very substantive and informative hearing a
few days ago. And I am sure the same will be true today.
I want to thank our colleague, Senator Wyden, who has been
a real leader on behalf of consumers in this and so many other
areas over the years and to welcome particularly a couple of
generals who are here today, I say as a former Attorney
General, General Granholm of Michigan and my own Attorney
General, Dick Blumenthal, from Connecticut, along with the
senior Assistant Attorney General Greene from California. I
know that they have very important testimony to offer.
This Permanent Subcommittee on Investigations report on
gasoline pricing raises some very serious questions. Is the oil
industry as competitive as it ought to be? And is government
doing everything it can, we can, to safeguard consumers?
I want to go back in history a bit. The government broke up
Standard Oil 91 years ago, ending one of the most egregious
distortions of free and fair markets in our history. There is a
wonderful quote from a book by Thomas Lawson called ``Frenzied
Finance,'' which was published in 1905. I believe that it may
have been given as a present to Senator Thurmond's parents on
his birth.
Anyway, I quote from it: ``Standard Oil has, from its birth
to present writing, been responsible for more hell than any
other trust or financial thing since the world began. Because
of it, the people have sustained incalculable losses and have
suffered untold miseries.''
Well, obviously, the oil market is much more free and more
fair today than it was back then. But today, as this
Subcommittee's investigation has shown, we are still faced with
mergers and marketing practices that may well be constraining
the marketplace rather than lubricating the gears of
competition.
The possibility of market manipulation in oil and gas is
particularly troubling because, as we know, higher gas prices
hit middle- and low-income workers and families the hardest.
They are regressive. For the American who earns $30,000 per
year, for instance, and has to drive 30 miles back and forth to
work each day, the price at the pump can mean the difference
between making ends meet and being unable to pay all the bills.
That is why we should be disturbed by the PSI
investigation's finding that gas prices in America are so
volatile not because of a responsive market, but because of a
market that is unhealthy. And its illness can be seen through
two sets of symptoms: Concentration in the wholesale markets on
the one hand and restrictive practices in the retail markets,
such as zone pricing and redlining, on the other.
In testimony to the House Judiciary Committee 2 years ago,
Attorney General Blumenthal called zone pricing ``invisible and
insidious.'' In fact, there are big signs outside every station
with the price of gas, but consumers are actually kept
completely in the dark when it comes to the workings of zone-
pricing schemes.
One major oil company operating in Connecticut, our
geographically small State--we have just eight counties--had 46
different zones just in our State. That is astonishing. How can
the market work as effectively as possible when wholesalers
offer different distributors, who have no choice but to accept
them, dozens of different prices for the very same product?
I did some work on this when I was Attorney General during
the 1980's. General Blumenthal has done very strong and
effective work. And I must say I agree with his assessment that
zone pricing is both invisible and insidious.
Based on the Permanent Subcommittee's investigation, it
does appear that oil companies could be charging more in some
areas to squeeze as much as they possibly can out of retailers
and consumers wherever and whenever they think they can get
away with it. If gasoline dealers had more freedom to shop
around, we would probably be seeing a much fairer and more
fluid market in which prices were kept down by the natural
pressures of supply and demand and not artificially inflated.
To date, the Federal Government has not sent a clear signal
on the legality of either zone pricing or redlining. Last year,
the Federal Trade Commission closed an investigation into
Western States' gasoline pricing after determining that there
was insufficient evidence to show that any of the Western
States refiners' practices caused higher wholesale or retail
prices for gas. But in a concurring statement, Commissioner
Mozelle Thompson expressed his concern about some of the
redlining practices being employed, and he concluded, ``The
Commission has vigilantly protected the competitiveness of the
Nation's energy sector for years through its enforcement
actions. I, therefore, am confident that should the Commission
find evidence in any future investigation that site-specific
redlining results in anti-competitive effects without
generating countervailing consumer benefits, it''--the
Commission--``would challenge the practice.''
With all respect, I am not confident that such effects
could be discovered because of the lack of information revealed
by big oil companies about their pricing policies. And
government cannot challenge what it doesn't know. Fair and
competitive markets are the foundation of a strong free
economy, but the current level of information about how the oil
industry really operates isn't enough for oversight agencies to
ensure that these markets are fair and competitive. That needs
to change, and quickly. And Attorney General Blumenthal has, I
think, a very constructive proposal to bring that about.
So, Mr. Chairman, I thank you again. I look forward to
hearing this morning's testimony, and I am eager to make sense
of these practices, and maybe even to figure out how we can
save consumers a few cents a gallon at the same time. Thank you
very much.
Senator Levin. Thank you very much, Senator Lieberman.
With respect to your zone-pricing point, one of the
witnesses on Tuesday said that every single gas station is a
separate zone.
Senator Lieberman. That is quite a statement.
Senator Levin. Quite a bit of testimony.
Let me now introduce our first witness this morning, our
friend and colleague, the senior Senator from Oregon, Ron
Wyden. Senator Wyden, as I mentioned, has worked for years on
the issue of gas prices and their volatility in Oregon and on
the West Coast. We are pleased to have you before our
Subcommittee this morning for your views on the subject.
As you know, pursuant to Rule VI, all of the witnesses
before this Subcommittee are required to be sworn, and so I
would ask you to stand and be sworn in at this time. Do you
swear that the testimony you will give before the Subcommittee
will be the truth, the whole truth, and nothing but the truth,
so help you, God?
Senator Wyden. I do, Mr. Chairman.
Senator Levin. Thank you. Please proceed.
TESTIMONY OF HON. RON WYDEN,\1\ A U.S. SENATOR FROM THE STATE
OF OREGON
Senator Wyden. Thank you, Mr. Chairman, and let me begin by
saying, watching you, Mr. Chairman, and your colleagues
question the oil company executives a couple of days ago was
like watching a teach-in on how to do oversight right. And I
just want to commend you and the staff for a superb job both
with the report and with the hearing that was held several days
ago.
---------------------------------------------------------------------------
\1\ The prepared statement of Senator Wyden appears in the Appendix
on page 175.
---------------------------------------------------------------------------
Senator Levin. Thank you very much.
Senator Wyden. As you know, I have been investigating the
oil price issue for several years, and I have brought with me
this morning just a portion of the pile of government reports,
including my own, that have detailed oil company anti-
competitive practices over the years. The findings of the
Subcommittee closely track what each of those investigations
have shown, and that is, anti-competitive practices are rampant
in the gasoline markets.
Now, essentially in these reports is everything: That oil
companies redlined; they sought to keep independent wholesalers
from competing in markets by refusing to let independent
dealers buy better-priced gas from the local jobber; they zone-
priced; they charged different prices for the same gas at their
own branded stores and adjacent neighborhoods, pricing it as
high as the market would bear. They kept the market for
themselves. They kept down refineries that could have increased
supply and introduced competition. And they stuck it to the
consumer on the export issue. The big oil companies, BP
specifically in their internal E-mail, called it a no-brainer
to export gas and oil to Asia at rock-bottom prices and just
make up the difference by sticking it to people on the West
Coast of the United States.
It seems to me that cumulatively these practices just strip
the competitive gears out of the gasoline market and hammer the
consumer. And what is especially ominous is when you look at
these reports and study the controlling law in this area, there
isn't a whole lot that can be done right now to turn this
situation around.
So I wanted to come this morning and say I think there is
really one question for the Congress at this point: Is it going
to be business as usual with these reports just becoming an
annual dust-collecting exercise? Or is the Congress going to
move to rein in market manipulation and require meaningful
consumer protection reforms?
And I think--and this is what I am going to outline this
morning, Mr. Chairman--moving to these reforms is critical now.
I was in a small town in Oregon Saturday last, a small town
on the Oregon coast called Brookings. The situation there is so
bad that they are trying to form a nonprofit organization so
that they can buy gas at a wholesale price because they are
getting killed with retail prices. You have senior citizens, in
my view, in Maine and Oregon and in small towns across this
country basically trying to figure out how to do this kind of
thing because the competition is being drained out of the
gasoline markets.
So here is my sense of what would constitute real reform,
Mr. Chairman. First, I think the controlling statute in this
area needs to be changed and broadened. The current law states
that there must be one of three kinds of outright collusion
taking place to stop these anti-competitive practices. One,
there has got to be a contract or an agreement between
companies to fix prices. Two, there has got to be a combination
or a formal alliance of companies fixing prices. Or, three,
there has got to be a conspiracy, which is basically like a
bunch of people getting together for dinner and saying, Well,
Bob, what do you think the price of unleaded should be?
Now, we all know the old saw that the certainties in life
are death and taxes. There is another one. You're not going to
find smart oil companies holing up in a room colluding in that
kind of way to set prices. They are just too savvy and the
problem is subtle. Supplies are being manipulated and
competition is being restricted in broad daylight.
For example, the FTC found that redlining was used to
discourage competition and raise prices while providing no
benefit to the consumer. But because the Commission found no
evidence that the refiners met either of those three tests for
collusion, redlining could just go forward unabated.
I believe it's time to make these anti-competitive
practices illegal once and for all. So I would propose that, in
addition to collusion, the statute be broadened to bar anti-
competitive practices by a single company where the market is
concentrated, where you have four or fewer players controlling
a significant majority of the market. This would raise the bar
to expect better business practices from the oil companies.
When a company tries to squeeze an independent jobber out
of a market by telling branded stores what gas they can and
can't buy, the law wouldn't have a loophole anymore. So I think
that would be change No. 1, making a change in the controlling
statute to broaden out beyond that three-part test with respect
to collusion.
But I would propose changes in a second area, specifically
changes to the law that authorizes the Federal Trade Commission
and governs its oversight of markets. Under the FTC Act, I
believe the Federal Government should consider establishing
consumer watch zones in these concentrated markets. At
Tuesday's hearing, ChevronTexaco's North American President
David Reeves admitted that the West Coast gasoline market is
dominated by a limited number of refinery marketers who, acting
alone, can evade the laws of supply and demand. There's no need
for oil company executives to get together in a smoke-filled
room to collude on price when they've got the individual power
to manipulate markets in that kind of fashion. And I believe
that when you have a market that is highly concentrated, you
ought to go beyond the question of whether there's collusion
between competitors. And in these consumer watch zones, when
oil companies employ anti-competitive practices like redlining
or zone pricing, I believe the burden of proof should shift
onto them to prove that those practices are not harming
consumers. So that would be the second change that I would
advocate, Mr. Chairman, as to the FTC statute in these
concentrated markets, when you find practices like redlining
and zone pricing, the burden of proof should shift to the
companies to demonstrate that it is not harming the consumer.
My sense was, Mr. Chairman, you were suggesting almost the
same sort of thing with respect to parallel pricing, and I
support those kinds of efforts as well.
In the same way, the whole litany of anti-competitive
practices should be considered an area that is substantively
questionable until proven otherwise. That would include
redlining, exporting at a discount, pressuring independents,
all of the practices that manipulate supply or limit
competition. The second set of changes I believe would go a
long way towards helping American consumers.
I would also empower the Federal Trade Commission to take
more immediate action when you have those problems in a
concentrated market. Under the FTC Act, I would like to see the
agency have the ability to issue cease and desist orders to
companies that participate in the anti-competitive practices so
as to provide the consumers protection. It seems to me the
Federal Government should not be powerless to regulate anti-
competitive practices that can raise gas prices for the
consumer.
In addition, I would use this watch zone concept, this
question of how you proceed in concentrated markets to serve as
an early warning signal with respect to the antitrust statutes.
If a proposed merger of oil companies would create a consumer
watch zone, again, with four or fewer players controlling 70
percent of the market, I would say that kind of merger should
require a closer level of scrutiny. A higher standard of
evidence--of review would demand evidence before the merger
would be allowed to proceed, again, to protect the consumer.
Americans shouldn't have to wait for what amounts to an oil
oligopoly to start gouging the consumer to get some protection
from high prices.
The Federal Trade Commission has already said that
Americans shouldn't have to suffer because of bad decisions
made by regulators years ago. The agency recently instituted a
new policy of looking back at previously approved oil company
mergers to see if there are any lingering anti-competitive
problems. If the agency finds such problems, they're going back
in to fix them. Why not make a change so as to do the
appropriate amount of investigating on the front end before you
let another anti-consumer merger kick in and, in my view, stop
the anti-competitive practices before they start?
Let me be clear on this point, Mr. Chairman and colleagues.
When I suggest changes to the laws that govern oil companies
and oil markets, I want to propose that those changes only be
made in the case of concentrated markets where a predisposition
to consumer abuse has been documented. Legislation along those
lines would ultimately take the country in a more constructive
direction. I don't think the country would be taken in a more
constructive direction by some of the proposals that we heard
in the last few days, such as weakening the Clean Air Act. We
even heard Tuesday that the Clean Air permitting process, known
as New Source Review, needs to be streamlined; it's been a
deterrent, according to the companies, to increase capacity in
the country. But I think there is something wrong with that
picture when Mr. Reeves from ChevronTexaco testifies they have
made significant expansions at their Mississippi refinery. He
also states it'll be one of the first refineries in the Nation
capable of producing both low-sulfur gas and highway diesel
fuel outside of California. The project will be completed in
advance of national deadlines for these requirements.
So it seems to me by their own words, the words that you
heard Tuesday, Mr. Chairman, the oil industry's claim that the
Clean Air Act requirements are deterring refineries from
increasing their output doesn't exactly match up with what's
happening in the real world at ChevronTexaco's refinery.
There's also something wrong with this picture when we hear
repeatedly that no new refineries have been built in decades
and that the Clean Air Act is at fault. Yet when asked whether
the United States needs additional refineries, all of the
executives at Tuesday's hearing said no. The real reason has
more to do with return on investment, in my view, than anything
to do with the Clean Air Act.
There isn't going to be any more competition under the
industry's proposals to streamline the Clean Air permitting.
What I tried to offer today was a proposal to open up the free
enterprise system in the gasoline business, and I think that
ought to be a base by which the Congress proceeds rather than
an approach that would advocate dirtier air and reward the same
oil companies who perpetuated the gasoline supply crunch in the
first place. These are the companies that deliberately worked
to keep down refineries. You and I have talked specifically
about Powerine in California, but these are the kinds of
examples that are in these reports, Mr. Chairman.
I want to commend you and your staff again on a very
thorough report. It documents a litany of anti-competitive
practices the oil companies use to manipulate supply and price
in gasoline markets, and close by coming back to that question
that I think is central to this debate.
Mr. Chairman, we could pile these reports over the next 10
years up to the ceiling, and yours is superb and the work that
you've done and Senator Collins and Senator Lieberman is
excellent. I think the question now is: Are we going to do more
than stack up the reports? I think that it is time now to get
beyond the statute today that makes it virtually impossible to
protect the consumer. These companies are not going to go into
a back room, have a big supper, and say, ``Joe, what do you
want the price of gas to be?'' They're just not going to do it.
But that's virtually what you have to prove in order to bring
an action to protect the consumer.
I think we can do better on a bipartisan basis. In my
State, Senator Smith shares many of the same views that I do.
Senator Collins has a long record of consumer advocacy in this
area. There is not going to be anything partisan about doing
this job right, in my view, and I thank you and your staff, Mr.
Chairman. You have given me a lot of time in recent months to
work on an area I feel strongly about, and I'm very
appreciative.
Senator Levin. Well, thank you, Senator Wyden, for your
testimony and for your long, energetic, persistent effort to
protect consumers in this area. As we have discussed, a number
of reforms are needed in the law to tighten up the law. I would
only add to that very general point that the Federal Trade
Commission does have power under existing law which it has not
exercised to try to prevent some of the mega-mergers which have
occurred and some of the lack of competition which has
resulted. But I very much appreciate your very specific
testimony. That is very helpful to this Subcommittee, and I
would ask my colleagues if they have any questions. Senator
Collins.
Senator Collins. No, thank you, Mr. Chairman.
Senator Levin. Senator Lieberman.
Senator Lieberman. No, Mr. Chairman.
Senator Levin. Thank you again.
Senator Wyden. Thank you.
Senator Levin. I would now like to introduce our second
panel of witnesses. Welcome to this Subcommittee. Richard
Blumenthal, Attorney General for the State of Connecticut;
Jennifer Granholm, Attorney General from my home State of
Michigan; and Tom Greene, the senior Assistant Attorney General
for the State of California. This is a very distinguished, a
very knowledgeable panel. We look forward to hearing your views
on gasoline volatility and your experiences in your respective
States and what we can do about it.
Pursuant to Rule VI, as I have indicated, all witnesses who
testify before the Subcommittee are required to be sworn, and
so I would ask each of you to stand at this time and raise your
right hand. Do you swear that the testimony that you will give
this morning before this Subcommittee will be the truth, the
whole truth, and nothing but the truth, so help you, God?
Mr. Blumenthal. I do.
Ms. Granholm. I do.
Mr. Greene. I do.
Senator Levin. Thank you. I think we will start with
Attorney General Blumenthal.
TESTIMONY OF RICHARD BLUMENTHAL,\1\ ATTORNEY GENERAL, STATE OF
CONNECTICUT, HARTFORD, CONNECTICUT
Mr. Blumenthal. Thank you, Mr. Chairman, and I would like
to second a number of the remarks that have been made about the
quality of the staff report that has been done. I know that
very frequently we compliment the staff on the work they do,
but this report really is extraordinarily insightful,
penetrating, and revealing about the practices of this
industry, and I think it will provide real ammunition for
effective reform, and I want to thank you, Senator, and Senator
Lieberman and Senator Collins for your excellent work in this
area and for making sure that this report will be as useful and
productive as I hope it will be.
---------------------------------------------------------------------------
\1\ The prepared statement of Mr. Blumenthal appears in the
Appendix on page 179.
---------------------------------------------------------------------------
Price spikes have become almost a national norm at this
point in gasoline pricing, and, unfortunately, they affect very
deeply not only American consumers, particularly those of low
and moderate means, but also our economy. And as you have
remarked, Mr. Chairman, they have probably stifled our recovery
and perhaps precipitated the recession that we are now seeking
to undo. So there are implications to these kinds of price
abuses beyond the simple consumer protection issues. They
affect all of us, and their effects are tremendously far-
reaching and fundamental.
Market concentration has enabled the industry to manipulate
prices, to take advantage of low supplies and even disruptions
that may be the result of temperature, refinery fires, pipeline
problems, and so forth. The industry has exploited those
problems for its own benefit, and the Subcommittee report very
dramatically documents that conduct. It also indicates that
there has been conduct verging on the illegal, if not an
outright violation of the antitrust laws. A number of the
discussions and memos that are evidenced in the report show
that there is a need for further investigation and enforcement.
And one of the reasons that we have such high degrees of
concentration is indeed the lack of effective enforcement. It
has been a bipartisan failure on the part of the FTC, on the
part of Federal enforcers, and the proposal that I am making
today really is the result of that lack of effective
enforcement that has brought us to such high degrees of market
concentration.
I am proposing a moratorium on all major mergers and
acquisitions within this industry, whether at the wholesale or
retail or other levels, a moratorium that would enable the
Congress to fashion more effective remedies, and not only to
empower but also to require Federal enforcers to do a better
job. And I believe that a moratorium of this kind may be
regarded as a kind of last resort. It ought to be for at least
1 year. It would affect only major mergers and acquisitions and
so provide an exception, for example, if there were failing
companies or if their market share were less than a certain HHI
degree or number. But I believe that the record now more than
justifies that kind of halt to any further major mergers and
acquisitions in this industry.
The second proposal that I believe is well merited would
involve the kind of change that Senator Wyden and you have
mentioned, Senator Levin, that would make admissible evidence
of parallel pricing, the kind of conscious parallelism that in
a market so highly concentrated as this one certainly ought to
be regarded as evidence of an antitrust violation. I believe
that the proposal that he has just made would also apply to
concentrated markets that have a predilection or a
predisposition toward abuse, those changes in the standard
itself are worth consideration as well. But I think at a
minimum there ought to be admissibility for common pricing
patterns or conscious parallelism under our antitrust laws
where there are highly concentrated markets, and that would
certainly apply to this industry. And perhaps in some
instances, with a sufficient threshold showing, it ought to be
a per se violation. Obviously there are arguments pro and con
to that kind of proposal, but I believe it's worthy of
consideration.
And then to promote more effective enforcement at the State
as well as Federal level, I think there needs to be better
information. Quite simply, there should be under the Energy
Information Administration a central data bank that is
accessible and more complete in real time so that it is truly
useful to Federal antitrust enforcers and to State enforcement
officials, such as those before you today and our colleagues
around the country who have our own antitrust and consumer
protection responsibilities.
Right now, we have to spend tens and sometimes hundreds of
thousands of dollars doing the kind of work that California did
in its study, that Connecticut has sought to do over the last
10 years while I have been Attorney General simply to make a
case, wholly apart from the use of subpoenas and other
investigatory tools. Basic information is simply not as
available and accessible as it should be.
Finally, I propose again and urge very strongly a ban on
zone pricing. I recognize that you have heard testimony from
the industry that would seek to justify it on a competitive
basis. In my view, zone pricing really is not a competitive
measure. In fact, it is anti-competitive. And I have cited in
my testimony pricing conduct that has been documented in our
local media. The Stamford Advocate, for example, has reported
price differentials in a very close proximity of 7 to 12 cents.
It now happens that a truck can be delivering the same gasoline
that is exactly the same product to the same city, indeed
sometimes the same street, out of the same truck, and often to
the same owner of two different stations located within blocks
of each other; and simply because of these artificial,
geographic, discriminatory means and distinctions, the prices
will be different substantially to the consumer. The industry
relies on computer programs and secret calculations as to how
much profit the consumer will bear, not what competition will
enable or provide.
And so I believe that the Robinson-Patman Act and the
Petroleum Marketing Practices Act ought to be amended to
specifically prohibit the single-source requirement, which is
at the root of this abuse, or specifically, discrimination
based on location of stations, discrimination in pricing, and
close the loopholes that now exist in those two statutes.
I recognize, finally, that conservation has a role to play.
All of the members of this panel have commented very eloquently
on the importance of conservation, fuel efficiency, and mass
transportation, other measures that can help us to save and
conserve as well as to eliminate the abuses that artificial
shortages and low inventories have created.
I again thank this Subcommittee for this opportunity to
comment on an area that I think has come of age. It certainly
is an issue whose time has come. These practices for the most
part are invidious and insidious. They are often invisible to
consumers, but their effects are real and dire. And I offer my
continuing help in addressing them. Thank you.
Senator Levin. Thank you very much, Mr. Blumenthal.
Attorney General Granholm.
TESTIMONY OF JENNIFER M. GRANHOLM,\1\ ATTORNEY GENERAL, STATE
OF MICHIGAN, LANSING, MICHIGAN
Ms. Granholm. Thank you very much, Mr. Chairman. It's great
to be invited here to talk about such an important subject. I
very much appreciate the opportunity.
---------------------------------------------------------------------------
\1\ The prepared statement of Ms. Granholm appears in the Appendix
on page 187.
---------------------------------------------------------------------------
I'm the Attorney General of Michigan, and for nearly 3
years, my office has been involved in the review of gas
pricing, as well as in independent actions from our office to
curb excesses. We joined with the FTC in looking at their
investigation following the spikes in the year 2000. In the
wake of the terrorist attacks, of course, many of us saw prices
go through the roof, and in Michigan, it was between $2 and $5
per gallon, and our office filed notices of intended action
against 46 gas stations who jacked up those prices and did get
refunds. Thank you for mentioning that.
In my role as legal counsel for our Michigan Public Service
Commission, which is the body that regulates utilities, my
office intervened in a FERC matter regarding the Wolverine
pipeline and its lack of competition with respect to access to
the pipeline and with respect to rates, which was so well
documented in your report.
So I would like to propose a couple of things. First of
all, I think that General Blumenthal has made some excellent
points. I agree on the issue of a moratorium--a moratorium
particularly with respect to wholesale mergers. I was
interested to hear Senator Wyden's comments about four
suppliers controlling 70 percent of the market as being sort of
a threshold. If you look at the HHI index, in Michigan we
approached that almost tipping point. We are almost at 1,800 on
that tipping point. And one more merger would push us over the
top.
Now, if you use that index as a means sort of across the
board of saying when do we apply a moratorium, when do we
believe there's too much concentration--and that's, of course,
the threshold that the FTC and the DOJ use, anyway--I think
that is a great way to start, at least where we might be able
to apply the existing criteria and know that we've got to take
another look before there's any more concentration of a market.
So I agree fully with the moratorium idea.
A couple of other things that I think are relevant, and I
know that they were discussed before. First of all, I know
Senator Collins was speaking particularly about the industry
capacity levels being at almost 100 percent. And, of course,
when that is the case, before, when they were much more fluid
and you could shoot gas to an area where there was a
disruption, there was an ability for the market to self-correct
in a much more ready fashion. The inventory levels, the
reformulated gas problems--and in Michigan, we don't have a
reformulated gas requirement, but certainly the availability of
supply from other States is more limited when other States have
got different requirements. And when you combine that with this
inventory level problem, that's, of course, exacerbating the
spike problems. And in Michigan, we've had the Wolverine
pipeline, which is our main pipeline, break down, huge gas
spikes as a result of inability to access quick supplies.
Now, the notion about that, though, that the market could
self-correct and that the industry can take advantage of the
arbitrage possibilities that previously existed when the prices
were high in one area, and the other area with lower prices
could shoot gas over and see the sort of equilibrium arise,
they are much more limited, of course, when there is a
concentration of market power in one area. And so in Michigan,
I just want to address this issue of--because we have seen
amazing price differentials from one adjacent area to the next,
where you would think that the ability to take advantage of the
arbitrage capability would really create a much more level
pricing scenario, and they have not.
We've seen as much of a 10-cent difference from the Chicago
market to the West Michigan market, and the reason is--I mean,
even a 2-cent differential would cause gas to shoot from one
place to another. But a 10-cent difference, you'd really have
to say: What is going on here? Who's taking advantage of
something? And it's because in West Michigan--because we have
had a merger, first of all, of Marathon and Ashland Petroleum.
That occurred in 1998. And then the two of them merged with
Ultramar Diamond Shamrock.
Now, the resulting merger means that five companies in
Michigan control 80 percent of the market, and in West
Michigan, this concentration is particularly egregious because
really the Marathon Wolverine pipeline--the Wolverine pipeline
is owned by a number of these very same companies, and they
control access to the tanks at the pipeline. So not only do you
have a concentration of supply, but you have a concentration of
the means of distribution and the tank--access to the tanks as
well.
As a result, we have seen--and the reason for this big
disparity that I mentioned between Chicago and West Michigan is
because people have difficulty accessing the terminals when the
terminals are owned by one entity, which in this case is
Marathon Ashland Petroleum. They were not allowing others to
have access, which is why our office intervened with FERC to
allow an independent wholesaler to have access to the
terminals. But the result of these mergers was to limit access,
and that is another area that I think this Subcommittee can
look at. So it's not just the concentration and the ability to
control capacity, but it's also the ability to control
distribution and access to these terminals that we have seen
the increases--where the increases have been so disturbing.
Merger mania within the industry, in the last 5 years--I
know you have documented this. This wave of mergers has
obviously reduced competition enormously. But because Marathon
Ashland Petroleum in our State alone has 28 percent of the
terminal capacity market, and the next one down is British
Petroleum Amoco, which merged, which has 14 percent, so the No.
1 person has more than twice what the next one has. And there's
five who control the market. Exxon is the next one. Equilon and
Citgo, and they have nearly 80 percent of the petroleum
terminal capacity in Michigan.
So I know that when you've got that concentration and you
have an inability of independent jobbers to access the
terminals or to access the pipeline or to access capacity, you
have these independents having an inability to compete, and
often they are not just competing with the retail
establishments like Speedway, which is owned by Marathon, but
they are also competing because they are purchasing their
supply from the owners of Speedway. So their supplier is
competing with the other retailers. You've got no ability for
greater independence in the market when the entity from whom
the independents are buying from is the same entity that's
supplying their competition, the retailers, the other
retailers. It's all coming from one place and, therefore, the
competition is just not there.
Consequently, in your report, which was very interesting,
on the graph that you showed on page 361 and 362,\1\ has, of
course, all of these spike fluctuations in Michigan. But this
one down here shows who leads the fluctuation. And in this
case, it is Speedway stations that are always leading the price
up or down, it's Speedway that is doing it. Speedway, of
course, is the one that is owned and controlled by the largest
capacity operator.
---------------------------------------------------------------------------
\1\ See Permanent Subcommittee on Investigations' Majority Staff
Report, Gas Prices: How Are They Really Set, which is reprinted in the
Appendix on page 322.
---------------------------------------------------------------------------
So the concern, of course, that one entity is being able to
not just control the market but control the prices is of great
significance, and the independent folks have to compete and
often lose money when the big players are lowering their
prices. I think you have Justine Hastings who's testifying
later today, and she will tell you, I'm sure--because she's
written this--that the independent station is the only type of
station that can purchase gasoline from any refiner and
independently set its retail markup and, thus, increase
competition at the wholesale and retail level. But if you
reduce their ability to compete, obviously, then you have much
higher prices.
My suggestion, respectfully, to the Subcommittee in the
wake of the great report that you have done, is to dovetail on
General Blumenthal's request for a moratorium. Again, in
Michigan, I would suggest that it would go to wholesale
suppliers because there may be some very small retailers that
are being acquired that may be independent gas stations, that
may not affect the market as much, but wholesale, absolutely,
terminal owners, etc.
I would like to see also that there be adequate resources
for merger review at the FTC and the DOJ so that they can
really focus in on this. I'm not sure that they've got the
ability to assess in the way they ought every merger that is
being proposed, and I'd like to see that occur as well. Not
every merger, of course, is a bad thing, but with the resource
constraints and the overwhelming number of mergers in the past
few years, I think that there are a number of anti-competitive
mergers slipping through the cracks.
And then I also believe that there should be a review of
whether the transportation and the access to terminals'
bottlenecks preclude normal market forces from responding to
the higher prices as well. I dovetail, too, as well on what
General Blumenthal said with respect to having access to
information from the Energy Information Administration. It
would be very good, particularly for States that don't have
their fingers in the pie as much, to be able to have access to
that information to know whether they can bring an action.
So, again, I want to thank you very much for the
opportunity to testify and talk a little bit about what has
happened in Michigan because of the concentration of market
power. And I truly do hope you're able to achieve some great
results, too.
Senator Levin. Thank you, General--``Jennifer,'' I almost
said.
Ms. Granholm. That's OK.
Senator Levin. General Granholm, thank you so much for the
testimony. Mr. Greene.
TESTIMONY OF TOM GREENE,\1\ SENIOR ASSISTANT ATTORNEY GENERAL
FOR ANTITRUST, CALIFORNIA DEPARTMENT OF JUSTICE, SACRAMENTO,
CALIFORNIA
Mr. Greene. Thank you, Mr. Chairman and Members, and
certainly thank you on behalf of Attorney General Bill Lockyer
of California, who could not be here this morning.
---------------------------------------------------------------------------
\1\ The prepared statement of Mr. Greene appears in the Appendix on
page 198.
---------------------------------------------------------------------------
I think that the panel has already spoken eloquently to the
key problems here. Let me just tick off the major points from
my perspective.
The first is that inventories, that key safety margin
between enough supplies and shortage, have razor-thin margins.
We are now at a point in which inventories are measured in days
rather than weeks or months. The implication of that is that
even a minor refinery outage, a minor fire, can throw markets
into complete disarray. Our experience in 1999 in California,
and more recently consumer experience in the Midwest, is that a
5- to 10-percent reduction in supply can kick the spot price up
50 to 100 percent. So this is a market in which volatility is
increasingly a normal aspect of the marketplace.
I think this has a number of critical implications. The
first from my perspective is the necessity for aggressive,
affirmative antitrust enforcement. That's what I do on a day-
to-day basis. I would certainly echo Attorney General
Granholm's perspective that resources are critical to this
process. I was personally involved in the ExxonMobil
transaction in which, at least from a California perspective, a
major refinery was spun off. So we did what we refer to in the
business as a zero delta deal, which is--from the perspective
of our markets, the competitive situation did not change.
But in that particular transaction, we received and
analyzed over 10,000 boxes of material. When you deal with
these kinds of transactions, you're talking about huge amounts
of material that must be analyzed and reviewed. So I think both
State resources and Federal resources must be adequate.
We are increasingly familiar with the importance of retail
in the competitive picture for this industry. We think of the
oil industry as going from Kuwait to Kansas to California. They
are enormously large corporations, among the largest in the
world. But one of the things that has happened, largely because
of the existence of new computer technology, the ability to
communicate by satellite link on a daily basis between
individual retail stations to the home office and to a very
small group of consultants, actually, that help set the retail
price, what is increasingly happening is a process which is
called ``retail-back pricing''--that is, prices are set based
on what's happening in the marketplace at the local corner.
It's not a question of prices being set by the price of crude
with a markup. It is what the market makes possible in a local
situation.
That is affected in a very dramatic way by what's already
been spoken to, and that is, zone pricing. In a situation in
which we have retail-back pricing, the lack of independence in
those zones means that prices will not fall. There will be much
less competition than we would otherwise expect.
One of the implications of that, at least one of the things
that we believe we've observed in California markets, is what
we refer to as ``a rockets and feathers pricing pattern''--that
is, when there is a refinery outage, prices rocket up, but they
do not fall at a similar speed. They rocket up and then feather
back down. We believe one of the reasons for that, indeed
perhaps the major reason, is a limited amount of retail
competition. There aren't effective competitive forces at
retail at the local level to push those prices down as quickly
as they rose.
As a professional prosecutor in this area, let me speak to
what I think may be important limits to current antitrust
jurisprudence in this arena, and this has been touched on
earlier. Largely unbeknownst to the public at large, there has
been a major sea change--starting with the Federal courts which
is now working its way into the State courts as well--
increasing substantially the burden of proof for prosecutors in
showing that there has been an agreement within the meaning of
the antitrust laws. A generation ago, actually, 10 years ago,
approximately, the Ninth Circuit decided, In Re Petroleum
Products Antitrust Litigation, that allowed us to use
substantially circumstantial evidence to prove up the existence
of a conspiracy.
Far more recently, actually, last year, the California
Supreme Court in its Aguilar decision looked at facts that were
very similar, frankly, when you really examined the two cases,
and determined that there was insufficient evidence to
determine the existence of a conspiracy.
When you are dealing with highly concentrated, oligopolized
industries, communications of a very limited sort can have
enormous implications in terms of providing and facilitating
coordination between ever more concentrated players in this
marketplace.
There may be some other implications which I would
certainly like to surface for the Subcommittee. Because of
California's insularity due to its physical location and its
unique fuel blend, we are beginning to look seriously at the
possibility of creating a State physical hedge, a strategic
inventory of fuel which would allow us to begin to move fuels
into the marketplace if there are small perturbations in the
supplies from the refineries as a way of addressing these very
volatile price spikes. Whether that makes sense on a national
basis, we would certainly leave it to the Subcommittee and its
expert consultants. However, I would certainly commend to the
Subcommittee the consultant reports that I've supplied with my
testimony.
There is another competitive issue which you need to be
aware of. This affects us very directly in California, but
insofar as reformulated gasoline becomes much more a part of
the national picture, the existence of certain key patents, may
become critical. Unocal sat in on the regulatory meetings, knew
what was the arc of development of our fuel blend. At the end
of the process, it was discovered both by the other major oil
companies and by regulators, to the chagrin of all, that Unocal
had patented the key blending technology. So our clean fuels
are now possibly subject to patent challenge.
This has gone through a whole series of pieces of
litigation, and the usual patent is itself being specifically
re-examined by the U.S. Patent Office.
As gasoline becomes much more technical in terms of meeting
specific clean air goals, patent policy may become very
important here. In California, as I said, one of the reasons
that we think people are more reluctant than not to come into
our market is because of ambiguities created by the Unocal
patent and whether people will be exposed to patent litigation,
licensing litigation, in the event that they bring fuels into
our market.
Let me mention two other supply points. There is in our
market a key oxygenate, methyl tertiary butyl ether, MTBE. This
constitutes roughly 11 percent of our supplies. We are in the
process, because of clean water problems associated with MTBE,
of removing MTBE from our gasoline blends while still meeting
our clean air obligations. Indeed, as the Subcommittee is
presumably aware, California sets the most stringent clean air
requirements in the United States.
We believe that there is no fundamental chemical or
environmental reason why we need to include oxygenates in our
fuel. Governor Davis has written to President Bush seeking a
waiver so that we can meet clean air requirements. We're
willing to meet any of the air standards, but we would like to
meet that without the necessity of oxygenates. This could very
well give us more flexibility to create a blend which would
both meet clean air standards and not result in an
extraordinary reduction in supplies. In this regard, the 11
percent portion of our fuel stocks that MTBE represents would
also be the equivalent of one major refinery in California.
And, again, if we're in a situation in which a 5 or more
percent perturbation in supplies could have a very outsized
effect on price, this is a very big deal for us.
Finally, I would certainly echo the points made earlier
about conservation. California consumers are among the
thriftiest in the Nation. We rank 44th in per capita gasoline
consumption. That said, we think there are still enormous
opportunities for reducing the need for gasoline both by
increased support for rapid transit, and we think, without re-
arguing all the questions about fuel economy standards, that
there are still enormous opportunities in the transportation
sector itself.
And with those points made, I'd certainly be prepared to
answer questions from the Subcommittee. Thank you.
Senator Levin. Thank you very much, Mr. Greene. Thank you
all.
One of our key findings is that in areas of high
concentration, where fewer refiners control most of the retail
sales, by keeping supplies tight refiners can raise the price
of gasoline without great fear of competition. And since all
the companies maintain minimal inventories, no company need
fear that a competitor would gain market share by keeping their
prices low, because that competitor would quickly run out of
gas.
We walked through with the industry representatives on
Tuesday a number of documents that we believe demonstrated that
effort to tighten supply. And I want to go through a few of
those with you.
One of the most troubling was a 1999 memo from BP which
went through a laundry list of truly outrageous methods for
keeping supplies of gas tight in the Midwest. The witness
agreed that the proposals were outrageous, said BP rejected
them, and, ``counseled'' the persons who prepared them.
But that doesn't take away from a very key fact that the
goal of the BP effort was to increase prices in the Midwest by
1 to 3 cents by restricting supply.
The top executives in BP were working to achieve that goal.
Whether they rejected the particular methods or not is one
issue but the goal they did not reject. Their goal was to
increase prices by restricting supply, and they felt they could
increase prices just by those means by 1 to 3 cents a gallon.
And, again, 1 penny a gallon is $1 billion a year for the
industry.
Another memo from Marathon talked about OPEC's efforts, and
here reading the words in this memo, OPEC's efforts to rein in
output as ``bearing fruit.'' For our consumers in America, it
is bitter fruit. But listen to what this Marathon memo says.
``As OPEC and other exporters' efforts to rein in output began
bearing fruit, nature stepped in to lend the oil producers a
helping hand in the form of Hurricane Georges, which caused
some major refinery closures, threatened offshore oil
production and imports, and generally lent some bullishness to
the oil futures market.'' And they acknowledge that was an
incredibly awful way to describe a result of a hurricane. But
that's the way it was viewed.
And then we had a memo from a Texaco official talking about
how Shell had told him that everyone was nervous because Texaco
wasn't saying what it was going to do about importing CARB into
California. The memo says that Shell threatened Texaco that if
they did import CARB fuel into California, then Shell would
lobby for a tax on that import.
So now the Shell official--who now owns that portion of
Texaco, by the way--disavowed that conduct, said it would not
be tolerated in the company today. But that was the conduct:
You do this, we're going to go and try to get a tax on your
import.
A Chevron memo, one the oil company did not disavow, said
the following: ``Market is dominated by limited number of large
committed refiner/marketers whose individual actions can have
significant market impact.'' So this is just some of a lot of
evidence of showing that they are aware of the fact that by
limiting supply in a highly concentrated market, that they can
basically succeed to raise prices.
Now, I have two questions. One, does that surprise you,
what I just read? And, second, would you forward to this
Subcommittee any material that is not in that report, if you
have had a chance to read it, which also shows in your States
the evidence of the oil companies' restricting supply because
of the ability in that situation, particularly in concentrated
markets, to have a direct impact on price? So let me start with
you, if I could, General Blumenthal.
Mr. Blumenthal. Thank you, Senator. To answer your second
question first, I would be happy to forward any documents now
in our possession or that we acquire in the future that show,
as these very powerfully do, an intent or a desire to exploit
tight supplies for purposes of raising prices and ultimately
raising profits, and prices, as Senator Collins and the report
indicated, have a very direct and immediate impact on profits
because every 10-cent increase in prices produces on an annual
basis $10 billion in additional revenues.
Of course, all of these documents were merely for the
purposes of brainstorming, I'm sure, as the industry has
indicated. I am actually, to be very serious, not so sure that
they were simply to consider illegal action and then reject
them, as the industry has also said. I think they are very
solid evidence that call for changes in the burden of proof, in
evidentiary standards, that make these kinds of cases easier to
detect, investigate, and prove.
There are two areas that need improvement: One, as Attorney
General Granholm has very well said, more resources so that
prosecutors have the wherewithal to prosecute these cases; and
the other is the standards of proof and evidence that enable
them to deal with the much more sophisticated, technologically
advanced means of communication. We don't have the smoke-filled
rooms. We don't have the handwritten notes. We often lack
cooperating witnesses in these cases. But the kinds of evidence
that should and would be admissible under the proposals made
this morning I think would enable more effective prosecution.
And, finally, I would say that these documents show also
that this industry as a whole needs to move in the direction of
more independence, more independent owners and operators and
refiners. It needs more unintegrated patterns of dealing, and
it needs more unbranded products. Independence, unintegrated
patterns of dealing, and unbranded products all will help to
open this industry to more competition.
Senator Levin. Thank you, General Blumenthal. General
Granholm.
Ms. Granholm. Yes, the euphemism of ``bearing fruit'' you
were lucky to find in a document, but I think this speaks
exactly why we do have to change the burden of proof. This is
basic economics. It's supply and demand--wink, wink. You know,
we tighten the supply, the price goes up. I don't even know you
need a document to tell you that. Anybody who's in this
industry knows that.
It was just interesting that you were able to find smoking
guns that revealed their knowledge of what they were doing. But
we've got cases that have been tossed out because--on this
notion of tacit collusion, where you've had a lot more--you've
had joint price communications between firms, including
meetings. You've had price verification calls, price changes
between competitors, and the Eighth Circuit threw that out. So
it wasn't enough.
Some courts are requiring too many factors to be able to
determine that this kind of collusion is going on. But, the
reality is I don't even think you need to have evidence of--
it's almost a basic textbook on economics that would
demonstrate that they know very well when you turn off the
spigot, the price is going to go up.
So, yes, if we have any documents that would reflect this,
I would be thrilled to forward them on to you. But I think that
this does call for a shifting of the burden of proof or of the
standards that courts might look at in order to determine
whether collusion has occurred.
Senator Levin. Thank you. Mr. Greene.
Mr. Greene. Senator, I would certainly agree. The documents
that relate to CARB certainly are part of the Aguilar
litigation, which was the case that I was referring to earlier
that was decided against the plaintiffs because they had
insufficient evidence. I think these documents are really quite
remarkable.
But currently, with the Federal courts leading the way, the
burden of proof has gone up quite dramatically. They also
illustrate, I think, really a key point of your hearing today
as well. In a fully competitive market, if this were a grain
market or this were some other more ordinary market, if
somebody were to withhold supply from the marketplace, they
would be unable to sustain that and sustain an increase in
price because other marketers would come into that gap and fill
it.
We are in a situation now in which concentration has
reached the point where it's both in the interest of an
individual company to withhold supplies from the marketplace
and others will not step in. Now, that may be a consequence of
oligopolistic coordination. It's sort of the classic sort of
perspective here, but we have reached the point where that
certainly is theoretically possible, and we now have direct
evidence that 's exactly what's going on.
Senator Levin. Let me ask you about exchange agreements. I
know you have had experience in California with that, and I
don't know if other States have or not. But we have several oil
company documents. Here is one from BP-ARCO. It reads:
``Exchange in trade selectively to preserve market
discipline.'' That is a direction from a BP-ARCO executive.
Then it says at another point in that document, ``From time to
time, ARCO may need to endure brush fires to discipline the
market.''
The particular witness did not know what was meant by that.
He said it occurred before his time, so that was his answer.
One way to discipline the market, I guess, would be to buy
up a competitor's product--in the case of a product that was
being sold in California--that is selling at a price lower than
yours, and then reselling it at a higher price. Mobil
apparently did that in California with respect to the Powerine
refinery. There is an internal memo from Mobil, which you
probably have, or you may have had, that is talking about the
Powerine refinery and the threat that it poses to Mobil, and
here is what it suggests: ``One other thought. If they do start
up''--that is, if Powerine does start up--``depending on
circumstances, might be worth buying out their production and
marketing it ourselves, especially if they start to market
below our incremental cost of production.'' And then it goes on
to say that Mobil already did that. ``Last year,'' it said,
``they were dumping RFG at below cost of MTBE, we purchased all
their avails, marketed it ourselves, which I believe was a
major reason that the RFG premium last year went from 1 cent
per gallon in January to 3 to 5 cents per gallon through to
their shutdown.''
In other words, Mobil accomplished--at least the year
before what it wanted to--by buying out the Powerine product,
selling it at a higher price, and then increased the premium
for all of the RFG several cents a gallon by doing that.
Is that a document which you are familiar with, by the way?
Mr. Greene. Yes, certainly.
Senator Levin. OK. Now, apparently--was that one of the
issues that was debated or litigated?
Mr. Greene. These documents came to public light through
the discovery process in the Aguilar case. We were actually
amicus curiae, the Attorney General was amicus curiae in that
case. But just from the analytics from an antitrust
perspective, if an individual company does things on its own,
that is, buys fuel and then resells it, that's an individual
activity.
Senator Levin. Sure.
Mr. Greene. So we don't have that key agreement or
conspiracy that Senator Wyden was speaking to. And it is also
the case that doctrinally the monopolization statutes typically
now require a very large market share, for example, 75-plus
percent of a relevant market. But it may be the case that we
need to look back at actual market power.
One of the real implications of these documents is that
everybody in these marketplaces has market power. They all have
the ability to increase the price in the marketplace based on
the individual steps that they take.
Senator Levin. Right. Well, I want to get to that point,
though. When you say we should look at it, a problem is that
even though this is the activity that they engaged in and were
able to raise prices 3 to 5 cents, acting on their own, without
collusion, as it is currently defined, that may not be or
apparently isn't illegal under the current definition in the
statute of collusion.
The question I would like to ask you, and perhaps the
others, if they want, is: Shouldn't that be illegal? You said
``considered.'' I mean, it is pretty glaring here what went on,
to be able to say I am going to buy up my competitor's product,
and as a result raise the price 3 to 5 cents. If you have that
kind of market power, if it is that kind of concentrated
oligopoly that you have got in that market, should we not say,
as Senator Wyden was suggesting, in terms of change the
definition of collusion or broaden it, shouldn't that be one
area where we ought to look seriously at broadening the
definition of an anti-competitive practice? General Granholm.
Ms. Granholm. To me, this goes to the question of using an
objective standard rather than having to rely on documents like
this. If you could make this judgment based upon the HHI index
as sort of just a pure objective factor, then you could
determine whether or not that is legal or not. Do you stop a
merger when somebody arrives at a tipping point in the industry
based upon objective factors? Because, otherwise, if you are
relying on the subjective stuff, what is very sophisticated
language--I mean, this is a little more obvious than what we
would normally find. But, they wouldn't put it in writing. They
would have it in a verbal meeting or something. Everybody knows
what's going on. To have to rely on that is a little more
difficult proof-wise, which is why I think an objective
standard would be easier.
Senator Levin. What you are then saying is that we should
make it a presumption that----
Ms. Granholm. Yes.
Senator Levin [continuing]. You will not approve mergers in
markets that are highly concentrated by some objective
measures, and I guess there are objective measures----
Ms. Granholm. The Herfindahl--what is it?
Senator Levin. The HHI measure, right.
Ms. Granholm. The Herfindahl-Hirschman Index would----
Senator Levin. We call it ``HHI'' around here because we
can't pronounce it.
Ms. Granholm. HHI is much easier, yes.
That 1,800 threshold I think is a very basic and fair way
of looking at it.
Senator Levin. OK.
Mr. Blumenthal. I would add on the issue of merger
approval, not only suggesting a moratorium but also that
consumer benefit ought to be an essential ingredient or element
of showing to justify a merger to the FTC or to the Department
of Justice as a part of the standard for approval.
I think this kind of practice, and from what I know about
it, clearly an anti-competitive practice, a practice with an
anti-competitive effect, ought to be at the very least
admissible as evidence of an antitrust violation. And that goes
to the suggestion that you and Senator Wyden have made as to
what kind of facts and documents and practices ought to be
admissible, especially in a highly concentrated market, and in
a highly concentrated market ought to be perhaps regarded as
proof of an antitrust violation if otherwise substantiated.
But I would add that part of the perspective in the
courtroom and in the court of public opinion ought to be what
the effects as well as the purposes are, because the effects of
many of these industry practices have been simply to maintain
market share, not to compete, not even to gain market share.
The Subcommittee report is very pointed and persuasive on this
point, that this industry is very unusual insofar as a lot of
its motive is to maintain market share, which perhaps is
typical of an oligopoly, but especially so in this one--and,
again, also maintaining shortages of supply. Ordinarily, higher
sales produce more revenue and more profits. In this industry,
the goal is to keep supplies tight and squeeze inventory so as
to retain control and increase profit.
So I think that this kind of document and this kind of
practice are very pertinent to the laws that exist now, but
ought to be made part of proof in court.
Senator Levin. I want to talk about parallel pricing
because it really fits in exactly with what we have been
talking about and what you just testified to. In Michigan, we
have a phenomenon that I think exists in a few other States,
and it is what I call ``Speedway bumps.'' Not speed bumps but
Speedway bumps. And as you can see from the chart \1\ and as
has been referred to already, prices spike up on Wednesday or
Thursday. You can see those spikes in greater detail on the
chart on the right, and in smaller bumps going up on the chart
on the left. The smaller peaks going up to the big spike on the
left are what I refer to as ``Speedway bumps.''
---------------------------------------------------------------------------
\1\ See Exhibit No. 11 and 12 which appear in the Appendix on pages
260 and 261.
---------------------------------------------------------------------------
They drift back down at the end of the weekend, and when
you look at it more closely, 1 month at a time, Speedway is
running up the price and then it is followed by other brands.
And then the next Wednesday and Thursday, the same thing
happens. So Speedway is the price leader in Michigan. It has
this pattern of weekly mini-spikes. And I am just wondering
here--General Granholm, let me ask you about that. We asked
Marathon about this, and here is what their reaction was a
couple days ago: ``Our pricing policy is every day. We look at
our costs. We look at our sales. We look at how competitors are
pricing, and we elect to always match the lowest price on the
street. And then there comes a time when our costs have
increased that we elect to raise''--``when our costs
increase''--like every Wednesday and Thursday, I guess, our
costs increase--``we elect to raise the retail price to try to
recover some of our costs. Every day''--and he repeats the
``every day'' part. ``I hope it's not predictable,'' he says,
``because we look at our prices every day.''
What is your reaction to that?
Ms. Granholm. I tell you, you ask any person in Michigan
and you know very well what happens. Everywhere I go, people
say, how about that? Everybody fills up on Wednesday because
you know on Thursday the price is going up. They hold off on
filling up until Monday so that they can get a better deal. It
is like clockwork. I cannot believe he would say, I hope it is
not predictable, because it certainly is.
They are the leader because they are the ones that have the
most market share and they are the ones from whom the
independents are buying the gas. So they can lead the rise of
the gas to perhaps a place where they are comfortably able to
make a profit, and then on Monday, they shoot it right back
down and the independents have difficulty even meeting that
because sometimes they are below even the price that they would
be charging the independents. So the independents are finding
it very difficult to compete because they have to compete with
their main competitor on the wholesale level buying from them.
That is the difficulty of this vertical integration.
Senator Levin. Now a question for each of you. There is
another pricing practice that is discussed in our report where
lessee branded dealers enter the long-term contracts with oil
companies, and under those contracts, the oil companies set
what is called a dealer tank wagon price, or DTW price, and
there is not much that the lessee dealer can do about it. As a
matter of fact, I think under those leases, they are required
to pay the price that is set by the oil company.
Under the antitrust law, the oil company, though, cannot
set the retail price that dealer can charge. Several oil
companies, however, acknowledged when we talked to them that
they do provide lessee dealers with a recommended price for the
retail price. What they charge the dealer is unilateral. They
do not admit that, but there is a lot of evidence that even the
leases themselves say you must pay the price, if you are a
lessee, the price that we charge you. But when it comes to what
you, the dealer, charge, we recommend a price to you, but by
law, you have the right to set that price.
We have heard now from several dealers the following. They
believe the oil companies enforce recommended prices through
their dealer tank wagon prices. They do that, these dealers
say, as follows. If the dealer charges a price that is higher
than the recommended price, the oil company will capture that
increase with a commensurate increase in the next dealer tank
wagon price.
Have any of you heard those kind of allegations from
dealers, that, yes, in theory, I set the price, but because I
have to pay that wholesale price by my lease--I have no option
on that--heck, if I change the price, raise it, for instance, 2
cents, the company will capture that 2 cents in the next DTW
price that they charge me? Is that something familiar to you?
General Blumenthal.
Mr. Blumenthal. Yes, it is, Senator. That practice is one
of a slew of practices that the big oil companies use, in
effect, to control and manipulate the prices and markets in the
zones they establish. It complements the zone pricing practices
that are imposed in States across the country. Those practices
are documented in this report and so are the motives for them
in the MPSI study that is referenced.
But one problem here is, and I will be very blunt to you,
Senator, what we find, at least what I find is that many of the
owners, the franchisees, that is, are very reluctant to come
forward because they are very fearful of retaliation, again,
another reason for making these cases easier to prove. The
degree of fear, that is, the fear factor simply cannot be
overemphasized, and so, no doubt, your staff and you have heard
about many of these kinds of abuses, but proving them in court
through witnesses who are willing and sufficiently courageous
and brave to help us is another challenge.
Senator Levin. Do either of the two of you have a comment
on that?
Mr. Greene. I think you are describing, Senator, a very
common practice in the industry. One of the sad realities, I
think, for lessee dealers is they are increasingly in a form of
indentured servitude. It is a problem that they are squeezed by
their leases, they are squeezed by the DTW. Much of their
historic independence has been lost. This DTW-lease combination
is the way the zone pricing system is actually enforced and
works. It is through these DTW price sets that you get
differences between down the block, down the street. So these
are absolutely key mechanisms for controlling price at the
retail level. That is certainly true.
Senator Levin. Thank you. I have just a couple more
questions for you. One has to do with parallel pricing, which
we have talked about, where companies stay in the same fixed
price relationship with each other, going up and down.
Currently, that is not a violation of the antitrust laws unless
you can prove that there is an agreement or conspiracy, some
kind of explicit collusion between the two.
This is one example. Where prices are in a fixed
relationship with each other and go up and down these peaks
together, the question is whether or not we should amend the
antitrust laws to make that at least either presumptively anti-
competitive or, at a minimum, evidence of an anti-competitive
practice, which can go to the jury. Now, I believe that one of
you has testified already on that, and I think it was you,
General Blumenthal.
Mr. Blumenthal. Yes, sir.
Senator Levin. That you have already said that should be
enough evidence to get you to a jury.
Mr. Blumenthal. In a highly concentrated market, certainly,
it should go to a jury and it should enable the case to go to a
jury.
Senator Levin. And I think that is a very important point
that I should restate, that we are talking about in the highly
concentrated markets when we talk about changing the antitrust
laws or making mergers presumptively not going to be approved
by the FTC in highly concentrated markets.
General Granholm, do you have a comment on the parallel
pricing question?
Ms. Granholm. Just so that we are very clear about what the
court has done, as we currently speak, the quote from the most
recent court who decided this said tacit collusion, sometimes
called oligopolistic price coordination or conscious
parallelism, describes the process, not in itself unlawful, by
which firms in a concentrated market might, in effect, share
monopoly power, setting their prices at profit maximizing
supra-competitive levels by recognizing their shared economic
interests and their interdependence with respect to price and
output decisions. It is well established that where a market is
dominated by a few major players, parallel pricing is not
uncommon and is generally insufficient to prove an antitrust
conspiracy. So that mindset has got to be changed.
Senator Levin. OK, thank you. Did you want to add anything,
Mr. Greene?
Mr. Greene. I think you do need to look at this very
closely. If you were to take a look at the In Re Petroleum
Products Litigation decision in the Ninth Circuit of 1990, one
of the key points there was the existence of a sawtooth
pattern, much like the first one you saw with the retail
station. That was a key piece of evidence.
Under current law, that might not even survive summary
judgment.
So I think, at the end of the day, I personally would feel
more comfortable with evidence of parallel pricing plus, but at
this point, that combination is probably not enough to get you
to a jury and I think that is a wholly appropriate result, and
insofar as the Subcommittee could suggest legislation that
would get us there, that would be very helpful.
Senator Levin. And the position that you favor would be
that evidence of parallel pricing would be either enough to get
to the jury, get you past summary judgment, or precisely what
is your position?
Mr. Greene. I think that it should be parallel pricing
plus.
Senator Levin. Plus what?
Mr. Greene. Plus communication patterns. There is a whole
body of law that existed circa 1990, 1989, in which, basically,
parallel pricing plus not a whole lot more would get you to the
jury. I think that is, at the very least, where we should be in
this concentrated industry.
Senator Levin. But short of the explicit concerted
agreement? When you say plus----
Mr. Greene. It is a way of inferring the existence of an
agreement.
Senator Levin. I have got you.
Ms. Granholm. The only problem with having an agreement is
you do not need one. It is out there on the corner. I mean, who
needs to talk to anybody when the price is up posted per gallon
on every street corner? So the plus part of it is what is hard
to get at when it is open and notorious.
Mr. Blumenthal. And I would simply add that a jury should
be permitted to infer an agreement, in this case an illegal
agreement, from those factors, including conscious parallelism
and parallel pricing, and these kinds of patterns are so
dramatic, to use the old expression, a picture is worth a
thousand words, this kind of picture should go to a jury and
evidence of signaling or the opportunity to communicate and
other kinds of implicit or tacit communication should be part
of that case, as well.
Senator Levin. I am just trying to get the exhibit number
there so we can put in the record what the picture is that you
are referring to. That is Exhibit 10.\1\
---------------------------------------------------------------------------
\1\ See Exhibit No. 10 which appears in the Appendix on page 259.
---------------------------------------------------------------------------
This is the response of the representative who was here
from ChevronTexaco when the parallel pricing issue was put to
him. ``I happen to think that the reflection of a reasonably
stable relationship of prices is actually an indication that
the market is working exactly as it should.'' He was shown the
same picture. ``The fact that market prices are going up and
going down and that individual companies are in relative
position not changing quite often, is, in fact, an indication
to me that the market is working.'' Do you have any comment on
that comment? Let me start with you, perhaps, Mr. Greene.
Mr. Greene. Generally, the economics of this are that if it
was an unconcentrated market, again, think of a grain market,
prices will converge on a particular price. But it is not the
case, typically, that each of the players stays in an
individual position vis-a-vis the other players. I think that
is a pattern much more closely associated with a concentrated
market, which is what you are dealing with here.
Senator Levin. Thank you.
Ms. Granholm. I think, in general, players do see what the
others are doing and they respond accordingly. That is the
market. But I do think this issue of concentration is really
the best place to start to prevent that, because I think that
is really much easier to get at than this issue of parallel
pricing, because that is a symptom.
Mr. Blumenthal. I agree, to emphasize the importance here
of market concentration in this industry, and also to, just as
a footnote, to say that zone pricing, as the Subcommittee
report shows, actually produces disparities, in my view,
artificial disparities, in very closely located areas with no
competitive or economic rationale.
Senator Levin. I just have one more question, but on this
particular subject, let me just say this, that where you
already have a concentrated market, it seems to me the question
of parallel pricing becomes more than a symptom. It becomes
something which may be one of the problems that you can get at
if you make it presumptively an anti-competitive act, because
you already have the concentration. Your alternatives, then,
are, I guess, either to break up the concentration, which is
mighty complicated, or to go at some of those symptoms and to
try to address the symptoms.
I happen to agree with you. It is better to try to avoid
the problem by preventing the mergers and the concentrated
market, or that would create a concentrated market to begin
with, but that is not the situation that we have now in half
our States. We are already there, so we have to deal, I am
afraid, with symptoms, and one of the issues we will face as to
whether or not the parallel pricing symptom should be one that
is addressed, even though it does not get to the underlying
problem.
One other symptom, and then we are going to let you go, and
you have addressed this, I believe, Mr. Greene, and that is the
question of whether we should mandate or let States mandate
increased inventories. I believe you said that you are
considering in California mandating a higher inventory level,
which really is a critical part of this problem. If I heard you
correctly--is that right, that you are thinking about doing
that?
Mr. Greene. That is certainly correct. The Attorney General
recommended that we look, that the legislature and our expert
energy agencies look very closely at this as a possibility. Our
inventories are now so low that, literally, if a refinery
coughs, we are in a price spike situation.
So in my prepared materials, there is a very substantial
report from one of our consultants explaining how that might
work. Now, we are, as I mentioned, a very isolated market, so
this may or may not be something that the Nation as a whole may
want to look at. I would note, though, that our European
partners, all of whom have these kinds of structures to deal
with pricing problems.
So I think it is something that may not be right for the
Nation, but we are certainly looking at it in our market in
California.
Senator Levin. General Granholm, do you have any comment on
that?
Ms. Granholm. I think it is something worth looking at.
Senator Levin. OK. Thank you.
Mr. Blumenthal. I think it is worth considering, Senator.
It has potential disadvantages in costs and difficulty to
manage. That is, a regional or, in California's case, a State
reserve might be very expensive and very problematic as a
management challenge.
But I do think at the Federal level, there should be much
stronger oversight and perhaps inventories that are mandated,
and I think there are other ways, even at the State level, to
intervene in these situations. We had just a week ago the
announcement from one of our major companies, Motiva, that it
is closing a 200,000 barrel terminal facility, and it is not
closing it and selling it, it is mothballing it. So that
storage capacity is removed from our State inventory and,
presumably, from the supply available to consumers at a time
when, obviously, in the summer months, demand is going to
increase. I think providing the legal means for some kind of
intervention in that situation would be very welcome in a lot
of States, but I do think that inventories perhaps are a
Federal task.
Senator Levin. Thank you. You have been a terrific panel.
We thank you all and appreciate your testimony.
Ms. Granholm. Thank you very much.
Mr. Blumenthal. Thank you, Mr. Chairman.
Mr. Greene. Thank you.
Senator Levin. Let me now introduce our third panel of
witnesses. First, Peter Ashton, who is President of Innovation
and Information Consultants; next, Dr. Justine Hastings,
Assistant Professor of Economics at Dartmouth; Dr. R. Preston
McAfee, who is the Murray Johnson Professor of Economics at the
University of Texas; and then Dr. Philip Verleger, President of
PK Verleger, LLC.
Let me first swear you all in, as is required by our rules.
I would ask you just to stand and raise your right hands.
Do you swear that the testimony that you will give before
this Subcommittee this morning will be the truth, the whole
truth, and nothing but the truth, so help you, God?
Mr. Ashton. I do.
Ms. Hastings. I do.
Mr. McAfee. I do.
Mr. Verleger. I do.
Senator Levin. We have a panel of academics, experts this
morning to discuss price volatility, to discuss mergers
approved by the FTC, and a number of other topics that we have
discussed both Tuesday and this morning. We would ask you,
given the hour, if you could keep your oral remarks to 10
minutes or less and we will make sure your printed testimony is
entirely in the record.
Let me just go alphabetically here. Mr. Ashton.
TESTIMONY OF PETER K. ASHTON,\1\ PRESIDENT, INNOVATION AND
INFORMATION CONSULTANTS, CONCORD, MASSACHUSETTS
Mr. Ashton. Good morning, Mr. Chairman, and thank you. It
is certainly a pleasure to be here to discuss issues related to
gasoline pricing.
---------------------------------------------------------------------------
\1\ The prepared statement of Mr. Ashton with attachments appear in
the Appendix on page 204.
---------------------------------------------------------------------------
As you indicated, my name is Peter Ashton. I am the
President of Innovation and Information Consultants, an
economic and financial consulting firm, and over the last 20
years, I have had the opportunity to act as a consultant to
various States, the Federal Government, and also different
firms in the industry with regard to gasoline and oil pricing
issues.
My comments, very briefly this morning, will relate to four
issues. First, I will talk about trends in market concentration
due to mergers in the refining and marketing industry. Second,
I will address recent episodes of price spikes, particularly in
the Midwestern region of the country. Third, I have a couple of
brief comments to make about your staff's excellent report. I
guess I am telegraphing what I am going to say. And fourth, I
have a few suggestions and a couple of additional thoughts
based on what I have heard this morning in terms of potential
policy recommendations.
Let me first start by talking about recent trends in terms
of merger activity. As you are aware, in the last 5 years, the
domestic refining and marketing industry has witnessed a wave
of mergers not unlike what was observed during the early
1980's. During that time frame, several larger mergers in the
industry were approved by the Federal Trade Commission, and in
a report it issued in 1989, the Federal Trade Commission
commented at that time that those mergers had led only to
modest increases in concentration and that such increases
stemmed as much from closure of independent, inefficient
refineries as it had from the mergers themselves. The recent
wave of mergers, however, has led to, I think, a fairly
different conclusion in terms of having a much more significant
impact on market concentration.
I do not need to go into and belabor what an HHI is. You
have certainly used that term and understand it. I have looked
at HHIs for both refining capacity as a whole and also just for
gasoline manufacturing capacity and there have been fairly
significant increases, really throughout the country, but
particularly in certain markets, such as the East Coast, what I
have termed and what the FTC has defined as a relevant market
as the Upper Midwest, which includes Indiana, Illinois,
Kentucky, Ohio, and Michigan. There, for example, the HHI in
both refining capacity and particularly gasoline manufacturing
capacity is now over 1,800, which signifies a highly
concentrated market.
And in California, which I have also spent time looking at,
due in part to its unique gasoline specifications and its
location, is a relatively isolated market. Here, the HHI for
gasoline production has risen from about 1,300 5 years ago now
to close to 1,800.
Concentration has also increased at the wholesale level.
This level of the market, in my opinion, is critical to
understanding pricing and supply, as it is the link between
refinery production and the consumer. In my experience, this is
often the point at which the greatest control over supply may
be exerted, where significant interdependence exists, and also
often where regulatory authorities fail to adequately examine
competitive impacts.
Finally, at the retail level, today, over 65 percent of all
retail sales now occur through branded stations, whereas only 5
years ago, that number was less than 45 percent, according to
DOE statistics. In some areas of the country, such as
California, independent marketers have virtually disappeared. I
would note that considerable research over the years, including
by my colleague next to me, has demonstrated the competitive
importance of maintaining a viable independent segment of the
retail market.
Let me turn now to the reasons that I see for the increased
gas price volatility over the last 2 years, particularly in the
Midwest. One naturally thinks of the cost of crude oil as
having a significant impact when the price at the pump goes up.
Indeed, crude oil represents about 75 percent of the cost of
making a barrel of gasoline. However, in my opinion, crude oil
price increases were not the cause of the price spikes in the
late spring of 2000 or during the spring and summer of 2001,
and that is shown in two of the figures that I have presented
as part of my testimony, Figures 1 and 2.\1\
---------------------------------------------------------------------------
\1\ Figures 1 and 2 which is attached to Mr. Ashton's prepared
statement appears in the Appendix on page 213.
---------------------------------------------------------------------------
Other possible explanations for the increase in gasoline
prices could include supply curtailments, either caused by a
reduction in inventories or production, or surges in demand.
Data on consumption reveal no unexpected surges in demand that
could explain either of the first two price increases. However,
demand did increase fairly significantly in the summer months
preceding the so-called Labor Day price spike of 2001 and may
have been partially responsible for the price increase.
Production did not decline in any meaningful way in the
periods leading up to and including the first two price spikes.
Supply disruptions due to refinery outages do not appear to be
a plausible explanation for the magnitude of the price spikes
that we observed. During the third price spike, there was a
nationwide decline in production, although not in the Midwest,
but this does appear to have had some impact on prices.
Inventories, however, present a more interesting picture.
First, it is important to understand that the absolute level of
gasoline inventories relative to consumption has fallen
significantly in recent years. Refining and marketing companies
made a conscious decision in the mid-1990's to carry lower
inventories of refined products, including gasoline. Such just-
in-time inventories were rationalized as a cost cutting
measure, but they appear to have led to greater price
volatility, as well. The reduction in inventory levels is
illustrated in Figure 3 \2\ to my written testimony, where the
average carrying level has now been reduced from about 30 days'
supply to less than 24 days' supply.
---------------------------------------------------------------------------
\1\ Figure 3 which is attached to Mr. Ashton's prepared statement
appears in the Appendix on page 214.
---------------------------------------------------------------------------
As a result, the difference between the average level of
inventories maintained and the minimum operating inventory
level has shrunk, so that now even brief supply disruptions can
cause major problems. This reduction in inventories means that
small changes in gasoline supply can result in very large
changes in prices, and is in my opinion the most likely reason
for the increase in price volatility in recent years.
Examination, for example, of inventories immediately
preceding the first two price spikes in the Midwest indicates
lower than normal levels, although not necessarily of the
magnitude to cause such a huge spike in prices. And it is
important to note that in each case, inventories return to
relatively normal seasonal levels within about 2 weeks after
the start of the price spike, and this is shown in Figure 4 \1\
to my written testimony.
---------------------------------------------------------------------------
\2\ Figure 4 which is attached to Mr. Ashton's prepared statement
appears in the Appendix on page 214.
---------------------------------------------------------------------------
During the June 2000 price spike, for example, the surge in
wholesale and retail prices began the last week in May, when
inventories were at abnormally low levels. Within 2 weeks,
however, inventory levels were back to normal, yet gasoline
prices continued to rise for the next 2 to 3 weeks, on the
order of 15 cents per gallon in the Midwest.
With each of the two succeeding price spikes in the Midwest
in the spring of 2000 and late summer 2001, much of the same
story played out. The August 2000 price increase, as I already
alluded to, is somewhat more puzzling as there appears to have
been not the reduction in inventory as much as a nationwide
increase in demand, as well as reduction in production. This
does not, however, explain the fact that Midwest prices
appeared to rise considerably more than in other parts of the
country.
I have also done some statistical analysis of the
relationship between changes in gasoline prices over the years
and various other economic factors that could explain those
prices, such as changes in crude oil prices, inventory levels,
production, capacity utilization, and the like. I have found
that in normal, relatively stable times, crude oil price
changes, along with changes in inventory and production levels,
do explain a significant portion of the change in gasoline
prices.
But changes in crude oil prices and these other factors do
not explain the price spikes observed in the Midwest, and also
to a large extent on the West Coast, in the last 2 years, even
accounting for possible lags. I have also found in my
statistical analysis that beginning in approximately 1998, a
measure of market concentration has become a more significant
statistically explanatory variable for those changes in
gasoline prices, not necessarily a large magnitude of the
change, but it has become a statistically significant factor.
Let me turn briefly to comments on the staff's report. I
have had the opportunity to review the Majority staff's report
and I share many of the same conclusions as contained in that
report. It is a highly professional piece of analysis and
points quite correctly, I believe, to the tightening of the
supply-demand balance, as well as increases in concentration,
as ways in which supply can be affected and which, given
inelastic product demand, has allowed gas prices to rise
significantly at certain times.
Staff's conclusions, importantly, are based on a 10-month
investigation that included interviews with industry officials,
trade associations, and others, as well as review of internal
company documents. It is, in my experience, rare when one is
able to catch a glimpse of the workings of an industry in this
way, and staff's analysis is more compelling to me as a result.
In light of these findings, let me talk just briefly about
possible measures to deter future price volatility. First, I do
believe that the FTC must be more vigilant in its merger
review, focusing more closely on competitive impacts,
particularly at the wholesale level, and encouraging, where
possible, the competitiveness of independent marketers and
refiners.
Second, due to the fact that many markets are already
highly or moderately concentrated, the FTC, as well as other
regulatory authorities, including FERC, should take a tougher
stand on various practices and behavior that might be conducive
to price fixing or price signaling.
Third, and I think we heard this recommendation earlier, I
think resources should be added to the enforcement agencies,
particularly the FTC in terms of its merger oversight, and it
should tend to view these mergers not in isolation but together
with other changes going on in various markets.
Fourth, I would recommend investigation of measures to
encourage greater supply flexibility. This would include, among
other things, increasing the role of unbranded competition,
greater consistency in regulatory policies, especially as it
relates to gasoline specifications, and other ways to increase
the general absolute levels of product inventories.
And in that vein, and I heard the suggestion from Mr.
Greene of California, I am intrigued and would at least suggest
that a study of some kind of maintenance of minimum inventory
levels, or perhaps even a reserve. I think that might be a very
interesting option.
Finally, I have also heard this morning, I think, some
interesting suggestions about changes to both the antitrust
laws as well as potentially enforcement. A couple of those
cases that I have heard mentioned in the discussion earlier
this morning were ones that I was involved with and I certainly
think that some of those moves should be considered.
That concludes my remarks, Mr. Chairman. I certainly
appreciate being here and I would be happy to try to answer any
questions.
Senator Levin. Thank you very much, Mr. Ashton. Dr.
Hastings.
TESTIMONY OF JUSTINE S. HASTINGS,\1\ ASSISTANT PROFESSOR OF
ECONOMICS, DARTMOUTH COLLEGE, HANOVER, NEW HAMPSHIRE
Ms. Hastings. Thank you. Mr. Chairman, my name is Justine
Hastings and I am an Assistant Professor of Economics at
Dartmouth. I received my Ph.D. in economics from UC-Berkeley.
---------------------------------------------------------------------------
\1\ The prepared statement of Ms. Hastings appears in the Appendix
on page 215.
---------------------------------------------------------------------------
My research focuses on the effects of vertical
relationships between refiners and retailers on retail and
wholesale gasoline prices. I have analyzed extensive data on
gasoline market structure for a diverse group of U.S.
metropolitan areas covering the 1990's. I have used this data
to conduct independent academic research into the relationships
between vertical market structure and competition in gasoline
refining and marketing. My independent research and my acquired
knowledge of the industry form the basis of my testimony before
the Subcommittee today.
I will now summarize the results of two of my research
papers and discuss their possible implications for government
policy. Both analyses use changes in vertical integration
generated by mergers to identify their main results.
The first study, entitled ``Vertical Relationships and
Competition in Retail Gasoline Markets,'' finds that
independent retailers are uniquely important for retail price
competition. This paper uses detailed station-level data for
Southern California, coupled with the 1997 purchase of the
independent retail chain Thrifty by ARCO to show that the loss
of independence contributes to higher retail prices.
Specifically, the analysis concludes that retail prices in
markets affected by the acquisition increased, on average, 5
cents a gallon relative to unaffected markets. When
independents exit and are replaced by integrated branded
competitors, competition in the market is softened and prices
increase. What matters for competition is whether there are
independent, unbranded retailers, not what types of contracts
integrated refiners have with their stations.
The second paper is entitled, ``Vertical Integration in
Gasoline Supply: An Empirical Test of Raising Rivals' Costs.''
This work is done with Dr. Richard Gilbert. This paper asked
the following question: Does vertical integration affect
wholesale gasoline prices?
Using Tosco Corporation's acquisition of Unocal's West
Coast refining and marketing assets, we find that integrated
refiners raise wholesale prices to independent retailers. This
allows them to increase prices at their own retail stations,
thus increasing their own retail profits. These results are
consistent with the strategic incentive to raise competitors'
input costs and show that the extent of a wholesaler's vertical
integration into downstream markets can have a significant
impact on wholesale competition and prices.
We then look at a broad panel of 26 metropolitan areas over
the 1990's, including ones in the West Coast, Rocky Mountain,
and Gulf Coast States. We find a positive correlation between
the extent of vertical integration and unbranded wholesale
price, consistent with the effect we identified in the Tosco-
Unocal event study. Our main result concludes that vertically
integrated refiners have an incentive to increase wholesale
prices to independent marketers in order to increase retail
profits. This implies that it is very important to consider
such interactions between vertical integration and competition
in antitrust and merger policy.
The main conclusions from my research are that independent
refiners and independent retailers are important contributors
to competition in retail and wholesale gasoline markets.
Independent retailers are uniquely important for competition
because they are incredibly price competitive and increase
competition at the retail level. In addition, they are the only
type of station that can purchase from the lowest price
wholesaler, thus introducing and forcing competition at the
wholesale level. Furthermore, they allow outside entry of other
refiners into concentrated markets when prices in those markets
are excessively high.
Independent refiners are also uniquely important for
competition, and this is because independent refiners do not
have the incentive to raise rivals' costs that integrated
refiners have. Independent refiners compete intensely on
wholesale price, unlike branded wholesalers, and because of
these two factors, unintegrated refiners are important to
ensure sufficient wholesale gasoline supply at competitive
prices. This is necessary for the entry and survival of
independent retailers, including new chains such as RaceTrac,
Wawa, Costco, or Wal-Mart.
What are the positive policy implications of my research?
First is that antitrust and merger policy should more carefully
consider the impacts of vertical integration on competition,
both in merger analysis and in divestiture requirements.
Mergers that result in a significant increase in the degree of
vertical concentration should be scrutinized more carefully.
In addition, competition may best be served by designing
divestiture requirements to increase the retail market share of
independent retailers and decrease the degree of vertical
concentration in the market. For example, divestitures required
from recent mergers consistently require the divestiture of a
refinery and retail stations to a single new integrated
competitor.
Take, for example, the divestiture requirements for
ExxonMobil merger on the West Coast and the Ultramar Diamond
Shamrock-Valero merger on the West Coast. In both cases, the
refinery and stations were divested to a single integrated
competitor. Why not divest the retail stations and the refinery
to separate companies? The results from my research imply that
divesting the refinery and station separately would do more to
increase competition in California's gasoline markets.
I encourage the current efforts of the Federal Trade
Commission to incorporate vertical integration issues into
merger and antitrust regulation. For example, in Michigan,
mergers between Marathon and Ashland and Ultramar Diamond
Shamrock's, or UDS's, total assets resulted in a significant
decrease in the number of competitors supplying unbranded
gasoline at wholesale racks. A traditional measure of HHI would
not have picked this up. It seems to me that we should adapt
the HHI to include specifically components of vertical
integration when looking at mergers. My colleague, Dr. McAfee,
has proposed such an alternative to the HHI.
Furthermore, the Environmental Protection Agency needs to
incorporate secondary impacts on market structure and
competition when designing environmental regulations. The
current system of boutique fuels further segments markets and
leads to market power for local refiners. It creates barriers
to entry and, thus, increases price levels and volatility. In
addition, price volatility caused by market segmentation drives
out independent retailers in the long run, further lessening
competition. The EPA should attempt to minimize the number of
fuels required while still protecting the environment in order
to minimize segregation of gasoline markets and increase price
volatility.
I would now like to comment on a couple of legislative
ideas that have been proposed and are aimed at increasing
competition in gasoline markets. The first of these falls under
wholesale price regulation and this legislation has the
following title. It comes under fair wholesale pricing, branded
open supply, or zone price elimination legislation. These types
of legislation are most likely regressive policies that will
lead to price increases in low-income neighborhoods.
Furthermore, they may lead to further vertical concentration,
lessening competition in the long run.
What would zone price elimination do? Currently, as has
been noted here, refiners price discriminate, charging higher
wholesale prices in less price sensitive markets and lower
prices in highly competitive markets. Zone price elimination
would require refiners to charge one wholesale price. In order
for this policy to lead to lower retail prices, two things have
to happen. First, zone price elimination must lead to lower
wholesale prices. Second, that lower wholesale price must be
passed on to the pump by the dealers who set the retail price.
If refiners are forced to charge one wholesale price, it
actually could be the case that average wholesale prices would
rise. In addition, they would certainly rise in low-income
neighborhoods, currently the most price sensitive
neighborhoods. Zone price elimination could be a very
regressive policy.
In addition, if zone price elimination leads to higher
average wholesale prices, this may lead to the closure of
independent marketing stations. Independent dealer-owned
stations may go out of business in the long run, further
increasing vertical concentration and lessening competition.
I would also like to point out one more fact. Branded open
dealers pay one rack price and it is not the case that we see
less price discrimination at those stations than we do at
lessee dealer stations where the oil companies price
discriminate.
I would like to sum up my comments by stating that members
of your staff have worked incredibly hard to produce an
extensive and excellent report, and I am certain that, by now,
they are deeply aware of the following two facts. First, there
is a pressing need for more independent academic research into
the factors that affect petroleum pricing at all levels of
production. Second, it is incredibly difficult to acquire data
to conduct such research.
I would like to propose creating a program at the Energy
Information Administration modeled after the excellent program
that the U.S. Census Bureau has to disseminate and make
available to highly screened researchers proprietary data that
would allow for excellent studies needed to inform public
policy debates.
This concludes my comments, and I look forward to answering
your questions.
Senator Levin. Thank you so much, Doctor. Dr. McAfee.
TESTIMONY OF R. PRESTON McAFEE,\1\ MURRAY S. JOHNSON PROFESSOR
OF ECONOMICS, UNIVERSITY OF TEXAS, AUSTIN, TEXAS
Mr. McAfee. Mr. Chairman and Members of the Subcommittee,
my name is Preston McAfee. I am a professor at the University
of Texas and I have worked extensively with the Federal Trade
Commission in evaluating mergers. This includes the ExxonMobil,
BP-ARCO mergers, and others. I also assisted the Commission
with the summer 2000 Midwest gas price spike investigation.
---------------------------------------------------------------------------
\1\ The prepared statement of Mr. McAfee appears in the Appendix on
page 227.
---------------------------------------------------------------------------
As part of my studies of these mergers, I have had access
to and studied a substantial amount of information, including
the documents that the FTC had gathered in the course of its
investigation. Much of this information is confidential. In the
case of ExxonMobil, it is more than 100 million pages of
documents.
I am pleased to be here today to discuss the economic
issues I have researched as they pertain to your examination of
gasoline prices in the United States. I will concentrate on
volatility and antitrust.
Let me start by saying I appreciate the effort and thought
that went into the Subcommittee's report. I want to compliment
the Chairman, the Subcommittee, and the staff on this report
and I am going to highlight a few issues considered in the
report and disagree with a few.
First, on volatility, a basic fact of the gasoline market
is that the combination of inelastic demand and inelastic
supply magnifies the effects of supply disruptions. Short-run
price changes can easily be three to five times the quantity
changes. So a 10 percent change in quantity can result in 30 to
50 percent price increases. This is a feature of consumer
values and production costs that cannot be changed by policy.
That is, unless you can change the way consumers value
gasoline, you cannot change this demand response.
Consequently, there is only a limited role for government
in reducing price volatility. Some level of fluctuations in
price is unavoidable and are caused by large-scale phenomena
like demand increases and short-term phenomena like pipeline
breaks.
I want to emphasize that price controls are not a fix for
volatility. We have lived through the gasoline lines of the
1970's, which were created by price controls, and I hope never
to see these again. Preventing the establishment of market
prices through price controls does not change underlying
conditions, but instead creates severe shortages and eliminates
investment.
Price volatility is increased by the proliferation of
boutique fuels, which certainly contributed to the Midwest
price spikes. As a Nation, we should be aware that every time
an area is assigned its own fuel specifications, the rest of us
lose a little bit of insurance. We should attempt to reduce the
total number of distinct types of gasoline in use. Currently,
there appear to be 19 different regular unleaded
specifications, and that means you need 19 distinct storage
units for those fuels.
The greater the extent to which the Nation is
interconnected, the less will be the overall volatility of
gasoline prices. Easing the construction of pipelines may
reduce volatility by linking geographic areas more tightly.
This is certainly relevant to Michigan.
Price volatility is not unambiguously bad. Gasoline prices
are volatile because the value of gasoline varies over time.
Stabilizing prices at a high level, which is essentially the
Canadian policy, is much worse than allowing fluctuation where
sometimes we get the benefit of low prices.
The tendency to reduce taxes when supply is temporarily
disrupted is a very bad policy. This was used by Illinois. The
price must rise to ration demand to the available supply.
Removing the taxes does not change this fact. It does not
change the fact that consumers must pay a higher price to
reduce their demands. A tax holiday during a price spike does
not decrease the prices but, in fact, creates a windfall gain
to the oil companies by transferring the taxes from the
government to the oil companies.
In terms of the response to price spikes, long-distance
transportation typically takes about 4 weeks. Refining adds
another 4 weeks. So a 2-month response to an unexpected
shortage is a normal competitive response.
In the case of the Midwest price spike, the possibility of
EPA waivers actually contributed to the problem. There were
several companies that expected EPA waivers that never came.
Because they were expecting waivers to the reformulated
gasoline specifications, they waited, hoping to be able to
supply regular unleaded. It would be very useful for the EPA to
clearly delineate the criteria under which waivers are issued.
In the case of the Midwest, the need to clean storage tanks
between summer and winter creates a window of severe
vulnerability to supply disruptions. Essentially, all companies
have their storage units empty at the same time, and that
contributed to the Midwest gas price spike. This problem is
easily cured by staggering the imposition of fuel requirements
across the companies. And so just a matter of a few weeks'
difference would actually ease this burden and reduce our
vulnerability.
Let me now turn to antitrust. Parallel pricing is a feature
of both perfect competition and collusion. That is, firms that
are aggressively competing will display parallel pricing. Firms
with similar costs engage in parallel pricing. It is not
possible to conclude from parallel pricing alone anything about
collusion. As a result, parallel pricing should not be made
illegal, in my opinion. It is equally evidence of competition
as it is evidence of collusion. Something else is needed.
As the report noted, the West Coast gasoline market is
controlled by an oligopoly of seven firms, ChevronTexaco,
Shell, BP, Tosco, Valero, ExxonMobil, and probably Tesoro,
depending on a spin-off. It is hard to keep up with this
without a scorecard. I want to note that is actually still
seven firms, just as it was before the ExxonMobil merger. That
is, the wave of mergers has not resulted in a significantly
more concentrated market in this very inter-dependent market.
I agree with the Subcommittee's finding that these firms
are inter-dependent and aware of each other's behavior and that
significantly reduces the likelihood of competitive behavior.
As Dr. Hastings emphasizes, vertical integration exacerbates
the risk of noncompetitive behavior.
The Federal Trade Commission is quite aware of the threat
created by increasing vertical integration and the
interdependence of the firms and it actively blocks it by
requiring divestitures. Unfortunately, while we would like to
actually improve the situation, the law dictates that you can
prevent a lessening of competition, so we cannot force the
firms to increase the competition. So we cannot break up the
vertical integration when divestitures are required. I am sure
the FTC would greatly appreciate more resources for its
investigations.
My bottom line is that the FTC does a thorough job
investigating large oil company mergers and that extensive
divestitures to preserve competition have been required.
Elimination of zone pricing by statute will not tend to
reduce average gasoline prices. Instead, as Dr. Hastings
emphasized, it will tend to increase prices in the most
competitive and also the poorest areas. Zone pricing is
essentially the same phenomenon as the senior citizen discount
at the movie theater. That is, the companies give a lower price
to the more price sensitive consumers, like students and senior
citizens. My 84-year-old mother very much appreciates the
senior citizen discount at the movie theater and would not like
to see it made illegal.
Finally, let me turn to conclusions. Industry executives
are justifiably pessimistic about the ability of this Nation to
produce new refineries, especially on the West Coast. Even in
their private documents, they say there will never be a new
West Coast refinery built.
There is a role for the government to moderate the ``not in
my backyard'' mentality that makes it more difficult for us to
build adequate refineries, adequate electric power generation
facilities, pipelines, electric transmission lines, and even
cellular phone towers.
And finally, for the big picture, over the past 30 years,
this country has deregulated or partially deregulated trucking,
airlines, rail, gasoline, oil, natural gas, and long-distance
telephony. We are in the process of deregulating electricity
and local telephony. Overall, economic studies indicate that
the deregulation of the U.S. economy has produced enormous
gains for the American consumer.
We should not let a few problems, and price spikes are a
problem and also the California electricity crisis is a
problem, but we should not let a few problems deflect us from
our market economy or send us back to the miserable regulated
environment of the 1970's. In almost all instances, competitive
industries deliver more, higher quality goods to consumers than
regulated industries do. Gasoline lines, which are the
archetypal outcome of regulation, are worse in the long run
than volatile prices.
Finally, on the presumption of guilt, let me end with this.
My understanding of the American system is innocent until
proven guilty. We should not be presuming guilt for what could
be competitive behavior. Thank you very much.
Senator Levin. Thank you very much, Dr. McAfee. Dr.
Verleger.
TESTIMONY OF PHILIP K. VERLEGER, JR.,\1\ PRESIDENT, PK
VERLEGER, LLC, NEWPORT BEACH, CALIFORNIA
Mr. Verleger. Thank you very much, Senator Levin. It is a
pleasure to be here.
---------------------------------------------------------------------------
\1\ The prepared statement of Mr. Verleger appears in the Appendix
on page 239.
---------------------------------------------------------------------------
Let me start by saying I am the BP Senior Fellow in
International Economics at the Council of Foreign Relations and
I also have my own consulting firm. What I am saying here today
are my own opinions and not those of the council.
I have studied energy now for more than 30 years. I have
written extensively on commodity markets and on the linkage
between commodity prices and stocks. I am a member of the
National Petroleum Council. I was a member of Attorney General
Lockyer's task force to look at California gasoline, testified
in the Aguilar matter, testified to the Senate Monopolies
Committee on the announcement of the BP-Amoco merger at the
request of the Chairman, consulted on ExxonMobil, BP-Amoco, and
on the Shell-Texaco joint venture. I also testified and
consulted extensively on the Unocal patent. I am an energy
person much more than an antitrust person.
Let me break the order of my testimony and start, by saying
that something has gone unmentioned here, that is the role of
the new competitors. Wawa, Sheetz, and most importantly, Wal-
Mart have entered the gasoline marketing business in many parts
of the country. Where local regulations permit them and where
State regulations do not prevent them from charging low prices,
they are bringing to the consumer the same benefit that they
have brought the consumer of every other commodity. That is,
they achieve economies of scope and scale and we see much lower
prices.
I think your Subcommittee report noted this. It is a little
hard to get information on this, but the Federal Trade
Commission has just recently issued a letter to Virginia
essentially trying to stop legislation which would impose
minimum cost selling prices. This entry is an important change
and it will progress. In Europe, it has brought much lower
prices. The officials at DG-9, which is the antitrust group at
the European Community, say that in France and in England,
where these competitors have been permitted to enter, consumer
prices have dropped sharply--I do not have a percentage
number--as compared to Spain and Portugal and other countries
where they are not permitted to market.
The second point is we have a fundamental inconsistency in
our national energy policy and our competition policy. In the
debate on the energy bill, the Senate and the House both
decided that nothing would be done, really, to limit CAFE
standards. This means that gasoline demand will probably
increase by around 2 percent per year for the next several
years. Unfortunately, supply will not. Unless imports are
available, that means each summer, we have to expect to see
higher prices than the summer before to balance supply and
demand. The very large sports utility vehicles that are being
sold create a demand for gasoline that we just cannot meet.
My third point is that refinery capacity in this country
has increased. The Federal Trade Commission will hold hearings
next week asking what has changed between 1985 and 2000, and in
preparation for this, I examined the refineries that were in
existence in 1985 and the refineries that exist today. What we
find is the number of refineries has declined, but total
refining capacity has increased by about 10 percent, to 16
million barrels a day. That is, the average refinery that
remained in operation increased in size roughly by 40,000
barrels a day.
One of the ways this occurred was by merging inefficient
older units with newer units. One of the major constraints on
building a refinery, I am told, is land. That is, if you do not
have enough land, you cannot expand capacity due to the
problems associated with fire and explosion. I regret that at
least in the case of two mergers, one in the case of Shell and
Texaco, there was an opportunity to achieve some real gains in
the State of Washington, where two refineries that were next
door to each other could have been combined. Unfortunately, the
FTC interpretation--correct interpretation--of antitrust laws
made that impossible.
The fourth point is that the sisters are diminishing in
importance. Senator Hart from Michigan held an excellent
hearing on the role of the seven sisters in the oil industry
years ago. Today, you are dealing with four sisters. The Gulf
has vanished, Texaco has vanished, Mobil has vanished.
Between 1985 and 2000, the four sisters disposed of 26
percent of their U.S. refining capacity. That is, they sold
over two million barrels a day of refining capacity, and they
have gone from firms that had surplus gasoline supplies to be
essentially short, and what we see is a set of firms that
really want to supply their own needs, their own branded
dealers, and leave the other unbranded dealers to the mercy of
other firms. There is nothing wrong with this. There is no
parallel decisionmaking in this. This is just something where
we see them moving back. It also seems to be the case, although
I have studied it less, in the case of Marathon, Ashland, and
others.
Fifth, the big firms have been replaced by smaller firms,
fringe suppliers, that now provide 35 percent of the refining
capacity in the United States. I have been afraid for years
that these firms, one, cannot afford to make the upgrades
needed to produce the very clean gasoline that EPA is
demanding, and two, would face problems holding sufficient
inventories. I note that in the last 48 hours, we have seen one
of those firms, Valero, cut its capital budget by 25 percent
and another of those firms, Tesoro, announce that it may not be
able to proceed with the purchase of a refinery in San
Francisco due to financial constraints.
The question, then, is what to do. What can be done? I
applaud the hearings and I applaud the report.
First, one of the reasons the gasoline market does not work
very well is there are no forward buyers. This is an arcane
subject that comes out of commodity markets, but the jet fuel
markets and the heating markets and the natural gas markets
work very well because buyers are willing to make purchases 6
months, a year ahead of time. I work with one major airline
which regularly will cover half to two-thirds of its supply
ahead of time to control its costs, and it actually reported a
profit in the fourth quarter of 2001 because of its fuel
management procedures offset some of their losses. Home heating
consumers in New England regularly buy their winter heating oil
by the end of October.
It is not possible to do this in gasoline for the average
consumer because any program you put together would conflict
with the Petroleum Marketing Practices Act. It is possible,
however, for State Governments and the Federal Government to
enter into forward contracted fixed prices to essentially
create that forward market. That is, the State of California
could buy its gasoline in the future.
Such purchases, we know, would cause inventories to be
increased. We teach it when we teach commodity market
economics. You see it in grain markets. If there is a forward
market, the buying causes inventories to rise and you get a net
gain in inventories.
So that one of the elements is to convince State
Governments, county governments, city governments, to enter
contracts to buy in the forward market. Now, many bureaucrats
will not do this for fear of what we call adverse publicity.
That is, they buy forward, prices go down, and everybody looks
at them and says, that was a stupid decision. We are going to
find somebody else to manage the job. So there needs to be some
sort of suggestion that, perhaps even a requirement, that
governments buy forward at fixed prices. One of the largest
buyers could be DFSC, the Defense Fuel Supply Agency.
A corollary to this rule is that attempts to require
stockpiles or to build strategic stockpiles by government are a
mistake. We know from extensive studies of commodity markets
that when the Federal Government or the government builds
inventories, private inventories go down. In my conversations
last week in Brussels, I find that there are many problems
associated with the Europeans.
The third point is to echo the comments made by the
Attorney General from Michigan that one needs to focus very
closely on bottlenecks such as pipelines. The Wolverine
Pipeline example in your report is excellent. In California, I
think we have a problem with the SFPP Pipeline, particularly in
the way they establish tariffs at their terminal facilities,
which are not regulated. These tarriffs could raise the cost of
entry for smaller independent firms.
Fourth, going to what Professor McAfee was saying on
regulations on fuel, Professor Bornstein of Berkeley has
proposed that instead of prohibitions, environmental agencies
impose fees. That is, require a supplier that wants to sell
unleaded gasoline in an area that requires reformulated
gasoline to pay a fee to the government agency and introduce
that gasoline into the market. Set a fee of 5 cents or 7 cents
a gallon, for example. That would allow conventional gasoline
into the market and would cap the price spikes. It is a very
clever solution. It goes back to what we have learned over the
last 30 years, that prohibitions and controls are a much
inferior method to some sort of fee-based system or taxation.
Finally, I will note that gasoline prices are affected by
winter weather. The reason gasoline prices rose in the spring
of 2000 was that January 2000 was very cold and the price spike
associated with heating oil forced refiners to make heating oil
for a longer period of time, preventing the normal conversion
to producing gasoline. Thank you very much, sir.
Senator Levin. Thank you, Dr. Verleger, very much for your
testimony.
Your reference to strategic purchasing by government raises
a question which I would like any of you who feel qualified to
address to comment on. It is my understanding that some
companies are using crude oil that is produced in the North Sea
called Brent to help fill up our Strategic Petroleum Reserve in
Louisiana, to replace oil which had been removed from it. So
they are using that particular kind of crude oil to fill the
reserve in response to the Department of Energy's program to
now replenish that reserve.
The problem apparently is this, and it is sort of raised in
an interesting way, Dr. Verleger, by your testimony. Brent is
in short supply, as I understand it. That particular kind of
crude is in short supply. What we have been told is that some
companies that produce or trade in Brent, not exclusively, but
who produce and trade in Brent, are putting Brent into the
reserve in order to create, or at least with the effect of
creating a shortage of Brent, which then drives up the
worldwide price of Brent.
Now, many other crude oils produced in Europe and Africa
are priced in relation to Brent, so that as the price of Brent
increases, the price of these other crude oils increase, also.
Approximately 20 percent of our imported crude oil is from
Europe and Africa, so we may be paying more for crude oil in
this country as a result of companies putting Brent oil into
the Strategic Petroleum Reserve, even though other oil would be
acceptable to replenish that reserve.
It is kind of triggered by your testimony about buying
strategically, but this is a little different question and I am
wondering whether this resonates with any of you. Dr. Verleger.
Mr. Verleger. We could spend all day talking about Brent.
Brent is the benchmark of the world crude market. It is
produced in the North Sea by several companies. There are
something like 25 to 30--I think, I may be wrong--500,000-
barrel cargoes a month. Over the years, the Brent system has
been expanded to include certain other crudes, similar
characteristics, as that production has gone down. But it is
really the reference to the world market.
Brent has been subject to a large number of manipulations
over the years. About a year and a half ago, a firm named
Arcadia, which is owned by a Japanese firm, managed to buy in
the paper market associated with this control of all the
cargoes, which they then took to South Africa or other places,
and they made, evidently, a very large profit because of
purchases of other crudes that were linked to this, and they
took the position secretly. Tosco Corporation sued under the
antitrust laws and it was a unique antitrust suit. It was
settled in 3 weeks. There was no discovery. There was nothing
else, and evidently, a large sum of money was paid.
I do not know about the existing rules. I have had any
number of problems with the Strategic Petroleum Reserve
management people. Two years ago September, I wrote an article
on the op-ed page of the New York Times calling for use of the
Strategic Petroleum Reserve when crude prices were $35, forward
crude was at $22, that the government should lease it out, that
is, ask firms to take 100 barrels today and get back 105
barrels in a year. The commodity rate of interest was a high
commodity rate of interest. The government finally did it, but
if you will recall, the Department of Energy managed to bollux
the auction up so that, in one case, about a third of the oil
they auctioned was purchased by somebody who had an apartment
in Harlem. It was not purchased by any major oil company.
I have a question of why we are putting light oil into the
Strategic Petroleum Reserve. If we ever need to use the
Strategic Petroleum Reserve, presumably, refinery operating
rates will be reduced because we will be in a shortage
situation on the world market and there will be some surplus
refining capacity and most good refining capacity can take
heavier crude oils. This may be a request of some of the
smaller independent refiners that have not made the investment
to upgrade it.
There are many ways that DOE could write the specifications
so that Brent would not be the crude but, say, a Bonnie light
out of Nigeria, which is the same. I just do not know the facts
on this one. I have read in the petroleum trade press that
cargoes are being purchased.
I will say that if the government imposes a requirement,
say, to deliver 10 million barrels of oil of a consistent
specification, there are very few places other than the Salom
Voe terminal in Scotland where you can go to arrange that. The
companies that happen to be equity producers have the crude, so
the government may have given them an opportunity.
Senator Levin. OK. Does anybody else have a comment on
that? Dr. Hastings.
Ms. Hastings. Sure. I understood your comment to be
analogous to what could happen in gasoline markets were the
government to engage in storage and long-term purchasing on the
market and reselling on the market in order to smooth supply
disruptions.
I would like to point out one thing. Reformulated fuel has
a much shorter shelf life than does crude oil, so if you are
putting out this one case where we once in a while have to dip
into the Strategic Reserve and then repurchase oil or produce
oil and bring it back in to replenish it, actually, for
gasoline, in order for it to meet EPA specs, this would have to
happen on a very frequent basis, i.e., the government would
have to go into the business of purchasing gasoline and
reselling it as quickly as that fuel goes off spec.
Now, it is an open debate as to how quickly the fuel goes
off spec. It depends on what additive and stabilizers you might
put in, something about mixing the gasoline. I am not an expert
on this, but I know that it is some time between about 3 and 6
months.
So if you are worried that firms could actually use this to
manipulate prices, i.e., get the government to be purchasing up
gasoline and further creating a shortage, that problem is going
to be exacerbated by the short shelf life of reformulated
gasoline.
The second question is, how do you sell the gasoline? If
there is a shortage, do you sell it to the major refiners?
Well, if they have an incentive, as was brought out in many of
the documents that your staff put together, if they have an
incentive to create shortages, what is to say that they have an
incentive, then, to purchase the gasoline from the government
and supply it through if they benefit from the shortage of the
gasoline or from restricting supply?
One of the documents said that Marathon-Ashland, for
example--correct me if I am wrong--actually had reformulated
gasoline. I know there was some debate about this between the
executive for Marathon-Ashland and the Subcommittee on Tuesday,
but they had supply available during one of the price spikes
and they did not release it onto the market because they would
make more money, right? So why would they buy gasoline from the
government and then release it onto the market? So there is
this second factor to take into account.
I think what really needs to be done is that we need to
encourage the integration between markets by decreasing
boutique fuels. We also need to de-bottleneck systems,
specifically in relationship to vertical integration. So we
need to make sure that independent wholesalers, such as Quality
Oil in Michigan, have access to pipelines and to tankage, that
those barriers of entry have not been erected through vertical
integration, that would enable tight oligopolies to prevent
outside entry when there is a large price increase. We need to
facilitate arbitrage.
The only ones, obviously, from this case study in Michigan
that have the incentive to arbitrage are independents, like
Quality Oil. So it is not clear to me how the government
reserve would actually facilitate that or not. Second, you have
this problem that the gasoline goes off spec at a fairly rapid
rate.
Senator Levin. Thank you.
Ms. Hastings. Thank you.
Senator Levin. Did you have a comment on my question, Dr.
McAfee?
Mr. McAfee. I did. I have two comments. One is the purpose
of the Strategic Oil Reserve itself is, I think, subject to a
lot of confusion. If the purpose is military, then we probably
should not be buying Brent because for preparedness for a war,
if we have actually run out of imported oil or imported oil is
being blocked, as Dr. Verleger said, we have excess refinery
capacity and we can probably crack heavier oils. So we should,
in fact, be using the cheapest oil we can put in there.
If, instead, the purpose is economic, that is, we are going
to try to stabilize world oil prices, for one thing, I think we
need a much larger team of people figuring out, trying to out
think the commodities market than we are, in fact, employing.
In fact, my impression is we are employing none. The ability of
government analysts to beat the commodities market at their
game strikes me as unlikely. But that would actually dictate a
very different thinking than is currently being used about the
Strategic Oil Reserve.
The second point I wanted to make was the ability to
manipulate world oil prices is limited by the fact that there
is a pretty large pool of oil out there and there is pretty
inexpensive transportation. Now, transportation across the
Pacific runs 75 cents per barrel, maybe $1 per barrel.
Transportation from the Middle East to California runs about
$1.50 a barrel at tops. So your ability to manipulate oil
prices is relatively limited. A barrel has 42 gallons, and so
even at the extreme of Middle East to California, we are
looking at on the order of 2.5 cents per gallon, which is
roughly one-for-one for gasoline.
So while this could be important and something that should
be studied, it is not an explanation for high gasoline prices.
Senator Levin. Thank you. Mr. Ashton.
Mr. Ashton. Senator, I have two comments which have, I
think, a common theme. First, with regard to the Strategic
Petroleum Reserve, unfortunately or fortunately, a lot of the
decisions that are made that come out of SPRO are politically
motivated or politically driven as opposed to economically
driven, and I have seen that over a number of years, and to the
extent to which perhaps purchasing a light sweet crude like
Brent is being done in a market which we know has been
manipulated in the past, it is probably not a very good
decision but may, in fact, be driven by something other than
economic motives.
The other part of your question, which I thought you were
also getting at, which is also where the political motivation
comes in, is this whole idea of trying to foster and encourage
large buyers to buy forward, such as State and local
governments and those types of entities. I have had some
experience trying to convince those types of entities to do
exactly that, and I will tell you that because of their
incredible risk averseness, which is in part driven, I think,
by their short-term political position, they are not likely to
do that type of activity or engage in that activity, although
it might well make some sense.
Senator Levin. I see that a roll call has begun in the
Senate, so I am just going to be able to ask a few additional
questions, but I do want to get to the role of regulation and
boutique fuels in terms of whether they are one of the major
causes of price spikes. A couple of you have commented about
the importance of trying to reduce the amount of regulation,
the number of different fuels that are required, but my
question relates to the role of boutique fuels in the price
spike, the large, sudden increases in prices.
Mr. Ashton, in your testimony, you said that none of the
factors which some people sometimes point to, which is the
fluctuation in crude prices or inventories, provide a rationale
for these price spikes.
Mr. Ashton. That is correct, Senator, yes.
Senator Levin. What about the role of boutique fuels?
Mr. Ashton. The role of boutique fuels, again,
unfortunately, the type of data that we would like to look at
with regard to inventories simply does not exist to be able to
extract out for each individual type of fuel exactly what was
going on in the period prior to and during the price spikes.
But looking just more generally at, for example, RFG
inventories, in the price spike in the spring of 2000, for
example, the RFG inventory hit its bottom actually in late
April, before the price spike even started, and started to
build again.
Now, to the extent to which boutique fuels and specific
types of formulas or specifications are required in specific
areas, such as Chicago or elsewhere, that does cause some
market dislocation and does, to some extent, exacerbate the
problem in terms of creating sort of mini-markets that cannot
be served by all producers. There is no question about that.
But you have to remember that the price spike that we
observed generally, although it was different in different
areas, certainly transcended throughout most of the Midwest
during this period of time. So it is being driven, certainly,
by factors other than just boutique fuels.
Senator Levin. Does anyone want to comment further on that?
Yes, Dr. McAfee?
Mr. McAfee. Where the prices were highest was Chicago and
Milwaukee, which shared a unique blend of ethanol-based RFG-2,
and those are the only places that we are using that fuel. So
the effect of the break in the Explorer Pipeline, which
affected the entire Upper Midwest, was that it would hit
hardest in the places that had the unique fuels because they
could not, in essence, share with St. Louis and other places.
Senator Levin. Yes?
Mr. Verleger. I think it should be added that one of the
problems that Wisconsin and Chicago had was that the EPA rules
prohibited commingling of RFG-2 that has MTBE in it with RFG
with the ethanol in the tanks, and so there was just a--the
product was around the corner, but it could not be used.
Senator Levin. When you say the worst price spikes occurred
in those areas, however, price spikes occurred in other areas,
as well, but not just to the same degree. Would you agree with
that?
Mr. McAfee. Yes, absolutely.
Senator Levin. OK. Just on inventory issues, this has been
referenced by a number of you, about the effects of inventory
changes in the market on these price spike situations that
really triggered this investigation. A number of our witnesses
have talked about the importance of trying to have greater
inventories, that would help in terms of prices. I am wondering
whether or not you believe that increased gasoline storage in
these areas of high concentration, at least, would lessen the
severity and the occasion of the price spikes. Would greater
storage have that effect, Mr. Ashland?
Mr. Ashton. Yes, Senator. I would certainly believe that
greater storage, investment in that type of infrastructure,
pipelines as well as storage capacity, would certainly help.
Senator Levin. OK. Do you have a comment on that? I think
you perhaps have already, but let me call on you anyway, Dr.
Hastings.
Ms. Hastings. Sure. I have two comments. Greater storage
would alleviate price spikes, but as I pointed out, it is not
clear that if there is gasoline, it would actually be released
onto the market during a price spike.
And second, I also think that--I forget what I was going to
say second, so----
Senator Levin. OK. We will come back to you. Dr. McAfee.
Mr. McAfee. Let me emphasize that it is greater total
storage that reduces volatility and agree with a comment made
earlier that government's own storage will tend to crowd out
private storage, and so that you may not get much, if any, net
benefit.
Ms. Hastings. That was my second point. Thanks. [Laughter.]
Senator Levin. Thank you. Dr. Verleger.
Mr. Verleger. I have made a career, and many economists
have in the agricultural economic business, inventories are the
whole story. If inventory levels are higher, the prices will be
lower and you do not get the price spikes. The question is, how
do you get the inventory to be higher?
Senator Levin. And I take it that you would not be
particularly supportive of mandates, but you would be
supportive of either incentives or perhaps advance purchases as
the way to do that, is that an accurate summation?
Mr. Verleger. I have made a career of testifying before the
Senate on Strategic Petroleum Reserves when that was an issue
10 years ago. Mandates do not work. One way or another, what
will happen is if you mandate it, we have seen the majors
leave. They will sell more refining capacity and we will be
left with more firms that do not have the capital and they will
come and they will ask for exemptions and the system will just
become more volatile. I think that is not the solution.
Senator Levin. But additional storage is a solution?
Mr. Verleger. That is----
Senator Levin. You agree with that, it is just how you get
there.
Dr. McAfee, do you have any comment about the importance of
additional--you have already commented on the importance of
additional storage--as to how you get there? Would it be worth
doing even if you had to have some kind of a mandate coming out
of the Department of Energy?
Mr. McAfee. I think mandates are hard to make workable. It
is too easy to have storage that does not actually have any
practical use but satisfies the requirements, or lobby for
exemptions, so that mandates are generally not such a great
idea because they are hard to enforce. Plus, you create this
problem that Dr. Hastings referred to of you store it and it
goes bad, and then you cannot actually sell it, and then what
do you do with it? It is just sitting there being a fire
hazard.
So how do you get there? Well, there are things like tax
incentives. The thing that I would most emphasize is where the
``not in my backyard'' mentality is preventing the building of
new facilities, those companies would like to but they are just
being blocked, the permits are too great, any ease of that
regulation may facilitate storage increases. The more
concentrated is the market, the less effective that is going to
be.
Senator Levin. Thank you. Did you want to comment on how we
get to the increased storage capacity any further, Dr.
Hastings?
Ms. Hastings. No.
Senator Levin. Thank you so much. Mr. Ashton, we are going
to wind up with you. If we needed mandates to get there, is it
worth considering?
Mr. Ashton. I think it is worth considering, although I
think the crowding out effect is potentially a problem. I think
you also have to evaluate sort of the trade-off of the costs
and benefits of doing that versus potentially other measures
that might increase supply or increase inventories.
Senator Levin. You heard the five buzzers go off, which
means you are going to see me run a little faster than usual,
so we will end right there, but let me just summarize as
follows.
This testimony today has been very helpful in a lot of
ways, and I want to thank this panel, as I have our earlier
panels, for your coming today to join us and to share with us
your experiences, your testimony, your studies, and to help us
take a look at some possible solutions, particularly in areas
of high concentration because that is what we are really
focusing on, where there are very few companies that have a
large market share in a particular area.
One of the possible solutions or options would be to have a
moratorium on mergers, or at least a presumption against
mergers in those areas of high concentration. We have heard
pros and cons about that. We have heard about the possibility
of beefing up the FTC staff in order to have a better
understanding of the effects of the mergers. We have not really
had a good FTC study about the impacts of previous mergers.
We have had some suggestions about modifying antitrust laws
to allow anti-competitive cases to get to a jury based on less
evidence than is currently required, in other words, less than
explicit evidence of agreement, cooperation, or collusion, but
something more circumstantial than that in areas in highly
concentrated markets.
While I surely believe in the presumption of innocence and
could never change that, as an American who believes in the
Constitution, I do believe, also, that there are presumptions
that are used all the time in court. That does not lead to
criminal convictions, but they do apply in civil cases. It will
at least allow you to change a burden of proof or to get to a
jury based on evidence, but it does not require a particular
conclusion.
We also talked about inventory, increasing inventories as
something which is important and how that might be achieved. We
need to have greater access to important industry data in order
to understand what is going on in industry. The reference to
eliminating logistical bottlenecks was referred to both by
Attorney General Granholm and by a number of other witnesses,
including two of you, I believe, on this panel, so that we can
move supplies more readily from market to market.
We do have a serious concentration problem in the oil
industry in many States and it clearly is hurting consumers
where it exists. Competition will lower prices. We know that,
and we should take appropriate steps, and I emphasize the word
``appropriate,'' but I also emphasize the word ``take,'' to
reinvigorate competition in highly concentrated areas. More
aggressive antitrust enforcement, I believe, is part of that,
but a number of the other solutions, I believe should also be
considered.
We would welcome additional comments from this panel or
others as we develop a response to what we learned in this
investigation, and let me conclude just by saying this. There
is not agreement among all of you as to each of the issues that
we discussed, but there was common agreement on something which
is very clear to me, which is that this staff report is
extraordinary, and each of you were kind enough to point that
out.
I want to just simply conclude by saying I have been around
here a long time and I have seen a lot of staff reports. I have
never seen one that was taking on a more complex issue and
doing a better job of dealing with it than this staff report of
mine is and I am very proud of them. I thank them. I think the
Nation is better off because we have this kind of an effort to
look at facts, see what might be appropriate to deal with those
facts, and if that happens as a result of this report, we will
all be better off, and I am going to do everything that I can
to make sure that it does, indeed, happen that way.
Thank you again for coming, and we stand adjourned.
[Whereupon, at 12:34 p.m., the Subcommittee was adjourned.]
A P P E N D I X
----------
OPENING PREPARED STATEMENT OF SENATOR BUNNING
May 2, 2002
Thank you, Mr. Chairman.
This is the second hearing this Subcommittee has held on gas
pricing, and I appreciate the time our witnesses have taken today to
testify.
I think that we can all agree that pricing gas is a complex
undertaking. It is not only affected by the price of crude oil on the
world market, but by a careful balance between supply and demand, the
amount of gas we have stockpiled, and our ability to transport the fuel
to certain areas of the country.
Every American notices when gas prices spike, and it always seems
that prices never fall as fast as they rise.
Like all companies, the gas industry has a responsibility to
consumers, and any acts of gouging or collusion should be investigated
thoroughly.
The solutions to fixing this problem are not easy, and I think that
the last thing anyone would want is for the Federal Government to get
into the game of pricing gas. However, every summer it seems that
consumers end up paying more at the pump as prices fluctuate widely.
I hope the gasoline industry can take steps to help alleviate some
of the causes to this problem.
Also, if we are serious about helping stabilize prices, State,
local and Federal leaders have to recognize that the sheer number of
special formulated fuels on the market can isolate communities or even
whole States for that matter.
We also need to make sure that our regulations and red tape for
getting infrastructure built--like a new pipeline or some new storage
tanks--doesn't discourage companies from making these types of
investments.
Thank you.
[GRAPHIC] [TIFF OMITTED] 80298.001
[GRAPHIC] [TIFF OMITTED] 80298.002
[GRAPHIC] [TIFF OMITTED] 80298.003
[GRAPHIC] [TIFF OMITTED] 80298.004
[GRAPHIC] [TIFF OMITTED] 80298.005
[GRAPHIC] [TIFF OMITTED] 80298.006
[GRAPHIC] [TIFF OMITTED] 80298.007
[GRAPHIC] [TIFF OMITTED] 80298.008
[GRAPHIC] [TIFF OMITTED] 80298.009
[GRAPHIC] [TIFF OMITTED] 80298.010
[GRAPHIC] [TIFF OMITTED] 80298.011
[GRAPHIC] [TIFF OMITTED] 80298.012
[GRAPHIC] [TIFF OMITTED] 80298.013
[GRAPHIC] [TIFF OMITTED] 80298.014
[GRAPHIC] [TIFF OMITTED] 80298.015
[GRAPHIC] [TIFF OMITTED] 80298.016
[GRAPHIC] [TIFF OMITTED] 80298.017
[GRAPHIC] [TIFF OMITTED] 80298.018
[GRAPHIC] [TIFF OMITTED] 80298.019
[GRAPHIC] [TIFF OMITTED] 80298.020
[GRAPHIC] [TIFF OMITTED] 80298.021
[GRAPHIC] [TIFF OMITTED] 80298.022
[GRAPHIC] [TIFF OMITTED] 80298.023
[GRAPHIC] [TIFF OMITTED] 80298.024
[GRAPHIC] [TIFF OMITTED] 80298.025
[GRAPHIC] [TIFF OMITTED] 80298.026
[GRAPHIC] [TIFF OMITTED] 80298.027
[GRAPHIC] [TIFF OMITTED] 80298.028
[GRAPHIC] [TIFF OMITTED] 80298.029
[GRAPHIC] [TIFF OMITTED] 80298.030
[GRAPHIC] [TIFF OMITTED] 80298.031
[GRAPHIC] [TIFF OMITTED] 80298.032
[GRAPHIC] [TIFF OMITTED] 80298.033
[GRAPHIC] [TIFF OMITTED] 80298.034
[GRAPHIC] [TIFF OMITTED] 80298.035
[GRAPHIC] [TIFF OMITTED] 80298.036
[GRAPHIC] [TIFF OMITTED] 80298.037
[GRAPHIC] [TIFF OMITTED] 80298.038
[GRAPHIC] [TIFF OMITTED] 80298.039
[GRAPHIC] [TIFF OMITTED] 80298.040
[GRAPHIC] [TIFF OMITTED] 80298.041
[GRAPHIC] [TIFF OMITTED] 80298.042
[GRAPHIC] [TIFF OMITTED] 80298.043
[GRAPHIC] [TIFF OMITTED] 80298.044
[GRAPHIC] [TIFF OMITTED] 80298.045
[GRAPHIC] [TIFF OMITTED] 80298.046
[GRAPHIC] [TIFF OMITTED] 80298.047
[GRAPHIC] [TIFF OMITTED] 80298.048
[GRAPHIC] [TIFF OMITTED] 80298.049
[GRAPHIC] [TIFF OMITTED] 80298.050
[GRAPHIC] [TIFF OMITTED] 80298.051
[GRAPHIC] [TIFF OMITTED] 80298.052
[GRAPHIC] [TIFF OMITTED] 80298.053
[GRAPHIC] [TIFF OMITTED] 80298.054
[GRAPHIC] [TIFF OMITTED] 80298.055
[GRAPHIC] [TIFF OMITTED] 80298.056
[GRAPHIC] [TIFF OMITTED] 80298.057
[GRAPHIC] [TIFF OMITTED] 80298.058
[GRAPHIC] [TIFF OMITTED] 80298.059
[GRAPHIC] [TIFF OMITTED] 80298.060
[GRAPHIC] [TIFF OMITTED] 80298.061
[GRAPHIC] [TIFF OMITTED] 80298.062
[GRAPHIC] [TIFF OMITTED] 80298.063
[GRAPHIC] [TIFF OMITTED] 80298.064
[GRAPHIC] [TIFF OMITTED] 80298.065
[GRAPHIC] [TIFF OMITTED] 80298.066
[GRAPHIC] [TIFF OMITTED] 80298.067
[GRAPHIC] [TIFF OMITTED] 80298.068
[GRAPHIC] [TIFF OMITTED] 80298.069
[GRAPHIC] [TIFF OMITTED] 80298.070
[GRAPHIC] [TIFF OMITTED] 80298.071
[GRAPHIC] [TIFF OMITTED] 80298.072
[GRAPHIC] [TIFF OMITTED] 80298.073
[GRAPHIC] [TIFF OMITTED] 80298.074
[GRAPHIC] [TIFF OMITTED] 80298.075
[GRAPHIC] [TIFF OMITTED] 80298.076
[GRAPHIC] [TIFF OMITTED] 80298.077
[GRAPHIC] [TIFF OMITTED] 80298.078
[GRAPHIC] [TIFF OMITTED] 80298.079
[GRAPHIC] [TIFF OMITTED] 80298.080
[GRAPHIC] [TIFF OMITTED] 80298.081
[GRAPHIC] [TIFF OMITTED] 80298.082
[GRAPHIC] [TIFF OMITTED] 80298.083
[GRAPHIC] [TIFF OMITTED] 80298.084
[GRAPHIC] [TIFF OMITTED] 80298.085
[GRAPHIC] [TIFF OMITTED] 80298.086
[GRAPHIC] [TIFF OMITTED] 80298.087
[GRAPHIC] [TIFF OMITTED] 80298.088
[GRAPHIC] [TIFF OMITTED] 80298.089
[GRAPHIC] [TIFF OMITTED] 80298.090
[GRAPHIC] [TIFF OMITTED] 80298.091
[GRAPHIC] [TIFF OMITTED] 80298.092
[GRAPHIC] [TIFF OMITTED] 80298.093
[GRAPHIC] [TIFF OMITTED] 80298.094
[GRAPHIC] [TIFF OMITTED] 80298.095
[GRAPHIC] [TIFF OMITTED] 80298.096
[GRAPHIC] [TIFF OMITTED] 80298.097
[GRAPHIC] [TIFF OMITTED] 80298.098
[GRAPHIC] [TIFF OMITTED] 80298.099
[GRAPHIC] [TIFF OMITTED] 80298.100
[GRAPHIC] [TIFF OMITTED] 80298.101
[GRAPHIC] [TIFF OMITTED] 80298.102
[GRAPHIC] [TIFF OMITTED] 80298.103
[GRAPHIC] [TIFF OMITTED] 80298.104
[GRAPHIC] [TIFF OMITTED] 80298.105
[GRAPHIC] [TIFF OMITTED] 80298.106
[GRAPHIC] [TIFF OMITTED] 80298.107
[GRAPHIC] [TIFF OMITTED] 80298.108
[GRAPHIC] [TIFF OMITTED] 80298.109
[GRAPHIC] [TIFF OMITTED] 80298.110
[GRAPHIC] [TIFF OMITTED] 80298.111
[GRAPHIC] [TIFF OMITTED] 80298.112
[GRAPHIC] [TIFF OMITTED] 80298.113
[GRAPHIC] [TIFF OMITTED] 80298.114
[GRAPHIC] [TIFF OMITTED] 80298.115
[GRAPHIC] [TIFF OMITTED] 80298.116
[GRAPHIC] [TIFF OMITTED] 80298.117
[GRAPHIC] [TIFF OMITTED] 80298.118
[GRAPHIC] [TIFF OMITTED] 80298.119
[GRAPHIC] [TIFF OMITTED] 80298.120
[GRAPHIC] [TIFF OMITTED] 80298.121
[GRAPHIC] [TIFF OMITTED] 80298.122
[GRAPHIC] [TIFF OMITTED] 80298.123
[GRAPHIC] [TIFF OMITTED] 80298.124
[GRAPHIC] [TIFF OMITTED] 80298.125
[GRAPHIC] [TIFF OMITTED] 80298.126
[GRAPHIC] [TIFF OMITTED] 80298.127
[GRAPHIC] [TIFF OMITTED] 80298.128
[GRAPHIC] [TIFF OMITTED] 80298.129
[GRAPHIC] [TIFF OMITTED] 80298.130
[GRAPHIC] [TIFF OMITTED] 80298.131
[GRAPHIC] [TIFF OMITTED] 80298.132
[GRAPHIC] [TIFF OMITTED] 80298.133
[GRAPHIC] [TIFF OMITTED] 80298.134
[GRAPHIC] [TIFF OMITTED] 80298.135
[GRAPHIC] [TIFF OMITTED] 80298.136
[GRAPHIC] [TIFF OMITTED] 80298.137
[GRAPHIC] [TIFF OMITTED] 80298.138
[GRAPHIC] [TIFF OMITTED] 80298.139
[GRAPHIC] [TIFF OMITTED] 80298.140
[GRAPHIC] [TIFF OMITTED] 80298.141
[GRAPHIC] [TIFF OMITTED] 80298.142
[GRAPHIC] [TIFF OMITTED] 80298.143
[GRAPHIC] [TIFF OMITTED] 80298.144
[GRAPHIC] [TIFF OMITTED] 80298.145
[GRAPHIC] [TIFF OMITTED] 80298.146
[GRAPHIC] [TIFF OMITTED] 80298.147
[GRAPHIC] [TIFF OMITTED] 80298.148
[GRAPHIC] [TIFF OMITTED] 80298.149
[GRAPHIC] [TIFF OMITTED] 80298.150
[GRAPHIC] [TIFF OMITTED] 80298.151
[GRAPHIC] [TIFF OMITTED] 80298.152
[GRAPHIC] [TIFF OMITTED] 80298.153
[GRAPHIC] [TIFF OMITTED] 80298.154
[GRAPHIC] [TIFF OMITTED] 80298.155
[GRAPHIC] [TIFF OMITTED] 80298.156
[GRAPHIC] [TIFF OMITTED] 80298.157
[GRAPHIC] [TIFF OMITTED] 80298.158
[GRAPHIC] [TIFF OMITTED] 80298.159
[GRAPHIC] [TIFF OMITTED] 80298.160
[GRAPHIC] [TIFF OMITTED] 80298.161
[GRAPHIC] [TIFF OMITTED] 80298.162
[GRAPHIC] [TIFF OMITTED] 80298.163
[GRAPHIC] [TIFF OMITTED] 80298.164
[GRAPHIC] [TIFF OMITTED] 80298.165
[GRAPHIC] [TIFF OMITTED] 80298.166
[GRAPHIC] [TIFF OMITTED] 80298.167
[GRAPHIC] [TIFF OMITTED] 80298.168
[GRAPHIC] [TIFF OMITTED] 80298.169
[GRAPHIC] [TIFF OMITTED] 80298.170
[GRAPHIC] [TIFF OMITTED] 80298.171
[GRAPHIC] [TIFF OMITTED] 80298.172
[GRAPHIC] [TIFF OMITTED] 80298.173
[GRAPHIC] [TIFF OMITTED] 80298.174
[GRAPHIC] [TIFF OMITTED] 80298.175
[GRAPHIC] [TIFF OMITTED] 80298.176
[GRAPHIC] [TIFF OMITTED] 80298.177
[GRAPHIC] [TIFF OMITTED] 80298.178
[GRAPHIC] [TIFF OMITTED] 80298.179
[GRAPHIC] [TIFF OMITTED] 80298.180
[GRAPHIC] [TIFF OMITTED] 80298.181
[GRAPHIC] [TIFF OMITTED] 80298.182
[GRAPHIC] [TIFF OMITTED] 80298.183
[GRAPHIC] [TIFF OMITTED] 80298.184
[GRAPHIC] [TIFF OMITTED] 80298.185
[GRAPHIC] [TIFF OMITTED] 80298.186
[GRAPHIC] [TIFF OMITTED] 80298.187
[GRAPHIC] [TIFF OMITTED] 80298.188
[GRAPHIC] [TIFF OMITTED] 80298.189
[GRAPHIC] [TIFF OMITTED] 80298.190
[GRAPHIC] [TIFF OMITTED] 80298.191
[GRAPHIC] [TIFF OMITTED] 80298.192
[GRAPHIC] [TIFF OMITTED] 80298.193
[GRAPHIC] [TIFF OMITTED] 80298.194
[GRAPHIC] [TIFF OMITTED] 80298.195
[GRAPHIC] [TIFF OMITTED] 80298.196
[GRAPHIC] [TIFF OMITTED] 80298.197
[GRAPHIC] [TIFF OMITTED] 80298.198
[GRAPHIC] [TIFF OMITTED] 80298.199
[GRAPHIC] [TIFF OMITTED] 80298.200
[GRAPHIC] [TIFF OMITTED] 80298.201
[GRAPHIC] [TIFF OMITTED] 80298.202
[GRAPHIC] [TIFF OMITTED] 80298.203
[GRAPHIC] [TIFF OMITTED] 80298.204
[GRAPHIC] [TIFF OMITTED] 80298.205
[GRAPHIC] [TIFF OMITTED] 80298.206
[GRAPHIC] [TIFF OMITTED] 80298.207
[GRAPHIC] [TIFF OMITTED] 80298.208
[GRAPHIC] [TIFF OMITTED] 80298.209
[GRAPHIC] [TIFF OMITTED] 80298.210
[GRAPHIC] [TIFF OMITTED] 80298.211
[GRAPHIC] [TIFF OMITTED] 80298.212
[GRAPHIC] [TIFF OMITTED] 80298.213
[GRAPHIC] [TIFF OMITTED] 80298.214
[GRAPHIC] [TIFF OMITTED] 80298.215
[GRAPHIC] [TIFF OMITTED] 80298.216
[GRAPHIC] [TIFF OMITTED] 80298.217
[GRAPHIC] [TIFF OMITTED] 80298.218
[GRAPHIC] [TIFF OMITTED] 80298.219
[GRAPHIC] [TIFF OMITTED] 80298.220
[GRAPHIC] [TIFF OMITTED] 80298.221
[GRAPHIC] [TIFF OMITTED] 80298.222
[GRAPHIC] [TIFF OMITTED] 80298.223
[GRAPHIC] [TIFF OMITTED] 80298.224
[GRAPHIC] [TIFF OMITTED] 80298.225
[GRAPHIC] [TIFF OMITTED] 80298.226
[GRAPHIC] [TIFF OMITTED] 80298.227
[GRAPHIC] [TIFF OMITTED] 80298.228
[GRAPHIC] [TIFF OMITTED] 80298.229
[GRAPHIC] [TIFF OMITTED] 80298.230
[GRAPHIC] [TIFF OMITTED] 80298.231
[GRAPHIC] [TIFF OMITTED] 80298.232
[GRAPHIC] [TIFF OMITTED] 80298.233
[GRAPHIC] [TIFF OMITTED] 80298.234
[GRAPHIC] [TIFF OMITTED] 80298.235
[GRAPHIC] [TIFF OMITTED] 80298.236
[GRAPHIC] [TIFF OMITTED] 80298.237
[GRAPHIC] [TIFF OMITTED] 80298.238
[GRAPHIC] [TIFF OMITTED] 80298.239
[GRAPHIC] [TIFF OMITTED] 80298.240
[GRAPHIC] [TIFF OMITTED] 80298.241
[GRAPHIC] [TIFF OMITTED] 80298.242
[GRAPHIC] [TIFF OMITTED] 80298.243
[GRAPHIC] [TIFF OMITTED] 80298.244
[GRAPHIC] [TIFF OMITTED] 80298.245
[GRAPHIC] [TIFF OMITTED] 80298.246
[GRAPHIC] [TIFF OMITTED] 80298.247
[GRAPHIC] [TIFF OMITTED] 80298.248
[GRAPHIC] [TIFF OMITTED] 80298.249
[GRAPHIC] [TIFF OMITTED] 80298.250
[GRAPHIC] [TIFF OMITTED] 80298.251
[GRAPHIC] [TIFF OMITTED] 80298.252
[GRAPHIC] [TIFF OMITTED] 80298.253
[GRAPHIC] [TIFF OMITTED] 80298.254
[GRAPHIC] [TIFF OMITTED] 80298.255
[GRAPHIC] [TIFF OMITTED] 80298.256
[GRAPHIC] [TIFF OMITTED] 80298.257
[GRAPHIC] [TIFF OMITTED] 80298.258
[GRAPHIC] [TIFF OMITTED] 80298.259
[GRAPHIC] [TIFF OMITTED] 80298.260
[GRAPHIC] [TIFF OMITTED] 80298.261
[GRAPHIC] [TIFF OMITTED] 80298.262
[GRAPHIC] [TIFF OMITTED] 80298.263
[GRAPHIC] [TIFF OMITTED] 80298.264
[GRAPHIC] [TIFF OMITTED] 80298.265
[GRAPHIC] [TIFF OMITTED] 80298.266
[GRAPHIC] [TIFF OMITTED] 80298.267
[GRAPHIC] [TIFF OMITTED] 80298.268
[GRAPHIC] [TIFF OMITTED] 80298.269
[GRAPHIC] [TIFF OMITTED] 80298.270
[GRAPHIC] [TIFF OMITTED] 80298.271
[GRAPHIC] [TIFF OMITTED] 80298.272
[GRAPHIC] [TIFF OMITTED] 80298.273
[GRAPHIC] [TIFF OMITTED] 80298.274
[GRAPHIC] [TIFF OMITTED] 80298.275
[GRAPHIC] [TIFF OMITTED] 80298.276
[GRAPHIC] [TIFF OMITTED] 80298.277
[GRAPHIC] [TIFF OMITTED] 80298.278
[GRAPHIC] [TIFF OMITTED] 80298.279
[GRAPHIC] [TIFF OMITTED] 80298.280
[GRAPHIC] [TIFF OMITTED] 80298.281
[GRAPHIC] [TIFF OMITTED] 80298.282
[GRAPHIC] [TIFF OMITTED] 80298.283
[GRAPHIC] [TIFF OMITTED] 80298.284
[GRAPHIC] [TIFF OMITTED] 80298.285
[GRAPHIC] [TIFF OMITTED] 80298.286
[GRAPHIC] [TIFF OMITTED] 80298.287
[GRAPHIC] [TIFF OMITTED] 80298.288
[GRAPHIC] [TIFF OMITTED] 80298.289
[GRAPHIC] [TIFF OMITTED] 80298.290
[GRAPHIC] [TIFF OMITTED] 80298.291
[GRAPHIC] [TIFF OMITTED] 80298.292
[GRAPHIC] [TIFF OMITTED] 80298.293
[GRAPHIC] [TIFF OMITTED] 80298.294
[GRAPHIC] [TIFF OMITTED] 80298.295
[GRAPHIC] [TIFF OMITTED] 80298.296
[GRAPHIC] [TIFF OMITTED] 80298.297
[GRAPHIC] [TIFF OMITTED] 80298.298
[GRAPHIC] [TIFF OMITTED] 80298.299
[GRAPHIC] [TIFF OMITTED] 80298.300
[GRAPHIC] [TIFF OMITTED] 80298.301
[GRAPHIC] [TIFF OMITTED] 80298.302
[GRAPHIC] [TIFF OMITTED] 80298.303
[GRAPHIC] [TIFF OMITTED] 80298.304
[GRAPHIC] [TIFF OMITTED] 80298.305
[GRAPHIC] [TIFF OMITTED] 80298.306
[GRAPHIC] [TIFF OMITTED] 80298.307
[GRAPHIC] [TIFF OMITTED] 80298.308
[GRAPHIC] [TIFF OMITTED] 80298.309
[GRAPHIC] [TIFF OMITTED] 80298.310
[GRAPHIC] [TIFF OMITTED] 80298.311
[GRAPHIC] [TIFF OMITTED] 80298.312
[GRAPHIC] [TIFF OMITTED] 80298.313
[GRAPHIC] [TIFF OMITTED] 80298.314
[GRAPHIC] [TIFF OMITTED] 80298.315
[GRAPHIC] [TIFF OMITTED] 80298.316
[GRAPHIC] [TIFF OMITTED] 80298.317
[GRAPHIC] [TIFF OMITTED] 80298.318
[GRAPHIC] [TIFF OMITTED] 80298.319
[GRAPHIC] [TIFF OMITTED] 80298.320
[GRAPHIC] [TIFF OMITTED] 80298.321
[GRAPHIC] [TIFF OMITTED] 80298.322
[GRAPHIC] [TIFF OMITTED] 80298.323
[GRAPHIC] [TIFF OMITTED] 80298.324
[GRAPHIC] [TIFF OMITTED] 80298.325
[GRAPHIC] [TIFF OMITTED] 80298.326
[GRAPHIC] [TIFF OMITTED] 80298.327
[GRAPHIC] [TIFF OMITTED] 80298.328
[GRAPHIC] [TIFF OMITTED] 80298.329
[GRAPHIC] [TIFF OMITTED] 80298.330
[GRAPHIC] [TIFF OMITTED] 80298.331
[GRAPHIC] [TIFF OMITTED] 80298.332
[GRAPHIC] [TIFF OMITTED] 80298.333
[GRAPHIC] [TIFF OMITTED] 80298.334
[GRAPHIC] [TIFF OMITTED] 80298.335
[GRAPHIC] [TIFF OMITTED] 80298.336
[GRAPHIC] [TIFF OMITTED] 80298.337
[GRAPHIC] [TIFF OMITTED] 80298.338
[GRAPHIC] [TIFF OMITTED] 80298.339
[GRAPHIC] [TIFF OMITTED] 80298.340
[GRAPHIC] [TIFF OMITTED] 80298.341
[GRAPHIC] [TIFF OMITTED] 80298.342
[GRAPHIC] [TIFF OMITTED] 80298.343
[GRAPHIC] [TIFF OMITTED] 80298.344
[GRAPHIC] [TIFF OMITTED] 80298.345
[GRAPHIC] [TIFF OMITTED] 80298.346
[GRAPHIC] [TIFF OMITTED] 80298.347
[GRAPHIC] [TIFF OMITTED] 80298.348
[GRAPHIC] [TIFF OMITTED] 80298.349
[GRAPHIC] [TIFF OMITTED] 80298.350
[GRAPHIC] [TIFF OMITTED] 80298.351
[GRAPHIC] [TIFF OMITTED] 80298.352
[GRAPHIC] [TIFF OMITTED] 80298.353
[GRAPHIC] [TIFF OMITTED] 80298.354
[GRAPHIC] [TIFF OMITTED] 80298.355
[GRAPHIC] [TIFF OMITTED] 80298.356
[GRAPHIC] [TIFF OMITTED] 80298.357
[GRAPHIC] [TIFF OMITTED] 80298.358
[GRAPHIC] [TIFF OMITTED] 80298.359
[GRAPHIC] [TIFF OMITTED] 80298.360
[GRAPHIC] [TIFF OMITTED] 80298.361
[GRAPHIC] [TIFF OMITTED] 80298.362
[GRAPHIC] [TIFF OMITTED] 80298.363
[GRAPHIC] [TIFF OMITTED] 80298.364
[GRAPHIC] [TIFF OMITTED] 80298.365
[GRAPHIC] [TIFF OMITTED] 80298.366
[GRAPHIC] [TIFF OMITTED] 80298.367
[GRAPHIC] [TIFF OMITTED] 80298.368
[GRAPHIC] [TIFF OMITTED] 80298.369
[GRAPHIC] [TIFF OMITTED] 80298.370
[GRAPHIC] [TIFF OMITTED] 80298.371
[GRAPHIC] [TIFF OMITTED] 80298.372
[GRAPHIC] [TIFF OMITTED] 80298.373
[GRAPHIC] [TIFF OMITTED] 80298.374
[GRAPHIC] [TIFF OMITTED] 80298.375
[GRAPHIC] [TIFF OMITTED] 80298.376
[GRAPHIC] [TIFF OMITTED] 80298.377
[GRAPHIC] [TIFF OMITTED] 80298.378
[GRAPHIC] [TIFF OMITTED] 80298.379
[GRAPHIC] [TIFF OMITTED] 80298.380
[GRAPHIC] [TIFF OMITTED] 80298.381
[GRAPHIC] [TIFF OMITTED] 80298.382
[GRAPHIC] [TIFF OMITTED] 80298.383
[GRAPHIC] [TIFF OMITTED] 80298.384
[GRAPHIC] [TIFF OMITTED] 80298.385
[GRAPHIC] [TIFF OMITTED] 80298.386
[GRAPHIC] [TIFF OMITTED] 80298.387
[GRAPHIC] [TIFF OMITTED] 80298.388
[GRAPHIC] [TIFF OMITTED] 80298.389
[GRAPHIC] [TIFF OMITTED] 80298.390
[GRAPHIC] [TIFF OMITTED] 80298.391
[GRAPHIC] [TIFF OMITTED] 80298.392
[GRAPHIC] [TIFF OMITTED] 80298.393
[GRAPHIC] [TIFF OMITTED] 80298.394
[GRAPHIC] [TIFF OMITTED] 80298.395
[GRAPHIC] [TIFF OMITTED] 80298.396
[GRAPHIC] [TIFF OMITTED] 80298.397
[GRAPHIC] [TIFF OMITTED] 80298.398
[GRAPHIC] [TIFF OMITTED] 80298.399
[GRAPHIC] [TIFF OMITTED] 80298.400
[GRAPHIC] [TIFF OMITTED] 80298.401
[GRAPHIC] [TIFF OMITTED] 80298.402
[GRAPHIC] [TIFF OMITTED] 80298.403
[GRAPHIC] [TIFF OMITTED] 80298.404
[GRAPHIC] [TIFF OMITTED] 80298.405
[GRAPHIC] [TIFF OMITTED] 80298.406
[GRAPHIC] [TIFF OMITTED] 80298.407
[GRAPHIC] [TIFF OMITTED] 80298.408
[GRAPHIC] [TIFF OMITTED] 80298.409
[GRAPHIC] [TIFF OMITTED] 80298.410
[GRAPHIC] [TIFF OMITTED] 80298.411
[GRAPHIC] [TIFF OMITTED] 80298.412
[GRAPHIC] [TIFF OMITTED] 80298.413
[GRAPHIC] [TIFF OMITTED] 80298.414
[GRAPHIC] [TIFF OMITTED] 80298.415
[GRAPHIC] [TIFF OMITTED] 80298.416
[GRAPHIC] [TIFF OMITTED] 80298.417
[GRAPHIC] [TIFF OMITTED] 80298.418
[GRAPHIC] [TIFF OMITTED] 80298.419
[GRAPHIC] [TIFF OMITTED] 80298.420
[GRAPHIC] [TIFF OMITTED] 80298.421
[GRAPHIC] [TIFF OMITTED] 80298.422
[GRAPHIC] [TIFF OMITTED] 80298.423
[GRAPHIC] [TIFF OMITTED] 80298.424
[GRAPHIC] [TIFF OMITTED] 80298.425
[GRAPHIC] [TIFF OMITTED] 80298.426
[GRAPHIC] [TIFF OMITTED] 80298.427
[GRAPHIC] [TIFF OMITTED] 80298.428
[GRAPHIC] [TIFF OMITTED] 80298.429
[GRAPHIC] [TIFF OMITTED] 80298.430
[GRAPHIC] [TIFF OMITTED] 80298.431
[GRAPHIC] [TIFF OMITTED] 80298.432
[GRAPHIC] [TIFF OMITTED] 80298.433
[GRAPHIC] [TIFF OMITTED] 80298.434
[GRAPHIC] [TIFF OMITTED] 80298.435
[GRAPHIC] [TIFF OMITTED] 80298.436
[GRAPHIC] [TIFF OMITTED] 80298.437
[GRAPHIC] [TIFF OMITTED] 80298.438
[GRAPHIC] [TIFF OMITTED] 80298.439
[GRAPHIC] [TIFF OMITTED] 80298.440
[GRAPHIC] [TIFF OMITTED] 80298.441
[GRAPHIC] [TIFF OMITTED] 80298.442
[GRAPHIC] [TIFF OMITTED] 80298.443
[GRAPHIC] [TIFF OMITTED] 80298.444
[GRAPHIC] [TIFF OMITTED] 80298.445
[GRAPHIC] [TIFF OMITTED] 80298.446
[GRAPHIC] [TIFF OMITTED] 80298.447
[GRAPHIC] [TIFF OMITTED] 80298.448
[GRAPHIC] [TIFF OMITTED] 80298.449
[GRAPHIC] [TIFF OMITTED] 80298.450
[GRAPHIC] [TIFF OMITTED] 80298.451
[GRAPHIC] [TIFF OMITTED] 80298.452
[GRAPHIC] [TIFF OMITTED] 80298.453
[GRAPHIC] [TIFF OMITTED] 80298.454
[GRAPHIC] [TIFF OMITTED] 80298.455
[GRAPHIC] [TIFF OMITTED] 80298.456
[GRAPHIC] [TIFF OMITTED] 80298.457
[GRAPHIC] [TIFF OMITTED] 80298.458
[GRAPHIC] [TIFF OMITTED] 80298.459
[GRAPHIC] [TIFF OMITTED] 80298.460
[GRAPHIC] [TIFF OMITTED] 80298.461
[GRAPHIC] [TIFF OMITTED] 80298.462
[GRAPHIC] [TIFF OMITTED] 80298.463
[GRAPHIC] [TIFF OMITTED] 80298.464
[GRAPHIC] [TIFF OMITTED] 80298.465
[GRAPHIC] [TIFF OMITTED] 80298.466
[GRAPHIC] [TIFF OMITTED] 80298.467
[GRAPHIC] [TIFF OMITTED] 80298.468
[GRAPHIC] [TIFF OMITTED] 80298.469
[GRAPHIC] [TIFF OMITTED] 80298.470
[GRAPHIC] [TIFF OMITTED] 80298.471
[GRAPHIC] [TIFF OMITTED] 80298.472
[GRAPHIC] [TIFF OMITTED] 80298.473
[GRAPHIC] [TIFF OMITTED] 80298.474
[GRAPHIC] [TIFF OMITTED] 80298.475
[GRAPHIC] [TIFF OMITTED] 80298.476
[GRAPHIC] [TIFF OMITTED] 80298.477
[GRAPHIC] [TIFF OMITTED] 80298.478
[GRAPHIC] [TIFF OMITTED] 80298.479
[GRAPHIC] [TIFF OMITTED] 80298.480
[GRAPHIC] [TIFF OMITTED] 80298.481
[GRAPHIC] [TIFF OMITTED] 80298.482
[GRAPHIC] [TIFF OMITTED] 80298.483
[GRAPHIC] [TIFF OMITTED] 80298.484
[GRAPHIC] [TIFF OMITTED] 80298.485
[GRAPHIC] [TIFF OMITTED] 80298.486
[GRAPHIC] [TIFF OMITTED] 80298.487
[GRAPHIC] [TIFF OMITTED] 80298.488
[GRAPHIC] [TIFF OMITTED] 80298.489
[GRAPHIC] [TIFF OMITTED] 80298.490
[GRAPHIC] [TIFF OMITTED] 80298.491
[GRAPHIC] [TIFF OMITTED] 80298.492
[GRAPHIC] [TIFF OMITTED] 80298.493
[GRAPHIC] [TIFF OMITTED] 80298.494
[GRAPHIC] [TIFF OMITTED] 80298.495
[GRAPHIC] [TIFF OMITTED] 80298.496
[GRAPHIC] [TIFF OMITTED] 80298.497
[GRAPHIC] [TIFF OMITTED] 80298.498
[GRAPHIC] [TIFF OMITTED] 80298.499
[GRAPHIC] [TIFF OMITTED] 80298.500
[GRAPHIC] [TIFF OMITTED] 80298.501
[GRAPHIC] [TIFF OMITTED] 80298.502
[GRAPHIC] [TIFF OMITTED] 80298.503
[GRAPHIC] [TIFF OMITTED] 80298.504
[GRAPHIC] [TIFF OMITTED] 80298.505
[GRAPHIC] [TIFF OMITTED] 80298.506
[GRAPHIC] [TIFF OMITTED] 80298.507
[GRAPHIC] [TIFF OMITTED] 80298.508
[GRAPHIC] [TIFF OMITTED] 80298.509
[GRAPHIC] [TIFF OMITTED] 80298.510
[GRAPHIC] [TIFF OMITTED] 80298.511
[GRAPHIC] [TIFF OMITTED] 80298.512
[GRAPHIC] [TIFF OMITTED] 80298.513
[GRAPHIC] [TIFF OMITTED] 80298.514
[GRAPHIC] [TIFF OMITTED] 80298.515
[GRAPHIC] [TIFF OMITTED] 80298.516
[GRAPHIC] [TIFF OMITTED] 80298.517
[GRAPHIC] [TIFF OMITTED] 80298.518
[GRAPHIC] [TIFF OMITTED] 80298.519
[GRAPHIC] [TIFF OMITTED] 80298.520
[GRAPHIC] [TIFF OMITTED] 80298.521
[GRAPHIC] [TIFF OMITTED] 80298.522
[GRAPHIC] [TIFF OMITTED] 80298.523
[GRAPHIC] [TIFF OMITTED] 80298.524
[GRAPHIC] [TIFF OMITTED] 80298.525
[GRAPHIC] [TIFF OMITTED] 80298.526
[GRAPHIC] [TIFF OMITTED] 80298.527
[GRAPHIC] [TIFF OMITTED] 80298.528
[GRAPHIC] [TIFF OMITTED] 80298.529
[GRAPHIC] [TIFF OMITTED] 80298.530
[GRAPHIC] [TIFF OMITTED] 80298.531
[GRAPHIC] [TIFF OMITTED] 80298.532
[GRAPHIC] [TIFF OMITTED] 80298.533
[GRAPHIC] [TIFF OMITTED] 80298.534
[GRAPHIC] [TIFF OMITTED] 80298.535
[GRAPHIC] [TIFF OMITTED] 80298.536
[GRAPHIC] [TIFF OMITTED] 80298.537
[GRAPHIC] [TIFF OMITTED] 80298.538
[GRAPHIC] [TIFF OMITTED] 80298.539
[GRAPHIC] [TIFF OMITTED] 80298.540
[GRAPHIC] [TIFF OMITTED] 80298.541
[GRAPHIC] [TIFF OMITTED] 80298.542
[GRAPHIC] [TIFF OMITTED] 80298.543
[GRAPHIC] [TIFF OMITTED] 80298.544
[GRAPHIC] [TIFF OMITTED] 80298.545
[GRAPHIC] [TIFF OMITTED] 80298.546
[GRAPHIC] [TIFF OMITTED] 80298.547
[GRAPHIC] [TIFF OMITTED] 80298.548
[GRAPHIC] [TIFF OMITTED] 80298.549
[GRAPHIC] [TIFF OMITTED] 80298.550
[GRAPHIC] [TIFF OMITTED] 80298.551
[GRAPHIC] [TIFF OMITTED] 80298.552
[GRAPHIC] [TIFF OMITTED] 80298.553
[GRAPHIC] [TIFF OMITTED] 80298.554
[GRAPHIC] [TIFF OMITTED] 80298.555
[GRAPHIC] [TIFF OMITTED] 80298.556
[GRAPHIC] [TIFF OMITTED] 80298.557
[GRAPHIC] [TIFF OMITTED] 80298.558
[GRAPHIC] [TIFF OMITTED] 80298.559
[GRAPHIC] [TIFF OMITTED] 80298.560
[GRAPHIC] [TIFF OMITTED] 80298.561
[GRAPHIC] [TIFF OMITTED] 80298.562
[GRAPHIC] [TIFF OMITTED] 80298.563
[GRAPHIC] [TIFF OMITTED] 80298.564
[GRAPHIC] [TIFF OMITTED] 80298.565
[GRAPHIC] [TIFF OMITTED] 80298.566
[GRAPHIC] [TIFF OMITTED] 80298.567
[GRAPHIC] [TIFF OMITTED] 80298.568
[GRAPHIC] [TIFF OMITTED] 80298.569
[GRAPHIC] [TIFF OMITTED] 80298.570
[GRAPHIC] [TIFF OMITTED] 80298.571
[GRAPHIC] [TIFF OMITTED] 80298.572
[GRAPHIC] [TIFF OMITTED] 80298.573
[GRAPHIC] [TIFF OMITTED] 80298.574
[GRAPHIC] [TIFF OMITTED] 80298.575
[GRAPHIC] [TIFF OMITTED] 80298.576
[GRAPHIC] [TIFF OMITTED] 80298.577
[GRAPHIC] [TIFF OMITTED] 80298.578
[GRAPHIC] [TIFF OMITTED] 80298.579
[GRAPHIC] [TIFF OMITTED] 80298.580
[GRAPHIC] [TIFF OMITTED] 80298.581
[GRAPHIC] [TIFF OMITTED] 80298.582
[GRAPHIC] [TIFF OMITTED] 80298.583
[GRAPHIC] [TIFF OMITTED] 80298.584
[GRAPHIC] [TIFF OMITTED] 80298.585
[GRAPHIC] [TIFF OMITTED] 80298.586
[GRAPHIC] [TIFF OMITTED] 80298.587
[GRAPHIC] [TIFF OMITTED] 80298.588
[GRAPHIC] [TIFF OMITTED] 80298.589
[GRAPHIC] [TIFF OMITTED] 80298.590
[GRAPHIC] [TIFF OMITTED] 80298.591
[GRAPHIC] [TIFF OMITTED] 80298.592
-